<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
Years ended June 30 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $ 231,880 $ 216,101 $ 223,254 $ 224,733 $ 194,638
Cost of sales 210,978 200,622 214,453 213,733 190,173
--------------------------------------------------------------------------------------------------------
Gross profit 20,902 15,479 8,801 11,000 4,465
Selling, general and
administrative expenses 12,109 11,908 11,363 9,169 9,001
Other operating income (expense) 39 136 100 370 159
--------------------------------------------------------------------------------------------------------
Income (Loss) from operations 8,832 3,707 (2,462) 2,201 (4,377)
Other income (Loss), net 719 350 658 618 1,309
Interest expense (1,469) (1,959) (1,887) (2,604) (2,556)
--------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes 8,082 2,098 (3,691) 215 (5,624)
Provision (Credit) for income taxes 3,192 828 (1,455) 84 (2,218)
--------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,890 $ 1,270 $ (2,236) $ 131 $ (3,406)
--------------------------------------------------------------------------------------------------------
Earnings (Loss) per common share $ 0.54 $ 0.13 $ (0.23) $ 0.01 $ (0.35)
Cash dividends per common share
Weighted average common
shares outstanding 9,122 9,609 9,700 9,762 9,765
--------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 45,089 $ 43,053 $ 39,825 $ 36,580 $ 37,113
Total assets 155,779 157,370 161,978 165,330 172,785
Long-term debt, less current
maturities 18,181 21,099 25,536 29,933 40,933
Stockholders' equity 102,378 105,445 106,325 108,561 109,222
========================================================================================================
</TABLE>
17
Midwest Grain Products 2000
<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:
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage
Years Ended June 30 Increase (Decrease)
Fiscal 2000 Fiscal 1999
2000 1999 1998 Over 1999 Over 1998
---- ---- ---- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 7.3% (3.2)%
Cost of sales 91.0 92.8 96.1 5.2 (6.4)
Gross profit 9.0 7.2 3.9 35.0 75.8
Selling, general and
administrative expenses 5.2 5.4 5.1 1.7 4.8
Other operating income (loss) 0.0 .1 .1 (71.3) 36.0
----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from operations 3.8 1.7 (1.1) 138.3 250.6
Other income (expense) (.3) (0.7) (.6) (53.4) 30.9
----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3.5 1.0 (1.7) 285.2 156.8
Provision (Credit) for income taxes 1.4 0.4 (.7) 285.5 156.9
----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 2.1% 0.6% (1.0)% 285.0% 156.8%
==================================================================================================================================
</TABLE>
18
Management's Discussion and Analysis
<PAGE>
FISCAL 2000 COMPARED TO FISCAL 1999
The Company's results for fiscal 2000 were up substantially over results for
the prior fiscal year. Net income rose to $4,890,000 compared to $1,270,000 in
fiscal 1999, due principally to the effects of heightened demand for the
Company's vital wheat gluten, specialty and modified wheat proteins and wheat
starches. Lower per unit costs for grain also contributed to the improvement.
These conditions partially offset the impact of reduced selling prices for the
Company's alcohol products resulting from the continuation of excess alcohol
supplies throughout the industry.
The increased demand for wheat gluten was mainly due to the effects of
measures to create a more equitable competitive environment in the U.S. market.
on June 1, 1998, just one month prior to the start of the Company's 1999 fiscal
year, President Clinton imposed a three-year annual quota on imports of foreig
wheat gluten. This action was taken after the U.S. International Trade
Commission determined that the U.S. wheat gluten industry was being seriously
injured by excess imports of artificially priced gluten from the European Union
(E.U.).
While the quota helped reduce some of the severe effects of excessive,
artificially-priced gluten shipments from the E.U. in fiscal 2000, expectations
of more substantial relief failed to be realized. In the early part of the
fiscal year, the U.S. was suddenly and rapidly inundated with gluten imports,
due mainly to the E.U.'s entire allocation entering the market within just two
weeks after the second year of the quota opened on June 1, 1999. Additionally,
the U.S. saw a substantial increase in gluten imports from other parts of the
world, particularly Poland. In response, President Clinton decided to allocate
imports of foreign wheat gluten on a quarterly rather than an annual basis
effective with the start of the third year of the three-year-long quota on June
1, 2000. He additionally added Poland to the list of countries which are subject
to the quota after determining that dramatically increased shipments from Poland
"have impaired the effectiveness" of the quota.
In a related matter, a dispute panel of the World Trade Organization (WTO) on
July 28, 2000 challenged the safeguards decision under which the wheat glute
quota was implemented. The WTO challenge is being appealed by the U.S. Trade
Representative in a process that could extend through December, 2000. In the
interim, the WTO ruling is not expected to have an impact on the quota.
Demand for the Company's specialty wheat proteins continued to gain momentum
in fiscal 2000, principally due to increased customer interest and the effects
of intensified marketing programs. Produced for a variety of food and non-food
applications, these value-added products include dough conditioners, meat
extenders and replacers, ingredients for hair care and skin care systems, and
bio-polymers for producing degradable, plastic-like items.
Increased sales of wheat starch resulted largely from strengthened demand for
the Company's modified and specialty starches. To further serve customers
requirements for these unique ingredients, the Company completed the
installation of additional production capacity at its Atchison, Kansas, plant in
the early part of fiscal 2000.
To improve alcohol production efficiencies long-term, the Company completed
the installation of new distillation equipment at its Atchison plant in the
first quarter of fiscal 2001. The project is expected to further enhance the
Company's high quality food grade alcohol. In addition, in the final quarter of
fiscal 2000, the Company began to experience increased demand for its fuel grade
alcohol. This resulted partially from a proposal by the Environmental Protection
<PAGE>
Agency (EPA) to phase-out MTBE, a synthetically-derived fuel oxygenate, due to
health-related environmental concerns associated with that product.
Net sales in fiscal 2000 increased nearly $16 million above net sales in
fiscal 1999. The increase resulted principally from higher sales of wheat
gluten, premium wheat starch and fuel grade alcohol.
Growth in wheat gluten sales occurred as the result of higher unit sales of
wheat gluten and specialty wheat proteins together with a modest improvement in
selling prices.
Increased wheat starch sales resulted from higher unit sales, while selling
prices for this product were slightly below selling prices in fiscal 1999. The
lower selling prices occurred with a reduction in raw material prices for wheat.
Fiscal 2000 alcohol sales were just slightly above the level reached the
prior year due to an increase in unit sales of fuel grade alcohol. This increase
helped to offset a decline in unit sales of food grade alcohol for industrial
applications, as well as decreases in selling prices for food grade alcohol for
both industrial and beverage uses. The drop in food grade alcohol selling prices
was due to lower demand caused mainly by the continuation of excess supplies
throughout the industry. The selling price of fuel grade alcohol, meanwhile, was
approximately even with the average selling price in fiscal 1999. This was due
mainly to a price improvement in the fourth quarter of fiscal 2000 as the
Company experienced an upturn in demand. Sales of distillers feed, the principal
19
Midwest Grain Products, 2000
by-product of the alcohol production process, dropped below sales of a year ago.
This was due to lower unit sales as the selling price was approximately even
with prior year's level.
The cost of sales in fiscal 2000 rose by approximately $10.4 million above
the cost of sales for the prior year. This was due to higher energy and
manufacturing costs together with costs associated with increased volume sales,
largely of gluten and alcohol products. Lower per unit grain prices partially
offset the higher costs resulting from increased 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 or hedge the risk of future grain price increases. 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 as related products are sold. For fiscal 2000, raw
material costs included a net hedging loss of $1,345,329 on contracts compared
to a net hedging loss of $3,472,815 on contracts for fiscal 1999.
Selling, general and administrative expenses in fiscal 2000 increased by
approximately $201,000 above selling, general and administrative expenses in
fiscal 1999. The increase was due largely to increased marketing activities,
industry-related fees and higher technology costs. A sizeable reduction in bad
debts partially offset this increase.
The consolidated effective income tax rate is consistent for all periods.
The general effects of inflation were minimal.
<PAGE>
As the result of the foregoing factors, the Company experienced net income
of $4,890,000 in fiscal 2000 compared to net income of $1,270,000 in fiscal
1999.
FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net income of $1,270,000 in Fiscal 1999 represented a
significant improvement over the net loss of $2,236,000 that was experienced in
Fiscal 1998. This improvement resulted primarily from lower raw material costs
for wheat, corn and milo and increased productivity in the Company's wheat
gluten processing operations. Reduced grain prices were due to high grain
carryovers from abundant harvests during the spring, summer and early fall of
1998. Gluten production levels were raised partially in response to heightened
market interest, but mainly in preparation to effectively satisfy future
customer requirements resulting from an expected reduction in imports of
subsidized and artificially priced wheat gluten from the European Union (E.U.).
A more sizeable earnings improvement was prevented by decreased selling
prices for both food grade and fuel grade alcohol, and the adverse effects of
the E.U.'s breach of quota restrictions on imported gluten.
Under the quota, imports of E.U. wheat gluten were limited to 54 million
pounds for the quota year ending May 31, 1999. However, Department of Commerce
data showed that from June 1 through November 30, 1998, the E.U. exported
approximately 24% more gluten to the U.S. than allowed for the full quota year
ending May 31, 1999. The effects of the violations delayed the relief that the
U.S. wheat gluten industry expected during the first year of the three-year
quota.
In response to the E.U.'s breach of the first-year quota, President Clinton
signed a proclamation on May 29, 1999 that reduced the E.U.'s second-year quota
to 45 million pounds. That amount represented approximately 12 million pounds
less than was originally allocated to the second year. More significantly, based
on Customs records, it was nearly 23 million pounds less than the actual amount
of gluten the E.U. delivered into the U.S. market during the initial 12-month
quota period.
Although a level playing Weld failed to be established in Fiscal 1999, the
Company experienced some strengthening in demand for its wheat gluten, and
continued to realize gradual but steady growth in sales of its specialty wheat
proteins.
Net sales in Fiscal 1999 decreased by approximately $7.2 million compared
to net sales in Fiscal 1998. The decrease was principally due
20
Management's Discussion and Analysis
to lower selling prices for the Company's alcohol products and was partially
offset by higher unit sales of fuel grade alcohol and wheat gluten products,
including specialty wheat proteins. Sales of wheat starch were down slightly
compared to starch sales in Fiscal 1998.
The increase in unit sales of the Company's fuel grade alcohol occurred as
the Company shifted more of its alcohol production to this area due to decreased
demand for food grade alcohol for beverage and industrial applications. However,
the impact of the increased unit sales was softened by lower selling prices for
fuel alcohol due to a surplus of that product. The decline in demand for food
grade alcohol was caused mainly by the continuation of excess supplies
<PAGE>
throughout the industry. Sales of distillers feed, the principal by-product of
the alcohol production process, were down compared to the prior year due to a
decline in the selling price. Unit sales of this product were approximately even
with the amount sold the prior year.
The increase in wheat gluten sales occurred as the Company raised
production levels in preparation for satisfying market requirements resulting
from the expected realization of a fair competitive environment. Higher sales of
specialty, value-added wheat gluten products also contributed to the increase in
total gluten sales.
Sales of wheat starch were affected by a decline in unit sales in the First
two quarters of Fiscal 1999. Selling prices for this product remained
essentially unchanged compared to selling prices in Fiscal 1998.
The cost of sales in Fiscal 1999 decreased by approximately $13.8 million
compared to cost of sales in Fiscal 1998. This occurred principally as the
result of lower raw material costs for grain combined with reduced energy costs,
lower maintenance and repair costs and decreased insurance costs.
In connection with the purchase of raw materials, principally corn and
wheat, for anticipated operating requirements, the Company enters into commodity
contracts to reduce or hedge the risk of future grain price increases. 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 as related products are sold. For Fiscal 1999, raw
material costs included a net loss of $3,470,000 on contracts settled during the
year compared to a net gain of $243,000 for Fiscal 1998.
Selling, general and administrative expenses in Fiscal 1999 increased by
approximately $545,000 above selling, general and administrative expenses in
Fiscal 1998. The increase resulted mainly from higher costs related to product
research and marketing promotional activities to strengthen the Company's
development and sales of value-added specialty products made from wheat, along
with increased bad debt expense relating to one customer. These increases were
partially offset by reductions in costs associated with industry-related fees,
commissions and professional services and the Company's employee benefit plans.
The consolidated effective income tax rate is consistent for all periods.
The general effects of inflation were minimal.
As the result of the foregoing factors, the Company experienced net income
of $1,270,000 in Fiscal 1999 compared to a net loss of $2,236,000 in Fiscal
1998.
21
Midwest Grain Products, 2000
<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 year due to the annual quota on imports of foreign wheat gluten. The
table below shows quarterly information for each of the years ended June 30,
2000 and 1999.
<TABLE>
<CAPTION>
Quarter Ending Sept. 30 Dec. 31 March 31 June 30 Total
------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
FISCAL 2000
Sales $54,975 $59,962 57,656 $59,287 $231,880
Gross profit 4,225 5,955 6,046 4,676 20,902
Net income (loss) 751 1,563 1,607 969 4,890
Earnings (Loss) per share .08 .17 .18 .11 .54
FISCAL 1999
Sales $51,938 $53,917 $56,958 $53,288 $216,101
Gross profit 4,429 6,074 3,315 1,661 15,479
Net income (loss) 666 1,430 232 (1,058) 1,270
Earnings (Loss) per share 0.07 0.15 0.02 (0.11) 0.13
</TABLE>
22
Management's Discussion and Analysis
<PAGE>
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. For inventory, the
table below presents the carrying amount and fair value at June 30, 2000. At
June 30, 2000, there were no open grain futures or options.
As of June 30, 2000 Carrying Amount Fair Value
-----------------------------------------------------------------------------
(in thousands)
INVENTORIES
Corn $ 965 $ 986
Milo 659 714
Wheat 1,649 1,652
============================================================================
The Company also contractually sells a portion of its fuel grade alcohol
at prices that fluctuate with gasoline futures. Gasoline futures are used as a
hedge to protect against these fluctuations. The table below presents
information about open futures contracts as of June 30, 2000.
Expected Maturity Fair Value
-----------------------------------------------------------------------------
Futures Contracts (short)
Contract Volumes (gallons) 2.77 million
Weighted Average Price $.93
Contract Amount $2.58 million $2.62 million
=============================================================================
23
Midwest Grain Products, 2000
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity
and financial condition:
June 30, 2000 1999
-----------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 7,728 $ 4,054
Working capital 45,089 43,053
Amounts available under lines of credit 23,000 33,000
Notes payable and long-term debt 20,454 23,532
Stockholders' equity 102,378 105,445
=============================================================================
During Fiscal 2000, the Company generated a $22.4 million positive cash flow
from operations, which was used to reduce its debt, pay for capital additions
and acquire treasury stock. In addition to higher profitability, the Company
reduced the levels of inventory, particularly in gluten and unprocessed grain.
Short-term liquidity was also impacted by open market purchases of 942,675
shares of the Company's common stock. These purchases were made to fund the
Company's stock option plans and for other corporate purposes. As of June 30,
2000, the Board has authorized the purchase of an additional 818,225 shares of
the Company's common stock.
At June 30, 2000, the Company had $7.5 million committed to improvements and
replacements of existing equipment. Additionally, in the August, 2000 Board
meeting, Directors approved a plan to expand the Company's Wheatex production
capacity with the construction of new facilities at a cost of $6.05 million.
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 as market demand increases due
to the effects of the quotas on imports of foreign wheat gluten, as well as its
other products.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements as well as historical
information. Forward-looking statements are identified by or are associated with
such words as "intend," "believe," "estimate," "expect," "anticipate," "hopeful"
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, 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.
24
Management's Discussion and Analysis
<PAGE>
INDEPENDENT ACCOUNTANTS' 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, 2000, and 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 2000. 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, 2000, and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 2000, in
conformity with generally accepted accounting principles.
s/Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
August 1, 2000
25
Midwest Grain Products, 2000
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $ 231,880 $ 216,101 $ 223,254
Cost of sales 210,978 200,622 214,453
---------------------------------------------------------------------------------------------------------------------------
Gross profit 20,902 15,479 8,801
Selling, general & administrative expenses 12,109 11,908 11,363
---------------------------------------------------------------------------------------------------------------------------
8,793 3,571 (2,562)
Other operating income 39 136 100
---------------------------------------------------------------------------------------------------------------------------
Income (Loss) from operations 8,832 3,707 (2,462)
Other income, net 719 350 658
Interest expense (1,469) (1,959) (1,887)
---------------------------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes 8,082 2,098 (3,691)
Provision (Credit) for income taxes 3,192 828 (1,455)
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4,890 $ 1,270 $ (2,236)
===========================================================================================================================
Earnings (Loss) per common share $ 0.54 $ 0.13 $ (0.23)
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
26
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Years ended June 30 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 7,728 $ 4,054
Receivables (less allowance for doubtful accounts;
2000--$252 and 1999--$285) 30,272 26,656
Inventories 19,246 24,450
Prepaid expenses 1,617 1,174
Deferred income taxes 4,058 3,034
------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 62,921 59,368
------------------------------------------------------------------------------------------------------------------------------
Property & equipment, at cost 232,508 224,381
Less accumulated depreciation 139,737 126,465
------------------------------------------------------------------------------------------------------------------------------
Property & equipment, net 92,771 97,916
------------------------------------------------------------------------------------------------------------------------------
Other assets 87 86
------------------------------------------------------------------------------------------------------------------------------
Total Assets $155,779 $157,370
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 2,273 $ 2,433
Accounts payable 10,563 9,129
Accrued expenses 4,044 4,296
Income taxes payable 952 457
------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 17,832 16,315
------------------------------------------------------------------------------------------------------------------------------
Long-term debt 18,181 21,099
------------------------------------------------------------------------------------------------------------------------------
Post-retirement benefits 6,170 6,312
------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 11,218 8,199
------------------------------------------------------------------------------------------------------------------------------
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 104,073 99,183
------------------------------------------------------------------------------------------------------------------------------
113,277 108,387
Treasury stock, at cost
Common; 2000C1,181,775 shares, 1999C239,100 shares (10,899) (2,942)
------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 102,378 105,445
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $155,779 $157,370
===============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
27
Midwest Grain Products, 2000
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Preferred Common Paid-In Retained Treasury
Years ended June 30 Stock Stock Capital Earnings Stock Total
-------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
Purchase of treasury stock (2,150) (2,150)
1999 net income 1,270 1,270
--------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 4 6,715 2,485 99,183 (2,942) 105,445
--------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (7,957) (7,957)
2000 net income 4,890 4,890
--------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $4 $6,715 $2,485 $104,073 $(10,899) $102,378
================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
28
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended June 30 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 4,890 $ 1,270 $(2,236)
Items not requiring (providing) cash:
Depreciation 13,515 13,604 13,892
Gain on sale of assets (19) (2)
Deferred income taxes 1,995 38 (172)
Gain on retirement of long-term debt (603)
Changes in:
Accounts receivable (3,616) (287) (93)
Inventories 5,204 (4,020) (5,430)
Accounts payable 1,334 38 847
Income taxes (receivable) payable 495 1,791 (1,107)
Other (838) 298 (183)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,376 12,713 5,516
------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property & equipment (8,127) (6,054) (4,765)
Proceeds from sale of equipment 12 31 4
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,115) (6,023) (4,761)
------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Purchase of treasury stock (8,112) (1,995)
Principle payments on long-term debt (2,475) (5,364) (2,037)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (10,587) (7,359) (2,037)
------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash & Cash Equivalents 3,674 (669) (1,282)
Cash & Cash Equivalents, Beginning of Year 4,054 4,723 6,005
-------------------------------------------------------------------------------------------------------------------------------
Cash & Cash Equivalents, End of Year $ 7,728 $ 4,054 $ 4,723
===============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
29
Midwest Grain Products, 2000
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. The activities of Midwest Grain Products, Inc., and
its subsidiaries consist of the processing of wheat, corn and milo into a
variety of products through an integrated production process. The process
produces wheat gluten products, which include 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. Additionally, the
Company enters into futures contracts for the sale of fuel grade alcohol to
protect its selling price to the customer. At June 30, 2000, the Company had
entered into contracts hedging future gasoline prices through the first quarter
of fiscal 2001.
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
Earnings Per Common Share. Earnings per common share data is based upon
the weighted average number of common shares totaling 9,121,717 for 2000,
9,608,769 for 1999 and 9,700,172 for 1998. The effect of employee stock options,
which were the only potentially dilutive securities held by the Company, was
anti-dilutive each of the three years.
<PAGE>
Cash Equivalents. The Company considers all liquid investments with
maturities of three months or less to be cash equivalents.
Income Taxes. Deferred tax liabilities and assets are recognized for the
tax effect of the differences between the financial statement and tax bases of
assets and liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will not be
realized.
NOTE 2: INVENTORIES
Inventories consist of the following:
June 30, 2000 1999
--------------------------------------------------------------------------
(in thousands)
Alcohol $ 5,317 $ 5,164
Unprocessed grain 4,971 6,914
Operating supplies 4,348 4,305
Gluten 2,492 6,710
By-products and other 2,118 1,357
--------------------------------------------------------------------------
$19,246 $24,450
==========================================================================
30
Midwest Grain Products, 2000
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, 2000 1999
-------------------------------------------------------------------------
(in thousands)
Land, buildings and improvements $ 19,516 $ 17,794
Transportation equipment 1,138 1,152
Machinery and equipment 205,152 198,957
Construction in progress 6,702 6,478
-------------------------------------------------------------------------
232,508 224,381
Less accumulated depreciation 139,737 126,465
-------------------------------------------------------------------------
$ 92,771 $ 97,916
=========================================================================
NOTE 4: ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, 2000 1999
--------------------------------------------------------------------------
(in thousands) $ 540 $ 540
Employee benefit plans (Note 10) 1,661 1,466
Salaries and wages 635 870
Property taxes 480 541
Insurance 138 222
Interest 569 642
Other expenses 21 15
---------------------------------------------------------------------------
$ 4,044 $ 4,296
===========================================================================
<PAGE>
NOTE 5: LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 2000 1999
---------------------------------------------------------------------------
(in thousands)
Senior notes payable $ 20,454 $ 22,727
Other 805
---------------------------------------------------------------------------
20,454 23,532
Less current maturities 2,273 2,433
---------------------------------------------------------------------------
Long-term portion $ 18,181 $ 21,099
===========================================================================
The unsecured senior notes are payable in annual installments of $2,273,000
from 2000 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, 2000, the Company had a $20 million unsecured revolving line of
credit expiring on November 1, 2001, with interest at 1% below prime on which
there were no borrowings at June 30, 2000 and 1999. The Company had two
additional lines of credit totaling $3.0 million expiring on dates through April
27, 2001, with interest rates varying from prime to 1% below prime on which
there were no borrowings at June 30, 2000 and 1999.
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 $84 million and
debt service coverage ratio of 1.5 to 1. The fair value of the senior notes
payable debt, based upon the current borrowing rates at June 30, 2000, was
approximately $19,000,000.
Aggregate annual maturities of long-term debt at June 30, 2000 are as
follows:
(in thousands)
2001 $ 2,273
2002 2,273
2003 2,273
2004 2,273
2005 2,273
Thereafter 9,089
----------------------------
$ 20,454
============================
31
Midwest Grain Products, 2000
<PAGE>
NOTE 6: INCOME TAXES
The provisions (credit) for income taxes is comprised of the following:
Years ended June 30, 2000 1999 1998
--------------------------------------------------------------------------
(in thousands)
Income taxes currently
payable (receivable) $1,197 $790 $(1,627)
Income taxes deferred 1,995 38 172
--------------------------------------------------------------------------
$3,192 $828 $(1,455)
===========================================================================
The tax effects of temporary differences related to deferred taxes shown
on the consolidated balance sheets are as follows:
June 30, 2000 1999
--------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 155 $ 141
Post-retirement liability 2,406 2,462
Insurance accruals 478 551
Federal operating loss carryforwards 657
State operating loss carryforwards 772 1,001
Alternative minimum tax 2,259 2,294
Other 1,563 753
-----------------------------------------------------------------------
7,633 7,859
-----------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation $(14,533) (12,737)
Deferred gain on involuntary conversion (260) (287)
-------------------------------------------------------------------------
(14,793) $(13,024)
-------------------------------------------------------------------------
Net deferred tax liability $ (7,160) $ (5,165)
=========================================================================
The above net deferred tax liability is presented on the consolidated
balance sheets as follows:
June 30, 2000 1999
---------------------------------------------------------------------------
(in thousands)
Deferred tax asset-current $ 4,058 $ 3,034
Deferred tax liability-long-term (11,218) (8,199)
---------------------------------------------------------------------------
Net deferred tax liability $ (7,160) $(5,165)
===========================================================================
<PAGE>
No valuation allowance has been recorded at June 30, 2000, or 1999.
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, 2000 1999 1998
--------------------------------------------------------------------------
(in thousands)
"Expected" provision (credit) at
federal statutory rate (34%) $2,748 $714 $(1,255)
Increases (Decreases) resulting from:
Effect of state income taxes 176 78 (195)
Other 268 36 (5)
-----------------------------------------------------------------------------
Provision (Credit) for income taxes $3,192 $828 $(1,455)
=============================================================================
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.
32
Midwest Grain Products, 2000
NOTE 8: OTHER OPERATING INCOME (EXPENSE)
Other operating income (expense) consists of the following:
Years ended June 30, 2000 1999 1998
---------------------------------------------------------------------------
(in thousands)
Truck operations $(53) $108 $ 95
Warehousing and
storage operations (35) (10) (6)
Miscellaneous 127 38 11
----------------------------------------------------------------------------
$ 39 $136 $100
============================================================================
NOTE 9: ENERGY COMMITMENT
During fiscal 1995, the Company negotiated a 15-year agreement to purchase
steam heat and electricity from a utility for its Illinois operations. Steam
heat is being purchased for a minimum monthly charge of $114,000, with a
declining fixed charge for purchases in excess of the minimum usage. Electricity
purchases will occur at fixed rates through May 31, 2002. In connection with the
agreement, the Company leased land to the utility company for 15 years so it
could construct a co-generation plant at the Company's Illinois facility. The
Company has also agreed to reimburse the utility for the net book value of the
plant if the lease is not renewed for an additional 19 years. The estimated net
book value of the plant would be $10.6 million at that date.
<PAGE>
NOTE 10: EMPLOYEE BENEFIT PLANS
Pension Plan. Prior to June 30, 1998, the Company had a non-contributory
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.
Employee Stock Ownership Plans. The Company and its subsidiaries have
employee stock ownership plans covering all eligible employees after certain
requirements are met. Contributions to the plans totaled $880,000, $947,000 and
$785,000 for the years ended June 30, 2000, 1999 and 1998, 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 to the plans totaled $392,000,
215,000 and $215,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
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, 2000 and 1999 was as follows:
June 30, 2000 1999
----------------------------------------------------------------------------
(in thousands)
Accumulated post-retirement
benefit obligations:
Retirees $3,390 $3,720
Active plan participants 2,872 2,473
----------------------------------------------------------------------------
Unfunded accumulated obligation 6,262 6,193
Unrecognized actuarial gain (loss) (92) 119
----------------------------------------------------------------------------
Accrued post-retirement benefit cost $6,170 $6,312
============================================================================
33
Midwest Grain Products, 2000
Net post-retirement benefit cost included the following components:
June 30, 2000 1999 1998
-------------------------------------------------------------------------------
(in thousands)
Service cost $138 $110 $101
Interest cost 355 323 346
(Gain) Loss amortization (27) (34)
-------------------------------------------------------------------------------
$493 $406 $413
===============================================================================
<PAGE>
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) is assumed to be 9.00%
(compared to 9.25% assumed for 1999) reducing to 7.50% over seven years and 6.0%
over 13 years. A one-percentage-point increase in the assumed health care cost
trend rate would have increased the accumulated benefit obligation by $370,000
at June 30, 2000, and the service and interest cost by $50,000 for the year then
ended.
A weighted average discount rate of 8.25% was used in determining the
accumulated benefit obligation.
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 salaried 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 2000, 1999 and 1998 net income and earnings per share would have been
reduced to the following pro forma amounts:
2000 1999 1998
---------------------------------------------------------------------------
Net Income (loss):
As Reported $4,890 $1,270 $(2,236)
Pro Forma $4,206 $ 697 $(2,575)
Basis Earnings Per Share:
As Reported $ .54 $ .13 $ (.23)
Pro Forma $ .46 $ .07 $ (.26)
Diluted EPS:
As Reported $ .54 $ .13 $ (.23)
Pro Forma $ .46 $ .07 $ (.26)
Under the 1996 Plan, the Company may grant incentives for up to 600,000
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, 2000, the Company
has granted incentive stock options to purchase 438,500 shares. The options
become exercisable in yearly increments through January 2004. They have ten-year
terms and 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 ten 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,
2000, the Company had granted options to purchase 27,000 shares, all of which
were exercisable as of June 30, 2000.
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 amount, 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, options
<PAGE>
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, 2000, the Company has granted incentive stock options on 263,860 shares. The
options become exercisable in yearly increments through January 2004. They have
ten-year terms and have exercise prices equal to fair market value on the date
of grant.
34
Midwest Grain Products, Inc.
A summary of the status of the Company's three stock option plans at June 30,
2000, 1999 and 1998 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
Beginning of Year 544,860 $13.74 441,360 $14.04 183,500 $14.68
Granted 184,500 8.03 103,500 12.43 257,860 13.60
Exercised
--------------------------------------------------------------------------------------------------------------------
Outstanding,
End of Year 729,360 $12.30 544,860 $13.74 441,360 $14.04
====================================================================================================================
</TABLE>
These are comprised as follows:
<TABLE>
<CAPTION>
Remaining Shares
Contractual Exercisable
Exercise Life at June 30,
Shares Price (Years) 2000
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
1996 90,000 $14.00 5.5 90,000
Plan 86,500 $15.25 6.5 64,875
79,500 $13.75 7.5 39,750
96,500 $12.50 8.5 24,125
86,000 $ 8.00 9.5
Directors' 7,000 $16.25 6.25 7,000
Plan 7,000 $14.25 7.25 7,000
7,000 $11.75 8.25 7,000
6,000 $ 9.00 9.25 6,000
Salaried Plan 171,360 $13.50 7.67 68,544
92,500 $ 8.00 9.5
--------------------------------------------------------------------------------------------------------
729,360 314,294
========================================================================================================
</TABLE>
<PAGE>
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, 2000: Risk free interest rate
of 6.27%; expected dividend yield of 0%; expected volatility of 44%, expected
life of ten years.
NOTE 11: OPERATING LEASES
The Company has several noncancelable operating leases for railcars and
other equipment, which expire from April 2001 through November 2004. 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, 2000 are as follows:
(in thousands)
2001 $ 2,144
2002 1,152
2003 645
2004 151
2004 2
---------------------------------------------------------------------
Future minimum lease payments $ 4,094
=====================================================================
Rental expense for all operating leases with terms longer than one month
totaled $2,458,096, $2,305,235 and $1,488,554 for the years ended June 30, 2000,
1999 and 1998, respectively.
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, 2002 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 $138,000
is included in the accompanying 2000 financial statements. Claims payments based
on actual claims ultimately filed could differ materially from these estimates.
During the years ended June 30, 2000, 1999 and 1998, the Company had
sales to one customer accounting for approximately 13.3%, 12.0% and 10.5%,
respectively, of consolidated sales.
35
Midwest Grain Products, 2000
<PAGE>
NOTE 13: OPERATING INFORMATION
The Company is comprised of one segment: The processing and marketing of
products derived from wheat, corn and milo through a single integrated
production process. Product group sales for the years ended June 30, are
summarized as follows:
2000 1999 1998
-------------------------------------------------------------------------
(in thousands)
Wheat gluten products $70,912 $ 56,153 $ 42,489
Premium wheat starch 29,186 27,173 27,791
Alcohol products 129,023 129,729 147,957
Flour and other mill products 2,759 3,046 5,017
-------------------------------------------------------------------------
$231,880 $216,101 $223,254
=========================================================================
NOTE 14: ADDITIONAL CASH FLOWS INFORMATION
Years ended June 30, 2000 1999 1998
--------------------------------------------------------------------------
(in thousands)
Investing and Non-cash
Financing Activities:
Purchase of property and
equipment in accounts payable $ 255 $ 136 $ 29
Purchase of treasury stock
in accounts payable $ 155
Additional Cash Payment Information:
Interest paid (net of
amount capitalized) $1,542 $ 2,013 $1,887
Income taxes paid
(refunded) $ 704 $(1,001) $ (178)
===========================================================================
NOTE 15: 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.
NOTE 16: FUTURE CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (ASFAS 133@). This statement, as amended by SFAS Nos. 137 and 138,
requires all derivatives to be recorded on the balance sheet at fair value and
establishes standardized accounting methodologies for hedging activities. If
certain conditions are met, a derivative may be designated as a fair value or
cash flow hedge. Qualifying hedges may result in recognition of offsetting
changes in fair values of the hedging instrument and hedged item in the
statement of income (fair value hedges) or recognition of changes in fair value
of the hedging instrument in comprehensive income (cash flow hedges).
<PAGE>
The Company is required to adopt the statement prospectively beginning in
its first quarter ending September 30, 2000. The Company cannot reasonably
estimate the impact of adoption on future financial statements. However, the
statement may generally have the effect of recognition of gains or losses on
hedging instruments in income in periods earlier than previously recognized to
the extent of hedge ineffectiveness or to the extent derivative instruments do
not qualify for hedge accounting recognition under SFAS 133.
36
Notes to Consolidated Financial Statements
