Attached files
file | filename |
---|---|
EX-31.1 - Otter Tail Ag Enterprises, LLC | v170271_ex31-1.htm |
EX-10.1 - Otter Tail Ag Enterprises, LLC | v170271_ex10-1.htm |
EX-32.1 - Otter Tail Ag Enterprises, LLC | v170271_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM 10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2009
o
|
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
|
41-2171784
|
|
(State
or other jurisdiction
|
(IRS
Employer
|
|
of
incorporation or organization)
|
Identification
No.)
|
24096
- 170th Avenue
Fergus
Falls, MN 56537-7518
(Address
and Zip Code of Principal Executive Offices)
Registrant’s
telephone number, including area code: (218) 998-4301
Securities
registered pursuant to Section 12(b) of the Act: None
Securities registered under
Section 12(g) of the Act: Class A
Membership Units
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicated
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 o
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 o No o
Indicate
by check mark if disclosures of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated Filer o
Non-accelerated filer o Smaller Reporting
Company x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No x
The
aggregate market value of the membership units held by non-affiliates of the
registrant as of September 30, 2009 was $46,406,664. There is no
established public trading market for our membership units. The aggregate
market value was computed by reference to the purchase price of $2.00 per unit
that was established in our intrastate offering that closed on October 31, 2006,
multiplied by the 23,203,332 Class A Membership units held by non-affiliates of
the Company.
APPLICABLE
ONLY TO REGISTRANTS 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 Section 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 o No o
As of
September 30, 2009 the Company had 23,944,000 Class A Membership Units
outstanding.
TABLE OF
CONTENTS
PART I
|
|
ITEM
1. BUSINESS
|
3
|
ITEM
1A. RISK FACTORS
|
10
|
ITEM
2. PROPERTIES
|
20
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
20
|
PART II
|
|
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED UNIT HOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
20
|
ITEM
6. SELECTED FINANCIAL DATA
|
21
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
22
|
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
30
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
31
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
|
31
|
ITEM
9A(T). CONTROLS AND PROCEDURES
|
31
|
PART III
|
|
ITEM
10. GOVERNORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
|
32
|
ITEM
11. EXECUTIVE COMPENSATION
|
34
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
36
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND GOVERNOR
INDEPENDENCE
|
37
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
37
|
PART IV
|
|
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
39
|
Exhibit
10.1
|
|
Exhibit
31.1
|
|
Exhibit
32.1
|
2
PART I
ITEM 1. BUSINESS.
Overview
Otter
Tail Ag Enterprises, LLC (“We,” “us,” “our,” or the “Company”), organized as a
Minnesota limited liability company on January 27, 2005, owns and operates
a nameplate capacity 55 million gallons per year corn dry mill ethanol plant in
Fergus Falls, Minnesota (the “Plant”), which became fully operational in
June 2008. Our Plant annually processes approximately 20 million
bushels of corn into 55 million gallons of denatured fuel grade ethanol, 135,500
tons of dried distillers grains with solubles, and 65,500 tons of distillers
grains with solubles. In this process, we consume approximately 1,700,000
cubic feet of natural gas per year. Our website is located at
www.ottertailethanol.com. Our principal executive offices currently are
located at 24096 -170th Avenue, Fergus Falls, Minnesota, 56537-7518, and our
telephone number is (218) 998-4301.
General
Development of Business
We began
preliminary production operations in April 2008, and ethanol was first
produced at the Plant in May 2008. The Plant encountered issues typical of
a plant startup during the first four months of operation. As of
September 30, 2009, we have been producing ethanol at the Plant at or near
nameplate capacity, and have been receiving revenues from the sale of ethanol,
Distillers Grains With Solubles (“WDGS”) and Distillers Dried Grains with
Solubles (“DDGS”). We had a period of profitability following the
commencement of ethanol production in May, June, and July 2008; however, since
that time we have not been profitable and we may not be able to achieve
profitability in the near future, or at all. We violated certain covenants under
our master loan agreement (the “Master Loan Agreement”) with Agstar Financial
Services, PCA (“Agstar”) and were in default as of September 30, 2008. We
received a waiver from Agstar for compliance with such covenants through October
1, 2009 and a waiver from MMCDC New Markets Fund II, LLC (“NMF”) and Otter Tail
county pertaining to the cross-default provisions contained in their respective
debt financing agreements. However, due to the untimely payments on
all our loans they are now all recorded as current and we have been unable to
obtain additional waivers from any of our lenders for the year ending September
30 2009. We have incurred net losses of $21.5 million and $8.7
million for the year ended September 30, 2009 and 2008,
respectively. In August 2009, we received notice that our senior
lender and other secured lenders had filed a foreclosure notice through the
court system to retrieve the assets and to appoint a receiver to control and
liquidate the business. As a means to protect ourselves and following failed
negotiation with our lenders, we filed for bankruptcy on October 30, 2009 under
the protection of Chapter 11 of the bankruptcy code.
We plan
to utilize the court system to file a reorganization and restructure plan to
meet the needs of the business on a going forward basis. We do not have a plan
of reorganization plan at present, and any proposed plan must be confirmed by
the bankruptcy court. There is no guarantee that such a plan will be confirmed
by the bankruptcy court. A major component of this plan will be the restructure
of our indebtedness as well as raising a minimum of $10 million of additional
equity. There can be no assurance that we will be able to obtain any sources of
funding on acceptable terms, or at all. Our long-term plan includes evaluating
improved technologies to either earn additional revenue or reduce operating
costs as well as evaluate our procurement and offtake agreements with the goal
of reducing our input costs and increasing our revenues. There can be no
assurance that we will be able to find or add improved technologies or change
our procurement or offtake structure.
Financial
Information
Please
refer to “Item 6 — Selected Financial Data” and “Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for
information about our revenues, profit and loss measurements and total assets.
Our consolidated financial statements and supplementary data are included
beginning at page F-1 of this annual report on Form 10-K.
Principal
Products and Their Markets
The
principal products we produce at our Plant are fuel grade ethanol and DDGS and
WDGS.
Our
Main Product - Ethanol
Ethanol
is ethyl alcohol, a fuel component made primarily from corn and various other
grains, and can be used as:
·
|
an
oxygenated fuel additive that can reduce ozone and carbon monoxide vehicle
emissions;
|
3
·
|
a
non-petroleum based gasoline substitute;
and
|
·
|
an
octane enhancer in fuels.
|
Most
ethanol is used in its primary form for blending with unleaded gasoline and
other fuel products. The principal purchasers of ethanol are generally
wholesale gasoline distributors or blenders.
Ethanol
is produced from starch or sugar-based feed products such as corn, potatoes,
wheat, and sorghum, as well as from agricultural waste products including sugar,
rice straw, cheese whey, beverage wastes and forestry and paper wastes.
Historically, corn has been the primary source because of its relatively low
cost, wide availability and ability to produce large quantities of carbohydrates
that convert into glucose more easily than other products. Today,
approximately 90% of the ethanol produced in the United States is produced from
corn.
The
Dry Mill Process
The Plant
uses a dry milling process to produce fuel-grade ethanol as its main product and
DDGS and WDGS as co-products. Our Plant has a design capacity to produce
55 million gallons of ethanol per year. In addition, the Plant has a
design capacity to produce approximately 135,500 tons of DDGS and 66,500 tons of
WDGS. We are presently venting the carbon dioxide gas into the
atmosphere. Our Plant has, among others, the following
facilities:
Grain Receiving, Storage and Milling
Equipment. The Plant contains receiving facilities that have the
ability to receive corn by rail and truck. Upon delivery, we weigh the
corn and issue a weight ticket. A leg lifts the corn to the storage
bins. We have installed a dust collection system in the grain receiving
system to limit particulate emissions. We then remove the corn from
storage to a scalper to remove rocks and debris before conveying the product and
processing it through a hammer-mill. The result of this process is ground
corn.
Conversion and Liquefaction System,
Fermentation System and Evaporation System. We mix the ground corn
in slurry tanks which produces cooked mash. The cooked mash then continues
through liquefaction tanks and into fermenters. Simultaneously, we add
yeast to the cooked mash as it enters the fermenters. After batch
fermentation is complete, the liquid produced by the fermentation process is
pumped to wells and then to the distillation column to separate the alcohol from
the mash.
Distillation and Molecular
Sieve. We dehydrate and separate the ethanol in the distillation
column, the side stripper and the molecular sieve system. We then blend
the ethanol with up to 5 percent gasoline as it is pumped into storage
tanks. The storage tanks contain meters, filters, pumps and loading
equipment for transfer to rail cars or trucks.
Liquid/Solid Separation
System. The Plant also produces distillers grains. We
transport the corn mash from the distillation column to centrifuges and then a
dryer, where moisture is removed. The Plant utilizes a dryer system with a
regenerative thermal oxidizer. After they are dried, the distillers grains
are conveyed to the filter receiver and then to a storage building.
Product Storage Area. We have storage tanks
on site to store the ethanol we produce. The Plant also contains a storage
building to hold distillers grains until they are shipped to
market.
General Plant Infrastructure and
Utilities. The Plant also consists of administration facilities,
chillers, cooling towers and other processing equipment, some of which require
fresh water to operate. We condition boiler water in regenerative
softeners and/or other treatment equipment and pump it through a deaerator and
into a deaerator tank. Appropriate boiler chemicals are added and the
pre-heated water is pumped into the boiler. Steam energy is provided by a
steam generator. Process cooling is provided by circulating cooling water
through heat exchangers, a chiller and a cooling tower. The Plant contains
a compressed air system consisting of an air compressor, receiver tank,
pre-filter and air dryer. The Plant design also incorporates the use of a
clean-in-place system for cooking, fermentation, distillation, evaporation,
centrifuges and other systems.
The block
flow diagram below illustrates how the Plant processes corn into
ethanol:
4
For our
fiscal years ended September 30, 2009 and 2008, revenue from the sale of
ethanol was approximately 85% of total revenues.
Distillers
Grains
A
principal co-product of the ethanol production process is distillers grains, a
high protein, high-energy animal feed supplement primarily marketed to the dairy
and beef industry. Distillers grains contain by-pass protein that is superior to
other protein supplements such as cottonseed meal and soybean meal. By-pass
proteins are more digestible to the animal, thus generating greater lactation in
milk cows and greater weight gain in beef cattle. The dry mill ethanol
processing used by the Plant results in two forms of distiller grains: WDGS and
DDGS. WDGS is processed corn mash that has not been dried and that has
approximately 65% moisture. WDGS have a shelf life of approximately three days
and are often sold to nearby markets. DDGS is processed corn mash that has been
dried to 10% to 12% moisture. DDGS has an almost indefinite shelf life and may
be sold and shipped to any market regardless of its vicinity to an ethanol
plant. At our Plant, the composition of the distillers grains we produce is
approximately 40% WDGS and 60% DDGS (by weight).
For our
fiscal years ended September 30, 2009 and 2008, revenues from sale of
distillers grains was approximately 15% of total revenues.
Employees
We have
33 full time employees, of which five are in general management and
administration, and the remainder in Plant operations. We entered into a
written agreement to employ a Chief Executive Officer, who also serves as our
Chief Financial Officer. We do not maintain an internal sales
organization. We rely upon third-party buyers and marketers to buy or
market the ethanol and distillers grains that we produce to multiple buyers
throughout the United States. Under such a business plan, our principal
operations are the general management of our business and the operation of the
Plant.
Sales
and Marketing
We have
hired a national marketing firm to sell our ethanol and another to sell our
distillers grain. However, because of the number of local feedlots and
livestock operations, we sell a portion of our distillers grains locally, as
WDGS.
Ethanol
On
July 18, 2006, we entered into an Ethanol Fuel Marketing Agreement with
Renewable Products Marketing Group, L.L.C. (“RPMG”) in which RPMG agreed to be
the sole marketing representative for our facility’s entire production of
ethanol. Under the terms of this agreement, RPMG agrees to use its best
efforts to market all our ethanol and its best efforts to find the best price
for all fuel grade ethanol obtained pursuant to the agreement, but is not
obligated to sell a minimum number of gallons per month. The cost
associated with this service is $0.01 per gallon of the sales price of the
ethanol. This agreement estimates that we will supply RPMG with an average
monthly volume of 4,583,333 gallons of ethanol. If we are unable to
achieve this monthly volume and, as a consequence, RPMG is unable to meet its
sale obligations to third parties, RPMG may purchase ethanol on the open market
and have us reimburse RPMG for any losses. RPMG is under no contractual
obligation to buy any minimum amount of our ethanol. If, for any reason,
this agreement is terminated by either party, we may incur significant expense
in finding a replacement to market our ethanol, which could have a material
negative effect on our business.
We
believe that utilizing RPMG not only enables us to bypass the need to develop
our own internal sales organization, but also provides us access to markets that
we would otherwise not be able to penetrate on our own. RPMG has access to
numerous markets because they manage large quantities of ethanol and can provide
flexibility to meet varying customer needs. We believe that having a
diverse customer base through RPMG provides us
better flexibility to respond to negative localized market fluctuations.
However, we seek to deliver as much product as possible to local markets, which
helps minimize our freight costs.
5
In
addition, RPMG offers a variety of services and infrastructure that would be
expensive and inefficient for us to implement on our own. For example,
RPMG provides scheduling, transportation logistics, permits, invoicing, account
collection and payment services. We believe it is more cost effective for
us to contract for these services from our marketer rather than developing and
funding in house expertise to handle these matters. This type of marketing
agreement is customary in the ethanol industry as ethanol producers focus on
producing ethanol and enter into agreements with third-party providers with
expertise in other key areas.
RPMG is a
producer-owned ethanol and bio-diesel marketing company formed in 1999.
RPMG applies cooperative principles to the marketing of fuel ethanol and it is
the only such association that is wholly owned and managed by its member
plants. The five founding member plants of RPMG are Al-Corn Clean Fuels of
Claremont, Minnesota; Chippewa Valley Ethanol Company of Benson, Minnesota; Corn
Plus of Winnebago, Minnesota; Diversified Energy Company of Morris, Minnesota
and Heartland Corn Products in Winthrop, Minnesota. We are not a member of
RPMG, but retain RPMG to market our ethanol pursuant to the Ethanol Fuel
Marketing Agreement. We do not anticipate any conflicts of interest
arising in the future due to RPMG marketing ethanol for other producers and its
member plants because RPMG is contractually obligated to use the same best
efforts to sell the ethanol produced at all its contracted plants. As a
result, RPMG would be in breach of its contracts with us and other members if it
favored one plant over another. No such event has occurred, to our
knowledge, in the past, nor would we reasonably expect that such an event would
happen in the future.
The
market segments for our ethanol depend in part on the buyers and marketers we
work with and their size and geographic reach. These outlets vary in terms
of where they distribute the ethanol and the transportation methods and costs
associated with delivering the ethanol to their facilities. Unless rail is
an option, ethanol sold in local and regional markets are typically shipped
primarily by truck. Ethanol sold into national markets is shipped by
rail.
To meet
the challenge of marketing ethanol to diverse market segments, we have planned
for an extensive rail siding at the production facility. The use of rail
allows us to quickly move large quantities of ethanol to the markets that
provide the greatest return.
Our
ethanol and distillers grains marketers decide where our products will be
marketed. Our products are primarily marketed within the United
States. However, we may experience increased exports of our products in
the future. Further, distillers grains may be exported to countries who
require animal feed. Management anticipates that the Asian market may
increase demand for distillers grains in the future. As distillers grains
become more accepted as an animal feed substitute throughout the world,
distillers grains exporting may increase.
Distillers
Grains
The
market for distillers grains generally consists of local markets for both DDGS
and WDGS and national markets for DDGS.
Most of
the distillers grains that we sell are in the form of DDGS. On
February 28, 2008, we signed an agreement with CHS, Inc. (“CHS”) in
which CHS agreed to be the sole marketing representative for our Plant’s entire
production of DDGS. If, for any reason, this agreement is terminated
by either party, we may incur significant expense in finding a replacement to
market our DDGS, which could have a material negative effect on our
business.
We sell a
portion of our distillers grains as WDGS, which are sold to local markets.
We are also party to a Distillers Grain Purchase Agreement with Bilden Farms,
LLC (“Bilden”) in which we give Bilden the first right and option to purchase
our output of WDGS, and Bilden agrees to utilize its best efforts to purchase
and resell the grains. The agreement is for a two-year term. We
believe this agreement helps to further reduce our shipping cost and minimize
drying costs. If, for any reason, this agreement is terminated by
either party, we may incur significant expense in finding a replacement to
market our WDGS, which could have a material negative effect on our
business.
Procurement
Agreements
We are
party to a Procurement Agreement with CHS in which CHS agreed to supply and we
agreed to buy all of the corn needed for ethanol production at the Plant,
estimated to be approximately 20 million bushels per year. Our contract
with CHS provides that we will establish the price we will pay for corn and CHS
will seek corn for us to buy at this price. In the event CHS cannot locate
adequate corn at this price, CHS will notify us and we may elect to change our
price in order to obtain more corn. If CHS is unable to obtain enough corn
in our immediate trade territory, we have installed rail unloading capability
and we have the ability to bring rail cars in from outside our immediate market
area. CHS would continue to act as our buying agent and we would set the
price. In the event that CHS is unable to obtain corn for us at a price we
deem acceptable, we would seek to purchase corn directly from farmers, elevators
and other corn supply companies in our local area, as well as from regional and
national sources. This agreement is for a term of five years and will
expire in 2012.
6
Dependence
on One or a Few Major Customers
We are
substantially dependent upon RPMG for the purchase, marketing and distribution
of our ethanol. RPMG purchases 100% of the ethanol produced at our Plant, all of
which is marketed and distributed to its customers. Therefore, we are highly
dependent on RPMG for the successful marketing of our ethanol. In the event that
our relationship with RPMG is interrupted or terminated for any reason, we
believe that another entity to market the ethanol could be located. However, any
interruption or termination of this relationship could temporarily disrupt the
sale and production of ethanol and adversely affect our business and
operations.
We are
substantially dependent on CHS for the purchase, marketing and distribution of
our DDGS. CHS purchases 100% of the DDGS produced at the Plant, all of which are
marketed and distributed to its customers. Therefore, we are highly dependent on
CHS for the successful marketing of our DDGS. In the event that our relationship
with CHS is interrupted or terminated for any reason, we believe that another
entity to market the DDGS could be located. However, any interruption or
termination of this relationship could temporarily disrupt the sale and
production of DDGS and adversely affect our business and
operations.
Seasonal
Factors in Business
In an
effort to improve air quality in regions where carbon monoxide and ozone are a
problem, the Federal Oxygen Program of the Federal Clean Air Act requires the
sale of oxygenated motor fuels during the winter months in certain major
metropolitan areas to reduce carbon monoxide pollution. Gasoline that is blended
with ethanol has a higher oxygen content than gasoline that does not contain
ethanol. As a result, we see fairly light seasonality with respect to our gross
profit margins on our ethanol, allowing us to, in some cases, be able to sell
our ethanol at a slight premium during the mandated oxygenate period.
Conversely, we expect our average sales price for fuel grade ethanol during the
summer, when fuel grade ethanol is primarily used as an octane enhancer or a
fuel supply extender, to be a little lower.
Financial
Information about Geographic Areas
All of
our operations and all of our long-lived assets are located in the United
States. We believe that all of the products we will sell to our customers in the
future will be produced in the United States.
Sources
and Availability of Raw Materials
Corn
Our corn
supply is secured through a procurement arrangement with CHS. Under
the terms of the procurement agreement, CHS agrees to supply and we agree to buy
all of the corn needed for ethanol production at the Plant, estimated to be
approximately 20 million bushels per year. We believe that CHS can supply
all of the corn needed for our ethanol production requirements. For the
fiscal year ended September 30, 2009, we had not experienced any problems
with our supply of corn from CHS, and do not anticipate experiencing any
problems with our supply of corn in fiscal 2010.
Utilities
The
production of ethanol is a very energy intensive process that requires
significant and uninterrupted amounts of electricity, natural gas and
water. We have signed contracts with utility providers to supply us with
our energy requirements. A natural gas pipeline has been installed to the
Plant distributing to the necessary equipment. If there is any
interruption in our supply of energy, such as supply, delivery or mechanical
problems, we may have to halt production. Halting production for any
extended period of time will harm our business.
Natural
Gas
On
May 23, 2006, we entered into an agreement with BP Canada Energy Marketing
Corp. (“BP Canada”) to provide us with the necessary supply of natural gas when
needed at a mutually agreed upon price via telephone. For the fiscal
year ended September 30, 2009, we had not experienced any problems with our
supply of natural gas from BP Canada, and do not anticipate experiencing any
problems with our supply of natural gas in fiscal 2010.
Denaturant
Wholesale
gasoline is mixed into the ethanol and used as a denaturant in the ethanol
process. Each tank of ethanol that we produce is presently allowed to
contain a certain blended amount of gasoline.
Other
Inputs
Other
inputs to the production process include chemicals, yeast, enzymes and
water. Of these, chemicals and enzymes are the largest
components.
7
Transportation
and Delivery
The Plant
has facilities to receive corn by truck and rail and to load ethanol and
distillers grains onto trucks and rail cars. On October 1, 2006, we
entered into a lease for an indefinite term with Otter Tail Valley Railroad
Company, Inc. (“OTVR”) at a cost of $4,200 per year with a annual increase of 3%
for the use of the land in which the railroad will be constructed and
used. On May 9, 2006, we entered into an agreement with Railworks
Track Systems, Inc. to construct the track at a total cost of approximately
$1.5 million. On April 6, 2007, we entered into an industry track
agreement with OTVR to maintain and operate the track for a period of one year,
with automatic one year renewals thereafter.
We have
entered into a pool marketing agreement with RPMG to provide all marketing
services for ethanol including both truck and rail transportation. RPMG is
responsible for scheduling all logistics based on information we provide to them
on the amount of gallons we will be selling and shipping for a given
month. The cost for transportation of product by rail to a specific
destination is posted on the Burlington Northern Santa Fe railroad Web
site. The transportation costs associated with truck is based on a mileage
and fuel surcharge basis and is established once a destination is
determined. RPMG will be responsible for providing all rail and trucking
services, excluding expenses payable to the rail or trucking companies, as part
of the fee we pay RPMG. Expenses payable to the rail or trucking companies
are paid by RPMG, but deducted from our portion of the ethanol sales
price.
We also
have entered into an agreement with CHS to distribute and market our DDGS.
Under the terms of the agreement, CHS purchases 100% of the DDGS produced at the
Plant, all of which are marketed and distributed to its customers.
Ethanol
Competition
We are in
direct competition with producers of ethanol and other alternative fuel
additives. We compete with other ethanol producers on the basis of price
and delivery service. Our Plant produces approximately 55 million gallons
of ethanol annually. We believe that this volume gives us certain
procurement and production efficiencies over smaller competitors.
Many
competitors are located in close proximity to our Plant and more may be in the
future. These competitors compete with us for, among other things, corn
and personnel. Because of their close proximity, these competitors may
also be more likely to sell to the same markets that we target for our ethanol
and distillers grains.
According
to the Renewable Fuels Association, as of October 22, 2009, 202 ethanol
refineries had a nameplate production capacity of 13.1 billion
gallons, and 11.9 billion gallons of operating production. A majority of
the ethanol plants are located in the Midwest, in the corn-producing states of
Illinois, Iowa, Minnesota, Nebraska and South Dakota. The largest ethanol
producers include Valero Energy Corporation, Abengoa Bioenergy Corp., Archer
Daniels Midland Company, Aventine Renewable Energy, Inc.,
Cargill, Inc., New Energy Corp. and Poet, LLC.
Distillers
Grains Competition
Ethanol
plants in the Midwest produce the majority of distillers grains and primarily
compete with other ethanol producers in the production and sales of distillers
grains. The amount of distillers grains produced is expected to
increase significantly as the number of ethanol plants increase, which will
increase competition in the distillers grains market in our area. In addition,
our distillers grains compete with other livestock feed products such as soybean
meal, corn gluten feed, dry brewers grain and mill feeds.
International
We also
compete and believe we will continue to compete in the future with ethanol that
is produced or processed in certain countries in Central America and the
Caribbean region, Brazil and other countries. Ethanol produced in the Caribbean
basin and Central America may be imported into the United States at low tariff
rates or free of tariffs under the Caribbean Basin Initiative and the Dominican
Republic — Central America — United States Free Trade Agreement. Although
tariffs presently impede large imports of Brazilian ethanol into the United
States, low production costs, other market factors or tariff reductions could
make ethanol imports from various countries a major competitive factor in the
United States.
Alternative
Fuel Additives
The
development of ethers intended for use as oxygenates is continuing. Methyl
tertiary butyl ether, or “MTBE,” is a petrochemical produced by combining
isobutylene (a product of the refining industry) with methanol. We expect
to compete with producers of MTBE, which costs less to produce than
ethanol. MTBE is an oxygenate commonly used in fuels for compliance with
the federal Clean Air Act. Many major oil companies produce MTBE.
These companies have significant resources to market MTBE and to influence
legislation and public perception of MTBE. However, MTBE has been
linked to groundwater contamination at various locations in the United
States. Many states have enacted legislation prohibiting the sale of
gasoline containing certain levels of MTBE or are phasing out the use of
MTBE.
8
Ethyl
tertiary butyl ether, or “ETBE,” is produced by combining isobutylene with
ethanol. ETBE’s advantages over ethanol as a fuel blend include its low
affinity for water and low vapor pressure. Because petroleum pipelines and
storage tanks contain water in various amounts, ETBE’s low affinity for water
allows it to be distributed through existing pipeline systems. This is not
possible for ethanol, which must be shipped via transport trucks or rail
cars.
A number
of automotive, industrial and power generation manufacturers are developing
alternative clean power systems using fuel cells or clean burning gaseous
fuels. Like ethanol, the emerging fuel cell industry offers a
technological option to address increasing worldwide energy costs, the long-term
availability of petroleum reserves and environmental concerns. Fuel cells
have emerged as a potential alternative to certain existing power sources
because of their higher efficiency, reduced noise and lower emissions.
Fuel cell industry participants are currently targeting the transportation,
stationary power and portable power markets in order to decrease fuel costs,
lessen dependence on crude oil and reduce harmful emissions.
Government
Incentives
National
Renewable Fuels Standard
The
Energy Policy Act of 2005 also introduced a national renewable fuels standard
program which sets a national minimum usage requirement that phases in over
seven years, beginning with approximately 4.0 billion gallons in 2006 and
increases to 7.5 billion gallons by 2012. On December 19, 2007,
President Bush signed into law the Energy Independence and Security Act of 2007,
which raises the minimum usage requirement to 13.2 billion gallons of ethanol by
2012 and 15 billion gallons by 2015. This law also mandates a minimum
requirement of 36 billion gallons of renewable fuels by 2022, with cellulosic
ethanol accounting for 16 billion gallons of this total. The renewable
fuels standard program should ensure the continued growth of the ethanol market
in the near future. While we cannot assure that this program’s mandates
will continue in force in the future, the following chart illustrates the
potential United States ethanol demand based on the program’s schedule through
the year 2022.
Source:
BioFuels Journal, December 28, 2007
Incentive
Programs
The
federal government and various state governments have created incentive programs
to encourage ethanol production and to enable ethanol-blended fuel to better
compete in domestic fuel markets with gasoline blended with MTBE. The
federal incentive programs include excise tax credits to gasoline distributors,
direct payments to eligible producers for increased ethanol production and
federal income tax credits which eligible producers may earn. State
incentive programs include production payments and income tax credits.
However, these programs are not without controversy, due in part to their cost,
and we cannot assure that they will continue to be available in the
future.
Federal
Excise Tax Exemption
Although
the regulatory program is complicated and there are other federal tax incentives
for ethanol production, the most important incentive for the ethanol industry
and its customers is the partial exemption from the federal motor fuels excise
tax, or the “excise tax exemption.” The excise tax exemption is provided
to gasoline distributors as an incentive to blend their gasoline with
ethanol. For each gallon of gasoline blended with 10 percent of ethanol,
the distributors receive a 4.5¢ per gallon reduction from the 18.3¢ per gallon
federal excise tax, which equates to a 45¢ reduction for each gallon of ethanol
that they use after annual production or importation of ethanol reaches 7.5
billion gallons. This exemption was lowered in the 2008 Farm Bill from a
previous excise tax exemption of 51¢ for each gallon and will expire in
December 2010 if not renewed.
9
Federal
Small Producer Credit
The
federal Small Ethanol Producer Credit provides an eligible ethanol producer with
a 10¢ per gallon tax credit for the first 15 million gallons of ethanol produced
annually. Under the program, ethanol producers that qualify or their
owners (for pass-through tax entities) can reduce their federal income tax
liability by the amount of the annual credit, subject to limitations.
However, benefit of the credit is reduced somewhat because the amount of the
credit must be added to regular taxable income (but not to alternative minimum
taxable income). Until recently, an eligible small ethanol producer was
defined as a producer whose annual production capacity was 30 million gallons or
less, which effectively precluded most newer plants from qualifying. The
Energy Tax Incentives Act of 2005 increased the annual production capacity
limitation from 30 million to 60 million gallons. Because our anticipated
annual capacity is 55 million gallons, we expect to qualify as a small ethanol
producer, at least in our initial year or years of operations. The credit
is scheduled to expire on December 31, 2010 and, if it is not extended,
taxpayers will have a three-year carry forward in which to utilize unused
credits.
Research
and Development
We do not
conduct any research and development activities associated with the development
of new technologies for use in producing ethanol or distillers
grains.
Costs
and Effects of Compliance with Environmental Laws
In the
fiscal year ended September 30, 2009, we incurred costs and expenses of
approximately $72,000 complying with environmental laws, including the cost of
obtaining permits, easements and installing emissions related equipment.
Although we have been successful in obtaining all of the permits currently
required, any retroactive change in environmental regulations, either at the
federal or state level, could require us to obtain additional or new permits or
spend considerable resources in complying with such regulations.
In
addition, permitting and environmental and other regulatory requirements may
change in the future. Changes in permitting and regulatory requirements
could make compliance more difficult and costly. If we are unable to
comply with the requirements of such permits or any other environmental
regulations, our business may be adversely affected and we may not be able to
operate our Plant.
Nuisance
The Plant
could be subject to environmental nuisance or related claims by employees,
property owners or residents near the Plant arising from air or water
discharges. These individuals and entities may object to the air emissions
from our Plant. Ethanol production has been known to produce an unpleasant
odor to which surrounding residents and property owners could object.
Environmental and public nuisance claims, or tort claims based on emissions, or
increased environmental compliance costs could significantly increase our
operating costs.
Future
Products
We
anticipate that advances in enzyme processes will increase the ethanol yield
realized from grain feedstock. These processes are not refined for
commercial application at this time, but we anticipate adopting, if possible,
technological advances as they become available if such advances are
commercially viable for the Company’s business plan. Past successes in
extractable starch and genetically modified corn, has shown marked improvements
for wet mill plants such as Minnesota Corn Processors and Archer Daniels
Midland. We intend to keep abreast of the advances in increased
fermentable starch corn as well as involve their members in the production of
genetically modified corn as advances are made.
The
production of ethanol from biomass feedstock may also become more economically
feasible in future years. We will look for options to benefit from those
advances as well. In the interim, the processes we plan to implement are
considered to be the most viable for the foreseeable future.
ITEM 1A. RISK
FACTORS.
You
should carefully read and consider the risks and uncertainties below and the
other information contained in this Annual Report on Form 10-K. The risks and
uncertainties described below are not the only ones we may face. The following
risks, together with additional risks and uncertainties not currently known to
us or that we currently deem immaterial, could impair our financial condition
and results of operations.
10
Risks
Relating to Our Bankruptcy
We
may not be able to successfully reorganize under Chapter 11, which would likely
terminate our future business prospects and our ability to continue as a going
concern and result in a liquidation of our assets.
On
October 30, 2009, we filed a voluntary petition for relief in the United
States Bankruptcy Court, District of Minnesota (the “Bankruptcy Court”) under
Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the “Code”). 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 Code are stayed while we continue business operations as a
debtor-in-possession (“DIP”). We have continued 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. For the duration of the
bankruptcy filing, our operations and our ability to execute our business
strategy will be subject to the risks and uncertainties associated with
bankruptcy. These risks include:
|
•
|
our
ability to continue as a going
concern;
|
|
•
|
our
ability to operate within the restrictions and the liquidity limitations
of any cash collateral order entered by the Bankruptcy Court in connection
with the bankruptcy filing;
|
|
•
|
our
ability to obtain Bankruptcy Court approval with respect to motions filed
in the bankruptcy filing from time to
time;
|
|
•
|
our
ability to develop, prosecute, confirm and consummate a plan of
reorganization with respect to the Chapter 11 proceedings and our ability
to fund and execute our business
plan;
|
|
•
|
our
ability to obtain and maintain normal payment and other terms with
customers, vendors and service
providers;
|
|
•
|
our
ability to maintain contracts that are critical to our
operations;
|
|
•
|
our
ability to attract, motivate and retain key
employees;
|
|
•
|
our ability to attract and retain
key customers, including RPMG;
and
|
|
•
|
our
ability to prevent or limit partial or complete dilution of existing
member equity in any refinancing required under a plan of
reorganization.
|
We will
also be subject to risks and uncertainties with respect to the actions and
decisions of our creditors and other third parties who have interests in
bankruptcy that may be inconsistent with our plans.
These
risks and uncertainties could affect our business and operations in various
ways. For example, negative events or publicity associated with the bankruptcy
filing could adversely affect our relationships with our vendors and employees,
as well as with customers, which in turn could adversely affect our operations
and financial condition. Also, pursuant to the Code, we need Bankruptcy Court
approval for transactions outside the ordinary course of business, which may
limit our ability to respond timely to events or take advantage of
opportunities. Because of the risks and uncertainties associated with the
bankruptcy filing, we cannot predict or quantify the ultimate impact that events
occurring during the Chapter 11 reorganization process will have on our
business, financial condition and results of operations, and there is no
certainty as to our ability to continue as a going concern.
As a
result of the bankruptcy filing, realization of assets and liquidation of
liabilities are subject to uncertainty. While operating under the protection of
the Code, and subject to Bankruptcy Court approval or otherwise as permitted in
the normal course of business, we may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in our
consolidated financial statements. Further, a plan of reorganization(which has
not yet been completed, submitted to, or confirmed by the Bankruptcy Court)
could materially change the amounts and classifications reported in our
consolidated historical financial statements, which 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.
A
long period of operating under Chapter 11 could harm our business.
So long
as the bankruptcy filing continues, our senior management, especially our chief
executive officer/chief financial officer, will be required to spend a
significant amount of time and effort dealing with the bankruptcy filing instead
of focusing exclusively on business operations. A prolonged period of operating
under Chapter 11 will also make it more difficult to attract and retain
management and other key personnel necessary to the success and growth of our
business. In addition, the longer the bankruptcy filing continues, the more
likely it is that our vendors will lose confidence in our ability to
successfully reorganize our business, and they may seek to establish alternative
arrangements for providing us with goods and services, including alternative
payment arrangements, which in turn could have an adverse effect on our
liquidity and/or results of operations. Our having sought bankruptcy protection
may also adversely affect our ability to negotiate favorable terms from
suppliers, landlords, contract or trading counterparties and others and to
attract and retain customers and counterparties. The failure to obtain such
favorable terms and to attract and retain customers and other contract or
trading counterparties could adversely affect our financial
performance.
11
We
may not be able to obtain confirmation of our Chapter 11 plan, and our emergence
from Chapter 11 proceedings is not assured.
In order
to successfully emerge from Chapter 11 bankruptcy protection, we believe that we
must develop, and obtain requisite court and creditor approval of, a viable
Chapter 11 plan of reorganization. This process requires us to meet statutory
requirements with respect to adequacy of disclosure with respect to a plan,
soliciting and obtaining creditor acceptance of a plan, and fulfilling other
statutory conditions for plan confirmation. We may not receive the requisite
acceptances to confirm a plan. Even if the requisite acceptances of a plan are
received, the Bankruptcy Court may not confirm it.
We
have substantial liquidity needs and may be required to seek additional
financing.
Our
principal sources of liquidity have historically consisted of cash provided by
operations, cash and cash equivalents on hand and available borrowings under our
credit agreements. Our liquidity position is significantly influenced by our
operating results, which in turn are substantially dependent on commodity
prices, especially prices for corn, ethanol, natural gas and unleaded gasoline.
As a result, adverse commodity price movements adversely impact our liquidity.
For the fiscal year ended September 30, 2009, operating activities used
cash of approximately $50,000, compared to $9.1 million of cash used in
operating activities for fiscal year 2008. We incurred a net loss of
approximately $21.5 million in fiscal year 2009, and a net loss of approximately
$8.7 million in fiscal year 2008.
We face uncertainty regarding the
adequacy of our liquidity and capital resources and have limited access to
additional financing. In addition to the cash requirements necessary to fund
ongoing operations, we have incurred significant professional fees and other
costs in connection with the bankruptcy filing and expect that we will continue
to incur significant professional fees and costs. We cannot assure you that the
amounts of cash available from operations, combined with our cash collateral
agreement, will be sufficient to fund our operations, including operations
during the period until such time as we are able to have a plan of
reorganization confirmed by the Bankruptcy Court. Our ability to maintain adequate
liquidity depends in part upon industry conditions and general economic,
financial, competitive, regulatory and other factors beyond our control.
Accordingly, there can be no assurance as to the success of our efforts. In the
event that cash flows are not sufficient to meet our cash requirements, we may
be required to seek additional financing. We can provide no assurance that
additional financing would be available or, if available, offered to us on
acceptable terms. Our access to additional financing is, and for the foreseeable
future will likely continue to be, very limited. Our long-term liquidity
requirements and the adequacy of our capital resources are difficult to predict
at this time and ultimately cannot be determined until a plan of reorganization
has been confirmed by the Bankruptcy Court.
We
may not have sufficient cash to service our indebtedness and other liquidity
requirements.
Our
ability to service any stipulations under the cash collateral agreements and
successfully consummate a plan of reorganization will depend, in part, on our
ability to generate cash. We cannot be certain that cash on hand together
with cash from operations will by itself be sufficient to meet our cash and
liquidity needs. If we are unable to generate enough cash to meet our
liquidity needs, we could be forced to discontinue some or all of our
operations.
We
may be subject to claims that will not be discharged in the bankruptcy filing,
which could have a material adverse effect on our results of operations and
profitability.
The Code
provides that the confirmation of a plan of reorganization discharges a debtor
from substantially all debts arising prior to confirmation and specified debts
arising afterwards. With few exceptions, all claims that arose prior to the date
of filing and before confirmation of the plan of reorganization (i) would
be subject to compromise and/or treatment under the plan of reorganization or
(ii) would be discharged in accordance with the Code and the terms of the
plan of reorganization. Any claims not ultimately discharged by the Bankruptcy
Court could have an adverse effect on our results of operations and
profitability. We have not yet submitted, and the Bankruptcy Court
has yet to confirm, a plan of reorganization for the Company.
Bankruptcy
laws may limit our secured creditors’ ability to realize value from their
collateral.
Upon the
commencement of a case for relief under Chapter 11, a secured creditor is
prohibited from repossessing its security from a debtor in a Chapter 11 case, or
from disposing of security repossessed from such debtor, without bankruptcy
court approval. Moreover, the Code generally permits the debtor to continue to
retain and use collateral even though the debtor is in default under the
applicable debt instruments, provided that the secured creditor is given
“adequate protection.” The meaning of the term “adequate protection” may vary
according to circumstance, but it is intended in general to protect the value of
the secured creditor’s interest in the collateral and may include cash payments
or the granting of additional security if and at such times as the Bankruptcy
Court in its discretion determines that the value of the secured creditor’s
interest in the collateral is declining during the pendency of the Chapter 11
proceedings. The Bankruptcy Court may determine that a secured creditor may not
require compensation for a diminution in the value of its collateral if the
value of the collateral exceeds the debt it secures.
In view
of the lack of a precise definition of the term “adequate protection” and the
broad discretionary power of the Bankruptcy Court, we cannot reliably
predict:
|
•
|
how long payments under our
secured debt could be delayed as a result of the Chapter 11
proceedings;
|
|
•
|
whether
or when secured creditors (or their applicable agents) could repossess or
dispose of collateral;
|
12
|
•
|
the value of the collateral;
or
|
|
•
|
whether
or to what extent secured creditors would be compensated for any delay in
payment or loss of value of the collateral through the requirement of
“adequate protection.”
|
Furthermore,
if the Bankruptcy Court determines that the value of the collateral is not
sufficient to repay all amounts due on applicable secured indebtedness, the
holders of such indebtedness would hold a secured claim only to the extent of
the value of their collateral and would otherwise hold unsecured claims with
respect to any shortfall. The Code generally permits the payment and accrual of
post-petition interest, costs and attorneys’ fees to a secured creditor during a
debtor’s Chapter 11 proceedings only to the extent the value of its collateral
is determined by the Bankruptcy Court to exceed the aggregate outstanding
principal amount of the obligations secured by the collateral.
Our
financial results may be volatile and may not reflect historical
trends.
While in
bankruptcy, we expect our financial results to continue to be volatile as asset
impairments, asset dispositions, restructuring activities, contract terminations
and rejections, and claims assessments may significantly impact our consolidated
financial statements. As a result, our historical financial performance is
likely not indicative of our financial performance after the date of the
bankruptcy filing. In addition, if we emerge from bankruptcy, the amounts
reported in subsequent consolidated financial statements may materially change
relative to historical consolidated financial statements, including as a result
of revisions to our operating plans pursuant to a plan of reorganization, if
such a plan is confirmed by the Bankruptcy Court. In addition, if we emerge from
bankruptcy, we may be required to adopt fresh start accounting. If fresh start
accounting is applicable, our assets and liabilities will be recorded at fair
value as of the fresh start reporting date. The fair value of our assets and
liabilities may differ materially from the recorded values of assets and
liabilities on our consolidated balance sheets. In addition, if fresh start
accounting is required, our financial results after the application of fresh
start accounting may be different from historical trends.
Conducting
a successful Chapter 11 reorganization will depend significantly on our ability
to retain and motivate management and key employees.
Our
success depends significantly on the skills, experience and efforts of our
personnel, especially our chief executive officer/chief financial officer. The
loss of our chief executive officer/chief financial officer or other key
personnel could have a material adverse effect upon our results of operations
and our financial position and could delay or prevent the achievement of our
business objectives. Our ability to develop and successfully consummate a plan
of reorganization will be highly dependent upon the skills, experience and
effort of our senior management, including our chief executive officer/chief
financial officer, and other personnel. The loss of the services of one or more
members of our employees with critical skills, or a diminution in our ability to
attract talented, committed individuals to fill vacant positions when needs
arise, could have a material adverse effect on our ability to successfully
reorganize and emerge from bankruptcy.
We
may raise additional capital in the future through one or more offerings of the
Company’s units, which may not be successful in raising enough capital for us to
continue operations.
As one
possible part of the Company’s plan of reorganization, which has yet to be
submitted to or confirmed by the Bankrupcy Court, we may raise additional
capital through one or more equity raises, including a Minnesota-only offering
of our existing Units, or a new class of units, to eligible investors. Details
of any of the offerings have yet to be finalized by the Company and have not
been approved by the Bankruptcy Court. There can be no assurance that any equity
raise will be successful, or will provide the Company with sufficient liquidity
to continue operations even if successful. Any equity raise undertaken by the
Company will likely result in significant dilution to our existing members. If
we are unsuccessful in raising additional capital through one or more offerings
of the Company’s units, or if the amounts received in such offerings are
insufficient to meet our liquidity needs, we could be forced to discontinue some
or all of our operations.
Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing.
Our
independent registered public accounting firm has issued its report, which
includes an explanatory paragraph for a going concern uncertainty on our
financial statements as of September 30, 2009 and 2008. As explained in
the report, we incurred net losses of $21.5 million and $8.7 million for the
years ended September 30, 2009 and 2008, respectively. 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 though 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.
13
Risks
Relating to Our Business
We
rely on the services of key personnel, the loss of which could adversely affect
the future success of the Company.
We are
highly dependent on the services of Anthony Hicks, who serves as our Chief
Executive Officer and Chief Financial Officer. If we were to lose the services
of Mr. Hicks, whether through termination, attrition, incapacitation or
otherwise, there are currently no successors who could implement our business
and restructuring plans. Therefore, such loss could have a material adverse
impact on us and our future profitability and ability to emerge successfully
from bankruptcy.
Our
lack of business diversification could result in significant operating losses if
our revenues from our primary products decrease.
Our
business solely consists of the production and sale of ethanol and distillers
grains. We do not have any other lines of business or other sources of
revenue if we are unable to successfully operate the Plant. Our lack of
business diversification could cause us to incur significant operating losses if
we are unable to generate revenues through the production and sale of ethanol
and distillers grains since we do not have or expect to have any other lines of
business or alternative revenue sources.
Our
executive officer and governors lack significant experience in financial
accounting and preparation of reports under the Securities and Exchange Act of
1934, as amended (the “Exchange Act”).
Neither
our executive officer nor any of our governors has ever served as such with a
company that is required to file reports under the Exchange Act. As a
result, we may not be able or qualified to efficiently and correctly deal with
our financial accounting issues and preparation of the Exchange Act
reports. If we are unable to correctly deal with our financial accounting
issues and prepare our Exchange Act reports, we may be exposed to significant
liabilities and have difficulty raising additional capital. Although we
plan to implement a search for a full-time controller or CFO with appropriate
U.S. GAAP and SEC experience as part of our remediation plan described under
Item 9A(T) of this Annual Report on Form 10-K, it is not clear how long this
search will take or whether it will be successful. If we are unsuccessful
in attracting qualified candidates we may continue to have difficulty in dealing
with our financial accounting issues and preparation of Exchange Act
reports.
Risks
Related to the Ethanol Industry
The
spread between ethanol and corn prices can vary significantly and we expect to
incur losses in the near future because of narrow spreads.
We have
certain risks and uncertainties that we experience during volatile market
conditions such as what we experienced during the fiscal years 2009 and 2008.
These volatilities can have a severe impact on operations. Our revenues
are derived from the sale and distribution of ethanol and distillers grains to
customers primarily located in the U.S. and our operating and financial
performance is largely driven by the prices at which we sell ethanol and the net
expense of corn. The price of ethanol is influenced by factors such as
supply and demand, weather, government policies and programs, and unleaded
gasoline and the petroleum markets, although since 2005 the prices of ethanol
and gasoline began a divergence with ethanol selling for less than gasoline at
the wholesale level. Excess ethanol supply in the market, in particular, puts
downward pressure on the price of ethanol. Our largest cost of production is
corn. The cost of corn is generally impacted by many factors, including
supply and demand, weather, government policies and programs.
We
incurred a net loss of approximately $21.5 million for the fiscal year ended
September 30, 2009. Net losses were high in large part because of
rising corn costs that were not offset by rises in ethanol prices.
We
anticipate that our results of operations for the first quarter of 2010 will be
affected by the increased production of ethanol as many plants that had been in
an idle state have been purchased and placed back in service. This will affect
corn price as demand increases. The protracted midwest harvest, combined with
unseasonal rain and lack of natural drying, may lead to quality issues in the
corn supply, as well as damage from excessive mechanical drying. These quality
issues could lead to elevated pricing or lower production from poor quality
corn. The volatility that is due to various factors, including uncertainty with
respect to the market for our major input (corn) and the major output (ethanol),
could lead to further losses.
Hedging
transactions that may be undertaken in the future could significantly increase
our operating costs if we incorrectly estimate our corn requirements and are not
able to utilize all of the corn subject to our futures contracts.
Although
we have presently exited all of our hedging positions, we may attempt in the
future to minimize the effects of fluctuations in the price of corn on our
operations by taking hedging positions in the corn futures markets.
Hedging is a means of protecting the price at which we will buy corn in the
future. In one type of hedging transaction, we would purchase futures
contracts that lock in the amount and price of corn that we will purchase at a
future date. Whether our hedging activities would be successful depends
upon, among other things, the cost of corn and our ability to sell sufficient
amounts of ethanol and distillers grain to utilize all of the corn subject to
the futures contracts. Although we would attempt to link hedging
activities to sales plans and pricing activities, hedging activities can result
in significant costs, especially if we could not use all of the corn subject to
our futures contracts. If we are unsuccessful with any hedging efforts we
may make in the future, our business may suffer.
14
Our
operating costs could be higher than we expect, and this could reduce our
profitability or cause us to lose money.
In
addition to general market fluctuations and economic conditions, we could
experience significant operating cost increases from numerous factors, many of
which are beyond our control. These increases could arise from, among
other things:
·
|
higher
natural gas and electricity
prices;
|
·
|
higher
labor costs, particularly if there is any labor
shortage;
|
·
|
higher
corn costs;
|
·
|
higher
transportation costs because of greater demands on truck and rail
transportation services; and
|
·
|
higher
costs of regulatory compliance, including regulations related to the
environment and worker
safety.
|
As
more ethanol plants are built, ethanol production will increase and, if demand
does not sufficiently increase, the price of ethanol and distillers grain may
decrease.
Although
we have recently witnessed a large volume of ethanol production going offline,
we expect that the number of ethanol producers and the amount of ethanol
produced will likely continue to increase in the future. We cannot assure
that the demand for ethanol will increase in order to compensate for the
increased supply. The demand for ethanol is dependent upon numerous
factors such as governmental regulations, governmental incentives, whether the
phase out or restrictions on the use of MTBE continues and the development of
other technologies or products that may compete with ethanol. If the
demand for ethanol does not sufficiently increase, increased ethanol production
may lead to lower ethanol prices. In addition, because ethanol production
produces distillers grain as a co-product, increased ethanol production will
also lead to increased supplies of distillers grain. Demand for distillers
grain is independent of the demand for ethanol and depends upon various factors,
such as the strength of the local and national beef and dairy cattle industry,
and the availability of other feed products at more economical prices. An
increase in the supply of distillers grain, without offsetting increases in
demand, could lead to lower prices. Decreases in the price of ethanol and
distillers grain will result in our generating lower revenue and lower profit
margin, thereby reducing or eliminating our profits.
Growth
in the ethanol industry is dependent on growth in the fuel blending
infrastructure to accommodate ethanol, which may be slow and could result in
decreased demand for ethanol.
The
ethanol industry depends on the fuel blending industry to blend the ethanol that
is produced with gasoline so it may be sold to the end consumer. In many
parts of the country, the blending infrastructure cannot accommodate ethanol
which leads to certain areas that do not blend any ethanol. Substantial
investments are required to expand this blending infrastructure that may not be
made by the fuel blending industry. Should the ability to blend ethanol
not expand at the same rate as increases in ethanol supply, it may decrease the
price of ethanol despite the fact that there may be significant demand at the
consumer level to purchase ethanol. Should the fuel blending industry not
make the required investments to expand the blending infrastructure, it may lead
to a decrease in the selling price of ethanol which could impact our ability to
operate profitably.
Competition
from ethanol imported from Central American and Caribbean basin countries may be
a less expensive alternative to our ethanol, which would cause us to lose market
share.
A portion
of the ethanol produced or processed in certain countries in Central America and
the Caribbean region is eligible for tariff reduction or elimination upon
importation to the United States under a program known as the Caribbean Basin
Initiative. Large ethanol producers, such as Cargill, Inc., have
expressed interest in building dehydration plants in participating Caribbean
Basin countries, such as El Salvador, which would convert ethanol into
fuel-grade ethanol for shipment to the United States. Ethanol imported
from Caribbean Basin countries may be a less expensive alternative to
domestically produced ethanol. Competition from ethanol imported from
Caribbean Basin countries may affect our ability to sell our ethanol
profitably.
We
face intense competition from competing ethanol producers, and we may not have
sufficient resources to compete effectively.
Competition
in the ethanol industry is intense. We face formidable competition in
every aspect of our business, and particularly from other companies that operate
large-scale ethanol plants. We face competitive challenges from larger
facilities and organizations that produce a wider range and larger quantity of
products than we can, and from other plants similar to our Plant. Our
Plant is in direct competition with other ethanol producers and oil companies
that have acquired ethanol plants, many of which have more experience and
greater resources than we do. Some of these producers are, among other
things, capable of producing a significantly greater amount of ethanol and
compete with us for corn and product markets. Nationally, the ethanol
industry may become more competitive given the substantial amount of
construction and expansion that is occurring in the industry. If we are
unable to compete effectively in this competitive environment, the value of our
business may suffer.
15
Technological
advances could significantly decrease the cost of producing ethanol or result in
the production of higher quality ethanol, and if we are unable to adopt or
incorporate technological advances into our operations, our Plant could become
uncompetitive or obsolete.
We expect
that technological advances in the processes and procedures for producing
ethanol will continue to occur. It is possible that those advances could
make the processes and procedures that we utilize at our Plant less efficient or
obsolete, or cause the ethanol we produce to be of a lesser quality. These
advances could also allow our competitors to produce ethanol at a lower cost
than us. If we are unable to adopt or incorporate technological advances,
our ethanol production methods and processes could be less efficient than our
competitors, which could cause our Plant to become uncompetitive.
Ethanol
production methods are also constantly advancing. The current trend in
ethanol production research is to develop an efficient method of producing
ethanol from cellulose-based biomass such as agricultural waste, forest residue,
and municipal solid waste. This trend is driven by the fact that
cellulose-based biomass is generally cheaper than corn and producing ethanol
from cellulose-based biomass would create opportunities to produce ethanol in
areas that are unable to grow corn. Another trend in ethanol production
research is to produce ethanol through a chemical process rather than a
fermentation process, thereby significantly increasing the ethanol yield per
pound of feedstock. Although current technology does not allow these
production methods to be competitive, new technologies may develop that would
allow these methods to become viable means of producing ethanol in the
future. If we are unable to adopt or incorporate these advances into our
operations, our cost of producing ethanol could be significantly higher than our
competitors, which could make our Plant obsolete and cause member investment to
decrease in value or become worthless.
In
addition, alternative fuels, additives and oxygenates are continually under
development. Alternative fuel additives that can replace ethanol may be
developed, which may decrease the demand for ethanol. It is also possible
that technological advances in engine and exhaust system design and performance
could reduce the use of oxygenates, which would lower the demand for
ethanol. If technological advances decrease consumer demand for ethanol,
our revenues may decrease and the value of our business may suffer.
If
we lose the services of third-party marketers, we will not be able to sell the
ethanol or distillers grain that we produce.
We have
entered into contracts with third-party providers to market our supply of
ethanol and distillers grains. Our dependence on these distributors means
that our financial performance depends upon the financial health of the
distributors we contract with. We cannot assure that we will be able to
find a suitable replacement if a distributor fails to perform. Further,
these third-party distributors will likely have relationships and agreements
with other ethanol producers. It is possible that a distributor’s ability
or willingness to market and sell our products could be impaired by agreements
that the distributor may have with other entities not related to us.
Consequently, we may not obtain the best possible prices for our products, which
may decrease our revenues and the value of our business.
Any
interruption in our natural gas or electricity supply may force us to halt
operations, and significant increases in the price of natural gas or electricity
may increase our costs of operation, thereby harming our
profitability.
We
require a significant amount of natural gas and electricity to operate our
Plant. The price of natural gas and electricity, like other commodities,
fluctuate significantly. Any significant increase in the price of gas or
electricity will result in increased operating costs and lower profit margins
because the price of ethanol tends to track with the price of gasoline and not
the cost of production. We may not be able to pass the higher costs on to
our customers. Further, natural gas is the only thermal heating source for
our Plant and electricity is our only source of power, and if there are any
interruptions in supply, we would have to halt operations. An interruption
in supply or problems with delivery could have a material adverse effect on our
business.
The
price of distillers grain is affected by the price of other commodity products,
such as soybeans, and decreases in the price of these commodities could decrease
the price of distillers grain, which will decrease the amount of revenue we may
generate.
Distillers
grain competes with other protein-based animal feed products. The price of
distillers grain may decrease when the price of competing feed products
decrease. The prices of competing animal feed products are based in part
on the prices of the commodities from which they are derived. Downward
pressure on commodity prices, such as soybeans, will generally cause the price
of competing animal feed products to decline, resulting in downward pressure on
the price of distillers grain. Because the price of distillers grain is
not tied to production costs, decreases in the price of distillers grain will
result in our generating less revenue and lower profit margins.
Competition
for qualified personnel in the ethanol industry is intense and we may not be
able to hire and retain qualified officers, engineers, and operators to
efficiently operate the Plant.
We have
33 employees, which is all of the personnel that we believe are necessary to
operate the Plant. Our success depends in part on our ability to retain
competent personnel in a rural community. We cannot assure that we will be
able to maintain qualified personnel, or hire competent personnel in the event
of turnover. If we are unable to maintain productive and competent
personnel, the amount of ethanol we produce may decrease and we may not be able
to efficiently operate the Plant.
16
Risks
Related to the Government and Regulatory Environment
The
use and demand for ethanol is dependent on various environmental regulations and
governmental programs that could change and cause the demand for ethanol to
decline.
There are
various federal and state laws, regulations and programs that have led to
increased use of ethanol in fuel. These laws, regulations and programs are
constantly changing. Federal and state legislators and environmental
regulators could adopt or modify laws, regulations or programs that could
adversely affect the use of ethanol. Certain states oppose the use of
ethanol because they must ship ethanol in from other corn producing states,
which could significantly increase gasoline prices in the state. Material
changes in environmental regulations regarding the use of MTBE or the required
oxygen content of automobile emissions or the enforcement of such regulations
could decrease the need to use ethanol. If the oxygenated fuel
requirements were eliminated or if any state were to receive a waiver, the use
and demand for ethanol may decline significantly. Future changes in the
law may further postpone or waive requirements to use ethanol. Such
changes in laws, regulations and programs may adversely affect our business and
its profitability.
Other
laws, regulations and programs provide economic incentives to ethanol producers
and users. For example, Congress recently adopted a Renewable Fuels
Standard directing the Environmental Protection Agency to adopt
rules requiring refineries, blenders, distributors and importers to
introduce or sell volumes of ethanol and biodiesel into commerce in accordance
with an annual renewable fuels schedule. On December 19, 2007,
President Bush signed into law the Energy Independence and Security Act of 2007,
which raises the minimum usage requirement to 13.2 billion gallons of ethanol by
2012 and 15 billion gallons by 2015. The Act also mandates a minimum
requirement of 36 billion gallons of renewable fuels by 2022, with cellulosic
ethanol accounting for 16 billion gallons of this total. The passage of
pending federal or state energy legislation or any other revocation or amendment
of any one or more of these laws, regulations or programs could have a
significant adverse effect on the ethanol industry and our business. We
cannot assure that any of these laws, regulations or programs will continue in
the future or that these laws, regulations or programs will benefit us or
benefit us more than our ethanol producing competitors. Some of these
laws, regulations and programs will expire under their terms unless extended,
such as the federal partial excise tax exemption for gasoline blenders who use
ethanol in their gasoline, which is scheduled to expire in
December 2010. Government support of the ethanol industry could
change and Congress and state legislatures could remove economic incentives that
enable ethanol to compete with other fuel additives. The elimination or
reduction of government subsidies and tax incentives could cause the cost of
ethanol-blended fuel to increase. The
increased price could cause consumers to avoid ethanol-blended fuel and cause
the demand for ethanol to decline, which could adversely affect our
business.
Our
business is subject to extensive and potentially costly environmental
regulations that could change and significantly increase our operating
costs.
The Plant
is subject to environmental regulation by the Minnesota Department of Natural
Resources and by the United States Environmental Protection Agency
(“EPA”). The state of Minnesota or the EPA may seek to implement
additional regulations or implement stricter interpretations of existing
regulations. Changes in environmental regulations or stricter
interpretation of existing regulations may require additional capital
expenditures or increase our operating costs. In addition, because our
Plant is a 55 million gallons per year Plant, it may be more difficult and
costly for us to comply with applicable environmental regulations than smaller
ethanol plants. Any increases in operating costs will result in lower
profit margins because we may be unable to pass any of these costs on to our
customers.
In
addition, the Plant could be subject to environmental nuisance or related claims
by employees, property owners or residents near the Plant arising from air or
water discharges. These individuals and entities may object to the air
emissions from our Plant. Ethanol production has been known to produce an
unpleasant odor to which surrounding residents and property owners could
object. Environmental and public nuisance claims, or tort claims based on
emissions, or increased environmental compliance costs could significantly
increase our operating costs, which could adversely affect our
profitability.
In 2007,
the Supreme Court decided a case in which it ruled that carbon dioxide is an air
pollutant under the Clean Air Act for the purposes of motor vehicle
emissions. The Supreme Court directed the EPA to regulate carbon dioxide
from vehicle emissions as a pollutant under the Clean Air Act. Similar
lawsuits have been filed seeking to require the EPA to regulate carbon dioxide
emissions from stationary sources such as our Plant under the Clean Air
Act. Initially, we will not likely market and sell any of the carbon
dioxide we produce. Instead, we will emit it into the atmosphere.
Any fines or settlements based on our carbon emissions could reduce our
profitability. While there are currently no regulations applicable to us
concerning carbon dioxide, if the EPA or the State of Minnesota were to regulate
carbon dioxide emissions by plants such as ours, we may have to apply for
additional permits or we may be required to install carbon dioxide mitigation
equipment or take other as yet unknown steps to comply with these potential
regulations. Compliance with any future regulation of carbon dioxide, if
it occurs, could be costly and may prevent us from operating the Plant
profitably which could decrease or eliminate the value of our
Units.
In
addition, the California Air Resources Board recently passed a Low Carbon Fuel
Standard (“LCFS”), which sets standards for the carbon intensity of fuels used
in the state starting in 2011. Certain provisions of the LCFS, which
are not yet final, have the potential to ban ethanol produced at our Plant from
being sold in California. While we believe there may be some negative
impact to our sales from the approval of the LCFS in California, we believe we
will still be able to market all the ethanol produced by our
Plant. If more states, or the federal government, adopt similar
provisions it could have a severe negative impact on our ability to sell all of
the ethanol produced at our Plant.
17
Our
business is subject to extensive occupational safety and health regulations that
could increase our operating costs.
We are
subject to various occupational safety and health regulations, and we have
incurred expense in training employees in occupational safety compliance.
On January 10 and 11, 2008, all Plant operational personnel were trained
for 10 hours in an Occupational Safety and Health Administration (“OSHA”) safety
course. In addition, on February 19, 2008 all operational employees
attended a training course on hazardous materials. We have compiled a
current Plant Safety Manual with the assistance of our consultants, Natural
Resource Group, which is available to all Plant personnel. We will
continue to be subject to such safety and health regulations and will continue
to incur expense with respect to training and compliance. We do not expect
that compliance with these rules and regulations will have a material
impact on our business or as to our competitive stance in the industry, as these
rules apply to other ethanol plants as well. However, any increase in
OSHA compliance costs could negatively affect our profitability.
Risks
Related to the Units
Our
lenders and other creditors would have priority over unit holders in the event
of a liquidation of our assets, and if there are insufficient assets to repay
our outstanding liabilities our unit holders could receive only a portion or
none of their initial investment.
As
further explained under “Risks Relating to Our Bankruptcy,” on October 30, 2009,
we filed a voluntary petition for relief in the Bankruptcy Court under
Chapter 11 of Title 11 of the Code. Our negotiated Chapter 11 bankruptcy filing,
In re: Otter Tail AG
Enterprises, LLC, was done with the approval of our senior lenders. In
the event that our bankruptcy is not successful, we would have insufficient
liquidity to continue operations, and may be forced to proceed with an orderly
liquidation of our assets. Under the terms of our debt financing agreements, our
senior lender will be repaid first out of the proceeds of any liquidation.
Subordinate lien holders, followed by any unsecured creditors, would then be
paid with remaining assets in satisfaction of our other debts and liabilities.
Unit holders would be paid with proceeds from remaining available assets, if
any. There is no guarantee that any funds would be available for our Unit
holders after repayment of our debt. In such liquidation scenario, our Unit
holders may receive little to no return on their investment in the Company and
the value of their Units may be nothing.
The
Units have no public market and none is expected to develop, which means it may
be difficult for members to sell their Units.
There is
no public trading market for the Units and we do not expect one to develop in
the foreseeable future. To maintain our partnership tax status, we do not
intend to list the Units on any stock exchange. Applicable securities laws
impose significant restrictions on the transfer of Units. Consequently,
members may have to hold their Units for an indefinite period of time because it
may be difficult for them to sell their Units.
There
are restrictions on transferring the Units, which may make the Units
unattractive to prospective purchasers and may prevent members from selling them
when they desire.
Investing
in our Units should be considered a long-term investment. The ability to
transfer Units is restricted by our Member Control Agreement. Members may
not transfer their Units unless the transfer is a “permitted transfer.”
Permitted transfers are transfers approved by the Board and that satisfy certain
conditions and restrictions set forth in Section 10 of our Member Control
Agreement. We have also adopted a Unit transfer policy. All
transfers must be approved by the Board.
In
addition, members may not transfer their Units if the transfer would cause us to
lose our partnership tax status and subject us to the publicly traded
partnership rules. The Board will generally approve a transfer so long as
the transfer falls within the “safe harbors” contained in the
publicly traded partnership rules under the Internal Revenue Code, and the
related rules and regulations, as amended (the “Tax Code”). In
addition, the transferee of our Units may not become a member unless approved by
the Board. These restrictions may make our Units unattractive to
prospective transferees, and may prevent members from selling Units when they
desire.
Members will be bound by actions
taken by members holding a majority of our Units, and because of the
restrictions on transfer and lack of dissenters’ rights, they could be forced to
hold a substantially changed investment.
We cannot
engage in certain transactions, such as a merger, consolidation or sale of all
or substantially all of our assets, without the approval of our members.
However, if holders of a majority of our Units approve a transaction, members
will also be bound to that transaction regardless of whether they agree with the
transaction. Under our Member Control Agreement, members will not have any
dissenters’ rights to seek appraisal or payment of the fair value of their
Units. Consequently, because there is no public market for the Units, they
may be forced to keep a substantially changed investment.
18
Risks
Related to Tax Issues in a Limited Liability Company
If
we are not taxed as a partnership, we will pay taxes on all of our net income
and members will be taxed on any earnings we distribute, and this will reduce
the amount of cash available for distributions to holders of our
Units.
We expect
that we will be taxed as a partnership for federal income tax purposes.
This means that we will not pay any federal or state income tax, and our members
will pay tax on their allocated share of our income. We cannot assure
members, however, that we will be able to maintain our partnership tax
treatment. The Internal Revenue Service (“IRS”) may from time to time
review our tax status, and we cannot assure members that there will not be
changes in the law or our operations that could cause us to lose our partnership
tax status. If we lose our partnership tax status, we may be taxed as a
corporation. If we were treated as a corporation, we would be taxed on our
net income, currently at rates of up to 35 percent, for federal income tax
purposes. Further, members would be required to treat distributions that
we make as ordinary dividend income to the extent of our earnings and
profits. These distributions would not be deductible by us, thus resulting
in double taxation of our earnings and profits. This would reduce the
amount of cash we may have available for distributions.
Members’
tax liability from the allocated share of our taxable income may exceed any cash
distributions members receive, and, as a result, members may have to pay income
tax on their allocated share of our taxable income with their personal
funds.
Because
we expect to be treated as a partnership for federal income tax purposes, all of
our profits and losses will “pass-through” to our members. Members must
pay tax on their allocated share of our taxable income every year. Members
may receive allocations of taxable income that exceed any cash distributions we
make to them. This may occur because of various factors, including but not
limited to, accounting methodology, the specific tax rates members face, and
payment obligations and other debt covenants that restrict our ability to pay
cash distributions. If this occurs, members may have to pay income tax on
their allocated share of our taxable income with their own personal
funds.
Because
we are treated as a partnership for federal income tax purposes, any audit of
our tax returns resulting in adjustments could cause the IRS to audit members’
tax returns, which could result in additional tax liability to
members.
The IRS
may audit our tax returns and may disagree with the tax positions that we take
on our returns. The rules regarding partnership allocations are
complex. The IRS could successfully challenge the allocations set forth in
our Member Control Agreement and reallocate items of income, gains, losses,
deductions or credits in a manner that adversely affects our members. If
challenged by the IRS, the courts may not sustain the position we take on our
tax returns. An audit of our tax returns could lead to separate audits of
members’ personal tax returns, especially if adjustments are required.
This could result in adjustments on members’ personal tax returns and in
additional tax liabilities, penalties and interest.
Risks
Related to Our Limited Liability Company Structure and Relationships with
Affiliates
Our
Member Control Agreement contains restrictions on a member’s right to
participate in the management of our affairs.
We are
governed primarily by our Member Control Agreement. Our Member Control
Agreement contains significant restrictions on a member’s right to influence the
manner or direction of management. Essentially, members have no right to
participate in management other than to elect governors to the Board or to vote
on matters that require the consent of our members. Transactions that
require the consent of our members are restricted to a merger, consolidation, or
the sale of all or substantially all of our assets, amendments to our Articles
of Organization or our Member Control Agreement, voluntarily dissolving our
business or making material changes to our business purpose.
Under
our Member Control Agreement, it may be difficult for members to enforce claims
against an officer or governor, and, as a result, they may not be able to
recover any losses they may suffer through their ownership of the Units arising
from acts of our officers and governors that harm our business.
Our
officers and governors must discharge their duties with reasonable care, in good
faith and in our best interests. Despite this obligation, Minnesota law
and our Member Control Agreement limit an officer’s or governor’s liability to
us and our members. Officers or governors are generally not liable to us
or our members for monetary damages for breaches of fiduciary duty, unless it
involves (i) a willful failure to deal fairly with us or our members in
connection with a matter in which the governor or officer has a material
conflict of interest; (ii) a violation of criminal law, unless the governor
or officer had reasonable cause to believe that his, her or its conduct was
lawful or no reasonable cause to believe that the conduct was unlawful;
(iii) a transaction from which the governor or officer derived an improper
personal profit; or (iv) willful misconduct. These limitations could
limit members’ rights to enforce claims against our officers or governors.
In addition, our Member Control Agreement contains an indemnification provision
which requires us to indemnify any governor or manager to the extent required or
permitted by Minnesota Statutes, Section 322B.699, as amended from time to
time, or as required or permitted by other provisions of law.
There
are conflicts of interest in our business, because we have relationships with
and may enter into additional transactions with our officers, governors, and
affiliates, which could impair an interested officer’s or governor’s ability to
act in our best interest.
Conflicts
of interest may exist in our structure and operation. Our governors may
have other business interests, which could compete with us for the time and
resources of our governors. Our officers, governors and affiliates may
sell corn to us and purchase distillers grains on terms similar to those
contained in contracts entered into by us with unaffiliated third parties.
We may also enter into other transactions with officers, governors and
affiliates. Conflicts of interest could have adverse consequences for our
business or members because our governors and officers may place their personal
interest and those of their affiliates ahead of our interests. We have a
conflict of interest policy with our officers and governors, but we cannot
assure that conflicts of interest will not harm our business or reduce the value
of members’ Units.
19
ITEM
2. PROPERTIES.
Our Plant
was constructed on a 116-acre site two miles northwest of Fergus Falls,
Minnesota. On October 25, 2006, we purchased a majority of the site
from Jonathan and Brenda Piekarski. Mr. Piekarski is a governor on
our Board. The purchase price of the site was $700,000, which is approximately
$6,100 per acre.
We are
also leasing our distillers grain processing facility from Otter Tail County
(the “County”) pursuant to a Solid Waste Facility Lease Agreement. We
began payments under the lease on February 25, 2008 and we are scheduled to
continue to make payments until November 1, 2019. The amount of total
payments under the lease is equal to the aggregate principal amount and interest
on the County’s $20 million Subordinate Exempt Facility Revenue Bonds and $6.01
million General Obligation Bonds. We hold restricted cash as part of the
capital lease financing. At September 30, 2009, the total of these accounts
was approximately $10,000 of capitalized interest reserve and approximately $2.0
million of debt reserve fund.
All of
our tangible and intangible property, real and personal, serves as collateral
for our senior and subordinated debt agreements with our lenders, including the
County under the Solid Waste Facility Lease Agreement. On October 30, 2009, we
filed a voluntary petition for relief in the Bankruptcy Court under the Code.
The ability of our senior creditors and the 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 senior 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.
In the
event that we do not successfully emerge from Chapter 11, all of our tangible
and intangible property is subject to forfeiture to our senior and subordinated
lenders, including the County. Our lending agreements and Chapter 11 bankruptcy
are discussed in more detail in “Item 3. Legal Proceedings,” “Item 7.
Management’s Discussion And Analysis,” and Notes 2, 6 and 7 to our financial
statements.
ITEM
3. 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.
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 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS.
We did
not submit any matter to a vote of our unit holders through the solicitation of
proxies or otherwise during the fourth quarter of the year ended
September 30, 2009.
PART II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED UNIT HOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Market
Information
There is
no established trading market for our Units. To maintain our partnership
tax status, members may not trade their Units on an established securities
market or readily trade the Units on a secondary market (or the substantial
equivalent thereof). All transfers are subject to a determination that the
transfer will not cause us to be deemed a publicly traded partnership, and to
all applicable securities law restrictions. We engaged AgStockTrade.com to
create a qualified matching service in order to facilitate trading of our
Units. Since our Units were cleared for trading on AgStockTrade.com on
July 1, 2008, there have been no trades of our Units. We suspended all trading
in our Units as a result of our negotiated Chapter 11 bankruptcy filing on
October 30, 2009.
20
We have
restricted the ability of our members to transfer their Units in our Member
Control Agreement. To help ensure that a secondary market does not
develop, our Member Control Agreement prohibits transfers without the approval
of our Board. The Board will not approve transfers unless they fall within
“safe harbors” contained in the publicly traded partnership rules under the
Tax Code, which include: (a) transfers by gift, (b) transfer
upon death of a member, (c) transfers between certain family members, and
(d) transfers that comply with the “qualifying matching service”
requirements. Any transfers of Units in violation of the publicly traded
partnership rules or without the prior consent of the Board will be
invalid.
Securities
Authorized for Issuance under Equity Compensation Plans
We
previously maintained an equity compensation plan in which eligible executive
officers received options to purchase our units. As of September 30,
2008, 20,000 units remained to be issued pursuant to exercise of outstanding
options. During fiscal year 2009, all of these options have been
cancelled pursuant to the termination of employment of our former chief
executive officer and plant manager, effective October 31, 2008, and
transition of our chief financial officer to chief executive officer and chief
financial officer, effective December 1, 2008.
Effective
December 1, 2008, our chief executive officer became eligible to receive
10,000 restricted Units pursuant to a vesting schedule that has 4,500 Units
vested on January 1, 2009, 4,500 Units vesting on December 31, 2009,
and 1,000 Units vesting on December 31, 2010.
Unit
Holders
As of
September 30, 2009, there were 966 holders of our Class A Units
determined by an examination of our Unit transfer book. There is no other
class of membership units issued or outstanding.
Distributions
For the
fiscal years ended September 30, 2009 and 2008, we did not make any
distributions to members. Distributions are payable at the discretion of
our Board, subject to the provisions of the Minnesota Limited Liability Company
Act and our Member Control Agreement. In addition, our senior and
subordinated long-term debt is subject to various financial and non-financial
covenants that restrict our ability to declare distributions. For example,
we are prohibited from making distributions if we are in default under our
Master Loan Agreement with Agstar. We were in default under this agreement and
our other senior and subordinated debt agreements, including our capital lease
with the County, as a result of our Chapter 11 bankruptcy filing on October 30,
2009. As a result, we are prohibited from making any distributions to
members unless and until we successfully emerge from
bankruptcy. Please see “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and Note 6 of our financial
statements on this Form 10-K for more information on such restrictions and
such debt agreements.
Purchases
of Equity Securities by the Company
None.
The
following tables set forth selected financial data of the Company for the
periods indicated. The audited financial statements for fiscal 2009 and 2008 are
included in Item 8 of this Annual Report on Form 10-K and have been
audited by our independent auditors, Boulay, Heutmaker, Zibell & Co.,
P.L.L.P.
2008
|
2009
|
|||||||
Statements
of Operations Data:
|
||||||||
Revenues
|
$ | 70,099,287 | $ | 95,981,559 | ||||
Cost
of Sales
|
68,411,568 | 96,688,753 | ||||||
Lower
of Cost or Market Adjustment
|
4,632,000 | — | ||||||
Impairment
of plant and process equipment
|
— | 12,500,000 | ||||||
Operating
Expenses
|
1,708,066 | 2,254,393 | ||||||
Operating
Loss
|
(4,652,347 | ) | (15,461,587 | ) | ||||
Other
Expense, net
|
(4,001,728 | ) | (6,052,538 | ) | ||||
Net
Income (Loss)
|
(8,654,074 | ) | (21,514,125 | ) | ||||
Weighted
Average Units Outstanding - Diluted
|
23,927,872 | 23,936,250 | ||||||
Weighted
Average Units Outstanding - Basic
|
23,927,872 | 23,936,250 | ||||||
Net
Income (Loss) Per Unit - Diluted
|
(0.36 | ) | (0.90 | ) | ||||
Net
Income (Loss) Per Unit - Basic
|
(0.36 | ) | (0.90 | ) |
21
Our
selected historical balance sheet information as of September 30, 2009 and
2008 are derived from our audited balance sheets.
September 30,
2008
|
September 30,
2009
|
|||||||
Balance
Sheet Data:
|
||||||||
Cash
and Equivalents
|
$ | 1,138,768 | $ | 4,058,000 | ||||
|
||||||||
Total
Assets
|
$ | 126,293,160 | $ | 105,153,022 | ||||
Total
Current Liabilities
|
$ | 12,478,776 | $ | 90,174,378 | ||||
Long
Term Debt, net of current maturities
|
$ | 77,323,865 | — |
CAUTIONARY
STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-K 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, including but not limited to the
following: our expectations regarding revenues and expenses, corn and ethanol
prices and supply, future competition and governmental supports, bankruptcy
filing, restructuring and reorganizational plans, and industry and general
economic conditions. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature, including statements
contained within Item 7 – “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.
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 Form 10-K, including statements contained
within “Item 1A – Risk Factors,” and including developments related to 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;
|
22
·
|
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;
|
|
·
|
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.
|
Critical
Accounting Estimates
Management
uses estimates and assumptions in preparing our financial statements in
accordance with generally accepted accounting principles. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Of the significant accounting policies described in the notes to our
financial statements, we believe that the following are the most critical:
valuation of inventory, assumptions used in analysis of long-lived asset
impairment and estimated useful lives of property, plant and
equipment. Actual results may differ from previously estimated
amounts and such differences may be material to the financial
statements.
Inventory
Inventory
consists of raw materials, work in process, and finished goods. The work in
process inventory is based on certain assumptions. The assumptions used in
calculating work in process are the quantities in the fermenter and beer well
tanks, the lower of cost or market price used to value corn at the end of the
month, the effective yield, and the amount of dried distillers grains assumed to
be in the tanks. These assumptions could change in the near term. Inventory is subject to lower
of cost or market valuation assumptions.
23
The
Company had entered into forward corn purchase contracts and corn purchase
agreements under which it was required to take delivery at the contract
price. Some of these contract prices were above current market prices
for corn. Given the declining ethanol price, upon taking delivery under these
contracts, the Company incurred a loss. Accordingly, the Company recorded a loss
on these purchase commitments aggregating to $3,600,000 for the fiscal year
ended September 30, 2008. The amount of the loss was determined by
applying a methodology similar to that used in the impairment evaluation with
respect to inventory. Given the uncertainty of future ethanol and corn prices
this loss may not be recovered, and future losses on outstanding purchase
commitments could be recorded in future periods.
During
the fiscal year ended September 30, 2008, the Company recorded an inventory
valuation impairment of approximately $1,032,000 attributable primarily to
decreases in market prices of corn and ethanol. The inventory valuation
impairment was recorded in lower of cost or market adjustments on the statements
of operations. For the fiscal year ended September 30, 2009, there
was no inventory valuation impairment necessary.
Commitments and
Contingencies
Contingencies,
by their nature, relate to uncertainties that require management to exercise
judgment both in assessing the likelihood that a liability has been incurred, as
well as in estimating the amount of the potential expense. In conformity with
United States generally accepted accounting principles, we accrue an expense
when it is probable that a liability has been incurred and the amount can be
reasonably estimated.
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. Future impairment analysis will depend on the Company generating
positive cash flow from operations of the plant and successful reorganization
under Chapter 11 bankruptcy.
Chapter
11 Bankruptcy
General
We
suffered significant losses in fiscal 2009 and fiscal 2008 from a dramatic
increase in its corn costs, reflecting in part costs attributable to its corn
procurement and hedging arrangements, and historically unfavorable margins.
Beginning in the third quarter of 2009, these losses, combined with worsening
capital market conditions and a tightening of trade credit resulted in severe
constraints on our liquidity position. Faced with these constraints,
on October 30, 2009 (the “Petition Date”), we filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code (the “Code”) with the United
States Bankruptcy Court for the District of Minnesota (the “Bankruptcy
Court”). Our Chapter 11 case is being administered by the Bankruptcy
Court as In re: Otter Tail AG
Enterprises, LLC (the “Bankruptcy Case”). The petition was filed in order
to enable us to pursue reorganization efforts under Chapter 11 of the Bankruptcy
Code. We intend to 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 and orders of the Bankruptcy Court. In
general, as debtors-in-possession, we are authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside of the ordinary course of business without the prior approval of the
Bankruptcy Court.
As a
result of the Bankruptcy Case, we are periodically required to file various
documents with, and provide certain information to, the Bankruptcy Court,
including statements of financial affairs, schedules of assets and liabilities,
monthly operating reports and other financial information. Such materials have
been and will be prepared according to requirements of federal bankruptcy law.
While they would accurately provide then-current information required under
federal bankruptcy law, such materials will generally be unaudited and prepared
in a format different from that used in the Company’s financial statements filed
under the securities laws. Accordingly, we believe that the substance and format
of such materials do not allow meaningful comparison with our regular
publicly-disclosed financial statements.
In order
to successfully exit Chapter 11 bankruptcy, we will need to obtain confirmation
by the Bankruptcy Court of a plan of reorganization that satisfies the
requirements of the Bankruptcy Code, which plan has yet to be submitted to the
Bankruptcy Court. A plan of reorganization would, among other things, resolve
our pre-petition obligations, set forth the revised capital structure of the
newly reorganized entity and provide for corporate governance subsequent to exit
from bankruptcy. The Company is in
negotiation with the relevant parties on developing a plan of reorganization
which we anticipate will be filed with the courts prior to February 28,
2010. There
can be no assurance that a reorganization plan will be confirmed by the
Bankruptcy Court, or that any such plan will be consummated.
24
Under
section 365 of the Bankruptcy Code, we may assume, assume and assign, or reject
executory 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 us of our
future obligations under such lease or contract but creates a deemed
pre-petition claim for damages caused by such breach or rejection. Parties whose
contracts or leases are rejected may file claims against us for damages.
Generally, the assumption of an executory contract or unexpired lease requires
us to cure all prior defaults under such executory contract or unexpired lease,
including all pre-petition arrearages, and to provide adequate assurance of
future performance. In this regard, we expect that liabilities subject to
compromise and resolution in the Bankruptcy Case will arise in the future as a
result of damage claims created by our rejection of various executory contracts
and unexpired leases. Conversely, we would expect that the assumption of certain
executory contracts and unexpired leases may convert 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, we are unable to
project the magnitude of such claims with any degree of certainty.
The
Bankruptcy Court will establish a deadline for the filing of proofs of claim
under the Bankruptcy Code, requiring our creditors to submit claims for
liabilities not paid and for damages incurred. There may be differences between
the amounts at which any such liabilities are recorded in the Company’s
financial statements and the amount claimed by our creditors. Significant
litigation may be required to resolve any such disputes or
discrepancies.
We have
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 our results of operations.
We have
approval from the Bankruptcy Court to use the cash held at the date of filing
for bankruptcy. We have certain obligations such as reporting to the
interested parties on a weekly basis as well as being required to carry a
minimum of $2 million of available cash. If we fail to meet our
equity raise goal of $10 million by February 28, 2010, we may have to cease
production as our creditors have the right to further restrict the use of cash
under the agreement to the extent of withdrawing permission. We could request an
extension for the use of cash; however it is not guaranteed that such permission
would be granted.
As a
result of the Bankruptcy Case, realization of assets and liquidation of
liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, we may sell or otherwise dispose of assets and liquidate or settle
liabilities for amounts other than those reflected in the condensed consolidated
financial statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in our consolidated financial
statements. Our historical consolidated 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.
The
potential adverse publicity associated with the Bankruptcy Case and the
resulting uncertainty regarding our future prospects may hinder our ongoing
business activities and our ability to operate, fund and execute our business
plan by impairing relations with existing and potential customers; negatively
impacting our ability to attract, retain and compensate key executives and
employees and to retain employees generally; limiting our ability to obtain
trade credit; and impairing present and future relationships with vendors and
service providers.
Under the
priority scheme established by the Code, unless creditors agree otherwise,
post-petition liabilities and pre-petition liabilities must be satisfied in full
before unit holders are entitled to receive any distribution or retain any
property under a plan of reorganization, which has yet to be submitted to or
confirmed by the Bankruptcy Court. The ultimate recovery, if any, to creditors
and/or unit holders will not be determined until confirmation and consummation
of a plan or plans of reorganization. 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. A plan of reorganization could result in holders of our units receiving
no distribution on account of their interests and cancellation of their existing
units.
Results
of Operations
We own
and operate a corn dry-mill ethanol Plant in Fergus Falls, Minnesota . We
process approximately 20 million bushels of corn into approximately 55 million
gallons of ethanol each year, based on the nameplate capacity of our
Plant. In addition, we sell distillers grains, a principal co-product of
the ethanol production process, which we will sell as WDGS and
DDGS.
Revenues
For the
year ended September 30, 2009, we had revenues of approximately $96
million. For the year ended September 30, 2008, we had revenues
of approximately $70.1 million. The increase in our
revenues of approximately $25.9 million, or 37 percent, was due to our Plant
only becoming operational in the second quarter of fiscal 2008. Our
increase in revenues reflects the additional amount of time that the Plant was
operational in fiscal year 2009 versus fiscal year 2008, and the corresponding
greater volume of ethanol sales that offset the higher price per gallon received
during 2008. During fiscal year 2009, we witnessed an average sales
price for our ethanol of $1.53 per gallon, which represents a decrease of $0.75
per gallon from our average sales price for ethanol in fiscal year
2008. Also, during fiscal year 2009, we witnessed an average sales
price for our WDGS of $29.79 per ton, a $4.90 per ton decrease over fiscal year
2008, and an average sales price for our DDGS of $110.48 per ton, a $36.66 per
ton decrease over fiscal year 2008.
25
Cost of
Sales
For the
year ended September 30, 2009, we had costs of sales of approximately $96.7
million, or approximately 101% of revenues, and no lower of cost or market
adjustment. We also incurred an impairment of plant and process
equipment charge of $12.5 million. For the year ended
September 30, 2008, we had costs of sales of approximately $68.4 million,
or approximately 98% of revenues, and a lower of cost or market adjustment of
approximately $4.6 million. Our higher costs of sales,
inclusive of impairment charges and lower of cost or market adjustment, for
fiscal 2009 over fiscal 2008 of approximately $36.1 million, or 49 percent, was
due to our Plant only becoming operational in the second quarter of fiscal
2008. Our increase in costs of sales reflects the additional amount
of time that the Plant was operational in fiscal 2009 versus fiscal 2008, and
the corresponding greater volume of input purchases, particularly
corn. While we witnessed a dramatic rise in corn prices throughout
the third and fourth quarters of fiscal year 2008, corn prices somewhat
stabilized in fiscal year 2009. Some of the other key components of
our costs of goods sold (chemicals, denaturant and natural gas) also decreased
during fiscal year 2009 vs. fiscal year 2008.
Operating
Expenses
Our
operating expenses were approximately $2.3 million and $1.7 million for the
fiscal years ended September 30, 2009 and 2008, respectively. Our
operating expenses increased by approximately $600,000, or 35 percent, for
fiscal year 2009 over 2008. These increases were due primarily to costs
associated with running our Plant for a full fiscal year, versus only partial
operation in fiscal year 2008, and professional and consulting fees related to
the bankruptcy and bank foreclosure proceedings. In fiscal year 2009, our
significant operating expenses were: 1) approximately $342,000 related to
salaries; and 2) approximately $816,000 related to professional fees (for legal
and accounting services). In fiscal year 2008, our
significant operating expenses were: 1) approximately $987,000 related to
general and administrative expense and 2) approximately $720,000 related to
professional fees (for legal and accounting services).
Other
Income, Net
Interest
expense was approximately $4.6 million and $2.9 million for fiscal years
September 30, 2009 and 2008, respectively, an increase of 59 percent
for fiscal year 2009 over 2008. The increase is due to late charges and
default interest being charged in 2009. As of September 30,
2009, we had fully drawn on our senior debt and operating line of
credit.
Interest
income was approximately $27,000 and $222,000 for the fiscal years ended
September 30, 2009 and 2008, respectively, a decrease of 715 percent
for fiscal year 2009 over 2008. Interest income decreased primarily due to
a reduction in cash held in interest bearing accounts and reduction in rate
earned.
Net
Loss
Our net
loss was approximately $21.5 million and $8.7 million for the fiscal years ended
September 30, 2009 and 2008, respectively, an increase of 147 percent for fiscal
year 2009 over 2008. The increase in our net loss was primarily the
result of the continued poor margin situation in the ethanol industry during
fiscal year 2009, as well as an impairment of plant and process equipment charge
of $12.5 million during the year. During the fiscal year ended
September 30, 2009, we had no lower of cost or market
adjustment. During the fiscal year ended September 30, 2008, we
had a lower of cost or market adjustment of approximately $4.6
million. As provided in “Chapter 11 Bankruptcy” in this Management’s
Discussion and Analysis, continued net losses and our worsening liquidity
situation 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 market place. 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 in fiscal year 2010 and possibly beyond.
Trends and Factors that
May Affect Future Operating Results
Bankruptcy
Our
future operating results will be significantly dependent on our ability to
emerge successfully from Chapter 11 bankruptcy protection with a court-approved
plan of reorganization that allows us to continue operations. Please
see “Chapter 11 Bankruptcy” in this Management’s Discussion and Analysis for
more information on the status of our bankruptcy filing.
26
Ethanol
Supports
On
December 19, 2007, President Bush signed into law the Energy Independence
and Security Act of 2007, which raises the minimum usage requirement to 13.2
billion gallons of ethanol by 2012 and 15 billion gallons by 2015. The Act
also mandates a minimum requirement of 36 billion gallons of renewable fuels by
2022, with cellulosic ethanol accounting for 16 billion gallons of this
total. The renewable fuels standard program should ensure the continued
growth of the ethanol market in the near future. The Energy Policy Act
also provides a small producer credit allowing qualifying producers to deduct
from their federal income taxes 10¢ per gallon for the first 15 million gallons
of ethanol produced in a given year. The Volumetric Ethanol Excise Tax
Credit provides refiners 4.5¢ per gallon of ethanol blended at 10 percent, which
encourages refiners and gasoline blenders to use ethanol. We expect that
the RFS and Volumetric Ethanol Excise Tax Credit will increase demand for our
ethanol and have a positive effect on our operating results.
Competition
and Product Demand
As of
October 22, 2009, according to the Renewable Fuels Association, 202 ethanol
refineries had a nameplate production capacity of a record 13.1 billion
gallons, and 11.9 billion gallons of operating production. In fiscal year
2009, we witnessed a number of plants temporarily reducing production or
shutting down for a limited amount of time or permanently. If and
when the margin situation improves in the industry, we would expect to see much
of this excess capacity coming back online. We believe that the
influx of new ethanol refineries and return of excess capacity and corresponding
increase in supply may have a negative effect on our short-term operating
results.
Commodity
Prices
Corn
Our
primary grain feedstock is corn. The cost of corn is dependent upon
factors that are generally unrelated to those affecting the price of
ethanol. Corn prices generally vary with international and regional grain
supplies, and can be significantly affected by weather, planting and carryout
projections, government programs, exports, and other international and regional
market conditions.
Due to
the significant expansion of the ethanol industry, corn futures rose in fiscal
2008 overall in response to this new demand, but lowered significantly in the
fourth quarter of fiscal 2008. Corn futures were significantly lower
and more stable throughout fiscal 2009. We anticipate that this trend
will continue, but there can be no guarantee that corn prices will not return to
the high prices and significant volatility that we witnessed in fiscal
2008. Factors such as United States Department of Agriculture
(“USDA”) estimates of acres planted, corn yield increases per acre, export
demand and domestic usage also have significant effects on the corn
market. Significant increases in the price of corn will have a significant
negative effect on future operating results.
Natural
Gas
The Plant
requires a significant and uninterrupted supply of natural gas for its
operations. Natural gas prices have historically fluctuated
dramatically. Natural gas prices in Minnesota have risen greatly in recent
years, rising from an average of $2.98 per 1000 cubic feet in 1999 to $9.09 per
thousand cubic feet in 2008 (Industrial Price), according to U.S. Department of
Energy. Natural gas prices lowered significantly in fiscal year
2009. As of September 30, 2009, natural gas prices were $3.94 per
1000 cubic feet. We expect that volatility in the natural gas market
will continue, and that significant increases in the price of natural gas would
have a significant negative effect on future operating results.
Inflation
We do not
consider the impact of inflation to be material to our revenues and income from
operations.
Statement of Cash Flows for the years ended September 30,
|
2009
|
2008
|
||||||
Cash
flows used in operating activities
|
$ | (51,238 | ) | $ | (9,143,260 | ) | ||
Cash
flows used in investing activities
|
(36,390 | ) | (46,540,912 | ) | ||||
Cash
flows provided by financing activities
|
3,006,860 | 52,221,623 |
Cash
Flows
Operating
activities. Net income before depreciation and amortization is a
significant contributor to cash flows from operating activities. The changes in
cash flows from operating activities generally follow the results of operations
and also are affected by changes in working capital. Cash flows used in
operating activities in 2009 decreased approximately $9.1 million from the
comparable prior period. The Company incurred a net loss of approximately $21.5
million due to operational losses from the negative spread between corn and
ethanol, together with a onetime impairment of plant and process equipment of
$12.5 million, as well as a further impairment of the financing costs of
approximately $1.5 million. Depreciation expense accounted for
approximately $7 million as compared to $3.7 million in 2008 and an accrued
interest increase of approximately $2.3 million over 2008 accrual accounted for
the change in cash flows from operations. The Company’s overall cash and
equivalent position improved from approximately $1.1 million at September 30,
2008 to approximately $4.0 million at September 30, 2009.
27
Investing
activities. Cash flows used in investing activities in fiscal 2009
decreased approximately $46.5 million compared to the comparable prior period,
the result of no construction in process expenditures in fiscal 2009 as a result
of the Plant becoming operational in 2008. There were approximately
$46.5 million in construction in process expenditures in fiscal
2008.
Financing
activities. Cash flows provided by financing activities in fiscal 2008
decreased approximately $49.2 million compared to the comparable prior period,
primarily the result of proceeds from our construction loan being fully
recognized in fiscal 2008. For fiscal year 2008, we recognized
approximately $47.5 million in proceeds from our construction loan.
As of
September 30, 2009, we had approximately $4 million in cash and cash
equivalents, approximately $2.8 million in restricted cash, and total assets of
approximately $105 million. As of September 30, 2009, we had current
liabilities of approximately $90.2 million, including approximately $80.1
million in current maturities of long-term debt. Total members’
equity as of September 30, 2009 was $14,978,644.
Since our
inception through September 30, 2009, we have an accumulated deficit of
approximately $30.2 million. 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 though 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.
Contractual Obligations and
Commercial Commitments
We have
entered into several loan agreements and a capital lease agreement for financing
of the Plant. The total loan commitment is approximately $60 million and
the capital lease is approximately $26 million, and both are described
below. As provided above and in Note 2 to the consolidated financial
statement notes, we filed for voluntary Chapter 11 bankruptcy protection on
October 30, 2009. The ability of our senior creditors and the County
to seek remedies to enforce their rights under the agreements listed below 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 senior 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. We are working
with our lenders to cure defaults related to the various loans to which we are a
party in order to successfully emerge from bankruptcy.
The loans
described below are subject to credit agreements 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.
We were
in violation of financial covenants as of September 30, 2008. We
failed to meet tangible net worth requirements and reporting requirements as of
September 30, 2008. As of September 30, 2008 the financing agencies
had waived the compliance with the tangible net worth ratio and reporting
requirements through October 1, 2009.
On March
20, 2009, we entered into a forbearance agreement (the “Forbearance
Agreement”) with our senior lender, Agstar Financial Services, PCA (“Agstar”),
which requires that Agstar not pursue certain remedies available to them until
April 30, 2009, which is the end of the forbearance period. The terms
of the Forbearance Agreement requires us to pay the current principal amounts
due as well as all accrued interest at the end of the forbearance
period. At that time, if we are unable to pay the amounts due after
the forbearance period as required under the Forbearance Agreement, Agstar 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, we received a notice letter from Agstar stating we are in default on
our loan agreement and that we are in default under our subordinate lender
agreements. Under the terms of the notice letter we had to cure all
defaults prior to June 15, 2009, or the entire amount due under the agreements
would become accelerated. We failed to make these payments under the
notice by June 15, 2009.
On July
21, 2009, our senior lender declared the principal and interest balance under
the Construction Term Note Term Revolving Note, and Revolving Line of Credit
Loan (both defined below) immediately due and payable.
On August
31, 2009, we received a summons and complaint from Agstar and NMF for our
defaults on the loan agreements to begin foreclosure
proceedings.
28
New
Market Tax Credit Loan
In March
2007, we entered into the agreement with NMF for the amount of $19,175,000. We
have guaranteed we 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 we 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, we must pay the amortized unpaid principal together with the accrued
interest. The interest rate is 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 2.514%. On the
first day of each month following the initial advance, August 2007, interest
only payments will be made until September 2014 when a principal payment of
$400,000 is required.
As of
September 30, 2009 we are being charged a default interest rate of 5% on the
term loan and 4.51% on the subordinated note along with late charges for
non-payment.
Construction
Term Loan
Upon
satisfactory completion of the Plant a portion of the construction loan (the
“Construction Loan”) converted to a construction term loan (the “Construction
Term Loan”), totaling $29 million. The interest rate reduced to LIBOR plus 2.95%
on the Construction Term Loan. 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 1st of 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, we will make additional principal
payments equal to 65% of our excess cash flow not to exceed $2 million per
fiscal year and an aggregate total of $8 million. As part of the
financing agreement, the premium above LIBOR may be reduced to 2.65% based on
attaining certain financial ratios.
The
financing agreement requires an annual servicing fee of $20,000. We
may make distributions which exceed 40% of net income as long as we have 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. We are also required to
obtain and maintain financial ratios on an annual basis.
Construction
Term Revolving Note
The
amount of the construction term revolving note (the “Construction Term Revolving
Note”) that converted to the term revolving note (the “Term Revolving Note”) was
$6 million. We are required to pay interest on the principal advances monthly at
the LIBOR rate plus 2.95% which totaled 3.2256% at September 30, 2009 and 5.41%
as of September 30, 2008. The outstanding principal and any accrued
interest is due on the five year anniversary from the conversion date. The
purpose of this loan is for cash and inventory management purpose.
Revolving
Line of Credit Loan
We also
have a revolving line of credit loan (“Revolving Line of Credit Loan”) with the
same lending institution for up to $6 million. We are required to pay
interest on the principal advances monthly at the LIBOR rate plus 2.95% which
totaled 3.2256% at September 30, 2009 and 5.41% as of September 30,
2008. 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. We pay 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 our tangible
owner’s equity (defined as tangible net worth plus subordinated debt divided by
total assets) is less than or equal to 60% or LIBOR plus 2.65% if the
tangible owner’s equity is greater than 60%.
The Term
Revolving Note as well as the Construction 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.
As of
September 30, 2009, we are being charged default interest at 5.23% for the
Construction Term Note, Term Revolving Note and Revolving Line of Credit Note as
well as late charges for payments not made on time.
Under the
terms of our Master Loan Agreement with Agstar, we may make distributions to
members of 40% of our immediately preceding fiscal year’s net income, and make
additional distributions permitted by lender after any excess cash flow has been
paid. We may not make any distributions while an event of default
exists. We were in default under the Master Loan Agreement as of September
30, 2008, but received a waiver for our violations through October 1, 2009, and
we filed for Chapter 11 bankruptcy protection on October 30, 2009. We
are therefore forbidden from making any distributions to
members.
29
County
Capital Lease
In April
2007, we entered into a long term equipment lease agreement with 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 million, 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, we began 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 were scheduled
to begin 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 were expected to make lease payments of principal and interest that
correspond to the principal and interest the County will pay on the General
Obligation Bonds Series 2007B and 2007C. Interest payments were financed through
an interest reserve recorded as restricted cash. We were expected to 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. We have guaranteed that
if such assessed lease payments are not sufficient for the required Bond
payments, we 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. Assets under this lease totaled
approximately $20,396,100 with accumulated depreciation of approximately
$2,226,740 and $867,000 recorded as of September 30, 2009 and 2008,
respectively.
We failed
to make basic payments on the County capital lease as of December 31, 2008,
which caused us to default on the Capital Lease. Accordingly, the
Capital Lease has been reclassified to current maturities of long-term
debt. The County has continued to make required principal and
interest payments to the bondholders. As of September 30, 2009, the
County has paid approximately $648,000 in principal through the County’s general
fund on our behalf. We included this amount due in the current debt
balance. Interest payments on the Capital Lease have been paid through
restricted funds during fiscal 2009. We have not accrued a liability
to replenish those funds as of September 30, 2009, but may be required to do so
in the future pending the bankruptcy proceedings results.
Off-Balance
Sheet Transactions
As
of September 30, 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.
We are
exposed to the impact of market fluctuations associated with interest rates as
discussed below. We have no exposure to foreign currency risk, as all
of our business is conducted in United States Dollars. While we
previously used derivative financial instruments as part of an overall strategy
to manage market risk, we no longer have any derivative instruments that expose
us to commodity price risk.
Interest
Rate Risk
If we
successfully emerge from bankruptcy, 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, 2008 and in the twelve months ended September 30,
2009. As of September 30, 2009, we have approximately $86.1 million
in short-term debt, including our line of credit. As we are being
charged default interest due to our defaults on existing loan agreements, our
interest rate is not subject to variability as of September 30,
2009. If and when we successfully emerge from bankruptcy and return
to variable interest rates, a hypothetical 1% change in interest rates would
change our interest expense by approximately $861,000 on an annual
basis.
Commodity
Price Risk
Effective
April 8, 2008, we closed the majority of all derivative positions. At
September 30, 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. We did not have
any firm purchase commitments related to corn for the period ended September 30,
2009. We recorded an accrued loss on our firm purchase commitments
related to corn aggregating to zero for the period ended September 30, 2009 and
approximately $3.6 million for the fiscal year ended September 30,
2008. At September 30, 2008 the Company recorded a net liability of
approximately $10,000, which included a liability of approximately $77,000 and
cash of $67,000.
30
Our
financial statements are included on pages F-1 to F-17 of this annual
report on Form 10-K.
None.
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 amended (the “Exchange Act”) as of the end of the
period covered by this report. Based on that evaluation, the chief
executive officer/chief financial officer has concluded 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 Exchange Act 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 Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. We are working on a developing a disclosure control remediation
plan to remedy our disclosure controls and procedures deficiencies. We
expect to have such a plan in place by the end of the second quarter of 2010 and
to continue to take additional steps necessary to ensure all controls and
procedures are in place for full compliance with a goal to have all of our
remediation measures in place by the end of the second quarter of 2010.
The remediation plan includes but is not limited toimplementing a search for a
full time controller or chief financial officer with appropriate
qualification.
The
implementation of this remediation plan has been initiated and will continue
through the third quarter 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 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.
Management’s
Report On Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting, as defined in the Exchange
Act Rule 13a-15(f). Management has conducted, with the participation of our
chief executive officer and chief financial officer, an assessment, including
testing of the effectiveness, of our internal control over financial reporting
as of September 30, 2009. Management’s assessment of internal control over
financial reporting was conducted using the criteria in Internal Control over
Financial Reporting – Guidance for Smaller Public Companies issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”).
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely
basis. In connection with management’s assessment of our
internal control over financial reporting as required under Section 404 of the
Sarbanes-Oxley Act of 2002, we identified the following material weakness in our
internal control over financial reporting as of September 30, 2009:
The
Company has in place a policy and procedures manual. However, due to
the limited staffing, we have a material weakness in segregation of duties. We
have been unable to fill the position of full-time chief financial officer. so
our senior accountant has been fulfilling a portion of the duties that would
otherwise be performed by a chief financial officer. The work of the
senior accountant has assisted in creating some segregation of duties; however,
due to our limited staffing, we anticipate that we always may have some
segregation of duties issues. Also, in particular, a
significant amount of information about the Company is channeled through the
chief executive officer related to disclosure controls for the financial report
and required SEC filings. The appointment of a chief financial
officer or controller will enable the Company to have more coverage for Company
information, rather than relying upon one individual. Our plan to
address the disclosure controls issue will be incorporated in the plan of
reorganization, which has yet to be submitted to or confirmed by the Bankruptcy
Court. As part of the plan, we will seek to appoint a chief financial
offcier or controller that has experience in preparing SEC periodic reports and
related matters that will provide additional segregation of internal
controls.
31
Because
of the material weaknesses noted above, management has concluded that we did not
maintain effective internal control over financial reporting as of September 30,
2009, based on Internal Control over Financial Reporting – Guidance for Smaller
Public Companies issued by COSO.
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
Changes
In Internal Control Over Financial Reporting
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.
The
following table contains information with respect to the members of the
Company’s board of governors:
Name
|
Age
|
Year First Became
A Governor
|
||
Gary
Thompson, Chairman
|
58
|
2009
|
||
Hans
Ronnevik, Treasurer
|
64
|
Inception
|
||
John
Anderson
|
50
|
2009
|
||
Philip
Deal
|
40
|
Inception
|
||
Gerald
Rust
|
56
|
Inception
|
||
Ronald
Tobkin
|
61
|
Inception
|
||
Jonathan
Piekarski
|
55
|
Inception
|
Gary Thompson, Chairman, Age
58
Mr.
Thompson currently owns and operates the 27-hole Geneva Golf Club in Alexandria,
Minnesota and is a partner with his oldest son on the 18-hole Trilogy Golf Club
in Gilbert, Arizona from 1999 to present. From 1969 to 2001, Mr.
Thompson owned and operated a dairy and cash grain farm with his father in
Clarissa, Minnesota. He has served on the board of Agri-Valley Farm Center in
Clarissa, Minnesota from 1974 to 1999 and was Vice Chair of Finance for the
Central Minnesota Ethanol Cooperative in Little Falls, Minnesota from 1997 to
1999.
Hans Ronnevik, Treasurer, Age
64
Mr. Ronnevik
has been a partner in Ronnevik Farms, a crop farming operation, since
1972. Mr. Ronnevik was a board member of AgCountry Farm Credit
Services of Fargo, North Dakota for five years from 2003-2008, and served on the
Audit Committee each year. Mr. Ronnevik graduated from North Dakota
State University in 1967 with a Bachelor of Science Degree in Animal
Science. Mr. Ronnevik has served as Treasurer and a governor since
our inception.
John Anderson, Governor, Age
50
Mr. Anderson
has been employed as the manager of NAPA of Perham, an auto parts and service
business in Perham, Minnesota since 2000. Mr. Anderson has also been
a general partner of New Life Farms, PLLP, and Vice President of NLF
Group, Inc. since 2000. From 1982 to 2000, Mr. Anderson served as the
owner and manager of Anderson Turkey Farms, a family owned and operated turkey
breeding farm. Mr. Anderson serves as Treasurer of MnAg2010, an
ad-hoc group of agricultural leaders from a five state area with a mission to
promote agricultural issues. Mr. Anderson holds Bachelor of Science
and Bachelor of Arts degrees from Moorhead State University.
Philip Deal, Governor, Age
40
Since
1986, Mr. Deal has been actively involved in his family farming
operation. Since 2001, he has been the grain merchandiser and manager of
the Grain Division of Wheaton-Dumont Coop Elevator in Wheaton, Minnesota, and he
was promoted to general manager in 2006, a position he currently holds.
Mr. Deal received his Bachelor of Science degree in Finance from Moorhead
State University. Mr. Deal has been an advisory board member since
our inception. Mr. Deal has served as a governor since our
inception.
32
Gerald Rust, Governor, Age
56
Mr. Rust
has served on several local boards and councils and most recently was a founding
member and director/governor (1993-2001) of Chippewa Valley Ethanol Co. in
Benson, Minnesota. In 1998, he was again involved as a founder of
Diversified Energy Co. in Morris, Minnesota, serving as governor and board
chairman from 1998-2005. During his involvement with the ethanol industry
he has been active in the Minnesota Coalition for Ethanol, Minnesota Corn
Co-products Export Group, U.S. Grains Council, and Minnesota Shippers
Association. Mr. Rust is retired. Mr. Rust has been a member of
our steering advisory committee since February 2005 and has served as a
governor since our inception.
Ronald Tobkin, Governor, Age
61
Mr. Tobkin
has actively been involved in the family farming operation since 1972, and has
been a self employed farmer for the past five years. His past experience
includes: Assistant Soil Scientist for University of Minnesota Northwest
Experiment Station, Co-Owner, President and General Manager of Perco Farm
Service in Perham, Minnesota, Co-Owner, President and General Manager of Prairie
Bean Co., Perham, Minnesota, Co-Owner, President and General Manager of Perco
Bean Co., Perham, Minnesota, and Managing Partner and majority owner of Little
Pine Dairy, LLP Perham, Minnesota. Mr. Tobkin has also been a Chamber
of Commerce Officer for School Board District 549 Chairman.
Mr. Tobkin graduated from North Dakota State University with a Bachelors
Degree in Soil Science in 1970. He also graduated and commissioned in the
Minnesota Military Academy in 1972. Mr. Tobkin has served as a
governor since our inception.
Jonathan Piekarski, Governor,
Age 55
Mr. Piekarski
has been a self-employed grain farmer from 1980 to the present. He has
over 20 years experience as a director in the Farm Credit System, starting with
the Federal Land Bank Association of Fergus Falls and remaining through the
successive mergers to what is now AgCountry Farm Credit Services, headquartered
in Fargo, North Dakota. In that capacity, Mr. Piekarski has served as
Vice-Chair and Chairman of the Board of Directors of Farm Credit Services of
West Central Minnesota, Moorhead and AgCountry Farm Credit Services. Over
his tenure, Mr. Piekarski has been a member of the state stockholder
advisory committee, state legislative advisory committee, board member and
Vice-Chair of the Minnesota Federation of Farm Credit Stockholders, member of
the Seventh Farm Credit District Federation Board, and the St. Paul Farm Credit
Council which does legislative/lobbying activity on system issues.
Mr. Piekarski has served on our Board since our inception.
Executive
Officers
Anthony
Hicks serves as the Company’s chief executive officer/chief financial
officer. Information regarding Mr. Hicks is below:
Anthony J. Hicks, Age
51
Mr. Hicks
is currently and has been since October 31, 2008 the Chief Executive
Officer of the Company, and is currently and has been since May 2007 the
Chief Financial Officer of the Company. Mr. Hicks served as the Chief
Operating Officer for Bell Farms/Whitestone Farms, LLP, a pig production company
located in Burnsville, Minnesota, from May 1996 to
May 2007.
Section 16(A) Beneficial
Ownership Reporting Compliance
Section 16(a) of
the Securities Exchange Act of 1934 requires the Company’s officers and
governors, and persons who own more than 10% of a registered class of the
Company’s equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, governors
and greater than 10% percent Unit holders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they
file. To the Company’s knowledge, based solely on a review of the copies
of such reports furnished to the Company and written representations from our
officers and governors, the Company believes that during fiscal year 2009 all
filings with the SEC by its officers and governors complied with requirements
for reporting ownership and changes in ownership of the Company’s units pursuant
to Section 16(a) of the Exchange Act, except as follows: a Form
3 was not timely filed upon John Anderson’s election to the board of governors
but has since been filed, and a Form 4 was not timely filed to reflect a unit
disposition by governor Ronald Tobkin.
Conflicts
of Interest Policy
The
Company has a written conflicts of interest policy and whistleblower complaint
policy and procedure and anti-retaliation policy, which collectively function as
the Company’s code of ethics, applicable to its governors, officers, and
employees of the Company, including the Company’s principal executive officer,
principal financial officer, and principal accounting officer. The
policies are available on the Company’s website at
http://www.ottertailethanol.com under the corporate governance section of the
website. The Company intends to satisfy the disclosure requirement
under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a
provision of its code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions by posting such information
on its website.
33
Changes
to Governor Nominations Procedures
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s board of governors from those disclosed in
the Company’s proxy statement for its 2009 annual meeting of members, filed with
the SEC on January 26, 2009.
Audit
Committee
The
Company is not a listed issuer, as defined in Rule 10A-3 under the Exchange Act,
and thus is not required to provide disclosure regarding its audit committee
membership. The board has determined that Hans Ronnevik is an “audit
committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K
under the Exchange Act, due to previous audit committee and work experience as
provided in the governor information provided above. Mr. Ronnevik is
independent under applicable Nasdaq corporate governance regulations, which the
Company has adopted although it is not a listed issuer. Mr.
Ronnevik’s designation does not impose on Mr. Ronnevik any duties, obligations
or liability that are greater than the duties, obligations and liability as a
member of the audit committee and board of governors in the absence of such
designation or identification.
Components
of Compensation Program
The
compensation program for Anthony Hicks, our chief executive officer and chief
financial officer, during the fiscal years ended September 30, 2009 and
2008 consisted of the following components:
·
|
Base
salary – Mr. Hicks received a base salary as reflected in the Summary
Compensation Table below. The purpose of the base salary was to
provide a secure base of cash compensation for Mr. Hicks. Base
salary was paid in equal bi-weekly installments and was not contingent
upon achieving any individual or company performance
goals.
|
|
|
·
|
Incentive
compensation - Mr. Hicks, as Chief Executive Officer and Chief
Financial Officer, became eligible effective December 1, 2008 to
receive 10,000 restricted Units pursuant to a vesting schedule that has
4,500 Units vesting on January 1, 2009, 4,500 Units vesting on
December 31, 2009, and 1,000 Units vesting on December 31, 2010,
provided that Mr. Hicks remains a member of the Company, complies
with his employment agreement, performs his duties, and substantially
complies with regulations governing Plant operations, as evaluated by the
compensation committee.
|
|
|
·
|
Term
and Termination —Mr. Hicks’s employment agreement as Chief Executive
Officer and Chief Financial Officer, as amended September 9, 2009, is set
to expire on December 31, 2010. In the event that
Mr. Hicks is terminated without cause, Mr. Hicks will receive
his pro-rated base salary through the termination date included in the
termination notice given to Mr. Hicks, and a severance payment equal
to six months of Mr. Hicks’s then annual base salary. Mr. Hicks
may resign at any time by giving 60 days prior written notice to the
Company. In connection with the Agreement, Mr. Hicks agreed to
a non-competition and non-solicit arrangement under which Mr. Hicks
agreed that for a period of two years after the termination of his
employment with the Company, Mr. Hicks will not consult for, be
employed with, or otherwise perform services for, any person or entity in
the ethanol business within 100 miles of any outer city limit of Fergus
Falls, Minnesota; and that Mr. Hicks will not, directly or
indirectly, solicit any customer, supplier, employee, or other
representative of the Company.
|
|
|
The
compensation program for the Company is administered by the compensation
committee of the Board, approved by the Board, and reviewed on an annual
basis. The objective of the program is to provide a fair and competitive
compensation package that will enable the Company to attract and retain talented
executives who will be instrumental in achieving company goals for growth and
profitability and in positioning the Company to compete in the rapidly expanding
and evolving renewable fuels industry. The compensation committee and the
Board believes that the compensation package must be competitive with financial
arrangements provided to executive officers of other renewable fuels companies
operating not only in Minnesota, but throughout the Midwestern United
States. The compensation package as adopted by the governors was designed
to promote and reward both individual performance of the Executives and their
collective performance as members of our team.
Decisions
concerning the compensation of the Chief Executive Officer and Chief Financial
Officer for the fiscal year ending September 30, 2009 were made by the
compensation committee of the Board and approved by the
Board.
SUMMARY COMPENSATION
TABLE
The
following table sets forth all compensation earned by our Chief Executive
Officer and Chief Financial Officer, and our former Chief Executive Officer (who
served as our Chief Executive Officer prior to termination effective October 31,
2008) for services performed during the last two fiscal
years.
34
Annual Compensation
|
||||||||||||||||||
Name & Principal Position
|
Year
|
Salary
|
Unit Awards(1)
|
All
Other
Compensation
|
Total
|
|||||||||||||
Anthony
J. Hicks
|
2009
|
$ | 131,766 | $ | 9,000 | — | $ | 140,766 | ||||||||||
Chief
Executive Officer and Chief Financial Officer (Principal Executive Officer
and Principal Financial Officer)
|
2008
|
$ | 105,000 | $ | 5,000 | — | $ | 110,000 | ||||||||||
Kelly
Longtin
|
2009
|
$ | 15,447 | $ | 5,000 | $ | 22,833 | (2) | $ | 43,280 | ||||||||
Former
Chief Executive Officer
|
2008
|
$ | 135,750 | $ | 5,000 | — | $ | 140,750 |
(1)
Market value of Units based by reference to the purchase price of $2.00 per unit
that was established in our intrastate offering that closed on October 31,
2006.
(2) Mr.
Longtin terminated employment with the Company effective October 31,
2008. Amounts in all other compensation column reflect severance
payments Mr. Longtin received in connection with his termination.
During
the fiscal years ended 2009 and 2008, the Company recognized approximately
$2,300 and $9,500, respectively, in compensation expense related to restricted
unit grants. As of September 30, 2009 and 2008, total unit-based
compensation expense for restricted unit non-vested awards not yet recognized
was $7,600and $22,300, respectively. Unit-based compensation in connection
with Unit Options for the year ended September 30, 2008 was $5,000.
Pursuant to his appointment as Chief Executive Officer, Mr. Hicks forfeited
2,500 Unit options granted to Mr. Hicks during his term as Chief Financial
Officer which were never exercised, and 2,500 remaining unvested Units that were
scheduled to vest on January 1, 2009 pursuant to the terms of his former
employment agreement as Chief Financial Officer.
OUTSTANDING EQUITY AWARDS AT
SEPTEMBER 30, 2009
Option Awards
|
Unit Awards
|
|||||||||||||||||
Equity
|
||||||||||||||||||
Equity
|
Equity
|
incentive plan
|
||||||||||||||||
incentive plan
|
incentive plan
|
awards:
|
||||||||||||||||
awards:
|
awards:
|
Market or
|
||||||||||||||||
Number of
|
Number of
|
Number of
|
payout value
|
|||||||||||||||
securities
|
securities
|
unearned
|
of unearned
|
|||||||||||||||
underlying
|
underlying
|
units or other
|
units or other
|
|||||||||||||||
unexercised
|
unexercised
|
Option
|
Option
|
Number of
|
Market value of
|
rights that
|
rights that
|
|||||||||||
options (#)
|
unearned
|
exercise
|
expiration
|
units that have
|
units that have
|
have not
|
have not
|
|||||||||||
Name
|
exercisable
|
options (#)
|
price ($)
|
date
|
not vested
|
not vested ($)
|
vested (#)
|
vested($)
|
||||||||||
Anthony
Hicks(1)
|
-
|
-
|
-
|
-
|
5,500
|
2.00
|
(2) | |||||||||||
Chief
Executive and Chief Financial Officer
|
||||||||||||||||||
Kelly
Longtin(3)
|
-
|
-
|
-
|
|
-
|
-
|
-
|
|||||||||||
Former
Chief Executive Officer
|
(1)
Pursuant to his appointment as Chief Executive Officer, effective
December 1, 2008, Mr. Hicks became eligible effective December 1,
2008 to receive 10,000 restricted Units pursuant to a vesting schedule that has
4,500 Units vested on January 1, 2009, 4,500 Units vesting on
December 31, 2009, and 1,000 Units vesting on December 31,
2010.
(2) Market
value of Units based by reference to the purchase price of $2.00 per Unit that
was established in our intrastate offering that closed on October 31,
2006.
(3) Mr.
Longtin terminated employment with the Company effective October 31,
2008. At that time, Mr. Longtin had 10,000 Unit options which
were never exercised and were forfeited. He received 2,500 restricted
Units which vested on January 1, 2009, and forfeited his remaining unvested
restricted Units.
35
Governors’
Compensation
The
following table sets forth all compensation earned by our governors during the
2009 fiscal year for service on our Board.
Name
|
Fees Earned or
Paid in Cash
|
All
Other
Compensation(1)
|
Total
|
|||||||||
Hans
Ronnevik
|
$ | 4,175 | $ | 180 | $ | 4,355 | ||||||
Gary
Thompson
|
$ | 0 | $ | 180 | $ | 180 | ||||||
Philip
Deal
|
$ | 4,500 | $ | 180 | $ | 4,680 | ||||||
Gerald
Rust
|
$ | 4,350 | $ | 180 | $ | 4,530 | ||||||
Ron
Tobkin
|
$ | 3,125 | $ | 180 | $ | 3,305 | ||||||
Jonathan
Piekarski
|
$ | 3,825 | $ | 180 | $ | 4,025 | ||||||
John
Anderson
|
$ | 1,425 | $ | 180 | $ | 1,605 | ||||||
Mark
Ellison(2)
|
$ | 3,025 | $ | 180 | $ | 3,205 | ||||||
Jerry
Larson(2)
|
$ | 5,900 | $ | 180 | $ | 6,080 | ||||||
Ed
Mehl(2)
|
$ | 2,850 | $ | 180 | $ | 3,030 | ||||||
Greg
Smith(2)
|
$ | 2,400 | $ | 180 | $ | 2,580 | ||||||
Lee
Rogness(3)
|
$ | 450 | $ | 180 | $ | 630 | ||||||
Jeff
Stanislawski(4)
|
$ | 750 | $ | 180 | $ | 930 |
(1) Reflects
payment of insurance premium by the Company for the benefit of each
governor.
(2)
Resigned effective on August 11, 2009 as reported in current report on Form 8-K
filed on August 19, 2009.
(3)
Resigned effective February 19, 2009 as reported in current report on Form 8-K
filed on February 23, 2009.
(4)
Resigned effective February 12, 2009 as reported in current report on Form 8-K
filed on January 23, 2009.
Governor
Compensation
Members
of the Board receive a monthly $150 per diem for attending meetings and for
rendering services to us. Members of the Board receive a monthly retainer
of $150, and the Chairman of the Board receives an additional $200 monthly
retainer. The Secretary receives a monthly officer retainer of $100 and
the Treasurer receives a monthly officer retainer of $100. Further,
members of the Board and officers receive reimbursement for reasonable expenses
incurred, if any, in connection with attending meetings of the Board and
rendering services to us.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
There are
no persons known to management of the Company that currently have beneficial
ownership of 5% or greater of the Company’s outstanding Units, based on
23,944,000 Units outstanding as of December 16, 2009.
The
executive officer and the governors own the following number of our Units as of
the date hereof, based on 23,944,000 Units outstanding as of December 16, 2009,
as follows:
Name of
Beneficial Owner
|
Amount and
Nature of
Beneficial
Ownership
|
Percent of
Class
|
||||||
Anthony
Hicks
|
47,000 | (1) | * | |||||
Hans
Ronnevik
|
91,668 | * | ||||||
Gary
Thompson
|
200,000 | * | ||||||
Philip
Deal
|
17,500 | * | ||||||
Ron
Tobkin
|
167,500 | (2) | * | |||||
John
Anderson
|
29,000 | (3) | * | |||||
Gerald
Rust
|
73,000 | * | ||||||
Jonathan
Piekarski
|
115,000 | (4) | * | |||||
All
officers and governors together as a group (8 persons)
|
740,668 |
3.1
|
%
|
* Designates less than one percent ownership.
(1) Includes
4,500 restricted Units subject to forfeiture if Mr. Hicks ceases his
employment with the Company prior to December 31, 2009 and 1,000 restricted
Units subject to forfeiture if Mr. Hicks ceases his employment with the
Company prior to December 31, 2010.
36
(2) Includes
12,500 Units held by RNR LLP, an entity in which Mr. Tobkin is an owner.
Mr. Tobkin disclaims beneficial ownership of all but 4,167 of such
Units. Also includes 50,000 Units held by Lakes Five, LLC, an entity in
which Mr. Tobkin is an owner. Mr. Tobkin disclaims beneficial
ownership of all but 10,000 of such Units.
(3) Includes
9,000 Units held by New Life Farms, LLLP, an entity in which Mr. Anderson is
general partner.
(4)
Includes 80,000 Units held by Piekarski Energy Holdings, an entity in which
Mr. Piekarski is an owner. Mr. Piekarski disclaims beneficial
ownership of all but 27,500 of such Units.
Securities
Authorized for Issuance under Equity Compensation Plans
All
options previously authorized for issuance under equity compensation plans were
cancelled pursuant to the termination of employment of our former chief
executive officer and plant manager, effective October 31, 2008, and transition
of our chief financial officer to chief executive officer, effective
December 1, 2008.
Transactions
With Related Persons
The Board
has adopted a policy requiring all governors, officers and employees, and their
immediate family members to notify the Board about any transaction, of any size,
with the Company. For the fiscal year ended September 30, 2009 and
September 30, 2008, we paid $176,000 for storage and corn procurement
services to Wheaton-Dumont Coop Elevator, an entity in which one of our
governors, Philip Deal, serves as the general manager. This transaction
was approved in accordance with our policies and procedures for review and
approval of related party transactions.
Our
Member Control Agreement provides that the existence and terms of any such
transactions must be fully disclosed to the Board. The Board may approve
the transaction only if it determines that it is on terms no more favorable to
the governors, executive officers, members or their affiliates than generally
afforded to non-affiliated parties in a similar transaction. A majority of
our governors who are disinterested in such a transaction must approve the
transaction and, acting as fiduciaries, conclude that it is in our best
interest. In addition, our Member Control Agreement permits us to enter
into transactions related to the sale of corn with governors, executive
officers, or their affiliates without any formal Board approval process,
provided that the terms of the transaction are commercially reasonable and no
less favorable to the Company than could be obtained from an unaffiliated third
party.
Governor
Independence
Although
the Company is not required to comply with NASDAQ rules and regulations, we
evaluate governor independence based on the NASDAQ definition of “independent
director” found in NASDAQ Rule 5605(a)(2). None of our current governors
are employees of the Company. Each of the governors hold an ownership
interest (or a beneficial interest) in the number of Units specified in
“Security Ownership of Certain Beneficial Owners and Management.” No
governor has provided services or goods to us or purchased services or goods
from us, except for those described below under “Transactions with Related
Persons, Promoters, and Certain Control Persons.” Based on that
information, it is our view that each of its governors that served during the
fiscal year ended September 30, 2009 is an “independent director” under the
NASDAQ listing standards related to director indepence for the board and each of
its committees. The Company has adopted a conflict of interest policy
applicable to all employees, officers, committee members and governors,
including the Company’s chief executive officer and chief financial officer,
that establishes Company-wide policies for gifts, financial interests in outside
organizations, and avoiding conflicts of interest. The conflict of
interest policy is available on the Investor Relations section of our website at
http://www.ottertailethanol.com.
Independent
Registered Public Accounting Firm
Boulay,
Heutmaker, Zibell & Co., P.L.L.P. (“BHZ”) currently serves as our
independent auditor, and has served as such during our previous two fiscal
years. The Board has appointed BHZ to be the Company’s independent auditor
for the fiscal year ending September 30, 2010.
Auditors’
Fees
BHZ
billed the Company the following amounts for services provided during fiscal
years 2008 and 2009:
2008
|
2009
|
|||||||
Audit
Fees
|
$ | 127,000 | $ | 118,000 | ||||
Audit-Related
Fees
|
— | — | ||||||
Tax
Fees
|
— | 2,100 | ||||||
All
Other Fees
|
— | — | ||||||
Total
Fees
|
$ | 127,000 | $ | 120,100 |
37
The fees
provided above are broken into the following categories:
·
|
Audit Fees. This
category includes the fees and out-of-pocket expenses for the audit of the
Company’s 2008 and 2009 annual financial statements and review of the
Company’s quarterly reports.
|
|
·
|
Audit-Related Fees.
This category consists of fees for assurance and related services
reasonably related to the performance of the audit or the review of the
Company’s financial statements, not otherwise reported under Audit Fees.
BHZ did not perform any services to us disclosable under Audit-Related
Fees.
|
|
·
|
Tax Fees. This category
consists of fees for tax compliance, tax advice and tax planning. BHZ did
not perform any services to us disclosable under Tax Fees for fiscal
2008. In fiscal year 2009, BHZ consulted with the Company on
tax advice related to the bankruptcy proceeding and
foreclosure.
|
|
·
|
All Other Fees. This
category consists of fees for other non-audit services. BHZ did not
perform any services to us disclosable under All Other
Fees.
|
The Board
is required to pre-approve all audit and non-audit services performed by the
Company’s independent auditor to assure that the provision of such services does
not impair the auditor’s independence. The Board will not authorize the
independent auditor to perform any non-audit service which independent auditors
are prohibited from performing under the rules and regulations of the
Securities and Exchange Commission or the Public Company Accounting Oversight
Board. The Board may delegate its pre-approval authority to one or more of
its members, but not to management. The member or members to whom such authority
is delegated shall report any pre-approval decisions to the Board at its next
scheduled meeting.
38
The
following exhibits and financial statements are file as part of, or are
incorporated by reference into, this report:
(1) Financial
Statements
The
financial statements appear beginning at page F-1 of this Annual
Report.
(2) Financial
Statement Schedules
All
supplemental schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(3) Exhibits
EXHIBIT
INDEX
Exhibit
|
||
Number
|
Description
|
|
3.1
|
Articles
of Organization filed September 22, 2006(a)
|
|
4.1
|
Membership
Unit Specimen Certificate(a)
|
|
4.2
|
Membership
Unit Specimen Certificate for Seed Units(a)
|
|
4.3
|
Membership
Unit Specimen Certificate for Incentive Units(a)
|
|
4.4
|
Operating
and Member Control Agreement dated effective January 20,
2006(a)
|
|
10.1
|
Amended
and Restated Employment Agreement of Chief Executive Officer effective
September 9, 2009 between the Company and Anthony
Hicks*+
|
|
10.2
|
Base
Contract for Sale and Purchase of Natural Gas dated May 1, 2006
between BP Canada Energy Marketing Corp. and the Company(a)(Exhibit
10.1)
|
|
10.3
|
Natural
Gas Services Agreement as of May 23, 2006 by and between BP Canada
Energy Marketing Corp. and the Company(a)
|
|
10.4
|
Forbearance
Agreement dated March 20, 2009 with Agstar Financial Services, PCA
(d) (Exhibit 10.1)
|
|
10.5
|
Agreement
dated June 1, 2006 by and among AL-Corn Clean Fuel Cooperative, Corn
Plus Cooperative, Heartland Corn Products Cooperative, Chippewa Valley
Ethanol Company, Diversified Energy Company, Central MN Ethanol Co-op,
Bushmills Ethanol Inc., Minnesota Energy LLC, Red Trail Energy LLC, the
Company and Commodity Specialists Company(a)
|
|
10.6
|
Ethanol
Fuel Marketing Agreement dated July 18, 2006, by and between
Renewable Products Marketing Group, L.L.C. and the
Company(a)
|
|
10.7
|
Lease
of Land For Construction/Rehabilitation of Track made October 1, 2006
by and between BNSF Railway Company, Otter Tail Valley Railroad
Company, Inc. and the Company(a)
|
|
10.8
|
Contract
for Construction dated October 24, 2006 between Riley Brothers
Companies and the Company(a)
|
|
10.9
|
Engineering,
Procurement and Construction Services Fixed Price Contract dated
October 24, 2006 between Harris Mechanical Contracting Company and
the Company(b)
|
|
10.10
|
License
of Technology dated October 24, 2006 between Delta-T Corporation and
the Company(b)
|
|
10.11
|
Purchase
Agreement executed October 25, 2006 by and between Jonathan C.
Piekarski and Brenda K. Piekarski and the Company(a)
|
|
10.12
|
Real
Estate Warranty Deed recorded November 1, 2006 at
2:05 p.m.(a)
|
|
10.13
|
Construction
Management Services Contract dated November 3, 2006 between Knutson
Construction Services and the Company(a)
|
|
10.14
|
Engineering,
Procurement and Construction Services Fixed Price Contract dated
November 13, 2006 between Gateway Building Systems and the
Company(a)
|
|
10.15
|
Job
Opportunity Building Zone Business Subsidy Agreement made on
January 2, 2007 by and between the City of Fergus Falls, Minnesota
and the Company(a)
|
|
10.16
|
Engineering,
Procurement and Construction Services Fixed Price Contract dated
January 9, 2007 between Woessner Construction, Inc. and the
Company(a)
|
|
10.17
|
Agreement
Regarding Corn Procurement made effective as of February 1, 2007 by
and between CHS Inc. and the Company(a)
|
|
10.18
|
Letter
Regarding Employment dated April 10, 2007 to Anthony
Hicks(a)+
|
|
10.19
|
Electric
Service Agreement dated May 18, 2007 by and between Lake Region
Electric Cooperative and the
Company(a)
|
39
10.20
|
Master
Loan Agreement dated as of March 28, 2007 by and among Agstar
Financial Services, PCA and the Company(a)
|
|
10.21
|
First
Supplement to the Master Loan Agreement (Construction and Term Loan) dated
as of March 28, 2007 between Agstar Financial Services, PCA and the
Company(a)
|
|
10.22
|
Second
Supplement to the Master Loan Agreement (Term Revolving Loan) dated as of
March 28, 2007 between
|
Agstar
Financial Services, PCA and the Company(a)
|
||
10.23
|
Third
Supplement to the Master Loan Agreement (Revolving Line of Credit Loan)
dated March 28, 2007 between Agstar Financial Services, PCA and the
Company(a)
|
|
10.24
|
Intercreditor
Agreement entered into as of March 28, 2007 by and among Agstar
Financial Services, PCA, MMCDC New Markets Fund II, LLC, U.S. Bank,
National Association, and Otter Tail County,
Minnesota(a)
|
|
10.25
|
Disbursing
Agreement as of March 28, 2007 by and among the Company, Agstar
Financial Services, PCA, MMCDC New Markets Fund II, LLC, U.S. Bank,
National Association, Otter Tail County, Minnesota, and First Minnesota
Title & Abstract, LLC(a)
|
|
10.26
|
$35,000,000.00
Construction Note dated March 28, 2007 with the Company as Borrower
and Agstar Financial Services, PCA as Lender(a)
|
|
10.27
|
$6,000,000.00
Term Revolving Note dated March 28, 2007 with the Company as Borrower
and Agstar Financial Services, PCA as Lender(a)
|
|
10.28
|
$4,000,000.00
Revolving Line of Credit Note dated March 28, 2007 with the Company
as Borrower and Agstar Financial Services, PCA as
Lender(a)
|
|
10.29
|
Construction
and Term Loan Agreement dated as of March 30, 2007 by and among MMCDC
New Markets Fund II, LLC and the Company(a)
|
|
10.30
|
$14,480,500.00
MMCDC Senior Loan Note dated March 30, 2007 with the Company as
Borrower and MMCDC New Markets Fund II, LLC as
Lender(a)
|
|
10.31
|
$4,694,500.00
MMCDC Subordinated Loan Note dated March 30, 2007 with the Company as
Borrower and MMCDC New Markets Fund II, LLC as
Lender(a)
|
|
10.32
|
Industry
Track Agreement made April 6, 2007 by and between BNSF Railway
Company, Otter Tail Valley Railroad Company, Inc. and the
Company(a)
|
|
10.33
|
Lease
Agreement as of May 1, 2007 between Otter Tail County, Minnesota and
the Company(a)
|
|
10.34
|
Bill
of Sale dated May 1, 2007 from the Company to Otter Tail County,
Minnesota(a)
|
|
10.35
|
Gas
Transportation Agreement dated September 1, 2007 by and between Great
Plains Natural Gas Co., a Division of MDU Resources Group, Inc. and
the Company(a)
|
|
10.36
|
Value-Added
Producer Grant Agreement dated October 1, 2007 between the Rural
Business-Cooperative Service of the United States Department of
Agriculture and the Company(a)
|
|
10.37
|
Distiller’s
Grain Purchase Agreement effective as of January 11, 2008 with Bilden
Farms, LLC and the Company(a)
|
|
10.38
|
Railroad
Car Lease Agreement made the February 21, 2008 between Trinity
Industries Leasing Company and the Company(b)
|
|
10.39
|
Distiller’s
Grain Marketing Agreement effective as of February 25, 2008 by and
between CHS Inc. and the Company(b)
|
|
10.40
|
First
Amendment to Master Loan Agreement entered into as of April 1, 2008
by and between Agstar Financial Services, PCA and the
Company(b)
|
|
10.41
|
Allonge
to Revolving Line of Credit Note dated March 28, 2007, made and
entered into as of April 1, 2007 by and between Agstar Financial
Services, PCA and the Company(b)
|
|
10.42
|
Allonge
to Term Revolving Note dated March 28, 2007, made and entered into as
of April 1, 2007 by and between Agstar Financial Services, PCA and
the Company(b)
|
|
10.43
|
Allonge
to Construction Note dated March 28, 2007, made and entered into as
of April 1, 2007 by and between Agstar Financial Services, PCA and
the Company(b)
|
|
10.44
|
Collaboration
Agreement dated April 24, 2008 made by Agricultural Utilization
Research Institute (AURI)/Minnesota’s Center for Producer-Owned Energy and
the Company(b)
|
|
10.45
|
Covenant
Waiver dated January 8, 2009 from Agstar Financial Services,
PCA(c)
|
|
10.46
|
Covenant
Waiver dated December 9, 2008 from MMCDC New Markets Fund II,
LLC(c)
|
|
10.47
|
Covenant
Waiver dated January 9, 2009 from MMCDC New Markets Fund II,
LLC(c)
|
|
10.48
|
Covenant
Waiver dated December 2, 2008 from Otter Tail County(c)
|
|
31.1
|
Section
302 Certification of Chief Executive Officer and Chief Financial
Officer*
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
|
(a)
|
Previously
filed as an exhibit under the same exhibit number (unless otherwise
specified) to the Company’s Form 10-12G (No. 000-53042 ) filed
on January 28, 2008.
|
|
(b)
|
Previously
filed as an exhibit under the same exhibit number (unless otherwise
specified) to the Company’s Amendment No. 1 to Form 10-12G
(No. 000-53042 ) filed on April 30, 2008.
|
|
(c)
|
Previously
filed as an exhibit under the same exhibit number to the Company’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2008, filed on
January 13, 2009.
|
|
(d)
|
Previously
filed as an exhibit to the Company’s Current Report on Form 8-K, filed on
March 26, 2009.
|
|
*
|
Filed
Herewith
|
|
+
|
Management
contract or compensatory plan or
arrangement.
|
40
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
OTTER
TAIL AG ENTERPRISES, LLC
|
|
Date:
December 31, 2009
|
By: /s/
Anthony Hicks
|
Anthony
Hicks
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
Chief
Financial Officer
(Principal
Financial Officer and Principal
Accounting
Officer)
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints ANTHONY HICKS, his attorney-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
in this Annual Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connections therewith, with the Securities and
Exchange Commission, hereby ratifying and conforming all that said
attorney-in-fact, or his substitutes, may do or cause to be done by virtue of
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date:
December 31, 2009
|
/s/
Anthony Hicks
|
Anthony
Hicks
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
Chief
Financial Officer
(Principal
Financial Officer and Principal
Accounting
Officer)
|
|
Date:
December 31, 2009
|
/s/
Gary Thompson
|
Gary
Thompson, Chairman of the Board and
Governor
|
|
Date:
December 31, 2009
|
/s/
Hans Ronnevik
|
Hans
Ronnevik, Treasurer and Governor
|
|
Date:
December 31, 2009
|
/s/
Philip Deal
|
Philip
Deal, Governor
|
41
Date:
December 31, 2009
|
/s/
Gerald Rust
|
Gerald
Rust, Governor
|
|
Date:
December 31, 2009
|
/s/
Ron Tobkin
|
Ron
Tobkin, Governor
|
|
Date:
December 31, 2009
|
/s/
Jonathan Piekarski
|
Jonathan
Piekarski,
Governor
|
Date:
December 31, 2009
|
/s/
John Anderson
|
John
Anderson, Governor
|
42
Otter
Tail Ag Enterprises, LLC
Financial
Statements
September 30,
2009 and 2008
CONTENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Financial
Statements
|
||
Balance
Sheets
|
F-3
|
|
Statements
of Operations
|
F-4
|
|
Statements
of Changes in Members’ Equity
|
F-5
|
|
Statements
of Cash Flows
|
F-6
|
|
Notes
to Financial Statements
|
|
F-7-17
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Members
of Otter Tail Ag Enterprises, LLC
Fergus
Falls, Minnesota
We have
audited the accompanying balance sheets of Otter Tail Ag Enterprises, LLC as of
September 30, 2009 and 2008, and the related statements of operations, members’
equity, and cash flows for the fiscal years then ended September 30, 2009 and
2008. Otter Tail Ag Enterprises, LLC’s management is responsible for these
financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Otter Tail Ag Enterprises, LLC as
of September 30, 2009 and 2008, and the results of its operations and its cash
flows for the years then ended September 30, 2009 and 2008, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred an accumulated deficit of approximately $30
million as of September 30, 2009. Based on the Company’s operating plan, its
existing working capital is not sufficient to meet the cash requirements to fund
Otter Tail Ag Enterprises, LLC’s 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. Also, on October 30, 2009, the Company
filed for protection under Chapter 11 of the Bankrupcy Code. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management’s plans regarding those matters also are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/
Boulay, Heutmaker, Zibell & Co. P.L.L.P
Minneapolis,
Minnesota
December
31, 2009
F-2
Otter
Tail Ag Enterprises, LLC
Balance Sheets
September 30,
|
September 30,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$ | 4,058,000 | $ | 1,138,768 | ||||
Restricted
cash
|
2,790,971 | 1,417,490 | ||||||
Accounts
receivable
|
2,829,033 | 2,657,721 | ||||||
Inventory
|
3,827,702 | 5,761,323 | ||||||
Prepaid
expenses and other
|
400,902 | 366,322 | ||||||
Total
current assets
|
13,906,608 | 11,341,624 | ||||||
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 | 108,963,404 | ||||||
101,971,350 | 114,434,960 | |||||||
Less
accumulated depreciation
|
(10,724,936 | ) | (3,678,591 | ) | ||||
Net
property and equipment
|
91,246,414 | 110,756,369 | ||||||
Other
Assets
|
||||||||
Debt
service reserve
|
— | 2,638,895 | ||||||
Debt
issuance costs, net of amortization
|
— | 1,556,272 | ||||||
Total
other assets
|
— | 4,195,167 | ||||||
Total
Assets
|
$ | 105,153,022 | $ | 126,293,160 | ||||
LIABILITIES AND MEMBERS’
EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Operating
line of credit
|
$ | 6,000,000 | $ | 4,034,349 | ||||
Accounts
payable
|
646,809 | 702,661 | ||||||
Accrued
liabilities
|
182,086 | 133,888 | ||||||
Construction
payable
|
— | 20,046 | ||||||
Construction
payable - related party
|
254,564 | 255,500 | ||||||
Accrued
interest
|
2,976,949 | 718,022 | ||||||
Accrued
purchase commitments
|
— | 3,600,000 | ||||||
Current
maturities of long-term debt
|
80,113,970 | 3,014,310 | ||||||
Total
current liabilities
|
90,174,378 | 12,478,776 | ||||||
Long-term
debt, net of current maturities
|
— | 77,323,865 | ||||||
Commitments
and Contingencies
|
||||||||
Members’
Equity, 23,944,000 units authorized and outstanding
|
||||||||
Members’
equity
|
45,237,798 | 45,235,548 | ||||||
Accumulated
deficit
|
(30,259,154 | ) | (8,745,029 | ) | ||||
Total
Members’ Equity
|
14,978,644 | 36,490,519 | ||||||
Total
Liabilities and Members’ Equity
|
$ | 105,153,022 | $ | 126,293,160 |
Notes to
Financial Statements are an integral part of this Statement.
F-3
Otter
Tail Ag Enterprises, LLC
Statements of
Operations
Year Ended
|
Year Ended
|
|||||||
September 30,
|
September 30,
|
|||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 95,981,559 | $ | 70,099,287 | ||||
Cost
of sales
|
96,688,753 | 68,411,568 | ||||||
Impairment
of plant and process equipment
|
12,500,000 | — | ||||||
Lower
of cost or market adjustment
|
— | 4,632,000 | ||||||
Gross
Loss
|
(13,207,194 | ) | (2,944,281 | ) | ||||
Professional
fees
|
815,595 | 721,418 | ||||||
General
and administrative
|
1,438,798 | 986,648 | ||||||
Total
operating expenses
|
2,254,393 | 1,708,066 | ||||||
Operating
Loss
|
(15,461,587 | ) | (4,652,347 | ) | ||||
Other
income (expense)
|
||||||||
Loss
on derivatives
|
— | (1,342,712 | ) | |||||
Interest
expense
|
(4,583,257 | ) | (2,888,102 | ) | ||||
Impairment
of financing costs
|
(1,496,476 | ) | — | |||||
Interest
income
|
27,195 | 229,086 | ||||||
Total
other expense, net
|
(6,052,538 | ) | (4,001,728 | ) | ||||
Net
Loss
|
$ | (21,514,125 | ) | $ | (8,654,075 | ) | ||
Weighted
Average Units
|
||||||||
Outstanding
– Basic and Diluted
|
23,936,250 | 23,927,872 | ||||||
Net
Loss Per Unit – Basic and Diluted
|
$ | (0.90 | ) | $ | (0.36 | ) |
Notes to
Financial Statements are an integral part of this Statement.
F-4
Otter
Tail Ag Enterprises, LLC
Statements of Changes in Members’
Equity
Balance
- September 30, 2007
|
$ | 45,124,125 | ||
Unit
based compensation
|
14,469 | |||
Equity
exchanged for land easement 3,000 @ $2 per unit
|
6,000 | |||
Net
loss
|
(8,654,075 | ) | ||
Balance
- September 30, 2008
|
$ | 36,490,519 | ||
Unit
based compensation
|
2,250 | |||
Net
loss
|
(21,514,125 | ) | ||
Balance
- September 30, 2009
|
$ | 14,978,644 |
Notes to
Financial Statements are an integral part of this Statement.
F-5
OTTER
TAIL AG ENTERPRISES, LLC
Statements of Cash
Flows
Year Ended
|
Year Ended
|
|||||||
September 30,
|
September 30,
|
|||||||
2009
|
2008
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
loss
|
$ | (21,514,125 | ) | $ | (8,654,075 | ) | ||
Adjustments
to reconcile net loss to net cash used in operations:
|
||||||||
Depreciation
|
7,046,345 | 3,669,433 | ||||||
Amortization
of debt financing costs
|
59,796 | 105,744 | ||||||
Impairment
of debt financing costs
|
1,496,476 | — | ||||||
Impairment
of plant and process equipment
|
12,500,000 | — | ||||||
Lower
of cost or market adjustment
|
— | 4,632,000 | ||||||
Unit
based compensation
|
2,250 | 14,469 | ||||||
Unrealized
loss on derivative investments
|
— | 77,174 | ||||||
Change
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(171,312 | ) | (2,657,721 | ) | ||||
Interest
receivable
|
— | 15,975 | ||||||
Inventory
|
1,933,621 | (6,793,323 | ) | |||||
Prepaid
expenses and other
|
(34,580 | ) | (348,149 | ) | ||||
Commodity
derivatives
|
— | (2,191 | ) | |||||
Accounts
payable
|
(76,834 | ) | 684,930 | |||||
Accrued
interest and other
|
2,307,125 | 112,474 | ||||||
Accrued
purchase commitments
|
(3,600,000 | ) | — | |||||
Net
cash used in operating activities
|
(51,238 | ) | (9,143,260 | ) | ||||
Cash
Flows from Investing Activities
|
||||||||
Capital
expenditures
|
(36,390 | ) | — | |||||
Payments
for construction in process
|
— | (46,540,912 | ) | |||||
Net
cash used in investing activities
|
(36,390 | ) | (46,540,912 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Payments
for long-term debt
|
(224,205 | ) | (30,212 | ) | ||||
Change
in restricted cash
|
1,265,414 | 722,813 | ||||||
Payments
for debt issuance costs
|
— | (46,669 | ) | |||||
Proceeds
from line of credit
|
1,965,651 | 4,034,348 | ||||||
Proceeds
from construction loan
|
— | 47,531,343 | ||||||
Net
cash provided by financing activities
|
3,006,860 | 52,211,623 | ||||||
Net
Increase (Decrease) in Cash and Equivalents
|
2,919,232 | (3,472,549 | ) | |||||
Cash
and Equivalents – Beginning of Period
|
1,138,768 | 4,611,317 | ||||||
Cash
and Equivalents – End of Period
|
$ | 4,058,000 | $ | 1,138,768 | ||||
Supplemental
Disclosure of Cash Flow Information
|
||||||||
Interest
paid, net of capitalized of $0 and $2,595,717 at September 30, 2009
and 2008, respectively
|
$ | 2,324,330 | $ | 2,453,842 | ||||
Supplemental
Disclosure of Noncash Operating, Investing and Financing
Activities
|
||||||||
Units
issued for line of land and construction
|
$ | — | $ | 6,000 | ||||
Construction
costs included in accounts payable
|
$ | 254,564 | $ | 275,546 | ||||
Financing
costs paid with debt proceeds
|
$ | — | $ | 17,296 |
Notes
to Financial Statements are an integral part of this Statement.
F-6
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Business
Otter
Tail Ag Enterprises, LLC, a Minnesota limited liability Company (the ‘Company”)
was organized with the intention 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: 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.
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 and commissions 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 $531,000 and $262,000 for
the years ended September 30, 2009 and 2008, respectively.
Cash and
Equivalents
The
Company considers all highly liquid debt instruments with a maturity of three
months or less to be cash and equivalents.
The
Company maintains its accounts primarily at two financial
institutions. At times throughout the year, the Company’s cash and
equivalents balances may exceed amounts insured by the Federal Deposit Insurance
Corporation
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 September 30, 2009 and 2008, the Company was of the belief
that such amounts would be collectible and thus an allowance was not considered
necessary. It is at least 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 September 30, 2009 and September 30, 2008,
the total of these accounts was approximately $2,800,000 and $4,100,000,
respectively.
F-7
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
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 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
|
Capitalized
Interest
The
Company’s policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year. During fiscal year 2008
approximately $2,595,700 of incurred interest cost was capitalized to property
and equipment. No interest was capitalized to property and equipment
during fiscal year 2009.
Long-lived
Assets
The
Company tests long-lived assets or asset groups for recoverability when events
or changes in circumstances indicate that their carrying amount may not be
recoverable. Circumstances which could trigger a review include, but
are not limited to: significant decreases in the market price of the asset;
significant adverse changes in the business climate or legal factors;
accumulation of costs significantly in excess of the amount originally expected
for the acquisition or construction of the asset; current period cash flow or
operating losses combined with a history of losses or a forecast of continuing
losses associated with the use of the asset; and current expectation that the
asset will more likely than not be sold or disposed significantly before the end
of its estimated useful life.
Recoverability
is assessed based on the carrying amount of the asset and its fair value which
is generally determined based on the sum of the undiscounted cash flows expected
to result from the use and the eventual disposal of the asset, as well as
specific appraisal in certain instances. An impairment loss is recognized when
the carrying amount is not recoverable and exceeds fair value. For the year
ended September 30, 2009, impairment of financing costs was recognized totaling
approximately $1,496,000. On June 30, 2009, impairment of plant and
process equipment costs was recognized totaling $12,500,000. An
analysis was reperformed as of September 30, 2009 and no further impairment was
deemed necessary. No impairment was recognized on long-lived assets for the year
ended September 30, 2008.
Unit-Based
Compensation
The
Company recognizes compensation expense for employee stock options based on the
estimated grant date fair value using the Black-Scholes option-pricing model.
The Company accounts for unit based instruments granted to nonemployees under
the fair value method. Unit based instruments usually are recorded at their
underlying fair value. In certain instances the fair value of the goods or
services is used to determine the value of the equity instrument as it is a
better measure of fair value.
Fair Value of Financial
Instruments
The
carrying value of cash and equivalents, restricted cash, receivables, and
payables approximates their fair value.
It is not
currently practicable to estimate the fair value of the debt
financing. Senior debt consisting of a term loan of approximately
$34,806,000 and a revolving line of credit of $6,000,000 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 a 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,
we are unable to enter into replacement debt and therefore are unable to
determine a fair value of the fixed rate subordinate debt.
F-8
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
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 September 30, 2009 or
2008.
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 (loss) 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 September 30, 2009,
the Company had 12,600 unit equivalents outstanding relating to outstanding unit
options and unvested restricted units. As of September 30, 2008, the Company had
11,375 unit equivalents outstanding. At September 30, 2009 and 2008 the effects
these 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
years ended September 30, 2009 and 2008.
Income
Taxes
The
Company is treated as a partnership for federal and state income tax purposes,
and generally does not incur income taxes. Instead its earnings and losses
are included in the income tax returns of the members. Therefore, no provision
or liability for federal and state income taxes has been included in these
financial statements.
Subsequent
Events
The
Company has evaluated subsequent events through December 31, 2009, the date
which the financial statements were available to be issued.
NOTE
2. GOING CONCERN
The
Company incurred net losses of approximately $21,500,000 and $8,700,000 for the
years ended September 30, 2009 and 2008 respectively. Based on the
Company’s operating plan, its existing working capital is not sufficient to meet
the cash requirements to fund the Company’s planned operating expenses, capital
expenditures, and working capital requirements for the next year without
additional sources of cash and/or the deferral, reduction or elimination of
significant planned expenditures.
These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. This basis of accounting contemplates the recovery of the
Company’s assets and the satisfaction of liabilities in the normal course of
business.
The
Company has incurred operating losses and negative operating cash flows since
September 2008. The Company was in violation of certain covenants as
at September 2008 for which it received a waiver, the Company remained in
violation since that time for quarters ending December 2008, March 2009, June
2009 as well as September 2009.
As of
September 30, 2009 market conditions have improved in the ethanol
industry. The Company projects that, if current market conditions
prevail it may be possible for the industry to see periods of profitably;
however numerous plants that have been out of production for a variety of
reasons have either restarted or may start in the future. This additional
production could create an oversupply situation which may cause similar poor
market conditions as previously recorded. The improvement in present market
conditions was insufficient to enable the Company to stall the foreclosure
motion filed by the senior lenders.
On March
20, 2009, the Company entered into a forbearance agreement (the “Forbearance
Agreement”) with the Agstar Financial Services, PCA (the “Senior Lender”), which
required the Senior Lender to forbear from pursuing certain remedies available
to them until April 30, 2009, the end of the forbearance period (the
“Forbearance Period”). The terms of the Forbearance Agreement
required the Company to pay the current principal due as well as all accrued
interest at the end of the Forbearance Period. At that time, if the
Company was unable to pay the amounts due as required under the Forbearance
Agreement, 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 AgStar stating that 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 the
defaults under the notice by June 15, 2009.
F-9
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
The
Company received notice that the Senior Lender and other secured lenders had
filed a foreclosure notice through the court system to retrieve the assets and
to appoint a receiver to control and liquidate the business. As a means to
protect itself the Company following negotiation with their lenders filed for
bankruptcy on October 30, 2009 under the protection of Chapter 11 of the
bankruptcy code.
The
Company plans to utilize the court system to file a reorganization and
restructure plan to meet the needs of the business on a going forward basis. A
major component of this plan will be the restructure of its indebtedness as well
as to raise a minimum of $10,000,000 of additional equity. The Company’s
long-term plan includes evaluating improved technologies to either earn
additional revenue or reduce operating costs. There can be no
assurance that the Company will be able to obtain any sources of funding on
acceptable terms, or at all.
If the
Company cannot obtain sufficient additional funding, it will be forced to
significantly curtail its operations, or cease operations. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
forced to take any such actions.
NOTE
3. INCOME TAXES
The
Company has adopted a tax year end of December 31. The differences between
financial statement basis and tax basis of assets as of September 30, 2009
and 2008 are as follows:
2009
|
2008
|
|||||||
Financial
statement basis of total assets
|
$ | 105,153,022 | $ | 126,293,160 | ||||
Organization
costs expensed for financial reporting purposes
|
4,226,207 | 4,546,247 | ||||||
Depreciation
|
(20,256,218 | ) | (5,684,885 | ) | ||||
Impairment
recorded for financial reporting purposes
|
12,500,000 | - | ||||||
Taxable
income tax basis of total assets
|
$ | 101,623,011 | $ | 125,154,522 |
NOTE
4. CONCENTRATIONS
Two
customers totaled approximately 98% and 96% of total revenue as of September 30,
2009 and 2008, respectively. As of September 30, 2009 and 2008, these
two customers accounted for approximately 99% and 97%, respectively, of the
Company’s outstanding accounts receivable.
NOTE
5. INVENTORY
Inventories
consist of the following:
September 30, 2009
|
September 30, 2008
|
|||||||
Raw
materials
|
$ | 1,896,519 | $ | 2,075,474 | ||||
Work
in progress
|
1,017,363 | 1,999,300 | ||||||
Finished
goods
|
520,059 | 1,294,635 | ||||||
Spare
parts
|
393,761 | 391,914 | ||||||
Total
|
$ | 3,827,702 | $ | 5,761,323 |
F-10
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
The
Company obtained approximately 100% of its corn purchases from one supplier in
fiscal 2009 and 2008. This supplier accounted for approximately 26% of the
outstanding accounts payable balances as of September 30, 2008. The Company
did not have an outstanding payable balance due to this supplier as of September
30, 2009. The Company has a formal supply agreement. See Note
8, “Marketing Contracts” for further information on the contract.
During
the fiscal year ended September 30, 2008, the Company recorded an inventory
valuation impairment of approximately $1,032,000 attributable primarily to
decreases in market prices of corn and ethanol. The inventory valuation
impairment was recorded in lower of cost or market adjustments on the statements
of operations. For the fiscal year ended September 30, 2009, there
was no inventory valuation impairment necessary.
In the
ordinary course of business, the Company entered into forward purchase contracts
for its commodity purchases and sales. At September 30, 2008 the
Company had forward corn purchase contracts to purchase approximately 2,775,000
bushels costing approximately $14,000,000 through June 2009. Some of
these contract prices were above current market prices for corn. Given the
declining ethanol price, upon taking delivery under these contracts, the Company
would not be able to recover the above market value cost
incurred. Accordingly, the Company recorded an accrual loss on these
purchase commitments aggregating to approximately $3,600,000 for the fiscal year
ended September 30, 2008. The loss was recorded in lower of cost or
market adjustments on the statements of operations. The amount of
loss was determined by applying a methodology similar to that used in the
impairment evaluation with respect to inventory. Given the
uncertainty of future ethanol prices, this loss may or may not be recovered, and
further losses on the outstanding purchase commitments and inventory could be
recorded in future periods. As of September 30, 2009, the Company was
not committed to any contract which required impairment. The Company
has moved to purchasing corn as needed at the current market rates to protect
the Company from market risk.
NOTE
6. BANK FINANCING
Debt
consists of the following at:
Principal
Balance
2009
|
Principal
Balance
2008
|
|||||||
Construction
and Term Loan, see terms below
|
$ | 34,806,137 | $ | 35,000,000 | ||||
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
|
122,833 | 153,175 | ||||||
Total
|
$ | 80,113,970 | $ | 80,338,175 | ||||
Total
short-term debt
|
$ | 80,113,970 | $ | 3,014,310 | ||||
Total
long-term debt
|
- | $ | 77,323,865 | |||||
Revolving
line of credit, see terms below
|
$ | 6,000,000 | $ | 4,034,349 |
The loans
described below are subject to credit agreements 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.
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 had waived the compliance with the tangible net
worth ratio and reporting requirements through October 1, 2009.
F-11
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
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 make these payments 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 for their defaults on the loan agreements to
begin foreclosure proceedings.
New Market Tax Credit
Loan
In March
2007, the Company entered into the agreement with MMCDC New Markets Fund II, LLC
(“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 2.514%. On the
first day of each month following the initial advance, August 2007, interest
only payments will be made until September 2014 when a principal payment of
$400,000 is required.
As of
September 30, 2009 the Company is being charged a default interest rate of 5% on
the term loan and 4.51% on the subordinated note along with late charges for
non-payment. The Company incurred accrued interest and late fees
totaling approximately $600,000 as of September 30, 2009. Accrued
interest totaled approximately $19,000 as of September 30, 2008.
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
reduced to LIBOR plus 2.95% 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 1st of
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
financing agreement requires an annual servicing fee of $20,000. 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.
F-12
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
Construction Term Revolving
Note
The
amount of the Construction Term Revolving Note that converted to the Term
Revolving Note was $6,000,000. The Company is required to pay interest on the
principal advances monthly at the LIBOR rate plus 2.95% which totaled 3.2256% at
September 30, 2009 and 5.41% as of September 30, 2008. The
outstanding principal and any accrued interest is due on the five year
anniversary from the conversion date. The purpose of this loan is for cash and
inventory management purpose.
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 3.2256% at September 30, 2009 and 5.41% as of September 30,
2008. 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 LIBOR plus 2.65% if the tangible owner’s equity is greater than
60%.
The Term
Revolving Note as well as the Construction 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.
As of
September 30, 2009, the Company is being charged default interest at 5.23% for
the Construction Term Note, Term Revolving Note and Revolving Line of Credit
Note as well as late charges for payments not made on time. The
Company has incurred accrued interest and late fees totaling approximately
$1,513,000 as of September 30, 2009. As of September 30, 2008, the
Company was current in their interest payments.
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
County 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 began 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 were scheduled
to begin 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 was expected to make lease payments of principal and interest
that correspond to the principal and interest the County will pay on the General
Obligation Bonds Series 2007B and 2007C. Interest payments were financed through
an interest reserve recorded as restricted cash. The Company was expected to 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. Assets under this
lease totaled approximately $20,396,000 with accumulated depreciation of
approximately $2,227,000 and $867,000 recorded as of September 30, 2009 and
2008, respectively.
The
Company failed to make basic payments on the County 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. The County has continued to
make required principal and interest payments to the bondholders. As
of September 30, 2009, the County has paid approximately $648,000 in principal
from the County’s general funds on behalf of the Company. The Company
included this amount due in the current debt balance. Interest payments on the
capital lease have been paid through restricted funds during fiscal
2009. The Company has not accrued a liability to replenish those
funds as of September 30, 2009, but may be required to do so in the future
pending the bankruptcy proceedings results. The Company accrued
approximately $875,000 and $700,000 in interest charges as of September 30, 2009
and 2008, respectively.
F-13
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
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 is
scheduled to continue for successive one month terms until terminated by either
party providing a 30 day written advance notice to the other. The
Company pays $600 per car per month, which may be adjusted according to the
terms defined in the agreement.
In April
2008, the Company entered into an operating lease for equipment. The
Company is generally responsible for maintenance, taxes, and utilities for
leased equipment. The term of the lease is for five years with monthly
payments of $338.
In
September of 2007, the Company entered into an easement agreement for a
permanent easement for certain parcels of land. Under the terms of
the agreement, the Company agreed to pay a sum of $2,000 and increasing annually
at 5% for twenty-five years, up to a maximum of $6,500. In addition
to cash, the parties to the easement agreement also received 3,000 member units,
issued as of December 31, 2007.
In
October 2006, the Company entered into a land lease for the construction and
certain activities related to the operation and maintenance of rail
track. Under the terms of this agreement, the Company agreed to pay
$4,200 as base rent and increasing 3% thereafter. Either party can
terminate this agreement giving at least 30 days written notice.
In June
2009, the Company amended its pipeline lease agreement. Under the
terms of this agreement, the Company agrees to pay $400 for the years 2008 and
2009, $600 for 2010, $800 for 2011. The $800 will become base rent
with a 3% annual increase starting 2012.
At
September 30, 2009, future minimum lease payments under operating leases
are as follows:
Operating
Leases
|
|||||
2010
|
$ |
514,600
|
|||
2011
|
233,800
|
||||
2012
|
11,100
|
||||
2013
|
9,700
|
||||
2014
|
7,700
|
||||
After
2014
|
181,800
|
||||
Total
|
$ |
|
958,700
|
Rent
expense totaled approximately $521,000 and $296,000 for the fiscal years ending
September 30, 2009 and 2008, respectively.
NOTE
8. COMMITMENTS AND CONTINGENCIES
Marketing
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 distillers dried
grains with solubles the Company is expected to produce. The Company
receives 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 startup of production and continues 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
is 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 is 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 storage and
transportation costs, which is included in cost of goods sold. The
initial term of the agreement is 12 months beginning the first day of the month
the Company ships ethanol and is automatically extended for an additional 12
months. The marketing agreement is automatically extended for additional 12
month periods unless either party gives a 90 day advance written notice of
termination.
F-14
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
In
January 2008, the Company entered into a marketing agreement with an unrelated
party to purchase all the 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 remains in effect thereafter unless a 90 day advance written notice is
provided by either party.
Natural
Gas
The
Company has an agreement to purchase a minimum of 2,700 dekatherms of natural
gas per day through May 31, 2011 at market prices, plus $0.015 per dekatherm 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 continues 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 letter of credit supported by a certificate of
deposit for the benefit of the supplier in the amount of $775,000.
In
June 2006, the Company entered into an agreement with an unrelated party
for the transportation of natural gas. The rates charged and services rendered
are specified in applicable company tariffs as approved by the Minnesota Public
Utilities Commission, or as otherwise stated in the agreement. The contract was
effective as of September 1, 2007 and continues for a period of five
years. At such time the contract will continue on a month by month basis
until either party terminates the agreement upon providing a 30 day advance
written notice.
In
August 2006, the Company entered into an agreement with an unrelated party
to qualify, monitor, register and manage the destruction and reduction of
certain greenhouse gases and will assist with the quantification of such
emission reductions for resulting emission credits. The Company agrees to a
share distribution schedule as defined in the agreement as payment for services
rendered. The term of the agreement continues for a period of 10 years,
and will automatically be extended for two successive renewal terms of five
years each, unless either party gives a 30 day advance written notice of
termination to the other party. Either party may also terminate the
agreement for cause as defined in the agreement by providing a 15 day written
advance notice.
In
May 2007, the Company entered into an agreement with an unrelated party for
the supply of electric service to the facilities. After the initial 4 year rate
agreement either party may terminate the agreement upon 12 months written
notice.
NOTE
9. UNIT BASED COMPENSATION
Unit
Plans
The
Company has reserved up to 650,000 units to be issued for employee and
non-employee compensation issued to consultants who provide or will provide
services to the Company. The Company issued 291,000 of these units to
employees and non-employees, with a total of 359,000 units available to be
granted. No new units were issued during fiscal year ending September 30,
2009.
Employment Agreements and
Restricted Units
In
May 2006 and April 2007, the Company executed employment agreements
with individuals to serve as chief executive officer and plant manager,
effective January 1, 2007, and chief financial officer of the Company,
effective June 1, 2007. The Company agreed to pay the executives a
base salary for the years ending on December 31, 2007, 2008 and 2009.
The terms of the employment agreements commence on the agreed upon start date,
and terminate on December 31, 2009, unless renewed or extended by mutual
written agreement.
As
a one time signing bonus, the executives also received 22,500 restricted and
non-restricted Class A units which vest over five years or 20% per
year. Vesting is contingent upon the executive being employed with the
Company on any of the vesting dates. The executives may terminate the
respective employment agreement any time prior to the termination date, upon 180
days advance written notice. In the event the executive is in breach of
any terms as defined in the agreement, the Company may terminate the executive’s
respective employment upon 5 days advance written notice.
F-15
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
The
Company and its former chief executive officer and plant manager agreed upon the
termination of their employment agreements, effective October 31,
2008. Both former employees received payments equal to two months base
salary, a restricted unit issuance of 2,500 and 1,000 units, respectively which
would have vested on January 1, 2009 based on their employment agreements,
and continued health benefits through December 31, 2008. The chief
executive officer and plant manager forfeited the remaining profits interests
available under their employment agreements.
The
Company’s chief financial officer signed a new employment agreement to become
chief executive officer and chief financial officer on December 1,
2008. In the agreement the Company granted the executive 10,000 Class
A units which vest at 4,500 units on December 31, 2009 and 1,000 units on
December 31, 2010.
During
the fiscal years ended 2009 and 2008, the Company recognized approximately
$2,250 and $9,500, respectively, in compensation expense related to these
grants.
As of
September 30, 2009 and 2008, total unit-based compensation expense for
restricted unit non-vested awards not yet recognized was $7,600 and $22,250,
respectively.
NOTE
10. FAIR VALUE
Fair
value is defined as the price that would be received to sell an asset or paid 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 outputs, 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.
The
following table provides information on those assets and liabilities that are
measured at fair value on a recurring basis.
September 30, 2009
|
||||||||||||||||
Fair Value Carrying
Amount in the Balance
|
Fair Value Measurement Using
|
|||||||||||||||
Sheet
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Assets
|
||||||||||||||||
Money
market funds (included in restricted cash)
|
$ | 2,013,381 | $ | 2,013,381 | $ | - | $ | - | ||||||||
Certificates
of deposit (included in restricted cash)
|
777,590 | 777,590 | ||||||||||||||
Total
|
$ | 2,790,971 | $ | 2,013,381 | $ | 777,590 | $ | - |
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
11. 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, an impairment analysis
was performed determining that 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. If the Company
were required to compute the fair value in the future, it may use the work of a
qualified valuation specialist who would assist it in examining replacement
costs, recent transactions between third parties and cash flow that can be
generated from operations. Given the recent completion of the
facilities in 2008, replacement cost would likely approximate the carrying
values of the facilities. 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.
F-16
OTTER
TAIL AG ENTERPRISES, LLC
NOTES
TO FINANCIAL STATEMENTS
September
30, 2009 and 2008
NOTE
12. EMPLOYEE BENEFITS
The
Company offers a sponsored 401(k) plan; the plan is available to all its full
time employees, with a matching rate of 50% based on the first 6% contributed by
the employee. The plan is open to all employees over 18 years of age
and has a 5 year vesting requirement, based upon the commencement date of the
plan. Expenses incurred for year ending September 30, 2009 and 2008
were approximately $32,000 and $31,000, respectively.
F-17