HIGH PLAINS CORPORATION 1998 ANNUAL REPORT
(Inside Front Cover)
Corporate Identity Inside Front Cover
(New logo displayed)
High Plains' new corporate identity marks a new era. Our business remains
strongly rooted in the transference of plants into usable energy sources, yet
our vision has broadened. Diversification opportunities abound through new
products, technology and applications. Our dynamic identity reflects this
sense of possibilities. The mark can be seen as a leaf and a drop of ethanol,
together creating a burst of energy. This new vision unites high technology
and innovation to create solutions for tomorrow.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Income Data
Net Sales and Revenues $84,864 $63,122 $87,925 $52,769 $33,566
Net (Loss) Earnings $(3,593)$ 1,733 $11,821 $ 6,072 $ (933)
(Loss) Earnings Per Share
Basic $ (.22)$ .11 $ .75 $ .41 $ (.07)
Assuming Dilution $ (.22)$ .11 $ .74 $ .39 $ (.07)
Balance Sheet
Long-term Debt $11,703 $10,200 $14,460 $19,052 $10,248
Total Assets $83,250 $79,075 $75,096 $67,517 $48,915
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For comparative purposes, prior year (loss) earnings have been restated as
required under FASB Statement No. 128, Earnings Per Share and, to affect stock
splits disclosed in fiscal 1995. No cash dividends were declared per common
share during the years shown above.
Forward-looking Statements
This report contains forward-looking statements made pursuant to the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty including but not limited to legislative changes regarding air
quality, fuel specifications or incentive programs; changes in market prices
or demand for motor fuels and ethanol; changes in supply and cost of grain
feedstocks; the ability of the Company to become Y2K compliant and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission, including but not limited to its annual report on Form
10K, Proxy Statement, quarterly reports on Form 10Q, and press releases.
<PAGE>
To Our Stockholders (Page 1)
High Plains is charting a sure course. One focused on partnering and risk
management with a renewed emphasis on cost control. We're looking for - and
finding - new efficiencies. Realizing possibilities through new products,
technology and applications. Benefiting from dedicated, reenergized
employees. Competitively positioning ourselves through diversification and
the recent passage of legislation that extends the ethanol tax incentive
through 2007.
As the seventh-largest U.S. producer of ethanol, we operate three plants
located in Kansas, Nebraska and New Mexico. These plants have the capacity to
turn 27 million bushels of corn and milo into 67.5 million gallons of ethanol
a year. Since our founding in 1980, our basic product has been fuel-grade
ethanol. While our faith in the integrity and potential of this product
remains unchanged, we're moving toward greater diversification. This past
fiscal year we began producing industrial-grade ethanol. Not only does it
command a higher price than fuel-grade, it opens new markets to us through
wide-ranging applications - from beverage-grade alcohol to vinegar for packing
pickles. We're also now selling carbon dioxide, generating significant
additional yearly earnings.
(Picture of Gary R. Smith)
Our new vision manifests itself in a renewed commitment to quality and
efficiency. We're moving toward ISO 9002 certification, and a fine-tuning of
all our facilities is underway. In addition, our Kansas plant has begun
piping in lower-cost methane gas from a nearby landfill. This initiative
could replace about 80 percent of the natural gas the plant burns to produce
ethanol. Further cost reductions are being sought companywide in the form of
higher production yields, better feedstock utilization and innovative
partnerships.
The road ahead looks promising. Granted, the drop in oil and gasoline
prices has affected the ethanol industry along with the oil industry, but
while this has negatively impacted our stock performance for fiscal 1998, we
believe our shareholders' confidence in High Plains will be rewarded. The
need for efficient, environmentally sound alternative fuels grows daily,
driven by communities striving to comply with the federal Clean Air Act and by
a growing public demand to reduce greenhouse gases. Both in our nation and
abroad the value of a renewable, domestically produced, clean-burning fuel
such as ethanol is increasingly recognized. High Plains is proud to produce a
sustainable product that lessens our country's dependence on imported oil,
promotes national security, improves the trade balance and shores up the farm
economy. As a shareholder, you should be proud, too.
Thank you for your continued support and belief in our long-term growth.
We're on a journey to success.
(Picture of Daniel O. Skolness)
Sincerely,
Gary R. Smith, Chief Executive Officer
Daniel O. Skolness, Chairman of the Board
(Dividing line separating letter from the following text)
High Plains' board of directors brought Gary Smith on board in April of 1998.
Smith specializes in alternative fuels, automotive engines and industrial
manufacturing. Most recently he served as president of Ohio-based Signa
Stortech Systems. The company's new management team welcomes the board's
challenging agenda and appreciates how generously board members have given
their time and expertise to make this a true team effort.
<PAGE>
(Page 2 contains a heading that covers page 2 and page 3 - heading reads
FINDING NEW WAYS - Page 2 contains a collage that includes all of the
different applications for the product the Company manufactures, and includes
the words "Fuel Grade Ethanol", "Industrial Grade Ethanol", "Carbon Dioxide"
and "Dried Distiller's Grain and Solubles".)
<PAGE>
(Page 3)
Recognizing new products, applications and technologies.
A new vision energizes High Plains. It comes from bold leadership and a
greater sense of the possibilities before us. As the nation's seventh-largest
ethanol producer, we're broadening our markets and diversifying our offerings.
We're now producing industrial-grade ethanol, which commands a higher price
than our core product, fuel-grade ethanol. Converting fuel-grade production
into industrial-grade not only increases our revenues, it expands our customer
base. Our efforts and those of the country's other 59 producers poured 1.7
billion gallons of ethanol into the marketplace in 1997. While High Plains
primarily serves the western United States, we also sell our ethanol and dried
distiller's grain and solubles nationwide and internationally. More than
ever, we're looking for new ways and new markets. And we're finding them.
FUEL-GRADE ETHANOL
Our three plants* have the capacity to convert 27 million bushels of corn and
milo into 67.5 million gallons of ethanol. Most of that is fuel-grade, used
for blended gasoline. This earth-friendly product reduces exhaust emissions
of pollutants such as carbon monoxide. Good news for a world increasingly
concerned with air quality.
INDUSTRIAL-GRADE ETHANOL
This versatile product is used to make such items as beverage alcohol,
perfume, cosmetics, paint thinner and vinegar. Last year, our industrial-
grade ethanol was certified to meet strict odor and taste tests. Our food-
grade product has received kosher certification, as well. Who knows, the
kosher pickles you buy might someday be packed with our product.
CARBON DIOXIDE
In our quest for greater efficiencies, we recently began to capture and market
carbon dioxide gas at our Nebraska facility and are working toward getting our
other two plants onstream. Taking this by-product of the production process
to market is reaping dividends.
DRIED AND WET DISTILLER'S GRAIN AND SOLUBLES
This by-product of ethanol production generates substantial revenues. Used
for animal feed, it contains all the fat and protein of corn. While the wet
products eliminate additional process costs, the dried product is only one-
third the mass of corn and is lightweight and marketable over long distances,
even overseas.
(Located in bottom right hand corner is the * information from the FUEL-GRADE
ETHANOL paragraph)
* Colwich, Kan., founded 1982; York, Neb., build 1994; Portales, N.M.,
acquired 1997.
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(Page 4)
(Page 4 and 5 has a heading that covers both pages - heading reads SHIFTING
GEARS - Page 5 contains a collage that shows gears shifting and road signs,
and includes the words "Control Costs," "Reenergize Employees," "Manage Risk,"
"Create Partnerships and Broaden Our Resources").
Building momentum through strategic alliances and reenergized employees.
At High Plains, we're exploring every road. Examining every process.
Reviewing every product. We're looking at ways to be more competitive.
Pursuing new methods to control costs, develop partnerships and improve
margins.
We're implementing systems to manage risk, taking advantage of strategic
alliances with other companies such as Centennial Trading for grain purchases,
ConAgra Commodity Services for feed ingredient sales, and EPCO Carbon Dioxide
Products for CO2. Smoothing out the price we pay for our feedstock.
Benefitting from this year's declining grain prices. Finding cost reductions
through higher-yield crops, efficient grain usage and state-of-the-art
technology. Creating partnerships that broaden our resources. New
legislation is also lessening our risk. Passed in June 1998, it extends for
ethanol blended gasoline a $5.4-a-gallon federal subsidy through the year 2007
(dropping to 5.3 cents in 2001 and 5.1 cents in 2005). The demand for clean-
burning, cost-effective fuels grows daily. The federal Clean Air Act requires
blended gasoline for use in many cities nationwide, from Atlanta to Tacoma.
Ethanol provides a much-needed solution to today's air quality problems.
Employee efficiency and enthusiasm have been elevated. New compensation
policies based on company productivity and profitability give them a greater
feeling of ownership. As High Plains succeeds, so do they. As a result,
everyone's looking for better ways of doing business. And we're fining them.
Greater attention to detail and cutting-edge technology have led to such
innovations as using anaerobic digesters to improve wastewater efficiencies.
We recently began burning lower-cost methane gas piped in from Wichita's
Brooks Landfill to replace up to 80 percent of the natural gas the Kansas
plant burns to produce ethanol. Alternative feedstocks are also being
aggressively pursued, and resulting cost savings will go directly to the
bottom line.
ENVIRONMENTAL BENEFIT
Ethanol blended fuel reduces automobile pollution because ethanol contains
twice as much oxygen by weight than any other approved oxygenate. This
additional oxygen allows the fuel to burn more completely, resulting in lower
emissions and increased power.
PROCESS
The grain, primarily corn or milo, is ground into a coarse flour, then mixed
with water and cooked. It's fermented for 48 hours. A centrifuge spins off
the heavy material, which is made into a protein-rich cattle feed. The liquid
goes to a distillation tower where it is distilled until it reaches 199.5-
proof alcohol. One part gasoline is then added to 19 parts ethanol for
storage and shipment. This is then mixed into automotive gasoline in varying
percentages to increase octane ratings and decrease pollution. Ethanol
without gasoline can be further distilled for uses in the food and beverage
markets, or for solvents and other industrial uses.
<PAGE>
(Management's Discussion and Analysis section starts on page 6 and goes
through page 8.)
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
During fiscal 1998, High Plains derived approximately 70% of its revenues from
the sale of ethanol, approximately 22% from the sale of distiller's grains and
other by-products of the ethanol production process, and approximately 7% from
state production incentive programs. The sale prices of ethanol vary with the
wholesale price of gasoline, while distiller's grain and other by-products
vary with the cost of alternative feedstocks for animal consumption in the
marketplace.
It is possible to obtain a higher price per gallon of ethanol than wholesale
gasoline due to the blenders' Federal excise tax credit. In June 1998, this
excise tax credit, which had been scheduled to expire in September 2000, was
extended through December 2007. Consequently, the excise tax credit will
continue to enhance the value of fuel grade ethanol and provides a level of
continuity, which supports funding and expansion in the industry. It has been
estimated that, over the next 18 months, approximately 130 million gallons in
production capacity will be added to the ethanol industry.
The Company traditionally has sold a majority of its spring and summer fuel
ethanol production based on spot market conditions and short-term seasonal
contracts. For fiscal 1999, the Company is making greater use of longer-term
contracts with variable pricing related to different market indices. The
Company believes that this management strategy will provide a better basis for
long-term planning, especially in the areas of production and margin
predictability.
During fiscal 1998, the Company's primary grain feedstocks were sorghum (also
known as milo) and corn. Production at the Colwich, Kansas and Portales, New
Mexico facilities relied almost exclusively on sorghum, while the York,
Nebraska plant utilized a mixture of approximately 67% corn and 33% sorghum.
The utilization of milo versus corn feedstocks is a function of supply and
cost per bushel. The cost of these grains is dependent upon factors that are
generally unrelated to those affecting the price of ethanol. Sorghum prices
generally vary directly with corn prices, and regional grain supplies, as well
as world grain market conditions.
The Company attempts to control the market risk associated with feedstock
prices by periodically employing certain strategies including grain trading
and forward contracting. During the second and third quarter of fiscal 1998,
the Company acquired certain commodity futures positions as part of its risk
management program. The futures contracts were designated as a hedge against
potentially rising prices for grain feedstock due to the uncertainty of
weather patterns and their effect. By the latter part of fiscal 1998, the
grain markets had begun a significant trend toward lower prices.
Consequently, the Company liquidated all of its the commodity futures
contracts prior to June 30, 1998, resulting in losses of approximately $1.6
million.
Grain feedstock prices have continued to decline into the first quarter of
fiscal 1999 and the Company anticipates locking in grain prices for future
deliveries at near record low prices. As of June 30, 1998, the Company had
forward contracts to purchase milo and corn totaling approximately 2.9 million
bushels with an average blended price of $2.47 per bushel. However, as of
August 31, 1998, the Company had forward contracts to purchase milo and corn
totaling approximately 22.7 million bushels, of which only 1.5 million bushels
were priced at an average of $2.17 per bushel. The balance, approximately
21.2 million bushels, was unpriced as of August 31, 1998, as management
attempts to lock-in the most advantageous pricing for this feedstock.
In December 1997 the Company completed negotiations with Giant Industries,
Inc. to purchase a previously closed plant in Portales, New Mexico. The
Company re-opened the plant and began production on a test basis in February
1998. Sustained economic production was achieved by March 1998, and resulted
in total production at the Portales facility of approximately 3.5 million
gallons of fuel grade ethanol during fiscal 1998.
The acquisition of the Portales plant adds approximately 13.5 million gallons
per year of fuel grade ethanol production capacity to the Company's baseline
production capacity. The Company's production capacity for all three
facilities including 18 million gallons at the Colwich, Kansas plant and 36
million gallons at the York, Nebraska plant, totals approximately 67.5 million
gallons of ethanol per year. Future volume growth beyond these levels will be
dependent upon improvements to the York or Portales facilities, acquisition of
new plants or the construction and operation of new production facilities.
Since July 1997, the York, Nebraska facility has had the ability to
further refine, to specifications, approximately one million gallons per month
of existing ethanol production capacity for sale to additional markets such as
the food and beverage industry. Sales of beverage grade ethanol during fiscal
1998 were approximately 3.5 million gallons. Management goals for fiscal 1999
will include increased sales efforts for these products and a priority to
utilize the full production capacity available.
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.
Consequently, the Company shut down both the Colwich, Kansas and the York,
Nebraska plants in May 1996. As grain prices began to decline in response to
the onset of the 1996 autumn harvest, the Company prepared to re-open its
production facilities. During September 1996 the Colwich, Kansas facility
became operational and began producing. By late October 1996, the York,
Nebraska plant was producing as well.
Results of Operations
Comparison of the fiscal years ended June 30, 1998 and June 30, 1997
Revenues
Net sales and revenues were $84.9 million for the fiscal year ended June 30,
1998, an increase of approximately $21.8 million or 34.4% from the $63.1
million in net sales and revenues for the fiscal year ended June 30, 1997. The
net increase resulted from several factors: lower production and sales in
fiscal 1997, a 9.7% decline in the average sale price of fuel grade ethanol in
fiscal 1998 offset by a slight increase in fiscal 1998 production related to
the start-up of the Portales, New Mexico facility. The lower 1997 production
was due to the temporary shutdown of the Company's plants and the
inefficiencies in production experienced as part of the re-opening of the
plants. For additional information regarding the temporary shutdown of the
production facilities in fiscal 1997 see "Temporary Shutdown of Plant
Operations" section above. The Company sold approximately 48.6 million gallons
of fuel grade ethanol with an average price of $ 1.13 per gallon during fiscal
1998. During fiscal 1997, the Company sold approximately 33.3 million gallons
of fuel grade ethanol with an average price of $ 1.24 per gallon.
Late in fiscal 1997, the Company began producing, on a test basis, beverage
grade ethanol. In fiscal 1998 the Company sold approximately 3.5 million
gallons of beverage grade ethanol at an average price of $1.36 per gallon.
Included in product sales and revenues for fiscal 1998 and fiscal 1997,
respectively, are $1.2 million and $1.1 million in revenues for ethanol
produced under the Kansas incentive program. These payments ranged from $.07
to $.09 per gallon of ethanol produced. The Kansas incentive program has been
renewed four times since its inception, most recently in July 1997. This
program is currently scheduled to expire July 1, 2001. However, the Company
maintains on-going efforts to extend the program beyond the current expiration
date. Management believes the Kansas legislature will continue to support the
incentive program in the future due to its economic benefits to agriculture.
Production tax credits from the State of Nebraska recorded as revenues totaled
$5.1 million and $4.0 million for the fiscal years ended June 30, 1998 and
1997, respectively. Under the Nebraska program, the Company receives, over a
five year period, an incentive
<PAGE>
in the form of a transferable production tax
credit in the amount of $.20 per gallon of anhydrous ethanol produced. Not
less than two million gallons and not more than twenty-five million gallons
produced annually, at the York, Nebraska facility, are eligible for the credit.
The Company will complete the five-year incentive period and will no longer be
eligible for this credit after December 31, 1999. Consequently, management has
placed a priority on working with the Nebraska legislature, during this next
fiscal year, to extend this benefit or some alternative benefit for ethanol
producers.
Currently, the State of New Mexico does not provide any ethanol production
incentives or tax credits. During fiscal year 1999, management plans to
aggressively pursue legislative support for the initiation of some form of
ethanol production incentive in the state.
For the fiscal year ended June 30, 1998 distiller's grain and other by-products
sales increased to $18.7 million from $13.6 million for the same fiscal year
ended June 30, 1997. The increase in distiller's grain and other by-products
revenues is primarily due to lower production and sales in fiscal 1997, as
previously discussed.
Cost of Products Sold
Cost of products sold, as a percentage of net sales and revenues was 97.9% and
94.1% for fiscal 1998 and 1997, respectively. The fiscal 1998 increase in cost
of products sold as a percentage of net sales and revenues was primarily due to
the decline in the average sale price of ethanol. However, this decline was
partially offset by a decline in the average price per bushel for grain
feedstocks. The Company?s cost of grain averaged $2.51 per bushel during the
fiscal year ended June 30, 1998 compared to an average cost of $2.61 per bushel
for the fiscal year ended June 30, 1997. In response to declining grain
prices, the Company stopped purchasing futures contracts as hedge instruments,
and by June 30, 1998 had sold all of its then held positions, resulting in
approximately $1.6 million in losses.
Selling, General and Administrative
Selling, general and administrative expenses were 10.9% greater in fiscal 1998
than in 1997. The increase was primarily due to lower compensation expense in
fiscal 1997 as a result of limited staffing during the temporary shutdown of
plant operations, and increased compensation from additional new staff and
management level personnel in fiscal 1998. Additional costs of approximately
$0.6 million were incurred in fiscal 1998 as a result of changes in the upper
management of the Company.
Earnings
For the fiscal year ended June 30, 1998, the Company recorded a net loss of
approximately $3.6 million compared to net income of $1.7 million for the
fiscal year ended June 30, 1997. In addition, the gross profit percentage
decreased from 6.8% of net sales and revenues in fiscal 1997 to 0.2% of net
sales and revenues in fiscal 1998. The Company's net loss in fiscal 1998
compared to a positive net earnings in fiscal 1997 is primarily a result of
lower per gallon revenues from the sale of ethanol and increased expenses
resulting from the sale of certain grain futures contracts in fiscal 1998.
Comparison of the fiscal years ended June 30, 1997 and June 30, 1996
Revenues
Net sales and revenues for the fiscal year ended June 30, 1997 were 28.2% lower
than net sales and revenues for the fiscal year ended June 30, 1996. The
Company sold 33.3 million gallons of ethanol, which generated sales of $41.2
million, with an average selling price of $1.24 per gallon for the fiscal year
ended June 30, 1997. During fiscal 1996, 44.6 million gallons of ethanol were
sold, generating sales of $51.7 million at an average selling price of $1.19
per gallon. Production and sales were significantly lower in fiscal 1997
compared to fiscal 1996 as a result of decreased production. This decline in
production was due to the temporary shutdown of the Company's plants and the
inefficiencies in production experienced as part of the re-opening of the
plants. For additional information regarding the temporary shutdown of the
production facilities see the "Temporary Shutdown of Plant Operations" section
above.
Included in ethanol and incentive revenues are amounts of $1.2 million and $1.1
million for fiscal 1997 and fiscal 1996, respectively, for ethanol produced
under the Kansas production incentive program. These payments ranged from $.08
to $.17 per gallon of ethanol produced. Additional amounts of $4.0 million and
$4.4 million in production tax credits from the State of Nebraska were recorded
as incentive revenues for the fiscal years ended June 30, 1997 and 1996,
respectively.
For the fiscal year ended June 30, 1997, distiller's grains, by-products and
other sales totaled $16.8 million of which $3.1 million was from the Company's
sale of certain processing equipment for the production of industrial grade
ethanol. In connection with this sale, the equipment was simultaneously leased
back to the Company under a capital lease.
Cost of Products Sold
Cost of products sold as a percentage of net sales and revenues was 94.1% and
79.0% for fiscal 1997 and fiscal 1996, respectively. The fiscal 1997 increase
in cost of products sold as a percentage of net sales and revenues was
primarily due to a decrease in revenues in fiscal 1997 because the Company did
not sell any of its forward grain contracts in fiscal 1997 as compared to
fiscal 1996. In the fourth quarter of fiscal 1996, the Company sold all of its
forward grain contracts, net of commissions, for approximately $14.0 million,
as a result of record level grain prices in excess of the forward grain
contract prices. For the fiscal year ended June 30, 1997, no revenue from the
sale of forward grain contracts was recognized. The Company's cost of grain
averaged $2.61 per bushel during the fiscal year ended June 30, 1997 compared
to an average cost of $2.90 per bushel for the fiscal year ended June 30, 1996.
Selling, General and Administrative
Selling, general and administrative expenses were 18% lower in fiscal 1997 than
in fiscal 1996. This decrease was primarily the result of lower compensation
expense related to lower net earnings in fiscal 1997.
Earnings
The Company recorded net earnings of $1.7 million for the fiscal year ended
June 30, 1997, compared to $11.8 million for the fiscal year ended June 30,
1996. In addition there was a decrease in gross profit percentage from 18.2%
of net sales and revenues in fiscal 1996 to 6.8% of net sales and revenues for
the fiscal year ended 1997. Net earnings for fiscal 1997 decreased compared to
fiscal year 1996 primarily as a result of higher revenues generated from the
sale of forward contracts during the fiscal year ended June 30, 1996. For the
fiscal year ended June 30, 1997 no revenue from the sale of forward contracts
was recognized.
Income Taxes
The Company expects to recognize income tax expense at the statutory federal
rates, plus applicable state rates, for financial reporting purposes for
substantially all pre-tax earnings reported after June 30, 1998. Most of this
tax expense will be in the form of increased deferred tax liabilities as
opposed to currently payable obligations. As of June 30, 1998, the Company's
deferred tax liabilities were approximately $15.1 million. For financial
reporting purposes, these deferred liabilities have been offset by deferred tax
assets, including net operating loss (NOL) carryforwards and various tax credit
carryforwards. The deferred liabilities are not subject to expiration, but the
offsetting deferred assets are subject to expiration at various future dates.
Certain of these deferred tax assets have been reserved, including Nebraska
income tax credit carryforwards in excess of amounts expected to be
<PAGE>
utilized, and the Company is actively developing tax planning strategies
intended to preserve as much of the deferred tax assets as possible. If and
when it becomes apparent that deferred tax assets will expire before the
benefit is realized, additional reserves may be necessary which could result in
the Company recognizing tax expenses in amounts in excess of the statutory
federal rates, plus state rates. See Note 8 to the financial statements for
additional information, including scheduled expiration dates of the Company's
deferred tax assets.
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 and NOL
carryforwards may be subject to an annual limitation. The Company does not
expect this annual limitation to necessarily limit the total tax carryforwards
ultimately utilized in the future. However, this annual limitation could defer
the timing of these tax benefits. The Company believes that a Section 382
Event has not occurred during the last three fiscal 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 that would be 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 over which the Company has no
control.
Seasonality
Historically, the Company generates higher gross profits during the second and
third fiscal quarters (October through March) of each fiscal year. This is
due to production efficiencies experienced during the cooler months of the
year and the traditional decrease in grain feedstock prices during and shortly
following the autumn grain harvest. Historically demand and average selling
prices for ethanol are higher during the winter months due to federal, state
and local governments' oxygen programs.
However, during the third quarter of fiscal 1998, gross profits were lower
than anticipated. This was due to an unexpected decline in average selling
prices for ethanol, similar to the decline experienced in wholesale gasoline
prices during this same period, and unusually high grain costs. At the end of
fiscal 1998, ethanol pricing had increased, but was still below historical
levels. In addition, grain prices have trended lower in the months
subsequent to fiscal year-end, as harvest approaches and are currently at
their lowest level in over ten years.
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 revolving lines-of-credit. Cash from operating activities
amounted to approximately $2.2 million in fiscal 1998 compared to approximately
$3.7 million in fiscal 1997. In fiscal 1996 cash from operating activities
amounted to approximately $14.8 million. The decrease in cash from operating
activities in fiscal 1998 was primarily attributable to the decrease in net
earnings and an increase in inventories. The increase in inventories was
primarily due to the start-up of the Portales, New Mexico plant prior to year-
end and the industrial grade ethanol diversification upgrades at the York,
Nebraska plant.
Cash and cash equivalents amounted to approximately $0.7 million as of June 30,
1998, compared to $2.4 million as of June 30, 1997, and $8.9 million as of June
30, 1996. As of June 30, 1998, the Company had negative working capital of
approximately $(6.4) million compared to a working capital surplus of
approximately $.07 million as of June 30, 1997, and a working capital surplus
of $6.6 million as of June 30, 1996. Working capital decreased due to the
decrease in net earnings and an increase in short-term borrowings.
Liquidity risk continues to be a major area of exposure for the Company due to
the volatility in both the selling price of ethanol and the cost of the
Company's primary raw material, grain feedstock. The Company anticipates it
will be able to satisfy its liquidity needs through operating activities during
fiscal 1999. However, the Company is currently seeking to expand its existing
lines-of-credit in anticipation of additional working capital needs. The
Company's revolving lines-of-credit have approximately $0.9 million of credit
available at June 30, 1998. Should the Company experience an increase in the
costs of its feedstocks, a decrease in the demand for ethanol or related
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 additional financing, sale of stock or the exercise
of options held by directors and officers.
Capital expenditures amounted to approximately $8.4 million in fiscal 1998,
compared to $7.8 million in fiscal 1997 and $4.9 million in fiscal 1996. In
fiscal 1998, approximately $4.4 million of the capital expenditures were
related to the acquisition and refurbishment of the Portales, New Mexico
facility. Of the remaining balance of expenditures approximately $4.0 was
related to modifications and upgrades at the York, Nebraska plant. In fiscal
1997, approximately $7.6 million of the capital expenditures were related to
modifications made for industrial grade ethanol production capabilities at the
York, Nebraska plant. In fiscal 1996, approximately $4.3 million of the
capital expenditures were related to modifications and upgrades for the York,
Nebraska plant. The balance of capital expenditures in each of fiscal 1998,
1997 and 1996 were for improvements at the Colwich, Kansas facility.
The Company does not have any material cash commitments to acquire capital
assets as of June 30, 1998. No further expansions of the Company's ethanol
production capacity are anticipated at this time. However, improvements may be
made to the plants to improve efficiency or to improve the recoverability of
by-products.
Year 2000 Issue
The Year 2000 "Y2K" issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Certain computer systems will be unable to properly recognize dates beyond the
year 1999. This could result in a system failure or miscalculations causing
disruptions of operations. In fiscal 1998, the Company developed a three-phase
compliance program: (1) identify major areas of exposure to ensure compliance,
(2) development and implementation of action plans to be Y2K compliant in all
systems by mid-1999, and (3) final testing of each major area of exposure to
ensure compliance by the end of 1999.
Under Phase 1, a number of applications were identified as being Y2K compliant
due to recent upgrades. The Company incurred less than $10,000 in costs to
upgrade these systems. In the manufacturing area, the Company has scheduled
tests and diagnostic procedures to verify compliance with regards to its core
systems. In addition, the Company is aware that its core process software is
not Y2K compliant. The Company will incur approximately $10,000 in costs for
the upgrading of the core software to be Year 2000 compliant.
The Company has begun the process of making inquiries and gathering information
regarding Y2K compliance exposures faced by its vendors. Management has
insufficient information at this time to assess the degree to which such
vendors and suppliers have addressed or are addressing Y2K compliance issues,
and to fully evaluate the risk of disruption to operations that those
businesses might face relating to Year 2000 compliance issues. However, no
major part or critical operation of any segment of the Company's business is
reliant on a single source for raw materials, supplies, or services.
Nonetheless, there can be no assurance that the Company will be able to
identify all Y2K compliance risks, or, that all contingency plans will assure
uninterrupted business operations across the millennium.
<PAGE>
(Audited financial statements and notes to financials start on page 9 and go
through page 19).
HIGH PLAINS CORPORATION
BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
ASSETS
<CAPTION>
1998 1997
___________ ___________
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 674,894 $ 2,389,758
Accounts receivable:
Trade (less allowance of $75,000
in 1998 and 1997) 4,500,579 4,102,173
Production credits and incentives 829,849 1,536,541
Inventories 6,328,232 4,246,783
Current portion of long-term notes receivable 31,307 117,417
Prepaid expenses 85,168 309,350
Refundable income tax 30,000 145,328
___________ ___________
Total current assets 12,480,029 12,847,350
___________ ___________
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land and land improvements 433,496 323,496
Ethanol plants 92,906,633 85,055,215
Other equipment 473,345 393,683
Office equipment 279,278 202,135
Leasehold improvements 48,002 48,002
___________ ___________
94,140,754 86,022,531
Less accumulated depreciation (23,819,484) (20,444,381)
___________ ___________
Net property, plant and equipment 70,321,270 65,578,150
___________ ___________
OTHER ASSETS
Equipment held for resale 264,554 427,432
Deferred loan costs (less accumulated
amortization of $38,095 and $10,857
in 1998 and 1997) 117,890 103,623
Long-term notes receivable, less
current portion -- 41,742
Other 65,886 76,235
___________ ___________
Total other assets 448,330 649,032
___________ ___________
$83,249,629 $79,074,532
___________ ___________
</TABLE>
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1998 1997
___________ ___________
CURRENT LIABILITIES
<S> <C> <C>
Revolving lines-of-credit $ 9,000,000 $ 6,200,000
Current maturities of capital
lease obligations 500,852 519,384
Accounts payable 8,364,074 5,114,452
Accrued interest 223,722 298,551
Accrued payroll and property taxes 822,971 644,846
___________ ___________
Total current liabilities 18,911,619 12,777,233
___________ ___________
Revolving line-of-credit 9,700,000 7,700,000
Capital lease obligations, less
current maturities 2,002,623 2,500,014
Other 364,240 441,109
___________ ___________
12,066,863 10,641,123
___________ ___________
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, authorized
50,000,000 shares; issued 16,410,622
shares and 16,396,622 shares at
June 30, 1998 and 1997, respectively, of
which 411,178 shares were held as treasury
stock at June 30, 1998 and 1997 1,641,062 1,639,662
Additional paid-in capital 37,457,167 37,348,072
Retained earnings 14,170,697 17,763,627
___________ ___________
53,268,926 56,751,361
Less:
Treasury stock - at cost (863,911) (863,911)
Deferred compensation (133,868) (231,274)
___________ ___________
Total stockholders' equity 52,271,147 55,656,176
___________ ___________
$83,249,629 $79,074,532
___________ ___________
<FN>
The accompanying notes are an integral
part of these financial statements
</TABLE>
<PAGE>
HIGH PLAINS CORPORATION
STATEMENTS OF OPERATIONS
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Product sales and revenues $84,863,782 $63,121,510 $73,920,096
Revenues from forward contracts -- -- 14,005,313
___________ ___________ ___________
Net sales and revenues 84,863,782 63,121,510 87,925,409
___________ ___________ ___________
Cost of products sold 83,126,259 59,414,514 69,414,221
Expense (recovery) from
futures/forward contracts 1,608,561 (610,069) 2,524,235
___________ ___________ ___________
Total costs and expenses 84,734,820 58,804,445 71,938,456
___________ ___________ ___________
Gross profit 128,962 4,317,065 15,986,953
Selling, general and
administrative expenses 1,834,725 1,653,681 2,022,095
Management restructuring costs 600,000 -- --
___________ ___________ ___________
Operating (loss) income (2,305,763) 2,663,384 13,964,858
___________ ___________ ___________
Other income (expense):
Interest and other income 128,155 276,345 175,296
Interest expense (1,535,819) (1,354,983) (2,220,427)
Gain on sale of equipment 26,157 129,649 256,606
___________ ___________ ___________
(1,381,507) (948,989) (1,788,525)
___________ ___________ ___________
Net (loss) earnings
before income taxes (3,687,270) 1,714,395 12,176,333
Income tax benefit (expense) 94,340 18,895 (355,256)
___________ ___________ ___________
Net (loss) earnings $(3,592,930) $ 1,733,290 $11,821,077
___________ ___________ ___________
(Loss) earnings per share-basic $ (.22) $ .11 $ .75
___________ ___________ ___________
(Loss) earnings per share-
assuming dilution $ (.22) $ .11 $ .74
___________ ___________ ___________
</TABLE>
[FN]
The accompanying notes are an integral
part of these financial statements.
<PAGE>
HIGH PLAINS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
_______________________
Number Additional
of Paid-In Retained Treasury Deferred
Shares Amount Capital Earnings Stock Compensation Total
__________ __________ ___________ ___________ _________ _________ ___________
<S> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options 149,333 14,933 516,560 531,493
Purchase of common stock (126,251) (126,251)
Employee stock purchase (273,750) (273,750)
Amortization of deferred compensation 131,183 131,183
Compensation expense on stock
options granted 78,868 78,868
Net earnings for year 1,733,290 1,733,290
__________ __________ ___________ ___________ _________ _________ ___________
Balance, June 30, 1997 16,396,622 1,639,662 37,348,072 17,763,627 (863,911) (231,274) 55,656,176
Exercise of stock options 14,000 1,400 19,600 21,000
Amortization of deferred compensation 97,406 97,406
Compensation expense on stock
options granted 89,495 89,495
Net loss for year (3,592,930) (3,592,930)
__________ __________ ___________ ___________ _________ _________ ___________
Balance, June 30, 1998 16,410,622 $1,641,062 $37,457,167 $14,170,697 $(863,911) $(133,868) $52,271,147
__________ __________ ___________ ___________ _________ _________ ___________
</TABLE>
[FN]
The accompanying notes are an integral
part of these financial statements.
<PAGE>
HIGH PLAINS CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
____________ ___________ ___________
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $ (3,592,930) $ 1,733,290 $11,821,077
Adjustments to reconcile net (loss)
earnings to net cash provided by
operating activities:
Depreciation and amortization 3,484,573 3,405,364 2,869,699
Gain on sale of equipment (26,157) (129,649) (256,606)
Amortization of deferred
compensation 46,204 107,923 53,230
Compensation expense on stock
options granted 89,495 78,868 --
Payments received on notes
receivable 127,852 236,552 96,691
Changes in operating assets and
liabilities:
Accounts receivable 336,561 (3,773,905) 1,953,952
Inventories (2,081,449) (2,565,940) 964,434
Equipment held for resale 157,540 105,794 606,353
Refundable income tax 115,328 264,931 (294,259)
Prepaid expenses 224,182 235,821 (160,312)
Accounts payable 3,249,622 4,422,317 (3,103,913)
Estimated contract commitments -- (629,093) 629,093
Accrued liabilities 103,296 168,262 (385,670)
__________ __________ ___________
Net cash provided by
operating activities 2,234,117 3,660,535 14,793,769
__________ __________ ___________
Cash flows from investing activities:
Proceeds from sale of property,
plant and equipment 167,090 43,620 54,477
Acquisition of property, plant
and equipment (8,359,325) (4,802,664) (4,947,663)
Decrease (increase) in other
non-current assets 10,349 (19,217) 5,591
__________ __________ __________
Net cash used in
investing activities (8,181,886) (4,778,261) (4,887,595)
__________ __________ __________
Cash flows from financing activities:
Payments on long-term debt -- (17,345,238) (5,273,810)
Payments on revolving
lines-of-credit (4,900,000) (3,100,000) (1,000,000)
Proceeds from revolving
lines-of-credit 9,700,000 15,000,000 3,000,000
Payments on capital lease
obligations (520,923) (295,330) (332,828)
Increase in other non-current assets (41,505) (207,558) --
(Decrease) increase in other
non-current liabilities (25,667) 97,996 13,811
Issuance of common stock -- 49,500 --
Proceeds from exercise of options 21,000 418,868 1,975,518
__________ ___________ __________
Net cash provided by
(used in) financing
activities 4,232,905 (5,381,762) (1,617,309)
__________ ___________ __________
(Decrease) increase in cash
and cash equivalents (1,714,864) (6,499,488) 8,288,865
Cash and cash equivalents:
Beginning of year 2,389,758 8,889,246 600,381
____________ ___________ ___________
End of year $ 674,894 $ 2,389,758 $ 8,889,246
____________ ___________ ___________
</TABLE>
[FN]
The accompanying notes are an integral
part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes
it is not exposed to any significant credit risk on cash and
cash equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market. During the year ended June 30, 1997, the
Company began hedging certain commodity transactions related to
anticipated production requirements. This was done to reduce risk
due to market price fluctuations. Readily marketable exchange-traded
futures contracts were the designated hedge instruments since there is a
high correlation between the market value changes of such contracts and
the price changes on grain commodities. Gains or losses arising from open
and closed hedging transactions were included as an adjustment to the
value of inventories and reflected in cost of products sold in the
statements of operations when the underlying purchase contracts were
fulfilled. At the end of the year ending June 30, 1998, the Company
stopped purchasing futures contracts as hedge instruments, and sold all
of its then held positions, resulting in a loss of approximately $1.6
million.
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, 1998 and 1997 were $-0- and
$220,523, 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:
<TABLE>
<S> <C>
Ethanol plants 5 - 40 years
Other equipment 5 - 10 years
Office equipment 3 - 10 years
Leasehold improvements 5 years
</TABLE>
Whenever events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be fully recoverable, the Company
reviews that asset for impairment. Scheduled future expirations of
state incentive payments and federal fuel tax incentive programs are
not considered to be such an event or change because of the
government's history of extending the expirations of these incentives.
Capitalized Interest - The Company capitalized interest of $46,147 in
1998 as part of the cost of construction and refurbishing at the
Portales, New Mexico facility and $115,585 in interest in 1997 as part
of the cost of construction at the York, Nebraska facility.
Equipment Held for Resale - The Company acquired ethanol processing
equipment located in New Iberia, Louisiana to be utilized in the
construction of the York, Nebraska facility. Amounts allocated for
equipment not utilized for the Nebraska facility are recorded as
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
sixty months, the life of the debt.
Fair Value of Financial Instruments - The fair values of financial
instruments recorded on the balance sheet are not significantly
different from the carrying amounts.
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, (FAS 109)
the tax benefit from utilization of loss carryforwards is not reflected
as an extraordinary item.
Deferred Compensation - Under the Employee Stock Purchase Plan (Note 9),
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 participating 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 sheets 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 immediately upon their election to
participate in the plan.
Stock-Based Compensation - The Company has chosen to continue to
account for stock-based compensation for employees using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire the
stock. However, the Company accounts for stock-based compensation for
non-employees as provided under FASB Statement No. 123, Accounting for
Stock-Based Compensation (FAS 123). The fair value of the option grant
is estimated on the date of grant using the Black-Scholes option
pricing method.
Earnings Per Share - The Company implemented FASB Statement No. 128,
Earnings Per Share (FAS 128) for the interim periods and years ended
after December 15, 1997. Under FAS 128, the presentation of primary
earnings per share (EPS) is replaced by the "basic" EPS. Basic per
share amounts are computed by dividing net (loss) income by the
weighted average number of common shares outstanding. In addition, a
diluted EPS continues to be required and is computed similarly to
"fully diluted" EPS as defined under APB Opinion No. 15 (See Note 11).
Also, in accordance with FAS 128, the Company has restated all prior
period EPS data presented in these financial statements.
Recently Issued Accounting Standards - At June 30, 1998, 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.
<PAGE>
Management Restructuring Costs - These costs include severance expenses
related to management changes during fiscal year ending 1998.
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.
2. DESCRIPTION OF BUSINESS
Ethanol Production Business - The Company's principal business is the
operation of three plants in Kansas, Nebraska and New Mexico for the
distillation and production of industrial grade and 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
Portales, New Mexico plant was acquired in December 1997. The facility
had been closed for approximately two years, was refurbished, and began
operations in March 1998. 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 $1,126,386 for fiscal 1996, $1,160,141 for
fiscal 1997 and $1,238,545 for fiscal 1998. The Kansas incentive
program is currently scheduled to expire July 1, 2001.
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
$4,428,437 in fiscal 1996, $4,019,584 in fiscal 1997 and $5,069,722 in
fiscal 1998.
The market for the Company's ethanol product is affected by the Federal
government's excise tax incentive program. This program, originally
scheduled to expire in 2000, has been extended to December 31, 2007.
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. Under
the recent extension, the current tax rate reduction equals $.054 per
blended gallon containing 10% or more ethanol by volume.
Alternatively, blenders may currently claim an income tax credit of
$.54 per gallon of ethanol blended with gasoline. However, in 2001,
the tax rate reduction begins to decrease over the remaining life of
the program. The rate decreases to $.053 in 2001, $.052 in 2003 and
$.051 in 2005. 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. Expenses incurred
prior to the year ending June 30, 1996 to fill these contracts were
estimated to be approximately $2.5 million. The Colwich facility
reopened in September 1996, and the York facility reopened in October
1996.
Business Acquisition - In December 1997, the Company acquired an idle
ethanol production facility in Portales, New Mexico. The purchase,
which had a total acquisition cost of $4,000,000, was funded from
additional borrowings on the Company's reducing revolving line-of-
credit (see Note 5). The purchase was accounted for under the purchase
method of accounting. Accordingly, the purchase price was allocated to
the net assets acquired based upon their estimated fair values as shown
below. The results of operations of the acquired facility are included
in the financial statements beginning from the acquisition date.
<TABLE>
<S> <C>
Land $ 110,000
Building 890,000
Equipment 3,000,000
$4,000,000
</TABLE>
Year 2000 Issue - The Company is currently working to resolve any
potential impact of the Year 2000 on the processing of date-sensitive
information by the Company's computerized information systems. Based
on preliminary information, costs of addressing potential corrections
are not currently expected to have material adverse impact on the
Company's financial position, results of operations or cash flows in
future periods. However, if the Company, its customers or vendors are
unable to resolve such processing issues in a timely manner, it could
result in material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant Year 2000
issues in a timely manner.
3. NOTES RECEIVABLE
In January 1995, the Company disposed of its engineering division, and
certain property assets associated with the division were transferred
to the former officer who took over the operations under a separate,
unrelated company. This company and former officer agreed to pay
$300,000 and $100,000, respectively, in notes, plus interest at 9.75%
over 45 months. The remaining balances on these notes receivable were
$31,307 and $-0- at June 30, 1998 and $119,370 and $39,789 at June 30,
1997, respectively. These notes are secured by the property
transferred and the former officer's personal guarantee.
4. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
June 30,
1998 1997
<S> <C> <C>
Raw materials $ 1,463,536 $ 957,894
Work-in-process 529,246 396,747
Finished goods 3,437,794 2,149,904
Spare parts 897,656 664,530
Adjustment to cost for
hedged grain inventory -- 77,708
$ 6,328,232 $ 4,246,783
</TABLE>
<PAGE>
5. REVOLVING LINES-OF-CREDIT
On December 11, 1997, the Company amended its existing loan agreement
with the bank. This amendment increased the credit available on its
two lines-of-credit for the purpose of providing additional working
capital and to fund the Company's acquisition of an ethanol production
facility in New Mexico. The lines-of-credit have an interest rate
option equal to the bank's prime rate or a rate based on the LIBOR
rate, whichever the Company elects.
Revolving lines-of-credit consisted of:
<TABLE>
<S> <C> <C> <C>
Revolving line- $ 2,000,000 7.94% 09/30/98 $ 2,300,000 8.14% 01/08/98
of-credit has a 2,000,000 7.97% 12/31/98 1,700,000 8.50% N/A
maturity of 2,000,000 8.00% 01/08/99 --
January 8, 1999
$ 6,000,000 $ 4,000,000
Reducing $ 6,000,000 7.94% 09/30/98 $ 9,350,000 8.14% 01/08/98
revolving line- 850,000 7.94% 09/30/98 550,000 8.02% 09/30/97
of-credit has a 850,000 8.00% 12/31/98 --
maturity of 5,000,000 8.00% 01/08/99 --
January 10, 2002
12,700,000 9,900,000
</TABLE>
At June 30, 1998, all interest rates are LIBOR-based rates with their
respective maturity dates as disclosed above. For the year ended June 30,
1997, all interest rates are LIBOR-based rates except the
outstanding balance of $1,700,000 which bears interest at a prime rate
of 8.5%.
The maximum availability under the lines-of-credit as set forth above
is limited so that the amount of collateral securing the lines at all
times exceeds the outstanding balances by a ratio of at least 2 to 1.
The maximum availabilities under the revolving and reducing lines-of-
credit at June 30, 1998 were $6,500,000 and $13,100,000, respectively.
Therefore, at June 30, 1998, the available, unused amount in the
combined lines-of-credit was $900,000. The maximum availability under
the reducing revolving line-of-credit decreases each calendar quarter
by $850,000. Therefore, the Company can expect to pay at least
$3,000,000 on this line-of-credit in the next fiscal year. This amount
is included in the current maturities of the lines-of-credit on the
balance sheet.
Collateral on the lines as amended under the new agreement includes all
eligible receivables, inventory, general intangibles, property and
equipment located at the Company's three ethanol facilities, and the
Company's rights to payments under present or future production
incentive contracts from the Ethanol Plant Production Credit Agreement
with the State of Nebraska.
The financing agreement contains various restrictions, including the
maintenance of certain financial ratios, fulfilling certain net worth
and indebtedness tests, and capital expenditure limitations. At June 30,
1998, the Company was in violation of certain covenants; however,
on September 24, 1998, the bank has waived its rights to declare the
debt due and payable based on these covenant violations through June 30,
1999.
6. LEASES
Sale - Leaseback Transaction - On December 12, 1996, the Company sold
certain processing equipment for the production of industrial grade
ethanol for $3,128,676 and concurrently entered into an agreement to
lease the property back at $54,191 per month through December 12, 2002.
The sale of equipment was recorded resulting in a gain of $87,447 which
was deferred and will be recognized over a period not to exceed the
six-year term of the lease agreement. The lease has been classified as
a capital lease. The equipment under lease is included in ethanol
plants totaling $3,128,676, less accumulated depreciation of $195,944,
for a net book value of $2,932,732 at June 30, 1998.
Other Capital Leases - The Company also leases various processing and
office equipment under long-term agreements which have been classified
as capital leases. The leases have terms of three years or less, and
expire through 2001. As of June 30, 1998, cost and accumulated
depreciation on equipment under capital leases amounted to $116,585 and
$26,934, for a net book value of $89,651. At June 30, 1997, cost and
accumulated depreciation on equipment under capital leases amounted to
$284,068 and $29,568, for a net book value of $254,500.
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 also leases 32 cars
under an operating lease expiring in June 30, 2002. Annual rentals are
$213,120 for all 32 cars. The Company leases an additional 57 railroad
cars under various operating leases expiring through fiscal year ending
June 30, 2003. These rail car leases require the Company to pay
certain executory costs. Corporate offices are also under a 5-year
lease expiring in 2003 that requires annual rentals of $31,000. Rent
paid during the years ended June 30, 1998, 1997 and 1996 was
$1,213,699, $977,449 and $865,941, respectively.
Future Minimum Lease Payments - The following is a schedule of future
minimum lease payments for capital leases and operating leases as of
June 30, 1998.
<TABLE>
<CAPTION>
Capital Operating
Year Ending June 30 Leases Leases
<S> <C> <C>
1999 $ 672,749 $ 1,060,799
2000 658,644 350,959
2001 650,819 326,239
2002 650,290 313,879
2003 325,145 86,562
Total minimum lease payments 2,957,647 $ 2,138,438
Less amount representing interest 454,172
Present value of net minimum
lease payments 2,503,475
Less current maturities 500,852
$ 2,002,623
</TABLE>
7. COMMITMENTS
Forward Contracts - 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, 1998, the Company had
forward contracts to purchase approximately 2,890,643 bushels of milo
and corn at fixed prices totaling $7,142,661 with delivery dates of
July 1998 through March 1999. An additional 641,185 bushels were held
under contracts for delivery, however, at June 30, 1998, no prices had
been set. The unpriced contracts are for deliveries from July through
December 1998. The Company had forward contracts to sell 60,395 tons of
DDG at fixed prices totaling approximately $4,769,785. No losses were
expected on these contracts.
During 1998, the Company also entered into a contract to sell carbon
dioxide, a production by-product, to another company. The contract
requires the Company to supply at least 200 tons of carbon dioxide gas
per day from its York, Nebraska plant through 2008.
<PAGE>
Retirement and Consulting Agreement - On April 11, 1997, the Company
entered into an agreement with the former President and Chairman of the
Board to provide a retirement benefit package and consulting agreement
for future services. As part of the retirement package, the Company
agreed to grant (on August 1, 1997) 14,000 non-qualified options at an
exercise price equal to one-half of the lowest closing price achieved
by the Company's stock between May 1, 1997 and August 1, 1997.
In consideration for future consulting services to be provided by the
former President, the Company agreed to make payments equal to the amounts
required under his former employment contract, which would have expired
July 1, 2000. At June 30, 1998, this totaled $265,983 plus annual bonuses
of 2% of net income before taxes. The Company also agreed to grant the
former President 50,000 non-qualified stock options on each April 11,
1997, 1998 and 1999 at the then closing stock price.
For compensation expenses recorded on the 64,000 and 50,000 shares
issued in 1998 and 1997, respectively, see Note 9.
8. INCOME TAXES
For Federal income tax purposes at June 30, 1998, the Company had a net
operating loss carryforward of approximately $21,422,000 and
approximately $5,856,000 of federal general business tax credit
carryforwards, which, if not used, will expire as follows:
<TABLE>
<CAPTION>
Expires in Operating Net General
Fiscal Year Loss Amount Business Credit
Ending Carryforward Carryforward
<S> <C> <C>
1999 $ -- $ 1,263,000
2000 -- 7,000
2001 -- 86,000
2002 -- --
2003 5,409,000 --
2004 1,553,000 --
2005 992,000 4,500,000
2008 3,000 --
2009 3,000 --
2010 481,000 --
2012 4,893,000 --
2013 8,088,000 --
$21,422,000 $ 5,856,000
</TABLE>
The general business credits expiring in fiscal 1999-2002 are
investment tax credits and the credits expiring in fiscal 2005 are
small ethanol producer tax credits. In the event these credits would
expire, the Company would receive a deduction of 50% of the investment
tax credit and 100% deduction of the small ethanol producer credit in
the year of expiration.
The Company also has a Nebraska investment credit carryforward of
$4,894,000, expiring in fiscal 2009, 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 FAS 109 totaling $20,126,000 at June 30, 1998 (see below).
The book basis of property, plant and equipment in excess of its tax
basis results in an offsetting deferred tax liability of $15,069,000,
and the valuation allowance offsets an additional $5,057,000, leaving
no net deferred tax assets at June 30, 1998. 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 as needed until such
time as future taxable income is generated or assured (if ever).
Income taxes consisted of:
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
<S> <C> <C> <C>
Current tax (benefit) expense $ (94,340) $ (18,895) $ 355,256
Tax effect of changes in
deferred tax assets
and liabilities:
Book basis of plant and
equipment in excess of
tax basis 1,751,000 3,354,000 2,652,000
Nondeductible accrued expenses (97,000) 239,000 (303,000)
(Increase) decrease in net
operating loss carryforward (3,163,000) (2,979,000) 1,588,000
(Increase) decrease in tax
credits carryforward 1,000 (80,000) 80,000
Increase in Nebraska investment
credit carryforward (366,000) (931,000) (170,000)
AMT credit carryforward
and other (122,000) 258,000 (230,000)
Change in asset valuation
allowance 1,996,000 139,000 (3,617,000)
Deferred tax expense -- -- --
Income tax (benefit) expense $ (94,340) $ (18,895) $ 355,256
</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:
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
<S> <C> <C> <C>
Computed income tax (benefit)
expense, at 34% $(1,253,672) $ 582,894 $ 4,139,953
Utilization of net operating
loss carryforwards -- (582,894) (4,139,953)
Increase in valuation allowance 1,253,672 -- --
Alternative minimum tax -- -- 239,256
Other, net (94,340) (18,895) 116,000
Total income tax (benefit)
expense $ (94,340) $ (18,895) $ 355,256
</TABLE>
The Company has deferred income tax liabilities and assets arising from
the following temporary differences and carryforwards:
<TABLE>
<CAPTION>
June 30,
1998 1997
<S> <C> <C>
Deferred tax liabilities:
Book basis of property,
plant and equipment in
excess of tax basis $15,069,000 $13,318,000
Deferred tax assets:
Net federal and state operating
loss carryforwards $ 8,673,000 $ 5,510,000
Nebraska investment credit
carryforward 4,894,000 4,528,000
General business credit carryforward 5,856,000 5,857,000
AMT credit carryforward and other 542,000 420,000
Nondeductible accrued expenses 161,000 64,000
20,126,000 16,379,000
Less: Valuation allowance 5,057,000 3,061,000
$15,069,000 $13,318,000
Net deferred income taxes $ -- $ --
</TABLE>
9. STOCK-BASED COMPENSATION
The Company has three stock-based compensation plans which are
described below. Grants to employees under those plans are accounted
for following APB Opinion No. 25. Accordingly, no compensation cost
has been recognized for options granted to employees in the financial
statements, except under the employee stock purchase plan where
compensation expense equals the excess of the fair market value of the
shares over the exercise price on the
<PAGE>
grant date. Grants to non-
employees under the plans are accounted for under FAS 123. For the
64,000 and 50,000 options granted to a non-employee in the years ended
June 30, 1998 and 1997, $89,495 and $78,868, respectively, were
recognized as compensation expense. Had compensation cost for all the
stock-based compensation plans been determined based on the fair value
grant date, consistent with the provisions of FAS 123, the Company's
net earnings and earnings per share would have been reduced to the
proforma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net (loss) earnings:
As reported $(3,592,930) $1,733,290 $11,821,077
Pro forma (3,866,883) 1,381,750 10,302,658
(Loss) earnings
per share:
As reported $ (.22) $ .11 $ .74
Pro forma (.24) .09 .65
</TABLE>
Fixed Stock Option Plans - The Company has two fixed option plans under
which it may grant options to key employees, officers and directors to
purchase common stock, with a maximum term of 10 years, at the market
price on the date of grant. Options up to 1,200,000 shares may be
granted under the 1990 plan and options up to 3,000,000 shares may be
granted under the 1992 plan. All options are 100% vested at the date
of grant. The fair value under FAS 123 of each option granted is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions for 1998, 1997
and 1996: dividend rate of 0% for all years; price volatility of
40.91%, 51.47% and 51.49%; risk-free interest rates of 5.7%, 6.6% and
6.26%; and expected lives of 3 years, 5 years and 4 years.
A summary of the status of the two fixed plans at June 30, 1998, 1997
and 1996 and changes during the years then ended is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding and
exercisable at
beginning of year 1,818,193 $ 5.6612 2,175,154 $ 5.7334 1,964,675 $ 4.7652
Granted 496,325 4.5781 204,333 3.9377 986,821 5.1525
Exercised 14,000 1.50 124,333 3.3689 776,342 2.5447
Expired or
surrendered 504,600 5.4832 436,961 5.8665 --
Outstanding and
exercisable at
end of year 1,795,918 5.4443 1,818,193 5.6612 2,175,154 5.7334
Weighted average
fair value per
option of options
granted during
the year $ .71 $ 2.04 $ 2.38
</TABLE>
The following table summarizes information about the outstanding
options at June 30, 1998:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Number Remaining Exercise
Range of Exercise Prices Outstanding Life Life
<S> <C> <C> <C>
$2.37 to $2.63 111,000 7.7 $ 2.484
$3.19 to $4.81 442,200 6.2 3.556
$5.12 to $5.63 810,718 4.2 5.334
$8.34 432,000 5.7 8.344
1,795,918
</TABLE>
The Company's 1990 and 1992 Stock Option Plans were approved for
modification at the Company's November 1994 annual meeting of
stockholders. The approved amendments provide that when optionees
exercise their options 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. Options subject to
reload included in total outstanding options at June 30, 1998 totaled
1,142,000 shares. These have a weighted average exercise price of
$5.97.
Employee Stock Purchase Plan - In August, 1995 the Company adopted a
compensatory Employee Stock Purchase Plan, effective for a 3-year
period, 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.
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 cost 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. 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
eligible to prepay. For those officers, the expense is recognized
immediately upon the measurement date.
Employees and key management personnel elected to purchase 87,600 and
75,700 shares with an exercise price per share of $1.50 and $2.50
through the stock purchase plan in 1997 and 1996, respectively. The
related deferred compensation recorded at June 30, 1997 and 1996
totaled $273,750 and $141,937, respectively.
Amortization of the deferred compensation recognized in the income
statement was $46,204, $107,923 and $53,230 for the periods ending
June 30, 1998, 1997 and 1996, respectively. Forfeitures of shares in
1998 from employee terminations totaled 20,562 shares under the 1996
and 1995 purchase years. The fair value under FAS
<PAGE>
123 of each
purchased share is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: expected life of
5 years for all years; dividend rate of 0% for all years; risk-free
interest rates of 6.8% and 5.6% in 1997 and 1996, and price volatility
of 53% in 1997 and 1996. The weighted average fair value per share
granted would be $3.09 in 1997 and $2.91 in 1996.
10. MAJOR CUSTOMERS
Sales to individual customers of 10% or more of net sales and revenues
are as follows:
<TABLE>
<CAPTION>
Trade Accounts
Receivable Balance at
Sales During the Year Ended June 30, June 30,
Customer 1998 1997 1996 1998 1997
<S> <C> <C> <C> <C> <C>
A $17,956,247 $12,532,761 $ -- $ 453,866 $ 421,759
B 15,255,183 -- -- 559,299 --
C 8,666,195 6,460,989 8,553,353 635,603 425,999
D -- 8,653,840 11,356,458 -- 594,879
E -- -- 13,917,311 -- --
$41,877,625 $27,647,590 $33,827,122 $ 1,648,768 $ 1,442,637
</TABLE>
11. EARNINGS PER SHARE
Basic earnings per share is computed by deducting from net earnings or
adding to net losses the income not available to common stockholders
and dividing the result by the weighted average number of shares
outstanding during the period.
Diluted earnings per share is computed by increasing the weighted
average shares outstanding by the number of additional shares that
would have been outstanding if all dilutive potential common shares had
been issued, unless the effect is to reduce the loss or increase the
income per common share outstanding.
<TABLE>
<CAPTION>
For the Year Ended 1998
Loss Shares Per Share
(numerator) (denominator) Amount
<S> <C> <C> <C>
Basic EPS:
(Loss) income available to
common stockholders $(3,592,930) 16,095,443 $ (.22)
Diluted EPS:
(Loss) income available to
common stockholders plus
assumed conversions $(3,592,930) 16,095,433 $ (.22)
</TABLE>
Options outstanding at June 30, 1998 to purchase 1,795,918 shares of
common stock with a range of exercise prices from $2.37 to $8.34, were
not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the
common shares. The options expire over a ten-year period.
<TABLE>
<CAPTION>
For the Year Ended 1997
Income Shares Per Share
(numerator) (denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to
common stockholders $1,733,290 15,933,157 $ .11
Effect of Dilutive Securities
Stock options 90,323
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $1,733,290 16,023,480 $ .11
</TABLE>
Options outstanding at June 30, 1997 to purchase 1,395,193 shares of
common stock with a range of exercise prices from $5.63 to $8.34 were
outstanding during fiscal 1997 but were not included in the computation
of diluted EPS because the options' exercise prices were greater than
the average market price of the common shares.
<TABLE>
<CAPTION>
For the Year Ended 1996
Income Shares Per Share
(numerator) (denominator) Amount
<S> <C> <C> <C>
Basic EPS:
Income available to
common stockholders $11,821,077 15,736,310 $ .75
Effect of Dilutive Securities
Stock options 192,095
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $11,821,077 15,928,405 $ .74
</TABLE>
Options outstanding at June 30, 1996 to purchase 1,779,821 shares of
common stock with a range of exercise prices from $5.25 to $8.34 were
outstanding during fiscal 1996 but were not included in the computation
of diluted EPS because the options' exercise prices were greater than
the average market price of the common shares.
12. ADDITIONAL INFORMATION FOR STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest paid $1,656,796 $1,328,310 $2,249,297
Income taxes paid -- -- 645,000
The Company had the following non-cash transactions:
1998 1997 1996
Purchase of plant and equipment
in exchange for debt $ 5,000 $3,271,074 $ 66,286
Increase in accrued compensation
costs at implementation of
employee stock purchase plan -- 273,750 141,937
Surrender of common stock in
lieu of employee payroll
tax obligations -- 126,251 493,283
Increase in additional paid-
in-capital from tax benefit
of exercise of stock options -- -- 116,000
Decrease in deferred compensation
from employee terminations 51,202 23,260 --
Acceptance of receivable in
exchange for sale of property,
plant and equipment 28,275 -- --
</TABLE>
13. 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, 1998,
1997 and 1996 were $37,697, $27,822 and $27,100, respectively.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended June 30, 1998
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter 1998
<S> <C> <C> <C> <C> <C>
Net sales
and revenues $22,570,837 $21,660,983 $19,123,056 $21,508,906 $84,863,782
Gross profit 2,064,738 1,171,191 437,837 (3,544,804) 128,962
Net (loss)
earnings 1,370,881 405,408 (299,425) (5,069,794) (3,592,930)
Net (loss)
earnings per
common share:
Basic $ 0.09 $ 0.03 $ (0.02) $ (0.32) $ (0.22)
Assuming
dilution 0.09 0.03 (0.02) (0.32) (0.22)
</TABLE>
<PAGE>
(The Independent Auditors' Report is on the top of page 20)
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
High Plains Corporation
We have audited the accompanying balance sheets of High Plains Corporation as
of June 30, 1998 and 1997, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. 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, 1998 and 1997, and the results of their operations and cash flows
for each of the three years in the period ended June 30, 1998 in conformity
with generally accepted accounting principles.
ALLEN, GIBBS & HOULIK, L.C.
Wichita, Kansas
August 28, 1998
(Except for the last paragraph in Note 5,
which is as of September 24, 1998)
(bold separation line)
Market For The Registrant's Common Equity
(located at the bottom of page 20)
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 share during fiscal 1998 and fiscal 1997. These prices do not
include retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Price Fiscal Price
1998 High Low 1997 High Low
<S> <C> <C> <S> <C> <C>
1st Quarter 4.375 3.375 1st Quarter 4.938 3.000
2nd Quarter 3.875 2.500 2nd Quarter 6.375 4.750
3rd Quarter 3.375 2.438 3rd Quarte 5.750 3.500
4th Quarter 3.375 2.125 4th Quarter 4.375 3.125
</TABLE>
<PAGE>
CORPORATE INFORMATION (located inside back cover)
BOARD OF DIRECTORS
John F. Chivers (2)(5)
Chivers Realty
Raymond G. Friend (4)(5)
Arthur Greenberg (4)(5)
Ronald D. Offutt (1)(5)
CEO of RDO Equipment Company
H.T. Ritchie (1)(4)
Secretary of High Plains Corporation
President of Ritchie Corporation
Donald D. Schroeder (2)(3)
Treasurer of High Plains Corporation
Daniel O. Skolness (1)(3)
Chairman of the Board of Directors
of High Plains Corporation
Donald M. Wright (2)(3)
(1) Policy and Compensation Committee Member
(2) Nominating Committee Member
(3) Budget and Audit Committee Member
(4) Finance and Capital Expenditure Committee Member
(5) Merger and Acquisition Committee Member
OFFICERS
Gary R. Smith
President and Chief Executive Officer
Christopher G. Standlee
Vice President and Chief Operating Officer
Dianne S. Rice
Vice President and Chief Financial Officer
H.T. Ritchie / Secretary
Donald D. Schroeder / Treasurer
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
Ethanol Facility - Portales
1827 Industrial Drive
Portales, New Mexico 88130
(505)356-3555, fax: 359-1060
Annual Meeting
November 17, 1998
Wichita Airport Hilton
2098 Airport Rd.
Wichita, Kansas
10:00 a.m.
Certified Public Accountants
Allen, Gibbs & Houlik, L.C.
Wichita, Kansas
Registrar & Transfer Agent
American Stock Transfer
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
www.NASDAQ.com
www.highplainscorp.com
Information Contact
High Plains Corporation
Gary R. Smith
Christopher G. Standlee
Availability of 10-K
A copy of the Company's fiscal 1998
annual report on Form 10-K filed with
the Securities and Exchange Commission
will be made available to interested stock-
holders without charge upon written
request to the Chief Financial Officer at
the above Corporate Headquarters.
<PAGE>
Outside back cover:
HIGH PLAINS CORPORATION LOGO (COLORED)
(Centered on bottom quarter of the page)
Diversified Energy Specialist
O.W. Garvey Building * 200 W. Douglas TEL 316.269.4310 * FAX 316.269.4008
Suite 820 * Wichita, Kansas 67202 http://www.highplainscorp.com
