Document:

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EXHIBIT 10.1

AGREEMENT REGARDING PLAN OF REORGANIZATION

     This Agreement Regarding Plan of Reorganization is dated as of May 3, 2005, (the “Agreement”)
by and between Gopher State Ethanol LLC, a Delaware limited liability company (the “Company”),
Granite Falls Energy, LLC, a Minnesota limited liability company (“Granite Falls”) and GS
Acquisition Inc., a yet-to-be-formed Minnesota corporation (“GS”).

     WHEREAS, the Company is a debtor in possession under Chapter 11 of the Bankruptcy Code (28
U.S.C. § 1101-1174);

     WHEREAS, Granite Falls, through GS, is the owner and operator of an ethanol production
facility; and

     WHEREAS, subject to confirmation of the Plan of Reorganization of the Company as hereinafter
described, the parties desire that GS merge with and into the Company and succeed to the historic
ethanol operations of the Company.

     NOW THEREFORE, in consideration of the foregoing and of the covenants and agreements contained
herein, the parties agree as follows:

ARTICLE 1

CERTAIN DEFINITIONS; INTERPRETATIONS

1.1 Certain Definitions. The following terms are used in this Agreement with the meanings
set forth below:

“Acquisition Proposal” has the meaning assigned in Section 5.3.

“Affiliate” means in connection with any specified person, any other person, directly or
indirectly controlling, controlled by, or under common control with such specified person.
For purposes of this definition, “control” when used in connection with any specified person
means the power to direct the management or policies of such person, directly or indirectly
whether through the ownership of securities, by contract or otherwise.

“Agreement” means this Agreement, as amended or modified from time to time in accordance
with Section 8.2.

“Articles of Merger” has the meaning assigned in Section 2.2.

“Bankruptcy Code” means the United States Bankruptcy Code, Article 28, United States Code,
as amended.

“Bankruptcy Court” means the United States Bankruptcy Court for the District of Minnesota.

“Certificate of Formation” has the meaning assigned in Section 2.3.

 

 

“Closing” has the meaning assigned in Section 2.2.

“Closing Date” has the meaning assigned in Section 2.2.

“Company” has the meaning assigned in the preamble to this Agreement.

“Condition Date” has the meaning assigned in Section 2.2.

“Confirmation” has the meaning assigned in Section 6.1(a).

“Contract” means with respect to any person, any agreement, indenture, undertaking, debt
instrument, contract, contractual obligation, lease or other commitment to which such person
or any of its subsidiaries as a party or by which any of them is bound or to which any of
their properties is subject.

“DLLCA” means the Delaware Limited Liability Company Act.

“Effective Date” means the date on which the Effective Time occurs.

“Effective Time” has the meaning assigned in Section 2.2

“Equity Interests” means an ownership interest in a party whether or not evidenced by a
certificate or other security and whether or not such interest represents financial rights
or governance rights, or both.

“Escrow Agent” has the meaning assigned in Section 5.4

“Governmental Authority” means any court, administrative agency or commission, or other
foreign, federal, state or local governmental authority or instrumentality.

“Granite Falls” has the meaning assigned to it in the preamble of this Agreement.

“GS” has the meaning assigned to it in the preamble of this Agreement.

“Managers” has the meaning assigned in Section 2.5.

“Material” means with respect to any fact, circumstance, event or thing, that such fact,
circumstance, event or thing is or would be expected to be material to Granite Falls and GS,
taken as a whole, the Company, or the Surviving Entity, as the case may be (other than to
the extent such fact, circumstance, event or thing is due to (x) general changes and
conditions in the securities industry, or in the global or United States economy or capital
markets, or (y) changes in applicable generally accepted accounting principles or in laws,
regulations, or regulatory policies of general applicability) or (ii) the ability of either
Granite Falls or the Company, as the case may be, timely to perform its obligations under
this Agreement or otherwise to consummate the transactions contemplated by this Agreement.

“Material Adverse Effect” means with respect to Granite Falls and GS, taken as a whole, the
Company, or the Surviving Entity, respectively, an effect that, individually or in the

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aggregate, is both material and adverse with respect to such party, in each case taken as a
whole; provided that “material adverse effect” shall not be deemed to include the effects of
(x) general changes in conditions in the securities industry, or in the global or United
States economy or capital markets, or (y) changes in applicable generally accepted
accounting principles or in laws, regulations, or regulatory policies of general
applicability, or (z) actions or omissions of the Company taken with the prior written
consent of Granite Falls.

“MBCA” means Minnesota Business Corporation Act.

“Merger” has the meaning assigned in Section 2.1.

“Officers” has the meaning assigned in Section 2.5.

“Operating Agreement” has the meaning assigned in Section 2.4.

“Person” shall mean and include an individual, bank, partnership, joint venture, limited
liability company, corporation, trust, unincorporated organization and government or any
department or agency thereof.

“Plan of Reorganization” has the meaning assigned in Section 5.1(b).

“Producer Payment” means the cash payment authorized to be paid from the Commissioner of
Agriculture of the State of Minnesota to certain producers of ethanol pursuant to Section
41A.09 of the Minnesota Statutes, as amended.

“Surviving Entity” has the meaning assigned in Section 2.1.

1.2 Interpretation. When a reference is made in this Agreement to Recitals, Sections,
Annexes or Schedules, such reference shall be to a Recital or Section of, or Annex or Schedule to,
this Agreement unless otherwise indicated. The Table of Contents and Headings contained in this
Agreement are for reference purposes only and are not part of this Agreement. Whenever “include,”
“includes” or “including” is used in this Agreement, they shall be deemed followed by the words
“without limitation.” No rule against the draftsperson shall be applied in connection with the
interpretation or enforcement of this Agreement. Whenever this Agreement shall require a party to
take an action, such requirement shall be deemed to constitute an undertaking by such party to
cause its Subsidiaries, and to use its reasonable best efforts, to cause its Affiliates, to take
appropriate action in connection therewith.

ARTICLE 2

THE MERGER

2.1 The Merger. Upon the terms and subject to the conditions hereof, at the Effective
Time, and in accordance with the provision of the DLLCA and the MBCA, GS shall be merged with and
into the Company whereupon the separate corporate existence of GS shall cease, and the Company
shall continue as a surviving entity (the “Surviving Entity”). From and after the Effective Date,
the Surviving Entity shall possess all the rights, privileges, immunities, powers and franchises by
public as well as of private nature, of the Company and GS, including, without

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limitation, the authority to operate ethanol production facilities for the production and sale of
ethanol and its co-products, and be subject to all the liabilities, obligations and duties of the
Company and GS all as more fully described in the DLLCA and the organizational documents in effect
prior to the Effective Time.

2.2 Closing; Effective Time. Subject to the provisions of Article 5, the closing of the
Merger (the “Closing”) shall take place at the offices of Leonard, Street and Deinard, 150 South
Fifth Street, Suite 2300, Minneapolis, MN 55402, as soon as practicable, but in no event later than
10 o’clock a.m. Minneapolis time on the first business day after the date on which each of the
conditions set forth in Article 6 has been satisfied or waived by the party or parties entitled to
the benefit of such conditions (the “Condition Date”), or at such other place, at such other time
or on such other date as Granite Falls and the Company may mutually agree. The date on which the
Closing actually occurs is hereinafter referred to as the “Closing Date.” At the Closing, Granite
Falls and the Company shall cause Articles of Merger for the Merger to be executed and filed with
the Secretary of State of the State of Delaware and the Secretary of State of the State of
Minnesota in the form required by and executed in accordance with the applicable provisions of the
DLLCA and the MBCA. The Merger shall become effective as of the date and time of such filings or
at such other time after such filings as the parties hereto agree to in the Articles of Merger (the
“Effective Time”).

2.3 Certificate of Formation. At the Effective Time, and without any further action on the
part of the Company or GS, the Certificate of Formation of the Company shall be the Articles of
Organization of the Surviving Entity and thereafter may be amended or repealed as provided by law.

2.4 Operating Agreement. The Operating Agreement of the Company as in effect immediately
prior to the Effective Time shall become, from and after the Effective Time, the Operating
Agreement of the Surviving Entity, until thereafter altered, amended or repealed as provided
therein, and in accordance with applicable law.

2.5 Managers and Officers. The directors and executive officers (“Officers”) of GS
immediately prior to the Effective Time shall become, from and after the Effective Time, the
directors and Officers of the Surviving Entity, until their respective successors are duly elected
or appointed or their earlier resignation or removal. For purposes of the DLLCA, the directors
shall be deemed to be the “Managers” (as such term is defined and used in the DLLCA) of the
Surviving Entity.

2.6 Further Assurances. At and after the Effective Time, the Managers and Officers of the
Surviving Entity will be authorized to execute and deliver, in the name and on behalf of the
Company or GS, any deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or GS, any other actions and things divest, perfect or confirm of
record or otherwise in the Surviving Entity any or all rights, title and interest in and to and
under any of the rights, properties or assets acquired or to be acquired by Surviving Entity as a
result of, or in connection with, the Merger.

2.7 Preservation of Interest in Producer Payments. The Surviving Entity shall solely
retain all legal, equitable, contractual and other rights with respect to any and all Producer
Payments

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and may, but is not required to, enforce all such rights. Notwithstanding the foregoing, any
Producer Payments earned by the Company as a result of ethanol production occurring prior to the
date of filing of the Company’s Chapter 11 voluntary petition in the United States Bankruptcy Court
(the “Earned Producer Payments”) shall remain an asset of the Company includible in the bankruptcy
estate and subject to the prior perfected security interest of Bruce Hendry and GDN Holdings, LLC.

ARTICLE 3

CONVERSION OF EQUITY INTERESTS

3.1 Affect on Capital Stock. At the Effective Time, by virtue of the Merger and
Confirmation of the Plan of Reorganization as hereinafter provided, and without any further action
on the part of the Company, GS or Granite Falls:

(a) Equity Interests of the Company. By virtue of the Plan of Reorganization, all
outstanding Equity Interests in the Company immediately prior to the Effective Time, shall
have been or shall be canceled and shall cease to exist; and

(b) Conversion of GS Common Stock. Each issued and outstanding share of GS Common
Stock shall be canceled, extinguished and converted into and shall become the right to
receive one (1) unit of Equity Interest in the Company. Each share of GS stock converted
into the right to receive an Equity Interest of the Company shall no longer be outstanding
and shall be automatically canceled and retired and shall cease to exist.

3.2 Other Consideration. Subject to the provisions of Article 5 and the terms of the Plan
of Reorganization, at the Effective Time, the unsecured creditors of the Company shall become
entitled to receive the consideration set forth in Article 5.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

OF THE COMPANY, GRANITE FALLS AND GS

4.1 Standard. No representation or warranty of the Company, on the one hand, or Granite
Falls and GS, on the other, contained herein shall be deemed untrue or incorrect, and no party
hereto shall be deemed to have breached a representation or warranty, as a consequence of the
existence of any fact, event, or circumstance that is inconsistent with one or more representations
or warranties (with such representations and warranties being read, for purposes of this Section
4.1, without regard to individual references to “materiality” or “Material Adverse Effect” set
forth herein), unless such fact, event or circumstance (individually or taken together with all
other facts, events or circumstances that are inconsistent with the representation or warranty
contained herein) would be Material with respect to the Company or Granite Falls, as the case may
be.

4.2 Representations and Warranties of the Company. Except as previously disclosed in the
Schedules, the Company hereby represents and warrants to Granite Falls and GS, as follows:

(a) Organization, Good Standing. The Company is a limited liability company, duly
organized and validly existing in a good standing under the laws of the State of Delaware

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and is duly qualified to do business and is in good standing in all jurisdictions where the
ownership or leasing of property or assets or the conduct of its business requires it to be
so qualified. The Company is operating as a debtor in possession under the Bankruptcy Code.

(b) Corporate Power. The Company has the corporate power and authority to carry on
its business, particularly, the production and sale of ethanol.

(c) Corporate Authority.

     (i) Subject to the Confirmation of the Plan of Reorganization, the Company has the
requisite power and authority, and has taken all corporate action necessary, in order to
authorize the execution and delivery of, and performance of its obligations under, this
Agreement and, subject only to the subsequent requisite approval of this Agreement and the
Plan of Reorganization by the Bankruptcy Court, to consummate the transactions contemplated
by this Agreement. This Agreement is a valid and legally binding obligation of the Company
enforceable in accordance with its terms.

(d) Bankruptcy Court Documents. The Company has provided or made available to
Granite Falls and GS all reports and documents, including monthly financial statements filed
by the Company in the Bankruptcy Court proceeding captioned Gopher State Ethanol, LLC, Bky.
No. 04-34706, pending in the United States Bankruptcy Court for the District of Minnesota.

(e) Producer Payments. The Company has taken any and all action necessary to apply
for and receive Producer Payments and has not taken any action or engaged in any activity,
agreement, arrangement, contract or obligation that would prohibit the Company or the
Surviving Entity from entitlement to future Producer Payments attributable to ethanol
production at any ethanol production facility operated by the Company or the Surviving
Entity. No other person or entity has any interest or claim to the Producer Payments except
in the Earned Producer Payments as described in Section 2.7 hereof.

4.3 Representations and Warranties of Granite Falls and GS. Except as previously disclosed
in a Schedule, each of Granite Falls and GS, as the case may be, hereby represent and warrant to
the Company as follows:

(a) Organization, Good Standing. Each of Granite Falls and GS has been duly
organized and is validly existing and in good standing under the laws of the State of
Minnesota and is duly qualified to do business and is in good standing in all jurisdictions
where the ownership or leasing of property or assets or the conduct of its business requires
it to be so qualified.

(b) Corporate Power. Granite Falls and GS each have the corporate power and
authority to carry on its business as it is now being conducted and own and operate all of
its properties and assets.

(c) Corporate Authority. Each of Granite Falls and GS has the requisite power and
authority and has taken all action necessary, in order to authorize the execution, delivery

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of and performance of its obligations under, this Agreement and to consummate the
transactions contemplated by this Agreement. This Agreement is a valid and legally binding
agreement of each of Granite Falls and GS, enforceable in accordance with its terms.

ARTICLE 5

COVENANTS

5.1 Covenants of the Company. From and after the date hereof until the Effective Time, the
Company will undertake to:

(a) Disposal of Assets. Pursuant to Bankruptcy Code and subject to approval of the
Bankruptcy Court, the Company will use its best efforts to sell, transfer or otherwise
dispose of all of its assets, including accounts receivable, rights to payment (including
Earned Producer Payments), contracts, real estate, personal property, equipment, and all
other property of every kind and nature, whether tangible or intangible, but excluding all
rights and permits for the production of ethanol and the right to apply for and obtain
Producer Payments with respect to the production of ethanol from and after the Effective
Time.

(b) Plan of Reorganization. Promptly prepare and file a Plan of Reorganization
incorporating the terms of this Agreement and promptly prepare and file a Disclosure
Statement with respect thereto and otherwise take such steps as may be necessary to cause
the approval of such Plan of Reorganization by its creditors and Confirmation of the Plan of
Reorganization by the Bankruptcy Court. The Plan of Reorganization shall incorporate the
terms of this Agreement and shall provide that at the time of Merger, the Company shall have
no assets, other than rights to the Producer Payments, or liabilities fixed or contingent,
including obligations under executory contracts, all of which shall have been discharged by
reason of such Confirmation to the full extent provided in 28 U.S.C. § 1141. In addition,
the Plan of Reorganization shall provide that the unsecured creditors’ rights to 50% of each
and every Producer Payment as provided in Section 5.4 herein, received by the Surviving
Entity, shall be in complete satisfaction, discharge and release of all of the liabilities,
claims, liens, obligations and causes of action against the Company and its assets
regardless of whether the Surviving Entity produces and sells ethanol or any Producer
Payments are distributed to the unsecured creditors pursuant to the Plan. Accordingly, the
Plan of Reorganization shall state that all of the Company’s property not otherwise
distributed pursuant to the Plan, shall remain the property of the Company and the Surviving
Entity as of the Effective Date, free and clear of all claims, liens, encumbrances, charges,
rights and interests of creditors and equity security holders and the Surviving Entity may
operate its business and use, acquire and dispose of property without supervision of the
Bankruptcy Court, free of any restrictions of the Bankruptcy Code or Bankruptcy Rules other
than those restrictions expressly imposed by the Plan of Reorganization and Confirmation
Order.

(c) Governing Documents. Not amend the Company Certificate of Formation and
Operating Agreement.

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(d) Contracts. Except as specifically authorized by this Agreement, not enter into
any contract that will survive Confirmation of the Plan of Reorganization.

5.2 Covenants of Granite Falls and GS. Prior to the Effective Time, Granite Falls shall
lease to GS all of the operating assets and business of its ethanol facility in such a manner that
GS shall be a wholly-owned operating subsidiary of Granite Falls.

5.3 No Solicitation. From the date of this Agreement until the Effective Time or the
termination of this Agreement pursuant to its terms the Company agrees that it will not and will
not permit any of its officers, directors, employees, representatives, agents or affiliates to,
directly or indirectly, (i) initiate, solicit, encourage or otherwise facilitate, including by way
of furnishing information, any inquiries or making of any proposal or offer that constitutes or may
be reasonably be expected to lead to an Acquisition Proposal (as defined below), or (ii) enter
into, maintain or continue discussions or negotiate with any person in furtherance of such
inquiries or to obtain an Acquisition Proposal, or (iii) agree to approve, recommend, or endorse
any Acquisition Proposal, or authorize or permit any of its representatives to take any such action
and, the Company shall promptly notify Granite Falls of any such inquiries or proposals received by
the Company or its representatives relating to such matters. For purposes of this Agreement,
“Acquisition Proposal” means any inquiry, offer or proposal regarding any Merger, reorganization,
consolidation, share exchange, recapitalization, business accommodation liquidation, dissolution or
other similar transaction involving the acquisition of or substantially all of the equity of the
Company.

5.4 Future Producer Payments. Subject to the provisions of Section 5.5, Granite Falls and
GS shall, for themselves and for the Surviving Entity, pay or cause to be paid to the unsecured
creditors of the Company in the aggregate 50% of each and every ethanol Producer Payment received
by the Surviving Entity with respect to the continuing production of ethanol by the Surviving
Entity as originally engaged in by the Company, from and after the Effective Time pursuant to Minn.
Stat. § 41A.09 or any successor thereof. Any future Producer Payments paid to the Surviving Entity
that are not attributable to the continuing ethanol production by the Surviving Entity as
originally commenced by the Company, shall not be subject to payment to the unsecured creditors of
the Company. Neither Granite Falls nor the Surviving Entity guarantees the qualification of the
Surviving Entity for Producer Payments and nothing in this Agreement shall be construed as
requiring any action on behalf of Granite Falls or the Surviving Entity to pursue collection of the
Producer Payments. Payments made pursuant to this Section 5.4 shall be made within ten (10) days
after receipt by the Surviving Entity to an Escrow Agent as identified in the Plan of
Reorganization. The escrow agreement shall provide that the cost of the escrow shall not be
assessed against the Surviving Entity. The Plan of Reorganization shall provide that neither the
Surviving Entity nor Granite Falls shall have any obligation or liability with respect to the
creditors of the Company other than to make payments to the Escrow Agent as provided herein. The
Plan of Reorganization shall further provide that the unsecured creditors’ rights to 50% of each
and every ethanol Producer Payment shall be in complete satisfaction, discharge and release of any
and all claims and causes of action, whether known or unknown, against, liabilities of, liens on,
obligations of, rights against and interests in the Company or any of its assets, including any
future Producer Payments, including, but not limited to, any claims relating to operations of the
Company prior to the Confirmation Date. The Confirmation Order shall be a judicial determination
of the discharge of all such claims against

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and interests in the Company. Payments shall be made to the Escrow Agent only as and when received
by the Surviving Entity. In the event the Surviving Entity receives less than the full amount or
no amount of the Producer Payments it is entitled to receive, the unsecured creditors of the
Company shall not be entitled to pursue any claim or right against the Surviving Entity or any of
its assets and the Surviving Entity shall not be required to enforce or pursue any right to any
portion or all of the unpaid amount of such Producer Payments. If, for any reason, the Surviving
Entity abandons the production and sale of ethanol, the unsecured creditors shall not be entitled
to pursue any claim or right against the Surviving Entity or any of its assets.

5.5 Pre Bankruptcy Claims. If, after the Effective Time, a claim is asserted against the
Surviving Entity that arises out of or relates to the business or operations of the Company prior
to Confirmation of the Plan of Reorganization by the Bankruptcy Court, the Surviving Entity or
Granite Falls may apply Producer Payments to pay such claim or reimburse the Surviving Entity or
Granite Falls for amounts paid with respect to such claim, including costs and expenses incurred in
the defense thereof. Any such payment or payments shall ratably reduce the payments to be made to
creditors of the Company under Section 5.2. The Surviving Entity or Granite Falls shall give
prompt notice of a claim to the Escrow Agent and shall account to the Escrow Agent for all amounts
retained by the Surviving Entity or Granite Falls on account of the payment of any such claim or
reimbursement of costs and expenses incurred in connection therewith. The Surviving Entity or
Granite Falls shall undertake the defense of such claim and shall permit a representative of the
creditors, at their cost, to participate in such defense.

ARTICLE 6

CONDITIONS TO THE CONSUMMATION OF THE MERGER

6.1 Conditions to the Obligations of Each Party. The respective obligations of each of the
parties hereto to consummate the Merger shall be subject to fulfillment or written waiver by the
Company and Granite Falls prior to the Effective Time of the following conditions:

(a) Approval of Proposed Plan of Reorganization. Prior to submission of the Plan of
Reorganization to the Bankruptcy Court, the Company shall have presented the proposed Plan
of Reorganization to Granite Falls and GS and Granite Falls and GS shall have provided their
written consents to the filing of such Plan of Reorganization with the Bankruptcy Court.

(b) Confirmation of Plan of Reorganization. The Bankruptcy Court shall have entered
an order confirming the Plan of Reorganization as approved by Granite Falls and GS and
consistent with the terms of this Agreement and such order of Confirmation shall have become
final.

(c) No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have been issued
since the date of this Agreement by any U.S. federal or state court of competent
jurisdiction and shall remain in effect; and no U.S. federal or state law, statute, rule,
regulation or decree that makes consummation of the Merger illegal shall have been enacted
or adopted since the date of this Agreement and shall remain in effect. No governmental
action shall be pending before any U.S. federal or state court of competent

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jurisdiction pursue action or proceeding against the Company, Granite Falls or GS (and no
Governmental Authority shall have overtly threatened to commence any such action or
proceeding): (i) challenging or seeking to restraint or prohibit the consummation of the
Merger; or (ii) seeking to prohibit the Company from receiving future state Producer
Payments under Minn. Stat. § 41A.09 or its successor.

6.2 Conditions to Obligations of the Company. The obligation of the Company to consummate
the Merger is also subject to the fulfillment or written waiver by the Company prior to the
Effective Time of each of the following conditions:

(a) Representations and Warranties. Subject to the standards set forth in Section
4.1, the representations and warranties of Granite Falls and GS set forth in this Agreement
shall be true and correct as of the Effective Time as though made on and as of the Effective
Date (except the representations and warranties that by their terms speak as of the date of
this Agreement or some other date shall be true and correct only as of such date), and the
Company shall have received a certificate, dated the Effective Date, signed on behalf of the
Granite Falls by a senior officer to that effect.

(b) Performance of Obligations of Granite Falls and GS. Granite Falls and GS shall
have performed in all Material respect all obligations required to be performed by them
under this Agreement at or prior to the Effective Time and the Company shall have received a
certificate, dated the Effective Date, signed on behalf of Granite Falls by a senior
executive officer to that effect.

6.3 Conditions of the Obligations of Granite Falls and GS. The obligations of Granite
Falls and GS to consummate the Merger is also subject to the fulfillment of written waiver by
Granite Falls prior to the Effective Time of each of the following conditions:

(a) Representations and Warranties. Subject to the standards set forth in Section
4.1, the representations and warranties of the Company set forth in this Agreement shall be
true and correct as of the Effective Date as though made on and as of the Effective Date
(except the representations and warranties that by their terms speak as of the date of this
Agreement or some other date shall be true and correct only as of such date), and Granite
Falls and GS shall have received a certificate, dated the Effective Date, signed on behalf
of the Company by a senior officer to that effect.

(b) Performance of Obligations of the Company. The Company shall have performed in
all Material respect all obligations required to be performed by it under this Agreement at
or prior to the Effective Time and Granite Falls and GS shall have received a certificate,
dated the Effective Date, signed on behalf of the Company by a senior executive officer to
that effect.

(c) Third Party Consents. All consents and approvals of all persons, other than
Governmental Authorities, required for or in connection with the execution, delivery and
performance of this Agreement and the consummation of the Merger shall have been obtained
and shall be in full force and effect, unless failure to obtain any such consent or

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approval is not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on the Company or the Surviving Entity.

ARTICLE 7

TERMINATION

7.1 Termination. This Agreement may be terminated, and the Merger may be abandoned at any
time prior to the Effective Time:

(a) Mutual Consent. At any time prior to the Effective Time, by the mutual consent
of the Company and Granite Falls.

(b) Breach. At any time prior to the Effective Time, by Granite Falls or the
Company in the event of either:

     (i) breach by the other party of any representation or warranty contained herein, which
breach cannot be or has not been cured within thirty (30) days after giving written notice
to the breaching party of such breach, or

     (ii) a breach by the other party of any of the covenants or agreements contained
herein, which breach has not been cured within thirty (30) days after the giving of written
notice to the breaching party of such breach and which breach is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on the breaching party
or the Surviving Entity.

(c) No Approval. By Granite Falls and GS in the event Granite Falls and GS do not
provide written consents to the Plan of Reorganization as proposed to be filed with the
Bankruptcy Court.

(d) No Confirmation. By the Company or Granite Falls in the event:

(i) The Plan of Reorganization as approved by Granite Falls and GS and consistent
with the terms and conditions of this Agreement is not confirmed by the Bankruptcy
Court; or

(ii) The approval of any Governmental Authority required for the consummation of the
Merger shall have been denied by final nonappealable action of such Governmental
Authority.

(e) By Granite Falls if there is a final determination by a Governmental Authority that the
Surviving Entity is not entitled to future Producer Payments.

7.2 Fees and Expenses. If this Agreement is terminated, each party shall bear its own
expenses with respect to this Agreement. No party shall have any liability or further obligation
to any other party hereunder and the consequences of such termination.

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ARTICLE 8

MISCELLANEOUS

8.1 Survival. No representations, warranties, agreements and covenants contained in this
Agreement shall survive the Effective Time or termination of this Agreement if the Agreement is
terminated prior to the Effective Time; provided, however, that to the extent agreements of the
parties contained herein by their terms apply after the Effective Time, such agreements shall
survive the Effective Time.

8.2 Waiver; Amendment. Prior to the Effective Time, any provision of this Agreement may be
waived, amended or modified only by agreement in writing between the parties hereto approved to
authorize by their respective board of directors or board of Managers and executed in the same
manner as this Agreement.

8.3 Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to constitute an original.

8.4 Governing Law. This Agreement shall be governed by and construed in accordance with
the laws of the State of Minnesota, regardless of the laws that might otherwise govern under
applicable principles of conflicts of law thereof.

8.5 Notices. All notices, requests and other communications hereunder to a party shall be
in writing and shall be deemed given (i) on the date of delivery, if personally delivered or
telecopied (with confirmation), (ii) the first business day following the date of dispatch if
delivered by a recognized next day courier service, or (iii) on the third business day following
the date of mailing, if mailed by registered or certified mail (return receipt requested), in each
case such party at its address or telecopy number set forth below or such other address or numbers
as such party may specify by notice to the parties hereto.

	 	 	 
	If to the Company to:

	 	Gopher State Ethanol L.L.C.
	

	 	882 West Seventh Street
	

	 	St. Paul, MN 55102
	 
	 	 
	With copies to:

	 	Albert A. Woodward
	

	 	Leonard, Street and Deinard, P.A.
	

	 	150 South Fifth Street, #2300
	

	 	Minneapolis, MN 55402
	 
	

	 	Michael L. Meyer
	

	 	Ravich, Meyer, Kirkman, McGrath & Nauman
	

	 	80 South Eighth Street, #4545
	

	 	Minneapolis, MN 55402-2225
	 
	 	 
	If to Granite Falls or GS to:

	 	Tom Branhan, CEO
	

	 	Granite Falls Energy, LLC
	

	 	15045 Highway 23 SE, PO Box 216
	

	 	Granite Falls, MN 55241-0216

12

 

	 	 	 
	With a copy to:

	 	William E. Hanigan
	

	 	Brown, Winick, Graves, Gross, Baskerville &
Schoenebaum, P.L.C.
	

	 	666 Grand Avenue, Suite 2000

	

	 	Des Moines, IA 50309-2510

8.6 Entire Understanding, No Third Party Beneficiaries. This Agreement represents the
entire understanding of the parties hereto with reference to the transactions contemplated hereby
and supercedes and all other oral or written agreements heretofore made. Nothing in this Agreement
express or implied is intended to confer upon any persons other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement.

8.7 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may
be assigned by any party without the prior written consent of the other parties hereto. Subject to
the foregoing, this Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties thereto and their respective successors and assigns.

[Intentionally left blank]

13

 

     IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed the day
and year first above written.

	 	 	 	 	 	 	 	 	 
	 	 	GOPHER STATE ETHANOL LLC	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	By:	 	     /s/ Bruce Hendry	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	Printed Name:	 	          Bruce Hendry	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	Its:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	GRANITE FALLS ENERGY LLC	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	By:	 	     /s/ Thomas Branhan	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	Printed Name:	 	          Thomas Branhan	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	Its:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	GS ACQUISITION, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	By:	 	     /s/ Paul Enstad	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	Printed Name:	 	          Paul Enstad	 	 
	 
	 	 	 	 	 	 	 	 
	

	 	Its:	 	 	 	 	 	 
	 	 	 	 	 	 	 

14<PAGE>

                                                                    Exhibit 10.1

            TECHNOLOGY TESTING AND CONTINGENT PURCHASE AGREEMENT FOR
                                    BIOSENTRY

      This Agreement is entered into by and between KIMPEN, S.A. DE C.V. (the
"Company") and JMAR Technologies, Inc., a Delaware corporation operating in the
State of California (hereinafter "JMAR").

                                 R-E-C-I-T-A-L-S

      1. Kimpen is responsible for the quality of the beverages produced by
Bepensa and desires to have a system to monitor for the presence of a variety of
microorganisms in water prior to being processed into a particular beverage;

      2. JMAR is a leading innovator in the development of laser-based equipment
for imaging, analysis and fabrication and has developed the BioSentry(TM)
system, a laser-based, early-warning system for detecting and classifying
potentially harmful microorganisms in water supplies;

      3. JMAR has successfully completed a proof of concept and beta versions of
its BioSentry(TM) units, and has offered to install 1 beta BioSentry unit in the
Company's facilities for the purposes of testing the operation of the beta unit
in a water facility environment on the terms and conditions set forth herein;
and

      4. JMAR and the Company desire to engage in a joint effort to test the
operation and effectiveness of the BioSentry units. If successful, the Company
has agreed to purchase at least 2 production units of the BioSentry(TM) system
for factory testing and an additional 15 production units upon successful
completion of the factory test on the terms set forth herein.

                                C-O-V-E-N-A-N-T-S

      1. Services to Be Performed. JMAR agrees to install one BioSentry beta
unit at the Company's laboratory facility and to operate and perform testing of
such unit in accordance with the BioSentry Test Program Proposal and Test Plan
attached hereto as Exhibit A and Exhibit A-1 and incorporated herein by
reference. All work performed by JMAR shall be subject to review and

                                        1
<PAGE>

approval by the Company. The Company shall have no obligation to approve any
work found defective by the Company, in its sole discretion.

      2. Installation and Testing of Beta Units. JMAR agrees to a) supply and
install one BioSentry(TM) Beta unit(s) at the Company's laboratory facility and
b) operate and test the Beta units in accordance with Exhibit A. The Company
agrees to make available its facility to JMAR at no additional cost to JMAR for
the purpose of the installation and testing of one BioSentry(TM) Beta unit(s).
The Company also agrees to make its personnel available to JMAR at the Company's
cost to support the installation and testing of the Beta units in accordance
with Exhibit A.

      3. Contingent Purchase Order. Upon successful completion of the Test Plan
for the Beta unit installed in the laboratory as set forth in Exhibit A-1, the
Company will issue a binding Purchase Order obligating the Company to purchase
at least 2 production units of the BioSentry(TM) system. The two production
units will be installed in factory locations and operated and tested in
accordance with the Test Plan set forth in Exhibit A-1. Upon successful
completion of the Test Plan for these two production units, the Company will
issue a binding Purchase Order obligating the Company to purchase an additional
15 production units for delivery within 6 months after the completion of the
factory tests. The Purchase Orders will contain the terms and conditions set
forth in the Quotation attached hereto as Exhibit B and incorporated herein by
reference.

      4. Work Performance Standards. JMAR agrees to perform all work and
services required by this Agreement in a manner which complies with all
applicable health and safety standards and in a manner which avoids damage or
injury to any real or personal property of any person or entity, including any
real or personal property of the Company. JMAR agrees to perform the work at all
times in a manner which avoids the creation of any trespass or private or public
nuisance during conduct of the work.

      5. Liability for Work of Agents, Independent Contractors, and
Subcontractors. JMAR shall be solely liable and responsible for all labor and
materials provided by any agent, employee, subcontractor, supplier, or
independent contractor hired or retained by JMAR to perform any work or to
provide any materials or supplies. Except as provided in this Agreement, the
Company shall have no liability whatsoever for any work or services performed or
any materials or supplies provided by JMAR or its agents, employees,
subcontractors, suppliers, or independent contractors.

                                        2
<PAGE>

      6. Time for Completion of Services. As a material term of this Agreement,
JMAR agrees to complete all work and services associated with the Laboratory
Test Plan required by this Agreement by no later than August 15, 2005, subject
to extension upon the mutual written agreement of the parties. Future testing of
two production BioSentry(TM) Systems at two Bepensa factories will be scheduled
following the completion of the Laboratory Test Plan.

      7. Termination Right. Either party shall have the express right to
terminate this Agreement at any time by giving thirty (30) consecutive days
advance written notice to the other party upon the failure of the BioSentry Beta
unit(s) to perform in accordance with the Test Plan set forth in Exhibit A-1 for
a period of 60 days after installation. Upon receipt of such a termination
notice, JMAR shall promptly cease its testing and operation of the BioSentry
units, shall remove the BioSentry units from the Company's facilities within 30
days at its sole cost and expense and shall avoid any injury or damage to any
part of the Company's facilities in removing the units. The Company shall be
responsible for restoring the premises to its previous condition.

      8. Independent Contractor. As a material term of this Agreement, it is
expressly agreed between the parties that JMAR is performing all work and
services for the Company pursuant to this Agreement as an independent contractor
and not as an agent or employee of the Company. The parties further agree and
acknowledge that the Company expects JMAR to make its own independent
determination of the means and methods to perform all work required by this
Agreement, and will not be directed as to any of these means or methods by the
Company.

      9. Insurance. At all times during the term of this Agreement, JMAR shall
maintain workers compensation insurance and a commercial general liability
insurance policy in amounts that are customary for businesses of this nature.

      10. Job Site Safety. JMAR shall be solely liable and responsible for the
job site safety and compliance with all applicable laws, rules and regulations
pertaining to job safety for all agents, employees, subcontractors, suppliers,
and independent contractors retained by JMAR to perform any work or services or
to provide any materials required by this Agreement. However, JMAR shall not be
liable or responsible for job site safety for any workers or agents employed by
the Company in connection with the installation and operation of the BioSentry
units.

                                        3
<PAGE>

      11. Indemnity. As a material term of this Agreement, JMAR agrees to hold
harmless, indemnify, and defend the Company and its directors, officers,
employees, agents, and representatives from and against any and all liability,
claims, causes of action, suits, actions, damages, losses, costs, fees,
expenses, fines, and penalties, of whatever type or nature, including all costs
of defense and attorney fees, caused in whole or in part, or claimed to be
caused in whole or in part by the action, inaction, passive or active
negligence, or intentional misconduct of JMAR or its directors, officers,
employees, agents, subcontractors, sub-consultants, suppliers, or independent
contractors, except claims and causes of action caused by the negligence or
intentional misconduct of the Company or its directors, officers, employees or
agents. The Company agrees to hold harmless, indemnify, and defend JMAR and its
directors, officers, employees, agents, and representatives from and against any
and all claims, causes of action, suits, actions, damages, losses, costs, fees,
expenses, fines, and penalties, of whatever type or nature, including all costs
of defense and attorney fees, caused by the negligence or intentional misconduct
of the Company or its directors, officers, employees, agents, subcontractors,
sub-consultants, suppliers, or independent contractors. In the event that any
administrative proceeding, litigation or arbitration is instituted naming an
indemnified party as a defendant, the indemnified party shall be entitled to
appoint its own independent counsel to represent it, and the indemnifying party
agrees to pay all reasonable attorneys fees, expert fees and costs, and
litigation costs associated with this defense within thirty (30) days of any
billing.

      12. Miscellaneous Provisions.

            12.1 California Law Governs. The rights and obligations of the
parties under this Agreement shall be governed and determined according to the
substantive laws of the State of California (excluding the conflict of laws
principles thereof. This Agreement shall be deemed to have been entered into at
Carlsbad, California, regardless of the places of signing by the parties hereto
or the order of their signing.

            12.2 Dispute Resolution. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof, shall be settled by
arbitration at San Diego, California, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award of the arbitrator(s) shall be entered in any court with appropriate
jurisdiction as the final binding judgment. The arbitrators shall not be
permitted to award punitive or other exemplary damages as a part of such award.
In addition to any other relief as may be granted,

                                        4
<PAGE>

the prevailing party shall be entitled to reasonable attorneys' fees in such
arbitration, with the amount thereof to be determined by the arbitrator or the
court.

            12.3 Modification. This Agreement may not be modified, amended,
rescinded, canceled, or waived, in whole or in part, except in writing signed by
the parties hereto.

            12.4 Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof, and
supersedes all previous agreements by and between JMAR and the Company, as well
as all proposals, oral or written, and all negotiations, conversations or
discussions heretofore had between the parties related to this Agreement.

The parties mutually declare that this Agreement and its exhibits constitute a
final, complete and integrated agreement between the parties.

            12.5 Prohibition on Assignment. Except as otherwise provided herein,
neither party shall have the right to assign or otherwise transfer its rights
and obligations under this Agreement (whether by contract, merger,
consolidation, sale of stock or assets or otherwise) except with the prior
written consent of the other party. Any prohibited assignment shall be null and
void.

            12.6 Binding Effect. This Agreement shall inure to the benefit of
and be binding upon the parties and on their respective purchasers, successors,
heirs and assigns.

            12.7 Unenforceable Provisions. In the event that any of the terms of
this Agreement are in conflict with any rule of law or statutory provisions or
are otherwise unenforceable under the laws or regulations of any government or
subdivision thereof, such terms shall be deemed stricken from the this
Agreement, but such invalidity or unenforceable shall not invalidate any of the
other terms of this Agreement and this Agreement shall continue in force, unless
the invalidity or enforceability of any such provisions hereof does substantial
violence to, or where the invalid or unenforceable provisions comprise an
integral part of, or are otherwise inseparable from, the remainder of this
Agreement.

            12.8 Representation of Capacity to Contract. Each party to this
Agreement represents and warrants that he or she has the authority to execute
this Agreement on behalf of the entity represented by that individual. This
representation is a material term of this Agreement.

                                        5
<PAGE>

            12.9 Opportunity to be Represented by Independent Counsel. Each of
the parties to this Agreement warrants and represents that it has been advised
to consult independent counsel of its own choosing and has had a reasonable
opportunity to do so prior to executing this Agreement.

            12.10 No Waiver. The failure of either party to enforce any term,
covenant or condition of this Agreement on the date it is to be performed shall
not be construed as a waiver of that party's right to enforce this, or any
other, term, covenant, or condition of this Agreement at any later date or as a
waiver of any term, covenant, or condition of this Agreement. No waiver shall
occur unless the waiver is expressly stated in writing and signed by the person
for the party having the authority to expressly waive the benefit or provision,
in writing. No oral waivers shall be effective against either party.

            12.11 No Joint Venture and No Third Party Beneficiaries. Nothing in
this Agreement is intended to create a joint venture, partnership or common
enterprise relationship of any kind between the Company and JMAR. No third
parties shall be construed as beneficiaries of any term, covenant or provision
of this Agreement.

            12.12 Notices. All letters, statements, or notices required pursuant
to this Agreement shall be deemed effective upon receipt when personally served,
transmitted by facsimile machine, or sent certified mail, return receipt
requested, to the following addresses or facsimile numbers:

To: "JMAR"

JMAR Technologies, Inc.
Attention: General Counsel
5800 Armada Drive
Carlsbad, California 92008
Facsimile No. (760) 602-3299

To: "Company"

KIMPEN, S.A. DE C.V.
Calle 31 s/n, Tablaje Catastral 19097
por 30 y Anillo Periferico. Colonia Pacabtun.
C.P. 97160. Merida, Yucatan, Mexico.
Attention: Mr. Adolfo Herrera Hiza

                                        6
<PAGE>

            12.13 Counterparts. This Agreement may be executed in two or more
counterparts, and each such counterpart shall be deemed an original hereof. In
case of any conflict between the English version and any translated version of
this Agreement, the English version shall govern.

            12.14 Effective Date. The effective date of this Agreement executed
in Carlsbad, California, within the North County Judicial Company, County of San
Diego, State of California, is April 15, 2005.

Dated: April 13, 2005                            KIMPEN, S.A. DE C.V.

                                                 By: /s/ ADOLFO HERRERA HIZA
                                                      Mr. Adolfo Herrera Hiza,
                                                      General Manager

Dated: April 13, 2005                            JMAR TECHNOLOGIES, INC.

                                                 By: /s/ JOHN P. RICARDI
                                                      John P. Ricardi,
                                                      Vice President, Senor
                                                      Products Group

                                        7
<PAGE>

                                    EXHIBIT A

                      BIOSENTRY(TM) TEST PROGRAM FOR KIMPEN

1. PROGRAM GOALS

      JMAR's goals in undertaking the Test Program include:

      1.1.  Validate BioSentry(TM) performance for detection and classification
            of Bacteria (E.coli, Pseudomonas,Salmonella & Shigella) and Protozoa
            (Cryptosporidium & Giardia) in accordance with the Test Plan in
            Exhibit A-1.

      1.2.  Demonstrate the value of the BioSentry(TM) to Kimpen

      1.3.  Gain valuable field experience that may result in modifications to
            the BioSentry(TM) prior to production start-up.

      1.4.  Publish joint reports regarding the BioSentry(TM) performance that
            could aide in proliferation of the BioSentry(TM) to the industry.

2. PROGRAM METHODOLOGY

      Create a 2-month test plan that:

      2.1.  Upon successful completion, satisfies Kimpen expectations of the
            BioSentry and results in the sale of at least two BioSentry(TM)
            systems.

      2.2.  Tests the suitability of the BioSentry(TM) as a quality and/or
            security device to ensure Kimpen's water at the test location is
            within the Kimpen's acceptable level of bioburden(1) contamination

      2.3.  Places one BioSentry(TM) Beta unit(s) at mutually agreeable a Kimpen
            location to continuously monitor treated (filtered and disinfected)
            water for Bacteria & Protozoa.

      2.4.  Operates the BioSentry(TM) on a 24/7 basis to continuously monitor
            the Kimpen's water supply and reports any `events' to the Kimpen.

      2.5.  Spikes the BioSentry(TM) weekly with known concentration levels of
            polystyrene test spheres and/or inactivated Bacteria and Protozoa to
            verify the system is working properly

      2.6.  Records BioSentry(TM) operational downtime to measure the system's
            reliability

      2.7.  Completes the Program within 2 months after installation and
            evaluates the performance of the BioSentry(TM) in accordance with
            the test plan detailed in Exhibit A-1

---------------
(1) POPULATION OF VIABLE MICROORGANISMS ON A PRODUCT AND/OR PACKAGE.

                                        8
<PAGE>

3. PROGRAM DETAILS

      3.1.  JMAR RESPONSIBILITIES:

            3.1.1.      Identify a Project Manager to interface with Kimpen.

            3.1.2.      Provide 1 BioSentry(TM) Beta system to Kimpen to be
                        installed at a mutually agreeable location.

            3.1.3.      Integrate the BioSentry(TM) systems with Kimpen's
                        internet or communications network to allow JMAR to
                        monitor the performance of the BioSentry(TM) systems.

            3.1.4.      Provide on-site service and maintenance, as required,
                        for the duration of the program

            3.1.5.      Validate test results through a certified test lab using
                        known test criteria (e.g. EPA Method 1623 for testing of
                        Cryptosporidium)

      3.2.  KIMPEN RESPONSIBILITIES:

            3.2.1.      Provide single Project Manager to interface with JMAR.

            3.2.2.      Make its facilities and personnel available for
                        installation, operation, testing and maintenance of the
                        BioSentry systems.

            3.2.3.      Provide personnel to be trained during the 2-month test
                        period to operate maintain and service the BioSentry(TM)
                        systems.

            3.2.4.      Provide JMAR with sufficient information and/or
                        personnel to help integrate the BioSentry(TM) with
                        Kimpen's internet or communications network.

            3.2.5.      Support monthly meetings of no more than 2 hours with
                        JMAR personnel to review system performance and critique
                        BioSentry(TM) data and system operations.

            3.2.6.      Together with JMAR, publish a report regarding the
                        performance of the BioSentry(TM) at the completion of
                        the Test Program that is suitable for possible public
                        dissemination.

4. SCHEDULE:

      4.1.  1 BioSentry(TM) unit(s) will be ready for installation at the Kimpen
            facility by no later than May 15, 2005.

      4.2.  JMAR will complete installation and integration of the 1
            BioSentry(TM) Beta unit(s) into the Kimpen facility by May 31, 2005.

                                        9
<PAGE>

5. INSTALLATION

    THE BIOSENTRY(TM) BETA SYSTEM(S) SUPPLIED IS FOR TESTING PURPOSES AND NOT
  INTENDED FOR EVALUATION IN KIMPEN OPERATIONS DURING THE `TEST PERIOD' UNLESS
                            AGREED BY BOTH PARTIES.

      5.1.  The BioSentry(TM) will be installed at a mutually agreed location to
            monitor `treated' water in accordance with the Exhibit B,
            Installation Plan

      5.2.  If desired by Kimpen, the BioSentry(TM) can be installed in parallel
            with a customer supplied standard particle counter and an on-line
            turbidimeter to allow for comparative testing.

      5.3.  JMAR will collect, remove and properly dispose of all biologicals
            used during the set-up of the BioSentry(TM) at Kimpen.

      5.4.  A `spiking receptacle;' will be mounted near the BioSentry(TM) to
            allow for weekly spiking with 8 micron polystyrene spheres and/or
            inactivated Bacteria and Protozoa. JMAR will collect, remove and
            properly dispose of all biologicals used during the `spiking' of the
            BioSentry(TM) at Kimpen.

      5.5.  The BioSentry(TM) system will drain directly to the sewer or other
            protected drain during normal operations.

      5.6.  The BioSentry(TM) will be equipped with a TCP/IP network for
            communications to JMAR's facility

      5.7.  JMAR use of Kimpen's internet connection to remotely monitor the
            operation of the BioSentry(TM).

6. PROGRAM COMPLETION

      Following the 2 month test program, JMAR, will publish a report
      summarizing the test results to Kimpen.

                                       10
<PAGE>

      EXHIBIT A-1

BIOSENTRY(TM) TEST PLAN FOR MONITORING KIMPEN'S TREATED WATER

1. GOAL

      1.1.  To validate the BioSentry(TM) as an Early Warning System for the
            detection and classification of Bacteria and Protozoa

2. EXPERIMENTAL PLAN

      2.1.  The BioSentry(TM) unit will be installed at a location to monitor
            treated water quality. The experiment will occur over a 2 month
            period.

      2.2.  During the initial 2-4 weeks of operation, the BioSentry(TM) will be
            configured for Kimpen's application. Test data obtained during this
            configuration period will not be used as part of the BioSentry(TM)
            system evaluation.

      2.3.  Weekly spiking using 8 micron PSL spheres will occur during the test
            period to identify differences in the performance of the existing
            particle counting monitoring system (if applicable) and the
            BioSentry(TM) system.

            2.3.1.      Concentration level will be 1000 spheres/ml.

            2.3.2.      The number of total event counts observed and False
                        Positives will be recorded

      2.4.  Bi-weekly spiking of UV inactivated Bacteria and Protozoa will occur
            during the test period to track the detection and classification
            accuracy.

            2.4.1.      Concentration level will be 1000 organisms/ml.

            2.4.2.      The number of total event counts observed and False
                        Positives will be recorded

            2.4.3.      The samples will be collected in a Pall Environcheck
                        sampling capsule for delivery to the laboratory.

            2.4.4.      The laboratory will analyze the sample for the
                        background presence of Bacteria and Protozoa using EPA
                        Method 1623 or a similar technique.

      2.5.  Reliability of the BioSentry(TM) unit will be calculated as follows:

            2.5.1.      Hours of operation will be recorded along with any
                        down-time.

            2.5.2.      Down-time duration and reason will be noted.

            2.5.3.      Reliability of the BioSentry(TM) unit will be recorded
                        as % Uptime (Total hours of operation - downtime hours /
                        total hours of operation)

                                       11
<PAGE>

3. FINAL REPORT

      The Final Report will include:

      3.1.  Data obtained from weekly spiking, day-to-day operations (recorded
            events), and reliability will be summarized in the report.

      3.2.  The False Positive Rate (ratio of False Positives recorded to the
            total events recorded) will be calculated.

      3.3.  The classification rate (ratio of properly classified particles to
            the number of particles passing through the BioSentry(TM)) will be
            calculated.

      3.4.  Comparisons of the measured concentrations of test spikes to
            concentrations measured by the `labs'.

      3.5.  Variability of the BioSentry(TM) results will be measured through a
            statistical analysis of the consistency of the results, based on the
            number tests performed.

4. SUCCESSFUL TEST CRITERIA

      The criteria to validate the successful performance of the BioSentry(TM)
      to satisfy Kimpen's needs is stated below. During the initial 2-4 week
      calibration period of operation, this critieria may be changed to reflect
      data obtained during the calibration period.

      4.1.  Pathogen Classification Accuracy: Correctly classifies organism as
            Bacteria or Protozoa 90% of time in concentrates of at least 1000
            organisms/Ml

      4.2.  Event Detection: During the first 2-4 weeks of operation after
            installation, a standard will be created to determine the
            statistical actual versus theoretical yield using polystyrene
            spheres. The results of these tests will produce the expected
            statistical yield of the BioSentry(TM). Successful test results will
            be deemed if the BioSentry(TM) performs within 3 sigma of the
            experimental mean.

      4.3.  Reliability: System uptime of at least 90% during the 2-month test
            duration

      4.4.  False positives: < 10% for bacteria or protozoa classification

      4.5.  Pathogen Classification Repeatability: Two systems are needed to
            obtain this metric. Hence, the criteria for this metric will be
            detailed prior to the start of the 2-system factory tests.

                                       12

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