Document:

Exhibit 4.2

 

TIENDAS MONTANA, C.A., company domiciled in Caracas and registered
before the Second Mercantile Registry of the Judicial Circuit of the Federal
District and Miranda State, on December nineteen (19) 1968, under number 42,
Volume 80-A hereinafter THE FRANCHISER, represented in this act by                      
and
                     ,
Venezuelans, of legal age and bearers of identity cards numbers                      
and                      ,
respectively, authorized for this act by the Board of Directors of their
principal on its session of may twenty two (22), 2002, on one side and on the
other
                                                  , C.A.,
company domiciled in
             
and registered before the
             
Mercantile Registry of the Judicial Circuit of
             ,
on
              ,
under number     , Volume       ,
hereinafter THE FRANCHISEE, represented in this act by its
              ,
Mr.                                   ,
Venezuelan, of legal age and bearer of identity card number
                  ;
WHEREAS:

 

1)     WHEREAS the franchise is a commercialization of goods and services
system where an individual or legal entity named THE FRANCHISER, contractually
or temporarily transfers to another named THE FRANCHISEE, the rights of use of
a trademark and the knowledge, commercial procedure, marketing techniques, etc;
as a compensation for the payment of a price, generally fixed, plus a
participation in the results of the commercial operation, that allow the latter
to operate a determined business in an uniform and standard fashion.

 

2)     WHEREAS TIENDAS MONTANA, C.A., has acquired the rights to use the name
TIENDAS MONTANA from Corimon Pinturas, C.A., company domiciled in Caracas and
registered before the Mercantile Registry of the Judicial Circuit of the
Federal District and Miranda State, under No 3, Volume 18-A, on May 16 1.962,
who hereinafter shall be named The Supplier; “TIENDAS MONTANA” or any variation
or simulation thereof collectively; TIENDAS MONTANA has created and developed a
plan, design, method and system for the commercialization of paints and related
products that satisfy the market needs.

 

3)     WHEREAS TIENDAS MONTANA, C.A., has reserved the exclusive rights to
franchise on behalf of TIENDAS MONTANA, or any of its variations; the parties
have agreed to enter into the franchise agreement contained in the following
clauses:

 

1.-
THE FRANCHISE AND THE ESTABLISHMENT 

 

First
Clause: THE FRANCHISEE
shall occupy a commercial office, distinguished with number
          , located in
                              
                            ,
-                    
State; hereinafter THE ESTABLISHMENT, where it shall operate its business under
the commercial denomination of TIENDAS MONTANA, exploiting the franchise that is
granted through this agreement.

 

Second
Clause:   Subject to the terms and conditions herein
set forth, THE FRANCHISER grants THE FRANCHISEE  the TIENDAS MONTANA franchise, and in consequence, the
non-transferable right to use the name TIENDAS MONTANA.

 

The
rights herein transferred imply the operation of THE ESTABLISHMENT to promote
and advertise it under the name of TIENDAS MONTANA, provided it abides

 

 

to
the guidelines set or approved by THE FRANCHISER. The franchise is applied to
the specific location of the abovementioned ESTABLISHMENT. This agreement does
not limit the right of THE FRANCHISER to use or franchise the TIENDAS MONTANA
system or to commit to franchise any other kind of business in any other
location with that same name. The name of THE ESTABLISHMENT shall be TIENDAS
MONTANA and THE FRANCHISEE  may not
change it.

 

It
is understood that this agreement is entered into “intuito personae” regarding
THE FRANCHISEE, in virtue of which, THE FRANCHISEE may not execute with
companies directly or indirectly related, or with any other legal entity or
individual, any kind of contract with respect thereto, nor assign it and it is
expressly forbidden the total or partial sublease of THE ESTABLISHMENT,
considering it null if it has not previously obtained for each case, the
authorization given in writing by THE FRANCHISER.

 

The
failure to comply with this clause shall give THE FRANCHISER the right to:

 

1)
Immediately terminate this agreement, 2) Demand the immediate eviction of THE
ESTABLISHMENT, and 3) The payment by THE FRANCHISEE of an amount of three
hundred thousand Dollars of the United States of America (US$ 300,000.oo) to be
paid in that same currency, excluding any other, for damages and losses,
without having to be proved by THE FRANCHISER.

 

Third
Clause:   THE ESTABLISHMENT is constituted by the
office where THE FRANCHISEE will commercially exploit the granted franchise.
THE ESTABLISHMENT must remain inalterable during the existence of the agreement
and any amendment, broadening, improvement or remodeling must be made with the
prior authorization and consequent supervision of THE FRANCHISER.

 

All
the furniture such as: shelves, counters, show windows, utilities office
furniture of, computer system, devices burglar alarm, special equipment of access
and exit, announcements and structures of promotion of the business, that have
been acquired by it shall be property of THE FRANCHISEE.

 

Fourth
Clause:   As consideration for the dispositions of
the second clause of this agreement, THE FRANCHISEE shall pay THE FRANCHISER,
within the first five (5) calendar days, an amount set by the aggregate of the
following amounts:

 

a)     The amount of
                                                                                
(Bs.                         ).
This amount shall be adjusted each year according to the variations existing in
the Consumer Price Index that is set by the Banco Central de Venezuela for the
city of Caracas for the corresponding period. THE FRANCHISEE shall also be
responsible for the payment of the basic services that are rendered in THE
ESTABLISHMENT, such as: water, public cleaning service, condominium, electric
energy and telephone expenses.

 

b)    An amount in bolívares equivalent to a percentage of the monthly
purchases made by THE FRANCHISEE to The Supplier, during the month immediately
prior (after deducting any applicable sales tax) to the month when such payment
is made. Said

 

2

 

percentage, which shall not
exceed four percent (4%), shall be determined by THE FRANCHISER and shall be
notified to THE FRANCHISEE in writing to the address of THE ESTABLISHMENT set
forth on the First Clause of this agreement

 

Fifth
Clause: THE FRANCHISER
expressly declares and THE FRANCHISEE so recognizes, that there is no express
or implied guaranty, nor any statement by THE FRANCHISER, its officers,
advisers, employees, agents or affiliates regarding the income, profits,
success or feasibility of the commercial adventure that THE FRANCHISEE is
beginning

 

Sixth
Clause: THE FRANCHISER
must be previously informed with respect to any statutory change that THE
FRANCHISEE suffers, if any amendment in its shares composition that compromises
the making of decisions of any of the contracting parties, reserving THE FRANCHISER
for itself the right to continue or not the contractual relation.

 

Seventh
Clause: THE FRANCHISER
declares that it shall make its best efforts to obtain the pacific, stable and
documented occupation of the real property mentioned on the first clause of
this contract. However, in case THE FRANCHISEE is obligated to the evict the
real estate within the first three (3) years of existence of this agreement, it
shall have a preferential right to install a new TIENDA MONTANA store, in a
term not longer than ninety (90) days beginning the abovementioned eviction, in
another real estate located in the area where both parties agree, provided it
complies with the quality specifications and standards and design determined by
TIENDAS MONTANA, and its operations begin within the abovementioned term.

 

2.-
STANDARDS:

 

Eight
Clause: The franchise
system grants the right of use of the service trademark TIENDAS MONTANA, as
well as similar trademarks that may be incorporated by THE FRANCHISER as part
of the franchise system. THE FRANCHISER shall be entitled to make changes and
improvements to the franchise system and everything relating thereto in order
to make it more effective, efficient, economic and competitive, or to adapt it
to the new conditions or technologies, or to increase the popularity of the
name TIENDAS MONTANA. Upon the execution of this agreement, THE FRANCHISER,
shall acquaint THE FRANCHISEE on the Operating Manual that regulates and
contains the specifications of the TIENDAS MONTANA franchise system; this
Operating Manual is of mandatory compliance for THE FRANCHISEE  since it is an integral part of this
agreement.

 

THE
FRANCHISEE  declares that THE FRANCHISER
shall have full use and disposition over the works or inventions that may
become profits for the business which are a result of the intellect of THE
FRANCHISEE, assuming that THE FRANCHISER may use without restriction, for
itself or for any other business given in franchise, the trademarks of the
products, service trademarks or any other kind of ideas that contribute to the
profitability thereof, without being obligated to pay an indemnification or
amount of money to THE FRANCHISEE for intellectual property rights.

 

3

 

Ninth
Clause: During the
existence of this agreement THE FRANCHISEE shall operate THE ESTABLISHMENT
keeping it in a clean and proper condition, and shall abide to the security
standards under which TIENDAS MONTANA operates; it shall render an efficient,
respectful and high quality service in strict compliance with the TIENDAS
MONTANA franchise system. THE FRANCHISEE 
shall open the stores to the public for eight (8) hours per day and
according to the extensions of time and/or changes that the company decides: It
shall comply with all the aspects of the manual or instructions of the
franchise system of TIENDAS MONTANA, and shall comply with all the requirements
of THE FRANCHISER regarding:

 

1)     Listings of price and discount referential margins of the products or
services established by THE FRANCHISER that are offered in THE ESTABLISHMENT,
in order to maintain the concept of the chain stores of TIENDAS MONTANA.

 

2)     The type or kinds of services and/or service products that may be sold,
advertised and offered in the store.

 

3)     The showing of the symbols and logos approved for the store.

 

4)     The capacitating of the persons that shall be involved in the operation
of the store.

 

5)     The procedure necessary for the service of the clients.

 

6)     Governmental requirements regarding the payment of all the national and
municipal taxes such as the business tax (patente de industria y comercio) and tax
over the commercial advertising (this latter one specified in the nineteenth
clause of this agreement), as well as to maintain in force all the
authorizations and governmental permits that are necessary for the operation of
the store according to the TIENDAS MONTANA franchise system.

 

7)     The hiring of a civil liability against third parties insurance policy,
with an ample and sufficient coverage, enough to cover any event occurring over
the merchandise and commercial activity, including rental risks for material
damages that THE ESTABLISHMENT may suffer (caused for incidents such as: fire,
explosion, short circuits; etc.)

 

Tenth Clause: To
verify the good conditions of THE ESTABLISHMENT, THE FRANCHISER shall be
entitled, at least once a month, through any of its representatives, or
auditors firms, to inspect the well functioning of the store, as well as to
audit the invoicing system to corroborate the proper compliance of the
obligations contained in this agreement.

 

3.- MAINTENANCE, RENOVATIONS AND RESTORATIONS:

 

Eleventh
Clause: During the
existence of this agreement, THE FRANCHISEE 
shall keep at all times THE ESTABLISHMENT in good conditions, restoring
it if it were necessary, including the replacement of the furniture, additions,
supplies and equipment; these restorations shall be made in rational period or
upon THE FRANCHISER’s request. THE FRANCHISEE 
shall restore or replace all the symbols

 

4

 

and
logos that contain the commercial denomination of TIENDAS MONTANA. Every
renovation or restoration shall comply with the standards and specifications of
quality and design of TIENDAS MONTANA imposed by THE FRANCHISER.

 

4.- PURPOSE OF THE TIENDAS MONTANA FRANCHISE: 

 

Twelfth Clause:
Purpose of the TIENDAS MONTANA franchise:

 

a)     Reach the expansion and placing of the commercial denomination TIENDAS
MONTANA, nationwide, with the least investment.

 

b)    Increase the sales of the products that are commercialized under the
TIENDAS MONTANA commercial denomination in a short period, through a higher
volume of sales with the consequent benefits for the franchisees.

 

c)     Allow the franchisees a stable development with a minimum investment in
evidenced commercial success products and good quality.

 

5.- OBLIGATIONS OF THE FRANCHISER:

 

Thirteenth Clause:
The following shall be the obligations of THE FRANCHISER

 

a)     Grant THE FRANCHISEE  the right
of use of the commercial denomination   TIENDAS
MONTANA.

 

b)    Ease the acquisition of the advertisement items for the display of the
merchandise at the cost value, as well as the tools necessary for the well
functioning of THE ESTABLISHMENT to THE FRANCHISEE.

 

c)     Give technical assistance and advise in all and each of the technical
aspects that allow a proper and good functioning of the franchises.

 

d)    Carry on the necessary formalities to procure the greatest efficiency
and time in the dispatches of the merchandise requested by THE FRANCHISEE, and
shall make its best efforts to have a fluid communication between THE
FRANCHISEE and The Supplier.

 

6.-
BASIC CONDITIONS FOR THE INSTALLATION OF THE FRANCHISE:

 

Fourteenth
Clause: THE FRANCHISEE
declares that it has efficient resources for the performance of the franchise
TIENDAS MONTANA, for which it states that it has the following for the
beginning of the commercial activity:

 

a)     The necessary computer equipment for the control of the sales that
allows the verification of the development of the same, as well as its
respective control for the purposes of tax administration, besides of the
communication equipment for the transmission of information required by the
company, such as: Fax, modem or others. It is understood that in the case that
THE FRANCHISER decides to include technological updates and improvements to the
system, such as

 

5

 

computer,
communication, sales or other systems, in order to facilitate the management of
the business as well as its operation and control, THE FRANCHISEE will be
adjusted to the standards adopted by THE FRANCHISER, understanding that these
improvements shall be set by this latter within reasonable parameters regarding
cost which do not affect the profitability of the business and shall be paid by
THE FRANCHISEE as part of the operation expenses of THE ESTABLISHMENT.

 

b)    External decoration of the premises, locale, respecting the colors
specified by THE FRANCHISER.

 

c)     Internal decoration of the premises according to the design of the
store.

 

d)    Security systems required by the authorities for the operation of the
store.

 

Fifteenth
Clause: THE FRANCHISER
shall be able to include at any of the stores given as franchise, new product
lines, which regarding its opinion, are accordant with the operation of the
business TIENDAS MONTANA, and, by mutual consent with each franchisee, shall
evaluate their selling feasibility at each store. It is understood that the
products that THE FRANCHISEE wants to include to THE ESTABLISHMENT, shall be
subjected, in written, to the consideration of THE FRANCHISER, and this latter,
within a period no longer than seven (7) business days following to the
petition of THE FRANCHISEE, shall approve or not the incorporation of the same
within the concept of Tiendas Montana.

 

7.-
DISTRIBUTION AND SALES OPERATION SYSTEMS:

 

Sixteenth
Clause: THE FRANCHISER
shall be able to audit the inventory at any moment, with or without previous
notification, in order to verify the compliance of the exclusivity of the commercialization
of products supplied or approved by THE FRANCHISER, care of the merchandise,
rotation of the same and the rest of the guidelines set forth in this
agreement.

 

Seventeenth
Clause: THE FRANCHISEE
is absolutely responsible for the store administration, for which it is
understood that everything corresponding to working personnel, services,
municipal duties, taxes and any other performance expenses, are of its absolute
responsibility and shall be paid by it. THE FRANCHISER, in any case and under any
concept, shall be jointly responsible for the obligations that should be
complied by THE FRANCHISEE for the performance of its stores.

 

Eighteenth
Clause: It is
understood that the reliable employees, supervisors and workers of THE
FRANCHISEE shall not be subordinate workers of THE FRANCHISER, neither of its
managers, supervisors or employees; for which both parties acknowledge that
there no working relation shall exist between THE FRANCHISER and the persons
rendering services to THE FRANCHISEE, being this latter the sole employer of
this personnel and therefore responsible for all the legal and/or contractual
obligations provided in the labor legislation. Notwithstanding the above, if
any of the persons rendering services to THE FRANCHISEE, initiates an administrative
or judicial proceeding against THE FRANCHISER, THE FRANCHISEE shall immediately

 

6

 

indemnify
THE FRANCHISER for all the expenses and/or contributions of any type in which
it have to incur, for the purposes of its defense.

 

8.-
PUBLICITY:

 

Nineteenth
Clause: THE FRANCHISEE
shall operate continuously the business granted as a franchise, making its best
effort to increase the profitability of the same, and shall be able, at its
option, to publicize it with the name TIENDAS MONTANA, just as indicated or
approved by the Marketing Department of THE FRANCHISER, through any way of
publicity; however, no design, billboard or any way of publicity, shall be used
to represent the store, unless the way, message, colors, number, place or size
of the same, have been previously approved in written by THE FRANCHISER
(through its Marketing Department). THE FRANCHISER or its authorized agents,
may, at any moment, through a previous notification to THE FRANCHISEE and
within a period no less than five (5) days, withdraw advertising billboards or
media, from any place, which have not been approved by it, without being
obliged to pay any penalty or amount of money for damages. Any merchandise
item, equipment, stationary, supplies, furniture or utensils having the
commercial denomination TIENDAS MONTANA, or any imitation of the same, shall be
used, unless these have been previously approved in written by THE FRANCHISER,
following the quality and design standards.

 

Pursuant
to the provisions of the ninth clause, numeral 6 of this agreement, THE
FRANCHISEE is obliged to pay the municipal tax regarding commercial publicity,
as well as to carry out the corresponding proceedings to get the necessary
permits for the installation of advertising billboards or walls metallic or
luminous signs or any way of publicity requiring THE ESTABLISHMENT, that
generates any tax.

 

It
is agreed, that THE FRANCHISEE shall accept and carry out all the publicity and
advertising guidelines and strategies developed by THE FRANCHISER, for the
chain and the benefit of the same, and also accepts the obligation to submit to
the prior authorization of THE FRANCHISER, any publicity segments and the items
that involve the trademark TIENDAS MONTANA or the products commercialized in
THE ESTABLISHMENT.

 

9.-
PROPERTY RIGHT ON THE FRANCHISE TIENDAS MONTANA:

 

Twentieth
Clause: THE FRANCHISEE
agrees that the rights on the name TIENDAS MONTANA and the use of the same,
shall be and remain as property of THE FRANCHISER, and THE FRANCHISEE, shall
transfer to TIENDAS MONTANA any additional right that may be acquired, if it is
the case, as consequence of the use of said name.

 

Any
registration request to be carried out by THE FRANCHISEE in order to use the
name TIENDAS MONTANA, required by the laws of any governmental entity, shall
specify that the use of said name is limited to the specifications of this
agreement. THE FRANCHISEE, also accepts to not interfere in any way whatsoever
and under any circumstance, in the use or registration of the name TIENDAS
MONTANA or any of the commercial names or registered trademarks TIENDAS MONTANA
by THE FRANCHISER.

 

7

 

THE
FRANCHISER has the exclusivity on the use of the commercial denomination
TIENDAS MONTANA, for which it has the full right to grant it as a franchise to
any other individual or legal entity it considers convenient, without THE
FRANCHISEE being able to oppose in any way whatsoever. All the improvements,
additions or inventions regarding the system, will result in the benefit of the
same, and may be used by THE FRANCHISER.

 

THE
FRANCHISER shall have absolute right and the responsibility be aware of the
disputes with third parties in everything related to Industrial Property Right
and Copyright of the franchise system TIENDAS MONTANA, and THE FRANCHISEE, at
its own expense, shall grant its full collaboration to THE FRANCHISER if
necessary.

 

THE
FRANCHISER is the only person obliged to defend the right of use of the
commercial denomination TIENDAS MONTANA, for which only it shall be able to
determine the way to conciliate or solve any conflict arising from the cases of
imitation or infringements in the use of its name. THE FRANCHISEE shall not
initiate, in any case, proceedings against the imitators or infringers or any
other trial or proceeding to demand and protect the TIENDAS MONTANA franchise
system. Both parties shall make their best effort regarding the above, in order
to keep, protect and promote the name TIENDAS MONTANA, its distinctive
characteristics and the rest of the service trademarks, registered trademarks,
logos and slogans, related to the franchise system TIENDAS MONTANA.

 

10.-
CONFIDENTIALITY OF THE INFORMATION SUPPLIED:

 

Twentieth-first
Clause: All the
information supplied by THE FRANCHISER pursuant to this agreement shall be
treated as confidential, and THE FRANCHISEE acknowledges that this is and shall
always remain property of THE FRANCHISER. THE FRANCHISEE shall make its best
efforts to ensure that the supplied information only be disclosed to those
employees that due to their duties must have access to it. This information,
including annotations or other documents containing it, shall be submitted to
THE FRANCHISER at the place it specifies, once the agreement has terminated.
While this information is not of public knowledge, the same shall not be
disclosed to any person, business, company or association.

 

11.-
RECORDS AND AUDITS:

 

Twentieth-second
Clause: All the store’s
incomes, including the net incomes, shall be permanently recorded in any way
reasonably required by THE FRANCHISER. The report shall be in the fashion and
detail as required by THE FRANCHISER, specifying prices, types of products,
quantities, cash, credit or discount sales, among others.

 

12.-
DURATION OF THE AGREEMENT:

 

Twentieth-third
Clause: For all the
purposes of this agreement, the starting date of this contracting shall be
understood as the
              day
of the month of                        
of
                       ,
even when the authentication of the same be done in a previous or further 

 

8

 

date
to that date. The duration of this agreement is three (3) years starting from
the abovementioned date.

 

13.-
CAUSES FOR EARLY TERMINATION:

 

Twentieth-fourth
Clause: The following
shall be causes granting the right to THE FRANCHISER to terminate this
agreement:

 

1.               The breach in the payment of any of the
concepts stated in the fourth clause of this agreement.

 

2.               The breach by THE FRANCHISEE on the obligation
to condition, maintain, restore or improve the store according to the
specifications and rules required by THE FRANCHISER.

 

3.               The suspension of the line of business of THE
FRANCHISEE due to the delay, bankruptcy, preventive or executive measure that
impede the continuance of the franchise.

 

All
these breach causes shall grant THE FRANCHISER the right to terminate the
agreement and demand the indemnification payment for damages generated, even
for damages generated to the property on their commercial trademark.

 

4.               The commercialization by THE FRANCHISEE of
products that compete with those manufactured by THE SUPPLIER. If there was a
termination of this contract due to a cause set herein, THE FRANCHISEE shall
pay THE FRANCHISER, the amount of three hundred thousand dollars of the United
States of America (US$ 300,000.00), for indemnification of damages, without
being necessary to prove said damages.

 

14.-
EXTENSION OF THE FRANCHISE:

 

Twentieth-fifth
Clause: If THE
FRANCHISEE is willing to continue with the TIENDAS MONTANA franchise after the
termination of this agreement, it shall submit a written request to THE
FRANCHISER for the renewal of the same, with at least one (1) year prior to the
expiration date of the agreement. THE FRANCHISER shall carry through the
request, reviewing the performance background of THE FRANCHISEE, pursuant to
the procedures and criteria (including the requirements corresponding to
renewals, restorations and improvements of THE ESTABLISHMENT, credit and market
feasibility), being applied by THE FRANCHISER at that moment, for the granting
of new TIENDAS MONTANA franchises, and shall answer to THE FRANCHISEE within
thirty (30) business days starting from the request.

 

15.-
TERRITORIALITY:

 

Twentieth-sixth
Clause: THE FRANCHISER
shall review the requests submitted by potential franchisees regarding the
installation of new franchises. If the new franchise should be placed within
the locality of THE ESTABLISHMENT where THE FRANCHISEE operates, THE FRANCHISER
shall grant THE FRANCHISEE the

 

9

 

preferential
right of installing a new store, at that locality. If interested in operating
the new franchise, THE FRANCHISEE shall inform in written and within a period
no longer than seven (7) days starting from the notification made to THE
FRANCHISER, its will to operate it, and shall have a maximum period of sixty
(60) days to begin its operation. If THE FRANCHISEE is not interested in
operating this new store or does not begin its operation during the period
indicated above, THE FRANCHISER shall be able to grant the franchise to whom it
deems convenient.

 

16.-
GUARANTEE:

 

Twentieth-seventh
Clause: I,
                    ,
Venezuelan, of legal age and bearer of the identity card number
                    ,
hereby certify: that I am guarantor and principal payer of
                    ,
C.A., mentioned above, for the compliance of all and each of the obligations
that the latter assumes towards Tiendas Montana, C.A. and/or Corimon Pinturas,
C.A., by virtue of the foregoing agreement.

 

17.-
FINAL DISPOSITIONS:

 

Twentieth-eighth
Clause: For the
purposes of any notification, these shall be made in written and delivered to
the following addresses: FRANCHISER: TIENDAS MONTANA, Calle Hans Neumann,
Edificio Corimon, Los Cortijos de Lourdes, Caracas – Venezuela. FRANCHISEE: At
the address of THE ESTABLISHMENT, mentioned in the first clause of this
agreement.

 

Twentieth-ninth
Clause: For the
purposes of complying to the provisions of the Law of the Central Bank of
Venezuela, it is expressly certified that the referential exchange rate used in
this agreement for the amounts expressed in US dollars, is one thousand six
hundred bolivares (Bs. 1,600.00) per each US dollar (US$ 1.00).

 

The
parties choose as special domicile the city of Caracas, to the jurisdiction of
which courts they declare to be subjected. Both parties also agree to
alternately submit any arising controversy to arbitration procedure, whether
through the regular procedure or through any procedure established in any
special legislation in force or in any other that grants the legal stability
and speediness in the solving of the conflict that is promoted or governed by
the Public Administration Entities or Private Entities or Institutions of
renown solvency and experience in this matter. Two copies of the same tenor are
made for a sole purpose, in Caracas at the date of its authentication with the
Notary Public.

 

	
  THE
  FRANCHISER

  	
   

  	
  THE
  FRANCHISEE

  

 

10Exhibit 10.5

 

CONSTRUCTION LOAN AGREEMENT

 

This Construction Loan Agreement (the “AGREEMENT”) is dated as of the
25 day of July, 2002, and is by and between LSCP, L.P., an Iowa limited
partnership (“BORROWER”) and FIRST NATIONAL BANK OF OMAHA (“BANK”), a national
banking association established at Omaha, Nebraska.

 

WHEREAS, the BORROWER has requested the BANK to lend to BORROWER up to
the sum of Thirty One Million Four Hundred Sixty-Five Thousand and no
one-hundredths ($31,465,000.00) Dollars (the “CONSTRUCTION LOAN”), for the
purpose of partially funding the cost of construction for an ethanol plant on
the real estate described in Exhibit A (the “PROPERTY”), together with a Three
Million Five Hundred Thousand ($3,500,000.00) Dollar revolving line of credit (“REVOLVING
LOAN”).

 

WHEREAS, the BANK is willing to provide such credit facilities to
BORROWER upon the terms and conditions herein set forth.

 

SECTION 1 Definitions.

 

1.1                                 “ASSIGNMENT
OF DESIGN/BUILD CONTRACT” means the assignment of the agreement (“DESIGN/BUILD
CONTRACT”) between the BORROWER and Fagen, Inc. (the “GENERAL CONTRACTOR”) for
preparation of PLANS and construction of the PROJECT in accordance with PLANS
therein described, by which the BORROWER assigns, as additional security for
repayment of the OBLIGATIONS, the BORROWER’s interest in the DESIGN/BUILD
CONTRACT in a form acceptable to the BANK in the exercise of its reasonable
discretion.

 

1.2                                 “ASSIGNMENT
OF RENTS” means the assignment of rents and leases as to the PROPERTY between
BORROWER, as assignor, and the BANK, as assignee, as security for payment of
the CONSTRUCTION NOTE in a form acceptable to the BANK.

 

1.3                                 “BANKING
DAY” means a day on which the BANK is open for substantially all of its
business.

 

1.4                                 “BORROWING
BASE” means the lesser of:

A.                                   $3,500,000.00
or

B.                                     The
aggregate of (i) 75% of BORROWER’s inventory of corn and distiller’s dried
grain, all at current value on the date reported, plus (ii) 75% of the amount
of BORROWER’s Ethanol Accounts aged thirty days or less, and 75% of the amount
of BORROWER’s Federal Incentive Payment Accounts aged less than 120 days,
excluding any Accounts reasonably deemed ineligible by BANK, plus (iii) 75% of
BORROWER’s Ethanol Inventory, valued at the lower of cost or market.

 

 

1.5                                 “CLOSING”
shall mean the date on which the BANK receives this AGREEMENT, executed by the
BORROWER, together with the CONSTRUCTION NOTE and the REVOLVING NOTE.

 

1.6                                 “CONSTRUCTION
LOAN TERMINATION DATE” means the earlier of (i) the date which is twelve months
subsequent to CLOSING, (ii) the COMPLETION DATE, or (iii) such earlier date
upon which the BANK’s commitment to make disbursements under the CONSTRUCTION
LOAN is terminated.

 

1.7                                 “COMPLETION
DATE” means the earlier of June 1, 2003, or the date the BANK determines
following a proper inspection and in the exercise of BANK’s reasonable
discretion, that the PROJECT has been completed in accordance with the PLANS.

 

1.8                                 “CONSTRUCTION
NOTE” means the promissory note of the BORROWER in the form of Exhibit B
evidencing borrowings under the CONSTRUCTION LOAN of up to a maximum amount of
Thirty One Million Four Hundred Sixty-five Thousand ($31,465,000.00) Dollars.

 

1.9                                 “DEBT
SERVICE” means any principal and interest expense attributable to INDEBTEDNESS.

 

1.10                           “DRAW
REQUEST” means forms acceptable to the BANK to be submitted to the BANK by
BORROWER when a disbursement is requested under the CONSTRUCTION NOTE.

 

1.11                           “EBITDA
CASH FLOW” means Earnings Before Interest, Taxes, Depreciation and
Amortization, all experienced during the applicable reporting period.

 

1.12                           “EVENT
OF DEFAULT” has the meaning provided for in Section 7 of this AGREEMENT.

 

1.13                           “EXCESS
CASH FLOW” means EBITDA CASH FLOW, less payments made on OBLIGATIONS or
SUBORDINATED DEBT, and less state and federal incentive payments, and
authorized capital expenditures, all experienced during the applicable
reporting period.

 

1.14                           “FIXED
CHARGE COVERAGE RATIO” means the ratio derived when comparing EBITDA CASH FLOW,
less capital expenditures, dividends and taxes to BORROWER’s payments on the
principal and interest of the OBLIGATIONS and SUBORDINATED DEBT made during the
applicable reporting period.

 

1.15                           “GAAP”
means generally accepted accounting principles, applied on a basis consistent
with the accounting principles applied in the preparation of the annual
financial statements of the BORROWER referred to in the Financial Condition
Section of this AGREEMENT. All accounting terms not otherwise defined in
this AGREEMENT have the meaning assigned to them in accordance with GAAP.

 

2

 

1.16                           “INDEBTEDNESS”
means all indebtedness for borrowed money including long-term debt, and capital
leases.

 

1.17                           “INDEPENDENT
INSPECTOR” means the firm which will be retained by BANK, at BORROWER’s cost,
which cost shall not exceed $50,000.00, to conduct on site inspections of the
work-in-progress on the PROJECT, and to issue periodic reports to BANK as to
the progress of construction and adherence to the PLANS. The BANK’s selection
of the INDEPENDENT INSPECTOR shall be subject to BORROWER’s approval, which
approval will not be unreasonably withheld.

 

1.18                           “LOAN
DOCUMENTS” means this AGREEMENT and each document referred to in Section 4
of this AGREEMENT.

 

1.19                           “LOAN
TERMINATION DATE” means the earliest to occur of the following: (i) as to the
CONSTRUCTION NOTE, June 1, 2003, as to the REVOLVING NOTE, a date 364 days
after initial funding of such NOTE, and the TERM NOTE, a date which is five
years subsequent to COMPLETION DATE (ii) the date the OBLIGATIONS are accelerated
pursuant to this AGREEMENT, and (iii) the date BANK receives (a) notice in
writing from BORROWER of BORROWER’s election to terminate this AGREEMENT and
(b) indefeasible payment in full of the OBLIGATIONS.

 

1.20                           “MARKETING
CONTRACT” means that written contract dated as of February 19, 2002
between BORROWER and Minnesota Corn Processors, L.L.C., by which the latter
agreed to provide marketing services to BORROWER for BORROWER’s ethanol
product, as well as the written contract dated as of June 19, 2002 between
BORROWER and Commodity Specialists Co. by which the latter agreed to provide
marketing services as to BORROWER’s distillers dried grains (“DDGs”).

 

1.21                           “MORTGAGE”
means the mortgage between the BORROWER as mortgagor and the BANK as mortgagee,
creating a first lien on the PROPERTY and a security interest in all of the
personal property located thereon as security for payment of the OBLIGATIONS.

 

1.22                           “NET
WORTH” means total assets less total liabilities and less the following types
of assets: (1) leasehold improvements; (2) receivables and other investments in
or amounts due from any partner, employee or other person or entity related to
or affiliated with the BORROWER; (3) goodwill, patents, copyrights, mailing
lists, trade names, trademarks, servicing rights, organizational and franchise
costs, bond underwriting costs and other like assets properly classified as
intangible, and (4) treasury stock or treasury partnership units. NET WORTH
shall not include any debt due to BORROWER not acceptable to BANK in the
exercise of its reasonable discretion, but shall include SUBORDINATED DEBT.

 

1.23                           “OBLIGATIONS”
means the obligation of the BORROWER:

 

(A)                              To
pay the principal of, and interest on, the CONSTRUCTION NOTE, the TERM

 

3

 

NOTE and the REVOLVING NOTE in accordance with the terms thereof and to
satisfy all of its other liabilities to the BANK, whether hereunder or
otherwise, whether now existing or hereafter incurred, matured or unmatured,
direct or contingent, joint or several, including any extensions,
modifications, renewals thereof, and substitutions therefore and including, but
not limited to, any obligations under letter of credit agreements;

 

(B)                                To
repay to the BANK all amounts advanced by the BANK hereunder or otherwise on
behalf of the BORROWER, including, but without limitation, advances for
principal or interest payments to prior secured parties, mortgagees, or
licensers, or taxes, levies, insurance, rent, or repairs to, or maintenance or storage
of, any of the real or personal property securing BORROWER’s payment and
performance of this AGREEMENT; and

 

(C)                                To
reimburse the BANK, on demand, for the BANK’s reasonable and necessary out of
pocket expenses and costs, including the reasonable fees and expenses of its
counsel, in connection with the preparation, administration, amendment,
modification, or enforcement of this AGREEMENT and the LOAN DOCUMENTS required
hereunder, including, without limitation, any proceeding brought or threatened,
to enforce payment of any of the OBLIGATIONS referred to in the foregoing
sub-paragraphs (A) and (B).

 

1.24                           “PERMIT”
or “PERMITS” means any license or permit, and all licenses or permits, required
under any environmental law or regulation required to construct and operate the
facility on the PROPERTY after completion of the PROJECT at its operational
capacity, including without limitation the following:

 

(a)                                  an
air emissions permit, which PERMIT will allow the BORROWER after COMPLETION
DATE to operate the ethanol plant on the PROPERTY after construction of the
PROJECT at maximum capacity.

 

(b)                                 All
permits required in connection with the construction and operation of all above
ground storage tanks included in the PLANS for the ethanol plant.

 

(c)                                  A
National Pollution Discharge Elimination System Construction Permit for any
storm water that is discharged during construction and after construction of
the PROJECT.

 

1.25                           “PLANS”
means the plans and specifications prepared by ICM, Inc. on behalf of the
GENERAL CONTRACTOR for the PROJECT and identified to this AGREEMENT by the
GENERAL CONTRACTOR, the BORROWER and the BANK.

 

1.26                           “PROJECT”
means the design and construction of an ethanol plant, together with all
necessary and appropriate fixtures, equipment, attachments, and accessories, as
described in the PLANS, to be constructed on the PROPERTY.

 

4

 

1.27                           “REVOLVING
NOTE” means that promissory note of BORROWER to BANK evidencing the revolving
credit facility described in Section 2.7 of this AGREEMENT, its renewals,
modifications and extensions.

 

1.28                           “SECURITY
AGREEMENT” means the SECURITY AGREEMENT between the BORROWER, as debtor, and
the BANK, as secured party, creating a first security interest in all
BORROWER’s assets, including general intangibles, securing the OBLIGATIONS.

 

1.29                           “SUBCONTRACTOR”
means any person who contracts with the GENERAL CONTRACTOR or BORROWER to
perform any work or supply any of the materials or equipment necessary to
complete the PROJECT.

 

1.30                           “SUBORDINATED
DEBT” means INDEBTEDNESS of BORROWER to entities other than BANK that has been
subordinated, in form acceptable to BANK, to the OBLIGATIONS.

 

1.31                           “TERM
NOTE” means that promissory note of BORROWER to BANK which evidences permanent
financing to pay the CONSTRUCTION NOTE as described in Sections 2.5 and 2.6 of
this AGREEMENT, its renewals, modifications and extensions.

 

1.32                           “WORKING
CAPITAL” means current assets (less investments in or other amounts due from
any partner, employee or any person or entity related to or affiliated with the
BORROWER and prepayments) less current liabilities (less any portion of such
current liabilities that constitute debt that is expressly subordinated to the
BANK in a writing acceptable to the BANK, in the exercise of its reasonable
discretion).

 

SECTION 2 Amount and Terms of the LOANS.

 

2.1                                 CONSTRUCTION
LOAN.  The BANK agrees, on the terms
and subject to the conditions hereinafter set forth, to make, from time to time
during the period from the date of execution of this AGREEMENT to and including
the CONSTRUCTION LOAN TERMINATION DATE disbursements to the BORROWER in an
aggregate principal amount not to exceed the amount of the CONSTRUCTION LOAN
for the sole purpose of paying approved construction costs of the PROJECT. If,
prior to the COMPLETION DATE, there is paid to BANK a third party payment (a
grant payment, for example), which is applied to the CONSTRUCTION LOAN, BANK
will advance such amount, or a lesser sum, as in BANK’s reasonable discretion
is necessary to complete the PROJECT. Approved construction costs are costs
actually incurred in connection with the construction of the PROJECT, which
shall include but not be limited to costs of permits, licenses, labor,
supplies, materials, services, equipment, insurance premiums, real estate taxes
and interest on disbursements, and operating costs of the ethanol plant.
Construction costs shall include costs in an aggregate of $100,000.00 payable
to Fagen, Inc. for “time and material” as specified in Exhibit D § 1 of the
DESIGN/BUILD CONTRACT unless it is specifically set forth on the Total Project
Cost Statement provided for in 4.1.8 of this AGREEMENT. Construction costs do
not include the cost

 

5

 

associated with termination under §11.4 of the General Conditions of
Contract to the DESIGN/BUILD CONTRACT.

 

2.2                                 The
CONSTRUCTION NOTE.  The obligation
of the BORROWER to repay the CONSTRUCTION LOAN shall be evidenced by the
CONSTRUCTION NOTE. Notwithstanding any provisions of the CONSTRUCTION NOTE,
interest shall be payable at the rate provided therein only on such portions of
the CONSTRUCTION LOAN proceeds as actually have been disbursed pursuant to this
AGREEMENT.

 

2.3                                 Interest
on the CONSTRUCTION NOTE.  Interest
on the principal amount outstanding on the CONSTRUCTION LOAN shall accrue, for
the period through and including the COMPLETION DATE, at a rate (the “RATE”)
one hundred (100) basis points above the BASE RATE in effect from time to time
until maturity, and six per cent (6%) above the BASE RATE in effect from time
to time after maturity, whether by acceleration or otherwise. For purposes
hereof, BASE RATE shall mean the rate announced by BANK from time to time and
published monthly as its “National Base Rate”.

 

Each time the BASE RATE shall change, the RATE shall change
contemporaneously with such change in the BASE RATE. Interest shall be
calculated on the basis of a 360-day year, counting the actual number of days
elapsed.

 

2.4                                 Repayment
of the CONSTRUCTION NOTE.  Interest
only shall be payable quarterly on the CONSTRUCTION NOTE. All outstanding
principal and accrued but unpaid interest shall be payable on the LOAN
TERMINATION DATE.

 

2.5                                 TERM
LOAN.  On COMPLETION DATE, the
CONSTRUCTION LOAN shall be paid in full by a new term loan (“TERM LOAN”),
evidenced by the TERM NOTE. Principal and interest shall be payable quarterly
on the TERM NOTE in an amount sufficient, as determined by the BANK, to
amortize the amount outstanding on the CONSTRUCTION NOTE at the applicable
interest rate over a ten (10) year period commencing from the COMPLETION DATE.
The balance will be due and payable on LOAN TERMINATION DATE.

 

2.6                                 Interest
on the TERM NOTE.  Interest on the
principal amount outstanding on the TERM LOAN shall accrue, for the period
through and including its maturity, at a rate (the “RATE”) one hundred (100)
basis points above the BASE RATE in effect from time to time until maturity,
and six per cent (6%) above the BASE RATE in effect from time to time after
maturity, whether by acceleration or otherwise. Not later than ninety (90) days
following COMPLETION DATE, BORROWER shall accept a fixed interest rate option
on no less than fifty (50%) per cent of the outstanding balance of the TERM
NOTE, and enter into a matched funding contract acceptable to BANK (for
example, an interest rate swap agreement) with a term of no less than three
years, and an interest spread of 250 basis points. One source of such matched
funding contract that is mutually acceptable to BANK and BORROWER is that used
by the Federal Home Loan Bank Board, Topeka, Kansas. In the event any of the
TERM NOTE amount bears interest at such a fixed rate, any

 

6

 

prepayment shall be applied first to the principal accruing interest at
a variable rate, and thereafter applied to principal accruing interest at the
fixed rate. For purposes hereof, BASE RATE shall mean the rate announced by
BANK from time to time as its “National Base Rate”. Prepayment penalties, as
provided in the matched funding contract, will apply as necessary to compensate
BANK for breakage of contracted interest rates on the fixed portion of the TERM
NOTE balance. In addition, a prepayment fee of 1.00% of the principal prepaid
will apply if the TERM LOAN is prepaid in its entirety during the first three
years, based on the outstanding amount at such date. However, notwithstanding
the foregoing, BANK agrees that BORROWER may obtain additional SUBORDINATED
DEBT, to reduce the OBLIGATIONS, which reduction will not result in prepayment
penalties as long as such reduction occurs prior to the time at which BORROWER
contracts for its matched funding contract.

 

Each time the BASE RATE shall change, the RATE shall change
contemporaneously with such change in the BASE RATE. Interest shall be
calculated on the basis of a 360-day year, counting the actual number of days
elapsed.

 

2.7                                 REVOLVING
LOAN.  BANK agrees to lend
$3,500,000.00 to BORROWER pursuant to this facility. As a part of this
facility, BANK will issue its letters of credit at BORROWER’s request, on
BORROWER’s account, pursuant to the BANK’s customary policies and with its
standardized documents; provided that the aggregate amount of such letters of
credit shall not exceed $1,000,000.00 at any time outstanding. BANK will credit
proceeds of this revolving loan (“REVOLVING LOAN”) to BORROWER’s deposit
account with the BANK, bearing number 22674210.

 

2.7.1                        Subject
to the terms hereof, the BANK will lend the BORROWER, from time to time until
the “LOAN TERMINATION DATE” such sums in integral multiples of $10,000.00 as
the BORROWER may request by reasonable same day notice to the BANK, received by
the BANK not later than 11:00 A.M. of such day, but which shall not exceed in
the aggregate principal amount at any one time outstanding, $3,500,000.00, less
the aggregate amounts of any issued and outstanding letters of credit issued by
BANK at the request of and on the account of BORROWER (the “LOAN COMMITMENT”).
The BORROWER may borrow, repay without penalty or premium and reborrow
hereunder, from the date of this AGREEMENT until the LOAN TERMINATION DATE,
either the full amount of the LOAN COMMITMENT or any lesser sum which is
$10,000.00 or an integral multiple thereof. It is the intention of the parties
that the outstanding balance of the REVOLVING LOAN shall not exceed the
BORROWING BASE, as required in section 6.1.9, and if at any time said
balance exceeds the BORROWING BASE, BORROWER shall forthwith pay BANK
sufficient funds to reduce the balance of the REVOLVING LOAN until it is in
compliance with this requirement.

 

2.8                                 THE
REVOLVING NOTE.  The LOAN COMMITMENT
shall be evidenced by a REVOLVING NOTE having stated maturity on the LOAN
TERMINATION DATE, in the form attached hereto as Exhibit C.

 

7

 

2.9                                 INTEREST
ON THE REVOLVING NOTE.  Interest on
the principal balance of the REVOLVING LOAN from time to time outstanding will
be payable at a rate (the “RATE”) equal to fifty (50) basis points higher than
the BASE RATE in effect from time to time until maturity, and six per cent (6%)
above the BASE RATE in effect from time to time after maturity, whether by
acceleration or otherwise. For purposes hereof, BASE RATE shall mean the rate
announced by BANK from time to time as its “National Base Rate”. Each time the
BASE RATE shall change, the RATE shall change contemporaneously with such
change in the BASE RATE. Interest shall be calculated on the basis of a 360-day
year, counting the actual number of days elapsed. Interest on the REVOLVING LOAN
shall be payable monthly.

 

2.10                           Payments.  All principal, interest and fees due under
this AGREEMENT, the CONSTRUCTION NOTE, the REVOLVING NOTE, the TERM NOTE and
the LOAN DOCUMENTS shall be paid in immediately available funds as contracted
in this AGREEMENT and no later than the payment due date set forth in the
monthly statement mailed to the BORROWER by the BANK. Should a payment come due
on a day other than a BANKING DAY, then the payment shall be made no later than
the next BANKING DAY and interest shall continue to accrue during the extended
period.

 

2.11                           Fees.  At CLOSING, the BORROWER shall pay to the
BANK a due diligence and negotiation fee in the sum of $100,000.00, which fee
BORROWER agrees and acknowledges has been earned by BANK as of the execution
hereof as the result of BANK’s efforts to acquire participating lenders. At
CLOSING, the BORROWER shall pay to the BANK a commitment fee of $314,650.00,
which fee BORROWER agrees and acknowledges has been earned by BANK. At
COMPLETION DATE, and on each annual anniversary of COMPLETION DATE for five
years subsequent to COMPLETION DATE, the BORROWER shall pay to the BANK an
Annual Servicing Fee of $50,000.00, which fee BORROWER agrees and acknowledges
has been earned by BANK; provided, however, an Annual Servicing Fee shall not
be due and payable on the LOAN TERMINATION DATE. BORROWER agrees to pay BANK an
unused commitment fee equal to 12.5 basis points of the average unused portion
of the REVOLVING LOAN, calculated and payable on a quarterly basis in arrears;
provided, however, the unused commitment fee shall not apply and be payable by
the BORROWER until such time as the BORROWER has requested, and the BANK has
deposited, the initial advance of the REVOLVING LOAN into the BORROWER’s
deposit account with BANK.

 

2.12                           Appraisal.  If the BANK is required by any government
entity with regulatory authority over the BANK the BANK may, at BORROWER’s
expense, order an appraisal of the PROPERTY. If such appraisal shows that the
outstanding CONSTRUCTION LOAN amount at that time exceeds the value of the
PROPERTY as determined by the appraisal then the BORROWER shall, within thirty
(30) days of notice by the BANK and without penalty or premium, pay the
difference between the outstanding CONSTRUCTION LOAN amount and the appraised
value amount of the PROJECT and PROPERTY as determined by such appraisal, and
no further advances shall be made on the

 

8

 

CONSTRUCTION LOAN thereafter until such time as the appraised value of
the PROJECT and PROPERTY exceeds the CONSTRUCTION LOAN amount.

 

2.13                           Incentive
Pricing.  The interest rate
applicable to the TERM LOAN and the REVOLVING LOAN is subject to reduction
commencing six months subsequent to COMPLETION DATE, based on the business
results of BORROWER. In the event that BORROWER maintains the following ratios,
measured monthly, the interest rate will be reduced accordingly:

 

	
  If INDEBTEDNESS to NET WORTH

  is less than:

  	
   

  	
  Interest
  will be:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  1.30 : 1.00

  	
   

  	
  BASE RATE plus 75 basis points

  	
   

  
	
  1.10 : 1.00

  	
   

  	
  BASE RATE plus 50 basis points

  	
   

  
	
   .90
  : 1.00

  	
   

  	
  BASE RATE plus 25 basis points

  	
   

  
	
   .70
  : 1.00

  	
   

  	
  BASE RATE

  	
   

  

 

SECTION 3 Disbursement Procedures.

 

3.1                                 Submission
of DRAW REQUESTS.  Whenever the
BORROWER desires a disbursement under the CONSTRUCTION LOAN, which shall be no
more often than three times a month, unless BANK agrees otherwise, the BORROWER
shall submit to the BANK a DRAW REQUEST, duly executed on behalf of the
BORROWER setting forth the information requested therein. Each DRAW REQUEST
shall be delivered to the BANK at least five (5) days before the date the
disbursement is desired.

 

3.2                                 Amount
of DRAW REQUEST.  Each DRAW REQUEST
shall be limited to amounts equal to (i) the total of costs actually incurred
and paid or owing by the BORROWER to the date of such DRAW REQUEST for work
performed or materials incorporated in the PROJECT as described in the PLANS,
plus (ii) the cost of materials and equipment not incorporated in the PROJECT,
but delivered to and suitably stored at the PROJECT site, plus (iii)
prepayments for equipment when prepayment is required by the manufacturer or
supplier; less, (iv) prior disbursements for such costs and from the
CONSTRUCTION LOAN or BORROWER’s WORKING CAPITAL for such costs. Notwithstanding
anything herein to the contrary, no disbursements for materials stored at the
PROJECT site will be made by the BANK unless the BORROWER shall advise the BANK
of its intention to store materials prior to their delivery, and provide
suitable security for such storage.

 

3.3                                 Other
Documents.  At the time of
submission of each DRAW REQUEST, the BORROWER shall submit or cause to be
submitted to the BANK the following:

 

3.3.1.                     A
written lien waiver from the GENERAL CONTRACTOR and each SUBCONTRACTOR for work
done and materials supplied by it which were paid for pursuant to the next
preceding DRAW REQUEST with copies of all invoices supporting the DRAW REQUEST.

 

9

 

3.3.2.                     A
document from the BORROWER and GENERAL CONTRACTOR, and if applicable, the
INDEPENDENT INSPECTOR requesting and/or approving payment of the relevant DRAW
REQUEST.

 

3.3.3.                     Such
other supporting evidence as may be reasonably requested by the BANK to
substantiate all payments which are to be made out of the relevant DRAW REQUEST
and/or to substantiate all payments then made with respect to the PROJECT.

 

3.4                                 Cost
Over Runs.  The BORROWER agrees that
all cost over runs on the PROJECT shall be paid solely by the BORROWER and that
the BORROWER shall deliver additional funds to the BANK in accordance with
Section 3.6 of this AGREEMENT to pay any cost over runs on the PROJECT.

 

3.5                                 Making
the Disbursements.  If on the date a
DRAW REQUEST is received by BANK, the BORROWER has performed all of its
agreements and complied with all requirements therefore to be performed or
complied with hereunder including satisfaction of all applicable conditions
precedent contained in Section 4 of this AGREEMENT and the BANK has
received a current report from the INDEPENDENT INSPECTOR documenting compliance
with the PLANS for those portions of the PROJECT indicated as completed in the
DRAW REQUEST and otherwise confirming the acceptability of the PROJECT work
represented by the DRAW REQUEST; the BANK shall pay to the BORROWER the amount
of the requested disbursement. Each disbursement disbursed to the BORROWER
under the CONSTRUCTION LOAN shall bear interest at the rate provided in the
CONSTRUCTION NOTE evidencing the disbursement from the date such disbursement
is so disbursed to the BORROWER or deposited into BORROWER’s account.

 

3.6                                 Deposit
of Funds by the BORROWER.  If the
BANK shall at any time in good faith determine that the undisbursed amount of
the CONSTRUCTION LOAN is less than the amount required to pay all costs and
expenses of any kind which reasonably may be anticipated in connection with the
completion of the PROJECT after application of all funds received from the
BORROWER’s equity and shall thereupon send written notice thereof to the
BORROWER specifying the amount required to be deposited by the BORROWER with
the BANK to provide sufficient funds to complete the PROJECT, the BORROWER
agrees that it will, within thirty (30) calendar days of receipt of any such
notice, deposit with the BANK, the amount of funds specified in the BANK’s
notice. The BORROWER agrees that any such funds deposited with the BANK may be
disbursed before any further disbursement of CONSTRUCTION LOAN proceeds from
the BANK, to pay any and all costs and expenses of any kind in connection with
completion of the PROJECT.

 

3.7                                 Disbursements
Without Receipt of DRAW REQUEST. 
Notwithstanding anything herein to the contrary, the BANK shall have the
irrevocable right at any time and from time to time to apply funds which it
agrees to disburse hereunder to pay interest on the CONSTRUCTION NOTE as and
when such interest becomes due, and to pay any and all of the expenses of BANK
related to the PROJECT and the CONSTRUCTION LOAN, all without receipt of a DRAW
REQUEST.

 

10

 

3.8                                 Miscellaneous
Procedures.  BANK may establish
additional procedures regarding disbursements as are reasonable to assure the
proceeds of the CONSTRUCTION LOAN are paid only to those persons and entities
entitled to the same, and that the liens securing the OBLIGATIONS are in all
cases first and paramount liens on the PROPERTY.

 

3.9                                 Appointment
of INDEPENDENT INSPECTOR.  No DRAW
REQUEST shall be honored after commencement of construction unless BORROWER has
consented to the appointment of an INDEPENDENT INSPECTOR.

 

SECTION 4 Conditions of Lending.

 

4.1                                 Conditions
Precedent to the Initial Disbursement. 
The obligation of the BANK to make its initial disbursement under the
CONSTRUCTION LOAN is subject to the condition precedent that the BORROWER shall
be in compliance with the conditions set forth in Section 4.2 of this
AGREEMENT and to the further condition precedent that the BANK shall have
received on or before the CLOSING all of the following, each dated (unless
otherwise indicated) such day, in form and substance satisfactory to the BANK:

 

4.1.1                        The
CONSTRUCTION NOTE, duly executed on behalf of the BORROWER.

 

4.1.2                        The
MORTGAGE duly executed on behalf of the BORROWER.

 

4.1.3                        The
ASSIGNMENT OF RENTS, duly executed on behalf of the BORROWER.

 

4.1.4                        The
SECURITY AGREEMENT, duly executed on behalf of the BORROWER.

 

4.1.5                        A
financing statement or statements sufficient when filed to perfect the security
interests granted under the MORTGAGE, the ASSIGNMENT OF RENTS, the SECURITY
AGREEMENT, and the ASSIGNMENT OF DESIGN/BUILD CONTRACT, to the extent such
security interests are capable of being perfected by filing.

 

4.1.6                        A
copy of the PLANS, certified by ICM, Inc., Fagen, Inc., and the BORROWER.

 

4.1.7                        The
assignment of the DESIGN/BUILD CONTRACT, duly executed by the BORROWER and
consented to by the GENERAL CONTRACTOR and a copy of the DESIGN/BUILD CONTRACT,
together with the General Conditions of Contract referred to therein.

 

4.1.8                        A
total project cost statement on the PROJECT duly executed by the BORROWER and
the GENERAL CONTRACTOR, setting forth the anticipated total cost of the
PROJECT’s completion.

 

11

 

4.1.9                        An
ALTA (American Land Title Association) Survey
of the PROPERTY, prepared at the BORROWER’s expense, currently
certified by a licensed, registered surveyor and incorporating the legal
description of the PROPERTY, showing the location of all points and lines
referred to in the legal description, the location of any existing
improvements, the proposed location of the PROJECT (including parking) as being
within the exterior boundaries of the PROPERTY and in compliance with all
applicable building set-back requirements, and the location of all utilities
and the location of all easements and encroachments onto or from the PROPERTY
that are visible on the PROPERTY, known to the surveyor preparing the survey or
of record, identifying easements of record by recording data, and currently
certified by the surveyor that there are no such easements or encroachments upon
the PROPERTY except as shown on the survey.

 

4.1.10                  An
as built appraisal based upon the PLANS to be performed by Natwick Associates
Appraisal Services which shows the as-completed value of the PROPERTY and
PROJECT addressed to and otherwise acceptable to BANK.

 

4.1.11                  A
title binder, issued by AgStar Financial Services, (the “TITLE COMPANY”) at
BORROWER’s expense, constituting a commitment by the TITLE COMPANY to issue a
mortgagee’s title policy in favor of the BANK as mortgagee under the MORTGAGE,
that will be free from all standard exceptions, including mechanics’ liens and
all other exceptions not previously approved by the BANK and that will insure
the MORTGAGE to be a valid first lien on the PROPERTY.

 

4.1.12                  A
soil report on the PROPERTY certified by a registered engineer including
structural design recommendations in form and substance satisfactory to the
BANK. Such report shall include soil borings and geo-technical analyses.

 

4.1.13                  A
Phase I Environmental Report of the PROPERTY in form and content satisfactory
to the BANK.

 

4.1.14                  A
Flood Hazard Determination Form for the PROPERTY, confirming whether or not the
parcel is in a flood hazard area and whether or not flood insurance must be
obtained.

 

4.1.15                  Copies
of all PERMITS from the applicable regulatory agencies from whom a permit or
license is required.

 

4.1.16                  Copies
of documents from the appropriate state, federal, city or county authority
having jurisdiction over the PROPERTY and the PROJECT that provide to the
reasonable satisfaction of the BANK that the PROJECT when constructed in
accordance with the PLANS will comply in all material respects with all
applicable ordinances, zoning, subdivision, platting, environmental and land
use requirements, without special variance or exception, and such other
evidence as the BANK shall reasonably request to establish that the PROJECT and
the contemplated use thereof are permitted by and comply with all

 

12

 

applicable use or other restrictions and requirements in prior
conveyances, zoning ordinances, environmental laws and regulations, water shed
district regulations and all other applicable laws or regulations, and
governmental authorities having jurisdiction over the PROJECT. BORROWER is not
required to obtain advance confirmation from any governmental body that the
PROJECT will comply with such ordinances, regulations and requirements.

 

4.1.17                  Copies
of the policy of property/casualty insurance and comprehensive general
liability insurance and a certificate of the worker’s compensation insurance
required under Section 6.3 of this AGREEMENT, with all such insurance in
full force and effect and approved by the BANK, in the exercise of its
reasonable discretion, and naming BANK as an additional named insured, together
with appropriate flood insurance, if the PROPERTY is in a flood hazard area.
Notwithstanding the foregoing, BORROWER is not required to obtain worker’s
compensation insurance until required by Iowa law.

 

4.1.18                  A
signed opinion of counsel for the BORROWER, addressed to the BANK, opining
that: 1) the BORROWER is duly organized and in good standing in the state of
Iowa; 2) the BORROWER is qualified in each state in which it does business and
is legally required to be qualified; 3) the BORROWER has the power to execute
and deliver the LOAN DOCUMENTS and to borrow money and perform in accordance
with the terms of the LOAN DOCUMENTS; 4) to the counsel’s knowledge, all
actions and consents by BORROWER necessary to the validity of the LOAN
DOCUMENTS have been obtained; 5) the LOAN DOCUMENTS have been duly signed and
are the valid and binding obligation of the BORROWER and enforceable in
accordance with their terms; and 6) to the best of counsel’s knowledge, the
LOAN DOCUMENTS and the transactions contemplated there under do not conflict
with any provision of the operating agreement of BORROWER or any agreement
binding upon the BORROWER or its properties.

 

4.1.19                  A
Certificate of Authority executed by such person or persons authorized by the
BORROWER’s organizational documents and/or agreements to do so, certifying the
incumbency and signatures of the managers or other persons authorized to
execute the LOAN DOCUMENTS, and authorizing the execution of the LOAN DOCUMENTS
and performance in accordance with their terms.

 

4.1.20                  A
recently certified copy of the BORROWER’s Limited Partnership Agreement, and
any amendments, if applicable.

 

4.1.21                  A
recently certified copy of the BORROWER’s Certificate of Limited Partnership
and any amendments, if applicable.

 

4.1.22                  A
certificate of good standing for the BORROWER from the office of the Iowa
Secretary of State.

 

13

 

4.1.23                  Proof
of injection of equity capital into BORROWER of no less than $18,000,000.00 by
BORROWER’s partners, which may include SUBORDINATED DEBT.

 

4.1.24                  A
copy of the MARKETING CONTRACT(s), together with an assignment in favor of BANK
in form satisfactory to BANK.

 

4.1.25                  A
copy of any existing contracts for BORROWER’s natural gas, electricity and
water service.

 

4.1.26                  BORROWER
shall provide a copy of its contract with F.C. Stone, L.L.C. to provide risk
management services associated with BORROWER’s purchase of grain, together with
an assignment in favor of BANK in form satisfactory to BANK as soon as it is
executed.

 

4.1.27                  Proof
of the existence of a completion bond for the PROJECT, in form satisfactory to
BANK, including BANK as an additional beneficiary.

 

4.1.28                  A
copy of BORROWER’s contract with U.S. Energy Services.

 

4.1.29                  A
copy of BORROWER’s loan documents representing all SUBORDINATED DEBT.

 

4.1.30                  (Reserved)

 

4.1.31                  (Reserved)

 

4.1.32                  (Reserved)

 

4.1.33                  BORROWER
shall provide an assignment, in form reasonably satisfactory to BANK, of all
warranties existing at CLOSING and after CLOSING, which have been issued or
will be issued to BORROWER by subcontractors and material suppliers to the
PROJECT.

 

4.1.34                  A
copy of the lease for the land south of the railroad line on the PROPERTY
together with an assignment and attornment agreement in favor of BANK, in form
reasonably satisfactory to BANK.

 

4.2                                 Conditions
Precedent to All Disbursements.  The
obligation of the BANK to make each disbursement under the CONSTRUCTION LOAN
(including the initial disbursement) shall be subject to the further conditions
precedent that on the date of such disbursement:

 

4.2.1                        The
representations and warranties contained in Section 5 of this AGREEMENT
are correct on and as of the date of such disbursement as though made on and as
of such date, except to the extent that such representations and warranties
relate solely to an earlier date.

 

14

 

4.2.2                        No
event has occurred and is continuing, or would result from such disbursement,
which constitutes an EVENT OF DEFAULT.

 

4.2.3                        No
determination shall have been made by the BANK that the undisbursed amount of
the CONSTRUCTION LOAN is less than the amount required to pay all costs and
expenses of any kind which reasonably may be anticipated in connection with the
completion of the PROJECT; or, if such a determination has been made and notice
thereof sent to the BORROWER in accordance with this AGREEMENT, the BORROWER
shall have deposited the necessary funds with the BANK in accordance with the
Section 3.6 of this AGREEMENT.

 

4.2.4                        The
disbursement requirements of Section 3 of this AGREEMENT have been
satisfied.

 

4.2.5                        If
required by the BANK, the BANK shall be furnished with a statement from the
BORROWER and the GENERAL CONTRACTOR, in form and substance satisfactory to the
BANK, in the exercise of its reasonable discretion, setting forth the names,
addresses and amounts due or to become due, as well as the amounts previously
paid, to every SUBCONTRACTOR.

 

4.2.6                        No
PERMIT necessary for the construction of the PROJECT shall have been revoked or
the issuance thereof subjected to challenge before any court or other
governmental authority having or asserting jurisdiction as to the PROJECT.

 

4.2.7                        The
parties intend that the CONSTRUCTION LOAN is available to fund the lesser of
sixty (60%) percent of the total cost of the PROJECT, as set forth in the final
version of the Sources and Uses of Funds document furnished to BANK by BORROWER
prior to Closing, or $31,465,000.00. No advances or disbursements under the
CONSTRUCTION LOAN shall exceed such levels, unless BANK consents in writing to
the same.

 

4.3                                 Conditions
Precedent to the Final Disbursements. 
The obligation of the BANK to make the final disbursement shall be
subject to the condition precedent that the BORROWER shall be in compliance
with all conditions set forth in Sections 4.1 and 4.2 of this AGREEMENT and,
further, that the following conditions shall have been satisfied prior to the
COMPLETION DATE:

 

4.3.1                        The
PROJECT has been completed in accordance with the PLANS and the BANK shall have
received a certificate of completion from the GENERAL CONTRACTOR, certifying
that (i) work on the PROJECT has been completed in accordance with the PLANS
and all labor, services, materials and supplies used in such work have been
paid for and (ii) the completed PROJECT conforms with all applicable zoning,
land use planning, building and environmental laws and regulations of the
governmental authorities having jurisdiction over the PROJECT.

 

15

 

4.3.2                        The
BANK has received satisfactory evidence that all work requiring inspection by
municipal or other governmental authorities having jurisdiction has been duly
inspected and approved by such authorities and by the rating or inspection
organization, bureau, corporation or office having jurisdiction.

 

4.3.3                        The
BANK shall have received a lien waiver from each SUBCONTRACTOR and the GENERAL
CONTRACTOR for all work done and for all materials furnished by it for the
PROJECT.

 

4.3.4                        The
BANK has received an itemized list from BORROWER of all equipment and fixtures
which are at that time subject to BANK’s security interest.

 

4.4                                 No
Waiver.  The making of any
disbursement under the CONSTRUCTION LOAN prior to fulfillment of any condition
thereto shall not be construed as a wavier of such condition, and the BANK
reserves the right to require fulfillment of any and all such conditions prior
to making any subsequent disbursements under the CONSTRUCTION LOAN.

 

SECTION 5 Representations and Warranties.

 

To induce the BANK to enter into this AGREEMENT, the BORROWER makes the
following representations and warranties and agrees that each DRAW REQUEST
constitutes a reaffirmation of these representations and warranties:

 

5.1                                 Existence
and Power.  The BORROWER is a
limited partnership duly formed and in good standing under the laws of the
State of Iowa. The BORROWER has accomplished all necessary actions required by
a limited partnership under applicable law to own the PROPERTY and construct
the PROJECT, and to execute and deliver, and to perform all of its obligations
under the LOAN DOCUMENTS.

 

5.2                                 Authorization
of Borrowing; No Conflict as to Law or Other Agreements.  The execution, delivery and performance by
the BORROWER of the LOAN DOCUMENTS and the borrowings from time to time
hereunder have been duly authorized by all necessary partnership actions of the
BORROWER and do not and will not (a) require any material consent or approval,
or authorization, by any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, (b) violate, in any material
respect, any provision of any law, rule or regulation or of any order, writ,
injunction or decree presently in effect having applicability to the BORROWER,
or violate any provision of the limited partnership agreement of the BORROWER,
(c) result in a breach of or constitute a default beyond any applicable cure
period under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the BORROWER is a party or by which it or its properties
may be bound or affected, or (d) result in, or require, the creation or
imposition of any mortgage, deed of trust, pledge, lien, security interest or
other charge or encumbrance of any nature to or with any other creditor of the
BORROWER, in the aggregate

 

16

 

exceeding $100,000.00, upon or with respect to any of the properties
now owned or hereafter acquired by the BORROWER.

 

5.3                                 Legal
Agreements.  The LOAN DOCUMENTS
constitute the legal, valid and binding obligations of the BORROWER enforceable
against the BORROWER in accordance with their respective terms.

 

5.4                                 License
and Permits.  The BORROWER has all
necessary PERMITS required for construction and operation of the PROJECT except
those which cannot be obtained until completion of the PROJECT.

 

5.5                                 Construction
of the PROJECT.  The PROJECT will be
constructed in material compliance with the PLANS; except for the pipeline
servicing the PROJECT which will be will be primarily on the property north of the
PROPERTY and will be subject to an easement benefiting BORROWER, the PROJECT
will be constructed entirely on the PROPERTY; and will not encroach upon or
overhang any easement or right-of-way on land not constituting part of the
PROPERTY. The PROJECT, both during construction and on COMPLETION DATE, and the
contemplated use thereof, will not violate in any material respect, any
applicable zoning or use statute, ordinance, building code, rule or regulation,
or any covenant or agreement of record. The BORROWER agrees that it will
furnish from time to time such satisfactory evidence with respect thereto as
may be required by the BANK.

 

5.6                                 Title
to the PROPERTY.  The BORROWER has
good and marketable fee simple title to the PROPERTY, subject to the limitations
described in 4.1.11, above.

 

5.7                                 Financial
Condition.  The BORROWER has
furnished to the BANK its compiled cash flow projection of the BORROWER for the
initial three years of operation, which were contained in BORROWER’s business
plan dated May 10, 2002, as amended May 13, 2002. This financial
statement fairly presents the projected financial condition of the BORROWER on
the dates thereof, and was prepared in accordance with GAAP. There has been no
material adverse change in the operations, properties or condition (financial
or otherwise) of the BORROWER since the date of the financial statement
referred to above and no additional borrowings have been made by the BORROWER
other than the borrowing contemplated hereby or approved by the BANK. The
above-referenced financial statement or any certificate or statement furnished
to the BANK by or on behalf of the BORROWER in connection with the transactions
contemplated hereby, and the representations and warranties in this AGREEMENT,
do not contain any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements contained therein or
herein not misleading. To the best of the knowledge of the BORROWER, there is
no fact which materially adversely affects or in the future (so far as the
BORROWER can now foresee) may materially adversely affect the operation or
prospects or condition (financial or other) of the BORROWER or its properties
or assets, which has not been set forth herein or in a certificate or statement
furnished to the BANK by the BORROWER.

 

17

 

5.8                                 Litigation.  There are no actions, suits or proceedings
pending or, to the knowledge of the BORROWER, threatened against or affecting
the BORROWER or the properties of the BORROWER before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which, if determined adversely to the BORROWER, would have a material
adverse effect on the financial condition, properties, or operations of the
BORROWER.

 

5.9                                 Taxes.  The BORROWER has paid or caused to be paid
to the proper authorities when due all federal, state and local taxes,
including taxes on the PROPERTY, required to be paid or withheld by it. The
BORROWER has filed all federal, state and local tax returns which to the
knowledge of the BORROWER are required to be filed, and the BORROWER has paid
or caused to be paid to the respective taxing authorities all taxes as shown on
said returns or on any assessment received by it to the extent such taxes have
become due.

 

5.10                           No
Default.  There is no event which
is, or with notice or the lapse of time would be, an EVENT OF DEFAULT under
this AGREEMENT.

 

5.11                           ERISA.  The BORROWER is in compliance in all
material respects with the Employee Retirement Income Security Act of 1974, as
amended, and has received no notice to the contrary from the Internal Revenue
Service, the Department of Labor, the Pension Benefit Guaranty Corporation or
any other governmental entity or notice of any claims or pending claims under
ERISA.

 

5.12                           Environmental
Matters.  Except as set forth in the
Phase I Environmental Report referenced in Section 4.1 of this AGREEMENT:
1) the BORROWER is in compliance in all material respects with all health and environmental
laws applicable to the BORROWER and its operations and knows of no conditions
or circumstances that could materially interfere with such compliance in the
future; 2) except for PERMITS that cannot be obtained until completion of the
PROJECT, the BORROWER has obtained all PERMITS, and approvals required by law
for the operation of its business; and 3) the BORROWER has not identified any
“recognized environmental conditions,” as that term is defined by the American
Society for Testing and Materials in its standards for environmental due
diligence, which could subject the BORROWER to enforcement action if brought to
the attention of appropriate governmental authorities.

 

5.13                           Necessary
Utilities, Etc.  BORROWER has made
suitable arrangements so that the PROJECT has all necessary electrical, gas,
water, and sewer facilities in place for the proper construction and operation
of its ethanol plant. BORROWER has made adequate provision for all storage
facilities, equipment and product supplies, including corn, as specified by its
engineers for the maximum output and operation of the plant.

 

18

 

SECTION 6 Additional Covenants of the BORROWER.

 

6.1                                 Financial
Information and Reporting.  Except
as otherwise stated in this AGREEMENT, all financial information provided to
the BANK shall be compiled using GAAP consistently applied. During the time
period that any amounts are outstanding under the CONSTRUCTION NOTE or this
AGREEMENT or the LOAN DOCUMENTS, unless the BANK shall otherwise agree in
writing:

 

6.1.1                        Annual
Financial Statements. BORROWER shall provide the BANK within 120 days of the
BORROWER’s fiscal year end, the BORROWER’s consolidated, annual financial
statements. The statements must be audited with an unqualified opinion by a
certified public accountant reasonably acceptable to the BANK, with such
opinion directed both to BORROWER and to BANK, and must be accompanied by a
certificate of such accountants stating whether, in conducting their audit,
they have become aware of any event of default under this AGREEMENT, or of any
event which would, after the lapse of time or the giving of notice, or both,
constitute an EVENT OF DEFAULT, specifying the nature and duration of the
default. Such audit statement shall be accompanied by the accountants’
calculations of BORROWER’s compliance with the covenants contained in
Section 6.2 of this AGREEMENT as of the said fiscal year end.

 

6.1.2                        The
BORROWER will furnish to the BANK within 30 days after the end of each calendar
month, consolidated financial statements of the BORROWER for such period and
year to date all in reasonable detail.

 

6.1.3                        BORROWER
will deliver to BANK each quarter, within thirty days of each calendar quarter
end, a certificate in the form of Exhibit D that has been signed by an officer
or manager of BORROWER, which: 1) certifies that the statements required by
section 6.1.1 and 6.1.2 have been accurately prepared in accordance with
GAAP applied consistently; 2) certifies that the manager has no knowledge of
any EVENT OF DEFAULT under this AGREEMENT or the LOAN DOCUMENTS, or of any
event which would, after the lapse of time or the giving of notice, or both,
constitute an event of default under this AGREEMENT or the LOAN DOCUMENTS.

 

6.1.4                        BORROWER
will deliver to BANK each month, within thirty days of each month end, a
monthly Production Report, in form acceptable to BANK, reporting for such month
BORROWER’s Input and Output amounts of Corn Usage, Natural Gas Usage, DDGs
Output, Ethanol Output, and if applicable, CO2 Output.

 

6.1.5                        BORROWER
shall immediately notify BANK of the existence of any EVENT OF DEFAULT.

 

6.1.6                        BORROWER
shall authorize all federal, state and municipal authorities to furnish reports
of examinations, records and other information relating to the condition and
affairs of

 

19

 

the BORROWER and its ethanol plant, and any information from reports,
returns, files and records by such authorities regarding BORROWER upon request
to the BANK.

 

6.1.7                        The
BORROWER will give the BANK prompt written notice of any material violation as
to any environmental matter by the BORROWER and, of the commencement of any
judicial or administrative proceeding relating to health, safety or
environmental matters (i) in which an adverse determination or result could
result in the revocation of or have a material adverse effect on any PERMITS
held by the BORROWER which are material to the operations of the BORROWER, and
(ii) which will or threatens to impose a material liability on the BORROWER to
any person or party or which will require a material expenditure by the
BORROWER to cure any alleged problem or violation.

 

6.1.8                        The
BORROWER will give immediate notice to the BANK of (i) any litigation or
proceeding in which it is a party if an adverse decision therein would require
it to pay more than $100,000.00 or deliver assets the value of which exceeds
such sum (whether or not the claim is considered to be covered by insurance);
and (ii) the institution of any other suit or proceeding involving it that
might materially and adversely affect its operations, financial condition,
property, or business prospects.

 

6.1.9                        BORROWER
shall provide monthly borrowing base certificates in the form of Exhibit E,
calculating advance rates under the REVOLVING LOAN pursuant to the BORROWING
BASE beginning the fourth month following COMPLETION DATE.

 

6.1.10                  The
BORROWER will provide the BANK, no later than thirty (30) days prior to
COMPLETION DATE, proof of retention by BORROWER of a plant manager with
previous experience managing an ethanol plant.

 

6.1.11                  The
BORROWER will provide the BANK with such other information as it may reasonably
request.

 

6.2                                 Financial
Covenants.  At all times that any
amounts are outstanding under the CONSTRUCTION NOTE, the TERM NOTE, or this
AGREEMENT or the LOAN DOCUMENTS, unless the BANK shall otherwise agree in
writing, the BORROWER agrees to comply with the financial covenants described
below, which shall be calculated using GAAP consistently applied, except as
they may be otherwise modified by the capitalized definitions:

 

6.2.1                        The
BORROWER shall maintain a FIXED CHARGE COVERAGE RATIO, measured quarterly, of
no less than 1.25 : 1.0, for all periods following COMPLETION DATE.

 

6.2.2                        The
BORROWER shall maintain a NET WORTH of not less than (i) $19,000,000.00 at all
times after COMPLETION DATE and (ii) $19,000,000.00 plus an amount each fiscal

 

20

 

year equal to the greater of (a) $250,000.00 or (b) the amount of
undistributed earnings during the current fiscal year, at all times subsequent
thereto.

 

6.2.3                        The
BORROWER shall determine, at each fiscal year end, the amount of its EXCESS
CASH FLOW for said fiscal year, and within one hundred twenty days following such
fiscal year end, pay twenty percent (20%) of such sum to BANK, to be applied to
the principal amount of the CONSTRUCTION LOAN or the TERM LOAN, as applicable.
Such annual payment shall not release BORROWER from making any payment of
principal or interest otherwise required by the CONSTRUCTION NOTE or TERM NOTE.
No payment of EXCESS CASH FLOW shall be the cause of a payment to BANK for
interest rate breakage fees or otherwise result in any prepayment penalty.

 

6.2.4                        BORROWER
shall maintain, at all times subsequent to COMPLETION DATE and measured at
fiscal year end, minimum WORKING CAPITAL of $1,000,000.00 during the first year
of operations, measured beginning at the end of the third month following
COMPLETION DATE, minimum WORKING CAPITAL of $1,500,000 during months thirteen
(13) through twenty-four (24) following COMPLETION DATE, and minimum WORKING
CAPITAL of $2,000,000.00 thereafter.

 

6.3                                 Affirmative
Covenants.  During the time period
that any amounts are outstanding under the CONSTRUCTION NOTE, TERM NOTE,
REVOLVING NOTE, this AGREEMENT or the LOAN DOCUMENTS, unless the BANK shall
otherwise agree in writing the BORROWER shall:

 

6.3.1                        Diligently
proceed with construction of the PROJECT according to the PLANS and in
accordance with all applicable laws and ordinances, and complete the PROJECT by
the COMPLETION DATE.

 

6.3.2                        Use
the proceeds of each of the disbursements under the CONSTRUCTION LOAN solely
for the purposes set forth in this AGREEMENT.

 

6.3.3                        Use
its best efforts to require the GENERAL CONTRACTOR and each SUBCONTRACTOR to
comply with all rules, regulations, ordinances and laws bearing on its conduct
of work on the PROJECT.

 

6.3.4                        Provide
and maintain at all times during the process of building the PROJECT and, from
time to time at the request of the BANK, furnish the BANK with proof of payment
of premiums on:

 

(i)                                     Builders’
Risk completed value form insurance insuring the PROJECT against all risks,
including flood, earthquake, and mechanical and electrical breakdown including
testing to the full value of the PROJECT (subject to reasonable loss deductible
provisions). The BANK’s interest shall be protected by naming the BANK as
additional named insured;

 

21

 

(ii)                                  Commercial
General Liability insurance (including products and completed operations,
operations of subcontractors, and contractual liability insurance) with limits
reasonably acceptable to BANK;

 

(iii)                               Worker’s
compensation insurance, with statutory limits, and Employer’s Liability
coverage with a $500,000.00 limit.

 

(iv)                              Business
automobile liability insurance insuring all vehicles on the site, including
hired and non-owned liability.

 

(v)                                 Environmental
coverage shall be provided for clean-up and removal once the Project becomes
operational, but only insofar as it is required by BANK.

 

The policies of insurance required pursuant to clauses (i) and (ii)
above shall be in form and content satisfactory to the BANK and shall be placed
with financially sound and reputable insurers. The policy of insurance referred
to in clause (i) above shall contain an agreement of the insurer to give not
less than thirty (30) days’ advance written notice to the BANK in the event of
cancellation of such policy or change affecting the coverage there under.
Acceptance of insurance policies referred to in clauses (i) and (ii) above
shall not bar the BANK from requiring additional insurance which it reasonably
deems necessary.

 

6.3.5                        Assign
to BANK, in form acceptable to BANK, all equipment and systems warranties
relating to the PROJECT, together with all contracts for natural gas,
electricity, water and other utilities, as the same are obtained by BORROWER
following CLOSING.

 

6.3.6                        Maintain
accurate and complete books, accounts and records pertaining to the PROPERTY
and the PROJECT and its ongoing and continuing operations in form and substance
reasonably satisfactory to the BANK. The BORROWER will permit the BANK, acting
by and through its officers and employees, to examine upon reasonable notice
all books, records, contracts, plans, drawings, PERMITS, bills and statements
of account pertaining to the PROJECT and to inspect upon reasonable notice all
books and records pertaining to its operations and to make extracts there from
and copies thereof.

 

6.3.7                        Cause
to be paid to the proper authorities when due all federal, state and local
taxes, including taxes on the PROPERTY, required to be paid or withheld by it
except those which the BORROWER is contesting in good faith and with respect to
which adequate reserves have been set aside.

 

6.3.8                        Allow
the BANK and its participants upon reasonable notice to conduct such
inspections of the PROJECT and BORROWER’s personal property subject to the
BANK’s security interest as the BANK may deem necessary for the protection of
the BANK’s interest.

 

22

 

Provided, however, such inspections shall occur during regular business
hours, or such other time as the BORROWER and BANK may agree, and shall not
unreasonably interfere with BORROWER’s business operations. Any such
inspections shall be made and any certificates issued are solely for the
benefit and protection of the BANK, and the BORROWER shall not be entitled to
rely thereon.

 

6.3.9                        Make
all repairs, renewals or replacements necessary to keep its plant, properties
and equipment in good working condition.

 

6.3.10                  Comply
in all material respects with all laws applicable to its form of organization,
business, and the ownership of its property.

 

6.3.11                  Maintain
and preserve all PERMITS, licenses, rights, privileges, charters and franchises
that it is required to hold to construct and operate the PROJECT.

 

6.3.12                  Observe
and comply with all laws, rules, regulations and orders of any government or
government agency relating to health, safety, pollution, hazardous materials or
other environmental matters to the extent non-compliance could result in a
material liability or otherwise have a material adverse effect on the BORROWER.

 

6.3.13                  Maintain
all depository accounts (including those accounts containing BORROWER’s equity
capital) at BANK, other than local operating accounts approved by BANK.

 

6.3.14                  Pay
to BANK, for application to the OBLIGATIONS, in addition to regularly scheduled
payments of principal and interest, all state and federal incentive payments,
less any amounts not to exceed 60% of such incentive payments which may be used
by BORROWER to make distributions to its partners. This 60% distribution shall
be based on the lesser of the previous fiscal year’s earnings or the total of
all previous fiscal year’s state and federal incentive payments. Provided,
however, the payments required by paragraph 6.2.3, above, and this paragraph
6.3.14, shall in no event exceed in the aggregate Three Million ($3,000,000.00)
Dollars in any fiscal year.

 

6.4                                 Negative
Covenants.  During the time period
that any amounts are outstanding under the CONSTRUCTION NOTE or this AGREEMENT
or the LOAN DOCUMENTS, unless the BANK shall otherwise agree in writing the
BORROWER shall not:

 

6.4.1                        Permit
any security interest or mortgage or lien on the PROPERTY or PROJECT or other
real or personal property BORROWER owns now or in the future, or assign any
interest that it may have in any assets or subordinate any rights that it may
have in any assets now or in the future, except: (i) liens, assignments, or
subordinations in favor of the BANK; (ii) liens, assignments, or subordinations
outstanding on the date of this AGREEMENT and disclosed in advance to the BANK
in writing and approved by the BANK; (iii) liens for taxes

 

23

 

or assessments or other governmental charges not delinquent or which
the BORROWER is contesting in good faith; (iv) liens which secure purchase
money indebtedness allowed under this AGREEMENT; (v) liens that are imposed by
law for obligations for labor or materials not overdue for more than 120 days,
such as mechanics’, materialmen’s, carriers’, landlords’, and warehousemen’s
liens, or liens, pledges, or deposits under workers’ compensation, unemployment
insurance, Social Security, or similar legislation.

 

6.4.2                        Agree
or consent to any changes in the PLANS, any changes in the terms and provisions
of the DESIGN/BUILD CONTRACT or any of the contracts specifically identified in
Section 4 of this AGREEMENT, or, following execution of this AGREEMENT, to
any one change order in an amount exceeding $50,000.00, or all change orders
when combined exceeding $100,000.00.

 

6.4.3                        Incorporate
in the PROJECT any materials, fixtures or property which are subject to the
claims of any other person, whether pursuant to conditional sales contract,
security agreement, lease, mortgage.

 

6.4.4                        Lease,
sell, transfer, convey, assign, or otherwise transfer all or any part of the
interest of the BORROWER in the PROJECT or the PROPERTY.

 

6.4.5                        Permit,
cause or suffer any material change in the management of its general partner or
any change, direct or indirect, of its capital ownership.

 

6.4.6                        Cause
or suffer any change in its general plant manager without BANK’s approval,
which will not unreasonably be withheld.

 

6.4.7                        Engage
in any line of business materially different from that presently engaged in by
the BORROWER.

 

6.4.8                        Except
for an election to become a limited liability limited partnership, change its
legal form of organization.

 

6.4.9                        Make
any material changes in its accounting procedures for tax or other purposes.

 

6.4.10                  Incur
any INDEBTEDNESS except: (1) debt arising under this or another agreement with
the BANK; (ii) trade credit incurred in the ordinary course of business; (iii)
indebtedness in existence on the date of this AGREEMENT and disclosed in
advance to the BANK in writing, and (iv) indebtedness set forth on Exhibit
6.4.10, attached hereto and by this reference made a part hereof. BORROWER
shall not borrow other than pursuant to this AGREEMENT, without permission of
the BANK.

 

6.4.11                  Consolidate,
or merge or pool or syndicate or otherwise combine with any other entity, or
give any preferential treatment, make any advance, directly or indirectly, by
way of

 

24

 

loan, gift, bonus, or otherwise, to any entity directly or indirectly
controlling or affiliated with or controlled by BORROWER, or any other entity,
or to any partner or employee of BORROWER, or of any such entity.

 

6.4.12                  Make,
or commit to make, capital expenditures (including the total amount of any
capital leases, but excluding BANK approved plant construction) in an aggregate
amount exceeding $500,000.00 in any single fiscal year.

 

6.4.13                  Make
or pay, without the written consent of BANK, which written consent will not be
unreasonably withheld, in any fiscal year, distributions to partners of the
BORROWER in excess of 65% of the previous fiscal year’s net income excluding
state or federal incentive payments, or which would result in the BORROWER at
the time of such distribution not being in compliance with any of the covenants
set forth in this AGREEMENT after payment of such distribution. The foregoing
restriction shall not limit the distributions of state and federal incentive
payments to partners of BORROWER pursuant to the terms of Section 6.3.14.
Any such distributions shall be made only once per fiscal year, and only after
receipt by BANK of BORROWER’s annual audited financial statements and
compliance statements as required herein, and if no EVENT OF DEFAULT has
occurred or is continuing. BANK and BORROWER agree to negotiate, on an annual
basis, the potential change of such limitation.

 

6.4.14                  Assume,
guarantee, endorse or otherwise becoming contingently liable for any
obligations of any other person, except for those guaranties outstanding at the
time of execution of this AGREEMENT and disclosed to the BANK in writing.

 

6.4.15                  Make
sales to or purchases from any affiliate of the BORROWER or extend creditor
make payments for services rendered by any affiliate of the BORROWER, except
under the MARKETING CONTRACT, unless such sales or purchases are made or such
services are rendered in the ordinary course of business and on terms and
conditions at least as favorable to the BORROWER as the terms and conditions
which would apply in a similar transaction with a person or party not an
affiliate of the BORROWER.

 

6.4.16                  Sell
or dispose of all or substantially all its assets.

 

SECTION 7 EVENTS OF DEFAULT, Rights and Remedies.

 

7.1                                 EVENTS
OF DEFAULT. Each of the following shall be an EVENT OF DEFAULT and give the
BANK the right to exercise its remedies under this AGREEMENT:

 

7.1.1                        The
BORROWER shall fail to pay when due any OBLIGATIONS or any other installment of
principal or interest or fee payable to BANK.

 

7.1.2                        The
BORROWER shall fail to observe or perform any other obligation to be

 

25

 

observed or performed by it hereunder or under any of the LOAN
DOCUMENTS.

 

7.1.3                        The
BORROWER shall fail to pay any INDEBTEDNESS due any third persons, and such
failure shall continue beyond any applicable grace period, or the BORROWER
shall suffer to exist any other default under any material agreement binding
the BORROWER, and such default shall continue beyond any applicable grace
period.

 

7.1.4                        Any
financial statement, representation, warranty, or certificate made or furnished
by or with respect to the BORROWER to the BANK in connection with this
AGREEMENT, or as an inducement to the BANK to enter into this AGREEMENT, or in
any separate statement or document to be delivered to the BANK hereunder, shall
be materially false, incorrect, or incomplete when made.

 

7.1.5                        The
BORROWER shall admit its inability to pay its debts as they mature or shall make
an assignment for the benefit of itself or any of its creditors.

 

7.1.6                        Proceedings
in bankruptcy, or for reorganization of the BORROWER, or for the readjustment
of debt under the Bankruptcy Code, as amended, or any part thereof, or under
any other laws, whether state or federal, for the relief of debtors, now or
hereafter existing, shall be commenced against or by the BORROWER and, except
with respect to any such proceedings instituted by the BORROWER, shall not be
discharged within sixty (60) days of their commencement.

 

7.1.7                        A
receiver or trustee shall be appointed for the BORROWER or for any substantial
part of its respective assets, or any proceedings shall be instituted for the
dissolution or the full or partial liquidation of the BORROWER, and except with
respect to any such appointments requested or instituted by the BORROWER, such
receiver or trustee shall not be discharged within sixty (60) days of his
appointment, and except with respect to any such proceedings instituted by the
BORROWER, such proceedings shall not be discharged within sixty (60) days of
their commencement, or the BORROWER shall discontinue business or materially
change the nature of its business.

 

7.1.8                        The
BORROWER shall suffer final judgments for payment of money aggregating in
excess of $100,000.00 which are not covered, without reservation, by insurance
or shall not discharge the same within a period of thirty (30) days unless,
pending further proceedings, execution has not been commenced or, if commenced,
has been effectively stayed.

 

7.1.9                        A
judgment creditor of the BORROWER shall obtain possession of any of BANK’s
collateral by any means, including (without implied limitation) levy,
distraint, replevin, or self-help.

 

26

 

7.1.10                  The
construction of the PROJECT is abandoned or shall be unreasonably delayed or be
discontinued for a period of fifteen (15) consecutive calendar days, in each
instance for reasons other than acts of God, fire, storm, strikes, blackouts,
labor difficulties, riots, inability to obtain materials, equipment or labor,
governmental restrictions or any similar cause over which the BORROWER is
unable to exercise control.

 

7.1.11                  The
BORROWER at any time prior to the completion of the PROJECT, shall delay construction
or suffer construction to be delayed for any period of time, for any reason
whatsoever, so that the completion of the PROJECT cannot be accomplished, in
the reasonable judgment of the BANK, by the COMPLETION DATE.

 

7.1.12                  The
PROJECT is materially damaged or destroyed by fire or other casualty and the
loss, in the reasonable judgment of the BANK, is not adequately covered by
insurance actually collected or in the process of collection.

 

7.1.13                  Fagen,
Inc. shall cease to be the GENERAL CONTRACTOR and BORROWER has not replaced the
GENERAL CONTRACTOR, within thirty (30) days following the termination of the
same to the satisfaction of BANK, which BANK approval shall not be unreasonably
withheld.

 

7.1.14                  Minnesota
Corn Processors, LLC, or Commodity Specialists Co., or their permitted
assignees shall cease to be the marketing agents of BORROWER as to sale of its
products, and BORROWER has not within thirty (30) days following termination of
either hired a replacement to the BANK’s satisfaction, which BANK approval will
not be unreasonably withheld.

 

7.2                                 Rights
and Remedies.  Upon the occurrence
of an EVENT OF DEFAULT and at any time thereafter, the BANK may refrain from
making any further disbursements hereunder (but the BANK may make disbursements
after the occurrence of such an EVENT OF DEFAULT without thereby waiving its
rights and remedies hereunder), and upon the occurrence of an EVENT OF DEFAULT
or at any time thereafter, the BANK may exercise any or all of the following
rights and remedies:

 

7.2.1                        The
BANK may declare the CONSTRUCTION LOAN to be terminated, whereupon the same
shall forthwith terminate.

 

7.2.2                        The
BANK may declare the entire unpaid principal amount of the CONSTRUCTION NOTE
then outstanding, all interest accrued and unpaid thereon, and all other
amounts payable under this AGREEMENT to be forthwith due and payable, whereupon
the CONSTRUCTION NOTE, all such accrued interest and all such amounts shall
become and be forthwith due and payable, without presentment, demand, protest
or further notice of any kind, all of which are hereby expressly waived by the
BORROWER.

 

27

 

7.2.3                        The
BANK may exercise and enforce its rights and remedies under any or all of the
LOAN DOCUMENTS.

 

7.2.4                        The
BANK may enter upon the PROPERTY, if allowed under applicable law, and take
possession thereof, together with the PROJECT then in the course of
construction, and proceed either in its own name or in the name of the
BORROWER, as the attorney-in-fact of the BORROWER (which authority is coupled
with an interest and is irrevocable by the BORROWER) to complete or cause to be
completed the PROJECT, at the cost and expense of the BORROWER. If the BANK
elects to complete or cause to be completed the PROJECT, it may do so according
to the PLANS or according to such changes, alterations or modifications in and
to the PLANS as the BANK may deem reasonable and appropriate; and the BANK may
enforce or cancel all contracts let by the BORROWER relating to construction of
the project, and/or let other contracts which in the BANK’s sole judgment may
seem advisable; and the BORROWER shall forthwith turn over and duly assign to
the BANK, as the BANK may from time to time require, contracts not already
assigned to the BANK relating to construction of the PROJECT, blueprints, shop
drawings, bonds, building permits, bills and statements of accounts pertaining
to the PROJECT, whether paid or not, and any other instruments or records in
the possession of the BORROWER pertaining to the PROJECT. The BORROWER shall be
liable under this AGREEMENT to pay to the BANK, on demand, any amount or
amounts reasonably expended by the BANK in so completing the PROJECT, together
with any reasonable costs, charges, or expenses incident thereto or resulting there
from, all of which shall be secured by the LOAN DOCUMENTS. In the event that a
proceeding is instituted against the BORROWER for recovery and reimbursement of
any moneys expended by the BANK in connection with the completion of the
PROJECT, a statement of such expenditures, verified by the affidavit of an
officer of the BANK, shall be prima facie evidence of the amounts so expended
and of the propriety of the necessity for such expenditures; and the burden of
proving to the contrary shall be upon the BORROWER. The BANK shall have the
right to apply any funds which it agrees to disburse hereunder to bring about
the completion of the PROJECT and to pay the costs thereof; and if such money
so agreed to be disbursed is insufficient, in the sole judgment of the BANK, to
complete the PROJECT, the BORROWER agrees to promptly deliver and pay to the
BANK such sum or sums of money as the BANK may from time to time demand for the
purpose of completing the PROJECT or of paying any liability, charge or expense
which may have been incurred or assumed by the BANK under or in performance of
this AGREEMENT, or for the purpose of completing the PROJECT. It is expressly
understood and agreed that in no event shall the BANK be obligated, or liable
in any way to complete the PROJECT or to pay for the costs of construction
thereof beyond the amount of the CONSTRUCTION LOAN.

 

7.2.5                        The
BANK may exercise any other rights and remedies available to it by law or
agreement.

 

28

 

SECTION 8 Miscellaneous.

 

8.1                                 Inspections.  The BORROWER and the GENERAL CONTRACTOR
shall be responsible for making inspections of the PROJECT during the course of
construction and shall determine to their own satisfaction that the work done
or materials supplied by the GENERAL CONTRACTOR or any SUBCONTRACTOR to whom
payment is to be made out of each disbursement has been properly done or
supplied in accordance with the DESIGN/BUILD CONTRACT. If any work done or
materials supplied by the GENERAL CONTRACTOR or any SUBCONTRACTOR are not
satisfactory to the BORROWER and/or its GENERAL CONTRACTOR and the same is not
remedied within fifteen days of the discovery thereof, the BORROWER will
immediately notify the BANK in writing of such fact. It is expressly understood
and agreed that the BANK and any party designated by the BANK may conduct such
inspections of the PROJECT, subject to the limitations expressed in this
AGREEMENT, as BANK may deem necessary for the protection of the BANK’s
interest, and that any inspections which may be made of the PROJECT by the BANK
will be made, solely for the benefit and protection of the BANK, and that the
BORROWER will not rely thereon.

 

8.2                                 Indemnification
by the BORROWER.  The BORROWER shall
bear all loss, expense (including reasonable attorneys’ fees) and damage in
connection with, and agrees to indemnify and hold harmless the BANK, its
agents, servants and employees from, all claims, demands and judgments made or
recovered against the BANK, its agents, servants and employees, because of
bodily injuries, including death at any time resulting there from, and/or
because of damages to property (including loss of use) from any cause
whatsoever, arising out of, incidental to, or in connection with the
construction of the PROJECT, whether or not due to any act of omission or
commission, including negligence of the BORROWER or the GENERAL CONTRACTOR or
of his or their employees, servants or agents, other than gross negligence or
willful misconduct of BANK or its agents. The BORROWER’s liability hereunder
shall not be limited to the extent of insurance carried by or provided by the
BORROWER or subject to any exclusions from coverage in any insurance policy.
The obligations of the BORROWER under this Section shall survive the
payment of the CONSTRUCTION NOTE.

 

8.3                                 No
Waiver; Cumulative Remedies.  No
failure or delay on the part of the BANK in exercising any right, power or
remedy under the LOAN DOCUMENTS shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy under the LOAN DOCUMENTS. The remedies provided in the LOAN DOCUMENTS
are cumulative and not exclusive of any remedies provided by law.

 

8.4                                 Amendments,
Etc.  No amendment, modification,
termination or waiver of any provision of any of the LOAN DOCUMENTS or consent
to any departure by the BORROWER there from shall be effective unless the same
shall be in writing and signed by the BANK and the BORROWER, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the BORROWER in any
case shall entitle the BORROWER to any other or further notice or demand in
similar or other circumstances.

 

29

 

8.7                                 Addresses
for Notices, Etc.  Except as
otherwise expressly provided herein, all notices, requests, demands and other
communications provided for under the LOAN DOCUMENTS shall be in writing and
mailed or delivered to the applicable party at its address indicated below:

 

	
  If to the BORROWER:

  	
  LSCP, L.P. (d/b/a Little Sioux Corn Processors, L.P.)

  4808 F Avenue

  Marcus, Iowa 50135

  Attn:  Daryl J. Haack

  
	
   

  	
   

  
	
   

  	
   

  
	
  If to the BANK:

  	
  First National Bank of Omaha

  1620 Dodge St. STOP 1050

  Omaha, NE 68197-1050

  Attention:  Brian Thome

  

 

or, as to each party, at such other address as shall be designated by
such party in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall, when mailed, be effective when deposited in the mails,
addressed as aforesaid, except that notices or requests to the BANK pursuant to
any of the provisions hereunder shall not be effective until received by the
BANK.

 

8.8                                 Time
of Essence.  Time is of the essence
in the performance of this AGREEMENT.

 

8.9                                 Execution
in Counterparts.  The LOAN DOCUMENTS
may be executed in any number of counterparts, each of which when so executed
and delivered shall be deemed to be an original and all of which counterparts
of each instrument or agreement, taken together, shall constitute but one and
the same instrument.

 

8.10                           Binding
Effect, Assignment.  The LOAN
DOCUMENTS shall be binding upon and inure to the benefit of the BORROWER and
the BANK and their respective successors and assigns, except that the BORROWER
shall not have the right to assign its rights there under or any interest
therein without the prior written consent of the BANK.

 

8.11                           Governing
Law.  The LOAN DOCUMENTS shall be
governed by, and construed in accordance with, the laws of the State of
Nebraska.

 

8.12                           Severability
of Provisions.  Any provision of
this AGREEMENT which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.

 

8.13                           Headings.  Section headings in this AGREEMENT are
included herein for convenience of reference only and shall not constitute a
part of this AGREEMENT for any other purpose.

 

30

 

8.14                           Integration.  This AGREEMENT supersedes, replaces and
terminates any prior oral offers, negotiations, understandings or agreements
and any commitment letters or similar writings relating to any of the matters
contemplated herein.

 

8.15                           Participations.  Notwithstanding any other provision of this
AGREEMENT, the BORROWER understands that the BANK may enter into participation
agreements with other lenders whereby the BANK will allocate a certain
percentage of the CONSTRUCTION LOAN to them. The BORROWER specifically permits
and authorizes the BANK to exchange financial information about the BORROWER
with actual or potential participants. The BORROWER acknowledges that, for the
convenience of all parties, this AGREEMENT is being entered into with the BANK
only and that its obligations under this AGREEMENT are undertaken for the
benefit of, and as an inducement to, each of the Participating Lenders as well
as the BANK, and the BORROWER hereby grants to each of the Participating
Lenders to the extent of its participation in the CONSTRUCTION LOAN, the right
to set off deposit accounts maintained by the BORROWER with such BANK. The
BORROWER understands that the terms of such participation agreements with any
of the participants will limit the BANK’s rights to amend, waive or modify the
terms and conditions of this AGREEMENT without the express written consent of
all or a designated percentage of such participants.

 

IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be
executed by their respective officers or managers thereunto duly authorized, as
of the date first above written.

 

	
  LSCP, L.P.

  	
   

  	
  First National Bank of Omaha

  
	
  by Little Sioux Corn Processors, L.L.C.

  Its general partner

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Daryl J. Haack

  	
   

  	
  By:

  	
    /s/ Brian Thome

  	
   

  
	
   

  	
  Daryl J. Haack, President

  	
  Brian Thome, Commercial Loan Officer

  
	
   

  
	
   

  
	
  STATE OF Iowa

  	
  )

  
	
   

  	
  ) ss.

  
	
  COUNTY OF Cherokee

  	
  )

  
									

 

On this 25 day of July 2002, before me, the undersigned, a Notary
Public, personally appeared Daryl J. Haack, the president of Little Sioux Corn
Processors, L.L.C., on behalf of said entity as general partner of LSCP, L.P.,
who executed the foregoing instrument, and acknowledged that he executed the
same as his voluntary act and deed.

 

 

	
   

  	
    /s/ Judith A. Letsche

  	
   

  
	
  [SEAL]

  	
  Notary Public

  

 

31

 

EXHIBIT A

 

LSCP, L.P.

Real Estate Description

 

TRACT I

 

A tract of land located in the
N1/2   NE1/4, Sec. 2, T92N, R42W, Cherokee County,
Iowa, described as follows: Commencing at the NE corner of the NE1/4 of said
Sec. 2; thence South 00°00’00” East, 1124.77 feet along the East line of the
NE1/4 of said Sec. 2 to a point on the South right-of-way line of the Chicago,
Central and Pacific Railroad Company and the point of beginning; thence
continuing South 00°00’00” East, 305.35 feet along said East line to the SE
corner of the NE1/4 NE1/4 of said Sec. 2; thence South 89°39’28” West, 2647.27
feet along the South line of the N1/2   NE1/4 to the SW corner of the NW1/4 NE1/4 of
said Sec. 2; thence North 00°12’41” West, 887.37 feet along the West line of
the NE1/4 of said Sec. 2 to a point on the South right-of-way line of the
Chicago, Central and Pacific Railroad Company; thence South 77°56’30” East,
along said South right-of-way line, a distance of 2710.30 feet to the point of
beginning.

 

AND

 

TRACT II

 

A tract of land located in the N1/2
NE1/4, Sec. 2, T92N, R42W, Cherokee County, Iowa, described as follows:
Commencing at the NE Corner of the NE1/4 of said Sec. 2; thence South 00°00’00”
East, 305.33 feet along the East line of the NE1/4 of said Sec. 2, to the point
of beginning; thence continuing South 00°00’00” East 717.18 feet along said
East line to a point on the North right-of-way line of the Chicago, Central
& Pacific Railroad Company; thence North 77°56’30” West, 2710.68 feet along
the North right-of-way line of the Chicago, Central & Pacific Railroad
Company to a point on the West line of the NE1/4 of said Sec. 2; thence North 00°12’41”
West, 409.15 feet along the West line of the NE1/4 to the NW Corner of the NE1
/4 of said Sec. 2; thence North 88°59’00” East, 2352.75 feet along the North
line of the NEl/4 of said Sec. 2; thence South 00°00’00” East, 300.00 feet;
thence North 90°00’00” East, 300.00 feet to the point of beginning.

 

NOTE: The East line of the NE1/4 of Sec. 2 is assumed to bear due North
and South.

 

Subject to existing highways, easements, and right-of-way of record.

 

32

 

EXHIBIT B

Construction Note

 

	
  Note
  Date:                      ,
  2002

  	
  $31,465,000.00

  
	
  Maturity
  Date:                ,
  2003

  	
   

  

 

FOR VALUE RECEIVED, LSCP,
L.P., an Iowa limited partnership (“BORROWER”) promises to pay to the order of
First National Bank of Omaha (“BANK”), at its principal office or such other
address as BANK or holder may designate from time to time, the principal sum of
Thirty One Million Four Hundred Sixty-five Thousand and No/100 Dollars
($31,465,000.00), or the amount shown on the BANK’s records to be outstanding,
plus interest (calculated on the basis of actual days elapsed in a 360-day
year) accruing each day on the unpaid principal balance at the annual interest
rates defined below. Absent manifest error, the BANK’s records shall be conclusive
evidence of the principal and accrued interest owing hereunder.

 

This promissory note is executed pursuant to a Construction Loan
Agreement (“CONSTRUCTION LOAN AGREEMENT”) between BORROWER and BANK dated as of
               ,
2002. All capitalized terms not otherwise defined in this note shall have the
meanings provided in the CONSTRUCTION LOAN AGREEMENT.

 

INTEREST  ACCRUAL. Interest on the principal amount
outstanding on the CONSTRUCTION LOAN shall accrue, for the period through and
including the COMPLETION DATE, at a rate (the “RATE”) one hundred (100) basis
points above the BASE RATE in effect from time to time until maturity, and six
per cent (6%) above the BASE RATE in effect from time to time after maturity,
whether by acceleration or otherwise. For purposes hereof, BASE RATE shall mean
the rate announced by BANK from time to time and published monthly as its
“National Base Rate”.

 

Each time the BASE RATE shall change, the RATE shall change
contemporaneously with such change in the BASE RATE. Interest shall be
calculated on the basis of a 360-day year, counting the actual number of days
elapsed.

 

REPAYMENT TERMS. Until
LOAN TERMINATION DATE, interest only shall be payable on the 1st day
of each calendar quarter, commencing October 1, 2002. On LOAN TERMINATION
DATE, all principal and accrued interest are due and payable. The LOAN
AGREEMENT describes the TERM NOTE that may be used by BORROWER to pay this
promissory note.

 

PREPAYMENT. The
BORROWER may prepay this CONSTRUCTION NOTE in full or in part at any time. Such
prepayment shall not excuse the BORROWER from making subsequent payments each
quarter until the indebtedness is paid in full.

 

ADDITIONAL TERMS AND CONDITIONS. The
LOAN AGREEMENT, and any amendments or substitutions, contains additional terms
and conditions, including default and acceleration provisions, which are
incorporated into this CONSTRUCTION NOTE by reference. The

 

 

BORROWER agrees to pay all costs of collection, including reasonable
attorneys fees and legal expenses incurred by the BANK if this CONSTRUCTION
NOTE is not paid as provided above. This CONSTRUCTION NOTE shall be governed by
the substantive laws of the State of Nebraska.

 

WAIVER OF PRESENTMENT AND NOTICE OF DISHONOR.
BORROWER and any other person who signs, guarantees or
endorses this CONSTRUCTION NOTE, to the extent allowed by law, hereby waives
presentment, demand for payment, notice of dishonor, protest, and any notice
relating to the acceleration of the maturity of this CONSTRUCTION NOTE.

 

	
   

  	
  LSCP, L.P. an Iowa Limited Partnership

  
	
   

  	
  by Little Sioux Corn Processors, L.L.C.,

  
	
   

  	
  Its general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Daryl J. Haack, President

  
					

 

 

	
  STATE OF

  	
  )

  
	
   

  	
  )  ss.

  
	
  COUNTY OF

  	
  )

  

 

On this       day
of                ,
2002, before me, the undersigned, a Notary Public, personally appeared Daryl J.
Haack, the President of Little Sioux Corn Processors, L.L.C., general partner
of LSCP, L.P., an Iowa limited
partnership, on behalf of said entity, who executed the foregoing instrument,
and acknowledged that he executed the same as his voluntary act and deed.

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public

  

 

 

EXHIBIT C

REVOLVING PROMISSORY NOTE

 

	
  Omaha, Nebraska

  	
  $3,500,000.00

  
	
  Note Date:

  	
                              ,
  2002

  	
  Maturity Date:

  	
  , 2003

  
				

 

On or before
                     ,
2003, LSCP, L.P. (“BORROWER”) promises to pay to the order of First National
Bank of Omaha (“BANK”) at any of its offices in Omaha, Nebraska the principal
sum hereof, which shall be Three Million Five Hundred Thousand and no/100
($3,500,000.00) Dollars or so much thereof as may have been advanced by BANK
and shown on the records of the BANK to be outstanding, under this Note and the
loan agreement executed by the BANK and BORROWER dated as
of                     ,
2002, as it may, from time to time, be amended. Interest on the principal balance
from time to time outstanding will be payable at a rate (the “RATE”) equal to
one hundred (100) basis points higher than the BASE RATE in effect from time to
time until maturity, and six per cent (6%) above the BASE RATE in effect from
time to time after maturity, whether by acceleration or otherwise. For purposes
hereof, BASE RATE shall mean the rate announced by BANK from time to time as
its “National Base Rate”. Each time the BASE RATE shall change, the RATE shall
change contemporaneously with such change in the BASE RATE. Interest shall be
calculated on the basis of a 360-day year, counting the actual number of days
elapsed. Interest on the REVOLVING LOAN shall be payable monthly.

This note is executed pursuant to a Construction Loan Agreement dated
as
of                     ,
2002, between BANK and BORROWER (the “LOAN AGREEMENT”). The LOAN AGREEMENT
contains additional terms of this Note, including, but not limited to
enumerated events of default, and the granting of liens to secure BORROWER’s performance.
All capitalized terms not otherwise defined herein shall have the same meanings
as set forth in the LOAN AGREEMENT.

As provided in the LOAN AGREEMENT, upon any such enumerated default,
BANK may accelerate the due date of this Note and declare all obligations set
forth herein immediately due and payable, and BANK shall also have such other
remedies as are described in the LOAN AGREEMENT and are provided by law. All
makers and endorsers hereby waive presentment, demand, protest and notice of
dishonor, consent to any number of extensions and renewals for any period
without notice; and consent to any substitution, exchange or release of
collateral, and to the addition or releases of any other party primarily or
secondarily liable.

 

Executed as of the          day
of                     ,
2002.

 

	
   

  	
  LSCP, L.P. an Iowa Limited Partnership

  
	
   

  	
  by Little Sioux Corn Processors, L.L.C.,

  
	
   

  	
  Its general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Daryl J. Haack, President

  
					

 

 

EXHIBIT D

LSCP, L.P.

 

CERTIFICATE OF COMPLIANCE

 

	
  TO:

  	
  First National Bank of Omaha

  
	
   

  	
  1620 Dodge Street STOP 1050

  
	
   

  	
  Omaha, Nebraska 68197-1050

  
	
   

  	
  Attn: Brian Thome

  

 

I
am
a                 of
LSCP, L.P. (the “BORROWER”) and under the terms of a CONSTRUCTION LOAN
AGREEMENT (the “AGREEMENT”) between the BANK and the BORROWER dated
               ,
and as it may be amended from time to time, certify that:

 

1.                                       The attached financial statements of the
BORROWER from
               
through
               
(the “STATEMENT DATE”) are true and correct and have been accurately prepared
in accordance with generally accepted accounting principles (GAAP) applied
consistently with the BORROWER’s most recent annual financial statement; and

 

2.                                       I have read and
am familiar with the AGREEMENT and have no knowledge of an existing EVENT OF
DEFAULT under the AGREEMENT or of any event which would, after the lapse of
time or the giving of notice, or both, constitute an EVENT OF DEFAULT under the
AGREEMENT.

 

The
calculations regarding each financial covenant, as of the STATEMENT DATE, and
regardless of whether the BORROWER must be in compliance with each covenant as
of the STATEMENT DATE, are as follows:

 

	
  COVENANT

  	
   

  	
  AT PRIOR

  YEAR-END

  	
   

  	
  ACTUAL

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET WORTH

  	
   

  	
  $

  	
                       

  	
   

  	
  $

  	
                       

  	
   

  
								

 

•           Covenant requires an
initial NET WORTH of not less than $19,000,000.00, and is required to increase
annually thereafter by an amount equal to the greater of (i) $250,000.00 per
fiscal year, or (ii) the amount of undistributed earnings during the current
year.

 

	
   

  	
   

  	
  REQUIRED

  	
   

  	
  ACTUAL

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FIXED CHARGE COVERAGE RATIO

  	
   

  	
  1.25:1.0

  	
   

  	
            :
  1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CAPITAL
  EXPENDITURES (Maximum)

  (Excluding construction and approved change orders)

  	
   

  	
  $

  	
  500,000

  	
   

  	
  $

  	
                       

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  WORKING CAPITAL (Minimum)

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
                       

  	
   

  

 

•                                          Covenant requires minimum WORKING CAPITAL of $1,000,000.00 during the first year of operations, measured beginning at the end of the third month following COMPLETION DATE, minimum WORKING CAPITAL of $1,500,000 during months thirteen(13) through twenty-four (24) following COMPLETION
DATE, and minimum WORKING CAPITAL of $2,000,000 thereafter.

 

1

 

3.                                       For the purpose
of determining Incentive Pricing changes, the Borrowers INDEBTNESS to NETWORTH
Ratio is

 

               :
1.00

 

4.                                       BORROWER has not
made or paid distributions to members of the BORROWER in excess of the
PERCENTAGE allowed. Note that distributions are only allowed annually based on
previous year’s audited financials. Calculation of “Proposed Distributions” is
required for communication purposes only. Calculated EXCESS CASH FLOW,
allowable distributions and distributions made in the current fiscal year are:

 

	
  EXCESS CASH FLOW

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Proposed distributions

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Year-to-date distributions

  	
   

  	
  $

  	
   

  	
   

  

 

5.                                       BORROWER has not
incurred any additional INDEBTEDNESS except debt allowed under the AGREEMENT or
debt otherwise authorized by BANK approval.

 

6.                                       There has been
no personnel change to the ethanol plant management that would be in violation
of the AGREEMENT.  Commodity Specialists
Corporation (CSC) continues to be the marketer of BORROWER’s Distiller’s Grain
products.  Minnesota Corn Processors Cooperative
(MCP) continues to be the marketer of BORROWER’s ethanol products.  F.C. Stone, L.L.C. continues to provide risk
management services for BORROWER’s purchases of grain.

 

 

	
   

  	
  LSCP, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  
							

 

	
  For BANK use only:

  
	
   

  
	
  Rate
  change based on Incentive Pricing:

  
	
   

  
	
  Old
  rate:                

  	
  New
  rate:                

  
	
   

  
	
  Effective
  date:                                                     

  
	
   

  
	
  Verified
  by:                                                         

  

 

2

 

EXHIBIT E

 

LSCP, L.P.

 

	
  First National Bank of Omaha

  	
  Borrowing Base Certificate

  
	
  ATTN: Brian Thome

  	
   

  
	
  1620 Dodge St. STOP 1050

  	
  Report
  No.                          

  
	
  Omaha, NE 68197-1050

  	
   

  
	
   

  	
  Date:                                   

  

 

	
  1.

  	
  Total Ethanol Accounts Receivable

  	
   

  	
  $

  	
                 

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  ADD Total
  Federal Incentive Payment Accounts Receivable

  	
   

  	
  +               

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  DEDUCT Ineligible Ethanol Accounts (31 days or more
  from invoice date)

  	
   

  	
  -               

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  DEDUCT Ineligible Federal Incentive
  Payment Accounts (121
  days or more from invoice date)

  	
   

  	
  -               

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  DEDUCT Ineligible Accounts (as
  determined by Bank)

  	
   

  	
  -               

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Eligible Accounts Receivable

  	
   

  	
  $

  	
                 

  	
   

  	
   

  	
   

  
	
   

  	
  MULTIPLY by
  Borrowing Base Factor

  	
   

  	
  X 75%

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  Accounts Receivable Loan
  Availability

  	
   

  	
  

  	
   

  	
  $

  	
                 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  Ending Distillers Grain Inventory

  	
   

  	
  $

  	
                 

  	
   

  	
   

  	
   

  
	
  5.

  	
  Ending Corn or Milo Inventory

  	
   

  	
  +               

  	
   

  	
   

  	
   

  
	
  6.

  	
  Ending Ethanol Inventory

  	
   

  	
  +               

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Eligible Inventory (Sum of Lines, 3, 4, 5)

  	
   

  	
  $

  	
                 

  	
   

  	
   

  	
   

  
	
   

  	
  MULTIPLY by Borrowing Base Factor

  	
   

  	
  X 75%

  	
   

  	
   

  	
   

  
	
  7.

  	
  Inventory Loan
  Availability

  	
   

  	
  

  	
   

  	
  $

  	
                 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  TOTAL Borrowing Base

  	
   

  	
     ADD
  Lines 3 & 7

  	
   

  	
  $

  	
                 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  Outstanding Loan Balance

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  $

  	
                 

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
  Letters of Credit
(not to exceed $1,000,000)

  	
   

  	
  $

  	
                 

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
  Total Outstanding Balance
(not to exceed $3,500,000)

  	
   

  	
  

  	
   

  	
  $

  	
                 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
  Margin

  	
   

  	
  Line 8  MINUS Line 11

  	
   

  	
  $

  	
                 

  	
   

  

 

 

EXHIBIT E

 

To induce the First National Bank of Omaha (herein called Bank) to make
an advance under the Construction Loan Agreement dated July 25, 2002,
between the undersigned and the Bank, and any amendments thereto, the undersigned
hereby reaffirms the Bank’s security interest in: all inventory, whether now
owned or hereafter acquired, and the proceeds thereof; and, each and every
account whether such right to payment now exists or hereafter arises, and the
proceeds thereof.  The undersigned also
certifies that the Borrowing Base as represented above is true and correct and
that there is no default under the aforementioned Agreement, or on any of the
Borrower’s liabilities to the Bank.

 

	
   

  	
  Borrower: LSCP, L.P.

  
	
   

  	
   

  
	
   

  	
  Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  

 

 

EXHIBIT 6.4.10

 

Additional Permitted Indebtedness

 

	
  1.

  	
   

  	
  Iowa Corn Promotion Board, up to $50,000.00

  
	
  2.

  	
   

  	
  Fagen, Inc., up to $1,250,000.00

  
	
  3.

  	
   

  	
  Farmers State Bank, Marcus, IA, up to $1,000,000.00

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00059-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00059-of-00352.parquet"}]]