As Filed with the Securities and Exchange Commission on September 28, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1998
MIDWEST GRAIN PRODUCTS, INC.
1300 Main Street
Box 130
Atchison, Kansas 66002
Telephone: (913) 367-1480
Incorporated in the State of Kansas
COMMISSION FILE NO. 0-17196
IRS No. 48-0531200
The Company has no securities registered pursuant to Section 12(b) of
the Act. The only class of common stock outstanding consists of Common Stock
having no par value, 9,700,172 shares of which were outstanding at June 30,
1998. The Common Stock is registered pursuant to Section 12(g) of the Act.
The aggregate market value of the Common Stock of the Company held by
non-affiliates, based upon the highest sales price of such stock on August 20,
1998, was $91,616,272.
The Company has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements for the past 90 days.
As indicated by the following check mark, disclosure of delinquent
filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge in a definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K:
[X].
The following documents are incorporated herein by reference:
(1) Midwest Grain Products, Inc. 1998 Annual Report to Stockholders, pages
17 through 36 [incorporated into Part II and contained in Exhibit 10(c)].
(2) Midwest Grain Products, Inc. Proxy Statement for the Annual Meeting of
Stockholders to be held on October 8, 1998, dated September 17, 1998
(incorporated into Part III).
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MIDWEST GRAIN PRODUCTS, INC.
FORM 10-K
For the Fiscal Year Ended June 30, 1998
CONTENTS
PAGE
PART I
Item 1. Business.......................................................... 4
General Information............................................... 4
Vital Wheat Gluten................................................ 5
Premium Wheat Starch.............................................. 8
Alcohol Products.................................................. 9
Flour and Other Mill Products..................................... 11
Transportation.................................................... 11
Raw Materials..................................................... 11
Energy............................................................ 12
Employees......................................................... 13
Regulation........................................................ 13
Item 2. Properties........................................................ 13
Item 3. Legal Proceedings................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................. 15
Item 6. Selected Financial Data........................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 15
Item 8. Financial Statements and Supplementary Data....................... 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 15
PART III
Item 10.Directors and Executive Officers of the Registrant................ 16
Item 11.Executive Compensation............................................ 18
Item 12.Security Ownership of Certain Beneficial
Owners and Management............................................ 18
Item 13.Certain Relationships and Related Transactions.................... 18
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K... 19
SIGNATURES.................................................................. 21
FINANCIAL STATEMENT SCHEDULES............................................... S-1
Report of Independent Public Accountants on Schedules..................... S-2
Schedule VIII. Valuation and Qualifying Accounts......................... S-3
The calculation of the aggregate market value of the Common Stock of the
Company held by non-affiliates is based on the assumption that non-affiliates do
not include directors. Such assumption does not constitute an admission by the
Company or any director that any director is an affiliate of the Company.
This report, including the portions of the Annual Report incorporated herein
by reference, contain forward-looking statements as well as historical
information. Forward-looking statements are usually identified by or are
associated with such words such as "intend, " believe," "estimate," "expect,"
"anticipate," "hopeful," "should," "may" and similar expressions. They reflect
management's current belief's and estimates of future economic circumstances,
industry conditions, Company performance and financial results and are not
guarantees of future performance. The forward- looking statements are based on
many assumptions and factors including those relating to grain prices, gasoline
prices, energy costs, product pricing, competitive environment and related
market conditions, operating efficiencies, access to capital and actions of
governments. Any changes in the assumptions or factors could produce materially
different results than those predicted and could impact stock values.
3
PART I
Item 1. Business.
General Information
Midwest Grain Products, Inc. (the Company) is a Kansas
corporation headquartered in Atchison, Kansas. It is the successor to a
business founded in 1941 by Cloud L. Cray, Sr.
The Company is a fully integrated producer of vital wheat gluten,
premium wheat starch, and alcohol products. These grain products are processed
at plants located in Atchison, Kansas, and Pekin, Illinois. Wheat is purchased
directly from local and regional farms and grain elevators and milled into
flour. The flour is processed with water to extract vital wheat gluten, a
portion of which is further processed into specialty wheat proteins. The vital
wheat gluten and most protein products are dried into powder and sold in
packaged or bulk form. The starch slurry which results after the extraction of
the gluten and wheat proteins is further processed to extract premium wheat
starch which is also dried into powder and sold in packaged or bulk form. The
remaining slurry is mixed with corn or milo and water and then cooked, fermented
and distilled into alcohol. The residue of the distilling operations is dried
and sold as a high protein additive for animal feed. Carbon dioxide which is
produced during the fermentation process is trapped and sold. As a result of
these processing operations, the Company sells approximately 95% (by weight) of
grain processed.
The table below shows the Company's sales from continuing operations by
product group for each of the five years ended June 30, 1998, as well as such
sales as a percent of total sales. .
PRODUCT GROUP SALES
Year Ended June 30,
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------
(thousands of dollars)
Amount % Amount % Amount % Amount % Amount %
Vital Wheat Gluten......... $ 42,489 19.0 $ 39,968 17.8 $ 39,514 20.3 $ 49,957 27.7 $ 70.966 38.2
Premium Wheat Starch....... 27,791 12.4 29,935 13.3 26,354 13.5 23,403 13.0 21,110 11.3
Alcohol Products:
Food Grade Alcohol
Beverage Alcohol...... 35,934 16.1 43,118 19.2 39,465 20.3 32,573 18.1 29,536 15.9
Food Grade Industrial. 27,487 12.3 38,004 16.9 32,064 16.5 23,379 13.0 22,585 12.1
Fuel Grade Alcohol....... 51,277 23.0 34,992 15.6 25,347 13.0 28,120 15.6 19,273 10.4
Alcohol By-products...... 33,259 14.9 34,553 15.4 28,449 14.6 19,583 10.9 18,146 9.8
------- ----- ------- ----- ------- ----- ------- ---- ------- -----
Total Alcohol
Products............. 147,957 66.3 150,667 67.1 125,325 64.4 103,655 57.5 89,540 48.2
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Flour and Other Mill
Products................. 5,017 2.3 4,163 1.8 3,445 1.8 3,237 1.8 4,352 2.3
----- ---- ------ ---- ------ ---- ------ ---- ------ ----
Net Sales ........... $223,254 100.0 $224,733 100.0 $194,638 100.0 $180,252 100.0 $185,968 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The Company's net loss of $2.2 million in fiscal 1998 represented a
substantial decrease from the prior year's net income of $131,000. The decline
was mainly due to the effects of increased wheat gluten production in the face
of adverse market conditions, together with a steady drop in selling prices for
the Company's alcohol products. Massive imports of artificially-priced gluten
from the European Union continued to place severe competitive pressures on the
Company throughout the year. The decision to raise production levels was made to
prepare to meet increased customer demand based on expectations of a positive
outcome in initiatives taken to have a quota imposed on imports of subsidized
foreign gluten. With the imposition of an annual quota on foreign gluten imports
for a three-year period beginning June 1, 1998, the Company expects a return to
more positive results for fiscal 1999.
The bulk of the Company's sales are made under informal arrangements
direct to large institutional food and beverage processors or distributors with
respect to which the Company has longstanding relationships. Sales to these
customers are typically evidenced by short term agreements that are cancelable
within 30 days and under which products are usually ordered, produced, sold and
shipped within 30 days. As a consequence, the Company's backlog of orders at any
time is usually less than 10 percent of annual sales. None of the Company's
customers accounted
4
for more than ten percent of the Company's consolidated revenues during fiscal
1998, except for a distributor of vital wheat gluten that makes purchases under
orders that are cancelable within thirty days.
Historically, the Company's sales have not been seasonal except for
variations affecting alcohol and gluten sales. Fuel alcohol sales usually
increase during the period August through March due to requirements of the Clean
Air Act which inhibit the sale of ethanol in certain areas of the country during
May 1 through September 15 each year. Certain environmental regulations also
favor greater use of ethanol during the winter months of the year. See "Alcohol
Products- Fuel Grade Alcohol." Beverage alcohol sales tend to peak in the fall
as distributors order stocks for the holiday season, while gluten sales have
tended to increase during the second half of the fiscal year as demand increases
for hot dog buns, hamburger buns, and similar bakery products. During the next
three years the Company may experience significant increases in wheat gluten
sales during the second half of each fiscal year. This may be anticipated due to
the effects of annual quotas on the import of wheat gluten into the United
States if importers continue to ship gluten into the US at rates in excess of an
annualized rate for the annual quota. The annual quota became effective June 1,
1998, and applies to each of the next three years ending on each May 31. See
"Vital Wheat Gluten - Competition."
For further information, see the Consolidated Financial Statements of
the Company and Management's Discussion and Analysis of the Company's Financial
Condition and Results of Operations which appear at pages 18 through 24 of the
Annual Report.
Vital Wheat Gluten
Vital wheat gluten is a free-flowing light tan powder which contains
approximately 75% to 80% protein. Its vitality, water absorption and retention
and film-forming properties make it desirable as an ingredient in many food
products. It is the only commercially available high protein food additive which
possesses vitality. The vitality of the Company's vital wheat gluten results
from its elastic and cohesive characteristics when added to dough or otherwise
reconstituted with water.
Vital wheat gluten is added by bakeries and food processors to baked
goods such as wheat breads, and to pet foods, cereals, processed meats, fish,
and poultry to improve the nutritional content, texture, strength, shape, and
volume of the product. The neutral flavor and color of wheat gluten also
enhances, but does not change, the flavor and color of food. It has been
increasingly used in breads and pet foods. The cohesiveness and elasticity of
the gluten enables the dough in wheat and other high protein breads to rise and
to support added ingredients such as whole cracked grains, raisins and fibers.
This allows the baker to make an array of different breads by varying the gluten
content of the dough. Vital wheat gluten is also added to white breads, and hot
dog and hamburger buns to improve the hinge strength and cohesiveness of the
product.
In recent years the Company began the development of a number of
Specialty Wheat Proteins for food and non-food applications. Specialty Wheat
Proteins are derived from vital wheat gluten through a variety of proprietary
processes which change the molecular structure of vital wheat gluten. These
specialty proteins include various hydrolyzed proteins, texturized proteins,
gliadin, glutenin and a product used to enhance pasta called "Pasta Power."
o Hydrolyzed proteins, unlike vital wheat gluten, are soluble in
water and other liquids. This enables their use in food
products such as high protein consumer beverages, calf milk
and soy sauce and non-food applications such as hair sprays,
shampoos and shower gels, body moisturizers, skin lotions and
the like.
o Texturized wheat proteins consist of vital wheat gluten that
is changed into a pliable substance through special
processing. The resulting solid food product can be further
enhanced with flavoring and coloring and reconstituted with
water. Texturized wheat proteins are used for meat, poultry
and fish substitutes and extenders.
o Gliadin and Glutenin are the two principal molecules that make
up vital wheat gluten. The Company's patented process enables
the separation of each for a variety of end uses. Glutenin, a
large molecule responsible for the elastic character of vital
wheat gluten, increases the strength of
5
bread doughs, improves the freeze-thaw characteristics of
frozen doughs and may be used as a functional protein source
in beef jerky-type products, as well as in meat extension.
Gliadin, the smaller of the two molecules is soluble in water
and other liquids, including alcohol and is responsible for
the viscous properties of wheat gluten. Those characteristics
make it ideal for use in hair sprays and to improve the
texture of noodles and pastas.
o Polytriticum 200 and Polytriticum 2000 are the Company's
environmentally friendly biodegradable gluten resins that can
be molded to produce a variety of plastic-like objects.
Polytriticum 200 may be used as a commercial raw material for
the production of pet foods and biodegradable landscaping
materials and Polytriticum 2000 is contemplated for use in
disposable eating utensils, golf tees, food and feed
containers and similar type vessels.
Although a number of the specialty wheat proteins are being marketed,
others are still in the test marketing or development stage. Only a small
fraction of the Company's 1997 and 1998 vital wheat gluten sales reflect sales
of specialty proteins. However, the Company's strategy is to focus on the
marketing and development of these products with the view to their becoming an
increasingly larger portion of total gluten sales. The Company has employed the
same strategy successfully through the gradual but steadily increasing
development of value-added modified wheat starches for niche markets. Specialty
wheat proteins are designed for sale in niche markets and generally compete with
other ingredients having similar characteristics.
The Company produces vital wheat gluten from modernized facilities at
the Atchison plant and new facilities at the Pekin plant. It is shipped
throughout the continental United States in bulk and in 50 to 100 pound bags.
Approximately 10.5% of the Company's total fiscal 1998 sales were made to a
distributor for the bakery industry, the Ben C. Williams Bakery Services
Company, which in turn distributes vital wheat gluten to independent bakeries.
The remainder is sold directly to major food processors and bakeries such as
Kellogg Co., Interstate Baking Company, Inc. and H. J. Heinz Co.
The Company's vital wheat gluten processing operations are believed to
produce a quality of vital wheat gluten and specialty wheat proteins that are
equal to or better than that of any others on the market. The Company's location
in the center of the United States grain belt, its production capacity and years
of operating experience, enable it to provide a consistently high level of
service to customers.
Competition-Vital Wheat Gluten. Historically, the Company's principal
competitors in the U.S. vital wheat gluten market have consisted of a few other
domestic producers and producers in the European Union (the "EU"), Australia and
certain other regulated countries (the "Foreign Exporters"). Beginning in 1994,
the E.U. has taken an increasingly large share of the U.S. gluten market.
Imports of wheat gluten shipped into the United States from the E.U. during the
crop year ended June 30, 1995, were approximately 51.9 million pounds. Those
imports increased by to 70.2 million pounds in the crop year ending June 30,
1996, to 91.1 million pounds in the crop year ending June 30, 1997, and to 97.5
million pounds in the crop year ending June 30, 1998, for an aggregate increase
of 88%.
Competition in the vital wheat gluten industry is based primarily upon
price. Since the increasing surge of large, subsidized volumes of E.U. wheat
gluten into the U.S., prices have been primarily affected by excess E.U.
capacity and subsidies and other protective measures ("Subsidies") provided to
E.U. exporters by their host governments and low U.S. tariffs. Previously, U.S.
Gluten prices were primarily affected by U.S. grain and U.S. energy costs and,
to a lesser extent, by foreign subsidies. Due to the Subsidies, it became
increasingly difficult for the Company to compete with the surge of E.U. wheat
gluten since the artificially low prices charged for those E.U. Subsidized
imports were less than the Company's cost of production. As a result of this
imbalance in the U.S. wheat gluten market the Company's strategy during fiscal
1997 and most of fiscal 1998 has been to limit its production of wheat gluten to
amounts necessary to produce wheat starch and other wheat co-products and to
support actions by the United States Wheat Gluten Industry Council (the "Wheat
Gluten Council") to stem the tide of E.U. Subsidized wheat gluten through legal
proceedings.
6
As mentioned above, the extraordinary increase in E.U. gluten imports into
the U.S. is due to high E. U. Subsidies, high E. U. import tariffs, and low U.S.
import tariffs on wheat products. These incentives have encouraged E.U.
producers to expand wheat starch and wheat gluten production capacity and to
continue the development of even greater capacities. During the fiscal year
ending 1998, an estimated 150 million pounds of additional E.U. capacity were
either completed or nearing completion and an estimated additional 20 million
pounds of E.U. capacity have been announced to come on line during the next two
years. Until the imposition of quotas by the President of the United States
effective June 1, 1998, it was expected that a majority of the excess wheat
gluten production from these plants would be targeted for shipment to the U.S.
The Wheat Gluten Council, which is principally supported by the Company
and another domestic wheat gluten producer, has engaged in a number of
initiatives to combat this surge in Subsidized E.U. wheat gluten. Initially the
Wheat Gluten Council attempted to establish equal opportunity or a "level
playing field" in the U.S. market through negotiations under a Grains Agreement
between the E.U. and the United States. A lack of meaningful discussions was
followed by an action under Section 301 of the Trade Act of 1974. Following a
further round of unsatisfactory discussions in connection with that action, the
Wheat Gluten Council initiated a second proceeding on September 19, 1997, with
the International Trade Commission of the United States (the "IT") under section
201 of the Trade Act of 1974 (the "Section 201 Proceeding").
The Section 201 Proceeding met with success during the second half of
fiscal 1998. On March 18, 1998, the ITC submitted to the President a unanimous
affirmative determination that "imports of wheat gluten are being imported into
the United States in such increased quantities as to be a substantial cause of
serious injury to the domestic industry." The ITC also recommended to the
President that a quota be placed on imports of foreign wheat gluten. As a result
of that finding and recommendation and pursuant to Section 203 of the Trade Act
of 1974, the President issued Proclamation 7103, on May 30, 1998. The
Proclamation imposes annual quantitative limitations for three years on imports
of wheat gluten from the E. U. and other Foreign Exporters at an amount equal to
the total average imports of wheat gluten shipped into the United States by the
Foreign Exporters during the three crop years ended June 30, 1995. The aggregate
quota for the first year is 126.8 million pounds. Annual increases in that quota
of six percent prevail in the second year and in the third year. The quotas for
"goods entered, or withdrawn from warehouse for consumption, on or after June 1,
1998" in millions of pounds are:
"If entered during the period from June 1, 1998, through May 31, 1999,
inclusive....:"
Australia...................................... 62.4 million pounds
European Community............................. 54.0 million pounds
Other Countries................................ 10.4 million pounds
"If entered during the period from June 1, 1999, through May 31, 2000,
inclusive....:"
Australia...................................... 66.1 million pounds
European Community............................. 57.3 million pounds
Other Countries................................ 11.0 million pounds
"If entered during the period from June 1, 2000, through May 31, 2001,
inclusive....:"
Australia...................................... 70.1 million pounds
European Community............................. 60.7 million pounds
Other Countries................................ 11.7 million pounds
7
Based on information reported from the U.S. Customs Service, during the
first 123 days of the quota between June 1, 1998, and September 21, 1998, the
E.U. had imported approximately 35.84 million pounds of wheat gluten or
approximately 66.33% of the quota for the crop year ending May 31, 1999. If the
shipments from the E.U. continue at that rate, the E.U. quota should be filled
by November 16, 1998, thereby precluding further imports from the E.U. for the
next 196 days of the crop year. If this occurs, the Company expects a sharp
increase in demand for the Company's vital wheat gluten in the second half of
fiscal 1999 and a possible reduction in demand during the first half of fiscal
2000. Based on these estimates, the Company has been increasing gluten
production with the view to inventorying excess gluten during the first half of
fiscal 1999 and liquidating those inventories during the second half of that
year. This cycle should translate into increased gluten sales and other
operating results during the second half of fiscal 1999 with the possibility of
reduced gluten results during first six months of fiscal 2000.
During the next three years and beyond the Company plans to intensify
its focus on increasing the sales and production of Specialty Wheat Proteins
since those niche products are expected to be able to compete more effectively
with increased foreign imports following the end of the annual quotas in 2001.
The Company's sales of vital wheat gluten during 1998 increased
slightly over gluten sales in fiscal 1997 as the Company began to increase
production in anticipation of a favorable outcome in the Section 201 Proceeding.
Although the average price of wheat for the year declined during 1997 and 1998,
the continued flood of subsidized wheat gluten from the E.U. negatively impacted
the Company's gluten results for the year and even into the beginning of fiscal
1999 as E.U. producers continued to import gluten at a rate well in excess of an
annualized rate for the quota.
Premium Wheat Starch
Wheat starch constitutes the carbohydrate-bearing portion of wheat
flour. The Company produces a pure white premium wheat starch powder by
extracting the starch from the starch slurry substantially free of all
impurities and fibers and then by spray, flash or drum drying the starch.
Premium wheat starch differs from low grade or B wheat starches which are
extracted along with impurities and fibers and are used primarily as a binding
agent for industrial applications such as the manufacture of charcoal
briquettes. The Company does not produce low grade or B starches since its
integrated processing facilities are able to process the remaining slurry after
the extraction of premium wheat starch into alcohol, animal feed and carbon
dioxide. Premium wheat starch differs from corn starch in its granular
structure, color, granular size and name identification.
A substantial portion of the Company's premium wheat starch is also
chemically altered during processing to produce certain unique modified wheat
starches designed for special applications.
The Company's premium wheat starches are used primarily as an additive
in a variety of food products to affect their appearance, texture, tenderness,
taste, palatability, cooking temperature, stability, viscosity, binding and
freeze-thaw characteristics. Important physical properties contributed by wheat
starch include whiteness, clean flavor, viscosity and texture. For example, the
Company's starches are used to improve the taste and mouth feel of cream puffs,
eclairs, puddings, pie fillings, breadings and batters; to improve the size,
symmetry and taste of angel food cakes; to alter the viscosity of soups, sauces
and gravies; to improve the freeze-thaw stability and shelf life of fruit pies
and other frozen foods; to improve moisture retention in microwavable foods; and
to add stability and to improve spreadability in frostings, mixes, glazes and
sugar coatings. The Company's specialty starches are also sold for a number of
industrial and non-food applications, which include uses in the manufacture of
adhesives, paper coatings and carbonless paper.
The Company's premium wheat starch is sold nationwide to food
processors, such as International Multi-Foods Corp., Pillsbury Company and
Keebler Company, to distributors, and for export to countries such as Japan,
Mexico and Malaysia which do not have wheat-based economies.
The Company believes that it is the largest producer of premium wheat
starch in the United States. Although wheat starch enjoys a relatively small
portion of the total United States starch market, the market is one which has
8
experienced substantial growth over the last ten years. Growth in the wheat
starch market reflects a growing appreciation for the unique characteristics of
wheat starch which provide it with a number of advantages over corn and other
starches for certain baking and other end uses. The Company has developed a
number of different modified wheat starches and continues to explore the
development of additional starch products with the view to increasing sales of
value added modified starches.
Premium wheat starch competes primarily with corn starch, which
dominates the United States market. Competition is based upon price, name, color
and differing granular and chemical characteristics which affect the food
product in which it is used. Premium wheat starch prices usually enjoy a price
premium over corn starches and low grade wheat starches. Wheat starch price
fluctuations generally track the fluctuations in the corn starch market, except
in the case of modified wheat starches. The wheat starch market also usually
permits pricing consistent with costs which affect the industry in general,
including increased grain costs. The Company's strategy is to market its premium
wheat starches in special market niches where the unique characteristics of
premium wheat starch or one of the Company's modified wheat starches are better
suited to a customer's requirements for a specific use.
Although Starch volumes increased during fiscal 1998, sales declined
slightly due primarily to increased competition.
Alcohol Products
The Company's Atchison and Pekin plants process corn and milo, mixed
with the starch slurry from gluten and starch processing operations, into food
grade alcohol, fuel grade alcohol, animal feed and carbon dioxide.
Food grade alcohol, or grain neutral spirits, consists of beverage
alcohol and industrial food grade alcohol that are distilled to remove all
impurities and all but approximately 5% of the water content to yield high
quality 190 proof alcohol. Fuel grade alcohol, or "ethanol," is a lower grade of
grain alcohol that is distilled to remove all water to yield 200 proof alcohol
suitable for blending with gasoline.
Food Grade Alcohol
Beverage Alcohol. Food grade beverage alcohol consists primarily of
grain neutral spirits and gin. Grain neutral spirits is sold in bulk or
processed into vodka and gin and sold in bulk quantities at various proof
concentrations to bottlers and rectifiers, such as James B. Beam Distilling Co.,
Florida Distillers Co, and Barton Brands, which further process the alcohol for
sale to consumers under numerous labels.
The Company believes that in terms of fiscal 1998 net sales, it is one
of the two largest bulk sellers of grain neutral spirits, vodka and gin in the
United States. The Company's principal competitors in the beverage alcohol
market are Grain Processing Company of Muscatine, Iowa and Archer Daniels
Midland of Decatur, Illinois. During 1997 and continuing into fiscal 1998
competition in beverage markets increased significantly as producers of fuel
grade alcohol converted portions of fuel grade production into food grade
production. Competition is based primarily upon price and service, and in the
case of gin, formulation. The Company believes that the centralized location of
its Illinois and Kansas distilleries and the capacity of its dual production
facilities combine to provide the Company with a customer service advantage
within the industry.
Food Grade Industrial Alcohol. Food grade alcohol which is not sold as
beverage alcohol is marketed as food grade industrial alcohol. Food grade
industrial alcohol is sold as an ingredient in foods (e.g., vinegar and food
flavorings), personal care products (e.g., hair sprays and deodorants), cleaning
solutions, biocides, insecticides, fungicides, pharmaceuticals, and a variety of
other products. Although grain alcohol is chemically the same as petroleum-based
or synthetic alcohol, certain customers prefer a natural grain-based alcohol.
Food grade industrial alcohol is sold in tank truck or rail car quantities
direct to a number of industrial processors, such as 7-Up Company
9
and Reckitt & Colman, a producer of Lysol brand products, and Avon Products,
Inc., from both the Atchison and Pekin plants.
The Company is a minor competitor in the total United States market for
food grade industrial alcohol, which is dominated by petroleum-based or
synthetic alcohol. Food grade industrial alcohol prices are normally consistent
with prices for synthetic industrial alcohol.
Food grade industrial and beverage alcohol sales declined by
approximately $17.7 million during 1998 due primarily to decreased demand and
increased food grade production capacity throughout the industry. Although the
effects of declining sales were partially offset by significantly reduced grain
prices, food grade results for 1998 contributed to the Company's 1998 loss. The
increased industry-wide capacity for food grade alcohol is due to a large scale
conversion of fuel grade distillation equipment into food grade production
because of an abundance of fuel grade capacity that was constructed in the early
1990s in anticipation of the implementation of Clean Air Act regulations
mandating ethanol use that were were subsequently reversed by court order.
Fuel Grade Alcohol
Fuel grade alcohol, which is commonly referred to as ethanol, is sold
primarily for blending with gasoline to increase the oxygen and octane levels of
the gasoline. As an octane enhancer, ethanol can serve as a substitute for lead
and petroleum based octane enhancers. As an oxygenate, ethanol permits gasoline
to meet certain environmental regulations and laws that regulate air quality by
reducing carbon monoxide, hydrocarbon particulates and other toxic emissions
generated from the burning of gasoline ("toxics"). Because ethanol is produced
from grain, a renewable resource, it also provides a fuel alternative that tends
to reduce the country's dependence on foreign oil.
Although ethanol can be blended directly with gasoline as an oxygenate
to enable it to reduce toxic air emissions, it also increases the volatility of
gasoline or its tendency to evaporate and release volatile organic compounds
("VOC's"). This latter characteristic has precluded it from meeting certain
Clean Air Act requirements for gasoline that pertain to nine of the smoggiest
U.S. metropolitan areas during the summer months (May 1 through September 15).
As a consequence, the demand for ethanol increases during the period from August
through March of each fiscal year as gasoline blenders acquire stocks for
blending with gasoline to be marketed in the period September 16 through April
30.
The cost of producing ethanol has historically exceeded the cost of
producing gasoline and gasoline additives, such as MTBE, all of which are
derived from fossil non-renewable fuels such as petroleum. Accordingly, to
encourage the production of ethanol for use in gasoline, the Federal government
and various states have enacted tax and other incentives designed to make
ethanol competitive with gasoline and gasoline additives. Under the internal
revenue code, and until the end of 2007, gasoline that has been blended in
qualifying proportions with ethanol provide sellers of the blend with certain
income tax credits and excise tax reductions that amount to up to $0.54 per
gallon of ethanol that is mixed with the gasoline (the "Federal Tax Credit"). A
mix of at least 10% ethanol by volume is required to receive the maximum credit.
Although the Federal Tax Credit is not directly available to the Company, it
allows the Company to sell its ethanol at prices competitive with less expensive
additives and gasoline. From time to time legislation is proposed to eliminate,
reduce or extend the tax benefits enjoyed by the ethanol industry, and
indirectly by producers of the grain that is converted into ethanol. During 1998
legislation was enacted that extended the credit through 2007, with the credit
being reduced to $0.51 per gallon beginning in 2005.
The Kansas Qualified Agricultural Ethyl Alcohol Producer Incentive
Fund, which expires in 2001, provides incentives for sales of ethanol produced
in Kansas to gasoline blenders. Fiscal 1998 payments to the Company out of the
fund totaled $379,000 for the ethanol produced by the Company at the Atchison
plant during that year. A few other states offer ethanol blending incentives,
which, in the aggregate, did not materially add to the Company's ethanol
revenues during fiscal 1998.
10
The fuel grade alcohol market is dominated by Archer Daniels Midland.
In recent years the Company and other competitors have significantly increased
domestic fuel grade alcohol distillation capacity. During fiscal 1995 the
Company more than tripled its fuel grade alcohol production capacity through the
expansion of its distillery operations at the Pekin plant. As a consequence, it
moved from a very small competitor in the fuel grade market to the smaller of a
few other larger second tier ethanol producers. The Company competes with other
producers of fuel grade alcohol on the basis of price and delivery service.
Fuel grade alcohol sales increased by 46.5 % during 1998 as demand for
food grade alcohol declined and the utilization of the distillery capacity at
the Pekin, Illinois plant increased. At the same time fuel alcohol prices
decreased significantly due to declining gasoline prices and increased
industry-wide capacity. Although grain costs also declined, a more pronounced
drop in fuel grade alcohol prices negatively impacted the Company's fuel grade
alcohol operations.
Alcohol By-Products
The bulk of fiscal 1997 sales of alcohol by-products consisted of
distillers feeds. Distillers feeds are the residue of corn, milo and wheat from
alcohol processing operations. The residue is dried and sold primarily to
processors of animal feeds as a high protein additive. The Company competes with
other distillers of alcohol as well as a number of other producers of animal
food additives in the sale of distillers feeds and mill feeds.
The balance of alcohol by-products consists primarily of carbon
dioxide. During the production of alcohol, the Company traps carbon dioxide gas
that is emitted in the fermentation process. The gas is purchased and liquefied
on site by two principal customers, one at the Atchison Plant and one at the
Pekin Plant, who own and operate the carbon dioxide processing and storage
equipment under long term contracts with the Company. The liquefied gas is
resold by these processors to a variety of industrial customers and producers of
carbonated beverages.
Sales of Alcohol by-products were relatively flat during 1998 due to an
increase in unit production of distillers feeds that was offset by reduced
selling prices which resulted from lower grain costs.
Flour and Other Mill Products
The Company owns and operates a flour mill at the Atchison plant. The
the mill's output of flour is used internally to satisfy a majority of the raw
material needed for the production of vital wheat gluten and premium wheat
starch.
In addition to flour, the wheat milling process generates mill feeds or
midds. Midds are sold to processors of animal feeds as a feed additive.
Transportation
The Company's output is transported to customers by truck, rail and
barge transportation equipment, most of which is provided by common carriers
through arrangements made by the Company. The Company leases 380 rail cars which
may be dispatched on short notice. Shipment by barge is offered to customers
through barge loading facilities on the Missouri and Illinois Rivers. The barge
facility on the Illinois River is adjacent to the Pekin plant and owned by the
Company. The facility on the Missouri River, which is not company-owned, is
approximately one mile from the Atchison plant.
Raw Materials
The Company's principal raw material is grain, consisting of wheat
which is processed into all of the Company's products and corn and milo which
are processed into alcohol, animal feed and carbon dioxide. Grain is purchased
directly from surrounding farms, primarily at harvest time, and throughout the
year from grain elevators. Historically, the cost of grain is subject to
substantial fluctuations depending upon a number of factors which affect
11
commodity prices in general, including crop conditions, weather, government
programs, and purchases by foreign governments. Such variations in grain prices
have had and are expected to have from time to time significant adverse effects
on the results of the Company's operations. This is primarily due to two
factors. First, it has been difficult in recent years for the Company to
compensate for increases in grain costs through adjustments in prices charged
for the Company's vital wheat gluten due to the surge of Subsidized E.U. wheat
gluten whose artificially low prices are not affected by such costs. Although
the Company expects that the three-year quota on imports of wheat gluten will
significantly alleviate this condition, no assurance can be given that the
effect will be uniform throughout each crop year covered by the quota or that
the market will otherwise adjust. Second, fuel grade alcohol prices, which
historically have tracked the cost of gasoline, do not usually adjust to rising
grain costs.
Beginning in the first quarter of fiscal 1997, grain prices began to
return to more normal levels from the record high levels that prevailed during
the privious fiscal year. By the end of fiscal 1997, the average market price of
corn and milo had gone from $6.52 per bushel at the beginning of the year to
$3.40 during June, 1997, while the average market price of wheat declined from
$5.51 per bushel at the beginning of fiscal 1997 to $3.90 at the end of that
year. During fiscal 1998 market prices for grain continued to decline to $3.17
per average bushel for corn and milo and to $3.06 for a bushel of wheat, as of
June 30, 1998. Although a return to more normal grain prices continued to
enabled positive cash flows in 1998, the fiscal 1998 surge in low priced
Subsidized E.U. gluten, excess alcohol capacities and low gasoline prices
continued to restrict the ability of the company to adjust the price of its
gluten and fuel grade alcohol to compensate for grain and other production
costs.
Historically the Company has not engaged in the purchase of commodity
futures to hedge economic risks associated with fluctuating grain and grain
products prices. However, due to the significantly increased volumes of grain
and grain products that have resulted from the expansion of the Company's
production facilities and the fact that the markets for an increasing portion of
the Company's products are not adjusting to fluctuations in grain costs, the
Company began during 1995 to make limited purchases of commodity futures,
including wheat, corn and gasoline futures. Since then it has expanded those
hedging activities through the purchase of commodity contracts. During fiscal
1998, the Company hedged approximately 23% of corn processed compared to 61% in
1997 and 37% of wheat processed compared to 16% in 1997. The contracts are
accounted for as hedges and, accordingly, gains and losses are deferred and
recognized in cost of sales as part of contract costs when contract positions
are settled and related products are sold. For fiscal 1998, raw material costs
included a net income of $243,000 on contracts settled during the year compared
to a net loss of $1,877,000 for fiscal 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk" in the
Annual Report.
Energy
Because energy comprises a major cost of operations, the Company seeks
to assure the availability of fuels for the Pekin and Atchison plants at
competitive prices.
All of the natural gas demand for the Atchison plant is transported by
a wholly-owned subsidiary which owns a gas pipeline. The subsidiary procures the
gas in the open market from various suppliers. The Atchison boilers may also be
oil fired.
In the past, the Company's Pekin plant generated the bulk of its energy
needs from coal and gas fired boilers. However, due to the expansion of the
Pekin plant, the Company entered into a long-term arrangement in 1995 with an
Illinois utility to satisfy the energy needs of the entire plant with a new gas
fired plant. Under the arrangement, the utility constructed at the Pekin plant
on ground leased from the Company a gas powered electric and steam generating
facility. The utility sells to the Company steam and electricity, generally at
fixed rates, using gas procured by the Company.
During 1997 the Company's results were negatively impacted by a
significant but temporary increase in natural gas prices due to periods of
extreme cold weather throughout much of the U.S. Natural gas prices have since
returned to more normal levels.
12
Employees
As of June 30, 1998, the Company had 421 employees, 285 of whom are
covered by two collective bargaining agreements with one labor union. One
agreement, that expires on August 31, 1999, covers 183 employees at the Atchison
Plant. The other agreement, that expires in November, 2000, covers 94 employees
at the Pekin plant. As of June 30, 1997, the Company had 411 employees.
The Company considers its relations with its personnel to be good and
has not experienced a work stoppage since 1978.
Regulation
The Company's beverage and industrial alcohol business is subject to
regulation by the Bureau of Alcohol, Tobacco and Firearms ("BATF") and the
alcoholic beverage agencies in the States of Kansas and Illinois. Such
regulation covers virtually every aspect of the Company's alcohol operations,
including production facilities, marketing, pricing, labeling, packaging, and
advertising. Food products are also subject to regulation by the Food and Drug
Administration. BATF regulation includes periodic BATF audits of all production
reports, shipping documents, and licenses to assure that proper records are
maintained. The Company is also required to file and maintain monthly reports
with the BATF of alcohol inventories and shipments.
The Company is subject to extensive environmental regulation at the
federal, state and local levels. The regulations include the regulation of water
usage, waste water discharge, disposal of hazardous wastes and emissions of
volatile organic compounds, particulates and other substances into the air.
Under these regulations the Company is required to obtain operating permits and
to submit periodic reports to regulating agencies. During 1997 the Illinois
Environmental Protection Agency commenced an action against the Company with
respect to alleged noncompliance of the Pekin Plant with certain air quality
regulations. This action is further described under "Item 3. Legal Proceedings."
The Company has submitted an application to the Agency for construction of new
pollution control equipment that is expected to bring emissions into compliance
with all applicable regulations.
Item 2. Properties.
The Company maintains the following principal plants, warehouses and
office facilities:
Plant Area Tract Area
Location Purpose (in sq. ft.) (in acres)
Atchison, Kansas Principal executive offices,
grain processing, warehousing,
and research and quality
control laboratories. 494,640 25
Pekin, Illinois Grain processing, warehousing,
and quality control laboratories. 462,926 49
Except as otherwise reflected under Item 1, the facilities mentioned
above are generally in good operating condition, are currently in normal
operation, are generally suitable and adequate for the business activity
conducted therein, and have productive capacities sufficient to maintain prior
levels of production. Except as otherwise reflected under Item 1, all of the
plants, warehouses and office facilities are owned. Although none are subject to
any major encumbrance, the Company has entered into loan agreements which
contain covenants against the pledging of such facilities to others. The Company
also owns transportation equipment and a gas pipeline described under
Transportation and Energy.
13
Item 3. Legal Proceedings.
On April 13, 1997, an administrative proceeding was filed against the
Company's Illinois subsidiary before the Illinois Pollution Control Board (the
"Board"), by the Illinois Attorney General on behalf of the Illinois
Environmental Protection Agency (the "Agency"). The proceeding relates to the
Company's installation and operation of two feed dryers at its facility in
Pekin, Illinois. The Complaint alleges that the dryers exceed the particulate
emission limitations specified in the construction permits for the units; that
the dryers are being operated without operating permits; and that the dryers
were constructed without a Prevention of Significant Deterioration (PSD)
construction permit setting forth a best available control technology ("BACT")
emission limitation. The Complaint seeks a Board order ordering the Company to
cease and desist from violations of the Illinois Environmental Protection Act
and associated regulations, assessing a civil penalty, and awarding the state
its attorneys fees.
The Company has filed an Answer before the Board admitting that
compliance tests have shown particulate emissions in excess of the limits set
forth in the construction permits, but denying the remainder of the State's
claims. Since the time operational problems were discovered with the dryers'
pollution control equipment, the Company has been conferring and negotiating
with the Agency on the issues involved in the Complaint. The Company has
submitted an application to the Agency for construction of new pollution control
equipment for the dryers, at an estimated cost of approximately $1.0 million. It
is anticipated that the new equipment will bring emissions into compliance with
all applicable limitations.
Proceedings under the Complaint are being held in abeyance by agreement
of the parties pending completion of a review by the State of the Company's
application and completion of the Company's compliance activities. Once
compliance has been achieved, the Company anticipates negotiating a settlement
of the remainder of the State's claims. Based on the circumstances and a
preliminary review of decisions by the Board in air pollution matters, the
Company does not believe that any such settlement will be material to the
business or financial condition of the Company.
There are no other legal proceedings pending as of June 30, 1998 which
the Company believes to be material. Legal proceedings which are pending,
including the proceeding with the Illinois Environmental Protection Agency
described above, are believed by the Company to consist of matters normally
incident to the business conducted by the Company and taken together do not
appear material.
Item 4. Submissions of Matters to a Vote of Security Holders.
No matters have been submitted to a vote of stockholders during the
fourth quarter of fiscal year covered by this report.
14
PART II
Item 5. Market for Registrants Common Equity and Related Stockholders Matters.
The Common Stock of the Company has been traded on the NASDAQ National
Market System under the symbol MWGP since November 1988.
The following table below reflects the the high and low closing prices
of the Common Stock for each quarter of fiscal 1998 and 1997. Cash dividends
have not been paid since the end of 1995.
Sales Price
High Low
1998:
Fourth Quarter............................... $ 15.00 $ 12.00
Third Quarter................................ 15.75 12.00
Second Quarter............................... 14.63 11.88
First Quarter................................ 15.13 12.50
1997:
Fourth Quarter............................... $ 13.25 $ 10.50
Third Quarter............................... 16.75 11.13
Second Quarter.............................. 19.50 13.63
First Quarter................................ 14.38 12.00
At June 30, 1998 there were approximately 1,000 holders of record of
the Company's Common Stock. It is believed that the Common Stock is held by more
than 2,000 beneficial owners.
Item 6. Selected Financial Data.
Incorporated by reference to the information under Selected Financial
Information on page 17 of the Annual Report, a copy of which page is included in
Exhibit 10(c) to this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Incorporated by reference to the information under Managements
Discussion and Analysis of Financial Condition and Results of Operations on
pages18 through 24 of the Annual Report, copies of which pages are included in
Exhibit 10(c) to this Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference to the consolidated financial statements and
related notes on pages 25 through 36 of the Annual Report, copies of which pages
are included in Exhibit 10(c) to this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
15
PART III
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Name Age Position
Cloud L. Cray, Jr. 75 Chairman of the Board and Director
Laidacker M. Seaberg 52 President, Chief Executive Officer and Director
Sukh Bassi, Ph.D. 57 Vice President - Vital Wheat Gluten Marketing,
Research and Development and Corporate
Technical Director
Robert G. Booe 61 Vice President - Administration, Controller,
Treasurer and Chief Financial Officer
Gerald Lasater 60 Vice President - Wheat Starch Marketing
Raymond L. Miller 64 Vice President - Purchasing and Energy and
President of Midwest Grain Pipeline, Inc.
Marta L. Myers 38 Secretary
Randy M. Schrick 48 Vice President - Operations and Director
Robert L. Swaw 68 Vice President - Alcohol Marketing
Michael Braude 62 Director
F.D. "Fran" Jabara 73 Director
Tom MacLeod, Jr. 50 Director
Robert J. Reintjes 66 Director
Daryl R. Schaller, Ph.D. 54 Director
Eleanor B. Schwartz, D.B.A. 61 Director
Mr. Cray, Jr. has been a Director since 1957, and has served as Chairman of
the Board since 1980. He served as Chief Executive Officer from 1980 to
September, 1988, and has been an officer of the Company and its affiliates for
more than thirty years.
Mr. Seaberg, a Director since 1979, joined the Company in 1969 and has
served as the President of the Company since 1980 and as Chief Executive Officer
since September, 1988. He is the son-in-law of Mr. Cray, Jr.
16
Dr. Bassi has served as Vice President of Research and Development
since 1985, Technical Director since 1989 and Vice President - Vital Wheat
Gluten Marketing since 1992. From 1981 to 1992 he was Manager of the Vital Wheat
Gluten Strategic Business Unit. He was previously a professor of biology at
Benedictine College for ten years.
Mr. Booe has served as Vice President, Treasurer and Chief Financial
Officer of the Company since 1988. He joined the Company in 1966 as its
Treasurer and became the Controller and Treasurer in 1980. In 1992 he was
assigned the additional task of Vice President - Administration.
Mr. Lasater joined the Company in 1962. He has served as Vice President -
Starch Marketing since 1992. Previously he served as Vice President in charge of
the Wheat Starch Strategic Business Unit.
Mr. Miller joined the Company in 1956. He has served as Vice President -
Purchasing and Energy since 1992, President of Midwest Grain Pipeline, Inc.
since 1987, and as Vice President of the Company since 1967.
Ms. Myers joined the Company in 1996. She has served as Secretary since
October 1996. Previously she was executive secretary for Superintendent of
Schools for Unified School District 409, Atchison, Kansas.
Mr. Schrick, a Director since 1987, joined the Company in 1973. He has
served as Vice President - Operations since 1992. From 1984 to 1992 he served as
Vice President and General Manager of the Pekin plant. From 1982 to 1984 he was
the Plant Manager of the Pekin Plant. Prior to 1982, he was Production Manager
at the Atchison plant.
Mr. Swaw joined the Company in 1989. He has served as Vice
President-Alcohol Marketing since September 1, 1995. Previously he was sales
manager of the Company's industrial alcohol division. Before joining the
Company, Mr. Swaw was general manager for the bulk alcohol division of Sofecia,
S.A. and general sales manager with Publicker Industries in Philadelphia.
Mr. Braude has been a Director since 1991 and is a member of the Audit and
Nominating Committees. He has been the President and Chief Executive Officer of
the Kansas City Board of Trade, a commodity futures exchange, since 1984.
Previously he was Executive Vice President of American Bank & Trust Company of
Kansas City. Mr. Braude is a director of and NPC International, Inc., an
operator of numerous Pizza Hut and other quick service restaurants throughout
the United States, Country Club Bank, Kansas City, Missouri and National Futures
Association, a member and immediate Past Chairman of the National Grain Trade
Council and a trustee of the University of Missouri-Kansas City and of Midwest
Research Institute.
Mr. Jabara has been a director since October 6, 1995, and is Chairman of
the Audit Committee and a member of the Nominating Committee. He is President of
Jabara Ventures Group, a venture capital firm. From September 1949 to August
1989 he was a distinguished professor of business at Wichita State University,
Wichita, Kansas. He is also a director of Commerce Bank, Wichita, Kansas and NPC
International, Inc., an operator of numerous Pizza Hut and other quick service
restaurants throughout the United States.
Mr. MacLeod, Jr. has been a Director since 1986 and is a member of the
Audit and Human Resources Committees. He has been the President and Chief
Operating Officer of Iams Company, a manufacturer of premium pet foods, since
1989. Previously, he was President and Chief Executive Officer of Kitchens of
Sara Lee, a division of Sara Lee Corporation, a food products company.
Mr. Reintjes has been a director since 1986, and is Chairman of the
Nominating Committee and a member of the Audit Committee. He has served as
President of Geo. P. Reintjes Co., Inc., of Kansas City, Missouri, for the past
23 years. The Geo. P. Reintjes Co., Inc. is engaged in the business of
refractory construction. He is a director of Butler Manufacturing Company, a
manufacturer of pre-engineered buildings, and Commerce Bank of Kansas City.
Dr. Schaller has been a director since October, 1997, and is Chairman of
the Human Resources Committee and a member of the Audit Committee. He retired
from Kellogg Co. in 1996 after 25 years of service. He served Kellogg
17
as its Senior Vice President -- Scientific Affairs from 1994, and previously was
Senior Vice President -- Research, Quality and Nutrition for Kellogg. He is also
a director of Iams Company, a producer of pet foods, and of Cancer Research
Foundation of America.
Dr. Schwartz has been a director since June 3, 1993. She is a member of
the Audit and Human Resources Committees. She has been the Chancellor of the
University of Missouri-Kansas City since May 1992, and was previously the Vice
Chancellor for Academic Affairs. She is a Trustee of Midwest Research Institute
and a director of each of the funds in The United Group of Mutual Funds,
Target/The United Funds, Inc. and Waddell & Reed Funds, Inc.
The Board of Directors is divided into two groups (Groups A and B) and
three classes. Group A directors are elected by the holders of Common Stock and
Group B directors are elected by the holders of Preferred Stock. One class of
directors is elected at each annual meeting of stockholders for three-year
terms. The present directors' terms of office expire as follows:
Term
Group A Directors Expires Group B Directors Term Expires
Mr. Jabara 2000 Mr. Cray, Jr. 1998
Mr. MacLeod 1998 Mr. Reintjes 1998
Dr. Schaller 2000 Mr. Braude 2000
Dr. Schwartz 1999 Mr. Schrick 1999
Mr. Seaberg 1999
Item 11. Executive Compensation.
Incorporated by reference to the information under "Executive Compensation"
on pages 17 through 22 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the information under "Principal Stockholders"
beginning on page 22 through 24 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
None.
18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following documents are filed as part of this report:
(a) Financial Statements:
Auditors' Report on Financial Statements.
Consolidated Balance Sheets at June 30, 1998 and 1997.
Consolidated Statements of Income - for the Three Years Ended
June 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the Three
Years Ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flow - for the Three Years
Ended June 30, 1998, 1997 and 1996. Notes to Consolidated
Financial Statements.
The foregoing have been incorporated by reference to the Annual
Report as indicated under Item 8.
(b) Financial Statement Schedules:
Auditors' Report on Financial Statement Schedules:
VIII - Valuation and Qualifying Accounts
Allother schedules are omitted because they are not applicable
or the information is contained in the Consolidated
Financial Statements or notes thereto.
(c) Exhibits:
Exhibit No. Description
3(a) Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3(a) of
the Company's Registration Statement No. 33-24398
on Form S-1).
3(b) Bylaws of the Company (Incorporated by reference
to Exhibit 3(b) of the Company's Registration
Statement No. 33-24398 on Form S-1).
4(a) Copy of Note Agreement dated as of August 1,
1993, providing for the issuance and sale of
$25 million of 6.68% term notes ("Term Notes",
incorporated by reference to Exhibit 4.1 to
the Company's Report on Form 10-Q for the
quarter ended September 30, 1993).
4(b) Copy of Term Notes dated August 27, 1993
(incorporated by reference to Exhibit 4.2 to
the Company's Report on Form 10-Q for the
quarter ended September 30, 1993).
4(c) Copy of Fourth Amended Line of Credit Loan
Agreement providing for the Issuance of a Line
of Credit Note in the amount of $27,000,000.
4(d) Copy of Line of Credit Note Under Fourth Amended
Line of Credit Loan Agreement.
9(a) Copy of Cray Family Trust (Incorporated by
reference to Exhibit 1 of Amendment No. 1 to
Schedule 13D of Cloud L. Cray, Jr. dated
November 17, 1995).
19
Exhibit No. Description
10(a) Summary of informal cash bonus plan
(incorporated by reference to the summary
contained in the Company's Proxy Statement
dated September 17, 1998, which is
incorporated by reference into Part III of
this Form 10-K).
10(b) Executive Stock Bonus Plan as amended June 15,
1992 (incorporated by reference to Exhibit
10(b) to the Company's Form 10-K for the year
ended June 30, 1992).
10(c) Information contained in the Midwest Grain
Products, Inc. 1998 Annual Report to Stockholders
that is incorporated herein by reference.
10(d) Copy of Midwest Grain Products, Inc. Stock
Incentive Plan of 1996, as amended as of
August 26, 1996 (incorporated by reference to
Exhibit 10(d) to the Company's Form 10-K for
the year ended June 30, 1996).
10(e) Form of Stock Option with respect to stock
options granted under the Midwest Grain
Products, Inc. Stock Incentive Plan of 1996
(incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended
June 30, 1996).
10(f) Copy of Midwest Grain Products, Inc. 1996
Stock Option Plan for Outside Directors, as
amended as of August 26, 1996 (incorporated by
reference to Exhibit 10(f) to the Company's
Form 10-K for the year ended June 30, 1996).
10(g) Copy of Midwest Grain Products, Inc. 1998
Stock Incentive Plan for Salaried Employees
(incorporated by reference to Appendix A to
the Company's Notice of Annual Meeting and
Proxy Statement dated September 17, 1998,
filed with theSecurities and Exchange
Commission on September 15, 1998).
10(h) Form of Stock Option with respect to stock
options granted under the Midwest Grain
Products, Inc. 1998 Stock Incentive Plan for
Salaried Employees (incorporated by reference
to Exhibit 10(e) to the Company's Form 10-K
for the year ended June 30, 1996).
22 Subsidiaries of the Company other than
insignificant subsidiaries:
State of Incorporation
Subsidiary or Organization
Midwest Grain Pipeline, Inc. Kansas
Midwest Grain Products of
Illinois, Inc. Illinois
Midwest Purchasing Company, Inc. Illinois
23 Consent of Baird, Kurtz & Dobson
25 Powers of Attorney executed by all officers
and directors of the Company who have signed
this report on Form 10-K (incorporated by
reference to the signature pages of this
report).
27 Midwest Grain Products Financial Data Schedule as
at June 30, 1998 and for the year then ended.
No reports on Form 8-K have been filed during the quarter ended June
30, 1998.
20
SIGNATURES
Pursuant to requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Atchison, State of
Kansas, on this 23rd day of September, 1998.
MIDWEST GRAIN PRODUCTS, INC.
By s/Laidacker M. Seaberg
Laidacker M. Seaberg, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Cloud L. Cray, Jr., Laidacker M. Seaberg
and Robert G. Booe and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and re-substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all reports of
the Registrant on Form 10-K and to sign any and all amendments to such reports
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities & Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the dates indicated.
Name Title Date
/s/ Laidacker M. Seaberg President (Principal
Laidacker M. Seaberg Executive Officer) and Director September 23, 1998
/s/ Robert G. Booe Vice President, Treasurer
Robert G. Booe and Controller (Principal
Financial and Accounting Officer) September 23, 1998
/s/ Michael Braude
Michael Braude Director September 23, 1998
/s/ Cloud L. Cray, Jr. Director
Cloud L. Cray, Jr. September 23, 1998
/s/ F. D. Jabara Director
F. D. "Fran" Jabara September 23, 1998
/s/ Tom MacLeod Director
Tom MacLeod, Jr. September 23 , 1998
/s/ Robert J. Reintjes Director
Robert J. Reintjes September 23, 1998
/s/ Randy M. Schrick Director September 23, 1998
Randy M. Schrick
/s/ Daryl R. Schaller Director
Daryl R. Schaller September 23, 1998
/s/ Eleanor B. Schwartz Director September 23, 1998
Eleanor B. Schwartz
21
MIDWEST GRAIN PRODUCTS, INC.
Consolidated Financial Statement Schedules
(Form 10-K)
June 30, 1998, 1997 and 1996
(With Auditors' Report Thereon)
S-1
[LOGO]
Baird, Kurtz & Dobson
Certified Public Accountants
City Center Square, Suite 2700, 1100 Main, 816 221-6300
Kansas City, Missouri 64105 FAX 816 221-6380
http://www.bkd.com
Member of Moores Rowland International
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas
In connection with our audit of the consolidated financial statements of
MIDWEST GRAIN PRODUCTS, INC. for each of the three years in the period ended
June 30, 1998, we have also audited the following financial statement schedule.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits of the basic financial statements. The
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rules and regulations and is not a required part of the
consolidated financial statements.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
S/BAIRD, KURTZ & DOBSON
Kansas City, Missouri
August 4, 1998 [LOGO]
S-2
MIDWEST GRAIN PRODUCTS, INC.
VIII. VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance, Charged to Charged Balance,
Beginning Costs and to Other Deductions End of
of Period Expenses Accounts Write-Offs Period
(In Thousands)
Year Ended
June 30, 1998
Allowance for
doubtful
accounts $285 $ 53 $53 $285
==== ==== === ====
Year Ended
June 30, 1997
Allowance for
doubtful
accounts $285 $ 49 $49 $285
=== ==== === ====
Year Ended
June 30, 1996
Allowance for
doubtful
accounts $ 85 $214 $ 14 $285
==== ==== ==== ===
S-3
EXHIBIT INDEX
Exhibit
No. Description
3(a) Articles of Incorporation of the Company (Incorporated by reference to
Exhibit 3(a) of the Company's Registration Statement No. 33-24398 on
Form S- 1).
3(b) Bylaws of the Company (Incorporated by reference to Exhibit 3(b) of
the Company's Registration Statement No. 33-24398 on Form S-1).
4(a) Copy of Note Agreement dated as of August 1, 1993, providing for the
issuance and sale of $25 million of 6.68% term notes ("Term Notes",
incorporated by reference to Exhibit 4.1 to the Company's Report on
Form 10-Q for the quarter ended September 30, 1993).
4(b) Copy of Term Notes dated August 27, 1993 (incorporated by reference to
Exhibit 4.2 to the Company's Report on Form 10-Q for the quarter ended
September 30, 1993).
4(c) Copy of Fourth Amended Line of Credit Loan Agreement providing for the
Issuance of a Line of Credit Note in the amount of $27,000,000.
4(d) Copy of Line of Credit Note Under Fourth Amended Line of Credit Loan
Agreement.
9(a) Copy of Cray Family Trust (Incorporated by reference to Exhibit 1 of
Amendment No. 1 to Schedule 13D of Cloud L. Cray, Jr. dated November
17, 1995).
10(a)Summary of informal cash bonus plan (incorporated by reference to the
summary contained in the Company's Proxy Statement dated September
17, 1998, is incorporated by reference into Part III of this Form
10-K).
10(b)Executive Stock Bonus Plan as amended June 15, 1992 (incorporated by
reference to Exhibit 10(b) to the Company's Form 10-K for the year
ended June 30, 1992).
10(c)Information contained in the Midwest Grain Products, Inc. 1998 Annual
Report to Stockholders that is incorporated herein by reference.
10(d)Copy of Midwest Grain Products, Inc. Stock Incentive Plan of 1996, as
amended as of August 26, 1996 (incorporated by reference to Exhibit
10(d) to the Company's Form 10-K for the year ended June 30, 1996).
10(e) Form of Stock Option with respect to stock options granted under the
Midwest Grain Products, Inc. Stock Incentive Plan of 1996
(incorporated by reference to Exhibit 10(e) to the Company's
Form 10-K for the year ended June 30, 1996).
10(f)Copy of Midwest Grain Products, Inc. 1996 Stock Option Plan for
Outside Directors, as amended as of August 26, 1996 (incorporated
by reference to Exhibit 10(f) to the Company's Form 10-K for the year
ended June 30, 1996).
10(g)Copy of Midwest Grain Products, Inc. 1998 Stock Incentive Plan for
Salaried Employees (incorporated by reference to Appendix A to the
Company's Notice of Annual Meeting and Proxy Statement dated
September 17, 1998, filed with the Securities and Exchange Commission
on September 15, 1998).
10(h)Form of Stock Option with respect to stock options granted
under the Midwest Grain Products, Inc. 1998 Stock Incentive Plan for
Salaried Employees (incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended June 30, 1996).
Exhibit
No. Description
------- -----------
22 Subsidiaries of the Company other than insignificant subsidiaries:
State of Incorporation
Subsidiary or Organization
Midwest Grain Pipeline, Inc. Kansas
Midwest Grain Products of Illinois, Inc. Illinois
Midwest Purchasing Company, Inc. Illinois
23 Consent of Baird, Kurtz & Dobson
25 Powers of Attorney executed by all officers and directors of the
Company who have signed this report on Form 10-K (incorporated by
reference to the signature pages of this report).
27 Midwest Grain Products Financial Data Schedule as at June 30, 1998
and for the year then ended.
2