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 December 31, 1997 - Commission File No. 0-17196
MIDWEST GRAIN PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS
48-0531200
(State or Other Jurisdiction of
Incorporation or Organization)
IRS Employer
Identification No.
1300 Main Street, Atchison, Kansas 66002
(Address of Principal Executive Offices and Zip Code)
(913) 367-1480
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
X YES ___ NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value
9,700,172 shares outstanding
as of February 1, 1998.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report........................... 2
Condensed Consolidated Balance Sheets as of
December 31, 1997 and June 30, 1997.............................. 3
Condensed Consolidated Statements of Operations for
the Three Months and Six Months Ended December 31, 1997 and 1996. 5
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1997 and 1996.................. 6
Note to Condensed Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 12
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Independent Accountants' Review Report
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas 66002
We have reviewed the condensed consolidated balance sheet of MIDWEST GRAIN
PRODUCTS, INC. and subsidiaries as of December 31, 1997, and the related
condensed consolidated statements of operations for the three month and six
month periods ended December 31, 1997 and 1996, and the related condensed
consolidated statements of cash flows for the six month periods ended December
31, 1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our reviews 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 reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of June 30, 1997, 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 8, 1997,
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, 1997, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
s/ Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
January 28, 1998
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
December 31, June 30,
1997 1997
------------ --------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 682 $ 6,005
Receivables 27,419 26,276
Inventories 25,264 15,000
Prepaid expenses 1,277 988
Deferred income taxes 1,688 1,688
Income taxes receivable 1,061 227
------ ------
Total Current Assets 57,391 50,184
------ ------
PROPERTY AND EQUIPMENT, At Cost 216,117 213,813
Less accumulated depreciation 106,022 99,099
------- -------
110,095 114,714
------- -------
OTHER ASSETS 432 432
------- -------
$ 167,918 $ 165,330
======= =======
See Accompanying Note to Condensed Consolidated
Financial Statements
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1997 1997
------------ --------
(Unaudited)
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,273
Note payable--bank 1,000 $ 1,000
Accounts payable 14,846 8,196
Accrued expenses 4,286 4,408
------- -----
Total Current Liabilities 22,405 13,604
------- ------
LONG-TERM DEBT 23,660 29,933
------- ------
POST-RETIREMENT BENEFITS 6,433 6,245
------- ------
DEFERRED INCOME TAXES 6,987 6,987
------- ------
STOCKHOLDERS' EQUITY
Capital stock
Preferred, 5% noncumulative, $10 par
value; authorized 1,000 shares; issued
and outstanding 437 shares 4 4
Common, no par; authorized 20,000,000
shares; issued 9,765,172 shares 6,715 6,715
Additional paid-in capital 2,485 2,485
Retained earnings 100,021 100,149
------- -------
109,225 109,353
Treasury stock, at cost
Common; 1997 - 65,000 shares (792) (792)
------- -------
108,433 108,561
------- -------
$167,918 $165,330
======== ========
See Accompanying Note to Condensed Consolidated
Financial Statements
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
Three Months Six Months
--------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $55,847 $55,249 $113,470 $108,422
COST OF SALES 52,028 50,360 107,040 101,470
------- ------ ------- -------
GROSS PROFIT 3,819 4,889 6,430 6,952
SELLING, GENERAL AND ADMINIS-
TRATIVE EXPENSES 3,615 2,379 6,259 4,542
------- ------ ------- -------
204 2,510 171 2,410
OTHER OPERATING INCOME (LOSS) (4) 115 10 217
------- ------ ------- -------
INCOME FROM OPERATIONS 200 2,625 181 2,627
------- ------ ------- -------
OTHER INCOME (LOSS)
Interest (440) (679) (895) (1,404)
Other 424 46 502 194
------- ------ ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES 184 1,992 (212) 1,417
PROVISION (CREDIT) FOR
INCOME TAXES 77 787 (84) 558
NET INCOME (LOSS) $ 107 $ 1,205 $ (128) $ 859
======== ======= ========= =========
EARNINGS (LOSS) PER
COMMON SHARE $ .01 $ .12 $ (.01) $ .09
======== ======= ========= =========
See Accompanying Note to Condensed Consolidated
Financial Statements
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
1997 1996
------ ------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (128) $ 859
Items not requiring (providing) cash:
Depreciation 6,923 7,008
Gain on sale of assets (6)
Changes in:
Accounts receivable (1,143) (4,643)
Inventories (10,264) (4,235)
Prepaid expenses and other assets (289) (446)
Accounts payable 6,864 3,228
Accrued expenses 66 262
Income taxes payable (834) 3,859
------- ------
Net cash provided by
operating activities 1,195 5,886
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (2,518) (706)
Proceeds from sale of equipment 59
------- ------
Net cash used in investing
activities (2,518) (647)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net principal payments on
long-term debt (4,000) (7,000)
------- ------
Net cash used in financing
activities (4,000) (7,000)
------- ------
DECREASE IN CASH AND CASH EQUIVALENTS (5,323) (1,761)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 6,005 3,759
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 682 $ 1,998
========= ==========
See Accompanying Note to Condensed Consolidated
Financial Statements
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MIDWEST GRAIN PRODUCTS, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
NOTE 1: GENERAL
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments necessary to present fairly the
Company's condensed consolidated financial position as of December 31, 1997, and
the condensed consolidated results of its operations and its cash flows for the
periods ended December 31, 1997 and 1996, and are of a normal recurring nature.
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
General
The Company's net income of $107,000 in the second quarter of fiscal 1998 was
down compared to its net income of $1,205,000 in the second quarter of fiscal
1997. This decrease was principally due to a decline in the average selling
price of wheat gluten caused by the continuation of competitive pressures from
the European Union (E.U.). Profits from their highly subsidized and protected
wheat starch business allow E.U. producers to unload huge surpluses of wheat
gluten, a co-product, at prices below U.S. production costs. As a result, the
Company thus far has been unable to adjust selling prices enough to offset those
costs despite the fact that prices for wheat, the raw material used in making
gluten, have fallen considerably from levels that were in place a year ago. In
addition to the benefits they receive from subsidies, E.U. producers are able to
take advantage of low U.S. tariff rates and use this country as a convenient
receptacle for their excess gluten. Conversely, high tariffs in Europe
effectively prohibit non-E.U. member countries from competing in the wheat
gluten and starch markets there.
In an effort to eliminate trade inequities and re-instill fairness and stability
in the marketplace, the Wheat Gluten Industry Council (WGIC) of the U.S. has
sought corrective action through various diplomatic measures and legal
proceedings. On January 15, the United States International Trade Commission
(ITC) voted 3-0 that the U.S. wheat gluten industry has been seriously injured
by wheat gluten imports from foreign countries. That decision immediately set in
motion a remedy phase, which is scheduled to conclude on March 18, 1998. At that
time, the ITC is to forward its recommendation for a remedy to the President,
who then is required to act within 60 days after receipt of the recommendation.
The process leading up to the Trade Commission's injury determination was
initiated by a petition filed by the WGIC on September 19, 1997. Filed under
Section 201 of the Trade Act of 1974, the petition seeks the establishment of a
four-year quota for countries exporting wheat gluten to the U.S.
While the Company is hopeful that the actions of the Wheat Gluten Industry
Council will ultimately result in the creation of a more level playing field, no
assurance can be given as to when or if any relief will be granted. Due to the
intensity of current competitive conditions, the Company has strategically
limited its production of wheat gluten to amounts necessary to maintain a stable
customer base. In addition, the Company has intensified efforts to develop
additional modified wheat gluten products that may be marketed in niches that
will be less affected by foreign competition. In the event the ITC and the
President fail to provide the U.S. wheat gluten industry with any relief
pursuant to the Section 201 petition, and if the E.U. continues to export gluten
at current or lower price levels and in the quantities anticipated by new E.U.
production facilities that have been announced, then the Company believes that
(a) the Company will not be able to profitably market wheat gluten products, (b)
that it will continue to produce only the amount of gluten necessary to produce
premium and modified wheat starches profitably, (c) that losses generated from
the unprofitable production of gluten are expected to be absorbed by the
Company's other operations, although there is no certainty that the Company will
be successful in that regard, (d) that such effects could have a material
adverse impact on the Company's results of operations and financial condition,
and (e) that other U.S.gluten plants will probably be forced to suspend
operations or be permanently shut down.
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
Conditions in the Company's premium wheat starch market remained
favorable in the second quarter, resulting in increased production. As in the
first quarter of fiscal 1998, the largest percentage of this increase occurred
in the production of regular wheat starch, which generally is sold at a lower
value than the Company's modified and specialty varieties. As a result, the
average per unit sales price for wheat starch during the second quarter was down
compared to the same period a year ago.
Conditions in the Company's alcohol markets in the second quarter generally
remained positive. However, the production of food grade alcohol for beverage
and industrial applications declined compared to the same period the prior year
due to a modest decline in demand. The production of fuel grade alcohol, on the
other hand, increased substantially compared to a year ago as the result of
greater utilization of distillery capacity at the Company's Pekin, Illinois
plant. Prices for all of the Company's alcohol products decreased compared to
the prior year's second quarter. Due largely to the effects of lower prices for
corn and milo, the principal raw materials used in the Company's alcohol
production process, prices for food grade alcohol decreased. Seasonal factors
and increased supplies of alcohol throughout the industry contributed to this
decline. The fall in fuel alcohol prices was caused principally by a recent
downturn in gasoline prices. As the result of this year's second quarter rise in
total alcohol production, unit sales of distillers' feed, the principal
by-product of the distillation process, grew substantially compared to a year
ago.
With consistently lower grain costs, a realization of stable energy costs and
improved production efficiencies, the Company expects to strengthen its
competitive abilities and improve profitability in the alcohol and wheat starch
markets going forward.
Sales
Net sales in the second quarter of fiscal 1998 were approximately $598,000
higher than sales in the second quarter of fiscal 1997. The increase principally
resulted from higher sales of fuel grade alcohol due to a nearly 83% rise in
units sold. The realization of higher sales in this category occurred from
increased utilization of distillery capacity at the Company's Pekin, Illinois
plant. Sales of food grade alcohol for beverage and industrial applications in
this year's second quarter were down compared to sales for the same period a
year ago. This was due to decreases in both unit sales and average prices. The
lower prices reflected a decline for raw material prices for corn and milo.
Sales of distillers' feeds, a by-product of the alcohol production process, rose
approximately 3% in the second quarter due to a substantial increase in total
alcohol units sold. Wheat gluten sales were approximately even with sales in the
second quarter of fiscal 1997. Despite a modest increase in unit output, selling
prices for wheat gluten decreased in the face of extreme competitive pressures
from the European Union. Sales of wheat starch decreased slightly compared to a
year ago, as higher unit sales were largely offset by lower selling prices. The
reduced selling prices resulted principally from a higher proportion of wheat
starches being sold for non-specialty, commodity-type applications. Net sales
for the first six months of fiscal 1998 increased by approximately $5.0 million
above sales for the first six months of fiscal 1997. The majority of this
increase occurred in the first quarter mainly as the result of higher sales of
fuel grade alcohol. The realization of higher sales of this product resulted
from increased production at the Company's Pekin, Illinois plant, where
operations were temporarily halted for a maintenance and repair shutdown during
a portion of the prior year's first quarter.
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
Cost of Sales
The cost of sales in the second quarter of fiscal 1998 increased by
approximately $1.7 million compared to the cost of sales in the second quarter
of fiscal 1997. This occurred primarily as the result of higher raw material
costs and higher energy costs due to greater uses of grain and energy to satisfy
increased production needs. Higher maintenance and repair costs, principally
associated with the Company's distillery operation in Pekin, Illinois, also
contributed to the cost of sales increase. The cost of sales for the first six
months of fiscal 1998 rose by approximately $5.6 million over cost of sales for
the first six months of fiscal 1997. This increase principally was due to the
factors cited above. Raw material costs for the first quarter of fiscal 1998
were approximately even with raw material costs in the first quarter of the
prior year as lower per unit grain prices offset the larger volume of grain that
was required for increased production. This in turn helped to partially offset
the cost of sales increase the Company experienced in the second quarter of
fiscal 1998.
In connection with the purchase of raw materials, principally corn and wheat,
for anticipated operating requirements, the Company enters into commodity
contracts to reduce the risk of future grain price increases. These contracts
are accounted for as hedges and, accordingly, gains and losses are deferred and
recognized in costs of sales as part of contract cost when contract positions
are settled and as related products are sold. For the second quarter of fiscal
1998, raw material costs included a net loss of $27,000 on contracts settled
during the quarter compared to a net loss of $132,000 for the same period in
fiscal 1997. For the first six months of
fiscal 1998, raw material costs included a net gain of $578,000 on contracts
settled during the period compared to a net loss of $193,000 for the same period
in fiscal 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the second quarter of fiscal
1998 increased by approximately $1.2 million above selling, general and
administrative expenses in the second quarter of fiscal 1997 due mainly to
employee-related costs. For the first six months of fiscal 1998, these expenses
increased by approximately $1.7 million above the same period the prior year,
mainly as the result of the second quarter increase.
The consolidated effective income tax rate is consistent for all periods. The
general effects of inflation were minimal.
Net Income
As the result of the foregoing factors, the Company experienced net income of
$107,000 in the second quarter of fiscal 1998 compared to net income of
$1,205,000 in the second quarter of fiscal 1997. A first quarter net loss in the
first quarter of fiscal 1998 more than offset the second quarter net income,
resulting in a net loss of $128,000 for the first six months of fiscal 1998. For
the first six months of fiscal 1997, the Company had net income of $859,000.
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity and
financial condition:
December 31, June 30
1997 1997
------------ ---------
(in thousands)
Cash and cash equivalents $ 682 $ 6,005
Working capital 34,986 36,580
Amounts available under lines of credit 33,000 29,000
Notes payable and long-term debt 26,933 30,933
Stockholders' equity 108,433 108,561
The Company continues to maintain a strong working capital position and a
relatively low debt-to-equity ratio. Continued strong cash flows have allowed
the Company to further reduce its debt by $4.0 million during the six month
period. Short-term liquidity has been affected by increased inventory resulting
from higher alcohol production levels and higher grain levels due to the fall
harvest. The cash management measures adopted two years ago, including stringent
cost controls, suspended quarterly dividends to stockholders and flexible
production, purchasing and marketing strategies remain in effect.
At December 31, 1997, the Company had $2.4 million committed to improvements and
replacements of existing equipment.
Management believes its strong financial position and available lines of credit,
combined with the strategies which continue to be implemented, position it to
take advantage of a return to more favorable conditions.
FORWARD-LOOKING INFORMATION
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.
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PART II
OTHER INFORMATION
Item 2. Legal Proceedings
The Wheat Gluten Industry Council of the United States has filed a Petition with
the United State Trade Representative (the "USTR") under Section 301 of the
Trade Act of 1974 and a petition with the International Trade Commission of the
United States (the "ITC," a commission appointed by the President) under Section
201 of the Trade Act of 1974. The petitions seek to alleviate alleged damage to
the U.S. wheat gluten industry by Subsidized foreign imports of wheat gluten
from the E.U. The proceedings are described under 'Vital Wheat Gluten -
Competition-Vital Wheat Gluten' under Item 1 in the Company's Form 10-K for the
year ended June 30, 1997, and under "RESULTS OF OPERATIONS - General" in Item 2
of Part I of this report. On January 15, 1998, the ITC voted 3-0 that the U.S.
wheat gluten industry has been seriously injured by foreign imports. The ITC is
now required to recommend to the President an appropriate remedy by March 18,
1998. The President must act on the recommendation within 60 days thereafter. As
described under "RESULTS OF OPERATIONS - General," in "Management's Discussion
and Analysis of Financial condition and Results of Operations" in Part I, no
assurance can be given as to when or if any relief will be granted. The failure
of the President to provide relief could have a material adverse effect on the
Company's future results of operations and financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(15) Letter from independent public accountants pursuant to paragraph
(d) of Rule 10-01 of Regulation S-X (incorporated by reference to
Independent Accountants' Review Report at page 2 hereof.)
(20) Letter to stockholders for the six months ended December 31, 1997.
(27) Financial data schedule.
(b) Reports on Form 8-K
The Company has filed no reports on Form 8-K during the quarter ended December
31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWEST GRAIN PRODUCTS, INC.
By s/Ladd M. Seaberg
Date: February 11, 1998 ----------------------------
Ladd M. Seaberg, President
and Chief Executive Officer
By s/Robert G. Booe
----------------------------
Date: February 11, 1998 Robert G. Booe, Vice President
and Chief Financial Officer
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