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, 1995 - 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, 1996.
INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Independent Accountants' Review Report............ 2 Condensed Consolidated Balance Sheets as of December 31, 1995 and June 30, 1995............. 3 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended December 31, 1995 and 1994........................................ 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1995 and 1994.. 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.................. 13
{LOGO} Independent Accountants' Review Report Baird, Kurtz & Dobson 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, Certified 1995, and the related condensed consolidated statements Public of income for the three month and six month periods ended Accountants December 31, 1995 and 1994, and the related condensed consolidated statements of cash flows for the six month periods ended December 31, 1995 and 1994. 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, 1995, 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 4, 1995, 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, 1995, 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 25, 1996 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, 1995 1995 ----------- -------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 3,011 $ 460 Receivables 23,680 21,550 Notes receivable 919 Inventories 15,737 14,690 Prepaid expenses 871 560 Deferred income taxes 875 875 Income taxes receivable 1,808 2,338 ------ ------ Total Current Assets 45,982 41,392 ------ ------ PROPERTY AND EQUIPMENT, At cost 208,894 206,336 Less accumulated depreciation 78,000 71,424 ------ ------ 130,894 134,912 ------- ------- OTHER ASSETS 433 445 ------- ------- $177,309 $176,749 ======== ======== 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, 1995 1995 ------------ -------- (Unaudited) CURRENT LIABILITIES Accounts payable $ 10,465 $ 7,807 Accrued expenses 4,398 6,630 ---------- --------- Total Current Liabilities 14,863 14,437 ---------- --------- LONG-TERM DEBT 40,933 38,908 ---------- --------- POST-RETIREMENT BENEFITS 5,740 5,449 ---------- --------- DEFERRED INCOME TAXES 5,327 5,327 ---------- --------- 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 6,715 6,715 9,765,172 shares Additional paid-in capital 2,485 2,485 Retained earnings 101,242 103,424 -------- -------- 110,446 112,628 -------- -------- $177,309 $176,749 ======== ======== 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, 1995 AND 1994 (Unaudited) Three Months Six Months --------------- -------------- 1995 1994 1995 1994 ------ ------ ------ ------ (in thousands, except per share amounts) NET SALES $55,751 $44,488 $102,911 $90,472 COST OF SALES 52,132 37,754 100,229 76,088 -------- -------- --------- -------- GROSS PROFIT 3,619 6,734 2,682 14,384 SELLING, GENERAL AND ADMINIS- TRATIVE EXPENSES 2,377 2,897 4,840 6,326 --------- --------- --------- -------- 1,242 3,837 (2,158) 8,058 OTHER OPERATING INCOME 54 9 53 13 -------- --------- --------- -------- INCOME (LOSS) FROM OPERATIONS 1,296 3,846 (2,105) 8,071 OTHER INCOME (LOSS) Interest (797) (15) (1,492) (15) Other (180) (72) (9) 335 --------- --------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES 319 3,759 (3,606) 8,391 PROVISION (CREDIT) FOR INCOME TAXES 124 1,522 (1,424) 3,398 --------- -------- --------- ------- NET INCOME (LOSS) $ 195 $ 2,237 $ (2,182) $ 4,993 ========= ======== ========= ======== EARNINGS (LOSS) PER COMMON SHARE $.02 $.23 $(.22) $.51 ==== ==== ====== ==== See Accompanying Note to Condensed Consolidated Financial Statements - 6 -
MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994 (Unaudited) 1995 1994 -------- --------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (2,182) $ 4,993 Items not requiring (providing) cash: Depreciation 6,677 3,527 Gain on sale of assets (30) (248) Changes in: Accounts receivable (2,130) (1,999) Inventories (1,047) (390) Prepaid expenses and other assets (299) (167) Disbursements in excess of demand deposit cash 3,553 Accounts payable 4,054 (163) Accrued expenses (720) (1,809) Income taxes payable 530 (2,001) -------- -------- Net cash provided by operating activities 4,853 5,296 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (4,093) (21,824) Purchase of short-term investments 14,531 Proceeds from sale of equipment 68 264 Payment received on note for sale of plant 919 343 -------- --------- Net cash used in investing activities (3,106) (6,686) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 6,000 Principal payments on long-term debt (3,975) Dividends paid (1,221) (2,442) -------- -------- Net cash provided by (used in) financing activities 804 (2,442) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,551 (3,832) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 460 3,832 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,011 $ 0 ======== ========== See Accompanying Note to Condensed Consolidated Financial Statements - 6 -
MIDWEST GRAIN PRODUCTS, INC. NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1995 (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, 1995, and the condensed consolidated results of its operations and its cash flows for the periods ended December 31, 1995 and 1994, 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, 1995 RESULTS OF OPERATIONS General While the Company's earnings in the second quarter of fiscal 1996 decreased compared to the same period a year ago, they represent a substantial improvement over the current year's first quarter loss. The improvement was largely the result of an intense cash management program to reduce costs and improve cash flow, including reductions in management and administrative compensation and benefits; strategies to maximize operating results; and increased sales of premium wheat starch, alcohol products and alcohol by-products. The decline in earnings compared to the prior year's second quarter was due primarily to unusually high raw material costs for grain in the face of lower selling prices for wheat gluten and low prices for fuel alcohol. Fuel alcohol prices remained flat due to increased capacities throughout the industry and lower gasoline prices. Wheat gluten prices not only failed to adjust to the rising grain costs, as is normally the case, but actually declined compared to a year ago due to significantly increased gluten imports from the European Union. Profits from their highly subsidized and protected wheat starch business have allowed European producers to dump their surpluses of gluten, a co-product, in the United States at prices below U.S. production costs. 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. A measure that should help rectify this problem has been included in a grains agreement being negotiated between the U.S. and E.U. The agreement is expected to be fully ratified during the third quarter of fiscal 1996. It states that "If the market share of European Community origin wheat gluten exports into the Untied States increases in comparison to their average 1990-1992 market share, the European Commission and the United States government shall consult with a view to finding a mutually acceptable solution." Until the intensity of competitive conditions subside, pursuant to the grains agreement or otherwise, and wheat costs substantially decrease, the Company does not anticipate utilizing the 40% increase in gluten production capacity that was completed at its Pekin, Illinois plant in the latter part of the first quarter. As a result of the Company's recent distillery expansion in Pekin, its unit sales of alcohol products in the second quarter rose significantly above the prior year's second quarter amount. Increases occurred in unit sales of both food grade alcohol, which is sold for beverage, industrial and commercial applications, and fuel grade alcohol, which is sold as an octane additive and oxygenate commonly known as ethanol. Demand in the food grade markets remains strong. Therefore, the Company plans to continue to maximize production in this category, as market prices for fuel grade alcohol remain depressed in spite of higher grain costs. The Company's unit sales of wheat starch in the second quarter increased substantially above the prior year's second quarter. The increase resulted from - 8 -
MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1995 higher volumes of unmodified, modified and specialty wheat starches, which was made possible by a 70% increase in the Company's total starch production capacity. Completion of the additional capacity occurred this past July in Pekin and greatly improves the Company's ability to meet current and future increases in demand for wheat starch. While the Company expects higher raw material costs for grain and intense foreign competition to continue having a negative impact on results during much of fiscal 1996, it believes it is in an excellent position to realize significant growth with a return to more favorable market conditions and lower grain prices. Sales Net sales for the second quarter of fiscal 1996 increased by approximately $11.3 million above sales in the second quarter of fiscal 1995. The increase was principally due to a higher sales of premium wheat starch, and significant increases in sales of alcohol products and alcohol by-products, the latter consisting mainly of distillers feeds. The rise in wheat starch sales resulted from strengthened market demand and the Company's ability to meet this demand with its increased production capacity. A 56% increase in total alcohol sales resulted from strengthened demand for food grade beverage and industrial alcohol and higher sales of fuel grade alcohol. Sales of distillers feed climbed 54% compared to a year ago. These increases were partially offset by a 23% decrease in sales of wheat gluten due to intense competitive pressures from European gluten producers. Net sales for the first six months of fiscal 1996 increased by approximately $12.4 million. The vast majority of this increase occurred in the second quarter for the reasons cited above. Changes in selling prices of the Company's vital wheat gluten normally 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. In the first and second quarters of fiscal 1996, grain costs increased to exceptionally high levels in the face of competition from foreign exporters of vital wheat gluten and a relatively flat market for fuel grade alcohol. The combination of these factors significantly restricted the ability of the Company to adjust the price of its gluten and fuel grade alcohol to compensate for the high grain costs in the first six months of fiscal 1996. - 9 -
MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1995 Cost of Sales The cost of sales in the second quarter of fiscal 1996 increased by approximately $14.4 million above the costs of sales in the second quarter of fiscal 1995. The principal cause was a $10.2 million increase in raw material costs for grain. Other manufacturing cost increases principally included higher operating costs associated with increased energy requirements and depreciation resulting from the Company's expanded production facilities at its Pekin, Illinois plant. These increases were partially offset by lower maintenance and repair costs, which returned to more normal levels following the completion of the expansion project in this year's first quarter. The cost of sales for the first six months of fiscal 1996 increased by approximately $24 million over cost of sales for the first six months of fiscal 1995. This was due largely to an increase of approximately $20.8 million in raw material costs. Other factors included the increased operating costs as experienced in the second quarter partially offset by decreased repair and maintenance costs. Selling, General and Administrative Expenses Selling, general and administrative expenses in the second quarter of fiscal 1996 were down approximately $520,000 compared to the same period the prior year. This principally was due to a decrease of almost $457,000 resulting from reductions in compensation, and accruals for the Company's management and employee incentive programs. These and other reductions helped to more than offset increases which were incurred in a minor segment of the expense categories. Selling, general and administrative expenses for the first six months of fiscal 1996 decreased by approximately $1.5 million, largely as the result of compensation and benefit reductions. Other Expense Interest expense increased substantially as the capital expansion at the Pekin plant came on line during the second half of fiscal 1995. Prior to that time, the interest incurred was primarily capitalized as a part of that expansion. 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 $195,000 in the second quarter of fiscal 1996 compared to net income of $2,237,000 in the second quarter of fiscal 1995. A first quarter net loss of $2,377,000 more than offset the first quarter income, resulting in a net loss of $2,182,000 for the first six months of fiscal 1996. For the first six months of fiscal 1995, the Company had net income of $4,993,000. - 10 -
MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1995 LIQUIDITY AND CAPITAL RESOURCES The following table is presented as a measure of the Company's liquidity and financial condition: December 31, June 30, 1995 1995 ----------- -------- (in thousands) Cash and cash equivalents $ 3,011 $ 460 Note payable and long-term debt 40,933 38,908 Working capital 31,119 26,955 The cost management program implemented by the Company at the end of the first quarter bore fruit during the second quarter, resulting in a positive cash flow. Cash provided by operations and increased borrowings on long-term debt improved working capital. Increased inventory requirements caused by a high level of fuel grade alcohol to be sold over the remaining winter months and the escalation of grain costs continued to impact cash flow. Due to the current downturn in operations and cash flow needs, dividends for the first and second quarters were suspended. At December 31, 1995, the Company has only $1.2 million to spend on capital improvement projects, primarily relating to improvements and replacements of existing equipment. The Company had approximately $18.6 million available under existing lines of credit at December 31, 1995. Management believes the available lines of credit, combined with existing working capital and working capital to be generated from future operations, will allow the Company to complete its capital improvement projects and meet its expanded working capital needs. -11-
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4(a) Copy of Consent and Waiver Agreement between Principal Mutual Life Insurance Company and the Company dated as of January 20, 1996. 4(b) Copy of Consent and Waiver Agreement between Commerce Bank of Kansas City, N.A., and the company dated as of February 2, 1996. 11(a) Copy of Midwest Grain Products, Inc. Stock Incentive Plan of 1996. 11(b) Copy of Midwest Grain Products, Inc. 1996 Stock Option Plan for Outside Directors. (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, 1995 (without financial statements). (27) Financial Data Schedule for the six months ended December 31, 1995. (b) Reports on Form 8-K The Company has filed no reports on Form 8-K during the quarter ended December 31, 1995. 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. February 14, 1996 S/Ladd M. Seaberg _______________________________________ By____________________________ Date Ladd M. Seaberg President and Chief Executive Officer February 14, 1996 s/Robert G. Booe _______________________________________ By_____________________________ Date Robert G. Booe, Vice President and Chief Financial Officer - 12 -