SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1994 - Commission File No. 0-17196 MIDWEST GRAIN PRODUCTS, INC. (Exact Name of Registrant as Specified in Its Charter) KANSAS 48-0531200 (State or Other Jurisdiction of IRS Employer Incorporation or Organization) Identification No. 1300 Main Street, Atchison, Kansas 66002 (Address of Principal Executive Offices and Zip Code) (913) 367-1480 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to the filing requirements for at least the past 90 days. [X] YES [ ] NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value 9,765,172 shares outstanding as of February 1, 1995. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Independent Accountants' Review Report 2 Condensed Consolidated Balance Sheets as of December 31, 1994 and June 30, 1994 3 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended December 31, 1994 and 1993 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1994 and 1993 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 [Baird, Kurtz & Dobson LOGO] Baird, Kurtz & Dobson Certified Public Accountants Independent Accountants' Review Report Board of Directors and Stockholders Midwest Grain Products, Inc. Atchison, Kansas 66002 We have reviewed the condensed consolidated balance sheet of MIDWEST GRAIN PRODUCTS, INC. and subsidiaries as of December 31, 1994, and the related condensed consolidated statements of income for the three month and six month periods ended December 31, 1994 and 1993, and the related condensed consolidated statements of cash flows for the six month periods ended December 31, 1994 and 1993. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of June 30, 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and, in our report dated August 11, 1994, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1994, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. S/Baird, Kurtz & Dobson BAIRD, KURTZ & DOBSON Kansas City, Missouri January 26, 1995 City Center Square, Suite 2700, 1100 Main, 816 221-6300 Kansas City, Missouri 64105 FAX 816 221-6380 With Offices in: Arkansas, Colorado, Kansas, Kentucky, Missouri, Nebraska, Oklahoma Member of Moores Rowland International -2- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) ASSETS December 31, June 30, 1994 1994 ------------- -------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ $ 3,832 Short-term investments 339 339 Receivables 22,456 20,457 Notes receivable 814 814 Inventories 13,619 13,229 Prepaid expenses 743 576 Refundable income taxes 769 Deferred income taxes 876 876 ------- ------- Total Current Assets 39,616 40,123 ------- ------- INVESTMENTS 14,504 ------- ------- LONG-TERM RECEIVABLES 591 961 ------- ------- PROPERTY AND EQUIPMENT, At cost 200,498 182,446 Less accumulated depreciation 72,318 69,888 ------- ------- 128,180 112,558 ------- ------- $168,387 $168,146 ======== ======== See Accompanying Note to Condensed Consolidated Financial Statements -3- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (In Thousands) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30, 1994 1994 ------------- -------- (Unaudited) CURRENT LIABILITIES Disbursements in excess of demand deposit cash $ 3,553 $ Accounts payable 5,729 8,551 Accrued expenses 6,077 8,189 Income taxes payable 1,232 -------- -------- Total Current Liabilities 15,359 17,972 -------- -------- LONG-TERM DEBT 25,000 25,000 -------- -------- POST-RETIREMENT BENEFITS 5,348 5,045 -------- -------- DEFERRED INCOME TAXES 5,956 5,956 -------- -------- STOCKHOLDERS' EQUITY Capital stock Preferred, 5% noncumulative, $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 107,520 104,969 -------- -------- 116,724 114,173 -------- -------- $168,387 $168,146 ======== ======== See Accompanying Note to Condensed Consolidated Financial Statements -4- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1994 AND 1993 (Unaudited) Three Months Six Months ------------------ ------------------ 1994 1993 1994 1993 ------ ------ ------- ------- (in thousands, except per share amounts) NET SALES $44,488 $45,286 $90,472 $84,448 COST OF SALES 37,754 37,201 76,088 71,786 ------- ------- ------- ------- GROSS PROFIT 6,734 8,085 14,384 12,662 SELLING, GENERAL AND ADMINIS- TRATIVE EXPENSES 2,897 2,670 6,326 5,501 ------- ------- ------- ------- 3,837 5,415 8,058 7,161 OTHER OPERATING INCOME (LOSS) 9 (122) 13 (228) ------- ------- ------- ------- INCOME FROM OPERATIONS 3,846 5,293 8,071 6,933 OTHER INCOME (LOSS) (87) (188) 320 (80) ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 3,759 5,105 8,391 6,853 PROVISION FOR INCOME TAXES 1,522 1,918 3,398 2,573 ------- ------- ------- ------- NET INCOME $ 2,237 $ 3,187 $ 4,993 $ 4,280 ======= ======= ======= ======= EARNINGS PER COMMON SHARE $.23 $.33 $.51 $.44 ==== ==== ==== ==== See Accompanying Note to Condensed Consolidated Financial Statements -5- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1994 AND 1993 (Unaudited) 1994 1993 -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,993 $ 4,280 Items not requiring (providing) cash: Depreciation 3,527 3,083 Gain on sale of assets (248) (29) Deferred income taxes (79) Changes in: Accounts receivable (1,999) (2,244) Inventories (390) 2,273 Prepaid expenses (167) (149) Disbursements in excess of demand deposit cash 3,553 Accounts payable (163) 362 Accrued expenses (1,809) (881) Income taxes payable (2,001) 29 ------- -------- Net cash provided by operating activities 5,296 6,645 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (21,824) (22,995) Purchase (sale) of short-term investments 14,531 (21,585) Proceeds from sale of equipment 264 47 Payment received on note for sale of plant 343 4 ------- ------- Net cash used in investing activities (6,686) (44,529) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 25,000 Dividends paid (2,442) (2,442) ------- -------- Net cash provided by (used in) financing activities (2,442) 22,558 ------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (3,832) (15,326) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,832 20,074 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 0 $ 4,748 ======= ======== See Accompanying Note to Condensed Consolidated Financial Statements -6- MIDWEST GRAIN PRODUCTS, INC. NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1994 (Unaudited) NOTE 1: GENERAL In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated financial position as of December 31, 1994, and the condensed consolidated results of its operations and its cash flows for the periods ended December 31, 1994 and 1993, and are of a normal recurring nature. -7- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1994 RESULTS OF OPERATIONS General - - - ------- Results of sales and earnings for the second quarter of fiscal 1995 decreased compared to these same results for the second quarter of fiscal 1994. Lower unit sales of vital wheat gluten combined with reduced efficiencies associated with the start-up of new distillery equipment at the Company's Pekin, Illinois plant were principal causes for the decline. The drop in wheat gluten volume was due to a severe tightening of marketing opportunities brought on by a barrage of gluten imports from Europe. Profits from their highly subsidized and protected wheat starch business allow European producers to easily place their gluten surpluses in the United States market. Low U.S. tariff rates on wheat gluten provide little deterrence to this practice, while high tariffs in Europe effectively prohibit non-European Union member countries from competing in the wheat gluten and wheat starch markets there. The Company's competitive abilities were further constricted in the second quarter by higher per bushel costs for wheat than were experienced during the same quarter the prior year. Although the Company, with the assistance of certain U.S. legislators and trade officials, is actively seeking measures that would create a more level playing field, gluten imports from Europe continue to come into this country at a record pace. The Company's unit sales of alcohol products in the second quarter remained approximately even with the prior year's second quarter amount. An increase in unit sales of fuel grade alcohol, which is sold as an octane additive commonly known as ethanol, offset a decrease in unit sales of food grade alcohol, which is sold for beverage, industrial and commercial applications. The reduction in food grade alcohol volume resulted from a change in the Company's alcohol production mix, which was required to satisfy heightened customer needs in the fuel market. Demand in both the food grade and fuel grade markets has remained strong, however. With completion of the distillery expansion in Pekin, which is designed to double Midwest Grain's total alcohol production capacity, the Company expects to improve its ability to satisfy demand in all of its alcohol markets more effectively. This expansion was scheduled to be on line by January 1995. However, the completion has been delayed until later in the current quarter due to unanticipated mechanical problems with two new distillery feed driers. As a result, the Company anticipates a continuation of lower efficiencies that will adversely affect results in the remaining months of fiscal 1995. -8- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1994 The Company's unit sales of wheat starch in the second quarter surged above the prior year's second quarter level. The increase resulted mainly from higher volumes of modified wheat starches which are sold in a variety of special market niches. A planned 70% increase in wheat starch production capacity, that was originally slated for completion at the Pekin plant toward the end of this year's third quarter, has been tentatively rescheduled for completion in the fourth quarter. The postponement was prompted by the delay in the distillery expansion. A planned 40% increase in total gluten production capacity also has been tentatively moved from the third quarter to the fourth quarter, principally due to weakened unit sales caused by increased foreign competition. While the Company believes unfavorable conditions, namely reduced efficiencies and intense foreign competition, may have significant negative impact on results for the third quarter and for all of fiscal 1995, it expects gradual improvements to occur from its projected higher alcohol capacities, and a continuance of strong demand for its alcohol products and wheat starch. Sales - - - ----- Grain products sales for the second quarter of fiscal 1995 decreased by approximately $798,000 below sales in the second quarter of fiscal 1994. The decrease was principally due to lower sales of vital wheat gluten, which fell by 14% as the result of reduced marketing opportunities caused by a large influx of gluten imports from Europe. A 2.5% increase in sales of alcohol products compared to the prior year's second quarter resulted from a significant jump in fuel alcohol volume. Sales of food grade alcohol for beverage, industrial and commercial application declined as a sizeable percentage of the Company's alcohol production was shifted to the fuel category in response to preestablished customer requirements. Sales of distillers' feeds, a by-product of the alcohol production process, rose almost 4% due to increased volumes resulting from the distillation of larger amounts of alcohol. A continued increase in sales of modified wheat starches pushed total wheat starch sales in the second quarter of 15% above the prior year's second quarter level. The increase in grain products sales for the first six-month period of fiscal 1995, amounting to approximately $6,024,000, was experienced in the first quarter. This mainly resulted from increased volume sales of all of the Company's principal products. The higher volumes were generated by increased demand in each principal product market compared to the first quarter of fiscal 1994, which suffered from the effects of record rain and floods in the Midwest. Changes in selling prices of the Company's vital wheat gluten -9- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1994 generally are due to fluctuations in grain costs and competition. Wheat starch prices traditionally track corn starch prices, with the exception of the Company's specialty modified starches. Fuel alcohol prices traditionally follow the movement of gasoline prices. Prices for food grade alcohol for beverage applications normally follow the movement of corn prices, while prices for food grade alcohol for industrial and commercial applications are normally consistent with prices for industrial alcohol derived from synthetic products such as petroleum. Cost of Sales - - - ------------- The cost of sales in the second quarter of fiscal 1995 rose by approximately $553,000 above cost of sales in the same period of the preceding year. Increased raw material costs for grain, amounting to approximately $.3 million, and increased maintenance and repair costs, amounting to approximately $1.1 million, were offset by volume declines from those realized in the second quarter of fiscal 1994. The higher maintenance and repair costs were mainly due to work associated with the distillery expansion at the Company's Pekin plant and repairs of wheat starch driers at the Atchison plant. Other manufacturing cost increases were principally due to higher energy costs, higher costs for chemicals and additives resulting from increased production of modified wheat starches, and depreciation of buildings and equipment. The cost of sales for the first six months of fiscal 1995 increased by approximately $4.3 million over costs for the first half of fiscal 1994. The vast majority of this increase occurred in the first quarter and was primarily due to volume increases as well as the increased costs referred to above in the second quarter. Selling, General and Administrative Expenses - - - -------------------------------------------- Selling, general and administrative expenses in the second quarter of fiscal 1995 were up approximately $227,000 compared to the same period the prior year. This increase was experienced generally throughout the expense categories with no major contribution to the increase. For the first six months of fiscal 1995, expenses rose by approximately $825,000 above expenses for the first half of fiscal 1994. Of the nearly $600,000 increase that occurred in the first quarter of fiscal 1995, over $200,000 was due to an increase in sales subject to commissions. An additional expense of over $200,000 resulted from an increase in the management bonus program, which is designed to recognize the accomplishment of specific, pre-established Company goals. The remainder of the increase during the first half of the year was experienced generally throughout the expenses categories. -10- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1994 The consolidated effective income tax rate increased as a result of federal and state tax rates. The general effects of inflation were minimal. Net Income - - - ---------- Primarily as a result of the foregoing factors, net income in the second quarter of fiscal 1995 declined to $2,237,000 from $3,187,000 realized in the second quarter of fiscal 1994. Combined with a first quarter increase of $1,663,000, net income for the first six months of fiscal 1995 increased to $4,993,000 from $4,280,000 in the first six months of fiscal 1994. RFG Program - - - ----------- Effective March 18, 1994, the Environmental Protection Agency ("EPA") adopted final rules under the Amended Clean Air Act of 1990 requiring that gasoline sold in certain areas of the Country after 1994 be reformulated to reduce vehicle emissions of toxic and ozone-forming compounds (the "RFG Rule"). Included in that Act and rule are requirements that the reformulated gasoline ("RFG") contain at least 2% oxygen by weight and that emissions of ozone-forming volatile organic compounds ("VOCs") be reduced to certain specified levels. RFG is required to be sold in nine of the smoggiest metropolitan areas in the United States. Although the addition of ethanol to gasoline will enable the gasoline formulation to satisfy the 2% oxygen requirement, its addition is expected to make it more difficult for the formulation to satisfy the VOC requirements during the summer months. This may encourage refiners and blenders to use alternative petroleum-based oxygenates in the RFG program, at least during the summer months. Due, among other things, to the EPA's desire to permit the RFG program to reduce the United States' reliance on nonrenewable fossil fuels and to reduce the emission of greenhouse gasses, effective September 1, 1994, the EPA adopted additional regulations which generally require that "renewable oxygenates" such as ethanol be used in RFG to satisfy 15% of the required oxygen content from December 1, 1994 through December 31, 1995, and 30% for each calendar year thereafter (the "Renewable Oxygenate Rule" or "ROR"). Subsequently, two groups representing the petroleum industry filed suit against the EPA seeking to have the ROR set aside on the grounds that the EPA lacked the -11- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1994 legal authority necessary to issue the Rule. On September 13, 1994, the U.S. Court of Appeals for the District of Columbia Circuit issued an order staying implementation of the Rule in order to permit the parties and other interested parties time to brief and orally argue the issues raised in the suit. Final briefs have been submitted and oral arguments have been scheduled for February 16, 1995. It is uncertain as to when the court will reach a decision following the hearing and whether the stay will ultimately be lifted. The preambles to the RFG Rule and the ROR indicate a belief by the EPA that the RFG Rule will increase demand for ethanol and that the ROR will further increase that demand. Accordingly, the Company believes that the RFG Rule, whether or not the ROR is implemented, will likely increase to some extent the demand for ethanol and that we will continue to have opportunities to market additional fuel alcohol from the distillery expansion currently under construction. In either case, the Company's total ethanol production is expected to be a relatively small part of a very large fuel ethanol market. LIQUIDITY AND CAPITAL RESOURCES The following table is presented as a measure of the Company's liquidity and financial condition: December 31, June 30, 1994 1994 ------------ -------- (in thousands) Cash, cash equivalents and short-term investments $ 339 $ 4,171 Long-term liquid investments 14,504 Long-term debt 25,000 25,000 Working capital 24,257 22,151 While the Company's working capital position improved during the first six months, expenditures for the Pekin plant expansion, which totalled $21.8 million, reduced investments held for this purpose and operating cash balances. Higher receivable balances at December 31, 1994 and increased income tax payments during the first six months also impacted short-term liquidity. As anticipated, the Company did not begin utilizing its available lines of credit until January, 1995. -12- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1994 At December 31, 1994, the Company has amounts remaining to spend under capital improvement projects totalling approximately $14.0 million. As previously discussed, the distillery project at Pekin is now scheduled to be completed during the third quarter. Additionally, the gluten expansion and new wheat starch facilities at Pekin, which will increase gluten and starch capacities by 40% and 70%, respectively, are now scheduled to come on line sometime during the fourth quarter. Capital improvement projects in Atchison include normal improvements and expansions primarily in the gluten and starch processes and expanded storage facilities for gluten and starch. While there were no borrowings at December 31, 1994 on available lines of credit totalling $25 million, the Company began utilizing the lines in January 1995. Midwest Grain Products believes the above borrowings, existing working capital and working capital to be generated from future operations, will allow it to complete its expansion projects and meet expanded working capital needs. -13- PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits (15) Letter from independent public accountants pursuant to paragraph (d) of Rule 10-01 of Regulation S-X (incorporated by reference to Independent Accountants' Review Report at page 2 hereof) (20) Report to stockholders for the six months ended December 31, 1994 (without financial statements). (b) Reports on Form 8-K The Company has filed no reports on Form 8-K during the quarter ended December 31, 1994. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MIDWEST GRAIN PRODUCTS, INC. 2-8-95 By /s/ Ladd M. Seaberg - - - -------------------------------- ------------------------------- Date Ladd M. Seaberg President and Chief Executive Officer 2-8-95 By /s/ Robert G. Booe - - - ------------------------------- ------------------------------- Date Robert G. Booe, Vice President and Chief Financial Officer -14-