<PAGE>
As Filed with the Securities and Exchange Commission on September 28, 1998
==============================================================================
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, 1998
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,
1998. 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 highest sales price of such stock on August 20,
1998, was $91,616,272.
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. 1998 Annual Report to Stockholders, pages
17 through 36 [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 8, 1998, dated September 17, 1998
(incorporated into Part III).
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MIDWEST GRAIN PRODUCTS, INC.
FORM 10-K
For the Fiscal Year Ended June 30, 1998
<PAGE>
CONTENTS
PAGE
PART I
Item 1. Business.......................................................... 4
General Information............................................... 4
Vital Wheat Gluten................................................ 5
Premium Wheat Starch.............................................. 8
Alcohol Products.................................................. 9
Flour and Other Mill Products..................................... 11
Transportation.................................................... 11
Raw Materials..................................................... 11
Energy............................................................ 12
Employees......................................................... 13
Regulation........................................................ 13
Item 2. Properties........................................................ 13
Item 3. Legal Proceedings................................................. 14
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.............................................. 15
Item 6. Selected Financial Data........................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 15
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................ 16
Item 11.Executive Compensation............................................ 18
Item 12.Security Ownership of Certain Beneficial
Owners and Management............................................ 18
Item 13.Certain Relationships and Related Transactions.................... 18
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K... 19
SIGNATURES.................................................................. 21
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, contain forward-looking statements as well as historical
information. Forward-looking statements are usually identified by or are
associated with such words such as "intend, " believe," "estimate," "expect,"
"anticipate," "hopeful," "should," "may" and similar expressions. They reflect
management's current belief's and estimates of future economic circumstances,
industry conditions, Company performance and financial results and are not
guarantees of future performance. The forward- looking statements are based on
many assumptions and factors including those relating to grain prices, gasoline
prices, energy costs, product pricing, competitive environment and related
market conditions, operating efficiencies, access to capital and actions of
governments. Any changes in the assumptions or factors could produce materially
different results than those predicted and could impact stock values.
3
<PAGE>
PART I
Item 1. Business.
General Information
Midwest Grain Products, Inc. (the Company) is a Kansas
corporation headquartered in Atchison, Kansas. It is the successor to a
business founded in 1941 by Cloud L. Cray, Sr.
The Company is a fully integrated producer of vital wheat gluten,
premium wheat starch, and alcohol products. These grain products are processed
at plants located in Atchison, Kansas, and Pekin, Illinois. Wheat is purchased
directly from local and regional farms and grain elevators and milled into
flour. The flour is processed with water to extract vital wheat gluten, 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, 1998, as well as such
sales as a percent of total sales. .
<TABLE>
PRODUCT GROUP SALES
Year Ended June 30,
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------
(thousands of dollars)
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vital Wheat Gluten......... $ 42,489 19.0 $ 39,968 17.8 $ 39,514 20.3 $ 49,957 27.7 $ 70.966 38.2
Premium Wheat Starch....... 27,791 12.4 29,935 13.3 26,354 13.5 23,403 13.0 21,110 11.3
Alcohol Products:
Food Grade Alcohol
Beverage Alcohol...... 35,934 16.1 43,118 19.2 39,465 20.3 32,573 18.1 29,536 15.9
Food Grade Industrial. 27,487 12.3 38,004 16.9 32,064 16.5 23,379 13.0 22,585 12.1
Fuel Grade Alcohol....... 51,277 23.0 34,992 15.6 25,347 13.0 28,120 15.6 19,273 10.4
Alcohol By-products...... 33,259 14.9 34,553 15.4 28,449 14.6 19,583 10.9 18,146 9.8
------- ----- ------- ----- ------- ----- ------- ---- ------- -----
Total Alcohol
Products............. 147,957 66.3 150,667 67.1 125,325 64.4 103,655 57.5 89,540 48.2
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Flour and Other Mill
Products................. 5,017 2.3 4,163 1.8 3,445 1.8 3,237 1.8 4,352 2.3
----- ---- ------ ---- ------ ---- ------ ---- ------ ----
Net Sales ........... $223,254 100.0 $224,733 100.0 $194,638 100.0 $180,252 100.0 $185,968 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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The Company's net loss of $2.2 million in fiscal 1998 represented a
substantial decrease from the prior year's net income of $131,000. The decline
was mainly due to the effects of increased wheat gluten production in the face
of adverse market conditions, together with a steady drop in selling prices for
the Company's alcohol products. Massive imports of artificially-priced gluten
from the European Union continued to place severe competitive pressures on the
Company throughout the year. The decision to raise production levels was made to
prepare to meet increased customer demand based on expectations of a positive
outcome in initiatives taken to have a quota imposed on imports of subsidized
foreign gluten. With the imposition of an annual quota on foreign gluten imports
for a three-year period beginning June 1, 1998, the Company expects a return to
more positive results for fiscal 1999.
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. Sales to these
customers are typically evidenced by short term agreements that are cancelable
within 30 days and under which 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. None of the Company's
customers accounted
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for more than ten percent of the Company's consolidated revenues during fiscal
1998, except for a distributor of vital wheat gluten that makes purchases under
orders that are cancelable within thirty days.
Historically, the Company's sales have not been seasonal except for
variations affecting alcohol and gluten sales. Fuel alcohol sales usually
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 have
tended to increase during the second half of the fiscal year as demand increases
for hot dog buns, hamburger buns, and similar bakery products. During the next
three years the Company may experience significant increases in wheat gluten
sales during the second half of each fiscal year. This may be anticipated due to
the effects of annual quotas on the import of wheat gluten into the United
States if importers continue to ship gluten into the US at rates in excess of an
annualized rate for the annual quota. The annual quota became effective June 1,
1998, and applies to each of the next three years ending on each May 31. See
"Vital Wheat Gluten - Competition."
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 18 through 24 of the
Annual Report.
<PAGE>
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.
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 used to enhance pasta called "Pasta Power."
o 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.
o Texturized wheat proteins consist of vital wheat gluten that
is changed into a pliable substance through special
processing. 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.
o 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
5
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.
<PAGE>
o Polytriticum 200 and Polytriticum 2000 are the Company's
environmentally friendly biodegradable gluten resins that can
be molded to produce a variety of plastic-like objects.
Polytriticum 200 may be used as a commercial raw material for
the production of pet foods and biodegradable landscaping
materials and Polytriticum 2000 is contemplated for use in
disposable eating utensils, golf tees, food and feed
containers and similar type vessels.
Although a number of the specialty wheat proteins are being marketed,
others are still in the test marketing or development stage. Only a small
fraction of the Company's 1997 and 1998 vital wheat gluten sales reflect sales
of specialty proteins. However, the Company's strategy is to focus on the
marketing and development of these 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 10.5% of the Company's total fiscal 1998 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. Historically, the Company's principal
competitors in the U.S. vital wheat gluten market have consisted of a few other
domestic producers and producers in the European Union (the "EU"), Australia and
certain other regulated countries (the "Foreign Exporters"). Beginning in 1994,
the E.U. has taken an increasingly large share of the U.S. gluten market.
Imports of wheat gluten shipped into the United States from the E.U. during the
crop year ended June 30, 1995, were approximately 51.9 million pounds. Those
imports increased by to 70.2 million pounds in the crop year ending June 30,
1996, to 91.1 million pounds in the crop year ending June 30, 1997, and to 97.5
million pounds in the crop year ending June 30, 1998, for an aggregate increase
of 88%.
Competition in the vital wheat gluten industry is based primarily upon
price. Since the increasing surge of large, subsidized 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. 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 became
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 were less than the Company's cost of production. As a result of this
<PAGE>
imbalance in the U.S. wheat gluten market the Company's strategy during fiscal
1997 and most of fiscal 1998 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 United States Wheat Gluten Industry Council (the "Wheat
Gluten Council") to stem the tide of E.U. Subsidized wheat gluten through legal
proceedings.
6
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 expand wheat starch and wheat gluten production capacity and to
continue the development of even greater capacities. During the fiscal year
ending 1998, an estimated 150 million pounds of additional E.U. capacity were
either completed or nearing completion and an estimated additional 20 million
pounds of E.U. capacity have been announced to come on line during the next two
years. Until the imposition of quotas by the President of the United States
effective June 1, 1998, it was expected that a majority of the excess wheat
gluten production from these plants would be targeted for shipment to the U.S.
The Wheat Gluten 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. Initially the
Wheat Gluten Council attempted to establish equal opportunity or a "level
playing field" in the U.S. market through negotiations under a Grains Agreement
between the E.U. and the United States. A lack of meaningful discussions was
followed by an action under Section 301 of the Trade Act of 1974. Following a
further round of unsatisfactory discussions in connection with that action, the
Wheat Gluten Council initiated a second proceeding on September 19, 1997, with
the International Trade Commission of the United States (the "IT") under section
201 of the Trade Act of 1974 (the "Section 201 Proceeding").
The Section 201 Proceeding met with success during the second half of
fiscal 1998. On March 18, 1998, the ITC submitted to the President a unanimous
affirmative determination that "imports of wheat gluten are being imported into
the United States in such increased quantities as to be a substantial cause of
serious injury to the domestic industry." The ITC also recommended to the
President that a quota be placed on imports of foreign wheat gluten. As a result
of that finding and recommendation and pursuant to Section 203 of the Trade Act
of 1974, the President issued Proclamation 7103, on May 30, 1998. The
Proclamation imposes annual quantitative limitations for three years on imports
of wheat gluten from the E. U. and other Foreign Exporters at an amount equal to
the total average imports of wheat gluten shipped into the United States by the
Foreign Exporters during the three crop years ended June 30, 1995. The aggregate
quota for the first year is 126.8 million pounds. Annual increases in that quota
of six percent prevail in the second year and in the third year. The quotas for
"goods entered, or withdrawn from warehouse for consumption, on or after June 1,
1998" in millions of pounds are:
"If entered during the period from June 1, 1998, through May 31, 1999,
inclusive....:"
Australia...................................... 62.4 million pounds
European Community............................. 54.0 million pounds
Other Countries................................ 10.4 million pounds
<PAGE>
"If entered during the period from June 1, 1999, through May 31, 2000,
inclusive....:"
Australia...................................... 66.1 million pounds
European Community............................. 57.3 million pounds
Other Countries................................ 11.0 million pounds
"If entered during the period from June 1, 2000, through May 31, 2001,
inclusive....:"
Australia...................................... 70.1 million pounds
European Community............................. 60.7 million pounds
Other Countries................................ 11.7 million pounds
7
Based on information reported from the U.S. Customs Service, during the
first 123 days of the quota between June 1, 1998, and September 21, 1998, the
E.U. had imported approximately 35.84 million pounds of wheat gluten or
approximately 66.33% of the quota for the crop year ending May 31, 1999. If the
shipments from the E.U. continue at that rate, the E.U. quota should be filled
by November 16, 1998, thereby precluding further imports from the E.U. for the
next 196 days of the crop year. If this occurs, the Company expects a sharp
increase in demand for the Company's vital wheat gluten in the second half of
fiscal 1999 and a possible reduction in demand during the first half of fiscal
2000. Based on these estimates, the Company has been increasing gluten
production with the view to inventorying excess gluten during the first half of
fiscal 1999 and liquidating those inventories during the second half of that
year. This cycle should translate into increased gluten sales and other
operating results during the second half of fiscal 1999 with the possibility of
reduced gluten results during first six months of fiscal 2000.
During the next three years and beyond the Company plans to intensify
its focus on increasing the sales and production of Specialty Wheat Proteins
since those niche products are expected to be able to compete more effectively
with increased foreign imports following the end of the annual quotas in 2001.
The Company's sales of vital wheat gluten during 1998 increased
slightly over gluten sales in fiscal 1997 as the Company began to increase
production in anticipation of a favorable outcome in the Section 201 Proceeding.
Although the average price of wheat for the year declined during 1997 and 1998,
the continued flood of subsidized wheat gluten from the E.U. negatively impacted
the Company's gluten results for the year and even into the beginning of fiscal
1999 as E.U. producers continued to import gluten at a rate well in excess of an
annualized rate for the quota.
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
<PAGE>
structure, color, granular size and name identification.
A substantial 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
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 has
8
experienced substantial growth over the last ten years. 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.
Although Starch volumes increased during fiscal 1998, sales declined
slightly due primarily to increased competition.
<PAGE>
Alcohol Products
The Company's Atchison and Pekin plants process corn and milo, mixed
with the starch slurry from gluten and starch processing operations, into food
grade alcohol, fuel grade alcohol, animal feed and carbon dioxide.
Food grade alcohol, or grain neutral spirits, consists of beverage
alcohol and industrial food grade alcohol that are distilled to remove all
impurities and all but approximately 5% of the water content to yield high
quality 190 proof alcohol. Fuel grade alcohol, or "ethanol," is a lower grade of
grain alcohol that is distilled to remove all water to yield 200 proof alcohol
suitable for blending with gasoline.
Food Grade Alcohol
Beverage Alcohol. Food grade beverage alcohol consists primarily of
grain neutral spirits and gin. Grain neutral spirits is sold in bulk or
processed into vodka and gin and sold in bulk quantities at various proof
concentrations to bottlers and rectifiers, such as 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 1998 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 and continuing into fiscal 1998
competition in beverage markets increased significantly as producers of fuel
grade alcohol converted portions of fuel grade production into food grade
production. Competition is based primarily upon price and service, and in the
case of gin, formulation. The Company believes that the centralized location of
its Illinois and Kansas distilleries and the capacity of its dual production
facilities combine to provide the Company with a customer service advantage
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
9
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 declined by
approximately $17.7 million during 1998 due primarily to decreased demand and
increased food grade production capacity throughout the industry. Although the
effects of declining sales were partially offset by significantly reduced grain
prices, food grade results for 1998 contributed to the Company's 1998 loss. The
<PAGE>
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 abundance 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.
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.
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 2007, 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 1998
legislation was enacted that extended the credit through 2007, with the credit
being reduced to $0.51 per gallon beginning in 2005.
The Kansas Qualified Agricultural Ethyl Alcohol Producer Incentive
Fund, which expires in 2001, provides incentives for sales of ethanol produced
in Kansas to gasoline blenders. Fiscal 1998 payments to the Company out of the
fund totaled $379,000 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 1998.
<PAGE> 10
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.
Fuel grade alcohol sales increased by 46.5 % during 1998 as demand for
food grade alcohol declined and the utilization of the distillery capacity at
the Pekin, Illinois plant increased. At the same time fuel alcohol prices
decreased significantly due to declining gasoline prices and increased
industry-wide capacity. Although grain costs also declined, a more pronounced
drop in fuel grade alcohol prices negatively impacted the Company's fuel grade
alcohol operations.
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 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.
Sales of Alcohol by-products were relatively flat during 1998 due to an
increase in unit production of distillers feeds that was offset by reduced
selling prices which resulted from lower grain costs.
Flour and Other Mill Products
The Company owns and operates a flour mill at the Atchison plant. The
the mill's output of flour is used internally to satisfy a majority of the raw
material needed for the production of vital wheat gluten and premium wheat
starch.
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 380 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.
<PAGE>
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
11
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 have from time to time significant adverse effects
on the results of the Company's operations. This is primarily due to two
factors. First, it has been difficult in recent years for the Company to
compensate for increases in grain costs 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. Although
the Company expects that the three-year quota on imports of wheat gluten will
significantly alleviate this condition, no assurance can be given that the
effect will be uniform throughout each crop year covered by the quota or that
the market will otherwise adjust. Second, fuel grade alcohol prices, which
historically have tracked the cost of gasoline, do not usually adjust to rising
grain costs.
Beginning in the first quarter of fiscal 1997, grain prices began to
return to more normal levels from the record high levels that prevailed during
the privious fiscal year. By the end of fiscal 1997, the average market price of
corn and milo had gone from $6.52 per bushel at the beginning of the year to
$3.40 during June, 1997, while the average market price of wheat declined from
$5.51 per bushel at the beginning of fiscal 1997 to $3.90 at the end of that
year. During fiscal 1998 market prices for grain continued to decline to $3.17
per average bushel for corn and milo and to $3.06 for a bushel of wheat, as of
June 30, 1998. Although a return to more normal grain prices continued to
enabled positive cash flows in 1998, the fiscal 1998 surge in low priced
Subsidized E.U. gluten, excess alcohol capacities and low gasoline prices
continued 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.
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 have resulted from 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. Since then it has expanded those
hedging activities through the purchase of commodity contracts. During fiscal
1998, the Company hedged approximately 23% of corn processed compared to 61% in
1997 and 37% of wheat processed compared to 16% in 1997. The contracts are
accounted for as hedges and, accordingly, gains and losses are deferred and
recognized in cost of sales as part of contract costs when contract positions
are settled and related products are sold. For fiscal 1998, raw material costs
included a net income of $243,000 on contracts settled during the year compared
to a net loss of $1,877,000 for fiscal 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk" in the
Annual Report.
<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.
12
Employees
As of June 30, 1998, the Company had 421 employees, 285 of whom are
covered by two collective bargaining agreements with one labor union. One
agreement, that expires on August 31, 1999, covers 183 employees at the Atchison
Plant. The other agreement, that expires in November, 2000, covers 94 employees
at the Pekin plant. As of June 30, 1997, the Company had 411 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.
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."
<PAGE>
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.
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.
13
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 $1.0 million. 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 a review by the State of the Company's
application and 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, 1998 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.
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.
14
<PAGE>
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 1998 and 1997. Cash dividends
have not been paid since the end of 1995.
Sales Price
High Low
1998:
Fourth Quarter............................... $ 15.00 $ 12.00
Third Quarter................................ 15.75 12.00
Second Quarter............................... 14.63 11.88
First Quarter................................ 15.13 12.50
1997:
Fourth Quarter............................... $ 13.25 $ 10.50
Third Quarter............................... 16.75 11.13
Second Quarter.............................. 19.50 13.63
First Quarter................................ 14.38 12.00
At June 30, 1998 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 17 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
pages18 through 24 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 25 through 36 of the Annual Report, copies of which pages
are included in Exhibit 10(c) to this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
15
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Name Age Position
Cloud L. Cray, Jr. 75 Chairman of the Board and Director
Laidacker M. Seaberg 52 President, Chief Executive Officer and Director
Sukh Bassi, Ph.D. 57 Vice President - Vital Wheat Gluten Marketing,
Research and Development and Corporate
Technical Director
Robert G. Booe 61 Vice President - Administration, Controller,
Treasurer and Chief Financial Officer
Gerald Lasater 60 Vice President - Wheat Starch Marketing
Raymond L. Miller 64 Vice President - Purchasing and Energy and
President of Midwest Grain Pipeline, Inc.
Marta L. Myers 38 Secretary
Randy M. Schrick 48 Vice President - Operations and Director
Robert L. Swaw 68 Vice President - Alcohol Marketing
Michael Braude 62 Director
F.D. "Fran" Jabara 73 Director
Tom MacLeod, Jr. 50 Director
Robert J. Reintjes 66 Director
Daryl R. Schaller, Ph.D. 54 Director
Eleanor B. Schwartz, D.B.A. 61 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.
16
<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.
Ms. Myers joined the Company in 1996. She has served as Secretary since
October 1996. Previously she was executive secretary for Superintendent of
Schools for Unified School District 409, Atchison, Kansas.
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. Braude has been a Director since 1991 and is a member of the Audit and
Nominating Committees. 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 and NPC International, Inc., an
operator of numerous Pizza Hut and other quick service restaurants throughout
the United States, 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 Audit Committee and a member of the Nominating 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.
Mr. MacLeod, Jr. has been a Director since 1986 and is a member of the
Audit and Human Resources 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.
<PAGE>
Mr. Reintjes has been a director since 1986, and is Chairman of the
Nominating Committee and a member of the Audit Committee. 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. Schaller has been a director since October, 1997, and is Chairman of
the Human Resources Committee and a member of the Audit Committee. He retired
from Kellogg Co. in 1996 after 25 years of service. He served Kellogg
17
as its Senior Vice President -- Scientific Affairs from 1994, and previously was
Senior Vice President -- Research, Quality and Nutrition for Kellogg. He is also
a director of Iams Company, a producer of pet foods, and of Cancer Research
Foundation of America.
Dr. Schwartz has been a director since June 3, 1993. She is a member of
the Audit and Human Resources Committees. She has been the Chancellor of the
University of Missouri-Kansas City since May 1992, and was previously the Vice
Chancellor for Academic Affairs. She is a Trustee of Midwest Research Institute
and a director of each of the funds in The United Group of Mutual Funds,
Target/The United Funds, Inc. and Waddell & Reed Funds, Inc.
The Board of Directors is divided into two groups (Groups A and B) and
three classes. Group A directors are elected by the holders of Common Stock and
Group B directors are elected by the holders of Preferred Stock. One class of
directors is elected at each annual meeting of stockholders for three-year
terms. The present directors' terms of office expire as follows:
Term
Group A Directors Expires Group B Directors Term Expires
Mr. Jabara 2000 Mr. Cray, Jr. 1998
Mr. MacLeod 1998 Mr. Reintjes 1998
Dr. Schaller 2000 Mr. Braude 2000
Dr. Schwartz 1999 Mr. Schrick 1999
Mr. Seaberg 1999
Item 11. Executive Compensation.
Incorporated by reference to the information under "Executive Compensation"
on pages 17 through 22 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 22 through 24 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
None.
18
<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, 1998 and 1997.
Consolidated Statements of Income - for the Three Years Ended
June 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the Three
Years Ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flow - for the Three Years
Ended June 30, 1998, 1997 and 1996. 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
Allother 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 Fourth Amended Line of Credit Loan
Agreement providing for the Issuance of a Line
of Credit Note in the amount of $27,000,000.
<PAGE>
4(d) Copy of Line of Credit Note Under Fourth Amended
Line of Credit Loan Agreement.
9(a) Copy of Cray Family Trust (Incorporated by
reference to Exhibit 1 of Amendment No. 1 to
Schedule 13D of Cloud L. Cray, Jr. dated
November 17, 1995).
19
Exhibit No. Description
10(a) Summary of informal cash bonus plan
(incorporated by reference to the summary
contained in the Company's Proxy Statement
dated September 17, 1998, 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. 1998 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).
10(g) Copy of Midwest Grain Products, Inc. 1998
Stock Incentive Plan for Salaried Employees
(incorporated by reference to Appendix A to
the Company's Notice of Annual Meeting and
Proxy Statement dated September 17, 1998,
filed with theSecurities and Exchange
Commission on September 15, 1998).
<PAGE>
10(h) Form of Stock Option with respect to stock
options granted under the Midwest Grain
Products, Inc. 1998 Stock Incentive Plan for
Salaried Employees (incorporated by reference
to Exhibit 10(e) to the Company's Form 10-K
for the year ended June 30, 1996).
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
23 Consent of Baird, Kurtz & Dobson
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, 1998 and for the year then ended.
No reports on Form 8-K have been filed during the quarter ended June
30, 1998.
20
<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 23rd day of September, 1998.
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 23, 1998
/s/ Robert G. Booe Vice President, Treasurer
Robert G. Booe and Controller (Principal
Financial and Accounting Officer) September 23, 1998
/s/ Michael Braude
Michael Braude Director September 23, 1998
/s/ Cloud L. Cray, Jr. Director
Cloud L. Cray, Jr. September 23, 1998
/s/ F. D. Jabara Director
F. D. "Fran" Jabara September 23, 1998
/s/ Tom MacLeod Director
Tom MacLeod, Jr. September 23 , 1998
/s/ Robert J. Reintjes Director
Robert J. Reintjes September 23, 1998
/s/ Randy M. Schrick Director September 23, 1998
Randy M. Schrick
/s/ Daryl R. Schaller Director
Daryl R. Schaller September 23, 1998
/s/ Eleanor B. Schwartz Director September 23, 1998
Eleanor B. Schwartz
21
<PAGE>
MIDWEST GRAIN PRODUCTS, INC.
Consolidated Financial Statement Schedules
(Form 10-K)
June 30, 1998, 1997 and 1996
(With Auditors' Report Thereon)
S-1
<PAGE>
[LOGO]
Baird, Kurtz & Dobson
Certified Public Accountants
City Center Square, Suite 2700, 1100 Main, 816 221-6300
Kansas City, Missouri 64105 FAX 816 221-6380
http://www.bkd.com
Member of Moores Rowland International
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, 1998, 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 4, 1998 [LOGO]
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, 1998
Allowance for
doubtful
accounts $285 $ 53 $53 $285
==== ==== === ====
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
==== ==== ==== ===
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 Fourth Amended Line of Credit Loan Agreement providing for the
Issuance of a Line of Credit Note in the amount of $27,000,000.
4(d) Copy of Line of Credit Note Under Fourth Amended Line of Credit Loan
Agreement.
9(a) Copy of Cray Family Trust (Incorporated by reference to Exhibit 1 of
Amendment No. 1 to Schedule 13D of Cloud L. Cray, Jr. dated November
17, 1995).
10(a)Summary of informal cash bonus plan (incorporated by reference to the
summary contained in the Company's Proxy Statement dated September
17, 1998, 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. 1998 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>
10(g)Copy of Midwest Grain Products, Inc. 1998 Stock Incentive Plan for
Salaried Employees (incorporated by reference to Appendix A to the
Company's Notice of Annual Meeting and Proxy Statement dated
September 17, 1998, filed with the Securities and Exchange Commission
on September 15, 1998).
10(h)Form of Stock Option with respect to stock options granted
under the Midwest Grain Products, Inc. 1998 Stock Incentive Plan for
Salaried Employees (incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended June 30, 1996).
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
23 Consent of Baird, Kurtz & Dobson
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, 1998
and for the year then ended.
2
<PAGE>
Exhibit 4(c)
FOURTH AMENDED LINE OF CREDIT LOAN AGREEMENT
THIS FOURTH AMENDED LINE OF CREDIT LOAN AGREEMENT (the "Agreement"),
executed as of this 28th day of October, 1997, by and between MIDWEST GRAIN
PRODUCTS, INC., a corporation organized under the laws of the state of Kansas
and having its principal place of business in Atchison, Kansas ("Borrower"), and
Commerce Bank, N.A., a national banking association, having its principal place
of business in Kansas City, Missouri ("Bank").
WHEREAS, Borrower desires to establish a line of credit with Bank to
provide working capital and capital expenditures; and
WHEREAS, Bank desires to extend such line of credit upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained in this Agreement, the parties agree as follows:
ARTICLE 1.
Line of Credit
Section 1.1 General Terms. Subject to the terms of this Agreement, Bank will
lend Borrower from time to time, until the termination hereof, such sums as
Borrower may request, in minimum increments of $100,000, which shall not exceed
in the aggregate principal amount at any one time outstanding the sum of Twenty
Seven Million and no/100 Dollars ($27,000,000.00) (the "Line of Credit Loan").
Bank's obligation to lend hereunder may be terminated by Bank at any
time in Bank's sole discretion, or if no such termination is made, then on
November 1, 1999. Each advance under the Line of Credit Loan is at the option of
Bank and Bank has no obligation to make advances. In addition this Agreement
shall be deemed to automatically terminate if the occurrence of an event
pursuant to Section 4.1 causes the Line of Credit Note to become immediately due
and payable, The inclusion of monthly interest payments, events of default and
an alternate maturity date does not alter the discretionary nature of the line
of credit.
Section 1.2 Commitment Fee. Borrower shall pay a fee equal to 1/4% per annum
on the unused portion of the Line of Credit Loan. Such fee shall be paid
quarterly in arrears.
<PAGE>
Section 1.3 Note. Borrower agrees to execute and deliver to Bank the Line of
Credit Note to evidence the Line of Credit Loan. Each advance made thereunder,
together with each repayment made by Borrower, shall be evidenced by a notation
dated the date of the advance or repayment and recorded by Bank on the schedule
appearing on the reverse side of or attached to the Line of Credit Note. The
aggregate unpaid principal amount of the Line of Credit Note set forth on the
schedule shall be conclusively presumed to reflect the amounts advanced and
repaid, and the outstanding principal balance of the Line of Credit Loan.
Section 1.4. Principal Payment. In the event of a default as defined in
Section 4.1 or on November 1, 1999, the principal balance of the Line of Credit
Note together with all accrued interest shall become immediately due and
payable.
Section 1.5. Interest. If the outstanding balance is less than $500,000,
the line of credit shall bear interest at a per annum rate equal to the Prime
Rate. If the outstanding balance is $500,000 or greater, the line of credit
shall bear interest at the greater of either (1) the Prime Rate, minus 1%, or
(2) the Federal Funds Rate plus 1.50%.
Interest will be payable monthly, in arrears, and at maturity, whether by
acceleration or otherwise, Interest will be computed on the actual days
outstanding based upon a year consisting of 360 days.
"Prime Rate" means the Prime Rate of interest established from time to time by
Bank and designated as such for its internal convenience, and no representation
is made that the Prime Rate is the best, the lowest or a favored rate of
interest. The rate of interest, if tied to the Prime Rate, shall change with and
be effective on the date of each change in the Prime Rate.
"Federal Funds Rate" means the effective Federal Funds Rate as quoted by the
Federal Reserve Bank of New York on a daily basis. The Federal Funds Rate is
adjusted daily.
Section 1.6 Purpose. Borrower represents the purpose of the Line of Credit
Loan is to provide short term working capital and capital expenditures.
Section 1.7 Disbursements. Bank will credit the proceeds of any borrowing
hereunder to Borrower's deposit; account maintained with Bank.
Section 1.8 Condition of Loans. Any advance under the Line of Credit Note is
subject to the condition precedent that no event of default described in Section
4.1 shall have occurred, and that the Line of Credit has not been terminated.
Each request for a borrowing under the Line of Credit Note shall be deemed to
constitute a representation by Borrower at the time of the request that no event
of default as defined in Section 4.1
2
<PAGE>
exists or is imminent and that the representations and warranties of
Borrower contained in this Agreement are true in all material respects on or as
of the date of borrowing.
ARTICLE 2.
Warranties and Representations
Section 2.1 Good Standing. The Borrower is a corporation duly organized and
in good standing, under the laws of the state of Kansas, and has the power to
own its property and to carry on its business and is in good standing in each
jurisdiction in which the character of the properties owned by it or in which
the transaction of its business makes such qualifications necessary.
Section 2.2 Authority. The Borrower has full power and authority to enter
into this Agreement, to make the borrowing hereunder, and to execute and deliver
the Line of Credit Note, all of which has been duly authorized by all proper and
necessary corporate action. No consent or approval of stockholders is required
as a condition to the validity of this Agreement or the Line of Credit Loan.
Section 2.3 Binding Agreement. This Agreement constitutes, and the Line of
Credit Note when issued and delivered pursuant hereto, for value received, will
constitute, the valid and legally binding obligations of the Borrower in
accordance with all stated terms.
Section 2.4 Litigation. There are no proceedings pending, or, so far as the
officers of the Borrower know threatened, which will materially adversely affect
the financial condition or operations of the Borrower or any subsidiary.
Section 2.5 No Conflicting Agreements. There are no charter, bylaw, or
preference stock provisions of the Borrower and no provision of any existing
mortgage, indenture, contract or agreement binding on the Borrower or affecting
its property, which would conflict with or in any way prevent the execution,
delivery, or carrying out of the terms of this Agreement and of the Line of
Credit Note.
Section 2.6 Taxes. The Borrower has filed all Federal, State and other tax
and similar returns and has paid or provided for the payment of all taxes and
assessments due thereunder including, without limitation, all withholding, FICA
and franchise taxes.
Section 2.7 Financial Statements. There have been no material changes in the
Borrower's financial statements dated June 30, 1997.
3
<PAGE>
ARTICLE 3.
Covenants
So long as this Agreement remains in effect or as long as there is any
principal or interest due on the Line of Credit Note, Borrower agrees as
follows:
Section 3.1 Comply with all Company Covenants as defined and contained in
Section 5 of the Note Agreement dated as of August 1, 1993, between Borrower and
the Principal Mutual Life Insurance Company (the "Principal Agreement")
including, but not limited to, the following:
(a) Current Ratio. Maintain a Current Ratio of not less than 1.50 to 1.00.
(b) Consolidated Tangible Net Worth. Maintain Consolidated Tangible Net
Worth at an amount not less than THE GREATER OF (i) $70,000,000 and (ii) the sum
of $70,000,000 plus 50% of Consolidated Net Income for the period from and after
March 31, 1993 to the date of determination thereof (considered as a single
accounting period).
(c) Funded Debt. Not permit Consolidated Funded Debt to exceed 60% of
total capitalization.
(d) Debt/Worth. Maintain a ratio of Debt to Tangible Net Worth of not more
than 2.50 to 1.00.
(e)Fixed Charges Coverage Ratio. Maintain a ratio of Net Income Available
for Fixed Charges to Fixed Charges of not less than 1.50 to 1.00.
The Company Covenants shall survive any amendment, modification or termination
of the Principal Agreement.
Section 3.2 Taxes, etc. Promptly pay all taxes, assessments and other
government charges (unless such payments are being contested in good faith).
Section 3.3 Insurance. Maintain insurance on all its properties in such
amounts and against such hazards as is customary in Borrowers industry.
Section 3.4 Books and Records. Maintain its books and records and account
for financial transactions in accordance with generally accepted accounting
principals.
4
<PAGE>
Section 3.5 Financial Reporting. Borrower shall furnish Bank with the
following information:
(a) Its annual audited financial statement within 90 days of its fiscal
year-end, in a form and prepared by a certified public accounting firm
acceptable to Bank;
(b) Its quarterly financial statements within 45 days after the end of each
quarter; and
(c) Such other information as Bank may reasonably request from time to
time.
Section 3.6 Notification. Notify Bank immediately if it becomes aware of the
occurrence of any Event of Default (as defined under Section 4.1 hereof) or of
any fact, condition, or event that, only with the giving of notice or passage of
time or both, would become an Event of Default, or if it becomes aware of a
material adverse change in the business prospects, financial condition
(including, without limitation, proceedings in bankruptcy, insolvency,
reorganization, or the appointment of a receiver or trustee), or results of
operations of Company, or the failure of Company to observe any of its
undertakings under this Agreement of any other note or agreement binding on
Borrower including, but not limited to, the Principal Agreement.
ARTICLE 4.
Defaults
Section 4.1 Events of Default. The entire unpaid balance of the Line of
Credit Note shall become immediately due and payable without demand,
presentment, notice or protest of any kind (all of which are expressly waived),
upon the happening of any of the following events of default:
(a) Nonpayment of any interest or any principal payment owing under the Line
of Credit Note whether at maturity or otherwise; or
(b) If any certificate, statement, representation warranty or audit
furnished by or on behalf of the Borrower in connection with this Agreement,
including those contained herein, or as an inducement by Borrower to enter into
modify, extend, or renew this Agreement shall prove to be false in any material
respect, or if Borrower shall have omitted the listing of a substantial
contingent or unliquidated liability or claim against Borrower or, if on the
date of execution of this Agreement there shall have been any materially adverse
change in any of the facts disclosed by any such certificate, statement,
5
<PAGE>
representation, warranty or audit, which change shall not have been disclosed by
Borrower to Bank at or prior to the time of execution; or
(c) If Borrower shall default in the due performance or observance of any
covenant undertaken by it under this Agreement; or
(d) Default in the performance of the obligations of Borrower pursuant to
any other note or agreement binding on Borrower including, but not limited to,
the Principal Agreement; or
(e) Borrower shall be adjudicated a bankrupt, or make a general assignment
for the benefit of its creditors, or there are instituted by or
against Borrower any type of bankruptcy proceedings or any proceeding for
the liquidation or the termination of Borrower's affairs, or the appointment of
a receiver or trustee for Borrower or for any of Borrower's assets, or a
properly filed petition for Borrower's reorganization under the Bankruptcy Code
or otherwise is approved, or Borrower files a petition for arrangement under
Chapter 11 of the Bankruptcy Code or any similar statute.
(f) Any judgment or judgments, writ or writs, or warrant or warrants of
attachment, or any similar process or processes shall be entered or filed
against the Borrower or any Subsidiary or against any of their respective
property or assets and remain unstayed and undischarged for a period of 60 days
from the date of its entry.
Section 4.2 Remedies. If any event of default occurs, Bank may resort to any
remedy existing at law or in equity for the collection of the Line of Credit
Note and enforcement of the covenants and provisions of this Agreement. Banks
resort to any remedy shall not prevent the concurrent or subsequent employment
of any other remedy.
Section 4.3 Waiver. Any waiver of an event of default by Bank shall not
extend to or affect any subsequent default. No failure or delay by Bank in
exercising any right hereunder shall operate as a waiver nor shall any single or
partial exercise of any right preclude any other right hereunder.
ARTICLE 5.
Miscellaneous
Section 5.1 Amendments. This Agreement may be amended or modified in whole
or in part at anytime, if in writing and signed by the parties. Bank may further
6
<PAGE>
consent in writing, or give written waiver to any covenant or event which might
otherwise create a default.
Section 5.2 Delay Waiver. No omission or delay on the part of Bank in
exercising any right, power, or privilege hereunder shall impair or operate as a
waiver thereof, nor shall any single or partial exercise or any right, power, or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. No waiver by Bank will be
valid unless in writing and signed by Bank and then only to the extent specified
therein. The rights and remedies herein expressly specified are cumulative and
not exclusive of any rights or remedies which Bank would otherwise have.
Section 5.3 Bank. Whenever in this Agreement reference is made to the Bank,
such term shall be deemed for the purpose of benefits, powers, and privileges
hereunder to include any firm, person, or corporation who may be the holder from
time to time of the Note issued hereunder or a participation therein.
Section 5.4 Governing Law. This Agreement and the Line of Credit Note shall
be construed and interpreted in accordance with the laws of the State of
Missouri.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT, INCLUDING PROMISES TO EXTEND OR RENEW SUCH
DEBT, ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER) AND US (CREDITOR) FROM
MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH
MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE
STATEMENT OF THE AGREEMENT BETWEEN US EXCEPT AS WE MAY LATER AGREE IN WRITING.
MIDWEST GRAIN PRODUCTS, INC. COMMERCE BANK, N.A.
By: /s/ Ladd M. Seaberg By: /s/ Fredrick J. Marston
Title: President and CEO Title: /s/ Vice President
By: /s/ Robert G. Booe
Title: Vice President and CFO
7
<PAGE>
Exhibit 4(d)
LINE OF CREDIT NOTE
$27,000,000 October 28, 1997
FOR VALUE RECEIVED, the undersigned, MIDWEST GRAIN PRODUCTS, INC., a Kansas
corporation ("Borrower") hereby promises to pay to the order of Commerce Bank,
N.A. ("Bank") at its offices in Kansas City, Missouri, the aggregate unpaid
principal amount and accrued interest of all borrowings hereunder. The aggregate
unpaid principal amount shall also become immediately due and payable, without
demand or further action on the part of Bank upon the occurrence of an event of
default as set forth in Section 4.1 of the Fourth Amended Line of Credit Loan
Agreement, as amended, dated as of October 28, 1997 (the "Agreement").
Interest on this note shall be calculated on the actual number of days on the
basis of a year of 360 days. If the outstanding balance is less than $500,000,
the line of credit shall bear interest at a per annum rate equal to the Prime
Rate. If the outstanding balance is $500,000 or greater, the line of credit
shall bear interest at the greater of either (1) the Prime Rate, minus 1 %, or
(2) the Federal Funds Rate plus 1.50%.
Interest will be payable monthly, in arrears, and at maturity, whether by
acceleration or otherwise, beginning December 1, 1997, and on the first day of
each month thereafter. Interest will be computed on the actual days outstanding
based upon a year consisting of 360 days. If any interest payment on this note
shall become due and payable on a day which is not a business day of Bank,
payment shall be made on the next succeeding business day of Bank.
"Prime Rate" means the Prime Rate of interest established from time to time by
Commerce Bank and designated as such for its internal convenience, and no
representation is made that the Prime Rate is the best, the lowest or favored
rate of interest. The rate of interest, if tied to the Prime Rate, shall change
with and be effective on the date of each change in the Prime Rate.
"Federal Funds Rate" means the effective Federal Funds Rate as quoted by the
Federal Reserve Bank of New York on a daily basis. The Federal Funds Rate is
adjusted daily.
So long as the Agreement has not been terminated, Borrower may, from the date of
this note through November 1, 1999 borrow, repay and reborrow sums, at any one
time outstanding, not to exceed $27,000,000. All advances and repayments
hereunder shall be endorsed on the reverse hereof (or an attached schedule) by
the Bank or holder, and between the undersigned and Bank, such endorsements and
the balances derived from such endorsements shall be conclusively presumed to
reflect the amounts advanced and repaid hereunder and the then outstanding and
unpaid balance of sums advanced or readvanced hereunder.
<PAGE>
The undersigned hereby waives presentment, protest, demand and notice of
dishonor or default.
This note is issued pursuant to the terms of the Agreement, to which Agreement,
and any amendments thereto, reference is hereby made for a statement of the
terms and conditions under which this borrowing was made, and is to be repaid.
MIDWEST GRAIN PRODUCTS, INC.
By: /s/ Ladd M. Seaberg
Title: President and CEO
By: /s/ Robert G. Booe
Title: Vice President and CFO
<PAGE>
Exhibit 10(c)
Selected Financial Information
Years ended June 30
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
(in thousand, except per share amounts)
Income Statement Data:
Net sales $223,254 $224,733 $194,638 $180,252 $185,968
Cost of sales 214,453 213,733 190,173 159,149 148,320
- -------------------------------------------------------------------------------
Gross profit 8,801 11,000 4,465 21,103 37,648
Selling, general and
administrative expenses 11,363 9,169 9,001 10,553 12,212
Other operating income
(expense) 100 370 159 (107) (669)
- -------------------------------------------------------------------------------
Income (loss) from
operations (2,462) 2,201 (4,377) 10,443 24,767
Other income (loss), net 658 618 1,309 (4,225) 924
Interest expense (1,887) $(2,604) (2,556) (606) (127)
- -------------------------------------------------------------------------------
Income (loss) before
income taxes (3,691) 215 (5,624) 5,612 25,564
Provision (credit) for
income taxes (1,455) 84 (2,218) 2,273 9,713
- -------------------------------------------------------------------------------
Net Income (Loss) $(2,236) $131 $(3,406) $3,339 $15,851
===============================================================================
Earnings (Loss) Per
Common Share $(0.23) $0.01 $(0.35) $0.34 $1.62
===============================================================================
Cash dividends per
common share $0.50 $0.50
Weighted average common
shares outstanding 9,700 9,762 9,765 9,765 9,765
===============================================================================
Balance Sheet Data:
Working capital $39,825 $36,580 $37,113 $26,955 $21,951
Total assets 161,978 165,330 172,785 176,749 168,146
Long-term debt, less
current maturities 25,536 29,933 40,933 38,908 25,000
Stockholders' equity 106,325 108,561 109,222 112,628 114,173
===============================================================================
Midwest Grain Products, Inc. 1998 Annual Report pg. 17
<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 Fiscal
1998 1997
1998 1997 1996 Over 1997 Over 1996
- -------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% (.7)% 15.5%
Cost of sales 96.1 95.1 97.7 .3 12.4
- -------------------------------------------------------------------------------
Gross profit 3.9 4.9 2.3 (20.0) 146.4
Selling, general
and administrative expenses 5.1 4.1 4.6 23.9 1.9
Other operating income (loss) .1 .2 .1 (73.0) 132.7
- -------------------------------------------------------------------------------
Income (loss) from operations (1.1) 1.0 (2.2) (211.9) 150.3
Other income (expense) (.6) (.9) (.6) 61.6 59.2
- -------------------------------------------------------------------------------
Income before income taxes (1.7) .1 (2.8) (1,616.7) 103.8
Provision (credit) for
income taxes (.7) .04 (1.1) (1,832.1) 103.8
- -------------------------------------------------------------------------------
Net income (loss) (1.0)% .06% (1.7)% (1,806.9)% 103.8%
===============================================================================
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
The Company's net loss of $2,236,000 in fiscal 1998 represented a
substantial decrease from the prior year's net income of $131,000. This decline
was mainly due to the effects of increased wheat gluten production in the face
of adverse market conditions, together with a steady drop in selling prices for
the Company's alcohol products.
Massive imports of artificially-priced gluten from the European Union
(E.U.) continued to place severe competitive pressures on the Company throughout
the year. The decision to raise production levels was made to prepare to meet
increased customer demand based on expectations of government action to create a
more fair and stable competitive environment.
On June 1, the White House implemented a three-year quota on imports of
foreign wheat gluten following a unanimous recommendation from the United States
International Trade Commission (ITC). The White House additionally announced
that international negotiations would be pursued to address the underlying cause
of the increase in imports of wheat gluten, particularly from the E.U., or to
otherwise alleviate injury to the domestic industry.
Midwest Grain Products, Inc. 1998 Annual Report pg. 18
<PAGE>
Management Discussion and Analysis
- -------------------------------------------------------------------------------
During the first year of implementation, the quota will restrict wheat
gluten imports to 126 million pounds, a reduction of approximately 30% compared
to the amount of gluten imported by the United States during the Company's 1998
fiscal year. In each of the two following years, imports will be allowed to
increase by 6%. Within the quota, separate quotas for the E.U., Australia and
all other non-excluded countries were assessed, "taking into account the
disproportional growth and the impact of imports of wheat gluten from the
European Union," according to the ITC's recommendation. Countries excluded from
the quota are Canada, Mexico, Israel and the beneficiary countries of the
Caribbean Basin Economic Recovery Act or the Andean Trade Preferences Act.
The quota is consistent with the type of remedy requested by the Company
and the Wheat Gluten Industry Council (WGIC) of the U.S. That request was made
in a petition that was filed by the WGIC on September 19, 1997 under Section 201
of the Trade Act of 1974. The petition was filed on the grounds that the U.S.
wheat gluten industry has been seriously injured by the surge in low-priced
wheat gluten imports from the E.U. Profits from their highly subsidized and
protected wheat starch business have allowed E.U. producers to unload huge
surpluses of wheat gluten, a co-product, in the U.S. market at prices below U.S.
production costs. This has forced domestic producers to drastically
under-utilize production capacities and relinquish sizeable percentages of
market share.
The Company expects the import quota to help establish a more level playing
field in the U.S. wheat gluten market by offsetting lopsided trade advantages
provided by the E.U. to E.U. producers. As a result, the Company began
increasing gluten production levels, particularly in the second half of fiscal
1998, to effectively supply future customer needs. In addition, the Company has
intensified efforts to develop and market modified wheat gluten products in
niches that will be less affected by foreign competition.
The Company's production of food grade alcohol for beverage and industrial
applications declined in fiscal 1998 compared to the prior year due to a decline
in demand. The production of fuel grade alcohol, on the other hand, increased
compared to fiscal 1997 as the result of greater utilization of distillery
capacity at the Company's Pekin, Illinois plant. Prices for all of the Company's
alcohol products decreased compared to the prior year's levels. Due partially to
the effects of lower costs for corn and milo, the principal raw materials used
in the Company's alcohol production process, prices for food grade alcohol
decreased. Seasonal factors and increased supplies of alcohol throughout the
industry also contributed to this decline. The fall in fuel alcohol prices was
caused principally by a downturn in gasoline prices. As the result of the rise
in total alcohol production, unit sales of distillers feed, the principal
by-product of the distillation process, also grew compared to a year ago.
However, prices for this product declined also, contributing to the Company's
total earnings decrease.
Conditions in the Company's premium wheat starch market remained favorable
in fiscal 1998, resulting in increased production. The largest percentage of
this increase occurred in the production of non-modified wheat starch, which
generally is sold at a lower value than the Company's modified and specialty
varieties. As a result, the average per unit sales price for wheat starch during
the year was down compared to the prior year. Lower raw material costs for
wheat, however, partially offset the reduced selling price.
<PAGE>
With consistently lower grain costs, improved conditions in the wheat
gluten market, a realization of stable energy costs and improved production
efficiencies, the Company expects to strengthen its competitive abilities and
improve profitability going forward.
Net sales in fiscal 1998 were down approximately $1.5 million compared to
sales in fiscal 1997. The
Midwest Grain Products, Inc. 1998 Annual Report pg. 19
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
decrease resulted mainly from lower selling prices for all principal products.
The realization of higher fuel alcohol unit sales occurred from increased
utilization of distillery capacity at the Company's Pekin, Illinois plant. This
volume increase, however, was offset by a decline in selling prices, which
tracked falling gasoline prices. Sales of food grade alcohol for beverage and
industrial applications during the year were down compared to sales for the
prior year. This was due to decreases in both unit sales and average prices. The
lower prices reflected both a decline in demand and a reduction in raw material
prices for corn and milo. Sales of distillers feed, a by-product of the alcohol
production process, fell slightly as lower sales prices offset an increase in
total units sold.
Wheat gluten sales were higher than sales in fiscal 1997 as the Company
increased production in preparation for satisfying market requirements resulting
from the expected realization of a fair competitive environment. A decrease in
wheat gluten selling prices compared to the prior year, however, offset the
increased volume. Sales of wheat starch decreased modestly compared to fiscal
1997, as higher unit sales were largely offset by lower selling prices. The
reduced selling prices resulted principally from a higher proportion of wheat
starches being sold for non-specialty, commodity-type applications.
The cost of sales in fiscal 1998 increased by approximately $720,000
compared to the cost of sales in fiscal 1997. This occurred primarily as the
result of higher raw material, energy, and maintenance and repair costs
associated with increased production volumes.
In connection with the purchase of raw materials, principally corn and
wheat, for anticipated operating requirements, the Company enters into commodity
contracts to reduce the risk of future grain price increases. These contracts
are accounted for as hedges and, accordingly, gains and losses are deferred and
recognized in cost of sales as part of contract costs when contract positions
are settled and as related products are sold. For fiscal 1998, raw material
costs included a net income of $243,000 on contracts settled during the year
compared to a net loss of $1,877,000 for fiscal 1997.
Selling, general and administrative expenses in fiscal 1998 increased by
approximately $2.2 million above selling, general and administrative expenses in
fiscal 1997 due mainly to employee-related costs. The largest portion of those
costs resulted from the termination of the Atchison plant union revised
retirement plan to fund a newly established 401K plan for those same employees.
The increase also resulted from the addition of research and marketing
personnel, together with higher costs related to research and promotional
activities, to strengthen the Company's development and sales of value-added
specialty products made from wheat.
The consolidated effective income tax rate is consistent for all periods.
<PAGE>
The general effects of inflation were minimal.
As the result of the foregoing factors, the Company experienced a net loss
of $2,236,000 in fiscal 1998 compared to net income of $131,000 in fiscal 1997.
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
Midwest Grain Products, Inc. 1998 Annual Report pg.20
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
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.
Conditions in the wheat gluten market were adversely affected by increased
competition from the European Union (E.U.), whose exports of 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.
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, resulting 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.
<PAGE>
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.
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
Midwest Grain Products, Inc. 1998 Annual Report pg. 21
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
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 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.
<PAGE>
Quarterly Financial Information
===============================================================================
Generally, the Company's sales have not been 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
Company may experience more significant fluctuations in quarterly sales during
the next two years due to the annual quotas on gluten imports if exporters to
the United States do not pro rate shipments throughout the year. The following
table shows quarterly information for each of the years ended June 30, 1998 and
1997.
Quarter Ending
Sept. 30 Dec. 31 March 31 June 30 Total
- -------------------------------------------------------------------------------
(in thousands, except per share amounts)
Fiscal 1998
- -------------------------------------------------------------------------------
Sales $57,623 $55,847 $53,310 $56,474 $223,254
Gross profit 2,611 3,819 2,319 52 8,801
Net income (loss) (235) 107 (438) (1,670) (2,236)
Earnings (loss)
per share (.02) .01 (.05) (.17) (.23)
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
===============================================================================
Midwest Grain Products, Inc. 1998 Annual Report pg. 22
<PAGE>
Management Discussion and Analysis
===============================================================================
Market Risk
- ------------------------------------------------------------------------------
The Company produces its products from wheat, corn and milo and, as such,
is sensitive to changes in commodity prices. Grain futures and/or options are
used as a hedge to protect against fluctuations in the market. The table below
provides information about the Company's inventory and futures contracts that
are sensitive to changes in grain prices. For inventory, the table presents the
carrying amount and fair value at June 30, 1998. For futures contracts, the
table presents the notional amounts in bushels, the weighted average contract
prices, and the total dollar contract amounts by expected maturity dates.
Contract amounts are used to calculate the contractual payments and quantity of
corn to be exchanged under the futures contracts.
As of June 30, 1998
- -------------------------------------------------------------------------------
Carrying Amount Fair Value
- -------------------------------------------------------------------------------
(in thousands)
Inventories
Corn $1,205 $1,222
Milo 579 613
Wheat 1,320 1,320
- -------------------------------------------------------------------------------
Expected Maturity Fair Value
- -------------------------------------------------------------------------------
Contracts
Corn futures (long)
Contract volumes (bushels) 3.6 million
Price per bushel $2.66
Contract amount $9.6 million $9.3 million
Wheat options (long)
Contract volumes (bushels) 2.0 million
Price of option per bushel $0.20
Contract amount $400,000 $320,000
Wheat options (short)
Contract volumes (bushels) 2.0 million
Price of option per bushel $0.1375
Contract amount $275,000 $150,000
===============================================================================
Midwest Grain Products, Inc. 1998 Annual Report pg. 23
<PAGE>
Management's Discussion and Analysis
===============================================================================
Liquidity and Capital Resources
===============================================================================
The following table is presented as a measure of the Company's liquidity and
financial condition:
- -------------------------------------------------------------------------------
June 30
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $4,723 $6,005
Working capital 39,825 36,580
Amounts available under lines of credit 30,000 29,000
Notes payable and long-term debt 28,896 30,933
Stockholders' equity 106,325 108,561
===============================================================================
During fiscal 1998, the Company generated a positive cash flow from
operations, which was used to reduce its debt and partially pay for capital
additions. Working capital also improved. Short-term liquidity has been impacted
by higher inventory requirements to prepare to satisfy customer needs for wheat
gluten resulting from an eventual reduction in import supplies. The Company
anticipates even higher inventory levels during the first half of 1999 to meet
customer needs.
At June 30, 1998, the Company had $4.4 million committed to improvements
and replacements of existing equipment.
Since 1996, the Company has recognized the need to ensure its operations
will not be adversely impacted by Year 2000 software failures. New hardware and
software has been acquired and installed for the core financial applications.
All core financial modules, except order entry, have been tested successfully.
The order entry module is in final modification and testing. The total costs
incurred to date approximate $200,000. Conversion to the new system is expected
to be completed during fiscal 1999. The Company expects no additional
significant costs to achieve Year 2000 compliance for these applications. Due to
the stage of completion and testing of these applications, as well as the
non-complexity of the systems, the Company fully anticipates being compliant far
in advance of December 31, 1999.
The company also has surveryed its plant operations to determine which
electrical and other instrumentation equipment relies on date sensitive software
and hardware. For those applications which have been identified, the Company has
received bids to modify the equipment. In some cases, testing of certain
equipment has already been completed. The cost to convert and test the
identified processes is expected to be less than $100,000. The Company
anticipates having the conversions completed and tested during fiscal 1999.
Should these conversions not be completed on a timely basis, the Company would
be able to produce all products except specialty and modified wheat glutens and
starches.
<PAGE>
The Company is also in the process of surveying key vendors and customers
regarding their abilities to achieve the Year 2000 compliance. Initial results
of the surveys indicate these companies are knowledgeable of Year 2000 issues
and are in the process of complying or have already complied.
The Company continues to maintain a strong working capital position and a
low debt-to-equity ratio, while generating strong earnings before interest,
taxes and depreciation. Management believes this strong financial position and
available lines of credit will allow the Company to effectively supply the
increased customer needs for vital wheat gluten when foreign quotas are reached,
as well as its other products.
Forward-Looking Information
===============================================================================
This report contains forward-looking information. Forward-looking statements are
identified by or are associated with such words as "intend", "believe,"
"expect," "anticipate," "hopeful," "should," "may," and similar expressions.
They reflect management's current beliefs and estimates of future economic
circumstances, industry conditions, Company performance and financial results
and are not guarantees of future performance. The forward-looking statements are
based on many assumptions and factors including those relating to grain prices,
gasoline prices, energy costs, product pricing, competitive environment and
related market conditions, operating efficiencies, access to capital and actions
of governments. Any changes in the assumptions or factors could produce
materially different results than those predicted and could impact stock values.
Midwest Grain Products, Inc. 1998 Annual Report pg. 24
<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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
s/Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
August 4, 1998
Midwest Grain Products, Inc. 1998 Annual Report pg. 25
<PAGE>
Financial Review
===============================================================================
Consolidated Statements of Operations
Years Ended June 30, 1998, 1997 and 1996
===============================================================================
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $223,254 $224,733 $194,638
Cost of sales 214,453 213,733 190,173
- -------------------------------------------------------------------------------
Gross profit 8,801 11,000 4,465
Selling, general & administrative expenses 11,363 9,169 9,001
- -------------------------------------------------------------------------------
(2,562) 1,831 (4,536)
Other operating income 100 370 159
- -------------------------------------------------------------------------------
Income (loss) from operations (2,462) 2,201 (4,377)
Other income (loss), net 658 618 1,309
Interest expense (1,887) (2,604) (2,556)
- -------------------------------------------------------------------------------
Income (loss) before income taxes (3,691) 215 (5,624)
Provision (credit) for income taxes (1,455) 84 (2,218)
- -------------------------------------------------------------------------------
Net income (loss) $(2,236) $131 $(3,406)
===============================================================================
Earnings (loss) per common share $(0.23) $0.01 $(0.35)
===============================================================================
See Notes to Consolidated Financial Statements
Midwest Grain Products, Inc. 1998 Annual Report pg. 26
<PAGE>
Financial Review
===============================================================================
Consolidated Balance Sheets
June 30, 1998 and 1997
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Assets
Current Assets
Cash and cash equivalents $4,723 $6,005
Receivables (less allowance for doubtful accounts;
1998 and 1997-$285) 26,369 26,276
Inventories 20,430 15,000
Prepaid expenses 753 988
Deferred income taxes 2,343 1,688
Income taxes receivable 1,334 227
- -------------------------------------------------------------------------------
Total Current Assets 55,952 50,184
- -------------------------------------------------------------------------------
Property & equipment, at cost 218,590 213,813
Less accumulated depreciation 112,976 99,099
- -------------------------------------------------------------------------------
Property & equipment, net 105,614 114,714
- -------------------------------------------------------------------------------
Other assets 412 432
- -------------------------------------------------------------------------------
Total Assets $161,978 $165,330
===============================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $1,000 $1,000
Current maturities of long-term debt 2,360
Accounts payable 9,072 8,196
Accrued expenses 3,695 4,408
- -------------------------------------------------------------------------------
Total Current Liabilities 16,127 13,604
- -------------------------------------------------------------------------------
Long-term debt 25,536 29,933
- -------------------------------------------------------------------------------
Post-retirement benefits 6,520 6,245
- -------------------------------------------------------------------------------
Deferred income taxes 7,470 6,987
- -------------------------------------------------------------------------------
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 shares 6,715 6,715
Additional paid-in capital 2,485 2,485
Retained earnings 97,913 100,149
- -------------------------------------------------------------------------------
107,117 109,353
Treasury stock, at cost
Common; 65,000 shares (792) (792)
- -------------------------------------------------------------------------------
Total stockholders' equity 106,325 108,561
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $161,978 $165,330
===============================================================================
See Notes to Consolidated Financial Statements
Midwest Grain Products, Inc. 1998 Annual Report pg. 27
<PAGE>
Financial Review
===============================================================================
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1998, 1997 and 1996
===============================================================================
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock Total
- -------------------------------------------------------------------------------
(in thousands)
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
1998 net loss (2,236) (2,236)
- -------------------------------------------------------------------------------
Balance, June 30, 1998 $4 $6,715 $2,485 $ 97,913 $(792) $106,325
===============================================================================
See Notes to Consolidated Financial Statements
Midwest Grain Products, Inc. 1998 Annual Report pg. 28
<PAGE>
Financial Review
===============================================================================
Consolidated Statements of Cash Flows
Years Ended June 30, 1998, 1997 and 1996
===============================================================================
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Cash Flows From Operating Activities
Net income (loss) $(2,236) $131 $(3,406)
Items not requiring (providing) cash:
Depreciation 13,892 14,041 13,854
Gain on sale of assets (2) (18) (41)
Deferred income taxes (172) 236 611
Changes in:
Accounts receivable (93) (7,911) 3,185
Inventories (5,430) 4,913 (5,223)
Accounts payable 847 1,578 4
Income taxes (receivable) payable (1,107) 2,836 (725)
Other (183) 618 (1,238)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 5,516 $16,424 7,021
- -------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property & equipment (4,765) (3,491) (5,516)
Proceeds from sale of equipment 4 105 71
Proceeds from notes receivable 919
<PAGE>
- -------------------------------------------------------------------------------
Net cash used in investing activities (4,761) (3,386) (4,526)
- -------------------------------------------------------------------------------
Cash Flows From Financing Activities
Purchase of treasury stock (792)
Principle payments on long-term debt (2,037 (10,000)
Proceeds from issuance of long-term debt 2,025
Dividends paid (1,221)
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (2,037) (10,792) 804
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash & Cash Equivalents (1,282) 2,246 3,299
Cash & Cash Equivalents, Beginning of Year 6,005 3,759 460
- -------------------------------------------------------------------------------
Cash & Cash Equivalents, End of Year $4,723 $6,005 $3,759
===============================================================================
See Notes to Consolidated Financial Statements
Midwest Grain Products, Inc. 1998 Annual Report pg. 29
<PAGE>
Notes to Consolidated Financial Statements
===============================================================================
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. The activities of Midwest Grain Products, Inc. and
its subsidiaries consist of production of vital wheat gluten and 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, 1998,
Midwest Grain Products, Inc. had entered into contracts hedging future wheat and
corn prices through the second quarter of fiscal 1999.
Property and Equipment. Depreciation is computed using both straight-line
and accelerated methods over the following estimated useful lives:
Buildings and improvements 20-30 years
Transportation equipment 5-6 years
Machinery and equipment 10-12 years
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,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Interest costs capitalized $ 364
Interest costs charged to expense $1,887 $2,604 2,556
- -------------------------------------------------------------------------------
$1,887 $2,604 $2,920
===============================================================================
<PAGE>
Earnings Per Common Share. Earnings per common share data is based upon the
weighted average number of common shares totaling 9,700,172 at June 30, 1998,
9,761,967 at June 30, 1997 and 9,765,172 at June 30, 1996. The effect of
employee stock options, which were the only potentially dilutive securities held
by the Company, was anti-dilutive at June 30, 1998.
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.
Midwest Grain Products, Inc. 1998 Annual Report pg. 30
<PAGE>
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
===============================================================================
Note 2: Inventories
Inventories consist of the following:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Whiskey, alcohol and spirits $6,884 $4,017
Unprocessed grain 6,398 5,803
Operating supplies 3,554 3,105
Gluten 2,382 757
By-products and other 1,212 1,318
- -------------------------------------------------------------------------------
$20,430 $15,000
===============================================================================
Note 3: Property and Equipment
Property and equipment consists of the following:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Land, buildings and improvements $17,411 $17,411
Transportation equipment 1,180 1,081
Machinery and equipment 196,903 193,923
Construction in progress 3,096 1,398
- -------------------------------------------------------------------------------
218,590 213,813
Less accumulated depreciation 112,976 99,099
- -------------------------------------------------------------------------------
$105,614 $114,714
===============================================================================
Note 4: Accrued Expenses
Accrued expenses consist of the following:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Excise taxes $ 239 $ 642
Employee benefit plans (Note 10) 973 768
Salaries and wages 784 963
Property taxes 525 593
Insurance 454 723
Interest 696 696
Other expenses 24 23
- -------------------------------------------------------------------------------
$3,695 $4,408
===============================================================================
<PAGE>
Note 5: Long-Term Debt Long-term debt consists of the following:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Senior notes payable $25,000 $25,000
Line of credit 2,000 4,000
Other 896 933
- -------------------------------------------------------------------------------
27,896 29,933
Less current maturities 2,360
- -------------------------------------------------------------------------------
Long-term portion $25,536 $29,933
===============================================================================
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, 1998, the Company had a $27 million unsecured revolving line of
credit expiring on November 1, 1999, with interest at 1% below prime on which
there was $2.0 million and $4.0 million in borrowings at June 30, 1998 and 1997,
respectively. All other terms remain the same. The Company had three additional
lines of credit totaling $6.0 million expiring on dates through April 30, 1999,
with interest rates varying from prime to 1% below prime on which there were
$1.0 million in borrowings at both June 30, 1998 and 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 a
debt service coverage ratio of 1.5 to 1.
The fair value of the senior notes payable, based upon the borrowing rate
of 7.10% at June 30, 1998, was $24,700,000.
Aggregate annual maturities of long-term debt at June 30, 1998 are as
follows:
(in thousands)
1999 $ 2,360
2000 4,433
2001 2,422
2002 2,273
2003 2,273
Thereafter 14,135
- -------------------------------------------------------------------------------
$27,896
===============================================================================
Midwest Grain Products, Inc. 1998 Annual Report pg. 31
<PAGE>
Notes to Consolidated Financial Statements
Note 6: Income Taxes
The provisions (credit) for income taxes is comprised of the following:
Years Ended June 30,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Income taxes currently
payable (receivable) $(1,627) $(152) $(2,829)
Income taxes deferred 172 236 611
- -------------------------------------------------------------------------------
$(1,455) $ 84 $(2,218)
===============================================================================
The tax effects of temporary differences related to deferred taxes shown on
the consolidated balance sheets are as follows:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 101 $ 110
Post-retirement liability 2,543 2,436
Insurance accruals 578 831
Federal operating loss c
arryforwards 828
State operating loss carryforwards 826 447
Alternative minimum tax 1,644 723
Other 504 383
- -------------------------------------------------------------------------------
7,024 4,930
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (11,823) (9,860)
Deferred gain on
involuntary conversion (328) (369)
- -------------------------------------------------------------------------------
$(12,151)$(10,229)
- -------------------------------------------------------------------------------
Net deferred tax liability $ (5,127)$ (5,299)
===============================================================================
The above net deferred tax liability is presented on the consolidated
balance sheets as follows:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Deferred tax asset-current $ 2,343 $ 1,688
Deferred tax liability-long-term (7,470) (6,987)
- -------------------------------------------------------------------------------
Net deferred tax liability $(5,127) $(5,299)
===============================================================================
<PAGE>
No valuation allowance has been recorded at June 30, 1998 or 1997.
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,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
"Expected" provision(credit)
at federal statutory rate (34%) $(1,255) $73 $(1,912)
Increases (decreases)
resulting from:
Effect of state income taxes (195) 9 (236)
Other (5) 2 (70)
- -------------------------------------------------------------------------------
Provision (credit) for income taxes $(1,455) $84 $(2,218)
===============================================================================
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.
Midwest Grain Products, Inc. 1998 Annual Report pg. 32
<PAGE>
Notes to Consolidated Financial Statements
Note 8: Other Operating Income (Expense)
Other operating income (expense) consists of the following: :
Years Ended June 30,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Truck operations $ (95) $342 $136
Warehousing and
storage operations 6 (13) (32)
Miscellaneous (11) 41 55
- -------------------------------------------------------------------------------
$100 $370 $159
===============================================================================
Note 9: Energy Commitment
During fiscal 1995, the Company negotiated a fifteen-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.
Note 10: Employee Benefit Plans
Pension Plan. Prior to June 30, 1998, the Company had a noncontributory
defined benefit pension plan covering union employees. The plan provided
benefits based on the participants' years of service.
During 1998, the Company terminated the plan and transferred the assets
into a newly formed 401(k) profit sharing plan. The pension cost for 1998,
including the cost of termination, amounted to $694,000.
<PAGE>
Pension cost for 1997 and 1996 included the following components:
Years Ended June 30,
1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Service cost-benefits earned during year $ 43 $ 54
Interest cost on projected benefit obligation 158 150
Actual investment income earned on plan assets (358) (257)
Amortization of transition
liability and difference between
actual and expected return on plan assets 219 133
- -------------------------------------------------------------------------------
Pension cost $ 62 $ 80
===============================================================================
The funded status of the plan was as follows for June 30, 1997:
(in thousands)
Accumulated benefit obligation,including
vested benefits of $2,141 $2,151
Plan assets at fair value $2,349
Projected benefit obligation for
participants' service rendered to date 2,151
- -------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 198
Unrecognized gains (333)
Unrecognized prior service cost 51
Unrecognized net obligation at July 1, 1987 being
recognized over the participants' average
remaining service period 88
- -------------------------------------------------------------------------------
Pension asset $ 4
===============================================================================
Plan assets were 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%.
Midwest Grain Products, Inc. 1998 Annual Report pg. 33
<PAGE>
Notes to Consolidated Financial Statements
Employee Stock Ownership Plans.
The Company and its subsidiaries have employee stock ownership plans
covering all employees after certain eligibility requirements are met.
Contributions to the plans totaled $785,000, $726,000 and $374,000 for the years
ended June 30, 1998, 1997 and 1996, respectively. Contributions are made in the
form of cash and/or additional shares of common stock.
401(k) Profit Sharing Plans. During 1998, the Company and its subsidiaries
formed 401(k) profit sharing plans covering all employees after certain
eligibility requirements are met. Contributions for 1998 totaled $215,000.
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, 1998 and 1997 was as follows:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Accumulated post-retirement benefit obligation:
Retirees $3,561 $3,395
Active plan participants 1,891 1,650
- -------------------------------------------------------------------------------
Unfunded accumulated obligation 5,452 5,045
Unrecognized actuarial gain 1,068 1,200
- -------------------------------------------------------------------------------
Accrued post-retirement benefit cost $6,520 $6,245
===============================================================================
Net post-retirement benefit cost included the following components:
June 30,
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
Service cost $101 $100
Interest cost 346 353
(Gain) loss amortization (34) (23)
- -------------------------------------------------------------------------------
$413 $430
===============================================================================
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 9.5%
(compared to 9.75% assumed for 1997) reducing to 8.0% over seven years and 6.0%
over 15 years. A one percentage point increase in the assumed health care cost
trend rate would have increased the accumulated benefit obligation by $350,000
at June 30, 1998, and the service and interest cost by $42,000 for the year then
ended.
A weighted average discount rate of 7.25% was used in determining the
accumulated benefit obligation.
<PAGE>
Stock Options. The Company has three stock option plans, the Stock
Incentive Plan of 1996 ("The 1996 Plan"), the Stock Option Plan for Outside
Directors ("The Directors Plan"), and the 1998 Stock Incentive Plan for Salaried
Employees ("The Salaried Plan"). These Plans permit the issuance of stock
awards, stock 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 1998 and 1997 net income and earnings per share would have been
reduced to the following pro forma amounts:
1998 1997
- -------------------------------------------------------------------------------
Net Income (loss):
As Reported $(2,236) $ 131
Pro Forma $(2,575) $( 82)
Basis Earnings Per Share:
As Reported $ (.23) $ .01
Pro Forma $ (.26) $(.01)
Diluted EPS:
As Reported $ (.23) $ .01
Pro Forma $ (.26) $(.01)
Midwest Grain Products, Inc. 1998 Annual Report pg. 34
Notes to Consolidated Financial Statements
Under the 1996 Plan, the Company may grant stock incentives for up to
450,000 shares of the Company's common stock to key employees. The term of each
award is 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 grant. Through June 30, 1998,
the Company has granted options to purchase 256,000 shares that become
exercisable in yearly increments through January, 2002. Options granted through
June 30, 1998 have exercise prices equal to fair market value on the date of
grant.
Under the Directors 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. Through June 30,
1998, the Company had granted options to purchase 14,000 shares, all of which
were exercisable as of June 30, 1998.
Under the Salaried Plan, the Company may grant stock incentives for up to
300,000 shares of the Company's common stock to full-time salaried employees.
The Salaried Plan provides that the amounts, recipients, timing and terms of
each award be determined by the Committee of the Board of Directors charged with
administering the Salaried Plan. Under the terms of the Salaried Plan, stock
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 grant.
Through June 30, 1998, the Company has granted options to purchase 171,360
shares, which become exercisable in yearly increments through March, 2003.
Options granted through June 30, 1998, have exercise prices equal to fair market
value on the date of grant.
<PAGE>
A summary of the status of the Company's three stock option plans at June
30, 1998 and 1997 and changes during the years then ended is presented below:
1998 1997
- -------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- -------------------------------------------------------------------------------
Outstanding, Beginning
of Year 183,500 $14.68 90,000 $14.00
Granted 257,860 13.60 93,500 15.32
Exercised
- -------------------------------------------------------------------------------
Outstanding,End of Year 441,360 $14.04 183,500 $14.68
===============================================================================
These are comprised as follows:
Shares
Remaining Exercisable
Contractual at
Exercise Life June 30,
Shares Price (Years) 1998
- -------------------------------------------------------------------------------
1996 90,000 $14.00 2.5 48,500
Plan 86,500 $15.25 3.5 24,250
79,500 $13.75 4.5
Directors' 7,000 $16.25 3.25 7,000
Plan 7,000 $14.25 4.25 7,000
Salaried Plan 171,360 $13.50 4.67
- -------------------------------------------------------------------------------
441,360 86,750
===============================================================================
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, 1998: Risk free interest rate
of 5.50%; expected dividend yield of 0%; expected volatility of 33%.
Midwest Grain Products, Inc. 1998 Annual Report pg. 35
<PAGE>
Notes to Consolidated Financial Statements
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, 1998 are as follows:
(in thousands)
1999 $2,025
2000 881
2001 398
2002 263
2003 157
- -------------------------------------------------------------------------------
Future minimum lease payments $3,724
===============================================================================
Rental expense for all operating leases with terms longer than one month
totaled $1,488,554, $1,438,466 and $1,546,000 for the years ended June 30, 1998,
1997 and 1996, respectively.
Minimum future rentals receivable under noncancellable operating subleases
at June 30, 1998, were $187,560.
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:
* A majority 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 $454,000
is included in the accompanying 1998 financial statements. Claims payments based
on actual claims ultimately filed could differ materially from these estimates.
* During the years ended June 30, 1998, 1997 and 1996, the Company had
sales to one customer accounting for approximately 10.5%, 8.2% and 10.7%,
respectively of consolidated sales.
<PAGE>
Note 13. Additional Cash Flows Information
Years Ended June 30,
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands)
Noncash Investing and Financing Activities:
Purchase of property and equipment in
accounts payable $ 29 $ 211 $ 12
Additional Cash Payment Information:
Interest paid (net of amount capitalized) 1,887 1,909 2,585
Income taxes paid (refunded) (178) (2,986) 2,105
===============================================================================
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.
Midwest Grain Products, Inc. 1998 Annual Report pg. 36
Exhibit 23
[BK&D Letterhead]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Midwest Grain Products, Inc.
We consent to the incorporation by reference in Registration Statement No.
333-51849, on Form S-8 and the related Prospectus dated May 5, 1998, of Midwest
Grain Products, Inc. of our report dated August 4, 1998, relating to the
consolidated balance sheets of Midwest Grain Products, Inc. as of June 30, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1998, which reports are incorporated by reference in the Annual Report on Form
10-K of Midwest Grain Products, Inc. for the fiscal year ended June 30, 1998. We
also consent to the reference to our firm under the heading "Experts" in the
Prospectus to the Registration Statement.
Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
September 24, 1998
[Logo]
<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, 1998 AND CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000835011
<NAME> MIDWEST GRAIN PRODUCTS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,723
<SECURITIES> 0
<RECEIVABLES> 26,369<F1>
<ALLOWANCES> 285
<INVENTORY> 20,430
<CURRENT-ASSETS> 55,952
<PP&E> 218,590
<DEPRECIATION> 112,976
<TOTAL-ASSETS> 161,978
<CURRENT-LIABILITIES> 16,127
<BONDS> 25,536
<COMMON> 6,715
0
4
<OTHER-SE> 99,579<F2>
<TOTAL-LIABILITY-AND-EQUITY> 161,978
<SALES> 223,254
<TOTAL-REVENUES> 223,254
<CGS> 214,453
<TOTAL-COSTS> 225,816<F3>
<OTHER-EXPENSES> 100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,887)
<INCOME-PRETAX> (3,691)
<INCOME-TAX> (1,455)
<INCOME-CONTINUING> (2,236)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,236)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
<FN>
<F1> Reflects Receivables less Allowances.
<F2> Reflects retained earnings and additional paid in captial
less cost of Treasury Stock.
<F3> Reflects cost of sales and selling, general &
administrative expenses.
</FN>
</TABLE>
