<PAGE>
As Filed with the Securities and Exchange Commission on September 26, 1996
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1996
MIDWEST GRAIN PRODUCTS, INC.
1300 Main Street
Box 130
Atchison, Kansas 66002
Telephone: (913) 367-1480
Incorporated in the State of Kansas
COMMISSION FILE NO. 0-17196
IRS No. 48-0531200
The Company has no securities registered pursuant to Section 12(b) of
the Act. The only class of common stock outstanding consists of Common Stock
having no par value, 9,765,172 shares of which were outstanding at June 30,
1996.
The Common Stock is registered pursuant to Section 12(g) of the Act.
The aggregate market value of the Common Stock of the Company held by
non-affiliates, based upon the last sales price of such stock on September 12,
1996, was $102,819,510.
The Company 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, and
has been subject to such filing requirements for the past 90 days.
As indicated by the following check mark, disclosure of delinquent
filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge in a definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K:
[X].
The following documents are incorporated herein by reference:
(1) Midwest Grain Products, Inc. 1996 Annual Report to Stockholders,
pages 10 through 28 [incorporated into Part II and contained in
Exhibit 10(c)].
(2) Midwest Grain Products, Inc. Proxy Statement for the Annual
Meeting of Stockholders to be held on October 10, 1996, dated
September 19, 1996 (incorporated into Part III).
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<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
FORM 10-K
For the Fiscal Year Ended June 30, 1996
<PAGE>
CONTENTS
PAGE
PART I
Item 1. Business.................................................. 4
General Information....................................... 4
Vital Wheat Gluten........................................ 5
Premium Wheat Starch...................................... 6
Alcohol Products.......................................... 7
Flour and Other Mill Products............................. 9
Transportation............................................ 9
Raw Materials............................................. 10
Energy.................................................... 10
Employees................................................. 10
Regulation................................................ 11
Item 2. Properties................................................ 11
Item 3. Legal Proceedings......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders....... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................... 12
Item 6. Selected Financial Data................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
Item 8. Financial Statements and Supplementary Data............... 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 12
PART III
Item 10. Directors and Executive Officers of the Registrant........ 13
Item 11. Executive Compensation.................................... 15
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................. 15
Item 13. Certain Relationships and Related Transactions............ 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................... 16
SIGNATURES............................................................ 18
FINANCIAL STATEMENT SCHEDULES......................................... S-1
Report of Independent Public Accountants on Schedules............... S-2
Schedule VIII. Valuation and Qualifying Accounts................... S-3
EXHIBIT INDEX ........................................................ E-1
-------------------
The calculation of the aggregate market value of the Common Stock of
the Company held by non-affiliates is based on the assumption that
non-affiliates do not include directors. Such assumption does not constitute an
admission by the Company or any director that any director is an affiliate of
the Company.
3
<PAGE>
PART I
Item 1. Business.
General Information
Midwest Grain Products, Inc. (the Company) is a Kansas corporation
headquartered in Atchison, Kansas. It is the successor to a business founded in
1941 by Cloud L. Cray, Sr.
The Company is a fully integrated producer of vital wheat gluten,
premium wheat starch, and alcohol products. These grain products are processed
at plants located in Atchison, Kansas, and Pekin, Illinois. Wheat is purchased
directly from local and regional farms and grain elevators and milled into
flour. The flour is processed with water to extract vital wheat gluten which is
dried into a tan powder and sold in packaged or bulk form. The resulting starch
slurry is further processed to extract premium wheat starch which is also dried
into a powder and sold in packaged or bulk form. The remaining slurry is mixed
with corn or milo and water and then cooked, fermented and distilled into
alcohol. The residue of the distilling operations is dried and sold as a high
protein additive for animal feed. Carbon dioxide which is produced during the
fermentation process is trapped and sold. As a result of these processing
operations, the Company sells approximately 95% (by weight) of grain processed.
The table below shows the Company's sales from continuing operations by
product group for each of the five years ended June 30, 1996, as well as such
sales as a percent of total sales. The table does not reflect the sales of
McCormick Distilling Company, a business that was sold as of December 31, 1992.
<TABLE>
PRODUCT GROUP SALES
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ------------ ------------ -------------- --------------
(thousands of dollars)
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vital Wheat Gluten........$ 39,514 20.3 $ 49,957 27.7 $ 70,966 38.2 $ 54,156 33.1 $ 46,941 30.1
Premium wheat starch....... 26,354 13.5 23,403 13.0 21,110 11.3 18,423 11.3 17,578 11.3
Alcohol Products:
Food Grade Alcohol
Beverage Alcohol...... 39,465 20.3 32,573 18.1 29,536 15.9 27,142 16.6 26,437 17.0
Food Grade Industrial. 32,064 16.5 23,379 13.0 22,585 12.1 17,123 10.5 17,974 11.5
Fuel Grade Alcohol....... 25,347 13.0 28,120 15.6 19,273 10.4 24,468 15.0 21,069 13.6
Alcohol by-products...... 28,449 14.6 19,583 10.9 18,146 9.8 19,288 11.8 17,791 11.4
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total alcohol
products............ 125,325 64.4 103,655 57.5 89,540 48.2 88,021 53.9 83,271 53.5
------- ---- ------- ---- ------ ---- ------ ---- ------ ----
Flour and other mill
products................ 3,445 1.8 3,327 1.8 4,352 2.3 2,826 1.7 8,004 5.1
----- --- ----- --- ----- --- ----- --- ----- ---
Net sales ..........$194,638 100.0 $180,252 100.0 $185,968 100.0 $163,426 100.0 $155,794 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
<PAGE>
Although fiscal 1996 sales increased in 1996 by $14.4 million, income
from operations declined by $15.0 million to produce a $3.4 million net loss for
the year. The loss, which was the first annual loss in the Company's 55 year
history, was due primarily to unusually high grain costs in the face of greatly
increased competition from foreign exporters of vital wheat gluten and a
relatively flat market for fuel grade alcohol. The combination of these factors
significantly restricted the ability of the Company to adjust the price of its
gluten and fuel alcohol to compensate for the increased grain costs.
During fiscal 1995 the Company completed $96.8 million of expansion
programs started in 1992 which have more than doubled the Company's 1991
capacity to produce all of its products. Although the Company expects that it
will take a number of years to develop profitable markets for all of the new
capacity, management believes that the expanded facilities have positioned the
Company for profitable growth as conditions in the market place improve.
4
The bulk of the Company's sales are made under informal arrangements
direct to large institutional food and beverage processors or distributors with
respect to which the Company has longstanding relationships. Under these
arrangements products are usually ordered, produced, sold and shipped within 30
days. As a consequence, the Company's backlog of orders at any time is usually
less than 10 percent of annual sales.
Generally, the Company's sales are not seasonal except for variations
affecting alcohol and gluten sales. Fuel alcohol sales increase during the
period August through March due to requirements of the Clean Air Act which
inhibit the sale of ethanol in certain areas of the country during May 1 through
September 15 each year. Certain environmental regulations also favor greater use
of ethanol during the winter months of the year. See "Alcohol Products- Fuel
Grade Alcohol." Beverage alcohol sales tend to peak in the fall as distributors
order stocks for the holiday season, while gluten sales tend to increase during
the second half of the fiscal year as demand increases for hot dog buns,
hamburger buns, and similar bakery products.
For further information, see the Consolidated Financial Statements of
the Company and Management's Discussion and Analysis of the Company's Financial
Condition and Results of Operations which appear at pages 11 through 17 of the
Annual Report.
Vital Wheat Gluten
Vital wheat gluten is a light tan powder which contains approximately
75% to 80% protein. It is the only commercially available high protein food
additive which possesses vitality. The vitality of the Company's vital wheat
gluten results from its elastic and cohesive characteristics when added to dough
or otherwise reconstituted with water.
Vital wheat gluten is added by bakeries and food processors to baked
goods such as wheat breads, and to pet foods, cereals, processed meats, fish,
and poultry to improve the nutritional content, texture, strength, shape, and
volume of the product. The neutral flavor and color of wheat gluten also
enhances, but does not change, the flavor and color of food. It has been
increasingly used in breads and pet foods. The cohesiveness and elasticity of
the gluten enables the dough in wheat and other high protein breads to rise and
to support added ingredients such as whole cracked grains, raisins and fibers.
<PAGE>
This allows the baker to make an array of different breads by varying the gluten
content of the dough. Vital wheat gluten is also added to white breads, and hot
dog and hamburger buns to improve the hinge strength and cohesiveness of the
product.
The Company ships its vital wheat gluten throughout the continental
United States in bulk and in 50 to 100 pound bags. Approximately 53% of fiscal
1996 gluten sales were made to a distributor for the bakery industry, the Ben C.
Williams Bakery Services Company, which in turn distributes vital wheat gluten
to independent bakeries. The remainder is sold directly to major food processors
and bakeries such as Kellogg Co., Interstate Baking Company, Inc. and H. J.
Heinz Co.
The Company's principal competitors in the U.S. vital wheat gluten
market consist of three other domestic producers and a number of foreign
importers. Foreign exporters provide significant competition from time to time
due to low U.S. tariffs and export incentives provided by foreign countries to
their wheat starch producers. Based on industry data, the Company believes that
in terms of fiscal 1996 sales it is the largest producer of vital wheat gluten
in the United States.
Competition in the vital wheat gluten industry is based primarily upon
price, quality, and service. Historically, gluten prices have been affected by
grain prices, grain quality, excess foreign capacity and by subsidies provided
to certain European exporters by their host governments.
The Company's vital wheat gluten processing operations are believed to
produce a quality of vital wheat gluten that is equal to or better than that of
any other wheat gluten on the market. The Company's location in the center of
the United States grain belt, its production capacity and years of operating
experience, enable it to provide a consistently high level of cost effective
service to customers.
5
The Company's sales of vital wheat gluten decreased by $10.4 million
during fiscal 1996 and $21.0 million during fiscal 1995 from the high levels of
fiscal 1994, due to reduced marketing opportunities resulting from significantly
increased European gluten imports which began during the second half of calendar
1994. The high level of fiscal 1994 Gluten sales resulted from a worldwide
shortage of gluten due to poor quality, low protein-yielding wheat following the
extremely wet weather in the spring and summer of 1993. The surge of low priced
foreign gluten occurred concurrent with significantly rising wheat costs which
began in the third quarter in fiscal 1995. Between March, 1995 and the end of
June, 1996, the average per bushel cost of wheat rose from $4.10 to $6.53.
Because of the flood of low priced foreign gluten, US wheat gluten prices failed
to adjust to the rising grain costs with a resulting negative impact on the
profitablility of the Company's gluten operations.
The substantial increase in European gluten imports are due to sizable
increases in European capacity to produce starch and gluten, high subsidies that
enable the sale of excess European gluten in the U.S. at low prices and low U.S.
tariffs on that gluten. The Company and the United States Wheat Gluten Council
have engaged in a number of initiatives to combat the dumping of foreign gluten.
Due to these efforts the United States and the European Union ratified an
agreement on July 22, 1996, that states: "If the market share of European
Community origin wheat gluten exports into the United States increases in
comparison to their average 1990-1992 market share, the European Commission and
<PAGE>
the United States government shall consult with a view to finding a mutually
acceptable solution." Consultations pursuant to that agreement have begun, and
the Company is hopeful that they will ultimately result in the creation of a
more level playing field. However, until the intensity of competitive conditions
subside, pursuant to the outcome of consultations or otherwise, and wheat costs
substantially decrease, the Company plans to limit the production of gluten to
those amounts necessary for the production of other more profitable wheat by
products. In addition, the Company has intensified its efforts to develop
additional modified vital wheat gluten products that may be marketed in niches
that will be less affected by grain costs and foreign competition.
During fiscal 1995 the Company substantially completed the construction
of new wheat gluten production facilities at the Pekin Illinois plant. The
expansion has increased the Company's total gluten capacity by approximately
40%. That project, together with other gluten expansion projects that were
completed at the Atchison facilities during 1993 and 1994, have approximately
doubled the gluten capacity that was available at June 30, 1991. However, as
mentioned above, due to the unusually high gluten imports from Europe, and
unusually high grain costs, the Company does not expect to immediately use the
increased capacity.
Premium Wheat Starch
Wheat starch constitutes the carbohydrate-bearing portion of wheat
flour. The Company produces a pure white premium wheat starch powder by
extracting the starch from the starch slurry substantially free of all
impurities and fibers and then by spray, flash or drum drying the starch.
Premium wheat starch differs from low grade or B wheat starches which are
extracted along with impurities and fibers and are used primarily as a binding
agent for industrial applications such as the manufacture of charcoal
briquettes. The Company does not produce low grade or B starches since its
integrated processing facilities are able to process the remaining slurry after
the extraction of premium wheat starch into alcohol, animal feed and carbon
dioxide. Premium wheat starch differs from corn starch in its granular
structure, color, granular size and name identification.
An increasing portion of the Company's premium wheat starch is also
chemically altered during processing to produce certain unique modified wheat
starches designed for special applications.
The Company's premium wheat starches are used primarily as an additive
in a variety of food products to affect their appearance, texture, tenderness,
taste, palatability, cooking temperature, stability, viscosity, binding and
freeze-thaw characteristics. For example, the Company's starches are used to
improve the taste and mouth feel of cream puffs, eclairs, puddings, pie
fillings, breadings and batters; to improve the size, symmetry and taste of
angel food cakes; to alter the viscosity of soups, sauces and gravies; to
improve the freeze-thaw stability and shelf life of fruit pies and other frozen
foods; to improve moisture retention in microwavable foods; and to add stability
and to improve spreadability in frostings, mixes, glazes and sugar coatings. The
Company's specialty starches are also sold for a number of industrial and
non-food uses, such as an ink bearing coating in carbonless paper.
6
The Company's premium wheat starch is sold nationwide to food
processors, such as International Multi-Foods Corp., Pillsbury Company and
<PAGE>
Keebler Company, to distributors, and for export to countries such as Japan,
Mexico and Malaysia which do not have wheat-based economies.
The Company believes that it is the largest producer of premium wheat
starch in the United States. Although wheat starch enjoys a relatively small
portion of the total United States starch market, the market is one which is
continuing to grow. Growth in the wheat starch market reflects a growing
appreciation for the unique characteristics of wheat starch which provide it
with a number of advantages over corn and other starches for certain baking and
other end uses. The Company has developed a number of different modified wheat
starches and continues to explore the development of additional starch products
with the view to increasing sales of higher margin modified starches.
Premium wheat starch competes primarily with corn starch, which
dominates the United States market. Competition is based upon price, name, color
and differing granular and chemical characteristics which affect the food
product in which it is used. Premium wheat starch prices usually enjoy a price
premium over corn starches and low grade wheat starches. Wheat starch price
fluctuations generally track the fluctuations in the corn starch market, except
in the case of modified wheat starches. The wheat starch market also usually
permits pricing consistent with costs which affect the industry in general,
including increased grain costs. The Company's strategy is to market its premium
wheat starches in special market niches where the unique characteristics of
premium wheat starch or one of the Company's modified wheat starches are better
suited to a customers requirements for a specific use.
Starch sales increased during fiscal 1996 by approximately $3.0
million, due primarily to higher volumes permitted by increased starch
production capacity and increased sales of modified wheat starches.
During June, 1995, the Company completed the construction of a new
starch production facility at the Pekin plant. Previously that Plant was
equipped only to produce gluten, alcohol and alcohol byproducts. The expansion
has increased total starch production capacity by 70%.
Alcohol Products
The Company's Atchison and Pekin plants process corn and milo, mixed
with the starch slurry from gluten and starch processing operations, into food
grade alcohol, fuel grade alcohol, animal feed and carbon dioxide.
Food grade alcohol, or grain neutral spirits, consists of beverage
alcohol and industrial food grade alcohol that are distilled to remove all
impurities and all but approximately 5% of the water content to yield high
quality 190 proof alcohol. Fuel grade alcohol, or "ethanol," is a lower grade of
grain alcohol that is distilled to remove all water to yield 200 proof alcohol
suitable for blending with gasoline.
Food Grade Alcohol
Beverage Alcohol. Food grade beverage alcohol consists primarily of
grain neutral spirits and gin. Grain neutral spirits is sold in bulk or
processed into vodka and gin and sold in bulk quantities at various proof
concentrations to bottlers and rectifiers, such as Heublein, Inc. and James B.
Beam Distilling Co., which further process the alcohol for sale to consumers
under numerous labels.
<PAGE>
The Company believes that in terms of fiscal 1996 net sales, it is one
of the two largest bulk sellers of grain neutral spirits, vodka and gin in the
United States. The Company's principal competitors in the beverage alcohol
market are Grain Processing Company of Muscatine, Iowa and Archer Daniels
Midland of Decatur, Illinois. Competition is based primarily upon price and
service, and in the case of gin, formulation. The Company believes that the
centralized location of its Illinois and Kansas distilleries and the capacity of
its dual production facilities combine to provide the Company with a customer
service advantage that is unique within the industry.
Food Grade Industrial Alcohol. Food grade alcohol which is not sold as
beverage alcohol is marketed as food grade industrial alcohol. Food grade
industrial alcohol is sold as an ingredient in foods (e.g., vinegar and food
flavorings), personal care products (e.g., hair sprays and deodorants), cleaning
solutions, biocides, insecticides,
7
fungicides, pharmaceuticals, and a variety of other products. Although grain
alcohol is chemically the same as petroleum-based or synthetic alcohol, certain
customers prefer a natural grain-based alcohol. Food grade industrial alcohol
is sold in tank truck or rail car quantities direct to a number of industrial
processors, such as Integrated Ingredients, a division of Burns Philip Foods,
Inc., 7-Up Company, and Lehn & Fink, a producer of Lysol based household
cleaners, from both the Atchison and Pekin plants.
The Company is a minor competitor in the total United States market for
food grade industrial alcohol, which is dominated by petroleum-based or
synthetic alcohol. Food grade industrial alcohol prices are normally consistent
with prices for synthetic industrial alcohol.
Food grade alcohol sales increased by approximately $6.9 million during
fiscal 1996 due primarily to volume increases. Those increases were primarily
due to increased demand and the availability of increased capacity derived from
the distillery expansion at the Pekin plant.
Fuel Grade Alcohol
Fuel grade alcohol, which is commonly referred to as ethanol, is sold
primarily for blending with gasoline to increase the oxygen and octane levels of
the gasoline. As an octane enhancer, ethanol can serve as a substitute for lead
and petroleum based octane enhancers. As an oxygenate, ethanol permits gasoline
to meet certain environmental regulations and laws that regulate air quality by
reducing carbon monoxide, hydrocarbon particulate and other toxic emissions
generated from the burning of gasoline ("toxics"). Because ethanol is produced
from grain, a renewable resource, it also provides a fuel alternative that tends
to reduce the country's dependence on foreign oil.
Although ethanol can be blended directly with gasoline as an oxygenate
to enable it to reduce toxic air emissions, it also increases the volatility of
gasoline or its tendency to evaporate and release volatile organic compounds
("VOC's"). This latter characteristic has precluded it from meeting certain
clean air act requirements for gasoline that pertain to nine of the smoggiest US
metropolitan areas during the summer months (May 1 through September 15). As a
consequence, the demand for ethanol increases during the period from August
through March of each fiscal year as gasoline blenders acquire stocks for
blending with gasoline to be marketed in the period September 16 through April
30.
<PAGE>
The cost of producing ethanol has historically exceeded the cost of
producing gasoline and gasoline additives, such as MTBE, all of which are
derived from fossil non-renewable fuels such as petroleum. Accordingly, to
encourage the production of ethanol for use in gasoline, the Federal government
and various states have enacted tax and other incentives designed to make
ethanol competitive with gasoline and gasoline additives. Under the internal
revenue code, and until October 1, 1999, gasoline that has been blended in
qualifying proportions with ethanol provide sellers of the blend with certain
income tax credits and excise tax reductions that amount to up to $0.54 per
gallon of ethanol that is mixed with the gasoline. A mix of at least 10% ethanol
by volume is required to receive the maximum credit. Although the Federal tax
benefits are not directly available to the Company, they allow it to sell its
ethanol at prices competitive with less expensive additives and gasoline. From
time to time legislation is proposed to eliminate or reduce the tax benefits
enjoyed by the ethanol industry, and indirectly by producers of the grain that
is converted into ethanol. No assurance can be given that such proposals and
complaints will not be successful or that Congress will continue the current
subsidies beyond September 30, 1999.
The Kansas Qualified Agricultural Ethyl Alcohol Producer Incentive
Fund, which expires in 1999, provides incentives for sales of ethanol produced
in Kansas to gasoline blenders. Fiscal 1996 payments to the Company out of the
fund totaled $297,000 for the ethanol produced by the Company at the Atchison
plant during that year. A few other states offer ethanol blending incentives,
which, in the aggregate, did not materially add to the Company's ethanol
revenues during fiscal 1996.
The Fuel grade alcohol market is dominated by Archer Daniels Midland.
In recent years the Company and other competitors have significantly increased
domestic fuel grade alcohol distillation capacity. During fiscal 1995 the
Company more than tripled its fuel grade alcohol production capacity through the
expansion of its distillery operations at the Pekin plant. As a consequence, it
moved from a very small competitor in the fuel grade market to the smaller
8
of a few other larger second tier ethanol producers. The Company competes with
other producers of fuel grade alcohol on the basis of price and delivery
service. Fuel alcohol prices traditionally follow the movement of gasoline
prices.
During 1996 fuel alcohol prices remained flat in the face of rising
gasoline prices, in part due to increased industry wide capacity. At the same
time the cost of grain escalated to extraordinary levels. The combination of
circumstances had a major negative impact on the Company's fuel grade alcohol
operations and those of the entire ethanol industry. A number of producers shut
down plants or otherwise significantly curtailed ethanol production. The
Company's response to the circumstance was to shift as much of its alcohol
production as possible into food grade alcohol products where prices were
adjusting to increased grain costs and to shut down its Pekin plant for the
entire month of June in order to perform extended maintenance.
Alcohol By-Products
The bulk of fiscal 1996 sales of alcohol by-products consist of
distillers feeds. Distillers feeds are the residue of corn, milo and wheat from
alcohol processing operations. The residue is dried and sold primarily to
processors of animal feeds as a high protein additive. The Company competes with
other distillers of alcohol as well as a number of other producers of animal
<PAGE>
food additives in the sale of distillers feeds and mill feeds. The $8.9 million
increase in 1996 sales of alcohol by-products is primarily due to the 1995
expansion of the distillery at the Pekin plant, which approximately doubled the
capacity of the Company to produce distillers feeds.
The balance of alcohol by-products consists primarily of carbon
dioxide. During the production of alcohol, the Company traps carbon dioxide gas
that is emitted in the fermentation process. The gas is purchased and liquefied
on site by two principal customers, one at the Atchison Plant and one at the
Pekin Plant, who own and operate the carbon dioxide processing and storage
equipment under long term contracts with the Company. The liquefied gas is
resold by these processors to a variety of industrial customers and producers of
carbonated beverages.
Flour and Other Mill Products
The Company owns and operates a flour mill at the Atchison plant. All
of the mill's output of flour is used internally for the production of vital
wheat gluten and premium wheat starch. In 1993 the Company completed the first
of a two-phase expansion of the mill. The second phase of the expansion was
completed during the first quarter of fiscal 1995. The entire project increased
the mill's total production capacity by approximately 80%.
In addition to flour, the wheat milling process generates mill feeds or
midds and a small quantity of wheat germ. Midds are sold to processors of animal
feeds as a feed additive. Wheat germ is sold primarily for use in vitamin E
production.
Transportation
The Company's output is transported to customers by truck, rail and
barge transportation equipment, most of which is provided by common carriers
through arrangements made by the Company. The Company leases 250 rail cars which
may be dispatched on short notice. Shipment by barge is offered to customers
through barge loading facilities on the Missouri and Illinois Rivers. The barge
facility on the Illinois River is adjacent to the Pekin plant and owned by the
Company. The facility on the Missouri River, which is not company-owned, is
approximately one mile from the Atchison plant.
Raw Materials
The Company's principal raw material is grain, consisting of wheat
which is processed into all of the Company's products and corn and milo which
are processed into alcohol, animal feed and carbon dioxide. Grain is purchased
directly from surrounding farms, primarily at harvest time, and throughout the
year from grain elevators. Historically, the cost of grain is subject to
substantial fluctuations depending upon a number of factors which affect
commodity prices in general, including crop conditions, weather, government
programs, and purchases by foreign
9
governments. Although significant variations in grain prices may temporarily
affect positively or negatively the results of the Company's operations, the
Company has usually, but not always, been able to compensate for such variations
through adjustments in prices charged for the Company's grain products.
<PAGE>
Beginning in fiscal 1995 and continuing through fiscal 1996 wheat, corn
and milo prices increased to unusually high levels in the face of intense
competition from foreign exporters of vital wheat gluten and relatively flat to
depressed markets for fuel grade ethanol. In fiscal 1996, the Company's corn and
milo costs averaged 44% more per bushel than those costs in fiscal 1995, and
wheat costs in fiscal 1996 averaged 32% more per bushel. While the Company used
only 2.3 million more bushels of grain in fiscal 1996, its total combined cost
for wheat, corn and milo for fiscal 1996 rose approximately $27 million above
grain expenditures in the prior year. The increase in grain prices appears to be
primarily due to historically low US stocks of grain reserves caused by weather
and increased worldwide demand. The combination of these factors have
significantly restricted the ability of the company to adjust the price of its
gluten and fuel grade alcohol to compensate for the high grain costs. The
Company is responding to these circumstances by shifting as much of its
production as is possible to starch and food grade alcohol production, by
restricting the production of gluten and fuel grade alcohol and through the
implementation of other cost-cutting measures.
Historically the Company has not engaged in the purchase of commodity
futures to hedge economic risks associated with fluctuating grain and grain
products prices. However, due to the significantly increased volumes of grain
and grain products that are expected as a result of the expansion of the
Company's production facilities and the fact that the markets for an increasing
portion of the Company's products are not adjusting to fluctuations in gain
costs, the Company began during 1995 to make limited purchases of commodity
futures, including wheat, corn and gasoline futures. It expects to increase such
hedging activity in the future.
Energy
Because energy comprises a major cost of operations, the Company seeks
to assure the availability of fuels for the Pekin and Atchison plants at
competitive prices.
All of the natural gas demand for the Atchison plant is transported by
a wholly-owned subsidiary which owns a gas pipeline. The subsidiary procures the
gas in the open market from various suppliers. The Atchison boilers may also be
oil fired.
In the past, the Company's Pekin plant generated the bulk of its energy
needs from coal and gas fired boilers. However, due to the expansion of the
Pekin plant, the Company entered into a long-term arrangement in 1995 with an
Illinois utility to satisfy the energy needs of the entire plant with a new gas
fired plant. Under the arrangement, the utility constructed at the Pekin plant
on ground leased from the Company a gas powered electric and steam generating
facility. The utility sells to the Company steam and electricity, generally at
fixed rates, using gas procured by the Company.
Employees
As of June 30, 1996, the Company had 385 employees, 263 of whom are
covered by three collective bargaining agreements with two labor unions. On
August 31, 1996, the Company successfully negotiated a contract covering 168
employees at the Atchison Plant. A contract covering 93 employees expires at the
Pekin plant on October 31, 1996, and the third contract covering 2 employees
expires on June 30, 1997. As of June 30, 1995, the Company had 429 employees.
The decline in employees resulted primarily from measures taken during fiscal
<PAGE>
1996 to reduce the size of the workforce due to adverse economic circumstances
affecting the Company's operations.
During fiscal 1995, the Company reduced compensation expense for
non-union personnel, including managers and executives by over $2.0 million. An
additional $1.2 million reduction was implemented in 1996. The reductions
include reductions of base salary in 1996 of approximately 8%, major reductions
in cash bonuses and ESOP contributions in 1995 and the elimination of all bonus
programs and ESOP contributions in 1996. These reductions were implemented in
response to the decline in the Company's operating results during the last two
fiscal years.
10
The Company considers its relations with its personnel to be good and
has not experienced a work stoppage since 1978.
Regulation
The Company's beverage and industrial alcohol business is subject to
regulation by the Bureau of Alcohol, Tobacco and Firearms ("BATF") and the
alcoholic beverage agencies in the States of Kansas and Illinois. Such
regulation covers virtually every aspect of the Company's alcohol operations,
including production facilities, marketing, pricing, labeling, packaging, and
advertising. Food products are also subject to regulation by the Food and Drug
Administration. BATF regulation includes periodic BATF audits of all production
reports, shipping documents, and licenses to assure that proper records are
maintained. The Company is also required to file and maintain monthly reports
with the BATF of alcohol inventories and shipments.
Item 2. Properties.
The Company maintains the following principal plants, warehouses and
office facilities:
Plant Area Tract Area
Location Purpose (in sq. ft.) (in acres)
-------- ------- ------------ ----------
Atchison, Kansas Principal executive offices,
grain processing, warehousing,
and research and quality
control laboratories. 494,640 25
Pekin, Illinois Grain processing, warehousing,
and quality control laboratories. 462,926 49
Except as otherwise reflected under Item 1, the facilities mentioned
above are generally in good operating condition, are currently in normal
operation, are generally suitable and adequate for the business activity
conducted therein, and have productive capacities sufficient to maintain prior
levels of production. Except as otherwise reflected under Item 1, all of the
plants, warehouses and office facilities are owned. Although none are subject to
any major encumbrance, the Company has entered into loan agreements which
contain covenants against the pledging of such facilities to others. The Company
also owns transportation equipment and a gas pipeline described under
Transportation and Energy.
<PAGE>
Item 3. Legal Proceedings.
There are no material legal proceedings pending as of June 30, 1996.
Legal proceedings which are pending consist of matters normally incident to the
business conducted by the Company and taken together do not appear material.
Item 4. Submissions of Matters to a Vote of Security Holders.
No matters have been submitted to a vote of stockholders during the
fourth quarter of fiscal year covered by this report.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholders Matters.
11
The Common Stock of the Company has been traded on the NASDAQ National
Market System under the symbol MWGP since November 1988.
The following table reflects the cash dividends paid and the high and
low closing prices of the Common Stock for each quarter of fiscal 1996 and 1995:
Quarterly Cash Sales Price
Dividends High Low
--------- ---- ---
1995:
First Quarter...........................$ .125 $ 36.25 $ 27.25
Second Quarter.......................... .125 28.50 22.50
Third Quarter........................... .125 24.00 17.00
Fourth Quarter.......................... .125 18.75 17.00
------
$ .50
======
1996:
First Quarter...........................$ .000 $ 19.50 $ 16.50
Second Quarter.......................... .000 17.00 10.75
Third Quarter........................... .000 15.00 12.00
Fourth Quarter.......................... .000 13.50 11.38
------
$ .000
======
At June 30, 1996, there were approximately 1,000 holders of record of
the Company's Common Stock. It is believed that the Common Stock is held by more
than 2,000 beneficial owners.
<PAGE>
Item 6. Selected Financial Data.
Incorporated by reference to the information under Selected Financial
Information on page 10 of the Annual Report, a copy of which page is included in
Exhibit 10(c) to this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference to the information under Managements
Discussion and Analysis of Financial Condition and Results of Operations on
pages 11 through 17 of the Annual Report, copies of which pages are included in
Exhibit 10(c) to this Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference to the consolidated financial statements and
related notes on pages 18 through 28 of the Annual Report, copies of which pages
are included in Exhibit 10(c) to this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
12
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Cloud L. Cray, Jr. 73 Chairman of the Board and Director
Laidacker M. Seaberg 50 President, Chief Executive Officer and Director
Sukh Bassi, Ph.D. 55 Vice President - Vital Wheat Gluten Marketing,
Research and Development and Corporate Technical
Director
Robert G. Booe 59 Vice President - Administration, Controller,
Treasurer and Chief Financial Officer
Gerald Lasater 58 Vice President - Wheat Starch Marketing
Raymond Miller 62 Vice President - Purchasing and Energy and
President of Midwest Grain Pipeline, Inc.
Anthony J. Petricola 60 Vice President - Engineering
Randy M. Schrick 46 Vice President - Operations and Director
Robert L. Swaw 66 Vice President - Alcohol Marketing
Michael Braude 60 Director
Richard J. Bruggen 70 Director
F.D. "Fran" Jabara 71 Director
Tom MacLeod, Jr. 48 Director
Robert J. Reintjes 64 Director
Eleanor B. Schwartz, D.B.A. 59 Director
Mr. Cray, Jr. has been a Director since 1957, and has served as Chairman
of the Board since 1980. He served as Chief Executive Officer from 1980 to
September, 1988, and has been an officer of the Company and its affiliates for
more than thirty years.
Mr. Seaberg, a Director since 1979, joined the Company in 1969 and has
served as the President of the Company since 1980 and as Chief Executive Officer
since September, 1988. He is the son-in-law of Mr. Cray, Jr.
13
<PAGE>
Dr. Bassi has served as Vice President of Research and Development
since 1985, Technical Director since 1989 and Vice President - Vital Wheat
Gluten Marketing since 1992. From 1981 to 1992 he was Manager of the Vital Wheat
Gluten Strategic Business Unit. He was previously a professor of biology at
Benedictine College for ten years.
Mr. Booe has served as Vice President, Treasurer and Chief Financial
Officer of the Company since 1988. He joined the Company in 1966 as its
Treasurer and became the Controller and Treasurer in 1980. In 1992 he was
assigned the additional task of Vice President - Administration.
Mr. Lasater joined the Company in 1962. He has served as Vice President
- - Starch Marketing since 1992. Previously he served as Vice President in charge
of the Wheat Starch Strategic Business Unit.
Mr. Miller joined the Company in 1956. He has served as Vice President
- - Purchasing and Energy since 1992, President of Midwest Grain Pipeline, Inc.
since 1987, and as Vice President of the Company since 1967.
Mr. Petricola joined the Company in 1985. He has served as Vice
President - Engineering since 1992. Previously he served as Corporate Director
of Engineering.
Mr. Schrick, a Director since 1987, joined the Company in 1973. He has
served as Vice President - Operations since 1992. From 1984 to 1992 he served as
Vice President and General Manager of the Pekin plant. From 1982 to 1984 he was
the Plant Manager of the Pekin Plant. Prior to 1982, he was Production Manager
at the Atchison plant.
Mr. Swaw joined the Company in 1989. He has served as Vice President-
Alcohol Marketing since September 1, 1995. Previously he was sales manager of
the Company's industrial alcohol division. Before joining the Company, Mr. Swaw
was general manager for the bulk alcohol division of Sofecia, S.A. and general
sales manager with Publicker Industries in Philadelphia.
Mr. Bruggen has been a Director since 1976 and is a member of the Audit
and Human Resources committees. He was Senior Vice President of Atchison Casting
Corporation from 1991 until his retirement in 1992. Previously he was the
General Manager of Rockwell International Plants at Atchison, Kansas and
St. Joseph, Missouri.
Mr. Braude has been a Director since 1991 and is Chairman of the Audit
Committee and a member of the Nominating Committee. He has been the President
and Chief Executive Officer of the Kansas City Board of Trade, a commodity
futures exchange, since 1984. Previously he was Executive Vice President of
American Bank & Trust Company of Kansas City. Mr. Braude is a director of
Country Club Bank, Kansas City, Missouri and National Futures Association, a
member and immediate Past Chairman of the National Grain Trade Council and a
trustee of the University of Missouri-Kansas City and of Midwest Research
Institute.
Mr. Jabara has been a director since October 6, 1994, and is Chairman
of the Human Resources Committee and a member of the Audit Committee. He is
President of Jabara Ventures Group, a venture capital firm. From September 1949
to August 1989 he was a distinguished professor of business at Wichita State
University, Wichita, Kansas. He is also a director of Commerce Bank, Wichita,
Kansas and NPC International, Inc., an operator of numerous Pizza Hut and other
quick service restaurants throughout the United States.
<PAGE>
Mr. MacLeod, Jr. has been a Director since 1986 and is a member of the
Audit and Nominating Committees. He has been the President and Chief Operating
Officer of Iams Company, a manufacturer of premium pet foods, since 1989.
Previously, he was President and Chief Executive Officer of Kitchens of Sara
Lee, a division of Sara Lee Corporation, a food products company.
Mr. Reintjes has been a Director since 1986, and is a member of the
Audit and Human Resources Committees. He has served as President of Geo. P.
Reintjes Co., Inc., of Kansas City, Missouri, for the past 23 years. The Geo. P.
Reintjes Co., Inc. is engaged in the business of refractory construction. He is
a director of Butler Manufacturing Company, a manufacturer of pre-engineered
buildings, and Commerce Bank of Kansas City.
14
Dr. Schwartz has been a director since June 3, 1993. She is Chairman of
the Nominating Committee and a member of the Audit Committee. She has been the
Chancellor of the University of Missouri-Kansas City since May 1992, and was
previously the Vice Chancellor for Academic Affairs. She is a Trustee of Midwest
Research Institute and a director of ANNUHCO, Inc. and Waddell, Reed, Torchmart
and United Funds Group, Inc.
The Board of Directors is divided into two groups (Groups A and B) and
three classes. Group A directors are elected by the holders of Common Stock and
Group B directors are elected by the holders of Preferred Stock. One class of
directors is elected at each annual meeting of stockholders for three-year
terms. The present directors' terms of office expire as follows:
Group A Directors Term Expires Group B Directors Term Expires
Mr. Bruggen 1997 Mr. Cray, Jr. 1998
Mr. MacLeod 1998 Mr. Reintjes 1998
Dr. Schwartz 1996 Mr. Braude 1997
Mr. Jabara 1997
Mr. Schrick 1996
Mr. Seaberg 1996
Item 11. Executive Compensation.
Incorporated by reference to the information under "Executive
Compensation" on pages 15 through 19 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the information under "Principal
Stockholders" beginning on page 20 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
None.
15
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following documents are filed as part of this report:
(a) Financial Statements:
Auditors Report on Financial Statements.
Consolidated Balance Sheets at June 30, 1996 and 1995.
Consolidated Statements of Income - for the Three Years Ended
June 30, 1996, 1995 and 1994.
Consolidated Statements of Stockholders Equity for the Three
Years Ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flow - for the Three Years
Ended June 30, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
The foregoing have been incorporated by reference to the Annual
Report as indicated under Item 8.
(b) Financial Statement Schedules:
Auditors Report on Financial Statement Schedules:
VIII - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or the information is contained in the Consolidated
Financial Statements or notes thereto.
(c) Exhibits:
Exhibit No. Description
---------- -----------
3(a) Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3(a) of
the Company's Registration Statement No. 33-24398
on Form S-1).
3(b) Bylaws of the Company (Incorporated by reference
to Exhibit 3(b) of the Company's Registration
Statement No. 33-24398 on Form S-1).
4(a) Copy of Note Agreement dated as of August 1,
1993, providing for the issuance and sale of
$25 million of 6.68% term notes ("Term Notes",
incorporated by reference to Exhibit 4.1 to
the Company's Report on Form 10-Q for the
quarter ended September 30, 1993).
4(b) Copy of Term Notes dated August 27, 1993
(incorporated by reference to Exhibit 4.2 to
the Company's Report on Form 10-Q for the
quarter ended September 30, 1993).
<PAGE>
4(c) Copy of Third Amended Line of Credit Loan
Agreement providing for the Issuance of a Line
of Credit Note in the amount of $27,000,000.
4(d) Copy of Line of Credit Note Under Third Amended
Line of Credit Loan Agreement.
9(a) Copy of Cray Family Trust (Incorporated by
reference to Exhibit 1 of Amendment No. 1 to
Schedule 13D of Cloud L. Cray, Jr. dated
November 17, 1995).
16
10(a) Summary of informal cash bonus plan
(incorporated by reference to the summary
contained in the Company's Proxy Statement
dated September 19, 1996, which is
incorporated by reference into Part III of
this Form 10-K).
10(b) Executive Stock Bonus Plan as amended June 15,
1992 (incorporated by reference to Exhibit
10(b) to the Company's Form 10-K for the year
ended June 30, 1992).
10(c) Information contained in the Midwest Grain
Products, Inc. 1996 Annual Report to
Stockholders that is incorporated herein by
reference.
10(d) Copy of Midwest Grain Products, Inc. Stock
Incentive Plan of 1996, as amended as of
August 26, 1996 (incorporated by reference to
Exhibit A to Midwest Grain Products, Inc. Notice
of 1996 Annual Meeting and Proxy Statement under
definitive Schedule 14A filed September 17,
1996).
10(e) Form of Stock Option with respect to stock
options granted under the Midwest Grain
Products, Inc. Stock Incentive Plan of 1996.
10(f) Copy of Midwest Grain Products, Inc. 1996 Stock
Option Plan for Outside Directors, as amended as
of August 26, 1996 (incorporated by reference to
Exhibit B to Midwest Grain Products, Inc. Notice
of 1996 Annual Meeting and Proxy Statement under
definitive Schedule 14A filed September 17,
1996).
22 Subsidiaries of the Company other than
insignificant subsidiaries:
<PAGE>
State of Incorporation
Subsidiary or Organization
---------- ---------------
Midwest Solvents Company
of Illinois, Inc. Illinois
Midwest Grain Pipeline, Inc. Kansas
Midwest Grain Products of
Illinois, Inc. Illinois
Midwest Purchasing Company, Inc. Illinois
25 Powers of Attorney executed by all officers
and directors of the Company who have signed
this report on Form 10-K (incorporated by
reference to the signature pages of this
report).
27 Midwest Grain Products Financial Data Schedule as
at June 30, 1996 and for the year then ended.
No reports on Form 8-K have been filed during the quarter ended June
30, 1996.
17
<PAGE>
SIGNATURES
Pursuant to requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Atchison, State of
Kansas, on this 19th day of September, 1996.
MIDWEST GRAIN PRODUCTS, INC.
By /s/Laidacker M. Seaberg
-------------------------
Laidacker M. Seaberg, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Cloud L. Cray, Jr., Laidacker M. Seaberg
and Robert G. Booe and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and re-substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all reports of
the Registrant on Form 10-K and to sign any and all amendments to such reports
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities & Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the dates indicated.
Name Title Date
---- ----- ----
/s/ Laidacker M. Seaberg
--------------------- President (Principal
Laidacker M. Seaberg Executive Officer) and Director September 19, 1996
/s/ Robert G. Booe
--------------------- Vice President, Treasurer
Robert G. Booe and Controller (Principal
Financial and Accounting Officer) September 19, 1996
/s/ Michael Braude
---------------------
Michael Braude Director September 19, 1996
/s/ Richard J. Bruggen
---------------------
Richard J. Bruggen Director September 19, 1996
/s/ Cloud L. Cray, Jr.
---------------------
Cloud L. Cray, Jr. Director September 19, 1996
<PAGE>
/s/ F. D. Jabara
---------------------
F. D. "Fran" Jabara Director September 19, 1996
/s/ Tom MacLeod
---------------------
Tom MacLeod, Jr. Director September 19, 1996
/s/ Robert J. Reintjes
---------------------
Robert J. Reintjes Director September 19, 1996
/s/ Randy M. Schrick
---------------------
Randy M. Schrick Director September 19, 1996
/s/ Eleanor B. Schwartz
-------------------
Eleanor B. Schwartz Director September 19, 1996
18
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
Consolidated Financial Statement Schedules
(Form 10-K)
June 30, 1996, 1995 and 1994
(With Auditors' Report Thereon)
S-1
<PAGE>
BAIRD,
KURTZ &
DOBSON Report of Independent Accountants
---------------------------------
on Financial Statement Schedule
-------------------------------
Board of Directors and Stockholders
Certified Midwest Grain Products, Inc.
Public Atchison, Kansas
Accountants
In connection with our audit of the financial statements of MIDWEST GRAIN
PRODUCTS, INC. for each of the three years in the period ended June 30, 1996, we
have also audited the following financial statement schedule. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits of the basic financial statements. The schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and regulations and is not a required part of the
consolidated financial statements.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/Baird, Kurtz & Dobson
Kansas City, Missouri
August 9, 1996
City Center Square
Suite 2700
1100 Main
Kansas City,
Missouri 64105
816 221-6300
FAX: 816 221-6380
- ------------------
With Offices in:
Arkansas
Colorado
Kansas
Kentucky
Missouri
Nebraska
Oklahoma
- --------
Member of
Moores Rowland
International
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
VIII. VALUATION AND QUALIFYING ACCOUNTS
Additions
----------------------
Balance, Charged to Charged Balance,
Beginning Costs and to Other Deductions End of
of Period Expenses Accounts Write-Offs Period
--------- ---------- -------- ---------- --------
(In Thousands)
YEAR ENDED JUNE 30, 1996 $85 $214 $14 $285
Allowance for doubtful == === == ===
accounts
YEAR ENDED JUNE 30, 1995 $25 $101 $41 $ 85
Allowance for doubtful == === == ==
accounts
YEAR ENDED JUNE 30, 1994 $25 $ 59 $59 $ 25
Allowance for doubtful == === == ===
accounts
S-3
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
3(a) Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3(a) of the Company's Registration Statement
No. 33-24398 on Form S-1).
3(b) Bylaws of the Company (Incorporated by reference to Exhibit 3(b)
of the Company's Registration Statement No. 33-24398 on Form S-1).
4(a) Copy of Note Agreement dated as of August 1, 1993, providing for
the issuance and sale of $25 million of 6.68% term notes ("Term
Notes", incorporated by reference to Exhibit 4.1 to the Company's
Report on Form 10-Q for the quarter ended September 30, 1993).
4(b) Copy of Term Notes dated August 27, 1993 (incorporated by
reference to Exhibit 4.2 to the Company's Report on Form 10-Q
for the quarter ended September 30, 1993).
4(c) Copy of Third Amended Line of Credit Loan Agreement providing for
the Issuance of a Line of Credit Note in the amount of
$27,000,000.
4(d) Copy of Line of Credit Note Under Third Amended Line of Credit
Loan Agreement.
9(a) Copy of Cray Family Trust (Incorporated by reference to Exhibit 1
of Amendment No. 1 to Schedule 13D of Cloud L. Cray, Jr. dated
November 17, 1995).
10(a) Summary of informal cash bonus plan (incorporated by reference to
the summary contained in the Company's Proxy Statement dated
September 19, 1996, which is incorporated by reference into Part
III of this Form 10-K).
10(b) Executive Stock Bonus Plan as amended June 15, 1992 (incorporated
by reference to Exhibit 10(b) to the Company's Form 10-K for the
year ended June 30, 1992).
10(c) Information contained in the Midwest Grain Products, Inc. 1996
Annual Report to Stockholders that is incorporated herein by
reference.
10(d) Copy of Midwest Grain Products, Inc. Stock Incentive Plan of 1996,
as amended as of August 26, 1996 (incorporated by reference to
Exhibit A to Midwest Grain Products, Inc. Notice of 1996 Annual
Meeting and Proxy Statement under definitive Schedule 14A filed
September 17, 1996).
10(e) Form of Stock Option with respect to stock options granted under
the Midwest Grain Products, Inc. Stock Incentive Plan of 1996.
10(f) Copy of Midwest Grain Products, Inc. 1996 Stock Option Plan for
Outside Directors, as amended as of August 26, 1996 (incorporated
by reference to Exhibit B to Midwest Grain Products, Inc. Notice
<PAGE>
of 1996 Annual Meeting and Proxy Statement under definitive
Schedule 14A filed September 17, 1996).
E-1
Exhibit No. Description
---------- -----------
22 Subsidiaries of the Company other than insignificant subsidiaries:
State of Incorporation
Subsidiary or Organization
---------- ---------------
Midwest Solvents Company of Illinois, Inc. Illinois
Midwest Grain Pipeline, Inc. Kansas
Midwest Grain Products of Illinois, Inc. Illinois
Midwest Purchasing Company, Inc. Illinois
25 Powers of Attorney executed by all officers and directors of the
Company who have signed this report on Form 10-K (incorporated by
reference to the signature pages of this report).
27 Midwest Grain Products Financial Data Schedule as at June 30, 1996
and for the year then ended.
E-2
<PAGE>
<PAGE>
Exhibit 4(c)
THIRD AMENDED LINE OF CREDIT LOAN AGREEMENT
THIS THIRD AMENDED LINE OF CREDIT LOAN AGREEMENT (the "Agreement"),
executed as of this 16th day of July, 1996, by and between MIDWEST GRAIN
PRODUCTS, INC., a corporation organized under the laws of the state of Kansas
and having its principal place of business in Atchison, Kansas ("Borrower"), and
Commerce Bank, N.A., a national banking association, having its principal place
of business in Kansas City, Missouri ("Bank").
WHEREAS, Borrower desires to establish a line of credit with Bank to
provide working capital and capital expenditures; and
WHEREAS, Bank desires to extend such line of credit upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained in this Agreement, the parties agree as follows:
ARTICLE I
Line of Credit
Section 1.1 General Terms. Subject to the terms of this Agreement, Bank
will lend Borrower, from time to time, until the termination hereof, such sums
as Borrower may request, in minimum increments of $100,000, which shall not
exceed in the aggregate principal amount at any one time outstanding the sum of
Twenty Seven Million and no/100 Dollars ($27,000,000.00) (the "Line of Credit
Loan").
Bank's obligation to lend hereunder may be terminated by Bank at any
time in Bank's sole discretion, or if no such termination is made, then on
October 1, 1998. Each advance under the Line of Credit Loan is at the option of
Bank and Bank has no obligation to make advances. In addition this Agreement
shall be deemed to automatically terminate if the occurrence of an event
pursuant to Section 4.1 causes the Line of Credit Note to become immediately due
and payable. The inclusion of monthly interest payments, events of default and
an alternate maturity date does not alter the discretionary nature of the line
of credit.
Section 1.2 Commitment Fee. Borrower shall pay a fee equal to
1/4% per annum on the unused portion of the Line of Credit Loan. Such fee shall
be paid quarterly in arrears.
Section 1.3 Note. Borrower agrees to execute and deliver to Bank the
Line of Credit Note to evidence the Line of Credit Loan. Each advance made
thereunder, together with each repayment made by Borrower, shall be evidenced by
a notation dated the date of the advance or repayment and recorded by Bank on
the schedule appearing on the reverse side of or attached to the Line of Credit
Note. The aggregate unpaid principal amount of the Line of Credit Note set forth
on the schedule shall be conclusively presumed to reflect the amounts advanced
and repaid, and the outstanding principal balance of the Line of Credit Loan.
<PAGE>
Section 1.4 Principal Payment. In the event of a default as defined in
Section 4.1 or on October 1, 1998, the principal balance of the Line of Credit
Note together with all accrued interest shall become immediately due and
payable.
Section 1.5 Interest. If the outstanding balance is less than $500,000,
the line of credit shall bear interest at a per annum rate equal to the Prime
Rate. If the outstanding balance is $500,000 or greater, the line of credit
shall bear interest at the greater of either (1) the Prime Rate, minus 1%, or
(2) the Federal Funds Rate plus 1.50%.
Interest will be payable monthly, in arrears, and at maturity, whether
by acceleration or otherwise. Interest will be computed on the actual days
outstanding based upon a year consisting of 360 days.
"Prime Rate" means the Prime Rate of interest established from time to
time by Bank and designated as such for its internal convenience, and no
representation is made that the Prime Rate is the best, the lowest or a favored
rate of interest. The rate of interest, if tied to the Prime Rate, shall change
with and be effective on the date of each change in the Prime Rate.
"Federal Funds Rate" means the effective Federal Funds Rate as quoted
by the Federal Reserve Bank of New York on a daily basis. The Federal Funds
Rate is adjusted daily.
Section 1.6 Purpose. Borrower represents the purpose of the Line
of Credit Loan is to provide short term working capital and capital
expenditures.
Section 1.7 Disbursements. Bank will credit the proceeds of any
borrowing hereunder to Borrower's deposit account maintained with Bank.
Section 1.8 Condition of Loans. Any advance under the Line of Credit
Note is subject to the condition precedent that no event of default described in
Section 4.1 shall have occurred, and that the Line of Credit has not been
terminated. Each request for a borrowing under the Line of Credit Note shall be
deemed to constitute a representation by Borrower at the time of the request
that no event of default as defined in Section 4.1 exists or is imminent and
that the representations and warranties of Borrower contained in this Agreement
are true in all material respects on or as of the date of borrowing.
ARTICLE II
Warranties and Representations
Section 2.1 Good Standing. The Borrower is a corporation duly organized
and in good standing, under the laws of the state of Kansas, and has the power
to own its property and to carry on its business and is in good standing in each
jurisdiction in which the character of the properties owned by it or in which
the transaction of its business makes such qualifications necessary.
Section 2.2 Authority. The Borrower has full power and authority to
enter into this Agreement, to make the borrowing hereunder, and to execute and
deliver the Line of Credit Note, all of which has been duly authorized by all
proper and necessary corporate action. No consent or approval of stockholders is
required as a condition to the validity of this Agreement or the Line of Credit
Loan.
<PAGE>
Section 2.3 Binding Agreement. This Agreement constitutes, and the Line
of Credit Note when issued and delivered pursuant hereto, for value received,
will constitute, the valid and legally binding obligations of the Borrower in
accordance with all stated terms.
Section 2.4 Litigation. There are no proceedings pending, or, so far as
the officers of the Borrower know threatened, which will materially adversely
affect the financial condition or operations of the Borrower or any subsidiary.
Section 2.5 No Conflicting Agreements. There are no charter, bylaw, or
preference stock provisions of the Borrower and no provision of any existing
mortgage, indenture, contract or agreement binding on the Borrower or affecting
its property, which would conflict with or in any way prevent the execution,
delivery, or carrying out of the terms of this Agreement and of the Line of
Credit Note.
2
Section 2.6 Taxes. The Borrower has filed all Federal, State and
other tax and similar returns and has paid or provided for the payment of all
taxes and assessments due thereunder including, without limitation, all
withholding, FICA and franchise taxes.
Section 2.7 Financial Statements. There have been no material
changes in the Borrower's financial statements dated June 30, 1996.
ARTICLE III
Covenants
So long as this Agreement remains in effect or as long as there is any
principal or interest due on the Line of Credit Note, Borrower agrees as
follows:
Section 3.1 Comply with all Company Covenants as defined and contained
in Section 5 of the Note Agreement dated as of August 1, 1993, between Borrower
and the Principal Mutual Life Insurance Company (the 'Principal Agreement')
including, but not limited to, the following:
(a) Current Ratio. Maintain a Current Ratio of not less
than 1.50 to 1.00.
(b) Consolidated Tangible Net Worth. Maintain
Consolidated Tangible Net Worth at an amount not less
than THE GREATER OF (1) $70,000,000 and (ii) the sum
of $70,000,000 plus 50% of Consolidated Net Income
for the period from and after March 31, 1993 to the
date of determination thereof (considered as a
single accounting period).
(c) Funded Debt. Not permit Consolidated Funded Debt to
exceed 60% of total capitalization.
(d) Debt/Worth. Maintain a ratio of Debt to Tangible Net
Worth of not more than 2.50 to 1.00.
<PAGE>
(e) Fixed Charges Coverage Ratio. Maintain a ratio of
Net Income Available for Fixed Charges to Fixed
Charges of not less than 1.50 to 1.00.
The Company Covenants shall survive any amendment, modification or termination
of the Principal Agreement.
Section 3.2 Taxes, etc. Promptly pay all taxes, assessments and other
government charges (unless such payments are being contested in good faith).
Section 3.3 Insurance. Maintain insurance on all its properties
in such amounts and against such hazards as is customary in Borrower's industry.
Section 3.4 Books and Records. Maintain its books and records
and account for financial transactions in accordance with generally accepted
accounting principals.
Section 3.5 Financial Reporting. Borrower shall furnish Bank
with the following information:
(a) Its annual audited financial statement within 90
days of its fiscal year-end, in a form and prepared
by a certified public accounting firm acceptable to
Bank;
(b) Its quarterly financial statements within 45 days
after the end of each quarter; and
3
(c) Such other information as Bank may reasonably request
from time to time.
Section 3.6 Notification. Notify Bank immediately if it becomes aware
of the occurrence of any Event of Default (as defined under Section 4.1 hereof)
or of any fact, condition, or event that, only with the giving of notice or
passage of time or both, would become an Event of Default, or if it becomes
aware of a material adverse change in the business prospects, financial
condition (including, without limitation, proceedings in bankruptcy, insolvency,
reorganization, or the appointment of a receiver or trustee), or results of
operations of Company, or the failure of Company to observe any of its
undertakings under this Agreement of any other note or agreement binding on
Borrower including, but not limited to, the Principal Agreement.
ARTICLE IV
Defaults
Section 4.1 Events of Default. The entire unpaid balance of the Line of
Credit Note shall become immediately due and payable without demand,
presentment, notice or protest of any kind (all of which are expressly waived),
upon the happening of any of the following events of default:
(a) Nonpayment of any interest or any principal payment
owing under the Line of Credit Note whether at
maturity or otherwise; or
<PAGE>
(b) If any certificate, statement, representation, warranty
or audit furnished by or on behalf of the Borrower in
connection with this Agreement, including those
contained herein, or as an inducement by Borrower to
enter into, modify, extend, or renew this Agreement
shall prove to be false in any material respect, or
if Borrower shall have omitted the listing of a
substantial contingent or unliquidated liability or
claim against Borrower or, if on the date of execution
of this Agreement there shall have been any materially
adverse change in any of the facts disclosed by any
such certificate, statement, representation, warranty
or audit, which change shall not have been disclosed by
Borrower to Bank at or prior to the time of execution;
or
(c) If Borrower shall default in the due performance or
observance of any covenant undertaken by it under this
Agreement; or
(d) Default in the performance of the obligations of
Borrower pursuant to any other note or agreement
binding on Borrower including, but not limited to, the
Principal Agreement; or
(e) Borrower shall be adjudicated a bankrupt, or make a
general assignment for the benefit of its creditors, or
there are instituted by or against Borrower any type of
bankruptcy proceedings or any proceeding for the
liquidation or the termination of Borrower's affairs,
or the appointment of a receiver or trustee for
Borrower or for any of Borrower's assets, or a
properly filed petition for Borrower's reorganization
under the Bankruptcy Code or otherwise is approved, or
Borrower files a petition for arrangement under Chapter
11 of the Bankruptcy Code or any similar statute.
(f) Any judgment or judgments, writ or writs, or warrant or
warrants of attachment, or any similar process or
processes shall be entered or filed against the
Borrower or any Subsidiary or against any of their
respective property or assets and remain unstayed and
undischarged for a period of 60 days from the date
of its entry.
4
Section 4.2 Remedies. If any event of default occurs, Bank may
resort to any remedy existing at law or in equity for the collection of the Line
of Credit Note and enforcement of the covenants and provisions of this
Agreement. Bank's resort to any remedy shall not prevent the concurrent or
subsequent employment of any other remedy.
Section 4.3 Waiver. Any waiver of an event of default by Bank shall not
extend to or affect any subsequent default. No failure or delay by Bank in
exercising any right hereunder shall operate as a waiver nor shall any single or
partial exercise of any right preclude any other right hereunder.
<PAGE>
ARTICLE V
Miscellaneous
Section 5.1 Amendments. This Agreement may be amended or modified in
whole or in part at anytime, if in writing and signed by the parties. Bank may
further consent in writing, or give written waiver to any covenant or event
which might otherwise create a default.
Section 5.2 Delay, Waiver. No omission or delay on the part of Bank in
exercising any right, power, or privilege hereunder shall impair or operate as a
waiver thereof; nor shall any single or partial exercise or any right, power, or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. No waiver by Bank will be
valid unless in writing and signed by Bank and then only to the extent specified
therein. The rights and remedies herein expressly specified are cumulative and
not exclusive of any rights or remedies which Bank would otherwise have.
Section 5.3 Bank. Whenever in this Agreement reference is made to the
Bank, such term shall be deemed for the purpose of benefits, powers, and
privileges hereunder to include any firm, person, or corporation who may be the
holder from time to time of the Note issued hereunder or a participation
therein.
Section 5.4 Governing Law. This Agreement and the Line of Credit
Note shall be construed and interpreted in accordance with the laws of the State
of Missouri.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
MIDWEST GRAIN PRODUCTS INC. COMMERCE BANK, N.A.
By: /s/Ladd M. Seaberg By: /s/Frederick J. Marston
------------------------- ----------------------
Title: President and CEO Title: Vice President
By: /s/Robert G. Booe
-------------------------
Title: Vice President and Chief
Financial Officer
5
<PAGE>
<PAGE>
Exhibit 4(d)
LINE OF CREDIT NOTE
$27,000,000
FOR VALUE RECEIVED, the undersigned, MIDWEST GRAIN PRODUCTS, INC., a Kansas
corporation ("Borrower") hereby promises to pay to the order of Commerce Bank,
N.A. ("Bank") at its offices in Kansas City, Missouri, the aggregate unpaid
principal amount and accrued interest of all borrowings hereunder. The aggregate
unpaid principal amount shall also become immediately due and payable, without
demand or further action on the part of Bank upon the occurrence of an event of
default as set forth in Section 4.1 of the Third Amended Line of Credit Loan
Agreement, as amended, dated as of July 16, 1996 (the "Agreement").
Interest on this note shall be calculated on the actual number of days on the
basis of a year of 360 days. If the outstanding balance is less than $500,000,
the line of credit shall bear interest at a per annum rate equal to the Prime
Rate. If the outstanding balance is $500,000 or greater, the line of credit
shall bear interest at the greater of either (1) the Prime Rate, minus 1 %, or
(2) the Federal Funds Rate plus 1.50%.
Interest will be payable monthly, in arrears, and at maturity, whether by
acceleration or otherwise, beginning August 1, 1996, and on the first day of
each month thereafter. Interest will be computed on the actual days outstanding
based upon a year consisting of 360 days. If any interest payment on this note
shall become due and payable on a day which is not a business day of Bank,
payment shall be made on the next succeeding business day of Bank.
"Prime Rate" means the Prime Rate of interest established from time to time by
Commerce Bank and designated as such for its internal convenience, and no
representation is made that the Prime Rate is the best, the lowest or a favored
rate of interest. The rate of interest, if tied to the Prime Rate, shall change
with and be effective on the date of each change in the Prime Rate.
"Federal Funds Rate" means the effective Federal Funds Rate as quoted by the
Federal Reserve Bank of New York on a daily basis. The Federal Funds Rate is
adjusted daily.
So long as the Agreement has not been terminated, Borrower may, from the date of
this note through October 1, 1998 borrow, repay and reborrow sums, at any one
time outstanding, not to exceed $27,000,000. All advances and repayments
hereunder shall be endorsed on the reverse hereof (or an attached schedule) by
the Bank or holder, and between the undersigned and Bank, such endorsements and
the balances derived from such endorsements shall be conclusively presumed to
reflect the amounts advanced and repaid hereunder and the then outstanding and
unpaid balance of sums advanced or readvanced hereunder.
The undersigned hereby waives presentment, protest, demand and notice of
dishonor or default.
<PAGE>
This note is issued pursuant to the terms of the Agreement, to which Agreement,
and any amendments thereto, reference is hereby made for a statement of the
terms and conditions under which this borrowing was made, and is to be repaid.
MIDWEST GRAIN PRODUCTS, INC.
By: /s/Ladd M. Seaberg
------------------------------
Title: President and CEO
By: /s/Robert G. Booe
------------------------------
Title: Vice President and Chief
Financial Officer
<PAGE>
<PAGE>
Exhibit 10(c)
SELECTED FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
YEARS ENDED JUNE 30
(in thousands, except per share amounts)
1996 1995 1994 1993 1992
INCOME STATEMENT DATA:
NET SALES $194,638 $180,252 $185,968 $163,426 $155,794
COST OF SALES 190,173 159,149 148,320 130,551 127,883
- --------------------------------------------------------------------------------
GROSS PROFIT 4,465 21,103 37,648 32,875 27,911
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 9,001 10,553 12,212 10,677 9,794
OTHER OPERATING INCOME (EXPENSE) 159 (107) (669) (264) 17
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (4,377) 10,443 24,767 21,934 18,134
OTHER INCOME (LOSS), NET 1,309 (4,225) 924 1,045 1,191
INTEREST EXPENSE (2,556) (606) (127) (71) (93)
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (5,624) 5,612 25,564 22,908 19,232
PROVISION (CREDIT) FOR INCOME TAXES (2,218) 2,273 9,713 8,278 7,020
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (3,406) 3,339 15,851 14,630 12,212
DISCONTINUED OPERATIONS 1,665 1,294
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES--POST-RETIREMENT BENEFIT (2,241)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES--INCOME TAXES 2,182
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ (3,406) $ 3,339 $ 15,851 $ 6,236 $ 13,506
================================================================================
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations (.35) .34 1.62 1.50 1.25
Discontinued operations .17 .13
Cumulative effect of changes in accounting principles (.01)
- --------------------------------------------------------------------------------
$ (.35) $ .34 $ 1.62 $ 1.66 $ 1.38
================================================================================
Cash dividends per common share .50 .50 .50 .48
Weighted average common
shares outstanding 9,765 9,765 9,765 9,765 9,765
BALANCE SHEET DATA:
Working capital 37,113 26,955 21,951 41,580 37,021
Total Assets 172,785 176,749 168,146 126,671 115,626
Long-term debt,
less current maturities 40,933 38,908 25,000 50
Stockholders' equity $109,222 $112,628 $114,173 $103,206 $ 91,853
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items in the Company's consolidated
statements of income expressed as percentages of net sales for the
years indicated and the percentage change in the dollar amount of
such items compared to the prior period:
Percentage of Net Sales Percentage
Years Ended June 30 Increase (Decrease)
- --------------------------------------------------------------------------------
Fiscal 1996 Fiscal 1995
1996 1995 1994 Over 1995 Over 1994
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 8.0% (3.1)%
Cost of sales 97.7 88.3 79.8 19.5 7.3
- --------------------------------------------------------------------------------
Gross profit 2.3 11.7 20.2 (78.8) (43.9)
Selling, general
and administrative expenses 4.6 5.8 6.6 (14.7) (13.6)
Other operating income (loss) .1 (.1) (.3) 248.6 84.0
- --------------------------------------------------------------------------------
Income from operations (2.2) 5.8 13.3 (141.9) (57.8)
Other income (expense) (.6) (2.7) .4 (74.2) (706.1)
- --------------------------------------------------------------------------------
Income from continuing opera-
tions before income taxes (2.8) 3.1 13.7 (200.2) (78.0)
Provision for income taxes (1.1) 1.2 5.2 (197.6) (76.6)
- --------------------------------------------------------------------------------
Income from continuing opera-
tions (1.7)% 1.9% 8.5% (202.0)% (78.9)%
================================================================================
Fiscal 1996 Compared to Fiscal 1995
The Company experienced a $3,406,000 net loss in fiscal 1996 compared to
net income of $3,339,000 in fiscal 1995. The decline, which actually began in
the third quarter of fiscal 1995, was due primarily to unusually high raw
material costs for grain in the face of greatly increased competition from
foreign exporters of vital wheat gluten and a relatively flat market for fuel
grade alcohol. The combination of these factors significantly restricted the
ability of the Company to adjust the price of its gluten and fuel alcohol to
compensate for the increased grain costs. In response to these negative
conditions, the Company developed an intense cash management program to reduce
costs and improve cash flow, including reductions in management and
administrative compensation and benefits, and strategies to maximize operating
results by maintaining a high degree of flexibility in targeting production
levels and product sales mixes.
<PAGE>
The upward surge in grain prices was driven by a worldwide shortage of
grain supplies, and concerns about crop conditions during the 1996 season due
principally to weather-related factors. As a result, the company's corn and milo
costs averaged 44% more per bushel in fiscal 1996 compared to the prior year.
Wheat costs in fiscal 1996 averaged 32% more per bushel versus the average in
fiscal 1995. While the Company used only 2.3 million more bushels of grain in
fiscal
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
1996, its total combined cost for wheat, corn and milo for the year rose
approximately $27 million above grain expenditures the prior year. The Company's
ability to adjust grain procurement strategies regularly through a strengthened
risk management program prevented this increase from being substantially higher.
Wheat gluten prices failed to adjust to the significant rise in wheat
costs, while record amounts of gluten from the European Union (E.U.) poured into
the United States. Profits from their highly subsidized and protected wheat
starch business have allowed European producers to dump their surpluses of
gluten, a co-product, in the U.S. market at prices below U.S. production costs.
Low U.S. tariff rates on wheat gluten provide little deterrence to this
practice, while high tariffs in Europe effectively prohibit non-European Union
member countries from competing in the wheat gluten and wheat starch markets
there. A measure that could help rectify this problem has been included in a
grains agreement between the U.S. and E.U. Ratified on July 22, 1996, the
agreement was part of a compensation package which the U.S. requested following
the enlargement of the E.U. from 12 to 15 countries in January, 1995. It states
that "If the market share of European Community origin wheat gluten exports into
the United States increases in comparison to their average 1990-1992 market
share, the European Commission and the United States government shall consult
with a view to finding a mutually acceptable solution." Consultations between
the U.S. and the E.U. have been requested, and the Company is hopeful that they
will ultimately result in the creation of a more level playing field. Until the
intensity of competitive conditions subside, pursuant to the outcome of
consultations or otherwise, and wheat costs substantially decrease, the Company
does not anticipate utilizing a substantial portion of it gluten production
capacity.
Unit sales of alcohol products in fiscal 1996 rose above the prior year's
amount. The increase occurred in unit sales of food grade alcohol, which is
sold for beverage and industrial applications. This more than offset a decline
in unit sales of fuel grade alcohol, which is sold as an octane additive and
oxygenate commonly known as ethanol. The reduction in fuel alcohol sales was
implemented by the Company due to depressed fuel alcohol prices and
exceptionally high grain costs. Fuel alcohol prices remained flat due to
increased capacities throughout the industry and low gasoline prices during a
substantial portion of fiscal 1996. Due to the significant grain cost
increases, combined with adverse market conditions for fuel alcohol and wheat
gluten, operations at the Company's Pekin plant were halted for an extended
maintenance shutdown during the last month of fiscal 1996. This resulted in
reduced production of all of the Company's principal products. Since then, the
Company has begun to see indications of strengthened demand in the fuel alcohol
market, as well as possibilities for increasing its presence in the food grade
alcohol markets.
<PAGE>
Demand for the Company's distillers feed, a principal by-product of the
alcohol production process, also remains healthy. In fiscal 1996, unit sales of
distillers feed rose above the prior year as the result of increased alcohol
production.
The Company's unit sales of wheat starch in fiscal 1996 continued the
upward pattern experienced over the past several years, rising noticeably above
the fiscal
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
1995 total. The increase resulted from higher volumes of unmodified, modified
and specialty wheat starches, which was made possible by a 70% increase in the
Company's total starch production capacity. Completion of the additional
capacity occurred during the first month of fiscal 1996 and greatly improves the
Company's ability to meet future increases in demand for wheat starch.
The Company believes it is in an excellent position to realize significant
growth in all principal product categories with a return to more favorable
market conditions and lower grain prices. This belief is based on the Company's
expanded production capacities, which were completed at the start of fiscal
1996, combined with its low debt-to-equity ratio and strong working capital.
Net sales in fiscal 1996 increased by approximately $14.4 million above
sales in fiscal 1995. The increase was principally due to increased sales of
alcohol products and alcohol by-products, the latter consisting mainly of
distillers feeds, and higher sales of premium wheat starch. A 15% increase in
total alcohol sales resulted from strong demand for food grade beverage and
industrial alcohol, mainly in the second and third quarters. Sales of
distillers feed climbed 45% compared to the prior year. The rise in wheat
starch sales resulted from strengthened market demand. These increases were
partially offset by a 21% decrease in sales of wheat gluten due to intense
competitive pressures from European gluten producers.
The cost of sales in fiscal 1996 increased by approximately $31.0 million
above the cost of sales in fiscal 1995. The principal cause was a nearly $27.0
million increase in raw material costs for grain. Other manufacturing cost
increases principally included a $5.2 million increase in depreciation and a
$2.4 million rise in operating costs associated with increased energy
requirements resulting from the Company's expanded production facilities at its
Pekin, Illinois plant. These increases were partially offset by a $4.3 million
decrease from excess costs incurred at the Pekin plant during 1995 to maintain
full operations during the expansion project.
Selling, general and administrative expenses in fiscal 1996 were down
approximately $1.6 million compared to the prior year. This principally was due
to a decrease of almost $1.2 million resulting from reductions in compensation,
and costs for the Company's management and employee incentive programs.
The consolidated effective income tax rate is consistent for all periods.
The general effects of inflation were minimal.
Other income amounted to $1.3 million compared to a loss of $4.2 in fiscal
1995, which was primarily due to the $5.0 million write-off of a coal-fired
boiler at the Company's Pekin plant during 1995.
<PAGE>
Interest expense increased as most of the new production facilities in
Pekin came on line during fiscal 1995. Therefore, far less interest was
capitalized as part of these projects.
As the result of the foregoing factors, the Company experienced a net loss
of $3,406,000 in fiscal 1996 compared to net income of $3,339,000 in fiscal
1995.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Fiscal 1995 Compared to Fiscal 1994
The Company's sales and earnings in fiscal 1995 declined significantly
compared to these same results in fiscal 1994. Lower unit sales of vital wheat
gluten combined with reduced efficiencies associated with the start-up of new
distillery equipment at the Company's Pekin, Illinois plant were principal
causes for the decrease.
The drop in wheat gluten volume resulted from reduced marketing
opportunities due to increased gluten imports from Europe. The high unit sales
of wheat gluten which the Company experienced in the latter half of fiscal 1994
resulted from an exceptionally large increase in demand during that period. This
situation was caused by a worldwide shortage of gluten due to poor quality, low
protein-yielding wheat. After a return to more normal crop conditions during the
summer of 1994, the U.S. market began experiencing a substantial rise in
imported wheat gluten from the European Union, where wheat starch and gluten
capacities underwent sizeable increases.
The Company's unit sales of alcohol products in fiscal 1995 were up
significantly compared to the prior year's amount. Substantial increases
occurred in unit sales of both fuel grade alcohol, which is sold as an octane
additive and oxygenate commonly known as ethanol, and food grade alcohol, which
is sold for beverage, industrial and commercial applications. The increase in
the food grade category resulted from higher unit sales of beverage alcohol,
which more than offset a slight decrease in industrial alcohol volume. That
decrease resulted from a change in the Company's alcohol production mix in the
second and third quarters, which was required to satisfy heightened customer
needs in the fuel market during those periods. Demand in the food grade markets,
however, remained strong. The Company's ability to meet this demand was enhanced
by the availability of additional production capacity at its Pekin plant. Growth
opportunities in the fuel grade alcohol market were expected to occur at a more
gradual rate than previously anticipated due to the reversal in the spring of
1995 of an Environmental Protection Agency regulation requiring that renewable
fuel oxygenates such as grain-based ethanol play a larger role in satisfying
future Clean Air Act requirements in certain areas of the country.
Designed to substantially increase Midwest Grain's total alcohol production
capacity, the distillery expansion was scheduled to be on line by January, 1995.
However, the completion was delayed by unanticipated mechanical equipment
problems with two new distillery feed dryers. At the end of the third quarter of
fiscal 1995, intermediate repairs to the dryers were completed by the equipment
supplier. Final repairs to the equipment were scheduled to be completed early in
the second quarter of fiscal 1996, substantially improving production
<PAGE>
capabilities. However, due to depressed market prices and increased grain costs,
the Company expected its production of fuel grade alcohol to be minimized until
more favorable conditions materialized.
The Company's unit sales of wheat starch in fiscal 1995 rose considerably
above the prior year's level. The increase resulted mainly from higher volumes
of modified wheat starches, which are sold in a variety of special market
niches. A 70% increase in wheat starch
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
production capacity, that was originally slated for completion at the Pekin
plant toward the end of the third quarter of fiscal 1995, was delayed until the
end of the fourth quarter. The postponement was in part due to the delay in the
distillery expansion. With the completion of additional wheat starch capacity,
the Company's ability to satisfy current and future demand for modified and
unmodified wheat starch became greatly enhanced.
Net sales in fiscal 1995 decreased by approximately $5.7 million below
sales in fiscal 1994. The decrease was principally due to lower sales of vital
wheat gluten, which fell nearly 30% as the result of increased foreign
competition and a reduction in market demand compared to the extraordinary
demand experienced in the latter half of fiscal 1994.
A 16% increase in sales of alcohol products compared to the prior year
principally resulted from a significant jump in fuel alcohol volume. Sales of
distillers feeds, a by-product of the alcohol production process, rose modestly
compared to feed sales in 1994. A continued increase in sales of modified wheat
starches pushed total wheat starch sales approximately 11% above the prior
year's level.
During fiscal 1995 and continuing into fiscal 1996, grain costs increased
to unusually high levels in the face of intense competition from foreign
exporters of vital wheat gluten and relatively flat markets for fuel grade
ethanol and poor markets for distillers feeds. The combination of these factors
significantly restricted the ability of the Company to adjust the price of its
gluten, fuel grade alcohol and distillers feeds to compensate for the high grain
costs.
The cost of sales in fiscal 1995 rose by approximately $10.8 million above
cost of sales in fiscal 1994. Principal causes were increased raw material costs
for grain, a $2.6 million increase in maintenance and repair costs and a $2.2
million increase in energy costs. The higher maintenance and repair costs were
mainly due to work associated with the distillery expansion at the Company's
Pekin plant. The higher energy and raw material costs resulted mainly from
increased alcohol production, which was made possible by the distillery
expansion in the second half of fiscal 1995, and increased grain prices. Other
manufacturing cost increases were due to higher costs for chemicals and
additives resulting from increased production of modified wheat starches, and
depreciation of buildings and equipment.
Selling, general and administrative expenses in fiscal 1995 were down
approximately $1.7 million compared to the prior year. This principally was due
<PAGE>
to a decrease of approximately $2 million in the Company's management and
employee incentive programs as a result of the decline in the company's earnings
performance. These reductions helped to more than offset increases which were
incurred generally throughout the remainder of the expense categories.
Other income in fiscal 1995 was down approximately $5.1 million compared to
the prior year. This resulted primarily from a non-recurring write-off for the
remaining book value of an inactive coal-fired boiler in the fourth quarter
amounting to $5.0 million. This write-off was made after
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
negotiations with a local utility culminated in 15- and 7-year fixed pricing
agreements for steam heat and electricity, respectively, with the option to
renew the steam heat agreement for an additional 19 years.
The consolidated effective income tax rate increased as a result of state
tax rates. The general effects of inflation were minimal.
As the result of the foregoing factors, the Company realized net income of
$3,339,000 in fiscal 1995 compared to net income of $15,851,000 in fiscal 1994.
QUARTERLY FINANCIAL INFORMATION
Generally, the Company's sales are not seasonal except for variations affecting
fuel grade alcohol, beverage alcohol and gluten sales. In recent years, demand
for fuel grade alcohol has tended to increase during the fall and winter to
satisfy clean air standards during those periods. Beverage alcohol sales tend to
peak in the fall as distributors order stocks for the holiday season, while
gluten sales tend to increase during the second half of the fiscal year as
demand increases for hot dog buns and similar bakery products. The following
table shows quarterly information for each of the years ended June 30, 1996 and
1995.
Quarter Ending
- --------------------------------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30 Total
- --------------------------------------------------------------------------------
(in thousands except per share amounts)
FISCAL 1996
Sales $47,160 $55,751 $53,871 $37,856 $194,638
Gross profit (937) 3,619 1,304 479 4,465
Net income (loss) (2,377) 195 (410) (814) (3,406)
Earnings (loss) per share (.25) .02 (.04) (.08) (.35)
FISCAL 1995
Sales $45,984 $44,488 $42,005 $47,775 $180,252
Gross Profit 7,650 6,734 2,973 3,746 21,103
Net Income (Loss) 2,756 2,237 298 (1,952) 3,339
Earnings (Loss) Per Share .28 .23 .03 (.20) .34
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of
the Company's liquidity and financial condition:
At June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 3,759 $ 460
Working capital 37,113 26,955
Amounts available under lines of credit 18,600 12,000
Note payable and long-term debt 40,933 38,908
Stockholders' equity $109,222 $112,628
- --------------------------------------------------------------------------------
Although the Company's income statement reflects losses due to factors
previously mentioned, a number of actions have enabled the Company to continue
to generate positive cash flows, maintain a strong working capital position and
a relatively low debt-to-equity ratio during this period of adversity. These
include stringent cost reduction measures, reductions in capital expenditures
due to the completion of the Pekin plant expansion program, the suspension of
quarterly cash dividends to stockholders and changes in production, purchasing,
and marketing strategies.
Due to the recent completion of major capital improvement projects at both
plants, there will not be significant capital improvement requirements in the
near future. At June 30, 1996, the Company had $400,000 committed to
improvements and replacements of existing equipment.
While grain costs have begun to decline, the current high cost of grain and
low selling prices are expected to continue to negatively impact the Company's
liquidity in the near term. However, management believes that the strategies
which continue to be implemented, together with the Company's strong working
capital and available lines of credit, should enable the Company to weather
current adversities and remain well positioned for a return to more favorable
conditions.
17
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas
We have audited the accompanying consolidated balance sheets of MIDWEST
GRAIN PRODUCTS, INC. as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MIDWEST
GRAIN PRODUCTS, INC. as of June 30, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
/s/Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
August 9, 1996
18
<PAGE>
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
NET SALES $194,638 $180,252 $185,968
COST OF SALES 190,173 159,149 148,320
- --------------------------------------------------------------------------------
GROSS PROFIT 4,465 21,103 37,648
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 9,001 10,553 12,212
- --------------------------------------------------------------------------------
(4,536) 10,550 25,436
OTHER OPERATING INCOME (EXPENSE) 159 (107) (669)
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (4,377) 10,443 24,767
OTHER INCOME (LOSS), NET 1,309 (4,225) 924
INTEREST EXPENSE (2,556) (606) (127)
- --------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (5,624) 5,612 25,564
PROVISION (CREDIT) FOR INCOME TAXES (2,218) 2,273 9,713
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ (3,406) $ 3,339 $ 15,851
================================================================================
EARNINGS (LOSS) PER COMMON SHARE $ (.35) $ .34 $ 1.62
================================================================================
See Notes to Consolidated Financial Statements
19
<PAGE>
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,759 $ 460
Receivables (less allowance for
doubtful accounts; 1996--$285; 1995--$85) 18,365 21,550
Notes receivable 919
Inventories 19,913 14,690
Prepaid expenses 573 560
Deferred income taxes 1,531 875
Income taxes receivable 3,063 2,338
- --------------------------------------------------------------------------------
Total Current Assets 47,204 41,392
- --------------------------------------------------------------------------------
PROPERTY & EQUIPMENT, at cost 210,304 206,336
Less accumulated depreciation 85,155 71,424
- --------------------------------------------------------------------------------
PROPERTY & EQUIPMENT, NET 125,149 134,912
- --------------------------------------------------------------------------------
OTHER ASSETS 432 445
- --------------------------------------------------------------------------------
TOTAL ASSETS $172,785 $176,749
================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,416 $ 7,807
Accrued expenses 3,675 6,630
- --------------------------------------------------------------------------------
Total Current Liabilities 10,091 14,437
- --------------------------------------------------------------------------------
LONG-TERM DEBT 40,933 38,908
- --------------------------------------------------------------------------------
POST-RETIREMENT BENEFITS 5,945 5,449
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES 6,594 5,327
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Preferred, 5% non-cumulative, $10 par value; authorized
1,000 shares; issued and outstanding 437 shares 4 4
Common, no par; authorized 20,000,000 shares; issued
and outstanding 9,765,172 6,715 6,715
Additional paid-in capital 2,485 2,485
Retained earnings 100,018 103,424
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 109,222 112,628
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $172,785 $176,749
================================================================================
See Notes to Consolidated Financial Statements
20
<PAGE>
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Total
(in thousands)
- --------------------------------------------------------------------------------
BALANCE, JUNE 30, 1993 $4 $6,715 $2,485 $ 94,002 $103,206
1993 net income 15,851 15,851
Payment of cash dividends
of $.50 per share (4,884) (4,884)
- --------------------------------------------------------------------------------
BALANCE, JUNE 30 1994 4 6,715 2,485 104,969 114,173
1995 net income 3,339 3,339
Payment of cash dividends
of $.50 per share (4,884) (4,884)
- --------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 4 6,715 2,485 103,424 112,628
1996 net loss (3,406) (3,406)
- --------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 $4 $6,715 $2,485 $100,018 $109,222
================================================================================
See Notes to Consolidated Financial Statements
21
<PAGE>
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(3,406) $3,339 $15,851
Items not requiring (providing) cash:
Depreciation 13,854 8,681 7,160
(Gain) loss on sale of assets (41) 4,696 (513)
Deferred income taxes 611 (628) (742)
Changes in:
Accounts receivable 3,185 (1,198) (2,452)
Inventories (5,223) (1,461) (2,356)
Accounts payable 4 1,780 (111)
Income taxes (receivable) payable (725) (3,570) 993
Other (1,238) (929) 985
- --------------------------------------------------------------------------------
Net cash provided by operating activities 7,021 10,710 18,815
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property & equipment (5,516) (38,870) (45,690)
Proceeds from sale of equipment 71 615 738
Proceeds from notes receivable 919 645 1,089
Change in current & non-current investments, net 14,504 (11,260)
- --------------------------------------------------------------------------------
Net cash used in investing activities (4,526) (23,106) (55,123)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments on long-term debt (50)
Proceeds from issuance of long-term debt 2,025 13,908 25,000
Dividends paid (1,221) (4,884) (4,884)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 804 9,024 20,066
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 3,299 (3,372) (16,242)
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR 460 3,832 20,074
- --------------------------------------------------------------------------------
CASH & CASH EQUIVALENTS, END OF YEAR $ 3,759 $ 460 $ 3,832
================================================================================
See Notes to Consolidated Financial Statements
22
<PAGE>
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1: Nature of Operations and
Summary of Significant
Accounting Policies
Nature of Operations. The activities of Midwest Grain Products, Inc. and
its subsidiaries consist of production of vital wheat gluten, premium wheat
starch, alcohol products and flour mill products. The Company sells its products
on normal credit terms to customers in a variety of industries located primarily
throughout the United States. Through its wholly-owned subsidiaries, the Company
operates in Atchison, Kansas and Pekin, Illinois (Midwest Grain Products of
Illinois, Inc.). Additionally, Midwest Grain Pipeline, Inc., another
wholly-owned subsidiary, supplies natural gas to the Company.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements include
the accounts of Midwest Grain Products, Inc. and all subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Inventories. Inventories are stated at the lower of cost or market on the
first-in, first-out (FIFO) method.
Property and Equipment. Depreciation is computed using both straight-line
and accelerated methods over the estimated useful lives of the assets. The
Company capitalizes interest costs as a component of construction in progress,
based on the weighted average rates paid for long-term borrowing. Total interest
incurred each year was:
Years Ended June 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Interest costs capitalized $ 364 $1,570 $1,328
Interest costs charged to expense 2,556 606 127
- --------------------------------------------------------------------------------
$2,920 $2,176 $1,455
================================================================================
Earnings Per Common Share. Earnings per common share is based upon the
weighted average number of shares and common share equivalents, except when
anti-dilutive, totaling 9,765,172 outstanding for each year.
Cash Equivalents. The company considers all liquid investments with
maturities of three months or less to be cash equivalents.
<PAGE>
Income Taxes. Deferred tax liabilities and assets are recognized for the
tax effect of the differences between the financial statement and tax basis of
assets and liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will not be
realized.
Note 2: Inventories
Inventories consist of the following:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Alcohol and spirits $ 9,830 $ 4,035
Unprocessed grain 5,203 5,785
Operating Supplies 2,632 2,645
Gluten 1,208 1,524
By-products and other 1,040 701
- --------------------------------------------------------------------------------
$19,913 $14,690
23
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 3: Property and Equipment
Property and equipment consists of the following:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Land, buildings and improvements $ 17,411 $ 17,568
Transportation equipment 1,166 1,323
Machinery and equipment 186,154 166,912
Construction in progress 5,573 20,533
- --------------------------------------------------------------------------------
210,304 206,336
Less accumulated depreciation 85,155 71,424
- --------------------------------------------------------------------------------
$125,149 $134,912
================================================================================
<PAGE>
Note 4: Accrued Expenses
Accrued expenses consist of the following:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Excise taxes $ 236 $ 602
Employee benefit plans (Note 10) 374 998
Salaries and wages 770 1,138
Dividends declared 1,221
Property taxes 519 573
Insurance 991 1,258
Interest 696 782
Other expenses 89 58
- --------------------------------------------------------------------------------
$3,675 $6,630
================================================================================
Note 5: Long-Term Debt
Long-term debt consists of the following:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Senior notes payable $25,000 $25,000
Line of credit 15,000 13,000
Other 933 908
- --------------------------------------------------------------------------------
Long-term portion $40,933 $38,908
================================================================================
The unsecured senior notes payable are payable in annual installments of
$2,273,000 from 1999 through 2008 with the final principal payment of $2,270,000
due in 2009. Interest is payable semiannually at 6.68% per annum for the
fifteen-year term of the notes.
At June 30, 1996, the Company had a $27 million unsecured revolving line of
credit expiring on October 1, 1997, with interest at 1% below prime on which
there was $15.0 million in borrowings at June 30, 1996. Subsequent to year end,
the maturity date of this line of credit was extended to October 1, 1998. All
other terms remain the same. The Company had four additional lines of credit
totaling $6.6 million expiring on dates through September 1,1997, with interest
rates varying from prime to 1% below prime on which there were no borrowings.
In connection with the above borrowings, the Company, among other
covenants, is required to maintain certain financial ratios, including a current
ratio of 1.5 to 1, minimum consolidated tangible net worth of $78 million and a
debt service coverage ratio of 1.5 to 1.
The fair value of the senior notes payable debt, based upon the borrowing
rate of 7.55% available to the Company at June 30, 1996, was $24,000,000.
<PAGE>
Aggregate annual maturities of long-term debt at June 30, 1996 are as
follows:
(in thousands)
1997 $ 0
1998 15,823
1999 2,296
2000 2,335
2001 2,298
Thereafter 18,181
-----------------------------------------------
$40,933
===============================================
24
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 6: Income Taxes
The provisions (credit) for income taxes are comprised of the following:
Years Ended June 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Income taxes currently payable (receivable) $(2,829) $2,901 $10,455
Income taxes deferred 611 (628) (742)
- --------------------------------------------------------------------------------
$(2,218) $2,273 $ 9,713
================================================================================
The tax effects of temporary differences related to deferred taxes shown on
the consolidated balance sheets are as follows:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 156 $ 244
Post-retirement liability 2,378 2,179
Insurance accruals 1,002 647
State operating loss carry forwards 341
Other 337 137
- --------------------------------------------------------------------------------
4,214 3,207
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (8,857) (7,197)
Deferred gain on involuntary conversion (420) (462)
- --------------------------------------------------------------------------------
(9,277) (7,659)
- --------------------------------------------------------------------------------
Net deferred tax liability $(5,063) $(4,452)
================================================================================
<PAGE>
The above net deferred tax liability is presented on the consolidated
balance sheets as follows:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Deferred tax asset - current $ 1,531 $ 875
Deferred tax liability - long-term (6,594) (5,327)
- --------------------------------------------------------------------------------
Net deferred tax liability $(5,063) $(4,452)
================================================================================
No valuation allowance has been recorded at June 30, 1996 or 1995.
A reconciliation of the provision for income taxes at the normal statutory
federal rate to the provision (credit) included in the accompanying consolidated
statements of operations is shown below:
Years Ended June 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
"Expected" provision (credit)
at federal statutory rate (34%) $(1,912) $1,908 $8,694
Increases (decreases) resulting from:
Effect of state income taxes (236) 223 760
Other (70) 142 259
- --------------------------------------------------------------------------------
Provision (credit) for income taxes $(2,218) $2,273 $9,713
================================================================================
Note 7: Capital Stock
The Common Stock is entitled to elect four out of the nine members of the
Board of Directors, while the Preferred Stock is entitled to elect the remaining
five directors. Holders of Common Stock are not entitled to vote with respect to
a merger, dissolution, lease, exchange or sale of substantially all of the
Company's assets, or on an amendment to the Articles of Incorporation, unless
such action would increase or decrease the authorized shares or par value of the
Common or Preferred Stock, or change the powers, preferences or special rights
of the Common or Preferred Stock so as to affect the holders of Common Stock
adversely.
25
<PAGE>
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 8: Other Operating Income (Expense)
Other operating income (expense) consists of the following:
Years Ended June 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Truck operations $136 $(222) $ (88)
Warehousing and storage operations (32) 41 (632)
Miscellaneous 55 74 51
- --------------------------------------------------------------------------------
$159 $(107) $(669)
================================================================================
Note 9: Energy Commitment
During fiscal 1995, the Company negotiated an agreement to purchase steam
heat and electricity from a utility for its Illinois operations. Steam heat will
be purchased for the next 15 years for a minimum monthly charge of $114,000,
with a declining fixed charge for purchases in excess of the minimum usage.
Electricity purchases will occur at fixed rates through May 31, 2002. In
connection with the agreement, the Company leased land to the utility company
for 15 years so it could construct a co-generation plant at the Company's
Illinois facility. The Company has also agreed to reimburse the utility for the
net book value of the plant if the lease is not renewed for an additional 19
years. The estimated net book value of the plant would be $10.6 million at the
date.
As a result of the above agreements, the Board approved the disposal of the
coal boiler which previously supplied the majority of the Illinois plant's
energy needs. The Company recorded the estimated effect of the disposal as a
non-recurring other expense of approximately $5.0 million during the fiscal year
ended June 30, 1995.
Note 10: Employee Benefit Plans
Pension Plan. The Company has a noncontributory defined benefit pension
plan covering union employees. The plan provides benefits based on the
participants' years of service. The Company only contributes amounts deductible
for federal income tax purposes.
<PAGE>
Pension cost included the following components:
Years Ended June 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Service cost-benefits earned during year $ 54 $ 58 $ 53
Interest cost on projected benefit
obligations 150 144 142
Actual investment income earned on plan
assets (257) (233) (83)
Amortization of transition liability and
difference between actual and expected
return on plan assets 133 121 (28)
- --------------------------------------------------------------------------------
Pension cost $ 80 $ 90 $ 84
================================================================================
The funded status of the plan is as follows:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Accumulated benefit obligations, including vested
benefits of $2,183 and $2,078 $2,191 $2,082
================================================================================
Plan assets at fair value $2,071 $1,888
Projected benefit obligations for participants'
service rendered to date 2,191 2,082
- --------------------------------------------------------------------------------
Projected benefit obligations in excess of plan's
assets (120) (194)
Unrecognized gains (75) (30)
Unrecognized prior service cost 57 64
Unrecognized net obligation at July 1, 1987 being
recognized over the participants' average
remaining service period 106 124
Adjustment required to recognize the minimum
liability (88) (158)
- --------------------------------------------------------------------------------
Minimum pension liability $ (120) $ (194)
================================================================================
26
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Plan assets are invested in cash equivalents, U.S. Government securities,
corporate bonds, fixed income funds and common stocks.
<PAGE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5%. The expected long-term rate of return on
the plan's assets was 8.0%.
Employee Stock Ownership Plans. The Company and its subsidiaries have
employee stock ownership plans covering all employees after certain eligibility
requirements are met. Contributions to the plans totaled $374,000, $998,000 and
$1,323,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
Contributions are made in the form of cash and/or additional shares of common
stock.
Post-Retirement Benefit Plan. The Company and its subsidiaries provide
certain post-retirement health care and life insurance benefits to all
employees. The liability for such benefits is unfunded.
The status of the Company's plans at June 30, 1996 and 1995 was as follows:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Accumulated post-retirement benefit obligations:
Retirees $3,360 $3,374
Active plan participants 1,526 2,237
- --------------------------------------------------------------------------------
Unfunded accumulated obligation 4,886 5,611
Unrecognized actuarial gain (loss) 1,059 (162)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $5,945 $5,449
================================================================================
Net post-retirement benefit cost included the following components:
June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Service cost $159 $201
Interest cost 424 414
- -------------------------------------------------------------------------------
$583 $615
===============================================================================
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) is assumed to be 10.0%
(compared to 13.0% assumed for 1995) reducing to 9.0% over five years and 6.0%
over 23 years. A one percentage point increase in the assumed health care cost
trend rate would have increased the accumulated benefit obligation by $352,000
at June 30, 1996 and the service and interest cost by $42,000 for the year then
ended.
A weighted average discount rate of 8.0% was used in determining the
accumulated benefit obligation.
<PAGE>
Stock Incentive Plan. During fiscal 1996, the Company adopted, subject to
stockholder approval, a stock incentive plan which permits the issuance of stock
awards, options and stock appreciation rights to selected employees of the
Company. The plan reserves 450,000 shares of common stock for grant and provides
that the term of each award be determined by the committee of the Board of
Directors charged with administering the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price may not be less than the fair
market value of a share on the date of the grant. In January 1996, the Company
granted 90,000 stock options at $14 per share, exercisable in installments over
a five year period. All options are outstanding at June 30, 1996.
27
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 11: Operating Leases
The Company has several noncancellable operating leases for railcars which
expire from August 1996 through October 1999. The leases generally require the
Company to pay all service costs associated with the railcars. Rental payments
include minimum rentals plus contingent amounts based on mileage.
Future minimum lease payments at June 30, 1996 are as follows:
(in thousands)
1997 $1,645
1998 1,550
1999 1,312
2000 398
-----------------------------------------------
future minimum lease payments $4,905
===============================================
Rental expense for all operating leases with terms longer than one month
totaled $1,546,000, $951,000 and $686,000 for the years ended June 30,1996, 1995
and 1994, respectively.
Minimum future rentals receivable under noncancellable operating subleases
at June 30, 1996, were $147,400.
Note 12: Significant estimates and concentrations
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain significant
concentrations. Those matters include the following:
* Substantially all of the Company's labor force is covered by
collective bargaining agreements which expire September 1, 1996 at
the Atchison plant and on November 1, 1996 at the Pekin plant.
<PAGE>
* Under its self-insurance plan, the Company accrues the estimated
expense of health care and workers' compensation claims costs based
on claims filed subsequent to year-end and an additional amount for
incurred but not yet reported claims based on prior experience. An
accrual for such costs of $991,000 is included in the accompanying
1996 financial statements. Claims payments based on actual claims
ultimately filed could differ materially from these estimates.
* During the years ended June 30, 1996, 1995 and 1994, the Company had
sales to one customer accounting for approximately 10.7%, 10.7% and
14.5%, respectively of consolidated sales.
Note 13: Additional Cash Flows Information
Years Ended June 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Noncash Investing and Financing Activities:
Purchase of property and equipment in
accounts payable $ 12 $1,407 $3,931
Dividends declared 1,221 1,221
Additional Cash Payment Information:
Interest paid (net of amount capitalized) 2,585 519 127
Income taxes paid (refunded) $(2,105) $4,200 $9,460
- --------------------------------------------------------------------------------
Note 14: Contingencies
There are various legal proceedings involving the Company and its
subsidiaries. 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.
28
<PAGE>
<PAGE>
Exhibit 10(e)
MIDWEST GRAIN PRODUCTS, INC.
INCENTIVE STOCK OPTION
GRANTED UNDER THE STOCK INCENTIVE PLAN OF 1996
Date of Grant: January 5, 1996 12,000 Shares
------
Time of Grant: 10:15 a.m. CST
THIS OPTION IS NOT ASSIGNABLE
Grant. Midwest Grain Products, Inc., a Kansas corporation (the
"Company"), hereby grants to the optionee named below an option to purchase, in
accordance with and subject to the terms and restrictions set forth in the
Midwest Grain Products, Inc. Stock Incentive Plan of 1996 (the "Plan") and in
this option, the number of shares of Common Stock, no par value, of the Company
("Shares") set forth below, at the price set forth below and expiring at the
date set forth below:
Optionee: Robert G. Booe
-----------------------
Number of Shares subject to option: 12,000
----------
Number of such Shares to be Incentive Options: 9,000
---------
Number of such Shares to be Nonqualified Options: 3,000
---------
Option price per Share: $14.00
Incentive Stock Option. This option is intended to qualify as an
incentive stock option under Section 422 of the Code, as amended from time to
time ("Incentive Option") as to the shares specified above to be Incentive
Options and as a nonqualified option as to the remainder of such shares
("Nonqualified Option"); provided that to the extent that the aggregate fair
market value (as defined in the Code), of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by you during any
calendar year under the Plan or any other Company plan exceeds $100,000, this
Option shall be treated as a Nonqualified Option in accordance with the
provisions of Section 422 of the Code, as amended.
Exercisability.
(a) Incentive Option Installments. Subject to the $100,000
limitation, the Incentive options shall become exercisable as to all or any part
of 3,000 shares upon the first anniversary of the Date of Grant, 3,000 shares
upon the second anniversary of the Date of Grant, 1,500 shares on the third
anniversary of the Date of Grant and 1,500 shares on the fourth anniversary of
the Date of Grant.
(b) Nonqualified Option Installments. The Nonqualified options
shall become exercisable as to all or any part of 0 shares upon the first
anniversary of the Date of Grant, 0 shares upon the second anniversary of
the Date of Grant, 1,500 shares on the third anniversary of the Date of Grant
and 1,500 shares on the fourth anniversary of the Date of Grant.
<PAGE>
(c) Other Provision concerning Exercisability. The options
shall otherwise be exercisable to the extent permitted in the Plan, including
provisions therein relating to a Change In Control, death, retirement or other
termination of employment. Installments or portions thereof not exercised in
earlier periods shall be cumulative and shall be available for exercise in later
periods.
Term. All options granted to you under this grant must be exercised, if
at all, within five years after the date of this grant. In the event of your
death, retirement from the Company or other termination of employment, whether
voluntary or involuntary, the options will expire and may be exercised in the
manner specified in Section 6 of the Plan.
Exercise. Upon exercise of an option, you may pay all or any part of
the option price in cash, by check satisfactory to the Company or by transfer to
the Company of shares of Mature Stock or other Common Stock which was not
obtained through the exercise of a stock option owned by the Optionee or by the
withholding of shares to be distributed in connection with the exercise of this
Option. Notwithstanding the foregoing, Shares issued under an Incentive Stock
Option may not be withheld to pay any portion of the purchase price. Common
Stock transferred to the Company or withheld from shares to be distributed in
payment of the option price or withholding taxes shall be valued at the Fair
Market Value of the Common Stock on the date of the exercise.
Option Not Assignable. This Option is not transferable by you otherwise
than by will or the laws of descent and distribution, and is exercisable, during
your lifetime, only by you.
Not a 10% Owner. You hereby certify that, at the date hereof, you
believe that you do not own stock of the Company that possesses more than 10
percent of the total combined voting power of all classes of stock of the
Company or of any parent or subsidiary of the Company.
Payment of Taxes. The Plan grants the Company the authority to make
such provision as the Company deems appropriate for the collection of any taxes
which the Company may withhold in connection with the grant or exercise of
options. Pursuant to that authority, the Company authorizes you to settle
withholding taxes generated upon the exercise of Nonqualified Options by
allowing you to pay the taxes with cash or shares of the Company's Common Stock
in accordance with the following guidelines:
1. You may satisfy obligations to pay to the Company the amount
of any federal, state or local income tax imposed on you as a result of the
exercise of this option by either:
(a) Delivering to the Company a personal check
satisfactory to the Company in the amount of the tax liability on the date that
the amount of the tax to be withheld is to be determined (the "Tax Date"); or by
2
<PAGE>
(b) Electing to pay the tax liability in shares of the
Company's Common Stock ("Stock Payment Election") by
(1) directing the Company at or prior to the Tax
Date to withhold from the number of shares to be issued to the optionee in
connection with the exercise of a Nonqualified Option that number of shares
equal to the amount of the tax liability divided by the fair market value (as
defined by the Plans) of one share of the Company's common stock on the Tax
Date; or
(2) delivering to the Company on the Tax Date
good and marketable title to that number of shares of Mature Stock (as defined
in the Plan) or other Stock which was not obtained through the exercise of a
stock option owned by you, as shall equal the amount of the tax liability
divided by the fair market value of one share of the Company's common stock on
the Tax Date.
2. If you are subject to the provisions of Section 16 of the Securities
Exchange Act of 1934, then you may settle the tax liability pursuant to a Stock
Payment Election only in accordance with the following additional restrictions
so long as Rule 16b-3, as amended, imposes such requirements:
(a) A Stock Payment Election that is made by delivering pre
owned shares under 1(b)(2) above may be made by delivering the shares concurrent
with the exercise of the option whether or not the option is exercised during
the third through the twelfth business days following the release of quarterly
financial information ("window period)." However, a Stock Payment Election that
is made by directing the Company to withhold shares to satisfy the taxes must be
made either (i) during a window period in which the option is exercised or
before such window period so long as the election takes effect in that window
period or (ii) six months before the date the option is exercised.
(b) A Stock Payment Election must be made in writing and
shall be irrevocable by you once made;
(c) The Committee shall have the right at any time to
disapprove the election at any time after it is made; and
(d) The election must be made at least six months after
the Date of Grant.
3. No fractional shares will be issued in connection with any election to
satisfy a tax liability by paying in shares. The balance of any tax liability
representing a fraction of a share will be settled in cash.
4. The amount of tax which may be paid by an optionee pursuant to a Stock
Payment Election will be the federal, state and local income taxes (including
FICA taxes) applicable to the exercise of the option determined by applying the
higher of either (a) the rate normally applied to the optionee's regular wages
by the Company or (b) the employee's highest applicable maximum marginal tax
rate, such rate to be selected by the optionee at the time of the election to
pay the taxes with surrendered or withheld shares.
3
<PAGE>
5. The provisions of these rules relating to the use of stock to satisfy
obligations may be unilaterally revised by the Committee from time to time to
conform the same to any applicable laws or regulations.
Compliance With Law. When the issue or transfer of the shares covered by
this option may, in the opinion of the Company, conflict or be inconsistent with
any applicable law or regulation of any governmental agency having jurisdiction,
the Company reserves the right to refuse to issue or transfer said stock. The
Company may also legend certificates covering shares purchase hereunder with
usual and customary transfer restrictions to insure compliance with applicable
securities laws, and may issue the same subject to its prior receipt of written
representations from optionee in form and substance satisfactory to the Company.
Option Subject to Stockholder Approval. This Stock Option shall become
null and void if the Plan is not approved by the Stockholders of the Company
prior to January 5, 1997, in accordance with the terms of the Plan. In such
event all benefits conferred hereunder shall be deemed canceled and you shall
have no further rights hereunder or by virtue hereof.
IN WITNESS WHEREOF, this instrument has been executed by the Company as of
this 5th day of January, 1996.
MIDWEST GRAIN PRODUCTS, INC.
By /s/Laidacker M. Seaberg
--------------------------
Laidacker M. Seaberg
President and Chief Executive
Officer
ACKNOWLEDGEMENT
I hereby acknowledge receipt of the above option and a copy of the Plan
referred to in said option. I am familiar with the terms of the Plan, and I
understand my rights under the option are subject to and governed by the terms
of the Plan, as well as by the terms set forth in the foregoing option itself.
4
1-5-96 /s/Robert G. Booe
-------------- ------------------------
Date Acknowledged Signature of Optionee
5
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM MIDWEST GRAIN PRODUCTS, INC. CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED JUNE 30, 1996 AND CONSOLIDATED BALANCE
SHEET AS AT JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000835011
<NAME> MIDWEST GRAIN PRODUCTS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,759
<SECURITIES> 0
<RECEIVABLES> 18,365
<ALLOWANCES> 285
<INVENTORY> 19,913
<CURRENT-ASSETS> 47,204
<PP&E> 210,304
<DEPRECIATION> 85,155
<TOTAL-ASSETS> 172,785
<CURRENT-LIABILITIES> 10,091
<BONDS> 40,933
<COMMON> 6,715
0
4
<OTHER-SE> 102,503<F1>
<TOTAL-LIABILITY-AND-EQUITY> 172,785
<SALES> 194,638
<TOTAL-REVENUES> 194,638
<CGS> 190,173
<TOTAL-COSTS> 199,174<F2>
<OTHER-EXPENSES> 159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,556)
<INCOME-PRETAX> (5,624)
<INCOME-TAX> (2,218)
<INCOME-CONTINUING> (3,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,406)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<FN>
<F1> Reflects retained earnings and additional paid in captial.
<F2> Reflects cost of sales and selling, general &
administrative expenses.
</FN>
<PAGE>
</TABLE>
