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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
AQUAPRO CORPORATION
(Name of Small Business Issuer in its charter)
Tennessee 62-1598919
................................................................................
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4307 Central Pike, Hermitage Tennessee 37076
................................................................................
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (615) 889-0804
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
................................................................................
(Title of class)
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TABLE OF CONTENTS
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PAGE
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PART I .....................................................................................-1-
Item 1. Description of Business.....................................................-1-
General ...................................................................-1-
The Catfish Farming Industry................................................-2-
Risk Factors................................................................-9-
Risks Associated With the Aquaculture Business..............................-9-
Item 2. Management's Discussion and Analysis or Plan of Operation..................-18-
Introduction...............................................................-18-
Results of Operations for the six months ended June 30, 1997 compared
to the six months ended June 30, 1996......................................-19-
Results of Operations for the three months ended March 31, 1997
compared to the three months ended March 31, 1996..........................-19-
Results of Operations 1996 Compared to 1995................................-19-
Liquidity and Capital Resources............................................-19-
Item 3. Description of Property....................................................-20-
Item 4. Security Ownership of Certain Beneficial Owners and Management.............-21-
Item 5. Directors, Executive Officers, Promoters and Control Persons...............-23-
Item 6. Executive Compensation.....................................................-25-
Item 7. Certain Relationships and Related Transactions.............................-27-
Item 8. Description of Securities..................................................-41-
Common Stock...............................................................-41-
Preferred Stock............................................................-41-
Warrants ..................................................................-42-
Options ..................................................................-43-
Debt Securities............................................................-43-
Transfer Agent.............................................................-44-
Registration Obligations...................................................-44-
PART II ....................................................................................-45-
Item 1. Market Price of and Dividends on the Registrant's common Equity and Other
Shareholder Matters......................................................-45-
Item 2. Legal Proceedings..........................................................-45-
Item 3. Changes in and Disagreements With Accountants..............................-45-
Item 4. Recent Sales at Unregistered Securities....................................-45-
Item 5. Indemnification of Directors and Officers..................................-47-
PART F/S ...................................................................................-48-
PART III ...................................................................................-49-
Item 1. Index to Exhibits..........................................................-49-
Item 2. Description of Exhibits....................................................-50-
SIGNATURES
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
THE COMPANY. AquaPro Corporation ("Registrant," "AquaPro" or the
"Company") was incorporated on March 20, 1995. The Company engages in the
business of owning and managing catfish aquaculture farms directly and through
its two wholly-owned subsidiaries, American Fisheries Corporation, a
Mississippi Corporation ("American") and Circle Creek Aquaculture, Inc., a
Tennessee Corporation ("Circle Creek"). The Company currently owns 1,843 water
acres of aquaculture ponds. All of the Company's catfish farming activities are
conducted in the State of Mississippi and are conducted through Circle Creek
and American.
Mr. Hastings, the Company's Chairman and Chief Executive Officer caused
Circle Creek to be incorporated in 1983 under the name of Hastings & Company,
Inc. It changed to its current name in March 1995. Until 1996, the business of
Circle Creek was primarily the sponsorship and operation of catfish farming
investment limited partnerships. Circle Creek sponsored eight such limited
partnerships which engaged in catfish farming (the "Circle Creek Partnerships"),
Circle Creek Aquaculture, L.P. ("CCA I"), Circle Creek Aquaculture II, L.P.
("CCA II"), Circle Creek Aquaculture III, L.P. ("CCA III"), Circle Creek
Aquaculture IV, L.P. ("CCA IV"), Circle Creek Aquaculture V, L.P. ("CCA V"),
Circle Creek Aquaculture VI, L.P. ("CCA VI"), Circle Creek Aquaculture VII, L.P.
("CCA VII"), and Circle Creek Aquaculture VIII, L.P. ("CCA VIII"),
(collectively, the "Circle Creek Partnerships"). Each of the Circle Creek
Partnerships was organized under the laws of the State of Tennessee.
Mr. Hastings acquired all of the outstanding stock of American in
February 1994. American had been formed in 1988 by unrelated persons to manage
catfish farming operations. At the time it was acquired by Mr. Hastings,
American served as manager for each of the six Circle Creek Partnerships then
existing. In 1995, Mr. Hastings and Ms. Hastings transferred all of their
interest in the stock of American and Circle Creek to the Company. Effective on
December 31, 1995, the Company acquired all of the assets of CCA I, CCA II, CCA
III and CCA IV, pursuant to certain merger transactions (the "Prior
Consolidation"). Effective June 30, 1997, the Company acquired all of the assets
of CCA V, CCA VI, CCA VII, and CCA VIII (the "Recent Consolidation"). See Part
III, Item 12, "Certain Relationships and Related Transactions."
Mr. Hastings sponsored and acted as sole general partner for the first
six Circle Creek Partnerships which were formed between 1989 and 1994. In 1995
and 1996, Mr. Hastings and the Company co-sponsored, and acted as co-general
partners of, CCA VII and CCA VIII. Effective December 31, 1995, Mr. Hastings
assigned all of his economic interest as general partner of each of the eight
Circle Creek Partnerships to the Company. These interests consisted of a one
percent (1%) interest in Partnership capital, profits and losses and a
promotional contingent interest of twenty-five percent (25%) of Partnership
distributions following a
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minimum cumulative return to the limited partners. To date, neither AquaPro or
the general partner are entitled to receive any distributions pursuant to this
contingent promotional interest in any of the Circle Creek Partnerships. As a
co-sponsor and owner of a General Partner's economic interest, the Company has
no express or contractual obligation to these Partnerships. As co-General
Partner of CCA VII and CCA VIII, the Company's subsidiary, Circle Creek, has the
responsibility of directing the business and affairs of these Partnerships
subject to the terms and conditions of the respective Partnerships and its
fiduciary duty to the limited partners.
The Company has changed its fiscal year to June 30 commencing with the
period ended June 30, 1997. The Company is now on a June 30 fiscal year.
Management believes the change in fiscal year will allow its accounting period
to better reflect operations during the normal catfish Aquaculture business
cycle and thus more accurately reflect the Company's performance in its business
segment.
The Company's corporate offices are located at 4307 Central Pike,
Hermitage, Tennessee 37076. The Company's catfish farms are located in the north
central area of Mississippi in the region known as the "Mississippi Delta" or
the "Delta." The address of the Company's farm management offices is 1100
Highway 3, Sunflower, MS 38778.
THE CATFISH FARMING INDUSTRY
The Company grows channel catfish for ultimate sale and processing.
Channel catfish account for substantially all of the commercial catfish
production within the United States. The channel catfish has many qualities
making it a superior candidate for commercial production over other species of
catfish. These qualities include ease of spawning, easily controlled
reproduction, relatively simple dietary needs, a relatively hardy constitution,
the ability to survive over a wide range of temperatures and the ability to
adapt well to commonly used culture systems.
The Food and Drug Administration ("FDA") funded a study in 1991, which
showed farm-raised catfish to be the fourth most popular seafood in the U.S. The
National Agricultural Statistic Service ("NASS") of the Agricultural Statistic
Board, U.S. Department of Agriculture, has released its annual survey data for
the catfish farming industry for 1996. NASS reports that catfish growers in the
fifteen (15) major producing states had total sales of $417 million during 1996,
up 4% from $400 million in 1995. Sales of all food-size catfish totaled $389
million in 1996, up 3% from $378 million in 1995, and in 1996, sales of
fingerling and fry totaled $21.6 million compared to $16.1 million during 1995.
During 1996 direct sales to processors accounted for 96% of total sales of
food-size catfish. NASS also reports that on January 1, 1997, the total number
of catfish aquaculture operations was 1,302, down 2% from the 1,328 operations
reported at January 1, 1996. However, the number of operations in the top four
(4) catfish producing states, Alabama, Arkansas, Louisiana and Mississippi
increased by 1% during this time. NASS also reports that on January 1, 1997,
water acres used for catfish aquaculture totaled 177,000 acres, up 6% from July
1, 1996, and that an additional 4,650 acres are currently under construction and
are expected be in use by July 1, 1997. NASS reports all food-size catfish
on-hand at January 1, 1997 total 271 million, up 19% from 228 million on-hand
the previous year. Medium food-size showed the largest increase of the three
categories from January 1, 1996, increasing by 30%. Also, 872 million
fingerlings were reported on January 1, 1997, up 6% from 823 million on-hand at
January 1, 1996.
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The average prices paid by major processors per pound for farm-raised
catfish during the past thirteen years, according to the U.S. Department of
Agriculture, are as follows:
HISTORIC AVERAGE PROCESSOR PRICE FOR CATFISH
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CALENDAR AVERAGE PRICE
YEAR PER POUND
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1984 69.2(c.)
1985 72.6
1986 66.8
1987 61.8
1988 76.4
1989 71.5
1990 77.3
1991 63.1
1992 60.0
1993 71.0
1994 78.9
1995 78.8
1996 77.0
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There are two major channels of distribution for farm-raised catfish:
retail grocery store outlets and the food service sector. Each accounts for
approximately half of total catfish sales. Catfish farmers can access these
markets directly only if they process their own production. The vast majority of
farmers, including the Company, do not have processing capability and thus must
sell their products to either cooperatively owned or independent processors. The
Company sells its catfish to a limited number of cooperative and independent
catfish processors. The terms of sale generally permit payment within 6 weeks of
delivery and does not require collateral for payment. For the six month period
ended June 30, 1997, one processor represented 90% of net sales. Three
processors represented 55%, 25% and 11%, respectively, of the Company's net
sales for the year ended December 31, 1996 and 51%, 25% and 18%, respectively,
for the year-ended December 31, 1995. These processors sell processed catfish
both to retail groceries and to the food service industry.
THE COMPANY'S CATFISH FARMING OPERATIONS
CATFISH AQUACULTURE. Channel catfish are grown in outdoor ponds in
which the water is about four to five feet deep. The Company's operations are
conducted in ponds ranging from 10 to 20 water acres in size. Each pond is
separated by levees that must be large and strong enough to support a semi truck
and trailer hauling up to 40,000 pounds of catfish. The levee system provides
access to the ponds for feeding, oxygen checking (oxygen level regulation),
aeration and other maintenance chores. Ponds are supplied with water from
underground sources (wells). The water does not flow back and forth between the
ponds because of the higher, heavy clay levees. The ponds have relatively flat,
regular sides and bottoms, since this shape facilitates
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harvesting. Individual ponds average 17 land acres and 4 to 5 feet in depth
from the bottom of the pond to the top of the levee.
Successful catfish farming requires stocking the ponds and feeding the
fish at the highest rate possible, while still maintaining a healthy living
environment. Management believes that 5,000 stocker fish and 8,000-10,000 5" to
6" fingerlings per acre for the initial stocking, and 10,000 5" to 6"
fingerlings each year thereafter, is the optimum number of fish to maintain
maximum production levels. Management believes only stocking rates greater than
7,000 head per acre are cost-effective on a long-term basis in the present
industry environment. Current stocking rates in the industry range from
approximately 3,000 head to more than 10,000 head per acre. Once fully stocked,
a well-managed catfish farm can produce 6,500 pounds of catfish per water acre
per year, although the industry average is less. Catfish farms in the
Mississippi Delta average 4,000 to 5,000 pounds of catfish production per acre
per year.
The time period required for a catfish to progress from fingerling to
its optimum weight of 1 to 1-1/2 pounds is 8 to 12 growing months, depending on
the feeding, health, density of population and other factors, many of which,
including climatic conditions, will be outside the control of Management. There
are normally eight growing months during a calendar year (March through October)
so fish are generally in the water over a two calendar year period.
Historically, most catfish were harvested and processed in the months of June
through October. However, as a result of an active marketing campaign by the
catfish industry and consistent year-round production, consumer demand for
catfish has become more year-round in recent years.
Channel catfish grow fastest and healthiest under certain environmental
conditions. The optimal temperature for channel catfish growth is about
85(degree). Because the growing of catfish in outdoor ponds is by far the most
economical (cultivation in tanks or heated water is much more expensive and is
commercially feasible only when some unique circumstance exists, such as the
opportunity to sell fish at an exceptional price), catfish are most easily grown
in a location where average daily water temperatures are above 70(degree) for at
least 180 days a year, with at least 120 days above 80(degree). Thus, climate is
one reason for choosing the Mississippi Delta region to grow the fish. When the
water approaches 50(degree) Fahrenheit, feeding activity slows, almost stopping
as temperature drops further. In the Mississippi Delta region, the heaviest
feeding times are spring, summer, and fall. (Channel catfish can survive,
however, for long periods of time at water temperatures ranging from just above
freezing to about 104(degree)).
The Company cultures its fingerlings until they reach marketable size
(or weight). Within the catfish farming industry, three sizes of food-size fish
are recognized. Large food-size catfish are 3 pounds and above. Medium food-size
catfish are 1-1/2 to 3 pounds, and small food-size catfish are 3/4 to 1-1/2
pounds. While catfish of 3/4 of a pound or more are considered market weight,
Management intends to market the Company's catfish at a weight of 1 to 1-1/2
pounds. In Management's experience, this is the optimum size for marketing
because it yields the best fillet when processed. The highest demand for catfish
production is for fillet cuts. Accordingly, the catfish will be fed and
maintained until they weigh 1 to 1-1/2 pounds before any will be ready to
harvest and sell to a processor. As catfish are sold, additional fingerlings
will be purchased periodically to restock the ponds. Generally, the Company
would replace inventory with 5" to 6" fingerlings. This is because, for
production during a full growing season, it is generally more efficient to
purchase 5" to 6" fingerlings than to devote one or more of the Farm's ponds to
catfish spawning. The price paid for fingerlings ranges between .75(cent) and
1.50(cent) per inch. Management anticipates that this price range will remain
fairly constant. However, fry are much less costly than larger stock-size fish,
and where ponds are newly refurbished or reworked they
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are sterile and ideal for growing fry-size fish. As the Company refurbishes
several of its ponds in 1997 and 1998, Management plans to take advantage of
these opportunities to stock its inventory with fry.
NECESSARY RESOURCES AND MATERIALS. As discussed in further detail
below, the raw materials necessary for the Company's agriculture operations
consist primarily of stock fish, feed, electricity and gasoline. The Company
also requires equipment and general supplies to maintain its operations. The
Company purchases its feed principally through cooperatives. The price of feed
closely reflects the costs of the raw materials used in the synthesis thereof,
including soybean, corn and other agricultural products. Accordingly, the price
of feed fluctuates in response to the prices of these commodities on the world
markets. The Company uses significant amounts of electricity and gasoline in
operating its aerators, particularly during the warmer months (principally
spring and summer) during which fish increase activity and thus, oxygen
consumption is greatest. Thus, the Company is subject to fluctuations in
electricity and gasoline prices.
The Company uses both unspecialized equipment, such as tractors,
trucks, etc., and specialized equipment, aerators, seining equipment, etc., in
its operations. New and used equipment in the past have been available at
competitive prices and terms to the Company, primarily because of the
concentration of catfish farming in the Delta area and as a result of the
historic high rate of turnover of catfish farming operators. The Company
anticipates this trend will continue and anticipates that both new and used
equipment will continue to be readily available to the Company as needed.
Another major expense of the Company's business is labor. The Company currently
employs a non-organized labor field staff. Most of the Company's field staff
requires low level skills and training and thus, the Company believes that
competent labor at competitive prices will continue to be available to the
Company in the area of its operations.
FEED. Catfish are fed a diet of "puffed" high protein, floating food
pellets which are a mixture of soybean, corn, wheat, vitamins, minerals and fish
meal, produced by fish mills. The food is scientifically formulated, not only to
provide an optimal level of nutrition to the individual fish but also to produce
a meat of a mild, sweet flavor and the absence of any "fishy" odor during
cooking. One of the advantages of catfish aquaculture is the higher
feed/conversion ratio of this meat source. Laboratory studies have shown
conversion ratios for channel catfish as high as 1.75 pounds of feed per one
pound of fish produced. However, based on its experience, Management believes
the "real life" conversion rate for catfish grown under commercial conditions,
including mortality, is closer to 2.5:1 and management uses this rate in its
inventory control and monitoring procedures. By comparison, chicken has a
conversion ratio of approximately 3:1; pork has a conversion ratio of
approximately 4:1; and beef has a conversion ratio of approximately 8:1.
Feed prices can vary greatly from year to year. In 1995, feed prices
averaged $235 per ton. Increases in soybean, corn and wheat prices in 1996 and
early 1997 pushed feed prices to $287 per ton in early 1997. Feed prices then
fell to approximately $252 per ton during the third calendar quarter of 1997.
Higher feed prices directly resulted in increased costs of products sold. The
price of feed is subject to crop yields, which cannot be predicted with
certainty. In order to help control its feed costs, the Company owns shares in
Indi-Bell Feed Mill Cooperative ("Delta Western"). As a member of this
Cooperative, the Company has the opportunity to buy feed at wholesale prices and
to purchase feed on an "as needed" basis on two days' prior notice. Thus, the
Company can avoid having to purchase and store large amounts of catfish feed in
order to lock in current prices. The Delta Western Cooperative has over 250
members. This cooperative hedges against price fluctuations for its members
through the purchase of futures option contracts on the Chicago Board of Trade
Futures Exchange. The Company has contracted to purchase at a price of $252 per
ton for approximately 85% of its budgeted feed consumption for calendar year
1997.
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OXYGEN LEVELS. Catfish are sensitive to water oxygen levels which
fluctuate on a more or less predictable cycle during a 24-hour period. Oxygen
levels are supplemented by algae growth during the daylight hours, and are
depleted during the dark hours as algae are dormant. Because the fish remain
active during both daylight and dark hours, the ponds must be constantly
monitored and aerated as necessary in order to maintain acceptable oxygen
levels.
DISEASE. Diseases affecting catfish are a constant risk. A vaccine is
presently available to treat enteric septicemia, which is currently the leading
cause of mortality among catfish (approximately 40% of all catfish disease is a
form of enteric septicemia). The most efficient safeguard against this disease
is constant monitoring and the purchase of fingerlings which have been fed the
oral vaccine. Once the disease is detected, medicated feed may be provided to
the infected fish to prevent a serious outbreak. Those diseases which cannot be
successfully treated can often be contained in the infected pond, since the Farm
ponds, as is typical with catfish ponds, are separated by levees, and water from
one pond does not normally cross over into another pond. Frequent monitoring is
also necessary in order to maintain proper water chemistry.
HARVESTING AND RESTOCKING. When Management determines that the catfish
of a particular pond are ready for market, the pond is seined using a net of
appropriate size, which will allow the smaller catfish to escape while trapping
the larger catfish in the net. The catfish will then be loaded live on trucks
and transported to the processor where the fish are cleaned, processed, and
chilled or frozen in less than three minutes. The processing plants pay an
agreed upon price per pound for the delivered fish. The Company owns shares in
Delta Pride Catfish, Inc. (Delta Pride) processing cooperative where most of its
catfish are sold for processing.
The Company seeks to restock its ponds annually in order to maintain
the optimum population within each pond. At any time, each pond will have fish
at various stages of growth. The cycle from fingerlings to ideal processing size
(1.0 lbs. to 1.5 lbs.) generally takes 18 months.
INVENTORY CONTROL PROCEDURES. Husbandry of its live fish inventories is
probably the most important aspect of the Company's aquaculture business.
Ongoing knowledge of live fish inventories is critical to management's ability
to make accurate and timely decisions regarding their feeding, care and
harvesting. For instance, accurate estimates of the number of fish and their
respective size are used in determining the amount and timing of feedings and
necessary aeration, restocking and harvesting. Live fish inventory control and
estimation procedures have historically employed both quantitative and more
subjective, qualitative procedures. Current industry estimation practices employ
the simultaneous use of two general estimation techniques: physical inventory
sampling (counting techniques) and statistical models. Typically, farmers will
use both techniques and cross-check the results to determine consistent
estimates.
The most certain physical sampling method would be the draining of
ponds and physical counting of fish inventory. However, this is only done at
such times as ponds are drained for rehabilitation because
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physical removal of fish results in significant loss and is not a practical
method of inventory determination. Therefore, typical sampling involves periodic
seining of ponds and observation of fish population number and size, observed
actual mortality, and observed food consumption patterns and rates. These
physical sampling techniques involve different degrees of subjective judgment
and non-random procedures. However, when used in conjunction with statistical
estimations, they serve as important cross-checks or verification of the
statistical estimates.
Management employs statistical techniques to estimate inventory based
on known factors, such as number and size of fingerling introduction, amounts
and timing of feed, and amounts harvested. Management estimates inventory size
and number based on these factors using statistical models. The Company
currently uses two statistical estimation procedures; its historical,
empirically evolved statistical procedures and the Fishy statistical program
developed in Mississippi under the leadership of Dr. Wallace E. Killcreas,
professor and economist at Mississippi State University. The latest version of
the Fishy program, Fishy 3.1, is quickly becoming a standard in the fish farming
industry. Fishy is a micro-computer program designed to help fish producers make
better production management decisions. The program is a complete fish
production management system designed for pond-raised catfish. When properly and
diligently used, the program's creators believe it will accumulate the end
report data needed to make economically efficient decisions. It allows users to
enter and analyze all information needed to compute out-of-pocket costs of
growing catfish. The general features of the program include gathering and
reporting historical production data, such as food purchased and fish stocked
and fed, lost, harvested and marketed. The program also allows water quality
data assimilation, reporting and graphing. The program calculates information
such as feed conversion ratios, percentages of bodyweight to feed, and
projections of fish growth and feed needed for future production.
While Management believes that its inventory control and estimated
procedures are consistent with the most advanced available to the aquaculture
industry, its degree of accuracy is difficult to quantify. In the past, physical
inventory counts made by Management in conjunction with pond drainings and
reconstruction have varied significantly from statistically derived inventory
estimates for the same ponds. Management now estimates a mortality rate of 1.6%
per month, based on the Fishy program. Management then compares these estimates
against its expected conversion of fingerlings to pounds of production marketed
using a lower than industry average conversion factor of one pound of growth per
2.5 pounds of feed used. While Management believes that it has determined the
basis of these variances and has made adjustments to its statistical procedures,
including mortality rates and food conversion rates, in order to eliminate these
variances in the future, there is no assurance that it has been able to do so.
It is reasonably possible that the Company's actual live fish mortality will
vary significantly from estimated mortality. See "RISK FACTORS - Risks
Associated with the AquaCulture Business."
EMPLOYEES. The Company currently employs 32 full-time persons.
RECENT DEVELOPMENTS
COMMUNITY BANK CREDIT LINE. Effective April 16, 1997, the Company has
obtained a revolving credit line in the amount of $750,000 from Community Bank,
Indianola. The purpose of the credit line is to provide financing for catfish
feed purchases from Delta Western by the Company for itself and for the
Partnerships. Borrowings under the credit line will bear interest at the rate of
prime plus 165 basis points (1.65%). The credit line matures on March 5, 1998.
The Company paid a commitment fee of 1% ($7,500). Under the credit
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line, the Company has established an operating deposit account with the Bank's
Indianola Branch into which the Company must deposit proceeds from pledged
inventory sales and accounts receivable. One-half of these amounts are applied
to repayment of the credit line balance and the remaining balance is then
available to the Company. The credit line is represented by the Company's
promissory note which is secured by a first lien on all Delta Pride and FishCo
stock owned by the Company, and a first lien on inventory and accounts
receivable of the Company and the Partnerships. Mr. George S. Hastings has
personally guaranteed the credit line.
ASSESSMENTS BY DELTA PRIDE COOPERATIVE. Delta Pride has assessed the
Company and its other members. The assessment is made on a 'per pound' basis for
fish processed by Delta Pride pursuant to each member's live fish deliveries
during the year ended June 30, 1997. The current assessment is three cents
($0.03) per pound processed, and is payable in installments of $0.01 per pound
each on July 31, August 29, and September 30, 1997. In addition, Delta Pride has
informed its members of an additional assessment of up to five cents ($0.05) per
pound, which would be payable in installments over the period from late 1997
through early 1998. The assessment is necessary primarily to cover operating
losses incurred by Delta Pride during the year ended June 30, 1997. The
Company's share of Delta Pride's operating losses for the year ended June 30,
1997 have been reflected as a reduction in the Company's investment in Delta
Pride stock as of June 30, 1997. Delta Pride is the largest catfish processor in
the United States. The Company is among the ten largest member shareholders of
Delta Pride and Delta Pride is the Company's largest customer.
The members' obligations to pay these installments are non-recourse,
but, until the installments are paid, the Company cannot deliver fish under its
delivery rights to Delta Pride. During the year ended June 30, 1997, the Company
assigned its Delta Pride delivery rights for approximately 580,000 pounds of
catfish to other party farmers because it could not use the rights a scheduled.
In general, these assignees are contractually obligated to the Company to pay
any assessments relating to their use of the Company's Delta Pride delivery
rights, and the Company believes it can successfully recover these amounts from
these contractees. The Company has paid each of its July, August and September
assessment installments. Payment of the Delta Pride assessments will materially
reduce the Company's cash flow for the year ending June 30, 1998 while the
charges increased its net loss by $272,000 for the year ended June 30, 1997.
RESIGNATION OF MR. JONES. Mr. Austin Jones, the Company's Vice
President - Production, has resigned effective August 1, 1997. The Company does
not intend to immediately replace Mr. Jones, who was an officer and part-time
employee of the Company. At the time of his departure, Mr. Jones served as an
administrative level consultant to the Company. Most of his field duties were
assumed by the Company's area managers pursuant to its staff reorganization in
1996 and management does not expect Mr. Jones' departure to adversely affect the
Company's production, staffing or performance. Mr. Jones was a co-founder of
American Fisheries Corporation in 1987, a predecessor of the Company, and
continued to be employed in a supervisory production capacity after American was
acquired in 1989.
ADJUSTMENT TO MR. HASTINGS' SALARY. Effective August 1, 1997, Mr.
Hastings has agreed and the Board of Directors has approved a change in Mr.
Hastings' compensation whereby his salary is reduced to $1 per year and the
Board increased the number of stock options granted to Mr. Hastings to 50,000
per quarter,
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with a maximum of 200,000 per year, to be exercisable over a seven year period.
The option exercise price will be $5.63 per Share (i.e. 90% of the $6.25 price
on which the Consolidation Units were based). The exercise price will be
adjusted to the average trading price of the Common Stock for the first 65 days
after listing on a national exchange, as defined for the purposes of the Series
A Preferred Stock.
RISK FACTORS
The Company and its securities are subject to a number of risks. Set
forth below is a description of the more material of these risks.
RISKS ASSOCIATED WITH THE AQUACULTURE BUSINESS
General Risks of Catfish Farming. The Company faces three
general types of risk in connection with its catfish farming business.
- Risks involving the price and availability of equipment and
supplies,
- Climatic, environmental and biological risks such as weather,
natural catastrophes and disease, and
- Market risks regarding the price and strength of the consumer
market for the Company's catfish production.
The risk exposure in each of these categories is amplified by
competition between the Company and other catfish producers, particularly those
located within the Mississippi Delta. If the Company is unable to maintain its
operating costs at levels which allow it to realize a profit in its catfish
sales, the Company will not be profitable and, if this condition persists, it
would fail and the Shareholders would lose some or all of their investment.
Certain risks, such as adverse climatic conditions, natural disasters,
disease, consumer demand and competition, are outside the Management's control
and, to a varying extent, cannot be planned for or avoided. The occurrence of
one or more of these events could deplete the Company's operating reserves and
resources and thereby result in the need for additional capital.
Availability and Price of Stock Fish and Supplies. The price
of stock fish and supplies such as feed, and labor, are subject to fluctuations
due to availability and varying demands. Increased competition for supplies and
services within the catfish farming industry in general, and the Mississippi
Delta in particular, could cause temporary or prolonged price increases for
feed, labor or other items necessary to the Company's farming operations. While
Management will attempt to obtain lower supply and labor costs through
cooperative purchasing, there is no assurance that it will be able to do so or
that future price increases will not occur. Prolonged increases in one or more
of these categories would negatively affect the Company's profitability and
ability to remain in business.
Consumer Demand. The Company's profitability will depend
substantially on the price at which it can sell its catfish. In the past years,
prices have fluctuated substantially and will likely continue to
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do so in the future. Prices are dependent upon the demand for catfish by
consumers and the supply of catfish available at any given time. While catfish
consumption is in general increasing, there continues to be substantial consumer
reluctance to eat catfish. Also, catfish continues to incur substantial
competition from other seafood, beef, pork and chicken. While foreign-produced
catfish currently accounts for less than one percent of the total catfish
consumed in the United States, increased foreign competition could negatively
impact the price at which the Company can sell its catfish production. Any
continued depression of the price the Company can receive for its catfish will
negatively affect the Company's profitability and its ability to remain in
business.
Loss Due to Disease. The single highest cause of loss in
catfish farming is disease. Disease has accounted for more than sixty percent of
catfish loss each year since 1990. The Company will attempt to control the more
common catfish diseases through the purchase of disease resistant or vaccinated
fingerlings, and will monitor its fish for disease so that a diseased pond can
be quickly quarantined. Nevertheless, catfish are susceptible to a number of
viral and bacterial diseases, many of which cannot be effectively treated, even
if diagnosed early. A number of these diseases cannot be prevented. Also, it is
possible that new diseases may occur in the future for which effective treatment
does not exist. There is no assurance that the Company will be able to limit
disease. A loss of a substantial amount of the Company's inventory due to
disease will negatively affect its profitability and its ability to remain in
business.
Water Oxygenation. Catfish survival is dependent upon the
maintenance of adequate oxygen levels in the catfish ponds on a 24-hour basis.
Typically, oxygen levels will fluctuate throughout a 24-hour period. Oxygen
levels are enhanced by photosynthetic bacteria during the daylight hours and
depleted during the nighttime hours by catfish activity. In order to maintain
adequate oxygen levels, catfish ponds must be aerated mechanically during times
of low oxygen levels. If oxygen levels are not monitored regularly or if low
levels are not discovered in time, the catfish will be lost. The Company will
maintain a regular oxygen monitoring schedule and will have on its premises
sufficient electric aerators to maintain pond oxygen levels under anticipated
conditions. Nevertheless, unanticipated conditions such as prolonged loss of
electric power may render unavailable the electric aerating equipment. A
substantial loss of the Company catfish inventory due to a failure to maintain
oxygen levels would negatively impact the Company's profitability and its
ability to remain in business.
Price of Catfish Feed. Catfish feed, which is the greatest
single production cost in catfish farming operations, is subject to large
fluctuations. Industry groups report in recent years, fluctuation between $180
and $300 per ton. Feed prices are currently as high as $287 per ton. Currently,
catfish feed is produced by a small number of producers, some of which are
cooperatives. The Company owns shares in Delta Western, a cooperative catfish
food producer, which allows the Company a limited preferential right to purchase
feed. These shares, however, do not assure the availability of feed or the price
at which feed can be purchased. While the Company attempts to budget for
anticipated feed costs in its operations, such costs are not predictable with
certainty and the Company has no control over the price at which it can buy
feed. There is no assurance that the Company will be able to purchase feed in
the future as needed at a cost that will allow it to operate profitably or
remain in business.
Climatic Conditions. While channel catfish are tolerant to a
wide range of climatic and temperature conditions, these catfish become immobile
below 32(degree) Fahrenheit. Catfish ponds cannot economically be heated.
Accordingly, prolonged cold weather conditions could lower pond temperatures to
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below 32(degree) and result in a substantial loss of the Company's catfish
inventory, thereby negatively impacting its profitability and its ability to
remain in business.
Water Contamination. Non-catfish farming operations in the
Mississippi Delta have in the past used and continue to use chemical fertilizers
and pesticides in their crop production. Even small concentrations of certain
chemicals and pesticides can significantly affect catfish production and can
result in loss of the entire catfish population in the pond affected. While
Management has from time to time tested the Partnerships' ponds and found no
dangerous levels of any chemical or pesticide present, there is no assurance
that contamination from these chemicals may not occur in the future, either
through penetration of ground water or surface application. Management will
continue to monitor and test the ponds for possible contamination.
Natural Hazards. Excessive amounts of aquatic weeds reduce
catfish production. The only method of aquatic weed control is chemical control,
which can result in oxygen depletion and accompanying loss of catfish in the
treated pond. Further, the chemicals used to destroy weeds are expensive to
purchase and are not always completely effective. Catfish population loss can
also occur as a result of predators, including naturally occurring birds, snakes
and turtles. The occurrence of such predators is common in the Mississippi Delta
area and Management will limit the damage caused by such predators by continuing
its policy of early detection and removal.
Water Availability. Catfish production requires large,
reliable sources of water. In general, the Mississippi Delta is supplied by a
large and readily accessible ground water source. The Partnerships' farms are
served by wells, capable of producing sufficient water to meet the anticipated
needs of the Company's catfish farming operations. Nevertheless, the water
available to the Company may be limited by natural courses or by chemical or
fertilizer contamination as described above. Further, there is no assurance that
the State of Mississippi, the U.S. Army Corps of Engineers or other governmental
authority will not in the future place limitations on the amount of water which
may be withdrawn by well. Nonavailability of sufficient water would
substantially and negatively impact the Company's profitability and ability to
remain in business.
Quality of Catfish. Management intends to follow farming
procedures which have been shown to result in the palatable, clean tasting,
"non-fishy" catfish demanded by the consumer market. Nevertheless, for reasons
which usually cannot be controlled before they are discovered, catfish in any
particular pond may acquire an "off-flavor" taste. A number of factors, many of
which often work together, may cause this result. A common cause is certain
types of algae which are difficult to control in catfish ponds, particularly in
late summer and early fall. Fortunately, a catfish pond will become "off-flavor"
only for a limited period of time, even if no affirmative corrective action is
taken. However, there may be several months during which one or more of the
Company's ponds may be "off-flavor," thereby preventing the Company from selling
catfish from that pond but requiring the Company to continue to incur expenses
in feeding and maintaining the catfish population. Catfish industry groups are
currently conducting studies to determine the cause and treatment of
"off-flavor" conditions.
Uninsured Losses. Management maintains liability and casualty
coverage for its farms and its major equipment in amounts it deems appropriate.
However, certain losses from significant risks, such as disease, chemical
contamination, climatic conditions or natural disasters, such as ice storms,
floods, droughts or hurricanes, are either uninsurable or are not economically
feasible to insure. Should the Company incur a
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loss from such an uninsured event, the Company could sustain a loss of its
catfish farming business. In such event, the Shareholders would lose all or
substantially all of their investment in the Company.
Ability to Sell its Fish Production. The Company does not have
the capability to process its own fish. The Company sells its catfish primarily
to two cooperative processors of which it is a member. Members of cooperative
processors are allocated fish delivery rights or sale allocations requiring the
cooperative to purchase an amount of fish in proportion to the number of shares
owned. The price received depends on the price paid by the processor at the time
of delivery. Cooperatives are managed by boards of directors elected by their
members. To the extent the cooperative processors operate profitably, the
members are benefitted through price concessions, rebates and/or distributions.
To the extent cooperatives operate unprofitably, members are subject to
assessments to fund such losses. The failure to pay assessments generally
results in a loss of delivery rights and sometimes in the loss of membership
interests. Accordingly, the Company's ability to market its catfish in volumes
and at prices necessary for profitable operations substantially depends on the
ability of management of the cooperative processors of which the Company is a
member to operate their processors in an efficient manner. Moreover, fish the
Company cannot sell to its cooperative processors must be sold to other
processors on a negotiated basis in competition with other catfish producers.
While there are a number of processors located in the Mississippi Delta,
management does not believe there is sufficient competition among processors to
provide any substantial leverage to the catfish producers in negotiating prices.
These circumstances do not allow the Company to depend on stable catfish prices
for its future production. Thus, there is no assurance that the Company will be
able to sell its catfish production at a price which will allow it to realize a
profit.
Assessments By Delta Pride. The Company's principal catfish
processing cooperative, Delta Pride has assessed its member stockholders,
including the Company, $.03 per pound of catfish processed to cover operating
losses sustained by Delta Pride during its fiscal year ended June 30, 1997.
Delta Pride has also notified its members that it may assess up to an additional
$.05 per pound of catfish processed which would be payable in installments over
a period from the end of 1997 through early 1998. As a member of this
cooperative, the Company must pay these assessments in order to retain its
member catfish delivery rights. In 1996, and for the six months ended June 30,
1997, the Company sold 55% and 90%, respectively, of its total catfish
production to Delta Pride. The assessments were recorded as a $272,000 charge to
earnings during the six-month period ended June 30, 1997 and are expected to be
paid and thereby reduce the cash flow of the Company during the next year.
Although Delta Pride has instituted significant measures, including a change in
executive management, to have operating income, there is no assurance it will be
able to do so. Should Delta Pride continue to operate at a loss, its members,
including the Company, can anticipate additional assessments in the future.
Should Delta Pride continue to sustain significant losses and/or should
a significant number of its members fail to pay their assessments, Delta Pride's
ability to continue to operate as a fish processing concern could be suspended
or terminated. In this event, the Company would be unable to market a
substantial percentage of its catfish unless it established alternative
processing arrangements. Also, in such event, the Company's significant
investment in Delta Pride cooperative stock would be significantly impaired or
possibly rendered valueless.
Availability and Price of Stock Fish and Supplies. The price
of stock fish, supplies such as feed, and labor are subject to fluctuations due
to availability and varying demands. Increased competition for
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supplies and services within the catfish farming industry in general, and the
Mississippi Delta in particular, could cause temporary or prolonged price
increases for feed, labor or other items necessary to the Company's farming
operations. While management will attempt to obtain lower supply and labor costs
through cooperative purchasing, there is no assurance that it will be able to do
so or that future price increases will not occur. Prolonged increases in one or
more of these categories would negatively affect the Company's profitability and
ability to remain in business.
Effect of Competition. The catfish farming industry is
intensely competitive, particularly in terms of costs of production and price,
and to a lesser extent in terms of quality and marketing. Many of the Company's
competitors are better established, have substantially greater financial,
marketing and other resources than the Company, and some may have more
efficiencies in cost of production. The existence of any of these facts could
give such competitors an advantage over the Company. Moreover, one or more
competitors may develop and successfully commercialize catfish farming
techniques or procedures that provide them with an advantage over the Company in
terms of costs of production, price and quality of catfish production. As a
consequence, such competition may result in the Company's inability to compete
with such farming operations on a continuing basis.
Impact of Environmental Laws and Regulations. As a food,
catfish is subject to federal and state laws and regulations regulating the
cultivating and growing of edible products and the content of regulated or
restricted substances therein. For example, various herbicides, algaecides,
fungicides and other mineral and chemical supplements and treatments which the
Company may otherwise in controlling algae, fungi and other pests, are
restricted or prohibited under prevailing federal and state laws and
regulations. The chemical content of catfish is subject to federal standards and
the Company is susceptible to inclusions of restricted or prohibited substances
in its catfish through means beyond its control. For instance, such substances
may be included by feed or ground water utilized by the Company in cultivating
its catfish. In the event restricted or prohibited substances or chemicals are
discovered to be present in the Company's ponds or catfish in amounts exceeding
permissible levels, the Company could be prohibited from selling all or a
significant portion of its catfish for an extended period of time, and may be
required to destroy all or a substantial portion of its then-current catfish
production. Also, under certain circumstances, the Company could be required to
pay monetary damages and/or take remedial measures to remove or prevent
occurrence contamination by the restricted or prohibited substance or chemical.
In July, the FDA advised the catfish industry that excessive levels of dioxin
had been detected. Dioxin is a toxic industrial byproduct thought to affect the
human immune system and to cause human reproductive disorders and cancer in the
catfish and poultry feed manufactured and distributed by one producer. The FDA
proposed to immediately ban all further shipments of catfish, eggs and poultry
on a nationwide basis that may have been contaminated by the trace levels of
dioxin. The catfish industry was able to delay FDA action until catfish
producers had an opportunity to test their catfish for dioxin levels. The
Company, among other catfish producers, had sufficient time to receive negative
test results for dioxin levels in their catfish production and avoid delaying
shipment and sales of their catfish after the ban implementation date. However,
had the FDA not delayed imposition of the ban, the Company and other catfish
producers would have experienced a delay in the sale and shipment of their
catfish production until such time as they could produce negative test results.
Also, under various federal, state and local laws, ordinances and
regulations, the owner of real estate generally is liable for the costs of
removal or amelioration of certain hazardous or toxic substances located on or
in, or emanating from, such property, as well as related costs of investigation
and property damage. Such
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laws often impose such liability without regard to whether the owner knew of, or
was responsible for, the presence of such hazardous or toxic substances.
Further, the presence of such substances, or the failure to properly ameliorate
such substances, may adversely affect the Company's ability to operate or sell
or rent a property or its catfish, or to borrow funds using the property as
collateral. Noncompliance with environmental, health or safety requirements may
result in the need to cease or alter the Company's operations. Also, certain
environmental laws impose liability on a previous owner of property to the
extent that hazardous or toxic substances were present during the prior
ownership period. Transfer of the property will not relieve a prior owner of
this liability. Thus, the Company could have liability with respect to a
property after it is sold.
The Company will not obtain its own environmental inspection of the
Company's properties. Based on management's previous inspections, general
familiarity with the Company's properties and its knowledge of the area,
management believes that the properties are in compliance in all material
respects with all applicable federal, state and local ordinances and regulations
regarding hazardous or toxic substances. Nevertheless, there is no assurance or
guarantee that hazardous or toxic substances will not later be found on a
property or that a property will not subsequently be found in violation of any
federal, state or local environmental law or regulation.
The Company may find it difficult or impossible to sell a property
prior to or following any such cleanup. If such substances are discovered after
the Company sells a property, the Company could be liable to the purchaser
thereof if the Company knew or had reason to know that such substances or
sources existed. In such case, the Company could also be subject to the costs
described above.
RISKS ASSOCIATED WITH THE COMPANY AND THE SECURITIES
Ability to Achieve Profitable Operations. The Company reported
a net loss for the six months ended June 30, 1997 of $1,487,525 and had an
accumulated deficit of $5,484,760 as of such date. Also, none of the individual
Circle Creek Partnerships whose farming operations the Company has acquired has
achieved profitable operations. Based on current and historical industry data,
management believes the Company's ability to achieve profitable operations will
require it to maximize production on its farms and to achieve more efficient and
cost-effective farming operations so that its costs of production as a
percentage of gross revenues are minimized. Management believes this strategy is
necessary to meet the demands of the farm grown catfish industry where profit
margins are expected to narrow because wholesale fish prices are expected to
remain flat and inventory costs, particularly feed and fuel costs, are expected
to continue to fluctuate and competition is expected to intensify. However,
there is no assurance that Management will be able to implement this strategy,
or if implemented that it will prove successful; and there is no assurance that
the Company will be able to operate at a profit in the future.
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Adequacy of Capital. There is no assurance that the Company
has capital resources sufficient to meet its operating expenses and general and
administrative expenses in the future if anticipated revenues from fish
inventory sales are not realized. During the next twelve months, the Company
anticipates that it will incur substantial costs in its restocking and
rehabilitation of the farms acquired from Participating Partnerships as it
endeavors to maximize production on those farms. In the event anticipated
operating revenues realized during this period, when added to current cash
reserves and proceeds, if any, from the Rights Offering, are not sufficient to
pay these costs, the Company may need to defer some or all of these
expenditures. In such event, it is unlikely such additional farms can be
operated profitably. Even if the Company, in the future, realizes a positive
cash flow from its operations, as to which there can be no assurance, it may
still require substantial capital to acquire additional farming properties and
further expand its farming operations. Such additional capital may not be
available when needed or on terms acceptable to the Company. The Company
anticipates seeking additional capital through public or private sales of its
securities, including equity securities. Future financings may result in the
issuance of equity securities and dilution to current shareholders. There are no
assurances that any additional debt or equity capital will be available to the
Company, or that, if such additional debt or capital is available, that the
terms would be favorable or acceptable to the Company. Insufficient funds may
require the Company to delay, reduce or eliminate certain or all of its
operations and development activities.
Restrictions on Payment of Dividends. The terms of the
Company's 10.35% Notes and 7.15% Convertible Notes, and present
institutional credit arrangements restrict the Company from paying dividends on
its capital stock, in certain circumstances. Also, the Company may, in the
future, enter into credit arrangements which restrict the Company's ability to
pay dividends on its Series A Preferred Stock. In general, these credit
agreements provide that for as long as there is no default in the payment of
principal or interest or any other default causing the acceleration of
indebtedness, the Company will be permitted to pay dividends on its Series A
Preferred Stock. The restrictions on the payment of dividends could prevent the
payment of dividends on the Series A Preferred Stock in the event the Company
were unable to make the payment of principal or interest as required by its
credit agreements.
Absence of Earnings and Profits. Because the Company presently
has a deficit in accumulated earnings and losses for United States federal
income tax purposes, in general, unless the Company generates earnings and
profits each year in an amount at least equal to the amount of dividends payable
on the Series A Preferred Stock (and all other stock ranking senior thereto or
on parity therewith), all or part of the distributions made by the Company on
the Series A Preferred Stock will be treated as returns of
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capital rather than dividends eligible for the dividends-received deduction. No
assurance can be given that the Company will be able to generate sufficient
earnings and profits to prevent all or a part of the distributions on the Series
A Preferred Stock from being treated as returns of capital.
Dependence on Management. The feasibility and profitability of
the Company will depend significantly upon the continued participation of Mr.
Hastings and Ms. Hastings. Each of these persons is expected to continue in his
or her position with the Company. However, one or more of these persons may in
the future be unable or unwilling to continue with the Company. The
unavailability of any of these persons would likely have significant adverse
effect on the Company and its business. The success of the Company's future
operations depends in large part on the Company's ability to recruit and retain
qualified personnel over time, and there can be no assurance that the Company
will be able to retain its existing personnel or attract additional qualified
employees in the future.
Effect of Anti-Takeover Measures. The Company's Restated
Certificate of Incorporation includes certain notice and meeting procedures and
super-majority voting rights of stockholders regarding approval of certain
merger, consolidation and other business combination transactions. These
provisions could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company by deferring certain mergers, tender offers or future takeover
attempts. Also, such provisions could limit the price that certain investors
might be willing to pay in the future for the Company's securities. Certain of
such provisions allow the Board of Directors to impose various procedural and
other requirements that could make it more difficult for stockholders to effect
certain corporate actions.
No Dividends on Common Stock. The Company has adopted a policy
of reinvesting its cash flow, if any, to expand its catfish farming operations
and expects to follow this policy in the future. Accordingly, shareholders
should anticipate not receiving regular dividends or distributions with respect
to their Shares.
Conflicts of Interest. The Company endeavors to resolve
conflicts of interest which arise between management and the Company by
requiring such matters to be approved by a majority vote of the independent
members of the Board of Directors. Management discloses and presents for
approval or other resolution any matter on which it deems to involve a conflict
of interest between itself and the Company. The Company's policy is not to
pursue a corporate action in which a conflict of interest exists between the
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Company on the one hand and Mr. and/or Ms. Hastings on the other unless such
action is approved by a majority of the Company's independent directors.
Risks of Leverage. The use of leverage to purchase property
and/or operate a business involves substantial risks. While the effects of
leveraging are to increase the number of properties purchased or number or
amount of operations conducted by the Company, thereby increasing the potential
for gain to the Company's Shareholders, the financial risk to the Company and
thus the Shareholder's investment is substantially increased. One reason for
this is because the Company will be required to pay fixed payments to retire the
debt, irrespective of the success of its operations. To the extent that the
Company does not have funds available to repay its debt, holders of the debt may
call a default and, if the debt is secured by the assets of the Company, such
debt holders may foreclose on such assets. Nonsecured debt holders may seek
repayment from the Company's assets through legal process. In any event, a
default on its debt could result in the Company's loss of all or a material
portion of its assets which could, in turn, result in the loss of all or a
substantial portion of the Shareholder's investment in the Company.
The Company has used significant financing to acquire its farming
properties and assets in the Consolidation and may incur additional financing to
expand its operations and/or to acquire additional farming properties. The use
of such financing ("leveraging") will allow the Company to expand its operations
and acquire additional property with a smaller cash investment by the
Shareholders, and thereby provides the Shareholders with the opportunity of
participating in correspondingly greater proceeds from the operations. However,
leveraging will also expose the Company (and thus the Shareholders) to
correspondingly larger potential losses. In the event a farm is operated at a
loss or sold for an amount less than the principal amount of such financing,
plus accrued interest payable thereon, a Shareholder could lose all or part of
his or her investment.
The Company has substantial obligations with respect to its 10.35%
Notes and its institutional credit agreements. Leverage has significant
consequences including the following: (i) dedication of a portion of the
Company's cash flow from operations to the payment of interest in respect of its
debt obligations, which reduces the funds available to the Company for its
operations and future business opportunities; (ii) potential impairment of the
Company's ability to obtain additional financing in the future; and (iii)
potential vulnerability of the Company to a downturn in its business or the
United States economy generally. A high degree of leverage would also make it
difficult for the Company to generate sufficient working capital which could
adversely affect the Company's ability to fund its continuing operations at
necessary levels.
Risks of Balloon Payments. Generally, the Company's debt
obligations require balloon payments at the end of their term. The Company
credit line with Community Bank is due in March 1998 and its other significant
debt is due between 1998 and 2002. In the event the Company is unable to
refinance these obligations or is otherwise unable to raise funds sufficient to
repay these obligations as scheduled, the Company would be in default of these
obligations. The Company's ability to repay these obligations when they mature
will be dependent upon its ability to obtain adequate refinancing or to
negotiate an extension. The Company's ability to obtain replacement financing
for these obligations will be dependent on, among other things, its financial
condition at the time and the economic conditions in general. Accordingly, there
is no assurance that, if necessary, AquaPro will be able to obtain replacement
financing for any of these obligations upon their maturity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
AquaPro Corporation consists of the combination of American Fisheries
Corporation (the farm management company), Circle Creek AquaCulture, Inc. (the
syndication company for the catfish farming investment partnerships) and eight
catfish farms, four of which farms were separate limited partnerships before the
Prior Consolidation effective on December 31, 1995 (Circle Creek I-IV) and four
of which farms were separate limited partnerships before the Recent
Consolidation effective on June 30, 1997. CCA I, CCA II, CCA III and CCA IV were
consolidated with AquaPro as of December 31, 1995 and CCA V, CCA VI, CCA VII and
CCA VIII were consolidated as of June 30, 1997. The mergers of these entities
with AquaPro have been accounted for as though they were a pooling of interests
because of the common control of the entities and AquaPro. Prior to its
consolidation, each limited partnership pursued short-term goals of pass-through
tax benefits and maximum cash distributions rather than focusing on longer-term
plans and goals. AquaPro owns and manages catfish aquaculture farms with the
purpose of raising and selling catfish to food processors.
In 1996, AquaPro began the implementation of plans that could not be
accomplished as individual partnerships before the respective consolidations:
- Cost reduction through economies of scale.
- Improved risk management through spreading the risks inherent
in catfish aquaculture over more geographical areas, farms and
ponds.
- Improved production capacity through investment in farm
capital improvement projects.
- Long-term increases in sales volume on existing farms through
increased stocking levels of fry and fingerlings and
intensified management practices.
- Reduced interest costs from retirement of debt.
- Growth in market share and further efficiencies from
acquisition of other catfish farms including the four
remaining Circle Creek farms.
None of the eight limited partnerships had operated at a profit as an
individual entity. Also, the financial statements show that AquaPro,
including the consolidations, has not been profitable since inception and
expects to incur additional losses. This discussion should be read in
conjunction with "Item 1, Business", the Financial Statements, and the Notes to
the Financial Statements included elsewhere in this report on Form 10-SB.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based on the Company's
current expectations. The actual performance of the Company could differ
materially from that indicated by the forward-looking statements because of
various risks and uncertainties including, without limitation, cost and
availability of feed, market price received for the Company's fish, mortality of
fish from disease or low oxygen levels, inability to acquire fry and fingerlings
at reasonable costs, changes in consumer demand for catfish, difficult climatic
conditions, the extent to which the number of "off flavor" fish occur and delay
fish sales to processors, the availability of adequate financing for AquaPro and
its terms as well as the impact that credit limitations would have on
competitors to force them to sell fish at or below market or cost, inability to
acquire more farms at competitive prices, the catfish industry's ability to gain
increased market acceptance for its existing product line, the ability for the
Company to scale up its production and reduce costs per pound, the potential of
quarterly variations in demand,
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production and sales, the impact of new and changes in government regulations on
food products and general economic conditions. These risks and uncertainties
cannot be controlled by the Company. When used in this report, the words
"believe", "estimate", "plans", "goals", "expects", "should", "outlook",
"anticipates", and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
Results of Operations Six Months Ended June 30, 1997 Compared to Six Months
Ended June 30, 1996
Revenue. Net sales during the six month period ended June 30, 1997
totaled $1,203,468 compared to $1,891,390 for the same period in 1996. This
represents a decline of $687,922 or 36.4%. Volume decreased 755,000 pounds to
1,638,000 pounds of fish sold compared to 2,393,000 pounds sold during the six
month period ended June 30, 1996. Accordingly, volume represented a 31.5%
decline during the six months ended June 30, 1997 compared to the same period in
1996. The remainder of the decline was due to a price decrease of approximately
6 cents a pound to 73 cents realized in 1997 compared to 1996 when the average
price of fish sold was 79 cents. This decrease in average price resulted from
lower prices received by the Company's major customers from food distributors,
restaurants, and grocers due to an increase in competitive pricing policies as
processors attempted to increase their market share. The Company's major
customers in turn passed on the lower prices to the catfish farmers, including
the Company. This trend did not follow historical price patterns since,
typically, catfish prices increase during the Lenten season. Furthermore, the
trend of these lower prices has continued into the summer months, and the
Company cannot predict when more favorable prices will occur.
During the first six months of 1996, the Company increased its efforts
and expenditures to adequately stock its ponds for future sales growth. Due to
the 12 to 18 month grow-out period for catfish to reach marketable size, this
stocking was not ready for market by the second calendar quarter of 1997.
Additionally, unusually cool spring weather prevented normal feeding and growth
patterns of catfish and, accordingly, fewer fish were of food size and available
for sale by June 30, 1997. Management expects to substantially increase sales
beginning July 1, 1997 as a result of the availability of the stocking in
the first half of 1996 discussed above. Sales for the first fiscal quarter
ending September 30, 1997 are expected to total approximately 1,800,000 pounds
which compares to 1,683,000 pounds sold during the first six months of 1997.
However, due to the unusually cool spring weather and poor feeding season,
optimal production and sales levels of 2,200,000 pounds of fish per quarter are
not expected to be achieved until April 1, 1998 when the feeding season begins
next year. Catfish grow to marketable size during the warmer weather months from
the middle of March through the Middle of October.
Cost of Products Sold and Margin. Cost of Products Sold was $1,188,159,
a decrease of $425,751 or 26.4% compared to the first six months of 1996, while
net sales decreased 36.4%. Margin from fish sales was 1.3% during the six month
period ended June 30, 1997 as compared to 14.7% in the same period in 1996.
These margin levels were both below expected margins of 20 to 25% based on
recent price and the Company's cost structure. During the first six months of
1997, the Company recorded $244,000 of additional reserves for mortality. These
reserves were deemed necessary as spring weather approached and inventory was
physically observed, indicating that winter kill of catfish was higher than
previously estimated. Had this reserve not been required, margin from fish sales
would have been 21.6% for the six month period ended June 30, 1997. In the six
months ended June 30, 1996, certain ponds were emptied for refurbishing and
mortality adjustments of approximately $220,000 were recorded in cost of
products sold. Had these mortality adjustments not occurred, margin from fish
sales would have been 26.3%. The lower margin from fish sales was due, in part,
to the higher cost of feed for the six months ended June 30, 1997 compared to
the same period in 1996. The Company's average cost of feed in 1997 was $263 per
ton compared to $244 per ton in 1996. Management believes that these reserves
and mortality adjustments were unusual and of a nonrecurring nature but cannot
predict with certainty due to risks beyond its control that such adjustments
will not be necessary in the future.
Selling, General and Administrative. Selling, General and
Administrative expenses during the first six months were $1,055,540 or $390,557
higher than in the six month period ended June 30, 1996. This increase was
primarily due to an increase in legal and accounting fees of approximately
$213,000 incurred during 1997 to facilitate the acquisition of the four
remaining catfish farming limited partnerships by the Company. This acquisition
was accomplished effective June 30, 1997. Additionally, legal and accounting
fees increased in 1997 compared to the same period in 1996 as the Company
prepared to become a public company registered with the Securities and Exchange
Commission.
Delta Pride Assessment. During the six month period ended June 30,
1997, the Company was required to record a net charge of $272,000 for its share
of losses of Delta Pride's operations. In 1996, the charge was $79,969. About
April 15, 1997, Delta Pride disclosed that it was experiencing significant
operating losses and that, since it operates as a cooperative, shareholders are
allocated these operating losses during the year ending June 30, 1997.
Management had previously expected a chargeback of $80,000 or less. Most recent
information from Delta Price indicates that operating losses will be incurred
during the year ending June 30, 1998 and the Company's portion of these losses
will total $80,000 or more. The Company cannot predict with any certainty what
its share of Delta Price's losses will be, and unless major changes occur at
Delta Pride, the charge for the year ending June 30, 1998 could be substantially
higher than $80,000. The Company is taking steps to reduce its dependency on
Delta Pride as a major customer but, because of the limited number of catfish
processors, there can be no assurance that it will be able to do so.
Interest Expense. Interest expense decreased $17,485 or 7.6% to
$212,685 in the six month period ended June 30, 1997 compared to the same period
in 1996. Debt levels were slightly lower during the 1997 period compared to 1996
and interest rates were slightly lower due to variable rate adjustments on
ceratin debt effective January 1, 1997. Management anticipates higher levels of
debt and interest expense during the year ending June 30, 1998 due to higher
than anticipated borrowings for catfish feed resulting from the delay in
production and sales discussed above, partially offset by a reduction in the
balance of Investor Notes converted to Preferred Stock (see Liquidity and
Capital Resources discussion below).
Income taxes as of June 30, 1997. The Company had net operating loss
carry-forwards of approximately $5,400,000 available to reduce taxable income
through the year 2012.
Seasonality of Operating Results. In prior years, the revenues of
AquaPro have fluctuated from quarter to quarter depending on stocking levels and
results of feeding. Also, prices for live fish have tended to rise during the
first part of the year and drift downward during the summer, only to rise again
in September and October and fall in November and December before beginning the
annual price cycle again. Accordingly, quarterly operating results of the
Company may vary from quarter to quarter and year to year and cannot be
predicted with certainty.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1996
Revenue. Net sales during the three month period ended March 31, 1997
totaled $492,165 compared to $1,019,417 for the same period in 1996. This
represents a decline of $527,252 or 51.7%. Volume decreased 624,000 pounds to
661,000 pounds of fish sold compared to 1,285,000 pounds sold during the three
month period ended March 31, 1996. Accordingly, volume represented a 48.6%
decline during the three months ended March 31, 1997 compared to the same period
in 1996. The remainder of the decline was due to a price decrease of
approximately 5 cents a pound to 74 cents realized in 1997 compared to 1996 when
the average price of fish sold was 79 cents. This decrease in average price
resulted from lower prices received by the Company's major customers from food
distributors, restaurants, and grocers due to an increase in competitive pricing
policies as processors attempted to increase their market share. The Company's
major customers in turn passed on the lower prices to the catfish farmers,
including the Company. This trend did not follow historical price patterns
since, typically, catfish prices increase during the Lenten season. Furthermore,
the trend of these lower prices has continued into the summer months, and the
Company cannot predict when more favorable prices will occur.
During the first six months of 1996, the Company increased its efforts
and expenditures to adequately stock its ponds for future sales growth. Due to
the 12 to 18 month grow-out period for catfish to reach marketable size, this
stocking was not ready for market by the first calendar quarter of 1997. Catfish
grow to marketable size during the warmer weather months from the middle of
March through the Middle of October.
Cost of Products Sold and Margin. Cost of Products Sold was $630,401,
a decrease of $255,547 or 28.8% compared to the first three months of 1996,
while net sales decreased 51.7%. Margin from fish sales was negative 28% during
the three month period ended March 31, 1997 as compared to 13% in the same
period in 1996. These margin levels were both below expected margins of 20% to
25% based on recent price and the Company's cost structure. During the first
three months of 1997, the Company recorded $244,000 of additional reserves for
mortality. These reserves were deemed necessary as spring weather approached and
inventory was physically observed, indicating that winter kill of catfish was
higher than previously estimated. Had this reserve not been required, margin
from fish sales would have been 21.5% for the three month period ended March 31,
1997. In the three months ended March 31, 1996, certain ponds were emptied for
refurbishing and mortality adjustments of approximately $100,000 were recorded
in cost of products sold. Had these mortality adjustments not occurred, margin
from fish sales would have been 22.9%. The lower margin from fish sales was due,
in part, to the higher cost of feed for the three months ended March 31, 1997
compared to the same period in 1996. Management believes that these reserve and
mortality adjustments were unusual and of a nonrecurring nature but cannot
predict with certainty due to risks beyond its control that such adjustments
will not be necessary in the future.
Selling, General and Administrative. Selling, General and
Administrative expenses during the first three months were $433,512 or $81,827
higher than in the three month period ended March 31, 1996. This increase was
primarily due to an increase in legal and accounting fees incurred during 1997
to facilitate the acquisition of the four remaining catfish farming limited
partnerships by the Company. Additionally, legal and accounting fees increased
in 1997 compared to the same period in 1996 as the Company prepared to become a
public company registered with the Securities and Exchange Commission.
Delta Pride Assessment. During the three month period ended March 31,
1997, the Company was required to record a net charge of $136,000 for its share
of losses of Delta Pride's operations. About April 15, 1997, Delta Pride
disclosed that it was experiencing significant operating losses and that, since
it operates as a cooperative, shareholders are allocated these operating losses
during the year ending June 30, 1997.
Interest Expense. Interest expense decreased $38,527 or 27.8% to
$99,941 in the three month period ended March 31, 1997 compared to the same
period in 1996. Debt levels were slightly lower during the 1997 period compared
to 1996 and interest rates were slightly lower due to variable rate adjustments
on ceratin debt effective January 1, 1997.
Seasonality of Operating Results. In prior years, the revenues of
AquaPro have fluctuated from quarter to quarter depending on stocking levels and
results of feeding. Also, prices for live fish have tended to rise during the
first part of the year and drift downward during the summer, only to rise again
in September and October and fall in November and December before beginning the
annual price cycle again. Accordingly, quarterly operating results of the
Company may vary from quarter to quarter and year to year and cannot be
predicted with certainty.
Results of Operations 1996 Compared to 1995
Revenue. Net sales in 1996 increased to $3,906,954, an increase of
$914,667 or 30.6% over 1995. The increase resulted from a 1,167,000 pound or
30.5% increase resulting in 4,999,000 pounds of fish being sold in 1996.
The net price per pound was 78 cents in 1996 and 1995.
The increase in net sales was attributable to more food-sized fish
available for sale, additional processing rights available to the Company in
1996, and the opportunity to sell more fish to processors in excess of
contractual rights. AquaPro anticipates increased revenues in 1997 as a result
of the grow-out of an increased number of fingerlings placed into pond
inventory in early 1996. Also, in early 1997 the Company contracted to sell an
additional 1,500,000 pounds of fish during 1997. This contractual arrangement
will allow the Company to increase sales beyond existing delivery agreements.
Cost of Products Sold. Cost of products sold was $3,525,405, an increase
of $1,222,211 or 53.1% over 1995, while net sales increased only 30.6%. Margin
from fish sales was 9.8% in 1996 compared to 23.0% in 1995. As ponds were
emptied for refurbishing during 1996, mortality adjustments of approximately
$438,000 were required to be recorded in cost of products sold. Had these
mortality adjustments not occurred, margin from fish sales would have been
21.0%, which was lower than in 1995 principally due to higher feed costs in
1996 compared to 1995.
Catfish feed is a major portion of cost of products sold. Uncertainties
in the grain futures markets and high demand for soybean and corn resulted in
higher feed costs during the second half of 1996. The Company has contracted
to purchase approximately 85% of its 1997 feed needs at an average cost of $252
per ton which was lower than the $287 per ton cost on the spot market in March
1997.
Selling, General and Administrative. Selling, General and Administrative
("SG&A") expenses were $1,349,499 in 1996, $27,539 higher than in 1995. During
1995, approximately $132,000 of legal and accounting expenses were incurred in
connection with the Prior Consolidation. Selling costs increased in 1996 over
1995 due to the increase in sales volume.
Interest Expense. Interest expense decreased in 1996 to $555,974 from
$674,149 in 1995. This decrease resulted from $1,932,103 reduction in debt
during 1996 principally from the conversion of $1,678,762 in investor notes to
the Company's common stock, rights, and warrants in AquaPro as part of the
Prior Consolidation. The balance of the debt reduction resulted from
application of part of the proceeds of exercise of the Company's Rights
Offering in 1996.
Liquidity and Capital Resources
As of June 30, 1997, the Company had a current ratio of 3.4 to 1, as
compared to 3.9 to 1 at December 31, 1996. Current assets exceeded current
liabilities by $4,289,944 compared to $4,405,922 in December 1996. Cash and cash
equivalents decreased during the six month period ended June 30, 1997 by
$556,163.
Cash and cash equivalents were used primarily to fund operating losses
and grow live fish inventories. Live fish inventories increased by almost
$1,200,000 during the six month period ended June 30, 1997. As discussed above,
net sales declined when compared to the previous year and the increase in live
fish inventories was funded by a $533,298 decrease in trade accounts receivable
and a $318,368 increase in accounts payable since December 31, 1996 as well as
cash on hand. Inventories normally increase during this period but the increase
was greater than normal due to the decline in sales.
During the six month period ended June 30, 1997, the Company purchased
approximately $530,000 in property and equipment. The Company's budget for the
calendar year 1997 was $750,000 and these purchases were within the planned
expenditures. For the fiscal year ending June 30, 1998, the Company's budget for
capital expenditures is $900,000. To increase production capacity, certain major
pond reworking programs are scheduled to be completed at a cost of approximately
$400,000. Management believes that in order to maintain productive catfish
farming operations over the long-term, 10 percent of ponds need to be reworked
each year and that capital will be required to maintain high levels of
production. The remaining $500,000 in property and equipment purchases planned
during the next year include additional aeration equipment to provide double
aeration to the refurbished ponds and vehicles and tractors to replace older
equipment. Also, in August 1997, the Company moved its administrative offices in
Mississippi to one of its farms from an office facility it had previously shared
with another catfish farming operation. This move required the purchase and
installation of double wide mobile trailer homes on the Company's farm land in
Sunflower, Mississippi. The total cost of this move was approximately $150,000,
including the trailers, utility hook-ups, well construction, and ground
preparation.
During the six month period ended June 30, 1997, the Company realized
proceeds from the sale of preferred stock and additional long-term borrowings of
$1,089,239 and $312,722, respectively. These funds were used to fund the
Company's operations and to increase its inventory as discussed above.
Additionally, principal payments totaling $149,708 were made to reduce long-term
debt and preferred stock dividends of $65,427 were paid during the six months
ended June 30, 1997.
The Company intends to fund its operations primarily through fish
sales, cash reserves, $925,000 in feed credit lines, the proceeds of sales from
the Company's Preferred Stock rights offering, additional credit lines and
long- and short-term debt, if needed. On April 16, 1997, a $750,000 credit line
was established with a bank in Mississippi as a revolving line of credit for
catfish feed purchases. Borrowings (which totaled $497,571 at June 30, 1997) are
secured by shares of the Company's cooperative processing stock and all accounts
receivable and live fish inventories on and related to seven of the Company's
eight farms. Interest is paid monthly and principal is paid with 50 percent of
all collections of accounts receivable from sales of the seven farms. Interest
accrues at the prime rate plus 165 basis points and the commitment expires March
8, 1998 with no prepayment penalty. During the quarter ending December 31, 1997,
the Company intends to attempt to obtain an additional credit facility of up to
$3,000,000. The Company anticipates its cash needs, including capital
expenditures, during the year ending June 30, 1998 will exceed its current
borrowing capacity. It is anticipated any new credit facility obtained will
replace the revolving line of credit mentioned above. This new credit facility,
if obtained, will give the Company added flexibility to access funds for general
corporate purposes and capital expenditures in addition to catfish feed
purchases.
In addition to the $750,000 credit line described above, the Company
has a $175,000 revolving feed credit line with a feed and processing company.
Approximately $31,000 was used at June 30, 1997. The interest rate is 10.25%
and the lender applies 34 cents for each pound of fish sold from the Balmoral
Farm as payment on the credit line. The collateral is a first lien on the
catfish inventory of the Balmoral Farm.
Management believes that additional capital will be necessary to
support the Company's growth. Management believes that the net proceeds from the
1997 stock rights offering, combined with its existing cash and cash
equivalents, long and short-term debt and product sales, will be adequate to
fund its planned existing operations and capital requirements discussed above
through June 30, 1998. Subsequent to June 30, 1997, $900,000 of the Company's
10.35% convertible notes were exchanged by debt holders into preferred stock.
Also, approximately $525,000, net of offering expenses, was raised from the
Preferred Stock rights offering. However, the Company may require additional
capital, which it may seek through equity or debt financing, collaborative
arrangements with corporate partners, equipment lease financing or funds from
other sources. No assurance can be given that these funds will be available to
the Company on acceptable terms, if at all. In addition, because of the
Company's need for funds to support future operations, it may seek to obtain
funds when conditions are favorable, even if it does not have an immediate need
for additional capital at such time.
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<PAGE> 22
ITEM 3. DESCRIPTION OF PROPERTY
REAL PROPERTY. The Company owns eight non-contiguous farms having a
total of 137 ponds comprising 1,843 water acres situated on a total of 2,417
land acres. The farms are located in the Mississippi Delta area of Mississippi.
The table below sets forth information regarding these properties.
INFORMATION REGARDING THE COMPANY'S REAL PROPERTY
<TABLE>
<CAPTION>
NAME UNPAID BALANCE OF
(LOCATION OF TOTAL ACRES NUMBER MORTGAGE LOAN AT
PROPERTY) (WATER ACRES) OF PONDS JUNE 30, 1997
--------- ------------- -------- -------------
<S> <C> <C> <C>
Circle Creek 275(210) 15 $ None
(Sunflower County, MS)
Panther Run 278(211) 15 None
(LeFlore County, MS)
Balmoral 318(270) 21 304,000(1)
(Sunflower County, MS)
Cypress Lake 254(193) 13 212,500(2)
(LeFlore County, MS)
Hidden Lakes 668 (443) 43 1,055,244(3)
(Bolivar County, MS)
Stillwater 170 (140) 8 134,700(4)
(Sunflower County, MS)
Crystal Waters 212 (189) 11 267,100(5)
(Bolivar County, MS)
Niagara 242 (188) 11 244,995(6)
(Bolivar County, MS)
</TABLE>
- ---------------------------------
(1) Note payable to an insurance company with current annual principal
payments of $16,000 through 2000 and the final installment of $256,000
due in 2001, with interest payable semi-annually at 7.7%. Note is
secured by real property with a book value of $830,000.
(2) Note payable to insurance company requiring annual principal payments
of $7,500 through 2002 and a final principal payment of $182,500 due in
2002 with interest payable semi-annually at 8.1%. Note is secured by
real property with a book value of $580,000.
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<PAGE> 23
(3) Note payable to a bank monthly principal and interest payments of
$11,754 through March 2000 and a final payment of approximately
$970,000 due April 2000 with interest at Prime plus 2 1/4%. Note is
secured by real property and equipment with a book value of $1,060,000.
(4) Note payable to Metropolitan Life Insurance Company requiring annual
payments of $6,100 through March 2004 and a final payment of $92,000
due September 2004 with interest payable semi-annually at 9.5%. Note is
secured by real property with a book value of $240,000.
(5) Note payable to a bank collateralized by land with a book value of
$370,000 requiring annual payments of $34,307, including interest at
variable rates (9.05% at June 30, 1997) through 2015.
(6) Note payable to a bank collateralized by land with a book value of
$500,000 requiring annual payments of $31,732, including interest at
variable rates (9.05% at June 30, 1997) through 2015.
- --------------------
The Mississippi Delta is an approximately 10,000 square mile area lying
predominately on the east side of the Mississippi River, beginning in the
vicinity of Memphis, Tennessee and extending into Mississippi. The portion of
the Delta where the Partnership's farms are located is approximately 44 feet
above sea level and is located approximately 5-1/2 hours by car from the Gulf of
Mexico and 1-1/2 hours by car from the Mississippi River. Accordingly, the farms
are not likely to be susceptible to flooding. The farms are located within
approximately 45 minutes of each other.
EQUIPMENT. The Company owns certain equipment; including tractors,
implements (including portable aerator attachments), utility trucks and electric
aerators. It also owns various lesser pieces of equipment, including electric
pumps and power units, and miscellaneous equipment.
COOPERATIVE MEMBERSHIPS. The Company has investments in the following
cooperatives:
Processing Cooperatives. AquaPro is a member of and owns
stock in the catfish cooperatives Delta Pride Catfish, Inc. ("Delta Pride") and
Fishco, Inc. ("Fishco"). Stock in these cooperatives provides the Company
with delivery rights for its catfish in amounts proportionate to its share
ownership. Prices paid by the cooperatives are not fixed in advance and are
determined at the time of delivery.
Feed Mill Cooperative. The Company is a member of and owns
stock in Indi-Bell (Delta Western) Feed Mill Cooperative. The Delta Western
Cooperative is one of the oldest and largest feed mill cooperatives with over
250 members. As a member of this cooperative, the Company is able to buy feed at
prices lower than are generally available from feed retailers. Also, for a
nominal charge, the Company is able to reserve or "lock-in" specified amounts
and at set prices. This cooperative hedges against price fluctuations for its
members through the purchase of futures option contracts on the Chicago Board of
Trade Futures Exchange. As a member of this cooperative, the Company can
purchase feed on an "as needed" basis on two days' prior notice. It is thus not
necessary for the Company to purchase and store large amounts of catfish feed.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 1997,
by each person or entity who is known to the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, the
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<PAGE> 24
beneficial ownership by each officer, Director and the beneficial ownership of
all Directors and Officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME & POSITION BENEFICIAL OWNERSHIP
OFFICERS AND DIRECTORS NUMBER OF COMMON SHARES(%)(1)
---------------------- -----------------------------
<S> <C> <C>
George S. Hastings, Jr. 369,774(2)(3) (11.76%)
President, Chief Executive Officer and Chairman of the Board
Patricia G. Hastings 369,774(2)(3) (11.76%)
Executive Vice President, Secretary and Director
Debra Kelly 18,000(4) (0.57%)
Vice President of Marketing
Roger Daley 61,373(5) (1.95%)
Director
Joseph F. Duncan, Sr. 32,933(6) (1.00%)
Director
All officers and directors as a group (five persons) 482,080 (15.33%)
</TABLE>
- -------------------
(1) In accordance with Rule 13d-3 promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"), Common Shares which are not
outstanding but which are subject to vested options, warrants, rights
or conversion privileges have been deemed to be outstanding for the
purpose of computing the percentage of outstanding Common Shares owned
by the individual having such right, but have not been deemed
outstanding for the purpose of computing the percentage for any other
person. The $6.25 Compensatory Options and Director Options referenced
in the table and below, are adjusted to reflect the one for five stock
dividend in September 1996 and previous to such adjustments had an
exercise price of $7.50.
The total number of Common Shares outstanding is 3,144,609 as of June
30, 1997, which includes 2,670,667 Common Shares issued and
outstanding, 313,224 Common Shares issuable on the mandatory conversion
of 235,507 shares of Series A Preferred Stock outstanding at June 30,
1997 and 160,718 issuable upon conversion of the Investor Notes assumed
by the Company in the Recent Consolidation. Neither Mr. Hastings nor
Ms. Hastings owns any shares of the Series A Convertible Preferred
Stock. No shares of the Series A Preferred Stock will remain
outstanding after the mandatory conversion date.
The number of Common Shares owned by each person equals the Common
Shares outstanding beneficially owned plus Common Shares issuable to
the beneficial holder upon the exercise of the rights, warrants and/or
options deemed to be outstanding.
(2) Includes the following Common Shares, warrants and options held of
record by Mr. Hastings: 108,776 Common Shares and 117,000 Common Shares
issuable upon the exercise of 108,000 $6.25 Compensatory Options and
9,000 Director Options.
(3) Includes the following Common Shares, warrants and options held of
record by Ms. Hastings: 107,998 Common Shares and 36,000 Common Shares
issuable upon the exercise of 27,000 $6.25 Compensatory Options and
9,000 Director Options.
(4) Includes 9,000 Common Shares held of record and 9,000 Common Shares
issuable upon the exercise of $6.25 Compensatory Options.
-22-
<PAGE> 25
(5) Includes 55,373 Common Shares held of record and 6,000 Common Shares
issuable upon the exercise of Director Options.
(6) Includes 23,993 Common Shares held of record and 9,000 Common Shares
issuable upon the exercise of $6.25 Director Options.
- -------------------
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the Directors and Executive Officers of AquaPro and
their ages, positions held and length of service.
<TABLE>
<CAPTION>
AN OFFICER OF THE
COMPANY (OR A DIRECTOR OF THE
PREDECESSOR OF THE COMPANY (OR
NAME AND AGE POSITION COMPANY) SINCE PREDECESSOR) SINCE
------------ -------- -------------- ------------------
<S> <C> <C> <C>
George S. Hastings, Jr. Chairman of the Board 1983 1983
Age 50 Chief Executive Officer
President
Patricia G. Hastings Executive Vice President, 1983 1983
Age 49 Secretary and Director
Eric P. Braschwitz Chief Financial Officer 1997 --
Age 40
Debra D. Kelly Vice President/National 1994 --
Age 40 Marketing Director
Roger Daley* Director -- 1996
Age 74
Joseph Duncan, Sr.* Director -- 1995
</TABLE>
* Independent director, i.e. director who is not an officer or employee of the
Company.
- ---------------------
None of the persons named are directors of any Reporting Companies.
"Reporting Companies" include companies with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or subject to the requirements of Section 15(d) of the 1934 Act, or
any company registered as an investment company under the Investment Company Act
of 1940, as amended (the "1940 Act").
Each of the Company's Directors serves a concurrent term of one year or
until his or her successor is elected and qualified.
Set forth below is a description of the business and employment
background of the Company's Directors and Executive Officers.
-23-
<PAGE> 26
George S. Hastings, Jr. has been involved in the catfish aquaculture
industry since 1986. Mr. Hastings has sponsored eight catfish farming programs,
including the Partnerships. Mr. Hastings has substantial experience in all
levels of catfish farm management. Mr. Hastings serves as an officer and
director of the Company's wholly-owned subsidiaries, American and Circle Creek,
the predecessor of which he co-founded in 1983. From 1976 through 1983, Mr.
Hastings worked in various capacities for Advanced Financial Planning
Corporation in Nashville, Tennessee, a financial planning firm emphasizing the
formation and sale of real estate investment programs. From 1983 to 1995 Mr.
Hastings owned 50% of and operated the Hastings/Huntingdon Companies which
provided financial planning, advisory and brokerage services to private
individuals and organizations. Mr. Hastings received his B.S. Degree in Finance
with a minor in accounting from the University of Tennessee and holds a J.D.
Degree from the University of Tennessee College of Law. Mr. Hastings has been a
member of the State Bar of Tennessee and the U.S. Tax Court since 1976.
Patricia G. Hastings has been involved in the catfish Aquaculture
industry since 1986. Ms. Hastings also serves as an officer and director of
American and Circle Creek, which she co-founded in 1983. From 1983 to 1995, Ms.
Hastings owned 50% of and operated the Hastings/Huntingdon Companies which
provided financial planning, advisory and brokerage services to private
individuals and organizations. Ms. Hastings and Mr. Hastings are married. Ms.
Hastings holds a B.A. Degree in English magna cum laude, Phi Beta Kappa from the
University of Tennessee and a J.D. Degree from the University of Tennessee
College of Law. Ms. Hastings was admitted to the Tennessee State Bar in 1976.
Eric P. Braschwitz joined the Company on March 3, 1997. Previously, Mr.
Braschwitz served as assistant controller for Camping World, Inc., a $200
million retailer with 25 store locations. At Camping World, Mr. Braschwitz was
responsible for all accounting and financial reporting and directly supervised a
staff of twelve and indirectly managed eighteen others. Prior to joining Camping
World in 1993, Mr. Braschwitz served for fourteen years in progressively more
responsible positions at Ernst & Young LLP and its predecessor firms. Mr.
Braschwitz has performed auditing services for a number of public companies and
has extensive experience in, among other fields, Securities and Exchange
Commission accounting and reporting. He has been a certified public accountant
since 1981. Mr. Braschwitz is 40 years old and received his Bachelors degree in
Business Administration with Option in Accounting degree from The University of
Texas at El Paso.
Debra D. Kelly has served as an officer of the Company since 1994.
Previously, Ms. Kelly worked as an international commodities trader in precious
metals and foreign currency for ten years. She also has financial planning
experience in mutual funds and annuities and was an independent public relations
coordinator for an internationally recognized firm for over five years. Ms.
Kelly is listed in Who's Who in Women of Finance and Marquis Who's Who of
American Women.
Roger A. Daley served as a Director of the Company effective September
16, 1996. Prior to his retirement in 1986, Mr. Daley served as General Manager
and President of the Knoxville News Sentinel, which he first joined as an
advertising sales representative in 1946. During his service with the News
Sentinel, the newspaper expanded five times and became agent for the Knoxville
Journal. Mr. Daley has also served as a guest consultant on business and
marketing for Taiwan and West Germany. He served as a charter member of and is
past president of the Knoxville Sales Executives Club and the Greater Knoxville
Advertising Club. He received the Printer Ink "Man of the Year" award and is a
charter member and served on the Board of the Better Business Bureau. Mr. Daley
has also served as a member of the American Newspaper Publishers
-24-
<PAGE> 27
Association and of the Southern Newspaper Publishers Association, for which he
served on several committees and served three years on that Board. In addition,
he has served in various capacities for numerous charitable and civic
organizations, including service on the Executive Council of the United Fund as
a past president of the Tourist Bureau and as vice president of the Chamber of
Commerce.
Joseph Duncan, Sr. has been elected and has served as a Director since
December 30, 1995. Mr. Duncan previously served as Chairman of the Board of
Security Alarms & Services Inc. ("SAS") until it was acquired by National
Guardian Services Corporation. Prior to that time, SAS was the largest
independently-owned, full-line security company in the Central South United
States, specializing in burglar and fire alarm systems, access control and
security guard services. Mr. Duncan is past president of the National Burglar &
Fire Alarm Association, and served as a member of the board of directors of that
trade association for fourteen years. In addition, Mr. Duncan served as a board
member or advisor to a number of national and regional trade associations
including the National Council of Investigation & Security Services, the Central
Station Alarm Association, and the Tennessee Burglar & First Alarm Association.
Mr. Duncan became a shareholder of the Company pursuant to the Prior
Consolidation and is also an investor in Circle Creek V.
Based upon a review on the Forms 3 furnished to the Company with
respect to its most recent fiscal year, each of the Company's Directors,
Executive Officers, Promoters and Control Persons failed to timely file his or
her initial Form 3 under Section 16(a) of the Securities and Exchange Act of
1934. Each person filed his or her report on or about September 29, 1997.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth remuneration to be paid by the Company
and/or its subsidiaries to its Chief Executive Officer and to its other highly
compensated executive officers of which there is only one whose annual salary
and bonus exceeds $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
VALUE OF SECURITIES
NAME AND PRINCIPAL POSITION RESTRICTED UNDERLYING
YEAR SALARY BONUS STOCK(1) OPTIONS(2)
---- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
George Hastings, Jr. 1996 $150,000 $56,000 $28,125 36,000
Chief Executive Officer(3) 1995 34,049 --- 28,125 36,000
Patricia G. Hastings 1996 $75,000 $6,000 $18,750 9,000
General Counsel, 1995 24,981 --- 18,750 9,000
Vice President, Secretary(3)
</TABLE>
- ---------------------
(1) Shares issuable on April 1, but subject to 2-year vesting whereby
shares will be lost if employee voluntarily terminates employment or is
terminated for cause before April 1, 1997. Shares were valued at $3.13
per Share, which is 50% of current value of $6.25.
(2) Options are exercisable for a 7-year period commencing on the date of
issuance at a price of $6.25 per Common Share. See discussion below.
-25-
<PAGE> 28
(3) Mr. Hastings and Ms. Hastings have agreed between themselves to share
equally their combined compensation from the Company.
The following table sets forth certain information regarding stock
options and warrants granted to each named Executive Officer by reason of their
employment during the Company's 1996 fiscal year.
<TABLE>
<CAPTION>
OPTION/WARRANT GRANTS IN 1996
INDIVIDUAL GRANTS
------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/WARRANTS
UNDERLYING GRANTS TO
OPTIONS/WARRANTS EMPLOYEES IN EXERCISE OR BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARE)(1) DATE
---- ---------- ----------- ------------ ----
<S> <C> <C> <C> <C>
George S. Hastings, Jr. 36,000(1) 70.6% $6.25 3/31/2003
Patricia G. Hastings 9,000(1) 17.6% $6.25 3/31/2003
</TABLE>
The following table sets forth the value of all unexercised employee
stock options and Director Options held by the Named Executive Officers as of
June 30, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION AND WARRANT VALUE TABLE
-----------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
------------------- --------------------
NAME
---- EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
---------------------------- -------------------------
<S> <C> <C>
George S. Hastings, Jr. 117,000/None None/None(1)
Patricia S. Hastings 36,000/None None/None(1)
</TABLE>
- ----------------------
(1) No Options are in-the-money based on the value of the Company's Common
Stock, which is estimated to be $6.25 per Share, as adjusted for the
September 18 Dividend.
EMPLOYMENT CONTRACTS. The Company has entered into separate written
employment agreements with Mr. George Hastings and Ms. Patricia Hastings.
Pursuant to their agreements each receives a base salaries of $150,000 per annum
and $75,000 per annum, respectively. In addition each is entitled to awards of
restricted stock and stock options and medical insurance coverage and to such
annual bonus compensation as determined by the Board of Directors. The award of
any bonus compensation, however, is dependent on the achievement of certain
performance levels by the Company, including growth in funds from operations
and/or water acres under management. The stock options awarded pursuant to such
employment contracts are exercisable for a term of seven years at an exercise
price equal to $6.25 per share and are exercisable upon issuance. Each agreement
has an initial three-year term and is automatically extended for an additional
year at the end of each year of the agreement, subject to the right of the
Company to terminate the contract for cause upon notice or voluntarily by giving
at least three months' prior written notice and the payment of severance payment
equal to three years of compensation.
-26-
<PAGE> 29
EXPLANATION OF LONG-TERM COMPENSATION. The employment contracts for
each of the executive employees provide for yearly issuances of Restricted
Stock, in the amounts stated, during the term of their contracts. Thus, total
stock of approximately 3% of the total outstanding will be issued each year.
Under their respective employment contracts, each of the executive employees is
awarded stock options in the amount stated entitling the holder to purchase
shares at a price of $6.25 per share. These options are for a term of seven
years.
COMPENSATION OF DIRECTORS. The Company does not pay its Directors cash
remuneration for their service but does reimburses each Director for his or her
out-of-pocket expenses incurred in connection with attending meetings. In
addition, commencing for its fiscal year 1995, the Company annually awards each
Director (including Directors who are officers of the Company) options for the
purchase of 3,000 Shares (the "Director Options"). The Director Options have a
term of seven years and are exercisable at a price equal to the estimated market
value of the common shares on the date of issuance. These options have a term of
seven years.
STOCK OPTION PLAN. The Board and the shareholders have approved and
authorized a stock option plan for officers, directors, employees and
consultants to the Company. The Plan is designed to comply with Rule 16b-3 under
the 1934 Act. The purpose of the stock option plan is to encourage stock
ownership by current and future officers, directors, employees and consultants
to the Company, and certain other persons judged by the committee who would
administer the plan to be instrumental to the success of the Company, and to
give such persons a greater personal interest in the Company achieving continued
growth and success. The stock option plan would be administered by persons who
are "disinterested persons" within the meaning of paragraph (c)(2) of Rule
16b-3.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION OF REGISTRANT
At December 31, 1995, the Company became sole owner of American and
Circle Creek. Mr. Hastings and Ms. Hastings were the sole owners of American and
Circle Creek (formerly Hastings and Company, Inc.) at the time of their
acquisition. Mr. Hastings and Ms. Hastings received 105,334 shares of Common
Stock of the Company in connection with the Company's acquisition of American
and Circle Creek. In connection with the Company's acquisition of American and
Circle Creek, Mr. Hastings and Ms. Hastings assigned all of their right and
title to the economic interest of the general partner in each of the Circle
Creek Partnerships to the Company.
Pursuant to the Prior Consolidation, the Company acquired all of the
assets and liabilities of CCA I, CCA II, CCA III and CCA IV. Pursuant to such
transaction, Mr. Hastings and Ms. Hastings received 4,584 units of Common Stock
and Common Stock purchase rights from the Company in exchange for their limited
partnership interest in these partnerships on the same basis as the other
limited partners. In addition, Mr. Hastings and Ms. Hastings received 2,994
units at $10.00 per unit and purchased 18,864 shares at $7.25 per share in
cancellation of $166,704 of debt owing to them by these partnerships.
Pursuant to the Recent Consolidation, the Company acquired all of the
assets and liabilities of CCA V, CCA VI, CCA VII, and CCA VIII. Pursuant to such
transaction, Ms. Hastings received 4,958 units of
-27-
<PAGE> 30
Common Stock and Common Stock purchase rights from the Company in exchange for
her limited partner interest in CCA VI on the same basis as the other limited
partners.
THE PRIOR CONSOLIDATION
GENERAL. On December 31, 1995 (the "Closing Date"), Registrant (i)
acquired by statutory merger all of the assets and liabilities of the four
participating partnerships (CCA I, CCA II, CCA III, and CCA IV) in consideration
for the issuance of units of its equity securities and/or 10.35% convertible
Notes (the "Prior Consolidation") and (ii) retired certain debt obligations of
the participating partnerships ("Investor Notes") in exchange for the 10.35%
Notes.
The foregoing prices and amounts of the securities issued in the Prior
Consolidation have been adjusted to reflect the September 18, 1996 stock
dividend. Each unit issued in the Prior Consolidation was comprised of one stock
right entitling the holder to purchase one and two-tenths (1.2) share of the
Company's no par value common stock (a "common share") for $6.04; one warrant
entitling the holder to purchase one and two-tenths (1.2) common share for
$6.875 within twelve (12) months following the Closing Date; and one warrant
entitling the holder to purchase one common share for $8.75 within twenty-four
(24) months following the closing date, which warrant, if not exercised prior to
expiration, is converted into thirty-six one hundredths (0.36) common share.
TERMS OF ACQUISITION. The table below sets forth the following with
respect to the Prior Consolidation: (a) the estimated Net Asset Value ("NAV") at
the Closing Date for each of the partnerships; (b) the maximum number of units
allocable to each of the partnerships; and (c) the maximum number of units
allocable to the participating limited partners and the maximum number of 10.35%
Notes that the participating limited partners could receive in lieu of units.
<TABLE>
<CAPTION>
ALLOCATION PER $1,000 OF
MAXIMUM ALLOCATION ORIGINAL INVESTMENT BY
TO LIMITED PARTNERS LIMITED PARTNERS IN EITHER
IN UNITS OR 10.35% NOTES UNITS OR 10.35% NOTES (5)
PERCENTAGE OF ------------------------ -------------------------
ESTIMATED AGGREGATE EST.
NET ASSET NET ASSET NUMBER FACE VALUE NUMBER FACE VALUE
PARTNERSHIP VALUE VALUE(1),(2) OF UNITS(3) OF NOTES(4) UNITS(3) OF NOTES
- ----------- ----- ------------ ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CCA I $ 659,735 13.22% 79,168 $ 263,894 57.72 $481
CCA II $ 868,805 17.42% 104,257 $ 347,522 74.88 $624
CCA III $1,126,041 22.57% 135,124 $ 450,416 82.80 $690
CCA IV $1,544,627 30.96% 185,354 $ 617,850 100.08 $834
---------- ------ ------- ---------- ------ ----
TOTAL Units Offered
to Partnerships: $4,199,208 84.17% 503,903 $1,679,682
</TABLE>
- ----------------------
(1) "Percentage of Aggregate Estimated Net Asset Value" represents the
percentage of the total Net Asset Value of the consolidated AquaPro
corporation, of which the partnerships together represented 84.17%.
(2) Neither the General Partner nor AquaPro received units or 10.35% Notes
in connection with the general partner interest or a sponsor's
"promotional" interest in a participating partnership.
(3) This represents the maximum number of units which could have been
issued by AquaPro to the limited partners with respect to their
interest in the partnership. Based upon the respective partnership NAV
and
-28-
<PAGE> 31
computed by dividing the partnership's NAV by the price per unit.
Calculations use a unit price of $8.33 per unit.
(4) The issuance of the 10.35% Notes was subject to the Note Restriction
and, as a result, the total face value of the 10.35% Notes is shown as
40% of the estimated aggregate Net Asset Value of a participating
partnership. Based upon the estimates of Net Asset Value used in the
Allocation Table, this represents the maximum aggregate principal
amount of the 10.35% Notes that AquaPro could have issued to the
limited partners of the partnerships in lieu of the units to which the
limited partners would otherwise be entitled. The Table does not
reflect units which were issued in exchange for Investor Notes or in
exchange for short-term debt owed Mr. Hastings by CCA III.
(5) The initial capital contribution for investment L.P. Unit in a
partnership was $19,895 for each of the partnerships. All comparisons
have been made in reference to an original capital contribution of
$1,000. Calculations use a unit price of $10 per unit.
- ------------------
In the Prior Consolidation, the limited partners of the participating
partnerships received the Company's units and 10.35% notes through their
respective New Corps as follows:
<TABLE>
<CAPTION>
NEW CORP UNITS 10.35% NOTES
-------- ----- ------------
<S> <C> <C>
CCA I 64,318 $ 16,746.60
CCA II 83,146 $ 37,243.50
CCA III 108,412 $ 41,182.70
CCA IV 148,888 $ 53,925.30
------- -----------
404,764 $149,098.10
======= ===========
</TABLE>
The 10.35% Notes issued in the Prior Consolidation are due December 31,
2002 and bear interest at the rate of 10.35% per annum for the period from and
including the date of original issuance. The 10.35% Notes are convertible into
Common Shares at a price of $10.42 per share.
The number of units issued in the Prior Consolidation was derived by
dividing the NAV of each partnership by a $8.33 unit price, as adjusted for the
September 18 Dividend. A unit price of $8.33 was chosen based on a value of
$6.25 per common share, which was the price used for the purposes of the Prior
Consolidation and was not based on any market or trading price. The 10.35% Notes
were offered in exchange at their par.
On the closing date, each of the four participating partnerships were
incorporated and were merged into the Company in accordance with the Amended
Plan and Agreement of Consolidation. In accordance with this agreement, each
participating partnership organized a new corporation (a "New Corp"), and, on
the Closing Date, transferred all of its assets and liabilities to its New Corp
in consideration for the New Corp's stock and debt obligations. The Respective
New Corps were then merged into Registrant. In the mergers, each limited partner
received a pro rata share of Registrant's units or 10.35% Notes for their
limited partner interests. Following the Closing Date, each participating
partnership dissolved and liquidated in compliance with Tennessee law.
-37-
<PAGE> 32
The Investor Note exchange phase of the Prior Consolidation expired on
January 30, 1996. As a result, holders of the Investor Notes elected to receive
units or 10.35% Notes in the exchange for their Investor Notes. As a result of
the Investor Note exchange offer, the Company issued a total of 163,753 units
and a total of $214,495 principal amount of 10.35% Notes to the holders of the
Investor Notes.
Neither Mr. Hastings or Ms. Hastings nor the Company received units or
10.35% Notes in connection with the General Partner interest in the
participating partnerships. The Hastings received no other compensation in
connection with the Prior Consolidation other than units in exchange for the
L.P. units they owned in the participating partnerships. Mr. Hastings owned 1.25
L.P. units in CCA II, 1.0 L.P. units in CCA III and 1.0 L.P. units in CCA IV and
elected to receive units for his limited partnership interests in the Prior
Consolidation. In addition, Mr. Hastings exchanged approximately $136,764 of
debt owed to him for cash advances by the participating partnerships for units
and for Stock upon the exercise of $7.25 Stock Rights received thereby.
DESCRIPTION OF THE ACQUIRED PARTNERSHIPS. Each of CCA I, CCA II, CCA
III, CCA IV was sponsored by Mr. Hastings, as sole General Partner, for the
purpose of acquiring a specified farming property and operating thereon a
catfish Aquaculture business. Each of these partnerships was intended to operate
its catfish farm for a period of approximately ten (10) years after which the
General Partner would, if practical, attempt to sell or otherwise dispose of the
Partnership's farming property and business for a profit. Accordingly, each of
the Partnerships was formed for long-term investment with a life cycle ranging
from 10 to 15 years or longer. Each of the Partnerships was organized under
Tennessee law. The following tables provide selected information regarding the
Investments of the Prior Partnerships.
<TABLE>
<CAPTION>
PARTNERSHIP ORGANIZATION AND CAPITALIZATION
NAME OF NO. OF DATE OF ORIGINAL LIMITED PARTNER INVESTOR NOTES MORTGAGE DEBT(1)
PARTNERSHIP PARTNERS ORGANIZATION CAPITAL (L.P. UNITS) AT 7/31/1995(1) AT 7/31/1995
- ----------- -------- ------------ -------------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
--
CCA I 56 3-31-1989 $1,372,755 $1,189,500 --
CCA II 63 4-16-1990 $1,392,650 $ 962,600 $336,000
CCA III 59 9-23-1990 $1,631,390 $ 260,951 $227,500
CCA IV 80 5-30-1991 $1,850,235 --
</TABLE>
<TABLE>
<CAPTION>
INFORMATION REGARDING PARTNERSHIP PROPERTIES
APPRAISED
TOTAL ACRES NUMBER PURCHASE PRICE VALUE OF FARM
NAME OF (WATER ACRES) OF PONDS OF FARM PROPERTY AT
PARTNERSHIP OWNED OWNED PROPERTY(1) 7/31/1995
----------- ----- ----- ----------- ---------
<S> <C> <C> <C> <C>
CCA I 275 (210) 15 $204,875 $482,479
CCA II 278 (211) 15 $222,400 $466,700
CCA III 318 (270) 14 $625,100 $524,700
CCA IV 254 (193) 13 $488,813 $387,550
</TABLE>
-30-
<PAGE> 33
<TABLE>
<CAPTION>
INFORMATION REGARDING PARTNERSHIP TANGIBLE ASSETS
CASH AND
ACCOUNTS CATFISH INVESTMENTS IN EQUIPMENT AND Total Tangible
NAME OF RECEIVABLE AT INVENTORY AT COOPERATIVES REAL PROPERTY Assets at
PARTNERSHIP 7-31-1995(1) 7-31-1995(1) AT 7-31-1995(1) AT 7-31-1995(1)(2) 7/31/1995(1)
----------- ------------ ------------ --------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
CCA I $ 77,787 $556,426 $134,123 $541,220 $1,309,556
CCA II $106,238 $711,939 $181,135 $594,512 $1,593,824
CCA III $106,243 $661,313 $311,665 $689,568 $1,768,789
CCA IV $ 47,975 $472,345 $334,442 $548,880 $1,403,642
</TABLE>
- ------------------
(1) Unaudited. July 31, 1995 was the appraisal date for the Prior
Consolidation.
(2) Net of accumulated depreciation.
- ------------------
THE RECENT CONSOLIDATION
As of June 30, 1997 (the "Closing Date"), each of CCA V, CCA VI, CCA
VII and CCA VIII was merged into the Company under the laws of the state of
Tennessee. As a result thereof, the Company assumed all of the assets and
liabilities of the merged Partnership and the Company's Units and Notes, as
described below, were distributed to the limited partners of the merged
Partnerships in accordance with their elections.
The Company and the partners of each Participating Partnership approved
the Consolidation on April 16, 1997 and June 30, 1997, respectively. The
Company's Shareholders approved the Consolidation by a greater than 85% vote.
More than 98% of the Limited Partners of each Partnership approved the
Consolidation by written consent. No Shareholder of the Company elected to
exercise his or her dissenter's rights with respect to the Consolidation as may
have been provided under Tennessee corporate law.
In the Consolidation, AquaPro (i) acquired by merger all of the assets
and assumed all of the liabilities of the four Participating Partnerships in
consideration for the issuance of its Units and its 7.15% Notes, (ii) offered
the holders of the Investor Notes the opportunity to exchange their investor
Notes for shares of the Preferred Stock, and (iii) is offering the Preferred
Stock upon exercise of the Stock Rights in the subject Offering.
TERMS OF THE MERGERS. The Company offered up to 722,232 Units and/or up
to $658,606 in principal amount of its 7.15% Notes to acquire the assets of the
Partnerships. Participating Limited Partners had the right to elect either
Units or Notes with respect to the L. P. Units. The amount of Units and Notes
the Company offered to the Partnerships in the Consolidation was determined in
accordance with two sets of procedures: first, procedures for the external
allocation of the consideration among the Participating Partnerships; and
second, procedures for the internal allocation of the consideration payable to
each Participating Partnership among the Participating Limited Partners.
Each Unit was comprised of One (1) Share; One (1) Stock Right; One (1)
$7.50 Warrant entitling the holder to purchase one share for $7.50 within twelve
(12) months following the Closing Date; and One (1) $9.50 Warrant entitling the
holder to purchase one share for $9.50 within twenty-four (24) months following
-31-
<PAGE> 34
the Closing Date. Each of the $7.50 Warrants and the $9.50 Warrants is converted
into three-tenths (3/10) Share if not exercised before they expire and upon
exercise, the holder will receive a credit against the exercise price equal to
the greater of 30% of the Exercise Price or 30% of the then market value of the
common shares, as defined. The 7.15% Notes issued in the Consolidation are due
December 31, 2003 and bear interest at the rate of 7.15% per annum for the
period from and including the date of original issuance. The Notes are
convertible at a price of $10.50 per share.
Both of the $7.50 Warrants and the $9.50 Warrants were called
immediately upon issuance. As a result, each Unit as issued was composed of 1.6
common shares and one $9.50 Stock Right.
The 7.15% Notes. The Notes bear interest at the rate of
7.15% per annum for the period from and including the date of original issuance.
The Notes are convertible into common shares at any time at the election of the
holder at a price of $10.00 per share. The Notes are redeemable at any time, or
from time to time, by AquaPro for a Redemption Price equal to their unpaid
principal balance plus accrued interest to the date called for prepayment.
The Series A Preferred Stock. The Series A Preferred Stock
(the"Preferred Stock") which underlie the $9.50 Stock Rights are part of a
series of up to 2,000,000 shares of Preferred Stock the Company is authorized to
issue. As of September 1, 1997, there were 352,000 shares of Preferred Stock
outstanding. The Preferred Stock pays cumulative dividends at the annual rate of
$.70.
The Company has relied upon the exemption from registration under the
Securities Act of 1933 (the "1933 Act") contained in Section 3(a)10 thereof. The
Company bases its reliance upon the fairness hearing held by the California
Commissioner of Corporations pursuant to Section 25142 of the California
Corporate Securities Law of 1968 on March 31, 1997, and on the Certificate of
Issuance of Permit and the issuance of permit dated April 30, 1997. For your
information, we supplementally enclose copies of the Notice of Hearing mailed to
all shareholders of the Company and limited partners and investor note holders
of each the subject Partnerships. We note that the Commission has held in
numerous no-action letters that fairness hearings pursuant to Section 25142 of
the California Corporate Securities Law satisfy the fairness hearing
requirements for the 3(a)10 exemption.
Neither the General Partner nor the Company received Shares or Notes in
connection with the General Partner interest in the Participating Partnerships.
The General Partner received no other compensation in connection with the Recent
Consolidation other than Units in exchange for the L.P. Units owned by
Affiliates. Ms. Patricia Hastings held 314 L.P. Units in CCA VI. The General
Partner and his Affiliates own no other L.P. Units in the Partnerships.
Participating Limited Partners who are subject to income tax will
realize taxable gain or loss in the Recent Consolidation. The amount of any gain
or loss recognized by Participating Limited Partners who are subject to income
tax will be based upon the allocation provisions of the Partnership Agreement,
as amended, of their Partnership as of the date of the Recent Consolidation. No
special distributions of cash will be made to Participating Limited Partners for
the payment of any tax. In general, any gain or loss will be recognized
-32-
<PAGE> 35
in the year of the Recent Consolidation. The gain or loss from a Recent
Consolidation generally will be treated as arising from the sale of assets used
in a trade or business and will be characterized as capital gain or loss or
ordinary income or loss, depending upon the amount of each Participating Limited
Partner's gains or losses attributable to any sales of assets used in a trade or
business. Participating Limited Partners who are not subject to income tax will
not recognize a material amount of unrelated business taxable income (UBTI) in
the Recent Consolidation.
The Company intends to use the net proceeds from the sale of the Series
A Preferred Stock pursuant to the exercise of the Stock Rights, if any, for
operating expenses, scheduled maintenance and capital improvements on farming
properties, the repayment of debt, and, to the extent such proceeds are
available, for expansion of its catfish inventories and working capital. There
is no assurance that the Company will realize proceeds from the Stock Rights
Offering or that such proceeds to the extent realized will be sufficient to
accomplish one or more of the foregoing.
Under the terms of the Consolidation, the Company acquired the assets
and liabilities of each Participating Partnership by statutory merger under the
laws of the state of Tennessee. Pursuant thereto, the limited partners of each
Partnership elected to receive either Units or 7.15% Notes in consideration for
their Partnership interests. As a result of the Consolidation, the Company
issued its Units and 7.15% Notes to the limited partners of the Partnerships as
follows:
<TABLE>
<CAPTION>
NUMBER 7.15%
PARTNERSHIP OF UNITS NOTES
----------- -------- -----
<S> <C> <C>
CCA V 340,662 $37,056
CCA VI 152,773 23,379
CCA VII 109,518 None
CCA VIII 105,973 8,147
------- -------
Total 708,926 $68,582
</TABLE>
The transactions constituting the Consolidation were approved by the
shareholders of the Company at their annual meeting on April 16, 1997. Under the
Corporations Law of the state of Tennessee, shareholders who either vote against
certain mergers or abstain from voting have the right to elect by written notice
to dissent and receive cash payment for their shares ("Dissenters' Rights"). The
holders of approximately 155,000 shares of the Company's common stock voted
against or abstained from voting on the transactions. The Company gave notice to
these shareholders of their possible Dissenters' Rights; no shareholders have
delivered notice of their election of such Dissenters' Rights.
Pursuant to the Recent Consolidation, the Company assumed a total of
$1,147,513 of collateralized notes of the Partnerships (the "Investor Notes").
The Investor Notes were convertible into Partnership interests, and by reason of
the Consolidation, into Units of the common stock of the Company at prices
ranging from $10.56 to $12.26 per share. The Investor Notes bear interest at a
rate of 10.35% per annum and are payable
-33-
<PAGE> 36
interest only on a quarterly basis until maturity, when they are due and payable
in full. Maturities of the Investor Notes occur in 1999 and 2000. Payment of the
Investor Notes is secured by liens on the catfish inventories of the issuing
Partnership.
Pursuant to the terms of the Recent Consolidation, the Company is
offering to retire the Investor Notes in exchange for shares of its Series A
Preferred Stock (the "Investor Note Exchange"). This offer terminated on
September 5, 1997. In the Investor Note Exchange, the Company is offering
to exchange shares of its Preferred Stock for the Investor Notes at the rate of
1.30 shares of Preferred Stock per $10.00 of unpaid balance of principal and
interest on the Investor Note as of the date of exchange. Approximately 117,000
shares of the Series A Preferred Stock were issued in the Investor Note
Exchange. The Investor Notes of those persons electing not to exchange their
Investor Notes will remain outstanding and were assumed by AquaPro pursuant to
the Consolidation.
ALLOCATION OF UNITS. The number of Units offered to each Participating
Partnership was derived by dividing the Net Exchange Value ("NEV") of that
Partnership by the Exchange Ratio. See "Computation of Net Exchange Values"
below. The Units (and the Notes) were allocated among the Partnerships in
accordance with their respective NEV, subject to adjustment in limited
circumstances. Under the Consolidation Agreement with each Partnership, each
participating Limited Partner was entitled to his or her pro rata share of the
consideration allocated to the Partnership based upon the participating Limited
Partners' relative percentage ownership of L.P. Units in his or her Partnership.
Each participating Limited Partner could elect to receive Notes subject to
satisfaction of elections by any Dissenting Partners and subject to the Note
Restriction.
The Table below sets forth: (a) the NEV of each Partnership for the
purposes of the offer; (b) the maximum number of Units allocable to each
Partnership; and (c) the maximum number of Units allocable to the participating
Limited Partners of each Partnership and the maximum number of Notes that the
Participating Limited Partners could receive in lieu of Units.
<TABLE>
<CAPTION>
AMOUNT OFFERED PER
$1,000 OF ORIGINAL
MAXIMUM OFFERED TO INVESTMENT BY LIMITED
LIMITED PARTNERS IN EITHER PARTNERS IN EITHER SHARES
UNITS OR NOTES OR NOTES(4)
-------------- -----------
NET EXCHANGE NUMBER FACE VALUE NUMBER FACE VALUE
PARTNERSHIP VALUE(1) OF UNITS OF NOTES OF UNITS OF NOTES
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CCA V $1,582,104 346,989 $316,421 102.95 $469.38
CCA VI 719,962 157,903 143,992 157.90 719.96
CCA VII 499,338 109,515 99,868 103.25 470.76
CCA VIII 491,628 107,825 98,326 119.14 543.24
TOTAL $3,293,032 722,232 $658,607 --- ---
100%
Partnership
Participation
</TABLE>
- -------------------
-34-
<PAGE> 37
(1) These amounts were subject to adjustment at the Closing under limited
circumstances.
(2) This represents the maximum number of Units issuable by AquaPro to the
Limited Partners with respect to their L.P. Units in the Partnership
based upon the respective Partnership NEV and computed by multiplying
the Partnership's NEV by the Exchange Ratio.
(3) The issuance of the Notes was subject to the Note Restriction and as a
result the total face value of the Notes is shown as 20% of the
estimated aggregate Net Exchange Value of a Participating Partnership.
Based upon the estimates of Net Exchange Value used in the Allocation
Table, this represents the maximum aggregate principal amount of the
Notes that AquaPro was prepared to issue to the Limited Partners of the
Partnerships in lieu of the Units to which the Limited Partners would
otherwise be entitled.
(4) All comparisons have been made in reference to an original capital
contribution of $100 per L.P. Unit.
- --------------------
TERMS OF ACQUISITION
The number of Units offered to each Partnership for its assets was
determined by the following formula:
Number of Units = Partnership's NEV x EXCHANGE RATIO
Where: EXCHANGE RATIO = (Total Units Offered by AquaPro in Prior Consolidation)
-------------------------------------------------------
Total NEV of CCA I, CCA II, CCA III and CCA IV
The Units and the Notes were allocated among the Partnerships in
accordance with the NEV of each Partnership (subject to adjustment in limited
circumstances, as described below). Under the merger agreements, each
Participating Limited Partner is entitled to his or her pro rata share of the
consideration allocated to his or her Participating Partnership based upon his
or her percentage Limited Partner interest in the Participating Partnership.
Each Participating Limited Partner had the opportunity to elect to receive Notes
rather than Units subject to satisfaction of elections by any Dissenting
Partners and subject to restriction that the Notes issued to a Participating
Partnership could not exceed 20% of that Partnership's NEV ("the Note
Restriction").
The fairness of the methodology of determining the respective values of
the Partnerships and AquaPro for the purposes of the Consolidation and the
determination of the amount of Units offered to the Partnerships in the
Consolidation was reviewed by Bishop-Crown Investment Research, Inc.
("Bishop-Crown"), an independent investment valuation and research firm.
Bishop-Crown rendered its Fairness Opinion for the Consolidation. Bishop-Crown
also issued a fairness opinion in the consolidation of CCA I-IV.
Determination of Exchange Ratio. The Exchange Value was
determined based on the ratio of units issued for the value of the net assets of
CCA I, CCA II, CCA III and CCA IV in the prior consolidation principally because
the Company and Bishop-Crown believed that this ratio was the simplest and most
reasonably likely method of assuring equal treatment of all of the Circle Creek
Partnerships. Because the businesses and assets of each of the eight Circle
Creek Partnerships were essentially qualitatively the same, the ratio of units
to unit of Net Asset Value for each of the Partnerships should have been the
same. This assumes that the method of determining the Net Asset Value of each of
the Partnerships was equally applicable
-35-
<PAGE> 38
and consistently applied to each Partnership. Any bias in the method towards a
higher or lower value would be more or less equally applied to each of the
Partnerships and equally reflected in the exchange ratio.
ALLOCATION OF UNITS. The company offered up to 722,232 Units to the
Partnerships in the merger transactions. The number of Units offered to each
Partnership was derived by dividing the total of the NEV of that Partnership by
the Exchange Ratio. See "Determination of Net Exchange Values" below. The Units
(and the Notes) were allocated among the Partnerships in accordance with their
respective NEV, subject to adjustment in limited circumstances. Under the
Consolidation Agreement with each Partnership, each participating Limited
Partner was entitled to his or her pro rata share of the consideration allocated
to the Partnership based upon the participating Limited Partners' relative
percentage ownership of L.P. Units in his or her Partnership. Each participating
Limited Partner could elect to receive Notes subject to satisfaction of
elections by any Dissenting Partners and subject to the Note Restriction.
COMPUTATION OF NET EXCHANGE VALUES. The NEV of each of CCA I, CCA II,
CCA III, and CCA IV ("CCA I - CCA IV") was determined as of December 31, 1995
(the Closing Date of the Prior Recent Consolidation) in the same manner as
described above for CCA V, CCA VI, CCA VII, and CCA VIII in the Recent
Consolidation.
The NEV of each Partnership was calculated as the sum of the fair value
of the respective assets of each Partnership as of September 30, 1996 (the
"Appraisal Date"), less their respective Liabilities on the Appraisal Date,
including the Partnership's Investor Notes. For the purposes of allocating Units
in the Recent Consolidation, the estimated Net Exchange Value of CCA I -CCA IV
were calculated as of December 31, 1995, the closing date of the Prior
Consolidation. These estimated Net Exchange Values were calculated in the same
manner as those for the Partnerships. The value of the assets of each
Partnership was calculated based on the appraised values of the Partnerships'
real and personal property, as described below.
Adjusted Cash. A total of $131,678 of Consolidation costs were
charged to CCA I-IV and reflected on their respective December 31, 1995
financial statements. Consolidation expenses have not been charged to CCA V-VIII
and are not reflected in their respective NEVs. Thus, these charges to CCA I-IV
were credited to cash to determine their combined NEV. A total of $149,136 was
included in Adjusted Cash. This amount represents pond
improvement/reconstruction expenditures by CCA III and CCA IV during 1995 which
were not reflected in the Appraisals for those Partnerships.
Live Fish Inventory. The market value of the live fish
inventory of each of CCA V-VIII was determined by estimating the number and
respective size by weight of the Partnership's inventory fish at December 31,
1995 for CCA I-IV and September 30, 1996 for CCA V, CCA VI, CCA VII and CCA
VIII. The market value was then calculated based on the prevailing wholesale
price per pound for food fish and a fingerling price of $1.20 per pound at the
time of estimation. The estimated number of each size of fish is based on the
Company's inventory accounting procedures, actual inventory sampling and the
FISHY program statistical estimates. In valuing the inventory, rates of loss by
reason of future mortality or delays in the sale and/or delivery of inventory
were ignored. The inventory values reflect all adjustments to the date of
valuation by reason of mortality loss rate and reserve changes. Adjustments
after the respective valuation dates are not taken into account. Thus, the
inventory for CCA I-IV at December 31, 1995 does not reflect the subsequent
adjustments of $450,923 for mortality loss and loss reserves against future
mortality loss made to certain of the CCA I-IV inventories. Even though such
adjustments were, at least in part, made as of December 31, 1995,
-36-
<PAGE> 39
they were not included in valuing the CCA I-IV inventory because, among other
things (1) they were made after the closing of the Prior Consolidation, (2) the
consolidation agreement for the Prior Consolidation placed the risk of
subsequent asset adjustments on the Company, not the transferring Partnership,
and (3) the terms of the Prior Consolidation did not provide for adjustment of
the consideration (i.e. number of Units) paid by reason of the Consolidation in
the event of subsequent asset adjustments. Moreover, in the Recent
Consolidation, the same terms will apply and none of the Participating
Partnerships will be at risk for inventory or other asset adjustments occurring
after the closing date.
Machinery and Equipment. For the purposes of both the Prior
Consolidation and the Recent Consolidation, the value of the machinery and
equipment of each of CCA V-VIII and the CCA I-IV Partnerships is the highest
estimated market value realizable upon resale of the Partnership's farm
equipment and machinery. For the purposes of both the Prior Consolidation and
the Recent Consolidation, the value for each of CCA V-VIII and CCA I-IV as a
group is determined as a fraction of undepreciated costs. The fraction applied
was determined based on the general condition and age. The following fractions
were applied.
<TABLE>
<CAPTION>
PARTNERSHIP CCA I-IV CCA V CCA VI CCA VII CCA VIII
----------- -------- ----- ------ ------- --------
<S> <C> <C> <C> <C> <C>
Value as fraction of 0.60 0.60 0.50 0.60 0.60
undepreciated cost.
</TABLE>
Investment in Circle Creek Seining Partnership. Circle Creek
Seining Partnership ("CCSP") is a partnership formed and operated to share
inventory, transportation and certain maintenance equipment costs among its
partners. Its assets consist almost entirely of machinery and equipment which
for the valuation purposes were valued at 50% of its original cost on the same
basis as the valuation of the machinery and equipment of each Partnership. See
discussion above. Because each Partnership's investment in CCSP represents the
depreciated cost of its investment in CCSP, for valuation purposes, each
Partnership's investment in CCSP was treated as a direct interest in CCSP's
machinery and equipment.
Real Property. For both the purposes of both the Prior
Consolidation and the Recent Consolidation, the value of the real property of
each of CCA V-VIII and of CCA I-IV is the appraised value of the property
determined by Mr. William J. Toler, independent real estate appraiser, and is
supported by an appraisal report by Mr. Toler.
Cooperative Stock. For both the purposes of both the Prior
Consolidation and the Recent Consolidation, the cooperative stock owned by each
of CCA V-VIII and CCA I-IV is valued at its cost.
The table below sets forth the calculation of the NEV for each
Partnership.
-37-
<PAGE> 40
<TABLE>
<CAPTION>
AT 12/31/1995 (UNAUDITED) AT 9/30/1996 (UNAUDITED)
------------------------- ----------------------------------------------------------------------
Partnerships
(CCA I-IV) CCA V CCA VI CCA VII CCA VIII
<S> <C> <C> <C> <C> <C>
ASSETS
Adj. Cash(1) $ 356,538 $ 30,786 $ 22,302 $ 25,848 $ 21,188
Acc. Receivable 100,503 37,146 52,419 25,392 43,407
Prepaid Expenses 65,100 -0- -0- -0- -0-
Inventory (at Market Value) 3,019,915 1,931,450 574,430 526,430 693,240
Coop Stock 659,912 319,755 145,900 43,950 60,000
C.C. Seining (at Market Value) 61,712 52,224 25,054 30,000 32,465
Machinery & Equip.(at Mkt Value) 364,268 171,689 60,902 108,520 141,641
Real Property (at appraised value)(2) 1,861,429 950,000 268,300 359,740 445,197
---------- ---------- ---------- ---------- ----------
Total Assets at Fair Market Value $6,489,377 $3,493,050 $1,149,307 $1,119,880 $1,437,138
---------- ---------- ---------- ---------- ----------
LIABILITIES
Current Liabilities $ 267,650 $ 110,776 $ 27,118 $ 28,432
Long-Term Liab. 1,643,295 318,569 593,424 917,078
---------- ---------- ---------- -------- --------
Total Liabilities $4,191,814 $1,910,945 $ 429,345 $620,542 $945,510
---------- ---------- ---------- -------- --------
NET EXCHANGE VALUE (NEV)(3) $2,297,563 $1,582,105 $ 719,962 $499,338 $491,628
---------- ---------- ---------- -------- --------
EXCHANGE RATIO
Original Capital $3,370,550 $1,000,000 $1,060,700 $ 905,000
---------- ---------- ---------- ----------
NEV PER ORIGINAL $1000 INVESTMENT $469.39 $719.96 $470.76 $543.24
Units Offered(4) 419,921
Ex Div-x1.20 503,905
Units Offered (5) 346,989 157,903 109,515 107,825
UNITS OFFERED PER ORIGINAL $1000 INVESTMENT 102.95 157.90 103.25 119.14
------- ------- ------- ------
7.15% Note/$1000 inv.(6) $469.39 $719.96 $470.76 $543.24
------- ------- ------- -------
</TABLE>
- ------------------
Notes:
(1) Includes cash equivalents and certain adjustments. See discussion above.
(2) Based on independent appraisals.
(3) Net Exchange Value equals "Total Assets (appraised)" less "Total
Liabilities."
(4) The maximum number of Units offered to L.P.s of CCA I-IV in the Prior
Consolidation.
-38-
<PAGE> 41
(5) The number of Units to be offered to each of CCA V, VI, VII and VIII is
based on the same ratio of Units per amount of Net Exchange Value (the
"Exchange Ratio") offered to CCA I, CCA II, CCA III and CCA IV, as a
group, in the Prior Consolidation as follows:
(NEV of Partnership) X (the Exchange Ratio)
(6) The principal amount of 7.15% Notes offered to dissenting Limited
Partners equals their Partnership's NEV per $1,000 of their original
investment.
- ------------------
DESCRIPTION OF THE PARTNERSHIPS. Each of the Partnerships was sponsored
by the Company or its predecessor. The Company owns all of the General Partner's
economic interest in each Partnership. The investment objectives of the
Partnerships are to acquire and operate a single catfish farm with a view
towards potential capital gain from appreciation of the farming operations and
real estate. Each Partnership was initially capitalized through the issuance of
its L.P. Units which constitute units of Limited Partner interests. The rights,
preferences and privileges of the L.P. Units are set forth in the Agreements of
Limited Partnership of their respective Partnership (the "Partnership
Agreements"). The Partnership Agreements of each Partnership have substantially
the same material terms and conditions. Each Partnership sold its L.P. Units to
its partners at a price of $100 per L.P. Unit. Set forth in the Table below is
certain information concerning each of the Partnerships.
<TABLE>
<CAPTION>
PARTNERSHIP ORGANIZATION AND CAPITALIZATION
ORIGINAL LIMITED INVESTOR MORTGAGE
NAME OF NO. OF DATE OF PARTNER CAPITAL NOTES AT DEBT AT
PARTNERSHIP PARTNERS ORGANIZATION (L.P. UNITS) 3/31/1997 3/31/1997
- ----------- -------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
CCA V 196 04/01/1993 $3,397,300 $312,700 $1,070,349(1)
CCA VI 41 05/27/1994 1,000,000 -0- $ 140,800(2)
CCA VII 51 12/31/1994 1,060,700 239,292 $ 267,100(3)
CCA VIII 60 08/15/1995 905,000 595,521 $ 244,995(4)
</TABLE>
- ------------------
(1) Note payable to a bank monthly principal and interest payments of
$11,754 through April 2000 and a final payment of $1,012,802 due April
2000 with interest at Prime plus 2 1/2%.
(2) Note payable to Metropolitan Life Insurance Company requiring annual
payments of $6,100 through March 2004 and a final payment of $92,000
due September 2004 with interest payable semi-annually at 9.5%.
(3) Note payable to a bank collateralized by land and equivalent requiring
annual payments of $34,307, including interest at variable rates (9.05%
at June 30, 1997) through 2015.
(4) Note payable to a bank collateralized by land and equipment requiring
annual payments of $31,732, including interest at variable rates (9.05%
at June 30, 1997) through 2015.
- ------------------
-39-
<PAGE> 42
<TABLE>
<CAPTION>
INFORMATION REGARDING PARTNERSHIP REAL PROPERTY
TOTAL ACRES COST OF REAL APPRAISED
(WATER PROPERTY BEFORE BY VALUE OF
NAME OF ACRES) NUMBER OF DEPRECIATION AT REAL PROPERTY
PARTNERSHIP OWNED PONDS OWNED 12/31/1996 AT 9/30/1996
----------- ------------ ----------- --------------- -------------
<S> <C> <C> <C> <C>
CCA V 668 (443) 43 $950,654 $950,000
CCA VI 170 (140) 8 281,846 268,300
CCA VII 212 (189) 11 325,586 359,740
CCA VIII 242 (188) 11 451,393 445,197
</TABLE>
<TABLE>
<CAPTION>
INFORMATION REGARDING PARTNERSHIP TANGIBLE ASSETS
INVESTMENTS IN MACHRY., EQUIP.
CASH AND COOPERATIVES & REAL
ACCOUNTS CATFISH & CIRCLE CREEK PROPERTY NET OF TANGIBLE
NAME OF RECEIVABLE AT INVENTORY SEINING ACC. DEPR. ASSETS
PARTNERSHIP 12/31/1996(1) AT 12/31/1996(1) AT 12/31/1996 AT 12/31/1996 AT 12/31/1996
- ----------- ------------- ------------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CCA V $139,143 $1,145,621 $407,922 $1,125,910 $2,818,596
CCA VI 246,963 249,635 $194,023 343,336 1,033,957
CCA VII 2,569 504,616 $101,286 404,104 1,012,575
CCA VIII 1,531 565,229 $124,066 538,771 1,229,597
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL CASH DISTRIBUTION AND ESTIMATED NET EXCHANGE VALUES PER $1,000 ORIGINAL INVESTMENT
Cumulative Distribution to Total Received as
Year of First Limited Partners Through 12/31/1996 per a Percent of
PARTNERSHIP NAME Investment $1,000 Original Investment(1) 1,000 Invested
---------------- ---------- ----------------------------- --------------
<S> <C> <C> <C>
CCA V 1993 119 11.9%
CCA VI 1994 113 11.3%
CCA VII 1994 78 7.8%
CCA VIII 1995 42 4.2%
</TABLE>
- ------------------
(1) This column represents the amount of cumulative distributions per
$1,000 of original investment that were received by investors in excess
of the amount of cumulative net income per $1,000 of original
investment. Depreciation on the Partnerships' properties is the primary
component of the return of capital.
- ------------------
-40-
<PAGE> 43
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 100,000,000 shares of no par
value Common Stock, of which 2,670,667 were outstanding on June 30, 1997. Each
of the Common Shares participates equally in dividends and distributions when
and as declared by the directors and in net assets of the Company, if any, upon
liquidation. The Common Shares will not be subject to redemption, nor will they
have any preference, conversion, exchange or preemptive rights. Upon issuance
the Shares will be fully paid and nonassessable. The Shares will be evidenced by
Share certificates. The holders of the common stock do not have the right to
cumulate their votes.
On November 1, 1996 the Company paid a one for five common stock
dividend which had a record date of September 18, 1996 (the "September 18
Dividend"). The Company issued 218,994 Common Shares as a result of the
September 18 Dividend. No fractional shares were issued. Also, as a result of
the share dividend, the Company's outstanding options, warrants and convertible
securities, including the $8.75 Warrants and the $6.25 employee options and
Director Options, were adjusted.
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of preferred stock
in such series as the Board of Directors may from time to time determine. The
Board of Directors has authorized the issuance of up to 1,900,000 shares of
Series A Preferred Stock, of which 235,507 shares were issued and outstanding on
June 30, 1997. The Series A Preferred Stock ranks senior to the Company's Common
Stock, as to the payment of dividends and distributions of assets upon
liquidation. Following is a summary of the rights, preferences and privileges of
the Series A Preferred Stock.
Dividends. Holders of the Preferred Shares are entitled to
receive, when and as dividends on the Preferred Shares are declared by the Board
of Directors out of funds legally available therefor, cash dividends from the
issue date of the Series A Preferred Stock, accruing at the rate per share of
(i) $0.70 per annum (equivalent to 7.0% per annum); or (ii) $0.175 per quarter
for each of the Preferred Shares, payable quarterly in arrears on January 1,
April 1, July 1, and October 1 of each year, commencing October 1, 1996, or if
any such date is not a business day, the next succeeding business day. The
initial dividend payable on a Preferred Share will be reduced to the extent such
share was outstanding less than the entire quarter in which it is issued.
Dividends will cease to accrue in respect of the Preferred Stock on the
Mandatory Conversion Date or on the date of their earlier conversion or
redemption. The Company, in its sole discretion, may pay up to two quarterly
dividends during any eight consecutive quarters in Common Shares. For the
purposes of any such dividend payments, the Common Shares shall be valued at a
price of $6.25 (the "Payment Ratio").
Mandatory Conversion of the Preferred Shares. On the Mandatory
Conversion Date, unless either previously converted at the option of the holder
or redeemed by the Company, each outstanding Preferred Share will mandatorily
convert into the greater of (i) 1.33 shares of Common Stock or (ii) the number
of Common Shares equal to the Liquidation Preference ($10.00) divided by the
Current Market Price. The Current Market Price is the average closing price of
the Common Shares during the 65 consecutive trading days immediately preceding
the Mandatory Conversion Date.
-41-
<PAGE> 44
Optional Redemption By the Company. At any time on and after
January 1, 2000 (the "First Call Date"), the Company may, in its sole
discretion, redeem in whole or in part the Series A Preferred Shares at a price
of $10.00 per Share plus accrued but unpaid dividends thereon (the "Call
Price"). The Company shall give not less than 30 nor more than 60 days notice
prior to the date of such redemption.
Conversion at the Option of the Holder. The Preferred Shares
are convertible, in whole or in part, at the option of the holder, at any time
before the Mandatory Conversion Date, unless previously redeemed, into Common
Shares at a rate of 1.33 Common Shares for each Preferred Share, which is
equivalent to a conversion price of $7.50 per Common Share. The right to convert
Preferred Shares called for redemption will terminate immediately before the
close of business on any redemption date with respect to such shares.
Certain Adjustments. The conversion rates applicable to a
conversion of the Preferred Stock are subject to adjustment in certain
circumstances.
Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of outstanding Preferred Stock are entitled to receive an amount equal to $10.00
per share, plus accrued and unpaid dividends thereon (the "Liquidation
Preference"). The Preferred Shareholders have a right to receive the Liquidation
Preference in pari passu, i.e. ratably, with the rights of holders of Parity
Preferred Stock (as defined herein), if any, out of the assets of the Company
available for distribution to shareholders, before any distribution of assets is
made to holders of Junior Stock (as defined herein).
Voting Rights. The holders of Preferred Shares will not have
the right to vote (except as otherwise provided by law) or, in the event that
the equivalent of three (3) quarterly dividends payable on the Series A
Preferred Stock shall be in arrears. In the latter event, holders of the Series
A Preferred Stock are entitled to twenty-five (25) votes per share and to vote
with the common stock for any duly called election for a director of the
Company. Such right shall continue until all dividends in arrears and dividends
in full for the current quarterly period have been paid or declared and set
apart for payment.
WARRANTS
The Company has the following Warrants outstanding as of June 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING EXERCISE EXPIRATION
COMMON SHARES PRICE DATE
------------- ----- ----
<S> <C> <C>
235,507 7.50 12/31/1998
</TABLE>
- -------------------
Each warrant entitles the registered holder thereof to purchase from
the Company one Share of its Common Stock at the respective exercise price,
stated through the close of business on the expiration date stated. The Warrants
were issued pursuant to the terms of the respective warrant agreements. The
Company acts as its own warrant agent.
-42-
<PAGE> 45
The exercise price, the number and kind of securities issuable on
exercise of any warrant, and the number of warrants are subject to adjustment
upon the occurrence of certain events, including mergers, reorganizations, stock
dividends or distributions, and certain subdivisions, combinations or
reclassification of the common shares.
OPTIONS
At June 30, 1997, the Company has outstanding options for the purchase
of a total of 180,000 Common Shares at a price of $6.25 per share. Options for
the purchase of 57,000 shares expire on March 31, 2002, 57,000 expire on March
31, 2003, and 66,000 expire on March 31, 2004. All of these options were issued
to the Company's officers or directors as compensation. See Part I, Item 6.
The Company has outstanding the options stated in the table below (the
"Agent Options"), which were issued to broker-dealers as additional underwriting
compensation for services in the 1996 Rights Offering and in the placement of
the securities of the Circle Creek Partnerships.
<TABLE>
<CAPTION>
No. of Shares
Underlying
ORIGINAL ISSUER Option Exercise Price Expiration Date
- --------------- ------ -------------- ---------------
<S> <C> <C> <C>
CCA V 302 $9.38 December, 2000
CCA VII 594 9.38 December, 2000
CCA VIII 580 9.38 December, 2000
AquaPro Corporation in 39,117 9.38 June, 2001
1996 Rights Offering
</TABLE>
- -----------------------
DEBT SECURITIES
As of June 30, 1997, the Company has outstanding a total of
approximately $363,593 of non-institutional long-term debt obligations as
follows:
-43-
<PAGE> 46
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
TYPE OF NOTE GENERAL DESCRIPTION OUTSTANDING
- ------------ ------------------- -----------------
<S> <C> <C>
10.35% Notes 10.35% interest only payable quarterly, notes due $363,593
on December 31, 2002, convertible into common
shares at $10.42 per share.
</TABLE>
The 10.35% Convertible Notes due December 31, 2002 were issued pursuant
to the Prior Consolidation.
TRANSFER AGENT
The Company currently acts as its own registrar and transfer agent. The
Company will engage an independent registrar and transfer agent prior to the
time it lists its Common Stock on a national securities exchange.
REGISTRATION OBLIGATIONS
The Company has certain obligations to register the resale of the
Common Stock underlying the Series A Preferred Stock under the 1933 Act. The
Company also has certain obligations to register the resale of common stock
underlying the underwritten options. However, such registration of the
Underlying Common Shares is required only if and when the Company lists the
Common Shares on a national securities exchange and there is no assurance the
Company will be able to do so.
-44-
<PAGE> 47
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Market of the Company's Common Equity: The Company's equity securities
are not currently registered or traded on any exchange or in any market.
ITEM 2. LEGAL PROCEEDINGS
No material litigation is currently pending or threatened against the
Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information for all securities that the Company has
sold in the past three (3) years without registering said securities under the
Securities Act of 1933 (the "1933 Act"). Share numbers and prices have not been
adjusted to reflect the one for five stock split effective September 18, 1996.
See Part I, Item 8 above.
Between December 31, 1995 and June 15, 1996, Registrant issued, in
connection with its acquisition of CCA I-IV in the Prior Consolidation, 404,764
units of its equity securities, and $149,098 in principal amount of its 10.35%
Notes. These securities were issued to a total of approximately 240 limited
partners. The units were issued at a price of $10.00 per unit. The notes were
issued at par. The units and notes were issued for net assets valued at
$4,199,210 for the purposes of the transaction. The Company issued 167,876 units
to approximately 25 persons who were holders of $1,678,762 in principal amount
of debt obligations of the partnerships acquired in the Prior Consolidation.
These units were issued at the rate of $10.00 per unit in unpaid balance of debt
obligation exchanged. Also in the Prior Consolidation, the Company issued 2,994
units at $10.00 per unit and 18,864 shares at a price of $7.25 per share to Mr.
Hastings in consideration of the cancellation of a total of $166,704 of
indebtedness. See the "Prior Consolidation" under Part I, Item 7 above.
Each unit issued in the Prior Consolidation was comprised of one Common
Share; one stock right entitling the holder to purchase one Common Share at
$7.25; one warrant entitling the holder to purchase one Common Shares for $8.25
within twelve (12) months following the Closing Date; and one warrant entitling
the holder to purchase one Common Share for $10.50 within twenty-four (24)
months following the closing date, which warrant, if not exercised prior to
expiration, is converted into three-tenths (0.3) Common Shares.
The 10.35% Notes in the Prior Consolidation are due December 31, 2002
and bear interest at the rate of 10.35% per annum for the period from and
including the date of original issuance. The 10.35% Notes are convertible into
common stock at a price of $10.42 per share.
-45-
<PAGE> 48
The Company issued 362,704 shares of its common stock upon the exercise
of stock rights issued as part of the units in the Prior Consolidation. The
exercise price of the stock rights was $7.25. Net cash proceeds in the amount of
$2,137,928 were received from the Rights Offering. The Company paid commissions
of 5% of the exercise price of the stock rights exercised to broker-dealers who
provided solicitation services in the exercise of the stock rights. As
additional compensation to these persons, the Company issued five-year options
to purchase a total of 39,117 shares at a price of $9.38.
In issuing its securities in the Prior Consolidation the Company relied
on the exemptions set forth in Section 3(a)(10) of the 1933 Act by reason of a
fairness hearing duly noticed and held by the California Commissioner of
Corporations pursuant to Section 25142 of the California Corporate Securities
Law of 1968, as canceled.
During the years ended December 31, 1995 and 1996 and during the six
month period ended June 30, 1997, the Company issued seven year, $6.25 stock
options to officers for 54,000, 54,000 and 51,000 shares, respectively, and
9,000, 12,000 and 12,000 shares, respectively, to directors. The options were
issued as compensation to the Company's Officers and Board of Directors. Also,
during the years ended December 31, 1995 and 1996 and during the six month
period ended June 30, 1997, the Company issued a total of 20,000, 20,000 and
22,500 restricted common shares valued at approximately $3.125 each,
respectively, to officers.
The foregoing Compensatory Options were issued only to persons who were
executive officers and/or directors of the Company or registered broker-dealers
or their associated persons. The foregoing compensatory shares were issued only
to persons who were executive officers and/or directors of the Company. The
Company believed each such person was either an accredited person or
sophisticated and for such issuances relied on the exemptions under Section 4(2)
of the 1933 Act and Rule 701, promulgated thereunder.
Effective on June 30, 1997, the Company issued a total of 708,926 Units
of its Common Stock and stock rights and $68,582 of its 7.15% Notes to the
approximately 340 Limited Partners of CCA V, CCA VI, CCA VII and CCA VIII in the
Recent Consolidation, as described under Part I, Item 7 above. In issuing these
securities, the Company relied upon the exemption from registration under
Section 3(a)10 of the 1933 Act pursuant to a fairness hearing duly noticed and
held by the California Commissioner of Corporations on March 31, 1997.
Over the past three years, the Company issued options which, when
exercisable, will entitle the holders thereof to purchase a total of 1,476
shares at a price of $9.38 as additional underwriting compensation to
broker-dealer firms which placed L.P. Units and/or Investor Notes in CCA V, CCA
VII and CCA VIII. These options were issued upon reliance on the exemption under
Section 4(2) of the 1933 Act.
Commencing on September 10, 1996 through June 30, 1997, Company sold a
total of 235,507 Preferred Units, each Unit consisted of one share of the
Company's Series A Preferred Stock and one, $7.50 Common Stock Purchase Warrant,
which expires on December 31, 1998 and is converted into 0.3 share of common
stock if it expires unexercised. Units were sold at $10 per Unit to a total of
90 accredited persons and not more than 35 non-accredited persons within the
meaning of Rule 506 of the 1933 Act. The Company offered and sold the Series A
Preferred Stock and $7.50 Common Stock Purchase Warrants in reliance upon the
exemption set forth in Rule 506 of Regulation D promulgated under the 1933 Act.
Pursuant to this
-46-
<PAGE> 49
exemption, sales were made only to accredited persons or non-accredited persons
who either alone or together with their purchaser representatives, were
sophisticated for the purposes of Rule 506.
At December 31, 1995, the Company issued 7-year options for the
purchase of 54,000 restricted Common Shares to five officers valued at $3.25 per
share and at December 31, 1996, the Company issued a total of 51,000 restricted
Common Shares to four officers valued at $3.125 per Share.
Over the past three years, the Company issued options which, when
exercisable, will entitle the holders thereof to purchase a total of 1,476
shares at a price of $9.38 as additional underwriting compensation to
broker-dealer firms which placed L.P. Units and/or Investor Notes in CCA V, CCA
VII and CCA VIII.
At December 31, 1995, the Company issued options for the purchase of
9,000 shares for $7.50 per share to three Directors, and at December 31, 1996,
the Company issued 7-year options to purchase 12,000 shares at $6.25 per share
to four Directors. The options were issued as compensation to the Company's
Board of Directors.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation provides that a Director's liability
for breach of fiduciary duty shall be limited to the full extent allowable under
Tennessee law. The Company's Certificate of Incorporation, Bylaws and Tennessee
state law provide broad indemnification rights to Directors and officers who act
in good faith, and in a manner reasonably believed to be in or not opposed to
the best interests of AquaPro, and with respect to criminal actions or
proceedings, without reasonable cause to believe the conduct was unlawful. They
further provide that the Company has the power to (a) indemnify against
judgments, fines, amounts paid in settlement and expenses actually and
reasonably incurred by the party seeking indemnification, (b) advance expenses
incurred in defending any civil, criminal, administrative or investigative
action, suit or proceeding prior to disposition of such action, suit or
proceeding upon the Company's receipt of an undertaking by or on behalf of such
Director or officer to repay such amount if it is ultimately determined he is
not entitled to be indemnified; and (c) purchase and maintain insurance on
behalf of a Director or officer against any liability asserted against and
incurred by him in such capacity, whether or not the Company would have the
power to indemnify him against such liability. In addition, to the extent a
Director or officer has been successful on the merits, or otherwise, in the
defense of any action, suit or proceeding to which he was subject by reason of
the fact that he is or was a Director or officer, he shall be entitled to
mandatory indemnification against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
-47-
<PAGE> 50
PART F/S
Please see the Company financial statements attached hereto.
-48-
<PAGE> 51
PART III
ITEM 1. INDEX TO EXHIBITS
AQUAPRO CORPORATION
<TABLE>
<CAPTION>
ITEM EXHIBIT
NO.
<S> <C>
AquaPro's Charter (1) 3.1
AquaPro's Amended and Restated Charter (1) 3.2
AquaPro's Articles of Correction to Charter (1) 3.3
AquaPro's Articles of Amendment to Charter (1) 3.4
AquaPro's First Amended and Restated Bylaws (1) 3.5
Plan and Agreement of Consolidation for CCA I - IV (1) 3.6
Plan and Agreement of Consolidation for CCA V - VIII (1) 3.7
Articles of Merger of CCA I - IV and AquaPro Corporation (1) 3.8
Amended Plan and Agreement of Merger of CCA V - VIII and
AquaPro Corporation(2) 3.9
Articles of Merger of CCA V - VIII and AquaPro Corporation(2) 3.10
Form of Common Stock Certificate (1) 4.1
Form of $10.50 Common Stock Warrant (1) 4.2
Form of $10.50 Warrant Agreement (1) 4.3
Form of 10.35% Debenture (1) 4.4
Form of 10.35% Loan Note Agreement (1) 4.5
Form of Series A Preferred Stock Certificate (1) 4.6
Form of $7.50 Common Stock Warrant (1) 4.7
Form of $9.50 Stock Right(2) 4.8
Form of $9.50 Stock Rights Agreement(2) 4.9
Exchange Form for Investor Notes(2) 4.10
Form of 10.35% Collateralized Convertible Note(2) 4.11
Form of Agency Agreement 10.35% Collateralized
Convertible Notes(2) 4.12
Form of Security Agreement 10.35% Collateralized
Convertible Notes(2) 4.13
Marketing Agreement with Delta Pride (1) 10.1
Agreements with Delta Western ("Indi Bell") (1) 10.2
Security Agreement, Guaranty, Note with Community Bank (1) 10.3
Note, Deed of Trust, Security Agreement with Met Life
(Balmoral) (1) 10.4
Note and Deed of Trust with Met Life (Cypress Lake) (1) 10.5
Employment Agreement with George S. Hastings, Jr. (1) 10.6
Employment Agreement with Patricia G. Hastings (1) 10.7
Note and Deed of Trust with Sunburst Bank (CCA V)(2) 10.8
Note, Deed of Trust, Loan Agreement, and Finance Charge
Agreement with Metropolitan Life (CCA VI)(2) 10.9
Deed of Trust, Assumption Agreements, Modification and
Loan Agreements and other communications with Federal
Land Bank (CCA VII and VIII)(2) 10.10
</TABLE>
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-SB filed May 30, 1997 (File # 000-29258).
(2) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-KSB filed September 29, 1997
(File # 000-29258).
ITEM 2. DESCRIPTION OF EXHIBITS
Attached, as appropriate, the issuer files those documents required to
be filed as Exhibit Numbers 2, 3, 5, 6, and 7 in Part III of Form 1-A.
-49-
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AQUAPRO CORPORATION (REGISTRANT)
As of June 30, 1997 and December 31, 1997 and for the six
month period ended June 30, 1997 and the years ended
December 31, 1996 and 1995
Report of Independent Auditors F-4
Consolidated Balance Sheets F-5
Consolidated Statements of Operations F-7
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-11
ENTITIES INCLUDED IN THE ACQUISITION:
As of December 31, 1996 and 1995 and for the years then
ended
CIRCLE CREEK AQUACULTURE V, LP
Report of Independent Auditors F-28
Balance Sheets F-29
Statements of Operations F-30
Statements of Partners' Capital F-31
Statements of Cash Flows F-32
Notes to Financial Statements F-33
CIRCLE CREEK AQUACULTURE VI, LP
Report of Independent Auditors F-40
Balance Sheets F-41
Statements of Operations F-42
Statements of Partners' Capital F-43
Statements of Cash Flows F-44
Notes to Financial Statements F-45
CIRCLE CREEK AQUACULTURE VII, LP
Report of Independent Auditors F-52
Balance Sheets F-53
Statements of Operations F-54
Statements of Partners' Capital F-55
Statements of Cash Flows F-56
Notes to Financial Statements F-57
</TABLE>
F-l
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CIRCLE CREEK AQUACULTURE VIII, LP
Report of Independent Auditors F-65
Balance Sheets F-66
Statements of Operations F-67
Statements of Partners' Capital F-68
Statements of Cash Flows F-69
Notes to Financial Statements F-70
AQUAPRO CORPORATION (REGISTRANT)
Interim Statements
As of March 31, 1997 and for the three months ended
March 31, 1997 and 1996 F-78
Six months ended June 30, 1996 F-83
</TABLE>
F-2
<PAGE> 54
AquaPro Corporation
Consolidated Financial Statements
Six months ended June 30, 1997 and years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors...........................................................................F-4
Audited Consolidated Financial Statements
Consolidated Balance Sheets..............................................................................F-5
Consolidated Statements of Operations....................................................................F-7
Consolidated Statements of Changes in Stockholders' Equity...............................................F-8
Consolidated Statements of Cash Flows....................................................................F-10
Notes to Consolidated Financial Statements...............................................................F-11
</TABLE>
F-3
<PAGE> 55
Report of Independent Auditors
The Board of Directors and Stockholders
AquaPro Corporation
We have audited the accompanying consolidated balance sheets of AquaPro
Corporation and subsidiaries as of June 30, 1997 and December 31, 1996 and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the six months ended June 30, 1997 and the years ended
December 31, 1996 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AquaPro Corporation and subsidiaries at June 30, 1997 and December 31, 1996,
and the consolidated results of their operations and their cash flows for the
six months ended June 30, 1997 and the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Jackson, Mississippi
August 21, 1997
F-4
<PAGE> 56
AquaPro Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 202,894 $ 759,057
Trade accounts receivable (Note 5) 108,009 598,307
Receivables from affiliates 27,998 27,998
Live fish inventories (Note 5) 5,740,124 4,549,528
Prepaid expenses 10,516 3,753
----------- -----------
Total current assets 6,089,541 5,938,643
Property, buildings and equipment (Note 5):
Land 1,781,078 1,781,078
Ponds and improvements 3,014,785 2,925,494
Buildings 346,416 280,103
Machinery and equipment 2,364,743 1,989,925
----------- -----------
7,507,022 6,976,600
Accumulated depreciation 1,867,269 1,550,735
----------- -----------
5,639,753 5,425,865
Investments in cooperatives (Notes 4 and 5) 883,518 1,198,517
Delivery rights and other intangible assets, net 104,161 110,522
----------- -----------
Total assets $12,716,973 $12,673,547
=========== ===========
</TABLE>
F-5
<PAGE> 57
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 5):
Bank $ 497,571 $ -
Officer and director 161,254 161,254
Others 30,637 576,292
Accounts payable 523,255 184,076
Accrued salaries 239,994 240,662
Accrued interest and other 74,628 94,771
Current maturities of long-term debt 272,258 275,666
----------- -----------
Total current liabilities 1,799,597 1,532,721
Long-term debt, less current maturities (Note 5) 4,102,980 3,867,976
Stockholders' equity:
Series A Preferred Stock, no par value - authorized
1,900,000 shares, cumulative, convertible, issued and
outstanding 235,507 at June 30, 1997 and 104,534
at December 31, 1996 (Note 8) 1,837,408 748,169
Preferred stock, par value to be determined by the
Board of Directors - authorized 100,000 shares, none
issued - -
Common stock, no par value - authorized 100,000,000
shares, issued and outstanding 2,670,667 shares at
June 30, 1997 and 2,452,819 shares at December 31,
1996 (Note 6) 10,588,311 10,568,989
Unearned compensation (126,563) (112,500)
Retained earnings (deficit) (5,484,760) (3,931,808)
----------- -----------
Total stockholders' equity 6,814,396 7,272,850
----------- -----------
Total liabilities and stockholders' equity $12,716,973 $12,673,547
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 58
AquaPro Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 1,203,468 $ 3,906,954 $ 2,992,287
Management fees from affiliates (Note 10) 9,000 18,000 18,000
----------- ----------- -----------
1,212,468 3,924,954 3,010,287
Cost of products sold 1,188,159 3,525,405 2,303,194
Selling, general and administrative (Note 6) 1,055,540 1,349,499 1,321,960
Impairment loss on long-lived assets -- 1,019,000 --
----------- ----------- -----------
Operating loss (1,031,231) (1,968,950) (614,867)
Other income (expense):
Equity in losses on investment
in cooperatives (272,000) (109,969) (69,501)
Interest expense (212,685) (555,974) (674,149)
Other, net 28,391 128,038 91,836
----------- ----------- -----------
(456,294) (537,905) (651,814)
----------- ----------- -----------
Net loss $(1,487,525) $(2,506,855) $(1,266,681)
=========== =========== ===========
Net loss per common share $ (.51) $ (1.02) $ (0.64)
=========== =========== ===========
Weighted average common shares outstanding 2,910,620 2,467,764 1,972,315
=========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 59
AquaPro Corporation
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
AquaPro Corporation
-------------------------------
General Limited
Partners' Partners' Common Stock
Capital Capital Shares Amount
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $(402,848) $ 2,523,502 510,099 $ 2,315,357
Capital contributions 1,000 --
Sale of limited partnership units -- 2,654,008
Reorganization and merger (Note 2) 442,784 (4,717,030) 1,134,282 4,178,915
--------- ----------- --------- ----------
40,936 460,480 1,644,381 6,494,272
Net loss for the year ended December 31, 1995
Cash distributions (30,085) (368,341)
Retirement of limited partnership units
Common stock issued to employees for services 20,000 150,000
Amortization of unearned compensation
Conversion of limited partnership units
to notes payable (149,098)
--------- ----------- --------- ----------
Balance at December 31, 1995 10,851 92,139 1,664,381 6,495,174
Net loss for the year ended December 31, 1996
Cash distributions (10,851) (97,665)
Retirement of limited partnership units
Sale of limited partnership units 5,526
Common stock issued to employees
for future services 20,000 150,000
Amortization of unearned compensation
Conversion of debt to stock (Note 5) 186,740 1,717,305
Sale of common stock (Note 6) 362,704 2,137,928
Sale of preferred stock (Note 8)
One-for-five common stock split 218,994
Preferred stock-cash dividend
--------- ----------- --------- ----------
Balance at December 31, 1996 -- -- 2,452,819 10,500,407
Net loss for the six months ended June 30, 1997
Common stock issued to employees for services 22,500 140,625
Cancellation of common stock
granted to former employees (9,000) (56,250)
Amortization of unearned compensation
Conversion of warrants to common stock 203,834
Sale of common stock (Note 6) 514 3,529
Sale of preferred stock (Note 8)
Preferred stock cash dividend
--------- ----------- --------- -----------
Balance at June 30, 1997 $ -- $ -- 2,670,667 $10,588,311
========= =========== ========= ===========
</TABLE>
F-8
<PAGE> 60
<TABLE>
<CAPTION>
AquaPro Corporation
- -------------------------------------------------------------------------------
Additional Retained Total
Preferred Stock Paid-In Unearned Earnings Stockholders'
Shares Amount Capital Compensation (Deficit) Equity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-- $ -- $ 19,894 $ -- $ (153,047) $4,302,858
1,000
2,654,008
26,749 (68,582)
- ---------- ---------- ---------- -------- ------------ ----------
-- -- 46,643 -- (153,047) 6,889,284
(1,266,681) (1,266,681)
(398,426)
(19,894) (19,894)
(150,000) --
56,250 56,250
(149,098)
- ---------- ---------- ---------- --------- ------------ ----------
-- -- 26,749 (93,750) (1,419,728) 5,111,435
(2,506,855) (2,506,855)
(108,516)
(26,749) (26,749)
5,526
(150,000) --
131,250 131,250
1,717,305
2,137,928
104,534 748,169 748,169
(5,225) (5,225)
- ---------- ---------- ---------- -------- ---------- ----------
104,534 748,169 -- (112,500) (3,931,808) 7,204,268
(1,487,525) (1,487,525)
(131,250) 9,375
56,250 --
60,937 60,937
--
3,529
130,973 1,089,239 1,089,239
(65,427) (65,427)
- ---------- ---------- ----------- --------- ----------- ----------
235,507 $1,837,408 $ -- $(126,563) $(5,484,760) $6,814,396
========== ========== =========== ========= =========== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE> 61
AquaPro Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,487,525) $ (2,506,855) $ (1,266,681)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 400,706 692,351 505,835
Impairment loss on long-lived assets - 1,019,000 -
Equity in losses on investment in cooperatives 272,000 109,969 69,501
Payments of loss allocations on investment in cooperative - (79,969) -
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable 533,298 (366,935) (3,423)
Increase in live fish inventories (1,190,596) (276,659) (820,029)
Increase in prepaid expenses and other assets (14,263) (17,969) (36,173)
Increase in accounts payable and accrued expenses 318,368 11,653 285,774
-------------- -------------- --------------
Net cash used in operating activities (1,168,012) (1,415,414) (1,265,196)
INVESTING ACTIVITIES
Purchase of certain assets of Fat Cat Corporation (Note 3) - - (1,850,358)
Purchases of property and equipment (530,422) (591,474) (1,348,680)
Purchases of cooperative stock - (62,000) (300,500)
-------------- -------------- --------------
(530,422) (653,474) (3,499,538)
FINANCING ACTIVITIES
Net increase (decrease) in notes payable (48,084) (743,758) 505,310
Principal payments on long-term borrowings (149,708) (741,152) (78,717)
Proceeds from long-term borrowings 312,722 503,178 2,594,771
Proceeds from exercise of common stock purchase rights - 2,137,928 -
Proceeds from issuance of preferred stock 1,089,239 748,169 -
Proceeds from exercise of common stock warrants 3,529 - -
Proceeds from sale of limited partnership units - 5,525 2,654,008
Capital contributions from general partners - - 1,000
Cash distributions to partners - (108,516) (398,426)
Retirement of limited partnership units - (26,749) (19,894)
Payments of preferred stock dividends (65,427) (5,225) -
-------------- -------------- --------------
Net cash provided by financing activities 1,142,271 1,769,400 5,258,052
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (556,163) (299,488) 493,318
Cash and cash equivalents at beginning of period 759,057 1,058,545 565,227
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 202,894 $ 759,057 $ 1,058,545
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION-
Interest paid $ 238,394 $ 501,960 $ 691,877
============== ============== ==============
NON-CASH FINANCING ACTIVITIES-
Conversion of notes payable and long-term debt to common stock $ - $ 1,717,305 $ -
============== ============== ==============
Common stock issued to employees for future services $ 140,625 $ 150,000 $ 150,000
============== ============== ==============
Conversion of long-term debt to 10.35% convertible notes payable $ - $ 214,495 $ -
============== ============== ==============
Conversion of limited partnership units to notes payable $ 68,582 $ - $ 149,098
============== ============== ==============
</TABLE>
See accompanying notes.
F-10
<PAGE> 62
AquaPro Corporation
Notes to Consolidated Financial Statements
June 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND BUSINESS
AquaPro Corporation (the "Company") and its wholly owned subsidiaries American
Fisheries Corporation ("American") and Circle Creek Aquaculture, Inc. ("Circle
Creek") own and operate eight catfish farms located in the delta area of the
State of Mississippi. The Company acquired the catfish farms by merger with
eight affiliated limited partnerships (see Note 2). These mergers have been
accounted in a manner similar to a pooling of interests because of common
control. The accompanying consolidated financial statements as of and for the
six months ended June 30, 1997 and as of December 31, 1996 and for the years
ended December 31, 1996 and 1995 have been restated to give effect to the
mergers described above and in Note 2. All material intercompany transactions
and balances have been eliminated in consolidation.
Effective January 1, 1997, the Company changed its fiscal year end to June 30
from December 31. Accordingly, the most recent financial statements presented
are as of June 30, 1997 and for the six month period then ended.
The Company conducts catfish farming activities on 1,843 water acres within the
State of Mississippi. Catfish farming is concentrated in a few southern states,
principally Mississippi, Louisiana, Alabama and Arkansas. Catfish are sold
principally to retail grocery stores and restaurants by catfish processors. The
Company's sales are to a limited number of processors and collateral is
generally not required. One processor represented 90% of the Company's net
sales for the six months ended June 30, 1997 and three processors represented
55%, 25% and 11%, respectively, for the year ended December 31, 1996 and 51%,
25%, and 18%, respectively, for the year ended December 31, 1995.
Fish prices are affected by changes in market demand and supply and may
fluctuate significantly from period to period.
F-11
<PAGE> 63
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
LIVE FISH INVENTORIES
Live fish inventories are stated at the lower of average cost or market. Market
value is determined as estimated selling price less estimated costs of
disposal. Revenue is recognized when catfish are delivered live to the
processor.
Live fish inventories are purchased as "fingerlings" (generally, 5 to 6 inches
in length) and are grown out to a marketable size over 9 to 18 months. Because
the Company's production cycle for fish generally exceeds one year, management
anticipates certain live fish inventories on hand at June 30, 1997 may not be
sold during the year ending June 30, 1998. Live fish inventories are classified
as a current asset in the accompanying balance sheets which is consistent with
the industry practice. The quantities of live fish inventories are determined
based upon estimated growth from feed fed to each pond and are reduced for the
actual quantities sold and estimated mortality. The Company estimates fish
grow-out based upon 2.5 pounds of feed fed per one pound of live fish growth.
Cost associated with live fish production are accumulated during the growing
period and consist principally of feed, labor and overhead costs required to
grow the live fish to a marketable size. Each pond is closed periodically and
the estimated pounds are adjusted to the actual harvest. Live catfish are
highly susceptible to disease, oxygen depletion and extreme temperatures which
could result in high mortality. Management continually monitors each pond and
attempts to take appropriate actions to minimize the risk of loss from
mortality. Given the nature of the live fish inventories, it is reasonably
possible that the Company's
F-12
<PAGE> 64
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LIVE FISH INVENTORIES (CONTINUED)
actual live fish mortality will vary significantly from estimates. The cost of
producing fish for harvest is subject to the cost of grains which is
susceptible to significant fluctuations in the commodity markets. The Company
establishes prices for a portion of its anticipated feed purchases over
specified periods of time through various feed purchase agreements.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives (15 years
for ponds and improvements, 15 years for buildings, and 3 to 7 years for
machinery and equipment).
INVESTMENTS IN COOPERATIVES
Investments in cooperatives are stated at original cost adjusted for allocation
of earnings or losses, net of distributions.
PROFIT-SHARING PLAN
Effective January 1, 1997, the Company established a profit sharing plan for
substantially all employees. This plan provides for monthly contributions based
on employee deferrals. The Company made contributions of approximately $9,100
to the plan for the six month period ended June 30, 1997.
INCOME TAXES
Income taxes are accounted for by the Company using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Deferred income taxes relate to temporary differences between
assets and liabilities recognized differently for financial reporting and
income tax purposes.
F-13
<PAGE> 65
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to estimated fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and, generally,
recognizes no compensation expenses for the stock option grants.
STOCK SPLIT
During 1996, the Company's Board of Directors declared a one-for-five stock
split effected in the form of a stock dividend. All historical share and per
share data presented herein have been restated for the effect of the stock
split.
NET LOSS PER COMMON SHARE
Net loss per share is computed by dividing net loss applicable to common stock
(net loss less dividend requirements for preferred stock of $65,427 in 1997 and
$5,225 in 1996) by the weighted average number of common shares outstanding
(2,910,620 shares in 1997, 2,467,764 shares in 1996 and 1,972,315 shares in
1995, adjusted for the one-for-five stock split). As a result of the mergers
described in Note 2, the common stock outstanding on December 31, 1995 is
considered outstanding for the entire year in 1995 for purposes of the weighted
average shares calculation. Common equivalent shares (stock options and
warrants) outstanding have not been included, due to their antidilutive
effects.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption by the Company of
Statement 121 resulted in a non-cash charge of $1,019,000 from the write-down
of land, ponds and improvements, buildings and goodwill to their estimated fair
F-14
<PAGE> 66
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
values. The charge represents the adjustment required to remeasure long-lived
assets at the lower of the carrying amount or fair value based upon 1996
appraisals obtained from an independent appraiser in connection with the merger
as described in Note 2.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate any prior periods. Under the new
requirements for calculating earnings per share, the dilutive effect of stock
options will be excluded. The impact of Statement 128 on the calculation of
earnings per share is not expected to be material.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to 1997 presentation.
2. MERGERS
Effective June 30, 1997, the Company acquired the assets and assumed the
liabilities of Circle Creek Aquaculture V, L.P., Circle Creek Aquaculture VI,
L.P., Circle Creek Aquaculture VII, L.P., and Circle Creek Aquaculture VIII,
L.P., ("Circle Creek V-VIII"). Circle Creek V-VIII are engaged in catfish
farming in the State of Mississippi and were previously managed by the Company
pursuant to management agreements. In consideration for the assets and
liabilities of Circle Creek V-VIII, the Company issued 708,926 "Units" and
$68,582 of 7.15% Convertible Notes based upon the relative fair value of the
net assets of the Company and Circle Creek V-VIII. A Unit consisted of 1.6
shares of common stock and one 90-day right to purchase one share of the
Company's 7.0% Series A Preferred Stock for $9.50 (the "Preferred Stock
Rights"). Also, as part of the merger, the Company offered its Series A
Preferred Stock in exchange for $1,147,513 in principal amount of certain
10.35% notes of Circle Creek V-VIII (the "Investor Notes"). This exchange offer
commenced subsequent to June 30, 1997 and each holder of Investor Notes was
offered 1.3 shares of Series A Preferred Stock for each $10 of
F-15
<PAGE> 67
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
Investor Notes. In the aggregate, approximately $900,000 of Investor Notes were
exchanged for approximately 117,000 shares of Series A Preferred Stock.
2. MERGERS (CONTINUED)
Separate revenues and net loss of the merged entities are presented in the
following table.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Revenues:
AquaPro Corporation $ 604,805 $ 2,837,274 $ 2,701,451
Circle Creek V-VIII 1,129,114 1,667,751 997,021
Elimination of intercompany
transactions (521,451) (580,071) (688,185)
----------- ----------- -----------
Total $ 1,212,468 $ 3,924,954 $ 3,010,287
=========== =========== ===========
Net loss:
AquaPro Corporation $ (972,102) $ (886,786) $ (691,936)
Circle Creek V-VIII (482,522) (1,592,813) (408,721)
Elimination of intercompany
transactions (32,901) (27,256) (166,024)
----------- ----------- -----------
Net loss, as reported $(1,487,525) $(2,506,855) $(1,266,681)
=========== =========== ===========
</TABLE>
Effective as of the close of business on December 31, 1995, The Company issued
105,334 shares of its common stock in exchange for all of the outstanding
common stock of American and Circle Creek, Inc.
Also, effective as of the close of business on December 31, 1995, all assets
and liabilities of Circle Creek Aquaculture, L.P., Circle Creek Aquaculture II,
L.P., Circle Creek Aquaculture III, L.P., and Circle Creek Aquaculture IV, L.P.
("Circle Creek I-IV") were merged into the Company by vote of the limited
partners of Circle Creek I-IV. In consideration for the Merger, AquaPro issued
404,764 "Units" to the limited partners (see Note 6) and $149,098 of 10.35%
convertible notes due on December 31, 2002 (see Note 5).
F-16
<PAGE> 68
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
2. MERGERS (CONTINUED)
The mergers are accounted for as a reorganization of the entities under common
control into the Company. Accordingly, the transactions are accounted for on
the historical cost basis of American, Circle Creek, Inc., Circle Creek I-IV
and Circle Creek V-VIII. The carrying amounts for common stock of American and
Circle Creek, Inc. and the general and limited partners' capital of Circle
Creek I-IV and Circle Creek V-VIII were transferred to the Company's common
stock as of January 1, 1995.
In connection with the mergers, approximately $213,000 and $132,000 of merger
costs and expenses were incurred and have been included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations for the six months ended June 30, 1997 and for the year ended
December 31, 1995, respectively. The merger costs and expenses consisted
principally of legal and consulting fees.
3. PURCHASES OF BUSINESS
In April 1993, Circle Creek Aquaculture V, L.P. ("Circle Creek V") entered into
a two-year agreement for the lease of substantially all of the land, ponds and
improvements, machinery and equipment, and other assets used in the
partnership's operations. Pursuant to the lease agreement, Circle Creek V had
the option to purchase for fair value the leased assets at the end of the lease
term. In March 1995, the Partnership exercised its option to purchase the
leased assets for $1,972,852 including acquisition costs of $174,852 of which
$122,494 was paid in 1994. The acquisition was accounted for by the purchase
method of accounting. Lease payments for 1995 totaled $45,000 and were included
in the cost of producing live fish inventories.
4. INVESTMENTS IN COOPERATIVES
Investments in cooperatives consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
------------------------
<S> <C> <C>
Delta Pride Catfish, Inc. $714,278 $1,029,277
Fishco, Inc. 112,000 112,000
Indi-Bell, Inc. 57,240 57,240
-------- ----------
$883,518 $1,198,517
======== ==========
</TABLE>
F-17
<PAGE> 69
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS IN COOPERATIVES (CONTINUED)
The ownership of Delta Pride Catfish, Inc. ("Delta Pride") and Fishco, Inc.
("Fishco") stock provides the Company the right to sell live catfish to Delta
Pride and Fishco. Delta Pride is the Company's most significant customer.
Substantially all of the Company's catfish feed purchases were from Indi-Bell,
Inc. during the six month period ended June 30, 1997 and the years ended
December 31, 1996 and 1995.
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable-bank consists of borrowings under a $750,000 revolving line of
credit used solely to fund purchases of feed. Interest accrues at the prime
rate plus 1.65% and the revolving line of credit expires March 8, 1998.
Interest is paid monthly and principal is paid with 50 percent of all
collections of accounts receivable from sales of seven of the Company's eight
farms.
The notes payable-officer and director are unsecured and bear interest at prime
plus 1/2%. Included in notes payable-others were borrowings of $30,636 at June
30, 1997 and $176,925 at December 31, 1996 under a revolving $175,000 credit
facility for feed purchases from one of the Company's customers who is also a
feed supplier. Borrowings accrue interest at 10.25%.
Also included in notes payable-other were borrowings of $376,190 at December
31, 1996 under a revolving $376,190 line of credit with one of the Company's
major feed suppliers. This line of credit was replaced in April 1997 by the
arrangement with the bank described above.
F-18
<PAGE> 70
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
------------------------------------
<S> <C> <C>
Note payable to a bank with monthly principal and interest
payments of $11,754 through March 2000 and a final payment of
approximately $970,000 due April 2000 with interest at prime plus
2 1/2% (11% at June 30, 1997) $1,055,244 $1,070,349
Convertible notes payable with interest due quarterly at 10.35% and
principal due December 1999 ($551,992) and December 2000
($595,521) 1,147,513 1,147,513
Convertible notes payable with interest due quarterly at 10.35% and
principal due in December 2002 363,593 363,593
Convertible notes payable with interest due quarterly at 7.15% and
principal DUE December 2003 68,582 -
Note payable to an insurance company with annual principal
payments of $16,000 through June 2000 and a final installment of
$256,000 due in June 2001 with interest payable seminannually at
7.7% 304,000 320,000
Note payable to an insurance company with annual principal
payments of $7,500 through February 2002 and a final payment of
$182,500 due in February 2002 with interest payable seminannually
at 8.1% 212,500 220,000
Note payable to an insurance company with annual principal
payments of $6,100 through March 2004 and a final payment of
$92,000 due September 2004 with interest payable seminannually
at 9.5% 134,700 140,800
Note payable to the Federal Land Bank with annual payments of
$34,307 including interest at variable rates (9.05% at June 30,
1997) through January 2015 267,100 267,100
5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Note payable to the Federal Land Bank with annual payments of
$31,732 including interest at variable rates (9.05% at June 30,
1997) through January 2015 $244,995 $244,995
</TABLE>
F-19
<PAGE> 71
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
<TABLE>
<S> <C> <C>
Notes payable to a finance company with annual payments aggregating
approximately $72,000 including interest at rates ranging from 6% to 10.65%,
maturing at various dates from July 1998 through March 2001 200,603 228,476
Capital lease obligations to Farm Credit Leasing Services Corporation with
quarterly payments aggregating $12,185 including interest at an effective rate
of 8.5% through June 2002 180,300 -
Notes payable to various finance companies with monthly payments aggregating
$9,400 including interest at rates ranging from 8.25% to 9%, maturing at
various dates through January 2000 141,931 140,816
Note payable to a bank with monthly payments of $1,156 including interest at
prime plus 1.65% (10.4% at June 30, 1997) through June 2002 54,177 -
-------- --------
Less current maturities 4,375,238 4,143,642
272,258 275,666
--------- ---------
$4,102,980 $3,867,976
========== ==========
</TABLE>
The 10.35% convertible notes payable due in 2002 are convertible into shares of
the Company's common stock at a price of $10.42 per share at the noteholders'
option at any time prior to maturity. The notes may be paid by the Company at
any time without penalty. The 7.15% convertible notes are convertible into
shares of the Company's stock at a price of $10 per share at the noteholders'
option at any time prior to maturity. The notes may be paid by the Company at
any time without penalty.
During 1996, certain holders of the unsecured and convertible (prime plus 3%)
notes payable converted notes with a principal balance of $1,678,762 into
167,876 units (see Note 5). Also in 1996, certain holders of the unsecured
notes payable and convertible notes payable (prime plus 3%) converted notes
with a principal balance of $214,495 into the 10.35% convertible notes payable.
The remaining unsecured notes payable and convertible (prime plus 3%) totaling
$505,356 were paid in 1996.
F-20
<PAGE> 72
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
During 1996, the Company issued 18,864 shares of its common stock to certain
officers and directors for the cancellation of $136,764 in notes payable to
officers and directors.
Substantially all trade accounts receivable, live fish inventories and
property, buildings and equipment are pledged as collateral to the note payable
to bank and long-term debt.
The aggregate annual maturities of long-term debt at June 30, 1997 are as
follows:
<TABLE>
<S> <C>
1998 $ 272,258
1999 770,871
2000 1,752,686
2001 394,402
2002 616,444
Thereafter 568,577
----------
$4,375,238
==========
</TABLE>
Subsequent to June 30, 1997, the holders of the 10.35% convertible notes
payable due in 1999 and 2000 were offered 1.3 shares of the Company's Series A
Preferred Stock for each $10 of principal in an exchange offer which expired
August 31, 1997 (see Note 2). In the aggregate, approximately $900,000 of these
notes were exchanged for approximately 117,000 shares of preferred stock.
Convertible notes not converted pursuant to this offer are convertible into
shares of the company's common stock at the noteholders' option any time prior
to maturity at a price of $6.56 to $8.08 per share.
6. COMMON STOCK
Effective December 31, 1995, AquaPro issued 404,764 "Units" in connection with
the merger with Circle Creek I-IV described in Note 2. In 1996, certain holders
of unsecured notes payable converted notes with principal balances totaling
$1,678,762 into 167,876 units. A Unit consisted of one share of the Company's
common stock, one $7.25 stock purchase right, one $8.25 stock purchase warrant
and one $10.50 stock purchase warrant. The stock rights expired on June 14,
1996 which allowed the holder to purchase one share of the Company's common
stock for $7.25. The $8.25 stock purchase warrants, which allowed the holder to
purchase one share of the Company's common stock for $8.25 (1.2 shares at
$6.875 post split), expired on December 31, 1996. The $10.50 stock purchase
warrants had an expiration date of December 31, 1997 and allowed the holder to
purchase one share of the Company's common stock for $10.50 (1.2 shares at
$8.75 post split);
F-21
<PAGE> 73
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
6. COMMON STOCK (CONTINUED)
however, on June 30, 1997, the Company exercised its option to convert the
$10.50 stock purchase warrants into 203,834 shares of the Company's common
stock. None of the $8.25 stock purchase warrants or the $10.50 stock purchase
warrants were outstanding at June 30, 1997. There were 235,507 $7.50 stock
purchase warrants outstanding at June 30, 1997 pertaining to preferred stock
issued in 1997 and 1996 (see Note 8.)
During 1996, the Company received $2,137,928, net of related expenses
pertaining to broker-dealer commissions, legal, printing, travel and other,
from the sale of 358,221 shares (429,865 shares post split) of common stock at
$7.25 per share pursuant to the exercise of the $7.25 stock purchase rights and
4,483 shares (5,380 shares post split) of common stock at $8.25 per share
pursuant to the exercise of the $8.25 stock purchase warrants. In connection
with the exercise of the $7.25 stock purchase rights, the Company granted
broker-dealers options to purchase 32,598 shares of the Company's common stock
at $11.25 per share (39,117 shares at $9.38 per share post split). The options
are exercisable at any time through June 2001. None of the options have been
exercised as of June 30, 1997.
During the six months ended June 30, 1997, the Company granted 22,500 shares of
common stock to key employees. The Company granted 20,000 shares (24,000 shares
post split) of common stock to key employees during the year ended December 31,
1996 and 1995, respectively. The shares generally vest after a two-year period.
Unearned compensation expense is amortized to selling, general and
administrative expenses in the accompanying consolidated statements of
operations over the vesting period. Common shares totaling 9,000 were canceled
during the six-month period ended June 30, 1997.
F-22
<PAGE> 74
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE STOCK OPTIONS
The Company granted directors and certain key employees options to purchase
shares of common stock at $6.25 per share as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Outstanding-beginning of period 129,000 63,000 -
Granted 63,000 66,000 63,000
Exercised - - -
Forfeited (12,000) - -
------- ------- ------
Outstanding-end of period 180,000 129,000 63,000
======= ======= ======
</TABLE>
All outstanding options at June 30, 1997 were exercisable. The options were
granted for a seven-year period and, accordingly, the 1997 options, the 1996
options, and the 1995 options are exercisable at any time through March 31,
2004, March 31, 2003, and March 2002, respectively.
Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, Accounting for Stock-Based Compensation, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of the Statement. The fair value was estimated at
the date of the grant using a Black-Scholes option pricing model with the
following weighted-average assumptions: volatility factor of .01 for the six
months ended June 30, 1997, and the years ended December 31, 1996 and 1995;
weighted-average expected life of options of three years; risk-free interest
rate of 6%; and no dividend yield.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
F-23
<PAGE> 75
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
7. EMPLOYEE STOCK OPTIONS (CONTINUED)
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
granted for the six months ended June 30, 1997, and the years ended December
31, 1996 and 1995 is amortized to expense over the vesting period. The
Company's pro forma net losses were $1,538,525, $2,572,855 and $1,329,681 for
the six months ended June 30, 1997 and the years ended December 31, 1996 and
1995, respectively, and the Company's pro forma loss per common share was
$(.53), $(1.04) and $(.67), respectively, for those same periods. The
weighted-average fair value of options granted during the six months ended June
30, 1997 and the years ended December 31, 1996 and 1995, respectively, was
$1.00.
8. PREFERRED STOCK
During the six months ended June 30, 1997, the Company received $1,089,239, net
of related expenses pertaining to broker-dealer-commissions, legal, printing,
travel and other, from the sale of 130,973 "Preferred Units." In 1996, the
Company received $748,169, net of related expenses pertaining to
broker-dealer-commissions, legal, printing, travel and other, from the sale of
104,534 "Preferred Units". A Preferred Unit consists of one share of the
Company's Series A Preferred Stock and one $7.50 common stock purchase warrant.
The $7.50 stock purchase warrants (235,507 warrants outstanding at June 30,
1997) allow the holder to purchase one share of the Company's common stock for
$7.50 prior to the expiration date of December 31, 1998. The warrants will be
automatically converted into three-tenths of a share of the Company's common
stock if not exercised by that date.
At June 30, 1997, 708,926 Preferred Stock Rights (see Note 2) were outstanding.
Subsequent to June 30, 1997, the Company received approximately $525,000, net
of offering expenses, from the exercise of approximately 75,000 Preferred Stock
Rights.
The Series A Preferred Stock has cumulative annual dividends of $0.175 per
share, payable quarterly. Each share (235,507 shares outstanding at June 30,
1997) may be converted, at the option of the holder, into 1.33 shares of the
Company's common stock. The Company may redeem the Series A Preferred stock at
any time on or after January 1, 2000 at $10 per share plus accrued dividends.
The Series A Preferred Stock will be
F-24
<PAGE> 76
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
mandatorily converted into the Company's common stock on the sixty-sixth
trading day following the listing of the Company's common stock on a national
exchange. On the
8. PREFERRED STOCK (CONTINUED)
mandatory conversion date, each share of Series A Preferred Stock will
automatically be converted into the greater of 1.33 shares of the Company's
common stock or $10 divided by the current market price, as defined. In the
event of the Company's liquidation, the holders of the Series A Preferred Stock
are entitled to $10 per share plus accrued dividends.
The Series A Preferred Stock has no voting rights. However, in the event that
three consecutive quarterly dividend payments are in arrears, each share of
Series A Preferred Stock will have 25 votes.
9. INCOME TAXES
For the year ended December 31, 1995, taxable income and losses of Circle Creek
I-IV and Circle Creek V-VIII were reported on the tax returns of the partners.
For the year ended December 31, 1996 and the six months ended June 30, 1997,
taxable income and losses of Circle Creek V-VIII were reported on the tax
returns of the partners. Accordingly, income taxes have not been provided in
the accompanying consolidated financial statements applicable to losses of
Circle Creek I-IV and Circle Creek V-VIII for 1995 or losses of Circle Creek
V-VIII for 1996 and for the six months ended June 30, 1997 . The merger
described in Note 2 was treated as a taxable transaction by the partners with
the excess of the fair value of the related assets and liabilities over the tax
basis reported as taxable income to the partners.
The Company had net operating loss carryovers of approximately $2,600,000 at
June 30, 1997, to reduce future taxable income through 2012.
AquaPro and its wholly-owned subsidiaries, American and Circle Creek, Inc.,
file a consolidated federal income tax return with operations subject to income
taxes at the corporate level.
F-25
<PAGE> 77
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Components of the Company's deferred tax assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets - current:
Inventories $ 80,000 $ 168,000
Accrued expenses 89,000 89,000
Deferred tax assets - noncurrent:
Goodwill for income tax purposes 2,440,000 457,000
Net operating loss carryforward 960,000 575,000
Other 37,000 11,000
----------- -----------
3,606,000 1,300,000
Valuation allowance for deferred tax assets (3,606,000) (1,300,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
Deferred income taxes were reinstated for temporary differences between
financial and income tax basis in connection with the merger of the Company and
Circle Creek I-IV, effective December 31, 1995 and in connection with the
merger of the Company and Circle Creek V-VIII, effective June 30, 1997.
10. RELATED PARTY TRANSACTIONS
Management fees from affiliates consist of management fees of $9,000 for the
six month period ended June 30, 1997 and $18,000 for the years ended December
31, 1996 and 1995, respectively, received from a catfish production farm in
which an officer of the Company is an owner of the catfish production farm.
For the years ended December 31, 1996 and 1995, the Company purchased
fingerling fish at prevailing market rates totaling $38,758 and $50,356,
respectively, from an affiliate.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents approximate their fair
values at June 30, 1997 and December 31, 1996. The carrying amount for
investments in cooperatives approximates their fair value at June 30, 1997 and
December 31, 1996 based upon estimates of recent sales of stock of the
cooperation obtained by management.
F-26
<PAGE> 78
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Notes payable to banks and officers and directors were at variable rates which
approximated fair value at June 30, 1997 and December 31, 1996. The fair value
of notes payable-other and long-term debt, which was estimated using discounted
cash flow analysis based upon the Company's incremental borrowing rates for
similar borrowings arrangements, approximated their carrying amounts at June
30, 1997 and at December 31, 1996.
F-27
<PAGE> 79
Report of Independent Auditors
The Partners
Circle Creek Aquaculture V, LP
We have audited the accompanying balance sheets of Circle Creek Aquaculture V,
LP as of December 31, 1996 and 1995, and the related statements of operations,
changes in partners' capital and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conduct 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 financial statements referred to above present fairly, in
all material respects, the financial position of Circle Creek Aquaculture V, LP
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
As described in Note 1 to the financial statements, in 1996 the Partnership
changed its method of accounting for long-lived assets and long-lived assets to
be disposed of.
/s/ ERNST & YOUNG LLP
Jackson, Mississippi
February 21, 1997
F-28
<PAGE> 80
Circle Creek Aquaculture V, LP
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,602 $ 14,887
Trade accounts receivable 123,541 124,912
Live fish inventories (Note 5) 1,145,621 1,108,267
--------------------------------
Total current assets 1,284,764 1,248,066
Property, buildings and equipment (Notes 1 and 5):
Land 446,000 544,564
Ponds and improvements 373,654 598,195
Buildings 131,000 216,004
Machinery and Equipment 286,148 285,871
--------------------------------
Accumulated depreciation 1,236,802 1,644,634
110,892 64,457
--------------------------------
1,125,910 1,580,177
Investments in cooperatives (Notes 4 and 5) 309,755 319,755
Investment in Circle Creek Seining Company 98,167 104,448
Goodwill, net (Note 1) - 117,914
--------------------------------
Total assets $2,818,596 $3,370,360
================================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Notes payable (Note 5):
General partner $ 85,254 $ 103,623
Other 180,090 85,384
Accounts payable 9,231 6,996
Accrued expenses 12,307 -
Payable to affiliates 344,664 65,314
Current maturities of long-term debt (Note 5) 19,382 16,395
--------------------------------
Total current liabilities 650,928 277,712
Long-term debt, less current maturities (Note 5) 1,363,667 1,387,605
Partners' capital (Note 3):
General partner's capital (deficit) (426,953) (418,210)
Limited partners' capital (33,706 partnership
units in 1996 and 33,973 in 1995) 1,230,954 2,123,253
--------------------------------
Total partners' capital 804,001 1,705,043
--------------------------------
Total liabilities and partners' capital $2,818,596 $3,370,360
================================
</TABLE>
See accompanying notes.
F-29
<PAGE> 81
Circle Creek Aquaculture V, LP
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
-------------------------
<S> <C> <C>
Net sales $ 797,748 $ 801,930
Cost of products sold (Note 6) 792,125 746,162
-------------------------
Gross profit 5,623 55,768
Selling, general and administrative (Note 6) 195,211 177,560
Impairment loss on long-lived assets (Note 1) 498,000 -
-------------------------
Operating loss (687,588) (121,792)
Other income (expense)
Interest expense (172,783) (138,932)
Other, net (13,922) 24,810
-------------------------
(186,705) (114,122)
-------------------------
Net loss (874,293) (235,914)
Less net loss allocated to general partner (8,743) (2,359)
-------------------------
Net loss allocated to limited partners $ (865,550) $ (233,555)
=========================
Net loss per limited partnership unit $ (25.58) $ (7.60)
=========================
</TABLE>
See accompanying notes.
F-30
<PAGE> 82
Circle Creek Aquaculture V, LP
Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
General Total
Partner's Limited Partners' Capital Partners'
Capital -------------------------
(Deficit) Units Amount Capital
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $(400,427) 23,151 $1,711,658 $1,311,231
Sale of limited partnership
units (Note 3) -- 10,822 873,662 873,662
Net loss for 1995 (2,359) -- (233,555) (235,914)
Cash distributions to partners (15,424) -- (228,512) (243,936)
-------------------------------------------------------------
Balance at December 31, 1995 (418,210) 33,973 2,123,253 1,705,043
Retirement of limited
partnership units -- (267) (26,749) (26,749)
Net loss for 1996 (8,743) -- (865,550) (874,293)
-------------------------------------------------------------
Balance December 31, 1996 $(426,953) 33,706 $1,230,954 $ 804,001
=============================================================
</TABLE>
See accompanying notes
F-31
<PAGE> 83
Circle Creek Aquaculture V, LP
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (874,293) $ (235,914)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment loss on long-lived assets 498,000 --
Depreciation and amortization 74,458 69,930
Equity in losses on investments in cooperatives 10,000 --
Equity in loss of Circle Creek Seining Company 6,281 9,153
Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable 1,371 (43,308)
Increase in live fish inventories (37,354) (215,009)
Decrease in prepaid expenses and other assets 19,256
Increase (decrease) in accounts payable and accrued
expenses 14,542 (13,613)
Increase in payable to affiliates 279,350 65,314
------------------------
Net cash used in operating activities (27,645) (344,191)
INVESTING ACTIVITIES
Purchase of certain assets of Fat Cat Corporation -- (1,850,358)
Purchases of equipment (277) (1,320)
------------------------
Net cash used in investing activities (277) (1,851,678)
FINANCING ACTIVITIES
Net increase in notes payable 76,337 133,146
Proceeds from long-term borrowings -- 1,307,000
Payments on long-term borrowings (20,951) --
Sale of limited partnership units -- 873,662
Cash distributions to partners (26,749) (243,936)
------------------------
Net cash provided by financing activities 28,637 2,069,872
------------------------
Increase (decrease) in cash and cash equivalents 715 (125,997)
Cash and cash equivalents at beginning of year 14,887 140,884
------------------------
Cash and cash equivalents at end of year $ 15,602 $ 14,887
========================
SUPPLEMENTAL CASH FLOW INFORMATION-
Interest paid $ 156,900 $ 142,508
========================
NONCASH INVESTING ACTIVITY-
Contribution of equipment to Circle Creek Seining Company $ -- $ 113,600
========================
</TABLE>
See accompanying notes.
F-32
<PAGE> 84
Circle Creek Aquaculture V, LP
Notes to Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Circle Creek Aquaculture V, LP (the "Partnership") was formed in 1993. The
Partnership's income (or loss) is allocated 1% to the general partner and 99%
to the limited partners. If certain minimum distribution are made to the
limited partners, the Partnership's income is allocated 10% to the general
partner and 90% to the limited partners.
The Partnership is a limited partnership engaged primarily in catfish farming
on 443 water acres within the State of Mississippi. Catfish farming is
conducted in a few southern states, principally Mississippi, Louisiana, Alabama
and Arkansas. Catfish are sold principally to retail grocery stores and
restaurants by catfish processors. The Partnership's sales have been to a
limited number of processors. Two processors represented 59% and 34%,
respectively, of the Partnership's net sales for the year ended December 31,
1996, and 73% and 16%, respectively, for the year ended December 31, 1995.
Fish prices are affected by changes in market demand and supply and may
fluctuate significantly from period to period.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results cold differ from those estimates.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
LIVE FISH INVENTORIES
Live fish inventories are stated at the lower of average cost or market.
F-33
<PAGE> 85
Circle Creek Aquaculture V, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Live fish inventories are purchased as "fingerlings" (generally, 5 to 6 inches
in length) and are grown out to a marketable size over 9 to 18 months. Because
the Partnership's production cycle for fish generally exceeds one year,
management anticipates certain live fish inventories on hand at December 31,
1996 may not be sold in 1997. Live fish inventories are classified as a
current asset in the accompanying balance sheet which is consistent with
industry practice. The quantities of live fish inventories are determined based
upon estimated growth from feed fed at each pond and are reduced for the actual
quantities sold and estimated mortality. Cost associated with live fish
production are accumulated during the growing period and consist principally
of feed, labor and overhead costs required to grow the live fish to a
marketable size. Each pond is closed periodically and the estimated pounds are
adjusted to the actual harvest. Live catfish are highly susceptible to disease,
oxygen depletion and extreme temperatures which could result in high mortality.
Management continually monitors each pond and takes appropriated actions to
minimize the risk of loss from mortality. Given the nature of the live fish
inventories, it is reasonably possible that the Company's actual live fish
mortality will vary significantly from estimates. The cost of producing fish
for harvest is subject to the cost of grains which is susceptible to
significant fluctuations in commodity markets. The Partnership establishes
prices for a portion of its anticipated feed purchases over specified periods
of time through various feed purchase agreements.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives (15 years
for ponds and improvements, 15 years for buildings and 7 years for machinery
and equipment).
INVESTMENT IN CIRCLE CREEK SEINING COMPANY
The Partnership owns 23.86% interest in the Circle Creek Seining Company (the
"Seining Company") which is accounted for using the equity method. Included in
other income, net in the accompanying statement of operations is expense of
$6,281 and $9,153 applicable to the Partnership's interest in the Seining
Company's losses for the year ended December 31, 1996 and 1995, respectively.
The Seining Company is a joint venture organized to provide seining and hauling
services to certain catfish farms. The Seining Company charged the Partnership
seining and hauling fees totaling $96,311 and $66,k 460 for the years ended
December 31, 1996 and 1995, respectively, which are included in selling, general
and administrative expenses in the accompanying statement of operations.
F-34
<PAGE> 86
Circle Creek Aquaculture V, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1996, the net assets of the Seining Company were approximately
$390,000.
INVESTMENTS IN COOPERATIVES
Investments in cooperatives are stated at original cost adjusted for allocation
of earnings or losses, net of distributions.
INCOME TAXES
Taxable income or loss of the Partnership is reported on the tax returns of
the partners. Accordingly, income taxes have not been provided for in the
financial statements of the Partnership. The Partnership's income or loss will
differ from the taxable income or loss reported by the partners because of
differences in reporting for income tax and financial reporting.
NET LOSS PER LIMITED PARTNERSHIP UNIT
The net loss per limited partnership unit is computed by dividing the net loss
allocated to limited partners by the weighted average limited partnership
units outstanding (33,840 units in 1996 and 30,505 units in 1995).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operation when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption by the Partnership of
Statement 121 resulted in a non-cash charge of $480,0000 from the writedown of
land, ponds and improvements, buildings and goodwill to their estimated fair
values. The charge represents the adjustment required to remeasure long-lived
assets at the lower of the carrying amount or fair value based upon 1996
appraisals obtained from an independent appraiser in connection with the
proposed merger as described in Note 8.
F-35
<PAGE> 87
Circle Creek Aquaculture V, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform to 1996 presentation.
2. PURCHASE OF BUSINESS
In April 1993, the Partnership entered into a two-year agreement for the lease
of substantially all of the land, ponds and improvements, machinery and
equipment, and other assets used in the Partnership's operations. Pursuant to
the lease agreement, the Partnership had the option to purchase for fair value
the leased assets at the end of the lease term. In March 1995, the Partnership
exercised its option to purchase the leased assets for $1,972,852 including
acquisition costs of $174,852 of which $122,494 was paid in 1994. The
acquisition was accounted for by the purchase method of accountin. Lease
payments for 1995 totaled approximately $45,000 and are included in the cost of
producing live fish inventories.
3. PARTNERS' CAPITAL
In 1995, the Partnership issued 10,882 partnership units at $100 per unit
pursuant to a private placement memorandum. Expenses of the offering, which
were netted against the proceeds, totaled $208,538 of which approximately
$91,000 was paid to the general partner or an affiliate of the general partner
in 1995.
4. INVESTMENTS IN COOPERATIVES
Investments in cooperatives consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------
<S> <C> <C>
Catfish processing cooperative $301,755 $311,755
Feed mill cooperative 8,000 8,000
--------------------------
$309,755 $319,755
==========================
</TABLE>
F-36
<PAGE> 88
Circle Creek Aquaculture V, LP
Notes to Financial Statements (continued)
5. CREDIT FACILITIES AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------------------
<S> <C> <C>
Note payable to a bank with monthly principal and
interest payments of $11,754 through April 2000 and
a final installment of $1,008,245 due Apri 2000 with
interest at prime plus 2 1/2% (10.75% at December
31, 1996) $1,070,349 $ 1,091,300
Convertible notes payable with interest due quarterly
at 10.35% and principal maturing in 1999 312,700 312,700
----------------------------------------
1,383,049 1,404,000
Less current maturities 19,382 16,395
----------------------------------------
$1,363,667 $ 1,387,605
========================================
</TABLE>
The convertible note payable are due in 1999 with interest due quarterly. At
any time after January 1, 1997, the noteholders may request early payment of the
notes on the following December 31 ("redemption date") upon 120 days written
notice prior to the requested redemption date. The interest rate on the notes
is reduced to 8.35% and 9.35% on any notes that are repaid in 1997 and 1998,
respectively. The notes are convertible into 75 Partnership units for each $100
of principal outstanding. Live fish inventories are pledged as collateral to
the convertible notes payable.
The note payable to a bank is collaterized by property, buildings and machinery
and equipment.
The note payable-other consists of borrowings of $180,090 at December 31, 1996
under a revolving $180,090 line of credit with the Partnership's major feed
supplier. Borrowings are at prime plus 2% and are collateralized by cooperative
stock with a book value of $301,755 as of December 31, 1996.
The note payable to general partner is unsecured and bears interest at prime
plus 1/2%.
F-37
<PAGE> 89
Circle Creek Acquaculture V, LP
Notes to Financial Statements (continued)
5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities of long-term debt at December 31, 1996 are as
follows:
1997 $ 19,382
1998 20,611
1999 335,811
2000 1,007,245
----------
$1,383,049
==========
6. RELATED PARTY TRANSACTIONS
The operations of the Partnership are managed by AquaPro Corporation
("AcquaPro"), which in turn manages other affilitated partnerships' catfish
farming operations. The general partner of the Partnership is an officer and
shareholder of AquaPro. Pursuant to a management agreement between the
Partnership and AcquaPro, the Partnership is charged a monthly fee equal to the
greater of $4,430 or 5% of gross receipts, as defined. The management fee is
included in the cost of producing live fish inventories and amounted to $53,160
for the years ended December 31, 1996 and 1995. Also included in the cost of
producing live fish inventories for the years ended December 31, 1996 and 1995
is $126,950 and $164,462, respectively, paid to AquaPro pursuant to the
management agreement as reimbursement for the Partnership's share of farm labor.
Pursuant to the Limited Partnership Agreement, the Partnership also pays AquaPro
a monthly administrative management fee equal to the greater of $1,845 or 2% of
gross receipts for the month. The administrative management fee was $22,152 and
$22,149 for the years ended December 31, 1996 and 1995, respectively, and is
included in selling, general and administrative expenses in the accompanying
statements of operations.
In 1996 and 1995, the Partnership purchased fingerling fish totaling $110,584
and $38,924, respectively, from affiliated partnerships.
F-38
<PAGE> 90
Circle Creek Aquaculture V, LP
Notes to Financial Statements (continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and equivalents approximates their fair values at
December 31, 1996 and 1995. The carrying amount for investments in
cooperatives approximates its fair value at December 31, 1996 and 1995 based
upon estimates of recent sales of stock obtained by management. The notes
payable have variable interest rates which are considered to approximate market
at December 31, 1996 and 1995. The fair value of long-term debt, which is
estimated using discounted cash flow analysis based upon the Partnership's
incremental borrowing rates for similar borrowings arrangements, approximates
their carrying amounts at December 31, 1996 and 1995.
8. SUBSEQUENT EVENT
AquaPro has proposed to acquire the assets and assume the liabilities of the
Partnership and three affiliated partnerships (the "Proposed Merger") pursuant
to a prospectus and consent solicitation statement. The Proposed Merger will be
consummated upon majority vote of the limited partners of the Partnership. In
consideration for the assets and liabilities of the Partnerships, AquaPro will
issue up to 346,989 "Units" to the limited partners based upon the relative fair
values of the net assets of the Partnership, the affiliated partnerships and
AquaPro. Limited partners may elect to receive 7.15% notes rather than Units
subject to certain limitations. A Unit in the Proposed Merger consists of one
share of AquaPro's common stock, one $9.50 stock purchase right, one $7.50
warrant and one $9.50 warrant. The $9.50 stock purchase right expires ninety
days following the closing of the Proposed Merger and entitles the holder to
purchase one share of AquaPro's Series A Preferred Stock for $9.50. The $7.50
warrant expires twelve months following the closing and entitles the holder to
purchase one share of AquaPro's common stock for $7.50. The $9.50 warrant
expires twenty-four months following the closing and entitles the holder to
purchase one share of AquaPro's common stock for $9.50. The $7.50 warrants and
the $9.50 warrants will each be automatically converted to three-tenths of a
share of AquaPro common stock if not exercised prior to the expiration dates.
The Proposed Merger will be a taxable transaction with taxable income or loss
reported on the tax returns of the partners. Upon completion of the Proposed
Merger, if approved, the Partnership will be dissolved and cease to be a
separate reporting entity.
F-39
<PAGE> 91
Report of Independent Auditors
The Partners
Circle Creek Aquaculture VI, LP
We have audited the accompanying balance sheets of Circle Creek Aquaculture VI,
LP as of December 31, 1996 and 1995, and the related statements of operations,
changes in partners' capital and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Circle Creek Aquaculture VI,
LP at December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
As described in Note 1 to the financial statements, in 1996 the Partnership
changed its method of accounting for long-lived assets and long-lived assets to
be disposed of.
/s/ Ernst & Young, LLP
Jackson, Mississippi
February 21, 1997
F-40
<PAGE> 92
Circle Creek Aquaculture VI, LP
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,736 $ 21,250
Trade accounts receivable 241,227 5,241
Receivable from affiliates - 9,263
Live fish inventories 249,635 295,945
---------------------
Total current assets 496,598 331,699
Property, buildings and equipment (Notes 1 and 3):
Land 90,000 115,925
Ponds and improvements 180,588 238,479
Buildings 11,258 9,758
Machinery and equipment 121,804 115,559
---------------------
403,650 479,721
Accumulated depreciation 60,314 48,136
---------------------
343,336 431,585
Investments in cooperatives (Notes 2 and 3) 145,900 145,900
Investment in Circle Creek Seining Company 48,123 50,108
Other intangible assets, net 1,148 1,300
---------------------
Total assets $1,035,105 $960,592
=====================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Notes payable (Note 3):
Banks $ 79,500 $ 67,202
General partner 76,000 -
Accounts payable 5,748 13,247
Accrued expenses 14,452 7,873
Payable to affiliates 72,810 -
Current maturities of long-term debt (Note3) 17,180 17,180
---------------------
Total current liabilities 265,690 105,502
Long-term debt, less current maturities (Note 3) 145,889 163,014
Partners' capital:
General partner's capital (deficit) (11,755) (11,069)
Limited partners' capital (10,000 partnership
units in 1996 and 1995) 635,281 703,145
---------------------
Total partners' capital 623,526 692,076
---------------------
Total liabilities and partners' capital $1,035,105 $960,592
=====================
</TABLE>
See accompanying notes.
F-41
<PAGE> 93
Circle Creek Aquaculture VI, LP
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
----------------------
<C> <C> <C>
Net sales $454,982 $195,091
Cost of products sold (Note 4) 357,994 163,993
---------------------
Gross profit 96,988 31,098
Selling, general, and administrative (Note 4) 76,291 47,898
Impairment loss on long-lived assets (Note 1) 73,000 -
---------------------
Operating income (loss) (52,303) (16,800)
Other income (expense):
Interest expense (25,898) (22,586)
Other 9,651 5,139
---------------------
(16,247) (17,447)
---------------------
Net loss (68,550) (34,247)
Less net loss allocated to general partner (686) (342)
---------------------
Net loss allocated to limited partners $(67,864) $(33,905)
=====================
Net income (loss) per limited partnership unit $ (6.79) $ (3.39)
=====================
</TABLE>
See accompanying notes.
F-42
<PAGE> 94
Circle Creek Aquaculture VI, LP
Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
General
Partners' Limited Partners' Capital Total
Capital ---------------------------- Partners'
(Deficit) Units Amount Capital
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ (2,421) 10,000 $811,844 $809,423
Net loss for 1995 (342) - (33,905) (34,247)
Cash distributions to partners (8,306) - (74,794) (83,100)
-------------------------------------------------
Balance at December 31, 1995 (11,069) 10,000 703,145 692,076
Net loss for 1996 (686) - (67,864) (68,550)
-------------------------------------------------
Balance at December 31, 1996 $(11,755) 10,000 $635,281 $623,526
=================================================
</TABLE>
See accompanying notes.
F-43
<PAGE> 95
Circle Creek Aquaculture VI, LP
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (68,550) $ (34,247)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment loss on long-lived assets 73,000 -
Depreciation and amortization 34,756 32,621
Equity in loss of Circle Creek Seining Company 1,985 2,892
Changes in operating assets and liabilities:
Increase in receivables (226,723) (14,504)
Increase (decrease) in live fish inventories 46,310 (76,622)
Increase (decrease) in accounts payable and
accrued expenses (920) 14,986
Increase in payable to affiliates 72,810 -
----------------------
Net cash used in operating activities (67,332) (74,874)
INVESTING ACTIVITIES
Purchases of property and equipment (19,355) (22,252)
Sales of cooperative stock - 3,000
Investment in Circle Creek Seining Co. - (34,738)
----------------------
Net cash used in investing activities (19,355) (53,990)
FINANCING ACTIVITIES
Net increase in notes payable 88,298 30,102
Principal payments on long-term borrowings (17,125) (17,127)
Cash distributions to partners - (83,100)
----------------------
Net cash provided by (used in) financing activities 71,173 (70,125)
----------------------
Decrease in cash and cash equivalents (15,514) (198,989)
Cash and cash equivalents at beginning of year 21,250 220,239
----------------------
Cash and cash equivalents at end of year $ 5,736 $ 21,250
======================
SUPPLEMENTAL CASH FLOW INFORMATION-
Interest paid $ 19,319 $ 20,091
======================
NONCASH INVESTING ACTIVITY-
Contribution of equipment to Circle Creek Seining
Company $ - $ 18,262
======================
</TABLE>
See accompanying notes.
F-44
<PAGE> 96
Circle Creek Aquaculture VI, LP
Notes to Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Circle Creek Aquaculture VI, LP (the "Partnership") was formed in 1994 with a
one percent general partner and limited partners owning 10,000 partnership
units. The Partnership's income (or loss) is allocated 1% to the general
partner and 99% to the limited partners. If certain minimum distributions are
made to the limited partners, the Partnership's income is allocated 10% to the
general partner and 90% to the limited partners.
The Partnership is a limited partnership engaged primarily in catfish farming
on 140 water acres within the State of Mississippi. Catfish farming is
conducted in a few southern states, principally Mississippi, Louisiana, Alabama
and Arkansas. Catfish are sold principally to retail grocery stores and
restaurants by catfish processors. The Partnership's sales during 1995
consisted principally of the sale of certain fingerlings to other Circle Creek
Aquaculture limited partnerships. The Partnership's sales during 1996 were to
a limited number of catfish processors. Three processors represented 34%, 33%,
and 27%, respectively, of the Partnership's net sales for the year ended
December 31, 1996.
Fish prices are affected by changes in market demand and supply and may
fluctuate significantly from period to period.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
LIVE FISH INVENTORIES
Live fish inventories are stated at the lower of average cost or market.
F-45
<PAGE> 97
Circle Creek Aquaculture VI, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Live fish inventories are purchased as "fingerlings" (generally, 5 to 6 inches
in length) and are grown out to a marketable size over 9 to 18 months. Because
the Partnership's production cycle for fish generally exceeds one year,
management anticipates certain live fish inventories on hand at December 31,
1996 may not be sold in 1997. Live fish inventories are classified as a
current asset in the accompanying balance sheets which is consistent with
industry practice. The quantities of live fish inventories are determined
based upon estimated growth from feed fed at each pond and are reduced for the
actual quantities sold and estimated mortality. Cost associated with live fish
production are accumulated during the growing period and consist principally of
feed, labor and overhead costs required to grow the live fish to a marketable
size. Each pond is closed periodically and the estimated pounds are adjusted
to the actual harvest. Live catfish are highly susceptible to disease, oxygen
depletion and extreme temperatures which could result in high mortality.
Management continually monitors each pond and takes appropriate actions to
minimize the risk of loss from mortality. Given the nature of the live fish
inventories, it is reasonably possible that the Company's actual live fish
mortality will vary significantly from estimates. The cost of producing fish
for harvest is subject to the cost of grains which is susceptible to
significant fluctuations in commodity markets. The Partnership establishes
prices for a portion of its anticipated feed purchases over specified periods
of time through various feed purchase agreements.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives (15 years
for ponds and improvements, 15 years for buildings and 7 years for machinery
and equipment).
INVESTMENTS IN CIRCLE CREEK SEINING COMPANY
The Partnership owns a 7.54% interest in the Circle Creek Seining Company (the
"Seining Company") which is accounted for using the equity method. Included in
other income, net in the accompanying statement of operations is expense of
$1,985 and $2,892 applicable to the Partnerships interest in the Seining
Company's losses for the years ended December 31, 1996 and 1995, respectively.
The Seining Company is a joint venture organized to provide seining and hauling
services to certain catfish farms. The Seining Company charged the Partnership
seining and hauling fees totaling $37,816 and $13,557 for the years ended
December 31, 1996 and 1995, respectively, which are included in selling,
general and administrative expenses in the accompanying statement of
operations.
F-46
<PAGE> 98
Circle Creek Aquaculture VI, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1996, the net assets of the Seining Company were approximately
$390,000.
INVESTMENTS IN COOPERATIVES
Investments in cooperatives are stated at original cost adjusted for allocation
of earnings or losses, net of distributions.
INCOME TAXES
Taxable income or loss of the Partnership is reported on the tax returns of the
partners. Accordingly, income taxes have not been provided for in the
financial statements of the Partnership. The Partnership's income or loss will
differ from the taxable income or loss reported by the partners because of
differences in reporting for income tax and financial reporting.
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
The net income (loss) per limited partnership unit is computed by dividing the
net income (loss) allocated to limited partners by the weighted average limited
partnership units outstanding (10,000 units in 1996 and 1995).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption by the Partnership of
Statement 121 resulted in a non-cash charge of $73,000 from the writedown of
land and ponds and improvements to their estimated fair values. The charge
represents the adjustment required to remeasure long-lived assets at the lower
of the carrying amount or fair value based upon appraisals obtained from an
independent appraiser in connection with the proposed merger as described in
Note 6.
F-47
<PAGE> 99
Circle Creek Aquaculture VI, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform to 1996 presentation.
2. INVESTMENTS IN COOPERATIVES
Investments in cooperatives consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------
<S> <C> <C>
Catfish processing cooperative $143,900 $143,900
Feed mill cooperative 2,000 2,000
------------------
$145,900 $145,900
==================
</TABLE>
3. CREDIT FACILITIES AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------
<S> <C> <C>
Note payable to an insurance company with
annual payments of $6,100 through March
2004 and a final installment of $92,000 due
September 2004 with interest payable
semi-annually at 9.5% $140,800 $146,900
Notes payable, collateralized by equipment, with
annual payments of $11,080, including interest
at 9.4% 22,269 33,294
------------------
163,069 180,194
Less current maturities 17,180 17,180
------------------
$145,889 $163,014
==================
</TABLE>
F-48
<PAGE> 100
Circle Creek Aquaculture VI, LP
Notes to Financial Statements (continued)
3. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 17,180
1998 17,289
1999 6,100
2000 6,100
2001 6,100
Thereafter 110,300
--------
$163,069
========
</TABLE>
The note payable to an insurance company is collateralized by land and ponds
and improvements and is guaranteed by the Partnership's general partner.
The note payable to banks included in current liabilities consists of
borrowings under a revolving credit facility with the Partnership's major feed
supplier. Borrowings are at prime plus 2% and are collateralized by stock in
cooperative with a book value of $143,900 as of December 31, 1996.
The note payable to the general partner is unsecured and bears interest at
prime plus 1/2%.
4. RELATED PARTY TRANSACTIONS
The operations of the Partnership are managed by AquaPro Corporation
("AquaPro"), which in turn manages other affiliated partnerships' catfish
farming operations. The general Partner of the Partnership is an officer and
shareholder of AquaPro. Pursuant to a management agreement between the
Partnership and AquaPro, the Partnership is charged a monthly fee equal to the
greater of $1,400 or 5% of gross sales, as defined. The management fee is
included in the cost of producing live fish inventories and amounted to $16,800
and $18,200 for the years ended December 31, 1996 and 1995, respectively. Also
included in the cost of producing live fish inventories for the years ended
December 31, 1996 and 1995 is $37,701 and $36,653, respectively, paid to
AquaPro pursuant to the management agreement as reimbursement for the
Partnership's share of farm labor.
F-49
<PAGE> 101
Circle Creek Aquaculture VI, LP
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to the Limited Partnership Agreement, the Partnership also pays
AquaPro a monthly administrative management fee equal to the greater of $583 or
2% of gross receipts for the month. The administrative management fee was
$6,417 and $7,583 for the years ended December 31, 1996 and 1995, respectively,
and is included in selling, general and administrative expenses in the
accompanying statements of operations.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents approximate their fair
values at December 31, 1996 and 1995. The carrying amount for investments in
cooperatives approximates its fair value at December 31, 1996 and 1995 based
upon estimates of recent sales of stock obtained by management. The notes
payable have variable interest rates which are considered to approximate market
at December 31, 1996 and 1995. The fair value of long-term debt, which is
estimated using discounted cash flow analysis based upon the Partnership's
incremental borrowing rates for similar borrowings arrangements, approximates
their carrying amounts at December 31, 1996 and 1995.
6. SUBSEQUENT EVENT
AquaPro has proposed to acquire the assets and assume the liabilities of the
Partnership and three affiliated partnerships (the "Proposed Merger") pursuant
to a prospectus and consent solicitation statement. The Proposed Merger will
be consummated upon majority vote of the limited partners of the Partnership.
In consideration for the assets and liabilities of the Partnerships, AquaPro
will issue up to 157,903 "Units" to the limited partners based upon the
relative fair values of the net assets of the Partnership, the affiliated
partnerships and AquaPro. Limited partners may elect to receive 7.15% notes
rather than Units subject to certain limitations. A Unit in the Proposed
Merger consists of one share of AquaPro's common stock, one $9.50 stock
purchase right, one $7.50 warrant and one $9.50 warrant. The $9.50 stock
purchase right expires ninety days following the closing of the Proposed Merger
and entitles the holder to purchase one share of AquaPro's Series A Preferred
Stock for $9.50. The $7.50 warrant expires twelve months following the closing
and entitles the holder to purchase one share of AquaPro's common stock for
$7.50. The $9.50 warrant expires twenty-four months following the closing and
entitles the holder to purchase one share of AquaPro's common stock for $9.50.
The $7.50 warrants and the $9.50 warrants will each be automatically converted
to three-tenths of a share of AquaPro's common stock if not exercised prior to
the expiration dates.
F-50
<PAGE> 102
Circle Creek Aquaculture VI, LP
Notes to Financial Statements (continued)
6. SUBSEQUENT EVENT (CONTINUED)
The Proposed Merger will be a taxable transaction with taxable income or loss
reported on the tax returns of the partners. Upon completion of the Proposed
Merger, if approved, the Partnership will be dissolved and cease to be a
separate reporting entity.
F-51
<PAGE> 103
Report of Independent Auditors
The Partners
Circle Creek Aquaculture VII, LP
We have audited the accompanying balance sheets of Circle Creek Aquaculture
VII, LP as of December 31, 1996 and 1995, and the related statements of
operations, changes in partners' capital and cash flows for the year ending
December 31, 1996 and from inception (July 6, 1995) to December 31, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Circle Creek Aquaculture VII,
LP at December 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996 and from inception (July 6, 1995) to
December 31, 1995, in conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, in 1996 the Partnership
changed its method of accounting for long-lived assets and long-lived assets to
be disposed of.
/s/ Ernst & Young LLP
Jackson, Mississippi
February 21, 1997
F-52
<PAGE> 104
Circle Creek Aquaculture VII, LP
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,569 $ -
Live fish inventories (Note 4) 504,616 533,069
------------------------------
Total current assets 507,185 533,069
Property, buildings and equipment (Notes 1 and 4)
Land 129,444 129,444
Ponds and improvements 160,703 382,182
Buildings 35,439 50,092
Machinery and equipment 104,501 233,062
------------------------------
430,087 794,780
Accumulated depreciation 25,983 31,035
------------------------------
404,104 763,745
Investments in cooperatives (Notes 3 and 4) 43,950 43,950
Investment in Circle Creek Seining Company 57,336 60,000
Deferred loan costs, net 21,250 29,750
------------------------------
Total assets $1,033,825 $ 1,430,514
==============================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Note payable (Note 4) $ 23,177 $ 30,870
Accounts payable - 19,122
Accrued expenses - 2,345
Payable to affiliates 61,755 8,356
Current maturities of long-term debt (Note 4) 25,320 23,185
------------------------------
Total current liabilities 110,252 83,878
Long-term debt, less current maturities (Note 4) 534,245 559,138
Partners' capital (Note 2): -
General partners' capital (deficit) (14,556) (5,051)
Limited partners' capital (10,607 partnership units in
1996 and 1995) 403,884 792,549
------------------------------
Total partners' capital 389,328 787,498
------------------------------
Total liabilities and partners' capital $ 1,033,825 $ 1,430,514
==============================
</TABLE>
See accompanying notes.
F-53
<PAGE> 105
Circle Creek Aquaculture VII, LP
Statements of Operations
<TABLE>
<CAPTION>
INCEPTION
YEAR ENDED (JULY 6, 1995)
DECEMBER 31 TO DECEMBER 31
1996 1995
---------------------------------------
<S> <C> <C>
Net sales $ 335,863 $ -
Cost of products sold (Note 5) 304,171 -
---------------------------------------
Gross profit 31,692 -
Selling, general and administrative (Note 5) 56,276 26,740
Impairment loss on long-lived assets (Note 1) 262,000 -
---------------------------------------
Operating loss (286,584) (26,740)
Other income (expense):
Interest expense (59,334) (46,366)
Other, net 9,120 5,579
---------------------------------------
(50,214) (40,787)
---------------------------------------
Net loss (336,798) (67,527)
Less net loss allocated to general partner (3,368) (675)
---------------------------------------
Net loss allocated to limited partners $ (333,430) $ (66,852)
=======================================
Net loss per limited partnership unit $ (31.43) $ (7.11)
=======================================
</TABLE>
See accompanying notes.
F-54
<PAGE> 106
Circle Creek Aquaculture VII, LP
Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
General
Partners' Limited Partners' Capital Total
Capital --------------------------- Partners'
(Deficit) Units Amount Capital
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital contributions $ 500 - $ - $ 500
Sale of limited partnership
units (Note 2) - 10,607 910,956 910,956
Net loss for period (675) - (66,852) (67,527)
Cash distributions to partners (4,876) - (51,555) (56,431)
---------------------------------------------------------------
Balance at December 31, 1995 (5,051) 10,607 792,549 787,498
Net loss for year (3,368) - (333,430) (336,798)
Cash distributions to partners (6,137) - (55,235) (61,372)
---------------------------------------------------------------
Balance at December 31, 1996 $ (14,556) 10,607 $ 403,884 $ 389,328
===============================================================
</TABLE>
See accompanying notes.
F-55
<PAGE> 107
Circle Creek Aquaculture VII, L.P.
Statements of Cash Flows
<TABLE>
<CAPTION>
Inception
(July 6, 1995)
Year ended to
December 31, December 31,
1996 1995
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (336,798) $ (67,527)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment loss on long-lived assets 262,000 -
Depreciation and amortization 39,353 35,285
Equity in loss of Circle Creek Seining Company 2,664 2,600
Changes in operating assets and liabilities:
Decrease (increase) in live fish inventories 28,453 (533,069)
(Decrease) increase in accounts payable and accrued
expenses (21,467) 21,467
Increase in payable to affiliates 53,399 8,356
------------------------------------
Net cash provided by (used in) operating activities 27,604 (532,888)
INVESTING ACTIVITIES
Purchases of cooperative stock - (43,950)
Investment in Circle Creek Seining Company - (62,600)
Purchases of property, buildings and equipment (15,103) (794,780)
Proceeds from sale of equipment 81,891 -
------------------------------------
Net cash provided by (used in) investing activities 66,788 (901,330)
FINANCING ACTIVITIES
Net (decrease) increase in notes payable (7,693) 30,870
Proceeds from long-term borrowings,
net of loan costs paid - 548,323
Principal payments on long-term borrowings (22,758) -
Capital contributions - 500
Sale of limited partnership units - 910,956
Cash distributions to partners (61,372) (56,431)
------------------------------------
Net Cash (used in) provided by financing activities (91,823) 1,434,218
------------------------------------
Change in cash and cash equivalents 2,569 -
Cash and cash equivalents at beginning of period - -
------------------------------------
Cash and cash equivalents at end of period $ 2,569 $ -
====================================
SUPPLEMENTAL CASH FLOW INFORMATION -
Interest paid $ 53,179 $ 39,771
====================================
</TABLE>
See accompanying notes.
F-56
<PAGE> 108
Circle Creek Aquaculture VII, LP
Notes to Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Circle Creek Aquaculture VII, LP (the "Partnership") was formed in 1995. The
Partnership is a limited partnership engaged primarily in catfish farming
within the State of Mississippi. The Partnership's income (or loss) is
allocated 1% to the general partner and 99% to the limited partners. If
certain minimum distributions are made to the limited partners, the
Partnership's income is allocated 10% to the general partner and 90% to the
limited partners.
The Partnership began operations on July 6, 1995 when it purchased property and
buildings totaling $439,223 from the general partner (including fees paid to
the general partner of $78,000) for the purpose of commencing a catfish farming
operation on 189 water acres within the State of Mississippi. Catfish farming
is conducted in a few southern states, principally Mississippi, Louisiana,
Alabama and Arkansas. Catfish are sold principally to retail grocery stores
and restaurants by catfish processors. During the period from inception to
December 31, 1995, the Partnership's principal operations consisted of stocking
catfish ponds and growing the fish to a marketable weight. There were no sales
during the period from inception to December 31, 1995. The Partnership's sales
during 1996 consisted principally of the sale of certain fingerlings to other
Circle Creek Aquaculture limited partnerships and AquaPro Corporation at
prevailing market rates. The Partnership anticipates its future sales will be
to a limited number of processors.
Fish prices are affected by changes in market demand and supply and may
fluctuate significantly from period to period.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-57
<PAGE> 109
Circle Creek Aquaculture VII, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
LIVE FISH INVENTORIES
Live fish inventories are stated at the lower of average cost or market.
Live fish inventories are purchased as "fingerlings" (generally, 5 to 6 inches
in length) and are grown out to a marketable size over 9 to 18 months. Because
the Partnership's production cycle for fish generally exceeds one year,
management anticipates certain live fish inventories on hand at December 31,
1996 may not be sold in 1997. Live fish inventories are classified as a
current asset in the accompanying balance sheets which is consistent with
industry practice. The quantities of live fish inventories are determined
based upon estimated growth from feed fed at each pond and are reduced for the
actual quantities sold and estimated mortality. Cost associated with live fish
production are accumulated during the growing period and consist principally of
feed, labor and overhead costs required to grow the live fish to a marketable
size. Each pond is closed periodically and the estimated pounds are adjusted
to the actual harvest. Live catfish are highly susceptible to disease, oxygen
depletion and extreme temperatures which could result in high mortality.
Management continually monitors each pond and takes appropriate actions to
minimize the risk of loss from mortality. Given the nature of the live fish
inventories, it is reasonably possible that the Company's actual live fish
mortality will vary significantly from estimates. The cost of producing fish
for harvest is subject to the cost of grains which is susceptible to
significant fluctuations in commodity markets. The Partnership establishes
prices for a portion of its anticipated feed purchases over specified periods
of time through various feed purchase agreements.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives (15 years
for ponds and improvements, 15 years for buildings and 7 years for machinery
and equipment).
F-58
<PAGE> 110
Circle Creek Aquaculture VII, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN CIRCLE CREEK SEINING COMPANY
The Partnership owns a 10.12% interest in the Circle Creek Seining Company (the
"Seining Company") which is accounted for using the equity method. Included in
other income in the accompanying statements of operations is expense of $2,664
and $470 applicable to the PartnershipGs interest in the Seining Company's
losses for the years ended DecemberE31, 1996 and 1995, respectively. The
Seining Company is a joint venture organized to provide seining and hauling
services to certain catfish farms. The Seining Company charged the Partnership
seining and hauling fees totaling $10,950 for the year ended December 31, 1996,
which are included in selling, general, and administrative expenses in the
accompanying statements of operations. At December 31, 1996, the net assets of
the Seining Company were approximately $390,000.
INVESTMENTS IN COOPERATIVES
Investments in cooperatives are stated at original cost adjusted for allocation
of earnings or losses, net of distributions.
DEFERRED LOAN COSTS
Cost incurred to obtain long-term financing are amortized on a straight-line
basis over the term of the related debt. Accumulated amortization of deferred
loan costs was $12,750 and $4,250 at December 31, 1996 and 1995, respectively.
Included in deferred loan costs are fees of $8,984 and $12,573 at December 31,
1996 and 1995, respectively, net of accumulated amortization, which were paid
to affiliates of the general partner in connection with obtaining long-term
financing.
INCOME TAXES
Taxable income or loss of the Partnership is reported on the tax returns of the
partners. Accordingly, income taxes have not been provided for in the
financial statements of the Partnership. The Partnership's income or loss will
differ from the taxable income or loss reported by the partners because of
differences in reporting for income tax and financial reporting.
F-59
<PAGE> 111
Circle Creek Aquaculture VII, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER LIMITED PARTNERSHIP UNIT
The net loss per limited partnership unit is computed by dividing the net loss
allocated to limited partners by the weighted average limited partnership units
outstanding (10,607 units in 1996 and 9,396 in 1995).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption by the Partnership of
Statement 121 resulted in a non-cash charge of $262,000 from the writedown of
ponds and improvements, buildings and machinery and equipment to their
estimated fair values. The charge represents the adjustment required to
remeasure long-lived assets at the lower of the carrying amount or fair value
based upon 1996 appraisals obtained from an independent appraiser in connection
with the proposed merger as described in Note 7.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform to 1996 presentation.
2. LIMITED PARTNERSHIP OFFERING
In 1995, the Partnership issued 10,607 partnership units at $100 per unit
pursuant to a private placement memorandum. Expenses of the offering, which
were netted against the proceeds, totaled $149,744 of which $63,642 were paid
to the general partner or an affiliate of the general partner.
F-60
<PAGE> 112
Circle Creek Aquaculture VII, LP
Notes to Financial Statements (continued)
2. LIMITED PARTNERSHIP OFFERING (CONTINUED)
In connection with the offering, the Partnership issued 612 warrants. The
warrants, which are not transferable, allow the holder to purchase one
partnership unit at $112.50 per unit through November 2000.
3. INVESTMENTS IN COOPERATIVES
Investments in cooperatives at consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------
<S> <C> <C>
Catfish processing cooperative $40,950 $40,950
Feed mill cooperative 3,000 3,000
------------------------
$43,950 $43,950
========================
</TABLE>
4. NOTES PAYABLE AND LONG-TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------
<S> <C> <C>
Note payable to a bank, collateralized by land, machinery and
equipment, and personal guaranty of a general partner, with annual
payments of $34,307, including interest at variable rates (8.75% at
December 31, 1996) through 2015 $267,100 $275,482
Notes payable, collateralized by machinery and equipment, with annual
payments of $17,785, including interest at variable rates (average
rate of 6.9% at December 31, 1996) through 1999
53,173 67,549
Convertible notes payable with interest due quarterly at 10.35% and
principal due in 1999 239,292 239,292
------------------------
559,565 582,323
Less current maturities 25,320 23,185
------------------------
$534,245 $559,138
========================
</TABLE>
F-61
<PAGE> 113
Circle Creek Aquaculture VII, LP
Notes to Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The convertible notes payable are due in 1999 with interest due quarterly. At
any time after January 1, 1997, the noteholders may request early payment of
the notes on the following December 31 ("redemption date") upon 120 days
written notice prior to the requested redemption date. The interest rate on
the notes is reduced to 8.35% and 9.35% on any notes that are repaid in 1997
and 1998, respectively. The notes are convertible into one partnership unit
for each $125 of principal outstanding. Live fish inventory is pledged as
collateral to the convertible notes payable.
The aggregate annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 25,320
1998 27,031
1999 267,012
2000 10,885
2001 12,122
Thereafter 217,195
---------
$ 559,565
=========
</TABLE>
The note payable included in current liabilities consists of a note to a bank
for the purchase of shares of stock of a cooperative, with interest at prime
plus 1%.
5. RELATED PARTY TRANSACTIONS
A wholly-owned subsidiary of AquaPro Corporation ("AquaPro") and an officer and
shareholder of AquaPro are the general partners of the Partnership. The
operations of the Partnership are managed by AquaPro, which in turn manages
other affiliated partnerships' catfish farming operations. Pursuant to a
management agreement between the Partnership and AquaPro, the Partnership is
charged a monthly fee equal to the greater of $1,880 or 5% of annual gross
revenues, as defined. The management fee is included in the cost of producing
live fish inventories and amounted to $22,560 and $14,968 for the year ended
December 31, 1996 and from inception (July 6, 1995) to December 31, 1995
respectively. Also included in the cost of producing live fish inventories for
the year ended December 31, 1996 and from inception (July 6, 1995) to December
31, 1995 is $53,875 and $40,241, respectively, paid to AquaPro pursuant to the
management agreement as reimbursement for the Partnership's share of farm
labor.
F-62
<PAGE> 114
Circle Creek Aquaculture VII, LP
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to the Limited Partnership Agreement, the Partnership pays AquaPro a
monthly administrative management fee equal to the greater of $788 or 2% of
annual gross revenues. The administrative management fee was $9,784 and $6,200
respectively, for the year ended December 31, 1996 and from inception (July 6,
1995) to December 31, 1995, and is included in selling, general and
administrative expenses in the accompanying statements of operations.
In 1996 and 1995, the Partnership purchased fingerling fish at prevailing
market rates totaling $5,968 and $36,939, respectively, from affiliated
partnerships.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents approximate their fair
values at December 31, 1996 and 1995. The carrying amount for investments in
cooperatives approximates its fair value at December 31, 1996 and 1995 based
upon estimates of recent sales of stock obtained by management. The note
payable has a variable interest rate which is considered to approximate market
at December 31, 1996 and 1995. The fair value of long-term debt, which is
estimated using discounted cash flow analysis based upon the Partnership's
incremental borrowing rates for similar borrowings arrangements approximates
their carrying amounts at December 31, 1996 and 1995.
7. SUBSEQUENT EVENT
AquaPro has proposed to acquire the assets and assume the liabilities of the
Partnership and three affiliated partnerships (the "Proposed Merger") pursuant
to a prospectus and consent solicitation statement. The Proposed Merger will
be consummated upon majority vote of the limited partners of the Partnership.
In consideration for the assets and liabilities of the Partnerships, AquaPro
will issue up to 109,515 "Units" to the limited partners based upon the
relative fair values of the net assets of the Partnership, the affiliated
partnerships and AquaPro. Limited partners may elect to receive 7.15% notes
rather than Units subject to certain limitations. A Unit in the Proposed
Merger consists of one share of AquaPro's common stock, one $9.50 stock
purchase right, one $7.50 warrant and one $9.50 warrant. The $9.50 stock
purchase right expires ninety days following the closing of the Proposed Merger
and entitles the holder to purchase one share of AquaPro's Series A Preferred
Stock for $9.50. The $7.50 warrant expires twelve
F-63
<PAGE> 115
Circle Creek Aquaculture VII, LP
Notes to Financial Statements (continued)
7. SUBSEQUENT EVENT (CONTINUED)
months following the closing and entitles the holder to purchase one share of
AquaPro's common stock for $7.50. The $9.50 warrant expires twenty-four months
following the closing and entitles the holder to purchase one share of
AquaPro's common stock for $9.50. The $7.50 warrants and the $9.50 warrants
will each be automatically converted to three-tenths of a share of AquaPro's
common stock if not exercised prior to the expiration dates.
The Proposed Merger will be a taxable transaction with taxable income or loss
reported on the tax returns of the partners. Upon completion of the Proposed
Merger, if approved, the Partnership will be dissolved and cease to be a
separate reporting entity.
F-64
<PAGE> 116
Report of Independent Auditors
The Partners
Circle Creek Aquaculture VIII, LP
We have audited the accompanying balance sheets of Circle Creek Aquaculture
VIII, LP as of December 31, 1996 and 1995, and the related statements of
operations, changes in partners' capital and cash flows for the year ended
December 31, 1996 and from inception (July 6, 1995) to December 31, 1995. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Circle Creek Aquaculture VIII,
LP at December 31, 1996 and 1995, and the results of its operations and its
cash flows for the year ending December 31, 1996 and from inception (July 6,
1995) to December 31, 1995, in conformity with generally accepted accounting
principles.
As described in Note 1 to the financial statements, in 1996 the Partnership
changed its method of accounting for long-lived assets and long-lived assets to
be disposed of.
/s/ Ernst & Young LLP
Jackson, Mississippi
February 21, 1997
F-65
<PAGE> 117
Circle Creek Aquaculture VIII, LP
Balance Sheets
<TABLE>
<CAPTION>
December 31
ASSETS 1996 1995
----------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,531 $ 850,446
Live fish inventories (Note 4) 565,229 -
----------------------------
Total current assets 566,760 850,446
Property, buildings and equipment (Notes 1 and 4):
Land 149,990 193,767
Ponds and improvements 295,158 320,740
Buildings 6,245 -
Machinery and equipment 119,680 -
----------------------------
571,073 514,507
Accumulated depreciation 32,302 14,461
----------------------------
538,771 500,046
Investments in cooperatives (Note 3) 62,000 -
Investment in Circle Creek Seining Company 62,066 64,930
Deferred loan costs, net 52,420 67,400
----------------------------
Total assets $ 1,282,017 $ 1,482,822
============================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ - $ 1,987
Payable to affiliates 53,710 4,538
Current maturities of long-term debt (Note 4) 20,507 6,774
----------------------------
Total current liabilities 74,217 13,299
Long-term debt, less current maturities (Note 4) 886,691 793,624
Partners' capital:
General partners' capital (deficit) (9,535) (1,689)
Limited partners' capital (9,050 partnership
units in 1996 and 8,850 in 1995) (Note 2) 330,644 677,588
----------------------------
Total partners' capital 321,109 675,899
----------------------------
Total liabilities and partners' capital $ 1,282,017 $ 1,482,822
============================
</TABLE>
See accompanying notes.
F-66
<PAGE> 118
Circle Creek Aquaculture VIII, LP
Statements of Operations
<TABLE>
<CAPTION>
Inception
(July 6, 1995)
Year ended to
December 31 December 31
1996 1995
------------------------------
<S> <C> <C>
Net sales $ 79,158 $ --
Cost of products sold (Note 5) 72,699 --
----------------------------
Gross profit 6,459 --
Selling, general and administrative (Note 5) 57,154 6,934
Impairment loss on long-lived assets (Note1) 186,000 --
----------------------------
Operating loss (236,695) (6,934)
Other income (expense):
Interest expense (95,700) (44,246)
Other, net 19,223 (19,853)
----------------------------
(76,477) (64,099)
----------------------------
Net loss (313,172) (71,033)
Less net loss allocated to general partner (3,132) (710)
============================
Net loss allocated to limited partners $ (310,040) $ (70,323)
============================
Net loss per limited partnership unit $ (34.64) $ (8.50)
============================
</TABLE>
See accompanying notes.
F-67
<PAGE> 119
Circle Creek Aquaculture VIII, LP
Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
General
Partners' Limited Partners' Capital Total
Capital ----------------------------------- Partners'
(Deficit) Units Amount Capital
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital contributions $ 500 - $ - $ 500
Sale of limited partnership units
(Note 2) - 8,850 761,391 761,391
Net loss for period (710) - (70,323) (71,033)
Cash distributions to partners (1,479) - (13,480) (14,959)
------------------------------------------------------------------
Balance at December 31, 1995 (1,689) 8,850 677,588 675,899
Sale of limited partnership units - 200 5,526 5,526
Net loss for year (3,132) - (310,040) (313,172)
Cash distributions to partners (4,714) - (42,430) (47,144)
-----------------------------------------------------------------
Balance at December 31, 1996 $(9,535) 9,050 $ 330,644 $ 321,109
=================================================================
</TABLE>
See accompanying notes.
F-68
<PAGE> 120
Circle Creek Aquaculture VIII, LP
Statements of Cash Flows
<TABLE>
<CAPTION>
INCEPTION
(JULY 6, 1995)
YEAR ENDED TO
DECEMBER 31 DECEMBER 31
1996 1995
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (313,172) $ (71,033)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment loss on long-lived assets 186,000 --
Depreciation and amortization 63,698 21,961
Equity in loss of Circle Creek Seining Company 2,864 --
Changes in operating assets and liabilities:
Increase in live fish inventories (565,229) --
Increase (decrease) in accounts payable and accrued
expenses (1,987) 1,987
Increase in payable to affiliates 49,172 4,538
----------------------------
Net cash used in operating activities (578,654) (42,547)
INVESTING ACTIVITIES
Purchases of cooperative stock (62,000) --
Investments in Circle Creek Seining Company -- (64,930)
Purchases of property, buildings and equipment (273,443) (514,507)
----------------------------
Net cash used in investing activities (335,443) (579,437)
FINANCING ACTIVITIES
Proceeds from long-term borrowings, net of loan costs paid 132,382 725,498
Principal payments on long-term borrowings (25,582) --
Capital contributions -- 500
Sale of limited partnership units 5,526 761,391
Distributions to partners (47,144) (14,959)
----------------------------
Net cash provided by financing activities 65,182 1,472,430
----------------------------
Increase (decrease) in cash and cash equivalents (848,915) 850,446
Cash and cash equivalents at beginning of period 850,446 --
----------------------------
Cash and cash equivalents at end of period $ 1,531 $ 850,446
============================
SUPPLEMENTAL CASH FLOW INFORMATION-
Interest paid $ 80,720 $ 36,746
============================
</TABLE>
See accompanying notes.
F-69
<PAGE> 121
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Circle Creek Aquaculture VIII, LP (the "Partnership") was formed in 1995. The
Partnership is a limited partnership engaged primarily in catfish farming
within the State of Mississippi. The Partnership's income (or loss) is
allocated 1% to the general partner and 99% to the limited partners. If certain
minimum distributions are made to the limited partners, the Partnership's
income is allocated 10% to the general partner and 90% to the limited partners.
The Partnership began operations on July 6, 1995 when it purchased property and
buildings totaling $353,079 from the general partner (including fees paid to
the general partner of $90,000) for the purpose of commencing a catfish farming
operation on 188 water acres within the State of Mississippi. Catfish farming
is conducted in a few southern states, principally Mississippi, Louisiana,
Alabama and Arkansas. Catfish are sold principally to retail grocery stores and
restaurants by catfish processors. During the period from inception to December
31, 1995, the Partnership's principal operations consisted of constructing
catfish ponds and improving existing ponds. During 1996, the Partnership's
principal operations consisted of stocking catfish ponds and growing fish to a
marketable weight. The Partnership's sales during 1996 consisted principally of
the sale of certain fingerlings to other Circle Creek Aquaculture limited
partnerships and AquaPro Corporation at prevailing market rates. The
Partnership anticipates its future sales will be to a limited number of
processors.
Fish prices are affected by changes in market demand and supply and may
fluctuate significantly from period to period.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-70
<PAGE> 122
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
LIVE FISH INVENTORIES
Live fish inventories are stated at the lower of average cost or market.
Live fish inventories are purchased as "fingerlings" (generally, 5 to 6 inches
in length) and are grown out to a marketable size over 9 to 18 months. Because
the Partnership's production cycle for fish generally exceeds one year,
management anticipates certain live fish inventories on hand at December 31,
1996 may not be sold in 1997. Live fish inventories are classified as a current
asset in the accompanying balance sheets which is consistent with industry
practice. The quantities of live fish inventories are determined based upon
estimated growth from feed fed at each pond and are reduced for the actual
quantities sold and estimated mortality. Cost associated with live fish
production are accumulated during the growing period and consist principally of
feed, labor and overhead cost required to grow the live fish to a marketable
size. Each pond is closed periodically and the estimated pounds are adjusted to
the actual harvest. Live catfish are highly susceptible to disease, oxygen
depletion and extreme temperatures which could result in high mortality.
Management continually monitors each pond and takes appropriate actions to
minimize the risk of loss from mortality. Given the nature of the live fish
inventories, it is reasonably possible that the Company's actual live fish
mortality will vary significantly from estimates. The cost of producing fish
for harvest is subject to the cost of grains which is susceptible to
significant fluctuations in commodity markets. The Partnership establishes
prices for a portion of its anticipated feed purchases over specified periods
of time through various feed purchase agreements.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives. (15 years
for ponds and improvements, 15 years for buildings and 7 years for machinery
and equipment.)
F-71
<PAGE> 123
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN CIRCLE CREEK SEINING COMPANY
The Partnership owns a 10.88% interest in the Circle Creek Seining Company (the
"Seining Company") which is accounted for using the equity method. Included in
other income, in the accompanying statements of operations is expense of $2,864
and $470 applicable to the Partnership's interest in the Seining Company's
losses for the years ended December 31, 1996 and 1995, respectively. The
Seining Company is a joint venture organized to provide seining and hauling
services to certain catfish farms. The Seining Company charged the Partnership
seining and hauling fees totaling $7,732 for the year ended December 31, 1996,
which are included in selling, general, and administrative expenses in the
accompanying statements of operations. At December 31, 1996, the net assets of
the Seining Company were approximately $390,000.
INVESTMENTS IN COOPERATIVES
Investments in cooperatives are stated at original cost adjusted for allocation
of earnings or losses, net of distributions.
DEFERRED LOAN COSTS
Cost incurred to obtain long-term financing are amortized on a straight-line
basis over the term of the related debt. Accumulated amortization of deferred
loan costs was $22,480 and $7,500 at December 31, 1996 and 1995, respectively.
Included in deferred loan costs are fees of $23,100 and $29,431 at December 31,
1996 and 1995, respectively, net of accumulated amortization, which were paid
to affiliates of the general partner in connection with obtaining long-term
financing.
INCOME TAXES
Taxable income or loss of the Partnership is reported on the tax returns of the
partners. Accordingly, income taxes have not been provided for in the financial
statements of the Partnership. The Partnership's income or loss will differ
from the taxable income or loss reported by the partners because of differences
in reporting for income tax and financial reporting.
F-72
<PAGE> 124
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER LIMITED PARTNERSHIP UNIT
The net loss per limited partnership unit is computed be dividing the net loss
allocated to limited partners by the weighted average limited partnership units
outstanding (8,950 units in 1996 and 8,270 units in 1995).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption by the Partnership of
Statement 121 resulted in a non-cash charge of $186,000 from the writedown of
land, ponds and improvements, and machinery and equipment to their estimated
fair values. The charge represents the adjustment required to remeasure
long-lived assets at the lower of the carrying amount or fair value based upon
1996 appraisals, obtained from an independent appraiser in connection with the
proposed merger described in Note 7.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform to 1996 presentation.
2. LIMITED PARTNERSHIP OFFERING
In 1996 and 1995, the Partnership issued 9,050 partnership units at $100 per
unit pursuant to a private placement memorandum. Expenses of the offering,
which were netted against the proceeds, totaled $138,083 of which approximately
$53,000 were paid to a general partner or an affiliate of the general partner.
F-73
<PAGE> 125
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements (continued)
2. LIMITED PARTNERSHIP OFFERING (CONTINUED)
In connection with the offering, the Partnership issued 820 warrants. The
warrants, which are not transferable, allow the holder to purchase one
partnership unit at $112.50 per unit from May 1997 through April 2001.
3. INVESTMENTS IN COOPERATIVES
Investments in cooperatives at December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Catfish processing cooperative $60,000
Feed mill cooperative 2,000
-------
$62,000
=======
</TABLE>
4. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------
<S> <C> <C>
Note payable to bank, collateralized by land, ponds and
improvements, machinery and equipment, and personal guaranty
of general partner, with annual payments of $31,732, including
interest at variable rates (8.75% at
December 31, 1996) $244,995 $254,877
Convertible notes payable with interest due quarterly
at 10.35% and principal due in 2000 595,521 545,521
Notes payable collateralized by equipment, with annual
payments of $18,810, including interest at variable rates
(average rate of 6.9% at December 31, 1996) through 2001 66,682 --
----------------------
907,198 800,398
Less current maturities 20,507 6,774
----------------------
$886,691 $793,624
======================
</TABLE>
F-74
<PAGE> 126
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The convertible notes payable are due in 2000 with interest due quarterly. At
any time after January 1, 1998, the noteholders may request early payment of
the notes on the following December 31 ("redemption date") upon 120 days
written notice prior to the requested redemption date. The interest rate on the
notes is reduced to 8.35% and 9.35% on any notes that are repaid in 1998 and
1999, respectively. The notes are convertible into one partnership unit for
each $125 of principal outstanding. Live fish inventories are pledged as
collateral to the convertible notes payable.
The aggregate annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 20,507
1998 22,170
1999 24,143
2000 622,021
2001 19,106
Thereafter 199,251
========
$907,198
========
</TABLE>
5. RELATED PARTY TRANSACTIONS
A wholly-owned subsidiary of AquaPro Corporation ("AquaPro") and an officer and
shareholder of AquaPro are the general partners of the Partnership. The
operations of the Partnership are managed by AquaPro, which in turn manages
other affiliated partnerships' catfish farming operations. Pursuant to a
management agreement between the Partnership and AquaPro, the Partnership is
charged a monthly fee equal to the greater of $2,020 or 5% of gross receipts,
as defined. The management fee is included in the cost of producing live fish
inventories and amounted to $24,240 and $4,040 for the year ended December 31,
1996 and from inception (July 6, 1995) to December 31, 1995, respectively. Also
included in the cost of producing live fish inventories for the year ended
December 31, 1996 and from inception (July 6, 1995) to December 31, 1995, is
$57,003 and $8,339, respectively, paid to AquaPro pursuant to the management
agreement as reimbursement for the Partnership's share of farm labor.
F-75
<PAGE> 127
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to the Limited Partnership Agreement, the Partnership pays AquaPro a
monthly administrative management fee equal to the greater of $783 or 2% of
annual gross revenues. The administrative management fee was $10,100 and $1,683
for the year ended December 31, 1996 and from inception (July 6, 1995) to
December 31, 1995, respectively, and is included in general and administrative
expenses in the accompanying statements of operations.
In 1996, the partnership purchased fingerling fish at the prevailing market
rates totaling $211,546 from an affiliated partnership.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents approximate their fair
values at December 31, 1996 and 1995. The carrying amount for investments in
cooperatives approximates its fair value at December 31, 1996 and 1995 based
upon estimates of recent sales of stock obtained by management. The fair value
of long-term debt, which is estimated using discounted cash flow analysis based
upon the Partnership's incremental borrowing rates for similar borrowings
arrangements approximates their carrying amounts at December 31, 1996 and 1995.
7. SUBSEQUENT EVENT
AquaPro has proposed to acquire the assets and assume the liabilities of the
Partnership and three affiliated partnerships (the "Proposed Merger") pursuant
to a prospectus and consent solicitation statement. The Proposed Merger will be
consummated upon majority vote of the limited partners of the Partnership. In
consideration for the assets and liabilities of the Partnerships, AquaPro will
issue up to 107,825 "Units" to the limited partners based upon the relative
fair values of the net assets of the Partnership, the affiliated partnerships
and AquaPro. Limited partners may elect to receive 7.15% notes rather than
Units subject to certain limitations. A Unit in the Proposed Merger consists of
one share of AquaPro's common stock, one $9.50 stock purchase right, one $7.50
warrant and one $9.50 warrant. The $9.50 stock purchase right expires ninety
days following the closing of the Proposed Merger and entitles the holder to
purchase one share of AquaPro's Series A Preferred Stock for $9.50. The $7.50
warrant expires twelve
F-76
<PAGE> 128
Circle Creek Aquaculture VIII, LP
Notes to Financial Statements (continued)
7. SUBSEQUENT EVENT (CONTINUED)
months following the closing and entitles the holder to purchase one share of
AquaPro's common stock for $7.50. The $9.50 warrant expires twenty-four months
following the closing and entitles the holder to purchase one share of
AquaPro's common stock for $9.50. The $7.50 warrants and the $9.50 warrants
will each be automatically converted to three-tenths of a share of AquaPro's
common stock if not exercised prior to the expiration dates.
The Proposed Merger will be a taxable transaction with taxable income or loss
reported on the tax returns of the partners. Upon completion of the Proposed
Merger, if approved, the Partnership will be dissolved and cease to be a
separate reporting entity.
F-77
<PAGE> 129
FINANCIAL STATEMENTS
The accompanying Condensed Consolidated Balance Sheets at March 31, 1997, and
December 31, 1996, the Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and March 31, 1996 and the Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997
and March 31, 1996, are unaudited but reflect all adjustments which are, in the
opinion of management, necessary to a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented, and not necessarily indicative of results which may be expected for
any other interim period or for the year as a whole.
AquaPro Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
--------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 698,177 $ 759,057
Trade accounts receivable 349,639 598,307
Live fish inventories 4,364,328 4,549,528
Prepaid expenses and other 36,139 31,751
-------------------------
Total current assets 5,448,283 5,938,643
Property, buildings and equipment, net 5,585,157 5,425,865
Investments in cooperatives 1,062,517 1,198,517
Delivery rights and other intangible assets, net 112,340 110,522
-------------------------
Total assets $12,208,297 $12,673,547
=========================
</TABLE>
F-78
<PAGE> 130
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
--------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Notes payable $ 260,850 $ 737,546
Accounts payable 46,321 184,076
Accrued salaries 239,994 240,662
Other accrued expenses 58,878 94,771
Current maturities of long-term debt 301,943 275,666
-----------------------------
Total current liabilities 907,986 1,532,721
Long-term debt, less current maturities 3,999,950 3,867,976
Stockholders' equity:
Series A Preferred Stock, no par value - authorized
1,900,000 shares, cumulative, convertible, issued and
outstanding 197,093 in 1997 and 104,534 in 1996 1,560,924 748,169
Preferred stock, par value to be determined by the
Board of Directors - authorized 100,000 shares, none
issued
- -
Common stock, no par value - authorized 100,000,000
shares, issued and outstanding 2,447,333 shares in
1997 and 2,452,819 shares in 1996 10,535,018 10,568,989
Unearned compensation (65,625) (112,500)
Retained earnings (deficit) (4,729,956) (3,931,808)
-----------------------------
Total stockholders' equity 7,300,361 7,272,850
-----------------------------
Total liabilities and stockholders' equity $12,208,297 $12,673,547
=============================
</TABLE>
See accompanying note to unaudited consolidated financial statements.
F-79
<PAGE> 131
AquaPro Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31
1997 1996
<S> <C> <C>
Revenues:
Net sales $ 492,165 $ 1,019,417
Management fees from affiliate 4,500 4,500
---------------------------
496,665 1,023,917
Cost of products sold 630,401 885,958
Selling, general and administrative 433,512 351,685
Impairment loss on long-lived assets - 1,019,000
---------------------------
Operating loss (567,248) (1,232,726)
Other (income) expense:
Equity in losses on investment in cooperatives 136,000 -
Interest expense 99,941 138,468
Other, net (31,421) 13,370
---------------------------
204,520 151,838
---------------------------
Net loss $ (771,768) $(1,384,564)
===========================
Net loss per share $ (0.27) $ (0.64)
===========================
Weighted average common shares outstanding 2,858,277 2,161,906
===========================
</TABLE>
See accompanying note to unaudited consolidated financial statements.
F-80
<PAGE> 132
AquaPro Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
1997 1996
-------------------------
<S> <C> <C>
Net cash provided by (used in) operating activities $(239,278) $ (118,781)
Investing activities - Purchases of property and equipment (293,061) (127,526)
Financing activities:
Net (decrease) increase in notes payable (476,696) (686,875)
Principal payments on long-term borrowings (72,349) (103,651)
Proceeds from long-term borrowings 230,600 460,417
Proceeds from exercise of stock purchase rights, net - 990,451
Exercise of stock warrants, net 3,529 -
Proceeds from issuance of preferred stock, net 812,755 -
Payment of preferred stock dividends (26,380) -
-------------------------
Net cash provided by financing activities 471,459 660,342
-------------------------
Net increase (decrease) in cash and cash equivalents (60,880) 414,035
Cash and cash equivalents at beginning of period 759,057 1,058,545
-------------------------
Cash and cash equivalents at end of period $ 698,177 $1,472,580
=========================
</TABLE>
See accompanying note to unaudited consolidated financial statements.
F-81
<PAGE> 133
AquaPro Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 1997 and 1996
1. Basis of Presentation of Unaudited Financial Statements
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the rules of the Securities and Exchange Commission. Accordingly
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation have been included. The results of
operations are not necessarily indicative of results which may be expected for
any other interim period or for the year as a whole.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate any prior periods. Under the new
requirements for calculating earnings per share, the dilutive effect of stock
options will be excluded. The impact of Statement 128 on the calculation of
earnings per share is not expected to be material.
2. Merger
Effective June 30, 1997, the Company acquired the assets and assumed the
liabilities of Circle Creek AquaCulture V, L.P., Circle Creek AquaCulture VI,
L.P., Circle Creek AquaCulture VII, L.P., and Circle Creek AquaCulture VIII,
L.P. (collectively the "Circle Creek Partnerships"). The merger has been
accounted for as through it were a pooling of interests because of common
control. The accompanying condensed consolidated financial statements for the
three months ended March 31, 1997 and 1996 have been restated to give effect
to the merger. The Circle Creek Partnerships are engaged in catfish farming in
the State of Mississippi and were previously managed by the Company pursuant to
management agreements.
In consideration for the assets and liabilities of the Circle Creek
Partnerships, the Company issued 708,926 Units and $68,582 of 7.15% Convertible
Notes based upon the relative fair value of the net assets of the Company and
the Circle Creek Partnerships. A unit consists of 1.6 shares of the Company's
common stock and one 90-day right to purchase one share of the Company's 7.0%
Series A Preferred Stock for $9.50 (the Stock Rights). Also, as part of the
consolidation, the Company offered its Series A Preferred
Stock in exchange for $1,147,513 in principal amount of certain 10.35% notes of
the Circle Creek Partnerships (the Investor Notes). This exchange offer
commenced subsequent to June 30, 1997 and each holder of Investor Notes was
offered 1.3 shares of Series A Preferred Stock for each $10 of Investor Notes.
In the aggregate, approximately $900,000 of Investor Notes were exchanged
117,000 shares of Preferred Stock.
Separate revenues and net loss of the merged entities for the three months ended
March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
AquaPro Corporation $ 213,719 $ 806,533
Circle Creek Partnerships 476,310 656,496
Elimination of intercompany transactions (193,364) (439,112)
--------- -----------
$ 496,665 $ 1,023,917
========= ===========
Net loss:
AquaPro Corporation $(382,367) $ (299,225)
Circle Creek Partnerships (365,432) (1,020,133)
Elimination of intercompany transactions (23,969) (65,206)
--------- -----------
Net loss, as reported $(771,768) $(1,384,56 )
========= ===========
</TABLE>
3. Impairment Loss on Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Live Assets and for Long-Live Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The adoption by the Company of Statement 121
resulted in a non-cash charge of $1,019,000 from the write-down of land, ponds
and improvements, buildings and goodwill to their estimated fair values. The
charge represents the adjustment required to remeasure long-lived assets at the
lower of the carrying amount or fair value based upon 1996 appraisals obtained
from an independent appraiser in connection with the merger as described in
Note 2.
F-82
<PAGE> 134
AquaPro Corporation
Condensed Consolidated Statement of Operations
Six Months Ended June 30, 1996 (unaudited)
<TABLE>
<S> <C>
Revenues:
Net sales $ 1,891,390
Management fees from affiliates 9,000
-----------
1,900,390
Cost of products sold 1,613,910
Selling, general and administrative 664,983
Impairment loss on long-lived assets 1,019,000
-----------
Operating loss (1,397,503)
Other (income) expense:
Delta Pride Catfish, Inc. assessment (79,969)
Interest expense (230,170)
Other, net 27,074
-----------
(283,065)
-----------
Net loss $(1,680,568)
===========
Net loss per common share $ (0.73)
===========
Weighted average common shares outstanding 2,305,904
===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-83
<PAGE> 135
AquaPro Corporation
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 1996 (unaudited)
<TABLE>
<S> <C>
Net cash used in operating activities $ (564,552)
Investing activities - Purchases of property and equipment (438,419)
Financing activities:
Net decrease in notes payable (819,354)
Principal payments on long-term borrowings (370,576)
Proceeds from long-term borrowings 354,304
Proceeds from exercise of stock purchase rights 2,137,928
Proceeds from sale of limited partnership units 5,525
Cash distributions to partners (108,516)
Retirement of partnership units (26,749)
----------
Net cash provided by financing activities 1,172,562
----------
Net increase in cash and cash equivalents 169,591
Cash and cash equivalents at beginning of period 1,058,545
----------
Cash and cash equivalents at end of period $1,228,136
==========
Supplemental cash flow information-
Interest paid $ 270,980
==========
Non-cash financing activities-
Conversion of notes payable and long-term debt to common stock $1,717,305
==========
Common stock issued to employees for future services $ 150,000
==========
Conversion of long-term debt to 10.35% convertible notes payable $ 214,495
==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-84
<PAGE> 136
AquaPro Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 1996
1. Basis of Presentation of Unaudited Financial Statements
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the rules of the Securities and Exchange Commission. Accordingly
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation have been included. The results of
operations are not necessarily indicative of results which may be expected for
any other interim period or for the year as a whole.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate any prior periods. Under the new
requirements for calculating earnings per share, the dilutive effect of stock
options will be excluded. The impact of Statement 128 on the calculation of
earnings per share is not expected to be material.
2. Merger
Effective June 30, 1997, the Company acquired the assets and assumed the
liabilities of Circle Creek AquaCulture V, L.P., Circle Creek AquaCulture VI,
L.P., Circle Creek AquaCulture VII, L.P., and Circle Creek AquaCulture VIII,
L.P. (collectively the "Circle Creek Partnerships"). The merger has been
accounted for as through it were a pooling of interests because of common
control. The accompanying condensed consolidated financial statements for the
six months ended June 30, 1996 have been restated to give effect to the merger.
The Circle Creek Partnerships are engaged in catfish farming in the State of
Mississippi and were previously managed by the Company pursuant to management
agreements.
In consideration for the assets and liabilities of the Circle Creek
Partnerships, the Company issued 708,926 Units and $68,582 of 7.15% Convertible
Notes based upon the relative fair value of the net assets of the Company and
the Circle Creek Partnerships. A unit consists of 1.6 shares of the Company's
common stock and one 90-day right to purchase one share of the Company's 7.0%
Series A Preferred Stock for $9.50 (the Stock Rights). Also, as part of the
consolidation, the Company offered its Series A Preferred
F-85
<PAGE> 137
Stock in exchange for $1,147,513 in principal amount of certain 10.35% notes of
the Circle Creek Partnerships (the Investor Notes). This exchange offer
commenced subsequent to June 30, 1997 and each holder of Investor Notes was
offered 1.3 shares of Series A Preferred Stock for each $10 of Investor Notes.
In the aggregate, approximately $900,000 of Investor Notes were exchanged
117,000 shares of Preferred Stock.
Separate revenues and net loss of the merged entities for the six months ended
June 30, 1996 are as follows:
<TABLE>
<S> <C>
Revenues:
AquaPro Corporation $ 1,423,528
Circle Creek Partnerships 1,073,259
Elimination of intercompany transactions (605,397)
-----------
$ 1,891,390
===========
Net loss:
AquaPro Corporation $ (509,555)
Circle Creek Partnerships (1,117,097)
Elimination of intercompany transactions 229,149
-----------
Net loss, as reported $(1,397,503)
===========
</TABLE>
3. Impairment Loss on Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Live Assets and for Long-Live Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The adoption by the Company of Statement 121
resulted in a non-cash charge of $1,019,000 from the write-down of land, ponds
and improvements, buildings and goodwill to their estimated fair values. The
charge represents the adjustment required to remeasure long-lived assets at the
lower of the carrying amount or fair value based upon 1996 appraisals obtained
from an independent appraiser in connection with the merger as described in
Note 2.
F-86
<PAGE> 138
SIGNATURES
In accordance with Section 12 of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
AQUAPRO CORPORATION
Date: November 14, 1997 By: /s/ George S. Hastings, Jr.
----------------------------------
George S. Hastings, Jr.
Chairman of the Board, Chief Executive
Officer, President and Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ George S. Hastings, Jr. Chairman of the Board, Chief November 14, 1997
- --------------------------- Executive Officer, President,
George S. Hastings, Jr. and Director (Principal
Executive Officer)
/s/ Patricia G. Hastings Vice President, General November 14, 1997
- --------------------------- Counsel, Secretary, and
Patricia G. Hastings Director
/s/ Eric P. Braschwitz Chief Financial Officer November 14, 1997
- --------------------------- (Principal Financial
Eric P. Braschwitz and Accounting Officer)
/s/ Joseph Duncan, Sr. Director November 14, 1997
- ---------------------------
Joseph Duncan, Sr.
/s/ Roger A. Daley Director November 14, 1997
- ---------------------------
Roger A. Daley
</TABLE>
