In May 2011, the Company granted its Chief Executive Officer an award of unit appreciation rights (“UAR”) with tandem nonqualified unit options. The agreement gave the officer the option to purchase up to 150,000 units in three tranches at prices ranging from $1.50 to $4.50 until May 2021, and under certain circumstances, to exchange the option for a cash payment equal to the appreciation on the value of the units over the exercise price. A portion of each tranche vested annually if the officer remained employed on a specific date each year between 2012 and 2016. The units were contingently exercisable only under certain limited circumstances, including a change in control, and therefore the Company did not recognize compensation expense related to the awards until such time that it was probable that these defined circumstances became probable of occurring. In the first quarter of fiscal 2013, the ABE Board of Directors (“Board”) accelerated the vesting of all units under the UAR agreement in connection with the sale of substantially all the assets of ABE Fairmont. The Board also reduced the exercise price of the third tranche to $4.15. The Chief Executive Officer exercised the full award, and the Company issued 150,000 units to the Chief Executive Officer in December 2012 and recorded compensation expense of $212,500.
In January 2013, the Company awarded its Chief Executive Officer a unit appreciation right for 200,000 units that was approved by the Company’s unit holders on March 22, 2013 at the Company’s Regular Meeting of Members. The UAR vests 1/18 per month over an 18-month period beginning December 7, 2012 so long as Mr. Peterson remains employed by the Company, and will be paid in cash upon such time as ABE sells all or substantially all the assets of the South Dakota plants. The UAR was issued for no consideration and had a grant price of $1.15 per unit at the time of the grant. The grant price for the UAR will be reduced by any distribution received by the Company’s unit holders from (i) the $12.5 million placed in escrow or (ii) the $10 million of cash reserved by the Company in connection with the sale of the Fairmont plant, or (iii) any other cash dividend received by the Company’s unit holders from the cash reserves at Advanced BioEnergy, LLC. The grant price will also be reduced in the event the $12.5 million of escrow proceeds or the $10.0 million of cash retained by the Company are not distributed to the Company’s unit holders. As a result, the grant price will be reduced by $0.31 per unit to $0.84 per unit as a result of the cash distribution paid in October 2013. The units are contingently exercisable only under certain limited circumstances, and therefore the Company is not recognizing compensation expense related to the awards until these defined circumstances are probable of occurring.
The Company had other restricted units outstanding as a result of employment agreements that fully vested through 2013 and recorded compensation expense of $3,000, $4,000 and $46,000 in the years ended September 30, 2013, 2012 and 2011, respectively.
Change of Control Agreement
On July 31, 2007, the Board granted the Chief Executive Officer the right to receive 14,000 units in connection with a change in control of the Company, subject to the terms and conditions included in his Change in Control Agreement. In December 2012, the Company issued 14,000 units to the Chief Executive Officer under the terms of this agreement as a result of the sale of substantially all Fairmont assets. The Company recorded compensation expense of $60,200 in December 2012.
In October 2009, the Company issued 532,671 warrants to PJC Capital LLC, to purchase units of the Company. The warrants had an exercise price of $1.50 per unit. PJC Capital LLC exercised the warrant on November 2, 2012, and the Company issued 532,671 units to PJC. The Company adjusted the fair value of the warrant derivative prior to exercise and recorded an expense of $1.4 million.
Board Representation and Voting Agreement
The Company, certain directors of the Company, South Dakota Wheat Growers Association, Clean Energy Capital, LLC (“CEC”) and Hawkeye Energy Holdings, LLC (“Hawkeye”), have each executed a voting agreement (the “Voting Agreement”). The Voting Agreement requires the parties to (a) nominate for election to the Board two designees of Hawkeye, two designees of CEC and the Chief Executive Officer of the Company, (b) recommend to the members the election of each of the designees, (c) vote all units of the Company they beneficially own or otherwise control to elect each of the designees to the Board, (d) not take any action that would result in the removal of any of the designees from the Board or to increase the size of the Board to more than nine members, and (e) not grant a proxy with respect to any units that is inconsistent with the parties’ obligations under the Voting Agreement. At October 31, 2013, the parties to the Voting Agreement held in the aggregate approximately 57% of the outstanding units of the Company.
On September 18, 2013, the Board declared a cash distribution to unit holders of $0.31 per unit, which was paid in October 2013.
In December 2012, as a result of the sale of the Fairmont assets, the Company paid a cash distribution to members of $4.15 per unit for a total of $105.5 million.
In fiscal 2013, in connection with the annual income tax return in Nebraska, the Company was required to remit withholding tax of approximately $80,000 relating to unit holders not resident in Nebraska. Per the terms of the Operating Agreement, withholding taxes are treated as distributions and reduce Members’ Equity.
In fiscal 2011, in connection with the annual income tax return in Nebraska, the Company was required to remit withholding tax of approximately $27,000 relating to unit holders who were not residents of Nebraska.