UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended
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November 30, 2005
Commission file number
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333-121321
GREEN PLAINS RENEWABLE ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Iowa 84-1652107
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(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
9635 Irvine Bay Court, Las Vegas, Nevada 89147 (702) 524-8928
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(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.001 par value None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ][No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates (i.e., does not include directors, executive officers or
ten percent stockholders identified in Item 12 hereof) of the issuer as of
February 15, 2006 was: There is no trading market for the issuer's securities.
As of January 31, 2006, the registrant had 4,220,990 shares of common
stock outstanding.
GREEN PLAINS RENEWABLE ENERGY, INC.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-K
YEAR ENDED NOVEMBER 30, 2005
PART I
Item 1. Business..........................................................3
Item 1A. Risk Factors.....................................................26
Item 1B. Unresolved Staff Comments........................................39
Item 2. Properties.......................................................39
Item 3. Legal Proceedings................................................39
Item 4. Submission of Matters to a Vote of Security Holders..............39
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..............40
Item 6. Selected Financial Data..........................................42
Item 7. Management's Discussion and Analysis or Plan of Operation........42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......48
Item 8. Financial Statements and Supplementary Data......................49
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures......................................49
Item 9A. Controls and Procedures..........................................49
Item 9B. Other Information................................................49
PART III
Item 10. Directors and Executive Officers of the Registrant...............50
Item 11. Executive Compensation...........................................54
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................55
Item 13. Certain Relationships and Related Transactions...................56
Item 14. Principal Accountant Fees and Services...........................57
PART IV
Item 15. Exhibits, Financial Statement Schedules..........................58
2
Forward-Looking Statements
Throughout this report, we make "forward-looking statements."
Forward-looking statements include the words "may," "will," "estimate,"
"continue," "believe," "expect" or "anticipate" and other similar words. These
forward-looking statements generally relate to our plans and objectives for
future operations and are based upon management's reasonable estimates of future
results or trends. Although we believe that our plans and objectives reflected
in or suggested by such forward-looking statements are reasonable, we may not
achieve such plans or objectives. Actual results may differ from projected
results due, but not limited, to unforeseen developments, including developments
relating to the following:
o The availability and adequacy of our cash flow to meet its
requirements, including payment of loans;
o Economic, competitive, demographic, business and other
conditions in our local and regional markets;
o Changes or developments in laws, regulations or taxes in the
ethanol, agricultural or energy industries;
o Actions taken or omitted to be taken by third parties
including our Design Builder, our suppliers and competitors,
as well as legislative, regulatory, judicial and other
governmental authorities;
o Competition in the ethanol industry;
o The loss of any license or permit;
o The loss of our plant due to casualty, weather, mechanical
failure or any extended or extraordinary maintenance or
inspection that may be required;
o Changes in our business strategy, capital improvements or
development plans;
o The availability of additional capital to support capital
improvements and development; and
o Other factors discussed under "Risk Factors" in this report.
You should read this report completely and with the understanding that
actual future results may be materially different from what we expect. The
forward looking statements specified in this report have been compiled as of the
date of this report and should be evaluated with consideration of any changes
occurring after the date of this report. We will not update forward-looking
statements even though our situation may change in the future.
PART I
Item 1. Business
In November 2005, we raised gross proceeds of $34,459,900 to develop,
construct, own, and operate a 50 million gallon dry mill ethanol plant in
Shenandoah, Iowa (the "Plant"). We plan to build the Plant such that it will,
according to representatives of our design-builder, Fagen, Inc. ("Fagen"), have
an annual capacity to process approximately 18 million bushels of corn into
approximately 50 million gallons of ethanol and will produce approximately
160,000 tons annually of animal feed known as Distillers Dried Grains with
3
Solubles ("DDGS") on a dry matter basis. These are the principal by-products of
the ethanol production process. Fagen, Inc. representatives have indicated to us
that the Plant will also produce approximately 148 thousand tons of raw carbon
dioxide annually as another by-product of the ethanol production process. We are
still exploring the options available to us to recover and market the raw carbon
dioxide. However, because there is significant ethanol production in the areas
where we intend to locate the Plant, we might not be able to find a market for
our CO(2) and may end up venting it off as many other producers do.
The following diagram describes the plant we intend to build.
[DIAGRAM OMITTED]
1. Ethanol storage tanks: Two ethanol storage tanks. Three tanks
used for 190 proof ethanol and 200 proof undenatured ethanol
and denaturant. All of the described tanks will be within a
retention berm.
2. Administration Building: This building will have brick and/or
siding on the exterior and will be approximately 2,700 square
feet.
3. DDGS Building: This will be a steel sided building and will be
21,875 square feet. All dry distillers grain will be stored in
this building.
4. Grain Receiving Building: The building will be a steel sided
building 165 feet long by 65 feet wide and approximately 40
feet tall. There will be two truck bays and one rail bay.
5. Cement Corn Silos: Two 200,000 bushel silos and two 15,000
bushel per hour legs.
6. Fermentation Tanks: Three fermentation tanks and one beer
well.
7. Main Process Building: Structural steel frame building housing
tanks, pumps and heat exchangers as well as a control room and
laboratory. Total square footage is approximately 25,000 feet.
8. Two Methanator Tanks.
9. Thermal Oxidizer Stack: Approximately 125 feet tall. The exact
height will depend on air modeling and input from the IDNR.
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10. Distillation and Evaporation Center.
11. Stillage and Syrup Tanks.
12. Energy Center: Structural steel building totaling
approximately 13,750 square feet housing both of the DDGS
dryers and the Thermal Oxidizer.
13. Cooling Tower: Four cell induced draft cooling tower.
Primary Product--Ethanol
Ethanol is a chemical produced by the fermentation of sugars found in
grains and other biomass. Ethanol can be produced from a number of different
types of grains, such as wheat and sorghum, as well as from agricultural waste
products such as sugar, rice hulls, cheese whey, potato waste, brewery and
beverage wastes and forestry and paper wastes. However, according to publicly
available information from the Renewable Fuels Association, approximately 90% of
ethanol in the United States today is produced from corn, because corn contains
large quantities of carbohydrates that convert into glucose more easily than
most other kinds of biomass.
Description of Dry Mill Process
Our Plant will produce ethanol by processing corn. The corn will be
received by rail and by truck, then weighed and unloaded in a receiving
building. It will then be transported to a scalper to remove rocks and debris
before it is conveyed to storage bins. Thereafter, the corn will be transported
to a hammer mill or grinder where it is ground into a mash and conveyed into a
slurry tank for enzymatic processing. We will add water, heat and enzymes to
break the ground grain into a fine slurry. The slurry will be heated for
sterilization and pumped to a liquefaction tank where additional enzymes are
added. Next, the grain slurry is pumped into fermenters, where yeast is added,
to begin a batch fermentation process. A vacuum distillation system will divide
the alcohol from the grain mash. Alcohol is then transported through a rectifier
column, a side stripper and a molecular sieve system where it is dehydrated. The
200 proof alcohol is then pumped to farm shift tanks and blended with five
percent denaturant (usually gasoline) as it is pumped into storage tanks.
Corn mash from the distillation stripper is pumped into one of several
decanter type centrifuges for dewatering. The water ("thin stillage") is then
pumped from the centrifuges and then to an evaporator where it is dried into a
thick syrup. The solids that exit the centrifuge or evaporators ("the wet cake")
are conveyed to the DDGS dryer system. Syrup is added to the "the wet cake" as
it enters the dryer, where moisture is removed. The process will produce
distillers grains, which are processed corn mash that can be used as animal
feed.
Construction is anticipated to begin in April of 2006. The Company
anticipates that the plant will begin producing ethanol and by-products in May
of 2007.
The following flow chart illustrates the dry mill process:
5
[FLOW CHART OMITTED]
Thermal Oxidizer
Ethanol plants such as ours may produce odors in the production of
ethanol and its primary by-product, DDGS that some people find to be unpleasant.
We intend to employ a thermal oxidizer emissions system to help reduce the risk
of this problem.
We expect a thermal oxidizer emissions system to reduce any unpleasant
odors caused by the ethanol and distillers grains manufacturing process. We
expect this addition to the Plant to reduce the risk of possible nuisance claims
and any related negative public reaction against us.
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By-Products
The principal by-product of the ethanol production process is
distillers grains, a high protein, high-energy animal feed supplement primarily
marketed to the dairy and beef industry. Distillers grains contain by-pass
protein that is superior to other protein supplements such as cottonseed meal
and soybean meal. By-pass proteins are more digestible to the animal, thus
generating greater lactation in milk cows and greater weight gain in beef
cattle. Dry mill ethanol processing creates three forms of distillers grains:
Distillers Wet Grains with Solubles ("DWGS"), Distillers Modified Wet Grains
with Solubles ("DMWG") and Distillers Dried Grains with Solubles ("DDGS"). DWGS
is processed corn mash that contains approximately 70% moisture. DWGS has a
shelf life of approximately three days and can be sold only to farms within the
immediate vicinity of an ethanol plant. DMWG is DWGS that has been dried to
approximately 50% moisture. DMWG have a slightly longer shelf life of
approximately three weeks and are often sold to nearby markets. DDGS is DWGS
that has been dried to 10% moisture. DDGS has an almost indefinite shelf life
and may be sold and shipped to any market regardless of its vicinity to an
ethanol plant. We intend to market DDGS and are exploring possibilities of local
demand for DMWG to market at least a portion of our distillers grains in this
form.
Corn Feedstock Supply
We anticipate that our Plant will process approximately 18 million
bushels of grain per year or 49,300 bushels per day as the feedstock for its dry
milling process. The corn supply for our plant will be obtained primarily from
local markets. In the year 2003, in the area surrounding the proposed site at
Shenandoah, corn production was approximately 167.4 million bushels. In 2004,
which was a record year for corn production in the US, the same area surrounding
the proposed site in Shenandoah, produced approximately 263.5 million bushels -
an increase of approximately 96 million bushels. We believe such increases were
due in part to better genetics in the corn seed itself as well as very favorable
climatic conditions. There is no assurance that such high levels of production
can be achieved in the future. The following table provides a summary of the
approximate number of bushels of corn produced by suppliers, in the counties
surrounding the proposed site in Shenandoah, Iowa, during the year 2004. These
figures were obtained from information published by the US Department of
Agriculture and the National Agricultural Statistics Service (NASS).
Corn
County District (bushels)
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Adair, Iowa SW 19,300,000
Fremont, Iowa SW 21,670,000
Cass, Iowa SW 23,850,000
Page, Iowa WC 18,620,000
Mills, Iowa SW 18,300,000
Montgomery, Iowa SW 16,860,000
Pottawattamie, Iowa SW 42,300,000
Taylor, Iowa SW 11,050,000
Atchison, Missouri SW 22,182,000
Nodaway, Missouri NW 17,125,000
Nemaha, Nebraska SW 12,732,400
Cass, Nebraska SE 20,585,600
Otoe, Nebraska SE 18,921,600
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Total 263,496,600
Source: USDA and NASS Websites
The price and availability of grain are subject to significant
fluctuations depending upon a number of factors that affect commodity prices in
general, including crop conditions, weather, governmental programs and foreign
purchases. Because the market price of ethanol is not related to corn prices,
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ethanol producers are generally not able to compensate for increases in the cost
of corn feedstock through adjustments in prices charged for their ethanol. We
therefore anticipate that our Plant's profitability will be negatively impacted
during periods of high corn prices. The straight, average price for corn in Iowa
over the past ten years has been approximately $2.185 per bushel. In the area
surrounding the proposed site in Shenandoah, Iowa over the last ten years has
been slightly less. The average price of $2.185 per bushel was calculated by the
Company gathered from information provided on the website of the National
Agricultural Statistics Service, a division of the USDA.
Grain Elevators
We anticipate establishing ongoing business relationships with local
corn farmers and elevators to acquire the corn needed for the project. Much of
our corn is expected to be acquired directly from farmers. Most of the farmers
in the area have their own dry storage facilities. This will allow us to
purchase much of the corn needed to operate the Plant directly from farmers. We
expect to become licensed as an Iowa Grain Dealer, which will allow us to
contract to purchase Iowa grains. We have identified a number of farms and
elevators as potential sources of corn for our plant and have had discussions
with various different people and groups about future corn delivery. We have no
contracts, agreements or understandings with any grain producers in the area,
although we anticipate procuring corn from these sources.
Commodities Manager
We intend to hire a commodities manager to ensure the consistent
scheduling of corn deliveries and to establish and fill forward contracts
through the grain elevators and local farmers. The commodities manager will
coordinate corn deliveries between the trucks, railroad and the participating
farmers and elevators. Additionally, the commodities manager will help develop
price protection through the use of hedging strategies, with input from our
general manager, Doug Shultz of John Stewart and Associates, who we anticipate
engaging to help us create such strategies, and certain members of our Board of
Directors.
Ethanol Markets
Ethanol has important applications. Ethanol is a primary fuel that can
be used in blended gasoline in quantities as high as 85% (E-85) per gallon in
certain flex-fuel vehicles. However, ethanol can also be used as a high quality
octane enhancer and as an oxygenate capable of reducing air pollution and
improving automobile performance. This is how ethanol has been predominately
used in the United States in the past. Further, the ethanol industry has
historically been heavily dependent on several economic incentives to produce
ethanol. However, the need for such incentives is becoming less and less as the
acceptance of ethanol as a primary fuel and as a fuel additive continues to
increase.
Local Ethanol Markets
Local markets are, of course, the easiest to service because of their
close proximity. We are building our plant in an area where there is no other
ethanol plants within approximately a 100 mile radius. Therefore, we may be able
to market a significant portion of our ethanol in the surrounding area. However,
the local markets where we intend to build our Plant may be oversold with other
regional marketers, and if we were to focus solely on local markets, it could
depress the local ethanol price. Therefore, we anticipate that we will market
the majority of our ethanol to regional and national markets.
Regional Ethanol Markets
Typically a regional market is one that is outside of the local market,
yet within the neighboring states. This market will likely be serviced by rail,
and is within a 450-mile radius of the Plant. A spur of the rail lines of
Burlington Northern railroad run adjacent to our site in Iowa. However, we will
8
have to expend a substantial amount of capital to have the spur upgraded to
service our plant - approximately $3.5 million dollars. We will also have to
spend significant capital to put in rail sidings, switches, etc. on our property
to allow us to move and store rail cars at the site - approximately $1.6
million. When completed, these rail lines will allow us to sell our products to
both the Western and Eastern markets. The rail lines and the nearness of
Interstate Highways will allow us to transport our products to regional markets.
Regional markets typically include large cities that are either carbon monoxide
or ozone non-attainment areas.
Generally, the regional market is good business to develop. The freight
is reasonable, but the competition is often aggressive. However, due to the
proximity of regional markets, it is often easier to obtain letters of intent to
sell product to regional buyers than from national buyers. These letters, while
not binding, do tend to raise the comfort level of the financial lending
institutions. Not surprising in a regional market, letters of intent to purchase
are taken quite seriously by the buyer. Regional pricing tends to follow
national pricing less the freight difference. As with national markets, the use
of a group-marketing program or a broker is advantageous, especially in the
first one to three years of operation. At this time, we have no letters of
intent with any third party concerning the possible sale of ethanol.
Occasionally there are opportunities to obtain backhaul rates from
local trucking companies. These are rates that are reduced since the truck is
loaded both ways. Normally the trucks drive to the refined fuels terminals empty
and load gasoline product for delivery. A backhaul is the opportunity to load
the truck with ethanol to drive to the terminal.
National Ethanol Markets
In the past few years, California has been the focus of a major ethanol
campaign as MTBE has now been phased out. California banned the use of MTBE
beginning January 1, 2004. California represents a market of about 950 million
gallons annually due to the oxygenate requirements. With further steps recently
taken by the State, the consumption of ethanol is expected to increase
substantially within California.
While there is a great deal of focus on California, another emerging
ethanol market is in the Northeast. Both New York and Connecticut banned the use
of MTBE as of December 31, 2004. As in California, the primary drivers are the
health and water concerns surrounding the use of MTBE. According to
representatives of our anticipated ethanol marketing group, RPMG, the markets in
the Northeast currently consume approximately 300 to 400 million gallons of
ethanol on an annual basis. In 2005, New Jersey banned the use of MTBE. That
phase out becomes effective on May 1, 2006. New Jersey alone represents 400
million gallons annually of incremental ethanol blending. If, other States, such
as Pennsylvania, Maryland, Massachusetts, Rhode Island and Maine, (and it is
anticipated that they will do so) begin to phase out the use of MTBE, the usage
in the Northeast could increase by an additional 1 billion gallons annually,
bringing the total consumption in the Northeast corridor to over 1.8 billion
gallons per year.
The location of Burlington Northern rail lines running adjacent to our
proposed Plant site will allow us to transport our ethanol to markets throughout
the country. Being an ethanol producer west of the Mississippi, we believe the
Western markets will become our largest and best markets, because it will be
less expensive to transport our products to the western markets than to the
eastern. However, we intend to market our ethanol to the best available market
at any given time.
California, Illinois, Ohio and Minnesota are by far the largest ethanol
markets. In addition to California there are also other significant national
ethanol market opportunities such as Arizona, Colorado, Texas, Oregon,
Washington, New Mexico and Nevada, and more are developing, especially, with the
passage of the US Energy Bill in 2005. The bill mandated that at least 7.5
billion gallons of ethanol were to be used annually within the United States by
the year 2012.
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General Demand
Ethanol demand is expected to continue at a very aggressive pace. If
the use of MTBE is phased out on a national level in the next few years, and the
use of E-85 as a primary fuel increases dramatically, as it is anticipated to
do, more than a doubling of ethanol demand could occur. This outlook was
affected significantly with the passage of the Energy Bill by the US Congress in
2005.
Ethanol Pricing
Historically, ethanol prices tend to track the wholesale gasoline price
plus the federal tax incentive of 52(cent) per gallon. In 1996 the ethanol price
increased dramatically because high corn prices caused many ethanol plants to
curtail operations or shutdown. During the past two years, ethanol has traded
between a high of approximately $3.05 and a low of approximately $1.05 per
gallon. Prices can vary from state to state at any given time.
The average price of corn in Iowa has historically been less than in
many other parts of the country, which is why we are focusing so intently on
Iowa for site location. However, unlike some neighboring states, such as
Minnesota, South Dakota, Nebraska, and Wisconsin, in which some of our
competitors are doing business, the State of Iowa does not have a state ethanol
producer incentive payment program. The lack of such an incentive may place us
at a competitive disadvantage for capital and other resources when compared to
competing ethanol producers in other states.
Federal 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 increased due to a
second Clean Air Act program, the Reformulated Gasoline Program. This program
became effective January 1, 1995, and requires the sale of reformulated gasoline
in nine major urban areas to reduce pollutants, including those that contribute
to ground level ozone, better known as smog.
The 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 exempted ethanol blended gasoline from the federal gas 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 exemption
currently allows the market price of ethanol to compete with the price of
domestic gasoline. The exemption for a 10% ethanol blend is the equivalent of
providing a per gallon "equalization" payment that allows blenders to pay more
for ethanol than the wholesale price of gasoline and still retain profit margins
equal to those received upon the sale of gasoline that is not blended with
ethanol. Under current legislation, the federal gasoline tax is $0.184 per
gallon and the tax on a 10% ethanol blend is $0.13 per gallon, providing a
$0.054 difference. The exemption gradually dropped to 5.1 cents in 2005. This
federal tax exemption is scheduled to expire in 2007.
We believe the most significant boost to ethanol demand was the passage
of the Energy Bill last year (2005) by the US Congress. The bill mandates that
at least 7.5 billion gallons of ethanol be used on an annual basis within the US
by the year 2012. It also gives "small ethanol producers" producing less than 60
million gallons of ethanol per year a 10 cent per gallon federal tax credit on
the first 15 million gallons produced on an annual basis. We believe we will be
eligible for this credit and intend to apply for it once our Plant is
operational.
10
Project Location--Proximity to Markets
We intend to build our Plant in southwestern Iowa in Fremont County
near the City of Shenandoah. Site selection was based upon location to existing
grain production and price, animal feed lots, roads, rail transportation,
natural gas lines, and major population centers. In November, 2005, we purchased
two different parcels of land totaling approximately 95.91 acres from a private
individual. The Shenandoah Chamber and Industry Association ("SCIA") is donating
to us an additional parcel of land of approximately 12 acres that lies to the
southeast of these two parcels. The rail lines of Burlington Northern run along
the Southern border of SCIA's property. These lines will connect us to the
regional and national ethanol markets of the U.S. Final site selection was
contingent on analysis of such issues as cost of water, utilities and
transportation, and upon raising sufficient funds to allow for construction, the
securing of additional financing needed, and obtaining necessary permits and
approvals to build at the selected location. There are no affiliations with the
Company, or any of our directors, and the owners of the land from whom we
acquired the land to build our Plant.
Transportation and Delivery
The Plant will have the facilities to receive grain by truck and rail
and to load ethanol and distiller's grains onto trucks and rail cars. The site
of the Plant lies adjacent to the lines of the Burlington Northern Railroad
(BNSF). However, the spur on which the plant will be located needs to be
upgraded to meet HAZMAT (Hazardous Materials) standards. Approximately 20 miles
of the spur will need to be upgraded and some additional track will need to be
constructed (the "GPRE Track"). On January 26, 2006, we entered into an
Allowance Contract (the "Allowance Agreement") with BNSF Railway Company
("BNSF") to renovate and add the additional track.
Under the Allowance Agreement, we will undertake to fund an estimated
$3.5 million for track renovation and construction. The renovation and
construction work will be done by BNSF. We are entitled to receive refund
payments from BNSF to reimburse us for this expense. We will receive rebates for
each car that is place on the track, but only to the extent that our usage of
the line exceeds the annual volume thresholds. There can be no assurance that
our usage will surpass the annual volume thresholds or that we will be
reimbursed for all or any part of the renovation or construction costs.
The Allowance Agreement is for a term expiring on September 14, 2015.
We are responsible for complying with all laws, regulations, ordinances, orders,
covenants, restrictions, and decisions of any court of competent jurisdiction in
connection with our use of the GRPE Track ("Laws") and the related renovation
and construction work. Our use of the GPRE Track is at our sole risk and
expense, and we are required to maintain, or cause to be maintained, the GRPE
Track and all facilities and equipment, if any, in a safe and satisfactory
condition, in compliance with all applicable Laws and in a condition
satisfactory to BNSF. BNSF may require for safety purposes that we, at our sole
cost and expense, provide flagmen, lights, traffic control devices, automatic
warning devices, or any such safety measures that BNSF deems appropriate in
connection with our use of this property and we are required to reimburse BNSF
for the costs of such items.
We also agreed to release, indemnify, defend, and hold BNSF harmless
from and against all claims, liabilities, fines, penalties, costs, damages, and
other expenses arising out of or related to our renovation, construction and use
of the GPRE Track.
Utilities
The production of ethanol is a very energy intensive process that uses
significant amounts of electricity and natural gas. Water supply and quality is
also an important consideration.
11
Natural Gas
The Plant will produce process steam from its own boiler system and dry
the DDGS by-product via a direct gas-fired dryer. We anticipate the Plant will
use approximately 5,500 deca-therms per day. The price of natural gas is
volatile, therefore we expect to use hedging strategies to protect us from the
volatility of gas prices. We have hired U.S. Energy Services, Inc., who is
experienced in doing this to assist us.
Although, as described in the following paragraph, Mid American Energy
has agreed to construct a gas pipeline to the Plant, we will not be committed to
purchase natural gas from Mid American. We expect to purchase natural gas from
the best possible source at any given time and simply pay a tariff fee to Mid
American for transporting the gas through the pipeline. We could choose to
purchase natural gas from Mid American and/or Northern Natural Gas, or any other
third party, but we have not yet entered into any agreement with a utility
regarding the specific type and nature of service to be provided.
To access sufficient supplies of natural gas to operate the Plant, a
connection to a distribution pipeline located underground, which lies about 9
miles away from the site will be required. Mid American Energy has agreed that
they would pay for the initial costs to run the additional pipe needed to make
our Plant operational. However, we would be expected to pay for a portion of the
costs if we were to expand the plant in the future. We have entered into an
agreement with U.S. Energy Services, Inc. to act as our natural gas purchaser
and we anticipate entering into agreements, with the assistance of U.S. Energy
Services, with a natural gas supplier(s) at whatever site we choose before we
begin construction of the Plant. U.S. Energy Services, Inc. will also act as our
risk manager where natural gas is concerned.
Electricity
The Plant will require approximately 30,000,000 kilowatts hours per
year. We have been in discussions with Mid American Energy concerning the
purchase of electricity. We believe that we will be able to purchase electricity
from Mid American and that Mid American will supply electricity to the plant at
rates that will be favorable for the Company for a period of 5 years. If we were
to build other plants in Iowa in the future, electricity at other sites in Iowa
may or may not be supplied by Mid American, but we would expect to be able to
negotiate favorable rates at other sites with Mid American or other electricity
providers. However, no assurance can be given that we would be able to negotiate
favorable rates. We would anticipate negotiating an agreement with a power
supplier at any site before we began construction of any other Plant.
Water
We will require a significant supply of water. The water requirements
for a 50 million-gallon per-year plant are approximately 400 to 600 gallons per
minute. That is approximately 864,000 gallons per day if we were to use the
maximum amount. Much of the water used in an ethanol plant is recycled back into
the process. We will need boiler makeup water and cooling tower water. Boiler
makeup water is treated on-site to minimize all elements that will harm the
boiler. Recycled water cannot be used for this process. Cooling tower water is
deemed non-contact water (it does not come in contact with the mash) and,
therefore, can be regenerated back into the cooling tower process. We anticipate
using "grey water" that the City has agreed to give us for the cost of pumping
the water from their treatment plant to our site, for this part of the Plant at
the Shenandoah site. This water will makeup about two thirds of the water that
we will use at the Plant. The makeup water requirements for the cooling tower
are primarily a result of evaporation. Depending on the type of technology
utilized in the plant design, much of the water can be recycled back into the
process, which will minimize the discharge water. This will have the long-term
effect of lowering wastewater treatment costs. Many new plants today are zero or
near zero effluent facilities. At most, there should be no more than 300 gallons
per minute of non-contact cooling water effluent.
12
The City Engineer for Shenandoah, the Manager of the Waste Water
Treatment Facility in Shenandoah and engineers from Fagen and ICM, working
together have almost completely designed the water system we will be using at
the Plant We anticipate purchasing the potable water that we will need for the
distillation process itself (water that will come into contact with the mash)
from the City of Shenandoah also. We have discussed our water needs with the
City's water plant superintendent, Kirk Kemper and Greg Scott, the Waste Water
Treatment Plant superintendent, on various occasions to make sure that there is
sufficient water for the Plant's operations. Mr. Kemper and Mr. Scott have also
had conversations with engineers at Fagen. and ICM to understand more fully the
exact amounts and types of water that will be necessary at our facility. Each
time we have had conversations with Mr. Kemper and Mr. Scott, including
conversations after they had been in contact with the engineers at Fagen and
ICM, we have been assured that the community has sufficient water to meet our
needs and that our water usage will not have any adverse effects on the needs of
other water users in the community.
Our Primary Competition
We will be in direct competition with numerous other ethanol producers,
many of whom have much greater resources. Currently, there are approximately 124
producing ethanol plants within the United States. Several of these are either
presently expanding their production capabilities or have plans to do so. There
are also numerous other plants under construction, and many more on the drawing
boards. Therefore, our proposed Plant will compete with many other ethanol
producers on the basis of price and, to a lesser extent, delivery service. We
anticipate that such competition will be extensive.
We also face competition from foreign producers of ethanol and such
competition may increase significantly in the future. According to information
obtained from the website of the Iowa Farm Bureau, at this time, there are large
international companies that have much greater resources than we have, including
Cargill, developing foreign ethanol production capacity. Cargill is currently
developing ethanol production capacity in El Salvador to process Brazilian
ethanol for export to the U.S. Long-standing U.S. trade preferences for
Caribbean and Central American countries allow them to ship ethanol to the U.S.
duty-free, avoiding a 54 cent per gallon import tariff that would otherwise
apply. 61 million gallons of ethanol were brought into the U.S. through the
Caribbean in 2003, to avoid said tariff, most of it reprocessed Brazilian
ethanol. It is believed that more than this amount was brought into the U.S. in
2004 and 2005, but we do not have data at this time to substantiate what those
numbers actually were.
Brazil is the world's largest ethanol producer. They make ethanol
primarily from sugarcane for about half of what it costs to make ethanol from
corn in Iowa. Brazil exported another 10 million gallons of ethanol directly to
the U.S. in 2003, even with the full import tariff. They could export even more
this year. If significant additional foreign capacity is created, such
facilities could produce a glut of ethanol on the world markets. Such a glut
could lower the price of ethanol throughout the world, including the U.S. If
this were to happen, it could have an adverse effect our operations and
potential profitability. We do not believe that this is likely to happen,
because we believe ethanol usage is going to increase significantly in the
future rather than decrease, due in part to higher prices for oil, which we
expect to increase even further from their current levels. However, such foreign
competition is a risk to our business.
Further, if the import duty on foreign ethanol were to ever be lifted
for any reason, our ability to compete with such foreign companies would be
drastically reduced. Although, at this time, such risks cannot be precisely
quantified, we believe that such risks exist, and could increase in the future.
Another risk we face is that because we do not presently have any
contracts to acquire corn from any producers, we may have to pay more for corn
than other plants that do have existing contracts. We believe we can compete
favorably with other ethanol producers due to our proximity to ample grain
supplies at favorable prices, because, historically, the price of corn in the
Southwest region of the State has been, more often than not, lower than in other
regions of Iowa. However, no guarantee can be given that the prices will remain
lower or that we will be able to purchase corn at lower prices than our
competition.
13
During the last twenty years, ethanol production capacity in the United
States has grown from almost nothing to an estimated 4.3 billion gallons per
year. New plants currently under construction and plants currently being
expanded should increase capacity by approximately 1.8 billion gallons by the
end of 2006 and the beginning of 2007. We believe this increase in capacity will
continue in the future as more plants are built and/or expanded. We cannot
determine the effect of this type of an increase upon the demand or price of
ethanol.
As stated above, the ethanol industry has grown to approximately 124
production facilities in the United States. Industry authorities estimate that
these facilities are capable of producing approximately 4.3 billion gallons of
ethanol per year. The largest ethanol producers include Archer Daniels Midland,
Cargill, Minnesota Corn Processors, Broin, Vera Sun, Midwest Grain, Williams
Energy Service, New Energy Corporation and High Plains Corporation, all of which
are capable of producing more ethanol than we expect to produce. In addition,
there are several regional entities recently formed, or in the process of
formation, of a similar size and with similar resources to ours.
The following table identifies all of the producers in the United
States that we are aware of along with their production capacities.
U.S. FUEL ETHANOL PRODUCTION CAPACITY
million gallons per year (mmgy)
Under
Current Construction/
Capacity Expansions
Company Location Feedstock (mmgy) (mmgy)
- ------- -------- --------- -------- ------------
Abengoa Bioenergy Corp. York, NE Corn/milo 55
Colwich, KS 25
Portales, NM 30
Ravenna, NE 88
ACE Ethanol, LLC Stanley, WI Corn 39
Adkins Energy, LLC* Lena, IL Corn 40
Advanced Bioenergy Fairmont, NE Corn 100
AGP* Hastings, NE Corn 52
Agra Resources Coop. Albert Lea, MN Corn 40 8
d.b.a. EXOL*
Agri-Energy, LLC* Luverne, MN Corn 21
Alchem Ltd. LLLP Grafton, ND Corn 10.5
Al-Corn Clean Fuel* Claremont, MN Corn 35
Amaizing Energy, LLC* Denison, IA Corn 40
Archer Daniels Midland Decatur, IL Corn 1,070
Cedar Rapids, IA Corn
Clinton, IA Corn
Columbus, NE Corn
Marshall, MN Corn
Peoria, IL Corn
Wallhalla, ND Corn/barley
Aventine Renewable Pekin, IL Corn 100 57
Energy, LLC Aurora, NE Corn 50
14
Badger State Ethanol, Monroe, WI Corn 48
LLC*
Big River Resources, LLC* West Burlington, IA Corn 40
Broin Enterprises, Inc. Scotland, SD Corn 9
Bushmills Ethanol, Inc.* Atwater, MN Corn 40
Cargill, Inc. Blair, NE Corn 85
Eddyville, IA Corn 35
Central Indiana Ethanol, Marion, IN Corn 40
LLC
Central MN Ethanol Coop* Little Falls, MN Corn 21.5
Central Wisconsin Alcohol Plover, WI Seed corn 4
Chief Ethanol Hastings, NE Corn 62
Chippewa Valley Ethanol Benson, MN Corn 45
Co.*
Commonwealth Agri-Energy, Hopkinsville, KY Corn 24 9
LLC*
Corn, LP* Goldfield, IA Corn 50
Cornhusker Energy Lexington, NE Corn 40
Lexington, LLC
Corn Plus, LLP* Winnebago, MN Corn 44
Dakota Ethanol, LLC* Wentworth, SD Corn 50
DENCO, LLC* Morris, MN Corn 21.5
E3 Biofuels Mead, NE Corn 24
East Kansas Agri-Energy, Garnett, KS Corn 35
LLC*
ESE Alcohol Inc. Leoti, KS Seed corn 1.5
Ethanol2000, LLP* Bingham Lake, MN Corn 32
Frontier Ethanol, LLC Gowrie, IA Corn 60
Front Range Energy, LLC Windsor, CO Corn 40
Glacial Lakes Energy, Watertown, SD Corn 50
LLC*
Golden Cheese Company of Corona, CA Cheese whey 5
California*
Golden Grain Energy, LLC* Mason City, IA Corn 40
Golden Triangle Energy, Craig, MO Corn 20
LLC*
Grain Processing Corp. Muscatine, IA Corn 20
Granite Falls Energy, LLC Granite Falls, MN Corn 45
Great Plains Ethanol, LLC* Chancellor, SD Corn 50
Green Plains Renewable Shenandoah, IA Corn 50
Energy
Hawkeye Renewables, LLC Iowa Falls, IA Corn 50 50
Fairbank, IA Corn 100
Heartland Corn Products* Winthrop, MN Corn 36
Heartland Grain Fuels, Aberdeen, SD Corn 9
LP* Huron, SD Corn 12 18
15
Heron Lake BioEnergy, LLC Heron Lake, MN Corn 50
Horizon Ethanol, LLC Jewell, IA Corn 60
Husker Ag, LLC* Plainview, NE Corn 26.5
Illinois River Energy, Rochelle, IL Corn 50
LLC
Iowa Ethanol, LLC* Hanlontown, IA Corn 50
Iroquois Bio-Energy Rensselaer, IN Corn 40
Company, LLC
James Valley Ethanol, LLC Groton, SD Corn 50
KAAPA Ethanol, LLC* Minden, NE Corn 40
Land O' Lakes* Melrose, MN Cheese whey 2.6
Lincolnland Agri-Energy, Palestine, IL Corn 48
LLC*
Lincolnway Energy, LLC* Nevada, IA Corn 50
Liquid Resources of Ohio Medina, OH Waste Beverage 3
Little Sioux Corn Marcus, IA Corn 52
Processors, LP*
Merrick/Coors Golden, CO Waste beer 1.5 1.5
MGP Ingredients, Inc. Pekin, IL Corn/wheat 78
starch
Atchison, KS
Michigan Ethanol, LLC Caro, MI Corn 50
Mid America Agri Madrid, NE Corn 44
Products/Wheatland
Mid-Missouri Energy, Inc.* Malta Bend, MO Corn 45
Midwest Grain Processors* Lakota, IA Corn 50 45
Riga, MI Corn 57
Midwest Renewable Energy, Sutherland, NE Corn 17.5 4.5
LLC
Minnesota Energy* Buffalo Lake, MN Corn 18
Missouri Ethanol Laddonia, MO Corn 45
New Energy Corp. South Bend, IN Corn 102
North Country Ethanol, Rosholt, SD Corn 20
LLC*
Northeast Missouri Grain, Macon, MO Corn 45
LLC*
Northern Lights Ethanol, Big Stone City, SD Corn 50
LLC*
Northstar Ethanol, LLC Lake Crystal, MN Corn 52
Otter Creek Ethanol, LLC* Ashton, IA Corn 55
Panhandle Energies of Dumas, TX Corn/Grain 30
Dumas, LP Sorghum
Parallel Products Louisville, KY Beverage waste 5.4
R. Cucamonga, CA
16
Permeate Refining Hopkinton, IA Sugars & 1.5
starches
Phoenix Biofuels Goshen, CA Corn 25
Pine Lake Corn Steamboat Rock, IA Corn 20
Processors, LLC*
Platte Valley Fuel Central City, NE Corn 40
Ethanol, LLC
Prairie Ethanol, LLC Loomis, SD Corn 60
Prairie Horizon Phillipsburg, KS Corn 40
Agri-Energy, LLC
Pro-Corn, LLC* Preston, MN Corn 42
Quad-County Corn Galva, IA Corn 27
Processors*
Red Trail Energy, LLC Richardton, ND Corn 50
Redfield Energy, LLC Redfield, SD Corn 50
Reeve Agri-Energy Garden City, KS Corn/milo 12
Siouxland Energy & Sioux Center, IA Corn 25
Livestock Coop*
Siouxland Ethanol, LLC Jackson, NE Corn 50
Sioux River Ethanol, LLC* Hudson, SD Corn 55
Sterling Ethanol, LLC Sterling, CO Corn 42
Tall Corn Ethanol, LLC* Coon Rapids, IA Corn 49
Tate & Lyle Loudon, TN Corn 67
The Andersons Albion Albion, MI Corn 55
Ethanol LLC
Trenton Agri Products, Trenton, NE Corn 35 10
LLC
United WI Grain Producers, Friesland, WI Corn 49
LLC*
US BioEnergy Corp. Albert City, IA Corn 100
Lake Odessa, MI Corn 45
U.S. Energy Partners, LLC Russell, KS Milo/wheat 48
starch
Utica Energy, LLC Oshkosh, WI Corn 48
Val-E Ethanol, LLC Ord, NE Corn 45
VeraSun Energy Corporation Aurora, SD Corn 230
Ft. Dodge, IA Corn
Voyager Ethanol, LLC* Emmetsburg, IA Corn 52
Western Plains Energy, Campus, KS Corn 45
LLC*
Western Wisconsin Boyceville, WI Corn 40
Renewable Energy, LLC*
Wind Gap Farms Baconton, GA Brewery waste 0.4
Wyoming Ethanol Torrington, WY Corn 5
Xethanol BioFuels, LLC Blairstown, IA Corn 5
- --------------------------------------------------------------------------------
Total Current Capacity 4336.4
- --------------------------------------------------------------------------------
Total Under
Construction/Expansions 1746
- --------------------------------------------------------------------------------
Total Capacity 6082.4
================================================================================
17
* farmer-owned
Updated: January 2006
Source: Renewable Fuels
Association
Operating Ethanol Plants in the State of Iowa
There are currently 21 operating ethanol plants in Iowa. Eight other
plants are currently under construction in Iowa or are expected to begin
construction in the near future. The plants are scattered throughout the State,
but are concentrated, for the most part, in the northern and central regions
where a majority of the corn is produced. We plan to build our Plant in the
southwestern part of Iowa, where corn has historically been less expensive than
in many other parts of the State.
Competition from Alternative Fuel Additives
Alternative fuels, gasoline oxygenates and ethanol production methods
are continually under development by ethanol and oil companies with far great
resources. New products or methods of ethanol production developed by larger and
better-financed competitors could provide them competitive advantages and harm
our business.
The development of ethers to be used as oxygenates may provide a growth
segment for ethanol. Ethers are composed of isobutylene (a product of the
refining industry) and ethanol or methanol. The products are ethyl tertiary
butyl ether ("ETBE") or methyl tertiary butyl ether ("MTBE"). We expect to
compete with producers of MTBE, a petrochemical derived from methanol that costs
less to produce than ethanol. MTBE is a commonly used oxygenate used in fuels
for compliance with Federal Clean Air Act mandates, and is a major competitor of
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.
However, MTBE has been linked to groundwater contamination at various
locations in the east and west. As a result, California passed legislation which
completely phased out MTBE from its gasoline pool as of January 1, 2004.
Similarly, New York and Connecticut passed legislation to phase out the use of
MTBE by December 31, 2004. According to the Energy Information Administration,
more than sixteen states have banned the use of MTBE, due to concerns over
groundwater contamination, and other states are proposing to do so. Ethanol is
the most readily available substitute for MTBE in these markets. Assuming that
more states, and/or the US Environmental Protection Agency, force elimination of
MTBE, we would expect the demand for ethanol to increase.
With the recent passage of the Federal Energy Bill in 2005, the
protection from lawsuits that had been granted to producers and blenders of MTBE
were removed. This means that anyone that used MTBE in the past cannot be sued
for doing so, since it was the Federal Government that required blenders to
oxygenate with such things as MTBE in the first place. However, producers and/or
blenders that continue to produce and/or use MTBE as an oxygenate, may be used
in the future. Therefore, many producers and blenders are choosing not to use
MTBE as an oxygenate, such as Valero, who stated that they were not going to
produce or blend MTBE any more, two days after the legislation was passed and
became law. Others are expected to follow.
Advances and changes in the technology of ethanol production are
expected to occur. Such advances and changes may make the ethanol production
technology less desirable or obsolete. The Plant is a single-purpose entity and
has no use other than the production of ethanol and associated products. Any
such event may have a material adverse effect on our operations, cash flows and
financial performance.
18
Employees
We presently have three permanent employees, our CEO, our general
manager and an assistant that works in our Shenandoah office with our general
manager. Our success will depend in part on our ability to attract and retain
qualified personnel at a competitive wage and benefit level. We must hire
qualified managers, accounting, human resources and other personnel. We will
operate in a rural area with low unemployment. There is no assurance that we
will be successful in attracting and retaining qualified personnel at a wage and
benefit structure at or below those we have assumed in our project. If we are
unsuccessful in this regard, such event may have a material adverse effect on
our operations, cash flows and financial performance.
Prior to completion of the Plant construction and commencement of
operations, we intend to hire a total of approximately 34 employees.
Approximately ten of our employees will work in management and administration
and the remainder will work in Plant operations.
The following table represents some of the anticipated positions within
the plant and the minimum number of individuals we intend to employ for each
position:
Position Number Employed
- ---------------------------------------------------- ---------------------------
President/CEO 1
General Manager 1
Plant Manager 1
Production Manager 1
Commodities Manager 1
Controller 1
Lab Manager 1
Lab Technician 2
Environmental/Safety Specialist 1
Secretary/Clerical 4
Shift Supervisors 4
Maintenance Supervisor 1
Maintenance Craftsmen 4
Plant Operators 12
---------------------------
TOTAL 35
The position titles, job responsibilities and numbers allocated to each
position may differ when we begin to employ individuals for each position.
We intend to enter into written confidentiality and assignment
agreements with our officers and employees. Among other things, these agreements
are expected to require such officers and employees to keep strictly
confidential all proprietary information developed or used by us in the course
of our business.
Sales and Marketing
We intend to sell and market the ethanol and distiller's grains
produced at the Plant through normal and established markets. We hope to market
all of the ethanol produced with the assistance of an ethanol distributor, but
have not entered into any agreements regarding the sale of our ethanol.
Similarly, we hope to sell all of our DDGS through the use of an
ethanol-byproducts marketing firm, but have not entered into any agreements
regarding the sale of our DDGS.
We do not plan to hire or establish a sales organization to market any
of the products or by-products we produce. Consequently, we will be extremely
dependent upon the entities we plan to engage to purchase or market each of our
products.
19
Construction of the Plant--Proposed Design-Build Contract
We have entered into a Design-Build Contract with Fagen, Inc. in
connection with the design, construction and operation of the Plant.
Fagen, Inc.
Fagen, Inc. has been involved in the construction of more ethanol
plants than any other company in this industry. Fagen, Inc. is providing two
services for the project. First, Fagen is acting as co-developer for the project
along with ICM. Second, Fagen will act as the general contractor on the project.
Fagen, Inc. has extensive experience in the area of heavy industrial projects,
particularly agricultural based facilities. The expertise of Fagen in
integrating process and facility design into a construction and operationally
efficient facility is very important. In many instances, Fagen, Inc. has been
asked to return to the plant as the maintenance contractor or follow up
construction for major expansions. Fagen, Inc. has done repeat work for Chief
Ethanol Fuels and Minnesota Corn Processors, both of whom rank in the top ten in
terms of the largest ethanol producers.
Fagen's understanding of operational efficiencies and integration of
various processes are essential to our success. Fagen, Inc. also has knowledge
and support to assist our management team in executing a successful start-up.
Fagen, Inc. is a meaningful project participant because of its investment and
desire to facilitate the project's successful transition from start-up to
day-to-day profitable operation.
General Terms and Conditions
We entered into a Lump-Sum Design Build Contract with Fagen, Inc. (the
"Construction Agreement"). The Construction Agreement is dated January 13, 2006,
but it was not mutually executed by the parties until January 23, 2006. Under
the Construction Agreement, Fagen will provide all work and services in
connection with the engineering, design, procurement, construction startup,
performances tests, training for the operation and maintenance of the Plant and
provide all material, equipment, tools and labor necessary to complete the Plant
in accordance with the terms of the Construction Agreement. As consideration for
the services to be performed, Fagen will be paid $55,881,454, subject to
adjustments contained in the Construction Agreement.
We are required to pay an initial payment of $5,000,000, less
retainage, at the time of the notice to proceed. We are required to make
payments to Fagen based upon monthly applications for payment submitted to us by
Fagen, Inc. for all work performed as of the date of the application. We expect
to retain 10% of the amount submitted in each application for payment up to a
maximum of $2,794,073. Retainage will be released upon substantial completion of
the Plant or that related to completed portions of the work. All undisputed
amounts not paid within five days after the due date will incur interest.
If Fagen encounters "differing site conditions," it will expect to be
entitled to an adjustment in the contract price and time of performance, if such
conditions adversely affect its costs and performance time. By "differing site
conditions," we mean any concealed physical conditions at the site that:
o Materially differ from the conditions contemplated in the
Construction Agreement; or
o Any unusual conditions which differ materially from the conditions
ordinarily encountered in similar work.
In addition, Fagen is expected to be responsible for the following:
20
o Providing all necessary design services, such as architectural,
engineering and other professional design services, consistent with
applicable law and provided by licensed design professionals either
employed by Fagen or qualified independent licensed design consultants;
o Performing all work in accordance with all legal requirements;
o Obtaining all underground utility locating service permits, building
permits, mechanical permits, electrical permits, structure permits and
above ground storage tank permits;
o Performing its responsibilities in a safe manner so as to prevent
damage, injury or loss;
o Providing to us a warranty that the work performed for us is of good
quality, conforms to all contract and construction documents, and is
free of defect in materials and workmanship;
o For a period of one year after substantial completion, correcting, at
their cost, any defects in materials and workmanship and commencing
correction of defects within seven days of receipt of notice from us
that the work performed was defective;
o Obtaining and providing us with a certificate of insurance covering
claims arising from worker's compensation or disability; claims for
bodily injury, sickness, death or disease, regardless of whether the
person injured was an employee of Fagen; coverage for usual personal
injury liability claims for damages sustained by a person as a direct
or indirect result of Fagen's employment of the person, or sustained by
any other person; claims for damage or destruction of tangible personal
property; claims for damages (other than relating to Fagen's work)
because of injury to or destruction of tangible property; claims
arising from personal injury, death or property damage resulting from
ownership, use and maintenance of any motor vehicles; or claims
pursuant to any duty to indemnify. Such insurance must be maintained
throughout the development and construction of the Plant; and
o Indemnifying, defending and holding us, our officers, directors,
agents and employees harmless against any claims, losses, damages,
liabilities, including attorney's fees and expenses, for any bodily
injury, sickness, death or damage or destruction of property if such
arises from the negligent acts or omissions of Fagen, its consultants,
agents or employees.
We expect to be responsible for the following:
o Obtaining and maintaining liability insurance to protect us from any
claim that may arise from performance of our responsibilities;
o Obtaining and maintaining property insurance for the full insurable
value of the Plant, including professional fees, overtime premiums and
all other expenses incurred to replace or repair the Plant;
o Indemnifying, defending and holding Fagen, its officers, directors,
agents and employees harmless against any claims, losses, damages,
liabilities, including attorney's fees and expenses, for any bodily
injury, sickness, death or damage or destruction of property due to the
negligent act or omission of our officers, directors, agents and
employees;
o Rough grading and preparing the construction site to the
specifications of Fagen;
o Obtaining septic tank and drain field permits, railroad permits and
approvals, archeological survey, highway access permit, construction
air permit, construction permit, operations permit, wastewater permit,
water appropriation permit, fire protection permit and TTB permit;
21
o Procuring potable water supply and distribution, process water supply
and distribution, fire loop and fire protection system, a continuous
supply of electricity and natural gas to the site, utility water
discharge line, wells and well pump, and fencing;
o Arranging for rail service, tracks, ties and ballast to the Plant.
Fagen will have the right to stop or postpone work and to reasonably
adjust the time for completion of the Plant if any of the following occurs:
o There is a force majeure event, such as, without limitation, floods,
earthquakes, hurricanes, tornadoes, adverse weather conditions not
reasonably anticipated or acts of God; sabotage; vandalism beyond that
which could reasonably be prevented; terrorism; war; riots; fire;
explosion; blockades; insurrection; strike; slow down or labor
disruptions; economic hardship or delay in the delivery of materials or
equipment that is beyond the control of Fagen, and action or failure to
take action by any governmental authority, but only if such
requirements, actions, or failures to act prevent or delay performance;
and inability, despite due diligence, to obtain any licenses, permits,
or approvals required by any governmental authority
o The presence of any hazardous conditions at the construction site.
Upon receiving notice of a hazardous condition, we must immediately
proceed to correct the condition. After the condition is corrected and
our experts provides written certification that the hazardous condition
has been corrected and all necessary governmental approvals have been
obtained, Fagen should resume work in the effected area. Fagen may be
entitled to an adjustment in price and time for completion of the Plant
if its price and time for performance has been adversely affected by
the hazardous condition;
o Work on the Plant has stopped for 60 consecutive days, or more than
90 days total, because of any order from us or a court or governmental
authority, if such stoppage is not because of any act or omission of
Fagen or because we failed to provide Fagen with information, permits
or approvals for which we will be responsible. Fagen may terminate the
Construction Agreement if we do not begin to correct the above within
seven days after receipt of Fagen's termination notice.
All drawings, specifications, calculations, data, notes and other
materials and documents furnished by Fagen will be owned by Fagen. We will be
granted an irrevocable limited license to use such drawings, specifications and
related documents in connection with our occupancy and repair of the Plant.
Timetable for Completion of the Plant, Early Completion Bonus and
Liquidated Damages
It is estimated that the Plant will be substantially completed within
485 days after the notice to proceed, which may not be given prior to March 1,
2006. Fagen is entitled to an early completion bonus if the project is finished
ahead of schedule and is required to pay liquidated damages in the event the
project is not timely completed. This schedule also assumes that weather,
strikes, and other factors beyond our control do not upset our timetable. There
can be no assurance that the timetable that we have set will be followed, and
factors or events beyond our control could hamper our efforts to complete the
project in a timely fashion.
It is anticipated that Fagen, Inc. will deliver the plant on time.
However, it is unknown at this time exactly how many plants Fagen, Inc. has
contracted to build, but it is believed that the number of plants Fagen, Inc.
has contracted to build in the coming year and a half is substantial. Further,
Fagen, Inc. owns controlling interest in more than one of the plants that are
presently being constructed. Therefore, because Fagen, Inc. has much larger
interests in plants currently under construction than ours, (which could cause
Fagen, Inc. to commit more of its time and resources into the construction of
such plants) and because Fagen, Inc. has taken on so much work, there is a risk
that Fagen, Inc. could fail to perform in a timely manner and not be able to
build our plant within the time frame outlined by our contract with Fagen, Inc.
22
Termination
Both parties have the right to terminate the Construction Agreement for
cause. If we terminate the Construction Agreement without cause or if Fagen
terminates the Construction Agreement for cause, then we will be required to pay
Fagen for (i) all work executed prior to termination, (ii) Fagen's reasonable
costs and expenses attributable to such termination, (iii) amounts due in
settlement of terminated contracts with subcontractors and design consultants,
(iv) overhead and profit margin of fifteen percent on the sum of (i) and (ii),
(v) all retainage withheld by us on account of work that was completed in
accordance with the Construction Agreement, and (iv) $1,250,000 for the use of
Fagen's work product if we resume construction of the plant without utilizing
Fagen's services.
Dispute Resolution
The Construction Contract provides that disputes would first be
resolved through discussions between Fagen and us. If the dispute is still not
resolved, then the parties would submit the matter to non-binding mediation. In
the event that the dispute is still not settled, the matter must be resolved by
arbitration in accordance with the Construction Industry Arbitration Rules and
Mediation Provisions of the American Arbitration Association, unless the parties
agree otherwise. The determination of the arbitrator is expected to be final and
may not be appealed to any court. The prevailing party in any arbitration
proceeding is entitled to recover reasonable attorney's fees and expenses
incurred.
Regulatory Permits
We engaged two different environmental consulting firms to coordinate,
advise and assist us with obtaining certain environmental, occupational health,
and safety permits, plans, submissions, and programs. Many of those permits are
discussed below. In addition to these permits, we have applied and will apply
for other local, state, and federal permits related to environmental,
occupational health, and safety requirements as needed. The information below is
based in part on information generally relied upon by consultants and may
include certain assumptions regarding the accuracy of specifications provided by
manufacturers of the equipment and other components used in the construction of
the Plant.
Phase I Environmental Permit
Before construction could begin, we had to obtain a Phase I
Environmental Permit, which stated that the proposed site was not contaminated
in anyway that would pose an environmental hazard to anyone working at the site.
We entered into an agreement with PSI, Inc. of Omaha, NE to perform this work.
They completed their study and found that there were no such hazards present at
the proposed site, and that we would be able to proceed with construction.
Air Permit
We engaged NRG (Natural Resource Group) to do the modeling and obtain
our air permit for the plant in Shenandoah. As of this writing, that process is
almost completed and we anticipate that our air permit will be obtained from the
IDNR by the time we are ready to commence construction. However, no concrete can
be laid until this permitting is completed.
Waste Water Discharge Permit
This Plant will be a zero-discharge facility. We expect that we will
use water to cool our closed circuit systems in the Plant. In order to maintain
a high quality of water for the cooling system, the water will be continuously
replaced with make-up water. As a result, this plant will discharge clean,
23
non-contact cooling water from boilers and the cooling towers. Several discharge
options, including publicly owned treatment works, use of a holding pond,
discharge to a receiving stream, subsurface infiltration, irrigation and other
options are under consideration by our consulting engineers and us. All of our
waste water will be returned to the City of Shenandoah, therefore, it is our
understanding that we will not need to apply for this permit because we will not
be releasing waste water. The disposal of waste water will be the city's
responsibility.
Storm Water Discharge Permit and Storm Water Pollution Prevention Plan
(SWPPP Permits)
Before we can begin construction of our Plant, we must obtain an
Industrial Storm Water Discharge Permit from the Iowa Department of Natural
Resources ("IDNR"). This permit is required for any construction project. We
were informed by the IDNR that we simply have to file a Notice of Intent in a
local newspaper as well as a Notice of Intent to them. This permit will be
classified as either general or specific by the IDNR and the application for it
must be filed before construction begins. In connection with this permit and
notice, we must also have a Storm Water Pollution Prevention Plan in place that
outlines various measures we plan to implement to prevent storm water pollution.
If the IDNR does not object to the notice of intent, according to
representatives of NRG, we could begin construction and allow storm water
discharge 3 business days after the filing. As part of the application for the
Construction Site Storm Water Discharge Permit, we will need to prepare a
construction site erosion control plan. We would also be subject to certain
reporting and monitoring requirements. This is also something we intend to hire
out to a third party experienced with plans and filings.
We entered into an agreement with NRG in the fall of 2005, to obtain
these permits.
Bureau of Alcohol, Tobacco and Firearms Requirements
Before we can begin operations, we will have to comply with applicable
Bureau of Alcohol, Tobacco and Firearms ("ATF") regulations. These regulations
require that we first make application for and obtain an alcohol fuel producer's
permit. 27 CFR ss.19.915. The application must include information identifying
the principal persons involved in our venture and a statement as to whether any
such person has ever been convicted of a felony or misdemeanor under federal or
state law. The term of the permit is indefinite until terminated, revoked, or
suspended. The permit also requires that we maintain certain security measures.
We must also secure an operations bond pursuant to 27 CFR ss. 19.957. There are
other taxation requirements related to special occupational tax and a special
tax stamp.
FAA
The proposed site in Shenandoah, Iowa is situated within a few thousand
feet of the Shenandoah airport. Our highest structure, the grain leg between our
two main storage silos, was anticipated to be 165'. Therefore, we needed to
receive approval from the FAA to build the Plant at the Shenandoah site.
The City Engineer in Shenandoah, who has had significant dealings with
the FAA indicated to us that he didn't believe there would be a problem if we
kept the structure below 150'. Engineers at Fagen, Inc., Inc. indicated that
that had faced that problem before and stated that they could redesign the Plant
to keep the grain leg under 150'. Therefore, we applied to the FAA for the
approval to build the Plant with the highest structure not to exceed 165'. We
were granted that approval to build on January 6, 2005. However, we were also
told that we could only build as long as the highest structure did not exceed
150'. Engineers at Fagen, Inc. have since redesigned the plant not to exceed
150' by lowering the grain leg and installing a series of conveyor belts that
will effectively move the grain into the hammer mill.
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EPA
Even if we receive all environmental permits for construction and
operation of the Plant, we will also be subject to oversight activities by the
EPA. There is always a risk that the EPA may enforce certain rules and
regulations differently than an individual state's environmental administrators.
Environmental rules are subject to change, and any such changes could result in
greater regulatory burdens.
Expected Timing of Permitting and Consequences of Delay or Failure
Without the air pollution construction permits, we will be unable to
begin construction. As stated above, these permits have been applied for and it
is anticipated that the air pollution construction permit applications will be
obtained prior to the beginning of construction. Once granted, the permit is
valid indefinitely until the plant is modified or there is a process change that
changes air emissions.
We must complete our spill prevention control and countermeasure
("SPCC") plan at or near the time of commencement of operations. That is in the
process of being completed and near completion.
If we decided to expand the plant and perhaps drill a well at the site,
we would also need to obtain a high capacity water withdrawal permit before
commencing operations, However, there is no assurance that this permit would be
granted.
We must obtain an Alcohol Fuel Producer's Permit, post an operations
bond, and file certain information with the Bureau of Alcohol, Tobacco, and
Firearms before we begin operations. We anticipate applying for this permit in a
timely fashion and believe that the permit will be granted. However, no
assurance can be given that it will be granted.
Without the air pollution construction permit, the waste water
discharge permit, the various storm water discharge permits, water withdrawal
permit, spill prevention control and countermeasures plan, and alcohol fuel
producer's permit, we will be unable to begin or continue operations.
Small Ethanol Producer Tax Credit
"Small Ethanol Producers" are allowed a 10-cents-per-gallon production
income tax credit on up to 15 million gallons of production annually. The Energy
Policy Act of 2005 (H.R. 6) changed the definition of a "small ethanol producer"
from 30 million gallons per year to 60 million gallons per year to reflect the
changing nature of the industry. Therefore, we believe we will qualify to
receive the credit under current law, and will apply for said tax-credit once we
are in production. Said legislation was introduced by U.S Congressman Steve King
(R-IA) (H.R. 36). Congressman King represents the district in which Shenandoah
is located. Specifically, producers producing up to 60 million gallons of
ethanol per year became eligible to receive the credit. With the tax legislation
enacted, we expect to receive the credit for our first 15 million gallons of
annual production. We believe this credit will be beneficial to our profits and
loss statements.
Environmental Compliance Costs
After construction of the Plant and after we obtain the initial
regulatory approvals to operate the Plant, we do not expect that compliance with
current applicable federal, state and local environmental regulations will have
a material impact on our capital expenditures, earnings or competitive position.
After the construction of the Plant is completed, we do not expect to make
significant capital expenditures for environmental control facilities during the
two fiscal years to follow, or thereafter for the foreseeable future. According
to Fagen, Inc. representatives, approximately 6% to 8% of the projected costs to
construct the plant will be spent on environmental control facilities. This
25
would equate to expenditures of approximately $3.4 to $4.5 million dollars. The
estimates provided in this paragraph are subject to change based on amendments
to existing rules or regulations or the adoption of new environmental rules or
regulations that may affect the Plant or our operations.
Nuisance
Even if we receive all EPA and Iowa environmental permits for
construction and operation of the Plant, we may be subject to the regulations on
emissions by the Environmental Protection Agency. We could also be subject to
environmental or nuisance claims from adjacent property owners or residents in
the area arising from odors or other air or water discharges from the Plant,
although we do not expect any such claims. To minimize the risk of such claims,
we intend to employ a thermal oxidizer.
Acquisition of Superior Ethanol, LLC
On February 22, 2006, we acquired all of the outstanding ownership
interest in Superior Ethanol, LLC. Superior has options to acquire at least 135
acres of property in Dickinson County, Iowa, has completed a feasibility study
relating to the construction of an ethanol plant on this site, the site is zoned
as "heavy industrial," the site has been awarded a property tax abatement from
Dickinson County, Iowa, and Superior had more than $200,000 in cash at closing.
In consideration for the acquisition of Superior as a wholly owned subsidiary of
the Company, we issued of 100,000 shares of our restricted common stock to Brian
Peterson, a director of the Company. Prior to the acquisition, substantially all
of Superior was owned by Mr. Peterson.
Item 1A. Risk Factors
An investment in our securities involves substantial risks and the
investment is suitable only for persons with the financial capability to make
and hold long-term investments not readily converted into cash. Investors must,
therefore, have adequate means of providing for their current and future needs
and personal contingencies. Prospective purchasers of our securities should
carefully consider the Risk Factors set forth below, as well as the other
information appearing in this report, before making any investment in our
securities. Investors should understand that there is a possibility that they
could loose their entire investment in the Company.
Risks Related to the Common Stock
We plan to construct the Plant by means of substantial leverage of
equity, resulting in substantial debt service requirements that could reduce the
value of your investment.
We raised gross proceeds of $34,459,900 in our recent public offering.
Upon completion of the Plant, we anticipate that our total term debt obligations
will be approximately $47 million. As a result, our capital structure will be
highly leveraged. Our debt load and service requirements could have important
consequences which could reduce the value of your investment, including:
o Limiting our ability to borrow additional amounts for operating
capital and other purposes or creating a situation in which such
ability to borrow may be available on terms that are not favorable to
us;
o Reducing funds available for operations and distributions because a
substantial portion of our cash flow will be used to pay interest and
principal on our debt;
o Making us vulnerable to increases in prevailing interest rates;
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o Placing us at a competitive disadvantage because we may be
substantially more leveraged than some of our competitors;
o Subjecting all, or substantially all of our assets to liens, which
means that there will be virtually no assets left for stockholders in
the event of a liquidation; and,
o Limiting our ability to adjust to changing market conditions, which
could increase our vulnerability to a downturn in our business or
general economic conditions.
In the event that we are unable to pay our debt service obligations, we
could be forced to: (a) reduce or eliminate dividends to stockholders, if they
were to commence or (b) reduce or eliminated needed capital expenditures. It is
possible that we could be forced to sell assets, seek to obtain additional
equity capital or refinance or restructure all or a portion of its debt. In the
event that we are unable to refinance our indebtedness or raise funds through
asset sales, sales of equity or otherwise, our business would be adversely
affected and we may be forced to liquidate, and investors could lose their
entire investment.
There is currently no established public trading market for our common stock and
your investment may be illiquid for an indefinite amount of time.
We have applied for listing on the NASDAQ Small Cap market. Our
application is under review. Although we have no reason to believe our
application to NASDAQ will not be accepted, no assurance can be given that our
stock will be accepted for listing or trading on the NASDAQ Small Cap market, on
any exchange or in any other market. Therefore, no assurance can be given that
an active, public trading market will ever develop.
Our lenders require us to abide by certain restrictive loan covenants that may
hinder our ability to operate and reduce our profitability.
The loan agreements governing our secured debt financing contain a
number of restrictive affirmative and negative covenants. These covenants limit
our ability to, among other things:
o Incur additional indebtedness;
o Make capital expenditures in excess of prescribed thresholds;
o Pay dividends to stockholders;
o Make various investments;
o Create liens on our assets;
o Utilize the proceeds of asset sales; or,
o Merge or consolidate or dispose of all or substantially all of
our assets.
We are also required to maintain specified financial ratios, including
minimum cash flow coverage, minimum working capital and minimum net worth. Our
lenders may utilize a portion of any excess cash flow generated by operations to
prepay our term debt. A breach of any of these covenants or requirements could
result in a default under our debt agreements. If we default, and if such
default is not cured or waived, our lenders could, among other remedies,
accelerate our debt and declare that such debt is immediately due and payable.
If this occurs, we may not be able to repay such debt or borrow sufficient funds
27
to refinance. Even if new financing is available, it may not be on terms that
are acceptable. Such an occurrence could cause us to cease building the Plant,
or if the Plant is constructed, such an occurrence could cause us to cease
operations. No assurance can be given that our future operating results will be
sufficient to achieve compliance with such covenants and requirements, or in the
event of a default, to remedy such default.
The common stock may be diluted in value and will be subject to further dilution
in value.
We issued a total of 765,000 shares of common stock to our founders and
to seed capital investors in a private offering. Initially, 550,000 shares of
common stock were sold to our two founding stockholders at $0.25 per share. We
then issued an additional 215,000 shares were sold to seed capital investors at
a price of $2.50 per share. We then issued 3,445,990 shares of common stock at
$10 per share, which included warrants exercisable for approximately 861,498
shares of common stock for aggregate consideration of approximately $25,844,940
in our public offering that closed in November 2005. Soon thereafter we issued
an additional 5,000 shares to a director of our Company for services rendered,
and an additional 5,000 shares were issued in January 2006, to the engineering
firm that designed the rail layout for our plant for services rendered. If for
any reason we are required in the future to raise additional equity capital, if
options of any kind or additional shares were issued to our officers and
directors, or to other members of our management or employees, our current
shareholders may suffer further dilution to their investment. There is no
assurance that further dilution will not occur in the future.
Risks Related to the Company
We have no operating history and our management has no material experience in
the ethanol industry.
We were recently formed and have no history of operations. Our proposed
operations are subject to all the risks inherent in the establishment of a new
business enterprise. Other than our general manager, no one else in the
Company's management has any material experience in the ethanol industry. There
is no assurance that we will be successful in our efforts to build and operate
the Plant. Even if we successfully meet all of these objectives and begin
operations at the Plant, there is no assurance that we will be able to market
the ethanol produced or operate the Plant profitably.
We may not be able to manage our start-up period effectively.
We anticipate a period of significant growth, involving the
construction and start-up of operations of the Plant and the hiring of our
employees. This period of growth and the start-up of the Plant are likely to be
a substantial challenge to us. 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. We operate in an area of low
unemployment. Though we believe that we can manage start-up effectively and
properly staff our operations, there is no assurance that this will occur, and
any failure by us to manage our start-up effectively could have a material
adverse effect on us, our financial condition, cash flows, results of operations
and our ability to execute our business plan.
If our cash flow from operations is not sufficient to service our anticipated
debts, then the business may fail and investors in our stock could lose their
entire investment.
Our ability to repay our anticipated debt will depend on our financial
and operating performance and on our ability to successfully implement our
business strategy. We cannot assure anyone that we will be successful in
implementing our strategy or in realizing our anticipated financial results. Our
financial and operational performance depends on numerous factors including
prevailing economic conditions and certain financial, business and other factors
beyond our control. Our cash flows and capital resources may be insufficient to
repay our anticipated debt obligations. If we cannot pay our debt service, we
may be forced to reduce or delay capital expenditures, sell assets, restructure
28
our indebtedness or seek additional capital. If we are unable to restructure our
indebtedness or raise funds through sales of assets, equity or otherwise, our
ability to operate could be harmed and the value of our common stock could
decline significantly.
The institutions lending funds to us are taking a security interest in
our assets, including the property and the Plant. If we fail to make our debt
financing payments, the lenders will have the right to repossess the secured
assets, including the property and the Plant, in addition to other remedies.
Such action would end our ability to continue operations. If we fail to make our
financing payments and we cease operations, your rights as a holder of common
stock are inferior to the rights of our creditors. We may not have sufficient
assets to make any payments to you after we pay our creditors.
It is also our intention to attempt to build other plants at other
locations, to expand at the sites on which we do build, and to aggressively
pursue the acquisition of existing plants. If we are successful in accomplishing
our goals, we may have to borrow even greater amounts of capital to fund said
growth and/or issue additional shares of our stock. This could leverage us even
further and cause greater dilution to our existing shareholders. If our cash
flows were to diminish for any reason and we were not able to service our debt
or raise additional equity through further sales of our shares, our lenders
could call our debt and the value of our shares could decline substantially and
purchasers of the shares of our Company could lose their entire investment.
A necessary part of our plan of operations is the receipt of significant debt
funding, of which there can be no assurance.
We entered into loan arrangements whereby Farm Credit Services of
America, FLCA and other participating lenders have agreed to loan us up to
$47,000,000. The loan agreements contain representations, warranties, conditions
precedent, affirmative covenants (including financial covenants) and negative
covenants. There can be no assurance that we will be or continue to be in
compliance with these representations, warranties, conditions precedent,
affirmative covenants (including financial covenants) and negative covenants. In
the event that we are in non-compliance, then the lenders may refuse or
terminate the funding of the project in which case we would not have the funding
to complete construction of the Plant or commence operations. Without such
funding the value of our common stock would probably decrease substantially.
Our business success is dependent on unproven management.
Prior to hiring Allen Sievertsen, our general manager, no one in the
management of our Company had any prior experience in the ethanol business.
Allen oversaw the construction of the Husker Ag plant in Plainview, NE and acted
as its general manager for approximately 4.5 years, prior to joining our
Company. Although Mr. Sievertsen has overseen the construction of an ethanol
plant before, and has successfully managed an extremely profitable Fagen built
plant, we are still presently, and likely will continue to be, heavily dependent
upon our current management, who, with the exception of Mr. Sievertsen, were
also the founding stockholders. We presently have only 3 employees, and our
founders and initial directors will therefore be instrumental to our success.
We currently have nine directors. Our two founding stockholders and
initial directors live in Nevada and Utah. Since inception, seven other
directors have been added to our board. Five of those directors live in Iowa, an
eighth lives in Nevada, and the ninth in Utah. These individuals are experienced
in business generally, and some have experience in raising capital, others in
construction, as well as in governing and operating companies, but none of them
have any experience in organizing, building and operating an ethanol plant. It
is also possible that one or more of our founding stockholders and/or initial
directors may later become unable to serve, and we may be unable to recruit and
retain suitable replacements. Our dependence on our founding stockholders and
initial directors may have a material adverse impact upon our operations, our
cash flows and overall financial performance.
29
Our board of directors will have the exclusive right to make all
decisions with respect to the management and operation of our business and our
affairs. Investors will have no right to participate in the decisions of our
board of directors or in the management of the Plant. Investors will only be
permitted to vote in a limited number of circumstances. Accordingly, no person
should purchase securities unless such person is willing to entrust all aspects
of our management to the board of directors. We are presently managed by our
board of directors. However, none of the directors have expertise in the ethanol
industry. In addition, all members of our board of directors are presently
engaged in business and other activities outside of and in addition to our
business. These other activities all impose substantial demand on the time and
attention of such directors.
We anticipate hiring a plant manager for the Plant with experience in
the ethanol industry and a production plant similar to our proposed Plant. We
also intend to hire a controller that has both experience as a controller of a
public company and experience with an ethanol production plant. However, there
is no assurance that we will be successful in attracting or retaining such
individuals because of a limited number of individuals with expertise in the
area and a competitive market with many new plants being constructed.
Furthermore, we may have difficulty in attracting other competent personnel to
relocate to Shenandoah, Iowa, in the event that such personnel are not available
locally. Our failure to attract and retain such individuals would likely have a
material adverse effect on our operations, cash flows and financial performance.
We have a history of losses and may never become profitable.
For the period from our formation on June 29, 2004 through November 30,
2005, we incurred an accumulated net loss of $447,749. We believe we will
continue to incur significant losses from this time forward until we are able to
successfully complete construction and commence operations of the Plant. There
is no assurance that we will be successful in our efforts to build and operate
an ethanol plant. Even if we successfully meet all of these objectives and begin
operations at the ethanol plant, there is no assurance that we will be able to
operate profitably.
We will be dependent on Fagen, Inc. for expertise in the commencement of
operation in the ethanol industry and any loss of this relationship could result
in diminished returns or the entire loss of any investment.
We are dependent on our relationship with Fagen, Inc., and its
employees. Specifically, we are dependent upon the Fagen, Inc. employees Mr.
Roland "Ron" Fagen, Inc. and Mr. Wayne Mitchell. Mr. Fagen, Inc. and Mr.
Mitchell have considerable experience in the construction, start-up and
operation of ethanol plants. Any loss of our relationship with Fagen, Inc., Mr.
Fagen, or Mr. Mitchell, particularly during the construction and start-up period
for the Plant, may have a material adverse impact on our operations, cash flows
and financial performance.
Risks Related to Construction of the Plant
We will depend on key suppliers, whose failure to perform could hinder our
ability to operate profitably and decrease the value of your investment.
We are highly dependent upon Fagen, Inc. to design and build the Plant
under our Design-Build Agreement. There are general risks and potential delays
associated with such a project, including, but not limited to, fire, weather,
permitting issues, and delays in the provision of materials or labor to the
construction site. Any significant delay in the planned completion date may have
a material adverse effect on our operations, cash flows and financial
performance.
It is believed that Fagen, Inc. has entered into agreements to build
numerous other ethanol plants such as our proposed plant and to expand several
other existing plants. There is a risk that Fagen has taken on so much work that
30
Fagen might not be able to perform in a timely manner. If this were to be the
case, Fagen, Inc. may be forced to terminate some of its relationships with
entities for whom Fagen, Inc. has contracted to build plants, or perhaps not be
able to construct said plants within the timeframes promised. If Fagen were to
terminate its relationship with us after construction was initiated, there is no
assurance that we would be able to obtain a replacement general contractor.
Fagen is one of the most respected builders of ethanol plants in the country and
we anticipate that the Plant will be delivered as promised by Fagen. However, if
Fagen were not able to deliver the Plant within the timetable promised, we could
come into a situation of default with our lenders. Any such event would likely
have a material adverse affect on our operations, cash flows and financial
performance.
The Design-Build Agreement contains a liquidated damages or
consequential damages provision. This would benefit us, but it could result in
an early completion bonus clause for Fagen, Inc. Our payment of an early
completion bonus could substantially reduce our net cash flows and financial
performance during the periods of the payment of such bonus.
We will depend on Fagen, Inc. for timely completion of our plant and training of
personnel, but Fagen, Inc.'s involvement in other projects could delay the
commencement of our operations and further delay our ability to commence
operations.
We believe Fagen, Inc. is negotiating and has undertaken with other
parties to begin the construction of numerous other ethanol plants in 2006. If
Fagen, Inc. has entered into other Design-Build contracts with liquidated damage
or consequential damage clauses with other plants, there could be substantial
risk to our project. For example, if Fagen, Inc. is under pressure to complete
another project in order to avoid the operation of such a clause or is already
operating under such a clause, Fagen, Inc. may prioritize the completion of
these other plants ahead of our Plant. As a result, our ability to sell ethanol
products would be delayed having a material adverse effect upon our operations,
cash flows, and financial performance.
It is also believed that Fagen, Inc. has investments in other projects
currently under construction, as well as others that are scheduled to be built,
that are substantially greater than the investment Fagen has in our project. No
assurance can be given that Fagen will not commit more of its time and resources
to complete such projects more quickly than ours. As a result, our ability to
sell ethanol and distillers grains would be delayed having a material adverse
effect upon our operations, cash flows, and financial performance.
We are also highly dependent upon Fagen's experience and ability to
train our personnel in operating the Plant. If the Plant is built and does not
operate to the level anticipated by us in our business plan, we will rely on
Fagen, Inc. to adequately address such deficiency. There is no assurance that
Fagen, Inc. will be able to address such deficiency in an acceptable manner.
Failure to do so could have a material adverse affect on our operations, cash
flows and financial performance.
Construction delays could result in a delay in our commencement of operations
and generation of revenue, if any.
We expect that, at the earliest, it will be April or May of 2007,
before we begin operation of the Plant. However, it could be at late as August
under the contract we have with Fagen. Construction projects often involve
delays in obtaining permits, construction delays due to weather conditions, or
other events that delay the construction schedule. In addition, changes in
interest rates or the credit environment or changes in political administrations
at the federal, state or local level that result in policy change towards
ethanol or this project, could cause construction and operation delays. If it
takes longer to obtain necessary permits or construct the Plant than we
anticipate, it would delay our ability to generate revenues and make it
difficult for us to meet our debt service obligations. This could reduce the
value of our common stock and could negatively affect our ability to execute our
plan of operation.
31
If there are defects in Plant construction it may negatively affect our ability
to operate the Plant.
There is no assurance that defects in materials and/or workmanship in
the Plant will not occur. Under the terms of the Design-Build Contract, Fagen,
Inc. has warranted that the material and equipment furnished to build the Plant
would be new, of good quality, and free from material defects in material or
workmanship at the time of delivery. Though the Design-Build Contract requires
Fagen, Inc. to correct all defects in material or workmanship for a period of
one year after substantial completion of the Plant, material defects in material
or workmanship may still occur. Such defects could cause us to delay the
commencement of operations of the Plant, or, if such defects are discovered
after operations have commenced, to halt or discontinue the Plant's operation.
Any such event may have a material adverse effect on our operations, cash flows
and financial performance.
Any delay or unanticipated cost in providing rail service infrastructure to the
Plant could significantly impede our ability to successfully operate the Plant
at a profit.
Rail service is not currently available in Shenandoah, Iowa. The site
lies adjacent to the lines of the Burlington Northern Railroad (BNSF). However,
as mentioned above, the spur on which the plant will be located has been closed
by BNSF and needs to be upgraded to meet HAZMAT (Hazardous Materials) standards.
Approximately 20 miles of the spur will need to be upgraded. The cost to upgrade
the rail will be approximately $3.5 million. We have entered into an agreement
with BNSF regarding these improvements, but there is not assurance that this
work will be completed in a timely fashion. If the track is not upgraded and
built in a timely fashion it could delay our ability to begin operations in the
most profitable manner.
We will need to construct additional track from the main line and lay
more track for railcar storage at the Plant and along a portion of the spur that
we are going to purchase from BNSF that will be deemed "Industrial Track" that
we will be responsible to upgrade at additional cost to the Company. In order to
have rail service for the Plant, a rail siding to accommodate at least 35 rail
cars of approximately 5,800 feet will need to be added to the site. The
estimated cost of adding such rail is approximately $1,900,000. We intend to
negotiate with a third party contractor that is experienced in rail construction
to provide this rail at the Plant and to upgrade the portion of the spur that we
will be purchasing from BNSF. There is no assurance that an acceptable agreement
will be reached with such a third party to do this, or on acceptable terms. We
believe we will be able to locate such a third party and reach an acceptable
agreement. However, no assurance can be given that we will be successful in
doing so and failure to locate and contract with such a third party would have a
material adverse effect on us, our cash flows and financial performance.
Any material variations to the actual cost verses our cost estimates relating to
the construction and operation of the Plant could materially and adversely
affect our ability to operate the Plant profitably.
It is anticipated that Fagen, Inc. will construct the Plant for a fixed
contract price, based on the plans and specifications in the anticipated
Design-Build Contract. We have based our capital needs on a design for the Plant
that will cost $55.81 million and additional start-up and development costs of
$25.26 million for a total of $81.4 million. This price includes construction
period interest, construction contingencies and approximately $7 million in
working capital to purchase such things as corn, enzymes, denaturant, and
natural gas at start up.
There is no assurance that the final cost of the Plant will not be
higher. There is no assurance that there will not be design changes or cost
overruns associated with the construction of the Plant. Any significant increase
in the estimated construction cost of the Plant may have a material adverse
effect on our operations, cash flows and financial performance.
We will acquire insurance that we believe to be adequate to prevent
loss from foreseeable risks. However, events occur for which no insurance is
available or for which insurance is not available on terms that are acceptable
to us. Loss from such an event, such as, but not limited to, earthquake,
32
tornados, war, riot, terrorism or other risks, may not be insured and such a
loss may have a material adverse effect on our operations, cash flows and
financial performance.
Risks Related to Ethanol Production
Our ability to operate at a profit is largely dependent on grain prices
and ethanol and distillers dried grains prices. Our results of operations and
financial condition will be significantly affected by the cost and supply of
grain and by the selling price for ethanol and DDGS. Price and supply are
subject to and determined by market forces over which we have no control. We
will be dependent on the availability and price of corn. Although the areas
surrounding the Plant produce a significant amount of corn and we do not
anticipate problems sourcing corn, there is no assurance that a shortage will
not develop, particularly if there were an extended drought or other production
problem. In addition, our financial projections assume that we can purchase
grain for approximately $2.25 per bushel. The current straight, average price
for corn in the Shenandoah area is much less, approximately $1.76 per bushel.
Over the past ten years, the average price for corn has been approximately
$2.185 per bushel in Iowa. However, there is no assurance that we will be able
to purchase corn for any of these prices. Corn prices are primarily dependent on
world feedstuffs supply and demand and on U.S. and global corn crop production.
These factors can be volatile because of weather, stocks prices, export prices
and the government's agricultural policy. The price of corn has fluctuated
significantly in the past and may fluctuate significantly in the future.
We anticipate purchasing our corn from farmers in the area surrounding
the Plant and in the cash market and hedging corn through futures contracts to
reduce short-term exposure to price fluctuations. We intend to contract with
third parties to manage our hedging activities and corn purchasing. However, we
have no definitive agreements with any third party to do so at this time, nor do
we have any contracts with any corn producers to provide corn to the Plant. We
may also enter into supply agreements with local elevators for the origination,
supply and delivery of corn to the Plant. There is no assurance that such
agreements will be available or be on acceptable terms. 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 our paying a higher price for corn than our competitors. Further, hedging for
protection against the adverse changes in the price of corn may be unsuccessful,
and could result in substantial losses to us. Generally, higher corn prices will
produce lower profit margins. This is especially true if market conditions do
not allow us to pass through increased corn costs to our customers. There is no
assurance that we will be able to pass through higher corn prices. If a period
of high corn prices were to be sustained for some time, such pricing may have a
material adverse effect on our operations, cash flows and financial performance.
Our revenues will be dependent on the market prices for ethanol and
DDGS. These prices can be volatile as a result of a number of factors. These
factors include the overall supply and demand, the price of gasoline, level of
government support, and the availability and price of competing products. For
instance, the price of ethanol tends to increase as the price of gasoline
increases, and the price of ethanol tends to decrease as the price of gasoline
decreases. Any lowering of gasoline prices will likely also lead to lower prices
for ethanol and adversely affect our operating results
Increased ethanol productions may negatively affect ethanol prices and
materially reduce our ability to operation successfully.
We believe that ethanol production is expanding rapidly at this time.
There are a number of new plants under construction or planned for construction,
both inside and outside the States of Iowa and Nebraska. We further expect
existing ethanol plants to expand by increasing production.
33
We cannot provide any assurance or guarantee that there will be any
material or significant increases in the demand for ethanol. Increased
production of ethanol may lead to lower prices. The increased production of
ethanol could have other adverse effects as well. For example, the increased
production could lead to increased supplies of co-products from the production
of ethanol, such as DDGS. Those increased supplies could lead to lower prices
for those co-products. Also, the increased production of ethanol could result in
increased demand for corn. This could result in higher prices for corn and corn
production creating lower profits. There can be no assurance as to the price of
ethanol or DDGS in the future. Any material adverse change affecting the price
of ethanol and/or DDGS may have a material adverse effect on our operations,
cash flows and financial performance.
We expect to compete with existing and future ethanol plants and oil companies,
which may result in diminished returns on your investment.
We will operate in a very competitive environment. We will compete with
large, multi-product companies that have much greater resources than we
anticipate having, and plants with a capacity greater than, equal to or less
than our Plant. We will face competition for capital, labor, management, corn
and other resources. Many of our competitors have greater resources than we
currently have or will have in the future.
We anticipate that as additional ethanol plants are constructed and
brought on line, the supply of ethanol will increase. The absence of increased
demand may result in prices for ethanol to decrease. There is no assurance that
we will be able to compete successfully or that such competition will not have a
material adverse effect on our operations, cash flows and financial performance.
We will also compete with producers of other gasoline additives having
similar octane and oxygenate values as ethanol. An example of such other
additives is MTBE, a petrochemical derived from methanol. MTBE costs less to
produce than ethanol. Many major oil companies produce MTBE and because it is
petroleum-based, its use is strongly supported by major oil companies.
Alternative fuels, gasoline oxygenates and alternative ethanol production
methods are also continually under development. The major oil companies have
significantly greater resources than we have to market MTBE, to develop
alternative products, and to influence legislation and public perception of MTBE
and ethanol. Despite this fact, the use of MTBE may become legally restricted as
a pollutant in several, and possibly, most, if not all states. California has
already banned the use of MTBE as have New York and Connecticut. However,
California has asked for a waiver of federal standards requiring oxygenates in
reformulated gasoline in the past. This means that rather than using ethanol as
an alternative oxygenate to MTBE, California sought to be released from federal
requirements to use any oxygenates at all. If such requests were ever granted,
whether limited to or expanded beyond California, the demand for ethanol would
not increase and could diminish. Furthermore, the United States petroleum
industry is pursuing a repeal of all federal oxygenated fuel requirements. These
companies also have sufficient resources to begin production of ethanol should
they choose to do so. Competition from these companies may have a material
adverse effect on our operations, cash flows and financial performance.
We are dependent on others third-party brokers or other to sell our product
which may result in diminished returns.
We currently have no sales force of our own to market ethanol and DDGS
and do not intend to establish such a sales force. We intend to sell all of our
ethanol to a third-party broker pursuant to an output contract and intend to
contract with a third-party broker to market and sell our DDGS feed products. As
a result, we will be dependent on the ethanol broker and the feed broker. There
is no assurance that we will be able to enter into contracts with any ethanol
broker or feed product broker on acceptable terms. If the ethanol broker
breaches the contract or does not have the ability (for financial or other
reasons) to purchase all of the ethanol we produce, we will not have any readily
available means to sell our ethanol. Our lack of a sales force and reliance on
third parties to sell and market our products may place us at a competitive
34
disadvantage. Our failure to sell all of our ethanol and DDGS feed products may
have a material adverse effect on our operations, cash flows and financial
performance.
Engaging in hedging activities to minimize the potential volatility of corn
prices could result in substantial costs and expenses.
In an attempt to minimize the effects of the volatility of corn costs
on operating profits, we will likely take hedging positions in corn futures
markets and in the natural gas markets. Hedging means protecting the price at
which we buy corn and the price at which we will sell our products in the
future. It is a way to attempt to reduce the risk caused by price fluctuation.
The effectiveness of such hedging activities is dependent upon, among other
things, the cost of corn and natural gas and our ability to sell sufficient
amounts of ethanol and DDGS. Although we will attempt to link hedging activities
to sales plans and pricing activities, such hedging activities can themselves
result in costs because price movements in corn contracts and natural gas are
highly volatile and are influenced by many factors that are beyond our control.
Our ability to successfully operate is dependent on the availability of energy
and water at anticipated prices.
The Plant will require a significant and uninterrupted supply of
electricity, natural gas and water to operate. We plan to enter into agreements
with local gas, electric, and water utilities to provide our needed energy and
water. There can be no assurance that those utilities will be able to reliably
supply the gas, electricity, and water that we need.
If there is an interruption in the supply of energy or water for any
reason, such as supply, delivery or mechanical problems, we may be required to
halt production. If production is halted for an extended period of time, it may
have a material adverse effect on our operations, cash flows and financial
performance.
Originally, a new gas pipeline of approximately 9 miles was going to be
built to run to the Plant site. Mid American Energy was going to build this line
for us at an estimated cost of approximately $3,510,000. We would be required to
put up approximately $1.5 million of that cost. Since that time, US Energy
Services, who has been hired as our energy consultant, and Mid American Energy
have discussed this issue and have decided that sufficient gas can be supplied
to the Plant simply by upgrading an existing line running from Red Oak to
Shenandoah. The cost to do this will be significantly less. Therefore, we will
not have to pay any of the $1.5 million dollars we had originally thought we
were going to have to pay. However, no assurance can be given at this time that
the pipeline can be upgraded in a timely manner. If it were not completed by the
time the Plant was ready to commence operations, we could come into a state of
default with our lenders, and we would not be able to commence operations in a
timely manner, which would have an extremely negative effect on our cash flows
and financial performance. Further, even if the pipeline were to be completed on
time, at the present time we have no contracts, commitments or understandings
with any natural gas supplier to supply gas to the plant. We have entered into
an agreement with U.S. Energy Services, Inc. of Wayzata, Minnesota to negotiate
and purchase natural gas for the plant from third party providers of natural gas
for up to six months after the Plant becomes operational. However, there can be
no assurance given at this time that we or U.S. Energy Services will be able to
obtain a sufficient supply of natural gas or that we will be able to procure
alternative sources of natural gas on acceptable terms, even with the assistance
of U.S. Energy Services. In addition, natural gas prices have historically
fluctuated. Presently, prices are significantly higher than the historical
average price - approximately $9.16 mcf. Higher natural gas prices may have a
material adverse effect on our operations, cash flows and financial performance.
Therefore, we urge investors to carefully consider the significant risks
involved concerning the potential of higher natural gas prices in the future in
making a decision about investing in our securities.
35
We will also need to purchase significant amounts of electricity to
operate the proposed Plant. We have negotiated an agreement with Mid American
Energy to supply electricity to the Plant in Shenandoah for a period of five
years.. We believe that our agreement with Mid American will be beneficial to
the Company. However, no assurance can be given that we will be able to
negotiate such favorable rates after the five year period is over. Electricity
prices have historically fluctuated significantly. Sustained increases in the
price of electricity would increase our cost of production. As a result, these
issues may have a material adverse effect on our operations, cash flows and
financial performance.
Sufficient availability and quality of water are important requirements
to produce ethanol. We anticipate that our water requirements to be
approximately 400 to 600 gallons per minute, depending on the quality of the
water. The town of Shenandoah has sufficient capacities of water to meet our
needs and we have negotiated a contract with the city to supply water to the
Plant at a price that we believe will be favorable to our operations. However,
no assurance can be given that a prolonged drought could not diminish the water
supplies in the areas of the proposed Plant, especially if we were to build the
Plant in Shenandoah, or that we would continue to have sufficient water supplies
in the future. Shenandoah is in the southwestern part of the State of Iowa and
has a history of water shortages. Historically, this area of the State has
experienced periods of drought. We are exploring the possibility of drilling
wells in the area of the proposed site in Shenandoah to use as back up for the
Plant. However, no assurance can be given at this time that we will be able to
drill wells at the site or in another location near the site. The inability to
drill such wells, and the possibility of drought, may have a material adverse
effect on our operations, cash flows and financial performance and could even
cause us to cease production for periods of time.
Risk of foreign competition from producers who can produce ethanol at less
expensive prices than it can be produced from corn in the United States.
According to information obtained from the website of the Iowa Farm
Bureau, at this time, there are large international companies that have much
greater resources than we have, including Cargill, developing foreign ethanol
production capacity. Cargill is currently developing ethanol production capacity
in El Salvador to process Brazilian ethanol for export to the U.S. Long-standing
U.S. trade preferences for Caribbean and Central American countries allow them
to ship ethanol to the U.S. duty-free, avoiding a 54 cent per gallon import
tariff that would otherwise apply. 61 million gallons of ethanol were brought
into the U.S. through the Caribbean in 2003 to avoid said tariff, most of it
reprocessed Brazilian ethanol. Brazil is the world's largest ethanol producer.
They make ethanol primarily from sugarcane for about half of what it costs to
make ethanol from corn in Iowa. Brazil exported another 10 million gallons of
ethanol directly to the U.S. in 2003, even with the full import tariff and could
export even more this year. If significant additional foreign capacity is
created, such facilities could produce a glut of ethanol on the world markets.
Such a glut could lower the price of ethanol throughout the world, including the
U.S. If this were to happen, it could have an adverse effect our operations and
potential profitability.
Further, if the import duty on foreign ethanol were to ever be lifted
for any reason, our ability to compete with such foreign companies would be
drastically reduced. Although, at this time, such risks cannot be precisely
quantified, we believe that such risks exist, and could increase in the future,
and anyone contemplating a purchase of the securities being offered herewith
should be aware of them and consider them in making their investment decision.
Risks Related to Regulation and Governmental Action
The loss of favorable tax benefits for ethanol production could hinder our
ability to successfully operate.
Congress currently provides federal tax incentives for oxygenated fuel
producers and marketers. Ethanol blended with gasoline is one of the oxygenated
fuels that qualify for federal tax incentives. These tax incentives allow a
lower federal excise tax rate for gasoline blended with at least 10%, 7.7%, or
5.7% ethanol. Additionally, income tax credits are available for blenders of
ethanol mixtures and small ethanol producers. Gasoline marketers pay a reduced
tax on gasoline sold that contains ethanol. The current credit for gasoline
36
blended with 10% ethanol is 5.4(cent) per gallon. The subsidy dropped to
5.1(cent) per gallon in 2005. Currently, a gasoline marketer that sells gas
without ethanol must pay a federal tax of 18.4(cent) per gallon compared to
13(cent) per gallon for gas with 10% ethanol. The tax on gasoline blended with
10% ethanol gradually increased to 13.3(cent) per gallon in 2005. Smaller
credits are available for gasoline blended with 7.7 percent and 5.7 percent
ethanol. The ethanol industry and our business are dependent upon the
continuation of the federal ethanol credit. This credit has supported a market
for ethanol that may disappear without the credit.
The federal tax incentives were scheduled to expire on September 30,
2007, but have recently been replaced by legislation which has extended those
incentives to the year 2010. These tax incentives to the ethanol industry may
not continue beyond their scheduled expiration date or, if they continue, the
incentives may not be at the same level. The revocation or amendment of any one
or more of those laws, regulations or programs could adversely affect the future
use of ethanol in a material way. We cannot assure you that any of those laws,
regulations or programs will continue. The elimination or reduction of federal
tax incentives to the ethanol industry would have a material adverse impact on
our business by making it more costly or difficult for us to produce and sell
ethanol. If the federal ethanol tax incentives are eliminated or sharply
curtailed, we believe that a decreased demand for ethanol will result.
A change in environmental regulations or violations thereof could impede our
ability to successfully operate the Plant.
We will be subject to extensive air, water and other environmental
regulation and we will need to obtain a number of environmental permits to
construct and operate the Plant. In addition, it is likely that our senior debt
financing will be contingent on our ability to obtain the various environmental
permits that we will require. Assuming we build the Plant in Iowa, the Iowa
Department of Natural Resources ("IDNR") may also require us to conduct an
environmental assessment prior to considering any permits.
Ethanol production involves the emission of various airborne
pollutants, including particulate (PM10), carbon monoxide (CO), oxides of
nitrogen (N0x) and volatile organic compounds. As a result, we will need to
obtain an air quality permit from the IDNR. We have applied for this permit and
expect that we will be granted the permit prior to the time that construction is
anticipated to commence . We have also applied to the IDNR for a storm-water
discharge permit, a water withdrawal permit, public water supply permit, and a
water discharge permit. We anticipate obtaining these permits before the times
that they will be needed during the construction process. We do not anticipate a
problem receiving all required environmental permits. However, if for any reason
any of these permits are not granted, construction costs for the Plant may
increase, or the Plant may not be constructed at all. In addition, the IDNR
could impose conditions or other restrictions in the permits that are
detrimental to us or which increase costs to us above those assumed in this
project. Any such event would likely have a material adverse impact on our
operations, cash flows and financial performance.
Even if we receive all required permits from the IDNR, we may also be
subject to regulations on emissions from the Environmental Protection Agency
("EPA"). Currently the EPA's statutes and rules do not require us to obtain
separate EPA approval in connection with construction and operation of the
proposed Plant. Additionally, environmental laws and regulations, both at the
federal and state level, are subject to change and changes can be made
retroactively. Consequently, even if we have the proper permits at the present
time, we may be required to invest or spend considerable resources to comply
with future environmental regulations. If any of these events were to occur,
they may have a material adverse impact on our operations, cash flows and
financial performance.
Our inability to obtain required regulatory permits and/or approvals will impede
our ability and may prohibit completely our ability to successfully operate the
Plant.
37
We also intend to apply for and receive from the IDNR a storm-water
discharge permit, a water withdrawal permit, public water supply permit, and
possibly a waste water discharge permit, but at this time we do not believe we
will be required to apply for the later permit if we build the Plant in
Shenandoah. The majority of these permits have now been applied for, and we
anticipate that we will be able to successfully obtain all of the necessary
permits prior to the commencement of construction. We do not anticipate a
problem receiving all required environmental permits. However, if for any reason
any of these permits are not granted, construction costs for the plant may
increase, or the plant may not be constructed at all. In addition, the IDNR
could impose conditions or other restrictions in the permits that are
detrimental to us or which increase costs to us above those assumed in this
project. The IDNR and the EPA could also change their interpretation of
applicable permit requirements or the testing protocols and methods necessary to
obtain a permit either before, during or after the permitting process. The IDNR
and the EPA could also modify the requirements for obtaining a permit. Any such
event would likely have a material adverse impact on our operations, cash flows
and financial performance.
Even if we receive all required permits from the IDNR, we may also be
subject to regulations on emissions from the United States Environmental
Protection Agency, "EPA". Currently the EPA's statutes and rules do not require
us to obtain separate EPA approval in connection with construction and operation
of the proposed Plant. Additionally, environmental laws and regulations, both at
the federal and state level, are subject to change and changes can be made
retroactively. Consequently, even if we have the proper permits at the present
time, we may be required to invest or spend considerable resources to comply
with future environmental regulations or new or modified interpretations of
those regulations, to the detriment of our financial performance.
Federal government laws that require the use of oxygenated gasoline
encourage ethanol production and use. Ethanol contains 35% oxygen by weight.
When combined with gasoline, ethanol acts as an oxygenate. As a result, the
gasoline burns cleaner, and releases less carbon monoxide and other exhaust
emissions into the atmosphere. The federal government encourages the use of
oxygenated gasoline as a measure to protect the environment. Oxygenated gasoline
is commonly referred to as reformulated gasoline or "RFG."
The government's regulation of the environment changes constantly. It
is possible that more stringent federal or state environmental rules or
regulations could be adopted, which could increase our operating costs and
expenses. It also is possible that federal or state environmental rules or
regulations could be adopted that could have an adverse effect on the use of
ethanol. For example, changes in the environmental regulations regarding the
required oxygen content of automobile emissions could have an adverse effect on
the ethanol industry. Furthermore, Plant operations likely will be governed by
the Occupational Safety and Health Administration (OSHA). OSHA regulations may
change such that the costs of the operation of the Plant may increase. Any of
these regulatory factors may result in higher costs or other materially adverse
conditions effecting our operations, cash flows and financial performance.
Risks Related to Conflicts of Interest
We have conflicts of interest with Fagen, Inc. which could result in loss of
capital and reduced financial performance.
As discussed above, we expect that our directors will be advised by one
or more employees or associates of Fagen, Inc. Fagen, Inc. is expected to
continue to be involved in substantially all material aspects of our formation
and operations. Consequently, the terms and conditions of our agreements and
understandings with Fagen have not been negotiated at arm's length. Therefore,
there is no assurance that our arrangements with such parties are as favorable
to us as could have been if obtained from unaffiliated third parties. In
addition, because of the extensive role that Fagen, Inc. is expected to have in
the construction and operation of the Plant, it may be difficult or impossible
38
for us to enforce claims that we may have against Fagen, Inc. If this were to
occur, it may have a material adverse impact on our operations, cash flows and
financial performance.
Fagen, Inc. and its affiliates may also have conflicts of interest
because employees or agents of Fagen, Inc. are involved as owners, creditors and
in other capacities with other ethanol plants in the United States. We cannot
require Fagen, Inc. to devote its full time or attention to our activities. As a
result, Fagen, Inc. may have or come to have a conflict of interest in
allocating personnel, materials and other resources to our Plant.
Though we will attempt to address actual or potential material
conflicts of interest as they arise or become known, we have not established any
formal procedures to address or resolve conflicts of interest. There is no
assurance that any conflict of interest will not have adverse consequences to
our operations, cash flows and financial performance.
Unidentified Risks
The foregoing discussion is not a complete list or explanation of the
risks involved with an investment in this business. Additional risks will likely
be experienced that are not presently foreseen by us. Investors are not to
construe this report as constituting legal or tax advice. Before making any
decision to invest in us, investors should read this entire report, including
all of its exhibits, and consult with their own investment, legal, tax and other
professional advisors.
An investor should be aware that we will assert that the investor
consented to the risks and the conflicts of interest described or inherent in
this report if the investor brings a claim against us or any of our directors,
officers, managers, employee, advisors, agents or representatives.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We currently own approximately 95.91 acres of land in Shenandoah, Iowa
and approximately 12.2 additional acres is being deeded over to us by SCIA
(Shenandoah Chamber and Industry Association). We also own an option on another
property in Atlantic, Iowa and our wholly owned subsidiary, Superior Ethanol,
LLC, owns options on property in Dickinson County, Iowa. We currently own no
ethanol plants. We believe that the property we own or have an option to acquire
in Shenandoah will be adequate to meet the needs of current and expected growth
in Shenandoah. We may, however, to acquire additional sites for additional
ethanol plants.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
39
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information
Currently, there is no public trading market for our securities and
there can be no assurance that any market will develop. We have applied for
listing on the NASDAQ Small Cap Market and our application is currently under
review. However, no assurance can be given that our stock will be accepted for
listing or trading on the NASDAQ Small Cap Market, on any exchange or in any
other market. There can be no assurance that an active, public trading market
will ever develop. If a market does develop for our securities, it may be
limited, sporadic and highly volatile.
Shares Available for Future Sale
As of the date of this report, there are 4,220,990 shares of our common
stock issued and outstanding. Affiliates of the Company own 623,000 shares. See
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. The shares held by non-affiliates of the Company
are freely tradable if a market for the securities exists, and the shares held
by affiliates could be sold subject to the volume limitations of Rule 144,
described below. Sales of shares of stock in the public markets may have an
adverse effect on prevailing market prices for the common stock.
We also have outstanding warrants that are exercisable for 461,498
shares of common stock at an exercise price of $30 per share. The warrants were
sold in our public offering and the common stock issuable upon exercise of the
warrants may also be sold by non-affiliates without restriction if a market
develops.
Rule 144 governs resale of "restricted securities" for the account of
any person, other than an issuer, and restricted and unrestricted securities for
the account of an "affiliate" of the issuer. Restricted securities generally
include any securities acquired directly or indirectly from an issuer or its
affiliates which were not issued or sold in connection with a public offering
registered under the Securities Act. An affiliate of the issuer is any person
who directly or indirectly controls, is controlled by, or is under common
control with the issuer. Affiliates of a company may include its directors,
executive officers, and person directly or indirectly owning 10% or more of the
outstanding common stock. Under Rule 144 unregistered re-sales of restricted
common stock cannot be made until it has been held for one year from the later
of its acquisition from the issuer or an affiliate of the issuer. Thereafter,
shares of common stock may be resold without registration subject to Rule 144's
volume limitation, aggregation, broker transaction, notice filing requirements,
and requirements concerning publicly available information about the company
("Applicable Requirements"). Re-sales by the issuer's affiliates of restricted
and unrestricted securities are subject to the Applicable Requirements. The
volume limitations provide that a person (or persons who must aggregate their
sales) cannot, within any three-month period, sell more than the greater of one
percent of the then outstanding shares, or the average weekly reported trading
volume during the four calendar weeks preceding each such sale. A non-affiliate
may resell restricted common stock which has been held for two years free of the
Applicable Requirements.
Dividend Policy
To date, we have not paid dividends on our common stock. The payment of
dividends on the common stock in the future, if any, is within the discretion of
the board of directors and will depend upon our earnings, capital requirements,
financial condition and other factors the board views are relevant. The board
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in our operations.
40
We have also entered into a Master Loan Agreement and related
agreements with lenders who will loan us up to $47,000,000 to build the Plant
and to provide funding for working capital purposes. The loan agreements contain
representations, warranties, conditions precedent, affirmative covenants
(including financial covenants) and negative covenants. One of these covenants
requires that dividends or other distributions to stockholders be limited to 40%
of the profit net of income taxes for such each fiscal year and may be paid only
where we are expected to remain in compliance with all loan covenants, terms and
conditions. Furthermore, with respect to the fiscal years ending in 2008 and
thereafter, an additional distribution may be made to stockholders in excess of
the 40% limit for such fiscal year if we have made certain additional payments
to the lender, and we will thereafter remain in compliance with all loan
covenants, terms and conditions on a pro forma basis net of said potential
additional payment.
Holders of Record
As of the date of this report, there were 783 holders of record of our
common stock.
Issuance of Securities
On December 9, 2006, we issued 5,000 shares of restricted common stock
to Gary Thien for services rendered to the Company. Mr. Thien is currently a
Director of the Company and its vice president. He is, therefore, deemed a
sophisticated, accredited investor. Mr. Thien located the site in Shenandoah and
has spent a significant amount of his time working on the Company's behalf from
the later part of 2004 to the present. The shares were issued to Mr. Thien by
the Board for work Mr. Thien has done for and on behalf of the Company. The sale
of these shares of common stock was exempt from registration pursuant to Rules
504, 505 and 506 of Regulation D and Sections 4(2) and 4(6) of the Securities
Act of 1933, as amended. We did not use an underwriter or pay any commissions in
connection with this transaction.
In January 2006, we issued 5,000 shares of restricted common stock to
Antioch International, Inc., an accredited and sophisticated investor, in lieu
of $50,000 (fifty thousand dollars) in fees that were owed to Antioch for
designing the rail layout that we will need to build at the Plant in Shenandoah,
which will allow us to effectively transport our ethanol and distillers grains.
The sale of these shares of common stock was exempt from registration pursuant
to Rules 504, 505 and 506 of Regulation D and Sections 4(2) and 4(6) of the
Securities Act of 1933, as amended. We did not use an underwriter or pay any
commissions in connection with this transaction.
On February 22, 2006, we issued 100,000 shares of common stock to Brian
Peterson in consideration for the acquisition of Superior Ethanol, LLC. Mr.
Peterson is a director of the Company. The sale of these shares of common stock
was exempt from registration pursuant to Rules 504, 505 and 506 of Regulation D
and Sections 4(2) and 4(6) of the Securities Act of 1933, as amended. We did not
use an underwriter or pay any commissions in connection with this transaction.
Use of Proceeds
The Securities and Exchange Commission declared our registration
statement on Form S-1 (SEC Registration No. 333-121321) effective on March 9,
2005. We commenced our initial public offering shortly thereafter. Our initial
public offering was for the sale of up to 3,800,000 shares of our common stock
at $10.00 per share. Each share purchased included a warrant to purchase 1/4 of
an additional share of common stock from the Company at a purchase price of
$30.00 per share. The offering ranged from a minimum aggregate offering amount
of $29,667,000 to a maximum aggregate offering amount of $38,000,000. Our
registered offering and escrow agreement required that we raise the $29,667,000
in proceeds by November 29, 2005 and secure a letter of commitment for debt
financing by November 29, 2005, both of which we accomplished in a timely
manner.
On November 15, 2005, we closed the offering prior to the sale of the
maximum number of registered shares. The net proceeds to the Company from our
offering were approximately $34,532,408. This is the amount of money raised in
41
the offering, ($34,459,900), less $11,619 that was paid to the escrow agent for
their services, less $17,476 in federal and state filing fees, less $227,563 in
commissions (7%) paid to Smith Hayes Financial Services for the money raised by
them in the offering, plus $329,166 that was earned as interest while the money
was held in escrow. The majority of the shares were sold by the directors of the
Company without the assistance of an underwriter. The following is a breakdown
of shares registered and shares sold in the offering:
Number of Shares Aggregate Price of Aggregate Price of
Registered for Sale Shares Offered Shares Sold Shares Sold
- ------------------- ------------------ ----------- ------------------
3,800 $38,000,000 3,445,990 $34,459,900
On November 15, 2005 the funds from our offering were released to us
from escrow. The following table describes our use of net offering proceeds
through February 15, 2005:
- ---------------------------------------------------------------------------
Railroad $ 3,500,000
Real Property Acquisition $ 681,461
Debt Financing Fees $ 354,650
Miscellaneous Costs $ 225,889
- ---------------------------------------------------------------------------
Total $ 4,762,000
===========================================================================
All of the foregoing payments were direct or indirect payments to
persons or entities other than our directors, officers, or unit holders owning
10% or more of our shares.
Item 6. Selected Financial Data
The following selected historical financial data of is only a summary
and you should read it in conjunction with our consolidated financial statements
and the notes to those financial statements.
June 29, 2004 (Date
of Inception) to
November 30, 2005 November 30, 2004
(Audited) (Audited)
----------------- -------------------
Statement of Operations Data:
Revenues................................. $ 0 $ 0
Operating Expenses....................... 729,546 50,305
Loss from Operations..................... (792,546) (50,305)
Interest Income.......................... 331,792 310
Net Loss................................. (397,754) (49,995)
Loss Per Common Share.................... (.42) (.08)
Balance Sheet Data:
Current assets........................... $ 33,862,636 $ 629,093
Total assets............................. 34,649,482 629,093
Current liabilities...................... 170,701 5,800
Total liabilities........................ 170,701 5,800
Stockholder's equity .................... 34,478,781 623,293
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of our
condensed results of operations and financial condition. The discussion contains
forward-looking statements that involve risks and uncertainties. Actual events
42
or results may differ materially from those indicated in such forward-looking
statements. The discussion should be read in conjunction with the financial
statements included herewith and notes thereto and the risk factors contained
therein.
Overview
We are a start-up company in development stage which was formed for the
purpose of building a plant to produce ethanol and animal feed products in
southwestern Iowa. We do not expect to operate at a profit before the ethanol
plant is completely constructed and operational.
For the fiscal year ended November 30, 2005, we incurred a net loss of
$397,754. We have incurred an accumulated loss of $447,749 from inception (June
29, 2004) through November 30, 2005. Our operating expenses were $729,546 for
the year ended November 30, 2005. These expenses related primarily to our fund
raising activities, general and administrative costs, consulting costs, costs
associated with various permits needed to build the Plant, and payments made to
Fagen Engineering for the Phase I and II Pre-engineering work.
We believe we will incur significant losses from this time forward
until we are able complete construction of our proposed Plant in Shenandoah and
commence operations. We also have options to acquire property in Atlantic, Iowa
and Dickinson County, Iowa, where we considering constructing two additional
ethanol plants. There is no assurance that we will be successful in our efforts
to build and operate an ethanol plant in Shenandoah or elsewhere. Even if we
successfully meet all of these objectives and begin operations of an ethanol
plant, there is no assurance that we will be able to operate profitably.
We raised gross proceeds of $34,459,900 in our initial public offering
that closed in November 2005. We expect that the Shenandoah project will cost
approximately $81.4 million. We raised approximately $637,500 in seed capital
prior to commencing our public offering. We entered into loan arrangements
whereby Farm Credit Services of America, FLCA and other participating lenders
have agreed to loan us up to $47,000,000 to use for construction costs and
working capital. Therefore, we have the necessary funding to commence
construction of the Shenandoah plant.
Representatives from Fagen Inc., our contractor, have informed the
Company that a 50 million gallon per year plant will consume on an annual basis
approximately 18 million bushels of locally grown corn and annually produce
approximately 50 million gallons of fuel-grade, denatured ethanol, and
approximately 160,000 tons of DDGS on a dry basis. We plan to hire independent
brokers to sell our ethanol and DDGS. This Plant will be located in Shenandoah,
Iowa, an area where we believe there are over 200 hundred thousand cattle on
feeder lots within a 50 mile radius of the Plant. We believe we can sell a
portion of our distillers grains in a wet form because of this, which will save
us a significant amount of money because we will not have to dry the grain
before selling it.
Additionally, in discussions with representatives from Fagen, Inc. we
have been informed that our plant will produce approximately 148 thousand tons
of carbon dioxide that may be recovered on an annual basis. While we intend to
have discussions with several companies regarding construction of a facility to
capture raw carbon dioxide prior to completion of the Plant, we presently have
no agreement with any third party to capture or market the raw carbon dioxide,
and the market may be too saturated in Iowa to recover the carbon dioxide
profitably. We therefore may choose to vent off the C0(2) and may have no market
for it of any kind.
The Plant lies adjacent to the lines of the BNSF Railway Company
(BNSF). However, the spur (the "SPUR") on which the plant will be located is
currently closed and needs to be upgraded to meet HAZMAT (Hazardous Materials)
standards. Approximately 20 miles of the spur will need to be upgraded. On
January 26, 2006, we entered into an Allowance Contract (the "Allowance
Agreement") with BNSF to renovate and maintain approximately 20 miles of track
on the SPUR.
In the Allowance Agreement, we have undertaken to fund an estimated
$3.5 million for the SPUR renovation. Said amount was paid by GPRE to BNSF on
the day the Allowance Agreement was entered into. The renovation work is to be
43
done by BNSF, and BNSF will own, operate and maintain the SPUR, as long as GPRE
meets certain annual volume thresholds (cars placed on the rail) as outlined in
the Allowance Agreement. We are entitled to receive refund payments from BNSF to
reimburse us for this expense, but only to the extent that our usage of the line
meets the annual volume thresholds. There can be no assurance that our usage
will meet the annual volume thresholds or that we will be reimbursed for all or
any part of the renovation costs. In the future, if there is any additional,
major, renovation needed to be done to the SPUR, it shall be GPRE's
responsibility to pay for any such additional, major, renovation. The Allowance
Agreement is for a term expiring on September 14, 2015.
We intend to enter into an agreement with RPMG of Belle Plaine, MN to
sell our ethanol production. We also anticipate that we will have an agreement
with an experienced marketer to sell our animal feed products. We will be hiring
staff to handle the direct operation of the plant, and currently expect to
employ approximately 34 people. We do not intend to hire a sales staff to market
our products. Third-party marketing agents will coordinate all shipping.
The following table describes our proposed use of proceeds, based upon
our current cash reserves and loan arrangements. The total use of proceeds is
estimated to be $81,389,800. The actual use of funds is based upon
contingencies, such as the estimated cost of plant construction, the regulatory
permits required and the cost of debt financing and inventory costs, which are
driven by the market. Therefore, the following figures are intended to be
estimates only and the actual use of funds may vary significantly from the
descriptions given below depending on the contingencies described above.
However, we anticipate that any variation in our use of proceeds will occur in
the level of proceeds attributable to a particular use (as set forth below)
rather than a change from one of the uses set forth below to a use not
identified in this report.
Projected Uses and Sources of Funds
Estimated Use of Proceeds
Estimated Sources:
Share Proceeds $ 34,549,884
Zero Interest Loan and Grant from State of Iowa 400,000
Seed Capital 637,500
Term Debt Financing 47,000,000
----------------
Total Estimated Sources of Funds $ 82,587,384
================
Estimated Uses of Funds:
Plant Construction and Misc. Costs $ 59,926,300
Estimated Site Costs 4,295,000
Estimated Railroad Costs 5,600,000
Estimated Fire Protection/Water Supply Costs 2,216,000
Estimated Rolling Stock Costs 240,000
Estimated Financing Costs and Capitalized Interest 1,402,500
Estimated Pre-Production Period Costs 710,000
Estimated Inventory & Working Capital Costs 8,827,584
----------------
Total Estimated Use of Funds $ 82,587,384
================
The City of Shenandoah awarded us a 15 year property tax abatement that
we would be able to receive if the city annexed the plant site into the City of
Shenandoah boundaries. We asked for voluntary annexation into the City limits
and were annexed into the City on February 15, 2006. It is anticipated that this
will result in significant long-term savings.
44
Plan for the Next 24 Months of Operations
We expect to spend the next 24 months in the design-development and
construction of the plant, and thereafter commence production of ethanol and
distillers grains at the plant. We expect to have sufficient cash on hand to
cover all costs associated with construction of the project, including but not
limited to, utilities, construction, equipment acquisition and site development.
In addition, we expect to have enough cash to cover our costs through this
period, including staffing, office costs, audit, legal, compliance and staff
training. We estimate that we will need approximately $81,389,800 to complete
the project.
The tables above describing the estimated sources of funds and various
costs associated with the project also describe operations for the next 24
months. These tables are only estimates and actual expenses could be higher or
lower due to a variety of factors described in the section of our Annual Report
entitled "Risk Factors".
Condition of Records
We recently hired an experienced general manager who will oversee Plant
construction. In addition to our general manager, we currently have office staff
comprised of our president, and an office worker that assists our general
manager in our Shenandoah office. We have also engaged an accountant that has a
great deal of experience working with public companies, on a part time basis, to
help us keep our books and records, with the assistance of our general manager
and our president. We intend to hire and train additional staff well before the
start of the plant operations, and we have included an expense allocation for
this in our budget. However, there can be no assurance that we will be able to
retain qualified individuals. It is possible that accounting or other financing
functions may not be performed on time, if at all.
Operating Expenses
We will have operating expenses, such as salaries, for our
president/CEO, general manager and other office staff as they are hired. We
commenced paying a salary to our CEO on January 1, 2006 for his full time work
on the project. Along with operating expenses, we anticipate that we will have
significant expenses related to financing and interest. We have allocated funds
in our capital structure for these expenses. However, there can be no assurance
that the funds allocated are sufficient to cover the expenses. We may need
additional funding to cover these costs if sufficient funds are not retained
up-front or if costs are higher than expected.
Results of Operations
We are a development stage company. We had no revenues in 2004 or 2005.
Our expenses in both years are the result of our efforts to identify a viable
site for an ethanol plant, to organize our company and to obtain the financing
to build the plant. We have engaged various consultants to assist us in these
efforts. These consultants included accountants, attorneys and experts in
finance and bio fuels. We incurred $626,751 in such fees in 2005 compared to
$46,511 in 2004. We also expended $105,110 in advertising fees in these efforts.
We also spent $102,455 in printing and mailing costs in 2005 compared to $-0- in
2004. After raising our initial capital we were able to invest the funds in
various interest bearing instruments. We offset our expenses with $331,792 and
$310 of interest income in 2005 and 2004, respectively.
45
Liquidity and Capital Resources
At November 30, 2005 we had $5,794,936 in cash and equivalents and
$28,064,700 in securities in the form of short-term US Government backed
securities. We anticipate that our working capital requirements for the next
twenty-four months will be as described above.
In furtherance of our business plan, on February 6, 2006, we entered
into a Master Loan Agreement, Construction and Term Loan Supplement,
Construction and Revolving Term Loan Supplement, Security Agreement and Real
Estate Mortgage with Farm Credit Services of America, FLCA (individually and
collectively, the "Loan Agreements"). A participating interest under the Loan
Documents was transferred to CoBank, ACB. Under the Loan Agreements, the lenders
will loan up to $47,000,000. The loan proceeds are to partially finance
construction of the Plant and to provide funding for working capital purposes.
The Plant is to be in production by no later than May 1, 2007 and construction
costs are not to exceed an aggregate of $71,000,000, net of refundable sales
taxes.
Loan Commitments and Repayment Terms
The loan is comprised of a $30,000,000 amortizing term loan and a
$17,000,000 revolving term facility.
o Term Loan - This loan is available for advances until July 1,
2007. Principal payments are to commence with $1,200,000 due
November 20, 2007, and each quarter thereafter with a final
maturity on November 20, 2013 at the latest. In addition, for
fiscal years ending in 2007 and thereafter, we are also
required to make a special payment equal to 65% of the
available (if any) free cash flow from operations, not to
exceed $2,000,000 per year, and provided, however, that if
such payments would result in a covenant default under the
Loan Agreements, the amount of the payments shall be reduced
to an amount which would not result in a covenant default. The
free cash flow payments are discontinued when the aggregate
total received from such payments exceeds $8,000,000.
o Revolving Term - This loan is available for advances
throughout the life of the commitment. This loan requires
semi-annual $2,400,000 payments on/step-downs of the
commitment to commence on the first day of the month beginning
approximately six months after repayment of the term loan, by
May 1, 2014 at the latest with a final maturity no later than
November 1, 2017.
Availability of Advances, Interest Rates and Fees
Advances are subject to satisfaction of specified lending conditions.
Advances correlate to budget and construction timeline projections, with
verification of progress by a third-party engineer. The loans will bear interest
at the rate of LIBOR plus 3.35%. We paid a loan origination fee in the amount of
$352,500, there is an annual administration fee in the amount of $25,000,
beginning November 1, 2007, and there is an unused commitment fee equal to 1/2%
of the unused revolving term. Appraisal, inspecting engineer, and title company
insurance and disbursing fees are also at the Company's expense.
Security
As security for the loan, the lenders received a first-position lien on
all personal property and real estate owned by us, including an assignment of
all contracts and rights pertinent to construction and on-going operation of the
Plant.
46
Representations, Warranties and Covenants
The Loan Agreements contain representations, warranties, conditions
precedent, affirmative covenants (including financial covenants) and negative
covenants. One of these covenants requires that dividends or other distributions
to stockholders be limited to 40% of the profit net of income taxes for each
fiscal year and may be paid only where we are expected to remain in compliance
with all loan covenants, terms and conditions. Furthermore, with respect to the
fiscal years ending in 2008 and thereafter, an additional distribution may be
made to stockholders in excess of the 40% limit for such fiscal year if we have
made the required free cash flow payment for/based on such fiscal year, and will
thereafter remain in compliance with all loan covenants, terms and conditions on
a pro forma basis net of said potential additional payment. There can be no
assurance that we can remain in compliance with all loan covenants.
Contractual Obligations
Our contractual obligations as of November 30, 2005 were as follows:
Payments Due by Period
--------------------------------------------------------
Less Than 1
Contractual Obligations Total Year 1-3 Years 3-5 Years Thereafter
------------- -------------- ------------- ------------- -------------
Long-Term Debt Obligations 0
Capital Lease Obligations 0
Operating Lease Obligations 0
Purchase Obligations 0
Other Long-Term Liabilities 0
------------- -------------- ------------- ------------- -------------
Total 0
Critical Accounting Policies
The Company applies SFAS No. 123 Accounting for Stock-Based
Compensation for all compensation related to stock, options or warrants. SFAS
123 requires the recognition of compensation cost using a fair value based
method whereby compensation costs is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. The Company uses the Black-Scholes pricing model to
calculate the fair value of options and warrants issued to both employees and
non-employees. Stock issued for compensation is valued using the market price of
the stock on the date of the related agreement.
The Company granted no warrants or options for compensation for the
period ended November 30, 2005.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on our financial
condition, results of operations or liquidity.
Recent Accounting Pronouncements
The Company has not adopted any new accounting policies that would have
a material impact on the Company's financial condition, changes in financial
conditions or results of operations.
Grant and Government Programs
We have been awarded a $300,000 zero interest loan and a $100,000
forgivable loan (grant) from the state of Iowa. These funds became available to
us once we closed on our financing. We have asked for the release of these funds
after closing on our financing and anticipate their receipt in the near future.
47
We believe that we are eligible for and anticipate applying for other state and
federal grant, loan and forgivable loan programs. Most grants that may be
awarded to us are considered paid-in capital for tax purposes and are not
taxable income. Although we may apply under several programs simultaneously and
may be awarded grants or other benefits from more than one program, it must be
noted that some combinations of programs are mutually exclusive. Under some
state and federal programs, awards are not made to applicants in cases where
construction on the project has started prior to the award date. There is no
guarantee that applications will result in awards of grants or loans. With the
exception of the $300,000 zero interest loan and the $100,000 forgivable loan
(grant) described above,, we are not depending on the award of any such grants
as part of our funding of the Project. However, we may be eligible to receive
such grants. If we do, the amount of money we will have to borrow may be reduced
by that amount. There can be no assurance that we will receive any funding under
any federal or state funding initiative.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a start-up company in development stage, which was formed for
the purpose of building a plant to produce ethanol and animal feed products in
southwestern Iowa, and anticipate locating other sites and building other plants
in other parts of Iowa or other states within the corn-belt. However, we are not
presently conducting operations and are not presently subject to market risks.
If and when we begin Plant operations, we will be exposed to the impact of
market fluctuations associated with commodity prices and interest rates as
discussed below. We do not expect to have exposure to foreign currency risk as
all of its business is expected to be conducted in U.S. dollars.
Commodity Price Risk
We expect to produce ethanol and its co-product, distiller's dried
grains with solubles (DDGS), from corn, and our business will be sensitive to
changes in the price of corn. The price of corn is subject to fluctuations due
to unpredictable factors such as weather, total corn planted and harvested
acreage, changes in national and global supply and demand, and government
programs and policies. We also expect to use natural gas in the ethanol and DDGS
production process, and our business will be sensitive to changes in the price
of natural gas. The price of natural gas is influenced by such weather factors
as extreme heat or cold in the summer and winter, in addition to the threat of
hurricanes in the spring, summer and fall. Other natural gas price factors
include the U.S. domestic onshore and offshore rig count and the amount of U.S.
natural gas in underground storage during both the injection and withdrawal
seasons.
We anticipate that we will attempt to reduce the market risk associated
with fluctuations in the price of corn and natural gas by employing a variety of
risk management strategies. Strategies include the use of derivative financial
instruments such as futures and options initiated on the Chicago Board of Trade
and/or the New York Mercantile Exchange, as well as the daily cash management of
our total corn and natural gas ownership relative to monthly demand for each
commodity, which may incorporate the use of forward cash contracts or basis
contracts.
We may hedge corn with derivative instruments including futures and
options contracts offered through the Chicago Board of Trade. Forward cash corn
and basis contracts may also be utilized to minimize future price risk.
Similarly, natural gas is hedged with futures and options contracts offered
through the New York Mercantile Exchange. Basis contracts may also be utilized
to minimize future price risk.
48
Gains and losses on futures and options contracts used as economic
hedges of corn inventory, as well as on forward cash corn and basis contracts,
are recognized as a component of cost of revenues for financial reporting on a
monthly basis using month-end settlement prices for corn futures on the Chicago
Board of Trade. Corn inventories are marked to fair value using market based
prices so that gains or losses on the derivative contracts, as well as forward
cash corn and basis contracts are offset by gains or losses on inventories
during the same accounting period.
Gains and losses on futures and options contracts used as economic
hedges of natural gas, as well as basis contracts, are recognized as a component
of cost of revenues for financial reporting on a monthly basis using month-end
settlement prices for natural gas futures on the New York Mercantile Exchange.
The natural gas inventories hedged with these derivatives or basis contracts are
valued at the spot price of natural gas, plus or minus the gain or loss on the
futures or options positions relative to the month-end settlement price on the
New York Mercantile Exchange.
While our hedging activities may have a material effect on future
operating results or liquidity in a specific quarter of its fiscal year,
particularly prior to harvest, management does not believe that such activities
will have a material, long-term effect on future operating results or liquidity.
Item 8. Financial Statements and Supplementary Data
See index to consolidated financial statements beginning on page F-1 of
this report, and financial statements for the year ended November 30, 2005
referenced therein, which are hereby incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company has evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
November 30, 2005, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective. There have
been no significant changes in internal controls or in other factors that could
significantly effect internal controls subsequent to the date of our most recent
evaluation.
Item 9B. Other Information
On February 22, 2006, we acquired all of the outstanding ownership
interest in Superior Ethanol, LLC. Superior has options to acquire at least 135
acres of property in Dickinson County, Iowa, has completed a feasibility study
relating to the construction of an ethanol plant on this site, the site is zoned
as "heavy industrial," the site has been awarded a property tax abatement from
Dickinson County, Iowa, and Superior had more than $200,000 in cash at closing.
In consideration for the acquisition of Superior as a wholly owned subsidiary of
the Company, we issued 100,000 shares of our restricted common stock to Brian
Peterson, a director of the Company. Prior to the acquisition, substantially all
of Superior was owned by Mr. Peterson.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
49
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information concerning each of our directors
and executive officers as of February 15, 2006.
With the
Name Age Position Company Since
---- --- -------- -------------
Barry Ellsworth 52 President/CEO/Chairman 2004
Dan Christensen 59 Treasurer/Secretary/Director 2004
Gary Thien 53 Vice President/Director 2004
David A. Hart (1)(2)(3) 52 Director 2004
Steven Nicholson (1)(2)(3) 79 Director 2004
Robert D. Vavra (1) 55 Director 2004
Brent Lorimor (1) 39 Director 2004
Hersch Patton (2)(3) 60 Director 2004
Brian Peterson (2)(3) 42 Director 2005
Allen H. Sievertsen 57 General Manager 2006
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating Committee.
Our board is divided into three classes. One class of directors is
elected at each annual meeting of stockholders for a three-year term. Each year
a different class of directors is elected on a rotating basis. The terms of Gary
Thien, David Hart, and Brent Lorimor were set to expire at the 2005 annual
meeting of stockholders. The terms of Dan Christensen, Steve Nicholson, and
Robert Vavra expire at the 2006 annual meeting of stockholders. The terms of
Barry Ellsworth, Hersch Patton and Brian Peterson expire at the 2007 annual
meeting of stockholders. Because we did not hold a shareholders meeting in 2005,
due to the shortness of the fiscal year, the terms of both groups one and two
are set to expire at our next shareholders meeting. At that meeting, board
members for both classes of directors will be voted on by the shareholders of
the Company. The number of directors currently comprising the board of directors
is nine. The bylaws authorize from one to nine directors, the exact number of
which may be determined by resolution of the board. The Company has chosen to
reduce the number of board members to eight effective at the Company's next
annual meeting. However, it may change that number at any time at its
discretion.
Business Experience of Management
The following is a brief description of the business experience and
background of the above-named officers and directors of our Company.
BARRY A. ELLSWORTH, resides in Las Vegas, Nevada. He assumed his
present positions with the Company as CEO/president and as a director on June
29, 2004, upon the formation of the Company and is responsible for the day to
day operations of the Company. Mr. Ellsworth graduated from Brigham Young
University in 1977, with a BA in Communications. He later attended Cal Western
School of Law in San Diego, CA. For more than a five year period immediately
prior to join the Company, Mr. Ellsworth has acted as the Managing Director of
Red Rock Investment Partners, a financial consulting firm. Earlier, he owned the
financial consulting firm of Ellsworth and Associates. Prior to that, he gained
experience in finance working as a stockbroker at the firms of Prudential-Bache
Securities, Wilson-Davis Securities, and Dean Witter Reynolds. He has been
instrumental in taking companies public and has raised capital for various
concerns.
50
DAN E. CHRISTENSEN, resides in Salt Lake City, Utah. He assumed his
present positions with the Company as Treasurer, Secretary and as a director on
June 29, 2004, upon the formation of the Company. Mr. Christensen graduated from
Brigham Young University with a Bachelor's Degree in Business in 1969 and
received a Management Administration Degree from the California Savings and Loan
Institute in 1973. He has acted as the CEO of Commercial Mortgage and
Investment, LLC, (CMI), with offices in South Jordan, Utah and San Francisco,
California, since 1981. CMI provides mortgage banking services for selected real
estate projects, nationwide, including real estate development projects for his
own account. Mr. Christensen has procured over 3 billion dollars in financing
for numerous real estate development projects over the years, including many of
his own projects.
GARY THIEN, resides in Council Bluffs, Iowa. Mr. Thien has acted as the
Company's Vice president and has been a director of the Company from 2004 to the
present. Gary graduated from Iowa State University in Ames, Iowa in 1974, with a
Bachelor of Science Degree in Agricultural Business. For the past 10 years, Mr.
Thien has owned and operated Thien Farm Management, located in Council Bluffs,
Iowa, which manages approximately 20 thousand acres of farm land in Southwest
Iowa. He is also a real estate broker and has expertise in commodity marketing,
insurance and risk management, budgeting, cash flow analysis, etc. Mr. Thien is
also president of the American Society of Farm Managers and Rural Appraisers.
DAVID A. HART, resides in rural Stanton, Iowa. Dave attended Iowa
Western Community College in Council Bluffs, Iowa, where he studied Farm
Operations and Management. He began farming in 1973. For more than the past five
years, Mr. Hart and his wife Cathy have operated Hart Farms in a 20 mile area
around Stanton. This diversified operation includes: Grain Production, Cattle
Feeding and Backgrounding, Cow/Calf Production, Custom Farming, Grain Hauling,
Custom Spraying, and Seed Sales. Hart Farms plants and harvests approximately
3,000 acres of corn and soybeans. This operation also includes approximately
1,500 acres of hay and pasture. Mr. Hart has served on numerous church and
community boards. He is a member of Stanton Fire and Rescue, having served 8
years as Fire Chief. As a Certified Emergency Medical Technician, Dave also
serves on the Montgomery County 911 board. Other memberships include the
National Cattlemen's Association, Corn and Soybean Associations, and the Farm
Bureau.
R. STEVEN NICHOLSON, resides in Las Vegas, Nevada. Mr. Nicholson served
in the US Navy during WWII from 1942-1946. He graduated with an AB in History
and Philosophy in 1950 from Wesleyan University. He received an MA in Cultural
Anthropology from Syracuse University in 1956 and received a PhD. in the
Sociology of Large Scale Organizations/Japanese and Chinese Cultures from
Michigan State University in 1971. From 1956-1962 Mr. Nicholson was Director of
World Vision Japan. From 1963-1971 he served as the Academic Dean, Lansing
Community College-Michigan; 1971-1973 president, Daily College-Chicago;
1973-1976 president, Southern Nevada Community College, Las Vegas; 1976-1985
president, Mount Hood Community College-Oregon; 1985-1990 president, Oakland
Community College-Michigan; 1990-1992 Chancellor, Higher Colleges of Technology
Abu Dhabi, United Arab Emirates;1992-1994 Christian College Coalition - Oregon;
1994-1999 Senior Fellow for Higher Education-Murdock Charitable Trust Vancouver,
Washington. Mr. Nicholson has served on various other boards throughout the
years, including Mercy Corps International (International Relief and
Development); Pontiac, Michigan Manpower Development Authority; American
Association of Community Colleges, Washington, DC; and the World Affairs Council
- - Japan/America Society. From January 1999 to the present, Mr. Nicholson has not
been employed, but has managed his own investments. Mr. Nicholson has also held
the following positions since January 1999: January 1999 to August
2000--Chairman of Mercy Corps International; July 2003 to 2004--member of the
Mercy Corps audit committee; March 1998 to March 2003--member of the board of
directors of Northwest Autism Foundation; and January 1999 to August
2001--Chairman and CEO of Northwest Autism Foundation.
ROBERT D. VAVRA, resides in Shenandoah, Iowa. Mr. Vavra is the Chairman
of our Audit Committee. Robert graduated from Black Hills State University in
Spearfish, South Dakota in 1972 with Bachelor of Science Degrees in Math and
History and graduated from the Graduate School of Banking in Boulder, Colorado
51
in 1991. Robert has been president and Director of Bank Iowa, since 1996. He has
worked for the same bank since 1986 in the role of a loan officer and Executive
vice president. Mr. Vavra has served on a number of community boards, over the
years, which include the Shenandoah Optimist Club, Shenandoah Memorial Hospital
and the Essex Commercial Club. Currently he serves on the Forest Park Manor
Board of directors and serves as a member of the Banking Committee for the
Shenandoah Chamber and Industry Association, Board of Directors.
BRENT LORIMOR, of rural Farragut, Iowa, was elected to serve as a
director of Green Plains Renewable Energy in November of 2004. Brent graduated
from Northwest Missouri State University in 1988 and taught vocational
agriculture in southeast Iowa for three years before returning home to farm.
Since 1992, Mr. Lorimor has been involved in the family farm operation with his
brother and mother. Lorimor Farming Corporation consists of 2500 acres of corn
and soybeans in Fremont, Page, and Montgomery counties. In addition to the
crops, Lorimor Farming Corporation feeds out over 2000 head of cattle annually.
Brent is the 5th generation to farm land in the area dating back to 1856. Mr.
Lorimor is a member of the Iowa and National Cattlemen's Association, Corn &
Soybean Grower's Association, as well as St. Mary's church in Shenandoah, Iowa.
HERSCHEL C. PATTON II, resides in Salt Lake City, Utah and was elected
to the Board of Directors of Green Pains Renewable Energy, Inc. in November of
2004. Hersch attended the University of Nevada/Reno and graduated from flight
school in 1970. Hersch was a senior captain and pilot for both Western and Delta
Airlines beginning in 1975 until retirement in June 2004. During his tenure as a
captain for Delta, Mr. Patton was involved in the ownership and development of
various successful commercial and residential real estate ventures including the
acquisition and sale of the Jeremy Ranch Golf and Country Club and the
Cottonwood Creek Retail Center. Hersch remains active in real estate and various
other investments.
BRIAN D. PETERSON, resides in Lawton, Iowa. Mr. Peterson is the
Chairman of our Nominating and Compensation Committees. He graduated from Dordt
College in Sioux Center, Iowa in 1986 with a Bachelor of Science Degree in
Agricultural Business. He started farming in 1978 at the age of fourteen. For
more that the past five years he has been principally employed by his grain
farm. His grain farm now consists of seven thousand eight hundred row crop acres
of corn and soybeans in Woodbury, Monona, and Sac counties in northwest Iowa.
Mr. Peterson owns and operates a beef feedlot with a capacity of twelve thousand
head in Woodbury County, Iowa. He owns a local grain elevator, a trucking
business, and a construction business. He has worked as a bank inspector and
internal bank auditor. He has been married for eighteen years. He is involved in
various other renewable energy investments.
ALLEN H. SIEVERTSEN, now resides in Shenandoah, Iowa and became our
general manager in February 2006. Mr. Sievertsen has substantial experience in
the ethanol industry. From August 2001 through December 2005, Mr. Sievertsen was
employed as the general manager/construction manager over an ethanol plant owned
by Husker AG, LLC in Plainview, Nebraska. From June 2000 to August 2001, Mr.
Sievertsen was a supervisor at Eaton Corp. where he directed the integration of
a new line of pumps into the Eaton Hydraulics Plant in Spencer, Iowa. He has a
B.S. in general science (chemistry emphasis) from the University of Iowa.
Our executive officers are elected by the board on an annual basis and
serve at the discretion of the board.
The Company has adopted a Code of Ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer and
other senior financial officers. Our Code of Ethics is posted on the Company's
Web site, which is located at www.gpreethanol.com.
52
Board Committees
We have a standing Audit Committee established in accordance with
section 3(a)(58)(A) of the Exchange Act, a Compensation Committee and a
Nominating Committee.
The Audit Committee
The Company's Audit Committee held two meetings during the fiscal year
ending on November 30, 2005. The function of the Audit Committee as detailed in
the Audit Committee Charter is to provide assistance to the Board in fulfilling
their responsibility to the stockholders, potential stockholders, and investment
community relating to corporate accounting, reporting practices of the Company
and the quality and integrity of the financial reports of the Company. In so
doing, it is the responsibility of the Audit Committee to maintain free and open
means of communication between the directors, the independent auditors and
Company management. The Company believes that the members of the Audit Committee
are independent as defined by Rule 4200(a) of NASD's listing standards. The
members of the Audit Committee are Messrs. David A. Hart, Steven Nicholson,
Robert D. Vavra, and Brent Lorimor. Mr. Vavra serves as our Chairman and
financial expert on that committee.
The Compensation Committee
The Compensation Committee was organized in November, 2005, near the
end of our November 30, 2005 fiscal year end. As a result, the committee held no
meetings during our last fiscal year. The Compensation Committee establishes a
general compensation policy for the Company and, except as prohibited by
applicable law, may take any and all actions that the Board could take relating
to the compensation of employees, directors and other parties. The members of
the Compensation Committee are Messrs. David A. Hart, Steven Nicholson, Hersch
Patton, and Brian Peterson. Mr. Peterson is Chairman of our Compensation
Committee.
The Nominating Committee
The Nominating Committee was organized in November, 2005, near the end
of our November 30, 2005 fiscal year end. As a result, the committee held no
meetings during our last fiscal year. The Nominating Committee's Charter and
Policies are available on the Company's website, which is located at
www.gpreethanol.com. The Company believes that the members of the Nominating
Committee are independent as defined by Rule 4200(a) of NASD's listing
standards. The members of the Nominating Committee are Messrs. David A. Hart,
Steven Nicholson, Hersch Patton, and Brian Peterson. Mr. Peterson is Chairman of
our Nominating Committee.
The function of the Nominating Committee, as detailed in the Nominating
Committee's Charter, is to recommend to the Board the slate of director nominees
for election to the Board and to identify and recommend candidates to fill
vacancies occurring between annual stockholder meetings. It is the policy of the
Nominating Committee to consider candidates recommended by security holders,
directors, officers and other sources, including, but not limited to,
third-party search firms. Security holders of the Company may submit
recommendations for candidates for the Board. All recommendations shall be
submitted to Brian Peterson at: Address: 1739 Charles Avenue, Lawton, Iowa,
51030; Phone: 712.944.4937; Email: branpete@netins.net. Such submissions should
include the name, contact information, a brief description of the candidate's
business experience and such other information as the person submitting the
recommendation believes is relevant to the evaluation of the candidate. Mr.
Peterson will then pass all such recommendations on to the Nominating Committee
for consideration. For candidates to be considered for election at the next
annual meeting stockholders, the recommendation must be received by the Company
no later than 120 calendar days prior to the date that the Company's proxy
statement is released to security holders in connection with such meeting.
The Nominating Committee has held meetings since our fiscal year end
and has established certain broad qualifications in order to consider a proposed
candidate for election to the Board. The Nominating Committee has a strong
53
preference for candidates with prior board of director experience with public
companies. The Nominating Committee will also consider such other factors as it
deems appropriate to assist in developing a board and committees that are
diverse in nature and comprised of experienced and seasoned advisors. These
factors include judgment, skill, diversity (including factors such as race,
gender or experience), integrity, experience with businesses and other
organizations of comparable size, the interplay of the candidate's experience
with the experience of other Board members, and the extent to which the
candidate would be a desirable addition to the Board and any committees of the
Board.
The Nominating Committee will evaluate whether an incumbent director
should be nominated for re-election to the Board or any committee of the Board
upon expiration of such director's term using the same factors as described
above for other Board candidates and the committee will also take into account
the incumbent director's performance as a Board member. Failure of any incumbent
director to attend at least seventy-five percent (75%) of the Board meetings
held in any calendar year will be viewed negatively by the Nominating Committee
in evaluating the performance of such director.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires our executive
officers, directors and persons who beneficially own more than 10% of our common
stock to file initial reports of ownership and reports of changes in ownership
with the SEC. Such persons are required by SEC regulations to furnish us with
copies of all Section 16(a) forms filed by such persons.
We did not become subject to these Section 16(a) requirements until
December 2005. As a result, our executive officers, directors and more than 10%
stockholders were not required to comply with these provisions during our fiscal
year ending November 30, 2005.
Item 11. Executive Compensation
During the fiscal year ended November 30, 2005, none of the Company's
officers worked for the Company on a full time basis, although Mr. Ellsworth,
the Company's president, has spent the majority of his time on the project from
March 2004 through the end of the 2005 fiscal year. None of the officers have
received any salary, wage or other compensation for services through November
30, 2005, with the exception of Mr. Ellsworth who received stock for services.
When the Company was originally incorporated, Mr. Ellsworth paid a total of
$87,500 for the 350,000 shares that were issued to him. In consideration for
these shares, Mr. Ellsworth paid the Company $50,000 in cash, and the remaining
$37,500 was paid to the Company in consideration for services rendered by Mr.
Ellsworth for and on behalf of the Company. No arrangements had been made with
respect to future compensation and no employment agreements existed with any
officer of the Company as of November 30, 2005. However, since that time, a
compensation agreement has been reached with Mr. Ellsworth, our CEO and
President. The Company commenced paying Mr. Ellsworth a salary on January 1,
2006, as described below. There are presently no ongoing pension or other plans
or arrangements pursuant to which remuneration is proposed to be paid in the
future to any of the officers and directors of the Company. We do reimburse our
officers and directors for out of pocket expenses incurred in connection with
their service to the Company. It is expected that that additional employment
agreements and compensation packages will be negotiated in the future.
On December 9, 2005, the Company issued 5,000 shares of our common
stock to Mr. Gary Thien for compensation for his services to the Company over
the past two years. Mr. Thien is vice president and a Director of the Company.
In February 2006, we hired Allen H. Sievertsen as our general manager
for the Plant. Mr. Sievertsen is working for us on an "at will" basis. His
annual salary is $150,000. He is also entitled to (i) a $50,000 bonus when the
Plant first begins producing ethanol, (ii) such other bonuses and compensation
as the our board of directors may award, (iii) reimbursement of moving expenses,
54
(iv) severance if Mr. Sievertsen's employment is terminated for any reason,
other than for cause, for a period of two months if Mr. Sievertsen was employed
by us for less than two years and for six months if he was employed by us for
more than two years, and (iv) other insurance, vacation, and retirement plan
benefits
In January 2006, we entered into an employment agreement with Mr. Barry
Ellsworth, our CEO/president, who is now working for us on a full time basis.
Mr. Ellsworth is being paid a salary of $120,000 per year. Additionally, the
Company has agreed to reimburse Mr. Ellsworth for his health insurance premiums,
which are approximately $350.00 per month. .The Board at its discretion may
increase or decrease said compensation in the future.
We intend to recruit and hire permanent employees who will be
compensated on a regular basis pursuant to agreed upon salaries once the Plant
is completed. We expect to offer typical health and other employee benefits.
Director Compensation
No cash fees or other consideration were paid to our directors for
service on the board from inception through November 30, 2005. The Company, upon
the recommendation of the Compensation Committee, recently agreed to compensate
its directors in nominal amounts for attendance at board meetings and for time
spent working for and on behalf of the Company. Each director is to be paid $150
for attendance at a board meeting held via telephonic conference and $300 per
meeting where travel is involved and a board meeting is held in one location at
which all board members (or a majority of our board members) are present. If a
board member spends an entire day working for and on behalf of the Company, said
board member will be eligible to receive $300 for that day's work. Our board
members are to be compensated in a like manner for meetings and work performed
by them in relation to the various committees of the Company. The Company also
reimburses our board members for any out of pocket expenses. After the Plant in
Shenandoah is operational, and/or after the Company is creating revenues of some
kind, it is anticipated that the Company will adopt a reasonable compensation
package for the board members.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of February 12, 2006, for: (i) each
person who is known by us to beneficially own more than five percent of our
common stock, (ii) each of our directors, (iii) each of our named executive
officers, and (iv) all directors and executive officers as a group. On February
12, 2006 the Company had 4,220,990 shares of common stock outstanding. Each
share is entitled to one vote.
Shares
Name and Address Beneficially Percentage
of Beneficial Owner(1) Owned(2) of Total Position
- ---------------------- ------------ ---------- --------
President/CEO/Chairman
Barry Ellsworth 334,400 7.9%
Treasurer/Secretary/Director
Dan Christensen 200,000 4.7%
Vice President/Director
Gary Thien (3) 19,250 *
Director
David A. Hart (4) 19,250 *
Director
Steven Nicholson (5) 87,500 2.3%
Director
Robert D. Vavra (6) 22,000 *
Director
Brent Lorimor 5,000 *
55
Shares
Name and Address Beneficially Percentage
of Beneficial Owner(1) Owned(2) of Total Position
- ---------------------- ------------ ---------- --------
Director
Hersch Patton (7) 51,250 1.2%
Director
Brian Peterson (8) 100,000 2.4%
General Manager
Allen H. Sievertsen 0 *
Executive Officers and 838,650 18.5%
Directors as a Group
(10 persons)
Wayne Hoovestol (9) 394,500 9.2%
2883 Paradise Rd. #1801
Las Vegas, Nevada
* Less than 1%.
- --------------
(1) Except where otherwise indicated, the address of the beneficial owner is
deemed to be the same address as the company.
(2) Beneficial ownership is determined in accordance with SEC rules and
generally includes holding voting and investment power with respect to the
securities. Shares of common stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for
computing the percentage of the total number of shares beneficially owned by
the designated person, but are not deemed outstanding for computing the
percentage for any other person.
(3) Includes 17,000 shares and warrants exercisable for 2,250 shares.
(4) Includes 17,000 shares and warrants exercisable for 2,250 shares.
(5) Includes 76,000 shares and warrants exercisable for 11,500 shares.
(6) Includes 16,800 shares and warrants exercisable for 2,700 shares. Also
includes 2,000 shares and warrants exercisable for 500 shares that Mr. Vavra
owns jointly with daughters.
(7) Includes 45,000 shares and warrants exercisable for 6,250 shares.
(8) Includes 65,000 shares and warrants exercisable for 16,250 shares. Also
includes 15,000 shares and warrants exercisable for 3,750 shares that Mr.
Peterson owns jointly with a child.
(9) Includes 285,600 shares and warrants exercisable for 71,400 shares owned
directly by Mr. Hoovestol. Also includes 30,000 shares and warrants
exercisable for 7,500 shares owned by Mr. Hoovestol's wife and therefore
deemed to be beneficially owned by Mr. Hoovestol.
We have no securities authorized for issuance under equity compensation
plans.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve on our Compensation Committee or
in a like capacity in any other entity.
Changes in Control
Management is not aware of any arrangement the operation of which may
at a subsequent date result in a change in control of Green Plains.
Item 13. Certain Relationships and Related Transactions
Since our inception, we have engaged in transactions with related
parties.
56
Sale and Issuance of Common Stock; Promoters
On July 1, 2004, 550,000 shares of common stock were issued to our two
initial directors and founders for cash payments to the Company. Barry A.
Ellsworth contributed $87,500 to the Company at that time and was issued 350,000
shares of common stock. Mr. Ellsworth paid the purchase price with $50,000 in
cash and $37,500 was paid in consideration for services rendered by Mr.
Ellsworth, for and on behalf of the Company. Dan E. Christensen contributed
$50,000 to the Company and was issued 200,000 shares of common stock. The
average purchase price for these shares was $0.25 per share.
Messrs. Ellsworth and Christensen were the founders of the Company and
may be considered to be promoters. Other than the stock purchases described in
the prior paragraph, the salary now being paid to Mr. Ellsworth, and possible
future compensatory arrangements as described in "Management," these gentlemen
have not received and are not entitled to receive any assets, services or other
consideration from Green Plains. These gentlemen may receive, however, dividends
on their common stock at the same rate and on the same terms as every other
stockholder of Green Plains.
On August 26, 2004, Steve Nicholson, a director of the Company, and his
wife purchased 28,000 shares of common stock for $70,000.
Fagen, Inc.
Ron Fagen of Fagen, Inc. purchased 100,000 shares in our public
offering through Hawkeye Companies, LLC. We entered into a Lump-Sum Design Build
Contract with Fagen, Inc. The Construction Agreement is dated January 13, 2006,
but it was not executed by the parties until January 22, 2006. Under the
Construction Agreement, Fagen, Inc. will provide all work and services in
connection with the engineering, design, procurement, construction startup,
performances tests, training for the operation and maintenance of the Plant and
provide all material, equipment, tools and labor necessary to complete the Plant
in accordance with the terms of the Construction Agreement. As consideration for
the services to be performed, Fagen, Inc. will be paid $55,881,454, subject to
adjustments contained in the Construction Agreement.
Superior Ethanol, LLC
On February 22, 2006, we acquired all of the outstanding ownership
interest in Superior Ethanol, LLC. Superior has options to acquire approximately
135 acres of property in Dickinson County, Iowa, has completed a feasibility
study relating to the construction of an ethanol plant on this site, the site is
zoned as "heavy industrial," the site has been awarded a property tax abatement
from Dickinson County, Iowa, and Superior had more than $200,000 in cash at
closing. In consideration for the acquisition of Superior as a wholly owned
subsidiary of the Company, we issued 100,000 shares of our restricted common
stock to Brian Peterson, a director of the Company. Prior to the acquisition,
substantially all of Superior was owned by Mr. Peterson.
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed for professional services rendered by our
principal accountant for the audit of our financial statements, review of
financial statements included in our quarterly reports and other fees that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for the fiscal years ended November 30, 2005 and 2004
were $11,500 and $3,500, respectively. With respect to the 2004 figure, we were
organized in June 2004 and we were not required to file reports under the
Securities Exchange Act of 1934 until 2005.
57
Audit Related Fees
The aggregate fees billed for assurance and related services by our
principal accountant that are reasonably related to the performance of the audit
or review of our financial statements, other than those previously reported in
this Item 14, for the fiscal years ended November 30, 2005 and 2004 were $0.00
and $0.00, respectively.
Tax Fees
The aggregate fees billed for professional services rendered by our
principal accountant for tax compliance, tax advice and tax planning for the
fiscal years ended November 30, 2005 and 2004 were $0.00 and $1,000,
respectively.
All Other Fees
The aggregate fees billed for products and services provided by the
principal accountant, other than those previously reported in this Item 14, for
the fiscal years ended November 30, 2005 and 2004 were $2,950 and $0.00,
respectively.
Audit Committee
Our audit committee is comprised of four independent directors. It is
the Company's policy that the Audit Committee pre-approves all audit, tax and
related services. All of the services described above in this Item 14 were
approved in advance by our Audit Committee. No items were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following exhibits and financial statements are filed as part
of, or are incorporated by reference into, this report:
(1) Financial Statements - Reference is made to the "Index to
Financial Statements" located at page F-1 of this report for a list of
the financial statements and schedules for the year ended November 30,
2005 included herein.
(2) Financial Statement Schedules - All supplemental schedules
are omitted because of the absence of conditions under which they are
required or because the information is shown in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits - The exhibits we have filed herewith or
incorporated by reference herein are set forth on the attached Exhibit
Index.
(b) See Item 15(a)(3) above.
(c) See Item 15(a)(2) above.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GREEN PLAINS RENEWABLE ENERGY, INC.
(Registrant)
Date: February 22, 2006 By /s/ Barry Ellsworth
-----------------------------------
Barry Ellsworth
President, Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Barry A. Ellsworth President and Chairman (acts as February 22, 2006
- ------------------------ Principal Executive Officer and
Barry A. Ellsworth Principal Financial Officer)
/s/ Dan Christensen Secretary, Treasurer and February 22, 2006
- ------------------------ Director (acts as Principal
Dan Christensen Financial Officer)
Director and Vice President
/s/ Gary Thien February 22, 2006
- ------------------------
Gary Thien
/s/ David A. Hart Director February 22, 2006
- ------------------------
David A. Hart
/s/ Steve Nicholson Director February 22, 2006
- ------------------------
Steve Nicholson
/s/ Robert D. Vavra Director February 22, 2006
- ------------------------
Robert D. Vavra
/s/ Brent Lorimor Director February 22, 2006
- ------------------------
Brent Lorimor
/s/ Hersch Patton Director February 22, 2006
- ------------------------
Hersch Patton
/s/ Brian Peterson Director February 22, 2006
- ------------------------
Brian Peterson
59
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
3(i).1 Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3(i).1 of the Company's
Registration Statement on Form S-1 filed December 16, 2004,
File No. 333-121321)
3(ii).1 Bylaws of the Company (Incorporated by reference to Exhibit
3(ii).1 of the Company's Registration Statement on Form S-1
filed December 16, 2004, File No. 333-121321)
10.1 Option Agreement on Hilger West Property, by and between the
Company and Alberta A. Bryon, dated November 12, 2004
(Incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-1 filed December 16, 2004,
File No. 333-121321)
10.2 Option Agreement on Hilger East Property, by and between the
Company and Alberta A. Bryon, dated October 20, 2004
(Incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-1 filed December 16, 2004,
File No. 333-121321)
10.3 Letter of Intent relating to the purchase of real property
from Shenandoah Chamber & Industry Association, dated November
12, 2004 (Incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-1 filed December
16, 2004, File No. 333-121321)
10.4 Letter Agreement by and between the Company and U.S. Energy,
Inc. dated October 5, 2004 (Incorporated by reference to
Exhibit 10.5 of the Company's Registration Statement on Form
S-1 filed December 16, 2004, File No. 333-121321)
10.5 Agreement by and between the Company and Alberta A. Bryon,
dated October 5, 2004 (Incorporated by reference to Exhibit
10.6 of the Company's Registration Statement on Form S-1 filed
February 4, 2005, File No. 333-121321)
10.6 Letter of Intent by and between the Company and Alberta A.
Bryon, dated October 20, 2005 (Incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on Form
S-1/A filed February 4, 2005, File No. 333-121321)
10.7 Martin D. Ruikka, dba PRX Geographic(TM) Quotation, dated May
3, 2004 (Incorporated by reference to Exhibit 10.8 of the
Company's Registration Statement on Form S-1/A filed February
4, 2005, File No. 333-121321)
10.8 Martin D. Ruikka, dba PRX Geographic(TM) Invoice, dated May 3,
2004 (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1/A filed February
4, 2005, File No. 333-121321)
10.9 Master Loan Agreement, dated January 30, 2006, by and between
the Company and Farm Credit Services of America, FLCA
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K, dated February 6, 2006)
10.10 Construction and Term Loan Supplement, dated January 30, 2006,
by and between the Company and Farm Credit Services of
America, FLCA (Incorporated by reference to Exhibit 10.2 of
the Company's Current Report on Form 8-K, dated February 6,
2006)
10.11 Construction and Revolving Term Loan Supplement, dated January
30, 2006, by and between the Company and Farm Credit Services
of America, FLCA (Incorporated by reference to Exhibit 10.3 of
the Company's Current Report on Form 8-K, dated February 6,
2006)
10.12 Security Agreement, dated January 30, 2006, by and between the
Company and Farm Credit Services of America, FLCA
(Incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K, dated February 6, 2006)
10.13 Administrative Agency Agreement, dated January 30, 2006, by
and between the Company, Farm Credit Services of America, FLCA
and CoBank, ACB (Incorporated by reference to Exhibit 10.5 of
the Company's Current Report on Form 8-K, dated February 6,
2006)
60
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.14 Real Estate Mortgage and Financing Statement, dated January
30, 2006 by and between the Company and Farm Credit Services
of America, FLCA
10.15 Lump Sum Design Build Agreement, dated January 13, 2006, by
and between the Company and Fagen, Inc. (certain portions of
the exhibit were omitted pursuant to a confidential treatment
request)
10.16 Allowance Contract, by and between the Company and BNSF
Railway Company, dated January 26, 2006
10.17 Share Exchange Agreement, dated February 22, 2006, by and
between the Company and the parties identified therein.
21.1 Schedule of Subsidiaries
31.1 Certification by Barry A. Ellsworth under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by Dan Christensen under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Barry A. Ellsworth pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Dan Christensen pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
61
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
NOVEMBER 30, 2005
L.L. Bradford & Company, LLC
Certified Public Accountants & Consultants
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE NO.
Report of Independent Registered Public Accountants 1
Financial statements
Balance sheet 2
Statement of operations 3
Statement of stockholders' equity 4
Statement of cash flows 5
Notes to financial statements 6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Green Plains Renewable Energy, Inc.
(A Development Stage Company)
Las Vegas, Nevada
We have audited the accompanying balance sheets of Green Plains Renewable
Energy, Inc. (A Development Stage Company) as of November 30, 2005 and 2004, and
the related statements of operations, stockholders' equity, and cash flows for
the year ended November 30, 2005 and for the period from June 29, 2004
(Inception) through November 30, 2004 and 2005. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Green Plains Renewable Energy,
Inc. as of November 30, 2005 and 2004, and the results of its activities and
cash flows for the periods from June 29, 2004 (Inception) through November 30,
2004 and 2005, in conformity with accounting principles generally accepted in
the United States of America.
/s/ L.L. Bradford & Company, LLC
L.L. Bradford & Company, LLC
January 16, 2006 (except for Note 7 as to which the date is February 6, 2006)
Las Vegas, Nevada
F-1
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
November 30, November 30,
2005 2004
CURRENT ASSETS
Cash and equivalents $ 5,794,936 $ 626,093
Securities 28,064,700 -
Deposits related to option agreements 3,000 3,000
----------------------------------------
Total current assets 33,862,636 629,093
PROPERTY AND EQUIPMENT, net 786,846 -
----------------------------------------
Total assets $ 34,649,482 $ 629,093
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 170,701 $ 5,800
----------------------------------------
Total current liabilities 170,701 5,800
----------------------------------------
Total Liabilities 170,701 5,800
----------------------------------------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common stock; $.001 par value, 25,000,000 shares
authorized, 4,215,990 and 765,000 shares issued
and outstanding respectively 4,216 765
Additional paid-in capital 34,922,314 672,523
Accumulated deficit (447,749) (49,995)
----------------------------------------
Total stockholders' equity 34,478,781 623,293
----------------------------------------
Total liabilities and stockholders' equity $ 34,649,482 $ 629,093
========================================
F-2
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
For the Period
From Inception
For the Year Ended On June 29, 2004
-------------------------------- Through
November 30, November 30, November 30,
2005 2004 2005
--------------------------------------------------
Revenues $ - $ - $ -
Operating expenses 729,546 50,305 779,851
-----------------------------------------------
Loss from operations (729,546) (50,305) (779,851)
Other income
Interest income 331,792 310 332,102
-----------------------------------------------
Loss before provision for income taxes (397,754) (49,995) (447,749)
Provision for income taxes - - -
-----------------------------------------------
Net loss $ (397,754) $ (49,995) $ (447,749)
===============================================
Loss per common share - basic and diluted $ (0.42) $ (0.08)
=============================
Weighted average common shares outstanding -
Basic and diluted 945,517 622,535
=============================
F-3
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 29, 2004 (INCEPTION) THROUGH NOVEMBER 30, 2005
Common Stock Additional Total
---------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ------- ----------- ---------- ------------
Balance at June 29, 2004 (Inception) - $ - $ - $ - $ -
Issuance of common stock to the founders of the
Company for cash at $0.25 per share 400,000 400 99,600 - 100,000
Issuance of common stock for services at $0.25
per share 150,000 150 37,350 - 37,500
Issuance of common stock to directors of the
Company for cash 73,000 73 182,427 - 182,500
Issuance of common stock for cash, net of
offering costs of $1,712 142,000 142 353,146 - 353,288
Net loss for the period ended
November 30, 2004 - - - (49,995) (49,995)
---------- ------- ----------- ---------- ------------
Balance at November 30, 2004 765,000 765 672,523 (49,995) 623,293
Issuance of common stock for services at
$10.00 per share 5,000 5 49,995 - 50,000
Issuance of common stock for cash, net of offering
costs of $256,658 at $10.00 per share 3,445,990 3,446 34,199,796 - 34,203,242
Net loss for the year ended November 30, 2005 - - - (397,754) (397,754)
---------- ------- ----------- ---------- ------------
Balance at November 30, 2005 4,215,990 $ 4,216 $ 34,922,314 $ (447,749) $ 34,478,781
========== ======= ============ ========== ============
F-4
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Period
From Inception
For the Year Ended On June 29, 2004
--------------------------------- Through
November 30, November 30, November 30,
2005 2004 2005
--------------------------------------------------
Cash flows from operating activities:
Net loss $ (397,754) $ (49,995) $ (447,749)
Adjustments to reconcile net loss to
net cash used by operating activities:
Stock based compensation 50,000 37,500 87,500
Depreciation 1,693 - 1,693
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 164,901 5,800 170,701
------------ ------------ ------------
Net cash used by operating activities (181,160) (6,695) (187,855)
Cash flows from investing activities:
Purchase of securities (28,064,700) - (28,064,700)
Purchase of property and equipment (788,539) - (788,539)
Deposits related to option agreements - (3,000) (3,000)
------------ ------------ ------------
Net cash used by investing activities (28,853,239) (3,000) (28,856,239)
Cash flows from financing activities:
Proceeds from issuance of stock 34,203,242 635,788 34,839,030
------------ ------------ ------------
Net cash provided by financing activities 34,203,242 635,788 34,839,030
------------ ------------ ------------
Net increase in cash and equivalents 5,168,843 626,093 5,794,936
Cash and equivalents, at beginning of period 626,093 - -
------------ ------------ ------------
Cash and equivalents, at end of period $ 5,794,936 $ 626,093 $ 5,794,936
============ ============ ============
Supplemental disclosures of cash flow:
Cash paid for income taxes $ - $ - $ -
============ ============ ============
Cash paid for interest $ - $ - $ -
============ ============ ============
F-5
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY, AND SUMMARY OF SIGNIFICANT POLICIES
Description of business - Green Plains Renewable Energy, Inc.
(hereinafter referred to as the "Company") is a development stage
company incorporated on June 29, 2004 under the laws of the state of
Iowa. Green Plains Renewable Energy, Inc. was organized to construct
and operate a 50 million gallon, dry mill, fuel grade ethanol plant
("Plant").
Definition of fiscal year - The Company's fiscal year end is November
30.
Use of estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents - The Company considers all unrestricted
highly liquid investments with an initial maturity of three months or
less to be cash equivalents. The Company maintains cash balances with
several regional financial institutions. Accounts are insured by the
Federal Deposit Insurance Corporation up to $100,000. As of November
30, 2005, the Company's uninsured cash balances totaled $17,745.
Income taxes - The Company accounts for its income taxes in accordance
with Statement of Financial Accounting Standards No. 109. Deferred tax
assets and liabilities at the end of each period are determined using
the tax rate expected to be in effect when taxes are actually paid or
recovered. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. As of
November 30, 2005 the Company had net operating loss carryovers of
approximately $397,749, with an approximate value of $155,000. which
expire in 2025. As of November 30, 2005, the Company established a
valuation allowance for the entire deferred tax asset of the net
operating loss carryover of approximately $155,000.
Net loss per common share - The Company computes net loss per share in
accordance with SFAS No. 128, Earnings per Share (SFAS 128) and SEC
Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS
128 and SAB 98, basic net loss per share is computed by dividing the
net loss available to common stockholders for the period by the
weighted average number of shares of common stock outstanding during
the period. The calculation of diluted net loss per share gives effect
to common stock equivalents, however, potential common shares are
excluded if their effect is antidilutive. For year ended November 30,
2005 and for the period from June 29, 2004 (Inception) through November
30, 2004, no shares were excluded from the computation of diluted
earnings per share because their effect would be antidilutive.
Stock-based compensation - The Company applies SFAS No. 123 Accounting
for Stock-Based Compensation for all compensation related to stock,
options or warrants. SFAS 123 requires the recognition of compensation
cost using a fair value based method whereby compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. The Company uses the Black-Scholes pricing model to calculate
the fair value of options and warrants issued to both employees and
non-employees. Stock issued for compensation is valued using the market
price of the stock on the date of the related agreement.
The Company granted no warrants or options for compensation for the
year ended November 30, 2005 or for the period from inception on June
29, 2004 through November 30, 2004.
F-6
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY, AND SUMMARY OF SIGNIFICANT POLICIES
(continued)
During the year ended November 30, 2005, the Company adopted the
following accounting pronouncements:
SFAS No. 150 -- In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" which is
effective for financial instruments entered into or modified
after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15,
2003. This Statement establishes standards for how an issuer
classifies and measures in its statement of financial position
certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability
(or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. The adoption
of SFAS No. 150 did not have a material effect on the
financial statements of the Company.
SFAS No. 151 -- In November 2004, the FASB issued SFAS No. 151
(SFAS 151), "Inventory Costs". SFAS 151 amends ARB No. 43,
Chapter 4. This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS 151 is the result
of a broader effort by the FASB and the IASB to improve
financial reporting by eliminating certain narrow differences
between their existing accounting standards. This statement is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of SFAS 151 will
not have a material impact on the results of operations or
financial position of the company as it does not have
inventory.
SFAS No. 153 -- In December 2004, the FASB issued SFAS No. 153
(SFAS 153) "Exchange of Non-monetary assets". This statement
was a result of a joint effort by the FASB and the IASB to
improve financial reporting by eliminating certain narrow
differences between their existing accounting standards. One
such difference was the exception from fair value measurement
in APB Opinion No. 29, Accounting for Non-Monetary
Transactions, for non-monetary exchanges of similar productive
assets. SFAS 153 replaces this exception with a general
exception from fair value measurement for exchanges of
non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly
as a result of the exchange. This statement is effective for
non-monetary assets exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS 153 will
not have a material effect on the Company's financial position
or results of operations.
The following accounting pronouncement has not yet been adopted by the
Company:
SFAS No. 123(R) -- In December 2004, the FASB issued SFAS No.
123 (Revised 2004) (SFAS 123 (R)) "Share-based payment". SFAS
123 (R) will require compensation costs related to share-based
payment transactions to be recognized in the financial
statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date
fair value of the equity or liability instruments issued. In
addition, liability awards will be re-measured each reporting
period. Compensation cost will be recognized over the period
that an employee provides service in exchange for the award.
FASB 123 (R) replaces FASB 123, Accounting for Stock-Based
Compensation and supersedes APB option No. 25, Accounting for
Stock Issued to Employees. This guidance is effective as of
the first interim or annual reporting period after December
15, 2005 for Small Business filers.
F-7
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY, AND SUMMARY OF SIGNIFICANT POLICIES
(continued)
Fixed assets - Fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets which is primarily
3 years. The cost of repairs and maintenance is charged to expense as
incurred. Expenditures for property betterments and renewals are
capitalized. Upon sale or other disposition of a depreciable asset,
cost and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in operating income or loss.
The Company periodically evaluates whether events and circumstances
have occurred that may warrant revision of the estimated useful life of
fixed assets or whether the remaining balance of fixed assets should be
evaluated for possible impairment. The Company uses an estimate of the
related undiscounted cash flows over the remaining life of the fixed
assets in measuring their recoverability.
Research and Development - The Company follows the policy of expensing
its research and development costs in the period in which they are
incurred.
Revenue Recognition - The Company currently has no source of revenues.
Revenue recognition policies will be determined when principal
operations begin.
Advertising - The Company expenses advertising costs in the period in
which they are incurred. Advertising expense was $105,110 and $-0- for
the 2005 and 2004, respectively.
Securities - The Company's marketable securities are classified as held
to maturity and reported at amortized cost. The Company's securities
are primarily investments in short term interest bearing financial
instruments.
2. DEPOSITS RELATED TO OPTION AGREEMENTS
As of November 30, 2005 deposits related to option agreements totaling
$3,000 consists of the following:
Deposit related to the option agreement to purchase
farm real estate located in Fremont county, Iowa $ 3,000
==============
3. STOCKHOLDERS' EQUITY
During July 2004, the Company issued 400,000 and 150,000 shares of
common stock to the founders of the Company for cash and services,
respectively. The shares were issued in consideration of cash and
services totaling $100,000 and $37,500, respectively.
During August, October and November 2004, the Company issued 73,000
shares of common stock to directors for cash totaling $182,500.
During August, September, October and November 2004, the Company issued
142,000 shares of common stock to various non-related individuals and
entities for cash totaling $355,000.
During November 2005, the Company issued 3,445,990 shares of common
stock to various non-related individuals and entities for cash totaling
$34,459,900.
During November 2005, the Company issued 5,000 shares of common stock
to a director for services valued at $50,000 or $10.00 per share.
F-8
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
4. COMMITMENTS AND CONTINGENCIES
During October 2005, the Company entered into an agreement with Fagen
Engineering for design services for the Pre Engineering Phase I and II
work to be done at the plant site by the Company, prior to turning the
site over to Fagen, Inc. for the construction of the plant itself. The
Company agreed to pay Fagen Engineering a lump sum fee for said
engineering. However, said amount is included as part of the total cost
of the plant itself, as outlined in the Design Build Contract we have
entered into with Fagen, Inc., which is anticipated to be $55,881,454.
Therefore, the cost of the pre-engineering will be deducted from the
total cost of plant once we pay for the pre-engineering work. All
payments are due upon receipt, and the Company is to be billed as work
is completed. As of November 30, 2005, the Company had paid $27,750 of
the total amount to be billed.
During October 2005, the Company entered into an agreement with a
company for air permitting and a storm water runoff plan for $11,000.
All payments are due upon receipt, and the Company is to be billed as
work is completed. As of November 30, 2005, the Company had paid $2,116
of the total amount to be billed.
During October 2005, the Company entered into an agreement with a
company that was to perform soil borings and soils testing at the plant
site for a total of $18,514. All payments are due upon receipt, and the
Company is to be billed as work is completed. As of November 30, 2005,
the majority of the work had been completed.
During July 2005, the Company entered into an agreement with an
engineer for design services for a spur track to serve the ethanol
plant the Company plans to construct in Iowa. The Company agreed to pay
the engineer $2,000 for the study and report phase of the project and a
lump sum fee of $50,000 for the preliminary and final design phases.
The engineer has the option of receiving the $50,000 in cash or 5,000
shares of the Company's common stock. All payments are due upon receipt
of engineer's invoices. Any additional payments and services must be
approved by the Company in writing. As of November 30, 2005 the Company
accrued approximately $2,800 for services performed under this
contract, recorded as part of accounts payable.
5. PROPERTY AND EQUIPMENT
Fixed assets consist of the following as of November 30, 2005:
Furniture and equipment $ 11,578
Land and improvements 684,461
Construction in progress 92,500
Less: accumulated depreciation (1,693)
----------
$ 786,846
==========
F-9
GREEN PLAINS RENEWABLE ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
In addition to trade creditors the following are included in Accounts
Payable and Accrued Liabilities:
The Company has a line of credit through a credit card company with a
credit line up to $10,700 with an annual variable rate (16.49% at
November 30, 2005). As of November 30, 2005, the balance on the line of
credit totaled $4,279.
The Company has a second line of credit through a credit card company
with a credit line up to $15,000 with an annual variable rate (9.99% at
November 30, 2005). As of November 30, 2005, the balance on the line of
credit totaled $7,697.
As of November 30, 2005 other accrued liabilities consisted of
consulting fees totaling $11,600.
7. SUBSEQUENT EVENTS
The engineering firm described in Note 4, engaged to design the rail
layout at the Plant exercised its option to be paid in shares of the
Company's common shares in lieu of cash of $50,000 for its services. On
January 4, 2006, the Board of Directors of the Company approved the
issuance of 5,000 of the Company's restricted stock at $10.00 per
share.
The Company entered into a construction agreement dated January 13,
2006, with Fagen, Inc., under which Fagen, Inc. will provide all work
and services in connection with the engineering, design, procurement,
construction startup, performances tests, training for the operation
and maintenance of its plant and provide all material, equipment, tools
and labor necessary to complete the plant. As consideration for the
services to be performed, the Fagen, Inc. will be paid $55,881,454,
subject to adjustments. The Company is required to pay an initial
payment of $5,000,000, less retainage, at the time of the notice to
proceed. The Company is required to make payments to Fagen, Inc. based
upon monthly applications for payment.
On February 6, 2006, we entered into a Master Loan Agreement,
Construction and Term Loan Supplement, Construction and Revolving Term
Loan Supplement, Security Agreement and Real Estate Mortgage with Farm
Credit Services of America, FLCA whereby the lenders will loan up to
$47,000,000. The loan proceeds are to partially finance construction of
the Plant and to provide funding for working capital purposes. The
Plant is to be in production by no later than May 1, 2007 and
construction costs are not to exceed an aggregate of $71,000,000, net
of refundable sales taxes. The loan is comprised of a $30,000,000
amortizing term loan and a $17,000,000 revolving term facility.
The amortizing term loan is available for advances until July 1, 2007.
Principal payments are to commence with $1,200,000 due November 20,
2007, and each quarter thereafter with a final maturity on November 20,
2013 at the latest. In addition, for fiscal years ending in 2007 and
thereafter, we are also required to make a special payment equal to 65%
of the available (if any) free cash flow from operations, not to exceed
$2,000,000 per year, and provided, however, that if such payments would
result in a covenant default under the Loan Agreements, the amount of
the payments shall be reduced to an amount which would not result in a
covenant default. The free cash flow payments are discontinued when the
aggregate total received from such payments exceeds $8,000,000.
The revolving term loan is available for advances throughout the life
of the commitment. This loan requires semi-annual $2,400,000 payments
or step-downs of the commitment to commence on the first day of the
month beginning approximately six months after repayment of the term
loan, by May 1, 2014 at the latest with a final maturity no later than
November 1, 2017.
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments, which are, in the opinion of management, necessary for a
fair statement of the results of the interim periods. Summarized
quarterly data for fiscal 2005 are as follow:
Year ended November 30, 2005
----------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Selected quarterly
financial data:
Revenues $ -0- $ -0- $ -0- $ -0-
Total operating expenses 110,714 231,766 222,433 164,633
Net income (loss) (109,491) (231,524) (222,013) 165,274
Net income (loss) (109,491) (231,524) (222,013) 165,274
applicable to common
stockholders
Basic and diluted net (0.14) (0.30) (0.29) 0.12
income (loss) per
common share(1)
- ---------------
(1)Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net losses per share will
not necessarily equal the total for the year.
F-10