UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[ X ]
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2008.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _________________________ to
_________________________________
Commission
File Number: 0-17196
MGP
INGREDIENTS, INC.
(Exact name of registrant as specified
in its charter)
KANSAS
|
48-0531200
|
(State
or other jurisdiction of incorporation or organization)
Identification
No.)
|
(I.R.S.
Employer
|
100
Commercial Street, Atchison Kansas
|
66002
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(913)
367-1480
(Registrant’s
telephone number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a “smaller reporting company, See definition
of “large accelerated filer”, “accelerated filer and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
One)
[ ]
Large accelerated
filer [
X ] Accelerated filer
[ ] Non-accelerated
filer [
] Smaller Reporting Company
Indicated
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
[ ]Yes
[ X ] No
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.
Common
stock, no par value
16,563,078
shares outstanding
as of
September 30, 2008
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
Item
1. Financial
Statements
|
|
Condensed
Consolidated Statements of Income
|
4 |
Condensed
Consolidated Balance Sheets
|
5 |
Condensed
Consolidated Statements of Cash Flows
|
6 |
Notes
to Condensed Consolidated Financial Statements
|
7 |
|
|
Item
2. Management’s Discussion and
Analysis of Financial
|
|
Condition and Results of Operations
|
19 |
|
|
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
|
33 |
Item
4. Controls and
Procedures
|
35 |
|
|
PART
II. OTHER INFORMATION
|
|
Item
1. Legal
Proceedings
|
36 |
Item
1A. Risk Factors
|
36 |
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds.
|
37 |
Item
3. Defaults upon Senior
Securities
|
37 |
Item
4. Submission of Matters to a
Vote of Security Holders
|
37 |
Item
6. Exhibits
|
38 |
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements as well as historical
information. All statements, other than statements of historical
facts, included in this Quarterly Report on Form 10-Q regarding the prospects of
our industry and our prospects, plans, financial position and business strategy
may constitute forward-looking statements. In addition,
forward-looking statements are usually identified by or are associated with such
words as “intend,” “plan”, “believe,” “estimate,” “expect,” “anticipate,”
“hopeful,” “should,” “may,” “will”, “could” and or the negatives of these terms
or variations of them or similar terminology. They reflect
management’s current beliefs and estimates of future economic circumstances,
industry conditions, Company performance and financial results and are not
guarantees of future performance. All such forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those contemplated by the relevant forward-looking
statement. Important factors that could cause actual results to
differ materially from our expectations include, among others: (i)
the availability and cost of grain, (ii) fluctuations in gasoline prices, (iii)
fluctuations in energy costs, (iv) competitive environment and related market
conditions, (v) our ability to realize operating efficiencies, (vi) the
effectiveness of our hedging programs, (vii) access to capital and (viii)
actions of governments. For further information on these and other
risks and uncertainties that may affect our business, see Item 1A. Risk Factors of our
Annual Report on Form 10-K for the fiscal year ended June 30, 2008 and Part II,
Item 1A, Risk Factors
in this Quarterly Report on Form 10-Q.
PART
I
ITEM
1 FINANCIAL STATEMENTS
MGP
INGREDIENTS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Dollars
in thousands, except per-share amounts
|
|
Quarter
ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
99,020 |
|
|
$ |
87,977 |
|
Cost
of sales
|
|
|
115,707 |
|
|
|
82,117 |
|
Gross
profit
|
|
|
(16,687 |
) |
|
|
5,860 |
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
6,115 |
|
|
|
6,279 |
|
Loss
from operations
|
|
|
(22,802 |
) |
|
|
(419 |
) |
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
41 |
|
|
|
190 |
|
Interest
expense
|
|
|
(728 |
) |
|
|
(276 |
) |
Equity
in loss of joint venture
|
|
|
(16 |
) |
|
|
- |
|
Loss
before income taxes
|
|
|
(23,505 |
) |
|
|
(505 |
) |
|
|
|
|
|
|
|
|
|
Benefit
for income taxes
|
|
|
(6,262 |
) |
|
|
(152 |
) |
Net
loss
|
|
|
(17,243 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
(1,502 |
) |
|
|
1,350 |
|
Comprehensive
income (loss)
|
|
$ |
(18,745 |
) |
|
$ |
997 |
|
|
|
|
|
|
|
|
|
|
Per
Share Data
|
|
|
|
|
|
|
|
|
Total
basic loss per common share
|
|
$ |
(1.04 |
) |
|
$ |
(0.02 |
) |
Total
diluted loss per common share
|
|
$ |
(1.04 |
) |
|
$ |
(0.02 |
) |
See
accompanying notes to condensed consolidated financial statements
MGP
INGREDIENTS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in Thousands)
(Unaudited)
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
|
June
30,
2008
|
|
ASSETS
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
- |
|
|
$ |
2,241 |
|
|
$ |
- |
|
Restricted
cash
|
|
|
2,063 |
|
|
|
30 |
|
|
|
3 |
|
Receivables
(less allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008 - $288; September 30, 2007 -$223 and June 30, 2008
-$264)
|
|
|
33,949 |
|
|
|
30,491 |
|
|
|
34,087 |
|
Inventory
|
|
|
60,134 |
|
|
|
52,905 |
|
|
|
63,620 |
|
Prepaid
expense
|
|
|
2,062 |
|
|
|
2,451 |
|
|
|
362 |
|
Deposits
|
|
|
2,243 |
|
|
|
922 |
|
|
|
580 |
|
Deferred
income taxes
|
|
|
2,696 |
|
|
|
2,289 |
|
|
|
394 |
|
Refundable
income taxes
|
|
|
15,036 |
|
|
|
1,576 |
|
|
|
8,570 |
|
Assets
held for sale
|
|
|
5,600 |
|
|
|
- |
|
|
|
5,600 |
|
Total current
assets
|
|
|
123,783 |
|
|
|
92,905 |
|
|
|
113,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
316,193 |
|
|
|
362,047 |
|
|
|
315,782 |
|
Less
accumulated depreciation
|
|
|
(209,608 |
) |
|
|
(231,925 |
) |
|
|
(206,808 |
) |
Property and equipment,
net
|
|
|
106,585 |
|
|
|
130,122 |
|
|
|
108,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in joint venture
|
|
|
355 |
|
|
|
- |
|
|
|
399 |
|
Other
assets
|
|
|
395 |
|
|
|
656 |
|
|
|
479 |
|
Total assets
|
|
$ |
231,118 |
|
|
$ |
223,683 |
|
|
$ |
223,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
432 |
|
|
$ |
4,106 |
|
|
$ |
432 |
|
Liabilities
related to assets held for sale
|
|
|
7,916 |
|
|
|
- |
|
|
|
8,760 |
|
Revolving
credit facility
|
|
|
50,656 |
|
|
|
11,000 |
|
|
|
23,000 |
|
Accounts
payable
|
|
|
22,966 |
|
|
|
14,775 |
|
|
|
23,315 |
|
Accrued
expenses
|
|
|
5,611 |
|
|
|
6,518 |
|
|
|
6,582 |
|
Total current
liabilities
|
|
|
87,581 |
|
|
|
36,399 |
|
|
|
62,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
debt
|
|
|
1,315 |
|
|
|
7,922 |
|
|
|
1,301 |
|
Deferred
credit
|
|
|
6,904 |
|
|
|
9,399 |
|
|
|
7,127 |
|
Other
non-current liabilities
|
|
|
7,884 |
|
|
|
8,035 |
|
|
|
8,047 |
|
Deferred
income taxes
|
|
|
9,108 |
|
|
|
14,352 |
|
|
|
7,630 |
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred,
5% non-cumulative; $10 par value; authorized 1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
shares;
issued and outstanding 437 shares
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
No
par value; authorized 40,000,000 shares; issued
19,530,344 shares
|
|
|
6,715 |
|
|
|
6,715 |
|
|
|
6,715 |
|
Additional
paid-in capital
|
|
|
12,047 |
|
|
|
11,108 |
|
|
|
11,862 |
|
Retained
earnings
|
|
|
114,570 |
|
|
|
144,959 |
|
|
|
131,813 |
|
Accumulated
other comprehensive income (loss)
|
|
|
13 |
|
|
|
118 |
|
|
|
1,515 |
|
|
|
|
133,349 |
|
|
|
162,904 |
|
|
|
151,909 |
|
Treasury
stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Common;
September 30, 2008 - 2,967,266 shares; September 30, 2007 - 3,029,841
shares and June 30, 2008 - 2,969,766 shares
|
|
|
(15,023 |
) |
|
|
(15,328 |
) |
|
|
(15,035 |
) |
Total stockholders’
equity
|
|
|
118,326 |
|
|
|
147,576 |
|
|
|
136,874 |
|
Total liabilities and
stockholders’ equity
|
|
$ |
231,118 |
|
|
$ |
223,683 |
|
|
$ |
223,068 |
|
See
accompanying notes to condensed consolidated financial statements
MGP
INGREDIENTS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
in Thousands)
(Unaudited)
|
|
Quarter
Ended
|
|
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(17,243 |
) |
|
$ |
(353 |
) |
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,425 |
|
|
|
3,827 |
|
Loss
(gain) on sale of assets
|
|
|
(85 |
) |
|
|
10 |
|
Deferred
income taxes
|
|
|
(812 |
) |
|
|
1,828 |
|
Equity
in loss of joint venture
|
|
|
16 |
|
|
|
- |
|
Changes
in working capital items:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(2,060 |
) |
|
|
3,306 |
|
Accounts
receivable
|
|
|
138 |
|
|
|
3,807 |
|
Inventory
|
|
|
3,486 |
|
|
|
(8,960 |
) |
Accounts
payable and accrued expenses
|
|
|
(977 |
) |
|
|
(2,768 |
) |
Deferred
credit
|
|
|
(223 |
) |
|
|
(310 |
) |
Income
taxes payable/receivable
|
|
|
(6,466 |
) |
|
|
(1,212 |
) |
Gains
previously deferred in other comprehensive income
|
|
|
(1,474 |
) |
|
|
- |
|
Other
|
|
|
(3,363 |
) |
|
|
(2,337 |
) |
Net
cash used in operating
|
|
|
|
|
|
|
|
|
Activities
|
|
|
(25,638 |
) |
|
|
(3,162 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(1,686 |
) |
|
|
(1,477 |
) |
Proceeds
from disposition of equipment
|
|
|
487 |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(1,199 |
) |
|
|
(1,477 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from stock plans
|
|
|
11 |
|
|
|
43 |
|
Proceeds
from long-term debt and capital leases
|
|
|
150 |
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(980 |
) |
|
|
(1,063 |
) |
Proceeds
from line of credit
|
|
|
33,456 |
|
|
|
7,000 |
|
Principal
payments on line of credit
|
|
|
(5,800 |
) |
|
|
(3,000 |
) |
Net
cash provided by
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
26,837 |
|
|
|
2,980 |
|
|
|
|
|
|
|
|
|
|
Decrease in
cash and cash equivalents
|
|
|
- |
|
|
|
(1,659 |
) |
Cash
and cash equivalents, beginning of year
|
|
|
- |
|
|
|
3,900 |
|
Cash
and cash equivalents, end of period
|
|
$ |
- |
|
|
$ |
2,241 |
|
See accompanying
notes to condensed consolidated financial statements
MGP
INGREDIENTS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Accounting Policies and Basis of Presentation.
The
accompanying condensed consolidated financial statements of MGP Ingredients,
Inc. and its subsidiaries ("Company") reflect all adjustments (consisting only
of normal adjustments) which, in the opinion of the Company’s management, are
necessary to fairly present the financial position, results of operations and
cash flows of the Company. These unaudited condensed consolidated
financial statements as of and for the period ended September 30, 2008 should be
read in conjunction with the consolidated financial statements and notes thereto
in the Company’s Form 10-K Annual Report for the fiscal year ended June 30, 2008
filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year.
In
accordance with the guidance of Staff Accounting Bulletin No. 108, these interim
consolidated financial statements reflect immaterial adjustments made to the
Company’s June 30, 2008 and September 30, 2007 balance sheets. None
of these adjustments had any impact upon the Company’s previously reported
earnings. For the balance sheet as of June 30, 2008, the Company
reclassified $2.5 million from liabilities related to assets held for sale to
deferred credit, reclassified $2.9 million from other non-current liabilities to
additional paid-in capital to reflect equity share-based awards, reclassified
deferred credits totaling $7.1 million from current to long-term liabilities and
reclassified current deferred tax assets of $2.9 million to reduce non-current
deferred tax liabilities. For the balance sheet as of September 30,
2007, the Company reclassified $2.0 million from other current liabilities to
additional paid-in capital to reflect equity share-based awards, reclassified
deferred credits totaling $9.4 million from current liabilities to non-current
liabilities and reclassified current deferred tax assets of $3.8 million to
reduce non-current deferred tax liabilities.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Fair Value
Accounting
On
July 1, 2008, the Company adopted, without any material effect on our
consolidated financial statements, the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 157, Fair Value Measurement, for
our financial assets and liabilities with respect to which the Company has
recognized or disclosed at fair value on a recurring basis. In
February 2008, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No.
157, which delays the effective date for nonfinancial assets and
non-financial liabilities to fiscal years beginning after November 15,
2008, except for items that are measured at fair value in the financial
statements on a recurring basis at least annually. Beginning July 1, 2009,
the Company will adopt the provisions for nonfinancial assets and nonfinancial
liabilities that are not required or permitted to be measured at fair value on a
recurring basis. Management does not expect the provisions of SFAS No. 157
related to these items to have a material effect on the consolidated financial
statements.
Overdrafts
The
Company’s historical policy has been to record book overdrafts, checks
outstanding, which have not been presented to the bank for payment, as accounts
payable. Changes in the amount of book overdrafts outstanding between
periods are reported as operating cash flows. The amount of book
overdrafts at September 30, 2008 and June 30, 2008 were $5.4 million and $4.4
million respectively.
Impairment
The
Company tests its long-lived assets for impairment whenever events or conditions
and circumstances indicate a carrying amount of an asset may not be
recoverable. During the first quarter of our fiscal year, declines in
overall equity values, including our common stock value, triggered an impairment
evaluation. Updated forecasts that reflect recent changes made to our
business were used in this analysis. The use of forecasts requires
considerable management judgment. Management believes the judgments
used in this analysis are reasonable. The testing and analysis did
not identify any impairment at September 30, 2008 (see Note 10 Subsequent
Events).
Note
2. Uncured Defaults on Indebtedness
At June
30, 2008, the Company was not in compliance with the tangible net worth and the
EBITDA based financial covenants in its Credit Agreement and the fixed charge
coverage ratio requirement of its 5.26% Industrial Revenue Bond
obligation. Its tangible net worth at such date, as
defined in the Credit Agreement, was $132.5 million instead of at least $135
million, its fixed charge coverage ratio was 0.56 to 1
instead of at least 1.5 to 1 and its leverage ratio was (11.03) to 1 instead of
at least 3.0 to 1. Its fixed charge coverage ratio, as defined in its
lease related to its 5.26% industrial revenue bond lease, was (0.51) to 1
instead of at least 1.5 to 1. As a result, the Company was in
default under the Credit Agreement and 5.26% industrial revenue bond
lease. Due to cross default provisions, it also was in
default under its 5.45% Secured Promissory Note to Commerce Bank and its 5.26%
Secured Promissory Note and 5.92% Secured Promissory Note to GECPF and GECC,
respectively. As of September 16, 2008, GECPF and GECC waived the
default under the industrial revenue bond lease and the resulting cross defaults
under the Company’s 5.26% Secured Promissory Note and 5.92% Secured
Promissory Note. As of September 3, 2008, Commerce Bank waived the
default under the 5.45% Promissory Note and the lenders under the Credit
Agreement agreed to an amendment providing for a standstill period expiring on
October 31, 2008, unless the Company defaulted under interim
covenants. The amendment imposed new, monthly interim minimum
adjusted EBITDA requirements (as defined in the credit agreement) of
$(7,500,000) for July, $(2,500,000) for August and $(1,400,000) for September,
and minimum tangible net worth requirements (as defined in the credit
agreement), of $125,000,000 at the end of July, $123,000,000 at the end of
August and $121,000,000 at the end of September. The Company met the
requirements for July and August but did not meet the September requirements and
as of October 25, 2008 was in forbearance default under the credit agreement and
was also in cross default under its 5.45% Secured Promissory Note to Commerce
Bank.
Although
it was in forbearance default, the Company’s lenders agreed to extend the
original expiration date of the forbearance period under its Credit Agreement,
as amended, to November 10, 2008, while a new amendment was being
discussed. Subsequently, as of November 7, 2008, the lenders under
the Credit Agreement entered a new amendment extending the standstill period to
February 27, 2009, during which the Company will be subject to new interim
financial covenants. These require the Company to maintain fiscal year to date
adjusted EBITDA (EBITDA adjusted to eliminate any mark-to-market adjustments
reflected in net income) of ($30.0 million) at the end of October 2008, ($44.0
million) at the end of November 2008, and ($46.0 million) at the end of December
2008 and January 2009. Terms include (i) an
increase in the interest rate on outstanding borrowings from LIBOR plus 2.75% or
prime plus 0.50% to prime plus 3%, with prime being not less than the greater of
4%, Agent's prime rate or the federal funds rate plus 1%, (ii) an amendment fee
of $110,000 (we expect related legal and other professional fees to be
approximately $100,000), (iii) a fee of 1% of the outstanding credit commitment,
as defined, payable on February 27, 2009 unless all outstanding obligations are
paid in full and the credit agreement is terminated (this continguent fee is
estimated at $350,000), (iv) the pledge of substantially all of the Company's
remaining unpledged assets, (v) restricting our use of a portion (approximately
$9.2 million) of the commitment under the credit agreement in an amount equal to
a tax refund anticipated to be received in the second quarter generally to
either fund margin calls or for other grain hedging positions, and (vi)
requiring us to use any portion of such anticipated tax refund received after
November 7 (estimated at approximately $8.0 million) to reduce outstanding
borrowings under the credit agreement. In the amendment, Commerce also waived
the cross default under the 5.45% Secured Promissory Note to
Commerce.
Although
the Company’s lenders have approved a new standstill period, after February 27,
2009 or before if the Company commits a forbearance default, there is no
guarantee they will not terminate the credit agreement; if this
occurs, the Company may not have sufficient funds available to continue
normal operations. If the Company’s lenders were to accelerate
its debt, it could result in the acceleration of debt under other secured
obligations, and the Company would be unable to repay its obligations
immediately. If any such event occurred, the Company would require
alternate funding and might, in the case of acceleration, suffer foreclosure on
the collateral it has pledged to its lenders. The Company may
not be able to access additional sources of financing on similar terms or
pricing as those that are currently in place under its credit agreement and
other debt, or at all, or otherwise obtain other sources of
funding. Therefore, depending on whether one or more of the Company’s
current lenders remains willing to continue making financing available to it,
among other steps the Company may have to consider issuing equity or convertible
debt, which could significantly dilute existing shareholders, further reducing
its expenses and capital expenditures, which may impair its ability to increase
revenue and grow operating cash flows, and selling some of its
assets. The Company believes its ability to continue operating after
February 27, 2009 is dependent on its ability to either obtain further
forbearances from its current lender group or to secure a new credit agreement
or other financing. At November 10, 2008, after giving effect to payments made
on such date, the Company had approximately $3.8 million available under its
credit agreement.
Note
3. Earnings Per Share.
Basic loss
per share data is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the
period. Potentially dilutive instruments are stock options and
unvested restricted stock awards.
|
|
Quarter
Ended
|
|
Weighted
average shares:
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
Basic
and Diluted Shares:
|
|
|
16,562,643 |
|
|
|
16,498,348 |
|
Additional
weighted average shares attributable to:
|
|
|
|
|
|
|
|
|
Stock
options:
|
|
|
16,645 |
|
|
|
202,135 |
|
Unvested
restricted stock awards:
|
|
|
153,565 |
|
|
|
219,820 |
|
Potentially
Diluted Shares(1)
|
|
|
16,732,853 |
|
|
|
16,920,303 |
|
(1)
|
The
stock options and the restricted stock awards have not been considered due
to the loss experienced during both
periods.
|
Note
4. Derivative Instruments.
In
connection with the purchase of raw materials, principally corn and wheat, for
anticipated operating requirements, the Company enters into readily marketable
exchange-traded commodity futures and option contracts to reduce the risk of
future price increases. Changes in the market value of the Company’s
futures and option contracts have historically been, and are expected to
continue to be, highly effective at offsetting changes in the price of the
hedged items. Derivative instruments are recorded as either assets or
liabilities and are measured at fair market value.
Prior to
April 1, 2008 changes in the fair market value of the derivative instruments
designated as cash flow hedges were recorded either in current earnings or in
other comprehensive income, depending on the nature of the hedged transaction,
consistent with the application of hedge accounting under Statement of Financial
Accounting Standards No. 133 as amended (“SFAS 133”). Gains or losses
recorded in other comprehensive income were reclassified into current earnings
in the periods in which the hedged items were consumed. Any
ineffective portion of a hedged transaction was immediately recognized in
current earnings.
Application
of hedge accounting under SFAS 133 requires significant resources, recordkeeping
and analytical systems. As a result of the rising compliance costs
and the complexity related to the application of hedge accounting under SFAS
133, the Company’s management elected to discontinue the use of hedge accounting
for all commodity derivative positions effective April 1,
2008. Accordingly, changes in the value of derivatives subsequent to
March 31, 2008 have been recorded in cost of sales in the Company’s Consolidated
Statements of Income.
As of
September 30, 2008, approximately $1.2 million in deferred gains on previously
designated derivative instruments remained in accumulated other comprehensive
income. These amounts will remain in equity under accumulated
comprehensive income until the forecasted transactions to which the specific
hedged positions relate impact earnings, at which time the accumulated
comprehensive income will be reclassified into earnings. Regardless
of accounting treatment, the Company’s management believes all commodity hedges
are economic hedges of the Company’s risk exposures.
Note
5. Contingencies.
The
Company is a party to various legal proceedings which are of an ordinary,
routine nature and incidental to its operations. 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. In addition, the Company is party to a recently filed
lawsuit styled Daniel Martin
v. MGP Ingredients, Inc., et al., No.
08-L-697 in the Circuit Court for the Third Circuit, Madison County, Illinois,
against the Company and approximately 70 other defendants, wherein the claimant
alleges that he contracted desmoplastic mesothelioma from exposure to asbestos.
The claimant alleges that in the late 1980’s or early 1990’s his company was
retained to install insulation at the Pekin, Illinois facility at the same time
that the Company was conducting asbestos abatement projects in the facility. The
claimant seeks unspecified compensatory and punitive damages. The Company
intends to defend itself vigorously. The matter is in preliminary states of
discovery, and at this time, management is unable to estimate the amount of
potential loss, if any, with respect to this claim.
Note
6. Operating Segments.
The
Company is a fully integrated producer of ingredient solutions, distillery and
other products. Products included within the ingredient solutions
segment consist of vital wheat gluten, commodity wheat starch, specialty wheat
starches and proteins and mill feeds. Distillery products consist of
food grade alcohol (consisting of beverage and industrial alcohol), fuel grade
alcohol, commonly known as ethanol, and distillers grain and carbon dioxide,
which are co-products of the Company’s distillery operations. Other
products include pet treat resins and plant-based biopolymers as well as other
products. For the quarter ended September 30, 2008, revenues from
products in the other segment represent less than 2.0 percent of the Company’s
consolidated revenues.
The
operating profit for each segment is based on net sales less identifiable
operating expenses directly attributable to each segment. Indirect
selling, general and administrative as well as interest expense, investment
income and other general miscellaneous expenses have been excluded from segment
operations and classified as Corporate, consistent with the measurements used to
evaluate segment performance internally. Receivables, inventories and
equipment have been identified with the segments to which they
relate. All other assets are considered as Corporate.
|
|
Quarter
Ended
|
|
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
(in
thousands)
|
|
|
|
|
|
|
Sales
to Customers
|
|
|
|
|
|
|
Ingredient
solutions
|
|
$ |
25,897 |
|
|
$ |
22,288 |
|
Distillery
products
|
|
|
71,382 |
|
|
|
64,358 |
|
Other
|
|
|
1,741 |
|
|
|
1,331 |
|
Total
|
|
|
99,020 |
|
|
|
87,977 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Ingredient
solutions
|
|
|
859 |
|
|
|
1,123 |
|
Distillery
products
|
|
|
2,119 |
|
|
|
1,941 |
|
Other
|
|
|
61 |
|
|
|
389 |
|
Corporate
|
|
|
386 |
|
|
|
374 |
|
Total
|
|
|
3,425 |
|
|
|
3,827 |
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before Income Taxes
|
|
|
|
|
|
|
|
|
Ingredient
solutions
|
|
|
(5,389 |
) |
|
|
2,107 |
|
Distillery
products
|
|
|
(12,926 |
) |
|
|
2,408 |
|
Other
|
|
|
237 |
|
|
|
(56 |
) |
Corporate
|
|
|
(5,427 |
) |
|
|
(4,964 |
) |
Total
|
|
$ |
(23,505 |
) |
|
$ |
(505 |
) |
|
|
September
30,
2008
|
|
|
September
30,
2007
(Restated)
|
|
|
June
30,
2008
|
|
Identifiable
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Ingredient
solutions
|
|
$ |
72,763 |
|
|
$ |
81,616 |
|
|
$ |
70,071 |
|
Distillery
products
|
|
|
119,425 |
|
|
|
113,982 |
|
|
|
121,650 |
|
Other
|
|
|
2,540 |
|
|
|
13,905 |
|
|
|
2,969 |
|
Assets
held for sale
|
|
|
5,600 |
|
|
|
- |
|
|
|
5,600 |
|
Corporate
|
|
|
30,790 |
|
|
|
14,180 |
|
|
|
22,778 |
|
Total
|
|
$ |
231,118 |
|
|
$ |
223,683 |
|
|
$ |
223,068 |
|
For the
quarter ended September 30, 2008, the Company refined its methodology for
assessing identifiable earnings (losses) before income taxes for all segments
whereby only direct sales, general and administrative costs are allocated to
operating segments. Previously, the Company had allocated
substantially all selling, general and administrative expenses to each operating
segment based upon numerous factors and attributes. All selling,
general and administrative expenses not directly attributable to operating
segments have been restated within Corporate income (loss) before taxes for the
quarter ended September 30, 2007. Accordingly, amounts previously
disclosed as earnings (loss) before income taxes for the quarter ended September
30, 2007 have been adjusted to reflect these changes.
Note
7. Fair Value Measurements
As
discussed in Note 1 to the Condensed Consolidated Financial Statements, the
Company adopted SFAS 157 on July 1, 2008 with the exception of nonfinancial
assets and nonfinancial liabilities that were deferred by FASB Staff Position
157-2. SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Statement
also establishes a three-level fair value hierarchy that prioritizes the inputs
used to measure fair value. The fair value hierarchy gives the highest priority
to quoted market prices (Level 1) and the
lowest priority to unobservable inputs (Level 3). The three levels of inputs
used to measure fair value are as follows:
|
•
|
|
Level 1—quoted
prices in active markets for identical assets or liabilities accessible by
the reporting entity.
|
|
•
|
|
Level 2—observable
inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
|
•
|
|
Level 3—unobservable
for an asset or liability. Unobservable inputs should only be used to the
extent observable inputs are not
available.
|
The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were measured at fair value on a recurring
basis as of September 30, 2008.
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Measurements
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
1,763 |
|
|
$ |
1,763 |
|
|
$ |
- |
|
|
$ |
- |
|
Note
8. Pension and Post Retirement Benefit Obligations.
Post Retirement
Benefits. The Company and its subsidiaries provide certain
post-retirement health care and life benefits to all employees. The
liability for such benefits is unfunded. The Company uses a June 30
measurement date for the plan.
The
components of the Net Periodic Benefit Cost for the quarter periods ended
September 30, 2008 and 2007, respectively, are as follows:
|
|
Quarter
Ended
|
|
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
(in
thousands)
|
|
|
|
|
|
|
Service
cost
|
|
$ |
75 |
|
|
$ |
61 |
|
Interest
cost
|
|
|
124 |
|
|
|
117 |
|
Prior
service cost
|
|
|
(9 |
) |
|
|
(9 |
) |
(Gain)
loss
|
|
|
5 |
|
|
|
11 |
|
Total
post-retirement benefit cost
|
|
$ |
195 |
|
|
$ |
180 |
|
The
Company previously disclosed in its financial statements for the year ended June
30, 2008, amounts expected to be paid to plan participants. There
have been no revisions to these estimates and there have been no changes in the
estimate of total employer contributions expected to be made for the fiscal year
ended June 30, 2009.
Total
employer contributions for the quarter ended September 30, 2008 were
$13,000.
Pension
Benefits. The Company and its subsidiaries also provide
defined retirement benefits to certain employees covered under collective
bargaining agreements. Under the collective bargaining agreements,
the Company’s pension funding contributions are a function of the wages paid and
are determined as a percentage of wages paid. The funding is divided
between the defined benefit plan and a 401(k) plan. It has been
management’s policy to fund the defined benefit plan in accordance with the
collective bargaining agreement. The collective bargaining agreements
allow the plan’s trustees to develop changes to the pension plan to allow
benefits to match funding, including reductions in benefits. The
Company uses a June 30 measurement date for the plan.
The
components of the Net Periodic Benefit Cost for the quarter periods ended
September 30, 2008 and 2007, respectively, are as follows:
|
|
Quarter
Ended
|
|
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
(in
thousands)
|
|
|
|
|
|
|
Service
cost
|
|
$ |
141 |
|
|
$ |
130 |
|
Interest
cost
|
|
|
49 |
|
|
|
35 |
|
Expected
return on plan assets
|
|
|
(44 |
) |
|
|
(35 |
) |
Prior
service cost
|
|
|
6 |
|
|
|
6 |
|
Recognition
of net loss(gain)
|
|
|
4 |
|
|
|
(2 |
) |
Total
pension benefit cost
|
|
$ |
156 |
|
|
$ |
134 |
|
The
Company has made employer contributions of $787,000 for the quarter ended
September 30, 2008.
Note
9. Correction of Accounting Error.
The
Condensed Consolidated Statements of Income for the quarter ended September 30,
2007 and the Condensed Consolidated Statement of Cash Flow for the quarter ended
September 30, 2007, presented herein have been restated to correct the following
error, in accordance with Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error
Corrections” (“SFAS 154”). Since fiscal 2001, the Company over
recognized deferred income from funds that it received over the course of fiscal
years 2001 to 2003 under a Commodity Credit Corporation program implemented by
Congress following termination of import quotas on gluten. The
Company received a total of $26 million under the program, of which
approximately $17.5 million was used for capital
expenditures. Recognition of the amount used for these capital
items was deferred and is being recognized over the life of the
assets. The amount recognized each year was to have approximated the
amount of depreciation on the assets that the Company acquired under the
program. The Company has determined that, through errors made upon
implementation and throughout the execution of the program that were undetected
until the third quarter of fiscal 2008, certain assets were placed on, or
omitted from, the depreciation schedule for commodity credit corporation funded
assets. As a result of the error, the asset pool whose depreciation determined
the amount of deferred credit that was amortized each year and recognized as
income had assets whose original cost was $21 million instead of $17.5 million,
and as a result, the Company recognized excess deferred income in each of fiscal
years 2001 through the second quarter of the previous fiscal year ended June 30,
2008. The amount of revenue involved ranged annually from a high of
$397,000 in 2002 to $175,000 in the fiscal year ended June 30, 2008, resulting
in annual overstatements of net income after taxes ranging from a low of 1% to a
high of 4.4% through fiscal 2007.
The
Company has conducted a materiality analysis under SAB 108 and determined that
the impact on prior years was not material. However, it is required
to report the error as an adjustment to its prior period financial
statements. The condensed consolidated statements of income for the
quarter ended September 30, 2007, the condensed, consolidated balance sheet as
of September 30, 2007 and the condensed consolidated statement of cash flows for
the quarter ended September 30, 2007 included in this report have been adjusted
to reflect a correction of the period-specific effects of the error, and the
effect of the correction on each financial statement line item and per share
amounts is shown below.
An analysis of the adjustment to the
Condensed Consolidated Statement of Income for the quarter ended September 30,
2007 is as follows: (In
thousands)
|
|
September
30, 2007
(as
originally reported)
|
|
|
adjustment
|
|
|
September
30, 2007
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
87,977 |
|
|
$ |
- |
|
|
$ |
87,977 |
|
Cost
of sales
|
|
|
82,058 |
|
|
|
59 |
|
|
|
82,117 |
|
Gross
profit
|
|
|
5,919 |
|
|
|
(59 |
) |
|
|
5,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
6,279 |
|
|
|
- |
|
|
|
6,279 |
|
Income
(loss) from operations
|
|
|
(360 |
) |
|
|
(59 |
) |
|
|
(419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
190 |
|
|
|
- |
|
|
|
190 |
|
Interest
expense
|
|
|
(276 |
) |
|
|
- |
|
|
|
(276 |
) |
Income
(loss) before income taxes
|
|
|
(446 |
) |
|
|
(59 |
) |
|
|
(505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
(128 |
) |
|
|
(24 |
) |
|
|
(152 |
) |
Net
income (loss)
|
|
|
(318 |
) |
|
|
(35 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
1,350 |
|
|
|
- |
|
|
|
1,350 |
|
Comprehensive
income (loss)
|
|
$ |
1,032 |
|
|
$ |
(35 |
) |
|
$ |
997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
basic earnings per common share
|
|
$ |
(0.02 |
) |
|
$ |
- |
|
|
$ |
(0.02 |
) |
Total
diluted earnings per common share
|
|
$ |
(0.02 |
) |
|
$ |
- |
|
|
$ |
(0.02 |
) |
An
analysis of the adjustment to the Condensed Consolidated Balance Sheet as of
September 30, 2007 is as follows: (In thousands)
|
|
September
30, 2007
(as
originally reported)
|
|
|
adjustment
|
|
|
September
30, 2007
(restated)
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
Dollars
in thousands, except share and per share amounts
|
|
ASSETS
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,241 |
|
|
$ |
- |
|
|
$ |
2,241 |
|
Restricted
cash
|
|
|
30 |
|
|
|
- |
|
|
|
30 |
|
Receivables
(less allowance for doubtful accounts:
|
|
|
|
|
|
|
- |
|
|
|
|
|
September
30, 2007 -$223)
|
|
|
30,491 |
|
|
|
- |
|
|
|
30,491 |
|
Inventory
|
|
|
52,905 |
|
|
|
- |
|
|
|
52,905 |
|
Prepaid
expense
|
|
|
2,451 |
|
|
|
- |
|
|
|
2,451 |
|
Deposits
|
|
|
922 |
|
|
|
- |
|
|
|
922 |
|
Deferred
income taxes
|
|
|
1,546 |
|
|
|
743 |
|
|
|
2,289 |
|
Refundable
income taxes
|
|
|
1,576 |
|
|
|
- |
|
|
|
1,576 |
|
Total current
assets
|
|
|
92,162 |
|
|
|
743 |
|
|
|
92,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
362,047 |
|
|
|
- |
|
|
|
362,047 |
|
Less
accumulated depreciation
|
|
|
(231,925 |
) |
|
|
- |
|
|
|
(231,925 |
) |
Property and equipment,
net
|
|
|
130,122 |
|
|
|
- |
|
|
|
130,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
656 |
|
|
|
- |
|
|
|
656 |
|
Total assets
|
|
$ |
222,940 |
|
|
$ |
743 |
|
|
$ |
223,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
4,106 |
|
|
$ |
- |
|
|
$ |
4,106 |
|
Revolving
credit facility
|
|
|
11,000 |
|
|
|
- |
|
|
|
11,000 |
|
Accounts
payable
|
|
|
14,775 |
|
|
|
- |
|
|
|
14,775 |
|
Accrued
expenses
|
|
|
6,518 |
|
|
|
- |
|
|
|
6,518 |
|
Total current
liabilities
|
|
|
36,399 |
|
|
|
- |
|
|
|
36,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
debt
|
|
|
7,922 |
|
|
|
- |
|
|
|
7,922 |
|
Deferred
credit
|
|
|
7,482 |
|
|
|
1,917 |
|
|
|
9,399 |
|
Other
non-current liabilities
|
|
|
8,035 |
|
|
|
- |
|
|
|
8,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
14,352 |
|
|
|
- |
|
|
|
14,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred,
5% non-cumulative; $10 par value; authorized 1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
shares;
issued and outstanding 437 shares
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
Common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
No
par value; authorized 40,000,000 shares; issued
19,530,344 shares
|
|
|
6,715 |
|
|
|
- |
|
|
|
6,715 |
|
Additional
paid-in capital
|
|
|
11,108 |
|
|
|
- |
|
|
|
11,108 |
|
Retained
earnings
|
|
|
146,133 |
|
|
|
(1,174 |
) |
|
|
144,959 |
|
Accumulated
other comprehensive income (loss)
|
|
|
118 |
|
|
|
- |
|
|
|
118 |
|
|
|
|
164,078 |
|
|
|
(1,174 |
) |
|
|
162,904 |
|
Treasury
stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Common;
September 30, 2007 – 3,029,841 shares
|
|
|
(15,328 |
) |
|
|
- |
|
|
|
(15,328 |
) |
Total stockholders’
equity
|
|
|
148,750 |
|
|
|
(1,174 |
) |
|
|
147,576 |
|
Total liabilities and
stockholders’ equity
|
|
$ |
222,940 |
|
|
$ |
743 |
|
|
$ |
223,683 |
|
An
analysis of the adjustment to the Condensed Consolidated Statement of Cash Flows
for quarter ended September 30, 2007 is as follows: (In thousands)
|
|
September
30, 2007
(as
originally reported)
|
|
|
adjustment
|
|
|
September
30, 2007
(restated)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
(318 |
) |
|
$ |
(35 |
) |
|
$ |
(353 |
) |
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,827 |
|
|
|
- |
|
|
|
3,827 |
|
Loss
(gain) on sale of assets
|
|
|
10 |
|
|
|
- |
|
|
|
10 |
|
Deferred
income taxes
|
|
|
1,852 |
|
|
|
(24 |
) |
|
|
1,828 |
|
Changes
in working capital items:
|
|
|
|
|
|
|
- |
|
|
|
|
|
Restricted
cash
|
|
|
3,306 |
|
|
|
- |
|
|
|
3,306 |
|
Accounts
receivable
|
|
|
3,807 |
|
|
|
- |
|
|
|
3,807 |
|
Inventory
|
|
|
(8,960 |
) |
|
|
- |
|
|
|
(8,960 |
) |
Accounts
payable and accrued expenses
|
|
|
(2,768 |
) |
|
|
- |
|
|
|
(2,768 |
) |
Deferred
credit
|
|
|
(369 |
) |
|
|
59 |
|
|
|
(310 |
) |
Income
taxes payable/receivable
|
|
|
(1,212 |
) |
|
|
- |
|
|
|
(1,212 |
) |
Other
|
|
|
(2,337 |
) |
|
|
- |
|
|
|
(2,337 |
) |
Net
cash provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
(3,162 |
) |
|
|
- |
|
|
|
(3,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(1,477 |
) |
|
|
- |
|
|
|
(1,477 |
) |
Proceeds
from disposition of equipment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(1,477 |
) |
|
|
- |
|
|
|
(1,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Proceeds
from stock plans
|
|
|
43 |
|
|
|
- |
|
|
|
43 |
|
Principal
payments on long-term debt
|
|
|
(1,063 |
) |
|
|
- |
|
|
|
(1,063 |
) |
Proceeds
from line of credit
|
|
|
4,000 |
|
|
|
- |
|
|
|
4,000 |
|
Dividends
paid
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash used in
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
2,980 |
|
|
|
- |
|
|
|
2,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in
cash and cash equivalents
|
|
|
(1,659 |
) |
|
|
- |
|
|
|
(1,659 |
) |
Cash
and cash equivalents, beginning of year
|
|
|
3,900 |
|
|
|
- |
|
|
|
3,900 |
|
Cash
and cash equivalents, end of period
|
|
$ |
2,241 |
|
|
$ |
- |
|
|
$ |
2,241 |
|
Note
10. Subsequent Events.
In
response to the losses which have been incurred and the Company’s current credit
position and in an effort to return the Company to profitability, actions have
been taken since the end of the first quarter. These actions include
significant changes to operations in both our Atchison and Pekin
facilities.
On October
20, 2008 the Company announced that it had signed a non-binding letter of intent
to acquire its flour requirements from a third party, was ceasing operations at
its flour mill in Atchison, Kansas and was reducing its workforce by
approximately 44 persons. The workforce reduction consisted of a
combination of temporary lay-offs and early retirement offers. On
November 6, the Company announced that the anticipated supply
contract for flour had been signed, and the layoffs will now become
permanent.
On
November 5, the Company announced plans to significantly reduce production of
commodity wheat proteins and starches by ceasing protein and starch production
operations at its Pekin, Illinois plant, effective November 12. The
majority of the Pekin facility’s protein and starch production consist of gluten
and commodity starches. The action will result in an
additional work force reduction of approximately 70-80 persons,
consisting of a combination of lay-offs and early retirement
offers. The Company also announced that it intends to curtail fuel
alcohol production at Pekin until market conditions become more
favorable. Market economics for fuel alcohol have continued to erode,
with recent prices being at or below production cost.
The
Company decided to close its flour mill because it can no longer produce flour
for its own use at costs that are competitive with those of third party
producers. It is ceasing starch and protein operations at its Pekin
facility due to continuing losses in its lower valued product lines and because
it has underutilized ingredient
solutions segment facilities at both of its production
facilities. Going forward, management expects to concentrate its
efforts on the production of value added proteins and starches.
Special
charges will be recognized in the second quarter to write down assets that will
no longer be used and for employee termination costs. As a result of the
shutdown of protein and starch operations in Pekin and the flour mill operations
in Atchison, a special non-cash charge estimated at $6.9 million to write down
assets will be recorded during the current fiscal year’s second quarter, which
ends December 31, 2008. The flour mill write-down would be exclusive
of costs related to excess leased rail cars associated with flour shipments to
the Pekin facility, the effect of which is still being evaluated by
management. The Company now expects to incur an estimated $3 million
loss resulting from sales of wheat no longer needed for milling
operations. Related to this wheat sale, the Company had approximately
$1.2 million in deferred gains in accumulated other comprehensive income which
is expected to be recognized in quarter two. The Company additionally
expects to incur approximately $2.5 in severance related charges associated with
early retirements and job eliminations during the second quarter.
ITEM
2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS
OF OPERATIONS
General
Reference
is made to Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—General, incorporated by reference to Item 7 of our Annual
Report on Form 10-K for the fiscal year ended June 30, 2008 for certain general
information about our principal products and costs.
Critical
Accounting Policies and Estimates
Reference
is made to Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies, incorporated by reference to
Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30,
2008, for a discussion of our critical accounting policies and the use of
certain judgments and estimates in the preparation of our financial
statements. As stated therein, the Company tests its long-lived
assets for impairment whenever events or conditions and circumstances indicate a
carrying amount of an asset may not be recoverable. During the first
quarter of our fiscal year, declines in overall equity values, including our
common stock value, triggered an impairment evaluation. Updated
forecasts that reflect recent changes made to our business were used in this
analysis. The use of forecast requires considerable management
judgment. Management believes the judgments used in this analysis are
reasonable. The testing and analysis did not identify any impairment
at September 30, 2008.
CHANGES
IN SEGMENT REPORTING
For the
quarter ended September 30, 2008, the Company refined its methodology for
assessing identifiable earnings (losses) before income taxes for all segments
whereby only direct sales, general and administrative costs are allocated to
operating segments. Previously, the Company had allocated
substantially all selling, general and administrative expenses to each operating
segment based upon numerous factors and attributes. All selling,
general and administrative expenses, not directly attributable to operating
segments, have been restated within Corporate income (loss) before taxes for the
quarter ended September 30, 2007. Accordingly, amounts previously
disclosed as earnings (loss) before income taxes for the quarter ended September
30, 2007 have been adjusted to reflect these changes.
DEVELOPMENTS
IN THE INGREDIENT SOLUTIONS AND DISTILLERY PRODUCTS SEGMENTS
In order
to become more efficient and effective and to improve our results, we have
decided to refocus our business on the production of our value added
products. Management believes the steps it has taken will help
enable the Company to return to profitability, be more competitive, and allow
the Company to negotiate a credit agreement and financing that will enable the
Company to maintain operations.
Among the
more important reasons for the decision to re-focus the business are the
following:
-
|
Market
economics for fuel grade alcohol have continued to erode, and recent
prices have been at or below production
cost.
|
-
|
Incremental
ethanol production decisions have been made difficult by continued
volatility in corn and ethanol
prices.
|
-
|
With
current ethanol industry capacity in excess of federal mandates, it does
not seem likely that there will be a return to equilibrium in the ethanol
markets in the short term.
|
-
|
We
have underutilized ingredients
solutions segment facilities at both of our production facilities,
and our
heritage platform business has experienced continuing
losses.
|
-
|
We
can no longer produce flour for our own use at costs that are
competitive with those of third party
producers.
|
Subject to
contractual obligations, we will be substantially exiting the commodity wheat
gluten business and will curtail our commodity starch and fuel grade
alcohol production. We anticipate that by curtailing fuel alcohol
production we will reduce our total annual operating distillery
capacity from 120-130 million gallons to approximately 84 million gallons, of
which we expect fuel grade alcohol will be approximately 29 million
gallons (compared with 61 million gallons in fiscal
2008.) Because we will be producing less fuel grade alcohol and using
less corn in the process, we also will produce less distillers
feed. By closing protein and starch production at Pekin, we
will reduce the volume of our ingredient solutions business by approximately 20
percent, in terms of pounds, substantially all of which will be our lower
margin commodity starch and protein products. We are in the process
of making the following changes to our operations:
-
|
As
previously announced, to shorten our supply chain and improve margin
management, we have entered a supply contract for flour with ConAgra Mills
whereby ConAgra will supply our wheat flour requirements for use in the
production of protein and starch ingredients. We have
discontinued our own mill operations. Because we will no longer be
producing flour from wheat, we will no longer produce mill feed
as a by product of this process.
|
-
|
We
intend to focus our ingredient solutions segment on value added
products. We will shut down our commodity and starch production
facilities in Pekin, Illinois on November 12,
2008. We will seek to limit our flour purchases
to quantities needed to service our specialty starch business,
and will only keep limited inventories of flour on site. To the
extent our flour purchases for specialty starch production cannot support
our specialty protein business, we will purchase gluten for our
needs. As a result of these changes, we expect to substantially
reduce our production of commodity starches and proteins, which, subject
to existing contracts, will now essentially be produced only as
by-products. Our commodity starches and proteins accounted
for approximately 41.3 percent and 32.3 percent of our ingredient
solutions segment revenues in fiscal 2008 and in the
first quarter of fiscal 2009,
respectively.
|
-
|
We
do not anticipate that we will derive much value from our Pekin ingredient
solutions segment assets going forward, as they are on our plant site and
we do not expect to sell them. We may transfer certain of these
assets to our Atchison facility or use them for spare parts as conditions
dictate.
|
-
|
During fiscal
2008 and the first quarter of fiscal 2009, we estimate that our ethanol
sales accounted for approximately 46.1 percent and 35.3 percent
of our distillery segment revenues. As noted above, unless and until
market dynamics change, we intend to produce fuel alcohol only to the
extent necessary to keep our plant in operation, thereby significantly
curtailing our production of fuel alcohol, and to focus our distillery
segment on food grade alcohol. Historically we have produced
substantially all of our food grade alcohol at Atchison and substantially
all of our fuel grade alcohol at Pekin. We estimate that we will now be
running our Pekin distillery at approximately 50 percent if its historical
fuel grade capacity, most of which capacity will now be devoted to the
production of food grade alcohol.
|
-
|
As a
result of the shutdown of protein and starch operations in Pekin and the
flour mill operations in Atchison, a special non-cash charge estimated at
$6.9 million to write down assets will be recorded during the current
fiscal year’s second quarter, which ends December 31, 2008. The
write-down would be exclusive of costs related to excess leased rail cars
associated with flour shipments to the Pekin facility, the effect of which
is still being evaluated by management. We now expect to incur an
estimated $3 million loss resulting from sales of wheat no longer needed
for milling operations. Related to these wheat sales, we had
approximately $1.2 million in deferred gains in accumulated other
comprehensive income, which we expect to recognize in the
second quarter. We also expect to incur approximately $2.5 in
severance related charges associated with early retirements and job
eliminations during the second
quarter.
|
DEVELOPMENTS
IN THE OTHER SEGMENT
For the
quarter ended September 30, 2008, sales of our plant-based biopolymers increased
substantially with a 271 percent increase in unit sales compared to the quarter
ended September 30, 2007. These products continue to represent an
emerging area of our business. Our plant-based biopolymers products
continue to undergo further research and development as we explore additional
enhancements to expand their functionality and use capabilities.
We
continue to evaluate the strategic alternatives for the plant and equipment at
our Kansas City facility, and are pursuing the sale of the assets. At September
30, 2008, this facility is presented as an asset held for sale. This
related debt is presented as Liabilities Held for Sale on the balance
sheet.
SEGMENT
RESULTS
The following is a summary of revenues
and pre-tax profits / (loss) allocated to each reportable operating segment for
the quarterly periods ended September 30, 2008 and 2007. For
additional information regarding our operating segments, see Note 6-Operating Segments
included under Part 1,
Item 1, Financial Statements of this Form 10-Q and incorporated
herein by reference.
|
|
Quarter
Ended
|
|
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
(in
thousands)
|
|
|
|
|
|
|
Ingredient
solutions
|
|
|
|
|
|
|
Net Sales
|
|
$ |
25,897 |
|
|
$ |
22,288 |
|
Pre-Tax Income
(Loss)
|
|
|
(5,389 |
) |
|
|
2,107 |
|
Distillery
products
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
71,382 |
|
|
|
64,358 |
|
Pre-Tax Income
(Loss)
|
|
|
(12,926 |
) |
|
|
2,408 |
|
Other
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
1,741 |
|
|
|
1,331 |
|
Pre-Tax Income
(Loss)
|
|
|
237 |
|
|
|
(56 |
) |
GENERAL
Consolidated
earnings for the first quarter of fiscal 2009 decreased compared to the same
period in fiscal 2008 with a net loss of $17,243,000 on consolidated sales of
$99,020,000 versus a net loss of $353,000 on consolidated sales of $87,977,000
in the first quarter of fiscal 2008. This decrease in earnings was
primarily the result of increasing cost of sales resulting primarily from higher
grain costs, partially offset by increased revenue. Earnings in the ingredient
solutions segment declined over the same period in fiscal 2008 primarily due to
higher wheat prices while earnings in our distillery products segment declined
due primarily to continued higher corn and natural gas prices coupled with
reduced unit sales. The positive earnings performance in the other
segment, consisting primarily of business lines for pet product and plant-based
biopolymer applications, was primarily the result of improvements in the
plant-based biopolymer business line as well as reduced per-unit operating costs
in the pet product business line.
INGREDIENT
SOLUTIONS
Total
ingredient solutions sales revenue for the quarter ended September 30, 2008
increased by $3.6 million, or 16.2 percent, compared to the quarter ended
September 30, 2007. Revenues for specialty ingredients, consisting of
specialty proteins and specialty starches, increased during the quarter ended
September 30, 2008 compared to the quarter ended September 30, 2007 by $3.7
million, or 26.7 percent. Revenues for specialty proteins
increased as a result of increased per unit prices, partially offset by lower
unit sales. Revenues for specialty starches rose as a result of
improved pricing as well as improved unit sales. Revenues for vital wheat
gluten for the quarter ended September 30, 2008 decreased by $1.0 million, or
12.9 percent, primarily as a result of reduced sales volume partially offset by
improved pricing. Revenues for commodity starch increased $914,000,
or 126 percent, as a result of increased sales volume as well as improved
pricing. While revenues for the ingredient solutions segment improved
overall, margins continued to be significantly impacted by increased cost of
sales related to record high wheat prices. The per bushel cost of
wheat for the quarter ended September 30, 2008 increased by 41.4 percent over
the quarter ended September 30, 2007.
DISTILLERY
PRODUCTS
Total
distillery products sales revenue for the quarter ended September 30, 2008
increased $7.0 million, or 10.9 percent, compared to the quarter ended September
30, 2007. This increase was due to increased revenues related to food
grade alcohol of $9.4 million, or 35.8 percent, over the quarter ended September
30, 2007. Increases in revenue for food grade alcohol were attributable to both
increased volume as well as improved per-unit pricing. Also
contributing to this increase were improvements in distillers feed
revenue. These factors, which led to increased revenue for distillery
products, were partially offset by reduced revenue for fuel grade alcohol due to
reduced production levels, partially offset by improvements in
pricing. While
revenues for distillery products improved for the quarter ended September 30,
2008, margins were still significantly impacted by increased cost of sales
related to increased corn prices compared to the quarter ended September 30,
2007. For the quarter ended September 30, 2008, the per-bushel cost
of corn, before adjustments for the impact of our hedging practices, averaged
nearly 49.3 percent higher than the quarter ended September 30, 2007. These increased costs
yielded a substantial loss for the segment.
OTHER
PRODUCTS
For the
quarter ended September 30, 2008, revenues for other products, consisting
primarily of pet products and plant-based biopolymers, increased $410,000, or
30.8 percent, compared to the quarter ended September 30, 2007. This
increase was the result of increased unit sales of our plant-based biopolymer
products as well as improved pricing for such products. This increase in sales
for our other segment was partially offset by reduced revenues related to our
pet products.
SALES
Net sales
for the quarter ended September 30, 2008 increased $11.0 million, or 12.5
percent, compared to the quarter ended September 30, 2007 as a result of
increased sales in all segments. Increased sales in the ingredient
solutions segment were related to improved unit sales for specialty and
commodity starches as well as overall improvements in pricing for both commodity
and specialty products. Sales in the distillery products segment as a
whole improved as a result of improved pricing and increased unit sales of food
grade alcohol partially offset by reduced production for fuel grade
alcohol. Per unit prices for food grade alcohol improved
approximately 5.9 percent compared to the quarter ended September 30,
2007. Revenues for distiller’s grain improved as a result of
increased per-unit pricing. Net sales for our other
segment increased as a result of improved unit sales of plant-based biopolymer
products as well as improved unit pricing. These factors, which
served to improve revenue from our other segment ,were partially offset by
reduced revenue related to our pet treat line of products as a result of
significantly reduced unit sales partially offset by improved
pricing.
COST
OF SALES
For the
quarter ended September 30, 2008, cost of sales rose $33.6 million, or 40.9
percent, while sales increased 12.5 percent compared to the quarter ended
September 30, 2007. This increase was primarily the result of higher
grain costs as well as increased costs of other inputs used in the manufacturing
process. Our higher grain costs were directly the result of higher
grain prices experienced during the quarter ended September 30,
2008. For the quarter ended September 30, 2008, before
adjustment for the impact of our hedging practices, the per-bushel
cost of corn averaged nearly 49.3 percent higher than the quarter ended
September 30, 2007.
For the
quarter ended September 30, 2008, the per-bushel cost of wheat averaged nearly
41.4 percent higher than the quarter ended September 30, 2007. The
average cost for natural gas increased 42.7 percent.
As
described in Note 4 of our Notes to Condensed Consolidated Financial Statements,
incorporated herein by reference, effective April 1, 2008, we elected to
discontinue the use of hedge accounting for all commodity derivative
positions. Accordingly, changes in the value of derivatives
subsequent to March 31, 2008 are recorded in cost of sales in the Company’s
Consolidated Statements of Income. As of March 31, 2008, the
cumulative mark-to-market adjustment of $4.2 million net of tax of $2.8 million
included in accumulated other comprehensive income was related to derivative
instruments that had previously been designated for hedge accounting under the
framework of SFAS 133. Gains related to those derivative instruments
have remained in accumulated other comprehensive income until the forecasted
transactions to which the specific hedged positions impact
earnings. As of September 30, 2008, approximately $1.2 million in
deferred gains on previously designated derivative instruments remained in
accumulated other comprehensive income. We anticipate the forecasted
transactions to which these positions relate will impact earnings in the second
quarter of fiscal 2009 with a corresponding recognition of the $1.2 million in
deferred gains.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
Selling,
general and administrative expenses for the quarter ended September 30, 2008
decreased by $164,000 compared to the quarter ended September 30,
2007.
For the
quarter ended September 30, 2007, professional fees of $568,000 related to the
settlement of the Company’s two year patent infringement and contract litigation
were included within selling, general and administrative
expenses. Upon settlement of this litigation during the quarter ended
December 30, 2007, this amount was reclassified and netted against the gain on
the settlement of the litigation. Adjusting for this amount, selling,
general and administrative expenses remained relatively flat for the quarter
ended September 30, 2008 compared to the quarter ended September 30,
2007.
As a
result of changes we are making within the organization referred to in Developments in the Ingredient
Solutions and Distillery Products Segments, we anticipate lower selling,
general and administrative costs in future periods.
OTHER
INCOME, NET
Other
income, net, decreased $149,000, or 78.4 percent, for the quarter ended
September 30, 2008, respectively, compared to the quarter ended September 30,
2007. This decrease was principally attributable to changes in
interest capitalized as well as to the effect of certain other non-recurring,
non-operating revenue items. It is our practice to credit other
income for capitalized interest.
INTEREST
EXPENSE
Interest
expense for the quarter ended September 30, 2008 increased $452,000 compared to
the quarter ended September 30, 2007. These increases were the result
of higher balances and higher interest rates on our outstanding line of credit
compared to the same periods in the prior year. These increases were
partially offset by reduced balances on our long-term notes payable. We
anticipate an increase in interest expense during the second quarter due to an
increase in the rates under the amendment to our credit facility effected as of
November 7, 2008.
EQUITY
IN LOSS OF JOINT VENTURE
Equity in
the loss of our joint venture was $16,000 for the quarter ended September 30,
2008. On July 17, 2007, we completed a transaction with Crespel and
Dieters GmbH & Co. KG for the formation and financing of a joint venture,
D.M. Ingredients, GmbH (“DMI”), located in Ibbenburen, Germany. DMI’s
primary operation is the production and tolling of the Wheatex series of
textured wheat proteins made from vital wheat gluten for marketing by MGPI
domestically and, through our partner and third parties,
internationally. Currently, the joint venture is utilizing a third
party toller in the Netherlands to produce the Wheatex products. We
own a 50 percent interest in DMI, and account for it using the equity method of
accounting. As of September 30, 2008, we had invested $375,000 in DMI
since July 2007.
For the
quarter ended September 30, 2008, DMI incurred a net loss of $32,000 related to
costs incurred for the initial implementation of operations. No sales
revenue was reported. As a 50 percent joint venture holder, our
equity in this loss was $16,000.
DMI’s
functional currency is the European Union Euro. Accordingly, changes
in the holding value of the Company’s investment in DMI resulting from changes
in the exchange rate between the U.S. Dollar and the European Union Euro are
recorded in other comprehensive income as a translation adjustment on
unconsolidated foreign subsidiary net of deferred taxes.
INCOME
TAXES
For the
quarter ended September 30, 2007 , we had an income tax benefit of $152,000
resulting in an effective rate of 30 percent. For the quarter
ended September 30, 2008, our income tax benefit was $6.3 million for an
effective rate of 26.7 percent. This rate differs from our statutory rate
primarily due to a valuation allowance of approximately $1.8
million. Management determined a valuation allowance was needed
for state NOLs and credit carryforwards that are not more likely than not of
being realized. Since the end of the fiscal year ended June 30, 2008,
there has been no change in our uncertain tax positions. As a result
of filing our fiscal 2008 tax return, we anticipate receiving a tax refund of
$9.2 million of which $1.2 million has been received subsequent to September 30,
2008.
NET
INCOME
As the
result of the factors outlined above, we experienced a net loss of $17,243,000
in the quarter ended September 30, 2008 compared to a net loss of $353,000 in
the quarter ended September 30, 2007.
LIQUIDITY
AND CAPITAL RESOURCES
GENERAL
Historically,
the principal sources of our cash have been operating cash flow and
borrowings under our credit agreement. Historically,
principal uses of cash are capital expenditures, payment of debt and the payment
of dividends. As a result of losses incurred during the year ended
June 30, 2008, we anticipate receiving tax refunds aggregating approximately
$9.2 million during the second quarter of fiscal 2009. However, under
a recent amendment to our credit agreement we must
use approximately $8.0 million of this refund to reduce borrowings under the
credit agreement. This payment will not reduce our lenders' commitment
under the credit agreement.
During the
past six quarters, we have relied on borrowings under our credit agreement to
operate. As of June 30, 2008 we were in default
under certain of the financial covenants of our credit agreement. At October 25,
2008, we also were in forbearance default under interim financial covenants that
applied during a forbearance period that our lenders had agreed to following our
June 30 covenant default. As a result of either default, our lenders
could have terminated our ability to borrow or accelerated our
debt. However, to date, they have not done so. Our lenders
have been willing to continue working with us notwithstanding our covenant
defaults, and at present we do not believe that they will terminate our credit
or accelerate our debt. However, one of our lenders would like
us to find new financing and we believe that we will have to do so on or before
our credit agreement’s outside expiration date of September 3,
2009. At present, our lenders have approved an amendment to our
credit agreement which extends the standstill period to February 27, 2009 and
which imposes new interim financial measures. Based on recent
discussions with one of our lenders, we believe that if we meet the new
performance measures, two of our current lenders will be willing to enter into a
new, asset based lending arrangement with us before February 27,
2009. Terms of any such agreement are not known. Further,
discussions are at a preliminary stage and they are under no legal obligation to
enter a new financing arrangement with us.
We believe
that our ability to continue operating after February 27, 2009 is dependent on
our ability to either obtain further forbearance from our current lender group
or secure a new credit agreement or other financing.
As noted
elsewhere herein, we are taking steps to focus our business on the production of
value added products. We believe these measures will improve our operating
performance. We expect them to reduce our operating costs. As a
result of the measures that we are taking, we believe that cash flows from
operating activities and the amounts available under the credit agreement should
be sufficient to provide for our projected needs through February 27, 2009, by
which date we anticipate obtaining a new credit facility. We
also forecast a return to profitable operations by next fiscal
year. It should be noted that these are forward looking
statements and that our projected cash needs, projected sources of liquidity and
anticipated results depend on a number of factors, some of which are
beyond our control, including commodity prices, natural
gas prices, our ability to liquidate inventories as planned, the level of
our capital expenditures, the amount of margin calls on our commodity
trading accounts, the willingness of our suppliers to extend normal trading
terms, receipt of tax refunds and compliance with the new interim covenants
imposed by our lenders. It should also be noted that we have made no
allowance for margin calls in our projected cash needs. During the
quarter ended September 30, 2008, we paid $1.4 million (net of
draws) in margin calls. Subsequent to September 30, we have had
net margin calls of $4.6 million through November 10th.
Inasmuch
as the amount available to us under our credit Agreement at September 30, 2008
was only $4.3 million, until we obtain a new credit facility we will
need to take particular care in managing our cash flows and may be unable to
take advantage of certain business opportunities that would otherwise
be available to us. For example, notwithstanding current favorable
grain prices, we are not taking long forward positions in grain in order to
conserve our cash. This could result in higher future expenses if
prices change adversely. In addition, commencing in September,
management extended the payment dates of vendors to preserve cash but we were
substantially current with our payment obligations as of November 10,
2008.
Although
our lenders continue to work with us, if they were to terminate our credit
agreement, we might not have sufficient funds available to us to continue normal
operations. If our lenders were to accelerate our debt, it
could result in the acceleration of debt under other secured obligations that we
are subject to. We would be unable to repay our debt immediately. If
any such event occurred, we would require alternate funding and
might, in the case of acceleration, suffer foreclosure on the collateral we have
pledged to our lenders. We may not be able to access additional
sources of financing on similar terms or pricing as those that are currently in
place under our credit agreement and other debt, or at all, or
otherwise obtain other sources of funding. Presently, the short term
prospects for conventional bank financing outside our current lending group do
not appear promising. The recent turmoil in the credit markets
has adversely impacted the willingness of many banks to extend credit to new
customers. Therefore, depending on whether one or more of our current
lenders remains willing to continue making financing available to us, among
other measures we may have to consider issuing equity or convertible debt, which
could significantly dilute existing shareholders, further reducing
our expenses and capital expenditures, which may impair our ability to increase
revenue and grow operating cash flows, and selling some of our
assets.
The
following table is presented as a measure of our liquidity and financial
condition:
(Dollars
in thousands)
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2008
|
|
Cash
and cash equivalents
|
|
$ |
- |
|
|
$ |
- |
|
Working
capital
|
|
|
36,202 |
|
|
|
51,127 |
|
Amounts
available under lines of credit
|
|
|
4,344 |
|
|
|
17,000 |
|
Credit
facility, liabilities related to assets held for sale and
long-term debt (including current maturities)
|
|
|
60,319 |
|
|
|
33,493 |
|
Stockholders’
equity
|
|
|
118,326 |
|
|
|
136,874 |
|
|
|
Year
to Date Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Depreciation
and amortization
|
|
|
3,425 |
|
|
|
3,827 |
|
Capital
expenditures
|
|
|
1,686 |
|
|
|
1,477 |
|
EBITDA(1)
|
|
|
(19,352 |
) |
|
|
3,598 |
|
(1)
|
EBITDA
equals earnings before interest, taxes, depreciation and
amortization.
|
EBITDA
We have
included EBITDA because we believe it provides investors with additional
information to measure our performance and liquidity. EBITDA is not a
recognized term under generally accepted accounting principles (“GAAP”) and does
not purport to be an alternative to net income as a measure of operating
performance or to cash flows from operating activities as a measure of
liquidity. Additionally, it is not intended to be a measure of free
cash flow for management’s discretionary use, as it does not consider certain
cash requirements such as interest payments, tax payments and debt service
requirements. Because not all companies use identical calculations,
this presentation may not be comparable to other similarly titled measures of
other companies.
The following table sets forth a
reconciliation of net income to EBITDA for the year to date periods ended
September 30, 2008 and 2007 (in thousands):
|
|
Quarter
Ended
|
|
|
|
September
30,
2008
|
|
|
September
30,
2007
(1)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
(17,243 |
) |
|
$ |
(353 |
) |
Provision
(benefit) for income taxes
|
|
|
(6,262 |
) |
|
|
(152 |
) |
Interest
expense
|
|
|
728 |
|
|
|
276 |
|
Depreciation
|
|
|
3,425 |
|
|
|
3,827 |
|
EBITDA
|
|
$ |
(19,352 |
) |
|
$ |
3,598 |
|
The
following table sets forth a reconciliation of EBITDA to cash flows
from operations for the quarters ended September 30, 2008 and 2007 (in
thousands):
|
|
Quarter
Ended
|
|
|
|
September
30,
2008
|
|
|
September
30,
2007
(1)
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
(19,352 |
) |
|
$ |
3,598 |
|
Benefit
(provision) for income taxes
|
|
|
6,262 |
|
|
|
152 |
|
Interest
expense
|
|
|
(728 |
) |
|
|
(276 |
) |
Equity
in loss of joint venture
|
|
|
16 |
|
|
|
- |
|
Non-cash
charges against (credits to) net income:
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
(812 |
) |
|
|
1,828 |
|
Loss
(gain) on sale of assets
|
|
|
(85 |
) |
|
|
10 |
|
Changes
in operating assets and liabilities
|
|
|
(10,939 |
) |
|
|
(8,474 |
) |
Cash
flow from operations
|
|
$ |
(25,638 |
) |
|
$ |
(3,162 |
) |
(1)
|
See
Note 9 to Notes to Condensed Consolidated Financial
Statements.
|
CASH
FLOW INFORMATION
Summary
cash flow information follows for the quarters ended September 30, 2008 and
2007, respectively: (Dollars in thousands)
|
|
Quarter
Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007(1)
|
|
Cash
flows provided by (used for):
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
(25,638 |
) |
|
$ |
(3,162 |
) |
Investing
activities
|
|
|
(1,199 |
) |
|
|
(1,477 |
) |
Financing
activities
|
|
|
26,837 |
|
|
|
2,980 |
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
- |
|
|
|
(1,659 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
- |
|
|
|
3,900 |
|
Cash
and cash equivalents at end of year
|
|
$ |
- |
|
|
$ |
2,241 |
|
(1)
|
See
Note 9 to Notes to Condensed Consolidated Financial
Statements.
|
During the
quarter ended September 30, 2008, our consolidated cash remained at zero
compared to a decrease of $1,659,000 during the quarter ended September 30,
2007. Reduced operating cash flow resulted from an increase in net
loss from $353,000 to $17,243,000 and increases in refundable income taxes and
other current assets, primarily receivables and
inventories. Cash outflows related to capital expenditures
during the quarter ended September 30, 2008 compared to the quarter ended
September 30, 2007 were reduced. Additionally, net proceeds from our
line of credit provided a source of cash.
Operating Cash
Flows. Summary operating cash flow information for the
quarters ended September 30, 2008 and 2007, respectively, is as
follows: (Dollars in thousands):
|
|
Quarter
Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(17,243 |
) |
|
$ |
(353 |
) |
Depreciation
|
|
|
3,425 |
|
|
|
3,827 |
|
Loss
(gain) on sale of assets
|
|
|
(85 |
) |
|
|
10 |
|
Deferred
income taxes
|
|
|
(812 |
) |
|
|
1,828 |
|
Equity
in loss of joint venture
|
|
|
16 |
|
|
|
- |
|
Changes
in working capital items:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(2,060 |
) |
|
|
3,306 |
|
Accounts
receivable
|
|
|
138 |
|
|
|
3,807 |
|
Inventory
|
|
|
3,486 |
|
|
|
(8,960 |
) |
Accounts
payable and accrued expenses
|
|
|
(977 |
) |
|
|
(2,768 |
) |
Deferred
credit
|
|
|
(223 |
) |
|
|
(310 |
) |
Income
taxes payable/receivable
|
|
|
(6,466 |
) |
|
|
(1,212 |
) |
Gains
previously deferred in other comprehensive income
|
|
|
(1,474 |
) |
|
|
- |
|
Other
|
|
|
(3,363 |
) |
|
|
(2,337 |
) |
Net
cash used in operating activities
|
|
$ |
(25,638 |
) |
|
$ |
(3,162 |
) |
(1)
|
See
Note 9 to Notes to Condensed Consolidated Financial
Statements.
|
Cash flow
from operations for the quarter ended September 30, 2008 decreased $22,476,000
to ($25,638,000) from ($3,162,000) for the quarter ended September 30,
2007. This decline in operating cash flow was primarily related to
the increase in net loss of $16,890,000 from a net loss of $353,000 for the
quarter ended September 30, 2007 to a net loss of $17,243,000 for the quarter
ended September 30, 2008. Other factors leading to a decrease in
operating cash flow were an increase in restricted cash of $2,060,000 for the
quarter ended September 30, 2008 compared to a decrease of $3,306,000 for the
quarter ended September 30, 2007 and an increase in taxes receivable of
$6,466,000 for the quarter ended September 30, 2008 compared to an
increase of only $1,212,000 for the quarter ended September 30,
2007. These factors, which served to reduce operating cash flow, were
partially offset by a decrease in inventory of
$3,486,000. Additionally, operating cash flow was impacted by the
timing of cash receipts and disbursements resulting in an increase in accounts
receivable and an increase in accounts payable, partially offset by the
pre-payment of certain expenses.
Investing Cash
Flows. Net investing cash outflow for the quarter ended
September 30, 2008 was $1,199,000 compared to $1,477,000 for the quarter ended
September 30, 2007. During the quarter ended September 30, 2008, we
made investments to our operating plant of $1,686,000. These
investments were partially offset by the net proceeds from the sale of a
corporate aircraft of $487,000.
Financing Cash
Flows. Net financing cash flow for the quarter ended September
30, 2008, was $26,837,000 compared to $2,980,000 for the quarter ended September
30, 2007 for a net increase in financing cash flow of
$23,857,000. During the quarter ended September 30, 2008, we had net
draws of $27,656,000 under our operating line of credit compared to net draws of
$4,000,000 for the quarter ended September 30, 2007. Proceeds from
stock plans were relatively minimal due to reduced option exercise activity as a
result of the reduced price of our stock.
HEDGING
AND INVENTORY COSTS
Included
within the carrying value of inventory of $60,134,000 as of September 30, 2008
is the market value of derivative instruments related to our hedging strategy of
($1,763,000). This value represents mark-to-market losses on open undesignated
derivative contracts.
In
connection with the purchase of raw materials, principally corn and wheat, for
anticipated operating requirements, we sometimes enter into various commodity
derivative contracts to manage the risk of future grain price
increases. During the quarter ended September 30, 2008, we utilized
derivatives to hedge approximately 57 percent of corn processed compared with
approximately 17 percent of corn processed in the quarter ended September 30,
2007. Additionally, we utilized derivatives to hedge
approximately 81 percent of wheat processed compared with no hedging of wheat
processed in the quarter ended September 30, 2007. Raw material costs
in the quarter ended September 30, 2008 included a net hedging gain of
approximately $119,000 compared to a net hedging loss of $730,000 in the quarter
ended September 30, 2007.
These
hedge transactions are highly effective. Accordingly, nearly all
related losses were entirely offset by reduced raw materials costs.
As of
September 30, 2008, through the use of derivative contracts, we had hedged 23
percent of our projected corn consumption, for the remainder of the fiscal
year. Including cash purchases, we have hedged 24 percent of our
projected corn consumption, for the remainder of the fiscal year.
As
described in Note 4 of our Notes to Condensed Consolidated Financial Statements
included elsewhere herein, effective April 1, 2008, we elected to discontinue
the use of hedge accounting for all commodity derivative
positions. Accordingly, changes in the value of derivatives
subsequent to March 31, 2008 are recorded in cost of sales in the Company’s
Consolidated Statements of Income. As of March 31, 2008, the
cumulative mark-to-market adjustment of $4.2 million net of tax of $2.8 million
included in accumulated other comprehensive income was related to derivative
instruments that had previously been designated for hedge accounting under the
framework of SFAS 133. Gains related to those derivative instruments
have remained in accumulated other comprehensive income until the forecasted
transactions to which the specific hedged positions relate
occurred. As of September 30, 2008, approximately $1.2 million in
deferred gains on previously designated derivative instruments remained in
accumulated other comprehensive income. We anticipate the forecasted
transactions to which these positions relate to will impact earnings in the
second quarter of fiscal 2009 with a corresponding recognition of the $1.2
million in deferred gains.
CONTRACTUAL
OBLIGATIONS
On
November 6, we entered into a Supply Agreement to purchase our requirements of
wheat flour from Conagra Foods Food Ingredients Company,
Inc. The Agreement has a term of five years and is automatically
renewable for an additional term of 5 years unless either party gives at least
180 days written notice of termination. Pricing is based on a formula
which varies depending on changes in several factors, including wheat futures
prices, millfeed prices and freight costs. There is no stated minimum
quantity required to be purchased.
As of November 7, we
entered a new amendment to our credit agreement with our bank lenders which
extended the standstill period thereunder and which imposed new interim
financial covenants summarized below under “Financial
Covenants.” Other terms in the amendment include (i) a provision
limiting loans to base rate loans, with an increase in the interest rate on
outstanding borrowings from LIBOR plus 2.75% or prime plus 0.50% to base
rate, as defined plus 3%, with base rate being not less than the
greater of 4%, Agent’s prime rate or the federal funds rate plus 1%, an
amendment fee of $110,000, (ii) an amendment fee
of $110,000 (we expect related legal and other professional fees to be
approximately $100,000), (iii) a fee of 1% of the outstanding credit
commitment, as defined, payable on February 27, 2009 unless all outstanding
obligations are paid in full and the credit agreement is terminated (this
contingent fee is estimated at $350,000), (iv) the pledge of substantially all
of the Companys remaining unpledged assets, (v) restricting our use of a portion
(approximately $9.2 million) of the commitment under the credit agreement in an
amount equal to a tax refund anticipated to be received in the second quarter
generally to either fund margin calls or for other grain hedging positions, and
(vi) requiring us to use any portion of such anticipated tax refund received
after November 7 (estimated at approximately $8.0 milllion) to reduce
outstanding borrowings under the credit
agreement.
After receipt of
the full tax refund anticipated in the second quarter, the effect of the
provision described in clause (v) above is to limit approximately $9.2 million
of our total availability under the credit agreement to application against
margin calls and other sums owing with respect to grain hedging positions. The
prepayment requirement referred to in clause (vi) above would not reduce the
lenders' total commitment under the credit agreement.
As noted above,
the second amendment expands the lien securing our obligations to the lenders so
that it now covers substantially all of our assets, excluding our new office
building and laboratory in Atchinson and our interest in our German joint
venture, and property at our KCIT facility in Kansas City so long as it is
encumbered by existing liens. We are obligated to deliver a recordable
mortgage with respects to our Atchinson facility by November 17. We are
also required to cause any person acting as a commodity intermediary to execute
a commodity account control agreement in favor of our
lenders.
CAPITAL
EXPENDITURES.
In the
year to date we have spent $1.7 million in capital expenditures and have
commitments for an additional $2.2 million, which we anticipate, will be spent
within the next 12 months.
We are
currently exploring alternative sources of energy for our Pekin, Illinois plant
in the form of a coal-fired steam generation facility. We have applied for
approvals for the construction of a 330,000 pound per hour high pressure solid
fuel boiler cogeneration facility at the plant. The proposed facility will
utilize coal as the primary fuel. The cost of the project is estimated at
$90 million to $100 million. We are seeking a third party energy provider
to fund, own and operate the facility, and would expect to enter a multi-year
energy supply agreement with the energy provider.
The
Illinois Environmental Protection Agency (IEPA) held a public hearing regarding
the fuel boiler cogeneration facility on July 14, 2008. This hearing
represented one step toward receiving a permit for the facility. The
hearing was followed by a written public comment period, which ended on August
13. If the IEPA determines to issue a construction permit, it will be
effective 35 days after the date of issue to allow for an appeal period for
interested parties. Barring an appeal, we would expect to receive a
construction permit at the end of the 35 day waiting period.
After an
operating license is granted and a third party energy provider is identified to
build the facility, we anticipate that it would take approximately two years to
construct and put the facility into operation.
The facility is proposed to
be located on a site that we would lease to the provider which is located on our
plant's 49-acre site. It will be utilized to produce steam to power the
plant's distillery, wheat gluten (protein) and wheat starch production
processes. In addition, a portion of the generated steam will be used to
supply the plant's electrical needs. Excess energy will be available for
sale by the provider to others.
LINE
OF CREDIT
Our credit
agreement, as amended, provides a $55 million revolving credit facility that,
except as noted below, is available for general working capital needs in
addition to permitted capital expenditures, investments, acquisitions and stock
repurchases, as defined in the credit agreement. As amended as of November 7,
2008, we are only permitted to use an amount of the commitment equal to our
anticipated tax refund described herein (approximately ($9.2 million) for
opening and maintaining grain hedging contracts. We will be required to
use approximately $8.0 million of that refund to reduce outstanding borrowings
under our credit agreement, although the lenders' aggregate commitment after
such payment will remain at $55 million. Our credit agreement will expire
on the earlier of February 27, 2009 (subject to extension by our lenders or
earlier termination if we commit a forbearance default) or September 3, 2009. As
of September 30, 2008, we had $50.7 million in outstanding borrowings under the
credit agreement. At November 10, 2008, after giving effect to payments
made on such date, the Company had approximately $3.8 million available under
its credit agreement.
As
previously reported, as of June 30, 2008, we were in default under our covenants
related to the leverage ratio, the fixed charge coverage ratio and the tangible
net worth requirements of our credit agreement. On September 3, 2008, our
lenders agreed to amend the credit agreement in several respects, including
imposing new, monthly interim minimum adjusted EBITDA requirements (as defined
in the credit agreement) of $(7,500,000) for July, $(2,500,000) for August and
$(1,400,000) for September, and minimum tangible net worth requirements (as
defined in the credit agreement of $125,000,000 at the end of July, $123,000,000
at the end of August and $121,000,000 at the end of
September. We met the new requirement for July and August but
did not do so for September. As a result, the lenders under our
credit agreement could, among other remedies, have reduced our borrowing base
under the credit agreement, declined to extend us further credit and/or
accelerated our debt and declared that such debt was immediately due and
payable. However, our lenders did not take these actions. Our lenders have not
terminated our credit or accelerated our debt, but have continued to honor our
draws under our credit agreement. They have approved an
amendment extending the standstill period as described above and imposing new
financial covenants summarized below.
FINANCIAL
COVENANTS
Under our
credit agreement prior to its amendment we were required to maintain a fixed
charge coverage ratio (adjusted EBITDA minus taxes and dividends to fixed
charges) of not less than 1.5 to 1 on a trailing four quarter basis and were
required to maintain at the end of each fiscal quarter;
• working capital
(current assets minus the sum of current liabilities and the unpaid principal
balance of the revolving credit loans to the extent not a current liability) of
$40 million;
• tangible net
worth of not less than $135 million plus (i) an amount equal to 50% of
consolidated net income (but not loss) subsequent to June 30, 2008 minus (ii)
cumulative stock purchases after June 30, 2008; and
• a leverage ratio
(senior fund debt to adjusted EBITDA (EBIDTA plus non cash losses, minus noncash
gains, minus or plus, as the case may be, extraordinary income or
losses).
Recently
our lenders agreed to a new standstill period and imposed new, interim financial
covenants. These require the Company to maintain fiscal year to date
adjusted EBITDA (EBITDA adjusted to eliminate any mark-to-market adjustments
reflected in net income) of ($30.0 million) at the end of October 2008, ($44.0
million) at the end of November 2008, and ($46.0 million) at the end of December
2008 and January 2009.
Our credit
agreement contains various other covenants, including ones limiting our ability
to incur liens, incur debt, make investments, make capital expenditures, dispose
of assets, issue stock, or purchase stock. While the initial agreement permitted
us to pay dividends in the ordinary course, we were required remain in
compliance with our financial covenants. Due to market conditions and
our resulting negative cash flow from operations since June 30, 2008 we have not
been able to pay dividends as a result of the fixed charge coverage ratio
maintenance requirement in our credit agreement. Further, under subsequent
amendments to the credit agreement we are prohibited from paying dividends
without the consent of our lenders.
WORKING
CAPITAL
COMPARISON
TO JUNE 30, 2008
Our
working capital decreased $14,925,000 from June 30, 2008 to September 30,
2008. This decrease was primarily the result of higher outstanding
balances on our revolving credit facility partially offset by an increase in
refundable income taxes, deposits, prepaid expenses and restricted cash balances
held with our hedge trading broker.
COMPARISON
TO SEPTEMBER 30, 2007
During the
twelve month period ended September 30, 2008, our consolidated cash decreased
$2,241,000. The twelve month decrease was primarily a result of an
increase in inventory carrying costs, deposits on pending grain purchases and
lower operating cash flow related to increased net loss. Additionally, we
incurred capital expenditures of $7,641,000 for the twelve month period ended
September 30, 2008, yielding a higher investment in property and
equipment. We financed capital expenditures, increased inventory and
our operations using our revolving credit facility.
During the
twelve month period ended September 30, 2008, our working capital decreased
$20,304,000, primarily as a result of increased balances outstanding on our
revolving credit facility and increased accounts payable. These
factors, which served to reduce working capital, were partially offset by
increased inventories, deposits on pending grain purchases, income taxes
receivable and increased accounts receivable.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We make
our products primarily from wheat and corn and, as such, are sensitive to
changes in commodity prices. We use grain futures and/or options,
which we account for as cash flow hedges, as a hedge to protect against
fluctuations in the market. Fluctuations in the volume of hedging
transactions are dictated by alcohol sales and are based on corn and gasoline
prices. We have a risk management committee, comprised of senior
management members, that meets bi-weekly to review futures contracts and
positions. This group sets objectives and determines when futures
positions should be held or terminated. A designated employee makes
trades authorized by the risk management committee. The futures
contracts that are used are exchange-traded contracts. We trade on
the Kansas City and Chicago Boards of Trade and the New York Mercantile Board of
Exchange.
For
inventory and open futures, the table below presents the carrying amount and
fair value at September 30, 2008 and June 30, 2008. We include the
fair values of open contracts in inventories or other accrued liabilities in our
balance sheet.
|
|
At September 30, 2008
|
|
|
At June 30, 2008
|
|
As of September
30,
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn
|
|
$ |
4,547,905 |
|
|
$ |
4,173,429 |
|
|
$ |
6,485,147 |
|
|
$ |
7,311,379 |
|
Wheat
|
|
$ |
9,573,423 |
|
|
$ |
7,643,128 |
|
|
$ |
3,499,541 |
|
|
$ |
3,069,123 |
|
|
|
Description
and
Expected
Maturity*
|
|
|
Fair Value
|
|
|
Description
and
Expected
Maturity*
|
|
|
Fair Value
|
|
Corn
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Volumes (bushels)
|
|
|
2,000,000 |
|
|
|
|
|
|
|
2,000,000 |
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strike
Price/Bushel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Calls
|
|
$ |
5.40 |
|
|
$ |
210,000 |
|
|
$ |
5.40 |
|
|
$ |
4,387,500 |
|
Short
Calls
|
|
$ |
6.20 |
|
|
$ |
(60,000 |
) |
|
$ |
6.20 |
|
|
$ |
(2,990,000 |
) |
Short
Puts
|
|
$ |
5.10 |
|
|
$ |
(815,000 |
) |
|
$ |
- |
|
|
$ |
- |
|
Contract
Amount
|
|
$ |
- |
|
|
$ |
(665,000 |
) |
|
$ |
- |
|
|
$ |
1,397,500 |
|
|
|
Description
and
Expected
Maturity*
|
|
|
Fair Value
|
|
|
Description
and
Expected
Maturity*
|
|
|
Fair Value
|
|
Corn
Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Volumes (bushels)
|
|
|
3,150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strike
Price/Bushel
|
|
$ |
5.2224 |
|
|
$ |
4.8750 |
|
|
|
|
|
|
|
|
|
Contract
Amount
|
|
$ |
16,451,000 |
|
|
$ |
15,356,000 |
|
|
|
|
|
|
|
|
|
|
|
Description
and
Expected
Maturity*
|
|
|
Fair Value
|
|
|
Description
and
Expected
Maturity*
|
|
|
Fair Value
|
|
Wheat
Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Volumes (bushels)
|
|
|
|
|
|
|
|
|
|
|
400,000 |
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strike
Price/Bushel
|
|
|
|
|
|
|
|
|
|
$ |
6.7775 |
|
|
$ |
8.9625 |
|
Contract
Amount
|
|
|
|
|
|
|
|
|
|
$ |
2,711,000 |
|
|
$ |
3,585,000 |
|
*The
latest expected maturity date occurs within one year from date
indicated.
We also
contractually sell a portion of our fuel grade alcohol at prices that fluctuate
with gasoline futures.
Except for
our credit facility, our outstanding debt at September 30, 2008 carries fixed
interest rates, which limit our exposure to increases in market
rates. We have a $55 million credit facility, which permits
borrowings at a rate equal to either a base rate or LIBOR plus an applicable
margin. Increases in market interest rates would cause interest
expense to increase and earnings before income taxes to decrease. The change in
interest expense and earnings before income taxes would be dependent upon the
weighted average outstanding borrowings during the reporting period following an
increase in market interest rates. The recent amendment
to our credit agreement discussed herein will result in an increase in our
interest rate by approximately 200 basis points. Based on weighted
outstanding borrowings during our first quarter, a 200 basis point increase over
the rates actually paid in the first quarter would have increased our interest
expense in the first quarter by approximately $184,000.
ITEM
4. CONTROLS AND PROCEDURES.
(a) Evaluation
of disclosure controls and procedures.
As
of the end of the quarter ended September 30, 2008 our Chief Executive Officer
and Chief Financial Officer have each reviewed and evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
each concluded that our current disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and include controls and procedures
designed to ensure that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure
(b) Changes
in Internal Controls.
There has
been no change in the Company’s internal control over financial reporting
required by Exchange Act Rule 13a-15 that occurred during the fiscal quarter
ended September 30, 2008 that has materially affected, or is reasonably likely
to materially affect MGP Ingredients, Inc.’s internal control over financial
reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
The
Company is party to a recently filed lawsuit styled Daniel
Martin v. MGP Ingredients, Inc., et al., No.
08-L-697 in the Circuit Court for the Third Circuit, Madison County, Illinois,
against the Company and approximately 70 other defendants, wherein the claimant
alleges that he contracted desmoplastic mesothelioma from exposure to asbestos.
The claimant alleges that in the late 1980’s or early 1990’s his company was
retained to install insulation at the Pekin, Illinois facility at the same time
that the Company was conducting asbestos abatement projects in the facility. The
claimant seeks unspecified compensatory and punitive damages. We intend to
defend ourselves vigorously. The matter is in preliminary states of discovery,
and at this time we are unable to estimate the amount of potential loss, if
any, with respect to this claim.
ITEM 1A. RISK
FACTORS.
Our
failure to comply with covenants in our credit facility could result in the
termination of our credit facility, the acceleration of our obligations under
such credit facility and trigger other rights. Turmoil in the credit
markets may make it difficult for us to find new lenders.
As
previously disclosed, as of June 30, 2008 we were in default under
certain of the financial covenants of our credit agreement. Our
lenders could have terminated our ability to borrow or accelerated our debt but
did not do so. Instead, they agreed to an amendment to our credit agreement,
which, among other matters, provided for a standstill period expiring on October
31, 2008 unless extended by the lenders or unless terminated due to our default
under the new terms set forth in the amendment. At October 25,
2008, we were in forbearance default under interim financial covenants that
applied during the forbearance period that our lenders had agreed
to. As a result, our lenders were again entitled to terminate our
ability to borrow or accelerate our debt. Again they did not do so
but approved a new standstill period during which we will be subject to new
interim financial covenants.
To date,
our lenders have been willing to continue working with us notwithstanding our
covenant defaults. However, they are under no obligation to continue
doing so and may exercise their remedies against us at the end of the current
forbearance period or sooner if we commit a forbearance period
default. Further, one of our lenders would like us to find
new financing and we believe that we will have to do so on or before
our credit agreement’s outside expiration date of September 3,
2009. Based on recent discussions with one of our lenders, we
believe that two of our current lenders will enter into a new, asset based
lending arrangement with us before February 27, 2009, if we meet the new interim
performance measures. However, discussions are at a preliminary stage and they
are under no legal obligation to enter a new financing arrangement with
us. We believe that our ability to continue operating after February
27, 2009 is dependent on our ability to either obtain further forbearance from
our current lender group or secure a new credit agreement or other
financing.
If our
bank lenders were to terminate our credit, we might not have sufficient funds
available to us to continue normal operations. If our lenders
were to accelerate our debt, it could result in the acceleration of debt under
other secured obligations that we are subject to. We would be unable to repay
our debt immediately. If any such event occurred, we
would require alternate funding and might, in the case of acceleration, suffer
foreclosure on the assets we have pledged to our lenders. We may not
be able to access additional sources of refinancing on similar terms or pricing
as those that are currently in place under our current debt
instruments, or at all, or otherwise obtain other sources of
funding. Presently, the short term prospects for conventional bank
financing outside our current lending group do not appear
promising. The recent turmoil in the credit markets has
adversely impacted the willingness of many banks to extend credit
to new customers. Therefore, depending on whether one or
more of our current lenders are willing to continue making financing available
to us, among other steps, we may have to consider issuing equity or convertible
debt, which could significantly dilute existing shareholders, further
reduce our expenses and capital expenditures, which may impair our ability to
increase revenue and grow operating cash flows, and selling
assets. There can be no assurance that any such strategy would be
successful.
Our
reduced liquidity could affect our operations.
During the
quarter ended September 30, 2008, we had net borrowings of $50.7 million under
our credit agreement and at September 30 we had $4.3 remaining capacity
available to us. Although we believe that cash flows from operating
activities and the amounts available under the credit agreement should be
sufficient to provide for our projected needs through February 27,
2009, until we obtain a new credit facility we will need to take particular
care in managing our cash flows and may be unable to take advantage
of certain business opportunities that would otherwise be available
to us. For example, notwithstanding current favorable grain prices,
we are not taking long forward positions in grain in order to conserve our
cash. This could result in higher future expenses if prices change
adversely. Our prospects depend on a number of factors, some of which
are beyond our control, including commodity prices, natural gas
prices, our ability to liquidate inventories as planned, the level of
our capital expenditures, the amount of margin calls on our commodity
trading accounts, the willingness of our suppliers to extend normal trading
terms, receipt of tax refunds and compliance with the new interim
covenants imposed by our lenders.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
During the
quarter ended September 30, 2008 we made no repurchases of our
stock.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
As of October 25, 2008 we were in
forbearance default of certain interim financial covenants under our credit
agreement. See Item 1A. Risk
Factors, above.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The
annual meeting of stockholders of the Company was held on October 16,
2008.
(b)
At the annual meeting, the following persons where elected to the Board
of Directors:
Gary
Gradinger was elected to the office of Group A Director for a term expiring in
2011 with 15,211,809 common share votes for his election, 369,929 votes
withheld.
Laidacker
M. Seaberg was elected to the office of Group B Director for a term expiring in
2011 with 410 preferred share votes for his election and zero votes
withheld.
Timothy W.
Newkirk was elected to the office of Group B Director for a term
expiring in 2011 with 410 preferred share votes for his election and zero votes
withheld.
In
addition, the terms of Linda E. Miller, Daryl L. Schaller, Ph.D. and
John R. Speirs as Group A Directors continued after the annual
meeting and the terms of Michael Braude, John E. Byom and Cloud L. Cray, Jr. as
Group B Directors continued after the annual meeting.
(c) –
(d)
Not applicable.
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004 (File No.
0-17196)
|
3.2
|
Bylaws
of the Company (Incorporated by reference to Exhibit 3.2 of the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2008 (File
Number 0-17196)
|
*4.1
|
Waiver
letter dated September 16, 2008 from GE Government Public Finance
Inc. and General Electric Capital
Corporation
|
*4.2
|
Letter
dated October 31, 2008 from Commerce Bank extending standstill period
under Credit Agreement to November 10,
2008.
|
*31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Acts of 2002
|
*31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
*32.1
|
Certification
of Chief Executive Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
*32.2
|
Certification
of Chief Financial Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements on the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
MGP
INGREDIENTS, INC.
|
Date: November
10, 2008
|
By /s/ Timothy W.
Newkirk
Timothy
W. Newkirk, President and Chief Executive Officer
|
|
|
Date: November
10, 2008
|
By /s/ Robert
Zonneveld
Robert
Zonneveld, Vice President
and
Chief Financial Officer
|