-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DMBfOTdlcYK1/ejoq3z1XypLoRZPtvFETNm2/vOIhewIno63ulgqlbMGY5D05250 86Xof3T0RiihmJ968xw8tA== 0000916002-96-000042.txt : 19960927 0000916002-96-000042.hdr.sgml : 19960927 ACCESSION NUMBER: 0000916002-96-000042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDWEST GRAIN PRODUCTS INC CENTRAL INDEX KEY: 0000835011 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 480531200 STATE OF INCORPORATION: KS FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17196 FILM NUMBER: 96634934 BUSINESS ADDRESS: STREET 1: 1300 MAIN ST CITY: ATCHISON STATE: KS ZIP: 66002 BUSINESS PHONE: 9133671480 MAIL ADDRESS: STREET 1: 1300 MAIN STREET CITY: ATCHISON STATE: KS ZIP: 66002 10-K 1 MIDWEST GRAIN PRODUCTS, INC. 1996 FORM 10-K As Filed with the Securities and Exchange Commission on September 26, 1996 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934 For the Fiscal Year Ended June 30, 1996 MIDWEST GRAIN PRODUCTS, INC. 1300 Main Street Box 130 Atchison, Kansas 66002 Telephone: (913) 367-1480 Incorporated in the State of Kansas COMMISSION FILE NO. 0-17196 IRS No. 48-0531200 The Company has no securities registered pursuant to Section 12(b) of the Act. The only class of common stock outstanding consists of Common Stock having no par value, 9,765,172 shares of which were outstanding at June 30, 1996. The Common Stock is registered pursuant to Section 12(g) of the Act. The aggregate market value of the Common Stock of the Company held by non-affiliates, based upon the last sales price of such stock on September 12, 1996, was $102,819,510. The Company 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, and has been subject to such filing requirements for the past 90 days. As indicated by the following check mark, disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K: [X]. The following documents are incorporated herein by reference: (1) Midwest Grain Products, Inc. 1996 Annual Report to Stockholders, pages 10 through 28 [incorporated into Part II and contained in Exhibit 10(c)]. (2) Midwest Grain Products, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on October 10, 1996, dated September 19, 1996 (incorporated into Part III). ================================================================================ MIDWEST GRAIN PRODUCTS, INC. FORM 10-K For the Fiscal Year Ended June 30, 1996 CONTENTS PAGE PART I Item 1. Business.................................................. 4 General Information....................................... 4 Vital Wheat Gluten........................................ 5 Premium Wheat Starch...................................... 6 Alcohol Products.......................................... 7 Flour and Other Mill Products............................. 9 Transportation............................................ 9 Raw Materials............................................. 10 Energy.................................................... 10 Employees................................................. 10 Regulation................................................ 11 Item 2. Properties................................................ 11 Item 3. Legal Proceedings......................................... 11 Item 4. Submission of Matters to a Vote of Security Holders....... 11 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................... 12 Item 6. Selected Financial Data................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 12 Item 8. Financial Statements and Supplementary Data............... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 12 PART III Item 10. Directors and Executive Officers of the Registrant........ 13 Item 11. Executive Compensation.................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 15 Item 13. Certain Relationships and Related Transactions............ 15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................... 16 SIGNATURES............................................................ 18 FINANCIAL STATEMENT SCHEDULES......................................... S-1 Report of Independent Public Accountants on Schedules............... S-2 Schedule VIII. Valuation and Qualifying Accounts................... S-3 EXHIBIT INDEX ........................................................ E-1 ------------------- The calculation of the aggregate market value of the Common Stock of the Company held by non-affiliates is based on the assumption that non-affiliates do not include directors. Such assumption does not constitute an admission by the Company or any director that any director is an affiliate of the Company. 3 PART I Item 1. Business. General Information Midwest Grain Products, Inc. (the Company) is a Kansas corporation headquartered in Atchison, Kansas. It is the successor to a business founded in 1941 by Cloud L. Cray, Sr. The Company is a fully integrated producer of vital wheat gluten, premium wheat starch, and alcohol products. These grain products are processed at plants located in Atchison, Kansas, and Pekin, Illinois. Wheat is purchased directly from local and regional farms and grain elevators and milled into flour. The flour is processed with water to extract vital wheat gluten which is dried into a tan powder and sold in packaged or bulk form. The resulting starch slurry is further processed to extract premium wheat starch which is also dried into a powder and sold in packaged or bulk form. The remaining slurry is mixed with corn 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. As a result of these processing operations, the Company sells approximately 95% (by weight) of grain processed. The table below shows the Company's sales from continuing operations by product group for each of the five years ended June 30, 1996, as well as such sales as a percent of total sales. The table does not reflect the sales of McCormick Distilling Company, a business that was sold as of December 31, 1992. PRODUCT GROUP SALES
Year Ended June 30, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ------------ ------------ -------------- -------------- (thousands of dollars) Amount % Amount % Amount % Amount % Amount % ------ --- ------ --- ------ --- ------ --- ------ --- Vital Wheat Gluten........$ 39,514 20.3 $ 49,957 27.7 $ 70,966 38.2 $ 54,156 33.1 $ 46,941 30.1 Premium wheat starch....... 26,354 13.5 23,403 13.0 21,110 11.3 18,423 11.3 17,578 11.3 Alcohol Products: Food Grade Alcohol Beverage Alcohol...... 39,465 20.3 32,573 18.1 29,536 15.9 27,142 16.6 26,437 17.0 Food Grade Industrial. 32,064 16.5 23,379 13.0 22,585 12.1 17,123 10.5 17,974 11.5 Fuel Grade Alcohol....... 25,347 13.0 28,120 15.6 19,273 10.4 24,468 15.0 21,069 13.6 Alcohol by-products...... 28,449 14.6 19,583 10.9 18,146 9.8 19,288 11.8 17,791 11.4 ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- Total alcohol products............ 125,325 64.4 103,655 57.5 89,540 48.2 88,021 53.9 83,271 53.5 ------- ---- ------- ---- ------ ---- ------ ---- ------ ---- Flour and other mill products................ 3,445 1.8 3,327 1.8 4,352 2.3 2,826 1.7 8,004 5.1 ----- --- ----- --- ----- --- ----- --- ----- --- Net sales ..........$194,638 100.0 $180,252 100.0 $185,968 100.0 $163,426 100.0 $155,794 100.0 ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Although fiscal 1996 sales increased in 1996 by $14.4 million, income from operations declined by $15.0 million to produce a $3.4 million net loss for the year. The loss, which was the first annual loss in the Company's 55 year history, was due primarily to unusually high grain costs in the face of greatly increased 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 alcohol to compensate for the increased grain costs. During fiscal 1995 the Company completed $96.8 million of expansion programs started in 1992 which have more than doubled the Company's 1991 capacity to produce all of its products. Although the Company expects that it will take a number of years to develop profitable markets for all of the new capacity, management believes that the expanded facilities have positioned the Company for profitable growth as conditions in the market place improve. 4 The bulk of the Company's sales are made under informal arrangements direct to large institutional food and beverage processors or distributors with respect to which the Company has longstanding relationships. Under these arrangements products are usually ordered, produced, sold and shipped within 30 days. As a consequence, the Company's backlog of orders at any time is usually less than 10 percent of annual sales. Generally, the Company's sales are not seasonal except for variations affecting alcohol and gluten sales. Fuel alcohol sales increase during the period August through March due to requirements of the Clean Air Act which inhibit the sale of ethanol in certain areas of the country during May 1 through September 15 each year. Certain environmental regulations also favor greater use of ethanol during the winter months of the year. See "Alcohol Products- Fuel Grade Alcohol." Beverage alcohol sales tend to peak in the fall as distributors order stocks for the holiday season, while gluten sales tend to increase during the second half of the fiscal year as demand increases for hot dog buns, hamburger buns, and similar bakery products. For further information, see the Consolidated Financial Statements of the Company and Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations which appear at pages 11 through 17 of the Annual Report. Vital Wheat Gluten Vital wheat gluten is a light tan powder which contains approximately 75% to 80% protein. It is the only commercially available high protein food additive which possesses vitality. The vitality of the Company's vital wheat gluten results from its elastic and cohesive characteristics when added to dough or otherwise reconstituted with water. Vital wheat gluten is added by bakeries and food processors to baked goods such as wheat breads, and to pet foods, cereals, processed meats, fish, and poultry to improve the nutritional content, texture, strength, shape, and volume of the product. The neutral flavor and color of wheat gluten also enhances, but does not change, the flavor and color of food. It has been increasingly used in breads and pet foods. The cohesiveness and elasticity of the gluten enables the dough in wheat and other high protein breads to rise and to support added ingredients such as whole cracked grains, raisins and fibers. This allows the baker to make an array of different breads by varying the gluten content of the dough. Vital wheat gluten is also added to white breads, and hot dog and hamburger buns to improve the hinge strength and cohesiveness of the product. The Company ships its vital wheat gluten throughout the continental United States in bulk and in 50 to 100 pound bags. Approximately 53% of fiscal 1996 gluten sales were made to a distributor for the bakery industry, the Ben C. Williams Bakery Services Company, which in turn distributes vital wheat gluten to independent bakeries. The remainder is sold directly to major food processors and bakeries such as Kellogg Co., Interstate Baking Company, Inc. and H. J. Heinz Co. The Company's principal competitors in the U.S. vital wheat gluten market consist of three other domestic producers and a number of foreign importers. Foreign exporters provide significant competition from time to time due to low U.S. tariffs and export incentives provided by foreign countries to their wheat starch producers. Based on industry data, the Company believes that in terms of fiscal 1996 sales it is the largest producer of vital wheat gluten in the United States. Competition in the vital wheat gluten industry is based primarily upon price, quality, and service. Historically, gluten prices have been affected by grain prices, grain quality, excess foreign capacity and by subsidies provided to certain European exporters by their host governments. The Company's vital wheat gluten processing operations are believed to produce a quality of vital wheat gluten that is equal to or better than that of any other wheat gluten on the market. The Company's location in the center of the United States grain belt, its production capacity and years of operating experience, enable it to provide a consistently high level of cost effective service to customers. 5 The Company's sales of vital wheat gluten decreased by $10.4 million during fiscal 1996 and $21.0 million during fiscal 1995 from the high levels of fiscal 1994, due to reduced marketing opportunities resulting from significantly increased European gluten imports which began during the second half of calendar 1994. The high level of fiscal 1994 Gluten sales resulted from a worldwide shortage of gluten due to poor quality, low protein-yielding wheat following the extremely wet weather in the spring and summer of 1993. The surge of low priced foreign gluten occurred concurrent with significantly rising wheat costs which began in the third quarter in fiscal 1995. Between March, 1995 and the end of June, 1996, the average per bushel cost of wheat rose from $4.10 to $6.53. Because of the flood of low priced foreign gluten, US wheat gluten prices failed to adjust to the rising grain costs with a resulting negative impact on the profitablility of the Company's gluten operations. The substantial increase in European gluten imports are due to sizable increases in European capacity to produce starch and gluten, high subsidies that enable the sale of excess European gluten in the U.S. at low prices and low U.S. tariffs on that gluten. The Company and the United States Wheat Gluten Council have engaged in a number of initiatives to combat the dumping of foreign gluten. Due to these efforts the United States and the European Union ratified an agreement on July 22, 1996, that states: "If the market share of European Community origin wheat gluten exports into the United 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." Consultations pursuant to that agreement have begun, and the Company is hopeful that they will ultimately result in the creation of a more level playing field. However, until the intensity of competitive conditions subside, pursuant to the outcome of consultations or otherwise, and wheat costs substantially decrease, the Company plans to limit the production of gluten to those amounts necessary for the production of other more profitable wheat by products. In addition, the Company has intensified its efforts to develop additional modified vital wheat gluten products that may be marketed in niches that will be less affected by grain costs and foreign competition. During fiscal 1995 the Company substantially completed the construction of new wheat gluten production facilities at the Pekin Illinois plant. The expansion has increased the Company's total gluten capacity by approximately 40%. That project, together with other gluten expansion projects that were completed at the Atchison facilities during 1993 and 1994, have approximately doubled the gluten capacity that was available at June 30, 1991. However, as mentioned above, due to the unusually high gluten imports from Europe, and unusually high grain costs, the Company does not expect to immediately use the increased capacity. Premium Wheat Starch Wheat starch constitutes the carbohydrate-bearing portion of wheat flour. The Company produces a pure white premium wheat starch powder by extracting the starch from the starch slurry substantially free of all impurities and fibers and then by spray, flash or drum drying the starch. Premium wheat starch differs from low grade or B wheat starches which are extracted along with impurities and fibers and are used primarily as a binding agent for industrial applications such as the manufacture of charcoal briquettes. The Company does not produce low grade or B starches since its integrated processing facilities are able to process the remaining slurry after the extraction of premium wheat starch into alcohol, animal feed and carbon dioxide. Premium wheat starch differs from corn starch in its granular structure, color, granular size and name identification. An increasing portion of the Company's premium wheat starch is also chemically altered during processing to produce certain unique modified wheat starches designed for special applications. The Company's premium wheat starches are used primarily as an additive in a variety of food products to affect their appearance, texture, tenderness, taste, palatability, cooking temperature, stability, viscosity, binding and freeze-thaw characteristics. For example, the Company's starches are used to improve the taste and mouth feel of cream puffs, eclairs, puddings, pie fillings, breadings and batters; to improve the size, symmetry and taste of angel food cakes; to alter the viscosity of soups, sauces and gravies; to improve the freeze-thaw stability and shelf life of fruit pies and other frozen foods; to improve moisture retention in microwavable foods; and to add stability and to improve spreadability in frostings, mixes, glazes and sugar coatings. The Company's specialty starches are also sold for a number of industrial and non-food uses, such as an ink bearing coating in carbonless paper. 6 The Company's premium wheat starch is sold nationwide to food processors, such as International Multi-Foods Corp., Pillsbury Company and Keebler Company, to distributors, and for export to countries such as Japan, Mexico and Malaysia which do not have wheat-based economies. The Company believes that it is the largest producer of premium wheat starch in the United States. Although wheat starch enjoys a relatively small portion of the total United States starch market, the market is one which is continuing to grow. Growth in the wheat starch market reflects a growing appreciation for the unique characteristics of wheat starch which provide it with a number of advantages over corn and other starches for certain baking and other end uses. The Company has developed a number of different modified wheat starches and continues to explore the development of additional starch products with the view to increasing sales of higher margin modified starches. Premium wheat starch competes primarily with corn starch, which dominates the United States market. Competition is based upon price, name, color and differing granular and chemical characteristics which affect the food product in which it is used. Premium wheat starch prices usually enjoy a price premium over corn starches and low grade wheat starches. Wheat starch price fluctuations generally track the fluctuations in the corn starch market, except in the case of modified wheat starches. The wheat starch market also usually permits pricing consistent with costs which affect the industry in general, including increased grain costs. The Company's strategy is to market its premium wheat starches in special market niches where the unique characteristics of premium wheat starch or one of the Company's modified wheat starches are better suited to a customers requirements for a specific use. Starch sales increased during fiscal 1996 by approximately $3.0 million, due primarily to higher volumes permitted by increased starch production capacity and increased sales of modified wheat starches. During June, 1995, the Company completed the construction of a new starch production facility at the Pekin plant. Previously that Plant was equipped only to produce gluten, alcohol and alcohol byproducts. The expansion has increased total starch production capacity by 70%. Alcohol Products The Company's Atchison and Pekin plants process corn and milo, mixed with the starch slurry from gluten and starch processing operations, into food grade alcohol, fuel grade alcohol, animal feed and carbon dioxide. Food grade alcohol, or grain neutral spirits, consists of beverage alcohol and industrial food grade alcohol that are distilled to remove all impurities and all but approximately 5% of the water content to yield high quality 190 proof alcohol. Fuel grade alcohol, or "ethanol," is a lower grade of grain alcohol that is distilled to remove all water to yield 200 proof alcohol suitable for blending with gasoline. Food Grade Alcohol Beverage Alcohol. Food grade beverage alcohol consists primarily of grain neutral spirits and gin. Grain neutral spirits is sold in bulk or processed into vodka and gin and sold in bulk quantities at various proof concentrations to bottlers and rectifiers, such as Heublein, Inc. and James B. Beam Distilling Co., which further process the alcohol for sale to consumers under numerous labels. The Company believes that in terms of fiscal 1996 net sales, it is one of the two largest bulk sellers of grain neutral spirits, vodka and gin in the United States. The Company's principal competitors in the beverage alcohol market are Grain Processing Company of Muscatine, Iowa and Archer Daniels Midland of Decatur, Illinois. Competition is based primarily upon price and service, and in the case of gin, formulation. The Company believes that the centralized location of its Illinois and Kansas distilleries and the capacity of its dual production facilities combine to provide the Company with a customer service advantage that is unique within the industry. Food Grade Industrial Alcohol. Food grade alcohol which is not sold as beverage alcohol is marketed as food grade industrial alcohol. Food grade industrial alcohol is sold as an ingredient in foods (e.g., vinegar and food flavorings), personal care products (e.g., hair sprays and deodorants), cleaning solutions, biocides, insecticides, 7 fungicides, pharmaceuticals, and a variety of other products. Although grain alcohol is chemically the same as petroleum-based or synthetic alcohol, certain customers prefer a natural grain-based alcohol. Food grade industrial alcohol is sold in tank truck or rail car quantities direct to a number of industrial processors, such as Integrated Ingredients, a division of Burns Philip Foods, Inc., 7-Up Company, and Lehn & Fink, a producer of Lysol based household cleaners, from both the Atchison and Pekin plants. The Company is a minor competitor in the total United States market for food grade industrial alcohol, which is dominated by petroleum-based or synthetic alcohol. Food grade industrial alcohol prices are normally consistent with prices for synthetic industrial alcohol. Food grade alcohol sales increased by approximately $6.9 million during fiscal 1996 due primarily to volume increases. Those increases were primarily due to increased demand and the availability of increased capacity derived from the distillery expansion at the Pekin plant. Fuel Grade Alcohol Fuel grade alcohol, which is commonly referred to as ethanol, is sold primarily for blending with gasoline to increase the oxygen and octane levels of the gasoline. As an octane enhancer, ethanol can serve as a substitute for lead and petroleum based octane enhancers. As an oxygenate, ethanol permits gasoline to meet certain environmental regulations and laws that regulate air quality by reducing carbon monoxide, hydrocarbon particulate and other toxic emissions generated from the burning of gasoline ("toxics"). Because ethanol is produced from grain, a renewable resource, it also provides a fuel alternative that tends to reduce the country's dependence on foreign oil. Although ethanol can be blended directly with gasoline as an oxygenate to enable it to reduce toxic air emissions, it also increases the volatility of gasoline or its tendency to evaporate and release volatile organic compounds ("VOC's"). This latter characteristic has precluded it from meeting certain clean air act requirements for gasoline that pertain to nine of the smoggiest US metropolitan areas during the summer months (May 1 through September 15). As a consequence, the demand for ethanol increases during the period from August through March of each fiscal year as gasoline blenders acquire stocks for blending with gasoline to be marketed in the period September 16 through April 30. The cost of producing ethanol has historically exceeded the cost of producing gasoline and gasoline additives, such as MTBE, all of which are derived from fossil non-renewable fuels such as petroleum. Accordingly, to encourage the production of ethanol for use in gasoline, the Federal government and various states have enacted tax and other incentives designed to make ethanol competitive with gasoline and gasoline additives. Under the internal revenue code, and until October 1, 1999, gasoline that has been blended in qualifying proportions with ethanol provide sellers of the blend with certain income tax credits and excise tax reductions that amount to up to $0.54 per gallon of ethanol that is mixed with the gasoline. A mix of at least 10% ethanol by volume is required to receive the maximum credit. Although the Federal tax benefits are not directly available to the Company, they allow it to sell its ethanol at prices competitive with less expensive additives and gasoline. From time to time legislation is proposed to eliminate or reduce the tax benefits enjoyed by the ethanol industry, and indirectly by producers of the grain that is converted into ethanol. No assurance can be given that such proposals and complaints will not be successful or that Congress will continue the current subsidies beyond September 30, 1999. The Kansas Qualified Agricultural Ethyl Alcohol Producer Incentive Fund, which expires in 1999, provides incentives for sales of ethanol produced in Kansas to gasoline blenders. Fiscal 1996 payments to the Company out of the fund totaled $297,000 for the ethanol produced by the Company at the Atchison plant during that year. A few other states offer ethanol blending incentives, which, in the aggregate, did not materially add to the Company's ethanol revenues during fiscal 1996. The Fuel grade alcohol market is dominated by Archer Daniels Midland. In recent years the Company and other competitors have significantly increased domestic fuel grade alcohol distillation capacity. During fiscal 1995 the Company more than tripled its fuel grade alcohol production capacity through the expansion of its distillery operations at the Pekin plant. As a consequence, it moved from a very small competitor in the fuel grade market to the smaller 8 of a few other larger second tier ethanol producers. The Company competes with other producers of fuel grade alcohol on the basis of price and delivery service. Fuel alcohol prices traditionally follow the movement of gasoline prices. During 1996 fuel alcohol prices remained flat in the face of rising gasoline prices, in part due to increased industry wide capacity. At the same time the cost of grain escalated to extraordinary levels. The combination of circumstances had a major negative impact on the Company's fuel grade alcohol operations and those of the entire ethanol industry. A number of producers shut down plants or otherwise significantly curtailed ethanol production. The Company's response to the circumstance was to shift as much of its alcohol production as possible into food grade alcohol products where prices were adjusting to increased grain costs and to shut down its Pekin plant for the entire month of June in order to perform extended maintenance. Alcohol By-Products The bulk of fiscal 1996 sales of alcohol by-products consist of distillers feeds. Distillers feeds are the residue of corn, milo and wheat from alcohol processing operations. The residue is dried and sold primarily to processors of animal feeds as a high protein additive. The Company competes with other distillers of alcohol as well as a number of other producers of animal food additives in the sale of distillers feeds and mill feeds. The $8.9 million increase in 1996 sales of alcohol by-products is primarily due to the 1995 expansion of the distillery at the Pekin plant, which approximately doubled the capacity of the Company to produce distillers feeds. The balance of alcohol by-products consists primarily of carbon dioxide. During the production of alcohol, the Company traps carbon dioxide gas that is emitted in the fermentation process. The gas is purchased and liquefied on site by two principal customers, one at the Atchison Plant and one at the Pekin Plant, who own and operate the carbon dioxide processing and storage equipment under long term contracts with the Company. The liquefied gas is resold by these processors to a variety of industrial customers and producers of carbonated beverages. Flour and Other Mill Products The Company owns and operates a flour mill at the Atchison plant. All of the mill's output of flour is used internally for the production of vital wheat gluten and premium wheat starch. In 1993 the Company completed the first of a two-phase expansion of the mill. The second phase of the expansion was completed during the first quarter of fiscal 1995. The entire project increased the mill's total production capacity by approximately 80%. In addition to flour, the wheat milling process generates mill feeds or midds and a small quantity of wheat germ. Midds are sold to processors of animal feeds as a feed additive. Wheat germ is sold primarily for use in vitamin E production. Transportation The Company's output is transported to customers by truck, rail and barge transportation equipment, most of which is provided by common carriers through arrangements made by the Company. The Company leases 250 rail cars which may be dispatched on short notice. Shipment by barge is offered to customers through barge loading facilities on the Missouri and Illinois Rivers. The barge facility on the Illinois River is adjacent to the Pekin plant and owned by the Company. The facility on the Missouri River, which is not company-owned, is approximately one mile from the Atchison plant. Raw Materials The Company's principal raw material is grain, consisting of wheat which is processed into all of the Company's products and corn and milo which are processed into alcohol, animal feed and carbon dioxide. Grain is purchased directly from surrounding farms, primarily at harvest time, and throughout the year from grain elevators. Historically, the cost of grain is subject to substantial fluctuations depending upon a number of factors which affect commodity prices in general, including crop conditions, weather, government programs, and purchases by foreign 9 governments. Although significant variations in grain prices may temporarily affect positively or negatively the results of the Company's operations, the Company has usually, but not always, been able to compensate for such variations through adjustments in prices charged for the Company's grain products. Beginning in fiscal 1995 and continuing through fiscal 1996 wheat, corn and milo prices increased to unusually high levels in the face of intense competition from foreign exporters of vital wheat gluten and relatively flat to depressed markets for fuel grade ethanol. In fiscal 1996, the Company's corn and milo costs averaged 44% more per bushel than those costs in fiscal 1995, and wheat costs in fiscal 1996 averaged 32% more per bushel. While the Company used only 2.3 million more bushels of grain in fiscal 1996, its total combined cost for wheat, corn and milo for fiscal 1996 rose approximately $27 million above grain expenditures in the prior year. The increase in grain prices appears to be primarily due to historically low US stocks of grain reserves caused by weather and increased worldwide demand. The combination of these factors have 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. The Company is responding to these circumstances by shifting as much of its production as is possible to starch and food grade alcohol production, by restricting the production of gluten and fuel grade alcohol and through the implementation of other cost-cutting measures. Historically the Company has not engaged in the purchase of commodity futures to hedge economic risks associated with fluctuating grain and grain products prices. However, due to the significantly increased volumes of grain and grain products that are expected as a result of the expansion of the Company's production facilities and the fact that the markets for an increasing portion of the Company's products are not adjusting to fluctuations in gain costs, the Company began during 1995 to make limited purchases of commodity futures, including wheat, corn and gasoline futures. It expects to increase such hedging activity in the future. Energy Because energy comprises a major cost of operations, the Company seeks to assure the availability of fuels for the Pekin and Atchison plants at competitive prices. All of the natural gas demand for the Atchison plant is transported by a wholly-owned subsidiary which owns a gas pipeline. The subsidiary procures the gas in the open market from various suppliers. The Atchison boilers may also be oil fired. In the past, the Company's Pekin plant generated the bulk of its energy needs from coal and gas fired boilers. However, due to the expansion of the Pekin plant, the Company entered into a long-term arrangement in 1995 with an Illinois utility to satisfy the energy needs of the entire plant with a new gas fired plant. Under the arrangement, the utility constructed at the Pekin plant on ground leased from the Company a gas powered electric and steam generating facility. The utility sells to the Company steam and electricity, generally at fixed rates, using gas procured by the Company. Employees As of June 30, 1996, the Company had 385 employees, 263 of whom are covered by three collective bargaining agreements with two labor unions. On August 31, 1996, the Company successfully negotiated a contract covering 168 employees at the Atchison Plant. A contract covering 93 employees expires at the Pekin plant on October 31, 1996, and the third contract covering 2 employees expires on June 30, 1997. As of June 30, 1995, the Company had 429 employees. The decline in employees resulted primarily from measures taken during fiscal 1996 to reduce the size of the workforce due to adverse economic circumstances affecting the Company's operations. During fiscal 1995, the Company reduced compensation expense for non-union personnel, including managers and executives by over $2.0 million. An additional $1.2 million reduction was implemented in 1996. The reductions include reductions of base salary in 1996 of approximately 8%, major reductions in cash bonuses and ESOP contributions in 1995 and the elimination of all bonus programs and ESOP contributions in 1996. These reductions were implemented in response to the decline in the Company's operating results during the last two fiscal years. 10 The Company considers its relations with its personnel to be good and has not experienced a work stoppage since 1978. Regulation The Company's beverage and industrial alcohol business is subject to regulation by the Bureau of Alcohol, Tobacco and Firearms ("BATF") and the alcoholic beverage agencies in the States of Kansas and Illinois. Such regulation covers virtually every aspect of the Company's alcohol operations, including production facilities, marketing, pricing, labeling, packaging, and advertising. Food products are also subject to regulation by the Food and Drug Administration. BATF regulation includes periodic BATF audits of all production reports, shipping documents, and licenses to assure that proper records are maintained. The Company is also required to file and maintain monthly reports with the BATF of alcohol inventories and shipments. Item 2. Properties. The Company maintains the following principal plants, warehouses and office facilities: Plant Area Tract Area Location Purpose (in sq. ft.) (in acres) -------- ------- ------------ ---------- Atchison, Kansas Principal executive offices, grain processing, warehousing, and research and quality control laboratories. 494,640 25 Pekin, Illinois Grain processing, warehousing, and quality control laboratories. 462,926 49 Except as otherwise reflected under Item 1, the facilities mentioned above are generally in good operating condition, are currently in normal operation, are generally suitable and adequate for the business activity conducted therein, and have productive capacities sufficient to maintain prior levels of production. Except as otherwise reflected under Item 1, all of the plants, warehouses and office facilities are owned. Although none are subject to any major encumbrance, the Company has entered into loan agreements which contain covenants against the pledging of such facilities to others. The Company also owns transportation equipment and a gas pipeline described under Transportation and Energy. Item 3. Legal Proceedings. There are no material legal proceedings pending as of June 30, 1996. Legal proceedings which are pending consist of matters normally incident to the business conducted by the Company and taken together do not appear material. Item 4. Submissions of Matters to a Vote of Security Holders. No matters have been submitted to a vote of stockholders during the fourth quarter of fiscal year covered by this report. PART II Item 5. Market for Registrants Common Equity and Related Stockholders Matters. 11 The Common Stock of the Company has been traded on the NASDAQ National Market System under the symbol MWGP since November 1988. The following table reflects the cash dividends paid and the high and low closing prices of the Common Stock for each quarter of fiscal 1996 and 1995: Quarterly Cash Sales Price Dividends High Low --------- ---- --- 1995: First Quarter...........................$ .125 $ 36.25 $ 27.25 Second Quarter.......................... .125 28.50 22.50 Third Quarter........................... .125 24.00 17.00 Fourth Quarter.......................... .125 18.75 17.00 ------ $ .50 ====== 1996: First Quarter...........................$ .000 $ 19.50 $ 16.50 Second Quarter.......................... .000 17.00 10.75 Third Quarter........................... .000 15.00 12.00 Fourth Quarter.......................... .000 13.50 11.38 ------ $ .000 ====== At June 30, 1996, there were approximately 1,000 holders of record of the Company's Common Stock. It is believed that the Common Stock is held by more than 2,000 beneficial owners. Item 6. Selected Financial Data. Incorporated by reference to the information under Selected Financial Information on page 10 of the Annual Report, a copy of which page is included in Exhibit 10(c) to this Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference to the information under Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 11 through 17 of the Annual Report, copies of which pages are included in Exhibit 10(c) to this Report. Item 8. Financial Statements and Supplementary Data. Incorporated by reference to the consolidated financial statements and related notes on pages 18 through 28 of the Annual Report, copies of which pages are included in Exhibit 10(c) to this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 12 PART III Item 10. Directors and Executive Officers of the Registrant. The directors and executive officers of the Company are as follows: Name Age Position - ---- --- -------- Cloud L. Cray, Jr. 73 Chairman of the Board and Director Laidacker M. Seaberg 50 President, Chief Executive Officer and Director Sukh Bassi, Ph.D. 55 Vice President - Vital Wheat Gluten Marketing, Research and Development and Corporate Technical Director Robert G. Booe 59 Vice President - Administration, Controller, Treasurer and Chief Financial Officer Gerald Lasater 58 Vice President - Wheat Starch Marketing Raymond Miller 62 Vice President - Purchasing and Energy and President of Midwest Grain Pipeline, Inc. Anthony J. Petricola 60 Vice President - Engineering Randy M. Schrick 46 Vice President - Operations and Director Robert L. Swaw 66 Vice President - Alcohol Marketing Michael Braude 60 Director Richard J. Bruggen 70 Director F.D. "Fran" Jabara 71 Director Tom MacLeod, Jr. 48 Director Robert J. Reintjes 64 Director Eleanor B. Schwartz, D.B.A. 59 Director Mr. Cray, Jr. has been a Director since 1957, and has served as Chairman of the Board since 1980. He served as Chief Executive Officer from 1980 to September, 1988, and has been an officer of the Company and its affiliates for more than thirty years. Mr. Seaberg, a Director since 1979, joined the Company in 1969 and has served as the President of the Company since 1980 and as Chief Executive Officer since September, 1988. He is the son-in-law of Mr. Cray, Jr. 13 Dr. Bassi has served as Vice President of Research and Development since 1985, Technical Director since 1989 and Vice President - Vital Wheat Gluten Marketing since 1992. From 1981 to 1992 he was Manager of the Vital Wheat Gluten Strategic Business Unit. He was previously a professor of biology at Benedictine College for ten years. Mr. Booe has served as Vice President, Treasurer and Chief Financial Officer of the Company since 1988. He joined the Company in 1966 as its Treasurer and became the Controller and Treasurer in 1980. In 1992 he was assigned the additional task of Vice President - Administration. Mr. Lasater joined the Company in 1962. He has served as Vice President - - Starch Marketing since 1992. Previously he served as Vice President in charge of the Wheat Starch Strategic Business Unit. Mr. Miller joined the Company in 1956. He has served as Vice President - - Purchasing and Energy since 1992, President of Midwest Grain Pipeline, Inc. since 1987, and as Vice President of the Company since 1967. Mr. Petricola joined the Company in 1985. He has served as Vice President - Engineering since 1992. Previously he served as Corporate Director of Engineering. Mr. Schrick, a Director since 1987, joined the Company in 1973. He has served as Vice President - Operations since 1992. From 1984 to 1992 he served as Vice President and General Manager of the Pekin plant. From 1982 to 1984 he was the Plant Manager of the Pekin Plant. Prior to 1982, he was Production Manager at the Atchison plant. Mr. Swaw joined the Company in 1989. He has served as Vice President- Alcohol Marketing since September 1, 1995. Previously he was sales manager of the Company's industrial alcohol division. Before joining the Company, Mr. Swaw was general manager for the bulk alcohol division of Sofecia, S.A. and general sales manager with Publicker Industries in Philadelphia. Mr. Bruggen has been a Director since 1976 and is a member of the Audit and Human Resources committees. He was Senior Vice President of Atchison Casting Corporation from 1991 until his retirement in 1992. Previously he was the General Manager of Rockwell International Plants at Atchison, Kansas and St. Joseph, Missouri. Mr. Braude has been a Director since 1991 and is Chairman of the Audit Committee and a member of the Nominating Committee. He has been the President and Chief Executive Officer of the Kansas City Board of Trade, a commodity futures exchange, since 1984. Previously he was Executive Vice President of American Bank & Trust Company of Kansas City. Mr. Braude is a director of Country Club Bank, Kansas City, Missouri and National Futures Association, a member and immediate Past Chairman of the National Grain Trade Council and a trustee of the University of Missouri-Kansas City and of Midwest Research Institute. Mr. Jabara has been a director since October 6, 1994, and is Chairman of the Human Resources Committee and a member of the Audit Committee. He is President of Jabara Ventures Group, a venture capital firm. From September 1949 to August 1989 he was a distinguished professor of business at Wichita State University, Wichita, Kansas. He is also a director of Commerce Bank, Wichita, Kansas and NPC International, Inc., an operator of numerous Pizza Hut and other quick service restaurants throughout the United States. Mr. MacLeod, Jr. has been a Director since 1986 and is a member of the Audit and Nominating Committees. He has been the President and Chief Operating Officer of Iams Company, a manufacturer of premium pet foods, since 1989. Previously, he was President and Chief Executive Officer of Kitchens of Sara Lee, a division of Sara Lee Corporation, a food products company. Mr. Reintjes has been a Director since 1986, and is a member of the Audit and Human Resources Committees. He has served as President of Geo. P. Reintjes Co., Inc., of Kansas City, Missouri, for the past 23 years. The Geo. P. Reintjes Co., Inc. is engaged in the business of refractory construction. He is a director of Butler Manufacturing Company, a manufacturer of pre-engineered buildings, and Commerce Bank of Kansas City. 14 Dr. Schwartz has been a director since June 3, 1993. She is Chairman of the Nominating Committee and a member of the Audit Committee. She has been the Chancellor of the University of Missouri-Kansas City since May 1992, and was previously the Vice Chancellor for Academic Affairs. She is a Trustee of Midwest Research Institute and a director of ANNUHCO, Inc. and Waddell, Reed, Torchmart and United Funds Group, Inc. The Board of Directors is divided into two groups (Groups A and B) and three classes. Group A directors are elected by the holders of Common Stock and Group B directors are elected by the holders of Preferred Stock. One class of directors is elected at each annual meeting of stockholders for three-year terms. The present directors' terms of office expire as follows: Group A Directors Term Expires Group B Directors Term Expires Mr. Bruggen 1997 Mr. Cray, Jr. 1998 Mr. MacLeod 1998 Mr. Reintjes 1998 Dr. Schwartz 1996 Mr. Braude 1997 Mr. Jabara 1997 Mr. Schrick 1996 Mr. Seaberg 1996 Item 11. Executive Compensation. Incorporated by reference to the information under "Executive Compensation" on pages 15 through 19 of the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the information under "Principal Stockholders" beginning on page 20 of the Proxy Statement. Item 13. Certain Relationships and Related Transactions. None. 15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. The following documents are filed as part of this report: (a) Financial Statements: Auditors Report on Financial Statements. Consolidated Balance Sheets at June 30, 1996 and 1995. Consolidated Statements of Income - for the Three Years Ended June 30, 1996, 1995 and 1994. Consolidated Statements of Stockholders Equity for the Three Years Ended June 30, 1996, 1995 and 1994. Consolidated Statements of Cash Flow - for the Three Years Ended June 30, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. The foregoing have been incorporated by reference to the Annual Report as indicated under Item 8. (b) Financial Statement Schedules: Auditors Report on Financial Statement Schedules: VIII - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the information is contained in the Consolidated Financial Statements or notes thereto. (c) Exhibits: Exhibit No. Description ---------- ----------- 3(a) Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) of the Company's Registration Statement No. 33-24398 on Form S-1). 3(b) Bylaws of the Company (Incorporated by reference to Exhibit 3(b) of the Company's Registration Statement No. 33-24398 on Form S-1). 4(a) Copy of Note Agreement dated as of August 1, 1993, providing for the issuance and sale of $25 million of 6.68% term notes ("Term Notes", incorporated by reference to Exhibit 4.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1993). 4(b) Copy of Term Notes dated August 27, 1993 (incorporated by reference to Exhibit 4.2 to the Company's Report on Form 10-Q for the quarter ended September 30, 1993). 4(c) Copy of Third Amended Line of Credit Loan Agreement providing for the Issuance of a Line of Credit Note in the amount of $27,000,000. 4(d) Copy of Line of Credit Note Under Third Amended Line of Credit Loan Agreement. 9(a) Copy of Cray Family Trust (Incorporated by reference to Exhibit 1 of Amendment No. 1 to Schedule 13D of Cloud L. Cray, Jr. dated November 17, 1995). 16 10(a) Summary of informal cash bonus plan (incorporated by reference to the summary contained in the Company's Proxy Statement dated September 19, 1996, which is incorporated by reference into Part III of this Form 10-K). 10(b) Executive Stock Bonus Plan as amended June 15, 1992 (incorporated by reference to Exhibit 10(b) to the Company's Form 10-K for the year ended June 30, 1992). 10(c) Information contained in the Midwest Grain Products, Inc. 1996 Annual Report to Stockholders that is incorporated herein by reference. 10(d) Copy of Midwest Grain Products, Inc. Stock Incentive Plan of 1996, as amended as of August 26, 1996 (incorporated by reference to Exhibit A to Midwest Grain Products, Inc. Notice of 1996 Annual Meeting and Proxy Statement under definitive Schedule 14A filed September 17, 1996). 10(e) Form of Stock Option with respect to stock options granted under the Midwest Grain Products, Inc. Stock Incentive Plan of 1996. 10(f) Copy of Midwest Grain Products, Inc. 1996 Stock Option Plan for Outside Directors, as amended as of August 26, 1996 (incorporated by reference to Exhibit B to Midwest Grain Products, Inc. Notice of 1996 Annual Meeting and Proxy Statement under definitive Schedule 14A filed September 17, 1996). 22 Subsidiaries of the Company other than insignificant subsidiaries: State of Incorporation Subsidiary or Organization ---------- --------------- Midwest Solvents Company of Illinois, Inc. Illinois Midwest Grain Pipeline, Inc. Kansas Midwest Grain Products of Illinois, Inc. Illinois Midwest Purchasing Company, Inc. Illinois 25 Powers of Attorney executed by all officers and directors of the Company who have signed this report on Form 10-K (incorporated by reference to the signature pages of this report). 27 Midwest Grain Products Financial Data Schedule as at June 30, 1996 and for the year then ended. No reports on Form 8-K have been filed during the quarter ended June 30, 1996. 17 SIGNATURES Pursuant to requirements of Section 13 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, in the city of Atchison, State of Kansas, on this 19th day of September, 1996. MIDWEST GRAIN PRODUCTS, INC. By /s/Laidacker M. Seaberg ------------------------- Laidacker M. Seaberg, President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cloud L. Cray, Jr., Laidacker M. Seaberg and Robert G. Booe and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all reports of the Registrant on Form 10-K and to sign any and all amendments to such reports and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities & Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the dates indicated. Name Title Date ---- ----- ---- /s/ Laidacker M. Seaberg --------------------- President (Principal Laidacker M. Seaberg Executive Officer) and Director September 19, 1996 /s/ Robert G. Booe --------------------- Vice President, Treasurer Robert G. Booe and Controller (Principal Financial and Accounting Officer) September 19, 1996 /s/ Michael Braude --------------------- Michael Braude Director September 19, 1996 /s/ Richard J. Bruggen --------------------- Richard J. Bruggen Director September 19, 1996 /s/ Cloud L. Cray, Jr. --------------------- Cloud L. Cray, Jr. Director September 19, 1996 /s/ F. D. Jabara --------------------- F. D. "Fran" Jabara Director September 19, 1996 /s/ Tom MacLeod --------------------- Tom MacLeod, Jr. Director September 19, 1996 /s/ Robert J. Reintjes --------------------- Robert J. Reintjes Director September 19, 1996 /s/ Randy M. Schrick --------------------- Randy M. Schrick Director September 19, 1996 /s/ Eleanor B. Schwartz ------------------- Eleanor B. Schwartz Director September 19, 1996 18 MIDWEST GRAIN PRODUCTS, INC. Consolidated Financial Statement Schedules (Form 10-K) June 30, 1996, 1995 and 1994 (With Auditors' Report Thereon) S-1 BAIRD, KURTZ & DOBSON Report of Independent Accountants --------------------------------- on Financial Statement Schedule ------------------------------- Board of Directors and Stockholders Certified Midwest Grain Products, Inc. Public Atchison, Kansas Accountants In connection with our audit of the financial statements of MIDWEST GRAIN PRODUCTS, INC. for each of the three years in the period ended June 30, 1996, we have also audited the following financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits of the basic financial statements. The schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and is not a required part of the consolidated financial statements. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/Baird, Kurtz & Dobson Kansas City, Missouri August 9, 1996 City Center Square Suite 2700 1100 Main Kansas City, Missouri 64105 816 221-6300 FAX: 816 221-6380 - ------------------ With Offices in: Arkansas Colorado Kansas Kentucky Missouri Nebraska Oklahoma - -------- Member of Moores Rowland International MIDWEST GRAIN PRODUCTS, INC. VIII. VALUATION AND QUALIFYING ACCOUNTS Additions ---------------------- Balance, Charged to Charged Balance, Beginning Costs and to Other Deductions End of of Period Expenses Accounts Write-Offs Period --------- ---------- -------- ---------- -------- (In Thousands) YEAR ENDED JUNE 30, 1996 $85 $214 $14 $285 Allowance for doubtful == === == === accounts YEAR ENDED JUNE 30, 1995 $25 $101 $41 $ 85 Allowance for doubtful == === == == accounts YEAR ENDED JUNE 30, 1994 $25 $ 59 $59 $ 25 Allowance for doubtful == === == === accounts S-3 EXHIBIT INDEX Exhibit No. Description ---------- ----------- 3(a) Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) of the Company's Registration Statement No. 33-24398 on Form S-1). 3(b) Bylaws of the Company (Incorporated by reference to Exhibit 3(b) of the Company's Registration Statement No. 33-24398 on Form S-1). 4(a) Copy of Note Agreement dated as of August 1, 1993, providing for the issuance and sale of $25 million of 6.68% term notes ("Term Notes", incorporated by reference to Exhibit 4.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1993). 4(b) Copy of Term Notes dated August 27, 1993 (incorporated by reference to Exhibit 4.2 to the Company's Report on Form 10-Q for the quarter ended September 30, 1993). 4(c) Copy of Third Amended Line of Credit Loan Agreement providing for the Issuance of a Line of Credit Note in the amount of $27,000,000. 4(d) Copy of Line of Credit Note Under Third Amended Line of Credit Loan Agreement. 9(a) Copy of Cray Family Trust (Incorporated by reference to Exhibit 1 of Amendment No. 1 to Schedule 13D of Cloud L. Cray, Jr. dated November 17, 1995). 10(a) Summary of informal cash bonus plan (incorporated by reference to the summary contained in the Company's Proxy Statement dated September 19, 1996, which is incorporated by reference into Part III of this Form 10-K). 10(b) Executive Stock Bonus Plan as amended June 15, 1992 (incorporated by reference to Exhibit 10(b) to the Company's Form 10-K for the year ended June 30, 1992). 10(c) Information contained in the Midwest Grain Products, Inc. 1996 Annual Report to Stockholders that is incorporated herein by reference. 10(d) Copy of Midwest Grain Products, Inc. Stock Incentive Plan of 1996, as amended as of August 26, 1996 (incorporated by reference to Exhibit A to Midwest Grain Products, Inc. Notice of 1996 Annual Meeting and Proxy Statement under definitive Schedule 14A filed September 17, 1996). 10(e) Form of Stock Option with respect to stock options granted under the Midwest Grain Products, Inc. Stock Incentive Plan of 1996. 10(f) Copy of Midwest Grain Products, Inc. 1996 Stock Option Plan for Outside Directors, as amended as of August 26, 1996 (incorporated by reference to Exhibit B to Midwest Grain Products, Inc. Notice of 1996 Annual Meeting and Proxy Statement under definitive Schedule 14A filed September 17, 1996). E-1 Exhibit No. Description ---------- ----------- 22 Subsidiaries of the Company other than insignificant subsidiaries: State of Incorporation Subsidiary or Organization ---------- --------------- Midwest Solvents Company of Illinois, Inc. Illinois Midwest Grain Pipeline, Inc. Kansas Midwest Grain Products of Illinois, Inc. Illinois Midwest Purchasing Company, Inc. Illinois 25 Powers of Attorney executed by all officers and directors of the Company who have signed this report on Form 10-K (incorporated by reference to the signature pages of this report). 27 Midwest Grain Products Financial Data Schedule as at June 30, 1996 and for the year then ended. E-2 EX-4 2 EXHIBIT 4(C) TO FORM 10-K Exhibit 4(c) THIRD AMENDED LINE OF CREDIT LOAN AGREEMENT THIS THIRD AMENDED LINE OF CREDIT LOAN AGREEMENT (the "Agreement"), executed as of this 16th day of July, 1996, by and between MIDWEST GRAIN PRODUCTS, INC., a corporation organized under the laws of the state of Kansas and having its principal place of business in Atchison, Kansas ("Borrower"), and Commerce Bank, N.A., a national banking association, having its principal place of business in Kansas City, Missouri ("Bank"). WHEREAS, Borrower desires to establish a line of credit with Bank to provide working capital and capital expenditures; and WHEREAS, Bank desires to extend such line of credit upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and mutual agreements contained in this Agreement, the parties agree as follows: ARTICLE I Line of Credit Section 1.1 General Terms. Subject to the terms of this Agreement, Bank will lend Borrower, from time to time, until the termination hereof, such sums as Borrower may request, in minimum increments of $100,000, which shall not exceed in the aggregate principal amount at any one time outstanding the sum of Twenty Seven Million and no/100 Dollars ($27,000,000.00) (the "Line of Credit Loan"). Bank's obligation to lend hereunder may be terminated by Bank at any time in Bank's sole discretion, or if no such termination is made, then on October 1, 1998. Each advance under the Line of Credit Loan is at the option of Bank and Bank has no obligation to make advances. In addition this Agreement shall be deemed to automatically terminate if the occurrence of an event pursuant to Section 4.1 causes the Line of Credit Note to become immediately due and payable. The inclusion of monthly interest payments, events of default and an alternate maturity date does not alter the discretionary nature of the line of credit. Section 1.2 Commitment Fee. Borrower shall pay a fee equal to 1/4% per annum on the unused portion of the Line of Credit Loan. Such fee shall be paid quarterly in arrears. Section 1.3 Note. Borrower agrees to execute and deliver to Bank the Line of Credit Note to evidence the Line of Credit Loan. Each advance made thereunder, together with each repayment made by Borrower, shall be evidenced by a notation dated the date of the advance or repayment and recorded by Bank on the schedule appearing on the reverse side of or attached to the Line of Credit Note. The aggregate unpaid principal amount of the Line of Credit Note set forth on the schedule shall be conclusively presumed to reflect the amounts advanced and repaid, and the outstanding principal balance of the Line of Credit Loan. Section 1.4 Principal Payment. In the event of a default as defined in Section 4.1 or on October 1, 1998, the principal balance of the Line of Credit Note together with all accrued interest shall become immediately due and payable. Section 1.5 Interest. If the outstanding balance is less than $500,000, the line of credit shall bear interest at a per annum rate equal to the Prime Rate. If the outstanding balance is $500,000 or greater, the line of credit shall bear interest at the greater of either (1) the Prime Rate, minus 1%, or (2) the Federal Funds Rate plus 1.50%. Interest will be payable monthly, in arrears, and at maturity, whether by acceleration or otherwise. Interest will be computed on the actual days outstanding based upon a year consisting of 360 days. "Prime Rate" means the Prime Rate of interest established from time to time by Bank and designated as such for its internal convenience, and no representation is made that the Prime Rate is the best, the lowest or a favored rate of interest. The rate of interest, if tied to the Prime Rate, shall change with and be effective on the date of each change in the Prime Rate. "Federal Funds Rate" means the effective Federal Funds Rate as quoted by the Federal Reserve Bank of New York on a daily basis. The Federal Funds Rate is adjusted daily. Section 1.6 Purpose. Borrower represents the purpose of the Line of Credit Loan is to provide short term working capital and capital expenditures. Section 1.7 Disbursements. Bank will credit the proceeds of any borrowing hereunder to Borrower's deposit account maintained with Bank. Section 1.8 Condition of Loans. Any advance under the Line of Credit Note is subject to the condition precedent that no event of default described in Section 4.1 shall have occurred, and that the Line of Credit has not been terminated. Each request for a borrowing under the Line of Credit Note shall be deemed to constitute a representation by Borrower at the time of the request that no event of default as defined in Section 4.1 exists or is imminent and that the representations and warranties of Borrower contained in this Agreement are true in all material respects on or as of the date of borrowing. ARTICLE II Warranties and Representations Section 2.1 Good Standing. The Borrower is a corporation duly organized and in good standing, under the laws of the state of Kansas, and has the power to own its property and to carry on its business and is in good standing in each jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes such qualifications necessary. Section 2.2 Authority. The Borrower has full power and authority to enter into this Agreement, to make the borrowing hereunder, and to execute and deliver the Line of Credit Note, all of which has been duly authorized by all proper and necessary corporate action. No consent or approval of stockholders is required as a condition to the validity of this Agreement or the Line of Credit Loan. Section 2.3 Binding Agreement. This Agreement constitutes, and the Line of Credit Note when issued and delivered pursuant hereto, for value received, will constitute, the valid and legally binding obligations of the Borrower in accordance with all stated terms. Section 2.4 Litigation. There are no proceedings pending, or, so far as the officers of the Borrower know threatened, which will materially adversely affect the financial condition or operations of the Borrower or any subsidiary. Section 2.5 No Conflicting Agreements. There are no charter, bylaw, or preference stock provisions of the Borrower and no provision of any existing mortgage, indenture, contract or agreement binding on the Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery, or carrying out of the terms of this Agreement and of the Line of Credit Note. 2 Section 2.6 Taxes. The Borrower has filed all Federal, State and other tax and similar returns and has paid or provided for the payment of all taxes and assessments due thereunder including, without limitation, all withholding, FICA and franchise taxes. Section 2.7 Financial Statements. There have been no material changes in the Borrower's financial statements dated June 30, 1996. ARTICLE III Covenants So long as this Agreement remains in effect or as long as there is any principal or interest due on the Line of Credit Note, Borrower agrees as follows: Section 3.1 Comply with all Company Covenants as defined and contained in Section 5 of the Note Agreement dated as of August 1, 1993, between Borrower and the Principal Mutual Life Insurance Company (the 'Principal Agreement') including, but not limited to, the following: (a) Current Ratio. Maintain a Current Ratio of not less than 1.50 to 1.00. (b) Consolidated Tangible Net Worth. Maintain Consolidated Tangible Net Worth at an amount not less than THE GREATER OF (1) $70,000,000 and (ii) the sum of $70,000,000 plus 50% of Consolidated Net Income for the period from and after March 31, 1993 to the date of determination thereof (considered as a single accounting period). (c) Funded Debt. Not permit Consolidated Funded Debt to exceed 60% of total capitalization. (d) Debt/Worth. Maintain a ratio of Debt to Tangible Net Worth of not more than 2.50 to 1.00. (e) Fixed Charges Coverage Ratio. Maintain a ratio of Net Income Available for Fixed Charges to Fixed Charges of not less than 1.50 to 1.00. The Company Covenants shall survive any amendment, modification or termination of the Principal Agreement. Section 3.2 Taxes, etc. Promptly pay all taxes, assessments and other government charges (unless such payments are being contested in good faith). Section 3.3 Insurance. Maintain insurance on all its properties in such amounts and against such hazards as is customary in Borrower's industry. Section 3.4 Books and Records. Maintain its books and records and account for financial transactions in accordance with generally accepted accounting principals. Section 3.5 Financial Reporting. Borrower shall furnish Bank with the following information: (a) Its annual audited financial statement within 90 days of its fiscal year-end, in a form and prepared by a certified public accounting firm acceptable to Bank; (b) Its quarterly financial statements within 45 days after the end of each quarter; and 3 (c) Such other information as Bank may reasonably request from time to time. Section 3.6 Notification. Notify Bank immediately if it becomes aware of the occurrence of any Event of Default (as defined under Section 4.1 hereof) or of any fact, condition, or event that, only with the giving of notice or passage of time or both, would become an Event of Default, or if it becomes aware of a material adverse change in the business prospects, financial condition (including, without limitation, proceedings in bankruptcy, insolvency, reorganization, or the appointment of a receiver or trustee), or results of operations of Company, or the failure of Company to observe any of its undertakings under this Agreement of any other note or agreement binding on Borrower including, but not limited to, the Principal Agreement. ARTICLE IV Defaults Section 4.1 Events of Default. The entire unpaid balance of the Line of Credit Note shall become immediately due and payable without demand, presentment, notice or protest of any kind (all of which are expressly waived), upon the happening of any of the following events of default: (a) Nonpayment of any interest or any principal payment owing under the Line of Credit Note whether at maturity or otherwise; or (b) If any certificate, statement, representation, warranty or audit furnished by or on behalf of the Borrower in connection with this Agreement, including those contained herein, or as an inducement by Borrower to enter into, modify, extend, or renew this Agreement shall prove to be false in any material respect, or if Borrower shall have omitted the listing of a substantial contingent or unliquidated liability or claim against Borrower or, if on the date of execution of this Agreement there shall have been any materially adverse change in any of the facts disclosed by any such certificate, statement, representation, warranty or audit, which change shall not have been disclosed by Borrower to Bank at or prior to the time of execution; or (c) If Borrower shall default in the due performance or observance of any covenant undertaken by it under this Agreement; or (d) Default in the performance of the obligations of Borrower pursuant to any other note or agreement binding on Borrower including, but not limited to, the Principal Agreement; or (e) Borrower shall be adjudicated a bankrupt, or make a general assignment for the benefit of its creditors, or there are instituted by or against Borrower any type of bankruptcy proceedings or any proceeding for the liquidation or the termination of Borrower's affairs, or the appointment of a receiver or trustee for Borrower or for any of Borrower's assets, or a properly filed petition for Borrower's reorganization under the Bankruptcy Code or otherwise is approved, or Borrower files a petition for arrangement under Chapter 11 of the Bankruptcy Code or any similar statute. (f) Any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes shall be entered or filed against the Borrower or any Subsidiary or against any of their respective property or assets and remain unstayed and undischarged for a period of 60 days from the date of its entry. 4 Section 4.2 Remedies. If any event of default occurs, Bank may resort to any remedy existing at law or in equity for the collection of the Line of Credit Note and enforcement of the covenants and provisions of this Agreement. Bank's resort to any remedy shall not prevent the concurrent or subsequent employment of any other remedy. Section 4.3 Waiver. Any waiver of an event of default by Bank shall not extend to or affect any subsequent default. No failure or delay by Bank in exercising any right hereunder shall operate as a waiver nor shall any single or partial exercise of any right preclude any other right hereunder. ARTICLE V Miscellaneous Section 5.1 Amendments. This Agreement may be amended or modified in whole or in part at anytime, if in writing and signed by the parties. Bank may further consent in writing, or give written waiver to any covenant or event which might otherwise create a default. Section 5.2 Delay, Waiver. No omission or delay on the part of Bank in exercising any right, power, or privilege hereunder shall impair or operate as a waiver thereof; nor shall any single or partial exercise or any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. No waiver by Bank will be valid unless in writing and signed by Bank and then only to the extent specified therein. The rights and remedies herein expressly specified are cumulative and not exclusive of any rights or remedies which Bank would otherwise have. Section 5.3 Bank. Whenever in this Agreement reference is made to the Bank, such term shall be deemed for the purpose of benefits, powers, and privileges hereunder to include any firm, person, or corporation who may be the holder from time to time of the Note issued hereunder or a participation therein. Section 5.4 Governing Law. This Agreement and the Line of Credit Note shall be construed and interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. MIDWEST GRAIN PRODUCTS INC. COMMERCE BANK, N.A. By: /s/Ladd M. Seaberg By: /s/Frederick J. Marston ------------------------- ---------------------- Title: President and CEO Title: Vice President By: /s/Robert G. Booe ------------------------- Title: Vice President and Chief Financial Officer 5 EX-4 3 EXHIBIT 4(D) TO FORM 10-K Exhibit 4(d) LINE OF CREDIT NOTE $27,000,000 FOR VALUE RECEIVED, the undersigned, MIDWEST GRAIN PRODUCTS, INC., a Kansas corporation ("Borrower") hereby promises to pay to the order of Commerce Bank, N.A. ("Bank") at its offices in Kansas City, Missouri, the aggregate unpaid principal amount and accrued interest of all borrowings hereunder. The aggregate unpaid principal amount shall also become immediately due and payable, without demand or further action on the part of Bank upon the occurrence of an event of default as set forth in Section 4.1 of the Third Amended Line of Credit Loan Agreement, as amended, dated as of July 16, 1996 (the "Agreement"). Interest on this note shall be calculated on the actual number of days on the basis of a year of 360 days. If the outstanding balance is less than $500,000, the line of credit shall bear interest at a per annum rate equal to the Prime Rate. If the outstanding balance is $500,000 or greater, the line of credit shall bear interest at the greater of either (1) the Prime Rate, minus 1 %, or (2) the Federal Funds Rate plus 1.50%. Interest will be payable monthly, in arrears, and at maturity, whether by acceleration or otherwise, beginning August 1, 1996, and on the first day of each month thereafter. Interest will be computed on the actual days outstanding based upon a year consisting of 360 days. If any interest payment on this note shall become due and payable on a day which is not a business day of Bank, payment shall be made on the next succeeding business day of Bank. "Prime Rate" means the Prime Rate of interest established from time to time by Commerce Bank and designated as such for its internal convenience, and no representation is made that the Prime Rate is the best, the lowest or a favored rate of interest. The rate of interest, if tied to the Prime Rate, shall change with and be effective on the date of each change in the Prime Rate. "Federal Funds Rate" means the effective Federal Funds Rate as quoted by the Federal Reserve Bank of New York on a daily basis. The Federal Funds Rate is adjusted daily. So long as the Agreement has not been terminated, Borrower may, from the date of this note through October 1, 1998 borrow, repay and reborrow sums, at any one time outstanding, not to exceed $27,000,000. All advances and repayments hereunder shall be endorsed on the reverse hereof (or an attached schedule) by the Bank or holder, and between the undersigned and Bank, such endorsements and the balances derived from such endorsements shall be conclusively presumed to reflect the amounts advanced and repaid hereunder and the then outstanding and unpaid balance of sums advanced or readvanced hereunder. The undersigned hereby waives presentment, protest, demand and notice of dishonor or default. This note is issued pursuant to the terms of the Agreement, to which Agreement, and any amendments thereto, reference is hereby made for a statement of the terms and conditions under which this borrowing was made, and is to be repaid. MIDWEST GRAIN PRODUCTS, INC. By: /s/Ladd M. Seaberg ------------------------------ Title: President and CEO By: /s/Robert G. Booe ------------------------------ Title: Vice President and Chief Financial Officer EX-10 4 EXHIBIT 10(C) TO FORM 10-K Exhibit 10(c) SELECTED FINANCIAL INFORMATION - ------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands, except per share amounts) 1996 1995 1994 1993 1992 INCOME STATEMENT DATA: NET SALES $194,638 $180,252 $185,968 $163,426 $155,794 COST OF SALES 190,173 159,149 148,320 130,551 127,883 - -------------------------------------------------------------------------------- GROSS PROFIT 4,465 21,103 37,648 32,875 27,911 SELLING, GENERAL & ADMINISTRATIVE EXPENSES 9,001 10,553 12,212 10,677 9,794 OTHER OPERATING INCOME (EXPENSE) 159 (107) (669) (264) 17 - -------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS (4,377) 10,443 24,767 21,934 18,134 OTHER INCOME (LOSS), NET 1,309 (4,225) 924 1,045 1,191 INTEREST EXPENSE (2,556) (606) (127) (71) (93) - -------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (5,624) 5,612 25,564 22,908 19,232 PROVISION (CREDIT) FOR INCOME TAXES (2,218) 2,273 9,713 8,278 7,020 - -------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (3,406) 3,339 15,851 14,630 12,212 DISCONTINUED OPERATIONS 1,665 1,294 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES--POST-RETIREMENT BENEFIT (2,241) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES--INCOME TAXES 2,182 - -------------------------------------------------------------------------------- NET INCOME (LOSS) $ (3,406) $ 3,339 $ 15,851 $ 6,236 $ 13,506 ================================================================================ EARNINGS (LOSS) PER COMMON SHARE Continuing operations (.35) .34 1.62 1.50 1.25 Discontinued operations .17 .13 Cumulative effect of changes in accounting principles (.01) - -------------------------------------------------------------------------------- $ (.35) $ .34 $ 1.62 $ 1.66 $ 1.38 ================================================================================ Cash dividends per common share .50 .50 .50 .48 Weighted average common shares outstanding 9,765 9,765 9,765 9,765 9,765 BALANCE SHEET DATA: Working capital 37,113 26,955 21,951 41,580 37,021 Total Assets 172,785 176,749 168,146 126,671 115,626 Long-term debt, less current maturities 40,933 38,908 25,000 50 Stockholders' equity $109,222 $112,628 $114,173 $103,206 $ 91,853 10 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth items in the Company's consolidated statements of income expressed as percentages of net sales for the years indicated and the percentage change in the dollar amount of such items compared to the prior period: Percentage of Net Sales Percentage Years Ended June 30 Increase (Decrease) - -------------------------------------------------------------------------------- Fiscal 1996 Fiscal 1995 1996 1995 1994 Over 1995 Over 1994 - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 8.0% (3.1)% Cost of sales 97.7 88.3 79.8 19.5 7.3 - -------------------------------------------------------------------------------- Gross profit 2.3 11.7 20.2 (78.8) (43.9) Selling, general and administrative expenses 4.6 5.8 6.6 (14.7) (13.6) Other operating income (loss) .1 (.1) (.3) 248.6 84.0 - -------------------------------------------------------------------------------- Income from operations (2.2) 5.8 13.3 (141.9) (57.8) Other income (expense) (.6) (2.7) .4 (74.2) (706.1) - -------------------------------------------------------------------------------- Income from continuing opera- tions before income taxes (2.8) 3.1 13.7 (200.2) (78.0) Provision for income taxes (1.1) 1.2 5.2 (197.6) (76.6) - -------------------------------------------------------------------------------- Income from continuing opera- tions (1.7)% 1.9% 8.5% (202.0)% (78.9)% ================================================================================ Fiscal 1996 Compared to Fiscal 1995 The Company experienced a $3,406,000 net loss in fiscal 1996 compared to net income of $3,339,000 in fiscal 1995. The decline, which actually began in the third quarter of fiscal 1995, was due primarily to unusually high raw material costs for grain in the face of greatly increased 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 alcohol to compensate for the increased grain costs. In response to these negative conditions, the Company developed an intense cash management program to reduce costs and improve cash flow, including reductions in management and administrative compensation and benefits, and strategies to maximize operating results by maintaining a high degree of flexibility in targeting production levels and product sales mixes. The upward surge in grain prices was driven by a worldwide shortage of grain supplies, and concerns about crop conditions during the 1996 season due principally to weather-related factors. As a result, the company's corn and milo costs averaged 44% more per bushel in fiscal 1996 compared to the prior year. Wheat costs in fiscal 1996 averaged 32% more per bushel versus the average in fiscal 1995. While the Company used only 2.3 million more bushels of grain in fiscal 11 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- 1996, its total combined cost for wheat, corn and milo for the year rose approximately $27 million above grain expenditures the prior year. The Company's ability to adjust grain procurement strategies regularly through a strengthened risk management program prevented this increase from being substantially higher. Wheat gluten prices failed to adjust to the significant rise in wheat costs, while record amounts of gluten from the European Union (E.U.) poured into the United States. 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 U.S. market 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 could help rectify this problem has been included in a grains agreement between the U.S. and E.U. Ratified on July 22, 1996, the agreement was part of a compensation package which the U.S. requested following the enlargement of the E.U. from 12 to 15 countries in January, 1995. It states that "If the market share of European Community origin wheat gluten exports into the United 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." Consultations between the U.S. and the E.U. have been requested, and the Company is hopeful that they will ultimately result in the creation of a more level playing field. Until the intensity of competitive conditions subside, pursuant to the outcome of consultations or otherwise, and wheat costs substantially decrease, the Company does not anticipate utilizing a substantial portion of it gluten production capacity. Unit sales of alcohol products in fiscal 1996 rose above the prior year's amount. The increase occurred in unit sales of food grade alcohol, which is sold for beverage and industrial applications. This more than offset a decline in unit sales of fuel grade alcohol, which is sold as an octane additive and oxygenate commonly known as ethanol. The reduction in fuel alcohol sales was implemented by the Company due to depressed fuel alcohol prices and exceptionally high grain costs. Fuel alcohol prices remained flat due to increased capacities throughout the industry and low gasoline prices during a substantial portion of fiscal 1996. Due to the significant grain cost increases, combined with adverse market conditions for fuel alcohol and wheat gluten, operations at the Company's Pekin plant were halted for an extended maintenance shutdown during the last month of fiscal 1996. This resulted in reduced production of all of the Company's principal products. Since then, the Company has begun to see indications of strengthened demand in the fuel alcohol market, as well as possibilities for increasing its presence in the food grade alcohol markets. Demand for the Company's distillers feed, a principal by-product of the alcohol production process, also remains healthy. In fiscal 1996, unit sales of distillers feed rose above the prior year as the result of increased alcohol production. The Company's unit sales of wheat starch in fiscal 1996 continued the upward pattern experienced over the past several years, rising noticeably above the fiscal 12 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- 1995 total. The increase resulted from 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 during the first month of fiscal 1996 and greatly improves the Company's ability to meet future increases in demand for wheat starch. The Company believes it is in an excellent position to realize significant growth in all principal product categories with a return to more favorable market conditions and lower grain prices. This belief is based on the Company's expanded production capacities, which were completed at the start of fiscal 1996, combined with its low debt-to-equity ratio and strong working capital. Net sales in fiscal 1996 increased by approximately $14.4 million above sales in fiscal 1995. The increase was principally due to increased sales of alcohol products and alcohol by-products, the latter consisting mainly of distillers feeds, and higher sales of premium wheat starch. A 15% increase in total alcohol sales resulted from strong demand for food grade beverage and industrial alcohol, mainly in the second and third quarters. Sales of distillers feed climbed 45% compared to the prior year. The rise in wheat starch sales resulted from strengthened market demand. These increases were partially offset by a 21% decrease in sales of wheat gluten due to intense competitive pressures from European gluten producers. The cost of sales in fiscal 1996 increased by approximately $31.0 million above the cost of sales in fiscal 1995. The principal cause was a nearly $27.0 million increase in raw material costs for grain. Other manufacturing cost increases principally included a $5.2 million increase in depreciation and a $2.4 million rise in operating costs associated with increased energy requirements resulting from the Company's expanded production facilities at its Pekin, Illinois plant. These increases were partially offset by a $4.3 million decrease from excess costs incurred at the Pekin plant during 1995 to maintain full operations during the expansion project. Selling, general and administrative expenses in fiscal 1996 were down approximately $1.6 million compared to the prior year. This principally was due to a decrease of almost $1.2 million resulting from reductions in compensation, and costs for the Company's management and employee incentive programs. The consolidated effective income tax rate is consistent for all periods. The general effects of inflation were minimal. Other income amounted to $1.3 million compared to a loss of $4.2 in fiscal 1995, which was primarily due to the $5.0 million write-off of a coal-fired boiler at the Company's Pekin plant during 1995. Interest expense increased as most of the new production facilities in Pekin came on line during fiscal 1995. Therefore, far less interest was capitalized as part of these projects. As the result of the foregoing factors, the Company experienced a net loss of $3,406,000 in fiscal 1996 compared to net income of $3,339,000 in fiscal 1995. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Fiscal 1995 Compared to Fiscal 1994 The Company's sales and earnings in fiscal 1995 declined significantly compared to these same results in 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 decrease. The drop in wheat gluten volume resulted from reduced marketing opportunities due to increased gluten imports from Europe. The high unit sales of wheat gluten which the Company experienced in the latter half of fiscal 1994 resulted from an exceptionally large increase in demand during that period. This situation was caused by a worldwide shortage of gluten due to poor quality, low protein-yielding wheat. After a return to more normal crop conditions during the summer of 1994, the U.S. market began experiencing a substantial rise in imported wheat gluten from the European Union, where wheat starch and gluten capacities underwent sizeable increases. The Company's unit sales of alcohol products in fiscal 1995 were up significantly compared to the prior year's amount. Substantial increases occurred in unit sales of both fuel grade alcohol, which is sold as an octane additive and oxygenate commonly known as ethanol, and food grade alcohol, which is sold for beverage, industrial and commercial applications. The increase in the food grade category resulted from higher unit sales of beverage alcohol, which more than offset a slight decrease in industrial alcohol volume. That decrease resulted from a change in the Company's alcohol production mix in the second and third quarters, which was required to satisfy heightened customer needs in the fuel market during those periods. Demand in the food grade markets, however, remained strong. The Company's ability to meet this demand was enhanced by the availability of additional production capacity at its Pekin plant. Growth opportunities in the fuel grade alcohol market were expected to occur at a more gradual rate than previously anticipated due to the reversal in the spring of 1995 of an Environmental Protection Agency regulation requiring that renewable fuel oxygenates such as grain-based ethanol play a larger role in satisfying future Clean Air Act requirements in certain areas of the country. Designed to substantially increase Midwest Grain's total alcohol production capacity, the distillery expansion was scheduled to be on line by January, 1995. However, the completion was delayed by unanticipated mechanical equipment problems with two new distillery feed dryers. At the end of the third quarter of fiscal 1995, intermediate repairs to the dryers were completed by the equipment supplier. Final repairs to the equipment were scheduled to be completed early in the second quarter of fiscal 1996, substantially improving production capabilities. However, due to depressed market prices and increased grain costs, the Company expected its production of fuel grade alcohol to be minimized until more favorable conditions materialized. The Company's unit sales of wheat starch in fiscal 1995 rose considerably above the prior year's level. The increase resulted mainly from higher volumes of modified wheat starches, which are sold in a variety of special market niches. A 70% increase in wheat starch 14 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- production capacity, that was originally slated for completion at the Pekin plant toward the end of the third quarter of fiscal 1995, was delayed until the end of the fourth quarter. The postponement was in part due to the delay in the distillery expansion. With the completion of additional wheat starch capacity, the Company's ability to satisfy current and future demand for modified and unmodified wheat starch became greatly enhanced. Net sales in fiscal 1995 decreased by approximately $5.7 million below sales in fiscal 1994. The decrease was principally due to lower sales of vital wheat gluten, which fell nearly 30% as the result of increased foreign competition and a reduction in market demand compared to the extraordinary demand experienced in the latter half of fiscal 1994. A 16% increase in sales of alcohol products compared to the prior year principally resulted from a significant jump in fuel alcohol volume. Sales of distillers feeds, a by-product of the alcohol production process, rose modestly compared to feed sales in 1994. A continued increase in sales of modified wheat starches pushed total wheat starch sales approximately 11% above the prior year's level. During fiscal 1995 and continuing into fiscal 1996, grain costs increased to unusually high levels in the face of intense competition from foreign exporters of vital wheat gluten and relatively flat markets for fuel grade ethanol and poor markets for distillers feeds. The combination of these factors significantly restricted the ability of the Company to adjust the price of its gluten, fuel grade alcohol and distillers feeds to compensate for the high grain costs. The cost of sales in fiscal 1995 rose by approximately $10.8 million above cost of sales in fiscal 1994. Principal causes were increased raw material costs for grain, a $2.6 million increase in maintenance and repair costs and a $2.2 million increase in energy costs. The higher maintenance and repair costs were mainly due to work associated with the distillery expansion at the Company's Pekin plant. The higher energy and raw material costs resulted mainly from increased alcohol production, which was made possible by the distillery expansion in the second half of fiscal 1995, and increased grain prices. Other manufacturing cost increases were due to higher costs for chemicals and additives resulting from increased production of modified wheat starches, and depreciation of buildings and equipment. Selling, general and administrative expenses in fiscal 1995 were down approximately $1.7 million compared to the prior year. This principally was due to a decrease of approximately $2 million in the Company's management and employee incentive programs as a result of the decline in the company's earnings performance. These reductions helped to more than offset increases which were incurred generally throughout the remainder of the expense categories. Other income in fiscal 1995 was down approximately $5.1 million compared to the prior year. This resulted primarily from a non-recurring write-off for the remaining book value of an inactive coal-fired boiler in the fourth quarter amounting to $5.0 million. This write-off was made after 15 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- negotiations with a local utility culminated in 15- and 7-year fixed pricing agreements for steam heat and electricity, respectively, with the option to renew the steam heat agreement for an additional 19 years. The consolidated effective income tax rate increased as a result of state tax rates. The general effects of inflation were minimal. As the result of the foregoing factors, the Company realized net income of $3,339,000 in fiscal 1995 compared to net income of $15,851,000 in fiscal 1994. QUARTERLY FINANCIAL INFORMATION Generally, the Company's sales are not seasonal except for variations affecting fuel grade alcohol, beverage alcohol and gluten sales. In recent years, demand for fuel grade alcohol has tended to increase during the fall and winter to satisfy clean air standards during those periods. Beverage alcohol sales tend to peak in the fall as distributors order stocks for the holiday season, while gluten sales tend to increase during the second half of the fiscal year as demand increases for hot dog buns and similar bakery products. The following table shows quarterly information for each of the years ended June 30, 1996 and 1995. Quarter Ending - -------------------------------------------------------------------------------- Sept. 30 Dec. 31 March 31 June 30 Total - -------------------------------------------------------------------------------- (in thousands except per share amounts) FISCAL 1996 Sales $47,160 $55,751 $53,871 $37,856 $194,638 Gross profit (937) 3,619 1,304 479 4,465 Net income (loss) (2,377) 195 (410) (814) (3,406) Earnings (loss) per share (.25) .02 (.04) (.08) (.35) FISCAL 1995 Sales $45,984 $44,488 $42,005 $47,775 $180,252 Gross Profit 7,650 6,734 2,973 3,746 21,103 Net Income (Loss) 2,756 2,237 298 (1,952) 3,339 Earnings (Loss) Per Share .28 .23 .03 (.20) .34 16 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The following table is presented as a measure of the Company's liquidity and financial condition: At June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Cash and cash equivalents $ 3,759 $ 460 Working capital 37,113 26,955 Amounts available under lines of credit 18,600 12,000 Note payable and long-term debt 40,933 38,908 Stockholders' equity $109,222 $112,628 - -------------------------------------------------------------------------------- Although the Company's income statement reflects losses due to factors previously mentioned, a number of actions have enabled the Company to continue to generate positive cash flows, maintain a strong working capital position and a relatively low debt-to-equity ratio during this period of adversity. These include stringent cost reduction measures, reductions in capital expenditures due to the completion of the Pekin plant expansion program, the suspension of quarterly cash dividends to stockholders and changes in production, purchasing, and marketing strategies. Due to the recent completion of major capital improvement projects at both plants, there will not be significant capital improvement requirements in the near future. At June 30, 1996, the Company had $400,000 committed to improvements and replacements of existing equipment. While grain costs have begun to decline, the current high cost of grain and low selling prices are expected to continue to negatively impact the Company's liquidity in the near term. However, management believes that the strategies which continue to be implemented, together with the Company's strong working capital and available lines of credit, should enable the Company to weather current adversities and remain well positioned for a return to more favorable conditions. 17 INDEPENDENT ACCOUNTANT'S 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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MIDWEST GRAIN PRODUCTS, INC. as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. /s/Baird, Kurtz & Dobson BAIRD, KURTZ & DOBSON Kansas City, Missouri August 9, 1996 18 FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands, except per share amounts) NET SALES $194,638 $180,252 $185,968 COST OF SALES 190,173 159,149 148,320 - -------------------------------------------------------------------------------- GROSS PROFIT 4,465 21,103 37,648 SELLING, GENERAL & ADMINISTRATIVE EXPENSES 9,001 10,553 12,212 - -------------------------------------------------------------------------------- (4,536) 10,550 25,436 OTHER OPERATING INCOME (EXPENSE) 159 (107) (669) - -------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS (4,377) 10,443 24,767 OTHER INCOME (LOSS), NET 1,309 (4,225) 924 INTEREST EXPENSE (2,556) (606) (127) - -------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (5,624) 5,612 25,564 PROVISION (CREDIT) FOR INCOME TAXES (2,218) 2,273 9,713 - -------------------------------------------------------------------------------- NET INCOME (LOSS) $ (3,406) $ 3,339 $ 15,851 ================================================================================ EARNINGS (LOSS) PER COMMON SHARE $ (.35) $ .34 $ 1.62 ================================================================================ See Notes to Consolidated Financial Statements 19 FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995 - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,759 $ 460 Receivables (less allowance for doubtful accounts; 1996--$285; 1995--$85) 18,365 21,550 Notes receivable 919 Inventories 19,913 14,690 Prepaid expenses 573 560 Deferred income taxes 1,531 875 Income taxes receivable 3,063 2,338 - -------------------------------------------------------------------------------- Total Current Assets 47,204 41,392 - -------------------------------------------------------------------------------- PROPERTY & EQUIPMENT, at cost 210,304 206,336 Less accumulated depreciation 85,155 71,424 - -------------------------------------------------------------------------------- PROPERTY & EQUIPMENT, NET 125,149 134,912 - -------------------------------------------------------------------------------- OTHER ASSETS 432 445 - -------------------------------------------------------------------------------- TOTAL ASSETS $172,785 $176,749 ================================================================================ LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 6,416 $ 7,807 Accrued expenses 3,675 6,630 - -------------------------------------------------------------------------------- Total Current Liabilities 10,091 14,437 - -------------------------------------------------------------------------------- LONG-TERM DEBT 40,933 38,908 - -------------------------------------------------------------------------------- POST-RETIREMENT BENEFITS 5,945 5,449 - -------------------------------------------------------------------------------- DEFERRED INCOME TAXES 6,594 5,327 - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Capital stock Preferred, 5% non-cumulative, $10 par value; authorized 1,000 shares; issued and outstanding 437 shares 4 4 Common, no par; authorized 20,000,000 shares; issued and outstanding 9,765,172 6,715 6,715 Additional paid-in capital 2,485 2,485 Retained earnings 100,018 103,424 - -------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 109,222 112,628 - -------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $172,785 $176,749 ================================================================================ See Notes to Consolidated Financial Statements 20 FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- Additional Preferred Common Paid-in Retained Stock Stock Capital Earnings Total (in thousands) - -------------------------------------------------------------------------------- BALANCE, JUNE 30, 1993 $4 $6,715 $2,485 $ 94,002 $103,206 1993 net income 15,851 15,851 Payment of cash dividends of $.50 per share (4,884) (4,884) - -------------------------------------------------------------------------------- BALANCE, JUNE 30 1994 4 6,715 2,485 104,969 114,173 1995 net income 3,339 3,339 Payment of cash dividends of $.50 per share (4,884) (4,884) - -------------------------------------------------------------------------------- BALANCE, JUNE 30, 1995 4 6,715 2,485 103,424 112,628 1996 net loss (3,406) (3,406) - -------------------------------------------------------------------------------- BALANCE, JUNE 30, 1996 $4 $6,715 $2,485 $100,018 $109,222 ================================================================================ See Notes to Consolidated Financial Statements 21 FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(3,406) $3,339 $15,851 Items not requiring (providing) cash: Depreciation 13,854 8,681 7,160 (Gain) loss on sale of assets (41) 4,696 (513) Deferred income taxes 611 (628) (742) Changes in: Accounts receivable 3,185 (1,198) (2,452) Inventories (5,223) (1,461) (2,356) Accounts payable 4 1,780 (111) Income taxes (receivable) payable (725) (3,570) 993 Other (1,238) (929) 985 - -------------------------------------------------------------------------------- Net cash provided by operating activities 7,021 10,710 18,815 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property & equipment (5,516) (38,870) (45,690) Proceeds from sale of equipment 71 615 738 Proceeds from notes receivable 919 645 1,089 Change in current & non-current investments, net 14,504 (11,260) - -------------------------------------------------------------------------------- Net cash used in investing activities (4,526) (23,106) (55,123) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Principle payments on long-term debt (50) Proceeds from issuance of long-term debt 2,025 13,908 25,000 Dividends paid (1,221) (4,884) (4,884) - -------------------------------------------------------------------------------- Net cash provided by financing activities 804 9,024 20,066 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 3,299 (3,372) (16,242) CASH & CASH EQUIVALENTS, BEGINNING OF YEAR 460 3,832 20,074 - -------------------------------------------------------------------------------- CASH & CASH EQUIVALENTS, END OF YEAR $ 3,759 $ 460 $ 3,832 ================================================================================ See Notes to Consolidated Financial Statements 22 FINANCIAL REVIEW - -------------------------------------------------------------------------------- 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 production of vital wheat gluten, premium wheat starch, alcohol products and flour mill products. The Company sells its products on normal credit terms to customers in a variety of industries located primarily throughout the United States. Through its wholly-owned subsidiaries, the Company operates in Atchison, Kansas and Pekin, Illinois (Midwest Grain Products of Illinois, Inc.). Additionally, Midwest Grain Pipeline, Inc., another wholly-owned subsidiary, supplies natural gas to the Company. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation. The consolidated financial statements include the accounts of Midwest Grain Products, Inc. and all subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Inventories. Inventories are stated at the lower of cost or market on the first-in, first-out (FIFO) method. Property and Equipment. Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the assets. The Company capitalizes interest costs as a component of construction in progress, based on the weighted average rates paid for long-term borrowing. Total interest incurred each year was: Years Ended June 30, - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Interest costs capitalized $ 364 $1,570 $1,328 Interest costs charged to expense 2,556 606 127 - -------------------------------------------------------------------------------- $2,920 $2,176 $1,455 ================================================================================ Earnings Per Common Share. Earnings per common share is based upon the weighted average number of shares and common share equivalents, except when anti-dilutive, totaling 9,765,172 outstanding for each year. Cash Equivalents. The company considers all liquid investments with maturities of three months or less to be cash equivalents. Income Taxes. Deferred tax liabilities and assets are recognized for the tax effect of the differences between the financial statement and tax basis of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. Note 2: Inventories Inventories consist of the following: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Alcohol and spirits $ 9,830 $ 4,035 Unprocessed grain 5,203 5,785 Operating Supplies 2,632 2,645 Gluten 1,208 1,524 By-products and other 1,040 701 - -------------------------------------------------------------------------------- $19,913 $14,690 23 FINANCIAL REVIEW - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 3: Property and Equipment Property and equipment consists of the following: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Land, buildings and improvements $ 17,411 $ 17,568 Transportation equipment 1,166 1,323 Machinery and equipment 186,154 166,912 Construction in progress 5,573 20,533 - -------------------------------------------------------------------------------- 210,304 206,336 Less accumulated depreciation 85,155 71,424 - -------------------------------------------------------------------------------- $125,149 $134,912 ================================================================================ Note 4: Accrued Expenses Accrued expenses consist of the following: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Excise taxes $ 236 $ 602 Employee benefit plans (Note 10) 374 998 Salaries and wages 770 1,138 Dividends declared 1,221 Property taxes 519 573 Insurance 991 1,258 Interest 696 782 Other expenses 89 58 - -------------------------------------------------------------------------------- $3,675 $6,630 ================================================================================ Note 5: Long-Term Debt Long-term debt consists of the following: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Senior notes payable $25,000 $25,000 Line of credit 15,000 13,000 Other 933 908 - -------------------------------------------------------------------------------- Long-term portion $40,933 $38,908 ================================================================================ The unsecured senior notes payable are payable in annual installments of $2,273,000 from 1999 through 2008 with the final principal payment of $2,270,000 due in 2009. Interest is payable semiannually at 6.68% per annum for the fifteen-year term of the notes. At June 30, 1996, the Company had a $27 million unsecured revolving line of credit expiring on October 1, 1997, with interest at 1% below prime on which there was $15.0 million in borrowings at June 30, 1996. Subsequent to year end, the maturity date of this line of credit was extended to October 1, 1998. All other terms remain the same. The Company had four additional lines of credit totaling $6.6 million expiring on dates through September 1,1997, with interest rates varying from prime to 1% below prime on which there were no borrowings. 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 $78 million and a debt service coverage ratio of 1.5 to 1. The fair value of the senior notes payable debt, based upon the borrowing rate of 7.55% available to the Company at June 30, 1996, was $24,000,000. Aggregate annual maturities of long-term debt at June 30, 1996 are as follows: (in thousands) 1997 $ 0 1998 15,823 1999 2,296 2000 2,335 2001 2,298 Thereafter 18,181 ----------------------------------------------- $40,933 =============================================== 24 FINANCIAL REVIEW - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 6: Income Taxes The provisions (credit) for income taxes are comprised of the following: Years Ended June 30, - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Income taxes currently payable (receivable) $(2,829) $2,901 $10,455 Income taxes deferred 611 (628) (742) - -------------------------------------------------------------------------------- $(2,218) $2,273 $ 9,713 ================================================================================ The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets are as follows: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Deferred tax assets: Accrued employee benefits $ 156 $ 244 Post-retirement liability 2,378 2,179 Insurance accruals 1,002 647 State operating loss carry forwards 341 Other 337 137 - -------------------------------------------------------------------------------- 4,214 3,207 - -------------------------------------------------------------------------------- Deferred tax liabilities: Accumulated depreciation (8,857) (7,197) Deferred gain on involuntary conversion (420) (462) - -------------------------------------------------------------------------------- (9,277) (7,659) - -------------------------------------------------------------------------------- Net deferred tax liability $(5,063) $(4,452) ================================================================================ The above net deferred tax liability is presented on the consolidated balance sheets as follows: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Deferred tax asset - current $ 1,531 $ 875 Deferred tax liability - long-term (6,594) (5,327) - -------------------------------------------------------------------------------- Net deferred tax liability $(5,063) $(4,452) ================================================================================ No valuation allowance has been recorded at June 30, 1996 or 1995. A reconciliation of the provision for income taxes at the normal statutory federal rate to the provision (credit) included in the accompanying consolidated statements of operations is shown below: Years Ended June 30, - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) "Expected" provision (credit) at federal statutory rate (34%) $(1,912) $1,908 $8,694 Increases (decreases) resulting from: Effect of state income taxes (236) 223 760 Other (70) 142 259 - -------------------------------------------------------------------------------- Provision (credit) for income taxes $(2,218) $2,273 $9,713 ================================================================================ 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. 25 FINANCIAL REVIEW - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 8: Other Operating Income (Expense) Other operating income (expense) consists of the following: Years Ended June 30, - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Truck operations $136 $(222) $ (88) Warehousing and storage operations (32) 41 (632) Miscellaneous 55 74 51 - -------------------------------------------------------------------------------- $159 $(107) $(669) ================================================================================ Note 9: Energy Commitment During fiscal 1995, the Company negotiated an agreement to purchase steam heat and electricity from a utility for its Illinois operations. Steam heat will be purchased for the next 15 years for a minimum monthly charge of $114,000, with a declining fixed charge for purchases in excess of the minimum usage. Electricity purchases will occur at fixed rates through May 31, 2002. In connection with the agreement, the Company leased land to the utility company for 15 years so it could construct a co-generation plant at the Company's Illinois facility. The Company has also agreed to reimburse the utility for the net book value of the plant if the lease is not renewed for an additional 19 years. The estimated net book value of the plant would be $10.6 million at the date. As a result of the above agreements, the Board approved the disposal of the coal boiler which previously supplied the majority of the Illinois plant's energy needs. The Company recorded the estimated effect of the disposal as a non-recurring other expense of approximately $5.0 million during the fiscal year ended June 30, 1995. Note 10: Employee Benefit Plans Pension Plan. The Company has a noncontributory defined benefit pension plan covering union employees. The plan provides benefits based on the participants' years of service. The Company only contributes amounts deductible for federal income tax purposes. Pension cost included the following components: Years Ended June 30, - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Service cost-benefits earned during year $ 54 $ 58 $ 53 Interest cost on projected benefit obligations 150 144 142 Actual investment income earned on plan assets (257) (233) (83) Amortization of transition liability and difference between actual and expected return on plan assets 133 121 (28) - -------------------------------------------------------------------------------- Pension cost $ 80 $ 90 $ 84 ================================================================================ The funded status of the plan is as follows: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Accumulated benefit obligations, including vested benefits of $2,183 and $2,078 $2,191 $2,082 ================================================================================ Plan assets at fair value $2,071 $1,888 Projected benefit obligations for participants' service rendered to date 2,191 2,082 - -------------------------------------------------------------------------------- Projected benefit obligations in excess of plan's assets (120) (194) Unrecognized gains (75) (30) Unrecognized prior service cost 57 64 Unrecognized net obligation at July 1, 1987 being recognized over the participants' average remaining service period 106 124 Adjustment required to recognize the minimum liability (88) (158) - -------------------------------------------------------------------------------- Minimum pension liability $ (120) $ (194) ================================================================================ 26 FINANCIAL REVIEW - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Plan assets are invested in cash equivalents, U.S. Government securities, corporate bonds, fixed income funds and common stocks. The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5%. The expected long-term rate of return on the plan's assets was 8.0%. Employee Stock Ownership Plans. The Company and its subsidiaries have employee stock ownership plans covering all employees after certain eligibility requirements are met. Contributions to the plans totaled $374,000, $998,000 and $1,323,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Contributions are made in the form of cash and/or additional shares of common stock. 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, 1996 and 1995 was as follows: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Accumulated post-retirement benefit obligations: Retirees $3,360 $3,374 Active plan participants 1,526 2,237 - -------------------------------------------------------------------------------- Unfunded accumulated obligation 4,886 5,611 Unrecognized actuarial gain (loss) 1,059 (162) - -------------------------------------------------------------------------------- Accrued post-retirement benefit cost $5,945 $5,449 ================================================================================ Net post-retirement benefit cost included the following components: June 30, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Service cost $159 $201 Interest cost 424 414 - ------------------------------------------------------------------------------- $583 $615 =============================================================================== 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 10.0% (compared to 13.0% assumed for 1995) reducing to 9.0% over five years and 6.0% over 23 years. A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $352,000 at June 30, 1996 and the service and interest cost by $42,000 for the year then ended. A weighted average discount rate of 8.0% was used in determining the accumulated benefit obligation. Stock Incentive Plan. During fiscal 1996, the Company adopted, subject to stockholder approval, a stock incentive plan which permits the issuance of stock awards, options and stock appreciation rights to selected employees of the Company. The plan reserves 450,000 shares of common stock for grant and provides that the term of each award be determined by the committee of the Board of Directors charged with administering the plan. Under the terms of the plan, options granted may be either nonqualified or incentive stock options and the exercise price may not be less than the fair market value of a share on the date of the grant. In January 1996, the Company granted 90,000 stock options at $14 per share, exercisable in installments over a five year period. All options are outstanding at June 30, 1996. 27 FINANCIAL REVIEW - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Note 11: Operating Leases The Company has several noncancellable operating leases for railcars which expire from August 1996 through October 1999. 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, 1996 are as follows: (in thousands) 1997 $1,645 1998 1,550 1999 1,312 2000 398 ----------------------------------------------- future minimum lease payments $4,905 =============================================== Rental expense for all operating leases with terms longer than one month totaled $1,546,000, $951,000 and $686,000 for the years ended June 30,1996, 1995 and 1994, respectively. Minimum future rentals receivable under noncancellable operating subleases at June 30, 1996, were $147,400. 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: * Substantially all of the Company's labor force is covered by collective bargaining agreements which expire September 1, 1996 at the Atchison plant and on November 1, 1996 at the Pekin plant. * Under its self-insurance plan, the Company accrues the estimated expense of health care and workers' compensation claims costs based on claims filed subsequent to year-end and an additional amount for incurred but not yet reported claims based on prior experience. An accrual for such costs of $991,000 is included in the accompanying 1996 financial statements. Claims payments based on actual claims ultimately filed could differ materially from these estimates. * During the years ended June 30, 1996, 1995 and 1994, the Company had sales to one customer accounting for approximately 10.7%, 10.7% and 14.5%, respectively of consolidated sales. Note 13: Additional Cash Flows Information Years Ended June 30, - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Noncash Investing and Financing Activities: Purchase of property and equipment in accounts payable $ 12 $1,407 $3,931 Dividends declared 1,221 1,221 Additional Cash Payment Information: Interest paid (net of amount capitalized) 2,585 519 127 Income taxes paid (refunded) $(2,105) $4,200 $9,460 - -------------------------------------------------------------------------------- Note 14: 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. 28 EX-10 5 EXHIBIT 10(E) TO FORM 10-K Exhibit 10(e) MIDWEST GRAIN PRODUCTS, INC. INCENTIVE STOCK OPTION GRANTED UNDER THE STOCK INCENTIVE PLAN OF 1996 Date of Grant: January 5, 1996 12,000 Shares ------ Time of Grant: 10:15 a.m. CST THIS OPTION IS NOT ASSIGNABLE Grant. Midwest Grain Products, Inc., a Kansas corporation (the "Company"), hereby grants to the optionee named below an option to purchase, in accordance with and subject to the terms and restrictions set forth in the Midwest Grain Products, Inc. Stock Incentive Plan of 1996 (the "Plan") and in this option, the number of shares of Common Stock, no par value, of the Company ("Shares") set forth below, at the price set forth below and expiring at the date set forth below: Optionee: Robert G. Booe ----------------------- Number of Shares subject to option: 12,000 ---------- Number of such Shares to be Incentive Options: 9,000 --------- Number of such Shares to be Nonqualified Options: 3,000 --------- Option price per Share: $14.00 Incentive Stock Option. This option is intended to qualify as an incentive stock option under Section 422 of the Code, as amended from time to time ("Incentive Option") as to the shares specified above to be Incentive Options and as a nonqualified option as to the remainder of such shares ("Nonqualified Option"); provided that to the extent that the aggregate fair market value (as defined in the Code), of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by you during any calendar year under the Plan or any other Company plan exceeds $100,000, this Option shall be treated as a Nonqualified Option in accordance with the provisions of Section 422 of the Code, as amended. Exercisability. (a) Incentive Option Installments. Subject to the $100,000 limitation, the Incentive options shall become exercisable as to all or any part of 3,000 shares upon the first anniversary of the Date of Grant, 3,000 shares upon the second anniversary of the Date of Grant, 1,500 shares on the third anniversary of the Date of Grant and 1,500 shares on the fourth anniversary of the Date of Grant. (b) Nonqualified Option Installments. The Nonqualified options shall become exercisable as to all or any part of 0 shares upon the first anniversary of the Date of Grant, 0 shares upon the second anniversary of the Date of Grant, 1,500 shares on the third anniversary of the Date of Grant and 1,500 shares on the fourth anniversary of the Date of Grant. (c) Other Provision concerning Exercisability. The options shall otherwise be exercisable to the extent permitted in the Plan, including provisions therein relating to a Change In Control, death, retirement or other termination of employment. Installments or portions thereof not exercised in earlier periods shall be cumulative and shall be available for exercise in later periods. Term. All options granted to you under this grant must be exercised, if at all, within five years after the date of this grant. In the event of your death, retirement from the Company or other termination of employment, whether voluntary or involuntary, the options will expire and may be exercised in the manner specified in Section 6 of the Plan. Exercise. Upon exercise of an option, you may pay all or any part of the option price in cash, by check satisfactory to the Company or by transfer to the Company of shares of Mature Stock or other Common Stock which was not obtained through the exercise of a stock option owned by the Optionee or by the withholding of shares to be distributed in connection with the exercise of this Option. Notwithstanding the foregoing, Shares issued under an Incentive Stock Option may not be withheld to pay any portion of the purchase price. Common Stock transferred to the Company or withheld from shares to be distributed in payment of the option price or withholding taxes shall be valued at the Fair Market Value of the Common Stock on the date of the exercise. Option Not Assignable. This Option is not transferable by you otherwise than by will or the laws of descent and distribution, and is exercisable, during your lifetime, only by you. Not a 10% Owner. You hereby certify that, at the date hereof, you believe that you do not own stock of the Company that possesses more than 10 percent of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary of the Company. Payment of Taxes. The Plan grants the Company the authority to make such provision as the Company deems appropriate for the collection of any taxes which the Company may withhold in connection with the grant or exercise of options. Pursuant to that authority, the Company authorizes you to settle withholding taxes generated upon the exercise of Nonqualified Options by allowing you to pay the taxes with cash or shares of the Company's Common Stock in accordance with the following guidelines: 1. You may satisfy obligations to pay to the Company the amount of any federal, state or local income tax imposed on you as a result of the exercise of this option by either: (a) Delivering to the Company a personal check satisfactory to the Company in the amount of the tax liability on the date that the amount of the tax to be withheld is to be determined (the "Tax Date"); or by 2 (b) Electing to pay the tax liability in shares of the Company's Common Stock ("Stock Payment Election") by (1) directing the Company at or prior to the Tax Date to withhold from the number of shares to be issued to the optionee in connection with the exercise of a Nonqualified Option that number of shares equal to the amount of the tax liability divided by the fair market value (as defined by the Plans) of one share of the Company's common stock on the Tax Date; or (2) delivering to the Company on the Tax Date good and marketable title to that number of shares of Mature Stock (as defined in the Plan) or other Stock which was not obtained through the exercise of a stock option owned by you, as shall equal the amount of the tax liability divided by the fair market value of one share of the Company's common stock on the Tax Date. 2. If you are subject to the provisions of Section 16 of the Securities Exchange Act of 1934, then you may settle the tax liability pursuant to a Stock Payment Election only in accordance with the following additional restrictions so long as Rule 16b-3, as amended, imposes such requirements: (a) A Stock Payment Election that is made by delivering pre owned shares under 1(b)(2) above may be made by delivering the shares concurrent with the exercise of the option whether or not the option is exercised during the third through the twelfth business days following the release of quarterly financial information ("window period)." However, a Stock Payment Election that is made by directing the Company to withhold shares to satisfy the taxes must be made either (i) during a window period in which the option is exercised or before such window period so long as the election takes effect in that window period or (ii) six months before the date the option is exercised. (b) A Stock Payment Election must be made in writing and shall be irrevocable by you once made; (c) The Committee shall have the right at any time to disapprove the election at any time after it is made; and (d) The election must be made at least six months after the Date of Grant. 3. No fractional shares will be issued in connection with any election to satisfy a tax liability by paying in shares. The balance of any tax liability representing a fraction of a share will be settled in cash. 4. The amount of tax which may be paid by an optionee pursuant to a Stock Payment Election will be the federal, state and local income taxes (including FICA taxes) applicable to the exercise of the option determined by applying the higher of either (a) the rate normally applied to the optionee's regular wages by the Company or (b) the employee's highest applicable maximum marginal tax rate, such rate to be selected by the optionee at the time of the election to pay the taxes with surrendered or withheld shares. 3 5. The provisions of these rules relating to the use of stock to satisfy obligations may be unilaterally revised by the Committee from time to time to conform the same to any applicable laws or regulations. Compliance With Law. When the issue or transfer of the shares covered by this option may, in the opinion of the Company, conflict or be inconsistent with any applicable law or regulation of any governmental agency having jurisdiction, the Company reserves the right to refuse to issue or transfer said stock. The Company may also legend certificates covering shares purchase hereunder with usual and customary transfer restrictions to insure compliance with applicable securities laws, and may issue the same subject to its prior receipt of written representations from optionee in form and substance satisfactory to the Company. Option Subject to Stockholder Approval. This Stock Option shall become null and void if the Plan is not approved by the Stockholders of the Company prior to January 5, 1997, in accordance with the terms of the Plan. In such event all benefits conferred hereunder shall be deemed canceled and you shall have no further rights hereunder or by virtue hereof. IN WITNESS WHEREOF, this instrument has been executed by the Company as of this 5th day of January, 1996. MIDWEST GRAIN PRODUCTS, INC. By /s/Laidacker M. Seaberg -------------------------- Laidacker M. Seaberg President and Chief Executive Officer ACKNOWLEDGEMENT I hereby acknowledge receipt of the above option and a copy of the Plan referred to in said option. I am familiar with the terms of the Plan, and I understand my rights under the option are subject to and governed by the terms of the Plan, as well as by the terms set forth in the foregoing option itself. 4 1-5-96 /s/Robert G. Booe -------------- ------------------------ Date Acknowledged Signature of Optionee 5 EX-27 6 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 EXHIBIT 27 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MIDWEST GRAIN PRODUCTS, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1996 AND CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000835011 MIDWEST GRAIN PRODUCTS, INC. 1,000 YEAR JUN-30-1996 JUL-1-1995 JUN-30-1996 3,759 0 18,365 285 19,913 47,204 210,304 85,155 172,785 10,091 40,933 6,715 0 4 102,503 172,785 194,638 194,638 190,173 199,174 159 0 (2,556) (5,624) (2,218) (3,406) 0 0 0 (3,406) (.35) (.35) Reflects retained earnings and additional paid in captial. Reflects cost of sales and selling, general & administrative expenses.
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