Attached files
file | filename |
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EX-10.3 - Otter Tail Ag Enterprises, LLC | v174513_ex10-3.htm |
EX-31.1 - Otter Tail Ag Enterprises, LLC | v174513_ex31-1.htm |
EX-32.1 - Otter Tail Ag Enterprises, LLC | v174513_ex32-1.htm |
EX-10.2 - Otter Tail Ag Enterprises, LLC | v174513_ex10-2.htm |
EX-10.1 - Otter Tail Ag Enterprises, LLC | v174513_ex10-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
DC 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
FOR
THE TRANSITION PERIOD FROM
TO
COMMISSION
FILE NUMBER: 000-53042
OTTER
TAIL AG ENTERPRISES, LLC
(Exact
name of registrant as specified in its charter)
MINNESOTA
|
EIN
41-2171784
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
Employer
Identification
No.)
|
24096
- 170th Avenue
Fergus Falls, MN
56537-7518
(Address
of principal executive offices)
(218)
998-4301
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Smaller
Reporting Company ¨
|
(Do
not check if a Smaller Reporting Company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
¨ Yes x No
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ¨ No ¨
As of
February 16, 2010 the Company has outstanding 23,944,000 Class A Membership
Units.
OTTER
TAIL AG ENTERPRISES, LLC
FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED
DECEMBER
31, 2009
TABLE OF
CONTENTS
Page
|
|
PART
I — FINANCIAL INFORMATION
|
2
|
Item
1. Condensed Financial Statements (Unaudited)
|
2
|
Condensed
Balance Sheets
|
2
|
Condensed
Statements of Operations
|
3
|
Condensed
Statements of Cash Flows
|
4
|
Condensed
Notes to Unaudited Financial Statements
|
5
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
16
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
22
|
Item
4. Controls and Procedures
|
23
|
PART
II – OTHER INFORMATION
|
23
|
Item
1. Legal Proceedings
|
23
|
Item
1A. Risk Factors
|
24
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
24
|
Item
3. Defaults Upon Senior Securities
|
24
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
24
|
Item
5. Other Information
|
24
|
Item
6. Exhibits
|
24
|
SIGNATURES
|
25
|
Exhibit
Index
|
26
|
i
PART I
— FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
(Unaudited)
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
CONDENSED
BALANCE SHEETS
December 31, 2009
|
September 30, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$ | 8,539,397 | $ | 4,058,000 | ||||
Restricted
cash
|
1,973,217 | 2,790,971 | ||||||
Accounts
receivable
|
2,888,001 | 2,829,033 | ||||||
Inventory
|
4,824,918 | 3,827,702 | ||||||
Prepaid
expenses and other
|
676,736 | 400,902 | ||||||
Total
current assets
|
18,902,269 | 13,906,608 | ||||||
Property
and Equipment
|
||||||||
Land
and land improvements
|
4,388,517 | 4,388,517 | ||||||
Buildings
|
941,836 | 941,836 | ||||||
Office
equipment
|
141,203 | 141,203 | ||||||
Plant
and process equipment
|
96,499,794 | 96,499,794 | ||||||
101,971,350 | 101,971,350 | |||||||
Less
accumulated depreciation
|
(12,335,897 | ) | (10,724,936 | ) | ||||
Net
property and equipment
|
89,635,453 | 91,246,414 | ||||||
Total
Assets
|
$ | 108,537,721 | $ | 105,153,022 | ||||
LIABILITIES AND MEMBERS’
EQUITY
|
||||||||
Liabilities
Not Subject to Compromise Current Liabilities:
|
||||||||
Accounts
payable
|
$ | 332,734 | $ | 646,809 | ||||
Accrued
Liabilities
|
135,533 | 182,086 | ||||||
Current
liabilities not subject to compromise
|
468,267 | 828,895 | ||||||
Liabilities
Subject to Compromise:
|
||||||||
Operating
line of credit
|
$ | 5,346,382 | $ | 6,000,000 | ||||
Accounts
payable
|
42,866 | — | ||||||
Construction
payable - related party
|
254,564 | 254,564 | ||||||
Accrued
interest
|
2,727,441 | 2,976,949 | ||||||
Current
maturities of long-term debt
|
80,106,123 | 80,113,970 | ||||||
Total
current liabilities
|
88,945,643 | 90,174,378 | ||||||
Commitments
and Contingencies
|
||||||||
Members’
Equity, 23,944,000 units outstanding
|
||||||||
Members’
equity
|
45,238,709 | 45,237,798 | ||||||
Accumulated
deficit
|
(25,646,631 | ) | (30,259,154 | ) | ||||
Total
Members’ Equity
|
19,592,078 | 14,978,644 | ||||||
Total
Liabilities and Members’ Equity
|
$ | 108,537,721 7 | $ | 105,153,022 6 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
2
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
CONDENSED
STATEMENTS OF OPERATIONS
Three Months
Ended
|
Three Months
Ended
|
|||||||
December 31, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Revenues
|
$ | 29,342,366 | $ | 25,531,288 | ||||
Cost
of sales
|
22,817,605 | 25,811,166 | ||||||
Lower
of cost or market adjustment
|
— | 441,542 | ||||||
Gross
Profit (Loss)
|
6,524,761 | (721,420 | ) | |||||
Professional
fees
|
118,567 | 174,318 | ||||||
General
and administrative
|
408,301 | 374,862 | ||||||
Total
operating expenses
|
526,868 | 594,180 | ||||||
Earnings
before reorganization items
|
5,997,893 | (1,270,600 | ) | |||||
Reorganization
items
|
||||||||
Professional
fees
|
227,552 | — | ||||||
Other
income (expense)
|
||||||||
Interest
expense
|
(1,163,501 | ) | (1,091,753 | ) | ||||
Interest
income
|
5,683 | 11,328 | ||||||
Total
other income (expenses), net
|
(1,157,818 | ) | (1,080,425 | ) | ||||
Net
Income (Loss)
|
$ | 4,612,523 | $ | (2,351,025 | ) | |||
Weighted
Average Units Outstanding – Basic
|
23,938,500 | 23,929,500 | ||||||
Net
Income (Loss) Per Unit – Basic
|
$ | 0.19 | $ | (0.10 | ) | |||
Weighted
Average Units Outstanding – Diluted
|
23,944,000 | 23,929,500 | ||||||
Net
Income (Loss) Per Unit – Diluted
|
$ | 0.19 | $ | (0.10 | ) |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
3
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
CONDENSED
STATEMENTS OF CASH FLOWS
Three Months Ended
December 31, 2009
|
Three Months Ended
December 31, 2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income (loss)
|
$ | 4,612,523 | $ | (2,351,025 | ) | |||
Adjustments
to reconcile net loss to net cash used in operations:
|
||||||||
Depreciation
|
1,610,961 | 1,817,771 | ||||||
Amortization
of debt financing costs
|
— | 59,796 | ||||||
Lower
of cost or market adjustment
|
— | 441,542 | ||||||
Unit-based
compensation
|
911 | 2,250 | ||||||
Professional
Services during Chapter 11 proceeding
|
227,552 | — | ||||||
Change
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(58,968 | ) | 871,581 | |||||
Inventory
|
(997,216 | ) | 441,986 | |||||
Prepaid
expenses and other
|
(275,834 | ) | (947,726 | ) | ||||
Derivative
instruments
|
— | (10,088 | ) | |||||
Accounts
payable
|
(498,761 | ) | 511,575 | |||||
Accrued
purchase commitments
|
— | (3,158,458 | ) | |||||
Accrued
interest and other
|
(296,060 | ) | (486,417 | ) | ||||
Net
cash provided by (used in) operating activities
|
4,325,108 | (2,807,213 | ) | |||||
Cash
Flows from Investing Activities
|
||||||||
Capital
expenditures
|
— | (26,336 | ) | |||||
Net
cash used in investing activities
|
— | (26,336 | ) | |||||
Cash
Flows from Financing Activities
|
||||||||
Payments
for long-term debt
|
(7,847 | ) | (7,444 | ) | ||||
Change
in restricted cash
|
817,754 | 498,173 | ||||||
Proceeds
from line of credit
|
— | 1,965,651 | ||||||
Prepayments
on pre-petition secured line of credit
|
(653,618 | ) | — | |||||
Net
cash provided by financing activities
|
156,289 | 2,456,380 | ||||||
Net
Increase (Decrease) in Cash and Equivalents
|
4,481,397 | (377,169 | ) | |||||
Cash
and Equivalents — Beginning of Period
|
4,058,000 | 1,920,972 | ||||||
Cash
and Equivalents — End of Period
|
$ | 8,539,397 | $ | 1,543,803 | ||||
Supplemental
Disclosure of Cash Flow Information
|
||||||||
Interest
paid, net of capitalized of $0 and $733,000 at December 31, 2009 and 2008,
respectively
|
$ | 1,411,416 | $ | 1,568,750 | ||||
Supplemental
Disclosure of Noncash Operating, Investing and Financing
Activities
|
||||||||
Construction
costs included in accounts payable
|
$ | 254,546 | $ | 275,546 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement
4
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying unaudited condensed interim financials have been prepared pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted as permitted by such rules and
regulations. These financial statements and related notes should be
read in conjunction with the financial statements and notes thereto included in
the Company’s audited financial statements for the year ended September 30,
2009, contained in the Company’s Annual Report on Form 10-K, as amended,
originally filed with the Securities and Exchange Commission on December 31,
2009.
In the
opinion of management, the interim financial statements reflect all adjustments
considered necessary for fair presentation. The adjustments made to
these statements consist only of normal recurring adjustments. The
results reported in these condensed interim financial statements should not be
regarded as necessarily indicative of results that may be expected for the
entire year.
In
accordance with accounting principles generally accepted in the United States,
we have applied authoritative guidance on Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, in preparing the condensed
financial statements. This guidance requires that the financial
statements, for periods subsequent to the Chapter 11 (“Bankruptcy Filing”),
distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the
business. Accordingly, certain expenses (including professional
fees), realized gains and losses, and provisions for losses that are realized or
incurred in the bankruptcy proceedings are recorded in reorganization items on
the accompanying condensed statements of operations. In addition, pre-petition
obligations that may be impacted by the bankruptcy reorganization process have
been classified on the condensed balance sheet at December 31, 2009 in
“liabilities subject to compromise.” These liabilities are reported
at the amounts expected to be allowed by the United States Bankruptcy Court for
the District of Minnesota (the “Bankruptcy Court”), even if they may be settled
for lesser. As of December 31, 2009, no adjustments have been made to the
liabilities subject to compromise due to the status of the bankruptcy case. As a
result of the Bankruptcy Filing under Chapter 11, realization of assets and
liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession (“DIP”) under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Company may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
financial statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in our condensed
financial statements. Our historical financial statements do not give
effect to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of confirmation of a plan
of reorganization.
Nature of
Business
Otter
Tail Ag Enterprises, LLC, a Minnesota limited liability company (the “Company”),
was organized with the intentions of developing, owning, and operating a 55
million gallon per year capacity dry-mill ethanol plant near Fergus Falls,
Minnesota. The Company was in the development stage until March 2008
when the Company commenced operations.
Accounting
Estimates
Management
uses estimates and assumptions in preparing these consolidated financial
statements in accordance with generally accepted accounting principles in the
United States of America. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. The Company
uses estimates and assumptions in accounting for the following significant
matters, among others: liabilities subject to compromise and
realization of the assets due to the Bankruptcy Filing, economic lives of
property, plant, and equipment; valuation of inventory; and assumptions used in
the analysis of long-lived assets impairment. Actual results may
differ from previously estimated amounts, and such differences may be material
to the financial statements. The Company periodically reviews
estimates and assumptions, and the effects of any such revisions are reflected
in the period in which the revision is made.
5
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
Revenue
Recognition
The
Company sells ethanol and related products pursuant to marketing
agreements. Revenues from the production of ethanol and the related
products are recorded when the customer (the marketing companies as further
discussed in Note 8) has taken title and assumed the risks and rewards of
ownership, prices are fixed or determinable, and collectability is reasonably
assured. The Company’s products are sold FOB shipping
point.
In
accordance with the Company’s agreements for the marketing and sale of ethanol
and related products, marketing fees due to the marketers are deducted from the
gross sales price at the time payment is remitted to the
Company. Marketing fees remitted by the Company are presented net in
revenue. Marketing fees were approximately $139,000 for the three
months ended December 31, 2009 and approximately $133,000 for the three months
ended December 31, 2008, respectively.
Accounts
Receivable
Credit
terms are extended to customers in the normal course of business. The
Company performs ongoing credit evaluations of its customers’ financial
condition and, generally, requires no collateral.
Accounts
receivable are recorded at their estimated net realizable
value. Accounts are considered past due if payment is not made on a
timely basis in accordance with the Company’s credit terms. Accounts
considered uncollectible are written off. The Company’s estimate of
the allowance for doubtful accounts is based on historical experience, its
evaluation of the current status of receivables, and unusual circumstances, if
any. At December 31, 2009, the Company was of the belief that such
amounts would be collectible and thus an allowance was not considered
necessary. It is possible this estimate will change in the
future.
Restricted Cash and Debt
Service Reserve
The
Company maintains cash accounts set aside for requirements as part of the
capital lease financing agreement. At December 31, 2009 and September
30, 2009, the total restricted cash related to these accounts was
approximately $2,000,000 and $2,800,000, respectively.
Inventories
Inventories
consist of raw materials, work in process, and finished goods. Corn
is the primary raw material and along with other raw materials, is stated at the
lower of average cost or market. Finished goods consist of ethanol,
dried distiller grains, and modified wet distiller grains and are stated at the
lower of cost or market on a first-in, first-out basis.
Property and
Equipment
Property
and equipment is stated at cost. Depreciation is provided over an
estimated useful life by use of the straight line depreciation method. Plant
maintenance and repairs are expensed as incurred; major improvements and
betterments are capitalized. The Company initiated Plant operations
in March 2008 and began depreciating the plant at that
time. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Land
improvements
|
15-20 | |||
Buildings
|
10-40 | |||
Office
equipment
|
5 | |||
Plant
and process equipment
|
10-20 |
6
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
Long-lived
Assets
Depreciation
and amortization of our property, plant and equipment is applied on the
straight-line method by charges to operations at rates based upon the expected
useful lives of individual or groups of assets placed in service. Economic
circumstances or other factors may cause management’s estimates of expected
useful lives to differ from the actual useful lives. Differences between
estimated lives and actual lives may be significant, but management does not
expect events that occur during the normal operation of our Plant related to
estimated useful lives to have a significant effect on results of
operations.
Long-lived
assets, including property, plant, equipment and investments, are evaluated for
impairment on the basis of undiscounted cash flows whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impaired asset is written down to its estimated fair market
value based on the best information available. Considerable management judgment
is necessary to estimate future cash flows and may differ from actual cash
flows. Management recorded an impairment of $12.5 million at September 30, 2009
based on their assessment of the risks and rewards related to the ownership of
these assets and the expected cash flows generated from the operation of the
Plant. A further assessment was carried out for the quarter ending
December 31, 2009 no impairment was recorded for the quarter ending
December 31, 2009 or 2008. Future impairment analysis will depend on the Company
generating positive cash flow from operations of the plant and successful
reorganization under Chapter 11 bankruptcy.
Fair Value of Financial
Instruments
The
carrying value of cash and equivalents, restricted cash, receivables, and
accounts not subject to compromise payable approximates their fair value.
Accounts payable and accrued expenses subject to compromise are at stated
original incurred values but are subject to reduced values due to adjustment by
the Bankruptcy Court.
Senior
debt consists of a term loan of approximately $34,806,000 and a revolving line
of credit of approximately $5,346,000 that bear a variable interest rate that
fluctuates with the market and therefore approximates fair
value. Subordinate debt consists of New Markets Tax Credit Loan of
$19,175,000 and an Otter Tail County (the “County”) capital lease of $26,010,000
that bear a fixed interest rate. Due to the current defaults under
the senior and subordinate loan agreements and the Company’s bankruptcy
proceedings, at the present time, the Company is unable to enter into
replacement debt and therefore is unable to determine a fair value of the fixed
rate subordinate debt.
Environmental
Liabilities
The
Company’s operations are subject to environmental laws and regulations adopted
by various governmental entities in the jurisdiction in which it operates. These
laws require the Company to investigate and remediate the effects of the release
or disposal of materials at its location. Accordingly, the Company has adopted
policies, practices, and procedures in the areas of pollution control,
occupational health, and the production, handling, storage, and use of hazardous
materials to prevent material environmental or other damage, and to limit the
financial liability, which could result from such events. Environmental
liabilities are recorded when the liability is probable and the costs can be
reasonably estimated. No liabilities were recorded at December 31, 2009 or 2008
or considered necessary by management.
Net Income (Loss) per
Unit
Basic net
income (loss) per unit is computed by dividing net income by the weighted
average number of members’ units outstanding during the
period. Diluted net income per unit is computed by dividing net
income by the weighted average number of members’ units and members’ unit
equivalents outstanding during the period. As of December 31, 2009,
the Company had 5,500 unit equivalents outstanding relating to outstanding unit
options and unvested restricted units. As of December 31, 2008, the
Company had 34,500 unit equivalents outstanding. At December 31, 2008, the
effects of 4,500 restricted units are excluded from the computation of diluted
units outstanding as their effects would be anti-dilutive, due to the Company’s
net loss for the period ended December 31, 2008.
7
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
NOTE
2. CHAPTER 11 BANKRUPTCY PROCEEDINGS
On
October 30, 2009 (the “Petition Date”), the Company filed voluntary petitions
for relief under Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”) with the Bankruptcy Court Case number
09-61250. The Company’s negotiated Chapter 11 bankruptcy filing, In
re: Otter Tail Ag Enterprises, LLC, was done with the approval of its
senior lenders. Under Chapter 11, certain claims in existence prior
to our filing of the petition for relief under the Bankruptcy Code are stayed
while the Company continues business operations as a debtor-in-possession, or
DIP.
The
Company is currently operating as DIP under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code
and orders of the Bankruptcy Court. In general, as DIP, the Company is
authorized under the Bankruptcy Code to continue to operate as an ongoing
business but may not engage in transactions outside of the ordinary course of
business without the approval of the Bankruptcy Court.
At a
hearing held on November 4, 2009, the Bankruptcy Court granted the Company’s
“First Day Motions.” The relief granted by the Bankruptcy Court
through the First Day Motions was designed to stabilize the Company’s operations
and business relationships with vendors, lenders, employees, and others,
minimize the effects of the commencement of the Bankruptcy Filing, and preserve
the value of the Company’s assets. The First Day Motions allowed,
among other things, the payment of vendors and other providers in the ordinary
course for goods and services ordered pre-petition but received on or after the
Petition Date and other business-related payments necessary to maintain the
operation of our businesses. The First Day Motions also included the
payment of pre-petition employee wages, salaries, and benefits. The
Company has retained, with Bankruptcy Court approval, legal and financial
professionals to advise the Company on the bankruptcy proceedings and certain
other “ordinary course” professionals. From time to time, the Company may
seek Bankruptcy Court approval for the retention of additional
professionals.
On
November 20, 2009, certain of the Company’s lenders (the “DIP Lenders”) entered
into a Cash Collateral Agreement allowing the DIP the use of cash available to
the Company to operate and maintain the business. The Cash Collateral
Agreement provides, subject to certain conditions as described in the agreement
that cash is available to, among other things: (i) fund the working
capital and general corporate needs of the Company and the costs of the
Bankruptcy Filing in accordance with an approved budget and (ii) provide
adequate protection, in accordance with the terms of the Cash Collateral
Agreement, to the pre-petition agent and pre-petition lenders under the
Company’s existing credit facilities. The Cash Collateral Agreement
provides that the revolving line of credit will bear interest at the standard
rates applicable in the line of credit agreement (See Note 6).
In order
to successfully exit Chapter 11, the Company will need to propose, and obtain
confirmation by the Bankruptcy Court of a plan of reorganization that satisfies
the requirements of the Bankruptcy Code (the “Chapter 11 Plan”). A
Chapter 11 Plan could, among other things, resolve the Company’s pre-petition
obligations, set forth the revised capital structure of the newly reorganized
entity, and provide for corporate governance subsequent to exit from
bankruptcy. As provided in the Bankruptcy Code, the Company has the
exclusive right for 120 days after the Petition Date to file a Chapter 11 Plan
and 60 additional days to solicit and obtain necessary acceptances. Such
periods may be extended by the Bankruptcy Court for cause to up to 18 months and
20 months, respectively, after the Petition Date. If the Company’s
exclusivity period lapses, any party in interest may file a Chapter 11 Plan for
the Company.
Although
the Company expects to file a Chapter 11 Plan that provides for emergence from
Chapter 11 sometime in the future, there can be no assurance that a Chapter 11
Plan will be proposed by the Company or confirmed by the Bankruptcy Court or
that any such plan will be consummated. In order to successfully emerge
from bankruptcy, the Company will need to, among other things, obtain approval
from their senior lenders for restructuring their debt and obtain additional
equity of $12,000,000 to meet requirements as outlined in the Cash Collateral
Agreement.
8
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
Under the
Bankruptcy Code, the Company may assume, assume and assign, or reject executor
contracts and unexpired leases, including real property, railcars, and equipment
leases subject to the approval of the Bankruptcy Court and certain other
conditions. Rejection constitutes a court-authorized breach of the
lease or contract in question and, subject to certain exceptions, relieves the
Company of future obligations under such lease or contract, but creates a
pre-petition claim for damages caused by such breach or rejection, subject to
the Company’s right to review and contest such claim. Parties whose contracts or
leases are rejected may file claims against the Company for
damages. Generally, the assumption of an executory contract or
unexpired lease requires the Company to cure all prior defaults under such
executor contract or unexpired lease, including all arrearages, and to provide
adequate assurance of future performance. In this regard, the
Company’s financial statements include amounts classified as “liabilities
subject to compromise” that the Company believes that the Bankruptcy Court will
allow as claim amounts as a result of the Company’s rejection of various
executory contracts and unexpired leases. Additional amounts may be
included in “pre-petition liabilities subject to compromise” in future periods
if additional executory contracts and unexpired leases are rejected. Conversely,
the Company would expect that the assumption of certain executory contracts and
unexpired leases may convert certain liabilities shown in future financial
statements as subject to compromise to post-petition liabilities. Due
to the uncertain nature of many of the potential claims, the Company is unable
to project the magnitude of such claims with any degree of
certainty.
Chapter
11 of the Bankruptcy Code provides that unless certain terms of the
Bankruptcy Code are satisfied, for a bankruptcy court to confirm a Chapter 11
Plan as a consensual plan, the holders of impaired claims against a debtor in
each class of impaired claims must accept such plan by the requisite majorities
set forth in the Bankruptcy Code. An impaired class of claims shall
have accepted a Chapter 11 Plan if: (a) the holders of at least
two-thirds in amount of the claims in such class actually voting on a plan have
voted to accept it; and (b) more than one-half in number of the holders in such
class actually voting on the plan have voted to accept it. Pursuant
to the provisions of the Bankruptcy Code, only holders of allowed claims or
equity interests in classes of claims or equity interests that are impaired and
that are not deemed to have rejected a Chapter 11 Plan are entitled to vote to
accept or reject such proposed plan. Generally, a claim or interest
is impaired under a plan if the holder’s legal, equitable, or contractual rights
are altered under such plan. Classes of claims or equity interests
under a Chapter 11 Plan in which the holders of claims or equity interests are
unimpaired are deemed to have accepted such plan and are not entitled to vote to
accept or reject the proposed plan. In addition, classes of claims or
equity interests in which the holders of claims or equity interests will not
receive or retain any property on account of their claims or equity interests
are deemed to have rejected the plan and are not entitled to vote to accept or
reject the plan. Under circumstances specified in the so-called “cramdown”
provisions of the Bankruptcy Code, the Bankruptcy Court may confirm a plan even
if such plan has not been accepted by all impaired classes. The
precise requirements and evidentiary showing for confirming a Chapter 11 Plan
notwithstanding its rejection by one or more impaired classes of claims or
equity interests depends upon a number of factors, including the status and
seniority of the claims or equity interests, in the rejecting class — i.e.,
secured claims or unsecured claims, subordinated or senior claims, or common
stock.
Under the
priority rules established by the Bankruptcy Code, unless creditors agree
otherwise, post-petition liabilities and pre-petition liabilities must be
satisfied in full before unit holders of the Company are entitled to receive any
distribution or retain any property under a plan of
reorganization. The ultimate recovery, if any, to creditors and unit
holders of the Company will not be determined until confirmation and
consummation of a Chapter 11 Plan. No assurance can be given as
to what values, if any, will be ascribed in the Bankruptcy Case to each of these
constituencies or what types or amounts of distributions, if any, they would
receive. Accordingly, the Company urges that appropriate caution be
exercised with respect to existing and future investments in any of the
Company’s member units or any of the Company’s liabilities.
The
Company has incurred and will continue to incur significant costs associated
with the reorganization. The amount of these costs, which are being
expensed as incurred, are expected to significantly affect the Company’s results
of operations.
9
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
NOTE
3. GOING CONCERN
The
ability of the Company to continue as a going concern is dependent upon, among
other things: (i) the Company’s ability to comply with the terms and
conditions of the Cash Collateral Agreement; (ii) the ability of the Company to
maintain adequate cash on hand; (iii) the ability of the Company to generate
cash from operations; (iv) the ability of the Company to obtain
confirmation of and to consummate a Chapter 11 Plan under the Bankruptcy Code;
(v) the cost and outcome of the reorganization process; and (vi) the Company’s
ability to achieve profitability. Uncertainty as to the outcome of these factors
raises substantial doubt about the Company’s ability to continue as a going
concern. The Company is currently evaluating various courses of
action to address the issues the Company is facing. There can be no assurance
that any of these efforts will be successful.
The
potential adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding the Company’s future prospects may hinder the
Company’s ongoing business activities and its ability to operate, fund, and
execute its business plan by impairing relations with existing and potential
customers; negatively impact the ability of the Company to attract, retain, and
compensate key executives and employees and to retain employees generally; limit
the Company’s ability to obtain trade credit; and impair present and future
relationships with vendors and service providers.
NOTE
4. MEMBER’S EQUITY
In
February 2009, the Company filed a Minnesota registered offering for a maximum
of 36 million Class A units at a cost of $0.50 per unit. The offering
was not declared effective and has been withdrawn.
NOTE
5. INVENTORY
Inventories
consist of the following:
December 31, 2009
|
September 30, 2009*
|
|||||||
(unaudited)
|
||||||||
Raw
materials
|
$ | 1,305,319 | $ | 1,896,519 | ||||
Work
in progress
|
1,872,458 | 1,017,363 | ||||||
Finished
goods
|
1,242,567 | 520,059 | ||||||
Spare
parts
|
404,574 | 393,761 | ||||||
Total
|
$ | 4,824,918 | $ | 3,827,702 |
* Derived
from audited financial statements
The
Company obtained approximately 100% of its corn purchases from one supplier in
the three month periods ended December 31, 2009 and 2008. The Company
has a formal supply agreement, as discussed in NOTE 8.
Each day
the Company fixes the price of corn it needs to maintain operations, converting
its basis contracts into fixed price contracts using the Chicago Board of Trade
price of the day. At December 31, 2009, the Company has fixed
purchase contracts to purchase approximately 99,000 bushels costing
approximately $388,000.
The
Company has adopted a risk management strategy that reflects working in present
day market values, securing corn on a “basis” program, and pricing daily once it
takes possession, this assists in aligning the procurement of corn with the sale
of ethanol; corn is estimated to be approximately 80% of the Company’s
production costs while ethanol is approximately 85% of revenue.
10
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
The
Company currently holds approximately 2,900,000 bushels of corn under contract
in this manner at a rate of ($0.33) per bushel basis through October
2010.
NOTE
6. BANK FINANCING
Total
debt consists of the following at:
December 31, 2009
(unaudited)
|
September 30,
2009*
|
|||||||
Construction
and Term Loan, see terms below
|
$ | 34,806,137 | $ | 34,806,137 | ||||
New
Markets Tax Credit Loan, see terms below
|
19,175,000 | 19,175,000 | ||||||
County
capital lease, (Note 7)
|
26,010,000 | 26,010,000 | ||||||
Equipment
financing
|
114,986 | 122,833 | ||||||
Total
debt
|
$ | 80,106,123 | $ | 80,113,970 | ||||
Revolving
line of credit, see terms below
|
$ | 5,346,382 | $ | 6,000,000 |
* Derived
from audited financial statements
The
Company was in violation of financial covenants as of September 30,
2008. The Company failed to meet tangible net worth requirements and
reporting requirements as of September 30, 2008. As of September 30,
2008, the financing agencies have waived the compliance with the tangible net
worth ratio and reporting requirements through October 1, 2009.
On March
20, 2009, the Company entered into a Forbearance Agreement with the Senior
Lender which requires that the Senior Lender not pursue certain remedies
available to them until April 30, 2009, which was the end of the Forbearance
Period. The terms of the Forbearance Agreement requires the Company
to pay the current principal amounts due as well as all accrued interest at the
end of the Forbearance Period. At that time, if unable to pay the
amounts due after the Forbearance Period as required under the Forbearance
Agreement, the Senior Lender may: (1) declare a default under the
loans; and (2) consent to remedial action taken by subordinate lenders and may
provide notice of default and/or acceleration.
On June
3, 2009, the Company received a notice letter from its senior lender stating the
Company is in default of its loan agreement and that the Company is in default
under its subordinate lender agreements. Under the terms of the
notice letter, the Company had to cure all defaults prior to June 15, 2009 or
the entire amount due under the agreements would become
accelerated. The Company failed to cure all defaults under the notice
by June 15, 2009.
On July
21, 2009, the Company’s senior lender declared the principal and interest
balance under the Construction Term Note, Term Revolving Note, and Revolving
Line of Credit Loan immediately due and payable.
On August
31, 2009, the Company received a summons and complaint from their senior lender
and MMCDC New Markets Fund II, LLC (“NMF”) for their defaults on the loan
agreements, as discussed below, to begin foreclosure
proceedings.
11
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
New Market Tax Credit
Loan
In March
2007, the Company entered into the agreement with NMF for the amount of
$19,175,000. The Company has guaranteed it will be in compliance with
the program over the tax credit recapture period from September 2007 until
September 2014. The NMF loan is divided into two
portions: a term loan of $14,480,500 (the “Term Loan”) and
subordinated note for $4,694,500 (the “Subordinated Note”). The Term
Loan contains a provision in which the Company must make interest-only payments
on the 6th day of the first month following the initial advancement, August 2007
until the 85th month. On the sixth day of the 85th month and continuing for an
additional 48 months, the Company shall pay the amortized unpaid principal
together with the accrued interest. The interest rate shall be
calculated using the Wall
Street Journal daily money rate (base rate) plus 1.0%.
The
Subordinated Note for $4,694,500 carries a fixed interest rate of
2.51%. On the first day of each month following the initial advance
in August 2007, interest-only payments will be made until September 2014 when a
principal payment of $400,000 is required.
As of
December 31, 2009 the Company is being charged a default interest rate of 5.00%
on the term loan and 4.51% on the subordinated note along with late charges for
non-payment. The Company has recommenced interest only payments on
this loan as part of the terms of the Cash Collateral Agreement.
Construction Term
Loan
Upon
satisfactory completion of the Plant a portion of the Construction Loan
converted to a Construction Term Loan totaling $29,000,000. The
interest rate charged is LIBOR plus 2.95% which totaled 3.19% as of December 31,
2009 and 3.23% as of December 31, 2008, respectively, on the Construction Term
Loan. The agreement includes an option to convert a portion of the
Construction Term Loan to a fixed rate loan. The Company is required
to make interest payments only on the first day of each month for the first six
months followed by 114 principal installments of $254,386 plus accrued interest
beginning six months following substantial completion payable in full in June
2018. In addition to the scheduled payments, the Company will make
additional principal payments equal to 65% of the Company’s excess cash flow not
to exceed $2,000,000 per fiscal year and an aggregate total of
$8,000,000. As part of the financing agreement, the premium above
LIBOR may be reduced to 2.65% based on attaining certain financial
ratios. The Company has recommenced interest only payments on this
loan as part of the terms of the Cash Collateral Agreement.
The
financing agreement requires an annual servicing fee of $20,000. The
Company is initially permitted to make distributions up to 40% of net
income. The Company may make distributions which exceed 40% of net
income as long as the Company has made the required excess cash flow payments
and maintained the required financial covenants. The financing
agreement contains certain prepayment fees in the first three years of the
scheduled payments. The Company is also required to obtain and
maintain financial ratios on an annual basis.
Construction Term Revolving
Note
The
amount of the Construction Term Revolving Note that converted to the Term
Revolving Note is $6,000,000. The Company is required to pay interest on the
principal advances monthly at the LIBOR rate plus 2.95% which totaled 3.19% at
December 31, 2009 and 3.23% as of September 30, 2009. The purpose of
this loan was for cash and inventory management. The Company has
recommenced interest only payments on this loan as part of the terms of the Cash
Collateral Agreement.
12
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
Revolving Line of Credit
Loan
The
Company also has a Revolving Line of Credit loan with the same lending
institution for up to $6,000,000. The Company is required to pay
interest on the principal advances monthly at the LIBOR rate plus 2.95% which
totaled 3.19% at December 31, 2009 and 3.23% as of September 30,
2009. The purpose of this loan is for general and operating
expenses. The maturity of the Revolving Line of Credit loan is 364
days from commencement; on the loan maturity date, the principal and any
outstanding accrued interest will be due. The Company pays a
commitment fee of 0.35% on the unused portion of the revolving promissory note
(the “Revolving Promissory Note”) payable quarterly in arrears. The
interest rate is equal to LIBOR plus 2.95% if the Company’s tangible owner’s
equity (defined as tangible net worth plus subordinated debt divided by total
assets) is less than or equal to 60% or to LIBOR plus 2.65% if the tangible
owner’s equity is greater than 60%. As of December 31, 2009,
approximately $5,346,000 was advanced against the line of credit. Any
further advances on the line of credit need to be approved by the senior lender.
The Company has made a one time principal payment and commenced interest only
payments on this loan as part of the terms of the Cash Collateral
Agreement.
The Term
Revolving Note as well as the Term Note and the Revolving Line of Credit Loan
are subject to a master loan agreement with various financial and non-financial
covenants that limit distributions, require minimum debt service coverage, net
worth and working capital requirements, and secured by all business
assets.
Exit
Financing
Subsequent
to quarter end, the Company entered into term sheets for exit financing with the
Senior lender and NMF. The exit financing term sheet with the Senior
lender modifies the Construction Term Loan and Construction Term Revolving Note,
combining them into one term note, in the amount of $35,000,000 which will
mature on June 1, 2013. Additionally, the exit financing term sheet
modifies the Revolving line of credit loan to a 364 day revolving credit
facility in an amount not to exceed the lesser of 75% of eligible accounts
receivable and inventory or $4,000,000 and will mature 364 days following the
effective date of the plan.
Interest
on the term and revolving loans will bear interest at a fixed rate of 6.5%
through May 31, 2013, however the rate is subject to changes in the three-year
U.S. Treasury bond rate between the date of the term sheet and the effective
date of the plan. The term note will be payable in a special
principal payment of $3,150,000 on the first day of the calendar month following
the effective date of the plan and the balance of the note in equal monthly
installments of principal and interest over a period of ten
years. All current default interest will be deferred until June 1,
2013. The loans will be secured by a first priority perfected
security interest in all of the Company’s assets.
The exit
term sheets of the NMF loan reaffirm all of the terms of the original
agreements, except for it provides for the deferral of default interest until
the present maturity dates as provided in the original agreements.
These
term sheets are contingent upon certain requirements, such as a confirmation
order confirming the plan, payments of certain accrued regular interest,
establishment of a debt reserve account equivalent to six months interest and
obtaining subscription letters of up to $12,000,000.
Equipment
Financing
In April
2008, the Company entered into two equipment financing agreements with an
unrelated party through 2013. Payments range from $679 per month to
$2,468 per month with interest rates ranging from 4.56% to 5.5%.
NOTE
7. LEASES
Capital
Lease
In April
2007, the Company entered into a long term equipment lease agreement with Otter
Tail County, Fergus Falls, Minnesota (the “County”) in order to finance
equipment for the Plant (the “Capital Lease”). The Capital Lease has
a term from May 1, 2007 through November 2019. The County financed
the purchase of equipment through Subordinate Exempt Facility Revenue Bonds
Series 2007A totaling $20,000,000, General Obligation Tax Abatement Bonds Series
2007B totaling $5,245,000, and Taxable General Obligation Tax Abatement Bonds
Series 2007C totaling $765,000 (collectively the “Bonds”).
Under the
Capital Lease with the County, the Company started making payments on May 25,
2008 and on the 25th of each
month thereafter. Until May 25, 2008, interest was being paid through
the interest reserve fund included in restricted cash. The Capital
Lease payments correspond to the interest of 1/6 the amount due on the bonds on
the next interest payment date. Capital Lease payments for principal started on
November 25, 2009 in an amount equal to 1/6 principal scheduled to become due on
the corresponding bonds on the next semi-annual principal payment
date. The Company must also make lease payments of principal and
interest that correspond to the principal and interest the County must pay on
the General Obligation Bonds Series 2007B and 2007C beginning February 25,
2008. Until that date, interest payments were financed through an
interest reserve recorded as restricted cash. The Company must pay
Capital Lease payments that correspond to 1/6 the amount of interest payable due
on the bonds on the following February 1 or August 1 and principal amounts
equaling 1/12 of the principal due on the following February 1. The
Company has guaranteed that if such assessed lease payments are not sufficient
for the required Bond payments, the Company will provide such funds as are
needed to fund the shortfall. The Capital Lease also includes an
option to purchase the equipment at fair market value at the end of the lease
term.
The
Company failed to make basic payments on the Capital Lease as of December 31,
2008, which caused the Company to default on the Capital
Lease. Accordingly, the Capital Lease has been reclassified to
current maturities of long-term debt.
Operating
Leases
In
February 2008, the Company entered into an operating lease agreement for 70
railroad cars for a minimum period of 36 months. The lease agreement
shall continue for successive one month terms until terminated by either party
providing a 30 day written advance notice to the other. The Company
will pay $600 per car per month, which may be adjusted according to the terms
defined in the agreement. The term of this lease began in April
2008.
13
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
NOTE
8. COMMITMENTS AND CONTINGENCIES
Marketing and Procurement
Contracts
In
February 2008, the Company entered into a marketing agreement with an unrelated
party for the marketing, sale, and delivery of all bulk grade Dried Distillers
Grains with Solubles the Company is expected to produce. The Company will
receive payment for the products sold based on a percentage of the actual sales
price as defined in the agreement. The initial term is for three years
commencing as of the start-up of production and will continue until terminated
by either party providing a 90 day advance written notice.
In
February 2007, the Company entered into a procurement agreement with an
unrelated party for the purchase of corn. The term of this agreement
shall be for five years followed by an automatic renewal term of one year unless
terminated by either party giving 90 days advance written notice. A
procurement fee shall be paid on a per bushel basis during the term of the
contract. The contract also provides for additional third-party
storage in the local surrounding area for a minimum of two turns per
year. In January 2009, this contract was amended changing the
procurement fee structure.
In July
2006, the Company entered into a marketing agreement for the sale and marketing
of all the ethanol the Company expects to produce. The Company agrees
to pay a fixed fee per gallon of ethanol sold for certain marketing, storage,
and transportation costs, which will be included in cost of goods
sold. The initial term of the agreement shall be for 12 months
beginning the first day of the month the Company ships ethanol and will be
automatically extended for an additional 12 months unless either party gives 90
days advance written notice of termination.
In
January 2008, the Company entered into a marketing agreement with an unrelated
party to purchase wet distillers grains and solubles the Company is expected to
produce. The agreement commences on completion and start-up of
operations of the plant and continues for two years. The agreement
will remain in effect thereafter unless 90 days advance written notice is
provided by either party.
Natural
Gas
The
Company has an agreement to purchase a minimum of 2,700 decatherms of natural
gas transportation per day through May 31, 2011 at market price plus $0.015 per
decatherm of natural gas.
Management
Agreements
In May
2006, the Company entered into an agreement with an unrelated party to manage
the Company’s supply of natural gas. The term of the agreement
continues through April 30, 2011, and shall continue on a year to year basis
thereafter until terminated by either party giving 60 days written advance
notice. The Company also executed a sale and purchase agreement with
the unrelated party for natural gas. Either party may terminate the
agreement by providing a 30 day advance written notice. The Company
is also required to hold a certificate of deposit for the benefit of the
supplier in the amount of $775,000.
NOTE
9. FAIR VALUE
Fair
value is defined as the price that would be received to sell an asset or pay to
transfer a liability in an orderly transaction between market participants at
the measurement date in the principal or most advantageous
market. The Company uses a fair value hierarchy that has three levels
of inputs, both observable and unobservable, with use of the lowest possible
level of input to determine fair value. Level 1 inputs include quoted
market prices in an active market or the price of an identical asset or
liability. Level 2 inputs are market data, other than Level 1, that
are observable either directly or indirectly. Level 2 inputs include
quoted market prices for similar assets or liabilities, quoted market prices in
an inactive market, and other observable information that can be corroborated by
market data. Level 3 inputs are unobservable and corroborated by
little or no market data. The Company uses valuation techniques in a
consistent manner from year to year.
14
OTTER
TAIL AG ENTERPRISES, LLC
(Debtor
in Possession)
Condensed
Notes to Unaudited Financial Statements
December
31, 2009 and 2008
The
following table provides information on those assets and liabilities that are
measured at fair value on a recurring basis:
December 31, 2009
|
||||||||||||||||
Fair Value Carrying
Amount in the Balance
Sheet
|
Fair Value Measurement Using
|
|||||||||||||||
Level 1
|
Level 2
|
Level 3
|
||||||||||||||
Assets
|
||||||||||||||||
Money
market funds (included in restricted cash)
|
$ | 1,193,674 | $ | 1,193,674 | $ | - | $ | - | ||||||||
Certificates
of deposit (included in restricted cash)
|
779,543 | - | 779,543 | - | ||||||||||||
Total
|
$ | 1,973,217 | $ | 1,193,674 | $ | 779,543 | $ | - |
The fair
value of the money market funds is based on quoted market prices in an active
market. Due to the short term nature of the certificates of deposit,
the recorded value approximates fair value.
NOTE
10. LONG-LIVED ASSETS
In 2008,
the Company completed construction of its ethanol production facilities with
installed capacity of 55 million gallons per year. In accordance
with the Company’s policy for evaluating impairment of long-lived assets,
management has evaluated the facilities for possible impairment based on
projected future cash flows from operations of these
facilities. Management has determined that the undiscounted cash
flows from operations of these facilities over their estimated useful lives do
not exceed their carrying values, and therefore, impairment has been recognized
totaling approximately $12,500,000 as of June 30, 2009. As of
September 30, 2009 and December 31, 2009, an impairment analysis was performed
determining no further impairment was necessary. In determining future
undiscounted cash flows, the Company has made significant assumptions concerning
the future viability of the ethanol industry, the future price of corn in
relation to the future price of ethanol, and the overall demand in relation to
production and supply capacity. Due to these significant assumptions,
the Company has determined that the impairment charge is a significant
estimate. Given the recent completion of the facilities in 2008,
replacement cost would likely approximate the carrying value of approximately
$89,600,000 of the facilities at December 31, 2009. However,
there have been recent transactions between independent parties to purchase
plants at prices substantially below the carrying value of the
facilities. Some of the facilities have been in bankruptcy and may
not be representative of transactions outside of bankruptcy. Given
these circumstances, should management be required to adjust the carrying value
of the facilities to fair value at some future point in time, the adjustment
could be significant and could significantly impact the Company’s financial
position and results of operation. No adjustment has been made in
these financial statements for this uncertainty.
15
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three month period ended December 31, 2009 compared to the
same period of the prior fiscal year. This discussion should be read
in conjunction with our interim condensed financial statements and notes
included in Item 1 of Part 1 of this Quarterly Report, and the audited condensed
financial statements and notes thereto, and Management’s Discussion and Analysis
contained in our Annual Report on Form 10-K for the fiscal year ended September
30, 2009.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report contains forward-looking statements within the meaning of
Section 21E of the Exchange Act. Forward-looking statements are all statements
other than statements of historical fact, including without limitation, those
statements that are identified by the words “anticipates,” “believes,”
“continue,” “could,” “estimates,” “expects,” “future,” “hope,” “intends,” “may,”
“plans,” “potential,” “predicts,” “should,” “target,” and similar expressions,
and include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions (many of which are based, in
turn, upon further assumptions) and other statements that are other than
statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature,
including statements contained within “Item 2 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Forward-looking
statements involve risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed. The Company’s
expectations, beliefs, and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management’s examination of historical operating trends, data
contained in the Company’s records, and other data available from third
parties. Nonetheless, the Company’s expectations, beliefs, or
projections may not be achieved or accomplished. Forward-looking
statements are subject to known and unknown risks and uncertainties, including
those risks described in “Item 1A – Risk Factors” of our Annual Report on Form
10-K for the fiscal year ended September 30, 2009, as updated in Part II, Item
1A of this Quarterly Report.
Any
forward-looking statement contained in this document speaks only as of the date
on which the statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances that occur after the date on which the statement is made or to
reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of the
factors, nor can it assess the effect of each factor on the Company’s business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statement. All forward-looking statements, whether written or oral
and whether made by or on behalf of the Company, are expressly qualified by the
risk factors and cautionary statements in this Quarterly Report, including
statements contained within “Part II, Item 1A – Risk Factors,” and in the
Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2009, and include the following:
our
ability to successfully emerge from the Chapter 11 bankruptcy process and
continue normal business
operations;
|
·
|
our
ability to comply in the future with covenants under our debt financing
agreements with senior lenders;
|
·
|
the
availability and adequacy of our cash flow to meet our requirements,
including payment of loans;
|
|
·
|
economic,
competitive, demographic, business, and other conditions in our local,
regional, and national markets;
|
16
·
|
changes
in the availability and price of corn;
|
|
·
|
changes
in the availability and price of natural gas;
|
|
·
|
changes
in the environmental regulations that apply to our Plant
operations;
|
|
·
|
the
occurrence of certain events causing an economic impact in the
agriculture, oil, or automobile markets;
|
|
·
|
lack
of transport, storage, and blending infrastructure preventing ethanol from
reaching high demand markets;
|
|
·
|
changes
and advances in ethanol and other renewable fuels production
technology;
|
|
·
|
changes
in interest rates or the availability of credit and limitations and
restrictions contained in the instruments and agreements governing our
indebtedness;
|
|
·
|
the
results of our hedging transactions and other risk mitigation
strategies;
|
|
·
|
our
ability to retain key employees and maintain labor
relations;
|
|
·
|
our
ability to develop diverse revenue streams;
|
|
·
|
our
ability to implement additional financial and management controls,
reporting systems and procedures, and comply with Section 404 of the
Sarbanes-Oxley Act, as amended;
|
|
·
|
changes
or developments in laws, regulations, tariffs, or taxes in the ethanol,
agricultural, or energy industries;
|
|
·
|
actions
taken or not taken by third parties, including our suppliers and
competitors, as well as legislative, regulatory, judicial, and other
governmental authorities;
|
·
|
competition
in the ethanol industry and excess capacity in the
industry;
|
|
·
|
litigation
against us or any third party suppliers;
|
|
·
|
the
loss of any license or permit;
|
|
·
|
the
lack of a public market for our membership units and restrictions on unit
transfer;
|
|
·
|
the
loss of our Plant due to casualty, weather, mechanical failure, or any
extended or extraordinary maintenance or inspection that may be required;
and
|
|
·
|
changes
in our business strategy, capital to support capital improvements and
development.
|
Summary
Otter
Tail Ag Enterprises, LLC, a Minnesota limited liability company (the “Company,”
“Otter Tail,” “we,” “our,” or “us”), owns and operates a nameplate 55 million
gallon annual production plant of undenatured ethanol in Fergus Falls, Minnesota
(the “Plant”).
17
Liquidity
and Capital Resources
Overview
As of
December 31, 2009, we had total assets of approximately $108,500,000 consisting
of primarily accounts receivable, inventory, property, plant, and
equipment. As of December 31, 2009, we had current liabilities of
approximately $88,900,000 consisting primarily of accounts payable, line of
credit, and outstanding debt. All of our long-term debt, consisting
of approximately $80,100,000 of bank debt financing and capital lease
financing for the construction of the Plant, has been reclassified as current
maturities of long-term debt because we were in default as of February 1, 2009
on our capital lease with Otter Tail County, Fergus Falls, Minnesota (the
“County”) for failure to make basic payments (defined as payments equal to the
aggregate amount of principal and interest outstanding on the bonds issued by
the County in conjunction with the capital lease), and we have failed to make
interest payments specifically on the Subordinate Exempt Facility
Revenue Bonds Series 2007A bonds since December 31, 2008. We have
also not made interest payments on the MMCDC New Markets Fund II, LLC (“NMF”)
Tax Credit Loans. In addition, as of February 15, 2009, we were in
default under our Master Loan Agreement with AgStar Financial Services, P.C.A.
(“AgStar”) for failure to pay principal and interest due. Under the
terms of our respective agreements with AgStar, NMF, and the County, the lenders
may exercise any or all default remedies against us including, but not limited
to, acceleration of all outstanding unpaid principal amounts. For
more information on these defaults and the remedies available to AgStar, NMF,
and the County, please see our current report on Form 8-K under Item 2.04 as
filed with the SEC on February 18, 2009.
For the
three months ended December 31, 2009, cash provided by operating activities was
approximately $4,300,000, cash used in investing activities was approximately $0
and cash provided by financing activities was approximately
$156,000.
Total
cash flow from the project following operational commencement of the project has
been impacted by many factors including, but not limited to, the final cost of
the project, timing of the commencement of operations, the speed of ethanol
production during the start-up phase, as well as energy and corn
prices. As of December 31, 2009, we had drawn on our revolving line
of credit with AgStar in the amount of approximately $5,346,000.
Also,
based on our operating plan, we believe our existing working capital will not be
sufficient to meet the cash requirements to fund our planned operating expenses,
capital expenditures, and working capital requirements through the fiscal year
ending September 30, 2010 without additional sources of cash and/or deferral,
reduction, or elimination of significant planned
expenditures. Assuming no deterioration in margins between corn and
ethanol prices, we estimate that we will require approximately an additional
$12,000,000 to fund our planned operating expenses, capital expenditures, and
working capital requirements through the end of fiscal year 2010. In
addition, we failed to meet tangible net worth and reporting requirements in
violation of certain financial covenants, but the financing agencies have waived
the compliance with these ratios through October 1, 2009. See Note 3
in our footnotes to our financial statements for more information on the
sufficiency of existing capital to meet our cash requirements and our ability to
operate as a going concern. Finally, as provided above, we are
currently in default on our Master Loan Agreement with AgStar, our tax credit
loans with NMF, and our capital lease with the County. We are working
with our lenders to restructure our loan agreements.
On
October 30, 2009 (the “Petition Date”), we filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”) with the United States Bankruptcy Court for the District of
Minnesota, Case number 09-61250. Our negotiated Chapter 11 bankruptcy
filing, In re: Otter Tail Ag Enterprises, LLC, was done with the
approval of our senior lenders. Under Chapter 11, certain claims in
existence prior to our filing of the petition for relief under the Bankruptcy
Code are stayed while we continue business operations as a debtor-in-possession,
or DIP.
We are
currently operating as DIP under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. In general, as DIP, we are authorized under the Bankruptcy
Code to continue to operate as an ongoing business but may not engage in
transactions outside of the ordinary course of business without the approval of
the Bankruptcy Court.
18
Short-term
Debt Sources
We have a
revolving promissory note with Agstar for up to $6,000,000. We are
required to pay interest on the principal advances monthly at the LIBOR rate
plus 2.95%, which totaled 3.1891% at December 31, 2009 and 3.2256% as of
September 30, 2009. The purpose of this loan is for general and
operating expenses. The maturity of this line of credit is 364 days
from commencement; on the loan maturity date, the principal and any outstanding
accrued interest will be due. We pay a commitment fee of 0.35% on the
unused portion of the revolving promissory note. As of December 31,
2009 and September 30, 2009, approximately $5,346,000 and $6,000,000 were
advanced against the line of credit, respectively. Any further advances on the
line of credit need to be approved by the senior lender.
Long-term
Debt Sources
We have
entered into two loan agreements and one capital lease agreement for financing
of the Plant. The total loan commitment is $60,000,000 and the
capital lease is $26,010,000, and both are described below. All of
our long term debt described below has been reclassified as current maturities
of long-term debt because we are in default on our Master Loan Agreement with
AgStar for failure to make required principal and interest payments, our tax
credit loans with NMF for failure to make required interest payments, and our
capital lease with the County for failure to make required basic payments equal
to the aggregate amount of principal and interest outstanding on County bonds,
entitling AgStar, NMF, and the County to exercise any and all default remedies
against us including, but not limited to, acceleration of all outstanding unpaid
principal amounts. For more information on these defaults, and the
remedies available to AgStar, NMF, and the County, please see our current report
on Form 8-K under Item 2.04 as filed with the SEC on February 18,
2009.
We
entered into a senior debt financing agreement for a construction loan of
$35,000,000 from AgStar, which includes a term and revolving loan (collectively,
the “Construction Loan”). We made interest payments during the
construction phase at the LIBOR plus 3.15%. Interest was paid
quarterly in arrears on the first day of January, April, July, and
October. At completion of the Plant, the loan converted into the
Construction Term Loan and Construction Term Revolving Note.
The
Construction Loan converted to a term loan (the “Construction Term Loan”) and
term revolving loan on June 1, 2008, totaling $29,000,000. The
interest rate was reduced to LIBOR plus 2.95% on the Construction Term Loan,
which totaled 3.19% at December 31, 2009, and 3.23% at September 30,
2009. The agreement includes an option to convert a portion of the
Construction Term Loan to a fixed rate loan. We are required to make
interest payments only on the first day of each month for the first six months
followed by 114 principal installments of $254,386 plus accrued interest
beginning six months following substantial completion, which was determined to
be June 1, 2008, payable in full in June 2018. In addition to the
scheduled payments, we will make additional principal payments equal to 65% of
our excess cash flow not to exceed $2,000,000 per fiscal year and an aggregate
total of $8,000,000. As part of the financing agreement, the premium
above LIBOR may be reduced to 2.65% based on attaining certain financial
ratios.
Commitment
fees of $20,000 were charged at the time of conversion and will be charged
annually thereafter.
The
maximum amount of the Construction Loan that could be converted to the term
revolving loan is $6,000,000 (the “Revolving Loan”). The amount of
the Construction Loan that did convert to the Revolving Loan was
$6,000,000. We are required to pay interest on the principal advances
monthly at the LIBOR rate plus 2.95% which totaled 3.19% at December 31, 2009
and 3.23% at September 30, 2009. The purpose of this loan is for cash
and inventory management.
On March
30, 2007, we entered into a loan arrangement with NMF for the amount of
$19,175,000 (the “NMF Loan”). The tax credit period of the NMF Loan
is from September 2007 to September 2014. The NMF Loan is divided
into two portions including a term loan of $14,480,500, which we shall make
interest-only payments on beginning the sixth day of the first month following
the initial advancement until the 85th
month. On the sixth day of the 85th month
and continuing for an additional 48 months, we shall pay the amortized unpaid
principal together with the accrued interest. The interest rate shall
be calculated using the Wall
Street Journal daily money rate (base rate) plus 100 basis points,
totaling 4.25% and 6.00% at December 31, 2009 and September 30, 2009,
respectively. In addition there is a subordinated loan for $4,694,500
which will carry an interest rate of 2.51%. On the first day of each
month following the initial advance, which occurred in August 2007, we are
required to make interest-only payments until September 2014 when we are
required to make a principal payment of $400,000. Any further
advances on the line of credit need to be approved by the senior lender. We are
currently in default under our NMF Loan for failure to make required interest
payments.
19
Capital
Lease
In April
2007, we entered into a long term equipment lease agreement (the “Equipment
Lease Agreement”) with the County in order to finance equipment for the Plant
(the “Capital Lease”). The Equipment Lease Agreement has a term from
May 1, 2007 through November 2019. The County financed the purchase
of equipment through Subordinate Exempt Facility Revenue Bonds Series 2007A
totaling $20,000,000, General Obligation Tax Abatement Bonds Series 2007B
totaling $5,245,000, and Taxable General Obligation Tax Abatement Bonds Series
2007C totaling $765,000 (collectively, the “Bonds”).
Under the
Equipment Lease Agreement with the County, we started making payments on May 25,
2008 and have and will make payments on the 25th of each
month. Payments for principal start on November 25, 2009 in an amount
equal to 1/6 principal scheduled to become due on the corresponding Bonds on the
next semi-annual principal payment date. We also make Capital Lease
payments that correspond to 1/6 the amount of interest payable due on the Bonds
on February 1 or August 1 of each year and principal amounts equaling 1/12 of
the principal due each February1. We have guaranteed that if such
assessed lease payments are not sufficient for the required Bond payments, we
should provide such funds as are needed to fund the shortfall. The
Capital Lease also includes an option to purchase the equipment at fair market
value at the end of the lease term. We are in default under the
Capital Lease for failure to make required basic payments.
Statement of Cash Flows for the three months ended December 31,
|
2009
(unaudited)
|
2008
(unaudited)
|
||||||
Cash
flows used in operating activities
|
$
|
4,325,108
|
$
|
(2,807,213)
|
||||
Cash
flows used in investing activities
|
—
|
(26,336)
|
||||||
Cash
flows provided by financing activities
|
156,289
|
2,456,380
|
Cash
Flow Used in Operations
The net
cash flow used in operating activities for the three months ended December 31,
2009 decreased approximately $7,130,000 over that for the three months ended
December 31, 2008. The use of cash flows in operating activities was
the result of the spread between ethanol and corn prices causing us to incur
losses for the first two quarters of fiscal 2010. As disclosed above,
we believe our existing working capital will not be sufficient to meet the cash
requirements to fund our planned operating expenses for the remainder of fiscal
2010.
Cash
Flow Used in Investing Activities
There was
no material change in cash used for investing activities for the three months
ended December 31, 2009 compared to the three months ended December 31,
2008.
Cash
Flow Provided By Financing Activities
Since our
inception, we have generated significant cash inflows from bank financing
arrangements and member equity contributions. Proceeds from the three
months ended December 31, 2009 from our bank financing arrangements decreased by
$2,300,000 compared to the bank proceeds for the three months ended December 31,
2008. This is primarily due to the proceeds from our construction
loan being fully utilized as of the end of fiscal 2008, net of payments made
during the first quarter of 2010 on our operating line of credit.
We are in
default under all of our senior and subordinated debt, which means that all of
our long-term debt has been classified to current maturity. On October 30, 2009,
we filed a voluntary petition for relief in the United States Bankruptcy Court,
District of Minnesota under Chapter 11 of the Code. Our negotiated Chapter 11
bankruptcy filing, In re:
Otter Tail AG Enterprises, LLC, was made with the approval of our senior
lenders. Our continued operations will be dependent on successfully emerging
from bankruptcy with a court-approved plan of reorganization, which we have yet
to submit to the Bankruptcy Court. Based on our operating plan, our existing
working capital is not sufficient to meet the cash requirements to fund our
planned operating expenses, capital expenditures, and working capital
requirements through September 30, 2010 without additional sources of cash
and/or the deferral, reduction, or elimination of significant planned
expenditures. Currently, we have no commitments to obtain additional capital,
and there can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. If we cannot obtain sufficient additional
funding, we will be forced to significantly curtail our operations or cease
operations.
20
Subsequent
to quarter end, we entered into term sheets for exit financing with the Agstar
and NMF. The exit financing term sheet with Agstar modifies the
Construction Term Loan and Construction Term Revolving Note, combining them into
one term note, in the amount of $35,000,000 which will mature on June 1,
2013. Additionally, the exit financing term sheet modifies the
Revolving line of credit loan to a 364 day revolving credit facility in an
amount not to exceed the lesser of 75% of eligible accounts receivable and
inventory or $4,000,000 and will mature 364 days following the effective date of
the plan.
Interest
on the term and revolving loans will bear interest at a fixed rate of 6.5%
through May 31, 2013; however, the rate is subject to changes in the three-year
U.S. Treasury bond rate between the date of the term sheet and the effective
date of the plan. The term note will be payable in a special
principal payment of $3,150,000 on the first day of the calendar month following
the effective date of the plan and the balance of the note in equal monthly
installments of principal and interest over a period of ten
years. All current default interest will be deferred until June 1,
2013. The loans will be secured by a first priority perfected
security interest in all of our assets.
The exit
term sheets of the NMF loan reaffirm all of the terms of the original
agreements, except for it provides for the deferral of default interest until
the present maturity dates as provided in the original
agreements. These term sheets are contingent upon certain
requirements, such as a confirmation order confirming the plan, payments of
certain accrued regular interest, establishment of a debt reserve account
equivalent to six months interest and obtaining subscription letters of up to
$12,000,000.
Results of Operations for
the Three Months Ended December 31, 2009 and December 31,
2008
Revenues
For the
three months ended December 31, 2009, we had revenues of approximately
$29,300,000. For the three months ended December 31, 2008, we had
revenues of approximately $25,500,000. The increase in our revenues
of approximately $3,800,000, or 15 percent, was due to an increased price
received for our ethanol production.
Cost of
Sales
For the
three months ended December 31, 2009, we had costs of sales of approximately
$22,800,000, or approximately 77.8% of revenues. For the three months
ended December 31, 2008, we had costs of sales of approximately $25,800,000, or
approximately 101.2% of revenues. Our lower costs of sales for the
three months ended December 31, 2009 over the comparable prior year period of
approximately $3,000,000 was due to a lower cost of corn, our primary operating
cost.
Operating
Expenses
Our
operating expenses were approximately $530,000 and $590,000 for the three months
ended December 31, 2009 and 2008, respectively. Our operating expenses
decreased by approximately $60,000 for the three months ended December 31, 2009
over the comparable prior year period. The decrease was due primarily
to lower non-reorganization professional fees.
21
Other
Income (Expense), Net
Interest
expense was approximately $1,200,000 and $1,100,000 for the three months ended
December 31, 2009 and 2008, respectively, an increase of approximately
$100,000 for the three months ended December 31, 2009 over the comparable prior
year period. As of December 31, 2009, we had fully drawn on our
senior debt.
Interest
income was approximately $6,000 and $11,000 for the three months ended December
31, 2009 and 2008, respectively, a decrease of approximately $5,000 for the
three months ended December 31, 2009 over the comparable prior year
period. Interest income decreased primarily due to a reduction in cash
held in interest bearing accounts and reduction in rate
earned.
Net
Loss
Our net
income was approximately $4,600,000 and our net loss was approximately
$1,100,000 for the fiscal quarters ended December 31, 2009 and 2008,
respectively, an increase of approximately $5,700,000 for the first quarter of
fiscal 2010 over the first quarter of fiscal 2009. The increase in
our net income was primarily the result of the improved margin situation in the
ethanol industry during the second half of fiscal 2009 which continued in the
first quarter of fiscal 2010. As provided in “Chapter 11 Bankruptcy”
in this Management’s Discussion and Analysis, continued net losses, and our
worsening liquidity situation towards the end of fiscal 2009 caused us to make a
voluntary filing for Chapter 11 protection on October 30, 2009.
Margins
have recently improved across the industry due to a more balanced supply and
demand of product in the marketplace. This margin improvement has
caused some of the production capacity that was previously slowed down or shut
down to increase production or come back on line. In the event that
we successfully emerge from bankruptcy and some or all of production capacity
that was previously slowed or shut down comes back on line, we may witness
tighter margins for the remainder of fiscal year 2010 and possibly
beyond.
Off-Balance
Sheet Arrangements
As
of December 31, 2009, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are
exposed to the impact of market fluctuations associated with commodity prices
and interest rates as discussed below. We have no exposure to foreign
currency risk as all of our business is conducted in United States
Dollars. We use derivative financial instruments as part of an
overall strategy to manage market risk. We use cash, futures, and
option contracts to hedge changes to the commodity prices of corn and
ethanol. We do not enter into these derivative financial instruments
for trading or speculative purposes, nor do we designate these contracts as
hedges for accounting purposes pursuant to the requirements of Financial
Accounting Standards Board ASC Topic 815, “Derivatives and
Hedging.”
Interest
Rate Risk
We expect
to be exposed to market risk from changes in interest rates on our existing debt
facilities. Exposure to interest rate risk results from holding our
credit agreements.
We used
debt to finance a significant amount of our expenditures in the year ended
September 30, 2009 and in the three months ended December 31,
2009. These agreements will expose us to market risk related to
changes in interest rates. As of December 31, 2009, we have
approximately $85,500,000 in short-term debt including our line of
credit.
Commodity
Price Risk
Effective
April 8, 2009, we closed the majority of all derivative positions. At
December 31, 2009, we have no derivative instruments that expose us to commodity
price risk. For the period ended September 30, 2009, we recorded a
realized loss of approximately $234,000.
22
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our chief
executive officer/chief financial officer, we have conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and
Exchange Act of 1934, as of the end of the period covered by this
report. In our Evaluation of Disclosure Controls and Procedures
filed with our Annual Report on Form 10-K for the year ended September 30, 2009,
we reported that the Company’s disclosure controls and procedures are not yet
fully effective to provide reasonable assurance that: (i) information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is accumulated and communicated to the
Company’s management, including the chief executive officer/chief financial
officer as appropriate to allow timely decisions regarding required disclosure
by the Company; and (ii) information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms. During the
quarter ended December 31, 2009, we continued to design enhancements to our
controls including the following:
|
·
|
implementing
a search for a full-time controller or CFO with appropriate U.S. GAAP and
SEC experience;
|
|
·
|
establishing
and implementing a detailed timeline review and completion of financial
reports to be included in our Forms 10-Q and 10-K;
and
|
|
·
|
employing the use of appropriate
supplemental SEC and U.S. GAAP checklists in connection with our closing
process and the preparation of our Forms 10-Q and
10-K.
|
As a
result of these material weaknesses, which were not remedied as of December 31,
2009, we have concluded that our disclosure controls and procedures were not
effective as of December 31, 2009. The implementation of the
remediation plan described above has been initiated and will continue through
the remainder of the first half of fiscal 2010 and possibly
beyond. The material weakness will not be considered remediated until
the applicable remedial procedures are tested and management has concluded that
the procedures are operating effectively. Management recognizes that
the use of our financial resources will be required not only for implementation
of these measures but also for testing their effectiveness and may seek the
assistance of an outside service provider to assist in this
process.
If we are
not able to implement controls to avoid the occurrence of material weaknesses in
our internal control over financial reporting or disclosure controls in the
future, then we might report results that are not consistent with our actual
results, and we may need to restate results that will have been previously
reported.
Changes
in Internal Controls
There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently
completed quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
October 30, 2009, we filed a voluntary petition for relief in the United States
Bankruptcy Court, District of Minnesota under Chapter 11 of the
Code. Our negotiated Chapter 11 bankruptcy filing, In re: Otter Tail AG Enterprises,
LLC, was made with the approval of our senior lenders.
23
Under
Chapter 11, certain claims in existence prior to our filing of the petition for
relief under the Code are stayed while we continue business operations as a
debtor-in-possession. We have continued and will continue to operate
our business as debtor-in-possession under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Code.
The
Chapter 11 bankruptcy filing described above constitutes an event of default
under the Company’s master loan agreement with Agstar Financial Services, PCA,
its construction and term loan agreement with MMCDC New Markets Fund II, LLC
(collectively, the parties are the “Secured Creditors”), and its capital lease
with the County. Prior to that, on June 3, 2009, all obligations
under the aforementioned agreements became automatically and immediately due and
payable. However, the ability of the Secured Creditors and County to
seek remedies to enforce their rights under the agreements is automatically
stayed as a result of the filing of the Chapter 11 petition. The
automatic stay invoked by the filing of the Chapter 11 petition effectively
precludes any actions by the Company’s Secured Creditors and County to collect,
assert, or recover a claim against us, subject to the applicable provisions of
the Code and orders granted by the Bankruptcy Court.
ITEM
1A. RISK FACTORS
In
addition to the other information set forth in this report, including the
important information under the heading “Disclosure Regarding Forward-Looking
Statements,” you should carefully consider the “Risk Factors” discussed in our
Annual Report on Form 10-K for the fiscal year ended September 30,
2009.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Please
see Notes 6 and 7 to our condensed unaudited financial statement notes in Part
1, Item 1 of this Quarterly Report on Form 10-Q.
None
None.
See
Exhibit Index following the signature page of this
report.
24
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OTTER
TAIL AG ENTERPRISES, LLC
|
||
Date:
February 16, 2010
|
By:
|
/s/
Anthony Hicks
|
Anthony
Hicks
|
||
Chief
Executive Officer and Chief Financial Officer
(principal
executive officer, principal financial officer
and
principal accounting
officer)
|
25
OTTER
TAIL AG ENTERPRISES, LLC
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009
10.1
|
Cash
Collateral Agreement by and between the Registrant, Agstar Financial
Services, PCA, and MMCDC New Markets Fund II, dated as of October 23,
2009.
|
10.2
|
Exit
Financing Term Sheet with MMCDC New Markets Fund II, dated as of February
3, 2010.
|
10.3
|
Exit
Financing Term Sheet with Agstar Financial Services, PCA, dated as of
January 15, 2010.
|
31.1*
|
Certification
by Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934).
|
32.1*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Filed herewith.
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