Table ofContents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

 

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2009**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THETRANSITION PERIOD FROM           TO           **

 

**COMMISSIONFILE NUMBER: 000-53042**

 

**OTTERTAIL AG ENTERPRISES, LLC**

(Exact name of registrantas specified in its charter)

 

| **MINNESOTA**                                                    | ** ** | **EIN  41-2171784**                |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (IRS Employer  Identification No.) |

 

**24096 -170th AvenueFergus Falls, MN 56537-7518**(Address of principal executive offices)

 

**(218)998-4301**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes x   No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).   Yes o   No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filter or asmaller reporting company. See the definition of “large accelerated filer,accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 
| Large accelerated  filer o                | Accelerated filer o          |
|------------------------------------------------|-----------------------------------|
|                                           |                              |
| Non-accelerated  filer o                  | Smaller Reporting  Company x |
| (Do not check if a  Smaller Reporting Company) |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No

 

As of August 14, 2009, the Company hasoutstanding 23,944,000 Class A Membership Units.

 

 

 

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OTTER TAIL AGENTERPRISES, LLC

FORM 10-Q QUARTERLYREPORT FOR THE QUARTER ENDED

JUNE 30, 2009

 

TABLE OF CONTENTS

 
| ** **                                                                                           | **Page** |
|------------------------------------------------------------------------------------------------------|----------|
| PART I —  FINANCIAL INFORMATION                                                            | 2        |
| Item 1. Condensed Financial Statements  (Unaudited)                                             | 2        |
| Balance Sheets                                                                                       | 2        |
| Statements of Operations                                                                             | 3        |
| Statements of Cash Flows                                                                             | 5        |
| Condensed Notes to Unaudited Financial Statements                                                    | 6        |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 16       |
| Disclosure Regarding Forward Looking Statements                                                      | 16       |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                  | 22       |
| Item 4T. Controls and Procedures                                                                     | 22       |
| PART II —  OTHER INFORMATION                                                               | 23       |
| Item  1. Legal Proceedings                                                                           | 23       |
| Item  1A. Risk Factors                                                                               | 23       |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                 | 24       |
| Item 3. Defaults Upon Senior Securities                                                              | 24       |
| Item 4. Submission of Matters to a Vote of Security  Holders                                         | 25       |
| Item  5. Other Information                                                                           | 25       |
| Item 6.  Exhibits                                                                                    | 25       |
| SIGNATURES                                                                                           | 26       |
| Exhibit Index                                                                                   | 27       |
| Section 302  Certification                                                                      |     |
| Section 906  Certification                                                                      |     |

 

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**PART I — FINANCIAL INFORMATION**

**Item 1.— CONDENSED FINANCIAL STATEMENTS** (Unaudited)

 

**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSED BALANCESHEETS

 
| ** **                                             | ** ** | **June 30, 2009** | ** **        | **September 30, 2008** | ** ** |
|--------------------------------------------------------|------------|------------------------|-------------------|-----------------------------|------------|
| ** **                                             | ** ** | **(Unaudited)**        | ** **        | ** **                  | ** ** |
| **ASSETS**                                             |       |                   |              |                        |       |
| **Current Assets**                                     |       |                   |              |                        |       |
| Cash  and equivalents                                  |       | $                      |  354,498     |                        | $          |  1,133,041 |   |
| Restricted  cash                                       |       | 785,498                |              | 1,423,217                   |       |
| Accounts  receivable                                   |       | 3,299,691              |              | 2,657,721                   |       |
| Inventory                                              |       | 3,708,209              |              | 5,761,323                   |       |
| Prepaid  expenses and other                            |       | 487,696                |              | 366,322                     |       |
| Total  current assets                                  |       | 8,635,592              |              | 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                           |       | 108,989,739            |              | 108,963,404                 |       |
|                                                   |       | 114,461,295            |              | 114,434,960                 |       |
| Less  accumulated depreciation and impairment          |       | (21,634,489            | )                 | (3,678,591                  | )          |
| Net  property and equipment                            |       | 92,826,806             |              | 110,756,369                 |       |
| **Other Assets**                                       |       |                   |              |                        |       |
| Restricted  cash - debt service reserve                |       | 2,013,387              |              | 2,638,895                   |       |
| Debt  issuance costs, net of amortization              |       | —                 |              | 1,556,272                   |       |
| Total  other assets                                    |       | 2,013,387              |              | 4,195,167                   |       |
| **Total Assets**                                       |       | $                      |  103,475,785 |                        | $          |  126,293,160 |   |
| **LIABILITIES AND MEMBERS’ EQUITY**               |       |                   |              |                        |       |
| **Current Liabilities**                                |       |                   |              |                        |       |
| Additional  revolving loan                             |       | $                      |  6,000,000   |                        | $          |  4,034,349 |   |
| Accounts  payable                                      |       | 734,928                |              | 702,661                     |       |
| Construction  payable                                  |       | —                 |              | 20,046                      |       |
| Construction  payable- related party                   |       | 254,564                |              | 255,500                     |       |
| Accrued  interest and other                            |       | 1,870,211              |              | 851,910                     |       |
| Accrued  purchase commitments                          |       | —                 |              | 3,600,000                   |       |
| Current  maturities of long-term debt                  |       | 80,121,704             |              | 3,014,310                   |       |
| Total  current liabilities                             |       | 88,981,407             |              | 12,478,776                  |       |
| **Long-term debt, net of current maturities**          |       | —                 |              | 77,323,865                  |       |
| **Commitments and Contingencies**                      | ** ** | **—**             | ** **        | **—**                  | ** ** |
| **Members’ Equity, 23,944,000 units outstanding** |       | 14,494,378             |              | 36,490,519                  |       |
| **Total Liabilities and Members’ Equity**         |       | $                      |  103,475,785 |                        | $          |  126,293,160 |   |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF OPERATIONS

 
| ** **                                                          | ** ** | **Three Months  Ended** | ** **        | **Three Months  Ended** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|-------------------|-------------------------|------------|
| ** **                                                          | ** ** | **June 30, 2009**  | ** **        | **June 30, 2008**  | ** ** |
| ** **                                                          | ** ** | **(Unaudited)**         | ** **        | **(Unaudited)**         | ** ** |
|                                                                |       |                    |              |                    |       |
| Revenues                                                            |       | $                       |  24,046,092  |                    | $          |  36,017,233 |   |
|                                                                |       |                    |              |                    |       |
| Cost of sales                                                       |       | 24,849,792              |              | 31,599,012              |       |
|                                                                |       |                    |              |                    |       |
| Impairment of plant and  process equipment                          |       | 12,500,000              |              | —                  |       |
|                                                                |       |                    |              |                    |       |
| Gross Profit (Loss)                                                 |       | (13,303,700             | )                 | 4,418,221               |       |
|                                                                |       |                    |              |                    |       |
| Professional fees                                                   |       | 218,434                 |              | 191,896                 |       |
| General and administrative                                          |       | 331,503                 |              | 1,585,280               |       |
| Total operating  expenses                                           |       | 549,937                 |              | 1,777,176               |       |
|                                                                |       |                    |              |                    |       |
| **Operating  Loss**                                                 |       | (13,853,637             | )                 | 2,641,045               |       |
|                                                                |       |                    |              |                    |       |
| **Other  income (expense)**                                         |       |                    |              |                    |       |
| Interest expense                                                    |       | (1,130,989              | )                 | (1,707,348              | )          |
| Interest income                                                     |       | 5,820                   |              | 29,600                  |       |
| Total other expense,  net                                           |       | (1,125,169              | )                 | (1,677,748              | )          |
|                                                                |       |                    |              |                    |       |
| **Net  Income (Loss)**                                              |       | $                       |  (14,978,806 | )                       | $          |  963,297 |   |
|                                                                |       |                    |              |                    |       |
| **Weighted  Average Units Outstanding –****Basic and Diluted** |       | 23,944,000              |              | 23,925,000              |       |
|                                                                |       |                    |              |                    |       |
| **Net  Income (Loss) Per Unit – Basic and Diluted**            |       | $                       |  (0.63       | )                       | $          |  0.05 |   |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF OPERATIONS

 
| ** **                                                          | ** ** | **Nine Months  Ended** | ** **  | **Nine Months  Ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                                          | ** ** | **June 30, 2009** | ** **  | **June 30, 2008** | ** ** |
| ** **                                                          | ** ** | **(Unaudited)**        | ** **  | **(Unaudited)**        | ** ** |
|                                                                |       |                   |        |                   |       |
| Revenues                                                            |       | $                      | 72,276,413  |                   | $          | 36,077,602 |   |
|                                                                |       |                   |        |                   |       |
| Cost of sales                                                       |       | 75,121,443             |        | 32,007,313             |       |
|                                                                |       |                   |        |                   |       |
| Impairment of plant and  process equipment                          |       | 12,500,000             |        | —                 |       |
|                                                                |       |                   |        |                   |       |
| Lower of cost or market  adjustment                                 |       | 168,422                |        | —                 |       |
|                                                                |       |                   |        |                   |       |
| Gross Profit (Loss)                                                 |       | (15,513,452            | )           | 4,070,289              |       |
|                                                                |       |                   |        |                   |       |
| Professional fees                                                   |       | 583,515                |        | 478,299                |       |
| General and  administrative                                         |       | 1,090,818              |        | 2,317,562              |       |
| Total operating  expenses                                           |       | 1,674,333              |        | 2,795,861              |       |
|                                                                |       |                   |        |                   |       |
| **Operating  Loss**                                                 |       | (17,187,785            | )           | 1,274,428              |       |
|                                                                |       |                   |        |                   |       |
| **Other  income (expense)**                                         |       |                   |        |                   |       |
| Gain (loss) on  derivatives                                         |       | —                 |        | (1,342,712             | )          |
| Interest expense                                                    |       | (3,337,653             | )           | (1,719,885             | )          |
| Impairment on financing  costs                                      |       | (1,496,476             | )           | —                 |       |
| Interest income                                                     |       | 23,524                 |        | 191,244                |       |
| Total other expense,  net                                           |       | (4,810,605             | )           | (2,871,353             | )          |
|                                                                |       |                   |        |                   |       |
| **Net  Loss**                                                       |       | $                      | (21,998,390 | )                      | $          | (1,596,924 | ) |
|                                                                |       |                   |        |                   |       |
| **Weighted  Average Units Outstanding –****Basic and Diluted** |       | 23,939,131             |        | 23,924,330             |       |
|                                                                |       |                   |        |                   |       |
| **Net  Loss Per Unit – Basic and Diluted**                     |       | $                      | (0.92       | )                      | $          | (0.07 | ) |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

CONDENSEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                           | ** ** | **Nine  Months Ended  June 30, 2009** | ** **  | **Nine  Months Ended  June 30, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **(Unaudited)**                            | ** **  | **(Unaudited)**                            | ** ** |
| **Cash  Flows from Operating Activities**                                                            |       |                                       |        |                                       |       |
| Net loss                                                                                             |       | $                                          | (21,998,390 | )                                          | $          | (1,596,924 | ) |
| Adjustments to  reconcile net loss to net cash used in operations:                                   |       |                                       |        |                                       |       |
| Depreciation                                                                                         |       | 5,455,898                                  |        | 2,130,333                                  |       |
| Amortization of debt  financing costs                                                                |       | 59,796                                     |        | 97,261                                     |       |
| Impairment of debt  financing costs                                                                  |       | 1,496,476                                  |        | —                                     |       |
| Impairment of plant and  process equipment                                                           |       | 12,500,000                                 |        | —                                     |       |
| Lower of cost or market  adjustment                                                                  |       | 168,422                                    |        | —                                     |       |
| Unit-based compensation                                                                              |       | 2,250                                      |        | 9,737                                      |       |
| Unrealized loss on  derivative instruments                                                           |       | —                                     |        | 11,250                                     |       |
| Change in assets and  liabilities:                                                                   |       | —                                     |        |                                       |       |
| Accounts receivable                                                                                  |       | (641,970                                   | )           | (5,949,420                                 | )          |
| Interest receivable                                                                                  |       | —                                     |        | 11,989                                     |       |
| Inventory                                                                                            |       | 1,884,692                                  |        | (5,332,015                                 | )          |
| Prepaid expenses and  other                                                                          |       | (121,374                                   | )           | (1,043,444                                 | )          |
| Derivative instruments                                                                               |       | —                                     |        | 3,963                                      |       |
| Accounts payable                                                                                     |       | 11,284                                     |        | 619,620                                    |       |
| Accrued purchase  commitments                                                                        |       | (3,599,998                                 | )           | —                                     |       |
| Accrued interest and  other                                                                          |       | 1,018,301                                  |        | (167,038                                   | )          |
| Net cash used in  operating activities                                                               |       | (3,764,613                                 | )           | (11,204,688                                | )          |
|                                                                                                 |       |                                       |        |                                       |       |
| **Cash  Flows from Investing Activities**                                                            |       |                                       |        |                                       |       |
| Capital expenditures                                                                                 |       | (26,339                                    | )           | (90,999                                    | )          |
| Payments for  construction in process                                                                |       | —                                     |        | (45,196,160                                | )          |
| Net cash used in  investing activities                                                               |       | (26,339                                    | )           | (45,287,159                                | )          |
|                                                                                                 |       |                                       |        |                                       |       |
| **Cash  Flows from Financing Activities**                                                            |       |                                       |        |                                       |       |
| Payments for long-term  debt                                                                         |       | (216,470                                   | )           | —                                     |       |
| Change in restricted  cash                                                                           |       | 1,257,501                                  |        | 1,608,476                                  |       |
| Payments for debt  issuance costs                                                                    |       | —                                     |        | (45,767                                    | )          |
| Proceeds from line of  credit                                                                        |       | 1,965,652                                  |        | —                                     |       |
| Proceeds from  construction loan                                                                     |       | —                                     |        | 51,667,425                                 |       |
| Net cash provided by  financing activities                                                           |       | 3,006,682                                  |        | 53,230,134                                 |       |
|                                                                                                 |       |                                       |        |                                       |       |
| **Net  Decrease in Cash and Equivalents**                                                            |       | (784,270                                   | )           | (3,261,713                                 | )          |
| **Cash  and Equivalents – Beginning of Period**                                                 |       | 1,138,768                                  |        | 4,611,317                                  |       |
| **Cash  and Equivalents – End of Period**                                                       |       | $                                          | 354,498     |                                       | $          | 1,349,604 |   |
|                                                                                                 |       |                                       |        |                                       |       |
| **Supplemental  Disclosure of Cash Flow Information**                                                |       |                                       |        |                                       |       |
| Interest paid, net of  capitalized of $0 and $2,595,717 at June 30, 2009 and 2008, respectively |       | $                                          | 1,568,750   |                                       | $          | 2,003,647 |   |
|                                                                                                 |       |                                       |        |                                       |       |
| **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     |                                       | $          | 1,589,746 |   |
| Financing costs paid  with debt proceeds                                                             |       | $                                          | —      |                                       | $          | 17,296 |   |

 

Notes to Unaudited Condensed Financial Statements arean integral part of this Statement

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**Condensed Notes to UnauditedFinancial Statements**

**June 30, 2009 and 2008**

 

**NOTE1.  SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Basis ofPresentation*

 

The accompanyingunaudited condensed interim financials have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted as permitted by such rules and regulations.  These financial statements and related notesshould be read in conjunction with the financial statements and notes theretoincluded in the Company’s audited financial statements for the year ended September 30,2008, contained in the Company’s Annual Report on Form 10-K for the fiscalyear ended September 30, 2008, filed with the Securities and ExchangeCommission on January 13, 2009.

 

Inthe opinion of management, the interim financial statements reflect alladjustments considered necessary for fair presentation.  The adjustments made to these statementsconsist only of normal recurring adjustments. The results reported in these condensed interim financial statementsshould not be regarded as necessarily indicative of results that may beexpected for the entire year.

 

*Nature ofBusiness*

 

OtterTail Ag Enterprises, LLC, (a Minnesota Limited Liability Company) was organizedwith the intentions of developing, owning and operating a 55 million gallon peryear capacity dry-mill ethanol plant near Fergus Falls, Minnesota.  The Company was in the development stageuntil March 2008, when the Company commenced operations.

 

*AccountingEstimates*

 

Management uses estimates and assumptions in preparingthese financial statements in accordance with generally accepted accountingprinciples.  Those estimates andassumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses.  Actual results could differfrom those estimates. Significant estimates, including the underlyingassumptions, consist of the economic lives of property, plant, and equipment,valuation of inventory, valuation of share-based compensation, analysis oflong-lived assets impairment; and other contingencies. It is at leastreasonably possible that these estimates may change in the near term.

 

*RevenueRecognition*

 

The Company sells ethanoland related products pursuant to marketing agreements.  Revenues from the production of ethanol andthe related products are recorded when the customer (the marketing companies asfurther discussed in Note 7) has taken title and assumed the risks and rewardsof ownership, prices are fixed or determinable and collectability is reasonablyassured.  The Company’s products are soldFOB shipping point.

 

In accordance with theCompany’s agreements for the marketing and sale of ethanol and relatedproducts, marketing fees and commissions due to the marketers are deducted fromthe gross sales price at the time payment is remitted to the Company.  Marketing fees remitted by the Company arepresented net in revenue.  Commissionswere approximately $129,000 for the three months ended June 30, 2009, andapproximately $85,000 for the same period ending June 30, 2008.

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**Condensed Notes to Unaudited Financial Statements**

**June 30, 2009 and 2008**

 

*Accounts Receivable*

 

Credit terms are extendedto 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 arerecorded at their estimated net realizable value.  Accounts are considered past due if paymentis not made on a timely basis in accordance with the Company’s creditterms.  Accounts considered uncollectibleare written off.  The Company’s estimateof the allowance for doubtful accounts is based on historical experience, itsevaluation of the current status of receivables, and unusual circumstances, ifany.  At June 30, 2009, the Companywas of the belief that such amounts would be collectible and thus an allowancewas not considered necessary.  It is atleast possible this estimate will change in the future.

 

*RestrictedCash*

 

The Company maintainscash accounts set aside for requirements as part of the capital lease financingagreement and for natural gas contracts. At June 30, 2009 and September 30,2008, the total of these accounts was approximately $2,800,000 and $4,000,000,respectively.

 

*Inventories*

 

Inventoriesconsist of raw materials; work in process and finished goods.  Corn is the primary raw material and alongwith other raw materials, is stated at the lower of average cost ormarket.  Finished goods consist ofethanol, dried distiller grains and modified wet distiller grains, and arestated at the lower of cost or market, on a first-in, first-out basis.

 

*Propertyand Equipment*

 

Property andequipment is stated at cost. Depreciation is provided over an estimated useful life by use of thestraight line depreciation method. Plant maintenance and repairs are expensedas incurred; major improvements and betterments are capitalized.  The Company initiated Plant operations in March 2008and began depreciating the plant at that time. Depreciation is computed using the straight-line method over thefollowing estimated useful lives:

 
| Land  improvements           |   | 15-20 years |   |
|------------------------------|--------|-------------|--------|
| Buildings                    |   | 10-40 years |   |
| Office  equipment            |   | 5 years     |   |
| Plant  and process equipment |   | 10-20 years |   |

 

*Long-lived Assets*

 

The Company testslong-lived assets or asset groups for recoverability when events or changes incircumstances 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 adversechanges in the business climate or legal factors; accumulation of costssignificantly in excess of the amount originally expected for the acquisitionor construction of the asset; current period cash flow or operating lossescombined with a history of losses or a forecast of continuing losses associatedwith the use of the asset; and current expectation that the asset will morelikely than not be sold or disposed significantly before the end of itsestimated useful life.

 

Recoverability isassessed based on the carrying amount of the asset and its fair value which isgenerally determined based on the sum of the undiscounted cash flows expectedto result from the use and the eventual disposal of the asset, as well asspecific appraisal in certain instances. An impairment loss is recognized whenthe carrying amount is not recoverable and exceeds fair value. For the ninemonth period ended June 30, 2009, impairment of financing costs wasrecognized totaling approximately $1,496,000 and impairment of plant andprocess equipment costs was recognized totaling $12,500,000.  No impairment was recognized on long-livedassets during the nine month period ended June 30, 2008.

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**Condensed Notes to Unaudited Financial Statements**

**June 30, 2009 and 2008**

 

*FairValue of Financial Instruments*

 

The carrying value ofcash and equivalents, restricted cash, receivables, derivative instruments, andpayables approximates their fair value.

 

Itis not currently practicable to estimate the fair value of the debtfinancing.  Senior debts consisting of aterm 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 marketand therefore approximates fair value. Subordinate debt consists of New Markets Tax Credit Loan of $19,175,000and a County capital lease of $26,010,000 that bear a fixed interest rate.  Due to the defaults under the senior andsubordinate loan agreements, at the present time, we are unable to enter intoreplacement debt and therefore are unable to determine a fair value of thefixed rate subordinate debt.

 

*EnvironmentalLiabilities*

 

The Company’s operationsare subject to environmental laws and regulations adopted by variousgovernmental entities in the jurisdiction in which it operates.  These laws require the Company to investigateand remediate the effects of the release or disposal of materials at itslocation.  Accordingly, the Company hasadopted policies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit thefinancial liability, which could result from such events.  Environmental liabilities are recorded whenthe liability is probable and the costs can be reasonably estimated.  No liabilities were recorded at June 30,2009 or September 30, 2008.

 

*NetIncome (Loss) per Unit*

 

Basicnet income (loss) per unit is computed by dividing net income by the weightedaverage number of members’ units outstanding during the period.  Diluted net income (loss) per unit iscomputed by dividing net income by the weighted average number of members’units and members’ unit equivalents outstanding during the period.  As of June 30, 2009, the Company had12,600 unit equivalents outstanding relating to outstanding unit options andunvested restricted units. As of June 30, 2008, the Company had 34,500unit equivalents outstanding. At June 30, 2009 and 2008, the effects ofthese units are excluded from the computation of diluted units outstanding astheir effects would be anti-dilutive, due to the Company’s net loss for theperiods ended June 30, 2009 and 2008.

 

*Subsequent Events*

 

The Company has evaluated subsequent events through August 19,2009, the date which the financial statements were available to be issued.

 

**NOTE 2.GOING CONCERN**

 

TheCompany incurred net losses of $8.7 million for the year ended September 30,2008, and has incurred net losses of $22 million for the nine-months endedJune 30, 2009.  Based on the Company’soperating plan, its existing working capital is not sufficient to meet the cashrequirements to fund the Company’s planned operating expenses, capitalexpenditures, and working capital requirements for the next year withoutadditional sources of cash and/or the deferral, reduction or elimination ofsignificant planned expenditures.

 

TheCompany operated half of fiscal year 2008 in development stage, thereforehaving substantial operating expenses with limited income; the loss for fiscal2008 was an operational loss of $4.7 million including $4.6 million loss froman adjustment for lower of cost or market. Commodity prices significantly influenced the viability of the Companyachieving its financial objectives, and record high prices during the summer of2008,  which coincided with the Company’sfirst full production quarter after commissioning and performance testing, ledto operational losses in the last quarter of the fiscal year.  This major commodity, corn, was influenced byexternal factors beyond 

 

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**OTTER TAIL AG ENTERPRISES, LLC**

**Condensed Notes to Unaudited Financial Statements**

**June 30, 2009 and 2008**

 

theCompany’s control which led to higher than normal market pricing.  To secure product for fiscal 2009, theCompany executed a number of forward purchase contracts.  The global financial crisis that began in2008 caused major reductions in commodity prices, leaving a shortfall betweencontract and present market value.  Themarket negatively impacted not only the Company’s input costs, but also itsoutput prices. This gave rise to a situation whereby the Company had supplycommitments that it was required to honor but could not obtain the requiredsales return to justify its carrying value. In recognition, the Company recorded an amount to reflect its bestestimate between then present market value and the future realization (See Note4).  At June 30, 2009, the Companyhas drawn the maximum amount available on its line of credit (See Note 5).

 

Thesefactors raise substantial doubt about the Company’s ability to continue as agoing concern.  The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  Thisbasis of accounting contemplates the recovery of the Company’s assets and thesatisfaction of liabilities in the normal course of business.

 

OnMarch 20, 2009, the Company entered into a forbearance agreement (the “ForbearanceAgreement”) with AgStar Financial Services, P.C.A. (the “Senior Lender,” or “AgStar”),which requires the Senior Lender to forbear from pursuing certain remediesavailable to them until April 30, 2009, which is the end of theforbearance period (the “Forbearance Period”). The terms of the Forbearance Agreement require the Company to pay thecurrent principal due as well as all accrued interest at the end of theForbearance Period.  At that time, if theCompany is unable to pay the amounts due as required under the ForbearanceAgreement, Senior Lender may (1) declare a default under the loans and (2) consentto remedial action taken by subordinate lenders, and may provide notice ofdefault and/or acceleration.  If SeniorLender declares a default under the loans or consents to remedial action byothers of our creditors, it is likely that we will be unable to continue ouroperations and will have to file for bankruptcy.  Presently, the Company is negotiating withSenior Lender to extend the Forbearance Agreement whilst seeking a morepermanent solution.  If the Company isunable to reach a mutually satisfactory agreement this will raise seriousdoubts about the Company’s ability to continue as a viable business. On June 3,2009, the Company received a notice letter from AgStar stating the Company isin default of its loan agreement and that the Company is in default under itssubordinate lender agreements.  Under theterms 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, and is currently working with the lenders to come to an agreement on thedefault and terms of repayment.

 

TheCompany’s plan to address the expected shortfall of working capital is togenerate additional funds through a combination of raising equity by having aplanned voluntary capital campaign and renegotiating and restructuring of theCompany’s debt.  The Company’s long-termplan includes evaluating improved technologies to either earn additionalrevenue or reduce operating costs.  Ifthe Company is unsuccessful in raising additional funds or revenues from eitherof these sources, it will defer, reduce, or eliminate certain plannedexpenditures.  The Company will continueto consider other funding sources.  Therecan be no assurance that the Company will be able to obtain any sources offunding on acceptable terms, or at all.

 

Ifthe Company cannot obtain sufficient additional funding in the short-term, itmay be forced to restructure or significantly curtail its operations, file forbankruptcy or cease operations.  Theconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of recorded asset amounts or amounts andclassification of liabilities that might be necessary should the Company beforced to take any such actions.

 

**NOTE3.  MEMBER’S EQUITY**

 

InFebruary 2009, the Company filed a Minnesota registered offering for amaximum of 36 million Class A units at a cost of $0.50 per unit.  This offering is limited to residents of thestate of Minnesota.  Each subscriber isrequired to purchase a minimum of 12,500 units ($6,250).  The offering will expire one year from theeffective date of the offering.  Theoffering has not yet been declared effective.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

**CondensedNotes to Unaudited Financial Statements**

**June30, 2009 and 2008**

 

**NOTE 4. INVENTORY**

 

Inventories consist ofthe following:

 
| ** **       | ** ** | **June 30, 2009** | ** **      | **September 30, 2008*** | ** ** |
|------------------|------------|-------------------|-----------------|-------------------------|------------|
| Raw materials    |       | $                 | 972,094         |                    | $          | 2,075,474 |   |
| Work in progress |       | 1,480,315         |            | 1,999,300               |       |
| Finished goods   |       | 866,146           |            | 1,294,635               |       |
| Spare parts      |       | 389,653           |            | 391,914                 |       |
| Total            |       | $                 |  3,708,209 |                    | $          | 5,761,323 |   |

 

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* Derived from auditedfinancial statements

 

In the ordinary course of business, the Companyenters into forward purchase contracts for its commodity purchases and sales.At September 30, 2008 the Company had forward corn purchase contracts topurchase approximately 2,775,000 bushels costing approximately $14,000,000through June 2009. Currently, some of these contract prices are abovecurrent market prices for corn. Given the declining ethanol price, upon takingdelivery under these contracts, the Company would not be able to recover theabove market value cost incurred. Accordingly, the Company recorded an accrual loss on these purchasecommitments aggregating to approximately $3,600,000 for the fiscal year ended September 30,2008.  The loss was recorded in lower ofcost or market adjustments on the statement of operations.  The amount of loss was determined by applyinga methodology similar to that used in the impairment evaluation with respect toinventory.  Given the uncertainty offuture ethanol prices, this loss may or may not be recovered, and furtherlosses on the outstanding purchase commitments and inventory could be recordedin future periods. As of June 30, 2009, the Company was not committed toany contract which required an accrual of a loss. The Company has moved to purchasingcorn as needed at the current market rates to protect the Company from marketrisk.

 

**NOTE 5.  BANK FINANCING**

 

Debt consists of thefollowing at:

 
| ** **                                   | ** ** | **June 30,********2009** | ** ** | **September 30,  2008*** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Construction and Term Loan, see terms below  |       | $                             | 34,806,138 |                          | $          | 35,000,000 |   |
|                                         |       |                          |       |                          |       |
| New Markets Tax Credit Loan, see terms below |       | 19,175,000                    |       | 19,175,000                    |       |
|                                         |       |                          |       |                          |       |
| County capital lease, (Note 6)               |       | 26,010,000                    |       | 26,010,000                    |       |
|                                         |       |                          |       |                          |       |
| Equipment financing                          |       | 130,566                       |       | 153,175                       |       |
|                                         |       |                          |       |                          |       |
| Total short-term debt                        |       | $                             | 80,121,704 |                          | $          | 3,014,318 |   |
| Total long-term debt                         |       | $                             | —     |                          | $          | 77,323,865 |   |
|                                         |       |                          |       |                          |       |
| Revolving line of credit, see terms below    |       | $                             | 6,000,000  |                          | $          | 4,034,348 |   |

 

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* Derived from auditedfinancial statements

 

The loans described below are subject to creditagreements with various financial and non-financial covenants that limitdistributions, require minimum debt service coverage, net worth and workingcapital requirements, and secured by all business assets.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

**CondensedNotes to Unaudited Financial Statements**

**June30, 2009 and 2008**

 

The Company was in violation of financial covenantsas of September 30, 2008.  TheCompany failed to meet tangible net worth requirements and reportingrequirements as of September 30, 2008. As of September 30, 2008, the financing agencies have waived thecompliance with the tangible net worth ratio and reporting requirements throughOctober 1, 2009.  All the Company’slong-term debt has been reclassified as current maturities of long-term debt asof December 31, 2008 because the Company was in default of its loanagreements.  The Company has not madeinterest payments since December 31, 2008 on the County capital lease and February 1,2009 on the New Market Tax Credit loans and the construction and termloans.  The Company did not pay theprincipal payment on the County capital lease which was due in February. Forthe nine month period ended June 30, 2009, impairment of financing costswas recognized totaling approximately $1,496,000.

 

On March 20, 2009, the Company entered into aForbearance Agreement with the Senior Lender which requires that the SeniorLender 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 the Company to pay thecurrent principal due as well as all accrued interest at the end of theForbearance Period.  At that time, ifunable to pay the amounts due after the Forbearance Period as required underthe Forbearance Agreement, the Senior Lender may (1) declare a defaultunder the loans and (2) consent to remedial action taken by subordinatelenders, and may provide notice of default and/or acceleration.  If the Senior Lender declares a default underthe loans or consents to remedial action by others of our creditors, it islikely we will be unable to continue our operations and will have to file forbankruptcy.

 

On June 3, 2009, the Company received a noticeletter from its senior lender stating the Company is in default of its loanagreement and that the Company is in default under its subordinate lenderagreements.  Under the terms of thenotice letter the Company had to cure all defaults prior to June 15, 2009,or the entire amount due under the agreements would become accelerated. TheCompany failed to make these payments under the notice by June 15, 2009and is currently working with the lenders to come to an agreement on thedefault and terms of repayment.

 

*NewMarket Tax Credit Loan*

 

In March 2007, the Company entered into theagreement 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 theprogram 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 “TermLoan”) and subordinated note for $4,694,500 (the “Subordinated Note”). The TermLoan contains a provision in which the Company must make interest only paymentson 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 anadditional 48 months, the Company shall pay the amortized unpaid principaltogether with the accrued interest. The interest rate shall be calculated usingthe Wall Street Journal daily money rate (base rate) plus 1.0% totaling 4.25%and 6% at June 30, 2009 and September 30, 2008 respectively.

 

The Subordinated Note for $4,694,500 carries a fixedinterest rate of 2.514%. On the first day of each month following the initialadvance, August 2007, interest only payments will be made until September 2014when a principal payment of $400,000 is required.

 

*ConstructionTerm Loan*

 

Upon satisfactory completion of the Plant a portionof the Construction Loan converted to the Construction Term Loan, totaling$29,000,000. The interest rate was reduced to LIBOR plus 2.95% on theConstruction Term Loan. The agreement includes an option to convert a portionof the Construction Term Loan to a fixed rate loan. The Company is required tomake interest payments only on the 1st of day of each month for the first sixmonths followed by 114 principal installments of $254,386 plus accrued interestbeginning six months following substantial completion, payable in full in June 2018.In addition to the scheduled payments, the Company will make additionalprincipal 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, thepremium above LIBOR may be reduced to 2.65% based on attaining certainfinancial ratios.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

**CondensedNotes to Unaudited Financial Statements**

**June30, 2009 and 2008**

 

The financing agreementrequires an annual servicing fee of $20,000. The Company is initially permitted to make distributions up to 40% ofnet income until fiscal 2008.  For fiscal2008 and thereafter, the Company may make distributions which exceed 40% of netincome as long as the Company has made the required excess cash flow paymentsand maintained the required financial covenants.  The financing agreement contains certainprepayment fees in the first three years of the scheduled payments. The Companyis also required to obtain and maintain financial ratios on an annual basis.

 

*ConstructionTerm Revolving Note*

 

The amount of theConstruction Term Revolving Note that converted to the Term Revolving Note is$6,000,000. The Company is required to pay interest on the principal advancesmonthly at the LIBOR rate plus 2.95% which totaled 3.33% at June 30, 2009and 5.41% as of September 30, 2008. The purpose of this loan is for cash and inventory management purpose.

 

*RevolvingLine of Credit Loan*

 

The Company also has aRevolving Line of Credit loan with the same lending institution for up to$6,000,000.  The Company is required topay interest on the principal advances monthly at the LIBOR rate plus 2.95%which totaled 3.33% at June 30, 2009 and 5.41% as of September 30,2008.  The purpose of this loan is forgeneral and operating expenses. The maturity of the Revolving Line of Creditloan is 364 days from commencement, on the loan maturity date the principal andany outstanding accrued interest will be due. The Company pays a commitment feeof 0.35% on the unused portion of the revolving promissory note (the “RevolvingPromissory Note”), payable quarterly in arrears. The interest rate is equal toLIBOR plus 2.95% if the Company’s tangible owner’s equity (defined as tangiblenet worth plus subordinated debt divided by total assets) is less than or equalto 60% or to LIBOR plus 2.65% if the tangible owner’s equity is greater than60%. As of June 30, 2009 $6,000,000 was advanced against the line ofcredit.

 

The Term Revolving Noteas well as the Term Note and the Revolving Line of Credit Loan are subject to amaster loan agreement with various financial and non-financial covenants thatlimit distributions, require minimum debt service coverage, net worth andworking capital requirements, and secured by all business assets.

 

*EquipmentFinancing*

 

In April 2008, theCompany entered into two equipment financing agreements with an unrelated partythrough 2013.  Payments range from $679per month to $2,468 per month with interest rates ranging from 4.56% to 5.5%.

 

**NOTE6.  LEASES**

 

Capital Lease

 

In April 2007, theCompany entered into a long term equipment lease agreement with Otter TailCounty, Fergus Falls, Minnesota (the “County”) in order to finance equipmentfor the Plant (the “Capital Lease”).  TheCapital Lease has a term from May 1, 2007 through November 2019. TheCounty financed the purchase of equipment through Subordinate Exempt FacilityRevenue Bonds Series 2007A totaling $20,000,000, General Obligation TaxAbatement Bonds Series 2007B totaling $5,245,000, and Taxable GeneralObligation Tax Abatement Bonds Series 2007C totaling $765,000(collectively the “Bonds”).

 

Under the Capital Leasewith the County, the Company started making payments on May 25, 2008 andcontinues making payments on the 25th of each month thereafter.  Until May 25, 2008, interest was paidthrough the interest reserve fund included in restricted cash. The CapitalLease payments correspond to the interest of 1/6 the amount due on the bonds onthe next interest payment date. Capital Lease payments for principal start on November 25,2009 in an amount equal to 1/6 principal scheduled to become due on thecorresponding bonds on the next semi-annual principal payment date. The Companyis expected to make lease payments of principal and interest that correspond tothe principal and interest the County will pay on the General Obligation Bonds Series 2007Band

 

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**OTTER TAIL AG ENTERPRISES,LLC**

**Condensed Notes toUnaudited Financial Statements**

**June 30, 2009 and2008**

 

2007C. Interest paymentswere financed through an interest reserve recorded as restricted cash. TheCompany is expected to make Capital Lease payments that correspond to 1/6 theamount of interest payable due on the bonds on the following February 1 orAugust 1 and principal amounts equaling 1/12 of the principal due on thefollowing February 1. The Company has guaranteed that if such assessedlease payments are not sufficient for the required Bond payments, the Companywill provide such funds as are needed to fund the shortfall. The Capital Leasealso includes an option to purchase the equipment at fair market value at theend of the lease term.

 

The company failed tomake 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 beenreclassified to current maturities of long-term debt.

 

# ***Operating Leases***

# ** **

In February 2008,the Company entered into an operating lease agreement for 70 railroad cars fora minimum period of 36 months. The lease agreement shall continue forsuccessive one month terms until terminated by either party providing a 30 daywritten advance notice to the other.  TheCompany will pay $600 per car per month, which may be adjusted according to theterms defined in the agreement. The term of this lease began in April 2008.

 

In April 2008, theCompany entered into an operating lease for equipment.  The Company isgenerally responsible for maintenance, taxes, and utilities for leasedequipment.  The term of the lease is for five years with monthly paymentsof $338.

 

In September of2007, the Company entered into an easement agreement for a permanent easementfor certain parcels of land.  Under theterms of the agreements, the Company agreed to pay a sum of $2,000, paid December 2007and increasing annually at 5% for twenty-five years, up to a maximum of$6,500.  In addition to cash, the partiesalso received 3,000 member units, issued as of December 31, 2007.

 

In October 2006, theCompany entered into a land lease for the construction and certain activitiesrelated to the operation and maintenance of rail track.  Under the terms of this agreement, theCompany agreed to pay $4,200 as base rent and increasing 3% thereafter.  Either party can terminate this agreementgiving at least 30 day’s written notice.

 

In June 2009, theCompany amended the pipeline lease agreement under the rail track. Under theterms of this agreement, the Company agrees to pay $400 for the years 2008 and2009, $600 for 2010, $800 for 2011. The $800 will become base rent with a 3%annual increase starting 2012

 

**NOTE7.  COMMITMENTS AND CONTINGENCIES**

 

*MarketingContracts*

 

In February 2008,the Company entered into a marketing agreement with an unrelated party for themarketing, sale and delivery of all bulk grade dried distiller grain withsolubles (DDGS) the Company is expected to produce.  The Company will receivepayment for the products sold based on a percentage of the actual sales priceas defined in the agreement.  The initial term is for three yearscommencing as of the startup of production and will continue until terminatedby either party providing a 90 day advance written notice.

 

In February 2007,the Company entered into a procurement agreement with an unrelated party forthe purchase of corn.  The term of thisagreement shall be for five years followed by an automatic renewal term of oneyear unless terminated by either party giving 90 days advance writtennotice.  A procurement fee shall be paidon a per bushels basis during the term of the contract.  The contract also provides for additionalthird-party storage in the local surrounding area for a minimum of two turnsper year.  In January 2009, thiscontract was amended changing the procurement fee structure.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

**CondensedNotes to Unaudited Financial Statements**

**June30, 2009 and 2008**

 

In July 2006, theCompany entered into a marketing agreement for the sale and marketing of allthe ethanol the Company expects to produce. The Company agrees to pay a fixed fee per gallon of ethanol sold forcertain marketing, storage and transportation costs, which will be included incost of goods sold.  The initial term ofthe agreement shall be for 12 months beginning the first day of the month theCompany shipped ethanol and was automatically extended for an additional 12months. It will continue to be automatically extended for additional 12 monthperiods unless either party gives a 90 day advance written notice oftermination.

 

In January 2008, theCompany entered into a marketing agreement with an unrelated party to purchasewet distillers grains with solubles the Company is expected to produce.  The agreement commences on completion andstart-up of operations of the plant and continues for two years.  The agreement will remain in effectthereafter unless a 90 day advance written notice is provided by either party.

 

*Natural Gas*

 

The Company has anagreement to purchase a minimum of 2,700 decatherms of natural gastransportation per day through May 31, 2011 at market price plus $0.015per decatherm of natural gas.

 

*Management Agreements*

 

In May 2006, theCompany entered into an agreement with an unrelated party to manage the Company’ssupply of natural gas.  The term of theagreement continues through April 30, 2011, and shall continue on a yearto year basis thereafter until terminated by either party giving 60 dayswritten advance notice.  The Company alsoexecuted a sale and purchase agreement with the unrelated party for naturalgas.  Either party may terminate theagreement by providing a 30 day advance written notice.  The Company is also required to hold acertificate of deposit for the benefit of the supplier in the amount of$775,000.

 

**NOTE 8. FAIR VALUE**

 

SFAS 157 defines fairvalue, outlines a framework for measuring fair value, and details the requireddisclosures about fair value measurements. The adoption of SFAS 157 did not have a material effect on the Companyfinancial position, results of operations, or cash flows for the periods ended June 30,2009.

 

SFAS 159 permits theCompany to irrevocably choose to measure certain financial instruments andother items at fair value.  Except forthose assets and liabilities which are required to be recorded at fair valuethe Company elected not to record any other assets or liabilities at fairvalue, as permitted by SFAS 159.

 

Fair value is defined asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurementdate in the principal or most advantageous market.  The Company uses a fair value hierarchy thathas three levels of inputs, both observable and unobservable, with use of thelowest possible level of input to determine fair value.  Level 1 inputs include quoted market pricesin an active market or the price of an identical asset or liability.  Level 2 inputs are market data, other thanLevel 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market pricesfor 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 andcorroborated by little or no market data. The Company uses valuation techniques in a consistent manner fromyear-to-year.

 

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**OTTERTAIL AG ENTERPRISES, LLC**

**CondensedNotes to Unaudited Financial Statements**

**June30, 2009 and 2008**

 

The following tableprovides information on those assets and liabilities that are measured at fairvalue on a recurring basis.

 
| ** **                                                                 | ** ** | **June 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 and debt service reserve) |       | $                                                | 2,023,249  |   | $ | 2,023,249 |   | $ | — |   | $ | — |   |
| Certificates of deposit  (included in restricted cash)                     |       | 775,637                                          |       | — |   | 775,637 |   |   |   |
| Total                                                                      |       | $                                                | 2,798,886  |   | $ | 2,023,249 |   | $ | 775,637 |   | $ | — |   |

 

The fair value of themoney market funds is based on quoted market prices in an active market.

 

The Company determinesthe fair value of the certificates of deposits using information provided bythe issuing bank, which includes discounted expected cash flows ofcertificates.

 

**NOTE 9.LONG-LIVED ASSETS**

 

In 2008, the Companycompleted construction of its ethanol production facilities with installedcapacity of 55 million gallons per year. The carrying value of these facilities at June 30, 2009 wasapproximately $105.3 million.  Inaccordance with the Company’s policy for evaluating impairment of long-livedassets in accordance with SFAS No. 144, management has evaluated thefacilities for possible impairment based on projected future cash flows fromoperations of these facilities. Management has determined that the undiscounted cash flows fromoperations of these facilities over their estimated useful lives do not exceedtheir carrying values, and therefore, impairment was recognized totalingapproximately $12,500,000 as of June 30, 2009.  In determining future undiscounted cashflows, the Company has made significant assumptions concerning the futureviability of the ethanol industry, the future price of corn in relation to thefuture price of ethanol and the overall demand in relation to production andsupply capacity.  Due to thesesignificant assumptions, the Company has determined that the impairment chargeis a significant estimate. If the Company were required to compute the fairvalue in the future, it may use the work of a qualified valuation specialistwho would assist it in examining replacement costs, recent transactions betweenthird parties and cash flow that can be generated from operations.  Given the recent completion of the facilitiesin 2008, replacement cost would likely approximate the carrying values of thefacilities.  However, there have beenrecent transactions between independent parties to purchase plants at pricessubstantially below the carrying value of the facilities.  Some of the facilities have been inbankruptcy and may not be representative of transactions outside ofbankruptcy.  Given these circumstances,should management be required to adjust the carrying value of the facilities tofair value at some future point in time, the adjustment could be significantand could significantly impact the Company’s financial position and results ofoperation.  No adjustment has been madein these financial statements for this uncertainty.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

We prepared the followingdiscussion and analysis to help you better understand our financial condition,changes in our financial condition, and results of operations for the three andnine month periods ended June 30, 2009, compared to the same periods ofthe prior fiscal year.  This discussionshould be read in conjunction with our interim condensed financial statementsand notes included in Item 1 of Part 1 of this Quarterly Report, and theaudited condensed financial statements and notes thereto and Management’sDiscussion and Analysis contained in our Annual Report on Form 10-K forthe fiscal year ended September 30, 2008.

 

**DISCLOSURE REGARDINGFORWARD-LOOKING STATEMENTS**

 

This Quarterly Reportcontains forward-looking statements within the meaning of Section 21E ofthe Exchange Act. Forward-looking statements are all statements other thanstatements of historical fact, including without limitation those statementsthat 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 statementsconcerning plans, objectives, goals, strategies, future events or performance,and underlying assumptions (many of which are based, in turn, upon furtherassumptions) and other statements that are other than statements of historicalfacts.  From time to time, the Companymay publish or otherwise make available forward-looking statements of thisnature, including statements contained within “Item 2 – Management’s Discussionand Analysis of Financial Condition and Results of Operations.”

 

Forward-lookingstatements involve risks and uncertainties, which could cause actual results oroutcomes to differ materially from those expressed.  The Company’s expectations, beliefs and projectionsare expressed in good faith and are believed by the Company to have areasonable basis, including without limitation, management’s examination ofhistorical operating trends, data contained in the Company’s records and otherdata available from third parties. Nonetheless, the Company’s expectations, beliefs or projections may notbe achieved or accomplished. Forward-looking statements are subject to know and unknown risks anduncertainties, including those risks described in “Item 1A – Risk Factors” ofour Annual Report on Form 10-K for the fiscal year ended September 30,2008, as updated in Part II, Item 1A of this Quarterly Report.

 

Any forward-lookingstatement contained in this document speaks only as of the date on which thestatement is made, and the Company undertakes no obligation to update anyforward-looking statement or statements to reflect events or circumstances thatoccur after the date on which the statement is made or to reflect theoccurrence of unanticipated events. New factors emerge from time to time, andit is not possible for management to predict all of the factors, nor can itassess the effect of each factor on the Company’s business or the extent towhich any factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statement,  All forward-looking statements,  whether written or oral and whether made byor on behalf of the Company, are expressly qualified by the risk factors andcautionary statements in this Quarterly Report, including statements containedwithin “Part II, Item 1A – Risk Factors,” and in the Company’s AnnualReport on Form 10-K for the fiscal year ended September 30, 2008, andinclude the following:

 

·                                          Ourability to renegotiate the terms of our senior debt agreements and/or obtainwaivers from our lenders to avoid any or all of our lenders exercising theirdefault remedies on agreements of which we are currently in default;

 

·                                          Theavailability and adequacy of our cash flow to meet its requirements, includingpayment of loans;

 

·                                          Economic,competitive, demographic, business and other conditions in our local,  regional and national markets;

 

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·                                          Effectof foreclosure sales in the industry;

 

·                                          Changesin the availability and price of corn;

 

·                                          Changesin the availability and price of natural gas;

 

·                                          Changesin the environmental regulations that apply to our Plant operations;

 

·                                          Theoccurrence of certain events causing an economic impact in the agriculture,oil, or automobile markets;

 

·                                          Lack of transport, storage, and blending infrastructurepreventing ethanol from reaching high demand markets;

 

·                                          Changes and advances in ethanol production technology;

 

·                                          Changes in interest rates or the availability of credit,and limitations and restrictions contained in the instruments and agreementsgoverning our indebtedness;

 

·                                          The results of our hedging transactions and other riskmitigation strategies;

 

·                                          Our ability to retain key employees and maintain laborrelations;

 

·                                          Our ability to develop diverse revenue streams;

 

·                                          Our ability to implement additional financial andmanagement controls, reporting systems and procedures and comply with Section 404of the Sarbanes-Oxley Act, as amended;

 

·                                          Changes or developments in laws, regulations, tariffs ortaxes in the ethanol, agricultural,  orenergy business

 

·                                          Competition in the ethanol industry and excess capacity inthe 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 andrestrictions on unit transfer;

 

·                                          The loss of our Plant due to casualty, weather, mechanicalfailure or any extended or extraordinary maintenance or inspection that may berequired; AND

 

·                                          Changes in our business strategy, capital to supportcapital improvements and development

 

*Summary*

 

Otter Tail Ag Enterprises,LLC, a Minnesota limited liability company (the “Company,” “Otter Tail,” “we,” “our,”or “us”), owns and operates a nameplate 55 million gallon annual productionplant of undenatured ethanol in Fergus Falls, Minnesota (the “Plant”).

 

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**Liquidity and Capital Resources**

 

*Overview*

 

As of June 30, 2009, wehad total assets of approximately $104,000,000 consisting of primarily cash,accounts receivable, inventory, financing costs and property, plant andequipment.  As of June 30, 2009, wehad current liabilities of approximately $89,000,000 consisting primarily ofaccounts payable, line of credit, and outstanding debt.  All of our long-term debt, consisting ofapproximately $80,100,000 of bank debt financing and capital lease financingfor the construction of the Plant, has been reclassified as current maturitiesof long-term debt, because we were in default as of February 1, 2009 onour capital lease with Otter Tail County, Fergus Falls, Minnesota (the “County”)for failure to make basic payments (defined as payments equal to the aggregateamount of principal and interest outstanding on the bonds issued by the Countyin conjunction with the capital lease), and we have failed to make interestpayments specifically on the Subordinate Exempt Facility Revenue Bonds Series 2007Abonds since December 31,2008.  Wehave also not made interest payments on the MMCDC New Markets Fund II, LLC (“NMF”)Tax Credit Loans.  In addition, as of February 15,2009, we were in default under our Master Loan Agreement with AgStar FinancialServices, P.C.A. (“AgStar”) for failure to pay principal and interest due.

 

On March 20, 2009, weexecuted a forbearance agreement (the “Forbearance Agreement”) with AgStar, inwhich AgStar – beginning on February 1, 2009 and ending on the earlier ofan Event of Default (as defined in the Master Loan Agreement with AgStar) or April 30,2009 (the “Forbearance Period”) – agrees to forbear from exercising its rightsand remedies under its loan documents, and further agrees that it will notconsent to the undertaking of any remedial action by our other lenders.  For more information on the ForbearanceAgreement, please see our current report on Form 8-K under Item 1.01 asfiled with the SEC on March 26, 2009.

 

On June 3, 2009, theCompany received a notice letter from their senior lender stating the Companyis in default of their loan agreement and that the Company is in default undertheir subordinate lender agreements. Under the terms of the notice letter the Company had to cure alldefaults prior to June 15, 2009, or the entire amount due under theagreements would become accelerated. The Company failed to make these paymentsunder the notice by June 15, 2009 and is currently working with thelenders to come to an agreement on the default and terms of repayment.  For more information on this notice letter,please see our current report on Form 8-K under Item 2.04 as filed withthe SEC on June 9, 2009.

 

For the nine months ended June 30,2009, cash used in operating activities was approximately $3,800,000, cash usedin investing activities was approximately $26,000 and cash provided byfinancing activities was approximately $3,000,000.

 

Total cash flow from theproject following operational commencement of the project has been impacted bymany factors including, but not limited to, the final cost of the project,timing of the commencement of operations, the speed of ethanol productionduring the start-up phase, as well as energy and corn prices.  As of June 30, 2009, we had completelydrawn on our revolving line of credit with AgStar in the amount ofapproximately $6,000,000, and are restricted on drawing on our revolving lineof credit in any additional amounts.

 

Based on our operating plan,we believe our existing working capital will not be sufficient to meet the cashrequirements to fund our planned operating expenses, capital expenditures, andworking capital requirements for the next year without additional sources ofcash and/or deferral, reduction or elimination of significant plannedexpenditures.  Assuming no deteriorationin margins between corn and ethanol prices, we estimate that we will requireapproximately an additional $10,000,000 to fund our planned operating expenses,capital expenditures, and working capital requirements through the end offiscal year 2009.  In addition, we failedto meet tangible net worth and reporting requirements in violation of certainfinancial covenants, but the financing agencies have waived the compliance withthese ratios through October 1, 2009. See Note 2 in our footnotes to our financial statements for moreinformation on the sufficiency of existing capital to meet our cashrequirements and our ability to operate as a going concern.  Finally, as provided above, we are currentlyin default on our Master Loan Agreement with AgStar, our tax credit loans withNMF, and our capital lease with the County. While we did execute a Forbearance Agreement with AgStar on March 20,2009 that covered existing defaults as of that date, the Forbearance Periodexpired on April 30, 2009.  Thus,AgStar may exercise any and all rights existing under the terms of our MasterLoan Agreement, including but not limited to declaring all of our debtimmediately due and payable.

 

We will attempt to raiseadditional capital through an offering of our units.  In February 2009, we filed aregistration statement with the state of Minnesota for an intrastate offeringof our units to existing members who are residents of Minnesota and otherMinnesota residents.  The offering hasyet to be declared effective by the state. The offering is for a 

 

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maximum of 36 million of ourunits at a per-unit cost of $0.50.  Eachsubscriber is required to purchase a minimum of 12,500 units in theoffering.  The offering will open for oneyear from the effectiveness of the registration statement, or at such othertime as determined by our Board of Governors.

 

**Short-term Debt Sources**

 

We have a revolvingpromissory note with AgStar for up to $6,000,000.  We are required to pay interest on theprincipal advances monthly at the LIBOR rate plus 2.95%, which totaled 3.33% atJune 30, 2009 and 5.41% as of September 30, 2008.  The purpose of this loan is for general andoperating expenses.  The maturity of thisline of credit is 364 days from commencement; on the loan maturity date, theprincipal and any outstanding accrued interest will be due.  We pay a commitment fee of 0.35% on theunused portion of the revolving promissory note.  As of June 30, 2009 and September 30,2008, $6,000,000 and $4,034,348 were advanced against the line of credit,respectively.

 

**Long-term Debt Sources**

 

We have entered into two loanagreements and one capital lease agreement for financing of the Plant.  The total loan commitment is $60,000,000 andthe capital lease is $26,010,000, and both are described below.  All of our long term debit described belowhas been reclassified as current maturities of long-term debt, because we arein default on our Master Loan Agreement with AgStar for failure to makerequired principal and interest payments, our tax credit loans with NMF forfailure to make required interest payments, and our capital lease with theCounty for failure to make required basic payments equal to the aggregateamount of principal and interest outstanding on County bonds, entitling AgStar,NMF, and the County to exercise any and all default remedies against us,including but not limited to acceleration of all outstanding unpaid principalamounts.  For more information on thesedefaults, and the remedies available to AgStar, NMF, and the County, please seeour current report on Form 8-K under Item 2.04 as filed with the SEC on February 18,2009.  On March 20, 2009, weexecuted a Forbearance Agreement with AgStar for existing defaults under ourMaster Loan Agreement.  For moreinformation on the Forbearance Agreement, please see our current report on Form 8-Kunder Item 1.01 as filed with the SEC on March 26, 2009.  For more information on the notice letterreceived by us from our senior lender, please see our current report on Form 8-Kunder Item 2.04 as filed with the SEC on June 9, 2009.

 

We entered into a senior debtfinancing agreement for a construction loan of $35,000,000 from AgStar, whichincludes a term and revolving loan (collectively, the “Construction Loan”).  We made interest payments during theconstruction phase at the LIBOR plus 3.15%. Interest was paid quarterly in arrears on the first day of January,April, July and October.  Atcompletion of the Plant, the loan converted into the Construction Term Loan andConstruction Term Revolving Note.

 

The Construction Loanconverted to a term loan (the “Construction Term Loan”) and term revolving loanon June 1, 2008, totaling $29,000,000. The interest rate was reduced to LIBOR plus 2.95% on the ConstructionTerm Loan, which totaled 3.33% on June 30, 2009 and 5.41% at September 30,2008.  The agreement includes an optionto convert a portion of the Construction Term Loan to a fixed rate loan.  We are required to make interest paymentsonly on the 1st day of each monthfor the first six months followed by 114 principal installments of $254,386plus accrued interest beginning six months following substantial completion,which was determined to be June 1, 2008, payable in full in June 2018.  In addition to the scheduled payments, wewill make additional principal payments equal to 65% of our excess cash flownot to exceed $2,000,000 per fiscal year and an aggregate total of$8,000,000.  As part of the financingagreement, the premium above LIBOR may be reduced to 2.65% based on attainingcertain financial ratios.

 

Commitment fees of $20,000were charged at the time of conversion and will be charged annually thereafter.

 

Themaximum amount of the Construction Loan that could be converted to the termrevolving loan is $6,000,000 (the “Revolving Loan”).  The amount of the Construction Loan that didconvert to the Revolving Loan was $6,000,000. We are required to pay interest on the principal advances monthly at theLIBOR rate plus 2.95% which totaled 3.33% at June 30, 2009 and 5.41% at September 30,2008.  The purpose of this loan is forcash and inventory management.

 

On March 30, 2007, weentered into a loan arrangement with NMF for the amount of $19,175,000 (the “NMFLoan”).  The tax credit period of the NMFLoan is from September 2007 to September 2014.  The NMF Loan is divided into two portionsincluding a term loan of $14,480,500, which we must make interest only paymentson beginning the 6th day of the 

 

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first month following theinitial advancement until the 85th month. On the 6th day of the 85th month and continuing for an additional 48months we must pay the amortized unpaid principal together with the accruedinterest.  The interest rate is to becalculated using the Wall Street Journal daily money rate (base rate) plus 100basis points, totaling 4.25% and 6% at June 30, 2009 and September 30,2008, respectively.  In addition there isa subordinated loan note for $4,694,500 which will carry an interest rate of2.514%.  On the 1st day of each month following the initialadvance, which occurred in August 2007, we are required to make interestonly payments until September 2014 when we are required to make aprincipal payment of $400,000.  We arecurrently in default under our NMF Loan for failure to make required interestpayments.

 

**Capital Lease**

 

In April 2007, weentered into a long term equipment lease agreement (the “Equipment LeaseAgreement”) with the County in order to finance equipment for the Plant (the “CapitalLease”).  The Equipment Lease Agreementhas a term from May 1, 2007 through November 2019.  The County financed the purchase of equipmentthrough 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 2007Ctotaling $765,000 (collectively, the “Bonds”).

 

Under the Equipment LeaseAgreement with the County, we started making payments on May 25, 2008 andare scheduled to make payments on the 25th of each month. Payments for principal start on November 25, 2009 in an amountequal to 1/6 principal scheduled to become due on the corresponding Bonds onthe next semi-annual principal payment date. We also make Capital Lease payments that correspond to 1/6 the amount ofinterest payable due on the Bonds on February 1 or August 1 of eachyear and principal amounts equaling 1/12 of the principal due each February 1.  We have guaranteed that if such assessedlease payments are not sufficient for the required Bond payments, we providesuch funds as are needed to fund the shortfall. The Capital Lease also includes an option to purchase the equipment atfair market value at the end of the lease term. We are in default under the Capital Lease for failure to make requiredbasic payments.

 

**Results ofOperations for the Three and Nine Months Ended June 30, 2009 and June 30,2008**

 

**Results of Operations**

 

**Revenues**

 

Our revenues wereapproximately $24,000,000 and $72,300,000 for the quarter and nine months endedJune 30, 2009.  Our revenues wereapproximately $36,000,000 and $36,100,000 for the quarter and nine months endedJune 30, 2008. The decrease in revenues from the quarter ended June 30,2008 is due to lower per unit ethanol and distillers grain prices.  The increase in revenues from the nine monthperiod ended June 30, 2008 is due to the Plant beginning to produceethanol in March 2008.  Prior to March 2008,the Company was in the developmental stage.

 

**Cost of Sales**

 

Our cost of goods sold as apercentage of revenues is 155% and 121% for the quarter and nine months ended June 30,2009,  compared to 88% and 89% for boththe three and nine months ended June 30, 2008.  The high cost of goods sold for the quarterand nine months ended June 30, 2009 is the result of high corn prices andtight margins for ethanol and corn that has significantly affected the ethanolindustry as a whole. We also determined that the undiscounted cash flows fromoperations of the facilities over their estimated useful life of the plant donot exceed their carrying values, and therefore, impairment was recognizedtotaling approximately $12,500,000 as of June 30, 2009.

 

**Operating Expenses**

 

Our operating expenses wereapproximately $550,000 and $1,670,000 for the quarter and nine months ended June 30,2009.  Compared to the three and ninemonths periods ended June 30, 2008, our operating expenses decreased by$1,230,000 or 70% and $1,120,000, or 40% respectively.  For the three and nine months ended June 30,2009, our material operating expenses were 1) approximately $330,000 and$1,100,000 respectively related to the general and administrative expenses; 2)and approximately $218,000 and $584,000 respectively related to professionalfees.  Some major factors impacting 

 

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professional fees for thethree and nine months period ended June 30, 2009, were legal andaccounting fees for SEC filings and present lender forbearancearrangements.  In the three and ninemonths ended June 30, 2008, our material operating expenses were: 1)approximately $1,585,000 and $2,320,000 related to general and administrativeexpenses; and 2) approximately $192,000 and $478,000 for professional fees.

 

Thefollowing table shows cash flows for the six month periods ended June 30,2009 and 2008:

 
| ** **                               | ** ** | **Nine  months ended**  | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **June 30,  2009** | ** ** | **June 30, 2008** | ** ** |
| ** **                               | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**        | ** ** |
| Cash flows used in  Operating Activities |       | $                       | (3,764,613 | )                      | $          | (11,204,688 | ) |
| Cash flows used in  Investing Activities |       | (26,339                 | )          | (45,287,159            | )          |
| Cash  flows from Financing Activities    |       | 3,006,682               |       | 53,230,134             |       |
|                                          |            |                         |            |                        |            |  |  |

 

**Cash Flows Used in Operations**

 

The net cash flow used inoperating activities for the nine months ended June 30, 2009 decreasedapproximately $7,440,000 over that for the nine months ended June 30,2008.  The decrease in use of cash flowsin operating activities was primarily the result us having to purchaseinventory and start selling ethanol on account during 2008 to prepare foroperations.  This was offset by anincrease in our net loss due to the spread between ethanol and corn prices causingus to incur losses for the first three quarters of fiscal 2009.  As disclosed above, we believe our existingworking capital will not be sufficient to meet the cash requirements to fundour planned operating expenses for the remainder of fiscal 2009.

 

**Cash Flows Used in InvestingActivities**

 

Cash used for investingactivities decreased by approximately $45,260,000 for the nine months ended June 30,2009 compared to the nine months ended June 30, 2008, primarily becauseconstruction of the Plant was complete as of the end of fiscal 2008, andconstruction-related expenses significantly decreased during the first threequarters of fiscal 2009.

 

**Cash Flows From FinancingActivities**

 

Since our inception, we havegenerated significant cash inflows from bank financing arrangements and memberequity contributions.  Proceeds from thenine months ended June 30, 2009 from our bank financing arrangementsdecreased by $50,200,000 compared to the bank proceeds for the nine monthsended June 30, 2008.  This isprimarily due to the proceeds from our construction loan being fully utilizedas of the end of fiscal 2008.

 

**Critical Accounting Estimates**

 

Our most critical accountingpolicies, which are those that require significant judgment, include valuationof derivative instruments, inventory and impairment of plant.  An in-depth description of these can be foundin our Annual Report on Form 10-K for the year ended September 30,2008.  Management has not changed themethod of calculating and using estimates and assumptions in preparing ourcondensed financial statements in accordance with generally accepted accountingprinciples.  There have been no changesin the policies for our accounting estimates for the nine months ended June 30,2009.

 

**Off-Balance Sheet Arrangements**

 

We have not entered into anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources thatare material to investors.

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to the impactof market fluctuations associated with commodity prices and interest rates asdiscussed below.  We have no exposure toforeign currency risk, as all of our business is conducted in United States Dollars.  We use derivative financial instruments aspart of an overall strategy to manage market risk.  We use cash, futures and option contracts tohedge changes to the commodity prices of corn and ethanol.  We do not enter into these derivativefinancial instruments for trading or speculative purposes, nor do we designatethese contracts as hedges for accounting purposes pursuant to the requirementsof Statements of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and Hedging Activities*.

 

**Interest Rate Risk**

 

We expect to be exposed tomarket risk from changes in interest rates on our existing debtfacilities.  Exposure to interest raterisk results from holding our credit agreements.

 

We used debt to finance asignificant amount of our expenditures in the year ended September 30,2008 and in the nine months ended June 30, 2009.  These agreements will expose us to marketrisk related to changes in interest rates. As of June 30, 2009, we have approximately $86,100,000 inshort-term debt, including our line of credit, all of which is subject tovariable interest rates.  A hypothetical10% change in interest rates, from those in effect on June 30, 2009, wouldchange our interest expense by approximately $8,610,000 on an annual basis.

 

**Commodity Price Risk**

 

Effective April 8, 2008,we closed the majority of all derivative positions.  At June 30, 2009, we have no derivativeinstruments that expose us to commodity price risk.  For the period ended June 30, 2009, werecorded a realized loss of approximately $234,000.  We did not have any firm purchase commitmentsrelated to corn for the period ended June 30, 2009.  We recorded an accrued loss on our firmpurchase commitments related to corn aggregating to approximately $3,600,000for the fiscal year ended September 30, 2008.  At September 30, 2008 the Companyrecorded a net liability of approximately $10,000, which included a liabilityof approximately $77,000 and cash of $67,000 related to derivativeinstruments.  At June 30, 2008, thefair value of our derivative instruments for corn and ethanol is an asset inthe amount of $49,682.

 

**ITEM 4T.CONTROLS AND PROCEDURES**

 

***Evaluation of DisclosureControls and Procedures***

 

Under the supervision andwith the participation of our management, including our chief executiveofficer/chief financial officer, we have conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities and Exchange Act of 1934, as of the end of the period covered bythis report.  In our Evaluation ofDisclosure Controls and Procedures filed with our Annual Report on Form 10-Kfor the year ended September 30, 2008, we reported that the Company’sdisclosure controls and procedures are not yet fully effective to providereasonable assurance that: (i) information required to be disclosed by theCompany in reports that it files or submits under the Securities Exchange Actof 1934 is accumulated and communicated to the Company’s management, includingthe chief executive officer/chief financial officer as appropriate to allowtimely decisions regarding required disclosure by the Company; and (ii) informationrequired to be disclosed by the Company in reports that it files or submitsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms.  Duringthe quarter ended June 30, 2009, we continued to design enhancements toour controls, including the following:

 

·                                          Implementing a search for a full-time controller or CFOwith appropriate U.S. GAAP and SEC experience;

 

·                                          Establishing and implementing a detailed timeline reviewand completion of financial reports to be included in our Forms 10-Q and 10-K;and

 

·                                          Employing the use of appropriate supplemental SEC and U.S.GAAP checklists in connection with our closing process and the preparation ofour Forms 10-Q and 10-K.

 

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As a result of these materialweaknesses, which were not remedied as of June 30, 2009, we have concludedthat our disclosure controls and procedures were not effective as of June 30,2009.  The implementation of theremediation plan described above has been initiated and will continue throughthe remainder of fiscal 2009 and possibly beyond.  The material weakness will not be consideredremediated until the applicable remedial procedures are tested and managementhas concluded that the procedures are operating effectively.  Management recognizes that the use of ourfinancial resources will be required not only for implementation of thesemeasures, but also for testing their effectiveness and may seek the assistanceof an outside service provider to assist in this process.

 

If we are not able toimplement controls to avoid the occurrence of material weaknesses in ourinternal control over financial reporting or disclosure controls in the future,then we might report results that are not consistent with our actual resultsand we may need to restate results that will have been previously reported.

 

***Changes in Internal Controls***

 

There has been no change inour internal control over financial reporting (as defined in Rules 13a-15(f) or15d-15(f) of the Exchange Act) during our most recently completed quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A. RISK FACTORS**

 

In addition to the otherinformation set forth in this report, including the important information underthe heading “Disclosure Regarding Forward-Looking Statements,” you shouldcarefully consider the “Risk Factors” discussed in our Annual Report on Form 10-Kfor the fiscal year ended September 30, 2008.  “Risk Factors” are conditions that may causeinvestment in our Company to be speculative or risky.  In addition to those Risk Factors, theCompany is aware of the following risk factors that we have identified duringthe periods ended June 30, 2009:

 

*We have defaulted on our capitallease with Otter Tail County and other loan agreements with our senior lendersand our lenders may declare all amounts of principal and interest dueimmediately.*

 

We were in default as of February 1,2009 on our capital lease with the County for failure to make basic payments(defined as payments equal to the aggregate amount of principal and interestoutstanding on the bonds issued by the County in Facility Revenue Bonds Series 2007Abonds) since December 31, 2008.  Wehave also failed to make interest payments of the NMF Tax Credit Loans,rendering us in default under our Construction and Term Loan Agreement withNMF.  In addition, as of February 15,2009, we were in default under our Master Loan Agreement with AgStar forfailure to pay principal and interest due. As of March 20, 2009 we secured a waiver agreement for our MasterLoan Agreement with AgStar beginning on February 1, 2009, and ending onthe earlier of an Event of Default (as defined below) or April 30, 2009(the “Forbearance Period”), provided that the Conditions Precedent set forthbelow have first been satisfied and Borrower complies with the terms of thisAgreement, the Lender agrees (i) it will not declare a default under theLoan Documents or enforce any remedies available to it under the Loan Documentsor applicable law on account of the Borrower’s defaults; (ii) it will notconsent to the undertaking of any Remedial Action by NMF, the County, or theTrustee (as such terms are defined in the ICA), nor will Lender provide anynotice of default and/or acceleration pursuant to Section 4 or Section 7.1of the ICA; (iii) that the Borrowing Base shall be deemed to have beenincreased to the lesser of $6,000,000 or the sum of 100% of the Borrower’sEligible Accounts Receivable and 100% of Borrower’s Eligible Inventory; (iv) thatthe passing of the maturity date of Note Three without payment in full on suchdate shall not be a Event of Default during the Forbearance Period; and (v) failureto comply with the financial covenants set forth in Sections 5.01(d), (e), (f) and(g) of the Loan Agreement may provide Borrower with a distressed loannotice pursuant to regulations of the Farm Credit Administration (the “DistressedLoan Notice”).  Under the terms of ourrespective agreements with AgStar, NMF and the

 

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County, the lenders may exercise any or all defaultremedies against us, including but not limited to acceleration of alloutstanding unpaid principal amounts.  Inthe event that any of our lenders determines to exercise their respectivedefault remedies, we would likely be forced to proceed with a bankruptcy,liquidation, reorganization, or other winding down of the businessaffairs.  On June 3, we received anotice letter from AgStar stating we are in default of our loan agreement andthat we are in default under our subordinate lender agreements.  Under the terms of the notice letter we hadto cure all defaults prior to June 15, 2009, or the entire amount dueunder the agreements would become accelerated. We failed to make these paymentsunder the notice by June 15, 2009 and are currently working with thelenders to come to an agreement on the default and terms of repayment. For moreinformation on these defaults, and the remedies available to AgStar, NMF andthe County, please see our current report on Form 8-K under Item 2.04 asfiled with the SEC on February 18, 2009. For more information on the notice letter we received from Agstar,please see our current report on Form 8-K under Item 2.04 as filed withthe SEC on June 9, 2009.

 

*We anticipate needing to raiseadditional capital to meet our short-term needs, and may be unsuccessful indoing so.*

 

We will require a significant capital for a number ofexpenditures, including financing operations, paying indebtedness, andimplementing our restructuring plan.  Webelieve that much of this capital must come from sources outside of availablecash flows from our operations.  There isno guarantee that we will be successful in raising enough capital from outsidesources to adequately fund our operations and other short-term needs.  In the event that we are unable to obtainenough capital, we may be forced to proceed with a bankruptcy, liquidation,reorganization, or other winding down of the business affairs.  Even if we are able to obtain additional debtfinancing, we may not be able to do so upon favorable terms.  Alternatively, if we seek additional equityfinancing in the future, the ownership of our current members will bediluted.  In order to attract investors,we may also have to offer equity at prices lower than we have previouslyoffered to members.

 

*Given the current condition ofthe Company and the ethanol market generally, it is unlikely that we will makeany distributions in the near future.*

 

Our obligations to our creditors restrict our ability tomake any distributions at this time, or at any time in the next year.  We may only make distributions in the eventthat we have positive cash flow.  We havenot had a positive cash flow since early 2008. Positive cash flow and cash distributions are not assured in the future,and we are not now, and may never again be, in a position to make suchdistributions.  Whether we are able togenerate sufficient cash flow from our business to make distributions tomembers will depend on numerous factors, including:

 

·                  Requiredprincipal and interest payments on any debt and compliance with applicable loancovenants which will reduce the amount of cash available for distributions;

 

·                  Ourability to operate our plant at full capacity which directly impacts ourrevenues;

 

·                  Adjustmentsand amounts of cash set aside for reserves and unforeseen expenses; and

 

·                  Stateand federal regulations and subsidies, and support for ethanol generally whichcan impact our profitability and the cash available for distributions.

 

**ITEM 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

Please see Note 6 to our condensed unaudited financialstatement notes in Part 1, Item 1 of this quarterly report on Form 10-Qand our current reports on Forms 8-K as filed with the SEC on February 18,2009 and June 9, 2009 for information regarding defaults on our existingloan and capital lease agreements.

 

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**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM6. EXHIBITS**

 

See Exhibit Index following the signature page ofthis report.

 

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**SIGNATURES**

 

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                       | OTTER TAIL AG ENTERPRISES, LLC |
|----------------------------|--------------------------------|
|                       |                           |   |
| Date: August 19, 2009 | By:                            | /s/ Anthony Hicks |
|                       |                           | Anthony Hicks |
|                       |                           | Chief Executive Officer and Chief Financial Officer |

 

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**EXHIBITINDEX**

 

**OTTERTAIL AG ENTERPRISES, LLCFORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009**

 
| 31.1*  |   | Certification by Chief Executive Officer and Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                         |
| 32.1*  |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                          |

 

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*     Filed herewith.

 

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