SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2002 - Commission File No. 0-17196
MIDWEST GRAIN PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0531200
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.
1300 Main Street, Atchison, Kansas 66002
(Address of Principal Executive Offices and Zip Code)
(913) 367-1480
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days. [X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value
8,063,379 shares outstanding
as of May 1, 2002
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report..................................... 2
Condensed Consolidated Balance Sheets as of March 31, 2002
and June 30, 2001......................................................... 3
Condensed Consolidated Statements of Income for the Three Months Ended and
Nine Months Ended March 31, 2002 and 2001................................. 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2002 and 2001................................................... 6
Notes to Condensed Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 16
1
Independent Accountants' Report
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas 66002
We have reviewed the accompanying condensed consolidated balance sheet of
Midwest Grain Products, Inc. and subsidiaries as of March 31, 2002, and the
related condensed consolidated statements of income for the three-month and
nine-month periods ended March 31, 2002 and 2001, and the related condensed
consolidated statements of cash flows for the nine-month periods ended March 31,
2002 and 2001. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
June 30, 2001, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein); and, in
our report dated August 1, 2001, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of June 30, 2001, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/BKD, LLP
Kansas City, Missouri
April 26, 2002
2
Midwest Grain Products, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
ASSETS
March 31, June 30,
2002 2001
---------------------------------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 23,629 $ 33,454
Investments 4,691
Receivables (less allowance for bad debts of $452 at
December 31, 2001 and June 30, 2001, respectively) 23,915 26,109
Inventories 17,381 18,230
Prepaid expenses 1,862 1,625
Deferred income taxes 2,934 2,451
Refundable income taxes -- 299
--------------- ---------------
Total current assets 74,412 82,168
--------------- ---------------
PROPERTY AND EQUIPMENT, at cost 254,231 245,305
Less accumulated depreciation 163,882 153,181
--------------- ---------------
90,349 92,124
--------------- ---------------
OTHER ASSETS 193 158
--------------- ---------------
Total assets $ 164,954 $ 174,450
=============== ==============
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
3
Midwest Grain Products, Inc.
Condensed Consolidated Balance Sheets (Continued)
(dollars in thousands)
Liabilities and Stockholders' Equity
June 30,
March 31, 2002 2001
----------------------------------------
(Unaudited)
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,202 $ 4,273
Accounts payable 6,242 10,446
Accrued expenses 3,793 4,008
Deferred income 12,242 15,951
Income taxes payable 1,229
--------------- ---------------
Total current liabilities 26,708 34,678
--------------- ---------------
LONG-TERM DEBT 18,665 22,420
--------------- ---------------
POST-RETIREMENT BENEFITS 5,929 6,034
--------------- ---------------
DEFERRED INCOME TAXES 10,769 10,774
--------------- ---------------
STOCKHOLDERS' EQUITY
Capital stock
Preferred, 5% noncumulative, $10 par value; authorized 1,000
shares; issued and outstanding 437 shares 4 4
Common, no par; authorized 20,000,000 shares; issued
9,765,172 shares 6,715 6,715
Additional paid-in capital 2,529 2,485
Retained earnings 110,362 105,878
Accumulated other comprehensive income (loss) -
Cash flow hedges (749) 15
--------------- ---------------
118,861 115,097
Treasury stock, at cost
Common
March 31, 2002 - 1,710,883 shares
June 30, 2001 - 1,585,518 shares (15,978) (14,553)
--------------- ----------------
102,883 100,544
--------------- ---------------
Total liabilities and stockholders' equity $ 164,954 $ 174,450
=============== ===============
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
4
Midwest Grain Products, Inc.
Condensed Consolidated Statements of Income
(dollars in thousands)
Three Months and Nine Months Ended March 31, 2002 and 2001
(Unaudited)
Three Months Nine Months
2002 2001 2002 2001
----------------------------------------------------------------
(dollars in thousands)
Net Sales $ 55,403 $ 55,434 $ 164,091 $ 172,220
Cost of Sales 51,292 52,893 146,096 160,761
----------- ----------- ----------- -----------
Gross Profit 4,111 2,541 17,995 11,459
Selling, General and Administrative Expenses 3,684 2,689 11,383 9,110
----------- ----------- ----------- -----------
427 (148) 6,612 2,349
Other Operating Income 1,182 14 3,633 19
----------- ----------- ----------- -----------
Income (Loss) From Operations 1,609 (134) 10,245 2,368
Other Income (Expense)
Interest (352) (348) (1,101) (996)
Other (86) 119 284 462
------------ ----------- ----------- -----------
Income (Loss) Before Income Taxes 1,171 (363) 9,428 1,834
Provision (Benefit) For Income Taxes 462 (145) 3,724 723
----------- ------------ ----------- -----------
Net Income (Loss) 709 (218) 5,704 1,111
Other Comprehensive Income (Loss) (690) (355) (764) (300)
------------ ------------ ----------- ------------
Comprehensive Income (Loss) $ 19 $ (573) $ 4,940 $ 811
=========== =========== =========== ============
Basic Earnings Per Common Share $ 0.09 $ (0.03) $ 0.70 $ 0.13
=========== ============ ========== ===========
Diluted Earnings per Common Share $ 0.09 $ (0.03) $ 0.70 $ 0.13
=========== ============ ========== ===========
Dividends per Common Share $ 0.15 $ 0.10
========== ===========
5
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
Midwest Grain Products, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
Nine Months Ended March 31, 2002 and 2001
(Unaudited)
2002 2001
----------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income (loss) $ 5,704 $ (395)
Items not requiring (providing) cash
Depreciation 10,701 3,276
Loss on sale of equipment -- 10
Deferred income taxes (488) --
Changes in
Accounts receivable 2,194 2,610
Inventories 85 1,261
Accounts payable and accrued expenses (4,371) (1,325)
Deferred revenue (3,709) --
Income taxes (receivable) payable 1,567 (1,858)
Other (377) (772)
---------------- ----------------
Net cash provided by operating activities 11,306 2,807
--------------- ----------------
INVESTING ACTIVITIES
Additions to property and equipment, net (8,974) (1,985)
Purchase of short-term investments (4,691) --
Proceeds from sale of equipment -- --
--------------- ---------------
Net cash used in investing activities (13,665) (1,985)
-------------- -----------------
FINANCING ACTIVITIES
Purchase of treasury stock (1,420) (323)
Net payments on long-term debt (11,249) (2,273)
Net proceeds from issuance of long-term debt 6,423 --
Dividends paid (1,220) --
---------------- ---------------
Net cash used in financing activities (7,466) (2,596)
---------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (9,825) (1,774)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,454 7,728
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,629 $ 5,954
=============== ===============
See Accompanying Notes to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
6
Midwest Grain Products
Notes To Condensed Consolidated Financial Statements
March 31, 2002
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments that are, in the opinion of the Company's
management, necessary to fairly present the financial position, results
of operations and cash flows of the Company. Those adjustments consist
only of normal recurring adjustments. The condensed consolidated balance
sheet as of June 30, 2001 has been derived from the audited consolidated
balance sheet of the Company as of that date. Certain information and
note disclosures normally included in the Company's annual financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
in the Company's Form 10-K Annual Report for 2001 filed with the
Securities and Exchange Commission. The results of operations for the
period are not necessarily indicative of the results to be expected for
the full year.
NOTE 2: BONDS PAYABLE
The Company has financed the new Wheatex production facility, acquired
in February 2001, through a capital lease financing involving the
issuance on August 22, 2001 of a $6.5 million industrial revenue bond by
the Unified Government of Wyandotte/Kansas City, Kansas. The bond bears
interest at a rate of 5.23% per annum and matures in September 2008.
Under the lease, the Company is making monthly payments declining from
$114,200 in October 2001 to $77,700 in September 2008. In connection
with the financing, the Company must maintain certain financial ratios,
including a current ratio of 1.5 to 1, minimum consolidated tangible net
worth of $84 million and a debt service coverage ratio of 1.5 to 1.
NOTE 3: 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.
The Company recently advised customers and the Food and Drug
Administration that certain products in one of its specialty protein
lines required relabeling because they contain sulfites, a potential
allergen. The products represented less than 1% of the Company's total
wheat protein product sales during fiscal year 2001. Certain customers
have advised the Company that they will expect indemnity against
resulting losses aggregating approximately $750,000 allegedly incurred
as a result of the mislabeling. Although the Company is unable to
estimate the costs that it might actually incur if any claims are
brought against it, after taking into account anticipated insurance
coverage the Company does not expect such costs would be material to its
financial condition or results of operations.
See Independent Accountants' Review Report
7
Midwest Grain Products, Inc.
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Three Months and Nine Months Ended March 31, 2002
RESULTS OF OPERATIONS
GENERAL
The Company had net income of $709,000 in the third quarter of fiscal
2002 compared to a net loss of $218,000 in the third quarter of fiscal
2001. For the year to date, the Company had net income of $5,704,000
compared to $1,111,000 for the prior fiscal year. Approximately $668,000
in net income for the quarter and $2,182,000 for the year to date
resulted from a United States Department of Agriculture Commodity Credit
Corporation program to support the development of value-added wheat
protein and wheat starch products. Details of this program are provided
below. Another significant cause for the improvement was a reduction in
energy costs resulting from an approximately 70 percent decrease in the
average per unit price for natural gas compared to the same period in
the prior year. Although grain costs increased because of increased
production of fuel alcohol, raw material costs for grain on a per unit
basis were slightly lower in the third quarter of fiscal 2002 compared
to the same period the prior year.
The Company's alcohol sales rose slightly over the prior year's third
quarter despite a decline in selling prices for fuel grade alcohol,
commonly known as ethanol, and lower unit sales of food grade alcohol.
Third quarter sales of wheat based ingredients, consisting of starches
and proteins, were lower than the prior year due to a planned reduction
in sales of vital wheat gluten, a protein that is used mainly as an
ingredient in bread products, and to a lesser extent, a planned
reduction in sales of commodity wheat starch. However, sales of
specialty value-added wheat proteins and starches increased
approximately 20 percent over the prior year to nearly $10 million for
the quarter and accounted for approximately 60 percent of the Company's
combined wheat-based ingredient sales for the quarter.
The increase in specialty wheat protein and starch sales was due mainly
to expanded marketing programs and heightened customer interest. The
reduction in vital wheat gluten sales occurred because the Company
elected to curtail production due to pricing pressures from artificially
low priced gluten imports from the European Union. Competitive pressures
from the E.U. increased following the expiration of a three-year-long
quota on wheat gluten imports in early June 2001. The reduction in
commodity wheat starch sales resulted from the Company's decision to
emphasize specialty starch sales over commodity wheat starch sales.
Unless future conditions warrant otherwise, the Company plans to
maintain a reduced presence in the more traditional wheat gluten and
commodity wheat starch markets while continuing to expand its presence
in specialty value-added protein and starch markets.
In June 2001, the White House approved a two-year program to support the
development of value-added wheat gluten and wheat starches to assist
wheat gluten producers adjust to import competition. Administered by the
U.S. Department of Agriculture's Commodity Credit Corporation, the
program is scheduled to end May 31, 2003. Under the program, the Company
is eligible for approximately $26 million of the program total of $40
million. On June 29, 2001, the Company received approximately
$17,280,000 for the first year of the program. The Company believes it
will receive the balance of the award for the second year of the program
after June 2002, subject to a
8
Midwest Grain Products, Inc.
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Three Months and Nine Months Ended March 31, 2002
review by the Commodity Credit Corporation to determine whether the
Company has satisfactorily completed the first year's activities under
the program. The Company must submit quarterly reports to the Commodity
Credit Corporation listing costs incurred and activities conducted to
date and an annual performance report after the first and second year of
the program explaining its activities. The Commodity Credit Corporation
may cancel the Company's second year eligibility and ask for a refund
with interest of some or all of the funds allocated to the Company if it
determines that the Company has not made significant progress in
completing its stated activities. Based on its contacts with Commodity
Credit Corporation personnel through the quarterly reporting process,
the Company believes that it will remain eligible to receive the balance
of the award in the second year of the program.
The funds allocated under the Commodity Credit Corporation program are
to be used for capital, research, marketing and promotional costs
related to value-added wheat protein and wheat starch products. Funds
received are recognized in income during the period in which they are
expended for a permitted purpose. However, funds that are used for
capital expenditure projects will be recognized in income over the
periods during which those projects are depreciated. They are not
intended to be used to reduce production and marketing related costs for
commodity vital wheat gluten and wheat starches that could extend the
U.S. industry's participation in these markets.
The Company expects that approximately 80 percent of the first year's
allotment under the program will be used for capital projects, including
the $8.3 million expansion project described below. The remaining 20
percent of the first year's funds are expected to be applied toward
research and marketing-related costs and, therefore, will be reflected
in earnings. Through February 28, 2002, as reported to the Commodity
Credit Corporation, approximately $7.2 million has been applied for
capital projects and $2.8 million has been applied to research and
marketing related costs.
On October 10, 2001, the Company's Board approved plans for an $8.3
million expansion project that is expected to substantially strengthen
production and sales capabilities for certain of the Company's specialty
wheat proteins. The expansion will occur at the Company's Atchison plant
and is scheduled for completion in early fiscal 2003. The project
involves the installation of additional processing and drying equipment
for the production of ingredients for bakery, pasta and noodle and
related food markets, both domestically and abroad. The cost of this
project is expected to be offset by funds provided through the U.S.
Department of Agriculture Commodity Credit Corporation program described
above.
The slight increase in the Company's third quarter alcohol sales
resulted from increased output of fuel grade alcohol compared to a year
ago. Selling prices for fuel alcohol declined due to increased ethanol
supplies throughout the industry. The Company experienced improved
selling prices for its food grade alcohol for beverage and industrial
applications, although unit sales in these markets decreased versus the
same period the prior year.
The increased supplies in the fuel alcohol market occurred because
certain producers added capacity and/or built inventories in
anticipation of an expanded market for grain-based ethanol as a
replacement for methyl tertiary butyl ether (MTBE) in California and
elsewhere. Recently, the governor of California delayed the state's ban
for a year, from January 2003 to January 2004. The
9
Midwest Grain Products, Inc.
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Three Months and Nine Months Ended March 31, 2002
Company expects that this delay will contribute to continuing soft
prices for fuel alcohol. However, long-term, the Company believes the
future for ethanol remains promising. This expectation is partially
based on the U.S. Senate's passage of a comprehensive energy bill in
April that includes a provision for establishing a renewable fuels
standard. Based on information published by the Renewable Fuels
Association, this provision could triple the use of ethanol to 5 billion
gallons annually by 2012. The energy bill must now be considered by the
U.S. House-Senate Conference Committee and could be forwarded to the
President by the end of 2002. However, there can be no assurance that
the bill will be enacted in its present form, if at all.
Currently, the Company is participating in a program that was developed
by the U.S. Department of Agriculture and initiated in December 2000 to
provide a two-year cash incentive for ethanol producers who increase
their grain usage by specified amounts to raise fuel alcohol production.
The Company presently satisfies the program's eligibility requirements
and began receiving payments in the third quarter of fiscal 2001.
Additionally, the Company has recently completed the installation of a
new distillery feed dryer at its Pekin, Illinois plant. Installed at a
cost of approximately $5 million, the new dryer expands the plant's feed
processing capacity and should improve alcohol production output and
efficiencies at that location. Distillers' feed is the principal
by-product of the alcohol production process.
The Company continually evaluates the market climate and growth
potential for its various market groups. The Company's strategy in
recent years has been to focus on the development and marketing of
specialty wheat protein and starch products for use in unique market
niches. Although it is strengthening its fuel alcohol manufacturing
capabilities, principally at its Pekin plant, the Company is also
considering the current and anticipated market environment for fuel
ethanol in the context of the Company's overall long-term growth
strategies for specialty ingredient markets.
SALES
Net sales for the third quarter of fiscal 2002 decreased by
approximately $31,000 below net sales for the third quarter of fiscal
2001. This slight decrease resulted mainly from a 32 percent reduction
in sales of vital wheat gluten and a 6 percent reduction in sales of
food grade alcohol for beverage and industrial applications. These
decreases were mostly offset by a 7 percent increase in fuel alcohol
sales and a 20 percent increase in sales of specialty wheat proteins and
starch compared to a year ago.
Sales of wheat based ingredients, consisting of starches and proteins,
were lower than the prior year due to a reduction in sales of vital
wheat gluten and commodity wheat starch. Sales of vital wheat gluten
dropped due to reductions in both unit sales and selling prices.
Commodity wheat starch sales declined primarily due to a reduction in
unit sales. However, sales of specialty value-added wheat proteins and
starches increased in the aggregate by approximately 20 percent over the
prior year to nearly $10 million for the quarter and accounted for
approximately 60 percent of the Company's combined wheat-based
ingredient sales for the quarter. This increase was due primarily to
higher unit sales. Sales of food grade alcohol fell as the result of
decreased unit sales in the beverage and industrial markets, which
offset higher selling prices in both markets. Notwithstanding
10
Midwest Grain Products, Inc.
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Three Months and Nine Months Ended March 31, 2002
lower prices, sales of fuel grade alcohol rose compared to the third
quarter of fiscal 2001 as the result of higher unit sales.
Net sales for the first nine months of fiscal 2002 decreased by
approximately $8.1 million compared to net sales for the first nine
months of fiscal 2001. The majority of this decrease occurred in the
first and second quarters of fiscal 2002 mainly as the result of reduced
sales of vital wheatgluten and food grade alcohol.
COST OF SALES
The cost of sales in the third quarter of fiscal 2002 decreased by
approximately $1.6 million below the cost of sales in the third quarter
of the prior fiscal year. This principally was due to a decrease in
energy costs resulting from a decline in natural gas prices and, to a
lesser extent, to approximately $1.4 million resulting from the U.S.
Department of Agriculture's cost incentive program for ethanol producers
discussed elsewhere. These reductions in costs were partially offset by
higher grain costs resulting from increased requirements to satisfy
increased fuel alcohol production. Prices for grain on a per bushel
basis, however, were slightly lower than a year ago.
The cost of sales for the first nine months of fiscal 2002 decreased by
approximately $14.7 million compared to the cost of sales for the first
nine months of fiscal 2001. The decrease was principally due to reduced
energy costs in the first, second and third quarters and lower raw
material costs for grain in the first and second quarters.
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. Additionally, the Company uses gasoline futures to hedge fuel
alcohol sales made under contracts with price terms based on gasoline
futures. In the third quarter of fiscal 2002, raw material costs
included a net hedging loss of $176,000 compared to a net hedging loss
of $25,000 on contracts in the third quarter of fiscal 2001. In the
first nine months of fiscal 2002, raw material costs included a net
hedging loss of $1.2 million compared to a net hedging loss of $355,000
in the first nine months of the prior fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the third quarter of
fiscal 2002 were approximately $995,000 higher than selling, general and
administrative expenses in the third quarter of fiscal 2001. The
increase was due largely to various factors, including higher
marketing-related expenses, employee remuneration and benefits and
research and development costs.
For the first nine months of fiscal 2002, selling, general and
administrative expenses increased by approximately $2.3 million over
selling, general and administrative expenses for the first nine months
of fiscal 2001. The reasons for this increase were principally the same
as those cited above and included a $310,000 bad debt expense in the
first quarter of fiscal 2002.
11
Midwest Grain Products, Inc.
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Three Months and Nine Months Ended March 31, 2002
OTHER OPERATING INCOME
The increase in other operating income relates to the recognition of
$3.7 million and $1.1 million for the nine months and quarter,
respectively, ended March 31, 2002 of pre-tax income from the previously
discussed U.S. Department of Agriculture Commodity Credit Corporation
program for value-added wheat protein and wheat starch products.
NET INCOME
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 $709,000 in the third quarter of fiscal 2002 compared to a net
loss of $218,000 in the third quarter of fiscal 2001. For the first nine
months of fiscal 2002, the Company had net income of $5,704,000 versus
net income of $1,111,000 for the first nine months of fiscal 2001.
12
Midwest Grain Products, Inc.
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Three Months and Nine Months Ended March 31, 2002
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity
and financial condition:
March 31, June 30,
2002 2001
---------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 23,629 $ 33,454
Working capital 47,704 47,490
Amounts available under lines of credit 12,000 5,500
Notes payable and long-term debt 21,867 26,693
Stockholders' equity 102,883 100,544
=====================================================================
Cash generated from operations, combined with reduced receivable levels,
were partially offset by increased working capital requirements through
reduced accounts payable and accruals. Payments for equipment additions,
debt reductions and treasury stock purchases reduced cash balances. The
comparatively high cash balances resulted from cash flows generated
during fiscal 2001 combined with $17.3 million received in June 2001 as
a result of the program administered by the U.S. Department of
Agriculture's Commodity Credit Corporation.
The Company made open market purchases of 147,200 shares of its common
stock during the nine-month period. These purchases were made to fund
the Company's stock option plans and for other corporate purposes. As of
March 31, 2002, the Board has authorized the purchase of additional
267,282 shares of the Company's common stock. During the third quarter,
21,835 shares of the treasury stock were sold as employees exercised
options under the Company's stock option plans.
At March 31, 2002, the Company had $11.2 million committed to capital
improvements including the $8.3 million expansion project, in Atchison,
that is designed to strengthen production and sales capabilities for the
Company's specialty wheat proteins and the acquisition of a new feed
dryer at the Pekin, Illinois to improve alcohol production efficiencies
at that location. The Company is also developing plans for other
additions relating to value added wheat gluten and wheat starch
products.
The Company has financed its new Wheatex production facility, acquired
in February 2001, through a capital lease financing involving the
issuance on August 22, 2001 of a $6.5 million industrial revenue bond by
The Unified Government of Wyandotte/Kansas City, Kansas. The bond bears
interest at a rate of 5.23% per annum and matures in September 2008.
Under the lease, the Company is making monthly payments declining from
$114,200 in October 2001 to 77,700 in September 2008. In connection with
the financing, the Company must maintain certain financial ratios,
including a current ratio of 1.5 to 1, minimum consolidated tangible net
worth of $84 million and a debt service coverage ratio of 1.5 to 1.
13
Midwest Grain Products, Inc.
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Three Months and Nine Months Ended March 31, 2002
The Company has added to its normally strong equity and working capital
positions while continuing to generate strong earnings before interest,
taxes and depreciation. Management believes the Company is well
positioned to effectively expand its production of specialty products as
well as supply customer needs for all 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 a "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.
FUTURE CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board (FASB) has issued four new
accounting pronouncements that will become effective in the fiscal year
commencing July 1,2002.
In June 2001, the FASB issued SFAS No.141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets," effective for fiscal
years beginning after December 15,2001. Under the new rules, goodwill
(and intangible assets deemed to have indefinite lives) will no longer
be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to
be amortized over their useful lives. SFAS No.143, "Accounting for Asset
Retirement Obligations," was issued in August 2001 and deals with the
recognition and remeasurement of obligations associated with the
retirement of tangible long-lived assets. SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," was issued in October
2001 and applies to all long-lived assets, other than goodwill, and
discontinued operations and develops one accounting model for long-
lived assets that are to be disposed of by sale. The adoption of these
statements is not expected to have a material impact on the Company's
financial statements.
14
Midwest Grain Products, Inc.
December 31, 2002
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 information regarding inventories and futures contracts at
June 30, 2001, as presented in the annual report, is not significantly
different from March 31, 2002.
From time to time, the Company enters into futures contracts that are
designated as hedges of specific volumes of commodities that will be
purchased and processed in a future month and finished goods that will
be produced and sold under contract in a future month. These readily
marketable exchange-traded futures contracts have historically been, and
are expected to continue to be, highly effective at offsetting changes
in price movements of the hedged items. The amounts representing the
ineffectiveness of these cash flow hedges are immaterial. Gains and
losses arising from open and closed hedging transactions are deferred in
other comprehensive income, net of applicable income taxes, and
recognized in the statement of earnings when the finished goods produced
from, or for, the hedged items are sold. The fair value of the futures
contracts is included in inventory (for contracts with gains) or other
liabilities (for contracts with losses) in the consolidated balance
sheet.
The bonds payable and unsecured senior notes carry fixed rates of
interest, which limits the Company's exposure to increases in market
rates. However, interest rate changes impact the fair market value of
such debt. At March 31, 2002, holding all other variables constant,
including levels of indebtedness, a one percentage point change in
interest rates would result in approximately a $650,000 change in the
fair market value of the Company's total debt. Principal payments over
the next five years on the fixed-rate debt are $16.0 million, with a
weighted-average interest rate of 6.3%. At the end of five years, then
outstanding fixed-rate debt of $5.9 million will carry a weighted
average interest rate of 6.3%. The Company's lines of credit provide for
interest at variable rates. At March 31, 2002 there were no outstanding
borrowings under the lines of credit. The Company does not hedge its
interest rate exposure.
15
Midwest Grain Products, Inc.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 Letter from independent public accountants pursuant to paragraph
(d) of Rule 10-01 of Regulation S-X (incorporated by reference to
Independent Accountants' Review Report at page 2 hereof).
15.2 Letter from independent public accountants concerning the use of
its Review Report in the Company's Registration Statement No.
333-51849.
(b) Reports on Form 8-K
The Company filed reports on Form 8-K on February 4, 2002, and
February 6, 2002, reporting information under Item 9.
16
SIGNATURES
Pursuant to the requirements on the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWEST GRAIN PRODUCTS, INC.
By /s/ Ladd M. Seaberg, President
Ladd M. Seaberg, President
Date: May 13, 2002 and Chief Executive Officer
By /s/ Robert G. Booe
Robert G. Booe, Vice President
Date: May 13, 2002 and Chief Financial Officer