Xethanol to Shareholders: "Copycat" Lawsuits Are Meritless

Includes: ADM, AVR, XNL
by: Konrad Imielinski

Xethanol Corp. (XNL) ended trading yesterday down 16.54%, to $2.22 a share, as it sunk below its 52-week low. Its continual decline is attributed to additional lawsuits filed against the company. The downward momentum has taken a toll on Xethanol; the stock plummeted 41.6% since October 24.

In hope to halt this decline, XNL has written a letter to its Shareholders about "copycat" lawsuits, as XNL once again rebuts their accusations. This is exactly what XNL needs; the informative letter is reassuring XNL's shareholders of the company's sustainability.

Can this letter reverse this downwards momentum into a great buying opportunity?

Dear Shareholder:

During the past week, a number of law firms have issued press releases indicating they either will be filing or have filed lawsuits against the company that seek class action status. As we already stated in our October 25, 2006 press release, the allegations contained in the complaints are very similar in nature to those made in August of this year by an on-line web newsletter whose owner admitted to having shorted the shares of Xethanol in advance of the publication of its negative article about the company. Xethanol Corporation previously responded to that article's allegations and insinuations, and demonstrated that they are either without foundation or irrelevant. Nevertheless, the decline in our share price following the publication of the web article apparently has prompted these law firms to file their actions. I want to assure you that the management and board of directors of Xethanol recognize and appreciate your and our other shareholders' concern about these law firms' press releases and filings.

Once again, we believe that these lawsuits, as well as any future copycat lawsuits, are meritless. Pure and simple, they explicitly bootstrap from the unfounded allegations and insinuations propagated by last summer's negative on-line publication about Xethanol. We applaud the messages and telephone calls from those of you shareholders who have indicated your support of Xethanol and have told us that you have no intention of participating in these suits. Yet, we believe that all of our shareholders deserve to know our position on this litigation in the context of our overall business.

First, a few words about the recent spate of lawsuits. As a lawyer with more than 25 years' experience managing the defense of various types of litigation, I assure you that the pattern you see here unfortunately has become the norm. Like bees drawn to honey, law firms from near and far will file these kinds of lawsuits, trolling for clients as well as for prospective lead plaintiffs, and ultimately seeking to serve as lead plaintiffs' counsel in order to gain the largest possible share of attorneys fees at the end of the case -- assuming their side prevails in the litigation. Although to our shareholders and investors these lawsuits may seem like an avalanche of bad news, in reality they are nothing more than the re-treading of bald and unsupported accusations, and conceivably they also may be serving to feed some manipulative short-sellers who yet again hope to engineer a decline in the company's share price.

Again, Xethanol is committed to defending these and any future similar lawsuits vigorously. To that end, the company is carefully considering our choice of defense counsel and we will inform you once we have made that decision.

Second, while we will defend these lawsuits vigorously, we will not allow them to distract us from executing on our business strategy. We continue to produce ethanol at our plant in Blairstown, Iowa, which currently contributes a positive cash flow to the company. We continue to actively pursue our existing collaborative research programs in cellulosic ethanol with leading academic and government scientists in the field. We continue to move forward with our expansion plans in Iowa and other potential locations. We remain on track with our search for a permanent CEO. And last but certainly not least, our dedicated and highly capable employees, our very strong management team and our board of directors remain focused on our business priorities and on creating and enhancing value for you, our shareholders.

On behalf of the employees, the management and the board of directors of Xethanol, I would like to thank you for your support and understanding during this time. Rest assured that all of us at Xethanol are committed to growing our strong company and building shareholder value. These remain our priorities, and we will not permit these "nuisance" lawsuits to distract us from them.


Louis Bernstein

President and interim Chief Executive Officer

Member of the Board of Directors

XNL's decline is not the only reason the ethanol sector has been bearish as of late. Aventine Renewable Energy Holdings Inc. (AVR) also suffered a large loss today as the stock declined 12.68% to $21.48 a share, due to the decline in its quarterly earnings. Archer Daniels Midland Co. (NYSE:ADM) declined 4.91% to $36.61 as it was downgraded to "sell" due to its "cash flow squeeze on the horizon." The news of its profits doubling in the first quarter has dried out as investors are focusing on the future of the company's profits, which don't look too appealing. Banc of America analyst Todd Duvick says of ADM: "We believe ethanol profits -- which we estimate represent about 20 percent of total company profits -- are unsustainable at current levels, while rising agricultural commodity prices will lead to increased working capital and lower cash flow from operations." All of these factors contributed to yesterday's performance in the sector:

Ethanol Quote Page 2 11 06

Something to look forward to:

Andersons Inc. (NASDAQ:ANDE) posted third quarter profits after-hours, and their results are quite impressive (up 4.23% after-hours):

  • The company posted earnings of $8.4 million, or 51 cents per share, compared with a loss of $636,000, or 4 cents per share, in the year-earlier quarter.
  • Sales and merchandising revenue climbed to $335.9 million, up 16 percent from $288.8 million a year-ago as wheat margins and corn prices rose during the quarter.

This news can give a nice push to not just ANDE, but to all ethanol stocks, as they are all correlated.