SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
Form 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------------
For the fiscal year ended August 31, 1998
Commission File No. 01-19001
MILLER DIVERSIFIED CORPORATION
------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 84-1070932
------ ----------
(State or other jurisdic- (I.R.S. Employer Iden-
tion of incorporation or tification No.)
organization)
Mailing Address:
P. O. BOX 937
La Salle, Colorado 80645
23360 Weld County Road 35
La Salle, Colorado 80645
------------------------
(Address of Principal Executive Office)
Registrant's telephone number including area code: (970) 284-5556
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
------------------------------
Title of Class
Indicate by checkmark whether the registrant (1) has filed all reports required
to have been 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 such filing
requirements for the past 90 days.
YES X NO ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B if not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. X
---
Registrant's revenues for its most recent fiscal year were $11,184,161.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was $556,906 based on the closing bid and ask prices as reported on
the NASD Over-the-Counter Bulletin Board on November 20,1998.
There were 6,364,640 shares of common stock $.0001 par value outstanding as of
August 31, 1998.
Documents incorporated by reference: None.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13, or 15(d) of
The SECURITIES EXCHANGE ACT OF 1934
MILLER DIVERSIFIED CORPORATION
------------------------------
(Exact Name of Registrant as Specified in its Charter)
AMENDMENT NO. 1
The undersigned registrant hereby amends sthe following items, financial
statements, exhibits or other portions o its Quarterly Report on Form 10-KSB for
the year ended August 31, 1998, as set forth in the pages attached hereto.
Entire Revised Form 10-KSB attached with changes to the following:
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereto duly authorized.
MILLER DIVERSIFIED CORPORATION
(Registrant)
Date: December 13, 1999 By: /s/ Stephen R. Story
---------------------------------
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
- --------------------------------
General Development of Business.
- --------------------------------
Miller Diversified Corporation (the Company) is a publicly-held Nevada
corporation that was formed in 1987 as the result of several transactions and
mergers of predecessor companies. In 1987, the Company acquired the commercial
cattle feeding business and some farms of Miller Feed Lots, Inc. (MFL), a
related entity as described later herein. The farms were subsequently sold, but
the Company's principal business is still commercial cattle feeding that is
operated on a feedlot facility and with equipment leased or rented from MFL. The
Company has a wholly-owned subsidiary, Miller Feeders, Inc. (MFI) which was
acquired in 1987. MFI is a cattle brokerage company that earns commissions from
the purchasing of feeder cattle and selling finished cattle for the Company's
cattle feeding customers, and for brokering certain "outside" cattle purchases
and sales. MFI has the required bond to enable it to receive and distribute the
sales proceeds from the sale of feeding customers' cattle. During fiscal 1996
the Company sold two of its subsidiaries, La Salle Commodity and Cattle Services
Co., a commercial commodity brokerage firm which had been acquired in 1990 and
Miller Trading Co., a retail commodity brokerage firm which had been formed by
the Company in January 1995. Also during fiscal 1996, the Company merged its
subsidiary Genetic Engineering, Inc. GEI), which was acquired in 1992, into the
Company. The Company sold the assets of the prior GEI in July 1997.
The Company is actively seeking additional acquisition and merger
candidates. Mergers or acquisitions probably would be accomplished by issuing or
exchanging securities of the Company for assets or securities of the company to
be acquired or merged, or by selling its securities to the public and using the
proceeds for an acquisition or merger. Such transactions may be accomplished by
an action of the Board of Directors, with or without a vote of the stockholders,
but, of course, in compliance with the Company's Articles of Incorporation and
Bylaws and applicable laws. The Company does not contemplate any "hostile
takeovers" and intends to acquire other businesses only on a mutually agreeable
basis.
In June 1998 the Company signed an Agreement and Plan of Exchange with
Miller Feed Lots, Inc. ("MFL"). The Agreement calls for the Company to issue up
to 15,000,000 shares of its common stock to the shareholders of MFL and MFL
would become a wholly owned subsidiary of the Company. Upon consum mation of the
Exchange, 14,763.78 shares of the Company's common stock would be issued in
exchange for each share of the MFL common stock currently outstanding. In the
aggregate, 15,000,000 shares of the Company's common stock would be issued in
exchange for 1,016 shares of MFL common stock issued and outstanding. The
exchange ratio of the common stock was based upon several factors, including the
net asset value of MFL, its value as a going concern, the fair market value of
-2-
<PAGE>
MFL assets as determined by appraisal and the market price of the Company's
common stock. The Board of Directors of the Company and MFL mutually determined
the exchange ratio, although both boards, for the most part, are made up of the
same individuals. The transaction is subject to stockholder approval.
The Company is headquartered near La Salle, Colorado at the site of its
cattle feeding operations. La Salle is about 40 miles northeast of Denver,
Colorado in the South Platte River Valley of Weld County.
Products and Services
- ----------------------
The Company's principal business is custom cattle feeding, which is the
selling of feed and services to customers who place their cattle in the
Company's feedlot. Occasionally the Company feeds some cattle for its own
account. Typically, customers are ranchers and experienced cattle feeders.
Cattle feeding customers are charged for feed consumed by their cattle and a
flat amount per head per day, referred to as "yardage", for the use of the
feedlot facilities. Feed sales usually account for 80% to 90% of the Company's
revenues. The Company and its subsidiary provide complete feedlot services which
include assisting customers with outside financing, purchasing feeder cattle,
making trucking arrangements, selling finished cattle, and assisting with
hedging transactions. The Company, through its subsidiary, derives commissions
and fees from buying and selling customers' cattle and, prior to the sale of
LCCS and MTC, derived commissions and fees from executing hedging transactions.
Most customers have their cattle delivered to the feedlot or authorize the
Company to purchase feeder cattle for them. Feeder cattle are usually delivered
at weights between 500 and 900 pounds. Lighter weight feeder cattle may be
"backgrounded", that is, placed in smaller farmer/feeder operations until they
reach the size that entry into the feedlot is deemed most beneficial. These
local farmer/feeders typically have small sheltered facilities and feed a
growing ration until the cattle reach the desired size to place them in the
finishing feedlot.
Once cattle enter the feedlot to be finished, they are usually fed from
three to six months, depending upon a variety of factors. The customer and
Company's management, often with the assistance of a nutritionist, plan custom
rations for the cattle considering such variables as size, sex, breed, and age
of the feeder cattle. Feed ingredients are purchased by the Company, stored on
the premises, mixed into rations and sold to the customer. The Company marks up
its cost of the feed for sale to customers. The customer is invoiced at least
twice per month for feed and yardage, and payment is due upon receipt of the
invoice except for ingredients the customer may have prepaid. The Company
follows certain procedures in managing its operations which include among
others: (a) physically identifying cattle as they are delivered by brand or ear
tags so that all customers' cattle are distinguishable; (b) all cattle, feed,
and funds of customers are strictly accounted for with specific identification
utilizing sophisticated and specialized computerized methods; (c) billing
procedures are fully automated and current so that customers are sent an
itemized billing with a complete breakdown of costs for each lot of cattle they
own; (d) weighing of all feed and cattle to be sold is done on sealed scales,
certified by the Colorado Department of Agriculture; (e) environmental standards
-3-
<PAGE>
of the feedlot is maintained to exceed all government regulation; and (f)
adhering to all laws and regulations pertaining to the cattle feeding industry.
Cattle fed at the Company's feedlot are given growth promotents unless otherwise
requested by the customer.
Once cattle reach finished weights, it is not economically feasible to hold
and feed those animals any longer, as further weight gains do not justify
additional feed and feedlot costs. As a result, cattle feeders are subject to
prevailing market prices of cattle at the time of finishing. When the cattle are
finished, the Company often delivers them to a purchaser (usually a meat packer)
designated by the customer or assists the customer in selling the cattle.
Finished cattle are sold to any of several packers, most of whom have buyers who
visit the Company's feedlot on a regular basis. One major meat packing plant is
about 15 miles from the Company's feedlot.
Feeder cattle, finished cattle, and feed are moved by truck, and excellent
trucking services are available because Weld County is a major feed corp and
cattle feeding area. The Company's cattle feeding business is somewhat seasonal
because most calves from the Rocky Mountains and northern plains areas are
weaned and ready to go to a feedlot in the fall. The cows are bred to calve in
the spring and wean their calves in the fall. However, the Company can and does
purchase feeder cattle from southern and west coast ranches at nearly any time
of the year.
The Company has no backlog of orders for its products or services and does
not anticipate any significant backlog of orders in the foreseeable future. The
Company did no research relating to the development of new products or services
during the last fiscal year. No new products will be introduced in the coming
year, and no employees will be engaged in research or new product development
during the next year.
Raw Materials
- --------------
The Company's main raw materials are cattle feed consisting primarily of
silage, hay, corn. wheat, protein supplement, and a variety of by-products that
are seasonally available in the area. The Company purchases most of its feed
from local farmers or brokers. Northern Colorado, which includes Weld County, is
a major crop production area with a reputation for quality crops and consistent
yields. Because most of the land is irrigated, local farmers do not have to
depend exclusively on rainfall, and drought is not often a factor. Shortages of
feed crops are rare in the United States, and especially in Weld County.
While there have been significant price fluctuations for certain feed
ingredients, especially corn, shortages have not developed. Although most feed
comes from local sources, excellent truck and rail systems give the Company
access to feed produced in Nebraska and Iowa.
Major Customers
- ----------------
During the fiscal year ended August 31, 1998, the Company had two customers
whose individual purchases accounted for more than 10% of the Company's
consolidated revenues. Sales to those customers totaled $7,463,286 or 71% of
total revenues.
-4-
<PAGE>
During the fiscal year ended August 31, 1997, the Company had two customers
that accounted for more than 10% of the Company's consolidated revenues. Sales
to these customers totaled $7,946,381 or 70% of total revenues.
Competition
- -----------
Custom cattle feeding is a highly competitive business in which stability
and quality services and facilities are more important than size. The Company's
feedlot is well laid out and in good repair, and, therefore, "shows well" to
customers. The Company's management has been engaged in cattle feeding at the
site of the Company's feedlot for over 20 years and is known for stable, quality
operations. The Company offers a full range of feedlot services, as described
above, and seeks to be attentive to the inquiries and wishes of its customers.
The Company has an active marketing program of calls, visits, mailings, and
seminars directed at attracting and developing new customers. Some customers
have been with the Company for many years because they have received good
service. However, other custom feeders, some with greater resources, are also
engaged in marketing programs which often are directed at the same customers the
Company is seeking. The Company's strategy is to provide complete quality
service, conduct feeding operations to optimize the customers' cattle weight
gains at the lowest cost possible, and continuously seek new customers to
maintain and increase its competitive position.
Government Regulations
- -----------------------
The Company is subject, directly and indirectly, to various Federal and
State governmental regulations in its operations. The US Food and Drug
Administration is responsible for regulating the use of animal growth promotents
and veterinary drugs, medicines, and vaccines. The US Department of Agriculture
is responsible for regulating certain other aspects of the agriculture business
in which the Company may be engaged. Specifically, the activities of Miller
Feeders, Inc. are subject to the Packers and Stockyards Act of 1921, as amended,
and regulated by the Packers and Stockyards Administration. The Environmental
Protection Agency is responsible for minimizing the environmental impact of
animal pollutants. The Company does not believe it incurs any expenses in
addition to its normal operating costs to specifically meet the requirements of
environmental laws. Since some of the Company's customers participate in
commodity futures transactions, certain activities may come under the
jurisdiction of the Chicago Mercantile Exchange on livestock transactions, the
Chicago Board of Trade on grain transactions, and the Commodity Futures Trading
Commission and National Futures Association which oversees compliance on futures
transactions. In addition, the Company is or may be subject to other regulations
such as changes in freight rates, increases or decreases in exports or imports,
and animal health inspection and brand inspection.
Employees
- ---------
The Company employs between 20 and 30 persons at any given time. As of
November 15, 1998, the Company had 23 full and part-time employees.
-5-
<PAGE>
ITEM 2 PROPERTIES
- ------------------
On February 1, 1991, the Company executed a 25-year lease with a related
company, Miller Feed Lots, Inc. (MFL) to lease its feedlot facilities (the
Facilities). All of the common stock of MFL is owned by Norman M. Dean and James
E. Miller, who are officers and directors of the Company. Initially, the
Facilities consisted of two feedlots with a total capacity of 35,000 head.
However, effective August 1, 1992, the Company amended its lease with MFL to
lease only one of the two feedlots that has a capacity of approximately 20,000
head of cattle. As a result of the amendment, the Company reduced its capital
lease asset, net of accumulated amortization, and reduced its long-term capital
lease obligation, to reflect the elimination of one of the feedlots. The Company
will continue to lease one feedlot for the remainder of the 25-year term at the
same monthly rent of 2 1/3(cent) per head per day, with a minimum of $10,750 and
maximum of $13,300 per month. The Company has an option to purchase the feedlot
it leases for $1,300,000. The lease requires that the Company pay for all
property taxes, insurance, and maintenance on the Facilities being leased. In
the opinion of management, the leased facilities are adequately covered by
insurance.
As mentioned above, GEI which became a wholly-owned subsidiary of the
Company in August 1992, was merged into the Company in July 1996 and was
operated as a division of the Company. This division included approximately 50
acres of land in Thornton, Colorado, just north of Denver (The Thornton
property) This division also owned shares in an irrigation and reservoir company
(the water shares) that provided water rights for the property. The property and
water rights were sold in May 1997.
The property taxes on the leased feedlot Facilities amounted to $3,349 for
the year ended August 31, 1998, based on the mill levy of .079642
The Company does not have any specific restrictions on the types of real
estate it may own or the percentages of assets that may be invested in any one
investment, nor on the incurrence of debt or lease obligations to acquire
properties. However, management does not intend to invest in any commercial,
residential, or other properties that would be rented to tenants to derive
income from the property investment. Further, management does not intend to
invest in any real estate mortgages or securities of entities primarily engaged
in real estate activities. The Company has no plans for the major renovation,
improvement, or development of its leased feedlot Facilities
ITEM 3 LEGAL PROCEEDINGS
- -------------------------
The Company was not involved in any litigation during the year ended August
31, 1998 and had no pending or known unasserted claims as of August 31, 1998
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of the stockholders in the fourth
quarter of the fiscal year covered by this Annual Report.
-6-
<PAGE>
PART II
ITEM 5 MARKET FOR THE COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------
The number of record holders of the Company's common stock as of August 31,
1998 was 1,462 according to information furnished by the Company's transfer
agent.
The following table sets forth the high and low bid quotations for the
Company's common stock, as reported by the National Quotation Bureau, Inc.
Accordingly, the stock quotations listed below are not necessarily indicative of
future trading activity or price trends.
Quarter Ended High Bid Low Bid
------------- -------- -------
1998
---- November 30, 1997 $ .12 $ .09
February 29, 1998 $ .10 $ .10
May 31, 1998 $ .11 $ .10
August 31, 1998 $ .15 $ .11
1997
---- November 30, 1996 $ .18 $ .09
February 28, 1997 $ .20 $ .13
May 31, 1997 $ .15 $ .12
August 31, 1997 $ .12 $ .11
The above prices are believed to be representative interdealer quotations,
without retail markup, markdown, or commissions, and may not represent actual
transactions. The Company's stock is traded on the NASD Over-the-Counter
Bulletin Board.
The Company has not paid any dividends on its common stock and the Board of
Directors presently intends to continue a policy of retaining earnings for use
in the Company's operations and to finance expansion of its business. The
declaration and payment of dividends in the future, of which there can be no
assurance, will be determined by the Board of Directors in light of conditions
then existing, including earnings, financial condition, capital requirements,
and other factors. The terms of the Company's preferred stock give it a
preference on the payment of dividends in any given year, but such dividends are
noncumulative. There are currently no Preferred Shares issued and outstanding.
No leasing, financing, or similar arrangements to which the Company is a party
preclude or limit in any manner the payment of any dividend.
-7-
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- --------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATION
---------------------------------------------
Results of Operations for the Fiscal Year Ended August 31, 1998 as Compared to
the Fiscal Year Ended August 31, 1997
- --------------------------------------------------------------------------------
The Company had a net loss of $54,357 for the fiscal year ended August 31,
1998 as compared to a net income of $179,241 for the prior fiscal year. For the
period ended August 31, 1997, Company recorded a non-recurring loss on the sale
of the Thornton property (formerly Genetic Engineering, Inc.), as described
below, of $178,452.
Key factors that affect revenues and profits from cattle feeding operations
are average numbers of head per day in the feedlot (average head days) and gross
profit percentages on feed and feedlot service sales. Average head days are
important because the "cattle days" are the basis for feed sales and yardage
charges. The average head days for the year ended August 31, 1998 were 15,720 as
compared to 15,540 for the previous fiscal year, an increase of 180, or 1.2%.
The following is a comparison of the gross profit and percentages on feed
and other sales between the year ended August 31, 1998 and the previous year:
Years Ended August 31
---------------------
1997 1997 Increase
---- ---- --------
(Decrease)
- --------------------------------------------------------------------------------
Feed and other sales $ 8,211,839 $ 9,215,851 $(1,004,012)
Cost of feed and other sales 7,372,392 8,483,551 (1,111,159)
--------------------------------------
Gross profit $ 839,447 $ 732,300 $ 107,147
Gross profit percentage 10.2% 8.0% 2.5%
Feed sales volume decreased and the gross profit percentage increased for
the year ended August 31, 1998. The 10.9% sales volume decrease is the result of
several factors.
1. The prices of the ingredients dropped during the year ended August 31,
1998 compared to price levels the prior year. This reduction is the
result in several market factor, including low cattle prices and
higher yields during harvest.
2. The types of the rations fed during the current year contained less of
the higher priced ingredients due to the Company's increasing use of
lower priced by-products in its rations to maintain and enhance its
competitiveness.
3. During the previous fiscal year, the Company had undertaken certain
pricing policies that had, in effect, transferred revenues for the
feed sales category to feedlot services category, as noted below. This
policy/procedure was discontinued for year ended August 31, 1998.
The gross margin percentage increased due to management's decision during
the previous fiscal year to lower the gross profit on certain ingredients and
-8-
<PAGE>
increase revenues in other areas with the intent of stabilizing gross revenues
based on a per head per day basis, rather than relying totally on the gross
margin of feed sales; this change resulted in a lower than targeted gross margin
during the previous year.
During the year ended August 31, 1998, the Company purchased and retained
ownership in cattle that were fed to slaughter in the Company's feedlot. The
Company had not retained ownership in a significant number of cattle in the
past. Sales proceeds received during the year ended August 31, 1998 totaled
$1,373,688, with a cost of sales of $1,477,479 for a loss for the year of
$103,791. Additionally, the Company recorded a market price adjustment on the
value of its cattle inventory, reducing the value by $140,416 from $1,241,290 to
$1,100,874 as of the year ended August 31, 1998.
A comparison of the gross profit and percentages on sales of feedlot
services between the two fiscal years is as follows:
Years Ended August 31
---------------------
1998 1997 Decrease
- --------------------------------------------------------------------------------
Feedlot services sales $ 1,524,310 $ 2,040,105 $ (515,795)
Cost of feedlot services 1,386,796 1,844,037 (457,241)
----------------------------------------
Gross profit $ 137,514 $ 196,068 $ (58,554)
Gross profit percentage 9.0% 9.6% (0.6%)
Feedlot services revenues and costs both decreased for the year ended
August 31, 1998 as compared to the prior year, as did the gross margin. The
primary cause of the decrease in the gross margin percentage is a change in the
ingredients fed, using less of the ingredients that generate grinding revenues
and the discontinuance of the policy/procedure that transferred revenues from
feed sales to feedlot services that had been in effect during a portion of the
previous fiscal year. Revenue from the processing of grain decreased $39,856 due
to the changes in the types of ingredients sold as described above. The sales
and cost of sales of the fall calf program, as described below, decreased
$454,000. partially the result of the decrease of 380 head in the fall calf
program to 3,085 head for the year ended August 31, 1998 compared to about 3,465
the prior fiscal year. Most of the decrease in the sales and cost of sales of
the fall program is attributable to a higher base rate during the year ended
August 31, 1997. The reduction in the fall calf program is not expected to have
any material effect on the Company's future cattle placements.
As a service to customers, the Company purchases calves for them as they
are weaned in the fall and places them with local farmer-feeders who feed and
care for them until the following February or March when they are transferred to
the Company's feedlot. These fall calf programs are undertaken on essentially a
break-even basis; that is, the amounts paid to the farmer-feeders are about the
same as the amounts charged to the customers.
Other revenues decreased $57,047 for the year ended August 31, 1998 as
compared to the prior fiscal year. Approximately $29,000 of the decrease is the
result of the sale of the Thornton property, which had generated some rental
-9-
<PAGE>
income. The effect of this loss of a source of revenue is negated by the
reduction in expenses associated with the Thornton property as noted below.
Commissions earned by the Company's subsidiary, Miller Feeders, Inc. decreased
approximately $15,500 from $31,068 for the year ended August 31, 1997 to $15,587
during the current year. The major cause this decrease is the reduction of
cattle buying and selling activities for customers not in the feedlot. This
effect of this loss of revenue is lessened by reduced commission expenses to the
outside salesman. Management also believed that some of the outside activities
presented more risk than were warranted by the income potential. Interest income
increased $3,758 for the year ended August 31, 1998, as compared to the prior
fiscal year primarily as a result of a increase in customer accounts receivable
financing, in which the Company "carries" certain customers' feedlot charges
until the cattle are marketed. Interest expense increased $19,417 for the year
ended August 31, 1998, as compared to the prior fiscal year as a result of the
additional funds borrowed to purchase cattle that are fed for the Company's
account. Interest revenue from a related party increased $6,000 as a result of
an additional loan to the related part during the year ended August 31, 1997.
Interest expense for capital leases party decreased $1,133 for the year ended
August 31, 1998 as compared to the prior fiscal year as the result of decreasing
balances on the equipment and facilities capital leases from the related party.
Sales, general, and administrative expenses increased $68,759 for the
fiscal year ended August 31, 1998 as compared to the prior fiscal year. General
and administrative expenses associated with the Thornton property, which was
sold during the previous fiscal year, decreased approximately $43,500. The
balance of the decrease is the result of increases and decreases in numerous
expenses. The following are the most significant increases and decreases for the
fiscal year ended August 31, 1998 as compared to the prior fiscal year:
Description Increase
----------- --------
1. Customer death loss adjustments $ 17,300
2. Legal and accounting fees 29,700
3. Customer feeding incentives 39,800
4. Participation losses 56,800
In May 1997, the Company sold the Thornton property and water rights to an
unrelated third party for $735,000, which resulted in a loss of $178,452. The
land had been held for resale since it was acquired with the merger of Genetic
Engineering, Inc. in 1992. Subsequent to the acquisition, the Company had had
several contracts and tender offers, none of which were fulfilled due to various
zoning and administrative constraints placed on the possible sales by the City
of Thornton. The Company had taken an interim write down on the value of the
land in 1994. With considerations to previous purchase offers, negative cash
flow of the operations, deteriorating condition of the property, and the
uncertainties dealing with the City of Thornton, management chose to accept the
offer in the best interests of the Company. The Company has received substantial
income tax benefits from the current loss as well as the previous write down of
the value by the Company and a devaluation made by Genetic Engineering, Inc.
prior to the merger.
Management does not believe there are any potential lawsuits that will have
a negative effect upon earnings for the year ending August 31, 1998. There were
no lawsuits pending for the year ended August 31, 1998.
-10-
<PAGE>
Management expects the level of average head day numbers to remain fairly
stable in the foreseeable future, with additional placements by related parties
and existing, new customers and Company owned cattle. The Company is continuing
its efforts to solicit new customers to reduce the effect of major customer and
Company-owned cattle. Although fed cattle prices are still relatively low
compared to prior periods, the cost of feeder cattle has declined to a level
more in line with projected fed cattle prices.
Liquidity and Capital Resources
- -------------------------------
For the year ended August 31, 1998, cash utilized by operating activities
was $1,292,724 as compared to funds generated of $187,222 the prior year, a
decrease of $1,479,946. This decrease is due to a decrease in the cash received
from customers of $685,577 and an increase in the cash paid to suppliers and
employees of $994,204, a decrease of $2,136 in interest paid, an increase of
$9,938 in interest received, an increase in income taxes refunded of $94,761 and
a decrease in income taxes paid of $93,000.
For the year ended August 31, 1998, there was cash provided by investing
activities of $22,994 compared to cash provided the prior fiscal year of
$310,095, a decrease of $287,100. During the year ended August 31, 1998, the
Company made collections of $250,000 on loans to a related party in comparison
to making a loan to a related party of $300,000 the prior year. During the year
ended August 31, 1998, the Company utilized funds totaling $186,366 to acquired
investments; during the previous year. During the year ended August 31, 1997,
the Company invested $30,000 in marketable securities and received proceeds of
$13,675 for the partial sale of the same securities. The Company generated
$645,893 by selling the Thornton property and water rights during the year ended
August 31, 1997. During the year ended August 31, 1998, the Company acquired
$21,167 more in equipment than it had in the previous year.
For the fiscal year ended August 31, 1998, cash provided by financing
activities was $974,108 as compared to cash utilized the prior year of $224,590
an increase of $1,198,698. There was an increase borrowings net of repayments of
$1,161,327 for the year ended August 31, 1998 as compared to the prior year. The
Company reduced its principal payments on the capital lease obligations to a
related party during the year ended August 31, 1998. Cash was generated by the
increase in the cash overdraft of $16,710 for the year ended August 31, 1997
compared to cash neither utilized nor generated through cash overdrafts for the
year ended August 31, 1998.
Working capital (current assets minus current liabilities) was $909,156 at
August 31, 1998 compared to $1,218,112 a year earlier, a decrease of $308,956.
This change is due to the offsets of a number of increases and decreases in
current assets and liabilities.
The $339,688 increase in trade accounts receivable from August 31, 1997 to
August 31, 1998 is primarily the result of decreases in feed accounts receivable
and other miscellaneous accounts receivable. Feed accounts receivable were
-11-
<PAGE>
$271,820 greater at August 31, 1998 than a year earlier as a result of increases
in accounts the Company "carried" or financed. There were no feeder cattle
accounts receivable at August 31, 1998 which was $15,450 less than at August 31,
1997. Accrued interest receivable increased $13,800 for the year ended August
31, 1998 as a result of the increases in the accounts the Company "carries" or
finances. The decrease in trade accounts receivable from related parties from
August 31, 1997 to August 31, 1998 is the result of decreased sales to the
related parties for the current year. Accounts receivable-related parties (from
MFL and its wholly owned subsidiaries) was $194,240 greater at August 31, 1998
than at August 31, 1997. This increase is mainly due to there being more funds
advanced to MFL than its charges to MDC for rents and freight, net of interest
charges and loan payments by MDC. Due to the periodic charges and settlements
between the companies, this balance varies from time to time.
For the year ended August 31, 1997, the Company had total income tax refund
receivables of $94,761, whereas the Company had neither income taxes payable nor
refunds receivable for the period ended August 31, 1998. The primary reason for
the change is the carry-back of the loss associated with the sale of the
Thornton land as previously discussed.
Inventories were $855,108 greater August 31, 1998 than at August 31, 1997.
The inventory of feeder cattle temporarily held for resale at August 31, 1997
was $215,546 compared to no feeder cattle inventory at August 31, 1998. The
Company owned cattle on feed valued at $1,100,874 for the year ended August 31,
1998, but did not owned any cattle on feed as of August 31, 1997. Feed
ingredients decreased $15,200 from August 31, 1997 to August 31, 1998. Specific
ingredient levels will vary on a daily basis depending on availability, season
and deliveries.
Notes payable increased $1,001,327 from a zero balance at August 31, 1997
to $1,001,327 at August 31, 1998. This was the result of the increase in the
owned cattle on feed inventory and the increase in accounts receivable, as
detailed above. Trade accounts payable increased $22,162 from $418,686 at August
31, 1997 to $440,848 at August 31, 1998. This increase is the result of timing
differences in delivery and payments for various expense items.
The Company has a revolving line of credit of $300,000 from a local branch
of a credit services company that matures December 1, 1998 and bears interest at
approximately 1.0% over the prime rate (actual rate of 9.00% at August 31,
1998). There was an outstanding balance at August 31, 1998 of 295,045, which
meant that the Company could generate an additional $4,955 cash if needed under
this line of credit. The note is secured by feed accounts receivable, feed
inventories, and equipment. The Company also has a revolving line of credit of
$850,000 from the same local branch of a credit services company for the purpose
of owning and feeding cattle to slaughter. This line of credit. This line of
credit also matures December 1, 1998 and bears interest at approximately 1.0%
over the prime rate (actual rate of 9.00% at August 31, 1998). There was an
outstanding balance at August 31, 1998 of $706,258 which meant that the Company
could generate an additional $143,742 cash if needed under this line of credit.
The note is secured by specific cattle and cross collateralized with the
revolving line of credit note above. The Company has another revolving line of
credit of $2,000,000 from the same local branch of a credit services company for
the purpose of financing qualified customers' cattle feeding programs. This line
-12-
<PAGE>
of credit also matures December 1, 1998 and bears interest at approximately 1.0%
over the prime rate (actual rate of 9.00% at August 31, 1998). There was no
outstanding balance at August 31, 1998. The Company did not have any requests
from customers to provide this service which meant that the Company could not
generate any additional cash under this line of credit. The note is secured by
specific customers' cattle and cross collateralized with the revolving lines of
credit noted above. Miller Feeders, Inc. (MFI) has a $300,000 revolving line of
credit at the same local branch of a credit services company for the procurement
of feeder cattle for resale to customers. The line of credit matures on December
1, 1998 and bears interest at approximately 1.0% over the prime rate (actual
rate of 9.00% at August 31, 1998). There was an outstanding balance at May 31,
1998 of $24 which meant that MFI could borrow up to $299,976 to purchase feeder
cattle for resale to customers. The line is secured by feeder cattle inventories
and feeder cattle accounts receivable and is cross collateralized with the
Company's lines of credit noted above.
The Company had no material commitments for capital expenditures at August
31, 1998.
Management believes it has adequate financial resources to conduct
operations at present and reasonably anticipated future levels.
Management in evaluating the impact of various recently issued accounting
standards. Statement of Financial Accounting Standard (SFAS) No. 130 on
Comprehensive Income will be implemented for the 1998-1999 fiscal year. The
impact is not expected to be significant as the Company presently has only one
additional component of comprehensive income that is not included in net income.
Implementing SFAS No. 131 on Disclosures about Segments of an Enterprise for the
August 31, 1999 financial statements may provide additional disclosures about
the Company's business segments; the required disclosure is currently under
review. No accounting changes are required to implement SFAS No. 131. The
effective date of SFAS No. 133 on Accounting for Derivative Instruments and
Hedging Activities has been deferred by SFAS No. 137, and will now be
implemented for the first quarter of fiscal year 2001. Management is still
evaluating the impact SFAS No. 133 will have on the Companay's financial
statements and related disclosures.
Year 2000 Compliance
- --------------------
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as virtually
every company's computer operations will be affected in some way. The Company's
computer programs which process it's operational and financial transactions,
were designed and developed without considering the impact of the upcoming
change in century. Nevertheless, as a result of the company's on going analysis
of it's computer programs and operations, it has reached the conclusion that
"Year 2000" programs will not seriously impact or have a material adverse effect
on the Company's expenses, business or its operations.
It is possible, however, that "Year 2000" problems incurred by the
customers or suppliers of the Company could have a negative impact on future
operations and financial performance of the Company, although the Company has
not been able to specifically identify any such problems among its suppliers.
The Company believes that it will not be dependent upon any single supplier for
its equipment, or cattle and feed inventories in the Year 2000, and therefore
has made the determination not to contact its primary suppliers to determine if
they are developing plans to address processing transactions which may impact
the Company in the year 2000. However, there can be no assurance that Year 2000
problems will not occur with respect to the Company's computer systems.
Furthermore, the Year 2000 problem may impact other entities with which the
Company transacts business and the Company cannot predict the effect on the
Company. The Company is developing a contingency plan to operate in the event
-13-
<PAGE>
that any non-compliant customer or supplier systems that materially impact the
Company are not remedied by January 1, 2000. Due to the specialized nature of
some of the Company's computer programs and equipment, all potential problems
and their contingencies, may not be identified in a manner timely enough to take
preventative and/or corrective actions. Therefore, the Company concedes that the
Year 2000 issue could have a material adverse effect on the Company's business,
financial condition and results of operation.
ITEM 7 FINANCIAL STATEMENTS
- ----------------------------
The Audited Consolidated Financial Statements follow on pages F-1 through
F-19. Item 8 follows the Audited Consolidated Financial Statements on Page 15.
-14-
<PAGE>
ANDERSON & WHITNEY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS ADVISORS
1001 Ninth Avenue
Greeley, Colorado 80631-4046
(970) 352-7990 FAX (970) 352-1855
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Miller Diversified Corporation
La Salle, Colorado
We have audited the accompanying consolidated balance sheets of Miller
Diversified Corporation and subsidiary as of August 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Miller
Diversified Corporation and subsidiary as of August 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Anderson & Whitney, P.C.
November 6, 1998
F-1
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
August 31 1998 1997
- ------------------------------------------------------------------------------
ASSETS
- ------
Current Assets:
Cash $ 63,656 $ 359,278
Trade accounts receivable 823,576 483,888
Trade accounts receivable - related parties -- 55,685
Accounts receivable - related parties 203,137 8,897
Income taxes receivable -- 94,761
Inventories 1,321,467 466,449
Prepaid expenses 13,542 19,337
Current portion of notes receivable -
related party -- 250,000
- -----------------------------------------------------------------------------
Total Current Assets 2,425,378 1,738,295
- -----------------------------------------------------------------------------
Property and Equipment:
Feedlot facility under capital lease -
related party 1,497,840 1,497,840
Equipment 77,453 77,453
Equipment under capital leases -
related party 30,649 64,092
Leasehold improvements 131,043 90,403
-----------------------------
1,736,985 1,729,788
Less: Accumulated depreciation
and amortization 581,331 525,320
- -----------------------------------------------------------------------------
Total Property and Equipment 1,155,654 1,204,468
- -----------------------------------------------------------------------------
Other Assets:
Securities available for sale 10,347 29,313
Other investments 186,366 --
Notes receivable - related party 300,000 300,000
Deferred income taxes 233,142 176,962
Deposits and other 30,885 1,500
- -----------------------------------------------------------------------------
Total Other Assets 760,740 507,775
- -----------------------------------------------------------------------------
TOTAL ASSETS $ 4,341,772 $3,450,538
=============================================================================
Continued on next page
F-2
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - Continued
- ----------------------------------------------------------------------------
August 31 1998 1997
- ----------------------------------------------------------------------------
LIABILITIES
- -----------
Current Liabilities:
Notes payable $ 1,001,327 $ --
Trade accounts payable 440,848 418,686
Accrued expenses 32,046 17,061
Customer advance feed contracts 14,907 14,907
Customer advance feed contracts -
related parties -- 40,892
Current portion of capital lease obligations -
related party 27,094 28,637
- ----------------------------------------------------------------------------
Total Current Liabilities 1,516,222 520,183
Capital Lease Obligations - related party 984,432 1,015,914
- ----------------------------------------------------------------------------
Total Liabilities 2,500,654 1,536,097
Commitments
- ----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
- --------------------
Preferred Stock -- --
Common Stock, par value $.0001 per share;
25,000,000 shares authorized; 6,364,640
shares issued and outstanding 636 636
Additional Paid-in Capital 1,351,693 1,351,693
Unrealized Gain (Loss) on Securities
available for sale (9,753) 9,213
Retained Earnings 498,542 552,899
- ----------------------------------------------------------------------------
Total Stockholders' Equity 1,841,118 1,914,441
- ----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,341,772 $ 3,450,538
============================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------
Years Ended August 31 1998 1997
- ----------------------------------------------------------------------------
Revenue:
Feed and related sales $ 8,211,839 $ 9,215,851
Fed cattle sales 1,373,688 --
Feedlot services 1,524,310 2,040,105
Other 23,005 80,052
Interest income 27,319 23,561
Interest income - related party 24,000 18,000
- ----------------------------------------------------------------------------
Total Revenue 11,184,161 11,377,569
- ----------------------------------------------------------------------------
Costs and Expenses:
Cost of:
Feed and related sales 7,372,392 8,483,551
Fed cattle sales 1,477,479 --
Cost of feedlot services 1,386,796 1,844,037
Selling, general, and administrative 773,055 704,296
Loss on sale of land and water rights -- 178 452
Loss on write down of inventory 140,416 --
Interest 31,563 12,146
Interest on capital leases - related party 112,997 117,130
- ----------------------------------------------------------------------------
Total Costs and Expenses 11,294,698 11,839,375
- ----------------------------------------------------------------------------
Income (Loss) Before Income Taxes (110,537) 37,957
Income Tax Benefit (56,180) (141,284)
- ----------------------------------------------------------------------------
NET INCOME (LOSS) $ (54,357) $ 179,241
============================================================================
INCOME (LOSS) PER COMMON SHARE $ (.01) $ .03
- ----------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding 6,364,640 6,364,640
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Unrealized Retained
Years Ended August 31, Common Stock Paid-In Gain (loss) Earnings
1997 and 1998 Shares Amount Capital Securities (Deficit) Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 1, 1996 6,364,640 $ 636 $1,351,693 $ -- $ 373,658 $1,725,987
Unrealized gain on securities
available for sale 9,213 9,213
Net income for the year ended
August 31, 1997 179,241 179,241
- ---------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1997 6,364,640 $ 636 $1,351,693 $ 9,213 $ 552,899 $1,914,441
Unrealized loss on securities
available for sale (18,966) (18,966)
Net loss for the year ended
August 31, 1998 (54,357) (54,357)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1998 6,364,640 $ 636 $1,351,693 $ (9,753) $ 498,542 $1,841,118
===========================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-5
</TABLE>
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------
Years Ended August 31 1998 1997
- ----------------------------------------------------------------------------
Cash Flows from Operating Activities:
Cash received from customers $10,814,227 $11,510,969
Cash paid to suppliers and employees (12,124,257) (11,141,218)
Interest received 51,319 41,381
Interest paid (128,774) (130,910)
Income taxes refunded 94,761 --
Income taxes paid -- (93,000)
- ----------------------------------------------------------------------------
Net Cash Provided (Utilized) by
Operating Activities (1,292,724) 187,222
- ----------------------------------------------------------------------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (40,640) (19,473)
Loan to related party -- (300,000)
Collections on loans to related party 250,000 --
Purchase of security -- (30,000)
Acquisition of other investments (186,366) --
Proceeds from:
Sale of land and water rights -- 645,893
Sale security -- 13,675
- ----------------------------------------------------------------------------
Net Cash Provided by Investing Activities 22,994 310,095
- ----------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from notes payable 3,050,699 1,213,000
Principal payments on notes payable (2,049,372) (1,373,000)
Principal payments on capital lease obligations
- related party (27,219) (47,880)
Decrease in cash overdraft -- (16,710)
- ----------------------------------------------------------------------------
Net Cash Provided (Utilized) by
Financing Activities 974,108 (224,590)
- -----------------------------------------------------------------------------
Net Increase in Cash (295,622) 272,727
Cash, Beginning of Year 359,278 86,551
- ----------------------------------------------------------------------------
Cash, End of Year $ 63,656 $ 359,278
============================================================================
Continued on next page.
F-6
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
- -----------------------------------------------------------------------------
Years Ended August 31 1998 1997
- -----------------------------------------------------------------------------
Reconciliation of Net Income (Loss) to Net
Cash Provided by Operating Activities:
Net income (loss) $ (54,357) $ 179,241
Adjustments:
Loss on sale of land and water rights -- 178,452
Gain on sale of security -- (3,775)
Depreciation and amortization 83,648 104,170
Increase in deferred income taxes (56,180) (52,944)
Reduction of inventory to market value 140,416 --
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (339,688) 251,921
Trade accounts receivable - related party 55,685 61,007
Accounts receivable - related party (194,240) 72,205
Income taxes receivable 94,761 (94,761)
Inventories (995,434) (183,170)
Prepaid expenses 5,795 2,388
Deposits and other (29,385) 14,520
Increase (decrease) in:
Trade accounts payable and accrued
expenses 37,147 (121,082)
Accrued income taxes payable -- (86,579)
Customer advance feed contracts -- 40,892
Customer advance feed contracts
- related parties (40,892) (175,263)
- ----------------------------------------------------------------------------
Net Cash Provided (Utilized) by
Operating Activities $ (1,292,724) $ 187,222
============================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------
Note 1 - Summary of Significant Accounting Policies:
The accounting and reporting policies of Miller Diversified
Corporation (the Company) and its subsidiaries conform to
generally accepted accounting principles. The following summary
of significant accounting policies is presented to assist the
reader in evaluating the Company's financial statements.
- --------------------------------------------------------------------------------
Description of Business:
The Company's primary business is operating a feedlot facility
near La Salle, Colorado in which cattle owned by customers are
fed and cared for by the Company. Most customers to which the
Company has granted credit either operate in the cattle industry
or feed cattle as an investment.
-----------------------------------------------------------------------
Principles of Consolidation:
The consolidated financial statements include Miller Diversified
Corporation and its wholly-owned subsidiary, Miller Feeders, Inc.
(commission agent buying feeder cattle and selling fed cattle for
the Company's feeding customers and others
All material intercompany profits, transactions, and balances
have been eliminated.
-----------------------------------------------------------------------
Trade Accounts Receivable:
No allowance for doubtful accounts receivable has been recorded
based on the history of the Company and its ability to place an
Agister's Lien on customers' cattle in the feedlot. An Agister's
Lien is a lien that a party can place on cattle in its possession
that enables it to collect for feed and care provided to the
cattle, ahead of other claimants, from the proceeds of selling
the cattle. The lien also enables the party in possession to sell
the cattle to the highest bidder in order to be paid for its feed
and services.
-----------------------------------------------------------------------
Concentration of Credit Risk:
At August 31, 1998 and 1997, the Company had trade accounts
receivable from three unrelated customers and two unrelated
customers, totaling $670,866 and $366,373, respectively. Each of
these customer's balances at year end exceeded 10% of the
Company's total trade accounts receivable.
-----------------------------------------------------------------------
F-8
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies: - Continued
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average cost method for feed and
grain inventories while the first in, first out (FIFO) and
specific identification methods are used for all other
inventories.
-----------------------------------------------------------------------
Property and Equipment:
Property and equipment are recorded at acquisition cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets.
The Company leases certain property under agreements which are
accounted for as capital leases. Accordingly, the assets and
liabilities are recorded at the amount equal to the lesser of the
present value of the minimum lease payments or the fair value of
the leased property at the beginning of the lease term. Such
assets are amortized on a straight-line basis over the lesser of
the related lease term or their economic lives. This amortization
is included in depreciation and amortization expense. Interest
expense relating to the lease liability is recorded to effect a
constant rate of interest over the term of the lease.
-----------------------------------------------------------------------
Securities Available for Sale:
Available for sale securities consist of equity securities not
classified as trading securities nor as held for maturity
securities. Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net amount in a
separate component of stockholders' equity until realized. Gains
and losses on the sale of securities available for sale are
determined using the specific-identification method.
-----------------------------------------------------------------------
Other Investments:
The Company's other investments consist of a working interest in
two oil and gas wells in Northern Colorado, which is accounted
for on a cost basis.
-----------------------------------------------------------------------
Water Rights:
The Company owned 3.2 shares of The Farmers Reservoir and
Irrigation Company (FRICO) entitling it to a pro rata share of
the water provided by FRICO's irrigation system. The water rights
were sold in May 1997.
-----------------------------------------------------------------------
F-9
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies: - Continued
Feed Sales:
Revenue is recognized on feed sales when the feed is delivered to
pens of customers' cattle for consumption.
-----------------------------------------------------------------------
Cattle Brokerage:
Miller Feeders, Inc. accumulates cattle which meet the
specifications of the Company's cattle feeding customers until a
complete lot is formed and ready for a feeding program. Feeder
cattle temporarily retained for brokerage are stated at
specifically identified cost.
The Company recognizes commissions earned at the time a lot of
feeder cattle is transferred to a customer. In addition,
commissions are earned as customers' fed cattle are marketed.
-----------------------------------------------------------------------
Income Taxes:
Deferred tax liabilities or assets, net of any applicable
valuation allowance for deferred tax assets, are recognized for
the estimated future tax effects attributable to temporary
differences and carryforwards. Deferred tax liabilities and
assets are classified as current or noncurrent based on the
classification of the asset and liability to which they relate
Deferred tax liabilities and assets not related to an asset or
liability for financial reporting, including deferred tax assets
related to carryforwards, are classified as current or noncurrent
F-10
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies: - Continued
Income Taxes - Continued:
according to the expected reversal date of the temporary
difference. The Company and its subsidiary file consolidated
corporate income tax returns.
-----------------------------------------------------------------------
Income per Common Share:
Income per common share is computed by using the weighted average
number of common shares outstanding during the period presented.
Fully diluted earnings per share amounts are not presented for
1998 or 1997 as no stock options, warrants, or preferred stock
were outstanding.
-----------------------------------------------------------------------
Cash Equivalents:
The Company considers all highly-liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
-----------------------------------------------------------------------
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimate and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
- --------------------------------------------------------------------------------
Note 2 - Securities Available for Sale:
-----------------------------------------------------------------
Amortized Estimated Gross Unrealized
August 31, 1998 Cost Market Value Gains Losses
-----------------------------------------------------------------
Equity Securities $ 20,100 $ 10,347 $ -- $ 9,753
-----------------------------------------------------------------
-----------------------------------------------------------------
Amortized Estimated Gross Unrealized
August 31, 1997 Cost Market Value Gains Losses
-----------------------------------------------------------------
Equity Securities $ 20,100 $ 29,313 $ 9,213 $ --
-----------------------------------------------------------------
The equity securities were restricted from sale until April 1998
- --------------------------------------------------------------------------------
F-11
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- --------------------------------------------------------------------------------
Note 3 - Inventories:
-----------------------------------------------------------------
Year Ending August 31 Total
-----------------------------------------------------------------
Feed and grain $ 204,889 $ 220,107
Feeder cattle for resale (Procurement) -- 215,546
Veterinary supplies and other 15,704 30,796
Cattle on feed to finish (Fed Cattle) 1,100,874 --
--------------------------
$ 1,321,467 $ 446,449
- --------------------------------------------------------------------------------
Note 4 - Capital Leases:
The Company leases its feedlot facilities and certain equipment
from a related party under capital leases expiring in various
years through 2016. Monthly lease payments on the feedlot
facilities are two and one-third cents (2 1/3(cent)) per head per
day for cattle actually in the feedlot, subject to a minimum of
$10,750 and maximum of $13,300. The Company is responsible for
all maintenance, insurance, utilities, and taxes on the property,
and has an option to purchase the feedlot facility for
$1,300,000. The following is an analysis of the leased property:
-----------------------------------------------------------------
Year Ending August 31 Total .
-----------------------------------------------------------------
Feedlot facilities under capital lease $ 1,497,840 $ 1,497,840
Less: Accumulated amortization 454,345 394,431
-----------------------------------------------------------------
Net feedlot facilities under
capital lease $ 1,043,495 $ 1,103,409
Equipment under capital leases 30,649 64,092
Less: Accumulated amortization 19,922 39,891
-----------------------------------------------------------------
Net equipment under capital leases 10,727 24,201
$ 1,054,222 $ 1,127,610
-----------------------------------------------------------------
Future minimum lease payments under the capital leases at August
31, 1998 for each of the next five years and in the aggregate are
as follows:
F-12
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- --------------------------------------------------------------------------------
Note 4 - Capital Leases - Continued:
-----------------------------------------------------------------
Year Ending August 31 Total
-----------------------------------------------------------------
1999 137,023
2000 135,305
2001 129,000
2002 129,000
2003 129,000
Later years 1,601,750
------------------------------------------------------------
Total minimum lease payments 2,261,078
Less: Amount representing interest 1,249,552
-------------------------------------------------------
Present value of net minimum lease payments 1,011,526
Less: Current portion 27,094
-------------------------------------------------------
$ 984,432
------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 5 - Notes Receivable - Related Party:
-----------------------------------------------------------------
Year Ending August 31 Total
-----------------------------------------------------------------
Note receivable from Miller Feed Lots,
Inc., interest payable monthly at 6%,
$250,000 principal due in May, 1998,
$300,000 of principle due May 2002,
without collateral, and subordinated to
MFL mortgagor $ 300,000 $ 550,000
Less: Current portion -- 250,000
---------------------------------------------------------------
$ 300,000 $ 300,000
---------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 6 - Notes Payable:
-----------------------------------------------------------------
Years Ended August 31 1998 1997
-----------------------------------------------------------------
Revolving lines of credit (summarized
below) with Farm Credit Services matur-
ing in December 1998, interest payable
quarterly at a variable interest rate
(9% at August 31, 1998), collateralized
by inventories, and accounts receivable,
guaranteed by two officers/directors and
Miller Feed Lots, Inc., a related party.
F-13
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 6 - Notes Payable - Continued
-----------------------------------------------------------------
Years Ended August 31 1998 1997
-----------------------------------------------------------------
$ 300,000 Operating $ 295,045 $ --
$ 850,000 Cattle feeding 706,258 --
$2,000,000 Customer financing -- --
$ 300,000 Cattle procurement 24 --
Revolving lines of credit totaling
$500,000 with a bank maturing in Decem-
ber,1997, interest payable quarterly at
1.5% over the Wall Street Journal prime
rate (actual rate of 10% at August 31,
1997) collateralized by inventories,
accounts receivable, and equipment -- --
--------------------------------------------------------------
$1,001,327 $ --
--------------------------------------------------------------
At August 31, 1998 and 1997, the Company had an outstanding
letter of credit amounting to $125,000 for a bond with an
insurance company.
- --------------------------------------------------------------------------------
Note 7 - Operating Leases:
The Company leases office space, certain equipment, and other
items under various month-to-month operating lease agreements.
Total rental expense was $147,709 and $112,122 for the years
ended August 31, 1998 and 1997, respectively, of which $123,618
and $90,276, respectively, was paid to related parties.
- --------------------------------------------------------------------------------
Note 8 - Income Taxes:
-----------------------------------------------------------------
Years Ended August 31 1998 1997
-----------------------------------------------------------------
Current income taxes $ -- $ (88,340)
Deferred income taxes (56,180) (52,944)
-----------------------------------------------------------------
Income Tax Benefit $ (56,180) $ (141,284)
Significant components and the related tax effect of temporary
differences and carryforwards are as follows:
F-14
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 8 - Income Taxes - Continued:
-----------------------------------------------------------------
August 31 1998 1997
Current Long-Term Current Long-Term
-----------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation $ -- $ 7,561 $ -- $ 5,570
-----------------------------------------------------------------
Deferred Tax Assets:
Capital leases -- 84,510 -- 75,805
Contributions
carryforward -- 3,497 -- 1,824
Built-in loss on land -- 179,406 -- 179,406
NOL carryover -- 152,696 -- 104,903
-----------------------------------------------------------------
-- 420,109 -- 361,938
-----------------------------------------------------------------
Deferred Tax Assets
Valuation Allowance -- (179,406) -- (179,406)
-----------------------------------------------------------------
Net Deferred
Tax Asset $ -- $ 233,142 $ -- $ 176,962
-----------------------------------------------------------------
The differences between income tax expense (benefit) and the
amount computed by applying the federal statutory rates are as
follows:
-----------------------------------------------------------------
Years Ended August 31 1998 1997
-----------------------------------------------------------------
Computed at expected federal
statutory rate $ (25,833) $ 5,694
Change in deferred tax asset
valuation allowance -- (136,794)
Other (30,347) (10,184)
-----------------------------------------------------------------
Income Tax Benefit $ (56,180) $ (141,284)
As of August 31, 1998, the Company had unused consolidated
operating carryforwards of $449,100 and tax credit carryforwards
of $67,000 available to reduce future taxable income and income
tax liabilities. The Internal Revenue Code restricts the
utilization of an additional $2,074,000 in operating loss
carryfowards to a maximum of $53,710 per year. These net
operating loss carry-forwards expire as follows:
F-15
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 8 - Income Taxes - Continued:
----------------------------------------------------------------
Years Ending August 31 Restricted Consolidated
----------------------------------------------------------------
2000 $ -- $ 168,450
2002 941,000 118,900
2003 321,000 --
2004 159,000 --
2005 57,000 --
2007 69,000 --
2012 527,000 74,900
2016 -- 86,850
---------------------------------------------------------------
$2,074,000 $ 449,100
- --------------------------------------------------------------------------------
Note 9 - Related Party Transactions:
The Company is related to Miller Feed Lots, Inc. (MFL) through
partial common ownership and management.
The following schedule summarizes transactions between the
Company and MFL.
-----------------------------------------------------------------
Years Ended August 31 1998 1997
-----------------------------------------------------------------
Payments to MFL for:
Freight $ 177,931 $ 274,302
Capital lease of feedlot
facility (Note 4) 129,000 129,000
Capital lease of
equipment (Note 4) 17,020 36,010
Operating lease of
equipment (Note 7) 114,618 81,276
Company housing rent (Note 7) 9,000 9,000
Interest income from MFL (Note 5) 24,000 18,000
-----------------------------------------------------------------
In August 1992, the Company sold substantially all of its
operating equipment to MFL and then leased back only a portion of
the equipment necessary to operate the feedlot facility. The
Company realized a gain on this transaction of $74,467 which was
deferred and was recognized over the term of the lease, which
terminated during the year ended August 31, 1997.
Employees and officers of the Company feed cattle personally and
in conjunction with companies they control. Sales to those
F-16
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 9 - Related Party Transactions - Continued:
related parties were approximately $838,600 and $1,004,000 net of
discounts of approximately $2,100 and $9,700, or 8% and 9% of
total revenue for the years ended August 31, 1998 and 1997,
respectively.
- --------------------------------------------------------------------------------
Note 10 - Major Customers:
The Company had sales to major customers which exceeded 10% of
total revenue for certain years as shown below. Because of the
nature of the Company's business, the major customers may vary
between periods.
-----------------------------------------------------------------
Years Ended August 31 1998 1997
-----------------------------------------------------------------
Charles Micale, $ 2,173,131 $ 1,297,249
dba My Way Land & Cattle
Ulrich Farms, Inc. 5,290,155 6,649,132
-----------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 11 - Commitments:
The Company is committed to purchase various crop commodities
with anticipated delivery dates in the subsequent fiscal year. At
August 31, 1998 and 1997, these purchase commitments aggregated
approximately $612,505 and $575,750, respectively.
The Company is a cosigner of a loan from an outside source to
Miller Feed Lots, Inc. (MFL), a related party, in the sum of
$400,000. The loan is secured by a first deed of trust on the
feedlot facilities that the Company leases from MFL. MFL has
given the Company an hypothecation agreement which allows the
Company to use MFL's equipment leased by the Company as
collateral for the Company's operating loans. The Company has not
recorded any obligation in relation to this commitment.
On June 22, 1998, the Company signed an Agreement and Plan of
Exhange with MFL, which would make MFL a wholly-owned subsidiary
of the Company. The agreement calls for the Company to issue
15,000,000 shares of its common stock to MFL shareholders in
exchange for all of MFL's issued and outstanding common shares.
The transaction is subject to the approval of the Company's
stockholders.
- --------------------------------------------------------------------------------
F-17
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 12 - Stock Options:
In March 1996, the Company's board of directors granted an option
to purchase up to 100,000 shares of common stock of the Company
to each of the three members of the board of directors and up to
200,000 shares of common stock each to the President and the
Chairman of the board of directors. The shares may be purchased
at $0.0605 per share, 110% of the average of the bid and ask
price at the date of the grant. These options were to expire in
March 2001, but were rescinded in January 1997.
- --------------------------------------------------------------------------------
Note 13 - Preferred Stock:
In January 1991, the stockholders authorized 1,000,000 shares of
8% noncumulative preferred stock with a par value of $2 per
share. No shares were issued or outstanding at August 31, 1998
and 1997.
- --------------------------------------------------------------------------------
Note 14 - Fair Value of Financial Instruments:
The Company's financial instruments include cash, accounts
receivable, notes receivable, accounts payable, customer advance
feed contracts, and notes payable. The Company estimates that the
fair value of all financial instruments at August 31, 1998 does
not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet.
The estimated fair value amounts have been determined using
available market information and appropriate valuation
methodologies. The carrying amount of cash, accounts receivable,
accounts payable, and customer advance feed contracts
approximates fair value because of the short maturity of these
instruments. The carrying amount of notes receivable and notes
payable approximates fair value as interest rates approximate
current rates for loans with similar terms and remaining
maturities. The equity securities available-for-sale are reported
at estimated market value determined by quote prices on the
balance sheet date.
- --------------------------------------------------------------------------------
Note 15 - Supplemental Schedule of Noncash Investing and Financing Activities:
-----------------------------------------------------------------
Years Ended August 31 1998 1997
-----------------------------------------------------------------
Unrealized gain (loss) on
securities available for sale $ (9,753) $ 9,213
- --------------------------------------------------------------------------------
F-18
<PAGE>
MILLER DIVERSIFIED CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- ------------------------------------------------------
Note 16 - Subsequent Event:
During the fiscal year ended August 31, 1998, the Company entered
negotiations with Highland Water LLC, a Colorado limited
liability company that owns and operates a water cooler business
in the state of Colorado. The Company is negotiating for a 50%
interest in Highland Water LLC. A tentative agreement was drafted
in October 1998, which states that the Company can acquire the
50% interest for $180,000. The Company paid a $45,000 deposit
toward the acquisition in September 1998.
F-19
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
- --------------------------------------------------------------------------------
DISCLOSURE
----------
None.
-15-
<PAGE>
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- -------------------------------------------------------
Directors
- ---------
The following table sets forth the names of all Directors of the Company as
of November 22, 1998, indicating all positions and offices with the Company held
by each such person.
All Positions and Offices
Name Age Held With the Company
-----------------------------------------------------------------
James E. Miller 59 President, Chief Executive
Officer, Chief Financial
Officer, and Director
Norman M. Dean 78 Chairman of the Board of
Directors and Director
Alan D. Gorden 54 Director
The Company's Directors hold office until the next annual meeting of the
Company's shareholders. There is no arrangement or understanding between any
Director of the Company and any other person or persons pursuant to which such
Director was or is to be selected as a Director or a nominee for director.
Executive Officers
- ------------------
The following table sets forth the name and ages of all Executive Officers
of the Company as of November 22, 1998, indicating all positions and offices
with the Company held by each such person.
All Positions and Offices
Name Age Held With the Company
----------------------------------------------------------------
James E. Miller 59 President, Chief Executive
Officer, Chief Financial
Officer, and Director
Norman M. Dean 78 Chairman of the Board of
Directors and Director
Stephen R. Story 47 Secretary-Treasurer
The Company's Executive Officers hold office at the pleasure of the
Directors of the Company. There is no arrangement or understanding between any
Executive Officer and any other person pursuant to which such Executive Officer
was selected as an Officer of the Company.
-16-
<PAGE>
Significant Employees
- ---------------------
The Company does not employ persons, other than the above named officers of
the Company, who make or are expected to make significant contributions to the
business of the Company.
Family Relationships
- --------------------
There is no family relationship between any Director or Executive Officer
of the Company, and there currently are no undisclosed persons chosen to become
Directors or Executive Officers.
Business Experience
- -------------------
Following is a brief account of the business experience during the past
five years of each Director and Executive Officer of the Company indicating his
principal occupation and employment during that period, and, the name and
principal business of any organization in which such occupations and employment
were carried on.
Norman M. Dean. Mr. Dean has been a director of the Company and its
predecessor since January, 1987, Treasurer of the Company from December, 1988
until October, 1989, and Chairman of the Board of Directors since October, 1989.
He is currently President and a director of Foothills Financial Corporation,
Greeley, Colorado, and is a member of the board of directors of Alaris Medical
Systems, Inc., San Diego, California, and Miller Feed Lots, Inc., La Salle,
Colorado. Mr. Dean is employed part-time by the Company.
James E. Miller. Mr. Miller was the President and a Director of the Company
and its predecessor from January, 1987 until November, 1989. He is presently
President, Chief Executive Officer, Chief Financial Officer, and Director of the
Company. He has also been a major shareholder, President and Chief Operating
Officer of Miller Feed Lots, Inc. since 1960. Mr. Miller also serves as
President of Central Weld County Water District, Greeley, Colorado. He works
full-time for the Company.
Alan D. Gorden. Mr. Gorden has been a Director since February 1991. He has
been President of Tour Ice National, Inc. in Colorado Springs, Colorado for the
last twenty years. Tour Ice National, Inc. designs, engineers, and builds ice
manufacturing facilities world wide.
Stephen R. Story. Mr. Story has been Secretary-Treasurer of the Company
since October, 1992. He has been employed by the Company and its predecessor
since 1987 in various accounting and administrative capacities and has served as
Controller since 1990.
Other Directorships
- -------------------
Except as described above, the Company has no Director who is also a
director of any other company with a class of securities registered pursuant to
-17-
<PAGE>
Section 15(d) of that Act or any company registered as an investment company
under the Investment Company Act of 1940.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Section 16(a) of the Exchange Act and the related regulations, require the
Company's executive officers, directors, and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of their
beneficial ownership of the Company's common stock and other equity securities
of the Company with the Securities and Exchange Commission (SEC). In addition,
such persons are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms filed by such persons.
To the Company's knowledge, based solely on the Company's review of such
copies of reports furnished to the Company and written representations the
Company believes that all Section 16(a) filing requirements applicable to its
directors, executive officers, and ten percent owners were complied with.
ITEM 10 EXECUTIVE COMPENSATION
- -------------------------------
Summary Compensation Table
- --------------------------
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company. There were no other executive
officers of the Company whose salary and bonuses for the year ended August 31,
1998 exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------- ------------------------------------------
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Annual Restricted Other
Name and Year Ended Compen- Stock Options/ LTIP Compen-
Principal Position August 31 Salary($) Bonus($) sation($) Award($) SARs (#) Payout($) sation($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James E. Miller, 1998 $72,000 $ -- $ -- $ -- --) $ -- $ --
Chief Executive Officer 1997 72,000 -- -- -- (300,000) -- --
1996 72,000 10,000 -- -- 300,000 -- --
</TABLE>
In January 1997, the Board of Directors rescinded the following options,
which had been granted in the year ended August 31, 1996:
James E. Miller 300,000 shares of common stock at .0605/share
Norman M. Dean 300,000 shares of common stock at .0605/share
Alan D. Gorden 100,000 shares of common stock at .0605/share
The Board rescinded the options when it was discovered that the stock
option plan under which they had been granted had expired.
-18-
<PAGE>
- --------------------------------------------------------------------------------
OPTIONS/SAR GRANTS IN YEAR ENDED AUGUST 31, 1998
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/SARs
Name and Granted to Exercise or
Principal Options/SARs Employees in Base Price Expiration
Position Granted (#) Fiscal Year ($/Share) Date
- --------------------------------------------------------------------------------
James E. Miller 0 .0% .0000
President
Norman M. Dean 0 .0% .0000
Chairman of the Board
Alan D. Gorden 0 .0% .0000
AGGREGATED OPTION/SAR EXERCISES IN YEAR ENDED AUGUST 31, 1998
AND OPTION/SAR VALUE AS OF AUGUST 31, 1997
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------
James E. Miller 0 $ 0 0/0 $ 0/$ 0
Norman M. Dean 0 $ 0 0/0 $ 0/$ 0
Alan D. Gorden 0 $ 0 0/0 $ 0/$ 0
- --------------------------------------------------------------------------------
Compensation of Directors
- -------------------------
The Directors of the Company are entitled to receive fees of $500 per
quarter for meetings attended, and reimbursement for travel expenses. During the
fiscal year ended August 31, 1998, each Director received a total of $1,500 in
director fees. These fees may be increased or decreased from time-to-time by a
majority vote of the Board of Directors. Norman M. Dean is a part-time employee
of the Company at a salary of $3,000 per month.
Termination of Employment and Change of Control Arrangement
- -----------------------------------------------------------
The Company has no compensation plan or arrangement with any of its current
or former Officers or Directors which results or will result from the
resignation, retirement, or any other termination by such individual of
employment with the Company.
-19-
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
- -----------------------------------------------
The following table sets forth the number and percentage of shares of the
Company's $.0001 par value Common Stock (its only class of voting securities)
owned beneficially by any person who, as of August 31, 1998, is known to the
Company to be the beneficial owner of 5% or more of such Common Stock (except
Directors and Officers whose ownership is set forth in the next paragraph).
Amount and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
- -------------------------------------------------------------------------
$.0001 Common Stock None
Security Ownership of Management
- --------------------------------
The following table sets forth the number and percentage of shares of
Company's $.0001 par value Common Stock (its only class of equity securities
outstanding) owned beneficially by each Director of the Company, and by all
Directors and Officers of the Company as a group, as of August 31, 1998.
Amount and Nature
Name of of Beneficial Percent
Beneficial Owner Ownership of Class
- -------------------------------------------------------------------------
James E. Miller 994,706 (1) 15.6%
23402 Weld County Road 35
La Salle, CO 80645
Norman M. Dean 1,109,786 (2) 17.4%
PO Box 1406
Greeley, CO 80631
Alan D. Gorden 50,000 .8%
4570 Old Ranch Road
Colorado Springs, CO 80908
Stephen R. Story 1,810 --%
2322 45th Avenue
Greeley, CO 80634
-20-
<PAGE>
Amount and Nature
Name of of Beneficial Percent
Beneficial Owner Ownership of Class
- -------------------------------------------------------------------------
All Directors and 2,156,302 33.8%
Executive Officers
as a Group (4 Persons)
- ---------------------
(1) Includes 45,906 shares owned by Mr. Miller's wife.
(2) Includes 45,905 shares owned by Mr. Dean's wife.
(3) Includes 100,000 shares owned by Gorden Properties LLC . Mr. Gorden is the
general partner and owns 50% of the shares of Gorden Properties LLC. Mr. Gorden
may be deemed to have indirect voting and investment power of 50% of the shares.
Changes in Control
- ------------------
There are no arrangements, known to the Company, including any pledge by
any person of securities of the Company or any of its parents, the operation of
which may at a subsequent date result in a change of control of the Company.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Transactions With Miller Feed Lots, Inc.
- ----------------------------------------
The Company is related through partial common ownership with Miller Feed
Lots, Inc. ("MFL"). James E. Miller, a Director and President of the Company,
and Norman M. Dean, a Director and Chairman of the Board of Directors of the
Company, together beneficially own 33% of the Company's stock. Together, Mr.
Dean and Mr. Miller own all of the outstanding stock of MFL. The Company leases
its feedlot facilities and most of its equipment, rents some equipment on a
month to month basis and purchases some of its transportation services from MFL.
Mr. Miller manages the operations of MFL as well as the feedlot operations of
the Company. See Note 10 of Notes to Consolidated Financial Statements attached
for a summary of the transactions with MFL for the years ended August 31, 1998
and 1997.
On February 1, 1991, the Company executed a 25-year capital lease of its
facilities (see Part I, Item 2, Properties) from MFL. As they negotiated for a
long-term lease, the Company's Board of Directors undertook considerable
analyses and comparisons to insure the lease was consistent with the Company's
objectives and that the terms were fair and reasonable. The lease was
unanimously approved by the Board of Directors, including all disinterested
directors. From February 1, 1987 through January 31, 1991, the Company leased
the Facilities from MFL under a short-term operating lease, and amendments and
extensions thereof. The monthly rent under the short-term operating leases was
the same as it was under the long-term lease, and the Company was responsible
-21-
<PAGE>
for the same property expenses as under the new long-term lease. Effective
August 1, 1992, the Company amended its lease with MFL to lease only one of the
two feedlots initially leased. The feedlot being leased after the amendment has
a capacity of approximately 20,000 head of cattle. The Company has continued to
lease one feedlot under the 25-year lease at the same rent of 2 1/3(cent)per
head per day, with a minimum of $10,750 and maximum of $13,300 per month. The
Company has an option to purchase the feedlot it leases for $1,300,000.
The above-described transactions were entered into on terms the Company
believes were at least as favorable as would have been available from
unaffiliated third parties.
On May 31, 1993 the Company loaned $250,000 to MFL pursuant to a note that
matured May 31, 1998 and was paid in full by that date. On May 31, 1997 the
Company loaned an additional $300,000 to MFL pursuant to a note that matures May
31, 2002. The note is unsecured and bears interest at 6% per annum, payable
monthly. MFL used the proceeds from the loan to acquire additional feeder cattle
to place in the Company's feedlot. The note is subordinated to MFL's mortgagor.
In June 1998 the Company signed an Agreement and Plan of Exchange with
Miller Feed Lots, Inc. ("MFL"). The Agreement calls for the Company to issue up
to 15,000,000 shares of its common stock to the shareholders of MFL and MFL
would become a wholly owned subsidiary of the Company. Upon consummation of the
Exchange, 14,763.78 shares of the Company's common stock would be issued in
exchange for each share of the MFL common stock currently outstanding. In the
aggregate, 15,000,000 shares of the Company's common stock would be issued in
exchange for 1,016 shares of MFL common stock issued and outstanding. The
exchange ratio of the common stock was based upon several factors, including the
net asset value of MFL, its value as a going concern, the fair market value of
MFL assets as determined by appraisal and the market price of the Company's
common stock. The Board of Directors of the Company and MFL mutually determined
the exchange ratio, although both boards, for the most part, are made up of the
same individuals. The transaction is subject to approval of the Company's
stockholders.
-22-
<PAGE>
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
Exhibits
- --------
3.1 Articles of Incorporation and Bylaws and Amendments (except the
Amendment described in 3.2 below) thereto (incorporated by reference
to Exhibit 3.1 to Registrant's Registration Statement No. 33-26285)
3.2 Amendment to Articles of Incorporation dated January 22, 1990,
providing for 1:250 reverse stock split and reduction in number of
authorized shares (incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement No. 33-40461)
10.1 Long-Term Lease of Feedlot Facilities dated August 1, 1992 which
constitutes an amendment to the original lease dated February 1, 1991
(incorporated by reference to Exhibit 10.1 to Registrant's Form 10-K
for the year ended August 31, 1992)
10.2 Equipment Sale and Purchase Agreement dated August 13, 1992
(incorporated by reference to Exhibit 10.2 to Registrant's Form 10-K
for the year ended August 31, 1992)
10.3 Equipment Lease dated August 15, 1992 (incorporated by reference to
Registrant's Form 10-K for the year ended August 31, 1992)
Reports on Form 8-K
- -------------------
Item 6 (b)- Exhibits and Reports on Form 8-K
On July 2, 1998 the Company filed a Form 8-K concerning the Agreement and
Plan of Exchange (the "Agreement") with Miller Feed Lots, Inc.("MFL") dated June
22, 1998. The Agreement calls for the Company to issue up to 15,000,000 shares
of its common stock to the shareholders of MFL and MFL would become a wholly
owned subsidiary of the Company. The transaction is subject to stockholder
approval. A copy of the Agreement was filed with the Form 8-K.
-23-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MILLER DIVERSIFIED CORPORATION
Dated: December 13, 1999 By /s/ JAMES E. MILLER
--------------------------
James E. Miller, President
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
\s\ JAMES E. MILLER President, Principal December 13, 1999
- ----------------------- Executive Officer,
James E. Miller Principal Financial
Officer, and Director
\s\ STEPHEN R. STORY Secretary-Treasurer, December 13, 1999
- ------------------------ Principal Accounting
Stephen R. Story Officer
\s\ NORMAN M. DEAN Chairman of the December 13, 1999
- ------------------------ Board and Director
Norman M. Dean
Director
- ------------------------
Alan D. Gorden
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM FORM 10-KSB FOR THE
TWELVE MONTHS ENDED AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 63,656
<SECURITIES> 10,347
<RECEIVABLES> 823,576
<ALLOWANCES> 0
<INVENTORY> 1,321,467
<CURRENT-ASSETS> 2,425,378
<PP&E> 1,736,985
<DEPRECIATION> 581,331
<TOTAL-ASSETS> 4,341,772
<CURRENT-LIABILITIES> 1,516,222
<BONDS> 0
0
0
<COMMON> 636
<OTHER-SE> 1,840,482
<TOTAL-LIABILITY-AND-EQUITY> 4,341,772
<SALES> 9,585,527
<TOTAL-REVENUES> 11,184,161
<CGS> 8,849,871
<TOTAL-COSTS> 1,386,796
<OTHER-EXPENSES> 773,055
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144,560
<INCOME-PRETAX> (110,537)
<INCOME-TAX> (56,180)
<INCOME-CONTINUING> (54,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (54,357)
<EPS-BASIC> (0.009)
<EPS-DILUTED> (0.009)
</TABLE>
