Exhibt 10(c) SELECTED FINANCIAL INFORMATION YEARS ENDED JUNE 30, _______________________________________________________________________________ 1995 1994 1993 1992 1991 _______________________________________________________________________________ (In Thousands, Except Per Share Amounts) INCOME STATEMENT DATA: NET SALES $180,252 $185,968 $163,426 $155,794 $133,120 COST OF SALES 159,149 148,320 130,551 127,883 108,963 _______________________________________________________________________________ GROSS PROFIT 21,103 37,648 32,875 27,911 24,157 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,553 12,212 10,677 9,794 8,083 OTHER OPERATING INCOME (EXPENSE) (107) (669) (264) 17 135 _______________________________________________________________________________ INCOME FROM OPERATIONS 10,443 24,767 21,934 18,134 16,209 OTHER INCOME (LOSS), NET (4,225) 924 1,045 1,191 501 INTEREST EXPENSE 606 127 71 93 123 _______________________________________________________________________________ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 5,612 25,564 22,908 19,232 16,587 PROVISION FOR INCOME TAXES 2,273 9,713 8,278 7,020 5,977 _______________________________________________________________________________ INCOME FROM CONTINUING OPERATIONS 3,339 15,851 14,630 12,212 10,610 DISCONTINUED OPERATIONS 1,665 1,294 530 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 $ 3,339 $ 15,851 $ 16,236 $ 13,506 $ 11,140 _______________________________________________________________________________ _______________________________________________________________________________ EARNINGS PER COMMON SHARE Continuing operations $.34 $1.62 $1.50 $1.25 $1.09 Discontinued operations .17 .13 .05 Cumulative effect of changes in accounting principles (.01) _______________________________________________________________________________ $.34 $1.62 $1.66 $1.38 $1.14 _______________________________________________________________________________ _______________________________________________________________________________ Cash dividends per common share $.50 $.50 $.50 $.48 $.47 Weighted average common shares outstanding 9,765 9,765 9,765 9,765 9,765 BALANCE SHEET DATA: Working capital $ 26,955 $ 21,951 $ 41,580 $ 37,021 $ 36,928 Total Assets $176,749 $168,146 $126,671 $115,626 $109,690 Long-term debt, less current maturities $ 38,908 $ 25,000 $50 $ 1,093 Stockholders' equity $112,628 $114,173 $103,206 $ 91,853 $82,986 1995 Annual Report 17 MANAGEMENT'S DISCUSSION AND ANALYSIS 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 NET SALES PERCENTAGE YEARS ENDED JUNE 30 INCREASE (DECREASE) ______________________________________________ FISCAL 1995 FISCAL 1994 1995 1994 1993 OVER 1994 OVER 1993 _______________________________________________________________________________ Net Sales 100.0% 100.0% 100.0% (3.1%) 13.8% Cost of sales 88.3 79.8 79.9 7.3 13.6 _______________________________________________________________________________ Gross profit 11.7 20.2 20.1 (43.9) 14.5 Selling, general and administrative expenses 5.8 6.6 6.5 (13.6) 14.4 Other operating income (loss) (.1) (.3) (.2) 84.0 (153.4) _______________________________________________________________________________ Income from operations 5.8 13.3 13.4 (57.8) 12.9 Other income (expense) (2.7) .4 .6 (706.1) (18.2) _______________________________________________________________________________ Income from continuing operations before income taxes 3.1 13.7 14.0 (78.0) 11.6 Provision for income taxes 1.2 5.2 5.1 (76.6) 17.3 _______________________________________________________________________________ Income from continuing operations 1.9 8.5 8.9 (78.9) 8.3 _______________________________________________________________________________ _______________________________________________________________________________ FISCAL 1995 COMPARED TO FISCAL 1994 The Company's sales and earnings in fiscal 1995 declined significantly compared to these same results in fiscal 1994. Lower unit sales of vital wheat gluten combined with reduced efficiencies associated with the start-up of new distillery equipment at the Company's Pekin, Illinois plant were principal causes for the decrease. The drop in wheat gluten volume resulted from reduced marketing opportunities due to increased gluten imports from Europe. The high unit sales of wheat gluten which the Company experienced in the latter half of fiscal 1994 resulted from an exceptionally large increase in demand during that period. This situation was caused by a worldwide shortage of gluten due to poor quality, low protein-yielding wheat. After a return to more normal crop conditions during the summer of 1994, the U.S. market began experiencing a substantial rise in imported wheat gluten from the European Union, where wheat starch and gluten capacities underwent sizeable increases. Profits from their 18 Midwest Grain Products, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS highly subsidized and protected wheat starch business have allowed European producers to easily place their gluten surpluses in the United States market.Low U.S. tariff rates on wheat gluten provide little deterrence to this practice, while high tariffs in Europe effectively prohibit non-European Union member countries from competing in the wheat gluten and wheat starch markets there. Although the Company is actively seeking measures that would create a more level playing field, gluten imports from Europe have continued to steadily flow into this country. Because of this situation, and due to higher per bushel costs for wheat, the Company does not expect to immediately begin utilizing the 40% increase in gluten production capacity which was added at the Pekin plant late this summer. However, plans are to shift production from the Pekin plant's older gluten processing equipment to the new, more efficient equipment until market conditions require that more of the total capacity be utilized. The Company's unit sales of alcohol products in fiscal 1995 were up significantly compared to the prior year's amount. Substantial increases occurred in unit sales of both fuel grade alcohol, which is sold as an octane additive and oxygenate commonly known as ethanol, and food grade alcohol, which is sold for beverage, industrial and commercial applications. The increase in the food grade category resulted from higher unit sales of beverage alcohol, which more than offset a slight decrease in industrial alcohol volume. That decrease resulted in a change in the Company's alcohol production mix in the second and third quarters, which was required to satisfy heightened customer needs in the fuel market during those periods. Demand in the food grade markets remains strong. The Company's ability to meet this demand has been enhanced by the availability of additional production capacity at its Pekin plant. Future growth opportunities are also expected to occur in the fuel grade alcohol market, but at a more gradual rate than previously anticipated due to the reversal this past spring of an Environmental Protection Agency regulation requiring that renewable fuel oxygenates such as grain-based ethanol play a larger role in satisfying future Clean Air Act requirements in certain areas of the country. Designed to substantially increase Midwest Grain's total alcohol production capacity, the distillery expansion was scheduled to be on line by January, 1995. However, the completion was delayed by unanticipated mechanical equipment problems with two new distillery feed dryers. At the end of the third quarter of fiscal 1995, intermediate repairs to the dryers were completed by the equipment supplier. Final repairs to the equipment are expected to be completed early in the second quarter of fiscal 1996, substantially improving production capabilities. However, due to depressed market prices and increased grain costs, the Company expects to minimize its production of fuel grade alcohol until more favorable conditions materialize. The Company's unit sales of wheat starch in fiscal 1995 rose considerably above the prior year's level. The increase resulted mainly from higher volumes of modified wheat starches which are sold in a variety of special market niches. A 70% increase in wheat starch production capacity, that was originally slated for completion at the Pekin plant toward the end of the third quarter of 1995 Annual Report 19 MANAGEMENT'S DISCUSSION AND ANALYSIS fiscal 1995, was delayed until the end of the fourth quarter. The postponement was in part due to the delay in the distillery expansion. With the additional wheat starch capacity now available, the Company's ability to satisfy current and future demand for modified and unmodified wheat starch is greatly enhanced. While the Company believes unfavorable conditions, namely reduced efficiencies, intense foreign competition and higher raw material costs for grain, will continue to have negative impact on results during the first part of fiscal 1996, it expects gradual improvements to occur from its projected higher capacities, assuming an improvement in market conditions and a continuation of strong demand for its food grade alcohol products and wheat starch. Additionally, in response to the unfavorable conditions, the Company is implementing measures to reduce costs and improve cash flow. Net sales in fiscal 1995 decreased by approximately $5.7 million below sales in fiscal 1994. The decrease was principally due to lower sales of vital wheat gluten, which fell nearly 30% as the result of increased foreign competition and a reduction in market demand compared to the extraordinary demand experienced in the latter half of fiscal 1994. A 16% increase in sales of alcohol products compared to the prior year principally resulted from a significant jump in fuel alcohol volume. Sales of distillers feeds, a by-product of the alcohol production process, rose modestly compared to feed sales in 1994. A continued increase in sales of modified wheat starches pushed total wheat starch sales approximately 11% above the prior year's level. Changes 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. Prices for food grade alcohol for beverage applications normally follow the movement of corn prices, while prices for food grade alcohol for industrial and commercial applications are normally consistent with prices for industrial alcohol derived from synthetic products such as petroleum. During fiscal 1995 and continuing into fiscal 1996, grain costs increased to unusually high levels in the face of intense competition from foreign exporters of vital wheat gluten and relatively flat markets for fuel grade ethanol and poor markets for distillers feeds. The combination of these factors have significantly restricted the ability of the Company to adjust the price of its gluten, fuel grade alcohol and distillers feeds to compensate for the high grain costs. The cost of sales in fiscal 1995 rose by approximately $10.8 million above cost of sales in fiscal 1994. Principal causes were increased raw material costs for grain, a $2.6 million increase in maintenance and repair costs and a $2.2 million increase in energy costs. The higher maintenance and repair costs were mainly due to work associated with the distillery expansion at the Company's Pekin plant. The higher energy and raw material costs resulted mainly from increased alcohol production, which was made possible by the distillery 20 Midwest Grain Products, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS expansion in the second half of fiscal 1995, and increased grain prices. Other manufacturing cost increases were due to higher costs for chemicals and additives resulting from increased production of modified wheat starches, and depreciation of buildings and equipment. Selling, general and administrative expenses in fiscal 1995 were down approximately $1.7 million compared to the prior year. This principally was due to a decrease of approximately $2 million in the Company's management and employee incentive programs as a result of the decline in the company's earnings performance. These reductions helped to more than offset increases which were incurred generally throughout the remainder of the expense categories. Other income in fiscal 1995 was down approximately $5.1 million compared to the prior year. This resulted primarily from a non-recurring write-off for the remaining book value of an inactive coal-fired boiler in the fourth quarter amounting to $5.0 million. This write-off was made after negotiations with a local utility culminated in 15- and 7- year fixed pricing agreements for steam heat and electricity, respectively, with the option to renew the steam heat agreement for an additional 19 years. The consolidated effective income tax rate increased as a result of state tax rates. The general effects of inflation were minimal. As the result of the foregoing factors, the Company realized net income of $3,339,000 in fiscal 1995 compared to net income of $15,851,000 in fiscal 1994. 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 unusually wet weather and floods in the Midwest in the Summer of 1993. 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 grade 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 1995 Annual Report 21 MANAGEMENT'S DISCUSSION AND ANALYSIS and milo began to subside after the end of fiscal 1994 due to improved crop conditions throughout the Midwest generally. However, because the higher quality wheat from the 1994 harvest required that less gluten be used to fortify flour, demand for gluten decreased somewhat. Additionally, the Company began experiencing 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. 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 the 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 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 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. 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 milo. 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 22 Midwest Grain Products, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS $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 unusually wet weather and record floods in the Midwest. The remainder of the increase was experienced generally throughout the expense categories. Pre-tax income for fiscal 1994 increased by approximately 11.6% 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. 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 of 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, 1995 and 1994. Quarter Ending _______________________________________________________________________________ Sept. 30 Dec. 31 March 31 June 30 Total _______________________________________________________________________________ (In Thousands Except Per Share Amounts) Fiscal 1995 Sales $45,984 $44,488 $42,005 $47,775 $180,252 Gross Profit 7,650 6,734 2,973 3,746 21,103 Net Income (Loss) 2,756 2,237 298 (1,952) 3,339 Earnings (Loss) Per Share .28 .23 .03 (.20) .34 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 (Loss) 1,093 3,187 6,084 5,487 15,851 Earnings (Loss) Per Share .11 .33 .62 .56 1.62 1995 Annual Report 23 MANAGEMENT'S DISCUSSION AND ANALYSIS Liquidity and Capital Resources The following table is presented as a measure of the Company's liquidity and financial condition: At June 30, ______________ 1995 1994 ______________ (In Thousands) Cash, cash equivalents and short-term investments $460 $3,832 Long-term liquid investments 14,504 Long-term debt 38,908 25,000 Working capital 26,955 21,951 _______________________________________________________________________________ The Company has expended almost $85 million in the past two years toward its significant capital improvement projects while incurring long-term debt of $38.9 million. Cash generated from operating activities and cash received from the disposal of McCormick Distilling Company were also used to fund the plant expansion, thus reducing short-term liquidity. An additional $5.8 million was needed at June 30, 1995 to make final payments against the project and to fund other normal capital needs expected through fiscal 1996. At June 30, 1995, the Company had $10.0 million available under existing long-term lines of credit, $2.0 million under short-term lines of credit which expire in fiscal 1996, and approximately $27.0 million of working capital. Management believes the available lines of credit, existing working capital and working capital to be generated from future operations will allow the Company to complete its ongoing capital improvement projects and meet expanded working capital needs. 24 Midwest Grain Products, Inc. INDEPENDENT ACCOUNT'S 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, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1995. 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 financial position of Midwest Grain Products, Inc. as of June 30, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 6 and 10 to the consolidated financial statements, the Company changed its methods of accounting for income taxes and post-retirement benefits other than pensions during fiscal 1993. S/BAIRD, KURTZ & DOBSON BAIRD, KURTZ & DOBSON Kansas City, Missouri August 4, 1995 1995 Annual Report 25 FINANCIAL REVIEW CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1995, 1994 AND 1993 1995 1994 1993 _______________________________________________________________________________ (In Thousands, Except Per Share Amounts) NET SALES (Note 15) $ 180,252 $ 185,968 $ 163,426 COST OF SALES 159,149 148,320 130,551 _______________________________________________________________________________ GROSS PROFIT 21,103 37,648 32,875 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,553 12,212 10,677 _______________________________________________________________________________ 10,550 25,436 22,198 OTHER OPERATING INCOME (EXPENSE) (Note 8) (107) (669) (264) _______________________________________________________________________________ INCOME FROM OPERATIONS 10,443 24,767 21,934 OTHER INCOME (LOSS), NET (Note 9) (4,225) 924 1,045 INTEREST EXPENSE 606 127 71 _______________________________________________________________________________ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 5,612 25,564 22,908 PROVISION FOR INCOME TAXES (Note 6) 2,273 9,713 8,278 _______________________________________________________________________________ INCOME FROM CONTINUING OPERATIONS 3,339 15,851 14,630 DISCONTINUED OPERATIONS (Note 15) Income from operations of McCormick Distilling (less applicable income tax) 616 Gain on sale of certain assets of McCormick Distilling (less applicable income tax) 1,049 _______________________________________________________________________________ INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE 16,295 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 10) (2,241) Cumulative effect of change in method of accounting for income taxes (Note 6) 2,182 _______________________________________________________________________________ NET INCOME $ 3,339 $ 15,851 $ 16,236 _______________________________________________________________________________ _______________________________________________________________________________ EARNINGS PER COMMON SHARE Continuing operations $ .34 $ 1.62 $ 1.50 Discontinued operations .17 Cumulative effect of changes in accounting principles (.01) _______________________________________________________________________________ $ .34 $ 1.62 $ 1.66 _______________________________________________________________________________ _______________________________________________________________________________ See Notes to Consolidated Financial Statements 26 Midwest Grain Products, Inc. FINANCIAL REVIEW CONSOLIDATED BALANCE SHEETS JUNE 30, 1995 AND 1994 ASSETS _______________________________________________________________________________ 1995 1994 (In Thousands) CURRENT ASSETS Cash and cash equivalents $ 460 $ 3,832 Receivables (less allowance for doubtful accounts; 1995 - $85; 1994 - $25) 21,550 20,457 Notes receivable 919 814 Inventories (Note 2) 14,690 13,229 Prepaid expenses 560 715 Deferred income taxes (Note 6) 875 876 Income taxes receivable 2,338 _______________________________________________________________________________ Total Current Assets 41,392 39,923 _______________________________________________________________________________ INVESTMENTS 14,504 _______________________________________________________________________________ PROPERTY AND EQUIPMENT, At cost (Note 3) 206,336 182,446 Less accumulated depreciation 71,424 69,888 _______________________________________________________________________________ PROPERTY AND EQUIPMENT, NET 134,912 112,558 _______________________________________________________________________________ OTHER ASSETS 445 1,161 _______________________________________________________________________________ TOTAL ASSETS $176,749 $168,146 _______________________________________________________________________________ _______________________________________________________________________________ LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 _______________________________________________________________________________ (In Thousands) CURRENT LIABILITIES Accounts payable $ 7,807 $ 8,551 Accrued expenses (Note 4) 6,630 8,189 Income taxes payable 1,232 _______________________________________________________________________________ Total Current Liabilities 14,437 17,972 _______________________________________________________________________________ LONG-TERM DEBT (Note 5) 38,908 25,000 _______________________________________________________________________________ POST-RETIREMENT BENEFITS (Note 10) 5,449 5,045 _______________________________________________________________________________ DEFERRED INCOME TAXES (Note 6) 5,327 5,956 _______________________________________________________________________________ STOCKHOLDERS' EQUITY (Note 4) 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 103,424 104,969 _______________________________________________________________________________ TOTAL STOCKHOLDERS' EQUITY 112,628 114,173 _______________________________________________________________________________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,749 $168,146 _______________________________________________________________________________ _______________________________________________________________________________ See Notes to Consolidated Financial Statements 1995 Annual Report 27 FINANCIAL REVIEW CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1995, 1994 AND 1993 ADDITIONAL PREFERRED COMMON PAID-IN RETAINED STOCK STOCK CAPITAL EARNINGS TOTAL _______________________________________________________________________________ (In Thousands) 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 1995 net income 3,339 3,339 Payment of cash dividends of $.50 per share (4,884) (4,884) _______________________________________________________________________________ BALANCE, JUNE 30, 1995 $4 $6,715 $2,485 $103,424 $112,628 _______________________________________________________________________________ _______________________________________________________________________________ See Notes to Consolidated Financial Statements 28 Midwest Grain Products, Inc. FINANCIAL REVIEW CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995, 1994 AND 1993 1995 1994 1993 _______________________________________________________________________________ (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $3,339 $15,851 $16,236 Items not requiring (providing) cash: Depreciation 8,681 7,160 6,201 (Gain) loss on sale of assets 4,696 (513) (1,119) Deferred income taxes (628) (742) (677) Changes in accounting principle 59 Discontinued operations 10,414 Changes in: Accounts receivable (1,198) (2,452) (4,861) Inventories (1,461) (2,356) (2,294) Accounts payable 1,780 (111) (1,699) Income taxes (receivable) payable (3,570) 993 (1,087) Other (929) 985 2,001 _______________________________________________________________________________ Net cash provided by operating activities 10,710 18,815 23,174 _______________________________________________________________________________ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (38,870) (45,690) (12,190) Proceeds from sale of equipment 615 738 150 Proceeds from sale of McCormick Distilling Company net of cash sold 645 1,089 5,088 Change in current and non-current investments, net 14,504 (11,260) (2,465) _______________________________________________________________________________ Net cash used in investing activities (23,106) (55,123) (9,417) _______________________________________________________________________________ CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (50) (1,043) Proceeds from issuance of long-term debt 13,908 25,000 Dividends paid (4,884) (4,884) (4,883) _______________________________________________________________________________ Net cash provided by (used in) financing activities 9,024 20,066 (5,926) _______________________________________________________________________________ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,372) (16,242) 7,831 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,832 20,074 12,243 _______________________________________________________________________________ CASH AND CASH EQUIVALENTS, END OF YEAR $ 460 $3,832 $20,074 _______________________________________________________________________________ _______________________________________________________________________________ See Notes to Consolidated Financial Statements 1995 Annual Report 29 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 by-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, ______________________ 1995 1994 1993 ______________________ (In Thousands) Interest costs capitalized $1,570 $1,328 Interest costs charged to expense 606 127 $71 ______________________ $2,176 $1,455 $71 ______________________ ______________________ 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. INVESTMENTS. Non-current investments consisted primarily of money market funds intended for construction projects and were valued at cost which approximated 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 1994 and 1993 financial statements to conform to the 1995 presentation. These changes had no effect on net income. 30 Midwest Grain Products, Inc. FINANCIAL REVIEW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: INVENTORIES Inventories consist of the following: June 30, __________________ 1995 1994 __________________ (In Thousands) Whiskey, alcohol and spirits $ 4,035 $ 3,798 Unprocessed grain 5,785 5,248 Operating supplies 2,645 2,206 Gluten 1,524 1,460 By-products and other 701 517 __________________ $14,690 $13,229 __________________ __________________ NOTE 3: PROPERTY AND EQUIPMENT Property and equipment consists of the following: June 30, __________________ 1995 1994 __________________ (In Thousands) Land buildings and improvements $17,568 $16,890 Transportation equipment 11,224 7,239 Machinery and equipment 157,011 105,804 Construction in progress 20,533 52,513 __________________ 206,336 182,446 Less accumulated depreciation 71,424 69,888 __________________ $134,912 $112,558 __________________ __________________ NOTE 4: ACCRUED EXPENSES Accrued expenses consist of the following: June 30, __________________ 1995 1994 __________________ (In Thousands) Excise taxes $ 602 $ 768 Employee benefit plans (Note 10) 998 2,098 Salaries and wages 1,138 1,354 Dividends declared 1,221 1,221 Property taxes 573 511 Insurance 1,258 1,045 Interest 782 696 Other expenses 58 496 __________________ $6,630 $8,189 __________________ __________________ NOTE 5: LONG-TERM DEBT Long-term debt consists of the following: June 30, __________________ 1995 1994 __________________ (In Thousands) Senior notes payable $25,000 $25,000 Line of credit 13,000 Other 908 __________________ $38,908 $25,000 __________________ __________________ The unsecured 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 semiannually at 6.68% per annum for the fifteen-year term of the notes. At June 30, 1995, the Company had a $20 million unsecured revolving line of credit expiring on October 1, 1997, with interest at 1% below prime on which there was $13.0 million in borrowings at June 30, 1995. The Company had two additional lines of credit totaling $5 million expiring on dates through September 1, 1996, with interest at 1.0% below prime on which there were no borrowings. In connection with the above borrowings, the Company, among other covenants, is required to maintain certain financial ratios, including a current ratio of 1.5 to 1 and a minimum consolidated tangible net worth of $80 million. The fair value of the senior notes payable debt, based upon the borrowing rate of 7.0% available to the Company at June 30, 1995, was $24,800,000. 1995 Annual Report 31 FINANCIAL REVIEW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Aggregate annual maturities of long-term debt at June 30, 1995 are as follows: (In Thousands) 1996 $ 0 1997 0 1998 13,823 1999 2,296 2000 2,335 Thereafter 20,454 ____________ $38,908 ____________ ____________ 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 $0.22 per share. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109. The provisions for income taxes are comprised of the following: Years Ended June 30, ________________________ 1995 1994 1993 ________________________ (In Thousands) Income taxes currently payable $2,901 $10,455 $9,913 Income taxes deferred (628) (742) (677) ________________________ $2,273 $ 9,713 $9,236 ________________________ ________________________ The income tax expense is reflected in the accompanying consolidated statements of income as follows: Years Ended June 30, ________________________ 1995 1994 1993 ________________________ (In Thousands) Continuing operations $2,273 $9,713 $8,278 Discontinued operations Income from operations 354 Gain on disposal 604 ________________________ $2,273 $9,713 $9,236 ________________________ ________________________ The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets are as follows: June 30, ___________________ 1995 1994 ___________________ (In Thousands) Deferred tax assets Accrued employee benefits $ 244 $ 456 Post retirement liability 2,179 2,007 Insurance accruals 647 415 Other 137 110 ___________________ 3,207 2,988 ___________________ ___________________ Deferred tax liabilities Accumulated depreciation (7,197) (7,564) Deferred gain on involuntary conversion (462) (504) (7,659) (8,068) ___________________ Net deferred tax liability $(4,452) $(5,080) ___________________ ___________________ The above net deferred tax liability is presented on the consolidated balance sheets as follows: June 30, ___________________ 1995 1994 ___________________ (In Thousands) Deferred tax asset - current $ 875 $ 876 Deferred tax liability - long term (5,327) (5,956) ___________________ Net deferred tax liability $(4,452) $(5,080) ___________________ ___________________ No valuation allowance has been recorded at June 30, 1995 or 1994. A reconciliation of the provision for income taxes from continuing operations at the normal statutory federal rate to the provision included in 32 Midwest Grain Products, Inc. FINANCIAL REVIEW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the accompanying consolidated statements of income is shown below: Years Ended June 30, _________________________ 1995 1994 1993 _________________________ (In Thousands) "Expected" provision at federal statutory rate (34%) $1,908 $8,694 $7,790 Increases (decreases) resulting from: Effect of state income taxes 223 760 871 Other 142 259 (383) _________________________ Provision for income taxes $2,273 $9,713 $8,278 _________________________ _________________________ NOTE 7: CAPITAL STOCK The Common Stock is entitled to elect four out of the nine members of the Board of Directors, 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, _________________________ 1995 1994 1993 _________________________ (In Thousands) Truck operations $(222) $ (88) $ (31) Warehousing and storage operations 41 (632) (328) Miscellaneous 74 51 95 _________________________ $(107) $(669) $(264) _________________________ _________________________ NOTE 9: ENERGY COMMITMENT During fiscal 1995, the Company negotiated an agreement to purchase steam heat and electricity from a utility for its Illinois operations. Steam heat will be purchased for the next 15 years for a minimum monthly charge of $114,000, with a declining fixed charge for purchases in excess of the minimum usage. Electricity purchases will occur at fixed rates through May 31, 2002. In connection with the agreement, the Company leased land to the utility company for 15 years so it could construct a co-generation plant on the Company's Illinois facility property. The Company has also agreed to reimburse the utility for the net book value of the plant if the lease is not renewed for an additional 19 years. The estimated net book value of the plant would be $10.6 million at that date. As a result of the above agreements, the Board approved the disposal of the coal boiler which previously supplied the majority of the Illinois plant's energy needs. The Company recorded the estimated effect of the disposal as a non-recurring expense of approximately $5.0 million in the fourth quarter of 1995. 1995 Annual Report 33 FINANCIAL REVIEW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: 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, _________________________ 1995 1994 1993 _________________________ (In Thousands) Service cost benefits earned during year $58 $53 $56 Interest cost on projected benefit obligations 144 142 136 Actual investment income earned on plan assets (233) (83) (203) Amortization of transition liability and difference between actual and expected return on plan assets 121 (28) 105 _________________________ Pension cost $ 90 $ 84 $ 94 _________________________ _________________________ The funded status of the plan is as follows: June 30, ________________ 1995 1994 ________________ (In Thousands) Accumulated benefit obligations, including vested benefits of $2,078 and $1,976 $2,082 $1,983 ________________ Plan assets at fair value $1,888 $1,727 Projected benefit obligations for participants' service rendered to date 2,082 1,983 ________________ Projected benefit obligations in excess of plan's assets (194) (256) Unrecognized gain (loss) (30) 21 Unrecognized prior service cost 64 71 Unrecognized net obligation at July 1, 1987 being recognized over the participants' average remaining service period 124 141 Adjustment required to recognize the minimum liability (158) (233) ________________ Minimum pension liability $ (194) $ (256) ________________ ________________ 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 present 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 employees after certain eligibility requirements are met. Discretionary contributions to the plans totaled $998,000, $1,323,000 and $1,163,000 for the years ended June 30, 1995, 1994 and 1993, respectively. Contributions are made in the form of cash and/or additional shares of common stock. The Company and its subsidiaries provide certain post-retirement health care and life insurance benefits to all 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 34 Midwest Grain Products, Inc. FINANCIAL REVIEW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The status of the Company's plans at June 30, 1995 and 1994 was as follows: June 30, ________________ 1995 1994 ________________ (In Thousands) Accumulated post-retirement benefit obligations: Retirees: $3,374 $2,854 Active plan participants: 2,237 2,645 ________________ Undefended accumulated obligation 5,611 5,499 Unrecognized actuarial loss (162) (454) ________________ Accrued post-retirement benefit cost $5,449 $5,045 ________________ ________________ Net post-retirement benefit cost included the following components: June 30, ________________ 1995 1994 ________________ (In Thousands) Service cost $201 $153 Interest cost 414 388 ________________ $615 $541 ________________ ________________ 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 13.0% (compared to 13.5% assumed for 1994) reducing to 11.0% over five years and 6.0% over 23 years. A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $447,000 at June 30, 1995, and the service and interest cost by $61,000 for the year then ended. A weighted average discount rate of 8.0% was used in determining the accumulated benefit obligation. NOTE 11: MAJOR CUSTOMERS During the years ended June 30, 1995, 1994 and 1993, the Company had sales to one customer accounting for approximately 10.7%, 14.5% and 13.0%, respectively, of consolidated sales. NOTE 12: OPERATING LEASES The Company has several noncancellable operating leases for railcars which expire from August 1995 through October 1999. 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, 1995 are as follows: (In Thousands) 1996 $1,701 1997 1,645 1998 1,550 1999 1,312 2000 398 _____________ Future minimum lease payments $6,606 _____________ _____________ 1995 Annual Report 35 FINANCIAL REVIEW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Rental expense for all operating leases with terms longer than one month totaled $951,000, $686,000 and $136,000 for the years ended June 30, 1995, 1994 and 1993, respectively. NOTE 13: ADDITIONAL CASH FLOWS INFORMATION Years Ended June 30, _________________________ 1995 1994 1993 _________________________ (In Thousands) Noncash Investing and Financing Activities: Purchase of property and equipment in accounts payable $1,407 $3,931 $ 2,045 Notes received from sale of subsidiary 4,557 Dividends declared 1,221 1,221 1,221 Additional Cash Payment Information Interest paid (net of amount capitalized) 519 127 67 Income taxes paid $4,200 $9,460 $10,648 NOTE 14: 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 15: 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 $919,000 at June 30, 1995 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 are as follows: Year Ended June 30, ____________ 1993 (In Thousands) Results of operations: Net sales: Grain products sales: $13,167 Excise taxes: 26,133 ____________ 39,300 Income before income taxes 971 Provision for income taxes 355 ____________ Income from operations $ 616 ____________ ____________ 36 Midwest Grain Products, Inc.