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, 1998 - 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
9,700,172 shares outstanding
as of May 1, 1998.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Independent Accountants' Review Report.............. 2
Condensed Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997.................... 3
Condensed Consolidated Statements of Operations for
the Three Months and Nine Months Ended March 31, 1998 and 1997.5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1998 and 1997....... 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 2. Legal Proceedings.............................. 12
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 March 31, 1998, and the related
condensed consolidated statements of operations for the three month and nine
month periods ended March 31, 1998 and 1997 and the related condensed
consolidated statements of cash flows for the nine month periods ended March 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with Statements on Standards for
Accounting and Review Services issued 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
April 22, 1998
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
March 31, June 30,
1998 1997
___________ ________
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 3,735 $ 6,005
Receivables 22,606 26,276
Inventories 23,739 15,000
Prepaid expenses 1,053 988
Deferred income taxes 1,688 1,688
Income taxes receivable 414 227
----------- ----------
Total Current Assets 53,235 50,184
----------- ----------
PROPERTY AND EQUIPMENT, At cost 216,968 213,813
Less accumulated depreciation 109,508 99,099
----------- ----------
107,460 114,714
----------- ----------
OTHER ASSETS 436 432
----------- ----------
$ 161,131 $ 165,330
=========== ==========
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1998 1997
___________ ________
(Unaudited)
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,273
Note payable - Bank $ 1,000
Accounts payable 7,827 8,196
Accrued expenses 4,862 4,408
----------- ----------
Total Current Liabilities 14,962 13,604
----------- ----------
LONG-TERM DEBT 24,660 29,933
----------- ----------
POST-RETIREMENT BENEFITS 6,527 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 99,583 100,149
----------- ----------
Total Stockholders' Equity 108,787 109,353
Treasury stock, at cost
Common; 1997 - 65,000 shares (792) (792)
------------ -----------
107,995 108,561
----------- ----------
$ 161,131 $ 165,330
=========== ==========
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Three Months Nine Months
_________________ _________________
1998 1997 1998 1997
____ ____ ____ ____
(in thousands, except per share amounts)
NET SALES $ 53,310 $ 54,449 $ 166,780 $ 162,871
COST OF SALES 50,991 51,975 158,031 153,445
----------- ---------- ----------- ----------
GROSS PROFIT 2,319 2,474 8,749 9,426
SELLING, GENERAL AND ADMINIS-
TRATIVE EXPENSES 2,622 2,102 8,881 6,644
----------- ---------- ----------- ----------
(303) 372 (132) 2,782
OTHER OPERATING INCOME 46 100 56 317
----------- ---------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS (257) 472 (76) 3,099
OTHER INCOME (LOSS)
Interest (486) (611) (1,381) (2,015)
Other 24 145 526 339
----------- ---------- ----------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES (719) 6 (931) 1,423
PROVISION (CREDIT) FOR
INCOME TAXES (281) 3 (365) 561
----------- ---------- ----------- ----------
NET INCOME (LOSS) $ (438) $ 3 $ (566) $ 862
=========== ========== =========== ==========
EARNINGS (LOSS) PER
COMMON SHARE $(.05) $.00 $(.06) $.09
====== ==== ====== ====
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
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MIDWEST GRAIN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
1998 1997
---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (566) $ 862
Items not requiring (providing) cash:
Depreciation 10,408 10,520
Gain on sale of assets (17)
Changes in:
Accounts receivable 3,670 (4,822)
Inventories (8,739) (4,868)
Prepaid expenses (65) (653)
Other assets (4)
Accounts payable (280) 1,261
Accrued expenses 736 202
Income taxes payable (187) 3,913
---------- ---------
Net cash provided by operating activities 4,973 6,398
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (3,243) (2,355)
Proceeds from sale of equipment 89
--------- ---------
Net cash used in investing activities (3,243) (2,266)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances on notes payable 3,000
Net principal payments on long-term debt (4,000) (8,000)
---------- ---------
Net cash used in financing activities (4,000) (5,000)
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (2,270) ( 868)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,005 3,759
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,735 $ 2,891
========= =========
See Accompanying Note to Condensed Consolidated Financial
Statements and Independent Accountants' Review Report
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MIDWEST GRAIN PRODUCTS, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
NOTE: GENERAL
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's condensed consolidated financial position as of March 31,
1998, and the condensed consolidated results of its operations and its cash
flows for the periods ended March 31, 1998 and 1997, and are of a normal
recurring nature.
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISUCSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998
RESULTS OF OPERATIONS
General
The Company's net loss of $438,000 in the third quarter of fiscal 1998
represented a decline from the prior year's third quarter net income of $3,000.
This decrease was mainly due to the effects of increased wheat gluten production
in the face of adverse market conditions. Massive imports of artificially-priced
gluten from the European Union (E.U.) continued to place severe competitive
pressures on the Company. The decision to raise production levels was made in
preparation to meet increased customer demand in the event that currently
pending White House action returns fairness and stability to the marketplace.
On March 11, the United States International Trade Commission (ITC) issued a
unanimous recommendation that the President impose a four-year quota on imports
of foreign wheat gluten. The ITC also recommended that "the President allocate,
within that quota, separate quotas for the European Union, Australia and all
other non-excluded countries, taking into account the disproportional growth and
the impact of imports of wheat gluten from the European Union." Countries
excluded from the quota would be Canada, Mexico, Israel and the beneficiary
countries of the Caribbean Basin Economic Recovery Act or the Andean Trade
Preferences Act. In conjunction with the quota recommendation, commissioners
announced they would further recommend that the President "undertake
international negotiations to address the underlying cause of the increase in
imports of wheat gluten or otherwise alleviate the injury to the domestic
industry." The President had been expected to act on the quota recommendation by
the middle of May. However, due to the extension of a related information
gathering process, his decision now is not expected to occur until the end of
May. The ITC's recommendation is consistent with the type of remedy requested by
the Wheat Gluten Industry Council (WGIC) of the U.S. That request was made in a
petition that was filed by the WGIC on September 19, 1997 under Section 201 of
the Trade Act of 1974. The petition was filed on the grounds that the U.S. wheat
gluten industry has been seriously injured by the surge in low priced wheat
gluten imports from the European Union. Profits from their highly subsidized and
protected wheat starch business allow E.U. producers to unload huge surpluses of
wheat gluten, a co-product, in the U.S. market at prices below U.S. production
costs, forcing domestic producers to drastically under-utilize production
capacities and relinquish sizeable percentages of market share.
While the Company hopes and expects that the President will follow the unanimous
recommendation of the ITC to implement the quota, and thereby create a more
level playing field, no assurance can be given as to when relief, if any, will
be granted. In addition, the Company has intensified efforts to develop
additional modified wheat gluten products that can be marketed in niches that
will be less affected by foreign competition. In the event the President fails
to provide the U.S. wheat gluten industry with adequate relief pursuant to the
Section 201 petition, and if the E.U. continues to export gluten at current or
lower price levels and in 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
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISUCSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998
premium and modified wheat starches profitably, (c) that losses generated from
the unprofitable production of gluten may 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.
Conditions in the Company's premium wheat starch market remained favorable in
the third quarter, resulting in increased production. As in the first two
quarters of fiscal 1998, the largest percentage of this increase occurred in the
production of non-modified wheat starch, which generally is sold at a lower
value than the Company's modified and specialty varieties. As a result, the
average pr unit sales price for wheat starch during the third quarter was down
compared to the same period a year ago.
The production of food grade alcohol for beverage and industrial applications
declined compared to the same period the prior year due to a decline in demand.
The production of fuel grade alcohol, on the other hand, increased 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 third quarter. Due partially to
the effects of lower costs for corn and milo, the principal raw materials used
in the Company's alcohol production process, prices for food grade alcohol
decreased. Seasonal factors and increased supplies of alcohol throughout the
industry also contributed to this decline. The fall in fuel alcohol prices was
caused principally by a downturn in gasoline prices. As the result of this
year's third quarter rise in total alcohol production, unit sales of distillers'
feed, the principal by-product of the distillation process, also grew compared
to a year ago.
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 third quarter of fiscal 1998 were down approximately $1.1
million compared to sales in the third quarter of fiscal 1997. The decrease
resulted mainly from lower selling prices for all principal products. The
realization of higher fuel alcohol sales occurred from increased utilization of
distillery capacity at the Company's Pekin, Illinois plant. This volume
increase, however, was offset by a decline in selling prices, which tracked
falling gasoline prices. Sales of food grade alcohol for beverage and industrial
applications in this year's third 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 both a decline in demand and a reduction in
raw material prices for corn and milo. Sales of distillers' feeds, a by-product
of the alcohol production process, fell slightly in the third quarter as lower
sales prices offset an increase in total units sold. Wheat gluten sales were
slightly higher than sales in the third quarter of
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISUCSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998
fiscal 1997 as the Company increased production and unit sales in preparation
for a possible solution to unfair competitive conditions caused by imports of
artificially-priced wheat gluten 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 nonspecialty,
commodity-type applications. Net sales for the first nine months of fiscal 1998
increased by approximately $3.9 million above sales for the first nine 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.
Cost of Sales
The cost of sales in the third quarter of fiscal 1998 decreased by approximately
$984,000 compared to the cost of sales in the third quarter of fiscal 1997. This
occurred primarily as the result of lower energy costs and slightly lower raw
material costs. The cost of sales for the first nine months of fiscal 1998 rose
by approximately $4.6 million over cost of sales for the first nine months of
fiscal 1997. This increase principally was due to higher raw material costs and
higher energy costs which were experienced in the first and second quarters and
which were associated with greater uses of grain and energy to satisfy increased
production needs.
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 third quarter of fiscal
1998, raw material costs included a net loss of $20,432 on contracts settled
during the quarter compared to a net loss of $427,851 for the same period in
fiscal 1997. For the first nine months of fiscal 1998, raw material costs
included a net gain of $426,971 on contracts settled during the period compared
to a net loss of $621,183 for the same period in fiscal 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the third quarter of fiscal 1998
increased by approximately $.5 million above selling, general and administrative
expenses in the third quarter of fiscal 1997 due mainly to employee-related
costs. For the first nine months of fiscal 1998, these expenses increased by
approximately $2.2 million above the same period the prior year, mainly as the
result of the same factor.
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 a net loss of
$438,000 in the third quarter of fiscal 1998 compared to a net income of $3,000
in the third quarter of fiscal 1997. A first quarter net loss combined with the
third quarter loss more than offset the second quarter net income, resulting in
a net loss of $566,000 for the first nine months of fiscal 1998. For the first
nine months of fiscal 1997, the Company had net income of $862,000.
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MIDWEST GRAIN PRODUCTS, INC.
MANAGEMENT'S DISUCSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity and
financial condition:
March 31, June 30,
1998 1997
-------- ---------
(in thousands)
Cash and cash equivalents $ 3,735 $ 6,005
Working capital 38,273 36,580
Amounts available under lines of credit 33,000 29,000
Notes payable and long-term debt 26,933 30,933
Stockholders' equity 107,995 108,561
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 nine month
period. Short-term liquidity has been affected by increased inventory resulting
from higher production levels and higher grain levels due to the increased
production requirements and lower grain costs. 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 March 31, 1998, the Company had $4.8 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," "should," "may" and similar expressions. They reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, Company performance and financial results and are not guarantees of
future performance. The forward-looking statements are based on many assumptions
and factors including those relating to grain prices, gasoline prices, energy
costs, product pricing, competitive environment and related market conditions,
operating efficiencies, access to capital and actions of governments. Any
changes in the assumptions or factors could produce materially different results
than those predicted and could impact stock values.
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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. On March
11, 1998, the ITC issued a unanimous recommendation that the President impose a
four-year quota on imports of foreign wheat gluten as described under Item 2 of
Part I of this report. The President must act on the recommendation by the end
of May, 1998. As described under "RESULTS OF OPERATIONS - General," in Part I,
no assurance can be given as to whether any relief will be granted. The failure
of the President to provide relief could have a material adverse affect on the
Company's future results of operations and financial condition.
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.
20 Letter to stockholders for the six months ended
March 31, 1998.
27 Financial data schedule.
(b) Reports on Form 8-K
The Company has filed no reports on Form 8-K during the quarter ended
March 31, 1998.
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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.
s/Ladd M. Seaberg
By _________________________________
Date: May 13, 1998 Ladd M. Seaberg, President
and Chief Executive Officer
s/Robert G. Booe
By _________________________________
Date: May 13, 1998 Robert G. Booe, Vice President
and Chief Financial Officer
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Exhibit Index
Exhibit No. Exhibit Description
----------- -------------------
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.
20 Letter to stockholders for the six months ended March 31, 1998.
27 Financial data schedule.
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