-----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, QU3VX4hb8jQIgOuWzpXD6tuXvdyddQpHyNEe7sWLv5xmRiL3CFCvUIhP4BqBZacm trGnKscxQWKQc8l5sFfksA== 0000916002-97-000018.txt : 19970520 0000916002-97-000018.hdr.sgml : 19970520 ACCESSION NUMBER: 0000916002-97-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17196 FILM NUMBER: 97606588 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-Q 1 MIDWEST GRAIN PRODUCTS, INC. 10Q 3RD QTR 1997 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1997 Commission File No. 0-17196 MIDWEST GRAIN PRODUCTS, INC. (Exact Name of Registrant as Specified in Its Charter) KANSAS 48-0531200 (State or Other Jurisdiction of IRS Employer Incorporation or Organization) Identification No. 1300 Main Street, Atchison, Kansas 66002 (Address of Principal Executive Offices and Zip Code) (913) 367-1480 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to the filing requirements for at least the past 90 days. X YES NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value 9,765,172 shares outstanding as of May 1, 1997. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Independent Accountants' Review Report 2 Condensed Consolidated Balance Sheets as of March 31, 1997 and June 30, 1996 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 1997 and 1996 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1997 and 1996 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11 {LOGO} Baird, Kurtz & Dobson Certified Public Accountants Independent Accountants' Review Report Board of Directors and Stockholders Midwest Grain Products, Inc. Atchison, Kansas 66002 We have reviewed the condensed consolidated balance sheet of MIDWEST GRAIN PRODUCTS, INC. and subsidiaries as of March 31, 1997, and the related condensed consolidated statements of operations for the three month and nine month periods ended March 31, 1997 and 1996, and the related condensed consolidated statements of cash flows for the nine month periods ended March 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of June 30, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and, in our report dated August 9, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1996, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. S/BAIRD, KURTZ & DOBSON Kansas City, Missouri BAIRD, KURTZ & DOBSON April 23, 1997 City Center Square, Suite 2700, 1100 Main, 816 221-6300 Kansas City, Missouri 64105 FAX 816 221-6380 With Offices in: Arkansas, Colorado, Kansas, Kentucky, Missouri, Nebraska, Oklahoma Member of Moores Rowland International -2- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) ASSETS March 31, June 30, 1997 1996 ---------- -------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 2,891 $ 3,759 Receivables 23,187 18,365 Inventories 24,781 19,913 Prepaid expenses 1,226 573 Deferred income taxes 1,531 1,531 Income taxes receivable 3,063 -------- ------- Total Current Assets 53,616 47,204 -------- ------- PROPERTY AND EQUIPMENT, At cost 212,511 210,304 Less accumulated depreciation 95,588 85,155 -------- -------- 116,923 125,149 -------- ------ OTHER ASSETS 432 432 -------- -------- $170,971 $172,785 ======== ======== See Accompanying Note to Condensed Consolidated Financial Statements and Independent Accountants' Review Report -3- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (In Thousands) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, June 30, 1997 1996 ------------- -------- (Unaudited) CURRENT LIABILITIES Notes payable $ 3,000 Accounts payable 7,688 $ 6,416 Accrued expenses 3,675 3,675 Income taxes payable 850 -------- --------- Total Current Liabilities 15,213 10,091 -------- --------- LONG-TERM DEBT 32,933 40,933 -------- --------- POST-RETIREMENT BENEFITS 6,147 5,945 -------- --------- DEFERRED INCOME TAXES 6,594 6,594 -------- --------- STOCKHOLDERS' EQUITY Capital stock Preferred, 5% noncumulative, $10 par value; authorized 1,000 shares; issued and outstanding 437 shares 4 4 Common, no par; authorized 20,000,000 shares; issued 9,765,172 shares 6,715 6,715 Additional paid-in capital 2,485 2,485 Retained earnings 100,880 100,018 --------- -------- Total Stockholders' Equity 110,084 109,222 --------- -------- $170,971 $172,785 ======== ======== See Accompanying Note to Condensed Consolidated Financial Statements and Independent Accountants' Review Report -4- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited) Three Months Nine Months 1996 1995 1996 1995 ----- ---- ---- ---- (in thousands, except per share amounts) NET SALES $54,449 $53,871 $162,871 $156,782 COST OF SALES 51,975 52,567 153,445 152,796 ------- ------ ------- ------- GROSS PROFIT 2,474 1,304 9,426 3,986 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,102 2,012 6,644 6,852 ------- ------- ------- ------- 372 (708) 2,782 (2,866) OTHER OPERATING INCOME 100 34 317 87 ------ ------ ------- ------- INCOME (LOSS) FROM OPERATIONS 472 (674) 3,099 (2,779) OTHER INCOME (LOSS) Interest (611) (706) (2,015) (2,198) Other 145 701 339 692 ------ ------ ------ ------- INCOME (LOSS) BEFORE INCOME TAXES 6 (679) 1,423 (4,285) PROVISION (CREDIT) FOR INCOME TAXES 3 (269) 561 (1,693) ------- ------ ------- ------- NET INCOME (LOSS) $ 3 $ (410) $ 862 $(2,592) ======= ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE $.00 $(.04) $.09 $(.27) ==== ===== ==== ===== See Accompanying Note to Condensed Consolidated Financial Statements and Independent Accountants' Review Report -5- MIDWEST GRAIN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited) 1997 1996 -------- ------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 862 $(2,592) Items not requiring (providing) cash: Depreciation 10,520 10,244 Gain on sale of assets (17) (30) Changes in: Accounts receivable (4,822) (2,429) Inventories (4,868) (2,424) Prepaid expenses (653) Other assets (239) Accounts payable 1,261 891 Accrued expenses 202 (699) Income taxes payable 3,913 557 ------- -------- Net cash provided by operating activities 6,398 3,279 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (2,355) (4,699) Proceeds from sale of equipment 89 69 Payment received on note for sale of plant 919 ------- ------- Net cash used in investing activities (2,266) (3,711) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net advances on notes payable 3,000 6,000 Net principal payments on long-term debt (8,000) (3,975) Dividends paid (1,221) ------- ------- Net cash provided by (used in) financing activities (5,000) 804 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (868) 372 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,759 460 -------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,891 $ 832 ======= ======== See Accompanying Note to Condensed Consolidated Financial Statements and Independent Accountants' Review Report -6- MIDWEST GRAIN PRODUCTS, INC. NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited) NOTE 1: GENERAL In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated financial position as of March 31, 1997, and the condensed consolidated results of its operations and its cash flows for the periods ended March 31, 1997 and 1996, and are of a normal recurring nature. See Independent Accountants' Review Report -7- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 1997 RESULTS OF OPERATIONS General - ------- The Company's net income of $3,000 in the third quarter of fiscal 1997 was a noticeable improvement over the prior year's third quarter net loss of $410,000. A greater improvement was prevented by the intensification of competitive pressures in the Company's vital wheat gluten and food grade alcohol markets, and higher than normal energy costs. The increased energy costs, which the Company began experiencing midway through the second quarter, resulted from a significant jump in natural gas prices due to periods of extreme cold weather throughout much of the U.S. Since early March, those prices have returned to more normal levels, allowing the Company to realize improved production cost efficiencies. Conditions in the wheat gluten market were adversely affected by increased competition from the European Union (E.U.), whose exports of cross-subsidized gluten to the U.S. have continued at record levels. As a result, the Company was unable to adjust the selling price of its gluten enough to effectively offset third quarter production costs. Previously announced consultations between the U.S. and E.U. to negotiate a mutually acceptable solution to this problem are still pending. Also pending are the results of a Section 301 investigation which was recently initiated by the Office of the U.S. Trade Representative in response to a petition filed by the Wheat Gluten Industry Council of the U.S. The investigation targets certain E.U. wheat starch/gluten subsidies. When completed, the results will be forwarded to an international panel of the World Trade Organization for a determination as to the extent to which any corrective measures might be taken. The Wheat Gluten council, of which the Company is a member, is prepared to seek additional legal action should a satisfactory remedy not materialize. In the meantime, efforts by the Company to develop specialty wheat gluten products for niche markets continue to garner increased, but gradual, interest. While conditions in the Company's alcohol markets generally remain healthy, prices for food grade alcohol for beverage and industrial applications declined in the third quarter due mainly to increased competition from the start-up of new distillation capacities throughout the industry. Increased supplies of fuel grade alcohol caused a reduction in selling prices in that market as well. MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NINE MONTHS ENDED MARCH 31, 1997 Demand for the Company's premium wheat starch remains strong and should continue to result in increased utilization of capacity at Midwest Grain's Pekin, Illinois plant, where a new starch production facility was completed in the first quarter of fiscal 1996. With a continued normalization of energy costs, consistently lower grain costs and improved production efficiencies, the Company expects to strengthen its competitive abilities and improve profitability in the fourth quarter of fiscal 1997. Sales - ----- Net sales in the third quarter of fiscal 1997 were approximately $578,000 higher See Independent Accountants' Review Report -8- than sales in the third quarter of fiscal 1996. The increase principally resulted from increased sales of fuel grade alcohol due to a 67% rise in units sold. Sales of beverage alcohol decreased 26% in this year's third quarter compared to the same period the prior year as the result of reduced selling prices and units sold. Sales of food grade alcohol for industrial applications fell 13% due to a decline in production volume. Sales of distillers' feeds, a by-product of the alcohol production process, rose approximately 15%, due to slightly improved selling prices and a 13% increase in units sold. Wheat gluten sales were approximately even with sales in the third quarter of fiscal 1996 despite a moderate increase in unit output. Selling prices for this product fell substantially in the face of extreme competitive pressures from the European Union. Sales of wheat starch increased 5% as the result of higher volumes. Net sales for the first nine months of fiscal 1997 increased by approximately $6,089,000 over sales for the first nine months of fiscal 1996. The increase occurred principally in the first quarter as the result of higher sales of wheat starch, food grade industrial alcohol, fuel grade alcohol and alcohol by-products compared to the prior year's first quarter. Cost of Sales - ------------- The cost of sales in the third quarter of fiscal 1997 decreased by slightly more than $592,000 compared to the cost of sales in the third quarter of fiscal 1996. This occurred primarily as the result of a $3.6 million reduction in raw material costs for grain. This decrease was partially offset by an increase of approximately $1.3 million in energy costs, due mainly to higher prices for natural gas, and an increase of almost $900,000 in maintenance and repair costs. The cost of sales for the first nine months of MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NINE MONTHS ENDED MARCH 31, 1997 fiscal 1997 increased by nearly $649,000 above the cost of sales in the first nine months of fiscal 1996. Raw material cost decreases in the second and third quarter offset most of a $5.0 million increase in raw material costs experienced in the first quarter. Increased energy costs for the nine months were experienced during the second and third quarters. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses in the third quarter of fiscal 1997 were approximately even with selling, general and administrative expenses in the third quarter of fiscal 1996. For the first nine months of fiscal 1997, these costs decreased by approximately $208,000 compared to the first nine months of fiscal 1996. This decrease was spread through most expense categories as part of the Company's cash management. The consolidated effective income tax rate is consistent for all periods. The general effects of inflation were minimal. Net Income - ---------- As the result of the foregoing factors, the Company experienced a net income of $3,000 in the third quarter of fiscal 1997 compared to a net loss of $410,000 in the third quarter of fiscal 1996. The Company's net income for the first nine months of fiscal 1997 was $862,000, compared to a net loss of $2,592,000 for the first nine months of fiscal 1996. See Independent Accountants' Review Report -9- MIDWEST GRAIN PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NINE MONTHS ENDED MARCH 31, 1997 LIQUIDITY AND CAPITAL RESOURCES The following table is presented as a measure of the Company's liquidity and financial condition: March 31, June 30, 1997 1996 --------- -------- (in thousands) Cash and cash equivalents $ 2,891 $ 3,759 Working capital 38,403 37,113 Amounts available under lines of credit 24,000 18,600 Note payable and long-term debt 35,933 40,933 Stockholders' equity 110,084 109,222 The Company continues to generate positive cash flows, improve its working capital position and maintain a relatively low debt-to-equity ratio. The measures instituted during the last fiscal year, including stringent cost reductions, suspension of quarterly cash dividends to stockholders and changes in production, purchasing and marketing strategies, remain in effect. Improved operations offset by increased levels of inventories and receivables produced the cash flow necessary to reduce borrowings by $5,000,000 during the first nine months of the fiscal year. At March 31, 1997, the Company had $2.0 million committed to improvements and replacements of existing equipment. This amount includes $800,000 in feed dryer equipment to reduce emissions at the Pekin plant. For additional information regarding this matter, refer to Part II, Item 1, relating to legal proceedings. Management believes that the strategies which continue to be implemented, together with the Company's strong working capital and available lines of credit, position it to take advantage of a return to more favorable conditions. FORWARD LOOKING INFORMATION Readers are cautioned that in addition to historical information included herein, this Report also includes forward-looking statements and information that are based on management's beliefs as well as on assumptions made by and information currently available to management. When used in this Report, the words "anticipate," "intend," "plan," "believe," "estimate," "expect" and similar expressions are intended to identify forward-looking statements. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which could cause the Company's future results and stockholder values to differ materially from those expressed in such forward-looking statements. See Independent Accountant Review Report -10- PART II OTHER INFORMATION Item 1. Legal Proceedings On April 13, 1997, an administrative proceeding was filed against the Company's Illinois subsidiary before the Illinois Pollution Control Board (the "Board"), by the Illinois Attorney General on behalf of the Illinois Environmental Protection Agency (the "Agency"). The proceeding relates to the Company's installation and operation of two feed dryers at its facility in Pekin, Illinois. The Complaint alleges that the dryers exceed the particulate emission limitations specified in the construction permits for the units; that the dryers are being operated without operating permits; and that the dryers were constructed without a Prevention of Significant Deterioration (PSD) construction permit setting forth a best available control technology ("BACT") emission limitation. The Complaint seeks a Board order ordering the Company to cease and desist from violations of the Illinois Environmental Protection Act and associated regulations, assessing a civil penalty, and awarding the state its attorneys fees. The Company has filed an Answer before the Board admitting that compliance tests have shown particulate emissions in excess of the limits set forth in the construction permits, but denying the remainder of the State's claims. Since the time operational problems were discovered with the dryers' pollution control equipment, the Company has been conferring and negotiating with the Agency on the issues involved in the Complaint. The Company has submitted an application to the Agency for construction of new pollution control equipment for the dryers, at an estimated cost of approximately $800,000. It is anticipated that the new equipment will bring emissions into compliance with all applicable limitations. Proceedings under the Complaint are being held in abeyance by agreement of the parties pending completion of the Company's compliance activities. Once compliance has been achieved, the Company anticipates negotiating a settlement of the remainder of the State's claims. Based on the circumstances and a preliminary review of decisions by the Board in air pollution matters, the Company does not believe that any such settlement will be material to the business or financial condition of the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 15) Letter from independent public accountants pursuant to paragraph (d) of Rule 10-01 of Regulation S-X (incorporated by reference to Independent Accountants' Review Report at page 2 hereof). (20) Letter Report to Stockholders for the three months ended December 31, 1996. (27) Financial data schedule (b) Reports on Form 8-K The Company has filed no reports on Form 8-K during the quarter ended March 31, 1997. -11- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MIDWEST GRAIN PRODUCTS, INC. 5-13-97 s/Ladd M. Seaberg - ------------------------ By--------------------------------- Date Ladd M. Seaberg President and Chief Executive Officer 5-13-97 s/Robert G. Booe - ------------------------ By--------------------------------- Date Robert G. Booe, Vice President and Chief Financial Officer See Independent Accountants' Review Report -12- EXHIBIT INDEX Exhibit Number Description 15) Letter from independent public accountants pursuant to paragraph (d) of Rule 10-01 of Regulation S-X (incorporated by reference to Independent Accountants' Review Report at page 2 hereof). (20) Letter Report to Stockholders for the three months ended December 31, 1996. (27) Financial data schedule -13- EX-27 2 FINANCIAL DATA SCHEDULE
5 EXHIBIT 27 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MIDWEST GRAIN PRODUCTS, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000835011 MIDWEST GRAIN PRODUCTS, INC. 1,000 9-MOS JUN-30-1997 JUL-1-1996 MAR-31-1997 2,891 0 23,187 0 24,781 53,616 212,511 95,588 170,971 15,213 32,933 0 4 6,715 103,365 170,971 162,871 162,871 153,445 160,089 339 0 (2,015) 1,423 561 862 0 0 0 862 .09 .09 Reflects retained earnings and additional paid in captial. Reflects cost of sales and selling, general & administrative expenses.
EX-20 3 LETTER TO STOCKHOLDERS Exhibit 20 May 8, 1997 Dear Stockholder: While we currently are experiencing much improved operational efficiencies, our Company's results for the third quarter of fiscal 1997 were weakened by competitive pressures in our vital wheat gluten and food grade alcohol markets. In addition, our energy costs remained considerably higher than normal during the first two months of the quarter due to an unusual spike in natural gas prices. A return to more normal energy costs, and significantly lower grain costs compared to a year ago are allowing us to strengthen our competitive abilities through increased production output and efficiencies. In general, conditions for improved profitability in the fourth quarter are firmly taking shape. Our net income in the third quarter amounted to $3,000 on sales of $54,449,000 compared to a net loss of $410,000, or $0.04 per share, on sales of $53,871,000 for the same period the prior year. For the first nine months of fiscal 1997, our net income totaled $862,000, or $0.09 per share, on sales of $162,871,000. This represents a substantial improvement over the first nine months of fiscal 1996, when we experienced a net loss of $2,592,000, or $0.27 per share, on sales of $156,782,000. Increased supplies of alcohol in this year's third quarter, which resulted from the start-up of new production capacities throughout the industry, caused prices for our food grade alcohol to decline from their second quarter levels. Prices for fuel grade alcohol, as well as food grade alcohol for beverage applications, also fell below the prior year's third quarter levels. Increased imports from the European Union (E.U.) continued to depress wheat gluten prices in the third quarter. The recent initiation of a Section 301 investigation by U.S. Trade Representative-Designate Charlene Barshefsky could help correct this problem by targeting certain E.U. starch/gluten subsidies. In addition, the possibility still exists for a bilateral solution to this unfair trade problem through consultations arising from the 1995 grains agreement with the E.U. I encourage you to take a few moments to write to the Trade Representative and to U.S. Secretary of Agriculture Dan Glickman requesting that immediate action be taken to eliminate the E.U.'s lopsided trade advantages. These advantages include various subsidies and incentives which can be manipulated at will, plus a wide difference between our country's low tariff rates and the E.U.'s high tariffs, which effectively prohibit outside competition from entering the E.U.'s highly protected market. Ambassador Barshefsky's address is: Office of the U.S. Trade Representative, 600 South 17th St. N.W., Room 201, Washington, D.C. 20508. Secretary Glickman's address is: U.S. Department of Agriculture, 14th St. and Independence Ave., Washington, D.C. 20250. Incidentally, recent news reports point out that U.S. flour exporters face similar trade inequities resulting from many of the same E.U. policies that affect American gluten/starch manufacturers. While working diligently to solve this problem, we are also placing considerable focus on the development and marketing of new specialty gluten products for industrial as well as food applications. Likewise, we continue to see new opportunities for growth in our premium wheat starch market, which should allow us to more fully utilize the expanded capacity that was strategically added to our Pekin, Illinois plant nearly a year and a half ago. In conclusion, we expect to improve our profitability by increasing production and strengthening efficiencies in all areas as conditions allow. Sincerely, s/Ladd M. Seaberg Ladd M. Seaberg President and CEO -----END PRIVACY-ENHANCED MESSAGE-----