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