PRELIMINARY
PROXY STATEMENT
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 2 to
SCHEDULE 14A
Proxy
Statement Pursuant to Section 14(a) of
the
Securities Exchange Act of 1934
Filed by
the Registrant
x
Filed by
a Party other than the Registrant
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Check the
appropriate box:
x
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Preliminary
Proxy Statement
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Confidential, for Use of the
Commission Only (as permitted by Rule
14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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¨
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Soliciting
Material under Rule 14a-12
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RED
TRAIL ENERGY, LLC
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(Name
of Registrant as Specified In Its Charter)
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment
of Filing Fee (Check the appropriate box):
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4)
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Proposed
maximum aggregate value of transaction:
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Fee
paid previously with preliminary
materials.
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Check box if any part of the fee
is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the
filing for which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form or
Schedule and the date of its
filing.
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(1)
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Amount Previously
Paid:
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(2)
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Form, Schedule or
Registration Statement No.:
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Persons
who are to respond to the collection of information contained in this form
are not required to respond unless the form displays a currently valid OMB
control number.
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PRELIMINARY
PROXY STATEMENT
P.O. Box
11
3682
Highway 8 South
Richardton,
ND 58652
Dear
Members:
You are
cordially invited to attend the special and annual meeting of the members (the
“Member Meeting”) of RED TRAIL ENERGY, LLC (the “Company”) to be held
on_______________,_______________, 20___ at the_________________, _______, North
Dakota. Registration for the meeting will begin at_________________
__.m. The Member Meeting will commence at approximately________________
__.m., and adjourn at approximately_______________.m.
This
proxy statement is dated ______, 20___ and is being mailed to members on
or about ______, 20___.
At this
important meeting, you will be asked to vote on the following:
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·
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Amendments to our
Amended and Restated Operating Agreement and our Amended and Restated
Member Control Agreement
. To amend our Amended and Restated
Operating Agreement and our Amended and Restated Member Control Agreement
to provide for the authorization of three separate and distinct classes of
units: Class A Units, Class B Units and Class C
Units.
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·
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Reclassification of
Units
. To reclassify our units into Class A Units, Class B
Units and Class C Units for the purpose of discontinuing the registration
of our units under the Securities Exchange Act of
1934.
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·
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Election of
Governors.
To elect 3 governors to the seats open for
election pursuant to our Amended and Restated Operating Agreement and
Amended and Restated Member Control
Agreement.
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In
connection with the proposals to amend our Amended and Restated Operating
Agreement, our Amended and Restated Member Control Agreement and to reclassify
our existing common equity units, units held by unit holders who are the record
holders of 50,000 or more units will be renamed as Class A Units. Unit
holders who are the record holders of 10,001 but no more than 49,999 units will
receive one Class B Unit for every unit held by such unit holders immediately
prior to the reclassification transaction. Unit holders who are the record
holders of 10,000 or fewer units will receive one Class C Unit for every unit
held by such unit holders immediately prior to the reclassification transaction.
Generally, if the proposed amendments to our Amended and Restated Operating
Agreement and Amended and Restated Member Control Agreement are approved, the
voting and transfer rights of the Class A Units will remain relatively
unchanged. The voting rights of Class B Units will be restricted to the
election of governors and dissolution of the Company. Class C Units will
be restricted to voting only on dissolution. The transfer rights of Class
A, B and C Units will be restricted to transfers that are approved by our board
of governors. Our board of governors will be provided with the authority
to disallow a transfer of Class A Units if such transfer would result in 300 or
more Class A Unit holders of record or a transfer of Class B Units or Class C
Units if such transfer would result in 500 or more Class B or Class C unit
holders or such other number as required to maintain the suspension of our duty
to file periodic reports with the Securities and Exchange Commission (SEC).
Under the proposed Second Amended and Restated Operating Agreement, the new
Class B and Class C unit holders will receive the same share of our “profits”
and “losses” as our Class A unit holders, and their respective rights to receive
distributions of our assets will not change.
The
primary effect of the reclassification will be to reduce the total number of
holders of record of our common equity units to below 300 by reclassifying a
portion of the current outstanding common equity units as Class A Units and the
remaining outstanding units will be reclassified as either Class B or Class C
Units. As a result, pursuant to Rule 13e-3, we will terminate the
registration of our units under federal securities laws and our SEC reporting
obligations will be suspended. This transaction is known as a 13e-3 going
private transaction under the Exchange Act of 1934. Additionally, because the
Class B and Class C Units will be held by less than 500 holders of record, the
Class B and Class C Units will be unregistered securities and, therefore, will
not be subject to the public reporting requirements imposed by the
SEC.
We are
proposing the amendments to our Amended and Restated Operating Agreement and our
Amended and Restated Member Control Agreement because our board of governors has
concluded, after careful consideration, that the costs and other disadvantages
associated with being a reporting company with the SEC outweigh any of the
advantages. We believe the terms of the proposed reclassification
transaction are fair and in the best interest of our affiliated and unaffiliated
unit holders who will receive Class A Units, Class B Units or Class C
Units. Our board unanimously recommends that you vote “FOR” the proposal
to approve our Second Amended and Restated Operating Agreement and our Second
Amended and Restated Member Control Agreement. Additionally, our board
unanimously recommends that you vote “FOR” the proposal to reclassify the units
held by unit holders who are the record holders of 50,000 or more units into
Class A Units, the units held by unit holders who are the record holders of not
more than 49,999 or fewer than 10,001 units into Class B Units, and the units
held by unit holders who are the record holders of 10,000 or fewer units into
Class C Units. The accompanying proxy statement includes a discussion of
the reasons, effects, alternatives and factors considered by the board in
connection with its approval of the reclassification and corresponding
amendments to the Amended and Restated Operating Agreement and the Amended and
Restated Member Control Agreement. We encourage you to read carefully the
proxy statement and appendices. As discussed in greater detail in the
proxy statement, you will not have appraisal rights in connection with the
reclassification transaction.
The three
year term of governors in Group III expires at the 2010 Annual Meeting.
The three Group III governors are Tim Meuchel, Frank Kirschenheiter and Sid
Mauch. Lynn Bergman also submitted a timely advanced notice to be
considered as a nominee. The nominating committee has recommended that
Lynn Bergman, Sid Mauch and Tim Meuchel be elected to a three year term, which
would expire at the 2013 Annual Meeting.
We are
mailing herewith, copies of our Annual Report for the fiscal year ended December
31, 2009 and Quarterly Report for the fiscal quarter ended June 30, 2010 and all
of the financial statements and related notes contained in the Annual Report and
Quarterly Report. The proxy statement, form of proxy and annual report to
members are available at
http://www.redtrailenergy.com
If
you have any questions regarding the information in the proxy statement,
regarding completion of the enclosed proxy card or for directions to be able to
attend the meeting in person, please call the Company at (701) 974-3308 or
email us at mail@redtrailenergy.com.
Only
members listed on the Company
’
s records at the
close of business on__________________are entitled to notice of the Member
Meeting and to vote at the Member Meeting and any adjournments
thereof.
All
members are cordially invited to attend the Member Meeting in person.
However, to assure the presence of a quorum, the board of governors requests
that you promptly sign, date and return the enclosed proxy card, which is
solicited by the board of governors, whether or not you plan to attend the
meeting. The proxy will not be used if you attend and vote at the meeting
in person. You may fax the enclosed proxy card to the Company at
701-974-3309 or mail it to us using the enclosed envelope. The proxy card
must be returned to the Company no later than ___ _.m. on _________,
20___.
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By
order of the Governors,
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/s/
Mike Appert
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Mike
Appert
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Chairman
and President
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Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved the amendments to our Amended and Restated Operating
Agreement, the Amended and Restated Member Control Agreement or the
reclassification transaction, passed upon the merits or fairness of the
reclassification transaction or passed upon the adequacy or accuracy of the
disclosure in this document. Any representation to the contrary is a
criminal offense.
PRELIMINARY
PROXY STATEMENT
P.O. Box
11
3682
Highway 8 South
Richardton,
ND 58652
‘
NOTICE
OF COMBINED SPECIAL AND ANNUAL MEETING OF MEMBERS
To
be held on ___________, 20___
Notice is
hereby given that a combined special and annual meeting of members of RED TRAIL
ENERGY, LLC will be held on _____________, 20___, at _______ __.m. central time,
at _____________________________, _____, North Dakota for the following
purposes:
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1.
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Amendments to our
Amended and Restated Operating Agreement and Amended and Restated Member
Control Agreement
. To amend our Amended and Restated
Operating Agreement and Amended and Restated Member Control Agreement to
provide for the authorization of three separate and distinct classes of
units, Class A Units, Class B Units and Class C
Units.
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2.
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Reclassification of
Units
. To reclassify our units into Class A Units, Class B
Units and Class C Units for the purpose of discontinuing the registration
of our units under the Securities Exchange Act of
1934.
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3.
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Election of
Governors.
To elect three governors to the open seat
positions on our board of governors pursuant to our Amended and Restated
Operating Agreement and Amended and Restated Member Control
Agreement.
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In
connection with the proposals to amend our Amended and Restated Operating
Agreement, Amended and Restated Member Control Agreement and to reclassify our
existing common equity units, units held by unit holders who are the record
holders of 50,000 or more units will be renamed as Class A Units. Unit holders
who are the record holders of at least 10,001 but no more than 49,999 units will
receive one Class B Unit for every unit held by such unit holders immediately
prior to the reclassification transaction. Unit holders who are the record
holders of 10,000 or fewer units will receive one Class C Unit for every unit
held by such unit holders immediately prior to the reclassification
transaction. Generally, if the proposed amendments to our Amended and
Restated Operating Agreement and Amended and Restated Member Control Agreement
are approved, the voting rights of the Class A Units will remain relatively
unchanged. The voting rights of Class B Units will be restricted to the
election of governors and dissolution of the Company. Class C Units will
be restricted to voting only on dissolution. Our board of governors will
be provided with the authority to disallow a transfer of Class A Units if such
transfer would result in 300 or more Class A unit holders of record or a
transfer of Class B Units or Class C Units if such transfer would result in 500
or more Class B or Class C unit holders or such other number as required to
maintain the suspension of our duty to file periodic reports with the SEC. Under
the proposed Second Amended and Restated Operating Agreement, the new Class B
and Class C unit holders will receive the same share of our “profits” and
“losses” as our Class A unit holders, and their respective rights to receive
distributions of our assets will not change. Unit holders of record at the
close of business on_________________________are entitled to notice of and to
vote at the Member Meeting and any adjournment or postponement of the Member
Meeting.
The
accompanying proxy statement includes a discussion of the reasons, effects,
alternatives and factors considered by the board in connection with its approval
of the reclassification and corresponding amendments to the Amended and Restated
Operating Agreement and Amended and Restated Member Control Agreement. We
encourage you to read carefully the proxy statement and
appendices.
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By
order of the Governors,
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/s/
Mike Appert
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Mike
Appert
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Chairman
and President
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YOUR
VOTE IS VERY IMPORTANT.
Whether
or not you plan to attend the combined special and annual meeting in person,
please take the time to vote by completing and marking the enclosed proxy card
in the enclosed postage-paid envelope. If you attend the combined special
and annual meeting, you may still vote in person if you wish, even if you have
previously returned your proxy card.
You may fax the enclosed proxy card
to the Company at
701-974-3309
or mail it to us using the enclosed
envelope. The proxy card must be returned to the Company no later than
____ _.m. on _______, 20___
.
Your
board of governors unanimously recommends that you vote “FOR” approval of the
proposed amendments to our Amended and Restated Operating Agreement and our
Amended and Restated Member Control Agreement contained in the proposed Second
Amended and Restated Operating Agreement and proposed Second Amended and
Restated Member Control Agreement that will, among other things, effect the
reclassification. Additionally, our board unanimously recommends that you
vote “FOR” the proposal to reclassify the units held by unit holders who are the
record holders of 50,000 or more units into Class A Units, the units held by
unit holders who are the record holders of not more than 49,999 or fewer than
10,001 units into Class B Units, and the units held by unit holders who are the
record holders of 10,000 or fewer units into Class C Units.
Your
board of governors recommends you vote in favor the nominees to the Board of
Governors set forth in this proposal, which are Lynn Bergman, Sid Mauch and Tim
Meuchel. Under applicable North Dakota law, the election of each nominee
requires the affirmative vote by a plurality of the voting power of the Units
present and entitled to vote on the election of governors at the combined
special and annual meeting at which a quorum is present.
PRELIMINARY
PROXY STATEMENT
TABLE
OF CONTENTS
SUMMARY TERM SHEET
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1
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QUESTIONS AND ANSWERS ABOUT AND SUMMARY TERMS
OF THE RECLASSIFICATION TRANSACTION
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1
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SPECIAL FACTORS
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14
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QUESTIONS RELATED TO GOVERNOR
ELECTIONS
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36
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THE SECOND AMENDED AND RESTATED OPERATING
AGREEMENT
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37
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THE SECOND AMENDED AND RESTATED MEMBER CONTROL
AGREEMENT
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38
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DESCRIPTION OF UNITS
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40
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PROPOSAL #3 ELECTION OF THREE MEMBERS OF THE
BOARD OF GOVERNORS
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47
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VOTE REQUIRED
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49
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ABOUT THE SPECIAL
MEETING
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49
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FINANCIAL
INFORMATION
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53
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MARKET PRICE OF RED TRAIL ENERGY, LLC UNITS AND
DISTRIBUTION INFORMATION
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59
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IDENTITY AND BACKGROUND OF FILING
PERSONS
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59
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CORPORATE GOVERNANCE
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62
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
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65
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UNIT PURCHASE
INFORMATION
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67
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CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
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67
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EXECUTIVE OFFICER AND GOVERNOR
COMPENSATION
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68
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OTHER MATTERS
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71
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APPENDIX
A
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AMENDED
AND RESTATED OPERATING AGREEMENT
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APPENDIX
B
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PROPOSED
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
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APPENDIX
C
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AMENDED
AND RESTATED MEMBER CONTROL AGREEMENT
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APPENDIX
D
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PROPOSED
SECOND AMENDED AND RESTATED MEMBER CONTROL AGREEMENT
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APPENDIX
E
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ANNUAL
REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 ON FORM 10-K AND
QUARTERLY REPORT FOR THE FISCAL QUARTER ENDED JUNE 30, 2010 ON FORM
10-Q
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APPENDIX
F
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FORM
OF PROXY
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APPENDIX
G
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FORM
OF TRANSMITTAL
LETTER
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PRELIMINARY
PROXY STATEMENT
SUMMARY
TERM SHEET
This
summary provides an overview of material information from this proxy statement
about the proposed reclassification transaction and the proposed amendments to
our currently effective Amended and Restated Operating Agreement and Amended and
Restated Member Control Agreement contained in the proposed Second Amended and
Restated Operating Agreement and proposed Second Amended and Restated Member
Control Agreement. However, it is a summary only. To better
understand the transaction and for a more complete description of its terms, we
encourage you to read carefully this entire document and the documents to which
it refers before voting.
In
this proxy statement, “RTE,” “we,” “our,” “ours,” “us” and the “Company” refer
to RED TRAIL ENERGY, LLC, a North Dakota limited liability company. The
term “reclassification” refers to the reclassification of our registered units
into three separate classes of units, Class A, Class B and Class C. The
reclassification is designed to reduce the number of RTE unit holders of record
holding our common equity units to below 300 by reclassifying a portion of the
common equity units as Class A Units, and the remaining units will be
reclassified as Class B or Class C Units which will result in less than 500 unit
holders of each of our Class B and Class C Units. This will allow us to suspend
our filing obligations under the Securities Exchange Act of 1934, as amended.
“Class A unit holders” refers to unit holders of our common equity units of
record with 50,000 or more units. The new “Class B unit holders” refers to all
the RTE unit holders of record with at least 10,001 but no more than 49,999
units. The new “Class C unit holders” refers to all the RTE unit holders
of record with 10,000 or fewer units. References to our “common equity
units” refer to our currently outstanding membership units; a portion of such
outstanding units will be renamed as Class A units in the event the
reclassification transaction is consummated.
RED
TRAIL ENERGY, LLC
RED TRAIL ENERGY, LLC was formed as a
North Dakota limited liability company on July 16, 2003. Our
principal business office is currently located at 3682 Highway 8 South,
Richardton, North Dakota 58652. We are managed by a seven member board of
governors. Our telephone number is (701) 974-3308
.
Since
January 2007, we have been engaged in the production of ethanol and distillers
grains. Our ethanol plant is a 50 million gallon per year facility.
Our revenues are derived from the sale and distribution of ethanol and
distillers grains throughout the continental United States, Canada, and
overseas. The principal markets for our ethanol are petroleum terminals in
the continental United States.
QUESTIONS
AND ANSWERS ABOUT AND SUMMARY TERMS OF THE RECLASSIFICATION
TRANSACTION
Q:
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What
is the proposed reclassification
transaction?
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A:
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We
are proposing that our members adopt a Second Amended and Restated
Operating Agreement and Second Amended and Restated Member Control
Agreement that will include amendments to our currently effective Amended
and Restated Operating Agreement dated July 31, 2008 and our currently
effective Amended and Restated Member Control Agreement dated May 28,
2009. If the proposed Second Amended and Restated Operating
Agreement and proposed Second Amended and Restated Member Control
Agreement is adopted, it will, among other things, result in the creation
of three separate classes of units, Class A Units, Class B Units and Class
C Units, and the reclassification of units held by holders of 50,000 or
more units into Class A Units, units held by holders of between 10,001 and
49,999 units into Class B Units, and units held by holders of 10,000 or
fewer units into Class C Units on the basis of one unit of Class A, Class
B or Class C for each unit currently held by such unit
holder.
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We are
proposing that you adopt two general amendments to our currently effective
Amended and Restated Operating Agreement and Amended and Restated Member Control
Agreement, one of which will provide for the authorization of three classes of
units, Class A, Class B and Class C Units, and the other of which will provide
for the authorization of the reclassification of our existing units into the
three separate and distinct classes. Unless both amendments pass for both
agreements, neither amendment will be implemented. Thus, for purposes of
this proxy statement, when we refer to the term “reclassification transaction”
we are referring to both the creation of the three classes of units and the
reclassification of our units since we will not implement one amendment without
each of the two amendments being approved for both agreements. See
“Overview of the Reclassification Transaction” beginning on page
__.
Q:
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What
is the purpose and structure of the proposed reclassification
transaction?
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A:
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The
purpose of the reclassification transaction is to allow us to terminate
our SEC reporting obligations (referred to as “going private”) by reducing
the number of our record unit holders of our common equity units, which
will be reclassified as Class A Units, to less than 300, and by having
under 500 record unit holders of each of our Class B and Class C
Units. This will allow us to suspend our registration under the
Securities Exchange Act of 1934, as amended, and relieve us of the costs
typically associated with the preparation and filing of public reports and
other documents. It will also allow our management and employees to
refocus time spent on complying with SEC-reporting obligations to
operational and business goals. See “Purpose and Structure of the
Reclassification Transaction” beginning on page
__.
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The
reclassification transaction is being effected at the record unit holder
level. This means that we will look at the number of units
registered in the name of a single holder to determine if that holder’s
units will be reclassified. On April 7, 2010, the Company sent a
letter to its unit holders notifying them that they had until May 21, 2010
to make transfers of units prior to the proposed reclassification of
units. The purpose of this letter was to allow unit holders the
opportunity to make transfers prior to the proposed reclassification so
that they could own the requisite number of units to be in their desired
class. However, these unit holders had to act within the constraints
of the transfer restrictions in our Amended and Restated Operating
Agreement, Amended and Restated Member Control Agreement, federal and
state securities laws and the IRS publicly traded partnership rules. We
have restricted transfers after May 21, 2010 to allow the Company to
determine definitively the number of Class A, Class B and Class C members
that would result from the reclassification prior to providing our members
with proxy materials. This restriction on transfers applies only to
optional transfers and does not restrict transfers as a result of a court
order, such as upon the occurrence of the death of a
member.
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Q:
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What
will be the effects of the reclassification
transaction?
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A:
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The
reclassification transaction is a “going private transaction” for RTE,
meaning that it will allow us to deregister with the SEC and we will no
longer be subject to reporting obligations under federal securities
laws. As a result of the reclassification transaction, among other
things:
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·
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The
number of our common equity units currently registered under the
Securities Exchange Act of 1934 (“34 Act”), which will be reclassified as
Class A Units, will be reduced from approximately a total of 40,193,973
common equity units to a total of 29,016,098 Class A units and the number
of unit holders of record will decrease from a total of 917 unit holders
to approximately 174 Class A unit holders of
record;
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·
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The
number of Class B units will correspondingly increase from zero to
approximately 7,630,765 and be held by approximately 335 Class B unit
holders of record;
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·
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The
number of Class C units will correspondingly increase from zero to
approximately 3,547,110 and be held by approximately 408 unit holders of
record;
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·
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As
a group, the percentage beneficial ownership of and voting power over
Class A Units by all governors and executive officers of RTE will increase
approximately 5.69% from approximately 14.90% to approximately 20.59%
after the reclassification, which is unlikely to have any practical effect
on their collective ability to control the
Company;
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·
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The
affiliated and unaffiliated new Class A, Class B and Class C unit holders
will have received one Class A, Class B or Class C Unit for each unit held
by them immediately prior to the effective time of the reclassification
and will continue to have an equity interest in RTE and, therefore, will
continue to share in our profits and losses and may be entitled to realize
any future value received in the event of any sale of the
Company;
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·
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The
new Class B and Class C unit holders will be required to surrender their
original membership units involuntarily in exchange for Class B or Class C
Units, for which they will receive no consideration other than the Class B
or Class C Units received in the
reclassification;
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·
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Because
of the reduction of our total number of record unit holders of our common
equity units, to less than 300 and because the total number of record unit
holders of the Class B and Class C Units will be less than 500 for each
class, we will be allowed to suspend our status as a reporting company
with the SEC;
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·
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The
new Class B unit holders will have limited voting rights and will have no
rights to amend our Second Amended and Restated Operating Agreement or our
Second Amended and Restated Member Control Agreement unless the proposed
amendment alters the unit holder’s financial rights or modifies the unit
holder’s limited liability. The loss of these rights may cause potential
purchasers of Class B Units to value these units at a value less than
Class A Units;
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·
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The
new Class B unit holders will have no right to transfer their units unless
such transfer is approved by a majority of our governors. The governors
will have the authority to disallow any proposed transfer at their sole
discretion. The loss of these rights may cause potential purchasers of
Class B Units to value these units at a value less than Class A
Units;
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·
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The
new Class C unit holders will only be allowed to vote on dissolution of
the Company and will have no right to nominate, elect or remove governors,
to amend our Second Amended and Restated Operating Agreement or our Second
Amended and Restated Member Control Agreement unless the proposed
amendment alters the unit holder’s financial rights or modifies the unit
holder’s limited liability. The loss of these rights may cause potential
purchasers of Class C Units to value these units at a value less than
Class A or Class B Units; and
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·
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In
addition, Class C unit holders will have no right to transfer their units
unless such transfer is approved by a majority of our governors. The
governors will have the authority to disallow any proposed transfer at
their sole discretion. The loss of these rights may cause potential
purchasers of Class C Units to value these units at a value less than
Class A or Class B Units.
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For a
further description of how the reclassification transaction will affect you,
please see “Effects of the Reclassification Transaction on Unit Holders of RTE”
beginning on page __.
Q:
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What
does it mean for RTE and our unit holders that RTE will no longer be a
public company and subject to federal securities laws reporting
obligations?
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A:
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We
will no longer be required to file annual, quarterly and current reports
with the SEC, which reports contain important information on the business
and financial condition of our Company, so this information will no longer
be publicly available. However, pursuant to our Second Amended and
Restated Operating Agreement and our Second Amended and Restated Member
Control Agreement and the North Dakota Limited Liability Company Act, our
unit holders will be allowed to inspect, upon reasonable request, Company
books and records and the Company intends to make available an annual
report to the members containing the Company’s audited financial
statements and quarterly reports to the members containing the Company’s
unaudited financial statements These financial statements and
quarterly reports, however, will not be the same as those required for
reporting companies and we will no longer be subject to the regulations
for reporting companies. The liquidity of the units you hold in RTE
may be further reduced since there will be no public information available
about RTE and all of our units will only be tradable in privately
negotiated transactions. We will also no longer be subject to the
Sarbanes-Oxley Act, which, among other things, requires our CEO and CFO to
certify as to the accuracy of our financial statements and the accuracy of
our internal controls over financial
reporting.
|
Q:
|
Why
are you proposing the reclassification
transaction?
|
A:
|
Our
reasons for the reclassification transaction are based
on:
|
|
·
|
The
administrative burden and expense of making our periodic filings with the
SEC;
|
|
|
|
|
·
|
The
fact that as a reporting company, we are required to disclose information
to the public, including to actual or potential competitors that may be
helpful to these competitors in challenging our business operations and to
take market share, employees and customers away from us. Terminating
our public company reporting obligations will help to protect that
sensitive information from required or inadvertent
disclosure;
|
|
·
|
The
fact that operating as a non-SEC reporting company will reduce the burden
on our management and employees which arises from increasingly stringent
SEC reporting requirements, thus allowing management to focus more of its
attention on our customers and the community in which we are
operating;
|
|
·
|
The
fact that management will have increased flexibility to consider and
initiate actions, such as a merger or sale of the Company, which may
produce long-term benefits and growth without being required to file a
preliminary proxy statement with the SEC and otherwise comply with
Regulation 14A of the Securities Exchange
Act;
|
|
·
|
The
fact that our unit holders receive limited benefit from being an SEC
reporting company because of our small size and the limited trading of our
units compared to the costs associated with the disclosure and procedural
requirements of the Sarbanes-Oxley
Act;
|
|
·
|
The
fact that a going private transaction could be structured in a manner that
would allow all our unit holders to retain an equity interest in the
Company, and none of our unit holders would be forced out by means of a
cash reverse stock split or other transaction;
and
|
|
·
|
We
anticipate the expense of a going private transaction will be less than
the cumulative future expenses we would incur to comply with continued SEC
reporting obligations.
|
We
considered that some of our unit holders may prefer that we continue as an SEC
reporting company, which is a factor weighing against the reclassification
transaction. However, we believe that the disadvantages and costs of
continuing our reporting obligations with the SEC outweigh any advantages
associated with doing so. See “Reasons for the Reclassification
Transaction; Fairness of the Reclassification Transaction; Board Recommendation”
beginning on page __.
Based
on a careful review of the facts and circumstances relating to the
reclassification transaction, our board of governors believes that the
reclassification transaction and the terms and provisions of the
reclassification transaction are substantively and procedurally fair to our unit
holders. Our board of governors unanimously approved the reclassification
transaction.
In the
course of determining that the reclassification transaction is fair to, and is
in the best interests of our unit holders, including both unit holders who will
continue to hold our common equity units as Class A Units, as well as those unit
holders whose units will be reclassified into Class B or Class C Units, our
board considered a number of positive and negative factors affecting these
groups of unit holders in making its determination. To review the reasons
for the reclassification transaction in greater detail, please see “Reasons for
the Reclassification Transaction; Fairness of the Reclassification Transaction;
Board Recommendation” beginning on page __.
Q:
|
What
amendments to the Amended and Restated Operating Agreement and Amended and
Restated Member Control Agreement are being proposed by the board of
governors?
|
A:
|
The
board of governors has proposed multiple changes to our Amended and
Restated Operating Agreement and our Amended and Restated Member Control
Agreement in order to reclassify our units and revise the voting and
transfer rights attributed to each new class of
units.
|
|
The
board is also proposing the following changes to the Amended and Restated
Member Control Agreement in the Second Amended and Restated Member Control
Agreement:
|
|
·
|
Addition
of Section 1.26 to include a definition of “Membership
Registry;”
|
|
·
|
Moving
Sections 1.12 and 1.13 of the Amended and Restated Operating Agreement,
related to member action with or without a meeting, into the Second
Amended and Restated Member Control Agreement, as Sections 10.2 and 10.3
of the Second Amended and Restated Member Control Agreement, so as to
allow modification of the member action provisions of the North Dakota
Limited Liability Company Act;
and
|
|
·
|
Moving
Sections 2.9 and 2.12 of the Amended and Restated Operating Agreement,
related to governor action with or without a meeting, into the Second
Amended and Restated Member Control Agreement, as Sections 11.2 and 11.3
of the Second Amended and Restated Member Control Agreement, so as to
allow modification of the governor action provisions of the North Dakota
Limited Liability Company Act.
|
The
board is also proposing the following changes to the Amended and Restated
Operating Agreement in the Second Amended and Restated Operating
Agreement:
|
·
|
Revision
of Section 1.15 related to the deadline for member proposals (other than
governor nominations) from 60 to 90 days before an annual meeting to not
less than 120 days prior to the one year anniversary of the date the
preceding year’s annual meeting materials were released to the members;
and
|
|
·
|
Removal
of Section 1.12, 1.12, 2.9 and 2.12, which were moved to the Second
Amended and Restated Member Control Agreement as described
above.
|
|
The
Second Amended and Restated Member Control Agreement and the Second
Amended and Restated Operating Agreement also contain non-material changes
to make definitions and capitalization consistent between the two
documents. To review the proposed changes to the Amended and
Restated Operating Agreement and Amended and Restated Member Control
Agreement in greater detail, please see “Description of Proposed Other
Changes in the Second Amended and Restated Operating Agreement and Second
Amended and Restated Member Control Agreement” beginning on page __ and
“Appendix B: Proposed Second Amended and Restated Operating Agreement and
Appendix D: Proposed Second Amended and Restated Member Control
Agreement.”
|
Q:
|
What
is the recommendation of our board of governors regarding the
reclassification proposals?
|
A:
|
The
board of governors has determined that the reclassification transaction is
advisable and in the best interests of our members. Our board of
governors has unanimously approved the reclassification transaction and
recommends that you vote
“FOR”
approval of the
amendments to our Amended and Restated Operating Agreement contained in
the proposed Second Amended and Restated Operating Agreement,
“FOR”
approval of the
amendments to our Amended and Restated Member Control Agreement contained
in the proposed Second Amended and Restated Member Control Agreement and
“FOR”
approval of
the reclassification of our units into Class A, Class B and Class C at the
combined special and annual meeting. See “Reasons for the
Reclassification Transaction; Fairness of the Reclassification
Transaction; Board Recommendation” beginning on page
__.
|
Q:
|
What
will I receive in the reclassification
transaction?
|
A:
|
If
you own, in record name, 50,000 or more of our common equity units on the
date of the reclassification, your units will automatically be converted
into an equal number of Class A Units. If you own, in record name,
no more than 49,999 but no less than 10,001 of our common equity units on
the date of the reclassification, your units will automatically be
converted into an equal number of Class B Units. If you own, in
record name, 10,000 or fewer of our common equity units on the date of the
reclassification, your units will automatically be converted into an equal
number of Class C Units.
|
In the
event the proposals to amend our current Amended and Restated Operating
Agreement, Amended and Restated Member Control Agreement and to reclassify our
units are adopted and you receive units of Class A, Class B or Class C
Units:
|
·
|
You
will receive no consideration for your units when they are reclassified
into Class A, Class B or Class C
Units;
|
|
·
|
You
may hold units even less liquid than the units you currently hold because
there is no existing market for our Class A, Class B or Class C
Units;
|
|
·
|
Class
B and Class C unit holders will receive a security with limited voting
rights and thus may hold units with less
value;
|
|
·
|
All
of our unit holders will receive a security with very limited
transferability rights; and
|
|
·
|
All
of our unit holders will lose the benefits of holding securities
registered under Section 12 of the Securities Exchange Act of
1934.
|
For
additional information, see “Effects of the Reclassification Transaction on Unit
Holders of RTE” beginning on page __ and “Effects of the Reclassification
Transaction on RTE; Plans or Proposals after the Reclassification Transaction”
beginning on page __.
Q:
|
What
are the terms of the Class A, Class B and Class C
Units?
|
A:
|
The
following table sets forth the principal differences between our three
classes of units:
|
|
|
Current Common
Equity Unit Holders
|
|
Class A
|
|
Class B
|
|
Class C
|
|
|
|
|
|
|
|
|
|
Voting
Rights
|
|
Entitled
to vote on all matters for which unit holder approval is required under
our Amended and Restated Operating Agreement, Amended and Restated Member
Control Agreement or North Dakota law. Entitled to cumulatively vote
for election of governors and vote on the removal of
governors.
|
|
Entitled
to vote on all matters for which unit holder approval is required under
our Second Amended and Restated Operating Agreement, Second Amended and
Restated Member Control Agreement or North Dakota law. (Section 1.8 of
Operating Agreement) Entitled to cumulatively vote for election of
governors, remove a governor without cause, by the affirmative vote of two
thirds (2/3) of the total Class A and Class B Units then outstanding, or
remove a governor for cause through member action of the Class A and Class
B unit holders.
|
|
Entitled
to vote on the election of our governors, voluntary dissolution and as may
be required by our Second Amended and Restated Operating Agreement, Second
Amended and Restated Member Control Agreement or North Dakota law.
(Section 1.8 of Operating Agreement) Entitled to cumulatively vote
for election of governors, remove a governor without cause, by the
affirmative vote of two thirds (2/3) of the total Class A and Class B
Units then outstanding, or remove a governor for cause through member
action of the Class A and Class B unit holders.
|
|
Only
entitled to vote on voluntary dissolution and as may be required by our
Second Amended and Restated Operating Agreement, Second Amended and
Restated Member Control Agreement or North Dakota law. (Section 1.8
of Operating
Agreement)
|
Transfer
Rights
|
|
Transfer
will only be allowed pursuant to the restrictions set forth in our Amended
and Restated Operating Agreement, Amended and Restated Member
Control Agreement and tax and securities laws.
|
|
Transfer
will only be allowed pursuant to the restrictions set forth in our Second
Amended and Restated Operating Agreement, Second Amended and Restated
Member Control Agreement and tax and securities laws. Our board of
governors has the sole discretion to approve or disallow any proposed
transfer. Our board of governors has the authority to prohibit
transfers that will result in 300 or more Class A unit holders of record
and in order to allow transfers that will result in 300 or more Class A
unit holders of record such issuance must first be approved by the
holders of a majority of the Class A Governance Rights. (Section 8.1
of Member Control Agreement)
|
|
Transfer
will only be allowed pursuant to the restrictions set forth in our Second
Amended and Restated Operating Agreement, Second Amended and Restated
Member Control Agreement and tax and securities laws. Our board of
governors has the sole discretion to approve or disallow any proposed
transfer. Our board of governors has the authority to prohibit transfers
that will result in 500 or more Class B unit holders of record and in
order to allow transfers that will result in 500 or more Class B unit
holders of record such issuance must first be approved by the
holders of a majority of the Class A Governance Rights. (Section 8.1
of Member Control Agreement)
|
|
Transfer
will only be allowed pursuant to the restrictions set forth in our Second
Amended and Restated Operating Agreement, Second Amended and Restated
Member Control Agreement and tax and securities laws. Our board of
governors has the sole discretion to approve or disallow any proposed
transfer. Our board of governors has the authority to prohibit
transfers that will result in 500 or more Class C unit holders of record
and in order to allow transfers that will result in 500 or more Class C
unit holders of record such issuance must first be approved by the
holders of a majority of the Class A Governance Rights. (Section 8.1
of Member Control Agreement)
|
|
|
|
|
|
|
|
|
|
Minimum/Maximum
Ownership Requirements
|
|
Holders
of common equity units are not subject to minimum ownership requirements
or limitations.
|
|
Holders
of Class A Units will not be subject to minimum ownership requirements or
limitations after the reclassification transaction. Units classified as
Class A units will permanently retain their classification following the
classification date.
|
|
Holders
of Class B Units will not be subject to minimum ownership requirements or
limitations after the reclassification transaction. Units classified as
Class B units will permanently retain their classification following the
classification date.
|
|
Holders
of Class C Units will not be subject to minimum ownership requirements or
limitations after the reclassification transaction. Units classified as
Class C units will permanently retain their classification following the
classification
date.
|
Amendments
to the Operating Agreement and Member Control
Agreement
|
|
Holders
of common equity units may amend the Company’s Amended and Restated
Operating Agreement, in addition to the rights of the governors to amend
the Amended and Restated Operating Agreement.
Holders
of common equity units may also amend the Company’s Amended and Restated
Member Control Agreement.
|
|
Holders
of Class A Units may amend the Company’s Second Amended and Restated
Operating Agreement, in addition to the rights of the governors to amend
the Second Amended and Restated Operating Agreement (Section 6.6 of the
Operating Agreement). Holders of Class A Units may also amend the
Company’s Second Amended and Restated Member Control Agreement (Section
2.5 of the Member Control Agreement).
|
|
Holders
of Class B Units may not amend the Company’s Second Amended and Restated
Operating Agreement or Second Amended and Restated Member Control
Agreement. However, Class B members may vote on any amendment to our
Second Amended and Restated Operating Agreement and/or Second Amended and
Restated Member Control Agreement if such amendment would modify the
limited liability of the member or alter the Financial Rights of the
member.
(Section
6.6 of the Operating Agreement and Section 2.5 of the Member Control
Agreement)
|
|
Holders
of Class C Units may not amend the Company’s Second Amended and Restated
Operating Agreement or Second Amended and Restated Member Control
Agreement. However, Class C members may vote on any amendment to our
Second Amended and Restated Operating Agreement and/or Second Amended and
Restated Member Control Agreement if such amendment would modify the
limited liability of the member or alter the Financial Rights of the
member.
(Section
6.6 of the Operating Agreement and Section 2.5 of the Member Control
Agreement)
|
|
|
|
|
|
|
|
|
|
Sharing
of Profits and Losses
|
|
Holders
of common equity units are entitled to share in the profits and losses of
the Company on a pro rata basis.
|
|
Holders
of the Class A Units are entitled to share in the profits and losses of
the Company on a pro rata basis (Article 6 of Member Control
Agreement).
|
|
Holders
of the Class B Units are entitled to share in the profits and losses of
the Company on a pro rata basis (Article 6 of Member Control
Agreement).
|
|
Holders
of the Class C Units are entitled to share in the profits and losses of
the Company on a pro rata basis (Article 6 of Member Control
Agreement).
|
Distributions
|
|
Holders
of common equity units are entitled to receive distributions on a pro rata
basis of Company cash and property as and when declared by the
governors.
|
|
Holders
of Class A Units are entitled to receive distributions on a pro rata basis
of Company cash and property as and when declared by the governors
(Section 7.1 of the Member Control Agreement).
|
|
Holders
of Class B Units are entitled to receive distributions on a pro rata basis
of Company cash and property as and when declared by the governors
(Section 7.1 of the Member Control Agreement).
|
|
Holders
of Class C Units are entitled to receive distributions on a pro rata basis
of Company cash and property as and when declared by the governors
(Section 7.1 of the Member Control Agreement).
|
|
|
|
|
|
|
|
|
|
Dissolution
|
|
Holders
of common equity units are entitled to participate pro rata in the
distribution of assets upon the Company’s dissolution.
|
|
Holders
of Class A Units are entitled to participate pro rata in the distribution
of assets upon the Company’s dissolution (Section 7.1 of Member Control
Agreement).
|
|
Holders
of Class B Units are entitled to participate pro rata in the distribution
of assets upon the Company’s dissolution (Section 7.1 of Member Control
Agreement).
|
|
Holders
of Class C Units are entitled to participate pro rata in the distribution
of assets upon the Company’s dissolution (Section 7.1 of Member Control
Agreement).
|
|
|
|
|
|
|
|
|
|
Information
Rights
|
|
Holders
of common equity units re entitled to receive financial reports and to
access and copy certain information concerning the Company’s
business.
|
|
Holders
of Class A Units are entitled to receive financial reports and to access
and copy certain information concerning the Company’s business (Section
10-32-51 of the North Dakota Limited Liability Company
Act).
|
|
Holders
of Class B Units are entitled to receive financial reports and to access
and copy certain information concerning the Company’s business (Section
10-32-51 of the North Dakota Limited Liability Company
Act).
|
|
Holders
of Class C Units are entitled to receive financial reports and to access
and copy certain information concerning the Company’s business (Section
10-32-51 of the North Dakota Limited Liability Company
Act).
|
For a
complete description of the terms of the Class A, Class B or Class C Units,
please refer to “Rights and Obligations of Class A Units Under the Second
Amended and Restated Operating Agreement and Second Amended and Restated Member
Control Agreement” beginning on page __, “Rights and Obligations of Class B
Units Under the Second Amended and Restated Operating Agreement and Second
Amended and Restated Member Control Agreement” beginning on page __, and “Rights
and Obligations of Class C Units Under the Second Amended and Restated Operating
Agreement and Second Amended and Restated Member Control Agreement” beginning on
page __.
Q:
|
Why
are 50,000 units and 10,001 units the “cutoff” numbers for determining
which unit holders will receive Class A, Class B or Class C
Units?
|
A:
|
The
purpose of the reclassification transaction is to reduce the number of our
record unit holders of our common equity units to fewer than 300 and to
have under 500 record unit holders of each of our Class B and Class C
Units, which will allow us to deregister as an SEC reporting
company. Our board selected 50,000 units and 10,001 units as the
“cutoff” numbers in order to enhance the probability that after the
reclassification transaction, if approved, we will have fewer than 300
record unit holders of our common equity units and have fewer than 500
record unit holders of each of our Class B and Class C Units. See
“Overview of the Reclassification Transaction” beginning on page __ and
“Purpose and Structure of the Reclassification Transaction” beginning on
page __.
|
Q:
|
When
is the reclassification transaction expected to be
completed?
|
A:
|
If
the proposed reclassification transaction is approved at the combined
special and annual meeting, we expect to complete such reclassification
transaction as soon as practicable following the combined
special and annual
meeting.
|
Q:
|
What
if the proposed reclassification transaction is not
completed?
|
A:
|
It
is possible that the proposed reclassification transaction will not be
completed. The proposed reclassification transaction will not
be completed if less than 66.67% of the total outstanding voting units are
voted in favor of the reclassification transaction. If the
reclassification transaction is not completed, we will continue our
current operations, and we will continue to be subject to the reporting
requirements of the SEC.
|
Q:
|
What
will happen if, through negotiated trades, RTE gains additional unit
holders requiring SEC
registration?
|
A:
|
We
are currently subject to the reporting obligations under Section 13(a) of
the Exchange Act, which requires us to file periodic reports with the SEC
because our units are registered under Section 12 of the Exchange
Act. Such registration is required under Section 12 because we
have more than 500 unit holders of record. If the unit holders
approve the proposals to adopt the Second Amended and Restated Operating
Agreement, the Second Amended and Restated Member Control Agreement and to
reclassify our units, our common equity units will be held by less than
300 unit holders of record.
|
We may
then file a Form 15 and terminate the registration of our units and the
obligation to file Section 13(a) periodic reports arising under Section 12;
however, our periodic reporting obligations arising under Section 15(d) of the
Exchange Act cannot be terminated, but can only be
suspended. Therefore, if the number of our unit holders of our Class
A common equity units ever rises above 300 as of the last day of any fiscal
year, then we will again be responsible for filing reports in compliance with
Section 15(d). This would require us to file periodic reports going
forward and an annual report for the preceding fiscal year. If the
unit holders of record for our Class B or Class C Units ever exceed 500, then we
will again become fully regulated under additional disclosure provisions of the
Exchange Act and we will again be responsible for filing reports. See
“Potential Registration of the Class B or Class C Units or Discontinuation of
our Suspended Duty to Report” beginning on page __.
Q:
|
If
the reclassification transaction is approved, will we continue to have
annual financial statements audited and will unit holders continue to
receive information on our
Company?
|
A:
|
Even
if we terminate our registration with the SEC, we will continue to make
available to our unit holders an annual report containing audited
financial statements in accordance with Section 10-32-52 of the North
Dakota Limited Liability Company Act. In addition, we will
continue to make available to our members quarterly reports containing
unaudited financial statements. Members, however, will not be
receive the same level of disclosure as before the reclassification,
because the financial information will not be subject to the disclosure
requirements and obligations that the federal securities laws require of
public companies.
|
Q:
|
Will
I have appraisal rights in connection with the reclassification
transaction?
|
A:
|
Under
North Dakota law, our Amended and Restated Operating Agreement and our
Amended and Restated Member Control Agreement, you do not have appraisal
or dissenter’s rights in connection with the reclassification transaction.
Other rights or actions besides appraisal and dissenter’s rights may exist
under North Dakota law or federal securities laws for unit holders who can
demonstrate that they have been damaged by the reclassification
transaction. See “Appraisal and Dissenters’ Rights” beginning
on page __.
|
Q:
|
What
are the tax consequences of the reclassification
transaction?
|
A:
|
We
believe the reclassification, if approved and completed, will have the
following federal income tax
consequences:
|
|
·
|
The
reclassification transaction should result in no material federal income
tax consequences to us;
|
|
·
|
Those
unit holders continuing to hold our common equity units as Class A Units
will not recognize any gain or loss in connection with the
reclassification;
|
|
·
|
Those
unit holders receiving Class B or Class C Units will not recognize any
gain or loss in the reclassification, and their adjusted tax basis in
their Class B or Class C Units held immediately after the reclassification
will equal their adjusted tax basis in their original common equity units
held immediately before the reclassification, and their holding period for
their Class B and Class C Units will include the holding period during
which their original common equity units were
held.
|
|
·
|
The
reclassification will have no effect on your ability to use otherwise
suspended passive activity losses or net operating loss carry
forwards. For further discussion of the tax consequences of the
reclassification transaction, see “Material Federal Income Tax
Consequences of the Reclassification Transaction” beginning on page
__.
|
Because
determining the tax consequences of the reclassification transaction can be
complicated and depends on your particular tax circumstances, you should consult
your own tax advisor to understand fully how the reclassification transaction
will affect you.
Q: Should
I send in my unit certificates now?
A:
|
No. If
the reclassification transaction is approved at the combined special and
annual meeting, we will send you written instructions for exchanging your
unit certificates for Class A, Class B or Class C Units after the
reclassification transaction is
completed.
|
Q:
|
Do
our governors and officers have different interests in the
reclassification transaction?
|
A:
|
You
should be aware that our governors and executive officers have interests
in the reclassification transaction that may present actual or potential,
or the appearance of actual or potential, conflicts of interest in
connection with the reclassification
transaction.
|
We
expect that several of our governors will own more than 50,000 units at the
effective time of the reclassification transaction, and, therefore, will be
Class A unit holders if the reclassification transaction is
approved. Additionally, some of our governors beneficially own units
at the record holder level in increments of less than 50,000 units (in addition
to their holdings of 50,000 or more units owned in another record name), and
therefore will also be Class B or Class C unit holders if the reclassification
transaction is approved. Specifically, all of our governors will be
Class A unit holders, except Sid Mauch, who will be a Class C unit holder and
Ron Aberle, who will be a Class A unit holder individually but will be a Class B
unit holder as related to the units he beneficially owns in the name of is
IRA.
Because
there will be fewer Class A Units following the reclassification transaction,
and because the Class B and Class C Units will have limited voting rights, the
governors who will be Class A Unit holders will own a larger relative percentage
of the voting interest in the Company. As of the record date, our
governors and executive officers collectively beneficially held and had voting
power 5,989,161 units, or 14.90% of our units. Based upon our
estimates, taking into account the effect of the reclassification transaction,
the governors will beneficially hold and have voting power over 20.59% of our
Class A Units following the reclassification transaction. This
represents a potential conflict of interest because our governors approved the
proposed amendments to our Amended and Restated Operating Agreement and Amended
and Restated Member Control Agreement, approved the reclassification transaction
and are recommending that you approve such proposals. Despite the
potential conflict of interest, our board believes the proposed reclassification
transaction is fair to our unaffiliated unit holders who will receive Class A
Units, our unaffiliated unit holders who will receive Class B Units, and our
unaffiliated unit holders who will receive Class C Units for the reasons
discussed in this proxy statement. See “Interests of Certain Persons
in the Reclassification Transaction” beginning on page __.
Q:
|
How
are we financing the reclassification
transaction?
|
A:
|
We
estimate that the reclassification transaction will cost approximately
$130,000, consisting of professional fees and other expenses payable by or
related to the reclassification transaction. See “Fees and
Expenses” beginning on page __ for a breakdown of the expenses associated
with the reclassification transaction. We intend to pay the
expenses of the reclassification transaction with working
capital. Our board believes that it has attempted to balance
the interests of reducing our expenses in transitioning to a non-SEC
reporting company while at the same time affording all unit holders the
opportunity to retain an equity ownership interest in the
Company.
|
Q:
|
What
does it mean if I receive more than one proxy for the
combined special and
annual meeting?
|
A:
|
It
means that you have multiple holdings reflected in our membership
register. Please sign and return ALL proxy forms to ensure that
all your membership units are voted. If you received more than
one proxy card but only one copy of the proxy statement and supplemental
materials, you may request additional copies from us at any
time.
|
Q:
|
Where
can I find more information about
RTE?
|
A:
|
Information
about us is also available at our website at
http://redtrailenergyllc.com
,
under “SEC Compliance,” which includes links to reports we have filed with
the Securities and Exchange Commission. The contents of our
website are not incorporated by reference in this Proxy
Statement.
|
Q:
|
Who
can help answer my questions?
|
A:
|
If
you have questions about the reclassification transaction after reading
this proxy statement or need assistance in voting your units, you should
contact Kent Anderson, CFO, of RTE at (701)
974-3308.
|
Q:
|
What
is the voting requirement for approval of the reclassification
transaction?
|
A:
|
The
presence, in person or by proxy, of a majority of our membership units is
necessary to constitute a quorum at the combined special and annual
meeting. Currently 20,096,987 membership units must be present,
in person or by proxy, to constitute a quorum at the combined special and
annual meeting.
Approval of the
reclassification transaction and the amendments to our Amended and
Restated
Operating
Agreement and our Amended and Restated Member Control Agreement contained
in the Second Amended and Restated Operating Agreement and Second Amended
and Restated Member Control Agreement requires the affirmative vote of at
least 66.67% of the total outstanding voting units, or at a minimum
26,809,380 of the total outstanding units. You may vote your
units in person by attending the combined special and annual meeting, or
by mailing us your completed proxy card if you are unable, or do not wish,
to attend. The proxy card must be returned to the
Company no later than ____ _.m. on , 20____ for your vote to be valid
if you do not plan to attend the meeting in
person.
|
Q:
|
How
can I revoke my proxy?
|
A:
|
You
can revoke your proxy at any time before we take a vote at the meeting by
submitting a written notice revoking the proxy, or by attending the
meeting and voting in person. See “Voting and Revocation of
Proxies” beginning on page __.
|
Q:
|
What
is the effect of an abstention?
|
A:
|
Because
approval of the reclassification requires approval of 66.67% of the total
voting units outstanding, abstentions will count for purposes of
establishing a quorum at the combined special and annual meeting and will
have the effect of a vote “AGAINST” the reclassification
transaction. Therefore, if 33.33% or more of the voting units
vote against or abstain from voting, the reclassification will not be
approved. See “Quorum; Vote Required for Approval” beginning on
page __.
|
Q:
|
Who
will count the votes?
|
A:
|
All
votes will be tabulated by Kent Anderson, the Company’s Chief Financial
Officer, and also by the inspector of election appointed for the combined
special and annual meeting, who will separately tabulate affirmative and
negative votes and abstentions.
|
Q:
|
Who
is paying for this proxy
solicitation?
|
A:
|
The
entire cost of this proxy solicitation will be borne by
RTE. The cost will include the cost of supplying necessary
additional copies of the solicitation material for beneficial owners of
units held of record by brokers, dealers, banks and voting trustees and
their nominees and, upon request, the reasonable expenses of such record
holders for completing the mailing of such material and report to such
beneficial owners. See “Solicitation of Proxies; Expenses of Solicitation”
beginning on page __.
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Overview
of the Reclassification Transaction
This proxy statement is being furnished
in connection with the solicitation of proxies by our board of governors at a
combined special and annual meeting at which our members will be asked to
consider and vote upon amendments to our Amended and Restated Operating
Agreement and Amended and Restated Member Control Agreement. If
approved, the amendments to our Amended and Restated Operating Agreement and our
Amended and Restated Member Control Agreement contained in the Second Amended
and Restated Operating Agreement and Second Amended and Restated Member Control
Agreement will, among other things, result in a reclassification of our common
equity units into three separate and distinct classes.
If the amendments and the
reclassification transaction are approved as described below, unit holders of
record with 50,000 or more units immediately prior to the reclassification
transaction will receive one Class A Unit for each of their common equity units
held immediately prior to the reclassification transaction. Unit
holders of record with no more than 49,999 but no less than 10,001 units
immediately prior to the reclassification transaction will receive one Class B
Unit for each of their common equity units held immediately prior to the
reclassification transaction. Unit holders of record with 10,000 or
fewer units immediately prior to the reclassification transaction will receive
one Class C Unit for each of their common equity units held immediately prior to
the reclassification transaction. We intend, immediately following
the reclassification, to terminate the registration of our common equity units
with the SEC and suspend further reporting under the Securities Exchange Act of
1934, as amended.
If approved by our unit holders at the
combined special and annual meeting and implemented by our board of governors,
the reclassification transaction will generally affect our unit holders as
follows:
UNIT HOLDER POSITION PRIOR TO
THE
RECLASSIFICATION
TRANSACTION
|
|
EFFECT OF THE RECLASSIFICATION
TRANSACTION
|
Unit
holders of record holding 50,000 or more units
|
|
Unit
holder will hold the same number of units held prior to the
reclassification transaction but such units shall be reclassified as Class
A Units.
|
Unit
holders of record holding no more than 49,999 but no fewer than 10,001
units
|
|
Unit
holders will hold the same number of units held prior to the
reclassification transaction but such units shall be reclassified as Class
B Units.
|
Unit
holders of record holding 10,000 or fewer units
|
|
Unit
holders will hold the same number of units held prior to the
reclassification transaction but such units shall be reclassified as Class
C Units.
|
Unit
holders holding units in “street name” through a nominee (such as a bank
or broker)
|
|
The
reclassification transaction will be effected at the record unit holder
level. Therefore, regardless of the number of beneficial
holders or the number of shares held by each beneficial holder, shares
held in “street name” will be subject to the reclassification transaction,
and the beneficial holders who hold their units in “street name” will be
continuing unit holders with the same number of units as before the
reclassification
transaction.
|
The effects of the reclassification
transaction on each group of unit holders are described more fully below under
“Effects of the Reclassification Transaction on Unit Holders of RTE” beginning
on page _ and the effects on the Company are described more fully below under
“Effects of the Reclassification Transaction on RTE; Plans or
Proposals after the Reclassification Transaction” beginning on page
__.
Background
of the Reclassification Transaction
As an SEC reporting company, we are
required to prepare and file with the SEC, among other items, the
following:
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·
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Annual
Reports on Form 10-K;
|
|
·
|
Quarterly
Reports on Form 10-Q;
|
|
·
|
Current
Reports on Form 8-K; and
|
|
·
|
Proxy
Statements on Form 14A.
|
Our management and several of our
employees expend considerable time and resources preparing and filing these
reports and we believe that such time and resources could be beneficially
diverted to other areas of our operations that would allow management and those
employees to focus more of their attention on our business. Also, as a reporting
company, we are required to disclose information to the public, including to
actual or potential competitors that may be helpful to the competitors in
challenging our business operations and to take market share, employees and
customers away from the Company. In addition, the costs associated with these
reports and other filing obligations comprise a significant corporate overhead
expense. These costs include, but are not limited to, securities
counsel fees, auditor fees, special board meeting fees, costs of printing and
mailing documents, and word processing and filing costs. Our
registration and reporting related costs have been increasing over the years due
to the requirements imposed by the Sarbanes-Oxley Act of 2002
(“SOX”). Section 404 requires us to include in our Annual Report on
Form 10-K our management’s report on, and assessment of, the effectiveness of
our internal controls over financial reporting. We estimate that our costs and
expenses incurred in connection with SEC reporting for 2010 will be
approximately $120,000, which assumes the reclassification will be approved and
our SEC reporting requirements will be suspended prior to the deadline to file a
quarterly report for our third quarter.
As of September 23, 2010, we had
40,193,973 units issued and outstanding, held by approximately 917 current unit
holders of record. Of our approximately 917 unit holders of record,
we believe approximately 743, or 81.03%, hold 49,999 or fewer
units. Our board of governors and management believe that the
recurring expense and burden of our SEC-reporting requirements described above
are not cost efficient for RTE. Becoming a non-SEC reporting company
will allow us to avoid these costs and expenses. In addition, once
our SEC reporting obligations are suspended, we will not be subject to the
provisions of the Sarbanes-Oxley Act of 2002 or the liability provisions of the
Securities Exchange Act of 1934, as amended, and our officers will not be
required to certify the accuracy of our financial statements under SEC
rules.
There can be many advantages to being a
public company, possibly including a higher value for our units, a more active
trading market and the enhanced ability of the Company to raise capital or make
acquisitions. However, there is a limited market for our units and,
in order to avoid being taxed as a corporation under the publicly traded
partnership rules under Section 7704 of the Internal Revenue Code, our member
units cannot be traded on an established securities market or be readably
tradable in a secondary market, thereby assuring that there will continue to be
a limited market for our member units. We have therefore not been
able to effectively take advantage of these benefits. Based on the
limited number of units available and the trading restrictions we must observe
under the Internal Revenue Code, we believe it is highly unlikely that our units
would ever achieve an active and liquid market comprised of many buyers and
sellers. In addition, as a result of our limited trading market and
our status as a limited liability company, we are unlikely to be well-positioned
to use our public company status to raise capital in the future through sales of
additional securities in a public offering or to acquire other business entities
using our units as consideration.
At RTE’s June 25, 2009 board meeting,
the board considered exploring the reclassification process, but determined such
a transaction was better set as a future goal. No definitive goal
date for the reclassification was set at this meeting, but RTE’s legal counsel
at the time did explain a reclassification / deregistration process to the
board. All governors were present, in addition to Gerald Bachmeier,
Mark Klimpl, Calvin Diehl and Todd Taylor (legal counsel). During
RTE’s February 4, 2010 board meeting, the board decided to pursue hiring
different legal counsel, in part to pursue a reclassification / deregistration
transaction. Present at this meeting were all the directors and
additionally, Gerald Bachmeier, Mark Kimpel and Calvin Diehl. By the
March 4, 2010 RTE board meeting, Brown Winick was retained. Valerie
Bandstra, present legal counsel, joined in this meeting and led a discussion
regarding the potential benefits and detriments of terminating the registration
of our membership units under federal securities laws and suspending our SEC
reporting obligations and the requirements and methods available to accomplish
the same. At this meeting, the board unanimously passed a motion to
move forward with pursuing the deregistration process. Our board
concluded that the Company receives little benefit in being a public company but
incurs significant expense to meet the public company reporting
requirements. In particular there is little trading volume with our
common equity units. Our board of governors discussed these burdens
and costs and lack of benefits, and it became clear that the recurring expense
and burden of our SEC reporting requirements are not cost efficient and that
becoming a non-SEC reporting company would allow us to avoid these costs and
expenses. Our board concluded that the benefits of being an
SEC-reporting company are substantially outweighed by the burden on management,
the expense related to the SEC reporting obligations and the burden on the
Company’s ability to explore long-term strategies while being a public reporting
company.
Our board considered the requirements
for going private as well as the alternatives available for a going private
transaction, including a reverse unit split, self-tender offer whereby unit
holders owning less than a certain number of units would be “cashed out,” and a
reclassification of our units in order to reduce our number of record holders to
below 300. Because our cash resources to effect such a transaction
are limited and we believe many of our unit holders feel strongly about
retaining their equity interest in the Company, management and our board found
the prospect of effecting a going private transaction by reclassifying some of
our units an attractive option.
At a special meeting of our board held
on March 19, 2010 and attended by our counsel, all of our governors, Mark
Klimpel and Calvin Diehl, we discussed setting the reclassification thresholds
at 50,000 units for Class A, 10,001 – 49,999 units for Class B and 10,000 units
or less for Class C, which were determined based on estimates of the resulting
number of unit holders. The board discussed that each class would
have different voting rights, with Class A members to retain the voting rights
of current common equity holders.
Additionally at this special meeting,
our board discussed the business considerations for engaging in a going private
transaction, highlighting the advantages and disadvantages and issues raised in
a going private transaction. Specifically, the board discussed the
following advantages of going private:
|
·
|
As
a reporting company, we are required to expend significant costs in
connection with our ‘34 Act obligations, including, but not limited to,
higher external auditing and accounting costs, higher costs of internal
controls, increased SEC reporting costs, increased legal/consulting costs,
and special board meeting fees. Suspending our public company
reporting obligations will help reduce or eliminate these additional and
significant costs.
|
|
·
|
As
a reporting company, we are required to disclose information to the
public, including to actual or potential competitors that may be helpful
to these competitors in challenging our business operations and to take
market share, employees and customers away from us. Suspending
our public company reporting obligations will help to protect that
sensitive information from required or inadvertent
disclosure. Although we will no longer be required to disclose
this information publicly, members will maintain the right of reasonable
access to the Company’s books and records and will be entitled to receive
fiscal year end audited financial statements and quarter end unaudited
financial statements.
|
|
·
|
Operating
as a non-SEC reporting company will reduce the burden on our management
and employees that arises from the increasingly stringent SEC reporting
requirements, thus allowing management and our employees to focus more of
their attention on our core
business.
|
|
·
|
Operating
a non-SEC reporting company may reduce expectations to produce and
publicly report short-term per unit earnings and may increase management’s
flexibility to consider and balance actions between short-term and
long-term income goals.
|
|
·
|
Our
unit holders may receive limited benefit from being an SEC reporting
company because of our small size and the limited trading of our units
compared to the costs associated with the disclosure and procedural
requirements of the SEC, including the Sarbanes-Oxley
Act.
|
|
·
|
Our
smaller unit holders will continue to have an equity interest in our
Company and therefore will continue to share in our profits and losses and
distributions on the same per unit basis as all other unit
holders.
|
|
·
|
Our
ability to explore, secure and structure financing or other transactions
to maximize long-term member value through prospective capital providers
or a potential sale, merger, consolidation or other business combination
between our Company and a third party may be more successful without the
requirement of publicly reporting such negotiations and
transactions.
|
At this
meeting, the board also considered the potential negative consequences of this
transaction to our unit holders, and in particular, our smaller unit holders who
will be reclassified into Class B and Class C Units:
|
·
|
Our
unit holders will lose the benefits of registered securities, such as
access to the information concerning the Company that is required to be
disclosed in periodic reports to the SEC although the unit holders will
retain their rights of reasonable access to the Company’s books and
records and will be entitled to receive fiscal year end audited financial
statements and quarter end unaudited financial
statements.
|
|
·
|
Our
unit holders will lose certain statutory safeguards since we will no
longer be subject to the requirements of the Sarbanes-Oxley Act, which
required our CEO and CFO to certify as to the Company’s financial
statements and internal controls over financial reporting and as to the
accuracy of our reports filed with the
SEC.
|
|
·
|
The
value and liquidity of our units may be reduced as a result of the Company
no longer being a public company or as a result of the differing terms
among the reclassified units.
|
|
·
|
Our
potential costs, in terms of time and dollars, in connection with
accomplishing the going private
filings.
|
|
·
|
Going
private may reduce the attractiveness of stock based incentive plans,
which are often used for executives and other key
employees.
|
|
·
|
Potential
liability may exist for our officers and governors associated with the
“interested” nature of the deregistration
transaction.
|
|
·
|
We
may have increased difficulty in raising equity capital in the future,
potentially limiting our ability to expand due to the restrictions
involved in the private sale of
securities.
|
Additionally, at the meeting, the
process and mechanism for going private was discussed. The board
discussed the possibility of forming an independent special committee to
evaluate the reclassification transaction. However, the board
believed that the fact that our board would be treated the same as the other
unit holders and that no consideration had been given to the unit cutoff number
relative to the unit ownership of the board members, a special committee for the
reclassification transaction was not needed. The board also discussed
requiring approval of the transaction by a majority of unaffiliated unit holders
and considered the fact that the interests of the unit holders receiving Class B
or Class C Units are different from the interests of the unit holders owning
Class A Units and may create actual or potential conflicts of interest in
connection with the reclassification transaction. However, because
affiliated and unaffiliated unit holders would be treated identically in terms
of the approval process of the reclassification transaction, the board believed
a special vote was not necessary.
After this discussion, the board agreed
that it is in the best interest of the Company to move forward with the
deregistration process structured as discussed at this meeting and unanimously
instructed counsel to proceed with reclassifying our units in order to no longer
be a public reporting company.
On April 22, 2010, at a board meeting
attended by all of our governors, Mark Klimpel, Calvin Diehl and Gerald
Bachmeier, the Company reviewed and considered its specific calculations of
costs savings that would result from the reclassification
transaction. At the May 27, 2010 board meeting, which was attended by
legal counsel, all the governors, Gerald Bachmeier, Calvin Diehl and Kent
Anderson, the board and management reviewed the amendments to the Amended and
Restated Member Control Agreement and the Amended and Restated Operating
Agreement with legal counsel.
On June 22, 2010, at a special board
meeting attended by all of our governors, Calvin Diehl, Gerald Bachmeier and K.
Anderson, and our legal counsel, our board of governors unanimously approved and
recommended to the unit holders the amendments to our Amended and Restated
Operating Agreement and our Amended and Restated Member Control Agreement as
contained in the Second Amended and Restated Operating Agreement and Second
Amended and Restated Member Control Agreement to authorize Class A, Class B and
Class C Units and to reclassify our outstanding units as follows: unit holders
holding 50,000 or more units will be classified as holders of Class A Units;
unit holders holding no more than 49,999 but no less than 10,001 units will be
classified as holders of Class B Units; and unit holders holding 10,000 or fewer
units will be classified as holders of Class C Units. The approval of
the amendments to our Amended and Restated Operating Agreement, Amended and
Restated Member Control Agreement and the reclassification transaction was based
upon the factors discussed above.
Reasons
for the Reclassification Transaction; Fairness of the Reclassification
Transaction; Board Recommendation
RTE’s
Reasons for the Reclassification
As a small company whose shares are not
listed on any exchange or traded on any quotation system, we have struggled to
maintain the costs associated with being a public company, while not enjoying
many of the benefits associated with being a public company. We
expect our costs associated with our reporting obligations to increase next year
as we become subject to the XBLR interactive data format in our SEC
filings. Finally, in order for the Company to maximize the long-term
value of membership in the Company, it is necessary to explore various potential
options with third parties including both equity and debt financing options as
well as business consolidation transactions. We believe that the
exploration of these options will be better suited for a private company as the
reporting of such transactions may create a disadvantage in our bargaining and
negotiation powers in such transactions. We are undertaking the
reclassification transaction at this time to end our SEC reporting obligations,
which will enable us to save the Company and our unit holders the substantial
costs associated with being a reporting company, and these costs are only
expected to increase over time. The specific factors considered in
electing at this time to undertake the reclassification transaction and become a
non-SEC reporting company are as follows:
|
·
|
We
estimate that we will be able to reallocate resources and eliminate costs
and avoid anticipated future costs of approximately $205,000 on an annual
basis starting in fiscal year ending December 31, 2011, by eliminating the
requirement to make periodic reports and reducing the expenses of
communications with our unit holders. These annual expenses are
expected to include reduced audit expenses ($85,000), reduced legal
expenses ($60,000), XBLR Edgarization reporting compliance ($50,000),
internal control testing and SOX compliance ($5,000) and other
miscellaneous expenses of $5,000. These amounts are just
estimated savings after considering legal, accounting and auditing
expenses expected to continue after the going private
transaction. We will continue to incur some accounting and
auditing expenses to maintain our books and records in accordance with
GAAP and make available annual and quarterly reports to our
members.
|
|
·
|
We
believe the disclosure and procedural requirements of the SEC reporting
rules and the Sarbanes-Oxley Act divert efforts from our board of
governors, management and staff and result in significant legal,
accounting and administrative expense, without commensurate benefit to our
unit holders. We expect to continue to make available to our
unit holders Company financial information on an annual and quarterly
basis, but these reports will not be required to comply with many of the
information requirements applicable to SEC periodic reports and will not
generally include that information. Therefore, we anticipate that the
costs associated with these reports will be substantially less than the
costs we currently incur and would otherwise incur in the future in
connection with our periodic filings with the
SEC.
|
|
·
|
In
our board of governors’ judgment, little or no justification exists for
the continuing direct and indirect costs of registration with the SEC
given that our compliance costs have increased as a result of heightened
government oversight; the low trading volume in our units; that at the
time our board approved the reclassification transaction, approximately
743 of our unit holders held 49,999 or fewer units; and that any need to
raise capital or enter into other financing or business consolidation
arrangements will likely not involve raising capital in the public
market. If it becomes necessary to raise additional capital, we
believe that there are adequate sources of additional capital available,
whether through borrowing or through private or institutional sales of
equity or debt securities or alternative business consolidation
transactions, although we recognize that there can be no assurance that we
will be able to raise additional capital or finalize any business
consolidation transaction with a third party to maintain the viability and
growth of the Company when required, or that the cost of additional
capital or the results of any such transactions will be
attractive.
|
|
·
|
Because
of our desire to avoid being taxed as a corporation under the publicly
traded partnership rules under Section 7704 of the Internal Revenue Code,
our units are not listed on an exchange. Although trading of
our units is facilitated through a qualified matching service, an
alternative trading system, as defined by the SEC, we do not enjoy
sufficient market liquidity to enable our unit holders to trade their
units very easily. In addition, our units are subject to
transferability restrictions, requiring the consent of our governors in
most instances. We also do not have sufficient liquidity in our
units to use it as potential currency in an acquisition. As a
result, we do not believe that registration of our units under the
Securities Exchange Act has benefited our unit holders in proportion to
the costs we have incurred and expect to incur in the
future.
|
|
·
|
As
a reporting company, we are required to disclose information to the
public, including to actual and potential competitors which may be helpful
to these competitors in challenging our business
operations. Some of this information includes disclosure of
material agreements affecting our business, the development of new
technology, product research and development, known market trends and
contingencies that may impact our operating results. These
competitors and potential competitors can use that information against us
in an effort to take market share, employees, and customers away from
us. Terminating our reporting obligation will help to protect
that sensitive information from required or inadvertent
disclosure.
|
|
·
|
We
expect that operating as a non-SEC reporting company will reduce the
burden on our management and employees that arises from the increasingly
stringent SEC reporting requirements. This will allow our management and
employees to focus more of their attention on our business, our customers,
and the community in which we
operate.
|
|
·
|
We
expect that operating as a non-SEC reporting company will increase
management’s flexibility to consider and initiate actions such as a merger
or sale of the Company without being required to file a preliminary proxy
statement with the SEC and otherwise comply with Regulation 14A of the
Securities Exchange Act.
|
|
·
|
The
reclassification transaction proposal allows us to discontinue our
reporting obligations with the SEC, but still allows those unit holders
receiving Class A, Class B, or Class C Units to retain an equity interest
in RTE. Therefore, our Class A, Class B, and Class C unit
holders will continue to share in our profits and losses and
distributions.
|
|
·
|
Operating
as a non-SEC reporting company may reduce the expectation to produce
short-term per unit earnings and may increase management’s flexibility to
consider and balance actions between short-term and long-term growth
objectives.
|
|
·
|
We
expect that completing the reclassification transaction at this time will
allow us to begin to realize cost savings and will allow our management
and employees to redirect their focus to our business and
customers.
|
We considered that some of our unit
holders may prefer to continue as unit holders of an SEC reporting company,
which is a factor weighing against the reclassification
transaction. However, we believe that the disadvantages of remaining
a public company subject to the registration and reporting requirements of the
SEC outweigh any advantages. There is a limited market for our units
and, in order to avoid being taxed as a corporation under the publicly traded
partnership rules under Section 7704 of the Internal Revenue Code, our units
cannot be traded on an established securities market or be readily tradable in a
secondary market, thereby assuring that there will continue to be a limited
market for our units. We have no present intention to raise capital through
sales of securities in a public offering in the future or to acquire other
business entities using our membership units as the consideration for such
acquisition. Accordingly, we are not likely to make use of any
advantage that our status as an SEC reporting company may offer.
The board
realized that many of the benefits of a Rule 13e-3 transaction, such as
eliminating costs associated with SEC reporting obligations and allowing
management and employees to focus on core business initiatives, have been in
existence for some time. However, once the board felt the impact over
time of the increasingly stringent regulation brought on by the Sarbanes-Oxley
Act and the expanded reporting requirements of larger reporting companies faced
by the Company over the past few fiscal years, the board began to seriously
consider a transaction that would result in the deregistration of our
units. Moreover, the board believes that the costs, both in terms of
time and money spent in connection with SEC reporting obligations, will increase
our next fiscal year as the Company becomes subject to the requirements of the
XBRL interactive data format. See “Overview of the Reclassification
Transaction” beginning on page __.
Other
than the cost savings and other benefits associated with becoming a non-SEC
reporting company, as outlined above and as described in the discussion under
“Purpose and Structure of the Reclassification Transaction” on page __, we do
not have any other purpose for engaging in the reclassification transaction at
this particular time.
In view of the wide variety of factors
considered in connection with its evaluation of the reclassification
transaction, our board of governors did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific factors
it considered in reaching its determination.
The reclassification transaction, if
completed, will have different effects on the Class A unit holders, Class B unit
holders, and Class C unit holders. You should read “Our Position as
to the Fairness of the Reclassification Transaction” below and “Effects of the
Reclassification Transaction on Unit Holders of RTE” beginning on page __ for
more information regarding the effects of the reclassification
transaction.
We considered various alternative
transactions to accomplish the proposed transaction, including a tender offer, a
stock repurchase on the open market or a reverse stock split whereby unit
holders owning less than a certain number of units would be “cashed out,” but
ultimately elected to proceed with the reclassification because these
alternatives could be more costly, might not have effectively reduced the number
of unit holders below 300, and would not allow all unit holders to retain an
equity interest in RTE. We have not received any proposal from third
parties for any business combination transactions, such as a merger,
consolidation or sale of all or substantially all of our assets. Our
board did not seek any such proposal because these types of transactions are
inconsistent with the narrower purpose of the proposed transaction, which is to
discontinue our SEC reporting obligations. Our board believes that by
implementing the reclassification transaction, our management will be better
positioned to focus on transactions to maximize our long-term goals, attention
on our customers and core business initiatives, and our expenses will be
reduced. See “Purposes and Structure of the Reclassification Transaction”
beginning on page __ for further information as to why this reclassification
transaction structure was chosen by our board.
Our
Position as to the Fairness of the Reclassification Transaction
Based on a careful review of the facts
and circumstances relating to the reclassification transaction, our board of
governors believes that the Second Amended and Restated Operating Agreement, the
Second Amended and Restated Member Control Agreement and the “going private”
transaction (i.e., the Rule 13e-3 transaction), including all the terms and
provisions of the reclassification transaction, are substantively and
procedurally fair to all our unit holders. Our board of governors
unanimously approved the reclassification transaction and has recommended that
our unit holders vote “
FOR
” the reclassification
transaction and “
FOR
”
approval of the proposed amendments to our Amended and Restated Operating
Agreement and our Amended and Restated Member Control Agreement as contained in
the proposed Second Amended and Restated Operating Agreement and proposed Second
Amended and Restated Member Control Agreement that will, among other things,
effect the reclassification.
In concluding that the terms and
conditions of the Rule 13e-3 transaction and the reclassification transaction
are substantively fair to unaffiliated unit holders who will receive Class A
Units, unaffiliated unit holders who will receive Class B Units, and
unaffiliated unit holders who will receive Class C Units, our board of governors
considered a number of factors. In its consideration of both the
procedural and substantive fairness of the transaction, our board considered the
potential effect of the transaction as it relates to all unaffiliated unit
holders generally, to unit holders receiving Class B or Class C Units and to
unit holders continuing to own common equity units as Class A
Units. Because the transaction will affect unit holders differently
only to the extent that some will receive Class B Units in the reclassification
transaction, some will receive Class C Units and some will retain their common
equity units as Class A Units, these are the only groups of unit holders with
respect to which the board considered the relative fairness and the potential
effects of the reclassification transaction. See “ Effects of the
Reclassification Transaction on Unit Holders of RTE” beginning on page
__.
Substantive Fairness
The factors that our board of governors
considered positive for our unaffiliated unit holders, including both those that
will continue to hold our common equity units as Class A Units as well as those
who will have their units converted into Class B or Class C Units, include the
following:
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Our
smaller unaffiliated unit holders who prefer to remain as holders of our
common equity units as Class A Unit holders, despite the board’s
recommendation, had notice that they had until May 21, 2010 to acquire
sufficient units so that they could hold 50,000 or more units in their own
names prior to the reclassification transaction. The limited
market for our member units may have made acquiring sufficient units
difficult and there may have been costs to unaffiliated unit holders,
beyond the purchase price of such units, associated with the
acquisition. However, we believe that acquiring additional
units was an option available to our unaffiliated unit holders and our
unaffiliated unit holders were able to weigh the costs and benefits of
implementing an acquisition of additional units. We have
restricted transfers after May 21, 2010 to allow the Company to determine
definitively the number of Class A, Class B and Class C members that would
result from the reclassification prior to providing our members with proxy
materials. This restriction on transfers applies only to
optional transfers and does not restrict transfers as a result of a court
order, such as upon the occurrence of the death of a
member.
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Beneficial
owners who hold their units in “street name,” who would receive Class B or
Class C Units if they were record owners instead of beneficial owners, and
who wish to receive Class B or Class C Units as if they were record owners
instead of beneficial owners, had notice that they had until May 21, 2010
to transfer their units so that they could receive Class B or Class C
Units.
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Our
unaffiliated unit holders receive little benefit from our being an SEC
reporting company because of our small size, the lack of analyst coverage
and the limited trading of our units compared to the costs associated with
the disclosure and procedural requirements of the Sarbanes-Oxley Act, in
addition to the legal, accounting and administrative costs involved in
being a public company. Accordingly, we believe that the costs to our
unaffiliated unit holders of being a public company are not commensurate
with the benefits to our unit holders of being a public
company.
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All
our unaffiliated unit holders will realize the potential benefits of
termination of registration of our units, including reduced expenses as a
result of no longer being required to comply with the SEC reporting
requirements.
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The
reclassification should not result in a taxable event for any of our
unaffiliated unit holders.
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All
our unaffiliated unit holders will continue to have the opportunity to
equally participate in future profit and loss allocations and
distributions on a per unit basis.
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Our
affiliated unit holders will be treated in the same manner in the
reclassification transaction as our unaffiliated unit holders and will be
reclassified according to the same
standards.
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·
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Our
unaffiliated unit holders are not being “cashed out” in connection with
the reclassification transaction, and our member units will continue to
have the same material economic rights and
preferences.
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In addition to the positive factors
applicable to all our unaffiliated unit holders set forth above, the factors
that our board of governors considered positive for those unaffiliated unit
holders receiving Class B or Class C Units included:
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All
our smaller unaffiliated unit holders will continue to have an equity
interest in RTE and therefore will share in our profits and losses and
distributions on the same per unit basis as our Class A Unit
holders.
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·
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Our
Class B and Class C unaffiliated unit holders will still have some voting
rights. Class B unaffiliated unit holders will have the right
to elect our governors and both Class B and Class C unaffiliated holders
will have the right to vote on dissolution of the
Company.
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·
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No
brokerage or transaction costs are to be incurred by them in connection
with the reclassification of their
units.
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In addition to the positive factors
applicable to all of our unaffiliated unit holders set forth above, the factors
that the board of governors considered positive for the unaffiliated unit
holders that are continuing to hold our common equity units as Class A Units
included:
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The
Class A unaffiliated unit holders will continue to have voting rights
including the right to elect governors and determine other decisions on
our behalf as provided in the Second Amended and Restated Operating
Agreement, the Second Amended and Restated Member Control Agreement and
pursuant to the North Dakota Limited Liability Company
Act.
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Our
Class A unaffiliated unit holders will continue to own an equity interest
in the company and will continue to share in our profits and losses and
distributions in the same respect as our Class B and Class C unit
holders.
|
Our board considered each of the
foregoing factors to weigh in favor of the substantive fairness of the
reclassification transaction to our unaffiliated unit holders, whether they are
unit holders continuing to hold our common equity units as Class A Units or unit
holders having their units converted into Class B or Class C Units.
The board is aware of, and has
considered, the impact of certain potentially countervailing factors on the
substantive fairness of the reclassification transaction to our unaffiliated
unit holders receiving Class B or Class C Units. In particular, the
factors that our board of governors considered as potentially negative for those
unit holders receiving Class B or Class C Units included:
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They
will be required to surrender their common equity units involuntarily in
exchange for Class B or Class C Units, although they will still have the
opportunity to participate in any future growth and earnings of the
Company.
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·
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The
voting rights of Class B unaffiliated unit holders will be limited to the
election of our governors and the dissolution of the
Company. Therefore, it is possible that a future merger, sale,
consolidation or other business combination may be approved by the Class A
Members only and the Class B unit holders will have no voting rights in
connection with such transactions. Such limitations may result
in decreased value of the Class B
Units.
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Our
Class B unaffiliated unit holders will only be able to vote on amendments
to our Second Amended and Restated Operating Agreement and our
Second Amended and Restated Member Control Agreement that would modify the
limited liability of the unit holder or alter the Financial Rights of the
unit holder. Such limitations may result in making these Class
B Units less valuable.
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The
new Class B unit holders will have no right to transfer their units unless
such transfer is approved by a majority of our governors. The governors
will have the authority to disallow any proposed transfer at their sole
discretion. The loss of these rights may cause potential purchasers of
Class B Units to value these units at a value less than Class A
Units;
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The
voting rights of Class C unaffiliated unit holders will be limited to the
dissolution of our Company. Therefore, it is possible that a future
merger, sale, consolidation or other business combination may be approved
by the Class A Members only and the Class C unit holders will have no
voting rights in connection with such transactions. Such
limitations may result in decreased value of the Class C
Units.
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Our
Class C unit holders will only be able to vote on amendments to our Second
Amended and Restated Operating Agreement and our Second Amended and
Restated Member Control Agreement that would modify the limited liability
of the unit holder or alter the Financial Rights of the unit
holder. Such limitations may result in making these Class C
Units less valuable.
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The
new Class C unit holders will have no right to transfer their units unless
such transfer is approved by a majority of our governors. The governors
will have the authority to disallow any proposed transfer at their sole
discretion. The loss of these rights may cause potential purchasers of
Class C Units to value these units at a value less than Class A
Units;
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The factors that our board of governors
considered as potentially negative for the unaffiliated unit holders who are
continuing to hold our common equity units as Class A Units
included:
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The
liquidity of unaffiliated Class A member units will likely be reduced
following the reclassification transaction because of the reduction in the
number of our common equity units.
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·
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The
transferability of the unaffiliated Class A Units will be
limited.
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The factors that our board of governors
considered as potentially negative for our unaffiliated unit holders, regardless
of whether they receive Class A Units, Class B Units or Class C Units
included:
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Following
the reclassification transaction, they will have restrictions on their
ability to transfer their units because our units will be tradable only in
privately-negotiated transactions, and there will not be a public market
for our units.
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They
will have reduced access to our financial information once we are no
longer an SEC reporting company, although we do intend to continue to make
available to all unit holders an annual report containing audited
financial statements and quarterly reports containing unaudited financial
statements.
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Once
our SEC reporting obligations are suspended, we will not be subject to the
provisions of the Sarbanes-Oxley Act or the liability provisions of the
Securities Exchange Act of 1934, as amended, and our officers will not be
required to certify the accuracy of our financial statements under the SEC
rules.
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Unaffiliated
unit holders who do not believe that the reclassification transaction is
fair to them do not have the right to dissent from the reclassification
transaction.
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·
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Until
the reclassification is complete or not consummated due to the members not
approving the reclassification, transfers of our common equity units will
be limited to transfers by court order or otherwise by operation of
law. If the reclassification is not approved by our members,
transfers other than by court order or operation of law will be allowed to
resume as soon as reasonably practicable after the member meeting, likely
within one week of the meeting.
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Our board of governors believes that
these potentially countervailing factors did not, individually or in the
aggregate, outweigh the overall substantive fairness of the reclassification
transaction to our unaffiliated unit holders who will receive Class A Units,
Class B Units or Class C Units and that the foregoing factors are outweighed by
the positive factors previously described.
In reaching a determination as to the
substantive fairness of the reclassification transaction, we did not consider
the liquidation value of our assets, the current or historical market price of
those units, our net book value, or our going concern value to be
material. We did not consider the net book value in that, as
shown in the pro forma balance sheet set forth below, the reclassification
transaction and subsequent deregistration of our units will have only an
insignificant effect on the overall net book value of our units. In addition,
neither the economic rights nor preferences of our unaffiliated unit holders
will change and will remain the same as our affiliated unit holders as a result
of the reclassification transaction. Additionally, our unaffiliated
unit holders are afforded the right to participate in our profits and losses on
the same basis as our affiliated unit holders and none of our unaffiliated unit
holders are being cashed out as a part of the reclassification
transaction.
We did not consider the current market
prices in that our units are not traded on a public market but instead are
traded in privately negotiated transactions, in which the current market price
may or may not be determinative. Any effect that the reclassification
transaction has on the current market price will be the same for our
unaffiliated unit holders and affiliated unit holders alike. In
addition, neither the economic rights nor preferences of our unaffiliated unit
holders will change and will remain the same as our affiliated unit holders as a
result of the reclassification. Moreover, none of our unaffiliated
unit holders are being cashed out as a result of the reclassification
transaction.
We did
not consider the historical market prices in that we do not expect the
reclassification transaction to have any effect on the historical market
prices. Our units are not traded on a public market and are instead
traded only in privately negotiated transactions and thus the historical market
prices may or may not be determinative of actual prices.
We did not consider the going concern
value in that the going concern value will be determined by the market at the
time of a sale, merger or other form of business combination. The
reclassification transaction will have only an insignificant effect on the
Company’s value on a going forward basis – a $205,000 per year savings – and
will not be determinative of the going concern value.
We did
not consider liquidation value in that the Company believes the reclassification
transaction will not have a material effect on the liquidation value of our
units. Pursuant to our Second Amended and Restated Operating
Agreement and our Second Amended and Restated Member Control Agreement, the
rights of our unaffiliated, like our affiliated unit holders, will not change
and all our unit holders will be afforded the right to continue to share equally
in the liquidation of the Company’s assets and in any residual funds allocated
to our unit holders. In addition, our Second Amended and Restated
Operating Agreement and our Second Amended and Restated Member Control Agreement
provides all our unit holders, both affiliated and unaffiliated, an equal vote
in the dissolution of the Company.
We did not consider any repurchases of
units by the Company over the past two years in that even if the Company had
repurchased any membership units over the past two years, the reclassification
transaction, if approved, would have been effective in reducing the number of
Class A unit holders to fewer than 300 and the number of Class B and Class C
unit holders to fewer than 500.
We also did not consider any report,
opinion, or appraisal or firm offer by unaffiliated parties within the past two
years in that there were none. The Company did not receive any
report, opinion or appraisal or any firm offers within the past two
years.
None of the members of our board of
governors or management received any reports, opinions or appraisals from any
outside party relating to the reclassification transaction or the fairness of
the consideration to be received by our unit holders.
Procedural Fairness
We
believe the reclassification transaction is procedurally fair to our
unaffiliated unit holders, including those that will continue to hold our common
equity units as Class A Units and those that will be reclassified as Class B or
Class C unit holders. In concluding that the reclassification
transaction is procedurally fair to our unaffiliated unit holders who will
receive Class A Units, Class B Units or Class Units, the board of governors
considered a number of factors. The factors that our board of
governors considered positive for our unaffiliated unit holders who will receive
Class A Units, Class B Units, or Class C Units, included the
following:
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The
reclassification transaction is being effected in accordance with the
applicable requirements of North Dakota
law.
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Our
board discussed the possibility of forming an independent special
committee to evaluate the reclassification transaction; however, the board
believed that the fact that our board would be treated the same as the
other unaffiliated unit holders and that no consideration had been given
to the unit cutoff number relative to the unit ownership of the board
members, a special committee for the reclassification transaction was not
needed, as the board was able to adequately balance the competing interest
of the unaffiliated unit holders in accordance with their fiduciary
duties.
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Our
board retained and received advice from legal counsel in evaluating the
terms of the reclassification transaction, including the possible creation
of a special committee of the board to evaluate the reclassification
transaction and the terms of the reclassification as provided in the
Second Amended and Restated Operating Agreement and the Second Amended and
Restated Member Control Agreement, including the balancing of the rights
of unaffiliated and affiliated Class A unit holders, Class B unit holders,
and Class C unit holders.
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Management
and our board considered alternative methods of effecting a transaction
that would result in our becoming a non-SEC reporting company, each of
which was determined to be impractical, more expensive than the
reclassification transaction, involving a cash-out of certain of our unit
holders, or potentially ineffective in achieving the goals of allowing
unit holders to retain an equity ownership in the Company while at the
same time, eliminating the costs and burdens of being a publicly reporting
company.
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Unaffiliated
unit holders were given notice that they had until May 21, 2010 to acquire
sufficient units so that they held 50,000 or more units prior to the
reclassification transaction or to sell sufficient units so that they held
less than 50,000 units or less than 10,001 units, respectively, prior to
the reclassification transaction, to determine whether such unit holders
will own Class A, Class B or Class C Units after the reclassification
transaction.
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To
implement the reclassification transaction it must be approved by the
affirmative vote of a majority of the Membership Voting Interests
represented at the combined special and annual
meeting.
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Our board
of governors considered each of the foregoing factors to weigh in favor of the
procedural fairness of the reclassification transaction to all our unaffiliated
unit holders, whether they are receiving Class A Units, Class B Units or Class C
Units.
The board
is aware of, and has considered, the impact of the following potentially
countervailing factors, which affect both our smaller unaffiliated unit holders
receiving Class B or Class C Units as well as those receiving Class A Units to
the same degree, on the procedural fairness of the reclassification
transaction:
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Although
the interests of the unaffiliated unit holders receiving Class B or Class
C Units are different from the interests of the unaffiliated unit holders
owning Class A Units and may create conflicts of interest in connection
with the reclassification transaction, neither the full board nor any of
the governors retained an independent, unaffiliated representative to act
solely on behalf of the unaffiliated unit holders receiving Class B or
Class C Units for the purpose of negotiating the terms of the
reclassification transaction or preparing a report concerning the fairness
of the reclassification transaction. However, our board members
will be treated the same as the unaffiliated unit holders in the proposed
transaction and certain of our current board members will be reclassified
as Class B unit holders.
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The
transaction is not structured to require approval of at least a majority
of unaffiliated unit holders, although at the time the reclassification
transaction was approved by our board of governors on March 19, 2010,
members of our board and our executive officers then collectively held
only 8.47% of our outstanding common equity
units.
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We
did not solicit any outside expressions of interest in acquiring the
Company.
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We
did not receive a report, opinion, or appraisal from an outside party as
to the value of our units, the fairness of the transaction to those unit
holders receiving Class B or Class C Units or the fairness of the
transaction to RTE.
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Our board
of governors believes that the foregoing potentially countervailing factors did
not, individually or in the aggregate, outweigh the overall procedural fairness
of the reclassification transaction to our unaffiliated unit holders, whether
they will be receiving Class A, Class B or Class C Units, and the foregoing
factors are outweighed by the procedural safeguards previously
described. In particular, with reference to the lack of a special
committee, the board felt that the consideration of the transaction by the full
board, whose sole conflict of interest is a relatively insignificant increase in
aggregate voting unit ownership following the reclassification transaction, was
a sufficient procedural safeguard that made it unnecessary to form a special
committee or retain an independent fairness advisor.
In
reaching its conclusion that the reclassification transaction is fair to our
unaffiliated unit holders, whether they will be receiving Class A Units, Class B
Units or Class C Units, the board did not consider the current or historical
market price of our units, our going concern value, our net book value or the
liquidation value of our assets to be material. Our board did not
believe these factors to be material because our unit holders are not being
“cashed out” in connection with the reclassification transaction, and we will
continue to have the same number of member units outstanding with the same
material economic rights and preferences. As a result, our smaller
unit holders will continue to hold an equity interest in RTE as Class B or Class
C unit holders and will therefore participate equally, and on the same basis
that they would participate absent a transaction, with the holders of our Class
A Units in our profits, losses and the receipt of
distributions. See
“Market Price of RTE
Units and Distribution Information – Comparative Market Price Data” beginning on
page __ for the current and historical market price of our
units. Instead of the foregoing factors, the board subjectively
considered the collective advantages of the Class B or Class C Units, including
the right of our Class B member units to elect governors, and our Class C
members will be allowed to transfer units in the same manner as Class A and B
members. The board also subjectively considered the relative
disadvantages of the three classes, including the limitation on voting and
decision-making in the case of the Class B and C member units. In
addition, the board also evaluated the benefits shared by all the Class A, Class
B and Class C Units, such as the ability to vote upon certain events such as
dissolution of the Company, the ability to benefit from the cost savings
associated with the reclassification transaction and the opportunity to share in
our future growth and earnings.
As a
result of the analysis described above, we believe that the reclassification
transaction is substantively and procedurally fair to all unit holders including
our unaffiliated unit holders receiving Class A Units, Class B Units or Class C
Units, for the reasons and factors described above. In reaching this
determination, we have not assigned specific weight to particular factors, and
we considered all factors as a whole. None of the factors considered
led us to believe that the reclassification transaction is unfair to any of our
unit holders including our unaffiliated unit holders.
We have
not made any provision in connection with the reclassification transaction to
grant our unaffiliated unit holders access to our Company files beyond the
access granted generally under our Amended and Restated Operating Agreement, our
Amended and Restated Member Control Agreement, and North Dakota Law, or to
obtain counsel or appraisal services at our expense. Nor did we
request or receive any reports, opinions or appraisals from any outside party
relating to the reclassification transaction or the monetary value of the Class
A Units, Class B Units or Class C Units. Our unit holders are not
being “cashed out” in connection with the reclassification transaction, and we
will continue to have the same number of membership units outstanding with the
same material economic rights and preferences. As a result, our
smaller unit holders will continue to hold an equity interest in RTE as Class B
or Class C unit holders and will therefore participate equally, and on the same
basis that they would participate absent a transaction, with the holders of our
Class A Units in our profits and losses and the receipt of
distributions. With respect to our unaffiliated unit holders’
access to our Company files, our board determined that this proxy statement,
together with our other filings with the SEC and information they may obtain
pursuant to our Amended and Restated Operating Agreement and our Amended and
Restated Member Control Agreement, provide adequate information for our
unaffiliated unit holders. Under the North Dakota Limited Liability
Company Act, our Amended and Restated Operating Agreement and our Amended and
Restated Member Control Agreement, subject to compliance with our safety,
security and confidentiality procedures and guidelines, our members have rights
to review lists of our members and governors, copies of our articles of
organization, operating agreements, tax returns for the last three years, and
financial statements for the most recent fiscal year. Any member may
inspect and copy these records during normal business hours if they have a
proper purpose reasonably related to their interest as a member of
RTE. With respect to obtaining counsel or appraisal services at our
expense, the board did not consider these actions necessary or
customary. In deciding not to adopt these additional procedures for
access to our company files or to obtain counsel or appraisal services for our
members at our expense, the board also took into account factors such as RTE’s
size and the cost of such procedures.
We have
not structured the transaction to require the approval of at least a majority of
unaffiliated unit holders. Because our affiliated and unaffiliated
unit holders will be treated identically in terms of the approval process of the
reclassification transaction, the board believes a special vote is not
necessary. In addition, the governors have not retained an
unaffiliated representative to act solely on behalf of unaffiliated security
holders. Again, because our affiliated and unaffiliated unit holders
will be treated identically in terms of the approval process of the
reclassification transaction, the board believes an unaffiliated representative
is unnecessary.
Board
Recommendation
Our board of governors believes the
terms of the reclassification transaction are fair and in the best interests of
our unit holders, regardless of whether they will receive Class A Units, Class B
Units or Class C Units as a result of the reclassification, and unanimously
recommends that you vote “
FOR
” the reclassification
transaction and “
FOR
”
approval of the proposed amendments to our Amended and Restated Operating
Agreement and our Amended and Restated Member Control Agreement contained in the
proposed Second Amended and Restated Operating Agreement and the proposed Second
Amended and Restated Member Control Agreement that will, among other things,
effect the reclassification.
Purpose
and Structure of the Reclassification Transaction
The purposes of the reclassification
transaction are to:
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Consolidate
ownership of our units in under 300 unit holders of record of our common
equity units, which will suspend our SEC reporting requirements and
thereby achieve significant cost savings. We estimate that we
will be able to reallocate resources and eliminate costs and avoid
anticipated future costs of approximately $205,000 on an annual basis by
eliminating the requirement to make periodic reports and reducing the
expenses of unit holder communications. We will also realize
cost savings by avoiding the need to add additional staff and from reduced
staff and management time spent on reporting and securities law compliance
matters.
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Help
protect sensitive business information from required or inadvertent
disclosure that might benefit our
competitors.
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Allow
our management and employees to refocus time spent on SEC reporting
obligations and unit holder administrative duties to our core
business.
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Reduce
the expectation to produce short-term per unit earnings, thereby
increasing management’s flexibility to consider and balance actions
between short-term and long-term growth
objectives.
|
For
further background on the reasons for undertaking the reclassification
transaction at this time, see “Overview of the Reclassification Transaction”
beginning on page __ and “Reasons for the Reclassification Transaction; Fairness
of the Reclassification Transaction; Board Recommendation” beginning on page
__.
The
structure of the reclassification transaction will give all our unit holders the
opportunity to retain an equity interest in RTE and therefore to participate in
any future growth and earnings of the Company. Because we are not
cashing out any of our unit holders, this structure minimizes the costs of our
becoming a non-SEC reporting company while achieving the goals outlined in this
proxy statement.
Our board
elected to structure the transaction to take effect at the record unit holder
level, meaning that we will look at the number of units registered in the name
of a single holder to determine if that holder’s units will be
reclassified. The board chose to structure the transaction this way
in part because it determined that this method would provide us with the best
understanding at the effective time of how many unit holders would receive Class
B or Class C Units because we will be able to have a complete and final list of
all record unit holders at the effective time. In addition, on April
7, 2010, the Company sent a letter to its unit holders notifying them that they
had until May 21, 2010 to make transfers of units prior to the proposed
reclassification of units. The purpose of this letter was to allow unit holders
the opportunity to make transfers prior to the proposed reclassification so that
they could own the requisite number of units to be in their desired class, which
our board felt would enhance the substantive fairness of the transaction to all
unit holders. Although providing this flexibility generated an
element of uncertainty, in that the reclassification, if approved, may not have
eliminated as many of our Class A unit holders as anticipated, our board felt
that the threshold ratio of 50,000 or more units allowed a sufficient margin for
unit holders to transfer their units in or out of street
name. Overall, our board determined that structuring the
reclassification transaction as one that would affect unit holders at the record
holder level would be the most efficient and cost-effective way to achieve its
goals of deregistration, notwithstanding any uncertainty that may have been
created by giving unit holders the flexibility to transfer their holdings
through May 21, 2010. We have restricted transfers after May 21, 2010
to allow the Company to determine definitively the number of Class A, Class B
and Class C members that would result from the reclassification prior to
providing our members with proxy materials. This restriction on
transfers applies only to optional transfers and does not restrict transfers as
a result of a court order, such as upon the occurrence of the death of a
member.
For
further background on the alternative structures considered by our board of
governors please see “Overview of the Reclassification Transaction” beginning on
page __ and “—Reasons for the Reclassification Transaction; Fairness of the
Reclassification Transaction; Board Recommendation” beginning on page
__.
Effects
of the Reclassification Transaction on RTE; Plans or Proposals after the
Reclassification Transaction
The reclassification transaction will
have various positive and negative effects on RTE, which are described
below.
Effect
of the Proposed Transaction on Our Outstanding Units.
As of the record date, the number of
outstanding units was 40,193,973. Based upon our best estimates, if the
reclassification transaction had been consummated as of the record date,
7,630,765 of the outstanding units would be reclassified as Class B Units issued
and approximately 3,547,110 outstanding units would be reclassified as Class C
units issued. The total number of common equity units would decrease
from approximately 40,193,973 to approximately 29,016,098 units and would be
reclassified as Class A Units. The total number of Class A
common equity unit holders of record would be reduced from approximately 917 to
approximately 174. We have no other current plans, arrangements or
understandings to issue any member units as of the date of this
proxy.
Effect of the Proposed Transaction on
our Class B or Class C Units
.
The amendments to our Amended and
Restated Operating Agreement and our Amended and Restated Member Control
Agreement will authorize the issuance of three separate and distinct classes of
units, Class A, Class B, and Class C Units. After completion of the
reclassification transaction, we will have approximately 29,016,098 Class A
Units outstanding, 7,630,765 Class B Units outstanding and 3,547,110 Class C
Units outstanding.
Termination
of Securities Exchange Act Registration and Reporting Requirements
Upon the completion of the
reclassification transaction, we expect that our common equity units, classified
as Class A Units, will be held by fewer than 300 record unit holders and each of
the Class B and Class C Units will be held by fewer than 500 record unit
holders. Accordingly, our obligation to continue to file periodic
reports with the SEC will be suspended pursuant to Rule 12h-3 of the Securities
Exchange Act of 1934, as amended.
The suspension of the filing
requirement will substantially reduce the information required to be furnished
by us to our unit holders and to the SEC. Therefore, we anticipate
that we will eliminate costs and avoid future costs associated with these filing
requirements, which we estimate to be approximately $205,000 on an annual
basis. These costs are broken down as follows:
Reduction
in Accounting and Auditing Expenses
|
|
$
|
85,000
|
|
|
|
|
|
|
SEC
Counsel
|
|
$
|
60,000
|
|
|
|
|
|
|
XBLR
Edgarization Reporting Compliance
|
|
$
|
50,000
|
|
|
|
|
|
|
SOX
compliance / internal control testing
|
|
$
|
5,000
|
|
|
|
|
|
|
Miscellaneous,
including Printing and Mailing
|
|
$
|
5,000
|
|
|
|
|
|
|
Total
|
|
$
|
205,000
|
|
We will
apply for termination of the registration of our units and suspension of our SEC
reporting obligations as soon as practicable following completion of the
reclassification transaction. Following completion of the
reclassification transaction, we intend to continue to make available to our
unit holders annual and quarterly financial information about RTE.
Potential
Registration of the Class B or Class C Units or Discontinuation of our Suspended
Duty to Report
After the reclassification transaction,
we anticipate that there will be up to approximately 335 Class B and 408 Class C
unit holders of record. If the number of record holders of our Class
B Units or our Class C Units exceeds 500 on the last day of any given fiscal
year, RTE will be required to register the Class B or Class C Units under
Section 12(g) of the Securities Exchange Act. As a result, we would
be subject to all of the reporting and disclosure obligations under the
Securities Exchange Act and the Sarbanes-Oxley Act to which we are currently
subject. For this reason, the proposed amendments to our Amended and Restated
Operating Agreement and our Amended and Restated Member Control Agreement
contained in the Second Amended and Restated Operating Agreement and the Second
Amended and Restated Member Control Agreement include a provision that gives our
board the authority to disallow a transfer of Class B or Class C Units if it
believes that a transfer will result in the Class B or Class C Units being held
by 500 or more respective holders or another number that otherwise obligates the
Company to register its Class B or Class C units under Section 12(g) of the
Securities Exchange Act. We do not expect any significant change in
the number of record holders of Class B or Class C Units in the near term that
will obligate us to register our Class B or Class C Units.
Similarly,
if the number of our Class A unit holders of record reaches or exceeds 300 on
the last day of any given fiscal year, the suspension of our duty to file
reports under Section 15(d) of the Securities Exchange Act would be
discontinued, and as a result, we would be again subject to the reporting and
disclosure obligations under the Securities Exchange Act and the Sarbanes-Oxley
Act to which we are currently subject. For this reason, the Second
Amended and Restated Operating Agreement and the Second Amended and Restated
Member Control Agreement also contain a new restriction on the transfer of Class
A Units that gives our board of governors the authority to disallow a transfer
of Class A Units if it believes that the transfer will result in the Class A
Units being held by 300 or more Class A unit holders. We estimate
that following the reclassification transaction, we will have 174 Class A unit
holders of record and do not anticipate any significant change in the number of
Class A unit holders of record that would obligate us to resume our periodic
reporting with the SEC.
Effect on Trading of Class A
Units
Our units are not traded on an exchange
and are not otherwise actively traded, although we have a qualified matching
service managed by Alerus, an alternative trading system as defined by the
SEC.
Because we will no longer be required
to maintain current public information by filing reports with the SEC, and
because of the reduction of the number of our record unit holders of our common
equity units and the fact that our units will only be tradable in privately
negotiated transaction, the liquidity of our units may be reduced following the
reclassification transaction.
Financial Effects of the
Reclassification Transaction
We expect that the professional fees
and other expenses related to the reclassification transaction of approximately
$130,000 will not have any material adverse effect on our liquidity, results of
operations or cash flow. See “Fees and Expenses” beginning on page __
for a description of the fees and expenses we expect to incur in connection with
the reclassification transaction. See “Financing of the
Reclassification Transaction” on page __ for a description of how the
reclassification transaction will be financed.
Effect on Conduct of Business after the
Transaction
We expect our business and operations
to continue as they are currently being conducted and, except as disclosed
below, the transaction is not anticipated to have any effect upon the conduct of
our business.
Effect
on Our Governors and Executive Officers
It is not anticipated that the
reclassification transaction will have any effect on our governors and executive
officers, other than with respect to their relative unit ownership, and,
therefore, will be Class A unit holders if the reclassification transaction is
approved. We expect that some of our governors will hold 50,000 or more units
immediately prior to the reclassification transaction. Our executive
officers do not currently own units in our company. Additionally,
some of our governors beneficially own units at the record holder level in
increments of less than 50,000 units, and therefore will also be Class B or
Class C unit holders if the reclassification transaction is
approved.
If the reclassification transaction is
approved, there will be fewer Class A units outstanding after the
reclassification transaction than the total units currently
outstanding. As a result, our governors and executive officers will
hold a larger relative percentage of the voting interests of RTE. As
of the record date, these governors and executive officers collectively
beneficially held and had voting power over approximately 5,989,161 units, or
14.90% of our units.
The annual compensation paid by us to
our officers and governors will not increase as a result of the reclassification
transaction, nor will the reclassification transaction result in any material
alterations to any existing employment agreements with our
officers.
Plans or Proposals
Other than as described in this proxy
statement, neither we nor our management have any current plans or proposals to
effect any extraordinary corporate transaction, such as a merger, reorganization
or liquidation, to sell or transfer any material amount of our assets, to change
our board of governors or management, to change materially our indebtedness or
capitalization or otherwise to effect any material change in our corporate
structure or business. As stated throughout this proxy statement, we
believe there are significant advantages in effecting the reclassification
transaction and becoming a non-reporting company. Although our
management does not presently have any intention to enter into any transaction
described above, there is always a possibility that we may enter into such an
arrangement or transaction in the future, including, but not limited to,
entering into a merger or acquisition transaction, making a public or private
offering of our member units or entering into any other arrangement or
transaction the board may deem appropriate and in the best interests of the
Company.
Effects
of the Reclassification Transaction on Unit Holders of RTE
The general effects of the
reclassification transaction on the unit holders of RTE are described
below.
Effects of the Reclassification
Transaction on Class A Unit Holders
The reclassification transaction will
have both positive and negative effects on the Class A unit holders. All of
these changes will affect affiliated and unaffiliated Class A unit holders in
the same way. The board of governors of RTE considered each of the following
effects in determining to approve the reclassification transaction.
Benefits
:
As a result of the reclassification
transaction, the unaffiliated and affiliated Class A unit holders
will:
|
·
|
Realize
the potential benefits of termination of registration of our units,
including reduced expenses as a result of no longer being required to
comply with reporting requirements under the Exchange
Act;
|
|
·
|
Be
entitled to vote on all matters brought before the members of RTE, except
as otherwise provided by the Second Amended and Restated Operating
Agreement, the Second Amended and Restated Member Control Agreement or
North Dakota law;
|
|
·
|
Be
entitled to transfer any number of units to any person approved by the
governors in accordance with the terms of the Second Amended and Restated
Operating Agreement and the Second Amended and Restated Member Control
Agreement; and
|
|
·
|
Realize
enhanced voting control over RTE in comparison to other classes of units
due to the voting limitations placed on Class B and C unit
holders.
|
Detriments
:
As a result of the reclassification
transaction, the unaffiliated and affiliated Class A unit holders
will:
|
·
|
Be
required to have their member units reclassified involuntarily for Class A
Units, for which they will receive no additional
consideration;
|
|
·
|
Hold
unregistered securities and therefore will lose the benefits of holding
Section 15 registered securities, such as access to the information
concerning RTE required to be contained in the Company’s periodic reports
to the SEC and which the Company may choose not to otherwise distribute to
unit holders, the requirement that our officers certify the accuracy of
our financial statements, and the benefits derived by the imposition of
the requirements of the Sarbanes-Oxley Act of
2002;
|
|
·
|
Hold
restricted securities which will require an appropriate exemption from
registration to be eligible for
transfer;
|
|
·
|
Bear
transfer restrictions as provided in our Second Amended and Restated
Operating Agreement and our Second Amended and Restated Member Control
Agreement, such that our governors will be entitled to, at their sole
discretion, approve or disallow any proposed transfer of the Class A
Units; and
|
|
·
|
Bear
the risk of a decrease in the market value of the Class A Units due to the
reduction in public information concerning the Company as a result of us
not being required to file reports under the Exchange Act, which may
adversely affect the already limited liquidity of the
units.
|
Effects
of the Reclassification Transaction on Class B Unit Holders
The
reclassification transaction will have both positive and negative effects on the
Class B unit holders. All of these changes will affect affiliated and
unaffiliated Class B unit holders in the same way. The board of governors of RTE
considered each of the following effects in determining to approve the
reclassification transaction.
Benefits
:
As a result of the reclassification
transaction, the affiliated and unaffiliated Class B unit holders
will:
|
·
|
Realize
the potential benefits of termination of registration of our units,
including reduced expenses as a result of no longer needing to comply with
reporting requirements under the Exchange
Act;
|
|
·
|
Continue
to hold an equity interest in RTE and share in our profits, losses and
distributions on the same basis as our Class A unit holders;
and
|
|
·
|
Be
entitled to transfer any number of units to any person approved by the
governors in accordance with the terms of the Second Amended and Restated
Operating Agreement and the Second Amended and Restated Member Control
Agreement.
|
Detriments
:
As a
result of the reclassification transaction, affiliated and
unaffiliated the Class B unit holders will:
|
·
|
Be
required to have their member units reclassified involuntarily for Class B
units, for which they will receive no additional
consideration;
|
|
·
|
Be
entitled to vote only to elect members to the board of governors and upon
a proposed dissolution of the Company. Therefore, it is
possible that a future merger, sale, consolidation or other business
combination may be approved by the Class A Members only and the Class B
unit holders will have no voting rights in connection with such
transactions;
|
|
·
|
Be
entitled to vote only on amendments to our Second Amended and Restated
Operating Agreement and our Second Amended and Restated Member Control
Agreement that would modify the limited liability of the member or alter
the member’s Financial Rights; and
|
|
·
|
Hold
restricted securities which will require an appropriate exemption from
registration to be eligible for
transfer.
|
Effects
of the Reclassification Transaction on Class C Unit Holders
The
reclassification transaction will have both positive and negative effects on the
Class C unit holders. All of these changes will affect affiliated and
unaffiliated Class C unit holders in the same way. The board of governors of RTE
considered each of the following effects in determining to approve the
reclassification transaction.
Benefits
:
As a result of the reclassification
transaction, the affiliated and unaffiliated Class C unit holders
will:
|
·
|
Realize
the potential benefits of termination of registration of our units,
including reduced expenses as a result of no longer needing to comply with
reporting requirements under the Exchange
Act;
|
|
·
|
Be
entitled to transfer any number of units to any person approved by the
governors in accordance with the terms of the Second Amended and Restated
Operating Agreement and the Second Amended and Restated Member Control
Agreement; and
|
|
·
|
Continue
to hold an equity interest in RTE and share in our profits, losses and
distributions on the same basis as our Class A unit
holders.
|
Detriments
:
As a
result of the reclassification transaction, the affiliated and unaffiliated
Class C unit holders will:
|
·
|
Be
required to have their member units reclassified involuntarily for Class C
Units, for which they will receive no additional
consideration;
|
|
·
|
Be
entitled to vote only upon a proposed dissolution of the Company and on
amendments to our Second Amended and Restated Operating Agreement and our
Second Amended and Restated Member Control Agreement that would modify the
limited liability of the member or alter the member’s Financial
Rights. Therefore, it is possible that a future merger, sale,
consolidation or other business combination may be approved by the Class A
Members only and the Class C unit holders will have no voting rights in
connection with such transactions;
and
|
|
·
|
Hold
restricted securities which will require an appropriate exemption from
registration to be eligible for
transfer.
|
Effects
of the Reclassification Transaction on Affiliated Unit Holders
In
addition to the effects of the reclassification transaction on unit holders
generally, which are described in the previous section, the reclassification
transaction will have some additional effects on our executive officers and
governors. As used in this proxy statement, the term “affiliated unit holders”
means any unit holder who is a director or executive officer of RTE and the term
“unaffiliated unit holder” means any member other than an affiliated unit
holder.
As a
result of the reclassification transaction, our affiliated unit holders
will:
|
·
|
Have
no further reporting obligations under the Exchange Act
.
After the
reclassification transaction, our units will not be registered under the
Exchange Act. As a result, our executive officers, governors and other
affiliates will no longer be subject to many of the reporting requirements
and restrictions of the Exchange Act, and information about their
compensation and unit ownership will not be publicly available;
and
|
|
·
|
Lose
the availability of Rule 144. Because our units will not be
registered under the Exchange Act after the reclassification transaction
and we will no longer be required to furnish publicly available periodic
reports, our executive officers and governors will lose the ability to
dispose of their units under Rule 144 of the Securities Act of 1933, which
provides a safe harbor for resales of securities by affiliates of an
issuer.
|
Record
and Beneficial Ownership of Membership Units of RTE
It is
important that our unit holders understand how units that are held by them in
“street name” will be treated for purposes of the reclassification transaction
described in this proxy statement. Unit holders who have transferred their units
of RTE into a brokerage or custodial account are no longer shown on our
membership register as the record holder of these units. Instead, the brokerage
firms or custodians typically hold all units of RTE that its clients have
deposited with it through a single nominee; this is what is meant by “street
name.” If that single nominee is the unit holder of record of 50,000
or more units, then the units registered in that nominee’s name will be renamed
as Class A Units. At the end of this transaction, these beneficial owners will
continue to beneficially own the same number of units as they did at the start
of this transaction. If you hold your units in “street name,” you should talk to
your broker, nominee or agent to determine how they expect the reclassification
transaction to affect you. Because other “street name” holders who hold through
your broker, agent or nominee may have adjusted their holdings prior to the
reclassification transaction, you may have no way of knowing how your units will
be reclassified in the transaction.
Interests
of Certain Persons in the Reclassification Transaction
Our
executive officers and governors who are also unit holders will participate in
the reclassification transaction in the same manner and to the same extent as
all of our other unit holders. We anticipate that some of our
governors will own 50,000 or more units, and therefore will be Class A unit
holders if the reclassification transaction is approved. Because of
the voting restrictions placed on Class B and C units, these governors may
experience a larger relative percentage of voting power than they previously
held. This represents a potential conflict of interest because our
governors unanimously approved the reclassification transaction and are
recommending that you approve it. Despite this potential conflict of
interest, the board believes the proposed reclassification transaction is fair
to all of our unit holders for the reasons discussed in the proxy
statement. Some of our governors beneficially own units at the record
holder level in increments of less than 50,000 units, and therefore will be
Class B or Class C unit holders if the reclassification transaction is
approved.
The fact
that percentage ownership for some of our director’s of our common equity Class
A member units will increase as a result of the reclassification transaction was
not a consideration in the board’s decision to approve the reclassification
transaction or in deciding its terms, including setting the 50,000 Class A unit
threshold. In this regard, the governors as a group will be treated exactly the
same as other unit holders. In addition, the board determined that
any potential conflict of interest created by the governors’ ownership of our
Class A Units is relatively insignificant. The board did not set the
50,000 Class A Unit threshold to avoid exchanging the Class A member units of
any governors. In addition, the increase in
each director’s percentage ownership of our Class A Units
resulting from the reclassification transaction is expected to be
insignificant. As a group, the percentage beneficial ownership and
voting power of all of our governors and executive officers would only increase
approximately 5.69%, from approximately 14.90% to approximately 20.59%, after
the reclassification transaction. This is also is very unlikely to
have a practical effect on their collective ability to control the
Company.
Our board of governors was aware of the
actual or potential conflicts of interest discussed above and considered them
along with the other matters that have been described in this proxy statement
under the captions “Overview of the Reclassification Transaction” beginning on
page __, “Reasons for the Reclassification Transaction; Fairness of the
Reclassification Transaction; Board Recommendation,” beginning on page __ and
“Effects of the Reclassification Transaction on Unit Holders of RTE” beginning
on page __.
Except as provided in this paragraph,
none of our executive officers or governors, who beneficially owns an aggregate
of 50,000 units, has indicated to us that he or she intends to sell some or all
of his or her units during the period between the public announcement of the
transaction and the effective date. In addition, except as provided
in this paragraph, none of these individuals has indicated his or her intention
to divide his or her units among different record holders so that fewer than
50,000 units are held in each account so that the holders would receive Class B
or C Units. Effective May 21, 2010, one of our governors, Jody Hoff,
transferred without consideration, 24,000 units owned individually to units
owned jointly with his spouse. Effective the same date, Richardton
Investments, LLC, transferred without consideration, 17,000 units owned by the
entity to Jody Hoff and Marla Hoff as joint tenants. The effect of these
transactions will be that the number of units owned by Jody Hoff individually
will decrease to 0, and the number of units owned by Jody and Marla Hoff as
joint tenants will increase to 51,000.
Financing
of the Reclassification Transaction
We
estimate that the reclassification transaction will cost approximately $130,000,
consisting of professional fees and other expenses payable by or related to the
reclassification transaction. See “Fees and Expenses” beginning on
page __ for a breakdown of the expenses associated with the reclassification
transaction. We intend to pay the expenses of the reclassification
transaction with working capital.
Material
Federal Income Tax Consequences of the Reclassification Transaction
The
following discussion is a general summary of the anticipated material United
States federal income tax consequences of the reclassification
transaction. This discussion does not consider the particular facts
or circumstances of any holder of our units. This discussion assumes
that you hold, and will continue to hold, your Class A, B, or C Units as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code of
1986, as amended, which we refer to as the “Code.” The federal income
tax laws are complex and the tax consequences of the reclassification may vary
depending upon each unit holder’s individual circumstances or tax
status. Accordingly, this description is not a complete description
of all of the potential tax consequences of the reclassification and, in
particular, may not address United States federal income tax considerations that
may affect the treatment of holders of units subject to special treatment under
United States federal income tax law (including, for example, foreign persons,
financial institutions, dealers in securities, traders in securities who elect
to apply a mark-to-market method of accounting, insurance companies, tax-exempt
entities, holders who acquired their units pursuant to the exercise of an
employee unit option or right or otherwise as compensation and holders who hold
units as part of a “hedge,” “straddle” or “conversion
transaction”).
This
discussion is based upon the Code, regulations promulgated by the United States
Treasury Department, court cases and administrative rulings, all as in effect as
of the date hereof, and all of which are subject to change at any time, possibly
with retroactive effect. No assurance can be given that, after any
such change, this discussion would not be different. Furthermore, no
opinion of counsel or ruling from the Internal Revenue Service has been or will
be sought or obtained with respect to the tax consequences of the
reclassification transaction, and the conclusions contained in this summary are
not binding on the Internal Revenue Service. Accordingly, the
Internal Revenue Service or ultimately the courts could disagree with the
following discussion.
Federal Income Tax Consequences to
RTE
The reclassification will likely be
treated as a tax-free “recapitalization” for federal income tax
purposes. As a result, we believe that the reclassification will not
have any material federal income tax consequences to us.
Federal
Income Tax Consequences to Class A, B, and C Unit Holders
Unit
holders receiving Class A, B, or C Units in exchange for their existing units
will not recognize any gain or loss in the reclassification. You will
have the same adjusted tax basis and holding period in your Class A, B, or C
Units as you had in your units immediately prior to the
reclassification. The reclassification will have no effect on your
ability to use otherwise suspended passive activity losses or net operating loss
carry forwards.
The
discussion of anticipated material United States federal income tax consequences
of the reclassification set forth above is based upon present law, which is
subject to change possibly with retroactive effect. You should consult your tax
advisor as to the particular federal, state, local, foreign and other tax
consequences of the reclassification, in light of your specific
circumstances.
Appraisal
and Dissenters’ Rights
The reclassification transaction,
amendments to our Amended and Restated Operating Agreement, and amendments to
our Amended and Restated Member Control Agreement are not circumstances in which
the North Dakota Limited Liability Company Act or the Company’s current member
control agreement provides members with dissenters’ rights or appraisal rights.
Pursuant to the North Dakota Limited Liability Company Act, dissenters’ rights
are available to members under the following circumstances: (1) an amendment to
the articles of organization, but not an amendment of the member control
agreement or operating agreement, which materially and adversely affects the
rights or preferences of the membership interests of the dissenting member; (2)
a sale, lease, transfer, or other disposition of property and assets requiring
member approval; (3) a plan of merger; (4) a plan of exchange; (5) a plan of
conversion; or (6) any other action taken to which the articles of organization,
member control agreement, operating agreement, or a resolution approved by the
Board of Governors directs that dissenting members may obtain payment for their
membership interests. Our articles of organization, member control agreement and
operating agreement only provide dissenters rights to the extent of North Dakota
Section 10-32-54 of the Limited Liability Company.
Other rights or actions under North
Dakota law or federal or state securities laws may exist for unit holders who
can demonstrate that they have been damaged by the reclassification transaction.
Although the nature and extent of these rights or actions are uncertain and may
vary depending upon facts or circumstances, unit holder challenges to actions of
the Company in general are related to the fiduciary responsibilities of limited
liability company officers and governors and to the fairness of limited
liability company transactions.
Regulatory
Requirements
In connection with the reclassification
transaction, we will be required to make a number of filings with, and obtain a
number of approvals from, various federal and state governmental agencies,
including, complying with federal and state securities laws, which includes
filing this proxy statement on Schedule 14A and a transaction statement on
Schedule 13E-3 with the SEC.
Fees
and Expenses
We will be responsible for paying the
reclassification transaction related fees and expenses, consisting primarily of
fees and expenses of our attorneys, and other related charges. We
estimate that our expenses will total approximately $130,000, assuming the
reclassification transaction is completed. This amount consists of
the following estimated fees:
Description
|
|
Amount
|
|
Legal
fees and expenses
|
|
$
|
125,000
|
|
Printing,
mailing costs and miscellaneous expenses
|
|
$
|
5,000
|
|
Total
|
|
$
|
130,000
|
|
QUESTIONS
RELATED TO GOVERNOR ELECTIONS
Q:
|
What
is the voting requirement to elect the
governors?
|
A.
|
Governors
are elected by a plurality of the votes cast. This means that the
individuals nominated for election to each group who receive the most
votes will be elected. The candidates receiving the highest number of
votes for each group, up to the number of governors to be elected for that
group, shall be elected.
|
Q.
|
How
did you select who to nominate for
governors?
|
A.
|
The
Nominating Committee of our Board of Governors undertook a detailed review
of all prospective nominees that either submitted their own names for
consideration, had their names submitted by another member for
consideration for election to our Board of Governors, or who the
Nominating Committee contacted directly as of the advance notice deadline
for member proposals. The Board received timely notice from Lynn Bergman
that he wished to be considered for nomination to the Board of Governors.
The three Group III incumbent governors, Sid Mauch, Tim Meuchel and Frank
Kirschenheiter, also asked that they be considered for nomination to their
existing seats.
|
|
Following
receipt of Mr. Bergman’s notice, the Board sent Mr. Bergman a
questionnaire and request for additional information related to Mr.
Bergman’s knowledge about the Company, the ethanol industry, financial
statements, corn and ethanol markets and general business. The Company
received a completed questionnaire from Mr. Bergman, and also conducted
interviews with all four potential
nominees.
|
|
Based
on this evaluation of the nominees, the Nominating Committee recommended
that Sid Mauch, Tim Meuchel and Lynn Bergman, be nominated for election as
Group III governors, to serve until the 2013 Annual Meeting or until their
successors are duly elected and qualified. The Board recommends that
members vote their units in favor of the election of Sid Mauch, Tim
Meuchel and Lynn Bergman.
|
Q.
|
How
many votes can I cast when
electing governors?
|
A.
|
In
accordance with the cumulative voting rights set forth in the Company’s
Articles of Organization and in Section 10-32-76 of the North Dakota
Limited Liability Company Act, to which the Company is subject, you are
entitled to give a nominee as many votes as is equal to the number of
Units you own multiplied by the number of governors to be elected, or you
may distribute your votes among the nominees as you see fit. For example,
if you own 100 Units as of the Record Date, and if three governors are to
be elected in a group at the Annual Meeting, you have 300 votes that you
can allocate among the nominees in that group in any manner you
choose. You are not required to cumulate your votes and may
split your votes equally among candidates. If three governors are to be
elected in a group at the Annual Meeting, the three nominees receiving the
highest number of affirmative votes at the Annual Meeting will be elected
to the Company’s Board. In order to exercise cumulative voting
rights, one member must give written notice of his or her intent to
cumulate voting power to any officer of the Company before or the meeting
or give written notice to the Chairman at the meeting and prior to the
election of directors. Then such cumulative voting option will
be announced at the meeting and all members will have the option to
cumulatively vote their units for the nominees. Such written
notice regarding cumulative voting has been received and, thus, cumulative
voting will be an option for the members when voting their units for the
nominees.
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THE
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
We are
currently governed by our Amended and Restated Operating Agreement, which is
attached to this proxy statement as Appendix A. In connection with
the reclassification transaction, we are proposing that our members approve
amendments to our Amended and Restated Operating Agreement contained in a
proposed Second Amended and Restated Operating Agreement, which is attached to
this proxy statement as Appendix B.
The board
of governors has proposed multiple changes to our Amended and Restated Operating
Agreement in order to reclassify our units and revise the voting and transfer
rights attributed to each new class of units.
The board
is also proposing the following changes to the Amended and Restated Operating
Agreement in the Second Amended and Restated Operating Agreement for
administrative reasons and to provide clarity under the North Dakota Limited
Liability Company Act:
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·
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Revision
of Section 1.15 related to the deadline for member proposals (other than
governor nominations) from 60 to 90 days before an annual meeting to not
less than 120 days prior to the one year anniversary of the date the
preceding year’s annual meeting materials were released to the members;
and
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·
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Removal
of Section 1.12, 1.12, 2.9 and 2.12, which were moved to the Second
Amended and Restated Member Control Agreement as described
above.
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The
Second Amended and Restated Member Operating Agreement also contains
non-material changes to make definitions and capitalization consistent between
the two documents.
The
Reclassification
Amendments to our Amended and Restated
Operating Agreement contained in the proposed Second Amended and Restated
Operating Agreement provide for the reclassification of our units held by unit
holders who are the record holders of 50,000 units or more into Class A Units,
unit holders who are the record holders of at least 10,001 but no more than
49,999 units into Class B Units, and unit holders who are the record holders of
10,000 or fewer units into Class C Units. In connection with the
reclassification, each unit held by such record holders will be reclassified on
the basis of one Class A, B, or C Unit for each unit held by such unit holders
immediately prior to the effective time of the
reclassification. Unless otherwise elected by the board as described
in this proxy statement, we anticipate that the reclassification will be
effective upon the approval of the proposed amendments to our Amended and
Restated Operating Agreement contained in the proposed Second Amended and
Restated Operating Agreement and the amendments to our Amended and Restated
Member Control Agreement contained in the proposed Second Amended and Restated
Member Control Agreement by our members. For a description of the
terms of the Class A, B, and C Units, see “Description of Units” beginning on
page __.
Description
of Proposed Other Changes in the Second Amended and Restated Operating
Agreement
In
addition to and conjunction with the provisions related to the reclassification
of units which have been described above, and described below in “Description of
Units,” our board of governors has proposed the following amendments to our
Amended and Restated Operating Agreement:
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·
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the
modifications in Sections 1.2, 1.3 and 1.4 of the Amended and Restated
Operating Agreement to reflect that only Class A Members (as opposed to
any member), owning 5% or more of the Class A Governance Rights for a
regular member meeting or owning 10% or more of the Class A Governance
Rights for a special meeting, can call a member meeting and the
procedure for scheduling the same;
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·
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the
modifications in Section 1.8 of the Amended and Restated Operating
Agreement to reflect the distinct voting rights of Class A, Class B and
Class C Members;
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·
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the
removal of Sections 1.12 and 1.13 related to member action with or without
a meeting to move it to the proposed Second Amended and Restated Member
Control Agreement to allow modification of the member action provisions of
the North Dakota Limited Liability Company
Act;
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the
modification of Section 1.14 to provide that only Class A or Class B
Members may make nominations for governor
elections;
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the
modification Section 1.15 related to the deadline for member proposals
(other than governor nominations) from 60 to 90 days before an annual
meeting to not less than 120 days prior to the one year anniversary of the
date the preceding year’s annual meeting materials were released to the
members;
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·
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the
removal of provisions in Section 2.1 related to the initial board of
governors prior to the first annual meeting of the members, because that
term has expired;
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·
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the
addition of Section 2.3 and modification of proposed Section 2.4 (former
Section 2.3) to include provisions that provide the circumstances in which
the Class A and Class B members or the governors can remove a
governor;
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·
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the
modification of former Section 2.5 to allow governor meetings to be held
by web conference in addition to the previously allowed telephone
conference;
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·
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the
removal of Sections 2.9 and 2.12 of the Amended and Restated Operating
Agreement, related to governor action with or without a meeting, into the
Second Amended and Restated Member Control Agreement, so as to allow
modification of the governor action provisions of the North Dakota Limited
Liability Company Act;
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·
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the
removal of former Section 2.10 related to participation by electronic
communications because those provisions are already covered in former
Section 2.5;
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the
revision of proposed Sections 3.2 and 3.3 to clarify that the office of
President includes the title of Chief Executive Officer and that the
office of Treasurer includes the title of Chief Financial
Officer;
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the
addition to proposed Section 3.5 to provide a cross reference to the North
Dakota Limited Liability Company Act definition of Required
Records;
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·
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the
addition to Section 6.5 to cross reference to defined terms in the Member
Control Agreement;
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·
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the
revision of Section 6.6 to provide that Class A Members owning 5% or more
of the Class A Governance Rights may propose an amendment to the Operating
Agreement for Class A Member
action;
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·
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and
other non-material changes throughout the proposed Second Amended and
Restated Operating Agreement to provide for consistent terminology and
capitalization in the proposed Second Amended and Restated Operating
Agreement and the proposed Second Amended and Restated Member Control
Agreement.
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THE SECOND AMENDED
AND RESTATED MEMBER CONTROL AGREEMENT
We are
currently governed by our Amended and Restated Member Control Agreement, which
is attached to this proxy statement as Appendix C. In connection with
the reclassification transaction, we are proposing that our members approve
amendments to our Amended and Restated Member Control Agreement contained in a
proposed Second Amended and Restated Member Control Agreement, which is attached
to this proxy statement as Appendix D.
The board
of governors has proposed multiple changes to our Amended and Restated Member
Control Agreement in order to reclassify our units and revise the voting and
transfer rights attributed to each new class of units.
The board
is also proposing the following changes to the Amended and Restated Member
Control Agreement in the Second Amended and Restated Member Control Agreement
for administrative reasons and to provide clarity under the North Dakota Limited
Liability Company Act:
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Addition
of Section 1.26 to include a definition of “Membership
Registry;”
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·
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Moving
Sections 1.12 and 1.13 of the Amended and Restated Operating Agreement,
related to member action with or without a meeting, into the Second
Amended and Restated Member Control Agreement, as Sections 10.2 and 10.3
of the Second Amended and Restated Member Control Agreement, so as to
allow modification of the member action provisions of the North Dakota
Limited Liability Company Act; and
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·
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Moving
Sections 2.9 and 2.12 of the Amended and Restated Operating Agreement,
related to governor action with or without a meeting, into the Second
Amended and Restated Member Control Agreement, as Sections 11.2 and 11.3
of the Second Amended and Restated Member Control Agreement, so as to
allow modification of the governor action provisions of the North Dakota
Limited Liability Company Act.
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The
Second Amended and Restated Member Control Agreement also contain non-material
changes to make definitions and capitalization consistent between the two
documents.
In
addition to and conjunction with the provisions related to the reclassification
of units which have been described above, and described below in “Description of
Units,” our board of governors has proposed the following amendments to our
Amended and Restated Member Control Agreement:
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the
revision of Section 1.1 to provide that definitions in the Operating
Agreement apply to the Member Control Agreement as
well;
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·
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the
addition of proposed Sections 1.6 through 1.14 to include definitions of
Class A Member, Class A Unit, Class A Unit Holder, Class B Member, Class B
Unit, Class B Unit Holder, Class C Member, Class C Unit and Class C Unit
Holder;
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·
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the
addition of proposed Section 1.15 to provide the definition of
Classification, which is the reclassification transaction described herein
so that the Company will have fewer than 300 Class A Members, fewer than
500 Members in any other class, resulting in a suspension of
the Company’s reporting obligations with the
SEC;
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the
addition of proposed Section 1.16 to provide the definition of
Classification Date, which is anticipated to occur on __________,
2010;
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addition
to Section 1.21 to add to the definition of Governance Rights that it
includes the voting rights of a Member, which is one (1) vote per Unit
owned on items in which that Member is entitled to
vote;
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the
addition of proposed Section 1.26 to include a definition of the Member
Registry of the Company;
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the
addition of proposed Section 1.30 to include a cross-reference definition
of Required Records from Section 10-32-02(55) of the North Dakota Limited
Liability Company Act;
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the
addition of proposed Section 1.32 to include a definition of Unit Holder,
which is the holder of one or more
Units;
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the
revision of Section 2.5 to provide that only Class A Members have the
right to vote on amendments to the Member Control Agreement, with the
caveat that amendments that would modify the limited liability of a
Member, or alter the Financial Rights of a Member, shall be consented to
by 75% of the Unit Holders adversely affected by such
amendment;
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the
revision of Section 4.1 describes the reclassification thresholds for the
proposed three classes of Units – each Unit outstanding immediately prior
to the Classification Date owned by a Member who is the holder of record
of 50,000 or more Units shall be classified as a Class A Unit, each Unit
outstanding immediately prior to the Classification Date owned by a Member
who is a holder of record of at least 10,001 but no more than 49,999 Units
shall be classified as a Class B Unit, each Unit outstanding immediately
prior to the Classification Dated owned by a Member who is a holder of
10,000 or less Units shall be classified as a Class C
Unit;
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·
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the
addition of proposed Section 4.2 that except as specifically provided for
in the Member Control Agreement, the Members shall not have any right or
power to take part in the management of the
Company;
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·
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the
revision of Section 8.1 to provide that if the issuance of any Units would
result in the Company being subjected to reporting obligations as a public
company, than such issuance must first be approved by the holders of a
majority of Class A Governance
Rights;
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the
addition of Sections 10.2 and 10.3 related to Member action, with or
without a meeting, which were moved from the Operating Agreement, so as to
allow modification of the statutory provisions related to the same in the
North Dakota Limited Liability Company
Act;
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·
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the
addition of Sections 11.2 and 11.3 related to Governor action, with or
without a meeting, which were moved from the Operating Agreement, so as to
allow modification of the statutory provisions related to the same in the
North Dakota Limited Liability Company
Act;
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·
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the
revision of Section 12.1 to clarify that officer shall have the same
meaning as Manager in the North Dakota Limited Liability Company Act;
and
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·
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revision
of Section 14.1 to provide that the board of governors must consent to any
transfer of Units that would result in the 300 or more Class A Unit
Holders or 500 or more Unit Holders of any other class of
Units.
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DESCRIPTION
OF UNITS
General
As of the
record date, 40,193,973 of our common equity units were issued and outstanding
and were held of record by approximately 917 unit holders. If the
reclassification transaction is approved, we estimate there will be
approximately 29,016,098 Class A Units, 7,630,765 Class B Units and 3,547,110
Class C Units after the reclassification transaction. The exact number of Class
A, B and C Units following the reclassification transaction will depend on the
number of units that are held by each member as of the record date and
reclassified into Class A, B and C Units. All units when fully paid are
nonassessable and are not subject to redemption or
conversion. Generally, the rights and obligations of our members are
governed by the North Dakota Limited Liability Company Act, our Amended and
Restated Operating Agreement, a copy of which is attached as Appendix A to this
proxy statement and our Amended and Restated Member Control Agreement, a copy of
which is attached as Appendix B to this proxy statement.
Our units
represent an ownership interest in the Company. Upon purchasing
units, our unit holders enter into our Amended and Restated Operating Agreement
and our Amended and Restated Member Control Agreement and become members of our
limited liability company. Each member has the right to:
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a
share of our profits and losses;
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receive
distributions of our assets when declared by our
governors;
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participate
in the distribution of our assets if we dissolve;
and
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access
and copy certain information concerning our
business.
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The
following summary describes the material terms of our Class A, B and C member
units in connection with the reclassification transaction and as provided in the
proposed amendments to our Amended and Restated Operating Agreement and our
Amended and Restated Member Control Agreement contained in our Second Amended
and Restated Operating Agreement and our Second Amended and Restated Member
Control Agreement.
Rights and Obligations of
Our Existing Units Under the Current Amended and Restated Operating Agreement
and the Current Amended and Restated Member Control
Agreement
Transfer of Units
The
transfer of our existing units is restricted. A person may freely
transfer or assign all or any portion of his or her Membership Interest under
the following circumstances (designed to make sure we do not become a publically
traded partnership for tax purposes):
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by
sale, gift or devise to a spouse or child of such
person;
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following
the death, withdrawal, bankruptcy, divorce, separation, dissolution or
termination of such person;
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by
a person and any related persons in one ore more transactions during any
30 calendar day period of Membership Interests representing in aggregate
less than 2% of the total outstanding Membership Interests in the
Company;
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by
a person and any other persons, acting together, of Membership Interests
representing in the aggregate less than 2% of the total outstanding
Membership Interests in the Company;
and
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by
transfer effected through a qualified matching
service.
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Prior to
allowing any transfers under the above circumstances, the following conditions
must be meet the approval of the board of governors:
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an
opinion of counsel that such transfer may be lawfully made without
registration or qualification under applicable state and federal
securities laws, or that such transfer has been properly registered, and
the transfer will not cause the Company to be treated as a publicly traded
partnership;
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such
documents and instruments of conveyance necessary or appropriate to effect
such transfer;
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surrender
of the transferor’s Unit
certificate;
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the
transferee’s taxpayer identification number and sufficient information to
determine the transferees initial tax basis in the interest transferred;
and
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other
conditions on the transfer adopted by the board of governors from time to
time as it deems appropriate, in its sole
discretion.
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The
transferor or assignor of all or any such portion of such Membership Interest
shall continue to be a Member of the Company to the extent such transferor or
assignor retains a Membership Interest having Governance Rights, but shall cease
to be the owner of the Governance Rights and/or Financial Rights transferred or
assigned. The transferee or assignee of the Governance Rights and
Financial Rights, or only Governance Rights, may be admitted as a
Member.
Termination
of Membership; Separable Governance Rights and Financial Rights
Although
we are managed by our governors, members have the right to vote on certain
transactions, such as amending our Amended and Restated Member Control Agreement
or dissolving the Company. Unit holders have these rights if they have been
admitted as members of our limited liability company. If
such membership terminates for any reason, then any such
former member will lose his or her Governance Rights, although in certain
circumstances may retain his or her Financial Rights.
As
provided in the North Dakota Limited Liability Company Act, our Amended and
Restated Operating Agreement and our Amended and Restated Member Control
Agreement, a member’s membership interest in our limited liability company may
be terminated by the following:
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The
member's retirement;
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The
member's resignation;
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The
redemption of the member's complete membership
interest;
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An
assignment of the member's governance rights which leaves the assignor
with no Governance Rights;
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A
buyout of a member's membership interest which leaves that Member with no
Governance Rights;
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The
member's expulsion;
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The
member's bankruptcy;
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The
dissolution of a member that is an organization;
or
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The
occurrence of any other event terminating the continued membership of a
member in the limited liability
company.
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Restrictive
Legend
We may place the following legend,
which may be amended by the governors in their sole discretion, upon any
counterpart of our Amended and Restated Operating Agreement, our Amended and
Restated Member Control Agreement, the articles of organization, or any other
document or instrument evidencing ownership of units:
THE
TRANSFERABILITY OF THE COMPANY UNITS REPRESENTED BY THIS DOCUMENT IS RESTRICTED.
SUCH UNITS MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, NOR WILL ANY ASSIGNEE,
VENDEE, TRANSFEREE, OR ENDORSEE THEREOF BE RECOGNIZED AS HAVING ACQUIRED ANY
SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER,
HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT
ACCORDANCE WITH, THE TERMS AND CONDITIONS SET FORTH IN THE OPERATING AGREEMENT,
MEMBER CONTROL AGREEMENT AND AGREED TO BY EACH MEMBER.
Distribution
of Operating Income
Our unit
holders are entitled to receive distributions of cash and property if a
distribution is declared by our governors in their sole
discretion. Distributions are made to our unit holders in proportion
to the number of units that are then issued and outstanding. No
distributions may be made in violation of North Dakota law.
Rights and Obligations of
Class A Units Under the Second Amended and Restated Operating
Agreement
Generally, as set out in the proposed
Second Amended and Restated Operating Agreement, which is attached as Appendix B
to this proxy statement, many of the terms and conditions of the Class A Units
will be similar to the terms and conditions of our common equity units prior to
a reclassification. The following are material similarities and
differences between the existing units and the Class A Units:
Voting
Rights
As with our existing units, Class A
members will be entitled to vote on all matters for which unit holder approval
is required under our Second Amended and Restated Operating Agreement or North
Dakota law.
Transferability
Our Class A Units will have similar
transfer restrictions as our existing units. Unlike our existing
units, Class A Units may not be transferred without the approval of our board of
governors, and the board of governors may disallow a transfer of Class A Units
if:
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the
transfer would result in the number of Class A unit holders equaling 300
or more, or as otherwise required to avoid the Company’s reporting
obligations under the Exchange Act;
or
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the
transfer would change certain tax treatments of the
Company.
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As with
transferees of our existing units, transferees of Class A Units will be required
to furnish certain tax information to the Company. In order to become members of
the Company, transferees of Class A Units must also become parties to the
Company’s Second Amended and Restated Operating Agreement.
Minimum
Ownership Requirement
There is
no minimum ownership requirement for Class A Units following the
reclassification. Units retain their classification permanently after
the reclassification transaction. For example, if units are deemed
Class A Units on the classification date, the holder of the units will not cease
to become a Class A member if he or she no longer holds 50,000 or more Class A
Units in the future.
Restrictive
Legend
Certificates
representing the Class A Units will bear the same restrictive legend as our
certificates currently representing our units.
Rights and Obligations of
Class B Units Under the Second Amended and Restated Operating
Agreement
The following are material similarities
and differences between the existing units and the Class B Units:
Voting
Rights
Unlike
our existing units or Class A Units, Class B members will be entitled to vote
only on the election or removal of governors and dissolution of the
Company. Class B members will, however, be entitled to vote on any
amendment to our proposed Second Amended and Restated Operating Agreement if
such amendment would modify the limited liability of the member or alter the
Financial Rights of the member.
Transferability
Our Class B Units will have similar
transfer restrictions as our existing units. Unlike our existing
units, Class B Units may not be transferred without the approval of our board of
governors, and the board of governors may disallow a transfer of Class B Units
if:
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the
transfer would result in the number of Class B unit holders equaling 500
or more, or as otherwise required to avoid the Company’s reporting
obligations under the Exchange Act;
or
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the
transfer would change certain tax treatments of the
Company.
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As with
transferees of our existing units, transferees of Class B Units will be required
to furnish certain tax information to the Company. In order to become members of
the Company, transferees of Class B Units must also become parties to the
Company’s Second Amended and Restated Operating Agreement.
Minimum
Ownership Requirement
There is
no minimum ownership requirement for Class B Units following the
reclassification. Units retain their classification permanently after
the reclassification transaction. For example, if units are deemed
Class B Units on the classification date, the holder of the units will not cease
to become a Class B member if he or she no longer holds at least 10,000 units in
the future.
Restrictive
Legend
Certificates
representing the Class B Units will bear the same restrictive legend as our
certificates currently representing our units.
Rights and Obligations of
Class C Units Under the Second Amended and Restated Operating
Agreement
The following are material similarities
and differences between the existing units and the Class C Units:
Voting Rights
Unlike our existing units or Class A or
B Units, Class C members will be entitled to vote only on the dissolution of the
Company. Class C members will, however, be entitled to vote on any
amendment to our proposed Second Amended and Restated Operating Agreement if
such amendment would modify the limited liability of the member or alter the
Financial Rights of the member.
Transferability
Our Class C Units will have similar
transfer restrictions as our existing units. Unlike our existing
units, Class C Units may not be transferred without the approval of our board of
governors, and the board of governors may disallow a transfer of Class C Units
if:
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the
transfer would result in the number of Class C unit holders equaling 500
or more, or as otherwise required to avoid the Company’s reporting
obligations under the Exchange Act;
or
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·
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the
transfer would change certain tax treatments of the
Company.
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As with
transferees of our existing units, transferees of Class C Units will be required
to furnish certain tax information to the Company. In order to become members of
the Company, transferees of Class C Units must also become parties to the
Company’s Second Amended and Restated Operating Agreement.
Restrictive
Legend
Certificates
representing the Class C Units will bear the same restrictive legend as our
certificates currently representing our units.
Comparison of Features of
Class A, B and C Units
The following table sets forth a
comparison of the proposed features of the Class A, B and C
Units. Section references are to sections in the proposed Second
Amended and Restated Operating Agreement.
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Current
Common
Equity
Unit Holders
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Class
A
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Class
B
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Class
C
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Voting
Rights
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Entitled
to vote on all matters for which unit holder approval is required under
our Amended and Restated Operating Agreement, Amended and
Restated Member Control Agreement or North Dakota law. Entitled
to cumulatively vote for election of governors and vote on removal of
governors.
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Entitled
to vote on all matters for which unit holder approval is required under
our Second Amended and Restated Operating Agreement, Second Amended and
Restated Member Control Agreement or North Dakota law. (Section 1.8 of
Operating Agreement)
Entitled
to cumulatively vote for election of governors remove a governor without
cause, by the affirmative vote of two thirds (2/3) of the total Class A
and Class B Units then outstanding, or remove a governor for cause through
member action of the Class A and Class B unitholders.
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Entitled
to vote on the election of our governors, voluntary dissolution and as may
be required by our Second Amended and Restated Operating Agreement, Second
Amended and Restated Member Control Agreement or North Dakota law.
(Section 1.8 of Operating Agreement)
Entitled
to cumulatively vote for election of governors remove a governor without
cause, by the affirmative vote of two thirds (2/3) of the total Class A
and Class B Units then outstanding, or remove a governor for cause through
member action of the Class A and Class B unitholders.
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Only
entitled to vote on voluntary dissolution and as may be required by our
Second Amended and Restated Operating Agreement, Second Amended and
Restated Member Control Agreement or North Dakota law. (Section
1.8 of Operating
Agreement)
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Transfer
Rights
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Transfer
will only be allowed pursuant to the restrictions set forth in our Amended
and Restated Operating Agreement, Amended and Restated Member
Control Agreement and tax and securities laws.
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Transfer
will only be allowed pursuant to the restrictions set forth in our Second
Amended and Restated Operating Agreement, Second Amended and Restated
Member Control Agreement and tax and securities laws. Our board
of governors has the sole discretion to approve or disallow any proposed
transfer. Our board of governors has the authority to prohibit
transfers that will result in 300 or more Class A unit holders of record
and in order to allow transfers that will result in 300 or more Class A
unit holders of record such issuance must first be approved by
the holders of a majority of the Class A Governance
Rights. (Section 8.1 of Member Control
Agreement)
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Transfer
will only be allowed pursuant to the restrictions set forth in our Second
Amended and Restated Operating Agreement, Second Amended and Restated
Member Control Agreement and tax and securities laws. Our board
of governors has the sole discretion to approve or disallow any proposed
transfer. Our board of governors has the authority to prohibit transfers
that will result in 500 or more Class B unit holders of record and in
order to allow transfers that will result in 500 or more Class B unit
holders of record such issuance must first be approved by the
holders of a majority of the Class A Governance
Rights. (Section 8.1 of Member Control
Agreement)
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Transfer
will only be allowed pursuant to the restrictions set forth in our Second
Amended and Restated Operating Agreement, Second Amended and Restated
Member Control Agreement and tax and securities laws. Our board of
governors has the sole discretion to approve or disallow any proposed
transfer. Our board of governors has the authority to prohibit
transfers that will result in 500 or more Class C unit holders of record
and in order to allow transfers that will result in 500 or more Class C
unit holders of record such issuance must first be approved by
the holders of a majority of the Class A Governance
Rights. (Section 8.1 of Member Control
Agreement)
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Minimum/Maximum
Ownership Requirements
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Holders
of common equity units are not subject to minimum ownership requirements
or limitations.
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Holders
of Class A Units will not be subject to minimum ownership requirements or
limitations after the reclassification transaction. Units classified as
Class A units will permanently retain their classification following the
classification date.
|
|
Holders
of Class B Units will not be subject to minimum ownership requirements or
limitations after the reclassification transaction. Units classified as
Class B units will permanently retain their classification following the
classification date.
|
|
Holders
of Class C Units will not be subject to minimum ownership requirements or
limitations after the reclassification transaction. Units classified as
Class C units will permanently retain their classification following the
classification date.
|
Amendments
to the Operating Agreement and Member Control Agreement
|
|
Holders
of common equity units may amend the Company’s Amended and Restated
Operating Agreement, in addition to the rights of the governors to amend
the Amended and Restated Operating Agreement.
Holders
of common equity units may also amend the Company’s Amended and Restated
Member Control Agreement.
|
|
Holders
of Class A Units may amend the Company’s Second Amended and Restated
Operating Agreement, in addition to the rights of the governors to amend
the Second Amended and Restated Operating Agreement (Section 6.6 of the
Operating Agreement). Holders of Class A Units may also amend
the Company’s Second Amended and Restated Member Control Agreement
(Section 2.5 of the Member Control Agreement).
|
|
Holders
of Class B Units may not amend the Company’s Second Amended and Restated
Operating Agreement or Second Amended and Restated Member Control
Agreement. However, Class B members may vote on any amendment
to our Second Amended and Restated Operating Agreement and/or Second
Amended and Restated Member Control Agreement if such amendment would
modify the limited liability of the member or alter the Financial Rights
of the member.
(Section
6.6 of the Operating Agreement and Section 2.5 of the Member Control
Agreement)
|
|
Holders
of Class C Units may not amend the Company’s Second Amended and Restated
Operating Agreement or Second Amended and Restated Member Control
Agreement. However, Class C members may vote on any amendment
to our Second Amended and Restated Operating Agreement and/or Second
Amended and Restated Member Control Agreement if such amendment would
modify the limited liability of the member or alter the Financial Rights
of the member.
(Section
6.6 of the Operating Agreement and Section 2.5 of the Member Control
Agreement)
|
|
|
|
|
|
|
|
|
|
Sharing
of Profits and Losses
|
|
Holders
of common equity units are entitled to share in the profits and losses of
the Company on a pro rata basis.
|
|
Holders
of the Class A Units are entitled to share in the profits and losses of
the Company on a pro rata basis (Article 6 of Member Control
Agreement).
|
|
Holders
of the Class B Units are entitled to share in the profits and losses of
the Company on a pro rata basis (Article 6 of Member Control
Agreement).
|
|
Holders
of the Class C Units are entitled to share in the profits and losses of
the Company on a pro rata basis (Article 6 of Member Control
Agreement).
|
Distributions
|
|
Holders
of common equity units are entitled to receive distributions on a pro rata
basis of Company cash and property as and when declared by the
governors.
|
|
Holders
of Class A Units are entitled to receive distributions on a pro rata basis
of Company cash and property as and when declared by the governors
(Section 7.1 of the Member Control Agreement).
|
|
Holders
of Class B Units are entitled to receive distributions on a pro rata basis
of Company cash and property as and when declared by the governors
(Section 7.1 of the Member Control Agreement).
|
|
Holders
of Class C Units are entitled to receive distributions on a pro rata basis
of Company cash and property as and when declared by the governors
(Section 7.1 of the Member Control Agreement).
|
|
|
|
|
|
|
|
|
|
Dissolution
|
|
Holders
of common equity units are entitled to participate pro rata in the
distribution of assets upon the Company’s dissolution.
|
|
Holders
of Class A Units are entitled to participate pro rata in the distribution
of assets upon the Company’s dissolution (Section 7.1 of Member Control
Agreement).
|
|
Holders
of Class B Units are entitled to participate pro rata in the distribution
of assets upon the Company’s dissolution (Section 7.1 of Member Control
Agreement).
|
|
Holders
of Class C Units are entitled to participate pro rata in the distribution
of assets upon the Company’s dissolution (Section 7.1 of Member Control
Agreement).
|
|
|
|
|
|
|
|
|
|
Information
Rights
|
|
Holders
of common equity units re entitled to receive financial reports and to
access and copy certain information concerning the Company’s
business.
|
|
Holders
of Class A Units are entitled to receive financial reports and to access
and copy certain information concerning the Company’s business (Section
10-32-51 of the North Dakota Limited Liability Company
Act).
|
|
Holders
of Class B Units are entitled to receive financial reports and to access
and copy certain information concerning the Company’s business (Section
10-32-51 of the North Dakota Limited Liability Company
Act).
|
|
Holders
of Class C Units are entitled to receive financial reports and to access
and copy certain information concerning the Company’s business (Section
10-32-51 of the North Dakota Limited Liability Company
Act).
|
PROPOSAL
#3
ELECTION
OF THREE MEMBERS OF THE BOARD OF GOVERNORS
Red Trail Energy has seven (7)
governors. Each governor is elected to a three year
term. The terms of the governors are staggered, so that the terms of
two governors expire in one year (Group I), two expire the next year (Group II),
and three expire the following year (Group III). The staggering of
the terms of the governors commenced at the Annual Meeting of the members which
was held on May 30, 2007, at which meeting two governors were elected to an
initial one year term, two governors were elected to an initial two year term,
and three governors were elected to an initial three year term. The
governors’ seats, as voted on at the 2007 Annual Meeting, were assigned to a
class as follows:
Group
I: Jody Hoff and Ronald Aberle
Group
II: Mike Appert and William Price
Group
III: Tim Meuchel, Frank Kirschenheiter and Roger Berglund (now filled by Sid
Mauch)
The initial one year term of the
governors in Group I expired at our 2008 Annual Meeting and the Group I governor
seats were filled via the election of Mr. Hoff and Mr. Aberle at the 2008 Annual
Meeting for an additional three-year term. The initial two year term
of the governors in Group II expired at the 2009 Annual Meeting and Group II
governor seats were filled via the election of Mr. Appert and Mr.
Price. The initial three year term of governors in Group III expires
at the 2010 Annual Meeting. One Group III governor, Roger Berglund,
resigned as a governor of the Company effective December 10, 2008. At
a March 31, 2009 Board of Governors meeting, the Board filled Mr. Berglund’s
seat by the appointment of Sid Mauch, who has served the remainder of Mr.
Berglund’s term.
The Nominating Committee of our Board
of Governors is comprised of Willaim Price - Chair, Jody Hoff, Ron Aberle and
Mike Appert and is responsible for selecting candidates for governor. The
Nominating Committee undertook a detailed review of all prospective nominees
that submitted their own names for consideration, had their names submitted
by another person for consideration for election to our Board of Governors or
whom the Nominating Committee contacted directly, as of the advance notice
deadline for member proposals. This year, pursuant to the advance
notice deadline set forth in our Operating Agreement, the Company must have
received the name of a prospective nominee between _______ and _________ for
consideration by the Nominating Committee.
The Nominating Committee of our Board
of Governors undertook a detailed review of all prospective nominees that either
submitted their own names for consideration, had their names submitted by
another member for consideration for election to our Board of Governors, or who
the Nominating Committee contacted directly as of the advance notice deadline
for member proposals. The Board received timely notice from Lynn
Bergman that he wished to be considered for nomination to the Board of
Governors. The three Group III incumbent governors, Sid Mauch, Tim
Meuchel and Frank Kirschenheiter, also asked that they be considered for
nomination to their existing seats.
Following receipt of Mr. Bergman’s
notice, the Board sent Mr. Bergman a questionnaire and request for additional
information related to Mr. Bergman’s knowledge about the Company, the ethanol
industry, financial statements, corn and ethanol markets and general
business. The Company received a completed questionnaire from Mr.
Bergman, and also conducted interviews with all four potential
nominees.
Based on this evaluation of the
nominees, the Nominating Committee recommended that Sid Mauch, Tim Meuchel and
Lynn Bergman, be nominated for election as Group III governors, to serve until
the 2013 Annual Meeting or until their successors are duly elected and
qualified. Frank Kirschenheiter is also listed as a nominee on the
Ballot, however, Mr. Kirschenheiter is not in the group of nominees recommended
by the Nominating Committee or the Board of Governors. Frank
Kirschenheiter, Sid Mauch, Tim Meuchel and Lynn Bergman have each consented to
being named in the proxy statement and to serve if elected. The Board
recommends that members vote their units in favor of the election of Sid Mauch,
Tim Meuchel and Lynn Bergman.
The three candidates who receive a
plurality of the affirmative votes for the election of governors (in person or
by proxy) will be elected to the position of governor. If you fail to
mark a vote, the proxies solicited by the Board of Governors will be voted in
favor of the Board of Governors’ nominees and your Units will be equally
distributed among the three nominating committee-recommended
nominees. If you do not submit a proxy card or attend the meeting, or
if you abstain from voting, your vote will not be counted as a vote for or
against any nominee.
The
following table contains certain information with respect to the nominees for
election to the Board of Governors at the 2010 Annual Meeting (which includes
all nominees, regardless of whether they are nominees recommended by the Board
of Governors and the Nominating Committee):
Name
|
|
Age
|
|
Year First Became
A Governor
|
|
Term Expires
|
|
If Elected, Term
will Expire
|
Sid
Mauch
|
|
64
|
|
2009
|
|
2010
|
|
2013
|
Tim
Muechel
|
|
51
|
|
2007
|
|
2010
|
|
2013
|
Lynn
Bergman
|
|
63
|
|
-
|
|
-
|
|
2013
|
Frank
Kirschenheiter
|
|
60
|
|
2007
|
|
2010
|
|
2013
|
Biographical
Information of Nominees
Tim
Meuchel
Mr.
Meuchel has been the president of Modern Grain, Inc., a grain elevator located
in Hebron, North Dakota, since 1986. Mr. Meuchel currently serves as
a member of the Governance, Acquisition and Risk Management. He has
been a Governor since May 2007. The Company has determined that Mr.
Meuchel is qualified for service on the Board of Governors because of his
experience as a grain elevator manager in the general locality of the Company
and his familiarity with many critical components that affect the Company’s
grain merchandising operation.
Sid
Mauch
Mr. Mauch
has served as a Governor since March 2009, replacing Roger Berglund, who
resigned as a Governor of the Company in December 2008. He serves on
our Risk Management committee.
Mr. Mauch
has been the manager and controller of Maple River Grain & Agronomy, LLC, a
grain elevator and agronomy supplier located in Casselton, North Dakota, since
1976. The Company has determined that Mr. Mauch is qualified for service on the
Board of Governors because of his extensive experience in the grain
merchandising industry, specifically his familiarity with many critical
components that affect the Company’s grain merchandising
operation.
Lynn
Bergman
Mr.
Bergman is the president of DuraCement, LLC, a cement production and marketing
company located in North Dakota, since 2004. Mr. Bergman is also a
retired civil engineer and land surveyor. He has served as a director
of Citizens for Responsible Government, a North Dakota nonprofit corportation,
since 2006. The Company has determined that Mr. Bergman is qualified
for service on the Board of Governors because of his experience owning a
business and his past experience working as a chief surveyor and water
management engineer in the coal industry.
Frank
Kirschenheiter
Mr.
Kirschenheiter currently serves as Treasurer of the Board of Governors and is a
member of our Audit Committee. He has been a Governor since May
2007.
Mr.
Kirschenheiter has served as the chief executive officer of Charmark
International, LLC since 2005. He and his wife Earlene are involved
with their children in a small cattle operation. Mr. Kirschenheiter
has served as the mayor of the City of Richardton for the past 14 years. The
Company has determined that Mr. Kirschenheiter is qualified for service on the
Board of Governors because of his experience in public service in the general
locality of the Company.
VOTE
REQUIRED
The Board recommends that you vote to
elect Lynn Bergman, Sid Mauch and Tim Meuchel to the board of governors set
forth in this Proposal #3. Under applicable North Dakota law, the election of
each nominee requires the affirmative vote by a plurality of the voting power of
the Units present and entitled to vote on the election of governors at the
Annual Meeting at which a quorum is present.
ABOUT
THE MEMBER MEETING
Date,
Time and Place of the Combined Special and Annual Meeting
Our board of governors is asking for
your proxy for use at a combined special and annual meeting of the members to be
held on ______, _________, 20___, at _:__ _.m., local time, at
________________________________, and at any adjournments or postponements of
that meeting.
Proposals
to be Considered at the Combined Special and Annual Meeting
Our board of governors has authorized,
and unanimously recommends for your approval at the combined special and annual
meeting, the following matters:
|
A.
|
Adoption
of the proposed amendments to our Amended and Restated Operating Agreement
contained in the proposed Second Amended and Restated Operating Agreement
and the proposed amendments to our Amended and Restated Member Control
Agreement contained n the proposed Second Amended and Restated Member
Control Agreement to provide for the authorization of three separate and
distinct classes of units: Class A Units, Class B Units and Class C
Units.
|
|
B.
|
Approval
of the reclassification of our units to reclassify our units into Class A
Units, Class B Units and Class C Units for the purpose of discontinuing
the registration of our units under the Securities Exchange Act of
1934.
|
|
C.
|
To
elect 3 governors to the seats open for election pursuant to our Amended
and Restated Operating Agreement and Amended and Restated Member Control
Agreement.
|
These
matters will be voted upon separately by our members. If Proposals A
or B are not approved, our board of governors, in its discretion may determine
not to implement:
|
·
|
the
reclassification; or
|
|
·
|
any
or all of the proposed amendments that our members otherwise
approved.
|
Our
board of governors will have the discretion to determine if and when to effect
the amendments to our Amended and Restated Operating Agreement and our Amended
and Restated Member Control Agreement, including the reclassification, and
reserves the right to abandon the amendments, including the reclassification,
even if they are approved by the members. For example, if the number
of record holders of member units changes such that the reclassification would
no longer accomplish our intended goal of discontinuing our SEC reporting
obligations, the board of governors may determine not to effect the
reclassification transaction.
We expect that if the members approve
and the board elects to effect the amendments to our Amended and Restated
Operating Agreement and our Amended and Restated Member Control Agreement, the
reclassification will become effective on ____________.
Members are also being asked to
consider and vote upon any other matters that may properly be submitted to a
vote at the meeting or any adjournment or postponement of the combined special
and annual meeting. The board is not aware of any other business to be conducted
at the combined special and annual meeting.
Record
Date
You may vote at the combined special
and annual meeting if you were the record owner of our member units at the close
of business on _____________, which has been set as the record
date. At the close of business on the record date, 40,193,973 units
issued and outstanding, held by approximately 917 current unit holders of
record. If you are a member of the Company, you are entitled to one
vote on each matter considered and voted upon at the combined special and annual
meeting for each membership unit you held of record at the close of business on
the record date.
Quorum;
Vote Required for Approval
The
presence, in person or by proxy, of a majority of our membership units entitled
to vote is necessary to constitute a quorum at the combined special and annual
meeting. Currently 20,096,987 membership units must be present, in
person or by proxy, to constitute a quorum at the combined special and annual
meeting.
Approval of the amendments to our
Amended and Restated Operating Agreement contained in the proposed Second
Amended and Restated Operating Agreement and amendments to our Amended and
Restated Member Control Agreement contained in the proposed Second Amended and
Restated Member Control Agreement, including the amendments to effect the
reclassification transaction, requires the affirmative vote of 66.67% of the
Membership Voting Interests
,
or at a minimum 26,809,390
of the 40,193,973 outstanding units. Because the executive officers and
governors of RTE have the power to vote a total of 5,989,161 units and because
we believe that all of the executive officers and governors will vote in favor
of the transaction, this means a total of only 20,820,219 units held by members
who are not executive officers or governors of the Company may be required to
vote in favor of the amendments for them to be
approved. Because the executive officers and
governors hold only approximately 14.90% of the voting power of our outstanding
units, there is no assurance that the amendments to our Amended and Restated
Operating Agreement contained in the proposed Second Amended and Restated
Operating Agreement and the amendments to our Amended and Restated Member
Control Agreement contained in the proposed Second Amended and Restated Member
Control Agreement, including the amendments to effect the reclassification
transaction, will be approved.
Abstentions
and broker non-votes will not be counted as entitled to vote, but will count for
purposes of establishing a quorum at the combined special and annual
meeting. Therefore, abstentions and broker non-votes will have the
effect of a vote “AGAINST” the amendments to our Amended and Restated Operating
Agreement contained in the proposed Second Amended and Restated Operating
Agreement and the amendments to our Amended and Restated Member Control
Agreement contained in the proposed Second Amended and Restated Member Control
Agreement, including the amendments to effect the reclassification
transaction. Approval of the amendments to our Amended and Restated
Operating Agreement contained in the proposed Second Amended and Restated
Operating Agreement and the amendments to our Amended and Restated Member
Control Agreement contained in the proposed Second Amended and Restated Member
Control Agreement, including the amendments to effect the reclassification
transaction, does not require the separate vote of a majority of our
unaffiliated unit holders, and no separate vote will be conducted.
Under applicable North Dakota law, the
election of each nominee requires the affirmative vote by a plurality of the
voting power of the Units present and entitled to vote on the election of
governors at the Annual Meeting at which a quorum is present.
Any
proposal to adjourn or postpone the combined special and annual meeting, if
necessary, must be approved by the greater of: a) a majority of the voting power
of the membership interests present and entitled to vote on that item of
business; or b) a majority of the voting power that would constitute a quorum
for the transaction of business at a duly held meeting of members. In addition,
Section 1.11 of our Amended and Restated Operating Agreement provides that if a
member meeting is properly convened a quorum is present, then the members can
continue to transact business, including an adjournment or postponement, even if
a subsequent withdrawal of members leaves less than a quorum
present.
Voting
and Revocation of Proxies
You
may vote your membership units in person by attending the combined special and
annual meeting, or by mailing us your completed proxy if you are unable or do
not wish to attend. The proxy card must be returned to the Company no
later than __:00 _.m. on _____________, 20___ for your vote to be
valid. If a proxy card is submitted by mail without instructions, the
proxies will be voted “FOR” Proposals 1- 4 and a proposal to adjourn or
postpone the meeting, if necessary.
You
can revoke your proxy at any time before RTE takes a vote at the meeting
by:
|
·
|
delivering
to Kent Anderson, our CFO, at our corporate offices at P.O. Box 11, 3682
Highway 8 South, Richardton, ND 58652, on or before the business day prior
to the combined special and annual meeting, a later-dated and signed proxy
card or a written revocation of the
proxy;
|
|
·
|
delivering to us at the combined
special and annual meeting prior to the taking of the vote on the
proposals, a later-dated and signed proxy card or a written
revocation;
|
|
·
|
attending the combined special
and annual meeting and voting in person;
or
|
|
·
|
if you have instructed a broker
to vote your units, following the directions received from your broker to
change those instructions.
|
A
written revocation of the proxy must be in writing stating the proxy is revoked,
executed by the member and set forth with information sufficient to determine
that the Member authorized such revocation. Examples of sufficient
information to determine that the Member authorized such revocation would be
notarized revocations, non-notarized revocations that are delivered
from a Member’s e-mail account, non-notarized revocations that are personally
delivered, signatures of all Members in the case of jointly-owned units or
entity-owned units, or reference to the appropriate authoritative document (such
as a trust document or organizational document) for non-individual
Members. Revoking a proxy will not affect a vote once it has been
taken. Attendance at the combined special and annual
meeting will not, in itself, constitute a revocation of a proxy. If
you plan to attend the combined special and annual meeting to change a vote that
you have previously made by submitting a signed proxy, you must vote in person
at the combined special and annual meeting.
Our
board of governors is not currently aware of any business to be brought before
the combined special and annual meeting other than that described in this proxy
statement. However, if other matters are properly presented, the persons named
as proxies will vote in accordance with their judgment with respect to those
matters.
Solicitation
of Proxies; Expenses of Solicitation
Solicitation
of proxies will be made primarily by mail. Proxies may also be
solicited in person or by telephone, facsimile or other means by our governors,
officers and regular employees. These individuals will receive no
additional compensation for these services, but will be reimbursed for any
transaction expenses incurred by them in connection with these
services.
We
will bear the expenses in connection with the solicitation of proxies. Upon
request, we will reimburse brokers, dealers and banks, or their nominees, for
reasonable expenses incurred in forwarding copies of the proxy materials to the
beneficial owners of the member units that those persons hold of
record.
We
are mailing this proxy material to our unit holders on or about _________,
20___.
Authority
to Adjourn the Combined Special and Annual Meeting to Solicit Additional
Proxies
We
are asking our members to grant full authority for the combined special and
annual meeting to be adjourned, if necessary, to permit solicitation of
additional proxies to approve any of the proposals presented in this proxy
statement.
2011
Member Proposals
In order
to be considered for inclusion in our 2011 Annual Meeting proxy statement,
member proposals must be submitted in writing to the Company between ___ and
_______ (approximately 60 to 90 days prior to the firs anniversary of the
preceding year’s annual meeting), if Proposal 2 is not approved, or ________
(120 days prior to the one year anniversary of the date of mailing of this
proxy), if Proposal 2 is approved. The Company suggests that proposals for the
2011 annual meeting of the members be submitted by certified mail-return receipt
requested.
2011
Annual Meeting Director Nominations
Our Nominating Committee will consider
governor candidates recommended by members. Members interested in
submitting the name of a candidate for consideration as governor should send a
letter to the Secretary of the Company, P.O. Box 11, 3682 Highway 8 South,
Richardton, ND 58652, and specify that the letter should be forwarded to the
chairman of the Nominating Committee. Our Board has not yet adopted a
formal policy regarding qualifications of governor
candidates. Currently, in evaluating governor nominees, our
nominating committee and Board considers a variety of factors, including the
appropriate size of our Board of Governors; our needs with respect to the
particular talents and experience of our governors; the knowledge, skills and
experience of nominees, including experience in the ethanol, corn or feed
industries, finance, administration or public service, in light of prevailing
business conditions and the knowledge, skills and experience already possessed
by other members of the Board; experience with accounting rules and practices;
and the desire to balance the benefit of continuity with the periodic injection
of the fresh perspective provided by new Board members. To date, we
have not engaged third parties to identify or evaluate or assist in identifying
potential nominees, although we reserve the right in the future to retain a
third party search firm, if necessary.
Our Amended and Restated Operating
Agreement provides that members must give advance notice to the Company
of any person that they propose be nominated as a
governor. Under the advance notice provision, to be timely a member’s
notice must be received at the principal executive offices of the Company not
less than 60 days nor more than 90 days prior to the anniversary date
of the immediately preceding annual meeting of members. With regard
to governor nominations, the notice must also set forth (a) the name and
address of the member who intends to make the nomination, (b) the name,
age, business address and, if known, residence address of each person so
proposed, (c) the principal occupation or employment of each person so
proposed for the past five (5) years, (d) the number of Units of the
Company beneficially owned by each person so proposed and the earliest date of
acquisition of any such Units, (e) a description of any arrangement or
understanding between each person so proposed and the member(s) making such
nomination with respect to such person’s proposal for nomination and election as
a governor and actions to be proposed or taken by such person if elected a
governor and (f) the written consent of each person so proposed to serve as
a governor if nominated and elected as a governor.
FINANCIAL
INFORMATION
Selected
Historical Financial Data
Set forth
below is our selected historical unaudited consolidated financial
information. The historical financial information was derived from
the audited consolidated financial statements included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, from the unaudited
consolidated financial statements included in our Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2010 and from other
information and data contained in the Annual Report and Quarterly
Report. The financial information that follows should be read in
conjunction with the Annual Report and the Quarterly Report. Copies
of the Annual Report and the Quarterly Report and all of the financial
statements and related notes contained in the Annual Report and the Quarterly
Report have been included as Appendix
C to this proxy
statement and mailed herewith to all unit holders. In addition,
copies of the Annual Report and the Quarterly Report and all of the financial
statements and related notes contained in the Annual Report and Quarterly Report
may also be obtained as set forth under the caption “Other Matters—Where You Can
Find More Information” beginning on page __.
RED
TRAIL ENERGY, LLC
CONDENSED
BALANCE SHEETS
|
|
Actual
|
|
|
Effect of
|
|
|
As Adjusted
|
|
|
|
31-Dec-09
|
|
|
Deregistration
|
|
|
31-Dec-09
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
13,214,091
|
|
|
$
|
205,000
|
|
|
$
|
13,419,091
|
|
Restricted
cash - collateral
|
|
|
750,000
|
|
|
|
|
|
|
|
750,000
|
|
Restricted
cash - margin account
|
|
|
1,467,013
|
|
|
|
|
|
|
|
1,467,013
|
|
Accounts
receivable
|
|
|
2,635,775
|
|
|
|
|
|
|
|
2,635,775
|
|
Derivative
instruments, at fair value
|
|
|
129,063
|
|
|
|
|
|
|
|
129,063
|
|
Inventory
|
|
|
6,993,031
|
|
|
|
|
|
|
|
6,993,031
|
|
Prepaid
expenses
|
|
|
195,639
|
|
|
|
|
|
|
|
195,639
|
|
Total
current assets
|
|
|
25,384,612
|
|
|
|
205,000
|
|
|
|
25,589,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
351,280
|
|
|
|
|
|
|
|
351,280
|
|
Plant
and equipment
|
|
|
79,199,850
|
|
|
|
|
|
|
|
79,199,850
|
|
Land
improvements
|
|
|
3,970,500
|
|
|
|
|
|
|
|
3,970,500
|
|
Buildings
|
|
|
5,312,995
|
|
|
|
|
|
|
|
5,312,995
|
|
Construction
in progress
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
88,834,625
|
|
|
|
|
|
|
|
88,834,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
17,419,043
|
|
|
|
|
|
|
|
17,419,043
|
|
Net
property, plant and equipment
|
|
|
71,415,582
|
|
|
|
|
|
|
|
71,415,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs, net of amortization
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Investment
in RPMG
|
|
|
605,000
|
|
|
|
|
|
|
|
605,000
|
|
Patronage
equity
|
|
|
192,207
|
|
|
|
|
|
|
|
192,207
|
|
Deposits
|
|
|
80,000
|
|
|
|
|
|
|
|
80,000
|
|
Total
other Assets
|
|
|
877,207
|
|
|
|
|
|
|
|
877,207
|
|
Total
Assets
|
|
$
|
97,677,401
|
|
|
$
|
205,000
|
|
|
$
|
97,882,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
6,500,000
|
|
|
|
|
|
|
|
6,500,000
|
|
Accounts
payable
|
|
|
7,605,302
|
|
|
|
|
|
|
|
7,605,302
|
|
Accrued
expenses
|
|
|
2,634,534
|
|
|
|
|
|
|
|
2,634,534
|
|
Derivative
instruments, at fair value
|
|
|
806,490
|
|
|
|
|
|
|
|
806,490
|
|
Accrued
loss on firm purchase commitments
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Interest
rate swaps, at fair value
|
|
|
2,360,686
|
|
|
|
|
|
|
|
2,360,686
|
|
Total
current liabilities
|
|
|
19,907,012
|
|
|
|
|
|
|
|
19,907,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
payable
|
|
|
275,000
|
|
|
|
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
43,620,025
|
|
|
|
|
|
|
|
43,620,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A (40,193,973 Units before and 29,016,098 units after reclassication,
respectively)
|
|
|
33,875,364
|
|
|
|
(9,272,691
|
)
|
|
|
24,627,940
|
|
Class
B (7,630,765 Units after reclassification
|
|
|
-
|
|
|
|
6,470,106
|
|
|
|
6,476,750
|
|
Class
C (3,547,110 Units after reclassiciation)
|
|
|
-
|
|
|
|
3,007,585
|
|
|
|
3,010,674
|
|
Total
Members' Equity
|
|
|
33,875,364
|
|
|
|
205,000
|
|
|
|
34,115,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Members' Equity
|
|
$
|
97,677,401
|
|
|
$
|
205,000
|
|
|
$
|
97,917,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Book Value/Unit (Class A)
|
|
$
|
0.84
|
|
|
$
|
(0.32
|
)
|
|
$
|
0.85
|
|
Net
Book Value/Unit (Class B)
|
|
$
|
-
|
|
|
$
|
0.85
|
|
|
$
|
0.85
|
|
Net
Book Value/Unit (Class C)
|
|
$
|
-
|
|
|
$
|
0.85
|
|
|
$
|
0.85
|
|
RED
TRAIL ENERGY, LLC
CONDENSED
STATEMENTS OF OPERATIONS
|
|
Actual
|
|
|
Effect
of
|
|
|
As Adjusted
|
|
|
|
31-Dec-09
|
|
|
Deregistration
|
|
|
31-Dec-09
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Ethanol,
net of changes in fair value of derivative instruments
|
|
$
|
77,700,414
|
|
|
$
|
-
|
|
|
|
77,700,414
|
|
Distillers
grains
|
|
|
16,136,247
|
|
|
|
-
|
|
|
|
16,136,247
|
|
Total
Revenue
|
|
|
93,836,661
|
|
|
|
-
|
|
|
|
93,836,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, net of changes in fair value of derivative
instruments
|
|
|
80,376,609
|
|
|
|
-
|
|
|
|
80,376,609
|
|
Loss
on firm purchase commitments
|
|
|
169,000
|
|
|
|
-
|
|
|
|
169,000
|
|
Lower
of cost or market adjustment for inventory on hand
|
|
|
1,464,500
|
|
|
|
-
|
|
|
|
1,464,500
|
|
Depreciation
|
|
|
5,840,760
|
|
|
|
-
|
|
|
|
5,840,760
|
|
Total
Cost of Goods Sold
|
|
|
87,850,869
|
|
|
|
-
|
|
|
|
87,850,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin (Loss)
|
|
|
5,985,792
|
|
|
|
-
|
|
|
|
5,985,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
2,812,891
|
|
|
|
(205,000
|
)
|
|
|
2,607,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
3,172,901
|
|
|
|
205,000
|
|
|
|
3,377,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
3,988,916
|
|
|
|
-
|
|
|
|
3,988,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income, net
|
|
|
1,176,675
|
|
|
|
-
|
|
|
|
1,176,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
360,660
|
|
|
|
205,000
|
|
|
|
565,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd
Avg Units Outstanding - Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Units
|
|
|
40,191,494
|
|
|
|
(11,175,396
|
)
|
|
|
29,016,098
|
|
Class
B Units
|
|
|
-
|
|
|
|
7,630,765
|
|
|
|
7,630,765
|
|
Class
C Units
|
|
|
-
|
|
|
|
3,544,631
|
|
|
|
3,544,631
|
|
|
|
|
40,191,494
|
|
|
|
-
|
|
|
|
40,191,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income per Unit - Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Units
|
|
$
|
0.01
|
|
|
$
|
-
|
|
|
$
|
0.01
|
|
Class
B Units
|
|
#DIV/0!
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Class
C Units
|
|
#DIV/0!
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Pro
Forma Information
Set forth below is our pro forma
information showing the effect of the reclassification transaction on the
Company’s balance sheet, the Company’s statement of income, earnings per share
and the Company’s book value per share.
RED
TRAIL ENERGY, LLC
CONDENSED
BALANCE SHEETS
|
|
Actual
|
|
|
Effect of
|
|
|
As Adjusted
|
|
|
|
31-Dec-09
|
|
|
Deregistration
|
|
|
31-Dec-09
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
13,214,091
|
|
|
$
|
240,000
|
|
|
$
|
13,454,091
|
|
Restricted
cash - collateral
|
|
|
750,000
|
|
|
|
|
|
|
|
750,000
|
|
Restricted
cash - margin account
|
|
|
1,467,013
|
|
|
|
|
|
|
|
1,467,013
|
|
Accounts
receivable
|
|
|
2,635,775
|
|
|
|
|
|
|
|
2,635,775
|
|
Derivative
instruments, at fair value
|
|
|
129,063
|
|
|
|
|
|
|
|
129,063
|
|
Inventory
|
|
|
6,993,031
|
|
|
|
|
|
|
|
6,993,031
|
|
Prepaid
expenses
|
|
|
195,639
|
|
|
|
|
|
|
|
195,639
|
|
Total
current assets
|
|
|
25,384,612
|
|
|
|
240,000
|
|
|
|
25,624,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
351,280
|
|
|
|
|
|
|
|
351,280
|
|
Plant
and equipment
|
|
|
79,199,850
|
|
|
|
|
|
|
|
79,199,850
|
|
Land
improvements
|
|
|
3,970,500
|
|
|
|
|
|
|
|
3,970,500
|
|
Buildings
|
|
|
5,312,995
|
|
|
|
|
|
|
|
5,312,995
|
|
Construction
in progress
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
88,834,625
|
|
|
|
|
|
|
|
88,834,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
17,419,043
|
|
|
|
|
|
|
|
17,419,043
|
|
Net
property, plant and equipment
|
|
|
71,415,582
|
|
|
|
|
|
|
|
71,415,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs, net of amortization
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Investment
in RPMG
|
|
|
605,000
|
|
|
|
|
|
|
|
605,000
|
|
Patronage
equity
|
|
|
192,207
|
|
|
|
|
|
|
|
192,207
|
|
Deposits
|
|
|
80,000
|
|
|
|
|
|
|
|
80,000
|
|
Total
other Assets
|
|
|
877,207
|
|
|
|
|
|
|
|
877,207
|
|
Total
Assets
|
|
$
|
97,677,401
|
|
|
$
|
240,000
|
|
|
$
|
97,917,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
6,500,000
|
|
|
|
|
|
|
|
6,500,000
|
|
Accounts
payable
|
|
|
7,605,302
|
|
|
|
|
|
|
|
7,605,302
|
|
Accrued
expenses
|
|
|
2,634,534
|
|
|
|
|
|
|
|
2,634,534
|
|
Derivative
instruments, at fair value
|
|
|
806,490
|
|
|
|
|
|
|
|
806,490
|
|
Accrued
loss on firm purchase commitments
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Interest
rate swaps, at fair value
|
|
|
2,360,686
|
|
|
|
|
|
|
|
2,360,686
|
|
Total
current liabilities
|
|
|
19,907,012
|
|
|
|
|
|
|
|
19,907,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
payable
|
|
|
275,000
|
|
|
|
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
43,620,025
|
|
|
|
|
|
|
|
43,620,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A (40,193,973 Units before and 29,016,098 units after reclassication,
respectively)
|
|
|
33,875,364
|
|
|
|
(9,247,424
|
)
|
|
|
24,627,940
|
|
Class
B (7,630,765 Units after reclassification
|
|
|
-
|
|
|
|
6,476,750
|
|
|
|
6,476,750
|
|
Class
C (3,547,110 Units after reclassiciation)
|
|
|
-
|
|
|
|
3,010,674
|
|
|
|
3,010,674
|
|
Total
Members' Equity
|
|
|
33,875,364
|
|
|
|
240,000
|
|
|
|
34,115,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Members' Equity
|
|
$
|
97,677,401
|
|
|
$
|
240,000
|
|
|
$
|
97,917,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Book Value/Unit (Class A)
|
|
$
|
0.84
|
|
|
$
|
(0.32
|
)
|
|
$
|
0.85
|
|
Net
Book Value/Unit (Class B)
|
|
$
|
-
|
|
|
$
|
0.85
|
|
|
$
|
0.85
|
|
Net
Book Value/Unit (Class C)
|
|
$
|
-
|
|
|
$
|
0.85
|
|
|
$
|
0.85
|
|
RED
TRAIL ENERGY, LLC
CONDENSED
STATEMENTS OF OPERATIONS
|
|
Actual
|
|
|
Effect
of
|
|
|
As Adjusted
|
|
|
|
31-Dec-09
|
|
|
Deregistration
|
|
|
31-Dec-09
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Ethanol,
net of changes in fair value of derivative instruments
|
|
$
|
77,700,414
|
|
|
$
|
-
|
|
|
|
77,700,414
|
|
Distillers
grains
|
|
|
16,136,247
|
|
|
|
-
|
|
|
|
16,136,247
|
|
Total
Revenue
|
|
|
93,836,661
|
|
|
|
-
|
|
|
|
93,836,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, net of changes in fair value of derivative instruments
|
|
|
80,376,609
|
|
|
|
-
|
|
|
|
80,376,609
|
|
Loss
on firm purchase commitments
|
|
|
169,000
|
|
|
|
-
|
|
|
|
169,000
|
|
Lower
of cost or market adjustment for inventory on hand
|
|
|
1,464,500
|
|
|
|
-
|
|
|
|
1,464,500
|
|
Depreciation
|
|
|
5,840,760
|
|
|
|
-
|
|
|
|
5,840,760
|
|
Total
Cost of Goods Sold
|
|
|
87,850,869
|
|
|
|
-
|
|
|
|
87,850,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin (Loss)
|
|
|
5,985,792
|
|
|
|
-
|
|
|
|
5,985,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
2,812,891
|
|
|
|
(240,000
|
)
|
|
|
2,572,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
3,172,901
|
|
|
|
240,000
|
|
|
|
3,412,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
3,988,916
|
|
|
|
-
|
|
|
|
3,988,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income, net
|
|
|
1,176,675
|
|
|
|
-
|
|
|
|
1,176,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
360,660
|
|
|
|
240,000
|
|
|
|
600,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd
Avg Units Outstanding - Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Units
|
|
|
40,191,494
|
|
|
|
(11,175,396
|
)
|
|
|
29,016,098
|
|
Class
B Units
|
|
|
-
|
|
|
|
7,630,765
|
|
|
|
7,630,765
|
|
Class
C Units
|
|
|
-
|
|
|
|
3,544,631
|
|
|
|
3,544,631
|
|
|
|
|
40,191,494
|
|
|
|
-
|
|
|
|
40,191,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income per Unit - Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Units
|
|
$
|
0.01
|
|
|
$
|
-
|
|
|
$
|
0.01
|
|
Class
B Units
|
|
#DIV/0!
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Class
C Units
|
|
#DIV/0!
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
MARKET
PRICE OF RED TRAIL ENERGY, LLC UNITS AND DISTRIBUTION INFORMATION
Comparative
Market Price Data
Our units
are not traded actively and there is no established public trading market for
our securities although we have engaged Alerus to manage our qualified matching
service for us, an alternative trading system as defined by the
SEC. The following table sets forth the high, low and average trading
prices on a quarterly basis for transactions in our membership units known to us
that occurred since our first quarter of 2008. There may be other
transactions of which we are not aware.
Completed Unit Transactions
|
|
Fiscal Quarter
|
|
Low Per
Unit Price
|
|
|
High Per
Unit Price
|
|
|
Number of
Units Traded
|
|
2008
1st Quarter
|
|
$
|
1.20
|
|
|
$
|
1.30
|
|
|
|
330,000
|
|
2008
2nd Quarter
|
|
$
|
1.10
|
|
|
$
|
1.10
|
|
|
|
1,000
|
|
2008
3rd Quarter
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
120,000
|
|
2008
4th Quarter
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
―
|
|
2009
1st Quarter
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
―
|
|
2009
2nd Quarter
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
|
10,000
|
|
2009
3rd Quarter
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
|
50,000
|
|
2009
4th Quarter
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
―
|
|
2010
1st Quarter
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
―
|
|
2010
2nd Quarter
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
|
10,000
|
|
There
were approximately 917 record holders of our 40,193,973 outstanding units on
September 23, 2010.
Distributions
We did not make any distributions to
our members for the fiscal years ended December 31, 2009 or 2008.
Distributions are payable at the discretion of our Board, subject to the
provisions of the North Dakota Limited Liability Company Act and our Member
Control Agreement. Distributions to our unit holders are also subject to certain
loan covenants and restrictions that require us to make additional loan payments
based on excess cash flow. We may distribute a portion of the net profits
generated from our operations to unit holders. A unit holder’s distribution is
determined by dividing the number of units owned by such unit holder by the
total number of units outstanding. Our
unit holders are
entitled to receive distributions of cash or property if and when a distribution
is declared by our Board. Subject to the North Dakota Limited Liability Company
Act, our Member Control Agreement and the requirements of our creditors, our
Board has complete discretion over the timing and amount of distributions, if
any, to our unit holders. There can be no assurance as to our ability to declare
or pay distributions in the future.
We do not
anticipate that the reclassification transaction will have any affect on our
ability to declare and pay distributions to our unit holders, nor will the terms
of the Class A, B and C Units differ with respect to the rights of members to
receive distributions from the Company.
IDENTITY
AND BACKGROUND OF FILING PERSONS
(GOVERNORS
AND EXECUTIVE OFFICERS OF THE COMPANY)
During the last five years, the Company
has not been convicted in a criminal proceeding and has not been a party to any
judicial or administrative proceeding that resulted in a judgment, decree or
final order enjoining it from future violations of, or prohibiting activities
subject to, federal or state securities laws or a finding of any violation of
federal or state securities laws.
Set below are the (i) name, (ii)
business address, (iii) current principal occupation or employment, and the
name, principal business and address of any corporation or other organization in
which the employment or occupation is conducted, and (iv) material occupations,
positions, offices or employment during the past five years, and the name,
principal business and address of any corporation or other organization in which
the occupation, position, office or employment was carried on, of each of our
governors and executive officers. Each person identified
below is a United States citizen. Unless otherwise noted, (a) all governors have
been employed in the principal occupations noted below for the past five years
or more, and (b) the principal business address of each person identified below
is P.O. Box 11, 3682 Highway 8 South, Richardton, ND 58652.
Mike
Appert
Mr. Appert
currently serves as the Chairman of the Board of Governors. He
previously served as Secretary. He is a member of our Acquisition,
Governance, Nominating and Risk Management Committees and has been a Governor
since our inception.
Mr. Appert
has been the owner and president of Appert Acres, Inc., a corn, soybean,
sunflowers and small grains farming operation since 1991, as well as operating a
Mycogen Seeds Dealership. He also serves on several boards which
include the Hazelton Airport Authority as president, the Goose Lake
Chapter Pheasants Forever as Treasurer and the Hazelton Lions Club. The
Company has determined that Mr. Appert is qualified for service on the Board of
Governors because of his experience owning a business and farming operation in a
trade area that is important to the Company’s grain merchandising
operation.
William
Price
Mr. Price
has served as a Governor since our inception and is a member of our Acquisition
Committee. He served as Vice President from inception of the Company
until May 2007, and currently serves as Secretary and is the chairman of the
Nominating Committee.
Since
1980, Mr. Price has been the managing partner and is currently vice
president of Price Cattle Ranch LLP, a cattle operation. Since 1997,
he has been the managing partner and is currently the president of Missouri
River Feeders LLP, a feedlot and diversified farm. He also serves as
a governor of Quality Dairy Growers, LLC, a dairy operation, and is a governor
of Sunnyside Feeds, LLC, a custom feed plant. Mr. Price is also a
governor of North Dakota Sow Center LLLP, a 10,000 head ISO wean
facility. Mr. Price is a member of multiple associations,
including the North Dakota Stockmen’s Association, the National Cattlemen’s Beef
Association, and the Great Bend Irrigation District, and has served on the
Missouri Slope Irrigation Board of Governors and served as Chairman of the North
Dakota Feeder Council. The Company has determined that Mr. Price is
qualified for service on the Board of Governors because of his experience as an
owner/manager for a variety of agriculture related businesses, several which
trade in distilled grains which are by-products of the Company’s ethanol
production.
Jody
Hoff
Mr. Hoff
currently serves as Vice Chairman, has served as a Governor since our inception
and serves as the chairman of our Audit Committee and is a member of our
Acquisition, Compensation and Nominating Committees.
Mr. Hoff
is a Mechanical Engineer, registered with the State of North
Dakota. Since 2002, he has been a partner, vice president, chief
engineer and head of operations of Amber Waves, Inc., a manufacturing
company. Prior to starting Amber Waves, Inc., Mr. Hoff spent over
five years working for Fagen Engineering where he led a design team working on
commercial and industrial projects including ethanol plant
design. Mr. Hoff holds a BS degree in mechanical engineering from
North Dakota State University. The Company has determined that Mr.
Hoff is qualified for service on the Board of Governors because of his
experience as an engineer and also owning and operating a business in the
general locality of the Company.
Frank
Kirschenheiter
Mr.
Kirschenheiter currently serves as Treasurer of the Board of Governors and is a
member of our Audit Committee. He has been a Governor since May
2007.
Mr.
Kirschenheiter has served as the chief executive officer of Charmark
International, LLC since 2005. He and his wife Earlene are involved
with their children in a small cattle operation. Mr. Kirschenheiter
has served as the mayor of the City of Richardton for the past 14
years. The Company has determined that Mr. Kirschenheiter is
qualified for service on the Board of Governors because of his experience in
public service in the general locality of the Company.
Tim
Meuchel
Mr.
Meuchel has been the president of Modern Grain, Inc., a grain elevator located
in Hebron, North Dakota, since 1986. Mr. Meuchel currently serves as
a member of the Governance, Acquisition and Risk Management. He has
been a Governor since May 2007. The Company has determined that Mr. Meuchel is
qualified for service on the Board of Governors because of his experience as a
grain elevator manager in the general locality of the Company and his
familiarity with many critical components that affect the Company’s grain
merchandising operation.
Ronald
Aberle
Mr. Aberle
has served as a Governor since our inception and is a member of our Nominating
Committee and also serves as a member of our Audit, Acquisition, Compensation,
Nominating and Risk Management Committees.
Mr. Aberle
is an owner and managing partner of Aberle Farms, a diversified farm and ranch,
and most recently added an RV Campground to the
enterprise. Mr. Aberle serves as an Advisory Board member of
U.S. Bank in Bismarck, North Dakota, and is a Trustee of St. Hildegards
Church. The Company has determined that Mr. Aberle is qualified for
service on the Board of Governors because of his experience owning a business
and farm/ranching operation in a trade area that is important to the Company’s
grain merchandising operation.
Sid
Mauch
Mr. Mauch
has served as a Governor since March 2009, replacing Roger Berglund, who
resigned as a Governor of the Company in December 2008. He serves on
our Risk Management committee.
Mr.
Mauch has been the manager and controller of Maple River Grain & Agronomy,
LLC, a grain elevator and agronomy supplier located in Casselton, North Dakota,
since 1976. The Company has determined that Mr. Mauch is qualified
for service on the Board of Governors because of his extensive experience in the
grain merchandising industry, specifically his familiarity with many critical
components that affect the Company’s grain merchandising
operation.
Gerald
Bachmeier, Chief Executive Officer
Mr.
Bachmeier was appointed Interim Chief Executive Officer effective on June 15,
2009. Mr. Bachmeier is also the Chief Manager of our management
consulting company, Greenway, and is also the Company’s largest shareholder
through his affiliation with RTSB, LLC. Under the terms of the
Management Agreement, Greenway was responsible to provide the Company’s Chief
Executive Officer and Plant Manager. Upon Mr. Miller’s resignation,
Mr. Bachmeier assumed the duties of Chief Executive Officer pursuant to the
terms of the Management Agreement until he was replaced by Mr. Diehl on January
1, 2010. On July 8, 2010, Mr. Bachmeier was again appointed as our
Chief Executive Officer as a part of the Company’s management reorganization
plan.
Mr.
Bachmeier has been involved in the ethanol industry for the past eighteen years.
He has served as a Plant Manager of Morris Ag Energy and Chief Marketing Manager
of United Ethanol Sales. He was instrumental in the formation of DENCO, LLC and
was the major role player for the acquisition of Morris Ag Energy. He was also
instrumental in the design and construction of DENCO, LLC as it stands today. He
is currently the Chief Manager of DENCO, LLC and Greenway and has held various
board positions with many industry trade groups.
Kent
Anderson, Chief Financial Officer
Mr.
Anderson has over 13 years of experience in various corporate accounting
positions. Mr. Anderson has most recently served as the CFO and
Assistant Treasurer for the Theodore Roosevelt Medora Foundation from August
2006 to April 2010. Prior to that, Mr. Anderson worked as the
Compliance and Control Manager for Dakota Growers Pasta Company, Inc. from
January 2005 to August 2006. Mr. Anderson is a Certified Public Accountant with
a Bachelors of Accountancy degree from the University of North
Dakota.
Calvin
Diehl, Former Chief Executive Officer
Mr. Diehl
was appointed Chief Executive Officer of the Company from January 1, 2010 to
July 8, 2010 and previously served as the Company’s Grain Merchandiser from
December 2008 to December 2009. As of July 8, 2010, Mr. Diehl
resigned from the Company. Prior to joining the Company, he was the
General Manager for James Valley Grain, a grain elevator with shuttle car
loading capabilities located in Oakes, North Dakota. Mr. Diehl was
also previously employed as a field representative with Cenex Harvest States
from June 1996 to June 2005. In his capacity as a field
representative, Mr. Diehl consulted with various elevators on their financing,
insurance and risk management needs.
Mark
E. Klimpel, Former Chief Financial Officer
Mr.
Klimpel was the Chief Financial Officer for the Company from October 2007
through May 13, 2010. Prior to joining the Company, he worked for
Knife River Corporation in Bismarck, North Dakota beginning in
1998. At Knife River he held various positions within the corporate
accounting department and, most recently, was ERP Implementation Project
Manager. Mr. Klimpel is a Certified Public Accountant with a
Bachelors of Accountancy degree from the University of North Dakota, located in
Grand Forks, North Dakota.
Mick
Miller, Former Chief Executive Officer
Mr. Miller
resigned his position as President and Chief Executive Officer of the Company
effective on June 15, 2009, a position to which he was appointed in August
2006. From June 2005 to August 2006, he was the General Manager for
the Company. Prior to joining the Company, he worked for Diversified
Energy Company LLC (DENCO), an ethanol plant in Morris, Minnesota beginning in
September 1999. At DENCO, Mr. Miller was Operations Supervisor
from July 2000 through May 2002 and Plant Manager from May 2002 to June
2005. Mr. Miller also served as the Vice President of Operations
for Greenway. Mr. Miller also represented the Company on the board of
directors of RPMG, Inc. He has served since May 2005 to the present
on the Advisory Board for the Process Plant Technology Program at Bismarck State
College in Bismarck, North Dakota and has served on the board since October 2006
as the Vice President for the North Dakota Ethanol Producers
Association.
To our
knowledge, none of our governors or executive officers has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors) or
has been a party to any judicial or administrative proceeding (except
for matters that were dismissed without sanction or settlement) that resulted in
a judgment, decree or final order enjoining future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
CORPORATE
GOVERNANCE
Governor
Independence
The
Company has voluntarily adopted the NASDAQ Marketplace Rules for determining
whether a governor is independent and our Board of Governors has determined that
three (3) of our current seven (7) governors are “independent” within the
meaning of Rule 4200(a)(15) of the NASDAQ Marketplace Rules. As a
non-listed issuer, we are not required to comply with the NASDAQ Marketplace
Rules, but have voluntarily adopted the Rule 4200(a)(15)
definition. Our independent governors under the definition are Jody
Hoff, Sid Mauch and Frank Kirschenheiter. None of our governors are
officers. Mike Appert, Ron Aberle and Tim Meuchel are not considered
independent because of their sales of corn to the Company. William
Price is not considered independent because of his ownership in operations that
purchase distillers grains from the Company. Transactions with our
governors are based on the same terms and conditions as those that are available
to the public. In evaluating the independence of our governors, we
considered the following factors: (i) the business relationships
of our governors; (ii) positions our governors hold with other companies;
(iii) family relationships between our governor and other individuals
involved with the Company; (iv) transactions between our governors and the
Company; and (v) compensation arrangements between our governors and the
Company.
Board
Meetings and Committees; Annual Meeting Attendance
The Board
of Governors generally meets once per month. The Board of Governors
is directly responsible for governance of the Company. The Board held
regular meetings on twelve (12) occasions in fiscal 2009; additionally the Board
held six (6) special meetings. The Board has a standing acquisition
committee, audit committee, compensation committee, governance committee,
nominating committee, and risk management committee. Each governor
attended 75% or more of the aggregate number of meetings of the Board and of
committees of which he was a member.
Member
Communication with the Board of Governors
Members
seeking to communicate with the Board of Governors should submit their written
comments to the Secretary of the Company, P.O. Box 11, 3682 Highway 8 South,
Richardton, ND 58652. The Secretary will forward all such
communications (excluding routine advertisements and business solicitations and
communications which the Secretary, in his or her sole discretion, deems to be a
security risk or for harassment purposes) to each member of the Board or, if
applicable, to the individual governors(s) named in the
correspondence.
Governor
Attendance at Annual Meeting of Members
The Board
of Governors does not have a policy with regard to governors’ attendance at
annual meetings, but governors are encouraged to attend each Annual
Meeting. All Board members were present at the 2009 Annual
Meeting.
Code
of Ethics
The
Company has adopted a Code of Business Conduct that applies to all of our
employees, officers and governors, and a Code of Ethics for Senior Financial
Officers that applies to our Chief Executive Officer, Chief Financial Officer or
Controller and other persons performing similar functions. The Code
of Business Conduct and Code of Ethics are available on the Investors section of
our website at http://redtrailenergyllc.com/investors. The Company
intends to satisfy the disclosure requirements of Form 8-K involving an
amendment to, or a waiver from, a provision of its code of ethics that applies
to our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions, by
posting such information on the Investors section of our website, located at
http://redtrailenergyllc.com/investors, or in a current report on Form
8-K.
Audit
Committee
The Audit
Committee of the board of governors operates under a charter adopted by the
board of governors on April 9, 2007. Under the charter, the Audit
Committee must have at least three members. Our audit committee
members are Mr. Hoff, Mr. Kirschenheiter and Mr. Aberle. The
chairperson of the Audit Committee is Mr. Hoff. Our audit committee
currently does not have an individual designated as a financial expert and has
communicated this to the Nominating Committee for their consideration as they
review potential nominees for the board of governors. The Audit
Committee is exempt from the independence listing standards because the
Company’s securities are not listed on a national securities exchange or listed
in an automated inter-dealer quotation system of a national securities
association or to issuers of such securities. Under NASDAQ rules 4200
and 4350, a majority of our Audit Committee is independent within the definition
of independence provided by NASDAQ rules 4200 and 4350. In addition,
our Audit Committee charter requires a majority of our committee members to be
independent. A majority of the members of our Audit Committee is
independent as required by our Audit Committee charter.
The Audit
Committee held 6 meetings during the fiscal year ended December 31,
2009. All of our Audit Committee members attended at least 75% of the
audit committee meetings.
Audit
Committee Report
The Audit
Committee delivered the following report to the board of governors of the
Company on March 31, 2010. The following report of the Audit Committee shall not
be deemed to be incorporated by reference in any previous or future documents
filed by the Company with the Securities and Exchange Commission under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the Company specifically incorporates the report by reference in any
such document.
The Audit
Committee reviews the Company’s financial reporting process on behalf of the
board of governors. Management has the primary responsibility for the financial
statements and the reporting process. The Company’s independent
auditors are responsible for expressing an opinion on the conformity of the
audited financial statements to generally accepted accounting
principles. The Audit Committee reviewed and discussed with
management the Company’s audited financial statements as of and for the fiscal
year ended December 31, 2009. The Audit Committee has discussed with
Boulay, Heutmaker, Zibell & Co. P.L.L.P., its independent auditors, the
matters required to be discussed by ASU section 380 Communication with audit
committees, as amended, by the Auditing Standards Board of the American
Institute of Certified Public Accountants and as adopted by the Public Company
Accounting Oversight Board in Rule 3200T. The Audit Committee has received and
reviewed the written disclosures and the letter to management from Boulay,
Heutmaker, Zibell & Co. P.L.L.P., as required by Independence Standards
Board Standard No. 1, as adopted by the Public Company Accounting Oversight
Board in Rule 3600T, and has discussed with the independent accountants the
independent accountants’ independence. The Audit Committee has
considered whether the provision of services by Boulay, Heutmaker, Zibell &
Co. P.L.L.P., not related to the audit of the financial statements referred to
above and to the reviews of the interim financial statements included in the
Company’s Forms 10-Q, and concluded that the provision of such services is
compatible with maintaining Boulay, Heutmaker, Zibell & Co. P.L.L.P’s
independence.
Based on
the reviews and discussions referred to above, the audit committee recommended
to the board of governors that the audited financial statements referred to
above be included in the Company’s annual report on Form 10-K for the
fiscal year ended December 31, 2009 and this proxy statement.
Audit
Committee
Jody
Hoff, Frank Kirschenheiter, Ron Aberle
Nominating
Committee
The
Nominating Committee of the Board of Governors consists of Bill Price, Ronald
Aberle, Mike Appert, and Jody Hoff. Ronald Aberle and Mike Appert are
not independent under the Marketplace Rules of NASDAQ, although as a non-listed
issuer we are not required to comply with the Rules. The nominating
committee met one time during the fiscal year ending December 31, 2009, and
has also met two times thus far during calendar year 2010. The
Nominating Committee does not currently have a written charter.
Governor
Nominations Policy
Our
Nominating Committee will consider governor candidates recommended by
members. Members interested in submitting the name of a candidate for
consideration as governor should send a letter to the Secretary of the Company,
P.O. Box 11, 3682 Highway 8 South, Richardton, ND 58652, and specify that the
letter should be forwarded to the chairman of the Nominating
Committee. Our Board has not yet adopted a formal policy regarding
qualifications of governor candidates because it does not feel a formal policy
is necessary given the small pools of candidates it has received thus
far. Currently, in evaluating governor nominees, our nominating
committee and Board considers a variety of factors, including the appropriate
size of our Board of Governors; our needs with respect to the particular talents
and experience of our governors; the knowledge, skills and experience of
nominees, including experience in the ethanol, corn or feed industries, finance,
administration or public service, in light of prevailing business conditions and
the knowledge, skills and experience already possessed by other members of the
Board; experience with accounting rules and practices; and the desire to balance
the benefit of continuity with the periodic injection of the fresh perspective
provided by new Board members. To date, we have not engaged third
parties to identify or evaluate or assist in identifying potential nominees,
although we reserve the right in the future to retain a third party search firm,
if necessary.
Our
Amended and Restated Operating Agreement provides that members must give advance
notice to the Company of any business that they propose to bring before an
annual meeting or of any person that they propose be nominated as a
governor. Under the advance notice provision, to be timely a member’s
notice must be received at the principal executive offices of the Company not
less than 60 days nor more than 90 days prior to the anniversary date
of the immediately preceding annual meeting of members. With regard
to governor nominations, the notice must also set forth (a) the name and
address of the member who intends to make the nomination, (b) the name,
age, business address and, if known, residence address of each person so
proposed, (c) the principal occupation or employment of each person so
proposed for the past five (5) years, (d) the number of Units of the
Company beneficially owned by each person so proposed and the earliest date of
acquisition of any such Units, (e) a description of any arrangement or
understanding between each person so proposed and the member(s) making such
nomination with respect to such person’s proposal for nomination and election as
a governor and actions to be proposed or taken by such person if elected a
governor and (f) the written consent of each person so proposed to serve as
a governor if nominated and elected as a governor.
For the
2010 Annual Meeting, Lynn Bergman was the only member who submitted his name for
consideration by the advance notice deadline. In addition, the
Nominating Committee evaluated the qualifications and performance of three
incumbent governors, whose terms as Group III governors will expire at this
Annual Meeting. Based upon these evaluations, the Nominating
Committee recommended Lynn Bergman, Sid Mauch and Tim Meuchel for election as
governors at the 2010 Annual Meeting. The Board accepted the
nominating committee’s recommendation on August 24, 2010.
Compensation
Committee
The
Company's standing compensation committee consists of Jody Hoff and Ron Aberle,
however, the Company’s board of governors has the overall responsibility for
approving and evaluating the Company's governor and executive compensation
plans, policies and programs. The compensation committee was formed
primarily to review an employment agreement and make a recommendation to the
board of governors on this matter. Neither the Company nor the
compensation committee has historically engaged compensation consultants to
assist in determining or recommending the amount or form of executive or
governor compensation, but would consider doing so in those situations where
either the Company or the compensation committee felt it was warranted or
appropriate. The compensation committee did not hold any meetings
during the fiscal year ended December 31, 2009.
The
compensation committee does not operate under a charter. The
compensation committee is exempt from the independence listing standards because
the Company's securities are not listed on a national securities exchange or
listed in an automated inter-dealer quotation system or a national securities
association or to issuers of such securities.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
table below sets forth information regarding the beneficial ownership of our
membership units as of September 23, 2010 by each 5% unit
holder. Other than RTSB, LLC, no person or entity is currently known
to the Company to be the beneficial owner of more than 5% of our outstanding
units.
The
table also sets forth the number and approximate percentage of units that the
persons and entities named in the table would beneficially own after the
reclassification transaction is effective, on a pro forma basis, assuming
29,016,098 units are reclassified as Class A Units and there are no changes in
the named entity or person’s ownership between September 23, 2010 and
__________, and the reclassification date.
Title of Class
|
|
Name and Address
|
|
Amount and Nature
of
Beneficial
Ownership
|
|
|
Percent of Class
before
Reclassification
|
|
|
Percent of Class A
After
Reclassification
|
|
Membership
Units
|
|
RTSB,
LLC
|
|
|
|
|
|
|
|
|
|
|
|
20897
467
th
Avenue
|
|
|
2,619,500
|
(1)
|
|
|
6.52
|
%
|
|
|
9.03
|
%
|
|
|
Morris,
MN 56267
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
RTSB,
LLC is a limited liability company, whose members have direct beneficial
ownership of all of the Units. Mr. Bachmeier was our interim
Chief Executive Officer from June 15, 2009 through December 31, 2009, and
was re-appointed effective July 8, 2010 and is a principal owner in RTSB,
LLC.
|
The
table below sets forth information regarding the beneficial ownership of our
governors and executive officers and by all of our governors and executive
officers as a group. The table also sets forth the number and approximate
percentage of units that the persons named in the table would beneficially own
after the reclassification transaction is effective, on a pro forma basis,
assuming 40,193,973 units are reclassified as Class A, B and C Units and there
are no changes in the named entity or person’s ownership between September 23,
2010 and ________, and the reclassification date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of
Beneficial Owner
|
|
Amount
and
Nature of
Beneficial
Ownership
|
|
|
Percent of
Class
|
|
|
Percent of Class
A After
Reclassification
|
|
|
Percent of Class B
After
Reclassification
|
|
|
Percent of Class C After
Reclassification
|
|
Mark
E. Klimpel,
Former
CFO
|
|
|
0
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
William
A. Price
|
|
|
400,000
|
(2)
|
|
|
1.00
|
%
|
|
|
1.38
|
%
|
|
|
-
|
|
|
|
-
|
|
Calvin
Diehl,
Former
CEO
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Tim
Meuchel
|
|
|
1,020,000
|
(3)
|
|
|
2.54
|
|
|
|
3.52
|
%
|
|
|
-
|
|
|
|
-
|
|
Frank
Kirschenheiter
|
|
|
62,500
|
|
|
|
*
|
|
|
|
1.24
|
%
|
|
|
-
|
|
|
|
-
|
|
Ron
Aberle
|
|
|
372,920
|
(4)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
-
|
|
Mike
Appert
|
|
|
1,095,000
|
(5)
|
|
|
2.72
|
|
|
|
3.78
|
%
|
|
|
-
|
|
|
|
-
|
|
Jody
Hoff
|
|
|
418,241
|
(6)
|
|
|
1.04
|
|
|
|
1.44
|
%
|
|
|
-
|
|
|
|
-
|
|
Gerald
Bachmeier,
Current
CEO
|
|
|
2,619,500
|
(7)
|
|
|
6.52
|
|
|
|
9.03
|
%
|
|
|
-
|
|
|
|
-
|
|
Sid
Mauch
|
|
|
1,000
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Kent
Anderson,
Current
CFO
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Officers/Governors
as a Group (11 persons)
|
|
|
5,989,161
|
|
|
|
14.90
|
(8)
|
|
|
20.59
|
(8)
|
|
|
0.17
|
(8)
|
|
|
0.03
|
(8)
|
*
|
Designates less than one percent
ownership.
|
(1)
|
Mr.
Klimpel was our CFO from October 2007 to May 13,
2010.
|
(2)
|
Includes 300,000 Units which
Mr. Price owns jointly with his brother and 100,000 Units held
jointly with his brother and
mother.
|
(3)
|
Includes 110,000 Units indirectly
held by Mr. Meuchel for the benefit of his son, and 200,000 Units owned by
Mr. Meuchel’s spouse of which Mr. Meuchel disclaims beneficial
ownership.
|
(4)
|
Includes 160,000 Units held
jointly with Mr. Aberle’s spouse and 12,920 held beneficially in
Mr. Aberle’s IRA account. Additionally, 200,000 Units are held by
Aberle Farms of which Mr. Aberle is a partner and of which Mr. Aberle
disclaims beneficial
ownership.
|
(5)
|
Includes 375,000 Units which
Mr. Appert owns jointly with his spouse and 100,000 Units held
directly by his son of which Mr. Appert disclaims beneficial
ownership. Additionally, 160,000 Units are held by Appert
Acres, Inc., of which Mr. Appert is a partial owner and of which
Mr. Appert disclaims beneficial ownership and 160,000 Units are held
by Appert Farms, Inc., of which Mr. Appert is a partial owner and of
which Mr. Appert disclaims beneficial
ownership.
|
(6)
|
Includes 51,000 Units owned
jointly with Mr. Hoff’s spouse. Additionally, 367,241
Units are held by Richardton Investments, LLC, of which Mr. Hoff is a
partial owner and of which Mr. Hoff disclaims beneficial
ownership.
|
(7)
|
Includes 2,619,500 Units owned by
RTSB, LLC of which Mr. Bachmeier is a principal owner and of which Mr.
Bachmeier disclaims beneficial ownership. As mentioned above,
Mr. Bachmeier served as the Company’s interim Chief Executive Officer from
June 15, 2009 through December 31, 2009 and was re-appointed effective
July 8, 2010.
|
(9)
|
The
total includes ownership percentages of certain directors that have less
that 1%
|
The
information presented in the tables above is based on information furnished by
the specified persons and entities and was determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as required for
purposes of this proxy statement. Briefly stated, under that rule,
units are deemed to be beneficially owned by any person or group having the
power to vote or direct the vote of, or the power to dispose or direct the
disposition of, such units, or who has the right to acquire beneficial ownership
thereof within 60 days. Beneficial ownership for the purposes of
this proxy statement is not necessarily to be construed as an admission of
beneficial ownership for other purposes.
UNIT
PURCHASE INFORMATION
Prior
Purchases of Membership Units
Since January 1, 2008, we have not
repurchased membership units.
Recent
Transactions
Except as provided in this paragraph,
since April 7, 2010 neither RTE, nor its affiliates, governors, or executive
officers, has engaged in any transaction in our membership units.
Effective
May 21, 2010, one of our governors, Jody Hoff, transferred without
consideration, 24,000 units owned individually to units owned jointly with his
spouse. Effective the same date, Richardton Investments, LLC,
transferred without consideration, 17,000 units owned by the entity to Jody Hoff
and Marla Hoff as joint tenants. The effect of these transactions will be
that the number of units owned by Jody Hoff individually will decrease to 0, and
the number of units owned by Jody and Marla Hoff as joint tenants will increase
to 51,000.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Certain
Relationships and Related Transactions
The Board has adopted a policy
requiring all governors, officers and employees, and their immediate family
members to notify the Board about any transaction, of any size, with the
Company. Some of our governors, officers and employees and their
immediate family members have sold corn to the Company or purchased distillers
grains from the Company. These purchases and sales were made on terms
available to all parties that do business with the Company, and were as follows
for the last two fiscal years.
Ron
Aberle, a governor, and a company owned in part by Mr. Aberle, sold corn to
the Company in an amount equal to $537,616 and $677,760 during the years ended
December 31, 2009 and 2008, respectively.
Mike
Appert, a governor, and a company owned in part by Mr. Appert, sold corn to
the Company in an amount equal to $2,116,091 and $2,183,781 during the years
ended December 31, 2009 and 2008, respectively.
Tim
Meuchel, a governor, and a company owned in part by Mr. Meuchel, sold corn
and provided trucking services to the Company in an amount equal to $1,690,775
and $4,637,594 during the years ended December 31, 2009 and 2008,
respectively.
William
Price, a governor, and a company owned in part by him, purchased distillers
grains from the Company in an amount equal to $12,386 and $381,693 during the
years ended December 31, 2009 and 2008, respectively. Another
company owned in part by Mr. Price sold corn to the Company in an amount
equal to $299,760, $0 during the years ended December 31, 2009 and 2008,
respectively.
Conflicts
of Interest
Conflicts of interest may exist and may
arise in the future as a result of the relationships between and among our
members, officers, governors and their affiliates. Although our
officers and governors have fiduciary duties to us, certain of our governors may
also owe fiduciary duties and other obligations to entities with whom we compete
or do business with. Whenever conflicts arise between us and an
officer or director or an entity with which that officer or director is
affiliated, the board as a whole will seek to resolve the conflict. A
director will not participate when the board considers a transaction where he or
she has a conflict of interest. We do not have a committee of
independent governors or members or an otherwise disinterested body to consider
transactions or arrangements that result from, or are burdened by conflicts of
interest.
Conflicts
of interest could arise in the situations described below, among
others:
|
·
|
We
may engage in transactions with affiliates of our governors. Members will
have no right to individually enforce the obligations of our governors or
their affiliates in our favor.
|
|
·
|
Our governors’ decisions
regarding various matters, including expenditures that we make for our
business, reserves for accrued expenses, including officer salaries and
reimbursement of director’s expenses, loan covenants, capital
improvements, contingencies or a sale, merger or business combination that
will effect the amount of cash available for distribution to
members.
|
|
·
|
We
may reimburse our governors for out-of-pocket expenses relating to our
business. We do not have a reimbursement policy or guideline for
determining what expenses will be reimbursed. We will review and reimburse
all reasonable expenses that governors submit to
us.
|
|
·
|
We
have retained counsel that has assisted us in various aspects of our
formation and development. We have not retained separate counsel on behalf
of unit holders.
|
|
·
|
Our
Amended and Restated Operating Agreement and Amended and Restated Member
Control Agreement do not prevent our governors from being involved in
activities that compete with us.
|
Agreements
Involving Our Securities
There are
no agreements relating to our units other than our Amended and Restated
Operating Agreement and Amended and Restated Member Control Agreement, which set
forth the rights and preferences of the membership units. A copy of
our Amended and Restated Operating Agreement is attached as Appendix B and a
copy of our Amended and Restated Member Control Agreement is attached as
Appendix D to this proxy statement.
EXECUTIVE
OFFICER AND GOVERNOR COMPENSATION
Compensation
Discussion and Analysis
The
compensation committee has responsibility for establishing, implementing and
regularly monitoring adherence to the Company’s compensation philosophy and
objectives. The compensation committee ensures that the total compensation
paid to the named Chief Executive Officer and Chief Financial Officer is fair,
reasonable and competitive.
The
compensation committee receives input from the Chief Executive Officer on his
personal performance achievements and that of the employees who report to
him. This individual performance assessment determines a portion of the
annual compensation for the Chief Executive Officer.
The
compensation committee does its own performance review of the Chief Executive
Officer. The compensation committee annually evaluates the performance of
our Chief Executive Officer in light of the Company’s goals and objectives and
determines and approves the executive’s compensation level based on this
evaluation.
Compensation
Committee Report
The
compensation committee has reviewed and discussed the Compensation Discussion
and Analysis with management. Based upon this review and discussion, the
board of governors determined that the Compensation Discussion and Analysis
should be included in this annual report.
Compensation
Committee
Jody
Hoff, Ron Aberle, Mike Appert, William Price, Tim Meuchel, Sid Mauch, Frank
Kirschenheiter
Governors’
compensation
The
following table sets forth all compensation paid or payable by the Company
during the 2009 fiscal year to our governors.
Name
|
|
Fees Earned
or
Paid in Cash
|
|
|
Total
|
|
Jody
Hoff
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Mike
Appert
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Ronald
Aberle
|
|
$
|
900
|
|
|
$
|
900
|
|
William
Price
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Sid
Mauch
|
|
$
|
8,400
|
|
|
$
|
8,400
|
|
Tim
Meuchel
|
|
$
|
900
|
|
|
$
|
900
|
|
Frank
Kirschenheiter
|
|
$
|
500
|
|
|
$
|
500
|
|
Our Board
of Governors adopted a governor compensation policy on July 24,
2007. However, in December 2008, compensation was suspended on a
voluntary basis and subsequently reinstated during January
2010. Pursuant to the governor compensation policy, we pay governor
fees as follows:
|
·
|
$500.00 per Board
meeting
|
|
·
|
$400.00 per audit committee
meeting
|
|
·
|
$100.00 per meeting for all other
committee meetings
|
The
compensation policy also provides for reimbursement to governors for all
out-of-pocket costs and mileage for travel to and from meetings and other
locations to perform these tasks.
In the
year ending December 31, 2009, the Company had incurred an aggregate of
$13,700 in governor fees and related expenses.
The
following table sets forth all compensation paid or payable by us during the
last two fiscal years to our President and Chief Executive Officer, who
functions as our principal executive officer, and our Chief Financial Officer,
who functions as our principal financial and accounting officer (the “Named
Executive Officers”). The Company has no other executive officers
that received in excess of $100,000 during the fiscal years ended December 31,
2009 and 2008, respectively. While the Company does have a standing
compensation committee, the main focus of that committee was to review and
approve the employment agreement entered into with Mr. Klimpel during
2008. Prior to January 1, 2010, the Chief Executive Officer was an
employee of Greenway Consulting, LLC, our management consulting company and was
compensated pursuant to the terms of our Management Agreement with
Greenway. The full board was involved in selecting and determining
the compensation for Mr. Diehl who was an employee of the Company until July 8,
2010.
Summary Compensation Table
|
|
|
|
|
|
Annual Compensation
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Award
|
|
|
Total
|
|
Calvin
Diehl
(1)
|
|
2009
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Former
Chief Executive Officer
|
|
2008
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerald
Bachmeier
(2)
|
|
2009
|
|
$
|
76,154
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
76,154
|
|
Chief
Executive Officer
|
|
2008
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mick
J. Miller
(3)
|
|
2009
|
|
$
|
65,154
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
65,154
|
|
Former
Chief Executive Officer
|
|
2008
|
|
$
|
135,000
|
|
|
$
|
―
|
|
|
$
|
15,000
|
(4)
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
E Klimpel
(5)
|
|
2009
|
|
$
|
119,475
|
(8)
|
|
$
|
25,500
|
(7)
|
|
$
|
―
|
|
|
$
|
144,975
|
|
Former
Chief Financial Officer
|
|
2008
|
|
$
|
116,327
|
|
|
$
|
3,087
|
(6)
|
|
$
|
―
|
|
|
$
|
119,414
|
|
(1)
|
Mr. Diehl was appointed Chief
Executive Officer on January 1, 2010 and served through July 8,
2010. Mr. Diehl was an employee of Red Trail Energy, LLC where
Chief Executive Officers prior to Mr. Diehl were employees of our
management company – Greenway Consulting, LLC (“Greenway”). His
salary for 2010 has been set at
$116,000.
|
(2)
|
Mr. Bachmeier was appointed
interim Chief Executive Officer on June 15, 2009 and was compensated
pursuant to the Management Agreement with Greenway. Mr.
Bachmeier resigned his position as CEO on December 31, 2009 and was
reappointed July 8, 2010.
|
(3)
|
Mr. Miller resigned his position
as CEO effective June 15, 2009. Mr. Miller was compensated
pursuant to our Management Agreement with
Greenway.
|
(4)
|
On September 8, 2006, Mr.
Miller was awarded an equity based, incentive compensation award of up to
150,000 Units, effective as of July 7, 2005, the date he formally
began working in the role of General Manager (the “Grant
Date”). The first 15,000 Units vested on July 1,
2008. All remaining unvested Units were lost upon Mr. Miller’s
resignation.
|
(5)
|
Mr.
Klimpel resigned as our Chief Financial Officer after the completion of
our 2009 fiscal year, and was replaced by Kent Anderson on May 14,
2010.
|
(6)
|
Bonus reflects payment from the
employee bonus program for the first quarter of fiscal
2008. Mr. Klimpel ceased participation in the employee bonus
program upon executing his employment agreement with the Company in August
2008.
|
(7)
|
Paid pursuant to the terms of Mr.
Klimpel’s employment agreement – see additional information below under
“Employment Agreements.” This reflects payment for 2008 and
2009.
|
(8)
|
Mr. Klimpel voluntarily took a
salary reduction at the beginning of 2009 so the increase in base salary
does not equal 6%.
|
Employment
Agreements with Governors or Officers
Mick Miller and Gerald Bachmeier, both
of whom served as our former Chief Executive Officer (and with Mr. Bachemier
again serving as our CEO), were compensated pursuant to our Management Agreement
with Greenway Consulting, LLC (“Greenway”), executed in December 2003 and
Amended and Restated during 2009. The original Management Agreement
provided that the Company would reimburse Greenway for the salary and benefit
package of the Chief Executive Officer, in addition to monthly
payment to Greenway for management of plant operations. The Amended
and Restated Management Agreement now allows the Company the flexibility to hire
its own Chief Executive Officer.
On June 29, 2010, the Company’s board
of governors approved a management reorganization plan that became effective on
July 8, 2010. Pursuant to this management reorganization plan Gerald
Bachmeier was appointed to the position of Chief Executive Officer for the
Company.
In conjunction with the implementation
of the Company’s management reorganization plan, the Company and Mr. Bachmeier
entered into an employment agreement effective on July 8, 2010. The
term of Mr. Bachmeier’s employment agreement is five and one-half years and is
subject to customary termination provisions. Mr. Bachmeier’s base
salary on an annualized basis for the period from July 8, 2010 through December
31, 2010 is $135,000. The employment agreement also provides for a
year-end bonus based on the Company’s net income.
Mark
Klimpel, our Chief Financial Officer as of the completion of our 2009 fiscal
year, executed a written employment agreement with the Company in August
2008. The agreement provides that Mr. Klimpel’s base salary shall
increase at a rate of six percent per year, and that Mr. Klimpel is eligible for
a bonus of 20 percent of base salary per year, which bonus is based 50% on
remaining employed with the Company and 50% on a performance determination by
the Compensation Committee of the Board in consultation with the President and
Chief Executive Officer. The Agreement also provides that if Mr.
Klimpel is terminated by the Company without cause or because of a
change-in-control, Mr. Klimpel is entitled to unpaid base salary and benefits up
to the date of termination, and six months salary thereafter.
The Company announced that Mr. Klimpel
resigned his position as the Company’s Chief Financial Officer effective May 13,
2010. Pursuant to the terms of Mr. Klimpel’s employment agreement,
the Company is required to pay any accrued salary and benefits through the
effective date of the resignation. Mr. Kent Anderson was appointed as our Chief
Financial Officer, effective on May 14, 2010.
We do not
have any employment agreements with any other officer or director.
OTHER
MATTERS
Reports,
Opinions, Appraisals and Negotiations
We have not received any report,
opinion or appraisal from an outside party that is materially related to the
reclassification transaction.
Persons
Making the Solicitation
The
enclosed proxy is solicited on behalf of the Company. The cost of soliciting
proxies in the accompanying form will be borne by us. In addition to
the use of mail, our officers and governors may solicit proxies by telephone or
other electronic means. Upon request, we will reimburse brokers,
dealers, banks and trustees or their nominees, for reasonable expenses incurred
by them in forwarding proxy material to beneficial owners of our membership
units.
Other
Matters of the Combined Special and Annual Meeting
As of the
date of this proxy statement, the only business that our management expects to
be presented at the meeting is that set forth above. If any other
matters are properly brought before the meeting, or any adjournments thereof, it
is the intention of the persons named in the accompanying form of proxy to vote
the proxy on such matters in accordance with their best judgment.
Forward
Looking Statements
Statements
contained herein that are not purely historical are forward-looking statements,
including, but not limited to, statements regarding our expectations, hopes,
beliefs, intentions or strategies regarding the future. We caution
you not to place undo reliance on any forward-looking statements made by, or on
behalf us in this proxy statement or in any of our filings with the SEC or
otherwise. Additional information with respect to factors that may
cause our results to differ materially from those contemplated by
forward-looking statements is included in our current and subsequent filings
with the SEC. See “Where You Can Find More Information”
below.
Where
You Can Find More Information
We are
subject to the information requirements of the Securities Exchange Act, as
amended, and in accordance therewith we file reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the SEC at Room 100 F Street, N.E., Washington, D.C., 20549. Copies
of such materials can also be obtained at prescribed rates by writing to the
Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C.,
20549. You may obtain information on the operations of the SEC’s
public reference room in Washington, DC by calling the SEC at
1-800-SEC-0330. In addition, such reports, proxy statements and other
information are available from the Edgar filings obtained through the SEC’s
Internet Website (http://www.sec.gov). In addition, we are
mailing herewith, copies of our Annual Report for the fiscal year ended December
31, 2009 and Quarterly Report for the fiscal quarter ended June 30, 2010 and all
of the financial statements and related notes contained in the Annual Report and
Quarterly Report.
Information
Incorporated by Reference
In our
filings with the SEC, information is sometimes incorporated by
reference. This means that we are referring you to information that
we have filed separately with the SEC. The information incorporated
by reference should be considered part of this proxy statement, except for any
information superseded by information contained directly in this proxy
statement. The following documents are incorporated by reference
herein:
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our Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2010, including
unaudited financial information;
and
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·
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our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, including
audited financial
information.
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We have
supplied all information contained in or incorporated by reference in this
document relating to us, provided that any reference to any claim of reliance on
the Private Securities Litigation Reform Act’s forward looking statement safe
harbor contained in any such document is excluded, and is not incorporated
herein by reference. You may have already received the information
incorporated by reference in this document by us, and we have attached our
Annual Report for the fiscal year ended December 31, 2009 and Quarterly Report
for the fiscal quarter ended June 30, 2010 with this proxy statement as
Appendix E
.
You can also
obtain any of them through the SEC at the locations described above, or through
us at the address below. We will provide to you, without charge, by
first class mail or other equally prompt means within one business day of any
written or oral request by you, a copy of any report or other information
incorporated by reference in this document by us. You should direct
your request to the following address: RED TRAIL ENERGY, LLC, 3682
Highway 8 South, Richardton, ND, Attention: Kent Anderson.
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By
order of the board of governors:
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/s/
Mike Appert
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Mike
Appert
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Chairman
and President
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PRELIMINARY
PROXY
RED
TRAIL ENERGY, LLC
PROXY
SOLICITED
ON BEHALF OF OUR BOARD OF GOVERNORS
FOR
THE COMBINED SPECIAL AND ANNUAL MEETING OF MEMBERS TO BE HELD
ON___________,
20__
MEMBER
NAME:______________________________________________________________________________
NUMBER OF
MEMBERSHIP
UNITS:______________________________________________________________
Vote
by Mail or Facsimile:
1) Read
the Proxy Statement
2) Check
the appropriate boxes below
3) Sign
and date the proxy card
4) Return the proxy card in the
envelope provided or via fax to 701-974-3309
no later than _:__ _.m. on
___________, _______________, 20__.
The
undersigned hereby appoints _____________________________, and each or either of
them, with the power of substitution, as Proxies to represent the undersigned
and to vote as designated below, at the Combined Special and Annual
Meeting of Members to be held on ___________, _____________, 20__, at
___________________ in ___________________, North Dakota, and at adjournment
thereof, on any matters coming before the meeting.
Said
Proxies will vote on the proposals set forth in the notice of the combined
special and annual meeting and proxy statement as specified on this
card. If a vote is not specified, said Proxies will vote in favor of
the proposals listed below. If any other matters properly come before
the combined special and annual meeting, said Proxies will vote on such matters
in accordance with the recommendations of the board of governors except to the
extent that such matters would include substantive matters presented by the
Company that would otherwise be required to be separately set out by the Company
on the proxy card.
Our
governors unanimously recommend that you vote
"FOR"
the proposals 1 and 2
and vote your units for the governors’ nominees, which are Sid Mauch, Tim
Meuchel and Lynn Bergman.
1. For
approval of the proposed amendments to the Amended and Restated Operating
Agreement and Amended and Restated Member Control Agreement of RED TRAIL ENERGY,
LLC contained in the Second Amended and Restated Operating
Agreement and Second Amended and Restated Member Control Agreement
and adoption of the Second Amended and Restated Operating Agreement and the
Second Amended and Restated Member Control Agreement.
¨
FOR
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¨
AGAINST
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¨
ABSTAIN
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2. For
approval of the Reclassification of units held by unit holders who are the
record holders of 50,000 or more units into Class A Units, the units held by
unit holders who are the record holders of not more than 49,999 or fewer than
10,001 units into Class B Units, and the units held by unit holders who are the
record holders of 10,000 or fewer units into Class C Units.
¨
FOR
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¨
AGAINST
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¨
ABSTAIN
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3. Elect
three (3) governors to the Board of Governors. Each will serve for a
term of three years.
To
withhold authority to vote for any individual nominee, strike a line through the
nominee’s name in the list below.
You are
entitled to give a nominee as many votes as is equal to the number of Units you
own multiplied by 3 (the number of governors to be elected), or you may
distribute your votes among the nominees as you see fit. Write in the
number of votes you are allocating to any nominee below. The Board of
Governors recommends you vote your Units for Tim Meuchel, Lynn Bergman and Sid
Mauch.
Tim
Meuchel
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Votes
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Lynn
Bergman
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Votes
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Sid
Mauch
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Votes
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Frank
Kirschenheiter
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Votes
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You are
encouraged to specify your choices by marking the appropriate boxes
above. This proxy card, if signed and returned, will be voted in
accordance with your instructions above and authorizes the Proxies to take
action in their discretion upon other matters that may properly come before the
meeting.
The Proxies
cannot vote your units unless you sign and return this card
.
Proposal
1 (the amendments to the Amended and Restated Operating Agreement and Amended
and Restated Member Control Agreement) Proposal 2 (the reclassification) are
conditioned upon each other. If either Proposal 1 or Proposal 2 are
not approved, the reclassification or any or all of the proposed amendments that
our members otherwise approved will not be implemented.
Please
sign exactly as your name appears on your unit certificate. When
units are held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name
by President or other authorized officer. If a partnership, please
sign in partnership name by authorized person.
Date:______________________________
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__________________________________
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Signature
of Unit Holder
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Date:______________________________
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__________________________________
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Signature
of Joint Unit Holder
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APPENDIX
A
AMENDED
AND RESTATED OPERATING AGREEMENT
AMENDED
AND RESTATED OPERATING AGREEMENT
MEMBERS
1.1
Place of
Meetings
. Each meeting of the members shall be held at the principal
executive office of the Company or at such other place as may be designated by
the Board of Governors or the President; provided, however, that any meeting
called by or at the demand of a member or members shall be held in the county
where the principal executive office of the company is located.
1.2
Regular
Meetings
. Regular meetings of the members may be held on an annual or
other more frequent basis as determined by the Board of Governors; provided,
however, that if a regular meeting has not been held during the immediately
preceding fifteen (15) months, a member or members owning five percent (5%)
or more of the voting power of all membership interests entitled to vote, may
demand a regular meeting of members by written demand given to the President or
Treasurer of the Company. At each regular meeting the members entitled to vote
shall elect qualified successors for governors who serve for an indefinite term
or whose terms have expired or are due to expire within six months after the
date of the meeting and may transact any other business, provided, however, that
no business with respect to which special notice is required by law shall be
transacted unless such notice shall have been given.
1.3
Special
Meetings
. A special meeting of the members may be called for any purpose
or purposes at any time by the President, by the Board of Governors or any two
or more governors, or by one or more members owning not less than ten percent
(10%) of the voting power of all membership interests of the Company entitled to
vote, who shall demand such special meeting by written notice given to the
President of the Company specifying the purposes of such meeting.
1.4
Meeting Held Upon
Member Demand
. Within thirty (30) days after receipt of a demand by
the President from any member or members entitled to call a meeting of the
members, it shall be the duty of the Board of Governors of the Company to cause
a special or regular meeting of members, as the case may be, to be duly called
and held on notice no later than ninety (90) days after receipt of such
demand. If the Board fails to cause such a meeting to be called and held as
required by the Section, the member or members making the demand may call the
meeting by giving notice as provided in Section 1.6 hereof at the expense
of the Company.
1.5
Adjournments
.
Any meeting of the members may be adjourned from time to time to another date,
time and place. If any meeting of the members is so adjourned, no notice as to
such adjourned meeting need be given if the date, time and place at which the
meeting will be reconvened are announced at the time of
adjournment.
1.6
Notice of
Meetings
. Unless otherwise required by law, written notice of each
meeting of the members, stating the date, time and place and, in the case of a
special meeting, the purpose or purposes, shall be given at least ten
(10) days and not more than fifty (50) days prior to the meeting to
every owner of membership interests entitled to vote at such meeting except as
specified in Section 1.5 or as otherwise permitted by law. The business
transacted at a special meeting of members is limited to the purposes stated in
the notice of the meeting.
1.7
Waiver of
Notice
. A member may waive notice of the date, time, place and purpose
or purposes of a meeting of members. A waiver of notice by a member entitled to
notice is effective whether given before, or after the meeting, and whether
given in writing, orally, or by attendance. Attendance by a member at a meeting
is a waiver of notice of that meeting, unless the member objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened, or objects before a vote on an item of business
because the item may not lawfully be considered at that meeting and does not
participate in the consideration of the item at that meeting.
1.8
Voting Rights
.
A member shall have voting power in proportion to the membership units owned, as
provided in a member control agreement. Except as otherwise required by law, an
owner entitled to vote may vote any portion of the membership units owned in any
way the member chooses. If a member votes without designating the proportion of
the membership units voted in a particular way, the member is deemed to have
voted all of the membership units in that way.
1.9
Voting
Representative
. Each member that is not a natural person shall designate
in writing an authorized voting representative to cast such Member’s vote. A
Member may change the voting representative at any time by written notice to the
Company. Whenever this agreement allows for or requires Members consent to an
action, the authorized voting representative of each member shall grant or
withhold such consent on behalf of such Member. The voting representative shall
represent the Member in all Company business and shall be eligible to serve as a
governor.
1.10
Proxies
. A
member may cast or authorize the casting of a vote by filing a written
appointment of a proxy with a manager of the Company at or before the meeting at
which the appointment is to be effective. The member may sign or authorize the
written appointment by telegram, cablegram or other means of electronic
transmission setting forth or submitted with information sufficient to determine
that the member authorized such transmission. Any copy, facsimile,
telecommunication or other reproduction of the original of either the writing or
transmission may be used in lieu of the original provided that it is a complete
and legible reproduction of the entire original.
1.11
Quorum
. The owners of a majority of the
voting power of the membership interests entitled to vote at a meeting of the
members are a quorum for the transaction of business, unless a larger or smaller
proportion is provided in the Articles of Organization of the Company or a
member control agreement. If a quorum is present when a duly called or held
meeting is convened, the members present may continue to transact business until
adjournment, even though the withdrawal of
members originally present leaves less
than the proportion otherwise required for a quorum.
1.12
Acts of Members
. Except as otherwise required by law or specified in the Articles of
Organization of the Company or a member control agreement, the members shall
take action by the affirmative vote of the owners of the greater of (a) a
majority of the voting power of the membership interests present and entitled to
vote on that item of business or (b) a majority of the voting power that
would constitute a quorum for the transaction of business at a duly held meeting
of members.
1.13
Action Without a
Meeting
. Any action required or permitted to be taken at a meeting of
the members of the Company may be taken without a meeting by written action
signed by all of the members entitled to vote on that action. Any action, if the
Articles of Organization or a member control agreement so provide, may be taken
by written action signed by the members who own voting power equal to the voting
power that would be required to take the same action at a meeting of the members
at which all members were required members, unless a different effective time is
provided in the written action. When written action is permitted to be taken by
less than all members, all members shall be notified immediately of its text and
effective date.
1.14
Nomination of
Governors
. Only persons who are nominated in accordance with the
procedures set forth in this Operating Agreement shall be eligible to serve as
Governors. Nominations of persons for election to the Board of Governors of the
Company may be made at a meeting of members (a) by or at the direction of the
Board of Governors or (b) by any member of the Company who is a member of record
at the time of giving of notice provided for in this Section 1.14, who shall be
entitled to vote for the election of Governors at the meeting and who complies
with the notice procedures set forth in this Section 1.14. Such nominations,
other than those made by or at the direction of the Board of Governors, shall be
made pursuant to timely notice in writing to the secretary of the Company. To be
timely, a member’s notice shall be delivered to or mailed and received at the
principal executive offices of the Company not less than sixty (60) days nor
more than ninety (90) days prior to the first anniversary of the preceding
year’s annual meeting of members; provided, however, that in the event that the
date of the annual meeting is advanced more than thirty (30) days prior to such
anniversary date or delayed more than sixty (60) days after such anniversary
date then to be timely such notice must be received by the Company no later than
forty (40) days prior to the date of the meeting. Such member’s notice shall set
forth (a) the name and address of the member who intends to make the nomination,
(b) the name, age, business address and, if known, residence address of each
person so proposed, (c) the principal occupation or employment of each person so
proposed for the past five (5) years, (d) the number of membership units of the
Company beneficially owned by each person so proposed and the earliest date of
acquisition of any such membership units, (e) a description of any arrangement
or understanding between each person so proposed and the member(s) making such
nomination with respect to such person's proposal for nomination and election as
a Governor and actions to be proposed or taken by such person if elected a
Governor and (f) the written consent of each person so proposed to serve as a
Governor if nominated and elected as a Governor. At the request of the Board of
Governors, any person nominated by the Board of Governors for election as a
Governor shall furnish to the secretary of the Company that information required
to be set forth in a member’s notice of nomination which pertains to the
nominee. No person shall be eligible to serve as a Governor of the Company
unless nominated in accordance with the procedures set forth in this Section
1.14. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this Section 1.14, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
1.15.
Notice of
Business
. At any meeting of the members, only such business shall be
conducted as shall have been brought before the meeting (a) by or at the
direction of the Board of Governors or (b) by any member of the Company who is a
member of record at the time of giving of the notice provided for in this
Section 1.15, who shall be entitled to vote at such meeting and who complies
with the notice procedures set forth in this Section 1.15. For business to be
properly brought before a member meeting by a member, the member must have given
timely notice thereof in writing to the secretary of the Company. To be timely,
a member’s notice shall be delivered to or mailed and received at the principal
executive offices of the Company not less than sixty (60) days nor more than
ninety (90) days prior to the first anniversary of the preceding year’s annual
meeting of members; provided, however, that in the event that the date of the
annual meeting is advanced more than thirty (30) days prior to such anniversary
date or delayed more than sixty (60) days after such anniversary date then to be
timely such notice must be received by the Company no later than forty (40) days
prior to the date of the meeting. A member’s notice to the secretary shall set
forth as to each matter the member proposes to bring before the meeting (a) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the Company’s books, of the member proposing such
business, (c)(i) the number of membership units of the Company which are held of
record or are beneficially owned by such member and (ii) any derivative
positions held or beneficially held by the member and the extent to which any
hedging or other transaction or series of transactions has been entered into by
or on behalf of, or any other agreement, arrangement or understanding has been
made, the effect or intent of which is to increase or decrease the voting power
of, such member with respect to the Company’s securities, and (d) any material
interest of the member in such business. Notwithstanding anything in the
Operating Agreement to the contrary, no business shall be conducted at a member
meeting except in accordance with the procedures set forth in this Section 1.15.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section 1.15, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
GOVERNORS
2.1
Number;
Qualifications
. The permanent Board elected by the members at the first
annual meeting shall be comprised of seven (7) individuals. Governors shall
be natural persons, and must be Members (or Voting Representatives of entity
members) of the Company. Prior to the first annual meeting of members, the
interim Board of Governors shall manage the Company.
2.2
Election; Term
. The Members shall elect the governors at a regular meeting of Members. The
procedural process for nominating and electing governors shall be determined in
advance of the meeting by the Board of Governors and shall be communicated to
all Members in a timely manner. Each governor, other than the interim initial
Board, shall hold office for a term of three (3) years; except that at the
first annual meeting the governors shall be elected to staggered one, two, and
three year terms. Two of the Governors elected at the first meeting of Members
shall be elected to a one year term, two for a two year term, and three for a
three year term.
2.3
Vacancies
.
Vacancies on the Board of Governors resulting from the death, resignation,
removal or disqualification of a governor may be filled by the affirmative vote
of a majority of the remaining governors, even though less than a quorum.
Vacancies on the Board resulting from newly-created governorships may be filled
by the affirmative vote of a majority of the governors serving at the time such
governorships are created. Each person elected to fill a vacancy shall hold
office until a qualified successor is elected by the members at the next regular
meeting or at any special meeting duly called for that purpose.
2.4
Place of
Meetings
. Each meeting of the Board of Governors shall be held at the
principal executive office of the Company or at such other place as may be
designated from time to time by a majority of the governors or by the President.
A meeting may be held by conference among the governors using any means of
communication through which the governors may simultaneously hear each other
during the conference.
2.5
Regular
Meetings
. Regular meetings of the Board of Governors shall be held
periodically, as established by the Board, but not less than one per
month.
2.6
Special
Meetings
. A special meeting of the Board of Governors may be called for
any purpose or purposes at any time by the President or at least two
(2) Governors by fixing the Date, time, and place of the meeting and
causing notice of the meeting to be given. The notice must state the purpose of
the meeting.
2.7
Waiver of Notice;
Previously Scheduled Meetings
.
Subdivision
1. A governor of the Company may waive notice of the date, time, and place of a
meeting of the Board. A waiver of notice by a governor entitled to notice is
effective whether given before, at, or after the meeting, and whether given in
writing, orally or by attendance. Attendance by a governor at a meeting is a
waiver of notice of that meeting, unless the governor objects at the beginning
of the meeting to the transaction of business because the meeting is not
lawfully called or convened and thereafter does not participate in the
meeting.
Subdivision
2. If the day or date, time, and place of a Board meeting have been provided
herein or announced at a previous meeting of the Board, no notice is required.
Notice of an adjourned meeting need not be given other than by announcement at
the meeting at which adjournment is taken of the date, time and place at which
the meeting will be reconvened.
2.8
Quorum
. A
majority of the governors currently holding office shall be necessary to
constitute a quorum for the transaction of business. In the absence of a quorum,
a majority of the governors present may adjourn a meeting from time to time
without further notice until a quorum is present. If a quorum is present when a
duly called or held meeting is convened, the governors present may continue to
transact business until adjournment, even though the withdrawal of a number of
the governors originally present leaves less than the proportion or number
otherwise required for a quorum.
2.9
Acts of Board
.
Except as otherwise required by law or specified in the Articles of Organization
of the Company or a member control agreement, the Board shall take action by the
affirmative vote of a majority of the governors present at a duly held
meeting.
2.10
Participation by
Electronic Communications
. A governor may participate in a Board meeting
by any means of communication through which the governor, other governors so
participating and all governors physically present at the meeting may
simultaneously hear each other during the meeting. A governor so participating
shall be deemed present in person at the meeting.
2.11
Absent
Governors
. A governor of the Company may give advance written consent or
opposition to a proposal to be acted on at a Board meeting. If the governor is
not present at the meeting, consent or opposition to a proposal does not
constitute presence for purposes of determining the existence of a quorum, but
consent or opposition shall be counted as a vote in favor of or against the
proposal and shall be entered in the minutes or other record of action at the
meeting, if the proposal acted on at the meeting is substantially the same or
has substantially the same effect as the proposal to which the governor has
consented or objected.
2.12
Action Without a
Meeting
. Any action required or permitted to be taken at a meeting of
the Members of the Company may be taken without a meeting by written action
signed by the number of Members who would be required to take the same action at
a meeting of the Member at which all members were present. The written action is
effective when signed by the required Members unless a different effective time
is provided in the written action. Notice of the text of such written action
must be given in advance to all Members.
2.13
Compensation
.
The Board of governors shall establish reasonable compensation of all governors
for services to the Company as governors, managers, or otherwise. By resolution
by the Board of Governors, the governors may be paid their expenses, if any, of
attendance at each meeting of the Board of Governors and incurred in action on
behalf of the Company.
MANAGERS
3.1
Number and
Designation
. The Company shall have one or more natural persons
exercising the functions of the position of President and Secretary/Treasurer.
The Board of Governors may elect or appoint such other managers or agents as it
deems necessary for the operation and management of the Company, with such
powers, rights, duties and responsibilities as may be determined by the Board,
each of whom shall have the powers, rights, duties and responsibilities set
forth in this Operating Agreement unless otherwise determined by the Board. Any
of the positions or functions of those positions may be held by the same
person.
3.2
President
.
Unless provided otherwise by a resolution adopted by the Board of Governors or
in a member control agreement, the President (a) shall have general active
management of the business of the Company; (b) shall, when present, preside
at all meetings of the members of the Board; (c) shall see that all orders
and resolutions of the Board are carried into effect; (d) may maintain records
of and certify proceedings of the Board and members; and (e) shall perform
such other duties as may from time to time be prescribed by the
Board.
3.3
Treasurer
.
Unless provided otherwise by a resolution adopted by the Board of Governors or
in a member control agreement, the Treasurer (a) shall keep accurate
financial records for the Company; (b) shall deposit all monies, drafts and
checks in the name of and to the credit of the Company in such banks and
depositories as the Board shall designate from time to time; (c) shall
endorse for deposit all notes, checks and drafts received by the Company as
ordered by the Board, making proper vouchers therefor (d) shall disburse
Company funds and issue checks and drafts in the name of the Company, as ordered
by the Board; (e) shall render to the President and the Board, whenever
requested, an account of all of such manager’s transactions as Treasurer and of
the financial condition of the Company; and (f) shall perform such other
duties as may be prescribed by the Board or the President from time to
time.
3.4
Vice Presidents
. The Board of Governors may establish the position of Vice-President. During
the absence of disability of the President, it shall be the duty of the
Vice-President to perform the duties of the President. The Vice-President shall
have such other duties and authority as established by the Board.
3.5
Secretary
. The
Secretary shall attend all meetings of the Board of Governors and of the Members
and shall maintain records of, and whenever necessary, certify all proceedings
of the Board of Governors and of the Members. The Secretary shall keep the
Require Records of the Company, when so directed by the Board of Governors or
other person or persons authorized to call such meetings, shall give or cause to
be given notice of meetings of the Members and of meetings of the Board of
Governors, and shall also perform such other duties and have such other powers
as the President or the Board of Governors may prescribe from time to
time.
3.6
Authority and
Duties
. In addition to the foregoing authority and duties, all managers
of the Company shall respectively have such authority and perform such duties in
the management of the business of the Company as may be designated from time to
time by the Board of Governors or in this Agreement. Unless prohibited by a
resolution approved by the affirmative vote of a majority of the governors
present, a manager elected or appointed by the Board may, without the approval
of the board, delegate some or all of the duties and powers of a position to the
Company’s employees, accountants, and legal counsel.
3.7
Term
.
Subdivision
1. All managers of the Company shall hold office until their respective
successors are chosen and have qualified or until their earlier death,
resignation or removal.
Subdivision
2. A manager may resign at any time by giving written notice to the Company. The
resignation is effective without acceptance when the notice is given to the
Company, unless a later effective date is specified in the notice.
Subdivision
3. A manager may be removed at any time, with or without cause, by a resolution
approved by the affirmative vote of a majority of the governors present at a
duly held Board meeting, subject to the provisions of any member control
agreement.
Subdivision
4. A vacancy in a position because of death, resignation, removal,
disqualification or other cause may, or in the case of a vacancy in the position
of President or Treasurer shall be billed for the unexpired portion of the term
by the Board.
3.8
Salaries
. The
salaries of all managers of the Company shall be fixed by the Board of Governors
or by the President if authorized by the Board.
INDEMNIFICATION
4.1
Indemnification
. The Company shall indemnify its managers and governors for such expenses and
liabilities, in such manner, unless such circumstances, and to such extent, as
require or permitted by North Dakota Statute, Section 10-32-99, as amended
from time to time, or as required or permitted by other provisions of
law.
4.2
Insurance
. The
Company may purchase and maintain insurance on behalf of any person in such
person’s official capacity against any liability asserted against and incurred
by such person in or arising from that capacity, whether or not the Company
would otherwise be required to indemnify the person against the
liability.
MEMBERSHIP
INTERESTS
5.1
Statement of
Membership Interest
. At the request of any member, the Company shall
state in writing, the particular membership interest owned by that member as of
the moment the Company makes the statement. The statement must describe the
member’s rights to vote, to share in profits and losses, and to share in
distributions, as well as any assignment or the member’s rights then in
effect.
5.2
Declaration of
Distributions
. The Board of Governors shall have the authority to
declare distributions upon the membership interests of the Company to the extent
permitted by law.
5.3
Transfer of Membership
Interests
. Membership interests in the Company may be transferred only
to the extent permitted by law and subject to any member control
agreement.
MISCELLANEOUS
6.1
Execution of
Instruments
.
Subdivision
1. All deeds, mortgages, bonds, checks, contracts and other instruments
pertaining to the business and affairs of the Company shall be signed on behalf
of the Company by the President or the Secretary/Treasurer as may be designated
from time to time by the Board of Governors.
Subdivision
2. If a document must be executed by persons holding different positions or
functions and one person holds such positions or exercises such functions, that
person may execute the document in more than one capacity if the document
indicates each such capacity.
6.2
Advances
. The
Company may, without a vote of the governors, advance money to its governors,
managers or employees to cover expenses that can reasonably be anticipated to be
incurred by them in the performance of their duties and for which they would be
entitled to reimbursement in the absence of an advance.
6.3
Company Seal
.
The Company will be a no seal company.
6.4
Fiscal Year
.
The fiscal year of the Company shall be determined by the Board of
Governors.
6.5
Construction
.
This Operating Agreement is subject to the terms of any member control agreement
from time to time in effect and to the extent inconsistent, the member control
agreement shall be controlling.
6.6
Amendments
.
The Board of Governors shall have the power to adopt, amend or repeal the
Operating Agreement of the Company, subject to the power of the members to
change or repeal the same, provided, however, that the Board shall not adopt,
amend or repeal any Section fixing a quorum for meetings of members, prescribing
procedures for removing governors or filling vacancies in the Board, or fixing
the number of governors or their classifications, qualifications, or terms of
office, but may adopt or amend a Section that increases the number of
governors.
The undersigned hereby certifies that
the foregoing Amended and Restated Operating Agreement was duly adopted as the
Operating Agreement of the company by its board of governors on July 31,
2008.
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RED
TRAIL ENERGY LLC
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/s/ Mick J. Miller
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Mick
J. Miller
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President
and Chief Executive Officer
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APPENDIX
B
PROPOSED
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
SECOND
AMENDED AND RESTATED OPERATING AGREEMENT
OF
RED
TRAIL ENERGY, LLC
MEMBERS
1.1
Place of
Meetings
. Each meeting of the Members shall be held at the principal
executive office of the Company or at such other place as may be designated by
the Board of Governors or the President; provided, however, that any meeting
called by or at the demand of a Member or Members shall be held in the county
where the principal executive office of the Company is located.
1.2
Regular
Meetings
. Regular meetings of the Members may be held on an annual or
other more frequent basis as determined by the Board of Governors; provided,
however, that if a regular meeting has not been held during the immediately
preceding fifteen (15) months, a Class A Member or Class A Members owning
five percent (5%) or more of the Class A Governance Rights entitled to vote, may
demand a regular meeting of Members by written demand given to the President or
Treasurer of the Company. At each regular meeting the Members entitled to vote
shall elect qualified successors for governors who serve for an indefinite term
or whose terms have expired or are due to expire within six months after the
date of the meeting and may transact any other business, provided, however, that
no business with respect to which special notice is required by law shall be
transacted unless such notice shall have been given.
1.3
Special
Meetings
. A special meeting of the Members may be called for any purpose
or purposes at any time by the President, by the Board of Governors or any two
or more governors, or by one or more Class A Members owning not less than ten
percent (10%) of the Class A Governance Rights entitled to vote, who shall
demand such special meeting by written notice given to the President of the
Company specifying the purposes of such meeting.
1.4
Meeting Held Upon
Member Demand
. Within thirty (30) days after receipt of a demand by
the President from any Class A Member or Class A Members entitled to call a
meeting of the Members, it shall be the duty of the Board of Governors of the
Company to cause a special or regular meeting of Members, as the case may be, to
be duly called and held on notice no later than ninety (90) days after
receipt of such demand. If the Board fails to cause such a meeting to be called
and held as required by the Section, the Class A Member or Class A Members
making the demand may call the meeting by giving notice as provided in
Section 1.6 hereof at the expense of the Company.
1.5
Adjournments
.
Any meeting of the Members may be adjourned from time to time to another date,
time and place. If any meeting of the Members is so adjourned, no notice as to
such adjourned meeting need be given if the date, time and place at which the
meeting will be reconvened are announced at the time of
adjournment.
1.6
Notice of
Meetings
. Unless otherwise required by law, written notice of each
meeting of the Members, stating the date, time and place and, in the case of a
special meeting, the purpose or purposes, shall be given at least ten
(10) days and not more than fifty (50) days prior to the meeting to
each Member, except as specified in Section 1.5 or as otherwise permitted
by law. The business transacted at a special meeting of Members is limited to
the purposes stated in the notice of the meeting.
1.7
Waiver of
Notice
. A Member may waive notice of the date, time, place and purpose
or purposes of a meeting of Members. A waiver of notice by a Member entitled to
notice is effective whether given before, during, or after the meeting, and
whether given in writing, orally, or by attendance. Attendance by a Member at a
meeting is a waiver of notice of that meeting, unless the Member objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened, or objects before a vote on an item of business
because the item may not lawfully be considered at that meeting and does not
participate in the consideration of the item at that meeting.
1.8
Voting Rights
.
A Member shall have voting power in proportion to the Membership Units owned, as
provided in the Company’s Member Control Agreement. Except as otherwise required
by law, an owner entitled to vote may vote any portion of the Membership Units
owned in any way the Member chooses. If a Member votes without designating the
proportion of the Membership Units voted in a particular way, the Member is
deemed to have voted all of the Membership Units in that way.
(a) The Class A Members shall have
voting rights as defined by the Governance Rights of such Member in accordance
with the provisions of this Agreement and in the Company’s Member Control
Agreement, as amended (the “Member Control Agreement”). Except as
otherwise provided by this Agreement and the Member Control Agreement, the Class
A Members shall be entitled to vote on all matters brought before the
Members.
(b) The Class B Members shall have
voting rights as defined by the Governance Rights of such Member and in
accordance with the provisions of this Agreement and in the Member Control
Agreement. Except as otherwise provided by this Agreement and the
Member Control Agreement, the Class B Members shall be entitled to vote only
upon:
(i) election of Governors pursuant to
Section 2.2; and
(ii) dissolution of the Company
pursuant to Section 10-32-111 of the North Dakota Limited
Liability Company Act, as amended from time to time.
(c) The Class C Members shall have
voting rights as defined by the by the Governance Rights of such Member in
accordance with the provisions of this Agreement and in the Member Control
Agreement. Except as otherwise provided in this Agreement and the
Member Control Agreement, the Class C Members shall be entitled to vote only
upon the dissolution of the Company pursuant to Section 10-32-111 of the North
Dakota Limited Liability Company Act, as amended from time to time.
(d) Except as required by law, when
more than one class is permitted to vote on a matter, the Class A Members, Class
B Members, and/or Class C Members, as applicable, shall vote together as a
single class and not as separate classes.
1.9
Voting
Representative
. Each Member that is not a natural person shall designate
in writing an authorized voting representative to cast such Member’s vote. A
Member may change the voting representative at any time by written notice to the
Company. Whenever this agreement allows for or requires Members consent to an
action, the authorized voting representative of each Member shall grant or
withhold such consent on behalf of such Member. The voting representative shall
represent the Member in all Company business and shall be eligible to serve as a
governor.
1.10
Proxies
. A
Member may cast or authorize the casting of a vote by filing a written
appointment of a proxy with a manager of the Company at or before the meeting at
which the appointment is to be effective. The Member may sign or authorize the
written appointment by telegram, cablegram or other means of electronic
transmission setting forth or submitted with information sufficient to determine
that the Member authorized such transmission. Any copy, facsimile,
telecommunication or other reproduction of the original of either the writing or
transmission may be used in lieu of the original provided that it is a complete
and legible reproduction of the entire original.
1.11
Quorum
. The owners of a majority of the
Governance Rights of the Membership Interests entitled to vote at a meeting of
the Members are a quorum for the transaction of business, unless a larger or
smaller proportion is provided in the Articles of Organization of the Company or
the Member Control Agreement. If a quorum is present when a duly called or held
meeting is convened, the Members present may continue to transact business until
adjournment, even though the withdrawal of
Members originally present leaves less
than the proportion otherwise required for a quorum.
1.12
Nomination of
Governors
. Only persons who are nominated in accordance with the
procedures set forth in this Operating Agreement shall be eligible to serve as
Governors. Nominations of persons for election to the Board of Governors of the
Company may be made at a meeting of Members (a) by or at the direction of the
Board of Governors or (b) by any Class A Member or Class B Member of the Company
who is a Member of record at the time of giving of notice provided for in this
Section 1.12, who shall be entitled to vote for the election of Governors at the
meeting and who complies with the notice procedures set forth in this Section
1.12. Such nominations, other than those made by or at the direction of the
Board of Governors, shall be made pursuant to timely notice in writing to the
secretary of the Company. To be timely, notice from a Class A Member or Class B
Member shall be delivered to or mailed and received at the principal executive
offices of the Company not less than sixty (60) days nor more than ninety (90)
days prior to the first anniversary of the preceding year’s annual meeting of
Members; provided, however, that in the event that the date of the annual
meeting is advanced more than thirty (30) days prior to such anniversary date or
delayed more than sixty (60) days after such anniversary date then to be timely
such notice must be received by the Company no later than forty (40) days prior
to the date of the meeting. Such Member’s notice shall set forth (a) the name
and address of the Class A Member(s) or Class B Member(s) who intends to make
the nomination, (b) the name, age, business address and, if known, residence
address of each person so proposed, (c) the principal occupation or employment
of each person so proposed for the past five (5) years, (d) the number and
classes of membership units of the Company beneficially owned by each person so
proposed and the earliest date of acquisition of any such membership units, (e)
a description of any arrangement or understanding between each person so
proposed and the Class A Member(s) or Class B Members(s) making such nomination
with respect to such person's proposal for nomination and election as a Governor
and actions to be proposed or taken by such person if elected a Governor and (f)
the written consent of each person so proposed to serve as a Governor if
nominated and elected as a Governor. At the request of the Board of Governors,
any person nominated by the Board of Governors for election as a Governor shall
furnish to the secretary of the Company that information required to be set
forth in notice of nomination from a Class A Member or Class B Member which
pertains to the nominee. No person shall be eligible to serve as a Governor of
the Company unless nominated in accordance with the procedures set forth in this
Section 1.12. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this Section 1.12, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
1.13
Notice of
Business
. At any meeting of the Members, only such business shall be
conducted as shall have been brought before the meeting (a) by or at the
direction of the Board of Governors or (b) by any Member of the Company who is a
Member of record at the time of giving of the notice provided for in this
Section 1.13, who shall be entitled to vote on such business that the Member is
proposing, and who complies with the notice procedures set forth in this Section
1.13. For business to be properly brought before a Member meeting by a Member,
the Member must have given timely notice thereof in writing to the secretary of
the Company. To be timely, a Member’s notice shall be delivered to or mailed and
received at the principal executive offices of the Company not less than 120
calendar days prior to the first anniversary of the date the preceding year’s
annual meeting materials were released to the Members; provided, however, that
in the event that the date of the annual meeting is advanced more than thirty
(30) days prior to such anniversary date or delayed more than sixty (60) days
after such anniversary date then to be timely such notice must be received by
the Company no later than forty (40) days prior to the date of the meeting. A
Member’s notice to the secretary shall set forth as to each matter the Member
proposes to bring before the meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address, as they appear on the
Company’s books, of the Member proposing such business, (c)(i) the number and
classes of membership units of the Company which are held of record or are
beneficially owned by such Member and (ii) any derivative positions held or
beneficially held by the Member and the extent to which any hedging or other
transaction or series of transactions has been entered into by or on behalf of,
or any other agreement, arrangement or understanding has been made, the effect
or intent of which is to increase or decrease the Governance Rights of, such
Member with respect to the Company’s securities, and (d) any material interest
of the Member in such business. Notwithstanding anything in the Operating
Agreement to the contrary, no business shall be conducted at a Member meeting
except in accordance with the procedures set forth in this Section 1.13. The
chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section 1.13, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
GOVERNORS
2.1
Number;
Qualifications
. The Board of Governors shall be comprised of seven
(7) individuals. Governors shall be natural persons, and must be Members
(or Voting Representatives of entity Members) of the Company.
2.2
Election; Term
. The Class A Members and Class B Members shall elect the governors at a regular
meeting of Members. The procedural process for nominating and electing governors
shall be as set forth in Section 1.12 above and shall be communicated to all
Class A Members and Class B Members in a timely manner. Governors shall hold
office for staggered terms of three (3) years.
2.3
Removal of
Directors
.
(a)
By the Class A and Class B
Members
. The Class A and Class B Members may remove an elected
Governor without cause, by the affirmative vote of two thirds (2/3) of the total
Class A and Class B Units then outstanding at a meeting called for that purpose
(represented in person, by proxy or by mail ballot), if notice has been given
that a purpose of the meeting is such removal. The Class A and Class
B Members may also remove an elected Governor for cause in accordance with the
procedures set forth in Section 10.2 of the Member Control Agreement, if notice
has been given that a purpose of the meeting is such removal.
(b)
By the
Governors
. A super majority of seventy-five percent (75%) of
all Governors authorized to vote may remove any Governor (whether elected or
appointed), for cause, at a meeting of the Board of Governors called for that
purpose, if proper notice has been given that a purpose of the meeting is such
removal. For purposes of this Section 2.3, the phrase "for cause"
shall be interpreted to include conviction of a felony, engagement in fraudulent
or dishonest conduct, or gross abuse of authority or discretion with respect to
the Company.
2.4
Vacancies
.
Vacancies on the Board of Governors resulting from the death, resignation,
removal or disqualification of a governor may be filled by the affirmative vote
of a majority of the remaining governors, even though less than a quorum.
Vacancies on the Board resulting from newly-created governorships pursuant to
Section 6.6(a) may be filled by the affirmative vote of a majority of the
governors serving at the time such governorships are created. Each person
elected to fill a vacancy shall hold office until a qualified successor is
elected by the Class A Members and Class B Members at the next regular meeting
of the Members or at any special meeting of the Members duly called for that
purpose.
2.5
Place of
Meetings
. Each meeting of the Board of Governors shall be held at the
principal executive office of the Company or at such other place as may be
designated from time to time by a majority of the governors or by the President.
A meeting may be held by telephone or web conference among the governors using
any means of communication through which the governors may simultaneously hear
each other during the conference.
2.6
Regular
Meetings
. Regular meetings of the Board of Governors shall be held
periodically, as established by the Board, but not less than one per
month.
2.7
Special
Meetings
. A special meeting of the Board of Governors may be called for
any purpose or purposes at any time by the President or at least two
(2) governors by fixing the Date, time, and place of the meeting and
causing written notice of the meeting to be given. The notice must state the
purpose of the meeting.
2.8
Waiver of Notice;
Previously Scheduled Meetings
.
(a).
A governor of the Company may waive notice of the date, time, and place of a
meeting of the Board. A waiver of notice by a governor entitled to notice is
effective whether given before, at, or after the meeting, and whether given in
writing, orally or by attendance. Attendance by a governor at a meeting is a
waiver of notice of that meeting, unless the governor objects at the beginning
of the meeting to the transaction of business because the meeting is not
lawfully called or convened and thereafter does not participate in the
meeting.
(b)
If the day or date, time, and place of a Board meeting have been provided herein
or announced at a previous meeting of the Board, no notice is required. Notice
of an adjourned meeting need not be given other than by announcement at the
meeting at which adjournment is taken of the date, time and place at which the
meeting will be reconvened.
2.9
Quorum
. A
majority of the governors currently holding office shall be necessary to
constitute a quorum for the transaction of business. In the absence of a quorum,
a majority of the governors present may adjourn a meeting from time to time
without further notice until a quorum is present. If a quorum is present when a
duly called or held meeting is convened, the governors present may continue to
transact business until adjournment, even though the withdrawal of a number of
the governors originally present leaves less than the proportion or number
otherwise required for a quorum.
2.10
Absent Governors
. A
governor of the Company may give advance written consent or opposition to a
proposal to be acted on at a Board meeting. If the governor is not present at
the meeting, consent or opposition to a proposal does not constitute presence
for purposes of determining the existence of a quorum, but consent or opposition
shall be counted as a vote in favor of or against the proposal and shall be
entered in the minutes or other record of action at the meeting, if the proposal
acted on at the meeting is substantially the same or has substantially the same
effect as the proposal to which the governor has consented or
objected.
2.11
Compensation
.
The Board of Governors shall establish reasonable compensation of all governors
for services to the Company as governors, managers, or otherwise. By resolution
of the Board of Governors, the governors may be paid their expenses, if any, of
attendance at each meeting of the Board of Governors and incurred in action on
behalf of the Company.
MANAGERS
3.1
Number and
Designation
. The Company shall have one or more natural persons
exercising the functions of the position of President and Secretary/Treasurer.
The Board of Governors may elect or appoint such other managers or agents as it
deems necessary for the operation and management of the Company, with such
powers, rights, duties and responsibilities as may be determined by the Board,
each of whom shall have the powers, rights, duties and responsibilities set
forth in this Operating Agreement unless otherwise determined by the Board. Any
of the positions or functions of those positions may be held by the same
person.
3.2
President
.
Unless provided otherwise by a resolution adopted by the Board of Governors or
in the Member Control Agreement, the President, which shall include the title of
Chief Executive Officer, (a) shall have general active management of the
business of the Company; (b) shall, when present, preside at all meetings
of the Members of the Board; (c) shall see that all orders and resolutions
of the Board are carried into effect; (d) may maintain records of and certify
proceedings of the Board and Members; and (e) shall perform such other
duties as may from time to time be prescribed by the Board.
3.3
Treasurer
.
Unless provided otherwise by a resolution adopted by the Board of Governors or
in the Member Control Agreement, the Treasurer, which shall include the title of
Chief Financial Officer, (a) shall keep accurate financial records for the
Company; (b) shall deposit all monies, drafts and checks in the name of and
to the credit of the Company in such banks and depositories as the Board shall
designate from time to time; (c) shall endorse for deposit all notes,
checks and drafts received by the Company as ordered by the Board, making proper
vouchers therefor (d) shall disburse Company funds and issue checks and
drafts in the name of the Company, as ordered by the Board; (e) shall render to
the President and the Board, whenever requested, an account of all of such
manager’s transactions as Treasurer and of the financial condition of the
Company; and (f) shall perform such other duties as may be prescribed by
the Board or the President from time to time.
3.4
Vice Presidents
. The Board of Governors may establish the position of Vice-President. During
the absence of disability of the President, it shall be the duty of the
Vice-President to perform the duties of the President. The Vice-President shall
have such other duties and authority as established by the Board.
3.5
Secretary
. The
Secretary shall attend all meetings of the Board of Governors and of the Members
and shall maintain records of, and whenever necessary, certify all proceedings
of the Board of Governors and of the Members. The Secretary shall keep the
Required Records (as that term is defined in Section 10-32-02(55) of the North
Dakota Limited Liability Company Act, as amended from time to time) of the
Company, when so directed by the Board of Governors or other person or persons
authorized to call such meetings, shall give or cause to be given notice of
meetings of the Members and of meetings of the Board of Governors, and shall
also perform such other duties and have such other powers as the President or
the Board of Governors may prescribe from time to time.
3.6
Authority and
Duties
. In addition to the foregoing authority and duties, all managers
of the Company shall respectively have such authority and perform such duties in
the management of the business of the Company as may be designated from time to
time by the Board of Governors or in this Agreement. Unless prohibited by a
resolution approved by the affirmative vote of a majority of the governors
present, a manager elected or appointed by the Board may, without the approval
of the board, delegate some or all of the duties and powers of a position to the
Company’s employees, accountants, and legal counsel.
3.7
Term
.
(a)
All managers of the Company shall hold office until their respective successors
are chosen and have qualified or until their earlier death, resignation or
removal.
(b)
A manager may resign at any time by giving written notice to the Company. The
resignation is effective without acceptance when the notice is given to the
Company, unless a later effective date is specified in the notice.
(c)
A manager may be removed at any time, with or without cause, by a resolution
approved by the affirmative vote of a majority of the governors present at a
duly held Board meeting, subject to the provisions of the Member Control
Agreement.
(d)
A vacancy in a manager position because of death, resignation, removal,
disqualification or other cause may, including in the case of a vacancy in the
position of President or Treasurer, be filled for the unexpired portion of the
term by the Board.
3.8
Salaries
. The
salaries of all managers of the Company shall be fixed by the compensation
committee of the Board of Governors or by the President if authorized by the
Board.
INDEMNIFICATION
4.1
Indemnification
. The Company shall indemnify its managers and governors for such expenses and
liabilities, in such manner, unless such circumstances, and to such extent, as
required or permitted by Section 10-32-99 of the North Dakota Limited
Liability Company Act, as amended from time to time, or as required or permitted
by other provisions of law.
4.2
Insurance
. The
Company may purchase and maintain insurance on behalf of any person in such
person’s official capacity against any liability asserted against and incurred
by such person in or arising from that capacity, whether or not the Company
would otherwise be required to indemnify the person against the
liability.
MEMBERSHIP
INTERESTS
5.1
Statement of
Membership Interest
. At the request of any Member, the Company shall
state in writing, the particular Membership Interest owned by that Member as of
the date the Company makes the statement. The statement must describe the
Member’s rights to vote, to share in profits and losses, and to share in
distributions, as well as any assignment or the Member’s rights then in
effect.
5.2
Declaration of
Distributions
. The Board of Governors shall have the authority to
declare distributions to the Members to the extent permitted by
law.
5.3
Transfer of Membership
Interests
. Membership Interests in the Company may be transferred only
to the extent permitted by law and subject to the Member Control
Agreement.
MISCELLANEOUS
6.1
Execution of
Instruments
.
(a) All deeds, mortgages, bonds,
checks, contracts and other instruments pertaining to the business and affairs
of the Company shall be signed on behalf of the Company by the President or the
Secretary/Treasurer as may be designated from time to time by the Board of
Governors.
(b) If a document must be executed by
persons holding different positions or functions and one person holds such
positions or exercises such functions, that person may execute the document in
more than one capacity if the document indicates each such
capacity.
6.2
Advances
.
Subject to the limitations under the Sarbanes Oxley Act, the Company may,
without a vote of the governors, advance money to its governors, managers or
employees to cover expenses that can reasonably be anticipated to be incurred by
them in the performance of their duties and for which they would be entitled to
reimbursement in the absence of an advance.
6.3
Company Seal
.
The Company will be a no seal company.
6.4
Fiscal Year
.
The fiscal year of the Company shall be determined by the Board of
Governors.
6.5
Construction
.
This Operating Agreement is subject to the terms of the Member
Control Agreement, as amended from time to time, in effect and to the extent
inconsistent, the Member Control Agreement shall be
controlling. Definitions not defined herein are as defined in the
Member Control Agreement of the Company, as amended from time to
time.
6.6
Amendments
.
(a) The Board of Governors shall have
the power to adopt, amend or repeal the Operating Agreement of the Company,
subject to the power of the Class A Members to change or repeal the same as
provided in subsection (b) of this Section 6.6, provided, however, that the
Board shall not adopt, amend or repeal any Section fixing a quorum for meetings
of Members, prescribing procedures for removing governors or filling vacancies
in the Board, or fixing the number of governors or their classifications,
qualifications, or terms of office, but may adopt or amend a Section that
increases the number of governors.
(b) Class A Members owning 5% or more
of the Class A Governance Rights may propose a resolution for action by the
Class A Members to adopt, amend, or repeal this Agreement as adopted, amended,
or repealed by the Board and the resolution must set forth the provision or
provisions proposed for adoption, amendment or repeal. Such
resolution must be submitted to a vote of the Class A Members at the next
regular or special meeting of the Members which notice has not yet been given
but still can be timely given. The resolution is adopted when
approved by the affirmative vote of the holders of a majority of Class A
Governance Rights. Notwithstanding any provision of this Section 6.6 to the
contrary, this Agreement shall not be amended without the consent of the holders
of 75% of Units of each Class of Units adversely affected if such amendment
would modify the limited liability of a Member, or alter the Financial Rights of
a Member.
The undersigned hereby certifies that
the foregoing Second Amended and Restated Operating Agreement was duly adopted
as the Operating Agreement of the Company by its Board of Governors on
_________, 2010.
|
RED
TRAIL ENERGY LLC
|
|
|
|
____________________________________
|
|
Gerald
Bachmeier, Chief Executive Officer
|
APPENDIX
C
AMENDED
AND RESTATED MEMBER CONTROL AGREEMENT
AMENDED
AND RESTATED MEMBER CONTROL AGREEMENT
FOR
RED
TRAIL ENERGY, LLC
This is
an Amended and Restated Member Control Agreement for Red Trail Energy, LLC,
dated effective as of May 28, 2009 by and among Red Trail Energy, LLC, a North
Dakota limited liability company, and the Persons named on the attached
Schedule
A
.
ARTICLE
1.
DEFINITIONS
1.1
Defined
Terms
.
The terms defined
in this Article shall have the meanings given to them in this Article for
purposes of this Agreement. Certain other capitalized terms in this
Agreement may be defined elsewhere in this Agreement. All defined
terms in this Agreement include the singular and the plural as the context
indicates.
1.2
Agreement
.
“Agreement” means
this Member Control Agreement as amended or restated.
1.3
Articles
of Organization
.
“Articles of
Organization” or “Articles” means the Articles of Organization for the Company
filed with the North Dakota Secretary of State as amended or
restated.
1.4
Board of
Governors
.
“Board of
Governors” or “Board” means the Board of Governors of the Company.
1.5
Capital
Accounts
.
“Capital
Accounts” mean the capital accounts required to be maintained by the Company for
each Member as provided in this Agreement.
1.6
Code
.
“Code” means the
Internal Revenue Code of 1986, as amended, and any comparable successor to such
Code. All references to a section of the Code shall mean and include
any subsequent amendment or replacement of such section.
1.7
Company
.
“Company” means
Red Trail Energy, LLC.
1.8
Event of
Termination
.
An “Event of
Termination” means an event described in Section 13.1.
1.9
Financial
Rights
.
“Financial
Rights” mean a Person’s rights to share in income, gain, receipt, loss,
deduction, credit and distribution as provided in this Agreement and any right
to assign such rights.
1.10
Governance
Rights
.
“Governance
Rights” mean all of a Member’s rights as a Member in the Company except for
Financial Rights or any right to assign Financial Rights.
1.11
Governor
.
“Governor” or
“Board member” means each natural person serving on the
Board. Governors or Board members are collectively referred to as
“Governors” or “Board members.” A Governor must be a Member of the
Company, or an authorized representative of an entity member.
1.12
LLC
Act
.
“LLC Act” means
the North Dakota limited liability company act, as amended, and any comparable
successor to such LLC Act. All references to a section of the LLC Act
shall mean and include any subsequent amendment or replacement of such
section.
1.13
Members
.
“Members” mean
all Persons reflected in the required records of the Company as the owners of
all or some Governance Rights of a Membership Interest. Members are
individually referred to as a “Member.” A Person may be a Member
without having voting rights, but a Person is not a Member if the Person’s
Membership Interest consists only of Financial Rights.
1.14
Membership
Interest
.
“Membership
Interest” means the interest in the Company consisting of each Person’s
Financial Rights and/or Governance Rights and any right such Person has to
assign such Person’s Financial Rights and/or Governance Rights. The
Membership Interests for all such Persons are collectively referred to as the
“Membership Interests.”
1.15
Officer
.
“Officer” means
the natural person elected, appointed, or otherwise designated as an Officer
pursuant to this Agreement and the LLC Act, including the President and
Treasurer. An Officer need not be a Member of the
Company. An Officer is a “Manager” for purposes of the LLC
Act.
1.16
Person
.
“Person” includes
a natural person or a domestic or foreign limited liability company,
corporation, partnership, limited partnership, joint venture, association,
business trust, estate, trust, enterprise, and any other legal or commercial
entity.
1.17
Treasury
Regulations
.
The “Treasury
Regulations” mean the treasury regulations promulgated under the
Code.
1.18
Units
.
“Units” are used
to designate Membership Interests as provided in Article 4 of this
Agreement.
ARTICLE
2.
SCOPE
AND EFFECT OF AGREEMENT
2.1
Member
Control Agreement
.
The Persons who
are parties to this Agreement intend to make specific arrangements relating to
the (i) formation, operations, ownership, governance, management, and
dissolution of the Company; (ii) allocation of income, receipt, gain, loss,
deduction, credit, and distribution; (iii) receipt of additional capital,
admission of new Members and all valuation issues associated with the receipt of
such additional capital and admission of Members; (iv) transfer or encumbrance,
whether voluntary or involuntary, of Membership Interests; and (v) other matters
related to the Company. This Agreement shall constitute a Member
Control Agreement under Section 10-32-50 of the LLC Act. It is
expressly intended that, during the entire term of this Agreement, the
provisions of this Agreement shall supersede any provisions of the LLC Act, as
they now exist or as may be subsequently amended or restated, that are
inconsistent or conflict with the provisions of this Agreement to the maximum
extent permitted by law.
2.2
Prior
Agreements
.
This Agreement
supersedes all prior agreements to which any or all of the parties to this
Agreement are parties to the extent that such prior agreements are inconsistent
with this Agreement.
2.3
Parties
Subject to Agreement
.
This Agreement
shall be binding on and inure to the benefit of the Company; each Person owning
a Membership Interest; and their respective heirs, legal representatives,
successors, and assigns. This Agreement is enforceable by and against
Persons who are parties to this Agreement, and this Agreement is binding upon
and enforceable against Persons who acquire an interest in a Membership Interest
or in a contribution agreement having knowledge of the existence of this
Agreement. A Person’s express agreement to be bound by this Agreement
or any amendment or restatement of this Agreement may be evidenced by such
Person or such Person’s legal representative either (i) signing this Agreement
or such amendment or restatement, or any predecessor Member Control Agreement of
the Company; (ii) signing a signature page to this Agreement or such amendment
or restatement that references this Agreement and/or such amendment or
restatement, or signing a signature page to any predecessor Member Control
Agreement of the Company; or (iii) signing any other document, statement or
instrument that evidences agreement to be a party to this Agreement and/or such
amendment or restatement, or signing any other document, statement or instrument
that evidences agreement to be a party to any predecessor Member Control
Agreement of the Company.
2.4
Membership
Interests Subject to Agreement
.
This Agreement
shall apply to all Membership Interests of the Company which are now owned or
hereafter acquired by or on behalf of any Person, whether by purchase, dividend,
split, or other recapitalization, gift, devise, or any other means
whatsoever.
2.5
Amendment
of Agreement
.
The terms and
provisions of this Agreement may be amended, restated or terminated only by the
agreement of the Members holding at least 66.67% of the Units having Governance
Rights entitled to vote, except as may be otherwise specifically provided in
this Agreement, provided, however, in no event may this Agreement be amended to
provide for less than unanimous consent to avoid dissolution under
Section 13.2. Amending or restating this Agreement will
not give rise to dissenters’ rights as provided in Section 10-32-54 of the LLC
Act.
2.6
Enforcement
of Agreement
.
If a Person
violates the terms of this Agreement, the Company and/or any Member may take
legal action against such Person or pursue an order compelling such Person to do
something or restraining such Person from doing something. If a
Person violates the terms of this Agreement, the Company and/or any Member will
be entitled to recover from such Person reasonable attorney’s fees and costs
incurred in connection with enforcing the terms of this Agreement. If
a court deems any term of this Agreement to be overly broad, superseded by the
LLC Act, or otherwise unenforceable or void, the court may modify and thereafter
enforce the term and the balance of this Agreement to the fullest extent
permitted by law, or sever such term if it cannot be so modified and enforce all
of the other terms of this Agreement to the fullest extent permitted by
law.
2.7
Arbitration
.
Any dispute
arising out of or relating to this Agreement or the breach thereof (including
fraud in the inducement) shall be discussed between the parties in a good-faith
effort to arrive at a settlement. If such dispute cannot be resolved
through discussion, such dispute shall be settled by arbitration
administered by the American Arbitration Association (“AAA”) under its
Commercial Arbitration Rules. The AAA Optional Rules for Emergency
Measures of Protection shall also apply to the proceedings. The
arbitration shall be conducted in Burleigh County, North Dakota by a single
arbitrator. The costs of the arbitration, including the arbitrator’s
compensation, shall be borne equally by the parties, except that the arbitrator
shall have discretion to reallocate such costs. Each party shall bear its
own attorneys’ fees. Judgment on the award may be entered in any court
having jurisdiction thereof.
ARTICLE
3.
ORGANIZATION
OF COMPANY
3.1
Formation
of the Company
.
The Company is a
limited liability company formed pursuant to the terms of the LLC Act except as
otherwise provided in this Agreement, and the rights and liabilities of the
Persons owning or holding Membership Interests, Governors and Officers are as
provided under the LLC Act, except as otherwise provided in this
Agreement.
3.2
Term of
the Company
.
The Company shall
exist perpetually until it is terminated in accordance with this Agreement and
the LLC Act.
3.3
Indemnification
.
The Company shall
indemnify each Member, Governor, Officer and agent of the Company in such
manner, under such circumstances, and to such extent as permitted by Section
10-32-99 of the LLC Act.
3.4
Tax
Matters
.
|
(1)
|
Tax
Status
.
The Company
shall be classified and taxed as a partnership for federal and state
income tax purposes except to the extent that the Company is to be
disregarded as an entity for federal and state income tax purposes
pursuant to applicable provisions of the Code. If the Company
is disregarded for income tax purposes, the Company shall not be
disregarded as a separate legal entity for any other purpose, including
but not limited to, diminishing in any respect the LLC Act providing that
a Person owning or holding Membership Interests, Governor, Officer or
other agent of the Company is not, merely on account of such status,
personally liable for the acts, debts, liabilities, or obligations of the
Company.
|
|
(2)
|
Tax
Matters Partner
.
Any “tax
matters partner” of the Company required to be appointed by the Code shall
be the Person selected by the Board that meets the qualifications of the
Code and applicable Treasury
Regulations.
|
|
(3)
|
Tax
Elections
.
All
elections permitted or required to be made for federal or state income tax
purposes on behalf of the Company, including but not limited to, the
election under Section 754 of the Code, and all revocations of such
elections, shall be made by the
Board.
|
ARTICLE
4.
MEMBERSHIP
INTERESTS, UNITS AND REGISTRATION
4.1
Class of
Membership Interests
.
The Company shall
initially have one class of Membership Interests, having the Governance Rights
and Financial Rights described in this Agreement. The Board may
establish one or more additional classes or series of Units, designate each such
additional class or series, and fix the relative rights and preferences of each
such additional class or series.
4.2
Additional
Classes of Membership Interests
.
Membership
Interests of the Company of a different class or series than the existing
Membership Interests may only be issued by the Board.
4.3
Units
.
The Company shall
use Units to designate Membership Interests for purposes of allocating income,
gain, receipt, loss, deduction, credit, and distribution; voting; and such other
purposes as provided in this Agreement.
|
(1)
|
General
.
Each Unit
shall represent Governance Rights consisting of one vote per Unit when a
vote is permitted or required by this Agreement and the LLC Act and
Financial Rights consisting of the right to the allocations of income,
gain, receipt, loss, deduction and credit and the right to distributions
as provided in the Agreement.
|
|
(2)
|
Assignment
.
If any
Governance Rights or Financial Rights are separately assigned as provided
in this Agreement, the Company shall reflect in the required records of
the Company the number of Units designating Governance Rights and the
number of Units designating Financial
Rights.
|
|
(3)
|
Required
Records
.
Ownership
of Membership Interests and the Units designating Membership Interests,
including the Governance Rights and Financial Rights, shall be as is
reflected in the required records of the Company and shall be binding on
the Company only to the extent so reflected. No transfer or
assignment of Membership Interests, Governance Rights or Financial Rights
and no designation of Units shall be effective until reflected in the
required records of the Company and then only to the extent so
reflected. The Company may request written evidence of any
transfer or assignment in a form and content acceptable to the Company
before reflecting any such transfer, assignment, or designation in the
required records of the Company. Any allocations of income,
gain, receipt, loss, deduction, credit, and distribution by the Company
and votes made, in each case, in reliance on the Company’s required
records shall acquit the Company of all liability to any Person who may
have an interest in such allocations, distributions, or
vote.
|
ARTICLE
5.
CAPITAL
AND OTHER ACCOUNTS
5.1
Required
Capital Accounts
.
|
(1)
|
Establishment
and Operation of Accounts
.
The Company
shall maintain a separate Capital Account for each Person owning a
Membership Interest having Financial Rights in accordance with Section
704(b) of the Code and applicable Treasury Regulations. Each
such Capital Account shall be (i) increased by the initial contribution
made to the Company by such Person; (ii) increased by additional
contributions, if any, made to the Company by such Person; (iii) decreased
by distributions made from the Company to such Person; and (iv) otherwise
adjusted as provided in this
Agreement.
|
|
(2)
|
Maintenance
of Accounts
.
The Capital
Accounts shall be maintained in accordance with Section 704(b) of the Code
and applicable Treasury Regulations. The Board may,
notwithstanding any other provisions in this Agreement, alter the method
by which Capital Accounts are maintained in order to comply with Section
704(b) of the Code and applicable Treasury
Regulations.
|
|
(3)
|
Events
Triggering Revaluation
.
The Board
shall restate the value of the Capital Accounts (and by so doing the value
of the old contributions) upon (i) any contribution made to the Company;
(ii) any distribution from the Company that was not made in proportion to
all Units; and (iii) the determination by the Board that a re-valuation is
appropriate to maintain Capital Accounts in accordance with Section 704(b)
of the Code and applicable Treasury Regulations. The Board may
use any method it determines appropriate to revalue the Capital
Accounts. If a contribution is made to the Company, absent any
valuation method specifically adopted by the Board, the Capital Accounts
shall be deemed to have been revalued by the Board such that, immediately
after the receipt of such contribution, the value of each Capital Account
for each Person owning a Membership Interest having Financial Rights will
bear the same proportion to the value of all Capital Accounts for all
Persons owning Membership Interests having Financial Rights as the number
of such Person’s Units designating Financial Rights bears to all of the
Units designating Financial Rights. It is intended that the
methods of revaluation of Capital Accounts provided in this Section of the
Agreement override Section 10-32-57 of the LLC Act including the
revaluation of the old
contributions.
|
5.2
Additional
Accounts
.
The Company may
maintain additional accounts for each Person owning a Membership Interest having
Financial Rights to reflect the equity shown on the Company’s financial
statements, to record such Person’s basis for income tax purposes, or for any
other purpose.
5.3
No
Interest; Effect of Balances
.
A positive
balance in a Capital Account or any other account for a Person shall not bear
interest; affect the allocation of income, gain, receipt, loss, deduction or
credit to a Person; or entitle a Person to any distributions or other economic
benefits. A negative balance in a Capital Account or any other
account for a Person shall not constitute an obligation of such Person to the
Company except as specifically provided in this Agreement or as such Person may
otherwise specifically agree in writing.
ARTICLE
6.
ALLOCATIONS
6.1
General
Allocations
.
All items of
income, gain, receipt, loss, deduction, and credit of the Company for each
fiscal year shall be allocated among all of the Persons owning Membership
Interests having Financial Rights, and to such Person’s Capital Accounts, in the
proportion that the total number of each Person’s Units having Financial Rights
bears to all of the Units having Financial Rights.
6.2
Allocations
for Income Taxes
.
The allocations
in Section 6.1 apply with respect to allocations solely for income tax purposes
except as provided in this Section 6.2. Allocations pursuant to this
Section 6.2 shall not affect, or in any way be taken into account in computing,
any Person’s Capital Account, right to vote, or allocable shares of income,
gain, receipt, loss, deduction, credit or distribution as provided in any other
Section of this Agreement.
|
(1)
|
Section 704(c)
.
Income,
gain, receipt, loss, deduction, and credit with respect to any property
contributed to the Company shall, solely for income tax purposes, be
allocated so as to take account of any variation between the adjusted
basis of such property to the Company for income tax purposes and the
value ascribed to such property in the Company’s books and records in
accordance with Section 704(c) of the Code and applicable Treasury
Regulations. In addition, if the Capital Accounts or any asset
of the Company is revalued pursuant to the provisions of this Agreement or
Section 704(b) of the Code and applicable Treasury Regulations, subsequent
allocations of income, gain, receipt, loss, deduction, and credit for
income tax purposes with respect to such asset shall take account of any
variation between the adjusted basis of such asset for federal income tax
purposes and its adjusted value in the same manner as under Section 704(c)
and applicable Treasury Regulations. Any elections or other
decisions relating to such allocations shall be made by the
Board.
|
|
(2)
|
Section
754
.
Any
election by the Company under Section 754 of the Code to adjust the basis
of the Company assets pursuant to Section 734 of the Code or Section 743
of the Code shall be made in the sole discretion of the
Board. If such an election is made, allocations of Company
items of income, gain, receipt, loss, deduction, and credit shall be made
in a manner consistent with such allocation of items in accordance with
Section 734 and/or Section 743 of the Code, as the case may
be.
|
|
(3)
|
Section
706(d)
.
In the
event of any changes in Membership Interests during a fiscal year, then
for purposes of this Article 6, the Board shall take into account the
requirements of Section 706(d) of the Code and shall have the right to
select any method of determining the varying interests of the Persons
owning Membership Interests of the Persons owning Membership Interests
having Financial Rights during the year which satisfies Section 706(d) of
the Code.
|
ARTICLE
7.
DISTRIBUTIONS
7.1
Distributions
.
|
(1)
|
Interim
Distributions
.
Subject to
Section 10-32-64 of the LLC Act, distributions may be made from the
Company at such times and in such amounts as determined from time to time
by the Board to the Persons owning Membership Interests having Financial
Rights in the proportion that the total number of each Person’s Units
having Financial Rights bears to all of the Units having Financial
Rights. It is intended that the method of allocating
distributions provided in this Section overrides Section 10-32-60 of the
LLC Act.
|
|
(2)
|
Terminating
Distributions
.
Upon
termination of the Company, assets of the Company, including proceeds from
liquidation of the Company’s assets, shall be applied in the following
order of priority:
|
|
(a)
|
To
creditors of the Company, including Persons owning Membership Interests
who are creditors, to the extent otherwise permitted by law, in
satisfaction of liabilities of the Company other than liabilities for
interim distributions or terminating distributions to Persons owning
Membership Interests having Financial
Rights.
|
|
(b)
|
To
reasonable reserves, if any, deemed necessary by the Board to provide for
the contingent liabilities of the
Company.
|
|
(c)
|
To
Persons owning Membership Interests having Financial Rights in the
proportion of each Person’s positive Capital Account
balance. It is intended that the method of allocating
distributions provided in this Section overrides Section 10-32-131, subd.
1(c) of the LLC Act.
|
7.2
Liquidations
.
Notwithstanding
anything herein to the contrary, the Board may provide for non-pro rata
distributions in the event of a distribution that reduces the outstanding
Membership Interests of a Person.
7.3
In
Kind
.
Distributions
from the Company may be in cash or in kind, but no Person shall have any right
to demand and receive any distribution from the Company in any form other than
cash.
ARTICLE
8.
ISSUANCE
OF MEMBERSHIP INTERESTS AND UNITS; CONTRIBUTIONS
8.1
Issuance
of Membership Interests and Units
.
The Board is
authorized to accept contributions, issue, sell and deliver Membership Interests
having Governance Rights and Financial Rights, Governance Rights only, or
Financial Rights only, and, in each case, consisting of the class of Membership
Interest that is then authorized to such Persons, at such times, and upon such
terms and conditions as the Board shall determine. The Board shall
establish a price in money or other consideration, or a minimum price, or a
general formula or method by which the price of such Membership Interests shall
be determined. The Board shall also fix the number of Units to
designate such Membership Interests. There is no limitation on the
number of Units used to designate such Membership Interests that may be so
issued by the Board. If the Board does not specifically designate
when issuing Membership Interests pursuant to this Agreement that such
Membership Interest has Governance Rights and Financial Rights, Governance
Rights only, or Financial Rights only, such Membership Interest shall be deemed
to have both Governance Rights and Financial Rights for all purposes of this
Agreement.
8.2
Issuance
of Rights to Purchase
.
The Board is
further authorized to enter into contribution agreements and contribution
allowance agreements and to otherwise grant and issue rights to subscribe for,
purchase, exchange securities for, or to convert securities into, Membership
Interests having Governance Rights and Financial Rights, Governance Rights only,
or Financial Rights only, and, in each case, consisting of the class of
Membership Interest that is then authorized with such Persons, at such times,
and upon such terms and conditions as the Board shall determine. The
Board shall fix the terms, provisions and conditions of such agreements,
including the price in money or other consideration, or a minimum price, or a
general formula or method by which the price of the Membership Interests shall
be determined or the exchange or conversion basis or the price at which such
Membership Interests may be purchased or subscribed for. The Board
shall also fix the number of Units to designate such Membership
Interests. There is no limitation on the number of Units used to
designate such Membership Interests that may be so issued by the
Board.
8.3
Unit
Dividends and Splits
.
The Board shall
have the authority to declare and effect any dividend or split of any Units used
to designate the class of Membership Interest of the Company that is then
authorized in which the number of Units of such Membership Interests are
increased or decreased ratably.
8.4
Valuation
of Contributions
.
The Board shall
value all non-monetary contributions made to the Company in exchange for
Membership Interests. Whenever the Company accepts contributions, the
Board shall also revalue the Capital Accounts as provided in Article 5 of this
Agreement.
8.5
Preemptive
Rights
.
No Member, merely
because of such Member’s status as a Member or an owner of Units, shall have any
preemptive rights to purchase any Units proposed to be sold or issued by the
Company. Nothing in this Agreement shall limit the right of the
Company to grant, by contract or otherwise, preemptive or first refusal rights
to one or more Members.
ARTICLE
9.
ADMISSION
OF MEMBERS
9.1
Admission
Following Issuance of Membership Interest
.
If the Board
issues Membership Interests having Governance Rights to a Person who is not then
a Member, such Person shall be admitted as a Member as of the effective date
that (i) such Person pays or is required to pay to the Company the amount the
Board determines to be contributed to the Company in exchange for the Membership
Interests to be issued to such Person, and (ii) such Person executes and
delivers to the Company such Person’s agreement to be bound by this Agreement in
such form and content as is acceptable to the Board. If the Board
issues Membership Interests to a Person who is then a Member, such Person shall
continue as a Member and shall be bound by this Agreement and such Membership
Interests shall be automatically subject to this Agreement. Upon
completion of any of such actions, the Company shall reflect the name and
address of the Member; the nature and type of contribution; the type of
Membership Interest, including the Governance Rights and Financial Rights; and
the number of Units designating such Membership Interest in the required records
of the Company as of such effective date.
9.2
Admission
Following Transfer or Assignment
.
The following
provisions apply to transferees or assignees of Membership
Interests.
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(1)
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Assignment
Which Includes Governance Rights
.
Any
transferee or assignee of a Membership Interest having Governance Rights
who is not already a Member may be admitted, subject to the affirmative
approval of such transferee or assignee as a Member by the Board, as a
Member with respect to such Membership Interest as of the effective date
that such Person executes and delivers to the Company such Person’s
agreement to be bound by this Agreement in such form and content as is
acceptable to the Board. Any transferee or assignee of a
Membership Interest in the Company who is already a Member shall continue
as a Member and shall be bound by this Agreement and such Membership
Interests shall be automatically subject to this
Agreement.
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(2)
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Assignee
of Only Financial Rights
.
Any Person
who is not a Member but who is a transferee or assignee of a Membership
Interest having only Financial Rights shall entitle such Person to
receive, to the extent assigned, the share of the profits and losses and
the distributions to which the assignor would otherwise be entitled but
shall not entitle or empower such Person to become a Member, to exercise
any Governance Rights, to receive any notices from the Company or to cause
dissolution of the Company.
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(3)
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Reflection
in Required Records
.
Upon
completion of any such actions, the Company shall reflect in the required
records of the Company the name and address of the transferee or assignee;
the nature and extent of the transfer or assignment; the type of
Membership Interest so transferred or assigned; whether the Governance
Rights or Financial Rights or both were transferred or assigned; and the
number of Units used to designate such Membership
Interest.
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ARTICLE
10.
MEMBERS
10.1
Voting
.
Each Member shall
have one vote for each Unit having Governance Rights entitled to vote that is
reflected in the name of such Member in the required records of the
Company. It is intended that the method of voting by Members provided
in this Section and throughout this Agreement is intended to override Section
10-32-40.1, subd. 5. At each meeting of the Members, every Member
owning Units having Governance Rights entitled to vote shall be entitled to vote
in person or by proxy duly appointed by an instrument in writing subscribed by
such Member. Procedures for notice, voting, and conduct of any
meeting of Members shall be as provided in the Operating Agreement of the
Company.
ARTICLE
11.
BOARD
OF GOVERNORS
11.1
General
Authority
.
The business and
affairs of the Company shall be directed by a Board of Governors, which shall be
composed of governors elected in the manner and shall operate in the manner
provided in the Operating Agreement of the Company.
ARTICLE
12.
OFFICERS
12.1
General
Authority
.
The business and
affairs of the Company shall be managed by the Officers subject to the direction
of the Board of Governors, which Officers shall operate in the manner provided
in the Operating Agreement of the Company.
ARTICLE
13.
EVENTS
TERMINATING MEMBERSHIP
13.1
Events of
Termination
.
The continued
membership of a Member in the Company is terminated upon the first to occur of
any of the following events occurring with respect to a Member (each an “Event
of Termination”):
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(2)
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The
Member’s retirement or resignation as a Member of the Company as defined
in Section 10-32-30 of the LLC Act;
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(3)
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The
redemption of such Member’s complete Membership Interest in the
Company;
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(4)
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An
assignment or a buyout of such Member’s Membership Interest that leaves
such Member with no Governance Rights as provided in Sections 10-32-32 or
10-32-119 of the LLC Act;
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(5)
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The
Member’s bankruptcy;
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(6)
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The
dissolution of such Member that is a domestic or foreign limited liability
company, corporation, partnership, limited partnership, joint venture,
operation, business trust, estate, trust, enterprise, or any other legal
or commercial entity;
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(7)
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A
merger in which the Company is not the surviving organization;
or
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(8)
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The
occurrence of any other event that terminates the continued membership of
the Member in the Company.
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13.2
Effect of
Event of Termination
.
If an Event of
Termination occurs with respect to any Member, the following provisions shall
apply:
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(1)
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Dissolution
Avoidance Consent
.
An event that
terminates the continued membership of a Member shall not cause the
company to be dissolved unless it is the last or sole member of the
Company. After the occurrence of an event, as provided in Section 13.1,
that terminates the continued membership of another Member in the Company,
each remaining Member may be asked to consent to the continuation of the
Company as a legal entity without dissolution and to the continuation of
its business, pursuant to the power set forth in Article V of the
Articles of Organization of the
Company.
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(2)
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Effect
on Member.
An Event of Termination does not give a
Member a right to have such Member’s Membership Interest purchased except
as specifically provided in this Agreement. The Membership
Interest of such Member shall continue to have the same Governance Rights
and Financial Rights as existed immediately prior to such Event of
Termination except to the extent that such Event of Termination resulted
in the redemption of such Membership Interest or the cancellation of such
Membership Interest as in the event of a merger in which the Company is
not the surviving organization.
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(3)
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Effect
on Transferee or Assignee
. Any transferee or assignee of
such Member’s Membership Interest having Governance Rights and Financial
Rights or only Governance Rights may be admitted as a Member as provided
in Article 9 of this Agreement; provided, if such Event of Termination
occurs with respect to the last or sole Member of the Company, the legal
representative of such Member shall be deemed to be admitted as a Member
as of the effective date of such Event of Termination and shall be deemed
to own the Membership Interest owned by such Member immediately prior to
such Event of Termination, including all Governance Rights and Financial
Rights, and, in such event, the Company shall not be dissolved as provided
in Section 10-32-109 of the LLC
Act.
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ARTICLE
14.
TRANSFERS
AND RESTRICTIONS REGARDING MEMBERSHIP INTERESTS
14.1
Permitted
Transfer or Assignment
.
A Person may
freely transfer or assign all or any portion of such Person’s Membership
Interest, including Governance Rights and/or Financial Rights, under the
following conditions:
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(1)
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by
sale, gift, or devise to a spouse or child of such
Person;
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(2)
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following
the death, withdrawal, bankruptcy, divorce, separation, dissolution or
termination of such Person;
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(3)
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by
a Person and any related persons (as defined in
Section 267(b) of the Code) in one or more transactions during
any thirty (30) calendar day period of Membership Interests
representing in the aggregate less than two percent (2%) of the total
outstanding Membership Interests in the
Company;
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(4)
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by
a Person and any other Persons, acting together, of Membership Interests
representing in the aggregate more than fifty percent (50%) of the total
outstanding Membership Interests in the
Company;
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(5)
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by
transfer effected through a qualified matching service
program;
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(6)
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or
otherwise, subject to the restrictions set forth in this
Agreement.
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The transferor or assignor of all or
any such portion of such Membership Interest shall continue to be a Member of
the Company to the extent such transferor or assignor retains a Membership
Interest having Governance Rights, but shall cease to be the owner of the
Governance Rights and/or Financial Rights transferred or
assigned. The transferee or assignee of the Governance Rights and
Financial Rights or only Governance Rights may be admitted as a Member as
provided in Article 9 of this Agreement.
14.2
Conditions
Precedent to Transfers.
The Board of Governors, in its sole discretion,
may elect not to recognize any transfer of Units unless and until the Company
has received:
(1) an
opinion of counsel (whose fees and expenses shall be borne by the transferor)
satisfactory in form and substance to the Board that such transfer may be
lawfully made without registration or qualification under applicable state and
federal securities laws, or such transfer is properly registered or qualified
under applicable state and federal securities laws and if, requested by the
Company that such transfer will not cause the company to be treated as a
publicly traded partnership;
(2) such
documents and instruments of conveyance executed by the transferor and
transferee as may be necessary or appropriate in the opinion of counsel to the
Company to effect such transfer, except that in the case of a transfer of units
involuntarily by operation of law, the transfer shall be confirmed by
presentation of legal evidence of such transfer, in form and substance
satisfactory to the Company;
(3) the
transferor’s Unit certificate;
(4) the
transferee’s taxpayer identification number and sufficient information to
determine the transferee’s initial tax basis in the interest transferred, and
any other information reasonably necessary to permit the company to file all
required federal and state tax returns and other legally required information
statements or returns; and
(5) other
conditions on the transfer of units adopted by the Board from time to time as it
deems appropriate, in its sole discretion.
IN
WITNESS WHEREOF, the Company and Members have executed this Agreement with all
of the schedules referenced herein effective as of the date first above
written.
RED
TRAIL ENERGY, LLC
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By:
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/s/ Mike Appert
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Its:
Chairman
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COUNTERPART
SIGNATURE PAGE
TO
MEMBER
CONTROL AGREEMENT
FOR
RED TRAIL
ENERGY, LLC
IN WITNESS WHEREOF,
______________________ has executed this Member Control Agreement of Red
Trail Energy, LLC dated effective as of ___________________, 20__, as of
_______________________, 20__.
SCHEDULE
A
TO
MEMBER
CONTROL AGREEMENT
OF
RED TRAIL
ENERGY, LLC
Name
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Addresses
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Number of Units With Full
Governance and Financial Rights
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APPENDIX
D
PROPOSED
SECOND AMENDED AND RESTATED MEMBER CONTROL AGREEMENT
SECOND
AMENDED AND RESTATED MEMBER CONTROL AGREEMENT
FOR
RED
TRAIL ENERGY, LLC
This
Second Amended and Restated Member Control Agreement for Red Trail Energy, LLC
is dated effective as of _________, 2010 by and among Red Trail Energy, LLC, a
North Dakota limited liability company, and the Persons named on the attached
Schedule
A
.
ARTICLE
1.
DEFINITIONS
1.1
Defined
Terms
.
The terms defined
in this Article shall have the meanings given to them in this Article for
purposes of this Agreement and the Operating Agreement of the Company, as may be
amended from time to time. Certain other capitalized terms in this
Agreement may be defined elsewhere in this Agreement. All defined
terms in this Agreement include the singular and the plural as the context
indicates.
1.2
Agreement
.
“Agreement” means
this Member Control Agreement as amended or restated.
1.3
Articles
of Organization
.
“Articles of
Organization” or “Articles” means the Articles of Organization for the Company
filed with the North Dakota Secretary of State as amended or
restated.
1.4
Board of
Governors
.
“Board of
Governors” or “Board” means the Board of Governors of the Company.
1.5
Capital
Accounts
.
“Capital
Accounts” mean the capital accounts required to be maintained by the Company for
each Member as provided in this Agreement.
1.6
Class A
Member.
“Class A Member” means any Person who: (i) has become
a Member pursuant to the terms of this Agreement, and (ii) is the owner of one
or more Class A Units. “Class A Members” means all such
Persons.
1.7
Class A
Unit.
“Class A Unit” means an ownership interest in the
Company representing a capital contribution made as provided in Article 4 in
consideration of Units that have been classified into Class A Units, including
any and all benefits to which the holder of such Units may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement and the Operating
Agreement.
1.8
Class A Unit
Holder(s)
. “Class A Unit Holder(s)” means the owner(s) of one
or more Class A Units.
1.9
Class B
Member.
“Class B Member” means any Person who: (i) has become
a Member pursuant to the terms of this Agreement, and (ii) is the owner of one
or more Class B Units. “Class B Members” means all such
Persons.
1.10
Class B
Unit.
“Class B Unit” means an ownership interest in the
Company representing a capital contribution made as provided in Article 4 in
consideration of Units that have been classified into Class B Units, including
any and all benefits to which the holder of such Units may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement and the Operating
Agreement.
1.11
Class B Unit
Holder(s)
. “Class B Unit Holder(s)” means the owner(s) of one
or more Class B Units.
1.12
Class C
Member.
“Class C Member” means any Person who: (i) has become
a Member pursuant to the terms of this Agreement, and (ii) is the owner of one
or more Class C Units. “Class C Members” means all such
Persons.
1.13
Class C
Unit.
“Class C Unit” means an ownership interest in the
Company representing a capital contribution made as provided in Article 4 in
consideration of Units that have been classified into Class C Units, including
any and all benefits to which the holder of such Units may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement and the Operating
Agreement.
1.14
Class C Unit
Holder(s)
. “Class C Unit Holder(s)” means the owner(s) of one
or more Class C Units.
1.15
Classification.
“Classification”
means the division of the Company’s Units into different classes such that the
Company has fewer than 300 Class A Members of record, and fewer than 500 Members
in any other class, resulting in a suspension of the Company’s reporting
obligations as a public company upon making the appropriate filings with the
SEC.
1.16
Classification
Date.
“Classification Date” means 5:00 p.m. on _________,
2010.
1.17
Code
.
“Code” means the
Internal Revenue Code of 1986, as amended, and any comparable successor to such
Code. All references to a section of the Code shall mean and include
any subsequent amendment or replacement of such section.
1.18
Company
.
“Company” means
Red Trail Energy, LLC.
1.19
Event of
Termination
.
An “Event of
Termination” means an event described in Section 13.1.
1.20
Financial
Rights
.
“Financial
Rights” mean a Unit Holder’s rights to share in income, gain, receipt, loss,
deduction, credit and distribution as provided in this Agreement and any right
to assign such rights.
1.21
Governance
Rights
.
“Governance
Rights” means all of a Member’s rights as a Member in the Company except for
Financial Rights or any right to assign Financial Rights, including, a Member’s
right to vote as set forth in this Agreement, the Operating Agreement, or
required by the LLC Act. The Governance Rights of a Member shall mean
as to any matter to which the Member is entitled to vote hereunder, under the
Operating Agreement or as may be required under the LLC Act, the right to one
(1) vote for each Unit registered in the same of such Member as shown in the
Membership Registry.
1.22
Governor
.
“Governor” or
“Board member” means each natural person serving on the
Board. Governors or Board members are collectively referred to as
“Governors” or “Board members.” A Governor must be a Member of the
Company, or an authorized representative of an entity member.
1.23
LLC
Act
.
“LLC Act” means
the North Dakota limited liability company act, as amended, and any comparable
successor to such LLC Act. All references to a section of the LLC Act
shall mean and include any subsequent amendment or replacement of such
section.
1.24
Members
.
“Members” mean
all Persons reflected in the Membership Register of the Company as the owners of
Membership Interest. Members are individually referred to as a
“Member.” A Person may be a Member without having voting rights, but
a Person is not a Member if the Person’s Membership Interest consists only of
Financial Rights.
1.25
Membership
Interest
.
“Membership
Interest” means the interest in the Company consisting of each Person’s
Financial Rights and Governance Rights and any right such Person has to assign
such Person’s Financial Rights and/or Governance Rights. The
Membership Interests for all such Persons are collectively referred to as the
“Membership Interests.”
1.26
Membership
Registry.
“Membership Registry” means the membership register
maintained by the Company at its principal office or a duly appointed agent of
the Company setting forth the name, address, the number of Units, and Capital
Accounts of each Member of the Company, which shall be modified from time to
time as additional Units are issued and as Units are transferred pursuant to
this Agreement.
1.27
Officer
.
“Officer” means
the natural person elected, appointed, or otherwise designated as an Officer
pursuant to this Agreement, the Operating Agreement, and/or the LLC Act,
including the President and Treasurer. An Officer need not be a
Member of the Company. An Officer is a “Manager” for purposes of the
LLC Act.
1.28
Operating
Agreement
. “Operating Agreement” means the Operating Agreement
of the Company, as effect and amended from time to time.
1.29
Person
.
“Person” includes
a natural person or a domestic or foreign limited liability company,
corporation, partnership, limited partnership, joint venture, association,
business trust, estate, trust, enterprise, and any other legal or commercial
entity.
1.30
Required
Records.
“Required Records” shall have the meaning as set
forth in Section 10-32-02(55) of the Act and shall specifically include the
Company’s Membership Registry.
1.31
Treasury
Regulations
.
The “Treasury
Regulations” mean the treasury regulations promulgated under the
Code.
1.32
Unit
Holder(s).
Unit Holder(s) means the owner(s) of one more
Units.
1.32
Units
.
“Units” are used
to designate Membership Interests, collectively of all classes, as provided in
Article 4 of this Agreement.
ARTICLE
2.
SCOPE
AND EFFECT OF AGREEMENT
2.1
Member
Control Agreement
.
The Persons who
are parties to this Agreement intend to make specific arrangements relating to
the (i) formation, operations, ownership, governance, management, and
dissolution of the Company; (ii) allocation of income, receipt, gain, loss,
deduction, credit, and distribution; (iii) receipt of additional capital,
admission of new Members and all valuation issues associated with the receipt of
such additional capital and admission of Members; (iv) transfer or encumbrance,
whether voluntary or involuntary, of Membership Interests; and (v) other matters
related to the Company. This Agreement shall constitute a Member
Control Agreement under Section 10-32-50 of the LLC Act. It is
expressly intended that, during the entire term of this Agreement, the
provisions of this Agreement shall supersede any provisions of the LLC Act, as
they now exist or as may be subsequently amended or restated, that are
inconsistent or conflict with the provisions of this Agreement to the maximum
extent permitted by law.
2.2
Prior
Agreements
.
This Agreement
supersedes all prior agreements to which any or all of the parties to this
Agreement are parties to the extent that such prior agreements are inconsistent
with this Agreement and specifically supersedes the Amended and Restated Member
Control Agreement dated May 28, 2009.
2.3
Parties
Subject to Agreement
.
This Agreement
shall be binding on and inure to the benefit of the Company; each Person owning
a Membership Interest; and their respective heirs, legal representatives,
successors, and assigns. This Agreement is enforceable by and against
Persons who are parties to this Agreement, and this Agreement is binding upon
and enforceable against Persons who acquire an interest in a Membership Interest
or in a contribution agreement having knowledge of the existence of this
Agreement. A Person’s express agreement to be bound by this Agreement
or any amendment or restatement of this Agreement may be evidenced by such
Person or such Person’s legal representative either (i) signing this Agreement
or such amendment or restatement, or any predecessor Member Control Agreement of
the Company; (ii) signing a signature page to this Agreement or such amendment
or restatement that references this Agreement and/or such amendment or
restatement, or signing a signature page to any predecessor Member Control
Agreement of the Company; or (iii) signing any other document, statement or
instrument that evidences agreement to be a party to this Agreement and/or such
amendment or restatement, or signing any other document, statement or instrument
that evidences agreement to be a party to any predecessor Member Control
Agreement of the Company.
2.4
Membership
Interests Subject to Agreement
.
This Agreement
shall apply to all Membership Interests of the Company which are now owned or
hereafter acquired by or on behalf of any Person, whether by purchase, dividend,
split, or other recapitalization, gift, devise, or any other means
whatsoever.
2.5
Amendment
of Agreement
.
The terms and
provisions of this Agreement may be amended, restated or terminated only by the
agreement of the Class A Members holding at least 66.67% of the Class A Units
having Governance Rights entitled to vote, except as may be otherwise
specifically provided in this Agreement, provided, however, in no event may this
Agreement be amended to provide for less than unanimous consent to avoid
dissolution under Section 13.2. Amending or restating this
Agreement will not give rise to dissenters’ rights as provided in Section
10-32-54 of the LLC Act. Notwithstanding any provision of this
Section 2.5 to the contrary, this Agreement shall not be amended without
the consent of the holders of 75% of Units of each Class of Units adversely
affected if such amendment would modify the limited liability of a Member, or
alter the Financial Rights of a Member.
2.6
Enforcement
of Agreement
.
If a Person
violates the terms of this Agreement, the Company and/or any Member may take
legal action against such Person or pursue an order compelling such Person to do
something or restraining such Person from doing something. If a
Person violates the terms of this Agreement, the Company and/or any Member will
be entitled to recover from such Person reasonable attorney’s fees and costs
incurred in connection with enforcing the terms of this Agreement. If
a court deems any term of this Agreement to be overly broad, superseded by the
LLC Act, or otherwise unenforceable or void, the court may modify and thereafter
enforce the term and the balance of this Agreement to the fullest extent
permitted by law, or sever such term if it cannot be so modified and enforce all
of the other terms of this Agreement to the fullest extent permitted by
law.
2.7
Arbitration
.
Any dispute
arising out of or relating to this Agreement or the breach thereof (including
fraud in the inducement) shall be discussed between the parties in a good-faith
effort to arrive at a settlement. If such dispute cannot be resolved
through discussion, such dispute shall be settled by arbitration
administered by the American Arbitration Association (“AAA”) under its
Commercial Arbitration Rules. The AAA Optional Rules for Emergency
Measures of Protection shall also apply to the proceedings. The
arbitration shall be conducted in Burleigh County, North Dakota by a single
arbitrator. The costs of the arbitration, including the arbitrator’s
compensation, shall be borne equally by the parties, except that the arbitrator
shall have discretion to reallocate such costs. Each party shall bear its
own attorneys’ fees. Judgment on the award may be entered in any court
having jurisdiction thereof.
ARTICLE
3.
ORGANIZATION
OF COMPANY
3.1
Formation
of the Company
.
The Company is a
limited liability company formed pursuant to the terms of the LLC Act except as
otherwise provided in this Agreement, and the rights and liabilities of the
Persons owning or holding Membership Interests, Governors and Officers are as
provided under the LLC Act, except as otherwise provided in this
Agreement.
3.2
Term of
the Company
.
The Company shall
exist perpetually until it is terminated in accordance with this Agreement and
the LLC Act.
3.3
Indemnification
.
The Company shall
indemnify each Member, Governor, Officer and agent of the Company in such
manner, under such circumstances, and to such extent as permitted by Section
10-32-99 of the LLC Act.
3.4
Tax
Matters
.
(1)
Tax
Status
.
The Company shall
be classified and taxed as a partnership for federal and state income tax
purposes except to the extent that the Company is to be disregarded as an entity
for federal and state income tax purposes pursuant to applicable provisions of
the Code. If the Company is disregarded for income tax purposes, the
Company shall not be disregarded as a separate legal entity for any other
purpose, including but not limited to, diminishing in any respect the LLC Act
providing that a Person owning or holding Membership Interests, Governor,
Officer or other agent of the Company is not, merely on account of such status,
personally liable for the acts, debts, liabilities, or obligations of the
Company.
(2)
Tax
Matters Partner
.
Any “tax matters
partner” of the Company required to be appointed by the Code shall be the Person
selected by the Board that meets the qualifications of the Code and applicable
Treasury Regulations.
(3)
Tax
Elections
.
All elections
permitted or required to be made for federal or state income tax purposes on
behalf of the Company, including but not limited to, the election under Section
754 of the Code, and all revocations of such elections, shall be made by the
Board.
ARTICLE
4.
MEMBERSHIP
INTERESTS, UNITS AND REGISTRATION
4.1
Class of
Membership Interests
.
A Member’s
Membership Interest in the Company shall be designated in
Units. Effective as of the Classification Date, there shall be three
(3) classes of Membership Units such that:
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(1)
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Each
Unit outstanding immediately prior to the Classification Date owned by a
Member who is the holder of record of fifty thousand (50,000) or more
Units on the Classification Date shall, by virtue of this Section 4.1 and
without any action on the part of the holder thereof, hereafter be
classified as a Class A Unit;
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(2)
|
Each
Unit outstanding immediately prior to the Classification Date owned by a
Member who is the holder of record of ten thousand and one (10,001) Units
but no more than forty nine thousand nine hundred ninety-nine (49,999)
Units on the Classification Date shall by virtue of this Section 4.1
without any action on the part of the holder thereof, hereafter classified
as a Class B Unit; and
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(3)
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Each
Unit outstanding immediately prior to the Classification Date owned by a
Member who is the holder of record of ten thousand (10,000) or less Units
on the Classification Date shall by virtue of this Section 4.1 without any
action on the part of the holder thereof, hereafter classified as a Class
C Unit.
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The
classification of each Unit as a Class A Unit, Class B Unit or Class C Unit
effective as of the Classification Date, as provided in this Section 4.1, shall
remain in effect permanently following the Classification Date.
4.2
Rights
or Powers.
Except as
otherwise expressly provided for in this Agreement, the Members shall not have
any right or power to take part in the management or control of the Company or
its business and affairs to act for or bind the Company in any way.
4.3
Additional
Classes of Membership Interests
.
The Board may
establish one or more additional classes or series of Units, designate each such
additional class or series, and fix the relative rights and preferences of each
such additional class or series.
Membership
Interests of the Company of a different class or series than the existing
Membership Interests may only be issued by the Board.
4.4
Units
.
The Company shall
use Units to designate Membership Interests for purposes of allocating income,
gain, receipt, loss, deduction, credit, and distribution; voting; and such other
purposes as provided in this Agreement.
(1)
General
.
Each Unit shall
represent Governance Rights consisting of one vote per Unit when a vote is
permitted or required by this Agreement, the Operating Agreement, or the LLC
Act, and Financial Rights consisting of the right to the allocations of income,
gain, receipt, loss, deduction and credit and the right to distributions as
provided in the Agreement.
(2)
Assignment
.
If any Governance
Rights or Financial Rights are separately assigned as provided in this
Agreement, the Company shall reflect in the Required Records, including the
Member Registry, of the Company the number of Units designating Governance
Rights and the number of Units designating Financial Rights.
(3)
Required
Records
.
Ownership of
Membership Interests and the Units designating Membership Interests, including
the Governance Rights and Financial Rights, shall be as is reflected in the
Required Records of the Company and shall be binding on the Company only to the
extent so reflected. No transfer or assignment of Membership
Interests, Governance Rights or Financial Rights and no designation of Units
shall be effective until reflected in the Required Records of the Company and
then only to the extent so reflected. The Company may request written
evidence of any transfer or assignment in a form and content acceptable to the
Company before reflecting any such transfer, assignment, or designation in the
Required Records of the Company. Any allocations of income, gain,
receipt, loss, deduction, credit, and distribution by the Company and votes
made, in each case, in reliance on the Company’s Required Records shall acquit
the Company of all liability to any Person who may have an interest in such
allocations, distributions, or vote.
ARTICLE
5.
CAPITAL
AND OTHER ACCOUNTS
5.1
Required
Capital Accounts
.
(1)
Establishment
and Operation of Accounts
.
The Company shall
maintain a separate Capital Account for each Person owning a Membership Interest
having Financial Rights in accordance with Section 704(b) of the Code and
applicable Treasury Regulations. Each such Capital Account shall be
(i) increased by the initial contribution made to the Company by such Person;
(ii) increased by additional contributions, if any, made to the Company by such
Person; (iii) decreased by distributions made from the Company to such Person;
and (iv) otherwise adjusted as provided in this Agreement.
(2)
Maintenance
of Accounts
.
The Capital
Accounts shall be maintained in accordance with Section 704(b) of the Code and
applicable Treasury Regulations. The Board may, notwithstanding any
other provisions in this Agreement, alter the method by which Capital Accounts
are maintained in order to comply with Section 704(b) of the Code and applicable
Treasury Regulations.
(3)
Events
Triggering Revaluation
.
The Board shall
restate the value of the Capital Accounts (and by so doing the value of the old
contributions) upon (i) any contribution made to the Company; (ii) any
distribution from the Company that was not made in proportion to all Units; and
(iii) the determination by the Board that a re-valuation is appropriate to
maintain Capital Accounts in accordance with Section 704(b) of the Code and
applicable Treasury Regulations. The Board may use any method it
determines appropriate to revalue the Capital Accounts. If a
contribution is made to the Company, absent any valuation method specifically
adopted by the Board, the Capital Accounts shall be deemed to have been revalued
by the Board such that, immediately after the receipt of such contribution, the
value of each Capital Account for each Person owning a Membership Interest
having Financial Rights will bear the same proportion to the value of all
Capital Accounts for all Persons owning Membership Interests having Financial
Rights as the number of such Person’s Units designating Financial Rights bears
to all of the Units designating Financial Rights. It is intended that
the methods of revaluation of Capital Accounts provided in this Section of the
Agreement override Section 10-32-57 of the LLC Act including the revaluation of
the old contributions.
5.2
Additional
Accounts
.
The Company may
maintain additional accounts for each Person owning a Membership Interest having
Financial Rights to reflect the equity shown on the Company’s financial
statements, to record such Person’s basis for income tax purposes, or for any
other purpose.
5.3
No
Interest; Effect of Balances
.
A positive
balance in a Capital Account or any other account for a Person shall not bear
interest; affect the allocation of income, gain, receipt, loss, deduction or
credit to a Person; or entitle a Person to any distributions or other economic
benefits. A negative balance in a Capital Account or any other
account for a Person shall not constitute an obligation of such Person to the
Company except as specifically provided in this Agreement or as such Person may
otherwise specifically agree in writing.
ARTICLE
6.
ALLOCATIONS
6.1
General
Allocations
.
All items of
income, gain, receipt, loss, deduction, and credit of the Company for each
fiscal year shall be allocated among all of the Persons owning Membership
Interests having Financial Rights, and to such Person’s Capital Accounts, in the
proportion that the total number of each Person’s Units having Financial Rights
bears to all of the Units having Financial Rights.
6.2
Allocations
for Income Taxes
.
The allocations
in Section 6.1 apply with respect to allocations solely for income tax purposes
except as provided in this Section 6.2. Allocations pursuant to this
Section 6.2 shall not affect, or in any way be taken into account in computing,
any Person’s Capital Account, right to vote, or allocable shares of income,
gain, receipt, loss, deduction, credit or distribution as provided in any other
Section of this Agreement.
(1)
Section 704(c)
.
Income, gain,
receipt, loss, deduction, and credit with respect to any property contributed to
the Company shall, solely for income tax purposes, be allocated so as to take
account of any variation between the adjusted basis of such property to the
Company for income tax purposes and the value ascribed to such property in the
Company’s books and records in accordance with Section 704(c) of the Code
and applicable Treasury Regulations. In addition, if the Capital
Accounts or any asset of the Company is revalued pursuant to the provisions of
this Agreement or Section 704(b) of the Code and applicable Treasury
Regulations, subsequent allocations of income, gain, receipt, loss, deduction,
and credit for income tax purposes with respect to such asset shall take account
of any variation between the adjusted basis of such asset for federal income tax
purposes and its adjusted value in the same manner as under Section 704(c) and
applicable Treasury Regulations. Any elections or other decisions
relating to such allocations shall be made by the Board.
(2)
Section
754
.
Any election by
the Company under Section 754 of the Code to adjust the basis of the Company
assets pursuant to Section 734 of the Code or Section 743 of the Code shall be
made in the sole discretion of the Board. If such an election is
made, allocations of Company items of income, gain, receipt, loss, deduction,
and credit shall be made in a manner consistent with such allocation of items in
accordance with Section 734 and/or Section 743 of the Code, as the case may
be.
(3)
Section
706(d)
.
In the event of
any changes in Membership Interests during a fiscal year, then for purposes of
this Article 6, the Board shall take into account the requirements of Section
706(d) of the Code and shall have the right to select any method of determining
the varying interests of the Persons owning Membership Interests of the Persons
owning Membership Interests having Financial Rights during the year which
satisfies Section 706(d) of the Code.
ARTICLE
7.
DISTRIBUTIONS
7.1
Distributions
.
(1)
Interim
Distributions
.
Subject to
Section 10-32-64 of the LLC Act, distributions may be made from the Company at
such times and in such amounts as determined from time to time by the Board to
the Persons owning Membership Interests having Financial Rights in the
proportion that the total number of each Person’s Units having Financial Rights
bears to all of the Units having Financial Rights. It is intended
that the method of allocating distributions provided in this Section overrides
Section 10-32-60 of the LLC Act.
(2)
Terminating
Distributions
.
Upon termination
of the Company, assets of the Company, including proceeds from liquidation of
the Company’s assets, shall be applied in the following order of
priority:
(a) To
creditors of the Company, including Persons owning Membership Interests who are
creditors, to the extent otherwise permitted by law, in satisfaction of
liabilities of the Company other than liabilities for interim distributions or
terminating distributions to Persons owning Membership Interests having
Financial Rights.
(b) To
reasonable reserves, if any, deemed necessary by the Board to provide for the
contingent liabilities of the Company.
(c) To
Persons owning Membership Interests having Financial Rights in the proportion of
each Person’s positive Capital Account balance. It is intended that
the method of allocating distributions provided in this Section overrides
Section 10-32-131, subd. 1(c) of the LLC Act.
7.2
Liquidations
.
Notwithstanding
anything herein to the contrary, the Board may provide for non-pro rata
distributions in the event of a distribution that reduces the outstanding
Membership Interests of a Person.
7.3
In
Kind
.
Distributions
from the Company may be in cash or in kind, but no Person shall have any right
to demand and receive any distribution from the Company in any form other than
cash.
ARTICLE
8.
ISSUANCE
OF MEMBERSHIP INTERESTS AND UNITS; CONTRIBUTIONS
8.1
Issuance
of Membership Interests and Units
.
The Board is
authorized to accept contributions, issue, sell and deliver Membership Interests
having Governance Rights and Financial Rights, Governance Rights only, or
Financial Rights only, and, in each case, consisting of the class of Membership
Interest that is then authorized to such Persons, at such times, and upon such
terms and conditions as the Board shall determine. The Board shall
establish a price in money or other consideration, or a minimum price, or a
general formula or method by which the price of such Membership Interests shall
be determined. The Board shall also fix the number of Units to
designate such Membership Interests. There is no limitation on the
number of Units used to designate such Membership Interests that may be so
issued by the Board, so long as such issuance shall not cause the Company to
become subject to reporting obligations as a public company. If an
issuance of Units would case the Company to become subject to reporting
obligations as a public company, such issuance must first be approved by the
holders of a majority of Class A Governance Rights.
8.2
Issuance
of Rights to Purchase
.
The Board is
further authorized to enter into contribution agreements and contribution
allowance agreements and to otherwise grant and issue rights to subscribe for,
purchase, exchange securities for, or to convert securities into, Membership
Interests having Governance Rights and Financial Rights, Governance Rights only,
or Financial Rights only, and, in each case, consisting of the class of
Membership Interest that is then authorized with such Persons, whether Class A,
Class B, or Class C Units, at such times, and upon such terms and conditions as
the Board shall determine. The Board shall fix the terms, provisions
and conditions of such agreements, including the price in money or other
consideration, or a minimum price, or a general formula or method by which the
price of the Membership Interests shall be determined or the exchange or
conversion basis or the price at which such Membership Interests may be
purchased or subscribed for. The Board shall also fix the number of
Units to designate such Membership Interests. Subject to Section 8.1,
there is no limitation on the number of Units used to designate such Membership
Interests that may be so issued by the Board.
8.3
Unit
Dividends and Splits
.
The Board shall
have the authority to declare and effect any dividend or split of any Units used
to designate the class of Membership Interest of the Company that is then
authorized in which the number of Units of such Membership Interests are
increased or decreased ratably.
8.4
Valuation
of Contributions
.
The Board shall
value all non-monetary contributions made to the Company in exchange for
Membership Interests. Whenever the Company accepts contributions, the
Board shall also revalue the Capital Accounts as provided in Article 5 of this
Agreement.
8.5
Preemptive
Rights
.
No Member, merely
because of such Member’s status as a Member or an owner of Units, shall have any
preemptive rights to purchase any Units proposed to be sold or issued by the
Company. Nothing in this Agreement shall limit the right of the
Company to grant, by contract or otherwise, preemptive or first refusal rights
to one or more Members.
ARTICLE
9.
ADMISSION
OF MEMBERS
9.1
Admission
Following Issuance of Membership Interest
.
If the Board
issues Membership Interests having Governance Rights to a Person who is not then
a Member, such Person shall be admitted as a Member as of the effective date
that (i) such Person pays or is required to pay to the Company the amount the
Board determines to be contributed to the Company in exchange for the Membership
Interests to be issued to such Person, and (ii) such Person executes and
delivers to the Company such Person’s agreement to be bound by this Agreement in
such form and content as is acceptable to the Board. If the Board
issues Membership Interests to a Person who is then a Member, such Person shall
continue as a Member and shall be bound by this Agreement and such Membership
Interests shall be automatically subject to this Agreement. Upon
completion of any of such actions, the Company shall reflect the name and
address of the Member; the nature and type of contribution; the type of or class
of Membership Interest, including the Governance Rights and Financial Rights;
and the number of Units designating such Membership Interest in the Required
Records of the Company as of such effective date.
9.2
Admission
Following Transfer or Assignment
.
The following
provisions apply to transferees or assignees of Membership
Interests.
(1)
Assignment
Which Includes Governance Rights
.
Any transferee or
assignee of a Membership Interest having Governance Rights who is not already a
Member may be admitted, subject to the affirmative approval of such transferee
or assignee as a Member by the Board, as a Member with respect to such
Membership Interest as of the effective date that such Person executes and
delivers to the Company such Person’s agreement to be bound by this Agreement in
such form and content as is acceptable to the Board. Any transferee
or assignee of a Membership Interest in the Company who is already a Member
shall continue as a Member and shall be bound by this Agreement and such
Membership Interests shall be automatically subject to this
Agreement.
(2)
Assignee
of Only Financial Rights
.
Any Person who is
not a Member but who is a transferee or assignee of a Membership Interest having
only Financial Rights shall entitle such Person to receive, to the extent
assigned, the share of the profits and losses and the distributions to which the
assignor would otherwise be entitled but shall not entitle or empower such
Person to become a Member, to exercise any Governance Rights, to receive any
notices from the Company or to cause dissolution of the Company.
(3)
Reflection
in Required Records
.
Upon completion
of any such actions, the Company shall reflect in the Required Records of the
Company the name and address of the transferee or assignee; the nature and
extent of the transfer or assignment; the type of Membership Interest so
transferred or assigned; whether the Governance Rights or Financial Rights or
both were transferred or assigned; and the number of Units used to designate
such Membership Interest.
ARTICLE
10.
MEMBERS
10.1
Voting
.
Each Member shall
have one vote for each Unit having Governance Rights entitled to vote that is
reflected in the name of such Member in the Required Records of the
Company. It is intended that the method of voting by Members provided
in this Section and throughout this Agreement is intended to override Section
10-32-40.1, subd. 5 of the Act. At each meeting of the Members, every
Member owning Units having Governance Rights entitled to vote shall be entitled
to vote in person or by proxy duly appointed by an instrument in writing
subscribed by such Member. Procedures for notice, voting, and conduct
of any meeting of Members and variance of Governance Rights among the Classes of
Members, shall be as provided herein and in the Operating Agreement of the
Company.
10.2
Acts of
Members
. Except as otherwise required by law or specified in the Articles
of Organization of the Company, herein, or in the Operating Agreement, the
Members shall take action by the affirmative vote of the owners of the greater
of (a) Units representing a majority of the Governance Rights of the
Membership Interests present and entitled to vote on that item of business or
(b) Units representing a majority of the Governance Rights of the
Membership Interests that would constitute a quorum for the transaction of
business at a duly held meeting of Members.
10.3
Action
Without a Meeting
. Any action required or permitted to be taken at a
meeting of the Members of the Company may be taken without a meeting by written
action signed by all of the Members entitled to vote on that action. Any action,
if the Articles of Organization or this Agreement so provide, will be effective
when a written action signed by the Members who own Governance Rights equal to
the Governance Rights that would be required to take the same action at a
meeting of the Members and entitled to vote on such action, unless a different
effective time is provided in the written action. When written action is
permitted to be taken by less than all Members, all Members shall be notified
immediately of its text and effective date.
ARTICLE
11.
BOARD
OF GOVERNORS
11.1
General
Authority
.
The business and
affairs of the Company shall be directed by a Board of Governors, which shall be
composed of governors elected in the manner and shall operate in the manner
provided in this Agreement and the Operating Agreement of the
Company.
11.2
Acts of
Board
. Except as otherwise required by law or specified in the Articles
of Organization of the Company, this Agreement, or the Operating Agreement,
assuming a quorum is present, the Board shall take action by the affirmative
vote of a majority of the governors present at a duly held meeting.
11.3
Action
Without a Meeting
. Any action required or permitted to be taken at a
meeting of the Board of Governors of the Company may be taken without a meeting
by written action signed by the number of governors who would be required to
take the same action at a meeting of the governors at which all governors were
present. The written action is effective when signed by the required governors
unless a different effective time is provided in the written action. Notice of
the text of such written action must be given in advance to all
governors.
ARTICLE
12.
OFFICERS
12.1
General
Authority
.
The business and
affairs of the Company shall be managed by the Officers, which is the same as a
Manager under the North Dakota Limited Liability Company Act and the Operating
Agreement, subject to the direction of the Board of Governors, which Officers
shall operate in the manner provided in the Operating Agreement of the
Company.
ARTICLE
13.
EVENTS
TERMINATING MEMBERSHIP
13.1
Events of
Termination
.
The continued
membership of a Member in the Company is terminated upon the first to occur of
any of the following events occurring with respect to a Member (each an “Event
of Termination”):
(1) The
Member’s death;
(2) The
Member’s retirement or resignation as a Member of the Company as defined in
Section 10-32-30 of the LLC Act;
(3) The
redemption of such Member’s complete Membership Interest in the
Company;
(4) An
assignment or a buyout of such Member’s Membership Interest that leaves such
Member with no Governance Rights as provided in Sections 10-32-32 or 10-32-119
of the LLC Act;
(5) The
Member’s bankruptcy;
(6) The
dissolution of such Member that is a domestic or foreign limited liability
company, corporation, partnership, limited partnership, joint venture,
operation, business trust, estate, trust, enterprise, or any other legal or
commercial entity;
(7) A
merger in which the Company is not the surviving organization; or
(8) The
occurrence of any other event that terminates the continued membership of the
Member in the Company.
13.2
Effect of
Event of Termination
.
If an Event of
Termination occurs with respect to any Member, the following provisions shall
apply:
(1)
Dissolution
Avoidance Consent
.
An event that
terminates the continued membership of a Member shall not cause the company to
be dissolved unless it is the last or sole member of the Company. After the
occurrence of an event, as provided in Section 13.1, that terminates the
continued membership of another Member in the Company, each remaining Member may
be asked to consent to the continuation of the Company as a legal entity without
dissolution and to the continuation of its business, pursuant to the power set
forth in Article V of the Articles of Organization of the
Company.
(2)
Effect on
Member.
An Event of Termination does not give a Member a right
to have such Member’s Membership Interest purchased except as specifically
provided in this Agreement. The Membership Interest of such Member
shall continue to have the same Governance Rights and Financial Rights as
existed immediately prior to such Event of Termination except to the extent that
such Event of Termination resulted in the redemption of such Membership Interest
or the cancellation of such Membership Interest as in the event of a merger in
which the Company is not the surviving organization.
(3)
Effect on
Transferee or Assignee
. Any transferee or assignee of such
Member’s Membership Interest having Governance Rights and Financial Rights or
only Governance Rights may be admitted as a Member as provided in Article 9 of
this Agreement; provided, if such Event of Termination occurs with respect to
the last or sole Member of the Company, the legal representative of such Member
shall be deemed to be admitted as a Member as of the effective date of such
Event of Termination and shall be deemed to own the Membership Interest owned by
such Member immediately prior to such Event of Termination, including all
Governance Rights and Financial Rights, and, in such event, the Company shall
not be dissolved as provided in Section 10-32-109 of the LLC Act.
ARTICLE
14.
TRANSFERS
AND RESTRICTIONS REGARDING MEMBERSHIP INTERESTS
14.1
Permitted
Transfer or Assignment
.
A Person may
freely transfer or assign all or any portion of such Person’s Membership
Interest, including Governance Rights and/or Financial Rights, under the
following conditions:
(1) by
sale, gift, or devise to a spouse or child of such Person;
(2) following
the death, withdrawal, bankruptcy, divorce, separation, dissolution or
termination of such Person;
(3) by
a Person and any related persons (as defined in Section 267(b) of the
Code) in one or more transactions during any thirty (30) calendar day
period of Membership Interests representing in the aggregate less than two
percent (2%) of the total outstanding Membership Interests in the
Company;
(4) by
a Person and any other Persons, acting together, of Membership Interests
representing in the aggregate more than fifty percent (50%) of the total
outstanding Membership Interests in the Company;
(5) by
transfer effected through a qualified matching service program;
(6) if
the transfer will not result in the number of Class A Unit Holders of record
equaling three hundred (300) or more, or such other number as required to
maintain suspension of the Company’s reporting obligations under the Securities
Exchange Act of 1934, as amended, unless otherwise consented to by the Board of
Directors;
(7) if
the transfer will not result in the number of Class B or Class C Unit Holders of
record equaling five hundred (500) or more, or such other number that would
otherwise require the Company to register its Class B or Class C Units with the
Securities and Exchange Commission, unless otherwise consented to by the Board
of Directors;
(6) or
otherwise, subject to the restrictions set forth in this Agreement.
The transferor or assignor of all or
any such portion of such Membership Interest shall continue to be a Member of
the Company to the extent such transferor or assignor retains a Membership
Interest having Governance Rights, but shall cease to be the owner of the
Governance Rights and/or Financial Rights transferred or
assigned. The transferee or assignee of the Governance Rights and
Financial Rights or only Governance Rights may be admitted as a Member as
provided in Article 9 of this Agreement.
14.2
Conditions
Precedent to Transfers.
The Board of Governors, in its sole discretion,
may elect not to recognize any transfer of Units unless and until the Company
has received:
(1) an
opinion of counsel (whose fees and expenses shall be borne by the transferor)
satisfactory in form and substance to the Board that such transfer may be
lawfully made without registration or qualification under applicable state and
federal securities laws, or such transfer is properly registered or qualified
under applicable state and federal securities laws and if, requested by the
Company that such transfer will not cause the company to be treated as a
publicly traded partnership;
(2) such
documents and instruments of conveyance executed by the transferor and
transferee as may be necessary or appropriate in the opinion of counsel to the
Company to effect such transfer, except that in the case of a transfer of units
involuntarily by operation of law, the transfer shall be confirmed by
presentation of legal evidence of such transfer, in form and substance
satisfactory to the Company;
(3) the
transferor’s Unit certificate;
(4) the
transferee’s taxpayer identification number and sufficient information to
determine the transferee’s initial tax basis in the interest transferred, and
any other information reasonably necessary to permit the company to file all
required federal and state tax returns and other legally required information
statements or returns; and
(5) other
conditions on the transfer of units adopted by the Board from time to time as it
deems appropriate, in its sole discretion.
IN
WITNESS WHEREOF, the Company and Members have executed this Agreement with all
of the schedules referenced herein effective as of the date first above
written.
RED
TRAIL ENERGY, LLC
|
|
By:
|
|
Its:
Chairman
|
COUNTERPART
SIGNATURE PAGE
TO
MEMBER
CONTROL AGREEMENT
FOR
RED TRAIL
ENERGY, LLC
IN WITNESS WHEREOF,
______________________ has executed this Member Control Agreement of Red
Trail Energy, LLC dated effective as of _______________________, 20__, as of
_______________________, 20__.
SCHEDULE
A
TO
MEMBER
CONTROL AGREEMENT
OF
RED TRAIL
ENERGY, LLC
Name
|
|
Addresses
|
|
Class of Units
|
|
|
|
|
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APPENDIX
E
FORM
10-K FISCAL YEAR END
DECEMBER
31, 2009
FORM
10-Q FISCAL QUARTER END
JUNE
30, 2010
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the quarterly period ended June 30, 2010
¨
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the transition period from _____________ to ______________
Commission
file number 000-53039
RED
TRAIL ENERGY, LLC
(Name of
registrant as specified in its charter)
NORTH
DAKOTA
|
76-0742311
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
3682
Highway 8 South, P.O. Box 11, Richardton, North Dakota
|
58652
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(701)
974-3308
(Registrant’s
telephone number)
Indicate
by check mark whether the registrant (1) 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.
x
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
¨
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
¨
|
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
x
|
(Do not check if a smaller reporting company)
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: As of August 13, 2010 there
were 40,193,973 Class A Membership Units.
INDEX
|
|
Page
|
|
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PART
I — FINANCIAL INFORMATION
|
|
3
|
Item
1. – Condensed Financial Statements
|
|
3
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
|
13
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
25
|
Item
4. Controls and Procedures
|
|
27
|
|
|
|
PART
II — OTHER INFORMATION
|
|
27
|
Item
1.
Legal
Proceedings
|
|
27
|
Item
1A. Risk Factors
|
|
28
|
Item
2.
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
|
28
|
Item
3.
Defaults
Upon Senior Securities
|
|
28
|
Item
4.
Removed
and Reserved
|
|
28
|
Item
5.
Other
Information
|
|
28
|
Item
6. Exhibits
|
|
29
|
|
|
|
SIGNATURES
|
|
29
|
PART
I — FINANCIAL INFORMATION
Item 1. –
Condensed Financial Statements
RED
TRAIL ENERGY, LLC
CONDENSED
BALANCE SHEETS
|
|
June 30, 2010
|
|
|
|
|
|
|
(Unaudited)
|
|
|
December
31,
2009
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
5,456,716
|
|
|
$
|
13,214,091
|
|
Restricted
cash
|
|
|
844,942
|
|
|
|
2,217,013
|
|
Accounts
receivable
|
|
|
2,672,952
|
|
|
|
2,635,775
|
|
Derivative
instruments, at fair value
|
|
|
―
|
|
|
|
129,063
|
|
Inventory
|
|
|
5,931,783
|
|
|
|
6,993,031
|
|
Prepaid
expenses
|
|
|
169,398
|
|
|
|
195,639
|
|
Total
current assets
|
|
|
15,075,791
|
|
|
|
25,384,612
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
Land
|
|
|
351,280
|
|
|
|
351,280
|
|
Land
improvements
|
|
|
3,970,500
|
|
|
|
3,970,500
|
|
Buildings
|
|
|
5,312,995
|
|
|
|
5,312,995
|
|
Plant
and equipment
|
|
|
79,441,785
|
|
|
|
79,199,850
|
|
Construction
in progress
|
|
|
94,358
|
|
|
|
―
|
|
|
|
|
89,170,918
|
|
|
|
88,834,625
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
20,322,359
|
|
|
|
17,419,043
|
|
Net
property, plant and equipment
|
|
|
68,848,559
|
|
|
|
71,415,582
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Investment
in RPMG
|
|
|
605,000
|
|
|
|
605,000
|
|
Patronage
equity
|
|
|
309,990
|
|
|
|
192,207
|
|
Deposits
|
|
|
46,133
|
|
|
|
80,000
|
|
Total
other assets
|
|
|
961,123
|
|
|
|
877,207
|
|
Total
Assets
|
|
$
|
84,885,473
|
|
|
$
|
97,677,401
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
6,755,687
|
|
|
$
|
7,605,302
|
|
Accrued
expenses
|
|
|
3,130,600
|
|
|
|
2,634,534
|
|
Derivative
instruments, at fair value
|
|
|
90,225
|
|
|
|
806,490
|
|
Accrued
loss on firm purchase commitments
|
|
|
60,000
|
|
|
|
―
|
|
Current
maturities of long-term debt
|
|
|
8,830,434
|
|
|
|
6,500,000
|
|
Current
portion of interest rate swaps, at fair value
|
|
|
888,343
|
|
|
|
785,591
|
|
Total
current liabilities
|
|
|
19,755,289
|
|
|
|
18,331,917
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
|
|
Contracts
payable
|
|
|
275,000
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
27,498,384
|
|
|
|
43,620,025
|
|
Long-term
portion of interest rate swaps, at fair value
|
|
|
1,270,532
|
|
|
|
1,575,095
|
|
Total
long-term debt
|
|
|
28,768,916
|
|
|
|
45,195,120
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
|
|
36,086,268
|
|
|
|
33,875,364
|
|
Total
Liabilities and Members' Equity
|
|
$
|
84,885,473
|
|
|
$
|
97,677,401
|
|
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
RED
TRAIL ENERGY, LLC
CONDENSED
STATEMENTS OF OPERATIONS
|
|
Quarter
Ended
June
30,
2010
(Unaudited)
|
|
|
Quarter
Ended
June
30,
2009
(Unaudited)
|
|
|
Six
Months
Ended
June
30,
2010
(Unaudited)
|
|
|
Six
Months
Ended
June
30,
2009
(Unaudited)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol,
net of derivative fair value changes
|
|
$
|
18,822,186
|
|
|
$
|
19,462,830
|
|
|
$
|
42,606,351
|
|
|
$
|
36,366,832
|
|
Distillers
grains
|
|
|
3,695,872
|
|
|
|
4,170,001
|
|
|
|
8,798,598
|
|
|
|
8,161,612
|
|
Total
Revenue
|
|
|
22,518,058
|
|
|
|
23,632,831
|
|
|
|
51,404,949
|
|
|
|
44,528,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, net of changes in fair value of derivative
instruments
|
|
|
20,528,249
|
|
|
|
21,659,717
|
|
|
|
44,154,801
|
|
|
|
40,051,075
|
|
(Gain)/loss
on firm purchase commitments
|
|
|
(42,000
|
)
|
|
|
421,000
|
|
|
|
60,000
|
|
|
|
695,000
|
|
Lower
of cost or market adjustment for inventory on hand
|
|
|
―
|
|
|
|
476,000
|
|
|
|
―
|
|
|
|
1,243,000
|
|
Depreciation
|
|
|
1,452,675
|
|
|
|
1,470,664
|
|
|
|
2,903,117
|
|
|
|
2,940,883
|
|
Total
Cost of Goods Sold
|
|
|
21,938,924
|
|
|
|
24,027,381
|
|
|
|
47,117,918
|
|
|
|
44,929,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin (Deficit)
|
|
|
579,134
|
|
|
|
(394,550
|
)
|
|
|
4,287,031
|
|
|
|
(401,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
586,172
|
|
|
|
701,337
|
|
|
|
1,226,327
|
|
|
|
1,482,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
(7,038
|
)
|
|
|
(1,095,887
|
)
|
|
|
3,060,704
|
|
|
|
(1,883,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
773,439
|
|
|
|
566,216
|
|
|
|
1,862,357
|
|
|
|
1,871,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
6,890
|
|
|
|
402,450
|
|
|
|
1,012,557
|
|
|
|
444,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(773,587
|
)
|
|
$
|
(1,259,653
|
)
|
|
$
|
2,210,904
|
|
|
$
|
(3,310,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd
Avg Units Outstanding - Basic
|
|
|
40,193,973
|
|
|
|
40,189,028
|
|
|
|
40,193,973
|
|
|
|
40,189,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Unit - Basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd
Avg Units Outstanding - Diluted
|
|
|
40,193,973
|
|
|
|
40,189,028
|
|
|
|
40,193,973
|
|
|
|
40,189,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Unit - Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.08
|
)
|
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
RED
TRAIL ENERGY, LLC
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
Six
months
ended
June
30,
2010
(Unaudited)
|
|
|
Six
months
ended
June
30,
2009
(Unaudited)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,210,904
|
|
|
$
|
(3,310,627
|
)
|
Adjustment
to reconcile net income (loss) to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,903,316
|
|
|
|
2,969,586
|
|
Amortization
and write-off of debt financing costs
|
|
|
―
|
|
|
|
567,385
|
|
Change
in fair value of derivative instruments
|
|
|
(588,305
|
)
|
|
|
447,739
|
|
Change
in fair value of interest rate swaps
|
|
|
506,846
|
|
|
|
(682,827
|
)
|
Equity-based
compensation
|
|
|
―
|
|
|
|
3,334
|
|
Equity-based
compensation non-cash write-off
|
|
|
―
|
|
|
|
(52,635
|
)
|
Noncash
patronage equity
|
|
|
(117,783
|
)
|
|
|
(75,911
|
)
|
Unrealized
gain (loss) on firm purchase commitments
|
|
|
60,000
|
|
|
|
(731,800
|
)
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
Restricted
cash-margin account
|
|
|
1,373,174
|
|
|
|
―
|
|
Accounts
receivable
|
|
|
(37,177
|
)
|
|
|
(2,359,302
|
)
|
Inventory
|
|
|
1,061,248
|
|
|
|
(1,063,706
|
)
|
Prepaid
expenses
|
|
|
26,241
|
|
|
|
4,255,655
|
|
Other
assets
|
|
|
33,867
|
|
|
|
―
|
|
Accounts
payable
|
|
|
(849,615
|
)
|
|
|
1,742,108
|
|
Accrued
expenses
|
|
|
496,066
|
|
|
|
393,262
|
|
Cash
settlements on interest rate swaps
|
|
|
(708,657
|
)
|
|
|
333,301
|
|
Net
cash provided by operating activities
|
|
|
6,370,125
|
|
|
|
2,435,562
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Investment
in RPMG
|
|
|
―
|
|
|
|
(127,971
|
)
|
Refund
of sales tax on fixed assets
|
|
|
―
|
|
|
|
753,386
|
|
Capital
expenditures
|
|
|
(336,293
|
)
|
|
|
(12,750
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(336,293
|
)
|
|
|
612,665
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Debt
repayments
|
|
|
(13,791,207
|
)
|
|
|
(1,270,078
|
)
|
Restricted
cash - collateral
|
|
|
―
|
|
|
|
(750,000
|
)
|
Treasury
units issued
|
|
|
―
|
|
|
|
5,000
|
|
Proceeds
from long-term debt
|
|
|
―
|
|
|
|
3,559,874
|
|
Net
cash provided by (used in) financing activities
|
|
|
(13,791,207
|
)
|
|
|
1,544,796
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Equivalents
|
|
|
(7,757,375
|
)
|
|
|
4,593,023
|
|
Cash
and Equivalents - Beginning of Period
|
|
|
13,214,091
|
|
|
|
4,433,839
|
|
Cash
and Equivalents - End of Period
|
|
$
|
5,456,716
|
|
|
$
|
9,026,862
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
2,235,525
|
|
|
$
|
1,434,732
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off
of debt issuance costs
|
|
$
|
―
|
|
|
$
|
517,823
|
|
Investment
in RPMG included in accounts payable
|
|
$
|
―
|
|
|
$
|
127,971
|
|
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
The
accompanying condensed unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. These financial statements
and related notes should be read in conjunction with the financial statements
and notes thereto included in the Company’s audited financial statements for the
year ended December 31, 2009, contained in the Company’s Annual Report on Form
10-K.
In the
opinion of management, the interim condensed financial statements reflect all
adjustments considered necessary for fair presentation. The adjustments made to
these statements consist only of normal recurring
adjustments. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Business
Red Trail
Energy, LLC, a North Dakota limited liability company (the “Company”), owns and
operates a 50 million gallon annual name-plate production ethanol plant near
Richardton, North Dakota (the “Plant”).
Accounting
Estimates
Management
uses estimates and assumptions in preparing these financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported revenues and
expenses. Significant items subject to such estimates and assumptions include
the useful lives of property, plant and equipment, valuation of derivatives,
inventory, patronage equity and purchase commitments, analysis of intangibles
impairment, the analysis of long-lived assets impairment and other
contingencies. Actual results could differ from those
estimates.
Reclassifications
The
presentation of certain items in the financial statements for the six months
ended June 30, 2009 have been changed to conform to the classifications used in
2010. These reclassifications had no effect on members’ equity, net
income (loss) or operating cash flows as previously reported.
Fair Value of Financial
Instruments
The fair
value of the Company’s cash and equivalents, accounts receivable, accounts
payable, and derivative instruments approximate their carrying
value. The Company evaluated the fair value of its long-term
debt at June 30, 2010 and December 31, 2009 and the fair value approximated the
carrying value (see Note 4 for additional information).
On
January 1, 2008, the Company adopted guidance for accounting for fair value
measurements of financial assets and financial liabilities and for fair value
measurements of nonfinancial items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. On January 1, 2009, the
Company adopted guidance for fair value measurement related to nonfinancial
items that are recognized and disclosed at fair value in the financial
statements on a nonrecurring basis. The guidance establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value.
The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to measurements involving significant unobservable inputs (Level
3 measurements). The three levels of the fair value hierarchy are as
follows:
|
·
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access at the
measurement date,
|
|
·
|
Level
2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either
directly or indirectly,
|
|
·
|
Level
3 inputs are unobservable inputs for the asset or
liability.
|
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
The level
in the fair value hierarchy within which a fair measurement in its entirety
falls is based on the lowest level input that is significant to the fair value
measurement in its entirety.
Net Income (Loss) Per
Unit
Net
income (loss) per unit is calculated on a basic and fully diluted basis using
the weighted average units outstanding during the period. There were
no member unit equivalents outstanding during the periods presented;
accordingly, the Company’s basic and diluted net income (loss) per unit are the
same.
2.
DERIVATIVE INSTRUMENTS
Commodity
Contracts
As part
of its hedging strategy, the Company may enter into ethanol and corn
commodity-based derivatives in order to protect cash flows from fluctuations
caused by volatility in commodity prices in order to protect gross profit
margins from potentially adverse effects of market and price volatility on
ethanol sales and corn purchase commitments where the prices are set at a future
date. These derivatives are not designated as effective hedges for
accounting purposes. For derivative instruments that are not accounted for as
hedges, or for the ineffective portions of qualifying hedges, the change in fair
value is recorded through earnings in the period of change. Ethanol derivative
fair market value gains or losses are included in the results of operations and
are classified as revenue and corn derivative changes in fair market value are
included in cost of goods sold.
As
of:
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
Contract
Type
|
|
#
of
Contracts
|
|
|
Notional
Amount
(Qty)
|
|
|
Fair
Value
|
|
|
#
of
Contracts
|
|
|
Notional
Amount
(Qty)
|
|
|
Fair
Value
|
|
Corn
futures
|
|
|
215
|
|
|
|
1,075,000
|
|
bushels
|
|
|
$
|
(90,225
|
)
|
|
|
82
|
|
|
|
410,000
|
|
bushels
|
|
|
$
|
129,063
|
|
Ethanol
swap contracts
|
|
|
0
|
|
|
|
0
|
|
gallons
|
|
|
|
0
|
|
|
|
530
|
|
|
|
7,632,000
|
|
gallons
|
|
|
|
(806,490
|
)
|
Total
fair value
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(90,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(677,427
|
)
|
Amounts
are recorded separately on the balance sheet - negative numbers represent
liabilties
None of
the commodity contracts in place at June 30, 2010 were designated as effective
hedges for accounting purposes. As such, the change in fair value of
the commodity contracts in place at June 30, 2010 has been recorded in the
results of operations and classified as stated above.
Interest
Rate Contracts
The
Company had approximately $29.3 million and $30.8 million of notional amount
outstanding in swap agreements, as of June 30, 2010 and December 31, 2009,
respectively that exchange variable interest rates (one-month LIBOR and
three-month LIBOR) for fixed interest rates over the terms of the
agreements. At June 30, 2010 and December 31, 2009, the fair value of the
interest rate swaps totaled approximately $2.2 million and $2.4 million,
respectively, and is recorded as a liability on the balance
sheets. These agreements are not designated as an effective hedge for
accounting purposes and the change in fair market value and associated net
settlements are recorded in interest expense. The swaps mature in
April 2012.
The
Company recorded net settlements of approximately $709,000 and $333,000 for the
six months ended June 30, 2010 and 2009, respectively. See Note 4 for
a description of these agreements.
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
The
following tables provide details regarding the Company’s derivative financial
instruments at June 30, 2010 and December 31, 2009:
Derivatives
not designated as hedging instruments under ASC 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet
-
as
of
June
30,
2010
|
|
Asset
|
|
|
Liability
|
|
Corn
derivative instruments, at fair value
|
|
$
|
―
|
|
|
$
|
90,225
|
|
Interest
rate swaps, at fair value
|
|
|
―
|
|
|
|
2,158,875
|
|
Total
derivatives not designated as hedging instruments for accounting
purposes
|
|
$
|
―
|
|
|
$
|
2,249,100
|
|
Balance Sheet - as of December 31,
2009
|
|
Asset
|
|
|
Liability
|
|
Derivative
instruments, at fair value
|
|
$
|
129,063
|
|
|
$
|
806,490
|
|
Interest
rate swaps, at fair value
|
|
|
―
|
|
|
|
2,360,686
|
|
Total
derivatives not designated as hedging instruments for accounting
purposes
|
|
$
|
129,063
|
|
|
$
|
3,167,176
|
|
Statement
of
Operations
Income/(expense)
|
|
Location
of
gain
(loss)
in
fair
value
recognized
in
income
|
|
Amount
of
gain
(loss)
recognized
in
income
during
three
months
ended
June
30,
2010
|
|
|
Amount
of
gain
(loss)
recognized
in
income
during
three
months
ended
June
30,
2009
|
|
|
Amount
of
gain
(loss)
recognized
in
income
during
six
months
ended
June
30,
2010
|
|
|
Amount
of
gain
(loss)
recognized
in
income
during
six
months
ended
June
30,
2009
|
|
Corn
derivative instruments
|
|
Cost
of Goods Sold
|
|
$
|
(296,759
|
)
|
|
$
|
(235,925
|
)
|
|
$
|
(155,927
|
)
|
|
$
|
(733,776
|
)
|
Ethanol
derivative instruments
|
|
Revenue
|
|
|
513,127
|
|
|
|
―
|
|
|
|
2,000,956
|
|
|
|
―
|
|
Interest
rate swaps
|
|
Interest
Expense
|
|
|
163,991
|
|
|
|
(495,115
|
)
|
|
|
201,811
|
|
|
|
(349,525
|
)
|
Total
|
|
|
|
$
|
380,359
|
|
|
$
|
(731,040
|
)
|
|
$
|
2,046,840
|
|
|
$
|
(1,083,301
|
)
|
3.
INVENTORY
Inventory
is valued at lower of cost or market. Inventory values as of June 30,
2010 and December 31, 2009 were as follows:
As
of
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
Raw
materials, including corn, chemicals and supplies
|
|
$
|
4,860,050
|
|
|
$
|
4,921,532
|
|
Work
in process
|
|
|
500,088
|
|
|
|
642,701
|
|
Finished
goods, including ethanol and distillers grains
|
|
|
571,645
|
|
|
|
1,428,798
|
|
Total
inventory
|
|
$
|
5,931,783
|
|
|
$
|
6,993,031
|
|
Lower of
cost or market adjustments for the three and six months ended June 30, 2010 and
2009 were as follows:
|
|
For
the
three
months
ended
June
30,
2010
|
|
|
For
the
three
months
ended
June
30,
2009
|
|
|
For
the
six
Months
ended
June
30,
2010
|
|
|
For
the
six
months
ended
June
30,
2009
|
|
Loss
on firm purchase commitments
|
|
$
|
(42,000
|
)
|
|
$
|
421,000
|
|
|
$
|
60,000
|
|
|
$
|
695,000
|
|
Lower
of cost or market adjustment for inventory on hand
|
|
|
-
|
|
|
|
476,000
|
|
|
|
-
|
|
|
|
1,243,000
|
|
Total
lower of cost or market adjustments
|
|
$
|
(42,000
|
)
|
|
$
|
897,000
|
|
|
$
|
60,000
|
|
|
$
|
1,938,000
|
|
The
Company has entered into forward corn purchase contracts under which it is
required to take delivery at the contract price. At the time the
contracts were created, the price of the contract price approximated market
price. Subsequent changes in market conditions could cause the
contract prices to become higher or lower than market prices. As of
June 30, 2010, the average price of corn purchased under fixed price contracts,
that had not yet been delivered, was slightly below market
price. Based on this information, the Company accrued an estimated
loss of firm purchase commitments of $60,000 for the six months ended June 30,
2010. The Company also recorded a loss on firm purchase commitments
of approximately $695,000 for the six month period ended June 30,
2009. The loss is recorded in “Loss on firm purchase commitments” on
the statement of operations. The amount of the loss was determined by
applying a methodology similar to that used in the impairment valuation with
respect to inventory. Given the uncertainty of future ethanol prices,
this loss may or may not be recovered, and further losses on the outstanding
purchase commitments could be recorded in future periods.
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
The
Company recorded inventory valuation impairments of $0 and $476,000 for the six
months ended June 30, 2010 and 2009, respectively. The impairments
were attributable primarily to decreases in market prices of corn and
ethanol. The inventory valuation impairment was recorded in “Lower of
cost or market adjustment for inventory on hand” on the statement of
operations.
4.
BANK FINANCING
Long-term
debt consists of the following:
As
of
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
Notes
payable under loan agreement to bank
|
|
$
|
30,780,269
|
|
|
$
|
44,541,350
|
|
Subordinated
notes payable
|
|
|
5,525,000
|
|
|
|
5,525,000
|
|
Capital
lease obligations (Note 6)
|
|
|
23,549
|
|
|
|
53,675
|
|
Total
Long-Term Debt
|
|
|
36,328,818
|
|
|
|
50,120,025
|
|
Less
amounts due within one year
|
|
|
8,830,434
|
|
|
|
6,500,000
|
|
Total
Long-Term Debt Less Amounts Due Within One Year
|
|
$
|
27,498,384
|
|
|
$
|
43,620,025
|
|
|
|
|
|
|
|
|
|
|
Market
value of interest rate swaps
|
|
|
2,158,875
|
|
|
|
2,360,686
|
|
Less
amounts due within one year
|
|
|
888,343
|
|
|
|
785,591
|
|
Total
Interest Rate Swaps Less Amounts Due Within One Year
|
|
$
|
1,270,532
|
|
|
$
|
1,575,095
|
|
Scheduled
maturities
for
the
twelve
months
ended
June
30
|
|
|
|
Interest
rate
swaps
|
|
|
Long-term
debt
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
2011+
|
|
$
|
888,343
|
|
|
$
|
8,830,434
|
|
|
$
|
9,718,777
|
|
2012
|
|
|
1,270,532
|
|
|
|
27,492,487
|
|
|
|
28,763,019
|
|
2013
|
|
|
―
|
|
|
|
2,953
|
|
|
|
2,953
|
|
2014
|
|
|
―
|
|
|
|
2,944
|
|
|
|
2,944
|
|
2015
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
Thereafter
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
Total
|
|
$
|
2,158,875
|
|
|
$
|
36,328,818
|
|
|
$
|
38,487,693
|
|
+ -
Scheduled maturities for the twelve months ended June 30, 2010 include the full
outstanding balance of our subordinated debt which has a maturity date of March
2011. However, the subordination agreement requires the Bank to
provide us written consent to make any principal payments to the subordinated
debt holders and we have not received such consent.
As of
June 30, 2010, the Company was in compliance with all of its debt
covenants.
Interest Rate Swap
Agreements
In
December 2005, the Company entered into an interest rate swap transaction that
effectively fixed the interest rate at 8.08% on the outstanding principal of the
Fixed Rate Note. In December 2007, the Company entered into a second
interest rate swap transaction that effectively fixed the interest rate at
7.695% on the outstanding principal of the December 2007 Fixed Rate
Note.
The
interest rate swaps were not designated as either a cash flow or fair value
hedge. Fair value adjustments and net settlements are recorded in interest
expense.
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
Interest Expense
|
|
For the six months
ended June 30, 2010
|
|
|
For the six months
ended June 30, 2009
|
|
Interest
expense on long-term debt
|
|
$
|
1,355,511
|
|
|
$
|
1,320,276
|
|
Amortization/write-off
of deferred financing costs
|
|
|
―
|
|
|
|
567,386
|
|
Change
in fair value of interest rate swaps
|
|
|
(201,811
|
)
|
|
|
(349,526
|
)
|
Net
settlements on interest rate swaps
|
|
|
708,657
|
|
|
|
333,301
|
|
Total
interest expense
|
|
$
|
1,862,357
|
|
|
$
|
1,871,437
|
|
5.
FAIR VALUE MEASUREMENTS
The
following table provides information on those assets and liabilities that are
measured at fair value on a recurring basis as of June 30, 2010 and December 31,
2009, respectively. Money market funds shown below are included in
cash and equivalents on the balance sheet.
|
|
|
|
|
|
|
|
Fair
Value
Measurement
Using
|
|
|
|
Carrying
Amount
as
of
June
30,
2010
|
|
|
Fair
Value
as
of
June
30,
2010
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
844,942
|
|
|
$
|
844,942
|
|
|
$
|
844,942
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Derivative
instruments
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
Total
|
|
$
|
844,942
|
|
|
$
|
844,942
|
|
|
$
|
844,942
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$
|
2,158,875
|
|
|
$
|
2,158,875
|
|
|
$
|
―
|
|
|
$
|
2,158,875
|
|
|
$
|
―
|
|
Derivative
instruments
|
|
|
90,225
|
|
|
|
―
|
|
|
|
90,225
|
|
|
|
―
|
|
|
|
―
|
|
Total
|
|
$
|
2,249,100
|
|
|
$
|
2,158,875
|
|
|
$
|
90,225
|
|
|
$
|
2,158,875
|
|
|
$
|
―
|
|
|
|
|
|
|
|
|
|
Fair
Value
Measurement
Using
|
|
|
|
Carrying
Amount
as
of
December
31,
2009
|
|
|
Fair
Value
as
of
December
31,
2009
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
5,010,325
|
|
|
$
|
5,010,325
|
|
|
$
|
5,010,325
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Derivative
instruments
|
|
|
129,063
|
|
|
|
129,063
|
|
|
|
129,063
|
|
|
|
―
|
|
|
|
―
|
|
Total
|
|
$
|
5,139,388
|
|
|
$
|
5,139,388
|
|
|
$
|
5,139,388
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$
|
2,360,686
|
|
|
$
|
2,360,686
|
|
|
$
|
―
|
|
|
$
|
2,360,686
|
|
|
$
|
―
|
|
Derivative
instruments
|
|
|
806,490
|
|
|
|
806,490
|
|
|
|
806,490
|
|
|
|
―
|
|
|
|
―
|
|
Total
|
|
$
|
3,167,176
|
|
|
$
|
3,167,176
|
|
|
$
|
806,490
|
|
|
$
|
2,360,686
|
|
|
$
|
―
|
|
The fair
value of the money market funds and corn and ethanol derivative instruments is
based on quoted market prices in an active market. The fair value of
the interest rate swap instruments are determined by using widely accepted
valuation techniques including discounted cash flow analysis on the expected
cash flows of each instrument. The analysis of the interest rate swaps reflect
the contractual terms of the derivatives, including the period to maturity and
uses observable market-based inputs and uses the market standard methodology of
netting the discounted future fixed cash receipts and the discounted expected
variable cash payments. The variable cash payments are based on an expectation
of future interest rates derived from observable market interest rate
curves.
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
Financial
Instruments Not Measured at Fair Value
The
estimated fair value of the Company’s long-term debt, including the short-term
portion, at June 30, 2010, approximated the carrying value of approximately
$36.3 million. The Company negotiated an amendment to its loan
agreements during 2009 that set an interest rate floor of 6% which was the
interest rate in effect at June 30, 2010 and was thought to approximate the
market interest rate for this debt. The estimated fair value of the
Company’s long-term debt, including the short-term portion, at December 31, 2009
approximated its carrying value of $50 million. Fair value was
estimated using estimated market interest rates as of December 31,
2009. The fair values and carrying values consider the terms of the
related debt and exclude the impacts of debt discounts and derivative/hedging
activity.
6.
LEASES
The
Company leases equipment under operating and capital leases through 2015. The
Company is generally responsible for maintenance, taxes, and utilities for
leased equipment. Equipment under operating lease includes a
locomotive and rail cars. Rent expense for operating leases was
approximately $130,000 and $260,000 for the three and six months ended June 30,
2010, respectively and $134,000 and $236,000 for the three and six months ended
June 30, 2009, respectively. Equipment under capital leases consists
of office equipment and plant equipment.
Equipment
under capital leases is as follows at:
As
of
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
Equipment
|
|
$
|
219,476
|
|
|
$
|
219,476
|
|
Accumulated
amortization
|
|
|
74,870
|
|
|
|
63,248
|
|
Net
equipment under capital lease
|
|
$
|
144,606
|
|
|
$
|
156,228
|
|
At June
30, 2010, the Company had the following minimum commitments, which at inception
had non-cancelable terms of more than one year. Amounts shown below
are for the 12 months period ending June 30:
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
2011
|
|
$
|
520,860
|
|
|
$
|
15,945
|
|
2012
|
|
|
464,875
|
|
|
|
3,354
|
|
2013
|
|
|
274,100
|
|
|
|
3,354
|
|
2014
|
|
|
31,200
|
|
|
|
3,075
|
|
2015
|
|
|
31,200
|
|
|
|
―
|
|
Thereafter
|
|
|
―
|
|
|
|
―
|
|
Total
minimum lease commitments
|
|
$
|
1,322,235
|
|
|
|
25,728
|
|
Less
amount representing interest
|
|
|
|
|
|
|
2,179
|
|
Present
value of minimum lease commitments included in the preceding current
liabilities
|
|
|
|
|
|
$
|
23,549
|
|
7.
COMMITMENTS AND CONTINGENCIES
Design-Build
Agreement
The
Company signed a design-build agreement (the “Design-Build Agreement”) with
Fagen, Inc. (“Fagen”) in September 2005 to design and build the Plant at a total
contract price of approximately $77 million. The Company has
remaining payments under the Design-Build Agreement of approximately $3.9
million. This payment has been withheld pending satisfactory
resolution of a punch list of items, including a major issue with the coal
combustor experienced during start up. The Plant was originally
designed to be able to run on lignite coal. During the first four
months of operation, however, the Plant experienced numerous shut downs related
to running on lignite coal. In April 2007, the Company switched to
using Powder River Basin (“PRB”) coal as its fuel source and has not experienced
a single shut down related to coal quality. The Company continues to
work with Fagen to find a solution to these issues. An amount
approximately equal to the final payment was used to pay down the Company’s
Long-Term Revolving Note. The funds may be released upon resolution
of this issue.
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
Firm Purchase Commitments
for Corn
To ensure
an adequate supply of corn to operate the Plant, the Company enters into
contracts to purchase corn from local farmers and elevators. At June
30, 2010 the Company had various fixed price contracts for the purchase of
approximately 1,146,000 bushels of corn. Using the stated contract
price for the fixed price contracts, the Company had commitments of
approximately $4.0 million related to the 1,146,000 bushels under
contract.
8.
RELATED-PARTY TRANSACTIONS
The
Company has balances and transactions in the normal course of business with
various related parties for the purchase of corn, sale of distillers grains and
sale of ethanol. The related parties include Unit holders, members of
the board of governors of the Company, Greenway Consulting, LLC (“Greenway”) and
RPMG, Inc. (“RPMG”). The Company also has a note payable to Greenway
and pays Greenway for consulting fees (recorded in general and administrative
expense). Significant related party activity affecting the financial
statements are as follows:
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
Balance
Sheet
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
2,111,792
|
|
|
$
|
2,155,238
|
|
Accounts
payable
|
|
|
1,039,228
|
|
|
|
1,164,218
|
|
Notes
payable
|
|
|
1,525,000
|
|
|
|
1,525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the
three
months
ended
June
30,
2010
|
|
|
For
the
three
months
ended
June
30,
2009
|
|
|
For
the
six
months
ended
June
30,
2010
|
|
|
For
the
six
months
ended
June
30,
2009
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,584,502
|
|
|
$
|
20,215,469
|
|
|
$
|
41,548,875
|
|
|
$
|
37,699,964
|
|
Cost
of goods sold
|
|
|
754,815
|
|
|
|
656,496
|
|
|
|
1,619,652
|
|
|
|
1,353,808
|
|
General
and administrative
|
|
|
64,716
|
|
|
|
176,968
|
|
|
|
114,614
|
|
|
|
283,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Purchases
|
|
$
|
1,005,698
|
|
|
$
|
1,179,356
|
|
|
$
|
2,331,243
|
|
|
$
|
2,692,493
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three and six month periods ended June 30, 2010, compared to
the same period of the prior fiscal year. This discussion should be read in
conjunction with the consolidated financial statements and the Management’s
Discussion and Analysis section for the fiscal year ended December 31, 2009,
included in the Company’s Annual Report on Form 10-K.
Cautionary
Statements Regarding Forward-Looking Statements
This
report contains forward-looking statements that involve future events, our
future performance and our future operations and actions. In some
cases you can identify forward-looking statements by the use of words such as
“may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,”
“could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative
of these terms or other similar expressions. These forward-looking
statements are only our predictions and involve numerous assumptions, risks and
uncertainties. Our actual results or actions may differ materially
from these forward-looking statements for many reasons, including the following
factors:
|
·
|
Fluctuations in the price and
market for ethanol and distillers
grains;
|
|
·
|
Availability and costs of
products and raw materials, particularly corn and
coal;
|
|
·
|
Changes in the environmental
regulations that apply to our plant operations and our ability to comply
with such regulations;
|
|
·
|
Ethanol supply exceeding demand
and corresponding ethanol price reductions impacting our ability to
operate profitably and maintain a positive spread between the selling
price of our products and our raw material
costs;
|
|
·
|
Our ability to generate and
maintain sufficient liquidity to fund our operations, meet debt service
requirements and necessary capital
expenditures;
|
|
·
|
Our ability to continue to meet
our loan covenants;
|
|
·
|
Limitations and restrictions
contained in the instruments and agreements governing our
indebtedness;
|
|
·
|
Results of our hedging
transactions and other risk management
strategies;
|
|
·
|
Changes in plant production
capacity, variations in actual ethanol and distillers grains production
from expectations or technical difficulties in operating the
plant;
|
|
·
|
Changes in our business strategy,
capital improvements or development
plans;
|
|
·
|
Changes in interest rates and the
availability of credit to support capital improvements, development,
expansion and operations;
|
|
·
|
Our ability to market and our
reliance on third parties to market our
products;
|
|
·
|
Changes in or elimination of
governmental laws, tariffs, trade or other controls or enforcement
practices that currently benefit the ethanol industry
including:
|
|
o
|
national, state or local energy
policy – examples include legislation already passed such as the
California low-carbon fuel standard as well as potential legislation in
the form of carbon cap and
trade;
|
|
o
|
federal and state ethanol tax
incentives;
|
|
o
|
legislation mandating the use of
ethanol or other oxygenate
additives;
|
|
o
|
state and federal regulation
restricting or banning the use of
MTBE;
|
|
o
|
environmental laws and
regulations that apply to our plant operations and their enforcement;
or
|
|
o
|
reduction or elimination of
tariffs on foreign ethanol.
|
|
·
|
The development of infrastructure
related to the sale and distribution of ethanol
including:
|
|
o
|
expansion of rail
capacity,
|
|
o
|
possible future use of ethanol
dedicated pipelines for
transportation,
|
|
o
|
increases in truck fleets capable
of transporting ethanol within localized
markets,
|
|
o
|
additional storage facilities for
ethanol, expansion of refining and blending facilities to handle
ethanol,
|
|
o
|
growth in service stations
equipped to handle ethanol fuels,
and
|
|
o
|
growth in the fleet of flexible
fuel vehicles capable of using higher blends of ethanol
fuel;
|
|
·
|
Increased competition in the
ethanol and oil
industries;
|
|
·
|
Fluctuations in U.S. oil
consumption and petroleum
prices;
|
|
·
|
Changes in general economic
conditions or the occurrence of certain events causing an economic impact
in the agriculture, oil or automobile
industries;
|
|
·
|
Ongoing disputes with our
design-build contractor;
|
|
·
|
Our liability resulting from
litigation;
|
|
·
|
Our ability to retain key
employees and maintain labor
relations;
|
|
·
|
Changes and advances in ethanol
production technology; and
|
|
·
|
Competition from alternative
fuels and alternative fuel
additives.
|
Our
actual results or actions could and likely will differ materially from those
anticipated in the forward-looking statements for many reasons, including the
reasons described in this report. We are not under any duty to update
the forward-looking statements contained in this report. We cannot
guarantee future results, levels of activity, performance or
achievements. We caution you not to put undue reliance on any
forward-looking statements, which speak only as of the date of this
report. You should read this report and the documents that we
reference in this report and have filed as exhibits completely and with the
understanding that our actual future results may be materially different from
what we currently expect. We qualify all of our forward-looking
statements by these cautionary statements.
Available
Information
Information
about us is also available at our website at
www.redtrailenergyllc.com
,
which includes links to reports we have filed with the Securities and Exchange
Commission. The contents of our website are not incorporated by reference in
this Quarterly Report on Form 10-Q.
Overview
Red Trail Energy, LLC, a North Dakota
limited liability company (the “Company,” “Red Trail,” or “we,” “our,” or “us”),
owns and operates a 50 million gallon annual name-plate production ethanol plant
near Richardton, North Dakota (the “Plant”).
Our revenues are derived from the sale
and distribution of our ethanol and distillers grains primarily in the
continental United States. Our ethanol plant currently operates at
approximately 110 percent of its nameplate capacity. Corn is our
largest cost component and our profitability is highly dependent on the spread
between the price of corn and the price of ethanol.
On April
8, 2010, the Company announced its intent to engage in a reclassification and
reorganization of the Company’s membership units. The proposed
transaction will provide for the reclassification of the Company’s membership
units into three separate and distinct classes.
If the proposed reclassification is
approved by the Company’s members, we expect that each member of record holding
50,000 or more units will receive one Class A unit for each common equity unit
held by such unit holder prior to the reclassification; each member of record
holding 10,001 to 49,999 units will receive one Class B unit for each common
equity unit held by such unit holder immediately prior to the reclassification;
and each member of record holding 10,000 or fewer units will receive one Class C
unit for each common equity unit held by such unit holder immediately prior to
the reclassification.
If the Company’s members approve the
proposed amendments to the Company’s operating agreement and member control
agreement and the reclassification is implemented, the Company anticipates
having fewer than 300 unit holders of record of its common equity units and
fewer than 500 unit holders of record of each of the additional classes, which
would enable the Company to voluntarily terminate the registration of its units
under the Securities and Exchange Act of 1934.
There
have been a number of recent developments in legislation that impacts the
ethanol industry. One such development concerns the federal Renewable
Fuels Standard (RFS). The ethanol industry is benefited by the RFS
which requires that a certain amount of renewable fuels must be used in the
United States each year. In February 2010, the EPA issued new
regulations governing the RFS. These new regulations have been called
RFS2. The most controversial part of RFS2 involves what is commonly
referred to as the lifecycle analysis of greenhouse gas
emissions. Specifically, the EPA adopted rules to determine which
renewable fuels provided sufficient reductions in greenhouse gases, compared to
conventional gasoline. Any fuels that fail to meet this standard
cannot be used by fuel blenders to satisfy their obligations under the RFS
program. The RFS2 as adopted by the EPA provides that corn-based
ethanol from modern ethanol production processes does meet the definition of a
renewable fuel under the RFS program.
In addition to RFS2 which included
greenhouse gas reduction requirements, in 2009, California passed a Low Carbon
Fuels Standard (LCFS). The California LCFS requires that renewable
fuels used in California must accomplish certain reductions in greenhouse gases
which is measured using a lifecycle analysis, similar to
RFS2. Management believes that this lifecycle analysis is based on
unsound scientific principles that unfairly harms corn based
ethanol. Management believes that these new regulations will preclude
corn based ethanol from being used in California. California
represents a significant ethanol demand market. If we are unable to
supply ethanol to California, it could significantly reduce demand for the
ethanol we produce. Several lawsuits have been filed by ethanol
industry groups challenging the California LCFS.
Ethanol production in the United States
is benefited by various tax incentives. The most significant of these
tax incentives is the federal Volumetric Ethanol Excise Tax Credit
(VEETC). VEETC provides a volumetric ethanol excise tax credit of 4.5
cents per gallon of ethanol blended with gasoline at a rate of
10%. VEETC is scheduled to expire on December 31, 2010. If
this tax credit is not renewed, it likely would have a negative impact on the
price of ethanol and demand for ethanol in the marketplace and may harm our
financial condition.
In addition to the tax incentives,
United States ethanol production is also benefited by a 54 cent per gallon
tariff imposed on ethanol imported into the United States. However,
the 54 cent per gallon tariff is set to expire at the end of the 2010 calendar
year. Elimination of the tariff that protects the United States
ethanol industry could lead to the importation of ethanol produced in other
countries, especially in areas of the United States that are easily accessible
by international shipping ports. Ethanol imported from other
countries may be a less expensive alternative to domestically produced ethanol
and may affect our ability to sell our ethanol profitably.
We expect to fund our operations during
the next 12 months using cash flow from our continuing operations and our
current credit facilities.
Results
of Operations for the Three Months Ended June 30, 2010 and 2009
The following table shows the results
of our operations and the percentages of revenues, cost of goods sold, general
and administrative expenses and other items to total sales and revenues in our
statements of operations for the three months ended June 30, 2010 and 2009,
respectively.
|
|
Three Months Ended
June 30, 2010
(Unaudited)
|
|
|
Three Months Ended
June 30, 2009
(Unaudited)
|
|
Statements of Operations Data
|
|
Amount
|
|
|
% of Revenue
|
|
|
Amount
|
|
|
% of Revenue
|
|
Revenues
|
|
$
|
22,518,058
|
|
|
|
100.0
|
%
|
|
$
|
23,632,831
|
|
|
|
100.00
|
%
|
Cost
of Goods Sold
|
|
|
21,938,924
|
|
|
|
97.43
|
%
|
|
|
24,027,381
|
|
|
|
101.67
|
%
|
Gross
Margin (Deficit)
|
|
|
579,134
|
|
|
|
2.57
|
%
|
|
|
(394,550
|
)
|
|
|
(1.67
|
)%
|
General
and Administrative Expenses
|
|
|
586,172
|
|
|
|
2.60
|
%
|
|
|
701,337
|
|
|
|
2.97
|
%
|
Operating
Loss
|
|
|
(7,038
|
)
|
|
|
(0.03
|
)%
|
|
|
(1,095,887
|
)
|
|
|
(4.64
|
)%
|
Interest
Expense
|
|
|
773,439
|
|
|
|
3.43
|
%
|
|
|
566,216
|
|
|
|
2.40
|
%
|
Other
Income
|
|
|
6,890
|
|
|
|
0.03
|
%
|
|
|
402,450
|
|
|
|
1.70
|
%
|
Net
Loss
|
|
$
|
(773,587
|
)
|
|
|
(3.44
|
)%
|
|
$
|
(1,259,653
|
)
|
|
|
(5.33
|
)%
|
Revenues
The
following table shows the sources of our revenue for the three months ended June
30, 2010 and June 30, 2009.
|
|
Three Months Ended
June 30, 2010
|
|
|
Three Months Ended
June 30, 2009
|
|
Revenue Source
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amount
|
|
|
% of Revenues
|
|
Ethanol
Sales
|
|
$
|
18,822,186
|
|
|
|
83.6
|
%
|
|
$
|
19,462,830
|
|
|
|
82.4
|
%
|
Dried
Distillers Grains Sales
|
|
|
3,139,859
|
|
|
|
13.9
|
%
|
|
|
2,934,077
|
|
|
|
12.4
|
%
|
Modified Distillers
Grains Sales
|
|
|
556,013
|
|
|
|
2.5
|
%
|
|
|
1,235,924
|
|
|
|
5.2
|
%
|
Total
Revenues
|
|
$
|
22,518,058
|
|
|
|
100.00
|
%
|
|
$
|
23,632,831
|
|
|
|
100.00
|
%
|
The following table shows additional
data regarding production and price levels for our primary inputs and products
for the three months ended June 30, 2010 and June 30, 2009.
|
|
Three Months ended
June 30, 2010
|
|
|
Three Months ended
June 30, 2009
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
Ethanol
sold (gallons)
|
|
|
12,717,000
|
|
|
|
12,689,000
|
|
Dried
distillers grains sold (tons)
|
|
|
32,970
|
|
|
|
24,055
|
|
Modified
distillers grains sold (tons)
|
|
|
11,274
|
|
|
|
22,088
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Ethanol
price/gallon (net of hedging)
|
|
$
|
1.48
|
|
|
$
|
1.53
|
|
Distillers
grains avg price/ton
|
|
$
|
95.23
|
|
|
$
|
121.97
|
|
Modified
distillers grains avg price/ton
|
|
$
|
49.23
|
|
|
$
|
55.88
|
|
|
|
|
|
|
|
|
|
|
Primary
Input:
|
|
|
|
|
|
|
|
|
Corn
ground (bushels)
|
|
|
4,660,800
|
|
|
|
4,423,712
|
|
|
|
|
|
|
|
|
|
|
Costs
of Primary Input:
|
|
|
|
|
|
|
|
|
Corn
avg price/bushel (net of hedging)
|
|
$
|
3.41
|
|
|
$
|
3.98
|
|
|
|
|
|
|
|
|
|
|
Other
Costs (per gallon of ethanol sold):
|
|
|
|
|
|
|
|
|
Chemical
and additive costs
|
|
$
|
0.079
|
|
|
$
|
0.081
|
|
Denaturant
cost
|
|
$
|
0.048
|
|
|
$
|
0.034
|
|
Electricity
cost
|
|
$
|
0.048
|
|
|
$
|
0.038
|
|
Direct
labor cost
|
|
$
|
0.039
|
|
|
$
|
0.035
|
|
Ethanol
production and sales held relatively steady during the three month period ended
June 30, 2010 as compared to the same period in 2009. We sold
12,717,000 gallons of ethanol during the three month period ended June 30, 2010
compared to 12,689,000, for the same three month period ending in
2009. The average price we received for our ethanol at was $1.48 and
$1.53 for the three month period ending June 30, 2010 and 2009,
respectively.
We
experienced an increase in the amount of dried distillers grains sold in the
three month period ended June 30, 2010 as compared to the same period in
2009. We sold 32,970 tons of dried distillers grains during the three
month period ended June 30, 2010 compared to 24,055 tons of dried distillers
grains during the three month period ended June 30, 2009. The average
price per ton of dried distillers grains was $95.23 and $121.97 for the three
month period ending June 30, 2010 and 2009, respectively.
Our
modified distillers grains sales were down significantly for the three month
period ended June 30, 2010 as compared to the same period in 2009. We
sold 11,274 tons of modified distillers grains during the three month period
ended June 30, 2010 compared to 22,088 tons of modified distillers grains during
the three month period ended June 30, 2009. The average price per ton
of modified distillers grains was $49.23 and $55.88 for the three month period
ending June 30, 2010 and 2009, respectively. This shift from modified
distillers grains to dried distillers grains is being driven by additional
demand for dried distillers grains by the export market.
We are currently operating at
approximately 110 percent of nameplate capacity. In the event that we
decrease our production of ethanol, our production of distillers grains would
also decrease. Such a decrease in our volume of production of ethanol
and distillers grains would result in lower revenues. However, if we
decreased production, we would experience a corresponding decrease in the
quantity of corn and coal used by the plant, thereby lowering our costs of good
sold. Therefore, the effect of a decrease in our product volume would
be largely dependent on the market prices of the products we produce and the
inputs we use to produce our products at the time of such a production
decrease. We anticipate operating at less than full capacity only if
industry margins become unfavorable or we experience technical difficulties in
operating the plant.
For the three months ended June 30,
2010, we received approximately 84% of our revenue from the sale of ethanol and
approximately 16% of our revenue from the sale of distillers grains. Our revenue
from ethanol increased slightly during the three months ended June 30, 2010
compared to the same period in 2009, as a result of a slight increase in the
volume of ethanol sold and a decrease in our distillers grains
revenue. During the three months ended June 30, 2010, we experienced
a decrease in the price we received for our ethanol. Ethanol prices
peaked late in 2009 and trended weaker though the end of June
2010. Since that time, ethanol prices have recovered and are back to
January 2010 price levels. Management attributes this decreasing trend in
ethanol prices with increased production of ethanol and steady
demand. Increased gasoline and ethanol prices during the last
calendar quarter of 2009 and the first quarter of 2010 allowed the ethanol
industry to realize more favorable margins. Management believes that
the increased margins led some idled ethanol plants to again commence
production. Unless this increased supply is equally met with
increased demand for ethanol, management believes ethanol prices will be
pressured downward.
Management
believes that demand for ethanol is being affected by what is known as the blend
wall. The blend wall is a theoretical limit where more ethanol cannot
be blended into the national gasoline pool. Currently, ethanol is
blended with conventional gasoline for use in standard (non-flex fuel) vehicles
to create a blend which is 10% ethanol and 90% gasoline. Estimates
indicate that approximately 135 billion gallons of gasoline are sold in the
United States each year. Assuming that all gasoline in the United
States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand
for ethanol is 13.5 billion gallons per year. This theoretical limit
acts as a cap on ethanol demand which can negatively impact ethanol
prices. If ethanol production continues to expand without a
corresponding increase in ethanol demand, management anticipates further
decreases in ethanol prices.
The trend in the price of ethanol is
uncertain unless the EPA approves an increase in the amount of ethanol that can
be blended with gasoline for use in standard (non-flex fuel)
vehicles. The EPA is considering allowing a blend of 15% ethanol and
85% gasoline (called E15) for use in standard vehicles. The EPA has
delayed making a decision on E15 until sometime in 2010. If the EPA
allows a 15% ethanol blend, it may result in increased ethanol demand which
could positively impact ethanol prices. However, the EPA may restrict
the type of vehicles that can use E15 which may lead to gasoline retailers
refusing to carry E15. Automobile manufacturers and environmental
groups are lobbying against higher percentage ethanol blends.
During the three months ended June 30,
2010, distillers grains prices trended downward. Management
attributes this decreasing price trend to an excess supply of distillers grains
and to concerns about the quality of distillers grains. After the end
of the three month period ended June 30, 2010, distillers grains prices
increased in conjunction with corn prices. Management anticipates
that distillers grains prices will continue to track the price of corn which has
been extremely volatile due to uncertainty over the condition of the corn crop
and price volatility in the wheat and soybean markets.
Cost of Goods
Sold
Our cost of goods sold from the
production of ethanol and distillers grains is primarily made up of corn and
energy expenses. The price we paid for our main input, corn, was
lower during the first quarter of 2010 compared to the first quarter of
2009. Our overall cost of goods sold decreased as a percentage of our
revenues to 97.4% for the three months ended June 30, 2010 compared to 101.7%
for the same period in 2009. The decrease in our cost of goods sold was
primarily due to our lower corn costs.
Our cost of corn is also affected by
gains and losses on the corn derivative instruments we use to manage our
exposure to risk in the corn market. For the three months ended
June 30, 2010, we recognized a loss on our corn derivatives of approximately
$297,000 compared to a loss of approximately $236,000 for the three months ended
June 30, 2009.
Competition
for corn in our area has tightened basis levels. Although we believe
there is corn available nationally from a supply and demand standpoint, there is
uncertainty over the quantity and quality of local corn for the
plant. The cost of corn is the highest input to the plant and these
uncertainties could dramatically affect our expected input
costs. During the three month period ended June 30, 2010, corn prices
were relatively steady but increased after the end of the quarter. We
expect that corn prices will continue to be volatile for the rest of our fiscal
year, depending on weather conditions and other demand factors.
The per unit cost of our other costs of
goods sold were all somewhat higher compared to last year although we did
experience a decrease in our chemical and additive costs.
We purchase the coal needed to power
our ethanol plant from a supplier under a long-term contract. This
arrangement helps us to mitigate price volatility in the coal
market. Our coal costs remained steady during the first quarter of
2010 compared to the first quarter of 2009. Our coal contract is up
for renewal in December 2011.
General and
Administrative
General and administrative costs for
the three months ended June 30, 2010 were approximately $586,000 or 2.6% of our
revenues compared to approximately $701,000 or 3.0% of revenues for the same
period in 2009. The decrease is primarily related to a decrease in
legal fees.
Operating Income and
Loss
Our loss from operations for the three
months ended June 30, 2010 was approximately $7,000 compared to an operating
loss of approximately $1,096,000 for the same period in 2009. This
reduction in our operating losses is primarily due to an improvement in the
relationship between the selling price of our products and our input costs for
the current year.
Interest
Expense
Our interest expense for the three
months ended June 30, 2010 was approximately $773,000 compared to approximately
$566,000 for the three months ended June 30, 2009. This increase in
primarily due to fluctuations in the market value of our interest rate swaps and
principal outstanding. Net settlements on the fair value of our
interest rate swaps are recorded in interest expense on a monthly
basis.
Other
Income
Our other income for the three months
ended June 30, 2010 was 0.03% of our revenues compared to 1.7% of revenues for
the same period in 2009. Our other income for the three month period
ended June 30, 2010 consisted primarily of interest income, gain/loss on sale of
assets and grant income. During the three month period ended June 30,
2009 we also received other income from interest earned on a sales tax refund
received related to plant construction.
Results
of Operations for the Six Months Ended June 30, 2010 and 2009
The following table shows the results
of our operations and the approximate percentage of revenues, costs of sales,
operating expenses and other items to total revenues in our unaudited statements
of operations for the six months ended June 30, 2010 and 2009:
|
|
Six Months Ended
June 30, 2010
(Unaudited)
|
|
|
Six Months Ended
June 30, 2009
(Unaudited)
|
|
Statement of Operations Data
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Revenues
|
|
$
|
51,404,949
|
|
|
|
100.0
|
%
|
|
$
|
44,528,444
|
|
|
|
100.00
|
%
|
Cost
of Goods Sold
|
|
|
47,117,918
|
|
|
|
91.66
|
%
|
|
|
44,929,958
|
|
|
|
100.90
|
%
|
Gross
Profit (Loss)
|
|
|
4,287,031
|
|
|
|
8.34
|
%
|
|
|
(401,514
|
)
|
|
|
(0.90
|
)%
|
General
and Administrative Expenses
|
|
|
1,226,327
|
|
|
|
2.39
|
%
|
|
|
1,482,347
|
|
|
|
3.33
|
%
|
Operating
Income (Loss)
|
|
|
3,060,704
|
|
|
|
5.95
|
%
|
|
|
(1,883,861
|
)
|
|
|
(4.23
|
)%
|
Interest
Expense
|
|
|
1,862,357
|
|
|
|
3.62
|
%
|
|
|
1,871,437
|
|
|
|
4.20
|
%
|
Other
Income
|
|
|
1,012,557
|
|
|
|
1.97
|
%
|
|
|
444,671
|
|
|
|
1.00
|
%
|
Net
Income (Loss)
|
|
$
|
2,210,904
|
|
|
|
4.30
|
%
|
|
$
|
(3,310,627
|
)
|
|
|
(7.43
|
)%
|
Revenues
Our revenues from operations come from
two primary sources: sales of ethanol and sales of distillers grains. The
following table shows the sources of our revenue for the six months ended June
30, 2010 and June 30, 2009.
|
|
Six Months Ended
June 30, 2010
|
|
|
Six Months Ended
June 30, 2009
|
|
Revenue Source
|
|
Amount
|
|
|
% of Revenues
|
|
|
Amount
|
|
|
% of Revenues
|
|
Ethanol
Sales
|
|
$
|
42,606,351
|
|
|
|
82.9
|
%
|
|
$
|
36,366,832
|
|
|
|
81.7
|
%
|
Dried
Distillers Grains Sales
|
|
|
7,075,730
|
|
|
|
13.8
|
%
|
|
|
5,150,927
|
|
|
|
11.6
|
%
|
Modified Distillers
Grains Sales
|
|
|
1,722,868
|
|
|
|
3.3
|
%
|
|
|
3,010,685
|
|
|
|
6.7
|
%
|
Total
Revenues
|
|
$
|
51,404,949
|
|
|
|
100.00
|
%
|
|
$
|
44,528,444
|
|
|
|
100.00
|
%
|
The
following table shows additional data regarding production and price levels for
our primary inputs and products for the six months ended June 30, 2010 and
2009:
|
|
Six Months ended
June 30, 2010
|
|
|
Six Months ended
June 30, 2009
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
Ethanol
sold (thousands of gallons)
|
|
|
26,967
|
|
|
|
24,481
|
|
Dried
distillers grains sold (tons)
|
|
|
67,486
|
|
|
|
39,508
|
|
Modified
distillers grains sold (tons)
|
|
|
31,489
|
|
|
|
56,688
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Ethanol
average price/gallon (net of hedging)
|
|
$
|
1.58
|
|
|
$
|
1.49
|
|
Dried
distillers grains avg price/ton
|
|
$
|
102.16
|
|
|
$
|
130.38
|
|
Modified
distillers grains avg price/ton
|
|
$
|
54.56
|
|
|
$
|
53.02
|
|
|
|
|
|
|
|
|
|
|
Primary
Input:
|
|
|
|
|
|
|
|
|
Corn
ground (bushels)
|
|
|
9,800,060
|
|
|
|
8,752,833
|
|
|
|
|
|
|
|
|
|
|
Costs
of Primary Input:
|
|
|
|
|
|
|
|
|
Corn
avg price/bushel (net of hedging)
|
|
$
|
3.48
|
|
|
$
|
3.98
|
|
|
|
|
|
|
|
|
|
|
Other
Costs (per gallon of ethanol sold):
|
|
|
|
|
|
|
|
|
Chemical
and additive costs
|
|
$
|
0.079
|
|
|
$
|
0.084
|
|
Denaturant
cost
|
|
$
|
0.046
|
|
|
$
|
0.031
|
|
Electricity
cost
|
|
$
|
0.046
|
|
|
$
|
0.043
|
|
Direct
Labor cost
|
|
$
|
0.036
|
|
|
$
|
0.038
|
|
In the six month period ended June 30,
2010, ethanol sales comprised approximately 83% of our revenues and distillers
grains sales comprised approximately 17% of our revenues. For the six month
period ended June 30, 2009, ethanol sales comprised approximately 82% of our
revenues and distillers grains sales comprised approximately 18% of our revenue.
Our revenues were higher for our first half of fiscal year 2010 compared to the
same period of 2009 primarily as a result of our increase in ethanol production
and an increase in the sales price of our ethanol.
The average ethanol sales price we
received for the six month period ended June 30, 2010 was approximately 6%
higher than our average ethanol sales price for the comparable 2009 period.
Management anticipates that ethanol prices will continue to be subject to the
uncertainties surrounding several pieces of legislation as well as the prices of
oil and gasoline.
The price we received for our dried
distillers grains decreased by approximately 20% during the six month period
ended June 30, 2010 compared to the same period of 2009. Management attributes
this decrease in the price of our dried distillers grains to an increase in the
supply of dried distillers grains in our local market area. The price
of dried distillers grains changes in proportion to the price of corn, which has
decreased in the six month period ended June 30,
2010. Accordingly, we anticipate that the market price of
distillers grains will continue to be volatile as a result of changes in the
price of corn and competing animal feed substitutes such as soybean
meal.
Cost of Good
Sold
Our costs of goods sold as a
percentage of revenues were approximately 92% for the six month period ended
June 30, 2010 compared to approximately 101% for the same period of 2009. Our
cost of goods sold increased by approximately 3.8% in the six months ended June
30, 2010, compared to the six months ended June 30, 2009, and our revenue for
the same period increased by approximately 15%. This increase in the cost of
goods sold is primarily a result of an increase in the volume of corn processed
at our facility. The increase in our revenues is due primarily to an
increase in the volume of ethanol sold along with an increase in the price we
received for our ethanol.
General and Administrative
Expenses
Our general and administrative expenses
as a percentage of revenues were lower for the six month period ended June 30,
2010 than they were for the same period ended June 30, 2009. These percentages
were approximately 2.4% and approximately 3.3% for the six months ended June 30,
2010 and 2009, respectively. This decrease in general and administrative
expenses is primarily due to increased operating efficiencies and our concerted
effort to lower general and administrative expenses. We expect that going
forward our general and administrative expenses will remain relatively steady
unless the proposed reclassification and reorganization of the Company’s
membership units, as discussed previously is approved. If proposed
reclassification is approved, there should be significant general and
administrative expense savings.
Operating Income
(Loss)
Our income from operations for the six
months ended June 30, 2010 was approximately 5.9% of our revenues compared to
loss of approximately 4.2% of our revenues for the six months ended June 30,
2009. This increase in our profitability is primarily due to the increase in the
price we received for our ethanol for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. During the same
period we experienced a $0.50 per bushel decrease in our cost of
corn. Both of these factors moved in our favor at the time we
increased production at our facility.
Interest
Expense
Our interest expense for the six months
ended June 30, 2010 was approximately $1,860,000 compared to approximately
$1,870,000 for the six months ended June 30, 2009. The outstanding
balance on our long-term debt obligations decreased by approximately $14,000,000
during the first six months of 2010. However, this reduction in
long-term debt was partially offset by the performance of our interest rate swap
transactions.
Other
Income
Other income for the six months ended
June 30, 2010, was approximately 2.0% of our revenue and totaled approximately
$1,013,000. Other income for the six months ended June 30, 2009 totaled
approximately $445,000 and was approximately 1.0% of our
revenues. The increase in other income is attributable to our receipt
of approximately $983,000 from a business interruption insurance claim related
to an unplanned outage at our plant during October 2009.
Changes
in Financial Condition for the Six Months Ended June 30, 2010
The following table highlights the
changes in our financial condition:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
Current
Assets
|
|
$
|
15,075,791
|
|
|
$
|
25,384,612
|
|
Current
Liabilities
|
|
$
|
19,755,289
|
|
|
$
|
18,331,917
|
|
Members' Equity
|
|
$
|
36,086,268
|
|
|
$
|
33,875,364
|
|
We
experienced a decrease in our current assets at June 30, 2010 compared to our
fiscal year ended December 31, 2009. We had approximately $7,750,000
less cash on hand at June 30, 2010 compared to December 31, 2009, and
approximately $1,372,000 less in restricted cash. Our accounts
receivable remained steady over the same period and our inventory was
approximately $1,000,000 less at June 30, 2010 than December 31,
2010.
We
experienced a slight increase in our total current liabilities on June 30, 2010
compared to December 31, 2009 due primarily to an increase in current maturities
of long-term debt.
Our
long-term liabilities as of June 30, 2010 are approximately $16,400,000 less
than our long-term liabilities as of December 31, 2009, primarily as a result of
principal payments made on our long-term debt and the movement of some long-term
debt to current maturities of long-term debt. At June 30, 2010, we
had approximately $29,044,000 outstanding in the form of long-term loans,
compared to approximately $45,470,000 at December 31, 2009.
We
experienced an increase in members' equity at June 30, 2010 compared to our
fiscal year ended December 31, 2009. This primarily is a result of
our net income so far this fiscal year in the amount of approximately
$2,211,000.
Liquidity
and Capital Resources
Based on financial forecasts performed
by our management, we anticipate that we will have sufficient cash from our
current credit facilities and cash from our operations to continue to operate
the ethanol plant for the next 12 months. We do not anticipate
seeking additional equity or debt financing during our 2010 fiscal
year. However, should we experience unfavorable operating conditions
in the future, we may have to secure additional debt or equity sources for
working capital or other purposes.
Statements of Cash Flows
|
|
For the six months
ended June 30, 2010
|
|
|
For the six months
ended June 30, 2009
|
|
Cash
flows provided by operating activities
|
|
$
|
6,370,125
|
|
|
$
|
2,435,562
|
|
Cash
flows provided by (used in) investing activities
|
|
$
|
(336,293
|
)
|
|
$
|
612,665
|
|
Cash
flows provided by (used in) financing activities
|
|
$
|
(13,791,207
|
)
|
|
$
|
1,544,796
|
|
Operating
activities
We experienced a significant increase
in our net cash provided by operations for the six month period ended June 30,
2010 as compared to the same period in 2009. Cash provided by
operating activities was approximately $6,370,000 for the six months ended June
30, 2010 as compared to approximately $2,436,000 provided by operating
activities for the six months ended June 30, 2009. Our net income
from operations for the six months ended June 30, 2010 was approximately
$2,211,000 as compared to a net loss of approximately $3,311,000 for the same
period in 2009.
Investing
activities
We had minimal investing activities for
the periods ended June 30, 2010 and 2009, respectively.
Financing
activities
We had a
significant increase in cash used for financing activities for the six month
period ended June 30, 2010 as compared to the same period in
2009. Cash used for financing activities was approximately
$13,791,000 for the nine months ended June 30, 2010. All of this cash
was used to pay down our long-term debt. For the six month period
ended June 30, 2009, we had net borrowing activity of approximately $1,545,000
as we borrowed an additional $3,560,000 on our long-term debt instruments which
was offset by a regularly scheduled debt payment of approximately $1,270,000 and
the issuance of letters of credit in the amount of $750,000 to support grain
warehouse bonds and distilled spirits bonds.
Our
liquidity, results of operations and financial performance will be impacted by
many variables, including the market price for commodities such as, but not
limited to, corn, ethanol and other energy commodities, as well as the market
price for any co-products generated by the facility and the cost of labor and
other operating costs. Assuming future relative price levels for corn,
ethanol and distillers grains remain consistent we expect operations to generate
adequate cash flows to maintain operations. This expectation assumes that we
will be able to sell all the ethanol that is produced at the plant.
Capital
Expenditures
The Company currently has three capital
projects in progress that it anticipates will cost a total of approximately
$302,000. We anticipate completion of these projects to occur in the
third quarter of 2010. The Company is also evaluating certain other
capital projects related to reducing the carbon intensity of its fuel in
anticipation of trying to meet the requirements of the California low-carbon
fuel standard. The Company is in the early stages of reviewing
potential projects and does not currently have any accurate cost
estimates. It is possible that such projects will be undertaken
during 2010. We anticipate being able to fund our current on-going
capital projects from our operating cash flows.
Capital
Resources
Short-Term Debt
Sources
The Company does not currently have any
short-term credit facilities.
Long-Term Debt
Sources
Our primary debt instruments are with
First National Bank of Omaha (the “Bank”) and have a scheduled maturity date of
April 2012. These debt instruments include fixed and variable rate
notes. The following table summarizes our long-term debt instruments
with the Bank.
|
|
Outstanding Balance
(Millions)
|
|
|
Interest Rate
|
|
|
Range of Estimated
|
|
|
|
|
Term Note
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
Quarterly Principal
Payment Amounts
|
|
|
Notes
|
|
Fixed
Rate Note
|
|
$
|
22.44
|
|
|
$
|
23.60
|
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
$560,000
- $630,000
|
|
|
1,
2, 4
|
|
2007
Fixed Rate Note
|
|
|
8.34
|
|
|
|
8.80
|
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
$200,000
- $235,000
|
|
|
1,
2, 5
|
|
Variable
Rate Note
|
|
|
0
|
|
|
|
2.10
|
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
$1,600,000
|
|
|
1,
2, 3, 5
|
|
Long-Term
Revolving Note
|
|
|
0
|
|
|
|
10.00
|
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
$550,000
- $610,000
|
|
|
1,
2, 6, 7, 8
|
|
Notes
1 - The
scheduled maturity date is April 2012
2 - Range
of estimated quarterly principal payments is based on principal balances and
interest rates as of June 30, 2010.
3 -
Quarterly payments of $634,700 are applied first to interest on the Long-Term
Revolving Note, next to accrued interest on the Variable Rate Note and finally
to principal on the Variable Rate Note. The Variable Rate Note was paid off in
April 2010 as the Excess Cash Flow payment was applied to the Variable Rate
Note.
4 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly.
5 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly.
6 -
Interest rate based on 5.0% over one-month LIBOR with a 6% minimum, reset
monthly.
7 -
Principal payments would be made on the Long-Term Revolving Note once the
Variable Rate Note is paid in full. Any principal applied to the Long-Term
Revolving Note reduces the amount available under the revolver.
8 - Funds
withheld from the plant's design builder (approx $4,100,000) which were
previously set aside in a money market account were applied to the Long-Term
Revolving Note in March 2010 pursuant to the terms of the 7th Amendment to our
loan agreement with Bank. Accordingly, the payment amounts above take into
account the application of those funds which may ultimately be paid to the
design builder depending upon the terms of any resolution of the
dispute.
Interest Rate Swap
Agreements
In December 2005, we entered into an
interest rate swap transaction that effectively fixed the interest rate at 8.08%
on the outstanding principal of the Fixed Rate Note. In December 2007, we
entered into a second interest rate swap transaction that effectively fixed the
interest rate at 7.695% on the outstanding principal of the December 2007 Fixed
Rate Note.
Subordinated
Debt
As part of our construction loan
agreement, we entered into three separate subordinated debt agreements totaling
$5,525,000 and received funds from these debt agreements during 2006. Interest
is charged at a rate of 2.0% over the Variable Rate Note interest rate (a total
of 8% and 6.4825% at June 30, 2010 and 2009, respectively) and has a scheduled
maturity of March 2011. The outstanding balance of the subordinated
debt has been included in our current debt maturities. However, the
subordination agreement requires the Bank to provide consent to make principal
payments to the subordinated debt holders but we have not received such
consent. Interest is compounding with any unpaid interest converted
to principal. The balance outstanding on these loans was $5,525,000
as of June 30, 2010 and December 31, 2009.
Letters of
Credit
We issued two letters of credit during
the second quarter of 2009 in conjunction with the issuance of certain grain
warehouse and distilled spirits bonds. The letters of credit were
issued in the amount of $500,000 and $250,000, respectively.
Restrictive
Covenants
We are subject to a number of covenants
and restrictions in connection with our credit facilities,
including:
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•
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Providing the Bank with current
and accurate financial
statements;
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•
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Maintaining certain financial
ratios including minimum net worth, working capital and fixed charge
coverage ratio;
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•
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Maintaining adequate
insurance;
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•
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Making, or allowing to be made,
any significant change in our business or tax structure;
and
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•
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Limiting our ability to make
distributions to members.
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The debt instruments with Banks also
contain a number of events of default (including violation of our loan
covenants) which, if any of them were to occur, would give the Bank certain
rights, including but not limited to:
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•
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declaring all the debt owed to
the Bank immediately due and payable;
and
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•
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taking possession of all of our
assets, including any contract
rights.
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The Bank could then sell all of our
assets or business and apply any proceeds to repay their loans. We would
continue to be liable to repay any loan amounts still outstanding.
As of June 30, 2010 we are in
compliance with our loan covenants.
Our net worth covenant is particularly
sensitive to our earnings. We estimate that we need to record
earnings of greater than $230,000 for the period July 2010 to December 2010 in
order to maintain compliance with this covenant at December 31,
2010.
Management
Reorganization Plan
On June 29, 2010, the Company’s board
of governors approved a management reorganization plan that became effective on
July 8, 2010. Pursuant to this management reorganization plan Gerald
Bachmeier was appointed to the position of Chief Executive Officer for the
Company.
In conjunction with the implementation
of the Company’s management reorganization plan, the Company and Mr. Bachmeier
entered into an employment agreement effective on July 8, 2010. The
term of Mr. Bachmeier’s employment agreement is five and one-half years and is
subject to customary termination provisions. Mr. Bachmeier’s base
salary on an annualized basis for the period from July 8, 2010 through December
31, 2010 is $135,000. The employment agreement also provides for a
year-end bonus based on the Company’s net income.
Mr. Bachmeier previously served as
interim Chief Executive Officer for the Company from June 15, 2009 through
December 31, 2009. Mr. Bachmeier serves on the Board of Directors for the
Renewable Fuels Association and the Minnesota Coalition for Ethanol and has
served on the Board of Directors for Renewable Products Marking
Group. Mr. Bachmeier has been involved in the ethanol industry for
the past 20 years.
Industry
Support
There has been no change in the
repayment status of our grant from the North Dakota State Industrial Commission
(totaling $275,000) during the second quarter of 2010.
North Dakota Ethanol
Incentive Program
Under this program, each fiscal
quarter, eligible ethanol plants may receive a production incentive based on the
average North Dakota price per bushel of corn received by farmers during the
quarter, as established by the North Dakota agricultural statistics service, and
the average North Dakota rack price per gallon of ethanol during the quarter, as
compiled by AXXIS Petroleum. The amount is capped at $1,600,000 per
plant per year up to a lifetime maximum of $10,000,000 per plant. We
did not receive any funds from this program during the six months ended June 30,
2010 and 2009, respectively. We cannot predict whether we will
receive funds from this program during the remainder of
2010.
Critical
Accounting Estimates
Our most critical accounting policies,
which are those that require significant judgment, include policies related to
the carrying amount of property, plant and equipment; valuation of derivatives,
inventory and purchase commitments of inventory; and analysis of intangibles
impairment. An in-depth description of these can be found in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2009. For valuation allowances related to firm purchase commitments
of inventory, please refer to the disclosures in Note 2 and Note 3 of the Notes
to the unaudited condensed financial statements in this Quarterly
Report. Management has not changed the method of calculating and
using estimates and assumptions in preparing our condensed financial statements
in accordance with generally accepted accounting principles. There
have been no changes in the policies for our accounting estimates for the
quarter ended June 30, 2010.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of market
fluctuations associated with interest rates and commodity prices as discussed
below. We have no exposure to foreign currency risk as all of our business is
conducted in U.S. Dollars. We use derivative financial instruments as part of an
overall strategy to manage market risk. We use cash, futures and option
contracts to hedge changes to the commodity prices of corn, ethanol and natural
gas. We do not enter into these derivative financial instruments for trading or
speculative purposes, nor do we designate these contracts as hedges for
accounting purposes pursuant to the requirements of Generally Accepted
Accounting Principles (“GAAP”).
Interest Rate
Risk
We are exposed to market risk from
changes in interest rates. Exposure to interest rate risk results primarily from
holding a revolving promissory note and construction term notes which bear
variable interest rates. In order to achieve a fixed interest rate on the
construction loan and reduce our risk to fluctuating interest rates, we entered
into an interest rate swap contract that effectively fixed the interest rate at
8.08% on approximately $27,600,000 of the outstanding principal of the
construction loan. We entered into a second interest rate swap in
December 2007 and effectively fixed the interest rate at 7.695% on an additional
$10,000,000 of our outstanding long-term debt. The interest rate
swaps are not designated as either a cash flow or fair value
hedge. Market value adjustments and net settlements are recorded in
interest expense. We anticipate that a hypothetical 1% change in
interest rates, from those in effect on June 30, 2010, would change the fair
value of our interest rate swaps by approximately $560,000.
Commodity Price
Risk
We expect to be exposed to market risk
from changes in commodity prices. Exposure to commodity price risk
results from our dependence on corn in the ethanol production process and the
sale of ethanol.
We enter in to fixed price contracts
for corn purchases on a regular basis. It is our intent that, as we
enter in to these contracts, we will use various hedging instruments (puts,
calls and futures) to maintain a near even market position. For
example, if we have 1 million bushels of corn under fixed price contracts we
would generally expect to enter into a short hedge position to offset our price
risk relative to those bushels we have under fixed price
contracts. Because our ethanol marketing company (RPMG) is selling
substantially all of the gallons it markets on a spot basis we also include the
corn bushel equivalent of the ethanol we have produced that is inventory but not
yet priced as bushels that need to be hedged.
Although we believe our hedge positions
will accomplish an economic hedge against our future purchases, they are not
designated as hedges for accounting purposes, which would match the gain or loss
on our hedge positions to the specific commodity purchase being
hedged. We use fair value accounting for our hedge positions, which
means as the current market price of our hedge positions changes, the gains and
losses are immediately recognized in our cost of sales. The immediate
recognition of hedging gains and losses under fair value accounting can cause
net income to be volatile from quarter to quarter and year to year due to the
timing of the change in value of derivative instruments relative to the cost of
the commodity being hedged. However, it is likely that commodity cash
prices will have the greatest impact on the derivatives instruments with
delivery dates nearest the current cash price.
As of June 30, 2010 we had
approximately 1,146,000 bushels of corn under fixed price
contracts. These contracts were priced slightly above current market
prices so we accrued a loss on firm purchase commitments of approximately
$60,000 related to these contracts. We would expect a sustained $0.10
change in the price of corn to have an approximate $115,000 impact on our net
income.
It is the current position of RPMG (our
ethanol marketing company) that, under current market conditions, selling
ethanol in the spot market will yield the best price for our
ethanol. RPMG will, from time to time, contract a portion of the
gallons they market with fixed price contracts.
We estimate that our expected corn
usage will be between 18 million and 20 million bushels per year for the
production of approximately 50 million to 54 million gallons of
ethanol. As corn prices move in reaction to market trends and
information, our income statements will be affected depending on the impact such
market movements have on the value of our derivative instruments.
To manage our coal price risk, we
entered into a coal purchase agreement with our supplier to supply us with coal,
fixing the price at which we purchase coal. If we are unable to continue buying
coal under this agreement, we may have to buy coal in the open
market.
Liability
Risk
We
participate in a captive reinsurance company (the “Captive”). The Captive
reinsures losses related to worker’s compensation, commercial property and
general liability. Premiums are accrued by a charge to income for the
period to which the premium relates and is remitted by our insurer to the
captive reinsurer. The Captive reinsures catastrophic losses in excess of
a predetermined amount. Our premiums are structured such that we have made
a prepaid collateral deposit estimated for losses related to the above
coverage. The Captive insurer has estimated and collected an amount in
excess of the estimated losses but less than the catastrophic loss limit insured
by the Captive. We cannot be assessed in excess of the amount in the collateral
fund.
Item
4. Controls and Procedures
Evaluation of Disclosure
Controls and Procedures
We conducted an evaluation under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d
– 15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), as amended,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by the company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s (“SEC”) rules and forms. Disclosure controls and
procedures also include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of our disclosure controls
and procedures as of June 30, 2010, have concluded that our disclosure controls
and procedures are effective in ensuring that material information required to
be disclosed is included in the reports that we file with the SEC.
Changes in Internal
Controls
There have been no changes in our
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 30,
2010, that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Inherent Limitations on the
Effectiveness of Controls
Management does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that objectives of the control systems are
met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in a cost-effective control system, no evaluation of internal
controls over financial reporting can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected or will be
detected.
These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of a simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any
system of controls is based in part on certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness
to future periods are subject to risks. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies and procedures.
PART
II — OTHER INFORMATION
Item
1. Legal Proceedings
The Company signed a design-build
agreement (the “Design-Build Agreement”) with Fagen, Inc. (“Fagen”) in September
2005 to design and build the plant at a total contract price of approximately
$77,000,000. The Company has remaining payments under the
Design-Build Agreement of approximately $3,900,000. This payment has
been withheld pending satisfactory resolution of certain punch list items,
including an issue with the coal combustor experienced during start
up. The plant was originally designed to be able to run on lignite
coal. During the first four months of operation, however, the plant
experienced numerous shut downs related to running on lignite
coal. In April 2007, the Company switched to using Powder River Basin
(“PRB”) coal as its fuel source and has not experienced a single shut down
related to coal quality. The Company and Fagen are currently engaged
in mediation to resolve the issues related to the plant’s coal
combustor.
Item
1A. Risk Factors
In addition to the other information
set forth in this report, including the important information under the heading
“Disclosure Regarding Forward-Looking Statements,” you should carefully consider
the “Risk Factors” discussed in our Annual Report on Form 10-K for the year
ended December 31, 2009. “Risk Factors” are conditions that may cause
investment in our Company to be speculative or risky. In light of developments
during the first quarter of fiscal 2010, we have decided to update our Risk
Factors as set forth below. Other than these updates, we are not currently aware
of factors other than those set forth in our Annual Report on Form 10-K that
would have a foreseeable effect on the level of risk associated with investment
in our Company; however, additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial might materially adversely
affect our actual business, financial condition and/or operating
results.
The California
Low Carbon Fuel Standard may decrease demand for corn based ethanol which could
negatively impact our profitability.
Recently, California passed a
Low Carbon Fuels Standard (LCFS). The California LCFS requires that
renewable fuels used in California must accomplish certain reductions in
greenhouse gases which are measured using a lifecycle analysis. Management
believes that these new regulations could preclude corn based ethanol produced
in the Midwest from being used in California. California represents a
significant ethanol demand market. If we are unable to supply ethanol to
California, it could significantly reduce demand for the ethanol we
produce. Any decrease in ethanol demand could negatively impact ethanol
prices which could reduce our revenues and negatively impact our ability to
profitably operate the ethanol plant.
If the Federal
Volumetric Ethanol Excise Tax Credit (“VEETC”) expires on December 31,
2010, it could negatively impact our profitability
. The ethanol
industry is benefited by VEETC which is a federal excise tax credit of 4.5 cents
per gallon of ethanol blended with gasoline at a rate of at least 10%.
This excise tax credit is set to expire on December 31, 2010. We
believe that VEETC positively impacts the price of ethanol. On
December 31, 2009, the portion of VEETC that benefits the biodiesel
industry was allowed to expire. This resulted in the biodiesel industry
ceasing to produce biodiesel because the price of biodiesel without the tax
credit was uncompetitive with the cost of petroleum based diesel. If the
portion of VEETC that benefits ethanol is allowed to expire, it could negatively
impact the price we receive for our ethanol and could negatively impact our
profitability.
If the secondary
tariff on imported ethanol is allowed to expire in January 2011, we could
see an increase in ethanol produced in foreign countries being marked in the
Untied States which could negatively impact our profitability.
The
secondary tariff on imported ethanol is a 54 cent per gallon tariff on ethanol
imports from certain foreign countries. The secondary tariff on imported
ethanol is scheduled to expire in January 2011. If this tariff is
allowed to expire, an influx of imported ethanol on the domestic ethanol market
could have a significant negative impact on ethanol prices and our
profitability.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4 Removed and Reserved
Item
5. Other Information
None.
Item
6. Exhibits.
The following exhibits are included
herein:
Exhibit No.
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Description
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10.1
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Employment
Agreement between Red Trail Energy, LLC and Gerald Bachmeier dated July 8,
2010.
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31.1
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Certificate
Pursuant to 17 CFR 240.15d-14(a).
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31.2
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Certificate
Pursuant to 17 CFR 240.15d-14(a).
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32.1
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Certificate
Pursuant to 18 U.S.C. § 1350.
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32.2
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Certificate
Pursuant to 18 U.S.C. § 1350.
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SIGNATURES
Pursuant
to the requirements 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.
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RED
TRAIL ENERGY, LLC
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Date:
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August
13, 2010
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/s/ Gerald
Bachmeier
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Gerald
Bachmeier
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Chief
Executive Officer
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Date:
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August
13, 2010
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/s/ Kent
Anderson
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Kent
Anderson
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Chief
Financial
Officer
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APPENDIX
F
FORM
OF PROXY
PRELIMINARY
FORM OF PROXY
RED
TRAIL ENERGY, LLC
PROXY
SOLICITED
ON BEHALF OF OUR BOARD OF GOVERNORS
FOR
THE COMBINED SPECIAL AND ANNUAL MEETING OF MEMBERS TO BE HELD
ON___________,
20__
MEMBER
NAME:_______________________________________________________________________________
NUMBER OF
MEMBERSHIP
UNITS:_______________________________________________________________
Vote
by Mail or Facsimile:
1) Read
the Proxy Statement
2) Check
the appropriate boxes below
3) Sign
and date the proxy card
4) Return the proxy card in the
envelope provided or via fax to 701-974-3309
no later than _:__ _.m. on
___________, _______________, 20__.
The
undersigned hereby appoints _____________________________, and each or either of
them, with the power of substitution, as Proxies to represent the undersigned
and to vote as designated below, at the Combined Special and Annual
Meeting of Members to be held on ___________, _____________, 20__, at
___________________ in ___________________, North Dakota, and at adjournment
thereof, on any matters coming before the meeting.
Said
Proxies will vote on the proposals set forth in the notice of the combined
special and annual meeting and proxy statement as specified on this
card. If a vote is not specified, said Proxies will vote in favor of
the proposals listed below. If any other matters properly come before
the combined special and annual meeting, said Proxies will vote on such matters
in accordance with the recommendations of the board of governors except to the
extent that such matters would include substantive matters presented by the
Company that would otherwise be required to be separately set out by the Company
on the proxy card.
Our
governors unanimously recommend that you vote
"FOR"
the proposals 1 and 2
and vote your units for the governors’ nominees, which are Sid Mauch, Tim
Meuchel and Lynn Bergman.
1. For
approval of the proposed amendments to the Amended and Restated Operating
Agreement and Amended and Restated Member Control Agreement of RED TRAIL ENERGY,
LLC contained in the Second Amended and Restated Operating
Agreement and Second Amended and Restated Member Control Agreement
and adoption of the Second Amended and Restated Operating Agreement and the
Second Amended and Restated Member Control Agreement.
£
FOR
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£
AGAINST
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£
ABSTAIN
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2. For
approval of the Reclassification of units held by unit holders who are the
record holders of 50,000 or more units into Class A Units, the units held by
unit holders who are the record holders of not more than 49,999 or fewer than
10,001 units into Class B Units, and the units held by unit holders who are the
record holders of 10,000 or fewer units into Class C Units.
£
FOR
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£
AGAINST
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£
ABSTAIN
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3. Elect
three (3) governors to the Board of Governors. Each will serve for a
term of three years.
To
withhold authority to vote for any individual nominee, strike a line through the
nominee’s name in the list below.
You are
entitled to give a nominee as many votes as is equal to the number of Units you
own multiplied by 3 (the number of governors to be elected), or you may
distribute your votes among the nominees as you see fit. Write in the
number of votes you are allocating to any nominee below. The Board of
Governors recommends you vote your Units for Tim Meuchel, Lynn Berman, and Sid
Mauch.
Tim
Meuchel
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Votes
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Lynn
Bergman
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Votes
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Sid
Mauch
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Votes
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Frank
Kirschenheiter
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Votes
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You are
encouraged to specify your choices by marking the appropriate boxes
above. This proxy card, if signed and returned, will be voted in
accordance with your instructions above and authorizes the Proxies to take
action in their discretion upon other matters that may properly come before the
meeting.
The Proxies
cannot vote your units unless you sign and return this card
.
Proposal
1 (the amendments to the Amended and Restated Operating Agreement and Amended
and Restated Member Control Agreement) Proposal 2 (the reclassification) are
conditioned upon each other. If either Proposal 1 or Proposal 2 are
not approved, the reclassification or any or all of the proposed amendments that
our members otherwise approved will not be implemented.
Please
sign exactly as your name appears on your unit certificate. When
units are held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name
by President or other authorized officer. If a partnership, please
sign in partnership name by authorized person.
Date:_______________________________________
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___________________________________________
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Signature
of Unit Holder
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Date:_______________________________________
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___________________________________________
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Signature
of Joint Unit Holder
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APPENDIX
G
FORM
OF TRANSMITTAL LETTER
[Date]
[name]
[address]
[city,
state, zip code]
Re: RED
TRAIL ENERGY, LLC Membership Certificates
Dear
Member:
As you
know, the Members of RED TRAIL ENERGY, LLC (the "Company") affirmatively voted
on ________________ to reclassify the membership units of the Company into three
classes: Class A, Class B and Class C. We now ask that you return
your original membership certificate(s) to the Company so that we may re-issue a
new certificate to you which will identify the Class of membership units you now
own. If your original membership certificates are being held by a
bank as security interest for debt or by a trustee or other third party, please
make arrangements with such third parties to return your original membership
certificates as soon as possible.
Please
mail or hand-deliver your membership certificates to:
RED TRAIL
ENERGY, LLC
Attn:
Kent Anderson
P.O. Box
11
3682
Highway 8 South
Richardton,
ND 58652
Please
feel free to contact Kent Anderson at (701) 974-3308 if you have
any questions regarding the return of your membership certificates.
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Very
truly yours,
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Mike
Appert, Chairman
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The
Board of Governors
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RED
TRAIL ENERGY, LLC
|
Red Trail Energy (CE) (USOTC:REGX)
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