SELECTED FINANCIAL INFORMATION Years ended June 30 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Net sales $ 231,880 $ 216,101 $ 223,254 $ 224,733 $ 194,638 Cost of sales 210,978 200,622 214,453 213,733 190,173 -------------------------------------------------------------------------------------------------------- Gross profit 20,902 15,479 8,801 11,000 4,465 Selling, general and administrative expenses 12,109 11,908 11,363 9,169 9,001 Other operating income (expense) 39 136 100 370 159 -------------------------------------------------------------------------------------------------------- Income (Loss) from operations 8,832 3,707 (2,462) 2,201 (4,377) Other income (Loss), net 719 350 658 618 1,309 Interest expense (1,469) (1,959) (1,887) (2,604) (2,556) -------------------------------------------------------------------------------------------------------- Income (Loss) before income taxes 8,082 2,098 (3,691) 215 (5,624) Provision (Credit) for income taxes 3,192 828 (1,455) 84 (2,218) -------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,890 $ 1,270 $ (2,236) $ 131 $ (3,406) -------------------------------------------------------------------------------------------------------- Earnings (Loss) per common share $ 0.54 $ 0.13 $ (0.23) $ 0.01 $ (0.35) Cash dividends per common share Weighted average common shares outstanding 9,122 9,609 9,700 9,762 9,765 -------------------------------------------------------------------------------------------------------- Balance Sheet Data: Working capital $ 45,089 $ 43,053 $ 39,825 $ 36,580 $ 37,113 Total assets 155,779 157,370 161,978 165,330 172,785 Long-term debt, less current maturities 18,181 21,099 25,536 29,933 40,933 Stockholders' equity 102,378 105,445 106,325 108,561 109,222 ========================================================================================================

17 Midwest Grain Products 2000 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 2000 Fiscal 1999 2000 1999 1998 Over 1999 Over 1998 ---- ---- ---- ------------- -------------- Net sales 100.0% 100.0% 100.0% 7.3% (3.2)% Cost of sales 91.0 92.8 96.1 5.2 (6.4) Gross profit 9.0 7.2 3.9 35.0 75.8 Selling, general and administrative expenses 5.2 5.4 5.1 1.7 4.8 Other operating income (loss) 0.0 .1 .1 (71.3) 36.0 - ---------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from operations 3.8 1.7 (1.1) 138.3 250.6 Other income (expense) (.3) (0.7) (.6) (53.4) 30.9 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3.5 1.0 (1.7) 285.2 156.8 Provision (Credit) for income taxes 1.4 0.4 (.7) 285.5 156.9 - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 2.1% 0.6% (1.0)% 285.0% 156.8% ==================================================================================================================================

18 Management's Discussion and Analysis FISCAL 2000 COMPARED TO FISCAL 1999 The Company's results for fiscal 2000 were up substantially over results for the prior fiscal year. Net income rose to $4,890,000 compared to $1,270,000 in fiscal 1999, due principally to the effects of heightened demand for the Company's vital wheat gluten, specialty and modified wheat proteins and wheat starches. Lower per unit costs for grain also contributed to the improvement. These conditions partially offset the impact of reduced selling prices for the Company's alcohol products resulting from the continuation of excess alcohol supplies throughout the industry. The increased demand for wheat gluten was mainly due to the effects of measures to create a more equitable competitive environment in the U.S. market. on June 1, 1998, just one month prior to the start of the Company's 1999 fiscal year, President Clinton imposed a three-year annual quota on imports of foreig wheat gluten. This action was taken after the U.S. International Trade Commission determined that the U.S. wheat gluten industry was being seriously injured by excess imports of artificially priced gluten from the European Union (E.U.). While the quota helped reduce some of the severe effects of excessive, artificially-priced gluten shipments from the E.U. in fiscal 2000, expectations of more substantial relief failed to be realized. In the early part of the fiscal year, the U.S. was suddenly and rapidly inundated with gluten imports, due mainly to the E.U.'s entire allocation entering the market within just two weeks after the second year of the quota opened on June 1, 1999. Additionally, the U.S. saw a substantial increase in gluten imports from other parts of the world, particularly Poland. In response, President Clinton decided to allocate imports of foreign wheat gluten on a quarterly rather than an annual basis effective with the start of the third year of the three-year-long quota on June 1, 2000. He additionally added Poland to the list of countries which are subject to the quota after determining that dramatically increased shipments from Poland "have impaired the effectiveness" of the quota. In a related matter, a dispute panel of the World Trade Organization (WTO) on July 28, 2000 challenged the safeguards decision under which the wheat glute quota was implemented. The WTO challenge is being appealed by the U.S. Trade Representative in a process that could extend through December, 2000. In the interim, the WTO ruling is not expected to have an impact on the quota. Demand for the Company's specialty wheat proteins continued to gain momentum in fiscal 2000, principally due to increased customer interest and the effects of intensified marketing programs. Produced for a variety of food and non-food applications, these value-added products include dough conditioners, meat extenders and replacers, ingredients for hair care and skin care systems, and bio-polymers for producing degradable, plastic-like items. Increased sales of wheat starch resulted largely from strengthened demand for the Company's modified and specialty starches. To further serve customers requirements for these unique ingredients, the Company completed the installation of additional production capacity at its Atchison, Kansas, plant in the early part of fiscal 2000. To improve alcohol production efficiencies long-term, the Company completed the installation of new distillation equipment at its Atchison plant in the first quarter of fiscal 2001. The project is expected to further enhance the Company's high quality food grade alcohol. In addition, in the final quarter of fiscal 2000, the Company began to experience increased demand for its fuel grade alcohol. This resulted partially from a proposal by the Environmental Protection Agency (EPA) to phase-out MTBE, a synthetically-derived fuel oxygenate, due to health-related environmental concerns associated with that product. Net sales in fiscal 2000 increased nearly $16 million above net sales in fiscal 1999. The increase resulted principally from higher sales of wheat gluten, premium wheat starch and fuel grade alcohol. Growth in wheat gluten sales occurred as the result of higher unit sales of wheat gluten and specialty wheat proteins together with a modest improvement in selling prices. Increased wheat starch sales resulted from higher unit sales, while selling prices for this product were slightly below selling prices in fiscal 1999. The lower selling prices occurred with a reduction in raw material prices for wheat. Fiscal 2000 alcohol sales were just slightly above the level reached the prior year due to an increase in unit sales of fuel grade alcohol. This increase helped to offset a decline in unit sales of food grade alcohol for industrial applications, as well as decreases in selling prices for food grade alcohol for both industrial and beverage uses. The drop in food grade alcohol selling prices was due to lower demand caused mainly by the continuation of excess supplies throughout the industry. The selling price of fuel grade alcohol, meanwhile, was approximately even with the average selling price in fiscal 1999. This was due mainly to a price improvement in the fourth quarter of fiscal 2000 as the Company experienced an upturn in demand. Sales of distillers feed, the principal 19 Midwest Grain Products, 2000 by-product of the alcohol production process, dropped below sales of a year ago. This was due to lower unit sales as the selling price was approximately even with prior year's level. The cost of sales in fiscal 2000 rose by approximately $10.4 million above the cost of sales for the prior year. This was due to higher energy and manufacturing costs together with costs associated with increased volume sales, largely of gluten and alcohol products. Lower per unit grain prices partially offset the higher costs resulting from increased 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 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 2000, raw material costs included a net hedging loss of $1,345,329 on contracts compared to a net hedging loss of $3,472,815 on contracts for fiscal 1999. Selling, general and administrative expenses in fiscal 2000 increased by approximately $201,000 above selling, general and administrative expenses in fiscal 1999. The increase was due largely to increased marketing activities, industry-related fees and higher technology costs. A sizeable reduction in bad debts partially offset this increase. 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 $4,890,000 in fiscal 2000 compared to net income of $1,270,000 in fiscal 1999. 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. Under the quota, imports of E.U. wheat gluten were limited to 54 million pounds for the quota year ending May 31, 1999. However, Department of Commerce data showed 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 represented approximately 12 million pounds less than was originally allocated to the second year. More significantly, based on Customs records, it was 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. Although a level playing Weld 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. Net sales in Fiscal 1999 decreased by approximately $7.2 million compared to net sales in Fiscal 1998. The decrease was principally due 20 Management's Discussion and Analysis 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 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. 21 Midwest Grain Products, 2000 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 year due to the annual quota on imports of foreign wheat gluten. The table below shows quarterly information for each of the years ended June 30, 2000 and 1999.

Quarter Ending Sept. 30 Dec. 31 March 31 June 30 Total ------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) FISCAL 2000 Sales $54,975 $59,962 57,656 $59,287 $231,880 Gross profit 4,225 5,955 6,046 4,676 20,902 Net income (loss) 751 1,563 1,607 969 4,890 Earnings (Loss) per share .08 .17 .18 .11 .54 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

22 Management's Discussion and Analysis 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. For inventory, the table below presents the carrying amount and fair value at June 30, 2000. At June 30, 2000, there were no open grain futures or options. As of June 30, 2000 Carrying Amount Fair Value ----------------------------------------------------------------------------- (in thousands) INVENTORIES Corn $ 965 $ 986 Milo 659 714 Wheat 1,649 1,652 ============================================================================ The Company also contractually sells a portion of its fuel grade alcohol at prices that fluctuate with gasoline futures. Gasoline futures are used as a hedge to protect against these fluctuations. The table below presents information about open futures contracts as of June 30, 2000. Expected Maturity Fair Value ----------------------------------------------------------------------------- Futures Contracts (short) Contract Volumes (gallons) 2.77 million Weighted Average Price $.93 Contract Amount $2.58 million $2.62 million ============================================================================= 23 Midwest Grain Products, 2000 LIQUIDITY AND CAPITAL RESOURCES The following table is presented as a measure of the Company's liquidity and financial condition: June 30, 2000 1999 ----------------------------------------------------------------------------- (in thousands) Cash and cash equivalents $ 7,728 $ 4,054 Working capital 45,089 43,053 Amounts available under lines of credit 23,000 33,000 Notes payable and long-term debt 20,454 23,532 Stockholders' equity 102,378 105,445 ============================================================================= During Fiscal 2000, the Company generated a $22.4 million positive cash flow from operations, which was used to reduce its debt, pay for capital additions and acquire treasury stock. In addition to higher profitability, the Company reduced the levels of inventory, particularly in gluten and unprocessed grain. Short-term liquidity was also impacted by open market purchases of 942,675 shares of the Company's common stock. These purchases were made to fund the Company's stock option plans and for other corporate purposes. As of June 30, 2000, the Board has authorized the purchase of an additional 818,225 shares of the Company's common stock. At June 30, 2000, the Company had $7.5 million committed to improvements and replacements of existing equipment. Additionally, in the August, 2000 Board meeting, Directors approved a plan to expand the Company's Wheatex production capacity with the construction of new facilities at a cost of $6.05 million. 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. 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 Management's Discussion and Analysis 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, 2000, and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2000. 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, 2000, and 1999, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2000, in conformity with generally accepted accounting principles. s/Baird, Kurtz & Dobson BAIRD, KURTZ & DOBSON Kansas City, Missouri August 1, 2000 25 Midwest Grain Products, 2000

CONSOLIDATED STATEMENTS OF INCOME Years ended June 30 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Net sales $ 231,880 $ 216,101 $ 223,254 Cost of sales 210,978 200,622 214,453 --------------------------------------------------------------------------------------------------------------------------- Gross profit 20,902 15,479 8,801 Selling, general & administrative expenses 12,109 11,908 11,363 --------------------------------------------------------------------------------------------------------------------------- 8,793 3,571 (2,562) Other operating income 39 136 100 --------------------------------------------------------------------------------------------------------------------------- Income (Loss) from operations 8,832 3,707 (2,462) Other income, net 719 350 658 Interest expense (1,469) (1,959) (1,887) --------------------------------------------------------------------------------------------------------------------------- Income (Loss) before income taxes 8,082 2,098 (3,691) Provision (Credit) for income taxes 3,192 828 (1,455) --------------------------------------------------------------------------------------------------------------------------- Net income (loss) 4,890 $ 1,270 $ (2,236) =========================================================================================================================== Earnings (Loss) per common share $ 0.54 $ 0.13 $ (0.23) ===========================================================================================================================

See Notes to Consolidated Financial Statements 26 Notes to Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS Years ended June 30 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Current Assets Cash and cash equivalents $ 7,728 $ 4,054 Receivables (less allowance for doubtful accounts; 2000--$252 and 1999--$285) 30,272 26,656 Inventories 19,246 24,450 Prepaid expenses 1,617 1,174 Deferred income taxes 4,058 3,034 ------------------------------------------------------------------------------------------------------------------------------ Total Current Assets 62,921 59,368 ------------------------------------------------------------------------------------------------------------------------------ Property & equipment, at cost 232,508 224,381 Less accumulated depreciation 139,737 126,465 ------------------------------------------------------------------------------------------------------------------------------ Property & equipment, net 92,771 97,916 ------------------------------------------------------------------------------------------------------------------------------ Other assets 87 86 ------------------------------------------------------------------------------------------------------------------------------ Total Assets $155,779 $157,370 ============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 2,273 $ 2,433 Accounts payable 10,563 9,129 Accrued expenses 4,044 4,296 Income taxes payable 952 457 ------------------------------------------------------------------------------------------------------------------------------ Total Current Liabilities 17,832 16,315 ------------------------------------------------------------------------------------------------------------------------------ Long-term debt 18,181 21,099 ------------------------------------------------------------------------------------------------------------------------------ Post-retirement benefits 6,170 6,312 ------------------------------------------------------------------------------------------------------------------------------ Deferred income taxes 11,218 8,199 ------------------------------------------------------------------------------------------------------------------------------ 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 104,073 99,183 ------------------------------------------------------------------------------------------------------------------------------ 113,277 108,387 Treasury stock, at cost Common; 2000C1,181,775 shares, 1999C239,100 shares (10,899) (2,942) ------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 102,378 105,445 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $155,779 $157,370 ===============================================================================================================================

See Notes to Consolidated Financial Statements 27 Midwest Grain Products, 2000

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Additional Preferred Common Paid-In Retained Treasury Years ended June 30 Stock Stock Capital Earnings Stock Total ------------------------------------------------------------------------------------------------------------------------------- (in thousands) 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 -------------------------------------------------------------------------------------------------------------------------------- Purchase of treasury stock (7,957) (7,957) 2000 net income 4,890 4,890 -------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2000 $4 $6,715 $2,485 $104,073 $(10,899) $102,378 ================================================================================================================================

See Notes to Consolidated Financial Statements 28 Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOW Years ended June 30 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Cash Flows From Operating Activities Net income (loss) $ 4,890 $ 1,270 $(2,236) Items not requiring (providing) cash: Depreciation 13,515 13,604 13,892 Gain on sale of assets (19) (2) Deferred income taxes 1,995 38 (172) Gain on retirement of long-term debt (603) Changes in: Accounts receivable (3,616) (287) (93) Inventories 5,204 (4,020) (5,430) Accounts payable 1,334 38 847 Income taxes (receivable) payable 495 1,791 (1,107) Other (838) 298 (183) ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 22,376 12,713 5,516 ------------------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Additions to property & equipment (8,127) (6,054) (4,765) Proceeds from sale of equipment 12 31 4 ------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (8,115) (6,023) (4,761) ------------------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Purchase of treasury stock (8,112) (1,995) Principle payments on long-term debt (2,475) (5,364) (2,037) ------------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (10,587) (7,359) (2,037) ------------------------------------------------------------------------------------------------------------------------------ Increase (Decrease) in Cash & Cash Equivalents 3,674 (669) (1,282) Cash & Cash Equivalents, Beginning of Year 4,054 4,723 6,005 ------------------------------------------------------------------------------------------------------------------------------- Cash & Cash Equivalents, End of Year $ 7,728 $ 4,054 $ 4,723 ===============================================================================================================================

See Notes to Consolidated Financial Statements 29 Midwest Grain Products, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: NATURE OF OPERATIONS AND SUMMARY 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 intercompany 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. Additionally, the Company enters into futures contracts for the sale of fuel grade alcohol to protect its selling price to the customer. At June 30, 2000, the Company had entered into contracts hedging future gasoline prices through the first quarter of fiscal 2001. 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 9,121,717 for 2000, 9,608,769 for 1999 and 9,700,172 for 1998. 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, 2000 1999 -------------------------------------------------------------------------- (in thousands) Alcohol $ 5,317 $ 5,164 Unprocessed grain 4,971 6,914 Operating supplies 4,348 4,305 Gluten 2,492 6,710 By-products and other 2,118 1,357 -------------------------------------------------------------------------- $19,246 $24,450 ========================================================================== 30 Midwest Grain Products, 2000 NOTE 3: PROPERTY AND EQUIPMENT Property and equipment consists of the following: June 30, 2000 1999 ------------------------------------------------------------------------- (in thousands) Land, buildings and improvements $ 19,516 $ 17,794 Transportation equipment 1,138 1,152 Machinery and equipment 205,152 198,957 Construction in progress 6,702 6,478 ------------------------------------------------------------------------- 232,508 224,381 Less accumulated depreciation 139,737 126,465 ------------------------------------------------------------------------- $ 92,771 $ 97,916 ========================================================================= NOTE 4: ACCRUED EXPENSES Accrued expenses consist of the following: June 30, 2000 1999 -------------------------------------------------------------------------- (in thousands) $ 540 $ 540 Employee benefit plans (Note 10) 1,661 1,466 Salaries and wages 635 870 Property taxes 480 541 Insurance 138 222 Interest 569 642 Other expenses 21 15 --------------------------------------------------------------------------- $ 4,044 $ 4,296 =========================================================================== NOTE 5: LONG-TERM DEBT Long-term debt consists of the following: June 30, 2000 1999 --------------------------------------------------------------------------- (in thousands) Senior notes payable $ 20,454 $ 22,727 Other 805 --------------------------------------------------------------------------- 20,454 23,532 Less current maturities 2,273 2,433 --------------------------------------------------------------------------- Long-term portion $ 18,181 $ 21,099 =========================================================================== The unsecured senior notes are payable in annual installments of $2,273,000 from 2000 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, 2000, the Company had a $20 million unsecured revolving line of credit expiring on November 1, 2001, with interest at 1% below prime on which there were no borrowings at June 30, 2000 and 1999. The Company had two additional lines of credit totaling $3.0 million expiring on dates through April 27, 2001, with interest rates varying from prime to 1% below prime on which there were no borrowings at June 30, 2000 and 1999. 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 $84 million and debt service coverage ratio of 1.5 to 1. The fair value of the senior notes payable debt, based upon the current borrowing rates at June 30, 2000, was approximately $19,000,000. Aggregate annual maturities of long-term debt at June 30, 2000 are as follows: (in thousands) 2001 $ 2,273 2002 2,273 2003 2,273 2004 2,273 2005 2,273 Thereafter 9,089 ---------------------------- $ 20,454 ============================ 31 Midwest Grain Products, 2000 NOTE 6: INCOME TAXES The provisions (credit) for income taxes is comprised of the following: Years ended June 30, 2000 1999 1998 -------------------------------------------------------------------------- (in thousands) Income taxes currently payable (receivable) $1,197 $790 $(1,627) Income taxes deferred 1,995 38 172 -------------------------------------------------------------------------- $3,192 $828 $(1,455) =========================================================================== The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets are as follows: June 30, 2000 1999 -------------------------------------------------------------------------- (in thousands) Deferred tax assets: Accrued employee benefits $ 155 $ 141 Post-retirement liability 2,406 2,462 Insurance accruals 478 551 Federal operating loss carryforwards 657 State operating loss carryforwards 772 1,001 Alternative minimum tax 2,259 2,294 Other 1,563 753 ----------------------------------------------------------------------- 7,633 7,859 ----------------------------------------------------------------------- Deferred tax liabilities: Accumulated depreciation $(14,533) (12,737) Deferred gain on involuntary conversion (260) (287) ------------------------------------------------------------------------- (14,793) $(13,024) ------------------------------------------------------------------------- Net deferred tax liability $ (7,160) $ (5,165) ========================================================================= The above net deferred tax liability is presented on the consolidated balance sheets as follows: June 30, 2000 1999 --------------------------------------------------------------------------- (in thousands) Deferred tax asset-current $ 4,058 $ 3,034 Deferred tax liability-long-term (11,218) (8,199) --------------------------------------------------------------------------- Net deferred tax liability $ (7,160) $(5,165) =========================================================================== No valuation allowance has been recorded at June 30, 2000, or 1999. 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, 2000 1999 1998 -------------------------------------------------------------------------- (in thousands) "Expected" provision (credit) at federal statutory rate (34%) $2,748 $714 $(1,255) Increases (Decreases) resulting from: Effect of state income taxes 176 78 (195) Other 268 36 (5) ----------------------------------------------------------------------------- Provision (Credit) for income taxes $3,192 $828 $(1,455) ============================================================================= 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, 2000 NOTE 8: OTHER OPERATING INCOME (EXPENSE) Other operating income (expense) consists of the following: Years ended June 30, 2000 1999 1998 --------------------------------------------------------------------------- (in thousands) Truck operations $(53) $108 $ 95 Warehousing and storage operations (35) (10) (6) Miscellaneous 127 38 11 ---------------------------------------------------------------------------- $ 39 $136 $100 ============================================================================ 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 non-contributory 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. Employee Stock Ownership Plans. The Company and its subsidiaries have employee stock ownership plans covering all eligible employees after certain requirements are met. Contributions to the plans totaled $880,000, $947,000 and $785,000 for the years ended June 30, 2000, 1999 and 1998, 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 to the plans totaled $392,000, 215,000 and $215,000 for the years ended June 30, 2000, 1999 and 1998, respectively. 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, 2000 and 1999 was as follows: June 30, 2000 1999 ---------------------------------------------------------------------------- (in thousands) Accumulated post-retirement benefit obligations: Retirees $3,390 $3,720 Active plan participants 2,872 2,473 ---------------------------------------------------------------------------- Unfunded accumulated obligation 6,262 6,193 Unrecognized actuarial gain (loss) (92) 119 ---------------------------------------------------------------------------- Accrued post-retirement benefit cost $6,170 $6,312 ============================================================================ 33 Midwest Grain Products, 2000 Net post-retirement benefit cost included the following components: June 30, 2000 1999 1998 - ------------------------------------------------------------------------------- (in thousands) Service cost $138 $110 $101 Interest cost 355 323 346 (Gain) Loss amortization (27) (34) - ------------------------------------------------------------------------------- $493 $406 $413 =============================================================================== 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 9.00% (compared to 9.25% assumed for 1999) reducing to 7.50% over seven years and 6.0% over 13 years. A one-percentage-point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $370,000 at June 30, 2000, and the service and interest cost by $50,000 for the year then ended. A weighted average discount rate of 8.25% 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 2000, 1999 and 1998 net income and earnings per share would have been reduced to the following pro forma amounts: 2000 1999 1998 --------------------------------------------------------------------------- Net Income (loss): As Reported $4,890 $1,270 $(2,236) Pro Forma $4,206 $ 697 $(2,575) Basis Earnings Per Share: As Reported $ .54 $ .13 $ (.23) Pro Forma $ .46 $ .07 $ (.26) Diluted EPS: As Reported $ .54 $ .13 $ (.23) Pro Forma $ .46 $ .07 $ (.26) 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, 2000, the Company has granted incentive stock options to purchase 438,500 shares. The options become exercisable in yearly increments through January 2004. 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, 2000, the Company had granted options to purchase 27,000 shares, all of which were exercisable as of June 30, 2000. 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, 2000, the Company has granted incentive stock options on 263,860 shares. The options become exercisable in yearly increments through January 2004. They have ten-year terms and have exercise prices equal to fair market value on the date of grant. 34 Midwest Grain Products, Inc. A summary of the status of the Company's three stock option plans at June 30, 2000, 1999 and 1998 and changes during the years then ended is presented below:

2000 1999 1998 -------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------------------------------------------------------------------------------------------------------------- Outstanding, Beginning of Year 544,860 $13.74 441,360 $14.04 183,500 $14.68 Granted 184,500 8.03 103,500 12.43 257,860 13.60 Exercised -------------------------------------------------------------------------------------------------------------------- Outstanding, End of Year 729,360 $12.30 544,860 $13.74 441,360 $14.04 ====================================================================================================================

These are comprised as follows:

Remaining Shares Contractual Exercisable Exercise Life at June 30, Shares Price (Years) 2000 -------------------------------------------------------------------------------------------------------- 1996 90,000 $14.00 5.5 90,000 Plan 86,500 $15.25 6.5 64,875 79,500 $13.75 7.5 39,750 96,500 $12.50 8.5 24,125 86,000 $ 8.00 9.5 Directors' 7,000 $16.25 6.25 7,000 Plan 7,000 $14.25 7.25 7,000 7,000 $11.75 8.25 7,000 6,000 $ 9.00 9.25 6,000 Salaried Plan 171,360 $13.50 7.67 68,544 92,500 $ 8.00 9.5 -------------------------------------------------------------------------------------------------------- 729,360 314,294 ========================================================================================================

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, 2000: Risk free interest rate of 6.27%; expected dividend yield of 0%; expected volatility of 44%, expected life of ten years. NOTE 11: OPERATING LEASES The Company has several noncancelable operating leases for railcars and other equipment, which expire from April 2001 through November 2004. 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, 2000 are as follows: (in thousands) 2001 $ 2,144 2002 1,152 2003 645 2004 151 2004 2 --------------------------------------------------------------------- Future minimum lease payments $ 4,094 ===================================================================== Rental expense for all operating leases with terms longer than one month totaled $2,458,096, $2,305,235 and $1,488,554 for the years ended June 30, 2000, 1999 and 1998, respectively. 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, 2002 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 $138,000 is included in the accompanying 2000 financial statements. Claims payments based on actual claims ultimately filed could differ materially from these estimates. During the years ended June 30, 2000, 1999 and 1998, the Company had sales to one customer accounting for approximately 13.3%, 12.0% and 10.5%, respectively, of consolidated sales. 35 Midwest Grain Products, 2000 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: 2000 1999 1998 - ------------------------------------------------------------------------- (in thousands) Wheat gluten products $70,912 $ 56,153 $ 42,489 Premium wheat starch 29,186 27,173 27,791 Alcohol products 129,023 129,729 147,957 Flour and other mill products 2,759 3,046 5,017 - ------------------------------------------------------------------------- $231,880 $216,101 $223,254 ========================================================================= NOTE 14: ADDITIONAL CASH FLOWS INFORMATION Years ended June 30, 2000 1999 1998 - -------------------------------------------------------------------------- (in thousands) Investing and Non-cash Financing Activities: Purchase of property and equipment in accounts payable $ 255 $ 136 $ 29 Purchase of treasury stock in accounts payable $ 155 Additional Cash Payment Information: Interest paid (net of amount capitalized) $1,542 $ 2,013 $1,887 Income taxes paid (refunded) $ 704 $(1,001) $ (178) =========================================================================== 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. NOTE 16: FUTURE CHANGES IN ACCOUNTING PRINCIPLES The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (ASFAS 133@). This statement, as amended by SFAS Nos. 137 and 138, requires all derivatives to be recorded on the balance sheet at fair value and establishes standardized accounting methodologies for hedging activities. If certain conditions are met, a derivative may be designated as a fair value or cash flow hedge. Qualifying hedges may result in recognition of offsetting changes in fair values of the hedging instrument and hedged item in the statement of income (fair value hedges) or recognition of changes in fair value of the hedging instrument in comprehensive income (cash flow hedges). The Company is required to adopt the statement prospectively beginning in its first quarter ending September 30, 2000. The Company cannot reasonably estimate the impact of adoption on future financial statements. However, the statement may generally have the effect of recognition of gains or losses on hedging instruments in income in periods earlier than previously recognized to the extent of hedge ineffectiveness or to the extent derivative instruments do not qualify for hedge accounting recognition under SFAS 133. 36 Notes to Consolidated Financial Statements