Note 4 - Corporate Borrowings And Capital And Capital Lease Obligations

6 Months Ended

Dec. 31, 2011

Debt and Capital Leases Disclosures [Text Block]

NOTE 4:                      CORPORATE BORROWINGS AND CAPITAL LEASE OBLIGATIONS

Indebtedness Outstanding.  Debt consists of the following:

	December 31			June 30
	2011			2011			2010
Credit Agreement	$	21,142		$	4,658		$	-
Secured Promissory Note, 6.47% (variable interest rate), due monthly to July, 2016.		1,374			1,516			1,783
Water Cooling System Capital Lease Obligation, 2.61%, due monthly to May, 2017		6,754			7,335			-
Other Capital Lease Obligations, 0.61%, due monthly to October, 2013.		394			556			988
Total		29,664			14,065			2,771
Less credit agreement		(21,142	)		(4,658	)		-
Less current maturities of long term debt		(1,670	)		(1,705	)		(689	)
Long-term debt	$	6,852		$	7,702		$	2,082

Credit Agreement.  On July 21, 2009, the Company entered a new revolving Credit and Security Agreement with Wells Fargo Bank, National Association.  The Credit and Security Agreement has been amended by consents dated August 19, 2009, December 21, 2009, December 31, 2009 and February 2, 2010 as well as by a First Amendment (“First Amendment”) dated June 30, 2010, a Second Amendment (“Second Amendment”) dated January 20, 2011 and a Third Amendment (“Third Amendment”) dated October 20, 2011 (as so amended, the “Credit Agreement”).  The Credit Agreement, which matures in October 2014, generally provides for a Maximum Line of Credit of $45,000, subject to borrowing base limitations. The face amount of any outstanding letters of credit reduces the availability under the Credit Agreement on a dollar-for-dollar basis.  As of December 31, 2011, after giving effect to the Third Amendment, outstanding borrowings under this facility were $21,142, leaving $23,358 available for additional borrowings after giving effect to outstanding letters of credit.  Borrowings under the Credit Agreement bear interest, payable monthly, at a variable rate equal to Daily One Month LIBOR plus an applicable margin ranging from 1.50% to 2.00%, based on the Balance Sheet Leverage Ratio.  During a default period, the interest rate may be increased to a variable rate equal to the Daily One Month LIBOR plus 6 percent at the lender’s discretion. The Credit Agreement provides for an unused line fee of 0.25 percent per annum and origination fees, letter of credit fees and other administrative fees.  The Credit Agreement is secured by a security interest in substantially all of the Company’s personal property and by mortgages or leasehold mortgages on our facilities in Atchison and Onaga. The Credit Agreement also includes provisions that limit or restrict our ability to:

·   incur additional indebtedness;

·   pay cash dividends to stockholders in excess of $2,000 during any fiscal year or re-purchase Company stock;

·   make investments that exceed $15,000 or acquisitions that exceed $5,000 (other than the acquisition of LDI) in the aggregate;

·   dispose of assets;

·   create liens on our assets;

·   incur operating lease expense in excess of $4,000 in any fiscal year;

·   pledge the fixed and real property assets of LDI’s Distillery Business;

·   merge or consolidate; or

·   increase certain salaries and bonuses.

MGPII has guaranteed the Company’s debt under the credit facility and has entered a security agreement granting a security agreement in substantially all of its personal property to secure its obligations to the bank.

Under the Credit Agreement, the Company must report adjusted net income each period.  Adjusted net income as defined must not be less than one dollar ($1.00) as of each quarter end for the 12 month period then ending.  The Credit Agreement defines adjusted net income as net income from continuing operations (which is inclusive of the bargain purchase gain and related tax effects), including extraordinary losses and excluding extraordinary gains, adjusted for unrealized gains and losses from hedging activities, non cash income or losses from equity method investments and gains or losses from the sale or disposition of assets.   The Company’s results for  periods ending December 31, 2011 included material unrealized losses from hedging activities, material non–cash losses from equity method investments, a material non-cash bargain purchase gain and a significant income tax benefit. Adjusted net income exceeded the $1.00 requirement, and the Company was in compliance with this covenant at December 31, 2011.

Also under the Credit Agreement, the Company must hedge the input costs of 100 percent of all contracted sales of inventory and not less than 40 percent of the input costs of inventory which will be sold on the spot market, and must meet the following ratios.

Fixed Charge Coverage Ratio of not less than 2.00 to 1.00 (measured at each quarter end for the 12-months then ended), calculated as follows:

(a)	the sum of:
	(i)	net profit
	(ii)	plus taxes
	(iii)	plus interest expense
	(iv)	plus depreciation and amortization expense
	(v)	minus dividends
	(vi)	minus non-cash joint venture gain/(loss)
	(vii)	minus non-cash unrealized hedging gain/(loss)
	(viii)	minus cash contributions to Joint Ventures
	(ix)	minus $7,000 in deemed per annum maintenance capital expenditures
divided by
(b)	the sum of:
	(i)	current maturities of long term debt
	(ii)	plus capitalized lease payments and interest expense

Balance Sheet Leverage Ratio (meaning total liabilities divided by tangible net worth) not to exceed 1.75 to 1.00 (measured as of each quarter end)

The lender has significant lending discretion under the Credit Agreement; it may modify the Company’s borrowing base and various components thereof in its reasonable discretion, thereby affecting the amount of credit available to the Company.  The lender may terminate or accelerate our obligations under the Credit Agreement upon the occurrence of various events in addition to payment defaults and other breaches, including such matters as over advances arising from reductions in the borrowing base, certain changes in the Board, failure to pay taxes when due, defaults under other material debt, lease or other contracts and the Company's CEO ceasing to be actively engaged in our day to day business activities if the Company fails to hire a successor acceptable to the lender within 90 days. For the 12-month period ended December 31, 2011, the Company was not in compliance with its minimum fixed charge coverage ratio of not less than 2.00 to 1.00.  The Company obtained a waiver from its primary lender for this default.  The Company also obtained a waiver from its primary lender for noncompliance related to an administrative matter that requires submission of specified information to the lender within 120 days of yearend for the fiscal years ending June 30, 2011 and 2010.  

Subsequent to year end, the Credit Agreement was amended by an Assignment and Assumption of Note and Credit Agreement and Fourth Amendment to the Credit Agreement (“Fourth Amendment”) dated January 3, 2012.  The Fourth Amendment modifies Registrant’s existing revolving credit facility under the Credit Agreement in several material respects, as follows:

·   Registrant assumes Processing’s obligations and indebtedness under the Credit Agreement;

·   Processing releases and discharges Wells Fargo from any and all claims related to the Credit Agreement;

·   The Fourth Amendment provides that Registrant and its more than 50%-held subsidiaries (the “Subsidiaries”), which includes Processing, are deemed to be one consolidated entity and, thus, Registrant and the Subsidiaries are generally subject to the representations and warranties and the covenants in the Credit Agreement as a single, consolidated entity.

On January 3, 2012, Processing also executed a Continuing Guaranty, whereby it agreed to guarantee the obligations of Registrant under the Credit Agreement.  Further, on January 3, 2012, Processing executed a Third Party Security Agreement which gives Wells Fargo a security interest in Processing’s assets as security for its obligations under the Continuing Guaranty.

6.47% (variable interest rate) Secured Promissory Note, due monthly to July 2016.  On July 20, 2009, Union State Bank – Bank of Atchison (“Bank of Atchison”), which previously had loaned the Company $1,500, agreed to loan Processing an additional $2,000.  The note for this loan is secured by a mortgage and security interest on the Company’s Atchison plant and equipment.  The note bears interest at 6.00% over the three year treasury index, adjustable quarterly, and is payable in 84 monthly installments of $32, with any balance due on the final installment. See Note 17. Related Party Transactions for further discussion on this related party transaction.

Leases

 Capital Lease Obligations.  Our capital lease obligations consist of a water cooling system capital lease obligation and other capital lease obligations as described below:

Water Cooling System Capital Lease Obligation.   On June 28, 2011, Processing sold a major portion of the new process water cooling towers and related equipment being installed at its Atchison facility to U.S. Bancorp Equipment Finance, Inc. for $7,335 and leased them from U.S. Bancorp pursuant to a Master Lease Agreement and related Schedule.  Monthly rentals under the lease are $110 (plus applicable sales/use taxes, if any) and continue for 72 months with a rate of 2.61%.  Processing may purchase the leased property after 60 months for approximately $1,328 and at the end of the term for fair market value.  Given this continuing involvement, the Company treated this as a financing transaction.  The lessor may, at its option, extend the lease for specified periods after the end of the term if Processing fails to exercise its purchase option.  Under the terms of the Master Lease, Processing is responsible for property taxes and assumes responsibility for insuring and all risk of loss or damage to the property.

Obligations under the Master Lease may be accelerated if an event of default occurs and continues for 10 days.   In addition to payment defaults and breaches of representations and covenants, events of default include defaults under any other agreement with lessor or payment default under any obligation.  In such event, among other matters, lessor may cancel the Master Lease, take possession of the property and seek to recover the present value of future rentals, the residual value of the property and the value of lost tax benefits.

Lenders having liens on the Atchison facility, including its revolving credit lender, Wells Fargo Bank, National Association, entered into mortgagee's waivers with respect to the leased property.  As described in Note 2. Other Balance Sheet Captions, this equipment is included in property, plant and equipment.

Other Capital Lease Obligations.  These were entered in connection with implementation of numerous information technology initiatives and other equipment purchases which have been funded under various capital lease agreements with rates ranging from 0.61% to 7.91%, certain of which expired during the six month transition period ended December 31, 2011.  One capital lease remains outstanding at December 31, 2011, which has a final maturity of October 2013.  This lease is unsecured.  The assets are included in Property and Equipment on the accompanying Consolidated Balance Sheets.

4.90% Industrial Revenue Bond Obligation.  On December 28, 2006, Processing engaged in an industrial revenue bond transaction with the City of Atchison, Kansas pursuant to which the City (i) under a trust indenture, (“the Indenture“), issued $7,000 principal amount of its industrial revenue bonds (“the Bonds”) to Processing and used the proceeds thereof to acquire from the Company its newly constructed office building and technical innovations center in Atchison, Kansas, (“the Facilities”) and (ii) leased the Facilities back to Processing under a capital lease (“the Lease”).  The assets related to this transaction are included in property and equipment.

The bonds mature on December 1, 2016 and bear interest, payable annually on December 1 of each year commencing December, 2007 at the rate of 4.90% per annum.  Basic rent under the lease is payable annually on December 1 in an amount sufficient to pay principal and interest on the bonds.  The Indenture and Lease contain certain provisions, covenants and restrictions customary for this type of transaction.  In connection with the transaction, Processing agreed to pay the city an administrative fee of $50 payable over 10 years.

The purpose of the transaction was to facilitate certain property tax abatement opportunities available related to the newly constructed facilities.  The facilities acquired with bond proceeds will receive property tax abatements which terminate upon maturity of the Bonds on December 1, 2016.  The issuance of the Bonds was integral to the tax abatement process.  Financing for the Facilities was provided internally from Processing’s operating cash flow.  Accordingly, upon consummation of the transaction and issuance of the Bonds, Processing acquired all bonds issued for $7,000, excluding transaction fees.  As a result, Processing owns all of the outstanding Bonds.  Because Processing owns all outstanding bonds, management considers the debt de-facto cancelled and, accordingly, no amount for these Bonds is reflected as debt outstanding on the Consolidated Balance Sheets as of December 31, 2011, June 30, 2011 or June 30, 2010.

Leases and Debt Maturities.  Processing leases railcars and other assets under various operating leases.  For railcar leases, the Company is generally required to pay all service costs associated with the railcars.  Rental payments include minimum rentals plus contingent amounts based on mileage.  Rental expenses under operating leases with terms longer than one month were $1,255 for the six month transition period ended December 31, 2011 and $2,128, $2,940 and $3,431 for the years ended June 30, 2011, 2010 and 2009, respectively.  Minimum annual payments and present values thereof under existing debt maturities, capital leases and minimum annual rental commitments under non-cancelable operating leases are as follows:

			Capital Leases
Year Ending December 31,	Long-Term Debt		Minimum Lease Payments		Less Interest		Net Present Value		Total Debt		Operating Leases
2012	$	303	$	1,535	$	167	$	1,368	$	1,671	$	2,593
2013		323		1,495		135		1,360		1,683		1,756
2014		345		1,316		104		1,212		1,557		725
2015		369		1,316		72		1,244		1,613		469
2016		34		1,316		39		1,277		1,311		392
Thereafter		-		693		7		687		687		-
Total	$	1,374	$	7,672	$	524	$	7,148	$	8,522	$	5,935