<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-KSB/A
AMENDMENT NO. 1
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
Commission file number 0-19352
AGRIBIOTECH, INC.
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(Name of small business issuer in its charter)
Nevada 85-0325742
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 Sunset Rd., Suite C-25, Las Vegas, Nevada 89120
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (702) 798-1969
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Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $.001 per share.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 contained herein, 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 this Form 10-KSB or any
amendment to this Form 10-KSB [_].
The issuer's revenues for its most recent fiscal year were $65,904,058.
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of September 26, 1997, was $212,627,936 (assuming solely for
purposes of this calculation that all directors, officers and greater than 5%
stockholders of the Registrant are "affiliates").
The number of shares outstanding of the issuer's common stock, par value
$.001 per share, as of September 19, 1997, was 25,282,222
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Documents Incorporated by Reference: Not Applicable.
Exhibit Index is located on page ____
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Explanatory Note
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This Amendment No. 1 on Form 10-KSB/A to the Annual Report on Form 10-KSB
("Form 10-KSB") for the fiscal year ended June 30, 1997 of Agribiotech, Inc., a
Nevada Corporation (the "Company"), is submitted in order to correct
typographical errors in items 1, 7, and 10. The Company hereby amends its Form
10-KSB in accordance with Rule 12b-15 under the Securities Exchange Act of 1934.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
AgriBioTech, Inc. ("ABT" or the "Company"), a Nevada corporation, was formed
under the laws of the State of Colorado on December 31, 1987, under the name
Sussex Ventures, Ltd. ("Sussex"). The Company was an inactive development stage
company until September 30, 1993 when it acquired all of the outstanding stock
of AgriBioTech, Inc., a Nevada corporation ("AgriBioTech"). AgriBioTech was
treated as the acquiring corporation in the transaction, which was accounted for
as a reverse purchase. In June 1994, the Company merged with and into
AgriBioTech, then a wholly-owned subsidiary of the Company, and changed its name
to AgriBioTech, Inc.
The Company's principal executive offices are located at Suite C-25, 2700
Sunset Road, Las Vegas, Nevada 89120, and its telephone number is
(702) 798-1969.
The statements discussed in this Report include forward looking statements
that involve a number of risks and uncertainties. These include the Company's
lack of profitability, need to manage its growth, intense competition in the
seed industry, seasonality of quarterly results, and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission.
OVERVIEW
ABT is the largest agricultural seed company in the United States that
specializes in developing, processing, packaging and distributing varieties of
forage and cool season turfgrass seeds. Since January 1, 1995, the Company has
completed 14 acquisitions and has grown from essentially zero sales in calendar
1994 to a current annualized level of net sales of approximately $145 million
per annum. The Company has also executed letters of intent to acquire two
additional companies with aggregate annual net sales of approximately $85.4
million. The Company's vertically integrated forage and turfgrass seed
operations include research and development through traditional genetic breeding
programs for most forage and cool season turfgrass species, seed processing
plants that clean, condition and package ABT's products, and national and
international distribution and sales networks.
The Company estimates aggregate annual revenue for the United States forage
and turfgrass seed sectors, in which the Company sells its products is
approximately $1.1 billion, with revenue evenly divided between forage and
turfgrass seeds. According to the U.S. Department of Agriculture ("USDA"),
approximately 61 million acres of forage crops were harvested for hay during
1996, generating cash hay sales of approximately $12 billion. Forage seed sales
are driven primarily by the size of the animal population for milk and meat
production (high protein foodstuffs) and for recreational activities (e.g.,
horse industry). Recent efforts in underdeveloped countries to increase the
level of protein in diets have created strong demand for forage crops, while
declining arable (suitable for farming) land has resulted in slight declines in
worldwide forage acreage.
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The Company believes this demand will place ABT in a particularly advantageous
position with respect to its competitors in the forage market. Turfgrass seed
consumption has increased at average annual rates of between 6% and 9%
during the period from 1987 to 1997, primarily due to increased housing starts,
increased appreciation by homeowners of the added value of higher quality
turfgrass and growth in the number of golf courses and recreational parks.
According to industry sources, at December 31, 1996, there were approximately 25
million acres of lawns, golf courses, parks and roadway medians in the United
States.
From its inception, ABT has implemented a business strategy designed to (i)
lead the consolidation of the forage and turfgrass seed sectors, (ii) vertically
integrate ABT's operations and (iii) shift the focus of the acquired companies
from public, non-proprietary seed varieties toward proprietary varieties with a
long-term objective of developing biotechnology enhanced varieties. Through its
efforts to consolidate these sectors, the Company has generated operating
efficiencies, including better utilization of personnel and inventory,
elimination of redundant resources and decreased administrative expenses. The
Company intends to expand development of proprietary genetically enhanced seed
varieties using traditional research, as well as fund biotechnology research to
accelerate product development. ABT, through its leading position with respect
to elite forage and turfgrass germplasm (i.e., the chromosomes and genes of
seeds) is seeking to become the licensee or partner of choice for owners of
biotechnology genes in order to accelerate introduction of these value-added
genes to its customers through biotechnology.
FORAGE AND TURFGRASS INDUSTRY
INDUSTRY OVERVIEW
Annual sales of the United States forage and turfgrass seed sectors in which
the Company sells its products is estimated to aggregate approximately $1.1
billion, with sales evenly divided between the two sectors.
The following (omitted) bar graph illustrates the relative size of the forage
and turfgrass seed sectors in comparison with other crops, based on the most
recently available USDA Statistics. The graph is entitled Revenue of Major U.S.
Seed Segments, Estimated 1996. It shows (in bars less than two inches high)
estimated revenue (in billions) for corn ($1.6 billion), soybean ($.7 billion),
forage and turfgrass ($1.3 billion), commercial vegetables ($.4 billion) and
home garden vegetables ($.3 billion). A footnote appears stating that the
Company excludes from its potential market approximately $0.2 billion of annual
sales in the forage and turfgrass seed sectors retailed to city homeowners.
FORAGES
Forage crops, which are crops in which the entire plant is harvested for
consumption, are the largest single component of livestock and dairy herd diets,
and are generally fed to animals either through grazing or in the form of hay.
Hay is one of the largest and most widely produced cash crops in the United
States and is harvested in all 50 states. The following (omitted) bar graph is
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entitled Estimated U.S. Crop Values-1996. It shows (in bars less than two inches
high) estimated crop sales (in billions) for corn ($24.9 billion), soybeans
($16.3 billion), hay, a forage ($12.0 billion), wheat ($9.0 billion) and cotton
($6.5 billion). The (omitted) graph that follows is entitled U.S. Acreage 1996.
It shows (in bars less than two inches high) estimated acreage (in millions of
acres) for corn (73.1 million), soybeans (63.4 million), wheat (62.9 million),
hay (61 million) and cotton (15 million).
Since most forage crops are consumed by livestock and are bulky and difficult
to transport, they are typically grown in areas with high concentrations of
dairy and beef cattle. In contrast, seeds are typically grown where climate and
other favorable conditions result in optimal yields. For example, approximately
75% of all alfalfa hay is grown east of the Mississippi River, while 95% of all
alfalfa seed is grown in the Pacific Northwest and California, where seed
quality and yields are higher. This geographic separation between seed producers
and end users of forage seed virtually eliminates growers' incentives to "save
seeds" in an effort to reduce costs, or for subsequent sale.
Farms are becoming larger as a result of economies of scale in farming.
Consequently, the number of farms is declining, with fewer farmers producing
most of the crops (18% of the farms in the United States produce 76% of the
crops). The owners of larger farms are generally more knowledgeable and
sophisticated, placing a premium on new valued-added technology.
While alfalfa is by far the best known of the forage crops and comprises
approximately 40% of planted forage acreage and an even greater percentage of
the hay cash crop value in the United States (see graphs above), there are
numerous other species comprising the forage sector. A high percentage of
grass forage species, including tall fescue, orchardgrass and bromegrass, are
seeded in mixtures with non-grass forages. In general, the grass component of
the mixture is included to decrease bloat (swelling in the stomach of cattle
caused by foaming, which can result in death by asphyxiation), improve soil
structure, decrease weed competition, improve organic matter and spread out
seasonal peaks of forage production.
TURFGRASS
Turfgrass seed consumption has increased at average annual rates of between 6%
and 9% during the period from 1987 to 1997, according to industry data. There
were 15,832 golf courses in the United States in 1996, with an additional 850
(5%) under construction. Furthermore, management believes that increases in
turfgrass usage in the Pacific Rim countries rival United States growth
statistics.
SEED PRODUCTION/DISTRIBUTION PROCESS
Outlined and illustrated below are the key components of the seed production
distribution process:
[An omitted graphic illustration of the seed production/distribution cycle
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appears here. It shows a circular progression using arrows and several small
(less than one inch high) illustrations and includes the following text:
Research. Develops Genetically Superior Proprietary Products. Seed Stocks
(Foundation Seed): Provided to individual farmers under contract. Farmer
Grows: Commercial Seed (Certified Seed) under contract with Regional Production
Companies. Uncleaned Seed Delivered to Production Company. Seed Cleaning
Plant: Production Company cleans, processes, coats and bags seed. Seed sold to
Regional Distribution Companies. Regional Distribution Companies warehouse,
market wholesale and/or retail seed and deliver to local outlet. Customer:
i.e., forage farmer, homeowner, golf course.]
RESEARCH
Varieties are developed by research companies with desirable value-added
improvements such as yield, disease and insect resistance and various quality
traits. Research companies then typically license the varieties to production
and/or distribution companies and provide them with foundation seed stocks,
which are the proprietary source seed used to plant seed fields for commercial
seed production.
GROWING
Seed farmers are generally called upon to grow the proprietary foundation seed
stocks into commercial quantities of "certified" (i.e. complying with state and
federal standards) seed under contract with processing and/or distribution
companies. These contracts are generally three years in length and contain fixed
contract prices for all or part of their duration. Farmers assume all of the
risks associated with growing the seed. However, because contracts are based on
acreage, excess seed produced by high yields must either be carried as inventory
by seed processing companies, or they must seek alternative distribution
channels or methods.
PROCESSING
The seed farmer delivers uncleaned seed to processing companies. The
processing companies clean, coat and package the seed in units that are size-
appropriate for the customer. Forage seeds are usually packaged in 50 pound
bags, as are turfgrass seeds for larger customers such as golf courses.
Homeowner/retail turfgrass seeds are generally packaged in one to three pound
bags or boxes.
DISTRIBUTION
Forage distribution companies store seed and distribute it wholesale to local
farm supply outlets and directly to large forage farmers. Turfgrass
distribution companies generally market to mass merchandisers such as K-Mart and
Home Depot for sale to homeowners and also sell directly to large seed users
such as golf courses, municipalities and sod farmers.
LOCAL RETAIL OUTLETS
Local outlets generally service small geographic areas. In most instances,
the local outlets are general farm supply stores that supply a combination of
seed, feed and fertilizers to local farmers and/or homeowners in rural areas.
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Larger farmers will sometimes act as outlets (i.e. farmer/dealers) to handle
seed for their own use and that of their neighbors.
CUSTOMERS
The Company sells forage and turfgrass seed to a wide variety of customers.
These include sales direct to end users, large regional distributors, national
accounts, and local feed and seed stores. The end customers for forage seeds are
farmers who are generally located in regions with large beef and dairy herds.
Hay sales to dairies often have quality-based price premiums and, consequently,
this customer segment is extremely attractive to forage growers. Turfgrass seed
customers are generally centralized in densely populated areas and generally
consist of parks, golf courses and other customers planting for their own
personal lawns.
MARKETS/DEMAND
Incomes are growing worldwide, particularly in developing countries. As
incomes rise, global demand for meat and milk is rising, which in turn is
driving demand for forage seed. Demand for forage and turfgrass seed is
generally cyclical in nature and subject to numerous factors. Seeds, like most
other agricultural products, are subject to fluctuations based on the underlying
supply and demand for the crops produced. The demand for seed is also
influenced by the general farm economy and a variety of nature's adversities
including, but not limited to, drought, wind, hail, disease, insects and early
frost.
FORAGES
Forages are the primary feed components for animals used in milk and meat
products (high protein foodstuffs). Forage seed sales are primarily driven by
the size of the animal population producing milk and meat products. Recent
efforts of underdeveloped countries to increase dietary protein have created
strong demand for forages. This demand is being driven by increasing world
population and income.
While global demand for milk and meat products has increased 13.5% since 1990,
worldwide arable acreage, upon which forage can be grown, has declined 8%. As
demand for meat and dairy animals increases and arable acreage decreases,
developing countries are likely to become increasingly dependent on higher
yielding varieties and agricultural imports. An omitted bar graph (in millions
of metric tons) appears here, which shows worldwide red meat consumption
increasing from approximately $111 million metric tons in 1990 to 126 million
metric tons in 1996 (estimated).
In the United States, the decline in arable acreage is less severe. The 1996
Freedom to Farm Act was designed to allow the market to better determine crop
selection, and the Company believes the new law will allow more farmers to
choose to grow forages. The Conservation Reserve Program will place
approximately nine million acres of arable land back into production, which the
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Company believes is likely to help stabilize the quantity of forage acreage in
the United States over the next several years. In addition, farms in the United
States are becoming larger in an effort to benefit from economics of scale. The
Company believes that these large-scale farmers tend to recognize the advantages
of value-added technology and are willing to pay a premium for such benefits.
The Company believes that the countervailing influences for increasing demand
for forages and the decreasing acreage available for their production will
create a strong demand for superior seed varieties and germplasm to increase
yields, especially among large-scale United States farmers.
TURFGRASS
Domestic turfgrass seed consumption growth has averaged between 6% and 9% over
the last ten years. The Company believes domestic demand for turfgrass is being
driven by both domestic population growth and the increased usage of turfgrass
to increase home values and build recreational facilities, such as golf courses
and parks. For example, there are currently approximately 25 million acres of
lawns, golf courses, parks and roadway medians which use turfgrass seed in the
United States alone. American consumers spent $13.4 billion on professional
lawns and landscape services in 1994, an increase of 7% over 1993. In addition,
according to industry data, there were 15,832 golf courses in the United States
in 1996, with an additional 850 (5%) under construction.
The Company believes turfgrass users are increasingly demanding higher
turfgrass quality and as a result, average maintenance costs and pesticide use
are also rising. The Company believes that the increasing demands for high-
quality turfgrass, combined with consumers' desires to reduce maintenance costs
and pesticide usage, will likely create a market for genetically enhanced
turfgrass.
INDUSTRY ECONOMICS
The forage and turfgrass seed sectors have historically been low margin
businesses due to their fragmented nature, lack of vertical integration, price-
based competition and, until recently, lack of protection for proprietary seeds.
More recently, however, margins have begun to expand as farmers have moved away
from public varieties and increasingly toward higher yielding proprietary
varieties with many desirable attributes, such as improved nutritional quality
and disease and insect tolerance.
As an example of the above described increase in margins, management estimates
that retail alfalfa seed pricing today is approximately $1.60 per pound for
public, non-proprietary varieties, while proprietary seed pricing is in the
$3.20 to $3.60 per pound range. Moreover, alfalfa seed with new value-added
traits, such as potato leafhopper tolerance, was introduced in limited
quantities in 1997 and sells for approximately $4.50 to $5.50 per pound.
Management believes that the introduction of biotechnology capabilities into the
forage and turfgrass seed sectors has the potential to further expand margins.
Outlined
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below is an allocation of the estimated purchase price for public, proprietary
and enhanced value-added alfalfa varieties to the various stakeholders in the
production and distribution value chain.
ALLOCATION OF THE WHOLESALE SEED DOLLAR PER POUND (ALFALFA EXAMPLE)
<TABLE>
<CAPTION>
Enhanced
Public Proprietary Value-added
Varieties Varieties Varieties
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<S> <C> <C> <C> <C> <C> <C>
Grower $1.00 72% $1.30 46% $1.40 35%
Research Company 0.00 0 0.40 15 1.00 25
Processing and Packaging
Company 0.20 14 0.40 15 0.55 14
Distribution Company 0.20 14 0.70 24 1.05 26
----- --- ----- --- ----- ---
Wholesale seed price $1.40 100% $2.80 100% $4.00 100%
===== === ===== === ===== ===
Retail seed price $1.60 114% $3.40 121% $5.00 125%
===== === ===== === ===== ===
</TABLE>
BUSINESS STRATEGY
OPERATING STRATEGY
The Company's strategy as the market share leader for the forage and cool
season turfgrass seed sectors is to develop and market value-added proprietary
seeds that meet the yield and quality needs of forage farmers and the
increasingly stringent turfgrass quality needs of end users, such as homeowners
and golf course superintendents. The Company strives to maintain superior
customer service while upgrading its product line. ABT plans to increase the
profitability of both the Company and its customers by implementing the
following key strategies:
VERTICAL INTEGRATION. ABT seeks to continue to vertically integrate its
forage and turfgrass seed operations and thus increase the percentage of the
wholesale seed dollar retained by the Company. This is being achieved by owning
companies which meet its needs with respect to proprietary research and
development, seed processing and the continued development of a national and
international sales network. Management believes that as the Company continues
the consolidation of these sectors, the economies of scale derived from vertical
integration (see "Integration of Acquisitions" below) should provide the Company
with the opportunity to improve margins, enhance efficiencies and eventually
secure access to the biotechnology breakthroughs that are expected to be
available in the forage and turfgrass seed sectors in the future.
. INDUSTRY LEADING RESEARCH AND DEVELOPMENT. The Company has developed an
industry leading research and development program for the forage and
turfgrass seed sectors. This research capability allows the Company to
develop
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proprietary seed varieties with value-added characteristics that improve
yield, nutritional quality, persistence, and insect and disease tolerance
for forages and quality, color, persistence and insect and disease
tolerance for turfgrasses. The Company believes that development of
propriety seed varieties through traditional genetic research programs has
become an essential foundation for transforming the forage and turfgrass
seed sectors into high margin businesses similar to the other proprietary
seed sectors.
. EFFICIENT PROCESSING AND PACKAGING. ABT owns and operates modern
processing and packaging facilities which clean, sort and bag seeds. The
Company's ownership of processing and packaging facilities enables it to
improve quality control, better control seed availability and capture a
larger portion of each seed sales dollar.
. NATIONAL AND INTERNATIONAL SALES NETWORKS. The Company believes that its
national and international sales force, which currently markets and sells
goods in 45 states and 26 countries, can support the Company's introduction
of new products and will facilitate development of a national brand.
. BIOTECHNOLOGY ACCESS. The Company believes that the introduction of
proprietary seed varieties with value-added characteristics will provide
the genetic platform from which specific value-added genes may be
introduced through biotechnology. ABT is seeking to become the licensee or
partner of choice for owners of biotechnology genes in order to accelerate
introduction of these value-added genes to its customers through
biotechnology.
INTEGRATION OF ACQUISITIONS. The Company continues to make strategic
acquisitions and is in the process of integrating these operations to increase
operating efficiencies by (i) eliminating geographic overlap in distribution,
(ii) consolidating administrative, finance and accounting functions, (iii)
expanding marketing and customer service programs, (iv) upgrading management
information systems and (v) coordinating and expanding research and
development.
INVESTMENT IN INFRASTRUCTURE. The Company has invested in personnel in
advance of future sales in order to support the sales growth of acquired
companies while focusing on marketing new value-added products. The Company
will continue to upgrade and expand its infrastructure as required and
believes it has the necessary senior management in place to meet its
near-term needs.
GROWTH STRATEGY
ABT's growth strategy focuses on acquiring attractive companies in the
forage and turfgrass seed sectors and increasing their level of sales,
improving the Company's product mix and realizing operating efficiencies.
CONSOLIDATION OF FORAGE AND TURFGRASS SEED SECTORS. ABT plans to continue
to build the premier forage and turfgrass seed company in the United States by
acquiring and integrating attractive companies which specialize in research and
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development, processing and distribution. The Company's acquisition strategy
consists of acquiring geographically dispersed companies with strong management
and operations. Based on financial results reported to date, the Company has
generally been able to maintain historical sales levels of its acquisitions
while at the same time integrating them into one organization thereby developing
synergies in operations.
INCREASING SALES OF HIGHER MARGIN PROPRIETARY SEEDS. ABT believes
opportunities exist to enhance profitability in the forage and turfgrass seed
sectors through increased sales of higher-margin proprietary seeds. The Company
believes forage seed customers will place a premium on new valued added
varieties that increase their profitability through increased sales, greater
milk or meat production or higher margins. The Company believes turfgrass seed
customers will also seek new products that improve turf quality while at the
same time decreasing maintenance costs and decreasing environmental pollution
from chemicals previously used to control plant pests.
REALIZATION OF ECONOMIES AND OPERATING EFFICIENCIES. As ABT continues to
consolidate the forage and turfgrass seed sectors, the Company expects to
achieve significant economies of scale and operating efficiencies. However,
because seed production contracts are generally three years in length and
management's desires to nurture certain existing business relationships, a time
lag will likely exist before full synergies can be achieved. Because of the
Company's investment in infrastructure ahead of future sales, the Company
believes operating expenses as a percentage of sales will likely decrease in the
future and revenue growth will exceed growth in general and administrative
expenses. In Fiscal 1997, the Company achieved a reduction in operating
expenses as a percentage of sales to approximately 27% from 37% in Fiscal 1996.
ACQUISITION PROGRAM
Since the Company commenced its acquisition program in January 1995, it has
acquired all or part of 14 seed companies and has signed letters of intent to
acquire two additional seed businesses, all as set forth in the table below.
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AGRIBIOTECH, INC.
ACQUISITIONS
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
ANNUAL REVENUE PURCHASE
EFFECTIVE AT ACQUISITION PRICE HEADQUARTERS AT DESCRIPTION
AGRIBIOTECH ACQUISITIONS DATE (IN MILLIONS) (IN MILLIONS) ACQUISITION OF BUSINESS
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<S> <C> <C> <C> <C> <C>
Seed Resource, Inc. Jan 95 $ 1.8 $ 1.1 Tulia, TX Markets proprietary sorghum,
sudan grass, ryes & millets in
the U.S., Mexico and Europe.
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Scott Seed Company Mar 95 $ 5.5 $ 2.0 New Albany, IN Markets proprietary alfalfa
varieties, clover varieties,
pasture mixes, turfgrass
varieties and corn hybrids
throughout Kentucky and Southern
Indiana.
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Hobart Seed Company Apr 95 $ 3.2 $ 1.7 Hobart, OK Markets alfalfa, field seeds &
lawn and garden supplies in
Oklahoma, Texas and Kansas.
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Sphar Seed Company July 95 $ 1.2 $ 0.3 Winchester, KY Markets proprietary alfalfa
varieties, clover varieties,
pasture mixes, turfgrass
varieties and corn hybrid
throughout Kentucky and Southern
Indiana. Sphar is also a
Pioneer corn distributor.
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Halsey Seed Company July 95 $ 1.2 $ 1.1 Trumansburg, NY Markets alfalfa, field seeds and
turf seeds in New York and New
England.
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Arnold Thomas Seed Service,
Inc. Oct 95 $ 2.0 $ 0.9 Lowden, WA Has four seed cleaning lines in
its Lowden, Washington facility
with access to grass, clover and
alfalfa seed production areas in
the Northwest.
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Clark Seeds, Inc. Oct 95 $ 4.0 $ 2.2 Nampa, ID Has two modern seed cleaning
facilities in Idaho and Oregon.
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Doug Conlee Seed Co. Jan 96 $ 1.0 $ 0.6 Waco, TX Is in same area as Seed
Resource, so operating synergies
were created along with
expansion of forage sales. The
company also has proprietary
sorghum and sudan grass
germplasm.
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Beachley-Hardy Seed Co. Feb 96 $ 9.0 $ 4.2 Shiremanstown, PA Strong market presence in
Northeast. Also included is
access to future breakthrough
proprietary forage and turf
products of its former owner.
It also provides ABT access to
products such as Roundup-ready
soybeans and high-oil corn.
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Michigan Hybrid Seed Co. Jun 96 Nil Nil Dansville, MI Markets proprietary alfalfa
varieties and hybrid seed corn
in Michigan.
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W-L Research, Inc. and Sept 96 $20.0 $16.0 Evansville, WI and W-L is a leading alfalfa
Germain's, Inc. Fresno, CA research company. The company
has a strong base of franchised
distributors in the U.S. and
several foreign countries. Its
alfalfa varieties are the
leading proprietary products in
Argentina. Germain's is one of
the leading regional seed
companies in the Western U.S.
The 125-year-old company markets
hybrid corn, alfalfa, turf,
clover, pasture grass and cover
crop seed in the Western U.S. &
Mexico.
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E.F. Burlingham & Sons Apr 97 $36.0 $10.1 Forest Grove, OR An 85-year-old turfgrass seed
company with many varieties
scoring as leading performers in
official national turf
evaluation tests.
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The Sexauer Company Apr 97 $10.0 $ 3.2 Brookings, SD A full-service forage and turf
seed company with four
distribution locations. The
company has 106 years of
history.
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Olsen Fennell Seeds, Inc. Jun 97 $35.0 $15.2 Salem, OR Good germplasm in turf seeds and
non-alfalfa forages.
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Pending Oct 97(1) $ 9.4 $ 7.0(1) Pending Markets alfalfa, field seeds and
turfgrass seeds.
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Loft's Seed, Inc.(pending) Jan. 98(1) $75.0 $34.0(1) Winston-Salem, N.C. Premier turfgrass seed company.
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</TABLE>
(1) Estimatd based on signed letters of intent
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RESEARCH AND DEVELOPMENT
The Company operates genetic breeding programs and intends to increase its
research and development spending to develop a full line of proprietary products
for most forage and turfgrass species, as well as continue to purchase
additional proprietary varieties and research programs.
The Company estimates that each of the industry's top five alfalfa research
companies, including the Company's wholly-owned subsidiaries, spend more on
proprietary alfalfa variety development than is spent by all industry members on
variety development for all other forage species combined. This minimal level
of research expenditure on variety development for secondary forage species
reflects the current fragmented nature of the forage sector, and the lack of
critical mass within any one company to justify research and development
spending.
ABT's goal is to alter this scenario by consolidating the industry and
achieving the economies of scale necessary to conduct research on both alfalfa
and non-alfalfa forages, as well as on turfgrass. This research is aimed at
developing (i) value-added forage seed products with improved characteristics
in yield, nutritional quality, persistence, and disease and insect tolerance
and (ii) improved turfgrass seeds with improvements to color, ease of mowing,
pest resistance, dwarfness and texture.
The Company sponsored research and development in the amounts of
$1,170,703, $59,836 and $56,488 during the fiscal year ended June 30, 1997
("Fiscal 1997"), the fiscal year ended June 30, 1996 ("Fiscal 1996") and the
nine months ended June 30, 1995 ("Fiscal 1995"), respectively.
FORAGES
The Company believes it has an industry leading alfalfa breeding program
and an excellent alfalfa germplasm base. The Company has been successful in
developing numerous varieties that produce high yields under intensive cutting
schedules, multiple pest tolerance and more recently, improved nutritional
quality. For instance, W-L's new High Quality (HQ(R)) alfalfa varieties have won
the "Forage Superbowl" three years in a row. The Forage Superbowl is held
annually in a conjunction with the World Dairy Expo in Madison, Wisconsin, and
is seen by customers and industry peers as the premier third party forage
analysis in the industry.
Potato leafhopper is often considered the most destructive alfalfa insect
pest in North America, with significant losses reported in both yield and forage
quality each year. Although some industry sources estimate that 8-10 million
acres are affected annually by potato leafhopper, chemical treatment is seldom
undertaken because of the cost and/or the inability to detect the problem in
time. ABT has developed a variety that is intended to protect against potato
leafhopper and is expected to introduce a second variety next spring.
TURFGRASS
The Company has an industry leading turfgrass breeding program with over
50,000 turf evaluation plots throughout the United States and has developed a
number of turfgrass varieties with superior turf quality that are independently
evaluated in National Turf Evaluation Plot ("NTEP") trials throughout the United
States. The Company's varieties currently top the NTEP list in three important
turfgrass species (tall fescue, perennial ryegrass and fine fescues). In
addition, a number of the Company's varieties are in the top ten for each
species. As a result, the Company's germplasm is highly desirable to customers
who want ABT to provide private label varieties for them. To date, the Company
has
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<PAGE>
chosen to engage in private labeling in order to maximize market share.
SEED PROCESSING AND PACKAGING
Forage and turfgrass seed varieties are grown for the Company under
contract by farmers specializing in seed production. The Company provides the
farmer with proprietary seed stocks and contracts for the entire production
from the farmer's field, generally for a three-year period. It is the farmer's
responsibility to plant, grow and harvest the seed crop. ABT's seed processing
facilities provide the growers with reusable bulk bins that farmers fill with
seed and deliver to ABT's processing facilities for cleaning, treating,
packaging and distribution.
The seed production areas for forage and turfgrass seeds are geographically
separated from the seed consumption regions. The Pacific Northwest states
(Oregon, Washington, Idaho, Nevada, Montana and California) are among the best
areas in the world to grow forage and turfgrass seed. The favorable climatic
conditions for growing seed in the Pacific Northwest results in high yields of
excellent quality alfalfa seed (700-1,200 pounds per acre) and turfgrass seed
(1,500-2,000 pounds per acre). In contrast, the hot, humid, rainy conditions
prevalent in the seed consumption regions dramatically decrease seed quality and
yield for both forage and turfgrass seeds (50-400 pounds per acre).
Consequently, there is little economic incentive for farmers to attempt to grow
their own seed for forage and turfgrass crops.
ABT's seed processing facilities are primarily located in Oregon, Idaho,
Washington and Texas and generally contain modern and efficient equipment.
Management believes the Company's facilities have enough capacity to handle
current seed volume and accommodate its near term growth needs. These facilities
were operating at significantly less than capacity prior to their acquisition by
the Company. The Company plans to acquire additional capacity as distribution
grows through acquisitions. As the Company acquires additional companies
specializing in seed processing, there will be an opportunity to gain
efficiencies by building one or two processing facilities with larger capacities
for shared use by a number of acquired companies that are processing seed in
close proximity.
DISTRIBUTION
DOMESTIC
Within the United States, the Company distributes seeds in 45 states. Since
forage crops are grown to be consumed by livestock and hay is bulky and
expensive to transport, these crops tend to be raised in geographic areas with
high concentrations of dairy and beef cattle. Consequently, the Company
distributes its forage products primarily in Wisconsin, Michigan, Minnesota, New
York, Pennsylvania, Texas, Oklahoma, Kansas, Nebraska, Southern Indiana,
Southern Ohio, Kentucky, Virginia, Tennessee, and California.
There is a strong correlation between population and turfgrass seed
consumption. As a result, the Company distributes turfgrass seed primarily in
urban areas. The heavily populated regions are best served by large retail chain
stores such as K-Mart and Home Depot.
FOREIGN.
Internationally, the Company distributes seeds in 26 foreign countries
through its independent historical relationships. Management believes that there
is an opportunity to significantly enhance international sales by coordinating
sales efforts across subsidiaries. The Company has not established an
international business unit to consolidate international sales, but is
evaluating its international business with a view toward operating as an
international business unit in mid to late calendar 1998.
Argentina is the most important forage market outside of the United States,
with approximately 16 million acres of alfalfa planted annually. The Company
markets alfalfa
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<PAGE>
under the W-L brand name through Cargill S.A.C.I. The largest international
turf markets for the Company are currently the Pacific Rim countries.
PRODUCTS
ABT offers its customers a large and diverse selection of seeds in the
forage and cool season turfgrass sectors. The Company sells proprietary
varieties which are exclusively owned and protected under the PVPA (see
"Proprietary Rights") and marketed on their value-added traits. The Company also
sells public varieties that were developed with government funds and distributed
to all members of the seed industry. In order to offer its customers a full
complement of products, the Company also sells opportunistic crop seeds such as
corn, soybeans, vegetables and small grains. The Company's acquisition of
Burlingham (effective April 1, 1997) and Olsen Fennell (effective June 1, 1997),
as well as its proposed acquisition of Lofts Seed, each of which adds a
significant amount of turfgrass sales, are expected to alter the Company's
product mix significantly, at least until any other forage companies are
acquired.
Public varieties generally means varieties that were developed with
government funds (state or federal) in which the parent seed stocks are released
to all members of the seed sector. On the other hand, proprietary varieties
have an exclusive owner who markets the varieties based on their value-added
traits and the profits they will generate for the customer.
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<PAGE>
The Company is in the process of reducing the number of products and brands
that it offers and increasing the percentage of proprietary seeds it sells. This
effort is being done cautiously, however, so as to retain customer loyalty while
at the same time concentrating on the more popular and value-added proprietary
seed varieties. As the Company invests in research and development and
accelerates the availability of proprietary products, the Company intends to
increase the rate at which these changes occur. There are consolidation
efficiencies associated with inventory costs when the number of products and
brands are decreased. Larger quantities of fewer items will facilitate inventory
control, especially where much of the inventory is transportable and can be
moved to other Company locations as needed.
Varieties vs. Hybrids - why the forage and turfgrass seed sectors were slow
___________________________________________________________________________
to consolidate. The primary reason why the corn seed sector developed into a
_______________
consolidated industry, with large research expenditures and high gross margins,
was the development of genetic hybridization techniques. Hybrids are crosses
between two inbred lines that produce superior crops. The seed from these crops,
however, cannot be retained for further use, as it will not produce a superior
crop. The owner of the inbred lines controls the inbred parents and therefore
controls ownership of the hybrid offspring. Development of hybrids enabled
investors to own and protect superior products developed through research.
Intellectual property rights protection for these products is by trade secrets,
the PVPA, patents or a combination of all three methods.
Hybridization techniques have not, to date, been successful in the forage
and turfgrass seed sectors. Proprietary protection for these sectors was not
generally available until passage of the Plant Variety Protection Act (the
"PVPA") in 1970, amendments to the PVPA in 1994 and a favorable United States
Supreme Court ruling in 1995. These recent developments have provided the forage
and turfgrass sectors with the needed proprietary protection to increase
research investment. Prior to having the legal protection of the PVPA, it was
relatively inexpensive to duplicate the research efforts of industry leaders.
"Copycat" varieties could often be commercialized two to three years after being
provided by the industry leader. See "Proprietary Rights."
CUSTOMERS
The Company sells seed to a wide variety of customers including sales
direct to end users, large regional distributors, national accounts, and local
feed and seed stores. The relative percentages of customer mix varies among
ABT's operating subsidiaries.
FORAGES
The Company sells most of its forage seeds to local feed and seed stores
and regional distributors, who, in turn, sell to the individual farmer. Alfalfa
varieties are primarily sold by the Company through regional franchisees in the
United States, and internationally, generally through exclusive representatives
such as Cargill S.A.C.I. in Argentina. The Company does some private labeling
of varieties to larger customers who have adequate value and brand recognition
for their territory.
TURFGRASS
About 15% of the Company's current turfgrass sales are direct to golf
courses, 70% are to regional distributors and national accounts and the
remaining 15% are to local feed and seed stores. Regional distributors of the
Company generally sell about 40% of the seed to professional end users, such as
golf courses, landscapers and parks. The remaining 60% is sold to homeowners.
Lofts Seeds, Inc.,
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<PAGE>
a pending acquisition, specializes in direct golf course sales and mass
merchandising to the retail outlets that sell to individual homeowners.
International customers represented approximately 15% of the Company's turfgrass
sales for Fiscal 1997.
COMPETITION
The Company competes in the forage and turfgrass seed sectors on the basis
of price, product quality and service. The major agricultural
companies in the United States focus their sales around hybrid seed corn
(Pioneer Hi-Bred International, DEKALB Genetics Corporation, Novartis AG and
Mycogen Corporation), cotton seed (Delta and Pine Land Company) and other grain
crops. In the past, they have treated forage and turfgrass seeds as ancillary
crops when they compete in the marketplace. This is the opposite of the
Company's business strategy, which is to treat forage and turfgrass seed as the
primary product. Therefore, the Company's major competitors in the forage and
turfgrass seed sectors are currently large regional companies and numerous small
family seed businesses. However, any of the major agricultural companies may
decide to compete directly against the Company. Management believes that as
ABT's acquisition strategy becomes better known in the seed industry, the
competition for acquisitions, sales, facilities and personnel will intensify.
The largest United States alfalfa competitors are Cenex/Land O'
Lakes/Research Seed, Helena/AgriPro, Pioneer and Cal/West Seeds. The largest
competitors for other forages are FFR Research and its farm cooperative members.
There are also many small family owned businesses that are strong competitors
in small geographic areas.
There are a number of cool season turfgrass seed competitors that have
annual sales of between $20 and $60 million. Most of these companies are
regional companies, with only Lofts Seed, Inc.(a pending acquisition for the
Company), Pennington Seed and O.M. Scott having national name brand acceptance.
Pennington Seed is the largest producer and marketer of turfgrass seed in the
United States, however, a higher percentage of their product revenues are warm
season grasses, birdseed and affiliated turf products, such as fertilizers and
chemicals. Therefore, based on its knowledge of the industry, the Company
believes that it is the largest forage and cool season turfgrass seed company in
the United States.
BIOTECHNOLOGY ACCESS
Biotechnological breakthroughs have been introduced into other seed sectors
such as corn, soybeans and cotton. The Company believes similar biotechnology
breakthroughs in the forage and turfgrass sectors will follow, although this may
not occur for some time. Three essential criteria have been established by
owners of seed biotechnology in order for seed companies to be granted
biotechnology access at early stages. These are (i) a well established
traditional genetic breeding program, (ii) significant market share and (iii) a
management team committed to marketing proprietary products with value-added
attributes. The Company believes it meets all three of these criteria.
Dr. Tom Rice, an experienced biotechnology program manager who is a
consultant to the Company, is working with management and the Company's
traditional genetic research breeders to identify and prioritize specific
biotechnology projects. Management believes its industry leading market share
and germplasm, in conjunction with Dr. Rice's efforts, will enable the Company
to negotiate relationships for forage and turfgrass seed biotechnology.
PROPRIETARY RIGHTS
The Company owns proprietary varieties for a number of forage and turfgrass
species that are protected under the PVPA. The PVPA prohibits others from
selling seed of those proprietary varieties for 18 years, when such protection
expires. It was not until the PVPA was passed in
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1970 that varieties such as forage and turfgrass seed were given legal
protection, which allowed them to be sold as something other than commodities.
Congress passed amendments to the PVPA in 1994, which further strengthened the
original legislation and in addition, a January 1995 United States Supreme Court
decision defined clear limitations on farmers' ability to resell seed,
essentially limiting the use of saved seed to the farmers' personal use only.
The Company owns PVPA protected varieties as shown in the following table.
In addition, the Company has licensed from third parties protected varieties for
exclusive marketing in numerous species, including alfalfa, red clover, corn and
soybean.
<TABLE>
<CAPTION>
- ------------------------------------------------------
PVPA STATUS
- ------------------------------------------------------
Issued Pending Exclusive
------- -------- License
(Owned) (Owned) ---------
- ------------------------------------------------------
<S> <C> <C> <C>
Alfalfa 16 1 5
- ------------------------------------------------------
Tall Fescue 2 3 -
- ------------------------------------------------------
Perennial Ryegrass 2 8 -
- ------------------------------------------------------
Kentucky Bluegrass 1 - 2
- ------------------------------------------------------
Fine Fescue 1 - 2
- ------------------------------------------------------
Orchardgrass - - 1
- ------------------------------------------------------
Crimson Clover - - 1
- ------------------------------------------------------
Bentgrass - - 2
- ------------------------------------------------------
Chicory - - 1
- ------------------------------------------------------
22 12 14
- ------------------------------------------------------
</TABLE>
EMPLOYEES
As of September 12, 1997, the Company had 286 full-time employees including
five Executive Officers (Johnny R. Thomas, President; John C. Francis, Vice
President and Secretary; Kathleen L. Gillespie, Vice President of Seed
Operations and Acquisitions; Henry A. Ingalls, Vice President, Treasurer and
Chief Financial Officer; and Byron Ford, Vice President of Corporate Development
and Strategic Planning), 93 marketing and sales personnel, 62 administrative
personnel and 131 distribution, processing and warehousing personnel. The
Company had 39 part-time employees and contracts with a number of independent
sales representatives.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements to be provided pursuant to this Item 7 begin on
page F-1 of this Report, following Part III hereof.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to the Company during the fiscal year ended June 30,
1997 ("Fiscal 1997"), the fiscal year ended June 30, 1996 ("Fiscal 1996") and
the nine-month period ended June 30, 1995 ("Fiscal 1995") by those persons who
served as Chief Executive Officer and any Named Executive Officers who received
compensation in excess of $100,000 during such years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
NAME AND ANNUAL COMPENSATION SHARES
PRINCIPAL ------------------------- OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)
- --------- ---- -------------- -------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Johnny R. Thomas, 1997 $84,000 -0- $131,906(2) -0-
President and CEO 1996 $84,000 -0- -0- 1,000,000
1995 $63,000 -0- -0- -0-
Henry A. Ingalls, 1997 $150,000 $30,000 $ 26,250(2) -0-
Vice President, 1996 $ 37,500(3) $ 7,500 $ 5,000 1,250,000
CFO, and 1995 -0- -0- -0- -0-
Treasurer
Scott J. Loomis, 1997 $84,000 -0- $165,000(2) -0-
Vice President 1996 $84,000 -0- -0- 1,000,000
1995 $63,000 -0- -0- -0-
John C Francis, 1997 $84,000 -0- $107,813(2) -0-
Vice President 1996 $84,000 -0- -0- 1,000,000
1995 $63,000 -0- -0- -0-
Kathleen L. 1997 $84,000 -0- $200,000(4) -0-
Gillespie, Vice 1996 $84,000 -0- -0- 1,250,000
President 1995 $49,000(5) -0- -0- -0-
</TABLE>
(1) The above compensation figures do not include the cost to the Company of
benefits, including premiums for life and health insurance and any other
personal benefits provided by the Company to such persons in connection
with the Company's business, which were in any event below reportable
thresholds.
(2) Includes the difference between the exercise price and the fair market
value of options (the "spread") on the date of exercise of in-the-money
options, but excludes the spread for options not in-the-money when
exercised.
(3) Mr. Ingalls became Vice President, Chief Financial Officer, and Treasurer
of the Company on April 3, 1996.
(4) Represents the sale of 200,000 options by Ms. Gillespie at $1.00 per
option.
(5) Ms. Gillespie became Vice President of Seed Operations and Acquisitions on
November 25, 1995.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The table below includes information regarding the value realized on option
exercises and the market value of unexercised options held by the executive
officers named in the Summary Compensation Table during the year ended June 30,
1997.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-The-Money
Shares options at FY- Options at
Acquired on Value End(#) FY-end($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---- ------------ ----------- ------------------ -------------
<S> <C> <C> <C> <C>
Johnny R. Thomas 1,000,000 $131,906(1) -0- -0-
Henry A. Ingalls 25,000 $ 6,250 1,225,000/0(2) $5,901,438/0
Scott J. Loomis 1,000,000 $165,000(1) -0- -0-
John C. Francis 1,000,000 $107,813(1) -0- -0-
Kathleen L. Gillespie -0- $200,000(3) 900,000/ $ 4,443,750/
150,000(4) 740,625
</TABLE>
(1) Includes the difference between the exercise price and the fair market
value of options (the "spread") on the date of exercise of in-the-money
options, but excludes the spread for options not in-the-money when
exercised.
(2) Of these options, 725,000 are currently exercisable only for cash.
(3) Represents the sale of 200,000 options by Ms. Gillespie at $1.00 per
option.
(4) Of these options, 450,000 are currently exercisable only for cash.
DIRECTOR FEES
Officer-directors currently receive no compensation for serving on the
Board of Directors other than reimbursement of reasonable expenses incurred in
attending meetings. Outside directors receive $9,000 per year for attending
meetings on up to six different days, $1,500 for additional days and
reimbursement of expenses. Each outside director also received options to
purchase 20,000 shares of Common Stock upon joining the Board, 10,000 of which
vested immediately, and 10,000 of which vest after a year of service.
EMPLOYMENT AGREEMENTS
On February 1, 1994, Scott Loomis entered into an employment agreement with
the Company and became Vice President on April 1, 1994. Mr. Loomis was
compensated at the rate of $7,000 per month until July 1, 1997 when he agreed to
reduce his salary to $55,000 per year. The employment agreement is terminable
by the Company without cause on ten days' prior notice. During the term of his
agreement, and for a period of two years following termination of employment,
Mr. Loomis will be prohibited from engaging in activities which are competitive
with those of the Company and its affiliated corporations within the United
States and from disclosing confidential information of the Company. See Item
12. "Certain Relationships and Related Transactions."
On March 10, 1994, the Company entered into an employment agreement with
Johnny Thomas, commencing on April 1, 1994. The agreement contains
substantially the same terms as Mr. Loomis' above-described agreement. On July
1, 1997, Dr.
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<PAGE>
Thomas agreed to reduce his salary to $60,000 per year.
As of April 1, 1994, the Company entered into an employment agreement with
John C. Francis. The agreement contains substantially the same terms as Mr.
Loomis' above-described agreement. On July 1, 1997, Mr. Francis agreed to
reduce his salary to $48,000 per year.
On November 29, 1994, the Company entered into an employment agreement, as
amended, with Kathleen L. Gillespie. The Agreement contains substantially the
same terms as Mr. Loomis' above described agreement. Ms. Gillespie received
options to purchase 1,250,000 shares of Common Stock, exercisable at $2.00 per
share, which vest over six years, except that all such options are immediately
exercisable for cash. See "Stock Options" below.
On February 13, 1996, the Company entered into an employment agreement with
Henry A. Ingalls. The agreement's term runs from April 3, 1996 for four years.
Mr. Ingalls' aggregate compensation begins at $170,000 per annum plus a minimum
bonus of $30,000 per year. The compensation is subject to annual escalations at
the greater of 5% or the general inflation rate. The Agreement contains a
covenant by Mr. Ingalls not to compete against the Company during the term and
for a two-year period thereafter. Upon termination without cause, Mr. Ingalls
would be entitled to two years' compensation. After a change of control of the
Company, in certain circumstances, Mr. Ingalls would be entitled to three years'
compensation. Mr. Ingalls also received options to purchase up to 1,250,000
shares of Common Stock, exercisable at $2.12 per share vesting over five years,
but immediately exercisable for cash. See "Stock Options" below.
On December 9, 1996, Byron D. Ford entered into an employment agreement
with the Company and became Vice President, Corporate Development and Strategic
Planning on January 15, 1997. The term of the agreement is for at least four
years through June 2001. It may, however, terminate sooner upon a change
of control (as defined). Mr. Ford was compensated at the rate of $90,000 per
annum through June 30, 1997. He is currently receiving $170,000 per year
through June 30, 2001 subject to annual adjustments beginning July 1, 1998; an
additional $30,000 in either bonus or perquisites aggregating $30,000 per year,
plus such additional bonuses as may be determined by the Board of Directors.
Upon a change of control of the Company, under certain circumstances, Mr. Ford
would be entitled to up to two years' compensation plus accelerated vesting of
his stock options which would become vested on the next anniversary date of his
employment. Mr. Ford received options to purchase up to 250,000 shares of Common
Stock, vesting through June 30, 2001. The first 125,000 options are exercisable
at $2.25 per share and the remaining 125,000 options are exercisable at $3.50
per share all until June 30, 2002 upon becoming vested. The Agreement contains
a covenant by Mr. Ford not to compete with the Company while employed by the
Company and for a two-year period following termination.
CONSULTING AGREEMENTS
On June 17, 1997 the Company retained Kent Schulze and James W. Hopkins,
directors of the Company (the "Consultants"), pursuant to separate consulting
agreements for terms commencing July 1, 1997 and continuing through June 30,
1998 (the "Consulting Agreements"). The Company entered into the Consulting
Agreements to capitalize on the Consultants' knowledge and expertise in the seed
business and to ensure that the Consultants will not compete with ABT. The
Consulting Agreements provide that the Consultants shall provide up to 25 days
of consulting services on specific projects, as requested by the Company's
CEO/President, provided that the projects do not conflict with other seed
business obligations of the Consultants. The Consultants may also propose ideas
or concepts to the Company. The Company shall have exclusive control over
deciding whether to proceed with any proposal. In compensation for their
services, the Consultants received a retainer of options to purchase 5,000
shares
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<PAGE>
of Common Stock at $5.50 per share through June 30, 1999, and shall receive $750
per day of actual consulting services, plus pre-approved expenses.
On July 17, 1997, the Company entered into a one-year consulting agreement
with Tom Rice. Dr. Rice is providing the Company with biotechnology consulting
services on specific projects as requested by the Company and may offer ideas or
concepts to the Company. He is being compensated at the rate of $1,200 per day.
STOCK BONUS PLAN
The Company adopted an Employee Stock Bonus Plan (the "Bonus Plan")
effective May 24, 1994 providing for the issuance of up to 40,000 shares of
Common Stock per year to any employee, consultant, officer or director, up to an
aggregate of 400,000 shares for the entire Bonus Plan. Pursuant to the Bonus
Plan, employees of the Company are eligible to receive a stock bonus at the
discretion of the managing committee based on length of service and contribution
or potential value to the Company. As of the date hereof, no bonus shares have
been issued to employees of the Company.
STOCK OPTIONS
The Company has established the AgriBioTech, Inc. 1994 Employee Stock
Option Plan (the "Plan"). The Plan is intended to provide the employees,
directors, independent contractors and consultants of the Company with an added
incentive to continue their services to the Company and to induce them to exert
their maximum efforts toward the Company's success. The Plan provides for the
grant of options to qualified directors, employees (including officers),
independent contractors and consultants of the Company to purchase an aggregate
of 1,600,000 shares of Common Stock, but no more than 300,000 options may be
granted to any one person in any two-year period. The Plan is currently
administered by the Stock Option Committee of the Board of Directors. The
Committee determines, among other things, the persons to be granted options
under the Plan, the number of shares subject to each option and the option
price.
The Plan allows the Company to grant incentive stock options ("ISOs"), as
defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), Non-Qualified Stock Options ("NQSOs") not intended to qualify under
Section 422(b) of the Code and Stock Appreciation Rights ("SARs"; collectively,
"Options") at any time within 10 years from the date the Plan was adopted. The
exercise price of ISOs may not be less than the fair market value of the Common
Stock on the date of grant, provided that the exercise price of ISOs granted to
an optionee owning more than 10% of the outstanding Common Stock may not be less
than 110% of the fair market value of the Common Stock on the date of grant. In
addition, the aggregate fair market value of stock with respect to which ISO's
are exercisable for the first time by an optionee during any calendar year shall
not exceed $100,000. Options shall have a term of no more than ten years,
except that ISOs granted to an optionee owning more than 10% of the outstanding
Common Stock shall have a term of no more than five years and must be granted to
and exercised by employees of the Company (including officers). Options are not
transferable, except upon the death of the optionee.
At June 30, 1997, an aggregate of 1,123,600 options were outstanding under
the Plan, at prices ranging from
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<PAGE>
$2.00 to $6.94, including 300,000 options to Kathleen L. Gillespie, a Vice
President of the Company, and 25,000 to each of the two independent directors of
the Company. An aggregate of 476,400 shares of Common Stock are issuable upon
exercise of options available for future grants under the Plan.
In addition, the Company has granted options outside of the Plan to
purchase 6,050,000 shares of Common Stock, of which 3,225,000 options have been
exercised. See Item 12. "Certain Relationships and Related Transactions" for
information concerning the grant and exercise of 1,000,000 options to each of
Messrs. Thomas, Francis and Loomis. As of September 19, 1997, officers and
employees of the Company held options to purchase an aggregate of 2,825,000
shares of Common Stock outside of the Plan, exercisable for up to ten years
ending in 2006, at prices ranging from $2.00 to $5.00 per share. Ms. Gillespie
held ten-year options outside of the Plan to purchase up to an aggregate of
750,000 shares of Common Stock outside of the Plan at $2.00 per share; Mr.
Ingalls held ten-year options to purchase up to 1,225,000 shares of Common Stock
at $2.12 per share; and Mr. Ford held five-year options outside of the Plan to
purchase up to 125,000 shares of Common Stock at $2.25 per share and 125,000
shares of Common Stock at $3.50 per share. Such options vest over three to six-
year periods, and Ms. Gillespie's and Mr. Ingalls' options are immediately
exercisable for cash.
RETIREMENT PLAN
The Company has a defined contribution plan the "401(k) Plan" which covers
all employees. Eligible employees may contribute up to 30 percent of their
annual compensation, not to exceed the statutory maximum. The Company may make
discretionary contributions. Participants are immediately vested in their
contribution and vest 20 percent per year in the Company's contributions for
each year of service after the first year. The Company made no contributions to
the 401(k) Plan in 1997, 1996 or 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On May 8, 1996, a Compensation Committee consisting of Mr. Schulze and Mr.
Ford (replaced by James W. Hopkins in January 1997) was appointed and took over
the responsibility of setting executive compensation. There are no compensation
committee (or Board of directors) interlock relationships with respect to the
Company.
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<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF AGRIBIOTECH, INC.
- -----------------------------------------
<S> <C>
Independent Auditors' Report.......................... F-2
Consolidated Balance Sheets as of
June 30, 1997 and 1996............................... F-3
Consolidated Statements of Operations for
the years ended June 30, 1997 and 1996
and the nine-month period ended June 30, 1995........ F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1997 and 1996
and the nine-month period ended June 30, 1995........ F-6
Consolidated Statements of Cash Flows for the
years ended June 30, 1997 and 1996
and the nine-month period ended June 30, 1995....... F-7
Notes to Consolidated Financial Statements - June 30,
1997, 1996 and 1995 ................................. F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
AgriBioTech, Inc.:
We have audited the accompanying consolidated balance sheets of AgriBioTech,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended June 30, 1997 and 1996 and the nine-month period ended June 30,
1995. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AgriBioTech, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for the years ended June 30, 1997 and 1996 and
the nine-month period ended June 30, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
September 26, 1997
F-2
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,553,634 2,522,309
Accounts receivable, less allowance for doubtful accounts
of $729,352 at June 30, 1997 and $104,773 at June 30, 1996 17,474,887 7,501,725
Inventories 23,328,961 7,257,795
Notes receivable from sale of common stock 9,990,000 -
Other 646,508 285,811
----------- ----------
Total current assets 53,993,990 17,567,640
Property, plant and equipment, net 17,864,052 7,916,145
Intangible assets, net of accumulated amortization 22,544,539 437,541
Investment in associated entity 567,235 -
Other assets 143,209 262,462
----------- ----------
Total assets $95,113,025 26,183,788
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
------------ ----------
<S> <C> <C>
Current liabilities:
Short-term debt $ 24,203,431 5,088,984
Current installments of long-term obligations 1,056,770 567,353
Accounts payable 10,601,813 4,406,588
Accrued liabilities 3,277,051 1,043,746
Amount due in connection with acquisition 7,300,000 -
------------ ----------
Total current liabilities 46,439,065 11,106,671
Long-term obligations, excluding current installments 2,667,609 1,054,621
Deferred income taxes 1,018,369 -
------------ ----------
Total liabilities 50,125,043 12,161,292
------------ ----------
Stockholders' equity:
Preferred stock, $.001 par value; authorized 10,000,000 shares;
issued and outstanding 1,100 shares at June 30, 1997
(aggregate liquidation preference of $1,221,666) and 6,530 shares
at June 30, 1996 (aggregate liquidation preference of $6,667,002) 1 7
Common stock, $.001 par value; authorized 50,000,000
shares; issued and outstanding 23,743,385 shares at
June 30, 1997 and 8,543,757 shares at June 30, 1996 23,743 8,544
Capital in excess of par value 49,439,319 23,752,051
Common stock to be issued in acquisition 7,950,000 -
Accumulated (deficit) (12,425,081) (9,711,316)
------------ ----------
44,987,982 14,049,286
Deferred compensation - (26,790)
------------ ----------
Total stockholders' equity 44,987,982 14,022,496
------------ ----------
Commitments, contingency and subsequent events (notes 1, 6, 7 and 8)
Total liabilities and stockholders' equity $ 95,113,025 26,183,788
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine-month
Year ended Year ended period ended
June 30, June 30, June 30,
1997 1996 1995
----------- ---------- ------------
<S> <C> <C> <C>
Net sales $65,904,058 25,961,541 4,753,608
Cost of sales 49,527,150 19,235,670 3,397,860
----------- ---------- ------------
Gross profit 16,376,908 6,725,871 1,355,748
Operating expenses 17,971,813 9,636,863 2,779,185
----------- ---------- ------------
(Loss) from operations (1,594,905) (2,910,992) (1,423,437)
----------- ---------- ------------
Other income (expense):
Interest expense (1,691,084) (464,515) (35,624)
Interest income 344,417 87,255 21,861
Other 227,807 35,880) 30,513
----------- ---------- ------------
Total other income (expense) (1,118,860) (413,140) 16,750
----------- ---------- ------------
Net (loss) $(2,713,765) (3,324,132) (1,406,687)
=========== ========== ============
Shares of common stock used in
computing (loss) per share 15,549,184 7,458,594 5,484,527
=========== ========== ============
Net (loss) per share $ (0.17) (0.45) (0.26)
=========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Preferred stock Common stock Capital in
----------------------- ---------------------- excess of
Shares Amount Shares Amount par value
----------------------- ---------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 - $ - 4,240,000 $ 4,240 6,150,765
Common stock issued for:
Exercise of warrants - - 2,638,000 2,638 6,911,362
Services - - 267,200 267 559,733
Reduction of notes for:
Cash - - - - -
Services - - - - -
Acquisitions - - - - -
Notes receivable paid subsequent to year end - - - - -
Increase in repayment amount of notes receivable - - - - 120,467
Deferred compensation earned - - - - -
Net (loss) - - - - -
------- ---- ---------- ------- ----------
Balance at June 30, 1995 - - 7,145,200 7,145 13,742,327
Issuance of preferred stock for cash 7,425 8 - - 7,424,992
Common stock issued for:
Services - - 10,000 10 31,490
Exercise of warrants - - 546,000 546 1,967,254
Acquisitions - - 162,343 163 608,624
Conversion of preferred stock (895) (1) 280,214 280 (279)
Exercise of options - - 250,000 250 624,750
Cancellation of options - - 150,000 150 (150)
Reduction of notes for:
Services - - - - -
Cash - - - - -
Acquisitions - - - - (343,777)
Increase in repayment amount of notes receivable - - - - 155,736
Restructuring of employee stock options - - - - 220,000
Options issued for services - - - - 185,616
Expenses of stock issuances - - - - (864,532)
Deferred compensation earned - - - - -
Net (loss) - - - - -
------- ---- ---------- ------- ----------
Balance at June 30, 1996 6,530 7 8,543,757 8,544 23,752,051
Issuance of preferred stock for cash 10,000 10 - - 9,999,990
Common stock issued for:
Services - - 15,000 15 45,885
Exercise of options - - 5,076,000 5,076 12,753,791
Exercise of warrants - - 2,116,000 2,116 6,672,844
Preferred stock converted and redeemed (15,430) (16) 7,094,226 7,094 (2,714,349)
Cancellation of options - - 750,000 750 (750)
Retirement of debt - - 148,402 148 319,852
Reduction of notes for:
Cash - - - - -
Notes receivable paid subsequent to year end - - - - -
Common stock to be issued in acquisition - - - - -
Expenses of stock issuances - - - - (1,389,995)
Reduction in deferred compensation - - - - -
Net (loss) - - - - -
------- ---- ---------- ------- ----------
Balance at June 30, 1997 1,100 $ 1 23,743,385 $23,743 49,439,319
======= ===== ========== ======= ==========
<CAPTION>
Common stock Notes
to be issued Accumulated Deferred receivable from
in acquisition (deficit) compensation sale of stock Total
-------------- ------------ ------------ ----------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 - (4,980,497) - (670,511) 503,997
Common stock issued for:
Exercise of warrants - - - (4,914,000) 2,000,000
Services - - (560,000) - -
Reduction of notes for:
Cash - - - 1,760,631 1,760,631
Services - - - 196,167 196,167
Acquisitions - - - 1,644,000 1,644,000
Notes receivable paid subsequent to year end - - - 1,433,167 1,433,167
Increase in repayment amount of notes receivable - - - (120,467) -
Deferred compensation earned - - 201,360 - 201,360
Net (loss) - (1,406,687) - - (1,406,687)
--------- ----------- -------- ----------- ----------
Balance at June 30, 1995 - (6,387,184) (358,640) (671,013) 6,332,635
Issuance of preferred stock for cash - - - - 7,425,000
Common stock issued for:
Services - - - - 31,500
Exercise of warrants - - - (1,297,800) 670,000
Acquisitions - - - - 608,787
Conversion of preferred stock - - - - -
Exercise of options - - - - 625,000
Cancellation of options - - - - -
Reduction of notes for:
Services - - - 40,499 40,499
Cash - - - 580,603 580,603
Acquisitions - - - 1,503,447 1,159,670
Increase in repayment amount of notes receivable - - - (155,736) -
Restructuring of employee stock options - - 260,000 - 480,000
Options issued for services - - - - 185,616
Expenses of stock issuances - - - - (864,532)
Deferred compensation earned - - 71,850 - 71,850
Net (loss) - (3,324,132) - - (3,324,132)
--------- ----------- -------- ----------- ----------
Balance at June 30, 1996 - (9,711,316) (26,790) - 14,022,496
Issuance of preferred stock for cash - - - 10,000,000
Common stock issued for:
Services - - - - 45,900
Exercise of options - - - (8,040,000) 4,718,867
Exercise of warrants - - - (3,750,000) 2,924,960
Preferred stock converted and redeemed - - - - (2,707,271)
Cancellation of options - - - - -
Retirement of debt - - - - 320,000
Reduction of notes for:
Cash - - - 1,800,000 1,800,000
Notes receivable paid subsequent to year end - - - 9,990,000 9,990,000
Common stock to be issued in acquisition 7,950,000 - - - 7,950,000
Expenses of stock issuances - - - - (1,389,995)
Reduction in deferred compensation - - 26,790 - 26,790
Net (loss) - (2,713,765) - - (2,713,765)
--------- ----------- -------- ----------- ----------
Balance at June 30, 1997 7,950,000 (12,425,081) - - 44,987,982
========= =========== ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AGRIBIOTECH, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine-month
Year ended Year ended period ended
June 30, June 30, June 30,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (2,713,765) (3,324,132) (1,406,687)
Adjustments to reconcile net (loss) to net cash
flows from operating activities:
Amortization 253,985 103,740 68,154
Depreciation 902,326 475,218 70,760
Equity in earnings of associated entity (233,690) - -
Common stock for services 72,690 143,849 397,527
Changes in assets and liabilities excluding
effects of acquisitions:
Accounts receivable 1,822,905 (4,599,458) 168,331
Inventories 1,898,354 (796,105) 990,006
Other assets 418,751 92,862 (49,123)
Payables (4,596,592) 1,446,661 (486,259)
Accrued liabilities (351,890) 768,930 51,678
----------- ------------ -----------
Net cash flows from operating activities (2,526,926) (5,688,435) (195,613)
----------- ------------ -----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,073,239) (504,395) (111,151)
Additions to intangible assets (19,228) (155,000) (15,790)
Distributions from associated entity 348,095 - -
Acquisitions (25,790,301) (5,960,585) (3,012,724)
----------- ------------ -----------
Net cash flows from investing activities (26,534,673) (6,619,980) (3,139,665)
----------- ------------ -----------
Cash flows from financing activities:
Net proceeds of short-term debt 13,986,911 4,104,779 564,291
Reductions of long-term obligations (1,278,265) (696,096) (8,333)
Sale of preferred stock 10,000,000 7,425,000 -
Exercise of options 4,718,867 625,000 -
Exercise of warrants 2,924,960 670,000 2,000,000
Additions to long-term obligations 1,037,717 - -
Redemption of preferred stock (2,707,271) - -
Expenses of stock issuance (1,389,995) (864,532) -
Restructuring of employee stock options - 480,000 -
Payments received on notes receivable from
sale of stock 1,800,000 1,663,630 1,760,631
----------- ------------ -----------
Net cash flows from financing activities 29,092,924 13,407,781 4,316,589
----------- ------------ -----------
Net increase in cash and cash equivalents 31,325 1,099,366 981,311
Cash and cash equivalents at beginning of period 2,522,309 1,422,943 441,632
----------- ------------ -----------
Cash and cash equivalents at end of period $2,553,634 2,522,309 1,422,943
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine-month
Year ended Year ended period ended
June 30, June 30, June 30,
1997 1996 1995
------------- ---------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,536,469 364,993 5,284
============= ========== ============
Non cash investing and financing activities:
Accrued costs of acquisition $ 1,167,322 - -
Common stock issued in settlement of debt 320,000 - -
Common stock to be issued in acquisition 7,950,000 - -
Debt issued in connection with acquisitions - 1,250,000 -
Increase in warrant exercise price - 155,736 120,467
Receivable from exercise of options and warrants 11,790,000 1,297,800 4,914,000
Reduction of notes receivable for acquisitions - 1,853,587 1,644,000
Common stock issued for deferred compensation - - 560,000
Notes receivable paid subsequent to year end 9,990,000 - 1,433,167
Options granted for services - 185,616 -
Notes receivable from sale of stock - 161,023 -
Discount on notes receivable from sale of stock - 343,777 -
============= ========== ============
Summary of assets and liabilities acquired through acquisitions:
Cash $ 567,566 5,641 29,165
Accounts receivable 11,796,067 1,949,016 1,087,602
Inventories 18,171,587 4,642,531 2,755,658
Property, plant and equipment 9,821,994 5,794,703 2,034,000
Intangible assets 22,094,688 330,193 -
Other assets 1,341,835 218,390 78,483
Accounts payable and accrued expenses (12,209,690) (2,388,781) (1,232,352)
Long-term and short-term debt (7,790,489) (1,216,870) (66,667)
Deferred income taxes (1,018,369) - -
------------- ---------- ------------
Net assets acquired $ 42,775,189 9,334,823 4,685,889
============= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
(1) Corporate Organization and Acquisitions
---------------------------------------
(a) Business
--------
AgriBioTech, Inc. ("ABT" or the "Company") is a vertically integrated
agricultural seed company specializing in developing, breeding,
processing, packaging and distributing varieties of forage (hay crops)
and cool season turfgrass seeds. The Company also distributes corn,
soybean and other seeds. Approximately 15% and 5% of the Company's
sales for the years ended June 30, 1997 and 1996 were to customers in
foreign countries. Since January 1, 1995, the Company has followed a
business strategy to acquire established, regionally based seed
companies with proprietary products and established research, production
and distribution channels in their respective markets in order to
consolidate and vertically integrate the forage and turfgrass sectors of
the seed industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Effective June 30, 1995, the Company changed its fiscal year end from
September 30 to June 30 since that date better reflects the natural
business year of the Company's business.
(b) Acquisitions
------------
The Company executed an asset purchase agreement to purchase
substantially all of the assets of Scott Seed Co. ("Scott") effective
March 1, 1995. The transaction was recorded using the purchase method of
accounting. The net purchase price was $1,956,411 which includes
inventory, accounts receivable, prepaid assets, and fixed assets, net of
accounts payable and certain assumed liabilities. The purchase price
was paid through 158,000 shares of ABT common stock valued at $474,000
and cash of $1,482,411.
The Company purchased all of the capital stock of Seed Resource, Inc.
("Seed Resource") effective January 1, 1995. The transaction was
recorded using the purchase method of accounting. The purchase price of
$1,075,500 was paid through 333,334 shares of ABT common stock valued at
$700,000 and cash of $375,500.
The Company executed an asset purchase agreement with Hobart Seed
Company ("Hobart") effective April 1, 1995. The transaction was recorded
using the purchase method of accounting. The purchase price of
$1,653,978 includes inventory, fixed assets, trademarks and trade names,
and a minority interest in the stock of a purchasing cooperative. The
purchase price was paid through 147,451 shares of ABT stock valued at
$470,000 and $1,183,978 of cash.
The Company purchased substantially all of the assets of Halsey Seed
Company ("Halsey") effective July 1, 1995. The transaction was recorded
using the purchase method of accounting. The purchase price of
$1,122,793 includes inventory, accounts receivable, prepaid assets, and
fixed assets, net of accounts payable and certain assumed liabilities.
The purchase price was paid through cash of $772,653 and 87,535 shares
of the Company's common stock valued at $350,140.
F-9
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company purchased substantially all of the assets of Arnold-Thomas
Seed Service, Inc. ("Arnold-Thomas") effective October 1, 1995. The
transaction was recorded using the purchase method of accounting. The
purchase price of $926,195 includes inventory, accounts receivable,
prepaid assets and fixed assets, net of accounts payable and certain
assumed liabilities. The purchase price was paid through cash of
$666,524 and 105,450 shares of the Company's common stock valued at
$259,671.
The Company purchased all of the capital stock of Clark Seeds, Inc.
("Clark Seed") effective October 1, 1995. The transaction was recorded
using the purchase method of accounting. The purchase price of
$2,150,000 was paid through 400,000 shares of the Company's common stock
valued at $900,000 and promissory notes of $1,250,000.
The Company purchased certain assets of Doug Conlee Seed Company
("Conlee") effective January 1, 1996. The transaction was recorded
using the purchase method of accounting. The purchase price of $639,606
includes inventory, prepaid assets, fixed assets and proprietary rights
to certain crop varieties. The purchase price was paid in cash. In
addition, the Company must pay the seller 20 percent of the net margin,
after expenses, from the business transferred to the Company through
December 31, 1998, which through June 30, 1997 was insignificant.
The Company purchased substantially all of the assets of Beachley-
Hardy Seed, a division of Research Seeds, Inc., ("Beachley-Hardy")
effective February 1, 1996. The transaction was recorded using the
purchase method of accounting. The net purchase price of $4,231,981
includes inventory, accounts receivable, prepaid assets, fixed assets
and trademark rights, less accounts payable and certain assumed
liabilities. The purchase price was paid through cash of $3,623,194 and
162,343 shares of the Company's common stock valued at $608,787.
The Company purchased substantially all of the assets of W-L Research,
Inc. and Germain's, Inc. (collectively "W-L/G"), which were indirect
subsidiaries of Berisford, plc, effective September 1, 1996. The
transaction also included the acquisition of a 50% ownership interest in
SeedBiotics, L.L.C. The transaction was recorded using the purchase
method of accounting. The net purchase price of $15,997,034 includes
inventory, accounts receivable, prepaid assets, fixed assets and
intangible assets, less accounts payable and certain assumed
liabilities. The intangible assets consist of trademark rights and
proprietary rights to certain crop varieties, as well as the genetic
breeding base for the development of additional varieties. The net
purchase price was paid in cash.
The Company purchased all of the capital stock of E. F. Burlingham &
Sons ("Burlingham") effective April 1, 1997. The net purchase price of
$10,100,000 was paid in cash. The transaction was recorded using the
purchase method of accounting which resulted in recording intangible
assets consisting of trademark rights, proprietary rights to certain
crop varieties (as well as the genetic breeding base for the development
of additional varieties), and goodwill.
The Company purchased substantially all of the assets of The Sexauer
Company ("Sexauer") effective April 1, 1997. The transaction was
recorded using the purchase method of accounting. The net purchase
price of $3,173,989 includes cash, inventory, accounts receivable,
prepaid assets, and fixed assets, less accounts payable and certain
assumed liabilities. The net purchase price was paid through a debt
arrangement with the bank that had been financing Sexauer's operations.
This debt was repaid subsequent to June 30, 1997.
The Company purchased all of the capital stock of Olsen Fennell Seeds,
Inc. ("OFI") effective June 1, 1997. The net purchase price of
$15,200,000 was paid through cash of $3,800,000 paid at closing,
payments of $3,500,000 to be made prior to April 14, 1998 paralleling
the timing of income tax payments made by the sellers, and 777,500
shares of ABT common stock valued at $7,900,000. The transaction was
recorded using the purchase method of accounting which resulted in
recording intangible assets consisting of trademark rights, proprietary
rights to certain crop varieties (as well as the genetic
F-10
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
breeding base for the development of additional varieties), and
goodwill. In connection with the OFI acquisition, the Company paid a
finders fee of $100,000, one-half of which was paid through the issuance
of 10,000 shares of ABT common stock valued at $50,000
Proforma results of operations (unaudited) assuming the above
acquisitions had occurred at the beginning of the periods presented are
as follows:
<TABLE>
<CAPTION>
Year ending Year ending
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Revenue $133,076,590 $108,334,417
Net (loss) (1,829,681) (6,546,875)
Net (loss) per share (0.11) (0.77)
</TABLE>
In June 1997, the Company signed a letter of intent to purchase a seed
operation which markets forage and turfgrass seed primarily in the
United States. The acquisition is expected to close in early fiscal
1998. This seed operation had unaudited total assets of approximately
$4.2 million at June 30, 1997 and, for the twelve months ended June 30,
1997, sales of approximately $9.4 million and net income before income
taxes of approximately $.9 million. The transaction will be recorded
using the purchase method of accounting.
On September 5, 1997, the Company signed a letter of intent to acquire
through merger all of the capital stock of Lofts Seed, Inc. and its
affiliated companies, Budd Seed, Inc. and Sunbelt Seeds, Inc.
(collectively "Lofts"). Lofts is one of the premier turfgrass seed
companies in the United States with unaudited total assets at June 30,
1997 of approximately $23.4 million and, for the twelve months ended
June 30, 1997, sales of approximately $74.7 million and income before
income taxes of approximately $4.0 million. The Company anticipates
closing this transaction in early calendar 1998. The transaction will be
recorded using the purchase method of accounting.
(2) Significant Accounting Policies
-------------------------------
(a) Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts have been eliminated.
(b) Cash and Cash Equivalents
-------------------------
Cash equivalents consist of financial instruments with original
maturities of no more than ninety days.
(c) Inventories
-----------
Inventories, consisting primarily of seed and related products, are
stated at the lower of cost (first-in, first-out) or market.
(d) Property, Plant, and Equipment
------------------------------
Property, plant, and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful
lives of the assets.
(e) Intangible Assets
-----------------
F-11
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Intangible assets are stated at cost and consist of costs of genetic
breeding bases for various proprietary plant varieties, trademarks,
covenants not to compete, and goodwill related to the Company's seed
business. Rights to genetic breeding bases and goodwill are amortized
using the straight-line and units-of-production methods over the
expected lives of such assets, up to 40 years with a weighted average at
June 30, 1997 of 31.5 years. Other intangible assets are amortized
using the straight-line method over three to fifteen years or the lives
of agreements, if applicable. The recoverability of intangible assets is
evaluated whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
(f) Investment in Associated Entity
-------------------------------
The Company records its 50% investment in SeedBiotics, L.L.C. using the
equity method of accounting and records its share of the associated
entity's income or loss as other income or expense.
(g) Income Taxes
------------
Income taxes are provided under Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109
---------------------------
requires that deferred income taxes be provided on temporary differences
between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes using the asset and liability
method. Under this method, deferred income taxes are computed based on
the enacted tax rates scheduled to be in effect when such differences
reverse.
(h) Revenue Recognition
-------------------
The Company recognizes revenue when product is shipped to customers
and title passes. Revenue is reduced by a reserve for estimated
returns.
(i) Research and Development Costs
------------------------------
Research and development costs are expensed as incurred and aggregated
$1,170,703, $59,836 and $56,488 in the periods ended June 30, 1997, 1996
and 1995, respectively.
(j) Employee Stock Options
----------------------
Under Accounting Principles Board Opinion No. 25, the Company does not
record compensation for stock options granted to employees unless the
exercise price is less than the quoted market price of the Company's
common stock at the date of grant. To date, the Company has not granted
any stock options to employees under which compensation has been
recorded. The Financial Accounting Standards Board ("FASB") has issued
SFAS No. 123 which allows the Company to continue its present policy or,
alternatively, to record a compensation element for stock options
granted to employees on the "fair value based method" which generally
uses a modeling technique to calculate the fair value of options issued.
The Company has elected to continue its present method of accounting for
employee stock options. Had the Company adopted the alternative method
provided by SFAS No. 123 the net loss and net loss per share would have
been $3,603,236 and $.23 for the year ended June 30, 1997 and
$3,561,625 and $.48 for the year ended June 30, 1996. The weighted-
average grant-date fair value of options granted was $644,035 in the
year ended June 30, 1997 and $5,288,928 in the year ended June 30, 1996.
Such computations were made using the Black-Scholes modeling technique
which was developed based on the relationship between the trading prices
of stock options which are actively traded in the securities market and
the trading prices of the common stock underlying those options. Options
to acquire ABT common stock are not traded in the securities market. The
modeling technique requires the utilization of assumptions, the weighted
average of which for the years ended June 30, 1997 and 1996 were 5.8%
and 5.7% for risk-free interest rate; 2.2 years and 3.0 years for
expected life; 37% and 47% for expected volatility; and 0% and 0% for
expected dividends.
(k) (Loss) Per Common Stock
-----------------------
F-12
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Loss) per share of common stock has been computed based upon average
shares outstanding during the periods presented. Contingently issuable
shares have been excluded because of their anti-dilutive effect.
(l) Recently Adopted Accounting Standards
-------------------------------------
The FASB has issued SFAS No. 128 which will change the presentation
of earnings per share for companies beginning with periods ending after
December 15, 1997 and will be required to be applied retroactively. The
Company will be required to present basic earnings per share based on
the average number of common shares outstanding during each period and
diluted earnings per share considering all contingently issuable
securities. The Company does not anticipate that SFAS No. 128 will have
a significant impact on the Company's earnings per share computation.
The FASB has issued SFAS No. 130 effective for years beginning after
December 15, 1997 which requires all changes in the equity of an
enterprise to be reflected in the income statement except those
resulting from investments by owners and distributions to owners. The
Company has not had items in the past which would have been impacted by
SFAS No. 130 and, based on its current operations, does not anticipate
having such items in the future.
The FASB has issued SFAS No. 131 effective for years beginning after
December 15, 1997 which requires the presentation of certain information
about an enterprise's operating segments, products and services,
geographic areas of operation, and major customers. The Company has
not completed its analysis of SFAS No. 131 or the impacts, if any, on
its financial statements.
(m) Reclassifications
-----------------
Certain amounts in the prior year financial statements have been
reclassified to be comparable to the current year presentation.
(3) Property, Plant, and Equipment
------------------------------
A summary of property, plant, and equipment is as follows:
<TABLE>
<CAPTION>
June 30,
Useful --------
lives 1997 1996
----- ---- ----
<S> <C> <C> <C>
Land - $ 3,753,400 1,394,500
Buildings 12 to 40 years 8,540,058 3,668,555
Equipment 1 to 25 years 7,001,782 3,388,624
----------- ---------
Total property, plant, and
equipment 19,295,240 8,451,679
Less accumulated depreciation 1,431,188 535,534
----------- ---------
Property, plant, and
equipment, net $17,864,052 7,916,145
=========== =========
(4) Intangible Assets
-----------------
Intangible assets consist of:
June 30,
--------
1997 1996
---- ----
</TABLE>
F-13
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<S> <C> <C>
Genetic breeding bases $ 5,559,909 297,000
Goodwill 15,317,192 5,000
Covenants not to compete 1,666,875 170,000
Other 302,200 13,193
----------- -------
Total intangible assets 22,846,176 485,193
Less accumulated amortization 301,637 47,652
----------- -------
Intangible assets, net $22,544,539 437,541
=========== =======
</TABLE>
(5) Long-Term Obligations
---------------------
A summary of long-term obligations is as follows:
<TABLE>
<CAPTION>
June 30,
-------
1997 1996
---- ----
<S> <C> <C>
Notes and mortgages payable; repayable in principal
payments of $503,429 annually plus interest at
6% to 8.75% and monthly payments of $8,358
including interest as 10.75%; secured by property,
plant and equipment $2,245,631 1,471,032
Unsecured notes payable bearing interest at 8% to 10% 232,456 106,390
Covenants not to compete 517,917 -
Deferred compensation 255,128 -
Other 473,247 44,552
---------- ---------
Total long-term debt 3,724,379 1,621,974
Less current installments 1,056,770 567,353
---------- ---------
Long-term obligations, excluding current
installments $2,667,609 1,054,621
========== =========
</TABLE>
Required principal payments are as follows:
<TABLE>
<CAPTION>
Year ending June 30, Amount
-------------------- ------
<S> <C>
1997 $1,056,770
1998 606,083
1999 187,268
2000 179,575
2001 187,869
</TABLE>
(6) Short-Term Debt
---------------
At June 30, 1997, the Company had a credit facility with Bank of America
that included a $22 million revolving line of credit, of which $15,086,013
was outstanding, including items in the process of collection. The amount
available under the revolving line of credit is limited to the sum of 70
percent of the Company's eligible receivables less than 90 days old and 50
percent of eligible inventory and is secured by inventory, receivables,
equipment, and intangibles. In addition, the credit facility provided for an
unsecured $4 million term loan, all of which was outstanding, that was
repayable in July and August 1997 and was repaid when due. Interest on the
revolving line of credit is at the bank's reference rate plus 0.5 percent
(9.0% at June 30, 1997) or the LIBOR rate plus 3 percent (8.6875% at June
30, 1997), at the Company's option and the bank's reference rate plus 2
percent (10.5% at June 30, 1997) for the term loan. In addition, the Company
pays a commitment fee of 0.5% of the unused line of credit.
F-14
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On August 13, 1997, the revolving line of credit was increased to $25
million and the LIBOR interest rate was changed to the LIBOR rate plus 2.5%.
In addition, the credit facility was amended to add a $5 million term loan,
all of which was drawn subsequent to June 30, 1997, that is repayable over
five years and bears interest at the bank's reference rate plus 0.5%. The
credit facility is currently scheduled to expire on March 1, 1998.
At June 30, 1997, the Company had approximately $3.2 million outstanding
under the short-term borrowing arrangement used to finance the acquisition
of Sexauer. In addition, OFI had approximately $1.9 million outstanding
under the line of credit it used to finance its operations. Both of these
facilities were repaid and terminated subsequent to June 30, 1997.
(7) Capital Stock
-------------
Prior to October 1, 1994, the Company issued warrants to purchase the
Company's common stock. The "Class A Warrant" entitled the holder to obtain
one share of ABT's common stock and a warrant (the "Class B Warrant") upon
payment of the exercise price of $3.50 through January 17, 1996. The Class B
Warrant entitles the holder to obtain one share of ABT's common stock and a
warrant (the "Class C Warrant") upon the payment of the exercise price of
$5.00 through January 17, 1997. The Class C Warrant entitles the holder to
obtain one share of ABT's common stock upon payment of the exercise price of
$7.50 through January 17, 1998.
On January 30, 1995, in order to accelerate the raising of capital, the
Company's Board of Directors temporarily reduced the exercise price of all
of the 2,160,000 Class A Warrants then outstanding from $3.50 per share to
$2.00 per share until March 1, 1995. As a result, the Company received an
aggregate of $2,000,000 from the exercise of 1,000,000 Class A Warrants.
Effective March 2, 1995, the exercise price of the Class A Warrants reverted
back to $3.50 per share.
In mid-March 1995, to further accelerate the raising of capital, the Company
reduced the exercise price of the Class A Warrants and Class B Warrants to
$3.00 per share in the event the warrant holder exercised on or before March
30, 1995 using cash or promissory notes. To the extent exercise was by
promissory note, funds due on these promissory notes increased periodically
back to the original exercise price of the warrants. By March 30, 1995,
1,038,000 Class A Warrants and 600,000 Class B Warrants were exercised by
promissory notes. These promissory notes were transferable and non-interest
bearing. The common stock underlying the exercise of these warrants was held
in escrow by the Company until the promissory notes were paid. On March 31,
1995, the exercise price of the unexercised Class A Warrants and Class B
Warrants reverted back to $3.50 per share and $5.00 per share, respectively.
In June 1995, the Company entered into a consulting agreement for assistance
with investor relations, strategic planning, funding plans, and other
corporate activities through December 31, 1995. The Company issued 300,000
Class A warrants exercisable at $3.50 per share through January 17, 1996 and
the market price on the date of the agreement was $3.00 per share. The
agreement was deemed to not contain significant compensation and, therefore,
no expense was recorded in connection with this agreement.
On October 10, 1995, the Company called all of its 422,000 outstanding Class
A Warrants. The Company paid warrant holders $.01 per warrant for A Warrants
not exercised by November 8, 1995. All of the warrants were
F-15
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
then exercised by "stand-by purchasers" who paid cash, signed promissory
notes or agreed to perform services. The warrants were exercised at $3.50
per share less a 10% commission.
During the nine-month period ended June 30, 1995, the Company reduced the
notes receivable from sale of stock by $1,644,000 through the acquisition of
Scott, Seed Resource and Hobart for $474,000, $700,000 and $470,000,
respectively, by the makers of the notes transferring 638,785 shares of ABT
common stock to the previous owners of those entities. During the year ended
June 30, 1996, in connection with the acquisitions of Arnold-Thomas and
Clark Seed, $1,503,447 of the notes were satisfied by makers of the notes
transferring 505,450 shares of stock to the previous owners of those
entities. To facilitate the Clark Seed transfer, the notes receivable for
sale of stock were discounted by $343,777 to reflect the then current market
price of the stock.
In January 1997, the Company lowered the exercise price on the Class B
Warrants to $1.81 which approximated the market price of the Company's
common stock at that time. All 1,616,000 outstanding Class B Warrants were
exercised by their holders or stand-by purchasers identified by the Company,
as permitted under the terms of the warrants. Upon exercise of the Class B
Warrants, the Company received proceeds of $2,924,960 and issued 1,616,000
Class C Warrants. In May 1997, officers of the Company and others exercised
500,000 Class C Warrants by signing promissory notes for $3,750,000 at the
stated exercise price of $7.50 per share. These notes were paid in full
subsequent to June 30, 1997. Subsequent to June 30, 1997, 392,912 Class C
Warrants were exercised at $7.50 per share and the 185,625 other warrants
(described below) were exercised at $3.00 per share.
In April 1996, the Company completed a private placement of convertible
preferred stock and issued 7,425 shares of Series B Convertible Preferred
Stock. The Company received cash proceeds, after commissions, of $6,608,250
from the issuance of the Series B Convertible Preferred Stock. The placement
agent in this transaction received warrants to purchase 185,625 shares of
the Company's common stock at $3.00 per share. The Series B Convertible
Preferred Stock is not entitled to a dividend and is not mandatorily
redeemable by the Company. The Series B Convertible Preferred Stock has a
liquidation preference of $1,000 per share, plus a premium of 10 percent per
annum from the date of issuance. The Series B Convertible Preferred Stock is
convertible into shares of common stock equal to the aggregate liquidation
preference, including the 10 percent per annum premium, divided by a
conversion price that is the lesser of (i) 80 percent of the average closing
bid price for the Company's common stock for the five days prior to
conversion or (ii) a set amount of approximately $3.90 per share which
escalates to approximately $5.90 per share over four years ($4.44 per share
at June 30, 1997). In the event of a conversion when the average closing bid
price of the Company's common stock is $3.75 per share or lower, the Company
has the option of redeeming for cash, at the average closing bid price, the
shares of common stock issuable upon such conversion. The Series B
Convertible Preferred Stock will convert into common stock after being
outstanding four years if not been previously converted.
Between the date of issuance and June 30, 1996, 895 shares of Series B
Convertible Preferred Stock were converted into 280,214 shares of common
stock. Between July 1, 1996 and June 30, 1997, 5,630 shares of Series B
Convertible Preferred Stock were submitted to the Company for conversion,
for which the Company issued 2,424,463 shares of common stock and redeemed
for cash the equivalent of 538,215 shares of common stock aggregating
$1,315,846. At June 30, 1996, the 6,530 shares of Series B Convertible
Preferred Stock outstanding were convertible into 2,096,542 shares of common
stock and had an aggregate liquidation preference of $6,667,002. At June 30,
1997, the 900 shares of Series B Convertible Preferred Stock outstanding
were convertible into 227,469 shares of common stock and had an aggregate
liquidation preference of $1,009,479.
In September 1996, the Company completed a private placement of 10,000
shares of Series C Convertible Preferred Stock at $1,000 per share,
receiving gross proceeds of $10,000,000. The Company paid commissions and
selling expenses of 13% of the gross proceeds. The Series C Convertible
Preferred Stock is not entitled to a dividend and is not mandatorily
redeemable by the Company. The Series C Convertible Preferred Stock has a
liquidation preference of $1,000 per share, plus a premium of 8 percent per
annum from the date of issuance. The Series C Convertible Preferred Stock is
convertible into shares of common stock equal to the aggregate liquidation
preference, including the 8 percent per annum premium, divided by a
conversion price that is the lesser of (i) 80 percent of the average closing
bid price for the Company's common stock for the five days prior to
conversion or (ii) a set amount, which is $3.00 for one-third of the shares,
$3.50 for one-third of the shares and $4.00 for one-third of the shares. In
the event of a conversion when the average closing bid price of the
Company's common stock is below the price at the issuance of the Series C
Convertible Preferred Stock, the Company has the option of redeeming for
cash, at the average closing bid price, the shares of common stock issuable
upon such conversion. The Series C Convertible Preferred Stock will convert
into common stock on September 30, 1998, if not previously converted.
Through June 30, 1997, 9,800 shares of the Company's Series C Convertible
Preferred Stock were presented for conversion, for which the Company issued
4,669,763 shares of common stock and redeemed for cash the
F-16
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
equivalent of 618,024 shares of common stock aggregating $1,391,423. At June
30, 1997, the 200 shares of Series C Convertible Preferred Stock outstanding
were convertible into 61,467 shares of common stock and had a liquidation
preference of $212,186.
On January 5, 1996, the Company entered into an eighteen-month consulting
agreement to assist the Company with investor communications and relations.
In consideration of the agreement, the Company granted the consultant a
five-year option to purchase 2,000,000 shares of the Company's common stock
exercisable at $1.81 per share which equaled the market price at the grant
date. The Company has determined that the value of the investor
communications and relations services to be received under this agreement is
$108,000, which is being amortized over the term of the agreement. In August
1996, the Company entered into another agreement with the consultant under
which the consultant surrendered rights to 1,550,000 of the options. In
exchange, the Company issued 750,000 shares of its restricted common stock
to the consultant. During the year ended June 30, 1997, 1,850,000 of these
options were exercised and 112,500 were exercised subsequent to June 30,
1997.
In March 1996, the Company entered into a bridge financing agreement,
pending the completion of the Series B Convertible Preferred Stock issuance
describe above, under which the Company borrowed $1,000,000 from an
individual, who was also a stockholder of the Company. The loan was repaid
from the proceeds of the Series B Convertible Preferred Stock offering.
Under the agreement, interest was paid on the loan at 9 percent per annum
and the lender was granted a five year option to purchase 500,000 shares of
the Company's common stock exercisable at $2.50 per share which equaled the
market price at the grant date. The Company has imputed $27,616 of
additional interest expense under this agreement to reflect the relative
risk undertaken by the lender. In addition, the Company granted a five year
option to purchase 250,000 shares of the Company's common stock exercisable
at $2.50 per share to the agent for the lender, who was also a consultant to
the Company. The Company determined that the compensation attributable to
the agent's services was $50,000, which was amortized over the term of the
loan agreement. In June 1996, the Company entered into an additional
agreement with the holders of these options under which 250,000 of these
options were exercised, along with the conversion of 150,000 Class B
Warrants, with the Company receiving $625,000 in cash, and the remaining
500,000 options were canceled.
The Company has (1) an Employee Stock Option Plan (the "ESOP") under which
options for the purchase of up to 1,600,000 shares of common stock may be
granted to qualified employees, officers and directors, employees of
subsidiaries, independent contractors, consultants, and other individuals
and (2) an Employee Stock Bonus Plan under which up to 400,000 shares of
common stock may be issued to qualified full-time employees. The ESOP is
administered by a committee of non-employee members of the Company's Board
of Directors, who have complete discretion to select the optionee and the
terms and conditions of each option. The exercise price of the options
cannot be less than the fair market value of the Company's common stock on
the date of grant and options may not be exercised more than ten years from
the date of grant. At June 30, 1997, the Company had outstanding options
under the ESOP for the purchase of 1,123,600 shares of common stock at
prices ranging from $2.00 to $6.94 per share, of which 585,200 were
exercisable. Options for 1,000 shares have been exercised. No shares have
been issued under the Employee Stock Bonus Plan.
The Company has also granted options outside of the ESOP for the purchase of
an aggregate of 6,050,000 shares of the Company's common stock to officers
of the Company and key employees of acquired companies. These options are
exercisable at prices ranging from $2.00 to $5.00, which equaled the market
values at the respective dates of grant, and expire five to ten years from
the date of grant. The options become exercisable over periods of three to
five years. Options for 3,225,000 shares have been exercised, including
2,680,000 options exercised by officers of the Company in May 1997 through
signing promissory notes for $8,040,000. Payments on these notes amounting
to $1,800,000 were received through June 30, 1997 and the remaining balance
was paid subsequent to June 30, 1997. Options for 1,050,000 shares were
vested at June 30, 1997. As part of the Company's capital raising program,
an additional 1,175,000 of the officers' options are exerciseable at any
time for cash.
F-17
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following is a summary of activity in the Company's stock options for
employees and directors:
<TABLE>
<CAPTION>
Year ended June 30
-------------------------------------
1997 1996
---------------- -----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Price Number Price Number
----- ------ ----- ------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year $2.63 5,751,500 - -
Issued 3.54 1,467,400 2.63 5,751,500
Exercised 2.93 (3,226,000) - -
Forfeited 3.75 (44,300) - -
- ------------------------ ----- ---------- ----- ---------
Outstanding at end
of year $2.70 3,948,600 $2.63 5,751,500
===== ========== ===== =========
Exercisable at end of year $2.28 2,810,200 $2.59 5,590,500
===== ========== ===== =========
</TABLE>
The following summarizes certain information regarding stock options for
employees and directors outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Total Exercisable
---------------------- -----------
Weighted
Weighted average Weighted
average remaining average
exercise contractual exercise
Exercise Price Number price life (years) price Number
- -------------- ------ ----- ------------ ----- ------
<S> <C> <C> <C> <C> <C>
$2.00 to $2.12 2,275,000 $2.06 8.6 $2.06 2,275,000
$2.25 to $3.50 810,000 2.71 5.9 2.70 342,000
$3.75 312,300 3.75 4.8 3.75 131,900
$4.00 to $5.00 440,000 4.46 6.6 4.06 31,000
$5.50 to $6.94 111,300 5.84 5.2 5.87 30,300
--------- ----- --- ----- ---------
3,948,600 $2.70 7.4 $2.28 2,810,200
Total ========= ===== === ===== =========
</TABLE>
In connection with acquisitions where the previous owners received ABT
common stock as part of the purchase price, such stock is subject to "lock-
up agreements" which limit the amount of common stock that the previous
owners of these entities can sell within specified time periods. In
addition, the Company guaranteed the proceeds to be received by the previous
owners of certain of these entities from the sale of the common stock if
sold in accordance with the lock up agreements. The only acquisition with
guaranteed proceeds remaining in effect is OFI where the previous owners are
to receive $7,900,000 from the sale of 777,500 shares of ABT common stock
through June 30, 1999. To secure the Company's guarantee, the previous
owners have a lien on OFI's land and building, subordinated to existing
mortgage financing. Any difference between the guaranteed proceeds and the
proceeds received by the previous owners will be paid in cash by the
Company. Sales made pursuant to lock-up agreements for the other
acquisitions were made such that the Company had no obligations under its
guarantees.
The closing price for the Company's common stock on September 26, 1997 was
$10.125 per share and the range of closing prices has been as follows:
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
January 1, 1995 - June 30, 1995 $ 4.75 1.75
July 1, 1995 - June 30, 1996 5.4375 1.625
July 1, 1996 - June 30, 1997 6.9375 2.0625
July 1, 1997 - September 26, 1997 10.50 6.03125
</TABLE>
F-18
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Commitments and Contingency
---------------------------
The Company has entered into employment agreements with its executive
officers for periods of up to four years. Annual compensation, excluding
bonuses and out-of-pocket expenses, aggregates approximately $650,000 under
these agreements. In addition, the Company has employment agreements with
approximately 25 other employees at annual compensation rates ranging from
$40,000 to $100,000, which are terminable by the Company without cause with
ten days to six months notice.
The Company contracts with growers to produce a substantial portion of its
proprietary seed requirements which the Company would be obligated to
purchase upon delivery by the growers. These contracts are typically for one
to four growing seasons and are generally renewed or replaced with other
growers.
The Company rents office space, land, warehouse space and equipment under
agreements expiring through the year 2000. Total rent expense was $292,812
for the year ended June 30, 1997, $152,999 for the year ended June 30, 1996
and $79,999 for the nine-month period ended June 30, 1995. Rent commitments
as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1998 $224,167
1999 79,560
2000 44,673
2001 17,901
2002 13,024
</TABLE>
Subsequent to June 30, 1997, the Company entered into a contract for the
purchase of land and construction of an office building for an aggregate of
approximately $1.5 million.
(9) Income Taxes
------------
The Company has reported significant losses for income tax purposes.
Utilization of these losses as carryforwards to offset future taxable income
is dependent on having taxable income. The losses which originated prior to
June 30, 1992 are further limited in each year to an amount equal to the
Federal long-term tax exempt interest rate times the entity's market value
at the time of change in ownership. The Company believes that the effect of
these limitations will be to limit the utilization of pre-1993 net operating
loss carryforwards to approximately $25,000 annually through the year 2007.
The net operating losses expire, if unused, as follows:
<TABLE>
<CAPTION>
Year ending June 30 Amount
------------------- ------
<S> <C>
2001 - 2007 $ 375,000
2008 231,265
2009 890,308
2010 1,351,218
2011 2,663,355
2012 2,513,829
----------
Total $8,024,975
==========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
-----------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ 665,865 -
Intangible assets 644,718 -
--------- ------
1,310,584 -
--------- ------
</TABLE>
F-19
<PAGE>
AGRIBIOTECH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<S> <C> <C>
Net operating loss carryforward $ 2,969,241 2,020,000
Other 613,799 35,000
----------- ----------
Total gross deferred tax assets 3,583,039 2,055,000
Less valuation allowance (3,290,824) (2,055,000)
----------- ----------
Net deferred tax assets 292,215 -
----------- ----------
Net deferred tax liabilities $ 1,018,369 -
=========== ==========
</TABLE>
The tax benefits of the deferred tax assets have been substantially
offset by a valuation allowance since the Company cannot currently conclude
that it is more likely than not that the benefits will be realized. The
valuation allowance increased by $1,235,824 during the year ended June 30,
1997, $1,098,000 during the year ended June 30, 1996 and $467,000 during
the nine-month period ended June 30, 1995. The deferred tax liabilities
arose in connection with the Burlingham acquisition.
(10) Retirement Plan
---------------
The Company has a defined contribution plan which covers all employees.
Eligible employees may contribute up to 30 percent of their annual
compensation, not to exceed the statutory maximum. The Company may make
discretionary contributions. Participants are immediately vested in their
contribution and vest 20 percent per year in the Company's contributions
for each year of service after the first year. The Company made no
contributions to the plan in 1997, 1996 and 1995.
(11) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash and cash equivalents, accounts receivables,
accounts payable and short-term debt approximate fair value due to the
short maturity periods of these instruments. The fair value of the
Company's long-term obligations based on the present value of the cash
flows from those obligations was approximately $3.7 million at June 30,
1997 using an assumed interest rate of 8.5% and $1.5 million at June 30,
1996 using an assumed interest rate of 10.25%.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: October 24, 1997
AGRIBIOTECH, INC.
By: /s/ Johnny R. Thomas
--------------------
Johnny R. Thomas,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Johnny R. Thomas President (Principal October 24, 1997
- ----------------------- Executive Officer)
Johnny R. Thomas and Director
/s/ Henry A. Ingalls Vice President and Treasurer October 24, 1997
- ----------------------- (Principal Financial and
Henry A. Ingalls Accounting Officer)
/s/ Scott J. Loomis Vice President and Director October 24, 1997
- -----------------------
Scott J. Loomis
/s/ John C. Francis Vice President, Secretary October 24, 1997
- ----------------------- and Director
John C. Francis
/s/ Kent Schulze Director October 24, 1997
- -----------------------
Kent Schulze
/s/ James W. Hopkins Director October 24, 1997
- -----------------------
James W. Hopkins
</TABLE>
