Exhibit 13
Selected Financial Information
Year ended June 30 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Income Statement Data:
Net sales: $214,528 $229,241 $231,880 $216,101 $223,254
Cost of sales 193,325 212,058 210,978 200,622 214,453
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 21,203 17,183 20,902 15,479 8,801
Selling, general and administrative expenses (14,689) (13,545) (12,109) (11,908) (11,363)
Other operating income 4,865 1,326 39 136 100
- -------------------------------------------------------------------------------------------------------------------------------
Income from operations 11,379 4,964 8,832 3,707 (2,462)
Other income, net 226 780 719 350 658
Interest expense (1,237) (1,347) (1,469) (1,959) (1,887)
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes 10,368 4,397 8,082 2,098 (3,691)
Provision (Credit) for income taxes 4,109 1,737 3,192 828 (1,455)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (Loss) $ 6,259 $ 2,660 $ 4,890 $ 1,270 $ (2,236)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per common share $ .77 $ 0.32 $ 0.54 $ 0.13 $ (0.23)
Cash dividends per common share .15 .10
Weighted average common shares outstanding 8,086 8,397 9,122 9,609 9,700
- -------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 48,383 $ 47,490 $ 45,089 $ 43,053 $ 39,825
Total assets 166,218 174,450 155,779 157,370 161,978
Long-term debt, less current maturities 18,433 22,420 18,181 21,099 25,536
Stockholders' equity 104,678 100,544 102,378 105,445 106,325
===============================================================================================================================
17
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
The policies discussed below are considered by management to be critical to an
understanding of the Company's financial statements. The application of certain
of these policies places significant demands on management's judgment, with
financial reporting results relying on estimations about the effects of matters
that are inherently uncertain. For all of these policies, management cautions
that future events rarely develop as forecast, and estimates routinely require
adjustment and may require material adjustment.
USDA GRANT: As discussed in Note 17 to the financial statements, the Company
received a grant from the United States Department of Agriculture totaling
approximately $26 million over the two-year period June 1, 2001 to May 31, 2003.
The funds are to be used for research, marketing, promotional and capital costs
related to value-added wheat gluten and starch products. Funds applied to
current operating costs are considered revenue as those costs are incurred.
Funds applied to capital expenditures will be recognized in income over the
periods during which applicable projects are depreciated.
HEDGING ACTIVITIES: The Company enters into commodity contracts to reduce the
risk of future grain price increases. Additionally, the Company enters into
futures contracts for the sale of fuel grade alcohol to protect its selling
price to the customer. 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.
SELF-INSURED PLAN: 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. Claims payments based on
actual claims ultimately filed could differ materially from these estimates.
VALUATION OF LONG-LIVED ASSETS: The Company reviews long-lived assets, mainly
equipment, whenever events or circumstances indicate that usage may be limited
and carrying values may not be recoverable. If events indicate the assets cannot
be used as planned, the realization from alternative uses or disposal is
compared to the carrying value. If an impairment loss is measured, this estimate
is recognized. A significant change in the assumptions could result in a
different determination of impairment loss and/or the amount of any impairment.
OTHER SIGNIFICANT ACCOUNTING POLICIES: Other significant accounting policies,
not involving the same level of measurement uncertainties as those discussed
above, are nevertheless important to an understanding of the financial
statements. These policies require difficult judgments on complex matters that
are often subject to multiple sources of authoritative guidance. See Note 1 to
the consolidated financial statements, which discusses accounting policies that
must be selected by management when there are acceptable alternatives.
Operations
The Company is a fully integrated producer of wheat-based products and
distillery products and has two reportable segments, wheat-based products and
distillery products. Wheat-based products consist of specialty ingredients,
including specialty, or value-added, wheat proteins and wheat starches,
commodity ingredients, including vital wheat gluten and commodity wheat starch,
mill feeds and other mill products. Distillery products consist of food grade
alcohol, including beverage alcohol and industrial alcohol, fuel grade alcohol,
commonly known as ethanol, and distillers feed and carbon dioxide, which are
by-products of the Company's distillery operations.
The Company processes its products at plants located in Atchison, Kansas and
Pekin, Illinois. The Company also operates a wheat protein and wheat starch
mixing facility in
18
Kansas City, Kansas. Wheat is purchased directly from local and regional farms
and grain elevators and milled into flour and mill feeds. The flour is processed
with water to extract vital wheat gluten, a portion of which is further
processed into specialty wheat proteins. Vital wheat gluten and most wheat
protein products are dried into powder and sold in packaged or bulk form. The
starch slurry which results after the extraction of the gluten and wheat
proteins is further processed to extract premium wheat starch, which is also
dried into powder and sold in packaged or bulk form, either as commodity wheat
starch or, after further processing, as specialty wheat starch. The remaining
slurry is mixed with mill feeds, corn and/or milo and water and then cooked,
fermented and distilled into alcohol. The residue of the distilling operations
is dried and sold as a high protein additive for animal feed. Carbon dioxide,
which is produced during the fermentation process, is trapped and sold. Mill
feeds not used in the distilling process are sold to feed manufacturers.
The following is a summary of revenues and pre-tax profits/(loss) allocated to
each reportable operating segment for the last three fiscal years:
(dollars in thousands)
2002 2001 2000
- ---------------------------------------------------------------------------
Wheat-Based
Products
Net sales $ 66,232 $ 79,703 $ 102,857
Pre-Tax income 4,562 2,089 16,058
- ---------------------------------------------------------------------------
Distillery Products
Net sales $ 148,296 $ 149,538 $ 129,023
Pre-Tax income 7,824 3,257 (6,746)
- ---------------------------------------------------------------------------
Fiscal 2002 Compared to Fiscal 2001
General
The Company had net income of $6,259,000 in fiscal 2002 compared to net income
of $2,660,000 in fiscal 2001. This improvement was due to several factors,
including funds allocated under a United States Department of Agriculture
Commodity Credit Corporation program to support the development of value-added
wheat protein and wheat starch products, as well as a Department of Agriculture
cash incentive program for ethanol producers. Details of these programs, which
are helping the Company evolve its business in both of its operating segments,
are provided below. Another significant cause for the improvement was a
reduction in energy costs resulting from an approximately 40% decrease in the
average per unit price for natural gas compared to the prior year. Grain costs
decreased because of lower average unit prices for corn and milo and reduced
wheat purchases compared to the prior year. Due to abnormally hot and dry
weather conditions across much of the U.S., prices for grain on a per unit basis
are expected to be higher in fiscal 2003 compared to fiscal 2002.
WHEAT-BASED PRODUCTS. Sales of wheat-based products, consisting primarily of
specialty and commodity starches and proteins, were lower than the prior year
due to a planned reduction in sales of commodity wheat starch and vital wheat
gluten, a protein that is used mainly as an ingredient in bread products.
However, sales of specialty wheat-based ingredients increased almost 14% over
the prior year to over $37 million for the year and accounted for more than 56%
of the Company's combined wheat-based product sales for the year.
The increase in specialty wheat-based ingredient sales was due mainly to
expanded marketing programs and heightened customer interest. The reduction in
commodity wheat starch sales resulted from the Company's decision to emphasize
specialty and modified starch sales over commodity wheat starch sales. 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. Competitive pressures from the E.U. increased
following the expiration of the three-year-long quota on wheat gluten imports in
early June 2001. Unless future conditions warrant otherwise, the Company plans
to maintain a reduced presence in the more traditional wheat gluten and
commodity wheat starch markets while continuing to expand its presence in
specialty wheat protein and starch markets.
In June 2001, the White House approved a two-year program to support the
development of value-added wheat gluten and wheat starch products to assist
wheat gluten producers in adjusting to import competition. This program was
implemented in lieu of an extension to a three-year long gluten import quota
that began in June, 1998. Administered by the U.S. Department of Agriculture's
Commodity
19
Credit Corporation, the program 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. On June 29, 2001, the Company received approximately
$17,280,000 for the first year of the program. The Company received the balance
of the award for the second year of the program in July, 2002. The Company must
submit quarterly reports to the Commodity Credit Corporation listing costs
incurred and activities conducted to date and an annual performance report after
each year of the program explaining its activities. The Commodity Credit
Corporation may ask for a refund with interest of some or all of the funds
allocated to the Company if it determines that the Company has not made
significant progress in completing its stated activities. Based on its contacts
with Commodity Credit Corporation personnel through the quarterly reporting
process, the Company believes that it is making satisfactory progress.
The funds allocated under the Commodity Credit Corporation program are to be
used for capital, research, marketing and promotional costs related to
value-added wheat protein and wheat starch products. Funds received are
recognized in income during the period in 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 that could
extend the U.S. industry's participation in these markets.
Approximately 80% of the first year's allotment under the program was used for
capital projects, including the $8.3 million expansion project described below.
The remaining 20% of the first year's funds were applied toward research and
marketing-related costs and, therefore, are reflected in earnings. Similar
allocations are expected for the second year's funds. As reported to the
Commodity Credit Corporation, during fiscal 2002, approximately $13.6 million
(including funds for capital projects that began in fiscal 2002 and are
scheduled for completion in fiscal 2003) was applied to capital projects and
$3.7 million was applied to research- and marketing-related costs.
On October 10, 2001, the Company's Board approved plans for an $8.3 million
expansion project at the Company's Atchison plant that is expected to
substantially strengthen production and sales capabilities for certain of the
Company's specialty value-added wheat protein products. The expansion is
scheduled for completion in early fiscal 2003. The project involves the
installation of additional processing and drying equipment for the production of
ingredients for bakery, pasta and noodle and related food markets, both
domestically and abroad. The cost of this project is expected to be offset by
funds provided through the U.S. Department of Agriculture Commodity Credit
Corporation program described above.
DISTILLERY PRODUCTS. Total sales of distillery products, consisting of food
grade and fuel grade alcohol and alcohol by-products, principally feed, were
slightly less than sales the prior year. Sales of fuel grade alcohol, commonly
known as ethanol, increased as the result of higher unit sales during all four
quarters of the year and higher selling prices during the first half of the
year. This partially offset a reduction in sales of food grade alcohol caused by
lower unit sales. Selling prices for food grade alcohol for both beverage and
industrial applications, meanwhile, improved over the prior year. Selling prices
for the Company's fuel grade alcohol decreased significantly in the second half
of fiscal 2002, primarily due to increased ethanol supplies throughout the
industry. The average price of fuel alcohol for the entire year was below the
prior year's average.
The increased supplies of fuel alcohol in the marketplace occurred because
certain producers added capacity and/or built inventories in anticipation of an
expanded market for grain-based ethanol as a replacement for methyl tertiary
butyl ether (MTBE) in California and elsewhere. However, the Governor of
California delayed the state's ban on MTBE for a year, from January, 2003 to
January, 2004, causing the surplus of fuel alcohol and the resulting softening
in prices during the latter part of fiscal 2002. At the end of fiscal 2002,
prices began to improve as various gasoline suppliers to California announced
plans to switch to ethanol-blended fuels much earlier than the delayed ban on
MTBE becomes effective. Although fuel alcohol prices during fiscal 2003 are
expected to be lower than the average experienced in the first half of fiscal
2002, the Company believes that in the
20
long-term the future for ethanol remains promising. This expectation is
partially based on the U.S. Senate's passage of a comprehensive energy bill in
April, 2002 that includes a provision for establishing a renewable fuels
standard. Based on information published by the Renewable Fuels Association,
this provision could triple the use of ethanol to 5 billion gallons annually by
2012. The energy bill is being considered by the U.S. House-Senate Conference
Committee and could be forwarded to the President by the end of 2002. However,
there can be no assurance that the bill will be enacted in its present form, if
at all.
Currently, the Company is participating in a program that was developed by the
U.S. Department of Agriculture and initiated in December, 2000 to provide a cash
incentive for ethanol producers who increase their grain usage over comparable
quarters to raise fuel alcohol production. The Company presently satisfies the
program's eligibility requirements and began receiving payments in the third
quarter of fiscal 2001. In fiscal 2002, the Company received payments totaling
approximately $4.1 million. The program extends through September, 2006, with
funding determined annually. The Company's eligibility to participate in the
program is determined from quarter to quarter.
In the final quarter of fiscal 2002, the Company completed the installation of a
new distillery feed dryer and related equipment at its Pekin, Illinois plant.
Installed at a cost of approximately $7 million, the new dryer expands the
plant's feed processing capacity and should improve alcohol production output
and efficiencies at that location.
Sales
Net sales in fiscal 2002 decreased by approximately $14.7 million below net
sales in fiscal 2001. This decrease resulted mainly from an 18% reduction in
sales of wheat-based products.
The decline in sales of wheat-based products was due to planned reductions in
sales of commodity wheat starch and vital wheat gluten. Sales of vital wheat
gluten also dropped due to reduced selling prices. Commodity wheat starch sales
declined primarily due to a reduction in unit sales. However, sales of specialty
wheat-based ingredients increased in the aggregate by nearly 14% over the prior
year to more than $37 million for the year and accounted for over 56% of the
Company's wheat-based product sales for the year. This increase was due
primarily to higher unit sales of specialty proteins, which offset a decrease in
unit sales of specialty starches.
Distillery product sales were slightly lower than the prior year. Lower sales of
food grade alcohol resulted from decreased unit sales in both the beverage and
industrial markets, which offset higher selling prices in both markets. However,
sales of fuel grade alcohol rose compared to fiscal 2001 as the result of higher
unit sales in all four quarters of the year and higher selling prices in the
first and second quarters. For fiscal 2002 as a whole, the average sales price
of fuel alcohol was lower than in the prior year. Sales of distillers feeds, the
principal by-product of the alcohol production process, increased as a result of
higher unit sales.
Cost of Sales
The cost of sales in fiscal 2002 decreased by approximately $19 million below
the cost of sales in the prior fiscal year. This principally was due to a
decrease in energy costs resulting from a decline in natural gas prices and, to
a lesser extent, to a decline in raw material costs resulting from reduced
average prices for corn and milo and lower wheat purchases compared to the prior
year. In addition, the Company received approximately $4.1 million in pre-tax
income from the U.S. Department of Agriculture's cost incentive program for
ethanol producers and approximately $500,000 in pre-tax income from a similar
program provided by the State of Kansas. The funds from these programs are not
included in sales, but they reduce cost of sales and, therefore, are reflected
in pre-tax income.
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. During
fiscal 2002, the Company hedged approximately 48% of corn processed, compared to
8% in fiscal 2001. Of the wheat processed by the Company in fiscal 2002, no
wheat was hedged compared to 9% that was hedged in fiscal 2001. Additionally,
the Company uses gasoline futures to hedge fuel alcohol sales made under
contracts with price terms based on gasoline futures. In fiscal 2002, raw
material costs included a net hedging loss of $1.8 million compared to a net
hedging loss of $1.2 million in the prior fiscal year.
21
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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2002 were approximately
$1.1 million, or 8.5%, higher than selling, general and administrative expenses
in fiscal 2001. The increase was due largely to various factors, including
higher research and development costs and higher marketing-related expenses. A
bad debt expense of approximately $310,000 in the first quarter of fiscal 2002
and a bad debt expense of approximately $148,000 in the fourth quarter also
contributed to the increase.
Other Operating Income
The increase in other operating income relates to the recognition of $5 million
of pre-tax income from the previously discussed U.S. Department of Agriculture
Commodity Credit Corporation program for value-added wheat protein and wheat
starch products.
Taxes and Inflation
The consolidated effective income tax rate is consistent for all periods. The
general effects of inflation were minimal.
Net Income
As the result of the foregoing factors, the Company experienced net income of
$6,259,000 in fiscal 2002 compared to net income of $2,660,000 in fiscal 2001.
FY 2001 Compared to Fiscal 2000
General
The Company had net income of $2,660,000 in fiscal 2001 compared to net income
of $4,890,000 in fiscal 2000. This decline was largely due to abnormally high
energy costs resulting from a dramatic rise in natural gas prices. A reduction
in sales of wheat-based products was also an affecting factor. The recognition
of income from a United States Department of Agriculture Commodity Credit
Corporation program, which is discussed above, 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.
WHEAT-BASED PRODUCTS. Wheat-based product sales, consisting primarily of
specialty and commodity starches and proteins, were lower than the prior year
due mainly to a planned reduction in sales of vital wheat gluten. This occurred
as the Company elected to curtail production due to pricing pressures from
artificially low priced gluten imports from the European Union (E.U.). However,
sales of the Company's specialty wheat-based ingredients increased by 4%
compared to the prior year. The Company believes that competitive pressures from
the E.U. in the vital wheat gluten market 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.
With the expiration of the import quota in June, 2001, vital wheat gluten prices
in the U.S. became subjected to increased downward pressures from E.U.
suppliers. In anticipation of the quota's end, the Company elected to reduce
wheat gluten production and sales even further in the final quarter of fiscal
2001.
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.
In February, 2001, 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
22
Technologies, Inc., primarily for the production of Wheatex(R), 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 2001 at a cost of
approximately $6.5 million, the purchase replaced the Company's earlier plan to
build a Wheatex(R) plant at a similar cost. The acquisition allowed it to
increase the production of textured wheat proteins and bio-polymers at a more
accelerated rate. Also, in addition to providing more space than was
incorporated into the design for a new plant, the facility provides greater
flexibility for producing other lines of value-added specialty wheat proteins.
The Company's wheat starch sales in fiscal 2001 were down due to lower unit
sales of specialty starches resulting mainly from a reduction in sales for
export. Sales of commodity wheat starches were approximately even with commodity
starch sales the prior year.
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.
DISTILLERY PRODUCTS. Total sales of distillery products were approximately 16%
higher than the prior year. 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 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.
As discussed above, a program developed by the U.S. Department of Agriculture
and initiated in December, 2000 provides a cash incentive for ethanol producers
who increase their grain usage by specified amounts to raise fuel alcohol
production. The Company began experiencing the program's effects in the third
quarter of fiscal 2001 and received approximately $1.6 million in pre-tax income
for the year. Additionally, the installation of new distillery columns to
replace older equipment at the Company's Atchison, Kansas plant during the first
quarter allowed the Company to improve food grade alcohol production
efficiencies at that location. This project has also allowed 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 to enhance food grade
alcohol production and strengthen the Company's fuel grade alcohol production
capabilities. The Board also approved the installation of a new feed dryer at
Midwest Grain's Pekin, Illinois plant to improve alcohol production efficiencies
at that location.
Sales
Net sales in fiscal 2001 decreased approximately $2.6 million below net sales in
fiscal 2000. A decrease in sales of wheat-based products, resulting mainly from
reduced sales of vital wheat gluten, were only partially offset by increased
alcohol sales, primarily fuel grade alcohol.
Total wheat-based product sales declined compared to the prior year. Sales of
vital wheat gluten dropped due to reductions in both unit sales and selling
prices. Specialty wheat starch sales declined primarily due to lower unit sales
compared to the prior year. These decreases were partially offset by increased
unit sales of the Company's specialty wheat proteins. Meanwhile, sales of
commodity wheat starch were approximately even with the prior year.
Total distillery product sales increased over the prior year. 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 food grade
alcohol fell as the result of decreased unit sales in the beverage market.
Meanwhile, selling prices for food grade alcohol for both beverage and
industrial applications improved. 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.
23
Cost of 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.
During fiscal 2001, the Company hedged approximately 8% of corn processed,
compared to 22% in fiscal 2000, and 9% of wheat processed, compared to 22% in
fiscal 2000. Additionally, the Company uses gasoline futures to hedge fuel
alcohol sales made under contracts with price terms based on gasoline futures.
In fiscal 2001, raw material costs included a net hedging loss of $1.2 million
compared to a net hedging loss of $1.3 million on contracts in fiscal 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2001 were approximately
$1.4 million 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.
Other Operating Income
The increase in other income relates to the recognition of $1.35 million of
income from the previously discussed United States Department of Agriculture
program for value-added wheat protein and wheat starch products.
Taxes and Inflation
The consolidated effective income tax is consistent for all periods. The general
effects of inflation were minimal.
Net Income
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.
24
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. However, vital wheat gluten sales declined
in fiscal 2002 due to the expiration of the annual quota on imports of foreign
wheat gluten and the Company's decision to curtail the production of this
product. The table below shows quarterly information for each of the years ended
June 30, 2002 and 2001.
Quarter Ending Sept. 30 Dec. 31 March 31 June 30 Total
- ---------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Fiscal 2002
Sales: $ 54,294 $ 54,394 $55,403 $50,437 $214,528
Gross profit 6,990 6,894 4,111 3,208 21,203
Net Income (Loss) 2,444 2,551 709 555 6,259
Earnings (Loss) per share .30 .32 .09 .06 .77
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
- ---------------------------------------------------------------------------------------
25
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, which
are accounted for as cash flow hedges, are used as a hedge to protect against
fluctuations in the market. Fluctuations in the volume of hedging transactions
are dictated by alcohol sales and are based on corn and gasoline prices. The
Company has a risk management committee, comprised of senior management members,
that meets weekly to review futures contracts and positions. This group sets
objectives and determines when futures positions should be held or terminated. A
designated employee makes trades authorized by the risk management committee.
The futures contracts that are used are exchange-traded contracts. The Company
trades on the Kansas City and Chicago Boards of Trade and the New York
Mercantile Board of Exchange. For inventory and open futures, the table below
presents the carrying amount and fair value at June 30, 2002 and 2001. The
Company includes the fair values of open contracts in inventories or accounts
payable in the balance sheet.
2002 2001
Carrying Fair Carrying Fair
As of June 30 Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
Inventories
Corn $1,308 $1,098 $1,598 $1,603
Milo 346 333 169 171
Wheat 2,576 2,496 2,377 2,375
- -----------------------------------------------------------------------------------------------------
Expected Fair Expected Fair
Maturity* Value Maturity* Value
- -----------------------------------------------------------------------------------------------------
Corn Futures (long)
Contract Volumes (bushels) 6.3 million 2.90 million
Weighted Average Price $2.32 $2.07
Contract Amount $15.181 million $15.780 million $6.011 million $5.720 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, 2002 and 2001.
2002 2001
Expected Fair Expected Fair
As of June 30 Maturity* Value Maturity* Value
- -----------------------------------------------------------------------------------------------------
Gasoline Futures (short)
Contract Volumes (gallons) 6.3 million 2.23 million
Weighted Average Price $0.072 $0.86
Contract Amount $4.515 million $4.825 million $1.92 million $1.614 million
- ------------------------------------------------------------------------------------------------------
*The latest expected maturity date occurs within one year from date
indicated.
The Company's outstanding long-term debt at June 30, 2002 carries fixed interest
rates which limit its exposure to increases in market rates. The Company's line
of credit provides for interest at variable rates. There were no borrowings on
this line at June 30, 2002.
26
Liquidity and Capital Resources
The following table is presented as a measure of the Company's liquidity and
financial condition:
2002 2001
- -------------------------------------------------------
(dollars in thousands)
Cash and cash equivalents $ 28,736 $ 33,454
Working capital 48,383 47,490
Amounts available under
lines of credit 10,000 5,500
Notes payable and long-term debt 21,634 26,693
Stockholders' equity 104,678 100,544
- -------------------------------------------------------
The high cash flow provided by operations in fiscal 2001 was largely the result
of the $17.3 million USDA grant received at the end of the year. In fiscal 2002,
cash flow generated from operations, exclusive of the effects of the grant, was
generally comparable to the preceding year. Cash flow provided from operations
combined with excess cash from last year was used for equipment additions,
reductions in debt, acquisition of treasury stock and dividend payments.
The Company made open market purchases of 147,200 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, 2002, the Board of
Directors has authorized the purchase of an additional 267,282 shares of the
Company's common stock. During the year, 47,940 shares of the treasury stock
were sold as employees exercised options under the Company's stock option plans.
At June 30, 2002, the Company had $9.0 million committed to improvements,
including completion of the expansion project relating to the Company's
specialty value-added wheat protein products, and replacements of existing
equipment.
Contractual obligations at June 30, 2002 are as follows:
Long term Operating
Year Debt Leases
- ------------------------------------------
2003 3,201 1,187
2004 3,201 607
2005 3,201 439
2006 3,201 174
2007 3,201 39
Thereafter 5,629
- ------------------------------------------
In connection with the Company's long-term loan agreements, it is required,
among other covenants, 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 a debt service coverage ratio
of 1.5 to 1.
The Company's line of credit for $10 million extends to November, 2003.
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 its production of specialty products as well as supply
customer needs for all 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.
27
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, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 2002. 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, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
2002, in conformity with accounting principles generally accepted in the United
States of America.
BKD, LLP
Kansas City, Missouri
August 2, 2002
28
Consolidated Statements of Income
Years ended June 30 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
(in thousands,except per share amounts)
Net sales $ 214,528 $ 229,241 $ 231,880
Cost of sales 193,325 212,058 210,978
- -------------------------------------------------------------------------------------------------------
Gross profit 21,203 17,183 20,902
Selling, general & administrative expenses (14,689) (13,545) (12,109)
Other operating income 4,865 1,326 39
- -------------------------------------------------------------------------------------------------------
Income from operations 11,379 4,964 8,832
Other income, net 226 780 719
Interest expense (1,237) (1,347) (1,469)
- -------------------------------------------------------------------------------------------------------
Income before income taxes 10,368 4,397 8,082
Provision (Credit) for income taxes 4,109 1,737 3,192
- -------------------------------------------------------------------------------------------------------
Net income $ 6,259 $ 2,660 $ 4,890
- -------------------------------------------------------------------------------------------------------
Earnings per common share $ 0.77 $ 0.32 $ 0.54
- -------------------------------------------------------------------------------------------------------
Other comprehensive income
Net income $ 6,259 $ 2,660 $ 4,890
- -------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Loss on cash flow hedge 2,356 1,201
Reclassification adjustment for (losses) included in net income (2,517) (1,216)
- -------------------------------------------------------------------------------------------------------
Other comprehensive income 161 15
- -------------------------------------------------------------------------------------------------------
Comprehensive income $ 6,420 $ 2,675 $ 4,890
=======================================================================================================
See Notes to Consolidated Financial Statements
29
Consolidated Balance Sheets
Years ended June 30 2002 2001
- ------------------------------------------------------------------------------------------------
(in thousands,except per share amounts)
Assets
Current Assets
Cash and cash equivalents $ 28,736 $ 33,454
Receivables (less allowance for doubtful accounts; 2002 and 2001-$252) 24,071 26,109
Inventories 20,755 18,230
Prepaid expenses 550 1,625
Deferred income taxes 284 2,451
Refundable income taxes 585 299
- ------------------------------------------------------------------------------------------------
Total Current Assets 74,981 82,168
- ------------------------------------------------------------------------------------------------
Property & equipment, at cost 258,501 245,305
Less accumulated depreciation 167,486 153,181
- ------------------------------------------------------------------------------------------------
Property & equipment, net 91,015 92,124
- ------------------------------------------------------------------------------------------------
Other Assets 222 158
- ------------------------------------------------------------------------------------------------
Total Assets $ 166,218 $ 174,450
================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 3,201 $ 4,273
Accounts payable 8,681 10,446
Accrued expenses 3,745 4,008
Deferred income 10,971 15,951
- ------------------------------------------------------------------------------------------------
Total Current Liabilities 26,598 34,678
- ------------------------------------------------------------------------------------------------
Long-term debt 18,433 22,420
- ------------------------------------------------------------------------------------------------
Post-retirement benefits 5,922 6,034
- ------------------------------------------------------------------------------------------------
Deferred income taxes 10,587 10,774
- ------------------------------------------------------------------------------------------------
Stockholders' equity
Capital Stock
Preferred, 5% non-cumulative, $10 par value; authorized 1,000 shares;
issued and outstanding 437 shares 4 4
Common, nopar; authorized 20,000,000 shares; issued 9,765,172 shares 6,715 6,715
Additional paid-in capital 2,601 2,485
Retained earnings 110,916 105,878
Accumulated other comprehensive income cash flow hedges 176 15
- ------------------------------------------------------------------------------------------------
120,412 115,097
Treasury stock, at cost
Common; 2002-1,684,778 shares, 2001-1,585,518 shares (15,734) (14,553)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 104,678 100,544
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 166,218 $ 174,450
================================================================================================
See Notes to Consolidated Financial Statements
30
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, 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
Purchase of treasury stock (3,654) (3,654)
2001 net income 2,660 2,660
Dividends paid (855) (855)
Unrealized gain on cash flow hedge 15 15
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 4 6,715 2,485 105,878 15 (14,553) 100,544
Purchase of treasury stock (1,628) (1,628)
Stock options exercised 116 447 563
2002 net income 6,259 6,259
Dividends paid (1,221) (1,221)
Unrealized gain on cash flow hedge 161 161
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 $ 4 $ 6,715 $ 2,601 $ 110,916 $ 176 $ (15,734) $ 104,678
==================================================================================================================================
See Notes to Consolidated Financial Statements
31
Consolidated Statements of Cash Flows
Years Ended June 30 2002 2001 2000
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 6,259 $ 2,660 $ 4,890
Items not requiring (providing) cash:
Depreciation 14,308 13,627 13,515
(Gain) loss on sale of assets 6
Deferred income taxes 1,980 1,163 1,995
Gan on retirement of long-term debt (603)
Changes in:
Accounts receivable 2,038 4,163 (3,616)
Inventories (2,364) 1,031 5,204
Accounts payable (1,992) 226 1,334
Deferred revenue (4,980) 15,951
Income taxes (receivable) payable (286) (1,251) 495
Other 636 (251) (838)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,599 37,325 22,376
- ------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Additions to property & equipment (12,972) (13,384) (8,127)
Proceeds from sale of equipment 55 12
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (12,972) (13,329) (8,115)
- ------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Purchase of treasury stock (1,628) (3,654) (8,112)
Sale of treasury stock 563
Principal payments on long-term debt (3,047) (2,273) (2,475)
Proceeds from issuance of long-term debt 6,500
Net proceeds (payment) on line of credit (8,512) 8,512
Dividends paid (1,221) (855)
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) in financing activities (7,345) 1,730 (10,587)
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Cash & Cash Equivalents (4,718) 25,726 (3,674)
Cash & Cash Equivalents, Beginning of Year 33,454 7,728 4,054
- ------------------------------------------------------------------------------------------
Cash & Cash Equivalents, End of Year $ 28,736 $ 33,454 $ 7,728
==========================================================================================
See Notes to Consolidated Financial Statements
32
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
protein products, which include vital wheat gluten and specialty wheat proteins;
premium wheat starch, which includes specialty and commodity wheat starches;
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 Ingredient Technologies, another wholly-owned subsidiary,
supplies labor expertise and operates as a protein and starch mixing facility in
manufacturing specialty products.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of America
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 AND DERIVATIVES. 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 readily marketable
exchange-traded commodity futures contracts to reduce the risk of future grain
price increases. Additionally, the Company enters into futures contracts for the
sale of fuel grade alcohol to hedge the selling price to its customers. These
contracts are designated as cash flow hedges of specific volumes of commodities
to be purchased or sold. The changes in the market value of the Company's
futures contracts have historically been, and are expected to continue to be,
highly effective at offsetting changes in the price movements of the hedged
items, and the amount representing ineffectiveness is immaterial. The fair value
of the open and closed hedging transactions is recorded in inventory or accounts
payable with the related gains and losses deferred in other comprehensive
income, net of applicable income taxes. Gains and losses are recognized in the
statement of income as the finished goods related to the hedged transactions 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. Gains and losses resulting from the hedged transactions will be
recognized in the statement of income within the next year.
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 8,085,847 for 2002, 8,397,308
for 2001 and 9,122,717 for 2000. The effect of employee stock options, which
were the only potentially dilutive securities held by the Company, were
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.
33
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.
REVENUE RECOGNITION. Revenue from the sale of the Company's products is
recognized as products are delivered to customers.
Income from various government incentive grant programs is recognized as it is
earned. In the case of the ethanol incentive program, income is based on grain
usage for fuel alcohol production measured in each quarter. In the case of the
USDA grant, income is recognized as costs are incurred or, in connection with
capital projects, as those projects are depreciated.
ADVERTISING. Advertising costs are expensed as incurred. These costs totaled
$810,000, $527,000 and $660,000 for June 30, 2002, 2001 and 2000, respectively.
RESEARCH AND DEVELOPMENT. Research and development costs are expensed as
incurred. These costs totaled approximately $1.8 million, $1.1 million and $1.3
million for June 30, 2002, 2001 and 2000, respectively.
NOTE 2: INVENTORIES
Inventories consist of the following:
June 30, 2002 2001
- ------------------------------------------
(in thousands)
Alcohol $ 2,816 $ 4,216
Unprocessed grain 7,861 5,745
Operating supplies 4,747 4,486
Wheat-based ingredients 4,989 3,393
By-products and other 342 390
- -------------------------------------------
$20,755 $18,230
===========================================
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, 2002 2001
- ---------------------------------------------------
(in thousands)
Land, buildings
and improvements $ 22,422 $ 20,553
Transportation equipment 1,183 1,155
Machinery and equipment 223,475 219,822
Construction in progress 11,421 3,775
- ---------------------------------------------------
258,501 245,305
Less accumulated depreciation 167,486 153,181
- ---------------------------------------------------
$ 91,015 $ 92,124
===================================================
NOTE 4: ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, 2002 2001
- --------------------------------------------------
(in thousands)
Excise taxes $ 82 $ 337
Employee benefit plans (Note 10) 1,543 1,795
Salaries and wages 727 704
Property taxes 805 596
Insurance 5 20
Interest 443 528
Other expenses 140 28
- --------------------------------------------------
$3,745 $4,008
==================================================
NOTE 5: LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 2002 2001
- -------------------------------------------
(in thousands)
Senior notes payable $15,908 $18,181
Industrial revenue bond 5,726
Lines of credit 8,512
- -------------------------------------------
21,634 26,693
Less current maturities 3,201 4,273
Long-term portion $18,433 $22,420
===========================================
34
The unsecured senior notes are payable in annual installments of $2,273,000 from
2002 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.
Industrial development revenue bonds were issued by The Unified Government of
Wyandotte County, Kansas City, Kansas; principal payments to bondholder of
$77,381 plus interest at 5.23% are due monthly. The bonds are secured by a
security interest in the project as defined in the lease agreement.
At June 30, 2002, the Company had a $10 million unsecured revolving line of
credit expiring on November 30, 2003, with interest at 1% below prime on which
there were no borrowings at June 30, 2002.
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 a debt service coverage ratio of 1.5 to 1.
Aggregate annual maturities of long-term debt at June 30, 2002 are as follows:
(in thousands)
2003 $ 3,201
2004 3,201
2005 3,201
2006 3,201
2007 3,201
Thereafter 5,629
- -----------------------------------------
$21,634
=========================================
NOTE 6: INCOME TAXES
The provision (credit) for income taxes is comprised of the following:
June 30, 2002 2001 2000
- ---------------------------------------------------------
(in thousands)
Income taxes currently payable $2,129 $ 574 $1,197
Income taxes deferred 1,980 1,163 1,995
- ----------------------------------------------------------
$4,109 $1,737 $3,192
==========================================================
The tax effects of temporary differences related to deferred taxes shown on the
consolidated balance sheets are as follows:
June 30, 2002 2001
- -----------------------------------------------------------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 148 $ 149
Post-retirement liability 2,309 2,353
Insurance accruals 163 226
State operating loss carryforwards 302 744
Alternative minimum tax 956 2,411
Other 370 486
- ------------------------------------------------------------
4,248 6,369
- ------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (13,223) (14,130)
Deferred gain on involuntary
conversion (235) (247)
Deferred income from federal grant (827) (315)
Futures contracts (113)
Other (153)
- -----------------------------------------------------------
(14,551) (14,692)
- -----------------------------------------------------------
Net deferred tax liability $ (10,303) $ (8,323)
===========================================================
The above net deferred tax liability is presented on the consolidated balance
sheets as follows:
June 30, 2002 2001
- -----------------------------------------------------------
(in thousands)
Deferred tax asset - current $ 284 $ 2,451
Deferred tax liability - long-term (10,587) (10,774)
- -----------------------------------------------------------
Net deferred tax liability $(10,303) $ (8,323)
===========================================================
No valuation allowance has been recorded at June 30, 2002 or 2001.
35
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 income is shown below:
June 30, 2002 2001 2000
- --------------------------------------------------
(in thousands)
"Expected" provision
(credit) at federal
statutory rate (34%) $3,525 $1,495 $2,748
Increases (decreases)
resulting from:
Effect of state
income taxes 442 139 176
Other 142 103 268
- --------------------------------------------------
Provision (credit) for
income taxes $4,109 $1,737 $3,192
==================================================
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:
June 30, 2002 2001 2000
- ---------------------------------------------------------
(in thousands)
CCC value-added program $ 4,981 $ 1,329
Truck operations (146) (79) (53)
Warehousing and
storage operations (25) (10) (35)
Miscellaneous 55 86 127
- ---------------------------------------------------------
$ 4,865 $ 1,326 $ 39
=========================================================
NOTE 9: ENERGY COMMITMENT
During fiscal 1994, 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 $119,000, with a declining fixed
charge for purchases in excess of the minimum usage. Electricity purchases will
occur at fixed rates through April 30, 2003. 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 $426,000, $409,000 and $880,000 for
the years ended June 30, 2002, 2001 and 2000, 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 $789,000,
$740,000 and $392,000 for the years ended June 30, 2002, 2001 and 2000,
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, 2002 and 2001 was as follows:
June 30, 2002 2001
- ---------------------------------------------------------------------
(in thousands)
Accumulated post-retirement benefit obligations:
Retirees $ 2,640 $ 3,044
Active plan participants 3,302 3,207
- ----------------------------------------------------------------------
Unfunded accumulated obligation 5,942 6,251
Unrecognized actuarial gain (loss) (20) (217)
- ----------------------------------------------------------------------
Accrued post-retirement benefit cost $ 5,922 $ 6,034
======================================================================
36
Net post-retirement benefit cost included the following components:
June 30, 2002 2001 2000
- ---------------------------------------------------
(in thousands)
Service cost $ 212 $ 177 $ 138
Interest cost 389 407 355
(Gain) loss amortization (15) (16)
- ---------------------------------------------------
$ 586 $ 568 $ 493
===================================================
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 8.50%
(compared to 8.75% assumed for 2001) reducing to 7.50% over four years and 6.0%
over 10 years. A one percentage point increase in the assumed health care cost
trend rate would have increased the accumulated benefit obligation by $420,000
at June 30, 2002, and the service and interest cost by $60,000 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 2002,
2001 and 2000 net income and earnings per share would have been reduced to the
following pro forma amounts:
June 30, 2002 2001 2000
- ---------------------------------------------------------------
Net Income (loss):
As Reported $ 6,259 $ 2,660 $ 4,890
Pro Forma $ 5,450 $ 1,979 $ 4,206
Basic Earnings Per Share:
As Reported $ .77 $ .32 $ .54
Pro Forma $ .67 $ .24 $ .46
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, 2002, the Company
has granted incentive stock options to purchase 489,125 shares. The options
become exercisable in yearly increments through June, 2005. 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,
2002, the Company had granted options to purchase 40,000 shares, all of which
were exercisable as of June 30, 2002.
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, 2002, the Company has granted incentive stock options on 276,435 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.
37
A summary of the status of the Company's three stock option plans at June 30,
2002, 2001 and 2000 and changes during the years then ended is presented below:
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------
Outstanding Beginning of Year 793,820 $11.65 729,360 $12.30 544,860 $13.74
Granted 128,680 12.39 133,460 9.33 184,500 8.03
Cancelled (69,000) 15.25 (69,000) 14.00
Exercised (47,940) 10.29
- ------------------------------------------------------------------------------------------------------------
Outstanding End of Year 805,560 $11.54 793,820 $11.65 729,360 $12.30
============================================================================================================
These are comprised as follows:
Remaining
Contractual Shares Exercisable
Shares Exercise Price Lives (Years) at June 30, 2002
- -----------------------------------------------------------------------------
1996 Plan
21,000 14.00 3.50 21,000
17,500 15.25 4.50 17,500
69,000 13.75 5.50 69,000
88,625 12.50 6.50 66,469
80,000 8.00 7.50 40,000
34,000 9.31 8.50 8,500
69,000 9.31 9.00 17,250
41,000 11.90 9.50
69,000 12.89 10.00
Directors' Plan
7,000 16.25 4.25 7,000
7,000 14.25 5.25 7,000
7,000 11.75 6.25 7,000
6,000 9.00 7.25 6,000
6,000 9.63 8.25 6,000
7,000 11.15 9.25 7,000
Salaried Plan
169,785 13.50 5.67 169,785
74,500 8.00 7.50 37,250
20,470 9.31 8.50 5,118
11,680 11.90 9.50
- -----------------------------------------------------------------------------
805,560 491,872
=============================================================================
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, 2002: Risk-free interest rate
of 4.79; expected dividend yield of 0%; expected volatility of 36%, expected
life of ten years.
NOTE 11: OPERATING LEASES
The Company has several noncancelable operating leases for railcars and other
equipment, which expire from December, 2002 through May, 2007. 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, 2002 are as follows:
(in thousands)
2003 $ 1,187
2004 607
2005 439
2006 174
2007 39
-------------------------------------
Future minimum lease payments $2,446
=====================================
38
Rental expense for all operating leases with terms longer than one month totaled
$1,880,543, $2,385,777 and $2,458,096 for the years ended June 30, 2002, 2001
and 2000, 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:
o 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.
o 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
$5,105 is included in the accompanying 2002 financial statements. Claims
payments based on actual claims ultimately filed could differ materially
from these estimates.
o During the year ended June 30, 2002, the Company had sales to two customers
accounting for approximately 26% of consolidated sales. In 2001 and 2000,
the Company had sales to one customer accounting for 9% and 13%,
respectively.
NOTE 13: OPERATING SEGMENTS
The Company is a fully integrated producer of wheat-based products and
distillery products. The operations are classified into two reportable segments:
wheat-based products and distillery products. Wheat-based products consist of
specialty ingredients, including specialty, or value-added, wheat proteins and
starches, commodity ingredients, including vital wheat gluten and commodity
wheat starch, and mill feeds. Distillery products consist of food grade alcohol,
including beverage alcohol and industrial alcohol, fuel grade alcohol, and
distillers feed and carbon dioxide, which are by-products of the Company's
distillery operations.
The operating profit for each segment is based on net sales less identifiable
operating expenses. Interest expense, investment income and other general
miscellaneous expenses have been excluded from segment operations and classified
as Corporate. Receivables, inventories and equipment have been identified with
the segments to which they relate. All other assets are considered as Corporate.
Segment Information
June 30, 2002 2001 2000
- -----------------------------------------------------------
Sales to Customers
Wheat-based products $ 66,232 $ 79,703 $ 102,857
Distillery products 148,296 149,538 129,023
- -----------------------------------------------------------
$ 214,528 $ 229,241 $ 231,880
===========================================================
Depreciation
Wheat-based products $ 5,002 $ 4,620 $ 4,435
Distillery products 8,286 8,076 8,514
Corporate 1,020 931 566
- -----------------------------------------------------------
$ 14,308 $ 13,627 $ 13,515
===========================================================
Income before
Income Taxes
Wheat-based products $ 4,562 $ 2,089 $ 16,058
Distillery products 7,824 3,257 (6,746)
Corporate (2,018) (949) (1,230)
- -----------------------------------------------------------
$ 10,368 $ 4,397 $ 8,082
===========================================================
Identifiable Assets
Wheat-based products $ 49,812 $ 46,635 $ 52,643
Distillery products 57,813 71,184 74,020
Corporate 58,593 56,631 29,116
- -----------------------------------------------------------
$ 166,218 $ 174,450 $ 155,779
===========================================================
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
39
the fair values shown below represent values at which the respective financial
instruments could be sold individually or in the aggregate.
June 30, 2002 2001
- ----------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------
Financial assets:
Cash and cash
equivalents $28,736 $28,736 $33,454 $33,454
Accounts
receivable 24,071 24,071 26,109 26,109
Unrealized gains
on futures contracts 598 598 306 306
Financial liabilities:
Long-term debt 21,634 22,734 26,693 25,374
Unrealized losses
on futures contracts 310 310 291 291
================================================================
NOTE 15: ADDITIONAL CASH FLOWS INFORMATION
Years Ended June 30, 2002 2001 2000
- ------------------------------------------------------------
(in thousands)
Investing and Non-cash
Financing Activities:
Purchase of property and
equipment in accounts payable $ 227 $ 343 $ 255
Additional Cash Payment
Information:
Interest paid $1,535 $1,388 $1,542
Income taxes paid 2,500 1,825 704
============================================================
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.
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 allocated in July, 2002. 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 recognized in income as those costs are incurred. Funds
allocated based on capital expenditures will be recognized in income as the
capital projects are depreciated.
NOTE 18: FUTURE CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board (FASB) has issued four new accounting
pronouncements that will become effective in the fiscal year commencing July 1,
2002.
In June 2001, the FASB issued SFAS 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. SFAS
No. 143, "Accounting for Asset Retirement Obligations," was issued in August,
2001 and deals with the recognition and remeasurement of obligations associated
with the retirement of tangible long-lived assets. SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," was issued in October, 2001
and applies to all long-lived assets, other than goodwill, and discontinued
operations and develops one accounting model for long-lived assets that are to
be disposed of by sale. The adoption of these statements is not expected to have
a material impact on the Company's financial statements.
40