As filed with the Securities and Exchange
Commission on April 2, 2015
Registration
No. 333-201879
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PACIFIC ETHANOL, INC.
(Exact name of Registrant as specified in its
charter)
Delaware |
2860 |
41-2170618 |
(State or Other Jurisdiction of
Incorporation or Organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification No.) |
400 Capitol Mall, Suite 2060
Sacramento, California 95814
(916) 403-2123
(Address, Including Zip Code, and Telephone
Number, Including Area Code, of Registrant’s Principal Executive Offices)
Neil M. Koehler
President and Chief Executive Officer
Pacific Ethanol, Inc.
400 Capitol Mall, Suite 2060
Sacramento, California 95814
(916) 403-2123
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
Copies of all correspondence to:
Larry A. Cerutti, Esq.
Rushika Kumararatne de Silva, Esq.
Troutman Sanders LLP
5 Park Plaza, 14th Floor
Irvine, California 92614
(949) 622-2700 / (949) 622-2739
(fax) |
|
Mark Beemer
President and Chief Executive Officer
Aventine Renewable Energy Holdings, Inc.
1300 South 2nd Street
Pekin, Illinois 61554
(309) 347-9200 |
|
Ackneil M. Muldrow, Esq.
Steve Kahn, Esq.
Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, New York 10036
(212) 872-1000 / (212) 872-1002
(fax) |
Approximate date of commencement of proposed sale of the securities
to the public: As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver
of all other conditions under the merger agreement described herein.
If the
securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. o
If this
Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. o
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 o |
Accelerated filer x |
Non-accelerated
filer o (Do not check if a smaller reporting
company) |
Smaller reporting company x |
If applicable, please an X in the box to designate the appropriate
rule provision relied upon in conducting this transaction:
Exchange
Act Rule 13c-4(i) (Cross-Border Issuer Tender Offer) o
Exchange
Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) o
The Registrant hereby amends
this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this joint proxy statement/prospectus
is not complete and may be changed. Pacific Ethanol may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This joint proxy statement/prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any state where the offer, solicitation or sale is not permitted.
Subject
to completion, dated April 2, 2015
[●], 2015
Dear Pacific Ethanol, Inc. and Aventine Renewable Energy
Holdings, Inc. Stockholders,
We are pleased to enclose the joint proxy
statement/prospectus relating to the merger of a wholly-owned subsidiary of Pacific Ethanol, Inc. (sometimes referred to as Pacific
Ethanol) with and into Aventine Renewable Energy Holdings, Inc. (sometimes referred to as Aventine), with Aventine continuing as
a wholly-owned subsidiary of Pacific Ethanol. We believe this merger will allow Pacific Ethanol and Aventine to be better positioned
to compete in the ethanol production and marketing industry.
In the merger, each issued and outstanding
share of Aventine common stock (other than dissenting shares and shares held by Pacific Ethanol or Aventine) will be converted
into the right to receive, at the election of the holder, pursuant to the terms of an election form to be distributed to all holders
in advance of the special meeting and certain limitations in order to maintain the tax free treatment of the merger (i.e., no
more than 20% of shares of Aventine common stock will be exchanged by the Aventine stockholders for shares of Pacific Ethanol
non-voting common stock), (i) 1.25 shares of Pacific Ethanol common stock, (ii) 1.25 shares of Pacific Ethanol non-voting common
stock, or (iii) a combination of Pacific Ethanol common stock and non-voting common stock resulting in such Aventine stockholder
receiving a total number of shares of common stock and non-voting common stock equal to 1.25 times the number of shares of Aventine
common stock held by such stockholder. Shares of Pacific Ethanol non-voting common stock are the same in all respects to shares
of Pacific Ethanol’s common stock, except that holders of shares of non-voting common stock are not entitled to vote on
matters submitted to Pacific Ethanol stockholders and shares of non-voting common stock are convertible into shares of common
stock on a one-for-one basis no earlier than sixty-one days after such holder provides a notice of conversion to Pacific Ethanol.
The stockholders of Pacific Ethanol
will continue to own their existing shares and the rights and privileges of their existing shares will not be affected by the
merger. However, because Pacific Ethanol will be issuing new shares of Pacific Ethanol common stock and non-voting common stock
to Aventine stockholders in the merger, the stockholders of Pacific Ethanol will experience dilution as a result of the issuance
of shares in the merger and each outstanding share of Pacific Ethanol common stock immediately prior to the merger will represent
a smaller percentage of the total number of shares of Pacific Ethanol common stock and non-voting common stock issued and outstanding
after the merger. It is expected that Pacific Ethanol stockholders before the merger will hold approximately 58% of the total
Pacific Ethanol common stock and non-voting common stock issued and outstanding immediately following completion of the merger.
Thus, Pacific Ethanol stockholders before the merger will experience dilution in the amount of 42% as a result of the merger.
The value of the consideration to be
received in exchange for each share of Aventine common stock will fluctuate with the market price of Pacific Ethanol common stock.
Based on the closing sale price for Pacific Ethanol common stock on December 30, 2014, the last trading day before public announcement
of the merger, the 1.25 exchange ratio represented approximately $13.39 in value for each share of Aventine common stock (assuming
only shares of Pacific Ethanol common stock are issued in the merger). Based on the closing price for Pacific Ethanol common stock
on [●], 2015, the latest practicable date before the printing of this joint proxy statement/prospectus, the 1.25 exchange
ratio represented approximately $[●] in value for each share of Aventine common stock (assuming only shares of Pacific Ethanol
common stock are issued in the merger). The value of the consideration to be received by Aventine stockholders will fluctuate with
changes in the price of Pacific Ethanol common stock.
We estimate that Pacific Ethanol may
issue up to an aggregate of approximately 17,755,300 shares of its common stock and non-voting common stock to Aventine stockholders
as contemplated by the merger agreement. Immediately following completion of the merger, Pacific Ethanol stockholders immediately
prior to the merger will own approximately 58% of Pacific Ethanol’s outstanding common stock and non-voting common stock
and former Aventine stockholders will own approximately 42% of Pacific Ethanol’s outstanding common stock and non-voting
common stock, in each case assuming no exercise or conversion of outstanding options and warrants. Pacific Ethanol’s common
stock will continue to be listed on The NASDAQ Capital Market under the symbol “PEIX.” Pacific Ethanol’s non-voting
common stock will not be listed on any stock exchange.
Pacific Ethanol stockholders are cordially
invited to attend Pacific Ethanol’s annual meeting of stockholders to be held at [●] on [●], 2015 at [●]
a.m., local time, at which time the holders of Pacific Ethanol common stock and Series B Preferred Stock, voting together as a
single class, will be asked to consider and vote upon proposals related to the merger including (i) a proposal to approve the
issuance of Pacific Ethanol common stock and non-voting common stock in connection with the proposed merger, (ii) a proposal to
amend Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock, and (iii) a proposal
to adjourn Pacific Ethanol’s annual meeting if necessary or advisable to permit further solicitation of proxies in the event
there are not sufficient votes at the time of the annual meeting to approve the above matters. The holders of Pacific Ethanol
Series B Preferred Stock, voting as a separate class, will be asked to consider and vote on (x) a proposal to approve the issuance
of Pacific Ethanol common stock and non-voting common stock in connection with the proposed merger, (y) a proposal to amend Pacific
Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock, and (z) the agreement by the holders
of Pacific Ethanol Series B Preferred Stock not to treat the merger as a liquidation, dissolution or winding up within the meaning
of Pacific Ethanol’s Certificate of Designations, Powers, Preferences and Rights relating to its Series B Preferred Stock.
In addition, at this year’s annual meeting, holders of Pacific Ethanol common stock and Series B Preferred Stock, voting
together as a single class, will be asked to (a) elect seven directors; (b) cast an advisory vote to approve Pacific
Ethanol’s executive compensation; and (c) ratify the appointment of Hein & Associates LLP to serve as Pacific Ethanol’s
independent registered public accounting firm for the year ending December 31, 2015. As of the effective time of the merger, the
board of directors of Pacific Ethanol will be increased to nine and will be comprised of the seven members of the Pacific Ethanol
Board elected at the annual meeting of stockholders and two designees nominated by holders of the majority of shares of Aventine
common stock.
Aventine stockholders are cordially
invited to attend a special meeting of the stockholders to be held at [●] on [●], 2015 at [●], a.m., local time,
at which time the stockholders of Aventine will be asked to consider and vote upon (i) a proposal to adopt the merger agreement
and approve the merger and (ii) a proposal to adjourn Aventine’s special meeting if necessary or advisable to permit further
solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt the merger agreement
and approve the merger. It is important to note that eight holders of outstanding shares of Aventine common stock (seven of whom
are affiliated with Candlewood Investment Group, LP) have entered into stockholders agreements with Pacific Ethanol, pursuant
to which they have agreed to vote their pro-rata share of 51% of the issued and outstanding shares of common stock of Aventine
in favor of the merger and adoption of the merger agreement, subject to the terms of the stockholder agreements.
We urge you to read the enclosed
joint proxy statement/prospectus, which includes important information about the merger, Pacific Ethanol’s annual
meeting and Aventine’s special meeting. In particular, see “Risk Factors” beginning on page 37 of the
joint proxy statement/prospectus for a description of the risks that you should consider in evaluating the
merger.
Pacific Ethanol’s board of
directors (sometimes referred to as the Pacific Ethanol Board) unanimously recommends that Pacific Ethanol stockholders vote “FOR”
the issuance of the shares of common stock and/or non-voting common stock, the charter amendment, and the agreement not to treat
the merger as a liquidation, dissolution or winding up, “FOR” each of the nominees to the Pacific Ethanol Board, “FOR”
the non-binding approval of Pacific Ethanol’s executive compensation, “FOR” the ratification of the appointment
of Hein & Associates LLP, and “FOR” the other matters to be considered at the Pacific Ethanol annual meeting.
Aventine’s board of
directors (sometimes referred to as the Aventine Board) unanimously recommends that Aventine stockholders vote
“FOR” the adoption of the merger agreement and “FOR” the other matters to be considered at the
Aventine special meeting. It should be noted that in connection with the merger, the Aventine Board will receive
indemnification for acts or omissions occurring prior to the effective time of the merger. The merger agreement also provides
that, prior to the effective time of the merger, Aventine will purchase “tail” officers’ and
directors’ liability insurance policies on terms and conditions reasonably comparable to Aventine’s existing
directors’ and officers’ liability insurance. See, “Additional Interests of Certain of Aventine’s
Directors and Executive Officers in the Merger” beginning on page 205 of the joint proxy statement/prospectus.
Your vote is very important. Whether
or not you plan to attend your respective company’s meeting of stockholders, please submit your proxy as soon as possible
to make sure that your shares are represented at that meeting. Information about these meetings, the merger and the other
business to be considered by stockholders is contained in this joint proxy statement/prospectus. We urge you to read this joint
proxy statement/prospectus carefully.
Sincerely, |
|
Sincerely, |
|
|
|
|
|
|
|
|
|
/s/ Neil M. Koehler |
|
/s/ Mark Beemer |
|
Neil M. Koehler |
|
Mark Beemer |
|
President and Chief Executive Officer |
|
Chief Executive Officer |
|
Pacific Ethanol, Inc. |
|
Aventine Renewable Energy Holdings, Inc. |
|
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the
merger or determined if this joint proxy statement/prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The enclosed joint proxy statement/prospectus
is dated [●], 2015, and is first being mailed or otherwise delivered to stockholders of Pacific Ethanol and Aventine on or
about [●], 2015.
Pacific Ethanol, Inc.
400 Capitol Mall, Suite 2060
Sacramento, CA 95814
(916) 403-2123
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD [●], 2015
To the Stockholders of Pacific Ethanol, Inc.:
Pacific Ethanol, Inc.’s annual
meeting of all stockholders will be held at [●] on [●], 2015 at [●] a.m., local time, for the following purposes:
| 1. | To approve the issuance of shares of Pacific Ethanol common
stock and non-voting common stock pursuant to the Agreement and Plan of Merger, dated
as of December 30, 2014, as amended on March 31, 2015, by and among Pacific Ethanol, Inc., AVR Merger Sub, Inc., and
Aventine Renewable Energy Holdings, Inc. (sometimes referred to as the merger agreement). A copy of the merger agreement has been
included as Annex A to this joint proxy statement/prospectus. In the merger, each
issued and outstanding share of Aventine common stock (other than dissenting shares and
shares held by Pacific Ethanol or Aventine) will be converted into the right to receive,
at the election of the holder, pursuant to the terms of an election form to be distributed
to all holders in advance of the special meeting and certain limitations in order to
maintain the tax free treatment of the merger (i.e., no more than 20% of shares of Aventine
common stock will be exchanged by the Aventine stockholders for shares of Pacific Ethanol
non-voting common stock), (i) 1.25 shares of Pacific Ethanol common stock, (ii) 1.25
shares of Pacific Ethanol non-voting common stock, or (iii) a combination of Pacific
Ethanol common stock and non-voting common stock resulting in such Aventine stockholder
receiving a total number of shares of common stock and non-voting common stock equal
to 1.25 times the number of shares of Aventine common stock held by such stockholder. |
| | |
| 2. | To approve an amendment to Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock.
A copy of the amendment to Pacific Ethanol’s Certificate of Incorporation has been included as Annex B to this joint
proxy statement/prospectus. |
| | |
| 3. | For holders of Pacific Ethanol Series B Preferred Stock only, to obtain the agreement of such holders not to treat the merger
as a liquidation, dissolution or winding up within the meaning of Pacific Ethanol’s Certificate of Designations, Powers,
Preferences and Rights relating to its Series B Preferred Stock. |
| | |
| 4. | To adjourn the annual meeting if necessary or advisable to permit
further solicitation of proxies in the event there are not sufficient votes at the time
of the annual meeting to approve (i) the issuance of shares described in Proposal 1,
(ii) the proposed amendment to Pacific Ethanol’s Certificate of Incorporation described
in Proposal 2, and/or (iii) the agreement by the holders of Pacific Ethanol Series B
Preferred Stock not to treat the merger as a liquidation, dissolution or winding up described
in Proposal 3. |
| | |
| 5. | To elect seven directors to
serve on Pacific Ethanol’s Board of Directors until the next annual meeting of
stockholders and/or until their successors are duly elected and qualified. The nominees
for election are William L. Jones, Neil M. Koehler, Terry L. Stone, John L. Prince, Douglas
L. Kieta, Larry D. Layne and Michael D. Kandris. |
| | |
| 6. | To cast a non-binding advisory vote to approve Pacific Ethanol’s
executive compensation (“say-on-pay”). |
| | |
| 7. | To ratify the appointment of Hein & Associates LLP as Pacific
Ethanol’s independent registered public accounting firm for the year ending December
31, 2015. |
| | |
| 8. | To transact such other business as may properly come before the
annual meeting or any adjournment or postponement thereof. |
If you held shares of Pacific Ethanol
common stock or Series B Preferred Stock at the close of business on [●], 2015, you are entitled to notice of and to vote
at the annual meeting and any adjournments or postponements thereof. If a new record date is set, you will be entitled to vote
at the annual meeting if you held shares in Pacific Ethanol as of such record date.
The Pacific Ethanol Board unanimously
recommends that you vote “FOR” all of these proposals, which are described in detail in the accompanying joint proxy
statement/prospectus. Your attention is directed to the accompanying joint proxy statement/prospectus for a discussion of the
merger and the merger agreement, as well as the other matters that will be considered at the meeting.
Your vote is very important. The
conditions to the merger include that the Pacific Ethanol stockholders approve the issuance of the common stock and/or non-voting
common stock, the charter amendment, and the agreement of the holders of Series B Preferred Stock not to treat the merger as a
liquidation, dissolution or winding up within the meaning of Pacific Ethanol’s Certificate of Designations, Powers, Preferences
and Rights relating to its Series B Preferred Stock. If you do not submit your proxy by telephone, the Internet, or
return your signed proxy card(s) by mail or vote in person at the annual meeting, it will be more difficult for Pacific Ethanol
to obtain the necessary quorum to hold its annual meeting. Holders of Pacific Ethanol Series B Preferred Stock will receive a
separate proxy card, that varies slightly from the proxy card sent to holders of Pacific Ethanol common stock, which includes
Proposal 3, a proposal to be voted on by holders of Pacific Ethanol Series B Preferred Stock only.
Whether or not you plan to attend
the annual meeting in person, please complete, sign, date and return the enclosed proxy in the accompanying self-addressed postage
pre-paid envelope or complete your proxy by following the instructions supplied on the proxy card for voting by telephone or via
the Internet (or, if your shares are held in “street name” by a broker, nominee, fiduciary or other custodian, follow
the directions given by the broker, nominee, fiduciary or other custodian regarding how to instruct it to vote your shares) as
soon as possible. If you attend the annual meeting, you may withdraw your proxy and vote in person.
IMPORTANT NOTICE
REGARDING THE INTERNET AVAILABILITY
OF PROXY MATERIALS
FOR THE PACIFIC ETHANOL 2015 ANNUAL MEETING
OF STOCKHOLDERS
TO BE HELD [●], 2015
This Joint Proxy Statement/Prospectus
and Pacific Ethanol’s Annual Report on Form 10-K for the year ended December 31, 2014 are available at the website address
at [●]. You are encouraged to access and review all of the important information contained in the proxy materials before
voting. The Pacific Ethanol Annual Report is not to be regarded as proxy soliciting material or as a communication through which
any solicitation of proxies is made.
|
By Order of the Board of Directors, |
|
|
|
/s/ William L. Jones |
Sacramento, CA |
William L. Jones |
[●], 2015 |
Chairman of the Board |
PLEASE VOTE YOUR SHARES PROMPTLY. YOU CAN FIND INSTRUCTIONS
FOR VOTING ON THE ENCLOSED PROXY CARD. IF YOU HAVE QUESTIONS ABOUT THE PROPOSALS OR ABOUT VOTING YOUR SHARES, PLEASE CALL PACIFIC
ETHANOL’S PROXY SOLICITOR, GEORGESON INC., AT [●].
Aventine
Renewable Energy Holdings, Inc.
1300 South 2nd Street
Pekin, IL 61554
(309) 347-9200
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [●], 2015
To the Stockholders of Aventine Renewable Energy Holdings,
Inc.:
A special meeting of stockholders of
Aventine Renewable Energy Holdings, Inc. will be held at [●], on [●], 2015 at [●] a.m., local time, for
the following purposes:
| 1. | To adopt the Agreement and Plan of Merger, dated as of December
30, 2014, as amended on March 31, 2015, by and among Pacific Ethanol, Inc., AVR Merger Sub, Inc., and Aventine Renewable
Energy Holdings, Inc. (sometimes referred
to as the merger agreement) and thereby approve the merger. A copy of the merger agreement
has been included as Annex A to this joint proxy statement/prospectus. In the
merger, each issued and outstanding share of Aventine common stock (other than dissenting
shares and shares held by Pacific Ethanol or Aventine) will be converted into the right
to receive, at the election of the holder, pursuant to the terms of an election form
to be distributed to all holders in advance of the special meeting and certain limitations
in order to maintain the tax free treatment of the merger (i.e., no more than 20% of
shares of Aventine common stock will be exchanged by the Aventine stockholders for shares
of Pacific Ethanol non-voting common stock), (i) 1.25 shares of Pacific Ethanol common
stock, (ii) 1.25 shares of Pacific Ethanol non-voting common stock, or (iii) a combination
of Pacific Ethanol common stock and non-voting common stock resulting in such Aventine
stockholder receiving a total number of shares of common stock and non-voting common
stock equal to 1.25 times the number of shares of Aventine common stock held by such
stockholder. |
| | |
| 2. | To adjourn the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the special meeting to adopt the merger agreement and approve the merger. |
| | |
| 3. | To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof. |
If you held shares of Aventine common
stock at the close of business on [●], 2015, you are entitled to notice of and to vote at the special meeting and any adjournments
or postponements thereof. If a new record date is set, you will be entitled to vote at the special meeting if you held shares in
Aventine as of such record date.
The Aventine Board has
unanimously approved the merger agreement, has determined that the merger agreement and the transactions contemplated
thereby, including the merger, are advisable and in the best interests of Aventine and its stockholders, and unanimously
recommends that Aventine stockholders vote “FOR” the Aventine merger proposal and “FOR” the Aventine
adjournment proposal. It should be noted that in connection with the merger, the Aventine Board will receive indemnification
for acts or omissions occurring prior to the effective time of the merger. The merger agreement also provides that, prior to
the effective time of the merger, Aventine will purchase “tail” officers’ and directors’ liability
insurance policies on terms and conditions reasonably comparable to Aventine’s existing directors’ and
officers’ liability insurance. See, “Additional Interests of Certain of Aventine’s Directors and Executive
Officers in the Merger” beginning on page 205 of the joint proxy statement/prospectus.
Your vote is very important. The
conditions to the merger include that the Aventine stockholders approve the adoption of the merger agreement. If you
do not return your signed proxy card(s) by mail or vote in person at your special meeting, it will be more difficult for Aventine
to obtain the necessary quorum to hold its special meeting.
Whether or not you plan to attend
the special meeting in person, please complete, sign, date and return the enclosed proxy in the accompanying self-addressed postage
pre-paid envelope (or, if your shares are held in “street name” by a broker, nominee, fiduciary or other custodian,
follow the directions given by the broker, nominee, fiduciary or other custodian regarding how to instruct it to vote your shares)
as soon as possible. If you attend the special meeting, you may withdraw your proxy and vote in person.
|
By Order of the Board of Directors, |
|
|
|
/s/ Mark Beemer |
Pekin, IL |
Mark Beemer |
[●], 2015 |
Chief Executive Officer |
PLEASE VOTE YOUR SHARES PROMPTLY. YOU CAN FIND INSTRUCTIONS
FOR VOTING ON THE ENCLOSED PROXY CARD. IF YOU HAVE QUESTIONS ABOUT THE PROPOSALS OR ABOUT VOTING YOUR SHARES, PLEASE CALL AVENTINE’S
CORPORATE SECRETARY, CHRISTOPHER A. NICHOLS AT 1-800-384-2665 (TOLL FREE) OR VIA EMAIL AT CHRIS.NICHOLS@AVENTINEREI.COM.
ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates
important business and financial information about Pacific Ethanol that is not included in or being delivered with this joint proxy
statement/prospectus. The incorporated information that is not included in or being delivered with this joint proxy statement/prospectus
is available to you without charge upon your written or oral request. You can obtain any document that is incorporated by reference
in this joint proxy statement/prospectus, excluding all exhibits that have not been specifically incorporated by reference, on
the investor relations page of Pacific Ethanol’s website at www.pacificethanol.com or by requesting it in writing or by telephone
from Pacific Ethanol at the following address or telephone number:
400 Capitol Mall, Suite 2060
Sacramento, CA 95814
(916) 403-2123
Attn.: Corporate Secretary
Website: www.pacificethanol.com
To obtain timely delivery, you must request
the information no later than five business days before [●], 2015. If you would like to request any documents, please do
so by [●], 2015 in order to receive them before Pacific Ethanol’s annual meeting. See “Where You
Can Find More Information.”
You should rely only on the information contained
in, or incorporated by reference into, this document. No one has been authorized to provide you with information that is different
from that contained in, or incorporated by reference into, this document. This document is dated [●], 2015, and you should
assume that the information in this document is accurate only as of such date. You should assume that the information incorporated
by reference into this document is accurate as of the date of such document. Neither the mailing of this document to Aventine stockholders
nor the issuance by Pacific Ethanol of shares of Pacific Ethanol common stock and/or non-voting common stock in connection with
the merger will create any implication to the contrary.
IMPORTANT NOTICE REGARDING
THE INTERNET AVAILABILITY
OF PROXY MATERIALS FOR
THE PACIFIC ETHANOL 2015 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD
[●], 2015
This Joint Proxy Statement/Prospectus and
Pacific Ethanol’s Annual Report on Form 10-K for the year ended December 31, 2014 are available at the website address at
[●]. You are encouraged to access and review all of the important information contained in the proxy materials before voting.
The Pacific Ethanol Annual Report is not to be regarded as proxy soliciting material or as a communication through which any solicitation
of proxies is made.
This document does not constitute an offer
to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from
any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Except where the context otherwise
indicates, information contained in this document regarding Aventine has been provided by Aventine and information contained in
this document regarding Pacific Ethanol has been provided by Pacific Ethanol.
TABLE OF CONTENTS
QUESTIONS
AND ANSWERS ABOUT THIS JOINT PROXY STATEMENT/PROSPECTUS |
1 |
QUESTIONS AND
ANSWERS ABOUT THE MERGER |
11 |
SUMMARY –
THE MERGER |
18 |
The Companies
Involved in the Merger |
18 |
The Proposed
Merger |
19 |
Merger Consideration |
20 |
Treatment of
Stock Options and Warrants |
20 |
Directors and
Executive Management of Pacific Ethanol Following the Merger |
21 |
Recommendation
of the Pacific Ethanol Board |
21 |
Recommendation
of the Aventine Board |
21 |
Opinion of Craig-Hallum
Capital Group LLC |
21 |
Opinion of Aventine
Financial Advisor |
22 |
Interests of
Certain Aventine Directors and Executive Officers in the Merger |
22 |
Material United
States Federal Income Tax Consequences of the Merger |
22 |
Forward-Looking
Financial Information |
23 |
Accounting Treatment
of the Merger |
28 |
Regulatory Matters |
28 |
Conditions to
Completion of the Merger |
28 |
No Solicitation
of Other Offers |
29 |
Termination |
29 |
Termination
Fees and Expenses |
29 |
Stockholders
Agreements |
30 |
Shares Beneficially
Owned by Directors and Executive Officers of Pacific Ethanol and Aventine |
31 |
Appraisal Rights |
31 |
Comparison of
the Rights of Pacific Ethanol and Aventine Stockholders |
31 |
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA OF PACIFIC ETHANOL |
32 |
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA OF AVENTINE |
33 |
SELECTED UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION |
34 |
EQUIVALENT AND
COMPARATIVE PER SHARE INFORMATION |
35 |
RISK FACTORS |
37 |
Risks Related
to the Merger |
37 |
Risks Related
to Aventine’s Business |
42 |
Risks Related
to the Combined Company if the Merger is Completed |
49 |
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS |
55 |
THE COMPANIES |
56 |
Pacific Ethanol,
Inc. |
56 |
AVR Merger Sub,
Inc. |
56 |
Aventine Renewable
Energy Holdings, Inc. |
56 |
TABLE OF CONTENTS
(continued)
INFORMATION
ABOUT THE PACIFIC ETHANOL ANNUAL MEETING AND VOTE |
79 |
Date, Time and
Place of the Annual Meeting |
79 |
Purpose of the
Pacific Ethanol Annual Meeting |
79 |
Record Date
and Voting Power |
81 |
Quorum and Voting
Rights |
81 |
Required Vote |
82 |
Broker Non-Votes |
84 |
Abstentions:
Non-Voting |
84 |
Appraisal Rights;
Trading of Shares |
85 |
Shares Beneficially
Owned by Pacific Ethanol Directors and Executive Officers |
85 |
Voting of Shares;
Proxies |
86 |
Revocability
of Proxies and Changes to a Pacific Ethanol Stockholder’s Vote |
87 |
Solicitation
of Proxies |
87 |
Other Business;
Adjournments |
87 |
Attending the
Meeting |
88 |
Proposal 1 |
88 |
Proposal 2 |
89 |
Proposal 3 |
90 |
Proposal 4 |
91 |
Proposal 5 |
92 |
Proposal 6 |
104 |
Proposal 7 |
105 |
AUDIT MATTERS
OF PACIFIC ETHANOL |
106 |
AUDIT COMMITTEE
REPORT OF PACIFIC ETHANOL |
107 |
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PACIFIC ETHANOL |
108 |
SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE OF PACIFIC ETHANOL |
111 |
EQUITY COMPENSATION
PLAN INFORMATION OF PACIFIC ETHANOL |
111 |
EXECUTIVE COMPENSATION
AND RELATED INFORMATION OF PACIFIC ETHANOL |
112 |
Executive Officers |
112 |
Compensation
Discussion and Analysis |
113 |
Executive Summary |
114 |
Compensation
Philosophy and Objectives |
116 |
Compensation
Governance Practices |
117 |
Executive Compensation
Program and Processes |
118 |
Other Policies
and Factors Affecting Executive Officer Compensation |
126 |
Compensation
Decisions for 2014 |
127 |
Compensation
Committee Report |
137 |
Compensation
Risk Analysis |
137 |
Summary Compensation
Table |
138 |
Grants of Plan-Based
Awards – 2014 |
141 |
Outstanding
Equity Awards at Fiscal Year-End – 2014 |
142 |
Option Exercises
and Stock Vested – 2014 |
143 |
Severance and
Change in Control Arrangements with Named Executive Officers |
144 |
Calculation
of Potential Payments upon Termination or Change in Control – 2014 |
144 |
TABLE OF CONTENTS
(continued)
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS OF PACIFIC ETHANOL |
146 |
INFORMATION ABOUT
THE AVENTINE SPECIAL MEETING AND VOTE |
153 |
Date, Time and
Place of the Special Meeting |
153 |
Purpose of the
Aventine Special Meeting |
153 |
Record Date
and Voting Power |
153 |
Quorum and Voting
Rights |
154 |
Required Vote |
154 |
Broker Non-Votes |
154 |
Abstentions;
Non-Voting |
154 |
Appraisal Rights |
155 |
Shares Beneficially
Owned by Aventine Directors and Executive Officers |
155 |
Voting of Shares;
Proxies |
155 |
Revocability
of Proxies and Changes to an Aventine Stockholder’s Vote |
156 |
Solicitation
of Proxies |
156 |
Other Business;
Adjournments |
156 |
Attending the
Meeting |
157 |
THE PROPOSED MERGER |
158 |
General |
158 |
Pacific Ethanol
Merger Proposal |
158 |
Aventine Merger
Proposal |
158 |
Merger Consideration |
159 |
Background of
the Merger |
160 |
Recommendation
of the Pacific Ethanol Board and its Reasons for the Merger |
176 |
Opinion of Craig-Hallum
Capital Group LLC |
179 |
Recommendation
of the Aventine Board and its Reasons for the Merger |
188 |
Opinion of Financial
Advisor to the Aventine Board |
191 |
Accounting Treatment |
197 |
Material United
States Federal Income Tax Consequences of the Merger |
197 |
Appraisal Rights |
201 |
Regulatory Matters
Relating to the Merger |
201 |
Federal Securities
Laws Consequences; Stock Transfer Restrictions |
203 |
Stock Exchange
Listing; Shares to be Issued in the Merger |
204 |
ADDITIONAL INTERESTS
OF CERTAIN OF AVENTINE’S DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER |
205 |
Leadership of
the Combined Company |
205 |
Severance Arrangements |
205 |
Golden Parachute
Compensation |
206 |
Indemnification
and Insurance |
207 |
THE MERGER AGREEMENT
AND RELATED AGREEMENTS |
208 |
The Merger |
208 |
Completion and
Effectiveness of the Merger |
208 |
Merger Consideration |
209 |
Treatment of
Aventine Stock Options |
210 |
TABLE OF CONTENTS
(continued)
Treatment of Aventine
Warrants |
211 |
Fractional Shares |
211 |
Conversion of Shares;
Exchange of Certificates |
211 |
Appraisal Rights |
213 |
Reasonable Best
Efforts; Other Agreements |
213 |
Representations
and Warranties |
214 |
Conduct of Business
Before Completion of the Merger |
216 |
Employee Matters |
220 |
Non-Solicitation;
Change in Recommendation |
220 |
Conditions to Completion
of the Merger |
222 |
Termination |
225 |
Termination Fee
and Expenses |
226 |
Effect of Termination |
227 |
Amendment, Waiver
and Extension of the Merger Agreement |
227 |
Stockholders Agreements |
227 |
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS |
229 |
NOTES TO UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS |
232 |
DESCRIPTION OF PACIFIC
ETHANOL CAPITAL STOCK |
236 |
Authorized and
Outstanding Capital Stock |
236 |
Common Stock |
236 |
Non-Voting Common
Stock |
237 |
Preferred Stock |
238 |
Series B Preferred
Stock |
238 |
Series A Preferred
Stock |
241 |
Warrants |
243 |
Options |
243 |
Anti-Takeover Effects
of Delaware Law and Pacific Ethanol’s Certificate of Incorporation and Bylaws |
243 |
COMPARISON OF RIGHTS
OF PACIFIC ETHANOL AND AVENTINE STOCKHOLDERS |
245 |
APPRAISAL RIGHTS |
252 |
LEGAL MATTERS |
255 |
EXPERTS |
255 |
STOCKHOLDER PROPOSALS |
256 |
Pacific Ethanol |
256 |
Aventine |
256 |
WHERE YOU CAN FIND
MORE INFORMATION |
257 |
INDEX TO FINANCIAL
STATEMENTS |
F-1 |
TABLE OF CONTENTS
(continued)
Annex A |
Agreement and Plan of Merger, dated as of
December 30, 2014, and Amendment No. 1 to Agreement and Plan of Merger dated March 31, 2015, by and among Pacific Ethanol,
Inc., AVR Merger Sub, Inc. and Aventine Renewable Energy Holdings, Inc. |
|
|
Annex B |
Form of Certificate of Amendment of Certificate of Incorporation of Pacific Ethanol, Inc. |
|
|
Annex C-1 |
Stockholders Agreement |
|
|
Annex C-2 |
Stockholders Agreement |
|
|
Annex D |
Opinion of Craig-Hallum Capital Group LLC |
|
|
Annex E |
Opinion of Duff & Phelps, LLC |
|
|
Annex F |
Section 262 of the General Corporation Law of the State of Delaware |
QUESTIONS AND ANSWERS ABOUT THIS
JOINT PROXY STATEMENT/PROSPECTUS
The
following are some questions that you, as a stockholder of Pacific Ethanol and/or Aventine, may have regarding this joint proxy
statement/prospectus, the Pacific Ethanol annual meeting of stockholders and the Aventine special meeting of stockholders, together
with brief answers to those questions. Pacific Ethanol and Aventine urge you carefully read this joint proxy statement/prospectus
in its entirety, including the annexes and other documents attached and/or referred to in this joint proxy statement/prospectus,
because the information in this section does not provide all of the information that will be important to you with respect to
the Pacific Ethanol annual meeting of stockholders and/or the Aventine special meeting of stockholders.
Q: Why am I receiving this document?
A: This document
is being delivered to you because you are either a stockholder of Pacific Ethanol, Inc. (sometimes referred to as Pacific Ethanol),
a stockholder of Aventine Renewable Energy Holdings, Inc. (sometimes referred to as Aventine), or both. Pacific Ethanol and Aventine
are delivering these proxy materials to you because each of the Pacific Ethanol Board and the Aventine Board is soliciting your
proxy to vote at Pacific Ethanol’s annual meeting of stockholders or Aventine’s special meeting of stockholders, as
applicable, and at any adjournment or postponement thereof.
In connection with the proposed acquisition
of Aventine by Pacific Ethanol through a merger , holders of Pacific Ethanol common stock and Series B Cumulative Redeemable Convertible
Preferred Stock (sometimes referred to as Series B Preferred Stock), voting together as a single class, are being asked to approve
at the annual meeting: (i) a proposal to approve the issuance of Pacific Ethanol common stock and non-voting common stock as contemplated
by the Agreement and Plan of Merger, dated as of December 30, 2014, as amended on March 31, 2015 (sometimes referred to as the
merger agreement), by and among Pacific Ethanol, AVR Merger Sub, Inc. (sometimes referred to as Merger Sub) and Aventine, (ii)
a proposal to amend Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock as contemplated
by the merger agreement, and (iii) a proposal to adjourn Pacific Ethanol’s annual meeting if necessary or advisable to permit
further solicitation of proxies in the event there are not sufficient votes at the time of the annual meeting to approve the above
matters. In connection with the merger, holders of Pacific Ethanol Series B Preferred Stock, voting as a separate class, are being
asked to approve at the annual meeting: (x) a proposal to approve the issuance of Pacific Ethanol common stock and non-voting
common stock as contemplated by the merger agreement, (y) a proposal to amend Pacific Ethanol’s Certificate of Incorporation
to authorize a class of non-voting common stock as contemplated by the merger agreement, and (z) the agreement by the holders
of Pacific Ethanol Series B Preferred Stock not to treat the merger as a liquidation, dissolution or winding up within the meaning
of Pacific Ethanol’s Certificate of Designations, Powers, Preferences and Rights relating to its Series B Preferred Stock
(sometimes referred to as the Pacific Ethanol Series B Certificate of Designations).
In addition, holders
of Pacific Ethanol common stock and Series B Preferred Stock, voting together as a single class, are being asked, at the annual
meeting, to: (i) elect seven directors; (ii) cast an advisory vote to approve Pacific Ethanol’s executive compensation;
and (iii) ratify the appointment of Hein & Associates LLP to serve as Pacific Ethanol’s independent registered
public accounting firm for the year ending December 31, 2015.
Aventine stockholders are being asked
to adopt at a special meeting the merger agreement, and thereby approve the merger; and a proposal to adjourn the special meeting
if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of
the special meeting to adopt the merger agreement and approve the merger.
This document is
serving as both a joint proxy statement of Pacific Ethanol and Aventine and a prospectus of Pacific Ethanol. It is a joint proxy
statement because it is being used by each of the Pacific Ethanol Board and Aventine Board to solicit proxies from their respective
stockholders with respect to the meetings. It is a prospectus because Pacific Ethanol is offering shares of its common stock and
non-voting common stock in exchange for shares of Aventine common stock if the merger is completed. A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus.
Q: Who is entitled
to vote at Pacific Ethanol’s annual meeting?
A: All holders of
Pacific Ethanol common stock and Series B Preferred Stock, who held shares at the record date for the Pacific Ethanol annual meeting
(the close of business on [●], 2015) are entitled to receive notice of, and to vote at, the Pacific Ethanol annual meeting
provided that those shares remain outstanding on the date of the Pacific Ethanol annual meeting. As of the close of business on
[●], 2015, there were [●] shares of Pacific Ethanol common stock issued and outstanding and 926,942 shares of Pacific
Ethanol Series B Preferred Stock issued and outstanding. Each holder of Pacific Ethanol outstanding common stock is entitled to
one vote for each share of Pacific Ethanol common stock owned at the record date. When voting on matters with holders of Pacific
Ethanol common stock together as a single class, each holder of Pacific Ethanol Series B Preferred Stock is entitled to approximately
0.03 votes per share held (sometimes referred to as the Preferred Voting Ratio). As a result, a total of [●] votes may be
cast at the annual meeting, of which holders of Pacific Ethanol common stock will be entitled to cast [●] votes and holders
of Pacific Ethanol Series B Preferred Stock will be entitled to cast [●] votes. When voting as a separate class, each holder
of Pacific Ethanol Series B Preferred Stock is entitled to one vote for each share of Pacific Ethanol Series B Preferred Stock
owned at the record date.
Q: Who is entitled to vote at the
Aventine special meeting?
A: All holders of Aventine common stock
who held shares at the record date for the Aventine special meeting (the close of business on [●], 2015) are entitled to
receive notice of, and to vote at, the Aventine special meeting provided that those shares remain outstanding on the date of the
Aventine special meeting. As of the close of business on [●], 2015, there were [●] shares of Aventine common stock
issued and outstanding. Each holder of Aventine common stock is entitled to one vote for each share of Aventine common stock owned
at the record date.
Q: What constitutes
a quorum for the Pacific Ethanol annual meeting?
A: A quorum is the
number of shares that must be represented at a meeting to lawfully conduct business. The presence at the annual meeting, in person
or by proxy, of the holders of a majority of the shares of Pacific Ethanol common stock and Series B Preferred Stock (giving effect
to the Preferred Voting Ratio) issued and outstanding and entitled to vote at the annual meeting constitutes a quorum for the
transaction of business. Abstentions and broker non-votes, if any, will be included in the calculation of the number of shares
considered to be present at the Pacific Ethanol annual meeting for purposes of determining a quorum.
Q: What constitutes a quorum for
the Aventine special meeting?
A: A quorum is the number of shares that
must be represented at a meeting to lawfully conduct business. The presence at the special meeting, in person or by proxy, of the
holders of a majority of the shares of Aventine common stock issued and outstanding and entitled to vote at the special meeting
constitutes a quorum for the transaction of business. Abstentions and broker non-votes, if any, will be included in the calculation
of the number of shares considered to be present at the meeting for quorum purposes.
Q: How will my proxy be voted?
A: If you are a
Pacific Ethanol stockholder and you submit your proxy by telephone, by the Internet or by completing, signing, dating and returning
your signed proxy card(s), your proxy will be voted in accordance with your instructions. If you are an Aventine stockholder and
you complete, sign, date and return your signed proxy card(s), your proxy will be voted in accordance with your instructions.
If other matters are properly brought before the stockholders meetings, or any adjournments of the meetings, your proxy includes
discretionary authority on the part of the individuals appointed to vote your shares to act on those matters according to their
best judgment.
Q: May I vote in person?
A: Yes. If you hold
shares directly in your name as a stockholder of record of Pacific Ethanol stock as of the close of business on [●], 2015,
or of Aventine common stock as of the close of business on [●], 2015, you may attend your annual or special meeting, as
applicable, and vote your shares in person, instead of submitting your proxy by telephone, by the Internet or returning your signed
proxy card(s) by mail, as applicable. If you hold shares of Pacific Ethanol common stock or Aventine common stock in “street
name,” meaning through a broker, nominee, fiduciary or other custodian, you must obtain a legal proxy from that institution
and present it to the inspector of election with your ballot to be able to vote in person at the Pacific Ethanol annual meeting
or Aventine special meeting, as applicable. To request a legal proxy, please contact your broker, nominee, fiduciary or other
custodian. Pacific Ethanol and Aventine highly recommend that you vote in advance by submitting your proxy by telephone, by the
Internet or by mail, as applicable, even if you plan to attend the stockholders meeting of your company.
Q: What are
the voting requirements to approve each of the proposals that will be voted on at the Pacific Ethanol annual meeting?
A:
|
Proposal |
|
Vote Required |
1. |
Approval of the issuance of shares of Pacific Ethanol common stock and non-voting
common stock pursuant to the merger agreement |
· |
If a quorum is present, a majority of
the shares of Pacific Ethanol common stock and Series B Preferred Stock, represented at the annual meeting, voting together
as a single class and entitled to vote (giving effect to the Preferred Voting Ratio); and |
|
|
|
|
|
|
· |
Affirmative vote of a majority of the outstanding shares
of Series B Preferred Stock, voting as a separate class and entitled to vote |
|
|
|
|
2. |
Approval of amendment to Pacific Ethanol’s Certificate of Incorporation
to create Pacific Ethanol non-voting common stock |
· |
Affirmative vote of a majority of the outstanding shares
of Pacific Ethanol common stock and Series B Preferred Stock, voting together as a single class and entitled to vote (giving effect
to the Preferred Voting Ratio); and |
|
|
|
|
|
|
· |
Affirmative vote of a majority of the outstanding shares of Series B Preferred
Stock, voting as a separate class and entitled to vote |
3. |
Approval not to treat the merger as a liquidation, dissolution
or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations |
· |
Affirmative vote of 66-2/3% of the outstanding shares of Series B Preferred Stock,
voting as a separate class and entitled to vote |
|
|
|
|
4. |
Approval of adjournment of the Pacific Ethanol annual meeting, if necessary,
to solicit additional proxies if there are not sufficient votes to approve the first three proposals |
· |
Affirmative vote of a majority of the outstanding shares of Pacific Ethanol common stock and
Series B Preferred Stock, represented at the meeting, voting together as a single class, and entitled to vote if a quorum
is present or a majority of the voting stock represented in person or by proxy if a quorum is not present |
|
|
|
|
5. |
Election to the Pacific Ethanol Board the seven nominees named in this
joint proxy statement/prospectus |
· |
The seven nominees receiving the highest number of affirmative votes of the outstanding
shares of Pacific Ethanol common stock and Series B Preferred Stock, voting together as a single class, present at the
annual meeting in person or represented by proxy and entitled to vote, will be elected as directors to serve until the
next annual meeting of stockholders and/or until their successors are duly elected and qualified. |
|
|
|
|
|
|
· |
Should any nominee(s) become unavailable to serve before the annual meeting, the proxies will
be voted by the proxy holders for such other person(s) as may be designated by the Pacific Ethanol Board or for such lesser
number of nominees as may be prescribed by the Pacific Ethanol Board. Votes cast for the election of any nominee who has become
unavailable will be disregarded. |
|
|
|
|
6. |
Non-binding advisory approval of Pacific Ethanol’s executive compensation
(“say-on-pay”) |
· |
The votes under this proposal are advisory in nature, and the outcome of stockholder votes
on this proposal will not be binding upon Pacific Ethanol, or Pacific Ethanol’s Compensation Committee or the full
Pacific Ethanol Board. However, Pacific Ethanol’s Compensation Committee and the full Pacific Ethanol Board will
consider the results of the votes when making future decisions regarding Pacific Ethanol’s executive
compensation policies and practices and in determining the frequency of future say-on-pay votes. |
|
|
|
|
7. |
Ratification of the appointment of Hein & Associates LLP as Pacific
Ethanol’s independent registered public accounting firm for 2015 |
· |
The affirmative vote of a majority of the votes of the shares of Pacific Ethanol common stock
and Series B Preferred Stock, voting together as a single class, present at the annual meeting in person or represented by
proxy and entitled to vote, is required for approval of this proposal. |
Q: What are the voting requirements
to approve each of the proposals that will be voted on at the Aventine special meeting?
A:
|
Proposal |
|
Vote Required |
1. |
Adopt the merger agreement, and approve the merger |
· |
Affirmative vote of a majority of the outstanding shares of Aventine common stock, voting together
as a single class, and entitled to vote |
|
|
|
|
2. |
Approval of adjournment of the Aventine special meeting, if necessary, to solicit additional proxies if there are not sufficient votes to approve the first three proposals |
· |
Affirmative vote of a majority of the shares of Aventine common stock, represented at the special
meeting, voting together as a single class, and entitled to vote if a quorum is present or a majority of the voting stock represented
in person or by proxy if a quorum is not present |
Q: Does Pacific Ethanol’s
board of directors recommend that Pacific Ethanol stockholders approve the proposals regarding the merger including the issuance
of shares of Pacific Ethanol common stock and non-voting common stock, the amendment of Pacific Ethanol’s Certificate of
Incorporation and the treatment of the merger not as a liquidation, dissolution or winding up within the meaning of the Pacific
Ethanol Series B Certificate of Designations?
A: Yes. The board of directors of Pacific
Ethanol (sometimes referred to as the Pacific Ethanol Board) has unanimously approved the merger agreement and the transactions
contemplated thereby, including the merger, and determined that the issuance of shares of Pacific Ethanol common stock and non-voting
common stock and the Certificate of Amendment of Pacific Ethanol’s Certificate of Incorporation as contemplated by the merger
agreement is in the best interests of Pacific Ethanol. Therefore, the Pacific Ethanol Board unanimously recommends that you vote
“FOR” the proposal respecting the issuance of shares of Pacific Ethanol common stock and non-voting common
stock as contemplated by the merger agreement at the Pacific Ethanol annual meeting, that you vote “FOR” the
proposal respecting the Certificate of Amendment of Pacific Ethanol’s Certificate of Incorporation and that you vote “FOR”
the proposal not to treat the merger as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol
Series B Certificate of Designations. See “The Proposed Merger—Recommendation of the Pacific Ethanol Board and its
Reasons for the Merger” beginning on page 176 of this joint proxy statement/prospectus.
Q: Does Pacific Ethanol’s
board of directors recommend that Pacific Ethanol stockholders approve the other proposals not related to the merger set forth
in this joint proxy statement/prospectus?
A: Yes. The Pacific Ethanol Board unanimously
recommends that you vote “FOR” each of the nominees to the Pacific Ethanol Board, “FOR”
the approval of Pacific Ethanol’s executive compensation (“say-on-pay”) and “FOR” the ratification
of the appointment of Hein & Associates LLP as Pacific Ethanol’s independent registered public accounting firm for 2015.
Q: Does Aventine’s board of
directors recommend that Aventine stockholders adopt the merger agreement and the transactions contemplated thereby?
A: Yes. The board of directors of
Aventine (sometimes referred to as the Aventine Board) has unanimously approved the merger agreement and the transactions
contemplated thereby, including the merger, and determined that these transactions are advisable and in the best interests of
Aventine and its stockholders. Therefore, the Aventine Board unanimously recommends that you vote “FOR”
the proposal to adopt the merger agreement and the transactions contemplated thereby at the Aventine special meeting. See
“The Proposed Merger—Recommendation of the Aventine Board and its Reasons for the Merger” beginning on page
188 of this joint proxy statement/prospectus. In considering the recommendation of the board of directors of Aventine
with respect to the merger agreement and the transactions contemplated thereby, including the merger, you should be aware
that certain directors and executive officers of Aventine are parties to agreements or are participants in other arrangements
that give them interests that may be different from, or in addition to, your interests as a stockholder of Aventine. It
should be noted that in connection with the merger, the Aventine Board will receive indemnification for acts or omissions
occurring prior to the effective time of the merger. The merger agreement also provides that, prior to the effective time of
the merger, Aventine will purchase “tail” officers’ and directors’ liability insurance policies on
terms and conditions reasonably comparable to Aventine’s existing directors’ and officers’ liability
insurance. Although the Aventine Board has the interests described above, no member of the Aventine Board has any equity
interest or equivalent in Aventine capital stock. You should consider these interests in voting on this proposal. These
different interests are described under “Additional Interests of Certain of Aventine’s Directors and Executive
Officers in the Merger” beginning on page 205 of this joint proxy statement/prospectus.
Q: What if my shares are held in
“street name”?
A: If some or all of your shares of
Pacific Ethanol and/or Aventine are held in “street name” by your broker, nominee, fiduciary or other custodian, you
must provide your broker, nominee, fiduciary or other custodian with instructions on how to vote your shares; otherwise, your
broker, nominee, fiduciary or other custodian will not be able to vote your shares on some of the proposals before your company’s
stockholders meeting.
As a result of the foregoing, please
be sure to provide your broker, nominee, fiduciary or other custodian with instructions on how to vote your shares. Please check
the voting form used by your broker, nominee, fiduciary or other custodian to see if it offers telephone or Internet submission
of proxies.
Q: What are
abstentions and broker non-votes?
An “abstention”
is the voluntary act of not voting by a stockholder who is present at a meeting in person or by proxy and entitled to vote. “Broker
non-votes” refers to shares held by a brokerage firm or other nominee (for the benefit of its client) that are represented
at the meeting, but with respect to which such broker or nominee is not instructed to vote on a particular proposal and does not
have discretionary authority to vote on that proposal.
If you are a beneficial
owner whose shares are held in street name and you do not submit voting instructions to your broker, your broker may generally
vote your shares in its discretion on routine matters. We believe that Pacific Ethanol’s Proposal 7 is routine and may be
voted on by your broker if you do not submit voting instructions. However, pursuant to rules of The NASDAQ Stock Market (sometimes
referred to as NASDAQ), brokers do not have the discretion to vote their clients’ shares on non-routine matters, unless
the broker receives voting instructions from the beneficial owner. Pacific Ethanol’s Proposals 1 through 6 and Aventine’s
Proposals 1 and 2 are considered non-routine matters. Consequently, if your shares are held in street name, you must provide your
broker with instructions on how to vote your shares in order for your shares to be voted on Pacific Ethanol’s Proposals
1 through 6 or Aventine’s Proposals 1 and 2.
Brokers may not
vote your shares on the election of directors or other non-routine matters in the absence of your specific instructions as to
how to vote, thus we strongly encourage you to provide instructions to your broker regarding the voting of your shares you hold
in “street name” or through a broker or other nominee.
Q: If I am a record holder of my
shares, what happens if I abstain from voting (whether by returning my proxy card or submitting my proxy by telephone or via the
Internet) or I don’t submit a proxy?
A: Pacific Ethanol.
| · | For the proposal
to approve the issuance of shares of Pacific Ethanol common stock and non-voting common
stock as contemplated by the merger agreement, if you abstain on the proposal, your shares
will be counted as a vote cast, and, therefore, will have the same effect as a vote “AGAINST”
such proposal with respect to the vote by Pacific Ethanol common stock and Series
B Preferred Stock, voting as a single class. A failure to submit a proxy is not counted
as a vote cast, and as such, will not otherwise have an effect on the outcome of the
vote for the proposal, but it will make it more difficult to meet the requirement under
Pacific Ethanol’s bylaws that the holders of a majority of the Pacific Ethanol
common stock and Series B Preferred Stock (giving effect to the Preferred Voting Ratio)
issued and outstanding and entitled to vote at the annual meeting be present in person
or by proxy to constitute a quorum at the annual meeting. |
| | |
| · | For the proposal to approve the amendment to Pacific
Ethanol’s Certificate of Incorporation as contemplated by the merger agreement,
an abstention or a failure to submit a proxy will have the same effect as a vote “AGAINST”
such proposal with respect to the vote by Pacific Ethanol common stock and Series
B Preferred Stock, voting as a single class. |
| | |
| · | For the proposal to approve not treating the
merger as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations,
an abstention or a failure to submit the proxy card being sent separately to the holders of Pacific Ethanol Series B Preferred Stock will have
the same effect as a vote “AGAINST” such proposal. |
| | |
| · | For the proposal to adjourn the Pacific Ethanol annual
meeting, if necessary or advisable, an abstention will have the same effect as a vote
cast “AGAINST” such proposal. A failure to submit a proxy will not
have an effect on the outcome of the vote for the proposal. |
| | |
| · | For the separate class vote of the Series B Preferred
Stock regarding the proposal to approve the issuance of shares of Pacific Ethanol common
stock and non-voting common stock and the amendment to Pacific Ethanol’s Certificate
of Incorporation, as contemplated by the merger agreement, an abstention or a failure
to submit a proxy by any holder of Series B Preferred Stock will have the same effect
as a vote “AGAINST” such proposal. |
| · | The election
of directors will be determined by the seven nominees receiving the highest number of
affirmative votes of the outstanding shares of Pacific Ethanol common stock and Series
B Preferred Stock, voting together as a single class. Abstentions or a failure to submit
a proxy will have no effect on the outcome of the election of nominees for director. |
| | |
| · | For the non-binding advisory vote to approve Pacific
Ethanol’s executive compensation (“say-on-pay”) an abstention will
have the same effect as a vote cast “AGAINST” such proposal. A failure
to submit a proxy will not have an effect on the outcome of the vote for the proposal. |
| | |
| · | For the proposal to ratify the appointment of Hein &
Associates LLP as Pacific Ethanol’s independent registered public accounting firm
for 2015, an abstention will have the same effect as a vote cast “AGAINST”
such proposal. A failure to submit a proxy will not have an effect on the outcome
of the vote for the proposal. |
Aventine.
| · | For the proposal
to adopt the merger agreement, an abstention or a failure to submit a proxy will have
the same effect as a vote “AGAINST” such proposal. |
| | |
| · | For the proposal
to adjourn the Aventine special meeting, if necessary or advisable, an abstention will
have the same effect as a vote cast “AGAINST” such proposal. A failure
to submit a proxy will not have an effect on the outcome of the vote for the proposal. |
Q: What will happen if I return
my proxy card without indicating how to vote?
A: If you are a Pacific Ethanol stockholder
of record and submit your proxy but do not make specific choices, your proxy will follow the Pacific Ethanol Board’s recommendations
and your shares will be voted “FOR” the proposal to approve the issuance of shares of Pacific Ethanol common
stock and non-voting common stock as contemplated by the merger agreement; “FOR” the proposal to approve the
Certificate of Amendment of Pacific Ethanol’s Certificate of Incorporation as contemplated by the merger agreement; if you
are holder of Pacific Ethanol Series B Preferred Stock, “FOR” the proposal to not treat the merger as a liquidation,
dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations; “FOR”
the proposal to adjourn the annual meeting if necessary or advisable to permit further solicitation of proxies in the event
there are not sufficient votes at the time of the annual meeting to approve the above matters; “FOR” each of
the nominees to the Pacific Ethanol Board; “FOR” the approval of Pacific Ethanol’s executive compensation
(“say-on-pay”); and “FOR” the ratification of the appointment of Hein & Associates LLP as Pacific
Ethanol’s independent registered public accounting firm for 2015.
If you are an Aventine
stockholder of record and submit your proxy but do not make specific choices with respect to the proposals, your proxy will
follow the Aventine Board’s recommendations and your shares will be voted “FOR” the
proposal to adopt the merger agreement (under such circumstances, your proxy will constitute a waiver of your right of
appraisal under Section 262 of the of the General Corporation Law of the State of Delaware (sometimes referred to as Section
262) and will nullify any previously delivered written demand for appraisal under Section 262), and “FOR”
the proposal to adjourn the special meeting if necessary or advisable to permit further solicitation of proxies in the event
there are not sufficient votes at the time of the special meeting to adopt the merger agreement and approve the
merger.
Q: What happens if I sell my
shares after the record date but before the stockholders meeting?
A: The record date for the Pacific
Ethanol annual meeting (the close of business on [●], 2015) is earlier than the date of the Pacific Ethanol annual meeting
and earlier than the date that the merger is expected to be completed. If you sell or otherwise transfer shares of Pacific Ethanol
stock after the record date but before the date of the Pacific Ethanol annual meeting, you will retain your right to vote those
shares at the Pacific Ethanol annual meeting.
The record date for the Aventine special
meeting (the close of business on [●], 2015) is earlier than the date of the Aventine special meeting and earlier than the
date that the merger is expected to be completed. If you sell or otherwise transfer shares of Aventine common stock after the record
date but before the date of the Aventine special meeting, you will retain your right to vote those shares at the Aventine special
meeting. However, you will not have the right to receive the merger consideration in respect of those shares. In order to receive
the merger consideration, you must hold your shares through completion of the merger.
Q: What does it mean if I receive
more than one set of materials?
A: This means you own shares of both
Pacific Ethanol and Aventine, or you own shares of Pacific Ethanol common stock and Series B Preferred Stock, or you own shares
of Pacific Ethanol or Aventine that are registered under different names or held in different brokerage accounts. For example,
you may own some shares directly as a stockholder of record and other shares through a broker or you may own shares through more
than one broker. In these situations, you may receive multiple sets of proxy materials. It is necessary for you to vote, sign and
return all of the proxy cards or follow the instructions for any alternative voting procedure on each of the proxy cards you receive
in order to vote all of the shares you own. Each proxy card you receive will come with its own prepaid return envelope; if you
submit your proxy by mail; make sure you return each proxy card in the return envelope which accompanied that proxy card.
Q: Can I revoke my proxy and change
my vote?
A: Yes. You have the right to revoke
your proxy at any time prior to the time your shares are voted at your stockholders meeting. If you are a stockholder of record,
your proxy can be revoked in several ways:
| · | by notifying
your company’s Corporate Secretary prior to the stockholders meeting that you are
revoking your proxy; |
| | |
| · | by executing and delivering a later dated proxy card or, for Pacific Ethanol stockholders only, by submitting a later dated
vote by telephone or by the Internet; or |
| | |
| · | by attending your stockholders meeting and voting your shares in person. |
However, if your shares are held in “street
name” through a broker, nominee, fiduciary or other custodian, you must check with your broker, nominee, fiduciary or other
custodian to determine how to revoke your proxy.
Q: When and where are the stockholders
meetings?
A: The Pacific Ethanol annual meeting
will take place on [●], 2015, at [●] a.m., local time, at [●]. The Aventine special meeting will take place
on [●], 2015, at [●] a.m., local time, at [●].
Q: Who can attend the stockholders
meetings? What must I bring to attend the stockholders meetings?
A: Admittance to the Pacific Ethanol
annual meeting will require a valid photo identification, such as a driver’s license or passport. Attendance at the meeting
will be limited to stockholders of record as of the record date and one guest per stockholder. Stockholders whose shares are held
in “street name” by a broker, nominee, fiduciary or other custodian should bring with them a copy of a brokerage statement
reflecting stock ownership as of the record date, together with a valid photo identification. If you want to vote your shares
of Pacific Ethanol common stock held in “street name” in person at the Pacific Ethanol annual meeting, you will have
to obtain a legal proxy in your name from the broker, nominee, fiduciary or other custodian who holds your shares.
Admittance to the Aventine special meeting
will require a valid photo identification, such as a driver’s license or passport. Attendance at the meeting will be limited
to stockholders of record as of the record date. Stockholders whose shares are held in “street name” by a broker, nominee,
fiduciary or other custodian should bring with them a copy of a brokerage statement reflecting stock ownership as of the record
date, together with a valid photo identification. If you want to vote your shares of Aventine common stock held in “street
name” in person at the Aventine special meeting, you will have to obtain a legal proxy in your name from the broker, nominee,
fiduciary or other custodian who holds your shares.
Q: Who can answer any questions
I may have about the stockholders meetings?
A: Pacific Ethanol stockholders may
call Georgeson Inc., Pacific Ethanol’s proxy solicitors for the annual meeting, toll-free at [●]. Aventine stockholders
may call Aventine’s Corporate Secretary, Christopher A. Nichols at 1-800-384-2665 toll-free or email chris.nichols@aventinerei.com.
QUESTIONS AND ANSWERS ABOUT THE
MERGER
The
following are some questions that you, as a stockholder of Pacific Ethanol and/or Aventine, may have regarding the merger, together
with brief answers to those questions. Pacific Ethanol and Aventine urge you carefully read this joint proxy statement/prospectus
in its entirety, including the annexes and other documents attached and/or referred to in this joint proxy statement/prospectus,
because the information in this section does not provide all of the information that will be important to you with respect to
the merger.
Q: What will happen in the merger?
A: In the merger, Merger Sub will
merge with and into Aventine. Aventine will be the surviving entity in the merger as a wholly-owned subsidiary of Pacific Ethanol.
Thus, Pacific Ethanol will acquire Aventine through the merger.
Q: What will Aventine stockholders
receive in the merger for their shares?
A: When the merger is completed, each
share of Aventine common stock issued and outstanding immediately prior to the merger (other than dissenting shares and shares
held by Pacific Ethanol or Aventine) will be converted automatically into the right to receive (i) 1.25 shares of Pacific Ethanol
common stock, (ii) 1.25 shares of Pacific Ethanol non-voting common stock, or (iii) a combination of the two, resulting in the
Aventine stockholder receiving a total number of shares of common stock and non-voting common stock equal to 1.25 times the number
of shares of Aventine common stock held by such stockholder, subject to certain limitations to maintain the tax free treatment
of the merger. Specifically, no more than 20% of the shares of Aventine common stock will be exchanged by the stockholders for
shares of Pacific Ethanol non-voting common stock. Shares of Pacific Ethanol non-voting common stock are the same in all respects
to shares of Pacific Ethanol’s common stock except that holders of shares of non-voting common stock are not entitled to
vote on matters submitted to Pacific Ethanol stockholders and shares of non-voting common stock are convertible into shares of
common stock on a one-for-one basis no earlier than sixty-one days after such holder provides a notice of conversion to Pacific
Ethanol.
The stockholders of Pacific Ethanol
will continue to own their existing shares and the rights and privileges of their existing shares will not be affected by the
merger. However, because Pacific Ethanol will be issuing new shares of Pacific Ethanol common stock and non-voting common stock
to Aventine stockholders in the merger, the stockholders of Pacific Ethanol will experience dilution as a result of the issuance
of shares in the merger and each outstanding share of Pacific Ethanol common stock immediately prior to the merger will represent
a smaller percentage of the total number of shares of Pacific Ethanol common stock and non-voting common stock issued and outstanding
after the merger. It is expected that Pacific Ethanol stockholders before the merger will hold approximately 58% of the total
Pacific Ethanol common stock and non-voting common stock issued and outstanding immediately following completion of the merger.
Thus, Pacific Ethanol stockholders before the merger will experience dilution in the amount of 42% as a result of the merger.
The exchange ratio to be used in connection
with the merger is fixed and will not be adjusted to reflect changes in the price of Pacific Ethanol or Aventine common stock
prior to the closing of the merger.
Q: Will any fractional shares
be issued in connection with the merger?
A: No fractional shares of Pacific
Ethanol common stock or non-voting common stock will be issued. Holders of Aventine common stock to whom fractional shares would
have otherwise been issued will be entitled to receive, subject to applicable withholding, a cash payment in lieu of such fraction
based on the volume-weighted average price per share of Pacific Ethanol common stock over the five trading day period immediately
preceding the effective time of the merger. See “Risk Factors” beginning on page 37 of this joint proxy statement/prospectus.
Q: When must an Aventine stockholder
elect the type of merger consideration that such stockholder would prefer to receive?
A: If you are an Aventine stockholder
and wish to elect the type of merger consideration you receive in the merger, you should carefully review and follow the instructions
set forth in the election form, which is being separately mailed to Aventine stockholders following the mailing of this proxy
statement/prospectus. The election form will be mailed no more than 40 business days and no less than 20 days prior to the anticipated
consummation of the merger. Election forms will be mailed to each holder of record of Aventine common stock as of five business
days prior to the mailing date. You will need to sign, date and complete the election form and transmittal materials and return
them, along with your Aventine stock certificates (or customary affidavits and indemnification regarding the loss or destruction
of such certificates or the guaranteed delivery of such certificates), to the exchange agent, at the address and pursuant to the
instructions given in the materials. The election deadline is 5:00 p.m. pacific time on the 20th day following the mailing date
of the election form. If you do not submit a properly completed and signed election form to the exchange agent by the election
deadline, you will not have the option to select the type of merger consideration you may receive, and consequently, you will
only receive shares of Pacific Ethanol common stock. If you hold shares in “street name,” you will have to follow
your broker’s instructions to make an election.
Q: What do I need to do now?
A: After you carefully read this joint
proxy statement/prospectus, please respond by completing, signing, dating and returning your signed proxy card(s) in the enclosed
prepaid return envelope(s), or, for Pacific Ethanol stockholders only, by submitting your proxy by telephone or by the Internet,
as soon as possible, so that your shares may be represented at your stockholders meeting. If you hold your shares in “street
name” through a broker, nominee, fiduciary or other custodian, follow the directions given by the broker, nominee, fiduciary
or other custodian regarding how to instruct them to vote your shares. In order to ensure that your vote is recorded, please submit
your proxy as instructed on your proxy card(s) even if you currently plan to attend your stockholders meeting in person.
Q: Why is my vote important?
A: If you do not submit your proxy
by returning your signed proxy card(s) by mail, voting in person at your stockholders meeting, or, for Pacific Ethanol stockholders
only, by submitting your proxy by telephone or by the Internet, it will be more difficult for Pacific Ethanol and Aventine to
obtain the necessary quorum to hold their respective annual and special meeting and to obtain the stockholder approvals necessary
for the completion of the merger. If a quorum is not present at the Pacific Ethanol annual meeting or the Aventine special meeting,
the stockholders of that company will not be able to take action on any of the proposals at that meeting.
While a failure to submit a proxy
or vote in person at the stockholders meeting, or a failure to provide your broker, nominee, fiduciary or other custodian, as
applicable, with instructions on how to vote your shares will not affect the outcome of the vote on the proposal to approve the
issuance of shares of Pacific Ethanol common stock and non-voting common stock (Proposal 1), a failure to submit a proxy or vote
in person at the annual meeting will make it more difficult to meet the requirement under Pacific Ethanol’s bylaws that
the holders of a majority of the shares of Pacific Ethanol common stock and Series B Preferred Stock (giving effect to the Preferred
Voting Ratio) and entitled to vote at the annual meeting be present in person or by proxy to constitute a quorum at the
annual meeting, except that a majority of the shares of outstanding Series B Preferred Stock, voting as a separate class and entitled
to vote, must also approve Proposal 1 and thus if you are a Series B Preferred Stock stockholder, a failure to submit a proxy
or vote in person on the annual meeting, or a failure to provide your broker, nominee, fiduciary or other custodian as applicable
with instructions on how to vote your shares will have the same effect as a vote “AGAINST” the proposal for
the purposes of the separate class vote of the Series B Preferred Stock.
For the proposal to amend Pacific
Ethanol’s Certificate of Incorporation (Proposal 2), (i) a majority of the outstanding shares of Pacific Ethanol common
stock and Series B Preferred Stock (giving effect to the Preferred Voting Ratio) entitled to vote on such matter and (ii) a majority
of the outstanding shares of Series B Preferred Stock, voting as a separate class and entitled to vote, must approve such proposal;
thus an abstention from voting, a failure to submit a proxy or vote in person at the annual meeting, or a failure to provide your
broker, nominee, fiduciary or other custodian, as applicable, with instructions on how to vote your shares will have the same
effect as a vote “AGAINST” the proposal.
For the proposal to be voted on by holders
of Pacific Ethanol Series B Preferred Stock to not treat the merger as a liquidation, dissolution or winding up within the meaning
of the Pacific Ethanol Series B Certificate of Designations (Proposal 3), holders of 66-2/3% of the outstanding shares of Series
B Preferred Stock must approve such proposal; thus an abstention from voting, a failure to submit the proxy card being sent separately
to holders of Pacific Ethanol Series B Preferred Stock or vote in person at the annual meeting will have the same effect as a
vote “AGAINST” the proposal.
For the Aventine stockholders to adopt
the merger agreement and approve the merger, a majority of the outstanding shares of common stock entitled to vote on such matter
must approve such proposal; thus an abstention from voting, a failure to submit a proxy or vote in person at the special meeting,
or a failure to provide your broker, nominee, fiduciary or other custodian, as applicable, with instructions on how to vote your
shares could have the same effect as a vote “AGAINST” the proposal.
Your vote is very important.
Pacific Ethanol and Aventine cannot complete the merger unless (i) holders of Pacific Ethanol common stock and Series B Preferred
Stock approve the share issuance, voting together as a single class (giving effect to the Preferred Voting Ratio) (ii) holders
of Pacific Ethanol Series B Preferred Stock approve the share issuance, voting as a separate class, (iii) holders of Pacific Ethanol
common stock and Series B Preferred Stock approve the amendment to Pacific Ethanol’s Certificate of Incorporation, voting
together as a single class (giving effect to the Preferred Voting Ratio), (iv) holders of Pacific Ethanol Series B Preferred Stock
approve the amendment to Pacific Ethanol’s Certificate of Incorporation, voting as a separate class, (v) holders of Pacific
Ethanol Series B Preferred Stock agree not to treat the merger as a liquidation, dissolution or winding up within the meaning
of the Pacific Ethanol Series B Certificate of Designations, voting as a separate class, and (vi) Aventine stockholders adopt
the merger agreement and approve the merger.
Q: Why have Pacific Ethanol and
Aventine agreed to the merger?
A: The board of directors and management
team of each of Pacific Ethanol and Aventine believe the merger to provide substantial strategic and financial benefits to their
stockholders, customers and other stakeholders, including, among others:
| · | marketing
advantages derived from expanded access to customers and new markets and an expanded
co-product mix; |
| · | greater combined
financial strength, enabling new investment in plant assets, pursuit of strategic initiatives,
and improved financing arrangements, as well as an improved ability to withstand cyclical
downturns; |
| · | diversified
geographical footprint, which will mitigate logistical constraints and price volatility
while creating marketing efficiencies and new hedging opportunities; |
| · | expected
improvement in financial performance arising from the recent restarting of idled plants
and investments in plant and logistical assets; |
| · | expected
synergies through the combination of the corporate management, commodities marketing
and administrative support functions; |
| · | greater liquidity
to Aventine’s stockholders through the exchange of their current equity interests
into the publicly-traded common stock of Pacific Ethanol; and |
| · | the ability
of Aventine stockholders to participate in any appreciation of Pacific Ethanol common
stock. |
Additional information on the reasons
for the merger can be found below, beginning on page 176 of this joint proxy statement/prospectus for Pacific Ethanol and
beginning on page 188 of this joint proxy statement/prospectus for Aventine.
Q: Why is Pacific Ethanol asking
to amend its Certificate of Incorporation to create a class of non-voting common stock?
A: Approval of an amendment to Pacific
Ethanol’s Certificate of Incorporation to create a class of non-voting common stock (which is the subject of Pacific Ethanol
Proposal No. 2) is one of the conditions to the consummation of the merger. Pacific Ethanol non-voting common stock is a type
of merger consideration Aventine stockholders may elect; thus, Pacific Ethanol must amend its Certificate of Incorporation to
create this class of non-voting common stock. Shares of Pacific Ethanol non-voting common stock are the same in all respects to
shares of Pacific Ethanol’s common stock except that holders of shares of non-voting common stock are not entitled to vote
on matters submitted to Pacific Ethanol stockholders and shares of non-voting common stock are convertible into shares of common
stock on a one-for-one basis no earlier than sixty-one days after such holder provides a notice of conversion to Pacific Ethanol.
The
inclusion of the option to receive non-voting common stock in exchange for Aventine common
stock is an accommodation to the seven Candlewood Investment Group, LP (sometimes referred
to as Candlewood) affiliates (collectively, Aventine’s majority stockholder) that
are party to the stockholders agreements who have expressed a desire to receive equity
consideration that would not require compliance with the continuing disclosure obligations
arising out of the reporting requirements under Sections 13(d) and 13(g) of the Securities
Exchange Act of 1934, as amended (sometimes referred to as the Exchange Act) with respect
to the Pacific Ethanol common stock.
Q: When do you expect the merger
to be completed?
A: Pacific Ethanol and Aventine hope
to complete the merger as soon as reasonably practicable, subject to receipt of stockholder approvals, which are proposals presented
at the Pacific Ethanol annual meeting and the Aventine special meeting, and necessary regulatory approvals. Pacific Ethanol and
Aventine currently expect that the transaction will be completed in the second quarter of 2015. However, Pacific Ethanol and Aventine
cannot predict when regulatory review will be completed, whether or when regulatory or stockholder approval will be received or
the potential terms and conditions of any regulatory approval that is received. In addition, certain other conditions to the merger,
some of which are outside of the control of Pacific Ethanol and Aventine, may not be satisfied until later in 2015 or at all.
For a discussion of the conditions to the completion of the merger and of the risks associated with obtaining regulatory approvals
in connection with the merger, see “The Merger Agreement and Related Agreements—Conditions to Completion of the Merger”
beginning on page 222 of this joint proxy statement/prospectus and “The Proposed Merger—Regulatory Matters Relating
to the Merger” beginning on page 201 of this joint proxy statement/prospectus.
Q: Will the merger be taxable
to stockholders of Aventine?
A: Each of Pacific Ethanol and Aventine
has received an opinion from its legal counsel to the effect that the merger will qualify as a “reorganization” for
United States federal income tax purposes within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(sometimes referred to as the Code), and that each of Pacific Ethanol and Aventine will be a party to the “reorganization.”
Assuming the merger does qualify as a reorganization, Aventine stockholders generally will not recognize gain or loss for United
States federal income tax purposes upon the receipt of Pacific Ethanol common stock and/or non-voting common stock in the merger,
except that an Aventine stockholder will recognize gain or loss with respect to any cash received in lieu of a fractional share
of Pacific Ethanol common stock and/or non-voting common stock, and except to the extent that any payment by Aventine of transfer
taxes is treated as taxable consideration received by Aventine stockholders. Aventine stockholders who exercise their appraisal
rights will recognize gain or loss with respect to cash received in exchange for Aventine common stock. In order to maintain the
tax free treatment of the merger, Pacific Ethanol is limited in the amount of Pacific Ethanol non-voting common stock that may
be issued to Aventine common stockholders as merger consideration. Specifically, no more than 20% of the shares of Aventine common
stock will be exchanged by the Aventine stockholders for shares of Pacific Ethanol non-voting common stock.
Aventine stockholders are urged to
read the discussion in the section entitled “The Proposed Merger—Material United States Federal Income Tax Consequences
of the Merger” beginning on page 197 of this joint proxy statement/prospectus and to consult their tax advisors as
to the United States federal income tax consequences of the transaction, as well as the effects of state, local and non-United
States tax laws.
Q: Will there be any changes
to the Pacific Ethanol Board if the merger becomes effective?
A: Yes. The merger agreement provides
that the holders of a majority of shares of Aventine common stock will be entitled to nominate two individuals to the Pacific
Ethanol Board. Pacific Ethanol currently has seven directors. After the merger, the number of directors will be increased to nine.
As of the date of this joint proxy statement/prospectus, the nominees have not been identified. For more information, please see
the section entitled “Summary—Directors and Executive Management of Pacific Ethanol Following the Merger” beginning
on page 21 of this joint proxy statement/prospectus.
Q: Are there any Pacific
Ethanol or Aventine stockholders already committed to vote in favor of the merger-related proposals?
A: Yes. Pacific Ethanol has entered
into stockholders agreements with eight significant stockholders of Aventine (seven of whom are affiliated with Candlewood) pursuant
to which each such significant stockholder has agreed to vote a portion of the number of shares of Aventine common stock beneficially
owned by them as of the record date in favor of the adoption of the merger agreement and against any alternative transaction with
respect to Aventine. Under the terms of the stockholders agreements, the eight stockholders have agreed to vote their pro-rata
share of 51% of Aventine’s issued and outstanding common stock in favor of the merger-related proposals. For more information,
please see copies of the stockholders agreements attached as Annex C-1 and Annex C-2 to this joint proxy statement/prospectus
and the section titled “The Merger Agreement and Related Agreements—Stockholders Agreements” beginning on page
227 of this joint proxy statement/prospectus. In connection with entry into the stockholders agreements, the eight significant
stockholders agreed to exercise any drag-along rights with respect to Aventine stockholders held by such significant stockholders.
The drag-along right applies to certain stockholders of Aventine who are party to that certain Stockholder Agreement, dated September
24, 2012, by and among Aventine and the investors and the stockholders party thereto (sometimes referred to as the Aventine Stockholders
Agreement).
Q: What happens if Pacific Ethanol
stockholders fail to approve the issuance of shares of Pacific Ethanol common stock and non-voting common stock, the amendment
to Pacific Ethanol’s Certificate of Incorporation as contemplated by the merger agreement or the treatment of the merger
by the holders of Pacific Ethanol Series B Preferred Stock as contemplated by the merger agreement?
A: In this circumstance, either party
is permitted to terminate the merger agreement and, in the event of such termination, Pacific Ethanol is required to pay Aventine’s
transaction expenses, up to a maximum amount of $1,994,000, to Aventine. See “The Merger Agreement and Related Agreements—Termination”
and “—Termination Fee and Expenses” beginning on pages 225 and 226, respectively, of this joint
proxy statement/prospectus.
Q: What happens if Aventine stockholders
fail to adopt the merger agreement and the transactions contemplated thereby?
A: In this circumstance, either party
is permitted to terminate the merger agreement. However, no termination fee is payable by Aventine if the merger agreement is
terminated upon the occurrence of this event. See “The Merger Agreement and Related Agreements—Termination”
and “—Termination Fee and Expenses” beginning on pages 225 and 226, respectively, of this joint
proxy statement/prospectus.
Q: Am I entitled to exercise appraisal
rights instead of receiving the per share merger consideration for my shares of Aventine common stock?
A: Aventine stockholders are entitled
to appraisal rights under Section 262, provided they fully comply with and follow the procedures and satisfy the conditions set
forth in Section 262. For more information regarding appraisal rights, see the section entitled “Appraisal Rights”
beginning on page 252 of this joint proxy statement/prospectus. In addition, a copy of Section 262 is attached as Annex
F to this joint proxy statement/prospectus. Failure to comply with Section 262 will result in your waiver of, or inability
to exercise, appraisal rights. To the extent the drag-along is exercised pursuant to the Aventine Stockholders Agreement, the Aventine
stockholders subject to the drag-along right have waived their respective appraisal rights with respect to the merger, which constitutes
a drag-along transaction.
Q: Should I send in my Aventine
stock certificates now?
A: No. Simultaneously with the mailing
of the election form discussed above, the exchange agent will provide each Aventine stockholder with a transmittal letter and instructions
for surrendering each share of Aventine common stock to the exchange agent in exchange for the merger consideration elected by
such Aventine stockholder. See “The Merger Agreement and Related Agreements – Conversion of Shares; Exchange of Certificates”
beginning on page 211 of this joint proxy statement/prospectus for more information regarding the procedure for exchanging
your Aventine stock certificates for the merger consideration. Pacific Ethanol stockholders will keep their existing stock certificates.
Q: Are there risks that I, as a
Pacific Ethanol stockholder, should consider in deciding to vote on the issuance of shares of Pacific Ethanol common stock and
non-voting common stock, the amendment to Pacific Ethanol’s Certificate of Incorporation, as contemplated by the merger agreement
and the agreement not to treat the merger as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol
Series B Certificate of Designations or, as an Aventine stockholder, should consider in deciding to vote on the adoption of the
merger agreement?
A: Yes. In evaluating the issuance of
shares of Pacific Ethanol common stock and non-voting common stock and the amendment to Pacific Ethanol’s Certificate of
Incorporation as contemplated by the merger agreement, or the adoption of the merger agreement and approval of the merger, you
should carefully read this joint proxy statement/prospectus, including the risk factors discussed in the section entitled “Risk
Factors” beginning on page 37 of this joint proxy statement/prospectus.
Q: Who can answer any questions
I may have about the merger?
A: Pacific Ethanol stockholders may
call Georgeson Inc., Pacific Ethanol’s proxy solicitors for the annual meeting, toll-free at [●]. Aventine stockholders
may call Aventine’s Corporate Secretary, Christopher A. Nichols at 1-800-384-2665 toll-free or email chris.nichols@aventinerei.com.
SUMMARY – THE MERGER
This
summary highlights selected information contained in this joint proxy statement/prospectus
and does not contain all the information that may be important to you. Pacific Ethanol
and Aventine urge you to read carefully this joint proxy statement/prospectus in its
entirety, including the Annexes. Unless stated otherwise, all references in this joint
proxy statement/prospectus to Pacific Ethanol refer to Pacific Ethanol, Inc., a Delaware
corporation, all references to Aventine refer to Aventine Renewable Energy Holdings,
Inc., a Delaware corporation, all references to Merger Sub refer to AVR Merger Sub, Inc.,
a Delaware corporation, and all references to the merger agreement refer to the Agreement
and Plan of Merger, dated as of December 30, 2014, as amended on March 31, 2015, by and
among Pacific Ethanol, Merger Sub, and Aventine, a copy of which is attached as Annex
A to this joint proxy statement/prospectus and is incorporated by reference into this
joint proxy statement/prospectus. See “Where you Can Find More Information”
beginning on page 257.
The Companies Involved in the Merger
Pacific Ethanol
Pacific Ethanol, Inc.
400 Capitol Mall, Suite 2060
Sacramento, CA 95814
(916) 403-2123
Pacific Ethanol is the leading producer
and marketer of low-carbon renewable fuels in the Western United States. Pacific Ethanol produces and markets all the ethanol
produced by four ethanol production facilities located in California, Idaho and Oregon (sometimes referred to as the Pacific Ethanol
Plants), markets all the ethanol produced by two other ethanol producers in California and markets ethanol purchased from other
third-party suppliers throughout the United States. Pacific Ethanol markets ethanol through its subsidiary, Kinergy Marketing
LLC (sometimes referred to as Kinergy), and ethanol co-products, including wet distillers grains (sometimes referred to as WDG),
a nutritious animal feed, and corn oil, for the Pacific Ethanol Plants.
Additional information about Pacific
Ethanol and its subsidiaries is included in documents incorporated by reference in this joint proxy statement/prospectus. See “Where
You Can Find More Information” beginning on page 257.
Aventine
Aventine Renewable Energy Holdings,
Inc.
1300 S. 2nd Street
Pekin, IL 61554
(309) 347-9200
Aventine has been engaged in the production
and marketing of corn-based fuel-grade ethanol in the United States since 1981. Aventine markets and distributes ethanol
to many of the leading energy and trading companies in the United States Aventine’s facilities also produce several
co-products while producing ethanol, such as distillers grain, corn gluten meal and feed, corn oil, corn germ and grain distillers
dried yeast. Aventine markets these co-products primarily to livestock producers and other end users as a substitute for corn and
other sources of starch and protein.
For additional information about Aventine
and its subsidiaries, see “The Companies—Aventine Renewable Energy Holdings, Inc.” beginning on page 56.
Merger Sub
Merger Sub, a wholly-owned subsidiary
of Pacific Ethanol, is a Delaware corporation formed on December 29, 2014 for the sole purpose of effecting the merger. Upon completion
of the merger, Merger Sub will merge with and into Aventine, with Aventine surviving as a wholly-owned subsidiary of Pacific Ethanol
after the merger.
The Proposed Merger
Each of the boards of directors of
Pacific Ethanol and Aventine has approved the merger of Pacific Ethanol and Aventine. Pacific Ethanol and Aventine have entered
into the merger agreement pursuant to which Aventine will merge with Merger Sub, a newly formed, wholly-owned subsidiary
of Pacific Ethanol, with Aventine surviving the merger as a wholly-owned subsidiary of Pacific Ethanol. In the merger, each issued
and outstanding share of Aventine common stock (other than dissenting shares and shares held by Pacific Ethanol or Aventine) will
be converted into the right to receive, at the election of the holder, pursuant to certain limitations in order to maintain the
tax free status of the merger (i.e., no more than 20% of shares of Aventine common stock will be exchanged by the Aventine stockholders
for shares of Pacific Ethanol non-voting common stock), (i) 1.25 shares of Pacific Ethanol common stock, (ii) 1.25 shares of Pacific
Ethanol non-voting common stock, or (iii) a combination of Pacific Ethanol common stock and non-voting common stock resulting
in such Aventine stockholder receiving a total number of shares of common stock and non-voting common stock equal to 1.25 times
the number of shares of Aventine common stock held by such stockholder. This exchange ratio is fixed and will not be adjusted
to reflect stock price changes prior to the closing.
Shares of Pacific Ethanol non-voting
common stock are the same in all respects to shares of Pacific Ethanol’s common stock, except that holders of shares of
non-voting common stock are not entitled to vote on matters submitted to Pacific Ethanol stockholders and shares of non-voting
common stock are convertible into shares of common stock on a one-for-one basis no earlier than sixty-one days after such holder
provides a notice of conversion to Pacific Ethanol.
The stockholders of Pacific Ethanol
will continue to own their existing shares and the rights and privileges of their existing shares will not be affected by the
merger. However, because Pacific Ethanol will be issuing new shares of Pacific Ethanol common stock and non-voting common stock
to Aventine stockholders in the merger, the stockholders of Pacific Ethanol will experience dilution as a result of the issuance
of shares in the merger and each outstanding share of Pacific Ethanol common stock immediately prior to the merger will represent
a smaller percentage of the total number of shares of Pacific Ethanol common stock and non-voting common stock issued and outstanding
after the merger. It is expected that Pacific Ethanol stockholders before the merger will hold approximately 58% of the total
Pacific Ethanol common stock and non-voting common stock issued and outstanding immediately following completion of the merger.
Thus, Pacific Ethanol stockholders before the merger will experience dilution in the amount of 42% as a result of the merger.
A copy of the merger agreement is attached
as Annex A to this joint proxy statement/prospectus. Pacific Ethanol and Aventine encourage you to read the entire merger
agreement carefully because they are the principal documents governing the merger. For more information on the merger
agreement, see “The Merger Agreement and Related Agreements” beginning on page 208.
The merger is expected to be completed
during the second quarter of 2015, subject to the satisfaction or waiver of the closing conditions.
Merger Consideration
In the merger, each issued and outstanding
share of Aventine common stock (other than dissenting shares and shares held by Pacific Ethanol or Aventine) will be converted
into the right to receive, at the election of the holder, pursuant to the terms of an election form to be distributed to all holders
in advance of the special meeting and certain limitations in order to maintain the tax free treatment of the merger (i.e., no
more than 20% of shares of Aventine common stock will be exchanged by the Aventine stockholders for shares of Pacific Ethanol
non-voting common stock), (i) 1.25 shares of Pacific Ethanol common stock, (ii) 1.25 shares of Pacific Ethanol non-voting common
stock, or (iii) a combination of Pacific Ethanol common stock and non-voting common stock resulting in such Aventine stockholder
receiving a total number of shares of common stock and non-voting common stock equal to 1.25 times the number of shares of Aventine
common stock held by such stockholder. Based upon the current number of issued and outstanding shares of Aventine common stock,
an aggregate of approximately 17,755,300 shares of Pacific Ethanol common stock and non-voting common stock will be issued upon
the closing of the merger, assuming no exercise or conversion of outstanding options and warrants. Pacific Ethanol will not issue
any fractional shares in the merger. Instead, Aventine stockholders will receive cash (without interest) in lieu of such fractional
share, after aggregating all fractional shares of Pacific Ethanol common stock issuable to that holder, determined by multiplying
such fraction by the volume weighted average price of Pacific Ethanol common stock for the five trading days immediately prior
to the closing date.
The inclusion of the option to receive non-voting
common stock in exchange for Aventine common stock is an accommodation to the seven Candlewood affiliates (collectively, Aventine’s
majority stockholder) that are party to the stockholders agreements who have expressed a desire to receive equity consideration
that would not require compliance with the continuing disclosure obligations arising out of the reporting requirements under Sections
13(d) and 13(g) of the Exchange Act with respect to the Pacific Ethanol common stock.
For a more complete description of the
merger consideration, see “The Merger Agreement and Related Agreements—The Merger” beginning on page 208.
Treatment of Stock Options and Warrants
Pacific Ethanol will assume outstanding
options and warrants to purchase shares of Aventine common stock in the merger. Each outstanding option and warrant to acquire
Aventine common stock will be converted automatically at the effective time of the merger into an option or warrant to acquire
Pacific Ethanol common stock and/or non-voting common stock, and will continue to be governed by the terms of the relevant Aventine
stock plan and/or related agreements under which it was granted, except that the number of shares of Pacific Ethanol common stock
for which each option or warrant is exercisable and the exercise price of each option or warrant will be adjusted based on the
exchange ratio in the merger. In addition, the holder of an option or warrant to acquire Aventine common stock may elect to receive
Pacific Ethanol common stock, non-voting common stock or a combination thereof upon the exercise of such option or warrant. As
of March 31, 2015, there were outstanding warrants to purchase up to 787,855 shares of Aventine common stock, at an exercise
price of $61.75, expiring on September 24, 2017 and outstanding options to purchase up to 3,140 shares of Aventine common stock
at an exercise price of $3.55 expiring on February 24, 2022. For a more complete discussion of the treatment of Aventine options
and other stock-based awards, see “The Merger Agreement and Related Agreements—Treatment of Aventine Stock Options”
beginning on page 210 and “The Merger Agreement and Related Agreements—Treatment of Aventine Warrants”
beginning on page 24.
Directors and Executive Management of Pacific Ethanol
Following the Merger
As of the effective time of the merger,
the board of directors of Pacific Ethanol will be comprised of the members of the Pacific Ethanol Board (currently seven members)
and two designees nominated by holders of the majority of shares of Aventine common stock and who must be independent with respect
to Pacific Ethanol. The current executive management of Pacific Ethanol will remain unchanged following the merger.
For a more complete discussion of the
directors and management of Pacific Ethanol after the merger, see “Additional Interests of Certain of Aventine’s Directors
and Executive Officers in the Merger—Leadership of the Combined Company” beginning on page 205.
Recommendation of the Pacific Ethanol Board
After careful consideration, the Pacific
Ethanol Board unanimously recommends that holders of Pacific Ethanol common stock and Series B Preferred Stock vote “FOR”
the issuance of Pacific Ethanol common stock and non-voting common stock in connection with the merger; vote “FOR”
the amendment to Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock and
vote “FOR” the adjournment of the annual meeting if necessary or advisable to permit further solicitation of
proxies in the event there are not sufficient votes at the time of the annual meeting to approve all matters brought before the
meeting; and that holders of Pacific Ethanol Series B Preferred Stock, vote “FOR” the agreement not to treat
the merger as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations.
For a more complete description of Pacific
Ethanol’s reasons for the merger and the recommendations of the Pacific Ethanol board of directors, see “The Proposed
Merger—Recommendation of the Pacific Ethanol Board and its Reasons for the Merger” beginning on page 176.
Recommendation of the Aventine Board
After careful consideration, the Aventine
Board unanimously recommends that holders of Aventine common stock vote “FOR” the adoption of the merger agreement
and approval of the merger and vote “FOR” the adjournment of the special meeting if necessary or advisable
to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt
the merger agreement and approve the merger. It should be noted that in connection with the merger, the Aventine Board will receive
indemnification for acts or omissions occurring prior to the effective time of the merger. The merger agreement also provides
that, prior to the effective time of the merger, Aventine will purchase “tail” officers’ and directors’
liability insurance policies on terms and conditions reasonably comparable to Aventine’s existing directors’ and officers’
liability insurance.
For a more complete description of Aventine’s
reasons for the merger and the recommendation of the Aventine Board, see “The Proposed Merger—Recommendation of the
Aventine Board and its Reasons for the Merger” beginning on page 188.
Opinion of Craig-Hallum Capital Group LLC
In connection with the transaction, the
Pacific Ethanol Board received a written opinion from Craig-Hallum Capital Group LLC (sometimes referred to as Craig-Hallum), as
to the fairness, from a financial point of view and as of the date of its opinion, of the exchange ratio in the transaction to
Pacific Ethanol. The full text of Craig-Hallum’s written opinion, dated December 29, 2014, is attached to this proxy statement
as Annex D. Holders of Pacific Ethanol common stock and Series B Preferred Stock are encouraged to read this opinion carefully
in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review
undertaken. Craig-Hallum did not act as a financial advisor to any party to the transaction. Craig-Hallum’s opinion was
provided to the Pacific Ethanol Board in connection with, and for the purposes of, its evaluation of the exchange ratio in the
transaction from a financial point of view, does not address the merits of the underlying decision by Pacific Ethanol to engage
in the transaction or the relative merits of any alternatives discussed by the Pacific Ethanol Board, does not constitute an opinion
with respect to Pacific Ethanol’s underlying business decision to effect the transaction, any legal, tax or accounting issues
concerning the transaction, or any terms of the transaction (other than the exchange ratio) and does not constitute a recommendation
as to any action Pacific Ethanol or any holder of Pacific Ethanol common stock or Series B Preferred Stock should take in connection
with the transaction or any aspect thereof.
For a more complete description of Craig-Hallum’s
opinion, see “The Proposed Merger—Opinion of Craig-Hallum Capital Group LLC” beginning on page 179. See
also Annex D to this joint proxy statement/prospectus.
Opinion of Aventine Financial Advisor
Duff & Phelps, LLC (sometimes
referred to as Duff & Phelps), delivered an opinion to Aventine’s board of directors that, subject to and based upon
the assumptions and limiting conditions set forth therein, as of the date of its opinion, the exchange ratio payable to Aventine’s
stockholders electing Pacific Ethanol common stock in the merger was fair from a financial point of view to such stockholders
of Aventine. The full text of Duff & Phelps’ written opinion, dated March 31, 2015, is attached as Annex E to
this joint proxy statement/prospectus. Holders of shares of Aventine common stock are urged to read the opinion carefully and
in its entirety. Duff & Phelps’ opinion does not and shall not constitute a recommendation to any holders of shares
of Aventine common stock as to how they should vote in connection with the merger. This summary of Duff & Phelps’ opinion
contained in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion.
For a more complete description of the
Duff & Phelps opinion, see “The Proposed Merger—Opinion of Financial Advisor to the Aventine Board” beginning
on page 191. See also Annex E to this joint proxy statement/prospectus.
Interests of Certain Aventine Directors and Executive
Officers in the Merger
You should be aware that some Aventine
directors and executive officers may have interests in the transaction that may be different from, or in addition to, the interests
of stockholders of Aventine.
For a further discussion of interests
of certain Aventine directors and executive officers in the merger, see “Additional Interests of Certain of Aventine Directors
and Executive Officers in the Merger” beginning on page 205.
Material United States Federal Income Tax Consequences
of the Merger
Pacific Ethanol and Aventine intend
for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code for United States federal income
tax purposes. Assuming the merger does qualify as a reorganization, Aventine stockholders generally will not recognize gain or
loss for United States federal income tax purposes upon the receipt of Pacific Ethanol common stock and/or non-voting common stock
in the merger, except that an Aventine stockholder will recognize gain or loss with respect to any cash received in lieu of a
fractional share of Pacific Ethanol common stock and/or non-voting common stock, and except to the extent that any payment by
Aventine of transfer taxes is treated as taxable consideration received by Aventine stockholders. In order to maintain the tax
free treatment of the merger, Pacific Ethanol is limited in the amount of Pacific Ethanol non-voting common stock that may be
issued to Aventine common stockholders as merger consideration. Specifically, no more than 20% of shares of Aventine common stock
will be exchanged by the Aventine stockholders for shares of Pacific Ethanol common stock. Aventine stockholders who exercise
their appraisal rights will recognize gain or loss with respect to cash received in exchange for their Aventine common stock.
Tax matters are very complicated and
the tax consequences of the merger to you, if you are an Aventine stockholder, will depend upon the facts of your situation. In
addition, you may be subject to state, local or foreign tax laws that are not addressed in this joint proxy statement/prospectus.
You are urged to consult with your own tax advisors for a full understanding of the tax consequences of the merger to you.
For a more complete description of the
material United States federal income tax consequences of the merger, see “The Proposed Merger—Material United States
Federal Income Tax Consequences of the Merger” beginning on page 197.
Forward-Looking Financial Information
Pacific Ethanol prepared forward-looking
financial information for years 2015 through 2019 for each of Pacific Ethanol and Aventine. Aventine also prepared forward-looking
financial information for years 2015 through 2019 for each of Pacific Ethanol and Aventine. The forward-looking financial information
prepared by each of the companies is on a stand-alone basis and is not intended to be added together, and adding together the forward-looking
financial information for the two companies would not represent the results the combined company will achieve if the merger is
completed and does not represent forward-looking financial information for the combined company. The following forward-looking
financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines
established by the American Institute of Certified Public Accountants with respect to forward-looking financial information.
Pacific Ethanol Forward-Looking Financial Information
Pacific Ethanol does not as a matter
of course make public projections as to future earnings or other results of operations (other than providing estimates for certain
financial items on a near-term basis in its regular earnings press releases and other communications with investors) or detailed
business plans or strategies. However, for internal purposes and in connection with the process leading to the merger agreement,
the management of Pacific Ethanol prepared certain projections of future financial and operating performance for each of Pacific
Ethanol and Aventine and for the combined company for the years 2015 through 2019.
Pacific Ethanol and Aventine prepared
projections that are included in this joint proxy statement/prospectus because these projections were provided to Craig-Hallum
in connection with Craig-Hallum’s opinion as to the fairness of the exchange ratio in the transaction to Pacific Ethanol.
In preparing the projections for Craig Hallum, management of both Pacific Ethanol and Aventine used assumptions for crush margins
(the differential between the price per gallon of ethanol and the price per gallon equivalent for corn) generally consistent with
industry averages for 2014 in order that Craig-Hallum could evaluate the relative projected performance of both companies on a
common basis. Pacific Ethanol viewed those assumptions made in preparing these projections as being reasonable for the purposes
they were being used. Further, both Pacific Ethanol’s and Aventine’s projections took into account the respective management’s
views of the likely future operating results of their respective plants, given recent results and expected effects of substantial
recent capital investments in the plants.
The projections provided to Craig-Hallum
were not prepared with a view toward public disclosure and the inclusion of summary projections herein should not be regarded as
an indication that either Pacific Ethanol or Aventine considered, or now considers, these projections to be predictive of actual
future results and readers of this joint proxy statement/prospectus are cautioned not to rely on this forward-looking financial
information.
Neither Pacific Ethanol’s nor Aventine’s
independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect
to the forward-looking financial information contained herein, nor have they expressed any opinion or any other form of assurance
on such information or its achievability, and assume no responsibility for, and disclaim any association with, the forward-looking
financial information.
The following table presents a summary
of the projections for Pacific Ethanol that were provided to Craig-Hallum:
| |
Pacific Ethanol | |
| |
(In millions) | |
| |
2015E | | |
2016E | | |
2017E | | |
2018E | | |
2019E | |
Adjusted EBITDA(1) | |
$ | 116.9 | | |
$ | 122.4 | | |
$ | 129.1 | | |
$ | 131.3 | | |
$ | 134.2 | |
Net income available to common stockholders | |
$ | 66.8 | | |
$ | 66.5 | | |
$ | 70.2 | | |
$ | 70.4 | | |
$ | 70.9 | |
__________
(1) | Adjusted EBITDA is defined as earnings before interest, provision for income taxes, depreciation and amortization, and fair
value adjustments. Adjusted EBITDA is a non-GAAP financial measure, as it excludes amounts, or is subject to adjustments that effectively
exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in financial
statements. Adjusted EBITDA was used by management to provide additional information in order to provide them with an alternative
method for assessing Pacific Ethanol’s and Aventine’s financial condition and operating results. These measures are
not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used
by other companies. |
Management of Pacific Ethanol also prepared
certain projections for its own internal use and for the use of the Pacific Ethanol Board (sometimes referred to as the Pacific
Ethanol Board Projections). The Pacific Ethanol Board Projections forecasted performance of Pacific Ethanol on a stand-alone basis,
Aventine on a stand-alone basis, and the performance of the combined company following the merger. In preparing the Pacific Ethanol
Board Projections, management of Pacific Ethanol used assumptions based on average crush margins for the period beginning January
1, 2012 and ending November 30, 2014, which covered a period of time that included both historically high and low crush margins.
These crush margin assumptions were approximately $0.35 per gallon lower than the crush margin assumptions used in the projections
for Craig-Hallum summarized above. Management elected to use these lower crush margin assumptions because the Pacific Ethanol Board
Projections were used for different purposes than the projections provided to Craig-Hallum. To better assess potential liquidity
needs of the combined company, management of Pacific Ethanol believed that it was important to make conservative crush margin assumptions
based on multi-year historical averages. These assumptions were viewed by Pacific Ethanol as being reasonable for the purposes
they were being used.
In preparing the projections for Aventine
on a stand-alone basis and for the combined company, Pacific Ethanol’s management also took into account their view of the
likely future operating results of Aventine’s ethanol plants, given recent results and expected effects of substantial recent
capital investments in the plants. In preparing the projections for the combined company, Pacific Ethanol’s management also
took into account significant planned and potential capital expenditures in 2015 and certain cost synergies expected to be realized
following the closing of the merger.
The Pacific Ethanol Board Projections
were not prepared with a view toward public disclosure and the inclusion of summary projections herein should not be regarded as
an indication that Pacific Ethanol considered, or now considers, these projections to be predictive of actual future results and
readers of this joint proxy statement/prospectus are cautioned not to rely on this forward-looking financial information.
Neither Pacific Ethanol’s nor Aventine’s
independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect
to the forward-looking financial information contained herein, nor have they expressed any opinion or any other form of assurance
on such information or its achievability, and assume no responsibility for, and disclaim any association with, the forward-looking
financial information.
The following table presents a summary
of the projections for Pacific Ethanol on a stand-alone basis, for Aventine on a stand-along basis, and for the combined company
that were prepared by the management of Pacific Ethanol and provided to the Pacific Ethanol Board:
| |
Pacific Ethanol | |
| |
(In millions) | |
| |
2015E | | |
2016E | | |
2017E | | |
2018E | | |
2019E | |
Adjusted EBITDA(1) | |
$ | 44.3 | | |
$ | 49.3 | | |
$ | 56.0 | | |
$ | 58.2 | | |
$ | 61.0 | |
Net income available to common stockholders | |
$ | 17.0 | | |
$ | 16.2 | | |
$ | 21.1 | | |
$ | 22.1 | | |
$ | 23.3 | |
Free cash flow(2) | |
$ | (11.8 | ) | |
$ | 25.5 | | |
$ | 39.3 | | |
$ | 40.3 | | |
$ | 41.1 | |
| |
Aventine | |
| |
(In millions) | |
| |
2015E | | |
2016E | | |
2017E | | |
2018E | | |
2019E | |
Adjusted EBITDA(1) | |
$ | 48.0 | | |
$ | 60.4 | | |
$ | 65.2 | | |
$ | 68.6 | | |
$ | 70.8 | |
Net income | |
$ | 16.2 | | |
$ | 24.3 | | |
$ | 27.6 | | |
$ | 29.9 | | |
$ | 31.2 | |
Free cash flow(2) | |
$ | (2.2 | ) | |
$ | 40.9 | | |
$ | 44.3 | | |
$ | 46.7 | | |
$ | 48.2 | |
| |
Combined | |
| |
(In millions) | |
| |
2015E | | |
2016E | | |
2017E | | |
2018E | | |
2019E | |
Adjusted EBITDA(1) | |
$ | 95.2 | | |
$ | 119.4 | | |
$ | 130.8 | | |
$ | 136.5 | | |
$ | 141.4 | |
Net income | |
$ | 40.7 | | |
$ | 54.9 | | |
$ | 63.0 | | |
$ | 66.3 | | |
$ | 68.9 | |
Free cash flow(2) | |
$ | (12.0 | ) | |
$ | 73.2 | | |
$ | 90.3 | | |
$ | 93.7 | | |
$ | 96.1 | |
__________
(1)
|
Adjusted EBITDA is defined as earnings before interest, provision for income taxes, depreciation and amortization, and fair value adjustments. Adjusted EBITDA is a non-GAAP financial measure, as it excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in financial statements. Adjusted EBITDA was used by management to provide additional information in order to provide them with an alternative method for assessing Pacific Ethanol’s and Aventine’s financial condition and operating results. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies. |
(2) |
Free cash flow is defined as earnings before interest and depreciation and amortization, less projected capital expenditures
plus adjustment for increase (decrease) in working capital. Free cash flow is a non-GAAP liquidity measure, as it includes/excludes
certain items from GAAP cash flows from operations, investing and financing activities. Free cash flow was used by management
to provide additional information with respect to available cash and liquidity to the combined company. These measures are
not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures
used by other companies. |
The assumptions and estimates underlying
forward-looking information for Pacific Ethanol and Aventine are inherently uncertain and, though considered reasonable by Pacific
Ethanol’s management as of the date of their preparation, are subject to a wide variety of significant business, economic,
and competitive risks and uncertainties that could cause actual results to differ materially from those contained therein, chief
among them being the price of corn and other feedstocks and the price of ethanol and co-products. Other factors include, among
others, the following: the ultimate timing, outcome and results of integrating the operations of Pacific Ethanol and Aventine
and the degree to which Pacific Ethanol’s operating efficiencies are applied to Aventine products and services; changes
in the demand for or price of oil and/or natural gas; changes in government regulations and regulatory requirements, particularly
those matters described in the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning
on page (2), “Risk Factors” beginning on page 37 and Part I, Item IA in Pacific Ethanol’s 2014 Annual
Report on Form 10-K. The Pacific Ethanol projections for Pacific Ethanol, the Pacific Ethanol projections for Aventine and the
Pacific Ethanol projections for the combined company also reflect assumptions as to certain business decisions that are subject
to change. Accordingly, there can be no assurance that the forward-looking results are indicative of the future performance of
Pacific Ethanol or Aventine or that actual results will not differ materially from those presented in the Pacific Ethanol projections
for Pacific Ethanol, the Pacific Ethanol projections for Aventine or the Pacific Ethanol projections for the combined company.
Inclusion of the Pacific Ethanol projections for Pacific Ethanol, the Pacific Ethanol projections for Aventine and the Pacific
Ethanol projections for the combined company in this joint proxy statement/prospectus should not be regarded as a representation
by any person that the results contained in the forward-looking financial information will be achieved.
Pacific Ethanol does not intend to update
or otherwise revise the forward-looking financial information to reflect circumstances existing since their preparation or to reflect
the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error.
Furthermore, Pacific Ethanol does not intend to update or revise the forward-looking financial information in this joint proxy
statement/prospectus to reflect changes in general economic or industry conditions.
The information concerning forward-looking
financial information provided by Pacific Ethanol is not included in this joint proxy statement/prospectus in order to induce any
stockholder to vote in favor of the stock issuance or to acquire securities of Pacific Ethanol.
Aventine Forward-Looking Financial Information
Aventine does not as a matter of course
make public projections as to future earnings or other results of operations other than providing estimates for certain financial
items on a near-term basis on its regular earnings calls. However, for internal purposes and in connection with the process leading
to the merger agreement, the management of Aventine prepared certain projections of future financial and operating performance
of each of Aventine and Pacific Ethanol for the years 2015 through 2019. Aventine prepared its Pacific Ethanol projections based
on publicly available information. These projections are included in this joint proxy statement/prospectus because Aventine provided
such projections to its financial advisor, Duff & Phelps, in connection with the merger. Aventine discussed these projections
with the Aventine Board in connection with Duff & Phelps’ presentation during the special meetings of the Aventine Board
held on March 31, 2015.
The following prospective financial information
was not prepared with a view toward public disclosure or with a view toward complying with GAAP with respect to prospective financial
information. In the view of Aventine’s management, the information was prepared on a reasonable basis and reflected the best
then currently available estimates and judgments at the time of its preparation, and presented at the time of its preparation,
to the best of Aventine management’s knowledge and belief, reasonable projections of the future financial performance of
Aventine and Pacific Ethanol. However, these projections have not been updated, are not fact and should not be relied upon as being
indicative of future results, and readers of this joint proxy statement/prospectus are cautioned not to rely on this forward-looking
financial information.
Neither Aventine’s nor Pacific
Ethanol’s independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures
with respect to the forward-looking financial information contained herein, nor have they expressed any opinion or any other form
of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the
forward looking financial information.
The following tables present a summary
of the Aventine projections and the Aventine projections for Pacific Ethanol.
| | |
Aventine Renewable Energy Holdings, Inc. | |
| | |
(In millions) | |
| | |
Year Ended December 31, | |
| | |
2015E | | |
2016E | | |
2017E | | |
2018E | | |
2019E | |
Revenue | | |
$ | 629 | | |
$ | 695 | | |
$ | 699 | | |
$ | 702 | | |
$ | 705 | |
EBITDA(1) | | |
$ | 2 | | |
$ | 51 | | |
$ | 58 | | |
$ | 59 | | |
$ | 60 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Pacific
Ethanol, Inc. | |
| | |
(In millions) | |
| | |
Year Ended December 31, | |
| | |
2015E | | |
2016E | | |
2017E | | |
2018E | | |
2019E | |
Revenue | | |
$ | 840 | | |
$ | 1,008 | | |
$ | 1,115 | | |
$ | 1,242 | | |
$ | 1,397 | |
EBITDA(1) | | |
$ | (8 | ) | |
$ | 33 | | |
$ | 41 | | |
$ | 43 | | |
$ | 46 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
______________
(1) | EBITDA is defined as earnings before interest, provision for income taxes and depreciation and amortization. EBITDA is a non-GAAP
financial measure, as it excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most
directly comparable measure calculated and presented in accordance with GAAP in financial statements. EBITDA was used by management
to provide additional information in order to provide them with an alternative method for assessing Aventine’s and Pacific
Ethanol’s financial condition and operating results. These measures are not in accordance with, or a substitute for, GAAP,
and may be different from or inconsistent with non-GAAP financial measures used by other companies.
|
The assumptions and estimates underlying
forward-looking information for Aventine are inherently uncertain and, though considered reasonable by Aventine’s management
as of the date of their preparation, are subject to a wide variety of significant business, economic, and competitive risks and
uncertainties that could cause actual results to differ materially from those contained therein, chief among them being the price
of corn and other feedstocks and the price of ethanol and co-products. Other factors include, among others, the following: changes
in the demand for or price of oil and/or natural gas; changes in government regulations and regulatory requirements, particularly
those matters described in the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning
on page 55 and “Risk Factors” beginning on page 37. The Aventine projections also reflect assumptions
as to certain business decisions that are subject to change. Accordingly, there can be no assurance that the forward-looking results
are indicative of the future performance of Aventine or that actual results will not differ materially from those presented in
the Aventine projections. Inclusion of the Aventine projections in this joint proxy statement/prospectus should not be regarded
as a representation by any person that the results contained in the forward-looking financial information will be achieved.
Aventine does not intend to update or
otherwise revise the forward-looking financial information to reflect circumstances existing since their preparation or to reflect
the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error.
Furthermore, Aventine does not intend to update or revise the forward-looking financial information to reflect changes in general
economic or industry conditions.
The information concerning forward-looking
financial information provided by Aventine is not included in this joint proxy statement/prospectus in order to induce any stockholder
to vote in favor of the merger agreement.
Accounting Treatment of the Merger
The merger will be accounted for as an
acquisition by Pacific Ethanol of Aventine under the acquisition method of accounting according to United States generally accepted
accounting principles.
Regulatory Matters
Under the Hart-Scott-Rodino Antitrust
Improvements Act (sometimes referred to as the HSR Act), and the rules promulgated thereunder by the Federal Trade Commission
(sometimes referred to as the FTC), the merger cannot be completed until each of Pacific Ethanol and Aventine files a notification
and report form with the FTC and the Antitrust Division of the Department of Justice (sometimes referred to as the DOJ) under
the HSR Act and the applicable waiting period has expired or been terminated. Each of Pacific Ethanol and Aventine filed an initial
notification and report form with the FTC and the DOJ on February 3, 2015. On February 18, 2015, the FTC notified Pacific Ethanol
and Aventine of the early termination of the waiting period under the HSR Act.
These filings and approvals are more
fully described in “The Proposed Merger—Regulatory Matters Relating to the Merger” beginning on page 201.
Conditions to Completion of the Merger
Pacific Ethanol and Aventine expect
to complete the merger after all the conditions to the merger in the merger agreement are satisfied or waived, including after
the receipt of stockholder approvals at their respective stockholder meetings. In addition to obtaining such stockholder approvals,
each of the other closing conditions set forth in the merger agreement must be satisfied. Pacific Ethanol and Aventine currently
expect to complete the merger during the second quarter of 2015. However, it is possible that factors outside of either company’s
control could cause the merger to be completed at a later time or not at all. The merger agreement provides that the conditions
to the closing of the merger may be waived, in whole or in part, by Pacific Ethanol or Aventine, to the extent legally allowed.
Neither Pacific Ethanol nor Aventine currently expects to waive any immaterial or material condition to the completion of the
merger. If either Pacific Ethanol or Aventine determines to waive any material condition to the merger and such waiver renders
the disclosure in this joint proxy statement/prospectus materially misleading, proxies will be resolicited from the Pacific Ethanol
and/or Aventine stockholders, as applicable.
For a more complete discussion of the conditions
to the merger, see “The Merger Agreement and Related Agreements—Conditions to Completion of the Merger” beginning
on page 222.
No Solicitation of Other Offers
The merger agreement contains certain
restrictions on the ability of Aventine to solicit or engage in discussions or negotiations with a third party with respect to
a proposal to acquire Aventine’s equity or assets. Notwithstanding these restrictions, the merger agreement provides that
under specified circumstances, if Aventine receives an unsolicited bona fide proposal from a third party to acquire a significant
interest in it that its board of directors determines in good faith is reasonably likely to lead to a proposal that is superior
to the merger, Aventine may furnish nonpublic information to that third party and engage in negotiations regarding an acquisition
proposal with that third party.
For a discussion of the prohibition on
solicitation of acquisition proposals from third parties, see “The Merger Agreement and Related Agreements—Non-Solicitation;
Change in Recommendation” beginning on page 220.
Termination
Pacific Ethanol and Aventine may mutually
agree at any time prior to the completion of the merger (including after stockholder approval) to terminate the merger agreement
and abandon the merger. In addition, the agreement may be terminated by either Pacific Ethanol or Aventine under certain circumstances
or upon the occurrence of certain events.
For a discussion of termination provisions
of the merger agreement, see “The Merger Agreement and Related Agreements—Termination” beginning on page 225.
Termination Fees and Expenses
Aventine is required to pay a termination
fee of $5,982,000 to Pacific Ethanol in the event the merger agreement is terminated by Aventine in connection with the entry into
an agreement for a superior proposal or in the event the merger agreement is terminated by Pacific Ethanol if prior to the time
that the Aventine stockholder vote approving the merger has been obtained (i) Aventine’s board of directors makes a change
in recommendation in favor of the merger with Pacific Ethanol, (ii) Aventine’s board of directors approves or recommends
to its stockholders a takeover proposal from someone other than Pacific Ethanol, (iii) a tender offer or exchange offer for shares
of Aventine’s common stock that constitutes a takeover proposal is commenced by someone other than Pacific Ethanol and the
board of directors of Aventine recommends that holders of Aventine common stock tender their shares in such tender offer or exchange
offer or the board of directors of Aventine fails to recommend that holders of Aventine common stock reject such tender offer or
exchange offer, or (iv) there has been a material breach by Aventine of its obligations under the merger agreement to call a special
meeting of the Aventine stockholders for the purpose of adopting the merger agreement and recommending that all Aventine stockholders
vote to approve the merger or the non-solicitation provisions of the merger agreement.
Pacific Ethanol is required to pay a
termination fee of $5,982,000 to Aventine if there shall occur an event, or Pacific Ethanol becomes aware of information not known
by Pacific Ethanol as of December 28, 2014 which, upon the occurrence of such event or upon Pacific Ethanol learning of such information,
that would be reasonably viewed as either resulting in, or substantially increasing the likelihood of, a material adverse result
in any litigation matter between Aventine and Aurora Cooperative Elevator Company (sometimes referred to as the Aurora Coop) existing
as of December 28, 2014 (sometimes referred to as the Aurora Coop Litigation).
In the event the merger agreement is
terminated by Aventine or Pacific Ethanol as a result of the failure of Pacific Ethanol’s stockholders to approve the issuance
of shares of Pacific Ethanol common stock and non-voting common stock, the amendment of Pacific Ethanol’s Certificate of
Incorporation, and the agreement by the holders of Pacific Ethanol Series B Preferred Stock not to treat the merger as a liquidation,
dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations, Pacific Ethanol must
reimburse Aventine for fees or expenses incurred by Aventine in connection with the proposed merger up to a maximum amount of $1,994,000.
See “The Merger Agreement and Related
Agreements—Termination Fee and Expenses” and “—Effect of Termination,” beginning on pages 226
and 227, respectively.
Stockholders Agreements
In order to induce Pacific Ethanol
to enter into the merger agreement, eight holders of outstanding shares of Aventine common stock (seven of whom are affiliated
with Candlewood) have entered into stockholders agreements with Pacific Ethanol, pursuant to which they have agreed, solely in
their capacity as stockholders of Aventine, to vote their pro-rata share of 51% of Aventine’s issued and outstanding common
stock in favor of the merger and adoption of the merger agreement and, with respect to all other proposals submitted to the Aventine
stockholders, which would reasonably be expected to prevent or materially delay the consummation of the merger, in such a manner
as directed by Pacific Ethanol. The stockholders agreements also subject the stockholders to certain market stand-off restrictions
with respect to the shares of Pacific Ethanol common stock and/or non-voting common stock received in the merger.
In connection with entry into the stockholders agreements, the eight significant stockholders agreed to exercise any drag-along
rights with respect to Aventine stockholders held by such significant stockholders. Under the Aventine Stockholders Agreement,
upon the exercise of the drag-along right by a majority stockholder(s), the Aventine stockholders party to such agreement who
are being “dragged” along, have agreed (pursuant to the terms of the Aventine Stockholders Agreement) to waive their
respective appraisal rights in connection with the merger. The “dragged” Aventine stockholders have further agreed
(pursuant to the terms of the Aventine Stockholders Agreement) to cast all votes to which such stockholders are entitled, in favor
of the merger. Copies of the stockholders agreements are attached to this joint proxy statement/prospectus as Annex C-1
and Annex C-2. See “The Merger Agreement and Related Agreements—Stockholders Agreements” beginning on
page 227.
Shares Beneficially Owned by Directors and Executive
Officers of Pacific Ethanol and Aventine
Pacific Ethanol’s directors
and executive officers beneficially owned [●] shares of Pacific Ethanol common stock on [●], 2015, the record date
for the annual meeting. These shares represent in total [●]% of the total voting power of Pacific Ethanol’s voting
securities outstanding and entitled to vote as of the record date. To approve the issuance of shares of Pacific Ethanol common
stock and non-voting common stock in the merger (Proposal 1), the affirmative vote of (i) if a quorum is present at the annual
meeting, the holders of a majority of shares of Pacific Ethanol common stock and Series B Preferred Stock, present in person or
represented by proxy at the annual meeting, voting together as a single class and entitled to vote (giving effect to the Preferred
Voting Ratio) and (ii) the holders of a majority of the outstanding shares of Series B Preferred Stock voting as a separate class
and entitled to vote, is required. Pacific Ethanol currently expects that Pacific Ethanol’s directors and executive officers
will vote their shares “FOR” all the proposals to be voted on at the annual meeting, although none of them
has entered into any agreements obligating them to do so.
Aventine’s directors and executive
officers did not beneficially own any shares of Aventine common stock on [●], 2015, the record date for the special meeting.
Appraisal Rights
Under Delaware law, Pacific Ethanol stockholders
are not entitled to appraisal rights in connection with the issuance of shares of Pacific Ethanol common stock and non-voting common
stock as contemplated by the merger agreement. Aventine stockholders of record have appraisal rights under the Delaware General
Corporation Law (sometimes referred to as the DGCL) in connection with the merger. To the extent the drag-along is exercised pursuant
to the Aventine Stockholders Agreement, the Aventine stockholders subject to the drag-along right have waived their respective
appraisal rights arising out of a drag-along transaction. For further discussion of appraisal rights, see “The Proposed Merger—Appraisal
Rights” beginning on page 201.
Comparison of the Rights of Pacific Ethanol and Aventine
Stockholders
The rights of Aventine stockholders as
Pacific Ethanol stockholders after the merger will be governed by Pacific Ethanol’s Certificate of Incorporation and bylaws,
each as amended, and the laws of the State of Delaware. Those rights differ from the rights of Aventine stockholders under Aventine’s
Certificate of Incorporation and bylaws. See “Comparison of Rights of Pacific Ethanol
and Aventine Stockholders” beginning on page 245.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA OF PACIFIC ETHANOL
The selected historical consolidated
financial data of Pacific Ethanol for each of the years ended December 31, 2014, 2013 and 2012, and as of December 31, 2014 and
2013 have been derived from Pacific Ethanol’s audited consolidated financial statements and related notes contained in its
Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated by reference in this joint proxy statement/prospectus.
The selected historical consolidated financial data for the years ended December 31, 2011 and 2010 and as of December 31, 2012,
2011 and 2010 have been derived from Pacific Ethanol’s audited consolidated financial statements and related notes, which
have not been incorporated by reference in this joint proxy statement/prospectus. The information set forth below is only a summary
and is not necessarily indicative of the results of future operations of Pacific Ethanol or the combined company, and you should
read the following information together with Pacific Ethanol’s audited consolidated financial statements, the related notes
and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
contained in Pacific Ethanol’s Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated by
reference in this joint proxy statement/prospectus. For more information, see the section entitled “Where You Can Find More
Information” beginning on page 257.
| |
As
of and for the Years Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | |
In thousands,
except per share data | |
| | |
| | |
| | |
| | |
| |
Consolidated
Statements of Operations Data: | |
| | |
| | |
| | |
| | |
| |
Net Sales | |
$ | 1,107,412 | | |
$ | 908,437 | | |
$ | 816,044 | | |
$ | 901,188 | | |
$ | 328,332 | |
Cost of goods sold | |
| 998,927 | | |
| 875,507 | | |
| 835,568 | | |
| 881,789 | | |
| 329,143 | |
Gross profit (loss) | |
| 108,485 | | |
| 32,930 | | |
| (19,524 | ) | |
| 19,399 | | |
| (811 | ) |
Gain from bankruptcy exit | |
| – | | |
| – | | |
| – | | |
| – | | |
| 119,408 | |
Consolidated net income (loss) | |
| 26,002 | | |
| (1,162 | ) | |
| (43,355 | ) | |
| (4,023 | ) | |
| 69,483 | |
Noncontrolling interests | |
| (4,713 | ) | |
| 381 | | |
| 24,298 | | |
| 7,097 | | |
| 4,409 | |
Income (loss) attributed to PEI | |
| 21,289 | | |
| (781 | ) | |
| (19,057 | ) | |
| 3,074 | | |
| 73,892 | |
Preferred stock dividends | |
| (1,265 | ) | |
| (1,265 | ) | |
| (1,268 | ) | |
| (1,265 | ) | |
| (2,847 | ) |
Income (loss) available to common stockholders | |
| 20,024 | | |
| (2,046 | ) | |
| (20,325 | ) | |
| 1,809 | | |
| 71,045 | |
Net income (loss) per share Basic | |
| 0.96 | | |
| (0.17 | ) | |
| (2.81 | ) | |
| 0.80 | | |
| 101.35 | |
Net income (loss) per share Diluted | |
| 0.88 | | |
| (0.17 | ) | |
| (2.81 | ) | |
| 0.80 | | |
| 83.48 | |
Shares used
in per share calculation | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 20,810 | | |
| 12,264 | | |
| 7,224 | | |
| 2,249 | | |
| 701 | |
Diluted | |
| 22,669 | | |
| 12,264 | | |
| 7,224 | | |
| 2,266 | | |
| 893 | |
Dividends per share Declared and Paid | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
Consolidated
Balance Sheet Data | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and equivalents | |
$ | 62,084 | | |
$ | 5,151 | | |
$ | 7,586 | | |
$ | 8,914 | | |
$ | 8,736 | |
Total assets | |
| 299,502 | | |
| 241,049 | | |
| 214,963 | | |
| 232,476 | | |
| 234,083 | |
Long-term debt (current and noncurrent) | |
| 34,533 | | |
| 99,158 | | |
| 121,282 | | |
| 94,439 | | |
| 123,089 | |
Total liabilities | |
| 81,520 | | |
| 146,148 | | |
| 142,056 | | |
| 113,212 | | |
| 146,268 | |
Total Stockholders’ equity | |
| 217,982 | | |
| 94,901 | | |
| 72,907 | | |
| 119,264 | | |
| 87,815 | |
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA OF AVENTINE
The selected historical consolidated financial
data of Aventine for each of the years ended December 31, 2014 and 2013 have been derived from audited consolidated financial
statements and related notes, included herein, which are incorporated by reference in this joint proxy statement/prospectus. The
selected historical consolidated financial data for the years ended December 31, 2012, 2011 and 2010 have been derived from Aventine’s
unaudited consolidated financial statements for such periods. The information set forth below is only a summary and is not necessarily
indicative of the results of future operations of Aventine or the combined company, and you should read the following information
together with Aventine’s audited consolidated financial statements, the related notes and the section entitled “The
Companies—Aventine Renewable Energy Holdings, Inc. —Management’s Discussion and Analysis of Financial Condition
and Results of Operations” contained in this joint proxy statement/prospectus.
| |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | |
Statement
of Operations data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Total sales | |
$ | 588,028 | | |
$ | 480,266 | | |
$ | 479,710 | | |
$ | 639,798 | | |
$ | 446,442 | |
Costs and expenses | |
| 545,325 | | |
| 483,628 | | |
| 530,716 | | |
| 630,333 | | |
| 452,980 | |
Loss (gain) on derivatives (1) | |
| 11,166 | | |
| 5,454 | | |
| (681 | ) | |
| 4,424 | | |
| (633 | ) |
Operating income (loss) (1) | |
| 31,537 | | |
| (8,816 | ) | |
| (50,325 | ) | |
| 5,041 | | |
| (5,905 | ) |
Interest expense | |
| 14,233 | | |
| 12,942 | | |
| 21,136 | | |
| 24,040 | | |
| 9,651 | |
Reorganization costs | |
| – | | |
| – | | |
| – | | |
| – | | |
| 267,722 | |
Other expense (income) | |
| 9 | | |
| (6,296 | ) | |
| (6,878 | ) | |
| 8,474 | | |
| 920 | |
Income tax expense (benefit) | |
| – | | |
| – | | |
| 9 | | |
| 536 | | |
| (655 | ) |
Net income (loss) – continuing operations | |
| 17,295 | | |
| (15,462 | ) | |
| (64,592 | ) | |
| (28,009 | ) | |
| (283,543 | ) |
Net loss – discontinued
operations | |
| (731 | ) | |
| (58,843 | ) | |
| (19,268 | ) | |
| (8,419 | ) | |
| (8,214 | ) |
Net income (loss) | |
$ | 16,564 | | |
$ | (74,305 | ) | |
$ | (83,860 | ) | |
$ | (36,428 | ) | |
$ | (291,757 | ) |
Basic
Earnings per Share: (unaudited) | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) – continuing operations per share | |
$ | 3.99 | | |
$ | (6.57 | ) | |
$ | (90.34 | ) | |
$ | (154.80 | ) | |
$ | (985.43 | ) |
Income (loss) – discontinued
operations per share | |
| (0.17 | ) | |
| (24.99 | ) | |
| (26.95 | ) | |
| (46.53 | ) | |
| (28.55 | ) |
Net Income (loss) per share
- Basic | |
$ | 3.82 | | |
$ | (31.55 | ) | |
$ | (117.29 | ) | |
$ | (201.33 | ) | |
$ | (1,013.97 | ) |
Diluted
Earnings per Share: (unaudited) | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) – continuing operations per share | |
$ | 1.22 | | |
$ | (6.57 | ) | |
$ | (90.34 | ) | |
$ | (154.80 | ) | |
$ | (985.43 | ) |
Income (loss) – discontinued
operations per share | |
| (0.05 | ) | |
| (24.99 | ) | |
| (26.95 | ) | |
| (46.53 | ) | |
| (28.55 | ) |
Net Income (loss) per share
- Diluted | |
$ | 1.17 | | |
$ | (31.55 | ) | |
$ | (117.29 | ) | |
$ | (201.33 | ) | |
$ | (1,013.97 | ) |
Shares used
in Earnings per Share calculation: | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic (2) | |
| 4,330 | | |
| 2,355 | | |
| 715 | | |
| 181 | | |
| 288 | |
Diluted (2) | |
| 14,208 | | |
| 2,355 | | |
| 715 | | |
| 181 | | |
| 288 | |
Balance Sheet data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Current assets | |
$ | 92,623 | | |
$ | 128,111 | | |
$ | 59,381 | | |
$ | 103,379 | | |
$ | 270,187 | |
Current liabilities | |
| 32,716 | | |
| 27,757 | | |
| 20,508 | | |
| 33,335 | | |
| 197,313 | |
Working capital | |
| 59,907 | | |
| 100,354 | | |
| 38,873 | | |
| 70,044 | | |
| 72,874 | |
Total assets | |
| 314,177 | | |
| 344,210 | | |
| 367,167 | | |
| 421,200 | | |
| 593,978 | |
Total liabilities | |
| 264,861 | | |
| 307,563 | | |
| 259,557 | | |
| 255,557 | | |
| 392,320 | |
Total equity | |
$ | 49,316 | | |
$ | 36,647 | | |
$ | 107,610 | | |
$ | 165,643 | | |
$ | 201,658 | |
__________
(1) |
Loss (gain) on derivatives has been reclassified
in the above table for the years ending December 31, 2012, 2011, and 2010 to conform to the presentation adopted
in the 2014 consolidated financial statements. |
(2) |
Weighted average shares outstanding have been adjusted to reflect
the 1-for-50 reverse stock split that occurred as part of Aventine’s capital restructuring in September of 2012. |
SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The following selected unaudited pro forma
combined condensed financial information has been prepared to illustrate the effect of the merger. The unaudited pro forma combined
condensed balance sheet information gives effect to the merger as if it occurred on December 31, 2014. The unaudited pro forma
combined condensed statements of operations information for the year ended December 31, 2014 gives effect to the merger as
if it occurred on January 1, 2014.
This unaudited pro forma combined condensed
financial information is for informational purposes only. It does not purport to indicate the results that would actually have
been obtained had the merger been completed on the assumed date or for the periods presented. A final determination of the fair
value of Aventine’s assets and liabilities will be based on the actual net tangible and intangible assets and liabilities
that exist as of the date of closing of the merger and, therefore, cannot be made prior to that date. Additionally, the value of
the portion of the merger consideration to be paid in shares of Pacific Ethanol common stock will be determined based on the trading
price of Pacific Ethanol’s common stock at the time of the closing of the merger.
This unaudited pro forma combined condensed
financial information should not be considered predictive of results that may be realized in the future. During the periods covered
by the pro forma financial statements, Pacific Ethanol had one and Aventine had two idled plants. In addition, Aventine has made
recent improvements in plant and logistical assets, the full impact of which was not realized during the periods covered. For a
discussion of the factors the Pacific Ethanol Board of Directors considered in evaluating the Aventine’s historical financial
information, see “The Proposed Merger—Recommendation of the Pacific Ethanol Board and its Reasons for the Merger”
beginning on page 176.
| |
Year
Ended
December
31, 2014 | |
Pro Forma Statements of Operations Information (in thousands,
except per share amounts) | |
| |
Revenue | |
$ | 1,695,440 | |
Operating income | |
| 120,065 | |
Net income attributed to Pacific Ethanol | |
| 18,455 | |
Net income attributable to common stockholders | |
| 17,190 | |
Net income attributable to common stockholders per share—basic | |
$ | 0.45 | |
Net income attributable to common stockholders per share—diluted | |
$ | 0.43 | |
| |
December
31, 2014 | |
Pro Forma Balance Sheet Information (in thousands) | |
| |
Total current assets | |
$ | 232,174 | |
Property and equipment, net | |
| 462,102 | |
Total assets | |
| 727,627
| |
Total liabilities | |
| 319,565 | |
Total stockholders’ equity | |
$ | 408,062 | |
EQUIVALENT AND COMPARATIVE PER SHARE INFORMATION
The tables below reflect:
|
· |
the historical net income from continuing
operations, book value per share and cash dividends per share of Pacific Ethanol common stock and the historical net income
from continuing operations, book value per share and cash dividends per share of Aventine common stock; |
|
· |
the unaudited pro forma combined Pacific
Ethanol and Aventine net income (loss) from continuing operations after giving effect to the merger on a purchase basis if
the merger had been consummated on January 1, 2014; book value per share, and cash dividends after giving effect to the merger
on a purchase basis if the merger had been consummated on December 31, 2014; and |
|
· |
the unaudited pro forma combined per Aventine equivalent share
data net income from continuing operations, book value per share and cash dividends per share calculated by multiplying the
unaudited pro forma combined data by the exchange ratio of 1.25, which is the Pacific Ethanol share which would be received
for each share of Aventine common stock pursuant to the merger agreement. |
The following tables should be read in conjunction
with the historical audited consolidated financial statements and accompanying notes of each of Pacific Ethanol and Aventine which
are included elsewhere in this joint proxy statement/prospectus.
The unaudited pro forma data are presented for
illustrative purposes only and are not necessarily indicative of actual or future financial position or results of operation that
would have been realized if the proposed mergers had been completed as of the date indicated or will be realized upon completion
of the proposed mergers. See the section entitled “Unaudited Pro Forma Combined Condensed Financial Statements” beginning
on page 229 of this joint proxy statement/prospectus.
| |
As
of and for the year
ended December 31, 2014 | |
Pacific Ethanol—Historical | |
| | |
Basic income (loss) per share | |
$ | 0.96 | |
Diluted income (loss) per share | |
$ | 0.88 | |
Book value per share | |
$ | 8.90 | |
Cash dividends per share | |
| – | |
| |
| | |
Aventine—Historical | |
| | |
Basic income (loss) per share | |
$ | 3.82 | |
Book value per share | |
$ | 3.47 | |
Cash dividends per share | |
| – | |
| |
| | |
Unaudited Pro Forma Combined | |
| | |
Basic income per share | |
$ | 0.45 | |
Diluted income per share | |
$ | 0.43 | |
Book value per common share | |
$ | 9.66 | |
Cash dividends per share | |
| – | |
| |
| | |
Unaudited Pro Forma Combined Aventine
Equivalents | |
| | |
Basic income per share | |
$ | 0.56 | |
Diluted income per share | |
$ | 0.54 | |
Book value per common share | |
$ | 12.08 | |
Cash dividends per share | |
| – | |
The above tables show only historical comparisons.
Because the market prices of Pacific Ethanol and Aventine common stock will likely fluctuate prior to the merger, these comparisons
may not provide meaningful information to Pacific Ethanol stockholders in determining whether to approve the issuance of shares
of Pacific Ethanol common stock and non-voting common stock in the merger or to Aventine stockholders in determining whether to
adopt the merger agreement and approve the merger. Pacific Ethanol and Aventine stockholders are encouraged to obtain current market
quotations for Pacific Ethanol and Aventine common stock and to review carefully the other information contained in this joint
proxy statement/prospectus in considering whether to approve the respective proposals before them.
The following table presents:
|
· |
the last reported price of a share of Pacific Ethanol common stock, as reported on The NASDAQ Capital Market; |
|
· |
the last reported price of a share of Aventine common stock, as reported on the OTC Bulletin Board (“OTCBB”) under the symbol “AVRW”; |
|
· |
the pro forma equivalent per share value of Aventine common stock based on the exchange ratio (i.e., 1.25 shares of Pacific Ethanol common stock and/or non-voting common stock for each outstanding share of Aventine common stock) and the closing price of Pacific Ethanol common stock; and |
|
· |
in each case, on December 30, 2014, the last full trading day
prior to the public announcement of the proposed merger, and on March 31, 2015, the last practicable trading day prior
to the date of this joint proxy statement/prospectus. |
Date |
|
Pacific
Ethanol Common Stock |
|
Aventine Common
Stock |
|
Equivalent Price
per Share |
|
December 30, 2014 |
|
$ |
10.71 |
|
$ |
9.00 |
|
$ |
13.39 |
|
March 31, 2015 |
|
$ |
10.79 |
|
$ |
27.00 |
|
$ |
13.49 |
|
Pacific Ethanol and Aventine stockholders are
advised to obtain current market quotations for Pacific Ethanol common stock and Aventine common stock. The market price of Pacific
Ethanol common stock and Aventine common stock may fluctuate between the date of this joint proxy statement/prospectus and the
date of completion of the merger. No assurance can be given concerning the market price of Pacific Ethanol or Aventine common stock
before the effective time of the merger or the market price of Pacific Ethanol common stock after the effective time of the merger.
Changes in the market price of Pacific Ethanol common stock prior to the completion of the merger will affect the market value
of the stock portion of the merger consideration that Aventine stockholders will receive upon completion of the merger.
No cash dividends have been paid on either Pacific
Ethanol or Aventine common stock during the two most recent fiscal years, and neither company intends to pay cash dividends on
its common stock in the immediate future.
It should be noted that Aventine common stock
is not listed on any exchanges and the daily trading volume of its common shares is very low in relation to the total number of
shares issued and outstanding (as reported by The Bloomberg Professional service, the average daily trade volume for every quarter
since Q1 2013 has been less than 1.5% of total shares issued and outstanding). Based on the stock transfer procedures outlined
in Aventine’s Stockholders Agreement, Aventine is notified from time to time when shares subject to the terms of the Aventine
Stockholders Agreement have traded in transactions that are not reported on the OTCBB. The actual transaction price of the shares
and the actual average daily trading volume in these transactions are not provided to Aventine. As a result, trade information
on the OTCBB may be unreliable and may not be indicative of the value of Aventine’s common stock at any particular point
in time. Aventine stockholders should not solely rely on the trade information provided on the OTCBB in making a determination
of the fair value of Aventine’s stock price and should review carefully the other information contained in this joint proxy
statement/prospectus in considering whether to approve the respective proposals before them.
RISK FACTORS
In addition to the other information
included or incorporated by reference in this joint proxy statement/prospectus, including the matters addressed in the section
entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 55, you should carefully
consider the following risks before deciding how to vote. In addition, you should read and consider the risk factors associated
with the businesses of Pacific Ethanol and Aventine because those risks will also affect the combined company. Risks associated
with the business of Pacific Ethanol can be found under the caption, “Risk Factors” in Part I, Item 1A of Pacific
Ethanol’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange
Commission on March 16, 2014, as such risks may be updated or supplemented in Pacific Ethanol’s subsequently filed Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, which are incorporated by reference into this joint proxy statement/prospectus.
Risks associated with the business of Aventine can be found below. You should also read and consider the other information in
this joint proxy statement/prospectus and the other documents incorporated by reference in this joint proxy statement/prospectus.
See the section entitled “Where You Can Find More Information” beginning on page 257.
Risks Related to the Merger
Because the market price of Pacific Ethanol common stock will
fluctuate, Aventine stockholders cannot be sure of the market value of the Pacific Ethanol common stock that they will receive
in the merger.
When we complete the merger, each share
of Aventine common stock will be converted into the right to receive 1.25 shares of Pacific Ethanol common stock or non-voting
common stock subject to certain limitations necessary to maintain the tax free treatment of the merger. Specifically, no more
than 20% of shares of Aventine common stock will be exchanges by the Aventine stockholders for shares of Pacific Ethanol non-voting
common stock. The exchange ratio is fixed and will not be adjusted for changes in the market price of either Pacific Ethanol common
stock or Aventine common stock. The merger agreement does not provide for any price-based termination right for either party. Accordingly, the market value of the shares of Pacific
Ethanol common stock that Pacific Ethanol issues and Aventine stockholders will be entitled to receive when the parties complete
the merger will depend on the market value of shares of Pacific Ethanol common stock at the time that the parties complete the
merger and could vary significantly from the market value on the date of this proxy statement/prospectus or the date of the Pacific
Ethanol annual meeting and the Aventine special meeting.
The market value of Pacific Ethanol common
stock will continue to fluctuate after the completion of the merger. For example, during the fourth calendar quarter of 2014 and
the first two months of 2015, the closing sales price of Pacific Ethanol common stock ranged from a low of $7.58 to a high of
$15.13, as reported on The NASDAQ Capital Market. On March 31, 2015 the closing sales price of Pacific Ethanol common stock was
$10.79. Accordingly, at the time of Pacific Ethanol’s annual meeting or Aventine’s special meeting, as the case may
be, neither the Pacific Ethanol stockholders nor the Aventine stockholders, as the case may be, will know or be able to calculate
the exact market value of the consideration the Aventine stockholders will receive upon completion of the merger.
The announcement and pendency of the merger
could have an adverse effect on Pacific Ethanol’s and Aventine’s stock prices, business, financial condition, results
of operations or business prospects.
While neither Pacific Ethanol nor Aventine is
aware of any significant adverse effects to date, the announcement and pendency of the merger could disrupt Pacific Ethanol’s
and/or Aventine’s businesses in the following ways, among others:
|
· |
customers and other third-party business partners of Pacific Ethanol or Aventine may seek to terminate and/or renegotiate their relationships with Pacific Ethanol or Aventine as a result of the merger, whether pursuant to the terms of their existing agreements with Pacific Ethanol or Aventine or otherwise; |
|
· |
the attention of Pacific Ethanol and/or Aventine management may be directed toward the completion of the merger and related matters and may be diverted from the day-to-day business operations of their respective companies, including from other opportunities that might otherwise be beneficial to Pacific Ethanol or Aventine; and |
|
· |
current and prospective employees may experience uncertainty regarding their future roles with the combined company, which might adversely affect Pacific Ethanol’s and/or Aventine’s ability to retain, recruit and motivate key personnel. |
Should they occur, any of these matters could
adversely affect the stock prices of, or harm the financial condition, results of operations or business prospects of, Pacific
Ethanol and/or Aventine.
The market price of Pacific Ethanol common stock and non-voting
common stock after the merger may be affected by factors different from those affecting the shares of Aventine or Pacific Ethanol
currently.
Upon completion of the merger, holders of Aventine
common stock will become holders of Pacific Ethanol common stock and/or non-voting common stock. Pacific Ethanol’s business
differs in important respects from that of Aventine, and, accordingly, the results of operations of the combined company and the
market price of Pacific Ethanol common stock after the completion of the merger may be affected by factors different from those
currently affecting the independent results of operations of each of Pacific Ethanol and Aventine. For a discussion of the businesses
of Pacific Ethanol and Aventine and of certain factors to consider in connection with those businesses, see the risk factors included
in this joint proxy statement/prospectus under the section entitled “Risk Factors—Related to Aventine’s Business”
beginning on page 42, the documents incorporated by reference by Pacific Ethanol into this joint proxy statement/prospectus
referred to under the section entitled “Where You Can Find More Information” beginning on page 257 and the description
of Aventine’s business under the section entitled “The Companies—Aventine Renewable Energy Holdings, Inc.”
beginning on page 56.
The issuance of shares of Pacific Ethanol common stock and
non-voting common stock to Aventine stockholders in the merger will substantially dilute the interest in Pacific Ethanol held by
Pacific Ethanol stockholders prior to the merger.
If the merger is completed, it is estimated
that Pacific Ethanol will issue up to approximately 17,755,300 shares of Pacific Ethanol common stock and non-voting common stock
upon the closing of the merger, assuming no exercise or conversion of outstanding options and warrants. Based on the number of
shares of Pacific Ethanol and Aventine common stock issued and outstanding on the Pacific Ethanol and Aventine record dates, Aventine
stockholders before the merger will own, in the aggregate, approximately 42% of the aggregate number of shares of Pacific Ethanol
common stock and non-voting common stock issued and outstanding immediately after the merger. The issuance of shares of Pacific
Ethanol common stock and/or non-voting common stock to Aventine stockholders in the merger will cause a 42% reduction in the relative
percentage interest of current Pacific Ethanol stockholders in the earnings, voting rights, liquidation value and book and market
value of Pacific Ethanol. It is expected that Pacific Ethanol stockholders before the merger will hold approximately 58% of the
total Pacific Ethanol common stock and non-voting common stock issued and outstanding immediately following completion of the
merger. Thus, Pacific Ethanol stockholders before the merger will experience dilution in the amount of 42% as a result of the
merger.
The unaudited pro forma combined condensed financial statements
included in this document are preliminary and the actual financial condition and results of operations after the merger may differ
materially.
The unaudited pro forma combined condensed financial
statements in this joint proxy statement/prospectus are presented for illustrative purposes only and are not necessarily indicative
of what Pacific Ethanol’s actual financial condition or results of operations would have been had the merger been completed
on the dates indicated. The unaudited pro forma combined condensed financial statements reflect adjustments to illustrate the effect
of the merger had it been completed on the dates indicated, which are based upon preliminary estimates, to record the Aventine
identifiable assets acquired and liabilities assumed at fair value and the resulting goodwill recognized. The purchase price allocation
for the merger reflected in this joint proxy statement/prospectus is preliminary, and final allocation of the purchase price will
be based upon the actual purchase price and the fair value of the assets and liabilities of Aventine as of the date of the completion
of the merger. Accordingly, the final acquisition accounting adjustments may differ materially from the pro forma adjustments reflected
in this document. For more information, see “Unaudited Pro Forma Combined Condensed Financial Statements” beginning
on page 229.
Failure to complete the merger could adversely affect Pacific
Ethanol’s and Aventine’s stock prices and their future business and financial results.
Completion of the merger is subject to a
number of conditions, including among other things, the receipt of approval of the Pacific Ethanol and Aventine stockholders.
There is no assurance that the parties will receive the necessary approvals or satisfy the other conditions to the completion
of the merger.
Failure to complete the proposed merger will prevent Pacific Ethanol and Aventine from realizing the anticipated benefits of the
merger. Each company will also remain liable for significant transaction costs, including legal, accounting and financial advisory
fees, unless provided otherwise by the merger agreement. In addition, the market price of each company’s common stock may
reflect various market assumptions as to whether the merger will occur. Consequently, the failure to complete the merger could
result in a significant change in the market price of the common stock of Pacific Ethanol and Aventine.
Because certain directors and executive officers of Aventine,
as the case may be, are parties to agreements or are participants in other arrangements that give them interests that may be different
from, or in addition to, your interests as a stockholder of Aventine, these persons may have conflicts of interest in recommending
that Aventine stockholders vote to adopt the merger agreement and approve the merger.
The directors and executive officers of
Aventine, as the case may be, are parties to certain agreements or are participants in other arrangements that give them interests
that may be different from, or in addition to, your interests as a stockholder of Aventine. This difference of interests stems
from employment agreements covering certain executive officers under which such officers are entitled to severance payments, change
of control payments and other benefits related to their employment resulting from the merger. In addition, Pacific Ethanol has
an obligation under the merger agreement to indemnify Aventine’s directors and executive officers for acts or omission occurring
prior to the effective time of the merger. The merger agreement also provided that Aventine will purchase “tail” officers’
and directors’ liability insurance policies on terms and conditions reasonably comparable to Aventine’s existing directors’
and officers’ liability insurance. The interests of the directors and executive officers of Aventine in the merger that
are different than those of the Aventine stockholders are described under “Additional Interests of Certain of Aventine’s
Directors and Executive Officers in the Merger” beginning on page 205.
Termination of the merger agreement could negatively impact
Aventine or Pacific Ethanol.
If the merger agreement is terminated, there
may be various consequences. For example, Aventine’s or Pacific Ethanol’s businesses may have been impacted adversely
by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of
the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of Aventine’s
or Pacific Ethanol’s common stock could decline to the extent that the current market prices reflect a market assumption
that the merger will be completed. If the merger agreement is terminated under certain circumstances, Aventine or Pacific Ethanol
may be required to pay to the other party a termination fee of $5,982,000 or an expense reimbursement amount of up to $1,994,000.
The termination rights and related fees are described under “The Merger Agreement and Related Agreements—Termination
Fee and Expenses” beginning on page 226.
The merger agreement contains provisions that could discourage
a potential alternative acquirer that might be willing to pay more to acquire Aventine.
The merger agreement contains “no shop”
provisions that restrict Aventine’s ability to solicit or facilitate proposals regarding a merger or similar transaction
with another party. Further, there are only limited exceptions to Aventine’s agreement that its board of directors will not
withdraw or adversely qualify its recommendation regarding the merger agreement. Under certain circumstances, Aventine’s
board of directors is permitted to terminate the merger agreement in response to an unsolicited third party proposal to acquire
Aventine, which Aventine’s board of directors determines to be more favorable than the merger with Pacific Ethanol. However,
if Aventine or Pacific Ethanol terminates the merger agreement because Aventine has received and accepted an acquisition proposal
that is deemed more favorable by its board of directors, Pacific Ethanol will be entitled to collect a $5,982,000 termination fee
from Aventine. We describe these provisions under “The Merger Agreement and Related Agreements—Termination” and
“—Termination Fee and Expenses” beginning on pages 225 and 226, respectively.
These provisions could discourage a potential
third party acquirer from considering or proposing an alternative acquisition, even if it were prepared to pay consideration with
a higher value than that proposed to be paid in the merger, or might result in a potential third party acquirer proposing to pay
a lower per share price than it might otherwise have proposed to pay because of the added expense of the termination fee.
Obtaining required approvals necessary to satisfy the conditions
to the completion of the merger may delay or prevent completion of the merger.
To complete the merger, Pacific Ethanol
stockholders must approve the issuance of shares of Pacific Ethanol common stock and non-voting common stock and the amendment
of its Certificate of Incorporation and holders of at least 66-2/3% of Pacific Ethanol Series B Preferred Stock must agree not
to treat the merger as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate
of Designations, each as contemplated by the merger agreement, and Aventine stockholders must adopt the merger agreement and approve
the merger. In addition, the completion of the merger is conditioned upon the receipt of certain governmental authorizations,
consents, orders or other approvals, including the expiration or termination of the waiting period under the HSR Act. On February
18, 2015, the FTC granted early termination of the waiting period under the HSR Act.
Pacific Ethanol and Aventine intend to pursue
all required approvals in accordance with the merger agreement. No assurance can be given that the required approvals will be obtained
and, even if all such approvals are obtained, no assurance can be given as to the terms, conditions and timing of the approvals
or that they will satisfy the terms of the merger agreement. See the sections entitled “The Merger Agreement and Related
Agreements—Conditions to the Completion of the Merger” and “The Proposed Merger—Regulatory Matter Relating
to the Merger” beginning on pages 222 and 201, respectively, for a discussion of the conditions to the completion
of the merger.
The shares of Pacific Ethanol common stock and non-voting
common stock to be received by Aventine stockholders receiving the stock consideration as a result of the merger will have different
rights from shares of Aventine common stock.
Following completion of the merger, Aventine
stockholders will no longer be stockholders of Aventine but will instead be stockholders of Pacific Ethanol. Although Aventine
and Pacific Ethanol are each incorporated under Delaware law, there will be important differences between the current rights of
Aventine stockholders and the rights of Pacific Ethanol stockholders, including the rights of holders of Pacific Ethanol non-voting
common stock that may be important to Aventine stockholders. See “Comparison of Rights of Pacific Ethanol and Aventine Stockholders”
beginning on page 245 for a discussion of the material differences between the rights associated with Aventine common stock
and Pacific Ethanol common stock and non-voting common stock.
The fairness opinion received by the Pacific Ethanol Board
from Craig-Hallum does not reflect changes in circumstances subsequent to the date of the fairness opinion.
Craig-Hallum delivered to the Pacific Ethanol
Board its opinion dated December 29, 2014. The opinion does not speak as of the time the merger will be completed or any date other
than the date of such opinion. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion,
including changes to the operations and prospects of Aventine or Pacific Ethanol, changes in general market and economic conditions
or regulatory or other factors including, among others, any adverse result in the Aurora Coop Litigation. Any such changes may
materially alter or affect the relative values of Aventine and Pacific Ethanol.
The fairness opinion received by the Aventine Board from Duff
& Phelps, Aventine’s financial advisor, does not reflect changes in circumstances subsequent to the date of the fairness
opinion.
Duff & Phelps,
Aventine’s financial advisor in connection with the merger, delivered to the board of directors of Aventine its opinion
dated March 31, 2015. The opinion does not speak as of the time the merger will be completed or any date other
than the date of such opinion. The opinion does not reflect changes that may occur or may have occurred after the date of the
opinion, including changes to the operations and prospects of Aventine or Pacific Ethanol, changes in general market and
economic conditions or regulatory or other factors including, among others, any adverse result in the Aurora Coop Litigation.
Any such changes may materially alter or affect the relative values of Aventine and Pacific Ethanol.
If the IRS (or a court, in the event of an IRS challenge)
determines that the merger does not qualify as a “reorganization” under Section 368(a) of the Code, Aventine stockholders
would be fully taxed on the merger.
If the merger is not treated as a “reorganization”
under Section 368(a) of the Code, then the merger will be a fully taxable transaction, and Aventine stockholders would be required
to recognize all of the gain or loss on their exchange of Aventine shares for the consideration received in the merger. See the
section entitled “The Proposed Merger—Material United States Federal Income Tax Consequences of the Merger” beginning
on page 197 for a discussion of the tax treatment of Aventine stockholders.
Risks Related to Aventine’s Business
Aventine has significant indebtedness under a term loan facility.
Aventine’s term loan facility and the revolving facility have substantial restrictions and affirmative covenants and Aventine
may have difficulty obtaining additional credit (if needed), which could adversely affect Aventine’s operations.
As of December 31, 2014, Aventine had an
aggregate of approximately $161 million in debt outstanding due primarily to a $140 million term loan facility (as amended, and
as may be amended, supplemented or otherwise modified from time to time, sometimes referred to as the Term Loan Facility) with
Citibank N.A., as administrative and collateral agent (sometimes referred to as the Term Loan Agreement). In addition, Aventine
has a $40 million revolving credit facility with Alostar Bank of Commerce as administrative agent (as amended, and as may be amended,
supplemented or otherwise modified from time to time, sometimes referred to as the Revolving Facility), and has borrowed approximately
$19 million as of December 31, 2014 under that facility. As a result of Aventine’s indebtedness, Aventine will use
a portion of cash flow to pay interest and principal when due, which will reduce the cash available to finance Aventine’s
operations and other business activities and could limit Aventine’s flexibility in planning for, or reacting to, changes
in Aventine’s business and the industry in which Aventine operates.
Aventine’s indebtedness under the Term
Loan Facility and the Revolving Facility restricts Aventine’s ability to engage in certain debt, dividend and equity activities.
Aventine is also required to comply with
certain affirmative covenants. Aventine’s ability to comply with these restrictions and covenants in the future is uncertain
and will be affected by the levels of its cash flow from Aventine’s operations and events or circumstances beyond Aventine’s
control. Aventine’s failure to comply with any of the restrictions and covenants could result in an event of default, which,
if it continues beyond any applicable cure periods, could cause all of Aventine’s existing indebtedness to be immediately
due and payable. As of the date of this joint proxy statement/prospectus, Aventine is in compliance with the covenants of the
Term Loan Agreement and Revolving Facility.
Aventine is currently engaged in litigation regarding
the Aurora Coop’s option to purchase the Aurora West Facility.
Among other legal claims, the
Aurora Coop has filed legal claims against Aventine asserting that it has the right, pursuant to an agreement between
Aventine and the Aurora Coop, dated March 23, 2010, to exercise an option to acquire the 84 acres of land upon which
Aventine’s Aurora, Nebraska 110 million gallon ethanol production facility (sometimes referred to as the Aurora West
Facility) is located, together with the Aurora West Facility and all related improvements, for a purchase price of $16,500
per acre (or $1,386,000 in the aggregate). The Aurora Coop asserts that its contractual right to exercise this option arose
on July 1, 2012 due to Aventine’s alleged failure to complete construction of the Aurora West Facility as of such date.
Aventine disputes the allegations and claims asserted by the Aurora Coop, and Aventine denies the validity and effectiveness
of the Aurora Coop’s exercise of its option to purchase the land on which the Aurora West Facility is located. Aventine
has asserted in its legal filings that it has satisfied its contractual obligations with respect to the completion of the
plant as of the required date. Aventine has advised that it will continue to vigorously defend against any assertion that the
Aurora Coop has any right to repurchase the land or any improvements on the land. The action is currently pending in the
United States District Court, Nebraska. If Aventine is unsuccessful in defending this litigation, a number of outcomes may
occur, including, without limitation, the conveyance of the land on which the Aurora West Facility is located (together with
the Aurora West Facility and all related improvements) to the Aurora Coop for a purchase price that is substantially below
the fair market value of the land and the facility, which Aventine believes would be an inequitable resolution of this
claim, together with an unspecified amount of damages to the Aurora Coop related to the income the Aurora Coop alleges that
it could have generated if the land had been conveyed as of an earlier date. An adverse outcome in Aventine’s defense
of this litigation, could materially adversely affect Aventine’s business, financial condition, and results of
operations. See “The Companies—Aventine Renewable Energy Holdings, Inc.—Legal Proceedings.”
An affiliate of Aventine is currently engaged in a dispute
in connection with its storage of surplus beet sugar and amounts allegedly owed by such affiliate.
In 2013, Aventine Renewable Energy, Inc.,
a wholly owned affiliate of Aventine (sometimes referred to as ARE, Inc.), purchased surplus beet sugar through a USDA program
for Aventine’s operations. The Western Sugar Cooperative (sometimes referred to as Western Sugar) (among other entities)
warehoused this surplus sugar. ARE, Inc. paid for the warehousing of this sugar from inception of the relationship. Western Sugar,
however, subsequently asserted that certain penalty rates for the storage of this product should have applied despite the lack
of an agreement to such rates by ARE, Inc. Aventine and ARE, Inc. had been attempting to resolve the matter short of formal litigation.
On February 27, 2015, Western Sugar filed an action in the United States District Court, District of Colorado, seeking payment
of the penalty storage fees as “expectation damages,” in the amount of approximately $8.6 million. Aventine considers
these claims to be without merit and will aggressively defend against them. See “The Companies—Aventine Renewable
Energy Holdings, Inc.—Legal Proceedings.”
Aventine may be unable to secure additional financing.
Aventine’s ability to arrange (in addition
to the Revolving Facility and the Term Loan Facility) financing (including any extension or refinancing), and the cost of additional
financing, are dependent upon numerous factors. Other factors affecting Aventine’s access to financing include:
|
· |
general economic and capital market conditions; |
|
· |
conditions in biofuels markets; |
|
· |
regulatory developments; |
|
· |
credit availability from banks or other lenders for Aventine and Aventine’s industry peers, as well as the economy in general; |
|
· |
investor confidence in the biofuels industry and in Aventine; |
|
· |
the continued reliable operation of Aventine’s ethanol production facilities; and |
|
· |
provisions of tax and securities laws that are conducive to raising capital. |
Aventine may not be able to generate enough cash flow to meet
its debt obligations.
Aventine expects its earnings and cash flow
to vary significantly from year to year due to the volatile nature of its industry. As a result, the amount of debt Aventine can
manage in some periods may not be appropriate for Aventine in other periods. Additionally, Aventine’s future cash flow may
be insufficient to meet its debt obligations and commitments. Any insufficiency could negatively impact Aventine’s business.
A range of economic, competitive, business and industry factors will affect Aventine’s future financial performance, and,
as a result, Aventine’s ability to generate cash flow from operations, and to pay its debt. Many of these factors, such as
ethanol prices, corn prices, economic and financial conditions in Aventine’s industry and the global economy or competitive
initiatives of Aventine’s competitors are beyond Aventine’s control.
If Aventine does not generate enough cash flow
from operations to satisfy its debt obligations, Aventine may have to undertake alternative financing plans, such as refinancing
or restructuring its debt, selling assets, reducing or delaying capital investments or raising additional capital.
Aventine cannot make any assurances that undertaking
alternative financing plans, if necessary, would allow Aventine to meet its debt obligations. Aventine’s inability to generate
sufficient cash flow to satisfy debt obligations, or to obtain alternative financing, could materially and adversely affect Aventine’s
business, financial condition, and results of operations.
Aventine’s business is dependent upon the availability
and price of corn. Significant disruptions in the supply of corn will materially affect Aventine’s operating results. In
addition, since Aventine cannot always pass on increases in corn prices to its customers, continued periods of historically high
corn prices could also materially adversely affect its operating results.
The principal raw material Aventine uses to
produce ethanol and ethanol by-products is corn. In general, higher corn prices produce lower profit margins and, therefore, represent
unfavorable market conditions. This is especially true when market conditions do not allow Aventine to pass along increased corn
costs to its customers.
The price of corn is influenced by general
economic, market, and regulatory factors. These factors include weather conditions, farmer planting decisions, government policies,
and subsidies with respect to agriculture and international trade and global demand and supply. The significance and relative
impact of these factors on the price of corn is difficult to predict. Factors such as severe weather or crop disease could have
an adverse impact on Aventine’s business because Aventine may be unable to pass on higher corn costs to its customers. Any
event that tends to negatively impact the supply of corn will tend to increase prices and potentially harm Aventine’s business.
The increasing ethanol capacity could boost demand for corn and result in increased prices for corn.
The market for natural gas is subject to market conditions
that create uncertainty in the price and availability of the natural gas that Aventine utilizes in its manufacturing process.
Aventine relies upon third parties for its supply
of natural gas which is consumed in the production of ethanol. The prices for and availability of natural gas are subject to volatile
market conditions. These market conditions often are affected by factors beyond Aventine’s control such as weather conditions,
overall economic conditions and foreign and domestic governmental regulation and relations. Significant disruptions in the supply
of natural gas could temporarily impair Aventine’s ability to produce ethanol for its customers. Increases in natural gas
prices or changes in Aventine’s natural gas costs relative to natural gas costs paid by competitors may adversely affect
Aventine’s results of operations and financial condition.
Fixed price and gasoline related contracts for ethanol may
be at a price level lower than the prevailing price.
At any given time, contract prices for ethanol
may be at a price level different from the current prevailing price, and such a difference could materially adversely affect Aventine’s
results of operations and financial condition.
Aventine may engage in hedging or derivative transactions
which involve risks that can harm Aventine’s business.
In an attempt to minimize the effects of the
volatility of the price of corn, natural gas, electricity and ethanol (sometimes referred to as commodities), Aventine may take
economic hedging positions in the commodities. Economic hedging arrangements also expose Aventine to the risk of financial loss
in situations where the other party to the hedging contract defaults on its contract or there is a change in the expected differential
between the underlying price in the hedging agreement and the actual price of the commodities. Although Aventine attempts to link
its economic hedging activities to sales plans and pricing activities, occasionally such hedging activities can themselves result
in losses. As a result, Aventine’s results of operations may be adversely affected during periods in which corn and/or natural
gas prices increase.
Changes in ethanol prices can affect the value of Aventine’s
inventory which may significantly affect Aventine’s profitability.
Aventine’s inventory is valued based upon
a weighted average of Aventine’s cost to produce ethanol and the price it pays for ethanol that it purchases from other producers.
Changes, either upward or downward, in Aventine’s purchased cost of ethanol or Aventine’s production costs, will cause
the inventory value to fluctuate from period to period, perhaps significantly. These changes in value flow through Aventine’s
statement of operations as the inventory is sold and can significantly increase or decrease Aventine’s profitability.
The relationship between the sales price of Aventine’s
by-products and the price it pays for corn can fluctuate significantly which may affect Aventine’s results of operations
and profitability.
Aventine sells co-products and by-products from
the ethanol production process in order to offset corn costs and increase profitability. Historically, sales prices for these co-products
have tracked along with the price of corn. However, there have been occasions when the value of these co-products and by-products
has lagged behind increases in corn prices. As a result, Aventine may occasionally generate less revenue from the sale of these
co-products and by-products relative to the price of corn. In addition, several of Aventine’s co-products compete with similar
products made from other plant feedstock. The cost of these other feedstocks may not rise as corn prices increase. Consequently,
the price Aventine may receive for these products may not rise as corn prices rise, thereby lowering Aventine’s cost recovery
percentage relative to corn.
Fluctuations in the demand for gasoline may reduce demand
for ethanol.
Ethanol is marketed as an oxygenate to reduce
vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended, and as
a fuel extender. As a result, ethanol demand has historically been influenced by the supply of and demand for gasoline. If gasoline
demand decreases, Aventine’s ability to sell its product and Aventine’s results of operations and financial condition
may be materially adversely affected.
Aventine sells ethanol primarily to the major oil companies
and traders and therefore Aventine can from time to time be subject to a high degree of concentration of sales and accounts receivable.
Aventine sells ethanol to most of the major
integrated oil companies and a significant number of large, independent refiners and petroleum wholesalers. Aventine’s trade
receivables result primarily from Aventine’s ethanol marketing operations. As a general policy, collateral is not required
for receivables, but customers’ financial condition and creditworthiness are evaluated regularly. If Aventine were to suddenly
lose a major customer and not be able to replace that demand for product very quickly, it could have a material impact on Aventine’s
sales and profitability.
Aventine is substantially dependent on its operational facilities
and any operational disruption could result in a reduction of sales volumes and could cause Aventine to incur substantial expenditures.
As of December 31, 2014, the substantial majority
of Aventine’s income was derived from the sale of ethanol and the related co-products/by-products that were produced at Aventine’s
facilities. Aventine’s operations may be subject to significant interruption if any of Aventine’s facilities experiences
a major accident or is damaged by severe weather or other natural disaster. In addition, Aventine’s operations may be subject
to labor disruptions and unscheduled downtime, or other hazards inherent in Aventine’s industry. Some of those hazards may
cause personal injury and loss of life, severe damage to or destruction of property, natural resources and equipment, pollution
and environmental damage, clean-up responsibilities, and repairs to resume operations and may result in suspension or termination
of operations and the imposition of civil or criminal penalties. As protection against these hazards, Aventine maintains property,
business interruption and casualty insurance which Aventine believes is in accordance with customary industry practices, but Aventine
cannot provide any assurance that this insurance will be adequate to fully cover the potential hazards described above or that
Aventine will be able to renew this insurance on commercially reasonable terms or at all.
Risks associated with the operation of Aventine’s production
facilities may have a material adverse effect on Aventine’s business.
Aventine’s revenue is dependent on the
continued operation of Aventine’s various production facilities. The operation of production plants involves many risks including:
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the breakdown, failure or substandard performance of equipment or processes; |
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inclement weather and natural disasters; |
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the need to comply with directives of, and obtain and maintain all necessary permits from, governmental agencies; |
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raw material supply disruptions; |
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labor force shortages, work stoppages, or other labor difficulties; and |
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transportation disruptions. |
The occurrence of material operational problems, including but not
limited to the above events, may have an adverse effect on the productivity and profitability of a particular facility, or to Aventine
as a whole.
Aventine is attempting to establish a rail connection in conjunction
with Burlington Northern Santa Fe Railroad Company.
Aventine is using its commercially reasonable
efforts to complete all necessary arrangements, including engineering, design and contracting with the Burlington Northern Santa
Fe Railroad Company (sometimes referred to as the BNSF) as promptly as practicable, in order to establish a new connection through
the rail facilities of Aventine’s affiliate, Nebraska Energy, L.L.C. (sometimes referred to as NELLC), to the inner rail
loop track belonging to Aventine’s Aurora West Facility along with the associated “diamond switch” crossing
the exterior rail track loop (sometimes referred to as the Exterior Track
Loop), along a path that lies entirely on land owned by NELLC or Aventine’s subsidiary, Aventine Renewable Energy
– Aurora West, LLC, such that the Aurora West Facility will be able to ship ethanol by rail in unit trains and single cars.
However, there are no guarantees that Aventine will be able to complete the rail connection on a certain schedule (or at all).
If such connection is not obtained it could have an adverse effect on Aventine’s business, results of operations and financial
condition.
The use and demand for ethanol and its supply are highly dependent
on various federal and state legislation and regulation, and any changes in legislation or regulation could cause the demand for
ethanol to decline or its supply to increase, which could have a material adverse effect on Aventine’s business, results
of operations and financial condition.
Various federal and state laws, regulations
and programs have led to increased use of ethanol in fuel. Among these regulations are the renewable fuel standard (sometimes
referred to as the RFS), which requires an increasing amount of renewable fuels to be used in the United States each year and the
federal “farm bill,” which establishes federal subsidies for agricultural commodities including corn, Aventine’s
primary feedstock. These laws, regulations, and programs are regularly changing, and sections of the RFS currently are the subject
of legal and political challenges. Federal and state legislators and environmental regulators could adopt or modify laws, regulations,
or programs that could affect adversely the use of ethanol. For example, California’s Low Carbon Fuel Standard Program makes
it difficult for corn-based ethanol produced in many Midwestern states to be used as a fuel in California.
Aventine may be adversely affected by environmental, health
and safety laws, regulations and liabilities.
Aventine is subject to extensive federal, state
and local environmental, health and safety laws, regulations and permit conditions (and interpretations thereof), including, among
other things, those relating to the discharge of hazardous and other waste materials into the air, water, and ground, the generation,
storage, handling, use, transportation and/or disposal of hazardous materials, and the health and safety of its employees. Compliance
with these laws, regulations, and permits requires Aventine to incur significant capital and other costs, including costs to obtain
and maintain expensive pollution control equipment. These regulations may also require Aventine to make operational changes to
limit actual or potential impacts to the environment. A violation of these laws, regulations, or permit conditions can result in
substantial administrative and civil fines and penalties, criminal sanctions, imposition of clean-up and site restoration costs
and liens, suspension or revocation of necessary permits, licenses and authorizations and/or the issuance of orders enjoining or
limiting Aventine’s current or future operations. In addition, environmental laws and regulations (and interpretations thereof)
change over time, and any such changes, more vigorous enforcement policies or the discovery of currently unknown conditions may
require substantial additional environmental expenditures.
In addition, the hazards and risks associated
with producing and transporting Aventine’s products (such as fires, natural disasters, explosions, abnormal pressures, and
spills) may result in releases of hazardous substances and other waste materials, and may result in claims from governmental authorities
or third parties relating to actual or alleged personal injury, property damage, or damages to natural resources. Aventine maintains
insurance coverage against some, but not all, potential losses associated with its operations. Aventine believes that its insurance
is adequate for the industry, but losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance
coverage. The occurrence of events which result in significant personal injury or damage to Aventine’s property, natural
resources or third parties that is not covered by insurance could have a material adverse impact on Aventine’s results of
operations and financial condition.
Aventine depends on rail, truck, and barge transportation
for delivery of corn to it and the distribution of ethanol to its customers.
Aventine depends on rail, truck, and barge
transportation for delivery of corn to it and/or the distribution of ethanol and co-products to its customers. Ethanol is not
currently distributed by pipeline. Although it is not anticipated that the current litigation with the Aurora Coop will have a
material impact on Aventine’s transportation services, disruption from any other source to the timely supply of Aventine’s
transportation services or increases in the cost of these services for any reason, including the availability or cost of fuel
or railcars to serve Aventine’s facilities, regulations affecting the industry, or labor stoppages in the transportation
industry, could have an adverse effect on its ability to distribute ethanol or other products to its customers, and could have
a material adverse effect on Aventine’s financial performance.
Aventine, and some of its major customers, have unionized
employees and could be adversely affected by labor disputes.
Some of Aventine’s employees and some
employees of Aventine’s major customers are unionized. At December 31, 2014, Aventine’s Pekin, Illinois
wet mill production employees were unionized. The unionized employees are covered by a collective bargaining agreement between
Aventine’s subsidiary, Aventine Renewable Energy, Inc., and the United Steel, Paper and Forestry, Rubber, Manufacturing,
Energy, Allied Industry and Service Workers International Union, on behalf of Local 7-662 (sometimes referred to as the Union).
Although Aventine does not have any recent experience with work stoppages by its employees, the collective bargaining agreement
may not prevent a strike or work stoppage in the future, and any such work stoppage could have a material adverse effect
on Aventine’s business, financial condition, and results of operations. There is no certainty that the current collective
bargaining agreement will be extended or that a new collective bargaining agreement will be reached.
If Aventine is unable to attract and retain key personnel,
its ability to operate effectively may be impaired.
Aventine’s ability to operate its business
and implement strategies depends, in part, on the efforts of its executive officers and other key employees. Aventine’s management
philosophy of cost-control means that it operates with a limited number of corporate personnel, and its commitment to a less centralized
organization also places greater emphasis on the strength of local management. Aventine’s future success will depend on,
among other factors, its ability to attract and retain qualified personnel, particularly executive and senior plant management.
The loss of the services of any of Aventine’s key employees or the failure to attract or retain other qualified personnel
could have a material adverse effect on its business or business prospects.
If Aventine’s internal computer network and applications
suffer disruptions or fail to operate as designed, Aventine’s operations will be disrupted and its business may be harmed.
Aventine relies on network infrastructure and
enterprise applications, and internal technology systems for its operational, marketing support and sales, and product development
activities. The hardware and software systems related to such activities are subject to damage from earthquakes, floods, lightning,
tornadoes, fire, power loss, telecommunication failures, and other similar events. They are also subject to acts such as computer
viruses, physical or electronic vandalism or other similar disruptions that could cause system interruptions and loss of critical
data, and could prevent Aventine from fulfilling its customers’ orders. Aventine has developed disaster recovery plans and
backup systems to reduce the potentially adverse effects of such events, but there are no assurances such plans and systems would
be sufficient. Any event that causes failures or interruption in Aventine’s hardware or software systems could result in
disruption of its business operations, have a negative impact on its operating results, and damage Aventine’s reputation.
Aventine’s results of operations may be adversely affected
by technological advances.
The development and implementation of new technologies
may result in a significant reduction in the costs of ethanol production. Aventine cannot predict when new technologies may become
available, the rate of acceptance of new technologies by its competitors or the costs associated with such new technologies. In
addition, advances in the development of alternatives to ethanol, or corn ethanol in particular, could significantly reduce demand
for or eliminate the need for ethanol, or corn ethanol in particular, as a fuel oxygenate or octane enhancer.
Any advances in technology which require significant
capital expenditures for Aventine to remain competitive or which otherwise reduce demand for ethanol will have a material adverse
effect on Aventine’s results of operations and financial condition.
Risks Related to the Combined Company if the Merger is Completed
The failure to integrate successfully the businesses of Pacific
Ethanol and Aventine in the expected timeframe would adversely affect the combined company’s future results following the
completion of the merger.
The success of the merger will depend, in large
part, on the ability of the combined company following the completion of the merger to realize the anticipated benefits from combining
the businesses of Pacific Ethanol and Aventine. To realize these anticipated benefits, the combined company must successfully integrate
the businesses of Pacific Ethanol and Aventine. This integration will be complex and time-consuming.
The failure to integrate successfully and to
manage successfully the challenges presented by the integration process may result in the combined company’s failure to achieve
some or all of the anticipated benefits of the merger.
Potential difficulties that may be encountered
in the integration process include the following:
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lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company; |
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complexities associated with managing the larger, more complex, combined business; |
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integrating personnel from the two companies; |
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potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the merger; and |
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performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations. |
The combined company’s future results will suffer if
the combined company does not effectively manage its expanded operations following the merger.
Following the merger, the size of the combined
company’s business will be significantly larger than the current businesses of Pacific Ethanol and Aventine. The combined
company’s future success depends, in part, upon its ability to manage this expanded business, which will pose substantial
challenges for the combined company’s management, including challenges related to the management and monitoring of new operations
and associated increased costs and complexity. Neither Pacific Ethanol nor Aventine can assure you that the combined company will
be successful or that the combined company will realize the expected operating efficiencies, annual net operating synergies, revenue
enhancements and other benefits currently anticipated to result from the merger.
The loss of key personnel could have a material adverse effect
on the combined company’s business, financial condition or results of operations.
The success of the merger will depend in part
on the combined company’s ability to retain key Pacific Ethanol and Aventine employees who continue employment with the combined
company after the merger is completed. It is possible that these employees might decide not to remain with the combined company
after the merger is completed. If these key employees terminate their employment, the combined company’s business activities
might be adversely affected, management’s attention might be diverted from integrating Pacific Ethanol and Aventine to recruiting
suitable replacements and the combined company’s business, financial condition or results of operations could be adversely
affected. In addition, the combined company might not be able to locate suitable replacements for any such key employees who leave
the combined company or offer employment to potential replacements on reasonable terms.
The success of the combined company will also depend on relationships
with third parties and pre-existing customers of Pacific Ethanol and Aventine, which relationships may be affected by customer
preferences or public attitudes about the merger. Any adverse changes in these relationships could adversely affect the combined
company’s business, financial condition or results of operations.
The combined company’s success will be
dependent on the ability to maintain and renew business relationships, including relationships with pre-existing customers of both
Pacific Ethanol and Aventine, and to establish new business relationships. There can be no assurance that the business of the combined
company will be able to maintain pre-existing customer contracts and other business relationships, or enter into or maintain new
customer contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business
relationships could have a material adverse effect on the business, financial condition or results of operations of the combined
company.
The combined company will incur significant transaction and
merger-related costs in connection with the merger.
Pacific Ethanol and Aventine expect to incur
significant costs associated with completing the merger and combining the operations of the two companies. Although the exact amount of these costs is not yet known, Pacific Ethanol and Aventine estimate that
these costs will be approximately $2.4 million in the aggregate. In addition, there may be unanticipated costs associated with the integration. Although Pacific
Ethanol and Aventine expect that the elimination of duplicative costs and other efficiencies may offset incremental transaction
and merger-related costs over time, these benefits may not be achieved in the near term or at all.
The combined company will record goodwill that could become
impaired and adversely affect the combined company’s operating results.
The merger will be accounted for as an acquisition
by Pacific Ethanol in accordance with accounting principles generally accepted in the United States. Under the acquisition method
of accounting, the assets and liabilities of Aventine will be recorded, as of completion, at their respective fair values and added
to those of Pacific Ethanol. The reported financial condition and results of operations of Pacific Ethanol issued after completion
of the merger will reflect Aventine balances and results after completion of the merger, but will not be restated retroactively
to reflect the historical financial position or results of operations of Aventine for periods prior to the merger. Following completion
of the merger, the earnings of the combined company will reflect acquisition accounting adjustments. See “Unaudited Pro Forma
Combined Condensed Financial Statements” beginning on page 229.
Under the acquisition method of accounting,
the total purchase price will be allocated to Aventine’s tangible assets and liabilities and identifiable intangible assets
based on their fair values as of the date of completion of the merger. The excess of the purchase price over those fair values
will be recorded as goodwill. Pacific Ethanol and Aventine expect that the merger will result in the creation of goodwill based
upon the application of the acquisition method of accounting. To the extent the value of goodwill or intangibles becomes impaired,
the combined company may be required to incur material charges relating to such impairment. Such a potential impairment charge
could have a material impact on the combined company’s operating results.
Pacific Ethanol’s ability to utilize net operating loss
carryforwards and certain other tax attributes may be limited.
Federal and state income tax laws impose restrictions
on the utilization of net operating loss (sometimes referred to as NOL) and tax credit carryforwards in the event that an “ownership
change” occurs for tax purposes, as defined by Section 382 of the Code. In general, an ownership change occurs when stockholders
owning 5% or more of a “loss corporation” (a corporation entitled to use NOL or other loss carryovers) have increased
their ownership of stock in such corporation by more than 50 percentage points during any three-year period. The annual base limitation
under Section 382 of the Code is calculated by multiplying the loss corporation’s value at the time of the ownership change
by the greater of the long-term tax-exempt rate determined by the IRS in the month of the ownership change or the two preceding
months.
As of December 31, 2014, Pacific Ethanol
and Aventine had $28.3 million and $63.5 million, respectively, of NOLs that are currently limited in their annual use.
As a result of the merger, it is possible that either or both Pacific Ethanol and Aventine will be deemed to have undergone an
“ownership change” for purposes of Section 382 of the Code. Accordingly, the combined company’s ability to utilize
Pacific Ethanol’s and Aventine’s net operating loss carryforwards may be substantially limited. These limitations
could in turn result in increased future tax payments for the combined company, which could have a material adverse effect on
the business, financial condition or results of operations of the combined company.
Aventine is currently engaged in litigation matters
that may prevent the combined company from crossing the Exterior Track Loop and could require the combined company to purchase
grain for the Aurora West Facility exclusively from the Aurora Coop.
Among other legal claims, the Aurora
Coop has filed legal claims against Aventine alleging that Aventine (and two of its subsidiaries) is in breach of the parties’
grain and marketing and master development agreements (sometimes referred to as the Aurora Coop Grain Agreements). Aventine denies
that it is in breach of the Aurora Coop Grain Agreements and maintains in a counterclaim that the Aurora Coop has breached the
parties’ grain supply agreement (sometimes referred to as the Grain Supply Agreement) and the marketing agreement (sometimes
referred to as the Marketing Agreement). As a result, Aventine issued notice of termination of the Grain Supply Agreement and
the Marketing Agreement. The Aurora Coop seeks a judicial order declaring that Aventine is in breach of the Aurora Coop Grain
Agreements and further declaring that Aventine’s termination of the Grain Supply Agreement and Marketing Agreement is ineffective.
If Aventine is unsuccessful in this matter, the Grain Supply Agreement will not be terminated and, as a result, Aventine could
be required to purchase grain for the Aurora West Facility exclusively from the Aurora Coop at a price higher than it otherwise
may be able to negotiate. The inability to purchase corn for the Aurora West Facility on market terms could have a material adverse
impact on the financial condition or results of operations of the combined company. On the other hand, if Aventine is successful
in this matter, the Grain Supply Agreement and Marketing Agreement may be terminated. The termination of the Grain Supply Agreement,
however, may trigger a termination provision in the parties’ Double Track Loop Easement and Use Agreement, thus terminating
an easement allowing Aventine the use of the Exterior Track Loop (sometimes referred to as the Easement Agreement).
The Aurora Coop has also filed a suit
against Aventine seeking a judicial declaration that Aventine’s right to use the Exterior Track Loop is terminated if the
Grain Supply Agreement, which is the subject of the litigation referred to above, is terminated. As discussed above,
Aventine has issued notice of termination of the Grain Supply Agreement. Aventine disputes the Aurora Coop’s assertion that
its easement rights to use the Exterior Track Loop have been terminated or extinguished. The easement would allow Aventine to
use the Exterior Track Loop and to access the BNSF line by crossing the Exterior Track Loop, but Aventine’s use of the easement
is currently blocked pending the resolution of these matters. If, as a result of the above discussed matters, it is determined
that the Grain Supply Agreement is terminated and that such termination triggers a termination of the Easement Agreement, Aventine
will be prevented from using the Exterior Track Loop and accessing the BNSF line by crossing the Exterior Track Loop under the
terms of the easement.
However, Aventine recently constructed
a diamond switch on adjoining land owned by Aventine’s affiliate, NELLC. This diamond switch allows Aventine to move rail
cars between the Aurora West Facility and the BNSF line by crossing the Exterior Track Loop on land owned by NELLC and,
therefore, obviates the need for the easement granted under the Easement Agreement. The Aurora Coop sought a temporary restraining
order to block Aventine’s construction and use of the diamond switch, which was denied by the Court, and the Aurora Coop
is seeking to amend the above case to challenge Aventine’s construction and use of the diamond switch. If the Aurora Coop
is permitted to bring such a claim and if Aventine is unsuccessful in defending this matter and if the Easement Agreement is terminated
as a result of the proceedings surrounding the Grain Supply Agreement (as discussed above), Aventine would not be able to use
the diamond switch or the easement, and thus would be unable to use the railroad to transport its products between the Aurora
West Facility and the BNSF line. If Aventine is unable to use railroad transportation to access the BNSF line from the Aurora
West Facility, it would be forced to use other means of transportation, such as truck transport, which would not be as effective
and cost efficient as railroad transportation. Aventine’s inability to use railroad transportation could have a materially
adverse impact on the financial condition or results of operations of the combined company. If, on the other hand, Aventine is
successful in defending the action regarding the diamond switch but the Easement Agreement is terminated as a result of the proceedings
surrounding the Grain Supply Agreement (as discussed above), the combined company’s ability to cross or use a portion of
the Exterior Track Loop may nonetheless be limited by the courts. For example, even if the combined company is able to transfer
single rail cars across between the Aurora West Facility and the BNSF line, it may be unable to transfer unit trains (i.e., trains
comprised of 100 or more rail cars). Any significant restrictions on the combined company’s use of the diamond switch to
cross the Exterior Track Loop could have a material adverse impact on the financial condition or results of operations of the
combined company inasmuch as the combined company may not be able to capture the cost advantages and efficiencies of shipping
products in the larger conveyance format. See “The Companies—Aventine Renewable Energy Holdings, Inc.—Legal
Proceedings.”
The combined company’s indebtedness following the merger
will be greater than Pacific Ethanol’s existing indebtedness. Therefore, it may be more difficult for the combined company
to pay or refinance its debts and the combined company may need to divert its cash flow from operations to debt service payments.
The additional indebtedness could limit the combined company’s ability to pursue other strategic opportunities and increase
its vulnerability to adverse economic and industry conditions.
In connection with the merger, the combined
company will also be responsible for Aventine’s outstanding debt. Pacific Ethanol’s total indebtedness as of December
31, 2014 was approximately $34.5 million. Pacific Ethanol’s pro forma total consolidated indebtedness as of December
31, 2014, after giving effect to the merger, would have been approximately $192.2 million (all of which would be non-current).
The combined company’s debt service obligations with respect to this increased indebtedness could have an adverse impact
on its earnings and cash flows, which after the merger would include the earnings and cash flows of Aventine, for as long as the
indebtedness is outstanding.
The combined company’s increased indebtedness
could also have important consequences to holders of Pacific Ethanol common stock. For example, it could:
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make it more difficult for the combined company to pay or refinance its debts as they become due during adverse economic and industry conditions because any decrease in revenues could cause the combined company to not have sufficient cash flows from operations to make its scheduled debt payments; |
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limit the combined company’s flexibility to pursue other strategic opportunities or react to changes in its business and the industry in which it operates and, consequently, place the combined company at a competitive disadvantage to its competitors with less debt; or |
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require a substantial portion of the combined company’s cash flows from operations to be used for debt service payments, thereby reducing the availability of its cash flow to fund working capital, capital expenditures, acquisitions, dividend payments and other general corporate purposes. |
Based upon current levels of operations, management
of Pacific Ethanol and Aventine expect the combined company to be able to generate sufficient cash on a consolidated basis to make
all of the principal and interest payments when such payments are due under its existing credit facilities, indentures and other
instruments governing their outstanding indebtedness, and the indebtedness of Aventine that may remain outstanding after the merger,
but there can be no assurance that the combined company will be able to repay or refinance such borrowings and obligations.
The merger may not be accretive, and may be dilutive, to Pacific
Ethanol’s earnings per share, which may negatively affect the market price of Pacific Ethanol common stock.
Although the merger is expected to be accretive
to earnings per share, the merger may not be accretive, and may be dilutive, to Pacific Ethanol’s earnings per share. The
expectation that the merger will be accretive is based on preliminary estimates that may materially change. In addition, future
events and conditions could decrease or delay any accretion, result in dilution or cause greater dilution than may be expected,
including:
|
· |
adverse changes in market conditions; |
|
· |
commodity prices for corn, ethanol, gasoline and crude oil; |
|
· |
competitive conditions; |
|
· |
laws and regulations affecting the ethanol business; |
|
· |
capital expenditure obligations; and |
|
· |
general economic conditions. |
Any dilution of, or decrease or delay of any
accretion to, Pacific Ethanol’s earnings per share could cause the price of Pacific Ethanol’s common stock to decline.
Business issues currently faced by one company may be imputed
to the operations of the other company or the combined company.
To the extent that either Pacific Ethanol or
Aventine currently has or is perceived by customers to have operational challenges, those challenges may raise concerns by existing
customers of the other company following the merger which may limit or impede Pacific Ethanol’s future ability to maintain
relationships with those customers.
Resales of shares of Pacific Ethanol common stock following
the merger and additional obligations to issue shares of Pacific Ethanol common stock may cause the market price of Pacific Ethanol
common stock to decrease.
As of March 31, 2015, Pacific Ethanol
had 24,715,029 shares of common stock issued and outstanding and approximately 1,709,963 shares of common stock subject to outstanding
options, warrants and other rights to purchase or acquire its shares, including the rights of holders of Pacific Ethanol Series
B Preferred Stock to convert shares of Series B Preferred Stock into shares of Pacific Ethanol common stock. Pacific Ethanol currently
estimates that it will issue up to an aggregate of approximately 17,755,300 shares of Pacific Ethanol common stock and non-voting
common stock upon the closing of the merger, assuming no exercise or conversion of outstanding options and warrants. A majority
of the newly issued shares are subject to stockholders agreements entered into by Pacific Ethanol and certain stockholders of
Aventine prohibiting the sale of the shares of Pacific Ethanol issued in connection with the merger for various periods of time.
The issuance of these new shares of Pacific Ethanol common stock and non-voting common stock, and the sale of these new shares
of common stock (including shares of common stock issuable upon conversion of shares of non-voting common stock issued in the
merger) by current Aventine stockholders (i) after the merger, for those Aventine stockholders not subject to the stockholders
agreements, or (ii) after applicable restrictive periods have passed for those Aventine stockholders subject to the stockholders
agreements, could have the effect of depressing the market price for shares of Pacific Ethanol common stock. In addition, the
issuance of Pacific Ethanol common stock upon exercise of outstanding Pacific Ethanol options and warrants or upon conversion
of Pacific Ethanol Series B Preferred Stock could also have the effect of depressing the market price for shares of Pacific Ethanol
common stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
The statements in this joint proxy statement/prospectus
and the documents incorporated by reference herein that are not historical statements, including statements regarding the expected
timetable for completing the merger, benefits and synergies of the merger, future opportunities for the combined company and products,
future financial performance and any other statements regarding Pacific Ethanol’s and Aventine’s future expectations,
beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts, are
forward-looking statements within the meaning of the federal securities laws. These statements are subject to numerous risks and
uncertainties, many of which are beyond the companies’ control, which could cause actual results to differ materially from
the results expressed or implied by the statements. These risks and uncertainties include, but are not limited to: failure to obtain
the required votes of Pacific Ethanol’s or Aventine’s stockholders; the timing to consummate the merger; the risk that
conditions to closing of the merger may not be satisfied or the closing of the merger may otherwise not occur; the risk that a
regulatory approval that may be required for the merger is not obtained or is obtained subject to conditions that are not anticipated;
the diversion of management time on transaction-related issues; the ultimate timing, outcome and results of integrating the operations
of Pacific Ethanol and Aventine and the ultimate outcome of Pacific Ethanol’s operating efficiencies applied to Aventine’s
products and services; the effects of the business combination of Pacific Ethanol and Aventine, including the combined company’s
future financial condition, results of operations, strategy and plans; expected synergies and other benefits from the merger and
the ability of Pacific Ethanol to realize such synergies and other benefits; expectations regarding regulatory approval of the
transaction; the possibility that Pacific Ethanol and Aventine may not be able to maintain relationships with their employees,
suppliers or customers as a result of the uncertainty surrounding the merger; direct or indirect effects on the combined company’s
business, financial condition or liquidity resulting from a change in its credit rating or the credit ratings of its counterparties
or competitors; results of litigation, settlements and investigations; actions by third parties, including governmental agencies;
changes in the demand for or price of ethanol can be significantly impacted by weakness in the worldwide economy; consequences
of audits and investigations by government agencies and legislative bodies and related publicity and potential adverse proceedings
by such agencies; protection of intellectual property rights and against cyber attacks; compliance with environmental laws; changes
in government regulations and regulatory requirements, particularly those related to the production of ethanol; compliance with
laws related to income taxes and assumptions regarding the generation of future taxable income; structural changes in the ethanol
industry; maintaining a highly skilled workforce; availability and cost of raw materials; and integration of acquired businesses
and operations of joint ventures.
Any forward-looking statements should be
considered in light of such important factors. Pacific Ethanol and Aventine undertake no obligation to revise or update publicly
any forward-looking statements for any reason. Readers are cautioned not to place undue reliance on any forward-looking statement,
which speaks only as of the date on which such statement is made or in the case of documents incorporated by reference, as of the
date of the document incorporated by reference.
All subsequent written and oral forward-looking
statements concerning the merger or other matters addressed in this joint proxy statement/prospectus and attributable to Pacific
Ethanol, Aventine or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained
or referred to in this joint proxy statement/prospectus.
The
Companies
Pacific Ethanol, Inc.
Pacific Ethanol is the leading producer
and marketer of low-carbon renewable fuels in the Western United States. Pacific Ethanol produces and markets all the ethanol
produced by the Pacific Ethanol Plants, markets all the ethanol produced by two other ethanol producers in California and markets
ethanol purchased from other third-party suppliers throughout the United States. Pacific Ethanol markets ethanol through its subsidiary,
Kinergy, and ethanol co-products, including WDG, a nutritious animal feed, and corn oil, for the Pacific Ethanol Plants.
Pacific Ethanol has extensive customer relationships
throughout the Western United States. Its ethanol customers are integrated oil companies and gasoline marketers who blend ethanol
into gasoline. Pacific Ethanol arranges for transportation, storage and delivery of ethanol purchased by its customers through
its agreements with third-party service providers in the Western United States, primarily in California, Arizona, Nevada, Utah,
Oregon, Colorado, Idaho and Washington. WDG customers are dairies and feedlots located near the Pacific Ethanol Plants. Corn oil
is sold to poultry and biodiesel customers.
Pacific Ethanol has extensive supplier relationships
throughout the Western and Midwestern United States. In some cases, it has marketing agreements with suppliers to market all of
the output of their facilities.
Pacific Ethanol was founded in February 2005,
is incorporated under the laws of the State of Delaware and is headquartered in Sacramento, California. Pacific Ethanol has ethanol
production facilities located in Stockton, California, Madera, California, Burley, Idaho and Boardman, Oregon.
Additional information about Pacific Ethanol
and its subsidiaries is included in documents incorporated by reference in this joint proxy statement/prospectus. See “Where
You Can Find More Information” beginning on page 257.
AVR Merger Sub, Inc.
Merger Sub, a wholly-owned subsidiary of Pacific
Ethanol, is a Delaware corporation formed on December 29, 2014 for the sole purpose of effecting the merger. Upon completion of
the merger, Merger Sub will merge with and into Aventine, with Aventine surviving as a wholly-owned subsidiary of Pacific Ethanol
after the merger.
Aventine Renewable Energy Holdings, Inc.
Aventine has been engaged in the production
and marketing of corn-based fuel-grade ethanol in the United States since 1981. Aventine markets and distributes ethanol to many
of the leading energy and trading companies in the United States. Aventine’s facilities also produce several co-products
while producing ethanol, such as distillers grain, corn gluten meal and feed, corn oil, corn germ and grain distillers dried yeast.
Aventine markets these co-products primarily to livestock producers and other end users as a substitute for corn and other sources
of starch and protein.
Founded in 2003, Aventine is incorporated in
Delaware. Its main office is located in Pekin, Illinois and it has operations in Pekin, Illinois and Aurora, Nebraska.
Aventine owns and operates a corn wet milling
plant in Pekin, Illinois, that produces approximately 100 million gallons of ethanol on an annual basis. In addition, Aventine
owns and operates a dry milling plant in Pekin, Illinois, that produces approximately 60 million gallons of ethanol on an annualized
basis. In addition, Aventine owns and operates two dry milling plants in Aurora, Nebraska, that produce approximately 155 million
gallons of ethanol annually. Aventine also owns a dry milling facility in Canton, Illinois, that has a nameplate capacity of 38
million gallons of ethanol per year, but is currently idled.
Business Overview
Today, Aventine derives its revenue primarily
from the sale of ethanol and co-products produced at its plants.
Ethanol Production
Aventine owns and operates a corn wet milling
plant in Pekin, Illinois (sometimes referred to as the Pekin wet mill). The Pekin wet mill produces approximately 100 million
gallons of ethanol on an annual basis. In addition, Aventine owns and operates a dry milling plant in Pekin, Illinois (sometimes
referred to as the Pekin dry mill). The Pekin dry mill produces approximately 60 million gallons of ethanol on an annualized basis.
Together, the Pekin wet mill and Pekin dry mill are sometimes collectively referred to as the Pekin facilities. In addition, Aventine
owns and operates two dry milling plants in Aurora, Nebraska (sometimes referred to as the Aurora facilities). These facilities
produce approximately 155 million gallons of ethanol annually. Aventine also owns a dry milling facility in Canton, Illinois (sometimes
referred to as the Canton facility). The Canton facility has a nameplate capacity of 38 million gallons of ethanol per year, but
is currently idled.
As typical in Aventine’s industry, Aventine’s
ethanol plants are set up to operate 24 hours per day, every day of the fiscal year. Occasionally, Aventine’s ethanol facilities
experience outages (both planned and unplanned) in order to perform routine maintenance (on average, approximately one week per
plant each year). Aventine’s ethanol plants may also experience unplanned outages for various reasons. Unplanned outages
are generally short-term in nature due to the negative impacts unplanned outages have on Aventine’s production efficiencies
and related profits.
Products
Aventine generates revenue from the following
products:
|
|
Year Ended
December 31, |
|
Percentage
of Total |
|
Year Ended
December 31, |
|
Percentage
of Total |
|
Year Ended
December 31, |
|
Percentage
of Total |
|
|
|
2014 |
|
Revenue |
|
2013 |
|
Revenue |
|
2012 |
|
Revenue |
|
|
|
(In millions, except
for percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol |
|
$ |
439.9 |
|
74.8% |
|
$ |
339.9 |
|
69.5 % |
|
$ |
327.7 |
|
68.3 % |
|
Co-Products |
|
148.1 |
|
25.2% |
|
146.4 |
|
30.5 % |
|
152.0 |
|
31.7 % |
|
Total |
|
$ |
588.0 |
|
100.0% |
|
$ |
480.3 |
|
100.0 % |
|
$ |
479.7 |
|
100.0 % |
|
Ethanol
Aventine’s principal product is fuel-grade
ethanol, an alcohol which is derived principally from corn. Ethanol is sold primarily for blending with gasoline to meet
mandates for the required consumption and use of biofuels, as an octane enhancer, as an oxygenate additive for the purpose of meeting
fuel emission standards, and as a fuel extender.
Co-Products
Additional revenue is generated through the
sale of co-products. The volume and portfolio of co-products produced varies with the level of ethanol production achieved
and production process used. In addition, the mix of these co-products can be shifted to increase revenues. Co-product
revenue is driven by both the quantity of by-products produced and the market price received for co-products.
In the wet milling process, the remaining parts
of the grain are processed into a number of different forms of protein used to feed livestock. The multiple co-products from
Aventine’s Pekin wet mill generates a higher level of cost recovery from corn than the principal co-product (dried distillers
grains with solubles (sometimes referred to as DDGS)) at Aventine’s dry milling facilities in Illinois and Nebraska.
The Pekin wet mill co-product portfolio includes
several products that are used in animal feed ingredients, such as corn gluten feed (both wet and dry), corn gluten meal, and corn
distillers with solubles (sometimes referred to as CCDS). Corn germ is produced and sold at the Pekin wet mill as corn oil for
human consumption. Aventine’s Pekin wet mill also produces grain distillers dried yeast which is sold primarily as a protein
additive in the animal and pet food industry, and a Kosher and Chametz free grain distillers dried yeast, which is processed into
a growing variety of products for use in animal and human food and fermentation applications. Carbon dioxide produced by the Pekin
Wet mill is used in beverage carbonation and dry ice production.
The dry mill facilities in Pekin, Illinois
and Aurora, Nebraska produce DDGS, wet distillers grains with soluble (sometimes referred to as WDGS), and corn oil as co-products.
These are sold for various consumer uses into large commodity markets. DDGS and WDGS are sold as a feed product to be included
in livestock feed rations. Corn oil is produced at Aventine’s Pekin dry mill and used in the biodiesel industry.
Customers
Some of Aventine’s customers have
purchased ethanol from Aventine for over ten years. For the year ended December 31, 2014, Aventine’s ten largest customers
accounted for approximately 59% of Aventine’s consolidated revenue.
Pricing
Ethanol is generally sold through
short-term contracts based upon indexed or fixed prices. Co-products are generally sold through short-term contracts based
upon fixed prices.
Raw Materials and Suppliers
Aventine’s principal raw material is #2
yellow corn. Corn requirements are contracted through a variety of sources, including farmers, grain elevators, and gain
cooperatives. Due to the Midwest location of Aventine’s ethanol facilities, Aventine has ample access to various corn markets
and suppliers.
The key elements of Aventine’s corn procurement
strategies are the assurance of a stable supply and the avoidance, where possible, of significant exposures to corn price fluctuations. Corn prices fluctuate daily, typically using the Chicago Board of Trade price as a benchmark. Corn is delivered to the facilities
via truck and railcars through local distribution networks.
Utilities
The production of ethanol requires the use of
natural gas and coal at Aventine’s facilities. From time to time, Aventine uses a combination of forward purchases
and financial hedge positions to minimize the effects of the volatility of the price of natural gas. Aventine’s Pekin wet
mill employs steam turbines to produce Aventine’s own electricity. Due to new air quality standards, Aventine is in the process
of replacing its coal equipment with natural gas. The result of this conversion will decrease Aventine’s energy consumption
and increase Aventine’s operating efficiency.
Employees
At December 31, 2014, Aventine had a total
of 295 full-time equivalent employees. Approximately 46% of the current full-time employees (comprised of the hourly employees
at the Pekin, Illinois facilities) are represented by the Union. The unionized employees are covered by a collective bargaining
agreement between Aventine’s subsidiary, Aventine Renewable Energy, Inc., and the Union. The contract with the Union is
scheduled to expire on October 31, 2015.
Competitive Strengths
Aventine’s competitive strengths include
the following:
|
· |
Strong Market Position. Aventine is a leading
producer and marketer of ethanol in the United States based on both gallons of ethanol produced and sold. For the years
ended December 31, 2014 and 2013, Aventine produced and sold 208.4 million and 208.1 million gallons of ethanol, respectively. |
|
· |
Strategic Diversification. Aventine’s facilities
are diversified across geography, fuel source, transportation capability, product lines and technology, allowing Aventine
to capitalize on market opportunities and limit its exposure to any one input or consumer market. Aventine’s Pekin,
Illinois facilities are located approximately two hours south of Chicago on the Illinois River, which provides Aventine with
low cost eastern corn-belt corn and access to the Midwest rail and truck markets, as well as the East Coast rail market. Being
located on the Illinois River also gives Aventine the ability to export its ethanol and co-products internationally. Aventine’s
Aurora, Nebraska location further diversifies Aventine with access to low cost western cornbelt corn, strong local feed demand
from livestock producers, and the ability to market ethanol to the West Coast and Southwest ethanol markets. |
|
· |
Co-located facilities reduce costs. Both of Aventine’s sites in Pekin, Illinois and Aurora, Nebraska have multiple ethanol production facilities in one location. Dual ethanol plant locations provide Aventine several advantages and synergies. Aventine effectively reduces it overall costs and maximized the efficiency of its equipment with the ability to share grain handling, ethanol storage, rail, barge and truck loading buildings and equipment, labor force and overhead compared to single ethanol plants built on greenfield sites. |
Competition
Aventine operates in a highly competitive
ethanol marketing and production industry. The top ten producers, of which Aventine is one, accounted for approximately
50% of total industry capacity. All of the top ten producers have annual production capacity exceeding 200 million gallons
per year. The largest ethanol producer’s share of domestic capacity was approximately 12% in 2014. According
to the Renewable Fuels Association (sometimes referred to as the RFA), the United States leads the world in ethanol production
with 210 bio-refineries in 28 states across the country as of December 2014.
Historically, the world’s ethanol producers
have competed primarily on a regional basis. Imports into the United States were generally limited by an import tariff (other
than from Caribbean basin countries which were exempt from this tariff up to specified limits). This tariff expired on December
31, 2011. In recent years, Aventine has faced competition from foreign producers. Brazil is the world’s second
largest ethanol producer. Brazil makes ethanol primarily from sugarcane, a process which has historically been lower in cost
than producing ethanol from corn. Several large companies produce ethanol in Brazil.
Business and Growth Strategies
Aventine has been pursuing the following business
and growth strategies:
|
· |
Capitalize on Current and Changing Regulation. Through continued investment in increasing production capacity and efficiency, Aventine is well positioned to take advantage of the current and changing regulatory environment in the ethanol industry. The original RFS program required 7.5 billion gallons of renewable fuel to be blended into gasoline by 2012. Under the EISA, the RFS program was expanded to increase the volume of renewable fuel required to be blended into transportation fuel to 36.0 billion gallons by 2022, of which 15.0 billion gallons relates to corn based ethanol. |
|
· |
Entry into new and diversified markets. Aventine is continually negotiating additional sales agreements. Aventine strives to enhance and optimize multiple modes of transportation and sources of production. In addition, numerous countries in Europe, Asia, and South America have increased the mandated use of renewable fuels, creating export opportunities for Aventine’s ethanol and co-products. |
Legal Proceedings
Aventine is subject to legal proceedings,
claims and litigation arising in the ordinary course of business, including those described in further detail below. Aventine
cannot predict the outcome of such matters or estimate the possible loss or range of loss, if any, because of considerable uncertainties
that exist. Therefore, it is possible that the outcome of those legal proceedings, claims and litigation could adversely affect
Aventine’s financial condition, results of operations or cash flows when resolved in a future period.
Aurora Coop—Option Dispute
On May 29, 2012, Aventine commenced suit
against the Aurora Coop, seeking declaratory relief. That suit alleged the Aurora Coop had improperly threatened to invoke a purported
option to acquire the land upon which the Aurora West Facility is located. The Aurora Coop then filed legal claims against Aventine,
on June 21, 2012, which were removed to and now are pending in the United States District Court for the District of Nebraska (Case
No. 4:12-cv-00230), asserting that it has the right, pursuant to an agreement between Aventine and the Aurora Coop, dated March
23, 2010, to exercise an option to acquire the 84 acres of land upon which the Aurora West Facility is located, together with
the Aurora West Facility and all related improvements, for a purchase price of $16,500 per acre (or $1,386,000 in the aggregate).
The Aurora Coop asserts that its contractual right to exercise this option arose on July 1, 2012 due to Aventine’s alleged
failure to complete construction of the Aurora West Facility as of such date and to operate at a certain rate of production. The
Aurora Coop seeks a judicial order requiring Aventine to convey the Aurora West Facility and the land upon which the Aurora West
facility is located to the Aurora Coop for the purchase price of set forth above. The Aurora Coop also seeks a judicial order
imposing a constructive trust and requiring Aventine to account for and pay to the Aurora Coop the greater of the profits which
Aventine received or may have received in the exercise of reasonable care in the operation of the Aurora West Facility after July
1, 2012. That is, the Aurora Coop also seeks an order requiring Aventine to pay an unspecified amount of damages to compensate
the Aurora Coop for damages it allegedly suffered as a result of Aventine’s purported delay in conveying title to the Aurora
West Facility and the land upon which it is located. Aventine disputes the allegations and claims asserted by the Aurora Coop,
and Aventine denies the validity and effectiveness of the Aurora Coop’s exercise of its option to purchase the land on which
the Aurora West Facility is located. Aventine has asserted in its legal filings that it has satisfied its contractual obligations
with respect to the completion of the plant as of the required date. The parties are currently engaged in extensive discovery.
Aventine will continue to vigorously defend against any assertion that the Aurora Coop has any right to repurchase the land or
any improvements on the land.
Aurora Coop—Grain Procurement
Dispute
On September 20, 2012, the Aurora Coop
filed a suit in the United States District Court for the District of Nebraska (Case No.4:12-cv-3200), naming Aventine as a defendant,
alleging that Aventine (and two of its subsidiaries) breached the parties’ Aurora Coop Grain Agreements. Specifically, the
Aurora Coop alleges that it procured 1.7 million bushels of corn on Aventine’s behalf, for which Aventine is liable in a
gross amount of approximately $2 million. Aventine denies that it ever contracted for the corn in question or that the Aurora
Coop suffered the alleged losses and maintains in its counterclaim that the Aurora Coop improperly set off approximately $400,000
it owes to Aventine (or one or more of its subsidiaries) in violation of the parties’ Aurora Coop Grain Agreements, resulting
in uncured breaches of each such agreement. As a result, Aventine issued notice of termination of the Grain Supply Agreement and
the Marketing Agreement. The Aurora Coop seeks a judicial order declaring that Aventine is in breach of the parties’ Aurora
Coop Grain Agreements and further declaring that Aventine’s termination of the parties’ Grain Supply Agreement is
ineffective. The Aurora Coop further seeks a judicial order requiring Aventine to abide by the Aurora Coop Grain Agreements and
prohibit Aventine from procuring grain for the Aurora West Facility from any source other than the Aurora Coop or marketing co-products
through anyone other than the Aurora Coop. Previously, the claims relating to the alleged purchases of grain by the Aurora Coop
and Aventine’s counterclaims for the amounts improperly set off were submitted to arbitration before the National Grain
and Feed Association, where an arbitration panel found in favor of Aventine in all material respects. The Aurora Coop is appealing
the arbitration panel’s decision. Aventine intends to pursue any and all rights and remedies available to it with respect
to the foregoing.
Aurora Coop—Rail Loop Dispute
On February 4, 2014, the Aurora Coop
filed a suit against Aventine in the United States District Court for the District of Nebraska (Case No. 4:14-cv-3032). The Aurora
Coop seeks a judicial declaration regarding the alleged termination of Aventine’s easement rights relating to the use of
the Exterior Track Loop surrounding the Aurora West Facility. Aventine was granted an easement to use the Exterior Track Loop
through an agreement with the Aurora Coop entitled the Double Track Loop Easement and Use Agreement. The Aurora Coop asserts that
Aventine’s right to use the Exterior Track Loop is terminated if the parties’ Grain Supply Agreement, which is the
subject of the litigation referred to above, is terminated. Aventine disputes the Aurora Coop’s assertion that its easement
rights to use the Exterior Track Loop have been terminated or extinguished. Aventine has implemented alternative means to avoid
the use of the Exterior Track Loop through the construction and use of a diamond crossover track which is used to transport rail
cars between the Aurora West Facility and the BNSF main line presently. This action is currently pending, and Aventine intends
to assert all of its rights and defenses available to it with respect to the foregoing.
Aurora Coop – Summary of Disputes
The primary disputed issues arising
from the pending lawsuits include the following:
| · | whether
the Aurora Coop’s exercise of the option to repurchase the land upon which the
Aurora West Facility is located is valid and whether that option includes the improvements
on the land including the Aurora West Facility; |
| · | whether
Aventine’s termination of an exclusive Grain Supply Agreement is valid; and |
| · | whether
an easement granting Aventine’s right to access an Exterior Track Loop surrounding
the Aurora West Facility used to connect to the main BNSF rail line is terminated, and
if it is, whether Aventine’s construction of a diamond crossing of the Exterior
Track Loop is permissible. |
The legal claims affecting the Aurora
Coop’s right to repurchase the Aurora West Facility will turn on the validity and effectiveness of the Aurora Coop’s
exercise of its option to repurchase the land on which the Aurora West Facility is located and the improvements thereon. The factual
issue impacting the resolution of this claim is whether the construction of the Aurora West Facility was “complete”
by the option exercise date of July 1, 2012.
If the Aurora Coop prevails on its option
exercise claim, it may be permitted to repurchase the land on which the Aurora West Facility is located and the improvements thereon,
including the Aurora West Facility at the option exercise price of $1,386,000.
If the Aurora Coop prevails on its option
exercise claim, the related legal claims concerning the Grain Supply Agreement and easements concerning the Aurora West Facility
may become irrelevant if the Aurora Coop is permitted to repurchase the land on which the Aurora West Facility is located and
the improvements thereon. If the Aurora Coop’s option exercise claim is denied by the court, the related easement and grain
supply claims may affect the operation of the Aurora West Facility.
There may be two primary issues
arising from these lawsuits surrounding the easement and grain supply claims: (i) whether Aventine will be required to
purchase grain for the Aurora West Facility exclusively from the Aurora Coop; and (ii) whether Aventine will be able to
access or cross the Exterior Track Loop to move its rail cars between the Aurora West Facility and the BNSF main line. Both
Aventine and the Aurora Coop claim that the other party breached the Grain Supply Agreement and the Marketing Agreement by
failing to pay for certain amounts due under those agreements. Aventine asserts that each of the Grain Supply Agreement and
the Marketing Agreement has been terminated by the Aurora Coop’s breach. These claims were submitted to arbitration
with the National Grain and Feed Association and are also the subject of a lawsuit which has been largely stayed pending the
arbitration.
Aventine prevailed in the National Grain
and Feed Association arbitration and the Aurora Coop is now appealing that decision. If the arbitration decision is upheld, Aventine’s
termination of the Grain Supply Agreement will likely be deemed valid and effective. The termination of the Grain Supply Agreement
may affect the operation of the Aurora West Facility in two primary ways. First, Aventine will not be required to purchase the
grain for the Aurora West Facility exclusively from the Aurora Coop. Second, the termination of the Grain Supply Agreement may
trigger a termination provision in the Easement Agreement preventing Aventine from accessing the Exterior Track Loop to transfer
rail cars between the Aurora West Facility and the main BNSF line. This result may prevent or severely limit Aventine from using
the railroad to transport its products. However, Aventine recently constructed a diamond switch crossing the Exterior Track Loop
on adjoining land owned by Aventine’s affiliate, NELLC. This diamond switch allows Aventine to move its rail cars between
the Aurora West Facility and the BNSF line. The Aurora Coop has sought permission to file a legal challenge to Aventine’s
construction and use of the diamond switch. This action is currently pending and the ultimate resolution of this legal claim may
impact the operations of the Aurora West Facility.
Western Sugar Cooperative
On February 27, 2015, Western Sugar filed
suit against ARE, Inc. in the United States District Court for the District of Colorado (Case No.1:15-cv-00415), claiming that
it was owed penalty rates for storage of surplus beet sugar. Western Sugar is seeking payment of approximately $8.6 million in
penalty storage fees as “expectation damages.” In 2013, ARE, Inc. purchased surplus beet sugar through a USDA program
for Aventine’s operations. Western Sugar (among other entities) warehoused this surplus sugar. ARE, Inc. paid for the warehousing
of this sugar from inception of the relationship. Western Sugar, however, subsequently
asserted that certain penalty rates for the storage of this product should have applied despite the lack of an agreement to such
rates by ARE, Inc. Aventine and ARE, Inc. had been attempting to resolve this matter short of formal litigation prior to Western
Sugar’s filing of the suit. Aventine considers these claims to be without merit and will aggressively defend against them.
In addition to those items disclosed above,
Aventine is presently a party to additional litigation with the Aurora Coop, and may, from time to time, be subject to claims
and suits arising in the ordinary course of business with other third parties, that it does not deem material. Although the ultimate
disposition of any such proceedings is not presently determinable, Aventine’s management does not believe that the ultimate
resolution of such matters will have a material adverse effect on Aventine’s financial condition, results of operations
or cash flows.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Business Summary
Aventine is a leading producer and marketer
of ethanol. Through Aventine’s production facilities, it markets and distributes ethanol to many of the leading energy
companies in the United States. Aventine’s revenues are principally derived from the sale of ethanol and from the sale
of other grain related co-products that are produced during the production of ethanol at Aventine’s plants.
Recent Developments
In March of 2014, Aventine sold its ethanol
facility located in Mount Vernon, Indiana, which had been idled since 2012 due to negative operating margins at that location.
The proceeds from the sale of those assets were used to pay down debt and fund the working capital needed for restarting Aventine’s
ethanol facilities located in Aurora, Nebraska. The operating results of Aventine’s Mount Vernon ethanol facility have been
classified as discontinued operations for the years ended December 31, 2014 and 2013, respectively.
In 2014, Aventine restarted its 110 million
gallon ethanol facility located in Aurora, Nebraska, which had been idled since 2012 due to negative operating margins at that
location. In July of 2014, Aventine restarted its 45 million gallon ethanol facility located in Aurora, Nebraska, which had been
idled since 2012 due to negative operating margins at that location.
Business Environment
The following discussion includes trends and
factors that may affect future operating results.
Commodity Pricing
Aventine’s operations are highly dependent
on commodity prices, especially prices for ethanol and corn.
Ethanol. During 2014, Midwest
spot ethanol prices averaged approximately $2.18 per gallon compared to an average price of $2.39 per gallon during 2013, a decrease
of approximately 9%. At December 31, 2014, Aventine had contracts for delivery of ethanol totaling 36.0 million gallons
through March 31, 2015, of which 20.4 million gallons were based on fixed-price contracts and 15.6 million were at spot prices
using Platts and Oil Price Information Service (“OPIS”) indices.
Corn. During 2014, Midwest
spot corn prices averaged approximately $4.15 per bushel compared to an average price of $5.78 per bushel during 2013, a decrease
of approximately 28%. At December 31, 2014 Aventine had contracts for the purchase of corn totaling 13.6 million bushels through
May of 2015, of which 0.9 million bushels were fixed price contracts and 12.7 million bushels were unpriced commitments.
Aventine continuously purchases corn for
physical delivery from suppliers using forward purchase contracts in order to assure supply. As Aventine does this, it may sell
a like amount of Chicago Board of Trade (“CBOT”) corn futures with similar dates to lock in the basis differential.
On occasion, Aventine uses CBOT futures contracts to lock in the price of corn by taking long purchase positions in CBOT contracts
in order to reduce Aventine’s risk of price increases. Exchange traded forward contracts for commodities are marked to market
each period. Aventine’s forward physical purchases of corn are not marked to market.
Results of Operations
The following discussion summarizes the
significant factors affecting Aventine’s consolidated operating results for the years ended December 31, 2014 and 2013 and
the years ended December 31, 2013 and 2012. This discussion should be read in conjunction with Aventine’s consolidated financial
statements and notes to Aventine’s consolidated financial statements for the years ended December 31, 2014, 2013 and 2012
which are contained herein.
The Year Ended December 31, 2014 Compared With the Year
Ended December 31, 2013
Overview
For the years ended December 31, 2014 and
2013, Aventine recognized net income of $16.6 million and a net loss of $74.3 million, respectively. The $90.9 million increase
in income in 2014 is primarily due to the increase in the spread between ethanol prices and corn costs, an increase in Aventine’s
operating performance and efficiency at its Pekin facilities, the sale of Aventine’s idled ethanol facility located in Mount
Vernon, Indiana, and the restart of Aventine’s Aurora facilities.
| |
2014 | | |
2013 | |
| |
(In millions) | |
Net sales | |
$ | 588.0 | | |
$ | 480.2 | |
Cost of goods sold | |
| 511.3 | | |
| 469.2 | |
Gross profit | |
| 76.7 | | |
| 11.0 | |
| |
| | | |
| | |
Selling, general and administrative expenses | |
| 31.4 | | |
| 13.6 | |
Loss on derivative transactions, net | |
| 11.2 | | |
| 5.5 | |
Other operating expense, net | |
| 2.6 | | |
| 0.8 | |
Operating income (loss) | |
| 31.5 | | |
| (8.9 | ) |
Other income (expense): | |
| | | |
| | |
Interest expense | |
| (14.2 | ) | |
| (12.9 | ) |
Other non-operating income (expense) | |
| – | | |
| 6.3 | |
Income tax expense | |
| – | | |
| – | |
Net income (loss) – continuing operations | |
$ | 17.3 | | |
$ | (15.5 | ) |
Net loss – discontinued operations | |
| (0.7 | ) | |
| (58.8 | ) |
Net income (loss) | |
$ | 16.6 | | |
$ | (74.3 | ) |
Sales were generated from the following products:
| |
2014 | | |
2013 | |
| |
(In millions) | |
Ethanol | |
$ | 439.9 | | |
$ | 333.9 | |
Co-products | |
| 148.1 | | |
| 146.4 | |
Total sales | |
$ | 588.0 | | |
$ | 480.3 | |
Ethanol sales increased in the year ended
December 31, 2014 compared to the year ended December 31, 2013 primarily due to an increase in ethanol gallons sold partially
offset by a decrease in the average price per gallon sold. During the twelve months of 2014, Aventine produced 208.4 million
gallons of ethanol compared to 142.8 million gallons produced during the twelve months ended December 31, 2013. The
65.6 million gallon increase in ethanol production was the result of process improvements and efficiencies at Aventine’s
Pekin facilities and the restart of Aventine’s Aurora facilities. Aventine sold 208.1 million gallons of ethanol in 2014
at an average sales price of $2.11 per gallon compared to 140.4 million gallons sold at an average sales price of $2.38 per gallon
in 2013.
Co-product revenues of $148.1 million in
2014 increased $1.7 million from $146.4 million in 2013 as a result of an increase in volume sold as well as the addition of corn
oil extraction at Aventine’s Pekin facilities. Co-product revenues, as a percentage of corn costs, rose to 50.3% in
2014 from 42.4% in 2013. This increase was primarily due to strong international demand for Aventine’s feed products,
particularly in China, which allowed feed product prices to remain firm while corn prices decreased over the same period of 2014.
Cost of goods sold consists of corn costs,
conversion costs (the cost to produce ethanol at Aventine’s facilities), freight and logistics costs and depreciation expense.
Cost of goods sold was $511.3 million and $469.2 million for the years ended December 31, 2014 and 2013, respectively.
The $42.1 million increase in cost of goods sold from 2013 to 2014 is primarily the result of the restart of the Aurora facilities
in the second and third quarter of 2014.
Corn costs for the years ended December 31,
2014 and 2013 were $294.4 million and $345.0 million, respectively. The decrease in Aventine’s costs is primarily
due to the decrease in corn prices partially offset by additional bushels ground at its Pekin and Aurora facilities. Aventine
used 71.0 million bushels of corn in production during the twelve months ended December 31, 2014 compared to 53.7 million bushels
during 2013. For 2014, corn used in production cost approximately $4.15 per bushel compared to $6.43 per bushel in 2013. The USDA
projected the domestic corn crop harvest to be a record 14.2 billion bushels on 83.1 million acres harvested. The record 2014
corn production is anticipated to result in corn ending stocks in the U.S. of approximately 1.9 billion bushels at August 31,
2015.
Due to high corn prices in 2013, Aventine
decided to participate in the USDA CCC Sugar program as a means for supplementing, and in some cases, substituting corn needs
at Aventine’s ethanol facilities. Aventine began receiving sugar at its ethanol facilities in the fourth quarter of 2013.
For the year ended December 31 2014, Aventine used 203.3 million pounds of sugar at a delivered cost of $0.07 per pound compared
to 13.3 million pounds of sugar at a delivered cost of $0.13 per pound in 2013.
A summary of Aventine commodity prices for
the years ended December 31, 2014 and 2013 has been provided below:
| |
2014 | | |
2013 | |
Average sales price per gallon of ethanol | |
$ | 2.11 | | |
$ | 2.38 | |
Average cost per bushel of corn | |
$ | 4.15 | | |
$ | 6.43 | |
Co-product revenue as a percentage of corn costs | |
| 50.3% | | |
| 42.5% | |
Conversion costs for the years ended December 31,
2014 and 2013 are as follows:
| |
2014 | | |
2013 | |
| |
(In millions) | |
Utilities | |
$ | 51.9 | | |
$ | 34.7 | |
Salary and benefits | |
| 22.4 | | |
| 20.1 | |
Maintenance and supplies | |
| 24.9 | | |
| 10.4 | |
Denaturant and chemicals | |
| 28.9 | | |
| 20.0 | |
General overhead and other | |
| 14.0 | | |
| 10.5 | |
| |
$ | 142.1 | | |
$ | 95.7 | |
Conversion costs increased by $46.4
million in 2014 as a result of restarting of Aventine’s Aurora facilities and additional maintenance incurred at Aventine’s
Pekin facilities that had been previously delayed due to negative margins in the past.
Freight and logistics costs for the
years ended December 31, 2014 and 2013 were $35.0 million and $17.8 million, respectively. The primary reason for the
increase in freight and logistics cost in 2014 was the restart of the Aurora facilities. On a per gallon sold basis, freight and
logistics costs were $0.17 per ethanol gallon sold and $0.13 per ethanol gallon sold in 2014 and 2013, respectively. The $0.04
per gallon sold increase in cost is primarily driven by the change in the mix of delivery points and an increase in railcar expenses
at Aventine’s Aurora facilities.
Depreciation
expense from continuing operations for the years ended December 31, 2014 and 2013 was
$13.4 million and $10.2 million, respectively. The $3.2 million increase in depreciation
expense related to capital improvements at Aventine’s ethanol facilities located
in Aurora, Nebraska primarily related to retrofitting the ethanol facility to accept
sugar as a feedstock, the addition of grain scales at Aventine’s sites, and the
expansion of wet feed storage.
Selling, general and administrative expenses
from continuing operations increased to $31.4 million in 2014 as compared to $13.6 million in 2013. The $17.8 million increase
was primarily related to a $10.5 million payment of restricted stock unit awards to Aventine’s directors and certain executive
officers in 2014, start-up related costs associated with Aventine’s Aurora facilities and increased legal and consulting
costs related to the retirement of the Term Loan A and Term Loan A-1 debt and ongoing litigation.
Interest expense for the years ended December
31, 2014 and 2013 was $14.2 million and $12.9 million, respectively. Interest expense for 2014 included $12.0 million related
to the Term Loan Facility (net of debt forgiveness income), $4.0 million of amortization of debt issuance costs and $0.2 million
of other interest expense, partially offset by $2.0 million of capitalized interest. Interest expense for the year ended
December 31, 2013 included $10.9 million related to the Term Loan Facility (net of debt forgiveness income and $2.0 million of
amortization of debt issuance costs. The $1.3 million increase in interest was primarily due to the issuance of the Term Loan
A-1, offset in part by an increase capitalized interest.
Loss on derivative transactions, net for
2014 includes $11.2 million of net realized and unrealized losses on corn and ethanol derivative contracts versus net realized
and unrealized losses in 2013 of $5.5 million. The reason for the $5.7 million increase in losses on derivative transactions is
that Aventine maintains a disciplined approach to locking in positive forward margins rather than focusing on the price movements
of individual commodities. In periods like 2014 where margins expanded during the year, Aventine experienced losses in its hedging
account. Aventine does not mark to market forward physical contracts to purchase corn or sell ethanol as Aventine accounts for
these transactions as normal purchases and sales under GAAP.
Other non-operating income (expense) from
continuing operations for the years ended December 31, 2014 and 2013 was $0.0 million of expense and $6.3 million of income, respectively.
The $6.3 million of income in 2013 primarily related to the settlement of certain litigation.
Facility Operating Data
The following table provides selected key
operating statistics for Aventine’s operating facilities.
| |
2014 | | |
2013 | |
| |
(In millions) | |
Pekin, Illinois: | |
| | | |
| | |
Ethanol gallons produced | |
| 157.8 | | |
| 142.8 | |
Corn consumed (bushels) | |
| 55.7 | | |
| 53.7 | |
Sugar consumed (pounds) | |
| 127.1 | | |
| 13.3 | |
| |
| | | |
| | |
Aurora, Nebraska: | |
| | | |
| | |
Ethanol gallons produced | |
| 50.6 | | |
| – | |
Corn consumed (bushels) | |
| 15.3 | | |
| – | |
Sugar consumed (pounds) | |
| 126.6 | | |
| – | |
In mid-2014, Aventine restarted its 110 million
gallon ethanol facility located in Aurora, Nebraska, and in the third quarter Aventine restarted its other 45 million gallon ethanol
facility in Aurora, Nebraska. Previously, both of these facilities were idled due to negative operating margins at that location.
Change in Working Capital and Cash Flows
Cash provided by operating activities of
$41.6 million was primarily due to consolidated net income of $16.6 million resulting from increased volumes of ethanol and co-products
produced and improved margins related to commodity prices. In addition, Aventine had non-cash adjustments of $7.3 million, related
to a $3.3 million loss on the sale of certain coal-fired equipment, the $4.0 million write-off of Aventine’s unamortized
loan acquisition costs related to the retirement of the Term Loan A and A-1, and depreciation and amortization expense of $13.4
million. In 2013, cash used in operating activities of $3.4 million was primarily the result of the $74.3 million net loss partially
offset by non-cash adjustments of $44.2 million related to the write down of Aventine’s held for sale assets and $18.7 million of depreciation
and amortization expense.
Cash provided by Aventine’s investing
activities of $12.3 million for the year ended December 31, 2014 was the result of the sale of Aventine’s ethanol facility
located in Mount Vernon, Indiana partially offset by $22.4 million of additions to property and equipment primarily attributable
to the installation of Aventine’s natural gas fired boilers in Pekin, Illinois and other investments in enhancing Aventine’s
ethanol facilities performance. Cash used in investing activities of $7.5 million for the year ended December 31, 2013 consisted
of additions to property and equipment primarily including the purchase of corn oil extraction equipment at Aventine’s ethanol
facilities located in Pekin, Illinois and other investments in enhancing Aventine’s ethanol facilities performance in 2013.
Cash used in financing activities of $61.1
million resulted from $83.4 million of repayments of Aventine’s Term Loan A and Term Loan A-1 debt, partially offset by
advances on Aventine’s loan and security agreement of $23.4 million. Cash provided by financing activities of $34.4 million
for the year ended December 31, 2013 resulted from the receipt of proceeds from the issuance of the Term Loan A-1 debt in June
of 2013.
The Year Ended December 31, 2013 Compared With the Year Ended
December 31, 2012
Overview
For the year ended December 31, 2013, Aventine
recognized a net loss from continuing operations of $15.5 million and a net loss of $58.8 million from discontinued operations
for a total net loss of $74.3 million. For the year ended December 31, 2012, Aventine recognized a net loss from continuing operations
of $64.6 million and a net loss of $19.3 million from discontinued operations for a total net loss of $83.9 million. The 2013 net
loss of $74.3 million net loss includes impairment charges of $44.2 million related to Aventine’s ethanol facilities located
in Mount Vernon, Indiana and Canton, Illinois. Excluding the nonrecurring impairment charges, Aventine’s 2013 net loss would
have been $30.1 million for the year ended, December 31, 2013.
| |
2013 | | |
2012 | |
| |
(In millions) | |
Net sales | |
$ | 480.2 | | |
$ | 479.7 | |
Cost of goods sold | |
| 469.2 | | |
| 503.9 | |
Gross profit (loss) | |
| 11.0 | | |
| (24.2 | ) |
| |
| | | |
| | |
Selling, general and administrative expenses | |
| 13.6 | | |
| 25.2 | |
Loss (gain) on derivative transactions, net | |
| 5.5 | | |
| (0.7 | ) |
Other operating expense, net | |
| 0.8 | | |
| 1.6 | |
Operating loss | |
| (8.9 | ) | |
| (50.3 | ) |
Other income (expense): | |
| | | |
| | |
Interest expense | |
| (12.9 | ) | |
| (21.1 | ) |
Other non-operating income | |
| 6.3 | | |
| 6.8 | |
Income tax expense | |
| – | | |
| – | |
Net income (loss) – continuing operations | |
$ | (15.5 | ) | |
$ | (64.6 | ) |
Net loss – discontinued operations | |
| (58.8 | ) | |
| (19.3 | ) |
Net loss | |
$ | (74.3 | ) | |
$ | (83.9 | ) |
Aventine’s total revenue was higher
for 2013 compared to 2012, primarily due to increased ethanol revenue. For 2013, Aventine sold 140.4 million gallons of ethanol
at an average price of $2.38 per gallon within Aventine’s continuing operations. In 2012, Aventine sold 143.5 million gallons
at an average price of $2.28 per gallon within continuing operations. In total, ethanol sales from continuing operations were
$333.8 million and $327.7 million in 2013 and 2012, respectively. Aventine’s average price per gall on of ethanol sold increased
by 4% in 2013 compared to 2012 primarily due to increases in commodity prices and an increase in domestic demand due to lower
imports of ethanol into the U.S. in 2013. Sales volume was 3.1 million gallons lower in 2013 compared to 2012 due to the idling
of Aventine’s Aurora ethanol facilities in third quarter of 2012.
Co-product sales in 2013 were $146.4 million
compared to $152.0 million in 2012. The primary reason for the $5.6 million decrease in co-product revenue was due to the idling
of Aventine’s Aurora ethanol facilities in third quarter of 2012. Offsetting lower volumes sold was the addition of corn
oil extraction at Aventine’s Pekin ethanol facilities in the second quarter of 2013. Aventine sells its corn oil to the biodiesel
industry, and demand for corn oil in the biodiesel industry has weakened due to adequate supplies, which had a negative impact
on Aventine’s prices in 2013. In total, Aventine sold $2.5 million in 2013, and did not produce corn oil in 2012.
Cost of goods sold consists of corn costs,
conversion costs (the cost to produce ethanol at Aventine’s facilities), freight and logistics costs and depreciation expense.
Total cost of goods sold was lower in 2013 compared to 2012 due primarily to lower corn costs. For the year ended December 31,
2013, Aventine’s corn costs were $345.0 million, which was $40.1 million lower than Aventine’s corn costs in 2012
of $385.1 million. Aventine’s average cost per bushel of corn from continuing operations was $6.43 in 2013, which was 9%
lower than Aventine’s average cost per bushel in 2012 of $7.04 delivered. This decrease in Aventine’s cost was primarily
related to a decrease in the market price for corn, especially during the last half of 2013. The amount of corn harvested in the
fall of 2012 was lower due to drought conditions. As a result, corn prices were higher in the first half of 2013 and Aventine
also at times had to pay higher basis prices than Aventine has paid in the past in order to secure enough corn to operate. However,
the record corn crop harvested in the fall of 2013 lowered the market price of corn as well as corn basis for the remainder of
2013. Aventine consumed approximately the same amount of corn in 2013 and 2012.
Due to the high corn prices in the first half
of 2013, Aventine decided to participate in the USDA CCC Sugar program as a means for supplementing, and in some cases, substituting
Aventine’s corn needs at Aventine’s ethanol facilities. Aventine began receiving sugar at its ethanol facilities in
the fourth quarter of 2013. For the year ended December 31 2013, Aventine’s sugar costs were $1.7 million. Aventine did not
use any sugar in 2012.
Conversion costs from continuing operations
increased by 7% in 2013 to $90.2 million from $84.1 million in the previous year. The $6.1 million increase was primarily due to
additional maintenance incurred at Aventine’s Pekin facilities in 2013 that had been previously delayed due to negative margins
in the past and slightly higher utility and chemical costs.
Freight and logistics costs from continuing
operations for the years ended December 31, 2013 and 2012 were $17.8 million and $21.1 million, respectively. On a per ethanol
gallon sold basis, freight and logistics costs were $0.13 and $0.15 per gallon for 2013 and 2012, respectively. The $0.02 per gallon
sold decrease in cost is primarily driven by the change in the mix of delivery points due to the idling of the Mount Vernon and
Aurora ethanol facilities, and the close proximity of the Pekin ethanol facilities location to Midwest ethanol market hub in Chicago,
Illinois.
Depreciation expense from continuing operations
for the years ended December 31, 2013 and 2012 was $10.2 million and $10.0 million, respectively.
Selling, general and administrative expenses
from continuing operations decreased to $13.6 million for the year ended December 31, 2013 as compared to $25.2 million for the
year ended December 31, 2012. In 2012, Aventine had increased legal and consulting costs related to the debt restructuring
, the reverse stock split, Aventine’s decision to cease voluntarily reporting with the Securities and Exchange Commission,
and on-going litigation as well as separation payments to departing senior executives in 2012.
Interest expense from continuing operations
for the years ended 2013 and 2012 was $12.9 million and $21.1 million, respectively. Interest expense for the year ended December
31, 2013 included $10.5 million related to the Term Loan Facility (net of debt forgiveness income), $2.1 million of amortization
of debt issuance costs and $0.5 million of other interest expense, partially offset by $0.2 million of capitalized interest. Interest
expense for the year ended December 31, 2012 includes $19.5 million related to the Term Loan Facility (net of debt forgiveness
income), $3.3 million of amortization of both debt issuance costs and original issue discount costs, and $0.6 million of other
interest expense, partially offset by $2.3 million of capitalized interest. The $8.2 million decrease in interest was primarily
due to the debt forgiveness from the troubled debt restructuring.
Gain (loss) on derivative transactions, net
for 2013 includes $5.5 million of net realized and unrealized losses on corn and ethanol derivative contracts versus net realized
and unrealized gains in the year ended December 31, 2012 of $0.7 million. In 2013, Aventine entered into derivative transactions
to lock in positive forward margins rather than focusing on the price movements of individual commodities. When margins expand
like they did in the last six months of 2013, Aventine experienced losses in Aventine’s hedging account. Aventine does not
mark to market forward physical contracts to purchase corn or sell ethanol as Aventine accounts for these transactions as normal
purchases and sales under GAAP.
Net loss – discontinued operations totaled
$58.8 million and $19.3 million for the years ended December 31, 2013 and 2012, respectively. Net loss – discontinued operations
includes the results of Aventine’s ethanol facilities located in Mount Vernon, Indiana and Canton, Illinois. Both of these
ethanol facilities were idle in 2013, and the ethanol facility located in Canton, Illinois was idle for all of 2012. The $39.5
million increase in Net loss – discontinued operations is due to a $22.8 million impairment charge related to Aventine’s
ethanol facility in Mount Vernon, Indiana and a $21.3 million impairment charge related to Aventine’s ethanol facility located
in Canton, Illinois. Excluding the $22.8 million impairment charge, the net loss at Mount Vernon improved by $3.0 million from
a $17.1 million loss in 2012 to $14.1 million loss in 2013. This primarily resulted from the decision to cold idle the facility
in 2013 in order to minimize the impact of negative margins at that location. The net loss at Aventine’s Canton ethanol facility
decreased from $2.2 million in 2012 to $0.6 million in 2013 after excluding the $21.3 million impairment charge. This improvement
was the result of continued cost cutting measures at that location.
Facility Operating Data
The following table provides selected key operating
statistics for Aventine’s operating facilities.
| |
2013 | | |
2012 | |
| |
(In millions) | |
Pekin, Illinois: | |
| | | |
| | |
Ethanol gallons produced | |
| 142.8 | | |
| 123.2 | |
Corn consumed (bushels) | |
| 53.7 | | |
| 48.2 | |
Sugar consumed (pounds) | |
| 13.3 | | |
| – | |
| |
| | | |
| | |
Aurora, Nebraska: | |
| | | |
| | |
Ethanol gallons produced | |
| – | | |
| 18.1 | |
Corn consumed (bushels) | |
| – | | |
| 6.5 | |
Sugar consumed (pounds) | |
| – | | |
| – | |
Change in Working Capital and Cash Flows
Working capital increased to $61.5 million for
the year ended December 31, 2013 to $100.4 million from $38.9 million at December 31, 2012 as a result of the proceeds from
the issuance of the Term Loan A-1 loans, the sale of Aventine’s ethanol facility located in Mount Vernon, Indiana and operating
margin improvements.
Cash used in operating activities was $3.3 million
and $36.2 million, for the years ended December 31, 2013 and 2012, respectively. The $32.9 million change in cash used in operating
activities was due to a lower net loss primarily from continuing operations in 2013 compared to 2012.
Cash used in investing activities of $7.5 million
related to additions to property and equipment primarily attributable to the purchase of corn oil extraction equipment at Aventine’s
ethanol facilities located in Pekin, Illinois and other investments in enhancing Aventine’s ethanol facilities’ performance
in 2013. Cash used in investing activities of $10.6 million in 2012 also related to capital improvements primarily at Aventine’s
ethanol facilities located in Aurora, Nebraska.
Cash provided by financing activities of $34.4
million was the result of the receipt of proceeds from the issuance of the Term Loan A-1 debt in June of 2013. In 2012, Aventine
had $27.6 million of cash provided by financing activities related to the debt restructuring in September of 2012 which included
receiving proceeds from the issuance of the Term Loan A debt.
Liquidity and Capital Resources
At December 31, 2014, Aventine had $33.3
million in cash and equivalents, and up to an additional $10.1 million available under Aventine’s Revolving Facility.
Debt
Loan and Security Agreement
Aventine maintains a revolving line of credit
with an availability maximum of $40.0 million. The credit facility expires on July 27, 2017. Interest accrues under the credit
facility at a rate equal to LIBOR plus 6%. The credit facility’s monthly unused line fee is 0.50% of the amount by which
the maximum credit under the facility exceeds the average daily balance. The loan agreement contains customary affirmative and
negative covenants including but not limited to, meeting certain financial covenants including but not limited to maintaining
a cash balance of $5 million and a fixed charge coverage ratio of at least 1.1 to 1.0. At December 31, 2014, Aventine had $19.1
million of loan advances and $5.6 million in letters of credit outstanding under the agreement and is in compliance with the financial
covenants.
Term Loan Debt
The payoff amount of Aventine’s Term
Loan B debt at December 31, 2014 is $140.3 million. Interest on Term Loan B may be paid in cash at a 10.5% rate or paid-in-kind
at a 15% interest rate. If Aventine elects paid-in-kind interest, the interest is capitalized at the end of each quarter. The
maturity date for Term Loan B is September 24, 2017. Aventine has always elected paid-in-kind interest on its Term Loan B debt,
and elected paid-in-kind interest for amounts due on December 31, 2014. The Term Loan B is secured with substantially all
of Aventine’s fixed assets and contains customary affirmative and negative covenants including but not limited to, meeting
certain financial covenants including but not limited to maintaining a cash balance of $5 million. As of the date of this joint
proxy statement/prospectus, Aventine is in compliance with its financial covenants.
Contractual Cash Obligations
In addition to Aventine’s long-term debt
obligations, Aventine has certain other contractual cash obligations and commitments. The following table provides information
regarding Aventine’s consolidated contractual obligations and approximate commitments as of December 31, 2014:
| |
Payment
Due By Period | |
Contractual
Cash Obligations | |
Total | | |
Less
than One Year | | |
One
to Three Years | | |
Three
to Five Years | | |
After
Five Years | |
Long-Term Debt Obligations
(1) | |
$ | 161.1 | | |
$ | 1.7 | | |
$ | 159.4 | | |
$ | – | | |
$ | – | |
Operating Lease Obligations | |
| 45.3 | | |
| 18.5 | | |
| 19.6 | | |
| 7.0 | | |
| 0.2 | |
Grain Purchase
Obligations | |
| 3.8 | | |
| 3.8 | | |
| – | | |
| – | | |
| – | |
Total Contractual
Cash Obligations | |
$ | 210.2 | | |
$ | 24.0 | | |
$ | 179.0 | | |
$ | 7.0 | | |
$ | 0.2 | |
__________
(1) | Maturities of long term debt include
the actual cash pay-off amount of the Term Loan B of $140.3 million at December 31, 2014.
The actual debt pay-off amount is lower than the carrying value of Aventine’s debt
at December 31, 2014 due to the troubled debt restructuring transaction that occurred
in 2012, which required Aventine to account for the impact of debt forgiveness prospectively
instead of taking an immediate write-down. |
Critical Accounting Policies
Aventine uses estimates and assumptions in preparing
its financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Of the significant accounting policies described in the notes to Aventine’s financial statements, Aventine
believes that the following are the most critical:
Revenue Recognition
Revenue from the sale of Aventine’s products
is recognized at the time title to the product and all risks of ownership transfer to the customers. The time of transfer
is defined in the specific sales agreement; however, it generally occurs upon shipment, loading of the products or when the customer
picks up Aventine’s products. Collectability of revenue is reasonably assured based on historical evidence of collectability
between Aventine and its customers. Interest income is recognized as earned.
The majority of sales are reported gross, inclusive
of freight costs being paid to Aventine. Aventine recognizes freight costs in its cost of goods sold. When product is sold F.O.B
plant and freight is paid by Aventine’s customer, Aventine excludes these costs from its financial statements.
Commodities Contracts, Derivative Instruments
and Hedging Activities
Aventine evaluates contracts to determine
whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from
derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales
are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that
will be delivered in physical quantities expected to be used or sold over a reasonable period in the normal course of business.
Aventine enters into short-term cash, option
and futures contracts as a means of securing corn and natural gas for its ethanol plants and managing exposure to changes in commodity
and energy prices. Aventine also enters into derivative contracts to hedge its exposure to price risk as it relates to ethanol
sales. As part of Aventine’s risk management process, Aventine uses futures and option contracts through regulated commodity
exchanges or through over-the-counter markets to manage Aventine’s risk. All of Aventine’s derivatives, other than
those excluded under the normal purchases and sales exclusion, are designated derivatives, with changes in fair value recognized
in net income. Although these contracts are economic hedges of specified risks, they are not designated or accounted for as hedging
instruments.
Realized and unrealized gains and losses related
to derivative contracts related to corn, ethanol and natural gas are included as gain (loss) on derivative transactions in the
accompanying financial statements. The fair values of these contracts are presented on the accompanying balance sheet as derivative
financial instruments.
Off-Balance Sheet Arrangements
Aventine currently has no off-balance sheet
arrangements.
Effects of Inflation
The impact of inflation was not significant
to Aventine’s financial condition or results of operations for the years ended December 31, 2014 and 2013.
Market Prices of and Dividends on Aventine Common Stock
Aventine common stock trades from time to
time on the OTCBB under the symbol “AVRW” and in unreported transactions. As of March 31, 2015, Aventine common
stock was held by approximately 53 stockholders of record. No cash dividends have been paid on Aventine common stock during the
two most recent fiscal years, and Aventine does not intend to pay cash dividends on its common stock in the immediate future.
The following
table sets forth the reported high and low sales prices of shares of Aventine common stock on the OTCBB. The high and low sales
prices are based on intraday sales for the periods reported. There is a limited historic
public trading market for Aventine’s common stock. This information has been obtained from the Bloomberg Professional service.
The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
|
|
Price Range* |
|
|
|
High |
|
|
Low |
|
Year Ended December 31, 2014: |
|
|
|
|
|
|
|
|
First Quarter (January 1 – March 31) |
|
$ |
30.00* |
|
|
$ |
10.10* |
|
Second Quarter (April 1 – June 30) |
|
$ |
18.00* |
|
|
$ |
13.00* |
|
Third Quarter (July 1 – September 30) |
|
$ |
14.00* |
|
|
$ |
8.75* |
|
Fourth Quarter (October 1 – December 31) |
|
$ |
15.00* |
|
|
$ |
9.00* |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
25.00* |
|
|
$ |
21.00* |
|
Second Quarter |
|
$ |
21.00* |
|
|
$ |
21.00* |
|
Third Quarter |
|
$ |
21.25* |
|
|
$ |
16.00* |
|
Fourth Quarter |
|
$ |
12.00* |
|
|
$ |
7.50* |
|
* It should be noted that Aventine common stock is not listed
on any exchanges and the daily trading volume of its common shares is very low in relation to the total number of shares issued
and outstanding (as reported by The Bloomberg Professional service, the average daily trade volume for every quarter since Q1 2013
has been less than 1.5% of total shares issued and outstanding). Based on the stock transfer procedures outlined in Aventine’s
Stockholders Agreement, Aventine is notified from time to time when shares subject to the terms of the Aventine Stockholders Agreement
have traded that are not reported on the OTCBB. The actual transaction price of the shares and the actual average daily trading
volume in these transactions are not provided to Aventine. As a result, trade information on the OTCBB may be unreliable and may
not be indicative of the value of Aventine’s common stock at any particular point in time. Aventine stockholders should not
solely rely on the trade information provided on the OTCBB in making a determination of the fair value of Aventine’s stock
price and should review carefully the other information contained in this joint proxy statement/prospectus in considering whether
to approve the respective proposals before them.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The following table sets forth information
with respect to the beneficial ownership of Aventine’s voting securities as of March 31, 2015, the date of the table,
by:
|
· |
each person known by Aventine to beneficially own more than 5% of the outstanding shares of its common stock; |
|
· |
each of Aventine’s directors; |
|
· |
each of Aventine’s current executive officers; and |
|
· |
all of Aventine’s directors and executive officers as a group. |
Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to the securities.
To Aventine’s knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons
named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially
owned by them. Shares of common stock underlying derivative securities, if any, that currently are exercisable or convertible or
are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the date of the table
are deemed to be outstanding in calculating the percentage ownership of each listed person or group but are not deemed to be outstanding
as to any other person or group. Except as indicated by footnote, percentage of beneficial ownership is based on 14,204,240 shares
of common stock issued and outstanding as of the date of the table. Except as otherwise indicated, the address of the stockholder
is: c/o Aventine Renewable Energy Holdings, Inc., 1300 S. 2nd Street, Pekin, IL, 61554.
Name and Address of Beneficial Owner |
|
Title of Class |
|
|
Amount
and Nature of Beneficial Ownership |
|
|
|
Percent of Class |
|
Candlewood Investment Group, LP(1)
(4) |
|
Common |
|
|
8,439,978 |
|
|
|
59.42% |
|
Credit Suisse Securities (USA) LLC(2)
(4) |
|
Common |
|
|
1,862,023 |
|
|
|
13.11% |
|
Midtown Acquisitions LP(3) |
|
Common |
|
|
929,101 |
|
|
|
6.54% |
|
James Continenza |
|
Common |
|
|
0 |
|
|
|
0% |
|
Kip Horton |
|
Common |
|
|
0 |
|
|
|
0% |
|
Dennis Alt |
|
Common |
|
|
0 |
|
|
|
0% |
|
Eric Hakmiller |
|
Common |
|
|
0 |
|
|
|
0% |
|
Mark Beemer |
|
Common |
|
|
0 |
|
|
|
0% |
|
Christopher A. Nichols |
|
Common |
|
|
0 |
|
|
|
0% |
|
Brian Steenhard |
|
Common |
|
|
0 |
|
|
|
0% |
|
John Valenti |
|
Common |
|
|
0 |
|
|
|
0% |
|
Directors and Officers (8) as a Group |
|
Common |
|
|
0 |
|
|
|
0% |
|
__________
(1) | Amount represents the shares of common stock held by each of Candlewood Financial
Opportunities Master Fund, LP, Candlewood Financial Opportunities Fund, LLC, Candlewood Special Situations Master Fund, Ltd.,
CWD OC 522 Master Fund, Ltd., Flagler Master Fund SPC Ltd. – Class A Segregated Portfolio, Flagler Master Fund SPC Ltd.
– Class B Segregated Portfolio and Candlewood Special Situations Fund, L.P. (collectively, the “Candlewood Funds”).
Candlewood Investment Group, LP is the investment advisor to each of the Candlewood Funds and has voting and dispositive power
with respect to the shares held by the Candlewood Funds. The address for Candlewood Investment Group, LP and each of the Candlewood
Funds is c/o Candlewood Investment Group, 777 Third Avenue, Suite 19B, New York, New York 10017. |
(2) | The address of Credit Suisse Securities (USA) LLC is 11 Madison Ave, 5th Floor, New
York, NY 10010. |
(3) | The address of Midtown Acquisitions LP is 65 East 55th Street, 19th Floor, New York,
NY 10022. |
(4) | Pacific Ethanol has entered into stockholders agreements with each of the Candlewood
Funds and Credit Suisse Securities (USA) pursuant to which each such stockholder has agreed to vote their pro-rata share of 51%
of Aventine’s issued and outstanding common stock in favor of the merger-related proposals. |
Equity Compensation Plan Information
The following table shows Aventine’s
approved equity compensation plans approved by its stockholders and not approved by its stockholders as of December 31, 2014:
Plan category |
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights |
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights |
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by security holders |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
|
3,140 |
|
|
$ |
3.55 |
|
|
|
1,583 |
|
Total |
|
|
3,140 |
|
|
$ |
3.55 |
|
|
|
N/A |
|
At December 31, 2014, Aventine maintained
one stock-based compensation plan, the Aventine Renewable Energy Holdings, Inc. 2010 Equity Incentive Plan (sometimes referred
to as the Aventine Plan). The amount shown in the first column above consists of 3,140 stock options granted under the Aventine
Plan.
The Aventine Plan was adopted by the Aventine
Board effective March 15, 2010, and has been deemed to satisfy all applicable federal and state law requirements and all listing
standards of any securities exchange and no additional stockholder approval of the Aventine Plan has been obtained.
The Aventine Plan provides for the grant
of awards in the form of stock options, restricted stock or units, stock appreciation rights and other equity-based awards to
directors, officers, employees and consultants or advisors (and prospective directors, officers, employees and consultants or
advisors) of Aventine or its affiliates at the discretion of the Aventine Board (or the compensation committee of the Aventine
Board (sometimes referred to as the Aventine Compensation Committee). The term of awards granted under the Aventine Plan is determined
by the Aventine Board or by the Aventine Compensation Committee, and cannot exceed ten years from the date of the grant. Unless
terminated sooner, the Aventine Plan will continue in effect until March 15, 2020.
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
On October 4, 2012, Aventine ceased voluntarily
reporting with the Securities and Exchange Commission and became a private entity. On November 1, 2013 Aventine decided to change
its auditing firms from Ernst & Young LLP to McGladrey LLP. Aventine did not have any disagreements with either auditing firm
in 2014, 2013 or 2012.
Quantitative and Qualitative Disclosures About Market Risk
Aventine has adopted a Risk Management Policy
to serve as the guideline for capturing, measuring, and reporting risk and enabling management to control the market risk exposure
of Aventine. Under the policy, Aventine’s risk committee is responsible for identifying, considering and managing all of
Aventine’s business risks, including agricultural and non-agricultural commodity price risk (procurement and selling prices);
financial risk (interest rates), and other business risks.
Aventine will be subject to ongoing market risks
concerning long-term debt, the market price of corn, natural gas, ethanol and by-products. Aventine is currently exposed to the
impact of market fluctuations associated with interest rates and commodity prices as discussed below. From time to time,
Aventine may purchase or sell corn, ethanol and natural gas futures and options to hedge a portion of the corn it anticipates it
will need. In addition, Aventine has contracted for future physical delivery of corn and sale of ethanol. At this time, Aventine
does not expect to have exposure to foreign currency risk as it expects to conduct all of its business in U.S. dollars.
Commodity Price Risk
Aventine produces ethanol and by-products, including
distillers grain, corn gluten meal and feed, corn germ and grain distillers dried yeast, from corn and its business is sensitive
to changes in the prices of each of these commodities. In the ordinary course of business, Aventine may enter into various types
of transactions involving financial instruments to manage and reduce the impact of changes in commodity prices, including price
risk on anticipated purchases of corn, natural gas and the sale of ethanol. Aventine does not enter into derivatives or other financial
instruments for trading or speculative purposes.
Aventine is subject to market risk with respect
to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products. The availability
and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions,
governmental policies with respect to agriculture and international trade, and global demand and supply. Aventine has firm-price
purchase commitments with some of its corn suppliers under which it agrees to buy corn at a stated price set in advance of the
actual delivery of that corn. Under these arrangements, Aventine assumes the risk of a decrease in the market price of corn between
the time this price is fixed and the time the corn is delivered.
Aventine is also subject to market risk with
respect to ethanol pricing. Ethanol prices are sensitive to global and domestic ethanol supply, crude-oil supply and demand; crude-oil
refining capacity and utilization; government regulation; and consumer demand for alternative fuels. Aventine’s ethanol sales
are priced using contracts that can either be based upon a fixed price, the price of wholesale gasoline plus or minus a fixed amount
or a market price at the time of shipment. Aventine sometimes fixes the price at which it sells ethanol using fixed price physical
delivery contracts. Under these arrangements, Aventine assumes the risk of an increase in the market price of ethanol between the
time this price is fixed and the time the ethanol is sold.
Distillers grain and other by-product prices
are sensitive to various demand factors such as numbers of livestock on feed, prices for feed alternatives, and supply factors,
primarily production by ethanol plants and other sources.
Aventine’s ethanol plants use natural
gas in the ethanol production process and, as a result, the business is also sensitive to changes in the price of natural gas.
The price of natural gas is influenced by such weather factors as extreme heat or cold in the summer and winter, or other natural
events like hurricanes in the spring, summer and fall. Other natural gas price factors include North American exploration and production,
and the amount of natural gas in underground storage during both the injection and withdrawal seasons.
Aventine attempts to reduce the market risk
associated with fluctuations in the price of ethanol, corn and natural gas by employing a variety of risk management and hedging
strategies. Strategies include the use of derivative financial instruments such as futures and options executed on the CBOT and/or
the NYMEX, as well as the daily management of physical corn and natural gas procurement relative to each plants’ requirements
for each commodity. The management of Aventine’s physical corn procurement and ethanol production may incorporate the use
of forward fixed-price contracts and basis contracts.
Recently, a sensitivity analysis was prepared
to estimate Aventine’s exposure to ethanol, corn, distillers grain and natural gas price risk. Market risk related to these
factors was estimated as the potential change in pre-tax income resulting from a hypothetical 10% adverse changes in prices of
its expected corn and natural gas requirements, and ethanol and distillers grains output for a one-year period. This analysis excluded
the impact of risk management activities that result from the use of fixed-price purchase and sale contracts and derivatives. The
results of this analysis as of December 2014, which may differ from actual results, are as follows (in thousands):
Commodity | |
Estimated Total Volume
for the Next 12 Months | | |
Unit of Measure | | |
Approximate Adverse Change to
Income | |
Ethanol | |
| 289,946 | | |
| Gallons | | |
$ | 45,049 | |
Corn | |
| 105,351 | | |
| Bushels | | |
$ | 28,001 | |
Distillers grain | |
| 600 | | |
| Tons* | | |
$ | 7,284 | |
Natural Gas | |
| 10,512 | | |
| MMBTU | | |
$ | 3,423 | |
__________
* Distillers grain quantities are stated
on an equivalent dried-ton basis.
Interest Rate Risk
Aventine is exposed to market risk
from changes in interest rates. Exposure to interest rate risk results primarily from holding revolving loans that bear
variable interest rates. Specifically, Aventine had $161.1 million outstanding in long-term debt as of December 31, 2014, of
which $19.1 million was variable-rate in nature. Aventine estimates that a one percent (1%) change in the interest rate on
the variable portion of its long-term debt would impact Aventine’s annual pre-tax earnings by approximately $0.2
million. The specifics of each note are discussed in greater detail in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources” beginning on page 71 of
this joint proxy statement/prospectus.
Supplemental Quarterly Information
The following table represents an unaudited
review of the significant items for the results of operations on a quarterly basis for the years ended December 31, 2014, 2013
and 2012:
(Dollars in thousands, except per share data) | |
Three
Months Ended March
31, 2014 | | |
Three
Months Ended June
30, 2014 | | |
Three
Months Ended September
30, 2014 | | |
Three
Months Ended December
31, 2014 | |
Revenues | |
$ | 117,333 | | |
$ | 145,455 | | |
$ | 153,805 | | |
$ | 171,435 | |
Gross profit | |
| 15,536 | | |
| 23,807 | | |
| 21,709 | | |
| 15,673 | |
Selling, general, and administrative expenses | |
| 3,426 | | |
| 7,313 | | |
| 4,141 | | |
| 16,508 | |
Hedging and other expense (income) | |
| 13,595 | | |
| (2,211 | ) | |
| 1,914 | | |
| 502 | |
Income (loss) from operations | |
| (1,485 | ) | |
| 18,705 | | |
| 15,654 | | |
| (1,337 | ) |
Net income (loss) | |
| (5,820 | ) | |
| 14,748 | | |
| 9,910 | | |
| (2,274 | ) |
Net income (loss) per share attributable to common stockholders - basic | |
$ | (2.47 | ) | |
$ | 6.26 | | |
$ | 4.20 | | |
$ | (0.36 | ) |
(Dollars in thousands, except per share data) |
|
Three
Months Ended March
31, 2013 |
|
|
Three
Months Ended June
30, 2013 |
|
|
Three
Months Ended September
30, 2013 |
|
|
Three
Months Ended December
31, 2013 |
|
Revenues |
|
$ |
121,393 |
|
|
$ |
132,517 |
|
|
$ |
110,463 |
|
|
$ |
115,893 |
|
Gross profit (loss) |
|
|
(1,768 |
) |
|
|
3,874 |
|
|
|
(3,043 |
) |
|
|
11,972 |
|
Selling, general, and administrative expenses |
|
|
4,017 |
|
|
|
3,712 |
|
|
|
3,079 |
|
|
|
2,782 |
|
Hedging and other expense (income) |
|
|
(266) |
|
|
|
1,060 |
|
|
|
(265) |
|
|
|
5,732 |
|
Income (loss) from operations |
|
|
(5,519 |
) |
|
|
(898 |
) |
|
|
(5,857 |
) |
|
|
3,458 |
|
Net loss |
|
|
(10,291 |
) |
|
|
(1,881 |
) |
|
|
(13,768 |
) |
|
|
(48,365 |
) |
Net income (loss) per share attributable to common stockholders - basic |
|
$ |
(4.37 |
) |
|
$ |
(0.80 |
) |
|
$ |
(5.85 |
) |
|
$ |
(20.53 |
) |
(Dollars in thousands, except per share data) |
|
Three
Months Ended March
31, 2012 |
|
|
Three
Months Ended June
30, 2012 |
|
|
Three
Months Ended September
30, 2012 |
|
|
Three
Months Ended December
31, 2012 |
|
Revenues |
|
$ |
155,310 |
|
|
$ |
131,563 |
|
|
$ |
87,145 |
|
|
$ |
105,692 |
|
Gross loss |
|
|
(2,146 |
) |
|
|
(8,501 |
) |
|
|
(7,270 |
) |
|
|
(6,253 |
) |
Selling, general, and administrative expenses |
|
|
5,880 |
|
|
|
4,267 |
|
|
|
5,213 |
|
|
|
9,844 |
|
Hedging and other
expenses (income)(1) |
|
|
433 |
|
|
|
708 |
|
|
|
(243 |
) |
|
|
53 |
|
Loss from operations(1) |
|
|
(8,459 |
) |
|
|
(13,476 |
) |
|
|
(12,240 |
) |
|
|
(16,150 |
) |
Net loss |
|
|
(22,499 |
) |
|
|
(22,099 |
) |
|
|
(22,559 |
) |
|
|
(16,703 |
) |
Net loss per share attributable to common stockholders - basic |
|
$ |
(133.92 |
) |
|
$ |
(131.54 |
) |
|
$ |
(9.60 |
) |
|
$ |
(7.09 |
) |
__________
(1) | Loss
(gain) on derivatives has been reclassified in the above table for the years ending December
31, 2013 and 2012 to conform to the presentation adopted in the 2014 consolidated financial
statements. |
INFORMATION ABOUT THE PACIFIC ETHANOL
ANNUAL MEETING AND VOTE
Date, Time and Place of the Annual Meeting
These proxy materials are delivered in connection
with the solicitation by the Pacific Ethanol Board of proxies to be voted at the Pacific Ethanol annual meeting, which is to be
held at [●], at [●], a.m., local time, on [●], 2015. On or about [●], 2015 Pacific Ethanol commenced mailing
this joint proxy statement/prospectus and the enclosed form of proxy to its stockholders entitled to vote at the meeting.
IMPORTANT NOTICE REGARDING THE INTERNET
AVAILABILITY
OF PROXY MATERIALS FOR THE PACIFIC ETHANOL
2015 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD [●],
2015
This Joint Proxy Statement/Prospectus and
Pacific Ethanol’s Annual Report on Form 10-K for the year ended December 31, 2014 are available at the website address at
[●]. You are encouraged to access and review all of the important information contained in the proxy materials before voting.
The Pacific Ethanol Annual Report is not to be regarded as proxy soliciting material or as a communication through which any solicitation
of proxies is made.
Purpose of the Pacific Ethanol Annual Meeting
Pacific Ethanol stockholders will be asked to
vote on the following proposals:
|
1. |
To approve the issuance of shares of Pacific Ethanol common
stock and non-voting common stock pursuant to the Agreement and Plan of Merger, dated as of December 30, 2014, as amended on
March 31, 2015, by and among Pacific Ethanol, Inc., AVR Merger Sub, Inc., and Aventine Renewable Energy Holdings, Inc.
(sometimes referred to as the merger agreement). A copy of the merger
agreement has been included as Annex A to this joint proxy statement/prospectus. In the merger, each share of
Aventine common stock issued and outstanding immediately preceding the completion of the merger (other than dissenting
shares and shares held by Pacific Ethanol or Aventine) will be converted into the right to receive, at the election of
each Aventine stockholder, and subject to certain limitations in order to maintain the tax-free treatment of the merger
(i.e., no more than 20% of shares of Aventine common stock will be exchanged by the Aventine stockholders for shares of
Pacific Ethanol non-voting common stock), (i) 1.25 shares of Pacific Ethanol common stock, (ii) 1.25 shares of Pacific
Ethanol non-voting common stock, or (iii) a combination of Pacific Ethanol common stock and non-voting common stock
resulting in such Aventine stockholder receiving a total number of shares of common stock and non-voting common stock
equal to 1.25 times the number of shares of Aventine common stock held by such stockholder. |
|
2. |
To approve an amendment to Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock. A copy of the amendment to Pacific Ethanol’s Certificate of Incorporation has been included as Annex B to this joint proxy statement/prospectus. |
|
3. |
For holders of Pacific Ethanol Series B Preferred Stock only, to obtain the agreement of such holders not to treat the merger as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations. |
|
4. |
To adjourn the annual meeting if necessary or advisable to permit
further solicitation of proxies in the event there are not sufficient votes at the time of the annual meeting to approve (i)
the issuance of shares described in Proposal 1, (ii) the proposed amendment to Pacific Ethanol’s Certificate of Incorporation
described in Proposal 2, and/or (iii) the agreement by the holders of Pacific Ethanol Series B Preferred Stock not to treat
the merger as a liquidation, dissolution or winding up described in Proposal 3. |
|
5. |
To elect seven directors to serve on the Pacific Ethanol Board
until the next annual meeting of stockholders and/or until their successors are duly elected and qualified. The nominees for
election are William L. Jones, Neil M. Koehler, Terry L. Stone, John L. Prince, Douglas L. Kieta, Larry D. Layne and Michael
D. Kandris. |
|
6. |
To cast a non-binding advisory vote to approve Pacific Ethanol’s
executive compensation (“say-on-pay”). |
|
7. |
To ratify the appointment of Hein & Associates LLP as Pacific
Ethanol’s independent registered public accounting firm for the year ending December 31, 2015. |
|
8. |
To transact such other business as may properly come before
the annual meeting or any adjournment or postponement thereof. |
It is a condition to completion of the merger
that (i) holders of Pacific Ethanol common stock and holders of Pacific Ethanol Series B Preferred Stock approve Proposal 1 and
Proposal 2, voting together as a single class (giving effect to the Preferred Voting Ratio), (ii) holders of Pacific Ethanol Series
B Preferred Stock approve Proposal 1 and Proposal 2 voting as a separate class and (iii) holders of Pacific Ethanol Series B Preferred
Stock agree to the matters described in Proposal 3.
In the merger, each issued and outstanding
share of Aventine common stock (other than dissenting shares and shares held by Pacific Ethanol or Aventine) will be converted
into the right to receive, at the election of the holder, pursuant to the terms of an election form to be distributed to all holders
in advance of the special meeting and certain limitations in order to maintain the tax free treatment of the merger (i.e., no
more than 20% of shares of Aventine common stock will be exchanged by the Aventine stockholders for shares of Pacific Ethanol
non-voting common stock), (i) 1.25 shares of Pacific Ethanol common stock, (ii) 1.25 shares of Pacific Ethanol non-voting common
stock, or (iii) a combination of Pacific Ethanol common stock and non-voting common stock resulting in such Aventine stockholder
receiving a total number of shares of common stock and non-voting common stock equal to 1.25 times the number of shares of Aventine
common stock held by such stockholder subject to certain limitations to maintain the tax free treatment of the merger. This exchange
ratio is fixed and will not be adjusted to reflect stock price changes prior to the closing.
The stockholders of Pacific Ethanol will
continue to own their existing shares and the rights and privileges of their existing shares will not be affected by the merger.
However, because Pacific Ethanol will be issuing new shares of Pacific Ethanol common stock and non-voting common stock to Aventine
stockholders in the merger, the stockholders of Pacific Ethanol will experience dilution as a result of the issuance of shares
in the merger and each outstanding share of Pacific Ethanol common stock immediately prior to the merger will represent a smaller
percentage of the total number of shares of Pacific Ethanol common stock and non-voting common stock issued and outstanding after
the merger. It is expected that Pacific Ethanol stockholders before the merger will hold approximately 58% of the total Pacific
Ethanol common stock and non-voting common stock issued and outstanding immediately following completion of the merger. Thus,
Pacific Ethanol stockholders before the merger will experience dilution in the amount of 42% as a result of the merger.
Under NASDAQ Marketplace Rule 5635(a), a company
listed on The NASDAQ Capital Market is required to obtain stockholder approval in connection with a merger with another company
if the number of shares of common stock or securities convertible into common stock to be issued is in excess of 20% of the number
of shares of common stock then outstanding. In addition, the issuance of Pacific Ethanol common stock and non-voting common stock
in the merger may constitute a “change of control” for purposes of NASDAQ Marketplace Rule 5635(b). Whether a “change
of control” exists under NASDAQ Marketplace Rule 5635(b) is a facts and circumstances determination that will be undertaken
by NASDAQ based on an evaluation of certain factors, such as changes in Pacific Ethanol’s management, board of directors,
voting power, ownership and financial structure as a result of the merger. If NASDAQ determines that the merger constitute a change
of control of Pacific Ethanol, Pacific Ethanol will be required to submit a new original listing application with NASDAQ and comply
with The NASDAQ Capital Market initial listing requirements.
Based upon the current number of issued
and outstanding shares of Aventine common stock, if the merger is completed, it is estimated that an aggregate of approximately
17,755,300 shares of Pacific Ethanol common stock and non-voting common stock will be issued upon the closing of the merger, assuming
no exercise or conversion of outstanding options and warrants. On an as converted basis, the aggregate number of shares of Pacific
Ethanol common stock and non-voting common stock to be issued and issuable in connection with the merger will (i) exceed 20% of
the shares of Pacific Ethanol common stock issued and outstanding on the record date for the Pacific Ethanol annual meeting, and
(ii) may result in a “change of control” under NASDAQ Marketplace Rule 5635(b). For these reasons Pacific Ethanol
must obtain the approval of Pacific Ethanol stockholders for the issuance of these securities to Aventine stockholders in the
merger.
Record Date and Voting Power
Only stockholders of record as of the close
of business on [●], 2015 will be entitled to notice of and to vote at the annual meeting or at any subsequent meeting due
to an adjournment of the original meeting.
On the record date, Pacific Ethanol had
two classes of voting stock, common stock and preferred stock, of which [●] shares of common stock were issued and outstanding
and 926,942 shares of Series B Preferred Stock were issued and outstanding. Each outstanding share of common stock entitles the
holder to one vote on all matters to be voted upon at the annual meeting (other than Proposal No. 3) and each outstanding share
of Series B Preferred Stock entitles the holder to the number of votes equal to the number of shares of common stock into which
each share of Series B Preferred Stock is convertible to, on matters at the annual meeting voted on with the common stock, voting
together as a single class, and one vote on matters at the annual meeting voted on with only the Series B Preferred Stock, voting
as a separate class.
A complete list of stockholders entitled
to vote at the Pacific Ethanol annual meeting will be available for examination by any Pacific Ethanol stockholder at Pacific
Ethanol’s headquarters, 400 Capitol Mall, Suite 2060, Sacramento, CA 95814, for purposes pertaining to the Pacific Ethanol
annual meeting, during normal business hours for a period of ten days before the Pacific Ethanol annual meeting, and at the time
and place of the Pacific Ethanol annual meeting.
Quorum and Voting Rights
A quorum is the number of shares that must
be represented at a meeting to lawfully conduct business. The presence, in person or by proxy, of holders of a majority of the
Pacific Ethanol common stock and Series B Preferred Stock (giving effect to the Preferred Voting Ratio) issued and outstanding
and entitled to vote at the annual meeting constitutes a quorum for the transaction of business. Proxies received but marked as
abstentions, if any, and broker non-votes, if any, will be included in the calculation of the number of shares considered to be
present at the Pacific Ethanol annual meeting for purposes of determining a quorum. As of the record date, a total of [●]
shares of common stock and 926,942 shares of Series B Preferred Stock were outstanding and eligible to vote at the Pacific Ethanol
annual meeting. The presence of [●] shares, consisting of outstanding common stock and Series B Preferred Stock (giving
effect to the Preferred Voting Ratio) will constitute a quorum.
Required Vote
To approve the issuance of shares of Pacific
Ethanol common stock and non-voting common stock in the merger (Proposal 1), the affirmative vote of (i) the holders of a majority
of shares of Pacific Ethanol common stock and Series B Preferred Stock, present in person or represented by proxy at the annual
meeting, voting together as a single class and entitled to vote (giving effect to the Preferred Voting Ratio) and (ii) the holders
of a majority of the outstanding shares of Series B Preferred Stock voting as a separate class and entitled to vote, is required.
Although failure to submit a proxy or vote in person at the annual meeting, or a failure to provide your broker, nominee, fiduciary
or other custodian, as applicable, with instructions on how to vote your shares will not affect the outcome of the vote on the
proposal to approve the issuance of shares of Pacific Ethanol common stock and non-voting common stock with respect to the vote
of the shares of Pacific Ethanol common stock and Series B Preferred Stock voting together as a single class (giving effect to
the Preferred Voting Ratio), the failure to submit a proxy or vote in person at the annual meeting will make it more difficult
to meet the requirement under Pacific Ethanol’s bylaws that the holders of a majority of the Pacific Ethanol capital stock
issued and outstanding and entitled to vote at the annual meeting be present in person or by proxy to constitute a quorum at the
annual meeting. Because the Series B Preferred Stock approval is based on the affirmative vote of a majority of the outstanding
Pacific Ethanol Series B Preferred Stock entitled to vote, a Pacific Ethanol Series B Preferred Stock stockholder’s failure
to vote in person or by proxy at the annual meeting, or an abstention from voting will have the same effect as a vote “AGAINST” adoption
of this proposal.
To approve the amendment to
Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock (Proposal 2), the
affirmative vote of a majority of the outstanding shares of Pacific Ethanol common stock and Series B Preferred Stock, voting
together as a single class and entitled to vote (giving effect to the Preferred Voting Ratio) and (ii) the holders of a
majority of the outstanding shares of Series B Preferred Stock, voting as a separate class and entitled to vote, is required
for such proposal. Because approval is based on the affirmative vote of a majority of the outstanding shares of Pacific
Ethanol common stock and Series B Preferred Stock entitled to vote, a Pacific Ethanol stockholder’s failure to vote in
person or by proxy at the annual meeting, or an abstention from voting, or the failure of a holder of Pacific Ethanol
common stock who holds his or her shares in “street name” through a broker or other nominee to give voting
instructions to such broker or other nominee, will have the same effect as a vote “AGAINST” adoption of
this proposal.
For the holders of Pacific Ethanol Series B
Preferred stock to agree not to treat the merger as a liquidation, dissolution or winding up within the meaning of Pacific Ethanol’s
Certificate of Designations, Powers, Preferences and Rights relating to its Series B Preferred Stock (Proposal 3), the affirmative
vote of holders of at least 66-2/3% of the outstanding shares of Series B Preferred Stock, entitled to vote thereon, is required
for such treatment. Holders of Pacific Ethanol common stock are not entitled to vote on this proposal.
To approve the adjournment of the annual
meeting, if necessary or advisable to solicit additional proxies if there are not sufficient votes to adopt the merger agreement
at the time of the annual meeting (Proposal 4), the affirmative vote of the holders of a majority of shares of Pacific Ethanol
common stock and Series B Preferred Stock voting together as a single class, entitled to vote thereon (giving effect to the Preferred
Voting Ratio), if a quorum is present, is required. The chairman of the meeting may also (regardless of the outcome of the stockholder
vote on adjournment) adjourn the meeting to another place, date and time. If a quorum is not present, a majority of the voting
stock represented in person or by proxy, or the chairman of the meeting, may adjourn the meeting until a quorum is present. Shares
held by stockholders who are not present at the annual meeting in person or by proxy will have no effect on the outcome of any
vote to adjourn the annual meeting. Broker non-votes will have no effect on the outcome of any vote to adjourn the annual meeting
if a quorum is present but will have the same effect as a vote “AGAINST” if no quorum is present. Abstentions
from voting will have the same effect as a vote “AGAINST” adjourning the annual meeting.
The seven nominees receiving the highest
number of affirmative votes of the outstanding shares of Pacific Ethanol common stock and Series B Preferred Stock, voting together
as a single class, present at the annual meeting in person or by proxy and entitled to vote, will be elected as directors to serve
until the next annual meeting of stockholders and/or until their successors are duly elected and qualified (Proposal 5). Votes
against a candidate, abstentions and broker non-votes will be counted for purposes of determining whether a quorum is present
for this proposal, but will not be included in the vote totals for this proposal and, therefore, will have no effect on the vote.
Pacific Ethanol has adopted corporate governance guidelines that implement a majority voting standard for uncontested elections
of directors—that is, an election where the only nominees are those recommended by the Pacific Ethanol Board. Notwithstanding
that a nominee may be within the group of seven nominees receiving the highest number of affirmative votes, as determined above,
if an incumbent nominee for director in an uncontested election receives a greater number of votes against his or her election
than votes for his or her election (sometimes referred to as a Majority Against Vote), Pacific Ethanol’s corporate governance
guidelines require that the nominee promptly tender his or her resignation following certification of the vote. Pacific Ethanol’s
Nominating and Corporate Governance Committee will promptly consider the tendered resignation and recommend to the full Pacific
Ethanol Board whether to accept the tendered resignation or take other action, such as rejecting the tendered resignation and
addressing the apparent underlying causes of the Majority Against Vote. In making this recommendation, Pacific Ethanol’s
Nominating and Corporation Governance Committee will consider all factors deemed relevant, including the underlying ascertainable
reasons why stockholders voted against the director, the length of service and qualifications of the director, the director’s
contributions to Pacific Ethanol, whether by accepting the resignation Pacific Ethanol will no longer be in compliance with any
applicable law, rule, regulation or governing document, and whether or not accepting the resignation is in the best interests
of Pacific Ethanol and its stockholders. Any director who tenders his or her resignation under these guidelines is not to participate
in the Nominating and Corporate Governance Committee recommendation or the Pacific Ethanol Board consideration regarding whether
or not to accept the tendered resignation. Pacific Ethanol will promptly and publicly disclose the Pacific Ethanol’s Board’s
decision and process in a report filed with or furnished to the Securities and Exchange Commission.
To approve the advisory (non-binding) resolution
to approve the compensation paid to Pacific Ethanol’s named executive officers (Proposal 6), as disclosed in this joint
proxy statement/prospectus, the affirmative vote of the holders of a majority of shares of Pacific Ethanol common stock and Series
B Preferred Stock voting together as a single class, present at the annual meeting in person or by proxy and entitled to vote
thereon (giving effect to the Preferred Voting Ratio), if a quorum is present, is required. Shares held by stockholders who are
not present at the annual meeting in person or by proxy will have no effect on the outcome of any vote to this “say-on-pay”
proposal. Abstentions from voting will have the same effect as a vote “AGAINST” this “say-on-pay”
proposal. Broker non-votes will be counted for purposes of determining whether a quorum is present, but will not be included in
the vote total for this proposal and, therefore, will have no effect on the vote. The “say-on-pay vote” is advisory,
and therefore not binding on Pacific Ethanol, or its Compensation Committee or the Pacific Ethanol Board. The vote will provide
the Compensation Committee and the Pacific Ethanol Board with information relating to the opinions of its stockholders which the
Compensation Committee will consider as it makes determinations with respect to future action regarding executive compensation
and the executive compensation program.
The ratification of the appointment of Pacific
Ethanol’s independent registered public accounting firm (Proposal 7) requires the affirmative votes of a majority of the
votes of the shares of Pacific Ethanol common stock and Series B Preferred Stock, voting together as a single class, present at
the annual meeting in person or by proxy and entitled to vote thereon (giving effect to the Preferred Voting Ratio), if a quorum
is present, is required. Shares held by stockholders who are not present at the annual meeting in person or by proxy will have
no effect on the outcome of any vote on the ratification of the appointment of Pacific Ethanol’s independent registered
public accounting firm. Abstentions from voting will have the same effect as a vote “AGAINST”
the ratification of the appointment of Pacific Ethanol’s independent registered public accounting firm.
Broker Non-Votes
If you are a beneficial owner of shares
held in street name and do not provide the organization that holds your shares with specific voting instructions, under the rules
of various national and regional securities exchanges, the organization that holds your shares may generally vote on routine matters
but cannot vote on non-routine matters. If the organization that holds your shares does not receive instructions from you on how
to vote your shares on a non-routine matter, the organization that holds your shares does not have the authority to vote on the
matter with respect to those shares. This is generally referred to as a “broker non-vote.” Broker non-votes, if any,
will be counted as being present at the annual meeting for purposes of determining a quorum, but will not be voted on those matters
for which specific authorization is required. Under the current rules of The NASDAQ Stock Market, brokers do not have discretionary
authority to vote on the proposal to issue the Pacific Ethanol common stock and non-voting common stock, the proposal to amend
Pacific Ethanol’s Certificate of Incorporation, the proposal to adjourn the annual meeting, the election of directors, or
the proposal to approve Pacific Ethanol’s executive compensation. Therefore, if you do not provide voting instruction to
your broker, your shares will not be voted on the proposal to issue the Pacific Ethanol common stock and non-voting common stock,
the proposal to adopt the Certificate of Amendment, the proposal to adjourn the annual meeting, the election of directors, or
the proposal to approve Pacific Ethanol’s executive compensation. A broker non-vote will have no effect on the outcome of
the proposal to issue the Pacific Ethanol common stock and non-voting common stock. A broker non-vote will have the same effect
as a vote “AGAINST” the amendment to Pacific Ethanol’s Certificate of Incorporation. A broker non-vote
will have no effect on the outcome of any vote on the proposal to adjourn the annual meeting if a quorum is present but will have
the same effect as a vote “AGAINST” if no quorum is present. A broker non-vote will have no effect on the outcome
of the election of directors or the proposal to approve Pacific Ethanol’s executive compensation.
Abstentions: Non-Voting
For the proposal to approve the issuance
of shares of Pacific Ethanol common stock and non-voting common stock as contemplated by the merger agreement, if you abstain
on the proposal, your shares will be counted as a vote cast, and, therefore, will have the same effect as a vote “AGAINST”
such proposal. With respect to the vote of Pacific Ethanol common stock and Series B Preferred Stock voting together as a
single class (giving effect to the Preferred Voting Ratio), a failure to submit a proxy is not counted as a vote cast, and as
such, will not otherwise have an effect on the outcome of the vote for the proposal, but it will make it more difficult to meet
the requirement under Pacific Ethanol’s bylaws that the holders of a majority of the Pacific Ethanol capital stock issued
and outstanding and entitled to vote at the annual meeting be present in person or by proxy to constitute a quorum at the annual
meeting.
For Series B Preferred Stock, for the proposal
to approve the issuance of the Pacific Ethanol common stock and non-voting common stock, an abstention on the proposal or failure
to submit a proxy will have the same effect as a vote “AGAINST” such proposal only with respect to the separate
class vote of the Series B Preferred Stock.
For the proposal to approve the amendment to
Pacific Ethanol’s Certificate of Incorporation as contemplated by the merger agreement, an abstention on the proposal or
failure to submit a proxy will have the same effect as a vote “AGAINST” such proposal.
For the proposal to be voted on
by holders of Pacific Ethanol’s Series B Preferred Stock only, to approve not treating the merger as a liquidation,
dissolution or winding up within the meaning of the Certificate of Designations, Powers, Preferences and Rights relating to
the Series B Preferred Stock, an abstention or a failure to submit the proxy card sent separately to the holders of
Pacific Ethanol’s Series B Preferred Stock will have the same effect as a vote “AGAINST” such
proposal.
For the proposal to adjourn the Pacific
Ethanol annual meeting, if necessary or advisable, an abstention will have the same effect as a vote cast “AGAINST”
such proposal. A failure to submit a proxy or vote in person at the annual meeting will not have an effect on the outcome
of the vote on the proposal.
The election of directors will be determined
by the seven nominees receiving the highest number of affirmative votes of the outstanding shares of Pacific Ethanol common stock
and Series B Preferred Stock, voting together as a single class. Abstentions or a failure to submit a proxy will have no effect
on the outcome of the election of nominees for director.
For the non-binding advisory vote to approve
Pacific Ethanol’s executive compensation (“say-on-pay”) an abstention will have the same effect as a vote cast
“AGAINST” such proposal. A failure to submit a proxy will not have an effect on the outcome of the vote for
the proposal.
For the proposal to ratify the appointment
of Hein & Associates LLP as Pacific Ethanol’s independent registered public accounting firm for 2015, an abstention
will have the same effect as a vote cast “AGAINST” such proposal. A failure to submit a proxy will not have
an effect on the outcome of the vote for the proposal.
Appraisal Rights; Trading of Shares
Under Delaware law, Pacific Ethanol stockholders
are not entitled to appraisal rights in connection with the issuance of shares of Pacific Ethanol common stock and non-voting common
stock as contemplated by the merger agreement. It is anticipated that shares of Pacific Ethanol common stock will continue to be
traded on The NASDAQ Capital Market during the pendency of and following the effectiveness of the merger. Shares of Pacific Ethanol
non-voting common stock will not trade on any stock exchange. Pacific Ethanol’s corporate status will not change because
the merger is being consummated between one of its subsidiaries and Aventine.
Shares Beneficially Owned by Pacific Ethanol Directors and Executive
Officers
Pacific Ethanol’s directors and executive
officers beneficially owned [●] shares of Pacific Ethanol common stock on [●], 2015, the record date for the annual
meeting. These shares represent in total [●]% of the total voting power of Pacific Ethanol’s voting securities outstanding
and entitled to vote as of the record date. Pacific Ethanol currently expects that Pacific Ethanol’s directors and executive
officers will vote their shares “FOR” all the proposals to be voted on at the annual meeting, although none
of them has entered into any agreements obligating them to do so.
Voting of Shares; Proxies
Stockholders of record may vote in person
by ballot at the annual meeting or by submitting their proxies:
|
· |
by telephone, by calling the toll-free number [●] and
following the recorded instructions; |
|
· |
by accessing the Internet website www.proxyvote.com and
following the instructions on the website; or |
|
· |
by mail, by indicating your vote on each proxy card you receive, signing and dating each proxy card returning each proxy card in the prepaid envelope that accompanied that proxy card. |
The internet and telephone proxy submission
procedures are designed to authenticate stockholders and to allow them to confirm that their instructions have been properly recorded.
Stockholders of Pacific Ethanol who hold their
shares in “street name” by a broker, nominee, fiduciary or other custodian should refer to the proxy card or other
information forwarded by their broker, nominee, fiduciary or other custodian for instructions on how to vote their shares.
Holders of Pacific
Ethanol Series B Preferred Stock will receive a separate proxy card, that varies slightly from the proxy card sent to holders
of Pacific Ethanol common stock, which includes Proposal 3, a proposal to be voted on by holders of Pacific Ethanol Series B Preferred
Stock, only.
Only proxy cards and
voting instruction forms that have been signed, dated and timely returned, and only shares that have been timely voted electronically
or by telephone will be counted in the quorum and voted. The Internet and telephone voting facilities will close at 11:59 p.m.
Eastern Time, [●], [●], 2015.
Stockholders who vote over the Internet
or by telephone need not return a proxy card or voting instruction form by mail, but may incur costs, such as usage charges, from
telephone companies or Internet service providers.
Pacific Ethanol recommends you submit your
proxy even if you plan to attend the annual meeting. If you properly give your proxy and submit it to Pacific Ethanol in time
to vote, one of the individuals named as your proxy will vote your shares as you have directed. If you attend the annual meeting,
you may vote by ballot, thereby cancelling any proxy previously submitted. If you hold your shares in “street name,”
you will have to obtain a legal proxy in your name from the broker, nominee, fiduciary or other custodian who holds your shares
in order to vote in person at the annual meeting. You may vote for or against the proposals or abstain from voting.
All votes will be tabulated by the inspector
of elections appointed for the annual meeting, who will separately tabulate affirmative and negative votes, abstentions and broker
non-votes.
If you are a stockholder of record and submit
your proxy but do not make specific choices, your proxy will follow the Pacific Ethanol Board’s recommendations and your
shares will be voted:
|
· |
“FOR” the proposal to approve the issuance of shares of Pacific Ethanol common stock and non-voting common stock as contemplated by the merger agreement. |
|
· |
“FOR” the proposal to amend Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock. |
|
· |
For holders of Pacific Ethanol Series B Preferred Stock,
“TO AGREE” not to treat the merger as a liquidation, dissolution or winding up within the meaning of the Pacific
Ethanol Series B Certificate of Designations. |
|
· |
“FOR” the proposal to adjourn the
annual meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes
at the time of the annual meeting to approve the above matters. |
|
· |
“FOR” the election of each of the
nominees set forth in this joint proxy statement/prospectus to the Pacific Ethanol Board. |
|
· |
“FOR” the approval of Pacific Ethanol’s
executive compensation. |
|
· |
“FOR” the proposal to ratify of the
appointment of Hein & Associates LLP as Pacific Ethanol’s independent registered public accounting firm for the
year ending December 31, 2015. |
If your shares are held in street name and
you do not specify how the shares represented thereby are to be voted, your broker may exercise its discretionary authority to
vote on Proposal 7.
Revocability of Proxies and Changes to a Pacific Ethanol Stockholder’s
Vote
A Pacific Ethanol stockholder has the power
to change its vote at any time before its shares are voted at the annual meeting by:
|
· |
notifying Pacific Ethanol’s Corporate Secretary, Christopher
W. Wright, Esq., in writing at 400 Capitol Mall, Sacramento, CA 95814, prior to the Pacific Ethanol annual meeting that you
are revoking your proxy; |
|
· |
executing and delivering a later dated proxy card or submitting a later dated vote by telephone or on the Internet; or |
|
· |
by attending the Pacific Ethanol annual meeting and voting your
shares in person. |
However, if your shares held in “street
name” through a brokerage firm, bank, nominee, fiduciary or other custodian, you must check with your brokerage firm, bank,
nominee, fiduciary or other custodian to determine how to revoke your proxy.
Solicitation of Proxies
The solicitation of proxies from Pacific Ethanol
stockholders is made on behalf of the Pacific Ethanol Board. Pacific Ethanol will be responsible for all fees paid to the Securities
and Exchange Commission and the costs of soliciting Pacific Ethanol stockholders and obtaining these proxies, including the cost
of reimbursing brokers, banks and other financial institutions for forwarding proxy materials to their customers. Proxies may be
solicited, without extra compensation, by Pacific Ethanol officers and employees by mail, telephone, fax, personal interviews or
other methods of communication. Pacific Ethanol has engaged the firm of Georgeson Inc. to assist Pacific Ethanol in the distribution
and solicitation of proxies from Pacific Ethanol stockholders and will pay Georgeson Inc. an estimated fee of $12,500 plus out-of-pocket
expenses for its services. Aventine will pay the costs of soliciting and obtaining its proxies and all other expenses related to
the Aventine special meeting.
Other Business; Adjournments
Pacific Ethanol is not currently aware of
any other business to be acted upon at the Pacific Ethanol annual meeting. If, however, other matters are properly brought before
the annual meeting, your proxies include discretionary authority on the part of the individuals appointed to vote your shares
to act on those matters according to their best judgment.
Any adjournment may be made from time to
time by the affirmative vote of the holders of a majority of the shares represented at the Pacific Ethanol annual meeting in person
or by proxy and entitled to vote thereat and, whether or not a quorum is present, without further notice other than by announcement
at the meeting.
If the annual meeting is adjourned to a
different place, date or time, Pacific Ethanol need not give notice of the new place, date or time if the new place, date or time
is announced at the meeting before adjournment, unless a new record date is set for the meeting. The Pacific Ethanol Board may
fix a new record date if the meeting is adjourned. Proxies submitted by Pacific Ethanol stockholders for use at the annual meeting
will be used at any adjournment or postponement of the meeting. Unless the context otherwise requires, references to the Pacific
Ethanol annual meeting in this joint proxy statement/prospectus are to such annual meeting as adjourned or postponed.
Attending the Meeting
Subject to space availability, all stockholders
as of the record date, or their duly appointed proxies, may attend the meeting. Since seating is limited, admission to the meeting
will be on a first-come, first-served basis. Registration and seating will begin at [●] a.m., local time.
Proposal 1
Approval
of the Issuance of Shares of Pacific Ethanol Common Stock
and
Non-Voting Common Stock in the Merger
At the Pacific Ethanol
annual meeting, holders of Pacific Ethanol common stock and Series B Preferred Stock will be asked to approve the issuance of
shares of Pacific Ethanol common stock and non-voting common stock pursuant to the merger agreement.
Holders of Pacific Ethanol common stock and Series B Preferred Stock should read this joint proxy statement/prospectus carefully
and in its entirety, including the annexes, for more detailed information concerning the merger agreement and merger. A copy of
the merger agreement is attached to this joint proxy statement/prospectus as Annex A.
Required Vote of Stockholders
Based upon the current number of issued
and outstanding shares of Aventine common stock, if the merger is completed, it is estimated that an aggregate of approximately
17,755,300 shares of Pacific Ethanol common stock and non-voting common stock will be issued upon the closing of the merger, assuming
no exercise or conversion of outstanding options and warrants. On an as converted basis, the aggregate number of shares of Pacific
Ethanol common stock and non-voting common stock to be issued and issuable in connection with the merger will (i) exceed 20% of
the shares of Pacific Ethanol common stock issued and outstanding on the record date for the Pacific Ethanol annual meeting, and
(ii) may result in a “change of control” under NASDAQ Marketplace Rule 5635(b). For these reasons Pacific Ethanol
must obtain the approval of Pacific Ethanol stockholders for the issuance of these securities to Aventine stockholders in the
merger.
To approve the issuance of shares of Pacific
Ethanol common stock and non-voting common stock in the merger (this Proposal 1), the affirmative vote of (i) if a quorum is present
at the annual meeting, the holders of a majority of shares of Pacific Ethanol common stock and Series B Preferred Stock, present
in person or represented by proxy at the annual meeting, voting together as a single class and entitled to vote (giving effect
to the Preferred Voting Ratio) and (ii) the holders of a majority of the outstanding shares of Series B Preferred Stock voting
as a separate class and entitled to vote, is required. Although failure to submit a proxy or vote in person at the annual meeting,
or a failure to provide your broker, nominee, fiduciary or other custodian, as applicable, with instructions on how to vote your
shares will not affect the outcome of the vote on the proposal to approve the issuance of shares of Pacific Ethanol common stock
and non-voting common stock with respect to the vote of the shares of Pacific Ethanol common stock and Series B Preferred Stock
voting together as a single class (giving effect to the Preferred Voting Ratio), the failure to submit a proxy or vote in person
at the annual meeting will make it more difficult to meet the requirement under Pacific Ethanol’s bylaws that the holders
of a majority of the Pacific Ethanol capital stock issued and outstanding and entitled to vote at the annual meeting be present
in person or by proxy to constitute a quorum at the annual meeting. Because the Series B Preferred Stock approval is based on
the affirmative vote of a majority of the outstanding Pacific Ethanol Series B Preferred Stock entitled to vote, a Pacific Ethanol
Series B Preferred Stock stockholder’s failure to vote in person or by proxy at the annual meeting, or an abstention from
voting, will have the same
effect as a vote “AGAINST” adoption of this proposal.
Recommendation of the Pacific Ethanol
Board
THE
PACIFIC ETHANOL BOARD unanimously recommends a vote “FOR” the Approval of the issuance of shares of pacific
ethanol common stock and non-voting common stock pursuant to the merger agreement.
Proposal 2
Approval
of the Amendment to Pacific Ethanol’s Certificate of
Incorporation
to Authorize a Class of Non-Voting Common Stock
At the Pacific Ethanol
annual meeting, holders of Pacific Ethanol common stock and Series B Preferred Stock will be asked to approve the amendment to
Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock in connection with the merger.
Holders of Pacific Ethanol common stock and Series B Preferred Stock should read this joint proxy statement/prospectus carefully
and in its entirety, including the annexes, for more detailed information concerning the merger agreement and merger. A copy of
the amendment to Pacific Ethanol’s Certificate of Incorporation is attached to this joint proxy statement/prospectus as
Annex B.
Required Vote of Stockholders
Approval of an amendment to Pacific Ethanol’s
Certificate of Incorporation to create a class of non-voting common stock (this Proposal 2) is one of the conditions to the consummation
of the merger. Pacific Ethanol non-voting common stock is a type of merger consideration Aventine stockholders may elect; thus,
Pacific Ethanol must amend its Certificate of Incorporation to create this class of non-voting common stock. Shares of Pacific
Ethanol non-voting common stock are the same in all respects to shares of Pacific Ethanol’s common stock except that holders
of shares of non-voting common stock are not entitled to vote on matters submitted to Pacific Ethanol stockholders and shares
of non-voting common stock are convertible into shares of common stock on a one-for-one basis no earlier than sixty-one days after
such holder provides a notice of conversion to Pacific Ethanol.
To approve the amendment to Pacific
Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock (this Proposal 2), the
affirmative vote of a majority of the outstanding shares of Pacific Ethanol common stock and Series B Preferred Stock, voting
together as a single class and entitled to vote (giving effect to the Preferred Voting Ratio) and (ii) the holders of a
majority of the outstanding shares of Series B Preferred Stock, voting as a separate class and entitled to vote, is required
for such proposal. Because approval is based on the affirmative vote of a majority of the outstanding shares of Pacific
Ethanol common stock and Series B Preferred Stock entitled to vote, a Pacific Ethanol stockholder’s failure to vote in
person or by proxy at the annual meeting, or an abstention from voting, or the failure of a holder of Pacific Ethanol
common stock who holds his or her shares in “street name” through a broker or other nominee to give voting
instructions to such broker or other nominee, will have the same effect as a vote “AGAINST” adoption of
this proposal.
Recommendation of the Pacific Ethanol
Board
THE
PACIFIC ETHANOL BOARD unanimously recommends a vote “FOR” the Approval of the AMEndment to pacific ethanol’s
certificate of incorporation to create a class of non-voting common stock.
Proposal 3
Agreement
of Holders of Pacific Ethanol Series B Preferred Stock Not
to
Treat the Merger as a Liquidation, Dissolution or Winding Up Within
the
Meaning of Pacific Ethanol’s Certificate of Designations, Powers,
Preferences
and Rights Relating to Pacific Ethanol’s
Series
B Preferred Stock
At the Pacific Ethanol
annual meeting, holders of Pacific Ethanol Series B Preferred Stock will be asked to agree not to treat the merger as a liquidation,
dissolution or winding up within the meaning of Pacific Ethanol’s Certificate of Designations, Powers, Preferences and Rights
relating to Pacific Ethanol’s Series B Preferred Stock. Holders of Pacific Ethanol Series B Preferred Stock will receive
a separate proxy card, that varies slightly from the proxy card sent to holders of Pacific Ethanol common stock, which includes
Proposal 3, a proposal to be voted on by holders of Pacific Ethanol Series B Preferred Stock only. Holders of Pacific Ethanol
Series B Preferred Stock should read this joint proxy statement/prospectus carefully and in its entirety, including the annexes,
for more detailed information concerning the merger agreement and merger.
Required Vote
of Stockholders
The merger may be considered a liquidation,
dissolution or winding up within the meaning of Pacific Ethanol’s Certificate of Designations, Powers, Preferences and Rights
relating to Pacific Ethanol’s Series B Preferred Stock. An agreement by the holders of Pacific Ethanol Series B Preferred
Stock not to treat the merger as a liquidation, dissolution or winding up within the meaning of Pacific Ethanol’s Certificate
of Designations, Powers, Preferences and Rights relating to Pacific Ethanol’s Series B Preferred Stock (this Proposal 3)
is one of the conditions to the consummation of the merger.
For the holders of Pacific Ethanol Series
B Preferred stock to agree not to treat the merger as a liquidation, dissolution or winding up within the meaning of Pacific Ethanol’s
Certificate of Designations, Powers, Preferences and Rights relating to its Series B Preferred Stock (this Proposal 3), the affirmative
vote of holders of at least 66-2/3% of the outstanding shares of Series B Preferred Stock, entitled to vote thereon, is required
for such treatment. Holders of Pacific Ethanol common stock are not entitled to vote on this proposal.
Recommendation
of the Pacific Ethanol Board
THE
PACIFIC ETHANOL BOARD unanimously recommends TO HOLDERS OF PACIFIC ETHANOL SERIES B PREFERRED STOCK a vote “FOR”
the AGREEMENT OF HOLDERS OF PACIFIC ETHANOL SERIES B PREFERRED STOCK NOT TO TREAT THE MERGER AS A liquidation, dissolution or
winding up within the meaning of Pacific Ethanol’s Certificate of Designations, Powers, Preferences and Rights relating
to PACIFIC ETHANOL’s Series B Preferred Stock.
Proposal 4
Approval
to adjourn the ANNUAL meeting if necessary or advisable to
permit
further solicitation of proxies in the event there are not
sufficient
votes at the time of the ANNUAL meeting to approve (i) the
issuance
of shares described in Proposal 1, (ii) the proposed amendment
to
Pacific Ethanol’s Certificate of Incorporation described in
Proposal
2, and/or (iii) the agreement by the holders of Pacific Ethanol
Series
B Preferred Stock not to treat the merger as a liquidation,
dissolution
or winding up described in Proposal 3.
At the Pacific Ethanol annual meeting, holders
of Pacific Ethanol common stock and Series B Preferred Stock will be asked to approve the adjournment of the annual meeting if
necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the
annual meeting to approve (i) the issuance of shares described in Proposal 1, (ii) the proposed amendment to Pacific Ethanol’s
Certificate of Incorporation described in Proposal 2, and/or (iii) the agreement by the holders of Pacific Ethanol Series B Preferred
Stock not to treat the merger as a liquidation, dissolution or winding up described in Proposal 3.
Required Vote of Stockholders
To approve the adjournment of the annual
meeting, if necessary or advisable to solicit additional proxies if there are not sufficient votes to adopt the merger agreement
at the time of the annual meeting (this Proposal 4), the affirmative vote of the holders of a majority of shares of Pacific Ethanol
common stock and Series B Preferred Stock voting together as a single class, entitled to vote thereon (giving effect to the Preferred
Voting Ratio), if a quorum is present, is required. The chairman of the meeting may also (regardless of the outcome of the stockholder
vote on adjournment) adjourn the meeting to another place, date and time. If a quorum is not present, a majority of the voting
stock represented in person or by proxy, or the chairman of the meeting, may adjourn the meeting until a quorum is present. Shares
held by stockholders who are not present at the annual meeting in person or by proxy will have no effect on the outcome of any
vote to adjourn the annual meeting. Broker non-votes will have no effect on the outcome of any vote to adjourn the annual meeting
if a quorum is present but will have the same effect as a vote “AGAINST” if no quorum is present. Abstentions
from voting will have the same effect as a vote “AGAINST” adjourning the annual meeting.
Recommendation of the Pacific Ethanol Board
THE
PACIFIC ETHANOL BOARD unanimously recommends a vote “FOR” the Approval to adjourn the ANNUAL meeting if necessary
or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the ANNUAL meeting
to approve (i) the issuance of shares described in Proposal 1, (ii) the proposed amendment to Pacific Ethanol’s Certificate
of Incorporation described in Proposal 2, and/or (iii) the agreement by the holders of Pacific Ethanol Series B Preferred Stock
not to treat the merger as a liquidation, dissolution or winding up described in Proposal 3.
Proposal 5
Election
of Directors
Pacific Ethanol’s bylaws provide for
seven directors unless otherwise changed by resolution of the Pacific Ethanol Board. Directors are elected annually and hold office
until the next annual meeting of stockholders and/or until their respective successors are duly elected and qualified. Stockholders
who desire to nominate any person for election to the Pacific Ethanol Board must comply with Pacific Ethanol’s bylaws, including
the advance notice bylaw provisions relating to the nomination of persons for election to the Pacific Ethanol Board. See “Information
About The Pacific Ethanol Board, Pacific Ethanol Board Committees and Related Matters—Board Committees and Meetings—Nominating
and Corporate Governance Committee” below. It is intended that the proxies solicited by the Pacific Ethanol Board will be
voted “FOR” election of the following seven nominees unless a contrary instruction is made on the proxy: William
L. Jones, Neil M. Koehler, Terry L. Stone, John L. Prince, Douglas L. Kieta, Larry D. Layne and Michael D. Kandris. If, for any
reason, one or more of the nominees is unavailable as a candidate for director, an event that is not expected, the person named
in the proxy will vote for another candidate or candidates nominated by the Nominating and Corporate Governance Committee. However,
under no circumstances may a proxy be voted in favor of a greater number of persons than the number of nominees named above. All
of the nominees for director are, at present, directors of Pacific Ethanol and have been nominated by Pacific Ethanol’s
Nominating and Corporate Governance Committee and ratified by the full Pacific Ethanol Board.
Required Vote of Stockholders
The seven nominees receiving the highest
number of affirmative votes of the outstanding shares of Pacific Ethanol common stock and Series B Preferred Stock, voting together
as a single class, present at the annual meeting in person or by proxy and entitled to vote, will be elected as directors to serve
until the next annual meeting of stockholders and/or until their successors are duly elected and qualified. Votes against a candidate,
abstentions and broker non-votes will be counted for purposes of determining whether a quorum is present for this proposal, but
will not be included in the vote totals for this proposal and, therefore, will have no effect on the vote.
Majority Voting Guidelines
Pacific Ethanol has adopted corporate governance
guidelines that implement a majority voting standard for uncontested elections of directors—that is, an election where the
only nominees are those recommended by the Pacific Ethanol Board. Notwithstanding that a nominee may be within the group of seven
nominees receiving the highest number of affirmative votes, as determined above, if an incumbent nominee for director in an uncontested
election receives a Majority Against Vote, the Pacific Ethanol corporate governance guidelines require that the nominee promptly
tender his or her resignation following certification of the vote. Pacific Ethanol’s Nominating and Corporate Governance
Committee will promptly consider the tendered resignation and recommend to the full Pacific Ethanol Board whether to accept the
tendered resignation or take other action, such as rejecting the tendered resignation and addressing the apparent underlying causes
of the Majority Against Vote.
In making this recommendation, the Pacific
Ethanol Nominating and Corporation Governance Committee will consider all factors deemed relevant, including the underlying ascertainable
reasons why stockholders voted against the director, the length of service and qualifications of the director, the director’s
contributions to Pacific Ethanol, whether by accepting the resignation Pacific Ethanol will no longer be in compliance with any
applicable law, rule, regulation or governing document, and whether or not accepting the resignation is in the best interests
of Pacific Ethanol and its stockholders. Any director who tenders his or her resignation under these guidelines is not to participate
in the Nominating and Corporate Governance Committee recommendation or Pacific Ethanol Board consideration regarding whether or
not to accept the tendered resignation. Pacific Ethanol will promptly and publicly disclose the Pacific Ethanol Board’s
decision and process in a report filed with or furnished to the Securities and Exchange Commission.
Recommendation of the Pacific Ethanol Board
THE
PACIFIC ETHANOL BOARD unanimously recommends a vote “FOR” the election of EACH OF the SEVEN director nominees
listed above.
Information About the Pacific Ethanol Board, Pacific Ethanol
Board Committees and Related Matters
Directors
The following table sets forth certain information
regarding Pacific Ethanol directors as of March 31, 2015:
Name |
Age |
Position(s) Held |
William L. Jones(1) |
65 |
Chairman of the Board and Director |
Neil M. Koehler |
57 |
Chief Executive Officer, President
and Director |
Michael D. Kandris |
67 |
Chief Operating Officer and Director |
Terry L. Stone(2) |
65 |
Director |
John L. Prince(3) |
72 |
Director |
Douglas L. Kieta(3) |
72 |
Director |
Larry D. Layne(4) |
74 |
Director |
__________
(1) | Member of the Audit Committee. |
(2) | Member of the Audit and Compensation Committees. |
(3) | Member of the Compensation and Nominating and Corporate Governance
Committees. |
(4) | Member of the Audit, Compensation and Nominating and Corporate
Governance Committees. |
Experience and
Background
The biographies below describe the skills,
qualities and attributes and business experience of each of the directors, including the capacities in which they served during
the past five years:
William L. Jones has
served as Chairman of the Pacific Ethanol Board, and as a director, since March 2005. Mr. Jones is a co-founder of Pacific Ethanol
California, Inc. (sometimes referred to as PEI California), which is one of Pacific Ethanol’s predecessors, and served as
Chairman of the Board of PEI California since its formation in January 2003 through March 2004, when he stepped off the board
of directors of PEI California to focus on his candidacy for one of California’s United States Senate seats. Mr. Jones was
California’s Secretary of State from 1995 to 2003. Since May 2002, Mr. Jones has also been the owner of Tri-J Land &
Cattle, a diversified farming and cattle company in Fresno County, California. Mr. Jones has a B.A. degree in Agribusiness and
Plant Sciences from California State University, Fresno.
Mr. Jones’s qualifications to serve
on the Pacific Ethanol Board include:
|
· |
co-founder of PEI California; |
|
· |
knowledge gained through his extensive work as Pacific Ethanol’s
Chairman since Pacific Ethanol’s inception in 2005; |
|
· |
extensive knowledge of and experience in the agricultural and
feed industries, as well as a deep understanding of operations in political environments; and |
|
· |
background as an owner of a farming company in California, and
his previous role in the California state government. |
Neil M. Koehler has
served as Chief Executive Officer, President and as a director since March 2005. Mr. Koehler is a co-founder of PEI California
and served as its Chief Executive Officer since its formation in January 2003 and as a member of its board of directors from March
2004 until its dissolution in March 2012. Prior to his association with PEI California, Mr. Koehler was the co-founder and General
Manager of Parallel Products, one of the first ethanol production facilities in California, which was sold to a public company
in 1997. Mr. Koehler was also the sole manager and sole limited liability company member of Kinergy, which he founded in September
2000, and which is one of Pacific Ethanol’s wholly-owned subsidiaries. Mr. Koehler has over 30 years of experience in the
ethanol production, sales and marketing industry in the Western United States. Mr. Koehler is a Director of the RFA and is a nationally-recognized
speaker on the production and marketing of renewable fuels. Mr. Koehler has a B.A. degree in Government from Pomona College.
Mr. Koehler’s qualifications to serve
on the Pacific Ethanol Board include:
|
· |
day-to-day leadership experience as Pacific Ethanol’s
current President and Chief Executive Officer provides Mr. Koehler with intimate knowledge of Pacific Ethanol operations; |
|
· |
extensive knowledge of and experience in the ethanol production,
sales and marketing industry, particularly in the Western United States; |
|
· |
prior leadership experience with other companies in the ethanol
industry; and |
|
· |
day-to-day leadership experience affords a deep understanding
of business operations, challenges and opportunities. |
Michael D. Kandris
has served as a director since June 2008 and as Pacific Ethanol’s Chief Operating Officer since January 6, 2013. Mr. Kandris
served as an independent contractor with supervisory responsibility for ethanol plant operations, under the direction of Pacific
Ethanol’s Chief Executive Officer, from January 1, 2012 to January 5, 2013. Mr. Kandris was President, Western Division
of Ruan Transportation Management Systems from November 2007 until his retirement in September 2009. From January 2000 to November
2007, Mr. Kandris served as President and Chief Operating Officer of Ruan Transportation Management Systems, where he had overall
responsibility for all operations, finance and administrative functions. Mr. Kandris has 30 years of experience in all modes of
transportation and logistics. Mr. Kandris served on the Executive Committee of the American Trucking Association and as a board
member for the National Tank Truck Organization until his retirement from Ruan Transportation Management Systems in September
2009. Mr. Kandris has a B.S. degree in Business from California State University, Hayward.
Mr. Kandris’ qualifications to serve
on the Pacific Ethanol Board include:
|
· |
extensive experience in various executive leadership positions; |
|
· |
extensive experience in rail and truck transportation and logistics;
and |
|
· |
day-to-day leadership experience affords a deep understanding
of business operations, challenges and opportunities. |
Terry L. Stone has
served as a director since March 2005. Mr. Stone is a Certified Public Accountant with over thirty years of experience in accounting
and taxation. He has been the owner of his own accountancy firm since 1990 and has provided accounting and taxation services to
a wide range of industries, including agriculture, manufacturing, retail, equipment leasing, professionals and not-for-profit
organizations. Mr. Stone has served as a part-time instructor at California State University, Fresno, teaching classes in taxation,
auditing and financial and management accounting. Mr. Stone is also a financial advisor and franchisee of Ameriprise Financial
Services, Inc. Mr. Stone has a B.S. degree in Accounting from California State University, Fresno.
Mr. Stone’s qualifications to serve
on the Pacific Ethanol Board include:
|
· |
extensive experience with financial accounting and tax matters; |
|
· |
recognized expertise as an instructor of taxation, auditing
and financial and management accounting; |
|
· |
“audit committee financial expert,” as defined by
the Securities and Exchange Commission, and satisfies the “financial sophistication” requirements of NASDAQ’s
listing standards; and |
|
· |
ability to communicate and encourage discussion, together with
his experience as a senior independent director of all Board committees on which he serves make him an effective chairman
of the Audit Committee. |
John L. Prince has
served as a director since July 2005. Mr. Prince is retired but also works as a consultant. Mr. Prince was an Executive Vice President
with Land O’ Lakes, Inc. from July 1998 until his retirement in 2004. Prior to that time, Mr. Prince was President and Chief
Executive Officer of Dairyman’s Cooperative Creamery Association located in Tulare, California, until its merger with Land
O’ Lakes, Inc. in July 1998. Land O’ Lakes, Inc. is a farmer-owned, national branded organization based in Minnesota
with annual sales in excess of $6 billion and membership and operations in over 30 states. Prior to joining the Dairyman’s
Cooperative Creamery Association, Mr. Prince was President and Chief Executive Officer for nine years until 1994, and was Operations
Manager for the preceding ten years commencing in 1975, of the Alto Dairy Cooperative in Waupun, Wisconsin. Mr. Prince has a B.A.
degree in Business Administration from the University of Northern Iowa.
Mr. Prince’s qualifications to serve
on the Pacific Ethanol Board include:
|
· |
extensive experience in various executive leadership positions; |
|
· |
day-to-day leadership experience affords a deep understanding
of business operations, challenges and opportunities; and |
|
· |
ability to communicate and encourage discussion helps Mr. Prince
discharge his duties effectively as chairman of the Nominating and Corporate Governance Committee. |
Douglas L. Kieta has
served as a director since April 2006. Mr. Kieta is currently retired but also works as a consultant through Century West Projects,
Inc., of which he is the President and an owner, providing project and construction management services. Prior to retirement in
January 2009, Mr. Kieta was employed by BE&K, Inc., a large engineering and construction company headquartered in Birmingham,
Alabama, where he served as the Vice President of Power from May 2006 to January 2009. From April 1999 to April 2006, Mr. Kieta
was employed at Calpine Corporation where he was the Senior Vice President of Construction and Engineering. Calpine Corporation
is a major North American power company which leases and operates integrated systems of fuel-efficient natural gas-fired and renewable
geothermal power plants and delivers clean, reliable and fuel-efficient electricity to customers and communities in 21 states
and three Canadian provinces. Mr. Kieta has a B.S. degree in Civil Engineering from Clarkson University and a Master’s degree
in Civil Engineering from Cornell University.
Mr. Kieta’s qualifications to serve
on the Pacific Ethanol Board include:
|
· |
extensive experience in various leadership positions; |
|
· |
day-to-day leadership experience affords a deep understanding
of business operations, challenges and opportunities; and |
|
· |
service with Calpine affords a deep understanding of large-scale
construction and engineering projects as well as plant operations, which is particularly relevant to Pacific Ethanol’s
ethanol production facility operations. |
Larry D. Layne has
served as a director since December 2007. Mr. Layne joined First Western Bank in 1963 and served in various capacities with First
Western Bank and its acquiror, Lloyds Bank of California, and Lloyd’s acquiror, Sanwa Bank California, until his retirement
in 2000. Sanwa Bank California was subsequently acquired by Bank of the West. From 1999 to 2000, Mr. Layne was Vice Chairman of
Sanwa Bank California in charge of its Commercial Banking Group which encompassed all of Sanwa Bank California’s 38 commercial
and business banking centers and 12 Pacific Rim branches as well as numerous internal departments. From 1997 to 2000, Mr. Layne
was also Chairman of the Board of The Eureka Funds, a mutual fund family of five separate investment funds with total assets of
$900,000,000. From 1996 to 2000, Mr. Layne was Group Executive Vice President of the Relationship Banking Group of Sanwa Bank
California in charge of its 107 branches and 13 commercial banking centers as well as numerous internal departments. Mr. Layne
has also served in various capacities with many industry and community organizations, including as Director and Chairman of the
Board of the Agricultural Foundation at California State University, Fresno; Chairman of the Audit Committee of the Ag. Foundation
at California State University, Fresno; board member of the Fresno Metropolitan Flood Control District; and Chairman of the Ag
Lending Committee of the California Bankers Association. Mr. Layne has a B.S. degree in Dairy Husbandry from California State
University, Fresno and is a graduate of the California Agriculture Leadership Program.
Mr. Layne’s qualifications to serve
on the Pacific Ethanol Board include:
|
· |
extensive experience in various leadership positions; |
|
· |
day-to-day leadership experience affords a deep understanding
of business operations, challenges and opportunities; |
|
· |
experience and involvement in California industry and community
organizations provides a useful perspective; and |
|
· |
ability to communicate and encourage discussion helps Mr. Layne
discharge his duties effectively as chairman of the Compensation Committee. |
Corporate Governance
Corporate Governance
Guidelines
The Pacific Ethanol Board believes that
good corporate governance is paramount to ensure that Pacific Ethanol is managed for the long-term benefit of the stockholders.
The Pacific Ethanol Board has adopted corporate governance guidelines that guide its actions with respect to, among other things,
the composition of the Pacific Ethanol Board and its decision making processes, Board meetings and involvement of management,
the Pacific Ethanol Board’s standing committees and procedures for appointing members of the committees, and its performance
evaluation of Pacific Ethanol’s Chief Executive Officer.
The Pacific Ethanol Board has adopted a
Code of Ethics that applies to all of Pacific Ethanol directors, officers and employees and an additional Code of Ethics that
applies to Pacific Ethanol’s Chief Executive Officer and senior financial officers. The Codes of Ethics, as applied to the
principal executive officer, principal financial officer and principal accounting officer constitutes Pacific Ethanol’s
“code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and is Pacific Ethanol’s
“code of conduct” within the meaning of NASDAQ’s listing standards. Pacific Ethanol’s Codes of Ethics
are available at Pacific Ethanol’s website at http://www.pacificethanol.com/investors/governance. Information on
Pacific Ethanol’s Internet website is not, and shall not be deemed to be, a part of this joint proxy statement/prospectus
or incorporated into any other filings Pacific Ethanol makes with the Securities and Exchange Commission.
Board Leadership
Structure
The Chairman of the Pacific Ethanol Board
is William L. Jones, who is a non-employee director. Pacific Ethanol’s Chief Executive Officer is Neil M. Koehler. These
individuals have served in those capacities since Pacific Ethanol’s inception in 2005. Although Pacific Ethanol does not
have a policy mandating the separation of the roles of Chairman and Chief Executive Officer, the Pacific Ethanol Board, under
its corporate governance guidelines, reserves the right to determine the appropriate leadership structure for the Pacific Ethanol
Board on a case-by-case basis. The Pacific Ethanol Board believes this separation remains appropriate as it allows the Chief Executive
Officer to focus on the day-to-day business matters, while the Chairman focuses on leading the Pacific Ethanol Board in its responsibilities
of acting in the best interests of Pacific Ethanol and its stockholders. Under the corporate governance guidelines, the Pacific
Ethanol Board will appoint a lead independent director, nominated by the independent directors, whenever the offices of Chairman
and Chief Executive Officer are held by the same individual, and at other times if requested by Pacific Ethanol’s independent
directors.
The Chairman of the Board is responsible
for managing the business of the Pacific Ethanol Board, including setting the Pacific Ethanol Board agenda (with Pacific Ethanol
Board and management input), facilitating communication among directors, presiding at meetings of the Pacific Ethanol Board and
stockholders, sitting as chair at executive sessions at each regularly scheduled Board meeting, and providing support and counsel
to the Chief Executive Officer. Pacific Ethanol’s lead independent director, if separately appointed, is responsible for
coordinating the activities of the independent directors and performing such other duties as the Pacific Ethanol Board may determine.
Pacific Ethanol believes that this Board leadership structure is appropriate in maximizing the effectiveness of the Board oversight
and in providing perspective to Pacific Ethanol’s business that is independent from management.
Risk Oversight
The Pacific Ethanol Board has an active
role, as a whole and also at the committee level, in overseeing management of Pacific Ethanol’s risks. The Pacific Ethanol
Board regularly reviews information regarding Pacific Ethanol’s credit, liquidity and operations, as well as the risks associated
with each of these areas. Pacific Ethanol’s Compensation Committee is responsible for overseeing the management of risks
relating to Pacific Ethanol’s executive compensation plans and arrangements. Pacific Ethanol’s Audit Committee oversees
management of financial risks, including internal controls. Pacific Ethanol’s Nominating and Corporate Governance Committee
manages risks associated with the independence of members of the Pacific Ethanol Board and potential conflicts of interest. While
each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Pacific Ethanol
Board is regularly informed through committee reports about such risks.
Director Independence
Pacific Ethanol’s corporate governance
guidelines provide that a majority of the Pacific Ethanol Board and all members of Pacific Ethanol’s Audit, Compensation
and Nominating and Corporate Governance Committees shall be independent. On an annual basis, each director and executive officer
is obligated to complete a Director and Officer Questionnaire that requires disclosure of any transactions with Pacific Ethanol
in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest.
Following completion of these questionnaires, the Pacific Ethanol Board, with the assistance of the Nominating and Corporate Governance
Committee, makes an annual determination as to the independence of each director using the current standards for “independence”
established by the Securities and Exchange Commission and NASDAQ, additional criteria contained in Pacific Ethanol’s corporate
governance guidelines and consideration of any other material relationship a director may have with Pacific Ethanol.
The Pacific Ethanol Board has determined
that all of its directors are independent under these standards, except for Neil M. Koehler, who serves as its Chief Executive
Officer and President, and Michael D. Kandris, who serves as its Chief Operating Officer. Messrs. Koehler and Kandris are deemed
not to be independent due to their employment relationships with Pacific Ethanol, Inc.
Stockholder Communications with the Pacific Ethanol Board
The Pacific Ethanol Board has implemented
a process by which stockholders may send written communications directly to the attention of the Pacific Ethanol Board or any
individual member of the Board. The Chairman of the Audit Committee, Terry L. Stone, is responsible for monitoring communications
from stockholders and providing copies of such communications to the other directors as he considers appropriate. Communications
will be forwarded to all directors if they relate to substantive matters and include suggestions or comments that the Chairman
considers to be important for the directors to consider. Stockholders who wish to communicate with the Pacific Ethanol Board can
write to Chairman of the Audit Committee, The Board of Directors, Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060, Sacramento,
California 95814.
Board Committees and Meetings
Pacific Ethanol’s business, property
and affairs are managed under the direction of the Pacific Ethanol Board. Pacific Ethanol’s directors are kept informed
of its business through discussions with its executive officers, by reviewing materials provided to them and by participating
in meetings of the Pacific Ethanol Board and its committees. During 2014, the Pacific Ethanol Board held 21 meetings and took
action by written consent on two other occasions. All directors attended at least 75% of the aggregate of the meetings of the
Pacific Ethanol Board and of the committees on which they served or that were held during the period they were directors or committee
members.
During 2014, members of the Pacific Ethanol
Board and its committees consulted informally with management from time to time and also acted by written consent without a meeting.
Additionally, the independent members of the Pacific Ethanol Board met in executive session regularly without the presence of
management.
It is Pacific Ethanol’s policy to
invite and encourage its directors to attend its annual meetings. At the date of Pacific Ethanol’s 2014 annual meeting,
Pacific Ethanol had seven members on the Pacific Ethanol Board, all of whom, except Larry D. Layne, attended the meeting.
Pacific Ethanol’s Board has established
standing Audit, Compensation and Nominating and Corporate Governance Committees. Each committee operates pursuant to a written
charter that has been approved by the Pacific Ethanol Board and the corresponding committee and that is reviewed annually and
revised as appropriate. Each charter is available at Pacific Ethanol’s website at http://www.pacificethanol.com/investors/governance.
Information on Pacific Ethanol’s Internet website is not, and shall not be deemed to be, a part of this joint proxy statement/prospectus
or incorporated into any other filings Pacific Ethanol makes with the Securities and Exchange Commission.
Audit Committee
Pacific Ethanol’s Audit Committee
selects its independent auditors, reviews the results and scope of the audit and other services provided by its independent auditors,
reviews its financial statements for each interim period and for the full year and implements and manages the enterprise risk
management program. The Audit Committee also has the authority to retain consultants, and other advisors. Messrs. Stone, Layne
and Jones served on Pacific Ethanol’s Audit Committee for all of 2014. The Pacific Ethanol Board has determined that each
member of the Audit Committee is “independent” under the current NASDAQ listing standards and satisfies the other
requirements under NASDAQ listing standards and Securities and Exchange Commission rules regarding audit committee membership.
Pacific Ethanol’s Board has determined that Mr. Stone qualifies as an “audit committee financial expert” under
applicable Securities and Exchange Commission rules and regulations governing the composition of the Audit Committee, and satisfies
the “financial sophistication” requirements of NASDAQ’s listing standards. During 2014, Pacific Ethanol’s
Audit Committee held seven meetings. The Audit Committee Report for 2014 can be found on page 107 of this joint proxy statement/prospectus.
Compensation Committee
Pacific Ethanol’s Compensation Committee
is responsible for establishing and administering a compensation policy for executive officers and the compensation to be provided
to its executive officers, including, among other things, annual salaries and bonuses, stock options, stock grants, other stock-based
awards, and other incentive compensation arrangements. In addition, Pacific Ethanol’s Compensation Committee reviews the
compensation philosophy and policies and approves the salaries, bonuses and stock compensation arrangements for all other employees.
Pacific Ethanol’s Compensation Committee also has the authority to administer Pacific Ethanol’s 2006 Stock Incentive
Plan with respect to grants to executive officers and directors, and also has authority to make equity awards under Pacific Ethanol’s
2006 Stock Incentive Plan to all other eligible individuals. However, the Pacific Ethanol Board may retain, reassume or exercise
from time to time the power to administer Pacific Ethanol’s 2006 Stock Incentive Plan. Equity awards made to members of
the Compensation Committee must be authorized and approved by a disinterested majority of the Pacific Ethanol Board.
The Compensation Committee evaluates both
performance and compensation to ensure that the total compensation paid to Pacific Ethanol’s executive officers is fair,
reasonable and competitive so that Pacific Ethanol can attract and retain superior employees in key positions. See “Executive
Compensation and Related Information” below.
Messrs. Layne, Kieta, Stone and Prince served
on the Compensation Committee for all of 2014. Pacific Ethanol’s Board has determined that each member of the Compensation
Committee is “independent” under the current NASDAQ listing standards. During 2014, Pacific Ethanol’s Compensation
Committee held three meetings and took action by written consent on one other occasion.
Nominating and Corporate Governance
Committee
Pacific Ethanol’s Nominating and Corporate
Governance Committee considers and reports periodically to the Pacific Ethanol Board on matters related to the identification,
selection and qualification of the Pacific Ethanol Board members and candidates nominated to the Pacific Ethanol Board. Pacific
Ethanol’s Nominating and Corporate Governance Committee also advises and makes recommendations to the Pacific Ethanol Board
with respect to corporate governance matters. The Nominating and Corporate Governance Committee also has the authority to retain
consultants, and other advisors. The Nominating and Corporate Governance Committee consisted of Messrs. Prince, Kieta and Layne
for all of 2014. The Pacific Ethanol Board has determined that each member of the Nominating and Corporate Governance Committee
is “independent” under the current NASDAQ listing standards. During 2014, Pacific Ethanol’s Nominating and Corporate
Governance Committee held one meeting.
The Nominating and Corporate Governance
Committee will consider candidates for director recommended by any stockholder that is the beneficial owner of shares representing
more than 1.0% of the then-outstanding shares of Pacific Ethanol’s common stock and who has beneficially owned those shares
for at least one year. The Nominating and Corporate Governance Committee will evaluate those recommendations by applying its regular
nominee criteria and considering the additional information described in the Nominating and Corporate Governance Committee’s
charter. Stockholders who desire to recommend candidates for the Pacific Ethanol Board for evaluation may do so by contacting
Pacific Ethanol in writing, identifying the potential candidate and providing background and other relevant information. Stockholders
must also comply with Pacific Ethanol’s bylaws, including Pacific Ethanol’s advance notice bylaw provisions relating
to the nomination of persons for election to the Pacific Ethanol Board that, among other things, require that nominations of persons
for election to the Pacific Ethanol Board at annual meetings be submitted to Pacific Ethanol’s Secretary at Pacific Ethanol,
Inc., 400 Capitol Mall, Suite 2060, Sacramento, California 95814, unless otherwise notified, by the close of business on the 45th
day before the first anniversary of the date on which Pacific Ethanol first mailed its proxy materials for the prior year’s
annual meeting. Pacific Ethanol first mailed its proxy materials for its 2014 annual meeting on or about May 5, 2014 and anticipate
mailing the proxy materials for its annual meeting on or about [●], 2015. Pacific Ethanol has received no stockholder nominations
of persons for election to the Pacific Ethanol Board for its annual meeting.
The Nominating and Corporate Governance
Committee utilizes a variety of methods for identifying and evaluating nominees for director. Candidates may also come to the
attention of the Nominating and Corporate Governance Committee through current Pacific Ethanol Board members, professional search
firms and other persons. In evaluating potential candidates, the Nominating and Corporate Governance Committee will take into
account a number of factors, including, among others, the following:
|
· |
the candidate’s independence from management; |
|
· |
whether the candidate has relevant business experience; |
|
· |
judgment, skill, integrity and reputation; |
|
· |
existing commitments to other businesses; |
|
· |
corporate governance background; |
|
· |
financial and accounting background, to enable the committee
to determine whether the candidate would be suitable for Audit Committee membership; and |
|
· |
the size and composition of the Pacific Ethanol Board. |
The Nominating and Corporate Governance
Committee is committed to actively seeking out highly-qualified women and minority groups to include in the pool from which Pacific
Ethanol Board nominees are chosen.
Compensation of Directors
Pacific Ethanol uses a combination of cash
and equity-based incentive compensation to attract and retain qualified candidates to serve on the Pacific Ethanol Board. In setting
the compensation of directors, Pacific Ethanol considers the significant amount of time that the Pacific Ethanol Board members
spend in fulfilling their duties to Pacific Ethanol as well as the experience level Pacific Ethanol requires to serve on the Pacific
Ethanol Board. The Pacific Ethanol Board, through its Compensation Committee, annually reviews the compensation and compensation
policies for Board members. In recommending director compensation, the Compensation Committee is guided by the following three
goals:
|
· |
compensation should pay directors fairly for work required in
a company of its size and scope; |
|
· |
compensation should align directors’ interests with the
long-term interests of its stockholders; and |
|
· |
the structure of the compensation should be clearly disclosed
to its stockholders. |
In making compensation decisions for 2014
as to Pacific Ethanol’s directors, the Compensation Committee compared Pacific Ethanol’s cash and equity compensation
payable to directors against market data obtained by the Compensation Committee’s independent advisor, Hay Group, Inc. (sometimes
referred to as Hay Group), in 2014. The Hay Group data included a survey of 1,400 companies across 24 industries, with revenues
between $500 million and $1 billion. For 2014, the Compensation Committee set compensation for its directors at approximately
the median of compensation paid to directors of the companies contained in the Hay Group data.
Cash Compensation
Effective April 10, 2014, the annual cash
compensation plan for directors included the following changes. The annual cash compensation provided to the Chairman of the Pacific
Ethanol Board increased from $80,000 to $97,500. The annual cash compensation provided to the Chairman of Pacific Ethanol’s
Audit Committee, the Chairman of its Strategic Transactions Committee and the Chairman of its Compensation Committee increased
from $42,000 to $65,000. The annual cash compensation provided to the Chairman of its Nominating and Corporate Governance Committee
and lead independent director increased from $42,000 to $77,000. These amounts were paid in advance in bi-weekly installments.
In addition, directors were reimbursed for specified reasonable and documented expenses in connection with attendance at meetings
of the Pacific Ethanol Board and its committees. Employee directors do not receive director compensation in connection with their
service as directors.
Equity Compensation
The Compensation Committee or the full Pacific
Ethanol Board typically grants equity compensation to its newly elected or reelected directors which normally vests as to 100%
of the grants no later than one year after the date of grant. Vesting is normally subject to continued service on the Pacific
Ethanol Board during the full year.
In determining the amount of equity compensation
for 2014, the Compensation Committee determined the value of total compensation, approximately targeting the median of compensation
paid to directors of the companies comprising the market data provided to Pacific Ethanol by Hay Group in 2014. The Compensation
Committee then determined the cash component based on this market data. The balance of the total compensation target was then
allocated to equity awards, and the number of shares to be granted to Pacific Ethanol’s directors was based on the estimated
value of the underlying shares on the expected grant date.
In addition, the Compensation Committee
may grant, and has from time to time granted, additional equity compensation to directors at its discretion.
Compensation of Employee Directors
Messrs. Koehler and Kandris were compensated
as a full-time employees and officers and therefore received no additional compensation for service as Board members during 2014.
Information regarding the compensation awarded to Messrs. Koehler and Kandris is included in “Executive Compensation and
Related Information—Summary Compensation Table” below.
Director Compensation Table – 2014
The following table summarizes the compensation
of Pacific Ethanol’s non-employee directors for the year ended December 31, 2014:
Name | |
Fees
Earned or Paid in Cash ($)(1) | | |
Stock
Awards ($) | | |
All
other Compensation ($)(2) | | |
Total ($) | |
William L. Jones | |
$ | 93,462 | | |
$ | 100,675 | (3) | |
$ | – | | |
$ | 194,137 | |
Terry L. Stone | |
$ | 59,692 | | |
$ | 67,107 | (4) | |
$ | – | | |
$ | 126,799 | |
John L. Prince | |
$ | 70,308 | | |
$ | 67,107 | (5) | |
$ | – | | |
$ | 137,415 | |
Douglas L. Kieta | |
$ | 58,308 | | |
$ | 67,107 | (6) | |
$ | – | | |
$ | 125,415 | |
Larry D. Layne | |
$ | 58,308 | | |
$ | 67,107 | (7) | |
$ | – | | |
$ | 125,415 | |
__________
(1) |
For a description of annual
director fees and fees for chair positions, see the disclosure above under “Compensation of Directors—Cash Compensation.” |
(2) |
The value of perquisites and other
personal benefits was less than $10,000 in aggregate for each director. |
(3) |
At December 31, 2014, Mr. Jones held
24,893 vested shares from stock awards and also held options to purchase an aggregate of 477 shares of common stock. Mr. Jones
was granted 6,619 shares of Pacific Ethanol’s common stock on June 18, 2014 having an aggregate grant date fair value
of $100,675, calculated based on the fair market value of Pacific Ethanol’s common stock on the applicable grant date.
The shares vest on the earlier of Pacific Ethanol’s next annual meeting or July 1, 2015. |
(4) |
At December 31, 2014, Mr. Stone held
11,646 vested shares from stock awards and also held options to purchase an aggregate of 143 shares of common stock. Mr. Stone
was granted 4,412 shares of Pacific Ethanol’s common stock on June 18, 2014 having an aggregate grant date fair value
of $67,107, calculated based on the fair market value of Pacific Ethanol’s common stock on the applicable grant date.
The shares vest on the earlier of Pacific Ethanol’s next annual meeting or July 1, 2015. |
(5) |
At December 31, 2014, Mr. Prince held
11,931 vested shares from stock awards and also held options to purchase an aggregate of 143 shares of common stock. Mr. Prince
was granted 4,412 shares of Pacific Ethanol’s common stock on June 18, 2014 having an aggregate grant date fair value
of $67,107, calculated based on the fair market value of Pacific Ethanol’s common stock on the applicable grant date.
The shares vest on the earlier of Pacific Ethanol’s next annual meeting or July 1, 2015. |
(6) |
At December 31, 2014, Mr. Kieta held
23,290 vested shares from stock awards. Mr. Kieta was granted 4,412 shares of Pacific Ethanol’s common stock on June
18, 2014 having an aggregate grant date fair value of $67,107, calculated based on the fair market value of Pacific Ethanol’s
common stock on the applicable grant date. The shares vest on the earlier of Pacific Ethanol’s next annual meeting or
July 1, 2015. |
(7) |
At December 31, 2014, Mr. Layne held
1,970 vested shares from stock awards. Mr. Layne was granted 4,412 shares of Pacific Ethanol’s common stock on June
18, 2014 having an aggregate grant date fair value of $67,107, calculated based on the fair market value of Pacific Ethanol’s
common stock on the applicable grant date. The shares vest on the earlier of Pacific Ethanol’s next annual meeting or
July 1, 2015. |
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation
Law permits a corporation to indemnify its directors and officers against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with a pending or completed action, suit or proceeding if the officer or director
acted in good faith and in a manner the officer or director reasonably believed to be in the best interests of the corporation.
Pacific Ethanol’s Certificate of Incorporation
provides that, except in certain specified instances, Pacific Ethanol’s directors shall not be personally liable to Pacific
Ethanol or its stockholders for monetary damages for breach of their fiduciary duty as directors, except liability for the following:
|
· |
any breach of their duty of loyalty
to Pacific Ethanol or its stockholders; |
|
· |
acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; |
|
· |
unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; and |
|
· |
any transaction from which the director
derived an improper personal benefit. |
In addition, Pacific Ethanol’s Certificate
of Incorporation and bylaws obligate Pacific Ethanol to indemnify Pacific Ethanol’s directors and officers against expenses
and other amounts reasonably incurred in connection with any proceeding arising from the fact that such person is or was an agent
of Pacific Ethanol’s. Pacific Ethanol’s bylaws also authorize Pacific Ethanol to purchase and maintain insurance on
behalf of any of its directors or officers against any liability asserted against that person in that capacity, whether or not
Pacific Ethanol would have the power to indemnify that person under the provisions of the Delaware General Corporation Law. Pacific
Ethanol has entered and expects to continue to enter into agreements to indemnify its directors and officers as determined by
the Pacific Ethanol Board. These agreements provide for indemnification of related expenses including attorneys’ fees, judgments,
fines and settlement amounts incurred by any of these individuals in any action or proceeding. Pacific Ethanol believes that these
bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
Pacific Ethanol also maintains directors’ and officers’ liability insurance.
The limitation of liability and indemnification
provisions in Pacific Ethanol’s Certificate of Incorporation and bylaws may discourage stockholders from bringing a lawsuit
against Pacific Ethanol’s directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative
litigation against Pacific Ethanol’s directors and officers, even though an action, if successful, might benefit Pacific
Ethanol and its stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent that Pacific
Ethanol pays the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (sometimes referred to as the Securities Act) may be permitted to Pacific
Ethanol’s directors, officers and controlling persons under the foregoing provisions of Pacific Ethanol’s Certificate
of Incorporation or bylaws, or otherwise, Pacific Ethanol has been informed that in the opinion of the Securities and Exchange
Commission, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Proposal 6
Advisory
Vote on Executive Compensation
Pacific Ethanol is providing its stockholders
with the opportunity to vote on a non-binding, advisory resolution to approve the compensation paid to its named executive officers,
as disclosed in this joint proxy statement/prospectus pursuant to the compensation disclosure rules of the Securities and Exchange
Commission, including the compensation tables and any narrative discussion of Pacific Ethanol’s compensation arrangements.
This proposal, commonly known as a “say-on-pay” proposal, gives Pacific Ethanol’s stockholders the opportunity
to express their views on the compensation paid to its named executive officers.
This vote is not intended to address any
specific item of compensation, but rather the overall compensation of Pacific Ethanol’s named executive officers and the
philosophy, policies and practices described in this Proxy Statement. Accordingly, Pacific Ethanol will ask its stockholders to
vote “FOR” the following resolution at the annual meeting:
“RESOLVED, that the compensation paid to Pacific
Ethanol’s named executive officers, as disclosed in Pacific Ethanol’s joint proxy statement/prospectus for its 2015
annual meeting of stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including
the compensation tables and related disclosure, is hereby APPROVED.”
Please read the “Executive Compensation
and Related Information of Pacific Ethanol” section of this joint proxy statement/prospectus for additional details about
Pacific Ethanol’s executive compensation program and the different components thereof, including information about the total
compensation of Pacific Ethanol’s named executive officers in 2014. See also “Information About the Pacific Ethanol
Board, Pacific Ethanol Board Committees and Related Matters – Board Committees and Meetings – Compensation Committee”
on page 99 of this joint proxy statement/prospectus.
The say-on-pay vote is advisory, and therefore
not binding on Pacific Ethanol, or Pacific Ethanol’s Compensation Committee or the Pacific Ethanol Board. The vote will
provide Pacific Ethanol’s Compensation Committee and the Pacific Ethanol Board with information relating to the opinions
of Pacific Ethanol stockholders which the Compensation Committee will consider as it makes determinations with respect to future
action regarding executive compensation and the executive compensation program.
Recommendation of the Pacific Ethanol Board
THE PACIFIC ETHANOL BOARD UNANIMOUSLY RECOMMENDS
A VOTE “FOR” APPROVAL OF THE 2014 COMPENSATION PAID TO ITS NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SECURITIES AND EXCHANGE COMMISSION.
Proposal 7
Ratification
of Appointment of Independent Registered Public Accounting Firm
Pacific Ethanol’s Audit Committee
has appointed the independent registered public accounting firm of Hein & Associates LLP to audit and comment on Pacific Ethanol’s
financial statements for the year ending December 31, 2015, and to conduct whatever audit functions are deemed necessary. Hein
& Associates LLP audited Pacific Ethanol’s financial statements for the year ended December 31, 2014 that were included
in Pacific Ethanol’s most recent Annual Report on Form 10-K.
A representative of Hein & Associates
LLP is expected to be present at the annual meeting, will have the opportunity to make a statement if he or she so desires and
will be available to respond to appropriate questions from stockholders.
Required Vote of Stockholders
Although a vote of stockholders is not
required on this proposal, the Pacific Ethanol Board is asking its stockholders to ratify the appointment of the independent registered
public accounting firm. The ratification of the appointment of Pacific Ethanol’s independent registered public accounting
firm requires the affirmative votes of a majority of the votes of the shares of Pacific Ethanol common stock and Series B Preferred
Stock, voting together as a single class, present at the annual meeting in person or by proxy and entitled to vote.
In the event that Pacific Ethanol stockholders
do not ratify the appointment of Hein & Associates LLP as Pacific Ethanol’s independent registered public accounting
firm, the appointment will be reconsidered by Pacific Ethanol’s Audit Committee. Even if the appointment is ratified, the
Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at
any time during the year if the Audit Committee believes that such a change would be in Pacific Ethanol and its stockholders’
best interests.
Recommendation of the Pacific Ethanol Board
THE PACIFIC ETHANOL BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR”
RATIFICATION OF THE APPOINTMENT OF HEIN & ASSOCIATES LLP TO SERVE AS PACIFIC ETHANOL’S INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2015.
Other Matters
The Pacific Ethanol Board knows of no other
matters to be brought before the annual meeting. However, if other matters should come before the annual meeting, it is the intention
of the person named in the proxy to vote such proxy in accordance with his judgment on such matters.
Audit
Matters OF PACIFIC ETHANOL
Principal Accountant Fees and Services
The following table presents fees for professional
audit services rendered by Hein & Associates LLP for the years ended December 31, 2014 and 2013.
| |
2014 | | |
2013 | |
Audit Fees | |
$ | 573,807 | | |
$ | 331,639 | |
Audit-Related Fees | |
| 14,175 | | |
| 12,630 | |
Tax Fees | |
| – | | |
| – | |
All Other Fees | |
| – | | |
| – | |
Total | |
$ | 587,982 | | |
$ | 344,269 | |
Audit Fees. Consist of amounts
billed for professional services rendered for the audit of Pacific Ethanol’s annual consolidated financial statements included
in Pacific Ethanol’s Annual Reports on Form 10-K, and reviews of Pacific Ethanol’s interim consolidated financial
statements included in its Quarterly Reports on Form 10-Q and its Registration Statements on Forms S-1, S-3, and S-8, including
amendments thereto, and the review of its internal accounting and reporting controls as required under Section 404 of the Sarbanes-Oxley
Act of 2002.
Audit-Related Fees. Audit-Related
Fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of
Pacific Ethanol’s consolidated financial statements but are not reported under “Audit Fees.” Such fees would
include amounts billed for professional services performed in connection with mergers and acquisitions. The fees for 2014 and
2013 represent amounts billed for professional services performed in connection with the audit of a 401(k) plan.
Tax Fees. Tax Fees consist
of fees for professional services for tax compliance activities, including the preparation of federal and state tax returns and
related compliance matters.
All Other Fees. Consists of
amounts billed for services other than those noted above.
Hein & Associates LLP did not provide
any non-audit services for the fiscal years ended December 31, 2014 and 2013. The Audit Committee did not, therefore, consider
whether the provision of non-audit services by Hein & Associates LLP is compatible with maintaining its independence; however,
the Audit Committee has satisfied itself with respect to Hein & Associates LLP’s independence.
Pacific Ethanol’s Audit Committee
is responsible for approving all audit, audit-related, tax and other services. The Audit Committee pre-approves all auditing services
and permitted non-audit services, including all fees and terms to be performed for Pacific Ethanol by its independent auditor
at the beginning of the fiscal year. Non-audit services are reviewed and pre-approved by project at the beginning of the fiscal
year. Any additional non-audit services contemplated by Pacific Ethanol after the beginning of the fiscal year are submitted to
the Chairman of the Audit Committee for pre-approval prior to engaging Pacific Ethanol’s independent auditor for such services.
These interim pre-approvals are reviewed with the full Audit Committee at its next meeting for ratification. During 2014 and 2013,
all services performed by Hein & Associates LLP were pre-approved by the Audit Committee in accordance with these policies
and applicable Securities and Exchange Commission regulations.
Audit
Committee Report OF PACIFIC ETHANOL
Our Audit Committee is comprised entirely
of independent directors who meet the independence requirements of the Listing Rules of NASDAQ and the Securities and Exchange
Commission. Our Audit Committee operates pursuant to a written charter that is available on our website at http://www.pacificethanol.net/investors/governance/audit-committee-charter.
Under its written charter, our Audit Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities,
has direct access to our independent registered public accounting firm as well as any of our employees, and has the ability to
retain, at our expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its
duties.
Our Audit Committee oversees our financial
reporting process and internal control structure on behalf of the Board and is directly responsible for the compensation, appointment
and oversight of our independent registered public accounting firm. Management is responsible for the preparation, presentation
and integrity of our financial statements and for the appropriateness of the accounting principles and reporting policies that
are used. Management is also responsible for the effectiveness of our internal control over financial reporting, and reports to
the Audit Committee on any deficiencies found. Our independent registered public accounting firm, Hein & Associates LLP, is
responsible for auditing our financial statements and expressing an opinion as to their conformity with GAAP.
In performing its responsibilities, our
Audit Committee reviewed and discussed the audited financial statements in the Annual Report on Form 10-K for the fiscal year
ended December 31, 2014 with management and Hein & Associates LLP. Our Audit Committee has also discussed with Hein &
Associates LLP the matters required to be discussed by Auditing Standard No. 16, “Communications with Audit Committees”
issued by the Public Company Accounting Oversight Board. In addition, the Audit Committee obtained from Hein & Associates
LLP the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board
regarding the independent accountants’ communications with the Audit Committee concerning independence and discussed with
Hein & Associates LLP its independence from Pacific Ethanol, Inc. and management.
Hein & Associates LLP did not provide
any non-audit services for the fiscal years ended December 31, 2014 and 2013. The Audit Committee did not, therefore, consider
whether the provision of non-audit services by Hein & Associates LLP is compatible with maintaining its independence; however,
the Audit Committee has satisfied itself with respect to Hein & Associates LLP’s independence.
Based on the reviews and discussions referred
to above, the Audit Committee recommended to our Board (and our Board approved) that the audited financial statements be included
in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for filing with the Securities and Exchange Commission.
Respectfully submitted,
Audit Committee
Terry
L. Stone
William
L. Jones
Larry
D. Layne
Security
Ownership of Certain Beneficial Owners and Management OF PACIFIC ETHANOL
The following table sets forth information
with respect to the beneficial ownership of Pacific Ethanol’s voting securities as of March 31, 2015, the date of
the table, by:
|
· |
each of its executive officers; |
|
· |
all of its executive officers and directors
as a group; and |
|
· |
each person known by Pacific Ethanol
to beneficially own more than 5% of the outstanding shares of any class of its capital stock. |
Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to the securities.
To Pacific Ethanol’s knowledge, except as indicated by footnote, and subject to community property laws where applicable,
the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. Shares of common stock underlying derivative securities, if any, that currently are exercisable or
convertible or are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the
date of the table are deemed to be outstanding in calculating the percentage ownership of each listed person or group but are
not deemed to be outstanding as to any other person or group. Except as indicated by footnote, percentage of beneficial ownership
is based on 24,715,029 shares of Pacific Ethanol common stock and 926,942 shares of Pacific Ethanol Series B Preferred Stock outstanding
as of the date of the table.
Name and Address of Beneficial Owner(1) | |
Title of Class | |
Amount and Nature of Beneficial Ownership | | |
Percent of Class |
William L. Jones | |
Common | |
| 40,950 | (2) | |
* |
| |
Series B Preferred | |
| 12,820 | | |
1.38% |
Neil M. Koehler | |
Common | |
| 634,255 | (3) | |
2.54% |
| |
Series B Preferred | |
| 256,410 | | |
27.66% |
Bryon T. McGregor | |
Common | |
| 92,373 | (4) | |
* |
Christopher W. Wright | |
Common | |
| 89,703 | (5) | |
* |
Terry L. Stone | |
Common | |
| 17,888 | (6) | |
* |
John L. Prince | |
Common | |
| 17,887 | (7) | |
* |
Douglas L. Kieta | |
Common | |
| 29,719 | | |
* |
Larry D. Layne | |
Common | |
| 6,382 | | |
* |
Michael D. Kandris | |
Common | |
| 75,456 | (8) | |
* |
Paul P. Koehler | |
Common | |
| 63,106 | (9) | |
* |
| |
Series B Preferred | |
| 12,820 | | |
1.38% |
James R. Sneed | |
Common | |
| 34,064 | (10) | |
* |
Frank P. Greinke | |
Common | |
| 58,319 | (11) | |
* |
| |
Series B Preferred | |
| 85,180 | | |
9.19% |
Lyles United, LLC | |
Common | |
| 380,413 | (12) | |
1.52% |
| |
Series B Preferred | |
| 512,820 | | |
55.32% |
Black Rock, Inc. | |
Common | |
| 1,476,583 | (13) | |
5.97% |
Vertex One Asset Management, Inc. | |
Common | |
| 1,418,380 | (14) | |
5.74% |
Gregg L. Engles | |
Common | |
| 1,321,285 | (15) | |
5.35% |
All executive officers and directors as a group (11 persons) | |
Common | |
| 1,101,783 | (16) | |
3.79% |
| |
Series B Preferred | |
| 282,050 | | |
30.43% |
__________
* |
Less than 1.00% |
(1) |
Messrs. Jones, Koehler, Stone, Prince, Kieta, Layne and Kandris
are directors of Pacific Ethanol. Messrs. N. Koehler, McGregor, Kandris, P. Koehler, Wright and Sneed are executive officers
of Pacific Ethanol. The address of each of these persons is c/o Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060, Sacramento,
California 95814. |
(2) |
Amount represents 31,512 shares of common stock held by William
L. Jones and Maurine Jones, husband and wife, as community property, 477 shares of common stock underlying options issued
to Mr. Jones, 184 shares of common stock underlying a warrant issued to Mr. Jones and 8,777 shares of common stock underlying
the Series B Preferred Stock held by Mr. Jones. |
(3) |
Amount represents 376,458 shares of common stock held directly,
3,663 shares of common stock underlying a warrant, 175,554 shares of common stock underlying the Series B Preferred Stock
and 78,580 shares of common stock underlying options. |
(4) |
Includes 22,667 shares of common stock underlying options. |
(5) |
Includes 22,667 shares of common stock underlying options. |
(6) |
Includes 143 shares of common stock underlying options. |
(7) |
Includes 143 shares of common stock underlying options. |
(8) |
Includes 20,952 shares of common stock underlying options. |
(9) |
Amount represents 47,288 shares of common stock held directly,
184 shares of common stock underlying a warrant, 8,777 shares of common stock underlying the Series B Preferred Stock and
6,857 shares of common stock underlying options. |
(10) |
Includes 6,803 shares of common stock underlying options. |
(11) |
Amount represents shares of common stock underlying the Series
B Preferred Stock. The shares are beneficially owned by Frank P. Greinke, as trustee under the Greinke Personal Living Trust
Dated April 20, 1999. The address of Frank P. Greinke is P.O. Box 4159, 1800 W. Katella, Suite 400, Orange, California 92863. |
(12) |
Amount represents 29,305 shares of common stock underlying a
warrant and 351,108 shares of common stock underlying the Series B Preferred Stock. In addition, Lyles Diversified, Inc. holds
5,333 shares of common stock and The Lyles Foundation holds 3,488 shares of common stock. The address of Lyles United, LLC
is P.O. Box 4376, Fresno, California 93744-4376. |
(13) |
The information with respect to the holdings
of BlackRock, Inc. is based solely on the Schedule 13G filed with the Securities and Exchange Commission on February 2, 2015
by BlackRock, Inc. as the reporting person which indicates that BlackRock, Inc. is acting as a parent holding company or control
person for the following subsidiaries: BlackRock Advisors, LLC; BlackRock Asset Management Canada Limited; BlackRock Fund
Advisors; BlackRock Institutional Trust Company, N.A.; and BlackRock Investment Management, LLC. As reported in the Schedule
13G, BlackRock, Inc. holds sole voting power over 1,439,036 shares and holds sole dispositive power and beneficial ownership
of 1,476,583 shares. The address for BlackRock, Inc. is 55 East 52nd Street, New York, New York, 10022. |
(14) |
The information with respect to the holdings of Vertex One Asset
Management, Inc. is based solely on the Schedule 13G filed with the Securities and Exchange Commission on February 4, 2015
by Vertex One Asset Management, Inc., John Thiessen and Vertex Fund as the reporting persons. As reported in the Schedule
13G, an aggregate of 1,418,380 shares beneficially owned by Vertex One Asset Management, Inc. and Mr. Thiessen are held by
persons in respect of which Vertex One Asset Management, Inc. acts as fund manager. Mr. Thiessen is the principal of Vertex
One Asset Management, Inc. with discretionary control over the assets of such persons. Each of Vertex One Asset Management,
Inc. and Mr. Thiessen are reported as holding shared voting and dispositive power over 1,418,380 shares. As further reported
in the Schedule 13G, Vertex Fund holds shared voting and dispositive power over 1,072,232 shares, all of which are beneficially
owned by Vertex Fund. According to the Schedule 13G, the reporting persons made the single, joint filing because they may
be deemed to constitute a “group” within the meaning of Section 13(d)(3) of the Exchange Act, but each reporting
person disclaims the existence of a “group” and, except as noted, disclaims beneficial ownership of all shares
other than any shares reported as being directly owned by it or him, as the case may be. The address for each of Vertex One
Asset Management, Inc., John Thiessen and Vertex Fund is c/o Vertex One Asset Management, Inc., 1177 W. Hastings St. #1920,
Vancouver, BC V6E 2K3, Canada. |
(15) |
The information with respect to the holdings of Gregg L. Engles
is based solely on the Schedule 13G/A filed with the Securities and Exchange Commission on February 2, 2015 by Gregg L. Engles
as the reporting person. As reported in the Schedule 13G/A, Mr. Engles holds sole voting and dispositive power over 1,318,500
shares and holds shared voting and dispositive power over an additional 2,785 shares owned by his spouse and as to which Mr.
Engles disclaims beneficial ownership. The address for Gregg L. Engles is 2750 Burbank Street, Dallas, Texas 75235. |
(16) |
Amount represents 745,355 shares of common stock held directly,
159,289 shares of common stock underlying options, 4,031 shares of common stock underlying warrants and 193,108 shares of
common stock underlying the Series B Preferred Stock. |
Section
16(a) Beneficial Ownership Reporting Compliance OF PACIFIC ETHANOL
Section 16(a) of the Exchange Act requires
Pacific Ethanol’s executive officers and directors, and persons who beneficially own more than 10% of a registered class
of Pacific Ethanol’s common stock, to file initial reports of ownership and reports of changes in ownership with the Securities
and Exchange Commission. These officers, directors and stockholders are required by Securities and Exchange Commission regulations
to furnish Pacific Ethanol with copies of all reports that they file.
Based solely upon a review of copies of
the reports furnished to Pacific Ethanol during the year ended December 31, 2014 and thereafter, or any written representations
received by Pacific Ethanol from directors, officers and beneficial owners of more than 10% of Pacific Ethanol common stock (“reporting
persons”) that no other reports were required, Pacific Ethanol believes that all reporting persons filed on a timely basis
all reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2014 or prior fiscal years.
Equity
Compensation Plan Information OF PACIFIC ETHANOL
The following table provides information
about Pacific Ethanol common stock that may be issued upon the exercise of options, warrants and rights under all of Pacific Ethanol’s
existing equity compensation plans as of December 31, 2014.
Plan
Category | |
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | |
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights | | |
Number
of Securities Remaining Available for Future Issuance Under Equity Compensation Plans(1) | |
Equity Compensation Plans Approved
by Security Holders: | |
| | | |
| | | |
| | |
2004
Stock Option Plan(1) | |
| 763 | | |
$ | 867.23 | | |
| – | |
2006 Stock Incentive Plan | |
| 240,713 | | |
$ | 4.18 | | |
| 739,430 | |
__________
(1) |
Pacific Ethanol’s
2004 Stock Option Plan was terminated effective September 7, 2006, except to the extent of then-outstanding options. |
Executive
Compensation and Related Information OF PACIFIC ETHANOL
Executive Officers
The following table sets forth certain information
regarding Pacific Ethanol’s executive officers as of March 31, 2015:
Name |
Age |
Position(s) Held |
Neil M. Koehler |
57 |
Chief Executive Officer, President and Director |
Michael D. Kandris |
67 |
Chief Operating Officer and Director |
Bryon T. McGregor |
51 |
Chief Financial Officer |
Christopher W. Wright |
62 |
Vice President, General Counsel and Secretary |
Paul P. Koehler |
55 |
Vice President of Corporate Development |
James R. Sneed |
48 |
Vice President of Ethanol Supply and Trading |
Neil M. Koehler has
served as Chief Executive Officer, President and as a director since March 2005. Mr. Koehler is a co-founder of PEI California
and served as its Chief Executive Officer since its formation in January 2003 and as a member of its board of directors from March
2004 until its dissolution in March 2012. Prior to his association with PEI California, Mr. Koehler was the co-founder and General
Manager of Parallel Products, one of the first ethanol production facilities in California, which was sold to a public company
in 1997. Mr. Koehler was also the sole manager and sole limited liability company member of Kinergy, which he founded in September
2000, and which is one of Pacific Ethanol’s wholly-owned subsidiaries. Mr. Koehler has over 30 years of experience in the
ethanol production, sales and marketing industry in the Western United States. Mr. Koehler is a Director of the RFA and is a nationally-recognized
speaker on the production and marketing of renewable fuels. Mr. Koehler has a B.A. degree in Government from Pomona College.
Michael D. Kandris
has served as a director since June 2008 and as Pacific Ethanol’s Chief Operating Officer since January 6, 2013. Mr. Kandris
served as an independent contractor with supervisory responsibility for ethanol plant operations, under the direction of Pacific
Ethanol’s Chief Executive Officer, from January 1, 2012 to January 5, 2013. Mr. Kandris was President, Western Division
of Ruan Transportation Management Systems from November 2007 until his retirement in September 2009. From January 2000 to November
2007, Mr. Kandris served as President and Chief Operating Officer of Ruan Transportation Management Systems, where he had overall
responsibility for all operations, finance and administrative functions. Mr. Kandris has 30 years of experience in all modes of
transportation and logistics. Mr. Kandris served on the Executive Committee of the American Trucking Association and as a board
member for the National Tank Truck Organization until his retirement from Ruan Transportation Management Systems in September
2009. Mr. Kandris has a B.S. degree in Business from California State University, Hayward.
Bryon T. McGregor has
served as Pacific Ethanol’s Chief Financial Officer since November 19, 2009. Mr. McGregor served as Vice President, Finance
at Pacific Ethanol from September 2008 until he became Interim Chief Financial Officer in April 2009. Prior to joining Pacific
Ethanol, Mr. McGregor was employed as Senior Director for E*TRADE Financial from February 2002 to August 2008, serving in various
capacities including International Treasurer based in London, England from 2006 to 2008, Brokerage Treasurer and Director from
2003 to 2006 and Assistant Treasurer and Director of Finance and Investor Relations from 2002 to 2003. Prior to joining E*TRADE,
Mr. McGregor served as Manager of Finance and Head of Project Finance for BP (formerly Atlantic Richfield Company – ARCO)
from 1998 to 2001. Mr. McGregor has extensive experience in banking and served as a Director of International Project Finance
for Credit Suisse from 1992 to 1998, as Assistant Vice President for Sumitomo Mitsubishi Banking Corp (formerly The Sumitomo Bank
Limited) from 1989 to 1992, and as Commercial Banking Officer for Bank of America from 1987 to 1989. Mr. McGregor has a B.S. degree
in Business Management from Brigham Young University.
Christopher W. Wright
has served as Vice President, General Counsel and Secretary since June 2006. From April 2004 until he joined Pacific Ethanol in
June 2006, Mr. Wright operated an independent consulting practice, advising companies on complex transactions, including acquisitions
and financings. Prior to that time, from January 2003 to April 2004, Mr. Wright was a partner with Orrick, Herrington & Sutcliffe,
LLP, and from July 1998 to December 2002, Mr. Wright was a partner with Cooley Godward LLP, where he served as Partner-in-Charge
of the Pacific Northwest office. Mr. Wright has extensive experience advising boards of directors on compliance, securities matters
and strategic transactions, with a particular focus on guiding the development of rapidly growing companies. He has acted as general
counsel for numerous technology enterprises in all aspects of corporate development, including fund-raising, business and technology
acquisitions, mergers and strategic alliances. Mr. Wright has an A.B. degree in History from Yale College and a J.D. from the
University of Chicago Law School.
Paul P. Koehler has
served as Vice President of Corporate Development since 2005. Mr. Koehler has over 25 years of experience in business development
and marketing in the energy industry. Prior to joining Pacific Ethanol in 2005, he served as Director of Business Development
for PPM Energy, Inc., leading PPM’s efforts to develop and acquire several wind power projects. Mr. Koehler was also a co-founder
of ReEnergy, one of the companies acquired by Pacific Ethanol. Mr. Koehler has also served as a member of the board of directors
of Towerstream Corporation, a public company, since May 30, 2007. During the 1990s he worked for Portland General Electric and
Enron in marketing and origination of long-term transactions, risk management, and energy trading. Mr. Koehler has a B.A. degree
from the Honors College at the University of Oregon.
James R. Sneed has
served as Vice President of Ethanol Supply and Trading since September 2012. Mr. Sneed has worked for over 20 years in various
senior management and executive positions in the ethanol industry. Prior to joining Pacific Ethanol in 2012, Mr. Sneed was employed
by Hawkeye Gold, LLC from April 2010 to September 2012, ultimately serving as Vice President – Ethanol Marketing and Trading.
Prior to that time, from May 2003 to April 2010, Mr. Sneed was employed by Aventine Renewable Energy, an ethanol production and
marketing company, where he helped build its operations from two ethanol plants in two states to marketing for fifteen production
facilities in eight states, ultimately serving as Vice President, Marketing and Logistics. Mr. Sneed is a Certified Public Accountant,
has a B.S. degree in Accounting from Olivet Nazarene University, and has an MBA degree from Northwestern University, Kellogg School
of Management.
Pacific Ethanol’s officers are appointed
by and serve at the discretion of the Pacific Ethanol Board. Except for Neil M. Koehler and Paul P. Koehler, who are brothers,
there are no family relationships among the executive officers and directors.
Compensation Discussion and Analysis
In this section, Pacific Ethanol explains
the material elements of its executive compensation program for its Chief Executive Officer and its other named executive officers
(sometimes referred to as NEOs) identified below whose compensation is in the executive compensation tables beginning on page
131 below.
|
· |
Neil M. Koehler, Chief Executive Officer and
President |
|
· |
Michael D. Kandris, Chief Operating Officer |
|
· |
Bryon T. McGregor, Chief Financial Officer |
|
· |
Christopher W. Wright, Vice President,
General Counsel and Secretary |
|
· |
James R. Sneed, Vice President of Ethanol Supply
and Trading |
The executive compensation tables provide
additional important information regarding the compensation and benefits awarded to, earned by or paid to Pacific Ethanol’s
NEOs over its last three fiscal years, as well as the compensation programs in which its NEOs are eligible to participate. You
should read that section in conjunction with this section.
The Compensation Committee of the Pacific
Ethanol Board administers its executive compensation program. Each member of the Compensation Committee is “independent”
under applicable NASDAQ listing standards, is an “outside director” within the meaning of Section 162(m) of the Internal
Revenue Code, and is a non-employee director within the meaning of Section 16 of the Exchange Act.
Executive Summary
Pacific Ethanol’s executive compensation
program is intended to achieve the following objectives:
|
· |
attract, retain, motivate and reward key executive officers
responsible for its success; |
|
· |
align and strengthen the mutuality of interests between its
executive officers, its company and its stockholders; |
|
· |
deliver compensation that reflects its financial and operational
performance, while providing the opportunity to earn above-targeted total compensation for exceptional performance; and |
|
· |
provide total compensation to each executive officer that is
internally equitable, competitive, and influenced by company and individual performance. |
Pacific Ethanol believes that its success
depends in large part on its ability to attract, retain and motivate qualified executives through competitive compensation arrangements.
Pacific Ethanol also believes that the compensation paid to its executive officers should be influenced by the value it creates
for its stockholders. For these reasons, the Compensation Committee believes that its compensation programs should provide incentives
to attain both short- and long-term financial and other business objectives and reward those executive officers who contribute
meaningfully to attaining those objectives. The Compensation Committee supports a pay-for-performance philosophy within a compensation
structure that is competitive, internally equitable and responsible.
The executive compensation program consists
of three primary elements:
|
· |
annual performance-based cash incentive compensation; and |
|
· |
long-term equity incentive compensation. |
2014 Pay-for-Performance Highlights
Pacific Ethanol revised its compensation
programs for 2014. Pacific Ethanol achieved this through extensive internal analysis and by engaging a third party compensation
consultant. Due to the extensive work involved in this analysis of its compensation programs, Pacific Ethanol’s compensation
decisions for 2014 described in this Executive Compensation section were generally finalized later in the year in June 2014.
In 2014, Pacific Ethanol achieved both strong
financial performance and significant progress towards its strategic objectives. Highlights of 2014 include:
|
· |
Strong Net Income. Pacific Ethanol reported strong
net income of $20.0 million, or $0.88 per diluted share. |
|
· |
Record Adjusted EBITDA. Pacific Ethanol achieved
a record $95.0 million of earnings before interest, taxes, debt extinguishments, fair value adjustments and warrant inducements
and depreciation and amortization (sometimes referred to as Adjusted EBITDA). Adjusted EBITDA is the financial performance
measure under Pacific Ethanol’s annual cash incentive compensation plan. |
|
· |
Kinergy’s Adjusted Net Income. Kinergy achieved
$4.1 million of adjusted net income, or Adjusted Net Income, calculated by reducing Kinergy’s net income by taxes deemed
incurred (excluding the effect of tax loss carryforwards) and adjusting Kinergy’s net income, either up or down, for
any policy or change in practice imposed during the year which affected Kinergy’s net income that was not accounted
for in Kinergy’s budgeted net income. Kinergy’s Adjusted Net Income, together with Pacific Ethanol’s overall
Adjusted EBITDA, are the financial performance measures under Kinergy’s annual cash incentive compensation plan. |
|
· |
Record Cash Flows from Operations. Pacific Ethanol
generated $88.3 million of cash flow from operations, allowing it to make substantial repayments of its outstanding consolidated
indebtedness and reinvest in the Pacific Ethanol’s plants through a number of plant improvement initiatives. |
|
· |
Restart of Madera, California Plant. Pacific Ethanol restarted
ethanol production at its Madera, California plant in April 2014 and achieved production levels at full capacity by the end
of the second quarter of 2014. |
|
· |
Substantial Repayment of Outstanding Indebtedness.
Pacific Ethanol repaid $70.8 million in consolidated debt, including all indebtedness at the parent company level, significantly
improving its balance sheet and cost of capital, and reducing its consolidated third-party debt at the Pacific Ethanol Plant
level to $17.0 million. |
As a result of Pacific Ethanol’s financial
performance and other accomplishments, as well as the compensation of its NEOs compared to the market data and other factors discussed
under “Compensation Decisions for 2014” on page 127 below and elsewhere in this Executive Compensation section,
total direct compensation increased for 2014 for Neil M. Koehler, Pacific Ethanol’s Chief Executive Officer, by 33.4%, for
Michael D. Kandris, Pacific Ethanol’s Chief Operating Officer, by 23.7%, for Bryon T. McGregor, Pacific Ethanol’s
Chief Financial Officer, by 38.5%, and for Christopher W. Wright, Pacific Ethanol’s Vice President, General Counsel and
Secretary, by 38.5%. The increases reflect a combination of additional base salary, performance-based annual cash incentive compensation
and long-term equity incentive compensation, with the bulk of the increases arising from changes to Pacific Ethanol’s performance-based
annual cash incentive compensation program. These percentage increases exclude the value of certain stock awards made to certain
NEOs in respect of their 2012 compensation that were granted in 2013. See footnotes 4, 6 and 7 to the “Summary Compensation
Table” on page 138 below.
Total direct compensation for 2014 for James
R. Sneed, Pacific Ethanol’s Vice President of Ethanol Supply and Trading, decreased by 41.7%. This decrease arises primarily
from revisions to Pacific Ethanol’s annual cash incentive compensation plan for Kinergy with compensation levels more aligned
with the compensation of similarly situated personnel at other organizations consistent with market data provided by its compensation
consultants. In addition, Pacific Ethanol did not impose an overall dollar cap for Kinergy’s bonus plan for 2013, resulting
in high bonus compensation paid to Mr. Sneed for that year. The Compensation Committee revised Kinergy’s annual cash incentive
compensation plan to include an overall dollar cap for 2014.
The 2014 compensation information in this
report includes actual results for 2014 under the performance-based annual cash incentive compensation plans. The annual cash
incentive compensation plan payouts were made in February 2015. The payouts under the Pacific Ethanol plan reflect overall achievement
of the plan’s financial performance element at 192% of the target level. This achievement reflects a level of Adjusted EBITDA
that was 92% above the target level, and strong individual performance that resulted in maximum payouts under the individual performance
measure. The Adjusted EBITDA Pacific Ethanol generated in 2014 was the result of substantially improved market conditions and
its successful execution of a variety of strategic and other initiatives in 2014.
The payout under the Kinergy plan reflects
overall achievement of the financial performance elements by James R. Sneed, Pacific Ethanol’s Vice President of Ethanol
Supply and Trading, at 160% of the target level. This achievement reflects a level of Adjusted EBITDA that was 92% above Pacific
Ethanol’s target level, a level of Kinergy’s Adjusted Net Income that was 40% above its target level, and strong individual
performance that resulted in the maximum payout under the individual performance measure. Kinergy’s Adjusted Net Income
generated in 2014 was the result of substantially improved market conditions and Pacific Ethanol’s efforts at efficiently
managing Kinergy’s operations.
Compensation Philosophy and Objectives
Pacific Ethanol’s compensation philosophy
and objectives are to align the interests of its executive officers with those of its stockholders and incent its executive officers
to attain its short- and long-term financial and other business goals. Pacific Ethanol also seeks to ensure that its executive
compensation structure and total compensation is fair, reasonable and competitive in the marketplace so that Pacific Ethanol can
attract and retain superior personnel in key positions. In addition, Pacific Ethanol endeavors to provide an executive compensation
structure and total compensation that are internally equitable based upon each executive officer’s role and responsibilities,
while grouping executive officers within compensation tiers, to promote a collaborative working environment, when the executive
officers are considered too closely aligned to make meaningful compensation distinctions. The Compensation Committee seeks to
make executive compensation decisions that embody this philosophy and that are directed towards attaining these objectives.
In implementing this compensation philosophy
and objectives, the Compensation Committee reviews and analyzes each executive position, including the importance and scope of
the role and how the position compares to other Pacific Ethanol executive officers and personnel. The Compensation Committee also
compares these positions to similar positions at organizations from across the United States, including organizations engaged
in the chemicals, light and heavy manufacturing, and construction and materials industries, as further described below under “Benchmarking”.
In addition, the Compensation Committee draws from other compensation-related market data. This information helps provide the
Compensation Committee with an understanding of how total compensation for each executive officer relates to the value of his
or her position and, given the particular circumstances, whether the executive officer should be grouped with others within a
compensation tier.
Pacific Ethanol believes that structuring
the executive officer compensation program to align the interests of its executive officers with its own interests and those of
its stockholders, and properly incenting its executive officers to attain the short- and long-term business goals, best serves
the interests of its stockholders and creates stockholder value. Pacific Ethanol believes this occurs through motivating its executive
officers to attain the short- and long-term business goals and retaining these executive officers by providing compensation opportunities
that are competitive in the marketplace and internally equitable. Pacific Ethanol also endeavors to design its executive compensation
programs so they are not reasonably likely to materially and adversely affect Pacific Ethanol, as discussed in more detail in
“Compensation Risk Analysis” on page 137 below. Pacific Ethanol intends that total compensation paid or
available to its executive officers, including base salary, annual cash incentive compensation, long-term equity incentive compensation
and benefits, is consistent with its compensation philosophy and objectives described above.
Compensation Governance Practices
Below Pacific Ethanol highlights various
executive compensation governance practices intended to align the interests of Pacific Ethanol’s executive officers with
those of its stockholders, incent the attainment of its short- and long-term business objectives, and attract and retain superior
employees in key positions.
|
· |
Pay-for-performance. Pacific Ethanol ties a substantial
portion of pay to company and individual performance. Pacific Ethanol structures total compensation with significant annual
cash incentives and a long-term equity component, thereby making a substantial portion of each NEO’s targeted total
compensation dependent upon company and individual performance as well as the performance of Pacific Ethanol’s stock
price. |
|
· |
Retention through long-term equity awards. Pacific
Ethanol employs long-term equity awards through grants of restricted stock that vest in the future. These equity awards are
designed to aid in its retention of key personnel in important positions and align the interests of its executive officers
with those of its stockholders. |
|
· |
Long vesting periods. Pacific Ethanol’s
equity awards to its NEOs generally vest in annual installments over a three year period. |
|
· |
Linkage of annual cash incentive compensation
plans to company performance. The annual cash incentive compensation plans link a substantial portion of targeted and
potential payouts to Pacific Ethanol’s financial performance. The 2014 financial performance measure for the compensation
pool for its primary incentive compensation plan was Adjusted EBITDA, which Pacific Ethanol weighted at 80% for its NEOs covered
by that plan. In addition, Kinergy’s annual cash incentive compensation plan, applicable only to James R. Sneed, Pacific
Ethanol’s Vice President of Ethanol Supply and Trading, linked his targeted and potential payouts to Kinergy’s
financial performance, in particular, Kinergy’s Adjusted Net Income as well as Pacific Ethanol’s overall Adjusted
EBITDA, which were collectively weighted at 80% for Mr. Sneed. The 2014 non-financial performance measure for funding the
compensation pools for these incentive compensation plans was individual performance measured against pre-established goals,
which were weighted at 20% for the NEOs. |
|
· |
Compensation Tiers. Pacific Ethanol groups certain
executive officers together within a compensation tier to promote a collaborative working environment. Pacific Ethanol’s
Compensation Committee makes these determinations when the executive officers are considered too closely aligned to make meaningful
compensation distinctions and to promote teamwork. |
|
· |
Perquisites. Pacific Ethanol does not currently
offer its NEOs any significant perquisites, other than certain travel perquisites or those offered to its employees generally.
Pacific Ethanol’s executive officers are not guaranteed any retirement or pension benefits or any non-qualified deferred
compensation plans. Instead, Pacific Ethanol offers its NEOs the opportunity to accumulate assets through their equity awards
and the appreciation of their equity awards, and offer the opportunity to participate in Pacific Ethanol’s 401(k) plan
on the same basis as its other employees. |
|
· |
Independent Compensation Consultant. Pacific Ethanol’s
independent compensation consultant, Hay Group, is retained directly by the Compensation Committee and performs no additional
services for Pacific Ethanol. |
|
· |
No short selling, pledging or hedging . Pacific
Ethanol’s insider trading policy prohibits all employees, officers and directors from engaging in any short sale of
Pacific Ethanol securities, as well as any transaction involving puts, calls, collars, forward sales contracts, warrants or
other options on Pacific Ethanol securities. Additionally, the executive officers are restricted from pledging Pacific Ethanol
securities as collateral for a loan. |
|
· |
No option re-pricing. Pacific Ethanol’s
2006 Plan does not permit options or stock appreciation rights to be repriced to a lower exercise price without the approval
of Pacific Ethanol’s stockholders, except in connection with certain changes to Pacific Ethanol’s capital structure. |
Executive Compensation Program and Processes
Participants
Compensation Committee
Pacific Ethanol’s Compensation Committee,
with input from Pacific Ethanol’s management and one or more independent compensation consultants, establishes, refines
and updates the executive compensation program. Pacific Ethanol’s Compensation Committee establishes the compensation philosophy
and objectives; oversees the design and administration of the executive compensation program; establishes the elements and mix
of total compensation; sets the parameters and specific target metrics of the performance-based incentive compensation plan; and
determines the target compensation of its executive officers.
Pacific Ethanol’s Compensation Committee
has the authority to retain independent counsel, advisors and other experts to assist it in the compensation-setting process and
receives adequate funding to engage those service providers.
Independent Compensation Consultant
In October 2013, following a competitive
request for proposal from three different compensation consultants, Pacific Ethanol’s Compensation Committee retained Hay
Group as its independent advisor for its 2013−2014 compensation review. Hay Group was selected based on its expertise and
skilled team dedicated to meet the needs of Pacific Ethanol’s Compensation Committee and its experience with ethanol and
other companies closely tied to agriculture and commodity businesses.
Hay Group furnishes independent data, market
analyses and advice to Pacific Ethanol’s Compensation Committee concerning executive compensation, including regarding the
competitiveness of compensation plan design and evolving executive compensation trends and practices. Hay Group is available to
attend and participate in Compensation Committee meetings from time to time as and when requested by Pacific Ethanol’s Compensation
Committee. Hay Group also advises Pacific Ethanol’s Compensation Committee on the principal aspects of the executive compensation
program, including the implementation of the compensation philosophy and objectives, and specific elements of executive compensation.
In evaluating Hay Group’s independence,
Pacific Ethanol’s Compensation Committee considered multiple factors. In particular, Pacific Ethanol’s Compensation
Committee reviewed all services Hay Group provided to Pacific Ethanol in 2013 and 2014. These services included consulting services
to help Pacific Ethanol determine appropriate compensation for 2014 for its NEOs as well as certain non-NEO personnel. The fees
for these consulting services were not segregated between consulting services in respect of NEO compensation and consulting services
in respect of non-NEO personnel compensation. In total, fees paid to Hay Group for services rendered to help Pacific Ethanol determine
appropriate compensation for 2014 were $34,000. Pacific Ethanol’s Compensation Committee also considered Pacific Ethanol’s
purchase of survey data from Hay Group for purposes of benchmarking NEO and non-NEO compensation, which amounted to $18,000. Pacific
Ethanol did not engage Hay Group, and no fees were paid to Hay Group, in respect of any services other than Hay Group’s
work with Pacific Ethanol’s Compensation Committee to help Pacific Ethanol determine appropriate compensation for 2014 for
its NEOs and certain non-NEO personnel. In evaluating Hay Group’s independence, Pacific Ethanol’s Compensation Committee
also considered Hay Group’s internal mechanisms and policies to ensure Hay Group’s ability to provide objective advice,
including that:
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Hay Group is hired by the Compensation Committee and reports
directly to the Compensation Committee; and |
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Hay Group has a broad base of clients, which reduces its reliance
on any specific account for achieving its business goals. |
Hay Group also represented to the Compensation
Committee that there are no personal or business relationships between the Hay Group account manager and any member of the Compensation
Committee or any NEO beyond the Pacific Ethanol relationship. Further, the Hay Group account manager does not directly own any
Pacific Ethanol shares (although some of the account manager’s investments controlled solely by independent, third-party
managers may own Pacific Ethanol shares by way of indexed funds). Based on the above and other factors, including the factors
set forth under Rule 10C-1 of the Exchange Act, the Compensation Committee assessed Hay Group’s independence and concluded
that no conflict of interest exists that would prevent Hay Group from independently representing the Compensation Committee.
Management
Pacific Ethanol’s Chief Executive
Officer and other executive officers attend Compensation Committee meetings as requested by the Compensation Committee. These
individuals are not present during executive sessions of Compensation Committee meetings except at the invitation of the Compensation
Committee. Pacific Ethanol’s General Counsel, under the direction of Pacific Ethanol’s Chief Executive Officer, leads
its management in preparing recommendations on executive and employee compensation requested by the Compensation Committee.
Benchmarking
Pacific
Ethanol’s Compensation Committee benchmarks the total compensation of its NEOs
using compensation market data as a reference to assist it in understanding the competitive
pay positioning of total compensation and each element of compensation. Pacific Ethanol’s
Compensation Committee reviews compensation for each executive officer in relation to
the middle 50% of the market (defined by the 25th, 50th and 75th
percentiles of the compensation market data) that, along with other factors, provides
context for executive pay decisions. Hay Group provided, for comparative purposes, compensation
data from surveys of third parties that includes information from United States industrial
companies, including organizations engaged in the chemicals, light and heavy manufacturing,
and construction and materials industries. Exhibit 99.7 to the registration statement
of which this joint proxy statement/prospectus forms a part lists the companies included
in the survey data.
Other Factors Considered in Setting Compensation
In addition to a review of Pacific Ethanol’s
competitive market position, Pacific Ethanol’s Compensation Committee also took into account several other important factors
in setting executive compensation for 2014, including company performance, internal pay equity considerations, the experience
and responsibilities of each NEO, budget constraints, market conditions, individual performance, and contributions to corporate
achievements.
As part of the 2014 compensation-setting
process for Pacific Ethanol’s NEOs, Pacific Ethanol’s Compensation Committee also reviewed “tally sheets”
comprised of spreadsheets and tabular information that indicated the dollar amount of each component of compensation, including
current and proposed base salaries, the proposed actual cash incentives to be paid for the prior year and the targeted cash incentives
for the current year, and current projected values for the proposed equity-based awards based on stock price assumptions. The
purpose of those tally sheets was to provide Pacific Ethanol’s Compensation Committee with a comprehensive snapshot of both
the actual compensation provided to Pacific Ethanol’s executive officers and the potential compensation that could result
from the various components of their proposed 2014 compensation packages. The Compensation Committee did not take into account
the potential payments under Pacific Ethanol’s severance and change-in-control arrangements as the Compensation Committee
sought to maintain the appropriate incentives with regard to matters that might result in severance and change-in-control payments.
See “Other Policies and Factors Affecting Executive Officer Compensation—Severance and Change-in-Control Arrangements”
below.
The Role of Stockholder Say-on-Pay Votes
Pacific Ethanol provides Pacific Ethanol’s
stockholders with the opportunity to cast an advisory vote on the compensation of Pacific Ethanol’s NEOs each year. At Pacific
Ethanol’s 2014 annual meeting, approximately 83% of votes cast on Pacific Ethanol’s “say-on-pay” proposal
were voted in favor of the proposal.
Pacific Ethanol’s Compensation Committee
considered the outcome of this advisory vote and believes it conveyed the support of Pacific Ethanol’s stockholders of the
Compensation Committee’s decisions and Pacific Ethanol’s executive compensation programs and practices for 2013. After
considering this advisory vote and other factors, Pacific Ethanol’s Compensation Committee decided, however, to revise its
executive compensation programs for 2014 to more closely align them with Pacific Ethanol’s compensation philosophy and objectives.
In keeping with the approval of Pacific
Ethanol’s proposal at Pacific Ethanol’s 2013 annual meeting to submit “say-on-pay” advisory proposals
to Pacific Ethanol’s stockholders annually, Pacific Ethanol will continue to do so for the foreseeable future and Pacific
Ethanol’s Compensation Committee will continue to consider the results of future “say-on-pay” advisory votes
in its ongoing evaluation of the compensation programs and practices.
Risk Considerations
As discussed in “Compensation Risk
Analysis” below, the Compensation Committee reviews Pacific Ethanol’s compensation programs annually and for 2014
concluded that these programs did not create risks that could be reasonably likely to have a material adverse effect on Pacific
Ethanol.
Elements of Compensation
Pacific Ethanol’s executive compensation
program is comprised of three principal elements designed to operate together as part of an integrated compensation package to
further Pacific Ethanol’s compensation objectives. The three principal elements of its executive compensation program are:
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cash compensation in the form of base salary; |
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annual cash incentive compensation; and |
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long-term equity incentive compensation. |
In addition, Pacific Ethanol’s executive
compensation program also includes indirect compensation in the form of standard employee benefit programs, limited perquisites
and other executive benefits, and severance and change-in-control benefits. Pacific Ethanol’s executive compensation program
also allows for special discretionary cash or equity awards to address specific individual circumstances not fully addressed by
the three principal elements of Pacific Ethanol’s executive compensation program.
In making compensation decisions, the Compensation
Committee exercises its judgment on the overall level of compensation provided by this total compensation package as well as the
mix of the three principal elements of compensation.
Base Salary
Pacific Ethanol’s Compensation Committee
reviews the base salary levels for its executive officers annually and makes such adjustments as it deems appropriate after taking
into account the officer’s level and scope of responsibility and experience, company and individual performance, competitive
market data, and internal pay equity considerations.
Annual Cash Incentive Compensation
Annual cash incentive compensation for key
employees, including the NEOs, consists of cash awards under Pacific Ethanol’s short-term incentive plans. Pacific Ethanol
has an annual cash incentive compensation plan applicable to all NEOs other than James R. Sneed, its Vice President of Ethanol
Supply and Trading, and an annual cash incentive compensation plan applicable solely to Mr. Sneed. Participants are eligible for
annual cash incentive compensation based upon the attainment of pre-established goals. Awards under the plans are based on up
to three elements: financial performance, departmental performance and individual performance. Pacific Ethanol’s financial
performance is an element in all participants’ awards, whereas one or both of the departmental performance and individual
performance elements will also apply, depending on the particular participant. Pacific Ethanol’s NEOs are evaluated under
the plans based solely on the financial performance and individual performance elements because the Compensation Committee believes
that these elements will best incent its NEOs to attain the short- and long-term financial and other business goals. The 2014
payout structure under the annual cash incentive compensation plans for its NEOs is set forth below:
Target
($) |
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x |
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Performance
Factor |
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= |
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Overall
Payout |
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• Target $ =
% of base salary
• NEO Target
%:
» CEO: 70%
» Other NEOs:
35-50% |
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• Financial performance:
» 80% weight
» Min/max payout
for Adjusted EBITDA (all NEOs): 0%/175% of target
» Min/max payout
for Kinergy’s Adjusted Net Income (Mr. Sneed only): 0%/855% of target
• Individual
performance:
» 20% weight
» Min/max payout
(all NEOs): 0%/100% of target
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• Minimum payout
(all NEOs): 0% of target
• Target Payout
(all NEOs): 100% of target
• Maximum payout
(NEOs other than Mr. Sneed): 160% of target
• Maximum payout
(Mr. Sneed only): 500% of target |
The Compensation Committee selected the
annual cash incentive compensation plans as the vehicle for cash incentive compensation for 2014 for Pacific Ethanol’s executive
officers because the Compensation Committee believes the plans properly incent Pacific Ethanol’s executive officers by focusing
primarily on Pacific Ethanol’s financial performance, as further discussed below, while allowing awards to reflect other
important factors, including an executive officer’s individual performance and accomplishments. The retention of such flexibility
may preclude certain of the annual awards from qualifying as performance-based compensation under Internal Revenue Code Section
162(m), resulting in the loss of income tax deductibility to the extent annual compensation exceeds $1.0 million.
Financial Performance
Pacific Ethanol has two annual cash incentive
compensation plans, one applicable to all NEOs other than James R. Sneed, its Vice President of Ethanol Supply and Trading, and
a separate plan applicable solely to Mr. Sneed. The annual cash incentive compensation plan applicable to all NEOs other than
Mr. Sneed uses Pacific Ethanol’s Adjusted EBITDA as its sole financial performance element. The annual cash incentive compensation
plan applicable to Mr. Sneed uses Pacific Ethanol’s Adjusted EBITDA and Kinergy’s Adjusted Net Income as its financial
performance elements.
Pacific Ethanol—Adjusted EBITDA
The financial performance element of the
annual cash incentive compensation plan applicable to all NEOs other than Mr. Sneed is based on an Adjusted EBITDA goal established
by the Compensation Committee. The Compensation Committee is expected to change the numerical Adjusted EBITDA goal from year to
year and may include financial performance measures other than Adjusted EBITDA in future years.
The Compensation Committee selected the
Adjusted EBITDA metric because it believed that earnings before interest, taxes, depreciation and amortization (sometimes referred
to as EBITDA), is an industry-accepted measure of overall financial performance and demonstrates Pacific Ethanol’s financial
performance and ability to reinvest in its business. The Compensation Committee departed from the standard EBITDA metric because
it believed Adjusted EBITDA better reflects Pacific Ethanol’s financial performance on a year-over-year basis by excluding
non-recurring charges for debt extinguishments and warrant inducements and by excluding non-cash charges for fair value adjustments.
Use of the Adjusted EBITDA metric also allowed the Compensation Committee to incent Pacific Ethanol’s executive officers
to focus on factors over which they can exert control, such as attaining higher margins through managing production volumes relative
to both ethanol and co-product sales prices and production input costs, increasing production efficiencies, and controlling operating
costs such as selling, general and administrative expenses, all of which impact Adjusted EBITDA. The Compensation Committee also
desired to omit from the financial performance metric factors over which the executive officers have less control and which it
viewed as less relevant to measuring year-over-year financial performance, such as interest expense, taxes, depreciation and amortization.
The financial performance element for 2014
was weighted at 80% and was the most heavily-weighted element. This element was assigned the highest weighting because the principal
purpose of the annual cash incentive compensation plan is to motivate and reward participants for achieving Pacific Ethanol’s
financial goals, while allowing significantly higher payouts for 2014 of up to 175% of the targeted payout amount for financial
outperformance, and to align participant and stockholder interests.
Kinergy—Adjusted EBITDA and Kinergy’s
Adjusted Net Income
The financial performance element of Kinergy’s
annual cash incentive compensation plan applicable to Mr. Sneed is based on Adjusted EBITDA and Kinergy’s Adjusted Net Income
goals established by the Compensation Committee. The Adjusted EBITDA goal applicable to Kinergy’s annual cash incentive
compensation plan is the same as the goal for the annual cash incentive compensation plan applicable to all other NEOs. The Compensation
Committee is expected to change Pacific Ethanol’s numerical Adjusted EBITDA and Kinergy’s numerical Adjusted Net Income
goals from year to year and may include financial performance measures other than Adjusted EBITDA and Kinergy’s Adjusted
Net Income in future years.
The Compensation Committee selected the
Adjusted EBITDA metric as an additional financial performance element of Kinergy’s annual cash incentive compensation plan
for the same reasons noted above with regard to the annual cash incentive compensation plan applicable to all NEOs other than
Mr. Sneed and because the Compensation Committee wanted to incent Mr. Sneed to benefit Pacific Ethanol as a whole through his
performance and enable Mr. Sneed to benefit from overall company performance.
The Compensation Committee selected Kinergy’s
Adjusted Net Income metric as a financial performance element of Kinergy’s annual cash incentive compensation plan because
the overall objective for Kinergy in 2014 was for Kinergy to contribute higher net income to Pacific Ethanol as a whole to boost
overall company performance by increasing Kinergy’s market share while focusing on Kinergy’s profitability. The Compensation
Committee departed from the standard net income metric because it believed Kinergy’s Adjusted Net Income better reflects
Kinergy’s financial performance by excluding the effects of legacy tax loss carryforwards while also maintaining a uniform
methodology of measuring Kinergy’s Adjusted Net Income against budgeted net income by excluding mid-year changes in policy
or practice. The Compensation Committee believed that excluding these mid-year changes would best incent Mr. Sneed by determining
Kinergy’s Adjusted Net Income under the same assumptions as budgeted net income. A departure from these assumptions mid-year
to make changes in policy or practice could have affected the calculation of Kinergy’s Adjusted Net Income and therefore
unfairly increase or decrease Mr. Sneed’s annual cash incentive compensation. For 2014, Kinergy had no mid-year changes
in policy or practice that affected the calculation of Kinergy’s Adjusted Net Income.
The financial performance element for 2014
was weighted at 80% and was the most heavily-weighted element. This element was assigned the highest weighting because the principal
purpose of the annual cash incentive compensation plan for Mr. Sneed is to motivate and reward him for achieving Pacific Ethanol’s
financial goals, while allowing significantly higher payouts for 2014 of up to 600% of target compensation for Kinergy and Pacific
Ethanol financial outperformance, and to align the interests of Mr. Sneed and Pacific Ethanol’s stockholders.
Departmental Performance
The departmental performance element is
based on quantitative criteria and subjective elements established by Pacific Ethanol’s executive committee. The extent
to which a department is deemed to have achieved its performance goals is determined by the executive committee in consultation
with the Compensation Committee. Payout under the departmental element is in the discretion of the Compensation Committee and
was funded at a rate of 0% to 100% of the participant’s targeted payout amount for the element. Although Pacific Ethanol’s
overall NEO performance evaluations included many departmental factors, the Compensation Committee weighted the departmental performance
element at 0% for 2014 for the NEOs, focusing instead solely on financial performance and individual performance by the NEOs because
the Compensation Committee believed those two performance elements, and their respective weightings, would best incent the NEOs
in a manner consistent with Pacific Ethanol’s compensation philosophy and objectives.
Individual Performance
The individual performance element is based
on individual participant goals based on quantitative criteria and subjective elements established by each participant’s
supervisor, in consultation with the executive committee. The extent to which a participant is deemed to have achieved his or
her individual performance goals is determined by the executive committee in consultation with the participant’s supervisor.
However, the extent to which a participant who is an executive officer is deemed to have achieved his or her individual performance
goals is recommended by Pacific Ethanol’s Chief Executive Officer but ultimately determined by Pacific Ethanol’s Compensation
Committee. Payout under the individual performance element is in the discretion of the Compensation Committee and was funded at
a rate of 0% to 100% of the participant’s targeted payout amount for the element.
Long-Term Equity Incentive Compensation
Long-term equity incentive compensation
for key employees, including the NEOs, generally consists of awards of restricted stock under Pacific Ethanol’s 2006 Plan.
Although Pacific Ethanol granted stock options in the past, Pacific Ethanol primarily made awards of restricted stock under its
2006 Plan as a means of providing long-term equity incentive compensation. Pacific Ethanol believes that shares of restricted
stock are less subject to market volatility than stock options and therefore offer a more balanced and competitive equity compensation
arrangement.
The Compensation Committee approves equity
awards for the NEOs in connection with the annual review of their individual performance and overall compensation. The annual
awards are typically made near the end of the first quarter and represent the majority of the shares granted for the year under
the equity incentive compensation program. Each award is designed primarily as a retention tool, requiring the executive to remain
with Pacific Ethanol for at least one year to receive the benefit of one-third of the award on partial vesting and at least three
years to receive the full benefit of the award on full vesting. Pacific Ethanol believes the equity incentive compensation aligns
the interests of the NEOs with those of its stockholders and provides each NEO with a significant incentive to manage the company
from the perspective of an owner with an equity stake in the business by tying significant portions of the recipients’ compensation
to the market price of Pacific Ethanol common stock.
Awards of restricted stock typically vest
annually over a three-year period of continued service measured from the grant date. Each award of restricted stock will provide
a return to the NEO only to the extent he or she remains employed with Pacific Ethanol during the partial or full vesting period.
In making long-term equity incentive awards,
the Compensation Committee sets a target value for the award for each executive officer based on its judgment about the factors
used in setting executive officer total compensation described under “Compensation Philosophy and Objectives” above
as well as the Compensation Committee’s judgment regarding the desired mix of base salary, annual cash incentives and long-term
equity incentives. The Compensation Committee also considers outstanding vested and unvested equity awards to executive officers,
the stock ownership levels of executive officers and the potential dilutive effect on Pacific Ethanol’s stockholders.
Once the Compensation Committee determines
the target value of a recipient’s long-term equity incentive award, Pacific Ethanol establishes the specific number of shares
subject to the award by dividing the target value of the equity grant by the closing price of a share of its common stock on the
date of grant. This is the same valuation model Pacific Ethanol uses for its financial statements determined in accordance with
the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718.
Other Compensation and Benefits
Pacific Ethanol does not currently offer
retirement or pension benefits or any non-qualified deferred compensation plans. Instead, Pacific Ethanol provides its NEOs with
the opportunity to accumulate retirement income primarily through a defined contribution plan and through the appreciation of
the value of their equity awards. Consistent with the pay-for-performance compensation philosophy, Pacific Ethanol does not provide
its executive officers with any significant perquisites, other than certain travel perquisites or those offered to Pacific Ethanol’s
employees generally. Except as noted below, the NEOs are eligible to participate in the following employee benefit programs on
the same basis as all other regular employees:
401(k) Plan. Each of the NEOs
and other salaried employees are eligible to participate in a defined contribution plan qualified under Section 401(k) of the
Internal Revenue Code. In 2014, Pacific Ethanol contributed $1.00 for each $1.00 of employee contributions, up to a maximum contribution
of 3.0% of the participant’s eligible compensation, and Pacific Ethanol contributed $0.50 for each $1.00 of employee contributions
for contributions in excess of 3.0% of the participant’s eligible compensation up to a maximum of 5.0% of the participant’s
eligible compensation. Pacific Ethanol’s maximum matching contribution during 2014 was $9,800 per year. Pacific Ethanol
has included its contributions to the accounts of the NEOs for the applicable years in the “All Other Compensation”
column in the Summary Compensation Table below to the extent “All Other Compensation” exceeded $10,000 for a particular
NEO.
Group Life, Health and Disability Plans.
Pacific Ethanol has established group life, health and disability plans for its employees. The NEOs may participate in these plans
on the same basis as other employees.
Perquisites and Other Benefits.
Pacific Ethanol furnishes a limited number of perquisites to its NEOs, of which only travel-related perquisites meet the threshold
for reporting in the “All Other Compensation” column in the Summary Compensation Table under the rules of the Securities
and Exchange Commission. Pacific Ethanol’s corporate travel policy, applicable only to certain executive officers, covers
expenses of its Vice President, General Counsel and Secretary and its Vice President of Ethanol Supply and Trading for business
travel from their out-of-state residences to Pacific Ethanol’s principal offices in Sacramento, California as well as expenses
for local lodging. Pacific Ethanol’s travel policy does not provide for a “gross-up” for taxes on amounts Pacific
Ethanol reimburses under the policy that are taxable compensation to the employee.
Other Policies and Factors Affecting Executive Officer Compensation
Severance and Change-in-Control Arrangements
Pacific Ethanol has established executive
employment agreements that include severance and change-in-control arrangements with each of its NEOs. These arrangements set
forth the terms and conditions upon which these NEOs would be entitled to receive certain benefits upon termination of employment.
These agreements are intended to help Pacific
Ethanol attract and retain executive talent in a competitive marketplace; enhance the prospects that the NEOs would remain with
Pacific Ethanol and devote their attention to Pacific Ethanol’s performance in the event of a potential change in control;
foster their objectivity in considering a change-in-control proposal; and facilitate their attention to Pacific Ethanol’s
affairs without the distraction that could arise from the uncertainty inherent in severance and change-in-control situations.
The disclosure below under “—Summary
Compensation Table—Executive Employment Agreements”, “—Severance and Change in Control Arrangements with
Named Executive Officers” and “—Calculation of Potential Payments upon Termination or Change in Control—2014”
explains in detail the benefits under these arrangements and the circumstances under which these NEOs would be entitled to them.
Trading Policy
Pacific Ethanol’s insider trading
policy prohibits all employees, officers and directors from engaging in any short sale of Pacific Ethanol securities, as well
as any transaction involving puts, calls, collars, forward sales contracts, warrants or other options on Pacific Ethanol securities.
Additionally, Pacific Ethanol’s executive officers are restricted from pledging Pacific Ethanol securities as collateral
for a loan.
Tax Considerations
Section 162(m) of the Internal Revenue Code
generally disallows a tax deduction to publicly-held corporations for compensation paid to certain of their executive officers
to the extent such compensation exceeds $1.0 million per covered officer in any year. However, this limitation only applies to
compensation that is not considered performance-based for purposes of Section 162(m). Certain types of performance-based compensation
are excluded from the $1.0 million deduction limit if specific requirements are met. As discussed earlier, certain amounts paid
under Pacific Ethanol’s annual cash incentive compensation plan for 2014 qualified as such performance-based compensation.
In addition, Pacific Ethanol’s time-based grants of restricted stock awarded to its executive officers do not qualify as
such performance-based compensation, because their vesting is not tied to any performance metric.
The Compensation Committee generally considers
the impact of Section 162(m) when designing the cash and equity incentive compensation programs so that awards may be granted
under these programs in a manner that qualifies them as performance-based for purposes of Section 162(m). However, Pacific Ethanol
believes that in establishing the cash and equity incentive compensation programs for its executive officers, the potential tax
deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration,
and not the sole governing factor. Pacific Ethanol believes it is important to maintain cash and equity incentive compensation
at the levels and with the design features needed to attract and retain the executive officers essential to its success, even
if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation. Accordingly, the Compensation
Committee may grant awards under which payments may not be deductible under Section 162(m) when the Compensation Committee determines
that such non-deductible arrangements are otherwise in Pacific Ethanol’s best interests and in furtherance of the objectives
of Pacific Ethanol’s executive compensation programs.
Compensation Recovery Policies
Pursuant to Section 304 of the Sarbanes-Oxley
Act of 2002, if Pacific Ethanol is required as the result of misconduct to restate its financial results due to its material noncompliance
with any financial reporting requirements under the federal securities laws, Pacific Ethanol’s Chief Executive Officer and
Chief Financial Officer may be legally required to reimburse Pacific Ethanol for any bonus or incentive-based or equity-based
compensation they receive. Pacific Ethanol anticipates additional requirements in this regard once the provisions of the Dodd-Frank
Wall Street Reform and Consumer Protection Act have been adopted and Pacific Ethanol intends to fully comply with the requirements.
Compensation Decisions for 2014
The Compensation Committee established compensation
for the NEOs in 2014 in a manner consistent with the executive compensation philosophy and objectives. The Compensation Committee’s
decisions were based upon its judgment about Pacific Ethanol’s financial and other business performance for 2013, expected
financial and other business performance for 2014, and the positions, scope and importance of the roles of the NEOs and how their
positions compared to other Pacific Ethanol executive officers and personnel. The Compensation Committee’s decisions were
also based on comparing and adjusting the compensation of the NEOs in reference to the compensation of similarly situated personnel
at other organizations through a benchmarking process. See “Benchmarking” above. The Compensation Committee also considered
certain other factors such as budget constraints and executive officer recommendations. Through these efforts, the Compensation
Committee established a desired level and mix of total compensation.
In setting the compensation of Pacific Ethanol’s
executive officers, except as noted below, the Compensation Committee did not adhere to any specific formulas tied to market data
nor did it rely on market data to determine the specific mix of compensation components. Instead, the Compensation Committee used
this data as a guide and a resource for tracking executive compensation trends.
Total Compensation
In implementing its compensation philosophy
and objectives for 2014, the Compensation Committee categorized each executive officer into one of three tiers based on its view
of the importance and scope of the executive officer’s role and how his position compares to other Pacific Ethanol executive
officers and personnel. The Tier 1 category included only Pacific Ethanol’s Chief Executive Officer. The Tier 2 category
included Pacific Ethanol’s Chief Operating Officer, its Chief Financial Officer and its Vice President, General Counsel
and Secretary. The Tier 3 category included all other executive officers, including its Vice President of Ethanol Supply and Trading.
The Compensation Committee targeted total
compensation for Neil M. Koehler, Pacific Ethanol’s Chief Executive Officer, as the sole member of the Tier 1 category,
at approximately the 75th percentile, targeted total compensation for Michael D. Kandris, its Chief Operating Officer,
Bryon T. McGregor, its Chief Financial Officer, and Christopher W. Wright, its Vice President, General Counsel and Secretary,
as members of the Tier 2 category, at above the 50th percentile but below the 75th percentile, and targeted
total compensation for its other executive officers, including James R. Sneed, its Vice President of Ethanol Supply and Trading,
as a member of the Tier 3 category, at approximately the 50th percentile, in each case relative to similarly situated
personnel, or groups of personnel in the case of the Tier 2 category, at its third-party survey group companies based on the market
data provided by Hay Group.
The Compensation Committee viewed the importance
and scope of the Tier 2 executive officers’ roles and how their respective positions compare to other Pacific Ethanol executive
officers and personnel as too closely aligned to make meaningful compensation distinctions among the Tier 2 executive officers.
In grouping the Tier 2 executive officers together, the Compensation Committee also desired to promote a collaborative environment
among the executive officers who work most closely together as a team. In determining the relevant percentile comparisons for
the Tier 2 officers, the Compensation Committee used compensation data from Pacific Ethanol’s third-party survey group companies
corresponding to each of the three officer positions within the Tier 2 category. This methodology resulted in three different
total compensation figures at the 50th and 75th percentile levels given the different officer positions
of the Tier 2 executive officers. Consistent with the Compensation Committee’s view that the Tier 2 executive officers were
too closely aligned to make meaningful compensation distinctions among them, and to promote a collaborative working environment,
the Compensation Committee selected the middle of the three 50th percentile total compensation figures by discarding
the highest and lowest compensation figures rather than viewing each officer separately against his respective market data. The
resulting single total compensation figure, increased for the reasons discussed below, was then used to target total compensation
for all three of Pacific Ethanol’s Tier 2 executive officers.
The Compensation Committee determined the
75th percentile was an appropriate benchmark for Mr. Koehler because of Mr. Koehler’s exceptional industry expertise,
his background as a founder of Pacific Ethanol and that his continued leadership of Pacific Ethanol is especially valuable in
light of these factors, as well as the Compensation Committee’s view that Mr. Koehler’s compensation is appropriate
relative to other public company Chief Executive Officers in Pacific Ethanol’s industry. The Compensation Committee determined
that total compensation for the Tier 2 executive officers above the 50th percentile and below the 75th percentile
was appropriate because that level is consistent with the Compensation Committee’s intention for 2014 to target total compensation
for Pacific Ethanol’s Tier 2 executive officers at or around the median of total compensation of similarly situated personnel
at other organizations, but increased to compensate the Tier 2 executive officers for lower base salaries relative to median base
salaries of similarly situated executive officers. The additional targeted compensation above the 50th percentile took
the form of long-term equity incentive compensation, further tying the Tier 2 executive officers’ compensation to company
performance. The Compensation Committee determined the 50th percentile was an appropriate benchmark for Pacific Ethanol’s
Tier 3 executive officers because that level is consistent with the Compensation Committee’s intention for 2014 to target
total compensation for its Pacific Ethanol’s executive officers at the median of total compensation of similarly situated
personnel at other organizations.
Base Salary
Given Pacific Ethanol’s history of
losses and uncertainties regarding future performance, and to reduce the impact on its financial position in the event of poor
2014 performance, the Compensation Committee decided to limit base salary adjustments for executive officers to a 3% increase
over 2013 levels. This resulted in higher targeted long-term equity incentive compensation for 2014 for Pacific Ethanol’s
Tier 1 and Tier 2 executive officers necessary to attain total compensation at the levels targeted.
Annual Cash Incentive Compensation
In setting total compensation for 2014,
the Compensation Committee determined that Pacific Ethanol’s executive officers, other than Mr. Sneed, were paid at significantly
lower levels than similarly situated personnel at other organizations largely due to the absence of regular payouts under an annual
cash incentive compensation plan. The Compensation Committee concluded that it was important to alter the payout criteria of the
annual cash incentive compensation in order to assure that annual cash incentive compensation is a meaningful part of the total
mix of compensation in 2014 and in future years in order to bring total compensation to competitive levels and properly incent
performance. Pacific Ethanol also revised its annual cash incentive compensation plan for Kinergy with compensation levels more
aligned with the compensation of similarly situated personnel at other organizations consistent with market data provided by Pacific
Ethanol’s compensation consultants. In addition, Pacific Ethanol did not impose an overall dollar cap for Kinergy’s
bonus plan for 2013, resulting in high bonus compensation paid to Mr. Sneed for that year. The Compensation Committee revised
Kinergy’s annual cash incentive compensation plan to include an overall dollar cap for 2014.
The Compensation Committee targeted 2014
annual cash incentive compensation at 70% of base salary for its Chief Executive Officer, at 50% of base salary for its Chief
Operating Officer, its Chief Financial Officer and its Vice President, General Counsel and Secretary and at approximately 35%
of base salary for its Vice President of Ethanol Supply and Trading. These levels were consistent with the targeted percentage
bonus amounts included in each executive officer’s employment agreement other than its Vice President of Ethanol Supply
and Trading, whose employment agreement does not include a targeted percentage bonus amount.
As discussed above, awards under the annual
cash incentive compensation plans are based on up to three elements: financial performance, departmental performance and individual
performance. For 2014, the Compensation Committee weighted for each of the NEOs, financial performance at 80%, departmental performance
at 0% and individual performance at 20%. In doing so, the Compensation Committee desired to incent most heavily activities that
lead to strong overall financial performance while still rewarding individual performance.
Pacific Ethanol’s Annual Cash Incentive Compensation
Plan
For the annual cash incentive compensation
plan applicable to all NEOs other than James R. Sneed, Pacific Ethanol’s Vice President of Ethanol Supply and Trading, the
Compensation Committee established its 2014 financial performance goal of Adjusted EBITDA at $49.6 million based on Pacific Ethanol’s
projections established early in the year, and approved a matrix with a sliding scale of achievement and payout opportunities
in which higher Adjusted EBITDA corresponded to higher levels of goal achievement and payouts. Pacific Ethanol’s Adjusted
EBITDA goal of $49.6 million was viewed as attainable but highly aspirational at the time the projections were finalized. Payout
under the financial performance element was non-discretionary and was funded at a rate of 0% to 175% of the participants’
targeted payout amount for the financial performance element based on the actual level of Adjusted EBITDA compared to the Adjusted
EBITDA goal. To achieve 100% of the Adjusted EBITDA performance goal, Pacific Ethanol had to achieve Adjusted EBITDA of $49.6
million for 2014; however, the matrix provided payout opportunities for partial achievement (e.g., payout as low as 40%) and overachievement
(e.g., payout as high as 175%) of the Adjusted EBITDA goal at specified Adjusted EBITDA levels.
The Compensation Committee established for
2014 a maximum aggregate plan pool of up to $1.8 million for all performance elements with a targeted payout amount of $1.2 million
if all personnel covered by the plan attained 100% of their financial, departmental and individual performance goals. The $0.6
million difference between the maximum aggregate plan pool of up to $1.8 million and the targeted payout amount of $1.2 million
was available if financial performance exceeded the Adjusted EBITDA goal by the maximum amount of 175%.
A minimum level of $39.7 million of Adjusted
EBITDA, or 80% of Pacific Ethanol’s Adjusted EBITDA goal, was required to be satisfied before there was any payout under
the financial performance element. This feature was intended to assure that Pacific Ethanol achieved an acceptable minimum level
of financial performance before annual cash incentives could be paid to any participant, including Pacific Ethanol’s executive
officers. At the 80% Adjusted EBITDA level, the targeted aggregate payout was $0.3 million, or 40% of the portion of the plan
pool attributable to financial performance. At the 100% Adjusted EBITDA level, the targeted aggregate payout was $0.8 million,
or 100% of the portion of the plan pool attributable to financial performance. From the 100% level, the amounts increased in 5%
increments to a maximum of 175% of Pacific Ethanol’s Adjusted EBITDA goal so that at the 175% Adjusted EBITDA level, the
targeted aggregate payout was $1.4 million, or 175% of the portion of the plan pool attributable to financial performance.
Kinergy’s Annual Cash Incentive Compensation Plan
For Pacific Ethanol’s annual cash
incentive compensation plan applicable solely to Mr. Sneed, the Compensation Committee established two financial performance goals
for 2014, specifically, Kinergy’s Adjusted Net Income goal of $2.9 million and Pacific Ethanol’s Adjusted EBITDA goal
of $49.6 million. Of the 80% weighting attributable to Pacific Ethanol’s financial performance under this plan, 50% was
attributable to the Kinergy’s Adjusted Net Income goal and 30% was attributable to Pacific Ethanol’s Adjusted EBITDA
goal. Kinergy’s annual cash incentive compensation plan operates in a manner substantially the same as the annual cash incentive
compensation plan applicable to Pacific Ethanol’s other NEOs, including with respect to matrices with sliding scales of
achievement and payout opportunities in which higher levels of Kinergy’s Adjusted Net Income and Pacific Ethanol’s
Adjusted EBITDA corresponded to higher levels of goal achievement and payouts. The Compensation Committee established for 2014
a maximum aggregate plan pool of up to $400,000 for all performance elements with a targeted payout amount of $80,000 if Mr. Sneed
attained 100% of his financial and individual performance goals. The $320,000 difference between the maximum aggregate plan pool
of up to $400,000 and the targeted payout amount of $80,000 was available if financial performance exceeded Kinergy’s Adjusted
Net Income goal by the maximum amount of 855% and financial performance exceeded Pacific Ethanol’s Adjusted EBITDA goal
by the maximum amount of 175%. A minimum level of $2.3 million of Kinergy’s Adjusted Net Income, or 80% of Kinergy’s
Adjusted Net Income goal, was required to be satisfied before there was any payout under Kinergy’s Adjusted Net Income financial
performance element.
Long-Term Equity Incentive Compensation
The Compensation Committee targeted 2014
long-term equity incentive compensation for the NEOs at a level equal to the balance of the executive officer’s targeted
total compensation in excess of the sum of the executive officer’s base salary and targeted annual cash incentive compensation.
Accordingly, in setting 2014 long-term equity incentive compensation, the Compensation Committee subtracted the sum of the executive
officer’s base salary and targeted annual cash incentive compensation from targeted total compensation and established the
specific number of shares subject to the award by dividing the target value of the equity grant by the closing price of a share
of Pacific Ethanol’s common stock on the date of grant.
Individual Executive Officer Compensation
Targets
Target direct compensation for each of Pacific
Ethanol’s NEOs for 2014 is set forth below.
Specific results against performance objectives
that influenced the amount and mix of the NEOs total direct compensation for 2014 included record Adjusted EBITDA and higher than
budgeted Kinergy Adjusted Net Income for 2014 and full attainment by the NEOs of their respective individual performance goals
under the annual cash incentive compensation plans. Pacific Ethanol achieved 192% of its Adjusted EBITDA goal for 2014, resulting
in a payout under the annual cash incentive compensation plans to all NEOs at 175% of the targeted payout levels for that performance
measure. Pacific Ethanol achieved 140% of Kinergy’s Adjusted Net Income goal for 2014 resulting in a payout under Kinergy’s
annual cash incentive compensation plan to James R. Sneed at 221% of the targeted payout level for that performance measure.
Neil M. Koehler, Chief Executive Officer
and President
The following table and chart shows Mr.
Koehler’s direct target compensation for 2014 and 2013, as well as the positioning of his 2014 direct target compensation
relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based on the market data
provided by Hay Group:
| |
| | |
| | |
Change | |
Neil
M. Koehler | |
2014 | | |
2013
| | |
Dollars | | |
Percent | |
Base Salary | |
$ | 395,906 | | |
$ | 384,375 | | |
$ | 11,531 | | |
| 3.0% | |
Annual Cash Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 70.0% | | |
| 70.0% | | |
| | | |
| – | |
Target Dollars | |
$ | 277,134 | | |
$ | 269,063 | | |
$ | 8,071 | | |
| 3.0% | |
Long-Term Equity Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 126.3% | | |
| 130.1% | | |
| | | |
| (2.9% | ) |
Target Dollars | |
$ | 500,000 | | |
$ | 500,000 | | |
$ | – | | |
| – | |
Target Total Direct Compensation | |
$ | 1,173,040 | | |
$ | 1,153,438 | | |
$ | 19,602 | | |
| 1.7% | |
The Compensation Committee increased Mr.
Koehler’s target total direct compensation by 1.7% for 2014 as compared to 2013. The increase in target compensation for
2014 resulted from an annual 3% increase of Mr. Koehler’s base salary, which also increased Mr. Koehler’s targeted
annual cash incentive compensation by an equivalent amount. In addition, as discussed above, the Compensation Committee established
Mr. Koehler’s target total direct compensation for 2014 at approximately the 75th percentile relative to similarly
situated personnel at Pacific Ethanol’s third-party survey group companies based on the market data provided by Hay Group.
Michael D. Kandris, Chief Operating Officer
The following table and chart shows Mr.
Kandris’ direct target compensation for 2014 and 2013, as well as the positioning of his 2014 direct target compensation
relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based on the market data
provided by Hay Group:
| |
| | |
| | |
Change | |
Michael
D. Kandris | |
2014 | | |
2013
| | |
Dollars | | |
Percent | |
Base Salary | |
$ | 253,380 | | |
$ | 246,000 | | |
$ | 7,380 | | |
| 3.0% | |
Annual Cash Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 50.0% | | |
| 50.0% | | |
| | | |
| – | |
Target Dollars | |
$ | 126,690 | | |
$ | 123,000 | | |
$ | 3,690 | | |
| 3.0% | |
Long-Term Equity Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 67.5% | | |
| 56.9% | | |
| | | |
| 18.6% | |
Target Dollars | |
$ | 171,030 | | |
$ | 140,000 | | |
$ | 31,030 | | |
| 22.2% | |
Target Total Direct Compensation | |
$ | 551,100 | | |
$ | 509,000 | | |
$ | 42,100 | | |
| 8.3% | |
The Compensation Committee increased Mr.
Kandris’ target total direct compensation by 8.3% for 2014 as compared to 2013. As discussed above, the Compensation Committee
established Mr. Kandris’ target total direct compensation at above the 50th percentile and below the 75th
percentile relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based
on the market data provided by Hay Group, which resulted in higher target total direct compensation for 2014 as compared to 2013.
Bryon T. McGregor, Chief Financial Officer
The following table and chart shows Mr.
McGregor’s direct target compensation for 2014 and 2013, as well as the positioning of his 2014 direct target compensation
relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based on the market data
provided by Hay Group:
| |
| | |
| | |
Change | |
Bryon
T. McGregor | |
2014 | | |
2013
| | |
Dollars | | |
Percent | |
Base Salary | |
$ | 253,380 | | |
$ | 246,000 | | |
$ | 7,380 | | |
| 3.0% | |
Annual Cash Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 50.0% | | |
| 50.0% | | |
| | | |
| – | |
Target Dollars | |
$ | 126,690 | | |
$ | 123,000 | | |
$ | 3,690 | | |
| 3.0% | |
Long-Term Equity Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 67.5% | | |
| 56.9% | | |
| | | |
| 18.6% | |
Target Dollars | |
$ | 171,030 | | |
$ | 140,000 | | |
$ | 31,030 | | |
| 22.2% | |
Target Total Direct Compensation | |
$ | 551,100 | | |
$ | 509,000 | | |
$ | 42,100 | | |
| 8.3% | |
The Compensation Committee increased Mr.
McGregor’s target total direct compensation by 8.3% for 2014 as compared to 2013. As discussed above, the Compensation Committee
established Mr. McGregor’s target total direct compensation at above the 50th percentile and below the 75th
percentile relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based
on the market data provided by Hay Group, which resulted in higher target total direct compensation for 2014 as compared to 2013.
Christopher W. Wright, Vice President,
General Counsel and Secretary
The following table and chart shows Mr.
Wright’s direct target compensation for 2014 and 2013, as well as the positioning of his 2014 direct target compensation
relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based on the market data
provided by Hay Group:
| |
| | |
| | |
Change | |
Christopher
W. Wright | |
2014 | | |
2013
| | |
Dollars | | |
Percent | |
Base Salary | |
$ | 253,380 | | |
$ | 246,000 | | |
$ | 7,380 | | |
| 3.0% | |
Annual Cash Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 50.0% | | |
| 50.0% | | |
| | | |
| – | |
Target Dollars | |
$ | 126,690 | | |
$ | 123,000 | | |
$ | 3,690 | | |
| 3.0% | |
Long-Term Equity Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 67.5% | | |
| 56.9% | | |
| | | |
| 18.6% | |
Target Dollars | |
$ | 171,030 | | |
$ | 140,000 | | |
$ | 31,030 | | |
| 22.2% | |
Target Total Direct Compensation | |
$ | 551,100 | | |
$ | 509,000 | | |
$ | 42,100 | | |
| 8.3% | |
The Compensation Committee increased Mr.
Wright’s target total direct compensation by 8.3% for 2014 as compared to 2013. As discussed above, the Compensation Committee
established Mr. Wright’s target total direct compensation at above the 50th percentile and below the 75th
percentile relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based
on the market data provided by Hay Group, which resulted in higher target total direct compensation for 2014 as compared to 2013.
James R. Sneed, Vice President of Ethanol
Supply and Trading
The following table and chart shows Mr.
Sneed’s direct target compensation for 2014 and 2013, as well as the positioning of his 2014 direct target compensation
relative to similarly situated personnel at Pacific Ethanol’s third-party survey group companies based on the market data
provided by Hay Group:
| |
| | |
| | |
Change | |
James
R. Sneed | |
2014 | | |
2013
| | |
Dollars | | |
Percent | |
Base Salary | |
$ | 226,600 | | |
$ | 220,000 | | |
$ | 6,600 | | |
| 3.0% | |
Annual Cash Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 35.3% | | |
| 13.6% | | |
| | | |
| 159.6% | |
Target Dollars | |
$ | 80,000 | | |
$ | 30,000 | | |
$ | 50,000 | | |
| 166.7% | |
Long-Term Equity Incentive Compensation | |
| | | |
| | | |
| | | |
| | |
Target Percent of Base Salary | |
| 33.1% | | |
| 34.1% | | |
| | | |
| (2.9% | ) |
Target Dollars | |
$ | 75,000 | | |
$ | 75,000 | | |
$ | – | | |
| – | |
Target Total Direct Compensation | |
$ | 381,600 | | |
$ | 325,000 | | |
$ | 56,600 | | |
| 17.4 | |
The Compensation Committee increased Mr.
Sneed’s target total direct compensation by 17.4% for 2014 as compared to 2013. As discussed above, the Compensation Committee
established Mr. Sneed’s target total direct compensation for 2014 at the 50th percentile relative to similarly
situated personnel at Pacific Ethanol’s third-party survey group companies based on the market data provided by Hay Group,
which resulted in higher target total direct compensation for 2014 as compared to 2013. The increase in 2014 was primarily related
to the implementation of a higher targeted annual cash incentive compensation payout based on Kinergy’s budgeted Adjusted
Net Income for 2014. For 2013, Pacific Ethanol did not target any annual cash incentive compensation payout at Kinergy’s
budgeted income level beyond a guaranteed minimum bonus of $30,000. Subject to the guaranteed minimum bonus, Kinergy had to attain
higher than budgeted income before any amounts were payable to Mr. Sneed in 2013.
The following Compensation Committee
Report is not deemed filed with the Securities and Exchange Commission. Notwithstanding anything to the contrary set forth in
any of Pacific Ethanol’s previous filings made under the Securities Act or under the Exchange Act that might incorporate
future filings made by Pacific Ethanol under those statutes, the Compensation Committee Report will not be incorporated by reference
into any such prior filings or into any future filings made by Pacific Ethanol under those statutes.
Compensation Committee Report
The Compensation Committee has reviewed
and discussed the foregoing Compensation Discussion and Analysis with management, and based on that review and discussion, the
Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the
annual report on Form 10-K for the year ended December 31, 2014.
Submitted by the Compensation Committee of the Board:
Larry D. Layne, Chair
Douglas L. Kieta
Terry L. Stone
John L. Prince
Compensation Risk Analysis
The Compensation Committee, with the
advice of its independent compensation consultant and input from management, reviewed the design of Pacific Ethanol’s employee
compensation policies and practices and concluded that those policies and practices do not create risks that are reasonably likely
to have a material adverse effect on Pacific Ethanol. Significant factors considered by the Compensation Committee in reaching
its conclusion include:
|
· |
the mix and balance of base salary, annual cash incentive compensation
and long-term equity incentive compensation, with an emphasis on long-term equity incentive compensation that increase along
with Pacific Ethanol’s executives’ levels of responsibility; |
|
· |
a long-term equity incentive compensation program under which
grants of restricted stock are made, which is intended to mitigate the risk of actions intended to capture short-term stock
appreciation gains at the expense of sustainable total stockholder return over the longer-term; |
|
· |
vesting of long-term equity incentive awards over a number of
years; |
|
· |
caps on annual cash incentive compensation; |
|
· |
broad performance ranges for minimum, target and maximum financial
performance goals with small tiered increments for annual cash incentive compensation that reduce the risk of accelerating
or delaying revenue or expense recognition in order to satisfy the threshold or next tier for larger incentive payouts; |
|
· |
the financial performance measures Pacific Ethanol utilizes
under the annual cash incentive compensation plans, which include Adjusted EBITDA that accounts for controllable factors such
as attaining higher margins through managing production volumes relative to both ethanol and co-product sales prices and production
input costs, increasing production efficiencies, and controlling operating costs such as selling, general and administrative
expenses; and Kinergy’s Adjusted Net Income that similarly accounts for controllable factors; and |
|
· |
the features in Pacific Ethanol’s incentive programs that
are intended to mitigate risks from the compensation program, particularly the risk of short-term decision-making. These features
include the potential forfeiture of incentive awards by certain executive officers in the event of material noncompliance
with any financial reporting requirements under the federal securities laws (other than to comply with changes in applicable
accounting principles), including as a result of misconduct; and the ability of the Compensation Committee to exercise discretion
to reduce or eliminate payouts under the discretionary components of the compensation program, such as the individual performance
element in the annual cash incentive compensation plan, if it deems appropriate. |
Summary Compensation Table
The following table sets forth summary information
concerning the compensation of the NEOs for all services rendered in all capacities to Pacific Ethanol for the years ended December
31, 2012, 2013 and 2014.
Name
and Principal Position | |
Year | | |
Salary
($) | | |
Bonus
($) | | |
Stock
Awards ($)(1) | | |
Option
Awards ($)(2) | | |
All
Other Compensation (3) | | |
Total
($) | |
Neil M. Koehler | |
| 2014 | | |
$ | 393,245 | | |
$ | 443,415 | | |
$ | 516,288 | | |
$ | – | | |
$ | – | | |
$ | 1,352,948 | |
Chief Executive Officer | |
| 2013 | | |
$ | 384,375 | | |
$ | 153,750 | | |
$ | 665,283 | | |
$ | 190,477 | | |
$ | – | | |
$ | 1,393,885 | |
and President(4) | |
| 2012 | | |
$ | 384,375 | | |
$ | 40,000 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 424,375 | |
Michael D. Kandris | |
| 2014 | | |
$ | 251,677 | | |
$ | 202,704 | | |
$ | 176,588 | | |
$ | – | | |
$ | – | | |
$ | 630,969 | |
Chief Operating Officer(5) | |
| 2013 | | |
$ | 246,000 | | |
$ | 98,400 | | |
$ | 112,179 | | |
$ | 53,333 | | |
$ | – | | |
$ | 509,912 | |
| |
| 2012 | | |
$ | – | (4) | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | (4) |
Bryon T. McGregor | |
| 2014 | | |
$ | 252,027 | | |
$ | 202,704 | | |
$ | 176,588 | | |
$ | – | | |
$ | – | | |
$ | 631,319 | |
Chief Financial Officer(6) | |
| 2013 | | |
$ | 246,000 | | |
$ | 98,400 | | |
$ | 191,183 | | |
$ | 53,333 | | |
$ | – | | |
$ | 588,916 | |
| |
| 2012 | | |
$ | 246,000 | | |
$ | 23,370 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 269,370 | |
Christopher W. Wright | |
| 2014 | | |
$ | 252,027 | | |
$ | 202,70 | | |
$ | 176,588 | | |
$ | – | | |
$ | 25,355 | (8) | |
$ | 656,674 | |
Vice President, General | |
| 2013 | | |
$ | 246,000 | | |
$ | 98,400 | | |
$ | 191,183 | | |
$ | 53,333 | | |
$ | 20,573 | (8) | |
$ | 609,489 | |
Counsel and Secretary(7) | |
| 2012 | | |
$ | 246,000 | | |
$ | 23,370 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 269,370 | |
James R. Sneed | |
| 2014 | | |
$ | 225,077 | | |
$ | 177,926 | | |
$ | 77,434 | | |
$ | – | | |
$ | – | | |
$ | 480,437 | |
Vice President of Ethanol | |
| 2013 | | |
$ | 220,000 | | |
$ | 525,031 | | |
$ | 43,635 | | |
$ | 17,143 | | |
$ | 17,969 | (8) | |
$ | 823,778 | |
Supply and Trading | |
| 2012 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
__________
(1) |
The amounts shown are the fair value of stock
awards on the date of grant. Fair value of stock awards is calculated by multiplying the number of shares of stock granted
by the closing price of Pacific Ethanol’s common stock on the date of grant. The shares of common stock were issued
under Pacific Ethanol’s 2006 Plan. Information regarding the grants of restricted stock and vesting schedules for the
named executive officers is included in the “Grants of Plan-Based Awards−2014” and “Outstanding Equity
Awards at Fiscal Year-End−2014” tables below and the footnotes thereto. |
(2) |
The amounts shown are the aggregate grant date fair values of
grants of stock options to the named executive officers pursuant to the provisions of Accounting Standards Codification (“ASC”)
718. For a discussion of valuation assumptions used in ASC 718 calculations, see “Note 10—Stock-Based Compensation”
of the Notes to Consolidated Financial Statements included in Pacific Ethanol’s annual report on Form 10-K for the year
ended December 31, 2014. The options were issued under Pacific Ethanol’s 2006 Plan. Information regarding the vesting
schedules for the named executive officers is included in the footnotes to the “Outstanding Equity Awards at Fiscal
Year-End−2014” table below. |
(3) |
Except as specifically noted, the value of perquisites and other
personal benefits was less than $10,000 in aggregate for each of the named executive officers. |
(4) |
The value of the stock awards reported for 2013 includes $380,002
of awards made to Mr. Koehler in respect of his 2012 compensation that were granted in 2013. Pacific Ethanol did not have
adequate shares available under its 2006 Plan to make awards in 2012. |
(5) |
Mr. Kandris was appointed as Pacific Ethanol’s Chief Operating
Officer effective January 6, 2013. Pacific Ethanol paid Mr. Kandris $1,385 in fees for his services in 2013 as a member of
the board of directors. Pacific Ethanol paid Mr. Kandris $239,135 in consideration of services provided to Pacific Ethanol
in 2012 under a consulting arrangement. In addition, Pacific Ethanol paid Mr. Kandris $36,000 in fees for his service in 2012
as a member of its board of directors. None of the foregoing amounts are included in the table above. Also, of the stock awards
granted to Mr. Kandris in 2013, an award of 10,000 shares of Pacific Ethanol’s common stock on January 4, 2013 having
an aggregate grant date fair value of $53,900, calculated based on the fair market value of Pacific Ethanol’s common
stock on the applicable grant date, was made in respect of Mr. Kandris’ service as a member of Pacific Ethanol’s
Board in 2012. |
(6) |
The value of the stock awards reported for 2013 includes $133,004
of awards made to Mr. McGregor in respect of his 2012 compensation that were granted in 2013. Pacific Ethanol did not have
adequate shares available under Pacific Ethanol’s 2006 Plan to make awards in 2012. |
(7) |
The value of the stock awards reported for 2013 includes $133,004
of awards made to Mr. Wright in respect of his 2012 compensation that were granted in 2013. Pacific Ethanol did not have adequate
shares available under Pacific Ethanol’s 2006 Plan to make awards in 2012. |
(8) |
Amount represents perquisites or personal benefits relating
to payment of or reimbursement of commuting expenses from the executive officer’s home to Pacific Ethanol’s corporate
office locations in Sacramento, California, and housing and other living expenses. |
Executive Employment
Agreements
Neil M. Koehler
Pacific Ethanol’s Amended and Restated
Executive Employment Agreement with Mr. Koehler dated as of December 11, 2007 provides for at-will employment as Pacific Ethanol’s
President and Chief Executive Officer. Mr. Koehler initially received a base salary of $300,000 per year, which was increased
to $375,000 effective March 1, 2008, further increased to $384,375 effective April 3, 2011, further increased to $395,906 on March
5, 2014 and further increased to $407,783 on February 15, 2015, and is eligible to receive an annual discretionary cash bonus
of up to 70% of his base salary, to be paid based upon performance criteria set by the Pacific Ethanol Board. For 2013, Pacific
Ethanol paid Mr. Koehler a discretionary cash bonus based on Pacific Ethanol’s 2013 performance. For 2014, Pacific Ethanol
paid Mr. Koehler a cash bonus under its annual cash incentive compensation program based on its 2014 performance.
Upon termination by Pacific Ethanol without
cause, resignation by Mr. Koehler for good reason or upon Mr. Koehler’s disability, Mr. Koehler is entitled to receive (i)
severance equal to twelve months of base salary, (ii) continued health insurance coverage for twelve months, and (iii) accelerated
vesting of 25% of all shares or options subject to any equity awards granted to Mr. Koehler prior to Mr. Koehler’s termination
which are unvested as of the date of termination. However, if Mr. Koehler is terminated without cause or resigns for good reason
within three months before or twelve months after a change in control, Mr. Koehler is entitled to (a) severance equal to eighteen
months of base salary, (b) continued health insurance coverage for eighteen months, and (c) accelerated vesting of 100% of all
shares or options subject to any equity awards granted to Mr. Koehler prior to Mr. Koehler’s termination that are unvested
as of the date of termination.
The term “for good reason” is
defined in the Amended and Restated Executive Employment Agreement as (i) the assignment to Mr. Koehler of any duties or responsibilities
that result in the material diminution of Mr. Koehler’s authority, duties or responsibility, (ii) a material reduction by
Pacific Ethanol in Mr. Koehler’s annual base salary, except to the extent the base salaries of all other executive officers
of Pacific Ethanol are accordingly reduced, (iii) a relocation of Mr. Koehler’s place of work, or Pacific Ethanol’s
principal executive offices if Mr. Koehler’s principal office is at these offices, to a location that increases Mr. Koehler’s
daily one-way commute by more than thirty-five miles, or (iv) any material breach by Pacific Ethanol of any material provision
of the Amended and Restated Executive Employment Agreement.
The term “cause” is defined
in the Amended and Restated Executive Employment Agreement as (i) Mr. Koehler’s indictment or conviction of any felony or
of any crime involving dishonesty, (ii) Mr. Koehler’s participation in any fraud or other act of willful misconduct against
Pacific Ethanol, (iii) Mr. Koehler’s refusal to comply with any lawful directive of Pacific Ethanol, (iv) Mr. Koehler’s
material breach of his fiduciary, statutory, contractual, or common law duties to Pacific Ethanol, or (v) conduct by Mr. Koehler
which, in the good faith and reasonable determination of the Board, demonstrates gross unfitness to serve; provided, however,
that in the event that any of the foregoing events is reasonably capable of being cured, Pacific Ethanol shall, within twenty
days after the discovery of the event, provide written notice to Mr. Koehler describing the nature of the event and Mr. Koehler
shall thereafter have ten business days to cure the event.
A “change in control” of Pacific
Ethanol is deemed to have occurred if, in a single transaction or series of related transactions (i) any person (as the term is
used in Section 13(d) and 14(d) of the Exchange Act), or persons acting as a group, other than a trustee or fiduciary holding
securities under an employee benefit program, is or becomes a “beneficial owner” (as defined in Rule 13-3 under the
Exchange Act), directly or indirectly of securities of Pacific Ethanol representing a majority of the combined voting power of
Pacific Ethanol, (ii) there is a merger, consolidation or other business combination transaction of Pacific Ethanol with or into
another corporation, entity or person, other than a transaction in which the holders of at least a majority of the shares of voting
capital stock of Pacific Ethanol outstanding immediately prior to the transaction continue to hold (either by the shares remaining
outstanding or by their being converted into shares of voting capital stock of the surviving entity) a majority of the total voting
power represented by the shares of voting capital stock of Pacific Ethanol (or the surviving entity) outstanding immediately after
the transaction, or (iii) all or substantially all of Pacific Ethanol’s assets are sold.
Michael Kandris
Pacific Ethanol’s Executive Employment
Agreement with Mr. Kandris dated as of January 6, 2013 provides for at-will employment as Pacific Ethanol’s Chief Operating
Officer. Mr. Kandris initially received a base salary of $246,000 per year, which was increased to $253,380 on March 5, 2014 and
further increased to $260,981 on February 15, 2015, and he is eligible to receive an annual discretionary cash bonus of up to
50% of his base salary, to be paid based upon performance criteria set by the Board. For 2013, Pacific Ethanol paid Mr. Kandris
a discretionary cash bonus based on Pacific Ethanol’s 2013 performance. For 2014, Pacific Ethanol paid Mr. Kandris a cash
bonus under Pacific Ethanol’s annual cash incentive compensation program based on Pacific Ethanol’s 2014 performance.
All other terms and conditions of Mr. Kandris’ Executive Employment Agreement are substantially the same as those contained
in Neil M. Koehler’s Amended and Restated Executive Employment Agreement described above.
Bryon T. McGregor
Pacific Ethanol’s Amended and Restated
Executive Employment Agreement with Mr. McGregor effective as of November 25, 2009 provides for at-will employment as Pacific
Ethanol’s Chief Financial Officer. Mr. McGregor initially received a base salary of $240,000 per year, which was increased
to $246,000 effective April 3, 2011, further increased to $253,380 on March 5, 2014 and further increased to $260,981 on February
15, 2015, and is eligible to receive an annual discretionary cash bonus of up to 50% of his base salary, to be paid based upon
performance criteria set by the Board. For 2013, Pacific Ethanol paid Mr. McGregor a discretionary cash bonus based on Pacific
Ethanol’s 2013 performance. For 2014, Pacific Ethanol’s paid Mr. McGregor a cash bonus under Pacific Ethanol’s
annual cash incentive compensation program based on Pacific Ethanol’s 2014 performance. All other terms and conditions of
Mr. McGregor’s Amended and Restated Executive Employment Agreement are substantially the same as those contained in Neil
M. Koehler’s Amended and Restated Executive Employment Agreement described above.
Christopher W. Wright
Pacific Ethanol’s Amended and Restated
Executive Employment Agreement with Mr. Wright dated as of December 11, 2007 provides for at-will employment as Pacific Ethanol’s
Vice President, General Counsel and Secretary. Mr. Wright initially received a base salary of $225,000 per year, which was increased
to $240,000 effective March 1, 2008, further increased to $246,000 effective April 3, 2011, further increased to $253,380 on March
5, 2014 and further increased to $260,981 on February 15, 2015, and is eligible to receive an annual discretionary cash bonus
of up to 50% of his base salary, to be paid based upon performance criteria set by the Board. For 2013, Pacific Ethanol paid Mr.
Wright a discretionary cash bonus based on Pacific Ethanol’s 2013 performance. For 2014, Pacific Ethanol paid Mr. Wright
a cash bonus under Pacific Ethanol’s annual cash incentive compensation program based on Pacific Ethanol’s 2014 performance.
All other terms and conditions of Mr. Wright’s Amended and Restated Executive Employment Agreement are substantially the
same as those contained in Neil M. Koehler’s Amended and Restated Executive Employment Agreement described above.
James R. Sneed
Pacific Ethanol’s Employment Agreement
with Mr. Sneed dated as of November 12, 2012 provides for at-will employment as Pacific Ethanol’s Vice President of Ethanol
Supply and Trading. Mr. Sneed received a signing bonus of $75,000 upon commencement of his employment. Mr. Sneed initially received
a base salary of $220,000 per year, which was increased to $226,600 on March 5, 2014 and further increased to $233,398 on February
15, 2015. Beginning January 1, 2013, Mr. Sneed is eligible to participate in a cash bonus program based on the financial results
of Kinergy, subject to a guaranteed minimum annual bonus of $30,000 for 2013. For 2013, Pacific Ethanol paid Mr. Sneed a cash
bonus, in accordance with Kinergy’s 2013 bonus program, based on the amount by which Kinergy’s net income exceeded
Kinergy’s targeted net income for the year. For 2014, Pacific Ethanol paid Mr. Sneed a cash bonus under Kinergy’s
annual cash incentive compensation program based on Pacific Ethanol’s 2014 performance. The severance provisions of Mr.
Sneed’s employment agreement entitle him to severance equal to nine months of base salary upon termination by Pacific Ethanol
without cause, resignation by the executive for good reason or upon Mr. Sneed’s disability, as those terms are defined above;
however, Mr. Sneed is not entitled to the additional severance benefits applicable to the other NEOs.
Clawback Policy
In 2011, the Compensation Committee instituted
a “clawback” policy with respect to incentive compensation. Except as otherwise required by applicable law and regulations,
the clawback policy applies to any incentive-based compensation awarded or paid after January 1, 2011. The clawback policy mitigates
the risks associated with the compensation policies, because certain executive officers will be required to repay compensation
in the circumstances identified in the policy. The clawback policy requires recoupment of the incentive based compensation paid
or granted to certain executive officers in the event of a material noncompliance with any financial reporting requirements under
the federal securities laws (other than to comply with changes in applicable accounting principles).
The Compensation Committee will reevaluate
and, if necessary, revise the clawback policy to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act once
the rules implementing the clawback requirements have been finalized by the Securities and Exchange Commission.
Grants of Plan-Based Awards – 2014
The following table sets forth summary information
regarding all grants of plan-based awards made to the NEOs during the year ended December 31, 2014. As of the end of 2014, none
of the NEOs held any performance-based equity or non-equity incentive awards.
Name
| |
Grant
Date | |
All
Other Stock Awards: Number of Shares of Stock or Units (#)(1) | | |
Grant
Date Fair Value of Stock and Option Awards($)(2) | |
Neil M. Koehler | |
June 18, 2014 | |
| 33,944 | | |
$ | 516,288 | |
Michael D. Kandris | |
June 18, 2014 | |
| 11,610 | | |
$ | 176,588 | |
Bryon T. McGregor | |
June 18, 2014 | |
| 11,610 | | |
$ | 176,588 | |
Christopher W. Wright | |
June 18, 2014 | |
| 11,610 | | |
$ | 176,588 | |
James R. Sneed | |
June 18, 2014 | |
| 5,091 | | |
$ | 77,434 | |
__________
(1) |
The stock awards reported in the above table
represent shares of stock granted Pacific Ethanol’s 2006 Stock Incentive Plan. One-third of the shares vest on each
of April 1, 2015, 2016 and 2017. |
(2) |
The dollar value of grants of common stock shown represents
the grant date fair value calculated based on the fair market value of Pacific Ethanol’s common stock on the grant date.
The actual value that an executive will realize on the award will depend on the price per share of Pacific Ethanol’s
common stock at the time shares are sold. There is no assurance that the actual value realized by an executive will be at
or near the grant date fair value of the shares awarded. |
Outstanding Equity Awards at Fiscal Year-End – 2014
The following table
sets forth information about outstanding equity awards held by the NEOs as of December 31, 2014.
| |
Option Awards | | |
Stock Awards | |
Name | |
Number
of Securities Underlying Unexercised Options (#) Exercisable | | |
Number
of Securities Underlying Unexercised Options (#) Unexercisable | | |
Option
Exercise Price ($) | | |
Option
Expiration Date | | |
Number
of Shares or Units of Stock That Have Not Vested (#)(1) | | |
Market
Value of Shares or Units of Stock That Have Not Vested ($)(2) | |
Neil M. Koehler | |
| 3,750 | (3) | |
| – | | |
$ | 12.90 | | |
| 8/1/2021 | | |
| 1,191 | (4) | |
$ | 12,303 | |
| |
| 37,793 | (5) | |
| 75,586 | (5) | |
$ | 3.74 | | |
| 6/24/2023 | | |
| 19,445 | (6) | |
$ | 200,867 | |
| |
| | | |
| | | |
| | | |
| | | |
| 8,334 | (7) | |
$ | 86,090 | |
| |
| | | |
| | | |
| | | |
| | | |
| 37,037 | (8) | |
$ | 382,592 | |
| |
| | | |
| | | |
| | | |
| | | |
| 33,944 | (9) | |
$ | 350,642 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Michael D. Kandris | |
| 10,582 | (10) | |
| 21,164 | (10) | |
$ | 3.74 | | |
| 6/24/2023 | | |
| 10,371 | (11) | |
$ | 107,132 | |
| |
| | | |
| | | |
| | | |
| | | |
| 11,610 | (12) | |
$ | 119,931 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bryon T. McGregor | |
| 1,715 | (13) | |
| – | | |
$ | 12.90 | | |
| 8/1/2021 | | |
| 334 | (14) | |
$ | 3,450 | |
| |
| 10,582 | (10) | |
| 21,164 | (10) | |
$ | 3.74 | | |
| 6/24/2023 | | |
| 7,778 | (15) | |
$ | 80,347 | |
| |
| | | |
| | | |
| | | |
| | | |
| 10,371 | (11) | |
$ | 107,132 | |
| |
| | | |
| | | |
| | | |
| | | |
| 11,610 | (12) | |
$ | 119,931 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Christopher W. Wright | |
| 1,715 | (13) | |
| – | | |
$ | 12.90 | | |
| 8/1/2021 | | |
| 334 | (14) | |
$ | 3,450 | |
| |
| 10,582 | (10) | |
| 21,164 | (10) | |
$ | 3.74 | | |
| 6/24/2023 | | |
| 7,778 | (15) | |
$ | 80,347 | |
| |
| | | |
| | | |
| | | |
| | | |
| 10,371 | (11) | |
$ | 107,132 | |
| |
| | | |
| | | |
| | | |
| | | |
| 11,610 | (12) | |
$ | 119,931 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
James R. Sneed | |
| 3,401 | (16) | |
| 6,803 | (16) | |
$ | 3.74 | | |
| 6/24/2023 | | |
| 7,778 | (17) | |
$ | 80,347 | |
| |
| | | |
| | | |
| | | |
| | | |
| 5,091 | (18) | |
$ | 52,590 | |
__________
(1) |
The stock awards reported
in the above table represent shares of restricted stock and stock options granted under Pacific Ethanol’s 2006 Plan. |
(2) |
Represents the fair market value per
share of Pacific Ethanol’s common stock on December 31, 2014, which was $10.33, multiplied by the number of shares that
had not vested as of that date. |
(3) |
Represents stock options granted on
August 1, 2011. The option vested as to 1,250 shares on each of April 1, 2012, 2013 and 2014. |
(4) |
Represents shares granted on August
1, 2011. Mr. Koehler’s grant vests as to 1,191 shares on April 1, 2015. |
(5) |
Represents stock options granted on
June 24, 2013. The option vested as to 37,793 shares on April 1, 2014 and vests as to 37,793 shares on each of April 1, 2015
and 2016. |
(6) |
Represents shares granted on March
1, 2013. The grant vests as to 19,445 shares on April 1, 2015. |
(7) |
Represents shares granted on April
12, 2013. The grant vests as to 8,334 shares on April 1, 2015. |
(8) |
Represents shares granted on June 24,
2013. The grant vests as to 18,519 on April 1, 2015 and vests as to 18,518 on April 1, 2016. |
(9) |
Represents shares granted on June 18, 2014.
The grant vests as to 11,315 shares on April 1, 2015, vests as to 11,314 shares on April 1, 2016 and vests as to 11,315 shares
on April 1, 2017. |
(10) |
Represents stock options granted on June 24, 2013. The option
vested as to 10,582 shares on April 1, 2014 and vests as to 10,582 shares on each of April 1, 2015 and 2016. |
(11) |
Represents shares granted on June 24, 2013. The grant vests
as to 5,185 shares on April 1, 2015 and 5,186 shares on April 1, 2016. |
(12) |
Represents shares granted on June 18, 2014. The grant vests
as to 3,870 shares on each of April 1, 2015, 2016 and 2017. |
(13) |
Represents stock options granted on August 1, 2011. The option
vested as to 572 shares on April 1, 2012, vested as to 571 shares on April 1, 2013 and vested as to 572 shares on April 1,
2014. |
(14) |
Represents shares granted on August 1, 2011. The grant vests
as to 334 shares on April 1, 2015. |
(15) |
Represents shares granted on March 1, 2013. The grant vests
as to 7,778 shares on April 1, 2015. |
(16) |
Represents stock options granted on June 24, 2013. The option
vested as to 3,401 shares on April 1, 2014, vests as to 3,402 shares on April 1, 2015 and vests as to 3,401 shares on April
1, 2016. |
(17) |
Represents shares granted on June 24, 2013. The grant vests
as to 3,889 shares on each of April 1, 2015 and 2016. |
(18) |
Represents shares granted on June 18, 2014. The grant vests
as to 1,697 shares on each of April 1, 2015, 2016 and 2017. |
Option Exercises and Stock Vested – 2014
The following table summarizes the vesting
of stock awards for each of the NEOs for the year ended December 31, 2014:
| |
| Stock
Awards
| |
Name
| |
| Number
of Shares Acquired on Vesting (#) | | |
| Value
Realized on Vesting
($)(1) | |
Neil M. Koehler | |
| 48,915 | | |
$ | 868,934 | |
Michael D. Kandris | |
| 5,185 | | |
$ | 92,812 | |
Bryon T. McGregor | |
| 13,696 | | |
$ | 243,298 | |
Christopher W. Wright | |
| 13,696 | | |
$ | 243,298 | |
James R. Sneed | |
| 3,889 | | |
$ | 69,613 | |
__________
(1) |
Represents the closing price of a share of
Pacific Ethanol’s common stock on the date of vesting multiplied by the number of shares that vested on such date, including
any shares that were withheld by Pacific Ethanol to satisfy minimum employment withholding taxes. |
Severance and Change in Control Arrangements with Named Executive
Officers
Executive Employment Agreements.
Pacific Ethanol have entered into agreements with the NEOs that provide certain benefits upon the termination of their employment
under certain prescribed circumstances. Those agreements are described under “Executive Employment Agreements” above.
2006 Stock Incentive Plan.
Under Pacific Ethanol’s 2006 Stock Incentive Plan, if a change in control occurs, each outstanding equity award under the
discretionary grant program will automatically accelerate in full, unless (i) that award is assumed by the successor corporation
or otherwise continued in effect, (ii) the award is replaced with a cash retention program that preserves the spread existing
on the unvested shares subject to that equity award (the excess of the fair market value of those shares over the exercise or
base price in effect for the shares) and provides for subsequent payout of that spread in accordance with the same vesting schedule
in effect for those shares, or (iii) the acceleration of the award is subject to other limitations imposed by the plan administrator.
In addition, all unvested shares outstanding under the discretionary grant and stock issuance programs will immediately vest upon
the change in control, except to the extent Pacific Ethanol’s repurchase rights with respect to those shares are to be assigned
to the successor corporation or otherwise continued in effect or accelerated vesting is precluded by other limitations imposed
by the plan administrator. Each outstanding equity award under the stock issuance program will vest as to the number of shares
of common stock subject to that award immediately prior to the change in control, unless that equity award is assumed by the successor
corporation or otherwise continued in effect or replaced with a cash retention program similar to the program described in clause
(ii) above or unless vesting is precluded by its terms. Immediately following a change in control, all outstanding awards under
the discretionary grant program will terminate and cease to be outstanding except to the extent assumed by the successor corporation
or its parent or otherwise expressly continued in full force and effect pursuant to the terms of the change in control transaction.
The plan administrator will have the discretion
to structure one or more equity awards under the discretionary grant and stock issuance programs so that those equity awards will
vest in full either immediately upon a change in control or in the event the individual’s service with Pacific Ethanol or
the successor entity is terminated (actually or constructively) within a designated period following a change in control transaction,
whether or not those equity awards are to be assumed or otherwise continued in effect or replaced with a cash retention program.
The definition
of “change in control” under Pacific Ethanol’s 2006 Stock Incentive Plan is substantially the same as provided
under “Executive Employment Agreements” above.
Calculation of Potential Payments upon Termination or Change
in Control – 2014
In accordance with the rules of the Securities
and Exchange Commission, the following table presents Pacific Ethanol’s estimate of the benefits payable to its NEOs under
their executive employment agreements and Pacific Ethanol’s 2006 Stock Incentive Plan assuming that for each of the NEOs
(i) a “change in control” occurred on December 31, 2014, the last business day of 2014, and (a) there was a termination
by the executive “for good reason,” or by Pacific Ethanol without “cause” within three months before or
twelve months after the change in control, or (b) none of the executives’ equity awards were assumed by the successor corporation
or replaced with a cash retention program, (ii) a qualifying termination occurred on December 31, 2014, which is a termination
by the executive “for good reason,” by Pacific Ethanol without “cause” or upon the executive’s disability,
or (iii) a non-qualifying termination occurred on December 31, 2014, which is a voluntary termination by the executive other than
“for good reason” or by Pacific Ethanol for “cause.” See “Executive Employment Agreements”
above for the definitions of “for good reason,” “cause” and “change in control.”
Name
| |
Trigger | |
Salary
and Bonus(1) | | |
Continuation
of Benefits(2) | | |
Value
of Stock Acceleration(3) | | |
Total
Value(4) | |
| |
| |
| | | |
| | | |
| | | |
| | |
Neil M. Koehler | |
Change in Control | |
$ | 593,859 | | |
$ | 22,198 | | |
$ | 1,032,494 | | |
$ | 1,648,551 | |
| |
Qualifying Termination | |
$ | 395,906 | | |
$ | 14,799 | | |
$ | 258,126 | | |
$ | 668,831 | |
| |
Non-Qualifying Termination | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| |
| |
| | | |
| | | |
| | | |
| | |
Michael D. Kandris | |
Change in Control | |
$ | 380,070 | | |
$ | 16,105 | | |
$ | 227,064 | | |
$ | 623,239 | |
| |
Qualifying Termination | |
$ | 253,380 | | |
$ | 10,736 | | |
$ | 56,774 | | |
$ | 320,890 | |
| |
Non-Qualifying Termination | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| |
| |
| | | |
| | | |
| | | |
| | |
Bryon T. McGregor | |
Change in Control | |
$ | 380,070 | | |
$ | 22,198 | | |
$ | 310,861 | | |
$ | 713,129 | |
| |
Qualifying Termination | |
$ | 253,380 | | |
$ | 14,799 | | |
$ | 77,733 | | |
$ | 345,912 | |
| |
Non-Qualifying Termination | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| |
| |
| | | |
| | | |
| | | |
| | |
Christopher W. Wright | |
Change in Control | |
$ | 380,070 | | |
$ | 7,942 | | |
$ | 310,861 | | |
$ | 698,873 | |
| |
Qualifying Termination | |
$ | 253,380 | | |
$ | 5,294 | | |
$ | 77,733 | | |
$ | 336,407 | |
| |
Non-Qualifying Termination | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| |
| |
| | | |
| | | |
| | | |
| | |
James R. Sneed | |
Change in Control | |
$ | 169,950 | | |
$ | – | | |
$ | – | | |
$ | 169,950 | |
| |
Qualifying Termination | |
$ | 169,950 | | |
$ | – | | |
$ | – | | |
$ | 169,950 | |
| |
Non-Qualifying Termination | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
__________
(1) |
Amount represents eighteen months additional
salary after the date of termination in the event of a change in control and twelve months additional salary after the date
of termination in the event of a qualifying termination, in each case based on the executive’s salary as of December
31, 2014; provided, that James R. Sneed is entitled to nine months of additional salary after the date of termination in the
event of a change in control or a qualifying termination, in each case based on the executive’s salary as of December
31, 2014. |
(2) |
For those NEOs reported as eligible for benefits, the amount
represents the aggregate value of the continuation of certain employee health benefits for up to eighteen months after the
date of termination in the event of a change in control and for up to twelve months after the date of termination in the event
of a qualifying termination. |
(3) |
For those NEOs reported as eligible for acceleration of vesting
benefits, the amount represents the aggregate value of the accelerated vesting of 100% of all of the executive’s unvested
restricted stock grants in the event of a change in control and 25% of all of the executive’s unvested restricted stock
grants in the event of a qualifying termination. The amounts shown as the value of the accelerated restricted stock grants
are based solely on the intrinsic value of the restricted stock grants as of December 31, 2014, which was calculated by multiplying
(i) the fair market value of Pacific Ethanol’s common stock on December 31, 2014, which was $10.33 per share, by (ii)
the assumed number of shares vesting on an accelerated basis on December 31, 2014. |
(4) |
Excludes the value to the executive of the continuing right
to indemnification and continuing coverage under Pacific Ethanol’s directors’ and officers’ liability insurance,
if applicable. |
Certain
Relationships and Related Transactions OF PACIFIC ETHANOL
Policies and Procedures for Approval
of Related Party Transactions
The Pacific Ethanol Board has the responsibility
to review and discuss with management and approve, and has adopted written policies and procedures relating to approval or ratification
of, interested transactions with related parties. During this process, the material facts as to the related party’s interest
in a transaction are disclosed to all members of the Pacific Ethanol Board or the Audit Committee. Under the policies and procedures,
the Pacific Ethanol Board, through the Audit Committee, is to review each interested transaction with a related party that requires
approval and either approve or disapprove of the entry into the interested transaction. An interested transaction is any transaction
in which Pacific Ethanol is a participant and in which any related party has or will have a direct or indirect interest. Transactions
that are in the ordinary course of business and would not require either disclosure required by Item 404(a) of Regulation S-K
under the Securities Act or approval of the Pacific Ethanol Board or an independent committee of the Pacific Ethanol Board as
required by applicable NASDAQ rules would not be deemed interested transactions. No director may participate in any approval of
an interested transaction with respect to which he or she is a related party. The Pacific Ethanol Board intends to approve only
those related party transactions that are in the best interests of Pacific Ethanol and its stockholders.
Other than as described below or elsewhere
in this joint proxy statement/prospectus, since January 1, 2013, there has not been a transaction or series of related transactions
to which Pacific Ethanol was or is a party involving an amount in excess of $120,000 and in which any director, executive officer,
holder of more than 5% of any class of Pacific Ethanol’s voting securities, or any member of the immediate family of any
of the foregoing persons, had or will have a direct or indirect material interest. All of the below transactions were separately
approved by the Pacific Ethanol Board.
Certain Relationships and Related Transactions
Miscellaneous
Pacific Ethanol is or has been a party to
employment and compensation arrangements with related parties, as more particularly described above in “Executive Compensation
and Related Information.” In addition, Pacific Ethanol has entered into an indemnification agreement with each of its directors
and executive officers. The indemnification agreements and Pacific Ethanol’s Certificate of Incorporation and bylaws require
Pacific Ethanol to indemnify its directors and officers to the fullest extent permitted by Delaware law.
Neil M. Koehler
Series B Preferred Stock
On May 20, 2008, Pacific Ethanol sold to
Neil M. Koehler, who is Pacific Ethanol’s President and Chief Executive Officer and one of its directors, 256,410 shares
of its Series B Preferred Stock, all of which were initially convertible into an aggregate of 7,326 shares of Pacific Ethanol’s
common stock based on an initial preferred-to-common stock conversion ratio of approximately 1-for-0.03, and warrants to purchase
an aggregate of 3,663 shares of Pacific Ethanol’s common stock at a split-adjusted exercise price of $735 per share, for
an aggregate purchase price of $5,000,000. As a result of various anti-dilution adjustments, the conversion ratio of the Series
B Preferred Stock has increased to approximately 1-for-0.68. For each of the years ended December 31, 2014 and 2013, Pacific Ethanol
accrued and paid cash dividends in the amount of $350,000 in respect of shares of Series B Preferred Stock held by Mr. Koehler.
On the following dates Pacific Ethanol entered
into agreements with Mr. Koehler under which the following amounts of accrued and unpaid dividends in respect of shares of Series
B Preferred Stock held by Mr. Koehler were to be paid in shares of Pacific Ethanol’s common stock at the following prices
per share. Pacific Ethanol made such payments by issuing the following number of shares of common stock to Mr. Koehler on the
dates indicated.
Agreement Date | |
Accrued
Dividends | | |
Price
Per Share | | |
Shares
Issued | | |
Issuance
Date |
August 21, 2012 | |
$ | 105,000 | | |
$ | 4.65 | | |
| 22,581 | | |
August 24, 2012 |
December 26, 2012 | |
$ | 105,000 | | |
$ | 5.06 | | |
| 20,753 | | |
December 31, 2012 |
March 27, 2013 | |
$ | 105,000 | | |
$ | 5.25 | | |
| 20,000 | | |
March 28, 2013 |
July 26, 2013 | |
$ | 105,000 | | |
$ | 4.19 | | |
| 25,082 | | |
July 31, 2013 |
September 13, 2013 | |
$ | 105,000 | | |
$ | 3.72 | | |
| 28,247 | | |
September 17, 2013 |
May 23, 2014 | |
$ | 210,000 | | |
$ | 12.16 | | |
| 17,270 | | |
May 28, 2014 |
In November and December 2014, Pacific Ethanol
paid cash in the aggregate amount of $314,999 to Mr. Koehler representing all accrued and unpaid dividends in respect of shares
of Series B Preferred Stock held by Mr. Koehler. As of December 31, 2014, there were no accrued and unpaid dividends in respect
of shares of Series B Preferred Stock held by Mr. Koehler.
Loan Transaction
On March 30, 2009, Pacific Ethanol entered
into an unsecured promissory note in favor of Mr. Koehler. The promissory note was for the principal amount of $1,000,000. Interest
on the unpaid principal amount of the promissory note accrues at a rate per annum of 8.00%. On March 29, 2010, Pacific Ethanol
entered into an amendment to the promissory note to extend its maturity date to January 5, 2011. On October 29, 2010, Pacific
Ethanol paid all accrued interest under the promissory note, totaling $126,500. On November 5, 2010, Pacific Ethanol entered into
an amendment to the promissory note extending its maturity date to March 31, 2012. On December 31, 2010, Pacific Ethanol paid
all accrued interest under the promissory note, totaling $13,774. On November 30, 2011, Pacific Ethanol made a principal payment
of $250,000, resulting in an unpaid principal balance of $750,000. On March 7, 2012, Pacific Ethanol entered into an amendment
to the promissory note further extending its maturity date to March 31, 2013. On February 7, 2013, Pacific Ethanol entered into
an amendment to the promissory note further extending its maturity date to March 31, 2014. For the years ended December 31, 2014
and 2013, Pacific Ethanol paid all accrued interest under the promissory note, totaling $14,795 and $60,000, respectively. On
March 31, 2014, Pacific Ethanol paid in cash the outstanding balance of the promissory note.
Paul P. Koehler
Paul P. Koehler, a brother of Neil M. Koehler,
who is Pacific Ethanol’s President and Chief Executive Officer and one of Pacific Ethanol’s directors, is employed
by Pacific Ethanol as Vice President of Corporate Development at an annual salary of $233,398.
Series B Preferred Stock
On May 20, 2008, Pacific Ethanol sold to
Mr. Koehler 12,820 shares of its Series B Preferred Stock, all of which were initially convertible into an aggregate of 366 shares
of its common stock based on an initial preferred-to-common conversion ratio of approximately 1-for-0.03, and warrants to purchase
an aggregate of 184 shares of its common stock at a split-adjusted exercise price of $735 per share, for an aggregate purchase
price of $250,000. As a result of various anti-dilution adjustments, the conversion ratio of the Series B Preferred Stock has
increased to approximately 1-for-0.68. For each of the years ended December 31, 2014 and 2013, Pacific Ethanol accrued and paid
cash dividends in the amount of $17,500 in respect of shares of Series B Preferred Stock held by Mr. Koehler.
On the following dates Pacific Ethanol entered
into agreements with Mr. Koehler under which the following amounts of accrued and unpaid dividends in respect of shares of Series
B Preferred Stock held by Mr. Koehler were to be paid in shares of Pacific Ethanol’s common stock at the following prices
per share. Pacific Ethanol made such payments by issuing the following number of shares of common stock to Mr. Koehler on the
dates indicated.
Agreement Date | |
Accrued
Dividends | | |
Price
Per Share | | |
Shares
Issued | | |
Issuance
Date |
August 21, 2012 | |
$ | 5,250 | | |
$ | 4.65 | | |
| 1,129 | | |
August 24, 2012 |
December 26, 2012 | |
$ | 5,250 | | |
$ | 5.10 | | |
| 1,038 | | |
December 31, 2012 |
March 27, 2013 | |
$ | 5,250 | | |
$ | 5.25 | | |
| 1,000 | | |
March 28, 2013 |
July 26, 2013 | |
$ | 5,250 | | |
$ | 4.19 | | |
| 1,255 | | |
July 31, 2013 |
September 13, 2013 | |
$ | 5,250 | | |
$ | 3.72 | | |
| 1,413 | | |
September 17, 2013 |
May 23, 2014 | |
$ | 10,500 | | |
$ | 12.16 | | |
| 864 | | |
May 28, 2014 |
In November and December 2014, Pacific Ethanol
paid cash in the aggregate amount of $15,748 to Mr. Koehler representing all accrued and unpaid dividends in respect of shares
of Series B Preferred Stock held by Mr. Koehler. As of December 31, 2014, there were no accrued and unpaid dividends in respect
of shares of Series B Preferred Stock held by Mr. Koehler.
Restricted Stock Grants
On January 4, 2013, Pacific Ethanol granted
12,500 shares of its restricted common stock to Mr. Koehler in consideration of services to be provided. The value of the common
stock was determined to be $67,406.
On June 24, 2013, Pacific Ethanol granted
11,667 shares of restricted common stock to Mr. Koehler in consideration of services to be provided. The value of the common stock
was determined to be $43,635. On June 24, 2013, Pacific Ethanol also granted to Mr. Koehler an option to purchase up to 10,204
shares of its common stock at an exercise price of $3.74 per share as incentive compensation. The option vested as to approximately
one-third of the shares on April 1, 2014 and vests as to approximately one-third of the shares on each of April 1, 2015 and 2016.
On June 18, 2014, Pacific Ethanol granted
5,091 shares of its restricted common stock to Mr. Koehler in consideration of services to be provided. The value of the common
stock was determined to be $77,434. One-third of the shares vests on each of April 1, 2015, 2016 and 2017.
Annual Cash Incentive Compensation
For 2013, Pacific Ethanol paid Mr. Koehler
a discretionary cash bonus of $52,800 based on Pacific Ethanol’s 2013 performance.
For 2014, Pacific Ethanol paid Mr. Koehler
annual performance-based cash incentive compensation of $103,670 based on Pacific Ethanol’s 2014 performance.
Thomas D. Koehler
Series B Preferred Stock
On May 20, 2008, Pacific Ethanol sold to
Thomas D. Koehler, a brother of Neil M. Koehler, who is Pacific Ethanol’s President and Chief Executive Officer and one
of its directors, 12,820 shares of Pacific Ethanol’s Series B Preferred Stock, all of which were initially convertible into
an aggregate of 366 shares of Pacific Ethanol’s common stock based on an initial preferred-to-common conversion ratio of
approximately 1-for-0.03, and warrants to purchase an aggregate of 184 shares of Pacific Ethanol’s common stock at a split-adjusted
exercise price of $735 per share, for an aggregate purchase price of $250,000. As a result of various anti-dilution adjustments,
the conversion ratio of the Series B Preferred Stock has increased to approximately 1-for-0.68. For each of the years ended December
31, 2014 and 2013, Pacific Ethanol accrued and paid cash dividends in the amount of $17,500 in respect of shares of Series B Preferred
Stock held by Mr. Koehler.
On the following dates Pacific Ethanol entered
into agreements with Mr. Koehler under which the following amounts of accrued and unpaid dividends in respect of shares of Series
B Preferred Stock held by Mr. Koehler were to be paid in shares of Pacific Ethanol’s common stock at the following prices
per share. Pacific Ethanol made such payments by issuing the following number of shares of common stock to Mr. Koehler on the
dates indicated.
Agreement Date | |
Accrued
Dividends | | |
Price
Per Share | | |
Shares
Issued | | |
Issuance
Date |
August 21, 2012 | |
$ | 5,250 | | |
$ | 4.65 | | |
| 1,129 | | |
August 24, 2012 |
December 26, 2012 | |
$ | 5,250 | | |
$ | 5.10 | | |
| 1,038 | | |
December 31, 2012 |
March 27, 2013 | |
$ | 5,250 | | |
$ | 5.25 | | |
| 1,000 | | |
March 28, 2013 |
July 26, 2013 | |
$ | 5,250 | | |
$ | 4.19 | | |
| 1,255 | | |
July 31, 2013 |
September 13, 2013 | |
$ | 5,250 | | |
$ | 3.72 | | |
| 1,413 | | |
September 17, 2013 |
May 23, 2014 | |
$ | 10,500 | | |
$ | 12.16 | | |
| 864 | | |
May 28, 2014 |
In November and December 2014, Pacific Ethanol
paid cash in the aggregate amount of $15,748 to Mr. Koehler representing all accrued and unpaid dividends in respect of shares
of Series B Preferred Stock held by Mr. Koehler. As of December 31, 2014, there were no accrued and unpaid dividends in respect
of shares of Series B Preferred Stock held by Mr. Koehler.
Independent Contractor Services Agreement
On April 1, 2008, Pacific Ethanol entered
into an Independent Contractor Services Agreement with Mr. Koehler for the provision of strategic consulting services, including
in connection with promoting Pacific Ethanol, and ethanol as a fuel additive and transportation fuel, with governmental agencies.
Mr. Koehler was compensated at a rate of $5,000 per month under this arrangement from April 1, 2008 through September 30, 2010.
Effective October 1, 2010, Mr. Koehler’s compensation was increased to $7,500 per month.
William L. Jones
Series B Preferred Stock
On May 20, 2008, Pacific Ethanol sold to
William L. Jones, who is Pacific Ethanol’s Chairman of the Board and one of its directors, 12,820 shares of Pacific Ethanol’s
Series B Preferred Stock, all of which were initially convertible into an aggregate of 366 shares of Pacific Ethanol’s common
stock based on an initial preferred-to-common conversion ratio of approximately 1-for-0.03, and warrants to purchase an aggregate
of 184 shares of Pacific Ethanol’s common stock at a split-adjusted exercise price of $735 per share, for an aggregate purchase
price of $250,000. As a result of various anti-dilution adjustments, the conversion ratio of the Series B Preferred Stock has
increased to approximately 1-for-0.68. For each of the years ended December 31, 2014 and 2013, Pacific Ethanol accrued and paid
cash dividends in the amount of $17,500 in respect of shares of Series B Preferred Stock held by Mr. Jones.
On the following dates Pacific Ethanol entered
into agreements with Mr. Jones under which the following amounts of accrued and unpaid dividends in respect of shares of Series
B Preferred Stock held by Mr. Jones were to be paid in shares of Pacific Ethanol’s common stock at the following prices
per share. Pacific Ethanol made such payments by issuing the following number of shares of common stock to Mr. Jones on the dates
indicated.
Agreement Date | |
Accrued
Dividends | | |
Price
Per Share | | |
Shares
Issued | | |
Issuance
Date |
August 21, 2012 | |
$ | 5,250 | | |
$ | 4.65 | | |
| 1,129 | | |
August 24, 2012 |
December 26, 2012 | |
$ | 5,250 | | |
$ | 5.06 | | |
| 1,038 | | |
December 31, 2012 |
March 27, 2013 | |
$ | 5,250 | | |
$ | 5.25 | | |
| 1,000 | | |
March 28, 2013 |
July 26, 2013 | |
$ | 5,250 | | |
$ | 4.19 | | |
| 1,255 | | |
July 31, 2013 |
September 13, 2013 | |
$ | 5,250 | | |
$ | 3.72 | | |
| 1,413 | | |
September 17, 2013 |
May 23, 2014 | |
$ | 10,500 | | |
$ | 12.16 | | |
| 864 | | |
May 28, 2014 |
In November and December 2014, Pacific Ethanol
paid cash in the aggregate amount of $15,748 to Mr. Jones representing all accrued and unpaid dividends in respect of shares of
Series B Preferred Stock held by Mr. Jones. As of December 31, 2014, there were no accrued and unpaid dividends in respect of
shares of Series B Preferred Stock held by Mr. Jones.
Michael
D. Kandris
On January 4, 2013, Pacific Ethanol granted
10,000 shares of its restricted common stock to Mr. Kandris in consideration of services to be provided. The value of the common
stock was determined to be $54,000.
On June 24, 2013, Pacific Ethanol granted
15,556 shares of its restricted common stock to Mr. Kandris in consideration of services to be provided. The value of the common
stock was determined to be $58,179. On June 24, 2013, Pacific Ethanol also granted to Mr. Kandris an option to purchase up to
31,746 shares of its common stock at an exercise price of $3.74 per share as incentive compensation. The option vested as to approximately
one-third of the shares on April 1, 2014 and vests as to approximately one-third of the shares on each of April 1, 2015 and 2016.
Christopher W. Wright
On March 1, 2013, Pacific Ethanol granted
23,333 shares of its restricted common stock to Mr. Wright in consideration of services to be provided. The value of the common
stock was determined to be $133,004.
On June 24, 2013, Pacific Ethanol granted
15,556 shares of its restricted common stock to Mr. Wright in consideration of services to be provided. The value of the common
stock was determined to be $58,179. On June 24, 2013, Pacific Ethanol also granted to Mr. Wright an option to purchase up to 31,746
shares of its common stock at an exercise price of $3.74 per share as incentive compensation. The option vested as to approximately
one-third of the shares on April 1, 2014 and vests as to approximately one-third of the shares on each of April 1, 2015 and 2016.
Bryon T. McGregor
On March 1, 2013, Pacific Ethanol granted
23,333 shares of its restricted common stock to Mr. McGregor in consideration of services to be provided. The value of the common
stock was determined to be $133,004.
On June 24, 2013, Pacific Ethanol granted
15,556 shares of its restricted common stock to Mr. McGregor in consideration of services to be provided. The value of the common
stock was determined to be $58,179. On June 24, 2013, Pacific Ethanol also granted to Mr. McGregor an option to purchase up to
31,746 shares of its common stock at an exercise price of $3.74 per share as incentive compensation. The option vested as to approximately
one-third of the shares on April 1, 2014 and vests as to approximately one-third of the shares on each of April 1, 2015 and 2016.
James R. Sneed
On June 24, 2013, Pacific Ethanol granted
11,667 shares of restricted common stock to Mr. Sneed in consideration of services to be provided. The value of the common stock
was determined to be $43,635. On June 24, 2013, Pacific Ethanol also granted to Mr. Sneed an option to purchase up to 10,204 shares
of its common stock at an exercise price of $3.74 per share as incentive compensation. The option vested as to approximately one-third
of the shares on April 1, 2014 and vests as to approximately one-third of the shares on each of April 1, 2015 and 2016.
Terry L. Stone, John L. Prince, Douglas
L. Kieta and Larry D. Layne
On January 4, 2013, Pacific Ethanol granted
10,000 shares of its restricted common stock to each of its non-employee directors (except for the Chairman of the Pacific Ethanol
Board, Mr. Jones) in consideration of services to be provided. The value of the common stock granted to each of Messrs. Stone,
Prince, Kieta and Layne on January 4, 2013 was determined to be $53,925.
On June 24, 2013, Pacific Ethanol granted
13,333 shares of its restricted common stock to each of its non-employee directors (except for the Chairman of the Pacific Ethanol
Board, Mr. Jones) in consideration of services to be provided. The value of the common stock was determined to be $48,265.
Lyles United,
LLC
On March 27, 2008, Pacific Ethanol sold
to Lyles United, LLC, or Lyles United, 2,051,282 shares of Pacific Ethanol’s Series B Preferred Stock, all of which were
initially convertible into an aggregate of 58,608 shares of Pacific Ethanol’s common stock based on an initial preferred-to-common
conversion ratio of approximately 1-for-0.03, and warrants to purchase an aggregate of 29,304 shares of Pacific Ethanol’s
common stock at a split-adjusted exercise price of $735 per share, for an aggregate purchase price of $40,000,000. As a result
of various anti-dilution adjustments, the conversion ratio of the Series B Preferred Stock has increased to approximately 1-for-0.68.
For each of the years ended December 31, 2014 and 2013, Pacific Ethanol accrued and paid cash dividends in the amount of $700,000
in respect of shares of Series B Preferred Stock held by Lyles United.
On the following dates Pacific Ethanol entered
into agreements with Lyles United under which the following amounts of accrued and unpaid dividends in respect of shares of Series
B Preferred Stock held by Lyles United were to be paid in shares of Pacific Ethanol’s common stock at the following prices
per share. Pacific Ethanol made such payments by issuing the following number of shares of common stock to Lyles United on the
dates indicated.
Agreement Date | |
Accrued
Dividends | | |
Price
Per Share | | |
Shares
Issued | | |
Issuance
Date |
August 21, 2012 | |
$ | 367,068 | | |
$ | 4.65 | | |
| 78,939 | | |
August 24, 2012 |
December 26, 2012 | |
$ | 367,068 | | |
$ | 5.06 | | |
| 72,552 | | |
December 31, 2012 |
March 27, 2013 | |
$ | 367,068 | | |
$ | 5.25 | | |
| 69,918 | | |
March 28, 2013 |
July 26, 2013 | |
$ | 367,068 | | |
$ | 4.19 | | |
| 87,683 | | |
July 31, 2013 |
September 13, 2013 | |
$ | 367,068 | | |
$ | 3.72 | | |
| 98,746 | | |
September 17, 2013 |
May 23, 2014 | |
$ | 734,136 | | |
$ | 12.16 | | |
| 60,374 | | |
May 28, 2014 |
In November and December 2014, Pacific Ethanol
paid cash in the aggregate amount of $1,101,207 to Lyles United representing all accrued and unpaid dividends in respect of shares
of Series B Preferred Stock held by Lyles United. As of December 31, 2014, there were no accrued and unpaid dividends in respect
of shares of Series B Preferred Stock held by Lyles United.
Frank P. Greinke
Series B Preferred
Stock
For each of the years ended December 31,
2014 and 2013, Pacific Ethanol accrued and paid cash dividends in the amount of $86,964 in respect of shares of Series B Preferred
Stock held by the Greinke Personal Living Trust Dated April 20, 1999 (sometimes referred to as the Greinke Trust). Frank P. Greinke
is one of Pacific Ethanol’s former directors and the trustee of the holder of shares of Pacific Ethanol’s issued and
outstanding Series B Preferred Stock. The Greinke Trust acquired its shares of Series B Preferred Stock from Lyles United in December
2009.
Shares of Pacific Ethanol’s Series
B Preferred Stock, which were initially convertible into shares of Pacific Ethanol’s common stock based on an initial preferred-to-common
conversion ratio of approximately 1-for-0.03, were converted into shares of Pacific Ethanol’s common stock based on lower
conversion ratios resulting from various anti-dilution adjustments, thereby increasing the number of shares of common stock issued
to the Greinke Trust in connection with its conversions of Pacific Ethanol’s Series B Preferred Stock. The current conversion
ratio is approximately 1-for-0.68.
On the following dates Pacific Ethanol entered
into agreements with the Greinke Trust under which the following amounts of accrued and unpaid dividends in respect of shares
of Series B Preferred Stock held by the Greinke Trust were to be paid in shares of Pacific Ethanol’s common stock at the
following prices per share. Pacific Ethanol made such payments by issuing the following number of shares of common stock to the
Greinke Trust on the dates indicated.
Agreement Date | |
Accrued
Dividends | | |
Price
Per Share | | |
Shares
Issued | | |
Issuance
Date |
August 21, 2012 | |
$ | 189,656 | | |
$ | 4.65 | | |
| 40,786 | | |
August 24, 2012 |
December 26, 2012 | |
$ | 189,656 | | |
$ | 5.06 | | |
| 37,486 | | |
December 31, 2012 |
March 27, 2013 | |
$ | 189,656 | | |
$ | 5.25 | | |
| 36,128 | | |
March 28, 2013 |
July 26, 2013 | |
$ | 189,656 | | |
$ | 4.19 | | |
| 45,304 | | |
July 31, 2013 |
September 13, 2013 | |
$ | 189,656 | | |
$ | 3.72 | | |
| 51,020 | | |
September 17, 2013 |
May 23, 2014 | |
$ | 379,312 | | |
$ | 12.16 | | |
| 31,194 | | |
May 28, 2014 |
In November and December
2014, Pacific Ethanol paid cash in the aggregate amount of $568,971 to the Greinke Trust representing all accrued and unpaid dividends
in respect of shares of Series B Preferred Stock held by the Greinke Trust. As of December 31, 2014, there were no accrued and
unpaid dividends in respect of shares of Series B Preferred Stock held by the Greinke Trust.
INFORMATION ABOUT THE AVENTINE SPECIAL MEETING
AND VOTE
Date, Time and Place of the Special Meeting
These proxy materials are delivered in connection
with the solicitation by the Aventine Board of proxies to be voted at the Aventine special meeting, which is to be held at [●],
at [●] a.m., local time, on [●], 2015. On or about [●], 2015, Aventine commenced mailing this joint proxy statement/prospectus
and the enclosed form of proxy to its stockholders entitled to vote at the meeting.
Purpose of the Aventine Special Meeting
Aventine stockholders will be asked to vote
on the following proposals:
|
1. |
To adopt the Agreement and Plan of Merger, dated as of December
30, 2014, as amended on March 31, 2015, by and among Pacific Ethanol, Inc., AVR Merger Sub, Inc., and Aventine
Renewable Energy Holdings, Inc. (sometimes referred to as the merger agreement), and thereby approve the merger. A copy of
the merger agreement has been included as Annex A to this joint proxy statement/prospectus. In the merger, each share
of Aventine common stock issued and outstanding immediately preceding the completion of the merger (other than dissenting
shares and shares held by Pacific Ethanol or Aventine) will be converted into the right to receive, at the election of each
Aventine stockholder, pursuant to the terms of an election form to be distributed to all holders in advance of the special
meeting and certain limitations in order to maintain the tax free treatment of the merger (i.e., no more than 20% of shares
of Aventine common stock will be exchanged by the Aventine stockholders for shares of Pacific Ethanol non-voting common stock),
(i) 1.25 shares of Pacific Ethanol common stock, (ii) 1.25 shares of Pacific Ethanol non-voting common stock or (iii) a combination
of Pacific Ethanol common stock and non-voting common stock resulting in such Aventine stockholder receiving a total number
of shares of common stock and non-voting common stock equal to 1.25 times the number of shares of Aventine common stock held
by such stockholder. |
|
2. |
To adjourn the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt the merger agreement. |
|
3. |
To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof. |
Record Date and Voting Power
Only stockholders of record as of the close
of business on [●], 2015 will be entitled to notice of and to vote at the special meeting or at any subsequent meeting due
to an adjournment of the original meeting.
On the record date, [●], 2015, Aventine
had one class of voting stock outstanding. On that date, [●] shares of Aventine common stock were issued and outstanding.
Each outstanding share of common stock entitles the holder to one vote on all matters to be voted upon at the special meeting.
A complete list of stockholders entitled to
vote at the Aventine special meeting will be available for examination by any Aventine stockholder at Aventine’s headquarters,
1300 S. 2nd Street, Pekin, IL, 61554, for purposes pertaining to the Aventine special meeting, during normal business hours for
a period of ten days before the Aventine special meeting, and at the time and place of the Aventine special meeting.
Quorum and Voting Rights
In order to carry on the business of the meeting,
Aventine must have a quorum. A quorum requires the presence, in person or by proxy, of the holders of a majority of the votes entitled
to be cast at the meeting. Proxies received but marked as abstentions, if any, and broker non-votes, if any, will be included in
the calculation of the number of shares considered to be present at the meeting for quorum purposes. The affirmative vote of a
majority of the outstanding shares of Aventine common stock entitle to vote thereon is required to adopt the merger agreement and
approve the merger.
Required Vote
To adopt the merger agreement, holders of a
majority of the shares of Aventine common stock issued and outstanding and entitled to vote thereon must vote in favor of adoption
of the merger agreement. Because approval is based on the affirmative vote of a majority of the outstanding shares of Aventine
common stock entitled to vote, an Aventine stockholder’s failure to vote in person or by proxy at the special meeting, or
an abstention from voting, or the failure of an Aventine stockholder who holds his or her shares in “street name” through
a broker or other nominee to give voting instructions to such broker or other nominee, will have the same effect as a vote “AGAINST”
adoption of the merger agreement.
To approve the adjournment of the special meeting,
if necessary or advisable to solicit additional proxies if there are not sufficient votes to adopt the merger agreement and approve
the merger at the time of the special meeting, the affirmative vote of the majority of shares present in person or represented
by proxy at the meeting and entitled to vote thereon is required, if a quorum is present. The chairman of the meeting may also
(regardless of the outcome of the stockholder vote on adjournment) adjourn the meeting to another place, date and time. If a quorum
is not present, a majority of the voting stock represented in person or by proxy, or the chairman of the meeting, may adjourn the
meeting until a quorum is present. Shares held by stockholders who are not present at the special meeting in person or by proxy
will have no effect on the outcome of any vote to adjourn the special meeting. Broker non-votes will have no effect on the outcome
of any vote to adjourn the special meeting if a quorum is present but will have the same effect as a vote “AGAINST”
if no quorum is present. Abstentions from voting will have the same effect as a vote “AGAINST” adjourning the
special meeting.
Broker Non-Votes
If your shares are held in an account at a broker
or through another nominee, you must instruct the broker or other nominee on how to vote your shares. If you do not provide voting
instructions to your broker or other nominee, your shares will not be voted on any proposal on which your broker or other nominee
does not have discretionary authority to vote. Broker non-votes, if any, will be counted as being present at the special meeting
for purposes of determining a quorum, but will not be voted on those matters for which specific authorization is required. Brokers
do not have discretionary authority to vote on the proposal to adopt the merger agreement and approve the merger, or the proposal
to adjourn the special meeting. Therefore, if you do not provide voting instructions to your broker, your shares will not be voted
on the proposal to adopt the merger agreement, or the proposal to adjourn the special meeting. A broker non-vote will have the
same effect as a vote “AGAINST” adoption of the merger agreement. A broker non-vote will have no effect on the
outcome of any vote on the proposal to adjourn the special meeting if a quorum is present but will have the same effect as a vote
“AGAINST” if no quorum is present.
Abstentions; Non-Voting
For the proposal to adopt the merger agreement
and approve the merger, an abstention or a failure to vote will have the same effect as a vote “AGAINST” the
proposal.
For the proposal to adjourn the Aventine special
meeting, if necessary or advisable, an abstention will have the same effect as a vote “AGAINST” adjourning the
special meeting. A failure to submit a proxy or vote in person at the special meeting will not have an effect on the outcome of
the vote on the proposal.
Appraisal Rights
Aventine stockholders of record have appraisal
rights under the DGCL in connection with the merger. Aventine stockholders who do not vote in favor of the adoption of the merger
agreement and who otherwise fully comply with and follow the applicable provisions of Section 262 will be entitled to exercise
appraisal rights thereunder. Through an appraisal, the Court of Chancery of the State of Delaware will determine the “fair
value” of Aventine shares, which amount may be greater than, less than, or equal to the merger consideration. To exercise
appraisal rights, Aventine stockholders must (i) not vote in favor of the adoption of the merger agreement, (ii) deliver in the
manner set forth below a written demand for appraisal of the stockholder’s shares to the Corporate Secretary of Aventine
before the vote on the adoption of the merger agreement at the special meeting at which the proposal to adopt the merger agreement
and approve the merger will be submitted to Aventine’s stockholders, (iii) continuously hold the shares of record from the
date of making the demand through the effective time of the merger, and (iv) otherwise fully comply with and follow the requirements
of Section 262. If, after the consummation of the merger, such holder of Aventine common stock fails to perfect, withdraws or otherwise
loses his, her or its appraisal rights, each such share will be treated as if it had been converted as of the consummation of the
merger into a right to receive the merger consideration.
The relevant provisions of Section 262 are included
as Annex F to this joint proxy statement/prospectus. You are encouraged to read these provisions carefully and in their
entirety. Due to the complexity of the procedures for exercising your appraisal rights, Aventine stockholders who are considering
exercising such rights are encouraged to seek the advice of legal counsel. Failure to comply with these provisions will result
in the loss of appraisal rights. See the section entitled “Appraisal Rights” beginning on page 185 for additional information
and the full text of Section 262 reproduced in its entirety as Annex F to this joint proxy statement/prospectus. To the
extent the drag-along is exercised pursuant to the Aventine Stockholders Agreement, the Aventine stockholders subject to the drag-along
right have waived their respective appraisal rights arising out of a drag-along transaction.
Shares Beneficially Owned by Aventine Directors and Executive
Officers
Aventine’s directors and executive officers
did not beneficially own any shares of Aventine common stock on [●], 2015, the record date for the special meeting.
Voting of Shares; Proxies
Stockholders of record may vote in person
by ballot at the special meeting or by submitting their proxies by mail, by indicating their vote on each proxy card they receive,
signing and dating each proxy card returning each proxy card in the prepaid envelope that accompanied that proxy card.
Stockholders of Aventine who hold their shares
in “street name” by a broker, nominee, fiduciary or other custodian should refer to the proxy card or other information
forwarded by their broker, nominee, fiduciary or other custodian for instructions on how to vote their shares.
Aventine recommends you submit your proxy even
if you plan to attend the special meeting. If you properly give your proxy and submit it to Aventine in time to vote, one of the
individuals named as your proxy will vote your shares as you have directed. If you attend the special meeting, you may vote by
ballot, thereby cancelling any proxy previously submitted. If you hold your shares in “street name,” you will have
to obtain a legal proxy in your name from the broker, nominee, fiduciary or other custodian who holds your shares in order to vote
in person at the special meeting. You may vote for or against the proposals or abstain from voting.
If you are a stockholder of record and
submit your proxy but do not make specific choices, your proxy will follow the Aventine Board’s
recommendations and your shares will be voted:
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1. |
“FOR” the proposal to adopt the merger agreement and approve the merger. |
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2. |
“FOR” the proposal to adjourn the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt the merger agreement. |
Under such circumstances, your proxy will constitute
a waiver of your right of appraisal under Section 262 and will nullify any previously delivered written demand for appraisal under
Section 262.
Revocability of Proxies and Changes to an Aventine Stockholder’s
Vote
An Aventine stockholder has the power to change
its vote at any time before its shares are voted at the special meeting by:
|
· |
notifying Aventine’s Corporate Secretary, Christopher A. Nichols, in writing at 1300 S. 2nd Street, Pekin, IL 61554, prior to the Aventine special meeting that you are revoking your proxy; |
|
· |
executing and delivering a later dated proxy card; or |
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by attending the Aventine special meeting and voting your shares in person. |
However, if your shares held in “street
name” through a brokerage firm, bank, nominee, fiduciary or other custodian, you must check with your brokerage firm, bank,
nominee, fiduciary or other custodian to determine how to revoke your proxy.
Solicitation of Proxies
The solicitation of proxies from Aventine stockholders
is made on behalf of the Aventine Board. Aventine will pay the costs of soliciting Aventine stockholders and obtaining these proxies,
including the cost of reimbursing brokers, banks and other financial institutions for forwarding proxy materials to their customers.
Proxies may be solicited, without extra compensation, by Aventine officers and employees by mail, telephone, fax, personal interviews
or other methods of communication. Aventine does not expect to engage a proxy solicitation firm to assist Aventine in soliciting
proxies for the special meeting.
Other Business; Adjournments
Aventine is not currently aware of any other
business to be acted upon at the Aventine special meeting. If, however, other matters are properly brought before the special meeting,
your proxies include discretionary authority on the part of the individuals appointed to vote your shares to act on those matters
according to their best judgment.
Any adjournment may be made from time to time
by the affirmative vote of the holders of a majority of the shares represented at the Aventine special meeting in person or by
proxy and entitled to vote thereat and, whether or not a quorum is present, without further notice other than by announcement
at the meeting.
If the special meeting is adjourned to a different place, date or time, Aventine need not give notice of the new
place, date or time if the new place, date or time is announced at the meeting before adjournment, unless a new record date is
set for the meeting. The Aventine Board may fix a new record date if the meeting is adjourned. Proxies submitted by Aventine stockholders
for use at the special meeting will be used at any adjournment or postponement of the meeting. Unless the context otherwise requires,
references to the Aventine special meeting in this joint proxy statement/prospectus are to such special meeting as adjourned or
postponed.
Attending the Meeting
Subject to space availability, all stockholders
as of the record date, or their duly appointed proxies, may attend the meeting. Since seating is limited, admission to the meeting
will be on a first-come, first-served basis. Registration and seating will begin at [●] a.m., local time.
If you are a registered stockholder (that is,
if you hold your stock in certificate form), an admission ticket is enclosed with your proxy card. If you wish to attend the special
meeting, please vote your proxy but keep the admission ticket and bring it with you to the special meeting.
THE PROPOSED MERGER
The following is a discussion of the
merger and the material terms of the merger agreement between Pacific Ethanol and Aventine. You are urged to read carefully the
merger agreement in its entirety, a copy of which is attached as Annex A to this joint proxy statement/prospectus and incorporated
by reference herein.
General
Pacific Ethanol and Aventine agreed to the
acquisition of Aventine by Pacific Ethanol through a merger under the terms of the merger agreement that is described in this
joint proxy statement/prospectus. Under the terms of the merger agreement, Merger Sub will merge with and into Aventine. As a
result, Aventine will survive the merger and will continue to exist as a wholly-owned subsidiary of Pacific Ethanol.
The Pacific Ethanol Board is using this
joint proxy statement/prospectus to solicit proxies from the holders of Pacific Ethanol common stock and Series B Preferred Stock
for use at the Pacific Ethanol annual meeting. The Aventine Board is using this joint proxy statement/prospectus to solicit proxies
from the holders of Aventine common stock for use at the Aventine special meeting. This joint proxy statement/prospectus also
forms a part of the registration statement which will be used by Pacific Ethanol in connection with the offering of Pacific Ethanol
common stock and non-voting common stock if the merger is completed.
Pacific Ethanol Merger Proposal
At the Pacific Ethanol annual meeting, holders
of shares of Pacific Ethanol common stock and Series B Preferred Stock will be asked to vote on (i) the issuance of shares of
Pacific Ethanol common stock and non-voting common stock as contemplated by the merger agreement, and (ii) an amendment to Pacific
Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock. In addition, voting as a separate
class, the holders of Pacific Ethanol Series B Preferred Stock will be asked to agree not to treat the merger as a liquidation,
dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations.
The merger will not be completed unless
(i) holders of Pacific Ethanol common stock and Pacific Ethanol Series B Preferred Stock approve the share issuance, voting together
as a single class (giving effect to the Preferred Voting Ratio), (ii) holders of Pacific Ethanol Series B Preferred Stock approve
the share issuance, voting as a separate class, (iii) holders of Pacific Ethanol common stock and Pacific Ethanol Series B Preferred
Stock approve the amendment to Pacific Ethanol’s Certificate of Incorporation (giving effect to the Preferred Voting Ratio),
(iv) holders of Pacific Ethanol Series B Preferred Stock approve the amendment to Pacific Ethanol’s Certificate of Incorporation,
voting as a separate class, (v) holders of Pacific Ethanol Series B Preferred Stock agree not to treat the merger as a liquidation,
dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations.
A separate vote by the holders of Pacific Ethanol
common stock or Series B Preferred Stock on the merger agreement or the merger itself is not required under Delaware law.
Aventine Merger Proposal
At the Aventine special meeting, holders of
shares of Aventine common stock will be asked to vote on, among other things, the adoption of the merger agreement and thereby
approve the merger. The merger will not be completed unless Aventine stockholders adopt the merger agreement and thereby approve
the merger.
Merger Consideration
Common Stock and Non-Voting Common Stock
Subject to the terms and conditions of the
merger agreement, at the effective time of the merger, each share of Aventine common stock issued and outstanding immediately
prior to the effective time of the merger (other than dissenting shares as described in “Appraisal Rights” beginning
on page 252 and other than shares held in Aventine’s treasury or owned by Pacific Ethanol or any subsidiary of Aventine
or Pacific Ethanol, which will be cancelled for no consideration) will be converted into the right to receive, at the election
of the holder (pursuant to the terms of an election form to be distributed to all holders in advance of the special meeting and
certain limitations in order to maintain the tax free treatment of the merger) (i.e., no more than 20% of shares of Aventine common
stock will be exchanged by the Aventine stockholders for shares of Pacific Ethanol non-voting common stock), (i) 1.25 shares of
Pacific Ethanol common stock, (ii) 1.25 shares of Pacific Ethanol non-voting common stock, or (iii) a combination of Pacific Ethanol
common stock and non-voting common stock resulting in such Aventine stockholder receiving a total number of shares of common stock
and non-voting common stock equal to 1.25 times the number of shares of Aventine common stock held by such stockholder.
Based on the exchange ratio contemplated
by the merger agreement and the number of shares of Aventine common stock issued and outstanding as of March 31, 2015,
a total of an aggregate of approximately 17,755,300 shares of Pacific Ethanol common stock and non-voting common stock will be
issued upon the closing of the merger, assuming no exercise or conversion of outstanding options and warrants, which will represent
approximately 42% of the total Pacific Ethanol common stock and non-voting common stock issued and outstanding immediately following
the merger. The exact number of shares of Pacific Ethanol common stock and non-voting common stock to be issued in the merger
will not be determined until such time as the holders of Aventine common stock deliver an election form to Pacific Ethanol indicting
the number of shares of Pacific Ethanol common stock and/or non-voting common stock to be issued to such stockholder. The aggregate
number of shares of Pacific Ethanol common stock and non-voting common stock to be issued to Aventine stockholders will represent,
assuming no exercise or conversion of outstanding options and warrants, approximately 42% of the shares of Pacific Ethanol common
stock and non-voting common stock issued and outstanding immediately after the merger. Those amounts will be adjusted depending
on the actual number of shares of Aventine common stock, options and warrants outstanding at the effective time of the merger.
Fractional shares of Pacific Ethanol common
stock will not be delivered pursuant to the merger. Instead, each holder of shares of Aventine common stock who would otherwise
be entitled to receive a fractional share of Pacific Ethanol common stock pursuant to the merger will be entitled to receive a
cash payment, in lieu thereof, in an amount that will represent such fraction multiplied by the market price of a share of Pacific
Ethanol common stock rounded to the nearest whole cent, calculated based on the volume-weighted average price per share of Pacific
Ethanol common stock on The NASDAQ Capital Market for the five trading days immediately preceding the closing of the merger.
The value of the consideration to be
received by Aventine stockholders will fluctuate with changes in the price of Pacific Ethanol common stock. The estimated merger
consideration is approximately $191.6 million based on Pacific Ethanol’s closing share price of $10.79 on March 31, 2015
(assuming all holders of Aventine common stock elect to receive only shares of Pacific Ethanol common stock in the merger).
Adjustments
The merger consideration will be equitably adjusted
to provide holders of shares of Aventine common stock with the same economic effect contemplated by the merger agreement if, at
any time between the signing and the effective time of the merger, there is any change in the outstanding shares of capital stock
of Aventine or Pacific Ethanol by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or
similar readjustment within such period, or a stock dividend with a record date during such period.
Treasury Shares; Shares Owned by Pacific Ethanol
At the effective time of the merger, each share
of Aventine common stock (i) held as a treasury share by Aventine, (ii) owned of record by any subsidiary of Aventine, or (iii)
owned of record by Pacific Ethanol or any of its subsidiaries will, in each case, be cancelled, and no consideration will be delivered
in exchange for those shares.
Background of the Merger
The board of directors and senior management
of Pacific Ethanol and Aventine regularly review and assess their respective company’s operations, performance, prospects
and strategic direction. In connection therewith, they consider potential strategic alternatives, including potential business
combinations, to strengthen their respective businesses and maximize stockholder value. In furtherance of Pacific Ethanol’s
goals, the Pacific Ethanol Board appointed a strategic transactions committee (sometimes referred to as the Strategic Transactions
Committee), consisting of members of the Pacific Ethanol Board and senior management, to investigate, pursue and take the primary
lead on identifying, pursuing and consummating strategic acquisitions.
In June 2014, the senior management of Pacific
Ethanol presented its annual strategic plan to the Pacific Ethanol Board, which included a strategy of expansion by means of one
or more acquisitions. During a joint meeting of the Pacific Ethanol Board and the Strategic Transactions Committee held on June
17 and 18, 2014, the senior management suggested an initial list of ten potential merger or acquisition candidates. This list included,
among other companies, Aventine. At that meeting, the Pacific Ethanol Board approved the overall strategy of expansion of Pacific
Ethanol by means of one or more acquisitions and directed senior management to work with the Strategic Transactions Committee to
further evaluate acquisition candidates, including those on the list, and to focus on the most promising targets.
At the July 2014 meeting of the Pacific Ethanol
Board, Pacific Ethanol’s senior management presented further information on a list of eight potential acquisition candidates.
Aventine was not on this list as, at this time, management had inadequate information upon which to base an evaluation and because
Aventine’s larger size would make its acquisition a larger step. At this meeting, the senior management suggested that they
should continue to develop information on the identified acquisition targets as well as other potential acquisition targets and
the Pacific Ethanol Board approved this course of action.
In August 2014, Jim Sneed, Pacific Ethanol’s
Vice President of Supply and Marketing, contacted Eric Hakmiller, a member of the Board of Directors of Aventine with whom he had
a prior acquaintance. With Mr. Hakmiller’s help, Mr. Sneed arranged a teleconference on August 21, 2014 that included Mr.
Sneed, Mr. Hakmiller, Neil Koehler, Pacific Ethanol’s President and Chief Executive Officer, and Jim Continenza, Chairman
of the Board of Aventine. During the call, Mr. Koehler provided an update on Pacific Ethanol and suggested that Aventine and Pacific
Ethanol explore possible synergies between the two companies. The potential for a business combination was discussed in general
terms only. Specific financial terms of a potential transaction were not discussed and the conference call ended with Aventine’s
representatives stating that they would advise Pacific Ethanol if they had any interest in pursuing the matter.
Later on August 21, 2014, Mr. Koehler sent an
email to Messrs. Continenza and Hakmiller following up on their conversation earlier that day. Mr. Koehler attached a recent press
release of Pacific Ethanol to his email. Aventine did not respond to Mr. Koehler’s email or otherwise contact Pacific Ethanol
in relation to the August 21, 2014 communications. Pacific Ethanol and Aventine had no further direct communications until November
13, 2014.
Pacific Ethanol and Candlewood, the investment
advisor to and affiliate of the funds that hold equity interests in Aventine, have had a long standing business relationship.
In the past, in addition to holding equity interests in Pacific Ethanol, affiliates of Candlewood have provided significant debt
financing to Pacific Ethanol and its subsidiaries. As a result of this relationship, over the years Neil Koehler and David Koenig,
Managing Partner of Candlewood, have had numerous and regular conversations about Pacific Ethanol and the ethanol industry in
general.
During
the months of June, July and August 2014, Aventine’s executive officers and the Aventine
Board were made aware of a number of trades in Aventine’s common equity and warrants
that were issued in connection with a financing transaction completed in July 2013 (sometimes
referred to as the 2013 Warrants). Aventine, along with its transfer agent and outside
counsel processed the trading transactions on a prompt basis and kept the Aventine Board
apprised of the changes in Aventine’s equity and 2013 Warrants ownership. In connection
with the issuance of Aventine’s Term Loan A-1 debt on June 18, 2013, the participating
debt holders received warrants allowing for the purchase of 11.8 million shares of Aventine’s
common stock at an exercise price of $0.01 per share, upon the occurrence of a change
of control of Aventine, as defined in the warrant agreement governing the 2013 Warrants.
On September 18, 2014, while Mr. Koehler
was attending the 5th Annual Alpha Select Conference, at the request of Mr. Koenig, Mr. Koehler met with Mr. Koenig
and his colleague, Mike Lau, at Candlewood’s offices in New York. At the meeting, Mr. Koenig advised Mr. Koehler that Candlewood
owned 30% of Aventine and that there were two other stockholders of Aventine holding another 28% of Aventine’s common stock
and expressed his belief that a combination of Pacific Ethanol and Aventine would be beneficial to the stockholders of both companies
because of what he believed to be strategic synergies between the two companies. At the meeting and during several telephone conferences
between Mr. Koenig and Mr. Koehler that occurred between September 18, 2014 and October 3, 2014, Mr. Koenig and Mr. Koehler discussed
Aventine’s debt, capital structure, potential valuation and the possibility of a combination of the two companies or the
acquisition of the stock or assets of Aventine by Pacific Ethanol for consideration comprised of cash, stock of Pacific Ethanol
or a combination of cash and stock of Pacific Ethanol. Mr. Koehler kept the senior management of Pacific Ethanol apprised of the
details of his telephone conferences with Mr. Koenig. Based upon review of Aventine’s stockholder position listing and correspondence
received from Candlewood, Aventine’s management determined on September 29, 2014, a change of control event occurred under
the warrant agreement governing the 2013 Warrants. As a result, the 2013 Warrants became exercisable. Notice was given on October
14, 2014 and the 2013 Warrant holders were given 30 days to exercise their warrants. Upon completion of the exercise period, Aventine
had 14,204,240 shares issued and outstanding, of which 33.4% were owned by funds affiliated with Candlewood.
During a telephone conference between Mr. Koenig
and Mr. Koehler on the morning of October 3, 2014, Mr. Koehler requested that Mr. Koenig send him an email outlining the structure
of the transaction being proposed by Candlewood. In the afternoon of October 3, 2014, Mr. Koehler received an email from Mr. Koenig
which briefly outlined Aventine’s capital structure and Candlewood’s proposal regarding the transaction, including
a discussion of a proposed exchange ratio. In the email, Mr. Koenig proposed a merger transaction between Aventine and Pacific
Ethanol where one share of Aventine’s common stock would be exchanged for $20.00 in consideration, consisting of $5.00 in
cash and a number of shares of Pacific Ethanol’s common stock obtained by dividing $15.00 by Pacific Ethanol’s stock
price at a predetermined time. Mr. Koenig discussed in the email that after the consummation of the transaction, the combined company
would retain Aventine’s debt, and have over 500 million gallons of annual ethanol production capacity. Mr. Koenig also pointed
out in his email that Candlewood owned 30% of Aventine and that there were two other stockholders of Aventine, holding another
28% of Aventine’s common stock that would likely support the transaction. The text of the email is as follows:
“Neil,
It was a pleasure talking to you today as always. You
asked that I sketch out the framework for the equity exchange we discussed on the phone so here it is:
Aventine currently has the following capital structure
in place:
$40 Revolver undrawn @ L+400; Executed Sept 2014
$140 mm TLB Term loan that is 15% PIK or 10.5% Cash pay at the company's option. The bullet maturity is 9/2017 and callable
at Par at any time.
Equity (2.35mm) and Penny Warrants (11.85mm) for a combined share count of 14.208mm shares on a fully diluted basis.
Each Aventine Energy share would be exchanged with PEI
for $20 in consideration. The consideration is a split of cash and shares of PEIX. We are proposing that the cash amount be $ 5.0
per share with the balance a floating number of PEIX shares. Therefore, for 100% of the equity of Aventine, PEIX will pay $5 x
14.2mm or $71mm in cash. In addition, for
the other $15 of consideration, PEIX will issue a floating number of shares based on the current per for PEIX. If PEIX were
trading at $15 then it would be a 1 for 1 basis, PEIX issues 14.2mm additional shares. At a price of 12 on PEIX, 1.25x shares would
be issued. Conversely, at a price of $20 for PEIX shares only .75x shares would need to be issued (15/20 * 14.2). The settlement
of the exchange ratio would be set at a specific date to be decided in advance.
After this exchange, Aventine would retain its plant
specific debt, PEHoldco would retain their balance sheet and Post-PEI would have 500+mm gallons of production. Current PEIX shareholders
would experience a 150% increase in production gallons and own roughly 64% of the newly merged entity (assuming $15 PEIX closing
price). The Aventine equity holders would own 36% of Post-PEI. All of the debt could then be consolidated across all the assets
of the company at a lower rate or left in place.
I will let you come to your own conclusions of valuation
for each enterprise but I believe this would be very accretive to PEI. The new enterprise company would have debt per gallon of
$.36 and interest expense of .043 per gallon per year without any assumed refinancing.
Candlewood directly owns over 30% of Aventine equity
and with two other holders are above 51%. There are two other large equity holders (20+% and 8%) that would likely support a transaction
but we have not approached them. That group also owns a significant portion of the TLB.
As I mentioned on the phone, I think this is a highly
accretive deal in terms of the earning power, diversification of location and diversification of assets technology. While I cannot
speak for anyone else in the group, I think that a merger with a strategic is a far better outcome than an outright sale. We believe
that these assets currently have tremendous earning power and as a combined entity offer a significant platform for growth.
If you have any questions or need an explanation of anything
above, please to not hesitate to call me. I look forward to Hearing from you.”
In the following weeks and through the signing
of the merger agreement, Mr. Koehler, Christopher Wright, General Counsel of Pacific Ethanol, and Bryon McGregor, Chief Financial
Officer of Pacific Ethanol, continually updated the Pacific Ethanol Board and members of the Strategic Transactions Committee with
respect to material developments regarding the proposed merger with Aventine.
Between October 3, 2014 and October 15,
2014, Mr. Koehler and the rest of Pacific Ethanol’s senior management team discussed the potential transaction. In particular,
members of Pacific Ethanol’s senior management, including Messrs. Neil Koehler, Paul Koehler, McGregor, Wright and Sneed
met on October 7 and 8, 2014 to discuss the proposed transaction. At these meetings, members of Pacific Ethanol’s senior
management discussed Aventine’s contractual relationships, Aventine’s management and operations teams, and potential
risks and other issues related to the potential transaction. On October 11, 2014, Mr. McGregor sent a draft memorandum containing
a preliminary analysis of Aventine and the transaction proposed by Candlewood to Mr. Douglas Kieta, a member of the Pacific Ethanol
Board and Chair of the Strategic Transactions Committee. On October 15, 2014, Pacific Ethanol’s senior management team had
a telephone conference with members of the Strategic Transactions Committee during which management and members of the Strategic
Transactions Committee discussed material concerns of the proposed transaction, including the falling prices of oil and competitive
value of ethanol, and also discussed the need to further question and analyze the strategic value of the proposed transaction
to Pacific Ethanol.
On October 21, 2014, at a meeting of
the Pacific Ethanol Board, Mr. Kieta reported on the October 15, 2014 meeting of the Strategic Transactions Committee. The Pacific
Ethanol Board then discussed in detail the strategic reasons for acquiring Aventine and certain issues related to the proposed
transaction. During the meeting Mr. Koehler updated the board on his most recent discussions with Mr. Koenig during which Mr.
Koehler reported that Mr. Koenig had stated that Candlewood would favor an all stock transaction and an exchange ratio of 1.5
shares of Pacific Ethanol common stock for each share of Aventine common stock. Mr. Koehler also advised the Pacific Ethanol Board
that Mr. Koenig had indicated that Candlewood expected to have control of Aventine within a week or so and desired to discuss
a term sheet in the meantime. The Pacific Ethanol Board discussed all of the alternative transactions first discussed between
Pacific Ethanol and Candlewood. The discussion led to a consensus among the Pacific Ethanol Board that a stock-for-stock merger
transaction was strategically meritorious and should be pursued. In that regard, the Pacific Ethanol Board noted that the proposed
stock-for-stock merger transaction was superior to the alternative transaction structures for a number of reasons. First, if the
transaction had been structured as an all cash or part cash transaction, Pacific Ethanol would have been, in all likelihood, required
to source the capital markets to raise the cash portion of the acquisition cost which, in turn, would have required Pacific Ethanol
to issue additional equity in a financing transaction that would have required Pacific Ethanol to incur underwriting fees and
costs and subjecting the overall transaction to increased execution risk. Second, the proposed stock-for-stock merger transaction
would afford the Aventine stockholders the ability to receive stock of Pacific Ethanol on a tax-free basis, a feature that Candlewood
advised Pacific Ethanol would be attractive to Candlewood and other Aventine stockholders. The Pacific Ethanol Board also gave
management direction to, among other things, provide it with a financing plan for the combined company which would demonstrate
that adequate liquidity could be maintained after the transaction and to analyze staffing and integration issues for the combined
company.
During the morning of October 28, 2014,
Pacific Ethanol received a draft non-binding term sheet from Mr. Koenig and a further modified version of the term sheet that
evening. The term sheet proposed an acquisition of Aventine by Pacific Ethanol in which Aventine’s stockholders would exchange
their shares of Aventine common stock for shares of Pacific Ethanol common stock. The term sheet, which referred to Aventine as
Atom and Pacific Ethanol as PubCo, proposed the following two options for the exchange ratio:
“[Option 1 - Fixed Exchange
with Collar] [Atom shareholders will be entitled to elect to receive, for each share of Atom common stock, 1.50 shares of Pubco
common stock (such amount, as it may be adjusted as set forth below, the “Exchange Ratio”), provided that the
Pubco Measurement Price is at least $[x] but not greater than $[y]. If the Pubco Measurement Price is less than $[x], the Exchange
Ratio shall be $[_____] divided by the Pubco Measurement Price. [In the event the foregoing calculation results in an Exchange
Ratio greater than [w], the Exchange Ratio shall be fixed at [w].] If the Pubco Measurement Price is greater than $[y], the Exchange
Ratio shall be $[______] divided by the PubCo Measurement Price. [In the event that the foregoing calculation results in an Exchange
Ratio less than [z], the Exchange Ratio shall be fixed at [z].]
“Pubco Measurement Price”
shall mean the volume weighted average price per share of Pubco Common Stock on the New York Stock Exchange only as reported by
Bloomberg LP for the ten (10) consecutive trading days ending on and including the third (3rd) trading day prior to, but not including,
the closing date of the merger.]
[Option 2 – Fixed Exchange]
[Atom shareholders will be entitled to elect to receive, for each share of Atom common stock, 1.5 shares of Pubco common stock
(the “Exchange Ratio”).]”
Based on the proposed exchange ratios, assuming
the exchange ratio was not subject to adjustment, Pacific Ethanol’s and Aventine’s stockholders would hold approximately
55% and 45%, respectively, of the combined company on a post transaction basis. In addition, the term sheet provided that any Aventine
stockholder who would acquire beneficial ownership of more than 4.99% of Pacific Ethanol’s common stock would have the option
to receive securities convertible into Pacific Ethanol’s common stock, which convertible securities would contain a customary
limitation on conversion. The term sheet also provided for customary “no-shop” and “go-shop” restrictions
as well as termination and reverse termination fees, although no dollar amount for either termination fee was proposed. The reverse
termination fee would apply if the transaction was not consummated within 60 days from the execution of the term sheet. Under the
terms proposed, the Pacific Ethanol Board would be increased by two members with the two vacancies to be initially filled by persons
nominated by Aventine. The term sheet also proposed certain closing conditions, including receiving stockholder approval of both
Pacific Ethanol and Aventine and obtaining applicable regulatory approvals.
After discussing the term sheet with Pacific
Ethanol’s senior management team and Pacific Ethanol’s outside counsel, Troutman Sanders, LLC (sometimes referred
to as Troutman Sanders), Mr. Koehler and Mr. McGregor had a telephone conference with Mr. Koenig on October 29, 2014, to discuss
the term sheet proposed by Candlewood during which Mr. Koehler and Mr. McGregor stated that Pacific Ethanol preferred “Option
2” for the exchange ratio, and would propose a range of fixed exchange ratios rather than a set fixed exchange ratio of
1.5 and that it believed that including termination fees in the term sheet was premature. Mr. Koehler and Mr. McGregor also advised
Mr. Koenig that while Pacific Ethanol was committed to completing due diligence and closing the merger in an expeditious manner,
it was unable to commit to a 60 day timeline for the completion of due diligence and the drafting, negotiation and execution of
a definitive merger agreement. Mr. Koehler and Mr. McGregor also advised Mr. Koenig that Pacific Ethanol would include as a further
condition to closing that none of Aventine’s stockholders would dissent and exercise their appraisal rights under Delaware
law.
On October 30, 2014, Bryon McGregor sent Mr.
Koenig a revised draft of the term sheet which included Pacific Ethanol’s preliminary comments to the term sheet, including
those comments that Mr. McGregor discussed with Mr. Koenig on October 29, 2014 and proposing an exchange ratio of between 1.25
and 1.50 shares of Pacific Ethanol common stock for each share of Aventine common stock. Mr. McGregor also included a draft of
a confidentiality agreement as an additional attachment to the email.
On November 3, 2014, Mr. Koenig sent an email
to Mr. McGregor and Mr. Koehler describing Candlewood’s high level questions on and comments to the draft term sheet provided
by Pacific Ethanol on October 30, 2014. Mr. Koenig’s comments included objecting to the range proposed by Pacific Ethanol
for the exchange ratio, questioning why Pacific Ethanol objected to the acceptable percentage of dissenting stockholders and explaining
that Aventine was opposed to a “no-shop” provision if termination fees were not included in the merger agreement.
On November 4, 2014, Mr. McGregor replied to
Mr. Koenig’s November 3, 2014 email. In his email, Mr. McGregor agreed that the parties would need to agree on an exchange
ratio prior to the execution of the term sheet. Mr. McGregor also explained that Pacific Ethanol was under the impression that
Aventine wouldn’t have any dissenting stockholders and that the transaction may prove unfavorable to Pacific Ethanol if Aventine
had a significant number of dissenting stockholders given that such stockholders would need to be cashed out. Mr. McGregor agreed
that a termination fee would only be appropriate in the merger agreement, and explained that Pacific Ethanol would want both parties
to agree to a “no-shop” while engaging in due diligence and suggested that Pacific Ethanol could pay Aventine’s
out of pocket expenses if a definitive merger agreement was not executed. Mr. McGregor also attached a revised version of the confidentiality
agreement to his email.
On November 6, 2014, Mr. McGregor sent Mr. Koenig
a due diligence request list. On the same day, Mr. Koenig sent Mr. McGregor a revised draft of the term sheet which proposed that
Pacific Ethanol would pay Aventine’s actual expenses up to a certain amount (which amount was not included in the draft),
if Pacific Ethanol’s stockholders did not approve the transaction. The draft term sheet deleted the requirement that Aventine
have no dissenting stockholders and included a footnote explaining that Aventine’s stockholders would be subject to a drag-along
requirement. The term sheet also included new exclusivity provisions requiring that each of Pacific Ethanol and Aventine not solicit
or initiate a transaction in which another party would acquire control of 20% or more of the respective company for a period of
time that was not set forth in the term sheet and specified that Pacific Ethanol would reimburse Aventine for all out-of-pocket
expenses incurred in connection with the transaction if a definitive agreement was not entered into between the parties by the
end of the exclusivity period.
Later on November 6, 2014, Mr. McGregor sent
Mr. Koenig a revised draft of the term sheet in which Pacific Ethanol selected “Option 2” for the exchange ratio, where
one share of Aventine’s common stock would be exchanged for 1.5 shares of Pacific Ethanol common stock. The exchange ratio
of 1.5, however, remained in brackets indicating that it was subject to further negotiation. Pacific Ethanol revised the termination
fee provision to provide that Pacific Ethanol would pay Aventine’s reasonable expenses up to a certain amount (which amount
was not included in the draft) if Pacific Ethanol’s stockholders did not approve the transaction and also included a provision
mandating that Aventine would pay a termination fee if Aventine terminated the transaction if it accepted a proposal by a third
party that Aventine believed was superior to Pacific Ethanol’s offer. Pacific Ethanol also moved the exclusivity provisions
included in the draft term sheet provided by Mr. Koenig on November 6, 2014 to a separate exclusivity agreement. Mr. McGregor also
attached a timetable for the transaction, suggesting how quickly the transaction might proceed assuming that the merger agreement
would be signed on December 1, 2014.
On November 7, 2014, Mr. Wright and Mr. McGregor
had a telephone conference with Mr. Koenig during which Pacific Ethanol’s changes to the term sheet were discussed. Mr. Koenig
noted that Candlewood desired to change the 20% threshold for an adverse transaction in the exclusivity agreement to 24.99%. The
parties also discussed timing and regulatory requirements surrounding the potential transaction. Mr. Koenig also clarified that
approximately 3% of Aventine’s stockholders were not subject to drag-along rights, and thus could potentially dissent and
exercise their appraisal rights. The parties then discussed when Aventine would be presented with the term sheet, which up until
that point in time, had been negotiated solely between Candlewood and Pacific Ethanol. Mr. Koenig stated that Candlewood planned
to exercise warrants to purchase shares of Aventine common stock on November 10, 2014, after which, assuming the term sheet was
finalized between Candlewood and Pacific Ethanol, he intended on calling Aventine’s management to introduce Aventine to Pacific
Ethanol and advise Aventine that Candlewood, which would at that point own over 50% of Aventine’s issued and outstanding
common stock, supported the transaction. Mr. Koenig stated that Candlewood would then turn it over to Pacific Ethanol to submit
the term sheet to Aventine.
On November 10, 2014, the Strategic Transactions
Committee sent an update on the transaction and a current draft of the term sheet to the Pacific Ethanol Board. The update included
a valuation analysis of Pacific Ethanol and Aventine and an update as to Candlewood’s ownership of Aventine. The update noted
that Candlewood would likely discuss the transaction with Aventine in the coming days and that due diligence on Aventine would
follow.
During the week of November 10, 2014, David
Koenig and members of Pacific Ethanol’s senior management had several conversations and email exchanges with respect to the
terms and timing of the transaction. In particular, on November 10, 2014, Mr. Koenig sent Pacific Ethanol a revised draft of the
exclusivity agreement under which Pacific Ethanol and Aventine would agree that each company would not solicit or initiate a transaction
in which another party would acquire control of 24.99%, as opposed to the 20% proposed in the initial draft, or more of the respective
company. Further, on November 11, 2014, Mr. McGregor provided Mr. Koenig with a comparative valuation model comparing Aventine
and Pacific Ethanol. This valuation model was based on existing information about Pacific Ethanol and information about Aventine,
including its capital structure, outstanding indebtedness, production capacities, assets and liabilities, which was provided to
Pacific Ethanol by Mr. Koenig.
On November 11, 2014, Aventine received
notice from funds affiliated with Castlelake, LP that owned shares of Aventine common stock that it was transferring shares of
common stock in the amount of approximately 3.7 million shares to a fund affiliated with Candlewood. After giving effect to such
transfer, the funds affiliated with Candlewood would then own, in the aggregate, in excess of 50% of the then issued and outstanding
shares of Aventine common stock.
On November 12, 2014, Mr. Koenig sent a
slightly revised draft of the term sheet to Mr. McGregor, with the exchange ratio and the corresponding post-merger calculations
left blank. Later on November 12, 2014, Mr. Koenig and Mr. Lau of Candlewood had a telephone conference with Messrs. Wright and
McGregor during which Mr. Koenig advised that earlier that day, Mr. Koenig, on behalf of Candlewood, had a conversation with Mr.
Continenza, chairman of the Aventine Board, and Kip Horton, another member of the Aventine Board, during which Mr. Koenig advised
Mr. Continenza and Mr. Horton for the first time of the proposed transaction between Aventine and Pacific Ethanol and requested
that the Aventine Board pursue the proposed transaction. Mr. Koenig also advised Pacific Ethanol Messrs. Wright and McGregor that
Aventine’s representatives had indicated to Candlewood that Aventine had a received an all-cash offer to purchase one of
its assets. Mr. Koenig advised Pacific Ethanol’s senior management that he had informed Aventine that Candlewood was not
interested in a partial sale of Aventine and that Candlewood fully supported the proposed transaction between Pacific Ethanol
and Aventine. On the call, Pacific Ethanol and Candlewood agreed that the term sheet that would be provided to Aventine would
not include a proposed exchange ratio, but instead would agree that the exchange ratio would be determined at a later date.
Later on November 12, 2014, after an email exchange
with Mr. Wright, Mr. Koenig agreed to the exclusivity agreement stating that Pacific Ethanol and Aventine would not solicit or
initiate a transaction in which another party would acquire control of 20%, as opposed to the 24.99% proposed in a previous draft,
or more of their respective companies. Later on November 12, 2014, Mr. McGregor sent an email to Mr. Koenig and attached a revised
version of the exclusivity agreement including a date of December 1, 2014 for the end of the exclusivity period to be covered by
the exclusivity agreement and a maximum of $50,000 for Aventine’s out-of-pocket expenses to be paid by Pacific Ethanol if
a definitive agreement was not entered into by 5 p.m. Pacific Time on December 1, 2014. In Mr. McGregor’s email, Mr. McGregor
advised Mr. Koenig that Pacific Ethanol would like to send the term sheet, confidentiality agreement and signed exclusivity agreement
to the Aventine Board on November 13, 2014 and asked if Mr. Koenig had any objections. Mr. Koenig advised Mr. McGregor that he
did not have any objections to sending the materials to Aventine and Mr. McGregor advised Mr. Koenig that Mr. Koehler would call
Mr. Continenza after sending the documents to Aventine to initiate a direct dialog with Aventine.
On November 12, 2014, the Pacific Ethanol Board
held a telephonic meeting during which the senior management of Pacific Ethanol provided the Pacific Ethanol Board with an update
on the progress made on the proposed transaction, including that Mr. Koenig had discussed the transaction with Aventine and that
management intended to contact Aventine about the transaction on November 13, 2014. After lengthy discussion, the Pacific Ethanol
Board approved senior management further pursuing the transaction directly with Aventine.
On the morning of November 13, 2014, Mr. Koehler
called Mr. Continenza to discuss the proposed transaction, including a high level discussion of the terms of the transaction as
proposed in the term sheet, confidentiality agreement and exclusivity agreement which Pacific Ethanol and Candlewood had previously
negotiated. Later on November 13, 2014, Mr. Koehler forwarded drafts of the term sheet, the confidentiality agreement and the exclusivity
agreement to Mr. Continenza. This initial draft of the term sheet provided for a maximum of $75,000 for Aventine’s out-of-pocket
expenses to be paid by Pacific Ethanol if a definitive agreement was not entered into by 5:00 p.m. Pacific Time on December 1,
2014.
On November 13, 2014, Mr. Continenza called
Mr. Koenig in order to discuss the interest of Candlewood in supporting a transaction with Pacific Ethanol.
On November 14, 2014, Mr. Continenza and
Mr. Horton called Mr. Koenig to discuss the Aventine Board’s next steps with regard to the review of the Pacific Ethanol
offer and the timing involved with the review of the Pacific Ethanol offer.
At a meeting of the Aventine Board held
on November 14, 2014, Mr. Continenza advised the Aventine Board and a representative of Akin Gump Strauss Hauer & Feld LLP
(sometimes referred to as Akin Gump), counsel to Aventine on this transaction, of Mr. Koehler’s email dated November 13,
2014, including the terms proposed in the term sheet and exclusivity agreement. Mr. Continenza notified the Aventine Board that
Aventine would enter into a confidentiality agreement with Pacific Ethanol. For the benefit of the Aventine Board, Mr. Continenza
noted his knowledge of the historical relationship between Pacific Ethanol and Candlewood. Following extensive discussion regarding
the proposal, the Aventine Board resolved to form a special committee consisting of Mr. Continenza and Mr. Horton (sometimes referred
to as the Aventine Special Committee) to assist in the evaluation, negotiation and determination with respect to the recommendation
of a proposed transaction with Pacific Ethanol.
Later on November 14, 2014, a representative
of Akin Gump exchanged email correspondence with Pacific Ethanol to provide comments to the drafts of the term sheet and limited
comments to the confidentiality agreement and exclusivity agreement. Later on November 14, 2014, both Pacific Ethanol and Aventine
executed the confidentiality agreement. Aventine’s comments to the exclusivity agreement included clarification that this
agreement would not prohibit any trading of Pacific Ethanol or Aventine securities. Aventine’s comments to the term sheet
included clarifications to make clear that the post-merger entity would assume all of Aventine’s outstanding debt, establishing
that the exchange ratio would be determined prior to the execution of a definitive agreement and not included in the term sheet,
and proposing the following: (i) a minimum value at which Pacific Ethanol’s stock would need to trade for the transaction
to proceed (which value was not included), (ii) that Aventine’s stockholders who would acquire beneficial ownership of more
than 4.99% of Pacific Ethanol’s common stock would have the option to receive a warrant containing customary limitations
on conversion, (iii) that Pacific Ethanol pay Aventine a termination fee of 1% of the aggregate consideration to be paid by Pacific
Ethanol if Pacific Ethanol’s stockholders do not approve the transaction, proposing that Aventine pay Pacific Ethanol a
termination fee of 3% of the aggregate consideration to be paid by Pacific Ethanol if Aventine terminated the transaction if it
accepted a proposal by a third party that Aventine believed was superior to Pacific Ethanol’s proposal, and (iv) an increase
to the number of directors of the Pacific Ethanol Board to provide for Aventine’s stockholders having the ability to nominate
a number of directors proportional to their ownership interest in Pacific Ethanol.
On November 15, 2014, Pacific Ethanol was granted
access to a data room populated with some due diligence documentation with respect to Aventine. Starting November 15, 2014 through
the signing of the merger agreement on December 30, 2014, Pacific Ethanol, Troutman Sanders and other advisors retained by Pacific
Ethanol conducted an extensive due diligence review of Aventine, including reviewing materials provided by Aventine in the data
room and by email, conducting site visits at Aventine’s plants, conducting numerous telephone conferences both internally
between Pacific Ethanol and its various advisors and between Pacific Ethanol and Aventine and its advisors to discuss Pacific Ethanol’s
findings and ask follow-up questions. Throughout the process, Mr. Koehler, Mr. Wright and Mr. McGregor continually updated the
Pacific Ethanol Board and members of the Strategic Transactions Committee on the results of the due diligence investigation that
was being conducted.
From November 14, 2014 through November 16,
2014, Pacific Ethanol’s senior management discussed the term sheet and exclusivity agreement with Troutman Sanders. On November
16, 2014, Mr. Wright sent a revised version of the term sheet containing Pacific Ethanol’s comments to Mr. Koenig. On the
same day, Mr. Wright also introduced a representative of Akin Gump to a representative of Troutman Sanders and proposed a telephone
conference on November 17, 2014 to discuss the term sheet and exclusivity agreement.
Not having received any comments from Mr. Koenig,
on November 17, 2014, Mr. Wright sent the draft term sheet to a representative of Akin Gump, copying Mr. Koenig. Pacific Ethanol’s
comments included rejecting Aventine’s proposal with respect to a minimum value at which Pacific Ethanol’s stock would
need to trade for the transaction to proceed, clarifying that after the transaction Aventine would be a wholly owned subsidiary
of Pacific Ethanol, and rejecting Aventine’s proposal with respect to increasing the number of directors on the Pacific Ethanol
Board by more than two.
On November 17, 2014, Aventine entered into
an agreement with RPA Advisors LLC (sometimes referred to as RPA Advisors) to assist Aventine with financial due diligence conducted
by potential purchasers, including Pacific Ethanol. RPA Advisors is a financial advisory firm. Due to Mr. Horton’s position
as a principal of RPA Advisors, RPA Advisors could not serve as financial advisor nor could it provide the Aventine Board with
a fairness opinion in connection with any transaction with Pacific Ethanol.
On November 17 and 18, 2014, a representative
from Troutman Sanders and Mr. Wright had several telephone conferences with a representative of Akin Gump during which the term
sheet and details related to Aventine’s history and capitalization were discussed. During the same period, a representative
of Akin Gump, Mr. Continenza and Mr. Horton had conversations regarding the revisions requested by Mr. Wright and a representative
of Troutman Sanders. On November 18, 2014, Pacific Ethanol and Aventine executed the exclusivity agreement and the term sheet.
From November 18, 2014 to December 28, 2014,
members of Aventine’s management team, including Aventine’s President, Chief Financial Officer and General Counsel,
and representatives of Akin Gump and RPA Advisors conducted due diligence on Pacific Ethanol.
On November 23, 2014, Mr. Wright sent an email
to a representative of Akin Gump providing an update with respect to Pacific Ethanol’s progress on its due diligence review,
the necessity for Aventine’s data room to be further populated with the requested diligence materials and noting that signing
a definitive agreement by December 1, 2014 was unlikely.
On November 23, 2014, Mr. McGregor sent the
Pacific Ethanol Board a written report advising that the term sheet and exclusivity agreements had been executed by Pacific Ethanol
and updating the Pacific Ethanol Board of the progress being made on the due diligence review of Aventine. The report discussed
in detail the site visit conducted by members of Pacific Ethanol’s senior management of Aventine’s ethanol facilities
located in Pekin, Illinois and Aurora, Nebraska, details regarding Aventine’s capital expenditures, personnel and labor,
operating costs and EBITDA performance and an analysis of the strengths, weaknesses, opportunities and threats associated with
each of Aventine’s plants.
On or about November 23, 2014, Mr. McGregor
had a conversation with Mr. Koenig whereby Mr. McGregor provided Mr. Koenig with an update on the status of the transaction and
noted that Pacific Ethanol would need additional time to complete its due diligence review of Aventine and, as a result, suggested
that the exclusivity period under the exclusivity agreement be extended to December 31, 2014.
At a meeting of the Pacific Ethanol Board
held on November 24, 2014, Mr. McGregor made a presentation on the status of Pacific Ethanol’s diligence review of Aventine
and lead a discussion about the results of the due diligence review. The Pacific Ethanol Board and members of the Strategic Transactions
Committee, who were also present at the meeting, discussed, among other things, Aventine’s historical and projected capital
expenditures, considerations related to Aventine’s unionized workforce, and the progress made on a number of legal due diligence
items, including the Aurora Coop Litigation matters.
On November 25, 2014, the Aventine Board
met to discuss, among other things, the request by Pacific Ethanol that the exclusivity period be extended from December 1, 2014
to December 31, 2014. The Aventine Board authorized the Aventine Special Committee to engage with Candlewood and discuss such
extension. During the course of the meeting, the Aventine Board learned that the anticipated share transfer by funds managed by
Castlelake LP to Candlewood’s affiliates would be completed on November 26, 2014.
On November 26, 2014, Pacific Ethanol and
Aventine entered into an amendment to the exclusivity agreement to extend the exclusivity period to December 31, 2014. Also, on
November 26, 2014, transactions involving funds affiliated with Castlelake LP and Candlewood’s affiliates were settled,
with Candlewood’s affiliates becoming the owner of 59.42% of Aventine’s issued and outstanding shares of common stock
as of such date, resulting in a change in control of Aventine. It was reported to Aventine that the purchase price per share was
$9.00.
On December 5, 2014, the Pacific Ethanol Board
held a meeting to review the terms of the proposed merger with Aventine. At the invitation of the Pacific Ethanol Board, members
of the Strategic Transactions Committee and a representative of Troutman Sanders also were present. Members of the Strategic Transaction
Committee provided the Pacific Ethanol Board with a further update on Pacific Ethanol’s operational and legal due diligence
review of Aventine. At the meeting, the Pacific Ethanol Board also discussed the valuation of the transaction, including a discussion
of projected future capital expenditures at Aventine’s plants and cash payouts anticipated to be made to Aventine’s
management at the closing of the transaction.
On December 8, 2014, a representative of Troutman
Sanders provided an initial draft of the merger agreement to representatives of Aventine and Akin Gump.
On December 9, 2014, a representative of
Akin Gump initiated a telephone conference call with Mr. Koenig, Janet Miller, general counsel of Candlewood, and a representative
of Proskauer Rose to discuss certain elements of the merger agreement. In particular, the inclusion of Pacific Ethanol non-voting
common stock as a component of the merger consideration instead of a warrant was discussed. Mr. Koenig expressed his desire to
have an option to receive equity consideration that would not require compliance with the reporting obligations that arise from
significant ownership of Pacific Ethanol Common Stock as a result of the reporting requirements under Sections 13(d) and 13(g)
of the Exchange Act. Mr. Koenig and a representative of Proskauer suggested the creation and issuance of Pacific Ethanol non-voting
common stock as an alternative and suggested that Akin Gump convey this message to Pacific Ethanol.
Later on December 9, 2014, a representative
of Akin Gump called a representative of Troutman Sanders to discuss and consider the inclusion of Pacific Ethanol non-voting common
stock in lieu of warrants.
On December 10, 2015, members of Pacific Ethanol’s
senior management and a representative of Troutman Sanders participated in a telephone conference with representatives of Craig-Hallum
to discuss the fairness opinion process.
On December 12, 2014, Akin Gump distributed
a revised draft of the merger agreement to the various interested parties. The revisions to the merger agreement included, among
other things, (i) changes to the merger consideration to include an option for Aventine stockholders to elect to receive shares
of non-voting common stock issued by Pacific Ethanol; (ii) changes to the Change in Recommendations section by Aventine’s
board; (iii) changes to the definition of a Company Takeover Proposal; (iv) changes to the employee benefits matters section relating
to Aventine employees after the merger; (v) the deletion of a requirement for Aventine to maintain pollution liability insurance;
(vi) changes to certain closing conditions, including among others, (A) the deletion of the condition that the parties receive
bring down fairness opinions, (B) changes to the condition related to the Aurora Coop Litigation, and (C) the addition of a condition
that Pacific Ethanol appoint two individuals to the Pacific Ethanol Board, nominated by holders of a majority of Aventine common
stock; and (vii) changes to the outside termination date.
On December 15, 2014, Pacific Ethanol and Craig-Hallum
entered into an engagement letter with respect to the delivery by Craig-Hallum to Pacific Ethanol of a fairness opinion in connection
with the proposed merger with Aventine.
During the negotiation of the transaction between
Pacific Ethanol and Aventine, Mr. Koenig and Mr. Koehler continued to be in communication about the terms of transaction. In particular,
on December 15, 2014, Mr. Koehler sent Mr. Koenig an issues list prepared by Troutman Sanders which outlined the significant issues
in Aventine’s December 12, 2014 draft of the merger agreement for the purpose of discussing the material issues with senior
management of Pacific Ethanol. Mr. Koehler requested that Mr. Koenig provide any input with respect to the issues prior to Pacific
Ethanol’s internal discussion. Later on December 15, 2014, Mr. Koenig replied to Mr. Koehler’s email responding to
certain of the issues including noting that Candlewood could not commit to a voting agreement in which it would agree to vote in
favor of the merger between Pacific Ethanol and Aventine.
In addition, on December 17, 2014, Mr. Koehler
had several telephone conferences with Mr. Koenig and Mr. Lau regarding the pricing of the proposed transaction. Mr. Koehler proposed
a sliding scale for the exchange ratio of between 1.0 and 1.5 shares of Pacific Ethanol common stock for each share of Aventine
common stock. In response to Mr. Koehler’s proposal, Mr. Koenig and Mr. Lau suggested an exchange ratio of 1.25 shares of
Pacific Ethanol’s common stock for each share of Aventine’s common stock. In response to this proposal, Mr. Koehler
advised Messrs. Koenig and Lau that an exchange ratio of 1.25 shares was acceptable to Pacific Ethanol, provided that Pacific
Ethanol could decide not to consummate the transaction if Pacific Ethanol’s common stock was trading at less than $10.00
per share immediately preceding the closing of the merger. In response, Messrs. Koenig and Lau advised Mr. Koehler that the minimum
trading price condition was acceptable provided that it be structured as a mutual condition. Mr. Koehler agreed to this counterproposal.
On December 19, 2014, the Pacific Ethanol
Board held a lengthy meeting to discuss the results of the due diligence review of Aventine to date and to review the terms of
the proposed merger with Aventine. At the invitation of the Pacific Ethanol Board, members of senior management and a representative
of Troutman Sanders also were present. At the meeting, the Pacific Ethanol Board approved the exchange ratio of 1.25 shares of
Pacific Ethanol’s common stock for each share of Aventine’s common stock and the option for Pacific Ethanol and Aventine
to not consummate the merger transaction if Pacific Ethanol’s common stock was trading at less than $10.00 per share immediately
preceding the closing of the merger.
On December 19, 2014, Troutman Sanders distributed
a revised draft of the merger agreement to the various interested parties. The revisions to the merger agreement included, among
others, (i) the addition of a termination right for Pacific Ethanol upon an Adverse Aurora Coop Litigation Event (defined in the
draft of the merger agreement), with a termination fee to be paid by Pacific Ethanol to Aventine; (ii) the deletion of the employee
benefits matters section, relating to Aventine employees after the merger; (iii) additions of certain covenants for Aventine including,
among others, (A) the use of commercially reasonable efforts to complete a connection from the inner rail loop track belonging
to Aurora West, LLC to the BNSF main line (sometimes referred to as the BNSF connection), (B) conducting necessary “effects”
bargaining with any labor organization prior to the closing of the merger and (C) maintaining pollution liability insurance; (iv)
changes to certain closing conditions including, but not limited to, (X) the addition of closing conditions related to a bring
down fairness opinion for Pacific Ethanol, the Pacific Ethanol stock price being a certain amount on the date immediately preceding
the closing date, Phase 1 Environmental assessments, receipt of releases from Aventine employees and the BNSF connection, and
(Y) changes to the Aurora Coop Litigation condition, and (v) changes to the outside termination date.
On December 20, 2014, the Aventine Special
Committee convened a meeting, which included Mr. Continenza and Mr. Horton, along with representatives of Akin Gump and the general
counsel of Aventine. During the course of the meeting, the group discussed the scope of changes to the merger agreement, including
the addition of certain representations and warranties and the condition related to the trading price per share of Pacific Ethanol’s
common stock, as reported on The NASDAQ Capital Market. The Aventine Special Committee decided that the Aventine Board should
meet as soon as possible to discuss the open issues surrounding the merger agreement.
On December 20, 2014, Aventine and Duff &
Phelps entered into an engagement letter with respect to the delivery by Duff & Phelps to Aventine of a fairness opinion in
connection with the proposed merger with Aventine.
On December 21, 2014, Mr. Wright provided
an initial draft of the stockholders agreement to representatives of Candlewood, which was to be executed simultaneously with
the merger agreement. The stockholders agreement provided that the Aventine stockholders party thereto would enter into the agreement
with respect to their pro rata share of 51% of the issued and outstanding shares of Aventine. Under the terms of the agreement,
the Aventine stockholders party thereto agreed to (among other things): (i) restrict their ability to transfer any of their pro
rata shares prior to the closing of the merger, (ii) vote such pro rata shares in favor of the merger, (iii) certain restrictions
in their ability to sell the Pacific Ethanol common stock they will receive from the merger, (iv) not solicit any other takeover
or merger transaction of Aventine and (v) exercise their drag-along right under the Aventine Stockholder Agreement.
On December 22, 2014, the Pacific Ethanol Board
held a meeting to discuss in detail various financial and valuation information relating to the proposed merger with Aventine.
At the invitation of the Pacific Ethanol Board, members of senior management and a representative of Troutman Sanders also
were present. Prior to the meeting, copies of the draft merger agreement and financial modeling information were made available
to the Pacific Ethanol Board.
On December 22, 2014, the Aventine Board
held a meeting to discuss recent developments in the proposed merger with Pacific Ethanol. At the invitation of the Aventine Board,
members of senior management and a representative of Akin Gump also were present. The Aventine Board also discussed its fiduciary
duty obligations, the executory period and the various contingencies impacting the closing of the merger, including the BNSF connection
and the Aurora Coop Litigation conditions, current crush margins and the status of negotiation of the merger agreement. In particular
the Aventine Board expressed concern about the lack of certainty with respect to its ability to satisfy the closing conditions
arising out of the Aurora Coop litigation and BNSF negotiations based upon the then current draft. The Aventine Board also approved
the retention of Duff & Phelps to render a fairness opinion regarding the proposed merger.
During the morning and early afternoon of December
23, 2014, the Pacific Ethanol Board held a meeting to continue its prior discussion that it had on December 22, 2014 regarding
various financial and valuation information relating to the proposed merger with Aventine. At the invitation of the Pacific Ethanol
Board, members of senior management and a representative of Troutman Sanders also were present. The Pacific Ethanol Board also
discussed the Aurora Coop Litigation matter, the BNSF connection matter, current crush margins and the status of negotiation of
the merger agreement.
On December 23, 2014, the Aventine Board held
a meeting to discuss disclosure information related to the Aurora Coop Litigation and negotiations and developments regarding the
proposed transaction with Pacific Ethanol. At the invitation of the Aventine Board, members of senior management and representatives
of Akin Gump also were present.
Also on December 23, 2014, Akin Gump distributed
a revised draft of the merger agreement to the various interested parties. The revisions to the merger agreement included, among
others, (i) the inclusion of the exchange ratio, (ii) changes to the treatment of Aventine’s warrants and stock options,
(iii) adding back the employee benefits matters section relating to Aventine employees after the merger, (iv) changes to the Change
in Recommendation section for the Aventine Board, (v) changes to the registration requirement to include only Pacific Ethanol’s
proxy instead of a joint proxy, (vi) the deletion of the closing condition that Pacific Ethanol receive a bring down fairness
opinion, (vii) changes to the Adverse Aurora Coop Litigation Event condition, (viii) a Phase 1 Environmental Assessment requirement,
(ix) changes to the pollution liability insurance requirement and (x) the deletion of the closing condition related to the BNSF
connection.
Also on December 23, 2014, Candlewood distributed
a revised draft of the stockholders agreement to the various interested parties. The revisions to the stockholders agreement included,
among others, (i) a change in the number of shares covered by the stockholders agreement from all the shares held by the Aventine
stockholders party to the agreement, to shares that, in the aggregate, account for 51% of the outstanding common stock of Aventine,
(ii) the deletion of the proxy granted to Pacific Ethanol in the event Candlewood failed to vote its shares in favor of the merger
at the meeting, (iii) changes to the market standoff provision, (iv) the deletion of the stockholders’ obligations for indemnification
of breaches, (v) the addition of a stockholder’s right to terminate the agreement upon a change in recommendation of the
Aventine Board or an amendment to the merger agreement reducing the merger consideration, (vi) the addition of a provision making
Pacific Ethanol responsible for stockholders’ out of pocket expenses related to the stockholders agreement and (vii) the
addition of a provision that made the obligations of the stockholders several and not joint.
After discussions held on December 24, 2014
between Candlewood and Troutman Sanders regarding open issues related to the stockholders agreement, on December 24, 2014, Candlewood
distributed a revised draft of the stockholders agreement to the various interested parties. The revisions to the stockholders
agreement included, among others, (i) the requirement that shares transferred by the stockholders continue to comply with the
stockholders agreement and (ii) the deletion of Pacific Ethanol’s obligation to be responsible for the stockholders’
out of pocket expenses relating to the stockholders agreement.
On December 24, 2014, the Pacific Ethanol
Board held a meeting to review the terms of the proposed merger with Aventine. At the invitation of the Pacific Ethanol
Board, members of senior management and representatives of Troutman Sanders and Craig-Hallum also were present telephonically.
Craig-Hallum, made a lengthy presentation of its financial analysis of the proposed merger with Aventine. In addition, the
senior management of Pacific Ethanol advised the Pacific Ethanol Board of the status of the negotiation of the proposed
merger.
On December 26, 2014, the Pacific Ethanol
Board held a meeting to review the terms of the proposed merger with Aventine. At the invitation of the Pacific Ethanol Board,
members of senior management and representatives of Troutman Sanders and Craig-Hallum also were present telephonically.
Later on December 26, 2014, Mr. Wright, representatives
from Troutman Sanders and representatives from Akin Gump held a telephonic meeting to discuss certain comments made by Akin Gump
in its draft of the merger agreement dated December 23, 2014 and open issues with respect to the merger agreement.
Also on December 26, 2014, Mr. Wright sent
an email to Mr. Koenig and Ms. Miller, Candlewood’s general counsel, outlining a number of open issues regarding the stockholders
agreements including, among others, (i) transfers by the signatories to the stockholders agreements of Aventine common stock between
signing of the stockholders agreements and the closing of the merger, (ii) the requirement by the signatories to invoke their
drag-along rights in connection with voting their shares of Aventine common stock in favor of the merger, (iii) the inclusion
of a provision granting Pacific Ethanol a proxy in the event any of the signatories fails to vote their shares at the special
meeting of Aventine stockholders, (iv) provisions relating to the termination of the stockholders agreements and (v) terms of
the market stand-off provisions. Later that day, Mr. Koenig responded to the issues raised in Mr. Wright’s email.
On December 27, 2014, Troutman Sanders circulated
a revised draft of the merger agreement to the various interested parties. The revisions to the merger agreement included, among
others, (i) a requirement that Pacific Ethanol and Aventine prepare a joint proxy statement/prospectus to be used in connection
with the stockholders meetings of stockholders of Pacific Ethanol and Aventine, (ii) the addition of certain voting requirements
regarding Pacific Ethanol’s Series B Preferred Stock, (iii) changes to the employee benefits matters section relating to
Aventine employees after the merger, (iv) changes to the pollution liability insurance requirement, (v) changes to the closing
condition related to the Phase I environment assessments requirement, and (vi) adding back the closing condition related to the
BNSF connection.
On December 27, 2014, Candlewood distributed
a revised draft of the stockholders agreement to the various interested parties. The revisions to the stockholders agreement included,
among others, (i) the addition of a covenant by the stockholders to exercise any drag-along rights such stockholders may have
in connection with the vote for the merger agreement and (ii) an agreement by Pacific Ethanol that it will not amend the sections
of the merger agreement related to company takeover proposals and changes in recommendation of the Aventine Board.
On December 28, 2014, Troutman Sanders distributed
a revised draft of the stockholders agreement to the various interested parties. The revisions to the stockholders agreement included,
among other things, the removal of the ability of the stockholders to terminate the stockholders agreement upon a change of recommendation
by the Aventine Board.
On December 29, 2014, Candlewood distributed
a revised draft of the stockholders agreement to the various interested parties, accepting most of the revisions contained in the
draft dated December 28, 2014 that was circulated by Troutman Sanders.
During the afternoon of December 29,
2014, the Pacific Ethanol Board held a meeting to approve the merger with Aventine and approve the issuance of shares of
Pacific Ethanol common stock and non-voting common stock pursuant to the terms of the merger agreement. At the invitation of
the Pacific Ethanol Board, members of senior management and representatives of Troutman Sanders and Craig-Hallum also were
present. Prior to the meeting, copies of the draft merger agreement and the presentation prepared by Craig-Hallum were made
available to the Pacific Ethanol Board. At the meeting, Mr. Wright provided an update on the negotiation of the merger
agreement and reviewed with the Pacific Ethanol Board the proposed material terms of the transaction. Representatives from
Craig-Hallum, each of whom participated in the meeting telephonically, delivered an oral opinion, subsequently confirmed by
delivery of a written opinion dated December 29, 2014, that, as of such date and based on and subject to the
factors, assumptions, procedures and limitations set forth in that opinion, the exchange ratio, as set forth in the merger
agreement, was fair from a financial point of view to Pacific Ethanol. After extensive discussion among the directors and
with their advisors regarding the proposed transaction, the Pacific Ethanol Board unanimously:
|
· |
determined that the merger is advisable, fair to and in the best interests of Pacific Ethanol and its stockholders; |
|
· |
approved the merger agreement; |
|
· |
directed that approval of (i) the issuance of Pacific Ethanol common stock and non-voting common stock pursuant to the merger agreement, (ii) the amendment to Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock, and (iii) the holders of Pacific Ethanol Series B Preferred Stock that the merger will not be treated as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations, be submitted for consideration by the Pacific Ethanol stockholders at a special meeting of the Pacific Ethanol stockholders; |
|
· |
resolved to recommend that the Pacific Ethanol stockholders vote “FOR” approval of the above proposals and a proposal to adjourn the special meeting if necessary to permit the solicitation of additional proxies; and |
|
· |
authorized Pacific Ethanol management to finalize, execute and deliver the merger agreement and to take all other actions with respect to the merger transaction. |
The parties continued to negotiate and revise
certain provisions of the merger agreement over the course of December 29, 2014 and December 30, 2014, including, among others,
(i) the closing conditions related to the Phase I environmental assessments and the BNSF connection, (ii) the outside termination
date and (iii) the inclusion of dollar amounts for the termination fees. The parties also continued to negotiate and revise certain
provisions of the stockholders agreement over the course of December 29, 2014 and December 30, 2014, including, among others,
(i) the market standoff provision (ii) the specific performance provision and (iii) the number of shares held by the stockholders
that would be subject to the terms of the stockholders agreements.
During the morning and early evening of December
30, 2014, the Aventine Board held a special meeting to consider the proposed definitive merger agreement and the other transaction
agreements, copies of which were delivered to each director prior to the meeting. At the invitation of the Aventine Board, members
of senior management and representatives of Akin Gump, Morris Nichols, Arsht & Tunnell LLP, Duff & Phelps and RPA Advisors
were also present. Representatives from RPA delivered a presentation to the Board regarding the proposed transaction, which included
diligence information about Pacific Ethanol. Representatives from Duff & Phelps reviewed its analysis with the Aventine Board,
and subsequently delivered to the Aventine Board an opinion that, as of that date and based upon the factors and assumptions set
forth in the Duff & Phelps fairness opinion, the exchange ratio, as set forth in the merger agreement, was fair from a financial
point of view to the Aventine stockholders electing to receive Pacific Ethanol common stock. After extensive discussion among the
directors and with their advisors and senior management regarding the proposed transaction and the definitive merger agreement
and the related transaction documents, the Aventine Board unanimously:
|
· |
determined that the merger is advisable, fair to and in the best interests of Aventine and its stockholders; and |
|
· |
approved the merger agreement. |
Following the respective resolutions by the
Pacific Ethanol and Aventine Boards to approve the merger agreement, the applicable parties executed the merger agreement and the
stockholders agreements on December 30, 2014.
In early March 2015, Pacific Ethanol’s
management discussed the possibility of proposing to Aventine that the parties remove or waive the closing condition in the original
Agreement and Plan of Merger that required that the VWAP per share (as defined in the merger agreement) of Pacific Ethanol’s
common stock, as reported on NASDAQ for the 20 trading days immediately preceding the closing, equals or exceeds $10.00 (sometimes
referred to as the $10.00 Closing Condition). Pacific Ethanol’s management discussed its desire to remove or waive the $10.00
Closing Condition in light of the prices at which Pacific Ethanol’s common stock was trading at that time and the time necessary
for a resolicitation of proxies if the parties decided to remove or waive the $10.00 Closing Condition at a later time. As a result
of these discussions, in early March 2015, a representative of Troutman Sanders called a representative of Akin Gump to convey
Pacific Ethanol’s desire to remove or waive the $10.00 Closing Condition.
Based on the trading price of Pacific Ethanol’s
common stock following the execution of the merger agreement through early March 2015, the $10.00 Closing Condition and the discussion
between a representative of Troutman Sanders and a representative of Akin Gump regarding the $10.00 Closing Condition, Aventine
was aware of potential issues with respect to the satisfaction of the $10.00 Closing Condition and began to investigate and evaluate
options. To that end, on March 9, 2015, representatives of Akin Gump had discussions with Duff & Phelps about what effect
an amendment to the merger agreement would have on the original fairness opinion issued by Duff & Phelps. Duff & Phelps
advised that its original fairness opinion was limited by its terms and if requested Duff & Phelps would issue a new fairness
opinion based upon the new terms of the amended merger agreement.
On or about March 11, 2015, a representative
of Troutman Sanders called a representative of Akin Gump to continue their discussions regarding Pacific Ethanol’s desire
to eliminate or waive the $10.00 Closing Condition. The representative of Troutman Sanders expressed that should a waiver to such
closing condition become necessary in the future, the time necessary for a resolicitation could be burdensome and delay the combined
company from taking advantage of the anticipated benefits of the merger transaction.
On March 13, 2015, a representative of Troutman
Sanders sent to representatives of Aventine a draft of a proposed amendment to the merger agreement that proposed the removal
of the $10.00 Closing Condition and a requirement that the closing occur on the first day of a calendar month after all closing
conditions were met.
On
March 13, 2015, a representative from Akin Gump discussed the proposal to eliminate the
$10.00 Closing Condition with members of Aventine’s management team and the Aventine
Board. Following discussions among Aventine’s management team and the Aventine
Board, a representative of Akin Gump called a representative of Troutman Sanders and
advised the representative of Troutman Sanders that Aventine had declined to accept Pacific
Ethanol’s proposal to eliminate the $10.00 Closing Condition at such time.
On March 23, 2015, Mr. Koenig contacted
Mr. Koehler to arrange to get an update from Mr. Koehler on progress in the transaction. When Messrs. Koenig and Koehler spoke
on March 24, 2015, Mr. Koehler mentioned Pacific Ethanol’s proposal to Aventine that the $10.00 Closing Condition be eliminated
and Aventine’s rejection of the proposal. Mr. Koehler expressed that, inasmuch as the $10.00 Closing Condition had originally
been proposed by Pacific Ethanol, primarily as a safeguard against negative market reaction to the announcement of the transaction,
Pacific Ethanol no longer viewed the $10.00 Closing Condition as useful or necessary. He also expressed concern about the possibility
that the $10.00 Closing Condition might become an impediment to closing the transaction on a timely basis.
On March 24, 2015, Mr. Lau and Mr. Koenig
contacted Mr. Continenza to discuss the elimination of the $10.00 Closing Condition with Mr. Continenza. Following their conversation,
Mr. Koenig e-mailed Mr. Continenza and told him that Candlewood was in favor of eliminating the $10.00 Closing Condition.
Following discussions with Mr. Koenig and
discussions with representatives of Akin Gump, Aventine then determined that it would consider eliminating the $10.00 Closing
Condition, subject to delivery of a new fairness opinion by Duff & Phelps that would take into consideration, among other
things, the elimination of such closing condition and the current financial condition of Aventine and Pacific Ethanol. In addition,
Aventine determined that it would prefer to eliminate the $10.00 Closing Condition by amending the original merger agreement rather
than waiving such closing condition so that it could modify certain other provisions in the original merger agreement. At a special
meeting of the Aventine Board held on March 24, 2015, the Aventine Board decided to reengage Duff & Phelps to seek a new fairness
opinion and to reconvene the Aventine Board once such opinion became available.
Later on March 24, 2015, a representative
of Troutman Sanders sent to representatives of Aventine a revised draft of a proposed amendment to the original Agreement and
Plan of Merger that proposed (i) the removal of the $10.00 Closing Condition, (ii) a requirement that the closing occur on the
first day of a calendar month after all closing conditions were met, (iii) that the stockholder meetings will occur promptly as
practicable after the declaration of effectiveness of the registration statement being filed by Pacific Ethanol in connection
with the issuance of shares of Pacific Ethanol common stock and non-voting common stock in the merger, (iv) that Pacific Ethanol
would identify individuals to be party to employment agreements within 5 days prior to the closing date of the merger; and (v)
a change in the outside termination date of the merger to September 1, 2015.
On March 25, 2015, a representative of Akin
Gump called a representative of Troutman Sanders to discuss the draft amendment to the original Agreement and Plan of Merger circulated
on March 24, 2015 and to discuss certain other proposed amendments to the original Agreement and Plan of Merger that Aventine
sought. The additional amendments that were discussed related to the closing condition provisions that (i) required certain Aventine
employees, identified by Pacific Ethanol within 30 days of signing the merger agreement, to execute employment agreements with
Pacific Ethanol and (ii) provided a termination right to Pacific Ethanol if the results of Phase I environmental reports disclosed
cost of remediation in excess of $3,300,000.
On March 25, 2015, the Pacific Ethanol Board
met to discuss the proposed amendments to the original Agreement and Plan of Merger and authorized senior management of Pacific
Ethanol to settle the terms of the proposed amendment and enter into an amendment that eliminated the $10.00 Closing Condition.
During the next several days several proposed
amendments to the original Agreement and Plan of Merger were prepared and negotiated by the parties.
At a special meeting of the Pacific Ethanol
Board held on March 31, 2015, the Pacific Ethanol Board approved the proposed amendment in its final form.
At a special meeting of the Aventine Board
held on March 31, 2015, Duff & Phelps presented its analysis and subsequently delivered to the Aventine Board a fairness opinion
that, as of that date and based upon the factors and assumptions set forth in the Duff & Phelps fairness opinion, the exchange
ratio, as set forth in the merger agreement, was fair from a financial point of view to the Aventine stockholders electing to
receive Pacific Ethanol common stock. After discussion among the directors and with Duff & Phelps and senior management regarding
the proposed amended transaction, the Aventine Board unanimously approved the merger agreement amendment.
On March 31, 2015, Pacific Ethanol,
Merger Sub and Aventine entered into Amendment No. 1 to Agreement and Plan of Merger. The original Agreement and Plan of Merger
was amended to:
| · | specify
that Pacific Ethanol’s stockholders’ meeting would occur as promptly as practicable
after the declaration of effectiveness of this registration statement, rather than within
45 days after the declaration of effectiveness of this registration statement; |
| · | remove the
requirement that the VWAP per share (as defined in the merger agreement) of Pacific Ethanol’s
common stock, as reported on NASDAQ for the 20 trading days immediately preceding the
closing, equals or exceeds $10.00; |
| · | provide
that Pacific Ethanol will identify individuals to be party to employment agreements and
provide such individuals the principal terms of employment, in each case, as promptly
as practicable following the date hereof but no later than on or prior to May 1, 2015,
rather than 30 days after the execution of the original Agreement and Plan of Merger;
and |
| · | specify
that the condition in Section 7.2(k) of the merger agreement shall be deemed to
have been satisfied without any further action if Pacific Ethanol has not provided notice
to Aventine within 20 days after receipt of the current and valid Phase I environmental
site assessment for Aventine’s facility in Pekin, Illinois, that the cost of remediation
of Aventine’s facility in Pekin, Illinois would in the reasonable determination
of Pacific Ethanol be expected to exceed $3,300,000 in the aggregate. |
Recommendation of the Pacific Ethanol Board and its Reasons for
the Merger
At a special meeting of the Pacific Ethanol
Board held on December 29, 2014, the Pacific Ethanol Board unanimously:
|
· |
determined that the merger is advisable, fair to and in the best interests of Pacific Ethanol and its stockholders; |
|
· |
approved the merger agreement; |
|
· |
directed that approval of (i) the issuance of Pacific Ethanol
common stock and non-voting common stock pursuant to the merger agreement, (ii) the amendment to Pacific Ethanol’s Certificate
of Incorporation to authorize a class of non-voting common stock, and (iii) the holders of Pacific Ethanol Series B Preferred
Stock that the merger will not be treated as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol
Series B Certificate of Designations, be submitted for consideration by the Pacific Ethanol stockholders at a special meeting
of the Pacific Ethanol stockholders; |
|
· |
resolved to recommend that the Pacific Ethanol stockholders vote “FOR” approval of the above proposals and a proposal to adjourn the special meeting if necessary to permit the solicitation of additional proxies; and |
|
· |
authorized Pacific Ethanol management to finalize, execute and deliver the merger agreement and to take all other actions with respect to the merger transaction. |
In reaching its decision, the Pacific Ethanol
Board consulted with Pacific Ethanol’s senior management and outside legal counsel, and considered the short-term and long-term
interests of Pacific Ethanol and its stockholders.
The Pacific Ethanol Board, with the advice
and assistance of its legal advisors, negotiated, evaluated, and, at a meeting held on March 31, 2015, unanimously approved, at
a special meeting of the Pacific Ethanol Board, the amendment to the merger agreement.
Strategic Rationale
The Pacific Ethanol Board’s decision
to approve the merger and the merger agreement and to recommend to Pacific Ethanol’s stockholders that they vote for the
adoption of the merger agreement was based on a number of factors. The following are all of the material factors considered by
the Pacific Ethanol Board (which were thoroughly discussed by the Pacific Ethanol Board with its outside advisors and members
of Pacific Ethanol senior management):
|
· |
the complementary nature of the business of the two companies,
which management believes should provide the combined company with the ability to access new customers and the additional
ability to access to new markets; |
|
· |
management’s expectations that the combined company, with
a larger number of assets and production capabilities, will be able to increase the mix of co-products and add high-value
products to regional and international markets, broadening the capabilities that the combined company can offer to its customers; |
|
· |
management’s expectations that the combined company will
have greater cash flow and liquidity, enabling new investment in plant assets, pursuit of strategic initiatives, and improved
financing arrangements; |
|
· |
management’s expectations that the combined company will
benefit from a more diverse geographical footprint, thereby mitigating exposure to regional logistical constraints and price
volatility in any one grain market, providing greater access to regional ethanol pricing premiums, creating new hedging opportunities,
and allowing for more efficient marketing and distribution of its products than on a stand-alone basis; |
|
· |
the financial and other terms of the merger agreement, including
the fixed exchange ratio, which the Strategic Transaction Committee and the Pacific Ethanol Board believed was consistent
with market practice for transactions of this type, the expected tax treatment and deal protection provisions, including the
ability of the Aventine Board, under certain circumstances, to withdraw or modify its recommendations to Aventine’s
stockholders, and to terminate the merger agreement in order to enter into a definitive agreement with respect to a superior
proposal (subject to payment of a termination fee), each of which it reviewed with its outside legal advisors; |
|
· |
the fact that management believes that the implied value of
Aventine’s ethanol production facilities in the merger is attractive when compared to recent comparable transactions
in the ethanol industry and to the implied market value of Pacific Ethanol’s ethanol production facilities; |
|
· |
the financial presentation of Craig-Hallum and its opinion dated
December 29, 2014 to the Pacific Ethanol Board as to the fairness, from a financial point of view and as of that date, of
the exchange ratio in the transaction to Pacific Ethanol, as more fully described below under “—Opinion of Craig-Hallum
Capital group LLC” beginning on page 179 and in the written opinion of Craig-Hallum attached as Annex D
to this joint proxy statement/prospectus; |
|
· |
management’s belief that the combined company will benefit
from expected cost synergies through the combination of the corporate management, commodities marketing and administrative
support functions; and |
|
· |
management’s belief that the merger will assist Pacific
Ethanol in achieving its growth objectives and profitability targets. |
Uncertainties, Risks and Other Potentially
Negative Factors
In addition to the above factors, the Pacific
Ethanol Board also identified and considered a number of uncertainties, risks and other potentially negative factors in its consideration
of the merger and the merger agreement, including the following (which comprise all material uncertainties, risks and potentially
negative factors considered by the Pacific Ethanol Board):
|
· |
the historical poor financial performance of Aventine, and the
fact that there have been significant changes in the operations in the recent past that should lead to improved financial
performance in the future; |
|
· |
the potential risks relating to the environmental conditions
at Aventine’s plants; |
|
· |
the potential risks and contingencies relating to litigation
to which Aventine is party, including the Aurora Coop Litigation and litigation involving Aventine’s easement rights relating
to the use of the Exterior Rail Loop surrounding the Aurora West Facility and Aventine’s alleged breach of a Grain Supply
Agreement with the Aurora Coop; |
|
· |
the challenges and costs of combining the two businesses and
the risks of completing the integration, which could harm the combined company’s operating results and preclude the
realization of anticipated synergies or benefits from the merger; |
|
· |
the potential for diversion of management and employee attention
from other strategic priorities and for increased employee attrition both before and after the closing of the merger agreement,
and the potential effect on the business and relations of Pacific Ethanol with customers and suppliers; |
|
· |
the dilution to current Pacific Ethanol stockholders from the
issuance of additional shares of Pacific Ethanol common stock in the merger; |
|
· |
the substantial amount of Aventine’s debt and the potential
risk associated with the combined company’s inability to service the debt and/or restructure the debt; |
|
· |
the substantial costs associated with completing the merger,
including the costs of integrating business of Pacific Ethanol and Aventine; |
|
· |
the potential risk that the merger would not be completed in
a timely manner or at all; and |
|
· |
the potential risks listed in the “Risk Factors”
section above. |
The Pacific Ethanol Board weighed these positive
and negative factors, realizing that future results are uncertain, including any future results considered or expected in the factors
noted above. In addition, many of the nonfinancial factors considered were highly subjective. As a result, in view of the number
and variety of factors they considered, the Pacific Ethanol Board did not consider it practicable and did not attempt to quantify
or otherwise assign relative weights to the specific factors it considered. Rather, the Pacific Ethanol Board made its determination
based on the totality of the information it considered. Individually, each director may have given greater or lesser weight to
a particular factor or consideration.
In addition, the Pacific Ethanol Board did not
undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable
or unfavorable to its ultimate determination, but rather conducted an overall analysis of the factors described above, including
discussions with Pacific Ethanol’s management team and Pacific Ethanol’s outside legal and financial advisors. Based
on the totality of the information presented, the Pacific Ethanol Board determined that Pacific Ethanol should proceed with the
merger and the merger agreement, and recommends that the Pacific Ethanol stockholders approve the issuance of common stock and
non-voting common stock and the amendment to Pacific Ethanol’s Certificate of Incorporation.
The Pacific Ethanol Board believes that, overall,
the potential benefits of the merger to Pacific Ethanol and its stockholders outweighs the risks mentioned above.
The foregoing discussion of the information
and factors considered by the Pacific Ethanol Board is forward-looking in nature. This information should be read in light of the
factors described under the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning
on page 55.
Opinion of Craig-Hallum Capital Group LLC
On December 29, 2014, at a special meeting
of the Pacific Ethanol Board held to evaluate the proposed transaction, Craig-Hallum delivered to the Pacific Ethanol Board an
oral opinion, confirmed by delivery of a written opinion, dated December 29, 2014, to the effect that, as of that date and based
upon and subject to the factors and assumptions set forth therein, the exchange ratio, as set forth in the merger agreement, was
fair, from a financial point of view, to Pacific Ethanol.
The full text of the written opinion of Craig-Hallum,
dated December 29, 2014, which sets forth assumptions made, procedures followed, matters considered and limitations on the review
undertaken in connection with the opinion, is attached as Annex D to this joint proxy statement/prospectus. The following
summary of Craig-Hallum’s opinion in this joint proxy statement/prospectus is qualified in its entirety by reference to the
full text of the opinion. Craig-Hallum provided its opinion for the information and assistance of the Pacific Ethanol Board in
connection with its consideration of the merger. The Craig-Hallum opinion was not intended to and does not constitute a recommendation
as to how any holder of Pacific Ethanol common stock should vote or take any action with respect to the merger or any other matter.
In arriving at its opinion, Craig-Hallum, among
other things:
|
· |
reviewed a substantially final draft of the merger agreement; |
|
· |
reviewed certain business, financial and other information and data with respect to Pacific Ethanol publicly available or made available to Craig-Hallum from internal records of Pacific Ethanol; |
|
· |
reviewed certain business, financial and other information and data with respect to Aventine made available to Craig-Hallum from internal records of Aventine; |
|
· |
reviewed certain internal financial projections for Pacific Ethanol and Aventine on a stand-alone basis prepared for financial planning purposes and furnished to Craig-Hallum by management of Pacific Ethanol and Aventine, respectively, including but not limited to forecasts prepared by the management teams of Pacific Ethanol and Aventine, respectively, of future utilization of its net operating losses; |
|
· |
conducted discussions with members of the senior management of Pacific Ethanol and Aventine with respect to qualitative factors expected to affect the business and prospects of Pacific Ethanol and Aventine, respectively, on a stand-alone basis and on a combined basis; |
|
· |
reviewed the reported prices and trading activity of Pacific Ethanol common stock and similar information for certain other companies deemed by Craig-Hallum to be comparable to Pacific Ethanol; |
|
· |
compared the financial performance of Pacific Ethanol and Aventine with that of certain other publicly traded companies deemed by Craig-Hallum to be comparable to Pacific Ethanol and Aventine, respectively; |
|
· |
reviewed the financial terms, to the extent publicly available, of certain comparable merger transactions; |
|
· |
performed a discounted cash flows analysis for Pacific Ethanol and Aventine, each on a stand-alone basis; |
|
· |
performed a relative contribution analysis of Pacific Ethanol and Aventine; and |
|
· |
conducted such other analyses, examinations and inquiries and considered such other financial, economic and market criteria as Craig-Hallum deemed necessary and appropriate in arriving at its opinion. |
In conducting its review and rendering its opinion,
Craig-Hallum relied upon and assumed the accuracy, completeness and fairness of the financial, accounting and other information
discussed with, reviewed by, provided to or otherwise made available to Craig-Hallum, and did not attempt to independently verify,
and assumed no responsibility for the independent verification of, such information; relied upon the assurances of management of
Pacific Ethanol and Aventine that the information provided was prepared on a reasonable basis in accordance with industry practice,
and that management was not aware of any information or facts that made the information provided to Craig-Hallum incomplete or
misleading; assumed that there were no material changes in assets, financial condition, results of operations, business or prospects
since the date of the last financial statements made available to Craig-Hallum prior to the date of its opinion; assumed that neither
Pacific Ethanol nor Aventine was party to any material pending transaction, including any external financing, recapitalization,
acquisition or merger, other than the merger; assumed with respect to financial forecasts, estimates of net operating loss tax
benefits and other estimates and forward-looking information relating to Pacific Ethanol and Aventine reviewed by Craig-Hallum,
that such information reflected the best available estimates and judgments of management at that time; and expressed no opinion
as to any financial forecasts, net operating loss or other estimates or forward-looking information of Pacific Ethanol or Aventine
or the assumptions on which they were based.
The internal management projections provided
by Pacific Ethanol and Aventine to Craig-Hallum in connection with Craig-Hallum’s analysis of the merger were not prepared
with a view toward public disclosure. These internal management projections were prepared by management of the respective companies
and were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management,
including, without limitation, factors related to general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in such internal management projections.
Craig-Hallum was not asked to undertake,
and did not undertake, an independent verification of any information provided to or reviewed by Craig-Hallum, nor was Craig-Hallum
furnished with any evaluations or appraisals of such information and Craig-Hallum does not assume any responsibility or liability
for the accuracy or completeness thereof. Craig-Hallum did not conduct a physical inspection of any of the properties or assets
of Pacific Ethanol or Aventine. Craig-Hallum did not undertake an independent analysis of any pending or threatened litigation
(including, but not limited to, the Aurora Coop Litigation or any other litigation to which Aventine is a party), governmental
proceedings or investigations, possible unasserted claims or other liabilities (contingent or otherwise), to which any of Pacific
Ethanol, Aventine or their respective affiliates is a party or may be subject. At Pacific Ethanol’s direction and with its
consent, Craig-Hallum’s opinion makes no assumption concerning and therefore does not consider, the possible assertion of
claims, outcomes, damages or recoveries arising out of any such matters. Craig-Hallum also did not evaluate the solvency of Pacific
Ethanol or Aventine under any state or federal laws.
Craig-Hallum also assumed that the final executed
form of the merger agreement did not differ in any material respects from the latest draft provided to Craig-Hallum, that the representations
and warranties contained in the merger agreement are true and correct, and that the merger will be consummated in accordance with
the terms and conditions of the merger agreement, without waiver, modification or amendment of any material term, condition or
agreement, and that, in the course of obtaining the necessary regulatory or third party consents and approvals (contractual or
otherwise) for the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on
Pacific Ethanol or Aventine or the contemplated benefits of the merger. Craig-Hallum is not a legal, tax or regulatory advisor
and relied upon, without independent verification, the assessment of Pacific Ethanol and its legal, tax and regulatory advisors
with respect to such matters, including the tax consequences of the merger summarized in this joint proxy statement/prospectus.
Craig-Hallum was not requested to, and did not,
(i) participate in negotiations with respect to the merger agreement, (ii) solicit any expressions of interest from any other parties
with respect to any business combination with Pacific Ethanol or any other alternative transaction or (iii) advise the Pacific
Ethanol Board or any other party with respect to alternatives to the merger. In addition, Craig-Hallum was not requested to and
did not provide advice regarding the structure, the exchange ratio, any other aspect of the merger, or provide services other than
the delivery of its opinion. Craig-Hallum expressed no opinion as to the amount, nature or fairness of consideration or compensation
to be received in or as a result of the proposed merger by warrant holders, option holders, officers, directors, employees or any
other class of such persons or relative to or in comparison with the exchange ratio. Craig-Hallum’s opinion did not address
any other aspect or implication of the merger, the merger agreement or any other agreement or understanding entered into in connection
with the merger or otherwise. Craig-Hallum was not requested to opine as to, and its opinion does not address, the basic business
decision to proceed with or effect the merger, or any solvency or fraudulent conveyance consideration relating to the merger.
Craig-Hallum’s opinion was necessarily
based upon economic, market, monetary, regulatory and other conditions as they existed and could be evaluated, and the information
made available to Craig-Hallum, as of the date of its opinion. Craig-Hallum did not express any opinion as to the prices or trading
ranges at which Pacific Ethanol common stock will trade at any time. Furthermore, Craig-Hallum did not express any opinion as to
the impact of the merger on the solvency or viability of the surviving corporation in the merger or the ability of the surviving
corporation to pay its obligations when they become due.
Craig-Hallum assumed no responsibility for updating
or revising its opinion based on circumstances or events occurring after the date thereof. Craig-Hallum’s opinion was approved
by Craig Hallum’s fairness opinion committee in accordance with established procedures.
The exchange ratio was determined through arm’s-length
negotiations between Pacific Ethanol and Aventine and was approved by the Pacific Ethanol Board. Craig-Hallum did not provide advice
to the Pacific Ethanol Board during these negotiations nor recommend any specific consideration to Pacific Ethanol or the Pacific
Ethanol Board or suggest that any specific consideration constituted the only appropriate consideration for the merger. In addition,
Craig-Hallum’s opinion and its presentation to the Pacific Ethanol Board were one of many factors taken into consideration
by the Pacific Ethanol Board in deciding to approve the merger.
Summary of Financial Analyses
In accordance with customary investment banking
practice, Craig-Hallum employed generally accepted valuation methods in reaching its fairness opinion. The following is a summary
of the material financial analyses contained in the presentation that was made by Craig-Hallum to the Pacific Ethanol Board on
December 29, 2014, and that were utilized by Craig-Hallum in connection with providing its opinion. The following summary, however,
does not purport to be a complete description of the financial analyses performed by Craig-Hallum, nor does the order of analyses
described represent the relative importance or weight given to those analyses by Craig-Hallum. Some of the summaries in the financial
analyses include information presented in tabular format. The tables must be read together with the full text of each summary and
are alone not a complete description of Craig-Hallum’s financial analyses. Some of the following quantitative information,
was based on market data as it existed on or before December 29, 2014, and is not necessarily indicative of current or future market
conditions. All analyses conducted by Craig-Hallum were going concern analyses and Craig-Hallum expressed no opinion regarding
the liquidation value of any entity.
For purposes of its stand-alone analyses performed
on Pacific Ethanol, Craig-Hallum utilized Pacific Ethanol’s internal financial projections for the years ended December 31,
2014 through December 31, 2019, prepared by and furnished to Craig-Hallum by the management of Pacific Ethanol. Information regarding
the net cash, number of fully-diluted shares of common stock outstanding and net operating losses for Pacific Ethanol was provided
by management. For purposes of its stand-alone analyses performed on Aventine, Craig-Hallum utilized Aventine’s internal
financial projections for the years ended December 31, 2014 through December 31, 2019 prepared by and furnished to Craig-Hallum
by the management of Aventine. Information regarding the net debt, number of fully-diluted shares of common stock outstanding and
net operating losses for Aventine was provided by management. For more information regarding these internal financial projections,
see “Summary—Forward-Looking Financial Information—Pacific Ethanol Forward-Looking Financial Information.”
For purposes of its analyses, Craig-Hallum calculated
a total enterprise value (sometimes referred to as TEV) of Aventine implied by the exchange ratio (for the purposes of this analysis,
TEV equates to implied equity value, plus debt, less cash) of approximately $323.4 million, based on the closing price per share
of Pacific Ethanol’s common stock on December 29, 2014, the number of shares of Aventine’s common stock outstanding
using the treasury share method based on information provided by Aventine’s management as of December 20, 2014, the exchange
ratio and Aventine’s cash and cash equivalents and total debt as of November 30, 2014 based on information provided by Aventine’s
management. For purposes of its analyses, Craig-Hallum calculated a TEV of Pacific Ethanol of approximately $283.4 million, based
on the closing price per share of Pacific Ethanol’s common stock on December 29, 2014, the number of shares of Pacific Ethanol’s
common stock outstanding using the treasury share method based on information provided by Pacific Ethanol’s management as
of December 22, 2014 and Pacific Ethanol’s cash and cash equivalents, minority equity interests, preferred stock and total
debt as of November 30, 2014 based on information provided by Pacific Ethanol’s management.
Pacific Ethanol Historical Trading Analyses
Craig-Hallum reviewed the share price trading
history of Pacific Ethanol common stock (which trades on The NASDAQ Capital Market under the symbol “PEIX”) and Aventine
common stock (which trades on the OTCBB under the symbol “AVRW”) for the one-year period ended December 29, 2014 on
a stand-alone basis and also in relation to the S&P 500 Index and an equal-weight composite index comprised of the public companies
listed below deemed by Craig-Hallum in its professional judgment to be comparable to Pacific Ethanol and Aventine:
|
· |
REX American Resources Corporation; and |
This analysis showed that during the one-year
period ended December 29, 2014, the trading price of the shares of Pacific Ethanol rose 110.7%, the S&P 500 Index rose 13.6%,
the comparable public companies index rose 74.4%. Craig-Hallum also noted that shares of Aventine were thinly traded relative to
Pacific Ethanol’s common stock and the common stock of most publicly traded companies.
Comparable Public Company Analysis
Craig-Hallum reviewed and compared certain
financial information for Pacific Ethanol and Aventine to corresponding financial information, ratios and public market multiples
for the following publicly traded companies, which, in the exercise of its professional judgment, Craig-Hallum determined to be
relevant to its analysis. In selecting comparable public companies, Craig-Hallum focused on businesses in the ethanol production
industry and did not include companies that primarily traded on an over-the-counter market or that were companies in the Fortune
500 with diversified operations. The selected companies were as follows:
|
· |
REX American Resources Corporation; and |
Craig-Hallum obtained financial metrics and
projections for the selected companies from documents filed by such companies with the Securities and Exchange Commission and S&P
Capital IQ (sometimes referred to as Capital IQ). In its analysis, Craig-Hallum derived and compared multiples for Aventine and
the selected companies, calculated as follows:
|
· |
the TEV as a multiple of Adjusted EBIT for 2014, which is referred to below as “TEV/2014E Adjusted EBIT”; |
|
· |
the TEV as a multiple of Adjusted EBITDA for 2014, which is referred to below as “TEV/2014E Adjusted EBITDA”; |
|
· |
the TEV as a multiple of estimated Adjusted EBIT for 2015, which is referred to below as “TEV/2015E Adjusted EBIT”; and |
|
· |
the TEV as a multiple of estimated Adjusted EBITDA for 2015, which is referred to below as “TEV/2015E Adjusted EBITDA”. |
Adjusted EBIT refers to earnings before interest,
taxes and one-time expenses deemed non-recurring in nature. Adjusted EBITDA refers to earnings before interest, taxes, depreciation,
amortization, stock-based compensation and one-time expenses deemed non-recurring in nature. Applying its professional judgment,
Craig-Hallum selected the representative ranges of the 25th percentile to the 75th percentile for each metric.
Craig-Hallum then compared Pacific Ethanol’s TEV and Aventine’s TEV implied by the exchange ratio to each company’s
projected Adjusted EBIT for 2014, Adjusted EBITDA for 2014, Adjusted EBIT for 2015 and Adjusted EBITDA for 2015. A summary of this
comparison is shown in the table below.
This analysis indicated the following:
|
TEV/2014E Adjusted
EBIT |
|
TEV/2014E Adjusted
EBITDA(1) |
|
TEV/2015E Adjusted EBIT |
|
TEV/2015E Adjusted EBITDA(1) |
25th Percentile |
3.1x |
|
2.8x |
|
3.3x |
|
2.9x |
Median |
3.6x |
|
3.3x |
|
3.4x |
|
3.1x |
75th Percentile |
3.9x |
|
3.4x |
|
3.9x |
|
3.4x |
Pacific Ethanol |
3.0x |
|
2.6x |
|
2.7x |
|
2.3x |
Aventine(2) |
5.7x |
|
4.3x |
|
2.2x |
|
2.0x |
__________
(1) | Consensus EBITDA estimates for one of the selected companies was not available. To
calculate projected EBITDA for this selected company, Craig-Hallum annualized the company’s depreciation and amortization
for the nine month period included in the company’s most recent publicly reported financial results and added it to consensus
EBIT for 2014. For 2015, Craig-Hallum annualized the company’s depreciation and amortization for the quarter for which the
company most recently reported its financial results and applied this figure to 2015 consensus EBIT estimates. |
(2) | Based on Aventine’s TEV implied by the exchange ratio. |
Although Craig-Hallum selected the companies reviewed in the analysis
because, among other things, their businesses are reasonably similar to that of Pacific Ethanol, no selected company is identical
to Pacific Ethanol or Aventine. Accordingly, Craig-Hallum’s comparison of selected companies to Pacific Ethanol and Aventine
and analysis of the results of such comparisons was not purely quantitative, but instead necessarily involved qualitative considerations
and professional judgments concerning differences in financial and operating characteristics and other factors that could affect
the relative value of Pacific Ethanol and Aventine.
Precedent Transaction Analysis
Craig-Hallum performed a selected precedent
transactions analysis, which is designed to imply a value for a company based on publicly available financial terms of the selected
transactions that share some characteristics with the merger. Craig-Hallum reviewed precedent transactions that, in the exercise
of its professional judgment, Craig-Hallum selected as relevant to its analysis and that met the following criteria:
|
· |
transactions where the target company operated completed facilities
in the ethanol production industry in the United States; |
|
· |
transactions closed since January 1, 2011 in which the implied
TEV of the target, the financial terms of the transaction and the gallons of the target’s ethanol production capacity
were publicly disclosed; and |
|
· |
the acquisition was not of a minority interest. |
In its analysis, Craig-Hallum reviewed the following
precedent transactions as of the date of announcement:
Acquirer |
|
Target |
|
Date Announced |
Guardian Hankinson |
|
Hankinson Renewable Energy |
|
December 2013 |
Green Plains |
|
Buffalo Lake Energy and Pioneer Trail Energy |
|
November 2013 |
Granite Falls Energy |
|
Heron Lake BioEnergy |
|
August 2013 |
Global Partners |
|
Cascade Kelly |
|
January 2013 |
Flint Hills Resources |
|
ABE Fairmont |
|
October 2012 |
Aemetis Advanced Fuels Keyes |
|
Cilion |
|
July 2012 |
The Andersons |
|
The Andersons Denison Ethanol |
|
February 2012 |
Great River Energy |
|
Blue Flint Ethanol |
|
January 2012 |
REX American Resources |
|
NuGen Energy |
|
November 2011 |
Green Plains |
|
Otter Tail Ag Enterprises |
|
January 2011 |
For each precedent transaction indicated
above, using SEC filings and Capital IQ, Craig-Hallum calculated multiples of implied TEV using the target company’s TEV
implied by the transaction value and the target company’s ethanol plant annual production capacity at the announcement date
(measured in millions of gallons) (sometimes referred to as MMGY Capacity). Applying its professional judgment, Craig-Hallum selected
the representative ranges of the 25th percentile to the 75th percentile for the target company’s implied
TEV/MMGY Capacity. Craig-Hallum then compared Aventine’s TEV implied by the exchange ratio to Aventine’s MMGY Capacity
as of December 29, 2014 as provided by Aventine’s management. A summary of this comparison is shown in the table below.
|
|
Implied TEV
($ in millions) |
|
MMGY Capacity |
|
Implied TEV/
MMGY Capacity |
75th Percentile |
|
$109 |
|
110 |
|
$1.39 |
Median |
|
$84 |
|
80 |
|
$1.10 |
25th Percentile |
|
$64 |
|
55 |
|
$0.88 |
Aventine(1) |
|
$323 |
|
312 |
|
$1.04 |
__________
(1) | Based on Aventine’s TEV implied by the exchange ratio. |
No target company or transaction utilized in
the selected precedent transactions analysis is identical to Aventine or the merger. In evaluating the precedent transactions,
Craig-Hallum made judgments and assumptions with regard to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Aventine, such as the impact of competition on the business
of Aventine or the industry generally, industry growth and the absence of any adverse material change in the financial condition
and prospects of Aventine or the industry or in the financial markets in general.
Discounted Cash Flow Analysis – Pacific
Ethanol Stand-Alone
Craig-Hallum conducted an illustrative discounted
cash flow analysis for Pacific Ethanol on a stand-alone basis, which is designed to estimate the implied value of a company by
calculating the present value of the estimated future unlevered free cash flows of the company. Craig-Hallum calculated a range
of implied equity values of Pacific Ethanol based on forecasts for calendar years 2015 through 2019 provided by management of Pacific
Ethanol. Craig-Hallum first calculated unlevered free cash flows (calculated as earnings before interest and taxes, less taxes,
plus depreciation and amortization, less the amount of any increase or plus the amount of any decrease in net working capital,
and less capital expenditures) of Pacific Ethanol for calendar years 2015 through 2019, using an assumed tax rate of 37.5%. Craig-Hallum
then calculated present value of Pacific Ethanol’s estimated future unlevered free cash flows after 2019 based on an assumed
growth rate of unlevered free cash flows for all years after 2019. The terminal perpetuity growth rates ranged from 2.0% to 3.0%
and were selected based on Craig-Hallum’s professional judgment. In addition, Craig-Hallum added Pacific Ethanol’s
net operating loss carryforwards expected to be utilized by Pacific Ethanol’s management to reduce future federal and state
taxes, in each case based on internal estimates of Pacific Ethanol’s management. These unlevered free cash flows and net
operating loss carryforwards were then discounted to present values as of December 31, 2014 using a range of discount rates of
13.0% to 17.0% (which range was selected based on Craig-Hallum’s professional judgment and derived from an analysis of the
estimated weighted average cost of capital using Pacific Ethanol and the comparable company data) to calculate a range of implied
total enterprise values for Pacific Ethanol. From this analysis, Craig-Hallum derived a 25th percentile value of $469.7
million and a 75th percentile value of $574.2 million for Pacific Ethanol from the discounted cash flow analysis.
Discounted Cash Flow Analysis – Aventine
Stand-Alone
Craig-Hallum conducted an illustrative discounted
cash flow analysis for Aventine on a stand-alone basis, which is designed to estimate the implied value of a company by calculating
the present value of the estimated future unlevered free cash flows of the company. Craig-Hallum calculated a range of implied
equity values of Aventine based on forecasts of future unlevered free cash flows for calendar years 2015 through 2019 provided
by management of Aventine. Craig-Hallum first calculated unlevered free cash flows (calculated as earnings before interest and
taxes, less taxes, plus depreciation and amortization, less the amount of any increase or plus the amount of any decrease in net
working capital, and less capital expenditures) of Aventine for calendar years 2015 through 2019, using an assumed tax rate of
37.5%. Craig-Hallum then calculated present value of Aventine’s estimated future unlevered free cash flows after 2019 based
on an assumed growth rate of unlevered free cash flows for all years after 2019. The terminal perpetuity growth rates ranged from
2.0% to 3.0% and were selected based on Craig-Hallum’s professional judgment. In addition, Craig-Hallum added Aventine’s
net operating loss carryforwards expected to be utilized by Aventine’s management to reduce future federal and state taxes,
in each case based on internal estimates of Aventine’s management. These unlevered free cash flows and net operating loss
carryforwards were then discounted to present values as of December 31, 2014 using a range of discount rates of 13.0% to 17.0%
(which range was selected based on Craig-Hallum’s professional judgment and derived from an analysis of the estimated weighted
average cost of capital using Pacific Ethanol and the comparable company data) to calculate a range of implied total enterprise
values for Aventine. From this analysis, Craig-Hallum derived a 25th percentile value of $622.8 million and a 75th
percentile value of $749.7 million for Aventine from the discounted cash flow analysis.
Relative Contribution Analysis
Craig-Hallum performed a relative contribution
analysis for Pacific Ethanol and Aventine based on the valuation methodologies described above as well as 2015 forecasted financials
and capacity. In performing the relative contribution analysis, Craig-Hallum compared the range of stand-alone implied equity values
for each company derived from the range of mean and median values calculated for each of the comparable public companies, selected
precedent transactions, and discounted cash flow analyses. Craig-Hallum then compared these ranges to generate the implied relative
contribution for each company for each analysis. Craig-Hallum then compared the implied relative contribution ranges to the exchange
ratio.
| |
Implied Equity Value* | |
Implied Relative Contribution* |
| |
Pacific Ethanol | |
Aventine | |
Pacific Ethanol | |
Aventine |
Methodology | |
Range of Means/Medians (1) | |
Range of Means/Medians (1) | |
Range of Means/Medians (1) | |
Range of Means/Medians (1) |
Comparable Public Company | |
$330.6 – $389.6 | |
$195.9 – $537.5 | |
38.1% – 66.5% | |
33.5% – 61.9% |
Precedent Transactions | |
$216.6 – $219.9 | |
$338.0 – $343.1 | |
38.7% – 39.4% | |
60.6% – 61.3% |
Discounted Cash Flow | |
$516.8 – $524.4 | |
$680.1 – $689.3 | |
42.8% – 43.5% | |
56.5% – 57.2% |
Merger Exchange Ratio | |
| |
| |
46.7% | |
53.3% |
__________
(1) |
Based on the lowest and highest mean and median multiples from the financial multiples calculated for the comparable public company and precedent transactions analyses, and the mean and median values produced by the discount cash flow analysis for each of Pacific Ethanol and Aventine. |
Miscellaneous
The foregoing summary of material financial
analyses does not purport to be a complete description of the analyses or data presented by Craig-Hallum. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Craig-Hallum
believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of it, without considering
all of its analyses, could create an incomplete view of the processes underlying the analyses and its opinion. No single factor
or analysis was determinative of Craig-Hallum’s fairness determination. Rather, Craig-Hallum considered the totality of the
factors and analyses performed in arriving at its opinion. Craig-Hallum based its analyses on assumptions that it deemed reasonable,
including those concerning general business and economic conditions and industry-specific factors. The other principal assumptions
upon which Craig-Hallum based its analysis have been described under the description of each analysis in the foregoing summary.
Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond
the control of the parties and their advisors. Accordingly, forecasts and analyses used or made by Craig-Hallum are not necessarily
indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Moreover,
Craig-Hallum’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which securities
may trade at the present time or at any time in the future or at which businesses actually could be bought or sold.
As part of its investment banking business,
Craig-Hallum and its affiliates are continually engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions. Craig-Hallum was selected to provide a fairness opinion to the Pacific Ethanol Board on the basis of
Craig-Hallum’s experience and its familiarity with Pacific Ethanol and the industry in which it operates.
Under the terms of the engagement letter dated
December 15, 2014, Pacific Ethanol has paid Craig-Hallum a fee of $275,000 for rendering its opinion whether or not the transaction
is consummated. In addition, Pacific Ethanol has paid Craig-Hallum a retainer fee of $25,000 in connection with engaging Craig-Hallum
and agreed to reimburse Craig-Hallum for reasonable expenses incurred in connection with the engagement and to indemnify Craig-Hallum
against certain liabilities that may arise out of its engagement by Pacific Ethanol and the rendering of the opinion. In the ordinary
course of business, Craig-Hallum and its affiliates may actively trade or hold the securities of Pacific Ethanol or any of its
affiliates for Craig-Hallum’s account or for others and, accordingly, may at any time hold a long or short position in such
securities. Craig-Hallum has, in the past two years, provided financial advisory and financing services to Pacific Ethanol, and
received fees for the rendering of such services. Craig-Hallum acted as underwriter for Pacific Ethanol’s April 2014 public
offering of common stock, for which Craig-Hallum received an underwriting discount of approximately $336,000.
Craig-Hallum’s analyses were prepared
solely as part of Craig-Hallum’s analysis of the fairness, from a financial point of view, to Pacific Ethanol of the exchange
ratio and were provided to the Pacific Ethanol Board in that connection. The opinion of Craig-Hallum was only one of the factors
taken into consideration by the Pacific Ethanol Board in making its determination to approve the merger agreement and the merger.
Recommendation of the Aventine Board and its Reasons for the
Merger
The Aventine Board, with the advice
and assistance of its financial and legal advisors, negotiated, evaluated, and, at a meeting held on December 30, 2014, unanimously
approved, at a special meeting of the Aventine Board, the merger agreement, the merger and the other transactions contemplated
thereby and authorize Aventine management to finalize, execute and deliver the merger agreement and take all other actions with
respect to the merger transactions. The Aventine Board unanimously recommends that the Aventine stockholders vote “FOR”
the adoption of the merger agreement. It should be noted that in connection with the merger, the Aventine Board will receive
indemnification for acts or omissions occurring prior to the effective time of the merger. The merger agreement also provides
that, prior to the effective time of the merger, Aventine will purchase “tail” officers’ and directors’
liability insurance policies on terms and conditions reasonably comparable to Aventine’s existing directors’ and officers’
liability insurance.
In reaching the decisions to approve the merger
agreement and the transactions contemplated thereby and to recommend that the Aventine stockholders vote to adopt the merger agreement
and approve the merger, the Aventine Board consulted extensively with its financial and legal advisors and Aventine’s management,
and considered strategic alternatives to the proposed merger. In addition, the Aventine Board received verbal direction and guidance
from its majority stockholder that it was favorably inclined to pursue a merger with Pacific Ethanol and enter into a voting agreement
to support the merger agreement. After such discussions and considering such alternatives, the Aventine Board unanimously determined
the proposed merger to be in the best interests of Aventine and its stockholders.
The Aventine Board, with the advice and
assistance of its legal advisors, negotiated, evaluated, and, at a meeting held on March 31, 2015, unanimously approved,
at a special meeting of the Aventine Board the amendment to the merger agreement.
Strategic
Rationale
The Aventine Board’s decision to
approve the merger and the merger agreement and to recommend to Aventine’s stockholders that they vote for the adoption
of the merger agreement was based on a number of factors. The following are all of the material factors considered by the Aventine
Board (which were actively debated and reviewed by the Aventine Board with its outside advisors and with executive management
of Aventine):
|
· |
management’s belief that Aventine’s stockholders
are likely to benefit from the combined company’s greater cash flow generation ability, enhanced liquidity and stronger
balance sheet, improving its ability to withstand cyclical downturns in the ethanol industry; |
|
· |
the combined company’s ability to pursue strategic initiatives,
including potential debt refinancing and acquisition opportunities is likely to be enhanced in relation to stand-alone enterprises; |
|
· |
management’s belief that Aventine’s stockholders are likely to benefit from the combined company’s more diverse geographical footprint, thereby mitigating exposure to regional logistical constraints and price volatility in any one grain market, providing greater access to regional ethanol pricing premiums and allowing for more efficient marketing and distribution of its products than on a stand-alone basis; |
|
· |
stockholders are likely to benefit from expected cost synergies through the combination of the corporate management, commodities marketing and administrative support functions; |
|
· |
as a result of the merger greater liquidity will be available to Aventine’s stockholders through the exchange of their current equity interests into the publicly-traded common stock of Pacific Ethanol since the common stock of Aventine is thinly traded and a very limited market exists for the trading of its common stock; |
|
· |
the merger is expected to qualify as a tax-free transaction and, as a result, provide greater value to the Aventine stockholders than a cash-based asset sale transaction that had been previously considered; |
|
· |
the merger consideration will be paid in shares of Pacific Ethanol common stock, which will provide the opportunity for Aventine stockholders to share in any synergies and participate in any future appreciation of Pacific Ethanol common stock following the consummation of the merger, whether from future earnings growth or as a result of any premium paid in connection with a future sale of the combined company; |
|
· |
prior transaction proposals inquired about a sale of a portion of Aventine’s assets and assumption of limited liabilities and the merger with Pacific Ethanol results in the transfer of all assets and liabilities, including but not limited to any potential exposure related to the Aurora Coop Litigation, which provides a payment with respect to the value of the Aventine enterprise and closing without risks associated with continuing liability retention; |
|
· |
Pacific Ethanol was able to conduct a sufficient level of diligence to enable it to agree to a transaction structure that excluded indemnification arrangements and any related escrows or holdback arrangements, which provides all merger consideration to Aventine’s stockholders at closing versus the risk of claw-back and potential reduction in overall purchase price payments; |
|
· |
the financial analyses reviewed and discussed with the Aventine
Board and the written opinion from Duff & Phelps, Aventine’s financial advisor, to the Aventine Board, dated as
of March 31, 2015, to the effect that, as of such date and based on and subject to the factors and assumptions, qualifications
and limiting conditions set forth in that opinion, the exchange ratio payable to Aventine’s stockholders electing Pacific
Ethanol common stock pursuant to the merger agreement was fair, from a financial point of view, to such stockholders of Aventine.
The full text of the written opinion of Duff & Phelps is attached to this joint proxy statement/prospectus as Annex
E ; |
|
· |
the fact that Duff & Phelps and Aventine’s legal advisors were involved throughout the negotiations and updated the Aventine Board directly and regularly, which provided the Aventine Board with perspectives on the negotiation in addition to those of management; |
|
· |
the fact that the merger consideration is a fixed exchange ratio
of shares of Pacific Ethanol common stock, which offers the Aventine stockholders the opportunity to benefit from any increase
in the trading price of Pacific Ethanol common stock between the announcement and completion of the merger; |
|
· |
the fact that the merger agreement contains a “floor”
share price as a condition to closing, which the Aventine Board subsequently concluded was a dispensable condition based in
part upon the Aventine Board’s thorough review and analysis of the new fairness opinion delivered by Duff &
Phelps, and after discussions with Duff & Phelps following its presentation to the Aventine Board; |
|
· |
although Aventine’s significant stockholders have entered
into stockholders agreements in support of the Pacific Ethanol merger, the Aventine Board retains the right to pursue unsolicited
takeover proposals deemed to be superior proposals, pursuant to the terms of the merger agreement, following payment of a reasonable
termination fee, which enables the Aventine stockholders to consider superior proposals to the offer provided by Pacific Ethanol;
and |
|
· |
Pacific Ethanol will be required to pay Aventine, pursuant to
the terms of the merger agreement, an agreed upon expense reimbursement amount if the requisite stockholder vote of Pacific
Ethanol is not obtained and the merger agreement is terminated. |
Risks and Potentially Negative Factors
In addition to the above factors, the Aventine
Board also identified and considered a number of uncertainties, risks and other potentially negative factors in its consideration
of the merger and the merger agreement, including the following (which comprise all material uncertainties, risks and potentially
negative factors considered by the Aventine Board):
|
· |
the fact that the merger may not be completed in a timely manner or at all, despite the parties’ efforts and even if the requisite approval is obtained from Aventine stockholders and Pacific Ethanol stockholders, if certain conditions related to Aventine’s litigation matters with Aurora Coop occur and/or other material conditions are not satisfied; |
|
· |
the fact that Aventine negotiated exclusively with Pacific Ethanol
rather than conducting a public or private “auction” or sales process of Aventine along with the extensive negotiations
of Pacific Ethanol with representatives of Candlewood prior to the engagement of the Aventine Board; |
|
· |
the risks and costs to Aventine if the merger is not completed,
including the diversion of management and employee attention, potential employee attrition and the potential damaging effects
on Aventine’s business and relations with customers, suppliers and vendors; |
|
· |
the transaction costs to be incurred in connection with the
merger will be quite significant, which could impact results of performance; |
|
· |
the restrictions on the conduct of Aventine’s business
prior to completion of the merger, which could delay or prevent Aventine from undertaking material strategic opportunities
that might arise pending completion of the merger to the detriment of Aventine’s stockholders and the potential duration
of the period between signing and closing; and |
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the fact that the merger consideration consists solely of stock
to be delivered on a fixed exchange ratio, which could result in the Aventine stockholders being adversely affected by a decrease
in the trading price of Pacific Ethanol common stock after the date of execution of the merger agreement, which is a risk
due to the public reporting requirements of Pacific Ethanol. At the signing of the amendment to the merger agreement, the
Aventine Board further considered the risk of not having a “floor” price for Pacific Ethanol’s common stock
as a condition to closing. |
The Aventine Board weighed these positive and
negative factors, realizing that future results are uncertain, including any future results considered or expected in the factors
noted above. In addition, many of the nonfinancial factors considered were highly subjective. As a result, in view of the number
and variety of factors they considered, the Aventine Board did not consider it practicable and did not attempt to quantify or otherwise
assign relative weights to the specific factors it considered. Rather, the Aventine Board made its determination based on the totality
of the information it considered. Individually, each director may have given greater or lesser weight to a particular factor or
consideration.
Mr. Continenza, Mr. Horton and Mr. Hakmiller
all have extensive experience in the operation, acquisition and disposition of ethanol facilities in the United States. During
the course of the negotiations of the terms of the merger agreement, these members of the Aventine Board drew upon their experience
with respect to public and private transactions as well as overtures made by potential acquirers to assess the Pacific Ethanol
offer and critically review the analysis provided in the Duff & Phelps fairness opinion.
The fact that Duff & Phelps did not
assess similar companies or transactions was not a factor in the Aventine Board’s determination to unanimously vote in favor
of the merger. The Aventine Board believed that, overall, the potential benefits identified above of the merger to Aventine and
its stockholders outweighed the risks considered by the Aventine Board mentioned above.
The foregoing discussion of the information
and factors considered by the Aventine Board is forward-looking in nature. This information should be read in light of the factors
described under the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page
55.
Opinion of Financial Advisor to the Aventine Board
Duff & Phelps was engaged to serve as an
independent financial advisor to the Aventine Board and to provide an opinion as to the fairness, from a financial point of view,
to the stockholders of Aventine electing Pacific Ethanol common stock of the exchange ratio to be received by such stockholders
in the merger of Merger Sub with and into Aventine, which we refer to as the merger (without giving effect to any impact of the
merger on any particular stockholder other than in its capacity as a stockholder).
Duff & Phelps delivered its written
opinion to the Aventine Board on March 31, 2015 to the effect that, based upon and subject to the assumptions, qualifications
and limiting conditions set forth therein, as of such date, the exchange ratio payable to Aventine’s stockholders electing
Pacific Ethanol common stock in the merger was fair, from a financial point of view, to such stockholders of Aventine (without
giving effect to any impact of the merger on any particular stockholder other than in its capacity as a stockholder).
The full text of the opinion of Duff & Phelps
is attached as Annex E to this joint proxy statement/prospectus and is incorporated into this joint proxy statement/prospectus
by reference. The full text of the written opinion should be read carefully in its entirety for a description of the assumptions
made, procedures followed, matters considered and qualifications and limitations of the review undertaken in connection with the
opinion.
The opinion of Duff & Phelps was furnished
for the use and benefit of the board of directors of Aventine in connection with its consideration of the merger and was not intended
to, and does not, confer any rights or remedies upon any other person, and was not intended to be used, and may not be used, by
any other person or for any other purpose, without Duff & Phelps’ express consent. The opinion of Duff & Phelps
also did not address the merits of the underlying business decision to enter into the merger versus any alternative strategy,
transaction, or transaction structure; did not address any transaction related to the merger; was not a recommendation as to how
the Aventine Board or any stockholder should vote or act with respect to any matters relating to the merger or whether to proceed
with the merger or any related transaction; and did not indicate that the exchange ratio payable was the best possibly attainable
under any circumstances; instead, it merely stated whether the exchange ratio payable to stockholders electing Pacific Ethanol
common stock in the merger was within a range suggested by certain financial analyses described in more detail below. The decision
as to whether to proceed with the merger or any related transaction may depend on an assessment of factors unrelated to the financial
analysis on which the opinion of Duff & Phelps was based. The opinion of Duff & Phelps should not be construed as creating
any fiduciary duty on the part of Duff & Phelps to any party. These limitations on liability in the Duff & Phelps opinion
and the material limitations on liability set forth in Aventine’s engagement letter with Duff & Phelps are consistent.
Duff & Phelps was engaged by Aventine
to advise the Aventine Board. The Aventine Board relied upon the opinion as one of the many factors the Aventine Board considered
in determining to recommend that the Aventine stockholders vote to adopt the merger agreement and approve the merger. The decision
as to whether to proceed with the merger or any related transaction may depend on an assessment of factors unrelated to the financial
analysis on which Duff & Phelps’ opinion was based and Duff & Phelps believes that Aventine stockholders should
rely only on the recommendation of the Aventine Board when making a decision to vote to adopt the merger agreement and approve
the merger. As specified in the engagement letter between Duff & Phelps and Aventine relating to the delivery of Duff &
Phelps’ opinion, Duff & Phelps was engaged solely by Aventine to serve as financial advisor to the Aventine Board and
the use of Duff & Phelps’ opinion was restricted solely to the Aventine Board. In accordance with such engagement letter,
Duff & Phelps’ opinion should not be construed as creating any fiduciary duty on the part of Duff & Phelps to any
party. Under such circumstances, Duff & Phelps believes that its engagement letter with Aventine does not create any contractual
relationship with Aventine’s stockholders. Duff & Phelps would likely assert the “no privity” and “no
third party reliance” defenses, in addition to any other defenses which may be available, to stockholder claims that might
be brought against it under applicable state law. The availability of such defenses to Duff & Phelps and the question of whether
such defenses are available under these circumstances would be resolved by a court of competent jurisdiction. In any event, the
resolution of whether such defense is available to Duff & Phelps would have no effect on (i) the rights and responsibilities
of Aventine’s Board under applicable state law or (ii) the rights and responsibilities of either Duff & Phelps or the
Aventine Board under federal securities law.
In connection with its opinion, Duff & Phelps
made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Duff & Phelps also
took into account its assessment of general economic, market and financial conditions, as well as its experience in securities
and business valuation, in general, and with respect to similar transactions, in particular. Duff & Phelps' procedures, investigations,
and financial analysis with respect to the preparation of its opinion included, but were not limited to, the items summarized below.
In performing its analyses and rendering its
opinion with respect to the merger, Duff & Phelps:
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reviewed the following documents: |
|
o |
Aventine’s audited financial statements for the years
ended December 31, 2010 through December 31, 2013; |
|
o |
audited financial information for Aventine for the year ended
December 31, 2014, which Aventine’s management identified as being the most current financial statements
available; |
|
o |
Pacific Ethanol’s annual reports and audited financial
statements on Form 10-K filed with the Securities and Exchange Commission for the years ended December 31, 2010 through December
31, 2014; |
|
o |
other internal documents relating to the history, current operations,
and probable future outlook of Aventine, including financial projections of Aventine and financial projections of Pacific
Ethanol provided to Aventine by Pacific Ethanol and used by Aventine in its own evaluation of Pacific Ethanol, all provided
to Duff & Phelps by management of Aventine; |
|
o |
a letter dated March 31, 2015 from the management
of Aventine which made certain representations as to historical financial statements, financial projections for
Aventine and Pacific Ethanol and the underlying assumptions, and a pro forma schedule of assets and liabilities
(including identified contingent liabilities) for Aventine and Pacific Ethanol on a post-transaction basis;
and |
|
o |
financial terms and conditions of the Agreement and Plan of Merger, by and among Aventine, Pacific Ethanol and Merger
Sub, dated December 30, 2014, and Amendment No. 1 to the Agreement and Plan of Merger, by and among Aventine, Pacific Ethanol and
Merger Sub, dated March 31, 2015; |
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discussed the information referred to above and the background
and other elements of the merger with the management of Aventine; |
|
· |
reviewed the historical trading price and trading volume of
Pacific Ethanol’s common stock, and the publicly traded securities of certain other companies that Duff & Phelps
deemed relevant; |
|
· |
performed certain valuation and comparative analyses using generally accepted valuation and analytical techniques, including a discounted cash flow analysis, an analysis of selected public companies that Duff & Phelps deemed relevant, and an analysis of selected transactions that Duff & Phelps deemed relevant; and |
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conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate. |
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· |
In performing its analyses and rendering its opinion with respect to the merger, Duff & Phelps, with Aventine’s consent: |
|
· |
relied upon the accuracy, completeness, and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including Aventine management, and did not independently verify such information; |
|
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relied upon the fact that the Aventine Board and Aventine have been advised by counsel as to all legal matters with respect to the merger, including whether all procedures required by law to be taken in connection with the merger have been duly, validly and timely taken; |
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assumed that any estimates, evaluations, forecasts and projections furnished to Duff & Phelps were reasonably prepared and based upon the best currently available information and good faith judgment of the person furnishing the same, and Duff & Phelps expressed no opinion with respect to such projections or the underlying assumptions; |
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assumed that information supplied and representations made by Aventine management were true and correct in all material respects regarding Aventine, Pacific Ethanol and the merger; |
|
· |
assumed that the representations and warranties made in the merger agreement were true and correct in all material respects; |
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assumed that the final versions of all documents reviewed by Duff & Phelps in draft form conformed in all material respects to the drafts reviewed; |
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· |
assumed that there has been no material change in the assets, liabilities, financial condition, results of operations, business, or prospects of Aventine since the date of the most recent financial statements and other information made available to Duff & Phelps, and that there was no information or facts that would make the information reviewed by Duff & Phelps incomplete or misleading; |
|
· |
assumed that all of the conditions required to implement the merger will be satisfied and that the merger will be completed in accordance with the terms of the merger agreement without any amendments thereto or any waivers of any terms or conditions thereof; and |
|
· |
assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on Aventine or the contemplated benefits expected to be derived in the merger. |
To the extent that any of the foregoing assumptions
or any of the facts on which its opinion was based prove to be untrue in any material respect, the opinion of Duff & Phelps
cannot and should not be relied upon. Furthermore, in Duff & Phelps’ analysis and in connection with the preparation
of its opinion, Duff & Phelps made numerous assumptions with respect to industry performance, general business, market and
economic conditions and other matters, many of which are beyond the control of any party involved in the merger.
The opinion of Duff & Phelps was necessarily
based upon market, economic, financial and other conditions as they existed and could be evaluated as of the date of its opinion,
and Duff & Phelps disclaimed any undertaking or obligation to update, revise, or reaffirm its opinion or advise any person
of any change in any fact or matter affecting its opinion which may come or be brought to the attention of Duff & Phelps after
the date of its opinion.
Duff & Phelps did not evaluate Aventine’s
solvency or conduct an independent appraisal or physical inspection of any specific assets or liabilities (contingent or otherwise).
Duff & Phelps was not requested to, and did not, (i) initiate any discussions with, or solicit any indications of interest
from, third parties with respect to the merger, the assets, businesses or operations of Aventine, or any alternatives to the merger,
(ii) negotiate the terms of the merger, and therefore, Duff & Phelps assumed that such terms are the most beneficial terms,
from Aventine’s perspective, that could, under the circumstances, be negotiated among the parties to the merger agreement
and the merger, or (iii) advise the Aventine Board or any other party with respect to alternatives to the merger.
Duff & Phelps did not express any opinion
as to the market price or value of the Pacific Ethanol non-voting common stock that may be issuable in the merger, the Pacific
Ethanol common stock or Aventine common stock (or anything else) after the announcement or the consummation of the merger. The
opinion of Duff & Phelps should not be construed as a valuation opinion, credit rating, solvency opinion, an analysis of Aventine's
credit worthiness, as tax advice or as accounting advice. Duff & Phelps has not made, and assumed no responsibility to make,
any representation, or render any opinion, as to any legal or tax matter. The issuance of its opinion was approved by Duff &
Phelps’ opinion review committee, and Duff & Phelps has consented to the inclusion of its opinion in this proxy statement.
In rendering its opinion, Duff & Phelps
did not express any opinion with respect to the amount or nature of any compensation to any of Aventine's officers, directors,
or employees, or any class of such persons, relative to the exchange ratio payable to the stockholders of Aventine electing Pacific
Ethanol common stock in the merger, or with respect to the fairness of any such compensation.
Set forth below is a summary of the material
analyses performed by Duff & Phelps in connection with providing its opinion to the Aventine Board. This summary is qualified
in its entirety by reference to the full text of the written opinion, attached to this proxy statement as Annex E.
While this summary describes the analyses and factors that Duff & Phelps deemed material in its presentation to the Aventine
Board, it is not a comprehensive description of all analyses and factors considered by Duff & Phelps. The preparation of a
fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances. Therefore, neither the fairness opinion nor Duff
& Phelps’ underlying analysis is readily susceptible to partial analysis or a summary description. In arriving at its
opinion, Duff & Phelps did not attribute any particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Duff & Phelps believes
that the totality of its analyses must be considered as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the evaluation
process underlying its opinion. The conclusion reached by Duff & Phelps was based on all analyses and factors taken as a whole,
and also on the application of Duff & Phelps’ own experience and judgment.
Selected M&A Transactions Analysis
The relevant transaction identified and
analyzed in Duff & Phelps’ M&A transaction analysis included precedent merger and acquisition transactions in the
ethanol industry, however the relevant transactions identified did not have sufficient publicly-available data to provide a basis
for valuation.
Selected Public Companies Analysis
The relevant companies identified an analyzed
in Duff & Phelps’ selected public companies analysis were determined by Duff & Phelps not to be sufficiently comparable
to Aventine to provide a basis for valuation.
Discounted Cash Flow Analysis
Duff
& Phelps performed a discounted cash flow analysis of the estimated future free cash
flows of Aventine for the nine months ending December 31, 2015 and the fiscal years ending
December 31, 2016 through December 31, 2019 based on the management projections provided
by Aventine. Duff & Phelps also performed a discounted cash flow analysis of the
estimated future free cash flows of Pacific Ethanol for the nine months ending December
31, 2015 and the fiscal years ending December 31, 2016 through December 31, 2019 based
on the management projections provided by Aventine. The discounted cash flow analyses
were used to determine the net present value of estimated future free cash flows of Aventine
and Pacific Ethanol utilizing appropriate costs of capital for the discount rates, which
reflect the relative risk associated with the companies’ respective cash flows
as well as the rates of return that security holders of Aventine and Pacific Ethanol
could expect to realize on alternative investment opportunities with similar risk profiles.
Duff & Phelps utilized and relied upon projections from Aventine’s management
and assumptions provided by Aventine’s management for purposes of its discounted
cash flow analysis.
In its discounted cash flow analysis of
Aventine, Duff & Phelps used discount rates ranging from 10.5% to 11.5%, reflecting Duff & Phelps' estimate of Aventine's
cost of capital, to discount the projected free cash flows and terminal value. Duff & Phelps estimated Aventine's terminal
value in 2019 using a terminal growth rate of 0.0%. Based on these assumptions, this analysis indicated a per share reference
range of Aventine common stock of $8.04 to $9.45.
In its discounted cash flow analysis of
Pacific Ethanol, Duff & Phelps used discount rates ranging from 10.5% to 11.5%, reflecting Duff & Phelps' estimate of
Pacific Ethanol's cost of capital, to discount the projected free cash flows and terminal value. Duff & Phelps estimated Pacific
Ethanol's terminal value in 2019 using a terminal growth rate of 3.0%. Based on these assumptions, this analysis indicated a per
share reference range of Pacific Ethanol common stock of $6.62 to $7.77.
Based on the per share reference range of
Aventine and Pacific Ethanol indicated by the discounted cash flow analysis, Duff & Phelps calculated the following implied
exchange ratio range:
Implied
Per Share Exchange Ratio Reference Range |
Merger
Exchange Ratio |
1.03 – 1.43 |
1.25 |
Duff & Phelps noted that the merger
exchange ratio of 1.25 shares of Pacific Ethanol common stock per each share of Aventine common stock was within in the implied
per share exchange ratio reference range of 1.03-1.43 shares of Pacific Ethanol common stock per each share of Aventine common
stock.
Duff & Phelps also performed a trading
analysis of Pacific Ethanol based on the closing price of Pacific Ethanol on March 27, 2015 and the volume weighted average price
of Pacific Ethanol common stock for the 30 day, 60 day and 90 day periods preceding March 27, 2015. This analysis indicated a
per share reference range of Pacific Ethanol common stock of $10.34 to $9.68. Applied to the per share reference ranges of Aventine
indicated by the discounted cash flow analysis set forth above, the Pacific Ethanol trading analysis implied the following exchange
ratio reference range:
Implied
Per Share Exchange Ratio Reference Range |
Merger
Exchange Ratio |
0.80 – 0.98 |
1.25 |
Duff & Phelps noted that the merger
exchange ratio of 1.25 shares of Pacific Ethanol common stock per each share of Aventine common stock was greater than the implied
per share exchange ratio reference range of 0.80-0.98 shares of Pacific Ethanol common stock per each share of Aventine common
stock.
Miscellaneous
The Aventine Board selected Duff & Phelps
because Duff & Phelps is a leading independent financial advisory firm, offering a broad range of valuation and corporate finance
services, including fairness and solvency opinions, mergers and acquisitions advisory, mergers and acquisitions due diligence services,
financial reporting and tax valuation, fixed asset and real estate consulting, ESOP and Employee Retirement Income Security Act
advisory services, legal business solutions and dispute consulting.
Fees and Expenses
The amount of the fees for Duff & Phelps’
services in connection with the rendering of its opinion to the Aventine Board were payable as follows: $350,000 in cash that
was previously paid; $50,000 in cash upon Duff & Phelps’ engagement to render its opinion; and $50,000 in cash upon
Duff & Phelps informing the Aventine Board that it was prepared to deliver its opinion. No portion of Duff & Phelps’
fee is contingent upon the conclusion expressed in its opinion. Furthermore, Duff & Phelps is entitled to be paid additional
fees at Duff & Phelps’ standard hourly rates for any time incurred should Duff & Phelps be called upon to support
its findings subsequent to the delivery of its opinion. Aventine has also agreed to reimburse Duff & Phelps for certain of
its out-of-pocket expenses and to indemnify Duff & Phelps for certain liabilities arising out of its engagement.
The terms of the fee arrangements with Duff
& Phelps, which Aventine believes are customary in transactions of this nature, were negotiated at arm’s length, and
the Aventine Board is aware of these fee arrangements.
Other than this engagement, during the two years
preceding the date of its opinion, Duff & Phelps has not had any material relationship with any party to the merger for which
compensation has been received or is intended to be received, nor is any such material relationship or related compensation mutually
understood to be contemplated.
Accounting Treatment
The acquisition of Aventine common stock by
Pacific Ethanol in the merger will be accounted for in accordance with the acquisition method of accounting and the regulations
of the Securities and Exchange Commission. This means that the assets and liabilities of Aventine will be recorded, as of the completion
of the merger, at their fair values and consolidated with those of Pacific Ethanol. This will result in recording an amount for
goodwill, which represents the excess of the purchase price over the fair value of the identifiable net assets of Aventine. Financial
statements of Pacific Ethanol issued after the merger will reflect only the operations of Aventine’s business after the merger
and will not be restated retroactively to reflect the historical financial position or results of operations of Aventine.
All unaudited pro forma combined condensed financial
information contained in this joint proxy statement/prospectus was prepared using the acquisition method of accounting for business
combinations. The final allocation of the purchase price will be determined after the merger is completed and after completion
of an analysis to determine the fair value of the assets and liabilities of Aventine’s business. Accordingly, the final purchase
accounting adjustments may be materially different from the unaudited pro forma adjustments. Any decrease in the fair value of
the assets or increase in the fair value of the liabilities of Aventine’s business as compared to the unaudited pro forma
combined condensed financial information included in this joint proxy statement/prospectus will have the effect of increasing the
amount of recorded goodwill. An increase or decrease in the share price of Pacific Ethanol would have the effect of increasing
or decreasing goodwill, as the case may be. The goodwill amount will not be affected by a change in the Aventine share price.
Material United States Federal Income Tax Consequences of the
Merger
The following discussion, subject to the limitations
and qualifications described herein, and to the extent this discussion constitutes a summary of United States federal income tax
laws or legal conclusions with respect thereto, constitutes the opinion of Troutman Sanders LLP and Akin Gump Strauss Hauer &
Feld LLP as to the material United States federal income tax consequences of the merger applicable to United States holders (as
defined below) of Aventine common stock. Pacific Ethanol and Aventine intend for the merger to qualify as a reorganization within
the meaning of Section 368(a) of the Code for United States federal income tax purposes. At or prior to the effective time and
as a closing condition to the merger, Pacific Ethanol will have received a written opinion from Troutman Sanders LLC, and Aventine
will have received a written opinion from Akin Gump Strauss Hauer & Feld LLP, both to the effect that the merger will constitute
a reorganization within the meaning of Section 368(a) of the Code for United States federal income tax purposes.
The tax opinions of Troutman Sanders LLP and
Akin Gump Strauss Hauer & Feld LLP are based, in part, on representations, in form and substance reasonably acceptable to Troutman
Sanders LLP and Akin Gump Strauss Hauer & Feld LLP, made by Pacific Ethanol and Aventine with respect to factual matters related
to the requirements of the tax law relevant to rendering the preceding opinions, and on customary factual assumptions set forth
in their opinions attached as Exhibits 8.1 and 8.2, respectively, to the registration statement of which this joint proxy
statement/prospectus forms a part, all of which must be consistent with the state of facts existing as of the effective time of
the merger. If any of the factual representations or assumptions on which the opinions described above are based, are inaccurate
as of the effective time of the merger, the tax consequences to United States holders of Aventine common stock could differ materially
from those described below. Although the merger agreement allows Pacific Ethanol and Aventine to waive the opinion requirements
as a condition to closing, neither Pacific Ethanol nor Aventine intends to do so. If either Pacific Ethanol or Aventine does waive
these conditions, you will be informed of this decision prior to being asked to vote on the transaction.
The above-described opinions of counsel represent
the best legal judgment of counsel to Pacific Ethanol and counsel to Aventine. These opinions and the discussion set forth herein
are not binding on the Internal Revenue Service (sometimes referred to as the IRS) or any court. No ruling will be sought from
the IRS with respect to the tax consequences of the transaction and no assurance can be given that the IRS would not assert, or
that a court would not sustain, a position contrary to any of the tax consequences set forth below.
The following discussion is based upon the Code,
United States Treasury regulations, judicial authorities, published positions of the IRS, and other applicable authorities, all
as currently in effect on the date of this joint proxy statement/prospectus and all of which are subject to change or differing
interpretations (possibly with retroactive effect). This discussion is limited to holders that hold their shares of Aventine common
stock as capital assets for United States federal income tax purposes (generally, assets held for investment). This discussion
does not address all of the tax consequences that may be relevant to a particular Aventine stockholder or to Aventine stockholders
that are subject to special treatment under United States federal income tax laws including, but not limited to, non-U.S. persons
or entities, financial institutions, tax-exempt organizations, insurance companies, regulated investment companies, partnerships
or other pass-through entities, broker-dealers, traders in securities who elect the mark to market method of accounting for their
securities, Aventine stockholders that hold their shares of Aventine common stock as part of a “straddle,” “hedge,”
“conversion transaction” or other integrated transaction, Aventine stockholders who acquired their shares of Aventine
common stock pursuant to the exercise of employee stock options or otherwise in connection with the performance of services, United
States expatriates, Aventine stockholders who have a functional currency other than the United States dollar, Aventine stockholders
liable for the alternative minimum tax and Aventine stockholders who exercise appraisal rights. This discussion also does not address
the tax consequences to Aventine, or to Aventine stockholders that own 5% or more of Aventine common stock or that are affiliates
of Aventine. In addition, this discussion does not address other United States federal taxes (such as gift or estate taxes or alternative
minimum taxes), the tax consequences of the transaction under state, local or foreign tax laws, certain tax reporting requirements
that may be applicable with respect to the transaction or the Medicare tax on “net investment income.”
For purposes of this discussion, the term “United
States holder” means a beneficial owner of Aventine common stock that is (i) a citizen or resident of the United States,
(ii) a corporation, or other entity treated as a corporation for United States federal income tax purposes, created or organized
under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject
to United States federal income tax regardless of its source and (iv) a trust if such trust has validly elected to be treated as
a United States person for United States federal income tax purposes or if (A) a United States court can exercise primary supervision
over the trust’s administration and (B) one or more United States persons have the authority to control all substantial decisions
of the trust.
If a partnership (or other entity treated as
a partnership for United States federal income tax purposes) is an Aventine stockholder, the United States federal income tax treatment
of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partner
in a partnership holding Aventine common stock should consult its tax advisors with respect to the tax consequences of the transaction.
Aventine stockholders are urged to consult
their tax advisors as to the particular United States federal income tax consequences of the transaction to them, as well as any
tax consequences arising under any state, local and non-United States tax laws or any other United States federal tax laws.
Based on and subject to the foregoing, assuming
that, for United States federal income tax purposes, the merger will constitute a reorganization within the meaning of Section
368(a) of the Code, the following material United States federal income tax consequences will result from the transaction:
Consequences to Pacific Ethanol and Aventine
Each of Pacific Ethanol and Aventine will be
a party to the merger within the meaning of Section 368(b) of the Code, and neither Pacific Ethanol nor Aventine will recognize
any gain or loss as a result of the merger.
Consequences to Aventine Stockholders
Exchange of Aventine Common Stock
for Pacific Ethanol Common Stock. United States holders of Aventine common stock that exchange all of their Aventine
common stock for Pacific Ethanol common stock or non-voting common stock will not recognize income, gain or loss for United States
federal income tax purposes, except, as discussed below, with respect to cash received in lieu of fractional shares of Pacific
Ethanol common stock or non-voting common stock, and except to the extent that any payment by Aventine of transfer taxes is treated
as taxable consideration received by United States holders of Aventine common stock.
Cash Received in Lieu of Fractional
Shares and Payment of Transfer Taxes. A United States holder that receives cash in lieu of a fractional share of
Pacific Ethanol common stock or non-voting common stock in the merger generally will be treated as if the fractional share of
Pacific Ethanol common stock or non-voting common stock had been distributed to them as part of the merger, and then redeemed
by Pacific Ethanol in exchange for the cash actually distributed in lieu of the fractional share, with the redemption generally
qualifying as an “exchange” under Section 302 of the Code. Consequently, those holders generally will recognize capital
gain or loss with respect to the cash payments they receive in lieu of fractional shares measured by the difference between the
amount of cash received and the tax basis allocated to the fractional shares, and will be long-term capital gain or loss if, as
of the effective date of the merger, the holding period of such shares is greater than one year. The deductibility of capital
losses is subject to limitations.
Pacific Ethanol and Aventine do not believe
that any significant transfer taxes will be payable as a consequence of the merger. As a result, United States holders of Aventine
common stock should not recognize any material amount of taxable consideration in the merger.
Tax Basis in, and Holding Period for,
Pacific Ethanol Common Stock and Non-Voting Common Stock. A United States holder’s aggregate tax basis in the Pacific
Ethanol common stock or non-voting common stock received in the merger will be equal to such stockholder’s aggregate tax
basis in the Aventine common stock surrendered in the merger, reduced by any amount allocable to a fractional share of Pacific
Ethanol common stock or non-voting common stock for which cash is received. The holding period of Pacific Ethanol common stock
or non-voting common stock received by a United States holder in the merger will include the holding period of the Aventine common
stock exchanged in the merger if the Aventine common stock exchanged is held as a capital asset at the time of the merger. If a
United States holder acquired different blocks of Aventine common stock at different times or at different prices, the Pacific
Ethanol common stock or non-voting common stock such holder receives will be allocated pro rata to each block of Aventine common
stock, and the basis and holding period of each block of Pacific Ethanol common stock or non-voting common stock such holder receives
will be determined on a block-for-block basis depending on the basis and holding period of the blocks of Aventine common stock
exchanged for such block of Pacific Ethanol common stock or non-voting common stock.
Backup Withholding and Reporting Requirements
United States holders of Aventine common stock,
other than certain exempt recipients, may be subject to backup withholding at a rate of 28% with respect to any cash payment received
in the merger in lieu of fractional shares. However, backup withholding will not apply to any United States holder that either
(a) furnishes a correct taxpayer identification number and certifies that it is not subject to backup withholding or (b) otherwise
proves to Pacific Ethanol and its exchange agent that the United States holder is exempt from backup withholding. Any amounts withheld
under the backup withholding rules generally will be allowed as a refund or credit against the holder’s United States federal
income tax liability, provided the holder timely furnishes the required information to the IRS.
In addition, United States holders of Aventine
common stock are required to retain permanent records and make such records available to any authorized IRS officers and employees.
The records should include the number of shares of Aventine stock exchanged, the number of shares of Pacific Ethanol common stock
and/or non-voting common stock received, the fair market value and tax basis of Aventine shares exchanged and the United States
holder’s tax basis in the Pacific Ethanol common stock and/or non-voting common stock received.
If a United States holder of Aventine common
stock that exchanges such stock for Pacific Ethanol common stock or non-voting common stock is a “significant holder”
with respect to Aventine, the United States holder is required to include a statement with respect to the exchange on or with the
federal income tax return of the United States holder for the year of the exchange. A United States holder of Aventine common stock
will be treated as a significant holder in Aventine if the United States holder’s ownership interest in Aventine is 5% or
more of Aventine’s issued and outstanding common stock or if the United States holder’s basis in the shares of Aventine
stock exchanged is $1,000,000 or more. The statement must be prepared in accordance with Treasury Regulation Section 1.368-3 and
must be entitled “STATEMENT PURSUANT TO §1.368-3 BY [INSERT NAME AND TAXPAYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER],
A SIGNIFICANT HOLDER”. The statement must include the names and employer identification numbers of Aventine and Pacific Ethanol,
the date of the merger, and the fair market value and tax basis of Aventine shares exchanged (determined immediately before the
merger).
The tax consequences of the transaction to
a particular Aventine stockholder will depend on the stockholder’s individual circumstances. Aventine stockholders are strongly
encouraged to consult their tax advisors regarding the specific tax consequences of the transaction to them, including tax return
reporting requirements and the applicability of federal, state, local and non-United States tax laws.
Appraisal Rights
Pacific Ethanol stockholders are not entitled
to appraisal rights in connection with the merger. See “Information About the Pacific Ethanol Annual Meeting and Vote—Appraisal
Rights; Trading of Shares” beginning on page 85 for more detail.
Under Delaware law, Aventine stockholders have
appraisal rights in connection with the merger. Therefore, a stockholder of Aventine may elect to be paid cash for the fair value
of such stockholder’s shares as determined by the Delaware Court of Chancery and in accordance with the procedures set forth
in Section 262. To the extent the drag-along is exercised pursuant to the Aventine Stockholders Agreement, the Aventine stockholders
subject to the drag-along right have waived their respective appraisal rights arising out of a drag-along transaction. See “Information
About the Aventine Special Meeting and Vote—Appraisal Rights” beginning on page 155 for more detail.
Regulatory Matters Relating to the Merger
General
Under the terms of the merger agreement, the
merger cannot be completed until the waiting period applicable to the consummation of the merger under the HSR Act has expired
or been terminated and all other specified required approvals have been obtained or any applicable waiting period thereunder has
expired or been terminated.
Under the HSR Act and the rules promulgated
thereunder by the FTC, the merger cannot be completed until each of Pacific Ethanol and Aventine has filed a notification and
report form with the FTC and the Antitrust Division of the DOJ under the HSR Act and the applicable waiting period has expired
or been terminated. Each of Pacific Ethanol and Aventine filed an initial notification and report form with the FTC and the DOJ
on February 3, 2015. On February 18, 2015, the FTC granted early termination of the waiting period under the HSR Act.
At any time before or after consummation of
the merger, notwithstanding the termination of the waiting period under the HSR Act, the Antitrust Division of the DOJ or the FTC
could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to
enjoin the completion of the merger or seeking divestiture of substantial assets of Pacific Ethanol or Aventine. At any time before
or after the completion of the merger, and notwithstanding the termination of the waiting period under the HSR Act, any state could
take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include
seeking to enjoin the completion of the merger or seeking divestiture of substantial assets of Pacific Ethanol or Aventine. Private
parties may also seek to take legal action under the antitrust laws under certain circumstances.
Under the terms of the merger agreement, each
of Pacific Ethanol and Aventine has agreed to cooperate and use its reasonable best efforts to take or cause to be taken all actions
that are necessary, proper or advisable to consummate and make effective the merger and the other transactions contemplated by
the merger agreement as promptly as practicable, including:
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obtaining from any government entity or any other third person any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by such party or any of their subsidiaries in connection with the merger; |
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as promptly as practicable, make all necessary filings and make any other required submissions, with respect to merger and the merger agreement required under applicable law, including an securities laws and antitrust laws; |
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making all required filings (subject to applicable law regarding the sharing of information), including giving all parties and their respective counsel reasonable opportunity to review and comment upon such filings and any amendments or supplements to the filing prior to such filing; |
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to obtain any clearances or approvals of any governmental entities required for the consummation of the merger under any antitrust law including the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other federal, state or foreign law designed to prohibit, restrict or regulate actions for the purpose or effect of monopolization or restraint of trade; |
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to obtain the expiration of any applicable waiting period under any antitrust law (on February 18, 2015, the FTC granted early termination of the waiting period under the HSR Act); |
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to respond to any government requests for information under any antitrust law; |
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to contest and resist any action, including any legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) that restricts, prevents or prohibits the consummation of the merger or any other transactions contemplated by the merger agreement under any antitrust law; and |
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to file, as promptly as practicable, all notifications required under the HSR Act and any applicable international antitrust requirements. |
Neither Pacific Ethanol, nor Aventine nor any
of their subsidiaries is required to (i) license, divest, dispose of or hold separate any assets or businesses of Pacific Ethanol
or Aventine or any of their subsidiaries or otherwise take or commit to take any action that limits its freedom of action with
respect to, or its ability to retain, any of the assets or businesses of Pacific Ethanol or Aventine or any of their subsidiaries,
or that would otherwise have a material adverse effect on the combined company or (ii) pay more than de minimis amounts in connection
with seeking or obtaining any such consents, approvals or authorizations as are required to complete the merger under applicable
antitrust laws (excluding any mandatory filing fees and reasonable and customary costs and expenses).
Pacific Ethanol and Aventine have agreed to
keep the other apprised of the status of matters relating to the completion of the merger and work cooperatively in connection
with obtaining all required consents, authorizations, orders or approvals of, or any exemptions by, any governmental entity. Each
party shall promptly consult with the other party with respect to and provide any necessary information and assistance as the other
party may reasonably request with respect to (and, in the case of correspondence, provide the other party (or their counsel) copies
of) all notices, submissions, or filings made by such party with any governmental entity or any other information supplied by such
party to, or correspondence with, a governmental entity in connection with the merger and the merger agreement. Pacific Ethanol
and Aventine have agreed to promptly inform the other party and, if in writing, furnish the other party with copies of any communication
from or to any governmental entity regarding the merger, and permit the other party to review and discuss in advance, and consider
in good faith the views of the other party in connection with, any proposed communication with any such governmental entity. If
Pacific Ethanol or Aventine, or their representatives receive a request for additional information or documentary material from
any governmental entity with respect to the merger, then such party shall use reasonable best efforts to make, or cause to be made,
promptly and after consultation with the other party, an appropriate response in substantial compliance with such request. No party
shall participate in any meeting or teleconference with any governmental entity where material issues or any matters relating to
timing would likely be discussed in connection with the merger and the merger agreement unless such party consults with the other
party in advance and, to the extent not prohibited by such governmental entity, gives the other party the opportunity to attend
and participate thereat. In addition, without the prior written consent of Pacific Ethanol, Aventine shall not agree or commit
to, or permit any of its subsidiaries to agree or commit to, any commitment to sell, divest or dispose of any businesses, assets,
relationships or contractual rights of Aventine or any of its subsidiaries or purporting to limit Aventine’s, any of its
subsidiaries’ or Pacific Ethanol’s freedom to action with respect to, or ability to retain, any businesses, assets,
relationships or contractual rights.
Each of Pacific Ethanol and Aventine currently
intends to submit the merger proposals to its respective stockholders at a stockholders meeting as noted above in “Information
About the Pacific Ethanol Annual Meeting and Vote” beginning on page 79 and “Information About the Aventine
Special Meeting and Vote” beginning on page 153. It is possible that a governmental agency will not have approved
the merger by the date of such stockholders meetings, which could delay or prevent completion of the merger for a significant
period of time after Pacific Ethanol stockholders and Aventine stockholders have approved the proposals relating to the merger.
Any delay in the completion of the merger could diminish the anticipated benefits of the merger or result in additional transaction
costs, loss of revenue or other effects associated with uncertainty surrounding the transaction. In addition, it is possible that,
among other things, a governmental agency could condition its approval of the merger upon Pacific Ethanol and Aventine entering
into an agreement to divest a portion of their combined businesses or assets, or could restrict the operations of the combined
businesses in accordance with specified business conduct rules. See “Risk Factors” beginning on page 34. A governmental
agency also could impose significant additional costs on the business of the combined company. Acceptance of any such conditions
could diminish the benefits of the merger to the combined company and result in additional costs, loss of revenue or other effects.
Alternatively, rejection of such conditions could result in Pacific Ethanol and Aventine litigating with a governmental entity,
which could delay the merger or cause the merger to be abandoned.
No additional stockholder approval is expected
to be required for any decision by Pacific Ethanol or Aventine after the stockholders meetings are held relating to any divestitures
or other terms and conditions necessary to resolve any regulatory objections to the merger and, possibly, to proceed with consummation
of the merger.
As more fully described in “The Merger
Agreement and Related Agreements—Termination” and “—Termination Fee and Expenses” beginning on pages
225 and 226, respectively, the merger agreement may be terminated by Pacific Ethanol or Aventine if the merger is not
consummated on or before the outside date (initially May 31, 2015 but subject to an automatic extension to June 30, 2015 if the
financial statements of Pacific Ethanol that are required to be included in the registration statement on Form S-4 are for the
year ended December 31, 2014), and the party seeking to terminate the merger agreement has not breached its obligations under the
merger agreement in a manner that proximately caused the failure of the merger to be completed on or before the outside date.
Federal Securities Laws Consequences; Stock Transfer Restrictions
The shares of Pacific Ethanol common stock
and non-voting common stock to be issued in connection with the merger, together with the shares of Pacific Ethanol common stock
issuable upon the conversion of shares of non-voting common stock, will be freely transferable under the Securities Act and the Exchange Act, except for shares issued to any stockholder of Aventine who may be deemed to be an “affiliate”
of Pacific Ethanol for purposes of Rule 144 under the Securities Act and except for shares issued to any stockholder of Aventine
who is a party to the stockholders agreements with Pacific Ethanol. Persons who may be deemed to be affiliates include individuals
or entities that control, are controlled by, or under the common control with Pacific Ethanol and may include the executive officers,
directors and significant stockholders of Pacific Ethanol. This joint proxy statement/prospectus does not cover resales of Pacific
Ethanol common stock or non-voting common stock received by any person upon the completion of the merger, and no person is authorized
to make any use of this joint proxy statement/prospectus in connection with any resale.
For a description of the stock transfer restrictions
imposed upon the Aventine stockholders who are parties to the stockholders agreements with Pacific Ethanol, see “The Merger
Agreement and Related Agreements—Stockholders Agreements” beginning on page 227.
Stock Exchange Listing; Shares to be Issued in the Merger
It is a condition to the merger that the shares
of Pacific Ethanol common stock issuable pursuant to the merger be approved for listing on The NASDAQ Capital Market, subject to
official notice of issuance. In addition, if the merger results in a “change of control” under NASDAQ Marketplace Rule
5635(b), Pacific Ethanol will be required to submit a new original listing application with NASDAQ and comply with the NASDAQ Capital
Market initial listing requirements.
Shares of Pacific Ethanol common stock will
continue to be traded on The NASDAQ Capital Market under the symbol “PEIX” immediately following the completion of
the merger. When the merger is completed, Aventine common stock will cease to be traded on OTCBB. Shares of Pacific Ethanol non-voting
common stock will not be listed for trading on any securities exchange, including The NASDAQ Capital Market.
Based on the exchange ratio contemplated
by the merger agreement and the number of shares of Aventine common stock issued and outstanding as of March 31, 2015,
a total of an aggregate of approximately 17,755,300 shares of Pacific Ethanol common stock and non-voting common stock will be
issued upon the closing of the merger, which will represent approximately 42% of the total Pacific Ethanol common stock and non-voting
common stock issued and outstanding immediately following the merger.
After the merger, Pacific Ethanol stockholders
will continue to own their existing shares of Pacific Ethanol common stock. Accordingly, Pacific Ethanol stockholders will hold
the same number of shares of Pacific Ethanol common stock that they held immediately prior to the merger. However, because Pacific
Ethanol will be issuing new shares of Pacific Ethanol common stock and non-voting common stock to Aventine stockholders in the
merger, the stockholders of Pacific Ethanol will experience dilution as a result of the issuance of shares of Pacific Ethanol
common stock and non-voting common stock in the merger and outstanding shares of Pacific Ethanol common stock immediately prior
to the merger will represent a smaller percentage of the total number of shares of Pacific Ethanol common stock and non-voting
common stock issued and outstanding after the merger. It is expected that Pacific Ethanol stockholders before the merger will
hold approximately 58% of the total Pacific Ethanol common stock and non-voting common stock issued and outstanding immediately
following completion of the merger. Thus, Pacific Ethanol stockholders before the merger will experience dilution in the amount
of 42% as a result of the merger.
ADDITIONAL INTERESTS OF CERTAIN OF AVENTINE’S
DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
Leadership of the Combined Company
As of the effective time of the merger,
the board of directors of the combined company will be composed of the members of the Pacific Ethanol Board (currently seven members)
and two designees nominated by holders of a majority of shares of Aventine common stock and who must be independent with respect
to Pacific Ethanol. A transition team comprised of senior executives from both companies is leading the integration planning process.
Upon the closing of the merger, the Pacific Ethanol Board will increase the number of board seats to nine and appoint the two
designees to fill the two vacancies. The new directors will serve as directors of the combined company until their resignation
or until the 2016 annual meeting of the combined company. The current executive management of Pacific Ethanol will remain unchanged
following the merger.
The seven current directors of Pacific Ethanol
are William L. Jones, Neil M. Koehler, Michael D. Kandris, Terry L. Stone, John L. Prince, Douglas L. Kieta, and Larry D. Layne,
each of whom is standing for reelection at the Pacific Ethanol annual meeting of stockholders. As of the date of this joint proxy
statement/prospectus, the two designees have not been identified.
To the extent each is re-elected at
the Pacific Ethanol annual meeting, following the merger, William L. Jones will continue to serve as Pacific Ethanol’s
Chairman of the Board and Neil M. Koehler will continue to serve as Pacific Ethanol’s President and Chief Executive
Officer.
Severance Arrangements
Each of Mark Beemer (Chief Executive Officer
of Aventine) and Brian Steenhard (Chief Financial Officer of Aventine), the executive officers of Aventine, are party to employment
agreements with Aventine.
Compensation upon Termination
Under each executive officer’s employment
agreement, such executive officer is entitled to “compensation upon termination” provisions.
Under the termination provision, each executive
officer whose employment is terminated without “cause” or by the executive officer “for good reason,” (see
below for the definitions of “cause” and “good reason”) is entitled to the payments and benefits described
below.
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a lump sum severance payment equal to 12 months’ base salary |
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provided that the executive officer timely elects COBRA continuation coverage the costs of continued group life, medical, dental, and vision insurance coverage for such executive officer and his dependents under the plans and programs in which such executive officer participated immediately prior to his employment termination, or materially equivalent plans and programs maintained by Aventine in replacement thereof, for a period of 12 months following the date of termination. |
“Cause” means (i) willful misconduct
or gross negligence by the executive officer in the performance of his duties; (ii) an executive officer being convicted of, or
pleading guilty or nolo contendere to a felony; (iii) an executive officer’s theft or embezzlement from Aventine or
its affiliates; (iv) an executive officer’s failure to relocate his residence within a reasonable period of time following
a written request to do so from the Aventine Board; (v) an executive officer’s willful and substantial failure to perform
his duties or any other material breach by such executive officer of any material provision of his employment agreement, which
is not cured (if curable) by such executive officer within 10 days following his receipt of written notice thereof.
“Good Reason” means the occurrence
of any of the following events, unless (1) such event occurs with the executive officer’s express prior written consent,
(2) the event is an isolated, insubstantial or inadvertent action or failure to act which was not in bad faith and which is remedied
by Aventine promptly after receipt of written notice thereof given by such executive officer, or (3) the event occurs in connection
with termination of such executive officer’s employment for cause, disability or death: (i) a material reduction (10% or
more) in such executive officer’s base salary, or a significant reduction in any employer-paid health insurance, life insurance
or disability insurance benefit that is not generally applicable to other executives of Aventine, (ii) the assignment to the executive
officer by Aventine of any duties which are, in any material respect, a diminution of such executive officer’s position,
duty, title, or responsibility with Aventine; or (iii) any material breach, non-performance, or non-observance of any material
provision of executive officer’s employment agreement; provided, however, that Good Reason shall not exist unless the executive
officer provides written notice to Aventine, of the existence of the event or occurrence giving rise to the alleged Good Reason
condition within 30 calendar days of its initial existence, and Aventine is provided a period of at least 30 calendar days from
the receipt of written notice during which it may remedy the Good Reason condition.
Pursuant to his employment letter with Aventine,
Christopher A. Nichols (General Counsel, Vice President, and Secretary) is entitled to six months of severance should his employment
with Aventine be terminated for any reason other than (i) for gross negligence on Mr. Nichols’s behalf or (ii) Mr. Nichols
resigning.
Golden Parachute Compensation
The following disclosure sets forth amounts
that Aventine’s named executive officers may become entitled to pursuant to the terms of their employment arrangements. These
amounts have been calculated assuming the merger was consummated on December 31, 2014, and assuming each named executive officer
experiences a qualifying termination of employment as of that date (see footnotes below for a discussion of each named executed
officer’s qualifying termination). All of the amounts shown in the table below would be payable by Aventine and only upon
such a qualifying termination of employment. Calculations of cash severance are based on the named executive officer’s current
base salary. See “Additional Interests of Certain of Aventine’s Directors and Executive Officers in the Merger—Severance
Arrangements” beginning on page 205.
The amounts indicated below are estimates of
amounts that would be payable to the named executive officers and the estimates are based on multiple assumptions that may or may
not actually occur, including assumptions described in this joint proxy statement/prospectus. Some of the assumptions are based
on information not currently available and as a result the actual amounts, if any, received by a named executive officer may differ
in material respects from the amounts set forth below.
Named Executive Officer | |
Cash ($) | | |
Equity ($) | | |
Pension/ NQDC ($) | | |
Perquisites/ Benefits ($) | | |
Tax Reimbursement ($) | | |
Total ($) | |
Mark Beemer, Chief Executive Officer | |
$ | 420,000 | (1) | |
| – | | |
| – | | |
$ | 34,000 | (5) | |
| – | | |
$ | 454,000 | |
Brian Steenhard, Chief Financial Officer | |
| 250,000 | (2) | |
| – | | |
| – | | |
| 34,000 | (5) | |
| – | | |
| 284,000 | |
Christopher A. Nichols, Vice President | |
| 110,000 | (3) | |
| – | | |
| – | | |
| – | | |
| – | | |
| 110,000 | |
John Valenti, Vice President | |
| 191,755 | (4) | |
| – | | |
| – | | |
| – | | |
| – | | |
| 191,755 | |
__________
(1) |
Represents the lump sum severance payment payable to Mr. Beemer if he is terminated by Aventine without cause or if he resigns for good reason, as such terms are more fully described in “Additional Interests of Certain of Aventine’s Directors and Executive Officers in the Merger—Severance Arrangements” beginning on page 134. Any such severance payment is subject to compliance with certain noncompetition and nonsolicitation covenants and a release of claims. |
(2) |
Represents the lump sum severance payment payable to Mr. Steenhard if he is terminated by Aventine without cause or if he resigns for good reason, as such terms are more fully described in “Additional Interests of Certain of Aventine’s Directors and Executive Officers in the Merger—Severance Arrangements” beginning on page 134. Any such severance payment is subject to compliance with certain noncompetition and nonsolicitation covenants and a release of claims. |
(3) |
Represents the lump sum severance payment payable to Mr. Nichols if he is terminated for any reason other than cause or his resignation. |
(4) |
Aventine at its sole discretion may award Mr. Valenti up to 12 months base salary and bonus amount in a lump sum severance payment. However, if Mr. Valenti is terminated prior to June 12, 2015, Aventine must continue to pay Mr. Valenti his base salary through such date. Any such severance payment is subject to compliance with certain noncompetition and nonsolicitation covenants and a release of claims. |
(5) |
Represents the value of continued group life, medical, dental and vision insurance coverage for such executive officer and his dependents under the plans and programs in which such executive officer participated immediately prior to his employment termination, or materially equivalent plans and programs maintained by Aventine in replacement thereof, for a period of 12 months following the date of termination. |
Indemnification and Insurance
The merger agreement provides that for six years
after the effective time of the merger and to the fullest extent permitted by law, Pacific Ethanol will cause the surviving corporation
to honor all rights to indemnification for acts or omissions prior to the effective time of the merger existing in favor of Aventine
directors or officers as provided in Aventine’s organizational documents. The merger agreement also provides that, prior
to the effective time of the merger, Aventine will purchase six-year “tail” officers’ and directors’ liability
insurance policies on terms and conditions reasonably comparable to Aventine’s existing directors’ and officers’
liability insurance. If such “tail” policies are not purchased prior to the effective time, Aventine shall purchase
these “tail” policies or as much insurance coverage as can be obtained following the effective time for 200% or less
of the annual premium paid by Aventine for its existing insurance. Pacific Ethanol and the surviving corporation are obligated
to maintain such tail policies in full force and effect and continue to honor their respective obligations thereunder for the full
term thereof. In addition, if a claim is made against Aventine’s current insurance policy prior to the closing of the merger,
a new aggregate limit of liability will be negotiated in connection with the directors’ and officers’ liability insurance
policy.
THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following discussion
summarizes material provisions of the Agreement and Plan of Merger and Amendment No. 1 to Agreement and Plan of Merger, which
we refer to together as the merger agreement, a copy of which is attached as Annex A to this joint proxy statement/prospectus
and is incorporated by reference herein. The rights and obligations of the parties are governed by the express terms and
conditions of the merger agreement and not by this summary. This summary is not complete and is qualified in its
entirety by reference to the complete text of the merger agreement. We urge you to read the merger agreement carefully in its
entirety, as well as this joint proxy statement/prospectus, before making any decisions regarding the merger.
The representations and warranties described
below and included in the merger agreement were made by Pacific Ethanol and Aventine to each other as of specific dates. The assertions
embodied in those representations and warranties were made solely for purposes of the merger agreement and may be subject to important
qualifications and limitations agreed to by Pacific Ethanol and Aventine in connection with negotiating its terms, including, but
not limited to, the qualifications and limitations listed in the disclosure schedules to the merger agreement. Moreover, the representations
and warranties may be subject to a contractual standard of materiality that may be different from what may be viewed as material
to stockholders, or may have been used for the purpose of allocating risk between Pacific Ethanol and Aventine rather than establishing
matters as facts. Information concerning the subject matter of these representations and warranties may have changed since the
date of the merger agreement. Pacific Ethanol will provide additional disclosure in its public reports to the extent it is aware
of the existence of any material facts that are required to be disclosed under federal securities laws and that might otherwise
contradict the terms and information contained in the merger agreement and will update such disclosure as required by federal securities
laws. Other than as disclosed in this joint proxy statement/prospectus and the documents incorporated herein by reference, as of
the date of this joint proxy statement/prospectus, neither Pacific Ethanol nor Aventine is aware of any material facts that are
required to be disclosed under the federal securities laws that would contradict the representations and warranties in the merger
agreement. The representations and warranties in the merger agreement and the description of them in this document should not be
read alone but instead should be read in conjunction with the other information contained in the reports, statements and filings
Pacific Ethanol publicly files with the Securities and Exchange Commission and the other information about Pacific Ethanol and
the information about Aventine contained in this joint proxy statement/prospectus. See “Where You Can Find More Information”
beginning on page 257.
The Merger
The merger agreement provides for the merger
of Merger Sub with and into Aventine. Aventine will be the surviving corporation in the merger and will remain a wholly-owned subsidiary
of Pacific Ethanol.
Completion and Effectiveness of the Merger
Unless they agree to an earlier date, Pacific
Ethanol and Aventine will complete the merger on the date that is the second business day after all of the conditions to completion
of the merger contained in the merger agreement are satisfied or waived. The conditions are described in the section entitled “The
Merger Agreement—Conditions to the Completion of the Merger” beginning on page 222. The merger will become effective
upon the filing of the certificate of merger with the Secretary of State of the State of Delaware or at such later time as Pacific
Ethanol and Aventine may agree in writing and specify in the certificate of merger.
Merger Consideration
Common Stock and Non-Voting Common Stock
Each share of Aventine common stock, par
value $0.001 per share, issued and outstanding immediately prior to the completion of the merger (other than dissenting shares
and shares held by Pacific Ethanol or Aventine), will be converted into the right to receive, at the election of the holder, pursuant
to the terms of an election form to be distributed to all holders in advance of the special meeting and certain limitations in
order to maintain the tax free treatment of the merger (i.e., no more than 20% of shares of Aventine common stock will be exchanged
by the Aventine stockholders for shares of Pacific Ethanol non-voting common stock), (i) 1.25 shares of Pacific Ethanol common
stock, (ii) 1.25 shares of Pacific Ethanol non-voting common stock, or (iii) a combination of Pacific Ethanol common stock and
non-voting common stock resulting in such Aventine stockholder receiving a total number of shares of common stock and non-voting
common stock equal to 1.25 times the number of shares of Aventine common stock held by such stockholder.
The inclusion of the option to receive non-voting
common stock in exchange for Aventine common stock is an accommodation to the seven Candlewood affiliates (collectively, Aventine’s
majority stockholder) that are party to the stockholders agreements who have expressed a desire to receive equity consideration
that would not require compliance with the continuing disclosure obligations arising out of the reporting requirements under Sections
13(d) and 13(g) of the Exchange Act with respect to the Pacific Ethanol common stock.
Based on the exchange ratio contemplated
by the merger agreement and the number of shares of Aventine common stock issued and outstanding as of March 31, 2015,
a total of an aggregate of approximately 17,755,300 shares of Pacific Ethanol common stock and non-voting common stock will be
issued upon the closing of the merger, assuming no exercise or conversion of outstanding options and warrants. Those amounts will
be adjusted based upon the actual number of shares of Aventine common stock, options and warrants outstanding at the effective
time of the merger.
Adjustments
The merger consideration will be equitably adjusted
to provide holders of shares of Aventine common stock with the same economic effect contemplated by the merger agreement if, at
any time between the signing and the effective time of the merger, there is any change in the outstanding shares of capital stock
of Aventine or Pacific Ethanol by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or
similar readjustment within such period, or a stock dividend with a record date during such period.
Treasury Shares; Shares Owned by Pacific Ethanol
At the effective time of the merger, each share
of Aventine common stock (i) held as a treasury share by Aventine, (ii) owned of record by any subsidiary of Aventine, or (iii)
owned of record by Pacific Ethanol, Merger Sub or any of their respective wholly owned subsidiaries will, in each case, be cancelled,
and no merger consideration will be delivered in exchange for those shares.
Dividends and Distributions
No dividends or other distributions declared
or made after the effective time of the merger with respect to Pacific Ethanol stock with a record date after the effective time
of the merger shall be paid to any holder of any unsurrendered share of Aventine common stock who is entitled to receive Pacific
Ethanol stock upon such surrender, and no cash payment amounts in respect of fractional shares shall be paid to any such Aventine
stockholder, unless and until the Aventine stockholder surrenders such holder’s Aventine common stock. Subject to the effect
of escheat, tax or other applicable laws, following surrender of any such Aventine common stock certificate or book entry share,
such Aventine stockholder will be paid (i) promptly, (A) the amount of any cash payable with respect to a fractional share of Pacific
Ethanol to which such holder is entitled and (B) the amount of dividends or other distributions with a record date after the effective
time of the merger theretofore paid with respect to such whole shares of Pacific Ethanol and (ii) at the appropriate payment date,
the amount of dividends or other distributions, with a record date after the effective time of the merger but prior to the date
of surrender of such holder’s Aventine common stock and with a payment date occurring after the date of surrender, payable
with respect to such whole shares of Pacific Ethanol.
Appraisal Rights
Holders of Aventine common stock will be entitled
to appraisal rights under Delaware law and to obtain payment in cash for the judicially-determined fair value of their shares of
Aventine common stock in connection with the merger agreement if the merger is consummated and provided that the holders follow
the requirements of Delaware law. If any such holder fails to perfect or waives, withdraws or loses the right to appraisal under
Delaware law or if a court of competent jurisdiction determines that such holder is not entitled to the relief provided thereunder,
then (i) such shares of Aventine common stock that were subject to the appraisal (appraisal shares) will cease to constitute appraisal
shares and (ii) the right of such holder to be paid the fair value of such holder’s appraisal shares will be forfeited and
cease. If such forfeiture occurs following the effective time of the merger, each such appraisal share will thereafter be deemed
to have been converted into and to have become, as of the effective time of the merger, the right to receive the merger consideration
(without interest thereon). See “Appraisal Rights” beginning on page 252 for additional information and the full
text of Section 262 reproduced in its entirety as Annex F to this joint proxy statement/prospectus. To the extent the drag-along
is exercised pursuant to the Aventine Stockholders Agreement, the Aventine stockholders subject to the drag-along right have waived
their respective appraisal rights arising out of a drag-along transaction.
Treatment of Aventine Stock Options
As of March 31, 2015, there were
outstanding options to purchase up to 3,140 shares of Aventine common stock at an exercise price of $3.55 expiring on February
24, 2022. Each outstanding option to acquire Aventine common stock will be converted automatically at the effective time of the
merger into an option to acquire Pacific Ethanol common stock and/or non-voting common stock and will continue to be governed
by the terms of the relevant Aventine stock plan and related grant agreements under which it was granted, which will remain in
effect, except that:
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each converted stock option will be exercisable for a number of shares of Pacific Ethanol common stock and/or non-voting common stock equal to the product of the number of shares of Aventine common stock previously subject to the Aventine stock option and 1.25, rounded down to the next whole share; and |
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the per share exercise price for the Pacific Ethanol common stock and/or non-voting common stock issuable upon exercise of each converted stock option will be equal to (i) exercise price for each share of Aventine common stock previously subject to the stock option immediately prior to completion of the merger, divided by (ii) 1.25, rounded up to the nearest whole cent. |
The holder of an option to acquire Aventine
common stock may elect to receive shares of Pacific Ethanol common stock, non-voting common stock or a combination thereof upon
exercise of such option.
Treatment of Aventine Warrants
As of March 31, 2015, there were
outstanding warrants to purchase up to 787,855 shares of Aventine common stock, at an exercise price of $61.75, expiring on September
24, 2017. Each outstanding warrant to purchase Aventine common stock will be converted automatically at the effective time of
the merger into a warrant to purchase Pacific Ethanol common stock and/or non-voting common stock and will continue to be governed
by the terms of the relevant Aventine warrant agreement, except that:
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the number of shares of Pacific Ethanol common stock and/or non-voting common stock subject to each such warrant will be equal to the product of the number of shares of Aventine common stock previously subject to the Aventine warrant and 1.25, rounded down to the next whole share; and |
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the per share exercise price for the Pacific Ethanol common stock and/or non-voting common stock issuable upon exercise of such warrant will be equal to (i) the exercise price for each share of Aventine common stock previously subject to the warrant immediately prior to completion of the merger, divided by (ii) 1.25, rounded up to the nearest whole cent. |
The holder of a warrant to acquire Aventine
common stock may elect to receive shares of Pacific Ethanol common stock, non-voting common stock or a combination thereof upon
exercise of such warrant.
Fractional Shares
Fractional shares of Pacific Ethanol common
stock will not be issued pursuant to the merger. Instead, each holder of shares of Aventine common stock who would otherwise be
entitled to receive a fractional share of Pacific Ethanol common stock pursuant to the merger will be entitled to receive a cash
payment, in lieu thereof, in an amount that will represent such fraction rounding to the nearest ten thousandth of a share multiplied
by the market price of a share of Pacific Ethanol common stock rounded to the nearest whole cent, calculated based on the volume-weighted
average price per share of Pacific Ethanol common stock on The NASDAQ Capital Market for the five most recent trading days ending
before the effective time of the merger.
Conversion of Shares; Exchange of Certificates
After the effective time, each certificate that
previously represented shares of Aventine common stock will represent only the right to receive the applicable merger consideration
as described above under “—Merger Consideration,” including cash for any fractional shares of Pacific Ethanol
common stock or non-voting common stock. The conversion of Aventine common stock into the right to receive the merger consideration
will occur automatically at the effective time of the merger.
Prior to the completion of the merger, Pacific
Ethanol will appoint an exchange agent (sometimes referred to as the exchange agent) for the purpose of exchanging certificates
and book entry shares of Aventine common stock. Promptly after the effective time of the merger, the exchange agent will mail transmittal
materials to each holder of record of shares of Aventine common stock. This mailing will contain instructions for surrendering
common stock certificates and book entry shares to the exchange agent in exchange for the merger consideration. Exchange of any
book entry shares will be made in accordance with the exchange agent’s customary procedures with respect to securities presented
by book entry.
Each holder of a share of Aventine common stock
that has been converted into a right to receive the applicable merger consideration (including cash for fractional shares) will
receive the applicable merger consideration upon surrender to the exchange agent of the applicable Aventine common stock certificate
or book entry shares, together with a letter of transmittal covering such shares and such other documents as Pacific Ethanol or
the exchange agent may reasonably require. Holders of Aventine common stock should not send in their Aventine stock certificates
until they receive, complete and submit a signed letter of transmittal sent by the exchange agent with instructions for the surrender
of Aventine stock certificates.
After completion of the merger, there will be
no further transfers on the stock transfer books of Aventine except as required to settle trades executed prior to completion of
the merger.
Withholding Taxes
Pacific Ethanol and Merger Sub or the exchange
agent will be entitled to deduct and withhold from the cash in lieu of fractional shares payable to any Aventine stockholder the
amounts it is required to deduct and withhold under any federal, state, local or foreign tax law. If the exchange agent withholds
any amounts, they will be treated as having been paid to the stockholders from whom they were withheld.
Termination of Exchange Fund
Nine months after the completion of the merger,
Pacific Ethanol may require the exchange agent to deliver to Pacific Ethanol all cash and shares of Pacific Ethanol common stock
and non-voting common stock remaining in the exchange fund. Thereafter, Aventine stockholders must look only to Pacific Ethanol
for payment of the merger consideration on their shares of Aventine common stock.
Transfers of Ownership and Lost Stock Certificates
Pacific Ethanol will only issue the merger consideration,
cash in lieu of a fractional share and any dividends or distributions on Pacific Ethanol common stock that may be applicable in
a name other than the name in which a surrendered Aventine stock certificate is registered if the certificate is properly endorsed
or otherwise in proper form and any applicable stock transfer taxes have been paid. If a certificate for Aventine common stock
has been lost, stolen or destroyed, the exchange agent will issue the consideration properly payable under the merger agreement
upon receipt of appropriate evidence as to that theft, loss or destruction and customary indemnification.
No Liability
Aventine and Pacific Ethanol are not liable
to holders of shares of Aventine common stock for any amount delivered to a public official under applicable abandoned property,
escheat or similar laws.
Distributions with Respect to Unexchanged Shares
Holders of Aventine common stock are not entitled
to receive any dividends or other distributions on Pacific Ethanol common stock until the merger is completed. After the merger
is completed, holders of Aventine common stock certificates will be entitled to dividends and other distributions declared or made
after completion of the merger with respect to the number of whole shares of Pacific Ethanol common stock and non-voting common
stock to which they are entitled upon exchange of their Aventine stock certificates, but they will not be paid any dividends or
other distributions on Pacific Ethanol common stock or non-voting common stock until they surrender their Aventine stock certificates
to the exchange agent in accordance with the exchange agent instructions.
Appraisal Rights
Shares of Aventine common stock held by any
Aventine stockholder that properly demands payment for its shares in compliance with the appraisal rights under Section 262 will
not be converted into the right to receive the merger consideration. Aventine stockholders properly exercising appraisal rights
will be entitled to payment as described under “Appraisal Rights” beginning on page 252. However, if any Aventine
stockholder fails to perfect or otherwise waives, withdraws or loses the right to receive payment under Section 262, then that
stockholder will not be paid in accordance with Section 262 and the shares of common stock held by that stockholder will be exchangeable
solely for the right to receive the merger consideration. To the extent the drag-along is exercised pursuant to the Aventine Stockholders
Agreement, the Aventine stockholders subject to the drag-along right have waived their respective appraisal rights arising out
of a drag-along transaction.
Reasonable Best Efforts; Other Agreements
Reasonable Best Efforts
Pacific Ethanol and Aventine have agreed to
use their reasonable best efforts to take, or cause to be taken, all reasonable actions, and do, or cause to be done, all reasonable
things necessary and proper under applicable law to consummate and make effective the merger as promptly as practicable. Notwithstanding
the foregoing, neither Pacific Ethanol, nor Aventine nor any of their subsidiaries shall be required to (i) license, divest, dispose
of or hold separate any assets or businesses of Pacific Ethanol or Aventine or any of their respective subsidiaries or otherwise
take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, any of the assets
or businesses of Pacific Ethanol or Aventine or any of their respective subsidiaries, or that would otherwise have a material adverse
effect on the combined company or (ii) pay more than de minimis amounts in connection with seeking or obtaining such consents,
approvals or authorizations as are required to complete the merger under any antitrust laws (excluding any mandatory filing fees
and reasonable and customary costs and expenses associated with making applications for, and responding to requests for information
from governmental entities with respect to, such required consents, approvals or authorizations). In addition, without the prior
written consent of Pacific Ethanol, Aventine shall not agree or commit to, or permit any of its subsidiaries to agree or commit
to, any commitment to sell, divest or dispose of any businesses, assets, relationships or contractual rights of Aventine or any
of its subsidiaries or purporting to limit Aventine’s, any of its subsidiaries' or Pacific Ethanol's freedom to action with
respect to, or ability to retain, any businesses, assets, relationships or contractual rights.
Joint proxy statement/prospectus; Stockholders’ Meetings
Pacific Ethanol and Aventine have agreed
to cooperate in preparing and filing with the Securities and Exchange Commission this joint proxy statement/prospectus and the
registration statement on Form S-4 of which it forms a part. Each has agreed to use its reasonable best efforts to resolve any
Securities and Exchange Commission comments relating to this joint proxy statement/prospectus and to have the registration statement
of which it forms a part declared effective, and will cause this joint proxy statement/prospectus to be mailed to its respective
stockholders as early as practicable after it is declared effective. Each has also agreed to hold a stockholders’ meeting
as promptly as practicable after the registration statement is declared effective.
Other Agreements
The merger agreement contains certain other
agreements, including agreements relating to access to information and cooperation between Pacific Ethanol and Aventine during
the pre-closing period, public announcements and certain tax matters.
Representations and Warranties
The merger agreement contains customary representations
and warranties of Aventine, which are subject to materiality and knowledge qualifications in many respects and which expire at
the effective time of the merger. These representations and warranties relate to, among other things:
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organization and qualification; |
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corporate power and authority, non-contravention; |
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reports and financial statements; |
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absence of undisclosed liabilities; |
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absence of certain changes or events; |
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compliance with applicable laws and permits; |
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material contracts and defaults; |
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employee benefit plans and ERISA compliance; |
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labor and other employment matters; |
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matters related to assets; |
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matters related to business practices, relationships, products and services; |
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related party transactions; |
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matters related to certain business practices; |
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opinion of financial advisor; |
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matters related to Aventine’s diamond switch; |
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information supplied; and |
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no additional representations. |
The merger agreement also contains customary
representations and warranties of Pacific Ethanol, which are subject to materiality and knowledge qualifications in many respects
and which expire at the effective time of the merger. These representations and warranties relate to, among other things:
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organization and qualification; |
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authority; non-contravention; approvals; |
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reports and financial statements; |
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absence of undisclosed liabilities; |
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absence of certain changes or events; |
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compliance with applicable laws and permits; |
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business relationships; |
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transactions with affiliates; |
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certain business practices; |
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opinion of financial advisor; |
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intellectual property rights; |
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off balance sheet arrangements; |
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no additional agreements; |
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information supplied; and |
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no additional representations. |
Conduct of Business Before Completion of the Merger
Aventine and Pacific Ethanol have agreed to
restrictions on their activities until the completion of the merger. In general, each of the parties has agreed to conduct its
business in the ordinary course of business consistent with past practice in all material respects and in compliance in all material
respects with all applicable laws and use its commercially reasonable efforts to preserve its current business organization and
goodwill. In addition, Aventine has agreed that it will not take any action that would adversely affect or delay in any material
respect the ability of Pacific Ethanol or Aventine to obtain any necessary approvals or any regulatory agency or entity required
for the transactions contemplated by the merger agreement and that it will keep available the services of its present officers,
employees and independent contractors and preserve its goodwill and business relationships with its customers, suppliers and others
having business relationships with Aventine.
Aventine has also agreed that, except as expressly
permitted by the merger agreement (including the Company Disclosure Schedule thereto) or with Pacific Ethanol’s prior written
consent, it will not (and will not permit any of its subsidiaries to):
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amend or propose to amend the Certificate of Incorporation or bylaws; |
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split, combine or reclassify its outstanding capital stock or issue or authorize the issuance of any other security; |
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declare, set aside, make or pay any dividend or other distribution; |
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create any subsidiary or alter its or any of its subsidiaries’ corporate structure or ownership; |
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enter into any agreement with respect to the voting of its capital stock or other securities held by it or any of its subsidiaries; |
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issue, sell, pledge, dispose of, grant, encumber, or agree to issue, sell, pledge, dispose of, grant or encumber any shares of any class of capital stock, or any options, warrants or rights of any kind to acquire any shares of, its capital stock of any class or any debt or equity securities convertible into or exchangeable for such capital stock, except that it may issue shares upon exercise of stock options and warrants outstanding on the date of the agreement in accordance with their terms; |
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issue any debt securities, incur, guarantee or otherwise become contingently liable with respect to any indebtedness for borrowed money, or enter into any arrangement having the economic effect of any of the foregoing; |
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make any loans, advances or capital contributions to, or investments in, any person; |
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redeem, purchase, acquire or offer to purchase or acquire any shares of its capital stock, or any options, warrants or rights to acquire any of its capital stock or any security convertible into or exchangeable for its capital stock; |
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acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, limited liability company, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets other than in the ordinary course of business consistent with past practice; |
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authorize, make or agree to make any new capital expenditure or expenditures, or enter into any contract or arrangement that reasonably may result in payments by or liabilities in excess of $1,000,000 individually or $5,000,000 in the aggregate in any 12 month period that is not set forth in Aventine’s capital budget; |
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sell, pledge, assign, dispose of, transfer, lease, securitize, or encumber any businesses, properties or assets; |
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except as required by any benefit plan or contract existing on the date of the merger agreement, increase the compensation payable or to become payable (including bonus grants) or increase or accelerate the vesting of the benefits provided to its directors, officers or employees or other service providers, except for increases in the ordinary course of business and consistent with past practice in salaries or wages of its employees who are not directors or executive officers; |
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except as required by any benefit plan or contract existing on the date of the merger agreement, grant any severance or termination pay or benefits to, or enter into any employment, severance, retention, change in control, consulting or termination agreement with, any director, officer or other employee or other service provider; |
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except as required by any benefit plan or contract existing on the date of the merger agreement, establish, adopt, enter into or amend any collective bargaining, bonus, profit-sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee or other service providers; |
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except as required by any benefit plan or contract existing on the date of the merger agreement, pay or make, or agree to pay or make, any accrual or arrangement for payment of any pension, retirement allowance, or any other employee benefit; |
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knowingly violate or knowingly fail to perform any obligation or duty imposed upon it by any applicable federal, state, local or foreign law, rule, regulation, guideline or ordinance, or under any order, settlement agreement or judgment; |
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announce, implement or effect any reduction in labor force, lay-off, early retirement program, severance program or other program or effort concerning the termination of employment of employees; |
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make any change to accounting policies or procedures, other than actions required to be taken by GAAP; |
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prepare or file any tax return inconsistent with past practice or, on any tax return, take any position, make any election, or adopt any method inconsistent with positions taken, elections made or methods used in preparing or filing similar tax returns in prior periods; |
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except for immaterial elections or changes, make or change any express or deemed election related to taxes, change an annual accounting period, adopt or change any method of accounting, file an amended tax return, surrender any right to claim a refund of taxes, consent to any extension or waiver of the limitation period applicable to any tax proceedings; |
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except as would not reasonably be expected to be materially adverse to Aventine and its subsidiaries as a whole, commence any litigation or proceedings with respect to taxes, settle or compromise any litigation or proceedings with respect to taxes; |
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enter into a new line of business which is material to Aventine and its subsidiaries taken as a whole or open or close any facility or office of Aventine or its subsidiaries; |
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pay, discharge or satisfy any claims, liabilities or obligations (whether or not absolute, accrued, asserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities adequately reflected or reserved against in, its most recent financial statements (or the notes thereto); |
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amend, modify or consent to the termination of any material contract, or amend, waive, modify or consent to the termination of its rights thereunder; |
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enter into, amend, modify, permit to lapse any rights under, or terminate (i) any agreements pursuant to which any other party is granted exclusive marketing or other exclusive rights of any type or scope with respect to any of its products or technology or which restricts Aventine or any of its subsidiaries or, upon completion of the merger or any other transaction contemplated by the merger agreement, Pacific Ethanol, from engaging or competing in any line of business or in any location, (ii) any agreement or contract with any customer, supplier, sales representative, agent or distributor, other than in the ordinary course of business and consistent with past practice, (iii) any arrangement with affiliates or executive officers or directors of Aventine, or (iv) any material rights or claims with respect to any confidentiality or standstill agreement to which Aventine is a party and which relates to a business combination or other similar extraordinary transaction, in each case, that would reasonably be expected to, individually or in the aggregate, materially affect Aventine’s business or operations; |
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terminate, cancel, amend or modify any insurance coverage policy which is not promptly replaced by a comparable amount of insurance coverage; |
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commence, waive, release, assign, settle or compromise any material claims, or any material litigation, proceeding or arbitration including, without limitation, all Aurora Coop Litigation; |
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except as Aventine’s Board determines in good faith is necessary to comply with its fiduciary duties, take any action to (i) render inapplicable, or to exempt any third person from, the provisions of Section 203 of the DGCL, or any other state takeover or similar law or state law that purports to limit or restrict business combinations or the ability to acquire or vote shares or (ii) adopt or implement any stockholder rights agreement or plan; or |
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authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. |
Pacific Ethanol has agreed that, except as expressly
permitted by the merger agreement or with Aventine’s prior written consent, it will not (and will not permit any of its subsidiaries
to):
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amend or propose to amend its Certificate of Incorporation or bylaws, except for such amendments (i) required by law or the rules or regulations of the Securities and Exchange Commission or The NASDAQ Capital Market, (ii) as contemplated by the proposed amendment to its Certificate of Incorporation authorizing a class of Pacific Ethanol non-voting common stock, or (iii) those changes that would not reasonably be expected to have a material adverse effect on Pacific Ethanol; |
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sell, lease, pledge or otherwise dispose of or encumber any properties or assets, other than sales of inventory in the ordinary course of business and other transactions that would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on Pacific Ethanol; |
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authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing; |
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split, combine or reclassify their outstanding capital stock or issue or authorize the issuance of any other security in respect or, in lieu of, or in substitution for, shares of its capital stock; |
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declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, other than the payment of any dividend on shares of Pacific Ethanol Series B Preferred Stock; |
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create any subsidiary or alter (through merger, liquidation, reorganization, restructuring or in any other fashion) the corporate structure or ownership of Pacific Ethanol or any of its subsidiaries; |
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enter into any agreement with respect to the voting of its capital stock or other securities held by Pacific Ethanol or any of its subsidiaries; |
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issue, sell, pledge, dispose of, grant, encumber, or agree to issue, sell, pledge, dispose of, grant or encumber any shares of any class of capital stock of Pacific Ethanol or any of its subsidiaries, or any options, warrants or rights of any kind to acquire any shares of, their capital stock of any class or any debt or equity securities convertible into or exchangeable for such capital stock, except that Pacific Ethanol may issue common stock upon exercise or conversion, as applicable, of options, warrants or Pacific Ethanol Series B Preferred Stock issued and outstanding on the date of the merger agreement in accordance with their present terms; |
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issue any debt securities, incur, guarantee or otherwise become contingently liable with respect to any indebtedness for borrowed money or enter into any arrangement having the economic effect of any of the foregoing; |
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make any loans, advances or capital contributions to, or investments in, any person; |
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redeem, purchase, acquire or offer to purchase or acquire any shares of its capital stock, or the capital stock of its subsidiaries, or any options, warrants or rights to acquire any of its capital stock or any security convertible into or exchangeable for its capital stock, or the capital stock of its subsidiaries; or |
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sell, pledge, assign, dispose of, transfer, lease, securitize, or encumber any businesses, properties or assets of Pacific Ethanol or its subsidiaries. |
Employee Matters
Pacific Ethanol has announced to its employees
and to Aventine’s employees that following completion of the merger, Aventine’s employees’ medical, dental and
vision benefits will remain in effect until mid-2015, the end of the current insurance contracts and Pacific Ethanol’s employees’
medical, dental and vision benefits will remain in effect until December 31, 2015, the end of the current insurance contracts.
The employee-paid premiums will also remain the same for the remainder of the current contracts. After the effective time of the
merger, Pacific Ethanol will review both insurance plans to take advantage of the buying power of the combined company and it is
likely that all employees will be covered by a single health insurance plan at some point in the future. Pacific Ethanol has agreed
to credit each Aventine employee with all service years for purposes of 401(k) and pension plan vesting, accrual rate for vacation
days, service recognition awards and unexpired equity awards. Notwithstanding the foregoing, Pacific Ethanol may amend, modify
or terminate any of the existing employee benefit plans of Aventine or related contracts in accordance with their terms and applicable
law.
Non-Solicitation; Change in Recommendation
In the merger agreement, Aventine has agreed
that its board will recommend that Aventine’s stockholders adopt the merger agreement and approve the merger and that it
will not directly or indirectly:
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solicit, initiate or knowingly encourage the submission, making or announcement of any “takeover proposal” (as described below); |
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participate in any discussions or negotiations regarding, or provide any person any information with respect to, or otherwise cooperate in any way with respect to, or take any action to facilitate the making of, any inquiry or proposal that is or would reasonably be expected to lead to a takeover proposal; or |
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make or authorize any statement, recommendation or solicitation in respect of any takeover proposal. |
In addition, Aventine has agreed to immediately
terminate any discussions with respect to any takeover proposal or any discussions that would reasonably be expected to lead to
a takeover proposal conducted prior to the entry into the merger agreement and has agreed to enforce (and not waive any provision
of or releases any person from any obligations under) any confidentiality, standstill or similar agreement to which Aventine or
any subsidiary of Aventine is a party unless the board of directors of Aventine concludes in good faith and a failure to take any
action described in this sentence would be inconsistent with the Aventine Board’s fiduciary duties to the stockholders of
Aventine under applicable law.
However, if Aventine receives a bona fide takeover
proposal prior to the time that the Aventine stockholder vote approving the merger has been obtained, that does not result from
the breach or deemed breach of the terms of the merger agreement or the confidentiality agreement with Pacific Ethanol and the
Aventine Board determines in good faith, (i) after consultation with outside counsel and an independent financial advisor, that
the takeover proposal is, or is reasonably likely to result in, a “superior proposal” (as described below), and (ii)
after consultation with outside counsel, that failure to take the following actions with respect to the takeover proposal would
be inconsistent with its fiduciary duties to its stockholders under applicable law, then Aventine may (after providing written
notice to Pacific Ethanol):
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furnish information about Aventine to the person making the takeover proposal, subject to a confidentiality agreement no less restrictive than the confidentiality agreement entered into with Pacific Ethanol, and providing that all information not previously provided to Pacific Ethanol is provided to it; and |
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participate in discussion or negotiations with the person making the takeover proposal. |
As used in the merger agreement, “takeover
proposal” means any inquiry, proposal or offer from any person relating to, or that is reasonably likely to lead to, directly
or indirectly: (i) a merger, consolidation, tender offer, exchange offer, share exchange, business combination or other similar
transaction involving Aventine or its subsidiaries that constitutes 25% or more of the net revenues, net income or assets of Aventine;
(ii) the acquisition by any person in any manner of a number of shares of any class of equity securities of Aventine or any subsidiary
of Aventine equal to or greater than 25% of the number of shares outstanding prior to such acquisition; (iii) the acquisition by
any person in any manner (including by license or lease), directly or indirectly, of assets that constitute 25% or more of the
net revenues, net income or assets of Aventine (in each case, on a consolidated basis), in each case other than the transactions
contemplated by the merger.
As used in the merger agreement, “superior
proposal” means any written offer made by a third party not in violation of the terms of the merger agreement that if consummated
would result in such third party acquiring, directly or indirectly, a majority of the outstanding capital stock of Aventine or
a majority of its assets (including the assets of Aventine’s subsidiaries), (i) for consideration that the Aventine Board
determines in its good faith judgment (following consultation with an independent financial advisor) to be superior from a financial
point of view to the Aventine stockholders than the transactions contemplated by the merger agreement, based on the advice of the
independent financial advisor, taking into account all the terms and conditions of such proposal, the merger agreement and any
proposal by Pacific Ethanol to amend the terms of the merger agreement, and (ii) that, in the good faith judgment of the board
of directors, is otherwise reasonably likely to be consummated, taking into account all legal, financial, regulatory and other
aspects of the proposal and the person making the proposal.
The Aventine Board has unanimously adopted a
resolution recommending that the Aventine stockholders adopt the merger agreement and approve the merger. Under the merger agreement,
except as provided below, the Aventine Board may not withdraw, modify or qualify, or propose to withdraw, modify or qualify its
recommendation, or approve or recommend, or propose to approve or recommend any takeover proposal. Any of these actions is referred
to as a “change in recommendation”. In addition, the Aventine Board may not approve or cause or permit Aventine to
enter into any letter of intent or agreement relating to any takeover proposal.
The Aventine Board may make a change of recommendation
if prior to the time that the Aventine stockholder vote approving the merger has been obtained, the board of directors receives
an unsolicited takeover proposal that did not result from a breach or deemed breach of the terms of the merger agreement or the
confidentiality agreement with Pacific Ethanol that the Aventine Board determines, in good faith after consultation with outside
counsel, constitutes a superior proposal that is not withdrawn, and the board determines that the failure to do so would be inconsistent
with its fiduciary duties to the Aventine stockholders under applicable law. However, the board of directors may make a change
of recommendation or terminate the merger agreement under these circumstances only if (i) it has complied with the non-solicitation
and change of recommendation provisions of the merger agreement, (ii) it has provided written notice to Pacific Ethanol in accordance
with the terms of the merger agreement, (iii) either Pacific Ethanol does not modify the terms of the merger agreement within five
business days after receipt of the written notice from Aventine or the Aventine Board determines in good faith after consultation
with its financial advisor that any proposed modifications by Pacific Ethanol do not cause the takeover proposal to cease being
a superior proposal, and (iv) concurrently with and as a condition of such termination, Aventine accepts the superior proposal
and enters into an acquisition agreement with respect to the superior proposal, and pays Pacific Ethanol a termination fee (as
described further in “—Termination Fee and Expenses” below).
The merger agreement also provides that Aventine
must promptly, but in any event within 48 hours, notify Pacific Ethanol of any takeover proposal received by it and provide Pacific
Ethanol with copies of all written material provided to it with respect to any takeover proposal. Aventine must also keep Pacific
Ethanol fully informed of the status and terms of any such takeover proposal and provide Pacific Ethanol with at least 48 hours
prior written notice (or such lesser prior notice as is provided to the members of the Aventine Board) of any Aventine Board meeting
at which the board of directors is expected to consider any takeover proposal or related inquiry, or consider providing information
to any person in connection with a takeover proposal.
Conditions to Completion of the Merger
Each party’s obligation to effect the
merger is subject to the satisfaction or waiver of various conditions, which include the following:
|
· |
the adoption of the merger agreement by Aventine stockholders; |
|
· |
the approval of (i) the issuance of shares of Pacific Ethanol common stock and non-voting common stock by Pacific Ethanol stockholders, (ii) the amendment to Pacific Ethanol’s Certificate of Incorporation to authorize a class of non-voting common stock and (iii) an agreement not to treat the merger as a liquidation, dissolution or winding up within the meaning of the Pacific Ethanol Series B Certificate of Designations; |
|
· |
the approval of the listing of the Pacific Ethanol common stock to be issued in the merger on The NASDAQ Capital Market; |
|
· |
the effectiveness of the registration statement of which this joint proxy statement/prospectus is a part and the absence of any stop order or proceedings initiated for that purpose; |
|
· |
the absence of any order, judgment, injunction or other decree issued by any court of competent jurisdiction making the merger illegal or otherwise preventing the consummation of the merger; |
|
· |
the receipt of any governmental
authorizations, consents, orders and approvals as may be required in connection with the merger, subject to certain
exceptions (on February 18, 2015, the FTC granted early termination of the waiting period under the HSR Act); or |
|
· |
the absence of any suit, action or proceeding by any person or governmental entity seeking to prohibit the consummation of the merger or any transaction contemplated by the merger agreement or that would otherwise have a material adverse effect on Aventine or Pacific Ethanol, provided that this condition is deemed satisfied if a court dismisses or denies a request for an injunction. |
Each of Pacific Ethanol’s and Aventine’s
obligations to complete the merger is also separately subject to the satisfaction or waiver of the following conditions:
|
· |
the truth and correctness of the other party’s representations and warranties, subject to certain materiality standards provided in the merger agreement; |
|
· |
the performance by the other party of its obligations under the merger agreement in all material respects; and |
|
· |
there shall have been no material adverse effect on the other party. |
In addition, Pacific Ethanol’s obligation
to complete the merger is also separately subject to a number of conditions, including the following:
|
· |
Aventine shall have obtained all required consents from any person or governmental entity whose consent or approval is required in connection with the merger or under certain agreed upon agreements; |
|
· |
Pacific Ethanol shall have received a tax opinion from its counsel, Troutman Sanders LLP that the transaction will be treated as a reorganization described in Section 368(a) of the Code; |
|
· |
the entry into certain employment agreements
by certain Aventine employees identified by Pacific Ethanol no later than May 1, 2015. |
|
· |
Aventine shall not have received demands for the appraisal of shares of Aventine common stock from holders of Aventine common stock representing more than 1% of the issued and outstanding shares of Aventine common stock; |
|
· |
Aventine shall have delivered resignation letters of its officers, directors and managers to Pacific Ethanol; |
|
· |
there shall not have occurred an event, nor shall Pacific Ethanol have become aware of information not known by Pacific Ethanol as of December 28, 2014 which, upon the occurrence of such event or upon Pacific Ethanol learning of such information, would be reasonably viewed as either resulting in, or substantially increasing the likelihood of, a material adverse result in any Aurora Coop Litigation; |
|
· |
the registration rights agreements between Aventine and certain of its stockholders shall have been terminated by mutual agreement of the parties; |
Pacific Ethanol shall have received
current and valid Phase I environmental site assessments for Aventine’s Pekin, Illinois facility, and such assessments shall
not reveal any condition(s) (except for certain enumerated conditions), that would reasonably be expected to give rise to a cost
of remediation exceeding $3,300,000 in the aggregate for Aventine’s Pekin, Illinois facility; provided, that this condition
will be deemed satisfied if Pacific Ethanol does not provide notice to Aventine within 20 days after receipt of all such current
and valid Phase I environmental site assessments commissioned by Pacific Ethanol as of December 30, 2014, that the cost of remediation
of Aventine’s Pekin, Illinois facility would be in the reasonable determination of Pacific Ethanol be expected to exceed
$3,300,000 in the aggregate;
Pacific Ethanol shall not have become
aware of information that would reasonably be understood to indicate that the BNSF does not intend to establish a rail track connecting
the rail facilities of Aventine’s subsidiary to the inner rail loop belonging to Aventine’s Aurora West Facility along
with the associated “diamond switch” crossing the Exterior Track Loop, which lie entirely on land owned by one or
more subsidiaries of Aventine such that Aventine’s Aurora West Facility will be able to ship ethanol by rail in unit trains
and single cars; and
Aventine shall have obtained agreed upon releases
relating to payment obligations pursuant to (i) an Aventine restricted stock unit from each person who has received payments
in respect of an Aventine restricted stock unit or (ii) a bonus or severance payment from each employee of Aventine who has
received or will receive a bonus or severance payment in connection with the merger.
In addition, Aventine’s obligation to
complete the merger is also separately subject to a number of conditions, including the following:
|
· |
Aventine shall have shall have received a tax opinion from its counsel, Akin Gump Strauss Hauer & Feld LLP, to the effect that the transaction will be treated as a reorganization within the meaning of Section 368(a) of the Code; and |
|
· |
Aventine shall have received evidence satisfactory to it of the appointment of two individuals nominated by the holders of a majority of shares of Aventine common stock to the Pacific Ethanol Board. |
The merger agreement provides that the
conditions to the closing of the merger may be waived, in whole or in part, by Pacific Ethanol or Aventine, to the extent legally
allowed. Neither Pacific Ethanol nor Aventine currently expects to waive any immaterial or material condition to the completion
of the merger. If either Pacific Ethanol or Aventine determines to waive any material condition to the merger and such waiver
renders the disclosure in this joint proxy statement/prospectus materially misleading, proxies will be resolicited from the Pacific
Ethanol and/or Aventine stockholders, as applicable.
The merger agreement defines a material adverse
effect on each party as any fact, event, circumstance or effect that, individually or together with all other such facts, events,
circumstances and effects, is, or could reasonably be expected to be, material and adverse to the business, condition (financial
or otherwise), capitalization, assets, liabilities, or results of operations of that party, taken as a whole, or prevents or materially
delays, or would reasonably be expected to prevent or materially delay, the ability of the party to perform its obligations under
the merger agreement or to consummate the transactions contemplated by the merger agreement in accordance, other than: (i) changes
after the date of the merger agreement in laws, rules or regulations of general applicability or interpretations thereof by a governmental
entity, unless such changes disproportionately adversely affects the party as compared with other companies operating in its industries,
(ii) general changes after the date hereof in economic conditions, securities markets in general in the United States, or political
environment in general or general changes in the industry in which the party operates generally, including adverse effects attributable
to conditions affecting ethanol and/or oil production, including changes to prevailing market prices (including futures prices)
of ethanol or corn, unless such changes disproportionately adversely affect the party as compared with other companies operating
in its industries, (iii) a change or proposed change in GAAP or the interpretation thereof; (iv) the outbreak or escalation
of hostilities involving the United States, the declaration by the United States of a national emergency or war, any other acts
of war (whether declared or undeclared), sabotage, military action or any escalation or worsening thereof, earthquakes, hurricanes
or similar catastrophes, or the occurrence of any other calamity or crisis, including an act of terrorism; (v) the announcement,
pendency or consummation of the transactions contemplated by the merger agreement, or the failure to take actions as a result of
any terms or conditions set forth in the merger agreement, including any loss of or change in the relationship with employees,
customers, partners, suppliers or other persons having business relationships with such person; (vi) any action taken pursuant
to the merger agreement or at the express request of the other party; (vii) failure to meet internal projections or forecasts or
(viii) a change in the market price or trading volume of the party’s common stock, in and of itself.
Termination
Generally, the merger agreement may be terminated
and the merger may be abandoned at any time prior to the completion of the merger (including after stockholder approval) by mutual
written consent of Pacific Ethanol and Aventine. The agreement may also be terminated by either Pacific Ethanol or Aventine if:
|
· |
the merger is not consummated on or before May 31, 2015, except that such right is not available to any party whose failure to comply with the merger agreement has been the cause of, or resulted in, such failure and provided that this date (which we sometimes refer to as the outside date) will be automatically extended to June 30, 2015 if the financial statements of Pacific Ethanol that are required for this registration statement are for the year ending December 31, 2014; |
|
· |
a governmental entity issues a final and nonappealable order, decree or ruling or takes any other final and nonappealable action enjoining or otherwise prohibiting the merger; |
|
· |
the required Pacific Ethanol or Aventine stockholder vote has not been obtained at the applicable stockholder meeting, or any adjournment or postponement thereof; or |
|
· |
the other party breaches any of its agreements or representations in the merger agreement in such a way as would cause certain of the conditions to closing not to be satisfied, and such breach is either incurable or is not cured by the earlier of (i) 30 days following receipt of written notice of such breach or failure to perform or (ii) the outside date. |
In addition, the merger agreement may be terminated
by Pacific Ethanol, and Aventine will be required to pay the termination fee (as described below) to Pacific Ethanol, if prior
to the time that the Aventine stockholder vote approving the merger has been obtained:
|
· |
the Aventine Board effects a change of recommendation or resolves to do so; |
|
· |
the Aventine Board approves or recommends a takeover proposal or resolves to do so; |
|
· |
a tender offer or exchange offer for Aventine’s shares is commenced (other than by Pacific Ethanol) and the Aventine Board recommends that the Aventine stockholders tender their shares in the offer or fails to recommend that its stockholders reject such tender or exchange; or |
|
· |
Aventine materially breaches certain terms of the merger agreement related to non-solicitation, changes in recommendations, its board of directors’ recommendation in favor of the merger and holding the stockholders meeting to approve the merger. |
The merger agreement may be terminated by Aventine
prior to the time the Aventine stockholder approval of the merger is obtained if Aventine terminates the agreement in connection
with the entry into an agreement for a superior proposal in accordance with the terms and conditions of the merger agreement with
Pacific Ethanol, as long as Aventine has complied with all related notice and other provisions and pays Pacific Ethanol the termination
fee (as described below).
In addition, the merger agreement may be terminated
by Pacific Ethanol and Pacific Ethanol will be required to pay the termination fee (as described below) to Aventine in connection
with such termination, if there shall occur an event, or Pacific Ethanol becomes aware of information not known by Pacific Ethanol
as of December 28, 2014 which, upon the occurrence of such event or upon Pacific Ethanol learning of such information, would be
reasonably viewed as either resulting in, or substantially increasing the likelihood of, a material adverse result in the Aurora
Coop Litigation.
Termination Fee and Expenses
Aventine is required to pay a termination fee
of $5,982,000 (which we sometimes refer to as the termination fee) to Pacific Ethanol in the event the merger agreement is terminated
by Aventine in connection with the entry into an agreement for a superior proposal, as described above. In addition, Aventine is
required to pay Pacific Ethanol the termination fee if Pacific Ethanol terminates the merger agreement prior to the time that the
Aventine stockholder vote approving the merger has been obtained under the following conditions:
|
· |
the Aventine Board effects a change of recommendation or resolves to do so; |
|
· |
the Aventine Board approves or recommends a takeover proposal or resolved to do so; |
|
· |
a tender offer or exchange offer for Aventine’s shares is commenced (other than by Pacific Ethanol) and the Aventine Board recommends that the Aventine stockholders tender their shares in the offer or fails to recommend that its stockholders reject such tender or exchange; or |
|
· |
Aventine materially violates certain terms of the merger agreement related to non-solicitation, changes in recommendations, its board of directors’ recommendation in favor of the merger and holding the stockholder meeting. |
Pacific Ethanol is required to pay the termination
fee to Aventine in the event the merger agreement is terminated by Pacific Ethanol if there shall occur an event, or Pacific Ethanol
learns of information that would be reasonably viewed as either resulting in, or substantially increasing the likelihood of, a
material adverse result in any of the Aurora Coop Litigation matters.
Pacific Ethanol is required to reimburse Aventine
for all fees and expenses incurred by Aventine in connection with the merger, up to $1,994,000, in the event the merger agreement
is terminated by Aventine or Pacific Ethanol because the required Pacific Ethanol stockholder vote has not been obtained at the
applicable stockholder meeting, or any adjournment or postponement thereof.
Except as set forth above, whether or not the
merger is completed, all costs and expenses incurred in connection with the merger agreement and the transactions contemplated
by the merger agreement will be paid by the party incurring those costs or expenses.
Effect of Termination
If the merger agreement is terminated as described
in “—Termination” above, the agreement will become void and there will be no liability or obligation of any party,
except that (i) both parties will remain liable for any willful breach of the merger agreement or fraud occurring prior to termination,
and (ii) designated provisions of the merger agreement, including certain provisions relating to confidential treatment of information
and fees and expenses (including the termination fees described above) will survive termination.
Amendment, Waiver and Extension of the Merger Agreement
Subject to applicable law, the merger agreement
may be amended by the parties in writing at any time. However, after approval by Pacific Ethanol’s stockholders of the transactions
contemplated by the merger agreement, if any such amendment or waiver would require the approval of Pacific Ethanol’s stockholders
under applicable law or in accordance with the rules and regulations of NASDAQ, the effectiveness of such amendment or waiver will
require further approval by Pacific Ethanol’s stockholders.
At any time prior to the completion of the merger,
each of the parties may extend the time for performance of any of the obligations or other acts of the other party to the merger
agreement, waive any inaccuracies in the representations and warranties of the other party or waive compliance by the other party
with any agreement or condition in the merger agreement.
Stockholders Agreements
In order to induce Pacific Ethanol to enter
into the merger agreement, on December 30, 2014 eight of Aventine’s stockholders (seven of whom are affiliated with Candlewood)
entered into stockholders agreements with Pacific Ethanol pursuant to which, among other things, each of these stockholders agreed,
solely in its capacity as a stockholder, to vote their pro-rata share of 51% of the issued and outstanding shares of common stock
of Aventine (i) in favor of the merger and the adoption of the merger agreement and (ii) with respect to any other proposals submitted
by Aventine stockholders that, directly or indirectly, would reasonably be expected to prevent or materially delay the consummation
of the merger or the transactions contemplated by the merger agreement vote, in such manner as Pacific Ethanol may direct. Such
Aventine stockholders agreed not to withdraw any such votes and not to take any action that is inconsistent with such stockholder’s
obligation to vote in favor of the merger agreement and the merger or that may have the effect of delaying or interfering with
the merger.
These eight Aventine stockholders may vote
their shares of Aventine capital stock and securities on all other matters not referred to in such proxy. Under these stockholders
agreements, subject to certain exceptions, the eight Aventine stockholders have also agreed not to sell or transfer Aventine capital
stock and securities held by them until the completion of the merger. These eight Aventine stockholders also agreed under the
stockholders agreements to exercise any drag-along rights under the Aventine Stockholders Agreement. Under the Aventine Stockholders
Agreement, upon the exercise of the drag-along right by a majority stockholder(s), the Aventine stockholders party to such agreement
who are being “dragged” along, have agreed (pursuant to the terms of the Aventine Stockholders Agreement) to waive
their respective appraisal rights in connection with the merger. The “dragged” Aventine stockholders have further
agreed (pursuant to the terms of the Aventine Stockholders Agreement) to cast all votes to which such stockholders are entitled,
in favor of the merger. Copies of the stockholders agreements are attached to this joint proxy statement/prospectus as Annex
C-1 and Annex C-2.
In addition, pursuant to the stockholders
agreements and subject to certain exceptions, Aventine stockholders that entered into the stockholders agreements have further
agreed not to directly or indirectly offer, sell or contract or grant any option to sell, or otherwise dispose of, pledge or transfer
any shares of Pacific Ethanol common stock and non-voting common stock acquired by them pursuant to the terms of the merger agreement
without the prior written consent of Pacific Ethanol for a restricted period of time. After the 30th day following
the consummation of the merger, such Aventine stockholders will be permitted to sell 25% of the shares of Pacific Ethanol common
stock and non-voting common stock acquired by them pursuant to the terms of the merger agreement without prior written consent
of Pacific Ethanol. After the 60th day following the consummation of the merger, such Aventine stockholders will be
permitted to sell 50% of the shares of Pacific Ethanol common stock and non-voting common stock acquired by them pursuant to the
terms of the merger agreement without prior written consent of Pacific Ethanol. After the 90th day following the consummation
of the merger, such Aventine stockholders will be permitted to sell 75% of the shares of Pacific Ethanol common stock and non-voting
common stock acquired by them pursuant to the terms of the merger agreement without prior written consent of Pacific Ethanol.
After the 120th day following the consummation of the merger, such Aventine stockholders will be permitted to sell
100% of the shares of Pacific Ethanol common stock and non-voting common stock acquired by them pursuant to the terms of the merger
agreement without prior written consent of Pacific Ethanol.
The Aventine stockholders that entered into
the stockholders agreements have agreed not to solicit any takeover proposal of Aventine, enter into any agreement with or approve
or recommend that Aventine enter into any takeover proposal or participate in any discussions or provide information regarding
Aventine with respect to a takeover proposal of Aventine. Such stockholders of Aventine agreed not to issue any press release or
make public statements regarding the merger. Such stockholders of Aventine also agreed to exercise any drag-along rights in favor
of the merger, pursuant to the Aventine Stockholders Agreement they are currently a party to.
Aventine stockholders that entered into the
stockholders agreements have agreed to waive any and all dissenter’s rights or similar rights they may have in connection
with the merger.
Nothing in the stockholders agreements limits
or restricts any of the stockholders who are party to the agreements or any of their affiliates from acting in its capacity as
an officer, director or employee of Aventine.
The stockholders agreements and the obligations
of the parties thereunder shall terminate immediately, without any further action being required, upon the earlier of the closing
date of the merger, any amendment to the merger agreement that reduces the consideration of such Aventine stockholders, the termination
of the merger agreement according to its terms or by mutual consent of all the parties to the stockholders agreement. However,
certain sections of the stockholders agreements will survive the termination including, if the merger is completed, the lock-up
restrictions on the shares of Pacific Ethanol common stock described above.
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed
balance sheet as of December 31, 2014 is presented as if the proposed merger had occurred as of December 31, 2014. The unaudited
pro forma combined condensed statement of operations for the year ended December 31, 2014 is presented as if the merger had occurred
on January 1, 2014. The pro forma consolidated financial statements of Pacific Ethanol and Aventine have been adjusted to
reflect certain reclassifications in order to conform Aventine’s historical financial statement presentation to Pacific
Ethanol’s financial statement presentation for the combined company.
The unaudited pro forma combined condensed
financial statements give effect to the merger under the acquisition method of accounting in accordance with Financial Accounting
Standards Board Accounting Standard Topic 805, Business Combinations, which we refer to as ASC 805, with Pacific
Ethanol treated as the acquirer. As of the date of this filing, Pacific Ethanol has not completed the detailed valuation work
necessary to arrive at the required estimates of the fair value of the Aventine assets to be acquired and the liabilities to be
assumed and the related allocation of purchase price, nor has it identified all adjustments necessary to conform Aventine’s
accounting policies to Pacific Ethanol’s accounting policies. A final determination of the fair value of Aventine’s
assets and liabilities, including intangible assets with both indefinite or finite lives, will be based on the actual net tangible
and intangible assets and liabilities of Aventine that exist as of the closing date of the merger and, therefore, cannot be made
prior to the completion of the merger. In addition, the value of the consideration to be paid by Pacific Ethanol upon the consummation
of the merger will be determined based on the closing price per share of Pacific Ethanol common stock on the closing date of the
merger. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information
becomes available and as additional analyses are performed. The preliminary pro forma adjustments have been made solely for the
purpose of presenting the unaudited pro forma combined condensed financial statements. Pacific Ethanol estimated the fair value
of Aventine’s assets and liabilities as of December 31, 2014 is based on preliminary valuation studies and due diligence.
Until the merger is completed, both companies are limited in their ability to share certain information. Therefore, information
necessary for the complete valuation is not currently available and, accordingly, management has used its best estimates based
upon information currently available. Upon completion of the merger, final valuations will be performed based on the actual net
tangible and intangible assets of Aventine that will exist on the date of the merger. The final purchase price allocation may
be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.
Assumptions and estimates underlying the unaudited
adjustments to the pro forma combined condensed financial statements are described in the accompanying notes, which should be read
in conjunction with the unaudited pro forma combined condensed financial statements. The historical consolidated financial statements
have been adjusted in the unaudited pro forma combined condensed financial statements to give effect to pro forma events that are:
(1) directly attributable to the merger; (2) factually supportable; and (3) with respect to the unaudited pro forma
combined condensed statements of operations, expected to have a continuing impact on the combined results of Pacific Ethanol and
Aventine following the merger.
In connection with the plan to integrate the
operations of Pacific Ethanol and Aventine, Pacific Ethanol anticipates that non-recurring charges, such as costs associated with
systems implementation, relocation expenses, severance and other costs related to closing the transaction, will be incurred. Pacific
Ethanol is not able to determine the timing, nature and amount of these charges as of the date of this joint proxy statement/prospectus.
However, these charges could affect the combined results of operations of Pacific Ethanol and Aventine, as well as those of the
combined company following the merger, in the period in which they are recorded. The unaudited pro forma combined condensed financial
statements do not include the effects of the costs associated with any restructuring or integration activities resulting from the
transaction, as they are non-recurring in nature and not factually supportable at the time that the unaudited pro forma combined
condensed financial statements were prepared. Additionally, these adjustments do not give effect to any synergies that may be realized
as a result of the merger, nor do they give effect to any nonrecurring or unusual restructuring charges that may be incurred as
a result of the integration of the two companies.
UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEETS
OF PACIFIC ETHANOL
AND AVENTINE
As of December
31, 2014
(in thousands)
| |
Historical | | |
Historical | | |
Pro Forma |
| | |
Pro Forma | |
| |
Pacific
Ethanol | | |
Aventine | | |
Adjustments |
| Notes | |
Amounts | |
Cash and equivalents | |
$ | 62,084 | | |
$ | 33,250 | | |
$ | – |
| | |
$ | 95,334 | |
Accounts receivable, net | |
| 34,612 | | |
| 20,353 | | |
| – |
| | |
| 54,965 | |
Inventories | |
| 18,550 | | |
| 24,612 | | |
| – |
| | |
| 43,162 | |
Prepaid inventory | |
| 11,595 | | |
| –, | | |
| – |
| | |
| 11,595 | |
Other current assets | |
| 12,710 | | |
| 14,408 | | |
| – |
| | |
| 27,118 | |
Total current assets | |
| 139,551 | | |
| 92,623 | | |
| – |
| | |
| 232,174 | |
| |
| | | |
| | | |
| |
| | |
| | |
Property and Equipment, net | |
| 155,302 | | |
| 217,830 | | |
| 88,970 |
| (a) | |
| 462,102 | |
| |
| | | |
| | | |
| |
| | |
| | |
Goodwill | |
| – | | |
| – | | |
| 24,978 |
| (b) | |
| 24,978 | |
Intangible assets | |
| 2,786 | | |
| – | | |
| – |
| | |
| 2,786 | |
Other assets | |
| 1,863 | | |
| 3,724 | | |
| – |
| | |
| 5,587 | |
| |
| | | |
| | | |
| |
| | |
| | |
Total other Assets | |
| 4,649 | | |
| 3,724 | | |
| 24,978 |
| | |
| 33,351 | |
| |
| | | |
| | | |
| |
| | |
| | |
Total Assets | |
$ | 299,502 | | |
$ | 314,177 | | |
$ | 113,948 |
| | |
$ | 727,627 | |
| |
| | | |
| | | |
| |
| | |
| | |
Accounts payable, trade | |
$ | 13,122 | | |
$ | 19,533 | | |
$ | – |
| | |
$ | 32,655 | |
Accrued liabilities | |
| 6,203 | | |
| 4,643 | | |
| 4,700 |
| (c) | |
| 15,546 | |
Current portion of capital leases | |
| 4,077 | | |
| – | | |
| – |
| | |
| 4,077 | |
Other current liabilities | |
| 2,045 | | |
| 8,540 | | |
| – |
| | |
| 10,585 | |
Total current liabilities | |
| 25,447 | | |
| 32,716 | | |
| 4,700 |
| | |
| 62,863 | |
| |
| | | |
| | | |
| |
| | |
| | |
Long-term debt-revolvers | |
| 17,530 | | |
| 19,060 | | |
| – |
| | |
| 36,590 | |
Long-term debt-term debt | |
| 17,003 | | |
| 201,299 | | |
| (62,656 |
) | (d) | |
| 155,646 | |
Warrant liabilities, at fair value | |
| 1,986 | | |
| – | | |
| – |
| | |
| 1,986 | |
Capital leases-net of current portion | |
| 2,055 | | |
| – | | |
| – |
| | |
| 2,055 | |
Deferred tax liabilities | |
| 17,040 | | |
| 2,078 | | |
| 31,140 |
| (e) | |
| 50,258 | |
Other liabilities | |
| 459 | | |
| 9,708 | | |
| – |
| | |
| 10,167 | |
| |
| | | |
| | | |
| |
| | |
| | |
Total Liabilities | |
| 81,520 | | |
| 264,861 | | |
| (26,816 |
) | | |
| 319,565 | |
| |
| | | |
| | | |
| |
| | |
| | |
Preferred stock | |
| 1 | | |
| – | | |
| – |
| | |
| 1 | |
Common stock | |
| 25 | | |
| 14 | | |
| 4 |
| (f) | |
| 43 | |
Additional paid-in capital | |
| 725,813 | | |
| 258,424 | | |
| (66,862 |
) | (f) | |
| 917,375 | |
Accumulated other comprehensive income | |
| – | | |
| (5,629 | ) | |
| 5,629 |
| (f) | |
| – | |
Accumulated deficit | |
| (512,332 | ) | |
| (203,493 | ) | |
| 201,993 |
| (f) | |
| (513,832 | ) |
Total Pacific Ethanol equity | |
| 213,507 | | |
| 49,316 | | |
| 140,764 |
| | |
| 403,587 | |
Non controlling interest equity | |
| 4,475 | | |
| – | | |
| – |
| | |
| 4,475 | |
Total Stockholders' Equity | |
| 217,982 | | |
| 49,316 | | |
| 140,764 |
| | |
| 408,062 | |
Total Liabilities and Stockholders' Equity | |
$ | 299,502 | | |
$ | 314,177 | | |
$ | 113,948 |
| | |
$ | 727,627 | |
The accompanying notes are an integral part
of these pro forma combined condensed consolidated financial statements
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENTS
OF OPERATIONS OF
PACIFIC ETHANOL AND AVENTINE
For the year ended
December 31, 2014
(in thousands,
except per share amounts)
| |
Historical | | |
Historical | | |
Pro Forma |
| | |
Pro Forma | |
| |
Pacific
Ethanol | | |
Aventine | | |
Adjustments |
| Notes | |
Amounts | |
Net revenues | |
$ | 1,107,412 | | |
$ | 588,028 | | |
$ | – |
| | |
$ | 1,695,440 | |
Cost of goods sold | |
| 998,927 | | |
| 511,303 | | |
| 15,615 |
| (g,i) | |
| 1,525,845 | |
Gross profit | |
| 108,485 | | |
| 76,725 | | |
| (15,615 |
) | | |
| 169,595 | |
Selling, general and administrative expenses | |
| 17,108 | | |
| 31,388 | | |
| 1,034 |
| (h) | |
| 49,530 | |
Gain (loss) on derivative transactions | |
| – | | |
| 11,166 | | |
| (11,166 |
) | (g) | |
| – | |
Other expense | |
| – | | |
| 2,634 | | |
| (2,634 |
) | (h) | |
| – | |
Operating income (loss) | |
| 91,377 | | |
| 31,537 | | |
| (2,849 |
) | | |
| 120,065 | |
Fair value adjustments | |
| (37,532 | ) | |
| – | | |
| – |
| | |
| (37,532 | ) |
Interest expense, net | |
| (9,438 | ) | |
| (14,233 | ) | |
| (17,280 |
) | (h,k) | |
| (40,951 | ) |
Loss on extinguishment of debt | |
| (2,363 | ) | |
| – | | |
| – |
| | |
| (2,363 | ) |
Other expense, net | |
| (905 | ) | |
| (9 | ) | |
| – |
| | |
| (914 | ) |
Income before provision for income taxes and discontinued
operations | |
| 41,139 | | |
| 17,295 | | |
| (20,129 |
) | | |
| 38,305 | |
Provision for income taxes | |
| (15,137 | ) | |
| – | | |
| – |
| | |
| (15,137 | ) |
Net income before discontinued operations | |
| 26,002 | | |
| 17,295 | | |
| (20,129 |
) | | |
| 23,168 | |
Loss from discontinued operations | |
| – | | |
| (731 | ) | |
| 731 |
| (l) | |
| – | |
Net income attributed to noncontrolling
interests | |
| (4,713 | ) | |
| – | | |
| – |
| | |
| (4,713 | ) |
Net income attributed to Pacific Ethanol | |
| 21,289 | | |
| 16,564 | | |
| (19,398 |
) | | |
| 18,455 | |
Preferred dividends | |
| (1,265 | ) | |
| – | | |
| – |
| | |
| (1,265 | ) |
Net income available to common
stockholders | |
$ | 20,024 | | |
$ | 16,564 | | |
$ | (19,398 |
) | | |
$ | 17,190 | |
Net income per share, basic | |
$ | 0.96 | | |
| | | |
| |
| | |
$ | 0.45 | |
Net income per share, diluted | |
$ | 0.88 | | |
| | | |
| |
| | |
$ | 0.43 | |
Weighted-average shares outstanding, basic | |
| 20,810 | | |
| | | |
| |
| | |
| 38,565 | |
Weighted-average shares outstanding, diluted | |
| 22,669 | | |
| | | |
| |
| | |
| 40,424 | |
The accompanying notes are an integral part
of these pro forma combined condensed consolidated financial statements
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma combined condensed financial
statements are prepared under the acquisition accounting method in accordance with ASC 805, with Pacific Ethanol treated as the
acquirer. Under the acquisition accounting method, the total estimated purchase price allocation is calculated as described in
Note 3. In accordance with ASC 805, the assets acquired and the liabilities assumed have been measured at fair value based on various
preliminary estimates, and these estimates are subject to change pending further review of the fair value of assets acquired and
liabilities assumed. The final amounts recorded for the merger may differ materially from the information presented herein.
The unaudited pro forma combined condensed
financial statements were prepared in accordance with GAAP and pursuant to Securities and Exchange Commission Regulation S-X Article
11, and present the pro forma financial position and results of operations of the combined companies based upon the historical
information after giving effect to the merger and adjustments described in these Notes to the unaudited pro forma combined condensed
financial statements. The unaudited pro forma combined condensed balance sheet is presented as if the merger had occurred on December
31, 2014; and the unaudited pro forma combined condensed statement of operations for the year ended December 31, 2014 is presented
as if the merger had occurred on January 1, 2014.
Certain reclassifications have been made relative
to Aventine’s historical financial statements to conform to the financial statement presentation of Pacific Ethanol. Such
reclassifications are described in further detail in Note 4 to the unaudited pro forma combined condensed financial statements.
2. Preliminary Estimated Purchase Price Consideration
Subject to the terms and conditions of the merger
agreement, each outstanding share of Aventine common stock will be exchanged for 1.25 shares of common stock of Pacific Ethanol.
The merger agreement further provides for each
Aventine stock option and restricted stock award that is outstanding and unexercised at the closing date to be assumed and converted
into an option or award to purchase Pacific Ethanol common stock based on the 1.25 conversion ratio. The estimated value of the
stock options and restricted stock awards assumed and converted based on closing price of Pacific Ethanol stock as of December 31,
2014 is not considered material.
The requirement to determine the final purchase
price using the number of Aventine shares outstanding at the closing date and the closing price of Pacific Ethanol’s common
stock as of the closing date could result in a total purchase price different from the price assumed in these unaudited pro forma
combined condensed financial statements, and that difference may be material. Therefore, the estimated consideration expected to
be transferred reflected in these unaudited pro forma combined condensed financial statements does not purport to represent what
the actual consideration transferred will be when the merger is completed.
On March 31, 2015, Pacific Ethanol’s
closing stock price was $10.79. Solely for purposes of these pro forma combined condensed financial statements, the stock price
assumed for the total preliminary purchase price is $10.79. As a result, the estimated total preliminary purchase price was approximately
$191.6 million.
For purposes of these unaudited pro forma
combined condensed financial statements, the estimated purchase price has been allocated among Aventine’s tangible and intangible
assets and liabilities based on their estimated fair value as of December 31, 2014. Based on a preliminary analysis, and after
considering potential intangibles related to Aventine’s customer base, no material identifiable intangible assets have been
determined and as such, none have been included in the allocation of the preliminary estimated purchase price. The final determination
of the allocation of the purchase price will be based on the fair value of such assets and liabilities as of the date of closing
of the merger. Such final determination of the purchase price allocation may be significantly different from the preliminary estimates
used in these unaudited pro forma combined condensed financial statements.
An increase (decrease) of 20% in the estimated
Pacific Ethanol common stock price of $10.79 would increase (decrease) the consideration transferred and the purchase price by
approximately $38.3 million. Such changes would be reflected in these unaudited pro forma combined condensed financial statements
as an increase (decrease) to goodwill, respectively.
3. Preliminary Estimated Purchase Price Allocation
The following allocation of the
preliminary estimated purchase price assumes, with the exception of property and equipment and long-term debt, carrying
values approximate fair value. Fair value of property and equipment is based on a preliminary valuation of similar historical
transactions available. Fair value of long-term debt was based on the amount outstanding. Based upon these assumptions, the
total purchase price consideration was allocated to Aventine’s assets and liabilities, as of December 31, 2014, as
follows (in thousands):
| |
Estimated Fair
Value | |
Cash and Equivalents | |
$ | 33,250 | |
Accounts Receivable, net | |
| 20,353 | |
Inventories | |
| 24,612 | |
Other current assets | |
| 14,408 | |
Total Current Assets | |
| 92,623 | |
| |
| | |
Property and Equipment, net | |
| 306,800 | |
| |
| | |
Other assets | |
| 3,724 | |
Total Assets Acquired | |
$ | 403,147 | |
| |
| | |
Accounts Payable, trade | |
$ | 19,533 | |
Accrued Liabilities | |
| 7,843 | |
Other current liabilities | |
| 8,540 | |
Total Current Liabilities | |
| 35,916 | |
| |
| | |
Long-term debt - Revolvers | |
| 19,060 | |
Long-term debt - Term debt | |
| 138,643 | |
Deferred tax liabilities | |
| 33,218 | |
Other Liabilities | |
| 9,708 | |
Total Liabilities Assumed | |
$ | 236,545 | |
| |
| | |
Net Assets Acquired | |
$ | 166,602 | |
Goodwill | |
$ | 24,978 | |
Total Estimated Purchase Price | |
$ | 191,580 | |
The final determination of the purchase
price allocation will be based on the actual net tangible and intangible assets of Aventine that will exist on the date of the
merger and completion of the valuation of the fair value of such net assets. Pacific Ethanol anticipates that the ultimate purchase
price allocation of balance sheet amounts such as current assets and liabilities, property and equipment, intangible assets and
long-term assets and liabilities will differ from the preliminary assessment outlined above. Any changes to the initial estimates
of the fair value of the acquired assets and assumed liabilities will be recorded as adjustments to those assets and liabilities
and residual amounts will be allocated to goodwill if net assets acquired are less than purchase price. If net assets acquired
exceed purchase price, residual amount will result in bargain purchase gain.
4. Preliminary Pro Forma Financial Statement Adjustments
Adjustments included in the column under the
heading “Pro Forma Adjustments” represent the following:
Unaudited Pro Forma Combined Condensed Balance Sheet
(a) To
record the difference in book value and fair value of property and equipment acquired if net assets acquired are less than
purchase price. If net assets acquired exceed purchase price, residual amount will result in bargain purchase gain. The step up
in property and equipment relates primarily to the ethanol production facilities, which have a current estimated
weighted average useful life of 20 years that will be depreciated on a straight-line basis. The amount of purchase price
allocated to tangible assets, as well as the associated useful lives, may increase or decrease and could materially affect
the amount of pro forma depreciation expense to be recorded in the pro forma combined condensed statements of
operations.
(b) Net
assets acquired are less than total estimated purchase price, creating goodwill.
(c) Reflects
the pro forma adjustments to accrued transaction costs of Aventine of $3.2 million as part of the purchase price allocation and
$1.5 million attributed to Pacific Ethanol’s estimated transaction costs, all of which are not included in the
historical balance sheets at December 31, 2014.
(d) Reflects
the pro forma adjustments to long-term debt – term debt to amount outstanding. See Note (k) for more information.
(e) Represents
deferred income taxes on step up in fair value of plant and equipment at 35% statutory tax rate.
(f) Represents
the elimination of Aventine’s historical stockholders’ equity and the issuance of Pacific Ethanol’s common stock.
The amounts adjusting APIC and Accumulated Deficit are as follows:
| |
APIC | | |
Accumulated
Deficit | |
Eliminate Aventine Historical Balance | |
$ | (258,424 | ) | |
$ | 203,493 | |
Issuance of Pacific Ethanol common stock less par | |
$ | 191,562 | | |
| – | |
Transaction cost attributed to Pacific Ethanol | |
| – | | |
$ | (1,500 | ) |
Net Pro forma adjustment | |
$ | (66,862 | ) | |
$ | 201,993 | |
Unaudited Pro Forma Combined Condensed Statements of Operations
Conforming Reclassifications Between Pacific Ethanol and Aventine:
The following reclassifications have been made
to the presentation of Aventine’s historical consolidated financial statements to conform to Pacific Ethanol’s presentation:
(g) Loss on
derivative transactions is recorded in cost of goods sold for Pacific Ethanol and is being reclassed with respect to Aventine’s
reported amounts, which was presented as a separate line within operating income (loss) in Aventine’s historical financial
statements.
(h) Other expense
represents write-off of disposed assets.
Pro Forma Adjustments
(i) Reflects pro forma adjustments to depreciation
of property and equipment assuming the preliminary estimates of the fair value and estimated useful life of the asset as described
in Note (a) and conforming classifications.
(j) Represents the amount of transaction
related costs recorded in the historical financials for Pacific Ethanol and Aventine.
(k) Reflects adjustments to eliminate the
impact of Aventine’s troubled debt restructuring accounting under ASC 470-60, Debt – Troubled Debt Restructurings
by Debtors. Aventine restructured its debt in 2012. All gains related to the forgiveness of Aventine’s debt were deferred
as the future cash outflows of the new debt exceeded the carrying amount of Aventine’s existing debt at that time. As payments
were made interest expense was reduced.
(l) Adjustment to present pro forma financials
to income (loss) from continuing operations.
5. Pro Forma Combined Net Income
Per Share
The pro forma basic and diluted net income
per share presented in the unaudited pro forma combined condensed statements of operations is computed based on the weighted-average
number of shares outstanding (in thousands except per share data):
| |
Year Ended | |
| |
December
31, 2014 | |
| |
| | |
Pro Forma net income available to common stockholders, as combined | |
$ | 17,190 | |
| |
| | |
Pacific Ethanol’s historical weighted-average shares, Basic | |
| 20,810 | |
Shares expected to be issued in merger | |
| 17,755 | |
Pro Forma weighted-average shares, Basic | |
| 38,565 | |
| |
| | |
Pro Forma net income per share, Basic | |
$ | 0.45 | |
| |
| | |
Pacific Ethanol's historical weighted-average shares, Diluted | |
| 22,669 | |
Shares expected to be issued in merger | |
| 17,755 | |
Pro Forma weighted-average shares, Diluted | |
| 40,424 | |
| |
| | |
Pro Forma net income per share, Diluted | |
$ | 0.43 | |
DESCRIPTION OF PACIFIC ETHANOL CAPITAL STOCK
Pacific Ethanol has summarized below the
material terms of Pacific Ethanol’s capital stock. The following description of the material terms of the capital stock of
Pacific Ethanol does not purport to be complete and is qualified in its entirety by reference to Pacific Ethanol’s Certificate
of Incorporation and bylaws, each as amended to date, which documents are incorporated by reference as exhibits to the registration
statement of which this joint proxy statement/prospectus is a part, and the applicable provisions of the DGCL. All references within
this section to common stock mean the common stock of Pacific Ethanol unless otherwise noted.
Authorized and Outstanding Capital Stock
Pacific Ethanol’s authorized capital
stock consists of 300,000,000 shares of common stock, $0.001 par value per share, 20,000,000 shares of non-voting common stock
(assuming the stockholders of Pacific Ethanol approve the proposed amendment to Pacific Ethanol’s Certificate of Incorporation
creating a class of non-voting common stock), $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par
value per share, of which 1,684,375 shares are designated as Series A Cumulative Redeemable Convertible Preferred Stock (sometimes
referred to as the Series A Preferred Stock), and 1,580,790 shares are designated as Series B Preferred Stock. As of March
31, 2015, there were 24,715,029 shares of common stock, no shares of non-voting common stock, no shares of Series A Preferred
Stock and 926,942 shares of Series B Preferred Stock issued and outstanding. On June 8, 2011, Pacific Ethanol effected a
one-for-seven reverse split of Pacific Ethanol’s common stock. On May 14, 2013, Pacific Ethanol effected a one-for-fifteen
reverse split of Pacific Ethanol’s common stock. All share information contained in this joint prospectus statement/prospectus
reflects the effects of these reverse stock splits. The following description of Pacific Ethanol’s capital stock does not
purport to be complete and should be reviewed in conjunction with Pacific Ethanol’s certificate of incorporation, including
Pacific Ethanol’s Certificate of Designations, Powers, Preferences and Rights of the Series A Preferred Stock (sometimes
referred to as the Pacific Ethanol Series A Certificate of Designations), the Pacific Ethanol Series B Certificate of Designations,
and Pacific Ethanol’s bylaws.
Common Stock
All outstanding shares of Pacific Ethanol’s
common stock are fully paid and nonassessable. The following summarizes the rights of holders of Pacific Ethanol’s common
stock:
|
· |
each holder of common stock is entitled to one vote per share on all matters to be voted upon generally by the stockholders; |
|
· |
subject to preferences that may apply to shares of preferred stock issued and outstanding, the holders of common stock are entitled to receive lawful dividends as may be declared by the board of directors of Pacific Ethanol; |
|
· |
upon liquidation, dissolution or winding up of Pacific Ethanol, the holders of shares of common stock and non-voting common stock are entitled to receive a pro rata portion of all of Pacific Ethanol’s assets remaining for distribution after satisfaction of all its liabilities and the payment of any liquidation preference of any outstanding preferred stock; |
|
· |
there are no redemption or sinking fund provisions applicable to Pacific Ethanol’s common stock; and |
|
· |
there are no preemptive or conversion rights applicable to Pacific Ethanol’s common stock. |
Transfer Agent and Registrar
The transfer agent and registrar for Pacific
Ethanol’s common stock is American Stock Transfer & Trust Company, LLC. Its telephone number is (718) 921-8200.
Listing of Common Stock
Pacific Ethanol’s common stock is listed
on The NASDAQ Capital Market under the symbol “PEIX”.
Non-Voting Common Stock
The rights and preferences of shares of
Pacific Ethanol’s non-voting common will be substantially the same in all respects to the rights and preferences of shares
of Pacific Ethanol’s common stock, except that (i) the holders of shares of non-voting common stock will not be entitled
to vote, (ii) shares of non-voting common stock are convertible into shares of common stock, and (iii) non-voting common stock
will not be listed on any stock exchange including The NASDAQ Capital Market.
The following summarizes the expected rights
of holders of Pacific Ethanol’s non-voting common stock:
|
· |
a holder of non-voting common stock will not be entitled to vote on any matter submitted to a vote of the stockholders, provided that such holders shall be entitled to prior notice of, and to attend and observe, all meetings of the stockholders; |
|
· |
subject to preferences that may apply to shares of preferred stock issued and outstanding, the holders of non-voting common stock will be entitled to receive lawful dividends as may be declared by the Pacific Ethanol Board on parity in all respects with the holders of common stock, provided that if the holders of common stock become entitled to receive a divided or distribution of shares of common stock, holders of non-voting common stock shall receive, in lieu of the shares of common stock, an equal number of shares of non-voting common stock; |
|
· |
upon liquidation, dissolution or winding up of Pacific Ethanol, the holders of shares of common stock and non-voting common stock will be entitled to receive a pro rata portion of all of Pacific Ethanol’s assets remaining for distribution after satisfaction of all its liabilities and the payment of any liquidation preference of any outstanding preferred stock; |
|
· |
there will be no redemption or sinking fund provisions applicable to Pacific Ethanol’s non-voting common stock; and |
|
· |
there will be no preemptive rights applicable to Pacific Ethanol’s non-voting common stock. |
Conversion
Each share of non-voting common stock will be
convertible at the option of the holder into one share of Pacific Ethanol’s common stock at any time. The conversion price
will be subject to customary adjustment for stock splits, stock combinations, stock dividends, mergers, consolidations, reorganizations,
share exchanges, reclassifications, distributions of assets and issuances of convertible securities, and the like.
No shares of non-voting common stock may be
converted into common stock if the holder of such shares or any of its affiliates would, after such conversion, beneficially own
in excess of 9.99% of Pacific Ethanol’s outstanding shares of common stock (sometimes referred to as the Blocker). The Blocker
applicable to the conversion of shares of non-voting common stock may be raised or lowered at the option of the holder to any percentage
not in excess of 9.99%, except that any increase will only be effective upon 61-days’ prior notice to Pacific Ethanol.
When shares of non-voting common stock cease
to be held by the initial holder or an affiliate of an initial holder of such shares, such shares shall automatically convert into
one share of Pacific Ethanol’s common stock.
Preferred Stock
The Pacific Ethanol Board is authorized to issue
from time to time, in one or more designated series, any or all of Pacific Ethanol’s authorized but unissued shares of preferred
stock with dividend, redemption, conversion, exchange, voting and other provisions as may be provided in that particular series.
The issuance need not be approved by Pacific Ethanol’s common stockholders and need only be approved by holders, if any,
of Pacific Ethanol’s Series A Preferred Stock and Series B Preferred Stock if, as described below, the shares of preferred
stock to be issued have preferences that are senior to or on parity with those of Pacific Ethanol’s Series A Preferred Stock
and Series B Preferred Stock.
The rights of the holders of Pacific Ethanol’s
common stock, non-voting common stock, Series A Preferred Stock and Series B Preferred Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuance of a new series of preferred
stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have
the effect of entrenching the Pacific Ethanol Board and making it more difficult for a third-party to acquire, or discourage a
third-party from acquiring, a majority of Pacific Ethanol’s outstanding voting stock. The following is a summary of the terms
of the Series A Preferred Stock and the Series B Preferred Stock.
Series B Preferred Stock
As of March 31, 2015, 926,942 shares
of Series B Preferred Stock were issued and outstanding and an aggregate of 1,419,210 shares of Series B Preferred Stock had been
converted into shares of Pacific Ethanol’s common stock. The converted shares of Series B Preferred Stock have been returned
to undesignated preferred stock. A balance of 653,848 shares of Series B Preferred Stock remains authorized for issuance.
Rank and Liquidation Preference
Shares of Series B Preferred Stock rank prior
to shares of Pacific Ethanol’s common stock and non-voting common stock as to distribution of assets upon liquidation events,
which include a liquidation, dissolution or winding up of Pacific Ethanol, whether voluntary or involuntary. The liquidation preference
of each share of Series B Preferred Stock is equal to $19.50 (sometimes referred to as the Series B Issue Price), plus any accrued
but unpaid dividends on the Series B Preferred Stock. If assets remain after the amounts are distributed to the holders of Series
B Preferred Stock, the assets shall be distributed pro rata, on an as-converted to common stock basis, to the holders of Pacific
Ethanol’s common stock, non-voting common stock and Series B Preferred Stock. The written consent of a majority of the issued
and outstanding shares of Series B Preferred Stock is required before Pacific Ethanol can authorize the issuance of any class or
series of capital stock that ranks senior to or on parity with shares of Series B Preferred Stock.
Dividend Rights
As long as shares of Series B Preferred Stock
remain outstanding, each holder of shares of Series B Preferred Stock is entitled to receive, and shall be paid quarterly in arrears,
in cash out of funds legally available therefor, cumulative dividends, in an amount equal to 7.0% of the Series B Issue Price per
share per annum with respect to each share of Series B Preferred Stock. The dividends may, at Pacific Ethanol’s option, be
paid in shares of Series B Preferred Stock valued at the Series B Issue Price. In the event Pacific Ethanol declares, orders, pays
or makes a dividend or other distribution on Pacific Ethanol’s common stock, other than a dividend or distribution made in
common stock, the holders of the Series B Preferred Stock shall be entitled to receive with respect to each share of Series B Preferred
Stock held, any dividend or distribution that would be received by a holder of the number of shares of Pacific Ethanol’s
common stock into which the Series B Preferred Stock is convertible on the record date for the dividend or distribution.
The Series B Preferred Stock ranks pari passu
with respect to dividends and liquidation rights with the Series A Preferred Stock and pari passu with respect to any class or
series of capital stock specifically ranking on parity with the Series B Preferred Stock.
Optional Conversion Rights
Each share of Series B Preferred Stock is convertible
at the option of the holder into shares of Pacific Ethanol’s common stock at any time. Each share of Series B Preferred Stock
is convertible into the number of shares of common stock as calculated by multiplying the number of shares of Series B Preferred
Stock to be converted by the Series B Issue Price, and dividing the result thereof by the Conversion Price. The “Conversion
Price” was initially $682.50 per share of Series B Preferred Stock, subject to adjustment; therefore, each share of Series
B Preferred Stock was initially convertible into 0.03 shares of common stock, which number is equal to the quotient of the Series
B Issue Price of $19.50 divided by the initial Conversion Price of $682.50 per share of Series B Preferred Stock. Accrued and unpaid
dividends are to be paid in cash upon any conversion.
Mandatory Conversion Rights
In the event of a Transaction which will result
in an internal rate of return to holders of Series B Preferred Stock of 25% or more, each share of Series B Preferred Stock shall,
concurrently with the closing of the Transaction, be converted into shares of common stock. A “Transaction” is defined
as a sale, lease, conveyance or disposition of all or substantially all of Pacific Ethanol’s capital stock or assets or a
merger, consolidation, share exchange, reorganization or other transaction or series of related transactions (whether involving
Pacific Ethanol or a subsidiary of Pacific Ethanol) in which the stockholders immediately prior to the transaction do not retain
a majority of the voting power in the surviving entity. Any mandatory conversion will be made into the number of shares of common
stock determined on the same basis as the optional conversion rights above. Accrued and unpaid dividends are to be paid in cash
upon any conversion.
No shares of Series B Preferred Stock will be
converted into common stock on a mandatory basis unless at the time of the proposed conversion Pacific Ethanol has on file with
the Securities and Exchange Commission an effective registration statement with respect to the shares of common stock issued or
issuable to the holders on conversion of the Series B Preferred Stock then issued or issuable to the holders and the shares of
common stock are eligible for trading on The NASDAQ Capital Market (or approved by and listed on a stock exchange approved by the
holders of 66 2/3% of the then outstanding shares of Series B Preferred Stock).
Conversion Price Adjustments
The Conversion Price is subject to customary
adjustment for stock splits, stock combinations, stock dividends, mergers, consolidations, reorganizations, share exchanges, reclassifications,
distributions of assets and issuances of convertible securities, and the like. The Conversion Price is also subject to downward
adjustments if Pacific Ethanol issues shares of common stock or securities convertible into or exercisable for shares of common
stock, other than specified excluded securities, at per share prices less than the then effective Conversion Price. In this event,
the Conversion Price shall be reduced to the price determined by dividing (i) an amount equal to the sum of (a) the number of shares
of common stock outstanding immediately prior to the issue or sale multiplied by the then existing Conversion Price, and (b) the
consideration, if any, received by Pacific Ethanol upon such issue or sale, by (ii) the total number of shares of common stock
outstanding immediately after the issue or sale. For purposes of determining the number of shares of common stock outstanding as
provided in clauses (i) and (ii) above, the number of shares of common stock issuable upon conversion of all outstanding shares
of Series B Preferred Stock, and the exercise of all outstanding securities convertible into or exercisable for shares of common
stock, will be deemed to be outstanding.
The Conversion Price will not be adjusted in
the case of the issuance or sale of the following: (i) securities issued to Pacific Ethanol’s employees, officers or directors
or options to purchase common stock granted by Pacific Ethanol to its employees, officers or directors under any option plan, agreement
or other arrangement duly adopted by Pacific Ethanol and the grant of which is approved by the compensation committee of the Pacific
Ethanol Board; (ii) the Series B Preferred Stock and any common stock issued upon conversion of the Series B Preferred Stock; (iii)
securities issued on the conversion of any convertible securities, in each case, outstanding on the date of the filing of the Pacific
Ethanol Series B Certificate of Designations; and (iv) securities issued in connection with a stock split, stock dividend, combination,
reorganization, recapitalization or other similar event for which adjustment is made in accordance with the foregoing.
Voting Rights and Protective Provisions
The Series B Preferred Stock votes together
with all other classes and series of Pacific Ethanol’s voting stock as a single class on all actions to be taken by Pacific
Ethanol’s stockholders (giving effect to the Preferred Voting Ratio). Each share of Series B Preferred Stock entitles the
holder thereof to the number of votes equal to the number of shares of common stock into which each share of Series B Preferred
Stock is convertible on all matters to be voted on by Pacific Ethanol’s stockholders, however, the number of votes for each
share of Series B Preferred Stock may not exceed the number of shares of common stock into which each share of Series B Preferred
Stock would be convertible if the applicable Conversion Price were $682.50 (subject to appropriate adjustment for stock splits,
stock dividends, combinations and other similar recapitalizations affecting the shares).
Pacific Ethanol is not permitted, without first
obtaining the written consent of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock
voting as a separate class, to:
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increase or decrease the total number of authorized shares of Series B Preferred Stock or the authorized shares of Pacific Ethanol’s common stock reserved for issuance upon conversion of the Series B Preferred Stock (except as otherwise required by Pacific Ethanol’s Certificate of Incorporation or the Pacific Ethanol Series B Certificate of Designations); |
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increase or decrease the number of authorized shares of preferred stock or common stock (except as otherwise required by Pacific Ethanol’s Certificate of Incorporation or the Pacific Ethanol Series B Certificate of Designations); |
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alter, amend, repeal, substitute or waive any provision of Pacific Ethanol’s Certificate of Incorporation or Pacific Ethanol’s bylaws, so as to affect adversely the voting powers, preferences or other rights, including the liquidation preferences, dividend rights, conversion rights, redemption rights or any reduction in the stated value of the Series B Preferred Stock, whether by merger, consolidation or otherwise; |
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authorize, create, issue or sell any securities senior to or on parity with the Series B Preferred Stock or securities that are convertible into securities senior to or on parity the Series B Preferred Stock with respect to voting, dividend, liquidation or redemption rights, including subordinated debt; |
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authorize, create, issue or sell any securities junior to the Series B Preferred Stock other than common stock or securities that are convertible into securities junior to Series B Preferred Stock other than common stock with respect to voting, dividend, liquidation or redemption rights, including subordinated debt; |
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authorize, create, issue or sell any additional shares of Series B Preferred Stock other than the Series B Preferred Stock initially authorized, created, issued and sold, Series B Preferred Stock issued as payment of dividends and Series B Preferred Stock issued in replacement or exchange therefore; |
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engage in a Transaction that would result in an internal rate of return to holders of Series B Preferred Stock of less than 25%; |
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declare or pay any dividends or distributions on Pacific Ethanol’s capital stock in a cumulative amount in excess of the dividends and distributions paid on the Series B Preferred Stock in accordance with the Pacific Ethanol Series B Certificate of Designations; |
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authorize or effect the voluntary liquidation, dissolution, recapitalization, reorganization or winding up of Pacific Ethanol’s business; or |
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purchase, redeem or otherwise acquire any of Pacific Ethanol’s capital stock other than Series B Preferred Stock, or any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Pacific Ethanol’s capital stock or securities convertible into or exchangeable for Pacific Ethanol’s capital stock. |
Reservation of Shares
Pacific Ethanol initially was required to reserve
200,000 shares of common stock for issuance upon conversion of shares of Series B Preferred Stock and is required to maintain a
sufficient number of reserved shares of common stock to allow for the conversion of all shares of Series B Preferred Stock.
Series A Preferred Stock
As of March 31, 2015, no shares of
Series A Preferred Stock were issued and outstanding and an aggregate of 5,315,625 shares of Series A Preferred Stock had been
converted into shares of Pacific Ethanol’s common stock and returned to undesignated preferred stock. A balance of 1,684,375
shares of Series A Preferred Stock remain authorized for issuance. The rights and preferences of the Series A Preferred Stock
are substantially the same as the Series B Preferred Stock, except as follows:
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the Series A Issue Price, on which the Series A Preferred Stock liquidation preference is based, is $16.00 per share; |
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dividends accrue and are payable at a rate per annum of 5.0% of the Series A Issue Price per share; |
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each share of Series A Preferred Stock is convertible at a rate equal to the Series A Issue Price divided by an initial Conversion Price of $840.00 per share; |
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holders of the Series A Preferred Stock have a number of votes equal to the number of shares of common stock into which each share of Series A Preferred Stock is convertible on all matters to be voted on by Pacific Ethanol’s stockholders, voting together as a single class; provided, however, that the number of votes for each share of Series A Preferred Stock shall not exceed the number of shares of common stock into which each share of Series A Preferred Stock would be convertible if the applicable Conversion Price were $943.95 (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting the shares); and |
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Pacific Ethanol is not permitted, without first obtaining the written consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock voting as a separate class, to: |
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change the number of members of the Pacific Ethanol Board to be more than nine members or less than seven members; |
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effect any material change in Pacific Ethanol’s industry focus or that of Pacific Ethanol’s subsidiaries, considered on a consolidated basis; |
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authorize or engage in, or permit any subsidiary to authorize or engage in, any transaction or series of transactions with one of Pacific Ethanol’s or Pacific Ethanol’s subsidiaries’ current or former officers, directors or members with value in excess of $100,000, excluding compensation or the grant of options approved by Pacific Ethanol’s board of directors; or |
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authorize or engage in, or permit any subsidiary to authorize or engage in, any transaction with any entity or person that is affiliated with any of Pacific Ethanol’s or Pacific Ethanol’s subsidiaries’ current or former directors, officers or members, excluding any director nominated by the initial holder of the Series B Preferred Stock. |
Preemptive Rights
Holders of Pacific Ethanol’s Series A
Preferred Stock have preemptive rights to purchase a pro rata portion of all capital stock or securities convertible into capital
stock that Pacific Ethanol issues, sells or exchanges, or agrees to issue, sell or exchange, or reserve or set aside for issuance,
sale or exchange. Pacific Ethanol must deliver each holder of its Series A Preferred Stock a written notice of any proposed or
intended issuance, sale or exchange of capital stock or securities convertible into capital stock which must include a description
of the securities and the price and other terms upon which they are to be issued, sold or exchanged together with the identity
of the persons or entities (if known) to which or with which the securities are to be issued, sold or exchanged, and an offer to
issue and sell to or exchange with the holder of the Series A Preferred Stock the holder’s pro rata portion of the securities,
and any additional amount of the securities should the other holders of Series A Preferred Stock subscribe for less than the full
amounts for which they are entitled to subscribe. In the case of a public offering of Pacific Ethanol’s common stock for
a purchase price of at least $12.00 per share and a total gross offering price of at least $50 million, the preemptive rights of
the holders of the Series A Preferred Stock shall be limited to 50% of the securities. Holders of Pacific Ethanol’s Series
A Preferred Stock have a 30 day period during which to accept the offer. Pacific Ethanol will have 90 days from the expiration
of this 30 day period to issue, sell or exchange all or any part of the securities as to which the offer has not been accepted
by the holders of the Series A Preferred Stock, but only as to the offerees or purchasers described in the offer and only upon
the terms and conditions that are not more favorable, in the aggregate, to the offerees or purchasers or less favorable to Pacific
Ethanol than those contained in the offer.
The preemptive rights of the holders of the
Series A Preferred Stock shall not apply to any of the following securities: (i) securities issued to Pacific Ethanol’s employees,
officers or directors or options to purchase common stock granted by Pacific Ethanol to its employees, officers or directors under
any option plan, agreement or other arrangement duly adopted by Pacific Ethanol and the grant of which is approved by the compensation
committee of the Pacific Ethanol Board; (ii) the Series A Preferred Stock and any common stock issued upon conversion of the Series
A Preferred Stock; (iii) securities issued on the conversion of any convertible securities, in each case, outstanding on the date
of the filing of the Pacific Ethanol Series A Certificate of Designations; (iv) securities issued in connection with a stock split,
stock dividend, combination, reorganization, recapitalization or other similar event for which adjustment is made in accordance
with the Pacific Ethanol Series A Certificate of Designations; and (v) the issuance of Pacific Ethanol’s securities issued
for consideration other than cash as a result of a merger, consolidation, acquisition or similar business combination by Pacific
Ethanol approved by the Pacific Ethanol Board.
Warrants
As of March 31, 2015, Pacific Ethanol
had outstanding warrants to purchase 833,8473 shares of its common stock at exercise prices ranging from $6.09 to $735.00 per
share. These outstanding warrants consist of warrants to purchase an aggregate of 210,503 shares of common stock at an exercise
price of $6.09 per share expiring in 2017, warrants to purchase an aggregate of 451,670 shares of common stock at an exercise
price of $8.85 per share expiring in 2015, warrants to purchase an aggregate of 138,154 shares of common stock at an exercise
price of $8.43 per share expiring in 2016 and warrants to purchase an aggregate of 33,520 shares of common stock at an exercise
price of $735.00 per share expiring in 2018.
Options
As of March 31, 2015, Pacific Ethanol
had outstanding options to purchase an aggregate of 241,475 shares of its common stock at exercise prices ranging from $3.74 to
$871.50 per share issued under Pacific Ethanol’s 2004 Stock Option Plan and 2006 Stock Incentive Plan.
Anti-Takeover Effects of Delaware Law and Pacific Ethanol’s
Certificate of Incorporation and Bylaws
A number of provisions of Delaware law, Pacific
Ethanol’s certificate of incorporation and Pacific Ethanol’s bylaws contain provisions that could have the effect of
delaying, deferring and discouraging another party from acquiring control of us. These provisions, which are summarized below,
are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage
persons seeking to acquire control of Pacific Ethanol to first negotiate with Pacific Ethanol’s board of directors. Pacific
Ethanol believes that the benefits of increased protection of Pacific Ethanol’s potential ability to negotiate with an unfriendly
or unsolicited acquiror outweigh the disadvantages of discouraging a proposal to acquire Pacific Ethanol because negotiation of
these proposals could result in an improvement of their terms.
Undesignated Preferred Stock
The ability to authorize undesignated preferred
stock makes it possible for the Pacific Ethanol Board to issue preferred stock with voting or other rights or preferences that
could impede the success of any attempt to acquire us. These and other provisions may have the effect of deferring hostile takeovers
or delaying changes in control or management of Pacific Ethanol.
Delaware Anti-Takeover Statute
Pacific Ethanol is subject to the provisions
of Section 203 of the DGCL (sometimes referred to as Section 203) regulating corporate takeovers. In general, Section 203 prohibits
a publicly-held Delaware corporation from engaging, under specified circumstances, in a business combination with an interested
stockholder for a period of three years following the date the person became an interested stockholder unless:
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prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
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upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares of voting stock outstanding (but not the outstanding voting stock owned by the stockholder) (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
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on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder. |
Generally, a business combination includes a
merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An interested
stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of
interested stockholder status, did own 15% or more of a corporation’s outstanding voting securities. Pacific Ethanol expects
the existence of this provision to have an anti-takeover effect with respect to transactions the Pacific Ethanol Board does not
approve in advance. Pacific Ethanol also anticipates that Section 203 may also discourage attempts that might result in a premium
over the market price for the shares of common stock held by stockholders.
The provisions of Delaware law, Pacific Ethanol’s
Certificate of Incorporation and Pacific Ethanol’s bylaws could have the effect of discouraging others from attempting hostile
takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of Pacific Ethanol’s common
stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing
changes in Pacific Ethanol’s management. It is possible that these provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their best interests.
COMPARISON OF RIGHTS OF PACIFIC ETHANOL AND
AVENTINE STOCKHOLDERS
Both Pacific Ethanol and Aventine are incorporated
under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue
to be, governed by the DGCL. Before the consummation of the merger, the rights of holders of Aventine common stock are also governed
by the fourth amended and restated Certificate of Incorporation of Aventine and the second amended and restated bylaws of Aventine.
After the consummation of the merger, Aventine stockholders will become stockholders of Pacific Ethanol, and their rights will
be governed by the DGCL, the Certificate of Incorporation of Pacific Ethanol, as amended, and the bylaws of Pacific Ethanol.
The following is a summary of the material differences
between the rights of Pacific Ethanol stockholders and the rights of Aventine stockholders. While we believe that this summary
covers the material differences between the two, this summary may not contain all of the information that is important to you.
This summary is not intended to be a complete discussion of the respective rights of Pacific Ethanol and Aventine stockholders
and is qualified in its entirety by reference to the DGCL and the various documents of Pacific Ethanol and Aventine that we refer
to in this summary. You should carefully read this entire joint proxy statement/prospectus and the other documents we refer to
in this joint proxy statement/prospectus for a more complete understanding of the differences between being a stockholder of Aventine
and being a stockholder of Pacific Ethanol. Pacific Ethanol has filed its documents referred to herein with the Securities and
Exchange Commission. Each of Pacific Ethanol and Aventine will send copies of these documents to you upon your request. See “Where
You Can Find More Information.”
Pacific Ethanol Stockholder Rights |
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Aventine Stockholder Rights |
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Authorized Capital Stock |
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Pacific Ethanol is authorized to issue: |
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Aventine is authorized to issue: |
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· 300,000,000
shares of common stock, of which 24,499,534 were issued and outstanding as of March 31, 2015. |
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· 15,000,000
shares of common stock, of which 14,204,240 were issued and outstanding as of March 31, 2015. |
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· 20,000,000
shares of non-voting common stock, of which none were issued and outstanding as of March 31, 2015 (assuming the stockholders
of Pacific Ethanol approve the proposed amendment to Pacific Ethanol’s Certificate of Incorporation creating a class
of non-voting common stock). |
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· 5,000,000
shares of preferred stock, of which none are issued and outstanding.
The Aventine Board is authorized to issue the preferred stock
in one or more series. |
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· 10,000,000
shares of preferred stock, of which 926,942 shares designated as Series B preferred stock were issued and outstanding as of
March 31, 2015. |
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The Pacific Ethanol Board is authorized to issue the preferred stock
in one or more series. |
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Pacific Ethanol Stockholder Rights |
Aventine Stockholder Rights |
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Voting Rights |
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Under Pacific Ethanol’s bylaws, at any meeting of Pacific Ethanol stockholders, each stockholder is entitled to vote in person or by and proxy and shall have one vote for each share of voting stock held by such stockholder. |
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Under Aventine’s fourth amended and restated Certificate of Incorporation and second amended and restated bylaws, at any meeting of Aventine stockholders, each stockholder is entitled to vote in person or by and proxy and shall have one vote for each share having voting power held by such stockholder. |
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Quorum |
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Under Pacific Ethanol’s bylaws, the holders of a majority of the stock issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders, except where otherwise provided by statute, the Certificate of Incorporation or the bylaws. |
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Under Aventine’s bylaws, except as otherwise provided by applicable law, the Certificate of Incorporation or the bylaws, the presence, in person or by proxy, at a stockholders meeting of the holders of shares of outstanding capital stock of Aventine representing a majority of the voting power of all outstanding shares of capital stock of Aventine entitled to vote at such meeting shall constitute a quorum for the transaction of business at such meeting, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of shares representing a majority of the voting power of the outstanding shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. |
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Stockholder Rights Plans |
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Pacific Ethanol is not a party to a rights plan. |
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Aventine is not a party to a rights plan. |
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Number of Directors |
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The Pacific Ethanol bylaws provide that the Pacific Ethanol Board
must consist of seven directors, until changed by resolutions of the Pacific Ethanol Board.
Currently, there are seven directors on the Pacific Ethanol Board.
After the merger, the Pacific Ethanol Board will comprise the current members of the Pacific Ethanol Board and two directors nominated
by the majority of Aventine stockholders. |
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The Aventine fourth amended and restated Certificate of Incorporation
and bylaws provide that the board of directors must consist of five directors; provided, however, that the number of directors
may be modified from time to time exclusively by the board pursuant to a resolution adopted by at least 66⅔% of the Aventine
Board.
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Filling Vacancies on the Board of Directors |
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Under Pacific Ethanol’s Certificate of Incorporation and bylaws, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum. |
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Under Aventine’s fourth amended and restated Certificate of Incorporation, newly created directorships resulting from an increase in the number of directors and any vacancies on the board resulting from death, resignation, retirement, disqualification, removal or other cause may be filled solely by a majority vote of the directors then in office that are not officers, employees or members of Aventine’s management team, even if less than a quorum. |
Pacific Ethanol Stockholder Rights |
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Aventine Stockholder Rights |
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Removal of Directors |
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Under Pacific Ethanol’s bylaws, any director, or the entire
Pacific Ethanol Board may be removed at any time, but only for cause. The removal shall be accomplished by the affirmative vote,
at a special meeting of stockholders called for that purpose, of the holders of at least a majority of the issued and outstanding
shares entitled to vote at an election for directors.
Under Pacific Ethanol’s bylaws, the Pacific Ethanol Board
or any individual director may be removed from office at any time without cause by the affirmative vote of the holders of at least
a majority of the issued and outstanding shares entitled to vote on such removal; provided, however, that unless the entire Pacific
Ethanol Board is removed, no individual director may be removed when the votes cast against such director’s removal, or not
consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election at which
the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director’s most recent election were then being elected.
No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such
director’s term of office. |
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Under Aventine’s fourth amended and restated Certificate of Incorporation, any and all of the directors may be removed from office at any time, with or without cause by the affirmative vote of holders of a majority of the voting power of all then outstanding shares of capital stock of Aventine entitled to vote in the election of directors, voting together as a single class. |
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Director Nominations by Stockholders |
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Nominations of persons for election to the Pacific Ethanol Board
by the stockholders may be made at any meeting of stockholders only (a) pursuant to Pacific Ethanol’s notice of meeting,
(b) by or at the direction of the Pacific Ethanol Board or (c) by any stockholder of Pacific Ethanol who was a stockholder of record
at the time of giving of notice provided for in Pacific Ethanol’s bylaws, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in the bylaws; provided that stockholder nominations of persons for election to the
Pacific Ethanol Board at a special meeting may only be made if the Pacific Ethanol Board has determined that directors are to be
elected at the special meeting.
For nominations to be properly brought before a meeting
of stockholders by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of Pacific
Ethanol. To be timely, a stockholder’s notice must be delivered to the secretary of Pacific Ethanol not later than: (A)
in the case of an annual meeting, the close of business on the 45th day before the first anniversary of the date on which Pacific
Ethanol first mailed its proxy materials for the prior year’s annual meeting of stockholders; provided, however, that if
the date of the meeting has changed more than 30 days from the date of the prior year’s meeting, then in order for the stockholder’s
notice to be timely it must be delivered to the secretary of Pacific Ethanol a reasonable time before Pacific Ethanol mails its
proxy materials for the current year’s meeting; provided further, that for purposes of the preceding sentence, a “reasonable
time” shall conclusively be deemed to coincide with any adjusted deadline publicly announced by Pacific Ethanol pursuant
to Rule 14a-5(f) or otherwise; and (B) in the case of a special meeting, the close of business on the 7th day following the day
on which public announcement is first made of the date of the special meeting. In no event shall the public announcement of an
adjournment of a meeting of stockholders commence a new time period for the giving of a stockholder’s notice as described
above. |
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Nominations of persons for election to the board of Aventine at
any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors as set
forth in Aventine’s notice of such special meeting, may be made (i) by or at the direction of the board or (ii) by any stockholder
of the Aventine (x) who is a stockholder of record on the date of the giving of the notice provided for in the Aventine bylaws
and who is entitled to vote in the election of directors at such meeting and (y) who complies with the notice procedures set forth
in the bylaws (unless such notice procedures are otherwise waived.
For a nomination to be made by a stockholder, such stockholder must
have given timely notice in proper written form to the Secretary of Aventine. To be timely, a stockholder’s notice with respect
to such nominations must be received by the Secretary at the principal executive offices of Aventine (i) in the case of an annual
meeting, not later than the close of business on the 20th day nor earlier than the opening of business on the 60th day before the
anniversary date of the immediately preceding annual meeting of stockholders; and (ii) in the case of a special meeting of stockholders
called for the purpose of electing directors, not later than the close of business on the 10th day nor earlier than the 30th day
following the day on which a public announcement of the date of the special meeting is first made by Aventine. The public announcement
of an adjournment or postponement of an annual meeting or special meeting shall not commence a new time period for the giving of
a stockholder’s notice.
These nominating notice requirements may be waived by holders of
at least a majority of the voting power of all then outstanding shares of capital stock of Aventine entitled to vote generally
in the election of directors, voting together as a single class, by written consent without prior board approval. |
Pacific Ethanol Stockholder Rights |
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Aventine Stockholder Rights |
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Such stockholder’s notice shall set forth as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act and Rule 14a-11 thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made (i) the name and address of such stockholder, as they appear on Pacific Ethanol’s books, and of such beneficial owner, (ii) the class and number of shares of Pacific Ethanol that are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of Pacific Ethanol entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group that intends (X) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of Pacific Ethanol’s outstanding capital stock required to elect the nominee and/or (Y) otherwise to solicit proxies from stockholders in support of such nomination. |
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Stockholder Proposals |
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At an annual or special meeting of the stockholders, only business
properly brought before the meeting will be conducted. Proposal of business to be considered by the stockholders may be made at
any meeting of stockholders only (a) pursuant to Pacific Ethanol’s notice of meeting, (b) by or at the direction of the Pacific
Ethanol Board or (c) by any stockholder of Pacific Ethanol who was a stockholder of record at the time of giving of notice provided
for in these bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in Pacific Ethanol’s
bylaws. In addition, the stockholder must comply with all notice procedures in Pacific Ethanol’s bylaws.
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To be properly brought before an annual meeting , the business must
be (i) specified in Aventine’s notice of meeting given by or at the direction of the board, (ii) otherwise properly brought
before the annual meeting by or at the direction of the board or (iii) otherwise properly brought before the annual meeting by
any stockholder of Aventine (x) who is a stockholder of record on the date of the giving of the notice and who is entitled to vote
at such annual meeting and (y) who complies with the notice procedures set forth in Aventine’s bylaws.
Special meetings of stockholders, for any purpose or purposes, may
be called only by (i) the Chairman of the Board, (ii) the Chief Executive Officer, (iii) the board pursuant to a resolution adopted
by a majority of the entire board, or (iv) a request of the holders of at least 35% of the voting power of all then outstanding
shares of capital stock of Aventine entitled to vote generally in the election of directors. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the meeting pursuant to Aventine’s notice of meeting.
Stockholders must comply with all notice procedures in Aventine’s
bylaws. |
Pacific Ethanol Stockholder Rights |
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Aventine Stockholder Rights |
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Stockholder Action by Written Consent |
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Any action required or which may be taken at any annual or special
meeting of stockholders of Pacific Ethanol may be taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing shall be signed by the holders of outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and
voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action
had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the
date that written consents signed by a sufficient number of holders to take the action were delivered to Pacific Ethanol. |
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Any action by the stockholders of Aventine may be taken without a meeting, without prior notice and without a vote if a consent in writing, setting forth the action so taken, shall be signed by the holders of the outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. |
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Amendments to Certificate of Incorporation |
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Pacific Ethanol’s Certificate of Incorporation provides that the corporation may amend, alter, change or repeal any provision contained in the Certificate of Incorporation in the manner prescribed by statute. Under Delaware law, an amendment to a Certificate of Incorporation generally requires the approval of the board of directors and the approval of the holders of a majority of the issued and outstanding stock entitled to vote upon the proposed amendment. |
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Aventine’s Certificate of Incorporation may be amended as provided by statute; provided however, that certain sections of the Certificate of Incorporation may only be amended by an affirmative vote of the holders of at least 66 ⅔% of the shares of the then outstanding shares of common stock, voting as a single class. Under Delaware law, an amendment to a Certificate of Incorporation generally requires the approval of the board of directors and the approval of the holders of a majority of the issued and outstanding stock entitled to vote upon the proposed amendment. |
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Bylaw Amendments |
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The Pacific Ethanol Board is expressly
authorized to make, alter, amend or repeal the bylaws. In addition, the
bylaws may be amended, altered or repealed, and new bylaws may be adopted, by the stockholders entitled to vote. |
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Aventine’s board shall have the power to adopt, amend, alter or repeal the bylaws; provided, however, that certain sections of the bylaws may only be amended, altered or repealed by the affirmative vote of at least 66⅔% of the entire board. Subject to the foregoing, the affirmative vote of a majority of the entire board shall be required to adopt, amend, alter or repeal the bylaws. The bylaws also may be adopted, amended, altered or repealed by the stockholders; provided, however, that the affirmative vote of the holders of at least a majority of the voting power of all outstanding shares of capital stock of Aventine entitled to vote generally in the election of directors, voting together as a single class, shall be required for the stockholders to adopt, amend, alter or repeal the bylaws; provided further that the affirmative vote of the holders of at least 66⅔% of the shares of all then outstanding shares of common stock of Aventine voting together as a single class, shall be required to amend certain sections of the bylaws. |
Pacific Ethanol Stockholder Rights |
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Aventine Stockholder Rights |
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Special Meetings of Stockholders |
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Special meetings of the stockholders of Pacific Ethanol for any
purpose or purposes, unless otherwise prescribed by law, may be called by the Pacific Ethanol Board, the chairman of the board,
the chief executive officer or president (in the absence of a chief executive officer), and shall be called by the secretary of
Pacific Ethanol at the request in writing by holders of not less than 10% of the total voting power of all outstanding securities
of Pacific Ethanol then entitled to vote.
If a special meeting is called by any person or persons
other than the Pacific Ethanol Board, chief executive officer, president or the chairman of the board, then the request shall
be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall
be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the secretary of Pacific
Ethanol. The secretary shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with Pacific
Ethanol’s bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting. No business
may be transacted at such special meeting other than the business specified in such notice to stockholders. |
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Except as otherwise required by applicable law, special meetings of stockholders of Aventine, for any purpose or purposes, may be called only by (i) the Chairman of the board, (ii) the Chief Executive Officer, (iii) the board pursuant to a resolution adopted by a majority of the entire board, or (iv) a request of the holders of at least 35% of the voting power of all then outstanding shares of capital stock of Aventine entitled to vote generally in the election of directors. Special meetings of stockholders shall be held at such place and time and on such date as shall be determined by the person calling the special meeting and stated in Aventine’s notice of the meeting, provided that the board may in its sole discretion determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication. |
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Limitation of Personal Liability of Directors |
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The Pacific Ethanol Certificate of Incorporation, as amended,
eliminates personally liable of a director to Pacific Ethanol and its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for a breach of the director’s duty of loyalty to Pacific Ethanol or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (which creates liability for unlawful payment of dividends and unlawful stock purchases or redemptions)
or (iv) for any transaction from which the director derived any improper personal benefit. The Pacific Ethanol Certificate of
Incorporation further provides that if the DGCL is amended to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of Pacific Ethanol shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended. |
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The Aventine fourth amended and restated Certificate of Incorporation eliminates the personal liability of a director to Aventine and its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent such exemption from liability or limitation thereof is not permitted by the DGCL. The Aventine Certificate of Incorporation further provides that if the DGCL is amended to authorize corporate action further limiting or eliminating the liability of directors, then the liability of a director to Aventine or its stockholders shall be limited or eliminated to the fullest extent permitted by the DGCL, as so amended. |
Pacific Ethanol Stockholder Rights |
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Aventine Stockholder Rights |
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Indemnification |
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Pacific Ethanol’s bylaws provides for mandatory indemnification,
to the fullest extent and in the manner permitted by the DGCL, for each of its directors and officers who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal or administrative
or investigative by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a
director, officer, employee or agent of Pacific Ethanol or is or was serving at the request of Pacific Ethanol as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust, non-profit entity or other enterprise, including service
with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person
in connection with any such action, suit, or proceeding. Pacific Ethanol shall be required to indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized by the Pacific Ethanol Board.
Pacific Ethanol’s Certificate of Incorporation, as
amended, and bylaws permit, to the fullest extent and in the manner permitted by the DGCL, Pacific Ethanol to indemnify and hold
harmless, each of its employees and agents who was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal or administrative or investigative by reason of the fact that he or she,
or a person for whom he or she is the legal representative, is or was an employee or agent of Pacific Ethanol or is or was serving
at the request of Pacific Ethanol as an employee or agent of another corporation, partnership, joint venture, trust, non-profit
entity or other enterprise, including service with respect to employee benefit plans, against all liability and loss suffered
and expenses reasonably incurred by such person in connection with any such action, suit, or proceeding. |
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Aventine’s fourth amended and restated Certificate
of Incorporation and second amended and restated bylaws provide for mandatory indemnification for each person who is or was made
a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he or she is or was a director
or officer of Aventine, while a director or officer of Aventine, is or was serving at the request of Aventine as a director, officer,
employee or agent of another corporation or of a partnership, limited liability company, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan and/or direct or indirect subsidiary, whether the basis of such proceeding
is alleged action in an official capacity as a director, officer, employee or agent, or in any other capacity while serving as
a director, officer, employee or agent, shall be indemnified and held harmless by Aventine to the fullest extent authorized or
permitted by applicable law, against all expense, liability and loss (including, without limitation, attorneys’ fees, judgments,
fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnified person
in connection with such proceeding, and such right to indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators. To the fullest extent
authorized or permitted by applicable law, the right to indemnification shall include the right to be paid by Aventine any expenses
incurred in defending or otherwise participating in any such proceeding in advance of its final disposition, subject to the delivery
by such indemnified person of any undertakings, if any, required by the DGCL (as it may be amended or modified from time to time)
at such time. |
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Business Combinations |
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Pacific Ethanol’s Certificate of Incorporation, as amended, does not contain any provision requiring a supermajority vote of stockholders for business combinations. |
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Aventine’s fourth amended and restated Certificate of Incorporation does not contain any provision requiring a supermajority vote of stockholders for business combinations. |
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Forum for Adjudication of Disputes |
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Pacific Ethanol’s Certificate of Incorporation, as amended, and bylaws do not contain any provision designating a sole and exclusive forum for stockholder claims. |
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Aventine’s fourth amended and restated Certificate of Incorporation, and second amended and restated bylaws do not contain any provision designating a sole and exclusive forum for stockholder claims. |
APPRAISAL RIGHTS
In connection with the merger, record holders
of Aventine common stock who are not party to the Aventine Stockholders Agreement and if the drag along is not exercised comply
with the procedures summarized below will be entitled to appraisal rights if the merger is completed. Under Section 262, as a result
of completion of the merger, holders of shares of Aventine common stock, with respect to which appraisal rights are properly demanded
and perfected and not withdrawn or lost, are entitled, in lieu of receiving the merger consideration, to have the “fair value”
of their shares at the effective time of the merger (exclusive of any element of value arising from the accomplishment or expectation
of the merger) judicially determined and paid to them in cash by complying with the provisions of Section 262. Aventine is required
to send a notice to that effect to each stockholder not less than 20 days prior to the special meeting. This joint proxy statement/prospectus
constitutes that notice to you.
The following is a brief summary of Section
262, which sets forth the procedures for demanding statutory appraisal rights. This summary is qualified in its entirety by reference
to Section 262, a copy of the text of which is attached to this joint proxy statement/prospectus as Annex F. The following
summary does not constitute any legal or other advice nor does it constitute a recommendation that stockholders exercise their
appraisal rights under Section 262.
A stockholder who desires to exercise appraisal
rights must (i) not vote in favor of the adoption of the merger agreement, (ii) deliver in the manner set forth below a written
demand for appraisal of the stockholder’s shares to the Corporate Secretary of Aventine before the vote on the adoption of
the merger agreement at the special meeting at which the proposal to adopt the merger agreement will be submitted to Aventine’s
stockholders, (iii) continuously hold the shares of record from the date of making the demand through the effective time of the
merger, and (iv) otherwise comply with the requirements of Section 262. Within 10 days after the effective time of the merger,
the surviving corporation must provide notice of the effective time to all stockholders who have complied with Section 262 and
not voted in favor of the merger.
Only a holder of record of Aventine common stock
is entitled to demand an appraisal of the shares registered in that holder’s name. If shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, such demand must be executed by the fiduciary. If shares are owned of record
by more than one person, as in a joint tenancy or tenancy in common, the demand must be executed by all joint owners. An authorized
agent, including an agent of two or more joint owners, may execute the demand for appraisal for a stockholder of record; however,
the agent must identify the record owner and expressly disclose that, in exercising the demand, the agent is acting as agent for
the record owner.
A record owner, such as a broker, who holds
shares as a nominee for others may exercise appraisal rights with respect to the shares held for all or less than all beneficial
owners of shares as to which the holder is the record owner. In that case, the written demand must set forth the number of shares
covered by the demand. Where the number of shares is not expressly stated, the demand will be presumed to cover all shares outstanding
in the name of the record owner.
Beneficial owners who are not record owners
and who intend to exercise appraisal rights must act promptly to cause the record holder to follow the steps summarized herein
properly and in a timely manner to perfect appraisal rights. Shares held through brokerage firms, banks and other financial institutions
are frequently deposited with and held of record in the name of a nominee of a central security depositary. Any holder of shares
desiring appraisal rights with respect to such shares who held such shares through a brokerage firm, bank or other financial institution
is responsible for ensuring that the demand for appraisal is made by the record holder. The stockholder should instruct such firm,
bank or institution that the demand for appraisal must be made by the record holder of the shares, which might be the nominee of
a central security depositary if the shares have been so deposited.
As required by Section 262, a demand for appraisal
must be in writing and must reasonably inform Aventine of the identity of the record holder (which might be a nominee as described
above) and of such holder’s intention to seek appraisal of such shares.
Stockholders of record who elect to demand appraisal
of their shares must mail or deliver their written demand to: Aventine Renewable Energy Holdings, Inc., 1300 S. 2nd
Street, Pekin, IL 61554 , Attention: Corporate Secretary. The written demand must be received by Aventine prior to the taking
of the vote on the merger. Neither voting (in person or by proxy) against, abstaining from voting on or failing to vote on the
proposal to adopt the merger agreement and approve the merger will alone suffice to constitute a written demand for appraisal within
the meaning of Section 262. In addition, the stockholder seeking to demand appraisal must not vote its shares of stock in favor
of adoption of the merger agreement. Because a proxy that does not contain voting instructions will, unless revoked, be voted in
favor of adoption of the merger agreement, it will constitute a waiver of the stockholder’s right of appraisal and will nullify
any previously delivered written demand for appraisal. Therefore, a stockholder who wishes to exercise appraisal rights must vote
against the adoption of the merger agreement, abstain from voting on the adoption of the merger agreement or refrain from executing
and submitting the enclosed proxy card.
Within 120 days after the effective time of
the merger, but not thereafter, either the surviving corporation in the merger or any stockholder who has timely and properly demanded
appraisal of such stockholder’s shares and who has complied with the requirements of Section 262 and is otherwise entitled
to appraisal rights, or any beneficial owner for which a demand for appraisal has been properly made by the record holder, may
commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery, with a copy served on the surviving corporation
in the case of a petition filed by a stockholder, demanding a determination of the fair value of the shares of all stockholders
who have properly demanded appraisal.
There is no present intent on the part of the
surviving corporation to file an appraisal petition and stockholders seeking to exercise appraisal rights should not assume that
the surviving corporation will file such a petition or that the surviving corporation will initiate any negotiations with respect
to the fair value of such shares. Accordingly, stockholders who desire to have their shares appraised should initiate any petitions
necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262. Within
120 days after the effective time of the merger, any stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from the surviving corporation a statement setting forth the aggregate
number of shares of common stock not voting in favor of the merger and with respect to which demands for appraisal were received
by the surviving corporation and the number of holders of such shares. A person who is the beneficial owner of shares held in a
voting trust or by a nominee on behalf of such person may, in such person’s own name, file a petition or request from the
corporation the statement described in the previous sentence. Such statement must be mailed within 10 days after the written request
therefor has been received by the surviving corporation.
If a petition for an appraisal is timely filed,
at the hearing on such petition, the Delaware Court of Chancery will determine which stockholders are entitled to appraisal rights.
The Delaware Court of Chancery may require the stockholders who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency
of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Delaware Court of Chancery may dismiss
the proceedings as to such stockholder. Where proceedings are not dismissed, the appraisal proceeding shall be conducted, as to
the shares of common stock owned by such stockholders, in accordance with the rules of the Delaware Court of Chancery, including
any rules specifically governing appraisal proceedings.
After a hearing on such petition, the Delaware
Court of Chancery will determine which stockholders are entitled to appraisal rights and thereafter will appraise the shares owned
by those stockholders, determining the fair value of the shares exclusive of any element of value arising from the accomplishment
or expectation of the merger, together with interest to be paid, if any, upon the amount determined to be the fair value. Unless
the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective date of
the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve
discount rate (including any surcharges) as established from time to time during the period between the effective date of the merger
and the date of payment of the judgment. In determining fair value, the Delaware Court of Chancery is required to take into account
all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered
in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise admissible in court” should be considered and that
“[f]air price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware
Supreme Court stated that in making this determination of fair value the court must consider “market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts which were known or which could be ascertained
as of the date of merger which throw any light on future prospects of the merged corporation.” The Delaware Supreme Court
construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” However, the Delaware
Supreme Court noted that Section 262 provides that fair value is to be determined “exclusive of any element of value arising
from the accomplishment or expectation of the merger.”
Stockholders considering seeking appraisal should
bear in mind that the fair value of their shares determined under Section 262 could be more than, the same as, or less than the
merger consideration they are entitled to receive pursuant to the merger agreement if they do not seek appraisal of their shares,
and that opinions of investment banking firms as to the fairness from a financial point of view of the consideration payable in
a transaction are not opinions as to, and do not address, fair value under Section 262. Neither Pacific Ethanol nor Aventine anticipates
offering more than the applicable merger consideration to any Aventine stockholder exercising appraisal rights, and reserve the
right to assert, in any appraisal proceeding, that for purposes of Section 262, the “fair value” of a share of Aventine
common stock is less than the applicable merger consideration.
The cost of the appraisal proceeding may be
determined by the Delaware Court of Chancery and charged upon the parties as the Delaware Court of Chancery deems equitable in
the circumstances. However, costs do not include attorneys’ and expert witness fees. Each dissenting stockholder is responsible
for his or her attorneys’ and expert witness fees although upon application of a stockholder seeking appraisal rights, the
Delaware Court of Chancery may order that all or a portion of the expenses incurred by such stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, be
charged pro rata against the value of all shares entitled to appraisal. In the absence of such a determination of assessment, each
party bears its own expenses.
Any stockholder who has duly demanded appraisal
in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote for any purpose any shares
subject to such demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions
payable to stockholders of record at a date prior to the effective time of the merger.
At any time within 60 days after the effective
time of the merger, any stockholder who has demanded appraisal and who has not commenced an appraisal proceeding or joined that
proceeding as a named party, shall have the right to withdraw such stockholder’s demand for appraisal and to accept the cash
and Pacific Ethanol common stock as provided for in the merger agreement by delivering to the surviving corporation a written withdrawal
of such stockholder’s demand for appraisal and acceptance of the merger consideration. After this period, the stockholder
may withdraw such stockholder’s demand for appraisal only with the consent of the surviving corporation. If no petition for
appraisal is filed with the Delaware Court of Chancery within 120 days after the effective time of the merger, all stockholders’
rights to appraisal shall cease and all stockholders shall be entitled only to receive the merger consideration as provided for
in the merger agreement. Inasmuch as the parties to the merger agreement have no obligation to file such a petition, and have no
present intention to do so, any stockholder who desires that such petition be filed is advised to file it on a timely basis. No
appraisal proceeding in the Delaware Court of Chancery shall be dismissed as to any stockholders without the approval of the Delaware
Court of Chancery, and that approval may be conditioned upon such terms as the Delaware Court of Chancery deems just. However,
the preceding sentence will not affect the right of any stockholder who has not commenced an appraisal proceeding or joined the
proceeding as a named party to withdraw such stockholder’s demand for appraisal and to accept the terms offered upon the
merger within 60 days after the effective time of the merger.
The foregoing is a brief summary of Section
262 that sets forth the procedures for demanding statutory appraisal rights. This summary, however, is not a complete statement
of all applicable requirements and is qualified in its entirety by reference to Section 262, a copy of the text of which is attached
as Annex F to this joint proxy statement/prospectus.
A stockholder’s failure to comply with
all the procedures set forth in Section 262 will result in the loss of such stockholder’s statutory appraisal rights. Consequently,
if you wish to exercise your appraisal rights, you should consider consulting a legal advisor. To the extent the drag-along is
exercised pursuant to the Aventine Stockholders Agreement, the Aventine stockholders subject to the drag-along right have waived
their respective appraisal rights arising out of a drag-along transaction.
LEGAL MATTERS
The validity of the Pacific Ethanol common stock
and non-voting common stock and certain United States federal income tax consequences relating to the merger will be passed upon
for Pacific Ethanol by Troutman Sanders LLP.
Certain United States federal income tax consequences
relating to the merger will be passed upon for Aventine by Akin Gump Strauss Hauer & Feld LLP.
EXPERTS
The consolidated financial statements and
the effectiveness of internal control over financial reporting of Pacific Ethanol, Inc. incorporated in this registration statement
by reference to the Annual Report on Form 10-K for the year ended December 31, 2014, have been audited by Hein & Associates
LLP, an independent registered public accounting firm, as stated in their reports incorporated by reference herein, and have been
so incorporated in reliance upon the authority of such firm as experts in accounting and auditing.
The consolidated financial
statements of Aventine and subsidiaries as of December 31, 2014 and 2013 and for the year ending December 31, 2014 and 2013
appearing in this registration statement have been audited by McGladrey LLP, as stated in their report appearing elsewhere in
the registration statement (which report expresses an unqualified opinion on the financial statements), and are included in
reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Aventine
Renewable Energy Holdings, Inc. at December 31, 2012 and 2011, and for the years then ended, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, set forth in their report therein appearing elsewhere
herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
Pacific Ethanol
Pursuant to Rule 14a–8 under the Exchange
Act, proposals by stockholders that are intended for inclusion in Pacific Ethanol’s Proxy Statement and proxy card and to
be presented at Pacific Ethanol’s next annual meeting must be received by Pacific Ethanol no later than [●], 2015
in order to be considered for inclusion in Pacific Ethanol’s proxy materials relating to the next annual meeting. Such proposals
shall be addressed to Pacific Ethanol’s corporate Secretary at Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060, Sacramento,
California 95814 and may be included in next year’s annual meeting proxy materials if they comply with rules and regulations
of the Securities and Exchange Commission governing stockholder proposals.
Stockholder nominations of persons for election
to the Pacific Ethanol Board, or proposals by stockholders that are not intended for inclusion in Pacific Ethanol’s proxy
materials, may be made by any stockholder who timely and completely complies with the notice procedures contained in Pacific Ethanol’s
bylaws, was a stockholder of record at the time of giving of notice and is entitled to vote at the meeting, so long as the proposal
is a proper matter for stockholder action and the stockholder otherwise complies with the provisions of Pacific Ethanol’s
bylaws and applicable law. However, stockholder nominations of persons for election to the Pacific Ethanol Board at a special
meeting may only be made if the Pacific Ethanol Board has determined that directors are to be elected at the special meeting.
To be timely, stockholder
nominations of persons for election to Pacific Ethanol’s Board of Directors, or proposals not intended for inclusion in
Pacific Ethanol’s proxy materials, must be delivered to Pacific Ethanol’s Secretary at its corporate headquarters
not later than:
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In the case of an annual meeting, the close of business on [●],
2016. However, if the date of the meeting has changed more than 30 days from the date of the prior year’s meeting, then
in order for the stockholder’s notice to be timely it must be delivered to Pacific Ethanol’s corporate Secretary
a reasonable time before Pacific Ethanol mails its proxy materials for the current year’s meeting. For purposes of the
preceding sentence, a “reasonable time” coincides with any adjusted deadline that is publicly announced by Pacific
Ethanol. |
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In the case of a special meeting, the close of business on the
7th day following the day on which Pacific Ethanol first publicly announces the date of the special meeting. |
Except as otherwise provided by law, if
the chairperson of the meeting determines that a nomination or any business proposed to be brought before a meeting was not made
or proposed in accordance with the procedures set forth in Pacific Ethanol’s bylaws and summarized above, the chairperson
may prohibit the nomination or proposal from being presented at the meeting.
Aventine
Aventine will hold a 2015 annual meeting of
stockholders only if the merger is not completed. Any proposal of a stockholder of Aventine that is intended to be presented by
such stockholder at Aventine’s 2015 annual meeting of stockholders (if it is held) must have been received by Aventine, such
proposal may be considered if written notice of such proposal is timely received by Aventine’s Secretary. Generally, a notice
is timely given if received by Aventine’s Secretary not less than 90 or more than 120 days before the date of the annual
meeting.
WHERE YOU CAN FIND MORE INFORMATION
Pacific Ethanol files annual, quarterly and
current reports, proxy statements and other information with the SEC. You may read and copy any of this information at the Securities
and Exchange Commission’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 or 202-942-8090 for further information on the public reference room. The Securities
and Exchange Commission also maintains an Internet website that contains reports, proxy statements and other information regarding
issuers, including Pacific Ethanol, who file electronically with the Securities and Exchange Commission. The address of that site
is http://www.sec.gov. The information contained on the Securities and Exchange Commission’s website is expressly
not incorporated by reference into this joint proxy statement/prospectus. Pacific Ethanol’s Internet website is www.pacificethanol.com,
and Pacific Ethanol makes available free of charge at such website Pacific Ethanol’s annual reports, quarterly reports, current
reports, reports filed pursuant to Section 16 of the Exchange Act and amendments to those reports as soon as reasonably practical
after such reports are electronically filed or furnished to the Securities and Exchange Commission. The information on Pacific
Ethanol’s website is not incorporated by reference into this joint proxy statement/prospectus.
Pacific Ethanol has filed with the Securities
and Exchange Commission a registration statement on Form S-4 of which this joint proxy statement/prospectus is a part. The registration
statement registers the shares of Pacific Ethanol common stock to be issued to Aventine stockholders in connection with the merger,
together with shares of Pacific Ethanol common stock that may be issued upon conversion of the Pacific Ethanol non-voting common
stock that may be issued in connection with the merger. The registration statement, including the attached exhibits and annexes,
contains additional relevant information about the common stock and non-voting common stock of Pacific Ethanol and the common stock
of Aventine. The rules and regulations of the Securities and Exchange Commission allow Pacific Ethanol to omit certain information
included in the registration statement from this joint proxy statement/prospectus.
The Securities and Exchange Commission allows
Pacific Ethanol to “incorporate by reference” information into this joint proxy statement/prospectus, which means that
Pacific Ethanol can disclose important information to you by referring you to another document filed separately with the Securities
and Exchange Commission. The information incorporated by reference is deemed to be part of this joint proxy statement/prospectus,
except for any information superseded by information in, or incorporated by reference in, this joint proxy statement/prospectus.
This joint proxy statement/prospectus incorporates by reference the documents listed below that Pacific Ethanol has previously
filed with the Securities and Exchange Commission (other than documents or information deemed to have been furnished and not filed
in connection with Securities and Exchange Commission rules). These documents contain important information about Pacific Ethanol
and its financial position.
Pacific Ethanol Securities and Exchange Commission
Filings (File No. 000-21467)
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Annual Report on Form 10-K for the year ended December 31, 2014; |
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Current Reports on Form 8-K filed on March 4, 2015 and April
2, 2015; |
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· |
The description of Pacific Ethanol common stock set forth in Current Report on Form 8-K filed on June 8, 2007, including any amendment or report filed for the purpose of updating such description; and |
|
· |
All documents filed by Pacific Ethanol in accordance with
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of this joint proxy statement/prospectus and
before the termination of an offering under this joint proxy statement/prospectus, other than documents or information deemed
furnished and not filed in accordance with Securities and Exchange Commission rules. |
Aventine is not required to and does not file
periodic reports with the Securities and Exchange Commission.
This document is a prospectus of Pacific
Ethanol and is a joint proxy statement of Pacific Ethanol and Aventine for the Pacific Ethanol annual meeting and the Aventine
special meeting. Neither Pacific Ethanol nor Aventine has authorized anyone to give any information or make any representation
about the merger or Pacific Ethanol or Aventine that is different from, or in addition to, that contained in this joint proxy
statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. The information
contained in this document speaks only as of the date of this document unless the information specifically indicates that another
date applies.
AVENTINE RENEWABLE ENERGY HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
|
|
Independent Auditor’s Report (McGladrey) |
F-2 |
|
|
Consolidated Balance Sheets as at December 31, 2014 and 2013 |
F-4 |
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013 |
F-5 |
|
|
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014 and 2013 |
F-6 |
|
|
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2014 and 2013 |
F-7 |
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013 |
F-8 |
|
|
Notes to Consolidated Financial Statements for the Years Ended December 31, 2014 and 2013 |
F-10 |
|
|
Report of Independent Auditors (Ernst & Young) |
F-31 |
|
|
Consolidated Balance Sheets as at December 31, 2012 and 2011 |
F-33 |
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011 |
F-34 |
|
|
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2012 and 2011 |
F-35 |
|
|
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012 and 2011 |
F-36 |
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011 |
F-37 |
|
|
Notes to Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 |
F-38 |
Independent Auditor’s Report
To the Board of Directors and Stockholders
Aventine Renewable Energy Holdings, Inc.
Pekin, Illinois
Report on the Financial Statements
We have audited the accompanying
consolidated financial statements of Aventine Renewable Energy Holdings, Inc. and its subsidiaries, which comprise the consolidated
balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss),
changes in stockholders’ equity and cash flows for the years then ended and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible
for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
Auditor’s Responsibility
Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing
procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of Aventine Renewable Energy
Holdings, Inc. and its subsidiaries as of December 31, 2014 and 2013, and the results of its operations and its cash flows for
the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ McGladrey LLP
Des Moines, Iowa
March 4, 2015
Aventine
Renewable Energy Holdings, Inc.
Consolidated Balance Sheets
December
31, 2014 and 2013 (in 000's)
| |
2014 | | |
2013 | |
Assets | |
| | | |
| | |
| |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 33,250 | | |
$ | 40,456 | |
Accounts receivable, net of allowance for doubtful accounts of $698 and
$299 at December 31, 2014 and 2013 |
|
|
20,353 |
|
|
|
8,779 |
|
Inventories | |
| 24,612 | | |
| 32,437 | |
Derivative financial instruments | |
| 286 | | |
| 1,183 | |
Prepaid expenses and other current assets | |
| 9,195 | | |
| 5,585 | |
Current assets held for sale | |
| 4,927 | | |
| 39,671 | |
Total current assets | |
| 92,623 | | |
| 128,111 | |
| |
| | | |
| | |
Property, Plant and Equipment, net | |
| 217,830 | | |
| 209,775 | |
| |
| | | |
| | |
Other Long Term Assets | |
| 3,724 | | |
| 6,324 | |
| |
| | | |
| | |
Total assets | |
$ | 314,177 | | |
$ | 344,210 | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity | |
| | | |
| | |
| |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Current maturities of long-term debt (stated principal amount of$1,657 and $2,043 at December 31, 2014 and 2013) |
|
$ |
1,657 |
|
|
$ |
2,043 |
|
Current obligations under capital leases | |
| – | | |
| 100 | |
Accounts payable | |
| 19,533 | | |
| 10,269 | |
Accrued liabilities | |
| 4,643 | | |
| 1,995 | |
Other current liabilities | |
| 6,883 | | |
| 12,759 | |
Current liabilities held for sale | |
| – | | |
| 591 | |
Total current liabilities | |
| 32,716 | | |
| 27,757 | |
| |
| | | |
| | |
Long-term debt (stated principal amount of $159,397 and $193,887 at December 31, 2014 and
2013) |
|
|
222,053 |
|
|
|
273,824 |
|
Deferred tax liabilities | |
| 2,078 | | |
| 2,078 | |
Other noncurrent liabilities | |
| 8,014 | | |
| 3,904 | |
Total liabilities | |
| 264,861 | | |
| 307,563 | |
| |
| | | |
| | |
Stockholders' Equity | |
| | | |
| | |
Common stock, par value $0.001 per share; 15,000,000 shares authorized; 14,204,240 and 2,354,673 shares outstanding,
net of 1,497 shares held in treasury at December 31, 2014 and 2013 |
|
|
14 |
|
|
|
2 |
|
Preferred stock; 5,000,000 shares authorized; no shares issued or outstanding |
|
|
– |
|
|
|
– |
|
Additional paid-in capital | |
| 258,424 | | |
| 258,318 | |
Accumulated deficit | |
| (203,493 | ) | |
| (220,057 | ) |
Accumulated other comprehensive loss, net | |
| (5,629 | ) | |
| (1,616 | ) |
Total stockholders' equity | |
| 49,316 | | |
| 36,647 | |
| |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 314,177 | | |
$ | 344,210 | |
See Notes to Consolidated Financial Statements.
Aventine Renewable Energy Holdings,
Inc.
Consolidated Statements of Operations
Years Ended December 31, 2014 and 2013 (in 000's)
| |
2014 | | |
2013 | |
| |
| | | |
| | |
Net sales | |
$ | 588,028 | | |
$ | 480,266 | |
Cost of goods sold | |
| 511,303 | | |
| 469,231 | |
Gross profit | |
| 76,725 | | |
| 11,035 | |
| |
| | | |
| | |
Selling, general and administrative expenses | |
| 31,388 | | |
| 13,590 | |
Other expense | |
| 2,634 | | |
| 807 | |
Loss on derivative transactions, net | |
| 11,166 | | |
| 5,454 | |
| |
| 45,188 | | |
| 19,851 | |
| |
| | | |
| | |
Operating income (loss) | |
| 31,537 | | |
| (8,816 | ) |
| |
| | | |
| | |
Nonoperating income (expense): | |
| | | |
| | |
Interest expense, net | |
| (14,233 | ) | |
| (12,942 | ) |
Other nonoperating income (expense) | |
| (9 | ) | |
| 6,296 | |
| |
| (14,242 | ) | |
| (6,646 | ) |
| |
| | | |
| | |
| |
| | | |
| | |
Income (loss) from continuing operations before income taxes | |
| 17,295 | | |
| (15,462 | ) |
| |
| | | |
| | |
Income tax expense | |
| – | | |
| – | |
| |
| | | |
| | |
Income (loss) from continuing operations | |
| 17,295 | | |
| (15,462 | ) |
| |
| | | |
| | |
Discontinued operations: | |
| | | |
| | |
Loss from operations of discontinued components | |
| (731 | ) | |
| (58,843 | ) |
| |
| | | |
| | |
Net income (loss) | |
$ | 16,564 | | |
$ | (74,305 | ) |
See
Notes to Consolidated Financial Statements.
Aventine Renewable Energy Holdings,
Inc.
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2014 and 2013 (in 000's)
| |
2014 | | |
2013 | |
| |
| | | |
| | |
Net income (loss) | |
$ | 16,564 | | |
$ | (74,305 | ) |
Other comprehensive gain (loss) | |
| | | |
| | |
Pension and postretirement liability adjustment | |
| (4,013 | ) | |
| 3,247 | |
Total comprehensive income (loss) | |
$ | 12,551 | | |
$ | (71,058 | ) |
| |
| | | |
| | |
See Notes to Consolidated Financial Statements.
Aventine Renewable Energy Holdings,
Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2014 and 2013 (dollars in 000's)
|
| |
| |
| |
| |
| |
Accumulated | |
| |
|
Number of Shares | |
| |
Additional | |
| |
Other | |
Total | |
|
Treasury | |
Common | |
Common | |
Paid-In | |
Accumulated | |
Comprehensive | |
Stockholders’ | |
|
Shares | |
Shares | |
Stock | |
Capital | |
Deficit | |
(Loss) | |
Equity | |
Balance, December 31, 2012 |
| 1,497 | |
| 2,354,673 | |
$ | 2 | |
$ | 258,223 | |
$ | (145,752 | ) |
$ | (4,863 | ) |
$ | 107,610 | |
Stock-based compensation |
| – | |
| – | |
| – | |
| 95 | |
| – | |
| – | |
| 95 | |
Net loss |
| – | |
| – | |
| – | |
| – | |
| (74,305 | ) |
| – | |
| (74,305 | ) |
Pension and postretirement
liability adjustment |
| – | |
| – | |
| – | |
| – | |
| – | |
| 3,247 | |
| 3,247 | |
Balance, December 31, 2013 |
| 1,497 | |
| 2,354,673 | |
| 2 | |
| 258,318 | |
| (220,057 | ) |
| (1,616 | ) |
| 36,647 | |
Stock-based compensation |
| – | |
| – | |
| – | |
| 50 | |
| – | |
| – | |
| 50 | |
Warrants exercised |
| – | |
| 11,849,567 | |
| 12 | |
| 56 | |
| – | |
| – | |
| 68 | |
Net income |
| – | |
| – | |
| – | |
| – | |
| 16,564 | |
| – | |
| 16,564 | |
Pension and postretirement
liability adjustment |
| – | |
| – | |
| – | |
| – | |
| – | |
| (4,013 | ) |
| (4,013 | ) |
Balance, December 31, 2014 |
| 1,497 | |
| 14,204,240 | |
$ | 14 | |
$ | 258,424 | |
$ | (203,493 | ) |
$ | (5,629 | ) |
$ | 49,316 | |
See Notes to Consolidated Financial Statements.
Aventine Renewable Energy Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2014 and
2013 (in 000's)
| |
2014 | | |
2013 | |
Cash Flows from Operating Activities | |
| | | |
| | |
Net income (loss) | |
$ | 16,564 | | |
$ | (74,305 | ) |
Adjustments to reconcile net income (loss) to net cash provided by(used in) operating activities: |
|
|
|
|
|
|
|
|
Loss on sale of assets | |
| 3,167 | | |
| – | |
Depreciation and amortization | |
| 13,425 | | |
| 18,717 | |
Stock-based compensation expense | |
| 50 | | |
| 95 | |
Amortization of additional carrying value of debt | |
| (17,280 | ) | |
| (15,289 | ) |
Amortization of deferred financing costs | |
| 3,979 | | |
| 2,089 | |
Write down to fair value of held for sale assets | |
| – | | |
| 44,184 | |
Accumulated PIK Interest | |
| 25,211 | | |
| 22,205 | |
Changes in working capital components: | |
| | | |
| | |
Accounts receivable, net | |
| (11,574 | ) | |
| 197 | |
Inventories | |
| 7,867 | | |
| (4,504 | ) |
Derivative financial instruments | |
| 897 | | |
| (1,015 | ) |
Prepaid expenses and other current assets | |
| (3,610 | ) | |
| (917 | ) |
Other assets | |
| (435 | ) | |
| (653 | ) |
Accounts payable | |
| 7,030 | | |
| 2,531 | |
Other liabilities | |
| (3,722 | ) | |
| 3,307 | |
Net cash provided by (used in) operating activities | |
| 41,569 | | |
| (3,358 | ) |
| |
| | | |
| | |
Cash Flows from Investing Activities | |
| | | |
| | |
Proceeds from the sale of assets | |
| 34,702 | | |
| – | |
Purchase of property, plant and equipment | |
| (22,413 | ) | |
| (7,513 | ) |
Net cash provided by (used in) investing activities | |
| 12,289 | | |
| (7,513 | ) |
| |
| | | |
| | |
Cash Flows from Financing Activities | |
| | | |
| | |
Proceeds from issuance of long-term debt | |
| 23,358 | | |
| 35,000 | |
Payments on long-term debt | |
| (83,446 | ) | |
| (540 | ) |
Debt issuance costs | |
| (944 | ) | |
| – | |
Payments on capital lease obligations | |
| (100 | ) | |
| (74 | ) |
Proceeds from warrant exercise | |
| 68 | | |
| – | |
Net cash provided by (used in) financing activities | |
| (61,064 | ) | |
| 34,386 | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
| (7,206 | ) | |
| 23,515 | |
| |
| | | |
| | |
Cash and Cash Equivalents | |
| | | |
| | |
Beginning of year | |
| 40,456 | | |
| 16,941 | |
| |
| | | |
| | |
End of year | |
$ | 33,250 | | |
$ | 40,456 | |
(Continued) | |
| | | |
| | |
Aventine Renewable Energy Holdings,
Inc.
Consolidated Statements Of Cash Flows (Continued)
ears Ended December 31, 2014 and 2013
(In 000's)
| |
2014 | | |
2013 | |
Supplemental Disclosure of Cash Flow Information | |
| | |
| |
Interest paid (including capitalized interest of 2014 $1,964; 2013 $242) | |
$ | 4,178 | | |
$ | 3,485 | |
| |
| | | |
| | |
Supplemental Schedule of Noncash Investing and Financing Activities | |
| | | |
| | |
Equipment purchased through issuance of seller financing | |
$ | – | | |
$ | 4,113 | |
| |
| | | |
| | |
Equipment purchases in accounts payable | |
$ | 2,234 | | |
$ | 1,163 | |
See Notes to Consolidated Financial Statements.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Aventine Renewable
Energy Holdings, Inc. and its wholly owned subsidiaries (collectively referred to as Aventine, the Company, we, or our) owns five
ethanol plants capable of producing approximately 350 million gallons of ethanol per year. In addition to producing ethanol, the
Company also produces and sells various co-products, including corn gluten feed and meal, corn germ, condensed corn distillers
solubles, distillers grains, corn oil, carbon dioxide, and yeast.
Basis of presentation: The accompanying
consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States
of America (U.S. GAAP). All material intercompany transactions and balances have been eliminated.
The ethanol facilities included in continuing
operations on the statements of operations are located in Pekin, Illinois and Aurora, Nebraska with a combined production capacity
of 315 million gallons. The ethanol facilities located in Mount Vernon, Indiana (Mount Vernon) were sold in 2014 and the idle ethanol
facility located in Canton, Illinois (Canton), is classified as held for sale on the consolidated balance sheet at December 31,
2014 and 2013 in accordance with Accounting Standard Codification (ASC) Topic 360-10-55 Disposal of Long-Lived Assets. As a result,
the Company has presented the results of operations for Mount Vernon and Canton as discontinued operations on the consolidated
statement of operations in accordance with ASC Topic 205-20 Discontinued Operations for 2014 and 2013, respectively.
Use of estimates: The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. These estimates are based on management's knowledge of
current events and actions that the Company may take in the future. Estimates, by their nature, are based on judgment and available
information. Therefore, actual results could differ from those estimates and could have a material impact on the consolidated financial
statements.
Revenue recognition: Revenue is recognized
when title transfers to an unaffiliated customer, the sales price is fixed or determinable and collectability is reasonably assured.
For the majority of our sales, transfer of title occurs after the product has been delivered to its designated shipping point.
The Company's ethanol indexed sales are invoiced based upon a provisional price and are adjusted to a final price in the same month
using the monthly average of spot market prices. Other sales are invoiced at the final per unit price, which may be the contracted
fixed price or a market price at the time of shipment. Sales are made under normal terms and do not require collateral.
The majority of sales are reported gross, inclusive
of freight costs being paid by the Company and charged to the customer. The Company recognizes such freight costs in cost of goods
sold in the financial statements. When freight costs are paid by the buyer, the Company excludes these costs from its financial
statements.
Fair value of financial instruments:
Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, long-term debt
and derivative instruments. Management believes the fair value of each of these instruments approximates their carrying value.
The fair value of derivative instruments is based on quoted market prices. The fair value of financial instruments classified as
current assets and liabilities are estimated to approximate carrying values due to the short-term nature of these instruments.
The fair values of the term loans are estimated to approximate the stated principal value.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 1. Nature of Business and Significant Accounting Policies
(Continued)
Cash and cash equivalents: The Company
considers all highly liquid short-term investments purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents are carried at cost, which approximates fair value. The Company’s cash balances are maintained in bank deposit
accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Accounts receivable: Accounts receivable
are recorded on a gross basis, without discounting, less an allowance for doubtful accounts. Trade receivables arise in the ordinary
course of business from sales of finished product to the Company's customers. Management estimates the allowance for doubtful accounts
based on existing economic conditions, the financial conditions of the customers, and the amount and age of past-due accounts.
The Company writes off specific accounts receivable when collection efforts are exhausted and the amounts are deemed unrecoverable.
Inventories: Inventories are stated
at the lower of cost or market. Cost is determined using a weighted-average method. Inventory costs include expenditures incurred
to bring inventory to its existing condition and location. Inventories primarily consist of agricultural and energy-related commodities,
including corn, sugar, ethanol, co-products, and coal, and were as follows at December 31, 2014 and 2013:
| |
2014 | | |
2013 | |
Raw materials | |
$ | 7,566 | | |
$ | 13,962 | |
Work in process | |
| 3,351 | | |
| 1,812 | |
Finished products | |
| 13,695 | | |
| 16,663 | |
| |
$ | 24,612 | | |
$ | 32,437 | |
Derivative financial instruments and hedging
activities: Derivatives are accounted for in accordance with ASC 815, Derivatives and Hedging, and primarily
consist of the Company’s commodity futures contracts. These derivative instruments are not designated as hedges for accounting
purposes and are marked to market each period and therefore any realized or unrealized gain or loss related to the derivative instruments
is recorded in the statements of operations as operating income (loss). The Company reports all contracts with the same counter
party on a net basis at fair value on the Company's consolidated balance sheets.
Under ASC 815, companies are required to evaluate
contracts to determine whether such contracts are derivatives. Certain contracts that meet the definition of a derivative under
ASC 815 may be exempted from the accounting and reporting requirements of ASC 815 as normal purchases or normal sales. The Company
has elected to designate its forward purchases of corn and natural gas and forward sales of ethanol as normal purchases and normal
sales under ASC 815. Accordingly, these forward commodity contracts are not reflected in the consolidated financial statements
at fair value.
Property, Plant and Equipment: Newly
acquired land, buildings, and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the estimated
useful lives of the assets, generally on the straight-line basis for financial reporting purposes (furniture and fixtures, 5-15
years; machinery and equipment, 10-20 years; storage tanks, 15-25 years; and buildings, 37-40 years). Maintenance and repairs are
charged to expense as incurred.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 1. Nature of Business and Significant Accounting Policies
(Continued)
Impairment of long-lived assets: Long-lived
assets are evaluated for impairment under the provisions of ASC 360, Property, Plant and Equipment. When facts and circumstances
indicate that long-lived assets used in operations may be impaired, and the undiscounted cash flows estimated to be generated from
those assets are less than their carrying values, an impairment charge is recorded equal to the excess of the carrying value over
fair value. No impairment was recognized at December 31, 2014 and 2013 on assets used in continuing operations.
Employment-related benefits: Employment-related
benefits associated with pensions and postretirement health care are expensed based on actuarial analysis. The recognition of expense
is affected by estimates made by management, such as discount rates used to value certain liabilities, investment rates of return
on plan assets, increases in future wage amounts, and future health care costs.
Discount rates are determined based on a spot
yield curve that includes bonds with maturities that match expected benefit payments under the plan.
Employee stock plans: The Company accounts
for its employee stock compensation in accordance with ASC 718, Compensation – Stock Compensation. Equity awards are
expensed based on their grant date fair value. As required under the guidance, management estimates the number of shares that are
expected to vest and expensed the value of those shares from the date of grant through the end of the performance cycle period
using the grant-date fair value. During the years ended December 31, 2014 and 2013, there were no new equity awards issued to employees.
All unvested equity awards issued prior to January 1, 2013 were forfeited during the year ended December 31, 2013 except for an
immaterial amount of stock options and hybrid equity units.
Income taxes: Deferred tax liabilities
and assets are recorded for the expected future tax consequences of events that have been recognized in the financial statements
or tax returns. Property, plant, and equipment, stock-based compensation expense, debt issuance costs, and original issue discount
are the primary sources of these temporary differences. Deferred income taxes also include net operating loss and capital loss
carryforwards. The Company establishes valuation allowances to reduce deferred tax assets to amounts it believes are realizable.
These valuation allowances and contingency reserves are adjusted based upon changing facts and circumstances.
The Company has evaluated its income tax positions
in accordance with the guidance related to Accounting for Uncertainty in Income Taxes and determined no income tax uncertainties
exist. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal, or state and local income tax examinations by tax authorities for years before
2011. On February 27, 2014, the IRS notified the Company that its 2012 consolidated federal tax return would be subject to IRS
audit. The audit process has continued through the end of 2014. Based on the size of the Company’s 2012 loss, its loss carry-forwards,
valuation allowance and reserves, the Company does not expect the outcome of the audit to generate additional tax liability or
penalty.
Accumulated other comprehensive loss:
Comprehensive loss is the total of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
is comprised of unrecognized pension and postretirement benefit costs.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 1. Nature
of Business and Significant Accounting Policies (Continued)
Major customers: The Company sells ethanol
to most of the major integrated oil companies, as well as to a significant number of large, independent refiners and petroleum
wholesalers. Trade receivables result primarily from ethanol marketing operations.
During the year ended December 31, 2014, Customer
A accounted for 15.2% of the Company's consolidated net sales and had receivable balances consisting of 35.8% of total trade accounts
receivable at December 31, 2014.
During the year ended December 31, 2013, Customer
A and Customer B accounted for 18.6% and 10.0%, respectively, of the Company's consolidated net sales and had receivable balances
consisting of 5.7% and 1.3%, respectively, of total accounts receivable at December 31, 2013.
Labor concentration: At December 31,
2014 approximately 46% of the Company’s full-time employees, which are located in Illinois, are covered by a collective bargaining
labor agreement that runs through October 31, 2015.
Reclassification: Certain items in the
consolidated financial statements as of and for the year ended December 31, 2013 have been reclassified to conform with the 2014
presentation with no effect on stockholders’ equity or net income (loss).
Subsequent events: Subsequent events have been
evaluated for potential recognition and disclosure through March 4, 2015, the date the financial statements were available for
issuance.
Note 2. Pending Merger with Pacific
On December 30, 2014, the Company entered into
a definitive merger agreement with Pacific Ethanol, Inc. (“Pacific”). The merger agreement provides that, subject to
the conditions set forth in the merger agreement, the Company will become a wholly-owned subsidiary of Pacific. Subject to the
conditions of the merger agreement which was approved by each of the Company’s and Pacific’s boards of directors, each
outstanding share of the Company’s common stock will, upon closing, be converted into the right to receive 1.25 shares of
Pacific’s common stock, which will result in the issuance of approximately 17.8 million shares of Pacific’s common
stock. The Company’s stockholders will have the right to convert its existing shares in Aventine into voting or non-voting
shares of the combined company. Upon the closing of the merger, the Company’s stockholders are expected to hold approximately
42% of the combined company. The merger, which is intended to be structured as a tax-free exchange of shares, is expected to close
during second quarter of 2015, and is subject to closing conditions, including obtaining certain regulatory approvals and approvals
from a majority of stockholders of each of Aventine and Pacific.
Note 3. Discontinued Operations
As part of a strategic repositioning and refocusing
on the Company’s core competitive advantages, Aventine made the decision in 2013 to sell its Mount Vernon and Canton facilities.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 3. Discontinued Operations (Continued)
On March 21, 2014, Aventine sold its Mount
Vernon facility to an independent third party. Under the terms of the agreement, Aventine received $34.2 million of cash consideration
and a full release of all of its contractual obligations related to the site lease and utility contracts. After transaction fees,
closing adjustments and working capital reserves, net sale proceeds of $24.3 million were used to repay Aventine’s senior
secured term loan debt.
The sale process for Canton continued through
December 31, 2014. The Company is in the process of assessing and analyzing all of its disposal options, and expects a final determination
for Canton to occur in 2015. At December 31, 2014 and 2013, the Company
determined the fair value of Canton to be approximately $5 million and has been classified as current assets held for sale on the
consolidated balance sheets.
The amount of revenue and pretax loss for each
disposal group included in discontinued operations is as follows for the years ended December 31, 2014 and 2013:
| |
2014 | | |
2013 | |
| |
Mount | | |
| | |
| | |
Mount | | |
| | |
| |
| |
Vernon | | |
Canton | | |
Total | | |
Vernon | | |
Canton | | |
Total | |
Revenue | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 556 | | |
$ | – | | |
$ | 556 | |
Pre-tax loss | |
| (35 | ) | |
| (696 | ) | |
| (731 | ) | |
| (14,110 | ) | |
| (549 | ) | |
| (14,659 | ) |
Write down to fair value, less costs to sell | |
| – | | |
| – | | |
| – | | |
| (22,849 | ) | |
| (21,335 | ) | |
| (44,184 | ) |
The major classes of assets and liabilities
classified as held for sale at December 31, 2014 and 2013 are as follows:
| |
2014 | | |
2013 | |
| |
Mount Vernon | | |
Canton | | |
Total | | |
Mount Vernon | | |
Canton | | |
Total | |
Current assets held for sale: | |
| | |
| | |
| | |
| | |
| | |
| |
Inventory | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 139 | | |
$ | 42 | | |
$ | 181 | |
Prepaid expenses and other current assets | |
| – | | |
| – | | |
| – | | |
| 516 | | |
| – | | |
| 516 | |
Property, plant and equipment, net | |
| – | | |
| 4,927 | | |
| 4,927 | | |
| 28,828 | | |
| 4,927 | | |
| 33,755 | |
Other long term assets | |
| – | | |
| – | | |
| – | | |
| 5,219 | | |
| – | | |
| 5,219 | |
Total
current assets held for sale | |
$ | – | | |
$ | 4,927 | | |
$ | 4,927 | | |
$ | 34,702 | | |
$ | 4,969 | | |
$ | 39,671 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current liabilities held for sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other current liabilities | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 591 | | |
$ | 591 | |
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 3. Discontinued Operations (Continued)
Included in the loss from operations of discontinued
components on the statement of operations for the year ended December 31, 2013 is a loss of $44,184 recognized to reduce the carrying
value of the assets being sold to fair value and an additional write-down for the amount of remaining selling costs to be incurred
subsequent to December 31, 2013.
Note 4. Fair Value Measurements
Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches,
the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques,
the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks
the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair
value will be classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active
markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are
not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that
require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market
activity).
A description of the valuation methodologies
used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation
hierarchy, is set for below. These valuation methodologies were applied to all of the Company’s financial assets and financial
liabilities carried at fair value.
Derivative financial instruments: Exchange-traded
futures and options and over-the-counter swaps and option contracts are reported at fair value utilizing Level 1 inputs. For these
contracts, fair value measurements consider observable exchange-traded pricing data from the Chicago Board of Trade and the Chicago
and New York Mercantile Exchanges. The fair value measurements also consider observable data that may include dealer quotes and
live trading levels from the over-the-counter markets.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 4. Fair Value Measurements (Continued)
Pooled separate accounts: Pooled separate
accounts (other than the Real estate account) invest primarily in domestic and international stocks, commercial paper, or single
mutual funds. The Real estate account invests primarily in commercial real estate and includes mortgage loans which are backed
by the associated properties. The net asset value is used as a practical expedient to determine fair value for these accounts.
Each pooled separate account provides for redemptions by the Plan at reported net asset values per share, with little to no advance
notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy.
The following tables summarize the valuation of
the Company's financial instruments that are measured at fair value on a recurring basis as of December 31, 2014 and 2013:
| |
2014 | | |
| |
| |
| | |
| | |
| | |
| | |
Benefit Plan | |
| |
Fair | | |
| | |
| | |
| | |
Percentage | |
| |
Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Allocation | |
Assets: | |
| | |
| | |
| | |
| | |
| |
Derivative financial instruments | |
$ | 2,634 | | |
$ | 2,634 | | |
$ | – | | |
$ | – | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Defined benefit plan assets | |
| | | |
| | | |
| | | |
| | | |
| | |
(pooled separate accounts): | |
| | | |
| | | |
| | | |
| | | |
| | |
Large U.S. Equity | |
| 3,889 | | |
| – | | |
| 3,889 | | |
| – | | |
| 29% | |
Small/Mid U.S. Equity | |
| 972 | | |
| – | | |
| 972 | | |
| – | | |
| 7% | |
International Equity | |
| 1,556 | | |
| – | | |
| 1,556 | | |
| – | | |
| 12% | |
Real estate | |
| 208 | | |
| – | | |
| 208 | | |
| – | | |
| 2% | |
Fixed Income | |
| 6,603 | | |
| – | | |
| 6,603 | | |
| – | | |
| 50% | |
| |
$ | 15,862 | | |
$ | 2,634 | | |
$ | 13,228 | | |
$ | – | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Derivative financial instruments | |
$ | (981 | ) | |
$ | (981 | ) | |
$ | – | | |
$ | – | | |
| | |
| |
2013 | | |
| |
| |
| | |
| | |
| | |
| | |
Benefit Plan | |
| |
Fair | | |
| | |
| | |
| | |
Percentage | |
| |
Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Allocation | |
Assets: | |
| | |
| | |
| | |
| | |
| |
Derivative financial instruments | |
$ | 412 | | |
$ | 412 | | |
$ | – | | |
$ | – | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Defined benefit plan assets | |
| | | |
| | | |
| | | |
| | | |
| | |
(pooled separate accounts): | |
| | | |
| | | |
| | | |
| | | |
| | |
Large U.S. Equity | |
| 3,820 | | |
| – | | |
| 3,820 | | |
| – | | |
| 29% | |
Small/Mid U.S. Equity | |
| 942 | | |
| – | | |
| 942 | | |
| – | | |
| 7% | |
International Equity | |
| 1,594 | | |
| – | | |
| 1,594 | | |
| – | | |
| 12% | |
Real estate | |
| 195 | | |
| – | | |
| 195 | | |
| – | | |
| 2% | |
Fixed Income | |
| 6,516 | | |
| – | | |
| 6,516 | | |
| – | | |
| 50% | |
| |
$ | 13,479 | | |
$ | 412 | | |
$ | 13,067 | | |
$ | – | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Derivative financial instruments | |
$ | (1,441 | ) | |
$ | (1,441 | ) | |
$ | – | | |
$ | – | | |
| | |
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 4. Fair Value Measurements (Continued)
The following table sets forth additional disclosures
of the investments whose fair value is estimated using net asset value per share as of December 31, 2014:
| |
| | |
Unfunded | | |
Redemption | |
Redemption |
Investment | |
Fair Value | | |
Commitment | | |
Frequency | |
Notice Period |
Pooled separate accounts: | |
| | | |
| | | |
| |
|
Large U.S. equity (a) | |
$ | 3,889 | | |
$ | – | | |
Immediate | |
None |
Small/mid-size U.S. equity (b) | |
| 972 | | |
| – | | |
Immediate | |
None |
International equity (c) | |
| 1,556 | | |
| – | | |
Immediate | |
None |
Real estate (d) | |
| 208 | | |
| – | | |
See (d) | |
See (d) |
Fixed income (e) | |
| 6,603 | | |
| – | | |
Immediate | |
None |
Total
pooled separate accounts | |
$ | 13,228 | | |
$ | – | | |
| |
|
| |
| | | |
| | | |
| |
|
(a) | | This category includes investments in funds comprised of equity securities of large
U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying
investments is used to value the fund. |
(b) | | This category includes investments in funds comprised of equity securities of small-
and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices
for the underlying investments is used to value the fund. |
(c) | | This category includes investments in funds comprised of equity securities of foreign
companies including emerging markets. The funds are valued using the net asset value method in which an average of the market
prices for the underlying investments is used to value the fund. |
(d) | | This category invests the majority of its assets in U.S. commercial real estate holdings
including multifamily, office, warehouse, manufacturing, and retail properties. It focuses on properties that return both lease
income and appreciation of the buildings’ marketable value. Investments in this category can be redeemed two times in a
30 day period at the current net asset value per share based on the fair value of the underlying assets. Participants are not
allowed to transfer back into this category until the 30 day period has expired. New contributions are allowed during this period. |
(e) | | This category includes investments in funds comprised of U.S. and foreign investment-grade
fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed
securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the
market prices for the underlying investments is used to value the fund. |
The following table presents the other financial
instruments that are not carried at fair value, but which require fair value disclosure as of December 31, 2014 and 2013:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
Carrying | | |
Fair | | |
Carrying | | |
Fair | |
| |
Value | | |
Value | | |
Value | | |
Value | |
| |
| | | |
| | | |
| | | |
| | |
Senior debt term loans | |
$ | 202,956 | | |
$ | 140,300 | | |
$ | 272,132 | | |
$ | 195,930 | |
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 5. Derivative Financial Instruments and Risk Management
The Company’s operating activities expose
it to a variety of market risks, including the effects of changes in commodity prices. Commodity price risk is monitored and managed
by the Company as part of its overall risk management program that seeks ways to reduce the potentially adverse effects market
volatility may have on its operating results. The Company generally follows a policy of entering into forward contracts for the
physical purchase of corn and the physical sale of ethanol and co-products to fix the price of these commodities and lock in operating
margins. These forward contracts have been designated as normal purchases and normal sales. Any unrealized gains or losses on these
contracts are not included in the Company’s consolidated financial statements. When forward contracts are not available at
competitive prices, the Company may enter into over-the-counter or exchange-traded futures, swaps and options contracts to reduce
its exposure to commodity market volatility. The fair value of these commodity derivative contracts is recorded on the Company’s
consolidated balance sheets. Changes in the fair value of commodity derivatives are recorded in operating income as gain (loss)
on derivative transactions.
Derivative financial instruments not designated
as hedging instruments at December 31, 2014 and 2013, were as follows:
Type | |
Balance Sheet Classification | |
2014 | | |
2013 | |
| |
| |
| | | |
| | |
Corn future contracts - gain | |
Derivative financial instruments | |
$ | 2,458 | | |
$ | 350 | |
Corn future contracts - loss | |
Derivative financial instruments | |
| (656 | ) | |
| (75 | ) |
Ethanol future contracts - gain | |
Derivative financial instruments | |
| 176 | | |
| 62 | |
Ethanol future contracts - loss | |
Derivative financial instruments | |
| (325 | ) | |
| (1,366 | ) |
Cash held by (due to) broker | |
Derivative financial instruments | |
| (1,367 | ) | |
| 2,212 | |
| |
| |
$ | 286 | | |
$ | 1,183 | |
The realized and unrealized effects on the
Company's consolidated statements of operations for derivatives not designated as hedging instruments for the years ended December
31, 2014 and 2013, were as follows:
Type | |
Statement of Operations Classification | |
2014 | | |
2013 | |
| |
| |
| | | |
| | |
Ethanol future contracts | |
Loss on derivative transactions, net | |
$ | 14,557 | | |
$ | 2,430 | |
Corn future contracts | |
Loss (gain) on derivative transactions, net | |
| (3,391 | ) | |
| 3,024 | |
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 6. Property, Plant and Equipment
Property, plant and equipment at December 31, 2014 and 2013, were
as follows:
| |
2014 | | |
2013 | |
| |
| | | |
| | |
Land and improvements | |
$ | 13,348 | | |
$ | 5,654 | |
Buildings | |
| 15,304 | | |
| 9,550 | |
Machinery and equipment | |
| 214,046 | | |
| 155,144 | |
Furniture and fixtures | |
| 934 | | |
| 890 | |
Less accumulated depreciation | |
| (51,894 | ) | |
| (38,469 | ) |
Total | |
| 191,738 | | |
| 132,769 | |
Construction-in-progress | |
| 26,092 | | |
| 77,006 | |
Total property, plant and equipment, net | |
$ | 217,830 | | |
$ | 209,775 | |
Depreciation expense for the years ended December
31, 2014 and 2013 was $13.4 million and $17.5 million, respectively. As a result of reclassifying the Mount Vernon facilities to
discontinued operations, the Company ceased recording depreciation on those assets while being held for sale during the year ended
December 31, 2013. For the year ended December 31, 2013, $6.9 million of depreciation expense was recorded in discontinued operations
related to the Mount Vernon facility while the remainder of depreciation expense for other locations was primarily all grouped
with cost of goods sold on the consolidated statement of operations. For the year ended December 31, 2014, a majority of the Company’s
depreciation expense was recorded in cost of goods sold on the consolidated statement of operations.
Note 7. Long-Term Debt and Pledged Assets
The following table summarizes the Company's
outstanding long-term debt at December 31:
| |
2014 | | |
2013 | |
| |
| | | |
| | |
Senior debt | |
$ | 202,956 | | |
$ | 272,132 | |
Loan and security agreement | |
| 19,060 | | |
| – | |
Other | |
| 1,694 | | |
| 3,735 | |
| |
| 223,710 | | |
| 275,867 | |
Less: current maturities of long-term debt | |
| (1,657 | ) | |
| (2,043 | ) |
Total long-term debt | |
$ | 222,053 | | |
$ | 273,824 | |
The Company’s long-term debt matures
over the next five years as follows: $1,657 in 2015, $37 in 2016, and $159,360 in 2017. The actual debt pay-off amount is $62,656
lower than the carrying value of the Company’s debt at December 31, 2014 due to the troubled debt restructuring transaction
that occurred in 2012, which required the Company to account for the impact of its debt forgiveness prospectively instead of taking
an immediate write-down.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 7. Long-Term Debt and Pledged Assets (Continued)
Senior Secured Term Loan Credit Agreement
On December 22, 2010, Aventine entered into
a Term Loan Agreement with its lenders to provide Aventine with a $200 million term loan facility (the Term Loan Facility). Aventine
provided a first lien priority security interest on substantially all of Aventine’s fixed assets as collateral under the
Term Loan Facility.
On September 24, 2012, Aventine restructured
its Term Loan Facility. As a result of the restructuring, Aventine converted $132.3 million of outstanding debt into 2,186,298
shares of common stock of Aventine. After the exchange, the remaining $100 million of debt was converted into a Term Loan B Facility
(Term Loan B) and continued to be secured with substantially all Aventine’s fixed assets. Interest on Term Loan B may be
paid in cash at a 10.5% rate or paid-in-kind at a 15% interest rate. If Aventine elects paid-in-kind interest, the interest is
capitalized to Term Loan B at the end of each quarter. The maturity date for Term Loan B is September 24, 2017. For the twelve
months ended December 31, 2014 and 2013, Aventine elected paid-in-kind interest on its Term Loan B debt.
The September 24, 2012 debt restructuring qualified
as a troubled debt restructuring under ASC 470-60, Debt – Troubled Debt Restructurings by Debtors. Accordingly in 2012, Aventine
reduced its aggregate debt balance of $232.3 under the Term Loan Facility million by $26.8 million to account for the fair value
of the equity interest granted in exchange for $132.3 million of debt forgiveness. No gain or loss on debt forgiveness was recognized
as the future maximum cash outflows on the restructured debt exceeded the amount of the Term Loan Facility. The additional carrying
value of the Term Loan Facility is $62,656 and $79,937 at December 31, 2014 and 2013, respectively.
In conjunction with the debt restructuring
on September 24, 2012, a new $30 million tranche of term loan debt was issued to Aventine (Term Loan A). Aventine provided a first
lien priority security interest in substantially all of Aventine’s fixed assets as collateral under the Term Loan A. Aventine
also financed its Term Loan A closing fees of $0.9 million. The total Term Loan A debt of $30.9 million was due on September 24,
2016. Interest on Term Loan A accrued at a 12% cash rate on a quarterly basis until it was amended on June 18, 2013.
On June 18, 2013, $35 million of Term Loan
A-1 was issued to Aventine (Term Loan A-1) as an amendment to the existing term loan agreement. Interest on Term Loan A-1 accrued
at 25% on a quarterly basis and is payable in kind. Term Loan A-1 was due on September 24, 2016. As part of the June 18, 2013 transaction,
the interest rate on Term Loan A was increased by 3% from 12% to 15% (12% cash and 3% paid in kind). The additional paid-in-kind
interest of 3% is capitalized to Term Loan A at the end of each quarter.
The Term Loan A and Term Loan A-1 debt was fully
repaid on September 20, 2014.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 7. Long-Term Debt and Pledged Assets (Continued)
Revolving Credit Facility
On July 20, 2011, Aventine entered into a $50.0
million revolving credit facility commitment with a bank. On September 24, 2012, the $50 million revolving credit facility was
lowered to a $30 million revolving facility with the same bank. The revolving credit facility was secured by Aventine’s accounts
receivable and inventory, and a second priority lien interest on substantially all of Aventine’s assets. Loans under the
revolving facility agreement originally matured on July 20, 2015. Borrowings bore interest at (i) the London Interbank Offered
Rate (LIBOR) plus 4.0% or (ii) an alternate base rate (prime rate) plus 2.5% based on Aventine’s election. The revolving
facility agreement contained customary affirmative and negative covenants concerning the conduct of Aventine's business operations.
There were no outstanding borrowings against the facility at December 31, 2013, and the revolving credit facility was cancelled
on September 17, 2014.
Loan and Security Agreement
On September 17, 2014, Aventine cancelled its
revolving credit facility and entered into a new $40 million loan and security agreement (“LSA”) with two co-lenders.
The LSA is secured by Aventine’s accounts receivable and inventory, and a second priority lien interest on substantially
all of Aventine’s assets. Advances under the LSA are charged interest at a rate of LIBOR plus 6.0% (6.5% at December 31,
2014).
The LSA contains customary affirmative and
negative covenants including but not limited to, maintaining a fixed charge coverage ratio and a minimum unrestricted cash balance.
Aventine used the initial advance on the LSA and its existing cash to repay the remaining balances of the Term Loan A and Term
Loan A-1 in full.
Borrowings under the LSA are limited to the
lesser of $40 million or the borrowing base which is calculated based on eligible accounts receivable and inventory, as defined
in the agreement. The Company has approximately $10.1 million of additional borrowings available at December 31, 2014. At December 31,
2014, the Company had $19.1 million of loan advances and $5.6 million in letters of credit issued under the LSA.
Total debt as of December 31, 2014 and 2013 are
comprised of the following:
| |
2014 | | |
2013 | |
Term Loan A principal | |
$ | – | | |
$ | 30,000 | |
Term Loan A fees | |
| – | | |
| 900 | |
Term Loan A interest paid-in-kind | |
| – | | |
| 507 | |
Term Loan B principal | |
| 100,000 | | |
| 100,000 | |
Term Loan B interest paid-in-kind | |
| 40,300 | | |
| 20,846 | |
Term Loan A-1 principal | |
| – | | |
| 35,000 | |
Term Loan A-1 interest paid-in-kind | |
| – | | |
| 4,942 | |
Loan and security agreement | |
| 19,060 | | |
| – | |
Other | |
| 1,694 | | |
| – | |
| |
| 161,054 | | |
| 192,195 | |
Additional carrying value of debt | |
| 62,656 | | |
| 79,937 | |
| |
$ | 223,710 | | |
$ | 272,132 | |
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 7. Long-Term Debt and Pledged Assets (Continued)
The following table summarizes interest expense
for the years ended December 31, 2014 and 2013:
| |
2014 | | |
2013 | |
Term Loan Facility and revolving credit facilities | |
$ | 29,140 | | |
$ | 26,383 | |
2012 Debt forgiveness recognized | |
| (17,280 | ) | |
| (15,289 | ) |
Debt issuance costs | |
| 3,979 | | |
| 2,089 | |
Other, net | |
| 358 | | |
| 1 | |
Capitalized interest | |
| (1,964 | ) | |
| (242 | ) |
Interest expense, net | |
$ | 14,233 | | |
$ | 12,942 | |
Note 8. Commitments and Contingencies
Lease commitments: The Company leases
certain assets such as rail cars, barges, buildings, and equipment from unaffiliated parties under noncancelable operating leases.
Terms of the leases, including renewals, vary by lease. Rental expense for operating leases for the years ended December 31, 2014
and 2013 was $12.1 million and $6.0 million, respectively.
At December 31, 2014, minimum rental commitments
under noncancelable operating lease terms in excess of one year are as follows:
Years Ending December 31: | |
| | |
| |
| | |
2015 | |
$ | 18,472 | |
2016 | |
| 11,578 | |
2017 | |
| 8,052 | |
2018 | |
| 5,167 | |
2019 | |
| 1,811 | |
Thereafter | |
| 215 | |
Total minimum lease payments | |
$ | 45,295 | |
| |
| | |
Other commitments: At December 31, 2014,
the Company had firm-price purchase commitments to purchase approximately .9 million bushels of corn for $3.8 million for delivery
through March 2015 and unpriced forward contracts for approximately 12.7 million bushels of commodity grain through May 2015. These
commitments were negotiated in the normal course of business and represent a portion of the Company's corn requirements.
At December 31, 2014, the Company had fixed-price
contracts to sell 20.4 million gallons for $33.6 million of ethanol through March of 2015, and had sold 15.6 million gallons of
ethanol at index prices using indices from Platts and Oil Price Information Service in 2014.
Environmental remediation and contingencies:
The Company is subject to federal, state, and local environmental laws and regulations. These laws and regulations, among other
things, require the Company to maintain or make operational changes that limit actual or potential adverse impacts to the environment.
Violations of regulations can result in substantial fines. In addition, environmental laws and regulations can change over time,
and any such changes may require additional compliance efforts. The Company has not accrued any amounts for environmental matters
as of December 31, 2014.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 8. Commitments and Contingencies (Continued)
Federal and state environmental authorities
have been investigating alleged excess volatile organic compounds emissions and other air emissions from many U.S. ethanol plants,
including the Company's Illinois facilities. The investigation relating to the Illinois wet mill facility is still pending, and
the Company could be required to install additional air pollution control equipment or take other measures to control air pollutant
emissions at that facility. In addition, if the authorities determine that the Company's emissions are in violation of applicable
law, the Company would likely be required to pay fines. The Company is in the process of installing natural gas boilers in 2014
to comply with the new 2016 emission standards.
The Company has made, and expects to continue
making capital expenditures on an ongoing basis to comply with the U.S. Environmental Protection Agency's (EPA) National Emissions
Standard for Hazardous Air Pollutants (NESHAP). This NESHAP was issued but subsequently vacated in 2007. The vacated version of
the rule required the Company to implement maximum achievable control technology at its Illinois wet mill facility to reduce hazardous
air pollutant emissions from its boilers. The EPA issued a new Boiler MACT rule on December 22, 2012. The rule became final on
January 31, 2013. The Company will have three years from the date of the final rule to meet the new emission limits and is in the
process of installing natural gas boilers in 2014 to comply with the new 2016 emission standards.
Litigation matters:
Aurora Cooperative Elevator Company (the
“Aurora Coop”)—Option Dispute
On May 29, 2012, Aventine commenced suit against
the Aurora Coop, seeking declaratory relief. That suit alleged the Aurora Coop had improperly threatened to invoke a purported
option to acquire the land upon which the Aurora West Facility is located. The Aurora Coop then filed legal claims against Aventine,
on June 21, 2012, which were removed to and now are pending in the United States District Court for the District of Nebraska (Case
No. 4:12-cv-00230: ), asserting that it has the right, pursuant to an agreement between Aventine and the Aurora Coop, dated March
23, 2010, to exercise an option to acquire the 84 acres of land upon which the Company’s Aurora West ethanol plant (the
“Aurora West Facility”) is located, together with the Aurora West Facility and all related improvements, for a purchase
price of $16,500 per acre (or $1,386,000 in the aggregate). The Aurora Coop asserts that its contractual right to exercise this
option arose on July 1, 2012 due to Aventine’s alleged failure to complete construction of the Aurora West Facility as of
such date and to operate at a certain rate of production. The Aurora Coop seeks a judicial order requiring Aventine to convey
the Aurora West Facility and the land upon which the Aurora West facility is located to the Aurora Coop for the purchase price
of set forth above. The Aurora Coop also seeks a judicial order imposing a constructive trust and requiring Aventine to account
for and pay to the Aurora Coop the greater of the profits which Aventine received or may have received in the exercise of reasonable
care in the operation of the Aurora West Facility after July 1, 2012. That is, the Aurora Coop also seeks an order requiring Aventine
to pay an unspecified amount of damages to compensate the Aurora Coop for damages it allegedly suffered as a result of Aventine’s
purported delay in conveying title to the Aurora West Facility and the land upon which it is located. Aventine disputes the allegations
and claims asserted by the Aurora Coop, and Aventine denies the validity and effectiveness of the Aurora Coop’s exercise
of its option to purchase the land on which the Aurora West Facility is located. Aventine has asserted in its legal filings that
it has satisfied its contractual obligations with respect to the completion of the plant as of the required date. The parties
are currently engaged in extensive discovery. Aventine will continue to vigorously defend against any assertion that the Aurora
Coop has any right to repurchase the land or any improvements on the land.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 8. Commitments and Contingencies (Continued)
Aurora Coop—Grain Procurement Dispute
On September 20, 2012, the Aurora Coop filed
a suit in the United States District Court for the District of Nebraska (Case No.4:12-cv-3200), naming Aventine as a defendant,
alleging that Aventine (and two of its subsidiaries) breached the parties’ Aurora Coop Grain Agreements. Specifically, the
Aurora Coop alleges that it procured 1.7 million bushels of corn on Aventine’s behalf, for which Aventine is liable in a
gross amount of approximately $2 million. Aventine denies that it ever contracted for the corn in question or that the Aurora Coop
suffered the alleged losses and maintains in its counterclaim that the Aurora Coop improperly set off approximately $400,000 it
owes to Aventine (or one or more of its subsidiaries) in violation of the parties’ Aurora Coop Grain Agreements, resulting
in uncured breaches of each such agreement. As a result, Aventine issued notice of termination of the Grain Supply Agreement and
the Marketing Agreement. The Aurora Coop seeks a judicial order declaring that Aventine is in breach of the parties’ Aurora
Coop Grain Agreements and further declaring that Aventine’s termination of the parties’ Grain Supply Agreement is ineffective.
The Aurora Coop further seeks a judicial order requiring Aventine to abide by the Aurora Coop Grain Agreements and prohibit Aventine
from procuring grain for the Aurora West Facility from any source other than the Aurora Coop or marketing co-products through anyone
other than the Aurora Coop. Previously, the claims relating to the alleged purchases of grain by the Aurora Coop and Aventine’s
counterclaims for the amounts improperly set off were submitted to arbitration before the National Grain and Feed Association,
where an arbitration panel found in favor of Aventine in all material respects. The Aurora Coop is appealing the arbitration panel’s
decision. Aventine intends to pursue any and all rights and remedies available to it with respect to the foregoing.
Western Sugar Cooperative
On February 27, 2015, the Western Sugar Cooperative
(“Western Sugar”) filed suit against Aventine Renewable Energy, Inc., (“ARE, Inc.”) a wholly owned subsidiary
of Aventine, in the United States District Court for the District of Colorado (Case No.1:15-cv-00415), claiming that it was owed
penalty rates for storage of surplus beet sugar. Western Sugar is seeking payment of approximately $8.6 million in penalty storage
fees as “expectation damages.” In 2013, ARE, Inc. purchased surplus beet sugar through a USDA program for Aventine’s
operations. ARE, Inc. paid for the warehousing of this sugar from inception of the relationship, some of which was warehoused by
Western Sugar. Western Sugar, however, subsequently asserted that certain penalty rates for the storage of this product should
have applied despite the lack of an agreement to such rates by ARE, Inc. Aventine and ARE, Inc. had been attempting to resolve
this matter short of formal litigation prior to Western Sugar’s filing of the suit. Aventine considers these claims to be
without merit and will aggressively defend against them.
Note 9. Warrants
In connection with the restructuring transaction
occurring in September 2012, the equity holders of the Company received warrants to purchase up to an aggregate amount of 787,855
shares of the Company’s common stock at an exercise price of $61.75 per share (the “2012 Warrants”). The 2012
warrants expire on the fifth anniversary of the issuance date and had no fair value as of the grant date. As of December 31, 2014,
none of the warrants issued in connection with the restructuring transaction had been exercised.
In connection with the issuance of the Term
Loan A-1 debt on June 18, 2013, debt holders received warrants allowing for the purchase of up to 11.8 million shares of the Company’s
common stock at an exercise price of $.01 per share (the “2013 Warrants”). The 2013 warrants can only be exercised
upon a change in control of the Company’s ownership, which the Company’s management team deemed unlikely at the grant
date. No fair value was assigned to the warrants. These warrants expire on the third anniversary of the issuance date.
In the fourth quarter of 2014, the 2013 warrants
became exercisable and as a result the warrant holders exercised their rights and an additional 11.8 million common shares were
issued.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 10. Long Term Incentive Compensation
The Company entered into restricted stock unit
agreements with certain of its directors and officers (the Participants) on January 1, 2014. Under the agreements, all participants
were granted an aggregate of 1,167,000 restricted stock unit awards (RSUs). The RSUs granted to directors of the Company vest in
one-third increments beginning on the date of the agreement through October 1, 2015 and the RSUs granted to the officers of the
Company vest in one-third increments on each of the first three anniversaries of the grant date. Upon a change of control, all
unvested RSU awards under the agreements become fully vested and settle based on the fair market value of the common shares of
the Company at that time. In addition, the RSUs only vest only if the respective participant is actively providing services to
the Company at the time of the change of control or as is the case for the directors of the Company, if a change of control occurs
within one-year following the director’s involuntary removal from the board of directors of the Company (other than a removal
for cause). If any of the directors and officers voluntary cease providing services to the Company, all unvested RSUs would automatically
terminate for that individual.
On November 25, 2014, a change of control occurred
under each of the restricted stock unit agreements resulting in an expense and aggregate payment of $10.5 million to the participants.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 11. Retirement and Pension Plans
Defined contribution plan: The Company
has 401(k) plans covering substantially all of its employees. Contributions made under the defined contribution plans include a
match, at the Company's discretion, of an employee's contribution to the plans. For each of the years ended December 31, 2014 and
2013, such contributions amounted to $.6 million.
Qualified retirement plan: The Company
has a defined benefit pension plan (the Retirement Plan) that is noncontributory, and covers unionized employees at its Pekin,
Illinois, facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the
employee's years of service. On October 29, 2010, the Union ratified a new collective bargaining agreement with the Company for
its hourly production workers in Pekin, Illinois. This new agreement was effective November 1, 2010. The agreement states
that, among other things, employees hired after November 1, 2010, will not be eligible to participate in the Retirement Plan. The
Company uses a December 31 measurement date for its Retirement Plan. The Company's funding policy is to make the minimum annual
contribution that is required by applicable regulations.
Information related to the defined benefit
plan is presented below:
| |
2014 | | |
2013 | |
Amounts at the end of the year: | |
| | | |
| | |
Accumulated/projected benefit obligation | |
$ | 17,432 | | |
$ | 13,708 | |
Fair value of plan assets | |
| 13,228 | | |
| 13,067 | |
Funded status, (underfunded)/overfunded | |
$ | (4,204 | ) | |
$ | (641 | ) |
| |
| | | |
| | |
Amounts recognized in the consolidated balance sheets: | |
| | | |
| | |
Other long-term liabilities | |
$ | (4,204 | ) | |
$ | (641 | ) |
Accumulated other comprehensive loss, unrecognized net loss | |
| 4,457 | | |
| 917 | |
| |
| | | |
| | |
Amounts recognized in the plan for the year: | |
| | | |
| | |
Company contributions | |
$ | – | | |
$ | – | |
Participant contributions | |
| – | | |
| – | |
Benefits paid | |
| (593 | ) | |
| (535 | ) |
| |
| | | |
| | |
Net periodic benefit cost | |
$ | 23 | | |
$ | 359 | |
| |
| | | |
| | |
Other changes recognized in other comprehensive loss: | |
| | | |
| | |
Net (gain)/loss | |
$ | 3,540 | | |
$ | (2,425 | ) |
Amortization of net gain/(loss) | |
| – | | |
| (206 | ) |
Total recognized in other comprehensive income (loss) | |
$ | 3,540 | | |
$ | (2,631 | ) |
| |
| | | |
| | |
Assumptions used in computation benefit obligations: | |
| | | |
| | |
Discount rate | |
| 3.88% | | |
| 4.80% | |
Expected long-term return on plan assets | |
| 7.75% | | |
| 7.75% | |
Rate of compensation increase | |
| – | | |
| – | |
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 11. Retirement and Pension Plans (Continued)
The Company is not expected to make contributions
in the year ending December 31, 2015. Expected net periodic benefit cost for 2015 is estimated at approximately $.4 million.
The following table summarizes the expected
benefit payments for the Company's plan for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter:
December 31: | |
| | |
| |
| | |
2015 | |
$ | 572 | |
2016 | |
| 613 | |
2017 | |
| 640 | |
2018 | |
| 656 | |
2019 | |
| 675 | |
2020-24 | |
| 3,698 | |
| |
$ | 6,854 | |
See Note 3 for discussion of the plan’s fair value disclosures.
Historical and future expected returns of multiple
asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate
for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated
risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plan.
The Company's pension committee is responsible
for overseeing the investment of pension plan assets. The pension committee is responsible for determining and monitoring the appropriate
asset allocations and for selecting or replacing investment managers, trustees, and custodians. The pension plan's current investment
target allocations are 50% equities and 50% debt. The pension committee reviews the actual asset allocation in light of these targets
periodically and rebalances investments as necessary. The pension committee also evaluates the performance of investment managers
as compared to the performance of specified benchmarks and peers and monitors the investment managers to ensure adherence to their
stated investment style and to the plan's investment guidelines.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 12. Postretirement Benefit Obligation
The Company sponsors a health care plan and
life insurance plan (the Postretirement Plan) that provides postretirement medical benefits and life insurance to certain "grandfathered"
unionized employees. Employees hired after December 31, 2000, are not eligible to participate in the Postretirement Plan. The plan
is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at
age 65 from a defined benefit to a defined dollar cap based upon years of service.
Information related to the Company’s postretirement
benefit obligation is presented below:
| |
2014 | | |
2013 | |
Amounts at the end of the year: | |
| | | |
| | |
Accumulated/projected benefit obligation | |
$ | 3,998 | | |
$ | 3,420 | |
Fair value of plan assets | |
| – | | |
| – | |
Funded status, (underfunded)/overfunded | |
$ | (3,998 | ) | |
$ | (3,420 | ) |
| |
| | | |
| | |
Amounts recognized in the consolidated balance sheets: | |
| | | |
| | |
Other current liabilities | |
$ | (188 | ) | |
$ | (157 | ) |
Other long-term liabilities | |
| (3,810 | ) | |
| (3,263 | ) |
Accumulated other comprehensive loss, unrecognized net loss | |
| 1,172 | | |
| 699 | |
| |
| | | |
| | |
Amounts recognized in the plan for the year: | |
| | | |
| | |
Company contributions | |
$ | 122 | | |
$ | 93 | |
Participant contributions | |
| 30 | | |
| 19 | |
Benefits paid | |
| (152 | ) | |
| (113 | ) |
| |
| | | |
| | |
Net periodic benefit cost | |
$ | 227 | | |
$ | 309 | |
| |
| | | |
| | |
Other changes recognized in OCI: | |
| | | |
| | |
Net (gain)/loss | |
$ | 491 | | |
$ | (537 | ) |
Amortization of net gain/(loss) | |
| (18 | ) | |
| (79 | ) |
Total recognized in other comprehensive
income | |
$ | 473 | | |
$ | (616 | ) |
| |
| | | |
| | |
Assumptions used in computation benefit obligations: | |
| | | |
| | |
Discount rate | |
| 3.7% | | |
| 4.6% | |
The Company expects to recognize amortization
of net actuarial loss of $0.1 million during the year ended December 31, 2015.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 12. Postretirement Benefit Obligation (Continued)
The following table summarizes the expected
benefit payments for the Company's plan for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter:
December 31: | |
| | |
| |
| | |
2015 | |
$ | 189 | |
2016 | |
| 217 | |
2017 | |
| 229 | |
2018 | |
| 195 | |
2019 | |
| 206 | |
2020-24 | |
| 1,051 | |
| |
$ | 2,087 | |
For purposes of determining the cost and obligation
for pre-Medicare postretirement medical benefits, a 5.5% annual rate of increase in the per capita cost of covered benefits (i.e.,
health care trend rate) was assumed for the plan in 2014, adjusting to a rate of 5.6% in 2024. Assumed health care cost trend rates
have a significant effect on the amounts reported for health care plans.
Note 13. Income Taxes
There was no provision for income taxes for
the years ended December 31, 2014 and 2013.
The reconciliation of differences between the
statutory U.S. federal income tax rate and the effective tax rate for the years ended December 31, 2014 and 2013, is primarily
due to changes in the valuation allowances and deferred tax assets limited as a result of the troubled debt restructuring transaction,
which caused a change in ownership for tax purposes.
Significant components of the deferred tax
assets and liabilities are as follows:
| |
Year Ended December 31 | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Current assets | |
$ | 2,523 | | |
$ | 2,391 | |
Long-term assets | |
| 92,441 | | |
| 95,079 | |
| |
| 94,964 | | |
| 97,470 | |
Valuation allowance | |
| (82,687 | ) | |
| (93,873 | ) |
| |
| 12,277 | | |
| 3,597 | |
| |
| | | |
| | |
Current liabilities | |
| 894 | | |
| 634 | |
Long-term liabilities | |
| 13,461 | | |
| 5,041 | |
| |
| 14,355 | | |
| 5,675 | |
| |
| | | |
| | |
| |
$ | (2,078 | ) | |
$ | (2,078 | ) |
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in
000’s)
Note 13. Income Taxes (Continued)
At December 31, 2014 and 2013, the Company
has recorded valuation allowances of $82.7 million and $93.8 million, respectively, on its deferred tax assets to reduce the deferred
tax assets to the amount that management believes is more likely than not to be realized. Management considered the scheduled reversal
of deferred tax liabilities and tax planning strategies in making this assessment. The change in the valuation allowance for the
years ended December 31, 2014 and 2013 was a (decrease) increase of approximately ($11.2) million and $34.9 million. The decrease
in the current year valuation allowance is primarily related to the realization of deferred tax benefits related to prior years.
At December 31, 2014, the Company had net operating
loss carryforwards of $63.5 million. The future utilization of these net operating loss carryforwards has been limited due to certain
ownership changes. Due to the uncertainty regarding realization of the tax benefits, $231.6 million of loss carryforward was deemed
worthless in 2013.
At December 31, 2014, the Company had no capital
loss carryforwards available to offset future consolidated capital gains. The future utilization of capital loss carryforwards
has been limited due to certain ownership changes. Due to the uncertainty regarding the realization of the capital loss carryforward,
$30 million of loss carryforward was deemed worthless in 2013.
|
|
Ernst
& Young LLP
The
Plaza in Clayton Suite 1300
190
Carondelet Plaza
St.
Louis, MO 63105-3434
Tel:
+1 314 290 1000
Fax:
+1 314 290 1882 ey.com
|
Report of Independent Auditors
The Board of Directors and Stockholders
Aventine Renewable Energy Holdings, Inc.
We have audited the accompanying consolidated
financial statements of Aventine Renewable Energy Holdings, Inc., which comprise the consolidated balance sheets as of December
31, 2012 and 2011, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash
flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the
Financial Statements
Management is responsible for the preparation
and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes
the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial
statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit involves performing procedures to
obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Aventine Renewable Energy Holdings, Inc.
at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
June 27, 2013
except for Note 2, as to which
the date is February 2, 2015
Aventine Renewable Energy Holdings, Inc.
Consolidated Balance Sheets
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
| (In Thousands, Except Share and
Per Share Data) | |
| |
| | | |
| | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and equivalents | |
$ | 16,941 | | |
$ | 36,105 | |
Accounts receivable, net of allowance for doubtful
accounts of $312 in 2012 and $174 in 2011 |
|
|
8,976 |
|
|
|
16,582 |
|
Inventories | |
| 28,113 | | |
| 42,999 | |
Prepaid expenses and other current assets | |
| 5,351 | | |
| 7,693 | |
Total current assets | |
| 59,381 | | |
| 103,379 | |
Property, plant, and equipment, net | |
| 293,540 | | |
| 301,700 | |
Other assets | |
| 14,246 | | |
| 16,121 | |
Total assets | |
$ | 367,167 | | |
$ | 421,200 | |
| |
| | | |
| | |
Liabilities and stockholders’ equity | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Current maturities of long-term debt | |
$ | 37 | | |
$ | 2,283 | |
Current obligations under capital leases | |
| 174 | | |
| 348 | |
Accounts payable | |
| 7,738 | | |
| 12,910 | |
Accrued liabilities | |
| 2,746 | | |
| 3,224 | |
Other current liabilities | |
| 9,813 | | |
| 14,570 | |
Total current liabilities | |
| 20,508 | | |
| 33,335 | |
| |
| | | |
| | |
Long-term debt | |
| 230,342 | | |
| 214,119 | |
Deferred tax liabilities | |
| 2,078 | | |
| 2,078 | |
Other long-term liabilities | |
| 6,629 | | |
| 6,025 | |
Total liabilities | |
| 259,557 | | |
| 255,557 | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Common stock, par value $0.001 per share; 15,000,000 shares
authorized; 2,353,176 shares outstanding, net of 1,497 shares held in treasury at December 31, 2012; 166,926 shares
outstanding, net of 1,497 shares held in treasury at December 31, 2011 |
|
|
2 |
|
|
|
– |
|
Preferred stock; 5,000,000 shares authorized; no shares issued or outstanding | |
| – | | |
| – | |
Additional paid-in capital | |
| 258,223 | | |
| 231,752 | |
Retained deficit | |
| (145,752 | ) | |
| (61,892 | ) |
Accumulated other comprehensive loss, net | |
| (4,863 | ) | |
| (4,217 | ) |
Total stockholders’ equity | |
| 107,610 | | |
| 165,643 | |
Total liabilities and stockholders’ equity | |
$ | 367,167 | | |
$ | 421,200 | |
See notes to consolidated financial statements.
Aventine Renewable Energy Holdings, Inc.
Consolidated Statements of Operations
| |
Year Ended December 31 | |
| |
2012 | | |
2011 | |
|
| |
| (In Thousands) | |
| |
| | |
Net sales | |
$ | 479,710 | | |
$ | 639,798 | |
Cost of goods sold | |
| (503,880 | ) | |
| (598,754 | ) |
Gross profit (loss) | |
| (24,170 | ) | |
| 41,044 | |
Selling, general, and administrative expenses | |
| (25,204 | ) | |
| (30,170 | ) |
Other expense | |
| (1,632 | ) | |
| (1,409 | ) |
Operating (loss) income | |
| (51,006 | ) | |
| 9,465 | |
Interest expense, net | |
| (21,136 | ) | |
| (24,040 | ) |
Gain (loss) on derivative transactions, net | |
| 681 | | |
| (4,424 | ) |
Loss on available-for-sale securities | |
| (174 | ) | |
| (510 | ) |
Loss on early extinguishment of debt | |
| (857 | ) | |
| (10,038 | ) |
Other nonoperating income | |
| 7,909 | | |
| 2,074 | |
Loss from continuing operations before income taxes | |
| (64,583 | ) | |
| (27,473 | ) |
Income tax benefit (expense) | |
| (9 | ) | |
| (536 | ) |
Loss from continuing operations | |
| (64,592 | ) | |
| (28,009 | ) |
Discontinued operations: | |
| | | |
| | |
Loss from operations of discontinued components | |
| (19,268 | ) | |
| (8,419 | ) |
Net loss | |
$ | (83,860 | ) | |
$ | (36,428 | ) |
See notes to consolidated financial statements.
Aventine Renewable Energy Holdings, Inc.
Consolidated Statements of Comprehensive
Loss
| |
Year Ended December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
| |
| |
Net loss | |
$ | (83,860 | ) | |
$ | (36,428 | ) |
Other comprehensive loss, net of tax: | |
| | | |
| | |
Pension and postretirement liability adjustment, net of tax | |
| (646 | ) | |
| (3,971 | ) |
Total comprehensive loss, net of tax | |
$ | (84,506 | ) | |
$ | (40,399 | ) |
See notes to consolidated financial statements.
Aventine Renewable Energy Holdings, Inc.
Consolidated Statements of Stockholders’
Equity
| |
Treasury Shares | | |
Common Shares | | |
Common Stock | | |
Additional
Paid-In Capital | | |
Retained Deficit | | |
Accumulated
Other
Comprehensive
Loss | | |
Total
Stockholders’
Equity | |
| |
(In Thousands) | |
Balance at December 31, 2010 | |
| 156 | | |
| 149,134 | | |
$ | – | | |
$ | 227,368 | | |
$ | (25,464 | ) | |
$ | (246 | ) | |
$ | 201,658 | |
Warrants exercised | |
| – | | |
| 3 | | |
| – | | |
| 5 | | |
| – | | |
| – | | |
| 5 | |
Stock-based compensation | |
| – | | |
| – | | |
| – | | |
| 4,912 | | |
| – | | |
| – | | |
| 4,912 | |
Issuances of common stock | |
| – | | |
| 19,286 | | |
| – | | |
| 522 | | |
| – | | |
| – | | |
| 522 | |
Purchase of treasury stock | |
| 1,341 | | |
| – | | |
| – | | |
| (1,055 | ) | |
| – | | |
| – | | |
| (1,055 | ) |
Comprehensive loss: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| (36,428 | ) | |
| – | | |
| (36,428 | ) |
Pension and postretirement
liability adjustment, net of tax | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| (3,971 | ) | |
| (3,971 | ) |
Balance at December 31, 2011 | |
| 1,497 | | |
| 168,423 | | |
| – | | |
| 231,752 | | |
| (61,892 | ) | |
| (4,217 | ) | |
| 165,643 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| – | | |
| – | | |
| – | | |
| 333 | | |
| – | | |
| – | | |
| 333 | |
Fractional share cancellation | |
| – | | |
| (48 | ) | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
Issuances of common stock | |
| – | | |
| 2,186,298 | | |
| 2 | | |
| 26,138 | | |
| – | | |
| – | | |
| 26,140 | |
Comprehensive loss: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| (83,860 | ) | |
| – | | |
| (83,860 | ) |
Pension and postretirement liability adjustment, net of
tax | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| (646 | ) | |
| (646 | ) |
Balance at December 31, 2012 | |
| 1,497 | | |
| 2,354,673 | | |
$ | 2 | | |
$ | 258,223 | | |
$ | (145,752 | ) | |
$ | (4,863 | ) | |
$ | 107,610 | |
See notes to consolidated financial statements.
Aventine Renewable Energy Holdings, Inc.
Consolidated Statements of Cash Flows
| |
Year Ended December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
| |
| |
Operating activities | |
| | | |
| | |
Net loss | |
$ | (83,860 | ) | |
$ | (36,428 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Unrealized/realized loss on available-for-sale securities | |
| 174 | | |
| 510 | |
Depreciation and amortization | |
| 22,232 | | |
| 20,243 | |
Stock-based compensation expense | |
| 333 | | |
| 5,434 | |
Loss on asset retirement | |
| 1,108 | | |
| – | |
Loss on early retirement of debt | |
| 857 | | |
| 10,038 | |
Gain on legal settlements | |
| – | | |
| (1,462 | ) |
Accrued interest – paid-in-kind | |
| 8,349 | | |
| – | |
Other | |
| 22 | | |
| 142 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable, net | |
| 7,803 | | |
| (5,007 | ) |
Income tax receivable | |
| (24 | ) | |
| 145 | |
Inventories | |
| 14,885 | | |
| 1,181 | |
Prepaid expenses and other current assets | |
| 2,224 | | |
| 4,744 | |
Other assets | |
| 199 | | |
| (448 | ) |
Accounts payable | |
| (5,004 | ) | |
| (8,579 | ) |
Other liabilities | |
| (5,475 | ) | |
| 1,000 | |
Net cash used in operating activities | |
| (36,177 | ) | |
| (8,487 | ) |
| |
| | | |
| | |
Investing activities | |
| | | |
| | |
Additions to property, plant, and equipment, net | |
| (10,564 | ) | |
| (23,330 | ) |
Net cash used in investing activities | |
| (10,564 | ) | |
| (23,330 | ) |
| |
| | | |
| | |
Financing activities | |
| | | |
| | |
Proceeds from issuance of debt | |
| 30,000 | | |
| 25,000 | |
Repayment of senior secured notes | |
| – | | |
| (155,000 | ) |
Payment of term loan | |
| (2,134 | ) | |
| (2,188 | ) |
Decrease in restricted cash | |
| – | | |
| 180,976 | |
Penalty on early retirement of debt | |
| – | | |
| (8,350 | ) |
Debt issuance costs | |
| (1,541 | ) | |
| (5,193 | ) |
Payments on other long-term debt and capital lease obligations | |
| (322 | ) | |
| (806 | ) |
Paid-in-kind amendment fee financed with debt | |
| 2,217 | | |
| – | |
Equity issuance costs | |
| (643 | ) | |
| – | |
Proceeds from warrants exercised | |
| – | | |
| 5 | |
Purchase of treasury shares | |
| – | | |
| (1,055 | ) |
Net cash provided by financing activities | |
| 27,577 | | |
| 33,389 | |
Net (decrease) increase in cash and equivalents | |
| (19,164 | ) | |
| 1,572 | |
Cash and equivalents at beginning of the period | |
| 36,105 | | |
| 34,533 | |
Cash and equivalents at end of the period | |
$ | 16,941 | | |
$ | 36,105 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow | |
| | | |
| | |
Interest paid | |
$ | 12,897 | | |
$ | 23,747 | |
Income taxes paid | |
| 50 | | |
| 372 | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
1. Organization and Basis of Presentation
Organization
Aventine Renewable Energy Holdings, Inc. and
its subsidiaries (collectively referred to as Aventine, the Company or we) produces and markets ethanol. In addition to producing
ethanol, the Company’s facilities also produce several co-products, including corn gluten feed and meal, corn germ, condensed
corn distillers solubles, dried distillers grain, wet distillers grain, carbon dioxide, and grain distillers dried yeast.
Basis of Presentation
The accompanying consolidated financial statements
are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). All material intercompany
transactions and balances have been eliminated. Any material events or transactions that occurred subsequent to December 31, 2012,
through June 27, 2013, the date these financial statements are being issued, were reviewed for purposes of determining whether
any adjustments or additional disclosures were required to be made to the accompanying consolidated financial statements.
The accompanying consolidated financial statements
for the prior period contain certain reclassifications to conform to the presentation used in the current period.
Liquidity Outlook
Our ability to maintain adequate liquidity
depends in part upon industry conditions and general economic, financial, competitive, regulatory, and other factors beyond our
control. We expect our earnings and cash flow to vary significantly from year to year due to the cyclical nature of our industry.
As a result, the amount of debt we can manage in some periods may not be appropriate for us in other periods. In addition, our
future cash flow may be insufficient to meet our debt obligations and commitments. Any insufficiency could negatively impact our
business. A range of economic, competitive, business, and industry factors will affect our future financial performance and, as
a result, our ability to generate cash flow from operations and to pay our debt. Many of these factors, such as ethanol prices,
corn prices, and economic and financial conditions in our industry and the global economy or competitive initiatives of our competitors
are beyond our control.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
1. Organization and Basis of Presentation (continued)
Our principal sources of liquidity are cash
and cash equivalents, cash provided by our borrowing facility and other borrowings, and cash provided by operations. At December
31, 2012, we had $16.9 million of cash and cash equivalents. On June 18, 2013, we further stabilized our long-term liquidity needs
by borrowing an additional $35 million under our term loan agreements using an amendment. See Note 10. In addition, at December
31, 2012, we had availability of $10.8 million under the New Revolving Facility. If our existing cash, operating cash flows, and
borrowings under the New Revolving Facility are not sufficient to meet our cash requirements, we may be required to seek additional
financing.
Our liquidity position is significantly influenced
by our operating results, which in turn are substantially dependent on commodity prices, especially prices for corn, ethanol, natural
gas, and unleaded gasoline. As a result, adverse commodity price movements adversely impact our liquidity. Often, movements in
commodity prices are well correlated such that increases or decreases in commodity prices provide a predictable change in our liquidity.
However, there have been periods of time in which other economic factors cause deterioration in commodity price correlations such
that our ability to predict our liquidity level may be significantly diminished.
Our principal uses of liquidity are working
capital, funding of operations, and capital expenditures. If we do not generate enough cash flow from operations to satisfy our
principal uses of liquidity, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt,
selling assets, reducing or delaying capital investments, or raising additional capital.
We believe that we have sufficient liquidity
through our cash and cash equivalents, cash from operations, borrowings executed subsequent to year-end, and borrowing capacity
under our New Revolving Facility to meet our short-term and long-term normal recurring operating needs, debt service obligations,
contingencies, and anticipated capital expenditures. We also believe that the additional avenues available to preserve liquidity
in the event of an industry or economic downturn are adequate to allow us to continue operations.
2. Discontinued Operations
As part of a strategic repositioning and refocusing
on the Company’s core competitive advantages, Aventine made the decision to sell its Mount Vernon and Canton facilities in
2013. Accordingly, the 2012 and 2011 financial statements have been adjusted to retroactively present the Mt. Vernon and Canton
facilities as discontinued operations.
On March 21, 2014, the Company sold its Mount
Vernon facility to an independent third party. Under the terms of the agreement, the Company received $34 million of cash consideration
and a full release of all of its contractual obligations related to the site lease and utility contracts.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
2. Discontinued Operations (continued)
The amount of net sales and loss before income
taxes for each disposal group included in discontinued operations is as follows for the years ended December 31, 2012 and 2011:
| |
2012 | | |
2011 | |
| |
Mount | | |
| | |
| | |
Mount | | |
| | |
| |
| |
Vernon | | |
Canton | | |
Total | | |
Vernon | | |
Canton | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Net sales | |
$ | 50,260 | | |
$ | – | | |
$ | 50,260 | | |
$ | 247,789 | | |
$ | – | | |
$ | 247,789 | |
Loss before income taxes | |
| (17,082 | ) | |
| (2,186 | ) | |
| (19,268 | ) | |
| (6,780 | ) | |
| (1,639 | ) | |
| (8,419 | ) |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
3. Bankruptcy Proceedings and Related Events
On April 7, 2009, Aventine and all of its direct
and indirect subsidiaries (collectively, the Debtors), filed voluntary petitions for relief under Chapter 11 of Title 11 of the
United States Code (the Bankruptcy Code) with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court).
The Debtors filed their First Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code on January 13, 2010
(as modified, the Plan). The Plan was confirmed by order entered by the Bankruptcy Court on February 24, 2010, and became effective
on March 15, 2010 (the Effective Date), the date on which the Company emerged from protection under Chapter 11 of the Bankruptcy
Code.
The Company emerged from bankruptcy on March
15, 2010. In accordance with Accounting Standards Codification (ASC) 852, Reorganizations, the Company adopted fresh-start
accounting and adjusted the historical carrying value of its assets and liabilities to their respective fair values at the Effective
Date. Simultaneously, the Company determined the fair value of its equity at the Effective Date.
4. Summary of Significant Accounting Policies
The accounting policies below relate to amounts
reported in the Company’s consolidated financial statements.
Use of Estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. These estimates are based on management’s knowledge of current events and actions
that the Company may take in the future. Estimates, by their nature, are based on judgment and available information. Therefore,
actual results could differ from those estimates and could have a material impact on the consolidated financial statements.
Revenue Recognition
Revenue is generally recognized when title
to products is transferred to an unaffiliated customer as long as the sales price is fixed or determinable and collectability is
reasonably assured. For the majority of sales, this generally occurs after the product has been offloaded at customer sites. For
others, the transfer of title occurs at the shipment origination point. The Company’s ethanol indexed sales are invoiced
based upon a provisional price and are adjusted to a final price in the same month using the monthly average of spot market prices.
Other sales are invoiced at the final per unit price, which may be the contracted fixed price or a market price at the time of
shipment. Sales are made under normal terms and usually do not require collateral.
The majority of sales are reported gross, inclusive
of freight costs being paid by the Company. The Company recognizes such freight costs in cost of goods sold in the financial statements.
When freight costs are paid by the buyer, the Company excludes these costs from its financial statements.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
4. Summary of Significant Accounting Policies (continued)
Fair Value Measurement
The Company accounts for certain financial
assets and liabilities under ASC 820, Fair Value Measurement. The Company uses the following methods in estimating fair
value disclosures for financial instruments:
Cash and equivalents, accounts receivable,
and accounts payable: The carrying amount reported in the consolidated balance sheets approximates fair value due to the short-term
nature of the asset or liability.
Revolving credit facility and long-term
debt: The carrying amount of the Company’s borrowings under its revolving credit facility approximates fair value. The
fair values of the term loans are based on observed transaction prices between market participants.
Commodity derivatives: Commodity derivative
instruments, entered into periodically by the Company, consist of futures contracts, swaps, and option contracts. The fair value
of these commodity derivative instruments is determined by reference to quoted market prices.
Available-for-sale securities: Available-for-sale
securities consist of a common stock investment in an exchange-traded security. The fair value of these securities is determined
using quoted market prices.
See Note 5 for additional information regarding
the Company’s fair value assets and liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
4. Summary of Significant Accounting Policies (continued)
Accounts Receivable
Accounts receivable are recorded on a gross
basis, with no discounting, less an allowance for doubtful accounts. These trade receivables arise in the ordinary course of business
from sales of finished product to the Company’s customers. Management estimates the allowance for doubtful accounts based
on existing economic conditions, the financial conditions of the customers, and the amount and age of past-due accounts. The Company
writes off specific accounts receivable when collection efforts are exhausted and the amounts are deemed unrecoverable.
Inventories
Inventories are stated at the lower of cost
or market. Cost is determined using a weighted-average first-in, first-out (FIFO) method for bushels of corn purchased, gallons
of ethanol produced at the Company’s plants, and other gallons purchased for resale, when applicable. Inventory costs include
expenditures incurred to bring inventory to its existing condition and location. Inventories primarily consist of agricultural
and energy-related commodities, including corn, ethanol, and coal, and were as follows:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
| |
| |
Finished products | |
$ | 19,430 | | |
$ | 27,946 | |
Work-in-process | |
| 3,408 | | |
| 6,542 | |
Raw materials | |
| 5,275 | | |
| 8,511 | |
Totals | |
$ | 28,113 | | |
$ | 42,999 | |
Derivatives and Hedging Activities
Derivatives are accounted for in accordance
with ASC 815, Derivatives and Hedging, and primarily consist of commodity futures contracts, swaps, and option contracts.
The Company’s futures contracts are not
designated as hedges and, therefore, are marked to market each period, with corresponding gains and losses recorded in other nonoperating
income. Such derivative instruments are recorded at fair value and are included in “Prepaid expenses and other current assets”
on the Company’s consolidated balance sheets. See Note 7.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
4. Summary of Significant Accounting Policies (continued)
Under ASC 815, companies are required to evaluate
contracts to determine whether such contracts are derivatives. Certain contracts that meet the definition of a derivative under
ASC 815 may be exempted from the accounting and reporting requirements of ASC 815 as normal purchases or normal sales. The Company
has elected to designate its forward purchases of corn and natural gas and forward sales of ethanol as normal purchases and normal
sales under ASC 815. Accordingly, these forward commodity contracts are not reflected in the consolidated financial statements
at fair value.
Property, Plant, and Equipment
Newly acquired land, buildings, and equipment
are carried at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, generally
on the straight-line basis for financial reporting purposes (furniture and fixtures, 5–15 years; machinery and equipment,
3–20 years; storage tanks, 15–25 years; and buildings and leasehold improvements, 4–40 years), and on accelerated
methods for tax purposes. See Note 8.
Impairment of Long-Lived Assets
Long-lived assets are evaluated for impairment
under the provisions of ASC 360, Property, Plant and Equipment. When facts and circumstances indicate that long-lived assets
used in operations may be impaired, and the undiscounted cash flows estimated to be generated from those assets are less than their
carrying values, an impairment charge is recorded equal to the excess of the carrying value over fair value.
Available-for-Sale Securities
Available-for-sale securities at December 31,
2012 and 2011, consisted of shares of Imperial Petroleum Inc. (Imperial). For the years ended December 31, 2012 and 2011, the Company
recognized a noncash loss on available-for-sale securities of $0.2 million and $0.5 million, respectively, due to the declining
market value of the Imperial stock, which was determined to be other than temporary. See Note 6.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
4. Summary of Significant Accounting Policies (continued)
Employment-Related Benefits
Employment-related benefits associated with
pensions and postretirement health care are expensed as actuarially determined. The recognition of expense is affected by estimates
made by management, such as discount rates used to value certain liabilities, investment rates of return on plan assets, increases
in future wage amounts, and future health care costs. The Company uses third-party specialists to assist management in appropriately
measuring the expenses and liabilities associated with employment-related benefits.
The Company determines its actuarial assumptions
for the pension and postretirement plans, after consultation with its actuaries, on December 31 of each year to calculate liability
information as of that date and pension and postretirement expense for the following year. The discount rate assumption is determined
based on a spot yield curve that includes bonds that are rated Corporate AA or higher with maturities that match expected benefit
payments under the plan.
The expected long-term rate of return on plan
assets reflects the projected returns for the investment mix and is determined by taking into account the expected weighted averages
of the investments of the assets, the fact that the plan assets are actively managed to mitigate downside risks, the historical
performance of the market in general and the historical performance of the retirement plan assets over the past ten years.
Employee Stock Plans
The Company accounts for its employee stock
compensation in accordance with ASC 718, Compensation – Stock Compensation. Equity awards are expensed based on their
grant date fair value. As required under the guidance, an accounting estimate of the number of shares that are expected to vest
is made and then expensed utilizing the grant-date fair value of the shares from the date of grant through the end of the performance
cycle period. See Note 16.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
4. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred tax liabilities and assets are recorded
for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Property,
plant, and equipment, stock-based compensation expense, debt issuance costs, and original issue discount are the primary sources
of these temporary differences. Deferred income taxes also include net operating loss and capital loss carryforwards. The Company
establishes valuation allowances to reduce deferred tax assets to amounts it believes are realizable. These valuation allowances
and contingency reserves are adjusted based upon changing facts and circumstances. See Note 14.
Concentrations
Labor Concentration
Approximately 60% of the Company’s full-time
employees at December 31, 2012 (comprised of the hourly employees at the Illinois facilities), are covered by a collective bargaining
agreement between Aventine’s subsidiary, Aventine Renewable Energy, Inc., and the United Steelworkers International Union,
Local 7-662 (the Union). On November 4, 2012, the Union ratified a new collective bargaining agreement with Aventine Renewable
Energy, Inc. for its hourly production workers in Pekin, Illinois. This new agreement was effective November 5, 2012, and runs
through October 31, 2015.
Concentration of Credit Risk
The Company sells ethanol to most of the major
integrated oil companies, as well as to a significant number of large, independent refiners and petroleum wholesalers. Trade receivables
result primarily from ethanol marketing operations. As a general policy, collateral is not required for receivables, but customers’
financial condition and creditworthiness are evaluated regularly. Credit risk concentration related to accounts receivable has
resulted from the Company’s top 10 customers having generated 62.4% and 65.6% of the consolidated net sales for the years
ended December 31, 2012 and 2011, respectively.
In 2012, Marathon Petroleum Corporation (Marathon)
accounted for 11.8% of the Company’s consolidated net sales. In 2011, Marathon and Buckeye Energy Services, LLC (Buckeye)
accounted for 24.0% and 14.2%, respectively, of the Company’s consolidated net sales. No other customers in 2012 or 2011
represented more than 10% of Aventine’s consolidated net sales.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
4. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income, which changes the presentation
requirements of comprehensive income to improve the comparability, consistency, and transparency of financial reporting and to
increase the prominence of items reported in other comprehensive income. ASU 2011-05 requires that all nonowner changes in stockholders’
equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.
This update was effective on January 1, 2012, and was retrospectively applied. The adoption did not have a material impact on the
Company’s consolidated financial statements.
The FASB issued ASU 2013-02, Reporting of
Amounts Out of Accumulated Other Comprehensive Income, in February 2013. This ASU amends ASC 220 and requires entities to report
either on the income statement or disclose in the footnotes to the financials the effects on earnings related to items reclassified
out of other comprehensive income. This update is effective for the Company in fiscal 2013, and the Company is currently evaluating
the impact of adopting this standard.
In May 2011, the FASB issued ASU 2011-04, Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards
(IFRS), which changes certain fair value measurement and disclosure requirements, clarifies the application of existing fair
value measurement and disclosure requirements, and provides consistency to ensure that GAAP and IFRS fair value measurement and
disclosure requirements are described in the same way. ASU 2011-04 was effective and adopted on January 1, 2012. This adoption
did not have a material impact on the Company’s consolidated financial statements.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
5. Fair Value Measurements
In accordance with ASC 820, the Company categorizes
its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:
• | | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities |
• | | Level 2: Quoted prices in markets that are not active, or inputs that are observable,
either directly or indirectly, for substantially the full term of the asset or liability |
• | | Level 3: Prices or valuation techniques that require inputs that are both significant
to the fair value measurement and unobservable (i.e., supported by little or no market activity) |
Fair Value Hierarchy on a Recurring Basis
The following tables summarize the valuation
of the Company’s financial instruments that are carried at fair value as of December 31, 2012 and 2011:
| |
Fair Value Measurements at December 31,
2012
| |
| |
Fair
Value | | |
Quoted
Prices in Active Markets Using Identical Assets
(Level 1)
| | |
Significant
Other
Observable
Inputs
(Level 2)
| | |
Significant
Unobservable Inputs
(Level 3)
| |
| |
(In Thousands) | |
| |
| |
Cash and equivalents | |
$ | 16,941 | | |
$ | 16,941 | | |
$ | – | | |
$ | – | |
Derivative contracts | |
| 168 | | |
| 168 | | |
| – | | |
| – | |
Available-for-sale securities | |
| 17 | | |
| 17 | | |
| – | | |
| – | |
| |
Fair Value Measurements at December 31,
2011
| |
| |
Fair
Value | | |
Quoted Prices in Active
Markets Using Identical Assets
(Level 1)
| | |
Significant
Other
Observable
Inputs
(Level 2)
| | |
Significant
Unobservable Inputs
(Level 3)
| |
| |
(In Thousands) | |
| |
| |
Cash and equivalents | |
$ | 36,105 | | |
$ | 36,105 | | |
$ | – | | |
$ | – | |
Derivative contracts | |
| 239 | | |
| 239 | | |
| – | | |
| – | |
Available-for-sale securities | |
| 191 | | |
| 191 | | |
| – | | |
| – | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
5. Fair Value Measurements (continued)
The Company did not hold any financial assets
requiring the use of Level 2 or Level 3 inputs at December 31, 2012 and 2011.
Available-for-Sale Securities
The Company’s available-for-sale securities
consist of shares of Imperial stock. The Company records the fair value of its Imperial stock using unadjusted quoted market prices
and, accordingly, discloses these investments in Level 1 of the fair value hierarchy.
Financial Instruments Not Reported at Fair Value
The carrying values of other financial instruments,
including cash, accounts receivable, and accounts payable and accrued liabilities, approximate fair value due to their short maturities
of the respective balances. The following table presents the other financial instruments that are not carried at fair value, but
which require fair value disclosure as of December 31, 2012 and 2011:
| |
December 31, 2012 | | |
December 31, 2011 | |
| |
Carrying
Value | | |
Fair
Value | | |
Carrying
Value | | |
Fair
Value | |
| |
(In Thousands) | |
Term loans | |
$ | (230,216 | ) | |
$ | (133,172 | ) | |
$ | (222,813 | ) | |
$ | (222,813 | ) |
In 2012, the Company completed a debt restructuring
that was accounted for as a troubled debt restructuring under GAAP. As a result, the $230.2 million carrying value is greater than
the term loan payoff of $135.9 million due to the inability to recognize any of debt forgiveness. See Note 10.
In 2011, the term loan was at a variable rate, and therefore the
carrying value approximated the fair value.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
6. Investments
Available-for-Sale Securities
Losses of $0.2 million and $0.5 million, respectively,
were presented in “Loss on available-for-sale securities” on the consolidated statements of operations for the years
ended December 31, 2012 and 2011. At each reporting date, the Company performs an evaluation of impaired equity securities to determine
if any unrealized losses are other than temporary. Such evaluation consists of a number of factors, including, but not limited
to, the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects
of the issuer, and management’s ability and intent to hold the securities until fair value recovers. The assessment of the
ability and intent to hold these securities to recovery focuses on liquidity needs, asset/liability management objectives, and
security portfolio objectives. Based on the results of the evaluation, management concluded that as of December 31, 2012 and 2011,
the unrealized losses related to its 425,000 shares of Imperial were not temporary.
7. Derivative Instruments and Hedging
The Company’s operations and cash flows
are subject to fluctuations due to changes in commodity prices. As such, the Company has historically used various derivative financial
instruments to minimize the effects of the volatility of commodity price changes primarily related to corn, natural gas, and ethanol.
The Company monitors and manages its exposure as part of its overall risk management policy. As such, the Company seeks to reduce
potentially adverse effects that the volatility of these markets may have on its operating results. The Company may take derivative
positions in these commodities as one way to mitigate risk.
The Company is subject to market risk with
respect to the price and availability of corn, the principal raw material it uses to produce ethanol and ethanol by-products. The
availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer
planting decisions, governmental policies with respect to agriculture and international trade, and global demand and supply. From
time to time, the Company may have firm-price purchase commitments with some of its corn suppliers under which the Company agrees
to buy corn at a price set in advance of the actual delivery of that corn. Under these arrangements, the Company assumes the risk
of a price decrease in the market price of corn between the time this price is fixed and the time the corn is delivered. The Company
accounts for these transactions as normal purchases under ASC 815, and accordingly, it does not mark these transactions to market.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
7. Derivative Instruments and Hedging (continued)
The Company periodically enters into firm-price
purchase commitments with some of its natural gas suppliers under which the Company agrees to buy natural gas at a price set in
advance of the actual delivery of that natural gas. Under these arrangements, the Company assumes the risk of a price decrease
in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered. The Company
accounts for these transactions as normal purchases under ASC 815, and accordingly, it does not mark these transactions to market.
The Company is also subject to market risk
with respect to ethanol pricing. The Company’s ethanol sales are priced using contracts that can either be fixed, based upon
the price of wholesale gasoline plus or minus a fixed amount, or based upon a market price at the time of shipment. The Company
sometimes fixes the price at which it sells ethanol using fixed price physical delivery contracts. The Company has elected to account
for these transactions as normal sales transactions under ASC 815, and accordingly, it has not marked these transactions to market.
Realized Gains (Losses)
The Company recorded a net gain of $0.7 million
on derivative transactions for the year ended December 31, 2012, and a net loss of $4.4 million for the year ended December 31,
2011, in “Gain (loss) on derivative transactions, net” on the consolidated statements of operations.
Derivative instruments not designated as hedging
instruments under ASC 815 at December 31, 2012 and 2011, were as follows:
| |
| |
December 31 | |
Type | |
Balance Sheet Classification | |
2012 | | |
2011 | |
| |
| |
(In Thousands) | |
Corn future positions | |
Other current assets | |
$ | 26 | | |
$ | 8 | |
Ethanol future positions | |
Other current assets | |
| – | | |
| 911 | |
The realized and unrealized effects on the
Company’s consolidated statements of operations for derivatives not designated as hedging instruments under ASC 815 for the
years ended December 31, 2012 and 2011, were as follows:
| |
| |
Year Ended December 31 | |
Type | |
Balance Sheet Classification | |
2012 | | |
2011 | |
| |
| |
(In Thousands) | |
Corn | |
Gain (loss) on derivative transactions | |
$ | 667 | | |
$ | (2,235 | ) |
Ethanol | |
Gain (loss) on derivative transactions | |
| 14 | | |
| (2,189 | ) |
| |
| |
| | | |
| | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
7. Derivative Instruments and Hedging (continued)
At December 31, 2012, the Company had 109 short
March 2013 corn futures contracts (545,000 bushels) at an average price of $7.19 per bushel, and six long May 2013 corn futures
contracts (30,000 bushels) at an average price of $7.98 per bushel.
8. Property, Plant, and Equipment
Property, plant, and equipment at December
31, 2012 and 2011, were as follows:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
| |
| |
Land and improvements | |
$ | 12,137 | | |
$ | 12,064 | |
Building and leasehold improvements | |
| 11,605 | | |
| 11,161 | |
Machinery and equipment | |
| 214,990 | | |
| 211,782 | |
Furniture and fixtures | |
| 957 | | |
| 957 | |
Less accumulated depreciation | |
| (41,012 | ) | |
| (24,394 | ) |
Totals | |
| 198,677 | | |
| 211,570 | |
Construction-in-progress | |
| 94,863 | | |
| 90,130 | |
Total property, plant, and equipment, net | |
$ | 293,540 | | |
$ | 301,700 | |
Total depreciation expense for the years ended
December 31, 2012 and 2011, was $17.3 million and $17.9 million, respectively, and depreciation from continuing operations was
primarily recorded in “Cost of goods sold” on the consolidated statements of operations. Depreciation expense related
to discontinued operations was recorded in “Loss from operations of discontinued components” on the consolidated statements
of operations.
Construction-in-Progress
At December 31, 2012, construction-in-progress
includes $63.3 million related to the construction of the Aurora West plant, $25.1 million related to the Canton facility acquired
in August 2010, and $6.0 million related to capitalized projects at the Pekin facility.
At December 31, 2011, construction-in-progress
includes $56.6 million related to the construction of the Aurora West plant, $23.0 million related to the Canton facility acquired
in August 2010, and $9.8 million related to capitalized projects at the Pekin facility.
The Company capitalized $2.3 million and $3.5 million of interest
for the years ended December 31, 2012 and 2011, respectively.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
9. Short-Term Borrowings
Revolving Credit Facility with Wells Fargo
On July 20, 2011, the Company and each of its
subsidiaries, as co-borrowers (collectively, the Borrowers), entered into a Revolving Facility with the lenders party thereto (the
Lenders), and Wells Fargo Capital Finance LLC as Lender and as agent for the Lenders (in such capacity, Wells Fargo) (as amended,
and as may be amended, supplemented or otherwise modified from time to time, the Revolving Facility Agreement) with a $50.0 million
commitment (the Commitments). The Revolving Facility has a borrowing base that is principally supported by accounts receivable
and inventory. The Company terminated the Old Revolving Credit Agreement with PNC and paid a $0.6 million early termination fee,
which is included in debt extinguishment costs for the year ended December 31, 2011. The Company capitalized $0.1 million and $2.9
million in debt issuance costs related to the Revolving Facility Agreement for the years ended December 31, 2012 and 2011, respectively.
The Company recognized $0.6 million and $0.3 million of expense for the amortization of debt issuance costs related to the Revolving
Facility Agreement during the years ended December 31, 2012 and 2011, respectively.
On June 8, 2012, the Company’s excess
availability under the Revolving Facility Agreement fell below the required $7.5 million threshold, which constituted an Event
of Default. Under the terms of the agreement, the Company had 30 days to cure the event of default. On July 6, 2012, the Revolving
Credit Facility was amended to cure the default. As part of the amendment, the Company was required to collateralize any excess
availability shortfall with restricted cash, up to an amount not to exceed $7.5 million.
On September 24, 2012, the Borrowers entered
into a New Revolving Facility with Wells Fargo with a $30 million commitment. The New Revolving Facility is principally supported
by accounts receivable and inventory, and replaces the Revolving Facility Agreement entered into with Wells Fargo in 2011. The
total borrowing capacity of the New Revolving Facility is 40% lower than the total borrowing capacity of the Revolving Facility.
As a result, a loss on debt extinguishment of $0.9 million was recognized in 2012 for the write-off of 40% of the previously unamortized
debt issuance costs relating to the Revolving Facility. The remaining portion of these costs will be added to the issuance costs
capitalized as part of the New Revolving Facility and amortized over the term of the New Revolving Facility, as described below.
The Company capitalized $1.5 million in debt issuance costs related to the New Revolving Facility. The Company recognized $0.3
million in expense for the amortization of debt issuance costs related to the New Revolving Facility for the year ended December
31, 2012.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
9. Short-Term Borrowings (continued)
The loans under the New Revolving Facility
Agreement will mature on the earlier of (a) July 20, 2015, and (b) the date that is six months before the earliest maturity date
of the Term Loan Indebtedness under the Term Loan Agreement (as defined below) (or if the indebtedness under the Term Loan Agreement
is fully refinanced or replaced, the maturity date of such refinanced or replaced indebtedness).
Borrowings under the New Revolving Facility
Agreement will bear interest at (i) the London Interbank Offered Rate (LIBOR) plus 4.0% or (ii) the alternate base rate plus 2.5%
based on the Company’s election. The alternate base rate will be calculated based on the greater of (A) the federal funds
rate plus 1/2 of 1.0%, (B) the LIBOR rate (calculated based upon an interest period of three months and determined on a daily basis),
plus 1.0% and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association, as its “prime
rate.”
The security interests granted under the New
Revolving Facility Agreement in the assets (including inventory and accounts receivable) other than substantially all of Borrowers’
fixed assets will be first priority in nature, subject to customary exceptions, and the security interests in the collateral constituting
substantially all of the Borrowers’ fixed assets will be second priority in nature, and subject to customary liens and the
first priority lien on such assets under Aventine’s senior secured term loan credit agreement dated as of December 22, 2010
by and among Aventine, as borrower, Citibank, N.A., as administrative agent and collateral agent (in such capacity, the “Term
Loan Agent”), the lenders party thereto and certain other persons (as amended, and as may be amended, supplemented or otherwise
modified from time to time, the “Term Loan Agreement”).
The New Revolving Facility Agreement requires
mandatory prepayment of the obligations thereunder in the event that the amount of (i) outstanding revolving loans under the New
Revolving Facility plus (ii) the aggregate undrawn amount of all outstanding letters of credit issued by certain Lenders exceeds
the Borrowing Base (as defined in the New Revolving Facility Agreement).
The New Revolving Facility Agreement contains
customary affirmative and negative covenants concerning the conduct of Aventine’s business operations, such as limitations
on the incurrence of indebtedness, the granting of liens, maintenance of operations, mergers, consolidations and dispositions of
assets, restricted payments and the payment of dividends, investments, and transactions with affiliates.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
9. Short-Term Borrowings (continued)
The New Revolving Facility Agreement contains
a financial covenant that will require Aventine to maintain minimum liquidity levels of $10.0 million throughout the term of the
agreement. In addition, the agreement contains an ethanol production covenant that will require production of at least 80 million
gallons during any trailing 12-month period ending as of any calendar month. The New Revolving Facility Agreement also includes
customary events of default, including, but not limited to, failure to pay principal or interest, failure to pay or default under
other material debt, misrepresentation or breach of warranty, violation of certain covenants, a change of control, the commencement
of a bankruptcy proceeding, any of the Borrowers’ insolvency and the rendering of a judgment or judgments against any of
the Borrowers in excess of a specified amount individually or in the aggregate. Upon the occurrence of an event of default, Aventine’s
obligations under the New Revolving Facility Agreement may be accelerated, and all indebtedness thereunder would become immediately
due and payable.
The Company was in compliance with all of the
covenants related to the New Revolving Facility Agreement at December 31, 2012.
At December 31, 2012, the Company had no short-term
borrowings and letters of credit outstanding of $7.6 million under the New Revolving Facility Agreement.
10. Long-Term Debt
The following table summarizes the Company’s
outstanding debt at December 31:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
Senior secured term loan credit agreement, final maturity date December 2017 | |
$ | 230,216 | | |
$ | 216,138 | |
Other | |
| 163 | | |
| 264 | |
| |
| 230,379 | | |
| 216,402 | |
Less: current maturities of long-term debt | |
| (37 | ) | |
| (2,283 | ) |
Total long-term debt, net | |
$ | 230,342 | | |
$ | 214,119 | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
10. Long-Term Debt (continued)
Senior Secured Term Loan Credit Agreement
On December 22, 2010, the Company entered into
the Term Loan Agreement with the Term Loan Agent, the lenders party thereto, Citigroup Global Markets Inc. and Jefferies Finance
LLC, as joint lead arrangers and joint book-runners, and Citibank, N.A. and Jefferies Finance LLC, as co-syndication agents. Under
the Term Loan Agreement, the lenders provided to the Company an aggregate principal amount $200 million term loan facility (the
Term Loan Facility). The Term Loan Facility was issued net of original issue discount of $8.0 million.
Also on December 22, 2010, the Company gave
notice of redemption pursuant to the indenture dated as of the Effective Date among the Company, each of the Company’s direct
and indirect wholly owned subsidiaries, as guarantors, and Wilmington Trust FSB, as trustee and collateral agent, providing that
it would redeem all $155.0 million aggregate principal amount of notes at a redemption price of 105% of the principal amount thereof,
plus accrued and unpaid interest to, but not including, the redemption date. The Company redeemed such notes on January 21, 2011.
In connection with the redemption, the Company paid $164.8 million, of which $155.0 million related to the principal amount of
the notes, $7.8 million related to a prepayment penalty on the notes and $2.0 million related to interest on the notes.
On April 7, 2011, the Company entered into
an incremental amendment (the Incremental Amendment) with the Term Loan Agent and Macquarie Bank Limited, as lender (Macquarie),
to the Company’s Term Loan Agreement. Pursuant to the Incremental Amendment, Macquarie loaned an aggregate principal amount
equal to $25.0 million, before fees of $1.3 million, to the Company. The loan under the Incremental Amendment had substantially
the same terms as the existing loans under the Term Loan Agreement, including seniority, ranking in right of payment and of security,
maturity date, applicable margin, and interest rate floor.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
10. Long-Term Debt (continued)
On September 24, 2012, the Company entered
into a troubled debt restructuring with the Term Loan Lenders and Citibank, as Agent for the Lenders. As a result of this transaction,
the Company converted $132.3 million of its outstanding term loan debt into 2,186,298 newly issued shares of common stock of the
Company, which represents approximately 92.5% of the Company’s currently issued and outstanding shares. After the exchange,
$100 million of original Term Loan debt (Term Loan B) remained. In addition, the Term Loan Lenders issued $30 million in debt to
the Company. Pursuant to the agreement, a closing fee of $0.9 million was capitalized and added to the principal. The total of
$30.9 million of principal (Term Loan A) and a $0.9 million exit fee are due at maturity. Term Loan A accrues interest payable
in cash at the end of each quarter. Interest accrues at a rate of 12%. The final maturity date for all principal and accrued interest
on Term Loan A is in September 2016.
Term Loan B accrues interest payable at the
end of each quarter. Under the terms of the agreement, the interest may be paid in cash or paid in kind. If the Company elects
to pay the interest in cash, interest will accrue at a rate of 10.5%. If the Company elects paid-in-kind interest, interest will
accrue at a rate of 15% and will be capitalized as part of Term Loan B at the end of the quarter. The final maturity date for all
principal and accrued interest on Term Loan B is in September 2017.
The restructuring transaction qualifies as
a troubled debt restructuring and falls within the scope of ASC 470-60, Debt – Troubled Debt Restructurings by Debtors,
because the Company, as the debtor, was experiencing financial difficulty and the creditor granted a concession. As a result, the
impact of the restructuring is accounted for prospectively using the effective-interest method. Accordingly, the aggregate debt
balance of $232.3 million was reduced by only $26.8 million, the fair value of the equity interest granted in exchange for forgiveness
of $132.3 million of debt. No gain on debt forgiveness was recognized, as the future maximum cash out flows associated with the
principal and interest on the remaining debt may exceed the amount of the previously recognized debt obligation. Additionally,
the debt balance was increased $30 million resulting from the issuance of Term Loan A. The Company recognized $1.4 million in effective
interest expense related to Term Loans A and B for the year ended December 31, 2012. The Company made interest payments of $1.0
million related to Term Loans A and B for the year ended December 31, 2012. ASC 470-60 requires debt issuance costs related to
the original debt to continue to be amortized over the term of the new debt instrument, through September 2017. Costs related to
the restructuring of the debt should be expensed as incurred. The Company amortized $1.5 million of debt issuance costs related
to the original Term Loan for the year ended December 31, 2012. As part of the troubled debt restructuring, the Company incurred
fees of $3.5 million. These fees are recorded in selling, general, and administrative expenses.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
10. Long-Term Debt (continued)
The Term Loan Agreement borrowings as of December
31, 2012, are comprised of the following:
| |
December 31, 2012 | |
| |
(In Thousands) | |
Term Loan A principal | |
$ | 30,000 | |
Term Loan A fees | |
| 900 | |
Term Loan B principal | |
| 100,000 | |
Term Loan B interest paid-in-kind | |
| 4,090 | |
Principal reduced but not derecognized and other | |
| 95,389 | |
| |
$ | 230,379 | |
Under the terms of the Term Loan Agreement,
the amount of indebtedness the Company is permitted to incur under the New Revolving Facility (including bank products and hedging
obligations) is capped at $58.0 million. The Term Loan Agreement requires the Company to maintain liquidity of at least $5 million
throughout the term of the agreement.
Debt Maturities
Maturities relating to outstanding debt, excluding
unrecognized principal forgiveness that may be paid as interest in future periods, at December 31, 2012, for each of the five years
in the period ending December 31, 2017, and thereafter are expected as follows:
| |
December 31 | |
| |
(In Thousands) | |
2013 | |
$ | 37 | |
2014 | |
| 42 | |
2015 | |
| 48 | |
2016 | |
| 31,836 | |
2017 | |
| 104,090 | |
Thereafter | |
| – | |
Total | |
$ | 136,053 | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
10. Long-Term Debt (continued)
Subsequent to 2012, the Company amended its
Term Loan Agreement and borrowed an additional $35 million to fund capital expenditures and provide additional liquidity. Interest
accrues quarterly and is payable in kind. The maturity date for the additional $35 million coincides with the Term Loan A maturity
date of September 2016.
11. Commitments and Contingencies
Lease Commitments
The Company leases certain assets such as rail
cars, terminal facilities, barges, buildings, and equipment from unaffiliated parties under noncancelable operating leases. Terms
of the leases, including renewals, vary by lease. Rental expense for operating leases for the years ended December 31, 2012 and
2011, was $7.3 million and $6.8 million, respectively.
At December 31, 2012, minimum rental commitments
under noncancelable operating lease terms in excess of one year are as follows:
| |
Minimum Rental Commitments | |
| |
(In Thousands) | |
Years ending December 31: | |
| | |
2013 | |
$ | 6,313 | |
2014 | |
| 4,475 | |
2015 | |
| 4,026 | |
2016 | |
| 1,155 | |
2017 | |
| 885 | |
Thereafter | |
| 7,713 | |
Total minimum lease payments | |
$ | 24,567 | |
Other Commitments
At December 31, 2012, the Company had forward
contracts to purchase approximately 153,000 tons of coal for $10.7 million, delivered in 2013.
At December 31, 2012, the Company had committed
to purchase approximately 241,800 MMBtus of natural gas for $0.9 million through January 2013, delivered.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
11. Commitments and Contingencies (continued)
At December 31, 2012, the Company had firm-price
purchase commitments to purchase approximately 841,332 bushels of corn at an average fixed price of $7.38 per bushel for delivery
through January 2013. These commitments were negotiated in the normal course of business and represent a portion of the Company’s
corn requirements.
At December 31, 2012, the Company had fixed-price
contracts to sell 336,000 gallons of ethanol at an average price of $2.85 per gallon, and had sold 35.4 million gallons of ethanol
at index prices using indices from Oil Price Information Service in 2013.
Environmental Remediation and Contingencies
The Company is subject to extensive federal,
state, and local environmental laws, regulations, and permit conditions (and interpretations thereof), including those relating
to the discharge of materials into the air, water, and ground; the generation, storage, handling, use, transportation, and disposal
of hazardous materials; and the health and safety of the Company’s employees. These laws, regulations, and permits require
the Company to incur significant capital and other costs, including costs to obtain and maintain expensive pollution control equipment.
They may also require the Company to make operational changes to limit actual or potential impacts to the environment. A violation
of these laws, regulations, or permit conditions can result in substantial fines, natural resource damages, criminal sanctions,
permit revocations, and/or facility shutdowns. In addition, environmental laws and regulations (and interpretations thereof) change
over time, and any such changes, more vigorous enforcement policies, or the discovery of currently unknown conditions may require
substantial additional environmental expenditures. The Company has not accrued any amounts for environmental matters as of December
31, 2012.
Federal and state environmental authorities
have been investigating alleged excess volatile organic compounds emissions and other air emissions from many U.S. ethanol plants,
including the Company’s Illinois facilities. The investigation relating to the Illinois wet mill facility is still pending,
and the Company could be required to install additional air pollution control equipment or take other measures to control air pollutant
emissions at that facility. If authorities require such controls to be installed, the Company anticipates that costs would be higher
than the approximately $3.4 million it incurred in connection with a similar investigation at its Nebraska facility due to the
larger size of the Illinois wet mill facility. In addition, if the authorities determine that the Company’s emissions are
in violation of applicable law, the Company would likely be required to pay fines that could be material.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
11. Commitments and Contingencies (continued)
The Company has made, and expects to continue
making, significant capital expenditures on an ongoing basis to comply with increasingly stringent environmental laws, regulations,
and permits, including compliance with the U.S. Environmental Protection Agency’s (EPA) National Emissions Standard for Hazardous
Air Pollutants (NESHAP) for industrial, commercial, and institutional boilers and process heaters (also known as Boiler MACT).
This NESHAP was issued but subsequently vacated in 2007. The vacated version of the rule required the Company to implement maximum
achievable control technology at its Illinois wet mill facility to reduce hazardous air pollutant emissions from its boilers. The
EPA issued a new Boiler MACT rule on December 22, 2012. The rule became final on January 31, 2013. The Company will have three
years from the date of the final rule to meet the new emission limits and is in the process of determining the costs of compliance,
which are not known at this time.
Litigation Matters
On November 6, 2008, Aventine Renewable Energy,
Inc. filed a complaint against JPMorgan Securities, Inc. and JPMorgan Chase Bank, N.A. in the Circuit Court for the Tenth Judicial
Circuit of Tazewell County, Illinois. Aventine sought to recover money lost in the investment of funds in student loan-backed auction
rate securities. Aventine alleged that JPMorgan Chase Bank, through its investment arm, JPMorgan Securities, gave false assurances
of the liquidity of this type of investment. Aventine’s claim represented funds lost because Aventine was forced to sell
the investment at a loss after the securities became illiquid. The matter was assigned to a FINRA arbitration panel and was set
to be heard in April 2013. Subsequent to year-end but prior to the scheduled hearing date, the parties agreed to settle this matter.
The terms of the settlement are subject to a confidentiality clause.
On April 7, 2009, the Company filed voluntary
petitions with the Bankruptcy Court to reorganize under Chapter 11 of the United States Code. On January 13, 2010, the Debtors
filed with an effective date of March 15, 2010. Since the Effective Date, most of the Debtors’ cases have been closed by
order of the Bankruptcy Court; however, the case of Aventine Renewable Energy, Inc. remains open, wherein certain creditor claims
remain subject to dispute and further adjudication, as do certain claims and potential claims by Aventine Renewable Energy, Inc.
against certain third parties to recover sums that Aventine asserts is owed to it. At this time, the Company is unable to determine
the impact such litigation will have on its business, operating results, financial condition and cash flows.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
11. Commitments and Contingencies (continued)
On May 31, 2012, the Company served Aurora
Cooperative Elevator Company (Aurora) with a petition for declaratory relief filed in the District Court of Dallas County, Texas,
160th Judicial District. The petition alleges, among other things, that Aurora has improperly threatened – in direct contravention
of the agreement between the Company and Aurora – to invoke a contractual option to repurchase the land on which the Company’s
Aurora West ethanol plant (the Plant) is located. Aurora’s stated position is that Aurora has the right to invoke the option
if the Plant has not been producing ethanol for 30 days, at a daily rate equivalent to an annualized production rate of 90 million
gallons, by July 31, 2012. The petition alleges that the contract setting forth the option does not require 30 days of production
in order to prevent Aurora’s exercise of the contractual option. Rather, the Company asserts the contract only requires that
it “diligently pursue construction” of the Plant “to completion by July 1, 2012,” where “diligently
pursue construction ... to completion” does not mean “operation” or “production.” The Company is
seeking a declaratory judgment that the Company was not required to operate the plant or produce ethanol at the Plant at the rates
or amounts asserted by Aurora before July 31, 2012, and the Company need not operate the Plant or meet the production requirements
to avoid the exercise of the contractual option. This case has since been transferred to the United States District Court for the
District of Nebraska, where the parties await rulings as to whether and which one of the competing claims will move forward. The
Company intends to pursue any and all rights available to it with respect to the foregoing. At this time, the Company is unable
to determine the impact such litigation will have on its business, operating results, financial condition, and cash flows.
On September 20, 2012, Aurora sued the Company
in the United States District Court for the District of Nebraska alleging that the Company (and two of its subsidiaries) breached
the parties’ grain supply agreement. Specifically, Aurora alleges that it procured 1.7 million bushels of corn on the Company’s
behalf, for which the Company is liable. The Company denies that it ever contracted for the corn in question or that Aurora suffered
the losses it alleges with respect to that corn. Rather, the Company maintains that Aurora improperly set off amounts it owes to
the Company (or one or more of its subsidiaries) in violation of the parties’ grain and marketing agreements, thus resulting
in uncured breaches of each agreement. As a result, the Company issued notice of termination of those agreements. This matter is
pending in court and also before the National Grain and Feed Association, where an arbitration proceeding has commenced to resolve
the grain dispute. The Company intends to pursue any and all rights and remedies available to it with respect to the foregoing.
At this time, the Company is unable to determine the impact such litigation will have on its business, operating results, financial
condition, and cash flows.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
11. Commitments and Contingencies (continued)
From time to time, the Company is involved
in various legal proceedings, including legal proceedings relating to the extensive environmental laws and regulations that apply
to the Company’s facilities and operations. The Company is not involved in any legal proceedings, other than those described
herein, that it believes could have a material adverse effect upon the Company’s business, operating results, financial condition,
or cash flows.
12. Retirement and Pension Plans
Defined Contribution Plan
The Company has 401(k) plans covering substantially
all of its employees. Contributions made under the defined contribution plans include a match, at the Company’s discretion,
of an employee’s contribution to the plans. For the years ended December 31, 2012 and 2011, such contributions amounted to
$0.9 million and $0.9 million, respectively.
Qualified Retirement Plan
The Company has a defined benefit pension plan
(the Retirement Plan) that is noncontributory, and covers unionized employees at its Pekin, Illinois, facility who fulfill minimum
age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. On October
29, 2010, the Union ratified a new collective bargaining agreement with the Company for its hourly production workers in Pekin,
Illinois. This new agreement was effective November 1, 2010. The agreement states that, among other things, employees hired after
November 1, 2010, will not be eligible to participate in the Retirement Plan. The Company uses a December 31 measurement date for
its Retirement Plan.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
12. Retirement and Pension Plans (continued)
Changes in the benefit obligations, the fair
value of the assets, the funded status, and the amounts recognized in the consolidated balance sheets were as follows:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
Changes in benefit obligation | |
| | | |
| | |
Benefit obligation
at the beginning of the year | |
$ | 13,490 | | |
$ | 10,405 | |
Service cost | |
| 457 | | |
| 364 | |
Interest cost | |
| 567 | | |
| 566 | |
Actuarial loss | |
| 833 | | |
| 2,592 | |
Benefits paid | |
| (481 | ) | |
| (437 | ) |
Benefit obligation at the end of the year | |
| 14,866 | | |
| 13,490 | |
| |
| | | |
| | |
Changes in plan assets | |
| | | |
| | |
Fair value at the beginning of the year | |
| 10,604 | | |
| 10,308 | |
Actual return on plan assets | |
| 1,321 | | |
| 116 | |
Employer contributions | |
| 509 | | |
| 617 | |
Benefits paid | |
| (481 | ) | |
| (437 | ) |
Fair value of plan assets at the end of the year | |
| 11,953 | | |
| 10,604 | |
Funded surplus (deficit) at the end of the year | |
$ | (2,913 | ) | |
$ | (2,886 | ) |
| |
| | | |
| | |
Amounts recognized in the consolidated balance sheets | |
| | | |
| | |
Noncurrent liabilities | |
$ | (2,913 | ) | |
$ | (2,886 | ) |
| |
| | | |
| | |
Amounts recognized in accumulated other comprehensive income | |
| | | |
| | |
Net loss | |
$ | 3,548 | | |
$ | 3,376 | |
The fair value of plan assets, the accumulated benefit obligation
and the projected benefit obligation were as follows:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
Fair value of plan assets | |
$ | 11,953 | | |
$ | 10,604 | |
Accumulated benefit obligation | |
| 14,866 | | |
| 13,490 | |
Projected benefit obligation | |
| 14,866 | | |
| 13,490 | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
12. Retirement and Pension Plans (continued)
A summary of the components of net periodic
pension cost for the Retirement Plan is as follows:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
Components of net periodic benefit cost (credit): | |
| | |
| |
Service cost | |
$ | 457 | | |
$ | 364 | |
Interest cost | |
| 567 | | |
| 566 | |
Expected return on plan assets | |
| (829 | ) | |
| (805 | ) |
Amortization of net actuarial loss | |
| 169 | | |
| – | |
Net periodic pension cost | |
| 364 | | |
| 125 | |
| |
| | | |
| | |
Other changes in plan assets and benefit obligations recognized in AOCI: | |
| | | |
| | |
Net loss | |
| 342 | | |
| 3,281 | |
Amortization of net loss | |
| (169 | ) | |
| – | |
Total recognized in AOCI | |
| | | |
| – | |
Net amount recognized in total periodic benefit cost and AOCI | |
| 173 | | |
| 3,281 | |
| |
| | | |
| | |
Actual return on plan assets | |
$ | 1,321 | | |
$ | 116 | |
Employer contributions | |
| 509 | | |
| 617 | |
Benefits paid | |
| 481 | | |
| 437 | |
The Company did not recognize any amortization
of net actuarial losses for the year ended December 31, 2011, as losses as of January 1, 2011, did not exceed 10% of projected
benefit obligation.
The Company is not expected to make any contributions
in the year ending December 31, 2013.
Certain assumptions utilized in determining
the projected benefit obligation and net periodic benefit cost for the years ended December 31 are as follows:
|
Year Ended December 31 |
|
2012 |
2011 |
|
|
Assumptions used to determine benefit obligation: |
|
|
Discount rate |
3.90% |
4.30% |
Assumptions used to determine net periodic benefit cost: |
|
|
Discount rate |
4.30% |
5.41% |
Expected long-term rate of return on plan assets |
7.75% |
7.75% |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
12. Retirement and Pension Plans (continued)
| |
December 31 | |
| |
2012 | | |
2011 | |
Unfunded status | |
$ | (2,913 | ) | |
$ | (2,886 | ) |
| |
| | | |
| | |
Amounts recognized in: | |
| | | |
| | |
Long-term liabilities | |
| (2,913 | ) | |
| (2,886 | ) |
Accumulated other comprehensive loss unamortized net actuarial loss | |
| 3,548 | | |
| 3,376 | |
The Company generated actuarial losses for
the years ended December 31, 2012 and 2011, primarily from the decrease in the discount rate used in the calculation of the benefit
obligation. The discount rate used was 3.90% at December 31, 2012, and 4.30% at December 31, 2011.
Expected Benefit Payments – The
following table summarizes the expected benefit payments for the Retirement Plan for each of the next five fiscal years and in
the aggregate for the five fiscal years thereafter:
| |
December 31
(In Thousands) | |
| |
| | |
2013 | |
$ | 496 | |
2014 | |
| 511 | |
2015 | |
| 546 | |
2016 | |
| 597 | |
2017 | |
| 610 | |
2018–2022 | |
| 3,351 | |
Plan Assets
The Company’s pension committee is responsible
for overseeing the investment of pension plan assets. The pension committee is responsible for determining and monitoring the appropriate
asset allocations and for selecting or replacing investment managers, trustees, and custodians. The pension plan’s current
investment target allocations are 53% equities and 47% debt. The pension committee reviews the actual asset allocation in light
of these targets periodically and rebalances investments as necessary. The pension committee also evaluates the performance of
investment managers as compared to the performance of specified benchmarks and peers and monitors the investment managers to ensure
adherence to their stated investment style and to the plan’s investment guidelines.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
12. Retirement and Pension Plans (continued)
Plan assets are invested using a total return
investment approach whereby a mix of equity securities and debt securities are used to preserve asset values, diversify risk and
achieve the Company’s target investment return benchmark. Investment strategies and asset allocations are based on careful
consideration of plan liabilities, the plan’s funded status and the Company’s financial condition. Investment performance
and asset allocation are measured and monitored on an ongoing basis.
Plan assets are managed in a balanced portfolio
comprised of two major components: an equity portion and a fixed income portion. The expected role of plan equity investments is
to maximize the long-term real growth of fund assets, while the role of fixed income investments is to generate current income,
provide for more stable periodic returns and provide some protection against a prolonged decline in the market value of fund equity
investments.
Equity securities include U.S. and international
equity, while fixed income securities include long-duration and high-yield bond funds.
The average asset allocations for the Retirement
Plan at December 31 are as follows:
| |
December 31 |
| |
2012 | |
2011 |
Equity securities | |
| 53 | % | |
| 49 | % |
Debt securities | |
| 47 | | |
| 51 | |
Total | |
| 100 | % | |
| 100 | % |
The following table presents the categorization of plan assets,
measured at fair value as of December 31, 2012:
Asset Category | |
Market Value at December 31, 2012 | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
| |
(In Thousands) | |
| |
| | |
| | |
| | |
| |
Large-cap U.S. equity securities(1) | |
$ | 3,793 | | |
$ | – | | |
$ | 3,793 | | |
$ | – | |
Small/mid-cap U.S. equity securities(2) | |
| 1,088 | | |
| – | | |
| 1,088 | | |
| – | |
International equity securities(3) | |
| 1,442 | | |
| – | | |
| 1,442 | | |
| – | |
Debt securities(4) | |
| 5,630 | | |
| – | | |
| 5,630 | | |
| – | |
Total pension assets | |
$ | 11,953 | | |
$ | – | | |
$ | 11,953 | | |
$ | – | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
12. Retirement and Pension Plans (continued)
The following table presents the categorization of plan assets,
measured at fair value as of December 31, 2011:
Asset Category | |
Market Value at December 31, 2011 | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
| |
(In Thousands) | |
| |
| | |
| | |
| | |
| |
Large-cap U.S. equity securities(1) | |
$ | 3,147 | | |
$ | – | | |
$ | 3,147 | | |
$ | – | |
Small/mid-cap U.S. equity securities(2) | |
| 905 | | |
| – | | |
| 905 | | |
| – | |
International equity securities(3) | |
| 1,145 | | |
| – | | |
| 1,145 | | |
| – | |
Debt securities(4) | |
| 5,407 | | |
| – | | |
| 5,407 | | |
| – | |
Total pension assets | |
$ | 10,604 | | |
$ | – | | |
$ | 10,604 | | |
$ | – | |
(1) | | This category includes investments in funds comprised of equity securities of large
U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying
investments is used to value the fund. |
(2) | | This category includes investments in funds comprised of equity securities of small-
and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices
for the underlying investments is used to value the fund. |
(3) | | This category includes investments in funds comprised of equity securities of foreign
companies including emerging markets. The funds are valued using the net asset value method in which an average of the market
prices for the underlying investments is used to value the fund. |
(4) | | This category includes investments in funds comprised of U.S. and foreign investment-grade
fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed
securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the
market prices for the underlying investments is used to value the fund. |
13. Postretirement Benefit Obligation
The Company sponsors a health care plan and
life insurance plan (the Postretirement Plan) that provides postretirement medical benefits and life insurance to certain “grandfathered”
unionized employees. Employees hired after December 31, 2000, are not eligible to participate in the Postretirement Plan. The plan
is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at
age 65 from a defined benefit to a defined dollar cap based upon years of service.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
13. Postretirement Benefit Obligation (continued)
On December 31, 2012, the annual measurement
date, the Postretirement Plan had an accumulated benefit obligation of $3.8 million, which is greater than the accumulated benefit
obligation at December 31, 2011, of $3.1 million. The Postretirement Plan is unfunded and has no assets.
Changes in the benefit obligations, the fair
value of the assets, the funded status and amount recognized in the consolidated balance sheets were as follows:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
Changes in benefit obligation | |
| | | |
| | |
Benefit obligation at the beginning of the year | |
$ | 3,086 | | |
$ | 2,206 | |
Service cost | |
| 106 | | |
| 94 | |
Interest cost | |
| 141 | | |
| 127 | |
Plan participants’ contribution | |
| 11 | | |
| – | |
Actuarial loss | |
| 549 | | |
| 696 | |
Benefits paid | |
| (72 | ) | |
| (37 | ) |
Benefit obligation at the end of the year | |
| 3,821 | | |
| 3,086 | |
| |
| | | |
| | |
Changes in plan assets | |
| | | |
| | |
Fair value at the beginning of the year | |
| – | | |
| – | |
Employer contributions | |
| 61 | | |
| 37 | |
Plan participants’ contributions | |
| 11 | | |
| – | |
Benefits paid | |
| (72 | ) | |
| (37 | ) |
Fair value of plan assets at the end of the year | |
| – | | |
| – | |
Deficit at the end of the year | |
$ | (3,821 | ) | |
$ | (3,086 | ) |
| |
| | | |
| | |
Amounts recognized in the consolidated balance sheets | |
| | | |
| | |
Current liabilities | |
$ | (106 | ) | |
$ | (49 | ) |
Noncurrent liabilities | |
| (3,715 | ) | |
| (3,037 | ) |
Amounts recognized | |
$ | (3,821 | ) | |
$ | 3,086 | ) |
| |
| | | |
| | |
Amounts recognized in accumulated other comprehensive loss | |
| | | |
| | |
Net loss | |
$ | 1,315 | | |
$ | 841 | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
13. Postretirement Benefit Obligation (continued)
A summary of the components of net periodic
postretirement benefit cost for the Postretirement Plan for the years ended December 31, 2012 and 2011 are as follows:
|
|
December 31 |
|
|
|
2012 |
|
|
2011 |
|
|
|
(In Thousands) |
|
Components of postretirement benefit cost: |
|
|
|
|
|
|
Service cost |
|
$ |
106 |
|
|
$ |
93 |
|
Interest cost |
|
|
141 |
|
|
|
127 |
|
Amortization of net actuarial loss |
|
|
76 |
|
|
|
7 |
|
Net periodic postretirement benefit cost |
|
|
323 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
Other changes in benefit obligations recognized in accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Net loss |
|
|
549 |
|
|
|
697 |
|
Amortization of net loss |
|
|
(76 |
) |
|
|
(7 |
) |
Total recognized in accumulated other comprehensive loss |
|
|
473 |
|
|
|
690 |
|
Net amount recognized in postretirement benefit cost and accumulated other comprehensive loss |
|
|
796 |
|
|
|
917 |
|
Items not yet recognized as a component of
net periodic postretirement cost and recognized in the consolidated balance sheets are as follows at December 31:
|
|
December 31 |
|
|
|
2012 |
|
|
2011 |
|
|
|
(In Thousands) |
|
|
|
|
|
Unfunded status |
|
$ |
(3,821 |
) |
|
$ |
(3,086 |
) |
|
|
|
|
|
|
|
|
|
Amounts recognized in: |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(106 |
) |
|
|
(49 |
) |
Long-term liabilities |
|
|
(3,715 |
) |
|
|
(3,037 |
) |
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
Unamortized net actuarial loss |
|
|
1,315 |
|
|
|
841 |
|
The Company expects to recognize amortization
of net actuarial loss of $0.1 million in 2013.
The weighted-average discount rate used to
determine net periodic postretirement benefit cost was 4.2% and 5.4% for the years ended December 31, 2012 and 2011, respectively.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
13. Postretirement Benefit Obligation (continued)
Expected Benefit Payments – The
following table summarizes the expected benefit payments for the Company’s plan for each of the next five fiscal years and
in the aggregate for the five fiscal years thereafter:
| |
December 31 | |
| |
(In Thousands) | |
| |
| |
2013 | |
$ | 106 | |
2014 | |
| 114 | |
2015 | |
| 121 | |
2016 | |
| 176 | |
2017 | |
| 193 | |
2018–2022 | |
| 1,003 | |
For purposes of determining the cost and obligation
for pre-Medicare postretirement medical benefits, a 7.5% annual rate of increase in the per capita cost of covered benefits (i.e.,
health care trend rate) was assumed for the plan in 2012, declining to a rate of 7.0% in 2022. Assumed health care cost trend rates
have a significant effect on the amounts reported for health care plans. A one percent change in the assumed health care cost trend
rate would have had the following effects:
| |
1% Increase | | |
1% Decrease | |
| |
2012 | | |
2011 | | |
2012 | | |
2011 | |
| |
(In Thousands) | |
Effect on total of service and interest cost components | |
$ | 25 | | |
$ | 21 | | |
$ | (22 | ) | |
$ | (18 | ) |
Effect on postretirement benefit obligation | |
| 306 | | |
| 247 | | |
| (267 | ) | |
| (216 | ) |
Patient Protection and Affordable Care Act
In March 2010, the Patient Protection and Affordable
Care Act (PPACA) was enacted, potentially impacting the Company’s cost to provide health care benefits to its eligible active
and retired employees. The PPACA has both short-term and long-term implications on benefit plan standards. Implementation of this
legislation is planned to occur in phases, beginning in 2010, and extending through 2018.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
14. Income Taxes
The provision for income taxes for the years ended December 31,
2012 and 2011, consists of the following:
| |
Year Ended December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) | |
| |
| |
Current expense | |
$ | 9 | | |
$ | 484 | |
Deferred expense | |
| – | | |
| 52 | |
Total income tax expense | |
$ | 9 | | |
$ | 536 | |
The reconciliation of differences between the
statutory U.S. federal income tax rate and the effective tax rate for the years ended December 31, 2012 and 2011, is primarily
due to changes in the valuation allowances and deferred tax assets limited as a result of the troubled debt restructuring transaction,
which caused a change in ownership for tax purposes.
Deferred income taxes included in the consolidated
balance sheets reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the carrying amount for income tax return purposes.
The deferred tax provision for the years ended
December 31, 2012 and 2011, does not reflect the tax effect of $1.9 million and $1.7 million, respectively, resulting from the
pension and other postretirement liability components included in accumulated other comprehensive income.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
14. Income Taxes (continued)
Significant components of the deferred tax
assets and liabilities are as follows:
| |
December 31 | |
| |
2012 | | |
2011 | |
| |
(In Thousands) |
| |
|
Current deferred tax asset | |
$ | 2,954 | | |
$ | 4,979 | |
Valuation allowance | |
| (2,737 | ) | |
| (4,837 | ) |
Net current deferred tax asset | |
| 217 | | |
| 142 | |
| |
| | | |
| | |
Current deferred tax liability | |
| 228 | | |
| 1,287 | |
| |
| | | |
| | |
Long-term deferred tax liabilities: | |
| | | |
| | |
Partnership investment | |
| 6,318 | | |
| 6,432 | |
Unrealized gain on bankruptcy | |
| 197 | | |
| 197 | |
Long-term deferred tax liability | |
| 6,515 | | |
| 6,629 | |
| |
| | | |
| | |
Long-term deferred tax assets: | |
| | | |
| | |
Basis of property, plant and equipment | |
| 49,445 | | |
| 130,744 | |
Debt issuance costs and original issue discount | |
| 4,079 | | |
| 24 | |
Capital losses | |
| 793 | | |
| 6,665 | |
State NOLs | |
| 239 | | |
| 8,660 | |
Federal NOLs | |
| 1,673 | | |
| 46,729 | |
Stock-based compensation | |
| 1,719 | | |
| 3,449 | |
Benefit obligations | |
| 2,694 | | |
| 2,305 | |
Investment in marketing alliances | |
| – | | |
| 696 | |
Valuation allowance | |
| (56,194 | ) | |
| (193,576 | ) |
Long-term deferred tax assets | |
| 4,448 | | |
| 5,696 | |
Net long-term deferred tax liability | |
$ | (2,078 | ) | |
$ | (2,078 | ) |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
14. Income Taxes (continued)
At December 31, 2012 and 2011, the Company
has recorded valuation allowances of $58.9 million and $198.4 million, respectively, on its deferred tax assets to reduce the deferred
tax assets to the amount that management believes is more likely than not to be realized. Management considered the scheduled reversal
of deferred tax liabilities and tax planning strategies in making this assessment. The decrease in current year valuation allowance
is primarily related to certain debt modifications and ownership transactions that have limited amounts of future tax benefits.
The deferred tax assets subject to the valuation allowance primarily include tax benefits associated with capital loss on securities;
stock-based compensation; basis of property, plant, and equipment; benefit obligations; debt issuance costs and original issuance
discount; and both federal and state income tax net operating loss carryforwards.
At December 31, 2012 and 2011, the Company
had net operating loss carryforwards of $147.1 million and $133.5 million, respectively. The future utilization of these net operating
loss carryforwards has been limited due to certain ownership changes. Due to the uncertainty regarding realization of the tax benefits,
$142.3 million of the 2012 loss carryforwards has been deemed worthless.
At December 31, 2012 and 2011, the Company
had capital loss carryforwards of $30.0 million and $6.7 million, respectively, which are available to offset future consolidated
capital gains. The future utilization of capital loss carryforwards has been limited due to certain ownership changes. Due to the
uncertainty regarding the realization of the capital loss carryforward, the entire 2012 loss carryforward has been deemed worthless.
ASC 740, Income Taxes, provides that
the tax effects from an uncertain tax position can be recognized in the Company’s financial statements only if the position
is more likely than not of being sustained on audit, based on the technical merits of the position. Tax positions that meet the
recognition threshold are reported at the largest amount that is more likely than not to be realized. This determination requires
a high degree of judgment and estimation. The Company periodically analyzes and adjusts amounts recorded for the Company’s
uncertain tax positions, as events occur to warrant adjustment, such as when the statutory period for assessing tax on a given
tax return or period expires or if tax authorities provide administrative guidance or a decision is rendered in the courts. The
Company does not reasonably expect the total amount of uncertain tax positions to significantly increase or decrease within the
next 12 months. As of December 31, 2012, the Company’s uncertain tax positions were not significant for income tax purposes.
In the event the Company has uncertain tax positions, it is the Company’s policy to include the interest expense or income,
as well as potential penalties on unrecognized tax benefits, as components of income tax expense in the consolidated statements
of operations.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
14. Income Taxes (continued)
The Company files a federal and various state
income tax returns. The Company’s federal income tax returns for 2009 to 2011 are open tax years under the statute of limitations.
The Company’s federal income tax return for 2008 has been audited. The Company files in numerous state jurisdictions with
varying statutes of limitations open from 2008 to 2011.
15. Warrants
When the Company emerged from protection under
Chapter 11 of the Bankruptcy Code in 2010, holders of allowed Class 9(a) equity interests received warrants (the Original Warrants)
to purchase up to an aggregate amount of 450,000 shares of common stock of the successor company at an exercise price of $40.94
per share. As of September 24, 2012, holders of the Original Warrants had exercised 498 of the Original Warrants. The Original
Warrants expired in 2012, after the restructuring transaction. Since the Original Warrants have expired, the share amounts and
prices are not affected by the 50 for 1 reverse stock split that occurred in September 2012.
In connection with the restructuring transaction
occurring in September 2012, the original equity holders of the Company received warrants to purchase up to an aggregate amount
of 787,855 shares of the Company’s common stock at an exercise price of $61.75 per share. These warrants expire on the 5th
anniversary of the issuance date and had no fair value as of the grant date. Under certain circumstances, the expiration date of
the warrants could be accelerated. Events that could lead to an acceleration of the expiration date include, but are not limited
to, a change in control, or a significant change in the price of the Company’s common stock. As of December 31, 2012, none
of the warrants issued in connection with the restructuring transaction have been exercised.
As provided in ASC 825-20, Financial Instruments
– Registration Payment Arrangements, the warrants are considered equity because they can only be physically settled in
company shares and can be settled in unregistered shares. The Company has adequate authorized shares to settle the outstanding
warrants, and each warrant is fixed in terms of settlement to one share of company stock subject only to remote contingency adjustment
factors designed to assure that the relative value in terms of shares remains fixed.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
16. Stock-Based Compensation Plans
The Equity Incentive Plan
At December 31, 2012, the Company maintained
one stock-based compensation plan, the Aventine Renewable Energy Holdings, Inc. 2010 Equity Incentive Plan (the Equity Incentive
Plan). The Equity Incentive Plan was adopted by the Board of Directors (the Board) effective March 15, 2010, and provides for the
grant of awards in the form of stock options, restricted stock or units, stock appreciation rights, and other equity-based awards
to directors, officers, employees and consultants or advisors (and prospective directors, officers, employees, and consultants
or advisors) of the Company or its affiliates at the discretion of the Board or the compensation committee of the Board. The term
of awards granted under the Equity Incentive Plan is determined by the Board or by the compensation committee of the Board, and
cannot exceed ten years from the date of the grant. The maximum number of shares of common stock that may be issued under the Equity
Compensation Plan is limited to 17,100. Unless terminated sooner, the Equity Incentive Plan will continue in effect until March
15, 2020.
Pretax stock-based compensation expense for
the years ended December 31, 2012 and 2011, was $0.3 million and $5.4 million, respectively, and was charged to selling, general,
and administrative expenses for both years.
The Company recorded pretax stock-based compensation
expense for the years ended December 31, 2012 and 2011, as follows:
| |
Year ended December 31 | |
| |
2012 | | |
2011 | |
| |
(In Millions) | |
Stock-based compensation expense: | |
Non-qualified options | |
$ | 0.3 | | |
$ | 0.7 | |
Restricted stock | |
| – | | |
| 0.6 | |
Restricted stock units | |
| (0.1 | ) | |
| 1.3 | |
Hybrid equity units | |
| 0.1 | | |
| 2.8 | |
Total | |
$ | 0.3 | | |
$ | 5.4 | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
16. Stock-Based Compensation Plans (continued)
As of December 31, 2012, the Company had not
yet recognized compensation expense on the following non-vested awards:
| |
December 31, 2012 | | |
December 31, 2011 | |
| |
Non-Recognized Compensation | | |
Average Remaining Recognition Period | | |
Non-Recognized Compensation | | |
Average Remaining Recognition Period | |
| |
(In Millions) | | |
(In Years) | | |
(In Millions) | | |
(In Years) | |
Non-qualified options | |
$ | – | | |
| – | | |
$ | 0.4 | | |
| 0.9 | |
Restricted stock | |
| – | | |
| – | | |
| 0.2 | | |
| 0.9 | |
Restricted stock units | |
| – | | |
| – | | |
| 0.1 | | |
| 0.8 | |
Hybrid equity units | |
| 0.6 | | |
| 2.0 | | |
| 1.4 | | |
| 3.1 | |
Total | |
$ | 0.6 | | |
| 2.0 | | |
$ | 2.1 | | |
| 2.2 | |
The Company values its share-based payments
awards using a form of the Black-Scholes option pricing model (the Option Pricing Model). The determination of fair value of share-based
payment awards on the date of grant using the Option Pricing Model is affected by the Company’s stock price as well as the
input of other subjective assumptions, of which the most significant are expected stock price volatility, the expected pre-vesting
forfeiture rate, and the expected option term (the amount of time from the grant date until the options are exercised or expire).
The Company estimated volatility by considering, among other things, the historical volatilities of public companies engaged in
similar industries. Pre-vesting forfeitures are estimated to be 0% due to the nature of the vesting schedules for the limited number
of grants made to employees. The expected option term is calculated using the “simplified” method permitted by ASC
718. The Company’s options have characteristics significantly different from those of traded options, and changes in the
assumptions can materially affect the fair value estimates.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
16. Stock-Based Compensation Plans (continued)
The determination of the fair value of the
stock-related awards, using the Option Pricing Model for the years ended December 31, 2012 and 2011, incorporated the assumptions
in the following table for stock options granted in 2012 and 2011:
| |
Year ended December 31 | |
| |
2012 | | |
2011 | |
Expected stock price volatility | |
| 102 | % | |
| 99 | % |
Expected life (in years) | |
| 6.0 | | |
| 3.7 | |
Risk-free interest rate | |
| 1.2 | % | |
| 1.4 | % |
Expected dividend yield | |
| 0.0 | % | |
| 0.0 | % |
Weighted-average fair value per option | |
$ | 2.82 | | |
$ | 17.67 | |
The following table summarizes stock options
outstanding and changes during the years ended December 31, 2012 and 2011:
| |
Shares | | |
Weighted- Average Exercise Price | | |
Weighted- Average Remaining Life (Years) | | |
Aggregate Intrinsic Value | |
| |
| | | |
| | | |
| | | |
| | |
Options outstanding – December 31, 2010 | |
| 6,519 | | |
$ | 2,192.20 | | |
| 8.6 | | |
$ | – | |
Options exercisable – December 31, 2010 | |
| 2,154 | | |
| 2,237.06 | | |
| 9.3 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Granted | |
| – | | |
| – | | |
| – | | |
| – | |
Exercised | |
| – | | |
| – | | |
| – | | |
| – | |
Cancelled or expired | |
| (250 | ) | |
| 2,280.00 | | |
| – | | |
| – | |
Options outstanding – December 31, 2011 | |
| 6,269 | | |
| 2,188.70 | | |
| 4.6 | | |
| – | |
Options exercisable – December 31, 2011 | |
| 4,796 | | |
| 2,332.76 | | |
| 4.0 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Granted | |
| 903 | | |
| 177.50 | | |
| 3.5 | | |
| – | |
Exercised | |
| – | | |
| – | | |
| – | | |
| – | |
Cancelled or expired | |
| (4,269 | ) | |
| 2,189.27 | | |
| – | | |
| – | |
Options outstanding – December 31, 2012 | |
| 2,903 | | |
| 489.07 | | |
| 1.7 | | |
| – | |
Options exercisable – December 31, 2012 | |
| 2,000 | | |
| 629.75 | | |
| 0.9 | | |
| – | |
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
16. Stock-Based Compensation Plans (continued)
Restricted stock award activity for the years
ended December 31, 2012 and 2011, is summarized below:
| |
Shares | | |
Weighted-
Average
Grant Date
Fair Value per Award | |
Unvested restricted stock awards – December 31, 2010 | |
| 1,233 | | |
$ | 1,437.64 | |
Granted | |
| – | | |
| – | |
Vested | |
| (695 | ) | |
| 1,359.32 | |
Cancelled or expired | |
| – | | |
| – | |
Unvested restricted stock awards – December 31, 2011 | |
| 538 | | |
| 1,538.94 | |
Granted | |
| – | | |
| – | |
Vested | |
| (352 | ) | |
| 1,693.20 | |
Cancelled or expired | |
| (186 | ) | |
| 1,247.00 | |
Unvested restricted stock awards – December 31, 2012 | |
| – | | |
| – | |
The total fair value of restricted stock awards
that vested during the years ended December 31, 2012 and 2011 was $0.6 million and $0.9 million,
respectively.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
16. Stock-Based Compensation Plans (continued)
Restricted stock units represent the right
to receive a share of stock in the future, provided that the restrictions and conditions designated have been satisfied. Restricted
stock unit award activity for the years ended December 31, 2012 and 2011, is summarized below:
| |
Shares | | |
Weighted-
Average
Grant Date
Fair Value
per Award | |
| |
| | | |
| | |
Unvested restricted stock unit awards – December 31, 2010 | |
| 3,031 | | |
$ | 1,280.78 | |
Granted | |
| 358 | | |
| 600.00 | |
Vested | |
| (3,122 | ) | |
| 1,194.66 | |
Cancelled or expired | |
| – | | |
| – | |
Unvested restricted stock unit awards – December 31, 2011 | |
| 267 | | |
| 1,375.00 | |
Granted | |
| 1,211 | | |
| 177.50 | |
Vested | |
| (620 | ) | |
| 177.50 | |
Cancelled or expired | |
| (858 | ) | |
| 550.15 | |
Unvested restricted stock unit awards – December 31, 2012 | |
| – | | |
| – | |
| |
Shares | | |
Weighted-
Average
Grant Date
Fair Value
per Award | |
| |
| | | |
| | |
Vested restricted stock unit awards – December 31, 2010 | |
| 428 | | |
$ | 1,247.00 | |
Vested | |
| 3,122 | | |
| 1,194.66 | |
Converted into shares of common stock | |
| (2,565 | ) | |
| 1,247.00 | |
Vested restricted stock unit awards – December 31, 2011 | |
| 985 | | |
| 1,081.43 | |
Vested | |
| 620 | | |
| 177.50 | |
Converted into shares of common stock | |
| (752 | ) | |
| 1,188.02 | |
Vested restricted stock unit awards – December 31, 2012 | |
| 853 | | |
| 328.86 | |
The total fair value of restricted stock unit
awards that vested during the years ended December 31, 2012 and 2011, was $0.1 million and $3.7 million, respectively.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
16. Stock-Based Compensation Plans (continued)
In 2011, the Board adopted a program of annual
grants of hybrid equity units. Hybrid equity units represent the right to receive shares of stock in the future, depending upon
the stock price on the measurement date. Each unit granted will translate into up to one share, depending on the average closing
share price for the last 15 trading days of 2014, denoted as “S” in the following formula:
# Shares = # Units x (1
– $980.00/S)
For example, if a manager is granted 200 units,
and S equals $2,000, then the manager would receive 102 shares (i.e., 200 units x (1 – $980.00/2,000) = 102). If the stock
price ends up higher, then the participant would receive more shares; if the stock price were lower, he or she would receive fewer
shares. If the stock price falls below $980.00, the participant would be granted no shares.
Hybrid equity unit activity for the years ended
December 31, 2012 and 2011 is summarized below:
| |
Units | | |
Weighted-
Average
Grant Date
Fair Value
per Award | |
| |
| | | |
| | |
Granted | |
| 5,530 | | |
$ | 883.50 | |
Vested | |
| (3,546 | ) | |
| 883.50 | |
Cancelled or expired | |
| (34 | ) | |
| 883.50 | |
Unvested hybrid equity units at December 31, 2011 | |
| 1,950 | | |
| 883.50 | |
Granted | |
| – | | |
| – | |
Vested | |
| – | | |
| – | |
Cancelled or expired | |
| (783 | ) | |
| 883.50 | |
Unvested hybrid equity units at December 31, 2012 | |
| 1,167 | | |
| 883.50 | |
The total fair value of hybrid equity units that vested during the
years ended December 31, 2012 and 2011, was $0 million and $3.1 million, respectively.
Aventine Renewable Energy Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2012
17. Subsequent Events
As described in Note 11, in May 2013, the Company
agreed to a settlement of its pending auction rate securities litigation.
As described in Note 10, in June 2013, the
Company amended its Term Loan Agreement to borrow an additional $35 million. In connection with this amendment, the Company granted
warrants for $11,853,453 shares of common stock, which are contingently exercisable upon a future event of liquidation.
PART
II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation
Law (sometimes referred to as the DGCL) permits a corporation to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in connection with a pending or completed action, suit or
proceeding if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in
the best interests of the corporation.
Pacific Ethanol’s certificate of incorporation
provides that, except in certain specified instances, its directors shall not be personally liable to Pacific Ethanol or its stockholders
for monetary damages for breach of their fiduciary duty as directors, except liability for the following:
| · | any breach of their duty of loyalty to Pacific Ethanol or its stockholders; |
| · | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| · | unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; and |
| · | any transaction from which the director derived an improper personal benefit. |
In addition, Pacific Ethanol’s certificate
of incorporation and bylaws obligate it to indemnify its directors and officers against expenses and other amounts reasonably incurred
in connection with any proceeding arising from the fact that such person is or was an agent of Pacific Ethanol. Pacific Ethanol’s
bylaws also authorize it to purchase and maintain insurance on behalf of any of its directors or officers against any liability
asserted against that person in that capacity, whether or not Pacific Ethanol would have the power to indemnify that person under
the provisions of the DGCL. Pacific Ethanol has entered and expect to continue to enter into agreements to indemnify its directors
and officers as determined by the Pacific Ethanol Board. These agreements provide for indemnification of related expenses including
attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding.
Pacific Ethanol believes that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. Pacific Ethanol also maintains directors’ and officers’ liability insurance.
The limitation of liability and indemnification
provisions in Pacific Ethanol’s certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit
against its directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against
Pacific Ethanol’s directors and officers, even though an action, if successful, might benefit Pacific Ethanol and other stockholders.
Furthermore, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage
awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation
or proceeding involving any of Pacific Ethanol’s directors, officers or employees regarding which indemnification is sought,
and Pacific Ethanol is not aware of any threatened litigation that may result in claims for indemnification.
Insofar as the provisions of Pacific Ethanol’s
certificate of incorporation or bylaws provide for indemnification of directors or officers for liabilities arising under the Securities
Act, Pacific Ethanol has been informed that in the opinion of the Securities and Exchange Commission this indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules
A list of exhibits included as part of this
registration statement is set forth in the Exhibit Index which immediately precedes such exhibits and is hereby incorporated by
reference herein
Item 22. Undertakings
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
| · | to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
| · | to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
| · | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement. |
That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide
offering thereof.
To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the termination of the offering.
That, for the purpose of determining liability
under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior
to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of
the registration statement or made in any such document immediately prior to such date of first use.
That, for the purpose of determining liability
of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such purchaser:
| i. | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant
to Rule 424; |
| ii. | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred
to by the undersigned registrant; |
| iii. | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the undersigned registrant; and |
| iv. | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
The undersigned registrant hereby undertakes
that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes
as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items
of the applicable form.
The registrant undertakes that every prospectus
(i) that is filed pursuant to the paragraph immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3)
of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes
to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or
13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
The undersigned registrant hereby undertakes
to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sacramento, State of California, on this 2nd day of April, 2015.
|
Pacific Ethanol, Inc., |
|
a Delaware corporation |
|
|
|
By: /s/ NEIL M. KOEHLER |
|
Neil M. Koehler |
|
Chief Executive Officer |
Pursuant to the requirements of the Securities
Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
|
Title |
Date |
|
|
|
|
/s/ WILLIAM
L. JONES
William L. Jones |
|
Chairman of the Board and Director |
April 2, 2015 |
|
|
|
|
/s/ NEIL
M. KOEHLER
Neil M. Koehler |
|
President, Chief Executive Officer (principal executive officer) and Director |
April 2, 2015 |
|
|
|
|
/s/ BRYON
T. MCGREGOR
Bryon T. McGregor |
|
Chief Financial Officer (principal financial and accounting officer) |
April 2, 2015 |
|
|
|
|
*
Michael D. Kandris |
|
Chief Operating Officer and Director |
April 2, 2015 |
|
|
|
|
*
Terry L. Stone |
|
Director |
April 2, 2015 |
|
|
|
|
*
John L. Prince |
|
Director |
April 2, 2015 |
|
|
|
|
*
Douglas L. Kieta |
|
Director |
April 2, 2015 |
|
|
|
|
* |
|
Director |
April 2, 2015 |
Larry D. Layne |
|
|
|
*By: /s/
NEIL M. KOEHLER
Neil M. Koehler
Attorney-in-Fact
EXHIBIT
INDEX
Exhibit
No. |
Description |
|
|
2.1 |
Agreement and and Plan of Merger, dated as of December 30, 2014, by and among Pacific Ethanol, Inc., AVR Merger Sub, Inc.
and Aventine Renewable Energy Holdings, Inc.(incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Pacific
Ethanol, Inc. filed December 31, 2014, File No. 000-21467
and included as a part of Annex A to the joint proxy statement/prospectus which forms part of this registration statement).
|
2.2 |
Amendment No. 1 to Agreement and Plan of Merger, dated March 31, 2015, by and among Pacific Ethanol, Inc., AVR Merger Sub,
Inc. and Aventine Renewable Energy Holdings, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of
Pacific Ethanol, Inc. filed April 2, 2015, File No. 000-21467
and included as a part of Annex A to the joint proxy statement/prospectus which forms part of this registration statement). |
3.1 |
Certificate of Incorporation of Pacific Ethanol, Inc. (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of Pacific Ethanol, Inc. filed August 7, 2013, File No. 000-21467). |
3.2 |
Certificate of Designations, Powers, Preferences and Rights of the Series A Cumulative Redeemable Convertible Preferred Stock of Pacific Ethanol, Inc. (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q of Pacific Ethanol, Inc. filed August 7, 2013, File No. 000-21467). |
3.3 |
Certificate of Designations, Powers, Preferences and Rights of the Series B Cumulative Convertible of Pacific Ethanol, Inc. (incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q of Pacific Ethanol, Inc. filed August 7, 2013, File No. 000-21467). |
3.4 |
Certificate of Amendment to Certificate of Incorporation of Pacific Ethanol, Inc. dated June 10, 2010 (incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form 10-Q of Pacific Ethanol, Inc. filed August 7, 2013, File No. 000-21467). |
3.5 |
Certificate of Amendment to Certificate of Incorporation of Pacific Ethanol, Inc. dated June 8, 2011(incorporated by reference to Exhibit 3.5 to the Quarterly Report on Form 10-Q of Pacific Ethanol, Inc. filed August 7, 2013, File No. 000-21467). |
3.6 |
Certificate of Amendment to Certificate of Incorporation of Pacific Ethanol, Inc. dated May 14, 2013 (incorporated by reference to Exhibit 3.6 to the Quarterly Report on Form 10-Q of Pacific Ethanol, Inc. filed August 7, 2013, File No. 000-21467). |
3.7 |
Form of Certificate of Amendment to Certificate of Incorporation of Pacific Ethanol, Inc. (included as Annex B to the joint proxy statement/prospectus which forms part of this registration statement). |
3.8 |
Bylaws of Pacific Ethanol, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Pacific Ethanol, Inc. filed on March 29, 2005, File No. 000-21467). |
5.1* |
Opinion of Troutman Sanders LLP as to validity of the securities being registered. |
8.1 |
Opinion of Troutman Sanders LLP regarding certain tax matters. |
8.2 |
Opinion of Akin Gump Strauss Hauer & Feld LLP regarding certain tax matters. |
10.1* |
Amended and Restated Senior Secured Term Loan Credit Agreement, dated September 24, 2012, by and among Aventine Renewable
Energy Holdings, Inc., the lenders listed therein and CitiBank, N.A., as collateral and administrative agent. |
10.2* |
Incremental Agreement, dated June 18, 2013, by and among Aventine Renewable Energy Holdings, Inc., the lenders listed
therein and CitiBank, N.A., as collateral and administrative agent. |
10.3* |
Loan and Security Agreement, dated September 17, 2014, by and among Aventine Renewable Energy, Inc., the financial
institutions listed therein, Midcap Financial, LLC, as collateral agent, and Alostar Bank of Commerce, as administrative agent. |
10.4* |
Stockholders Agreement, dated September 24, 2012, by and among Aventine Renewable Energy Holdings,
Inc., the investors listed therein and the existing stockholders listed therein. |
10.5* |
Agreement, effective November 5, 2012 through October 31, 2015, between Aventine Renewable Energy, Inc. and the United
Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industry and Service Workers International Union on behalf
of Local 7-662. |
21.1* |
Subsidiaries of Pacific Ethanol, Inc. |
23.1 |
Consent of Hein & Associates LLP, independent registered public accounting firm for Pacific Ethanol, Inc. |
23.2 |
Consent of McGladrey LLP, independent auditor for Aventine Renewable Energy Holdings, Inc. |
23.3 |
Consent of Ernst & Young LLP, independent auditors for Aventine Renewable Energy Holdings, Inc. |
23.4 |
Consent of Troutman Sanders LLP (included in Exhibit 5.1 and Exhibit 8.1 hereto). |
23.5 |
Consent of Akin Gump Strauss Hauer & Feld LLP (included in Exhibit 8.2 hereto). |
24.1* |
Power of Attorney. |
99.1 |
Form of Proxy Card of Pacific Ethanol, Inc. |
99.2 |
Form of Proxy Card of Aventine Renewable Energy Holdings, Inc. |
99.3 |
Opinion of Craig-Hallum Capital Group LLC (included as Annex D to the joint proxy statement/prospectus which forms part of this registration statement). |
99.4 |
Opinion of Duff & Phelps, LLC (included as Annex E to the joint proxy statement/prospectus which forms part of this registration statement). |
99.5 |
Consent of Craig-Hallum Capital Group LLC. |
99.6 |
Consent of Duff & Phelps, LLC. |
99.7 |
List of Companies Included in Hay Group Survey Data |
________
* Previously filed
ANNEX A
AGREEMENT AND PLAN OF MERGER
by and
among
PACIFIC ETHANOL, INC.,
AVR MERGER SUB, INC. AND
AVENTINE RENEWABLE ENERGY HOLDINGS, INC.
Dated as of December 30, 2014
TABLE
OF CONTENTS
Page
Article
I DEFINITIONS; CONSTRUCTION |
2 |
Section
1.1 Definitions |
2 |
Section
1.2 Construction |
16 |
Article
II THE MERGER |
16 |
Section
2.1 The Merger |
16 |
Section
2.2 Closing; Effective Time |
16 |
Section
2.3 Effect of the Merger |
17 |
Section
2.4 Certificate of Incorporation of the Surviving Corporation |
17 |
Section
2.5 Bylaws of the Surviving Corporation |
17 |
Section
2.6 Directors and Officers of the Surviving Corporation |
17 |
Article
III EFFECT ON CAPITAL STOCK; EXCHANGE PROCEDURES |
18 |
Section
3.1 Effect on Capital Stock |
18 |
Section
3.2 Election Procedures |
19 |
Section
3.3 Company Stock Options and Company Warrants |
20 |
Section
3.4 Dissenters’ Rights |
21 |
Section
3.5 Exchange Procedures |
22 |
Section
3.6 Adjustments |
25 |
Article
IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY |
25 |
Section
4.1 Organization and Qualification |
25 |
Section
4.2 Capitalization |
26 |
Section
4.3 Subsidiaries |
27 |
Section
4.4 Authority; Non-Contravention; Approvals |
28 |
Section
4.5 Reports and Financial Statements |
29 |
Section
4.6 Absence of Undisclosed Liabilities |
30 |
Section
4.7 Litigation |
30 |
Section
4.8 Absence of Certain Changes or Events |
30 |
Section
4.9 Compliance with Applicable Law; Permits |
32 |
Section
4.10 Company Material Contracts; Defaults |
33 |
Section
4.11 Taxes |
34 |
Section
4.12 Employee Benefit Plans; ERISA |
37 |
Section
4.13 Labor and Other Employment Matters |
40 |
Section
4.14 Environmental Matters |
42 |
Section
4.15 Intellectual Property |
43 |
Section
4.16 Real Property |
45 |
Section
4.17 Insurance |
46 |
Section
4.18 Assets |
47 |
Section
4.19 Business Relationships |
47 |
Section
4.20 Related Party Transactions |
48 |
Section
4.21 Certain Business Practices |
48 |
Table of Contents
(continued)
Page
Section
4.22 Opinion of Financial Advisor |
48 |
Section
4.23 Brokers and Finders |
48 |
Section
4.24 Takeover Laws |
49 |
Section
4.25 Hedging |
49 |
Section
4.26 Diamond Switch |
49 |
Section
4.27 Company Hybrid Equity Plan |
49 |
Section
4.28 Books and Records |
49 |
Section
4.29 Information Supplied |
50 |
Section
4.30 No Additional Representations |
50 |
Article
V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB |
50 |
Section
5.1 Organization and Qualification |
50 |
Section
5.2 Capitalization |
51 |
Section
5.3 Subsidiaries. |
52 |
Section
5.4 Authority; Non-Contravention; Approvals |
52 |
Section
5.5 Reports and Financial Statements |
54 |
Section
5.6 Absence of Undisclosed Liabilities |
55 |
Section
5.7 Litigation |
55 |
Section
5.8 Absence of Certain Changes or Events |
55 |
Section
5.9 Compliance with Applicable Law; Permits |
56 |
Section
5.10 Taxes |
56 |
Section
5.11 Environmental Matters |
58 |
Section
5.12 Contracts |
59 |
Section
5.13 Business Relationships. |
59 |
Section
5.14 Transactions with Affiliates |
59 |
Section
5.15 Certain Business Practices |
60 |
Section
5.16 Opinion of Financial Advisor |
60 |
Section
5.17 Brokers and Finders |
60 |
Section
5.18 Indebtedness |
60 |
Section
5.19 Intellectual Property Rights |
61 |
Section
5.20 Off Balance Sheet Arrangements |
61 |
Section
5.21 Manipulation of Price |
61 |
Section
5.22 No Additional Agreements |
61 |
Section
5.23 Parent Stock |
61 |
Section
5.24 Merger Sub |
61 |
Section
5.25 Insurance |
61 |
Section
5.26 Employee Relations |
62 |
Section
5.27 Information Supplied |
62 |
Section
5.28 No Additional Representations |
63 |
Table of Contents
(continued)
Page
Article
VI COVENANTS |
63 |
Section
6.1 Conduct of Business by the Company Pending the Closing |
63 |
Section
6.2 Conduct of Business by Parent Pending the Closing |
66 |
Section
6.3 Access to Information; Confidentiality |
67 |
Section
6.4 Employee Matters |
68 |
Section
6.5 BNSF Matters |
68 |
Section
6.6 Joint Proxy Statement/Prospectus; Registration Statement |
68 |
Section
6.7 Meetings of Stockholders; Board Recommendations |
69 |
Section
6.8 [Reserved] |
70 |
Section
6.9 Public Announcements |
70 |
Section
6.10 Reasonable Best Efforts |
71 |
Section
6.11 Notification of Certain Matters |
73 |
Section
6.12 Indemnification; Insurance |
73 |
Section
6.13 No Solicitation |
75 |
Section
6.14 Tax Free Reorganization |
77 |
Section
6.15 Litigation |
78 |
Section
6.16 Takeover Laws and Rights |
78 |
Section
6.17 Registration Statement on Form S-8 |
78 |
Section
6.18 Effects Bargaining. |
78 |
Section
6.19 Merger Sub Compliance |
78 |
Section
6.20 Pollution Liability Insurance |
78 |
Section
6.21 Further Assurances |
79 |
Article
VII CONDITIONS TO THE MERGER |
79 |
Section
7.1 Conditions to the Obligations of Each Party |
79 |
Section
7.2 Additional Conditions to Obligations of Parent and Merger Sub |
80 |
Section
7.3 Additional Conditions to Obligations of the Company |
82 |
Section
7.4 Frustration of Closing Conditions |
83 |
Article
VIII TERMINATION |
83 |
Section
8.1 Termination |
83 |
Section
8.2 Effect of Termination |
85 |
Section
8.3 Fees and Expenses |
85 |
Article
IX MISCELLANEOUS |
87 |
Section
9.1 Non-Survival of Representations and Warranties |
87 |
Section
9.2 Notices |
87 |
Section
9.3 Interpretation; Other Remedies |
88 |
Section
9.4 Transfer Taxes |
88 |
Section
9.5 Counterparts |
88 |
Section
9.6 Entire Agreement; Third-Party Beneficiaries |
88 |
Table of Contents
(continued)
Page
Section
9.7 Assignment |
89 |
Section
9.8 Amendment |
89 |
Section
9.9 Waiver |
89 |
Section
9.10 Severability |
89 |
Section
9.11 Specific Performance |
90 |
Section
9.12 Governing Law |
90 |
Section
9.13 Jurisdiction |
90 |
Section
9.14 Waiver of Jury Trial |
91 |
Section
9.15 Disclosure |
91 |
EXHIBITS
& SCHEDULES
Exhibits:
Exhibit A |
Form of Parent Stockholders Agreement |
Exhibit B |
Certificate of Merger |
Exhibit C
Exhibit D
Exhibit E |
Certificate of Incorporation of the Surviving Corporation
Bylaws of the Surviving Corporation
Certificate of Amendment to the Certificate of Incorporation of
Parent |
Schedules:
Schedule A |
Parties to Parent Stockholders Agreement |
Schedule 2.6(a) |
Directors of the Surviving Corporation |
Schedule 2.6(b) |
Officers of the Surviving Corporation |
Company Disclosure Schedules
AGREEMENT
AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this
“Agreement”) is dated as of December 30, 2014 (the “Execution Date”), among PACIFIC ETHANOL,
INC., a Delaware corporation (“Parent”), AVR MERGER SUB, INC., a Delaware corporation and a direct wholly-owned
subsidiary of Parent (“Merger Sub”), and AVENTINE RENEWABLE ENERGY HOLDINGS, INC., a Delaware corporation (the
“Company”). Each of Parent, Merger Sub and the Company is a “Party” and together, the “Parties.”
RECITALS:
WHEREAS, the Boards of Directors
of Parent, Merger Sub and the Company have each determined unanimously that it is in the best interests of their respective corporations
and stockholders for Parent to acquire the Company upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance of such
acquisition, it is proposed that Merger Sub will merge with and into the Company, with the Company surviving the merger as a wholly-owned
subsidiary of Parent (the “Merger”), on the terms and subject to the conditions of this Agreement;
WHEREAS, the respective Boards
of Directors of Parent, Merger Sub and the Company have unanimously approved, in accordance with applicable provisions of the Delaware
General Corporation Law, as amended (the “DGCL”), this Agreement, the Merger and the transactions contemplated
hereby; the Board of Directors of the Company has resolved to recommend to its stockholders the adoption of this Agreement; the
Board of Directors of Parent has resolved to (i) recommend to its stockholders the approval of the issuance of shares of common
stock of Parent, par value $0.001 per share (the “Parent Voting Common Stock”), and (ii) amend the certificate
of incorporation of Parent, as amended, to create a class of convertible non-voting common stock of Parent, par value $0.001 per
share, (the “Parent Non-Voting Common Stock” and together with the Parent Voting Common Stock, the “Parent
Stock”); and Parent, in its capacity as the sole stockholder of Merger Sub, will approve and adopt this Agreement promptly
following the execution of this Agreement by the parties hereto;
WHEREAS, concurrently with the
execution of this Agreement, and as a condition to and inducement of Parent’s willingness to enter into this Agreement, certain
stockholders of the Company are entering into a stockholders agreement providing for, among other things, certain restrictions
on transferability, an irrevocable proxy and a market stand-off agreement, in substantially the form attached hereto as Exhibit
A (the “Parent Stockholders Agreement”), as specified on Schedule A;
WHEREAS, Parent, Merger Sub and
the Company desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger; and
WHEREAS, Parent, Merger Sub and
the Company intend, (i) for federal income tax purposes, that the Merger qualifies as a “reorganization” described
in Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) that this Agreement
constitute a “plan of reorganization” within the meaning of Section 1.368-2(g) of the regulations promulgated
under the Code; and (iii) that Parent, Merger Sub and the Company will each be a “party to the reorganization” within
the meaning of Section 368(a) of the Code.
NOW, THEREFORE, in consideration
of the foregoing and the respective representations, warranties, covenants and agreements set forth herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
Article
I
DEFINITIONS; CONSTRUCTION
Section
1.1 Definitions.
The following capitalized terms as used in this Agreement shall have the meanings ascribed to them in this Article I:
“Acquisition Agreement”
has the meaning set forth in Section 6.13(b)(i) of this Agreement.
“Adverse Aurora Coop Litigation
Event” has the meaning set forth in Section 7.2(k) of this Agreement.
“Affiliate” of any
Person shall mean another Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person.
“Affiliated Person”
has the meaning set forth in Section 4.20(a) of this Agreement.
“Agreement” has the
meaning set forth in the Preamble of this Agreement.
“Amended Certificate of Incorporation”
means the Certificate of Amendment to the Certificate of Incorporation of Parent in the form of Exhibit E attached hereto.
“Antitrust Laws” has
the meaning set forth in Section 6.10(b) of this Agreement.
“Audited Financial Statements”
has the meaning set forth in Section 4.5(a) of this Agreement.
“Aurora Coop Litigation”
means any and all litigation matters between the Company or any Subsidiary of the Company and Aurora Cooperative Elevator Company
including, without limitation, the following matters: (i) Aurora Cooperative Elevator Co. v. Aventine Renewable Energy –
Aurora West, LLC, et al.; United States District Court, District of Nebraska, Case No. 4:12-cv-00230; (ii) Aurora Cooperative
Elevator Co. v. Aventine Renewable Energy Holdings, Inc. et al, United States District Court, District of Nebraska, Case No.
4:14-cv-03032; (iii) Aurora Cooperative Elevator Co. v. Aventine Renewable Energy Holdings, Inc. et al, United States District
Court, District of Nebraska, Case No. 4:12-cv-03200; (iv) Aurora Cooperative Elevator Co. v. Aventine Renewable Energy Holdings,
Inc. et al., National Grain and Feed Association, NGFA Case No. 2651; (v) Aventine Renewable Energy – Aurora West,
LLC v. Aurora Cooperative Elevator Co., Nebraska Public Service Commission; and (vi) Nebraska Energy, L.L.C. v. Aurora Cooperative
Elevator Co., United States District Court, District of Nebraska, Case No. 4:13-cv-03190.
“Aurora West Facility”
means the Company’s Delta-T ethanol plant located in Aurora, Nebraska.
“Balance Sheet Date”
has the meaning set forth in Section 4.6 of this Agreement.
“BNSF” means Burlington
Northern Santa Fe Railroad Company, or any successor thereto.
“Book-Entry Shares”
has the meaning set forth in Section 3.1(d) of this Agreement.
“Business Day” means
any day, other than (i) a Saturday or a Sunday or (ii) a day on which banking and savings and loan institutions are authorized
or required by Law to be closed in Sacramento, California.
“Certificate” has
the meaning set forth in Section 3.1(d) of this Agreement.
“Certificate of Merger”
has the meaning set forth in Section 2.2 of this Agreement.
“Change in Recommendation”
has the meaning set forth in Section 6.13(b)(i) of this Agreement.
“Closing” has the
meaning set forth in Section 2.2 of this Agreement.
“Closing Date” has
the meaning set forth in Section 2.2 of this Agreement.
“Code” has the meaning
set forth in the Recitals of this Agreement.
“Company” has the
meaning set forth in the Preamble of this Agreement.
“Company Benefit Arrangement”
means each individual employment, severance or termination agreement between the Company or any of the Company’s Subsidiaries
and any current or former employee, officer or director of the Company or any of the Company’s Subsidiaries, other than (i) any
agreement mandated by applicable Law or (ii) any Company Benefit Plan.
“Company Benefit Plans”
mean each employee benefit plan, program or policy providing benefits to any current or former employee, officer or director of
the Company or any of its Subsidiaries or any beneficiary or dependent thereof that is sponsored or maintained by the Company or
any of its Subsidiaries or to which the Company or any of its Subsidiaries contributes or is obligated to contribute, or with respect
to which the Company or any of its Subsidiaries has or may have any Liability, including but not limited to each “employee
pension benefit plan” (as defined in Section 3(2) of ERISA), each “employee welfare benefit plan” (as defined
in Section 3(1) of ERISA), and any other bonus, pension, profit sharing, deferred compensation, incentive compensation, stock
ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, change in control, disability, death benefit,
hospitalization, medical, fringe benefit or other plan, or program.
“Company Board” means
the Board of Directors of the Company.
“Company Bylaws” has
the meaning set forth in Section 4.1(b) of this Agreement.
“Company Certificate”
has the meaning set forth in Section 4.1(b) of this Agreement.
“Company Common Stock”
shall mean the common stock of the Company, par value $0.001 per share.
“Company Disclosure Schedule”
has the meaning set forth in the preamble to Article IV of this Agreement.
“Company Financial Advisor”
has the meaning set forth in Section 4.22 of this Agreement.
“Company Hedges” has
the meaning set forth in Section 4.25 of this Agreement.
“Company Hybrid Equity Plan”
means the 2011 Hybrid Equity Unit Plan established by the Company.
“Company Leases” has
the meaning set forth in Section 4.16(b) of this Agreement.
“Company Material Adverse Effect”
means any fact, event, circumstance or effect, other than any Excluded Company Matters, that, individually or together with all
other such facts, events, circumstances and effects, (i) is, or would reasonably be expected to be, material and adverse to
the business, condition (financial or otherwise), capitalization, assets, liabilities, or results of operations of the Company
and its Subsidiaries, taken as a whole or (ii) prevents or materially delays, or would reasonably be expected to prevent or
materially delay, the ability of the Company and its Subsidiaries to perform their obligations under this Agreement or to consummate
the transactions contemplated by this Agreement in accordance with the terms hereof.
“Company Material Contracts”
has the meaning set forth in Section 4.10(a) of this Agreement.
“Company Material Leased Real
Property” has the meaning set forth in Section 4.16(b) of this Agreement.
“Company Material Licenses”
has the meaning set forth in Section 4.15(b) of this Agreement.
“Company Owned Intellectual
Property” means all material Intellectual Property owned by the Company or any of its Subsidiaries.
“Company Owned Real Property”
has the meaning set forth in Section 4.16(a) of this Agreement.
“Company Permits”
has the meaning set forth in Section 4.9(a) of this Agreement.
“Company Preferred Stock”
has the meaning set forth in Section 4.2(a) of this Agreement.
“Company Product”
means any product, line of products or service which the Company or any of its Subsidiaries has marketed and/or sold in the preceding
three (3) calendar years.
“Company Qualified Plans”
has the meaning set forth in Section 4.12(d) of this Agreement.
“Company Registered Brand Name”
means all registrations for trademarks, trade names, brand names, and service marks owned by the Company or any of its Subsidiaries
that are material to the business and operations of the business.
“Company Registration Rights
Agreements” means any and all agreements between the Company and any Person relating to the registration of any of the
Company’s securities under the Securities Act.
“Company Representatives”
means with respect to the Company, each of its Subsidiaries, and each of their respective officers, directors, employees, agents,
counsel, accountants, investment bankers, financial advisors and authorized representatives.
“Company Required Statutory
Approvals” has the meaning set forth in Section 4.4(d) of this Agreement.
“Company Shares” has
the meaning set forth in Section 3.1(b) of this Agreement.
“Company Stock Options”
means options to acquire Company Shares granted under or pursuant to any Company Stock Plan or otherwise.
“Company Stock Plans”
means any plan or arrangement under which the Company grants equity-based awards.
“Company Stockholder Approval”
has the meaning set forth in Section 4.4(a) of this Agreement.
“Company Stockholders Agreement”
means that certain Stockholders Agreement dated as of September 24, 2012 by and among the Company and the investors and stockholders
parties thereto.
“Company Stockholders’
Meeting” shall mean a meeting of the holders of Company Common Stock to vote on the approval and adoption of this Agreement
and the Merger.
“Company Takeover Proposal”
means any inquiry, proposal or offer from any Person relating to, or that is reasonably likely to lead to, directly or indirectly:
(i) a merger, consolidation, tender offer, exchange offer, share exchange, business combination or other similar transaction
involving the Company or any operating Company’s Subsidiaries that constitutes twenty-five percent (25%) or more of the net
revenues, net income or assets of the Company; (ii) the acquisition by any Person in any manner of a number of shares of any
class of equity securities of the Company or any of the Company’s Subsidiary equal to or greater than twenty-five percent
(25%) of the number of such shares outstanding before such acquisition; or (iii) the acquisition by any Person in any manner
(including by license or lease), directly or indirectly, of assets that constitute twenty-five percent (25%) or more of the net
revenues, net income or assets of the Company (in each case, on a consolidated basis) in the case of each of the foregoing clauses
(i)-(iii) other than the transactions contemplated by this Agreement.
“Company Tax Opinion”
has the meaning set forth in Section 7.3(d) of this Agreement.
“Company Termination Fee”
has the meaning set forth in Section 8.3(b) of this Agreement
“Company Unregistered Brand
Name” means all (i) trademarks, trade names, brand names, and service marks for which the Company or any of its
Subsidiaries that are the subjects of such trademarks, trade names, brand names, and service marks has filed an application with
the U.S. Patent and Trademark Office or any foreign equivalent office and (ii) material trademarks, trade names, brand names,
and service marks owned and used by the Company or any of its Subsidiaries but not registered or are the subject of any pending
applications in any country anywhere in the world.
“Company Voting Proposal”
has the meaning set forth in Section 6.7(a) of this Agreement.
“Company Warrants”
has the meaning set forth in Section 3.3(b) of this Agreement.
“Company’s Facilities”
means the Company’s productions facilities located in Pekin, Illinois, Aurora, Nebraska, and Canton, Illinois.
“Confidentiality Agreement”
has the meaning set forth in Section 6.3(a) of this Agreement.
“Contingent Obligation”
means, as to any Person, any direct or indirect Liability, contingent or otherwise, of that Person with respect to any indebtedness,
lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such Liability,
or the primary effect thereof, is to provide assurance to the obligee of such Liability that such Liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the holders of such Liability will be protected (in whole
or in part) against loss with respect thereto.
“Contract” means any
agreements, contracts, leases, powers of attorney, notes, loans, evidence of indebtedness, purchase orders, letters of credit,
settlement agreements, franchise agreements, undertakings, covenants not to compete, employment agreements, licenses, covenants
not to sue, instruments, obligations, commitments, understandings, policies, purchase and sales orders, quotations and other executory
commitments to which any Person is a party or to which any of the assets of such Person are subject, whether oral or written, express
or implied (each, including all amendments thereto).
“control” (including
the terms “controlled,” “controlled by” and “under common control with”) means the possession,
direct or indirect, or the power to direct or cause the direction of the management and policies of a Person, whether through the
ownership of voting securities, by Contract or otherwise, and shall be construed as such term is used in the rules promulgated
under the Securities Act.
“Dataroom” means the
electronic dataroom hosted by Merrill Corporation with such contents contained therein as of immediately prior to the execution
of this Agreement.
“D&O Insurance”
has the meaning set forth in Section 6.12(d) of this Agreement.
“DGCL” has the meaning
set forth in the Recitals of this Agreement.
“Dissenting Shares”
has the meaning set forth in Section 3.4 of this Agreement.
“EDGAR” means the
Electronic Data Gathering, Analysis and Retrieval System.
“Effective Time” has
the meaning set forth in Section 2.2 of this Agreement.
“Election Deadline”
has the meaning set forth in Section 3.2(c) of this Agreement.
“Election Form” has
the meaning set forth in Section 3.2(b) of this Agreement.
“Election Form Record Date”
has the meaning set forth in Section 3.2(b) of this Agreement.
“Environmental Law(s)”
means any and all applicable international, federal, state, or local Laws or rule of common Law which regulate or relate to (i) the
condition, protection or cleanup of the environment, or the preservation or protection of waterways, groundwater, surface water,
drinking water, land, soil, air, wildlife, plants or other natural resources; (ii) the generation, manufacturing, labeling,
use, treatment, storage, transportation, handling, disposal, presence or release of Hazardous Substances; (iii) the protection
of public health or property; or (iv) impose Liability or responsibility with respect to any of the foregoing, including without
limitation the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. § 9601 et seq.),
the Toxic Substances Control Act, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation
and Recovery Act, as amended, the Clean Water Act, as amended, California’s Proposition 65, the Clean Air Act, as amended,
the Atomic Energy Act of 1954, as amended, and all analogous Laws promulgated or issued by any Governmental Entity.
“ERISA” means the
Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.
“ERISA Affiliate”
means, with respect to any entity, trade or business, any other entity, trade or business that is, or was at the relevant time,
a member of a group described in Section 52 or 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that
includes or included the first entity, trade or business, or that is, or was at the relevant time, a member of the same “controlled
group” as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA.
“Exchange Act” means
the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.
“Exchange Agent” has
the meaning set forth in Section 3.5(a) of this Agreement.
“Exchange Agent Agreement”
has the meaning set forth in Section 3.5(a) of this Agreement.
“Exchange Fund” has
the meaning set forth in Section 3.5(a) of this Agreement.
“Exchange Ratio” means
1.25.
“Excluded Company Matters”
means any one or more of the following: (i) changes after the date hereof in Laws, rules or regulations of general applicability
or interpretations thereof by a Governmental Entity; (ii) general changes after the date hereof in economic conditions, markets
(including capital, financial, credit or securities) or political environment in general or general changes in the industry in
which the Company operates generally, including adverse effects attributable to conditions affecting ethanol and/or oil production,
including changes to prevailing market prices (including futures prices) of ethanol or corn; (iii) a change or proposed change
in GAAP or the interpretation thereof; (iv) the outbreak or escalation of hostilities involving the United States, the declaration
by the United States of a national emergency or war, any other acts of war (whether declared or undeclared), sabotage, military
action or any escalation or worsening thereof, earthquakes, hurricanes or similar catastrophes, or the occurrence of any other
calamity or crisis, including an act of terrorism; (v) the announcement, pendency or consummation of the transactions contemplated
by this Agreement, or the failure to take actions as a result of any terms or conditions set forth in this Agreement, including
any loss of or change in the relationship with employees, customers, partners, suppliers or other persons having business relationships
with such Person; (vi) any action taken pursuant to this Agreement or at the express request of the other Party; (vii) failure
to meet internal projections or forecasts (provided, that the underlying causes of any such change shall not be excluded pursuant
to this clause (vii)), or (viii) a change in the market price or trading volume of the Company Common Stock, in and of itself;
provided, however, that any matter in subsections (i) or (ii) that disproportionately adversely affects the Company compared
with other companies in the ethanol production and distribution industry in which the Company operates shall not be an Excluded
Company Matter.
“Excluded Parent Matters”
means any one or more of the following: (i) changes after the date hereof in Laws, rules or regulations of general applicability
or interpretations thereof by a Governmental Entity; (ii) general changes after the date hereof in economic conditions, securities
markets in general in the United States or general changes in the industry in which Parent operates generally; (iii) a change
or proposed change in GAAP or the interpretation thereof ; (iv) the outbreak or escalation of hostilities involving the United
States, the declaration by the United States of a national emergency or war, any other acts of war (whether declared or undeclared),
sabotage, military action or any escalation or worsening thereof, earthquakes, hurricanes or similar catastrophes, or the occurrence
of any other calamity or crisis, including an act of terrorism; (v) the announcement, pendency or consummation of the transactions
contemplated by this Agreement, or the failure to take actions as a result of any terms or conditions set forth in this Agreement,
including any loss of or change in the relationship with employees, customers, partners, suppliers or other persons having business
relationships with such Person; (vi) any action taken pursuant to this Agreement or at the express request of the other party;
(vii) failure to meet internal projections or forecasts (provided, that the underlying causes of any such change shall not
be excluded pursuant to this clause (vii)), or (viii) a change in the market price or trading volume of the Parent Stock,
in and of itself; provided, however, that any matter in subsections (i) or (ii) that disproportionately adversely
affects Parent compared with other companies operating in the ethanol production and distribution industry in which Parent operates
shall not be an Excluded Parent Matter.
“Execution Date” has
the meaning set forth in the Preamble of this Agreement.
“Financial Statements”
has the meaning set forth in Section 4.5(b) of this Agreement.
“Fractional Share Cash Amount”
has the meaning set forth in Section 3.5(e) of this Agreement.
“GAAP” means United
States generally accepted accounting principles.
“Governmental Entity”
means any foreign, federal, state, local or multi-national court, arbitral tribunal, administrative agency or commission or other
governmental or regulatory body, agency, instrumentality or authority.
“Hazardous Substances”
means any pollutant, chemical, chemical compound, waste, material or substance that is defined, classified or regulated, or controlled
by any Environmental Law, whether solid, liquid or gas, and including without limitation, any quantity of asbestos in any form,
urea formaldehyde, PCBs, radon gas, crude oil or any fraction thereof, all forms of natural gas, petroleum products or by-products,
mixtures or derivatives.
“Hedging Transaction”
means any futures, hedge, swap, collar, put, call, floor, cap, option or other contract that is intended to benefit from, relate
to or reduce or eliminate the risk of fluctuations in the price of commodities, including ethanol, interest rates, currencies or
securities.
“Holder Representative”
has the meaning set forth in Section 3.2(b) of this Agreement.
“HSR Act” means the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
“Indebtedness” of
any Person means, without duplication (i) all indebtedness for borrowed money; (ii) all obligations issued, undertaken
or assumed as the deferred purchase price of property or services (including, without limitation, “capital leases”
in accordance with generally accepted accounting principles) (other than trade payables entered into in the ordinary course of
business); (iii) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar
instruments; (iv) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses; (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property
or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such
agreement in the event of default are limited to repossession or sale of such property); (vi) all monetary obligations under
any leasing or similar arrangement which, in connection with GAAP, consistently applied for the periods covered thereby, is classified
as a capital lease; (vii) all indebtedness referred to in clauses (i) through (vi) above secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, claim, lien, tax, right of
first refusal, encumbrance, pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (viii) all Contingent Obligations in respect of indebtedness or obligations
of others of the kinds referred to in clauses (i) through (vii) above.
“Indemnified Directors and Officers”
has the meaning set forth in Section 6.12(b) of this Agreement.
“Indemnified Parties”
has the meaning set forth in Section 6.12(c) of this Agreement.
“Intellectual Property”
means all intellectual property or other proprietary rights of every kind, foreign and domestic, including: (i) patents, patent
applications (including any provisionals, continuations, divisions, continuations-in-part, extensions, renewals, reissues, revivals
and reexaminations, any national phase PCT applications, PCT international applications, and all foreign counterparts), statutory
invention certificates, copyrights, mask works, industrial designs, URLs, domain names, trademarks, service marks, logos, brand
names, trade dress and trade names; (ii) all rights in, applications for, registrations of any of the foregoing; (iii) moral
rights, rights to use a natural person’s name and likeness, publicity rights; (iv) all rights in and to trade secrets,
confidential information, inventions, discoveries, improvements, modifications, know-how, techniques, methods, data, embodied or
disclosed in any computer programs; product specifications; and manufacturing; and (v) all goodwill related to any of the
foregoing.
“IRS” means Internal
Revenue Service.
“Joint Proxy Statement/Prospectus”
shall mean the joint proxy statement/prospectus to be sent to the holders of the Company Shares in connection with the Company
Stockholders’ Meeting and to the holders of Parent Voting Common Stock in connection with the Parent Stockholders’
Meeting.
“Knowledge” shall
mean, with respect to the Company, the actual knowledge or awareness of any of Mark Beemer and Brian Steenhard, and the knowledge
of each such person after inquiry of those persons employed by the Company or any of its Subsidiaries that would reasonably be
expected to know the answer to such inquiry. “Knowledge” shall mean, with respect to Parent, the actual knowledge
or awareness of any of Neil Koehler and Bryon McGregor, and the knowledge of each such person after inquiry of those persons employed
by Parent or any of its Subsidiaries that would reasonably be expected to know the answer to such inquiry.
“Law” means, as to
any Person, any statute, rule, regulation, ordinance, code, guideline, law, judicial decision, determination, order (including
any injunction, judgment, writ, award or decree), or consent of the court, other Governmental Entity or arbitrator, in each case
applicable to or binding upon such Person, including the conduct of its business, or any of its assets or revenues to which such
Person or any of its assets or revenues are subject.
“Liability” or
“Liabilities” mean any direct or indirect liability, Indebtedness, obligation, commitment, expense, claim,
deficiency, guaranty or endorsement of or by any Person of any type, whether accrued, absolute, contingent, matured, unmatured,
liquidated, unliquidated, known or unknown.
“Liens” means any
mortgage, deed of trust, deed to secure debt, title retention agreement, pledge, lien, encumbrance, security interest, right of
first refusal, option, conditional or installment sale agreement, charge or other claims of third parties of any kind.
“Mailing Date” has
the meaning set forth in Section 3.2(b) of this Agreement.
“Merger” has the meaning
set forth in the Recitals of this Agreement.
“Merger Consideration”
means the aggregate of (i) the Voting Common Stock Consideration, (ii) the Non-Voting Common Stock Consideration and (iii)
the Fractional Share Cash Amount.
“Merger Sub” has the
meaning set forth in the Preamble of this Agreement.
“Merging Corporations”
shall mean Merger Sub and the Company.
“Mixed Election” has
the meaning set forth in Section 3.1(c)(iii) of this Agreement.
“Multiemployer Plan”
means any “multiemployer plan” within the meaning of Section 3(37) or 4001(a)(3) of ERISA.
“NASDAQ” shall mean
the National Association of Securities Dealers Automated Quotation System.
“NELLC” means Nebraska
Energy, L.L.C.
“Non-Election Shares”
has the meaning set forth in Section 3.1(c)(iv) of this Agreement.
“Non-Voting Common Stock Consideration”
has the meaning set forth in Section 3.1(c)(i) of this Agreement.
“Non-Voting Election Shares”
has the meaning set forth in Section 3.2(a) of this Agreement.
“Non-Voting Stock Election”
has the meaning set forth in Section 3.2(a) of this Agreement.
“Non-Employee Options”
has the meaning set forth in Section 6.17 of this Agreement.
“Parent” has the meaning
set forth in the Preamble of this Agreement.
“Parent Board” shall
mean the Board of Directors of Parent.
“Parent Expense Reimbursement
Fee” has the meaning set forth in Section 8.3 of this Agreement.
“Parent Financial Advisor”
has the meaning set forth in Section 5.16 of this Agreement.
“Parent Financial Statements”
has the meaning set forth in Section 5.5 of this Agreement.
“Parent Material Adverse Effect”
shall mean any fact, event, circumstance or effect, other than any Excluded Parent Matters, that, individually or together with
all other such facts, events, circumstances and effects, (i) is, or would reasonably be expected to be, material and adverse
to the business, condition (financial or otherwise), capitalization, assets, Liabilities, or results of operations of Parent; or
(ii) prevents or materially delays, or would reasonably be expected to prevent or materially delay, the ability of Parent
to perform its obligations under this Agreement or to consummate the transactions contemplated by this Agreement in accordance
with the terms hereof.
“Parent Material Contract”
has the meaning set forth in Section 5.12 of this Agreement.
“Parent Non-Voting Common Stock”
has the meaning set forth in the Recitals of this Agreement.
“Parent Permits” has
the meaning set forth in Section 5.9(a) of this Agreement.
“Parent Representatives”
means Affiliates of Parent and each of its Subsidiaries, and each of their respective officers, directors, employees, agents, counsel,
accountants, investment bankers, financial advisors and representatives.
“Parent Required Statutory Approvals”
has the meaning set forth in Section 5.4(c) of this Agreement.
“Parent SEC Documents”
has the meaning set forth in Section 5.5(a) of this Agreement.
“Parent Series A Preferred Stock”
has the meaning set forth in Section 5.2(a) of this Agreement.
“Parent Series B Preferred Stock”
has the meaning set forth in Section 5.2(a) of this Agreement.
“Parent Stockholders’
Meeting” shall mean a meeting of the holders of Parent Voting Common Stock to vote on the Parent Voting Proposals.
“Parent Stock” has
the meaning set forth in the Recitals of this Agreement.
“Parent Stockholders Agreement”
has the meaning in the Recitals of this Agreement.
“Parent Stock Option”
means any option to purchase Parent Stock granted under any Parent Stock Plan or otherwise.
“Parent Stock Plans”
means any plan or arrangement under which Parent grants equity-based awards.
“Parent Tax Opinion”
has the meaning set forth in Section 7.2(e) of this Agreement.
“Parent Termination Fee”
has the meaning set forth in Section 8.3(b)(ii) of this Agreement.
“Parent Voting Common Stock”
has the meaning set forth in the Recitals of this Agreement.
“Parent Voting Proposals”
has the meaning set forth in Section 6.7(b) of this Agreement.
“Parent Warrant” means
any warrant to purchase Parent Stock granted by Parent.
“Parties” has the
meaning set forth in the Preamble of this Agreement.
“PBGC” means the Pension
Benefit Guaranty Corporation.
“Person” means any
individual, firm, corporation, partnership, company, limited liability company, trust, joint venture, association, Governmental
Entity or other entity.
“Plants” means any
and all ethanol plants owned by the Company and/or a Company’s Subsidiary.
“Pollution Liability Insurance”
has the meaning set forth in Section 6.20 of this Agreement.
“Proceeding(s)” means
any claims, controversies, demands, actions, lawsuits, investigations, proceedings or other disputes, formal or informal, including
any by, involving or before any arbitrator or any Governmental Entity.
“Proposal Period”
has the meaning set forth in Section 6.13(b)(ii) of this Agreement.
“Registration Statement”
shall mean the registration statement on Form S-4 to be filed with the SEC by Parent in connection with issuance of Parent Stock
in the Merger, as said registration statement may be amended prior to the time it is declared effective by the SEC.
“Remediation Notice”
has the meaning set forth in Section 7.2(k).
“Required Company Stockholder
Vote” shall mean the affirmative vote to approve and adopt this Agreement and the Merger by (i) the holders of a majority
of the Company Shares issued and outstanding and entitled to vote at the Company Stockholders’ Meeting (in person or by proxy)
and constituting a quorum for the purpose of voting on such approval or (ii) the holders of a majority of the Company Shares issued
and outstanding and entitled to vote by written consent in lieu of any stockholder meeting.
“Required Parent Stockholder
Vote” shall mean the vote or consent, as applicable, to (i) approve the issuance of Parent Stock in the Merger,
(ii) approve the amendment to Parent’s Amended Certificate of Incorporation to authorize a class of Parent Non-Voting
Common Stock that has the terms and conditions set forth in the Amended Certificate of Incorporation, and (iii) not treat
the Merger as a liquidation, dissolution or winding up within the meaning of Section 4 of the Certificate of Designations, Powers,
Preferences and Rights of the Series B Cumulative Convertible Preferred Stock of the Parent Series B Preferred Stock, (x) in the
case of clause (i), (A) by the holders of a majority of the votes of Parent Stock and Parent Series B Preferred Stock, voting
together as a single class, present (in person or by proxy) at the Parent Stockholders’ Meeting and constituting a quorum
for the purpose of voting on such approval, and (B) by the holders of a majority of the shares of Parent Series B Preferred
Stock, voting as a separate class, present (in person or by proxy) at the Parent Stockholders’ Meeting, (y) in the case of
clause (ii), (A) by the holders of a majority of the issued and outstanding shares of Parent Stock and (B) by the holders
of a majority of the shares of Parent Series B Preferred Stock present (in person or by proxy) at the Parent Stockholders’
Meeting, and (z) in the case of clause (iii), by the holders of 66-2/3% of the shares of Parent Series B Preferred Stock (the
matter in this clause (z) is referred to as the “Special Series B Approval”).
“SEC” means the United
States Securities and Exchange Commission.
“SEC Reports” means
all forms, reports, statements, schedules and other documents filed by Parent pursuant to the federal securities laws and the SEC
rules and regulations thereunder, and all forms, reports, statements, schedules and other documents to be filed by Parent with
the SEC after the date hereof and prior to the Effective Time.
“Securities Act” means
the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder.
“Sarbanes-Oxley Act”
means the Sarbanes-Oxley Act of 2002, as amended.
“Subsidiary” means,
with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such
party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of
which held by such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or
(ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to such corporation or other organization is directly
or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of
its Subsidiaries.
“Subsidiary Bylaws”
has the meaning set forth in Section 4.3(c) of this Agreement.
“Subsidiary Charters”
has the meaning set forth in Section 4.3(c) of this Agreement.
“Superior Company Proposal”
means any written offer made by a third party not in violation of Section 6.13 that if consummated would result in such
third party acquiring, directly or indirectly, a majority of the Company Shares or a majority of the assets of the Company and
the Company’s Subsidiaries, (i) for consideration that the Company Board determines in its good faith judgment (following
consultation with an independent financial advisor) to be superior from a financial point of view to the holders of Company Shares
than the transactions contemplated by this Agreement (based on the advice of the Company Financial Advisor), taking into account
all the terms and conditions of such proposal, this Agreement and any proposal by Parent to amend the terms of this Agreement as
permitted hereunder; and (ii) that, in the good faith judgment of the Company Board, is reasonably likely to be consummated,
taking into account all legal, financial, regulatory and other aspects of the proposal and the Person making the proposal.
“Superior Proposal Notice”
has the meaning set forth in Section 6.13(b)(ii) of this Agreement.
“Surviving Corporation”
has the meaning set forth in Section 2.1 of this Agreement.
“Takeover Laws” has
the meaning set forth in Section 6.16 of this Agreement.
“Tax” or “Taxes”
means all taxes of whatever kind or nature, including, without limitation, those on or measured by or referred to as income, gross
receipts, sales, use, ad valorem, franchise, profits, license, estimated, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or other similar fees, assessments
or charges of any kind whatsoever (together with any interest and any penalties, additions to tax or additional amounts), whether
disputed or not, imposed by any Governmental Entity (domestic or foreign).
“Tax Returns” means
any report, return (including information return or declaration of estimated Taxes), claim for refund, or statement relating to
Taxes filed or required to be filed with any Governmental Entity, including any schedule or attachment thereto, and including any
amendments thereof.
“Termination Date”
has the meaning set forth in Section 8.1(b)(i) of this Agreement.
“Trading Day” means
(i) a day on which the Parent Voting Common Stock is traded on NASDAQ or (ii) if the Parent Voting Common Stock is not
listed on NASDAQ, a day on which the Parent Voting Common Stock is traded in the over the counter market, as reported by the OTC
Bulletin Board; provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (i) and
(ii) hereof, then “Trading Day” shall mean a Business Day.
“Transfer Taxes” has
the meaning set forth in Section 9.4 of this Agreement.
“TTB” means the Alcohol
and Tobacco Tax and Trade Bureau.
“Unaudited Financial Statements”
has the meaning set forth in Section 4.5(b) of this Agreement.
“Voting Common Stock Consideration”
has the meaning set forth in Section 3.1(c)(ii) of this Agreement.
“Voting Election Shares”
has the meaning set forth in Section 3.2(a) of this Agreement.
“Voting Stock Election”
has the meaning set forth in Section 3.2(a) of this Agreement.
Section 1.2 Construction. Unless the context of this Agreement clearly requires otherwise, (a) references to the plural include the singular, and references to the singular include the plural, (b) references to any gender include the other gender, (c) the words “include,” “includes” and “including” do not limit the preceding terms or words and will be deemed to be followed by the words “without limitation”, (d) the terms “hereof,” “herein,” “hereunder,” “hereto” and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement, (e) the terms “day” and “days” mean and refer to calendar day(s) and (f) the terms “year” and “years” mean and refer to calendar year(s). Unless otherwise set forth herein, references in this Agreement to (a) any document, instrument or agreement (including this Agreement) include (1) all exhibits, schedules and other attachments thereto, (2) all documents, instruments or agreements issued or executed in replacement thereof and (3) such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified or supplemented from time to time in accordance with its terms and in effect at any given time, and (b) a particular Law means such Law as amended, modified, supplemented or succeeded, from time to time and in effect through the Closing Date. All Article, Section, Exhibit and Schedule references herein are to Articles, Sections, Exhibits and Schedules of this Agreement, unless otherwise specified. This Agreement will not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if all Parties had prepared it. All accounting terms not specifically defined herein will be construed in accordance with GAAP.
Volume Weighted Average Price”
or “VWAP” means on any Trading Day such price per share of Parent Voting Common Stock as displayed on Bloomberg
(or any successor service) page “PEIX US&equity&VAP” (or any equivalent successor page) in respect of the period
from 9:30 a.m. to 4:00 p.m. (Eastern time), on such Trading Day; or, if such price is not available, “VWAP”
means the market value per share of Parent Voting Common Stock on that day as determined by a nationally recognized independent
investment banking firm retained for this purpose by Parent.
Article
II
THE MERGER
Section 2.1 The Merger. Upon the terms and subject to the satisfaction or waiver of the conditions set forth in this Agreement, and in accordance with the DGCL, Merger Sub shall be merged with and into the Company at the Effective Time. Following the Effective Time, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the corporation surviving the Merger (the “Surviving Corporation”) and shall continue its corporate existence under the DGCL.
Section 2.2 Closing; Effective Time. The closing of the Merger (the “Closing”) shall take place at 10:00 a.m. (Pacific time) at the offices of Troutman Sanders LLP, 5 Park Plaza, Irvine, California 92614, unless another place is agreed to in writing by the Parties hereto on the second Business Day after the satisfaction or waiver (subject to applicable Law) of the conditions set forth in Article VII (excluding conditions that, by their nature, cannot be satisfied until the Closing, but subject to the continued satisfaction or, to the extent provided by Law and this Agreement, waiver of those conditions), unless this Agreement has been terminated pursuant to its terms or unless another time or date is agreed to in writing by the Parties hereto (the actual date at 10:00 a.m. (Pacific time) of the Closing being referred to herein as the “Closing Date”). On the Closing Date and subject to the terms and conditions hereof, the Parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger, in substantially the form attached hereto as Exhibit B (the “Certificate of Merger”), executed in accordance with the relevant provisions of the DGCL, with the Secretary of State of the State of Delaware. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware (or at such subsequent time as Parent and the Company shall agree and as shall be specified in the Certificate of Merger), such time being referred to herein as the “Effective Time.”
Section 2.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the DGCL. Without limiting the generality of the foregoing, at the Effective Time, except as otherwise provided herein, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, Liabilities and duties of the Company and Merger Sub shall become the debts, Liabilities and duties of the Surviving Corporation.
Section 2.4 Certificate of Incorporation of the Surviving Corporation. At the Effective Time, the certificate of incorporation of the Surviving Corporation shall be amended to read in its entirety as set forth on Exhibit C attached hereto and shall be the certificate of incorporation of the Surviving Corporation until thereafter changed or amended as provided therein, by the DGCL or by applicable Law.
Section 2.5 Bylaws of the Surviving Corporation. At the Effective Time, the bylaws of the Surviving Corporation shall be amended to read in its entirety as set forth on Exhibit D attached hereto and shall be the bylaws of the Surviving Corporation, until amended as provided therein, by the DGCL or by applicable Law.
Section 2.6 Directors and Officers of the Surviving Corporation.
(a)
The individuals set forth on Schedule 2.6(a) attached hereto shall be the directors of the Surviving Corporation
upon the Effective Time and such persons shall hold office from the Effective Time until their respective successors are duly elected
or appointed and qualified in the manner provided in the certificate of incorporation or bylaws of the Surviving Corporation or
as otherwise provided by Law.
(b)
The individuals set forth on Schedule 2.6(b) attached hereto shall be the officers of the Surviving Corporation
upon the Effective Time and shall hold office from the Effective Time until their respective successors are duly elected or appointed
and qualified in the manner provided in the certificate of incorporation or bylaws of the Surviving Corporation or as otherwise
provided by Law.
Article
III
EFFECT ON CAPITAL STOCK; EXCHANGE PROCEDURES
Section 3.1 Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of Merger Sub, the Company or the holders of any securities of the Merging Corporations:
(a)
Merger Sub Common Stock. Each share of common stock, par value $0.001 per share, of Merger Sub issued and
outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable share
of common stock, par value $0.001 per share, of the Surviving Corporation and shall constitute the only shares of capital stock
of the Surviving Corporation outstanding immediately after the Effective Time. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation
after giving effect to the transactions contemplated by this Section 3.1(a).
(b)
Cancellation of Treasury Stock and Parent-Owned Stock. Each share of Company Common Stock (shares of Company
Common Stock being hereinafter collectively referred to as “Company Shares”) held in the treasury of the Company
and any Company Shares owned by Parent or by any direct or indirect wholly-owned Subsidiary of Parent or the Company (including
any Company Shares issued by the Company pursuant to a stock option) immediately prior to the Effective Time shall be canceled
and extinguished without any conversion thereof and no payment shall be made with respect thereto.
(c)
Conversion of Company Common Stock. Subject to the provisions of this Article III, each share of Company
Common Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled in accordance with
Section 3.1(b) and other than Dissenting Shares shall become and be converted into, as provided in and subject to the limitations
set forth in this Agreement, the right to receive, at the election of the holder thereof, the following:
(i)
for each share of Company Common Stock with respect to which a holder elects to receive Parent Non-Voting Common
Stock pursuant to Section 3.2, an amount of Parent Non-Voting Common Stock equal to the product of (i) the Exchange
Ratio and (ii) each such share of Company Common Stock (the “Non-Voting Common Stock Consideration”)
upon surrender and exchange of a Certificate or Book-Entry Share;
(ii)
for each share of Company Common Stock with respect to which a holder elects to receive Parent Voting Common Stock
pursuant to Section 3.2, an amount of Parent Voting Common Stock equal to the product of (i) the Exchange Ratio and
(ii) each such Company Share (the “Voting Common Stock Consideration”) upon surrender and exchange of a
Certificate or Book-Entry Share;
(iii)
a combination of the Non-Voting Common Stock Consideration and the Voting Common Stock Consideration converted in
accordance with Section 3.1(c)(i) and Section 3.1(c)(ii) in the proportion set forth in the Election Form (a “Mixed
Election”); and
(iv)
for each share of Company Common Stock as to which a Non-Voting Election, a Voting Election, or a Mixed Election
has not been effectively made or lost, pursuant to Section 3.2 (collectively, “Non-Election Shares”),
such Non-Election Shares of each holder shall be converted into Voting Common Stock Consideration in accordance with Section
3.1(c)(ii) upon surrender and exchange of a Certificate or Book-Entry Share.
(d)
Cancellation of Company Converted Common Stock. All of the Company Shares converted into the right to receive
the Merger Consideration pursuant to this Article III shall no longer be outstanding and shall automatically be cancelled
and shall cease to exist as of the Effective Time, and uncertificated Company Shares represented in book-entry form (“Book-Entry
Shares”) and each certificate that, immediately prior to the Effective Time, represented any such Company Shares (each,
a “Certificate”) shall thereafter represent only the right to receive the Merger Consideration and the Fractional
Share Cash Amount, plus any dividends or other distributions to which such Certificates or Book-Entry Shares become entitled in
accordance with Section 3.5(d).
Section 3.2 Election Procedures.
(a)
Holders of Company Common Stock may elect to receive shares of Parent Non-Voting Common Stock (a “Non-Voting
Stock Election”) or Parent Voting Common Stock (a “Voting Stock Election”) (in either case without
interest) in exchange for their Company Shares in accordance with the procedures set forth herein. Shares of Parent Non-Voting
Common Stock as to which a Non-Voting Election (including, pursuant to a Mixed Election) has been made are referred to herein as
“Non-Voting Election Shares”. Shares of Parent Voting Common Stock as to which a Voting Election (including,
pursuant to a Mixed Election) has been made are referred to herein as “Voting Election Shares”.
(b)
An election form and other appropriate and customary transmittal materials (which shall specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of such Certificates to the Exchange
Agent), in such form as Company and Parent shall mutually agree (“Election Form”), shall be mailed no more than
forty (40) Business Days and no less than twenty (20) Business Days prior to the anticipated Effective Time or on such earlier
date as Company and Parent shall mutually agree (the “Mailing Date”) to each holder of record of Company Common
Stock as of five (5) Business Days prior to the Mailing Date (the “Election Form Record Date”). Each Election
Form shall permit such holder, subject to the election procedures set forth in this Section 3.2, (i) to elect to receive
the Non-Voting Common Stock Consideration for all of the Company Shares held by such holder, in accordance with Section 3.1(c)(i);
(ii) to elect to receive the Voting Common Stock Consideration for all of such Company Shares, in accordance with Section
3.1(c)(ii); (iii) to elect to receive the Non-Voting Common Stock Consideration for a part of such holder’s Company
Common Stock and Voting Common Stock Consideration for the remaining part of such holder’s Company Common Stock; or (iv) to
indicate that such record holder has no preference as to the receipt of Parent Non-Voting Common Stock or Parent Voting Common
Stock for such Company Shares. A holder of record of Company Shares who holds such Company Shares as nominee, trustee or in another
representative capacity (a “Holder Representative”) may submit multiple Election Forms, provided that each such
Election Form covers all the Company Shares held by such Holder Representative for a particular beneficial owner. Any Company Shares
with respect to which the holder thereof shall not, as of the Election Deadline, have made an election by submission to the Exchange
Agent of an effective, properly completed Election Form shall be deemed Non-Election Shares.
(c)
To be effective, a properly completed Election Form shall be submitted to the Exchange Agent on or before 5:00 p.m.,
(Pacific time), on the twentieth (20th) day following the Mailing Date (or such other time and date as the Company and
Parent may mutually agree) (the “Election Deadline”); provided, however, that the Election Deadline may
not occur on or after the Closing Date. The Company shall use its reasonable best efforts to make available up to two separate
Election Forms, or such additional Election Forms as Parent may permit, to all Persons who become holders (or beneficial owners)
of Company Common Stock between the Election Form Record Date and the close of business on the business day prior to the Election
Deadline. The Company shall provide to the Exchange Agent all information reasonably necessary for it to perform as specified herein.
An election shall have been properly made only if the Exchange Agent shall have actually received a properly completed Election
Form by the Election Deadline. An Election Form shall be deemed properly completed only if accompanied by one or more Certificates
(or customary affidavits and indemnification regarding the loss or destruction of such Certificates or the guaranteed delivery
of such Certificates) and/or evidence of Book-Entry Shares representing all Company Shares covered by such Election Form, together
with duly executed transmittal materials included with the Election Form. If a holder of Company Common Stock either (i) does
not submit a properly completed Election Form in a timely fashion or (ii) revokes its Election Form prior to the Election
Deadline (without later submitting a properly completed Election Form prior to the Election Deadline), the Company Shares held
by such stockholder shall be designated as Non-Election Shares. Any Election Form may be revoked or changed by the person submitting
such Election Form to the Exchange Agent by written notice to the Exchange Agent only if such notice of revocation or change is
actually received by the Exchange Agent at or prior to the Election Deadline. Parent shall cause the Certificates and/or Book-Entry
Shares relating to any revoked Election Form to be promptly returned without charge to the person submitting the Election Form
to the Exchange Agent. Subject to the terms of this Agreement and of the Election Form, the Exchange Agent shall have discretion
to determine when any election, modification or revocation is received and whether any such election, modification or revocation
has been properly made. All elections shall be revoked automatically if the Exchange Agent is notified in writing by Parent or
the Company, upon exercise by Parent or the Company of its respective or their mutual rights to terminate this Agreement to the
extent provided under Article VIII, that this Agreement has been terminated in accordance with Article VIII.
Section 3.3 Company Stock Options and Company Warrants.
(a)
Treatment of Company Stock Options. The Company and Parent shall take all actions reasonably necessary (including
any required notices by the Company) to provide that, effective as of the Effective Time, each outstanding Company Stock Option
will be assumed by Parent. Each Company Stock Option assumed by Parent will continue to have, and be subject to, the same material
terms and conditions of such option immediately prior to the Effective Time, except that (i) each Company Stock Option will
be exercisable for a number of shares of Parent Voting Common Stock equal to the product of the number of Company Shares that would
have been issuable upon exercise of the Company Stock Option outstanding immediately prior to the Effective Time multiplied by
the Exchange Ratio, rounded down to the nearest whole number of shares of Parent Stock, and (ii) the per share exercise price
for the Parent Voting Common Stock issuable upon exercise of such assumed Company Stock Option will be equal to the quotient determined
by dividing the per share exercise price for such Company Stock Option outstanding immediately prior to the Effective Time by the
Exchange Ratio, rounded up to the nearest whole cent. The holder of a Company Stock Option may elect to receive shares of Parent
Non-Voting Common Stock, Parent Voting Common Stock or a combination thereof upon exercise of such Company Stock Option. The exercise
price and the number of shares purchasable pursuant to the assumed Company Stock Options as well as the terms and conditions of
exercise of such assumed options shall be designed to comply with Sections 424(a) and 409A of the Code. Any restriction on the
exercisability of such Company Stock Option will continue in full force and effect, and the term, exercisability, vesting schedule
or other provisions of such Company Stock Option will remain unchanged. The Merger will not terminate any of the outstanding Company
Stock Options or accelerate the exercisability or vesting of such Company Stock Options or the shares of Parent Voting Common Stock
underlying the Company Stock Options upon Parent’s assumption thereof in the Merger.
(b)
Treatment of Company Warrants. To the extent the Company Warrants have not been terminated in accordance with
their terms, at the Effective Time, (i) each outstanding warrant to purchase Company Shares (a “Company Warrant”)
shall by virtue of the Merger be assumed by Parent subject to the terms of such Company Warrant and (ii) the Company shall
take all actions reasonably necessary, including any required notices by the Company, to provide that, effective as of the Effective
Time, each outstanding Company Warrant will be assumed by Parent. Each Company Warrant assumed by Parent will continue to have,
and be subject to, the same terms and conditions of such warrant immediately prior to the Effective Time, except that (A) each
Company Warrant will be exercisable for a number of shares of Parent Voting Common Stock equal to the product of the number of
Company Shares that would have been issuable upon exercise of the Company Warrant outstanding immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of Parent Voting Common Stock, and (B) the
per share exercise price for the Parent Voting Common Stock issuable upon exercise of such assumed Company Warrant will be equal
to the quotient determined by dividing the per share exercise price for such Company Warrant outstanding immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. The holder of a Company Warrant may elect to receive
shares of Parent Non-Voting Common Stock, Parent Voting Common Stock or a combination thereof upon exercise of such Company Warrant.
Any restriction on the exercisability of such Company Warrant will continue in full force and effect, and the term, exercisability
or other provisions of such Company Warrant will remain unchanged. Consistent with the terms of the Company Warrants, the Merger
will not accelerate the exercisability of such Company Warrants or the shares of Parent Voting Common Stock underlying the Company
Warrants upon Parent’s assumption thereof in the Merger.
Section
3.4 Dissenters’
Rights. Notwithstanding any provision of this Agreement to the contrary, Company Shares which are issued and outstanding immediately
prior to the Effective Time and which are held by holders who shall have complied with the provisions of Section 262 of the
DGCL (the “Dissenting Shares”) shall not be converted into or represent a right to receive the applicable Merger
Consideration, and holders of such Dissenting Shares shall be entitled to receive payment of the fair value of such Dissenting
Shares in accordance with the provisions of Section 262 of the DGCL, unless and until the applicable holder fails to comply
with the provisions of Section 262 of the DGCL or effectively withdraws or otherwise loses such holder’s rights to
receive payment of the fair value of such holder’s Shares under Section 262 of the DGCL. If, after the Effective Time,
any such holder fails to comply with the provisions of Section 262 of the DGCL or effectively withdraws or loses such right,
such Dissenting Shares shall thereupon be treated as if they had been converted at the Effective Time into the right to receive
the applicable Merger Consideration and the Surviving Corporation and Parent shall remain liable for payment of the Merger Consideration
with respect to such Dissenting Shares. Notwithstanding anything to the contrary contained in this Section 3.4, if this
Agreement is terminated prior to the Effective Time, then the right of any holder of Company Common Stock to be paid the fair
value of such holder’s Dissenting Shares pursuant to Section 262 of the DGCL shall cease. The Company shall give Parent
notice of any written demands for appraisal of Company Common Stock received by the Company under Section 262 of the DGCL,
and shall give Parent the opportunity to participate in all negotiations and Proceedings with respect thereto. The Company shall
not, except with the prior written consent of Parent, (i) make any payment with respect to any such demands for appraisal
or (ii) offer to settle or settle any such demands.
Section 3.5
Exchange Procedures.
(a)
Exchange Agent. Prior to the mailing of the Joint Proxy Statement/Prospectus, Parent shall appoint a bank
or trust reasonably acceptable to the Company to act as exchange agent (the “Exchange Agent”) for the payment
of Merger Consideration and shall enter into an agreement (the “Exchange Agent Agreement”) relating to the Exchange
Agent’s responsibilities under this Agreement, which Exchange Agent Agreement shall be subject to the reasonable approval
of the Company. At or prior to the Effective Time, Parent shall deposit, or shall cause to be deposited, with the Exchange Agent
for the benefit of the holders of Company Shares, for exchange in accordance with this Article III through the Exchange
Agent (i) evidence of Parent Stock in book-entry form representing the number of shares of Parent Stock sufficient to deliver
the applicable Merger Consideration and (ii) an amount of cash sufficient to make Fractional Share Cash Amount payments in
accordance with Section 3.5(e) (collectively, the “Exchange Fund”). Parent further agrees to provide
to the Exchange Agent, from time to time as needed, immediately available funds sufficient to pay any dividends and other distributions
pursuant to Section 3.5(c). Pursuant to irrevocable instructions, the Exchange Agent shall promptly deliver the applicable
Merger Consideration from the Exchange Fund to the former Company stockholders who are entitled thereto pursuant to Section
3.1. Except as contemplated by Section 3.5(c) and Section 3.5(e) hereof, the Exchange Fund shall not be used for
any other purpose. Parent shall pay all charges and expenses, including those of the Exchange Agent, incurred by it in connection
with the exchange of Company Shares for the Merger Consideration and other amounts contemplated by this Article III.
(b)
Surrender of Certificates. Upon surrender of a Certificate or Book-Entry Shares to the Exchange Agent, together
with such Election Form, duly executed and completed in accordance with the instructions thereto, and such other documents as may
reasonably be required by Parent or the Exchange Agent, the holder of such Certificate or Book-Entry Shares shall be entitled to
receive in exchange therefor the Merger Consideration into which the shares represented by such Certificates or Book-Entry Shares
have been converted pursuant to this Agreement, together with the Fractional Share Cash Amount and any dividends or other distributions
to which such Certificates or Book-Entry Shares become entitled in accordance with Section 3.5(c), if any, and the Certificate
or Book-Entry Share so surrendered shall forthwith be cancelled and exchanged as provided in this Article III. No interest
will be paid or will accrue on any cash payable pursuant to Section 3.5(c) or Section 3.5(e). In the event of a transfer
of ownership of Company Shares which is not registered in the transfer records of the Company, the Merger Consideration may be
issued and paid with respect to such Company Shares to such a transferee if the Certificate or sufficient evidence of Book-Entry
Shares representing such transferred Company Shares is presented to the Exchange Agent in accordance with this Section 3.5(b),
accompanied by all documents required to evidence and effect such transfer and evidence that any applicable stock Transfer Taxes
have been paid.
(c)
Dividends and Distributions; Treatment of Unexchanged Shares. No dividends or other distributions declared
or made after the Effective Time with respect to the Parent Stock with a record date after the Effective Time shall be paid to
any holder of any unsurrendered share of Company Common Stock who is entitled to receive Parent Stock upon such surrender, and
no Fractional Share Cash Amount payment in respect of fractional shares shall be paid to any such holder pursuant to Section
3.5(e), unless and until the holder of such Company Common Stock shall surrender such Company Common Stock in accordance with
Section 3.5(b). Subject to the effect of escheat, Tax or other applicable Laws, following surrender of any such Company
Common Stock, there shall be paid to the holder of the stock certificates or Book-Entry Shares representing whole shares of Parent
Stock to be issued in exchange therefor, without interest, (i) promptly, (A) the amount of any cash payable with respect
to a fractional share of Parent Stock to which such holder is entitled pursuant to Section 3.5(e) and (B) the amount
of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares
of Parent Stock and (ii) at the appropriate payment date, the amount of dividends or other distributions, with a record date
after the Effective Time but prior to the date of surrender of such holder’s Company Common Stock and a payment date occurring
after the date of surrender, payable with respect to such whole shares of Parent Stock.
(d)
Full Satisfaction. The Merger Consideration delivered upon surrender of Company Common Stock in accordance
with the terms hereof (including any cash paid pursuant to Section 3.5(c)) shall be deemed to have been paid in full satisfaction
of all rights pertaining to the such Company Shares.
(e)
Fractional Shares. No fractional shares of Parent Stock shall be issued in connection with the Merger, and
no certificates or scrip for any such fractional shares shall be issued. Any holder of Company Common Stock who would otherwise
be entitled to receive a fraction of a share of Parent Stock, after aggregating all fractional shares of Parent Stock issuable
to such holder, shall in lieu of such fraction of a share and upon surrender of such holder’s Certificates, be paid in cash
the dollar amount (rounded to the nearest whole cent), without interest, determined by multiplying such fraction by the VWAP of
the Parent Stock during the five (5) Trading Days immediately preceding the Closing Date (the “Fractional Share Cash Amount”).
As soon as practicable after the determination of the Fractional Share Cash Amount to be paid to former holders of Company Shares
in lieu of any fractional shares of Parent Stock, the Exchange Agent shall distribute such amounts to such former holders.
(f)
Termination of Fund. Any portion of the Exchange Fund which remains undistributed to the holders of Company
Shares nine (9) months after the Effective Time shall be returned to Parent, upon demand, and, from and after such delivery to
Parent, any holders of Company Shares who have not theretofore complied with this Article III shall thereafter look only
to Parent for the Merger Consideration payable in respect of such Company Shares and any cash paid in respect of the Fractional
Share Cash Amount and any dividends or other distributions with respect to Parent Stock to which they are entitled pursuant to
Section 3.5(c), in each case, without any interest thereon. Neither Parent, the Surviving Corporation, the Exchange Agent
nor the Company shall be liable to any holder of Company Common Stock for any such shares of Parent Stock (or dividends or distributions
with respect thereto) or cash from the Exchange Fund delivered to a public official pursuant to any abandoned property, escheat
or similar Law.
(g)
Lost, Stolen or Destroyed Certificates. If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required
by Parent or Exchange Agent, the posting by such Person of a bond in such reasonable amount as Parent or Exchange Agent may direct
as indemnity against any claim that may be made against the Surviving Corporation with respect to such Certificate, the Exchange
Agent shall pay in exchange for such lost, stolen or destroyed Certificate the Merger Consideration payable in respect of the Company
Shares represented by such Certificate, any cash paid in respect of the Fractional Share Cash Amount and any dividends or other
distributions to which the holders thereof are entitled pursuant to Section 3.5(c), in each case, without any interest thereon.
(h)
Withholding Taxes. Parent or the Exchange Agent shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of Company Common Stock such amounts as Parent or the Exchange Agent
are required to deduct and withhold under the Code, or any Tax Law, with respect to the making of such payment. To the extent that
amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement
as having been paid to the holder of Company Common Stock in respect of whom such deduction and withholding was made by Parent
or the Exchange Agent.
(i)
Exchange Fund Cash. The Exchange Agent shall invest any cash included in the Exchange Fund, as directed by
Parent, on a daily basis; provided, however, that no such investment or loss thereon shall affect the amounts payable to
the holder of Company Common Stock pursuant to this Article III. Any interest and other income resulting from such investments
shall be paid to Parent upon termination of the Exchange Fund pursuant to Section 3.5(f). In the event the cash in the Exchange
Fund shall be insufficient to fully satisfy all of the payment obligations to be made by the Exchange Agent hereunder, Parent shall
promptly deposit cash into the Exchange Fund in an amount that is equal to the deficiency in the amount of cash required to fully
satisfy such payment obligations.
(j)
No Further Ownership Rights in Shares. From and after the Effective Time, the stock transfer books of the
Company shall be closed, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation
of Company Shares that were outstanding immediately prior to the Effective Time. From and after the Effective Time, subject to
applicable Law in the case of Dissenting Shares, all holders of Certificates and/or Book-Entry Shares shall cease to have any rights
as Company stockholders other than the right to receive the Merger Consideration into which the shares represented by such Certificates
and/or Book-Entry Shares have been converted pursuant to this Agreement upon the surrender of such Certificates and/or Book-Entry
Shares in accordance with Section 3.5(b) (together with the Fractional Share Cash Amount and any dividends or other distributions
to which such Certificates and/or Book-Entry Shares become entitled in accordance with Section 3.5(c)), without interest.
If, after the Effective Time, any Certificates and/or Book-Entry Shares formerly representing Company Shares are presented to the
Surviving Corporation, Parent or the Exchange Agent for any reason, such Certificates or Book-Entry Shares shall be cancelled and
exchanged as provided in this Article III, subject to applicable Law in the case of Dissenting Shares. Any cash paid in
respect of the Fractional Share Cash Amount and any dividends or other distributions to which the holders thereof are entitled
pursuant to Section 3.5(c), in each case, net of any required withholding for Taxes and without any interest thereon.
Section 3.6 Adjustments. Notwithstanding anything in this Agreement to the contrary, if, between the date of this Agreement and the Effective Time, the issued and outstanding Company Shares or Parent Stock shall have been changed into a different number of shares or a different class by reason of any stock split, reverse stock split, stock dividend, reclassification, redenomination, recapitalization, split-up, combination, exchange of shares or other similar transaction, the Merger Consideration and any other dependent items shall be appropriately adjusted to provide to the holders of Company Shares the same economic and proportional effect as contemplated by this Agreement prior to such action and as so adjusted shall, from and after the date of such event, be the Merger Consideration or other dependent item, subject to further adjustment in accordance with this sentence; provided, however, that nothing in this Section 3.6 shall be constrained to permit the Company or Parent to take any action with respect to its securities that is prohibited by the terms of this Agreement.
Article
IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Subject to the disclosures expressly
set forth in the correspondingly numbered Section of the disclosure letter of the Company delivered to Parent and Merger Sub concurrently
with the parties’ execution of this Agreement (the “Company Disclosure Schedule”), the Company represents
and warrants to Parent and Merger Sub as follows:
Section
4.1 Organization
and Qualification.
(a)
The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction
of organization and has the requisite power and authority to own, lease, license and operate its assets and properties and to carry
on its business as it is now being conducted. The Company is duly licensed or qualified to do business, and is in good standing,
in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets
owned or leased by it makes such licensing or qualification necessary, except where such failure to be so duly approved, qualified
or licensed and in good standing has not had and would not reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect. Section 4.1(a) of the Company Disclosure Schedule lists each jurisdiction in which the
Company is qualified to do business as a foreign entity and its directors and officers.
(b)
Complete, true and correct copies of the Company’s certificate of incorporation, as amended (the “Company
Certificate”), and bylaws, as amended (the “Company Bylaws”), have been made available to Parent in
the Dataroom, and no other such documents are binding upon the Company. The Company Certificate and the Company Bylaws are in full
force and effect. The Company is not in violation of any provision of the Company Certificate or the Company Bylaws. The Company
has made available to Parent in the Dataroom copies of the charters of each committee of the Company’s Board of Directors
and any code of conduct or similar policy adopted by the Company.
Section 4.2 Capitalization.
(a)
The authorized capital stock of the Company consists of 15,000,000 Company Shares and 5,000,000 shares of preferred
stock, par value $0.001 per share (“Company Preferred Stock”). As of December 29, 2014, (i) 14,204,240
Company Shares were issued and outstanding, (ii) no shares of Company Preferred Stock were issued or outstanding, (iii) 537
Company Shares were held in the treasury of the Company, (iv) 3,140 Company Shares were reserved for issuance upon exercise
of Company Stock Options, and (v) 787,855 Company Shares were reserved for issuance upon exercise of Company Warrants. Each
issued and outstanding share of capital stock of the Company is, and each share of Company Common Stock reserved for issuance as
specified above will be, upon issuance on the terms and conditions specified in the instruments pursuant to which it is issuable,
duly authorized, validly issued, fully paid, nonassessable. All of the issued and outstanding shares of capital stock of the Company
were issued in compliance with applicable Laws. None of the issued and outstanding shares of capital stock of the Company were
issued in violation of any agreement, arrangement or commitment to which the Company is a party or is subject to or in violation
of any preemptive or similar rights of any Person. All of the issued and outstanding Company Shares are owned of record by the
Persons set forth in Section 4.2(a) of the Company Disclosure Schedule. Since the Balance Sheet Date, there are no dividends
or distributions which have accrued or been declared but are unpaid upon any of the Company’s capital stock.
(b)
Except for Company Stock Options set forth in Section 4.2(c) of the Company Disclosure Schedule and Company
Warrants set forth in Section 4.2(d) of the Company Disclosure Schedule, as of the date hereof, there are no outstanding
subscriptions, options, calls, Contracts, commitments, understandings, restrictions, arrangements, rights or warrants, including
any right of conversion or exchange under any outstanding security, instrument or other agreement and also including any rights
plan or other anti-takeover agreement, obligating the Company or any Subsidiary of the Company to issue, deliver or sell, or cause
to be issued, delivered or sold, Company Shares or obligating the Company or any Subsidiary of the Company to grant, extend or
enter into any such agreement or commitment. As of the date hereof, there are no obligations, contingent or otherwise, of the Company
or its Subsidiaries to (i) repurchase, redeem or otherwise acquire any Company Shares or the capital stock or other equity
interests of any Subsidiary of the Company or (ii) provide material funds to, or make any material investment in (in the form
of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of, any Person other than
a Company’s Subsidiary. Except as set forth in Section 4.2(b) of the Company Disclosure Schedule, there are no outstanding
stock appreciation rights or similar derivative securities or rights of the Company or any of its Subsidiaries. There are no bonds,
debentures, notes or other Indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which stockholders of the Company may vote. Except for the Company Stockholders Agreement,
there are no voting trusts, irrevocable proxies or other agreements or understandings to which the Company or any Subsidiary of
the Company is a party or is bound with respect to the voting of any Company Shares. Except for the Company Registration Rights
Agreements, the Company has not agreed to register any securities under the Securities Act or under any state securities law or
granted registration rights to any Person (except rights which have terminated or expired). Neither the Company nor any of its
Subsidiaries has any outstanding obligations in respect of prior acquisitions of businesses to pay, in the form of securities,
cash or other property, any portion of the consideration payable to the seller or sellers in such transaction.
(c)
Section 4.2(c) of the Company Disclosure Schedule sets forth a complete and correct list as of the date hereof,
of all holders of outstanding Company Stock Options, including the date of grant, the number of Company Shares subject to each
such option, the exercise price per Company Share, the exercise and vesting schedule, the number of Company Shares remaining subject
to each such option, the Company Stock Options that are incentive stock options for purposes of the Code, and the maximum term
of each such option. Complete and correct copies of (i) all written agreements, including amendments thereto, evidencing the
grant of Company Stock Options and (ii) all Company Board consents approving each Company Stock Option, including the written
agreement and amendments thereto, have been made available to Parent in the Dataroom. None of the Company Stock Options were granted
with exercise prices below fair market value on the date of grant. All Company Stock Options have been validly issued and properly
approved by the Company Board (or a duly authorized committee or subcommittee thereof) in compliance with all applicable Law and
recorded on the Company financial statements in accordance with GAAP, and no such grants involved any “back dating,”
“forward dating” or similar practices with respect to such grants.
(d)
The Company has previously made available to Parent in the Dataroom complete and correct copies of each Company Warrant.
Section 4.2(d) of the Company Disclosure Schedule sets forth a complete and correct list as of the date hereof, of all holders
of outstanding Company Warrants, including the date of issuance, the number of Company Shares subject to each such warrant, the
exercise price per Company Share, the exercise and vesting schedule, the number of Company Shares remaining subject to each such
warrant, and the maximum term of each such warrant. Complete and correct copies of the relevant forms of written agreements, including
forms of amendments thereto, evidencing the issuance of Company Warrants have been made available to Parent in the Dataroom. All
Company Warrants have been validly issued and properly approved by the Company Board (or a duly authorized committee or subcommittee
thereof) in compliance with all applicable Law and recorded on the Financial Statements in accordance with GAAP.
Section 4.3 Subsidiaries.
(a)
Each Subsidiary of the Company is duly organized, validly existing and in good standing under the laws of its jurisdiction
of organization and has the requisite power and authority to own, lease, license and operate its assets and properties and to carry
on its business as it is now being conducted, and each Subsidiary of the Company is qualified to transact business, and is in good
standing, in each jurisdiction in which the properties owned, leased, licensed or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where such failure to be so duly approved, qualified or licensed and
in good standing has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material
Adverse Effect.
(b)
All of the outstanding shares of capital stock or other equity interests of each Subsidiary of the Company are validly
issued, fully paid, nonassessable and free of preemptive rights and are owned directly or indirectly by the Company as set forth
in Section 4.3(b) of the Company Disclosure Schedule. All of the issued and outstanding shares of capital stock of each
Subsidiary of the Company were issued in compliance with applicable Laws. None of the issued and outstanding shares of capital
stock of any Subsidiary of the Company were issued in violation of any agreement, arrangement or commitment to which any Subsidiary
of the Company or the Company is a party or is subject to or in violation of any preemptive or similar rights of any Person. There
are no subscriptions, options, warrants, voting trusts, proxies or other commitments, understandings, restrictions or arrangements
relating to the issuance, sale, voting or transfer of any shares of capital stock or other equity interests of any Subsidiary of
the Company, including any right of conversion or exchange under any outstanding security, instrument or agreement. The Company
has no material investment in any entity other than its Subsidiaries.
(c)
Section 4.3(c) of the Company Disclosure Schedule contains, for each Subsidiary of the Company, a complete
and accurate list of each jurisdiction in which such Subsidiary of the Company is qualified to do business as a foreign entity.
The Company has heretofore furnished to Parent in the Dataroom a complete and correct copy of each of the Company’s Subsidiaries’
Articles of Incorporation, Certificate of Incorporation, Articles of Organization or Operating Agreement, as the case may be, (collectively,
the “Subsidiary Charters”) and Bylaws (collectively, the “Subsidiary Bylaws”), each as amended
to date. The Subsidiary Charters and the Subsidiary Bylaws are in full force and effect. The Company’s Subsidiaries are not
in violation of any provision of the applicable Subsidiary Charters or the Subsidiary Bylaws. The Company has made available to
Parent in the Dataroom copies of, the charters of each committee of the Board of Directors of each Subsidiary of the Company and
any code of conduct or similar policy adopted by each Subsidiary of the Company.
Section 4.4 Authority; Non-Contravention; Approvals.
(a)
The Company has all necessary power and authority to execute and deliver this Agreement, to perform its obligations
hereunder and, subject to obtaining the Company Stockholder Approval, to consummate the Merger and the other transactions contemplated
by this Agreement. Subject to obtaining the Company Stockholder Approval, the execution, delivery and performance by the Company
of this Agreement, and the consummation by the Company of the Merger and the other transactions contemplated by this Agreement,
have been duly authorized by all necessary corporate action on the part of the Company, and no other actions on the part of the
Company are necessary to authorize this Agreement or to consummate the Merger or the other transactions contemplated by this Agreement
other than (i) obtaining the Company Stockholder Approval, (ii) the filing and recordation of the Certificate of Merger as required
by the DGCL and (iii) filings by the Company required by the HSR Act. This Agreement has been duly executed and delivered by the
Company and, assuming the due authorization, execution and delivery by Parent and Merger Sub, constitutes a valid and binding obligation
of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar Laws relating to or affecting the rights and remedies of creditors generally
and the effect of general principles of equity (regardless of whether such enforceability is considered in a Proceeding in equity
or at Law). The affirmative vote of the holders of a majority of the issued and outstanding Company Shares (i) entitled to vote
at a duly called and held meeting of the Company stockholders or (ii) action by written consent as permitted by the Company Bylaws,
will be the only vote of the holders of capital stock of the Company necessary to approve and adopt this Agreement and the Merger
(the “Company Stockholder Approval”).
(b)
At a meeting duly held on December 30, 2014, at which all directors were present, the Company Board unanimously (i) determined
that this Agreement, the Merger and the other transactions contemplated hereby, are advisable, fair to and in the best interests
of the Company and the holders of the Company Shares, (ii) approved and adopted this Agreement, the Merger and the transactions
contemplated hereby and (iii) resolved to recommend approval and adoption of this Agreement and the Merger by the Company’s
stockholders. Such determinations, approvals, resolutions and recommendations are in effect as of the date hereof. No takeover
statute or other similar statute or regulation relating to the Company is applicable to the Merger or the other transactions contemplated
by this Agreement.
(c)
Except as disclosed in Section 4.4(c) of the Company Disclosure Schedule, the execution, delivery and performance
of this Agreement by the Company and the consummation of the Merger and the other transactions contemplated hereby do not and will
not violate, conflict with, give rise to the right to modify or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or acceleration under, or require any offer to purchase
or any prepayment of any debt, or result in the creation of any Lien, security interest or encumbrance upon any of the properties
or assets of the Company or any of its Subsidiaries under any of the terms, conditions or provisions of (i) the respective
certificate of incorporation or bylaws or similar governing documents of the Company or any of its Subsidiaries, (ii) any
statute, Law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Entity
applicable to the Company or any of its Subsidiaries or any of their respective properties or assets, subject in the case of consummation,
to obtaining the Company Required Statutory Approvals and the Company Stockholder Approval, (iii) any Company Permit, or (iv) any
Contract to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of
their respective properties or assets may be bound or affected, other than such violations, conflicts, rights to modify, breaches,
defaults, terminations, accelerations or creations of Liens, security interests or encumbrances that would not, individually or
in the aggregate, reasonably be expected to result in a Company Material Adverse Effect.
(d)
Except as disclosed in Section 4.4(d) of the Company Disclosure Schedule and for (i) obtaining the Company
Stockholder Approval, (ii) the filings by the Company required by the HSR Act, (iii) the filing of the Certificate of
Merger as required by the DGCL and (iv) the filings with TTB (the filings and approvals referred to in clauses (i), (ii), (iii)
and (iv) collectively, the “Company Required Statutory Approvals”), no declaration, filing or registration with,
or notice to, or authorization, consent or approval of, any Governmental Entity or other Person is necessary for the execution
and delivery of this Agreement by the Company or the consummation by the Company of the Merger or the other transactions contemplated
hereby, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not made
or obtained, as the case may be, would not, individually or in the aggregate, reasonably be expected to have a Company Material
Adverse Effect.
Section 4.5 Reports and Financial Statements.
(a)
The Company has made available to Parent in the Dataroom copies of the Company’s audited consolidated financial
statements as of and for the fiscal years ended December 31, 2012 and 2013, together with the notes thereto (the “Audited
Financial Statements”). The Audited Financial Statements were prepared in accordance with GAAP applied on a consistent
basis throughout the periods indicated (except as otherwise stated in such financial statements, including the related notes) and
each fairly presents, in all material respects, the consolidated financial position, results of operations and cash flows of the
Company and its consolidated Subsidiaries as at the respective dates thereof and for the respective periods indicated therein,
except as otherwise set forth in the notes thereto.
(b)
The Company has made available to Parent in the Dataroom copies of Company’s unaudited consolidated financial
statements, including the notes thereto, for the nine (9) month period ended September 30, 2014 (the “Unaudited Financial
Statements”). The Unaudited Financial Statements were prepared in accordance with GAAP on a basis consistent with the
Audited Financial Statements and are correct and complete and fairly present, in all material respects, the financial position
and condition of the Company at the date thereof and the results of operations for the period covered thereby (subject to normal
year-end adjustments and the absence of complete footnotes) (the Audited Financial Statements and the Unaudited Financial Statements,
together, the “Financial Statements”).
(c)
The Company has disclosed to its auditors and the audit committee of the Company Board (and made available to Parent
in the Dataroom a summary of the significant aspects of such disclosure) (i) any significant deficiencies or material weaknesses
in the design or operation of internal control over financial reporting and (ii) any fraud, whether or not material, that
involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.
(d)
Since October 4, 2012, the Company has not received written notice of any SEC inquiries or investigations or other
governmental inquiries or investigations (pending or threatened) in each case regarding any accounting practices of the Company
or any malfeasance by any director or executive officer of the Company. The Company has not conducted any internal investigations
regarding accounting or revenue recognition discussed with, reviewed by or initiated at the direction of the chief executive officer,
chief financial officer, general counsel or similar legal officer, the Company Board or any committee thereof.
Section 4.6 Absence of Undisclosed Liabilities. Except as set forth in Section 4.6 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has any Liabilities that are required to be reported by GAAP, except such Liabilities: (a) as and to the extent set forth on the audited consolidated balance sheet of the Company and its Subsidiaries as of December 31, 2013 (the “Balance Sheet Date”); or (b) incurred after the Balance Sheet Date in the ordinary course of business consistent with past practice which, individually or in the aggregate, would not have a Company Material Adverse Effect. Since the Balance Sheet Date, the Company has collected its accounts receivable and paid its accounts payable in the ordinary course of business consistent with past practice.
Section 4.7 Litigation. Except as set forth in Section 4.7 of the Company Disclosure Schedule, there is no Proceeding pending, or, to the Knowledge of the Company, threatened, against the Company, any of its Subsidiaries or any of their respective directors, managers or officers (in their capacities as such or relating to their employment, services or relationship with the Company or any of its Subsidiaries) or that would materially relate to or affect the Company or any of its Subsidiaries. Neither the Company nor any Subsidiary has committed a violation of any judgment, decree, injunction or order of any Governmental Entity applicable to the Company or any Subsidiary or any of their respective properties or assets. Since January 1, 2013, there has not been any internal investigations or inquiries conducted by the Company, the Company Board (or any committee thereof) or any other Person at the request of any of the foregoing concerning any financial, accounting, Tax, conflict of interest, self-dealing, fraudulent or deceptive conduct or other misfeasance or malfeasance issues. Neither the Company nor its Subsidiaries, nor, to the Knowledge of the Company, any of the directors, managers or officers of the Company or any of its Subsidiaries (in their capacities as such or relating to their employment, services or relationship with the Company or any of its Subsidiaries as applicable) is subject to any judgment, decree, injunction or order of any Governmental Entity. Except as set forth in Section 4.7 of the Company Disclosure Schedule, neither the Company nor its Subsidiaries has any Proceeding pending against any other Person.
Section 4.8 Absence of Certain Changes or Events. Except as set forth in Section 4.8 of the Company Disclosure Schedule, since September 30, 2014, the Company and its Subsidiaries have conducted their businesses in the ordinary course of business consistent with past practice and there has not been:
(a)
any circumstance or event, or series of circumstances or events, which, individually or in the aggregate, has had
or would reasonably be expected to have a Company Material Adverse Effect;
(b)
any material change in any method of accounting or accounting practice by the Company or any Subsidiary, except for
any such change required by reason of a concurrent change in GAAP;
(c)
any material revaluation by the Company or any Subsidiary of a material asset (including, without limitation, any
material writing down of the value of inventory or material writing-off of notes or accounts receivable);
(d)
any transaction or commitment made, or any Contract or agreement entered into, by the Company or any Subsidiary,
relating to its assets or business (including, without limitation, the acquisition, disposition, leasing or licensing of any tangible
or intangible assets) or any relinquishment by the Company or any Subsidiary of any Contract or other right, in either case, material
to the Company and Subsidiary taken as a whole, other than transactions and commitments in the ordinary course of business consistent
with past practice and those contemplated by this Agreement;
(e)
any declaration, setting aside or payment of any dividend (whether in cash, stock or property) or other distribution
in respect of the Company’s capital stock or any redemption, purchase or other acquisition of any of the Company’s
securities;
(f)
any split, combination or reclassification of any of the Company’s capital stock or any issuance or the authorization
of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock;
(g)
any amendment of any material term of any outstanding security of the Company or any Subsidiary;
(h)
any issuance by the Company or any Subsidiary of any notes, bonds or other debt securities or any capital stock or
other equity securities or any securities convertible, exchangeable or exercisable into any capital stock or other equity securities,
except for the issuance of any Company Shares pursuant to the exercise of any Company Stock Options and Company Warrants in existence
prior to the date hereof;
(i)
any material incurrence, assumption or guarantee by the Company or any Subsidiary of any Indebtedness for borrowed
money other than in the ordinary course of business and in amounts and on terms consistent with past practices;
(j)
any creation or assumption by the Company or any Subsidiary of any material Lien on any material asset(s) (alone
or in the aggregate) other than in the ordinary course of business consistent with past practice;
(k)
any making of any material loan, advance or capital contributions to or investment in any entity or person other
than loans, advances or capital contributions to or investments in any Subsidiary and except for cash advances to employees for
reimbursable travel and other reasonable business expenses, in each case made in the ordinary course of business consistent with
past practice;
(l)
any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets
of the Company or any Subsidiary which, individually or in the aggregate, has had or would reasonably be expected to have a Company
Material Adverse Effect;
(m)
any material grant of equity or other compensation, or increase in the benefits under, or the establishment, material
amendment or termination of, any Company Benefit Plan covering current or former employees, officers, consultants, or directors
of the Company or any Subsidiary, or any material increase in the compensation payable or to become payable to or any other material
change in the employment terms for any current or former directors or officers of the Company or any of its Subsidiaries or any
other employee earning noncontingent cash compensation in excess of $100,000 per year;
(n)
any entry by the Company or any Subsidiary into any employment, consulting, severance, change in control, retention,
termination or indemnification agreement with any current or former director, consultant or officer of the Company or any Subsidiary,
entry into any such agreement with any person for a noncontingent cash amount in excess of $250,000 per year or outside the ordinary
course of business, or entry into any employment agreement other than on an at-will basis;
(o)
any labor dispute, other than routine individual grievances, or any activity or Proceeding by a labor union or representative
thereof to organize any employees of the Company or any of its subsidiaries for the purposes of forming a labor union or labor
organization, or for selecting a labor union or labor organization as a collective bargaining representative, for employees who
were not subject to a collective bargaining agreement as of September 30, 2014 or any lockouts, strikes, slowdowns, work stoppages
or threats thereof by or with respect to any employees;
(p)
any authorization or commitment with respect to, any single capital expenditure that was in excess of $1,000,000
individually or $5,000,000 in the aggregate; or
(q)
any authorization of, or agreement by the Company or any Subsidiary to take, any of the actions described in this
Section 4.8, except as expressly contemplated by this Agreement.
Section 4.9 Compliance with Applicable Law; Permits.
(a)
Except as set forth in Section 4.9 of the Company Disclosure Schedule, the Company and its Subsidiaries hold
all material authorizations, permits, licenses, certificates, easements, concessions, franchises, variances, exemptions, orders,
consents, registrations, approvals and clearances of all Governmental Entities (including, without limitation, any Governmental
Entity engaged in the regulation of the Company’s products) which are required for the Company and its Subsidiaries to own,
lease, license and operate their respective properties and other assets and to carry on their respective business in the manner
as they are being conducted as of the date hereof (the “Company Permits”), and all the Company Permits are valid,
and in full force and effect other than any Company Permit which if not held or not valid, as the case may be, would not individually
or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. Section 4.9 of the Company Disclosure
Schedule sets forth a list of all material Company Permits.
(b)
The Company and its Subsidiaries are, and have been since January 1, 2013, in compliance with the terms of the Company
Permits and all applicable Laws relating to the Company and its Subsidiaries or their respective businesses, assets or properties,
except where the failure to be in compliance with the terms of the Company Permits or such applicable Law would not, individually
or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. Since January 1, 2013, neither the Company
nor any of its Subsidiaries has received any written notification from any Governmental Entity (i) asserting that the Company
or any of its Subsidiaries is not in compliance with any Law or Company Permit, or (ii) threatening to revoke any Company
Permit.
Section 4.10 Company Material Contracts; Defaults.
(a)
Except as set forth in Section 4.10(a) of the Company Disclosure Schedule and previously made available to
Parent, neither the Company nor any of its Subsidiaries is a party to, and none of their respective assets, businesses or operations
is bound by, any Contract (whether written or oral), or groups of related Contracts with the same party or group of parties, that
(i) would constitute a “material contract” (as such term is defined in Item 601(b)(10) of Regulation S-K promulgated
under the Securities Act (it being understood that to the extent that a material contract described under Item 601(b)(10) is duplicative
with any of the Contracts set forth in clauses (ii) through (xiii) of this Section 4.10(a), the thresholds set forth in
clauses (ii) through (xiii) of this Section 4.10(a) shall control for disclosure purposes to the extent there is any conflict
with such material contract definition); (ii) relate to borrowed money or other Indebtedness in excess of $1,000,000 or the
mortgaging, pledging or otherwise placing a Lien on any material asset or material group of assets of the Company or any of its
Subsidiaries, the foreclosure of which would reasonably be expected to have, individually or in the aggregate a Company Material
Adverse Effect; (iii) require the payment or receipt of $1,000,000 or more per year which are not cancelable by the Company
on 30 days’ or less notice without premium or penalty or other cost of any kind or nature; (iv) relate to any joint
venture, partnership or other similar agreements to which the Company or any of its Subsidiaries is a party; (v) relate to
lease agreements to which the Company or any of its Subsidiaries is a party with annual lease payments in excess of $1,000,000;
(vi) relate to standby letter of credits obtained by the Company or any of its Subsidiaries has in an amount in excess of
$100,000 and Contracts under which the Company or any of its Subsidiaries has advanced or loaned any other Person or entity an
amount in excess of or guaranteed an amount in excess of $100,000; (vii) relate to agreements under which the Company has
granted any Person or entity registration rights (including, without limitation, demand and piggy-back registration rights); (viii) relate
to agreements under which the Company or any of its Subsidiaries has granted any right of first refusal or similar right in favor
of any third party with respect to any material portion of the Company’s or any of its Subsidiaries’ properties or
assets; (ix) (A) purport to restrict or prohibit the Company or any of its Subsidiaries from engaging or competing in
any material line of business or activity, with any Person or in any geographic area, or (B) would have any such effect on
Parent or any of its Affiliates after the consummation of the Merger or the Closing Date; (x) (A) grants any exclusive
supply or exclusive distribution agreement or other material exclusive rights, or (B) grants any “most favored nation”
rights or other preferential pricing terms with respect to any Company Product or service; (xi) relate to any executory obligations
relating to the acquisition or disposition of all or any portion of any material business of the Company or any of its Subsidiaries
(whether by merger, sale of stock, sale of assets, business combination or otherwise); (xii) the Company or any of the Company’s
Subsidiary is a party with any Governmental Entity and which requires the payment or receipt of $1,000,000 or more per year; and
(xiii) to the extent not included within the foregoing, any Contract that the termination of which would result in a Company
Material Adverse Effect (the items described in clauses (i) through (xiii) hereof, collectively, the “Company Material
Contracts”). The Company has made available to Parent in the Dataroom a correct and complete copy of each Company Material
Contract listed in Section 4.10(a) of the Company Disclosure Schedule (including all exhibits and schedules thereto).
(b)
Each of the Company Material Contracts is valid and binding on the Company or its Subsidiary party thereto and, to
the Knowledge of the Company, each other Person party thereto, and is in full force and effect and enforceable against the Company
or such Subsidiary, as the case may be, in accordance with its terms, except as enforcement may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or
affecting creditors’ rights or by general equity principles and (ii) to the extent applicable, securities laws limitations
on the enforceability of provisions regarding indemnification in connection with the sale or issuance of securities. No Company
Material Contract will, by its terms, terminate as a result of the transactions contemplated by this Agreement or require any consent
from or notice to any Person thereto in order to remain in full force and effect immediately after the Effective Time.
(c)
Neither the Company nor any of its Subsidiaries is in material violation, breach or default under any of the Company
Material Contracts, and there has not occurred any event that, with the lapse of time or the giving of notice or both, would constitute
such a violation, breach or default. The Company has delivered or made available to Parent in the Dataroom a list of those Persons
who, to the Company’s Knowledge, have alleged or claimed that the Company or any of its Subsidiaries, or any sublicensee
of the Company or any of its Subsidiaries, is in material violation, breach or default under any Company Material Contract.
Section 4.11 Taxes.
(a)
Each of the Company and its Subsidiaries has (i) duly and timely filed with the appropriate Governmental Entity
all Tax Returns required to be filed by it (taking into account any applicable extensions), and all such Tax Returns are true,
correct and complete in all material respects and prepared in compliance with all applicable Laws and (ii) timely paid all
Taxes due and owing (whether or not shown due on any Tax Returns). Neither the Company nor any of its Subsidiaries currently is
the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by a Governmental Entity
in a jurisdiction where the Company and its Subsidiaries do not file Tax Returns that the Company or any of its Subsidiaries is
or may be subject to taxation by that jurisdiction. Neither the Company nor any of its Subsidiaries has commenced activities in
any jurisdiction which will result in an initial filing of a Tax Return with respect to Taxes imposed by a Governmental Entity
that it had not previously been required to file in the immediately preceding taxable period.
(b)
The unpaid Taxes of the Company and its Subsidiaries did not, as of September 30, 2014, exceed the reserve for Tax
Liabilities (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set
forth on the face of the balance sheets (rather than in any notes thereto) contained in the Financial Statements. Since September
30, 2014, neither the Company nor any of its Subsidiaries has incurred any Liability for Taxes outside the ordinary course of business
or otherwise inconsistent with past custom and practice.
(c)
There are no Liens for Taxes upon any property or asset of the Company or any Subsidiary thereof, except for Liens
for current Taxes the payment of which is not yet delinquent, or for Taxes contested in good faith through appropriate proceedings
and reserved against in accordance with GAAP.
(d)
Except as set forth in Section 4.11(d) of the Company Disclosure Schedule, no deficiencies for Taxes with
respect to any of the Company and its Subsidiaries have been set forth or claimed in writing, or proposed or assessed by a Governmental
Entity. There are no pending or, to the Knowledge of the Company, proposed or threatened audits, investigations, disputes or claims
or other actions for or relating to any Liability for Taxes with respect to any of the Company and its Subsidiaries. No material
issues relating to Taxes of the Company or any Subsidiary of the Company were raised by the relevant Governmental Entity in any
completed audit or examination that would reasonably be expected to recur in a later taxable period. The Company has made available
to Parent in the Dataroom true and complete copies of federal, state and local income Tax Returns of each of the Company and its
Subsidiaries and their predecessors for the years ended December 31, 2010, 2011 and 2012, and true and complete copies of all examination
reports and statements of deficiencies assessed against or agreed to by any of the Company and its Subsidiaries or any predecessor,
with respect to Taxes. None of the Company, any of its Subsidiaries or any predecessor has waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, or has made any request in
writing for any such extension or waiver. There is not currently in effect any power of attorney authorizing any Person to act
on behalf of the Company, or receive information relating to the Company, with respect to any Tax matter.
(e)
Neither the Company nor any of its Subsidiaries has requested or received any ruling from any Governmental Entity,
or signed any binding agreement with any Governmental Entity (including, without limitation, any advance pricing agreement) that
would affect any amount of Tax payable after the Closing Date and has not made any request for issuance of a ruling from a Governmental
Entity on behalf of the Company or any of its Subsidiaries (regardless of whether the requested ruling is still pending or withdrawn).
(f)
Each of the Company and its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid
in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and
all Tax Returns (including without limitation all IRS Forms W-2 and 1099) required with respect thereto have been properly completed
and timely filed with, and supplied to, the appropriate parties.
(g)
Except for any such customary agreements with customers, vendors, lenders, lessors or the like entered into in the
ordinary course of business (each of which is not specifically entered into to address Taxes), neither the Company nor any of its
Subsidiaries is a party to or bound by or has any obligation under any Tax sharing, allocation or indemnification agreement or
similar contract or arrangement or any agreement that obligates it to make any payment computed by reference to the Taxes, taxable
income or taxable losses of any other Person.
(h)
Except for the affiliated group of which the Company is the common parent, each of the Company and its Subsidiaries
is not and has never been a member of an affiliated group of corporations within the meaning of Section 1504 of the Code or
any group that has filed a combined, consolidated or unitary Tax Return. Neither the Company nor any of its Subsidiaries is liable
for the Taxes of any Person (including an individual, corporation, general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union or other entity or Governmental Entity) other than the Company and
its Subsidiaries (i) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign
law), (ii) as a transferee or successor, (iii) by Contract, or (iv) otherwise.
(i)
Neither the Company nor any of its Subsidiaries is a party to or subject to any joint venture, partnership or other
agreement or arrangement which is treated as a partnership for federal income Tax purposes.
(j)
Neither the Company nor any of its Subsidiaries has constituted either a “distributing corporation” or
a “controlled corporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355
of the Code.
(k)
Neither the Company nor any of its Subsidiaries has taken any action, failed to take any action, or knows of any
fact that would be reasonably expected to prevent the Merger from qualifying as a “reorganization” within the meaning
of Section 368(a) of the Code.
(l)
Neither the Company nor any of its Subsidiaries has been a party to a “reportable transaction,” as such
term is defined in Treasury Regulations Section 1.6011-4(b)(1) (other than such transactions that have been properly reported)
or any other transaction requiring disclosure under analogous provisions of state, local or foreign Tax law.
(m)
Except as set forth in Section 4.11(m) of the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries has made or agreed to make, and is not required to make, any change in method of accounting previously used by
it in any Tax Return which change in method would require an adjustment to its income pursuant to Section 481(a) of the Code
(or any similar provision) on any Tax Return for any taxable period for which the Company or any of its Subsidiaries has not yet
filed a Tax Return. No application is pending with any Governmental Entity requesting permission to make any change in any accounting
method that would require such an adjustment, nor has the Company or any of its Subsidiaries received any notice that a Governmental
Entity proposes to require a change in method of accounting used in any Tax Return which has been filed by the Company or any of
its Subsidiaries that would require such an adjustment.
(n)
The Company has not taken any action not in accordance with past practice that would have the effect of deferring
a measure of Tax from a period (or portion thereof) ending on or before the Execution Date to a period (or portion thereof) beginning
after the Execution Date. Except to the extent adequately reserved for in the Unaudited Financial Statements, the Company has no
deferred income or other Tax Liability arising out of any transaction, including, without limitation, any (i) intercompany
transaction (as defined in Treasury Regulations Section 1.1502-13), (ii) the disposal of any property in a transaction
accounted for under the installment method pursuant to Section 453 of the Code, (iii) excess loss account (as defined
in Treasury Regulations Section 1.1502-19) with respect to the stock of any Subsidiary of the Company, (iv) use of the
long-term contract method of accounting, or (v) receipt of any prepaid amount on or before the Execution Date.
(o)
Neither the Company nor any of its Subsidiaries has made an election under Section 108(i) of the Code (or any
corresponding provision of state, local or foreign Law).
(p)
The Company has made available to Parent in the Dataroom the amount of any net operating loss, net capital loss,
unused investment or other credit, unused foreign tax or excess charitable deduction available for use by the Company or any of
its Subsidiaries. Except as disclosed by the Company to Parent in the Dataroom, there is currently no limitation on the use of
the Tax attributes of the Company under Sections 269, 382, 383, 384 or 1502 of the Code (and similar provisions of state, local
or foreign Tax Law).
(q)
Neither the Company nor any of its Subsidiaries has been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code at any time during the preceding five (5) years.
(r)
Neither the Company nor any of its Subsidiaries has a permanent establishment (within the meaning of an applicable
Tax treaty) or otherwise has an office or fixed place of business in a jurisdiction outside of its place of incorporation.
Section 4.12 Employee Benefit Plans; ERISA.
(a)
Section 4.12(a) of the Company Disclosure Schedule includes a complete list, as of the date hereof, of each
Company Benefit Plan. With respect to each of the written Company Benefit Plans, the Company has made available to Parent true
and complete copies of the following documents to the extent applicable: (i) the governing plan document, all amendments thereto
and related trust documents, group contracts, insurance policies or other funding arrangements, and amendments thereto; (ii) the
three most recently filed Forms 5500 annual returns and all schedules thereto, including any audited financial statements and auditors’
opinions; (iii) the most recent favorable determination, opinion or advisory letter issued by the IRS; (iv) the actuarial
report, statement of assets and liabilities, and annual nondiscrimination testing results for the three most recently completed
plan years; (v) the most recent summary plan description and any summaries of material modifications thereto; (vi) a
summary of the material terms of any Company Benefit Plan that is not in writing; and (vii) any filings, applications or submissions
under the IRS’ Voluntary Correction Program or the Department of Labor’s Delinquent Filer Voluntary Compliance Program
or the Voluntary Fiduciary Correction Program.
(b)
The Company and its Subsidiaries have operated and administered each of the Company Benefit Plans in accordance with
their terms and all the provisions of Laws and regulations applicable to the Company Benefit Plans. All contributions, reserves
or premium payments required to be made or accrued as of the date hereof with respect to the Company Benefit Plans have been timely
paid or accrued by the Company and its Subsidiaries as applicable. The Company and its Subsidiaries have satisfied all reporting
and disclosure requirements under the Code and ERISA that are applicable to the Company Benefit Plans. No event or condition exists
which would reasonably be expected to subject the Company or any of its Subsidiaries to Liability in connection with the Company
Benefit Plans or any plan, program, or policy sponsored or contributed to by any of their respective ERISA Affiliates other than
the provision of benefits thereunder in the ordinary course. With respect to each applicable Company Benefit Plan, (i) there
are no pending or, to the Knowledge of the Company, threatened actions which have been asserted or instituted and which would reasonably
be expected to result in any Liability of the Company or any of its Subsidiaries (other than routine claims for benefits payable
in the ordinary course); (ii) there are no audits, inquiries or Proceedings pending or threatened by any governmental authority;
and (iii) there has been no breach of fiduciary duty (including violations under Part 4 of Subtitle B of Title I of ERISA)
which has resulted or would reasonably be expected to result in material Liability to the Company, any Company Subsidiary, or any
of their respective employees.
(c)
In no event will the execution and delivery of this Agreement or any other related agreement, the consummation of
the Merger or the transactions contemplated hereby or thereby, or the Company Stockholder Approval (either alone or in conjunction
with any other event, such as termination of employment) result in, cause the accelerated vesting, exercisability, funding or delivery
of, or increase the amount or value of, any material payment or benefit to any current or former employee, officer or director
of the Company or any of its Subsidiaries or any beneficiary or dependent thereof or result in a limitation on the right of the
Company or any of its Subsidiaries to amend, merge, terminate or receive a reversion of assets from any Company Benefit Plan or
related trust.
(d)
Section 4.12(d) of the Company Disclosure Schedule identifies each Company Benefit Plan that is intended to
be a “qualified plan” within the meaning of Section 401(a) of the Code or is intended to be similarly qualified
or registered under applicable foreign law (collectively, the “Company Qualified Plans”). Each Company Qualified
Plan that is intended to be tax-qualified under Section 401(a) of the Code has received a favorable determination or opinion
letter from the IRS that it is entitled to rely upon, and its accompanying trust is exempt from taxation under Section 501(a)
of the Code, and, to the Knowledge of the Company, no fact or event has occurred since the date of such letter that would reasonably
be expected to jeopardize the tax-qualified status of any such Company Qualified Plan or the tax-exempt status of its accompanying
trust.
(e)
Except as otherwise provided in Section 4.12(e) of the Company Disclosure Schedule, no Company Benefit Plan
provides health benefits (whether or not insured) with respect to employees or former employees (or any of their beneficiaries)
of the Company or any of its Subsidiaries after retirement or other termination of service (other than coverage or benefits (A) required
to be provided under Part 6 of Subtitle B of Title I of ERISA or any other similar applicable Law or (B) the full cost of
which is borne by the employee or former employee (or any of their beneficiaries)).
(f)
Except as otherwise provided in Section 4.12(f) of the Company Disclosure Schedule, neither the Company nor
any of its Subsidiaries or any of their respective ERISA Affiliates sponsor, contribute to or have any Liabilities with respect
to any Company Benefit Plan that: (i) is subject to Title IV or Section 302 of ERISA or Section 412, 430, 431 or
432 of the Code; (ii) is a Multiemployer Plan; or (iii) is a multiple employer plan that is described in Section 413
of the Code. No “reportable event,” as such term is defined in ERISA Section 4043(c), has occurred or is continuing
with respect to any Company Benefit Plan. No Company Benefit Plan that is or was subject to Title IV of ERISA has been terminated
and no proceeding has been initiated to terminate any such plan. Neither the Company nor any of its Subsidiaries or any of their
respective ERISA Affiliates has incurred or reasonably expects to incur, any Liability to the PBGC with respect to any Company
Benefit Plan, except for required premium payments, which payments have been timely made when due. The market value of assets under
each Company Benefit Plan that is subject to Title IV of ERISA or Section 412 of the Code equals or exceeds the present
value of all vested and nonvested Liabilities thereunder determined in accordance with PBGC methods, factors and assumptions applicable
to a plan terminating on the date of determination. No Company Benefit Plan that is subject to Part 3 of Subtitle B of Title I
of ERISA has incurred any “accumulated funding deficiency” (within the meaning of Section 302 of ERISA), whether
or not waived.
(g)
Neither the Company nor any of its Subsidiaries or any of their respective ERISA Affiliates has incurred or expects
to incur any “withdrawal liability” (as defined in ERISA Section 4201) under or with respect to any Company Benefit
Plan that is a Multiemployer Plan.
(h)
No Company Benefit Plan is maintained outside the jurisdiction of the United States, or covers any employee, contractor
or other service provider residing or working outside the United States.
(i)
There is no Contract, agreement, plan or arrangement to which the Company or any Subsidiary of the Company is a party,
including but not limited to the provisions of this Agreement, that, individually or collectively, would give rise to the payment
of any amount that would not be deductible pursuant to Section 162(m) of the Code.
(j)
No payment pursuant to any Company Benefit Plan or Company Benefit Arrangement between Company or a Subsidiary and
any “service provider” (as such term is defined in Section 409A of the Code and the United States Treasury Regulations
and IRS guidance thereunder), including, without limitation, the grant, vesting or exercise of any equity option, would subject
any Person to a tax pursuant to Section 409A of the Code, whether pursuant to the consummation of the Merger, any other transaction
contemplated by this Agreement or otherwise.
(k)
Each Company Benefit Plan, Company Benefit Arrangement, or other Contract, plan, program, agreement, or arrangement
that is a “nonqualified deferred compensation plan” (within the meaning of Section 409A(d)(1) of the Code) has
been operated in compliance with Section 409A of the Code, its Treasury regulations, and any applicable administrative guidance
relating thereto; and no additional tax under Section 409A(a)(1)(B) of the Code has been or is reasonably expected to be incurred
by a participant in any such Company Benefit Plan, Company Benefit Arrangement, or other Contract, plan, program, agreement, or
arrangement. Neither the Company nor any ERISA Affiliate is a party to, or otherwise obligated under, any Contract, agreement,
plan or arrangement that provides for the gross-up of taxes imposed by Section 409A(a)(1)(B) of the Code.
(l)
Except as set forth on Section 4.12(l) of the Company Disclosure Schedule, no amount that could be received
(whether in cash or property or the vesting of property), as a result of the execution and delivery of this Agreement or any other
related agreement, the consummation of the transactions contemplated hereby or thereby, or the stockholder approval of the Merger
(either alone or in conjunction with any other event, such as termination of employment), by any employee, officer or director
of the Company or any Subsidiary of the Company who is a “disqualified individual” (as such term is defined in Treasury
Regulation Section 1.280G-1) under any Company Benefit Plan, Company Benefit Arrangement or otherwise could be characterized as
a “parachute payment” (as defined in Section 280G(b)(2) of the Code). The Company has made available to Parent all
necessary information to determine, as of the date hereof, the estimated maximum amount that could be paid to each disqualified
individual in connection with the transactions contemplated by this Agreement under all employment, severance and termination agreements,
other compensation arrangements, Company Benefit Arrangements and Company Benefit Plans currently in effect, assuming that the
individual’s employment with the Company is terminated immediately after the Effective Time. The Company has made available
to Parent in the Dataroom (i) the grant dates, exercise prices and vesting schedules applicable to each Company Option granted
to the individual; (ii) the “base amount” (as defined in Section 280G(b)(e) of the Code) for each such individual as
of the date of this Agreement; and (iii) the maximum additional amount that the Company has an obligation to pay to each disqualified
individual to reimburse the disqualified individual for any excise tax imposed under Section 4999 of the Code with respect to the
disqualified individual’s excess parachute payments (including any taxes, interest or penalties imposed with respect to the
excise tax).
Section 4.13 Labor and Other Employment Matters.
(a)
Except as set forth on Section 4.13(a) of the Company Disclosure Schedules, as of the date hereof, (i) no
work stoppage, slowdown, lockout, labor strike, grievances, arbitration or other material labor dispute against the Company or
any of its Subsidiaries by employees is pending or, to the Knowledge of the Company, threatened; (ii) neither the Company
nor any of its Subsidiaries is delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or
other direct compensation for any services performed for it or amounts required to be reimbursed to such employees; (iii) for
the past four (4) years, the Company and each of its Subsidiaries have been in material compliance with all applicable Laws respecting
labor, employment, fair employment practices, terms and conditions of employment, immigration, workers’ compensation, occupational
safety, plant closings, layoffs, reductions in force and wage and hours; (iv) the Company and each of its Subsidiaries has
withheld all amounts required by Law or by agreement to be withheld from the wages, salaries, and other payments to employees and
is not liable for any arrears of wages or any Taxes or any penalty for failure to comply with any of the foregoing; (v) neither
the Company nor any of its Subsidiaries is liable for any material payment to any trust or other fund or to any Governmental Entity,
with respect to unemployment compensation benefits, social security or other benefits or obligations for employees (other than
routine payments to be made in the ordinary course of business consistent with past practice); (vi) other than as made available
to Parent in the Dataroom, there are no pending claims against the Company or any of its Subsidiaries under any workers’
compensation plan or policy or for long term disability; (vii) there are no controversies pending or, to the Knowledge of
the Company, threatened (including threatened lawsuits or claims), between the Company or any of its Subsidiaries and any of their
respective current or former employees, which controversies have or would reasonably be expected to result in an Proceeding before
the National Labor Relations Board, the Equal Employment Opportunity Commission, the Department of Fair Employment and Housing,
Labor Commissioner, the Department of Labor, OSHA, or any other Governmental Entity; (viii) all employees of the Company and
its Subsidiaries are employed on an at-will basis, and their respective employment can be terminated at any time, with or without
notice, for any lawful reason or no reason at all; and (ix) the Company and its Subsidies have not conducted any layoffs or
reductions in force within six (6) months of the date hereof. As of the date hereof, to the Knowledge of the Company, no employees
of the Company or any of its Subsidiaries are in violation of any term of any employment or other Contract, including any non-disclosure
agreement, noncompetition agreement, or any restrictive covenant to a former employer relating to the right of any such employee
to be employed by the Company or any of its Subsidiaries because of the nature of the business conducted or presently proposed
to be conducted by the Company or such Subsidiary or to the use of trade secrets or proprietary information of others. As of the
date hereof, no exempt employee of the Company or any of its Subsidiaries has given notice in writing to the Company or any of
its Subsidiaries that any such employee intends to terminate his or her employment with the Company or any of its Subsidiaries.
(b)
Except as set forth in Section 4.13(b) of the Company Disclosure Schedule, since January 1, 2013, neither
the Company nor any of its Subsidiaries is a party to or otherwise bound by any collective bargaining Contract with a labor union
or labor organization, nor is any such Contract presently being negotiated. Except as set forth in Section 4.13(b) of the
Company Disclosure Schedule, since January 1, 2013 to the date hereof, there has not been any campaign to organize any of the employees
of the Company or any of its Subsidiaries for the purposes of forming a labor union or labor organization or selecting a labor
union or labor organization as a collective bargaining representative and, to the Knowledge of the Company, there are no campaigns
or other efforts being conducted to organize employees of the Company or any of its Subsidiaries for the purposes of forming a
labor union or labor organization or selecting a labor union or labor organization as a collective bargaining representative.
(c)
The Company has identified in Section 4.13(c) of the Company Disclosure Schedule and has made available to
Parent in the Dataroom true and complete copies of (i) all severance and employment agreements with directors, officers or
employees of or consultants to the Company or any of its Subsidiaries; (ii) all severance programs and policies of each of
the Company and each of its Subsidiaries with or relating to its employees; and (iii) all plans, programs, agreements and
other arrangements of the Company and each of its Subsidiaries with or relating to its directors, officers, employees or consultants
which contain change in control provisions. In no event will the execution and delivery of this Agreement or any other related
agreement, the consummation of the transactions contemplated hereby or thereby, or the Company Stockholder Approval (either alone
or in conjunction with any other event, such as termination of employment) (x) result in any payment (including, without limitation,
severance, unemployment compensation, parachute or otherwise) becoming due to any director or any employee of the Company or any
of its Subsidiaries or Affiliates from the Company or any of its Subsidiaries or Affiliates under any Company Benefit Plan or otherwise,
(y) significantly increase any benefits otherwise payable under any Company Benefit Plan or otherwise, or (z) result
in any acceleration of the time of payment or vesting of any benefits.
(d)
The Company has made available to Parent, as of the date hereof, a list of the names of all current directors, officers,
employees and consultants currently employed or engaged by the Company and its Subsidiaries and who have received payment by way
of compensation from the Company or its Subsidiaries in excess of $100,000 during the current fiscal year, together with their
respective salaries or wages, other compensation, dates of employment or service with the Company or its Subsidiaries, seniority,
exemption classification, any union membership, and current positions and identifies all written agreements between the Company
or its Subsidiaries and such individuals (other than any of the following agreements in the Company or its Subsidiaries’
standard form: (i) offer letters for employment; (ii) proprietary rights assignment agreements; (iii) stock option
agreements; or (iv) restricted stock purchase agreements) concerning their employment, consulting or independent contractor
relationship with the Company.
Section 4.14 Environmental Matters.
(a)
Except as set forth in Section 4.14(a) of the Company Disclosure Schedule, the Company and its Subsidiaries
are in compliance and have been in compliance since January 1 2010, in all material respects, with all Environmental Laws, which
compliance has included obtaining and complying, in all material respects, with all Permits required pursuant to Environmental
Laws for the occupation of their facilities and properties and the operation of their respective businesses (it being understood
that the Company Disclosure Schedule shall not include any closed environmental matters).
(b)
Except as set forth in Section 4.14(b) of the Company Disclosure Schedule, since January 1, 2010, neither
the Company nor any of its Subsidiaries has received any written notice, report or other information regarding any actual or alleged
material violation of, or Liability under, Environmental Laws with respect to their past or current operations, properties or facilities
(it being understood that the Company Disclosure Schedule shall not include any closed environmental matters).
(c)
Except as set forth in Section 4.14(c) of the Company Disclosure Schedule, none of the following exists at
any property or facility owned or operated by the Company and its Subsidiaries: (i) underground storage tanks; (ii) asbestos-containing
material; (iii) materials or equipment containing polychlorinated biphenyls; or (iv) landfills, surface impoundments,
or disposal areas.
(d)
Except as set forth in Section 4.14(d) of the Company Disclosure Schedule since January 1, 2010, neither the
Company nor any of its Subsidiaries have treated, stored, disposed of, arranged for or permitted the disposal of, transported,
handled, released, or exposed any Person to, any substance, including any Hazardous Substance, or currently or formerly owned,
operated or leased any property or facility so as to give rise to any current or future material Liability or corrective or remedial
obligation under any Environmental Laws (it being understood that the Company Disclosure Schedule shall not include any closed
environmental matters).
(e)
Except as set forth in Section 4.14(e) of the Company Disclosure Schedule, and to the Knowledge of the Company,
no release or threatened release of any Hazardous Substance has occurred or is occurring at, on, under, from or to any property
or facility currently or formerly owned, operated or leased by the Company, or to which the Company has sent a Hazardous Substance,
and no such property or facility is contaminated by any Hazardous Substance that would reasonably be expected to give rise to any
current or future Liability or corrective or remedial obligation under any Environmental Laws.
(f)
Except as set forth in Section 4.14(f) of the Company Disclosure Schedule, to the Knowledge of the Company,
neither the Company nor any of its Subsidiaries have assumed, provided an indemnity with respect to, or otherwise become subject
to any material Liabilities of any other Person under any Environmental Law.
(g)
To the Knowledge of the Company, there are no past or present actions, activities, circumstances, conditions, events
or incidents that would reasonably be expected to form the basis of any material claim, action, cause of action, suit, Proceeding,
investigation, order, demand, notice or other material Liability of the Company or its Subsidiaries arising out of, based on, resulting
from or relating to (a) the presence, or release into the environment, of, or exposure to, any Hazardous Substances at any
location, whether or not owned, operated or leased by the Company or any of its Subsidiaries, now or in the past, or (b) any
violation, or alleged violation, or requirement of any Environmental Law.
(h)
To the Knowledge of the Company, the Company has made available to Parent in the Dataroom all assessments, reports,
data, results of investigations or audits, and other material information that is in the possession of the Company regarding environmental
matters pertaining to or the environmental condition of the business and properties of the Company or its Subsidiaries, or the
compliance (or material noncompliance) by such entities with any Environmental Laws.
Section 4.15 Intellectual Property.
(a)
Section 4.15(a) of the Company Disclosure Schedule sets forth a true and complete list as of the date hereof
of all (i) issued patents and patent applications; (ii) Company Registered Brand Names; (iii) Company Unregistered
Brand Names and applications therefor; and (iv) domain name registrations, in each case set forth in subsections (i) through
(iv) above, included in the Company Owned Intellectual Property as of the date hereof. All the patents, patent applications, Company
Registered Brand Names, copyright registrations, copyright applications, and applications comprising Company Unregistered Brand
Names are subsisting and all the necessary fees and costs have been paid.
(b)
Section 4.15(b) of the Company Disclosure Schedule sets forth a complete and accurate list of all Contracts
by which the Company or any of its Subsidiaries has been granted or has granted to others any license, covenant not to sue or other
immunity to or under Intellectual Property that is material to the conduct of the business of the Company or any of its Subsidiaries,
as conducted as of the date hereof (collectively, “Company Material Licenses”); provided, however, that
Section 4.15(b) of the Company Disclosure Schedule does not disclose licenses of computer software which computer software
has not been significantly modified or customized and that is available commercially off-the-shelf. The Company has made available
to Parent in the Dataroom a true and complete copy of each Company Material License.
(c)
Neither (i) the use of the Company Owned Intellectual Property and Intellectual Property licensed to the Company
and/or its Subsidiaries under the Company Material Licenses in connection with the operation of the business of the Company or
any of its Subsidiaries as conducted as of the date hereof, nor(ii) the manufacture, use, offer for sale, and sale of Company
Products (as such products exist as of the date hereof) to the Knowledge of the Company, infringe or misappropriate or otherwise
violate any valid Intellectual Property rights of any Person, and the Company is unaware of any facts that would form a reasonable
basis for a claim of any such infringement, misappropriation or violation. No Proceeding is pending or, to the Knowledge of the
Company, threatened against the Company or any of its Subsidiaries alleging any of the foregoing.
(d)
The Company or a Subsidiary of the Company is the exclusive owner of all right, title and interest in and to each
item of Intellectual Property purported to be Company Owned Intellectual Property, including without limitation, the items listed
on Section 4.15(a) of the Company Disclosure Schedule. The Company or a Subsidiary of the Company is entitled to use the
Company Owned Intellectual Property and Intellectual Property licensed to the Company and/or its Subsidiaries under the Company
Material Licenses in the ordinary course of its business consistent with past practice, subject only to any applicable terms of
the Company Material Licenses.
(e)
Other than the Company Owned Intellectual Property and Intellectual Property licensed to the Company and/or its Subsidiaries
under the Company Material Licenses, there are no items of Intellectual Property that are necessary to the conduct of the business
of the Company or any of its Subsidiaries as conducted as of the date hereof, with the exception of any licenses of computer software
which computer software has not been significantly modified or customized and that is available commercially off-the-shelf. The
Company Owned Intellectual Property is valid and enforceable, and the Company has the right to enforce such Company Owned Intellectual
Property that has not been licensed to another Person on an exclusive basis, and such Intellectual Property has not been adjudged
by a court of competent jurisdiction to be invalid or unenforceable (except for challenges and adjudications that may be received
in the ordinary course of the prosecution of Intellectual Property applications in Intellectual Property offices) in whole or part.
(f)
No legal Proceedings are pending or, to the Knowledge of the Company, threatened against the Company or any of its
Subsidiaries (i) based upon, challenging or seeking to deny or restrict the use by the Company or any of its Subsidiaries
of any of the Intellectual Property licensed to the Company and/or its Subsidiaries under the Company Material Licenses, or (ii) alleging
that the Company Material Licenses conflict with the terms of any other Person’s license or other agreement.
(g)
To the Knowledge of the Company, there are no infringements, misappropriations or violations by others of any of
the Company Owned Intellectual Property and the Company is unaware of any facts which would form a reasonable basis for a claim
of any such infringement, misappropriation or violation.
(h)
The Company and its Subsidiaries have taken commercially reasonable measures (but at least commensurate with industry
standards) to maintain their material trade secrets in confidence.
(i)
To the Knowledge of the Company (i) there has been no misappropriation of any trade secrets of the Company or
any of its Subsidiaries by any Person, and (ii) no employee, independent contractor or agent of the Company or any of its
Subsidiaries has misappropriated any trade secrets of any other Person in the course of such performance as an employee, independent
contractor or agent.
(j)
The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated
hereby, will not result in or give rise to (i) any right of termination or other right to impair or limit any of the Company’s
rights to own or license any of the Company Owned Intellectual Property, (ii) the inability (for any period of time) of the
Surviving Corporation to succeed to the rights and perform the obligations of the Company and any of its applicable Subsidiaries
with respect to the Company Owned Intellectual Property, pursuant to the terms of this Agreement, or (iii) the right to market
the Company Products as presently marketed.
Section 4.16 Real Property.
(a)
Section 4.16(a) of the Company Disclosure Schedule sets forth a complete list of all material real property
owned by the Company or any of its Subsidiaries as of the date hereof (“Company Owned Real Property”). Except
as set forth in the title reports made available to Parent in the Dataroom, the Company and each of its Subsidiaries has good and
valid title in fee simple to all Company Owned Real Property, free and clear of all Liens of any nature whatsoever, except (i) Liens
for current Taxes, payments of which are not yet delinquent or are being disputed in good faith, or (ii) such imperfections
in title and easements and encumbrances, if any, as are not substantial in character, amount or extent and do not materially detract
from the value, or interfere with the present use of the property subject thereto or affected thereby, or otherwise materially
impair the Company’s or any of its Subsidiaries’ business operations (in the manner presently carried on by the Company
or such Subsidiaries). Except as set forth in Section 4.16(a) of the Company Disclosure Schedule, no litigation, condemnation,
expropriation, eminent domain or similar Proceeding affecting all or any material portion of any Company Owned Real Property is
pending or threatened. The Company Owned Real Property has the benefit of indefeasible easements or other real property rights
sufficient to continue the current use and operation of the Company Owned Real Property, including without limitation, to the extent
in use as of the date hereof, easements or other grants of access rights to common rail service lines from the Company Owned Real
Property.
(b)
Section 4.16(b) of the Company Disclosure Schedule sets forth a complete list of all material real property
leased by the Company or any of its Subsidiaries as of the date hereof (“Company Material Leased Real Property”).
A copy of the lease, including all amendments, extensions, renewals, guaranties and other agreements for each Company Material
Leased Real Property (the “Company Leases”) has been made available to Parent in the Dataroom. With respect
to each of the Company Leases: (i) such Company Lease is legal, valid, and binding on the Company or its Subsidiary party
thereto, and, to the Knowledge of the Company, each other Person party thereto, and is enforceable and in full force and effect,
except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to
or affecting the rights and remedies of creditors generally and the effect of general principles of equity (regardless of whether
such enforceability is considered in a Proceeding in equity or at law); (ii) the transactions contemplated by this Agreement
do not require the consent of any other party to such Company Lease, will not result in a breach of or default under such Company
Lease, or otherwise cause such Company Lease to cease to be legal, valid, binding, enforceable and in full force and effect on
identical terms following the Closing; (iii) neither the Company nor any of its Subsidiaries, as the case may be, nor any
other party to the Company Lease is in material breach or default under such Company Lease, and no event has occurred or failed
to occur or circumstance exists which, with the delivery of notice, the passage of time or both, would constitute such a breach
or default, or permit the termination, modification or acceleration of rent under such Company Lease; (iv) the other party
to such Company Lease is not an Affiliate of, and otherwise does not have any economic interest in, the Company or any of its Subsidiaries;
(v) neither the Company nor any of its Subsidiaries, as the case may be, has subleased, licensed or otherwise granted any
Person the right to use or occupy such Company Material Leased Real Property or any portion thereof; and (vi) neither the
Company nor any of its Subsidiaries, as the case may be, has collaterally assigned or granted any other security interest in such
Company Lease or any interest therein.
(c)
The Company and each of its Subsidiaries has good and valid leasehold interest to all Company Material Leased Real
Property, free and clear of all Liens of any nature whatsoever, except (i) Liens for current Taxes, payments of which are
not yet delinquent or are being disputed in good faith, (ii) liens in respect of pledges or deposits under workers’
compensation laws or similar legislation, or (iii) liens imposed by law and incurred in the ordinary course of business for
obligations not past due, and liens, encumbrances and defects in title, that in each case do not materially detract from the value
or use of the property subject thereto.
(d)
Except as set forth in Section 4.16(d) of the Company Disclosure Schedule, the present use of the land, buildings,
structures and improvements on the Company Owned Real Property and Company Material Leased Real Property are, in all material respects,
in conformity with all Laws, including all applicable zoning Laws, ordinances and regulations and with all registered deeds or
other restrictions of record, and neither the Company nor any of its Subsidiaries, as the case may be, has received any written
notice of material violation thereof. Neither the Company nor any of its Subsidiaries, as the case may be, has received any written
notice of any material conflict or dispute with any regulatory authority or other Person relating to any Company Owned Real Property
and Company Material Leased Real Property or the activities thereon, other than where there is no current or reasonably likely
material interference with the operations at the Company Owned Real Property and Company Material Leased Real Property as presently
conducted (or as would be conducted at full capacity).
(e)
Neither the Company nor any of its Subsidiaries, as the case may be, has received any notice from any insurance company
of any material defects or inadequacies in the Company Owned Real Property and Company Material Leased Real Property or any part
thereof, which would materially and adversely affect the insurability of the same or of any termination or threatened (in writing)
termination of any policy of insurance relating to any such Company Owned Real Property and Company Material Leased Real Property.
Section 4.17 Insurance. Section 4.17 of the Company Disclosure Schedule contains an accurate and complete list of all policies and programs of insurance providing coverage for the Company together with its Subsidiaries, including the name of the insurer, type of insurance or coverage, and the amount of coverage and any retention or deductible of the Company or any Subsidiary. All premiums due and payable under all such policies and bonds have been paid and the Company and its Subsidiaries are otherwise in compliance in all material respects with the terms of such policies and bonds. Except as set forth in Section 4.17 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries maintains any material self-insurance or co-insurance programs. Neither the Company nor any of its Subsidiaries has any material disputed claim or claims with any insurance provider relating to any claim for insurance coverage under any policy or insurance maintained by the Company or any of its Subsidiaries. No notice of cancellation, termination or reduction in coverage has been received by the Company or any Subsidiary with respect to any policy listed in Section 4.17 of the Company Disclosure Schedule.
Section 4.18 Assets. Except as disclosed in Section 4.18 of the Company Disclosure Schedule, the Company and its Subsidiaries have good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of their properties and assets, real and personal, used or held for use in their businesses located on their premises or shown on the consolidated balance sheet of the Company and its subsidiaries as of the Balance Sheet Date or acquired thereafter, free and clear of any Liens. As fee owners and operators of the Company Owned Real Property, except as disclosed in Section 4.18 of the Company Disclosure Schedule, the Company and its Subsidiaries hold indefeasible rights of access to common rail service lines from the Company Owned Real Property as necessary for the operation of the Company Owned Real Property in the normal course of business consistent with past use and practice. Except as disclosed in Section 4.18 of the Company Disclosure Schedule, the Company’s and each of its Subsidiary’s buildings, equipment and other tangible assets are in good operating condition (normal wear and tear excepted) and are fit for use in the ordinary course of their respective businesses, consistent with past use and practice. Except as disclosed in Section 4.18 of the Company Disclosure Schedule, the buildings, Plants, structures, furniture, fixtures, machinery, equipment, vehicles and other items of tangible personal property of the Company and its Subsidiaries are structurally sound, are in good operating condition and repair, and are adequate for the uses to which they are being put, consistent with past use and practice. Except as disclosed in Section 4.18 of the Company Disclosure Schedule, the buildings, Plants, structures, furniture, fixtures, machinery, equipment, vehicles and other items of tangible personal property currently owned or leased by the Company or its Subsidiaries, together with all other properties and assets of the Company and its Subsidiaries, are sufficient for the conduct of the Company’s business as of the date hereof in substantially the same manner as conducted prior to the date hereof and constitute all of the rights, property and assets necessary to conduct the business of the Company as currently conducted as of the date hereof.
Section 4.19 Business Relationships. The Company has made available to Parent in the Dataroom the top ten (10) suppliers (based on current fiscal year expenditures) of products or services and the top ten (10) customers (based on current fiscal year revenues) of the Company and its Subsidiaries (on a consolidated basis). Since the Balance Sheet Date, to the Knowledge of the Company, there has not been any material adverse change in the business relationship of the Company or any of its Subsidiaries with any such customer or supplier or any change or development that is reasonably likely to give rise to any such material adverse change, and neither the Company nor any of its Subsidiaries has received any written or oral communication or notice from any such customer or supplier to the effect that, or otherwise has Knowledge that, any such customer or supplier (a) has changed, modified, amended or reduced, or is reasonably likely to change, modify, amend or reduce, its business relationship with the Company or any of its Subsidiaries in a manner that is, or is reasonably likely to be, materially adverse to the Company or any of its Subsidiaries, or (b) will fail to perform, or is reasonably likely to fail to perform, its obligations under any Contract with the Company or any of its Subsidiaries in any manner that is, or is reasonably likely to be, materially adverse to business and operations of the Company or any of its Subsidiaries.
Section 4.20 Related Party Transactions.
(a)
Except as set forth on Section 4.20 of the Disclosure Schedule, no director, officer, partner, “affiliate”
or “associate” (as such terms are defined in Rule 12b-2 under the Exchange Act) of the Company or any of its Subsidiaries
(or, with respect to clause (a) of this sentence, to the Knowledge of the Company, its employees) (collectively, “Affiliated
Persons”): (i) has borrowed any monies from or has outstanding any Indebtedness or other similar obligations to
the Company or any of its Subsidiaries; (ii) owns any direct or indirect interest of any kind in, or is a director, officer,
employee, partner, affiliate or associate of, or consultant or lender to, or borrower from, or has the right to participate in
the management, operations or profits of, any person or entity which is (x) a competitor, supplier, customer, distributor,
lessor, tenant, creditor or debtor of the Company or any of its Subsidiaries, (y) engaged in a business related to the business
of the Company or any of its Subsidiaries, (iii) participating in any transaction to which the Company or any of its Subsidiaries
is a party, (iv) otherwise a party to any Contract, arrangement or understanding with the Company or any of its Subsidiaries,
or (v) to the Knowledge of the Company, no Affiliated Person has any claim against the Company or any of its Subsidiaries, other
than claims arising in the ordinary course of business for wages owed and employment benefits accrued.
(b)
No Affiliated Person of the Company is a party to any Contract with any customer or supplier of the Company or any
Subsidiary that affects in any material manner the business, financial condition or results of operation of the Company.
Section 4.21 Certain Business Practices. Neither the Company, nor any of its Subsidiaries, nor any of their respective directors, officers, agents, employees or any other Persons acting on their behalf has, in connection with the operation of their respective businesses, (a) used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials, candidates or members of political parties or organizations, or established or maintained any unlawful or unrecorded funds in violation of Section 104 of the Foreign Corrupt Practices Act of 1977, as amended, or any other similar applicable foreign, federal or state Law, (b) paid, accepted or received any unlawful contributions, payments, expenditures or gifts, or (c) violated or operated in noncompliance with any export restrictions, anti-boycott regulations, embargo regulations or other applicable domestic or foreign Laws and regulations.
Section 4.22 Opinion of Financial Advisor. The Company’s independent financial advisor (the “Company Financial Advisor”), has delivered to the Company Board its written opinion to the effect that, as of the date of such opinion, the Exchange Ratio is fair, from a financial point of view, to holders of Company Shares electing to receive Parent Voting Common Stock. Subject to Section 6.6(c), a copy of that opinion has been delivered to Parent.
Section 4.23 Brokers and Finders. Except as set forth in Section 4.23 of the Company Disclosure Schedule, none of the Company or its Subsidiaries has entered into any Contract, arrangement or understanding with any Person or firm which may result in the obligation of the Company or any of its Subsidiaries to pay any investment banking fees, finder’s fees, or brokerage commissions in connection with the transactions contemplated hereby, other than fees payable to the Company Financial Advisor.
Section 4.24 Takeover Laws. The Company has taken all action necessary to exempt this Agreement and the transactions contemplated hereby, including the Merger and the Company Stockholders Agreements, from the provisions of Section 203 of the DGCL. No other anti-takeover, “fair price”, “moratorium”, “control share acquisition”, “business combination” or other similar statute or regulation applies or purports to apply to this Agreement or the transactions contemplated hereby. The Company does not have any stockholder rights plan or “poison pill” in effect, including without limitation any agreement with a third party trust or fiduciary entity with respect thereto.
Section 4.25 Hedging. The Company has made available to Parent in the Dataroom a complete and correct list of all Hedging Transactions (including each outstanding commodity or financial hedging position) entered into by or assigned to the Company or its Subsidiaries or for the account of any of their respective customers as of the date of this Agreement (“Company Hedges”). All Company Hedges were entered into in accordance with applicable Laws, and in accordance with the investment, securities, commodities, risk management and other policies, practices and procedures employed by the Company and its Subsidiaries, and were entered into with counterparties believed at the time and still believed to be financially responsible and able to understand (either alone or in consultation with its advisers) and to bear the risks of such material Company Hedges. The Company has duly performed all of its material obligations under the Company Hedges to the extent that such obligations to perform have accrued, and, to the Knowledge of the Company, there are no material breaches, violations, collateral deficiencies, requests for collateral or demands for payment, or defaults or allegations or assertions of such by any party thereunder.
Section 4.26 Diamond Switch. The rail track connecting the rail facilities of NELLC to the inner rail loop belonging to the Aurora West Facility along with the associated “diamond switch” crossing the outer rail loop, lie entirely on land owned by NELLC or Aventine Renewable Energy - Aurora West, LLC and were installed in compliance with all published rules and regulations, and to the Knowledge of the Company in compliance with any unpublished rules and regulations of the BNSF, and in compliance with all applicable Laws.
Section 4.27 Company Hybrid Equity Plan. The Company Hybrid Equity Plan has expired pursuant to its terms and the Company has no Liability thereunder.
Section 4.28 Books and Records. The minute books and stock record books of the Company and each of its Subsidiaries, all of which have been made available to Parent, are materially complete and correct. The minute books of the Company and each of its Subsidiaries contain accurate and complete records of all meetings, and actions taken by written consent of, the stockholders, members, the board of directors, managers and any committees of the board of directors of the Company and its Subsidiaries, as applicable, and no meeting, or action taken by written consent, of any such stockholders, members, board of directors, managers or committee has been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of those books and records will be in the possession of the Company. The accounting, financial reporting , and business books and records of the Company and each of its Subsidiaries accurately and fairly reflect in all material respects the business and condition of the Company and its Subsidiaries and the transactions and the assets and liabilities of the Company and its Subsidiaries with respect thereto.
Section 4.29 Information Supplied. The information supplied or to be supplied by the Company in writing expressly for inclusion in the Form S-4 will not, at the time the Form S-4 is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation or warranty is made by the Company with respect to statements made therein based on information supplied by Parent in writing expressly for inclusion therein. The information supplied by the Company in writing expressly for inclusion in the Joint Proxy Statement/Prospectus will not, at the time the Joint Proxy Statement/Prospectus is first mailed to Parent stockholders and at the time of the Parent Stockholders’ Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation or warranty is made by the Company with respect to statements made therein based on information supplied by Parent in writing expressly for inclusion therein.
Section 4.30 No Additional Representations. Except for the representations and warranties contained in this Article IV, each of Parent and Merger Sub acknowledges that neither the Company nor any other Person on behalf of the Company makes any other express or implied representation or warranty with respect to the Company or any of its Subsidiaries or with respect to any other information provided to Parent or Merger Sub, including any information, documents, projections, forecasts or other material made available to Parent or any Parent Representative, or Merger Sub or their representatives in the Dataroom (other than information contained in the Dataroom that is specifically referred to in any of the representations and warranties contained in this Article IV) or management presentations in expectation of the transactions contemplated by this Agreement, including with respect to the completeness, accuracy or currency of any such information. The Company disclaims any other representations or warranties, whether made by the Company or any of its Subsidiaries or any other Person.
Article
V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant
to the Company that except as set forth in the SEC Reports (including any documents, instruments or Contracts included as exhibits
to the SEC Reports):
Section 5.1 Organization and Qualification. Each of Parent and Merger Sub is a corporation duly organized and validly existing under the laws of the State of Delaware and has the requisite corporate power and authority to own, lease, license and operate its assets and properties and to carry on its business as it is now being conducted. Each of Parent and Merger Sub is qualified to transact business and, where applicable, is in good standing in each jurisdiction in which the properties owned, leased, licensed or operated by it or the nature of the business conducted by it makes such qualification necessary, except where failure to be so qualified or in good standing would not, individually or in the aggregate, reasonable be expected to have a Parent Material Adverse Effect.
Section 5.2 Capitalization.
(a)
The authorized capital stock of Parent consists of 300,000,000 shares of Parent Stock and 10,000,000 shares of preferred
stock, $0.001 par value per share, of which 1,684,375 shares are designated as Series A Cumulative Redeemable Convertible Preferred
Stock (“Parent Series A Preferred Stock) and 1,580,790 shares are designated as Series B Cumulative Convertible Preferred
Stock (“Parent Series B Preferred Stock”). As of December 30, 2014, (i) 24,504,534 shares of Parent Stock
were issued and outstanding, (ii) no shares of Series A Preferred Stock were issued and outstanding, (iii) 926,942 shares
of Series B preferred Stock were issued and outstanding, (iv) 634,641 shares of Parent Stock were reserved for issuance upon
conversion of the Series B Preferred Stock, (v) 1,267,948 shares of Parent Stock were reserved for issuance upon exercise
of outstanding options and warrants outstanding, and (vi) 724,288 shares of Parent Stock were reserved for issuance under
the Parent Stock Plans (including shares of Parent Stock authorized and reserved for future issuance upon exercise of outstanding
awards issued under the Parent Stock Plans). No shares of Parent Voting Common Stock are held in treasury. To the Knowledge of
the Parent, as of the date hereof, no Person owns ten percent (10%) or more of the Company’s issued and outstanding shares
of Parent Voting Common Stock (calculated based on the assumption that all securities convertible, exchangeable or exercisable
into any capital stock or other equity securities of Parent, whether or not presently exercisable or convertible, have been fully
exercised or converted (as the case may be) taking account of any limitations on exercise or conversion (including “blockers”)
contained therein without conceding that such identified Person is a ten percent (10%) stockholder for purposes of federal securities
laws).
(b)
Except as disclosed in Section 5.2(a) above, (i) none of Parent’s or any of its Subsidiaries’
outstanding capital stock is subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or
permitted by Parent or any Subsidiary of Parent; (ii) there are no outstanding options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable
for, any capital stock of Parent or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which
Parent or any of its Subsidiaries is or may become bound to issue additional capital stock of Parent or any of its Subsidiaries
or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any capital stock of Parent or any of its Subsidiaries; (v) there
are no agreements or arrangements under which Parent or any of its Subsidiaries is obligated to register the sale of any of their
securities under the Securities Act; (vi) there are no outstanding securities or instruments of Parent or any of its Subsidiaries
which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by
which Parent or any of its Subsidiaries is or may become bound to redeem a security of Parent or any of its Subsidiaries; (vii) there
are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Merger Agreement
or the issuance of the Parent Stock contemplated hereunder; (viii) neither Parent nor any of its Subsidiaries has any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and (ix) neither
Parent nor any of its Subsidiaries have any Liabilities or obligations required to be disclosed in the Parent SEC Documents which
are not so disclosed in the Parent SEC Documents, other than those incurred in the ordinary course of Parent’s or its Subsidiaries’
respective businesses and which, individually or in the aggregate, do not or would not have a Parent Material Adverse Effect.
Section 5.3 Subsidiaries.
(a)
Each Subsidiary of Parent is duly organized, validly existing and in good standing under the laws of its jurisdiction
of organization and has the requisite power and authority to own, lease, license and operate its assets and properties and to carry
on its business as it is now being conducted, and each Subsidiary of Parent is qualified to transact business, and is in good standing,
in each jurisdiction in which the properties owned, leased, licensed or operated by it or the nature of the business conducted
by it makes such qualification necessary, except where such failure to be so duly approved, qualified or licensed and in good standing
has not had and would not reasonably be expected to have, individually or in the aggregate, a Parent Material Adverse Effect.
(b)
All of the outstanding shares of capital stock or other equity interests of each Subsidiary of Parent are validly
issued, fully paid, nonassessable and free of preemptive rights and are owned directly or indirectly by Parent. There are no subscriptions,
options, warrants, voting trusts, proxies or other commitments, understandings, restrictions or arrangements relating to the issuance,
sale, voting or transfer of any shares of capital stock or other equity interests of any Subsidiary of Parent, including any right
of conversion or exchange under any outstanding security, instrument or agreement.
Section 5.4 Authority; Non-Contravention; Approvals.
(a) Parent
and Merger Sub have all necessary power and authority to execute and deliver this Agreement, to perform their respective obligations
hereunder and, subject to obtaining the Required Parent Stockholder Vote, to consummate the Merger and the other transactions
contemplated by this Agreement. Subject to obtaining the Required Parent Stockholder Vote, the execution, delivery and performance
by Parent and Merger Sub of this Agreement, and the consummation of the Merger and the other transactions contemplated by this
Agreement, have been duly authorized by all necessary corporate action on the part of Parent and Merger Sub, and no other corporate
proceedings on the part of Parent or Merger Sub are necessary to authorize this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement other than (i) the filing and recordation of the Certificate of Merger as required
by the DGCL, (ii) obtaining the Required Parent Stockholder Vote, (iii) approval of this Agreement by Parent as the
sole stockholder of Merger Sub and (iv) the Parent Required Statutory Approvals. This Agreement has been duly executed and delivered
by Parent and Merger Sub and, assuming the due authorization, execution and delivery by the Company, constitutes a valid and binding
obligations of Parent and Merger Sub enforceable against Parent and Merger Sub in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to or affecting the rights and remedies
of creditors generally and the effect of general principles of equity (regardless of whether such enforceability is considered
in a Proceeding in equity or at law). Promptly following the execution of this Agreement by the parties hereto, Parent shall,
by consent in lieu of a meeting, approve and adopt this Agreement and the transactions contemplated hereby in its capacity as
the sole stockholder of Merger Sub, which consent shall be delivered to the Company.
(b)
The execution, delivery and performance of this Agreement by Parent and Merger Sub and the consummation of the Merger
and the other transactions contemplated hereby does not and will not violate, conflict with, give rise to the right to modify or
result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or require any offer to purchase or any prepayment of any debt, or result in the creation of
any Lien upon any of the properties or assets of Parent or any of its Subsidiaries under any of the terms, conditions or provisions
of (i) the respective certificate of incorporation or bylaws or similar governing documents of Parent or any of its Subsidiaries,
(ii) any statute, Law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental
Entity applicable to Parent or any of its Subsidiaries or any of their respective properties or assets, subject to obtaining the
Parent Required Statutory Approvals, or (iii) any Parent Permit or Contract to which Parent or any of its Subsidiaries is
a party or by which Parent or any of its Subsidiaries or any of their respective properties or assets may be bound or affected,
other than, in the case of (ii) and (iii) above, such violations, conflicts, rights to modify, breaches, defaults, terminations,
accelerations or creations of Liens, security interests or encumbrances that would not, individually or in the aggregate, reasonably
be expected to have a Parent Material Adverse Effect.
(c)
Except for (i) the filings by Parent or Merger Sub required by the HSR Act (ii) the applicable requirements
of the Exchange Act and the Securities Act, (iii) the filing of the Certificate of Merger and appropriate merger documents
as required by the DGCL, (iv) the filing of the Joint Proxy Statement/Prospectus and the Registration Statement, and the effectiveness
of the Registration Statement, and (v) any required filings under the rules and regulations of NASDAQ (the filings and approvals
referred to in clauses (i) through (v) collectively, the “Parent Required Statutory Approvals”), no declaration,
filing or registration with, or notice to, or authorization, consent or approval of, any Governmental Entity is necessary for the
execution and delivery of this Agreement by Parent or Merger Sub or the consummation by Parent or Merger Sub, as applicable, of
the Merger or the other transactions contemplated hereby, other than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would not, individually or in the aggregate, reasonably
be expected to have a Parent Material Adverse Effect.
Section 5.5 Reports and Financial Statements.
(a)
Since January 1, 2013, Parent has timely filed all reports, schedules, forms, statements and other documents required
to be filed by it with the SEC pursuant to the reporting requirements of NASDAQ and the Exchange Act (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the “Parent SEC Documents”). As of their
respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Exchange Act and the
rules and regulations of the SEC promulgated thereunder applicable to the Parent SEC Documents, and none of the Parent SEC Documents,
at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which
they were made, not misleading. As of their respective dates, the financial statements of Parent included in the Parent SEC Documents
(the “Parent Financial Statements”) complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect thereto as in effect as of the time of filing. Such
financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during
the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in
the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and
fairly present in all material respects the financial position of Parent as of the dates thereof and the results of its operations
and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments which
will not be material, either individually or in the aggregate). Parent is not currently contemplating to amend or restate any of
the Parent Financial Statements (including without limitation, any notes or any letter of the independent accountants of Parent
with respect thereto) included in the Parent SEC Documents, nor is Parent currently aware of facts or circumstances which would
require Parent to amend or restate any of the Parent Financial Statements, in each case, in order for any of the Parent Financials
Statements to be in compliance with GAAP and the rules and regulations of the SEC. Parent has not been informed by its independent
accountants that they recommend that Parent amend or restate any of the Parent Financial Statements or that there is any need for
Parent to amend or restate any of the Parent Financial Statements.
(b)
Parent is in compliance with all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as
of the date hereof, and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of the date
hereof.
(c)
Each of Parent and its Subsidiaries maintains internal control over financial reporting (as such term is defined
in Rule 13a-15(f) under the Exchange Act) that is effective to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,
including that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions
are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles
and to maintain asset and liability accountability; (iii) access to assets or incurrence of liabilities is permitted only
in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable intervals and appropriate action is taken with respect
to any difference. Parent maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange
Act) that are effective in ensuring that information required to be disclosed by Parent in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms
of the SEC, including, without limitation, controls and procedures designed to ensure that information required to be disclosed
by Parent in the reports that it files or submits under the Exchange Act is accumulated and communicated to Parent’s management,
including its principal executive officer or officers and its principal financial officer or officers, as appropriate, to allow
timely decisions regarding required disclosure.
Section 5.6 Absence of Undisclosed Liabilities. Neither Parent nor any of its Subsidiaries has any Liabilities (whether accrued, absolute, contingent or otherwise), except Liabilities: (a) as and to the extent set forth on the audited consolidated balance sheet of Parent and its Subsidiaries as of the Balance Sheet Date; or (b) incurred after the Balance Sheet Date in the ordinary course of business consistent with past practice which, individually or in the aggregate, would not have a Parent Material Adverse Effect. Since the Balance Sheet Date, Parent has collected its accounts receivable and paid its accounts payable in the ordinary course of business consistent with past practice. No material event or development has occurred with respect to Parent, any of its Subsidiaries or any of their respective businesses, properties, prospects, operations (including results thereof) or condition (financial or otherwise), since the filing of Parent’s Form 10-Q for the three and nine months ended September 30, 2014 through the date hereof, that would be required to be disclosed by Parent under applicable securities Laws on a registration statement on Form S-1 filed with the SEC on the date hereof relating to an issuance of securities or would be reasonably likely to have a Parent Material Adverse Effect.
Section 5.7 Litigation. There is no Proceeding pending, or, to the Knowledge of Parent, threatened, against Parent, any of its Subsidiaries or any of their respective directors, managers or officers (in their capacities as such or relating to their employment, services or relationship with Parent or any of its Subsidiaries) or that would materially relate to or affect Parent and Merger Sub or any of its Subsidiaries, before any court or other Governmental Entity or any arbitrator which would reasonably be expected to individually or in the aggregate, have a Parent Material Adverse Effect. To the Knowledge of Parent, neither Parent nor any Subsidiary has committed a violation of any judgment, decree, injunction or order of any Governmental Entity applicable to the Company or any Subsidiary or any of their respective properties or assets. Since January 1, 2013, there has not been any internal investigations or inquiries conducted by Parent, the Parent Board (or any committee thereof) or any other Person at the request of any of the foregoing concerning any financial, accounting, Tax, conflict of interest, self-dealing, fraudulent or deceptive conduct or other misfeasance or malfeasance issues. Neither Parent nor its Subsidiaries, nor, to the Knowledge of Parent, any of the directors, managers or officers of Parent or any of its Subsidiaries (in their capacities as such or relating to their employment, services or relationship with Parent or any of its Subsidiaries as applicable) is subject to any judgment, decree, injunction or order of any Governmental Entity. Neither Parent nor its Subsidiaries has any action, suit, proceeding, claim, mediation, arbitration or investigation pending against any other Person.
Section 5.8 Absence of Certain Changes or Events. Since September 30, 2014, there has been no material adverse change and no material adverse development in the business, assets, liabilities, properties, operations (including results thereof), condition (financial or otherwise) or prospects of Parent or any of its Subsidiaries. Since September 30, 2014, neither Parent nor any of its Subsidiaries has (i) sold any assets, individually or in the aggregate, outside of the ordinary course of business or (ii) through the date hereof made any material capital expenditures, individually or in the aggregate. Parent nor any of its Subsidiaries has taken any steps to seek protection pursuant to any law or statute relating to bankruptcy, insolvency, reorganization, receivership, liquidation or winding up, nor does Parent or any of its Subsidiaries have any knowledge or reason to believe that any of their respective creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor to do so.
Section 5.9 Compliance with Applicable Law; Permits.
(a)
Parent and its Subsidiaries hold all material authorizations, permits, licenses, certificates, easements, concessions,
franchises, variances, exemptions, orders, consents, registrations, approvals and clearances of all Governmental Entities (including,
without limitation, all those that may be required by Governmental Entities engaged in the regulation of Parent’s products)
which are required for Parent and its Subsidiaries to own, lease, license and operate their properties and other assets and to
carry on their respective business in the manner described in the Parent SEC Documents filed prior to the date hereof and as they
are being conducted as of the date hereof (the “Parent Permits”), and all Parent Permits are valid, and in full
force and effect, except where the failure to have, or the suspension or cancellation of, or the failure to be valid or in full
force and effect of, any such Parent Permits would not, individually or in the aggregate, reasonably be expected to have a Parent
Material Adverse Effect.
(b)
Parent and its Subsidiaries are, and have been at all times, in compliance with the terms of the Parent Permits and
all applicable Laws relating to Parent and its Subsidiaries or their respective businesses, assets or properties, except where
the failure to be in compliance with the terms of the Parent Permits or such applicable Law would not, individually or in the aggregate,
reasonably be expected to have a Parent Material Adverse Effect. To the Knowledge of Parent, neither Parent nor any of its Subsidiaries
has received any written notification from any Governmental Entity (i) asserting that Parent or any of its Subsidiaries is
not in compliance with any Law or Parent Permit, or (ii) threatening to revoke any Parent Permit.
Section 5.10 Taxes.
(a)
Each of Parent and its Subsidiaries has (i) duly and timely filed with the appropriate Governmental Entity all
Tax Returns required to be filed by it (taking into account any applicable extensions), and all such Tax Returns are true, correct
and complete in all material respects and prepared in compliance with all applicable Laws and (ii) timely paid all Taxes due
and owing (whether or not shown due on any Tax Returns). Neither Parent nor any of its Subsidiaries currently is the beneficiary
of any extension of time within which to file any Tax Return. No claim has ever been made by a Governmental Entity in a jurisdiction
where Parent and its Subsidiaries do not file Tax Returns that Parent or any of its Subsidiaries is or may be subject to taxation
by that jurisdiction. Neither Parent nor any of its Subsidiaries has commenced activities in any jurisdiction which will result
in an initial filing of a Tax Return with respect to Taxes imposed by a Governmental Entity that it had not previously been required
to file in the immediately preceding taxable period.
(b)
The unpaid Taxes of Parent and its Subsidiaries did not, as of September 30, 2014, materially exceed the reserve
for Tax Liabilities (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income)
set forth on the face of the balance sheets (rather than in any notes thereto) contained in the Financial Statements. Since September
30, 2014, neither Parent nor any of its Subsidiaries has incurred any Liability for Taxes outside the ordinary course of business
or otherwise inconsistent with past custom and practice.
(c)
There are no Liens for Taxes upon any property or asset of Parent or any Subsidiary thereof, except for Liens for
current Taxes the payment of which is not yet delinquent, or for Taxes contested in good faith through appropriate proceedings
and reserved against in accordance with GAAP.
(d)
No material deficiencies for Taxes with respect to any of Parent and its Subsidiaries have been set forth or claimed
in writing, or proposed or assessed by a Governmental Entity. There are no pending or, to the Knowledge of Parent, proposed or
threatened audits, investigations, disputes or claims or other actions for or relating to any Liability for Taxes with respect
to any of Parent and its Subsidiaries; provided, however, that Parent’s Subsidiary, Pacific Ethanol Madera LLC, is currently
under audit for tax years 2011 through 2014 in respect of property taxes. No material issues relating to Taxes of the Company or
any Subsidiary of the Company were raised by the relevant Governmental Entity in any completed audit or examination that would
reasonably be expected to recur in a later taxable period. There are no examination reports or statements of deficiencies assessed
against or agreed to by any of Parent and its Subsidiaries or any predecessor, with respect to Taxes. None of Parent, any of its
Subsidiaries or any predecessor has waived any statute of limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency, or has made any request in writing for any such extension or waiver.
(e)
Each of Parent and its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and all Tax Returns
(including without limitation all IRS Forms W-2 and 1099) required with respect thereto have been properly completed and timely
filed with, and supplied to, the appropriate parties.
(f)
Except for any such customary agreements with customers, vendors, lenders, lessors or the like entered into in the
ordinary course of business (each of which is not specifically entered into to address Taxes), neither Parent nor any of its Subsidiaries
is a party to or bound by or has any obligation under any Tax sharing, allocation or indemnification agreement or similar contract
or arrangement or any agreement that obligates it to make any payment computed by reference to the Taxes, taxable income or taxable
losses of any other Person.
(g)
Except for the affiliated group of which Parent is the common parent, each of Parent and its Subsidiaries is not
and has never been a member of an affiliated group of corporations within the meaning of Section 1504 of the Code or any group
that has filed a combined, consolidated or unitary Tax Return. Neither Parent nor any of its Subsidiaries is liable for the Taxes
of any Person (including an individual, corporation, general or limited partnership, limited liability company, joint venture,
estate, trust, association, organization, labor union or other entity or Governmental Entity) other than Parent and its Subsidiaries
(i) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law), (ii) as
a transferee or successor, (iii) by Contract, or (iv) otherwise.
(h)
Neither Parent nor any of its Subsidiaries has constituted either a “distributing corporation” or a “controlled
corporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code.
(i)
Neither Parent nor any of its Subsidiaries has taken any action, failed to take any action, or knows of any fact
that would be reasonably expected to prevent the Merger from qualifying as a “reorganization” within the meaning of
Section 368(a) of the Code.
(j)
Neither Parent nor any of its Subsidiaries has been a party to a “reportable transaction,” as such term
is defined in Treasury Regulations Section 1.6011-4(b)(1) (other than such transactions that have been properly reported)
or any other transaction requiring disclosure under analogous provisions of state, local or foreign Tax law.
(k)
Neither Parent nor any of its Subsidiaries has been a United States real property holding corporation within the
meaning of Section 897(c)(2) of the Code at any time during the preceding five (5) years.
(l)
Neither Parent nor any of its Subsidiaries has requested or received any ruling from any Governmental Entity, or
signed any binding agreement with any Governmental Entity (including, without limitation, any advance pricing agreement) that would
affect any amount of Tax payable after the Closing Date and has not made any request for issuance of a ruling from a Governmental
Entity on behalf of Parent or any of its Subsidiaries (regardless of whether the requested ruling is still pending or withdrawn).
(m)
Parent has provided to the Company its good faith estimate of the amount of any net operating loss and net capital
loss available for use by Parent or any of its Subsidiaries, which Tax attributes of Parent are limited in their use under Sections
382 of the Code (and similar provisions of state, local or foreign Tax Law).
Section 5.11 Environmental Matters. Parent and its Subsidiaries (i) are in compliance with all Environmental Laws, (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply would be reasonably expected to have, individually or in the aggregate, a Parent Material Adverse Effect.
Section 5.12 Contracts. The Exhibit Index to Parent’s Annual Report on Form 10-K for the year ended December 31, 2013 or the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K filed subsequent to such Form 10-K list each Contract that would be required to be filed by Parent as a “material contract” pursuant to Item 601(b)(10) of Regulation S-K in such reports (each, a “Parent Material Contract”). Neither Parent nor any Subsidiary of Parent is in breach or violation of or default in any material respect under the terms of any Parent Material Contract and, to the Knowledge of Parent, no other party to any Parent Material Contract is in breach or violation of or default in any material respect under the terms of any Parent Material Contract and, to the Knowledge of Parent, no event has occurred or not occurred through Parent’s or any of its Subsidiaries’ action or inaction or, to Parent’s Knowledge, through the action or inaction of any third party, that with notice or the lapse of time or both would constitute a breach or violation of or default under the terms of any Parent Material Contract, in each case except as has not had and would not reasonably be expected to have a Parent Material Adverse Effect. To the Knowledge of Parent, each Parent Material Contract (i) is a valid and binding obligation of Parent or the Subsidiary of Parent that is party thereto and of each other party thereto and (ii) is in full force and effect except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to or affecting the rights and remedies of creditors generally and the effect of general principles of equity (regardless of whether such enforceability is considered in a Proceeding in equity or at Law). There are no disputes pending or, to Parent’s Knowledge, threatened with respect to any Parent Material Contract and neither Parent nor any of its Subsidiaries has received any written notice of the intention of any other party to a Parent Material Contract to terminate for default, convenience or otherwise any Parent Material Contract, nor to the Parent’s Knowledge, is any such party threatening to do so, in each case except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Parent Material Adverse Effect.
Section 5.13 Business Relationships. Parent has made available to the Company the top ten (10) suppliers (based on current fiscal year expenditures) of products or services and the top ten (10) customers (based on current fiscal year revenues) of Parent and Parent’s Subsidiaries (on a consolidated basis). Since the Balance Sheet Date, to the Knowledge of Parent, there has not been any material adverse change in the business relationship of Parent or any of Parent’s Subsidiaries with any such customer or supplier or any change or development that is reasonably likely to give rise to any such material adverse change, and neither Parent nor any of Parent’s Subsidiaries has received any written or oral communication or notice from any such customer or supplier to the effect that, or otherwise has Knowledge that, any such customer or supplier (a) has changed, modified, amended or reduced, or is reasonably likely to change, modify, amend or reduce its business relationship with Parent or any of Parent’s Subsidiaries in a manner that is, or is reasonably likely to be materially adverse to Parent or any of Parent’s Subsidiaries, or (b) will fail to perform, or is reasonably likely to fail to perform, its obligations under any Contract with Parent or any of Parent’s Subsidiaries in any manner that is, or is reasonably likely to be materially adverse to the business and operations of Parent or any of Parent’s Subsidiaries.
Section 5.14 Transactions with Affiliates. None of the officers, directors, employees or Affiliates of Parent or any of its Subsidiaries is presently a party to any transaction with Parent or any of its Subsidiaries (other than for ordinary course services as employees, officers or directors), including any Contract or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director, employee or affiliate or, to the Knowledge of Parent or any of its Subsidiaries, any corporation, partnership, trust or other Person in which any such officer, director, or employee has a substantial interest or is an employee, officer, director, trustee, affiliate or partner.
Section 5.15 Certain Business Practices.
(a)
Neither Parent nor its Subsidiaries, nor any of their directors, managers, officers, or to the Knowledge of Parent
their employees, agents or any other person acting for or on behalf of Parent or any of its Subsidiaries, directly or indirectly,
(i) violated the Foreign Corrupt Practices Act of 1977, as amended, or violated any similar Law; or (ii) made any unlawful
bribe, unlawful kickback or other unlawful payment to any person, private or public, regardless of form, whether in money, property
or services, to obtain favorable treatment in securing business to obtain special concessions for Parent or any of its Subsidiaries.
Neither Parent nor its Subsidiaries, nor, any of their directors, officers, or, to the Knowledge of Parent their employees, agents,
or any other person acting for or on behalf of Parent or its Subsidiaries is the subject of any current, pending or threatened
investigation, inquiry or enforcement proceedings for violations of the Foreign Corrupt Practices Act of 1977, as amended, or any
similar Law in any country in which Parent or its Subsidiaries does business.
(b)
None of Parent or any Subsidiary of Parent nor, to the Knowledge of Parent, any director, officer, employee, auditor,
accountant or representative of Parent or any Subsidiary of Parent, has received or otherwise had or obtained knowledge of any
material complaint, allegation, assertion or claim, whether written or oral, regarding accounting, internal accounting controls
or auditing practices, procedures, methodologies or methods of Parent or any Subsidiary of Parent or any material complaint, allegation,
assertion or claim from employees of Parent or any Subsidiary of Parent regarding questionable accounting or auditing matters with
respect to Parent or any Subsidiary of Parent, and to the Knowledge of Parent, no attorney representing Parent or any Subsidiary
Parent, whether or not employed by Parent or any Subsidiary of Parent, has reported evidence of any material violation of state
or federal banking or securities Laws, breach or violation of fiduciary duty or similar violation, by Parent, any Subsidiary of
Parent or any of their respective officers, directors, managers, employees or agents to the Board of Directors of Parent or any
committee thereof, or to the general counsel or chief executive officer of Parent.
(c)
Without limiting the generality of the foregoing, Parent is not in violation of any of the rules, regulations or
requirements of NASDAQ and has no Knowledge of any facts or circumstances that would reasonably be expected to lead to delisting
or suspension of the Parent Voting Common Stock by the rules and regulations of NASDAQ. During the two years prior to the date
hereof, (i) the Parent Voting Common Stock has been listed or designated for quotation on NASDAQ; (ii) trading in the
Parent Voting Common Stock has not been suspended by the SEC or NASDAQ; and (iii) Parent has received no communication, written
or oral, from the SEC or NASDAQ regarding the suspension or delisting of the Voting Parent Common Stock from NASDAQ.
Section 5.16 Opinion of Financial Advisor. Parent’s financial advisor, Craig-Hallum Capital Group LLC (the “Parent Financial Advisor”), has delivered to the Parent Board its written opinion to the effect that, as of the date of such opinion, the Merger is fair, from a financial point of view, to the stockholders of Parent. A copy of that opinion has been delivered to the Company.
Section 5.17 Brokers and Finders. Parent has not entered into any Contract, arrangement or understanding with any Person or firm which may result in the obligation of Parent to pay any investment banking fees, finder’s fees, or brokerage commissions in connection with the transactions contemplated hereby, other than fees payable to the Parent Financial Advisor.
Section 5.18 Indebtedness. Neither Parent nor any of its Subsidiaries has any outstanding material Indebtedness.
Section 5.19 Intellectual Property Rights. Parent and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, original works, inventions, licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights and all applications and registrations therefor (the “Parent Intellectual Property Rights”) necessary to conduct their respective businesses as now conducted. Parent has no Knowledge of any infringement of the Parent Intellectual Property Rights by others. There is no claim, action or proceeding pending, or to the Knowledge of Parent, threatened, against Parent or any of its Subsidiaries regarding the Parent Intellectual Property Rights. To the Knowledge of Parent, there are no facts or circumstances which could reasonably be expected to give rise to any of the foregoing infringements or Proceedings. Parent and each of its Subsidiaries have taken commercially reasonable security measures to protect the secrecy, confidentiality and value of all material Parent Intellectual Property Rights.
Section 5.20 Off Balance Sheet Arrangements. There is no transaction, arrangement, or other relationship between Parent or any of its Subsidiaries and an unconsolidated or other off balance sheet entity that is required to be disclosed by Parent in its Exchange Act filings and is not so disclosed or that otherwise would be reasonably likely to have a Parent Material Adverse Effect.
Section 5.21 Manipulation of Price. Neither Parent nor any of its Subsidiaries has, and, to the Knowledge of Parent, no Person acting on their behalf has, directly or indirectly, (a) taken any action designed to cause or to result in the stabilization or manipulation of the price of any security of Parent or any of its Subsidiaries to facilitate the sale or resale of any of the Parent Voting Common Stock, (b) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Parent Voting Common Stock, or (c) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of Parent or any of its Subsidiaries.
Section 5.22 No Additional Agreements. Except with respect to the Parent Stockholders Agreement, Parent does not have any agreement or understanding with the Company or its Affiliates or stockholders with respect to the transactions contemplated hereunder other than as specified in this Agreement.
Section 5.23 Parent Stock. At the Closing, Parent shall have sufficient authorized but unissued shares of Parent Stock to consummate the Merger.
Section 5.24 Merger Sub. Merger Sub is a direct, wholly-owned subsidiary of Parent formed solely for the purpose of effecting the Merger, and has conducted no other material activity and has incurred no other material Liability or obligation other than as contemplated by this Agreement.
Section 5.25 Insurance. Parent and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of Parent believes to be prudent and customary in the businesses in which the Parent and its Subsidiaries are engaged. Neither Parent nor any such Subsidiary has since January 1, 2013 been refused any insurance coverage sought or applied for, and neither Parent nor any such Subsidiary has any reason to believe that it will be unable to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Parent Material Adverse Effect.
Section 5.26 Employee Relations. Neither Parent nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union. No executive officer (as defined in Rule 501(f) promulgated under the Securities Act) or other key employee of Parent or any of its Subsidiaries has notified Parent or any such Subsidiary that such officer intends to leave Parent or any such Subsidiary or otherwise terminate such officer’s employment with Parent or any such Subsidiary. No executive officer or other key employee of Parent or any of its Subsidiaries is, or is now expected by Parent to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer or other key employee (as the case may be) will, to the Knowledge of Parent, not subject Parent or any of its Subsidiaries to any liability with respect to any of the foregoing matters. Parent and its Subsidiaries are in compliance with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Parent Material Adverse Effect.
Section 5.27 Information Supplied. The information supplied or to be supplied by Parent in writing expressly for inclusion in the Form S-4 will not, at the time the Form S-4 is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation or warranty is made by Parent with respect to statements made therein based on information supplied by the Company in writing expressly for inclusion therein. The information supplied by Parent in writing expressly for inclusion in the Joint Proxy Statement/Prospectus will not, at the time the Joint Proxy Statement/Prospectus is first mailed to the Company stockholders and at the time of the Company Stockholders’ Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation or warranty is made by Parent with respect to statements made therein based on information supplied by the Company in writing expressly for inclusion therein.
Section 5.28 No Additional Representations. Except for the representations and warranties contained in this Article V, the Company acknowledges that none of Parent, Merger Sub nor any other Person on behalf of either Parent or Merger Sub makes any other express or implied representation or warranty with respect to Parent or Merger Sub or with respect to any other information provided to the Company (other than information provided to the Company specifically referred to in any of the representations and warranties contained in this Article V), including any information, documents, projections, forecasts or other material made available to the Company or any Company Representative or management presentations in expectation of the transactions contemplated by this Agreement, including with respect to the completeness, accuracy or currency of any such information. Parent and Merger Sub disclaim any other representations or warranties, whether made by Parent or Merger Sub or any other Person.
Article
VI
COVENANTS
Section 6.1 Conduct of Business by the Company Pending the Closing. From the Execution Date through the Effective Time, except as expressly contemplated by the terms of this Agreement, the Company shall, and shall cause each of its Subsidiaries to, (i) conduct its business in the ordinary course of business consistent with past practice in all material respects and in compliance in all material respects with all applicable Laws, (ii) use commercially reasonable efforts to preserve intact their respective business organizations and goodwill, keep available the services of their respective present officers, employees and independent contractors, and preserve the goodwill and business relationships with customers, suppliers, licensors, licensees and others having business relationships with them and (iii) not take any action which would adversely affect or delay in any material respect the ability of either Parent or the Company to obtain any necessary approvals of any regulatory agency or other Governmental Entity required for the transactions contemplated hereby. In addition, and without limiting the generality of the foregoing, from the Execution Date through the Effective Time, except as expressly contemplated by the terms of this Agreement, as required by applicable Law and except as set forth in Section 6.1 of the Disclosure Schedule, the Company shall not, and shall not permit any of its Subsidiaries to, do any of the following outside of the ordinary course of business consistent with past practices without the prior written consent of Parent (which consent shall not be unreasonably withheld, conditioned or delayed):
(a)
(i) amend or propose to amend the certificate of incorporation or bylaws or similar governing documents of the
Company or any of its Subsidiaries, (ii) split, combine or reclassify their outstanding capital stock or issue or authorize
the issuance of any other security in respect or, in lieu of, or in substitution for, shares of its capital stock, (iii) declare,
set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, (iv) create any
Subsidiary or alter (through merger, liquidation, reorganization, restructuring or in any other fashion) the corporate structure
or ownership of the Company or any of its Subsidiaries, or (v) enter into any agreement with respect to the voting of its
capital stock or other securities held by the Company or any of its Subsidiaries;
(b)
issue, sell, pledge, dispose of, grant, encumber, or agree to issue, sell, pledge, dispose of, grant or encumber
any shares of any class of capital stock of the Company or any of its Subsidiaries, or any options, warrants or rights of any kind
to acquire any shares of, their capital stock of any class or any debt or equity securities convertible into or exchangeable for
such capital stock, except that the Company may issue Company Shares upon exercise of Company Stock Options and Company Warrants
outstanding on the date hereof in accordance with their present terms;
(c)
(i) issue any debt securities, incur, guarantee or otherwise become contingently liable with respect to any
indebtedness for borrowed money or enter into any arrangement having the economic effect of any of the foregoing, (ii) make
any loans, advances or capital contributions to, or investments in, any Person, or (iii) redeem, purchase, acquire or offer
to purchase or acquire any shares of its capital stock, or the capital stock of its Subsidiaries, or any options, warrants or rights
to acquire any of its capital stock or any security convertible into or exchangeable for its capital stock, or the capital stock
of its Subsidiaries;
(d)
(i) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of
the assets of or equity in, or by any other manner, any business or any corporation, limited liability company, partnership, association
or other business organization or division thereof or otherwise acquire or agree to acquire any assets other than in the ordinary
course of business consistent with past practice, or (ii) authorize, make or agree to make any new capital expenditure or
expenditures, or enter into any Contract or arrangement that reasonably may result in payments by or Liabilities of the Company,
in excess of $1,000,000 individually or $5,000,00 in the aggregate in any twelve (12) month period that is not set forth in the
capital expenditure budget;
(e)
sell, pledge, assign, dispose of, transfer, lease, securitize, or encumber any businesses, properties or assets of
the Company or its Subsidiaries;
(f)
except as required by any Company Benefit Plan or Company Contract existing on the date hereof, (i) increase
the compensation payable or to become payable (including bonus grants) or increase or accelerate the vesting of the benefits provided
to its directors, officers or employees or other service providers, except for increases in the ordinary course of business and
consistent with past practice in salaries or wages of employees of the Company or any of its Subsidiaries who are not directors
or executive officers of the Company, (ii) grant any severance or termination pay or benefits to, or enter into any employment,
severance, retention, change in control, consulting or termination agreement with, any director, officer or other employee or other
service providers of the Company or of any of the Company’s Subsidiary, (iii) establish, adopt, enter into or amend
any collective bargaining, bonus, profit-sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of
any director, officer or employee or other service providers, or (iv) pay or make, or agree to pay or make, any accrual or
arrangement for payment of any pension, retirement allowance, or any other employee benefit;
(g)
knowingly violate or knowingly fail to perform any obligation or duty imposed upon it by any applicable federal,
state, local or foreign Law, rule, regulation, guideline or ordinance, or under any order, settlement agreement or judgment;
(h)
announce, implement or effect any reduction in labor force, lay-off, early retirement program, severance program
or other program or effort concerning the termination of employment of employees of the Company or any of its Subsidiaries;
(i)
make any change to accounting policies or procedures, other than actions required to be taken by GAAP;
(j)
prepare or file any Tax Return inconsistent with past practice or, on any Tax Return, take any position, make any
election, or adopt any method inconsistent with positions taken, elections made or methods used in preparing or filing similar
Tax Returns in prior periods;
(k)
except for immaterial elections or changes, make or change any express or deemed election related to Taxes, change
an annual accounting period, adopt or change any method of accounting, file an amended Tax Return, surrender any right to claim
a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax Proceedings relating to the
Company or any of its Subsidiaries;
(l)
except as would not reasonably be expected to be materially adverse to the Company and its Subsidiaries taken as
a whole, commence any litigation or Proceedings with respect to Taxes, settle or compromise any Proceedings with respect to Taxes;
(m)
(i) enter into a new line of business which is material to the Company and its Subsidiaries taken as a whole
or (ii) open or close any facility or office of the Company or any of its Subsidiaries;
(n)
pay, discharge or satisfy any claims, Liabilities or obligations (whether or not absolute, accrued, asserted, contingent
or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice
or in accordance with their terms, of Liabilities adequately reflected or reserved against in, the most recent financial statements
(or the notes thereto) of the Company;
(o)
amend, modify or consent to the termination of any Company Material Contract, or amend, waive, modify or consent
to the termination of the Company’s or any of its Subsidiary’s rights thereunder;
(p)
enter into, amend, modify, permit to lapse any rights under, or terminate (i) any agreements pursuant to which
any other party is granted exclusive marketing or other exclusive rights of any type or scope with respect to any of its products
or technology or which restricts the Company or any of its Subsidiary or, upon completion of the Merger or any other transaction
contemplated hereby, Parent or any of its Subsidiaries, from engaging or competing in any line of business or in any location,
(ii) any agreement or Contract with any customer, supplier, sales representative, agent or distributor, other than in the
ordinary course of business and consistent with past practice; (iii) arrangement with Persons that are Affiliates or are executive
officers or directors of the Company, or (iv) any material rights or claims with respect to any confidentiality or standstill
agreement to which the Company is a party and which relates to a business combination or other similar extraordinary transaction,
in each case, that would reasonably be expected to, individually or in the aggregate, materially affect the business or operations
of the Company;
(q)
terminate, cancel, amend or modify any material insurance coverage policy maintained by Company or any of its Subsidiaries
which is not promptly replaced by a comparable amount of insurance coverage;
(r)
commence, waive, release, assign, settle or compromise any material claims, or any material litigation, Proceeding
or arbitration including, without limitation, the Aurora Coop Litigation;
(s)
except as the Company Board determines in good faith is necessary to comply with its fiduciary duties, take any action
to (i) render inapplicable, or to exempt any third Person from, the provisions of Section 203 of the DGCL, or any other
state takeover or similar Law or state Law that purports to limit or restrict business combinations or the ability to acquire or
vote shares or (ii) adopt or implement any stockholder rights agreement or plan; or
(t)
authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any Contract, agreement,
commitment or arrangement to do any of the foregoing.
Section 6.2 Conduct of Business by Parent Pending the Closing. From the Execution Date until the Effective Time, unless the Company shall otherwise consent in writing, which consent shall not be unreasonably withheld, or except as otherwise expressly permitted by or provided for in this Agreement, Parent shall, and shall cause each of its Subsidiaries to, conduct its business in the ordinary course of business consistent with past practice and in compliance in all material respects with all applicable Laws and use reasonable best efforts to preserve intact their respective business organizations and goodwill. In addition to and without limiting the generality of the foregoing, except as otherwise expressly permitted by or provided for in this Agreement, from the date hereof until the Effective Time, without the prior written consent of the Company, which consent shall not be unreasonably withheld, conditioned, or delayed, Parent shall not, and shall not permit any of its Subsidiaries to, do any of the following outside the ordinary course of business consistent with past practices:
(a)
adopt or propose any material change in its certificate of incorporation or bylaws, except for such amendments (i) required
by any applicable Law or the rules and regulations of the SEC or NASDAQ, (ii) as contemplated by the Amended Certificate of
Incorporation, or (iii) that would not, individually or in the aggregate, reasonably be expected to have a Parent Material
Adverse Effect;
(b)
sell, lease, pledge, or otherwise dispose of or encumber any properties or assets of Parent or its Subsidiaries,
except for (i) the sale of inventory in the ordinary course of business and (ii) other transactions which would not,
individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect;
(c)
authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing; (i) amend or propose to amend the certificate of incorporation or bylaws
or similar governing documents of Parent or any of its Subsidiaries, (ii) split, combine or reclassify their outstanding capital
stock or issue or authorize the issuance of any other security in respect or, in lieu of, or in substitution for, shares of its
capital stock, (iii) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property
or otherwise, other than the payment of any dividend on shares of Parent Series B Preferred Stock (iv) create any Subsidiary
or alter (through merger, liquidation, reorganization, restructuring or in any other fashion) the corporate structure or ownership
of Parent or any of its Subsidiaries, or (v) enter into any agreement with respect to the voting of its capital stock or other
securities held by Parent or any of its Subsidiaries;
(d)
issue, sell, pledge, dispose of, grant, encumber, or agree to issue, sell, pledge, dispose of, grant or encumber
any shares of any class of capital stock of Parent or any of its Subsidiaries, or any options, warrants or rights of any kind to
acquire any shares of, their capital stock of any class or any debt or equity securities convertible into or exchangeable for such
capital stock, except that Parent may issue Parent Stock upon exercise or conversion, as applicable, of Parent Stock Options, Parent
Warrants or Parent Series B Preferred Stock outstanding on the date hereof in accordance with their present terms;
(e)
(i) issue any debt securities, incur, guarantee or otherwise become contingently liable with respect to any
indebtedness for borrowed money or enter into any arrangement having the economic effect of any of the foregoing, (ii) make
any loans, advances or capital contributions to, or investments in, any Person, or (iii) redeem, purchase, acquire or offer
to purchase or acquire any shares of its capital stock, or the capital stock of its Subsidiaries, or any options, warrants or rights
to acquire any of its capital stock or any security convertible into or exchangeable for its capital stock, or the capital stock
of its Subsidiaries; and
(f)
sell, pledge, assign, dispose of, transfer, lease, securitize, or encumber any businesses, properties or assets of
Parent or its Subsidiaries.
Section 6.3 Access to Information; Confidentiality.
(a)
Each of Parent and the Company shall afford to each other’s officers, employees, accountants, counsel, financial
advisors, and other representatives, reasonable access (subject to applicable Laws regarding the sharing of such information),
during normal business hours, and upon reasonable prior notice, during the period from the Execution Date through the Effective
Time or the termination of this Agreement, to its properties, books and records, contracts, commitments and personnel in a manner
commensurate with due diligence conducted by any Party prior to the date hereof. Any investigation conducted pursuant to the access
contemplated by this Section 6.3(a) shall be conducted in a manner that does not unreasonably interfere with the conduct
of the business of the Parties or their respective Subsidiaries, as the case may be, or create a risk of damage or destruction
to any property or assets of the Parties or their respective Subsidiaries. During such period, the Company and Parent shall furnish
or make available promptly to each other (except as otherwise available on EDGAR) (i) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant to the requirements of federal or state securities
laws; and (ii) all other information concerning its business, properties, assets and personnel as the other may reasonably
request. Notwithstanding the foregoing, Parent and the Company may restrict or otherwise prohibit access to any documents or information
to the extent that access to such documents or information would risk waiver of any attorney-client privilege, work product doctrine
or other applicable privilege applicable to such documents or information. Except as otherwise required by applicable Law, all
information obtained by Parent and the Company, and their respective Subsidiaries, pursuant to this Section 6.3(a) shall
be kept confidential in accordance with the confidentiality agreement, dated November 18, 2014, by and between Parent and the Company
(the “Confidentiality Agreement”) or any other similar agreement among the Parties.
(b)
The Company shall consult with Parent regarding its business in a prompt manner and on a regular basis. In addition,
the Company and its officers and employees shall reasonably cooperate with Parent in, and shall permit Parent to participate in
any discussions or negotiations relating to, the execution or amendment of any Company Material Contract.
(c)
No information or knowledge obtained in any investigation pursuant to this Section 6.3 or otherwise shall
affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of
the parties to consummate the Merger.
Section 6.4 Employee Matters. Promptly following the Execution Date, the Company and Parent shall reasonably cooperate to develop communication to the employees of the Company and its Subsidiaries concerning the Merger, including responses to anticipated employee questions and concerns.
Section 6.5 BNSF Matters. The Company shall use commercially reasonable efforts to complete all necessary arrangements, including engineering, design and contracting with the BNSF as promptly as practicable, in order to establish a connection from the rail facilities of NELLC to the inner rail loop track belonging to the Aurora West Facility along with the associated “diamond switch” crossing the outer rail loop, which lie entirely on land owned by NELLC or Aventine Renewable Energy – Aurora West, LLC such that the Aurora West Facility will be able to ship ethanol by rail in unit trains and single cars.
Section 6.6 Joint Proxy Statement/Prospectus; Registration Statement.
(a)
Parent and the Company shall each use their reasonable best efforts to jointly prepare and file with the SEC the
Joint Proxy Statement/Prospectus and the Registration Statement within twenty (20) Business Days following the Execution Date.
Each of Parent and The Company shall provide as promptly as practicable to the other such information concerning its business affairs
and Financial Statements as, in the reasonable judgment of the providing Party or its counsel, may be required or appropriate for
inclusion in the Joint Proxy Statement/Prospectus and the Registration Statement, or in any amendments or supplements thereto,
shall cause its counsel to cooperate with the other Party’s counsel in the preparation of the Joint Proxy Statement/Prospectus
and the Registration Statement and shall request the cooperation of such Party’s auditors in the preparation of the Joint
Proxy Statement/Prospectus and the Registration Statement. Each of Parent and the Company shall respond to any comments of the
SEC and shall use their reasonable best efforts to have the Registration Statement declared effective under the Securities Act
as promptly as practicable after such filings, and each of Parent and the Company will provide the other with a reasonable opportunity
to review and comment (which comments will be considered by the other Party in good faith) on any amendment or supplement to the
Joint Proxy Statement/Prospectus or the Registration Statement prior to the filing thereof with the SEC. The Company and Parent
shall cause the Joint Proxy Statement/Prospectus to be mailed to their respective stockholders at the earliest practicable time
after the Registration Statement is declared effective under the Securities Act. Each of Parent and the Company shall notify the
other promptly upon the receipt of any comments from the SEC or its staff or any other government officials and of any request
by the SEC or its staff or any other government officials for amendments or supplements to the Registration Statement, the Joint
Proxy Statement/Prospectus or any filing pursuant to this Section 6.6(a) or for additional information and shall supply
the other with copies of all correspondence between such Party or any of its Representatives, on the one hand, and the SEC, or
its staff or any other government officials, on the other hand, with respect to the Registration Statement, the Joint Proxy Statement/Prospectus,
the Merger or any filing pursuant to Section 6.6(b). Each of Parent and the Company shall cause all documents that it is
responsible for filing with the SEC or other regulatory authorities under this Section 6.6(a) to comply as to form and substance
as to such Party in all material respects with all applicable Laws.
(b)
If, at any time prior to the Effective Time, any information is discovered or any event occurs with respect to Parent,
the Company or any of their respective Subsidiaries, or any change occurs with respect to the other information included in the
Registration Statement or the Joint Proxy Statement/Prospectus which is required to be described in an amendment of, or a supplement
to, the Registration Statement or the Joint Proxy Statement/Prospectus so that such document does not include any misstatement
of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, then (i) the Party learning of such information shall notify the other Parties as promptly
as practicable of such event, and Parent and the Company shall as promptly as practicable file with the SEC any necessary amendment
or supplement to the Registration Statement or the Joint Proxy Statement/Prospectus, respectively, and (ii) Parent and the
Company shall (A) use their reasonable best efforts to have such amendment or supplement cleared for mailing as soon as practicable
and (B) as required by applicable Law, disseminate the information contained in such amendment or supplement to holders of
Company Shares and Parent Shares; provided, however, that no amendment or supplement will be filed and no such information
shall be otherwise disseminated without prior consultation between Parent and the Company and providing Parent and the Company
with a reasonable opportunity to review and comment on such amendment or supplement.
(c)
The Company shall provide Parent on a confidential, non-reliance basis for informational purposes only, a copy of
the fairness opinion from the Company Financial Advisor stating that the Exchange Ratio is fair from a financial point of view
to the holders of the Company Shares electing to receive Parent Voting Common Stock, as of the date of the fairness opinion; provided,
that Parent has executed a non-reliance release letter reasonably acceptable to the Company Financial Advisor prior to the receipt
of the fairness opinion, and Parent shall not disclose the fairness opinion, its contents or the identity of the Company Financial
Advisor, including in the Joint Proxy Statement/Prospectus or the Registration Statement, except as required by applicable Law.
Section 6.7 Meetings of Stockholders; Board Recommendations.
(a)
The Company, acting through the Company Board, shall take all actions in accordance with the DGCL, the Company Certificate
or Company Bylaws or similar governing documents of the Company and all applicable Laws to promptly and duly call, give notice
of, convene and hold as promptly as practicable, and in any event within forty-five (45) days after the declaration of effectiveness
of the Registration Statement, the Company Stockholders’ Meeting for the purpose of considering and voting upon the Company
Voting Proposal. Subject to Section 6.13(b), (i) the Company Board shall recommend approval and adoption of this Agreement
and the Merger by the stockholders of the Company (the “Company Voting Proposal”) and include such recommendation
in the Joint Proxy Statement/Prospectus, (ii) neither the Company Board nor any committee thereof shall effect a Change in
Recommendation and (iii) the Company shall use its reasonable best efforts to solicit from its stockholders proxies in favor
of the Company Voting Proposal and shall take all other action reasonably necessary or advisable to secure the Required Company
Stockholder Vote. Without limiting the generality of the foregoing, (x) the Company agrees that its obligation to duly call,
give notice of, convene and hold a meeting of the holders of Company Shares, as required by this Section 6.7(a), shall not
be affected by the withdrawal, amendment or modification of the recommendation by the Company Board or committee thereof, including
a Change in Recommendation, pursuant to the provisions contained in Section 6.12(b), (y) the Company agrees that its obligations
pursuant to this Section 6.7(a) shall not be affected by the commencement, public proposal, public disclosure or communication
to the Company of any Company Takeover Proposal and (z) notwithstanding any Change in Recommendation, unless this Agreement
is validly terminated pursuant to, and in accordance with, Article VIII, this Agreement shall be submitted to the holders
of the Company’s Common Stock for the purpose of obtaining the Required Company Stockholder Vote.
(b)
Parent, acting through the Parent Board, shall take all actions in accordance with the DGCL, the certificate of incorporation
or bylaws or similar governing documents of Parent and all applicable Laws to promptly and duly call, give notice of, convene and
hold as promptly as practicable, and in any event within forty-five (45) days after the declaration of effectiveness of the Registration
Statement, the Parent Stockholders’ Meeting for the purpose of considering and voting upon the issuance of Parent Stock in
the Merger, the amendment to Parent’s Amended Certificate of Incorporation to authorize a class of Parent Non-Voting Common
Stock and securing the Special Series B Approval (the “Parent Voting Proposals”). The Parent Board shall recommend
approval of the Parent Voting Proposals by the holders of Parent Stock and include such recommendation in the Parent’s Proxy
Statement. Neither the Parent Board nor any committee thereof shall withdraw, qualify or modify, or publicly propose to withdraw,
qualify or modify in any manner adverse to the Company the recommendation of the Parent Board that the Parent’s stockholders
vote in favor of the Parent Voting Proposals. Parent shall use its reasonable best efforts to solicit from its stockholders proxies
in favor of the Parent Voting Proposals and shall take all other action reasonably necessary or advisable to secure the Required
Parent Stockholder Vote.
(c)
Nothing contained in this Section 6.7 or otherwise contained in this Agreement shall be deemed to prohibit
the Company from taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange
Act or complying with the provisions of Rule 14d-9 promulgated under the Exchange Act or making any disclosure to its stockholders
in order to comply with the Company Board’s fiduciary duties to its stockholders under the DGCL.
(d)
Unless otherwise mutually agreed upon by the Parties, the Parties shall use reasonable best efforts to cause the
respective record dates and meeting dates for the Company Stockholders’ Meeting and for the Parent Stockholders’ Meeting
to be the same.
(e)
Except to the extent required by applicable Laws, the Company shall not (i) change the date specified in the
Joint Proxy Statement/Prospectus for the Company Stockholders’ Meeting or (ii) postpone, delay or adjourn the Company
Stockholders’ Meeting without the consent of Parent (not to be unreasonably withheld, delayed or conditioned), except, in
each case, after consultation with Parent, (A) to the extent necessary (as determined in good faith by the Company Board following
consultation with outside counsel) to ensure that any amendment or supplement to the Joint Proxy Statement/Prospectus required
by applicable Laws is provided to the stockholders of the Company sufficiently in advance of the Company Stockholders’ Meeting;
(B) if there are an insufficient number of shares of Company Shares represented in person or by proxy at the Company Stockholders’
Meeting to constitute a quorum or to adopt this Agreement, in which case the Company may adjourn the Company Stockholders’
Meeting and use its reasonable best efforts to obtain a quorum and the Required Company Stockholder Vote as promptly as practicable
in the prevailing circumstances; or (C) to a date not less than five (5) Business Days after the expiration of any five-Business
Day contemplated by Section 6.13(b)(ii)); and (D) to a date not less than five (5) Business Days after a Change in
Recommendation effected pursuant to Section 6.13(b)(iii). Except to the extent required by applicable Law, Parent shall
not (i) change the date specified in the Joint Proxy Statement/Prospectus for the Parent Stockholders’ Meeting or (ii) postpone,
delay or adjourn the Parent Stockholders’ Meeting without the consent of the Company (not to be unreasonably withheld, delayed
or conditioned) except, in each case, after consultation with the Company, (A) to the extent necessary to ensure that any
amendment or supplement to the Joint Proxy Statement/Prospectus required by applicable Law is provided to the stockholders of Parent
sufficiently in advance of the Parent Stockholders’ Meeting or (B) if there are an insufficient number of shares of
Parent Stock represented in person or by proxy at the Parent Stockholders’ Meeting to constitute a quorum, in which case
Parent may adjourn the Parent Stockholders’ Meeting and use its reasonable best efforts to obtain a quorum and the Required
Parent Stockholder Vote as promptly as practicable in the prevailing circumstances.
Section 6.8 [Reserved].
Section 6.9 Public Announcements. Parent and the Company will provide each other a reasonable opportunity to review and make reasonable comment upon, any press release or other public statement with respect to this Agreement and the business combination contemplated hereby and, except as may be required by applicable Law or any listing agreement with, or regulation of, any securities exchange or market on which the Company Shares or the Parent Voting Common Stock, as applicable, are traded or listed, will not issue any such press release or make any such public statement prior to receiving the other Party’s consent (which shall not be unreasonably withheld or delayed); provided, however, that each of Parent and the Company may make (a) subject to Section 6.10(a), public disclosure reasonably required in the public SEC filings made by the respective Parties in connection with the transactions contemplated hereby and (b) public statements in response to specific questions by the press, analysts, investors or those attending industry conferences or financial analyst conference calls, so long as any such statements are not inconsistent with previous statements that have been mutually agreed upon by each of the Parties with respect to press releases, public disclosures or public statements.
Section 6.10 Reasonable Best Efforts.
(a)
Prior to the Closing, the Company and Parent shall each use their reasonable best efforts to (i) take, or cause
to be taken, all reasonable actions, and do, or cause to be done, all reasonable things necessary and proper under applicable Law
to consummate and make effective the Merger as promptly as practicable, (ii) obtain from any Governmental Entity or any other
third Person any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by such
Party or any of their Subsidiaries in connection with the consummation of the Merger and the transactions contemplated hereby,
and (iii) as promptly as practicable, make all necessary filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act, and any other applicable
federal or state securities Laws, (B) any Antitrust Laws and any related governmental request thereunder, and (C) any
other applicable Law. The Company and Parent shall cooperate with each other in connection with the making of all such filings
(subject to applicable Law regarding the sharing of information), and the Company and Parent and their counsel shall be given a
reasonable opportunity to review and comment upon such filings and any amendments or supplements thereto (and shall provide any
comments thereon as soon as practicable) prior to the filing thereof with the SEC.
(b)
The Company and Parent agree, and shall cause each of their respective Subsidiaries, to cooperate and to use their
reasonable best efforts to obtain any clearances or approvals of any Governmental Entities required for the consummation of the
Merger under the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended,
and any other federal, state or foreign Law designed to prohibit, restrict or regulate actions for the purpose or effect of monopolization
or restraint of trade (collectively “Antitrust Laws”), to obtain the expiration of any applicable waiting period
under any Antitrust Law, to respond to any government requests for information under any Antitrust Law, and to contest and resist
any action, including any legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other order (whether temporary, preliminary or permanent) that restricts, prevents or prohibits
the consummation of the Merger or any other transactions contemplated by this Agreement under any Antitrust Law. No Party to this
Agreement shall consent to any voluntary delay of the consummation of the Merger at the behest of any Governmental Entity without
the consent of the other Parties to this Agreement, which consent shall not be unreasonably withheld. The Company and Parent shall
use reasonable best efforts to file, as promptly as practicable, all notifications required under the HSR Act and any applicable
international antitrust requirements.
(c)
Notwithstanding anything to the contrary in this Section 6.10(c), neither Parent, nor the Company nor any
of their Subsidiaries shall be required to (i) license, divest, dispose of or hold separate any assets or businesses of Parent
or the Company or any of their respective Subsidiaries or otherwise take or commit to take any action that limits its freedom of
action with respect to, or its ability to retain, any of the assets or businesses of Parent or the Company or any of their respective
Subsidiaries, or that would otherwise have a material adverse effect on the combined company or (ii) pay more than de minimis
amounts in connection with seeking or obtaining such consents, approvals or authorizations as are required to complete the Merger
under applicable Antitrust Laws (excluding any mandatory filing fees and reasonable and customary costs and expenses associated
with making applications for, and responding to requests for information from Governmental Entities with respect to, such required
consents, approvals or authorizations).
(d)
Each of Parent and the Company, as applicable, shall give (or shall cause their respective Subsidiaries to give)
any notices to third Persons, and use, and cause their respective Subsidiaries to use, their commercially reasonable efforts to
obtain any third Person consents related to or required in connection with the Merger that are (i) necessary to consummate
the transactions contemplated hereby, (ii) disclosed or required to be disclosed in the Company Disclosure Schedule, or (iii) required
to prevent a Parent Material Adverse Effect or a Company Material Adverse Effect from occurring prior to or after the Effective
Time; provided, however, that, with respect to this subsection (d), the Company shall not offer or pay any consideration
in excess of $250,000 for all consents, approvals or waivers in the aggregate, or make any agreement or understanding affecting
the business or the assets, properties or Liabilities of the Company, in order to obtain any such third Person consents, approvals
or waivers, except with the prior written consent of Parent (which shall not be unreasonably withheld, conditioned or delayed).
If any Party shall fail to obtain any consent from a third Person described in this subsection (d), such Party will use its
reasonable efforts, and will take any such actions reasonably requested by the other Party hereto, to limit the adverse affect
upon the Company and Parent, their respective Subsidiaries, and their respective businesses resulting, or that would reasonably
be expected to result after the consummation of the Merger, from the failure to obtain such consent.
(e)
Parent and the Company shall each keep the other apprised of the status of matters relating to the completion of
the Merger and work cooperatively in connection with obtaining all required consents, authorizations, Orders or approvals of, or
any exemptions by, any Governmental Entity undertaken pursuant to the provisions of this Section 6.10(e). In that regard,
prior to the Closing, each party shall promptly consult with the other parties to this Agreement with respect to and provide any
necessary information and assistance as the other parties may reasonably request with respect to (and, in the case of correspondence,
provide the other parties (or their counsel) copies of) all notices, submissions, or filings made by such party with any Governmental
Entity or any other information supplied by such party to, or correspondence with, a Governmental Entity in connection with this
Agreement and the Merger. Each party to this Agreement shall promptly inform the other parties to this Agreement, and if in writing,
furnish the other parties with copies of (or, in the case of oral communications, advise the other parties orally of) any communication
from or to any Governmental Entity regarding the Merger, and permit the other parties to review and discuss in advance, and consider
in good faith the views of the other parties in connection with, any proposed communication with any such Governmental Entity.
If any party to this Agreement or any Representative of such parties receives a request for additional information or documentary
material from any Governmental Entity with respect to the Merger, then such party shall use reasonable best efforts to make, or
cause to be made, promptly and after consultation with the other parties to this Agreement, an appropriate response in substantial
compliance with such request. No party shall participate in any meeting or teleconference with any Governmental Entity where material
issues or any matters relating to timing would likely be discussed in connection with this Agreement and the Merger unless it consults
with the other party in advance and, to the extent not prohibited by such Governmental Entity, gives the other party the opportunity
to attend and participate thereat. In addition, without the prior written consent of Parent, the Company shall not agree or commit
to, or permit any of its Subsidiaries to agree or commit to, any commitment to sell, divest or dispose of any businesses, assets,
relationships or contractual rights of the Company or any of its Subsidiaries or purporting to limit the Company’s, any of
its Subsidiaries' or Parent's freedom to action with respect to, or ability to retain, any businesses, assets, relationships or
contractual rights. Without limiting the foregoing, unless prohibited by Law or the applicable Governmental Entity, each party
shall, on a current basis, furnish the other parties with copies of all correspondence, filings and communications (and memoranda
setting forth the substance thereof) between it and any such Governmental Entity with respect to this Agreement and the Merger,
and furnish the other parties with such necessary information and reasonable assistance as the other parties may reasonably request
in connection with its preparation of necessary filings or submissions of information to any such Governmental Entity. Notwithstanding
anything to the contrary contained in this Section 6.10(e), materials provided pursuant to this Section 6.10(e) may
be redacted (i) to remove references concerning the valuation of the Company and the Merger or other similarly confidential
information, (ii) as necessary to comply with contractual arrangements, and (iii) as necessary to address reasonable
privilege concerns.
Section 6.11 Notification of Certain Matters. Parent and the Company shall promptly (and, in any event, within two (2) Business Days) advise the other orally and in writing of any state of facts, event, change, effect, development, condition or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Parent Material Adverse Effect or a Company Material Adverse Effect, respectively. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) any representation or warranty made by it contained in this Agreement that is qualified as to materiality becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the Parties under this Agreement.
Section 6.12 Indemnification; Insurance.
(a)
The certificate of incorporation and the bylaws of the Surviving Corporation (and the organizational documents of
each Subsidiary of the Company) shall contain provisions with respect to indemnification, advancement of expenses and exculpation
as are set forth in the Company Certificate and Company Bylaws as in effect at the date hereof (to the extent consistent with applicable
Law), which provisions shall not be amended, repealed or otherwise modified for a period of six (6) years after the Effective Time
in any manner that would adversely affect the rights thereunder of the persons who at any time prior to the Effective Time were
entitled to indemnification, advancement of expenses or exculpation under the Company Certificate and Company Bylaws (or the applicable
organizational documents of the Company’s Subsidiaries) in respect of actions or omissions occurring at or prior to the Effective
Time, unless otherwise required by applicable Law (and provided that all rights of indemnification, advancement of expenses and
exculpation in respect of any claim asserted or made within such six-year period shall continue until the final disposition of
such claim). From and after the Effective Time, Parent shall assume, be jointly and severally liable for, and honor, and cause
the Surviving Corporation and the Surviving Corporation’s Subsidiaries to honor, the respective covenants of this Section
6.12.
(b)
From and after the Effective Time and until the expiration of any applicable statutes of limitation of the underlying
claim to which the indemnification relates, Parent shall indemnify, defend and hold harmless the present and former officers directors
of the Company and its Subsidiaries (collectively, together with their respective heirs, executors and administrators, the “Indemnified
Directors and Officers”) against all losses, claims, damages, expenses (including reasonable attorneys’ fees and
including any attorneys’ fees or other fees incurred to enforce the provisions of this Section 6.12(b)), Liabilities
or amounts that are paid in settlement of, or otherwise, in connection with any claim, action, suit, Proceeding or investigation,
whether civil, criminal, administrative or investigative and including all appeals thereof to which any Indemnified Directors and
Officers is or may become a party to by virtue of his or her service as a present or former director or officer of the Company
or any of its Subsidiaries, and arising out of actual or alleged events, actions or omissions occurring or alleged to have occurred
at or prior to the Effective Time, in each case to the fullest extent permitted by applicable Law.
(c)
Parent agrees and shall cause the Surviving Corporation to agree, and the Company agrees, that all rights to indemnification,
exculpation and advancement of expenses now existing in favor of any Indemnified Directors and Officers or any current or former
employee of the Company or any of its Subsidiaries (together with their heirs, executors and administrators, and any Indemnified
Directors and Officers, the “Indemnified Parties”) as provided in the Company Certificate or the Company Bylaws
(or the organizational documents of Company’s Subsidiaries) shall survive the Merger and shall continue in full force and
effect in accordance with their terms. For a period of six (6) years after the Effective Time, Parent shall cause the Surviving
Corporation to agree, and the Surviving Corporation agrees, to maintain in effect the indemnification, exculpation and advancement
of expenses provisions of the Company Certificate or the Company Bylaws (and the organizational documents of the Company’s
Subsidiaries) now in effect and any such indemnification agreements of the Company or any of its Subsidiaries with the Indemnified
Parties and not to amend, repeal or otherwise modify such provisions in any manner that would adversely affect the rights thereunder
of such Indemnified Parties, and all such rights in respect of any action, suit, proceeding or investigation pending or asserted
or claim made or threatened within such period shall continue until the final disposition or resolution thereof.
(d)
Prior to the Effective Time, the Company shall obtain “tail” insurance policies with a claims period
of six (6) years from the Effective Time with respect to directors’ and officers’ liability insurance in an amount
and scope reasonably comparable to the existing policy of the Company and reasonably acceptable to Parent for claims arising from
facts or events that occurred on or prior to the Effective Time at a cost that is reasonable and customary for tail insurance policies
with its existing directors’ and officers’ liability policy insurer or an insurer with a comparable insurer financial
strength rating as Parent’s existing directors’ and officers’ liability policy insurer (the “D&O
Insurance”). The Company shall use commercially reasonable efforts to obtain competitive quotes (from insurance providers
with comparable ratings) for such insurance coverage in an effort to reduce the cost thereof and shall use Lockton Companies in
obtaining such insurance coverage. The cost of the D&O Insurance shall not exceed 200% of the Company’s current annual
premium, with credit given for any unearned premium remaining on the current policy. The parties agree that if a claim has been
made against the Company’s current D&O policy prior to the Closing, a new aggregate limit of liability shall be negotiated
in connection with the D&O Insurance.
(e)
The rights of each Indemnified Party hereunder shall be in addition to, and not in limitation of, any other rights
such Indemnified Party may have under the certificate of incorporation, bylaws or other organizational documents of the Company
and any of the Company’s Subsidiaries or under any other indemnification agreements or under applicable Law. The obligations
under this Section 6.12 shall not be terminated or modified in such a manner as to affect adversely any Indemnified Party
to whom this Section 6.12 applies without the consent of such affected Indemnified Party (it being expressly agreed that
the Indemnified Parties to whom this Section 6.12 applies and their respective heirs, successors and assigns shall be express
third-party beneficiaries of this Section 6.12). This Section 6.12 shall survive the consummation of the Merger and
is intended to be for the benefit of, and shall be enforceable by, the Indemnified Parties referred to herein.
(f)
If the Parent or the Surviving Corporation or any of their respective successors or assigns (i) consolidates
with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each
case, to the extent necessary, proper provision shall be made so that the successors and assigns of the Parent or the Surviving
Corporation, as the case may be, shall assume the obligations set forth in this Section 6.12.
Section 6.13 No Solicitation.
(a)
Company Takeover Proposal.
(i)
The Company shall not, nor shall it authorize or permit any Subsidiary of the Company to, nor shall it authorize
or permit any Company Representative to, directly or indirectly, (i) solicit, initiate or knowingly encourage the submission,
making or announcement of any Company Takeover Proposal, (ii) participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, or otherwise cooperate in any way with respect to, or take any other action
to facilitate the making of, any inquiry or any proposal that constitutes, or would reasonably be expected to lead to, any Company
Takeover Proposal or (iii) make or authorize any statement, recommendation or solicitation in respect of any Company Takeover
Proposal (in each case, except as permitted by this Section 6.13).
(ii)
The Company shall, and shall cause each Subsidiary of the Company and each Company Representative to, immediately
cease and cause to be terminated all discussions or negotiations with any person conducted heretofore with respect to any proposal
that constitutes or would reasonably be expected to lead to a Company Takeover Proposal. The Company shall, and shall cause each
Subsidiary of the Company to, enforce (and not waive any provision of or release any Person from any obligations under) any confidentiality,
standstill or similar agreement to which the Company or any Subsidiary of the Company is a party unless the Company Board concludes
in good faith that a failure to take any action described in this sentence would be inconsistent with the Company Board’s
fiduciary duties to the Company’s stockholders under applicable Law.
(iii)
Notwithstanding the foregoing, if, at any time after the date hereof and prior to the time that the Required Company
Stockholder Vote has been obtained, the Company receives a bona fide Company Takeover Proposal that did not result from a breach
or a deemed breach (pursuant to Section 6.13(a)(iv)) by the Company or any Company Representative of Section 6.13(a)(i)
and/or (ii), or the Confidentiality Agreement and the Company otherwise has complied with Sections 6.13(a)(i) and (ii),
and the Company Board determines in good faith (A) after consultation with outside counsel and an independent financial advisor
that such Company Takeover Proposal is, or is reasonably likely to result in, a Superior Company Proposal and (B) after consultation
with outside counsel that failure to take the actions set forth in clauses (1) and (2) below with respect to such Company Takeover
Proposal would be inconsistent with the Company Board’s fiduciary duties to the Company’s stockholders under applicable
Law, the Company may, subject to providing prior written notice of its decision to take such action to Parent and compliance with
Section 6.13(c): (1) furnish information with respect to the Company and the Company’s Subsidiaries to the Person
making such Company Takeover Proposal pursuant to a confidentiality agreement no less restrictive of the other party than the Confidentiality
Agreement (but which confidentiality agreement may allow such Person to make any Company Takeover Proposal to the Company in connection
with the negotiations and discussions permitted by this Section 6.13), provided that all such information not previously
provided to Parent is promptly provided to Parent and (2) participate in discussions or negotiations with the Person making
such Company Takeover Proposal regarding such Company Takeover Proposal.
(iv)
The parties hereto acknowledge that any violation by any Subsidiary of the Company or any Company Representative
of any provision of this Section 6.13 shall be deemed to be a violation by the Company.
(b)
Change in Recommendation.
(i)
Neither the Company nor the Company Board nor any committee thereof shall (A) (1) withdraw (or qualify
or modify in a manner adverse to Parent) or propose to withdraw (or qualify or modify in a manner adverse to Parent), the approval
or recommendation by the Company Board or any such committee of this Agreement, the Merger or any of the transactions contemplated
by this Agreement or (2) approve or recommend, or propose to approve or recommend, any Company Takeover Proposal (either (1)
or (2) being a “Change in Recommendation”) or (B) approve, or cause or permit the Company or any Subsidiary
of the Company to enter into, any letter of intent, agreement in principle, merger agreement, acquisition agreement or other similar
agreement relating to any Company Takeover Proposal (each, an “Acquisition Agreement”).
(ii)
Notwithstanding the foregoing, if, at any time after the date hereof and prior to the time that the Required Company
Stockholder Vote has been obtained, (x) the Company receives a Superior Company Proposal that did not result from a breach
or a deemed breach (pursuant to Section 6.13(a)(iv)) by the Company or any Company Representative of Section 6.13(a)(i)
and/or Section 6.13(a)(ii), or the Confidentiality Agreement, and (y) the Company Board determines in good faith after
consultation with outside counsel that, in light of such proposal, a failure to make a Change in Recommendation would be inconsistent
with the Company Board’s fiduciary duties to the Company’s stockholders under applicable Law, the Company may, (A) make
a Change in Recommendation or (B) terminate this Agreement pursuant to Section 8.1(f), so long as (and only if) (i) the
Company has complied with this Section 6.13, including subsection (c) below, (ii) the Company Board shall have first
provided a Superior Proposal Notice to Parent, (iii) either (x) within five (5) Business Days after receipt of such Superior
Proposal Notice (the “Proposal Period”), Parent shall not have proposed (in writing and in a manner what would
be binding on Parent if accepted by the Company) any adjustments to the terms and conditions of this Agreement or (y) the
Company Board shall have determined in good faith, after consultation with its financial advisor, that any such proposal by Parent
during the Proposal Period does not cause the Superior Company Proposal to cease to constitute a Superior Company Proposal, and
(iv) concurrently with and as a condition to such termination, the Company Board causes the Company to enter into an Acquisition
Agreement with such Person with respect to such Superior Company Proposal and to pay the Company Termination Fee pursuant to Section
8.3(b). The Company agrees that, during the Proposal Period, the Company and the Company Representatives shall negotiate in
good faith with Parent and the Parent Representatives regarding any revisions to the terms of the transactions contemplated by
this Agreement that are proposed by Parent. A “Superior Proposal Notice” means a written notice to Parent from
the Company advising Parent that the Company Board is prepared to make a Change in Recommendation or accept a Superior Company
Proposal, specifying the terms and conditions of such Superior Company Proposal, attaching the most current draft of the Superior
Company Proposal and identifying the Person making such Superior Company Proposal (it being understood and agreed that any material
amendment to the price or any other material term of such Superior Company Proposal shall require a new Superior Proposal Notice
and a new Proposal Period, as provided above.
(iii)
Notwithstanding anything to the contrary contained herein, prior to obtaining the Required Company Stockholder Vote,
the Company Board may make a Change in Recommendation (except for a Change in Recommendation with respect to a Superior Proposal
to which Section 6.13(b)(ii) applies), if the Company Board determines in good faith, after consultation with the Company’s
outside counsel, that the failure to take such action would be inconsistent with the Company directors’ fiduciary duties
to the Company stockholders under applicable Law.
(c)
Company Takeover Proposal Information.
(i)
The Company shall promptly, but in any event within forty-eight (48) hours, (i) advise Parent orally and in
writing of any Company Takeover Proposal or any inquiry with respect to, or that would reasonably be expected to lead to or contemplates,
any Company Takeover Proposal (including any change to the terms of any such Company Takeover Proposal or inquiry), specifying
the material terms and conditions thereof and the identity of the Person making any such Company Takeover Proposal or inquiry and
(ii) provide to Parent a copy of all written material provided to the Company or any Subsidiary of the Company or any Company Representative
in connection with any such Company Takeover Proposal or any inquiry with respect to, or that would reasonably be expected to lead
to or contemplates, any Company Takeover Proposal. The Company shall (A) keep Parent fully informed of the status of any such
Company Takeover Proposal or inquiry, and (B) promptly, but in any event within forty-eight (48) hours, advise Parent orally
and in writing of any material amendments to the terms of any such Company Takeover Proposal or inquiry and shall provide to Parent
a copy of all written materials provided to the Company or any Subsidiary of the Company or any Company Representative in connection
with any such Company Takeover Proposal. The Company shall not take any actions whether contractually or otherwise to limit its
ability to comply with its obligations hereunder.
(ii)
The Company shall provide Parent with at least forty-eight (48) hours prior notice (or such lesser prior notice as
is provided to the members of the Company Board) of any meeting of the Company Board at which the Company Board is expected to
consider any Company Takeover Proposal or any such inquiry or to consider providing information to any person or group in connection
with a Company Takeover Proposal or any such inquiry.
Section 6.14 Tax Free Reorganization.
(a)
Each of Parent and the Company shall use its commercially reasonable best efforts to cause the Merger to qualify
as a “reorganization” within the meaning of Section 368(a) of the Code. None of Parent, the Company, or their
respective Subsidiaries shall take, or agree to take, fail to take, or agree to fail to take, any action (including any action
otherwise permitted by Section 6.1 in the case of the Company) that would reasonably be expected to prevent or impede the
Merger from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code. Pursuant to the
foregoing, each Party agrees to make such commercially reasonable additions or modifications to the terms of this Agreement as
may be reasonably necessary to permit the Merger to so qualify.
(b)
Unless otherwise required by applicable Law, each of Parent, Merger Sub and the Company (i) shall report the
Merger as a “reorganization” within the meaning of Section 368(a) of the Code, (ii) shall not take any Tax
reporting position inconsistent with such characterization and (iii) shall properly file with their federal income Tax Returns
all information required by Treasury Regulations Section 1.368-3.
(c)
The Parties hereto shall cooperate and use their commercially reasonable efforts to deliver to Parent’s and
the Company’s Tax counsel and Tax advisors a certificate containing representations reasonably requested by such counsel
and/or advisors in connection with the rendering of the Tax opinions to be issued by such counsel and/or advisors with respect
to the treatment of the Merger as a reorganization within the meaning of Section 368(a) of the Code as required under Section
7.2(f) and 7.3(d) and in connection with the filing of the Registration Statement. Parent’s and the Company’s
Tax counsel and Tax advisors shall be entitled to rely upon such representations in rendering any such opinions.
(d)
The certificates required pursuant to Section 6.14(c) and the tax opinions required pursuant to Section
7.2(e) and Section 7.3(d) will be in a form and content that is reasonably acceptable to both Parent and the Company.
Section 6.15 Litigation. Each of the Parties hereto shall promptly notify the other Parties of any Proceeding that shall be instituted or threatened against a Party to restrain, prohibit or otherwise challenge the legality of any of the transactions contemplated by this Agreement. The Company shall promptly notify the other Parties of any Proceeding that may be threatened or asserted in writing, brought or commenced against such Party or any of such Party’s Subsidiaries, that would have been disclosed pursuant to Article IV or Article V, as the case may be, if such Proceeding had arisen prior to the date hereof. The Company agrees that it shall not settle or make an offer to settle any litigation commenced against the Company or any director by any stockholder relating to this Agreement, the Merger or any other transactions contemplated hereby, unless Parent shall have consented in writing to such payment or settlement (with such consent not to be unreasonably withheld).
Section 6.16 Takeover Laws and Rights. If any “fair price,” “moratorium,” “control share acquisition” or other anti-takeover statute or regulation (“Takeover Law”) is or may become applicable to this Agreement, the Parent Stockholders Agreement, the Company Shares, the Merger or any of the other transactions contemplated hereby, each of the Company and the Company Board, Parent and the Parent Board shall grant such approvals and take such actions as are necessary so that such transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise act to eliminate or minimize the effects of such Takeover Law on this Agreement, the Parent Stockholders Agreement, the Company Shares, the Merger or such other transactions contemplated hereby.
Section 6.17 Registration Statement on Form S-8. Parent shall, as soon as practicable following the Effective Time, file a registration statement on Form S-8 with the SEC, if available for use by Parent, relating to the shares of Parent Stock issuable with respect to assumed Company Stock Options eligible for registration on Form S-8; provided, however, that (i) assumed Company Stock Options held by non-employees of the Company (the “Non-Employee Options”) shall not be registered by Parent on Form S-8 and (ii) the Non-Employee Options may only be exercised following the Closing upon delivery to Parent of an opinion of counsel, in such form to be reasonably acceptable to Parent, that the exercise does not violate federal or state Law.
Section 6.18 Effects Bargaining. The Company shall be responsible for conducting any necessary “effects” bargaining with any labor union or labor organization that is a party to any collective bargaining Contract with the Company prior to the Closing Date.
Section 6.19 Merger Sub Compliance. Parent shall cause Merger Sub to comply with all of Merger Sub’s obligations under this Agreement and to consummate the transactions contemplated hereby upon the terms and subject to the conditions in this Agreement.
Section 6.20 Pollution Liability Insurance. The Company shall, at the Company’s expense, (a) prior to the Effective Time maintain in effect its existing pollution liability coverage, and (b) obtain as of the Effective Time and maintain pollution liability coverage for $20 million with no exclusions for pre-existing conditions, in each case for the properties of the Company and covering any releases of Hazardous Materials or other pollution conditions commencing or occurring on each of the properties prior to the Closing, and obtain endorsements naming Parent and Merger Sub as additional insureds, for a period of five (5) years following the Effective Date; provided, however, that if such pollution liability insurance is unavailable on a commercially reasonable basis and on commercially reasonable terms, the Company shall instead as of the Effective Time obtain and maintain pollution liability insurance as required under this Section 6.20 but in such lesser limits as are available on a commercially reasonable basis and on commercially reasonable terms (the “Pollution Liability Insurance”).
Section 6.21 Further Assurances. Each of the Parties to this Agreement shall use its reasonable best efforts to effect the transactions contemplated hereby. Each Party hereto, at the reasonable request of another Party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting the consummation of the Merger and the transactions contemplated hereby.
Article
VII
CONDITIONS TO THE MERGER
Section 7.1 Conditions to the Obligations of Each Party. The respective obligations of each party to consummate the Merger are subject to the satisfaction on or prior to the Closing Date of the following conditions:
(a)
Stockholder Approval. The Company Voting Proposal shall have been approved at the Company Stockholders’
Meeting by the Required Company Stockholder Vote and the Parent Voting Proposals shall have been approved at the Parent Stockholders’
Meeting by the applicable Required Parent Stockholder Vote.
(b)
No Order. No judgment, injunction, order or decree of a Governmental Entity of competent jurisdiction shall
be in effect which has the effect of making the Merger illegal or prohibiting the consummation of the Merger or the other transactions
contemplated by this Agreement; provided, however, that prior to asserting this condition, subject to Section 6.10,
the Party seeking to assert this condition shall have used its reasonable efforts to prevent the entry of any such judgment, injunction,
order or decree.
(c)
HSR Act; Approvals. All waiting periods, and any extensions thereof, under the HSR Act relating to the Merger
or any of the transactions contemplated hereby will have expired or terminated early. All other authorizations, consents, orders,
declarations or approvals of, or filings and registrations with, any Governmental Entity that are required to effect the Merger
or any of the transactions contemplated hereby shall have been obtained, shall have been made or shall have occurred.
(d)
Registration Statement; Joint Proxy Statement/Prospectus. The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued and
no proceeding for that purpose, and no similar proceeding with respect to the Joint Proxy Statement/Prospectus, shall have been
initiated or threatened in writing by the SEC or its staff and not concluded or withdrawn.
(e)
Litigation. There shall not be pending any suit, action or proceeding by any Person or Governmental Entity
in any court of competent jurisdiction seeking to prohibit the consummation of the Merger or any other transaction contemplated
by this Agreement or that would otherwise cause a Company Material Adverse Effect or a Parent Material Adverse Effect; provided,
however, that if the court of competent jurisdiction dismisses or renders a final decision denying a Governmental Entity’s
request for an injunction in such suit, action or proceeding, then four (4) Business Days following such dismissal or decision,
this condition to Closing shall, with respect to such suit, action or proceeding, thereafter be deemed satisfied whether or not
such Governmental Entity appeals the decision of such court or files an administrative complaint before the Federal Trade Commission.
(f)
Parent Stock Price. The VWAP per share of Parent Voting Common Stock, as reported on NASDAQ for the twenty
(20) Trading Days immediately preceding the Closing Date, shall equal or exceed $10.00.
(g)
NASDAQ Listing. Shares of Parent Voting Common Stock to be issued in the Merger and the transactions contemplated
hereby, shall have been authorized for listing on NASDAQ, subject to official notice of issuance.
Section 7.2 Additional Conditions to Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following additional conditions, any of which may be waived, in writing, exclusively by Parent and Merger Sub:
(a)
Representations and Warranties. Each of the representations and warranties of the Company set forth in this
Agreement, without giving effect to any materiality or “Company Material Adverse Effect” qualification therein, shall
be true and correct as of the Closing Date, except for such failures to be true and correct as would not have, individually or
in the aggregate, a Company Material Adverse Effect (except to the extent such representations and warranties are expressly made
as of a certain date, in which case such representations and warranties shall be so true and correct as of such certain date only);
provided, however, that the representations and warranties contained in (i) Section 4.1 (Organization and Qualification);
Section 4.3 (Subsidiaries); Section 4.4(a) and (b) (Authority; Non-Contravention; Approvals) and Section
4.11 (Taxes) shall be true and correct in all material respects as of the Closing Date (except to the extent such representations
and warranties are expressly made as of a certain date, in which case such representations and warranties shall be so true and
correct in all material respects as of such certain date only), and (ii) Section 4.2 (Capitalization) shall be true
and correct in all respects, other than de minimis inaccuracies, at and as of the date of this Agreement and at and as of the Closing
Date (except to the extent as permitted or approved pursuant Section 6.1(b)); and Parent shall have received a certificate
signed on behalf of the Company by its Chief Executive Officer and Chief Financial Officer to the effect that the conditions contained
in this Section 7.2(a) have been satisfied.
(b)
Performance of Obligations. The Company shall have performed in all material respects all obligations required
to be performed by it under this Agreement on or prior to the Effective Time including, among other obligations, the obligation
to obtain the D&O Insurance, and Parent shall have received a certificate signed on behalf of the Company by its Chief Executive
Officer and its Chief Financial Officer to such effect.
(c)
Material Adverse Effect. Since the date of this Agreement, there shall have been no Company Material Adverse
Effect. Parent shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and the Chief Financial
Officer of the Company to such effect.
(d)
Consents. The Company shall have obtained the consent or approval of each Person or Governmental Entity whose
consent or approval shall be required in connection with the Merger and the transactions contemplated hereby under any loan or
credit agreement, note, mortgage, indenture, lease or other Contract or agreement (including any Company Material Contract) or
instrument, or otherwise, as required to be set forth in Section 4.4(c) of the Company Disclosure Schedule.
(e)
Tax Opinion. Parent shall have received the written opinion of its counsel, Troutman Sanders LLP, in form
and substance reasonably satisfactory to Parent, on the basis of facts, representations and assumptions set forth in such opinion
and dated the Closing Date, to the effect that the Merger will be treated as a reorganization described in Section 368(a)
of the Code (the “Parent Tax Opinion”). In rendering such opinion, counsel may require and rely upon representations
contained letters or certificates of officers of Parent and the Company, reasonably satisfactory in form and substance to it.
(f)
Employment Agreements. The execution and delivery by those individuals identified by Parent within thirty
(30) days after the date of this Agreement of employment agreements between such individuals and Parent, in each case in a form
substantially similar to the form of employment agreements entered into between Parent and its employees holding similar positions.
(g)
Dissenters’ Rights. The Company shall not have received demands (in accordance with applicable Law and
which have not been withdrawn or effectively withdrawn and with respect to which the right to seek appraisal on the shares underlying
such demand has not otherwise been lost) for the appraisal of Company Shares as contemplated by Section 3.4 and within the
time periods mandated by the DGCL from holders of Company Shares representing more than one percent (1%) of the issued and outstanding
Company Shares.
(h)
Resignation Letters. The Company shall have delivered to Parent written resignations of all officers, directors
and managers, as the case may be, of the Company and each of the Company’s Subsidiary effective as of the Effective Time.
(i)
Aurora Coop Litigation. There shall not have occurred an event, nor shall Parent have become aware of information
not known by Parent as of December 28, 2014 which, upon the occurrence of such event or upon Parent learning of such information,
would be reasonably viewed as either resulting in, or substantially increasing the likelihood of, a material adverse result in
any Aurora Coop Litigation (in either case, an “Adverse Aurora Coop Litigation Event”).
(j)
Company Registration Rights Agreements. The Company Registration Rights Agreements shall have been terminated
by mutual agreement of the parties thereto and shall be of no further force or effect.
(k)
Phase I Environmental Site Assessment. Parent shall have received current and valid Phase I environmental
site assessments, performed in accordance with the applicable technical standard, along with a reliance letter if applicable, for
each of the Company’s Facilities, and such assessments shall not reveal any condition(s) (except any condition(s) that would
be reasonably apparent to a reasonable Person under Parent’s circumstances from the information disclosed to Parent in the
Company’s Disclosure Schedules or in the Dataroom on or prior to December 21, 2014, including from any previous Phase I environmental
site assessments performed on any site of the Company’s Facilities disclosed to Parent in the Dataroom on or prior to such
date), that would reasonably be expected to give rise to a cost of remediation exceeding $3,300,000 in the aggregate (including
the aforementioned reasonably apparent condition(s)) for the Company’s Facilities; provided, that the condition in this Section
7.2(k) shall be deemed to have been satisfied if Parent has not provided notice to the Company within 30 days after receipt of
all current and valid Phase I environmental site assessments commissioned by Parent as of the date hereof, that the cost of remediation
of the Company’s Facilities would in the reasonable determination of Parent be expected to exceed $3,300,000 in the aggregate
(the “Remediation Notice”). If Parent timely provides the Remediation Notice, but without, however, affecting
the satisfaction of the foregoing condition to Closing, the Parties will negotiate in good faith to develop a remediation plan
that is mutually acceptable to the Parties.
(l)
BNSF. Parent shall not have become aware of information that would reasonably be understood to indicate that
the BNSF does not intend to establish a rail track connecting the rail facilities of NELLC to the inner rail loop belonging to
the Aurora West Facility along with the associated “diamond switch” crossing the outer rail loop, which lie entirely
on land owned by NELLC or Aventine Renewable Energy - Aurora West, LLC such that the Aurora West Facility will be able to ship
ethanol by rail in unit trains and single cars (the “BNSF Connection”).
(m)
Releases. The Company shall have obtained releases, in forms that have been made available to Parent in the
Dataroom, relating to payment obligations pursuant to (i) a Company Restricted Stock Unit from each Person who has received
payments in respect of a Company Restricted Stock Unit or (ii) a bonus or severance payment from each employee of the Company
who has received or will receive a bonus or severance payment in connection with the Merger.
Section 7.3 Additional Conditions to Obligations of the Company. The obligation of the Company to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following additional conditions, any of which may be waived, in writing, exclusively by the Company:
(a)
Representations and Warranties. Each of the representations and warranties of Parent and Merger Sub set forth
in this Agreement, without giving effect to any materiality or “Parent Material Adverse Effect” qualification therein,
shall be true and correct as of the Closing Date, except for such failures to be true and correct as would not have, individually
or in the aggregate, a Parent Material Adverse Effect (except to the extent such representations and warranties are expressly made
as of a certain date, in which case such representations and warranties shall be so true and correct as of such certain date only);
provided, however, that the representations and warranties contained in Section 5.1 (Organization and Qualification);
Section 5.3 (Subsidiaries); and Section 5.4(a) (Authority; Non-Contravention: Approvals) shall be true and correct
in all material respects as of the Closing Date (except to the extent such representations and warranties are expressly made as
of a certain date, in which case such representations and warranties shall be so true and correct in all material respects as of
such certain date only); and the Company shall have received a certificate signed on behalf of Parent by its Chief Executive Officer
and Chief Financial Officer to the effect that the conditions contained in this Section 7.3(a) have been satisfied.
(b)
Performance of Obligations. Parent and Merger Sub shall have performed in all material respects all obligations
required to be performed by them under this Agreement on or prior to the Closing Date, and the Company shall have received certificates
signed on behalf of Parent by its Chief Executive Officer and Chief Financial Officer to such effect.
(c)
Material Adverse Effect. Since the date of this Agreement, there shall have been no Parent Material Adverse
Effect. The Company shall have received a certificate signed on behalf of Parent by its Chief Executive Officer and Chief Financial
Officer to such effect.
(d)
Tax Opinion. The Company shall have received the written opinion of its counsel, Akin Gump Strauss Hauer &
Feld LLP, in form and substance reasonably satisfactory to the Company, on the basis of facts, representations and assumptions
set forth in such opinion and dated the Closing Date, to the effect that the Merger will be treated as a reorganization described
in Section 368(a) of the Code (the “Company Tax Opinion”). In rendering such opinion, counsel may require
and rely upon representations contained in letters or certificates of officers of Parent and the Company, reasonably satisfactory
in form and substance to it.
(e)
Directors. The Company shall have received evidence satisfactory to the Company of the appointment of the
two individuals nominated by the holders of the majority of the issued and outstanding Company Shares to the Parent Board.
Section 7.4 Frustration of Closing Conditions. Neither the Company, on one hand, nor Parent or Merger Sub, on the other hand, may rely on the failure of any condition set forth in this Article VII to be satisfied if such failure was caused (to any substantial extent) by the Company’s failure or either Parents’ or Merger Sub’s failure, respectively, to act in good faith to comply with this Agreement and to consummate the transactions provided for herein.
Article
VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after any requisite approval of the stockholders of the Company or Merger Sub:
(a)
by mutual written consent of Parent and the Company;
(b)
by either Parent or the Company:
(i)
if the Merger has not been consummated on or before May 31, 2015, which shall be automatically extended to June 30,
2015 if the financial statements of Parent that are required to be included in the Registration Statement are for the year ending
December 31, 2014 (the “Termination Date”); provided, however, that the right to terminate this Agreement
pursuant to this subsection shall not be available to a Party if the failure of the Closing to occur by such date shall be due
to the material breach, violation or failure to perform by such Party of any representation, warranty, covenant, obligation or
other agreement of such Party set forth in this Agreement;
(ii)
if any Governmental Entity shall have issued a final order, decree or ruling or taken any other final action enjoining
or otherwise prohibiting the consummation of the Merger and such order, decree, ruling or other action is or shall have become
final and nonappealable;
(iii)
if, at the Company Stockholders’ Meeting (including any adjournment or postponement thereof permitted by this
Agreement) at which a vote on the Company Voting Proposal is taken, the Required Company Stockholder Vote in favor of the Company
Voting Proposal shall not have been obtained; or
(iv)
if the Parent Stockholders’ Meeting (including any adjournments and postponements thereof) shall have been
held and completed and Parent’s stockholders shall have voted on the Parent Voting Proposals, and the Parent Voting Proposals
shall not have been approved at such meeting (and shall not have been approved at any adjournment or postponement thereof) by the
Required Parent Stockholder Vote;
(c)
by Parent, if there has been a breach of or failure to perform any representation, warranty, covenant or agreement
on the part of the Company set forth in this Agreement, which breach or failure to perform (i) if it occurred or was continuing
to occur on the Closing Date, would result in the failure of the conditions set forth in Section 7.2(a) or Section 7.2(b)
to be satisfied, and (ii) which is either not curable or is not cured by the earlier of (A) the Termination Date and
(B) the date that is thirty (30) days following written notice from the Company to Parent describing such breach, violation
or failure in reasonable detail; provided, that Parent is not then in material breach or violation of, and has not materially
failed to perform, any representation, warranty, covenant, obligation or other agreement contained herein;
(d)
by the Company, if there has been a breach of or failure to perform any representation, warranty, covenant or agreement
on the part of Parent or Merger Sub set forth in this Agreement, which breach or failure to perform (i) if it occurred or
was continuing to occur on the Closing Date, would result in the failure of the conditions set forth in Section 7.3(a) or
Section 7.3(b) to be satisfied, and (ii) which is either not curable or is not cured by the earlier of (A) the
Termination Date and (B) the date that is thirty (30) days following written notice from Parent to the Company describing
such breach, violation or failure in reasonable detail; provided, that the Company is not in material breach or violation
of, and has not materially failed to perform, any representation, warranty, covenant, obligation or other agreement contained herein;
(e)
by Parent (but only prior to the time the Required Company Stockholder Vote is obtained), if (i) the Company
Board shall have effected a Change in Recommendation (other than as contemplated by Section 6.13(b)(iii)); (ii) the
Company Board shall have approved or recommended to the holders of the Company Shares a Company Takeover Proposal; (iii) a
tender offer or exchange offer for Company Shares that constitutes a Company Takeover Proposal is commenced (other than by Parent
or any of its Affiliates) and the Company Board recommends that the holders of the Company Shares tender their shares in such tender
or exchange offer or the Company Board fails to recommend that the holders of the Company Shares reject such tender or exchange
offer within ten (10) Business Days of commencement thereof; or (iv) there has been a material breach by the Company of Section
6.7(a) or Section 6.13;
(f)
by the Company, prior to the time that the Required Company Stockholder Vote has been obtained in accordance with
Section 6.13(b); provided, however, that, in order for the termination of this Agreement pursuant to this Section
8.1(f) to be effective, (A) the Company shall have complied in all respects with the provisions of Section 6.13,
including the notice provisions therein, (B) the Company Board shall have authorized the Company to enter into an Acquisition
Agreement with respect to a Superior Proposal, (C) substantially concurrently with a termination, pursuant to this Section
8.1(f) the Company enters into such Acquisition Agreement and (D) the Company shall have complied with all applicable
requirements of Section 8.3, including payment of the Company Termination Fee; or
(g)
by Parent, if there shall have occurred an Adverse Aurora Coop Litigation Event.
The Party desiring to terminate this Agreement pursuant to
this Section 8.1 (other than pursuant to Section 8.1(a)) shall give written notice of such termination to the other
Parties.
Section 8.2 Effect of Termination. In the event of termination of this Agreement by either Parent or the Company prior to the Effective Time pursuant to the provisions of Section 8.1, this Agreement shall forthwith become void, and there shall be no Liability or further obligation on the part of Parent, the Company or Merger Sub or their respective officers or directors (except for the last sentence of Section 6.3(a) and the entirety of Section 8.2, Section 8.3 and Article IX, all of which shall survive the termination); provided, however, that nothing contained in this Section 8.2 shall relieve any Party hereto from any Liability for any willful material breach of this Agreement or fraud occurring prior to termination, in which case the aggrieved Party shall be entitled to all rights and remedies available at law or in equity.
Section 8.3 Fees and Expenses.
(a)
General. Except as set forth in this Section 8.3 or as otherwise provided herein, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses
whether or not the Merger is consummated.
(b)
Termination Fee.
(i)
In the event that:
(A)
this Agreement is terminated by the Company pursuant to Section 8.1(f); or
(B)
this Agreement is terminated by Parent pursuant to Section 8.1(e).
then in the case of (A) or (B) above, the Company shall
promptly, but in no event later than the date of the earliest such event, pay to Parent a fee equal to Five Million Nine Hundred
Eighty-Two Thousand Dollars ($5,982,000)(the “Company Termination Fee”), payable by wire transfer of same day
funds; provided, however, that, in the case of any termination pursuant to Section 8.1(f), the Company Termination
Fee shall be payable prior to, and as a condition to, such termination.
(ii)
In the event that this Agreement is terminated by Parent pursuant to Section 8.1(g), Parent shall promptly,
but in no event later than the date of the earliest such event, pay to the Company a fee equal to Five Million Nine Hundred Eighty-Two
Thousand Dollars ($5,982,000) (the “Parent Termination Fee”), payable by wire transfer of same day funds; provided,
however, that, in the case of any termination pursuant to Section 8.1(g), the Parent Termination Fee shall be payable
prior to, and as a condition to, such termination.
(iii)
Each of the Company and Parent acknowledges that the agreements contained in this Section 8.3(b) are an integral
part of the transactions contemplated by this Agreement, and that, without these agreements, each Party would not enter into this
Agreement. Accordingly, if the Company or Parent fails promptly to make a payment due pursuant to this Section 8.3(b), and,
in order to obtain such payment, Parent or Merger Sub on the one hand, or the Company on the other hand, commences a suit that
results in a judgment against the other Party, such other Party shall pay to Parent and Merger Sub or the Company, as applicable,
their reasonable costs and expenses (including attorneys’ fees and expenses) in connection with such suit, together with
interest on the amount set forth in this Section 8.3(b) at the publicly announced prime rate of Bank of America, N.A. plus
two percent (2.0%) per annum, compounded quarterly, from the date such payment was required to be paid. Payment of the fees described
in this Section 8.3(b) shall not be in lieu of damages incurred in the event of a breach of this Agreement described in
Section 8.2.
In no event shall more than one Company Termination Fee or
Parent Termination Fee be payable hereunder.
(c)
Payment of Company Expenses. In the event this Agreement is terminated by the Company or Parent pursuant to
Section 8.1(b)(iv), Parent shall promptly, but in no event later than the third Business Day following the date of termination
of this Agreement, reimburse the Company for fees or expenses (including all fees and expenses of counsel, accountants, consultants,
financial advisors and investment bankers) incurred by the Company in connection with the authorization, preparation, negotiation,
execution or performance of transactions contemplated by this Agreement, up to maximum amount of One Million Nine Hundred Ninety-Four
Thousand Dollars ($1,994,000), (the “Parent Expense Reimbursement Fee”), payable by wire transfer of same day
funds. If Parent fails promptly to make a payment due pursuant to this Section 8.3(c), and, in order to obtain such payment,
the Company commences a suit that results in a judgment against Parent, Parent shall pay to the Company its reasonable costs and
expenses (including attorneys’ fees and expenses) in connection with such suit, together with interest on the amount set
forth in this Section 8.3(c) at the publicly announced prime rate of Bank of America, N.A. plus two percent (2.0%) per annum,
compounded quarterly, from the date such payment was required to be paid. Payment of the fees described in this Section 8.3(c)
shall not be in lieu of damages incurred in the event of a breach of this Agreement described in Section 8.2.
Article
IX
MISCELLANEOUS
Section 9.1 Non-Survival of Representations and Warranties. The representations, warranties and covenants of the Company, Parent and Merger Sub contained in this Agreement, or any instrument delivered pursuant to this Agreement, shall terminate at the Effective Time, except that the covenants that by their terms survive the Effective Time and this Article IX shall survive the Effective Time.
Section 9.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed duly given (i) on the date of delivery if delivered personally, (ii) on the date of confirmation of receipt (or, the first Business Day following such receipt if such date is not a Business Day) of transmission by facsimile (but only if followed by transmittal by a nationally recognized overnight carrier for delivery on the next Business Day), or (iii) on the date of confirmation of receipt (or, the first Business Day following such receipt if such date is not a Business Day) if delivered by a nationally recognized overnight courier service. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice:
If to Parent, Merger Sub, or the Surviving Corporation,
to:
Pacific
Ethanol, Inc.
400 Capitol Mall, Suite 2060
Sacramento, CA 95814
Attention: Christopher W. Wright, Esq., General Counsel
Email: cwright@pacificethanol.com
Facsimile No.: (916) 403-2785
with copies to:
Troutman Sanders LLP
5 Park Plaza, 14th Floor
Irvine, CA 92614
Attention: Larry A. Cerutti, Esq.
Email: larry.cerutti@troutmansanders.com
Facsimile No.: (949) 622-2739
If to the Company, to:
Aventine Renewable Energy Holdings, Inc.
1300 S. 2nd Street
Pekin, IL 61554
Attention: Christopher A. Nichols, Esq.
Email: Chris.Nichols@AventineREI.com
Facsimile No.: (309) 214-9026
with copies to:
Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, NY 10036
Attention: Ackneil M. Muldrow, III, Esq.
Email: tmuldrow@akingump.com
Facsimile No.: (212) 872-1002
Section 9.3 Interpretation; Other Remedies. The table of contents, captions and headings contained in this Agreement are solely for convenience of reference and shall not be used to interpret or construe this Agreement. The Parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any Law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a Party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such Party, and the exercise by a Party of any one remedy will not preclude the exercise of any other remedy.
Section 9.4 Transfer Taxes. All stock transfer, real estate transfer, documentary, stamp, recording and other similar Taxes (including interest, penalties and additions to any such Taxes) (“Transfer Taxes”) incurred in connection with the transactions contemplated by this Agreement shall be paid by Parent, Merger Sub or the Surviving Corporation, and expressly shall not be a liability of the stockholders of the Company.
Section 9.5 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Parties.
Section 9.6 Entire Agreement; Third-Party Beneficiaries. This Agreement and all exhibits and attachments hereto, including the Company Disclosure Schedule, the Parent Stockholders Agreement and the Confidentiality Agreement constitute the entire agreement among the Parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof, it being understood that the Confidentiality Agreement shall continue in full force and effect until the Closing and shall survive any termination of this Agreement. Each of Parent, Merger Sub and the Company agrees that this Agreement is not intended to, and does not, confer upon any Person, other than the Parties to this Agreement, any rights or remedies, and the Company only shall be entitled to enforce any remedies against Parent and Merger Sub on the one hand, and Parent and Merger Sub shall only be entitled to enforce any remedies against the Company on the other (in each case, including pursuant to Section 9.11 (related to specific performance)) for any breach or violation of this Agreement. Notwithstanding the foregoing, each Company Indemnified Party shall be an express third party beneficiary of and shall be entitled to rely upon Section 6.12 (notwithstanding this Section 9.6). Each of Parent, Merger Sub and the Company also agrees that their respective representations, warranties, covenants, obligations and other agreements set forth herein are solely for the benefit of the other Party hereto, in accordance with and subject to the terms of this Agreement.
Section 9.7 Assignment. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other parties, except that Parent may assign or pledge as collateral this Agreement or any of its rights and obligations hereunder to an affiliate of Parent or to any financing sources. Any purported assignment in violation of this Section 9.7 shall be void. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.
Section 9.8 Amendment. This Agreement may be modified or amended by the Parties hereto, by or pursuant to action taken by their respective Boards of Directors, in the case of Merger Sub or the Company, or Parent, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of the Company or by the stockholder of Merger Sub, but, after any such approval if any such amendment or waiver shall by applicable Law or in accordance with the rules and regulations of NASDAQ require further approval of the Company stockholders, the effectiveness of such amendment or waiver shall be subject to the approval of the Company stockholders; provided, however, that no modification or amendment of this Agreement or of any provision of this Agreement shall be valid or enforceable unless in writing duly executed by each of the Parties hereto.
Section 9.9 Waiver. At any time prior to the Effective Time, the Parties hereto may (i) extend the time for the performance of any of the obligations or other acts of the other Parties hereto, (ii) waive any inaccuracies in the other Parties’ representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the other Parties’ agreements or conditions contained herein which may legally be waived. Any agreement on the part of a Party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. No failure of any Party to exercise any power given such Party hereunder or to insist upon strict compliance by any party with its obligations hereunder, and no custom or practice of the parties in variance with the terms hereof, shall constitute a waiver of that Party’s right to demand exact compliance with the terms hereof. Any waiver shall not obligate that Party to agree to any further or subsequent waiver or affect the validity of the provision relating to any such waiver.
Section 9.10 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other Persons or circumstances will be interpreted so as reasonably to effect the intent of the Parties hereto. The Parties further agree to negotiate in good faith to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purposes of such void or unenforceable provision.
Section 9.11 Specific Performance. The Parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. Each of the parties agrees that it will not oppose the granting of an injunction, specific performance and other equitable relief on the basis that any other party has an adequate remedy at law or that any award of specific performance is not an appropriate remedy for any reason at law or in equity. Any party seeking an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement shall not be required to provide any bond or other security in connection with any such order or injunction.
Section 9.12 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 9.13 Jurisdiction. Each of the Parties hereto irrevocably and unconditionally agrees that any legal action or Proceeding with respect to this Agreement and the rights and obligations arising hereunder, or for recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations arising hereunder brought by the other Party hereto or its successors or assigns, shall be brought and determined exclusively in the Delaware Court of Chancery (or, if (and only if) the Court of Chancery does not accept jurisdiction over a particular matter, any court within the State of Delaware). Each of the Parties hereto hereby irrevocably submits with regard to any such action or Proceeding for itself and in respect of its property, generally and unconditionally, to the exclusive personal jurisdiction of the aforesaid courts and agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than the aforesaid courts. Each of the Parties hereto hereby irrevocably waives, and agrees not to assert, by way of motion, as a defense, counterclaim or otherwise, in any action or Proceeding with respect to this Agreement, (i) any claim that it is not personally subject to the jurisdiction of the above-named courts for any reason, (ii) any claim that it or its property is exempt or immune from jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise) and (iii) to the fullest extent permitted by applicable Law, any claim that (A) the suit, action or Proceeding in such court is brought in an inconvenient forum, (B) the venue of such suit, action or Proceeding is improper or (C) this Agreement, or the subject matter hereof, may not be enforced in or by such courts. Each of the Company, Parent and Merger Sub hereby agrees that service of any process, summons, notice or document by U.S. registered mail to the respective addresses set forth in Section 9.2 shall be effective service of process for any suit or proceeding in connection with this Agreement or the transactions contemplated hereby.
Section 9.14 Waiver of Jury Trial. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED BY THE PARTIES IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 9.14.
Section 9.15 Disclosure. Any matter disclosed in any Section of a Party’s Disclosure Schedule shall be considered disclosed for other sections of such Disclosure Schedule, but only to the extent such matter on its face would reasonably be expected to be pertinent to a particular Section of a Party’s Disclosure Schedule in light of the disclosure made in such section. The provision of monetary or other quantitative thresholds for disclosure does not and shall not be deemed to create or imply a standard of materiality hereunder.
[Remainder of Page Intentionally Left
Blank]
IN WITNESS WHEREOF, Parent, Merger
Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the
date first written above.
PACIFIC ETHANOL, INC.
By: /s/ NEIL M. KOEHLER
Name: Neil M. Koehler
Title: President & Chief Executive Officer
AVR MERGER SUB, INC.
By: /s/ NEIL M. KOEHLER
Name: Neil M. Koehler
Title: President & Chief Executive Officer
AVENTINE RENEWABLE ENERGY HOLDINGS, INC.
By: /s/ MARK BEEMER
Name: Mark Beemer
Title: Chief Executive Officer
[SIGNATURE PAGE TO AGREEMENT AND
PLAN OF MERGER]
AMENDMENT NO. 1 TO AGREEMENT AND
PLAN OF MERGER
THIS AMENDMENT
NO. 1 TO AGREEMENT AND PLAN OF MERGER (this “Amendment”) is dated as of March 31, 2015, among PACIFIC ETHANOL,
INC., a Delaware corporation (“Parent”), AVR MERGER SUB, INC., a Delaware corporation and a direct wholly-owned
subsidiary of Parent (“Merger Sub”), and AVENTINE RENEWABLE ENERGY HOLDINGS, INC., a Delaware corporation (the
“Company”).
RECITALS:
A. Parent,
Merger Sub and the Company are parties to that certain Agreement and Plan of Merger dated as of December 30, 2014 (the “Agreement”).
Capitalized terms not defined herein shall have the meanings attributed to them in the Agreement.
B. The
Parties desire to amend the Agreement to (i) specify that the Company Stockholders’ Meeting would occur as promptly as practicable
after the declaration of effectiveness of the Registration Statement rather than within forty-five days after the declaration
of effectiveness of the Registration Statement as set forth in Section 6.7(a) of the Agreement; (ii) remove the requirement
contained in Section 7.1(f) of the Agreement that the VWAP per share of Parent Voting Common Stock, as reported on NASDAQ
for the twenty (20) Trading Days immediately preceding the Closing Date, equals or exceeds $10.00; (iii) provide that Parent will
identify individuals to be party to employment agreements pursuant to Section 7.2(f) of the Agreement and provide such
individuals the principal terms of employment, in each case, as promptly as practicable following the date hereof but no later
than on or prior to May 1, 2015; and (iv) specify that the condition in Section 7.2(k) of the Agreement shall be deemed to
have been satisfied without any further action if Parent has not provided notice to the Company within 20 days after receipt of
the current and valid Phase I environmental site assessment for the Company’s production facility in Pekin, Illinois, that
the cost of remediation of the Company’s production facility in Pekin, Illinois would in the reasonable determination of
Parent be expected to exceed $3,300,000 in the aggregate.
AGREEMENT:
NOW, THEREFORE,
in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. Amendment.
The Parties hereby amend the Agreement as follows:
(a) The
first sentence of Section 6.7(a) of the Agreement is hereby amended by deleting such sentence in its entirety and inserting
in its place the following
“The Company, acting
through the Company Board, shall take all actions in accordance with the DGCL, the Company Certificate or Company Bylaws or similar
governing documents of the Company and all applicable Laws to promptly and duly call, give notice of, convene and hold as promptly
as practicable after the declaration of effectiveness of the Registration Statement, the Company Stockholders’ Meeting for
the purpose of considering and voting upon the Company Voting Proposal.”
(b) Section
7.1(f) of the Agreement is hereby amended by deleting such section in its entirety and inserting in its place the following:
“(f) [INTENTIONALLY
OMITTED.]”
(c) Section
7.2(f) of the Agreement is hereby amended by deleting such sentence in its entirety and inserting in its place the following:
“(f) Employment
Agreements. The execution and delivery by those individuals identified by Parent in writing as promptly as practicable following
the date hereof but no later than on or prior to May 1, 2015 of employment agreements between such individuals and Parent, in
each case in a form substantially similar to the form of employment agreements entered into between Parent and its employees holding
similar positions. The delivery of the written notification to each such individuals shall contain the principal terms of employment
including title, duties, compensation and term.”
(d) Section
7.2(k) of the Agreement is hereby amended by deleting such section in its entirety and inserting in its place the following:
“(k) Phase
I Environmental Site Assessment. Parent shall have received a current and valid Phase I environmental site assessment, performed
in accordance with the applicable technical standard, along with a reliance letter if applicable, for the Company’s production
facility in Pekin, Illinois, and such assessment shall not reveal any condition(s) (except any condition(s) that would be reasonably
apparent to a reasonable Person under Parent’s circumstances from the information disclosed to Parent in the Company’s
Disclosure Schedules or in the Dataroom on or prior to December 21, 2014, including from any previous Phase I environmental site
assessments performed on the Company’s production facility in Pekin, Illinois disclosed to Parent in the Dataroom on or
prior to such date), that would reasonably be expected to give rise to a cost of remediation exceeding $3,300,000 in the aggregate
(including the aforementioned reasonably apparent condition(s)) for the Company’s production facility in Pekin, Illinois;
provided, that the condition in this Section 7.2(k) shall be deemed to have been satisfied without any further action if Parent
has not provided notice to the Company within 20 days after receipt of the current and valid Phase I environmental site assessment
for the Company’s production facility in Pekin, Illinois, that the cost of remediation of the Company’s production
facility in Pekin, Illinois would in the reasonable determination of Parent be expected to exceed $3,300,000 in the aggregate
(the “Remediation Notice”). If Parent timely provides the Remediation Notice, but without, however, affecting
the satisfaction of the foregoing condition to Closing, the Parties will negotiate in good faith to develop a remediation plan
that is mutually acceptable to the Parties.”
2. No
Other Amendments. Except as otherwise provided in this Amendment, no other amendments to the Agreement (including the
Schedules or Exhibits thereto) are hereby made or intended, and the Agreement remains in full force and effect and legally binding
on the Parties. This Amendment may be executed in counterparts, including facsimile counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same instrument.
(Signature page follows.)
IN WITNESS WHEREOF, Parent,
Merger Sub and the Company have caused this Amendment to be signed by their respective officers thereunto duly authorized all
as of the date first written above.
PACIFIC ETHANOL, INC.
By: /s/ Neil M. Koehler
Name: Neil M. Koehler
Title: President & Chief Executive Officer
AVR MERGER SUB, INC.
By: /s/ Neil M. Koehler
Name: Neil M. Koehler
Title: President & Chief Executive Officer
AVENTINE RENEWABLE ENERGY HOLDINGS, INC.
By: /s/ Mark Beemer
Name: Mark Beemer
Title: Chief Executive Officer
[SIGNATURE PAGE
TO AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER]
Annex B
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PACIFIC ETHANOL, INC.
a Delaware corporation
PACIFIC ETHANOL, INC. a corporation organized
and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies as follows:
1. The name of the Corporation is
PACIFIC ETHANOL, INC.
2. That the Corporation’s Certificate
of Incorporation was filed with the Secretary of State of the State of Delaware on February 28, 2005 (the “Original Certificate”).
The following were subsequently filed: (i) Certificate of Designations, Powers, Preferences and Rights of the Series A Cumulative
Redeemable Convertible Preferred Stock filed with the Secretary of State of Delaware on April 12, 2006; (ii) Certificate of Designations,
Powers, Preferences and Rights of the Series B Cumulative Convertible Preferred Stock filed with the Secretary of State of Delaware
on March 26, 2008; (iii) Certificate of Amendment of Certificate of Incorporation filed with the Secretary of State of Delaware
on June 3, 2010; (iv) Certificate of Amendment of Certificate of Incorporation filed with the Secretary of State of Delaware on
June 6, 2011; and (v) Certificate of Amendment of Certificate of Incorporation filed with the Secretary of State of Delaware on
May 10, 2013 (the Original Certificate, together with the subsequently filed certificates, shall be collectively referred to as
the “Certificate of Incorporation”).
3. The Certificate of Incorporation
of the Corporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following
new Article FOURTH:
“FOURTH: The total number of shares
of all classes of stock that the corporation shall have authority to issue is [●] shares, consisting of (A) three hundred
million (300,000,000) shares of Common Stock, with the par value of $0.001 per share (“Common Stock”), (B) [●]
shares of Non-Voting Common Stock, with the par value of $0.001 per share (“Non-Voting Common Stock”) and (C)
ten million (10,000,000) shares of Preferred Stock, with the par value of $0.001 per share (“Preferred Stock”),
each having the rights set forth in this Article FOURTH.
4.1 Common Stock. Except as
otherwise provided by the General Corporation Law of the State of Delaware or in this Article FOURTH (or in any certificate of
designation establishing a series of Preferred Stock), the holders of Common Stock shall exclusively possess all voting power of
the corporation. Each share of Common Stock shall be equal in all respects to every other share of Common Stock. Each holder of
record of issued and outstanding Common Stock shall be entitled to one (1) vote on all matters for each share so held. Subject
to the rights and preferences, if any, of the holders of Preferred Stock, each issued and outstanding share of Common Stock shall
entitle the record holder thereof to receive dividends and distributions out of funds legally available therefor, when, as and
if declared by the board of directors of this corporation (the “Board of Directors”), in such amounts and at
such times, if any, as the board of directors shall determine, ratably in proportion to the number of shares of Common Stock held
by each such record holder. Upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, after
there shall have been paid to or set aside for the holders of any class of capital stock having preference over the Common Stock
in such circumstances the full preferential amounts to which they are respectively entitled, the holders of the Common Stock, and
of any class or series of capital stock entitled to participate in whole or in part therewith as to the distribution of assets,
shall be entitled, after payment or provision for the payment of all debts and liabilities of the corporation, to receive the remaining
assets of the corporation available for distribution, in cash or in kind, ratably in proportion to the number of shares of Common
Stock (or any class or series of capital stock entitled to participate in whole or in part therewith) held by each such holder.
4.2 Non-Voting Common Stock. Each
share of Non-Voting Common Stock shall rank equally in all respects and shall be subject to the following provisions of this Certificate
of Incorporation.
4.2.1 Rank. Non-Voting Common Stock
shall, with respect to rights on liquidation, winding up and dissolution, rank equally with the Common Stock.
4.2.2 Dividends. Holders of Non-Voting
Common Stock shall receive dividends and distributions on parity in all respects with holders of Common Stock; provided,
however, that if holders of shares of Common Stock become entitled to receive a distribution or dividend of shares of Common
Stock, holders of Non-Voting Common Stock shall receive, in lieu of the shares of Common Stock that they are entitled to receive,
an equal number of shares of Non-Voting Common Stock. Dividends or distributions payable pursuant to the preceding sentence shall
be payable on the same date that such dividends or distributions are payable to the holders of record of Common Stock.
4.2.3 Liquidation Preference. Holders
of Non-Voting Common Stock shall be entitled to receive, in all respects, the same preference as holders of Common Stock in the
event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation.
4.2.4 Voting Rights.
(A) Except as set forth in Section
4.2.4(B) and Section 4.2.4(C) below, holders of shares of Non-Voting Common Stock shall not be entitled to vote (in
their capacity as holders of Non-Voting Common Stock) on any matter submitted to a vote of the stockholders of the corporation,
but shall be entitled to prior written notice of, and to attend and observe, all special and annual meetings of the stockholders
of the corporation.
(B) So long as any shares of Non-Voting
Common Stock are outstanding, the corporation shall not, without the affirmative vote at a meeting called for that purpose by holders
of at least a majority of the then outstanding shares of Non-Voting Common Stock, voting as a single and separate class, amend,
alter or repeal any provision of this Article FOURTH or any other provision of the Certificate of Incorporation (by any means,
including by merger, consolidation, reclassification, or otherwise) so as to, or in a manner that would, disproportionately and
adversely affect the preferences, rights, privileges or powers of the Non-Voting Common Stock relative to the preferences, rights,
privileges or powers of the Common Stock.
(C) The consent or votes required
by Section 4.2.4(B) hereof shall be in addition to any approval of stockholders of the corporation which may be required
by applicable law or pursuant to any provision of this Certificate of Incorporation.
4.2.5 Conversion.
(A) Optional Conversion; Conversion
Upon Transfer.
(i) Holders of Non-Voting Common
Stock shall have the right, at any time and from time to time, at the option of such holder, to convert any share of Non-Voting
Common Stock held by such holder into one fully paid and non-assessable share of Common Stock, subject to the provisions contained
in Section 4.2.5(A)(iii) and subject to the adjustments as described in Section 4.2.5(C) hereof.
(ii) Notwithstanding anything
contained in Section 4.2.5(A)(i), at any time when a share of Non-Voting Common Stock is not or ceases to be owned by an
Initial Holder or an Affiliate of an Initial Holder, such share of Non-Voting Common Stock, without any further action or deed
on the part of the corporation or any other Person, shall automatically convert into one (1) fully paid and non-assessable share
of Common Stock subject to adjustments as described in Section 4.2.5(C) hereof.
(iii) Notwithstanding anything
to the contrary contained in this Article FOURTH, no Non-Voting Common Stock shall be convertible to Common Stock to the extent
(but only to the extent) that after giving effect to such conversion pursuant to this Section 4.2.5, the holder (together
with any of its Affiliates) of the Common Stock received from such conversion would beneficially own in excess of 9.99% (the “Maximum
Percentage”) of the Common Stock of the corporation. To the extent the above limitation applies, the determination of
whether the Non-Voting Common Stock shall be convertible (vis-à-vis other convertible, exercisable or exchangeable securities
owned by the holder or any of its Affiliates) and of which such securities shall be convertible, exercisable or exchangeable (as
the case may be, as among all such securities owned by the holder) shall, subject to such Maximum Percentage limitation, be determined
on the basis of the first submission to the corporation for conversion, exercise or exchange (as the case may be). No prior inability
to convert the Non-Voting Common Stock pursuant to this Section 4.25(A)(iii) shall have any effect on the applicability
of the provisions of this Section 4.25(A)(iii) with respect to any subsequent determination of exercisability. For the purposes
of this Section 4.25(A)(iii), beneficial ownership and all determinations and calculations (including, without limitation,
with respect to calculations of percentage ownership) shall be determined in accordance with Section 13(d) of the Exchange Act
and the rules and regulations promulgated thereunder. To the extent permitted by applicable law, the provisions of this Section
4.25(A)(iii) shall be implemented in a manner otherwise than in strict conformity with the terms of this Section 4.25(A)(iii)
to correct this Section 4.25(A)(iii) (or any portion hereof) which may be defective or inconsistent with the intended Maximum
Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly
give effect to such Maximum Percentage limitation. For purposes of determining Maximum Percentage, in determining the number of
outstanding shares of Common Stock, the holder of Non-Voting Common Stock may rely on the number of outstanding shares of Common
Stock as reflected in (1) the corporation’s most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public
filing with the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the corporation
or (3) any other notice by the corporation or the corporation’s transfer agent setting forth the number of shares of Common
Stock outstanding. For any reason at any time, upon the written or oral request of the holder of Non-Voting Common Stock, the corporation
shall within one (1) Business Day confirm orally and in writing to such holder the number of shares of Common Stock then outstanding,
including by virtue of any prior conversion or exercise of convertible or exercisable securities into Common Stock. By written
notice to the corporation, any holder of Non-Voting Common Stock may increase or decrease the Maximum Percentage to any other percentage
not in excess of 9.99% specified in such notice; provided that (i) any such increase will not be effective until the sixty-first
(61st) day after such notice is delivered to the corporation, and (ii) any such increase or decrease will apply only
to the holder sending such notice and not to any other holder of Non-Voting Common Stock.
(B) Mechanics of Conversion.
(i) In order to exercise its conversion
right pursuant to Section 4.2.5(A)(i), a holder of Non-Voting Common Stock shall (i) surrender the certificate or certificates
representing shares of Non-Voting Common Stock at the office of the corporation (or any transfer agent of the corporation previously
designated by the corporation to the holders of Non-Voting Common Stock for this purpose) with a written notice of election to
convert, completed and signed, specifying the number of shares to be converted.
(ii) Each conversion shall be
deemed to have been effected immediately prior to the close of business on (x) in the case of conversion pursuant to Section 4.2.5(A)(i)
hereof, the sixty-first (61st) day following the day on which the certificates for shares of Non-Voting Common Stock
shall have been surrendered and such notice received by the corporation pursuant to Section 4.2.5(B)(i), and (y) in the
case of conversion pursuant to Section 4.2.5(A)(ii) hereof, the date the Non-Voting Common Stock is not or ceases to be
owned by an Initial Holder or an Affiliate of an Initial Holder (in either case, the “Conversion Date”). On
the Conversion Date: (a) the Person in whose name or names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder of record of the shares of Common Stock represented thereby
at such time, and (b) the shares of Non-Voting Common Stock so converted shall no longer be deemed to be outstanding, and all rights
of a holder with respect to such shares shall immediately terminate except the right to receive the Common Stock pursuant to this
Section 4.2.5. All shares of Common Stock delivered upon conversion of the Non-Voting Common Stock shall, upon delivery,
be duly and validly authorized and issued, fully paid and nonassessable.
(iii) Holders of shares of Non-Voting
Common Stock at the close of business on the record date for any payment of a dividend in which shares of Non-Voting Common Stock
are to participate pursuant to Section 4.2.2 hereof shall be entitled to receive the dividend payable on such shares on
the corresponding dividend payment date notwithstanding the conversion thereof following such dividend payment record date and
prior to such dividend payment date.
(iv) The corporation shall at
all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, solely for
the purpose of effecting conversions of the Non-Voting Common Stock, the aggregate number of shares of Common Stock issuable upon
conversion of the Non-Voting Common Stock (as if all shares of Non-Voting Common Stock are so convertible). To the extent that
shares of Common Stock are listed or traded on a securities exchange, the corporation shall procure, at its sole expense, the listing
of all shares of Common Stock issuable upon conversion of the Non-Voting Common Stock, subject to issuance or notice of issuance,
on such stock exchange, and shall take all action as may be necessary to ensure that all shares of Common Stock issuable upon conversion
of Non-Voting Common Stock shall be issued without violation of any applicable law or regulation or of any requirement of such
securities exchange.
(v) Issuance of certificates for
shares of Common Stock upon conversion of the Non-Voting Common Stock shall be made without charge to the holder of shares of Non-Voting
Common Stock or any of its transferees for any issue or transfer tax (other than taxes in respect of any transfer of Non-Voting
Common Stock occurring contemporaneously therewith) or other incidental expense in respect of the issuance of such certificates,
all of which taxes and expenses shall be paid by the corporation; provided, however, that the corporation shall not
be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of Common
Stock in a name other than that of the transferee of the Non-Voting Common Stock pursuant to Section 4.2.5(A)(ii) hereof,
and no such issuance or delivery need be made unless and until the Person requesting such issuance or delivery has paid to the
corporation the amount of any such tax or has established, to the reasonable satisfaction of the corporation, that such tax has
been, or will timely be, paid.
(vii) Each share of Common Stock
issued as a result of conversion of Non-Voting Common Stock shall be accompanied by any rights associated generally with each other
share of Common Stock outstanding as of the applicable Conversion Date.
(C) Adjustments to Non-Voting
Common Stock. From and after the date hereof, Non-Voting Common Stock shall be adjusted from time to time as follows:
(i) Stock Splits, Subdivisions,
Reclassifications or Combinations. If the corporation shall (a) subdivide or reclassify the outstanding shares of Common Stock
into a greater number of shares, or (b) combine or reclassify the outstanding Common Stock into a smaller number of shares, the
Non-Voting Common Stock shall be equally and ratably subdivided, combined or reclassified on the same basis as that of Common Stock.
(ii) Other Distributions.
In case the corporation shall fix a record date for the making of a dividend or distribution to all holders of shares of its Common
Stock of (a) shares of any class or of any Person other than shares of the corporation’s Common Stock, (b) evidence of indebtedness
of the corporation or any Subsidiary, (c) assets (excluding dividends or distributions covered by Section 4.2.5(C)(i)),
or (d) rights or warrants in respect of any of the foregoing, in each such case all holders of Non-Voting Common stock shall receive
such dividend or distribution equally and ratably in all respects with holders of Common Stock.
(iii) Certain Repurchases of
Common Stock. In the event that the corporation effects a Pro Rata Repurchase (as defined below) of Common Stock, the corporation
shall, simultaneously with the Offer related to such Pro Rata Repurchase of Common Stock, offer, in writing and in compliance with
applicable laws, to all holders of Non-Voting Common Stock to purchase, on an equal, share-for-share basis, a percentage of all
shares of Non-Voting Common Stock equal to the percentage of all shares of Common Stock that the corporation has offered to purchase
under the related Offer, which offer to the holders of Non-Voting Common Stock shall be open for the same period, offer the same
form and value of consideration, and otherwise be on the same terms and conditions, as such Offer to the holders of Common Stock
in all respects.
As used in this Section 4.2.5(C)(iii):
“Pro Rata Repurchase” means any purchase of shares of Common Stock by the corporation or any Subsidiary thereof
pursuant to any Offer. “Offer” means any tender offer or exchange offer subject to Section 13(e) of the Exchange
Act, or pursuant to any other offer available to substantially all holders of Common Stock, whether for cash, shares of capital
stock of the corporation, other securities of the corporation, evidences of indebtedness of the corporation or any other Person
or any other property (including, without limitation, shares of capital stock, other securities or evidences of indebtedness of
a Subsidiary of the corporation), or any combination thereof, effected while the Non-Voting Common Stock is outstanding.
(iv) Business Combinations.
In case of any Business Combination or reclassification of Common Stock (other than a reclassification of Common Stock covered
by Section 4.2.5(C)(i)), lawful provision shall be made as part of the terms of such Business Combination or reclassification
whereby the holder of each share of Non-Voting Common Stock then outstanding shall have the right thereafter, to convert such share
only into the kind and amount of securities, cash and other property receivable upon the Business Combination or reclassification
by holders of Common Stock; provided, that, if the holders of at least a majority of the outstanding shares of Non-Voting
Common Stock so elect, any such security receivable upon such Business Combination or reclassification by holders of Common Stock
shall not have voting rights greater than those contained in Section 4.2.4 hereof.
(v) Adjustment for Unspecified
Actions. If the corporation takes any action affecting the Common Stock, other than an action described in this Section
4.2.5(C), which would materially adversely affect the conversion rights of the holders of shares of Non-Voting Common Stock,
the provisions of this Certificate of Incorporation shall be adjusted, to the extent permitted by law, in such manner, if any,
and at such time, as the Board of Directors of the corporation may determine in good faith to be equitable in the circumstances.
(vi) Notices. In the event
that the corporation shall give notice or make a public announcement to the holders of Common Stock of any action of the type described
in this Section 4.2.5(C) or in Sections 4.2.2 or 4.2.4 hereof, the corporation shall, at the time of such notice
or announcement, and in the case of any action which would require the fixing of a record date, at least ten (10) days prior to
such record date, give notice to the holders of shares of Non-Voting Common Stock, by mail, first class postage prepaid, which
notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is
to take place. Such notice shall also set forth the facts with respect thereto as shall be reasonably necessary to indicate the
effect on the Non-Voting Common Stock and the number, kind or class of shares or other securities or property which shall be deliverable
upon conversion of the Non-Voting Common Stock.
4.2.6 Certain Other Provisions.
(A) The provisions of this Section
4.2 shall not be in effect at any time that there are no shares of Non-Voting Common Stock outstanding.
(B) No provision in this Section
4.2 shall be construed to limit or impair the right of each holder of Non-Voting Common Stock to participate equally and ratably
in dividends and distributions pursuant to Section 4.2.2 hereof, the operation of any of the provisions of Section 4.2.5
hereof or the rights, preferences and privileges of a holder of Non-Voting Common Stock pursuant to Sections 4.2.1 and 4.2.3
hereof.
(C) If any Non-Voting Common Stock
certificate shall be mutilated, lost, stolen or destroyed, the corporation shall issue, in exchange and in substitution for and
upon cancellation of the mutilated certificate, or in lieu of and substitution for the certificate lost, stolen or destroyed, a
new Non-Voting Common Stock certificate of like tenor and representing an equivalent amount of Non-Voting Common Stock, upon receipt
of evidence of such loss, theft or destruction of such certificate and, if requested by the corporation, an indemnity on customary
terms for such situations reasonably satisfactory to the corporation.
(D) The
corporation shall not, by amendment of this Certificate of Incorporation or through reorganization, consolidation, merger, dissolution,
sale of assets, or otherwise, avoid or seek to avoid the observance or performance of any of the terms of this Section 4.2,
but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may
be necessary or appropriate in order to protect the rights of the holders of Non-Voting Common Stock against dilution or impairment.
At all times, the corporation shall take all such actions as may be necessary or appropriate in order that the corporation may
validly and legally issue shares of Common Stock as herein contemplated upon conversion of the shares of Non-Voting Common Stock.
(E)
The headings and various subdivisions used within this Section 4.2 are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
4.2.7 Definitions. Unless the context otherwise
requires, when used in this Section 4.2, the following terms shall have the meaning indicated.
“Affiliate” means
with respect to any Person, any other Person directly, or indirectly through one or more intermediaries, controlling, controlled
by or under common control with such Person. For purposes of this definition, the term “control” (and correlative terms
“controlling,” “controlled by” and “under common control with”) means possession of the power,
whether by contract, equity ownership or otherwise, to direct the policies or management of a Person.
“Business Day”
means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required
by law to remain closed.
“Business Combination”
means (i) any reorganization, consolidation, merger, share exchange or similar business combination transaction involving the corporation
or (ii) the sale, assignment, conveyance, transfer, lease or other disposition by the corporation of all or substantially all of
its assets.
“Exchange Act”
means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder.
“Initial Holder”
means any Person who received shares of Non-Voting Common Stock upon the closing of that certain Agreement and Plan of Merger by
and among Pacific Ethanol, Inc., Aventine Merger Sub, Inc. and Aventine Renewable Energy Holdings, Inc. dated December [●],
2014.
“Person” means
an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act).
“Subsidiary” of
a Person means (i) a corporation, a majority of whose stock with voting power, under ordinary circumstances, to elect directors
is at the time of determination, directly or indirectly, owned by such Person or by one or more Subsidiaries of such Person, or
(ii) any other entity (other than a corporation) in which such Person or one or more Subsidiaries of such Person, directly or indirectly,
at the date of determination thereof has at least a majority ownership interest.
4.3 Preferred Stock. The Board
of Directors is authorized by resolution or resolutions, from time to time adopted, to provide for the issuance of Preferred Stock
in one or more series and to fix and state the voting powers, designations, preferences and relative participating, optional or
other special rights of the shares of each series and the qualifications, limitations and restrictions thereof, including, but
not limited to, determination of one or more of the following:
(i) the distinctive designations of
each such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise
provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding)
from time to time by the Board of Directors;
(ii) the annual rate or amount of dividends
payable on shares of such series, whether such dividends shall be cumulative or non-cumulative, the conditions upon which and the
dates when such dividends shall be payable, the date from which dividends on cumulative series shall accrue and be cumulative on
all shares of such series issued prior to the payment date for the first dividend of such series, the relative rights of priority,
if any, of payment of dividends on the shares of that series, and the participating or other special rights, if any, with respect
to such dividends;
(iii) whether such series will have
any voting rights in addition to those prescribed by law and, if so, the terms and conditions of the exercise of such voting rights;
(iv) whether the shares of such series
will be redeemable or callable and, if so, the prices at which, and the terms and conditions on which, such shares may be redeemed
or called, which prices may vary under different conditions and at different redemption or call dates;
(v) the amount or amounts payable upon
the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and
the relative rights of priority, if any, of payment of shares of such series;
(vi) whether the shares of such series
shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and
if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may
be redeemed or purchased through the application of such fund;
(vii) whether the shares of such series
shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any
other class or classes of capital stock of the corporation, and if so convertible or exchangeable, the conversion price or prices,
or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any
other terms of such conversion or exchange;
(viii) whether the shares of such series
that are redeemed or converted shall have the status of authorized but unissued shares of Preferred Stock and whether such shares
may be reissued as shares of the same or any other series of stock;
(ix) the conditions and restrictions,
if any, on the payment of dividends or on the making of other distributions on, or the purchase, redemption or other acquisition
by the corporation, or any subsidiary thereof, of, the Common Stock or any other class (or other series of the same class) ranking
junior to the shares of such series as to dividends or upon liquidation, dissolution or winding up of the corporation; and
(x) the conditions and restrictions,
if any, on the creation of indebtedness of the corporation, or any subsidiary thereof, or on the issue of any additional stock
ranking on parity with or prior to the shares of such series as to dividends or upon liquidation, dissolution or winding up of
the corporation.
All shares within each series of Preferred
Stock shall be alike in every particular, except with respect to the dates from which dividends, if any, shall commence to accrue.
4.4 Reverse Stock Split on June 8, 2011.
On June 8, 2011 (the “First Split Date”), each share of common stock, par value $0.001 per share (the “Oldest
Common Stock”), issued and outstanding immediately before the First Split Date, was reclassified as and changed into
one-seventh (1/7) of a share of common stock, par value $0.001 per share (the “Newer Common Stock”). The corporation,
through its transfer agent, provided certificates representing Newer Common Stock to holders of Oldest Common Stock in exchange
for certificates representing Oldest Common Stock. From and after the First Split Date, certificates representing shares of Oldest
Common Stock were cancelled and as of the First Split Date represent only the right of holders thereof to receive Newer Common
Stock. The corporation did not issue fractional shares of Newer Common Stock. The reverse stock split did not increase or decrease
the amount of stated capital or paid-in surplus of the corporation, and any fractional share that would otherwise be issuable as
a result of the reverse stock split was rounded up to the nearest whole share of Newer Common Stock. From the First Split Date
until the Second Split Date (as defined below), the term “Newer Common Stock” as used in this Article FOURTH shall
mean Common Stock as provided in the Certificate of Incorporation. From and after the Second Split Date, the term “Newer
Common Stock” as used in this Article FOURTH shall mean Older Common Stock as provided in the Certificate of Incorporation.
4.5 Reverse Stock Split
on May 14, 2013. On May 14, 2013 (the “Second Split Date”), each share of common stock, par value $0.001
per share (the “Older Common Stock”), issued and outstanding immediately before the Second Split Date, was
reclassified as and changed into one-fifteenth (1/15) of a share of common stock, par value $0.001 per share (the “Newest
Common Stock”). The corporation, through its transfer agent, provided certificates representing Newest Common Stock
to holders of Older Common Stock in exchange for certificates representing Older Common Stock. From and after the Second Split
Date, certificates representing shares of Older Common Stock were cancelled and now represent only the right of holders thereof
to receive Newest Common Stock. The corporation did not issue fractional shares of Newest Common Stock. The reverse stock split
did not increase or decrease the amount of stated capital or paid-in surplus of the corporation, and any fractional share that
would otherwise be issuable as a result of the reverse stock split was rounded up to the nearest whole share of Newest Common
Stock. From and after the Second Split Date, the term “Newest Common Stock” as used in this Article FOURTH shall mean
common stock as provided in the Certificate of Incorporation.”
4. The amendment of the Certificate
of Incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation
Law of the State of Delaware.
5. The Effective Date of this Amendment
will be [●], 2015 at 12:01 a.m. Eastern Time.
IN WITNESS WHEREOF, said Corporation
has caused this Certificate to be signed this [●]th day of [●], 2015.
/s/ Christopher W. Wright
Christopher W. Wright
Vice President, General Counsel
& Secretary
ANNEX C-1
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (the “Stockholders
Agreement”), dated as of December 30, 2014, is by and among those entities holding shares of Aventine Renewable Energy
Holdings, Inc. as set forth in the signature pages hereto (each a “Stockholder”; and collectively, “Stockholders”)
and Pacific Ethanol, Inc., a Delaware corporation (“Parent”).
RECITALS
WHEREAS, contemporaneously with
the execution and delivery of this Stockholders Agreement, Parent, AVR Merger Sub, Inc., a Delaware corporation and wholly-owned
subsidiary of Parent (the “Merger Sub”), and Aventine Renewable Energy Holdings, Inc., a Delaware corporation
(the “Company”), are entering into an Agreement and Plan of Merger (the “Merger Agreement”),
dated as of the date hereof, which provides for the merger of Merger Sub with and into the Company, with the Company surviving
as a wholly owned subsidiary of Parent (the “Merger”);
WHEREAS, capitalized terms used
herein and not otherwise defined shall have the meanings assigned such terms in the Merger Agreement;
WHEREAS, in the aggregate, Stockholders
hold of record and own beneficially the number of shares of the Company’s capital stock set forth on Exhibit A, certain
of which shares, as noted on Exhibit A, are subject to pending sales by Stockholders to a third party pursuant to one or
more transfer agreements entered into prior to the date hereof (collectively, the “Third Party Transfers”);
WHEREAS, Stockholders wish to
enter into this Stockholders Agreement solely with respect to their respective Pro Rata Share of an aggregate 51% of the issued
and outstanding shares of capital stock of the Company (the Stockholders’ shares described herein, collectively, the “Shares,”
are set forth on Exhibit B); for purposes of this Stockholders Agreement, “Pro Rata Share” means,
as to any Stockholder, a fraction, (i) the numerator of which is the number of shares of the Company’s capital stock
held by the Stockholder as set forth on Exhibit A, and (ii) the denominator of which is the sum of (A) the number of
shares of the Company’s capital stock held by all Stockholders, in each case after the Third Party Transfers, and (B) the
CS Shares (as defined in Section 16 below); and
WHEREAS, Stockholders stand to
receive a material benefit from the Merger in the form of the consideration payable in the Merger in respect of the Shares and,
as a condition to entering into the Merger Agreement, Parent has required that Stockholders agree, and Stockholders have agreed,
to enter into this Stockholders Agreement.
NOW, THEREFORE, in consideration
of the foregoing and the respective representations, warranties, covenants and obligations set forth herein, and intending to be
legally bound hereby, each of the parties hereto agrees as follows:
1. Representations and Warranties
of Stockholders. Each Stockholder hereby severally, but not jointly, represents and warrants, as to itself only, to Parent
as follows:
(a) Title. As
of the date hereof, such Stockholder holds of record and owns beneficially, free and clear of any Encumbrances (other than restrictions
under applicable securities Laws), all of the Shares set forth opposite its name on Exhibit B hereto. Other than the Shares
and those additional shares of Company stock set forth on Exhibit A, such Stockholder does not, directly or indirectly,
own any shares of capital stock of the Company, any option, warrant or other right to acquire shares of capital stock of the Company
or any other securities of the Company. Other than the agreements subject to the Third Party Transfers, such Stockholder is not
a party to any executory written or oral agreement, contract, subcontract, lease, instrument, commitment or undertaking of any
nature (“Contract”) (other than this Stockholders Agreement) that could require such Stockholder to sell, transfer
or otherwise dispose of any capital stock of the Company and each Subsidiary of the Company.
(b) Right to Vote.
Such Stockholder has full legal power, authority and right to vote all of the Shares, in favor of the approval and authorization
of the Merger Agreement and the principal terms of the Merger without any approval, consent, ratification, permission, waiver or
authorization (including any consents of Governmental Entities) (“Consent”) of, or any other action on the part
of, any other Person. Without limiting the generality of the foregoing, except as otherwise provided in this Stockholders Agreement
or as set forth on Exhibit B hereto, such Stockholder has not entered into any voting agreement with any Person with respect
to any of the Shares, granted any Person any proxy (revocable or irrevocable) or power of attorney with respect to any of the Shares,
deposited any of the Shares in a voting trust or entered into any arrangement or agreement with any Person limiting or affecting
such Stockholder’s legal power, authority or right to vote the Shares on any matter.
(c) Authority.
Such Stockholder has full legal power, capacity, authority and right to execute and deliver, and to perform its obligations under,
this Stockholders Agreement. This Stockholders Agreement has been duly and validly authorized, executed and delivered by such Stockholder
and constitutes a valid and binding agreement of Stockholder enforceable against Stockholder in accordance with its terms.
(d) Opportunity.
Such Stockholder has had the opportunity to review this Stockholders Agreement and the Merger Agreement. Such Stockholder has had
adequate opportunity to discuss the requirements of this Stockholders Agreement with his or her professional advisors to the extent
such Stockholder has deemed necessary. Such Stockholder understands that its representations and agreements contained herein constitute
a material inducement and condition to Parent and Merger Sub in entering the Merger.
(e) No Conflicts;
Consents. The execution and delivery of this Stockholders Agreement by such Stockholder does not and will not, and the performance
of this Stockholders Agreement by such Stockholder will not, result in or constitute (with or without notice or lapse of time)
any breach of or default under, or result (with or without notice or lapse of time) in the creation of any Encumbrance on any of
the Shares pursuant to, any Contract to which such Stockholder is a party or by which such Stockholder or any of the Shares are
bound or affected as of the date of this Stockholders Agreement. The execution and delivery of this Stockholders Agreement by such
Stockholder does not and will not, and the performance of this Stockholders Agreement by such Stockholder will not, require any
Consent of any Person.
(f) Due Organization.
(i) If such Stockholder is an Entity:
(A) such Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction under which such
Stockholder is organized; (B) the execution, delivery and performance of this Stockholders Agreement by such Stockholder has been
duly authorized by all necessary action on the part of the board of directors of such Stockholder or other Persons performing similar
functions; and (C) the execution and delivery of this Stockholders Agreement by such Stockholder does not and will not, and the
performance of this Stockholders Agreement by such Stockholder will not, (I) result in or constitute any breach of or default under
the partnership agreement or any of the other organizational documents of such Stockholder, or (II) require the approval of holders
of voting or equity interests in Stockholder, other than any approval already obtained, except in each case as will not adversely
affect the ability of such Stockholder to perform its obligations hereunder in any material respect or to consummate the transactions
contemplated hereby in a timely manner.
(ii) If such Stockholder is an executor
of an estate or trustee of a trust: (A) such Stockholder is the sole executor or trustee of such estate or trust; (B) such Stockholder
has the sole power and authority to act on behalf of and bind such estate or trust; and (C) the execution and delivery of this
Stockholders Agreement by such Stockholder does not and will not, and the performance of this Stockholders Agreement by such Stockholder
will not, (I) result in or constitute any breach of or default under the will, trust agreement or other document relating to such
estate or trust, or (II) require the approval of any beneficiary of such estate or trust, other than any approval already obtained.
(g) Accuracy of Representations
and Warranties. All of such Stockholder's representations and warranties contained in this Stockholders Agreement will be accurate
on the Closing as if made on and as of the Closing, provided, however, that Exhibits A and B may be updated
as of Closing to reflect the consummation of the Third Party Transfers and/or transfers of shares or Shares permitted pursuant
to the terms of this Stockholders Agreement.
2. Representations and Warranties
of Parent. Parent hereby represents and warrants to each Stockholder as follows:
(a) Authority.
Parent has full legal power, capacity, authority and right to execute and deliver, and to perform its obligations under, this Stockholders
Agreement. This Stockholders Agreement has been duly and validly authorized, executed and delivered by Parent and constitutes a
valid and binding agreement of Parent enforceable against Parent in accordance with its terms.
3. Stockholder Covenants. Until
the termination of this Stockholders Agreement in accordance with Section 8(b), each Stockholder hereby severally, but not
jointly, as to itself only, agrees as follows:
(a) Restrictions on
Transfer. Such Stockholder agrees that, except for the Third Party Transfers, during the period from the Execution Date of
the Merger Agreement through the Effective Time (the “Pre-Closing Period”), such Stockholder shall not directly
or indirectly sell or otherwise transfer or dispose of, or pledge or otherwise permit to be subject to any Encumbrance (other than
the Merger Agreement), any of the Shares, or any direct or indirect beneficial interest therein, unless such proposed transferee
agrees, pursuant to a written agreement in form and content reasonably satisfactory to Parent, to be bound by, and comply with,
the terms and provisions of this Stockholders Agreement in its entirety (subject to any necessary name or like changes) with respect
to such transferred Shares.
(b) Agreement to Vote.
Such Stockholder agrees that, following the execution and delivery of the Merger Agreement, such Stockholder shall vote the Shares
at regular or special meetings of stockholders of the Company, including adjournments thereof, or in any other circumstances upon
which a vote, consent or other approval (including by written consent) is sought (i) with respect to the Merger and the Merger
Agreement, in favor of any proposal to approve the Merger Agreement and the Merger and (ii) with respect to all other proposals
submitted to the stockholders of the Company, which, directly or indirectly, would reasonably be expected to prevent or materially
delay the consummation of the Merger or the transactions contemplated by the Merger Agreement, in such manner as Parent may direct.
Such Stockholder agrees not to withdraw any such vote and not to take any other action that is inconsistent with such Stockholder’s
obligation to vote in favor of approval of the Merger Agreement and the Merger or that may have the effect of delaying or interfering
with the Merger.
(c) Market Stand-Off
Agreement. Except as provided herein, such Stockholder will not, without the prior written consent of Parent, directly or indirectly
offer, sell or contract or grant any option to sell, or otherwise dispose of (including short sales, sales against the box and/or
other hedging or derivative transactions), pledge or transfer 100% of the shares of Parent Stock acquired by such Stockholder (including
any Parent Voting Common Stock into which any Parent Non-Voting Common Stock is converted) pursuant to the terms of the Merger
Agreement in exchange for the Shares (the “Restricted Merger Consideration Shares”) for a period commencing
on the Closing Date and continuing through (i) the 30th day thereafter, after which an aggregate of 25% of the Restricted
Merger Consideration Shares shall be released from the foregoing restrictions, (ii) the 60th day thereafter, after which
an aggregate of 50% of the Restricted Merger Consideration Shares shall be released from the foregoing restrictions, (iii) the
90th day thereafter, after which an aggregate of 75% of the Restricted Merger Consideration Shares shall be released
from the foregoing restrictions, and (iv) the 120th day thereafter, after which an aggregate of 100% of the Restricted
Merger Consideration Shares shall be released from the foregoing restrictions. The foregoing sentence shall not apply to (A) transfers
of Restricted Merger Consideration Shares to immediate family members or trusts, partnerships, limited liability companies or other
entities for the benefit of such family members, (B) transfers of Restricted Merger Consideration Shares to a wholly-owned subsidiary,
parent, general partner, limited partner, retired partner, member or retired member of the undersigned, or (C) transfers of Restricted
Merger Consideration Shares by such Stockholder in non-public transactions; provided, however, that in each case, (1) such
transferee takes such Restricted Merger Consideration Shares subject to all of the provisions of this Stockholders Agreement, and
(2) no filing by any party (transferor or transferee) under the Securities Exchange Act of 1934, as amended, shall be required
or shall be voluntarily made in connection with such transfer of Restricted Merger Consideration Shares.
(d) No Actions.
From and after the date hereof, except as otherwise permitted by this Stockholders Agreement, such Stockholder will not commit
any act that would reasonably be expected to restrict or otherwise adversely affect in any material respect Stockholder’s
legal power, authority and right to vote all of the Shares. Without limiting the generality of the foregoing, except as required
by this Stockholders Agreement, from and after the date hereof, such Stockholder will not enter into any voting agreement with
any Person with respect to any of the Shares, grant any Person any proxy (revocable or irrevocable) or power of attorney with respect
to any of the Shares, deposit any of the Shares in a voting trust or otherwise enter into any Contract with any Person limiting
or affecting such Stockholder’s legal power, capacity, authority or right to vote the Shares in favor of the Merger Agreement
and the Merger.
(e) No Solicitation.
Such Stockholder shall not, nor shall it authorize or permit any officer, director, employee of such Stockholder or instruct any
investment banker, financial advisor, attorney or other advisor or representative of such Stockholder to, directly or indirectly
(i) solicit, initiate, or encourage the submission of, any Company Takeover Proposal, (ii) enter into any agreement with respect
to or approve or recommend any Company Takeover Proposal or (iii) participate in any discussions or negotiations regarding, or
furnish to any Person any information with respect to the Company or any Subsidiary in connection with, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Company
Takeover Proposal. For the avoidance of doubt, a Stockholder may discuss any matters or information relating to the Company, any
Subsidiary or any actual or potential Company Takeover Proposal with any of the partners, members, officers, directors, employees,
advisors (including investment advisers), attorneys and other agents and representatives of (x) such Stockholder or any other Stockholder,
(y) Credit Suisse AG or one or more of its Affiliates (“CS”) or (z) the Company; provided, that the Stockholder
complies with its obligations under this Section 3(e).
(f) Public Announcements.
During the Pre-Closing Period, except as may be required under applicable Law, such Stockholder shall not (and such Stockholder
shall not permit any of its representatives to) issue any press release or make any public statement regarding this Stockholders
Agreement, the Merger Agreement or the Merger, or regarding any of the other transactions contemplated by this Stockholders Agreement
or the Merger Agreement, without Parent's prior written consent. Unless made available to the public by any Stockholder or its
Affiliate, the foregoing shall not apply or otherwise restrict investor communications between any Stockholder and its investors.
(g) Exercise of Drag-Along.
With respect to the Shares, such Stockholder, simultaneously with CS and each other Stockholder, hereby agrees to exercise its
drag-along rights under Article 6 of the Aventine Stockholders Agreement in favor of the Merger Agreement and the Merger.
Pursuant to such exercise, such Stockholder shall furnish, together with CS and each other Stockholder, a Sale Notice (as such
term is defined in the Aventine Stockholders Agreement) to all other stockholders of the Company party to the Aventine Stockholders
Agreement in accordance with the terms thereof. Furthermore, at the reasonable request of Parent, Company or any other Stockholder,
such Stockholder agrees to execute such additional instruments and other writings, and take such other action, as Parent, Company
or any other Stockholder may reasonably request to effect or evidence the performance of Article 6 of the Aventine Stockholders
Agreement in connection with the Merger.
4. Waiver of Dissenters’
Rights. Each Stockholder hereby irrevocably and unconditionally waives, and agrees not to assert, (a) any dissenters' rights
or any similar right relating to the Merger that Stockholder may have by virtue of, or with respect to, all of its shares of capital
stock of the Company, and (b) any right to object to the manner in which the consideration to be paid to the Stockholders of the
Company in connection with the Merger is to be calculated or paid pursuant to the Merger Agreement, or the nature or amount of
consideration to be paid to Stockholder or any other stockholder of the Company pursuant to the Merger Agreement.
5. Parent Covenants. Until
the termination of this Stockholders Agreement in accordance with Section 8(b), Parent hereby agrees not to consent to or
permit the amendment of Section 6.13(b) of the Merger Agreement without the prior consent of Stockholders holding at least
a majority of the Shares.
6. Action in Stockholder Capacity
Only. No Stockholder makes an agreement or understanding herein in such Stockholder’s capacity as a director, officer
or employee of the Company. Each Stockholder is executing this Stockholders Agreement solely in such Stockholder’s capacity
as a record holder and beneficial owner of the Shares, and nothing herein shall limit or affect any actions taken in such Stockholder's
capacity as an officer, director or employee of the Company.
7. Additional Shares. For the
avoidance of doubt, if, after the date hereof, Stockholders acquire beneficial or record ownership of any additional shares of
capital stock of the Company (any such shares, “Additional Shares”), including, without limitation, upon exercise
of any option, warrant or right to acquire shares of capital stock of the Company or through any stock dividend or stock split,
the provisions of this Stockholders Agreement applicable to the Shares shall not be applicable to such Additional Shares; provided,
however, that the provisions of Section 4 of this Stockholders Agreement shall apply to any Additional Shares.
8. Amendments; Termination.
(a) This Stockholders Agreement
may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by
the parties hereto.
(b) This Stockholders Agreement
shall terminate upon the first to occur of (i) the Closing Date, (ii) the date of any material modification, waiver or amendment
to any provision of the Merger Agreement that reduces the amount, changes the form or otherwise adversely affects the consideration
payable to the Stockholder pursuant to the Merger Agreement as in effect on the date hereof, (iii) the valid termination of the
Merger Agreement in accordance with its terms, and (iv) the mutual written consent of all of the parties hereto. Upon due termination
of this Stockholders Agreement, no party shall have any further obligations or liabilities under this Stockholders Agreement; provided,
however, that: (x) no party shall be relieved of any obligation or liability arising from any prior breach by such party of
any representation, warranty, covenant or obligation of Stockholders contained in this Stockholders Agreement; and (y) subject
to Section 16, Stockholders shall, in all events, remain bound by and continue to be subject to the provisions set forth
in Sections 7 (excluding the proviso therein), 8, 9, 11 through 15 and 17 through 19
of this Stockholders Agreement; and (z) if this Stockholders Agreement terminates as a result of the occurrence of the Closing
Date, Stockholders shall, in all events, remain bound by and continue to be subject to the provisions set forth in the Sections
referenced in subsection (y) above and Sections 3(c), 4 and 7 (including the proviso therein).
9. Severability. If any term
or other provision of this Stockholders Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms, conditions and provisions of this Stockholders Agreement shall nevertheless remain in full force and effect
so long as the economic and legal substance of the transactions contemplated hereby are not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Stockholders Agreement so as to effect the original intent of the parties
as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Stockholders Agreement
may be consummated as originally contemplated to the fullest extent possible. If the parties fail to so agree within ten (10) Business
Days of such determination that any term or other provision is invalid, illegal or incapable of being enforced, such holding shall
not affect the validity or enforceability of any other aspect hereof (or of such provision in another jurisdiction) and the parties
agree and hereby request that the court or arbitrator(s) make such valid modifications to (or replacement of, if necessary) the
invalid provision as are necessary and reasonable to most closely approximate the parties' intent as evidenced hereby as a whole.
10. Execution in Counterparts;
Exchanges by Facsimile or Electronic Transmission. This Stockholders Agreement may be executed in counterparts, each of which
shall be an original, with the same effect as if the signatures hereto and thereto were upon the same instrument. The exchange
of a fully executed Stockholders Agreement (in counterparts or otherwise) by facsimile or electronic transmission shall be sufficient
to bind the parties to the terms of this Stockholders Agreement.
11. Specific Performance. The
parties hereto agree that the failure for any reason of a Stockholder to perform any of such Stockholder’s covenants or obligations
under this Stockholders Agreement will cause irreparable harm or injury to Parent with respect to which money damages would not
be an adequate remedy. Accordingly, such Stockholder agrees that, in seeking to enforce this Stockholders Agreement against such
Stockholder, Parent shall be entitled to specific performance and injunctive and other equitable relief in addition to any other
remedy available at law, in equity or otherwise.
12. Governing Law; Submission to
Jurisdiction.
(a) This Stockholders Agreement
shall be construed in accordance with, and governed in all respects by, the internal Laws of the State of Delaware (without giving
effect to principles of conflicts of laws which would result in the application of the Law of any other jurisdiction). Any action,
suit or proceeding relating to this Stockholders Agreement or the enforcement of any provision of this Stockholders Agreement may
be brought or otherwise commenced in any state or federal court located in Wilmington, Delaware. Each party to this Stockholders
Agreement: (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the state and federal
courts located in the State of Delaware; (ii) agrees that each state and federal court located in Wilmington, Delaware shall be
deemed to be a convenient forum; (iii) agrees not to assert (by way of motion, as a defense or otherwise), in any such action,
suit or proceeding commenced in any state or federal court located in Wilmington, Delaware, any claim that such party is not subject
personally to the jurisdiction of such court, that such action, suit or proceeding has been brought in an inconvenient forum, that
the venue of such proceeding is improper or that this Stockholders Agreement or the subject matter of this Stockholders Agreement
may not be enforced in or by such court; and (iv) waives such party’s right to trial by jury.
(b) EACH PARTY ACKNOWLEDGES
AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS STOCKHOLDERS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY, INCLUDING ANY CONTROVERSY INVOLVING ANY REPRESENTATIVE OF PARENT UNDER THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES
THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO
THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 12(b).
13. Successors and Assigns.
This Stockholders Agreement shall be binding upon: Parent and its successors and assigns (if any); each Stockholder and the Stockholders'
heirs, executors, personal representatives, successors and assigns (if any). This Stockholders Agreement shall inure to the benefit
of Parent and its respective successors and assigns (if any). Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent
of the other party; provided, however, that Parent may assign this Stockholders Agreement or any of the rights, interests
hereunder to an affiliate of Parent or to any financing sources.
14. Entire Agreement. This
Stockholders Agreement and the Merger Agreement set forth the entire understanding of the parties hereto relating to the subject
matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof.
15. Notices. Any notice or
other communication required or permitted to be delivered to any party under this Stockholders Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery
service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such
other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto):
If to Parent, to:
Pacific Ethanol, Inc.
400 Capitol Mall, Suite 2060
Sacramento, CA 95814
Attention: Christopher W. Wright, Esq., General Counsel
Email: cwright@pacificethanol.com
Facsimile No.: (916) 403-2785
with copy to:
Troutman Sanders LLP
5 Park Plaza, Suite 1400
Irvine, CA 92614
Attention: Larry A. Cerutti, Esq.
Email: larry.cerutti@troutmansanders.com
Facsimile No.: (949) 622-2739
If to a Stockholder, to the address set
forth beneath such Stockholders name on the signature page hereto with copy to:
Candlewood
Investment Group, LP
777 Third Avenue, Suite 19B
New York, NY 10017
Attention: David Koenig
Janet Miller, General Counsel/COO
Email: dkoenig@candlewoodgroup.com; compliance@candlewoodgroup.com
Facsimile No.: (212) 493-4492
16. Condition to Effectiveness.
This Stockholders Agreement shall not be effective and shall be of no force or effect until (a) the Merger Agreement is executed
by all parties thereto, (b) this Agreement is executed by all parties hereto and (c) such time as CS has executed an agreement
substantially identical to this Stockholders Agreement with respect to all shares of the Company’s capital stock beneficially
held by CS, after giving effect to the Third Party Transfers (collectively, the “CS Shares”), pursuant to which
CS agrees to vote its Pro Rata Share of an aggregate 51% of the issued and outstanding shares of capital stock of the Company (together
with the Shares) in favor of the Merger Agreement and the Merger.
17. No Ownership Interest.
Except as otherwise expressly provided herein, nothing contained in this Stockholders Agreement shall be deemed to vest in Parent
or Merger Sub any direct or indirect ownership or incidence of ownership of or with respect to the Shares. All rights, ownership
and economic benefits of and relating to the Shares shall remain vested in and belong to each applicable Stockholder, and neither
Parent nor Merger Sub shall have any authority to manage, direct, restrict, regulate, govern, or administer any of the policies
or operations of the Company or exercise any power or authority to direct such Stockholder in the voting of any of the Shares,
except as otherwise expressly provided herein.
18. Stockholder Obligations Several
and Not Joint. The obligations of each Stockholder hereunder shall be several and not joint, and no Stockholder shall be liable
for any breach of the terms of this Agreement by any other Stockholder.
19. Definitions.
“Aventine Stockholders
Agreement” means that certain Stockholders Agreement dated as of September 24, 2012 by and among Aventine Renewable Energy
Holdings, Inc. and certain investors and stockholders party thereto.
“Encumbrance”
means, except (i) as provided in the ordinary course with any Stockholder’s prime broker, or (ii) pursuant to the Aventine
Stockholders Agreement, any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right or restriction of any nature (including any restriction on the voting
of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived
from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other
attribute of ownership of any asset).
“Entity” means
any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership,
joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise,
association, organization or entity.
[Remainder of Page Intentionally left
Blank.]
IN WITNESS WHEREOF, the parties
hereto have executed this Stockholders Agreement as of the date first above written.
PACIFIC
ETHANOL, INC.
By:
/s/ NEIL M. KOEHLER
Name: Neil M. Koehler
Title:
Chief Executive Officer
STOCKHOLDER:
Candlewood Special Situations Master Fund, Ltd.
By: /s/ DAVID KOENIG
Name: David Koenig
Authorized Signatory
STOCKHOLDER:
CWD OC 522 Master Fund, Ltd.
By:
/s/ DAVID KOENIG
Name: David Koenig
Authorized Signatory
STOCKHOLDER:
Candlewood Financial Opportunities Master Fund, LP
By:
/s/ DAVID KOENIG
Name: David Koenig
Authorized Signatory
STOCKHOLDER: Candlewood
Financial Opportunities Fund, LLC
By:
/s/ DAVID KOENIG
Name: David Koenig
Authorized Signatory
STOCKHOLDER:
Flagler Master Fund SPC Ltd., for itself and on behalf of its Class A Segregated Portfolio
By:
/s/ DAVID KOENIG
Name: David Koenig
Authorized Signatory
STOCKHOLDER:
Flagler Master Fund SPC Ltd., for itself and on behalf of its Class B Segregated Portfolio
By:
/s/ DAVID KOENIG
Name: David Koenig
Authorized Signatory
EXHIBIT A
All Company capital stock held by
Stockholders
|
December 30,2014 |
Post-Third
Party Transfers |
Third Party
Transfers |
TOTAL held by Stockholders |
8,439,977 |
7,600,533 |
(839,444) |
Candlewood Special Situations Master Fund, Ltd. |
3,913,400 |
3,859,390 |
(54,010) |
CWD OC 522 Master Fund, Ltd. |
3,476,269 |
2,902,228 |
(574,041) |
Candlewood Financial Opportunities Master Fund, LP |
253,440 |
246,392 |
(7,048) |
Candlewood Financial Opportunities Fund, LLC |
181,393 |
61,598 |
(119,795) |
Flagler Master Fund SPC Ltd. – Class A Segregated Portfolio |
431,378 |
432,052 |
674 |
Flagler Master Fund SPC Ltd. – Class B Segregated Portfolio |
184,097 |
98,873 |
(85,224) |
EXHIBIT B
All Shares held by Stockholders &
Related Proxy Documents
TOTAL
held by Stockholders |
5,299,342 |
|
Candlewood Special Situations Master Fund, Ltd. |
2,690,894 |
|
CWD OC 522 Master Fund, Ltd. |
2,023,529 |
|
Candlewood Financial Opportunities Master Fund, LP |
171,792 |
|
Candlewood Financial Opportunities Fund, LLC |
42,948 |
|
Flagler Master Fund SPC Ltd. – Class A Segregated Portfolio |
301,241 |
|
Flagler Master Fund SPC Ltd. – Class B Segregated Portfolio |
68,938 |
|
|
|
|
Credit Suisse |
1,946,6961 |
|
|
|
|
Total |
7,246,038 |
51.0% |
|
14,207,917 |
|
| 1. | Investment Management Agreement effective as of September 30, 2010 between the Candlewood Special Situations Master Fund, Ltd.
and Candlewood Investment Group, LP |
| 2. | Investment Management Agreement effective as of August 17, 2011 by and among Candlewood Investment Group, LP, CWD OC 522 Offshore
Fund, Ltd., CWD OC 522 Master Fund, LTD., and that certain investor |
| 3. | Investment Advisory Agreement made August 1, 2013 by and between Candlewood Financial Opportunities Master Fund, LP, Candlewood
Investment Group Financial Advisors, LLC, and Candlewood Financial Opportunities General, LLC |
| 4. | Investment Advisory Agreement made July 19, 2013 by and between Candlewood Financial Opportunities Fund, LLC, Candlewood Investment
Group Financial Advisors, LLC, and Candlewood Financial Opportunities General, LLC |
| 5. | Amended and Restated Investment Management Agreement effective as of May 28, 2014 entered into by and among Candlewood Investment
Group, LP, Flagler Offshore Fund, Ltd., Flagler Master Fund SPC Ltd, on behalf of its Class A Segregated Portfolio and its Class
B Segregated Portfolio and that certain investment advisor, general partner and/or managing member to investment funds or other
accounts |
_______________
1
As provided by Credit Suisse Securities (USA) LLC. Stockholders do not represent or warrant as to the accuracy of
the Credit Suisse stockholder holdings.
ANNEX C-2
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (the “Stockholders
Agreement”), dated as of December 30, 2014, is by and among the entity holding shares of Aventine Renewable Energy Holdings,
Inc. as set forth in the signature pages hereto (the “Stockholder”) and Pacific Ethanol, Inc., a Delaware corporation
(“Parent”).
RECITALS
WHEREAS, contemporaneously with
the execution and delivery of this Stockholders Agreement, Parent, AVR Merger Sub, Inc., a Delaware corporation and wholly-owned
subsidiary of Parent (the “Merger Sub”), and Aventine Renewable Energy Holdings, Inc., a Delaware corporation
(the “Company”), are entering into an Agreement and Plan of Merger (the “Merger Agreement”),
dated as of the date hereof, which provides for the merger of Merger Sub with and into the Company, with the Company surviving
as a wholly owned subsidiary of Parent (the “Merger”);
WHEREAS, capitalized terms used
herein and not otherwise defined shall have the meanings assigned such terms in the Merger Agreement;
WHEREAS, the Stockholder holds
of record and owns beneficially the number of shares of the Company’s capital stock set forth on Exhibit A, certain
of which shares, as noted on Exhibit A, are subject to pending sales by the Stockholder to a third party pursuant to one
or more transfer agreements entered into prior to the date hereof (collectively, the “Third Party Transfers”);
WHEREAS, the Stockholder wishes
to enter into this Stockholders Agreement solely with respect to its Pro Rata Share of an aggregate 51% of the issued and outstanding
shares of capital stock of the Company (the Stockholder’s shares described herein, collectively, the “Shares,”
are set forth on Exhibit B); for purposes of this Stockholders Agreement, “Pro Rata Share” means,
as to the Stockholder, a fraction, (i) the numerator of which is the number of shares of the Company’s capital stock
held by the Stockholder as set forth on Exhibit A, and (ii) the denominator of which is the sum of (A) the number of
shares of the Company’s capital stock held by the Stockholder, in each case after the Third Party Transfers, and (B) the
Candlewood Shares (as defined in Section 16 below); and
WHEREAS, the Stockholder stands
to receive a material benefit from the Merger in the form of the consideration payable in the Merger in respect of the Shares and,
as a condition to entering into the Merger Agreement, Parent has required that the Stockholder agrees, and the Stockholder has
agreed, to enter into this Stockholders Agreement.
NOW, THEREFORE, in consideration
of the foregoing and the respective representations, warranties, covenants and obligations set forth herein, and intending to be
legally bound hereby, each of the parties hereto agrees as follows:
1. Representations and Warranties
of the Stockholder. The Stockholder hereby represents and warrants to Parent as follows:
(a) Title. As
of the date hereof, such Stockholder holds of record and owns beneficially, free and clear of any Encumbrances (other than restrictions
under applicable securities Laws), all of the Shares set forth opposite its name on Exhibit B hereto. Other than the Shares
and those additional shares of Company stock set forth on Exhibit A, such Stockholder does not, directly or indirectly,
own any shares of capital stock of the Company, any option, warrant or other right to acquire shares of capital stock of the Company
or any other securities of the Company. Other than the agreements subject to the Third Party Transfers, such Stockholder is not
a party to any executory written or oral agreement, contract, subcontract, lease, instrument, commitment or undertaking of any
nature (“Contract”) (other than this Stockholders Agreement) that could require such Stockholder to sell, transfer
or otherwise dispose of any capital stock of the Company and each Subsidiary of the Company.
(b) Right to Vote.
Such Stockholder has full legal power, authority and right to vote all of the Shares, in favor of the approval and authorization
of the Merger Agreement and the principal terms of the Merger without any approval, consent, ratification, permission, waiver or
authorization (including any consents of Governmental Entities) (“Consent”) of, or any other action on the part
of, any other Person. Without limiting the generality of the foregoing, except as otherwise provided in this Stockholders Agreement
or as set forth on Exhibit B hereto, such Stockholder has not entered into any voting agreement with any Person with respect
to any of the Shares, granted any Person any proxy (revocable or irrevocable) or power of attorney with respect to any of the Shares,
deposited any of the Shares in a voting trust or entered into any arrangement or agreement with any Person limiting or affecting
such Stockholder’s legal power, authority or right to vote the Shares on any matter.
(c) Authority.
Such Stockholder has full legal power, capacity, authority and right to execute and deliver, and to perform its obligations under,
this Stockholders Agreement. This Stockholders Agreement has been duly and validly authorized, executed and delivered by such Stockholder
and constitutes a valid and binding agreement of Stockholder enforceable against Stockholder in accordance with its terms.
(d) Opportunity.
Such Stockholder has had the opportunity to review this Stockholders Agreement and the Merger Agreement. Such Stockholder has had
adequate opportunity to discuss the requirements of this Stockholders Agreement with his or her professional advisors to the extent
such Stockholder has deemed necessary. Such Stockholder understands that its representations and agreements contained herein constitute
a material inducement and condition to Parent and Merger Sub in entering the Merger.
(e) No Conflicts;
Consents. The execution and delivery of this Stockholders Agreement by such Stockholder does not and will not, and the performance
of this Stockholders Agreement by such Stockholder will not, result in or constitute (with or without notice or lapse of time)
any breach of or default under, or result (with or without notice or lapse of time) in the creation of any Encumbrance on any of
the Shares pursuant to, any Contract to which such Stockholder is a party or by which such Stockholder or any of the Shares are
bound or affected as of the date of this Stockholders Agreement. The execution and delivery of this Stockholders Agreement by such
Stockholder does not and will not, and the performance of this Stockholders Agreement by such Stockholder will not, require any
Consent of any Person.
(f) Due Organization.
(i) If such Stockholder is an Entity:
(A) such Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction under which such
Stockholder is organized; (B) the execution, delivery and performance of this Stockholders Agreement by such Stockholder has been
duly authorized by all necessary action on the part of the board of directors of such Stockholder or other Persons performing similar
functions; and (C) the execution and delivery of this Stockholders Agreement by such Stockholder does not and will not, and the
performance of this Stockholders Agreement by such Stockholder will not, (I) result in or constitute any breach of or default under
the partnership agreement or any of the other organizational documents of such Stockholder, or (II) require the approval of holders
of voting or equity interests in Stockholder, other than any approval already obtained, except in each case as will not adversely
affect the ability of such Stockholder to perform its obligations hereunder in any material respect or to consummate the transactions
contemplated hereby in a timely manner.
(ii) If such Stockholder is an executor
of an estate or trustee of a trust: (A) such Stockholder is the sole executor or trustee of such estate or trust; (B) such Stockholder
has the sole power and authority to act on behalf of and bind such estate or trust; and (C) the execution and delivery of this
Stockholders Agreement by such Stockholder does not and will not, and the performance of this Stockholders Agreement by such Stockholder
will not, (I) result in or constitute any breach of or default under the will, trust agreement or other document relating to such
estate or trust, or (II) require the approval of any beneficiary of such estate or trust, other than any approval already obtained.
(g) Accuracy of Representations
and Warranties. All of such Stockholder's representations and warranties contained in this Stockholders Agreement will be accurate
on the Closing as if made on and as of the Closing, provided, however, that Exhibits A and B may be updated
as of Closing to reflect the consummation of the Third Party Transfers and/or transfers of shares or Shares permitted pursuant
to the terms of this Stockholders Agreement.
2. Representations and Warranties
of Parent. Parent hereby represents and warrants to Stockholder as follows:
(a) Authority.
Parent has full legal power, capacity, authority and right to execute and deliver, and to perform its obligations under, this Stockholders
Agreement. This Stockholders Agreement has been duly and validly authorized, executed and delivered by Parent and constitutes a
valid and binding agreement of Parent enforceable against Parent in accordance with its terms.
3. Stockholder Covenants. Until
the termination of this Stockholders Agreement in accordance with Section 8(b), the Stockholder hereby agrees as follows:
(a) Restrictions on
Transfer. Such Stockholder agrees that, except for the Third Party Transfers, during the period from the Execution Date of
the Merger Agreement through the Effective Time (the “Pre-Closing Period”), such Stockholder shall not directly
or indirectly sell or otherwise transfer or dispose of, or pledge or otherwise permit to be subject to any Encumbrance (other than
the Merger Agreement), any of the Shares, or any direct or indirect beneficial interest therein, unless such proposed transferee
agrees, pursuant to a written agreement in form and content reasonably satisfactory to Parent, to be bound by, and comply with,
the terms and provisions of this Stockholders Agreement in its entirety (subject to any necessary name or like changes) with respect
to such transferred Shares.
(b) Agreement to Vote.
Such Stockholder agrees that, following the execution and delivery of the Merger Agreement, such Stockholder shall vote the Shares
at regular or special meetings of stockholders of the Company, including adjournments thereof, or in any other circumstances upon
which a vote, consent or other approval (including by written consent) is sought (i) with respect to the Merger and the Merger
Agreement, in favor of any proposal to approve the Merger Agreement and the Merger and (ii) with respect to all other proposals
submitted to the stockholders of the Company, which, directly or indirectly, would reasonably be expected to prevent or materially
delay the consummation of the Merger or the transactions contemplated by the Merger Agreement, in such manner as Parent may direct.
Such Stockholder agrees not to withdraw any such vote and not to take any other action that is inconsistent with such Stockholder’s
obligation to vote in favor of approval of the Merger Agreement and the Merger or that may have the effect of delaying or interfering
with the Merger.
(c) Market Stand-Off
Agreement. Except as provided herein, such Stockholder will not, without the prior written consent of Parent, directly or indirectly
offer, sell or contract or grant any option to sell, or otherwise dispose of (including short sales, sales against the box and/or
other hedging or derivative transactions), pledge or transfer 100% of the shares of Parent Stock acquired by such Stockholder (including
any Parent Voting Common Stock into which any Parent Non-Voting Common Stock is converted) pursuant to the terms of the Merger
Agreement in exchange for the Shares (the “Restricted Merger Consideration Shares”) for a period commencing
on the Closing Date and continuing through (i) the 30th day thereafter, after which an aggregate of 25% of the Restricted
Merger Consideration Shares shall be released from the foregoing restrictions, (ii) the 60th day thereafter, after which
an aggregate of 50% of the Restricted Merger Consideration Shares shall be released from the foregoing restrictions, (iii) the
90th day thereafter, after which an aggregate of 75% of the Restricted Merger Consideration Shares shall be released
from the foregoing restrictions, and (iv) the 120th day thereafter, after which an aggregate of 100% of the Restricted
Merger Consideration Shares shall be released from the foregoing restrictions. The foregoing sentence shall not apply to (A) transfers
of Restricted Merger Consideration Shares to immediate family members or trusts, partnerships, limited liability companies or other
entities for the benefit of such family members, (B) transfers of Restricted Merger Consideration Shares to a wholly-owned subsidiary,
parent, general partner, limited partner, retired partner, member or retired member of the undersigned, or (C) transfers of Restricted
Merger Consideration Shares by such Stockholder in non-public transactions; provided, however, that in each case, (1) such
transferee takes such Restricted Merger Consideration Shares subject to all of the provisions of this Stockholders Agreement, and
(2) no filing by any party (transferor or transferee) under the Securities Exchange Act of 1934, as amended, shall be required
or shall be voluntarily made in connection with such transfer of Restricted Merger Consideration Shares.
(d) No Actions.
From and after the date hereof, except as otherwise permitted by this Stockholders Agreement, such Stockholder will not commit
any act that would reasonably be expected to restrict or otherwise adversely affect in any material respect Stockholder’s
legal power, authority and right to vote all of the Shares. Without limiting the generality of the foregoing, except as required
by this Stockholders Agreement, from and after the date hereof, such Stockholder will not enter into any voting agreement with
any Person with respect to any of the Shares, grant any Person any proxy (revocable or irrevocable) or power of attorney with respect
to any of the Shares, deposit any of the Shares in a voting trust or otherwise enter into any Contract with any Person limiting
or affecting such Stockholder’s legal power, capacity, authority or right to vote the Shares in favor of the Merger Agreement
and the Merger.
(e) No Solicitation.
Such Stockholder shall not, nor shall it authorize or permit any officer, director, employee of such Stockholder or instruct any
investment banker, financial advisor, attorney or other advisor or representative of such Stockholder to, directly or indirectly
(i) solicit, initiate, or encourage the submission of, any Company Takeover Proposal, (ii) enter into any agreement with respect
to or approve or recommend any Company Takeover Proposal or (iii) participate in any discussions or negotiations regarding, or
furnish to any Person any information with respect to the Company or any Subsidiary in connection with, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Company
Takeover Proposal. For the avoidance of doubt, the Stockholder may discuss any matters or information relating to the Company,
any Subsidiary or any actual or potential Company Takeover Proposal with any of the partners, members, officers, directors, employees,
advisors (including investment advisers), attorneys and other agents and representatives of (x) such Stockholder, (y) certain investment
funds for which Candlewood Investment Group, LP or one or more of its Affiliates provides investment advice (collectively, the
“Candlewood Entities”) or (z) the Company; provided, that the Stockholder complies with its obligations under
this Section 3(e).
(f) Public Announcements.
During the Pre-Closing Period, except as may be required under applicable Law, such Stockholder shall not (and such Stockholder
shall not permit any of its representatives to) issue any press release or make any public statement regarding this Stockholders
Agreement, the Merger Agreement or the Merger, or regarding any of the other transactions contemplated by this Stockholders Agreement
or the Merger Agreement, without Parent's prior written consent. Unless made available to the public by the Stockholder or its
Affiliate, the foregoing shall not apply or otherwise restrict investor communications between the Stockholder and its investors.
(g) Exercise of Drag-Along.
With respect to the Shares, such Stockholder, simultaneously with the Candlewood Entities, hereby agrees to exercise its drag-along
rights under Article 6 of the Aventine Stockholders Agreement in favor of the Merger Agreement and the Merger. Pursuant
to such exercise, such Stockholder shall furnish, together with the Candlewood Entities, a Sale Notice (as such term is defined
in the Aventine Stockholders Agreement) to all other stockholders of the Company party to the Aventine Stockholders Agreement in
accordance with the terms thereof. Furthermore, at the reasonable request of Parent or Company, such Stockholder agrees to execute
such additional instruments and other writings, and take such other action, as Parent or Company may reasonably request to effect
or evidence the performance of Article 6 of the Aventine Stockholders Agreement in connection with the Merger.
4. Waiver of Dissenters’
Rights. The Stockholder hereby irrevocably and unconditionally waives, and agrees not to assert, (a) any dissenters' rights
or any similar right relating to the Merger that Stockholder may have by virtue of, or with respect to, all of its shares of capital
stock of the Company, and (b) any right to object to the manner in which the consideration to be paid to the Stockholder of the
Company in connection with the Merger is to be calculated or paid pursuant to the Merger Agreement, or the nature or amount of
consideration to be paid to Stockholder or any other stockholder of the Company pursuant to the Merger Agreement.
5. Parent Covenants. Until
the termination of this Stockholders Agreement in accordance with Section 8(b), Parent hereby agrees not to consent to or
permit the amendment of Section 6.13(b) of the Merger Agreement without the prior consent of the Stockholder.
6. Action in Stockholder Capacity
Only. No Stockholder makes an agreement or understanding herein in such Stockholder’s capacity as a director, officer
or employee of the Company. The Stockholder is executing this Stockholders Agreement solely in such Stockholder’s capacity
as a record holder and beneficial owner of the Shares, and nothing herein shall limit or affect any actions taken in such Stockholder's
capacity as an officer, director or employee of the Company.
7. Additional Shares. For the
avoidance of doubt, if, after the date hereof, the Stockholder acquires beneficial or record ownership of any additional shares
of capital stock of the Company (any such shares, “Additional Shares”), including, without limitation, upon
exercise of any option, warrant or right to acquire shares of capital stock of the Company or through any stock dividend or stock
split, the provisions of this Stockholders Agreement applicable to the Shares shall not be applicable to such Additional Shares;
provided, however, that the provisions of Section 4 of this Stockholders Agreement shall apply to any
Additional Shares.
8. Amendments; Termination.
(a) This Stockholders Agreement
may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by
the parties hereto.
(b) This Stockholders Agreement
shall terminate upon the first to occur of (i) the Closing Date, (ii) the date of any material modification, waiver or amendment
to any provision of the Merger Agreement that reduces the amount, changes the form or otherwise adversely affects the consideration
payable to the Stockholder pursuant to the Merger Agreement as in effect on the date hereof, (iii) the valid termination of the
Merger Agreement in accordance with its terms, and (iv) the mutual written consent of all of the parties hereto. Upon due termination
of this Stockholders Agreement, no party shall have any further obligations or liabilities under this Stockholders Agreement; provided,
however, that: (x) no party shall be relieved of any obligation or liability arising from any prior breach by such party of
any representation, warranty, covenant or obligation of the Stockholder contained in this Stockholders Agreement; and (y) subject
to Section 16, the Stockholder shall, in all events, remain bound by and continue to be subject to the provisions set forth
in Sections 7 (excluding the proviso therein), 8, 9, 11 through 15 and 17 through 19
of this Stockholders Agreement; and (z) if this Stockholders Agreement terminates as a result of the occurrence of the Closing
Date, the Stockholder shall, in all events, remain bound by and continue to be subject to the provisions set forth in the Sections
referenced in subsection (y) above and Sections 3(c), 4 and 7 (including the proviso therein).
9. Severability. If any term
or other provision of this Stockholders Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms, conditions and provisions of this Stockholders Agreement shall nevertheless remain in full force and effect
so long as the economic and legal substance of the transactions contemplated hereby are not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Stockholders Agreement so as to effect the original intent of the parties
as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Stockholders Agreement
may be consummated as originally contemplated to the fullest extent possible. If the parties fail to so agree within ten (10) Business
Days of such determination that any term or other provision is invalid, illegal or incapable of being enforced, such holding shall
not affect the validity or enforceability of any other aspect hereof (or of such provision in another jurisdiction) and the parties
agree and hereby request that the court or arbitrator(s) make such valid modifications to (or replacement of, if necessary) the
invalid provision as are necessary and reasonable to most closely approximate the parties' intent as evidenced hereby as a whole.
10. Execution in Counterparts;
Exchanges by Facsimile or Electronic Transmission. This Stockholders Agreement may be executed in counterparts, each of which
shall be an original, with the same effect as if the signatures hereto and thereto were upon the same instrument. The exchange
of a fully executed Stockholders Agreement (in counterparts or otherwise) by facsimile or electronic transmission shall be sufficient
to bind the parties to the terms of this Stockholders Agreement.
11. Specific Performance. The
parties hereto agree that the failure for any reason of the Stockholder to perform any of Stockholder’s covenants or obligations
under this Stockholders Agreement will cause irreparable harm or injury to Parent with respect to which money damages would not
be an adequate remedy. Accordingly, the Stockholder agrees that, in seeking to enforce this Stockholder Agreement against the Stockholder,
Parent shall be entitled to specific performance and injunctive and other equitable relief in addition to any other remedy available
at law, in equity or otherwise.
12. Governing Law; Submission to
Jurisdiction.
(a) This Stockholders Agreement
shall be construed in accordance with, and governed in all respects by, the internal Laws of the State of Delaware (without giving
effect to principles of conflicts of laws which would result in the application of the Law of any other jurisdiction). Any action,
suit or proceeding relating to this Stockholders Agreement or the enforcement of any provision of this Stockholders Agreement may
be brought or otherwise commenced in any state or federal court located in Wilmington, Delaware. Each party to this Stockholders
Agreement: (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the state and federal
courts located in the State of Delaware; (ii) agrees that each state and federal court located in Wilmington, Delaware shall be
deemed to be a convenient forum; (iii) agrees not to assert (by way of motion, as a defense or otherwise), in any such action,
suit or proceeding commenced in any state or federal court located in Wilmington, Delaware, any claim that such party is not subject
personally to the jurisdiction of such court, that such action, suit or proceeding has been brought in an inconvenient forum, that
the venue of such proceeding is improper or that this Stockholders Agreement or the subject matter of this Stockholders Agreement
may not be enforced in or by such court; and (iv) waives such party’s right to trial by jury.
(b) EACH PARTY ACKNOWLEDGES
AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS STOCKHOLDERS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY, INCLUDING ANY CONTROVERSY INVOLVING ANY REPRESENTATIVE OF PARENT UNDER THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES
THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO
THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 12(b).
13. Successors and Assigns.
This Stockholders Agreement shall be binding upon: Parent and its successors and assigns (if any); the Stockholder and the Stockholder’s
heirs, executors, personal representatives, successors and assigns (if any). This Stockholders Agreement shall inure to the benefit
of Parent and its respective successors and assigns (if any). Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent
of the other party; provided, however, that Parent may assign this Stockholders Agreement or any of the rights, interests
hereunder to an affiliate of Parent or to any financing sources.
14. Entire Agreement. This
Stockholders Agreement and the Merger Agreement set forth the entire understanding of the parties hereto relating to the subject
matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof.
15. Notices. Any notice or
other communication required or permitted to be delivered to any party under this Stockholders Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery
service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such
other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto):
If to Parent, to:
Pacific Ethanol, Inc.
400 Capitol Mall, Suite 2060
Sacramento, CA 95814
Attention: Christopher W. Wright, Esq., General Counsel
Email: cwright@pacificethanol.com
Facsimile No.: (916) 403-2785
with copy to:
Troutman Sanders LLP
5 Park Plaza, Suite 1400
Irvine, CA 92614
Attention: Larry A. Cerutti, Esq.
Email: larry.cerutti@troutmansanders.com
Facsimile No.: (949) 622-2739
If to the Stockholder, to the address
set forth beneath the Stockholder’s name on the signature page hereto with copy to:
Credit
Suisse Securities (USA) LLC
11 Madison Avenue
New York, NY 10010
Attention: Ashwinee Sawh
Email: Americas.loandocs@credit-suisse.com
16. Condition to Effectiveness.
This Stockholders Agreement shall not be effective and shall be of no force or effect until (a) the Merger Agreement is executed
by all parties thereto, (b) this Agreement is executed by all parties hereto and (c) such time as the Candlewood Entities have
executed an agreement substantially identical to this Stockholders Agreement with respect to all shares of the Company’s
capital stock beneficially held by such Candlewood Entities, after giving effect to the Third Party Transfers (collectively, the
“Candlewood Shares”), pursuant to which the Candlewood Entities agree to vote their respective Pro Rata Share
of an aggregate 51% of the issued and outstanding shares of capital stock of the Company (together with the Shares) in favor of
the Merger Agreement and the Merger.
17. No Ownership Interest.
Except as otherwise expressly provided herein, nothing contained in this Stockholders Agreement shall be deemed to vest in Parent
or Merger Sub any direct or indirect ownership or incidence of ownership of or with respect to the Shares. All rights, ownership
and economic benefits of and relating to the Shares shall remain vested in and belong to each applicable Stockholder, and neither
Parent nor Merger Sub shall have any authority to manage, direct, restrict, regulate, govern, or administer any of the policies
or operations of the Company or exercise any power or authority to direct such Stockholder in the voting of any of the Shares,
except as otherwise expressly provided herein.
18. Reserved.
19. Definitions.
“Aventine Stockholders
Agreement” means that certain Stockholders Agreement dated as of September 24, 2012 by and among Aventine Renewable Energy
Holdings, Inc. and certain investors and stockholders party thereto.
“Encumbrance”
means, except (i) as provided in the ordinary course with the Stockholder’s prime broker, or (ii) pursuant to the Aventine
Stockholders Agreement, any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right or restriction of any nature (including any restriction on the voting
of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived
from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other
attribute of ownership of any asset).
“Entity” means
any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership,
joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise,
association, organization or entity.
[Remainder of Page Intentionally left
Blank.]
IN WITNESS WHEREOF, the parties
hereto have executed this Stockholders Agreement as of the date first above written.
PACIFIC
ETHANOL, INC.
By:
/s/ NEIL M. KOEHLER
Name: Neil M. Koehler
Title:
Chief Executive Officer
STOCKHOLDER:
Credit Suisse Securities (USA) LLC
By:
/s/ NORMAN PARTON
Name: Norman Parton
Authorized
Signatory
EXHIBIT A
All Company capital stock held by
Stockholder
|
December 30,2014 |
Post-Third
Party Transfers |
Third Party
Transfers |
TOTAL held by Stockholder |
1,862,023 |
2,792,031 |
930,008 |
|
|
|
|
Credit Suisse Securities (USA) LLC |
1,862,023 |
2,792,031 |
930,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT B
All Shares held by Stockholder
TOTAL held by Stockholder |
1,946,696 |
|
|
|
|
Credit Suisse Securities (USA) LLC |
1,946,696 |
|
Candlewood Entities |
5,299,3421 |
|
|
|
|
Total |
7,246,038 |
51.0% |
|
14,207,917 |
|
_______________
1
As provided by Candlewood Investment Group, LP. Stockholder does not represent or warrant as to the accuracy of the
Candlewood Entities’ holdings.
ANNEX D
December 29, 2014
Personal and Confidential
Board of Directors
Pacific Ethanol, Inc.
400 Capitol Mall, Suite 2060
Sacramento, California 95814
Members of the Board of Directors:
You have requested
our opinion as to the fairness, from a financial point of view, to Pacific Ethanol, Inc. (the “Company”) of
the Exchange Ratio set forth in a draft of the Agreement and Plan of Merger (the “Agreement”), dated December
27, 2014, to be entered into among the Company, Aventine Merger Sub, Inc. (the “Merger Sub”), a wholly owned
subsidiary of the Company, and Aventine Renewable Energy Holdings, Inc, a Delaware corporation (“Aventine”). The
Agreement provides for the merger (the “Merger”) of the Merger Sub with and into Aventine pursuant to which,
among other things, each share of common stock of Aventine, other than Dissenting Shares and shares held in the treasury of Aventine
and shares owned by the Company or by any direct or indirect wholly-owned subsidiary of the Company or Aventine, will be converted
into the right to receive 1.25 shares of common stock of the Company (the shares of common stock of the Company issuable at such
ratio being the “Exchange Ratio”). The terms and conditions of the Merger are more fully set forth
in the Agreement. Capitalized terms not otherwise defined in this letter have the same meaning as in the Agreement.
We,
as a customary part of our investment banking business, engage in the valuation of businesses and their securities in connection
with mergers and acquisitions, underwriting and secondary distributions of securities, private placements and valuations for estate,
corporate and other purposes. We have been engaged by the Company to render an opinion to its Board of Directors and
we will receive a fee from the Company for rendering this opinion. This opinion fee is not contingent upon the consummation of
the Merger or the conclusions reached in our opinion. Further the
Company has agreed to pay us a retainer fee and to reimburse our expenses and indemnify us against certain liabilities that may
arise in relation to our engagement. We have not been requested to, and did not, (i) participate in negotiations with respect to
the Agreement, (ii) solicit any expressions of interest from any other parties with respect to any business combination with the
Company or any other alternative transaction or (iii) advise the Board of Directors or any other party with respect to alternatives
to the Merger. In addition, we were not requested to and did not provide advice regarding the structure, the Exchange Ratio, any
other aspect of the Merger, or to provide services other than the delivery of this opinion. We have not otherwise acted as financial
advisor to any party to the Merger.
In the ordinary
course of our business, we and our affiliates may actively trade securities of the Company for our own account or the account of
our customers and, accordingly, we may at any time hold a long or short position in such securities. We have, in the past two years,
provided financial advisory and financing services to the Company, and have received fees for the rendering of such services.
PEIX -
Fairness Opinion Letter
December 29, 2014
Page 2
In connection
with our review of the Merger, and in arriving at our opinion, we have: (i) reviewed the financial terms of the draft of the Agreement
dated December 27, 2014; (ii) reviewed certain business, financial and other information and data with respect to the Company publicly
available or made available to us from internal records of the Company; (iii) reviewed certain business, financial and other information
and data with respect to Aventine made available to us from internal records of Aventine; (iv) reviewed certain internal financial
projections for the Company and Aventine on a stand-alone basis prepared for financial planning purposes and furnished to us by
management of the Company and Aventine, respectively, including but not limited to forecasts prepared by Company management of
future utilization of the Company’s net operating losses; (v) conducted discussions with members of the senior management
of the Company and Aventine with respect to the business and prospects of the Company and Aventine, respectively, on a stand-alone
basis and on a combined basis; (vi) reviewed the reported prices and trading activity of Company common stock and similar information
for certain other companies deemed by us to be comparable to the Company; (vii) compared the financial performance of the Company
and Aventine with that of certain other publicly traded companies deemed by us to be comparable to the Company and Aventine, respectively;
(viii) reviewed the financial terms, to the extent publicly available, of certain comparable merger transactions; and (ix) performed
a discounted cash flows analysis for the Company and Aventine, each on a stand-alone basis. In addition, we have conducted
such other analyses, examinations and inquiries and considered such other financial, economic and market criteria as we have deemed
necessary and appropriate in arriving at our opinion.
In
conducting our review and in rendering our opinion, we have relied upon and assumed the accuracy, completeness and fairness of
the financial, accounting and other information discussed with us, reviewed by us, provided to us or otherwise made available to
us, and have not attempted to independently verify, and have not assumed responsibility for the independent verification, of such
information. We have further relied upon the assurances of the Company’s and Aventine’s management that
the information provided has been prepared on a reasonable basis in accordance with industry practice, and that they are not aware
of any information or facts that would make the information provided to us incomplete or misleading. We have assumed
that there have been no material changes in either the Company’s or Aventine’s assets, financial condition, results
of operations, business or prospects since the date of the last financial statements made available to us. Without limiting
the generality of the foregoing, for the purpose of this opinion, we have assumed that neither the Company nor Aventine is a party
to any material pending transaction, including any external financing, recapitalization, acquisition or merger, other than the
Merger. With respect to financial forecasts, estimates of net operating loss tax benefits and other estimates and forward-looking
information relating to the Company, Aventine and the Merger reviewed by us, we have assumed that such information reflects the
best currently available estimates and judgments of the Company’s and Aventine’s management, respectively. We
express no opinion as to any financial forecasts, net operating loss or other estimates or forward-looking information of the Company
or Aventine or the assumptions on which they were based. We have
relied, with your consent, on advice of the outside counsel and the independent accountants to the Company and Aventine, and on
the assumptions of the management of the Company and Aventine, as to all accounting, legal, tax and financial reporting matters
with respect to the Company, Aventine and the Agreement. Without limiting the foregoing, we have assumed that the Merger qualifies
as a “reorganization” described in Section 368(a) of Code, that the Agreement constitutes a “plan of reorganization”
within the meaning of Section 1.368-2(g) of the regulations promulgated under the Code and that the parties to the Agreement
each are a “party to the reorganization” within the meaning of Section 368(a) of the Code.
We have assumed
that the final form of the Agreement will be substantially similar to the draft, dated December 27, 2014, reviewed by us,
without modification of any material terms or conditions. We have assumed that the representations and warranties contained
in the Agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed
by it under the Agreement, and that the Merger will be consummated pursuant to the terms of the Agreement without amendments thereto
and without waiver by any party of any conditions or obligations thereunder. In arriving at our opinion, we have assumed
that all the necessary regulatory approvals and consents required for the Merger will be obtained in a manner that will not adversely
affect the Company or Aventine or alter the terms of the Merger.
PEIX -
Fairness Opinion Letter
December 29, 2014
Page 3
In arriving at
our opinion, we have not performed any appraisals or valuations of any specific assets or liabilities (fixed, contingent or other)
of the Company or Aventine or concerning the solvency or appraised or fair value of the Company or Aventine, and have not been
furnished with any such appraisals or valuations, and we have made no physical inspection of the property or assets of the Company
or Aventine. We express no opinion regarding the liquidation value of any entity. The analyses we performed
in connection with this opinion were going concern analyses of an entity. We were not requested to opine, and no opinion
is hereby rendered, as to whether any analyses of an entity, other than as a going concern, is appropriate in the circumstances
and, accordingly, we have performed no such analyses.
We have
undertaken no independent analysis of any pending or threatened litigation, governmental proceedings or investigations,
possible unasserted claims or other contingent liabilities, to which any of the Company, Aventine or their respective
affiliates is a party or may be subject and at the Company’s direction and with its consent, our opinion makes no
assumption concerning and therefore does not consider, the possible assertion of claims, outcomes, damages or recoveries
arising out of any such matters. No company or transaction used in any analysis for purposes of comparison is
identical to the Company, Aventine or the Merger. Accordingly, an analysis of the results of the comparisons is not
mathematical; rather, it involves complex considerations and judgments about differences in the companies and transactions to
which the Company, Aventine and the Merger were compared and other factors that could affect the public trading value or
transaction value of the companies.
This opinion is
necessarily based upon the information available to us, facts and circumstances and economic, market and other conditions as they
exist and are subject to evaluation on the date hereof; events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We are not expressing any opinion herein as to the price at which shares of common stock
of the Company have traded or such stock may trade following announcement of the Merger or at any future time. We have assumed
for purposes of our analyses that the Company will issue only shares of its voting common stock in connection with the Merger. We
have not undertaken to reaffirm or revise this opinion or otherwise comment upon any events occurring after the date hereof and
do not have any obligation to update, revise or reaffirm this opinion.
Consistent with
applicable legal and regulatory requirements, we have adopted policies and procedures to establish and maintain the independence
of our research department and personnel. As a result, our research analysts may hold opinions, make statements or recommendations,
and/or publish research reports with respect to the Company and the Merger and other participants in the Merger that differ from
the views of our investment banking personnel.
This opinion is
furnished pursuant to our engagement letter dated December 15, 2014. This opinion is directed to the Board of Directors
of the Company in connection with its consideration of the Merger. This opinion is not intended to be and does not constitute
a recommendation to any stockholder of the Company as to how such stockholder should act or vote with respect to the Merger or
any other matter. Except with respect to the use of this opinion in connection with the proxy statement relating to
the Merger in accordance with our engagement letter with the Company, this opinion shall not be published or otherwise used, nor
shall any public references to us be made, without our prior written approval. This opinion has been approved by the
Craig-Hallum Fairness Opinion Committee.
This opinion addresses
solely the fairness, from a financial point of view, to the Company of the Exchange Ratio set forth in the Agreement and does not
address any other terms or agreement relating to the Merger. We were not requested to opine as to, and this opinion
does not address, the basic business decision to proceed with or effect the Merger, or any solvency or fraudulent conveyance consideration
relating to the Merger. We express no opinion as to the relative merits of the Merger as compared to any alternative
business strategies or transactions that might exist for the Company or any other party or the effect of any other transaction
in which the Company or any other party might engage. We express no opinion as to the amount, nature or fairness of
the consideration or compensation to be received in or as a result of the Merger by warrant holders, option holders, officers,
directors or employees of the Company or Aventine, or any other class of such persons, or relative to or in comparison with the
Exchange Ratio.
Based upon and
subject to the foregoing and based upon such other factors as we consider relevant, it is our opinion that, as of the date hereof,
the Exchange Ratio is fair, from a financial point of view, to the Company.
Sincerely,
Craig-Hallum Capital Group LLC
ANNEX E
Confidential
Aventine Renewable Energy Holdings, Inc.
1300 South Second Street
Pekin, IL 61554 |
March
31, 2015 |
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Ladies and Gentlemen:
Aventine Renewable Energy Holdings,
Inc. (the “Company”) has engaged Duff & Phelps, LLC (“Duff & Phelps”) to serve as
an independent financial advisor to the Board of Directors (the “Board”) of the Company (solely in their capacity
as members of the Board) to provide an opinion (the “Opinion”) as of the date hereof as to the fairness, from
a financial point of view, to the stockholders of the Company electing Parent Voting Common Stock of the Exchange Ratio (as defined
below) to be received by such stockholders in the contemplated transaction described below (the "Proposed Transaction")
(without giving effect to any impact of the Proposed Transaction on any particular stockholder other than in its capacity as a
stockholder).
Description of the Proposed Transaction
Duff & Phelps understands that
the Company, Pacific Ethanol, Inc. ("Parent") and AVR Merger Sub, Inc., a direct wholly-owned subsidiary of Parent ("Merger
Sub"), have entered into an Agreement and Plan of Merger dated as of December 30, 2014 and propose to enter into Amendment
No. 1 to Agreement and Plan of Merger pursuant to which, among other things, Merger Sub will be merged with and into the Company
and that, in connection with the Proposed Transaction, each outstanding share of common stock of the Company, par value $0.001
per share ("Company Common Stock"), shall be converted into the right to receive, at the election of the holder thereof,
1.25 shares (the "Exchange Ratio") of (i) convertible non-voting common stock of Parent, par value $0.001 ("Parent
Non-Voting Common Stock"), or (ii) common stock of Parent, par value $0.001 per share ("Parent Voting Common Stock"),
or (iii) a combination of Parent Non-Voting Common Stock and Parent Voting Common Stock in the proportion specified by the shareholder
on the election form.
Scope of Analysis
In connection with this Opinion, Duff
& Phelps has made such reviews, analyses and inquiries as it has deemed necessary and appropriate under the circumstances.
Duff & Phelps also took into account its assessment of general economic, market and financial conditions, as well as its experience
in securities and business valuation, in general, and with respect to similar transactions, in particular. Duff & Phelps’
procedures, investigations, and financial analysis with respect to the preparation of its Opinion included, but were not limited
to, the items summarized below:
| 1. | Reviewed the following documents: |
| a. | The Company’s audited financial statements for the years ended December 31, 2010 through
December 31, 2013; |
| b. | Audited financial information
for the Company for the twelve months ended December 31, 2014, which the Company’s
management identified as being the most current financial statements available; |
| c. | Parent’s annual reports
and audited financial statements on Form 10-K filed with the Securities and Exchange
Commission (“SEC”) for the years ended December 31, 2010 through December
31, 2014; |
| d. | Other internal documents relating to the history, current operations, and probable future outlook
of the Company, including financial projections of Aventine and financial projections of Parent provided to the Company management
by Parent and used by the Company in its own evaluation of Parent, all provided to us by management of the Company; |
| e. | A letter dated March 31, 2015
from the management of the Company which made certain representations as to historical
financial statements, financial projections for the Company and Parent and the underlying
assumptions, and a pro forma schedule of assets and liabilities (including identified
contingent liabilities) for the Company and Parent on a post-transaction basis; and |
| f. | Financial terms and conditions
of the Agreement and Plan of Merger, by and among the Company, Parent and Merger Sub,
dated as of December 30, 2014, and a draft of Amendment No. 1 to Agreement and Plan of
Merger, by and among the Company, Parent and Merger Sub, dated as of March 31, 2015 (collectively,
the "Amended Merger Agreement"); |
| 2. | Discussed the information referred to above and the background and other elements of the Proposed
Transaction with the management of the Company; |
| 3. | Reviewed the historical trading price and trading volume of Parent’s common stock, and the
publicly traded securities of certain other companies that Duff & Phelps deemed relevant; |
| 4. | Performed certain valuation and comparative analyses using generally accepted valuation and analytical
techniques including a discounted cash flow analysis, an analysis of selected public companies that Duff & Phelps deemed relevant,
and an analysis of selected transactions that Duff & Phelps deemed relevant; and |
| 5. | Conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate. |
Assumptions, Qualifications and Limiting
Conditions
In performing its analyses and rendering
this Opinion with respect to the Proposed Transaction, Duff & Phelps, with the Company’s consent:
| 1. | Relied upon the accuracy, completeness, and fair presentation of all information, data, advice,
opinions and representations obtained from public sources or provided to Duff & Phelps from private sources, including Company
management, and did not independently verify such information; |
| 2. | Relied upon the fact that the Board and the Company have been advised by counsel as to all legal
matters with respect to the Proposed Transaction, including whether all procedures required by law to be taken in connection with
the Proposed Transaction have been duly, validly and timely taken; |
| 3. | Assumed that any estimates, evaluations, forecasts and projections furnished to Duff & Phelps
were reasonably prepared and based upon the best currently available information and good faith judgment of the person furnishing
the same, and Duff & Phelps expresses no opinion with respect to such projections or the underlying assumptions; |
| 4. | Assumed that information supplied and representations made by Company management are true and correct
in all material respects regarding the Company, Parent and the Proposed Transaction; |
| 5. | Assumed that the representations
and warranties made in the final Amended Merger Agreement are true and correct in all
material respects; |
| 6. | Assumed that the final versions of all documents reviewed by Duff & Phelps in draft form conform
in all material respects to the drafts reviewed; |
| 7. | Assumed that there has been no material change in the assets, liabilities, financial condition,
results of operations, business, or prospects of the Company since the date of the most recent financial statements and other information
made available to Duff & Phelps, and that there is no information or facts that would make the information reviewed by Duff
& Phelps incomplete or misleading; |
| 8. | Assumed that all of the conditions
required to implement the Proposed Transaction will be satisfied and that the Proposed
Transaction will be completed in accordance with the terms of the Amended Merger Agreement
without any amendments thereto or any waivers of any terms or conditions thereof; and |
| 9. | Assumed that all governmental, regulatory or other consents and approvals necessary for the consummation
of the Proposed Transaction will be obtained without any adverse effect on the Company or the contemplated benefits expected to
be derived in the Proposed Transaction. |
To the extent that any of the foregoing
assumptions or any of the facts on which this Opinion is based prove to be untrue in any material respect, this Opinion cannot
and should not be relied upon. Furthermore, in Duff & Phelps’ analysis and in connection with the preparation of this
Opinion, Duff & Phelps has made numerous assumptions with respect to industry performance, general business, market and economic
conditions and other matters, many of which are beyond the control of any party involved in the Proposed Transaction.
Duff & Phelps has prepared this
Opinion effective as of the date hereof. This Opinion is necessarily based upon market, economic, financial and other conditions
as they exist and can be evaluated only as of the date hereof, and Duff & Phelps disclaims any undertaking or obligation to
update, revise, or reaffirm this Opinion, or advise any person of any change in any fact or matter affecting this Opinion which
may come or be brought to the attention of Duff & Phelps after the date hereof.
Duff & Phelps
did not evaluate the Company’s solvency or conduct an independent appraisal or physical inspection of any specific assets
or liabilities (contingent or otherwise). Duff & Phelps has not been requested to, and did not, (i) initiate any discussions
with, or solicit any indications of interest from, third parties with respect to the Proposed Transaction, the assets, businesses
or operations of the Company, or any alternatives to the Proposed Transaction, (ii) negotiate the terms of the Proposed Transaction,
and therefore, Duff & Phelps has assumed that such terms are the most beneficial terms, from the Company’s perspective,
that could, under the circumstances, be negotiated among the parties to the Amended Merger Agreement and the Proposed Transaction,
or (iii) advise the Board or any other party with respect to alternatives to the Proposed Transaction.
Duff & Phelps is not expressing
any opinion as to the market price or value of the Parent Non-Voting Common Stock, the Parent Voting Common Stock or the Company
Common Stock (or anything else) after the announcement or the consummation of the Proposed Transaction. This Opinion should not
be construed as a valuation opinion, credit rating, solvency opinion, an analysis of the Company’s credit worthiness, as
tax advice, or as accounting advice. Duff & Phelps has not made, and assumes no responsibility to make, any representation,
or render any opinion, as to any legal matter.
In rendering this Opinion, Duff &
Phelps is not expressing any opinion with respect to the amount or nature of any compensation to any of the Company’s officers,
directors, or employees, or any class of such persons, relative to the Exchange Ratio payable to the stockholders of the Company
electing Parent Voting Common Stock in the Proposed Transaction, or with respect to the fairness of any such compensation.
This Opinion is furnished solely for
the use and benefit of the Board in connection with its consideration of the Proposed Transaction and is not intended to, and does
not, confer any rights or remedies upon any other person, and is not intended to be used, and may not be used, by any other person
or for any other purpose, without Duff & Phelps’ express consent. This Opinion (i) does not address the merits of the
underlying business decision to enter into the Proposed Transaction versus any alternative strategy, transaction or transaction
structure; (ii) does not address any other transaction related to the Proposed Transaction; (iii) is not a recommendation as to
how the Board or any stockholder should vote or act with respect to any matters relating to the Proposed Transaction, or whether
to proceed with the Proposed Transaction or any related transaction, and (iv) does not indicate that the Exchange Ratio payable
is the best possibly attainable under any circumstances; instead, it merely states whether the Exchange Ratio payable to shareholders
electing Parent Voting Common Stock in the Proposed Transaction is within a range suggested by certain financial analyses. The
decision as to whether to proceed with the Proposed Transaction or any related transaction may depend on an assessment of factors
unrelated to the financial analysis on which this Opinion is based. This letter should not be construed as creating any fiduciary
duty on the part of Duff & Phelps to any party.
This
Opinion is solely that of Duff & Phelps, and Duff & Phelps’ liability in connection with this letter shall be limited
in accordance with the terms set forth in the letter agreement between Duff & Phelps and the Company dated March 31, 2015
(the “Letter Agreement”) and the engagement letter between Duff & Phelps and the Company dated December
20, 2014, as amended by the Addendum dated December 29, 2014 (together with the Letter Agreement, the “Engagement Letter”).
This Opinion is confidential, and its use and disclosure is strictly limited in accordance with the terms set forth in the Engagement
Letter.
Disclosure of Prior Relationships
Duff & Phelps has acted as financial
advisor to the Board and will receive a customary fee for its services. No portion of Duff & Phelps’ fee is refundable
or contingent upon either the conclusion expressed in this Opinion or whether or not the Proposed Transaction is successfully consummated.
Pursuant to the terms of the Engagement Letter, a portion of Duff & Phelps’ fee is payable upon Duff & Phelps’
informing the Company that it is prepared to deliver the Opinion. In addition, the Company has agreed to indemnify Duff & Phelps
for certain liabilities arising out of its engagement and to reimburse it for certain out-of-pocket expenses. Other than the current
engagement, during the two years preceding the date of this Opinion, Duff & Phelps has not had any material relationship with
any party to the Proposed Transaction for which compensation has been received or is intended to be received, nor is any such material
relationship or related compensation mutually understood to be contemplated.
Conclusion
Based upon and subject to the foregoing,
Duff & Phelps is of the opinion that as of the date hereof, the Exchange Ratio payable to the Company's stockholders electing
Parent Voting Common Stock in the Proposed Transaction is fair, from a financial point of view, to such stockholders of the Company
(without giving effect to any impact of the Proposed Transaction on any particular stockholder other than in its capacity as a
stockholder).
This Opinion has been approved by the Opinion Review Committee
of Duff & Phelps.
Respectfully submitted,
/s/ Duff &
Phelps, LLC
Duff & Phelps, LLC
ANNEX F
Section
262 of the General Corporation Law of the State of Delaware
§
262 Appraisal rights
(a) Any
stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to § 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b)
and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those words; and the words "depository
receipt" mean a receipt or other instrument issued by a depository representing an interest in 1 or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal
rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation
to be effected pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this title and, subject to paragraph
(b)(3) of this section, § 251(h) of this title), § 252, § 254, § 255, § 256, § 257, § 258,
§ 263 or § 264 of this title:
(1) Provided,
however, that, except as expressly provided in § 363(b) of this title, no appraisal rights under this section shall be available
for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of the meeting of stockholders to act upon the agreement of merger or
consolidation, were either: (i) listed on a national securities exchange or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving
a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided
in § 251(f) of this title.
(2) Notwithstanding
paragraph (b)(1) of this section, appraisal rights under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation
pursuant to §§ 251, 252, 254, 255, 256, 257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares
of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof;
b. Shares
of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national
securities exchange or held of record by more than 2,000 holders;
c. Cash
in lieu of fractional shares or fractional depository receipts described in the foregoing paragraphs (b)(2)a. and b. of this section;
or
d. Any
combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing paragraphs (b)(2)a., b. and c. of this section.
(3) In
the event all of the stock of a subsidiary Delaware corporation party to a merger effected under § 251(h), § 253 or
§ 267 of this title is not owned by the parent immediately prior to the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(4) In
the event of an amendment to a corporation's certificate of incorporation contemplated by § 363(a) of this title, appraisal
rights shall be available as contemplated by § 363(b) of this title, and the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply as nearly as practicable, with the word "amendment"
substituted for the words "merger or consolidation," and the word "corporation" substituted for the words
"constituent corporation" and/or "surviving or resulting corporation."
(c) Any
corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the
shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation
in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation.
If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal
rights shall be perfected as follows:
(1) If
a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders
who was such on the record date for notice of such meeting (or such members who received notice in accordance with § 255(c)
of this title) with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) of this section
that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice
a copy of this section and, if 1 of the constituent corporations is a nonstock corporation, a copy of § 114 of this title.
Each stockholder electing to demand the appraisal of such stockholder's shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for appraisal of such stockholder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such stockholder's shares. A proxy or vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of
the date that the merger or consolidation has become effective; or
(2) If
the merger or consolidation was approved pursuant to § 228, § 251(h), § 253, or § 267 of this title, then
either a constituent corporation before the effective date of the merger or consolidation or the surviving or resulting corporation
within 10 days thereafter shall notify each of the holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any
or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this
section and, if 1 of the constituent corporations is a nonstock corporation, a copy of § 114 of this title. Such notice may,
and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing
of such notice or, in the case of a merger approved pursuant to § 251(h) of this title, within the later of the consummation
of the tender or exchange offer contemplated by § 251(h) of this title and 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights
of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice or, in the case of a merger approved pursuant to § 251(h) of this
title, later than the later of the consummation of the tender or exchange offer contemplated by § 251(h) of this title and
20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the
notice is given.
(e) Within
120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) of this section hereof and who is otherwise entitled to appraisal rights, may commence
an appraisal proceeding by filing a petition in the Court of Chancery demanding a determination of the value of the stock of all
such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation,
any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party shall have the right
to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120
days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections
(a) and (d) of this section hereof, upon written request, shall be entitled to receive from the corporation surviving the merger
or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger
or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for
such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery
of demands for appraisal under subsection (d) of this section hereof, whichever is later. Notwithstanding subsection (a) of this
section, a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf
of such person may, in such person's own name, file a petition or request from the corporation the statement described in this
subsection.
(f) Upon
the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a
duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with
whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The
Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition
by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable.
The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At
the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold
stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings
as to such stockholder.
(h) After
the Court determines the stockholders entitled to an appraisal, the appraisal proceeding shall be conducted in accordance with
the rules of the Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceeding
the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account all relevant factors. Unless the Court in its discretion determines
otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment shall
be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established
from time to time during the period between the effective date of the merger and the date of payment of the judgment. Upon application
by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, proceed to trial upon the appraisal prior to the final determination of the stockholders entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted such stockholder's certificates of stock to the Register in Chancery, if such is required,
may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The
Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Payment shall be so made to each such stockholder, in the case of holders of
uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation
of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may
be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state.
(j) The
costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection
with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts,
to be charged pro rata against the value of all the shares entitled to an appraisal.
(k) From
and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions
on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective
date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided
in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal
of such stockholder's demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval
of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval
may be conditioned upon such terms as the Court deems just; provided, however that this provision shall not affect the right of
any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party to withdraw such stockholder's
demand for appraisal and to accept the terms offered upon the merger or consolidation within 60 days after the effective date
of the merger or consolidation, as set forth in subsection (e) of this section.
(l) The
shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted
had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting
corporation.
Exhibit 8.1
|
|
TROUTMAN SANDERS LLP
Attorneys at Law
The Chrysler Building
405 Lexington Avenue
New York, New York 10174-0700
212.704.6000 telephone
troutmansanders.com
|
April 2, 2015
Pacific Ethanol, Inc..
400 Capitol Mall, Suite 2060
Sacramento, California 95814
Ladies and Gentlemen:
We have acted as special
counsel to Pacific Ethanol, Inc., a Deleware corporation (“Parent”), in connection with the proposed merger
(the “Merger”) of AVR Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of PacEthanol
(“Merger Sub”), with and into Aventine Renewable Energy Holdings, Inc., a Delaware corporation (“Company”),
in accordance with the applicable provisions of the Delaware General Corporation Law, as amended and pursuant to the Agreement
and Plan of Merger (the “Agreement”) dated as of December 30, 2014. Capitalized terms used but not defined herein
shall have the meanings ascribed to them in the Agreement. At your request, and in connection with the filing of the Form S-4 (as
amended or supplemented through the date hereof, the “Registration Statement”), including the proxy statement/prospectus
forming a part thereof, we are rendering our opinion concerning certain United States federal income tax matters.
In rendering our opinion
set forth below, we have examined and relied upon, without independent investigation or verification, the accuracy and completeness
of the facts, information, representations, covenants and agreements contained in the Agreement, the Registration Statement and
such other documents as we have deemed necessary or appropriate as a basis for the opinion set forth below. In addition, we have
relied upon the accuracy and completeness of certain statements, representations, covenants and agreements made by Parent and Company,
including factual statements and representations set forth in officers’ certificates dated the date hereof from officers
of Parent and Company (the “Representation Letters”). For purposes of rendering our opinion, we have assumed
that (i) the transaction will be consummated in accordance with the provisions of the Agreement and as described in the Registration
Statement (and no transaction or condition described therein and affecting this opinion will be waived by any party to the Agreement),
(ii) the statements concerning the transactions contemplated by the Agreement made in the Agreement, the Registration Statement
and the Representation Letters are true, complete and correct, and will remain true, complete and correct at all times up to and
including the Effective Time and thereafter (where relevant), (iii) any statements made in the Agreement, the Registration Statement
or the Representation Letters regarding the “belief” of any person are true, complete and correct, and will remain
true, complete and correct at all times up to and including the Effective Time and thereafter (where relevant) in each case as
if made without such qualification, (iv) the parties to the Agreement have complied with, and, if applicable, will continue to
comply with, their respective covenants and agreements contained in the Agreement, and (v) there will be no change in applicable
U.S. federal income tax law from the date hereof through the Effective Time. Our opinion assumes and is expressly conditioned on,
among other things, the initial and continuing accuracy and completeness of the facts, information, representations, covenants
and agreements set forth in the documents referred to in this paragraph.
Based upon and subject
to the foregoing, we hereby confirm to you that, subject to the limitations, qualifications, exceptions and assumptions set forth
herein and therein, (i) it is our opinion that the Merger will qualify as a “reorganization” within the meaning of
Section 368(a) of the Code, and (ii) the discussion in the section of the Registration Statement entitled “Material United
States Federal Income Tax Consequences of the Merger” constitutes our opinion as to the material United States federal income
tax consequences of the Merger to holders of Parent common stock.
We hereby consent to the
filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement and to the references
therein to us. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Troutman Sanders LLP
TROUTMAN SANDERS LLP
Atlanta BEIJING Chicago Hong
Kong New York Norfolk Orange
County Portland
Raleigh Richmond San Diego Shanghai Tysons
Corner Virginia Beach Washington, DC
Exhibit 8.2
April 2, 2015
Aventine Renewable Energy Holdings, Inc.,
1300 South 2nd Street
Pekin, IL 61554
Ladies and Gentlemen:
We have acted as counsel to
Aventine Renewable Energy Holdings, Inc., a Delaware corporation ( the “Company"), in connection with the Merger, as
defined in the Agreement and Plan of Merger dated as of December 30, 2014, by and among Pacific Ethanol, Inc., a Delaware corporation,
(“Parent”), AVR Merger Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Parent ("Merger
Sub"), and the Company (the "Agreement"). This opinion regarding certain tax consequences is being delivered to
you in connection with the Merger, pursuant to Section 7.3(d) of the Merger Agreement, and in connection with the Registration
Statement on Form S-4, which includes the joint proxy statement/prospectus, filed on February 4, 2015, as amended through the effective
date hereof (the "Registration Statement") with the Securities and Exchange Commission (the Commission") under the
Securities Act of 1933, as amended (the "Securities Act”). Capitalized terms used but not otherwise defined herein shall
have the meanings assigned to them in the Agreement.
In rendering our opinion set
forth below, we have examined and relied upon, without independent investigation or verification, the accuracy and completeness
both initially and continuing as of the Effective Time, of the facts, information, representations, covenants and agreements contained
in originals or copies, certified or otherwise identified to our satisfaction, of the Agreement, the Registration Statement and
such other documents as we have deemed necessary or appropriate as a basis for the opinion set forth below. In addition, we have
relied upon the accuracy and completeness, both initially and continuing as of the Effective Time, of certain statements, representations,
covenants and agreements made by Parent, Merger Sub and the Company, including factual statements and representations set forth
in letters dated the date hereof from officers of Parent, Merger Sub and the Company (the "Representation Letters").
For purposes of rendering our opinion, we have assumed that such statements, representations, covenants and agreements are, and
will continue to be as of the Effective Time, true and correct without regard to any qualification as to knowledge or belief. Our
opinion assumes and is expressly conditioned on, among other things, the initial and continuing accuracy and completeness of the
facts, information, representations, covenants and agreements set forth in the documents referred to above and the statements,
representations, covenants and agreements made by Parent, Merger Sub and the Company, including those set forth in the Representation
Letters, and we have assumed that the Representation Letters will be re-executed by appropriate officers as of the Effective Time.
In our examination, we have
assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and
the authenticity of the originals of such documents. We also have assumed that the transactions related to the Merger or contemplated
by the Agreement will be consummated in accordance with the Agreement and as described in the Registration Statement, and that
none of the terms and conditions contained therein will have been waived or modified in any respect prior to the Effective Time.
We do not express any opinion
concerning any laws other than the United States federal income tax laws. In rendering our opinion, we have considered applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations promulgated thereunder
(the "Regulations"), pertinent judicial authorities, rulings of the Internal Revenue Service, and such other authorities
as we have considered relevant, in each case, in effect on the date hereof. It should be noted that the Code, the Regulations,
such judicial authorities, such rulings, and such other authorities are subject to change at any time and, in some circumstances,
with retroactive effect. A change in any of the authorities upon which our opinion is based, or any variation or difference in
any fact from those set forth or assumed herein or in the Registration Statement, the Agreement or the Representation Letters,
could affect our conclusions herein. Moreover, there can be no assurance that our opinion will be accepted by the Internal Revenue
Service or, if challenged, by a court.
Based solely upon and subject
to the foregoing, and provided that the Agreement and representations referenced above set forth all of the material facts relating
to the Merger fully and accurately as of the date hereof, and will continue to set forth such facts fully and accurately as of
the Effective Time, we are of the opinion that (i) the Merger will qualify as a reorganization within the meaning of Section 368(a)
of the Code, and (ii) the discussion in the section of the Registration Statement entitled “Material United States Federal
Income Tax Consequences of the Merger” constitutes our opinion as to the material United States federal income tax consequences
of the Merger to holders of Parent common stock, to the extent such discussion sets forth statements of United States federal income
tax law or legal conclusions with respect thereto.
We hereby consent to the filing
of this opinion as an exhibit to the Registration Statement and the use of our name under the heading "Legal Matters"
in the Registration Statement. In giving this consent, we do not admit that we come within the category of persons whose consent
is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder.
We are furnishing this
opinion solely to you in connection with the Merger, pursuant to Section 7.3(d) of the Merger Agreement. This opinion may not be
relied upon by you for any other purpose or relied upon or furnished to any other person without our prior written consent.
This opinion is expressed as
of the date hereof, and we are under no obligation to supplement or revise our opinion to reflect any legal developments or factual
matters arising subsequent to the date hereof or the impact of any information, document, certificate, record, statement, representation,
covenant, agreement or assumption relied upon herein that becomes untrue, incorrect or incomplete.
Very truly yours,
/s/ Akin,
Gump, Strauss, Haeuer & Feld, L.L.P.
AKIN, GUMP, STRAUSS, HAUER
& FELD, L.L.P.
Exhibit 23.1
Consent of Independent Registered Public
Accounting Firm
We consent to the incorporation by reference
in this Registration Statement on Amendment No. 1 to Form S-4 of Pacific Ethanol, Inc. of our reports dated March 16, 2015, relating
to our audits of the consolidated financial statements and internal control over financial reporting, which appear in the Annual
Report on Form 10-K of Pacific Ethanol, Inc. for the year ended December 31, 2014.
We also consent to the reference to our
firm under the caption "Experts" in the Prospectus, which is part of this Registration Statement.
/s/ HEIN & ASSOCIATES LLP
Irvine, California
April 1, 2015
Exhibit 23.2
Consent of Independent Auditor
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-201879 on Form S-4 of Pacific Ethanol, Inc. of our report dated March 4, 2015, relating to our audits of the consolidated
financial statements of Aventine Renewable Energy Holdings, Inc., appearing in the Joint Proxy Statement/Prospectus, which is part
of this Registration Statement.
We also consent to the reference to our firm under the caption "Experts"
in such Joint Proxy Statement/Prospectus.
/s/ McGladrey LLP
Des Moines, Iowa
April 2, 2015
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption “Experts”
and to the use of our report dated June 27, 2013, except Note 2, as to which the date is February 2, 2015, in Amendment No. 1 to
the Proxy Statement of Pacific Ethanol, Inc. that is made a part of this Registration Statement (Form S-4 No. 333-201879) and related
Prospectus of Pacific Ethanol, Inc. for the registration of its common stock non-voting common stock.
/s/ Ernst & Young LLP
St. Louis, Missouri
April 2, 2015
Exhibit 99.1
____________
Pacific
Ethanol, Inc.
PACIFIC
ETHANOL, INC.
ATTN:
MIKE KRAMER
400
CAPITOL MALL, SUITE 2060
SACRAMENTO, CA 95814-4407 |
|
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern
Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the
instructions to obtain your records and to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS
If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all
future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery,
please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access
proxy materials electronically in future years.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions
up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting
date. Have your proxy card in hand when you call and then follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid
envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. |
Important Notice
Regarding the Availability of Proxy Materials for the Special Meeting:
The Notice and Proxy
Statement is available at www.proxyvote.com.
PROXY
FOR 2015 SPECIAL MEETING OF STOCKHOLDERS
PACIFIC ETHANOL,
INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Pacific Ethanol, Inc. (the “Company”) hereby constitutes and appoints Neil M.
Koehler and William L. Jones, with the power to appoint their substitutes, as attorney and proxy to appear, attend and vote
all of the shares of common stock of the Company standing in the name of the undersigned on the record date at the 2015 special
meeting of stockholders of the Company to be held at 8:00 a.m., local time, on April 29, 2015, at [TBD], and at any adjournment
or adjournments thereof, upon the proposals on the reverse side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR” EACH OF THE NOMINEES LISTED ON THE REVERSE SIDE
AND “FOR” THE PROPOSALS INDICATED AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXY HOLDER ON ANY OTHER BUSINESS.
ALL OTHER PROXIES HERETOFORE GIVEN BY THE UNDERSIGNED IN CONNECTION WITH THE ACTIONS PROPOSED ON THIS PROXY CARD ARE HEREBY EXPRESSLY
REVOKED. THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY, BY ISSUANCE
OF A SUBSEQUENT PROXY OR BY VOTING IN PERSON AT THE SPECIAL MEETING.
Continued
and to be signed on reverse side
Exhibit 99.2
Aventine
renewable energy holdings, inc.
1300 SOUTH 2ND STREET.
PEKIN, IL 61554
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: |
YOU CAN VOTE TODAY IN THE FOLLOWING MANNER:
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the
postage-paid envelope
we have provided or return it to Vote Processing,1300 South 2nd Street, Pekin, IL 61554. All proxy cards must be received
by [l], 2015.
Each and every vote is important. Your Board of Directors
recommends that all Aventine Renewable Energy Holdings, Inc. stockholders vote the proxy card “FOR” Proposals 1 and
2.
|
KEEP THIS PORTION FOR YOUR RECORDS |
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED
AND DATED
|
AVENTINE RENEWABLE ENERGY HOLDINGS, INC. |
┐
|
The Board of Directors recommends you vote FOR Proposals 1 and 2: |
For |
Against |
Abstain |
1. To adopt the Agreement and Plan of Merger, dated
as of December 30, 2014, as amended on March 31, 2015, by and among Pacific Ethanol, Inc., AVR Merger Sub, Inc., and
Aventine Renewable Energy Holdings, Inc. and thereby approve the merger. |
o |
o |
o |
2. To adjourn the special meeting if necessary or advisable to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt the merger agreement and approve the merger. |
o |
o |
o |
|
|
|
|
NOTE: Such other business as may properly
come before the special meeting or any adjournment or postponement thereof, which the proxyholders are authorized to vote
upon in their discretion. |
|
For address changes/comments, mark here. o
(see reverse for instructions)
Please indicate if you plan to attend this meeting |
Yes No
o o |
Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name by authorized officer.
|
|
|
Signature [PLEASE SIGN WITHIN BOX] Date |
|
Signature (Joint Owners) |
|
Date |
|
Admission Ticket
Please retain and present this top portion
of the
proxy card as your admission ticket together with a
valid picture identification to gain admittance
to the Special Meeting.
Important Notice Regarding the Availability
of Proxy Materials for the Special Meeting to be held
on [l], 2015:
|
|
AVENTINE
RENEWABLE ENERGY HOLDINGS, INC. For the Special Meeting of Stockholders To be
held [l], 2015 This proxy is solicited on behalf of the Board of Directors
The undersigned hereby
appoints Mark Beemer and Christopher Nichols, and each of them, the attorneys-in-fact, agents and proxies of the undersigned,
with full powers of substitution to each, to attend and act as proxy or proxies of the undersigned at the
Special Meeting of Stockholders of Aventine Renewable Energy Holdings, Inc. to be held at Aventine’s headquarters
located at 1300 South 2nd Street, Pekin, IL 61554, on [l], 2015 at 9:00 AM Central Time, and at any and all
adjournments
or postponements thereof, and to vote upon and in respect of the following matters and in accordance with the following
instructions the number of shares which the undersigned, if personally present, would be entitled to vote.
This
proxy, when properly executed, will be voted as directed on this proxy, or if no direction
is indicated, this proxy will be voted “For” Proposals 1 and 2 and in the
discretion of the proxy holders on any other matter that may properly come before the
meeting or any adjournments or postponements thereof.
IF VOTING BY MAIL, PLEASE MARK, SIGN, DATE AND RETURN
THIS PROXY CARD PROMPTLY USING THE ENCLOSED REPLY ENVELOPE.
Address
Changes/Comments:___________________________________________________________________________
_________________________________________________________________________________________________
(If you noted any
Address Changes/Comments above, please mark corresponding box on the reverse side.)
Continued
and to be signed on reverse side
|
Exhibit 99.5
CONSENT OF CRAIG-HALLUM CAPITAL GROUP LLC
We hereby consent to the inclusion of our opinion
letter dated December 29, 2014 as Annex D to, and to the reference thereto under the captions “SUMMARY—THE MERGER—Opinion
of Craig-Hallum Capital Group LLC,” “THE PROPOSED MERGER—Background of the Merger,” “THE PROPOSED
MERGER—Recommendation of the Pacific Ethanol Board and its Reasons for the Merger” and “THE PROPOSED MERGER—Opinion
of Craig-Hallum Capital Group LLC” in, Amendment No. 1 to the Joint Proxy Statement/Prospectus relating to the proposed merger
transaction involving Pacific Ethanol, Inc., Aventine Renewable Energy Holdings, Inc. and AVR Merger Sub, Inc., which Joint Proxy
Statement/Prospectus is a part of the Registration Statement on Form S-4 (Reg. No. 333-201879) of Pacific Ethanol, Inc. By giving
such consent, we do not thereby admit that we are experts with respect to any part of such Registration Statement within the meaning
of the term “expert” as used in, or that we come within the category of persons whose consent is required under, the
Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder.
Craig-Hallum Capital Group LLC |
/s/ Craig-Hallum Capital Group LLC |
|
|
Minneapolis, Minnesota
April 2, 2015
Exhibit 99.6
CONSENT OF DUFF & PHELPS, LLC
We hereby consent to the use in Amendment
No. 1 to the Registration Statement (Form S-4) of Pacific Ethanol, Inc. ("Pacific") and in the Proxy
Statement/Prospectus of Pacific and Aventine Renewable Energy Holdings, Inc. ("Aventine"), which is part of
Amendment No. 1 to the Registration Statement, of our opinion letter, dated March 31, 2015, to the Board of
Directors of Aventine, appearing as Annex E to such Proxy Statement/Prospectus, and to the description of such opinion and to
the references to our name contained therein under the headings "Summary—Opinion of Aventine Financial
Advisor", "Risk Factors—Risks Related to the Merger", "The Proposed Merger—Background of the
Merger", "The Proposed Merger—Recommendation of the Aventine Board of Directors and its Reasons for the
Merger" and "The Merger—Opinion of Financial Advisor to the Aventine Board of Directors". In giving such
consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended (the "Act"), or the rules and regulations of the Securities and Exchange
Commission thereunder (the "Regulations"), nor do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the Act or the Regulations.
DUFF & PHELPS, LLC
By: /s/ Andrew Capitman
Name: Andrew Capitman
Title: Managing Director
April 2, 2015
Exhibit 99.7
List of Companies Included in Hay Group Survey Data
3M
Aceto
Afton Chemical
AGC Chemicals Americas, Inc.
Agrana
Ainsworth Pet Nutrition
Air Liquide America
Air Products & Chemicals
AK Steel Corporation
Akzo Nobel
Akzo Nobel -- Automotive and Aerospace Coatings
Akzo Nobel -- Deco Paints
Akzo Nobel -- Functional Chemicals
Akzo Nobel -- Industrial Coatings
Akzo Nobel -- Marine and Protective Coatings
Akzo Nobel -- Powder Coatings
Akzo Nobel -- Pulp & Paper Chemicals
Akzo Nobel -- Surface Chemistry
Akzo Nobel -- Wood Finishes and Adhesives
Albemarle
Almatis
Amcor Limited - Flexibles
Amcor Limited -- Rigid Plastics
American Crystal Sugar
Amesbury Group
Amsted Industries
Amway -- Alticor
Anheuser-Busch InBev -- Anheuser-Busch
ArcelorMittal
ArcelorMittal -- ArcelorMittal Tubular
Arizona Chemical
Arkema
Ascend Performance Materials
Ashland
Ashland -- Aqualon Functional Ingredients
Ashland -- Consumer Markets
Ashland -- Hercules Water Technologies
Ashland -- Performance Materials
Associated Materials
Aurubis AG
Austin Packaging Company
Avantor Performance Materials
Avon Products
Bacardi Limited -- Bacardi USA
Bare Escentuals
Barnes Group -- Barnes Aerospace
BASF
Bauer Hockey
Bayer -- MaterialScience
BE Aerospace
Beam Global Spirits & Wine
Beiersdorf
Beneo
Berry Plastics
BIC
Boral Industries
Boston Beer
Braskem America
Brown-Forman
Buckman Laboratories
Cabot
Calgon Carbon
Campari America
Campbell Soup
Cargill
Celanese Americas
CF Industries
Charlotte Pipe & Foundry
Chemtrade Logistics
Church & Dwight
Clariant
Coca-Cola
Coca-Cola Bottling
Colgate-Palmolive
Commercial Metals
ConAgra Foods
Corbion
Coty
Crown Imports
CSN
CSS Industries
Curtiss-Wright
Cytec Industries
D&M
Daikin America
Day & Zimmermann
Dean Foods
Del Monte Foods
Diageo North America
Dow Chemical
Dow Chemical -- Dow AgroSciences
Dow Corning
Dow Corning -- Hemlock Semiconductor
DSM Dyneema
DSM Pharmaceuticals
DSM Resins -- DSM Nutritional Products
DSM Resins -- DSM Services USA
Duraline
Dyno Nobel
E. I. du Pont de Nemours
EADS North America
Eastman Chemical
Eaton
Elevance Renewable Sciences
Embraer
Eramet Marietta
Ethyl
Evonik Degussa
Farmland Foods
Ferrero USA
Ferro
Firmenich
Fisher & Paykel Appliances
FMC
FMC -- Agricultural Products Group
FMC -- Industrial Chemicals Group
FMC -- Specialty Chemicals Group
Fonterra
Forbo Flooring
Fuller (H.B.)
Geberit -- Chicago Faucet
GEO Specialty Chemicals
Gerdau AmeriSteel
Gestamp
Ghirardelli Chocolate
Givaudan
Great Lakes Dredge and Dock
Griffith Laboratories USA
Groupe SEB
Heineken USA
Henkel
Hershey Foods
Hilti -- US
Honeywell -- Specialty Materials
Hormel Foods
Houghton International
Huhtamaki
Huntsman -- Advanced Materials
Huntsman -- Performance Products
Huntsman -- Polyurethanes
Huntsman -- Textile Effects
ICL Industrial Products
Ineos
INEOS Oligomers
Infineum USA
Innophos
International Flavors & Fragrances
Interstates
INVISTA
Italcementi
Itochu International
Japan Tobacco -- JT International USA
Johnson Matthey, Inc. - Precious Metal Products
Jotun Coating
Kellogg
Kemira Chemicals
Kimberly-Clark
Kuraray Americas
Lansing Trade Group LLC
LANXESS
Lavazza Premium Coffees
LA-Z BOY
Lego Systems
Lehigh Hanson
Lehigh Hanson -- Building Products
Lehigh Hanson -- Canada Region
Lehigh Hanson -- Lehigh White
Lehigh Hanson -- North Region
Lehigh Hanson -- South Region
Lehigh Hanson -- West Region
Lenzing Fibers
Lhoist North America
Linde Group, NA
L'Oreal USA
Lotus Bakeries
Lubrizol
LVMH Moet Hennessy Louis Vuitton -- Moet Hennessy USA
LyondellBasell North America -- Lyondell
MacDermid
Magotteaux
Marine Harvest
Martek Biosciences Corporation
Matthews International
Mauser
McCormick & Company
MeadWestvaco
Millennium Inorganic Chemicals
Minn-Dak Farmers Cooperative
Mitsubishi International
Mitsubishi Polycrystalline Silicon America
Molson Coors Brewing
Momentive Specialty Chemicals
Moog
Mosaic
Nestle USA
NewMarket
NORFALCO
North American Breweries
NOVA Chemicals
Nutreco Holding -- Trouw Nutrition USA
Nyrstar Tennessee Mines
Occidental Petroleum -- Occidental Chemical
OCI Enterprises
Olam Americas
Orion Engineered Carbons, LLC
Outotec Oyj
Owens-Illinois
Panasonic Consumer Electronics
Peabody Holding
PepsiCo
Pernod Ricard SA -- Pernod Ricard USA
Philip Morris International
Plastiflex
Ply Gem Siding Group
PolyOne
Potash Corporation of Saskatchewan
Praxair
Procter & Gamble
Proximo Spirits
Public Building Commission of Chicago
Remy Cointreau USA
Rich Products
Rio Tinto Group
RockTenn
Rolls Royce
Roquette America
S&B Industrial Minerals S.A.
SABIC Innovative Plastics US
Sabra Dipping Company
Saint-Gobain -- Abrasives
Saint-Gobain -- Ceramics
Saint-Gobain -- Certain Teed
Saint-Gobain -- Containers
Saint-Gobain -- Delegation
Saint-Gobain -- Gypsum
Saint-Gobain -- Technical Fabrics
Saint-Gobain -- Vetrotex
Sasol North America
Sazerac
Sentry Safe
Severstal - Severstal North America
Sherwin Alumina
Shiseido Cosmetics America
Siegwerk USA
Sika
Silgan Holdings
Smith & Wesson
Sojitz Corporation of America
Solvay - Rhodia
Solvay America
Solvay America -- Flourides
Solvay America -- Solvay Advanced Polymers
Solvay America -- Solvay Chemicals
Solvay America -- Solvay Information Technologies
Sonoco Products
Southco
Southern Star Concrete
Stepan
Stihl Incorporated
Taminco Higher Amines, Inc.
Tampico
Tata Global Beverages
Tate & Lyle Americas
Tate & Lyle Americas -- Custom Ingredients
Tate & Lyle Americas -- Ingredients Americas
Tekni-Plex
Tesa Tape
Tessenderlo
ThyssenKrupp
Tigre USA
TOTAL S.A. -- Total Petrochemicals & Refining USA
Treasury Wine Estates
Tronox
Tyson Foods
Umicore (N.V.)
Unifi Manufacturing
Unilever US
United Space Alliance
United States Steel
VWR Funding
WD-40
Westlake Chemical
Wienerberger -- General Shale Brick
William Grant & Sons
Williams Companies
Number of Participants: 285
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