Selected Financial Information
Years ended June 30
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Income Statement Data:
Net sales $216,101 $223,254 $224,733 $194,638 $180,252
Cost of sales 200,622 214,453 213,733 190,173 159,149
-------- -------- -------- -------- --------
Gross profit 15,479 8,801 11,000 4,465 21,103
Selling, general and
administrative
expenses 11,908 11,363 9,169 9,001 10,553
Other operating income (expense) 136 100 370 159 (107)
-------- -------- -------- -------- --------
Income (Loss) from
operations 3,707 (2,462) 2,201 (4,377) 10,443
Other income (Loss), net 350 658 618 1,309 (4,225)
Interest expense (1,959) (1,887) (2,604) (2,556) (606)
-------- --------- --------- --------- --------
Income (Loss) before
income taxes 2,098 (3,691) 215 (5,624) 5,612
Provision (Credit)
for income taxes 828 (1,455) 84 (2,218) 2,273
-------- --------- -------- --------- --------
Net income (loss) $ 1,270 $ (2,236) $ 131 $ (3,406) $ 3,339
-------- --------- -------- --------- --------
Earnings (Loss)
per common share $ 0.13 $ (0.23) $ 0.01 $ (0.35) $ 0.34
-------- --------- -------- --------- --------
Cash dividends per
common share $ 0.50
Weighted average common
shares outstanding 9,609 9,700 9,762 9,765 9,765
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $ 43,053 $ 39,825 $ 36,580 $ 37,113 $ 26,955
Total assets 157,370 161,978 165,330 172,785 176,749
Long-term debt,
less current maturities 21,099 25,536 29,933 40,933 38,908
Stockholders' equity 105,445 106,325 108,561 109,222 112,628
======== ======== ======== ======== ========
Selected Financial Information 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The following table sets forth items in the Company's consolidated
statements of income expressed as percentages of net sales for the years
indicated and the percentage change in the dollar amount of such items compared
to the prior period:
Percentage of Net Sales Percentage
Years Ended June 30 Increase (Decrease)
---------------------------------------------- --------------------------
Fiscal Fiscal
1999 1998
1999 1998 1997 Over 1998 Over 1997
--------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% (3.2)% (.7)%
Cost of sales 92.8 96.1 95.10 (6.4) .3
Gross profit 7.2 3.9 4.9 75.8 (20.0)
Selling, general and
administrative expenses 5.4 5.1 4.1 4.8 23.9
Other operating income (loss) 0.1 .1 .2 36.0 (73.0)
--------------------------------------------------------------------------------
Income (Loss) from operations 1.7 (1.1) 1.0 250.6 (211.9)
Other income (expense) (0.7) (.6) (.9) 30.9 61.6
--------------------------------------------------------------------------------
Income before income taxes 1.0 (1.7) .1 156.8 (1,616.7)
Provision (Credit) for
income taxes 0.4 (.7) .04 156.9 (1,832.1)
--------------------------------------------------------------------------------
Net income (loss) 0.6% (1.0)% .06% 156.8% (1,806.9)%
================================================================================
Fiscal 1999 Compared to Fiscal 1998
The Company's net income of $1,270,000 in fiscal 1999 represented a
significant improvement over the net loss of $2,236,000 that was experienced in
fiscal 1998. This improvement resulted primarily from lower raw material costs
for wheat, corn and milo and increased productivity in the Company's wheat
gluten processing operations. Reduced grain prices were due to high grain
carryovers from abundant harvests during the spring, summer and early fall of
1998. Gluten production levels were raised partially in response to heightened
market interest, but mainly in preparation to effectively satisfy future
customer requirements resulting from an expected reduction in imports of
subsidized and artificially priced wheat gluten from the European Union (E.U.).
A more sizeable earnings improvement was prevented by decreased selling
prices for both food grade and fuel grade alcohol, and the adverse effects of
the E.U.'s breach of quota restrictions on imported gluten.
On June 1, 1998, just one month prior to the start of the Company's 1999
fiscal year, the White House implemented a three-year annual quota on imports of
foreign wheat gluten. This action was taken following a unanimous recommendation
from the United States International Trade Commission (ITC). The White House
additionally announced that international negotiations would be pursued to
18 Midwest Grain Products
address the underlying cause of the increase in imports of wheat gluten,
particularly from the E.U., or to otherwise alleviate injury to the domestic
industry. Profits from their highly subsidized and protected wheat starch
business have allowed E.U. producers to unload huge surpluses of wheat gluten, a
co-product, in the U.S. market at prices sometimes below U.S. production costs.
In recent years, this has forced domestic producers to drastically under-utilize
production capacities and relinquish significant market share.
Under the quota, imports of E.U. wheat gluten were limited to 54 million
pounds for the year ending May 31, 1999. However, Department of Commerce data
indicates that from June 1 through November 30, 1998, the E.U. exported
approximately 24% more gluten to the U.S. than allowed for the full quota year
ending May 31, 1999. The effects of the violations delayed the relief that the
U.S. wheat gluten industry expected during the first year of the three-year
quota.
In response to the E.U.'s breach of the first year quota, President Clinton
signed a proclamation on May 29, 1999 that reduced the E.U.'s second year quota
to 45 million pounds. That amount is approximately 12 million pounds less than
was originally allocated to the second year. More significantly, based on
Customs records, it represents nearly 23 million pounds less than the actual
amount of gluten the E.U. delivered into the U.S. market during the initial
12-month quota period.
In addition to reducing the E.U.'s second year quota amount, the
President's proclamation also provides preventive measures for possible future
quota violations. Imports in excess of the second year quota must be charged
against the quota for the third year. Any excess imports must be placed in a
bonded warehouse until June 1, 2001 or exported. Additionally, the Secretary of
the Treasury is authorized to take any necessary action to ensure that the quota
is not violated in the third year.
Although a level playing field failed to be established in fiscal 1999, the
Company experienced some strengthening in demand for its wheat gluten and
continued to realize gradual but steady growth in sales of its specialty wheat
proteins.
With a continuation of low grain costs, improved conditions in the vital
wheat gluten market, growth in the specialty wheat protein and wheat starch
markets, a realization of stable energy costs and improved production
efficiencies, the Company expects to strengthen its competitive abilities and
improve profitability going forward.
Net sales in fiscal 1999 decreased by approximately $7.2 million compared
to net sales in fiscal 1998. The decrease was principally due to lower selling
prices for the Company's alcohol products and was partially offset by higher
unit sales of fuel grade alcohol and wheat gluten products, including specialty
wheat proteins. Sales of wheat starch were down slightly compared to starch
sales in fiscal 1998.
The increase in unit sales of the Company's fuel grade alcohol occurred as
the Company shifted more of its alcohol production to this area due to decreased
demand for food grade alcohol for beverage and industrial applications. However,
the impact of the increased unit sales was softened by lower selling prices for
fuel alcohol due to a surplus of that product. The decline in demand for food
grade alcohol was caused mainly by the continuation of excess supplies
throughout the industry. Sales of distillers feed, the principal by-product of
the alcohol production process, were down compared to the prior year due to a
decline in the selling price. Unit sales of this product were approximately even
with the amount sold the prior year.
The increase in wheat gluten sales occurred as the Company raised
production levels in preparation for satisfying market requirements resulting
from the expected realization of a fair competitive environment. Higher sales of
specialty, value-added wheat gluten
Management's Discussion and Analysis 19
products also contributed to the increase in total gluten sales.
Sales of wheat starch were affected by a decline in unit sales in the first
two quarters of fiscal 1999. Selling prices for this product remained
essentially unchanged compared to selling prices in fiscal 1998.
The cost of sales in fiscal 1999 decreased by approximately $13.8 million
compared to cost of sales in fiscal 1998. This occurred principally as the
result of lower raw material costs for grain combined with reduced energy costs,
lower maintenance and repair costs and decreased insurance costs.
In connection with the purchase of raw materials, principally corn and
wheat, for anticipated operating requirements, the Company enters into commodity
contracts to reduce or hedge the risk of future grain price increases. The
contracts are accounted for as hedges and, accordingly, gains and losses are
deferred and recognized in cost of sales as part of contract costs when contract
positions are settled and as related products are sold. For fiscal 1999, raw
material costs included a net loss of $3,470,000 on contracts settled during the
year compared to a net gain of $243,000 for fiscal 1998.
Selling, general and administrative expenses in fiscal 1999 increased by
approximately $545,000 above selling, general and administrative expenses in
fiscal 1998. The increase resulted mainly from higher costs related to product
research and marketing promotional activities to strengthen the Company's
development and sales of value-added specialty products made from wheat, along
with increased bad debt expense relating to one customer. These increases were
partially offset by reductions in costs associated with industry-related fees,
commissions and professional services and the Company's employee benefit plans.
The consolidated effective income tax rate is consistent for all periods.
The general effects of inflation were minimal.
As the result of the foregoing factors, the Company experienced net income
of $1,270,000 in fiscal 1999 compared to a net loss of $2,236,000 in fiscal
1998.
Fiscal 1998 Compared to Fiscal 1997
The Company's net loss of $2,236,000 in fiscal 1998 represented a
substantial decrease from the prior year's net income of $131,000. This 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
(E.U.) 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 government action to create a
more fair and stable competitive environment in the U.S. wheat gluten market.
In addition, the Company intensified efforts to develop and market
modified wheat gluten products in niches that would be less affected by foreign
competition.
The Company's production of food grade alcohol for beverage and industrial
applications declined in fiscal 1998 compared to the prior year due to a decline
in demand. The production of fuel grade alcohol, on the other hand, increased
compared to fiscal 1997 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 levels. 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 the rise
in total
20 Midwest Grain Products
alcohol production, unit sales of distillers feed, the principal by-product of
the distillation process, also grew compared to the prior year. However, prices
for this product declined also, contributing to the Company's total earnings
decrease.
Conditions in the Company's premium wheat starch market remained
favorable in fiscal 1998, resulting in increased production. 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 per unit sales price for wheat
starch during the year was down compared to the prior year. Lower raw material
costs for wheat, however, partially offset the reduced selling price.
Net sales in fiscal 1998 were down approximately $1.5 million compared
to sales in fiscal 1997. The decrease resulted mainly from lower selling prices
for all principal products.
The realization of higher fuel alcohol unit 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 during the year were down compared to sales for the
prior year. 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 feed, a by-product of the alcohol
production process, fell slightly as lower sales prices offset an increase in
total units sold.
Wheat gluten sales were higher than sales in fiscal 1997 as the Company
increased production in preparation for satisfying market requirements resulting
from the expected realization of a fair competitive environment. A decrease in
wheat gluten selling prices compared to the prior year, however, offset the
increased volume. Sales of wheat starch decreased modestly compared to fiscal
1997, as higher unit sales were largely offset by lower selling prices. The
reduced selling prices resulted principally from a higher proportion of wheat
starches being sold for non-specialty, commodity-type applications.
The cost of sales in fiscal 1998 increased by approximately $720,000
compared to the cost of sales in fiscal 1997. This occurred primarily as the
result of higher raw material, energy, and maintenance and repair costs
associated with increased production volumes.
In connection with the purchase of raw materials, principally corn and
wheat, for anticipated operating requirements, the Company enters into commodity
contracts to reduce the risk of future grain price increases. These contracts
are accounted for as hedges and, accordingly, gains and losses are deferred and
recognized in cost of sales as part of contract costs when contract positions
are settled and as related products are sold. For fiscal 1998, raw material
costs included a net gain of $243,000 on contracts settled during the year
compared to a net loss of $1,877,000 for fiscal 1997.
Selling, general and administrative expenses in fiscal 1998 increased by
approximately $2.2 million above selling, general and administrative expenses in
fiscal 1997 due mainly to employee-related costs. The largest portion of those
costs resulted from the termination of the Atchison plant union revised
retirement plan to fund a newly established 401K plan for those same employees.
The increase also resulted from the addition of research and marketing
personnel, together with higher costs related to research and promotional
activities to strengthen the Company's development and sales of value-added
specialty products made from wheat.
The consolidated effective income tax rate was consistent for all periods.
The general effects of inflation were minimal.
As the result of the foregoing factors, the Company experienced a net loss
of $2,236,000 in fiscal 1998 compared to net income of $131,000 in fiscal 1997.
Management's Discussion and Analysis 21
Quarterly Financial Information
Generally, the Company's sales have not been seasonal except for
variations affecting fuel grade alcohol, beverage alcohol and gluten sales. In
recent years, demand for fuel grade alcohol has tended to increase during the
fall and winter to satisfy clean air standards during those periods. Beverage
alcohol sales tend to peak in the fall as distributors order stocks for the
holiday season, while gluten sales tend to increase during the second half of
the fiscal year as demand increases for hot dog buns and similar bakery
products. The Company may experience more significant fluctuations in quarterly
sales during the next two years due to the annual quotas on gluten imports if
exporters to the United States do not pro rate shipments throughout the year.
The table below shows quarterly information for each of the years ended June 30,
1999 and 1998.
Quarter Ending
------------------------------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30 Total
-------- ------- -------- ------- -----
(in thousands, except
per share amounts)
Fiscal 1999
Sales $51,938 $53,917 $56,958 $53,288 $216,101
Gross profit 4,429 6,074 3,315 1,661 15,479
Net income (loss) 666 1,430 232 (1,058) 1,270
Earnings (loss) per share 0.07 0.15 0.02 (0.11) 0.13
Fiscal 1998
Sales $57,623 $55,847 $53,310 $56,474 $223,254
Gross profit 2,611 3,819 2,319 52 8,801
Net income (loss) (235) 107 (438) (1,670) (2,236)
Earnings (loss) per share (0.02) 0.01 (0.05) (0.17) (0.23)
22 Midwest Grain Products
Market Risk
The Company produces its products from wheat, corn and milo and, as
such, is sensitive to changes in commodity prices. Grain futures and/or options
are used as a hedge to protect against fluctuations in the market. The table
below provides information about the Company's inventory and futures contracts
that are sensitive to changes in grain prices. For inventory, the table presents
the carrying amount and fair value at June 30, 1999. For futures contracts, the
table presents the notional amounts in bushels, the weighted average contract
prices, and the total dollar contract amounts by expected maturity dates.
Contract amounts are used to calculate the contractual payments and quantity of
corn to be exchanged under the futures contracts.
As of June 30, 1999
-----------------------------------------------
(in thousands) Carrying Amount Fair Value
--------------- ----------
Inventories
Corn $ 979 $ 979
Milo 580 646
Wheat 3,371 3,378
====== ======
Expected Maturity Fair Value
----------------- ----------
Contracts
Corn options (long)(calls)
Contract volumes (bushels) 2.55 million
Price per bushel $.15
Contract amount $400,000 $ 80,000
Corn options (short)(puts)
Contract volumes (bushels) 2.55 million
Price of option per bushel $0.08
Contract amount $200,000 $320,000
============= ========
Management's Discussion and Analysis 23
Liquidity and Capital Resources
The following table is presented as a measure of the Company's liquidity
and financial condition:
June 30,
---------------------------------
(in thousands) 1999 1998
------- -------
Cash and cash equivalents $ 4,054 $ 4,723
Working capital 43,053 39,825
Amounts available under lines of credit 33,000 30,000
Notes payable and long-term debt 23,532 28,896
Stockholders' equity 105,445 106,325
======= =======
During fiscal 1999, The Company generated a $12.7 million positive cash
flow from operations, which was used to reduce its debt, pay for capital
additions and acquire treasury stock. Short-term liquidity continues to be
impacted by the higher inventory requirements to meet anticipated customer needs
for wheat gluten. As expected, the increased customer requirements result from
the three-year import quota to create a more fair and stable competitive
environment. The Company anticipates continuing to produce the higher volume
levels of gluten into fiscal 2000.
Short-term liquidity was also impacted by open market purchases of
174,100 shares of the Company's common stock. These purchases were made to fund
the Company's stock option plans and for other corporate purposes.
At June 30, 1999, the Company had $9.3 million committed to improvements
and replacements of existing equipment.
The Company continues to maintain a strong working capital position and a
low debt-to-equity ratio while generating strong earnings before interest,
taxes, and depreciation. Management believes this strong financial position and
available lines of credit will allow the Company to effectively supply the
increased customer needs for vital wheat gluten as market demand increases due
to the effects of the quotas on imports of foreign wheat gluten, as well as its
other products.
Year 2000 Readiness Disclosure
Since 1996, the Company has recognized the need to configure its
operations so that they will not be adversely impacted by internal Year 2000
software failures. New hardware and software have been acquired and installed
for the core financial applications. All core financial modules have been tested
successfully, installed and are currently in use. The total costs incurred were
approximately $225,000.
The Company also has surveyed its plant operations to determine which
electrical and other instrumentation equipment relies on date-sensitive software
and hardware. For those applications which have been identified, the Company has
modified and tested the equipment. The external cost to convert and test the
identified processes was less than $100,000.
The Company has also surveyed key vendors and customers regarding their
abilities to achieve Year 2000 compliance. Results of the surveys indicated
these companies are knowledgeable of Year 2000 issues and are in the process of
complying or already have complied.
Although the Company believes that it is taking appropriate steps to
address the Year 2000 readiness issue, there can be no assurance that its
operations will not be negatively impacted in the year 2000. Additional actions
that may be required in the year 2000 cannot presently be anticipated.
Forward-Looking Information
This report contains forward-looking statements as well as historical
information. Forward-looking statements are identified by or are associated with
such words as "intend," "believe," "estimate," "expect," "anticipate," "hopeful"
and similar expressions. They reflect management's current beliefs and estimates
of future economic circumstances, industry conditions, Company performance and
financial results and are not guarantees of future performance. The
forward-looking statements are based on many assumptions and factors including
those relating to grain prices, energy costs, product pricing, competitive
environment and related market conditions, operating efficiencies, access to
capital and actions of governments. Any changes in the assumptions or factors
could produce materially different results than those predicted and could impact
stock values.
24 Midwest Grain Products
Independent Accountants' Report
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas
We have audited the accompanying consolidated balance sheets of MIDWEST
GRAIN PRODUCTS, INC. as of June 30, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MIDWEST
GRAIN PRODUCTS, INC. as of June 30, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
s/Baird, Kurtz & Dobson
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
July 30, 1999
Independent Accountants' Report 25
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30
--------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands, except per share amounts)
Net sales $216,101 $223,254 $224,733
Cost of sales 200,622 214,453 213,733
-------- -------- --------
Gross profit 15,479 8,801 11,000
Selling, general & administrative expenses 11,908 11,363 9,169
-------- -------- --------
3,571 (2,562) 1,831
Other operating income 136 100 370
-------- -------- --------
Income (Loss) from operations 3,707 (2,462) 2,201
Other income, net 350 658 618
Interest expense (1,959) (1,887) (2,604)
-------- -------- --------
Income (Loss) before income taxes 2,098 (3,691) 215
Provision (Credit) for income taxes 828 (1,455) 84
-------- -------- --------
Net income (loss) $ 1,270 $ (2,236) $ 131
======== ======== ========
Earnings (Loss) per common share $ 0.13 $ (0.23) $ 0.01
======== ======== ========
26 Midwest Grain Products
CONSOLIDATED BALANCE SHEETS
Years ended June 30
----------------------------
(in thousands) 1999 1998
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 4,054 $ 4,723
Receivables (less allowance for doubtful accounts; 1999 and 1998--$285) 26,656 26,369
Inventories 24,450 20,430
Prepaid expenses 1,174 753
Deferred income taxes 3,034 2,343
Income taxes receivable 1,334
-------- --------
Total Current Assets 59,368 55,952
-------- --------
Property & equipment, at cost 224,381 218,590
Less accumulated depreciation 126,465 112,976
-------- --------
Property & equipment, net 97,916 105,614
-------- --------
Other assets 86 412
-------- --------
Total Assets $ 157,370 $ 161,978
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 1,000
Current maturities of long-term debt $ 2,433 2,360
Accounts payable 9,129 9,072
Accrued expenses 4,296 3,695
Income taxes payable 457
-------- --------
Total Current Liabilities 16,315 16,127
-------- --------
Long-term debt 21,099 25,536
-------- --------
Post-retirement benefits 6,312 6,520
-------- --------
Deferred income taxes 8,199 7,470
-------- --------
Stockholders' equity
Capital stock
Preferred, 5% non-cumulative, $10 par value; authorized
1,000 shares; issued and outstanding 437 shares 4 4
Common, no par; authorized 20,000,000 shares; issued 9,765,172 shares 6,715 6,715
Additional paid-in capital 2,485 2,485
Retained earnings 99,183 97,913
-------- --------
108,387 107,117
Treasury stock, at cost
Common; 1999--239,100 shares; 1998--65,000 shares (2,942) (792)
-------- --------
Total stockholders' equity 105,445 106,325
-------- --------
Total liabilities and stockholders' equity $ 157,370 $ 161,978
======== ========
See Notes to Consolidated Financial Statements
Financial Review 27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30
--------------------------------------------------------------------------------------
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock Total
--------- ------ ------- -------- -------- -----
(in thousands)
Balance, June 30, 1996 $4 $6,715 $2,485 $100,018 $109,222
Purchase of treasury stock $ (792) (792)
1997 net income 131 131
--------- ------ ------ -------- ------ --------
Balance, June 30, 1997 4 6,715 2,485 100,149 (792) 108,561
1998 net loss (2,236) (2,236)
--------- ------ ------ -------- ------- --------
Balance, June 30, 1998 4 6,715 2,485 97,913 (792) 106,325
Purchase of treasury stock (2,150) (2,150)
1999 net income 1,270 1,270
--------- ------- ------ -------- -------- --------
Balance, June 30, 1999 $4 $6,715 $2,485 $ 99,183 $(2,942) $105,445
========= ======= ====== ========= ======== ========
See Notes to Consolidated Financial Statements
28 Midwest Grain Products
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30
--------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Cash Flows From Operating Activities
Net income (loss) $ 1,270 $ (2,236) $ 131
Items not requiring (providing) cash:
Depreciation 13,604 13,892 14,041
Gain on sale of assets (19) (2) (18)
Deferred income taxes 38 (172) 236
Changes in:
Accounts receivable (287) (93) (7,911)
Inventories (4,020) (5,430) 4,913
Accounts payable 38 847 1,578
Income taxes (receivable) payable 1,791 (1,107) 2,836
Other 298 (183) 618
-------- -------- --------
Net cash provided by operating activities 12,713 5,516 16,424
-------- -------- --------
Cash Flows From Investing Activities
Additions to property & equipment (6,054) (4,765) (3,491)
Proceeds from sale of equipment 31 4 105
-------- -------- --------
Net cash used in investing activities (6,023) (4,761) (3,386)
-------- -------- --------
Cash Flows From Financing Activities
Purchase of treasury stock (1,995) (792)
Principle payments on long-term debt (5,364) (2,037) (10,000)
-------- --------- --------
Net cash (used in) financing activities (7,359) (2,037) (10,792)
-------- --------- --------
Increase (Decrease) in Cash & Cash Equivalents (669) (1,282) 2,246
Cash & Cash Equivalents, Beginning of Year 4,723 6,005 3,759
-------- --------- --------
Cash & Cash Equivalents, End of Year $ 4,054 $ 4,723 $ 6,005
======== ========= =========
See Notes to Consolidated Financial Statements
Financial Review 29
Notes to Consolidated Financial Statements
Note 1: Nature of Operations and Summary of Significant Accounting Policies
* Nature of Operations. The activities of Midwest Grain Products, Inc.
and its subsidiaries consist of the processing of wheat, corn and milo into a
variety of products through an integrated production process. The process
produces wheat gluten products, which include vital wheat gluten and specialty
wheat proteins; premium wheat starch; alcohol products; and flour mill products.
The Company sells its products on normal credit terms to customers in a variety
of industries located primarily throughout the United States. Through its
wholly-owned subsidiaries, the Company operates in Atchison, Kansas and Pekin,
Illinois (Midwest Grain Products of Illinois, Inc.). Additionally, Midwest Grain
Pipeline, Inc., another wholly-owned subsidiary, supplies natural gas to the
Company's Atchison plant.
* Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
* Principles of Consolidation. The consolidated financial statements
include the accounts of Midwest Grain Products, Inc. and all subsidiaries. All
significant inter- company balances and transactions have been eliminated in
consolidation.
* Inventories. Inventories are stated at the lower of cost or market on the
first-in, first-out (FIFO) method. In connection with the purchase of raw
materials, principally corn and wheat, for anticipated operating requirements,
Midwest Grain Products, Inc. enters into commodity contracts to reduce the risk
of future grain price increases. These contracts, including those terminated
early, are accounted for as hedges and, accordingly, gains and losses are
deferred and recognized in cost of sales as part of product cost when contract
positions are settled and as related products are sold. If grain requirements
fall below anticipated needs and open contract levels, then gains and losses are
recognized immediately for the excess open contract levels. At June 30, 1999,
Midwest Grain Products, Inc. had entered into contracts hedging future corn
prices through the first quarter of fiscal 2000.
* Property and Equipment. Depreciation is computed using both straight-line
and accelerated methods over the following estimated useful lives: Buildings and
improvements 20-30 years Transportation equipment 5-6 years Machinery and
equipment 10-12 years.
* Earnings Per Common Share. Earnings per common share data is based upon
the weighted average number of common shares totaling 9,608,769 for 1999,
9,700,172 for 1998 and 9,761,967 for 1997. The effect of employee stock options,
which were the only potentially dilutive securities held by the Company, was
anti-dilutive each of the three years.
* Cash Equivalents. The Company considers all liquid investments with
maturities of three months or less to be cash equivalents.
* Income Taxes. Deferred tax liabilities and assets are recognized for the
tax effect of the differences between the financial statement and tax bases of
assets and liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will not be
realized.
Note 2 : Inventories
Inventories consist of the following:
June 30,
-------------------------
(in thousands) 1999 1998
-------- -------
Alcohol $ 5,164 $ 6,884
Unprocessed grain 6,914 6,398
Operating supplies 4,305 3,554
Gluten 6,710 2,382
By-products and other 1,357 1,212
-------- --------
$ 24,450 $ 20,430
======== ========
30 Midwest Grain Products
Note 3: Property and Equipment
Property and equipment consists of the following:
June 30,
--------------------------
1999 1998
--------- --------
(in thousands)
Land, buildings and
improvements $ 17,794 $ 17,411
Transportation equipment 1,152 1,180
Machinery and equipment 198,957 196,903
Construction in progress 6,478 3,096
--------- --------
224,381 218,590
Less accumulated
depreciation 126,465 112,976
--------- --------
$ 97,916 $105,614
========= ========
Note 4: Accrued Expenses
Accrued expenses consist of the following:
June 30,
--------------------------
1999 1998
-------- -------
(in thousands)
Excise taxes $ 540 $ 239
Employee benefit plans
(Note 10) 1,466 973
Salaries and wages 870 784
Property taxes 541 525
Insurance 222 454
Interest 642 696
Other expenses 15 24
-------- --------
$ 4,296 $ 3,695
======== ========
Note 5: Long-Term Debt
Long-term debt consists of the following:
June 30,
-------------------------
1999 1998
-------- --------
(in thousands)
Senior notes payable $ 22,727 $ 25,000
Line of credit 0 2,000
Other 805 896
-------- --------
23,532 27,896
Less current maturities 2,433 2,360
--------- --------
Long-term portion $ 21,099 $ 25,536
========= ========
The unsecured senior notes are payable in annual installments of $2,273,000
from 1999 through 2008 with the final principal payment of $2,270,000 due in
2009. Interest is payable semiannually at 6.68% per annum for the fifteen-year
term of the notes.
At June 30, 1999, the Company had a $27 million unsecured revolving line
of credit expiring on November 1, 2000, with interest at 1% below prime on which
there were no borrowings at June 30, 1999 and $2.0 million in borrowings at June
30, 1998. All other terms remain the same. The Company had three additional
lines of credit totaling $6.0 million expiring on dates through April 29, 2000,
with interest rates varying from prime to 1% below prime on which there were no
borrowings at June 30, 1999 and $1.0 million in borrowings at June 30, 1998.
In connection with the above borrowings, the Company, among other
covenants, is required to maintain certain financial ratios, including a current
ratio of 1.5 to 1, minimum consolidated tangible net worth of $78 million and
debt service coverage ratio of 3.0 to 1.
The fair value of the senior notes payable debt, based upon the
borrowing rate of 7.62% at June 30, 1999, was $22,100,000.
Aggregate annual maturities of long-term debt at June 30, 1999 are as
follows:
(in thousands)
2000 $ 2,433
2001 2,418
2002 2,273
2003 2,273
2004 2,273
Thereafter 11,862
---------
$23,532
=========
Notes to Consolidated Financial Statements 31
Note 6: Income Taxes
The provisions (credit) for income taxes is comprised of the following:
Years Ended June 30,
--------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Income taxes currently
payable (receivable) $790 $(1,627) $(152)
Income taxes deferred 38 172 236
---- -------- ------
$828 $(1,455) $ 84
==== ======== ======
The tax effects of temporary differences related to deferred taxes shown on
the consolidated balance sheets are as follows:
June 30,
------------------------
1999 1998
-------- --------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 141 $ 101
Post-retirement liability 2,462 2,543
Insurance accruals 551 578
Federal operating loss carryforwards 657 828
State operating loss carryforwards 1,001 826
Alternative minimum tax 2,294 1,644
Other 753 504
------ ------
7,859 7,024
------ ------
Deferred tax liabilities:
Accumulated depreciation (12,737) (11,823)
Deferred gain on involuntary conversion (287) (328)
--------- ---------
$(13,024) $(12,151)
--------- ---------
Net deferred tax liability $ (5,165) $ (5,127)
========= =========
The above net deferred tax liability is presented on the consolidated
balance sheets as follows:
June 30,
---------------------------
(in thousands) 1999 1998
------- --------
Deferred tax asset--current $ 3,034 $ 2,343
Deferred tax liability--long-term (8,199) (7,470)
-------- --------
Net deferred tax liability $(5,165) $(5,127)
======== ========
No valuation allowance has been recorded at June 30, 1999 or 1998.
A reconciliation of the provision for income taxes at the normal
statutory federal rate to the provision (credit) included in the accompanying
consolidated statements of operations is shown below:
Years Ended June 30,
---------------------------
1999 1998 1997
---------------------------
(in thousands)
"Expected" provision
(credit) at federal
statutory rate (34%) $714 $(1,255) $73
Increases (decreases)
resulting from:
Effect of state
income taxes 78 (195) 9
Other 36 (5) 2
---- -------- ---
Provision (credit) for
income taxes $828 $(1,455) $84
==== ======== ===
Note 7: Capital Stock
The Common Stock is entitled to elect four out of the nine members of
the Board of Directors, while the Preferred Stock is entitled to elect the
remaining five directors. Holders of Common Stock are not entitled to vote with
respect to a merger, dissolution, lease, exchange or sale of substantially all
of the Company's assets, or on an amendment to the Articles of Incorporation,
unless such action would increase or decrease the authorized shares or par value
of the Common or Preferred Stock, or change the powers, preferences or special
rights of the Common or Preferred Stock so as to affect the holders of Common
Stock adversely.
32 Midwest Grain Products
Note 8: Other Operating Income (Expense)
Other operating income (expense) consists of the following:
Years Ended June 30,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Truck operations $108 $(95) $342
Warehousing and
storage operations (10) 6 (13)
Miscellaneous 38 (11) 41
----- ----- -----
$136 $100 $370
===== ===== =====
Note 9: Energy Commitment
During fiscal 1995, the Company negotiated a 15-year agreement to
purchase steam heat and electricity from a utility for its Illinois operations.
Steam heat is being purchased for a minimum monthly charge of $114,000, with a
declining fixed charge for purchases in excess of the minimum usage. Electricity
purchases will occur at fixed rates through May 31, 2002. In connection with the
agreement, the Company leased land to the utility company for 15 years so it
could construct a co-generation plant at the Company's Illinois facility. The
Company has also agreed to reimburse the utility for the net book value of the
plant if the lease is not renewed for an additional 19 years. The estimated net
book value of the plant would be $10.6 million at that date.
Note 10: Employee Benefit Plans
Pension Plan. Prior to June 30, 1998, the Company had a noncontributory
defined benefit pension plan covering union employees. The plan provided
benefits based on the participants' years of service.
During 1998, the Company terminated the plan and transferred the assets
into a newly formed 401(k) profit sharing plan. The pension cost for 1998,
including the cost of termination, amounted to $694,000.
Pension cost for 1997 included the following components:
Year Ended June 30,1997
-----------------------
(in thousands)
Service cost-benefits earned during year $ 43
Interest cost on projected benefit obligation 158
Actual investment income earned on plan assets (358)
Amortization of transition liability and difference
between actual and expected return on plan assets 219
------
Pension cost $ 62
======
Employee Stock Ownership Plans. The Company and its subsidiaries have
employee stock ownership plans covering all employees after certain eligibility
requirements are met. Contributions to the plans totaled $947,000, $785,000 and
$726,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
Contributions are made in the form of cash and/or additional shares of common
stock.
401(k) Profit Sharing Plans. During 1998, the Company and its
subsidiaries formed 401(k) profit sharing plans covering all employees after
certain eligibility requirements are met. Contributions for 1999 and 1998
totaled $215,000 for each year.
Notes to Consolidated Financial Statements 33
Post-Retirement Benefit Plan. The Company and its subsidiaries provide
certain post-retirement health care and life insurance benefits to all
employees. The liability for such benefits is unfunded.
The status of the Company's plans at June 30, 1999 and 1998 was as follows:
June 30,
--------------------------
1999 1998
----- -----
(in thousands)
Accumulated post-retirement benefit obligation:
Retirees $3,720 $3,561
Active plan participants 2,473 1,891
Unfunded accumulated obligation 6,193 5,452
Unrecognized actuarial gain 119 1,068
------ ------
Accrued post-retirement
benefit cost $6,312 $6,520
====== ======
Net post-retirement benefit cost included the following components:
June 30,
------------------------
1999 1998 1997
----- ----- -----
(in thousands)
Service cost $110 $101 $100
Interest cost 323 346 353
(Gain) loss amortization (27) (34) (23)
----- ----- -----
$406 $413 $430
===== ===== =====
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) is assumed to be
9.25% (compared to 9.5% assumed for 1998) reducing to 7.75% over seven years and
6.0% over 14 years. A one percentage point increase in the assumed health care
cost trend rate would have increased the accumulated benefit obligation by
$410,000 at June 30, 1999, and the service and interest cost by $50,000 for the
year then ended.
A weighted average discount rate of 7.25% was used in determining the
accumulated benefit obligation.
Stock Options. The Company has three stock option plans, the Stock
Incentive Plan of 1996 ("The 1996 Plan"), the Stock Option Plan for Outside
Directors ("The Directors Plan"), and the 1998 Stock Incentive Plan for Salaried
Employees ("The Salaried Plan"). These Plans permit the issuance of stock
awards, stock options and stock appreciation rights to salaried employees and
outside directors of the Company. The Company accounts for these plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost been determined consistent with FASB Statement No. 123, the
Company's 1999 and 1998 net income and earnings per share would have been
reduced to the following pro forma amounts:
1999 1998 1997
------- ------- -------
Net Income (loss):
As Reported $1,270 $(2,236) $ 131
Pro Forma $ 697 $(2,575) $ (82)
Basis Earnings Per Share:
As Reported $ .13 $ (.23) $ .01
Pro Forma $ .07 $ (.26) $ (.01)
Diluted EPS:
As Reported $ .13 $ (.23) $ .01
Pro Forma $ .07 $ (.26) $ (.01)
Under the 1996 Plan, the Company may grant incentives for up to 600,000
shares of the Company's common stock to key employees. The term of each award is
determined by the committee of the Board of Directors charged with administering
the 1996 Plan. Under the terms of the 1996 Plan, options granted may be either
nonqualified or incentive stock options and the exercise price may not be less
than the fair value on the date of the grant. Through June 30, 1999, the Company
has granted incentive stock options to purchase 352,000 shares. The options
become exercisable in yearly increments through January, 2003. They have
ten-year terms and have exercise prices equal to fair market value on the date
of grant.
Under the Directors Plan, each non-employee or "outside" director of the
Company receives on the day after each annual meeting of stockholders an option
to purchase 1,000 shares of the Company's common stock at a price equal to the
fair market value of the Company's common stock on such date. Options become
exercisable on the 184th day following the date of grant and expire not later
than ten years after the date of grant. Subject to certain adjustments, a total
of 90,000 shares are reserved for annual grants under the Plan. Through June 30,
1999, the Company has granted options to purchase 21,000 shares, all of which
were exercisable as of June 30, 1999.
34 Midwest Grain Products
Under the Salaried Plan, the Company may grant stock incentives for up
to 300,000 shares of the Company's common stock to full-time salaried employees.
The Salaried Plan provides that the amount, recipients, timing and terms of each
award be determined by the Committee of the Board of Directors charged with
administering the Salaried Plan. Under the terms of the Salaried Plan, options
granted may be either nonqualified or incentive stock options and the exercise
price may not be less than the fair value on the date of the grant. Through June
30, 1999, the Company has granted incentive stock options on 171,360 shares. The
options become exercisable in yearly increments through March, 2003. They have
ten-year terms and have exercise prices equal to fair market value on the date
of grant.
A summary of the status of the Company's three stock option plans at June
30, 1999, 1998 and 1997 and changes during the years then ended is presented
below:
1999 1998 1997
-------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding,
Beginning of Year 441,360 $14.04 183,500 $14.68 90,000 $14.00
Granted 103,500 12.43 257,860 13.60 93,500 15.32
Exercised
------- ------ ------- ------ ------- ------
Outstanding,
End of Year 544,860 $13.74 441,360 $14.04 183,500 $14.68
======= ====== ======= ====== ======= ======
These are comprised as follows:
Remaining Shares
Contractual Exercisable
Exercise Life at June 30,
Shares Price (Years) 1999
------ --------- ----------- -----------
1996 90,000 $14.00 6.5 69,250
Plan 86,500 $15.25 7.5 45,000
79,500 $13.75 8.5 19,875
96,500 $12.50 9.5
Directors' 7,000 $16.25 7.25 7,000
Plan 7,000 $14.25 8.25 7,000
7,000 $11.75 9.25 7,000
Salaried
Plan 171,360 $13.50 8.67 42,840
------- -------
544,860 197,965
======= =======
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model. The following
weighted-average assumptions were used for the year ended June 30, 1999: Risk
free interest rate of 5.81%; expected dividend yield of 0%; expected volatility
of 47%; expected life of ten years.
Note 11: Operating Leases
The Company has several noncancellable operating leases for railcars
which expire from November 1999 through November 2003. The leases generally
require the Company to pay all service costs associated with the railcars.
Rental payments include minimum rentals plus contingent amounts based on
mileage.
Future minimum lease payments at June 30, 1999 are as follows:
(in thousands)
2000 $2,263
2001 2,139
2002 1,146
2003 640
2004 147
------
Future minimum lease payments $6,335
======
Rental expense for all operating leases with terms longer than one month
totaled $3,305,235, $1,488,554 and $1,438,466 for the years ended June 30, 1999,
1998 and 1997, respectively.
Notes to Consolidated Financial Statements 35
Note 12: Significant Estimates and Concentrations
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain significant
concentrations. Those matters include the following:
* A majority of the Company's labor force is covered by collective
bargaining agreements which expire August 31, 1999 at the Atchison
plant and on November 1, 2000 at the Pekin plant.
* Under its self-insurance plan, the Company accrues the estimated
expense of health care and workers' compensation claims costs based on
claims filed subsequent to year-end and an additional amount for
incurred but not yet reported claims based on prior experience. An
accrual for such costs of $222,000 is included in the accompanying
1999 financial statements. Claims payments based on actual claims
ultimately filed could differ materially from these estimates.
Note 13: Operating Information
The Company is comprised of one segment: the processing and marketing of
products derived from wheat, corn and milo through a single integrated
production process. Product group sales for the years ended June 30, are
summarized as follows:
1999 1998 1997
-------- -------- --------
(in thousands)
Wheat gluten products $ 56,153 $ 42,489 $ 39,968
Premium wheat starch 27,173 27,791 29,935
Alcohol products 129,729 147,957 150,667
Flour and other mill products 3,046 5,017 4,163
-------- -------- --------
$216,101 $223,254 $224,733
======== ======== ========
During the years ended June 30, 1999, 1998 and 1997, the Company had
sales to one customer accounting for approximately 12.0%, 10.5% and 8.2%,
respectively, of consolidated sales.
Note 14: Additional Cash Flows Information
Years Ended June 30,
----------------------------------------------
1999 1998 1997
-------- ------- -------
(in thousands)
Investing and Non-cash
Financing Activities:
Purchase of property and equipment in
accounts payable $ 136 $ 29 $ 211
Purchase of treasury stock
in accounts payable $ 155
Additional Cash Payment Information:
Interest paid (net of
amount capitalized) $2,013 $1,887 $ 1,909
Income taxes paid
(refunded) $(1,001) $ (178) $(2,986)
======== ======= =========
Note 15: Contingencies
There are various legal proceedings involving the Company and its
subsidiaries. Management considers that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
consolidated financial position or operations of the Company.
36 Midwest Grain Products