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.