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As Filed with the Securities and Exchange Commission on September 24, 1997
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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, 1997
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, 9,700,172 shares of which were outstanding at June 30, 1997. 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 4,
1997, was $111,602,923.
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. 1997 Annual Report to Stockholders, pages 10
through 27 [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 9, 1997, dated September 17, 1997
(incorporated into Part III).
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MIDWEST GRAIN PRODUCTS, INC.
FORM 10-K
For the Fiscal Year Ended June 30, 1997
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CONTENTS
PAGE
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PART I
Item 1. Business....................................................... 4
General Information............................................ 4
Vital Wheat Gluten............................................. 5
Premium Wheat Starch........................................... 7
Alcohol Products............................................... 8
Flour and Other Mill Products..................................10
Transportation.................................................11
Raw Materials..................................................11
Energy.........................................................12
Employees......................................................12
Regulation.....................................................12
Item 2. Properties.....................................................13
Item 3. Legal Proceedings..............................................13
Item 4. Submission of Matters to a Vote of Security Holders............14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.........................................14
Item 6. Selected Financial Data........................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................14
Item 8. Financial Statements and Supplementary Data....................15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................15
PART III
Item 10. Directors and Executive Officers of the Registrant.............15
Item 11. Executive Compensation.........................................17
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................17
Item 13. Certain Relationships and Related Transactions.................17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .18
SIGNATURES................................................................. 20
FINANCIAL STATEMENT SCHEDULES...............................................S-1
Report of Independent Public Accountants on Schedules.....................S-2
Schedule VIII. Valuation and Qualifying Accounts.........................S-3
--------------
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.
This report, including the portions of the Annual Report incorporated
herein by reference, contains forward-looking statements. Such statements are
typically identified by or are associated with such words such as "intend,"
"believe," "estimate," "expect," "anticipate" and similar expressions. Such
statements reflect management's current views and estimates of future economic
circumstances, industry conditions, Company performance and financial results
and are not guarantees of future performance. The statements are based on many
assumptions and factors including those relating to grain prices, energy costs,
product pricing, competitive environment and related market conditions,
operating efficiencies, access to capital and actions of governments. Any
changes in such assumptions or factors could produce significantly different
results and impact stock values.
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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, a
portion of which is further processed into specialty wheat proteins. The vital
wheat gluten and most protein products are dried into powder and sold in
packaged or bulk form. The starch slurry which results after the extraction of
the gluten and wheat proteins is further processed to extract premium wheat
starch which is also dried into 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, 1997, as well as such
sales as a percent of total sales.
<TABLE>
<CAPTION>
PROJECT GROUP SALES
Year Ended June 30,
1997 1996 1995 1994 1993
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(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount % Amount % Amount % Amount % Amount %
Vital Wheat Gluten......... $ 39,968 17.8 $ 39,514 20.3 $ 49,957 27.7 $ 70,966 38.2 $ 54,156 33.1
Premium Wheat Starch....... 29,935 13.3 26,354 13.5 23,403 13.0 21,110 11.3 18,423 11.3
Alcohol Products:
Food Grade Alcohol
Beverage Alcohol...... 43,118 19.2 39,465 20.3 32,573 18.1 29,536 15.9 27,142 16.6
Food Grade Industrial. 38,004 16.9 32,064 16.5 23,379 13.0 22,585 12.1 17,123 10.5
Fuel Grade Alcohol....... 34,992 15.6 25,347 13.0 28,120 15.6 19,273 10.4 24,468 15.0
Alcohol By-products...... 34,553 15.4 28,449 14.6 19,583 10.9 18,146 9.8 19,288 11.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Alcohol
Products............. 150,667 67.1 125,325 64.4 103,655 57.5 89,540 48.2 88,021 53.9
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Flour and Other Mill
Products................. 4,163 1.8 3,445 1.8 3,327 1.8 4,352 2.3 2,826 1.7
----- ---- ------ ---- ------ ---- ------ ---- ------ ----
Net Sales ........... $224,733 100.0 $194,638 100.0 $180,252 100.0 $185,968 100.0 $163,426 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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Results for 1997 improved over those of 1996. Sales increased by $30.1
million due primarily to increased alcohol production and increased sales of
premium wheat starch. A small net profit of $131,000 was a sizable improvement
over the prior year's net loss of $3.4 million. A greater improvement in net
income was prevented in large part by the intensification of competitive
pressures in the Company's vital wheat gluten market. Other adverse factors
included higher than normal energy costs from late fall through late winter and
a surge in competition in the food grade and fuel grade alcohol markets in the
third quarter of 1997. Most importantly, the Company's positive earnings before
interest, taxes, depreciation and amortization ("EBITDA") were $16.9 million for
1997 versus $10.8 million for 1996. The positive cash flows generated by the
liquidation of alcohol inventories enabled the Company to reduce long term debt
by $10 million during 1997 with an additional $5.0 million debt reduction in the
first quarter of fiscal 1998. As a result, the Company's cash, working capital
and amounts available under lines of credit amounted to $65.6 million at June
30, 1997 versus $55.7 million at June 30, 1996.
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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 15 of the
Annual Report.
Vital Wheat Gluten
Vital wheat gluten is a free-flowing light tan powder which contains
approximately 75% to 80% protein. Its vitality, water absorption and retention
and film-forming properties make it desirable as an ingredient in many food
products. 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.
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.
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In recent years the Company began the development of a number of
Specialty Wheat Proteins for food and non-food applications. Specialty Wheat
Proteins are derived from vital wheat gluten through a variety of proprietary
processes which change the molecular structure of vital wheat gluten. These
specialty proteins include various hydrolyzed proteins, texturized proteins,
gliadin, glutenin and a product which the Company refers to as "Pasta Power."
Hydrolyzed proteins, unlike vital wheat gluten, are soluble in water and other
liquids. This enables their use in food products such as high protein consumer
beverages, calf milk and soy sauce and non-food applications such as hair
sprays, shampoos and shower gels, body moisturizers, skin lotions and the like.
Texturized wheat proteins consist of vital wheat gluten that is changed into a
plastic substance and then extruded under heat and pressure. The resulting solid
food product can be further enhanced with flavoring and coloring and
reconstituted with water. Texturized wheat proteins are used for meat, poultry
and fish substitutes and extenders. Prototypes of a product called "Gluten
Resin" may be used as a commercial raw material for the production of pet foods
and environmentally friendly degadeable products such as usable forks, spoons
and knives. Gliadin and Glutenin are the two principal molecules that make up
vital wheat gluten. The Company's patented process enables the separation of
each for a variety of end uses. Glutenin, a large molecule responsible for the
elastic character of vital wheat gluten, increases the strength of bread doughs,
improves the freeze-thaw characteristics of frozen doughs and may be used as a
functional protein source in beef jerky-type products, as well as in meat
extension. Gliadin, the smaller of the two molecules is soluble in water and
other liquids, including alcohol and is responsible for the viscous properties
of wheat gluten. Those characteristics make it ideal for use in hair sprays and
to improve the texture of noodles and pastas.
Although a number of the specialty wheat proteins are beginning to be
commercially marketed, others are still in the test marketing or development
stage. Only a small fraction of the Company's 1997 vital wheat gluten sales
reflect sales of specialty proteins. However, the Company's strategy is to focus
attention on the marketing and development of these
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products with the view to their becoming an increasingly larger portion of total
gluten sales. The Company has employed the same strategy successfully through
the gradual but steadily increasing development of value-added modified wheat
starches for niche markets. Specialty wheat proteins are designed for sale in
niche markets and generally compete with other ingredients having similar
characteristics.
The Company produces vital wheat gluten from modernized facilities at
the Atchison plant and new facilities at the Pekin plant. It is shipped
throughout the continental United States in bulk and in 50 to 100 pound bags.
Approximately 46% of fiscal 1997 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 vital wheat gluten processing operations are believed to
produce a quality of vital wheat gluten and specialty wheat proteins that are
equal to or better than that of any others 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
service to customers.
Competition-Vital Wheat Gluten. The Company's principal competitors in
the U.S. vital wheat gluten market consist of three other domestic producers and
a number of producers in Europe, Australia and other parts of the world. During
the year ended December 31, 1996, European Union ("E.U.") wheat gluten shipped
to the United States rose approximately 40% above shipments in 1995, and nearly
162% above shipments in 1993.
Competition in the vital wheat gluten industry is based primarily upon
price. Since the increasing surge of large volumes of E.U. wheat gluten into the
U.S., prices have been primarily affected by excess E.U. capacity and subsidies
and other protective measures ("Subsidies") provided to E.U. exporters by their
host governments and low U.S. tariffs. Although a determination has yet to be
made, the Company and the Wheat Gluten Industry Council of the United States
(the "Council") believe those Subsidies to be in violation of international
trade agreements. Previously, U.S. Gluten prices were primarily affected by U.S.
grain and U.S. energy costs and, to a lesser extent, by foreign subsidies. Due
to the Subsidies, it has become increasingly difficult for the Company to
compete with the surge of E.U. wheat gluten since the artificially low prices
charged for those E.U. Subsidized imports have been less than the Company's cost
of production. As a result of this imbalance in the U.S. wheat gluten market the
Company's strategy has been to limit its production of wheat gluten to amounts
necessary to produce wheat starch and other wheat co-products and to support
actions by the Council to stem the tide of E.U. Subsidized wheat gluten through
legal proceedings described below.
As mentioned above, the extraordinary increase in E.U. gluten imports into
the U.S. is due to high E. U. Subsidies, high E. U. import tariffs, and low U.S.
import tariffs on wheat products. These incentives have encouraged E.U.
producers to make sizable increases in E.U. wheat starch and wheat gluten
production capacity and to continue the development of even greater capacities.
The Council expects a massive expansion of E.U. capacity over the next three
years with a majority of the excess wheat gluten production being targeted for
shipment to the U.S.
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The Council, which is principally supported by the Company and another
domestic wheat gluten producer, has engaged in a number of initiatives to combat
this surge in Subsidized E.U. wheat gluten. The first initiative resulted in the
July 22, 1996, ratification by the United States and the E.U. of an agreement
(the "Grains Agreement") that requires the E. U. and the United States to engage
in consultations designed to reach "a mutually acceptable solution." Although
some consultations were initiated under the Grains Agreement, a lack of progress
led the Council to the filing of a Petition in January 1997, with the United
State Trade Representative (the "USTR") under Section 301 of the Trade Act of
1974 (the Section 301 Petition"). The Section 301 Petition alleges that the
various E.U. Subsidies which promote the E.U. production and sale of wheat
gluten into the U.S. constitute Subsidies that violate the 1994 General
Agreement on Tariffs and Trade (GATT) and the Agreement on Subsidies and
Countervailing Measures. The petition requests that the USTR take action to
eliminate the effects of the alleged violations. The USTR initiated an
investigation under Section 301 after its receipt of the Petition. However, in
April, 1997, the USTR terminated the investigation when the E.U. indicated that
it intended to pursue meaningful consultations with the U.S. under the Grains
Agreement. Following a round of unsatisfactory discussions, the Council
initiated a second proceeding on September 22, 1997, with the International
Trade Commission
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of the United States (the "ITC," a commission appointed by the President) under
section 201 of the Trade Act of 1974 (the "Section 201 Proceeding").
Under Section 201, the President is authorized to take action to
protect a U.S. industry if the ITC "determines ....that an article is being
imported into the U.S. in such increased quantities as to be a substantial cause
of serious injury, or threat thereof, to the domestic industry producing an
article like or directly competitive with the imported article." The Section 201
petition filed by the Council alleges serious injury to the U.S. wheat gluten
industry from the increasing volume of Subsidized imports. It asks for, among
other things, the establishment of a four-year quota on a country-by-country
basis on all imports into the U.S. of wheat gluten, allocated on a yearly basis,
based on the average market share percentage for the years 1990-1992. Under
Section 201, the ITC is required to complete an investigation and hearings and
make a recommendation to the President by March 23, 1998. The President is then
required to act within 60 days after receipt of the ITC recommendation.
Although the Company is hopeful that the actions of the Council will
ultimately result in the creation of a more level playing field, no assurance
can be given as to when or if any relief will be granted. Due to the intensity
of these competitive conditions the Company has limited its production of gluten
to those amounts necessary for the production of other wheat 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 foreign competition.
The Company's sales of vital wheat gluten during 1997 were
approximately even with sales in fiscal 1996 as the Company continued to
minimize gluten production in the face of greatly increased competition from
European Union producers. Although the average cost of wheat for the year
declined during 1997, wheat costs remained high compared to historical norms.
Prior to the end of fiscal 1995 the Company was able to adjust the selling price
of its wheat gluten to take into account such high grain prices. However, due to
the excessive subsidized foreign imports that have been shipped into the U.S.
from the E.U. since then, the Company has been unable to adjust those prices to
effectively offset production costs.
During fiscal 1995 the Company substantially completed the construction
of new wheat gluten production facilities at the Pekin, Illinois plant. The
expansion 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, 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, the Company does
not expect to immediately use the increased capacity.
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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. Important physical properties contributed by wheat
starch include whiteness, clean flavor, viscosity and texture. 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
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sugar coatings. The Company's specialty starches are also sold for a number of
industrial and non-food applications, which include uses in the manufacture of
adhesives, paper coatings and carbonless paper.
The Company's premium wheat starch is sold nationwide to food
processors, such as International Multi-Foods Corp., Pillsbury Company and
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 value added 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 customer's requirements for a specific use.
Starch sales increased during fiscal 1996 by approximately $3.6
million, due primarily to continued solid demand and higher volumes permitted by
increased starch production capacity.
During the first quarter of fiscal 1996, 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 by-products.
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.
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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 James B. Beam Distilling Co.,
Florida Distillers Co, and Barton Brands, which further process the alcohol for
sale to consumers under numerous labels.
The Company believes that in terms of fiscal 1997 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. During 1997, competition in beverage markets
increased significantly as producers of fuel grade alcohol began to convert fuel
grade production into food grade production. Competition is based primarily upon
price and service, and in the case of gin, formulation. The Company
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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 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, 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 7-Up Company and Reckitt &
Colman, a producer of Lysol brand products, and Avon Products, Inc., 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 industrial and beverage alcohol sales increased by
approximately $9.6 million during 1997 and $15.6 million during fiscal 1996 due
primarily to volume increases from increased capacities and the Company's
strategy to shift its alcohol production into food grade alcohol products during
periods of rising grain prices and flat prices for fuel grade alcohol. However,
prices for food grade alcohol began to be negatively impacted during the third
quarter of fiscal 1997 due to competition from the start-up of significantly
increased food grade production capacities throughout the industry. The
increased industry-wide capacity for food grade alcohol is due to a large scale
conversion of fuel grade distillation equipment into food grade production
because of an over supply of fuel grade capacity that was constructed in the
early 1990s in anticipation of the implementation of clean air act regulations
mandating ethanol use that were were subsequently reversed by court order.
Although the demand for the Company's food grade alcohol has grown steadily
since the third quarter of 1997, the Company expects that increased industry
capacity will result in increased price competition for food grade alcohol.
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 particulates 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.
<PAGE>
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
U.S. 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.
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 the end of 2000, 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 (the "Federal Tax Credit"). A
mix of at least 10% ethanol by volume is required to receive the maximum credit.
Although the Federal Tax Credit is not directly available to the Company, it
allows the Company to sell its ethanol at prices competitive with less expensive
additives and gasoline. From time to time legislation is proposed to eliminate,
reduce or extend the tax benefits enjoyed by the ethanol industry, and
indirectly by producers of the grain that is converted into ethanol. During 1997
an initiative was introduced in congress to effect an early termination of the
Federal tax credit. Other initiatives
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have been proposed to extend the credit to the end of 2007. The outcome of
these legislative initiatives is uncertain. Therefore, no assurance can be given
that Congress will continue the current subsidies or extend them beyond the
present expiration date.
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 1997 payments to the Company out of the
fund totaled $411,000 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 1997.
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 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.
Although Fuel Alcohol prices have traditionally followed the movement of
gasoline prices, the over-supply of fuel grade capacity resulted in declining
fuel grade alcohol prices during 1997, generally consistent with declining grain
prices.
During 1997 fuel alcohol prices continued to adjust downward in the
face of rising gasoline prices, in part due to increased industry-wide capacity.
Although grain costs also began to decline at the same time from the
extraordinarily high levels encountered in 1996, the declining fuel prices and
relatively high grain costs continued to negatively impact the Company's fuel
grade alcohol operations and those of the entire ethanol industry. A number of
producers have shut down plants, converted fuel grade production equipment to
the production of food grade alcohol or otherwise curtailed ethanol production.
The Company's response to these circumstances has been to shift as much of its
alcohol production as possible into higher margin food grade alcohol products
and to regulate fuel grade alcohol production to a rate that will maximize the
efficiency of the Company's integrated grain processing operations and that will
otherwise take advantage of opportunities in the marketplace. Beginning in the
fourth quarter of 1997, fuel grade alcohol results began to stabilize somewhat
as demand in the fuel grade markets began to increase and as grain prices
continued to decline.
<PAGE>
Alcohol By-Products
The bulk of fiscal 1997 sales of alcohol by-products consisted 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
food additives in the sale of distillers feeds and mill feeds. The $6.1 million
increase in 1997 and $8.9 million increase in 1996 sales of Alcohol by-products
is primarily due to the $32 million increase in alcohol sales made possible by
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. A
majority 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%.
10
<PAGE>
In addition to flour, the wheat milling process generates mill feeds or
midds. Midds are sold to processors of animal feeds as a feed additive.
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 governments. Such variations in grain prices
have had and are expected to continue to have have significant adverse effects
on the results of the Company's operations. This is primarily because it has
become increasingly difficult in recent years for the Company to compensate for
such variations through adjustments in prices charged for the Company's vital
wheat gluten due to the surge of Subsidized E.U. wheat gluten whose artificially
low prices are not affected by such costs. Fuel grade alcohol prices, which
historically have tracked the cost of gasoline also do not usually adjust to
rising grain costs.
Beginning in fiscal 1995 and continuing through fiscal 1996 and into
fiscal 1997 wheat, corn and milo prices increased to unusually high levels in
the face of intense Subsidized competition from E.U. 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. Beginning
in the first quarter of 1997, grain prices began to return to more normal
levels. By the end of 1997, the average cost of corn and milo had gone from
$4.56 per bushel at the beginning of the year to $2.80 during June, 1997, while
the average cost of wheat declined from $6.31 per bushel at the beginning of the
year to $4.74 at the end of the year. Although a return to more normal but still
relatively high grain prices has enabled improved operating results, low priced
Subsidized E.U. gluten and excess alcohol capacities continue to restrict the
ability of the company to adjust the price of its gluten and fuel grade alcohol
to compensate for grain and other production costs. The Company is continuing to
respond to these circumstances by shifting as much of its production as possible
to starch, specialty wheat protein and alcohol production, by restricting the
production of vital wheat gluten, and through a continued implementation of
other cost-cutting measures.
<PAGE>
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 grain
costs, the Company began during 1995 to make limited purchases of commodity
futures, including wheat, corn and gasoline futures. It expanded those hedging
activities in 1996 and 1997 and expects to continue them in the future. See Note
1 to Notes to consolidated financial statements at page 21 of the Annual Report.
11
<PAGE>
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.
During 1997 the Company's results were negatively impacted by a
significant but temporary increase in natural gas prices due to periods of
extreme cold weather throughout much of the U.S. Natural gas prices have since
returned to more normal levels.
Employees
As of June 30, 1997, the Company had 411 employees, 277 of whom are
covered by three collective bargaining agreements with two labor unions. On
August 31, 1996, the Company successfully negotiated a three-year contract
covering 183 employees at the Atchison Plant. A four-year contract covering 94
employees at the Pekin plant was successfully negotiated on November 6, 1996. As
of June 30, 1996, the Company had 385 employees.
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.
<PAGE>
The Company is subject to extensive environmental regulation at the
federal, state and local levels. The regulations include the regulation of water
usage, waste water discharge, disposal of hazardous wastes and emissions of
volatile organic compounds, particulates and other substances into the air.
Under these regulations the Company is required to obtain operating permits and
to submit periodic reports to regulating agencies. During 1997 the Illinois
Environmental Protection Agency commenced an action against the Company with
respect to alleged noncompliance of the Pekin Plant with certain air quality
regulations. This action is further described under "Item 3. Legal Proceedings."
The Company has submitted an application to the Agency for construction of new
pollution control equipment that is expected to bring emissions into compliance
with all applicable regulations.
12
<PAGE>
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.
Item 3. 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.
<PAGE>
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.
There are no other legal proceedings pending as of June 30, 1997 which
the Company believes to be material. Legal proceedings which are pending,
including the proceeding with the Illinois Environmental Protection Agency
described above, are believed by the Company to consist of matters normally
incident to the business conducted by the Company and taken together do not
appear material.
13
<PAGE>
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.
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 below reflects the the high and low closing prices
of the Common Stock for each quarter of fiscal 1997 and 1996. Cash dividends
have not been paid since the end of 1995.
Sales Price
High Low
1996:
First Quarter..................................... $ 19.50 $ 16.50
Second Quarter.................................... 17.00 10.75
Third Quarter..................................... 15.00 12.00
Fourth Quarter.................................... 13.50 11.38
1997:
First Quarter..................................... $ 14.38 $ 12.00
Second Quarter.................................... 19.50 13.63
Third Quarter..................................... 16.75 11.13
Fourth Quarter.................................... 13.25 10.50
At June 30, 1997 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.
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 15 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 16 through 27 of the Annual Report, copies of which pages
are included in Exhibit 10(c) to this Report.
14
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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. 74 Chairman of the Board and Director
Laidacker M. Seaberg 51 President, Chief Executive Officer and
Director
Sukh Bassi, Ph.D. 56 Vice President - Vital Wheat Gluten Marketing,
Research and Development and Corporate
Technical Director
Robert G. Booe 60 Vice President - Administration, Controller,
Treasurer and Chief Financial Officer
Gerald Lasater 59 Vice President - Wheat Starch Marketing
Raymond Miller 63 Vice President - Purchasing and Energy and
President of Midwest Grain Pipeline, Inc.
Randy M. Schrick 47 Vice President - Operations and Director
Robert L. Swaw 67 Vice President - Alcohol Marketing
Michael Braude 61 Director
Richard J. Bruggen 71 Director
F.D. "Fran" Jabara 72 Director
Tom MacLeod, Jr. 49 Director
Robert J. Reintjes 65 Director
Eleanor B. Schwartz, D.B.A. 60 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.
15
<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. 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. Bruggen plans to retire as a director at the 1997 Annual
Meeting of Stockholders.
Mr. Braude has been a Director since 1991 and is Chairman of the 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, 1995, 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.
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,
16
<PAGE>
and was previously the Vice Chancellor for Academic Affairs. She is a Trustee of
Midwest Research Institute and a director of Country Club Bank and
Transfinancial Holdings, Inc., the successor to American Carriers.
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 1999 Mr. Braude 1997
Mr. Jabara 1997
Mr. Schrick 1999
Mr. Seaberg 1999
Item 11. Executive Compensation.
Incorporated by reference to the information under "Executive Compensation"
on pages 8 through 12 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 13 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
None.
17
<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, 1997 and 1996.
Consolidated statements of income - for the three years ended
June 30, 1997, 1996 and 1995.
Consolidated statements of stockholders' equity for the three
years ended June 30, 1997, 1996 and 1995.
Consolidated statements of cash flow - for the three years
ended June 30, 1997, 1996 and 1995.
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).
4(c) Copy of Second Amended Line of Credit Loan
Agreement providing for the Issuance of a Line
of Credit Note in the amount of $27,000,000
(incorporated by reference to Exhibit 4.(a) to
the Company's Report on Form 10-Q for the
quarter ended September 30, 1995).
4(d) Copy of Line of Credit Note Under Second
Amended Line of Credit Loan Agreement
(incorporated by reference to Exhibit 4.(b) to
the Company's Report on Form 10-Q for the
quarter ended September 30, 1995).
18
<PAGE>
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. 1997 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 10(d) to the Company's Form 10- K for
the year ended June 30, 1996).
10(e) Form of Stock Option with respect to stock
options granted under the Midwest Grain
Products, Inc. Stock Incentive Plan of 1996
(incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended
June 30, 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 10(f) to the Company's
Form 10-K for the year ended June 30, 1996).
<PAGE>
22 Subsidiaries of the Company other than
insignificant subsidiaries:
State of Incorporation
Subsidiary or Organization
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, 1997 and for the year then
ended.
No reports on Form 8-K have been filed during the quarter ended June
30, 1997.
19
<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 22nd day of September, 1997.
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 22, 1997
/s/ Robert G. Booe Vice President, Treasurer
- --------------------------
Robert G. Booe and Controller (Principal
Financial and Accounting Officer) September 22, 1997
/s/ Michael Braude
- --------------------------
Michael Braude Director September 22, 1997
/s/ Richard J. Bruggen Director
- --------------------------
Richard J. Bruggen September 22, 1997
/s/ Cloud L. Cray, Jr. Director
- --------------------------
Cloud L. Cray, Jr. September 22, 1997
<PAGE>
/s/ F. D. Jabara Director
- --------------------------
F. D. "Fran" Jabara September 22, 1997
/s/ Tom MacLeod Director
- --------------------------
Tom MacLeod, Jr. September 8, 1997
/s/ Robert J. Reintjes Director
- --------------------------
Robert J. Reintjes September 22, 1997
/s/ Randy M. Schrick Director September 22, 1997
- --------------------------
Randy M. Schrick
/s/ Eleanor B. Schwartz Director September 22, 1997
- --------------------------
Eleanor B. Schwartz
20
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
Consolidated Financial Statement Schedules
(Form 10-K)
June 30, 1997, 1996 and 1995
(With Auditors' Report Thereon)
S-1
<PAGE>
[LOGO]
Baird, Kurtz & Dobson
Certified Public Accountants
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas
In connection with our audit of the consolidated financial statements of
MIDWEST GRAIN PRODUCTS, INC. for each of the three years in the period ended
June 30, 1997, 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 8, 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
S-2
<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, 1997
Allowance for
doubtful
accounts $285 $ 49 $49 $285
==== ==== === ====
Year Ended
June 30, 1996
Allowance for
doubtful
accounts $85 $214 $14 $285
=== ==== === ====
Year Ended
June 30, 1995
Allowance for
doubtful
accounts $ 25 $101 $ 41 $85
==== ==== ==== ===
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 Second Amended Line of Credit Loan Agreement providing
for the Issuance of a Line of Credit Note in the amount of
$27,000,000 (incorporated by reference to Exhibit 4.(a) to the
Company's Report on Form 10-Q for the quarter ended September 30,
1995).
4(d) Copy of Line of Credit Note Under Second Amended Line of Credit
Loan Agreement (incorporated by reference to Exhibit 4.(b) to the
Company's Report on Form 10-Q for the quarter ended September 30,
1995).
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. 1997
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 10(d) to the Company's Form 10- K for the year ended
June 30, 1996).
<PAGE>
10(e) Form of Stock Option with respect to stock options granted under
the Midwest Grain Products, Inc. Stock Incentive Plan of 1996
(incorporated by reference to Exhibit 10(e) to the Company's Form
10-K for the year ended June 30, 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 10(f) to the Company's Form 10-K for the
year ended June 30, 1996).
<PAGE>
Exhibit No. Description
- ----------- -----------
22 Subsidiaries of the Company other than insignificant
subsidiaries:
State of Incorporation
Subsidiary or Organization
---------- ---------------
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,
1997 and for the year then ended.
2
<PAGE>
Exhibit 10(c)
Selected Financial Information
Years ended June 30
(in thousands, except per share amounts)
1997 1996 1995 1994 1993
-------------------------------------------
Income Statement Data:
Net sales $224,733 $194,638 $180,252 $185,968 $163,426
Cost of sales 213,733 190,173 159,149 148,320 130,551
------- ------- ------- ------- -------
Gross profit 11,000 4,465 21,103 37,648 32,875
Selling, general &
administrative expenses 9,169 9,001 10,553 12,212 10,677
Other operating income (expense) 370 159 (107) (669) (264)
--- --- ---- ---- ----
Income (loss) from operations 2,201 (4,377) 10,443 24,767 21,934
Other income (loss), net 618 1,309 (4,225) 924 1,045
Interest expense (2,604) (2,556) (606) (127) (71)
------ ------ ---- ---- ---
Income (loss) from continuing
operations before income taxes 215 (5,624) 5,612 25,564 22,908
Provision (credit) for income taxes 84 (2,218) 2,273 9,713 8,278
-- ------ ----- ----- -----
Income (loss) from
continuing operations 131 (3,406) 3,339 15,851 14,630
Discontinued operations 1,665
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) $ 131 $ (3,406) $ 3,339 $ 15,851 $ 16,236
======= ======== ======= ======== ========
Earnings (Loss) per Common Share
Continuing operations .01 (.35) .34 1.62 1.50
Discontinued operations .17
Cumulative effect of changes in accounting principles (.01)
------- -------- ------- -------- --------
$ .01 $ (.35) $ .34 $ 1.62 $ 1.66
======= ======== ======= ======== ========
Cash dividends per common share .50 .50 .50
Weighted average common
shares outstanding 9,762 9,765 9,765 9,765 9,765
Balance Sheet Data:
Working capital 36,580 37,113 26,955 21,951 41,580
Total Assets 165,330 172,785 176,749 168,146 126,671
Long-term debt, less
current maturities 29,933 40,933 38,908 25,000
Stockholders' equity $108,561 $109,222$ 112,628$ 114,173 $103,206
10
<PAGE>
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 1997 Fiscal 1996
1997 1996 1995 Over 1996 Over 1995
---- ---- ---- --------- ---------
Net sales 100.0% 100.0% 100.0% 15.5% 8.0%
Cost of sales 95.1 97.7 88.3 12.4 19.5
---- ---- ---- ---- ----
Gross profit 4.9 2.3 11.7 146.4 (78.8)
Selling, general
and administrative
expenses 4.1 4.6 5.8 1.9 (14.7)
Other operating income
(loss) .2 .1 (.1) 132.7 248.6
-- -- --- ----- -----
Income from operations 1.0 (2.2) 5.8 150.3 (141.9)
Other income (expense) (.9) (.6) (2.7) 59.2 (74.2)
--- --- ---- ---- -----
Income from continuing
operations
before income taxes .1 (2.8) 3.1 103.8 (200.2)
Provision for income
taxes .04 (1.1) 1.2 103.8 (197.6)
--- ---- --- ----- ------
Income from continuing
operations .06 (1.7)% 1.9% 103.8% (202.0)%
=== ==== === ===== ======
Fiscal 1997 Compared to Fiscal 1996
The Company's net income of $131,000 in fiscal 1997 was a sizeable improvement
over the prior year's net loss of $3,406,000. A greater improvement was
prevented by the intensification of competitive pressures in the Company's vital
wheat gluten market. Higher than normal energy costs from late fall through late
winter, and a surge in competition in the food grade alcohol markets in the
third quarter affected the Company's alcohol production. In addition, while
average prices for the Company's principal raw materials, namely wheat, corn and
milo, were below the exceptionally high levels experienced in the prior fiscal
year, they remained well above what traditionally have been considered normal
price levels. 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.
During the latter part of the third quarter, those prices returned to more
normal levels, allowing the Company to realize improved energy cost
efficiencies.
<PAGE>
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 United States continued at record levels. As a result, the Company
was unable to adjust the selling price of its gluten enough to effectively
offset production costs. Profits from their highly subsidized and protected
wheat starch business have allowed European producers to dump surpluses of
gluten, a co-product, at prices below U.S. production costs. Low U.S. tariff
rates on wheat gluten offer little deterrence to this practice, while high
tariffs in Europe effectively prohibit non-E.U. member countries from competing
in the wheat gluten and starch markets there. Consultations
11
<PAGE>
Management's discussion and Analysis
aimed at finding a bilateral solution to the gluten trade problem were
renewed in June, 1997 between U.S. and E.U. officials. The framework for these
discussions arose from a grains agreement that was ratified in July, 1996.
However, because this process has failed to produce evidence that the E.U. is
genuinely willing to negotiate an effective remedy, the U.S. Wheat Gluten
Industry Council plans to request additional legal action. This action woud seek
to bring stability back to the market and provide relief from artificially low
E.U. prices. In the meantime, efforts by the Company to develop specialty wheat
gluten products for niche markets continue to attract increased, but gradual
interest
While conditions in the Company's alcohol markets generally remained
healthy in fiscal 1997, prices for food grade and fuel grade alcohol declined
through the year from their first quarter highs. This primarily was due to the
effects of falling prices for corn and milo, the principal raw materials used in
the Company's alcohol production process. A drop in beverage alcohol prices in
the third quarter additionally was due to increased competition resulting 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 during the third quarter. Demand for each type of alcohol
produced by the Company increased in the fourth quarter, raising unit sales
substantially and causing prices to stabilize somewhat. As the result of
increased alcohol production in fiscal 1997, unit sales of distillers feed, the
principal by-product of the distillation process, grew significantly in fiscal
1997 compared to fiscal 1996.
Demand for the Company's premium wheat starch was solid throughout fiscal
1997 and is expected to 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 in the alcohol and wheat starch markets going forward.
Net sales in fiscal 1997 were approximately $30.1 million higher than net
sales in fiscal 1996. The increase principally resulted from increased unit
sales of most of the Company's principal products. The lower sales in fiscal
1996 were partially caused by reduced production resulting from an extended
maintenance and repair shutdown at the Company's Pekin, Illinois plant during
the entire month of June.
Sales of all alcohol increased by aproximately 20% over fiscal 1996 mainly
as the result of higher unit sales and higher prices for the Company's food
grade industrial alcohol and fuel grade alcohol. Sales of distillers feed, the
principal by-product of the alcohol process, rose by approximately 21%, due
mainly to higher production and sales of alcohol and an improvement in the
selling price compared to the prior year.
<PAGE>
Sales of vital wheat gluten were approximately even with sales in fiscal
1996, as the Company continued to minimize gluten production in the face of
greatly increased competition from European Union producers. Sales of the
Company's premium wheat starch grew approximately 14% above sales in fiscal 1996
as the result of greater unit sales and a modest price improvement.
The cost of sales in fiscal 1997 increased by approximately $23.6 million
above the cost of sales in fiscal 1996. This occurred partially as the result of
a $16.7 million rise in raw material costs for grain, as more grain was required
to satisfy increased production needs. In addition, the Company experienced a
jump of approximately $4.7 million in energy costs due principally to higher
than normal prices for natural gas during the second and third quarters, and a
rise of approximately $1.2 million in maintenance and repair costs. The
remainder of the increase in the total cost of sales compared to fiscal 1996 was
mainly attributable to costs associated with increased product sales,
principally in the food grade alcohol area.
Selling, general and administrative expenses in fiscal 1997 were
approximately even with selling, general and administrative expenses the prior
year. This principally was the result of the continuation
12
<PAGE>
of an intense cash management program which was implemented in fiscal 1996
and included reductions in compensation as well as in costs for management and
employee incentive programs.
The consolidated effective income tax rate was consistent for all periods.
The general effects of inflation were minimal.
As the result of the foregoing factors, the Company experienced net income
of $131,000 in fiscal 1997 compared to a net loss of $3,406,000 in fiscal 1996.
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 implemented 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.
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 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.
Increased alcohol production in fiscal 1996 resulted from growth 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. A 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 during the fourth quarter.
<PAGE>
Net sales in fiscal 1996 increased by approximately $14.4 million above
sales in fiscal 1995. The increase was principally due to increased unit sales
of food grade alcohol and alcohol by-products, the latter consisting mainly of
distillers feeds, and higher sales of premium wheat starch. These increases were
partially offset by a 21% decrease in sales of wheat gluten due to intense
competitive pressures from European Union gluten producers.
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 as the result of
increased alcohol production.
The Company's sales of wheat starch in fiscal 1996 continued the upward
pattern experienced over the previous several years, rising noticeably
13
<PAGE>
Management's Discussion and Analysis
above fiscal 1995. 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, greatly improving the
Company's ability to satisfy increased demand for wheat starch.
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 in maintenance and repair and costs, which returned to more normal
levels following the completion of the expansion project in the first quarter of
fiscal 1996.
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 in costs for the Company's management and employee incentive programs. These
and other reductions helped to more than offset increases which were incurred in
a minor segment of the expense categories.
The consolidated effective income tax rate was consistent for all periods.
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.
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.
<PAGE>
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, 1997 and
1996. Note: sales for the period ended June 30, 1996 were significantly lower
than sales for the same period in fiscal 1997 due principally to reduced
production resulting from an extended maintenance and repair shutdown at the
Company's Pekin, Illinois plant during the month of June, 1996.
Quarter Ending
Sept. 30 Dec. 31 March 31 June 30 Total
-------- ------- -------- ------- -----
(in thousands except per share amounts)
Fiscal 1997
Sales $53,173 $55,249 $54,449 $61,862 $224,733
Gross profit 2,063 4,889 2,474 1,574 11,000
Net income (loss) (346) 1,205 3 (731) 131
Earnings(loss) per share (.04) .12 .00 (.08) .01
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)
14
<PAGE>
Liquidity and Capital Resources
The following table is presented as a measure of the Company's liquidity and
financial condition:
At June 30,
-----------
1997 1996
---- ----
(in thousands)
Cash and cash equivalents $ 6,005 $ 3,759
Working capital 36,580 37,113
Amounts available under lines of credit 29,000 18,600
Note payable and long-term debt 30,933 40,933
Stockholders' equity $108,561 $109,222
The Company's positive cash flow generated from operations allowed it to
reduce its debt by $10 million during fiscal 1997. Continued positive cash flow
has allowed the Company to further reduce its debt by another $5.0 million since
the end of the fiscal year. Additionally, the Company's Board of Directors
authorized the purchase of up to 200,000 shares of its common stock to fund the
Company's stock option plans and for other corporate purposes. Pursuant to that
authority, 65,000 shares were purchased for $791,700 prior to the fiscal year
end. The measures instituted in the previous fiscal year, including stringent
cost reductions, suspension of quarterly cash dividends to stockholders and
changes in production, purchasing and marketing strategies, remain in effect.
At June 30, 1997, the Company had $3.4 million committed to improvements
and replacements of existing equipment.
The Company continues to maintain a strong working capital position and a
low debt-to-equity ratio, while generating positive cash flows. Management
believes this strong financial position and available lines of credit, combined
with the strategies which continue to be implemented, position it to take
advantage of a return to more favorable conditions.
Forward-Looking Information
Readers are cautioned that in addition to historical information contained
herein, this Annual Report also includes forward-looking statements and
information which 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'" "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
stock values to differ materially from those expressed in such forward-looking
statements.
15
<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, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
/s/ Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
August 8, 1997
16
<PAGE>
Financial Review
Consolidated Statements of Operations
Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(in thousands, except per share amounts)
Net Sales $224,733 $194,638 $180,252
Cost of sales 213,733 190,173 159,149
------- ------- -------
Gross profit 11,000 4,465 21,103
Selling, general & administrative expenses 9,169 9,001 10,553
----- ----- ------
(4,536) 10,550
Other operating income (expense) 370 159 (107)
--- --- ----
Income (loss) from operations 2,201 (4,377) 10,443
Other income (loss), net 618 1,309 (4,225)
Interest expense (2,604) (2,556) (606)
------ ------ ----
Income (loss) before income taxes 215 (5,624) 5,612
Provision (credit) for income taxes 84 (2,218) 2,273
Net income (loss) $ 131 $ (3,406) $ 3,339
-------- -------- --------
Earnings (loss) per common share $ .01 $ (.35) $ .34
======== ======== ========
See Notes to Consolidated Financial Statements
17
<PAGE>
Consolidated Balance Sheets
June 30, 1997 and 1996
1997 1996
---- ----
Assets (in thousands)
Current Assets
Cash and cash equivalents $ 6,005 $ 3,759
Receivables (less allowance for
doubtful accounts (1997 and 1996 - $285) 26,276 18,365
Inventories 15,000 19,913
Prepaid expenses 988 573
Deferred income taxes 1,688 1,531
Income taxes receivable 227 3,063
--- -----
Total Current Assets 50,184 47,204
------ ------
Property & equipment, at cost 213,813 210,304
Less accumulated depreciation 99,099 85,155
------ ------
Property & equipment, net 114,714 125,149
------- -------
Other assets 432 432
--- ---
Total assets $165,330 $172,785
======== ========
Liabilities & Stockholders' Equity
Current Liabilities
Notes payable $ 1,000
Accounts payable 8,196 6,416
Accrued expenses 4,408 3,675
----- -----
Total Current Liabilities 13,604 10,091
------ ------
Long-term debt 29,933 40,933
------ ------
Post-retirement benefits 6,245 5,945
----- -----
Deferred income taxes 6,987 6,594
----- -----
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 9,765,172 6,715 6,715
Additional paid-in capital 2,485 2,485
Retained earnings 100,149 100,018
------- -------
109,353 109,222
Treasury stock, at cost
Common; 1997-65,000 shares (792)
---- -------
Total stockholders' equity 108,561 109,222
------- -------
Total liabilities and stockholders' equity $165,330 $172,785
======== ========
See Notes to Consolidated Financial Statements
18
<PAGE>
Financial Review
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1997, 1996 and 1995
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
----- ----- ------- -------- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
Purchase of treasury stock $(792) (792)
1997 net income 131 131
---- --- ---
Balance, June 30, 1997 $4 $6,715 $2,485 $100,149 $(792) $108,561
=== ==== == ====== ====== ======== ===== ========
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE>
Financial Review
Consolidated Statements of Cash Flows
Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(In Thousands)
Cash Flows from Operating Activities
Net income (loss) $ 131 $(3,406) $3,339
Items not requiring (providing) cash:
Depreciation 14,041 13,854 8,681
(Gain) loss on sale of assets (18) (41) 4,696
Deferred income taxes 236 611 (628)
Changes in:
Accounts receivable (7,911) 3,185 (1,198)
Inventories 4,913 (5,223) (1,461)
Accounts payable 1,578 4 1,780
Income taxes (receivable) payable 2,836 (725) (3,570)
Other 618 (1,238) (929)
--- ------ ----
Net cash provided by operating activities 16,424 7,021 10,710
------ ----- ------
Cash Flows From Investing Activities
Additions to property & equipment (3,491) (5,516) (38,870)
Proceeds from sale of equipment 105 71 615
Proceeds from notes receivable 919 645
Change in current & non-current investments, net 14,504
------ ----- ------
Net cash used in investing activities (3,386) (4,526) (23,106)
------ ----- ------
Cash Flows From Financing Activities
Purchase of treasury stock (792)
Principle payments on long-term debt (10,000)
Proceeds from issuance of long-term debt 2,025 13,908
Dividends paid (1,221) (4,884)
------ ------
Net cash (used in) provided by
financing activities (10,792) 804 9,024
------- --- -----
Increase (Decrease) in Cash & Cash Equivalents 2,246 3,299 (3,372)
Cash & Cash Equivalents, Beginning of Year 3,759 460 3,832
----- --- -----
Cash & Cash Equivalents, End of Year $ 6,005 $ 3,759 $ 460
======== ======== ========
See Notes to Consolidated Financial Statements
20
<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 the production of vital wheat gluten, specialty
wheat proteins, 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's Atchison plant.
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. In connection with the purchase of raw
materials, principally corn and wheat, for anticipated operating requirements,
Midwest Grain Products, Inc. enters into commodity contracts to reduce the risk
of future grain price increases. These contracts, including those terminated
early, are accounted for as hedges and, accordingly, gains and losses are
deferred and recognized in cost of sales as part of product cost when contract
positions are settled and as related products are sold. If grain requirements
fall below anticipated needs and open contract levels, then gains and losses are
recognized immediately for the excess open contract levels. At June 30, 1997,
Midwest Grain Products, Inc. had entered into contracts hedging future corn
prices through the first quarter of fiscal 1998.
<PAGE>
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,
1997 1996 1995
---- ---- ----
(in thousands)
Interest costs capitalized $ 364 $1,570
Interest costs charged
to expense $2,604 2,556 606
------ ----- ---
$2,604 $2,920 $2,176
====== ====== ======
Earnings Per Common Share. Earnings per common share data is based upon the
weighted average number of shares and common share equivalents, except when
anti-dilutive, totaling 9,761,967 at June 30, 1997 and 9,765,172 at June 30,
1996 and 1995.
Cash Equivalents. The Company considers all liquid investments with
maturities of three months or less to be cash equivalents.
Income Taxes. Deferred tax liabilities and assets are recognized for the
tax effect of the differences between the financial statement and tax bases 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,
1997 1996
---- ----
(in thousands)
Whiskey, alcohol and spirits $ 4,017 $ 9,830
Unprocessed grain 5,803 5,203
Operating Supplies 3,105 2,632
Gluten 757 1,208
By-products and other 1,318 1,040
----- -----
$15,000 $19,913
======= =======
21
<PAGE>
Financial Review
Notes to consolidated financial statements
Note 3: Property and Equipment
Property and equipment consists of the following:
June 30,
1997 1996
---- ----
(in thousands)
Land, buildings and improvements $ 17,411 $ 17,411
Transportation equipment 1,081 1,166
Machinery equipment 193,923 186,154
Construction in progress 1,398 5,573
----- -----
213,813 210,304
Less accumulated depreciation 99,099 85,155
------ ------
$114,714 $125,149
======== ========
Note 4: Accrued Expenses
Accrued expenses consist of the following:
June 30,
1997 1996
---- ----
(in thousands)
Excise taxes $ 642 $ 236
Employee benefit plans (Note 10) 768 374
Salaries and wages 963 770
Property taxes 593 519
Insurance 723 991
Interest 696 696
Other expenses 23 89
-- --
$4,408 $3,675
====== ======
<PAGE>
Note 5: Long-Term Debt
Long-term debt consists of the following:
June 30,
1997 1996
---- ----
(in thousands)
Senior notes payable $25,000 $25,000
Line of credit 4,000 15,000
Other 933 933
--- ---
Long-term portion $29,933 $40,933
======= =======
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, 1997, the Company had a $27 million unsecured revolving line of
credit expiring on October 1, 1998, with interest at 1% below prime on which
there was $4.0 million in borrowings at June 30, 1997. All other terms remain
the same. The Company had four additional lines of credit totaling $7.0 million
expiring on dates through April 1, 1998, with interest rates varying from prime
to 1% below prime on which there were $1.0 million in borrowings at June 30,
1997.
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
debt service coverage ratio of 1.5 to 1.
The fair value of the senior notes payable debt, based upon a market rate
of 7.35% at June 30, 1997 was $24,300,000.
Aggregate annual maturities of long-term debt at June 30, 1997 are as
follows:
(in thousands)
1998 $ 0
1999 7,119
2000 2,335
2001 2,298
2002 2,273
Thereafter 15,908
------
$29,933
=======
22
<PAGE>
Note 6: Income Taxes
The provisions (credit) for income taxes are comprised of the following:
Years Ended June 30,
1997 1996 1995
---- ---- ----
(in thousands)
Income taxes currently
payable (receivable) $(152) $(2,829) $2,901
Income taxes deferred 236 611 (628)
--- --- ----
$ 84 $(2,218) $2,273
===== ======= ======
The tax effects of temporary differences related to deferred taxes shown on
the consolidated balance sheets are as follows:
June 30,
1997 1996
---- ----
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 110 $ 156
Post-retirement liability 2,436 2,378
Insurance accruals 831 1,002
State operating loss
carryforwards 447 341
Alternative minimum tax 723
Other 383 337
--- ---
4,930 4,214
----- -----
Deferred tax liabilities:
Accumulated depreciation (9,860) (8,857)
Deferred gain on
involuntary conversion (369) (420)
---- ----
(10,229) (9,277)
------- ------
Net deferred tax liability $ (5,299) $(5,063)
======== =======
The above net deferred tax liability is presented on the consolidated
balance sheets as follows:
June 30,
1997 1996
---- ----
(in thousands)
Deferred tax asset - current $ 1,688 $ 1,531
Deferred tax liability - long-term (6,987) (6,594)
------ ------
Net deferred tax liability $(5,299) $(5,063)
======= =======
<PAGE>
No valuation allowance has been recorded at June 30, 1997 or 1996.
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,
1997 1996 1995
---- ---- ----
(in thousands)
"Expected" provision (credit)
at federal statutory
rate (34%) $73 $(1,912) $1,908
Increases (decreases)
resulting from:
effect of state
income taxes 9 (236) 223
Other 2 (70) 142
- --- ---
Provision (credit) for
income taxes $84 $(2,218) $2,273
=== ======= ======
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.
23
<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,
1997 1996 1995
---- ---- ----
(in thousands)
Truck operations $342 $136 $(222)
Warehousing and
storage operations (13) (32) 41
Miscellaneous 41 55 74
-- -- --
$370 $159 $(107)
==== ==== =====
Note 9: Energy Commitment
During fiscal 1995, the Company negotiated a 15-year agreement to purchase
steam heat and electricity from a utility for its Illinois operations. Steam
heat is being purchased 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 that 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.
<PAGE>
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.
Pension costs included the following components:
Years Ended June 30,
1997 1996 1995
---- ---- ----
(in thousands)
Service cost benefits
earned during year $ 43 $ 54 $ 58
Interest cost on projected
benefit obligations 158 150 144
Actual investment income
earned on plan assets (358) (257) (233)
Amortization of transition
liability and difference between
actual and expected return
on plan assets 219 133 121
--- --- ---
Pension cost $ 62 $ 80 $ 90
===== ===== =====
The funded status of the plan is as follows:
June 30,
1997 1996
---- ----
(in thousands)
Accumulated benefit obligations,
including vested benefits
of $2,141 and $2,183 $2,151 $2,191
====== ======
Plan assets at fair value $2,349 $2,071
Projected benefit obligations
for participants' service
rendered to date 2,151 2,191
----- -----
Projected benefit obligations
in excess of plan's assets 198 (120)
Unrecognized gains (333) (75)
Unrecognized prior service cost 51 57
Unrecognized net obligation at July 1,
1987 being recognized over the
participants' average remaining
service period 88 106
Adjustment required to recognize
the minimum liability (88)
--- ---
Pension asset (liability) $ 4 $ (120)
====== ======
24
<PAGE>
Plan assets are invested in cash equivalents, U.S. Government securities,
corporate bonds, fixed income funds and common stocks. 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. Discretionary contributions to the plans totaled $726,000,
$374,000 and $998,000 for the years ended June 30, 1997, 1996 and 1995,
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, 1997 and 1996 was as follows:
June 30,
1997 1996
---- ----
(in thousands)
Accumulated post-retirement
benefit obligations
Retirees $3,395 $3,360
Active plan participants 1,650 1,526
----- -----
Unfunded accumulated obligation 5,045 4,886
Unrecognized actuarial gain (loss) 1,200 1,059
----- -----
Accrued post retirement
benefit cost $6,245 $5,945
====== ======
Net post-retirement benefit costs included the following components:
June 30,
1997 1996
---- ----
(in thousands)
Service cost $100 $159
Interest cost 353 424
(Gain) loss amortization (23)
---
$430 $583
==== ====
<PAGE>
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 9.75%
(compared to 10.0% assumed for 1996), reducing to 8.0% over eight years and 6.0%
over 16 years. A one percentage point increase in the assumed health care cost
trend rate would have increased the accumulated benefit obligation by $300,000
at June 30, 1997, 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.
Stock Options. The Company has two stock option plans, the Stock Incentive
Plan of 1996 ("The 1996 Plan") and the Stock Option Plan for Outside Directors
("The Directors Plan"). These Plans permit the issuance of stock awards, options
and stock appreciation rights to selected employees and outside directors of the
Company. The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost been
determined consistent with FASB Statement No. 123, the Company's 1997 net income
and earnings per share would have been reduced to the following pro forma
amounts:
Net Income (loss): As Reported $ 131
Pro Forma $ (82)
Primary Earnings per share: As Reported $ .01
Pro Forma $(.01)
Fully Diluted EPS: As Reported $ .01
Pro Forma $(.01)
Under the 1996 Plan, the Company may grant incentives for up to 450,000
shares of the Company's common stock to certain of the Company's management
personnel. The term of each award shall be determined by the committee of the
Board of Directors charged with administering the 1996 Plan. Under the terms of
the 1996 Plan, options granted may be either nonqualified or incentive stock
options and the exercise price may not be less than the fair value on the date
of the
25
<PAGE>
Financial Review
Notes to consolidated financial statements
grant. Through June 30, 1997, the Company has granted options on 176,500
shares becoming exercisable in yearly increments through January, 2001. Options
granted through June 30, 1997 have exercise prices equal to fair market value on
the date of grant.
Under the Director's Plan each non-employee or "outside" director of the
Company receives on the day after each annual meeting of stockholders an option
to purchase 1,000 shares of the Company's common stock at a price equal to the
fair market value of the Company's common stock on such date. Options become
exercisable on the 184th day following the date of grant and expire not later
than five years after the date of grant. Subject to certain adjustments, a total
of 90,000 shares are reserved for annual grants under the Plan, subject to
certain adjustments. Through June 30, 1997, the Company had granted options on
7,000 shares, all of which became exercisable in April, 1997.
A summary of the status of the Company's two stock option plans at June 30,
1997 and 1996 and changes during the years then ended is presented below:
Years Ended June 30,
1997 1996
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
(in thousands)
Outstanding Beginning
of Year 90,000 $14.00
Granted 93,500 15.32 90,000 $14.00
Exercised
- --------------------------------------------------------------------------------
Outstanding End
of Year 183,500 $14.67 90,000 $14.00
======= ====== ====== ======
As of June 30, 1997, 90,000 of the 183,500 options outstanding have an
exercise price of $14 and a remaining contractual life of 3.5 years. Of these
options, 27,750 are exercisable at June 30, 1997. Options outstanding of 86,500
have an exercise price of $15.25 and a remaining contractual life of 4.5 years.
None of these options are exercisable at June 30, 1997. The remaining 7,000
shares have an exercise price of $16.25 and all are exercisable at June 30,
1997. These options must be exercised by October, 2001.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model. The following weighted-average
assumptions were used for the year ended June 30, 1997: Risk free interest rate
of 6.13%; expected dividend yield of 0%; expected volatility of 34%.
<PAGE>
Note 11: Operating Leases
The Company has several noncancellable operating leases for railcars which
expire from July, 1998 through November, 2001. 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, 1997 are as follows:
(in thousands)
1998 $1,804
1999 1,566
2000 555
2001 93
2002 56
---- --
Future minimum lease payments $4,074
======
Rental expense for all operating leases with terms longer than one month
totaled $1,438,466, $1,546,000 and $951,000 for the years ended June 30, 1997,
1996 and 1995, respectively.
Minimum future rentals receivable under non-cancellable operating subleases
at June 30, 1997, were $155,500.
26
<PAGE>
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 August 31, 1999 at the Atchison plant
and on November 1, 2000 at the Pekin plant.
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 $723,000 is included in the accompanying 1997 financial
statements. Claims payments based on actual claims ultimately filed
could differ materially from these estimates.
During the years ended June 30, 1997, 1996 and 1995, the Company had sales
to one customer accounting for approximately 8.2%, 10.7% and 10.7%,
respectively of consolidated sales.
Note 13: Additional Cash Flows Information
Years Ended June 30,
1997 1996 1995
---- ---- ----
(in thousands)
Noncash Investing and
Financing Activities:
Purchase of property
and equipment in
accounts payable $ 211 $ 12 $1,407
Dividends declared 1,221
Additional Cash Payment
Information
Interest paid (net of
amount capitalized 1,909 2,585 519
Income taxes paid
(refunded) $(2,986) $(2,105) $4,200
------- ------- ------
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
MIDWEST GRAIN PRODUCTS, INC.
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MIDWEST
GRAIN PRODUCTS, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE
30, 1997 AND CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1997, 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> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<CASH> 6,005
<SECURITIES> 0
<RECEIVABLES> 26,276<F1>
<ALLOWANCES> 285
<INVENTORY> 15,000
<CURRENT-ASSETS> 50,184
<PP&E> 213,813
<DEPRECIATION> 99,099
<TOTAL-ASSETS> 165,330
<CURRENT-LIABILITIES> 13,604
<BONDS> 29,993
<COMMON> 6,715
0
4
<OTHER-SE> 101,842<F2>
<TOTAL-LIABILITY-AND-EQUITY> 165,330
<SALES> 224,733
<TOTAL-REVENUES> 224,733
<CGS> 213,733
<TOTAL-COSTS> 222,902<F3>
<OTHER-EXPENSES> 370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,604)
<INCOME-PRETAX> 215
<INCOME-TAX> 84
<INCOME-CONTINUING> 131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
<F1> Reflects Receivables less Allowances.
<F2> Reflects retained earnings and additional paid in captial
less cost of Treasury Stock.
<F2> Reflects cost of sales and selling, general &
administrative expenses.
</FN>
</TABLE>
