Exhibit 10-C
Annual report Financial information
MIDWEST GRAIN PRODUCTS, INC.
SELECTED FINANCIAL INFORMATION
(in thousands except per share amounts)
Years ended June 30.
________________________________________________________________________________________
1994 1993 1992 1991 1990
_______________________________________________________________________________________________________________
Income Statement Data
Net Sales $185,968 $163,426 $155,794 $133,120 $131,599
Cost of Sales 148,320 130,551 127,883 108,963 112,701
_______________________________________________________________________________________________________________
Gross Profit 37,648 32,875 27,911 24,157 18,898
Selling, general and
administrative expenses 12,212 10,677 9,794 8,083 7,209
Other operating income (expense) (669) (264) 17 135 161
_______________________________________________________________________________________________________________
Income from operations 24,767 21,934 18,134 16,209 11,850
Other income, net 924 1,045 1,191 501 985
Interest expense 127 71 93 123 490
_______________________________________________________________________________________________________________
Income from operations
before income taxes 25,564 22,908 19,232 16,587 12,345
Provision for income taxes 9,713 8,278 7,020 5,977 4,461
_______________________________________________________________________________________________________________
Income from continuing operations 15,851 14,630 12,212 10,610 7,884
Discontinued operations 1,665 1,294 530 468
Cumulative effect of change in accounting
principles--post-retirement benefits (2,241)
Cumulative effect of change in accounting
principles--income taxes 2,182
_______________________________________________________________________________________________________________
Net Income $15,851 $16,236 $13,506 $11,140 $ 8,352
===============================================================================================================
Earnings per common share
Continuing operations $1.62 $1.50 $1.25 $1.09 $ .81
Discontinued operations .17 .13 .05 .05
Cumulative effect of accounting changes (.01)
--------------------------------------------------------------
$1.62 $1.66 $1.38 $1.14 $ .86
==============================================================
Cash dividends per common share $.50 $.50 $.48 $.47 $.45
Weighted average common
shares outstanding 9,765 9,765 9,765 9,765 9,765
Balance Sheet Data:
Working capital $22,151 $41,580 $37,021 $36,928 $30,943
Total Assets $168,146 $126,671 $115,626 $109,690 $102,271
Long-term debt, less
current maturities $ 25,000 $ 50 $ 1,093 $ 1,341
Stockholders' equity $114,173 $103,206 $ 91,853 $ 82,986 $76,403
1994 ANNUAL REPORT
17
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items in the Company's
consolidated statements of income expressed as percentages of net
sales for the years indicated and the percentage change in the
dollar amount of such items compared to the prior period.
Percentage of Percentage
Net Sales Increase (Decrease)
Years Ended June 30 -----------------------------
___________________________________ Fiscal 1994 Fiscal 1993
1994 1993 1992 Over 1993 Over 1992
_________________________________________________________________________ _____________________________
Net Sales 100.0% 100.0% 100.0% 13.8% 5.0%
Cost of sales 79.8 79.9 82.1 13.6 2.1
_________________________________________________________________________
Gross profit 20.2 20.1 17.9 14.5 17.8
Selling, general and
administrative expenses 6.6 6.5 6.3 14.4 9.0
Other operating income (loss) (.3) (.2) (153.4) (165.3)
_________________________________________________________________________
Income from operations 13.3 13.4 11.6 12.9 21.0
Other income (expense) .4 .6 .7 (18.2) (11.3)
_________________________________________________________________________
Income from continuing
operations before
income taxes 13.7 14.0 12.3 11.6 19.1
Provision for income taxes 5.2 5.1 4.5 17.3 17.9
_________________________________________________________________________
Income from continuing
operations 8.5% 8.9% 7.8% 8.3% 19.8%
=========================================================================
_______________________________________________________________________________________________________________
FISCAL 1994 COMPARED TO FISCAL 1993
Results of operations in fiscal 1994 surpassed the prior
year's results, placing sales and income from continuing
operations at record levels. Growth in sales was spurred by
strengthened demand for the Company's vital wheat gluten, mostly
in the second half of fiscal 1994, and increased production
capacities. This resulted in increased volumes and greater
production efficiencies, substantially improving the cost
effectiveness of Midwest Grain's fully integrated production
processes. The improved efficiencies helped to offset higher raw
material costs for grain resulting mainly from the adverse
effects of last summer's unusually wet weather and floods in the
Midwest. Costs for wheat, which the Company mills into flour and
then processes into vital wheat gluten and premium wheat starch
for food and some non-food applications, were significantly
higher in fiscal 1994 compared to costs experienced in fiscal
1993. Because of the wheat's poor milling and protein yield, the
Company had to pay substantially higher prices for moderate to
high protein wheats, while using more wheat than normally would
be necessary to satisfy production requirements. Additionally,
costs for corn and milo, which the Company uses for alcohol
production, rose considerably in the third and fourth quarters
while prices for food grade industrial and fuel alcohol declined.
The negative impact of these raw material cost increases was
somewhat reduced by improved alcohol production efficiencies
resulting from higher alcohol volumes in the food grade
industrial category. The higher raw material costs for wheat,
corn and milo have subsided since the end of fiscal 1994 due to
improved crop conditions
1994 ANNUAL REPORT
18
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
throughout the Midwest generally. Also, gasoline prices are
returning to higher levels. However, because the current year's
higher quality wheat requires that less gluten be used to fortify
flour, demand for gluten has decreased somewhat. Additionally,
the Company is seeing strong indications of growing competition
from European wheat gluten producers, who are able to take
advantage of inequitably low tariff rates to ship their excess
product into the United States market. The threat and frequent
materialization of this situation has been ongoing, but has
ranged in severity depending on the size and quality of European
wheat crops and associated factors. To withstand increased
competitive pressures, the Company will continue to strengthen
its position as a highly reliable, cost-effective domestic
supplier.
Greater operational efficiencies for Midwest Grain's entire
corporate complex are expected to result from the major
distillery expansion which currently is under construction at the
Company's Pekin, Illinois plant. The expansion will prepare the
way for future growth objectives in all alcohol product areas by
doubling the Company's total alcohol production capacity by early
1995. Significant growth opportunities for fuel alcohol are
expected to result from the Environmental Protection Agency's
recent ruling that 30% of the motor fuel oxygenates sold in the
nation's smoggiest cities be made from renewable sources such as
grain-based ethanol. The distillery expansion also is allowing
the Company to proceed with additional construction at the Pekin
facility which is expected to result in a 70% increase in total
wheat starch production capacity and a 40% increase in total
wheat gluten production capacity by the spring of 1995.
The increase in net sales for the 12-month period of fiscal
1994, amounting to approximately $22.5 million, was largely
experienced in the third and fourth quarters. The remainder of
the increase was experienced in the second quarter. This was
mainly due to substantially increased demand for vital wheat
gluten and increased production of all three of the Company's
principal products, significantly improving operational
efficiency. Sales in the first quarter were more severely
affected by conditions resulting from last summer's excessive
moisture and flooding. In addition to experiencing higher grain
costs, the Company was forced to use more expensive methods for
routing shipments of raw and finished goods due to damaged rail
lines and highways across the country's midsection. More
abnormal first quarter costs resulted from a four-day shutdown of
the Atchison plant, which occurred when nearby pumping stations
which supply water for the plant's distillery process were
flooded by the rain-swollen Missouri River. Sales of wheat
gluten in fiscal 1994 rose by approximately 31% as the result of
increased demand, increased grain costs, and higher volumes. The
increased demand resulted partially from increased market needs,
principally in the baking industry where more gluten was required
to fortify flour due to the poor quality of available wheat
during most of the year. Premium wheat starch sales increased by
15%, mainly as the result of higher volumes and increased sales
of modified starch varieties in special market niches. Sales of
alcohol products climbed 4% in spite of reduced demand, with a
substantial increase in food grade industrial alcohol volume and
a slight increase in beverage alcohol volume. These increases
more than offset a decrease in fuel alcohol volume and added
1994 ANNUAL REPORT
19
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
substantially to improvements in the Company's total operational
efficiencies. Sales of distillers feed, a by-product of the
alcohol production process, were approximately even with the
prior year's sales, while all of the Company's flour was used
internally as a raw material for the gluten production process.
Sales of flour mill by-products, namely mill feeds, rose
significantly due to higher volumes resulting from increased
flour production to satisfy heightened gluten processing needs.
Fluctuations in selling prices of the Company's vital wheat
gluten generally are due to fluctuations in grain costs and
competition. Wheat starch prices traditionally track corn starch
prices, with the exception of the Company's specialty modified
starches. Fuel alcohol prices traditionally follow the movement
of gasoline prices, and food grade industrial alcohol prices are
normally consistent with prices for industrial alcohol derived
from synthetic products such as petroleum. During fiscal 1994,
the Company's results were negatively affected by low gasoline
prices coupled with increased grain costs.
Raw material cost increases in fiscal 1994 accounted for
slightly more than $16 million of the approximately $17.8 million
increase in cost of sales compared to fiscal 1993. This was
principally due to higher wheat costs and lower protein yields,
and increased costs for corn and mil. The lower protein yields
caused more wheat to be used than normally would have been
required to produce enough flour for wheat gluten processing. A
rise in employee insurance costs of approximately $1.6 million
also contributed to the increase in total cost of sales in fiscal
1994. This was partially offset by a decrease of $709,150 in
maintenance and repair costs compared to fiscal 1993. Other
manufacturing cost increases were due to increased production
volumes.
Selling, general and administrative expenses in fiscal 1994
increased by approximately $1.5 million compared to fiscal 1993.
The majority of the increase, approximately $1.1 million,
resulted from contributions to the Company's management bonus
program, which is designed to recognize the accomplishment of
specific, pre-established Company goals. Goals in fiscal 1994
were made exceptionally challenging by conditions related to the
adverse effects of last summer's unusually wet weather and record
floods in the Midwest. The Company achieved a high level of
performance for the year and there was a significant rise in the
number of bonus recipients. The remainder of the increase was
experienced generally throughout the expense categories.
Pre-tax income for fiscal 1994 increased by approximately
11.5% due primarily to increased volumes and demand for vital
wheat gluten offset by reduced prices for food grade industrial
and fuel grade alcohol and increased grain costs.
The consolidated effective income tax rate is consistent for
the two fiscal years.
The general effects of inflation were minimal.
As a result of the foregoing factors, the Company realized
income from continuing operations of $15,851,000 in fiscal 1994
compared to $14,630,000 in fiscal 1993.
FISCAL 1993 COMPARED TO FISCAL 1992
Sales and income from continuing operations in fiscal 1993
outdistanced the record results achieved in fiscal 1992. The
higher results were reached through
1994 ANNUAL REPORT
20
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
increased volume sales of all major products, with alcohol
products accounting for the largest surge. Higher yields on
grain helped reduce overall raw material costs, which in turn
contributed to the increase in profitability. The growth in
alcohol volume occurred in the Company's beverage and fuel grade
alcohol markets. In January, 1993, the Company announced plans
for doubling its total alcohol production capacity by early 1995
with a major expansion at its Pekin, Illinois plant. While the
Company will continue to focus on increasing its presence in the
beverage and high quality industrial alcohol markets, a sizeable
portion of the new capacity is scheduled for fuel alcohol
production. The expanded gluten production capacities that went
into operation at the Pekin and Atchison, Kansas plants in the
latter half of fiscal 1992 allowed the Company to supply
increased customer needs and realize higher volume sales in
fiscal 1993. Opportunities to produce even greater quantities of
gluten were eroded somewhat by a steady stream of gluten imports
from the European Community, which grew substantially in the
second quarter and had carry-over effects on sales in the third
and fourth quarters. The increase in wheat starch volume sales
resulted mainly from greater development and penetration of
special market niches which utilize the Company's modified starch
varieties. To keep up with increasing demand for its wheat
starch, the Company initiated the expansion of its modified
starch production capacity at the Atchison plant. Expansion of
the Company's flour mill in Atchison was also begun in fiscal
1993 to keep pace with increased needs for flour to supply the
wheat gluten process.
The Company's strong financial position has allowed it to
adopt an aggressive plant expansion program so that it can remain
highly competitive in the years to come. While the Company
believes long-term prospects are strong, the excessively wet
spring and summer flooding in much of the Midwest is expected to
adversely impact fiscal 1994. In addition to causing lower
quality wheat harvests, severe damage to rail lines and major
highways has caused difficulties with shipments of raw materials
and finished goods.
On December 31, 1992, the Company sold the operations of
McCormick Distilling Company, a wholly-owned subsidiary, for an
after-tax gain of approximately $1.0 million. McCormick was
primarily engaged in the business of bottling alcohol beverages
at the Weston, Missouri plant and selling same throughout the
United States through distributors. The following discussion
relates to the results of continuing operations exclusive of
McCormick.
The increase in sales for the 12-month period of fiscal
1993, amounting to approximately $7.6 million, was evenly
experienced through the first three quarters of the year as a
result of the higher volumes of all major products. Sales in the
fourth quarter were approximately $2.1 million lower than in the
final quarter of fiscal 1992 due principally to a curtailment in
alcohol and gluten production while necessary repairs and
improvements were made to distillery equipment in Atchison.
Sales of all alcohol products for the year increased by
approximately 6% over fiscal 1992. An 11% increase in beverage
alcohol volume, together with an 11% increase in fuel alcohol
volume outweighed a nearly 15% decrease in volume sales of food
grade industrial alcohol. Increased prices for fuel and high
quality industrial alcohol offset a slight price decrease in the
beverage category to
1994 ANNUAL REPORT
21
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
contribute to the gain in total alcohol sales. A 7% increase in
volume sales of distillers feed, an alcohol by-product, also
contributed to the gain. Sales of vital wheat gluten increased
by 15% over fiscal 1992 as a result of increased volume coupled
with a modest price increase. The price increase only partially
offset successive increases in raw material costs for wheat,
which the Company experienced in the second and third quarters of
fiscal 1993. For the year, wheat costs averaged slightly higher
per bushel than in fiscal 1992, and, because more wheat was
required to supply increased production needs, the total cost for
this raw material rose accordingly. Sales of flour and other
mill products decreased by approximately $5.2 million. This
decline resulted almost entirely from a significant reduction in
outside sales of flour in order to satisfy internal requirements
for its use as a raw material in the gluten process. Sales of
premium wheat starch rose by 5% as the result of increased
volumes in the second, third and fourth quarters. Wheat starch
prices for the year were approximately level with those realized
during fiscal 1992.
The cost of sales for fiscal 1993 increased by approximately
$2.7 million over the prior year. Higher costs for repairs and
maintenance, utilities and post-retirement benefits were offset
by lower raw material costs and insurance expenses.
Volume-related increases of natural gas and electricity usage
combined with higher natural gas prices to cause an increase of
$2.4 million in utility costs. Increased repairs and maintenance
costs approximating $1.3 million resulted from a plant shutdown
for maintenance, ongoing expenditures to continually improve
clean operations and modifications to distillery equipment.
Also, fiscal 1993 employee benefit costs increased by almost
$350,000 due to the accrual of higher post-retirement costs in
accordance with the newly adopted accounting pronouncement. The
reduction of raw material costs ($1.6 million), in spite of
volume increases, was caused by lower prices for corn and milo
combined with higher yields. Lower wheat prices were more than
offset by decreased yields due to lower quality of the wheat
crops. Insurance costs declined substantially as a result of
more favorable experience in workers' compensation and general
liability claims.
Selling, general and administrative expenses increased over
fiscal 1992 by $883,000. Commissions increased by approximately
$540,000 due to higher volumes of sales subject to commissions.
The provision for bad debts was $356,000 higher than the
preceding year primarily relating to the write-off of one
customer. Salaries and other employee benefits decreased by
$260,000.
Income from continuing operations increased by $2,418,000 to
$14,630,000 in fiscal 1993. The improved profitability was
largely due to higher volume sales of alcohol products combined
with increased price realizations, primarily of fuel alcohol
sales. While volume and price increases in vital wheat gluten
and premium wheat starch occurred, increased raw material costs
for wheat caused profitability of these products to decline.
Higher volumes in all products resulted in greater overall
operational efficiency which improved profitability.
The consolidated effective income tax rate is consistent for
the two fiscal years.
The general effects of inflation for fiscal 1993 were
minimal.
The Company adopted two new accounting
1994 ANNUAL REPORT
22
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
pronouncements in fiscal 1993. Statement of Financial Accounting
Standards (SFAS) No. 106, "Employer's Accounting for
Post-Retirement Benefits Other Than Pensions," requires the cost
of these benefits to be charged to expense during the years that
employees render service rather than on the cash basis previously
used. In addition to the initial recording of the cumulative
effect of this accounting change as of July 1, 1992, the ongoing
expense will also be higher than that charged in prior years
under the previous method. SFAS No. 109, "Accounting for Income
Taxes," establishes financial accounting and reporting standards
for the effects of income taxes. The cumulative effect at July
1, 1992 results from the recomputation of the deferred income tax
liability at current rates for temporary differences between tax
and financial reporting which were originated in periods of
higher tax rates.
The effects of the activities of the discontinued operations
and cumulative effects of the accounting changes combined with
the Company's income from continuing operations to produce a net
income of $16,236,000 for fiscal 1993, compared to $13,506,000
for the preceding year.
________________________________________________________________
QUARTERLY FINANCIAL INFORMATION
Generally the Company's sales are not seasonal except for
minor variations affecting beverage alcohol and gluten sales.
Beverage alcohol sales tend to peak in the fall as distributors
order stocks for the holiday season, while gluten sales tend to
increase during the second half on the fiscal year as demand
increases for hot dog buns, and similar bakery products. The
following table shows quarterly information for each of the years
ended June 30, 1994 and 1993.
Quarter Ending
_________________________________________________
Sept. 30 Dec. 31 March 31 June 30 Total
_______________________________________________________________________________________________________________
(in thousands except per share amounts)
Fiscal 1994
Sales $39,162 $45,286 $50,652 $50,868 $185,968
Gross Profit 4,577 8,085 12,641 12,345 37,648
Net Income 1,093 3,187 6,084 5,487 15,851
Earnings per share .11 .33 .62 .56 1.62
Fiscal 1993
Sales $40,117 $41,993 $40,784 $40,532 $163,426
Gross Profit 7,717 8,861 8,232 8,065 32,875
Income from continuing operations 3,253 3,993 3,503 3,881 14,630
Income before cumulative change
in accounting principle 3,543 5,368 3,503 3,881 16,295
Net Income 3,484 5,368 3,503 3,881 16,236
Earnings per share
Continuing operations .33 .41 .36 .40 1.50
Before cumulative change
in accounting principle .36 .55 .36 .40 1.67
Net Income .35 .55 .36 .40 1.66
_______________________________________________________________________________________________________________
1994 ANNUAL REPORT
23
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the
Company's liquidity and financial condition:
At June 30,
________________________________________
1994 1993
___________________________________________________________________________________________
(In Thousands)
Cash, cash equivalents and short-term investments $ 4,171 $23,539
Long-term liquid investments 14,504
Long-term debt (including current maturities) 25,000 50
Working capital 22,151 41,580
____________________________________________________________________________________________
LIQUIDITY AND CAPITAL RESOURCES
Strong operations and the liquidation of net operating
assets of McCormick caused the Company's cash and working capital
positions to be higher than normal at June 30, 1993. These
amounts have since been reduced as expenditures for the
distillery expansion in Pekin, as well as other capital
improvement projects, have exceeded cash generated from operating
activities. Additionally, the Company has used $10.5 million of
the $25 million borrowed to fund its expansion program.
Increased receivable and inventory levels due to volume increases
have also reduced short-term liquidity. In spite of these high
cash requirements to fund growth, the Company continued paying
dividends to stockholders at a consistent pace.
At June 30, 1994, the Company has amounts remaining to spend
under capital improvements projects totaling approximately $22.3
million. As previously discussed, the distillery project at
Pekin is proceeding on schedule toward a January, 1995
completion. Additionally, the gluten expansion and new wheat
starch facilities at Pekin are expected to come on line in March,
1995, which will increase gluten and starch capacities by 40% and
70%, respectively. Capital improvement projects in Atchison
include expansions of the flour mill, wheat starch capacity and
wastewater treatment plant.
In August, 1993, the Company borrowed $25 million through
the issuance of unsecured fifteen-year senior notes bearing
interest at 6.68%. The proceeds from this borrowing have been
invested in short-term investments and are fully available to
finance the ongoing expenditures. Additionally, the Company
obtained an additional $20.0 million line of credit to go along
with two already existing lines of credit totaling $5.0 million.
There were no borrowings on either line of credit at June 30,
1994.
Midwest Grain Products believes the above borrowings,
existing working capital and working capital generated from
future operations will allow it to accomplish its plant expansion
and expanded working capital needs.
1994 ANNUAL REPORT
24
MIDWEST GRAIN PRODUCTS, INC.
Independent Accountants' Report
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas
We have audited the accompanying consolidated balance sheets
of MIDWEST GRAIN PRODUCTS, INC. as of June 30, 1994 and 1993, and
the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period
ended June 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of MIDWEST GRAIN PRODUCTS, INC.
as of June 30, 1994 and 1993 and the results of its operation and
its cash flows for each of the three years in the period ended
June 30, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 6 and 9 to the consolidated financial
statements, the Company changed its methods of accounting for
income taxes and post-retirement benefits other than pensions,
respectively, during fiscal 1993.
/s/ Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
August 11, 1994
1994 ANNUAL REPORT
25
MIDWEST GRAIN PRODUCTS, INC.
Financial Review
Consolidated Statements of Income
Years Ended June 30, 1994, 1993, and 1992
1994 1993 1992
_______________________________________________________________________________________________________________
(In Thousands, Except Per Share Amounts)
NET SALES (Note 14) $185,968 $163,426 $155,794
COST OF SALES 148,320 130,551 127,883
_______________________________________________________________________________________________________________
GROSS PROFIT 37,648 32,875 27,911
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 12,212 10,677 9,794
_______________________________________________________________________________________________________________
25,436 22,198 18,117
OTHER OPERATING INCOME (EXPENSE)(Note 8) (669) (264) 17
_______________________________________________________________________________________________________________
INCOME FROM OPERATIONS 24,767 21,934 18,134
OTHER INCOME, NET 924 1,045 1,191
INTEREST EXPENSE 127 71 93
_______________________________________________________________________________________________________________
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 25,564 22,908 19,232
PROVISION FOR INCOME TAXES (Note 6) 9,713 8,278 7,020
_______________________________________________________________________________________________________________
INCOME FROM CONTINUING OPERATIONS 15,851 14,630 12,212
DISCONTINUED OPERATIONS (Note 14)
Income from operations of McCormick Distilling
(less applicable income tax) 616 1,294
Gain on sale of certain assets of McCormick Distilling
(less applicable income tax of $604) 1,049
_______________________________________________________________________________________________________________
INCOME BEFORE CUMULATIVE CHANGE
IN ACCOUNTING PRINCIPLE 16,295 13,506
CHANGE IN ACCOUNTING PRINCIPLE
Cumulative effect of change in method of accounting
for post-retirement benefits (net of income tax
benefit of $1,288) (Note 9) (2,241)
Cumulative effect of change in method of accounting
for income taxes (Note 6) 2,182
_______________________________________________________________________________________________________________
NET INCOME $ 15,851 $ 16,236 $ 13,506
===============================================================================================================
EARNINGS PER COMMON SHARE
Continuing operations $1.62 $1.50 $1.25
Discontinued operations .17 .13
Cumulative effect of changes in accounting principles (.01)
______________________________________________________________________________________________________________
$1.62 $1.66 $1.38
===============================================================================================================
See Notes to Consolidated Financial Statements
1994 ANNUAL REPORT
26
MIDWEST GRAIN PRODUCTS, INC.
Financial Review
Consolidated Balance Sheets
June 30, 1994 and 1993
Assets
1994 1993
_______________________________________________________________________________________________________________
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 3,832 $ 20,074
Short term investments 339 3,465
Receivables (less allowance for doubtful accounts:
1994-$25; 1993-$25) 20,457 18,005
Notes receivable 814 814
Inventories (Note 2) 13,229 10,873
Prepaid expenses 576 629
Deferred income taxes 876 548
_______________________________________________________________________________________________________________
Total Current Assets 40,123 54,408
_______________________________________________________________________________________________________________
INVESTMENTS 14,504
_______________________________________________________________________________________________________________
LONG-TERM RECEIVABLES 961 2,168
_______________________________________________________________________________________________________________
PROPERTY AND EQUIPMENT, At cost (Note 3) 182,446 135,761
Less accumulated depreciation 69,888 65,666
_______________________________________________________________________________________________________________
PROPERTY AND EQUIPMENT, NET 112,558 70,095
_______________________________________________________________________________________________________________
TOTAL ASSETS $168,146 $126,671
===============================================================================================================
See Notes to Consolidated Financial Statements
1994 ANNUAL REPORT
27
MIDWEST GRAIN PRODUCTS, INC.
Financial Review
Consolidated Balance Sheets
June 30, 1994 and 1993
Liabilities and Stockholders' Equity
1994 1993
_______________________________________________________________________________________________________________
(In Thousands)
CURRENT LIABILITIES
Current maturities of long-term debt $ 50
Accounts payable $ 8,551 5,742
Accrued expenses (Note 4) 8,189 6,797
Income taxes payable 1,232 239
_______________________________________________________________________________________________________________
Total Current Liabilities 17,972 12,828
_______________________________________________________________________________________________________________
LONG-TERM DEBT (Note 5) 25,000
_______________________________________________________________________________________________________________
POST-RETIREMENT BENEFITS (Note 9) 5,045 4,267
_______________________________________________________________________________________________________________
DEFERRED INCOME TAXES (Note 6) 5,956 6,370
_______________________________________________________________________________________________________________
STOCKHOLDERS' EQUITY (Note 5)
Capital stock (Note 7)
Preferred, 5% non-cumulative, $10 par value;
authorized 1,000 shares; issued and outstanding 437 shares 4 4
Common, no par;
authorized 20,000,000 shares;
issued and outstanding 9,765,172 6,715 6,715
Additional paid-in capital 2,485 2,485
Retained earnings 104,969 94,002
_______________________________________________________________________________________________________________
TOTAL STOCKHOLDERS' EQUITY 114,173 103,206
_______________________________________________________________________________________________________________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $168,146 $126,671
===============================================================================================================
See Notes to Consolidated Financial Statements
1994 ANNUAL REPORT
28
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL REVIEW
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1994, 1993, and 1992
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Total
_______________________________________________________________________________________________________________
(In Thousands)
BALANCE, JUNE 30, 1991 $4 $6,715 $2,485 $73,782 $ 82,986
1992 net income 13,506 13,506
Payment of cash dividends
of $.48 per share (4,639) (4,639)
_______________________________________________________________________________________________________________
BALANCE, JUNE 30, 1992 4 6,715 2,485 82,649 91,853
1993 net income 16,236 16,236
Payment of cash dividends
of $.50 per share (4,883) (4,883)
_______________________________________________________________________________________________________________
BALANCE, JUNE 30, 1993 4 6,715 2,485 94,002 103,206
1994 net income 15,851 15,851
Payment of cash dividends
of $.50 per share (4,884) (4,884)
_______________________________________________________________________________________________________________
BALANCE, JUNE 30, 1994 $4 $6,715 $2,485 $104,969 $114,173
===============================================================================================================
See Notes to Consolidated Financial Statements
1994 ANNUAL REPORT
29
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL REVIEW
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1994, 1993, and 1992
1994 1993 1992
_______________________________________________________________________________________________________________
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $15,851 $16,236 $13,506
Items not requiring (providing) cash
Depreciation 7,160 6,201 7,236
Gain on sale of assets (513) (1,119) (325)
Deferred income taxes (742) (677) (731)
Change in accounting principles 59
Changes in:
Accounts receivable (2,452) (4,861) (2,888)
Inventories (2,356) (2,294) 71
Prepaid expenses 53 (107) (280)
Accounts payable (111) (1,699) 1,791
Accrued expenses 932 2,108 1,406
Income taxes payable 993 (1,087) (483)
Discontinued operations 10,414 1,344
_______________________________________________________________________________________________________________
Net cash provided by operating activities 18,815 23,174 20,647
_______________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (45,690) (12,190) (15,020)
Proceeds from sale of equipment 738 150 516
Proceeds from sale of McCormick Distilling Company
net of cash acquired 1,089 5,088
Change in current and non current investments, net (11,260) (2,465) (1,000)
_______________________________________________________________________________________________________________
Net cash used in investing activities (55,123) (9,417) (15,504)
______________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payment on long-term debt (50) (1,043) (248)
Proceeds from issuance of long-term debt 25,000
Dividends paid (4,884) (4,883) (4,557)
_______________________________________________________________________________________________________________
Net cash provided by (used in) financing activities 20,066 (5,926) (4,805)
_______________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,242) 7,831 338
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,074 12,243 11,905
_______________________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,832 $20,074 $12,243
===============================================================================================================
See Notes to Consolidated Financial Statements
1994 ANNUAL REPORT
30
MIDWEST GRAIN PRODUCTS, INC.
Financial Review
Notes to Consolidated Financial Statements
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization. The activities of Midwest Grain Products Inc.
and its subsidiaries consist of production of vital wheat gluten,
premium wheat starch, alcohol products and flour mill products.
The Company sells its products on normal credit terms to
customers in a variety of industries located primarily throughout
the United States. Through its wholly-owned subsidiaries, the
Company operates in Atchison, Kansas and Pekin, Illinois (Midwest
Grain Products of Illinois, Inc.). Additionally, Midwest Grain
Pipeline, Inc. another wholly-owned subsidiary, supplies natural
gas to the Company.
Principles of Consolidation. The consolidated financial
statements include the accounts of Midwest Grain Products, Inc.
and all subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Inventories. Inventories are stated at the lower of cost or
market on the first-in, first-out (FIFO) method.
Property and Equipment. Depreciation is computed using both
straight-line and accelerated methods over the estimated useful
lives of the assets. The Company capitalizes interest costs as a
component of construction in progress, based on the weighted
average rates paid for long-term borrowing. Total interest
incurred each year was:
Years Ended June 30,
---------------------------
1994 1993 1992
----------------------------
(In Thousands)
Interest costs capitalized $1,328
Interest costs
charged to expense 127 $71 $93
-----------------------------
$1,455 $71 $93
=============================
Earnings Per Common Share. Earnings per common share data
is based upon the weighted average number of shares totaling
9,765,172 outstanding for each year.
Cash Equivalents. The Company considers all liquid
investments with maturities of three months or less to be cash
equivalents and excludes unexpended funds included in investments
intended for construction projects.
Investments. Current and non-current investments consist
primarily of money market funds and are valued at cost which
approximates market.
Income Taxes. Deferred tax liabilities and assets are
recognized for the tax effect of the differences between the
financial statement and tax basis of assets and liabilities. A
valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not
be realized.
Reclassification. Certain reclassifications have been made
to the 1993 financial statements to conform to the 1994
presentation. These changes had no effect on net income.
NOTE 2: INVENTORIES
Inventories consist of the following:
June 30,
______________________
1994 1993
______________________
(In Thousands)
Whiskey, alcohol, and spirits $ 3,798 $3,308
Unprocessed grain 5,248 4,543
Operating supplies 2,206 1,957
Gluten 1,460 661
By-products and other 517 404
______________________
$13,229 $10,873
======================
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1994 ANNUAL REPORT
31
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
______________________
1994 1993
______________________
(In Thousands)
Land, buildings and improvements $16,890 $18,262
Transportation equipment 7,239 3,354
Machinery and equipment 105,804 102,263
Construction in progress 52,513 11,882
______________________
182,446 135,761
Less accumulated depreciation 69,888 65,666
______________________
$112,558 $ 70,095
======================
NOTE 4: ACCRUED EXPENSES
Other accrued expenses consist of the following:
June 30,
______________________
1994 1993
______________________
(In Thousands)
Excise taxes $ 768 $1,392
Employee benefit plans (Note 9) 2,098 1,404
Salaries and wages 1,354 1,378
Dividends declared 1,221 1,221
Property taxes 511 429
Royalties 441 429
Payroll taxes 48 14
Insurance 1,045 489
Interest 696
Other expenses 7 41
______________________
$8,189 $6,797
======================
NOTE 5: LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
______________________
1994 1993
______________________
(In Thousands)
Senior notes payable $25,000
Other $50
______________________
25,000 50
Less current maturities 50
______________________
Long-term portion $25,000 $ 0
======================
The senior notes payable are payable in annual installments of
$2,273,000 from 1999 through 2008 with the final principal
payment of $2,270,000 due in 2009. Interest is payable
semi-annually at 6.68% per annum for the fifteen-year term of the
notes. In connection with the borrowing, the Company, among
other covenants, is required to maintain certain financial
ratios, including a minimum consolidated tangible net worth of
$70,000,000.
At June 30, 1994, the Company had a formal revolving line of
credit, with interest at prime minus 1%, amounting to $20.0
million, and two additional lines of credit with interest at
prime, amounting to $5.0 million. There were no borrowings on
any of the available lines.
The fair value of the senior notes payable debt, based upon
the borrowing rate of 8.0% currently available to the Company at
June 30, 1994, was $23,700,000.
Aggregate annual maturities of long-term debt at June 30,
1994 are as follows:
(In Thousands)
1995 $ 0
1996 0
1997 0
1998 0
1999 2,273
Thereafter 22,727
_________
$ 25,000
=========
NOTE 6: INCOME TAXES
Effective July 1, 1992, the Company elected early adoption
of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. The cumulative effect at July 1,
1992 included in the accompanying consolidated statements of
income was a $2,182,000 reduction in previously recorded
deferred tax liabilities, or $.22 per share. Prior years'
financial statements have not been restated to apply the
provision of SFAS No. 109.
The provisions for income taxes is comprised of the
following:
Years Ended June 30,
______________________________
1994 1993 1992
______________________________
(In Thousands)
Income taxes
currently payable $10,455 $9,913 $8,496
Income taxes deferred (742) (677) (731)
______________________________
$9,713 $9,236 $7,765
==============================
1994 ANNUAL REPORT
32
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax expense is reflected in the accompanying
statements of income as follows:
Years Ended June 30,
____________________________
1994 1993 1992
____________________________
(In Thousands)
Continuing operations $9,713 $8,278 $7,020
Discontinued operations
Income from operations 354 745
Gain on disposal 604
____________________________
$9,713 $9,236 $7,765
============================
The tax effects of temporary differences related to deferred
taxes shown on the consolidated balance sheets were as follows:
June 30,
__________________________
1994 1993
__________________________
(In Thousands)
Deferred tax assets
Accrued employee benefits $ 456 $ 415
Post-retirement liability 2,007 1,565
Insurance accruals 415 182
Other 110 68
__________________________
2,988 2,230
__________________________
Deferred tax liabilities:
Accumulated depreciation (7,564) (7,520)
Deferred gain on
involuntary conversion (504) (532)
__________________________
(8,068) (8,052)
__________________________
Net deferred tax liability $(5,080) $(5,822)
==========================
The above net deferred tax liability is presented on the
consolidated balance sheets as follows:
June 30,
_________________________
1994 1993
_________________________
(In Thousands)
Deferred tax asset - current $ 876 $ 548
Deferred tax liability - current (5,956) (6,370)
_________________________
Net deferred tax liability $(5,080) $ (5,822)
=========================
No valuation allowance has been recorded at June 30, 1994 or
1993.
During 1992, deferred income taxes were provided for timing
differences in the recognition of revenue and expense for tax and
financial purposes. In 1992, the largest component of deferred
taxes was an $8.5 million deferred tax liability resulting from
depreciation.
A reconciliation of the provision for income taxes from
continuing operations at the normal statutory federal rate to the
provision included in the accompanying consolidated statements of
income is shown below:
Years Ended June 30,
____________________________
1994 1993 1992
____________________________
(In Thousands)
"Expected" provision at
Federal statutory rate (34%) $8,694 $7,790 $6,539
Increases (decreases)
resulting from:
Effect of State
income taxes 760 871 510
Other 259 (383) ( 29)
____________________________
Provision for income taxes $9,713 $8,278 $7,020
============================
NOTE 7: CAPITAL STOCK
The Common Stock is entitled to elect four out of the nine
members of the Board of Directors of the Company, while the
Preferred Stock is entitled to elect the remaining five
directors. Holders of Common Stock are not entitled to vote with
respect to a merger, dissolution, lease, exchange or sale of
substantially all of the Company's assets, or on an amendment to
the Articles of Incorporation, unless such action would increase
or decrease the authorized shares or par value of the Common or
Preferred Stock, or change the powers, preferences or special
rights of the Common or Preferred Stock so as to affect the
holders of Common Stock adversely.
NOTE 8: OTHER OPERATING INCOME (EXPENSE)
Other operating income (expense) consists of the following:
Years Ended June 30,
____________________________
1994 1993 1992
____________________________
(In Thousands)
Truck operations $(88) $(31) $29
Warehousing and
storage operations (632) (328) (75)
Miscellaneous 51 95 63
____________________________
$(669) $(264) $17
============================
1994 ANNUAL REPORT
33
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994, 1993, and 1992
NOTE 9: EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension
plan covering union employees. The plan provides benefits based
on the participants' years of service. The Company only
contributes amounts deductible for federal income tax purposes.
Pension cost included the following components:
Years Ended June 30,
____________________________
1994 1993 1992
____________________________
(In Thousands)
Service cost-benefits
earned during year $ 53 $ 53 $ 57
Interest cost on projected
benefit obligations 142 136 128
Actual investment income
earned on plan assets (83) (203) (103)
Amortization of transition
liability and difference
between actual and expected
return on plan assets (28) 105 12
____________________________
Pension cost $ 84 $ 94 $94
============================
The funded status of the plan is as follows:
June 30,
__________________
1994 1993
__________________
(In Thousands)
Accumulated benefit obligations
including vested benefits
of $1,976 and $1,938 $1,983 $1,955
==================
Plan assets at fair value $1,727 $1,702
Projected benefit obligations
for participants' service
rendered to date 1,983 1,955
______ ______
Projected benefit obligations
in excess of plan's assets (256) (253)
Unrecognized gain (loss) 21 (1)
Unrecognized prior service cost 71 77
Unrecognized net obligation at
July 1, 1987 being recognized
over the participants' average
remaining service period 141 159
Adjustment required to recognize
the minimum liability (233) (235)
__________________
Minimum pension liability $(256) $(253)
==================
Plan assets are invested in cash equivalents, U.S.
Government securities, corporate bonds, fixed income funds and
common stocks.
The discount rate used in determining the actuarial resent
value of the projected benefit obligation was 7.5%. The expected
long-term rate of return on the plan's assets was 8.0%.
The Company and its subsidiaries have employee stock
ownership plans covering all eligible employees. Discretionary
contributions to the plans totaled $1,323,000, $1,163,000 and
$1,193,000 for the years ended June 30, 1994, 1993 and 1992,
respectively. Contributions are made in the form of cash and/or
additional shares of common stock.
The Company and its subsidiaries provide certain health care
and life insurance benefits to existing retired employees. The
liability for such benefits is unfunded. The Company adopted the
accounting provisions of the Statement of Financial Accounting
Standards (SFAS) No. 106, "Employer's Accounting for
Post-Retirement Benefits Other Than Pensions," during fiscal
1993. This standard requires that the expected cost of retiree
health and life insurance benefits be charged to expense during
the years that the employees render service rather than the
Company's past practice of recognizing these costs on a cash
basis.
The cumulative effect of this accounting change reduced net
income for the year ended June 30, 1993 by approximately $2.2
million ($3.5 million less related deferred income taxes of $1.3
million), or $.23 per share. The Company elected to record the
transition obligation as a one-time charge against earnings
rather than amortize it over a longer period. If the 1993
expense had been determined under the cash method previously
used, the amount recognized would have been $187,000 before
taxes.
1994 ANNUAL REPORT
34
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of the Company's plans at June 30, 1994 and 1993
was as follows:
June 30,
_______________________
1994 1993
_______________________
(In Thousands)
Accumulated post-retirement
benefit obligation:
Retirees $2,854 $2,785
Active plan participants 2,645 2,059
_______________________
Unfunded accumulated
obligation 5,499 4,844
Unrecognized actuarial
loss (454) (577)
_______________________
Accrued post-retirement
benefit cost $5,045 $4,267
=======================
Net post-retirement benefit cost included the following
components:
June 30,
______________________
1994 1993
______________________
(In Thousands)
Service cost $ 153 $ 115
Interest cost 388 420
______________________
Post-retirement benefit cost $ 541 $ 535
======================
The expense under the cash method previously used was
$136,000 for fiscal 1992.
The weighted average annual assumed rate of increase in the
per capita cost of covered benefits (i.e., health care cost trend
rate) is assumed to be 13.5% (compared to 14.0% assumed for 1993)
reducing to reducing to 11.0 % over five years and 6 % over 23
years. A one percentage point increase in the assumed health care
cost trend rate would have increased the accumulated benefit
obligation by $480,000 at June 30, 1994 and the service and
interest cost by $80,000 for the year then ended.
A weighted average discount rate of 8.0% was used in
determining the accumulated benefit obligation.
NOTE 10: MAJOR CUSTOMERS
During the years ended June 30, 1994, 1993 and 1992, the
Company had sales to one customer accounting for approximately
14.5 % 13.0 % and 14.5 %, respectively, of consolidated sales.
NOTE 11: OPERATING LEASES
The Company has several noncancellable operating leases for
railcars which expire from January, 1995 through November, 2000.
The leases generally require the Company to pay all service costs
associated with the railcars. Rental payments include minimum
rentals plus contingent amounts based on mileage.
Future minimum lease payments at June 30, 1994 are as
follows:
(In Thousands)
1995 $ 697
1996 651
1997 596
1998 501
1999 262
Thereafter 48
_________
Future minimum lease payments $ 2,755
=========
Rental expense for all operating leases with terms longer
than one month totaled $532,000, $136,000 and $166,000 for the
years ended June 30, 1994, 1993 and 1992, respectively.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
Years Ended June 30,
______________________________
1994 1993 1992
______________________________
(In Thousands)
Noncash Investing and
Financing Activities
Purchase of property and
equipment in accounts
payable $ 3,931 $ 2,045 $ 100
Notes received from
sale of subsidiary 4,557
Dividends declared 1,221 1,221 1,221
Additional Cash Information
Interest paid 127 67 93
Income taxes paid 9,460 10,648 8,354
1994 ANNUAL REPORT
35
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: CONTINGENCIES
There are various legal proceedings involving the Company
and its subsidiaries. Management considers that the aggregate
liabilities, if any, arising from such actions would not have a
material adverse effect on the consolidated financial position or
operations of the Company.
NOTE 14: SALE OF McCORMICK DISTILLING COMPANY
On December 31, 1992, the Company's wholly-owned subsidiary
McCormick Distilling Company, sold its principal operating assets
consisting of inventories, property and equipment, trademarks,
patents and licenses, to MDC Acquisition Company (now known as
McCormick Distilling Company), an independent business formed by
a group of private investors. The Company retained accounts
receivable and assumed accounts payable while MDC assumed certain
accrued liabilities, including excise taxes, of approximately
$1.7 million. In addition, the Company received cash of
approximately $3.1 million, a $1.6 million 30-day note at prime
and a three year note for approximately $3.0 million,
collateralized by bulk whiskey, with interest payable at prime.
The sale resulted in a gain of $1.0 million after taxes of
approximately $600,000.
The three year note receivable had a balance due of
approximately $1.5 million at June 30, 1994 and is included in
notes receivable in the consolidated balance sheet.
The disposal is being accounted for as a discontinued
operation and, accordingly, its operating results are segregated
and reported as discontinued operations in the accompanying
consolidated statements of income.
Summarized results of operations of McCormick Distilling
Company were as follows:
Years Ended June 30,
________________________
1993 1992
________________________
(In Thousands)
Results of Operations:
Net Sales:
Grain products sales $ 13,167 $ 22,970
Excise taxes 26,133 52,542
________________________
39,300 75,512
Income before
income taxes 971 2,039
Provision for
income taxes 355 745
________________________
Income from
operations $ 616 $ 1,294
========================
1994 ANNUAL REPORT
36