<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997
Commission File No. 0-17196
MIDWEST GRAIN PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0531200
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.
1300 Main Street, Atchison, Kansas 66002
(Address of Principal Executive Offices and Zip Code)
(913) 367-1480
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to the filing
requirements
for at least the past 90 days. X YES NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value
9,765,172 shares outstanding
as of May 1, 1997.
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 2
Condensed Consolidated Balance Sheets as of
March 31, 1997 and June 30, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1997 and 1996 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
{LOGO}
Baird, Kurtz & Dobson
Certified Public Accountants
Independent Accountants' Review Report
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas 66002
We have reviewed the condensed consolidated balance sheet of MIDWEST GRAIN
PRODUCTS, INC. and subsidiaries as of March 31, 1997, and the related condensed
consolidated statements of operations for the three month and nine month periods
ended March 31, 1997 and 1996, and the related condensed consolidated statements
of cash flows for the nine month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of June 30, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and, in our report dated August 9, 1996,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 30, 1996, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
S/BAIRD, KURTZ & DOBSON
Kansas City, Missouri BAIRD, KURTZ & DOBSON
April 23, 1997
City Center Square, Suite 2700, 1100 Main, 816 221-6300
Kansas City, Missouri 64105 FAX 816 221-6380
With Offices in: Arkansas, Colorado, Kansas, Kentucky, Missouri,
Nebraska, Oklahoma
Member of Moores Rowland International
-2-
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
March 31, June 30,
1997 1996
---------- --------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,891 $ 3,759
Receivables 23,187 18,365
Inventories 24,781 19,913
Prepaid expenses 1,226 573
Deferred income taxes 1,531 1,531
Income taxes receivable 3,063
-------- -------
Total Current Assets 53,616 47,204
-------- -------
PROPERTY AND EQUIPMENT, At cost 212,511 210,304
Less accumulated depreciation 95,588 85,155
-------- --------
116,923 125,149
-------- ------
OTHER ASSETS 432 432
-------- --------
$170,971 $172,785
======== ========
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
-3-
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1997 1996
------------- --------
(Unaudited)
CURRENT LIABILITIES
Notes payable $ 3,000
Accounts payable 7,688 $ 6,416
Accrued expenses 3,675 3,675
Income taxes payable 850
-------- ---------
Total Current Liabilities 15,213 10,091
-------- ---------
LONG-TERM DEBT 32,933 40,933
-------- ---------
POST-RETIREMENT BENEFITS 6,147 5,945
-------- ---------
DEFERRED INCOME TAXES 6,594 6,594
-------- ---------
STOCKHOLDERS' EQUITY
Capital stock
Preferred, 5% noncumulative,
$10 par value; authorized
1,000 shares; issued and
outstanding 437 shares 4 4
Common, no par; authorized
20,000,000 shares; issued
9,765,172 shares 6,715 6,715
Additional paid-in capital 2,485 2,485
Retained earnings 100,880 100,018
--------- --------
Total Stockholders' Equity 110,084 109,222
--------- --------
$170,971 $172,785
======== ========
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
-4-
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997
AND 1996
(Unaudited)
Three Months Nine Months
1996 1995 1996 1995
----- ---- ---- ----
(in thousands, except per share amounts)
NET SALES $54,449 $53,871 $162,871 $156,782
COST OF SALES 51,975 52,567 153,445 152,796
------- ------ ------- -------
GROSS PROFIT 2,474 1,304 9,426 3,986
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,102 2,012 6,644 6,852
------- ------- ------- -------
372 (708) 2,782 (2,866)
OTHER OPERATING INCOME 100 34 317 87
------ ------ ------- -------
INCOME (LOSS) FROM
OPERATIONS 472 (674) 3,099 (2,779)
OTHER INCOME (LOSS)
Interest (611) (706) (2,015) (2,198)
Other 145 701 339 692
------ ------ ------ -------
INCOME (LOSS) BEFORE
INCOME TAXES 6 (679) 1,423 (4,285)
PROVISION (CREDIT) FOR
INCOME TAXES 3 (269) 561 (1,693)
------- ------ ------- -------
NET INCOME (LOSS) $ 3 $ (410) $ 862 $(2,592)
======= ======= ======= =======
EARNINGS (LOSS) PER
COMMON SHARE $.00 $(.04) $.09 $(.27)
==== ===== ==== =====
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
-5-
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
-------- ------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 862 $(2,592)
Items not requiring (providing) cash:
Depreciation 10,520 10,244
Gain on sale of assets (17) (30)
Changes in:
Accounts receivable (4,822) (2,429)
Inventories (4,868) (2,424)
Prepaid expenses (653)
Other assets (239)
Accounts payable 1,261 891
Accrued expenses 202 (699)
Income taxes payable 3,913 557
------- --------
Net cash provided by operating
activities 6,398 3,279
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (2,355) (4,699)
Proceeds from sale of equipment 89 69
Payment received on note for sale of plant 919
------- -------
Net cash used in investing
activities (2,266) (3,711)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances on notes payable 3,000 6,000
Net principal payments on long-term debt (8,000) (3,975)
Dividends paid (1,221)
------- -------
Net cash provided by (used in)
financing activities (5,000) 804
------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (868) 372
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,759 460
-------- -------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,891 $ 832
======= ========
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
-6-
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
NOTE 1: GENERAL
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's condensed consolidated financial position as of March 31,
1997, and the condensed consolidated results of its operations and its cash
flows for the periods ended March 31, 1997 and 1996, and are of a normal
recurring nature.
See Independent Accountants' Review Report
-7-
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997
RESULTS OF OPERATIONS
General
- -------
The Company's net income of $3,000 in the third quarter of fiscal 1997 was a
noticeable improvement over the prior year's third quarter net loss of $410,000.
A greater improvement was prevented by the intensification of competitive
pressures in the Company's vital wheat gluten and food grade alcohol markets,
and higher than normal energy costs. The increased energy costs, which the
Company began experiencing midway through the second quarter, resulted from a
significant jump in natural gas prices due to periods of extreme cold weather
throughout much of the U.S. Since early March, those prices have returned to
more normal levels, allowing the Company to realize improved production cost
efficiencies.
Conditions in the wheat gluten market were adversely affected by increased
competition from the European Union (E.U.), whose exports of cross-subsidized
gluten to the U.S. have continued at record levels. As a result, the Company was
unable to adjust the selling price of its gluten enough to effectively offset
third quarter production costs. Previously announced consultations between the
U.S. and E.U. to negotiate a mutually acceptable solution to this problem are
still pending. Also pending are the results of a Section 301 investigation which
was recently initiated by the Office of the U.S. Trade Representative in
response to a petition filed by the Wheat Gluten Industry Council of the U.S.
The investigation targets certain E.U. wheat starch/gluten subsidies. When
completed, the results will be forwarded to an international panel of the World
Trade Organization for a determination as to the extent to which any corrective
measures might be taken. The Wheat Gluten council, of which the Company is a
member, is prepared to seek additional legal action should a satisfactory remedy
not materialize. In the meantime, efforts by the Company to develop specialty
wheat gluten products for niche markets continue to garner increased, but
gradual, interest.
While conditions in the Company's alcohol markets generally remain healthy,
prices for food grade alcohol for beverage and industrial applications declined
in the third quarter due mainly to increased competition from the start-up of
new distillation capacities throughout the industry. Increased supplies of fuel
grade alcohol caused a reduction in selling prices in that market as well.
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED MARCH 31, 1997
Demand for the Company's premium wheat starch remains strong and should continue
to result in increased utilization of capacity at Midwest Grain's Pekin,
Illinois plant, where a new starch production facility was completed in the
first quarter of fiscal 1996.
With a continued normalization of energy costs, consistently lower grain costs
and improved production efficiencies, the Company expects to strengthen its
competitive abilities and improve profitability in the fourth quarter of fiscal
1997.
Sales
- -----
Net sales in the third quarter of fiscal 1997 were approximately $578,000 higher
See Independent Accountants' Review Report
-8-
than sales in the third quarter of fiscal 1996. The increase principally
resulted from increased sales of fuel grade alcohol due to a 67% rise in units
sold. Sales of beverage alcohol decreased 26% in this year's third quarter
compared to the same period the prior year as the result of reduced selling
prices and units sold. Sales of food grade alcohol for industrial applications
fell 13% due to a decline in production volume. Sales of distillers' feeds, a
by-product of the alcohol production process, rose approximately 15%, due to
slightly improved selling prices and a 13% increase in units sold. Wheat gluten
sales were approximately even with sales in the third quarter of fiscal 1996
despite a moderate increase in unit output. Selling prices for this product fell
substantially in the face of extreme competitive pressures from the European
Union. Sales of wheat starch increased 5% as the result of higher volumes. Net
sales for the first nine months of fiscal 1997 increased by approximately
$6,089,000 over sales for the first nine months of fiscal 1996. The increase
occurred principally in the first quarter as the result of higher sales of wheat
starch, food grade industrial alcohol, fuel grade alcohol and alcohol
by-products compared to the prior year's first quarter.
Cost of Sales
- -------------
The cost of sales in the third quarter of fiscal 1997 decreased by slightly more
than $592,000 compared to the cost of sales in the third quarter of fiscal 1996.
This occurred primarily as the result of a $3.6 million reduction in raw
material costs for grain. This decrease was partially offset by an increase of
approximately $1.3 million in energy costs, due mainly to higher prices for
natural gas, and an increase of almost $900,000 in maintenance and repair costs.
The cost of sales for the first nine months of
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED MARCH 31, 1997
fiscal 1997 increased by nearly $649,000 above the cost of sales in the first
nine months of fiscal 1996. Raw material cost decreases in the second and third
quarter offset most of a $5.0 million increase in raw material costs experienced
in the first quarter. Increased energy costs for the nine months were
experienced during the second and third quarters.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses in the third quarter of fiscal 1997
were approximately even with selling, general and administrative expenses in the
third quarter of fiscal 1996. For the first nine months of fiscal 1997, these
costs decreased by approximately $208,000 compared to the first nine months of
fiscal 1996. This decrease was spread through most expense categories as part of
the Company's cash management.
The consolidated effective income tax rate is consistent for all periods.
The general effects of inflation were minimal.
Net Income
- ----------
As the result of the foregoing factors, the Company experienced a net income of
$3,000 in the third quarter of fiscal 1997 compared to a net loss of $410,000 in
the third quarter of fiscal 1996. The Company's net income for the first nine
months of fiscal 1997 was $862,000, compared to a net loss of $2,592,000 for the
first nine months of fiscal 1996.
See Independent Accountants' Review Report
-9-
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED MARCH 31, 1997
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity and
financial condition:
March 31, June 30,
1997 1996
--------- --------
(in thousands)
Cash and cash equivalents $ 2,891 $ 3,759
Working capital 38,403 37,113
Amounts available under lines of credit 24,000 18,600
Note payable and long-term debt 35,933 40,933
Stockholders' equity 110,084 109,222
The Company continues to generate positive cash flows, improve its working
capital position and maintain a relatively low debt-to-equity ratio. The
measures instituted during the last fiscal year, including stringent cost
reductions, suspension of quarterly cash dividends to stockholders and changes
in production, purchasing and marketing strategies, remain in effect. Improved
operations offset by increased levels of inventories and receivables produced
the cash flow necessary to reduce borrowings by $5,000,000 during the first nine
months of the fiscal year.
At March 31, 1997, the Company had $2.0 million committed to improvements and
replacements of existing equipment. This amount includes $800,000 in feed dryer
equipment to reduce emissions at the Pekin plant. For additional information
regarding this matter, refer to Part II, Item 1, relating to legal proceedings.
Management believes that the strategies which continue to be implemented,
together with the Company's strong working capital and available lines of
credit, position it to take advantage of a return to more favorable conditions.
FORWARD LOOKING INFORMATION
Readers are cautioned that in addition to historical information included
herein, this Report also includes forward-looking statements and information
that are based on management's beliefs as well as on assumptions made by and
information currently available to management. When used in this Report, the
words "anticipate," "intend," "plan," "believe," "estimate," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions which could cause the Company's future results and
stockholder values to differ materially from those expressed in such
forward-looking statements.
See Independent Accountant Review Report
-10-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On April 13, 1997, an administrative proceeding was filed against the
Company's Illinois subsidiary before the Illinois Pollution Control Board (the
"Board"), by the Illinois Attorney General on behalf of the Illinois
Environmental Protection Agency (the "Agency"). The proceeding relates to the
Company's installation and operation of two feed dryers at its facility in
Pekin, Illinois. The Complaint alleges that the dryers exceed the particulate
emission limitations specified in the construction permits for the units; that
the dryers are being operated without operating permits; and that the dryers
were constructed without a Prevention of Significant Deterioration (PSD)
construction permit setting forth a best available control technology ("BACT")
emission limitation. The Complaint seeks a Board order ordering the Company to
cease and desist from violations of the Illinois Environmental Protection Act
and associated regulations, assessing a civil penalty, and awarding the state
its attorneys fees.
The Company has filed an Answer before the Board admitting that
compliance tests have shown particulate emissions in excess of the limits set
forth in the construction permits, but denying the remainder of the State's
claims. Since the time operational problems were discovered with the dryers'
pollution control equipment, the Company has been conferring and negotiating
with the Agency on the issues involved in the Complaint. The Company has
submitted an application to the Agency for construction of new pollution control
equipment for the dryers, at an estimated cost of approximately $800,000. It is
anticipated that the new equipment will bring emissions into compliance with all
applicable limitations.
Proceedings under the Complaint are being held in abeyance by agreement
of the parties pending completion of the Company's compliance activities. Once
compliance has been achieved, the Company anticipates negotiating a settlement
of the remainder of the State's claims. Based on the circumstances and a
preliminary review of decisions by the Board in air pollution matters, the
Company does not believe that any such settlement will be material to the
business or financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15) Letter from independent public accountants pursuant to
paragraph (d) of Rule 10-01 of Regulation S-X
(incorporated by reference to Independent Accountants'
Review Report at page 2 hereof).
(20) Letter Report to Stockholders for the three months ended December
31, 1996.
(27) Financial data schedule
(b) Reports on Form 8-K
The Company has filed no reports on Form 8-K during the quarter ended
March 31, 1997.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MIDWEST GRAIN PRODUCTS, INC.
5-13-97 s/Ladd M. Seaberg
- ------------------------ By---------------------------------
Date Ladd M. Seaberg
President and Chief Executive
Officer
5-13-97 s/Robert G. Booe
- ------------------------ By---------------------------------
Date Robert G. Booe, Vice President
and Chief Financial Officer
See Independent Accountants' Review Report
-12-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
15) Letter from independent public accountants pursuant to
paragraph (d) of Rule 10-01 of Regulation S-X
(incorporated by reference to Independent Accountants'
Review Report at page 2 hereof).
(20) Letter Report to Stockholders for the three months ended December
31, 1996.
(27) Financial data schedule
-13-
<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 NINE MONTHS
ENDED DECEMBER 31, 1996 AND CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000835011
<NAME> MIDWEST GRAIN PRODUCTS, INC.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,891
<SECURITIES> 0
<RECEIVABLES> 23,187
<ALLOWANCES> 0
<INVENTORY> 24,781
<CURRENT-ASSETS> 53,616
<PP&E> 212,511
<DEPRECIATION> 95,588
<TOTAL-ASSETS> 170,971
<CURRENT-LIABILITIES> 15,213
<BONDS> 32,933
0
4
<COMMON> 6,715
<OTHER-SE> 103,365<F1>
<TOTAL-LIABILITY-AND-EQUITY> 170,971
<SALES> 162,871
<TOTAL-REVENUES> 162,871
<CGS> 153,445
<TOTAL-COSTS> 160,089<F2>
<OTHER-EXPENSES> 339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,015)
<INCOME-PRETAX> 1,423
<INCOME-TAX> 561
<INCOME-CONTINUING> 862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 862
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1> Reflects retained earnings and additional paid in captial.
<F2> Reflects cost of sales and selling, general &
administrative expenses.
</FN>
</TABLE>
<PAGE>
Exhibit 20
May 8, 1997
Dear Stockholder:
While we currently are experiencing much improved operational efficiencies, our
Company's results for the third quarter of fiscal 1997 were weakened by
competitive pressures in our vital wheat gluten and food grade alcohol markets.
In addition, our energy costs remained considerably higher than normal during
the first two months of the quarter due to an unusual spike in natural gas
prices.
A return to more normal energy costs, and significantly lower grain costs
compared to a year ago are allowing us to strengthen our competitive abilities
through increased production output and efficiencies. In general, conditions for
improved profitability in the fourth quarter are firmly taking shape.
Our net income in the third quarter amounted to $3,000 on sales of $54,449,000
compared to a net loss of $410,000, or $0.04 per share, on sales of $53,871,000
for the same period the prior year.
For the first nine months of fiscal 1997, our net income totaled $862,000, or
$0.09 per share, on sales of $162,871,000. This represents a substantial
improvement over the first nine months of fiscal 1996, when we experienced a net
loss of $2,592,000, or $0.27 per share, on sales of $156,782,000.
Increased supplies of alcohol in this year's third quarter, which resulted from
the start-up of new production capacities throughout the industry, caused prices
for our food grade alcohol to decline from their second quarter levels. Prices
for fuel grade alcohol, as well as food grade alcohol for beverage applications,
also fell below the prior year's third quarter levels.
Increased imports from the European Union (E.U.) continued to depress wheat
gluten prices in the third quarter. The recent initiation of a Section 301
investigation by U.S. Trade Representative-Designate Charlene Barshefsky could
help correct this problem by targeting certain E.U. starch/gluten subsidies. In
addition, the possibility still exists for a bilateral solution to this unfair
trade problem through consultations arising from the 1995 grains agreement with
the E.U.
I encourage you to take a few moments to write to the Trade Representative
and to U.S. Secretary of Agriculture Dan Glickman requesting that immediate
action be taken to eliminate the E.U.'s lopsided trade advantages. These
advantages include various subsidies and incentives which can be manipulated at
will, plus a wide difference between our country's low tariff rates and the
E.U.'s high tariffs, which effectively prohibit outside competition from
entering the E.U.'s highly protected market. Ambassador Barshefsky's address is:
Office of the U.S. Trade Representative, 600 South 17th St. N.W., Room 201,
Washington, D.C. 20508. Secretary Glickman's address is: U.S. Department of
Agriculture, 14th St. and Independence Ave., Washington, D.C. 20250.
Incidentally, recent news reports point out that U.S. flour exporters face
similar trade inequities resulting from many of the same E.U. policies that
affect American gluten/starch manufacturers.
While working diligently to solve this problem, we are also placing considerable
focus on the development and marketing of new specialty gluten products for
industrial as well as food applications. Likewise, we continue to see new
opportunities for growth in our premium wheat starch market, which should allow
us to more fully utilize the expanded capacity that was strategically added to
our Pekin, Illinois plant nearly a year and a half ago. In conclusion, we expect
to improve our profitability by increasing production and strengthening
efficiencies in all areas as conditions allow.
Sincerely,
s/Ladd M. Seaberg
Ladd M. Seaberg
President and CEO
<PAGE>
