Exhibit 10(c) Selected Financial Information Years ended June 30 (in thousands, except per share amounts) 1997 1996 1995 1994 1993 ------------------------------------------- Income Statement Data: Net sales $224,733 $194,638 $180,252 $185,968 $163,426 Cost of sales 213,733 190,173 159,149 148,320 130,551 ------- ------- ------- ------- ------- Gross profit 11,000 4,465 21,103 37,648 32,875 Selling, general & administrative expenses 9,169 9,001 10,553 12,212 10,677 Other operating income (expense) 370 159 (107) (669) (264) --- --- ---- ---- ---- Income (loss) from operations 2,201 (4,377) 10,443 24,767 21,934 Other income (loss), net 618 1,309 (4,225) 924 1,045 Interest expense (2,604) (2,556) (606) (127) (71) ------ ------ ---- ---- --- Income (loss) from continuing operations before income taxes 215 (5,624) 5,612 25,564 22,908 Provision (credit) for income taxes 84 (2,218) 2,273 9,713 8,278 -- ------ ----- ----- ----- Income (loss) from continuing operations 131 (3,406) 3,339 15,851 14,630 Discontinued operations 1,665 Cumulative effect of change in accounting principles-post-retirement benefit (2,241) Cumulative effect of change in accounting principles-income taxes 2,182 Net Income (Loss) $ 131 $ (3,406) $ 3,339 $ 15,851 $ 16,236 ======= ======== ======= ======== ======== Earnings (Loss) per Common Share Continuing operations .01 (.35) .34 1.62 1.50 Discontinued operations .17 Cumulative effect of changes in accounting principles (.01) ------- -------- ------- -------- -------- $ .01 $ (.35) $ .34 $ 1.62 $ 1.66 ======= ======== ======= ======== ======== Cash dividends per common share .50 .50 .50 Weighted average common shares outstanding 9,762 9,765 9,765 9,765 9,765 Balance Sheet Data: Working capital 36,580 37,113 26,955 21,951 41,580 Total Assets 165,330 172,785 176,749 168,146 126,671 Long-term debt, less current maturities 29,933 40,933 38,908 25,000 Stockholders' equity $108,561 $109,222$ 112,628$ 114,173 $103,206 10 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 1997 Fiscal 1996 1997 1996 1995 Over 1996 Over 1995 ---- ---- ---- --------- --------- Net sales 100.0% 100.0% 100.0% 15.5% 8.0% Cost of sales 95.1 97.7 88.3 12.4 19.5 ---- ---- ---- ---- ---- Gross profit 4.9 2.3 11.7 146.4 (78.8) Selling, general and administrative expenses 4.1 4.6 5.8 1.9 (14.7) Other operating income (loss) .2 .1 (.1) 132.7 248.6 -- -- --- ----- ----- Income from operations 1.0 (2.2) 5.8 150.3 (141.9) Other income (expense) (.9) (.6) (2.7) 59.2 (74.2) --- --- ---- ---- ----- Income from continuing operations before income taxes .1 (2.8) 3.1 103.8 (200.2) Provision for income taxes .04 (1.1) 1.2 103.8 (197.6) --- ---- --- ----- ------ Income from continuing operations .06 (1.7)% 1.9% 103.8% (202.0)% === ==== === ===== ====== Fiscal 1997 Compared to Fiscal 1996 The Company's net income of $131,000 in fiscal 1997 was a sizeable improvement over the prior year's net loss of $3,406,000. A greater improvement was prevented by the intensification of competitive pressures in the Company's vital wheat gluten market. Higher than normal energy costs from late fall through late winter, and a surge in competition in the food grade alcohol markets in the third quarter affected the Company's alcohol production. In addition, while average prices for the Company's principal raw materials, namely wheat, corn and milo, were below the exceptionally high levels experienced in the prior fiscal year, they remained well above what traditionally have been considered normal price levels. The increased energy costs, which the Company began experiencing midway through the second quarter, resulted from a significant jump in natural gas prices due to periods of extreme cold weather throughout much of the U.S. During the latter part of the third quarter, those prices returned to more normal levels, allowing the Company to realize improved energy cost efficiencies. Conditions in the wheat gluten market were adversely affected by increased competition from the European Union (E.U.), whose exports of cross-subsidized gluten to the United States continued at record levels. As a result, the Company was unable to adjust the selling price of its gluten enough to effectively offset production costs. Profits from their highly subsidized and protected wheat starch business have allowed European producers to dump surpluses of gluten, a co-product, at prices below U.S. production costs. Low U.S. tariff rates on wheat gluten offer little deterrence to this practice, while high tariffs in Europe effectively prohibit non-E.U. member countries from competing in the wheat gluten and starch markets there. Consultations 11 Management's discussion and Analysis aimed at finding a bilateral solution to the gluten trade problem were renewed in June, 1997 between U.S. and E.U. officials. The framework for these discussions arose from a grains agreement that was ratified in July, 1996. However, because this process has failed to produce evidence that the E.U. is genuinely willing to negotiate an effective remedy, the U.S. Wheat Gluten Industry Council plans to request additional legal action. This action woud seek to bring stability back to the market and provide relief from artificially low E.U. prices. In the meantime, efforts by the Company to develop specialty wheat gluten products for niche markets continue to attract increased, but gradual interest While conditions in the Company's alcohol markets generally remained healthy in fiscal 1997, prices for food grade and fuel grade alcohol declined through the year from their first quarter highs. This primarily was due to the effects of falling prices for corn and milo, the principal raw materials used in the Company's alcohol production process. A drop in beverage alcohol prices in the third quarter additionally was due to increased competition resulting from the start-up of new distillation capacities throughout the industry. Increased supplies of fuel grade alcohol caused a reduction in selling prices in that market as well during the third quarter. Demand for each type of alcohol produced by the Company increased in the fourth quarter, raising unit sales substantially and causing prices to stabilize somewhat. As the result of increased alcohol production in fiscal 1997, unit sales of distillers feed, the principal by-product of the distillation process, grew significantly in fiscal 1997 compared to fiscal 1996. Demand for the Company's premium wheat starch was solid throughout fiscal 1997 and is expected to continue to result in increased utilization of capacity at Midwest Grain's Pekin, Illinois plant, where a new starch production facility was completed in the first quarter of fiscal 1996. With a continued normalization of energy costs, consistently lower grain costs and improved production efficiencies, the Company expects to strengthen its competitive abilities in the alcohol and wheat starch markets going forward. Net sales in fiscal 1997 were approximately $30.1 million higher than net sales in fiscal 1996. The increase principally resulted from increased unit sales of most of the Company's principal products. The lower sales in fiscal 1996 were partially caused by reduced production resulting from an extended maintenance and repair shutdown at the Company's Pekin, Illinois plant during the entire month of June. Sales of all alcohol increased by aproximately 20% over fiscal 1996 mainly as the result of higher unit sales and higher prices for the Company's food grade industrial alcohol and fuel grade alcohol. Sales of distillers feed, the principal by-product of the alcohol process, rose by approximately 21%, due mainly to higher production and sales of alcohol and an improvement in the selling price compared to the prior year. Sales of vital wheat gluten were approximately even with sales in fiscal 1996, as the Company continued to minimize gluten production in the face of greatly increased competition from European Union producers. Sales of the Company's premium wheat starch grew approximately 14% above sales in fiscal 1996 as the result of greater unit sales and a modest price improvement. The cost of sales in fiscal 1997 increased by approximately $23.6 million above the cost of sales in fiscal 1996. This occurred partially as the result of a $16.7 million rise in raw material costs for grain, as more grain was required to satisfy increased production needs. In addition, the Company experienced a jump of approximately $4.7 million in energy costs due principally to higher than normal prices for natural gas during the second and third quarters, and a rise of approximately $1.2 million in maintenance and repair costs. The remainder of the increase in the total cost of sales compared to fiscal 1996 was mainly attributable to costs associated with increased product sales, principally in the food grade alcohol area. Selling, general and administrative expenses in fiscal 1997 were approximately even with selling, general and administrative expenses the prior year. This principally was the result of the continuation 12 of an intense cash management program which was implemented in fiscal 1996 and included reductions in compensation as well as in costs for management and employee incentive programs. The consolidated effective income tax rate was consistent for all periods. The general effects of inflation were minimal. As the result of the foregoing factors, the Company experienced net income of $131,000 in fiscal 1997 compared to a net loss of $3,406,000 in fiscal 1996. Fiscal 1996 Compared to Fiscal 1995 The Company experienced a $3,406,000 net loss in fiscal 1996 compared to net income of $3,339,000 in fiscal 1995. The decline, which actually began in the third quarter of fiscal 1995, was due primarily to unusually high raw material costs for grain in the face of greatly increased competition from foreign exporters of vital wheat gluten and a relatively flat market for fuel grade alcohol. The combination of these factors significantly restricted the ability of the Company to adjust the price of its gluten and fuel alcohol to compensate for the increased grain costs. In response to these negative conditions, the Company implemented an intense cash management program to reduce costs and improve cash flow, including reductions in management and administrative compensation and benefits, and strategies to maximize operating results by maintaining a high degree of flexibility in targeting production levels and product sales mixes. The upward surge in grain prices was driven by a worldwide shortage of grain supplies, and concerns about crop conditions during the 1996 season due principally to weather-related factors. As a result, the Company's corn and milo costs averaged 44% more per bushel in fiscal 1996 compared to the prior year. Wheat costs in fiscal 1996 averaged 32% more per bushel versus the average in fiscal 1995. While the Company used only 2.3 million more bushels of grain in fiscal 1996, its total combined cost for wheat, corn and milo for the year rose approximately $27 million above grain expenditures the prior year. The Company's ability to adjust grain procurement strategies regularly through a strengthened risk management program prevented this increase from being substantially higher. Wheat gluten prices failed to adjust to the significant rise in wheat costs, while record amounts of gluten from the European Union (E.U.) poured into the United States. Increased alcohol production in fiscal 1996 resulted from growth in unit sales of food grade alcohol, which is sold for beverage and industrial applications. This more than offset a decline in unit sales of fuel grade alcohol. A reduction in fuel alcohol sales was implemented by the Company due to depressed fuel alcohol prices and exceptionally high grain costs. Fuel alcohol prices remained flat due to increased capacities throughout the industry and low gasoline prices during a substantial portion of fiscal 1996. Due to the significant grain cost increases, combined with adverse market conditions for fuel alcohol and wheat gluten, operations at the Company's Pekin plant were halted for an extended maintenance shutdown during the last month of fiscal 1996. This resulted in reduced production of all of the Company's principal products during the fourth quarter. Net sales in fiscal 1996 increased by approximately $14.4 million above sales in fiscal 1995. The increase was principally due to increased unit sales of food grade alcohol and alcohol by-products, the latter consisting mainly of distillers feeds, and higher sales of premium wheat starch. These increases were partially offset by a 21% decrease in sales of wheat gluten due to intense competitive pressures from European Union gluten producers. A 15% increase in total alcohol sales resulted from strong demand for food grade beverage and industrial alcohol, mainly in the second and third quarters. Sales of distillers feed climbed 45% compared to the prior year as the result of increased alcohol production. The Company's sales of wheat starch in fiscal 1996 continued the upward pattern experienced over the previous several years, rising noticeably 13 Management's Discussion and Analysis above fiscal 1995. The increase resulted from higher volumes of unmodified, modified and specialty wheat starches, which was made possible by a 70% increase in the Company's total starch production capacity. Completion of the additional capacity occurred during the first month of fiscal 1996, greatly improving the Company's ability to satisfy increased demand for wheat starch. The cost of sales in fiscal 1996 increased by approximately $31.0 million above the cost of sales in fiscal 1995. The principal cause was a nearly $27.0 million increase in raw material costs for grain. Other manufacturing cost increases principally included a $5.2 million increase in depreciation and a $2.4 million rise in operating costs associated with increased energy requirements resulting from the Company's expanded production facilities at its Pekin, Illinois plant. These increases were partially offset by a $4.3 million decrease in maintenance and repair and costs, which returned to more normal levels following the completion of the expansion project in the first quarter of fiscal 1996. Selling, general and administrative expenses in fiscal 1996 were down approximately $1.6 million compared to the prior year. This principally was due to a decrease of almost $1.2 million resulting from reductions in compensation, and in costs for the Company's management and employee incentive programs. These and other reductions helped to more than offset increases which were incurred in a minor segment of the expense categories. The consolidated effective income tax rate was consistent for all periods. Other income amounted to $1.3 million, compared to a loss of $4.2 in fiscal 1995, which was primarily due to the $5.0 million write-off of a coal-fired boiler at the Company's Pekin plant. Interest expense increased as most of the new production facilities in Pekin came on line during fiscal 1995. Therefore, far less interest was capitalized as part of these projects. As the result of the foregoing factors, the Company experienced a net loss of $3,406,000 in fiscal 1996 compared to net income of $3,339,000 in fiscal 1995. Quarterly Financial Information Generally, the Company's sales are not seasonal except for variations affecting fuel grade alcohol, beverage alcohol and gluten sales. In recent years, demand for fuel grade alcohol has tended to increase during the fall and winter to satisfy clean air standards during those periods. 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, 1997 and 1996. Note: sales for the period ended June 30, 1996 were significantly lower than sales for the same period in fiscal 1997 due principally to reduced production resulting from an extended maintenance and repair shutdown at the Company's Pekin, Illinois plant during the month of June, 1996. Quarter Ending Sept. 30 Dec. 31 March 31 June 30 Total -------- ------- -------- ------- ----- (in thousands except per share amounts) Fiscal 1997 Sales $53,173 $55,249 $54,449 $61,862 $224,733 Gross profit 2,063 4,889 2,474 1,574 11,000 Net income (loss) (346) 1,205 3 (731) 131 Earnings(loss) per share (.04) .12 .00 (.08) .01 Fiscal 1996 Sales $47,160 $55,751 $53,871 $37,856 $194,638 Gross profit (937) 3,619 1,304 479 4,465 Net income (loss) (2,377) 195 (410) (814 (3,406) Earnings (loss) per share (.25) .02 (.04) (.08) (.35) 14 Liquidity and Capital Resources The following table is presented as a measure of the Company's liquidity and financial condition: At June 30, ----------- 1997 1996 ---- ---- (in thousands) Cash and cash equivalents $ 6,005 $ 3,759 Working capital 36,580 37,113 Amounts available under lines of credit 29,000 18,600 Note payable and long-term debt 30,933 40,933 Stockholders' equity $108,561 $109,222 The Company's positive cash flow generated from operations allowed it to reduce its debt by $10 million during fiscal 1997. Continued positive cash flow has allowed the Company to further reduce its debt by another $5.0 million since the end of the fiscal year. Additionally, the Company's Board of Directors authorized the purchase of up to 200,000 shares of its common stock to fund the Company's stock option plans and for other corporate purposes. Pursuant to that authority, 65,000 shares were purchased for $791,700 prior to the fiscal year end. The measures instituted in the previous fiscal year, including stringent cost reductions, suspension of quarterly cash dividends to stockholders and changes in production, purchasing and marketing strategies, remain in effect. At June 30, 1997, the Company had $3.4 million committed to improvements and replacements of existing equipment. The Company continues to maintain a strong working capital position and a low debt-to-equity ratio, while generating positive cash flows. Management believes this strong financial position and available lines of credit, combined with the strategies which continue to be implemented, position it to take advantage of a return to more favorable conditions. Forward-Looking Information Readers are cautioned that in addition to historical information contained herein, this Annual Report also includes forward-looking statements and information which are based on management's beliefs as well as on assumptions made by and information currently available to management. When used in this report, the words "anticipate," "intend'" "believe," "estimate," "expect" and similar expressions are intended to identify forward-looking statements. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which could cause the Company's future results and stock values to differ materially from those expressed in such forward-looking statements. 15 Independent Accountant'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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ Baird, Kurtz & Dobson BAIRD, KURTZ & DOBSON Kansas City, Missouri August 8, 1997 16 Financial Review Consolidated Statements of Operations Years Ended June 30, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- (in thousands, except per share amounts) Net Sales $224,733 $194,638 $180,252 Cost of sales 213,733 190,173 159,149 ------- ------- ------- Gross profit 11,000 4,465 21,103 Selling, general & administrative expenses 9,169 9,001 10,553 ----- ----- ------ (4,536) 10,550 Other operating income (expense) 370 159 (107) --- --- ---- Income (loss) from operations 2,201 (4,377) 10,443 Other income (loss), net 618 1,309 (4,225) Interest expense (2,604) (2,556) (606) ------ ------ ---- Income (loss) before income taxes 215 (5,624) 5,612 Provision (credit) for income taxes 84 (2,218) 2,273 Net income (loss) $ 131 $ (3,406) $ 3,339 -------- -------- -------- Earnings (loss) per common share $ .01 $ (.35) $ .34 ======== ======== ======== See Notes to Consolidated Financial Statements 17 Consolidated Balance Sheets June 30, 1997 and 1996 1997 1996 ---- ---- Assets (in thousands) Current Assets Cash and cash equivalents $ 6,005 $ 3,759 Receivables (less allowance for doubtful accounts (1997 and 1996 - $285) 26,276 18,365 Inventories 15,000 19,913 Prepaid expenses 988 573 Deferred income taxes 1,688 1,531 Income taxes receivable 227 3,063 --- ----- Total Current Assets 50,184 47,204 ------ ------ Property & equipment, at cost 213,813 210,304 Less accumulated depreciation 99,099 85,155 ------ ------ Property & equipment, net 114,714 125,149 ------- ------- Other assets 432 432 --- --- Total assets $165,330 $172,785 ======== ======== Liabilities & Stockholders' Equity Current Liabilities Notes payable $ 1,000 Accounts payable 8,196 6,416 Accrued expenses 4,408 3,675 ----- ----- Total Current Liabilities 13,604 10,091 ------ ------ Long-term debt 29,933 40,933 ------ ------ Post-retirement benefits 6,245 5,945 ----- ----- Deferred income taxes 6,987 6,594 ----- ----- Stockholders' equity Capital stock 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 9,765,172 6,715 6,715 Additional paid-in capital 2,485 2,485 Retained earnings 100,149 100,018 ------- ------- 109,353 109,222 Treasury stock, at cost Common; 1997-65,000 shares (792) ---- ------- Total stockholders' equity 108,561 109,222 ------- ------- Total liabilities and stockholders' equity $165,330 $172,785 ======== ======== See Notes to Consolidated Financial Statements 18 Financial Review
Consolidated Statements of Stockholders' Equity Years Ended June 30, 1997, 1996 and 1995 Additional Preferred Common Paid-in Retained Treasury Stock Stock Capital Earnings Stock Total ----- ----- ------- -------- ----- ----- (in thousands) 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 1996 net loss (3,406) (3,406) -- ------ ------ ------ ------ Balance, June 30, 1996 4 6,715 2,485 100,018 109,222 Purchase of treasury stock $(792) (792) 1997 net income 131 131 ---- --- --- Balance, June 30, 1997 $4 $6,715 $2,485 $100,149 $(792) $108,561 === ==== == ====== ====== ======== ===== ========
See Notes to Consolidated Financial Statements 19 Financial Review Consolidated Statements of Cash Flows Years Ended June 30, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- (In Thousands) Cash Flows from Operating Activities Net income (loss) $ 131 $(3,406) $3,339 Items not requiring (providing) cash: Depreciation 14,041 13,854 8,681 (Gain) loss on sale of assets (18) (41) 4,696 Deferred income taxes 236 611 (628) Changes in: Accounts receivable (7,911) 3,185 (1,198) Inventories 4,913 (5,223) (1,461) Accounts payable 1,578 4 1,780 Income taxes (receivable) payable 2,836 (725) (3,570) Other 618 (1,238) (929) --- ------ ---- Net cash provided by operating activities 16,424 7,021 10,710 ------ ----- ------ Cash Flows From Investing Activities Additions to property & equipment (3,491) (5,516) (38,870) Proceeds from sale of equipment 105 71 615 Proceeds from notes receivable 919 645 Change in current & non-current investments, net 14,504 ------ ----- ------ Net cash used in investing activities (3,386) (4,526) (23,106) ------ ----- ------ Cash Flows From Financing Activities Purchase of treasury stock (792) Principle payments on long-term debt (10,000) Proceeds from issuance of long-term debt 2,025 13,908 Dividends paid (1,221) (4,884) ------ ------ Net cash (used in) provided by financing activities (10,792) 804 9,024 ------- --- ----- Increase (Decrease) in Cash & Cash Equivalents 2,246 3,299 (3,372) Cash & Cash Equivalents, Beginning of Year 3,759 460 3,832 ----- --- ----- Cash & Cash Equivalents, End of Year $ 6,005 $ 3,759 $ 460 ======== ======== ======== See Notes to Consolidated Financial Statements 20 Financial Review Notes to consolidated financial statements Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations. The activities of Midwest Grain Products, Inc. and its subsidiaries consist of the production of vital wheat gluten, specialty wheat proteins, 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's Atchison plant. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. In connection with the purchase of raw materials, principally corn and wheat, for anticipated operating requirements, Midwest Grain Products, Inc. enters into commodity contracts to reduce the risk of future grain price increases. These contracts, including those terminated early, are accounted for as hedges and, accordingly, gains and losses are deferred and recognized in cost of sales as part of product cost when contract positions are settled and as related products are sold. If grain requirements fall below anticipated needs and open contract levels, then gains and losses are recognized immediately for the excess open contract levels. At June 30, 1997, Midwest Grain Products, Inc. had entered into contracts hedging future corn prices through the first quarter of fiscal 1998. 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, 1997 1996 1995 ---- ---- ---- (in thousands) Interest costs capitalized $ 364 $1,570 Interest costs charged to expense $2,604 2,556 606 ------ ----- --- $2,604 $2,920 $2,176 ====== ====== ====== Earnings Per Common Share. Earnings per common share data is based upon the weighted average number of shares and common share equivalents, except when anti-dilutive, totaling 9,761,967 at June 30, 1997 and 9,765,172 at June 30, 1996 and 1995. Cash Equivalents. The Company considers all liquid investments with maturities of three months or less to be cash equivalents. Income Taxes. Deferred tax liabilities and assets are recognized for the tax effect of the differences between the financial statement and tax bases 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. Note 2: Inventories Inventories consist of the following: June 30, 1997 1996 ---- ---- (in thousands) Whiskey, alcohol and spirits $ 4,017 $ 9,830 Unprocessed grain 5,803 5,203 Operating Supplies 3,105 2,632 Gluten 757 1,208 By-products and other 1,318 1,040 ----- ----- $15,000 $19,913 ======= ======= 21 Financial Review Notes to consolidated financial statements Note 3: Property and Equipment Property and equipment consists of the following: June 30, 1997 1996 ---- ---- (in thousands) Land, buildings and improvements $ 17,411 $ 17,411 Transportation equipment 1,081 1,166 Machinery equipment 193,923 186,154 Construction in progress 1,398 5,573 ----- ----- 213,813 210,304 Less accumulated depreciation 99,099 85,155 ------ ------ $114,714 $125,149 ======== ======== Note 4: Accrued Expenses Accrued expenses consist of the following: June 30, 1997 1996 ---- ---- (in thousands) Excise taxes $ 642 $ 236 Employee benefit plans (Note 10) 768 374 Salaries and wages 963 770 Property taxes 593 519 Insurance 723 991 Interest 696 696 Other expenses 23 89 -- -- $4,408 $3,675 ====== ====== Note 5: Long-Term Debt Long-term debt consists of the following: June 30, 1997 1996 ---- ---- (in thousands) Senior notes payable $25,000 $25,000 Line of credit 4,000 15,000 Other 933 933 --- --- Long-term portion $29,933 $40,933 ======= ======= 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, 1997, the Company had a $27 million unsecured revolving line of credit expiring on October 1, 1998, with interest at 1% below prime on which there was $4.0 million in borrowings at June 30, 1997. All other terms remain the same. The Company had four additional lines of credit totaling $7.0 million expiring on dates through April 1, 1998, with interest rates varying from prime to 1% below prime on which there were $1.0 million in borrowings at June 30, 1997. 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, minimum consolidated tangible net worth of $78 million and debt service coverage ratio of 1.5 to 1. The fair value of the senior notes payable debt, based upon a market rate of 7.35% at June 30, 1997 was $24,300,000. Aggregate annual maturities of long-term debt at June 30, 1997 are as follows: (in thousands) 1998 $ 0 1999 7,119 2000 2,335 2001 2,298 2002 2,273 Thereafter 15,908 ------ $29,933 ======= 22 Note 6: Income Taxes The provisions (credit) for income taxes are comprised of the following: Years Ended June 30, 1997 1996 1995 ---- ---- ---- (in thousands) Income taxes currently payable (receivable) $(152) $(2,829) $2,901 Income taxes deferred 236 611 (628) --- --- ---- $ 84 $(2,218) $2,273 ===== ======= ====== The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets are as follows: June 30, 1997 1996 ---- ---- (in thousands) Deferred tax assets: Accrued employee benefits $ 110 $ 156 Post-retirement liability 2,436 2,378 Insurance accruals 831 1,002 State operating loss carryforwards 447 341 Alternative minimum tax 723 Other 383 337 --- --- 4,930 4,214 ----- ----- Deferred tax liabilities: Accumulated depreciation (9,860) (8,857) Deferred gain on involuntary conversion (369) (420) ---- ---- (10,229) (9,277) ------- ------ Net deferred tax liability $ (5,299) $(5,063) ======== ======= The above net deferred tax liability is presented on the consolidated balance sheets as follows: June 30, 1997 1996 ---- ---- (in thousands) Deferred tax asset - current $ 1,688 $ 1,531 Deferred tax liability - long-term (6,987) (6,594) ------ ------ Net deferred tax liability $(5,299) $(5,063) ======= ======= No valuation allowance has been recorded at June 30, 1997 or 1996. A reconciliation of the provision for income taxes at the normal statutory federal rate to the provision (credit) included in the accompanying consolidated statements of operations is shown below: Years Ended June 30, 1997 1996 1995 ---- ---- ---- (in thousands) "Expected" provision (credit) at federal statutory rate (34%) $73 $(1,912) $1,908 Increases (decreases) resulting from: effect of state income taxes 9 (236) 223 Other 2 (70) 142 - --- --- Provision (credit) for income taxes $84 $(2,218) $2,273 === ======= ====== 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. 23 Financial Review Notes to consolidated financial statements Note 8: Other Operating Income (Expense) Other operating income (expense) consists of the following: Years Ended June 30, 1997 1996 1995 ---- ---- ---- (in thousands) Truck operations $342 $136 $(222) Warehousing and storage operations (13) (32) 41 Miscellaneous 41 55 74 -- -- -- $370 $159 $(107) ==== ==== ===== Note 9: Energy Commitment During fiscal 1995, the Company negotiated a 15-year agreement to purchase steam heat and electricity from a utility for its Illinois operations. Steam heat is being purchased 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 at the Company's Illinois facility. 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 other expense of approximately $5.0 million during the fiscal year ended June 30, 1995. Note 10: Employee Benefit Plans Pension Plan. 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 costs included the following components: Years Ended June 30, 1997 1996 1995 ---- ---- ---- (in thousands) Service cost benefits earned during year $ 43 $ 54 $ 58 Interest cost on projected benefit obligations 158 150 144 Actual investment income earned on plan assets (358) (257) (233) Amortization of transition liability and difference between actual and expected return on plan assets 219 133 121 --- --- --- Pension cost $ 62 $ 80 $ 90 ===== ===== ===== The funded status of the plan is as follows: June 30, 1997 1996 ---- ---- (in thousands) Accumulated benefit obligations, including vested benefits of $2,141 and $2,183 $2,151 $2,191 ====== ====== Plan assets at fair value $2,349 $2,071 Projected benefit obligations for participants' service rendered to date 2,151 2,191 ----- ----- Projected benefit obligations in excess of plan's assets 198 (120) Unrecognized gains (333) (75) Unrecognized prior service cost 51 57 Unrecognized net obligation at July 1, 1987 being recognized over the participants' average remaining service period 88 106 Adjustment required to recognize the minimum liability (88) --- --- Pension asset (liability) $ 4 $ (120) ====== ====== 24 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%. Employee Stock Ownership Plans. 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 $726,000, $374,000 and $998,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Contributions are made in the form of cash and/or additional shares of common stock. Post-Retirement Benefit Plan. 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 status of the Company's plans at June 30, 1997 and 1996 was as follows: June 30, 1997 1996 ---- ---- (in thousands) Accumulated post-retirement benefit obligations Retirees $3,395 $3,360 Active plan participants 1,650 1,526 ----- ----- Unfunded accumulated obligation 5,045 4,886 Unrecognized actuarial gain (loss) 1,200 1,059 ----- ----- Accrued post retirement benefit cost $6,245 $5,945 ====== ====== Net post-retirement benefit costs included the following components: June 30, 1997 1996 ---- ---- (in thousands) Service cost $100 $159 Interest cost 353 424 (Gain) loss amortization (23) --- $430 $583 ==== ==== 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 9.75% (compared to 10.0% assumed for 1996), reducing to 8.0% over eight years and 6.0% over 16 years. A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $300,000 at June 30, 1997, and the service and interest cost by $42,000 for the year then ended. A weighted average discount rate of 8.0% was used in determining the accumulated benefit obligation. Stock Options. The Company has two stock option plans, the Stock Incentive Plan of 1996 ("The 1996 Plan") and the Stock Option Plan for Outside Directors ("The Directors Plan"). These Plans permit the issuance of stock awards, options and stock appreciation rights to selected employees and outside directors of the Company. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost been determined consistent with FASB Statement No. 123, the Company's 1997 net income and earnings per share would have been reduced to the following pro forma amounts: Net Income (loss): As Reported $ 131 Pro Forma $ (82) Primary Earnings per share: As Reported $ .01 Pro Forma $(.01) Fully Diluted EPS: As Reported $ .01 Pro Forma $(.01) Under the 1996 Plan, the Company may grant incentives for up to 450,000 shares of the Company's common stock to certain of the Company's management personnel. The term of each award shall be determined by the committee of the Board of Directors charged with administering the 1996 Plan. Under the terms of the 1996 Plan, options granted may be either nonqualified or incentive stock options and the exercise price may not be less than the fair value on the date of the 25 Financial Review Notes to consolidated financial statements grant. Through June 30, 1997, the Company has granted options on 176,500 shares becoming exercisable in yearly increments through January, 2001. Options granted through June 30, 1997 have exercise prices equal to fair market value on the date of grant. Under the Director's Plan each non-employee or "outside" director of the Company receives on the day after each annual meeting of stockholders an option to purchase 1,000 shares of the Company's common stock at a price equal to the fair market value of the Company's common stock on such date. Options become exercisable on the 184th day following the date of grant and expire not later than five years after the date of grant. Subject to certain adjustments, a total of 90,000 shares are reserved for annual grants under the Plan, subject to certain adjustments. Through June 30, 1997, the Company had granted options on 7,000 shares, all of which became exercisable in April, 1997. A summary of the status of the Company's two stock option plans at June 30, 1997 and 1996 and changes during the years then ended is presented below: Years Ended June 30, 1997 1996 ---- ---- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ ----- ------ ----- (in thousands) Outstanding Beginning of Year 90,000 $14.00 Granted 93,500 15.32 90,000 $14.00 Exercised - -------------------------------------------------------------------------------- Outstanding End of Year 183,500 $14.67 90,000 $14.00 ======= ====== ====== ====== As of June 30, 1997, 90,000 of the 183,500 options outstanding have an exercise price of $14 and a remaining contractual life of 3.5 years. Of these options, 27,750 are exercisable at June 30, 1997. Options outstanding of 86,500 have an exercise price of $15.25 and a remaining contractual life of 4.5 years. None of these options are exercisable at June 30, 1997. The remaining 7,000 shares have an exercise price of $16.25 and all are exercisable at June 30, 1997. These options must be exercised by October, 2001. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used for the year ended June 30, 1997: Risk free interest rate of 6.13%; expected dividend yield of 0%; expected volatility of 34%. Note 11: Operating Leases The Company has several noncancellable operating leases for railcars which expire from July, 1998 through November, 2001. 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, 1997 are as follows: (in thousands) 1998 $1,804 1999 1,566 2000 555 2001 93 2002 56 ---- -- Future minimum lease payments $4,074 ====== Rental expense for all operating leases with terms longer than one month totaled $1,438,466, $1,546,000 and $951,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Minimum future rentals receivable under non-cancellable operating subleases at June 30, 1997, were $155,500. 26 Note 12: Significant estimates and concentrations Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain significant concentrations. Those matters include the following: Substantially all of the Company's labor force is covered by collective bargaining agreements which expire August 31, 1999 at the Atchison plant and on November 1, 2000 at the Pekin plant. Under its self-insurance plan, the Company accrues the estimated expense of health care and workers' compensation claims costs based on claims filed subsequent to year-end and an additional amount for incurred but not yet reported claims based on prior experience. An accrual for such costs of $723,000 is included in the accompanying 1997 financial statements. Claims payments based on actual claims ultimately filed could differ materially from these estimates. During the years ended June 30, 1997, 1996 and 1995, the Company had sales to one customer accounting for approximately 8.2%, 10.7% and 10.7%, respectively of consolidated sales. Note 13: Additional Cash Flows Information Years Ended June 30, 1997 1996 1995 ---- ---- ---- (in thousands) Noncash Investing and Financing Activities: Purchase of property and equipment in accounts payable $ 211 $ 12 $1,407 Dividends declared 1,221 Additional Cash Payment Information Interest paid (net of amount capitalized 1,909 2,585 519 Income taxes paid (refunded) $(2,986) $(2,105) $4,200 ------- ------- ------ 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.