HIGH PLAINS CORPORATION 1996 ANNUAL REPORT
(Inside Front Cover)
Table of Contents (on far left side of page)
Selected Financial Data 1
Letter to Stockholders 2
Ethanol Outlook 3
Management's Discussion and Analysis 6
Financial Statements 10
Notes to Financial Statements 15
Auditors' Report 21
Corporate Information Inside Back Cover
Investor Information Inside Back Cover
GRAPHS: 1994, 1995, 1996 - Millions of U.S. Dollars
Sales $33.6 $52.8 $87.9
Total Assets $48.9 $67.5 $75.1
Net Income $(.9) $ 6.1 $11.8
(Graphs placed on left side of page, just to the right of the Table
of Contents. Placed one on top the other, down the entire page in
a column.)
Corporate Mission Statement (placed in middle of page, running down
the lenghth of the page)
Corporate Mission Statement / Corporate Profile
Our Goal: Provide a vital product, Ethanol, that improves the
quality of life, cleans our air, aids the American farmer and
decreases our dependence on foreign oil.
Corporate Profile (placed on the right hand side of page, running
down the length of the page)
High Plains Corporation is the 6th largest in a U.S. field of
approximately 60 Ethanol manufacturers. The Company produces at
two state-of-the-art plants, one located in Colwich, Kansas and
the other located in York, Nebraska, each producing approximately
20 million and 40 million gallons per year, respectively.
The Company converts grain into Ethanol, distiller's grains
both wet and dry (DDGs), and high purity carbon dioxide (CO2).
The Ethanol is sold for blending into gasoline nationwide. The
Company markets DDGs as livestock feed.
High Plains was founded in 1980 and is headquartered in
Wichita, Kansas.
<PAGE>
<TABLE>
<CAPTION>
Five Year Summary of Selected Financial Data
For The Years Ended June 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
INCOME ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales and Revenues $87,925,409 $52,769,014 $33,566,271 $31,490,226 $30,226,939
Net Earnings (Loss) $11,821,077 $ 6,072,407 $ (933,453) $ 5,337,791 $ 2,051,936
BALANCE SHEET
Working Capital $ 6,573,150 $ (538,322) $(2,544,316) $ 2,960,512 $ 1,560,674
Long-term Debt $14,460,274 $19,052,272 $10,248,339 $ .00 $21,171,466
Total Assets $75,096,095 $67,517,301 $48,915,483 $33,622,311 $29,676,592
Stockholders' Equity $53,581,343 $40,250,738 $32,412,525 $32,331,610 $ 5,920,467
OPERATIONS
Gallons of Ethanol Sold 44,630,313 33,576,788 18,449,822 16,741,131 17,332,896
Tons of DDG Sold 130,082 107,325 64,662 54,502 57,457
PER SHARE
Earnings (Loss) Per
Common And
Dilutive Common
Equivalent Share:
Earnings (Loss)
Before Extra-
ordinary Item $.74 $.39 $(.06) $.46 $.27
Extraordinary Item $.00 $.00 $.00 $.07 $.00
Net Earnings (Loss) $.74 $.39 $(.06) $.53 $.27
RATIOS
Book Value Per Share $3.30 $2.60 $2.19 $2.19 $.71
Return on Total Assets .19 .11 (.02) .14 .11
<FN>
For comparative purposes, prior year financial ratios and earnings per
share have been restated to effect stock splits disclosed in these
financial statements.
No cash dividends were declared per common share during the years shown
above.
</TABLE>
1
<PAGE>
Fiscal years 1995 and 1996 remind us what it means to be in a business
that is affected by commodities. When a company takes appropriate steps to
limit risks and plan ahead adequately, it can be a wonderful and lucrative
business. You will note in our financial statements that we have just
achieved a very outstanding year in terms of revenues, net profit, and cash
flow. We prepaid our long-term debt and interest by over $8 million and we
have in hand the necessary capital to begin operations for the upcoming
year.
I am sure everyone is aware of the recent, record high prices of corn
and milo, which constitute the feedstock for our Ethanol plants. One and
one-half years ago, we anticipated increasing corn prices due to the
expected reductions of the 1994-1995 corn harvest. Corn prices also
increased due to extremely high exports. This combination resulted in
prices of corn exceeding $5.00 per bushel, which was more than double the
price of $2.50 that was the average price paid over the last ten years.
Since 40 percent of a bushel is required to produce one gallon of Ethanol,
when the price per bushel is $5.00, the cost for just the feedstock
necessary to produce that gallon of Ethanol is $2.00. When you add the
other costs of production, total costs far exceeded the sales price of a
gallon of Ethanol.
Our industry has gone through a very difficult period in which plants
were closed and some producers were forced into bankruptcy. In addition,
ADM, the industry's largest producer, reduced their fuel Ethanol production
by about 70 percent due to the high cost of feedstock. Our Company was in
the position of having to deal with the same high feedstock costs. However,
thanks to farsighted planning and having appropriate risk management
policies in place, we purchased forward corn contracts early to lock in
favorable prices.
In early May, we decided that it was no longer the best economical
choice to maintain production with the high cost of grain, even though we
had forward contracted the corn. We could have continued producing with
small profits as we consumed the corn feedstock we had under contract. We
chose the alternative, which was to close both plants in the spring, with
the anticipation of opening this fall at harvest. We sold our corn
contracts for approximately $14 million. This turned out to be one of the
best moves our Company has ever made and resulted in the most profitable
year we have ever had.
As of today, we have purchased milo feedstock at prices below $3.00 per
bushel on the open market. Our Colwich, Kansas plant will open September
16, and we plan for the York, Nebraska plant, which is farther north and
with a later local harvest, to open by October 1.
Conditions have changed dramatically this fall. Not only have corn
prices come back to a more reasonable level, but we anticipate much lower
prices during and after harvest. Also, due to the industry's cutbacks, we
have been able to sell a large part of our fall, winter, and spring
production of Ethanol at prices exceeding the price levels of previous
years.
Today, we are issuing a news release announcing the acquisition of the
majority of the equipment necessary to modify our York plant, so that it
will have the capability of producing a higher quality industrial Ethanol.
We have taken this step, because we have obtained a contract for the sale
of this Ethanol which should result in an even higher level of
profitability than fuel Ethanol sales. The anticipated profit from the
industrial Ethanol sales should allow the majority of the cost of the
modification of the York plant to be recovered within 12 months of
production. More importantly, this should give us the ability in the future
to sell Ethanol into not only the fuel grade market but also to the various
industrial grade markets. The modifications to the York plant will permit
us to produce either type of Ethanol by throwing a simple switch.
I hope that we have relayed the enthusiasm and the optimistic outlook
that we have for the coming year. We feel that we have gained a tremendous
amount of experience in operating and succeeding in a commodity driven
industry in such a volatile year, and feel that we are capable of meeting
any changes in the commodity prices of the future.
You will note by our financial statistics that we have just completed a
record year in revenues and almost doubled our highest year in net
profitability. We haven't seen our Company's stock prices react accordingly
to that achievement. Instead, our stock appears recently to have reacted
mostly in opposite directions to the movement of our feedstock prices.
Obviously, this year's historically high price of corn has reduced our
stock price. We now look for record to near record harvests which should
lower costs and increase our profitability. If this relationship between
grain costs and our stock's market price continues, lower grain prices
could assist in an increase in the market price for our stock. Thank you
for your support and look forward with us to a bountiful year.
Stanley E. Larson
Chairman of the Board
President and CEO
September 11, 1996
(Picture of Stan located left hand column, half-way down page)
2
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ETHANOL OUTLOOK
What is the likelihood that the Ethanol industry will be affected by high
corn prices in the future, as it was in 1996?
1996 was a year in which we saw the price of corn increase from slightly
over $2.00 per bushel to as high as $5.60 per bushel prior to the fall
harvest. The year began with low corn inventories; and with a mediocre 7.5
billion bushel corn harvest in the U.S. and a weak harvest worldwide,
supplies ran low while trying to satisfy the hunger for U.S. feedgrains.
While there are some who indicate that we have seen the last of $2.50
per bushel corn due to constraints on grain production and on an ever-
increasing worldwide demand, we think otherwise. We think that the U.S.
corn market has started a grain accumulation phase, largely due to the
recently signed Freedom to Farm legislation.
Freedom to Farm provides U.S. producers government payments for seven
years, with no strings attached. Farmers are free to grow as much of any
crop that they wish. In the past, the U.S. Department of Agriculture (USDA)
was able to control U.S. and world grain supplies through crop set aside
and crop acreage reserve programs. These set aside programs either no
longer exist or are being severely limited in conjunction with Freedom to
Farm. Consequently, many experts expect grain production to occur on record
acreage. Foreign planted acres are increasing, too. In addition, trendlines
on crop yield per acre are continually increasing as a result of biogenetic
advances and new farming technologies. Following a period of several normal
growing seasons, large world inventories of grains could be accumulated
which could be price depressing.
While worldwide demand for feedgrains will undoubtedly increase, the
only major elements to offset expected worldwide increases in grain
production would be drought or lower prices.
Graphs: 1994 1995 1996
ETHANOL SOLD
Millions of U.S. Gallons 18.4 33.6 44.6
STOCKHOLDERS' EQUITY
Millions of U.S. Dollars $32.4 $40.3 $53.5
(located to the far right hand side of page, one on top the other in a
column)
(Picture of Ray Friend, Executive Vice President and Chief Financial
Officer located to the left of the graphs, half-way down page)
Are the Reformulated Gasoline (RFG) Program and the Federal Oxygen Program
effective? What is happening currently, and are these programs expected to
grow? (This is a continuation of Ethanol Outlook, it starts half-way down
page 3, and carries over onto page 4)
These clean air programs appear to be both extremely effective and
economic, and we expect Ethanol usage in both of these programs to grow. In
fact, the actual cost of RFG has been much lower than even the EPA expected
in most areas, and the gasoline marketers are fulfilling their oxygenate
requirements while they benefit from the extra octane that Ethanol
provides.
In addition, increased demand for Ethanol should occur from several
other initiatives. For example, there are now seventeen E-85 refueling
stations in the country, and that number is targeted to increase to forty
before the end of 1996. E-85 is a fuel mixture containing 85 percent
Ethanol and 15 percent gasoline. Automobile manufacturers are producing
thousands of E-85 cars per year. The City of Los Angeles, California has
determined that all 330 of their metropolitan buses will be converted over
to burn Ethanol instead of methanol due to benefits such as reduced
pollution, improved economics, and reduced maintenance costs.
3
<PAGE>
Below are some recent indicators that document the Ethanol industry
outlook as bright:
- - The EPA recently wrote a letter to the American Petroleum Institute in
which they stated that RFG is much more effective in reducing air
pollutants than the oil companies' low vapor pressure gasoline (low RVP).
- - Automobile manufacturers have indicated that the drivability of
automobiles on RFG is improved compared to those fueled with low RVP
gasoline.
- - Ozone exceedences in 1996 were down from those in 1995.
- - The effectiveness of oxygenated fuels, such as Ethanol, in reducing
carbon monoxide emissions was again praised, this time by two Professors
from the University of California at Berkeley.
- - The California Air Resource Board concluded that the introduction of
California Phase II RFG will result in a 50 percent decline in the amount
of ambient benzene in Northern California.
- - A recent General Accounting Office report shows that the use of
oxygenated fuels such as Ethanol could significantly reduce our dependence
on foreign oil. We currently import over 54 percent of our oil/gasoline
needs.
- - President Clinton has recently issued a statement that more areas that
are currently in ozone attainment will be allowed to opt-in to the RFG
program due to its economics and its effectiveness at pollution reduction.
- - Due to its effectiveness and the low cost of RFG compared to other
alternatives, the Association of Western Governors, many environmentalists
and several prominent legislators have endorsed a National Reformulated
Gasoline Program. With RFG's recent successes and with the support of
members of Congress and the President, RFG could become the standard fuel
required in all states.
- - The EPA estimates that in the first full year of RFG, 1995, over
280,000 tons of pollution were removed from the air over America due to
this program. As the RFG program grows, even more pollution will be
removed.
(picture of York plant placed 2/3 way down page, running across entire
width of page)
Why do oil companies and the legislators from oil producing states complain
about the Federal excise tax incentive to utilize Ethanol fuel blends?
(continuation of Ethanol Outlook, starts at the bottom of page 4 and
carries over onto page 5)
The answer is simple: gasoline is losing market share to Ethanol.
Congress created the Federal Excise Tax Credit in an effort to stimulate
the use of Ethanol for a variety of reasons. Several benefits from
increased Ethanol production and use are the reduction of our economic and
military dependence on foreign oil, cleaner air quality, the creation of a
market to consume excess farmers' grain, the creation of domestic jobs,
help in balancing our Federal budget through Ethanol production's economic
development benefits and reduced military costs, reduction of our foreign
trade deficit, and moving towards a more secure energy future for our
children.
4
<PAGE>
Recognizing that every commonly used fuel and energy source, including
nuclear, solar, oil, natural gas, and gasoline is subsidized, Congress
established an Ethanol incentive in order for it to be competitive. The
Federal incentive for Ethanol amounts to $.54 per gallon and is received by
the fuel blender. Current oil/gasoline subsidization, that we are aware of,
amounts to approximately $1.00 for every gallon of gasoline sold in this
country, totalling nearly $125 billion per year. This doesn't include the
cost of American lives lost defending oil sensitive areas. Gasoline has
been subsidized for over seventy years. The subsidies include but are not
limited to:
1. Federal and State intangible drilling expense write-offs
2. Federal and State depletion allowances
3. Exclusion from alternative minimum tax computation
4. Exclusion from passive loss limitations
5. Tax credits for alternative oil and gas recovery methods
6. Foreign trade deficit for oil at $50 billion per year
7. Commerce Department programs to protect U.S. oil investments
on foreign soil
8. Foreign tax credits reducing overall income tax rates for oil
companies to as low as 4%, while others pay as high as 50%
9. Access to low-cost reserves on Federal land
10. Strategic Petroleum Reserve
11. Research subsidies
12. Cost of removing air pollution
13. Cost of oil spills on land and in water (both ecological and
economic)
14. Cost of adverse health effects of citizens
15. Antitrust exemptions
16. Price protection
17. Military spending to protect oil sensitive areas
Without the subsidies that benefit the domestic oil and gas industry, we
would be close to total dependency on foreign energy sources, instead of
the current 55 percent dependency. Consequently, we believe there is a need
to continue to subsidize domestic oil and gas exploration. However, make no
mistake; these benefits granted to the oil and gas industry, whether
directly or indirectly, are still subsidies paid for by each of us as
taxpayers. It is unrealistic and unfair to expect Ethanol to compete with a
subsidized oil and gas industry that is unable to compete against foreign
oil without subsidies of their own. If all energy subsidies were removed,
Ethanol would be able to compete easily with gasoline.
(picture of York plant towers on page 5, right hand column, starting 1/3 of
the way down the page, and extending to the end of the page)
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
High Plains derives revenue from the sale of Ethanol and
Distiller's grain (DDG), a by-product of the Ethanol production
process. The sales price of Ethanol historically has varied
directly with the wholesale price of gasoline, which is primarily
dependent upon the spot market for crude oil. In the past,
Ethanol producers have been able to obtain a higher price per
gallon than wholesale gasoline prices because of Federal excise
tax rate reductions available to customers who blend Ethanol with
gasoline and direct and indirect incentive payments from state
governments.
Recently, Ethanol sales prices have also reflected a premium
due to oxygenate and octane enhancing properties of Ethanol.
Demand for Ethanol products also affects price, which is
influenced by the cost and availability of alternative oxygenate
products. Two Federal programs established by the Clean Air Act
amendments of 1990, (1) the Federal Oxygen Program, which became
effective November 1, 1992, and (2) the Reformulated Gasoline
(RFG) program, which became effective on January 1, 1995, are
increasing the demand for Ethanol.
The Company believes that Ethanol and ETBE, an Ethanol based
fuel additive with a low vapor pressure, are normally competitive
in the market place. However, during the spring and summer of
1996, grain costs increased to record levels which caused many
Ethanol producers, including the Company, to curtail their
Ethanol production, making Ethanol more expensive and thus,
inhibiting the manufacture of ETBE. Grain costs are currently
returning to normal levels and Ethanol production has increased.
This should provide for sufficient quantities of competitively
priced Ethanol, to be used as an oxygenate, either as Ethanol or
in the form of ETBE.
The Company believes a 1995 ruling by the U.S. Treasury
Department, which allowed the production and sale of ETBE to
qualify for an excise tax exemption, will result in an increase
in demand for ETBE and consequently Ethanol, ETBE's major
ingredient. Legislative proposals initiated by certain
legislators from oil producing states regularly attempt to reduce
or eliminate Ethanol's excise tax exemption, eliminate the excise
tax exemption for ETBE and reduce the tax benefits of Ethanol
usage. To date these legislative proposals have not been
successful, primarily because of resistance from other
legislators and environmentalists who are aware of the economic
and environmental benefits that result from the Ethanol and ETBE
tax exemption. The Company believes that support for Ethanol is
still strong at both the State and Federal government levels.
The Company's primary grain feedstock for fiscal 1996,
continues to be sorghum (also known as milo), however, the use of
corn represented approximately 36% of total grains utilized for
both of the Company's plants. Production at the Colwich, Kansas
plant relied almost exclusively on sorghum as its grain
feedstock, while production at the York, Nebraska facility relied
on a mixture of approximately 53% corn and 47% sorghum. The cost
of these grains is primarily dependent upon factors unrelated to
those affecting the price of Ethanol. Sorghum prices generally
vary directly with corn prices, and both are influenced by local
grain supplies and market prices as well as world market
conditions.
As to the risk of increased grain prices, High Plains attempts
to control this major operating cost by periodically employing
certain strategies including grain trading and forward
contracting. To this end, on July 1, 1995, the Company entered
into an exclusive grain supply agreement with Farmland
Industries, Inc. (Farmland) to supply all grain needs for the
Company's Colwich, Kansas and York, Nebraska plants for one year
with automatic renewal for one-year terms. The agreement may be
terminated by either party at any time upon thirty days written
notice. On June 30, 1996, this agreement was allowed to
automatically renew. The Company believes the Farmland agreement
has contributed to the Company's ability to minimize grain costs
by providing the Company with access to a larger number of grain
sources and to more complete feedgrain analysis and forecast
information.
During the fourth quarter of fiscal 1996, the Company sold all
of its forward grain contracts, at a time when feedstock prices
were at record level highs in comparison to the forward grain
contract prices. Consequently, as of June 30, 1996, the Company
held no forward grain contracts or feedstock inventories.
The selling price of DDG, the Company's primary by-product,
generally varies in accordance with sorghum and corn prices.
Traditionally, as grain prices increase, the Company's DDG prices
also increase and have resulted in an offset up to approximately
one-half the effect of the grain price increase. DDG sales
accounted for 25.0%, 20.8% and 17.9% of sales in fiscal 1994,
1995 and 1996, respectively.
The Company has traditionally sold a majority of its Ethanol
production based on spot market conditions during spring and
summer. However, during the winter the Company continues to sell
up to 80% of its Ethanol under fixed price forward contracts that
secure Ethanol deliveries for customers and allow the Company to
control its operating revenues by protecting the Company against
spot market price changes. The ability to forward contract
Ethanol sales at fixed prices during the winter months is a
direct result of greater demand for Ethanol created by the
Federal Oxygen Program, a recurring wintertime program.
The Company normally sells all of its production volume and
typically has less than two weeks inventory on hand. The increase
in sales volume in 1996 over prior fiscal years is primarily due
to the increased production contributed by the Company's York,
Nebraska facility. In fiscal 1996, the Colwich plant produced
14.3 million gallons, a 19.7% decrease in Ethanol production from
the 17.8 million gallons produced in fiscal 1995. The reduced
1996 production at the Colwich facility was primarily due to the
temporary shutdown of the plant in May 1996. Production at the
Colwich facility for fiscal 1996 reflects a 22.7% decrease from
the 18.5 million gallons produced at the facility in fiscal 1994.
In fiscal 1996, the York facility produced 29.2 million gallons,
an 85.9% increase in Ethanol production above the 15.7 million
gallons produced in fiscal 1995. The increased 1996 production at
the York plant was primarily due to full operation of the plant
until the May 1996 temporary shutdown, compared to only eight
months of production for fiscal 1995, the York plant's start-up
year.
The Company has expanded the Colwich plant to a production
capacity of approximately 20 million gallons per year, which
management has determined is its maximum efficient level of
production. The York plant was originally designed to produce 30
million gallons annually. However, in fiscal 1996, the York
facility achieved production levels in excess of design capacity
and produced at an annualized rate of approximately 35 million
gallons in spite of down time for equipment repairs. Management
believes the maximum efficient level of production has not yet
been achieved due to the downtime noted above and the temporary
shutdown of the plant in May 1996. Future volume growth beyond
these maximum levels will be dependent upon improvements to the
York facility, the success of any further expansions and the
construction and operation of new Ethanol production facilities.
Temporary Shutdown of Plant Operations
During the spring of fiscal 1996, corn and milo feedstock
prices increased substantially compared to prior years, reaching
record level highs. Prior to these increases, the Company had
forward contracted grain purchases to insure the availability of
grain at a fixed price. These contracts would have allowed
continued operations through approximately August 1997. However,
due to the substantial increases in grain prices which were in
excess of the forward contracted levels, the Company sold all of
its forward grain contracts for approximately $14 million net of
commissions. As a result, grain supplies for production were
reduced to on-site inventories, which were completely consumed by
May 1996. Consequently, both the Colwich, Kansas and York,
Nebraska plants were temporarily shutdown in May 1996, and as of
June 30, 1996, were not operating. The majority of plant
employees were temporarily furloughed during this shutdown and
staff was reduced at the Company's headquarters.
At the time of shutdown, the Company had unfilled delivery
commitments for the sale of Ethanol and DDG for which
insufficient inventory levels were held. Expenses incurred prior
to year end related to these undelivered contracts for the sale
of Ethanol and DDG were approximately $2.5 million. At June 30,
1996, the Company had outstanding commitments of approximately
$292,000 for DDG and $629,093 for Ethanol. Final settlements are
dependent on fluctuation in prices the Company may pay to fill
the contracts should the plants not be in production to meet
timely fulfillment of the contracts.
Subsequent Events
In September 1996, the Company began rehiring furloughed
employees for both the Colwich, Kansas and York, Nebraska plants.
As the plants became fully
6
<PAGE>
staffed, preliminary testing of
equipment began in preparation for a production start-up date set
for no later than mid-October 1996. In addition, the Company has
contracted to purchase approximately five million bushels of
feedstock and expects to buy more as harvest progresses.
Also, subsequent to year end the Company secured a $17 million
contract to sell industrial grade Ethanol for a 12-month period
beginning January 1997. The York, Nebraska facility was selected
for the retrofit needed to enable industrial grade Ethanol
production. Modifications to the York plant, which will not
impede normal plant operations, are scheduled for completion in
December 1996. Total costs to modify the plant are estimated to
be $2.5 million.
Non-recurring Events
Several events occurred in fiscal 1994 that had significant
impact on the Company's business and operations. The net effect
of these events totaling $1,535,363 has been separately disclosed
in the financial statements.
During March and April, 1994 the Company inadvertently
processed undisclosed ingredients into one batch of its DDG, due
to those ingredients being contained in alcohol provided by a
vendor. With the ingredients inclusion in the DDG and when
coupled with specific other feed products, certain customers
experienced cattle losses. The Company's product liability
insurance has covered virtually all of these losses except for
certain related expenses. These expenses included costs of
product recall, freight, legal fees and inventory losses totaling
$859,848 and were provided for at June 30, 1994. For the year
ended June 30, 1995, $108,000 of additional charges in excess of
the original reserve estimate were incurred, primarily for legal
fees and freight.
With regard to the above matter, on March 22, 1996, the
Company filed suit against the vendor and other related parties
that provided the contaminated alcohol, for the full cost of the
product recall caused by the undisclosed ingredients, as well as
related lost profits. However, no provision has been made for any
potential recovery for fiscal year ended 1996 or prior.
A major customer of the Company with an outstanding trade
receivable balance of $675,515, filed for protection under
Chapter 11 of the Bankruptcy Code during June, 1994. A one-time
charge for the write-down of this receivable was recorded at June
30, 1994. The Company included no write-downs of trade
receivables for the same period ended June 30, 1996, or June 30,
1995. Historically, the Company's bad debt expense has been less
than .1% of sales.
Results of Operations
The following table sets forth certain items in the Company's
Statements of Operations expressed as percentages of net sales
and revenues for the periods indicated:
For the Years ended June 30, 1996 1995 1994
----- ----- -----
Ethanol and incentive revenues 65.1% 78.4% 73.5%
By-products and other sales 19.0 21.6 26.5
Revenue from forward contracts 15.9 0.0 0.0
----- ----- -----
Net sales and revenues 100.0 100.0 100.0
Cost of products sold 79.0 82.8 92.6
Expense of forward contracts 2.8 0.0 0.0
----- ----- -----
Gross profit 18.2 17.2 7.4
Selling, general and
administrative expenses 2.3 2.9 5.7
----- ----- -----
Operating income 15.9 14.3 1.7
Interest expense (2.5) (2.4) 0.0
Non-recurring expense 0.0 (0.2) (4.6)
Other operating income 0.4 0.1 0.1
----- ----- -----
Net earnings (loss) before
income taxes 13.8 11.8 (2.8)
Income tax expense 0.4 0.3 0.0
----- ----- -----
Net earnings (loss) 13.4% 11.5% (2.8)%
===== ===== =====
FISCAL 1996 COMPARED TO FISCAL 1995:
1996 1995
----------- -----------
Ethanol and incentive revenues $57,256,397 $41,355,707
By-products and other sales 16,663,699 11,413,307
Revenues from forward contracts 14,005,313 --
----------- -----------
Net sales and revenues $87,925,409 $52,769,014
=========== ===========
Net sales and revenues for the year ended June 30, 1996 were
66.7% higher than net sales and revenues for the same period
ended June 30, 1995. The Company sold 43,333,305 gallons of
Ethanol which generated sales of $51,701,573 with an average
selling price of $1.19 for the year ended June 30, 1996. During
the same period in fiscal 1995, 33,576,788 gallons were sold
generating sales of $37,337,916 at an average selling price of
$1.11. Production and sales increased significantly in fiscal
1996 compared to fiscal 1995 primarily due to the increased
production provided by the York, Nebraska facility and higher per
gallon prices. The selling price of Ethanol is influenced by
several factors, including crude oil, wholesale gasoline prices
and product demand. The Federal Oxygen Program, which replaced
various state winter fuel oxygen programs and the RFG program
have also affected Ethanol pricing due to demand for Ethanol's
oxygen content.
Included in Ethanol and incentive revenues are amounts of
$1,126,387 and $1,304,019 for fiscal 1996 and 1995, respectively,
for Ethanol produced under the Kansas production incentive
program. These payments ranged from $.08 to $.10 per gallon of
Ethanol produced. The Kansas incentive program is scheduled to
expire July 1, 1997. The Company believes the Kansas legislature
will continue to support the incentive program due to its
economic benefits to agriculture, and thus, believes there is a
good possibility that the program will be extended beyond the
current expiration date. Additional amounts of $4,428,437 and
$2,713,772 in production tax credits from the State of Nebraska
were recorded as incentive revenues for the years ended June 30,
1996 and 1995, respectively. Under the Nebraska program the
Company receives an incentive in the form of a transferrable
production tax credit in the amount of $.20 per gallon of Ethanol
produced. Not less than two million gallons and not more than
twenty-five million gallons produced annually, at the Nebraska
facility, are eligible for this credit. The Company will no
longer be eligible for this credit after December 31, 1999.
For the year ended June 30, 1996, by-products and other sales
totaled $16,663,699. For the same period ended June 30, 1995, by-
products and other sales totaled $11,413,307. In addition, during
the fourth quarter of fiscal year 1996, the Company sold all of
its forward grain contracts net of commissions for approximately
$14.0 million, due to record level grain prices in excess of the
forward grain contract prices.
Cost of products sold as a percentage of net sales and
revenues were 79.0% and 82.8% for fiscal 1996 and 1995,
respectively. The decrease in cost of products sold as a
percentage of net sales and revenues was primarily due to the
increase in revenues from the sale of forward contracts, net of
the increase in average grain costs. As a result of the sale of
its forward grain contracts, the Company incurred approximately
$2.5 million in additional expenses related to filling
undelivered contract commitments for the sale of Ethanol and DDG.
The Company's cost of grain averaged $2.90 per bushel during the
year ended June 30, 1996 compared to an average cost of $2.25 per
bushel for the same period ended June 30, 1995.
Selling, general and administrative expenses increased by 33%
in 1996 over 1995. This increase was primarily the result of
higher compensation expense related to higher net earnings.
7
<PAGE>
The Company recorded net earnings of $11,821,077 for the year
ended June 30, 1996, compared to $6,072,407 for the year ended
June 30, 1995, with an increase in gross profit percentage from
17.2% of net sales and revenues in fiscal 1995 to 18.2% of net
sales and revenues for the same period ended 1996. Net earnings
for fiscal 1996 increased primarily as a result of revenue
generated from the sale of forward contracts.
FISCAL 1995 COMPARED TO FISCAL 1994:
1995 1994
----------- -----------
Ethanol and incentive revenues $41,355,707 $24,673,903
By-products and other sales 11,413,307 8,892,368
----------- -----------
Net sales and revenues $52,769,014 $33,566,271
=========== ===========
Net sales and revenues for the year ended June 30, 1995 were
higher compared to the same period ended June 30, 1994. Ethanol
production of 33,576,788 gallons generated sales with an average
selling price of $1.11 per gallon for the year ended June 30,
1995, compared to 18,449,822 gallons sold during the same period
in fiscal 1994 at an average selling price of $1.25 per gallon.
Production and sales increased significantly in fiscal 1995
compared to fiscal 1994 primarily due to the start-up of the
York, Nebraska facility in fiscal 1995. The selling price of
Ethanol is influenced by several factors, including crude oil,
wholesale gasoline prices and product demand. The Federal Oxygen
Program, which replaced various state winter fuel oxygen programs
and covers approximately 40 separate metropolitan areas and the
RFG program, have also affected Ethanol pricing due to demand for
Ethanol's oxygen content.
Included in Ethanol and incentive revenues are amounts of
$1,304,019 and $1,647,420 for fiscal 1995 and 1994, respectively,
for Ethanol produced under the Kansas production incentive
program. These payments ranged from $.08 to $.10 per gallon of
Ethanol produced. The Kansas incentive program is scheduled to
expire July 1, 1997. The Company believes the Kansas legislature
will continue to support the incentive program due to its
economic benefits to agriculture, and thus, the Company believes
there is a good possibility that the program will be extended
beyond the current expiration date. An additional $2,713,772 in
production tax credits from the State of Nebraska were recorded
as incentive revenues for the year ended June 30, 1995. Under the
Nebraska program the Company receives an incentive in the form of
a transferrable production tax credit in the amount of $.20 per
gallon of Ethanol produced. Not less than two million gallons and
not more than twenty-five million gallons produced annually, at
the Nebraska facility, are eligible for this credit. The Company
is no longer eligible for this credit after December 31, 1999.
For the year ended June 30, 1995, by-products and other sales
totaled $11,413,307. For the same period ended June 30, 1994, by-
products and other sales totaled $8,892,368 of which $363,000 was
from equipment sales.
Cost of products sold as a percentage of net sales and
revenues was 82.8% and 92.6% for fiscal 1995 and 1994,
respectively. The decrease in cost of products sold as a
percentage of net sales and revenues was primarily due to lower
average grain costs in fiscal 1995. The Company's cost of grain
averaged $2.25 per bushel during the year ended June 30, 1995
compared to an average cost of $2.73 per bushel for the same
period ended June 30, 1994.
Selling, general and administrative expenses decreased by 20%
in 1995 over 1994. This decrease was primarily the result of
higher compensation expense related to stock options previously
granted, which were earned during the year ended June 30, 1994.
For the year ended June 30, 1995 no compensation expense related
to stock options was recognized.
The Company recorded net earnings of $6,072,407 for the year
ended June 30, 1995, compared to a net loss of $(933,453) for the
year ended June 30, 1994, with an increase in gross profit
percentage from 7.4% of net sales and revenues in fiscal 1994 to
17.2% of net sales and revenues for the same period ended 1995.
Net earnings for fiscal 1995 primarily improved as a result of
lower cost of products sold.
Seasonality
Historically, the Company's gross profits have been higher
during its second and third fiscal quarters (October through
March). Ethanol production efficiencies increase during the
cooler months of the year avoiding the difficulties associated
with controlling temperature levels in the fermentation process
during the hot summer months. In addition, the Company's cost of
grain, it's primary cost of production, traditionally decreases
during and shortly following the autumn grain harvest.
Historically, demand, and thus the sales price for Ethanol, has
been higher in winter months due to state and local government
winter fuel oxygen programs and the Federal Oxygen Program.
Ethanol demand continued to increase during fiscal 1996, in
response to the continuing success of the oxygenate programs
nationwide. Summer demand for Ethanol has not yet been materially
influenced by oxygenate programs. It was anticipated that Ethanol
demand would increase and prices would not be as negatively
impacted as in prior summer seasons due to expected demand for
ETBE as a summertime oxygenate. However, due to increased grain
costs, the summertime price of Ethanol increased to a level that
made ETBE manufacture uneconomical. Instead, manufacturers
continued to produce MTBE out of methanol. In addition, summer
Ethanol demand continued to be somewhat influenced by increased
automobile use, fuel consumption and the withdrawal from the
Ethanol market of certain producers who choose to produce high
fructose corn syrup during the summer months rather than Ethanol.
With the implementation of the RFG program which began on January
1, 1995, the Company experienced a small increase in demand.
However, the Company believes stronger year-round demand for
oxygenates such as Ethanol, will occur in response to the RFG
program. The RFG program is believed to be of a lower cost
compared to other pollution reduction measures. Currently the
Company is unable to fully determine the impact of the RFG
program on future demand, seasonality of demand, or price of
Ethanol. This is primarily due to the disruption of Ethanol
production during fiscal 1996 resulting from high grain prices.
During fiscal 1995, several cities optioned not to participate in
the RFG program. However, many other large cities and counties
continue to pursue voluntary submission into the RFG program.
Currently, nine major metropolitan areas are required to
participate in the RFG program, with an additional 14 states, or
portions thereof, and the District of Columbia voluntarily
submitting to its requirements.
Income Taxes
The Company expects to recognize income tax expense for
financial reporting purposes for substantially all pre-tax
earnings after June 30, 1996. However, the Company will be able
to utilize a limited portion of its tax credit carryforwards to
reduce the amount of taxes actually paid to the 20% alternative
minimum tax rate, deferring the balance of the tax expense into
future periods. See Note 8 to the Financial Statements for
additional information.
If changes in the stock ownership of the Company cause the
Company to undergo an "ownership change," as broadly defined in
Section 382 of the Internal Revenue Code (a "Section 382 Event"),
utilization of the Company's tax credit carryforwards may be
subject to an annual limitation. The Company does not expect this
annual limitation to necessarily limit the total tax credit
carryforwards utilized in the future. However, this annual
limitation could defer recognition of these tax benefits. The
Company believes that a Section 382 Event has not occurred during
the last three years. However, application of the complex
provisions of Section 382 may be subject to differing
interpretations by taxing authorities. The Company has no current
plans which are expected to result in a Section 382 Event in the
immediate future. However, large purchases of the Company's stock
by a single stockholder could create a Section 382 Event and
would be beyond the Company's control.
8
<PAGE>
Liquidity and Capital Resources
The Company obtained funds during the last three fiscal years
from several sources, including cash from operations, exercise of
stock options, and proceeds from long-term and short-term debt.
Cash from operating activities amounted to $14,793,769 in fiscal
1996 compared to $4,559,912 in fiscal 1995. In fiscal 1994 cash
from operating activities amounted to $5,320,769. The increase in
cash from operating activities in 1996 was primarily attributable
to the increase in net earnings and the decreases in trade
accounts receivables and inventories related to the temporary
shutdown of both production facilities.
Cash and cash equivalents amounted to $8,889,246 at June 30,
1996, compared to $600,381 at June 30, 1995, and $131,105 at June
30, 1994. At June 30, 1996, the Company had a working capital
surplus of $6,573,150 compared to a working capital deficit of
$(538,322) at June 30, 1995, and a working capital deficit of
$(2,544,316) at June 30, 1994. This significant improvement in
working capital during fiscal 1996 was primarily due to the
increase in net earnings resulting from the sale of forward
contracts and the exercise of stock options.
Due to the volatility in the selling price of Ethanol, as well
as the cost of the Company's raw materials, the Company continues
to be exposed to liquidity risk. However, since 1992, Ethanol
pricing has been influenced by its oxygenate and octane value
which have contributed to higher prices and stronger demand.
Increases in demand and pricing help to offset some liquidity
risk. With Ethanol's expanded role in the fuel markets as an
oxygenate under the Federal Oxygen Program and the Reformulated
Gasoline Program, and should this trend continue, the Company
anticipates it will be able to satisfy its liquidity needs
through operating activities. However, if the Company experiences
an increase in the costs of its feedstocks, a decrease in the
demand for oxygenates, or if instability in the oil markets
results in decreased prices for gasoline, then the Company's
liquidity and cash reserves could be potentially inadequate on a
long-term basis. If any of these events should occur and cash
reserves proved insufficient, the Company would have to seek
additional funding through the sale of stock, exercise of options
held by directors and officers or additional financing.
In August 1996, the Company amended its loan agreement with
its primary lender. Included within this amendment were the
following provisions (1) temporary suspension of term loan
payments including excess cash flow payment requirements until
October 31, 1997, (2) one-time principal payment of $4,600,000 on
the term loan and (3) prepayment of the interest due on the
revolving loan and term loan discounted to its present value,
totaling $1,721,671. Consequently, the Company will not be
required to make any additional principal or interest payments
under this loan agreement, until October 31, 1997.
Capital expenditures in fiscal 1996 amounted to $4,947,663
compared to $17,015,408 in fiscal 1995 and $17,389,618 in fiscal
1994. In fiscal 1996, $4,341,962 of the capital expenditures were
primarily related to modifications and upgrades for the York,
Nebraska plant. In fiscal 1995, $16,159,518 of the expenditures
were for construction-in-progress, compared to $16,075,737 in
1994, for the York, Nebraska plant. The York facility was
completed in November, 1994. The balance of expenditures were for
improvements at the Colwich, Kansas facility.
The Company believes that capital expenditures at the Colwich
plant are for relatively minor, on-going capital improvements. No
further expansion of the plant's Ethanol production capacity is
considered practicable, due to cost. However, improvements may be
made to the plant to improve efficiency or to improve the
recoverability of by-products. The Company does not have any
material cash commitments to acquire capital assets as of June
30, 1996. For additional information regarding capital
expenditures see "Subsequent Events" section in Management's
Discussion and Analysis.
Inflation
General inflation increased slightly, but continued to be
moderate during the years ended June 30, 1996, 1995 and 1994. The
Company's management believes that inflation has a relatively
minor direct impact on its results of operations. While certain
types of costs (such as salaries) are affected by inflation, the
items which most affect the Company's operations are Ethanol
prices and the cost of grain, which are influenced by a variety
of factors. The impact of inflation on these items is not readily
determinable.
Other
In March, 1994 the EPA issued regulations which implemented
certain requirements of the 1990 Clean Air Act requiring
significant reductions in toxic air emissions over a three year
period. The Company has not experienced and does not expect any
material adverse impact on its financial condition, results of
operations, or liquidity due to additional capital expenditures
necessary to comply with such regulations.
9
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Years Ended June 30, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Product sales and revenues $ 73,920,096 $ 52,769,014 $ 33,566,271
Revenues from forward contracts 14,005,313 -- --
------------ ------------ ------------
Net sales and revenues 87,925,409 52,769,014 33,566,271
------------ ------------ ------------
Cost of products sold 69,414,221 43,698,552 31,098,523
Expense of forward contracts 2,524,235 -- --
------------ ------------ ------------
Total costs and expenses 71,938,456 43,698,552 31,098,523
------------ ------------ ------------
Gross profit 15,986,953 9,070,462 2,467,748
Selling, general and administrative
expenses 2,022,095 1,519,615 1,900,032
------------ ------------ ------------
Operating income 13,964,858 7,550,847 567,716
------------ ------------ ------------
Other income (expense):
Interest and other income 175,296 151,511 1,705
Interest expense (2,220,427) (1,268,354) --
Gain (loss) on sale of equipment 256,606 (112,024) 36,937
Non-recurring expenses -- (108,196) (1,535,363)
------------ ------------ ------------
(1,788,525) (1,337,063) (1,496,721)
------------ ------------ ------------
Net earnings (loss)
before income taxes 12,176,333 6,213,784 (929,005)
Income tax expense 355,256 141,377 4,448
------------ ------------ ------------
Net earnings (loss) $ 11,821,077 $ 6,072,407 $ (933,453)
============ ============ =============
Earnings (loss) per common and dilutive
common equivalent share $ .74 $ .39 $ (.06)
============ ============ =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1996, 1995, and 1994
Preferred Stock Common Stock
------------------- ------------------------ Retained
Number Number Additional Earnings
of of Paid-in (Accumulated Treasury Deferred
Shares Amount Shares Amount Capital Deficit) Stock Compensation Total
------ --------- ---------- ----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 30,
1993 25,000 $ 150,000 5,107,404 $ 510,740 $ 33,944,941 $ (929,694) $ (244,377) $ (1,100,000) $ 32,331,610
Six for
five stock
split 1,021,478 102,148 (102,148)
Six for
five stock
split 1,225,777 122,578 (122,578)
Three for
two stock
split 3,677,329 367,733 (367,733)
Amortization
of deferred
compensation 1,014,368 1,014,368
Change in
valuation of
deferred
compensation (85,632) 85,632
Net loss
for year (933,453) (933,453)
------ --------- ---------- ----------- ------------ ------------ ---------- ------------ ------------
Balance,
June 30,
1994 25,000 150,000 11,031,988 1,103,199 33,266,850 (1,863,147) (244,377) -- 32,412,525
Exchange of
preferred
stock for
common
stock (25,000) (150,000) 36,918 3,692 146,308 --
Exercise of
stock options 615,479 61,548 1,704,258 1,765,806
Four for
three stock
split 3,786,562 378,656 (378,656) --
Net earnings
for year 6,072,407 6,072,407
------ --------- ---------- ----------- ------------ ------------ ---------- ------------ ------------
Balance,
June 30,
1995 -- -- 15,470,947 1,547,095 34,738,760 4,209,260 (244,377) -- 40,250,738
Exercise
of stock
options 776,342 77,634 1,897,884 1,975,518
Purchase of
common stock (493,283) (493,283)
Employee stock
purchase (141,937) (141,937)
Amortization
of deferred
compensation 53,230 53,230
Income tax
benefit from
the exercise
of stock
options 116,000 116,000
Net earnings
for year 11,821,077 11,821,077
------ --------- ---------- ----------- ------------ ------------ ---------- ------------ ------------
Balance,
June 30,
1996 -- $ -- 16,247,289 $ 1,624,729 $ 36,752,644 $ 16,030,337 $ (737,660) $ (88,707) $ 53,581,343
====== ========= ========== =========== ============ ============ ========== ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
June 30, 1996 and 1995
ASSETS
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,889,246 $ 600,381
Trade accounts receivable
(less allowance of $100,000 and
$110,000 in 1996 and 1995) 1,839,809 3,948,761
Inventories 1,680,843 2,645,277
Current portion of long-term notes
receivable 106,552 96,691
Prepaid expenses 545,171 384,859
Refundable income tax 410,259 --
------------ ------------
Total current assets 13,471,880 7,675,969
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land and land improvements 142,283 142,283
Ethanol plants 77,217,199 72,387,277
Other equipment 417,559 300,210
Office equipment 237,085 231,284
Leasehold improvements 48,002 48,002
------------ ------------
78,062,128 73,109,056
Less accumulated depreciation (17,573,003) (14,806,417)
------------- ------------
Net property, plant and equipment 60,489,125 58,302,639
------------ ------------
OTHER ASSETS
Property and equipment held for resale 451,090 798,763
Deferred loan costs (less
accumulated amortization of $164,644
and $65,857 in 1996 and 1995) 312,823 411,610
Long-term notes receivable 314,159 265,711
Other 57,018 62,609
------------ ------------
Total other assets 1,135,090 1,538,693
------------ ------------
$ 75,096,095 $ 67,517,301
============ ============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 4,928,618 $ 3,876,972
Accounts payable 692,135 3,796,048
Estimated contract commitments 629,093 --
Accrued interest 156,294 185,163
Accrued payroll and property taxes 492,590 356,108
------------ ------------
Total current liabilities 6,898,730 8,214,291
------------ ------------
Revolving line-of-credit 2,000,000 --
Long-term debt, excluding current maturities 12,460,274 19,052,272
Other 155,748 --
------------ ------------
14,616,022 19,052,272
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, authorized
50,000,000 shares; issued 16,247,289 shares
and 15,470,947 shares at June 30, 1996
and 1995, respectively, of which 391,178
and 289,440 shares were held as treasury
stock at June 30, 1996 and 1995,
respectively 1,624,729 1,547,095
Additional paid-in capital 36,752,644 34,738,760
Retained earnings 16,030,337 4,209,260
------------ ------------
54,407,710 40,495,115
Less:
Treasury stock - at cost (737,660) (244,377)
Deferred compensation (88,707) --
------------ ------------
Total stockholders' equity 53,581,343 40,250,738
------------ ------------
$ 75,096,095 $ 67,517,301
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996, 1995, and 1994
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 11,821,077 $ 6,072,407 $ (933,453)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 2,869,699 2,084,469 2,077,796
Provision for bad debt -- 68,487 100,000
(Gain) loss on sale of equipment (256,606) 112,024 (36,937)
Amortization of deferred compensation 53,230 -- 1,014,368
Payments received on notes receivable 96,691 37,598 --
Changes in operating assets and liabilities:
Trade accounts receivable 1,953,952 (1,949,675) 209,426
Inventories 964,434 (1,703,415) 54,908
Property and equipment held for resale 606,353 (487,921) 35,000
Costs and estimated earnings in excess
of billings on uncompleted contracts -- -- 100,000
Refundable income tax (294,259) 107,825 (107,825)
Prepaid expenses (160,312) 52,080 (73,099)
Accounts payable (3,103,913) (62,638) 2,772,874
Estimated contract commitments 629,093 -- --
Accrued liabilities (385,670) 228,671 107,711
------------ ------------ -------------
Net cash provided by operating activities 14,793,769 4,559,912 5,320,769
------------ ------------ -------------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment 54,477 586,237 86,937
Acquisition of property, plant and
equipment (4,947,663) (16,519,158) (17,389,618)
Decrease (increase) in other
non-current assets 5,591 5,804 (2,609)
------------ ------------ -------------
Net cash used in investing activities (4,887,595) (15,927,117) (17,305,290)
------------ ------------ -------------
Cash flows from financing activities:
Payments on long-term debt (5,606,638) (2,567,006) (3,000,000)
Proceeds from long-term debt -- 12,668,328 15,331,672
Payments on revolving line-of-credit (1,000,000) (1,000,000) --
Proceeds from revolving line-of-credit 3,000,000 1,000,000 --
Increase in other non-current assets -- (30,648) (446,819)
Increase in other non-current liabilities 13,811 -- --
Proceeds from exercise of options 1,975,518 1,765,807 --
------------ ------------ -------------
Net cash (used in) provided by
financing activities (1,617,309) 11,836,481 11,884,853
------------ ------------ -------------
Increase (decrease) in cash and cash equivalents 8,288,865 469,276 (99,668)
Cash and cash equivalents:
Beginning of year 600,381 131,105 230,773
------------ ------------ -------------
End of year $ 8,889,246 $ 600,381 $ 131,105
============ ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
14
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - High Plains Corporation, the "Company,"
considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories - Inventories are stated at the lower of cost
(first-in, first-out) or market.
Property, Plant and Equipment - Property, plant and equipment
are recorded at cost. The cost of internally-constructed assets
includes direct and allocable indirect costs. Plant
improvements are capitalized, while maintenance and repair costs
are charged to expense as incurred. Periodically, a plant or a
portion of a plant's equipment is shut down to perform certain
maintenance projects which are expected to improve the operating
efficiency of the plant over the next year. These expenses are
generally incurred once a year and thus are capitalized and
amortized over the future 12-month period benefited. Included
in prepaid expenses at June 30, 1996 and 1995 were $429,207 and
$112,299, respectively, of these expenditures.
Provisions for depreciation of property, plant and equipment are
computed using the straight-line method over the following
estimated useful lives:
Ethanol plants 5 - 40 years
Other equipment 5 - 10 years
Office equipment 3 - 10 years
Leasehold improvements 5 years
See Note 18 for discussion of change in estimated depreciable
lives of the Colwich ethanol facility.
Property and Equipment Held for Resale - The Company acquired
land and ethanol processing equipment located in New Iberia,
Louisiana to be utilized in the construction of the York,
Nebraska facility. Amounts allocated for land and equipment not
utilized for the Nebraska facility are recorded as property and
equipment held for resale and these amounts are decreased as
sales occur. Management expects a gain upon its ultimate
disposition and, accordingly, no loss has been provided for.
Deferred Loan Costs - The Company incurred certain costs in
connection with obtaining financing. The Company is amortizing
these costs over fifty-eight months, the life of the debt.
Income Taxes - The Company uses an asset and liability approach
to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established
when considered necessary to reduce deferred tax assets to the
estimated amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Under FASB Statement No. 109, Accounting for Income Taxes, the
tax benefit from utilization of loss carryforwards is not
reflected as an extraordinary item.
Deferred Compensation - Under the Employee Stock Purchase Plan
(Note 16), compensation is recognized as an expense in the
period in which the employee performs the services, which is
generally the period over which the stock appreciation is vested
or earned. With the exception of certain officers, the
employees must continue to work for five years to acquire the
full amount of the stock. Compensation expense attributable to
future services has been recorded as deferred compensation in
the equity section of the balance sheet and is amortized over
the period of future services. Officers who have ten years of
continuous service are allowed to prepay their obligation and
receive the stock immediately and thus, the compensation
attributable to their election is recognized upon their election
to participate in the plan.
Deferred compensation at June 30, 1993 represents stock options
granted to directors, officers and employees in lieu of
directors' fees or additional compensation to be earned in
future periods. Deferred compensation was amortized over the
period the directors' fees and compensation were to be earned.
See Note 12 and the Statements of Stockholders' Equity.
Recently Issued Accounting Standards - In October 1995 FASB
issued Statement No. 123, Accounting for Stock-Based
Compensation (FAS 123), effective for the Company for the years
ended after June 30, 1996. Upon implementation, disclosures
must include the pro forma effects of options and other awards
granted during the year ended June 30, 1996. FAS 123 encourages
companies to account for stock compensation awards based on
their fair value at the date the awards are granted. Recognized
option pricing models are to be used to estimate fair values.
Companies may continue to apply the accounting provisions as
they have in the past as long as the effects of computing the
fair value approach are disclosed in the footnotes to the
financial statements.
FAS 123 is applicable to the Company's Stock Option Plans and
the Employee Stock Purchase Plans. The impact of implementing
FAS 123 is not determinable as the Company has not yet
determined how it will implement the standard.
Other pronouncements issued by the Financial Accounting
Standards Board with future effective dates are either not
applicable or not material to the financial statements of the
Company.
Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect: 1) the reported amounts of assets and liabilities, 2)
disclosures such as contingencies, and 3) the reported amounts
of revenues and expenses included in such financial statements.
Actual results could differ from those estimates.
Contingencies - In the normal course of business, the Company
becomes party to litigation and other contingencies that may
result in loss or gain contingencies. The Company follows
Statement of Financial Accounting Standards No. 5, Accounting
for Contingencies. Under FAS No. 5, loss contingencies are
accrued if available information indicates that it is probable
that a loss is incurred and the amount of such loss can be
reasonably estimated.
Reclassifications - Certain items have been reclassified on the
1994 statement of operations and statement of cash flows to be
consistent with the classifications in 1995.
2. DESCRIPTION OF BUSINESS
Ethanol Production Business - The Company was formed in 1980 for
the purpose of constructing and operating a plant in Colwich,
Kansas for the distillation and production of fuel grade ethanol
for sale to customers concentrated primarily in the Western
United States for mixture with gasoline to be used as a motor
fuel. The Company's operations are dependent upon state
governmental incentive payments. Kansas production incentive
payments recorded as product sales and revenues in the
accompanying financial statements were $1,647,420 for fiscal
1994, $1,304,019 for fiscal 1995 and $1,126,386 for fiscal 1996.
The Kansas incentive program is currently scheduled to expire
July 1, 1997.
The Company began similar operations at a second plant in York,
Nebraska in November 1994. The State of Nebraska offers a
transferable production tax credit in the amount of $.20 per
gallon of ethanol produced for a period of sixty months from
date of first eligibility. The credit is only available to
offset Nebraska motor fuels excise taxes. The Company transfers
these credits to a Nebraska gasoline retailer which then
reimburses the Company for the credit amounts less a handling
fee. Not less than two million gallons and not more than
twenty-five million gallons of ethanol produced annually at the
Nebraska facility are eligible for the tax credit. The Company
will no longer be eligible for this credit after December 31,
1999. Nebraska production tax credit amounts recorded as
revenues in the accompanying financial statements were
$2,713,772 in fiscal 1995 and $4,428,437 in fiscal 1996.
15
<PAGE>
The market for the Company's ethanol product is affected by the
Federal government's excise tax incentive program scheduled to
expire on September 30, 1999. Under this program, gasoline
distributors who blend gasoline with ethanol receive a federal
excise tax rate reduction for each blended gallon, resulting in
an indirect pricing incentive to ethanol. This tax rate
reduction equals $.054 per blended gallon containing 10% or more
ethanol by volume. Alternatively, blenders may claim an income
tax credit of $.54 per gallon of ethanol mixed with gasoline.
The market for the Company's product is also affected through
Federal regulation by the Environmental Protection Agency under
the Clean Air Act and the Reformulated Gasoline Program.
Shut Down of Plant Operations - Due to increasing corn and
milo-feedstock prices, management temporarily suspended
operations at both its York and Colwich facilities in May 1996.
The Company had forward contracted grain purchases to insure the
availability of grain needed for its production process at a
fixed price. These contracts would have allowed continued
operations through approximately August 1997. Due to grain
prices rising to record levels in excess of the forward
contracted levels, the Company sold all of its forward grain
contracts for approximately $14 million after commissions. See
Note 8 for details on the Company's outstanding commitments at
June 30, 1996 related to undelivered contracts for the sale of
ethanol and dried distiller's grain (DDG). Expenses incurred
prior to year end to fill these contracts were approximately
$2.5 million.
The Colwich facility reopened in September 1996, and management
intends to open the York facility in October 1996. During the
shutdown period, the Company secured a $17 million contract to
sell industrial grade ethanol for the 12-month period beginning
January 1997. Subsequent to year end, the Company began
acquiring the equipment needed to modify the York facility for
production of industrial grade ethanol in addition to the fuel
grade ethanol it currently produces. Management intends to have
the modification completed by December 1996 and to continue to
produce fuel grade ethanol while completing the modifications.
Subsequent to year end, the Company has contracted to purchase
over five million bushels of feedstocks and expects to buy more
as harvest gets into full swing. The Company has also
contracted to sell a significant portion of its production of
fuel grade ethanol for its second and third quarters of fiscal
1997. No losses are expected as a result of fulfilling these
contracts.
Disposal of Engineering Division - With the completion of the
York facility in December, 1994, the engineering and
construction operations were determined by management to no
longer be cost effective. The Company determined that it should
substantially dispose of its engineering and construction
division to focus management and financial resources on plant
operations. In January 1995, the Company entered into a number
of agreements with a former officer. The former officer's
primary responsibilities immediately prior to that time had been
to oversee the design and construction of the York facility.
The former officer had employment agreements with the Company
that extended through June 30, 1997, providing for his salary, a
bonus arrangement of approximately 1.5% of net profits, and his
continuation as an officer of the Corporation.
As a result of the January 1995 agreements with the former
officer, the following matters occurred: the former officer
resigned as an officer on January 19, 1995, and terminated his
employment as of April 15, 1995; the former officer agreed to
furnish 1,350 hours (up to 100 hours per month) of future
engineering consulting services to the Company, at the Company's
direction and during the 45 months after January 1995; the
Company agreed to continue to pay the former officer a quarterly
payment based on 1.5% of Net Profits as previously provided for
by his employment agreement through the year ended June 30,
1997; certain property assets associated with the Company's
engineering and construction division, which the Company had
acquired or developed primarily for the construction of the York
facility, were transferred to the former officer's company; this
company and the former officer agreed to pay $300,000 and
$100,000, respectively, in notes, plus interest at 9.75%, over
45 months. The remaining balances due on these notes receivable
at June 30, 1996 were $199,283 and $66,428 and at June 30, 1995
were $271,802 and $90,600, respectively. These notes are
secured by the property transferred and the former officer's
personal guarantee.
In February 1996, the Company and the former officer entered
into an agreement to modify and amend the previous agreements.
The Company agreed to pay to the former officer's company
$31,850 in full and complete satisfaction of all bonus and
compensation owed to either the former officer or his company.
This agreement also releases the former officer and his company
from any further obligation to perform any services for the
Company.
The difference between the then book value of the engineering
and construction assets disposed of (estimated to be $816,000)
and the $400,000 of consideration received, was accounted for as
an additional cost of constructing the York facility during 1995.
3. INVENTORIES
Inventories consisted of:
June 30,
-------------------------
1996 1995
----------- -----------
Raw materials $ 157,939 $ 814,210
Work-in-process -- 425,127
Finished goods 821,481 750,649
Spare parts 701,423 655,291
----------- -----------
$ 1,680,843 $ 2,645,277
=========== ===========
4. REVOLVING LINE-OF-CREDIT
In July 1995, the Company amended its bank term loan agreement
to provide for a revolving loan. Under the amendment, the
Company may borrow up to a maximum amount of $3,000,000, which
includes any standby letters-of-credit not to exceed $1,000,000.
The note bears interest at a rate of 1.5% above the prime rate
(9.75% at June 30, 1996), with an initial maturity of June 30,
1996. The note is secured by the same collateral as the term
loan agreement, and is subject to the same covenants.
Subsequent to June 30, 1996, the revolving loan was amended,
extending its maturity to October 31, 1997, and reducing the
maximum available to $2,000,000, with an additional $1,000,000
available for issuance under standby letters-of-credit in the
event the Company resumed normal business operations. (See also
Note 5.)
5. LONG-TERM DEBT
Long-term debt consisted of: 1996 1995
------------ ------------
Term loan payable to bank in monthly
installments of $297,619 plus interest
at a two-year fixed rate equal to 1.5%
above prime rate (9.75% at June 30, 1996)
with a final payment due September 2000. $ 17,345,238 $ 22,619,048
Various financing agreements payable in
monthly installments of $3,770 including
interest with a final payment due April 1998;
secured by two forklifts and two photo
copiers with a book value of $88,235
at June 30, 1996. 43,654 310,196
Less current maturities 17,388,892 22,929,244
4,928,618 3,876,972
------------ ------------
$ 12,460,274 $ 19,052,272
============ ============
16
<PAGE>
The term loan is secured by all equipment, inventory, accounts
receivable, Kansas and Nebraska real estate and general
intangibles of the Company. Also secured are the Company's
rights to payment under any present or future production
incentive contracts with the State of Kansas and the Ethanol
Production Credit Agreement with the State of Nebraska and all
similar contracts entered into in the future.
5. LONG-TERM DEBT (Continued)
Within 30 days following the bank's receipt of audited financial
statements, the Company must also pay an amount equal to 75% of
the excess cash flow (as defined) of the Company for each fiscal
year. The financing agreement contains various restrictions,
including the maintenance of certain financial ratios and
fulfilling certain net worth and indebtedness tests. At June
30, 1996, the Company was in violation of certain covenants;
however, the bank has waived its rights to declare the debt due
and payable based on these covenant violations through June 30,
1997.
Subsequent Event - On August 1, 1996, the Company amended its
loan agreement with the bank covering both the term loan above
and the revolving loan in Note 4. Given management's temporary
suspension of operations (See Note 2), the bank permitted a
temporary suspension of the term loan payments, including
payments calculated on excess cash flow, until October 31, 1997,
at which time they will resume according to the original note
terms, provided the Company pays (a) $4,600,000 in principal on
the term loan, and (b) $1,721,671, which is equal to the present
value of the interest due on both the term loan and revolving
line-of-credit through September 30, 1997. The amendment also
extended the maturity of the revolving line-of-credit to October
31, 1997, though it disallows any further advances until that
date.
Aggregate minimum maturities are as follows:
1997 $ 4,928,618
1998 2,691,227
1999 3,571,428
2000 6,197,619
------------
$ 17,388,892
============
Interest Payments - Interest paid on long-term debt in 1996,
1995 and 1994 amounted to $2,249,297, $2,051,866, and $391,801,
respectively. The Company capitalized $889,211 and $391,801 in
interest in 1995 and 1994, respectively, as part of the cost of
constructing the York, Nebraska facility. No interest was
capitalized in 1996.
6. OPERATING LEASES
The Company leases 100 railroad cars under an operating lease
expiring in fiscal year ending June 30, 1999. Annual rentals
are $618,000 for all 100 cars. The Company leases an additional
57 railroad cars under various operating leases expiring through
fiscal year ending June 30, 1999. The total minimum rental
commitment at June 30, 1996 under these leases are due as
follows:
Fiscal Year
Ending
June 30,
------------
1997 $ 980,875
1998 918,900
1999 746,920
2000 37,080
2001 12,360
-----------
$ 2,696,135
===========
The Company has subleased 27 of the above railroad cars under
various short-term noncancelable operating leases. The total
minimum future rentals to be received in fiscal year ended June
30, 1997 is $133,000.
7. NON-RECURRING EXPENSES
The Company has included in its Statements of Operations for the
years ended June 30, 1995 and 1994 charges totaling $108,000 and
$859,848, respectively, for expenses that were not expected to
be covered by insurance in association with the dried
distiller's grain product recall. The additional $108,000
incurred during the year ended June 30, 1995 was in excess of
the original estimate.
An additional one-time charge is included in the year ended June
30, 1994 due to the write-down of a trade receivable of $675,515
from a major customer that occurred as a result of an ethanol
customer's Chapter 11 bankruptcy filing.
8. COMMITMENTS
The Company periodically enters into forward contracts with
suppliers and customers on both the purchase of grain and the
sale of ethanol and DDG. At June 30, 1996, the Company had no
forward contracts to purchase grain. No material forward
contracts for purchases or sales existed at June 30, 1995.
The Company sells DDG and certain condensed distiller's solubles
(CDS), the by-products of its ethanol production, through
merchandisers. At June 30, 1996 one merchandiser had certain
unfilled contracts for DDG. The Company also had two unfilled
contracts to sell ethanol at June 30, 1996. Due to the shutdown
of plant operations (See Note 2), the Company is liable for the
difference in the contracted sales prices and the costs to
purchase the necessary product to fill these contracts. The
Company's liability for this difference at June 30, 1996 was
approximately $292,000 for DDG and $629,093 for ethanol. The
$292,000 was recorded as an offset to a receivable from the DDG
merchandiser and the $629,093 was recorded as a liability.
These contracts mostly extend through September 1996, and final
settlements are dependent on fluctuations in the price the
Company may pay to fill the contracts should the plants not be
in production to meet timely fulfillment of the contracts.
9. INCOME TAXES
For Federal income tax purposes at June 30, 1996, the Company
had a net operating loss carryforward of $5,827,000 and
approximately $5,777,000 of federal general business tax credit
carryforwards, which, if not used, will expire as follows:
Net
Expires in Operating General
Fiscal Year Loss Amount Business Credit
Ending Carryforward Carryforward
----------- ------------ ---------------
1999 $ -- $ 1,185,000
2000 -- 7,000
2001 -- 85,000
2003 5,017,000 --
2004 -- 4,500,000
2005 807,000 --
2008 3,000 --
----------- -----------
$ 5,827,000 $ 5,777,000
=========== ===========
The general business credits expiring in fiscal 1999-2001 are
investment tax credits and the credits expiring in fiscal 2004
are small ethanol producer tax credits.
The Company also has a Nebraska investment credit carryforward
of $3,597,000, expiring in fiscal 2003, which may be used to
offset taxes in the State of Nebraska.
The tax net operating loss carryforward and federal tax credit
carryforwards discussed above and other matters result in
deferred tax assets under FASB 109 totaling $12,886,000 at June
30, 1996 (see below). The book basis of property, plant and
equipment in excess of its tax basis results in an offsetting
deferred tax liability of $9,964,000, and the valuation
allowance offsets an additional $2,922,000, leaving no net
deferred tax assets at June 30, 1996. Future tax expenses, if
any, may be offset, at least in part, by net increases in future
tax assets (including changes in the valuation allowance) to the
extent that such assets exceed the amounts of future deferred
tax liabilities. The Company expects to continue annually to
provide for a reasonable valuation allowance, to reduce deferred
tax assets to zero until such time as future taxable income is
generated or assured (if ever).
17
<PAGE>
<TABLE>
<CAPTION>
Income taxes consisted of:
June 30,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense $ 355,256 $ 141,377 $ 4,448
Tax effect of changes in deferred
tax assets and liabilities:
Book basis of plant and
equipment in excess of tax
basis 2,652,000 1,216,000 (351,807)
Nondeductible accrued expenses (303,000) -- --
Reduction of net operating
loss carryforward 1,588,000 1,195,000 151,602
Decrease (increase) in tax
credits carryforward 80,000 -- (1,500,000)
Nebraska investment
credit carryforward (170,000) (3,427,000) --
AMT credit carryforward and
other (230,000) (179,000) (58,044)
Change in asset valuation allowance (3,617,000) 1,195,000 1,758,249
----------- ----------- -----------
Deferred tax expense -0- -0- -0-
----------- ----------- -----------
Income tax expense $ 355,256 $ 141,377 $ 4,448
=========== =========== ============
</TABLE>
A reconciliation between the actual income tax expense and
income taxes computed by applying the statutory Federal income
tax rate to earnings before income taxes is as follows:
June 30,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
Computed income taxes, at 34% $ 4,139,953 $ 2,112,687 $ (315,861)
Utilization of net operating
loss carryforwards (4,139,953) (2,112,687) --
Alternative minimum tax 239,256 141,377 --
Other, net 116,000 -- 320,309
----------- ----------- ----------
Total income tax expense $ 355,256 $ 141,377 $ 4,448
=========== =========== ==========
The Company has deferred income tax liabilities and assets
arising from the following temporary differences and
carryforwards:
June 30,
---------------------------
1996 1995
------------ ------------
Deferred tax liabilities:
Book basis of property, plant and
equipment in excess of tax basis $ 9,964,000 $ 7,312,000
============ ============
Deferred tax assets:
Net federal and state operating loss
carryforwards $ 2,531,000 $ 4,119,000
Nebraska investment credit carryforward 3,597,000 3,427,000
General business credit carryforward 5,777,000 5,857,000
AMT credit carryforward and other 678,000 448,000
Nondeductible accrued expenses 303,000 --
------------ ------------
12,886,000 13,851,000
Less: Valuation allowance 2,922,000 6,539,000
============ ============
$ 9,964,000 $ 7,312,000
============ ============
Net deferred income taxes $ -0- $ -0-
============ ============
10. PREFERRED STOCK
The Company had 25,000 shares authorized of no par value
cumulative preferred stock at June 30, 1994. All 25,000 shares
were designated 11.5% cumulative preferred stock and were
outstanding. Cumulative dividends on the outstanding preferred
stock aggregating $174,200 ($6.98 per share) had not been
declared or provided for at June 30, 1994. During the fiscal
year ended June 30, 1995, the preferred stock was converted into
36,918 shares of common stock.
11. COMMON STOCK SPLITS
On January 28, 1994, the Company resolved to initiate a Common
Stock Split program increasing the number of outstanding shares.
The stock splits were effected in the form of stock dividends.
Beginning with the January 31, 1994 declaration and ending with
the final stock split on February 22, 1995, the Company
increased the total outstanding common stock shares from
5,107,404 to 15,470,947.
Declared Payable Split
-------- ------- --------------
1/31/94 2/18/94 6 shares for 5
4/29/94 5/27/94 6 shares for 5
7/19/94 8/22/94 3 shares for 2
1/10/95 2/22/95 4 shares for 3
The earnings per common share for the years ended June 30, 1995
and 1994 have been retroactively adjusted for the above splits
as if they had occurred on July 1, 1993.
12. STOCK OPTIONS
<TABLE>
<CAPTION>
The following summarizes the Company's stock option transactions:
Original Compensation and
Shares Exercise Directors' Fees Shares
Granted Price as Recorded as 1994 Remaining
Adjusted Adjusted Selling, General Under Option
Grant for Stock for Stock and Administrative at June 30, Expiration
Date Splits Splits Expenses 1996 Date
----- ------- ------ ----------- ------- -----
<C> <C> <C> <C> <C> <C>
12/92 302,400 0.6076 $ 1,014,366 -- 12/02
12/92 504,000 5.3819 288,000* 12/02
08/93 36,000 5.3819 36,000* 12/02
12/93 576,000 3.3438 248,333* 12/03
12/94 576,000 8.3440 504,000* 12/04
05/95 15,000 5.2500 15,000* 04/05
05/95 25,000 5.6300 25,000* 05/05
08/95 366,746 5.2500 366,746 08/05
08/95 28,800 5.2500 28,800 08/96
08/95 28,800 5.2500 28,800 02/98
08/95 12,275 5.2500 12,275 05/98
08/95 28,800 5.2500 28,800 04/98
08/95 57,600 5.2500 57,600 07/98
08/95 108,400 5.2500 108,400 12/02
08/95 14,400 6.1250 14,400 08/96
08/95 28,800 6.1250 28,800 02/98
08/95 28,800 6.1250 28,800 04/98
08/95 50,000 5.5000 50,000 12/03
10/95 86,400 5.6250 86,400 12/02
01/96 35,000 4.3750 35,000 12/03
05/96 28,800 3.8125 28,800 05/98
05/96 43,200 3.8125 43,200 12/02
05/96 40,000 3.5000 40,000* 05/06
----------- ---------
$ 1,014,366 2,103,154
=========== =========
<FN>
* Subject to reload.
</TABLE>
18
<PAGE>
The Company granted 986,821 and 522,000 shares under option
during fiscal years 1996 and 1995, respectively, at the then
fair market prices and no compensation expense was recognized.
The Company granted 226,800 options during fiscal year 1993 in
lieu of compensation to be earned in fiscal years 1993 and 1994.
The Company recorded compensation expense of $1,014,366 in the
year ended June 30, 1994 for the options.
During the year ended June 30, 1996, options for 72,000 shares
were allowed to expire and the following options were exercised:
Number Price
of Shares Per Share
--------- ---------
300,275 $ 0.6076
57,600 1.4653
57,600 1.8889
115,200 2.0833
85,000 3.3438
66,667 5.3480
22,000 5.3819
72,000 8.3440
-------
776,342
=======
During the year ended June 30, 1995, the following options were
exercised:
Prior to February 22, 1995 After the February 22, 1995
Stock Split Stock Split
-------------------------- -------------------------
Number Price Number Price
of Shares Per Share of Shares Per Share
------- ---------- --------- ---------
162,600 $ .8100 44,518 $ .6080
74,000 4.4580 57,586 1.4640
54,000 7.1760 28,793 1.9000
143,982 3.3450
50,000 5.3820
------- -------
290,600 324,879
======= =======
No options were exercised during the year ended June 30, 1994.
The Company's 1990 and 1992 Stock Option Plans, under which all
of the previously discussed options were granted, were approved
for modification at the Company's November 1994 stockholder
meeting. The approved amendments provide that when optionees
exercise their options, above, and remit the exercise payment to
the Company, they may be granted a one-time option to purchase a
like quantity of Common Shares as those options exercised
(Reload Options). The Reload Options shall have an exercise
price equal to the closing sales price of the Company's Common
Stock on the day in which the original options were exercised,
and shall have an exercise period that extends to the later of
one year from the date of grant of the Reload Option or the
expiration date of the originally exercised option.
The implementation of the above amendments to the 1990 and 1992
plans was delayed by the Directors until August 2, 1995. On
that date, 366,746 options were granted to optionees who had
exercised their options prior to August 2, but after November,
1994, as compensation for the delay in implementation of the
"Reload" amendments. The exercise price of these options was
$5.25, the closing sales price on August 2, 1995. Further, on
August 4, 1995, options totaling 264,675 were exercised;
accordingly, Reload Options in the same amount were granted at
that day's closing price, also $5.25 per share. These 631,421
options are not subject to further "Reload" provisions.
13. MAJOR CUSTOMERS
<TABLE>
<CAPTION>
Sales to individual customers of 10% or more of net product
sales and revenues are as follows:
Sales During the Fiscal Trade Accounts Receivable
Ended June 30, Balance at June 30,
-------------------------------------------- --------------------------
Customer 1996 1995 1994 1996 1995
------------ ------------ ------------ ----------- ------------ -----------
<C> <C> <C> <C> <C> <C>
A $ -- $ -- $ 3,810,141 $ -- $ --
B -- -- 6,215,607 -- --
C 11,356,458 8,871,672 8,505,444 568,016 305,445
D 8,553,353 8,384,212 -- 587,508 65,521
E -- 9,345,425 -- -- 1,049,577
F 13,917,311 -- -- -- --
------------ ------------ ------------ ----------- -----------
$ 33,827,122 $ 26,601,309 $ 18,531,192 $ 1,155,524 $ 1,420,543
============ ============ ============ =========== ===========
</TABLE>
14. EARNINGS PER SHARE
Earnings per common and dilutive common equivalent share are
computed by dividing net earnings, less (plus) cumulative
dividends (undeclared) on the 11-1/2% cumulative preferred
stock, by the weighted average number of common stock and common
stock equivalent shares with a dilutive effect.
Share and per share information have been adjusted to give
effect to stock splits in the three years ended June 30, 1996.
Earnings per common share assuming full dilution assume, in
addition to the above, the additional dilutive effect of stock
options whenever the period end stock price of the Company is
higher than the average stock price of the Company during the
period. Such per share amounts are not separately presented
since they are equal to earnings per common and dilutive common
equivalent share.
<TABLE>
<CAPTION>
The weighted average number of common stock and common stock
equivalent shares used in the computation of net earnings per
share of common stock is as follows:
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Earnings per common and dilutive
common equivalent share:
Weighted average common shares 15,736,310 14,760,967 14,419,877
Stock options 192,095 908,134 1,139,847
---------- ---------- ----------
Average common and common
dilutive shares outstanding 15,928,405 15,669,101 15,559,724
Earnings per common share
assuming full dilution:
Additional dilutive effect of
stock options -- -- --
---------- ---------- ----------
Common stock outstanding
assuming full dilution 15,928,405 15,669,101 15,559,724
</TABLE>
15. ADDITIONAL INFORMATION FOR STATEMENTS OF CASH FLOWS
1996 1994 1993
----------- ----------- ---------
Rent paid $ 865,941 $ 806,942 $ 422,569
Interest paid 2,249,297 2,051,866 391,801
Income taxes paid 645,000 145,813 167,825
19
<PAGE>
The Company had the following non-cash transactions:
1996 1995
--------- ---------
Acceptance of notes receivable in exchange
for sale of property, plant and equipment $ -- $ 400,000
Purchase of property, plant and equipment
in exchange for debt 66,286 496,250
Exchange of preferred stock for common stock -- 150,000
Increase in accrued compensation costs
at implementation of employee stock
purchase plan 141,937 --
Surrender of common stock in lieu of
employee payroll tax obligations 493,283 --
Increase in additional paid-in-capital from
tax benefit of exercise of stock options 116,000 --
16. EMPLOYEE STOCK PURCHASE PLAN
In August, 1995 the Company adopted a compensatory Employee
Stock Purchase Plan to provide employees of the Company with an
incentive to remain with the Company and an opportunity to
participate in the growth of the Company. The plan is
administered by the Company's Board of Directors. Employees
with one year of service are able to elect annually to purchase
shares of the Company's common stock at a price equal to 50% of
its lowest market value recorded between May 1 and August 1 of
each calendar year. The aggregate number of shares which may be
purchased under the plan shall not exceed 80,000 as adjusted for
stock splits or stock dividends. These shares may be purchased
over the 3-year effective period of the Plan. The employees,
with the exception of certain officers, pay for their stock
through payroll deductions as well as vest pro rata over 5
years.
Employees must elect to purchase a designated number of shares
on or before May 15 of each calendar year, except that the
election for the first year may be made on or before January 31,
1996. The number of shares that may be purchased by each
employee is limited to 100 shares per year of service. The
shares are paid for by the participating employees through
payroll deductions ratably over a five-year period and
prepayment is not permitted. The employee vests in the shares
over the same five-year period based on the amounts paid.
Shares are transferred to the employee only at the end of the
five-year period. Compensation value is measured on August 1 of
each year, which is the first date that both the purchase price
and the number of shares are known, except that for the plan's
first year, the measurement date is January 31, 1996. The
amount of compensation measured on the measurement date is
recorded as deferred compensation and charged to expense over
the periods in which the employee performs the related services,
which is the same as the vesting period.
The Company also adopted a stock purchase plan for certain key
management personnel, which is similar to the above plan, except
that the aggregate number of shares available shall not exceed
250,000 and the employee is limited to 1,000 shares plus an
additional 1,000 shares for each year of service. Vesting is
the same as above except that any employee who is also an
officer of the Company and who has achieved at least ten
continuous years of employment shall have the option to prepay
any balance due for shares purchased under the plan. At that
time, the Company will immediately transfer said shares to the
employee. The amount of compensation measured for this key
management employee plan is on the same measurement date as set
forth above for the employee plan. Deferred compensation is
recorded and charged to expense over the five-year vesting
period except for those officers with ten continuous years of
service. For those officers, the expense is recognized
immediately upon the measurement date.
During 1996, employees and key management personnel elected to
purchase 75,700 shares at $2.50 per share. Deferred
compensation recorded in the equity section of the balance sheet
was $141,937 and current year amortization of the deferred
compensation recognized in the income statement was $53,230.
17. 401(k) PLAN
The Company adopted a 401(k) Plan on June 1, 1991. All
employees who are over the age of 19 and have one year (1,000
hours) of service are eligible to participate. Employees may
contribute from 1% to 12% of their pay. The Company matches
100% of the first 1% of employee salary deferrals and 50% of the
next 5% of employee salary deferrals. The Company contributions
to the Plan for the years ended June 30, 1996, 1995 and 1994
were $27,100, $29,165 and $22,614, respectively.
18. CHANGE IN ACCOUNTING ESTIMATE
Effective July 1, 1994, the Company revised its estimate of the
useful lives of various components of the Colwich ethanol
production facility for financial statement purposes.
Previously, the facility was depreciated over 20 years. The
change involved the Company separating the ethanol facility into
various components and changing the estimated lives to 5 - 40
years, depending on the component. The Company is depreciating
the net book value of the various components over their
estimated remaining lives of 3 - 30 years. These changes were
made to better reflect the estimated period during which the
various components will remain in service. The change had the
effect of reducing depreciation expense and increasing net
income for the fiscal years ended June 30, 1996 and 1995 by
approximately $660,000 and $.04 per share.
20
<PAGE>
The Stockholders and Board of Directors
High Plains Corporation
We have audited the accompanying balance sheets of High Plains
Corporation as of June 30, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of High Plains Corporation as of June 30, 1996 and 1995, and the
results of their operations and cash flows for each of the three
years in the period ended June 30, 1996 in conformity with
generally accepted accounting principles.
ALLEN, GIBBS & HOULIK, L.C.
August 23, 1996 (except for Note 2,
which is as of September 16, 1996)
Wichita, Kansas
Market For The Registrant's Common Equity
(located on page 21, which is the inside of the back cover, at the bottom
of the page)
The Company is traded on the NASDAQ National Market under the symbol HIPC.
The table below sets forth the range of high and low market prices for
the Company's shares during fiscal 1996 and fiscal 1995. These prices have
been adjusted to reflect the stock splits effected in the form of a stock
dividend payable on August 19, 1994, and February 22, 1995. These prices do
not include retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
FISCAL PRICE FISCAL PRICE
- ---------------------------------------------------------------
1996 HIGH LOW 1995 HIGH LOW
- ---------------------------------------------------------------
1ST QUARTER 6-3/8 4-7/8 1ST QUARTER 6-3/4 5-1/4
2ND QUARTER 6-1/8 4 2ND QUARTER 10-1/2 5-7/8
3RD QUARTER 5 3-1/4 3RD QUARTER 10-1/8 5-3/4
4TH QUARTER 4-3/4 3-1/4 4TH QUARTER 7-1/2 4-1/4
CORPORATE INFORMATION (located on page 21, which is the back
inside cover, at far right hand column, going down the entire
length of the page)
BOARD OF DIRECTORS
Stanley E. Larson (2)
Chairman of the Board
President of High Plains Corporation
John F. Chivers (2)
Chivers Realty
H. T. Ritchie (1)
Secretary of High Plains Corporation
President of Ritchie Corporation
Roger D. Skaer (3)
Treasurer of High Plains Corporation
Daniel O. Skolness (1)(3)
President of Skolness, Inc.
Donald M. Wright (2)(3)
(1) Policy and Compensation Committee Member
(2) Nominating Committee Member
(3) Budget and Audit Committee Member
OFFICERS
Stanley E. Larson
President and Chief Executive Officer
H. T. Ritchie
Secretary
Roger D. Skaer
Treasurer
Raymond G. Friend
Executive Vice President
Chief Financial Officer
Corporate Headquarters
High Plains Corporation
O. W. Garvey Building
200 W. Douglas, Suite #820
Wichita, Kansas 67202
(316)269-4310, fax: 269-4008
Ethanol Facility - Colwich
412 N. First St.
P.O. Box 427
Colwich, Kansas 67030
(316)796-1234, fax: 796-1523
Ethanol Facility - York
Rural Route 2, Box 60
York, Nebraska 68467
(402)362-2285, fax: 362-7041
Annual Meeting
November 15, 1996
The Broadview Hotel
400 W. Douglas
Wichita, Kansas
The Crystal Ballroom
10:00 a.m.
Certified Public Accountants
Allen, Gibbs & Houlik, L.C.
Wichita, Kansas
Registrar & Transfer Agent
American Stock Transfer Co.
40 Wall Street, 46th Floor
New York, NY 10005
(718)921-8206
Stock Information
High Plains Corporation stock is traded on
NASDAQ under the symbol HIPC
Information Contact
Stanley E. Larson, High Plains Corporation
Raymond G. Friend, High Plains Corporation
Availability of 10-K
A copy of the Company's fiscal 1996 annual report on Form 10-K
filed with the Securities and Exchange Commission will be made
available to interested stockholders without charge upon written
request to the Chief Financial Officer at the above Corporate
Headquarters.
21
<PAGE>
Outside back cover:
LOGO: (COLORED) e t h a n o l Better Gas. Cleaner Air.
HIGH PLAINS CORPORATION
O. W. Garvey Building
200 W. Douglas, Suite #820
Wichita, Kansas 67202
(316)269-4310 fax: 269-4008
TRADING SYMBOL: NASDAQ-HIPC
High Plains Internet Home Page:
http://www.ctaonline.com/ir/hipc.htm
