Exhibit 13
Selected Financial Information
Years ended June 30 2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Income Statement Data:
Net sales $229,241 $231,880 $216,101 $223,254 $224,733
Cost of sales 212,058 210,978 200,622 214,453 213,733
-------------------------------------------------------------------------------------------------------------------------------
Gross profit 17,183 20,902 15,479 8,801 11,000
Selling, general and administrative
expenses 13,545 12,109 11,908 11,363 9,169
Other operating income (expense) (3) 39 136 100 370
-------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from operations 3,635 8,832 3,707 (2,462) 2,201
Other income (Loss), net 2,109 719 350 658 618
Interest expense (1,347) (1,469) (1,959) (1,887) (2,604)
-------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes 4,397 8,082 2,098 (3,691) 215
Provision (Credit) for income taxes 1,737 3,192 828 (1,455) 84
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,660 $ 4,890 $ 1,270 $ (2,236) $ 131
-------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per common share $ 0.32 $ 0.54 $ 0.13 $ (0.23) $ 0.01
Cash dividends per common share 0.10
Weighted average common shares
outstanding 8,397 9,122 9,609 9,700 9,762
-------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $47,490 $ 45,089 $ 43,053 $ 39,825 $ 36,580
Total assets 174,450 155,779 157,370 161,978 165,330
Long-term debt, less current
maturities 24,420 18,181 21,099 25,536 29,933
Stockholders' equity 100,544 102,378 105,445 106,325 108,561
===============================================================================================================================
-17-
Midwest Grain Products, Inc., Annual Report 2001
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 2001 Fiscal 2000
2001 2000 1999 Over 2000 Over 1999
----- ----- ----- ------------- -------------
Net sales 100.0% 100.0% 100.0% (1.1)% 7.3%
Cost of sales 92.5 91.0 92.8 0.5 5.2
------------------------------------------------------------------------------------------------------------------------------
Gross profit 7.5 9.0 7.2 (17.8) 35.0
Selling, general and
administrative expenses 5.8 5.2 5.6 11.9 1.7
Other operating income (loss) (0.1) 0.0 0.1 107.7 (71.3)
------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from operations 1.6 3.8 1.7 (58.8) 138.3
Other income (expense) 0.3 (.3) (0.7) 201.6 (53.4)
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1.9 3.5 1.0 (45.6) 285.2
Provision (Credit) for income taxes 0.8 1.4 0.4 (45.6) 285.5
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 1.1% 2.1% 0.6% (45.6) 285.0%
==============================================================================================================================
-18-
Management's Discussion and Analysis
FISCAL 2001 COMPARED TO FISCAL 2000
The Company's results for fiscal 2001 declined from fiscal 2000. This was
largely due to abnormally high energy costs resulting from a dramatic rise in
natural gas prices. Reduced sales of vital wheat gluten, premium wheat starch
and food grade alcohol were also affecting factors. The decrease was partially
offset by increased sales of fuel grade alcohol and value-added wheat proteins.
The recognition of income from a United States Department of Agriculture
Commodity Credit Corporation program, which is detailed below, also helped to
partially offset the decrease.
The severe spike in natural gas prices was caused by low gas reserves and
increased demand across the nation, especially during the winter months. After
reaching record levels in January, gas prices began to fall, dropping
substantially in the fourth quarter. Additionally, the Company was able to
satisfy a portion of the energy requirements at its Atchison, Kansas plant with
lower priced fuel oil, a situation that prevented energy costs from being
affected even more severely during the year.
The reduction in vital wheat gluten sales occurred because the Company
elected to curtail production due to pricing pressures from artificially low
priced gluten imports from the European Union (E.U). The Company believes that
competitive pressures from the E.U. would have been even more intense but for a
three-year-long quota that was placed on gluten imports by former President
Clinton in 1998. The quota helped reduce the extent of injuries caused to U.S.
producers by excess amounts of low priced gluten imports from subsidized E.U.
producers.
In February, 2001, the U.S. International Trade Commission unanimously
recommended a two-year extension of the quota following a request for an
extension by the Wheat Gluten Industry Council of the U.S. The recommendation
was based on grounds that through circumvention and similar tactics, E.U.
producers deliberately and effectively prevented the U.S. wheat gluten industry
from receiving the full extent of relief that the quota intended. Rather than
granting an extension, however, the White House approved a funding program to
support the development of products and markets for value-added wheat gluten and
wheat starches.
Administered by the U.S. Department of Agriculture's Commodity Credit
Corporation, the program began in June, 2001 and is scheduled to end May 31,
2003. Under the program, the Company is eligible for approximately $26 million
of the program total of $40 million. For the first 12 months of the program,
approximately $17.3 million has been allocated to the Company. The remaining
amount is expected to become available to the Company starting in June, 2002.
The funds are to be used for capital, research, marketing and promotional costs
related to value-added gluten, or wheat protein, and starch products. Funds
received will be recognized in income during the period during which they are
expended for a permitted purpose. However, funds that are used for capital
expenditure projects will be recognized in income over the periods during which
those projects are depreciated. They are not intended to be used to reduce
production and marketing-related costs for commodity vital wheat gluten and
wheat starches which could extend the U.S. industry's participation in these
markets.
With the expiration of the import quota in June, vital wheat gluten prices
in the U.S. became subjected to increased downward pressures from E.U.
suppliers. As a result, the Company elected to reduce wheat gluten production
and sales even further in the final quarter of fiscal 2001. Unless future
conditions warrant otherwise, the Company plans to maintain a reduced presence
in the more traditional, commodity-related gluten markets while continuing to
build its presence in specialty, value-added markets.
Due principally to increased customer interest and the effects of
intensified marketing programs, demand for the Company's specialty wheat
proteins continued to strengthen in fiscal 2001. As a result, sales of these
products showed an improvement over the prior fiscal year. Produced for a
variety of food and non-food applications, these value-added products include
dough enhancers, meat extenders and replacers, ingredients for hair care and
skin care systems, and bio-polymers for producing pet treats as well as
degradable, plastic-like items.
In February, the Company was named the successful bidder on a
state-of-the-art manufacturing facility owned by a Kansas City, Kansas firm that
entered Chapter 11 bankruptcy proceedings. The Company is using the facility,
which is operated by its subsidiary, Kansas City Ingredient Technologies, Inc.,
primarily for the production of Wheatex(TM), Midwest Grain's unique line of
textured wheat proteins that are sold to enhance the flavor and texture of
vegetarian and extended meat products, as well as wheat-based bio-polymers.
Finalized in the third quarter of fiscal 200l at a cost of approximately $6.5
million, the purchase replaces the Company's earlier plan to build a Wheatex(TM)
plant at a similar cost. The Company expects the acquisition will allow it to
increase the production of textured wheat proteins and bio-polymers at a more
accelerated rate. Also, the Company anticipates that, in addition to providing
more space than was incorporated into the design for a new plant, the facility
will provide greater flexibility for producing other lines of value-added
specialty wheat proteins.
The Company's wheat starch sales in fiscal 2001 were down due partially to
a reduction in sales for export. The Company expects that starch sales in fiscal
2002 should show an improvement based on indications of increased demand both
domestically and abroad.
Increased demand for fuel grade alcohol, or ethanol as it is commonly
known, drove up sales of this product compared to the prior fiscal year. The
heightened market interest was partially attributable to the Environmental
Protection Agency's proposal to phase out MTBE, a competing fuel oxygenate that
-19-
Midwest Grain Products, Inc., Annual Report 2001
is synthetically derived and has been shown to be harmful to groundwater
supplies. In response to the increased demand, the Company raised fuel alcohol
production levels, while also experiencing substantial upward price adjustments.
The Company also experienced improved selling prices for its food grade alcohol
for beverage and industrial applications. However, the unit volume of food grade
alcohol for beverage uses declined compared to fiscal 2000 due largely to the
Company's decision to reduce sales to export markets.
A program developed by the U.S. Department of Agriculture and initiated in
December, 2000, provides a two-year cash incentive for ethanol producers who
increase their grain usage by specified amounts to raise fuel alcohol
production. The Company presently satisfies the program's eligibility
requirements and began experiencing its effects in the third quarter of fiscal
2001. Additionally, the installation of new distillery columns to replace older
equipment at the Company's Atchison, Kansas plant during the first quarter has
allowed the Company to improve food grade alcohol production efficiencies at
that location. This project also is allowing the Company to serve beverage
alcohol customers with an even higher purity, higher quality premium product.
In fiscal 2001, the Company's Board of Directors approved a $2.1 million
distillery improvement project at the Atchison plant. Expected to be completed
early in the third quarter of fiscal 2002, this project is designed to enhance
food grade alcohol production, while also strengthening the Company's fuel grade
alcohol production capabilities. The Board has additionally approved plans for
the installation of a new feed drier at Midwest Grain's Pekin, Illinois plant.
Expected to be completed by the end of fiscal 2002 at a cost of $5 million, the
new drier should improve alcohol production efficiencies at that location.
Distillers feed is the principal by-product of the alcohol production process.
Although slightly higher than they were during the prior fiscal year, per
unit raw material costs for grain continued to remain relatively low in fiscal
2001. However, that situation was offset by the severe rise in natural gas
prices. With the onset of more normal energy costs combined with reasonable
grain costs, continued strength in alcohol demand and growth in sales of
value-added wheat gluten and starch products, the Company should experience
improved conditions for growth going forward.
Net sales in fiscal 2001 decreased approximately $2.6 million below net
sales in fiscal 2000. The decrease resulted mainly from reduced sales of vital
wheat gluten throughout fiscal 2001, reduced sales of wheat starch in the second
and third quarters and lower sales of food grade alcohol for beverage
applications in the second, third and fourth quarters. These decreases were
partially offset by increased fuel alcohol sales in all four quarters of fiscal
2001 and higher sales of food grade alcohol for industrial uses in the first,
third and fourth quarters.
Sales of vital wheat gluten dropped due to reductions in both unit sales
and selling prices. This decrease was partially offset by increased unit sales
of the Company's specialty wheat proteins. Wheat starch sales declined primarily
due to lower unit sales compared to the prior year. Sales of food grade alcohol
fell as the result of decreased unit sales in the beverage market. This offset
an increase in unit sales of food grade alcohol for industrial uses, as well as
improved selling prices in both the beverage and industrial markets. Sales of
fuel grade alcohol rose compared to fiscal 2000 as the result of higher unit
sales and substantially higher prices caused by increased demand. Sales of
distillers feed were approximately even with the prior year's level as a slight
decrease in selling prices offset a small increase in unit sales.
The cost of sales in fiscal 2001 rose by approximately $1.1 million above
the cost of sales in the prior fiscal year. This principally was due to a
significant increase in energy costs resulting from higher natural gas prices.
Non-recurring costs related to the final installation of new distillation
equipment at the Company's Atchison plant in the first quarter also contributed
to the increase. Lower raw material costs for grain, due mainly to lower grain
requirements resulting from reduced vital wheat gluten production, partially
offset the higher costs resulting from the above.
In order to control energy costs, the Company has developed a risk
management program whereby, at pre-determined prices, the Company will purchase
a portion of its natural gas requirements for future delivery.
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.
Additionally, the Company uses gasoline futures to hedge fuel alcohol sales
contractually sold at prices fluctuating with gasoline futures. In fiscal 2001,
raw material costs included a net hedging loss of $1,215,945 compared to a net
hedging loss of $1,345,329 on contracts in fiscal 2000.
Selling, general and administrative expenses in fiscal 2001 were
approximately $1.4 higher than selling, general and administrative expenses in
fiscal 2000. The increase was due largely to an increase in costs associated
with employee-related benefits, industry-related fees and a combination of
various other factors, including increased marketing-related expenses and higher
technology costs.
The increase in other income relates to the recognition of $1.35 million of
income from the previously discussed USDA program for value-added wheat gluten
and wheat starch products.
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 $2,660,000 in fiscal 2001 compared to net income of $4,890,000 in fiscal
2000.
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
-20-
Management's Discussion and Analysis
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
availability 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 foreign
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 were placed
under the quota after determining that dramatically increased shipments from
Poland "have impaired the effectiveness" of 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.
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 availability of excess supplies
throughout the industry. The average 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 by-product of the alcohol production process, dropped below fiscal
1999 sales. 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.
-21-
Midwest Grain Products, Inc., Annual Report 2001
QUARTERLY FINANCIAL INFORMATION
Generally, the Company's sales have not been seasonal except for variations
affecting fuel grade alcohol, beverage alcohol and vital wheat 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.
Historically, beverage alcohol sales tend to peak in the fall as distributors
order stocks for the holiday season, while vital wheat gluten sales tend to
increase during the second half of the fiscal year as demand increases for hot
dog buns and similar bakery products. Vital wheat gluten sales are expected to
decline during the next year due to the expiration of the annual quota on
imports of foreign wheat gluten. The table below shows quarterly information for
each of the years ended June 30, 2001 and 2000.
Quarter Ending Sept. 30 Dec. 31 March 31 June 30 Total
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
FISCAL 2001
Sales $58,287 $58,489 $55,434 $57,021 $229,241
Gross profit 2,765 6,153 2,541 5,724 17,183
Net income (loss) (395) 1,724 (218) 1,549 2,660
Earnings (Loss) per share (.05) .20 (.03) .19 .32
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
-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 and
open futures, the table below presents the carrying amount and fair value at
June 30, 2001 and 2000.
2001 2000
As of June 30 Carrying Amount Fair Value Carrying Amount Fair Value
----------------------------------------------------------------------------------------------------------------------------
(in thousands)
INVENTORIES
Corn $ 1,598 $ 1,603 $ 965 $ 986
Milo 169 171 659 714
Wheat 2,377 2,375 1,649 1,652
===========================================================================================================================
Expected Maturity* Fair Value Expected Maturity* Fair Value
----------------------------------------------------------------------------------------------------------------------------
CORN FUTURES (long)
Contract Volumes (bushels) 2.90 million
Weighted Average Price $ 2.07
Contract Amount $6.01 million $5.72 million
===========================================================================================================================
*The latest expected maturity date occurs within one year from date
indicated.
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, 2001 and 2000.
2001 2000
As of June 30 Expected Maturity* Fair Value Expected Maturity* Fair Value
-------------------------------------------------------------------------------------------------------------------------------
GASOLINE FUTURES (short)
Contract Volumes (gallons) 2.23 million 2.77 million
Weighted Average Price $ .86 $ .93
Contract Amount $1.92 million $1.61 million $2.58 million $2.62 million
===========================================================================================================================
*The latest expected maturity date occurs within one year from date
indicated.
-23-
Midwest Grain Products, Inc., Annual Report 2001
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented as a measure of the Company's liquidity
and financial condition:
June 30, 2001 2000
--------------------------------------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 33,454 $ 7,728
Working capital 47,490 45,089
Amounts available under lines of credit 5,500 23,000
Notes payable and long-term debt 26,693 20,454
Stockholders' equity 100,544 102,378
==============================================================================================================
Cash flow generated from operations combined with $17.3 million received as
a result of the program administered by the U.S. Department of Agriculture's
Commodity Credit Corporation produced total cash provided by operations of $37.3
million. Reduced levels of receivables due primarily to lower gluten sales and
lower inventories also contributed to improved cash flow. While a portion of the
positive operating cash flow was used to pay for capital additions, acquire
treasury stock and pay dividends, cash balances increased to $33.4 million at
the end of the year.
The Company made open market purchases of 403,743 shares of its common
stock during the year. These purchases were made to fund the Company's stock
option plans and for other corporate purposes. As of June 30, 2001, the Board
has authorized the purchase of an additional 414,482 shares of the Company's
common stock.
During the year, the Company completed property and equipment additions
totaling $13.4 million, including the $6.5 million acquisition of the new
facility for the production of Wheatex(TM) and the installation of new
distillery columns at the Atchison, Kansas plant to improve food grade alcohol
production efficiencies. At June 30, 2001, the Company had $8.1 million
committed to improvements and replacements of existing equipment and for the
acquisition of a new feed dryer at the Pekin, Illinois plant to improve alcohol
production efficiencies at that location. The Company is also developing plans
for other additions relating to value-added wheat gluten and wheat starch
products.
The Company has financed its new Wheatex(TM) production facility through a
capital lease financing involving the issuance on August 22, 2001 of a $6.5
million industrial revenue bond by The Unified Government of Wyandotte
County/Kansas City, Kansas. The bond bears interest at a rate of 5.23% per annum
and matures in September 2008. Under the lease, the Company will make monthly
payments declining from $114,200 in October 2001 to $77,700 in September 2008.
In connection with the financing, the Company must maintain certain financial
ratios, including a current ratio of 1.5 to 1, minimum consolidated tangible net
worth of $84 million and a debt service coverage ratio of 1.5 to 1.
The Company has added to its normally strong equity and working capital
positions while continuing to generate strong earnings before interest, taxes,
and depreciation. Management believes the Company is well positioned to
effectively expand is production of specialty products as well as supply
customer needs for all its other products.
FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and tangible assets deemed to
have indefinite lives) will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. Because the Company does not
currently have any recorded
intangible assets deemed to have indefinite lives, the adoption of this
statement is not expected to have a material impact on the financial statements.
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 a "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 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, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States of America.
s/BKD, LLP
Kansas City, Missouri
August 1, 2001
-25-
Midwest Grain Products, Inc., Annual Report 2001
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $229,241 $231,880 $216,101
Cost of sales 212,058 210,978 200,622
------------------------------------------------------------------------------------------------------------------------------
Gross profit 17,183 20,902 15,479
Selling, general & administrative expenses 13,545 12,109 11,908
------------------------------------------------------------------------------------------------------------------------------
3,638 8,793 3,571
Other operating income (loss) (3) 39 136
------------------------------------------------------------------------------------------------------------------------------
Income from operations 3,635 8,832 3,707
Other income, net 2,109 719 350
Interest expense (1,347) (1,469) (1,959)
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,397 8,082 2,098
Provision (Credit) for income taxes 1,737 3,192 828
------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,660 $ 4,890 $ 1,270
==============================================================================================================================
Earnings per common share $ 0.32 $ 0.54 $ 0.13
------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income
Net income $ 2,660 $ 4,890 $ 1,270
------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Loss on cash flow hedge 1,201
Reclassification adjustment for (losses) included in net income (1,216)
------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 15
------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 2,675 $ 4,890 $ 1,270
==============================================================================================================================
-26-
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
Years ended June 30 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 33,454 $ 7,728
Receivables (less allowance for doubtful accounts;
2001 and 2000--$252) 26,109 30,272
Inventories 18,230 19,246
Prepaid expenses 1,625 1,617
Deferred income taxes 2,451 4,058
Refundable income taxes 299
---------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 82,168 62,921
---------------------------------------------------------------------------------------------------------------------------------
Property & equipment, at cost 245,305 232,508
Less accumulated depreciation 153,181 139,737
---------------------------------------------------------------------------------------------------------------------------------
Property & equipment, net 92,124 92,771
---------------------------------------------------------------------------------------------------------------------------------
Other assets 158 87
---------------------------------------------------------------------------------------------------------------------------------
Total Assets $174,450 $155,779
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 4,273 $ 2,273
Accounts payable 10,446 10,563
Accrued expenses 4,008 4,044
Deferred income 15,951
Income taxes payable 952
---------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 34,678 17,832
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt 22,420 18,181
---------------------------------------------------------------------------------------------------------------------------------
Post-retirement benefits 6,034 6,170
---------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 10,774 11,218
---------------------------------------------------------------------------------------------------------------------------------
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 105,878 104,073
Accumulated other comprehensive income cash flow hedges 15
---------------------------------------------------------------------------------------------------------------------------------
115,097 113,277
Treasury stock, at cost
Common; 2001--1,585,518 shares, 2000--1,181,775 shares (14,553) (10,899)
---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 100,544 102,378
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $174,450 $155,779
=================================================================================================================================
See Notes to Consolidated Financial Statements
-27-
Midwest Grain Products, Inc., Annual Report 2001
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Accumulated Other
Preferred Common Paid-in Retained Comprehensive Income Treasury
Years ended June 30 Stock Stock Capital Earnings Cash Flow Hedges Stock Total
--------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance, June 30, 1998 $4 $6,715 $2,485 $ 97,913 $ (792) $106,325
Purchase of treasury stock (2,150) (2,150)
1999 net income 1,270 1,270
--------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 4 6,715 2,485 99,183 (2,942) 105,445
Purchase of treasury stock (7,957) (7,957)
2000 net income 4,980 4,890
--------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 4 6,715 2,485 104,073 (10,889) 102,378
Purchase of treasury stock (3,654) (3,654)
2001 net income 2,660 2,660
Dividends paid--$.10 per share (855) (855)
Unrealized gain on cash
hedge $ 15 15
--------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $4 $6,715 $2,485 $105,878 $ 15 $(14,553) $100,544
================================================================================================================================
See Notes to Consolidated Financial Statements
-28-
Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 2,660 $ 4,890 $ 1,270
Items not requiring (providing) cash:
Depreciation 13,627 13,515 13,604
(Gain) loss on sale of assets 6 (19)
Deferred income taxes 1,163 1,995 38
Gain on retirement of long-term debt (603)
Changes in:
Accounts receivable 4,163 (3,616) (287)
Inventories 1,031 5,204 (4,020)
Accounts payable 226 1,334 38
Deferred revenue 15,951
Income taxes (receivable) payable (1,251) 495 1,791
Other (251) (838) 298
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,325 22,376 12,713
---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Additions to property & equipment (13,384) (8,127) (6,054)
Proceeds from sale of equipment 55 12 31
---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,329) (8,115) (6,023)
---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Purchase of treasury stock (3,654) (8,112) (1,995)
Principal payments on long-term debt (2,273) (2,475) (5,364)
Net proceeds on line of credit 8,512
Dividends paid (855)
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) in financing activities 1,730 (10,587) (7,359)
---------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash & Cash Equivalents 25,726 3,674 (669)
Cash & Cash Equivalents, Beginning of Year 7,728 4,054 4,723
---------------------------------------------------------------------------------------------------------------------------------
Cash & Cash Equivalents, End of Year $33,454 $ 7,728 $ 4,054
=================================================================================================================================
See Notes to Consolidated Financial Statements
-29-
Midwest Grain Products, Inc., Annual Report 2001
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 and Kansas City Ingredients Technology, another wholly
owned subsidiary, supplies labor expertise in manufacturing specialty products.
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 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, 2001, the Company had entered into contracts hedging future gasoline
prices through the second quarter of fiscal 2002 and corn prices through the
first quarter of fiscal 2002.
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 8,397,308 for 2001, 9,121,717
for 2000 and 9,608,769 for 1999. The effect of employee stock options, which
were the only potentially dilutive securities held by the Company, was
anti-dilutive in all 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, 2001 2000
-----------------------------------------------------------------------------------------------
(in thousands)
Alcohol $ 4,216 $ 5,317
Unprocessed grain 5,745 4,971
Operating supplies 4,486 4,348
Gluten and starch 3,393 4,186
By-products and other 390 424
-----------------------------------------------------------------------------------------------
$18,230 $19,246
===============================================================================================
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, 2001 2000
-----------------------------------------------------------------------------------------------
(in thousands)
Land, buildings and improvements $ 20,553 $ 19,516
Transportation equipment 1,155 1,138
Machinery and equipment 219,822 205,152
Construction in progress 3,775 6,702
-----------------------------------------------------------------------------------------------
245,305 232,508
Less accumulated depreciation 153,181 139,737
-----------------------------------------------------------------------------------------------
$ 92,124 $ 92,771
===============================================================================================
-30-
NOTE 4: ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, 2001 2000
-----------------------------------------------------------------------------------------------
(in thousands)
Excise taxes $ 337 $ 540
Employee benefit plans (Note 10) 1,795 1,661
Salaries and wages 704 635
Property taxes 596 480
Insurance 20 138
Interest 528 569
Other expenses 28 21
------------------------------------------------------------------------------------------------
$4,008 $4,044
================================================================================================
NOTE 5: LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 2001 2000
-----------------------------------------------------------------------------------------------
(in thousands)
Senior notes payable $18,181 $20,454
Lines of credit 8,512
-----------------------------------------------------------------------------------------------
26,693 20,454
-----------------------------------------------------------------------------------------------
Less current maturities 4,273 2,273
------------------------------------------------------------------------------------------------
Long-term portion $22,420 $18,181
================================================================================================
The unsecured senior notes are payable in annual installments of $2,273,000
from 2001 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, 2001, the Company had a $12,233,741 unsecured revolving line of
credit expiring on November 30, 2002, with interest at 1% below prime on which
there were borrowings of $6,511,500 at June 30, 2001. The Company had a $3
million unsecured term note expiring on October 1, 2001, with interest at 1%
below prime on which there was $2,000,000 in borrowings at June 30, 2001. The
Company had an additional line of credit totaling $2.0 million expiring on April
26, 2002, with interest of .5% below prime on which there were no borrowings at
June 30, 2001 and 2000.
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, debt
to tangible net worth not to exceed 2.5 to 1, and debt service coverage ratio of
1.5 to 1.
Aggregate annual maturities of long-term debt at June 30, 2001 are as
follows:
(in thousands)
2002 $ 4,273
2003 8,785
2004 2,273
2005 2,273
2006 2,273
Thereafter 6,816
-----------------------------------------------------
$26,693
=====================================================
NOTE 6: INCOME TAXES
The provisions (credit) for income taxes is comprised of the following:
June 30, 2001 2000 1999
-----------------------------------------------------------------------------------------------
(in thousands)
Income taxes currently payable $ 574 $ 1,197 $790
Income taxes deferred 1,163 1,995 38
-----------------------------------------------------------------------------------------------
$1,737 $ 3,192 $828
===============================================================================================
The tax effects of temporary differences related to deferred taxes shown on
the consolidated balance sheets are as follows:
June 30, 2001 2000
-----------------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 149 $ 155
Post-retirement liability 2,353 2,406
Insurance accruals 226 478
State operating loss carryforwards 744 772
Alternative minimum tax 2,411 2,259
Other 486 1,563
-----------------------------------------------------------------------------------------------
6,369 7,633
-----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (14,130) (14,533)
Deferred gain on involuntary conversion (247) (260)
Deferred income from federal grant (315)
-----------------------------------------------------------------------------------------------
(14,692) (14,793)
-----------------------------------------------------------------------------------------------
Net deferred tax liability $ (8,323) $ (7,160)
===============================================================================================
The above net deferred tax liability is presented on the consolidated
balance sheets as follows:
June 30, 2001 2000
------------------------------------------------------------------------------------------------
(in thousands)
Deferred tax asset--current $ 2,451 $ 4,058
Deferred tax liability--long-term (10,774) (11,218)
------------------------------------------------------------------------------------------------
Net deferred tax liability $ (8,323) $ (7,160)
================================================================================================
No valuation allowance has been recorded at June 30, 2001 or 2000.
-31-
Midwest Grain Products, Inc., Annual Report 2001
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, 2001 2000 1999
------------------------------------------------------------------------------------------------
(in thousands)
"Expected" provision
(credit) at federal
statutory rate (34%) $1,495 $2,748 $714
Increases (Decreases)
resulting from:
Effect of state
income taxes 139 176 78
Other 103 268 36
------------------------------------------------------------------------------------------------
Provision (Credit) for income taxes $1,737 $3,192 $828
================================================================================================
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.
NOTE 8: OTHER OPERATING INCOME (EXPENSE)
Other operating income (expense) consists of the following:
Years Ended June 30, 2001 2000 1999
------------------------------------------------------------------------------------------------
(in thousands)
Truck operations $ (79) $ (53) $108
Warehousing and
storage operations (10) (35) (10)
Miscellaneous 86 127 38
------------------------------------------------------------------------------------------------
$ (3) $ 39 $136
================================================================================================
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
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 $409,000, $880,000 and
$947,000 for the years ended June 30, 2001, 2000 and 1999, 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 $740,000,
$392,000 and $215,000 for the years ended June 30, 2001, 2000 and 1999,
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, 2001 and 2000 was as follows:
June 30, 2001 2000
------------------------------------------------------------------------------------------------
(in thousands)
Accumulated post-retirement benefit obligations:
Retirees $3,044 $3,390
Active plan participants 3,207 2,872
------------------------------------------------------------------------------------------------
Unfunded accumulated obligation 6,251 6,262
Unrecognized actuarial gain (loss) (217) (92)
------------------------------------------------------------------------------------------------
Accrued post-retirement benefit cost $6,034 $6,170
================================================================================================
-32-
Net post-retirement benefit cost included the following components:
June 30, 2001 2000 1999
------------------------------------------------------------------------------------------------
(in thousands)
Service cost $177 $154 $110
Interest cost 407 355 323
(Gain) loss amortization (16) (27)
------------------------------------------------------------------------------------------------
$568 $493 $406
================================================================================================
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 8.75%
(compared to 9.00% assumed for 2000) reducing to 7.25% 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 $405,000
at June 30, 2000, and the service and interest cost by $56,000 for the year then
ended.
A weighted average discount rate of 7.50% 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 2001, 2000 and 1999 net income and earnings per share would have been
reduced to the following pro forma amounts:
2001 2000 1999
-----------------------------------------------------------------------------------------------
Net Income (loss):
As Reported $2,660 $4,890 $1,270
Pro Forma $1,979 $4,206 $697
Basis Earnings Per Share:
As Reported $.32 $.54 $.13
Pro Forma $.24 $.46 $.07
===============================================================================================
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, 2001, the Company
has granted incentive stock options to purchase 472,500 shares. The options
become exercisable in yearly increments over four-year periods. 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,
2001, the Company had granted options to purchase 33,000 shares, all of which
were exercisable as of June 30, 2001.
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, 2001, the Company has granted incentive stock options on 288,320 shares. The
options become exercisable in yearly increments over four-year periods. They
have ten-year terms and have exercise prices equal to fair market value on the
date of grant.
-33-
Midwest Grain Products, Inc., Annual Report 2001
A summary of the status of the Company's three stock option plans at June
30, 2001, 2000 and 1999 and changes during the years then ended is presented
below:
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------------------------------------------------
Outstanding Beginning of Year 729,360 12.30 544,860 $ 13.74 441,360 $14.04
Granted 133,460 9.33 184,500 8.03 103,500 12.43
Cancelled (69,000) $14.00
Outstanding End of Year 793,820 $11.65 729,360 $12.30 544,860 $13.74
================================================================================================================================
These are comprised as follows:
Shares
Remaining Exercisable
Exercise Contractual at June 30,
Shares Price Lives (Years) 2001
----------------------------------------------------------------------------------------------------------------------------
1996 Plan 21,000 $14.00 4.50 21,000
86,500 $15.25 5.50 86,500
79,500 $13.75 6.50 59,625
96,500 $12.50 7.50 48,250
86,000 $ 8.00 8.50 21,500
34,000 $ 9.31 9.50
69,000 $ 9.31 10.00
Directors Plan 7,000 $16.25 5.25 7,000
7,000 $14.25 6.25 7,000
7,000 $11.75 7.25 7,000
6,000 $ 9.00 8.25 6,000
6,000 $ 9.63 8.25 6,000
Salaried Plan 171,360 $13.50 6.67 85,680
92,500 $ 8.00 8.50 23,125
24,460 $ 9.31 9.50
----------------------------------------------------------------------------------------------------------------------------
793,820 378,680
============================================================================================================================
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, 2001: Risk free interest rate
of 4.98%; expected dividend yield of 0%; expected volatility of 35%, expected
life of ten years.
NOTE 11: OPERATING LEASES
The Company has several noncancelable operating leases for railcars and
other equipment, which expire from October 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, 2001 are as follows:
(in thousands)
2002 $1,260
2003 645
2004 151
2005 2
----------------------------------------------------------------------
Future minimum lease payments $4,094
======================================================================
Rental expense for all operating leases with terms longer than one month
totaled $2,385,777, $2,458,096 and $2,305,235 for the years ended June 30, 2001,
2000 and 1999, 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 October 31,
2003 at the Pekin plant.
-34-
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 $20,000
is included in the accompanying 2001 financial statements. Claims payments based
on actual claims ultimately filed could differ materially from these estimates.
During the years ended June 30, 2001, 2000 and 1999, the Company had sales
to one customer accounting for approximately 8.7%, 13.3% and 12.0%,
respectively, of consolidated sales.
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:
2001 2000 1999
------------------------------------------------------------------------------------------------
Wheat gluten products $ 49,762 $ 70,912 $ 56,153
Premium wheat starch 27,907 29,186 27,173
Alcohol products 149,538 129,023 129,729
Flour and other
mill products 2,034 2,759 3,046
------------------------------------------------------------------------------------------------
$229,241 $231,880 $216,101
================================================================================================
NOTE 14: FAIR VALUE OF FINANCIAL INVESTMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves significant
judgments by management and uncertainties. Fair value is the estimated amount at
which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Because no market exists for certain of these financial instruments and because
management does not intend to sell these financial instruments, the Company does
not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the aggregate.
June 30,
2001 2000
----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $33,454 $33,454 $ 7,728 $ 7,728
Accounts receivable 26,109 26,109 30,272 30,272
Futures contracts 15 15
Financial liabilities:
Long-term debt 26,693 25,374 20,454 19,000
==========================================================================================================
-35-
Midwest Grain Products, Inc., Annual Report 2001
NOTE 15: ADDITIONAL CASH FLOWS INFORMATION
Years Ended June 30, 2001 2000 1999
----------------------------------------------------------------------------------------------------------
(in thousands)
Investing and Non-cash Financing Activities
Purchase of property and
equipment in accounts payable $ 343 $ 255 $ 136
Purchase of treasury stock in accounts
payable $ 155
Additional Cash Payment Information:
Interest paid $1,388 $1,542 $ 2,013
Income taxes paid (refunded) $1,825 $ 704 $ (1,001)
==========================================================================================================
NOTE 16: 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.
The Company recently advised customers and the Food and Drug Administration
that certain products in one of its specialty protein lines required relabeling
because they contain sulfites, a potential allergen. The products represented
less than 1% of the Company's total wheat protein product sales during 2001.
Certain customers have advised the Company that they will expect indemnity
against resulting losses allegedly incurred as a result of the mislabeling.
Although the Company is unable to estimate the costs that it might incur if any
claims are brought against it, after taking into account anticipated insurance
coverage the Company does not expect such costs would be material to its
financial condition or results of operations.
NOTE 17: USDA GRANT
During the fourth quarter of fiscal 2001, the United States Department of
Agriculture developed a grant program for the gluten industry in place of a
two-year extension of a wheat gluten import quota that took effect on June 1,
1998. Over the life of the program, which is scheduled to end May 31, 2003, the
Company is eligible to receive nearly $26 million of the program total of $40
million. For the first year of the program, approximately $17.3 million has been
allocated to the Company with the remainder available in the second year. The
funds are to be used for research, marketing, promotional and capital costs
related to value-added gluten and starch products. Funds allocated on the basis
of current operating costs will be considered revenue as those costs are
incurred. Funds allocated based on capital expenditures will reduce the cost
basis of the related capital assets. Approximately $1,350,000 is included in
other income for the year ended June 30,2001, related to this program.
NOTE 18: FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. Because the
Company does not currently have any recorded intangible assets deemed to have
indefinite lives, the adoption of this statement is not expected to have a
material impact on the financial statements.
-36-