Edgar Filing: MGP INGREDIENTS INC

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________________ to _________________________________

Commission File Number: 0-17196

MGP INGREDIENTS, INC.

(Exact name of registrant as specified in its charter)

KANSAS	48-0531200
(State or other jurisdiction of incorporation or organization) Identification No.)	(I.R.S. Employer

100 Commercial Street, Atchison Kansas	66002
(Address of principal executive offices)	(Zip Code)

(913) 367-1480

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a “smaller reporting company, See definition of “large accelerated filer”, “accelerated filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

[ ] Large accelerated filer [ X ] Accelerated filer

[ ] Non-accelerated filer [ ] Smaller Reporting Company

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ]Yes [ X ] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, no par value

16,563,078 shares outstanding

as of September 30, 2008

INDEX

PART I. FINANCIAL INFORMATION	Page

Item 1. Financial Statements
Condensed Consolidated Statements of Income	4
Condensed Consolidated Balance Sheets	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	35

PART II. OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	37
Item 3. Defaults upon Senior Securities	37
Item 4. Submission of Matters to a Vote of Security Holders	37
Item 6. Exhibits	38

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as well as historical information. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding the prospects of our industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements are usually identified by or are associated with such words as “intend,” “plan”, “believe,” “estimate,” “expect,” “anticipate,” “hopeful,” “should,” “may,” “will”, “could” and or the negatives of these terms or variations of them or similar terminology. They reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results and are not guarantees of future performance. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from our expectations include, among others: (i) the availability and cost of grain, (ii) fluctuations in gasoline prices, (iii) fluctuations in energy costs, (iv) competitive environment and related market conditions, (v) our ability to realize operating efficiencies, (vi) the effectiveness of our hedging programs, (vii) access to capital and (viii) actions of governments. For further information on these and other risks and uncertainties that may affect our business, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 and Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q.

PART I

ITEM 1 FINANCIAL STATEMENTS

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Dollars in thousands, except per-share amounts

	Quarter ended
	September 30,			September 30,
	2008			2007

Net sales	$	99,020		$	87,977
Cost of sales		115,707			82,117
Gross profit		(16,687	)		5,860

Selling, general and administrative expenses		6,115			6,279
Loss from operations		(22,802	)		(419	)

Other income (expense), net		41			190
Interest expense		(728	)		(276	)
Equity in loss of joint venture		(16	)		-
Loss before income taxes		(23,505	)		(505	)

Benefit for income taxes		(6,262	)		(152	)
Net loss		(17,243	)		(353	)

Other comprehensive income (loss), net of tax:		(1,502	)		1,350
Comprehensive income (loss)	$	(18,745	)	$	997

Per Share Data
Total basic loss per common share	$	(1.04	)	$	(0.02	)
Total diluted loss per common share	$	(1.04	)	$	(0.02	)

See accompanying notes to condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

	September 30, 2008			September 30, 2007			June 30, 2008
ASSETS
Current Assets
Cash and cash equivalents	$	-		$	2,241		$	-
Restricted cash		2,063			30			3
Receivables (less allowance for doubtful accounts:
September 30, 2008 - $288; September 30, 2007 -$223 and June 30, 2008 -$264)		33,949			30,491			34,087
Inventory		60,134			52,905			63,620
Prepaid expense		2,062			2,451			362
Deposits		2,243			922			580
Deferred income taxes		2,696			2,289			394
Refundable income taxes		15,036			1,576			8,570
Assets held for sale		5,600			-			5,600
Total current assets		123,783			92,905			113,216

Property and equipment, at cost		316,193			362,047			315,782
Less accumulated depreciation		(209,608	)		(231,925	)		(206,808	)
Property and equipment, net		106,585			130,122			108,974

Investment in joint venture		355			-			399
Other assets		395			656			479
Total assets	$	231,118		$	223,683		$	223,068

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	432		$	4,106		$	432
Liabilities related to assets held for sale		7,916			-			8,760
Revolving credit facility		50,656			11,000			23,000
Accounts payable		22,966			14,775			23,315
Accrued expenses		5,611			6,518			6,582
Total current liabilities		87,581			36,399			62,089

Long-Term debt		1,315			7,922			1,301
Deferred credit		6,904			9,399			7,127
Other non-current liabilities		7,884			8,035			8,047
Deferred income taxes		9,108			14,352			7,630
Stockholders’ Equity
Capital stock
Preferred, 5% non-cumulative; $10 par value; authorized 1,000
shares; issued and outstanding 437 shares		4			4			4
Common stock
No par value; authorized 40,000,000 shares; issued 19,530,344 shares		6,715			6,715			6,715
Additional paid-in capital		12,047			11,108			11,862
Retained earnings		114,570			144,959			131,813
Accumulated other comprehensive income (loss)		13			118			1,515
		133,349			162,904			151,909
Treasury stock, at cost
Common; September 30, 2008 - 2,967,266 shares; September 30, 2007 - 3,029,841 shares and June 30, 2008 - 2,969,766 shares		(15,023	)		(15,328	)		(15,035	)
Total stockholders’ equity		118,326			147,576			136,874
Total liabilities and stockholders’ equity	$	231,118		$	223,683		$	223,068

See accompanying notes to condensed consolidated financial statements

MGP INGREDIENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Quarter Ended
	September 30, 2008			September 30, 2007

Cash Flows from Operating Activities
Net loss	$	(17,243	)	$	(353	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		3,425			3,827
Loss (gain) on sale of assets		(85	)		10
Deferred income taxes		(812	)		1,828
Equity in loss of joint venture		16			-
Changes in working capital items:
Restricted cash		(2,060	)		3,306
Accounts receivable		138			3,807
Inventory		3,486			(8,960	)
Accounts payable and accrued expenses		(977	)		(2,768	)
Deferred credit		(223	)		(310	)
Income taxes payable/receivable		(6,466	)		(1,212	)
Gains previously deferred in other comprehensive income		(1,474	)		-
Other		(3,363	)		(2,337	)
Net cash used in operating
Activities		(25,638	)		(3,162	)

Cash Flows from Investing Activities
Additions to property and equipment		(1,686	)		(1,477	)
Proceeds from disposition of equipment		487			-
Net cash used in investing activities		(1,199	)		(1,477	)

Cash Flows from Financing Activities
Proceeds from stock plans		11			43
Proceeds from long-term debt and capital leases		150
Principal payments on long-term debt		(980	)		(1,063	)
Proceeds from line of credit		33,456			7,000
Principal payments on line of credit		(5,800	)		(3,000	)
Net cash provided by
financing activities		26,837			2,980

Decrease in cash and cash equivalents		-			(1,659	)
Cash and cash equivalents, beginning of year		-			3,900
Cash and cash equivalents, end of period	$	-		$	2,241

See accompanying notes to condensed consolidated financial statements

MGP INGREDIENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Accounting Policies and Basis of Presentation.

The accompanying condensed consolidated financial statements of MGP Ingredients, Inc. and its subsidiaries ("Company") reflect all adjustments (consisting only of normal adjustments) which, in the opinion of the Company’s management, are necessary to fairly present the financial position, results of operations and cash flows of the Company. These unaudited condensed consolidated financial statements as of and for the period ended September 30, 2008 should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Form 10-K Annual Report for the fiscal year ended June 30, 2008 filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

In accordance with the guidance of Staff Accounting Bulletin No. 108, these interim consolidated financial statements reflect immaterial adjustments made to the Company’s June 30, 2008 and September 30, 2007 balance sheets. None of these adjustments had any impact upon the Company’s previously reported earnings. For the balance sheet as of June 30, 2008, the Company reclassified $2.5 million from liabilities related to assets held for sale to deferred credit, reclassified $2.9 million from other non-current liabilities to additional paid-in capital to reflect equity share-based awards, reclassified deferred credits totaling $7.1 million from current to long-term liabilities and reclassified current deferred tax assets of $2.9 million to reduce non-current deferred tax liabilities. For the balance sheet as of September 30, 2007, the Company reclassified $2.0 million from other current liabilities to additional paid-in capital to reflect equity share-based awards, reclassified deferred credits totaling $9.4 million from current liabilities to non-current liabilities and reclassified current deferred tax assets of $3.8 million to reduce non-current deferred tax liabilities.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value Accounting

On July 1, 2008, the Company adopted, without any material effect on our consolidated financial statements, the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement, for our financial assets and liabilities with respect to which the Company has recognized or disclosed at fair value on a recurring basis. In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date for nonfinancial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, except for items that are measured at fair value in the financial statements on a recurring basis at least annually. Beginning July 1, 2009, the Company will adopt the provisions for nonfinancial assets and nonfinancial liabilities that are not required or permitted to be measured at fair value on a recurring basis. Management does not expect the provisions of SFAS No. 157 related to these items to have a material effect on the consolidated financial statements.

Overdrafts

The Company’s historical policy has been to record book overdrafts, checks outstanding, which have not been presented to the bank for payment, as accounts payable. Changes in the amount of book overdrafts outstanding between periods are reported as operating cash flows. The amount of book overdrafts at September 30, 2008 and June 30, 2008 were $5.4 million and $4.4 million respectively.

Impairment

The Company tests its long-lived assets for impairment whenever events or conditions and circumstances indicate a carrying amount of an asset may not be recoverable. During the first quarter of our fiscal year, declines in overall equity values, including our common stock value, triggered an impairment evaluation. Updated forecasts that reflect recent changes made to our business were used in this analysis. The use of forecasts requires considerable management judgment. Management believes the judgments used in this analysis are reasonable. The testing and analysis did not identify any impairment at September 30, 2008 (see Note 10 Subsequent Events).

Note 2. Uncured Defaults on Indebtedness

At June 30, 2008, the Company was not in compliance with the tangible net worth and the EBITDA based financial covenants in its Credit Agreement and the fixed charge coverage ratio requirement of its 5.26% Industrial Revenue Bond obligation. Its tangible net worth at such date, as defined in the Credit Agreement, was $132.5 million instead of at least $135 million, its fixed charge coverage ratio was 0.56 to 1 instead of at least 1.5 to 1 and its leverage ratio was (11.03) to 1 instead of at least 3.0 to 1. Its fixed charge coverage ratio, as defined in its lease related to its 5.26% industrial revenue bond lease, was (0.51) to 1 instead of at least 1.5 to 1. As a result, the Company was in default under the Credit Agreement and 5.26% industrial revenue bond lease. Due to cross default provisions, it also was in default under its 5.45% Secured Promissory Note to Commerce Bank and its 5.26% Secured Promissory Note and 5.92% Secured Promissory Note to GECPF and GECC, respectively. As of September 16, 2008, GECPF and GECC waived the default under the industrial revenue bond lease and the resulting cross defaults under the Company’s 5.26% Secured Promissory Note and 5.92% Secured Promissory Note. As of September 3, 2008, Commerce Bank waived the default under the 5.45% Promissory Note and the lenders under the Credit Agreement agreed to an amendment providing for a standstill period expiring on October 31, 2008, unless the Company defaulted under interim covenants. The amendment imposed new, monthly interim minimum adjusted EBITDA requirements (as defined in the credit agreement) of $(7,500,000) for July, $(2,500,000) for August and $(1,400,000) for September, and minimum tangible net worth requirements (as defined in the credit agreement), of $125,000,000 at the end of July, $123,000,000 at the end of August and $121,000,000 at the end of September. The Company met the requirements for July and August but did not meet the September requirements and as of October 25, 2008 was in forbearance default under the credit agreement and was also in cross default under its 5.45% Secured Promissory Note to Commerce Bank.

Although it was in forbearance default, the Company’s lenders agreed to extend the original expiration date of the forbearance period under its Credit Agreement, as amended, to November 10, 2008, while a new amendment was being discussed. Subsequently, as of November 7, 2008, the lenders under the Credit Agreement entered a new amendment extending the standstill period to February 27, 2009, during which the Company will be subject to new interim financial covenants. These require the Company to maintain fiscal year to date adjusted EBITDA (EBITDA adjusted to eliminate any mark-to-market adjustments reflected in net income) of ($30.0 million) at the end of October 2008, ($44.0 million) at the end of November 2008, and ($46.0 million) at the end of December 2008 and January 2009. Terms include (i) an increase in the interest rate on outstanding borrowings from LIBOR plus 2.75% or prime plus 0.50% to prime plus 3%, with prime being not less than the greater of 4%, Agent's prime rate or the federal funds rate plus 1%, (ii) an amendment fee of $110,000 (we expect related legal and other professional fees to be approximately $100,000), (iii) a fee of 1% of the outstanding credit commitment, as defined, payable on February 27, 2009 unless all outstanding obligations are paid in full and the credit agreement is terminated (this continguent fee is estimated at $350,000), (iv) the pledge of substantially all of the Company's remaining unpledged assets, (v) restricting our use of a portion (approximately $9.2 million) of the commitment under the credit agreement in an amount equal to a tax refund anticipated to be received in the second quarter generally to either fund margin calls or for other grain hedging positions, and (vi) requiring us to use any portion of such anticipated tax refund received after November 7 (estimated at approximately $8.0 million) to reduce outstanding borrowings under the credit agreement. In the amendment, Commerce also waived the cross default under the 5.45% Secured Promissory Note to Commerce.

Although the Company’s lenders have approved a new standstill period, after February 27, 2009 or before if the Company commits a forbearance default, there is no guarantee they will not terminate the credit agreement; if this occurs, the Company may not have sufficient funds available to continue normal operations. If the Company’s lenders were to accelerate its debt, it could result in the acceleration of debt under other secured obligations, and the Company would be unable to repay its obligations immediately. If any such event occurred, the Company would require alternate funding and might, in the case of acceleration, suffer foreclosure on the collateral it has pledged to its lenders. The Company may not be able to access additional sources of financing on similar terms or pricing as those that are currently in place under its credit agreement and other debt, or at all, or otherwise obtain other sources of funding. Therefore, depending on whether one or more of the Company’s current lenders remains willing to continue making financing available to it, among other steps the Company may have to consider issuing equity or convertible debt, which could significantly dilute existing shareholders, further reducing its expenses and capital expenditures, which may impair its ability to increase revenue and grow operating cash flows, and selling some of its assets. The Company believes its ability to continue operating after February 27, 2009 is dependent on its ability to either obtain further forbearances from its current lender group or to secure a new credit agreement or other financing. At November 10, 2008, after giving effect to payments made on such date, the Company had approximately $3.8 million available under its credit agreement.

Note 3. Earnings Per Share.

Basic loss per share data is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Potentially dilutive instruments are stock options and unvested restricted stock awards.

	Quarter Ended
Weighted average shares:	September 30, 2008		September 30, 2007

Basic and Diluted Shares:		16,562,643		16,498,348
Additional weighted average shares attributable to:
Stock options:		16,645		202,135
Unvested restricted stock awards:		153,565		219,820
Potentially Diluted Shares(1)		16,732,853		16,920,303

(1)	The stock options and the restricted stock awards have not been considered due to the loss experienced during both periods.

Note 4. Derivative Instruments.

In connection with the purchase of raw materials, principally corn and wheat, for anticipated operating requirements, the Company enters into readily marketable exchange-traded commodity futures and option contracts to reduce the risk of future price increases. Changes in the market value of the Company’s futures and option contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price of the hedged items. Derivative instruments are recorded as either assets or liabilities and are measured at fair market value.

Prior to April 1, 2008 changes in the fair market value of the derivative instruments designated as cash flow hedges were recorded either in current earnings or in other comprehensive income, depending on the nature of the hedged transaction, consistent with the application of hedge accounting under Statement of Financial Accounting Standards No. 133 as amended (“SFAS 133”). Gains or losses recorded in other comprehensive income were reclassified into current earnings in the periods in which the hedged items were consumed. Any ineffective portion of a hedged transaction was immediately recognized in current earnings.

Application of hedge accounting under SFAS 133 requires significant resources, recordkeeping and analytical systems. As a result of the rising compliance costs and the complexity related to the application of hedge accounting under SFAS 133, the Company’s management elected to discontinue the use of hedge accounting for all commodity derivative positions effective April 1, 2008. Accordingly, changes in the value of derivatives subsequent to March 31, 2008 have been recorded in cost of sales in the Company’s Consolidated Statements of Income.

As of September 30, 2008, approximately $1.2 million in deferred gains on previously designated derivative instruments remained in accumulated other comprehensive income. These amounts will remain in equity under accumulated comprehensive income until the forecasted transactions to which the specific hedged positions relate impact earnings, at which time the accumulated comprehensive income will be reclassified into earnings. Regardless of accounting treatment, the Company’s management believes all commodity hedges are economic hedges of the Company’s risk exposures.

Note 5. Contingencies.

The Company is a party to various legal proceedings which are of an ordinary, routine nature and incidental to its operations. Management considers that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the consolidated financial position or operations of the Company. In addition, the Company is party to a recently filed lawsuit styled Daniel Martin v. MGP Ingredients, Inc., et al., No. 08-L-697 in the Circuit Court for the Third Circuit, Madison County, Illinois, against the Company and approximately 70 other defendants, wherein the claimant alleges that he contracted desmoplastic mesothelioma from exposure to asbestos. The claimant alleges that in the late 1980’s or early 1990’s his company was retained to install insulation at the Pekin, Illinois facility at the same time that the Company was conducting asbestos abatement projects in the facility. The claimant seeks unspecified compensatory and punitive damages. The Company intends to defend itself vigorously. The matter is in preliminary states of discovery, and at this time, management is unable to estimate the amount of potential loss, if any, with respect to this claim.

Note 6. Operating Segments.

The Company is a fully integrated producer of ingredient solutions, distillery and other products. Products included within the ingredient solutions segment consist of vital wheat gluten, commodity wheat starch, specialty wheat starches and proteins and mill feeds. Distillery products consist of food grade alcohol (consisting of beverage and industrial alcohol), fuel grade alcohol, commonly known as ethanol, and distillers grain and carbon dioxide, which are co-products of the Company’s distillery operations. Other products include pet treat resins and plant-based biopolymers as well as other products. For the quarter ended September 30, 2008, revenues from products in the other segment represent less than 2.0 percent of the Company’s consolidated revenues.

The operating profit for each segment is based on net sales less identifiable operating expenses directly attributable to each segment. Indirect selling, general and administrative as well as interest expense, investment income and other general miscellaneous expenses have been excluded from segment operations and classified as Corporate, consistent with the measurements used to evaluate segment performance internally. Receivables, inventories and equipment have been identified with the segments to which they relate. All other assets are considered as Corporate.

	Quarter Ended
	September 30, 2008			September 30, 2007
(in thousands)
Sales to Customers
Ingredient solutions	$	25,897		$	22,288
Distillery products		71,382			64,358
Other		1,741			1,331
Total		99,020			87,977

Depreciation and amortization
Ingredient solutions		859			1,123
Distillery products		2,119			1,941
Other		61			389
Corporate		386			374
Total		3,425			3,827

Income (Loss) before Income Taxes
Ingredient solutions		(5,389	)		2,107
Distillery products		(12,926	)		2,408
Other		237			(56	)
Corporate		(5,427	)		(4,964	)
Total	$	(23,505	)	$	(505	)

	September 30, 2008		September 30, 2007 (Restated)		June 30, 2008
Identifiable Assets
Ingredient solutions	$	72,763	$	81,616	$	70,071
Distillery products		119,425		113,982		121,650
Other		2,540		13,905		2,969
Assets held for sale		5,600		-		5,600
Corporate		30,790		14,180		22,778
Total	$	231,118	$	223,683	$	223,068

For the quarter ended September 30, 2008, the Company refined its methodology for assessing identifiable earnings (losses) before income taxes for all segments whereby only direct sales, general and administrative costs are allocated to operating segments. Previously, the Company had allocated substantially all selling, general and administrative expenses to each operating segment based upon numerous factors and attributes. All selling, general and administrative expenses not directly attributable to operating segments have been restated within Corporate income (loss) before taxes for the quarter ended September 30, 2007. Accordingly, amounts previously disclosed as earnings (loss) before income taxes for the quarter ended September 30, 2007 have been adjusted to reflect these changes.

Note 7. Fair Value Measurements

As discussed in Note 1 to the Condensed Consolidated Financial Statements, the Company adopted SFAS 157 on July 1, 2008 with the exception of nonfinancial assets and nonfinancial liabilities that were deferred by FASB Staff Position 157-2. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Statement also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs used to measure fair value are as follows:

•

Level 1—quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.

•

Level 2—observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3—unobservable for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are not available.

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2008.

	Fair Value
	Measurements		Level 1		Level 2		Level 3
Liabilities
Derivatives	$	1,763	$	1,763	$	-	$	-

Note 8. Pension and Post Retirement Benefit Obligations.

Post Retirement Benefits. The Company and its subsidiaries provide certain post-retirement health care and life benefits to all employees. The liability for such benefits is unfunded. The Company uses a June 30 measurement date for the plan.

The components of the Net Periodic Benefit Cost for the quarter periods ended September 30, 2008 and 2007, respectively, are as follows:

	Quarter Ended
	September 30, 2008			September 30, 2007
(in thousands)
Service cost	$	75		$	61
Interest cost		124			117
Prior service cost		(9	)		(9	)
(Gain) loss		5			11
Total post-retirement benefit cost	$	195		$	180

The Company previously disclosed in its financial statements for the year ended June 30, 2008, amounts expected to be paid to plan participants. There have been no revisions to these estimates and there have been no changes in the estimate of total employer contributions expected to be made for the fiscal year ended June 30, 2009.

Total employer contributions for the quarter ended September 30, 2008 were $13,000.

Pension Benefits. The Company and its subsidiaries also provide defined retirement benefits to certain employees covered under collective bargaining agreements. Under the collective bargaining agreements, the Company’s pension funding contributions are a function of the wages paid and are determined as a percentage of wages paid. The funding is divided between the defined benefit plan and a 401(k) plan. It has been management’s policy to fund the defined benefit plan in accordance with the collective bargaining agreement. The collective bargaining agreements allow the plan’s trustees to develop changes to the pension plan to allow benefits to match funding, including reductions in benefits. The Company uses a June 30 measurement date for the plan.

The components of the Net Periodic Benefit Cost for the quarter periods ended September 30, 2008 and 2007, respectively, are as follows:

	Quarter Ended
	September 30, 2008			September 30, 2007
(in thousands)
Service cost	$	141		$	130
Interest cost		49			35
Expected return on plan assets		(44	)		(35	)
Prior service cost		6			6
Recognition of net loss(gain)		4			(2	)
Total pension benefit cost	$	156		$	134

The Company has made employer contributions of $787,000 for the quarter ended September 30, 2008.

Note 9. Correction of Accounting Error.

The Condensed Consolidated Statements of Income for the quarter ended September 30, 2007 and the Condensed Consolidated Statement of Cash Flow for the quarter ended September 30, 2007, presented herein have been restated to correct the following error, in accordance with Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). Since fiscal 2001, the Company over recognized deferred income from funds that it received over the course of fiscal years 2001 to 2003 under a Commodity Credit Corporation program implemented by Congress following termination of import quotas on gluten. The Company received a total of $26 million under the program, of which approximately $17.5 million was used for capital expenditures. Recognition of the amount used for these capital items was deferred and is being recognized over the life of the assets. The amount recognized each year was to have approximated the amount of depreciation on the assets that the Company acquired under the program. The Company has determined that, through errors made upon implementation and throughout the execution of the program that were undetected until the third quarter of fiscal 2008, certain assets were placed on, or omitted from, the depreciation schedule for commodity credit corporation funded assets. As a result of the error, the asset pool whose depreciation determined the amount of deferred credit that was amortized each year and recognized as income had assets whose original cost was $21 million instead of $17.5 million, and as a result, the Company recognized excess deferred income in each of fiscal years 2001 through the second quarter of the previous fiscal year ended June 30, 2008. The amount of revenue involved ranged annually from a high of $397,000 in 2002 to $175,000 in the fiscal year ended June 30, 2008, resulting in annual overstatements of net income after taxes ranging from a low of 1% to a high of 4.4% through fiscal 2007.

The Company has conducted a materiality analysis under SAB 108 and determined that the impact on prior years was not material. However, it is required to report the error as an adjustment to its prior period financial statements. The condensed consolidated statements of income for the quarter ended September 30, 2007, the condensed, consolidated balance sheet as of September 30, 2007 and the condensed consolidated statement of cash flows for the quarter ended September 30, 2007 included in this report have been adjusted to reflect a correction of the period-specific effects of the error, and the effect of the correction on each financial statement line item and per share amounts is shown below.

An analysis of the adjustment to the Condensed Consolidated Statement of Income for the quarter ended September 30, 2007 is as follows: (In thousands)

	September 30, 2007 (as originally reported)			adjustment			September 30, 2007 (restated)

Net sales	$	87,977		$	-		$	87,977
Cost of sales		82,058			59			82,117
Gross profit		5,919			(59	)		5,860

Selling, general and administrative expenses		6,279			-			6,279
Income (loss) from operations		(360	)		(59	)		(419	)

Other income, net		190			-			190
Interest expense		(276	)		-			(276	)
Income (loss) before income taxes		(446	)		(59	)		(505	)

Provision (benefit) for income taxes		(128	)		(24	)		(152	)
Net income (loss)		(318	)		(35	)		(353	)

Other comprehensive income (loss), net of tax:		1,350			-			1,350
Comprehensive income (loss)	$	1,032		$	(35	)	$	997

Per Share Data
Total basic earnings per common share	$	(0.02	)	$	-		$	(0.02	)
Total diluted earnings per common share	$	(0.02	)	$	-		$	(0.02	)

An analysis of the adjustment to the Condensed Consolidated Balance Sheet as of September 30, 2007 is as follows: (In thousands)

	September 30, 2007 (as originally reported)			adjustment			September 30, 2007 (restated)
	(unaudited)			(unaudited)
	Dollars in thousands, except share and per share amounts
ASSETS
Current Assets
Cash and cash equivalents	$	2,241		$	-		$	2,241
Restricted cash		30			-			30
Receivables (less allowance for doubtful accounts:					-
September 30, 2007 -$223)		30,491			-			30,491
Inventory		52,905			-			52,905
Prepaid expense		2,451			-			2,451
Deposits		922			-			922
Deferred income taxes		1,546			743			2,289
Refundable income taxes		1,576			-			1,576
Total current assets		92,162			743			92,905

Property and equipment, at cost		362,047			-			362,047
Less accumulated depreciation		(231,925	)		-			(231,925	)
Property and equipment, net		130,122			-			130,122

Other assets		656			-			656
Total assets	$	222,940		$	743		$	223,683

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	4,106		$	-		$	4,106
Revolving credit facility		11,000			-			11,000
Accounts payable		14,775			-			14,775
Accrued expenses		6,518			-			6,518
Total current liabilities		36,399			-			36,399

Long-Term debt		7,922			-			7,922
Deferred credit		7,482			1,917			9,399
Other non-current liabilities		8,035			-			8,035

Deferred income taxes		14,352			-			14,352

Stockholders’ Equity
Capital stock
Preferred, 5% non-cumulative; $10 par value; authorized 1,000
shares; issued and outstanding 437 shares		4			-			4
Common stock
No par value; authorized 40,000,000 shares; issued 19,530,344 shares		6,715			-			6,715
Additional paid-in capital		11,108			-			11,108
Retained earnings		146,133			(1,174	)		144,959
Accumulated other comprehensive income (loss)		118			-			118
		164,078			(1,174	)		162,904
Treasury stock, at cost
Common; September 30, 2007 – 3,029,841 shares		(15,328	)		-			(15,328	)
Total stockholders’ equity		148,750			(1,174	)		147,576
Total liabilities and stockholders’ equity	$	222,940		$	743		$	223,683

An analysis of the adjustment to the Condensed Consolidated Statement of Cash Flows for quarter ended September 30, 2007 is as follows: (In thousands)

	September 30, 2007 (as originally reported)			adjustment			September 30, 2007 (restated)
Cash Flows from Operating Activities
Net income	$	(318	)	$	(35	)	$	(353	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,827			-			3,827
Loss (gain) on sale of assets		10			-			10
Deferred income taxes		1,852			(24	)		1,828
Changes in working capital items:					-
Restricted cash		3,306			-			3,306
Accounts receivable		3,807			-			3,807
Inventory		(8,960	)		-			(8,960	)
Accounts payable and accrued expenses		(2,768	)		-			(2,768	)
Deferred credit		(369	)		59			(310	)
Income taxes payable/receivable		(1,212	)		-			(1,212	)
Other		(2,337	)		-			(2,337	)
Net cash provided by operating
activities		(3,162	)		-			(3,162	)

Cash Flows from Investing Activities
Additions to property and equipment		(1,477	)		-			(1,477	)
Proceeds from disposition of equipment		-			-			-
Net cash used in investing activities		(1,477	)		-			(1,477	)

Cash Flows from Financing Activities
Purchase of treasury stock		-			-			-
Proceeds from stock plans		43			-			43
Principal payments on long-term debt		(1,063	)		-			(1,063	)
Proceeds from line of credit		4,000			-			4,000
Dividends paid		-			-			-
Net cash used in
financing activities		2,980			-			2,980

Decrease in cash and cash equivalents		(1,659	)		-			(1,659	)
Cash and cash equivalents, beginning of year		3,900			-			3,900
Cash and cash equivalents, end of period	$	2,241		$	-		$	2,241

Note 10. Subsequent Events.

In response to the losses which have been incurred and the Company’s current credit position and in an effort to return the Company to profitability, actions have been taken since the end of the first quarter. These actions include significant changes to operations in both our Atchison and Pekin facilities.

On October 20, 2008 the Company announced that it had signed a non-binding letter of intent to acquire its flour requirements from a third party, was ceasing operations at its flour mill in Atchison, Kansas and was reducing its workforce by approximately 44 persons. The workforce reduction consisted of a combination of temporary lay-offs and early retirement offers. On November 6, the Company announced that the anticipated supply contract for flour had been signed, and the layoffs will now become permanent.

On November 5, the Company announced plans to significantly reduce production of commodity wheat proteins and starches by ceasing protein and starch production operations at its Pekin, Illinois plant, effective November 12. The majority of the Pekin facility’s protein and starch production consist of gluten and commodity starches. The action will result in an additional work force reduction of approximately 70-80 persons, consisting of a combination of lay-offs and early retirement offers. The Company also announced that it intends to curtail fuel alcohol production at Pekin until market conditions become more favorable. Market economics for fuel alcohol have continued to erode, with recent prices being at or below production cost.

The Company decided to close its flour mill because it can no longer produce flour for its own use at costs that are competitive with those of third party producers. It is ceasing starch and protein operations at its Pekin facility due to continuing losses in its lower valued product lines and because it has underutilized ingredient solutions segment facilities at both of its production facilities. Going forward, management expects to concentrate its efforts on the production of value added proteins and starches.

Special charges will be recognized in the second quarter to write down assets that will no longer be used and for employee termination costs. As a result of the shutdown of protein and starch operations in Pekin and the flour mill operations in Atchison, a special non-cash charge estimated at $6.9 million to write down assets will be recorded during the current fiscal year’s second quarter, which ends December 31, 2008. The flour mill write-down would be exclusive of costs related to excess leased rail cars associated with flour shipments to the Pekin facility, the effect of which is still being evaluated by management. The Company now expects to incur an estimated $3 million loss resulting from sales of wheat no longer needed for milling operations. Related to this wheat sale, the Company had approximately $1.2 million in deferred gains in accumulated other comprehensive income which is expected to be recognized in quarter two. The Company additionally expects to incur approximately $2.5 in severance related charges associated with early retirements and job eliminations during the second quarter.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

General

Reference is made to Management’s Discussion and Analysis of Financial Condition and Results of Operations—General, incorporated by reference to Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 for certain general information about our principal products and costs.

Critical Accounting Policies and Estimates

Reference is made to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, incorporated by reference to Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, for a discussion of our critical accounting policies and the use of certain judgments and estimates in the preparation of our financial statements. As stated therein, the Company tests its long-lived assets for impairment whenever events or conditions and circumstances indicate a carrying amount of an asset may not be recoverable. During the first quarter of our fiscal year, declines in overall equity values, including our common stock value, triggered an impairment evaluation. Updated forecasts that reflect recent changes made to our business were used in this analysis. The use of forecast requires considerable management judgment. Management believes the judgments used in this analysis are reasonable. The testing and analysis did not identify any impairment at September 30, 2008.

CHANGES IN SEGMENT REPORTING

For the quarter ended September 30, 2008, the Company refined its methodology for assessing identifiable earnings (losses) before income taxes for all segments whereby only direct sales, general and administrative costs are allocated to operating segments. Previously, the Company had allocated substantially all selling, general and administrative expenses to each operating segment based upon numerous factors and attributes. All selling, general and administrative expenses, not directly attributable to operating segments, have been restated within Corporate income (loss) before taxes for the quarter ended September 30, 2007. Accordingly, amounts previously disclosed as earnings (loss) before income taxes for the quarter ended September 30, 2007 have been adjusted to reflect these changes.

DEVELOPMENTS IN THE INGREDIENT SOLUTIONS AND DISTILLERY PRODUCTS SEGMENTS

In order to become more efficient and effective and to improve our results, we have decided to refocus our business on the production of our value added products. Management believes the steps it has taken will help enable the Company to return to profitability, be more competitive, and allow the Company to negotiate a credit agreement and financing that will enable the Company to maintain operations.

Among the more important reasons for the decision to re-focus the business are the following:

-	Market economics for fuel grade alcohol have continued to erode, and recent prices have been at or below production cost.

-	Incremental ethanol production decisions have been made difficult by continued volatility in corn and ethanol prices.

-	With current ethanol industry capacity in excess of federal mandates, it does not seem likely that there will be a return to equilibrium in the ethanol markets in the short term.

-	We have underutilized ingredients solutions segment facilities at both of our production facilities, and our heritage platform business has experienced continuing losses.

-	We can no longer produce flour for our own use at costs that are competitive with those of third party producers.

Subject to contractual obligations, we will be substantially exiting the commodity wheat gluten business and will curtail our commodity starch and fuel grade alcohol production. We anticipate that by curtailing fuel alcohol production we will reduce our total annual operating distillery capacity from 120-130 million gallons to approximately 84 million gallons, of which we expect fuel grade alcohol will be approximately 29 million gallons (compared with 61 million gallons in fiscal 2008.) Because we will be producing less fuel grade alcohol and using less corn in the process, we also will produce less distillers feed. By closing protein and starch production at Pekin, we will reduce the volume of our ingredient solutions business by approximately 20 percent, in terms of pounds, substantially all of which will be our lower margin commodity starch and protein products. We are in the process of making the following changes to our operations:

As previously announced, to shorten our supply chain and improve margin management, we have entered a supply contract for flour with ConAgra Mills whereby ConAgra will supply our wheat flour requirements for use in the production of protein and starch ingredients. We have discontinued our own mill operations. Because we will no longer be producing flour from wheat, we will no longer produce mill feed as a by product of this process.

We intend to focus our ingredient solutions segment on value added products. We will shut down our commodity and starch production facilities in Pekin, Illinois on November 12, 2008. We will seek to limit our flour purchases to quantities needed to service our specialty starch business, and will only keep limited inventories of flour on site. To the extent our flour purchases for specialty starch production cannot support our specialty protein business, we will purchase gluten for our needs. As a result of these changes, we expect to substantially reduce our production of commodity starches and proteins, which, subject to existing contracts, will now essentially be produced only as by-products. Our commodity starches and proteins accounted for approximately 41.3 percent and 32.3 percent of our ingredient solutions segment revenues in fiscal 2008 and in the first quarter of fiscal 2009, respectively.

-	We do not anticipate that we will derive much value from our Pekin ingredient solutions segment assets going forward, as they are on our plant site and we do not expect to sell them. We may transfer certain of these assets to our Atchison facility or use them for spare parts as conditions dictate.

During fiscal 2008 and the first quarter of fiscal 2009, we estimate that our ethanol sales accounted for approximately 46.1 percent and 35.3 percent of our distillery segment revenues. As noted above, unless and until market dynamics change, we intend to produce fuel alcohol only to the extent necessary to keep our plant in operation, thereby significantly curtailing our production of fuel alcohol, and to focus our distillery segment on food grade alcohol. Historically we have produced substantially all of our food grade alcohol at Atchison and substantially all of our fuel grade alcohol at Pekin. We estimate that we will now be running our Pekin distillery at approximately 50 percent if its historical fuel grade capacity, most of which capacity will now be devoted to the production of food grade alcohol.

As a result of the shutdown of protein and starch operations in Pekin and the flour mill operations in Atchison, a special non-cash charge estimated at $6.9 million to write down assets will be recorded during the current fiscal year’s second quarter, which ends December 31, 2008. The write-down would be exclusive of costs related to excess leased rail cars associated with flour shipments to the Pekin facility, the effect of which is still being evaluated by management. We now expect to incur an estimated $3 million loss resulting from sales of wheat no longer needed for milling operations. Related to these wheat sales, we had approximately $1.2 million in deferred gains in accumulated other comprehensive income, which we expect to recognize in the second quarter. We also expect to incur approximately $2.5 in severance related charges associated with early retirements and job eliminations during the second quarter.

DEVELOPMENTS IN THE OTHER SEGMENT

For the quarter ended September 30, 2008, sales of our plant-based biopolymers increased substantially with a 271 percent increase in unit sales compared to the quarter ended September 30, 2007. These products continue to represent an emerging area of our business. Our plant-based biopolymers products continue to undergo further research and development as we explore additional enhancements to expand their functionality and use capabilities.

We continue to evaluate the strategic alternatives for the plant and equipment at our Kansas City facility, and are pursuing the sale of the assets. At September 30, 2008, this facility is presented as an asset held for sale. This related debt is presented as Liabilities Held for Sale on the balance sheet.

SEGMENT RESULTS

The following is a summary of revenues and pre-tax profits / (loss) allocated to each reportable operating segment for the quarterly periods ended September 30, 2008 and 2007. For additional information regarding our operating segments, see Note 6-Operating Segments included under Part 1, Item 1, Financial Statements of this Form 10-Q and incorporated herein by reference.

	Quarter Ended
	September 30, 2008			September 30, 2007
(in thousands)
Ingredient solutions
Net Sales	$	25,897		$	22,288
Pre-Tax Income (Loss)		(5,389	)		2,107
Distillery products
Net Sales		71,382			64,358
Pre-Tax Income (Loss)		(12,926	)		2,408
Other
Net Sales		1,741			1,331
Pre-Tax Income (Loss)		237			(56	)

GENERAL

Consolidated earnings for the first quarter of fiscal 2009 decreased compared to the same period in fiscal 2008 with a net loss of $17,243,000 on consolidated sales of $99,020,000 versus a net loss of $353,000 on consolidated sales of $87,977,000 in the first quarter of fiscal 2008. This decrease in earnings was primarily the result of increasing cost of sales resulting primarily from higher grain costs, partially offset by increased revenue. Earnings in the ingredient solutions segment declined over the same period in fiscal 2008 primarily due to higher wheat prices while earnings in our distillery products segment declined due primarily to continued higher corn and natural gas prices coupled with reduced unit sales. The positive earnings performance in the other segment, consisting primarily of business lines for pet product and plant-based biopolymer applications, was primarily the result of improvements in the plant-based biopolymer business line as well as reduced per-unit operating costs in the pet product business line.

INGREDIENT SOLUTIONS

Total ingredient solutions sales revenue for the quarter ended September 30, 2008 increased by $3.6 million, or 16.2 percent, compared to the quarter ended September 30, 2007. Revenues for specialty ingredients, consisting of specialty proteins and specialty starches, increased during the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007 by $3.7 million, or 26.7 percent. Revenues for specialty proteins increased as a result of increased per unit prices, partially offset by lower unit sales. Revenues for specialty starches rose as a result of improved pricing as well as improved unit sales. Revenues for vital wheat gluten for the quarter ended September 30, 2008 decreased by $1.0 million, or 12.9 percent, primarily as a result of reduced sales volume partially offset by improved pricing. Revenues for commodity starch increased $914,000, or 126 percent, as a result of increased sales volume as well as improved pricing. While revenues for the ingredient solutions segment improved overall, margins continued to be significantly impacted by increased cost of sales related to record high wheat prices. The per bushel cost of wheat for the quarter ended September 30, 2008 increased by 41.4 percent over the quarter ended September 30, 2007.

DISTILLERY PRODUCTS

Total distillery products sales revenue for the quarter ended September 30, 2008 increased $7.0 million, or 10.9 percent, compared to the quarter ended September 30, 2007. This increase was due to increased revenues related to food grade alcohol of $9.4 million, or 35.8 percent, over the quarter ended September 30, 2007. Increases in revenue for food grade alcohol were attributable to both increased volume as well as improved per-unit pricing. Also contributing to this increase were improvements in distillers feed revenue. These factors, which led to increased revenue for distillery products, were partially offset by reduced revenue for fuel grade alcohol due to reduced production levels, partially offset by improvements in pricing. While revenues for distillery products improved for the quarter ended September 30, 2008, margins were still significantly impacted by increased cost of sales related to increased corn prices compared to the quarter ended September 30, 2007. For the quarter ended September 30, 2008, the per-bushel cost of corn, before adjustments for the impact of our hedging practices, averaged nearly 49.3 percent higher than the quarter ended September 30, 2007. These increased costs yielded a substantial loss for the segment.

OTHER PRODUCTS

For the quarter ended September 30, 2008, revenues for other products, consisting primarily of pet products and plant-based biopolymers, increased $410,000, or 30.8 percent, compared to the quarter ended September 30, 2007. This increase was the result of increased unit sales of our plant-based biopolymer products as well as improved pricing for such products. This increase in sales for our other segment was partially offset by reduced revenues related to our pet products.

SALES

Net sales for the quarter ended September 30, 2008 increased $11.0 million, or 12.5 percent, compared to the quarter ended September 30, 2007 as a result of increased sales in all segments. Increased sales in the ingredient solutions segment were related to improved unit sales for specialty and commodity starches as well as overall improvements in pricing for both commodity and specialty products. Sales in the distillery products segment as a whole improved as a result of improved pricing and increased unit sales of food grade alcohol partially offset by reduced production for fuel grade alcohol. Per unit prices for food grade alcohol improved approximately 5.9 percent compared to the quarter ended September 30, 2007. Revenues for distiller’s grain improved as a result of increased per-unit pricing. Net sales for our other segment increased as a result of improved unit sales of plant-based biopolymer products as well as improved unit pricing. These factors, which served to improve revenue from our other segment ,were partially offset by reduced revenue related to our pet treat line of products as a result of significantly reduced unit sales partially offset by improved pricing.

COST OF SALES

For the quarter ended September 30, 2008, cost of sales rose $33.6 million, or 40.9 percent, while sales increased 12.5 percent compared to the quarter ended September 30, 2007. This increase was primarily the result of higher grain costs as well as increased costs of other inputs used in the manufacturing process. Our higher grain costs were directly the result of higher grain prices experienced during the quarter ended September 30, 2008. For the quarter ended September 30, 2008, before adjustment for the impact of our hedging practices, the per-bushel cost of corn averaged nearly 49.3 percent higher than the quarter ended September 30, 2007.

For the quarter ended September 30, 2008, the per-bushel cost of wheat averaged nearly 41.4 percent higher than the quarter ended September 30, 2007. The average cost for natural gas increased 42.7 percent.

As described in Note 4 of our Notes to Condensed Consolidated Financial Statements, incorporated herein by reference, effective April 1, 2008, we elected to discontinue the use of hedge accounting for all commodity derivative positions. Accordingly, changes in the value of derivatives subsequent to March 31, 2008 are recorded in cost of sales in the Company’s Consolidated Statements of Income. As of March 31, 2008, the cumulative mark-to-market adjustment of $4.2 million net of tax of $2.8 million included in accumulated other comprehensive income was related to derivative instruments that had previously been designated for hedge accounting under the framework of SFAS 133. Gains related to those derivative instruments have remained in accumulated other comprehensive income until the forecasted transactions to which the specific hedged positions impact earnings. As of September 30, 2008, approximately $1.2 million in deferred gains on previously designated derivative instruments remained in accumulated other comprehensive income. We anticipate the forecasted transactions to which these positions relate will impact earnings in the second quarter of fiscal 2009 with a corresponding recognition of the $1.2 million in deferred gains.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the quarter ended September 30, 2008 decreased by $164,000 compared to the quarter ended September 30, 2007.

For the quarter ended September 30, 2007, professional fees of $568,000 related to the settlement of the Company’s two year patent infringement and contract litigation were included within selling, general and administrative expenses. Upon settlement of this litigation during the quarter ended December 30, 2007, this amount was reclassified and netted against the gain on the settlement of the litigation. Adjusting for this amount, selling, general and administrative expenses remained relatively flat for the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007.

As a result of changes we are making within the organization referred to in Developments in the Ingredient Solutions and Distillery Products Segments, we anticipate lower selling, general and administrative costs in future periods.

OTHER INCOME, NET

Other income, net, decreased $149,000, or 78.4 percent, for the quarter ended September 30, 2008, respectively, compared to the quarter ended September 30, 2007. This decrease was principally attributable to changes in interest capitalized as well as to the effect of certain other non-recurring, non-operating revenue items. It is our practice to credit other income for capitalized interest.

INTEREST EXPENSE

Interest expense for the quarter ended September 30, 2008 increased $452,000 compared to the quarter ended September 30, 2007. These increases were the result of higher balances and higher interest rates on our outstanding line of credit compared to the same periods in the prior year. These increases were partially offset by reduced balances on our long-term notes payable. We anticipate an increase in interest expense during the second quarter due to an increase in the rates under the amendment to our credit facility effected as of November 7, 2008.

EQUITY IN LOSS OF JOINT VENTURE

Equity in the loss of our joint venture was $16,000 for the quarter ended September 30, 2008. On July 17, 2007, we completed a transaction with Crespel and Dieters GmbH & Co. KG for the formation and financing of a joint venture, D.M. Ingredients, GmbH (“DMI”), located in Ibbenburen, Germany. DMI’s primary operation is the production and tolling of the Wheatex series of textured wheat proteins made from vital wheat gluten for marketing by MGPI domestically and, through our partner and third parties, internationally. Currently, the joint venture is utilizing a third party toller in the Netherlands to produce the Wheatex products. We own a 50 percent interest in DMI, and account for it using the equity method of accounting. As of September 30, 2008, we had invested $375,000 in DMI since July 2007.

For the quarter ended September 30, 2008, DMI incurred a net loss of $32,000 related to costs incurred for the initial implementation of operations. No sales revenue was reported. As a 50 percent joint venture holder, our equity in this loss was $16,000.

DMI’s functional currency is the European Union Euro. Accordingly, changes in the holding value of the Company’s investment in DMI resulting from changes in the exchange rate between the U.S. Dollar and the European Union Euro are recorded in other comprehensive income as a translation adjustment on unconsolidated foreign subsidiary net of deferred taxes.

INCOME TAXES

For the quarter ended September 30, 2007 , we had an income tax benefit of $152,000 resulting in an effective rate of 30 percent. For the quarter ended September 30, 2008, our income tax benefit was $6.3 million for an effective rate of 26.7 percent. This rate differs from our statutory rate primarily due to a valuation allowance of approximately $1.8 million. Management determined a valuation allowance was needed for state NOLs and credit carryforwards that are not more likely than not of being realized. Since the end of the fiscal year ended June 30, 2008, there has been no change in our uncertain tax positions. As a result of filing our fiscal 2008 tax return, we anticipate receiving a tax refund of $9.2 million of which $1.2 million has been received subsequent to September 30, 2008.

NET INCOME

As the result of the factors outlined above, we experienced a net loss of $17,243,000 in the quarter ended September 30, 2008 compared to a net loss of $353,000 in the quarter ended September 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

Historically, the principal sources of our cash have been operating cash flow and borrowings under our credit agreement. Historically, principal uses of cash are capital expenditures, payment of debt and the payment of dividends. As a result of losses incurred during the year ended June 30, 2008, we anticipate receiving tax refunds aggregating approximately $9.2 million during the second quarter of fiscal 2009. However, under a recent amendment to our credit agreement we must use approximately $8.0 million of this refund to reduce borrowings under the credit agreement. This payment will not reduce our lenders' commitment under the credit agreement.

During the past six quarters, we have relied on borrowings under our credit agreement to operate. As of June 30, 2008 we were in default under certain of the financial covenants of our credit agreement. At October 25, 2008, we also were in forbearance default under interim financial covenants that applied during a forbearance period that our lenders had agreed to following our June 30 covenant default. As a result of either default, our lenders could have terminated our ability to borrow or accelerated our debt. However, to date, they have not done so. Our lenders have been willing to continue working with us notwithstanding our covenant defaults, and at present we do not believe that they will terminate our credit or accelerate our debt. However, one of our lenders would like us to find new financing and we believe that we will have to do so on or before our credit agreement’s outside expiration date of September 3, 2009. At present, our lenders have approved an amendment to our credit agreement which extends the standstill period to February 27, 2009 and which imposes new interim financial measures. Based on recent discussions with one of our lenders, we believe that if we meet the new performance measures, two of our current lenders will be willing to enter into a new, asset based lending arrangement with us before February 27, 2009. Terms of any such agreement are not known. Further, discussions are at a preliminary stage and they are under no legal obligation to enter a new financing arrangement with us.

We believe that our ability to continue operating after February 27, 2009 is dependent on our ability to either obtain further forbearance from our current lender group or secure a new credit agreement or other financing.

As noted elsewhere herein, we are taking steps to focus our business on the production of value added products. We believe these measures will improve our operating performance. We expect them to reduce our operating costs. As a result of the measures that we are taking, we believe that cash flows from operating activities and the amounts available under the credit agreement should be sufficient to provide for our projected needs through February 27, 2009, by which date we anticipate obtaining a new credit facility. We also forecast a return to profitable operations by next fiscal year. It should be noted that these are forward looking statements and that our projected cash needs, projected sources of liquidity and anticipated results depend on a number of factors, some of which are beyond our control, including commodity prices, natural gas prices, our ability to liquidate inventories as planned, the level of our capital expenditures, the amount of margin calls on our commodity trading accounts, the willingness of our suppliers to extend normal trading terms, receipt of tax refunds and compliance with the new interim covenants imposed by our lenders. It should also be noted that we have made no allowance for margin calls in our projected cash needs. During the quarter ended September 30, 2008, we paid $1.4 million (net of draws) in margin calls. Subsequent to September 30, we have had net margin calls of $4.6 million through November 10th.

Inasmuch as the amount available to us under our credit Agreement at September 30, 2008 was only $4.3 million, until we obtain a new credit facility we will need to take particular care in managing our cash flows and may be unable to take advantage of certain business opportunities that would otherwise be available to us. For example, notwithstanding current favorable grain prices, we are not taking long forward positions in grain in order to conserve our cash. This could result in higher future expenses if prices change adversely. In addition, commencing in September, management extended the payment dates of vendors to preserve cash but we were substantially current with our payment obligations as of November 10, 2008.

Although our lenders continue to work with us, if they were to terminate our credit agreement, we might not have sufficient funds available to us to continue normal operations. If our lenders were to accelerate our debt, it could result in the acceleration of debt under other secured obligations that we are subject to. We would be unable to repay our debt immediately. If any such event occurred, we would require alternate funding and might, in the case of acceleration, suffer foreclosure on the collateral we have pledged to our lenders. We may not be able to access additional sources of financing on similar terms or pricing as those that are currently in place under our credit agreement and other debt, or at all, or otherwise obtain other sources of funding. Presently, the short term prospects for conventional bank financing outside our current lending group do not appear promising. The recent turmoil in the credit markets has adversely impacted the willingness of many banks to extend credit to new customers. Therefore, depending on whether one or more of our current lenders remains willing to continue making financing available to us, among other measures we may have to consider issuing equity or convertible debt, which could significantly dilute existing shareholders, further reducing our expenses and capital expenditures, which may impair our ability to increase revenue and grow operating cash flows, and selling some of our assets.

The following table is presented as a measure of our liquidity and financial condition:

(Dollars in thousands)

	September 30,		June 30,
	2008		2008
Cash and cash equivalents	$	-	$	-
Working capital		36,202		51,127
Amounts available under lines of credit		4,344		17,000
Credit facility, liabilities related to assets held for sale and long-term debt (including current maturities)		60,319		33,493
Stockholders’ equity		118,326		136,874

	Year to Date Ended
	September 30,			September 30,
	2008			2007
Depreciation and amortization		3,425			3,827
Capital expenditures		1,686			1,477
EBITDA(1)		(19,352	)		3,598

(1)	EBITDA equals earnings before interest, taxes, depreciation and amortization.

EBITDA

We have included EBITDA because we believe it provides investors with additional information to measure our performance and liquidity. EBITDA is not a recognized term under generally accepted accounting principles (“GAAP”) and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, it is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, this presentation may not be comparable to other similarly titled measures of other companies.

The following table sets forth a reconciliation of net income to EBITDA for the year to date periods ended September 30, 2008 and 2007 (in thousands):

	Quarter Ended
	September 30, 2008			September 30, 2007 (1)

Net income	$	(17,243	)	$	(353	)
Provision (benefit) for income taxes		(6,262	)		(152	)
Interest expense		728			276
Depreciation		3,425			3,827
EBITDA	$	(19,352	)	$	3,598

The following table sets forth a reconciliation of EBITDA to cash flows from operations for the quarters ended September 30, 2008 and 2007 (in thousands):

	Quarter Ended
	September 30, 2008			September 30, 2007 (1)

EBITDA	$	(19,352	)	$	3,598
Benefit (provision) for income taxes		6,262			152
Interest expense		(728	)		(276