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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB
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-
The Company's Catfish Farming Operations......................................................-3-
Recent Developments...........................................................................-7-
Risk Factors..................................................................................-7-
Item 2. Management's Discussion and Analysis or Plan of Operation....................................-15-
Introduction.................................................................................-15-
Results of Operations 1996 Compared to 1995..................................................-16-
Liquidity and Capital Resources..............................................................-17-
Item 3. Description of Property......................................................................-19-
Item 4. Security Ownership of Certain Beneficial Owners and Management...............................-21-
Item 5. Directors, Executive Officers, Promoters and Control Persons.................................-22-
Item 6. Executive Compensation.......................................................................-25-
Item 7. Certain Relationships and Related Transactions...............................................-28-
Formation of Registrant......................................................................-28-
Acquisition of Assets from Affiliates........................................................-28-
The Proposed Consolidation...................................................................-31-
Item 8. Description of Securities....................................................................-42-
Common Stock.................................................................................-42-
Preferred Stock..............................................................................-42-
Warrants............................................................................-43-
Options ....................................................................................-44-
Debt Securities..............................................................................-44-
Transfer Agent...............................................................................-45-
Registration Obligations.....................................................................-45-
PART II ......................................................................................................-46-
Item 1. Market Price of and Dividends on the Registrant's Common Equity and Other Shareholder Matters
............................................................................................-46-
Item 2. Legal Proceedings............................................................................-46-
Item 3. Changes in and Disagreements with Accountants................................................-46-
Item 4. Recent Sales of Unregistered Securities......................................................-46-
Item 5. Indemnification of Directors and Officers....................................................-47-
PART F/S ......................................................................................................-49-
PART III ......................................................................................................-50-
Item 1. Index to Exhibits............................................................................-50-
Item 2. Description of Exhibits......................................................................-50-
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA INFORMATION.........................................................F-1
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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") 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 883 water acres of aquaculture ponds and has a total of
approximately 1,800 water acres under management. All of the Company's catfish
farming activities are conducted in the State of Mississippi and are conducted
through American. American was formed in 1987 and presently has nine farms under
management, including those owned by four affiliated limited partnerships. Mr.
Hastings, the Company's Chairman and Chief Executive Officer, acquired all of
the outstanding stock of American in February 1994 and contributed that stock to
the Company on December 31, 1995.
Circle Creek was 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 and its predecessor, Mr. Hastings, was primarily the
sponsorship and operation of catfish farming investment partnerships. Between
1989 and 1994, Mr. Hastings sponsored and acted as general partner for the first
six Circle Creek Partnerships.
Through 1996, Circle Creek has sponsored the following eight limited
partnerships which engage 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.
In 1995, Mr. Hastings and Ms. Hastings transferred all of their
interest in the stock of American and Circle Creek to the Company. Also, in 1995
Mr. Hastings assigned all of his economic interest as general partner in all
eight Circle Creek Partnerships to the Company. On December 31, 1995, the
Company acquired all of the assets of the first four Circle Creek Partnerships,
CCA I, CCA II, CCA III and CCA IV, pursuant to certain merger transactions (the
"Prior Consolidation"). The Company proposes to purchase the assets of CCA V,
CCA VI, CCA VII, and CCA VIII (the "Proposed Consolidation"). See Part I, Item 7
below.
American presently manages a total of nine farms, four of which are
owned by the Company, four of which are owned by the four remaining Circle Creek
Partnerships and one of which is owned by a company affiliated with Mr. Austin
Jones, the Company's Vice President of Production. Under its farm management
agreement with these Circle Creek Partnerships, American supervises the
day-to-day farming operations of the Partnerships and for these services
receives management fees and reimbursements for certain of its costs and
expenses. Each of these Partnerships pays American a management fee of five
percent (5.0%) of the
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Partnerships's annual gross revenues or $120 per water acre per year, whichever
is greater. The fees are paid monthly, subject to an annual adjustment.
The Company has determined to change its fiscal year to June 30. The
Company will institute this change prior to June 30, 1997 and, accordingly, the
Company will have a transition period (short year) of six (6) months ending June
30, 1997. Thereafter, the Company's fiscal year will commence each July 1st and
end each June 30. 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 900 Olive
Street, P.O. Box 646, Moorhead, Mississippi 38761.
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.
According to the National Fisheries Institute, farm-raised catfish now
ranks as the fifth most popular seafood in America, with a per capita annual
consumption of one pound. 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.
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
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:
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HISTORIC AVERAGE PROCESSOR PRICE FOR CATFISH
Year Average Price Per Pound
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1984 69.2(cent)
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. Three processors
represented 53%, 24% and 17%, respectively, of the Company's net sales for the
year ended December 31, 1996 and 42%, 28% and 25%, respectively, for the
year-ended December 31, 1995. These cooperatives 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 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
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acre per year, although the industry average is less. Catfish farms in the
Mississippi Delta average 4,000 to 5,000 pounds of catfish 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 are sterile and ideal for
growing fry-size fish. As the Company plans to refurbish several of its ponds in
1997 and 1998, Management intends to take advantage of these opportunities to
stock its inventory with fry.
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
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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 have pushed feed prices to $287 per ton in early 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 1997.
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. As discussed above, the
Company owns shares in the Delta Pride processing cooperative where most of its
catfish are sold for processing.
In order to control harvesting and transportation costs in 1992, the
Company formed and is majority partner of Circle Creek Seining Partnership, a
Tennessee Partnership (Circle Creek Seining"). The other partners of Circle
Creek Seining are the Circle Creek Partnerships. The Partnership functions as a
cooperative which provides equipment and labor to members on a cost-sharing
basis for seining and live fish transportation. In 1996, the cooperative was
able to provide seining and transportation services to its member farms at a
cost equal to $0.05 per pound of catfish sold. Management believes these charges
are at least competitive with the best rates available from unrelated parties.
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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 fingerling 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 and
physical counting of fish inventory. However, this is only done at such times as
ponds are drained for rehabilitation because 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 estimating
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 higher than industry average conversion factor of 2.5 times the 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
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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 28 full-time persons and 4
part-time persons. Personnel may be provided by Affiliates, as needed, on a cost
reimbursement basis.
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 Circle
Creek 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), one-half of which will
be repaid in the event the line of credit is fully satisfied and cancelled prior
to October 1, 1997. Under the credit 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 certain stock in coopertives 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.
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 (which includes the 4 remaining Circle
Creek Partnerships). 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.
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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, supplies such as feed, and labor is 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 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.
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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 market price of 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
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.
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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.
Processing. 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.
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 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.
Regulation. Currently, the catfish industry is virtually
unregulated by federal or state government. The Environmental Protection Agency
and/or the U.S. Fish and Wildlife Agency have proposed legislation which would
require permits for catfish pond construction. If adopted as currently proposed,
management believes these regulations would not have a material affect on the
Company's current properties or those of the Partnerships. In the future, these
agencies or other federal or state agencies may enact laws or regulations
imposing restrictions or restricting procedures for growing, feeding or handling
of catfish, including the restrictions on the use of chemical food supplements
or herbicides, the composition, content, handling and disposal of pond and waste
water and/or the handling, packaging and processing of catfish. Any such
regulations which could require the Company to discontinue or change one or more
of its procedures or practices. The Food and Drug Administration and the
National Marine Fisheries Service of the National Oceanic and Atmospheric
Administration (the "FDA/NOAA") are completing development of a new seafood
inspection program which will serve as an adjunct to already existing inspection
programs. The FDA/NOAA program is called "HACCP," or "Hazard Analysis Critical
Control Point," and proposes to include regulations regarding product safety,
food hygiene and economic fraud. In its final form, HACCP will be a voluntary,
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fee-for-service inspection program, with an official mark indicating that the
participating firm has met the requirements of the HACCP system. The nature and
extent of any regulations ultimately enacted could have an adverse impact on the
profitability of the Company if, for whatever reason, it is unable to
participate in the program and the participation is required for consumer
acceptance of catfish production. The proposed system also provides for use of
industry controls and requires government inspection at various key points in
the water-to-market cycle where health risks, such as spoilage and bacterial
growth are greatest. The Company anticipates that it will sell its catfish to
fish processors which have for some time been under voluntary inspection
compliance with the FDA.
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.
Environmental Liabilities. 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 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
Partnerships' properties. Based on Management's previous inspections, general
familiarity with the Partnerships' 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 year ended December 31, 1996 of $886,786 and had an
accumulated deficit of $1,736,994 as of such date. Also, none of the individual
Circle Creek Partnerships whose farming operations the Company has acquired or
proposes
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to acquire, 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.
No Assurance of Proposed or Future Acquisitions. The Company
intends to acquire the farming operations of its four affiliated limited
partnerships in consideration for the issuance of its equity and debt securities
(the "Proposed Consolidation"). The Company believes the acquisition of these
additional properties is necessary for it to achieve efficiencies of scale of
operations and will facilitate its ability to achieve profitable operations. See
Part I, Item 7 below. There can be no assurance, however, that the Company will
successfully complete the Proposed Consolidation. The Company's inability to
acquire additional properties and/or to expand its operations could adversely
affect the Company's ability to achieve necessary economies of scale of
operations.
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.
Disproportionate Effect of Inaccurate Valuation. The estimated
exchange values upon which the consideration paid to the partnerships
participating in the Proposed Consolidation are based on consideration paid by
the Company in the Prior Consolidation. There is no assurance that such values
are not greater than those which would result from arms-length negotiations
between unrelated parties. The values used are one of a number of possible
reasonable estimates of the fair value of the net assets of the Company and the
participating partnerships. Therefore, it is likely that these estimated values
would differ from the actual value which would be paid by Shareholders of the
Company for each partnership's net assets to an unrelated party. In the event
these estimated values of the net assets of these partnerships are greater than
such actual fair value, the overvaluation would favor the limited partners of
those Partnerships over the Company.
See Part I, Item 7 below.
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Restrictions on Payment of Dividends. The terms of the
Company's 10.35% Notes and proposed 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 profits 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 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, Ms. Hastings and Mr. Jones. 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. Certain conflicts of interest exist
between the Company, its management and its non-management shareholders. Mr.
Hastings is a general partner of each of the remaining four Circle Creek
Partnerships and the Company is the co-general partner of two of these
Partnerships. As general partners, Mr. Hastings and the Company have a financial
interest in the success of these partnerships, and each has a fiduciary duty to
these partnerships and their limited partners. These relationships create
inherent conflicts of interest in managing these Partnerships and operating the
Company's business, particularly in
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connection with transactions between the Company and these partnerships. To
limit his conflicts of interest with the Company regarding the partnerships, Mr.
Hastings has assigned his economic interest as a general partner in each
partnership to the Company. The Company would end these conflicts of interest if
it successfully acquires the partnerships in the Proposed Consolidation.
However, the terms and conditions of the Proposed Consolidation have been
structured by management of the Company in light of these conflicts of interest.
See Item 7 of Part I below.
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 due 2002 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 four catfish farms
which, individually, were Limited Partnerships prior to December 31, 1995 (CCA
I, CCA II, CCA III and CCA IV), American Fisheries Corporation (the farm
management company), and Circle Creek AquaCulture, Inc. (the syndication company
for the catfish farming investment partnerships). The merger of these entities
with AquaPro as of December 31, 1995 has been accounted for as though it were a
pooling of interests because of the common control of the entities and AquaPro.
Prior to the Consolidation, the limited partnerships 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 Prior Consolidation:
- 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 CCA V, CCA VI,
CCA VII and CCA VIII.
The Limited Partnerships (CCA I-IV) were not profitable as individual
entities. Also, the pro forma financial statements show that AquaPro, including
the Proposed Consolidation, has not been profitable since inception. 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, 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.
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RESULTS OF OPERATIONS 1996 COMPARED TO 1995
REVENUE. Net sales in 1996 increased to $2,654,224, an increase of
$481,316 or 22.1% over 1995. The increase resulted from a 645,000 pound or 23.9%
increase resulting in 3,344,000 pounds of fish being sold in 1996.
This increase in volume and its effect on net sales was partially
offset by a decline in the net price per pound realized of 79.4 cents in 1996
compared to 80.5 cents in 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.
MANAGEMENT FEES FROM AFFILIATES. Management fees were $183,050 in 1996,
an increase of $36,182 or 24.6% over 1995. The increase was attributable to the
Company's management of CCA VII and CCA VIII for a full twelve-month period in
1996, compared to five months in 1995.
FEE INCOME FROM AFFILIATES. No new partnerships were formed by the
Company in 1996, resulting in a decrease from 1995.
The Company's plans include the Proposed Consolidation of the last four
Circle Creek Partnerships with AquaPro in 1997. If this occurs, the Company
would expect no further management or fee income from Circle Creek Partnerships.
However, the results of operations of these four newly acquired farms would be
included in the financial statements of AquaPro.
COST OF PRODUCTS SOLD. Cost of products sold was $2,492,682, an
increase of $846,736 or 51.4% over 1995, while net sales increased only 22.1%.
Margin from fish sales was 6.1% in 1996 compared to 24.3% in 1995. As ponds were
emptied for refurbishing during 1996, mortality adjustments of approximately
$350,000 were required to be recorded in Cost of Products Sold. Had these
mortality adjustments not occurred, margin from fish sales would have been
19.3%, which was lower than in 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 have resulted
in a current price of $287 per ton. The Company has contracted to purchase
approximately 85% of its 1997 feed needs at an average cost of $252 per ton.
AquaPro believes that its margin from fish sales will increase in 1997 compared
to 1996 due to efficiencies gained from increased volume.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and
Administrative ("SG&A") expenses were $1,027,654 in 1996, down $280,475 or 21.4%
compared to 1995. During 1995, approximately $132,000 of legal and accounting
expenses were incurred in connection with the Prior Consolidation. During 1997,
the Company expects SG&A expenses to increase as a result of the Proposed
Consolidation.
INTEREST EXPENSE. Interest expense decreased to $188,651 from $409,245
in 1995. This decrease resulted from $2,142,062 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
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Consolidation. The balance of the debt was repaid from proceeds of the exercise
of the Company's $7.25 Rights Offering in 1996.
The Company expects interest expense will decline in 1997 because of a
full year's impact of the debt reduction. On the other hand, if the Proposed
Consolidation of the last four Circle Creek Partnerships is completed, interest
expense will be expected to increase as a result of debt to be assumed in the
Proposed Consolidation.
INCOME TAXES AS OF DECEMBER 31, 1996. The Company had available net
operating loss carry forwards of approximately $1,600,000 in 1996.
SEASONALITY OF OPERATING RESULTS. In prior years, the revenues of
AquaPro have been seasonal and cyclical. 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. However, through the end of March
1997, prices have not increased as expected. Accordingly, quarterly operating
results of the Company may vary from quarter to quarter and year to year and
cannot be predicted with certainty.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had a current ratio of 4.53 to 1,
as opposed to 1.39 to 1 at December 31, 1995. Current assets exceeded current
liabilities by $2,781,046, compared to $753,844 in December 1995. Cash and cash
equivalents increased to $729,965 from $157,377.
Cash and cash equivalents increased and debt was reduced through
conversion of investors' debt to equity, exercise of warrants, and sale of
preferred stock in a private offering. In 1996, certain holders of unsecured
notes payable converted notes with principal balances totaling $1,678,762 to
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 Company used approximately $860,000 of cash in operations during
1996, compared to $7,000 in 1995. This was primarily attributable to three
significant factors, the largest of which was a $387,000 increase in receivables
from affiliates and a $126,000 decrease in payables to affiliates.
The Company is manager for the four remaining Circle Creek
Partnerships. It is also a General Partner in two of the farms and has had all
the economic interest of General Partner assigned to it in each of the four
farms. Therefore, the Company had a fiduciary duty to the Partnerships to manage
them to the best of its ability. It has been the goal of AquaPro and the four
remaining Circle Creek Partnerships to combine operations for the last few
years. Management believes that the stronger these farms can be from a financial
and production standpoint, the better acquisition candidates they would be and
the more quickly they can become profitable. If the Proposed Consolidation is
completed, the Company expects that affiliated transactions would be eliminated.
If the Proposed Consolidation does not occur, the target farms may not be able
to reduce their payables to the Company. Conditions beyond the control of
management could make such payments doubtful.
The second largest impact to Operating Activities occurred in
Inventories. Inventories decreased a net of $213,000. However, this was after
management's inventory maximization program was implemented in 1996. The program
entailed significant increases in the annual restocking rates of fingerling to
increase
-17-
<PAGE> 20
production from the grow-out of the fingerlings to food-sized fish starting in
the summer of 1997. Management also increased its oversight of accounting for
the live inventory in the ponds and more conservative feed to meat conversion
ratios. This resulted in mortality adjustments of $350,000 during 1996. The
Company also sold approximately 645,000 more pounds of fish in 1996 than 1995.
The above numbers indicate that the Company was able to replace $780,000 of the
$1,000,000 value removed from inventory in 1996. Because of the prior year's low
volume, high debt service, and inefficiencies of operating as stand-alone farms
in 1995, the fish sold in 1996 had a high cost basis per pound sold. The
$780,000 provided many more head into inventory than were taken out of
inventory. In 1995, between 4,000 to 6,000 head per acre were stocked, and in
1996 9,000 to 10,000 head per acre were stocked. Management believes that it is
important to stock at these higher levels. This ongoing inventory maximization
plan should provide an increase in food- fish sales starting in July of 1997.
From January 1 to July the Company will be selling the remainder of the fish
that were stocked in the ponds in 1995, before the Prior Consolidation and
before implementation of the inventory maximization program. Management believes
that sales for the first half of 1997 will be below the 1996 levels but also
expects that sales in the second half of the year will be high enough to make up
the shortfall and exceed 1996 sales in total. As always, events beyond
management's control may prevent this from happening.
The third major item of cash used in operations was a $132,230 increase
in accounts receivable. Sales increased $481,500 in 1996 and receivables
increased as a result. The Company expects that increased sales in 1997 will
bring increased receivables.
The Company intends to fund its operating losses primarily through fish
sales, cash reserves, $925,000 feed credit lines, the proceeds of sales of the
Company's Series A Preferred Stock in a private placement, credit lines, and
additional long and short term debt if needed. On Effective 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. The collateral is the Company's
cooperative processing stock and a first lien on inventory on all except the
Balmoral farm (formerly Circle Creek AquaCulture III, L.P.). The interest rate
is prime plus 165 basis points, and the commitment expires March 5, 1998 with no
prepayment penalty. The Bank will apply 50% of net fish sales collected as
payment on the credit line.
The Company has a $175,000 revolving feed credit line with a feed and
processing company. The interest rate is 10.25% and the lender will apply
34(cent) 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 on the
Balmoral Farm.
Capital expenditures for the years ended 1996 and 1995 were $389,075
and $113,127, respectively. The higher level of capital expenditures for 1996
was due primarily to rebuilding and refurbishing ponds and the purchase of
related production equipment. Planned expenditures for 1997 total approximately
$750,000. To increase production capacity, a major pond reworking program is
scheduled to be completed in 1997 for $165,000. To ensure adequate oxygenation
to the increased inventory, the Company is installing double aeration in all of
its ponds for approximately $300,000. The extra aeration equipment will be
installed as ponds are completed. As of March 15, 1997, approximately $200,000
has been purchased and installed. A capital leasing organization has provided a
five-year capital lease and financed $171,000 to date. The balance of the
aeration equipment is expected to be financed by the capital leasing firm.
In order to provide seining services to all farms and provide
transportation to managers and oxygen- testing crews, the Company expects to
spend $200,000 on vehicles and tractors. As in the past, the vendors
are expected to provide installment payment programs for this equipment. Also,
$70,000 has been allocated to upgrade the Company's computer and software
equipment. The improvement is intended to give instantaneous access to all
information from all farms for production management and accounting controls.
-18-
<PAGE> 21
The $15,000 balance will be used for new seines, two way radios, tools, and
small production items during the year.
Management believes that additional capital will be necessary to
support the Company's growth. Management believes that the net proceeds from the
1997 private preferred stock offering, combined with its existing cash and cash
equivalents, long and short term debt and product sales, will be adequate to
fund its planned operations, capital requirements and expansion needs through
1997. 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.
THE PROPOSED CONSOLIDATION. As discussed elsewhere herein, AquaPro has
obtained approval at its April 16, 1997 Annual Shareholders Meeting for the
Proposed Consolidation of CCA V-VIII with AquaPro. If the Proposed Consolidation
is approved by the majority of the Partners in each farm, AquaPro would acquire
all of the assets and assume all of the liabilities of the Partnerships in
return for up to $658,606 of 7.15% Notes or up to 722,232 Units comprised of the
Company's common stock, stock purchase rights, and warrants. Discussions with
Limited Partners (who have been waiting to merge with AquaPro) indicate a large
majority for the Consolidation. In the Prior Consolidation, 97% of the Partners
and 100% of the stockholders voted for the Consolidation.
Following the Consolidation, the Company will offer current debt
investors an opportunity to exchange up to $1,147,513 of Investor Notes for
shares of the Company's Series A Preferred Stock. Debt converted to equity will
reduce the Company's outstanding debt and interest payments on the acquired
farms.
Upon closing, the holders of Units received in the Proposed
Consolidation will have the right for 90 days to purchase one share of the
Company's Series A Preferred Stock for $9.50. Note that proceeds from the
exercise of the rights will be used to fund operations, improve the plant and
equipment, and, to the extent possible, reduce debt. While up to $6,861,204
could be raised from the exercise of the rights, no guarantee can be given as to
the amount that will be raised in these offerings. The Company is in
negotiations with the Bank providing the $750,000 feed credit line to
significantly expand the funds available with a full operating line after the
completion of the Proposed Consolidation.
After the Proposed Consolidation, the Company intends to attempt to
list its securities on a national exchange. Also, the Company intends to fund
the potential expansion of farms funded from public offerings of stock.
ITEM 3. DESCRIPTION OF PROPERTY
REAL PROPERTY. The Company owns four non-contiguous farms having a
total of 57 ponds comprising 883 water acres situated on a total of 1,125 land
acres. The farms are located in the Mississippi Delta area of Mississippi. The
table below sets forth information regarding these properties.
-19-
<PAGE> 22
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 DECEMBER 31, 1996
--------- ------------ -------- -----------------
<S> <C> <C> <C>
Circle Creek
(Sunflower County, MS) 275(210) 15 None
Panther Run,
(LeFlore County, MS) 278(211) 15 None
Balmoral
(Sunflower County, MS) 318(270) 14 $320,000(1)
Cypress Lake
(LeFlore County, MS) 254(193) 13 $220,000(2)
</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 9.5%. Note is
secured by land with a book value of $916,130 and stock in a
cooperative with a book value of $13,525.
(2) Note payable to insurance company requiring annual principal payments
of $7,500 through 2001 and a final principal payment of $182,500 due in
2002 with interest payable semi-annually at 8.75%. Note is secured by
land with a book value of $679,344.
- ----------------------------
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.
The Company intends to expand its catfish farming operations by the
acquisition of up to four additional farming properties and equipment pursuant
to the Proposed Acquisition. See Part I, Item 7 below.
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 belongs to the following
cooperatives.
Processing Cooperatives. AquaPro is a member of and owns
stock in the catfish cooperatives Delta Catfish Processors, Inc. ("Delta Pride")
and Fish Co, Inc. ("FishCo"). Membership 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
-20-
<PAGE> 23
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 April 16,
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 beneficial ownership by
each Director and the beneficial ownership of all Directors and Officers as a
group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME & POSITION BENEFICIAL OWNERSHIP(1)
OFFICERS AND DIRECTORS NUMBER OF COMMON SHARES(%)
- ---------------------- --------------------------
<S> <C> <C>
George S. Hastings, Jr.
President, Chief Executive Officer
and Chairman of the Board 313,927(2)(3) (20.67%)
Patricia G. Hastings
Executive Vice President,
Secretary and Director 313,927(2)(3) (20.67%)
Austin Jones
Vice President of Production 12,000(4) (0.79%)
Debra Kelly
Vice President of Marketing 12,000(4) (0.79%)
Joseph F. Duncan, Sr.
Director 24,983(5) (1.65%)
Roger Daley
Director 73,389(6) (4.84%)
All officers and directors as a
group (six persons) 436,299 (28.75%)
Leslie B. Borum 92,040(7) (6.06%)
</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 $8.75 Warrants and the $6.25 Compensatory Options and
Director Options referenced in the table and below, are adjusted to
reflect the September 18 Dividend and previous to such adjustments had
exercise prices of $10.50 and $7.50, respectively.
-21-
<PAGE> 24
The total number of Common Shares outstanding is 1,517,764 as of April
16, 1997, which includes 1,313,050 Common Shares issued and outstanding
and 204,714 Common Shares issuable at the rate of 0.36 Common Shares
for each of 568,650 outstanding $8.75 Warrants to the extent such
Warrants expire unexercised. The total does not include a minimum of
273,530 Common Shares issuable on the mandatory conversion of 205,662
Common Shares of Series A Preferred Stock outstanding on April 16,
1997.
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: 94,065 Common Shares, 15,864 Common Shares
issuable upon the exercise of $8.75 Warrants and 78,000 Common Shares
issuable upon the exercise of 72,000 $6.25 Compensatory Options and
6,000 Director Options.
(3) Includes the following Common Shares, warrants and options held of
record by Ms. Hastings: 94,065 Common Shares and 24,000 Common Shares
issuable upon the exercise of 18,000 $6.25 Compensatory Options and
6,000 Director Options.
(4) Includes 6,000 Common Shares held of record and 6,000 Common Shares
issuable upon the exercise of $6.25 Compensatory Options.
(5) Includes 12,655 Common Shares held of record, 6,328 Common Shares
issuable upon the exercise of $8.75 Warrants and 6,000 Common Shares
issuable upon the exercise of $6.25 Director Options.
(6) Includes 46,927 Common Shares held of record, 23,462 Common Shares
issuable upon the exercise of $8.75 Warrants and 3,000 Common Shares
issuable upon the exercise of Director Options.
(7) Includes 46,020 Common Shares held of record, and 46,020 Common Shares
issuable upon the exercise of $8.75 Warrants.
- ----------------------------
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the Directors and Executive Officers of the Company
and their ages, positions held and length of service.
-22-
<PAGE> 25
<TABLE>
<CAPTION>
AN OFFICER OF THE
COMPANY (OR A DIRECTOR OF THE
PREDECESSOR OF THE COMPANY
NAME AND AGE POSITION COMPANY) SINCE (OR PREDECESSOR) SINCE
- ------------ -------- -------------- ----------------------
<S> <C> <C> <C>
George S. Hastings, Jr. Chairman of the Board, 1983 1983
Age 50 Chief Executive Officer,
President
Patricia G. Hasting Executive Vice 1983 1983
Age 49 President, Secretary and
Director
Eric P. Braschwitz Chief Financial Officer 1997 --
Age 40
Austin Jones Vice President- 1987 --
Age 43 Production
Debra D. Kelly Vice President/National 1994 --
Age 40 Marketing Director
Roger Daley* Director 1996 --
Age 74
Director
Joseph Duncan, Sr. Director -- 1995
Age 68
</TABLE>
- ----------------------
* Independent (outside) director.
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").
Set forth below is a description of the business and employment
background of the Company's Directors and Executive Officers.
George S. Hastings, Jr. has been involved in the catfish
aquaculture industry since 1986. Mr. Hastings has sponsored eight catfish
farming limited partnerships, four of which are still in existence. 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
Company 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.
-23-
<PAGE> 26
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 Company
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 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 from The University of Texas at El Paso.
Austin Jones is a part-time employee and serves as the
Company's Production Manager. He is responsible for various aspects of the
Company's farming operations and strategic planning. Mr. Jones has been involved
in all areas of catfish farm operations for the past nineteen years. He is a
former founder and owner of American. His responsibilities for the Company
include production management and marketing to processors. He is currently a
manager and part owner of a 800-acre catfish hatchery and farm. Prior to
entering the catfish farming business as a principal in 1992, Mr. Jones was
manager for Trans Fisheries, Inc., a catfish farming company in Moorhead,
Mississippi. Mr. Jones has a Bachelor of Science Degree in Fishery Biology, with
a minor in zoology, from Mississippi State University. Mr. Jones has completed a
number of graduate programs and seminars related to catfish farming and has
taught classes at Mississippi Delta Junior College in Catfish Management. He
presently serves as chairman of the Mississippi Governor's Counsel for
Aquaculture Development. Mr. Jones is President for 1997-98 and past secretary
and treasurer of the Catfish Farmers of Mississippi, a trade organization, and
was voted "Catfish Farmer of the Year" in Mississippi for 1994 by that
organization. He is a member of the executive committee of the Board of
Directors of Delta Pride, Mississippi's largest catfish processor.
Debra D. Kelly has been an employee of the Company or its
predecessors since 1993. Prior to joining the Company team, 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 has 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. Daley has also served as a guest consultant on business and
marketing for Taiwan and West Germany. Mr. Daley 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.
He was 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
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<PAGE> 27
Publishers Association and of the Southern Newspaper Publishers Association, for
which he served on several committees and served three years on that Board. In
addition Mr. Daley 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.
COMMITTEES OF DIRECTORS. The Directors have established an Audit
Committee, an Executive Committee and an Executive Compensation Committee. Each
Committee would consist of at least two Directors. Messrs. Daley and Duncan
serve on the Audit Committee which must consist of Directors who are not
executive officers of the Company ("Non-Officer Directors"). Among its other
duties, the Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with independent public accountants the
plans and results of the audit engagement, approves professional services
provided by the independent accountants, reviews the independence of the
independent accountants, considers the range of audit and non-audit fees, and
reviews the adequacy of the Company's internal accounting controls.
Ms. Hastings and Mr. Hastings serve on the Executive Committee which
must consist of at least two directors. Subject to the Company's conflict of
interest policies, the Executive Committee has been granted the authority to
acquire and dispose of real property and to borrow or loan funds on behalf of
the Company provided, however, that any such transaction involving amounts equal
to ten percent or more of the Company's gross assets would require the approval
of at least a majority of the Directors, subject to certain further restrictions
set forth in the Company's Bylaws. The Executive Committee also has the power to
authorize on behalf of the full Board of Directors the execution of certain
contracts and agreements, including those related to the borrowing of money by
the Company.
Messrs. Daley and Duncan serve on the Executive Compensation Committee
which must be comprised of at least two directors, a majority of which must be
Non-Officer Directors. The Executive Compensation Committee determines
compensation for the Company's executive officers, subject to full Board
approval.
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.
-25-
<PAGE> 28
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
VALUE OF SECURITIES
NAME AND RESTRICTED UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS STOCK(1) OPTION(2)
- ------------------ ---- ------ ----- -------- ---------
<S> <C> <C> <C> <C> <C>
George Hastings, Jr. 1996 $150,000 $ 56,000 $ 28,125 36,000
Chief Executive 1995 56,931 None 28,125 36,000
Officer(3) 1994 171,139 None None None
Patricia G. Hastings 1996 $ 75,000 $ 6,000 $ 18,750 9,000
General Counsel, 1995 56,931 None 18,750 9,000
Vice President, 1994 171,139 None None None
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 the vesting period ends. 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 $6.25 per Common Share. See discussion below.
(3) Mr. Hastings and Ms. Hastings have agreed between themselves to share
equally their combined compensation from the Company.
- -------------------
The following table sets forth certain information regarding stock
options and warrants granted to each named Executive Officer by reason of their
employment during the Company's 1996 fiscal year.
<TABLE>
<CAPTION>
OPTION/WARRANT GRANTS IN 1996
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/WARRANTS
UNDERLYING GRANTS TO
OPTIONS/WARRANTS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SHARE)(1) EXPIRATION 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
April 16, 1997.
-26-
<PAGE> 29
AGGREGATED OPTION AND WARRANT VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
------------------------------ --------------------
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
---- ---------------------------- -------------------------
<S> <C> <C>
George S. Hastings, Jr. 78,000/None None/None(1)
Patricia S. Hastings 24,000/None None/None(1)
</TABLE>
- ---------------------
(1) No Options are in-the-money based on the value of the Company's Common
Stock, which, as of April 16, 1997, 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. Each
of these agreements provides for an initial three-year term and each 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
voluntarily by giving at least three months' prior written notice. Each of the
agreements provides for an initial annual base salary set forth below, as well
as an award of restricted stock and stock options and medical insurance
coverage. In addition, each of such employees is entitled 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.
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
-27-
<PAGE> 30
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.
Since its inception in 1987, and continuing after its acquisition by
the Company, American provides administrative and bookkeeping services to a
catfish aquaculture production and hatchery farm owned by an entity in which Mr.
Austin Jones, the Company's vice president of production, owns approximately a
one-third (1/3) interest. American provides these services to Mr. Jones'
affiliate for compensation substantially below that which American charges its
other customers, including the Circle Creek partnerships. The Company believes
this arrangement is reasonable and essentially constitutes additional
compensation to Mr. Jones for his services as an officer and production manager
of the Company.
ACQUISITION OF ASSETS FROM AFFILIATES
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. See Part I, Item 8, below. 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.
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<PAGE> 31
The table below sets forth the following with respect to the Prior
Consolidation: (a) the 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.
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 total of the estimated Net Asset Value, as defined ("NAV") of each
partnership by a $8.33 unit price. 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.
<TABLE>
<CAPTION>
ALLOCATION PER $1,000 OF
MAXIMUM ALLOCATION ORIGINAL INVESTMENT BY
TO LIMITED PARTNERS LIMITED PARTNERS IN EITHER
PERCENTAGE IN UNITS OR 10.35% NOTES UNITS OR 10.35% NOTES (5)
---------- ------------------------ -------------------------
OF AGGREGATE
ESTIMATED NET EST. NET ASSET NUMBER OF FACE VALUE NUMBER OF FACE VALUE
PARTNERSHIP ASSET VALUE VALUE(1),(2) 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>
-29-
<PAGE> 32
(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 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.
- --------------------------------
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.
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
-------------------------------------------
ORIGINAL
LIMITED PARTNER INVESTOR MORTGAGE
NAME OF NO. OF DATE OF CAPITAL NOTES AT DEBT(1)AT
PARTNERSHIP PARTNERS ORGANIZATION (L.P. UNITS) 7/31/1995(1) 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 --
CCA III 59 9-23-1990 $1,631,390 $ 260,951 $336,000
CCA IV 80 5-30-1991 $1,850,235 -- $227,500
</TABLE>
-30-
<PAGE> 33
INFORMATION REGARDING PARTNERSHIP PROPERTIES
<TABLE>
<CAPTION>
APPRAISED
VALUE
TOTAL ACRES PURCHASE PRICE OF FARM
NAME OF WATER ACRES) NUMBER OF OF FARM PROPERTY
PARTNERSHIP OWNED PONDS OWNED PROPERTY(1) AT 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>
INFORMATION REGARDING PARTNERSHIP TANGIBLE ASSETS
<TABLE>
<CAPTION>
CASH AND
ACCOUNTS CATFISH INVESTMENTS IN EQUIPMENT AND TOTAL TANGIBLE
NAME OF RECEIVABLE AT INVENTORY COOPERATIVES REAL PROPERTY ASSETS
PARTNERSHIP 7-31-1995(1) AT 7-31-1995(1) AT 7-31-1995(1) AT 7-31-1995(1)(2) AT 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.
- -------------
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.
THE PROPOSED CONSOLIDATION
GENERAL. Pursuant to the Proposed Consolidation, the Company will seek
to acquire by purchase all of the assets and assume the liabilities of CCA V,
CCA VI, CCA VII, CCA VIII. The Proposed Consolidation will consist of three
phases as follows.
Asset Purchase Phase. In the Proposed Consolidation, the
Company will acquire by purchase all of the assets of and will assume the
liabilities of each participating partnership. In consideration for the
acquisition the assets and liabilities of the Partnerships, the Company will
offer the Limited Partners the right to receive either (i) the Company's
convertible, 7.15% Notes, or (ii) Units comprised of the Company's common stock,
Series A Preferred Stock purchase rights and warrants. Participating Limited
Partners will have the right to elect to receive either Units or Notes with
respect to their Limited Partnership Units ("L.P. Units"). See "Consideration
Offered the Limited Partners" below.
Investor Note Exchange Phase. Immediately following the
closing of the asset purchase phase of the Proposed Consolidation, (the
"Closing Date"), the Company will offer to acquire up to $1,147,513 of
-31-
<PAGE> 34
the Investor Notes in exchange for shares of the Company's Series A Preferred
Stock. The Investor Notes are 10.35% convertible, collateralized notes issued by
CCA V, CCA VII and CCA VIII See the "Investor Note Exchange Offer" below.
Rights Offering Phase. Upon the Closing Date, the Stock Rights
will be exercisable for a period of 90 days. Each Stock Right entitles the
holder thereof to purchase one share of the Company's Series A Preferred Stock
for a price of $9.50. See the "Rights Offering" below.
CONSIDERATION OFFERED THE LIMITED PARTNERS
General. AquaPro is offering to issue up to 722,232 Units
and/or up to $658,606 in principal amount of its Notes to acquire the
Partnerships. Participating Limited Partners will have the right to elect either
Units or Notes with respect to the L. P. Units.
Each Unit is comprised of:
One (1) Share;
One (1) Stock Right entitling the holder to purchase one share of
Series A Preferred Stock at a price of $9.50 on or before the 90th day
following the Closing Date;
One (1) $7.50 Warrant entitling the holder to purchase one share of
Common Stock at a price of $7.50 for a period of 12 months following
the Closing Date; and
One (1) $9.50 Warrant entitling the holder to purchase one share of
Common Stock at a price of $9.50 for a period of 24 months following
the Closing Date.
In the case of each of the $7.50 Warrants and the $9.50 Warrants, if
not exercised upon expiration, each Warrant is converted into
three-tenths (3/10) share of Common Stock and the holder of each
Warrant would receive, upon exercise, a credit for the value of said
3/10 share.
The 7.15% Notes. The Notes will bear interest at the rate of
7.15% per annum for the period from and including the date of original issuance
(expected to be the Closing Date). 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 extent to which the Company issues Notes
in place of Units in the Proposed Consolidation will depend upon elections of
the Dissenting Partners whose elections to receive Notes will be honored in full
prior to elections for Notes by other Participating Limited Partners. The
issuance of the Notes, however, is limited by the Note Restriction which
prohibits the issuance of Notes to any Participating Partnership if, as a result
of such issuance, the aggregate principal amount of Notes issued to such
Participating Partnership in the Proposed Consolidation would exceed 20.0% of
the Partnership's estimated Net Exchange Value, as described below, on the
Closing Date. Also, Dissenting Partners, if any, will have the first election to
receive Notes.
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 900,000 shares of Preferred Stock the Company is authorized to
issue. As of April 16, 1997, there were 205,662 shares of Preferred Stock
outstanding. The
-32-
<PAGE> 35
Preferred Stock pays cumulative dividends at the annual rate of $.70. For a
description of the Series A Preferred Stock, see Part I, Item 8.
ALLOCATION OF UNITS. Up to 722,232 Units will be issued in the event of
100% Partnership participation and as few as 173,872 Units in the event of
acceptance by only the two smallest Partnerships in terms of Net Exchange Value
("NEV"), CCA VII and CCA VIII ("Minimum Partnership Acceptance") and the maximum
amount of Notes are issued. The number of Units issued for each Participating
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) will be allocated among the Partnerships in
accordance with their respective NEV, subject to adjustment in limited
circumstances. Under the Proposed Consolidation Agreement, each Participating
Limited Partner is entitled to his or her pro rata share of the consideration
allocated to the Participating Partnership based upon the Participating Limited
Partners' relative percentage ownership of L.P. Units in his or her Partnership.
Each Participating Limited Partner may elect to receive Notes subject to
satisfaction of elections by any Dissenting Partners and subject to the Note
Restriction.
The Table below sets forth estimates of: (a) the Net Exchange Value 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 Notes
that the Participating Limited Partners may receive in lieu of Units.
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM ESTIMATED ALLOCATION PER
ALLOCATION TO LIMITED $1,000 OF ORIGINAL INVESTMENT
PARTNERS IN EITHER BY LIMITED PARTNERS
UNITS OR NOTES IN EITHER SHARES OR NOTES(4)
------------------------ ----------------------------
NET EXCHANGE NUMBER OF FACE VALUE NUMBER OF FACE VALUE
PARTNERSHIP VALUE(1) UNITS (2) OF NOTES(3) UNITS OF NOTES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CCA V $1,582,104 346,889 $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 $3,293,032 722,233 $658,607 --- ---
100%
Partnership
Participation
================================================================================================
</TABLE>
(1) These amounts are 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 is 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 is 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.
- ------------------------------------
-33-
<PAGE> 36
DETERMINATION OF NET EXCHANGE VALUES
Valuation Methodology. In the Proposed Consolidation, the
Units and the Notes will be allocated among the Participating Partnerships in
accordance with the Net Exchange Value of each Partnership (subject to
adjustment in limited circumstances, as described below). Under the Proposed
Consolidation Agreement, each Participating Limited Partner will be 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
may 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 may 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 Proposed Consolidation and
the determination of the amount of Units offered to the Partnerships in the
Proposed Consolidation has been reviewed by Bishop-Crown Investment Research,
Inc. ("Bishop-Crown"), an independent investment valuation and research firm.
Bishop-Crown will render its Fairness Opinion for the Proposed Consolidation.
Bishop-Crown also issued a fairness opinion in the Prior Proposed Consolidation.
Determination of Exchange Ratio. The consideration paid by the
Company (consisting of the Units and Notes) to the Participating Partnerships in
the Proposed Consolidation was allocated 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.
The amount of Units offered to each Partnership for its assets was
determined by the following formula:
Number of Units = Partnership's NEV x EXCHANGE RATIO
<TABLE>
<CAPTION>
<S> <C> <C>
Where: EXCHANGE RATIO = (Total Units Offered by AquaPro in Prior Proposed Consolidation)
---------------------------------------------------------------
Total NEV of CCA I, CCA II, CCA III and CCA IV
</TABLE>
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
Proposed Consolidation) in the same manner as described above for CCA V, CCA VI,
CCA VII, and CCA VIII in the Proposed Consolidation.
COMPUTATION OF NET EXCHANGE VALUES. The NEV of each Partnership was 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 Proposed 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.
-34-
<PAGE> 37
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 the
Partnerships 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 each Partnership's
live fish inventory 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, 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 Proposed 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. The value of the machinery and
equipment of each Partnership and the CCA I-IV Partnerships is the highest
estimated market value realizable upon resale of the Partnership's farm
equipment and machinery. The Value for each Partnership (and CCA I-IV as a
group) was 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 a 0.60 0.60 0.50 0.60 0.60
fraction of
undepreciated
cost.
</TABLE>
Investment in Circle Creek Seining Partnership. Circle Creek
Seining Partnership ("CCSP") is a cooperative 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.
-35-
<PAGE> 38
Real Property. The value of the real property of each
Partnership and of the CCA I-IV Partnerships 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. The cooperative stock owned by each
Partnership and the CCA I-IV Partnerships was valued at its cost.
The table below sets forth the calculation of the NEV for each
Partnership.
-36-
<PAGE> 39
<TABLE>
<CAPTION>
AT 12/31/1995 (UNAUDITED) AT 9/30/1996 (UNAUDITED)
------------------------- ------------------------------------------------------
PARTNERSHIPS
(CCA I-IV) CCA V CCA VI CCA VII CCA VIII
- ------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
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 $6,489,377 $3,493,050 $1,149,307 $1,119,880 $1,437,138
---------- ---------- ---------- ---------- ----------
Market Value
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 $2,297,563 $1,582,105 $ 719,962 $ 499,338 $ 491,628
---------- ---------- ---------- ---------- ----------
(NEV)(3)
EXCHANGE RATIO
Original Capital $3,370,550 $1,000,000 $1,060,700 $ 905,000
NEV PER ORIGINAL $100 $ 469.39 $ 719.96 $ 470.76 $ 543.24
INVESTMENT ---------- ---------- ---------- ----------
Units Offered(4) 419,921
Ex Div-x1.20 503,905
Units Offered (5) 346,989 157,903 109,515 107,825
UNITS OFFERED PE 102.95 157.90 103.25 119.14
ORIGINAL $1000 INVESTMENT ---------- ---------- ---------- ----------
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."
-37-
<PAGE> 40
(4) The maximum number of Units offered to L.P.s of CCA I-IV in
the Prior Consolidation.
(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.
MECHANICS OF THE PROPOSED CONSOLIDATION
General. As of the Closing Date, each Participating
Partnership will organize and transfer all of its assets and liabilities to a
newly formed corporation (a "New Corp") in exchange for all of the common stock
of the New Corp. Contemporaneously therewith, the New Corp will transfer all of
such assets to AquaPro (which will assume such liabilities) in consideration for
the issuance of Units and Notes in accordance with the elections made by the
Limited Partners of the Participating Partnership. Contemporaneously therewith,
the New Corp will distribute such Units and Notes to the Participating
Partnership, which will thereupon distribute such Units and Notes to its Limited
Partners in accordance with their elections. The New Corp and the Participating
Partnership will thereafter dissolve in accordance with Tennessee law.
Conditions to Proposed Consolidation. No Partnership will
participate in the Proposed Consolidation unless its participation is approved
by Limited Partners holding at least a majority of the outstanding L.P. Units of
such Partnership and unless at least two of the Partnerships participate in the
Proposed Consolidation (the "Minimum Partnership Acceptance"). The Company will
not consummate the consolidation unless it is approved by a majority vote of its
shareholders. Upon the consummation of the closing of the Proposed
Consolidation, each Participating Partnership would be merged into AquaPro and
the Limited Partners thereby would receive Units (or as described below, the
Notes) in place of his or her L.P. Units. AquaPro will not proceed to consummate
the transactions which together comprise the Proposed Consolidation unless the
Minimum Partnership Acceptance is achieved and certain other conditions are
satisfied.
Nonparticipating Partnerships. If the Limited Partners of a
Partnership do not approve the Proposed Consolidation by a Majority Vote, no
Units or Notes will be issued to the Limited Partners of such Partnership and
the Nonparticipating Partnership will continue to operate as a separate legal
entity with its own assets and liabilities. There will be no change in
governance, investment objectives, policies and restrictions, and the
Nonparticipating Partnership will continue to operate in accordance with the
terms of its Partnership Agreement.
Participation by General Partner. Neither the General
Partner nor the Company will receive Shares or Notes in connection with the
General Partner interest in the Participating Partnerships. The General Partner
will receive no other compensation in connection with the Proposed
Consolidation other than Units in exchange for the L.P. Units owned by
Affiliates. Ms. Patricia Hastings holds 314 L.P. Units in CCA VI. The General
Partner and his Affiliates own no other L.P. Units in the Partnerships.
Material Federal Income Tax Considerations. Participating
Limited Partners who are subject to income tax will realize taxable gain or loss
in the Proposed Consolidation. The amount of any gain or loss
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<PAGE> 41
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 Proposed 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 in the
year of the Proposed Consolidation. The gain or loss from a Proposed
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 Proposed Consolidation.
INVESTOR NOTE EXCHANGE OFFER. Immediately following the Closing Date of
its purchase of the assets from the Participating Partnerships, the Company will
offer to the holders of the Investor Notes of the Participating Partnerships the
opportunity to exchange their Investor Notes for Shares of Series A Preferred
Stock. The Company will offer 1.30 shares of Preferred Stock for $10.00 in
unpaid amounts of principal and accrued interest of each Investor Note. For a
description of the terms and conditions of the Series A Preferred Stock see Part
I, Item 8.
The Investor Notes are unsecured obligations of the Partnerships which
bear interest at 10.35% per annum. The Investor Notes are payable 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. There are a total of
$1,147,513 of Investor Notes outstanding. Circle Creek V has a total of $312,700
of Investor Notes outstanding, Circle Creek VII has a total of $239,292 of
Investor Notes outstanding, and Circle Creek VIII has a total of $595,521 of
Investor Notes outstanding. The Investor Notes are convertible into Limited
Partnership Units (and thus Units at the exchange rates stated herein) at the
following rates: CCA V - $133.33 per L.P. Unit; CCA VII - $125.00 per L.P. Unit;
and CCA VIII - $125.00 per L.P. Unit.
Up to 149,176 shares of the Series A Preferred Stock could be issued in
the Investor Note Exchange. The Investor Note Exchange offer will expire after
60 days unless sooner terminated by the Company. Each Investor Noteholder may
elect to accept the offer with respect to all or a portion of an Investor Note.
The Investor Notes of those persons electing not to exchange their Investor
Notes will remain outstanding and will be assumed by AquaPro pursuant to the
Proposed Consolidation. The Company intends to engage one or more broker-dealer
firms who are members of the National Association of Securities Dealers, Inc.
(the "NASD") to solicit their customers to exchange their Investor Notes. The
Company intends to pay such firms commissions equal to 5.0% of the unpaid
balance of the Investor Notes exchanged plus options to purchase Common Shares
for $7.50 at the rate of one option for each $77.00 of unpaid balance of
Investor Notes exchanged. The Options will be exercisable for 4 years commencing
one year from the date of issuance.
THE STOCK RIGHTS OFFERING. As part of the Units, the Company will offer
up to 772,232 of the Stock Purchase Rights. Each Stock Right entitles the Holder
thereof to purchase one share of the Company's Series A Preferred Stock for a
price of $9.50 for a period of 90 days. See "Description of the Series A
Preferred Stock" above. The Stock Rights will be transferrable, subject to
compliance with applicable state securities laws. The Company intends to engage
broker-dealers who are members of the NASD to solicit the exercise of the Stock
Rights. The Company intends to pay such broker-dealers commissions equal to 5.0%
of the exercise price of the Stock Rights options to purchase Common Shares at a
price of $7.50 at the rate of one option for every ten Stock Rights exercised.
The Options will be exercisable for 4 years commencing one year from the date of
issuance. The Company intends to issue the Stock Rights so that they are
exercisable for the 90-day period commencing on the date of their issuance as of
the Closing Date of the asset purchase phase of the Proposed Consolidation.
However, the Company may, in its sole discretion, delay the commencement
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<PAGE> 42
of the Stock Rights offering phase until such time as the Company has complied
with such regulatory requirements as may be necessary, including the approval of
the corporate financing department of the National Association of Securities
Dealers regarding the compensation of the soliciting broker-dealers.
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
expansion of its catfish inventories, capital improvements and/or to retire
existing indebtedness. 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.
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.
PARTNERSHIP ORGANIZATION AND CAPITALIZATION
<TABLE>
<CAPTION>
ORIGINAL
LIMITED PARTNER INVESTOR MORTGAGE
NAME OF NO. OF DATE OF CAPITAL NOTES AT DEBT AT
PARTNERSHIP PARTNERS ORGANIZATION (L.P. UNITS) 12/31/1996 12/31/1996
- ----------- -------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
CCA 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 60 905,000 595,521 $ 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 (8.75%
at December 31, 1996) through 2015.
(4) Note payable to a bank collateralized by land and equipment requiring
annual payments of $31,732, including interest at variable rates (8.75%
at December 31, 1996) through 2015.
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<PAGE> 43
INFORMATION REGARDING PARTNERSHIP REAL PROPERTY
<TABLE>
<CAPTION>
COST OF REAL APPRAISED
TOTAL ACRES PROPERTY BEFORE BY VALUE OF
NAME OF (WATER 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) 44 $950,654 $950,000
CCA VI 170(140) 8 281,846 268,300
CCA VII 212(189) 13 325,586 359,740
CCA VIII 242(188) 16 451,393 445,197
</TABLE>
INFORMATION REGARDING PARTNERSHIP TANGIBLE ASSETS
<TABLE>
<CAPTION>
INVESTMENTS IN
CASH AND COOPERATIVES & MACHRY., EQUIP.
ACCOUNTS CIRCLE CREEK & REAL PROPERTY TANGIBLE
NAME OF RECEIVABLE AT CATFISH INVENTORY SEINING NET OF 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>
HISTORICAL CASH DISTRIBUTION AND ESTIMATED NET EXCHANGE VALUES
PER $1,000 ORIGINAL INVESTMENT
<TABLE>
<CAPTION>
CUMULATIVE
DISTRIBUTION
TO LIMITED PARTNERS
THROUGH 12/31/1996 PER TOTAL RECEIVED
YEAR OF FIRST $1,000 ORIGINAL AS A PERCENT OF
PARTNERSHIP NAME INVESTMENT 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.
- --------------------------------
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<PAGE> 44
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 1,313,050 were outstanding on April 16, 1997, which
amount does not include up to an additional 245,600 shares which would be issued
upon the expiration of the unexpired $8.75 Warrants on December 31, 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.
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 1,000,000 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 900,000 shares of Series
A Preferred Stock, of which 205,662 shares were issued and outstanding on April
16, 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.
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<PAGE> 45
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 April 16, 1997.
<TABLE>
<CAPTION>
NUMBER OF UNDERLYING
COMMON SHARES EXERCISE PRICE EXPIRATION DATE
------------- -------------- ---------------
<S> <C> <C>
682,220 $8.75 12/31/1997
205,662 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. Unless
otherwise stated, the terms and conditions of the $8.75 Warrants and $7.50
Warrants are identical. The Warrants will be issued pursuant to the terms of the
respective warrant agreements. The Company acts as its own warrant agent.
In the event an $8.75 Warrant is not exercised by its expiration date,
it will be converted into thirty-six one hundredths (0.36) common share. The
Company may accelerate the expiration date of the $8.75 Warrant
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<PAGE> 46
in the event the Shares have had a closing price of not less than 150% of the
$8.75 Warrant exercise price for a period of 15 consecutive trading days ending
not more than 10 calendar days immediately prior to the date of such notice.
Notice of acceleration must be mailed to all Warrantholders at least thirty (30)
days before the date to which the Expiration Date has been accelerated. The
Company may, at its sole election, redeem all but not part of the $8.75 Warrants
at any time or from time to time, upon written notice to the holders thereof at
least thirty (30) days prior to the date set for redemption and the issuance to
the Warrantholder of thirty-six one hundredths (0.36) common share on the
redemption date.
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 April 16, 1997, the Company has outstanding options for the purchase
of a total of 123,000 Common Shares at a price of $6.25 per share. Options for
the purchase of 60,000 shares expire on March 31, 2002 and the remainder expire
on March 31, 2003. 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
ORIGINAL ISSUER UNDERLYING 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 March 19, 1997, the Company has outstanding a total of
approximately $363,593 of noninstitutional long-term debt obligations as
follows:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
TYPE OF NOT GENERAL DESCRIPTION OUTSTANDING
- ----------- ------------------- -----------
<S> <C> <C>
10.35% Notes 10.35% interest only payable $363,593
quarterly, notes due on December
31, 2002, convertible into
common shares at $10.42 per share.
</TABLE>
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<PAGE> 47
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.
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<PAGE> 48
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Not Applicable
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 September 18 dividend. See Part I, Item 8 above.
Between December 31, 1995 and June 15, 1996, Registrant issued the
following securities in connection with its acquisition of four (4) affiliated
partnerships (the "Prior Consolidation"). See Part I, Item 7 above.
The Company issued 404,764 units of its equity securities, and $149,098
in principal amount of its 10.35% Notes, to approximately 240 limited partners
of the four partnerships acquired in the Prior Consolidation. 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 certain 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. A total of $1,678,762 in principal amount
of the notes were exchanged.
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. Gross cash proceeds in the amount
of $2,667,217 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 a total
of five-year options to purchase a total of 32,598 shares at a price of $9.38.
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.
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
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<PAGE> 49
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.
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 the
approval of the offer and sale of said securities by the California Commissioner
of Corporations pursuant to a Fairness Hearing duly noticed and held pursuant to
Section 25142 of the California Corporate Securities Law of 1968.
At December 31, 1995, the Company issued 7-year options for the
purchase of 45,000 restricted Common Shares to five officers valued at $3.25 per
share and at December 31, 1996, the Company issued a total of 45,000 restricted
Common Shares to four officers valued at $3.125 per Share.
Pursuant to the September 18 Dividend, the Company issued 218,994
shares as a one-for-five stock dividend to shareholders of record on September
18, 1996.
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
7,500 shares for $7.50 per share to three Directors, and at December 31, 1996,
the Company issued 7-year options to purchase 10,000 shares at $6.25 per share
to four Directors. The options were issued as compensation to the Company's
Board of Directors.
In issuing the foregoing options, the Company relied on the exemptions
under Section 4(2) of the 1933 Act and Rule 701, promulgated thereunder.
Commencing on September 10, 1996 through April 16, 1997, Company sold a
total of 205,662 Preferred Units, each Unit consisted of one share of the
Company's Series A Preferred Stock and one $7.50 Common Stock Purchase Warrant.
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.
For a description of the Series A Preferred Stock, please see Part I, Item 8
above. 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.
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
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<PAGE> 50
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.
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<PAGE> 51
PART F/S
Please see the Company financial statements for the year ended December
31, 1996 attached hereto.
-49-
<PAGE> 52
PART III
ITEM 1. INDEX TO EXHIBITS
See attached Exhibit Index to Form 10-SB.
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.
-50-
<PAGE> 53
AQUAPRO CORPORATION
EXHIBIT INDEX TO FORM 10-SB
<TABLE>
<CAPTION>
Exhibit Seq.
Item Number Page No.
---- ------- --------
<S> <C> <C>
AquaPro's Charter 3.1
AquaPro's Amended and Restated Charter 3.2
AquaPro's Articles of Correction to Charter 3.3
AquaPro's Articles of Amendment to Charter 3.4
AquaPro's First Amended and Restated Bylaws 3.5
Plan and Agreement of Consolidation for CCA I-IV 3.6
Plan and Agreement of Consolidation for CCA V-VIII 3.7
Articles of Merger of CCA I, CCA II, CCA III, CCA IV,
and AquaPro Corporation 3.8
Form of Common Stock Certificate 4.1
Form of $10.50 Common Stock Warrant 4.2
Form of $10.50 Warrant Agreement 4.3
Form of 10.35% Debenture 4.4
Form of 10.35% Loan Note Agreement 4.5
Form of Series A Preferred Stock Certificate 4.6
Form of $7.50 Common Stock Warrant 4.7
Marketing Agreement with Delta Pride 10.1
Agreements with Delta Western ("Indi Bell") 10.2
Security Agreement, Guaranty, Note with Community
Bank 10.3
Note, Deed of Trust, Security Agreement with Met
Life (Balmoral) 10.4
Note and Deed of Trust with Met Life (Cypress Lake) 10.5
Employment Agreement with George S. Hastings, Jr. 10.6
Employment Agreement with Patricia G. Hastings 10.7
</TABLE>
-51-
<PAGE> 54
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AQUAPRO CORPORATION
Date: May 2, 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 May 2, 1997
- ----------------------------- Executive Officer, President,
George S. Hastings, Jr. and Director (Principal
Executive Officer)
/s/ Patricia G. Hastings Vice President, General May 2, 1997
- ----------------------------- Counsel, Secretary, and
Patricia G. Hastings Director
/s/ Eric P. Braschwitz Chief Financial Officer May 2, 1997
- ----------------------------- (Principal Financial
Eric P. Braschwitz and Accounting Officer)
/s/ Joseph Duncan, Sr. Director May 2, 1997
- -----------------------------
Joseph Duncan, Sr.
/s/ Roger A. Daley Director May 2, 1997
- -----------------------------
Roger A. Daley
</TABLE>
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA INFORMATION
As of December 31, l996 and 1995 and for the Years Then Ended
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AQUAPRO CORPORATION (REGISTRANT)
Report of Independent Auditors F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
ENTITIES INCLUDED IN THE PROPOSED ACQUISITION:
CIRCLE CREEK AQUACULTURE V, LP
Report of Independent Auditors F-23
Balance Sheets F-24
Statements of Operations F-25
Statements of Partners' Capital F-26
Statements of Cash Flows F-27
Notes to Financial Statements F-28
CIRCLE CREEK AQUACULTURE VI, LP
Report of Independent Auditors F-35
Balance Sheets F-36
Statements of Operations F-37
Statements of Partners' Capital F-38
Statements of Cash Flows F-39
Notes to Financial Statements F-40
CIRCLE CREEK AQUACULTURE VII, LP
Report of Independent Auditors F-47
Balance Sheets F-48
Statements of Operations F-49
Statements of Partners' Capital F-50
Statements of Cash Flows F-51
Notes to Financial Statements F-52
</TABLE>
F-l
<PAGE> 56
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA INFORMATION
As of December 31, 1996 and 1995 and for the Years Then Ended
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CIRCLE CREEK AQUACULTURE VIII, LP
Report of Independent Auditors F-60
Balance Sheets F-61
Statements of Operations F-62
Statements of Partners' Capital F-63
Statements of Cash Flows F-64
Notes to Financial Statements F-65
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introductory Statement F-73
Pro Forma Consolidated Balance Sheet as of
December 31, l996 F-74
Pro Forma Consolidated Statements of Operations for
the year ended December 31, l996 F-75
Pro Forma Consolidated Statements of Operations for
the year ended December 31, l995 F-76
Notes to Pro Forma Consolidated Financial Statements F-77
</TABLE>
F-2
<PAGE> 57
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 December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the years then ended. 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 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 aspects, the consolidated financial position of AquaPro
Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Jackson, Mississippi
February 21, 1997
F-3
<PAGE> 58
AquaPro Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 729,965 $ 157,377
Trade accounts receivable 233,539 101,219
Receivables from affiliates 463,193 76,207
Live fish inventories (Note 4) 2,137,767 2,351,576
Prepaid expenses 3,753 175
------------------------
Total current assets 3,568,217 2,686,554
Property, buildings and equipment (Note 4):
Land 965,644 965,644
Ponds and improvements 1,915,391 1,671,636
Buildings 96,161 84,016
Machinery and equipment 695,331 637,454
------------------------
3,672,527 3,358,750
Accumulated depreciation 1,088,195 944,338
------------------------
2,584,332 2,414,412
Investments in cooperatives (Notes 3 and 4) 636,912 656,912
Investment in Circle Creek Seining Company 110,893 123,424
Delivery rights, net 61,031 65,100
Deferred loan costs, net - 115,037
Other intangible assets, net 6,614 15,258
------------------------
Total assets $6,967,999 $6,076,697
========================
</TABLE>
F-4
<PAGE> 59
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 4):
Banks $ - $ 336,288
Officers and directors - 481,242
Others 293,525 208,525
Accounts payable 169,097 140,206
Payable to affiliates - 125,934
Accrued salaries 240,662 233,501
Other accrued expenses 54,603 41,468
Current maturities of long-term debt (Note 4) 29,284 365,546
----------------------------------
Total current liabilities 787,171 1,932,710
Long-term debt, less current maturities (Note 4) 960,661 2,766,461
Stockholders' equity:
Series A Preferred Stock, no par value - authorized
900,000 shares, cumulative, convertible, issued and
outstanding 104,534 in 1996 and none in 1995 (Note 7) 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 1,318,537 shares in
1996 and 530,099 shares in 1995 (Note 5) 6,321,492 2,316,259
Unearned compensation (112,500) (93,750)
Retained earnings (deficit) (1,736,994) (844,983)
----------------------------------
Total stockholders' equity 5,220,167 1,377,526
----------------------------------
Total liabilities and stockholders' equity $ 6,967,999 $6,076,697
==================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
AquaPro Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
-----------------------------
<S> <C> <C>
Revenues:
Net sales $2,654,224 $2,172,908
Management fees from affiliates (Note 9) 183,050 146,868
Fee income from affiliates (Note 9) - 381,675
-----------------------------
2,837,274 2,701,451
Cost of products sold 2,492,682 1,645,946
Selling, general and administrative (Note 5) 1,027,654 1,308,129
-----------------------------
Operating loss (683,062) (252,624)
Other expense:
Interest expense (188,651) (409,245)
Other, net (15,073) (26,567)
-----------------------------
(203,724) (435,812)
-----------------------------
Loss before income taxes (886,786) (688,436)
Current federal and state income taxes - 3,500
-----------------------------
Net loss $ (886,786) $ (691,936)
=============================
Net loss per share $ (0.80) $ (1.09)
=============================
</TABLE>
See accompanying notes.
F-6
<PAGE> 61
AquaPro Corporation
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Common Stock Preferred Stock Paid-In Unearned Earnings Stockholders'
Shares Amount Shares Amount Capital Compensation (Deficit) Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 510,099 $2,315,357 - $ - $19,894 - $ (153,047) $2,182,204
Net loss for 1995 (691,936) (691,936)
Retirement of partnership
interest (Note 1) (19,894) (19,894)
Common stock issued to
employees for services 20,000 150,000 (150,000) -
Amortization of unearned
compensation
Conversion of partnership 56,250 56,250
units to notes payable (149,098) (149,098)
---------------------------------------------------------------------------------------------
Balance at December 31, 1995 530,099 2,316,259 - - - (93,750) (844,983) 1,377,526
Net loss for 1996 (886,786) (886,786)
Common stock issued to
employees for services 20,000 150,000 (150,000) -
Amortization of unearned
compensation 131,250 131,250
Conversion of debt to
stock (Note 4) 186,740 1,717,305 1,717,305
Common stock issued 362,704 2,137,928 2,137,928
Preferred stock issued 104,534 748,169 748,169
One-for-five common stock split 218,994 -
Preferred stock-cash dividend (5,225) (5,225)
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 1,318,537 $6,321,492 104,534 $748,169 $ - $(112,500) $(1,736,994) $5,220,167
============================================================================================
</TABLE>
See accompanying notes.
F-7
<PAGE> 62
AquaPro Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (886,786) $(691,936)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 379,934 265,192
Equity in losses on investment in cooperatives 20,000 69,501
Equity in losses of Circle Creek Seining Company 12,531 24,241
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (132,320) 20,590
Increase in receivable from affiliates (386,986) (48,219)
(Increase) decrease in live fish inventories 213,809 (11,317)
(Increase) decrease in prepaid expenses and other assets (3,578) 9,850
Increase in accounts payable and accrued expenses 49,187 243,400
(Decrease) increase in payables to affiliates (125,934) 125,934
-------------------------
Net cash provided by (used in) operating activities (860,143) 7,236
INVESTING ACTIVITIES - Purchases of property and equipment (389,075) (113,127)
FINANCING ACTIVITIES
Net (decrease) increase in notes payable (732,530) 143,022
Principal payments on long-term borrowings (627,383) (61,599)
Proceeds from long-term borrowings 300,847 -
Proceeds from exercise of stock purchase rights 2,137,928 -
Proceeds from issuance of preferred stock 748,169 -
Retirement of partnership units - (19,894)
Payments of preferred stock dividends (5,225) -
-------------------------
Net cash provided by financing activities 1,821,806 61,529
-------------------------
Net increase (decrease) in cash and cash equivalents 572,588 (44,362)
Cash and cash equivalents at beginning of year 157,377 201,739
-------------------------
Cash and cash equivalents at end of year $ 729,965 $ 157,377
=========================
SUPPLEMENTAL CASH FLOW INFORMATION-
Interest paid $ 168,138 $ 434,935
=========================
NON-CASH FINANCING ACTIVITIES-
Conversion of notes payable and long-term debt to common stock $1,717,305 $ -
=========================
Common stock issued to employees for services $ 150,000 $ 150,000
=========================
Conversion of long-term debt to 10.35% convertible notes payable $ 214,495 $ -
=========================
</TABLE>
See accompanying notes.
F-8
<PAGE> 63
AquaPro Corporation
Notes to Consolidated Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Effective as of the close of business on December 31, 1995, the assets,
liabilities and business 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. (collectively, the "Partnerships") were merged into
AquaPro Corporation (the "Company") (see Note 2). Also effective as of the
close of business on December 31, 1995, the shareholders of American Fisheries
Corporation ("American") and Circle Creek Aquaculture, Inc. ("Circle Creek,
Inc.") exchanged the issued and outstanding shares of those respective
companies for shares of the Company.
The merger of American, Circle Creek, Inc. and the Partnerships has been
accounted for as though it were a pooling of interests because of common
control. The accompanying consolidated financial statements as of and for the
years ended December 31, 1995 have been restated to give effect to the
transactions described above and in Note 2. The amounts in the accompanying
financial statements are based on historical cost. Significant intercompany
transactions and balances have been eliminated in consolidation.
The Company is engaged primarily in catfish farming on 883 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 Company's sales are to a limited number of processors and
collateral is generally not required. Three processors represented 53%, 24% and
17%, respectively, of the Company's net sales for the year ended December 31,
1996 and 42%, 28% and 25%, 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 could differ from those estimates.
F-9
<PAGE> 64
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 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 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. 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 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 7 years for machinery
and equipment).
F-10
<PAGE> 65
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN CIRCLE CREEK SEINING COMPANY
The Company owns a 47.6% interest in the Circle Creek Seining Company (the
"Seining Company") which is accounted for using the equity method. Included in
other expense in the accompanying statements of operations is expense of
$12,531 and $24,241 applicable to the Corporation'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 Company
seining and hauling fees totaling $262,689 and $177,675 for the years ended
December 31, 1996 and 1995, respectively, 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 $98,899 at December 31, 1995.
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-11
<PAGE> 66
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 $5,225 in 1996) by
the weighted average number of common shares outstanding (1,115,087 shares in
1996 and 636,119 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 effect of adoption of
Statement 121 in 1996 was not material to the Company's financial position or
operations.
F-12
<PAGE> 67
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform to 1996 presentation.
2. MERGERS
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 the Partnerships were merged into the Company by vote of
the limited partners of each Partnership (the "Merger"). In consideration for
the Merger, AquaPro issued 404,764 "Units" to the limited partners (see Note 5)
and $149,098 of 10.35% convertible notes due on December 31, 2002 (see Note 4).
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. and the Partnerships.
The carrying amounts for common stock of American and Circle Creek, Inc. and
the general and limited partners' capital of the Partnerships were transferred
to the Company's common stock as of January 1, 1995.
In connection with the mergers, $131,678 of merger costs and expenses were
incurred and have been included in selling, general and administrative expenses
in the accompanying consolidated statement of operations for the year ended
December 31, 1995. The merger costs and expenses consisted principally of legal
and consulting fees. The net loss for the year ended December 31, 1995
consisted of a net loss of $461,399 attributable to the Partnerships, a net
loss of $192,791 attributable to Circle Creek, Inc., and net income of $18,504
attributable to American.
F-13
<PAGE> 68
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS IN COOPERATIVES
Investments in cooperatives consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------
<S> <C> <C>
Catfish processing cooperative $594,672 $614,672
Feed mill cooperative 42,240 42,240
------------------
$636,912 $656,912
==================
</TABLE>
4. NOTES PAYABLE AND LONG-TERM DEBT
Included in notes payable to banks was a note payable of $201,864 at December
31, 1995, with interest at prime plus 2%. The note was collateralized by the
personal guarantee of an officer and director. The note was paid in 1996. Also
included in notes payable to banks is a note payable of $134,424 at December
31, 1995, with interest at prime plus 1%. The note was paid in 1996.The notes
payable to officers and directors at December 31, 1995 were unsecured with
interest at prime plus 1 1/2%. The notes were paid in 1996.
Included in notes payable-other are borrowings of $176,925 at December 31, 1996
and $136,605 at December 31, 1995 under a revolving $175,000 credit facility
with one of the Company's major customers. Borrowings are at 10.25% and are
collateralized by certain live fish inventories with a book value of
approximately $500,000, and the personal guaranty of an officer and director of
the Company.
Also included in notes payable-other are borrowings of $116,600 at December 31,
1996 under a revolving $116,600 line of credit with one of the Company's major
feed suppliers. Borrowings are at prime plus 2% and are collateralized by stock
in a cooperative with a book value of $268,000.
F-14
<PAGE> 69
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------
<S> <C> <C>
Notes payable, collateralized by certain equipment,
with annual payments of $7,500 in 1997 and $24,378
through 2001, including interest at 7.9% $ 86,352 $ -
12.5% unsecured notes payable - 162,600
15% unsecured notes payable - 389,500
Convertible notes payable with interest at prime plus 3% - 1,600,000
Note payable to an insurance company with annual
principal payments of $16,000 through 2000 and a final
installment of $256,000 due in 2001 with interest
payable semiannually at 9.5%, collateralized by land
with a book value of $916,130 and by stock in a
cooperative with a book value of $13,525 320,000 336,000
12% unsecured notes payable - 246,513
Note payable to an insurance company with annual
principal payments of $7,500 through 2001 and a final
principal payment of $182,500 due in 2002 with interest
payable semi-annually at 8.75%, collateralized by land
with a book value of $679,344 220,000 227,500
Convertible notes payable maturing in 2002 with
interest payable quarterly at 10.35% 363,593 149,098
Other notes payable - 20,796
--------------------------
989,945 3,132,007
Less current maturities 29,284 365,546
--------------------------
$960,661 $2,766,461
==========================
</TABLE>
During 1996, certain holders of the unsecured and convertible (prime plus 3%)
notes payable converted notes with a principal balance of $1,678,762 to 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 to the 10.35% convertible notes payable. The
remaining unsecured notes payable and convertible (prime plus 3%) totaling
$505,356 were paid in 1996.
The 10.35% convertible notes payable are convertible at the noteholders' option
at any time prior to maturity into shares of the Company's common stock at a
price of $12.50 ($10.42 post split) per share. The note may be prepaid by the
Company at any time without penalty.
F-15
<PAGE> 70
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
During 1996, the company issued 18,864 shares of common stock to certain
officers and directors for the cancellation of $136,764 in notes payable to
officers and directors.
The aggregate annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 29,284
1998 41,410
1999 42,825
2000 44,352
2001 45,991
Thereafter 786,083
--------
$989,945
========
</TABLE>
5. COMMON STOCK
Effective December 31, 1995, AquaPro issued 404,764 units in connection with
the merger described in Note 2. In 1996, certain holders of unsecured notes
payable converted notes with principal balances totaling $1,678,762 to 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 expired on December 31, 1996 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). The $10.50 stock purchase warrants will expire on December
31, 1997 and allow the holder to purchase one share of the Company's common
stock for $10.50 (1.2 shares at $8.75 post split). The $10.50 stock purchase
warrants will be automatically converted into three-tenths of a share
(thirty-six one hundredths post split) of the Company's common stock if not
exercised by December 31, 1997.
During 1996, the Company received $2,137,928, net of related expenses, from the
issuance 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 $8.25 stock purchase warrants.
F-16
<PAGE> 71
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
5. COMMON STOCK (CONTINUED)
The Company granted 20,000 shares (24,000 shares post split) of common stock to
key employees during 1996 and 1995, respectively. The shares vest over a
two-year period. Compensation expense is included in selling, general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 1996 and 1995, respectively.
In connection with the exercise of $7.25 stock purchase rights during 1996, the
Company granted broker-dealers options to purchase 32,598 shares of 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
were exercised during 1996.
6. EMPLOYEE STOCK OPTIONS
The Company granted directors and certain key employees options in 1996 and
1995, respectively, to purchase 55,000 and 52,500 shares of common stock at
$7.50 per share (66,000 and 63,000 shares at $6.25 per share post split). The
1996 and 1995 options are exercisable at any time through March 31, 2003 and
March 31, 2002, respectively. None of the options were exercised during 1995
or 1996.
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 1996 and
1995; weighted-average expected life of options of 3 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 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.
F-17
<PAGE> 72
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
granted in 1996 and 1995 is amortized to expense over the vesting period. The
Company's pro forma net loss is $952,786 and $754,936 for the years ended
December 31, 1996 and 1995, respectively. The Company's pro forma loss per
common share is $0.86 and $1.19 for the years ended December 31, 1996 and 1995,
respectively. The weighted-average fair value of options granted during 1996
and 1995 was $1.20.
7. PREFERRED STOCK
In 1996, the Company received $748,169, net of related expenses, from the
issuance 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 expire December 31, 1998 and allow
the holder to purchase one share of the Company's common stock for $7.50. The
warrants will be automatically converted into three-tenths of a share of the
Company's common stock if not exercised by December 31, 1998.
The Series A Preferred Stock requires cumulative annual dividends of $0.175 per
share payable quarterly. Each share may be converted, at the option of the
holder, into 1.33 shares of 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 mandatorily converted
into common stock on the sixty-sixth trading day following the listing of the
Company's common stock on a national exchange. On the mandatory conversion
date, each share of Series A Preferred Stock will automatically convert into
the greater of 1.33 shares of 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 three
consecutive quarterly dividend payments are in arrears, each share of Series A
Preferred Stock will have 25 votes.
F-18
<PAGE> 73
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
For the year ended December 31, 1995, taxable income and losses of the
Partnerships 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 the Partnerships for 1995. The Merger
described in Note 2 was treated as a taxable transaction to 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. Current federal and state
income taxes for the year ended December 31, 1995 are applicable to American.
The Company had net operating losses of approximately $1,600,000 at December
31, 1996, available to reduce future taxable income through 2011.
AquaPro and its wholly-owned subsidiaries, American and Circle Creek, Inc.,
will file a consolidated federal income tax return in 1996 with operations
subject to income taxes at the corporate level.
Components of the Company's deferred tax assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------
<S> <C> <C>
Deferred tax assets - current:
Inventories $ 168,000 $ 419,000
Accrued expenses 89,000 68,000
Deferred tax assets - noncurrent:
Goodwill for income tax purposes 457,000 489,000
Net operating loss carryforward 575,000 -
Other 11,000 14,000
--------------------------
1,300,000 990,000
Valuation allowance for deferred tax assets (1,300,000) (990,000)
--------------------------
Net deferred tax assets $ - $ -
==========================
</TABLE>
Effective December 31, 1995, deferred income taxes were reinstated in
connection with Merger.
F-19
<PAGE> 74
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
9. RELATED PARTY TRANSACTIONS
Management fees from affiliates includes management fees paid to the Company
pursuant to management agreements with affiliated catfish production farms.
Certain salaries, wages and payroll taxes related to farm operations are
reimbursed by the farms pursuant to the management agreements and reported as a
reduction of selling, general and administrative expenses. Management fees
from affiliates also include administrative fees paid to the Company. The
management fees are equal to 5% of gross receipts, as defined, subject to the
minimum compensation as determined by the respective agreements. The
administrative fees are equal to 2% of gross receipts, as defined, subject to
the minimum compensation as determined by the respective agreements.
An officer and director of the Company owns a general partnership interest in
all but one of the catfish production farms managed but not owned by the
Company which accounts for substantially all of the Company's management fees
from affiliates. In 1995, the officer and director assigned the right and
title to the economic interest of the general partner in the catfish production
farms to the Company. The Company owns a general partnership interest in two
of the catfish production farms managed but not owned by the Company.
Management fees from affiliates includes management fees of $18,000 in 1996 and
1995 received from a catfish production farm in which an officer of the Company
is an owner of the catfish production farm.
Fee income from affiliates totaling $381,675 in 1995 consisted of fees paid to
the Company, based upon 10% of the proceeds from limited partnership offerings,
in which an officer and director of the Company owned a general partnership
interest. In 1995, the officer and director assigned his rights to receive such
fees to Circle Creek, Inc. In consideration for the assignment of the rights to
receive the fees, the Company assumed notes payable of the officer and director
of $75,000 resulting in a charge of $75,000 to selling, general and
administrative expense in the accompanying consolidated statement of operations
for the year ended December 31, 1995.
In 1996 and 1995, the Company purchased fingerling fish at prevailing market
rates totaling $126,222 and $152,135, respectively, from affiliates.
F-20
<PAGE> 75
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
10. 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. Notes payable
to banks and officers and directors were at variable rates which approximated
fair value at December 31, 1995. The fair value of notes payable-other and
long-term debt, which is estimated using discounted cash flow analysis based
upon the Company's incremental borrowing rates for similar borrowings
arrangements approximates their carrying amounts at December 31, 1996 and 1995.
11. SUBSEQUENT EVENTS
Subsequent to December 31, 1996 in connection with the private placement
offering of preferred stock described in Note 6, the Company issued 65,723
Preferred Units at $10 per unit.
The Company has proposed to purchase the assets and assume the liabilities (the
"Proposed Merger") 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. (the "Circle Creek Partnerships"). The Circle Creek
Partnerships are engaged in catfish farming in the State of Mississippi. The
Circle Creek Partnerships are managed by the Company pursuant to management
agreements described in Note 9. The Proposed Merger will be consummated upon
majority vote of the limited partners in each of the Circle Creek Partnerships.
In consideration for the assets and liabilities of the Circle Creek
Partnerships, the Company will issue up to 722,232 "Units" based upon the
relative fair value of the net assets of the Company and the Circle Creek
Partnerships. Limited partners may elect to receive up to a total of $658,606
in principal amount of 7.15% notes. A Unit in the Proposed Merger consists of
one share of the Company'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 the Company'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 the Company'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 the Company's common stock for
$9.50. The $7.50 warrants and
F-21
<PAGE> 76
AquaPro Corporation
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS (CONTINUED)
the $9.50 warrants will each be automatically converted to three-tenths of a
share of the Company's common stock if not exercised prior to the expiration
dates. The Proposed Merger will be accounted for as though it is a pooling of
interests because of common control.
F-22
<PAGE> 77
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-23
<PAGE> 78
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-24
<PAGE> 79
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-25
<PAGE> 80
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-26
<PAGE> 81
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-27
<PAGE> 82
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-28
<PAGE> 83
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-29
<PAGE> 84
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-30
<PAGE> 85
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-31
<PAGE> 86
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-32
<PAGE> 87
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-33
<PAGE> 88
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-34
<PAGE> 89
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-35
<PAGE> 90
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-36
<PAGE> 91
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-37
<PAGE> 92
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-38
<PAGE> 93
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-39
<PAGE> 94
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-40
<PAGE> 95
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-41
<PAGE> 96
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-42
<PAGE> 97
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-43
<PAGE> 98
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-44
<PAGE> 99
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-45
<PAGE> 100
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-46
<PAGE> 101
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-47
<PAGE> 102
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-48
<PAGE> 103
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-49
<PAGE> 104
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-50
<PAGE> 105
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-51
<PAGE> 106
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-52
<PAGE> 107
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-53
<PAGE> 108
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-54
<PAGE> 109
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-55
<PAGE> 110
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-56
<PAGE> 111
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-57
<PAGE> 112
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-58
<PAGE> 113
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-59
<PAGE> 114
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-60
<PAGE> 115
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-61
<PAGE> 116
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-62
<PAGE> 117
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-63
<PAGE> 118
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-64
<PAGE> 119
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-65
<PAGE> 120
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-66
<PAGE> 121
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-67
<PAGE> 122
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-68
<PAGE> 123
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-69
<PAGE> 124
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-70
<PAGE> 125
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-71
<PAGE> 126
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-72
<PAGE> 127
AQUAPRO CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1996 and the Pro Forma Consolidated Statements of Operations for
the years then ended December 31, 1996 and 1995 give effect to AquaPro
Corporation's ("AquaPro") proposed acquisition (the "Proposed Consolidation")
of the Circle Creek Partnerships, CCA V, CCA VI, CCA VII, and CCA VIII
(collectively, "the Circle Creek Partnerships" or "CCA V - CCA VIII"). The
pro forma information is based on the historical financial statements of
AquaPro and the combined historical financial statements of the Circle Creek
Partnerships to be acquired and the adjustments described in the accompanying
Notes to the Pro Forma Consolidated Financial Statements. The Pro Forma
Financial Statements give effect to the Proposed Consolidation as though it
were a pooling of interests because of common control.
AquaPro's Pro Forma Consolidated Financial Statements set forth the
effect of the Proposed Consolidation of 722,232 Units being issued to acquire
all of the Circle Creek Partnership Units outstanding and no Notes being issued.
The Pro Forma Statements have been prepared by AquaPro management based
on the historical financial statements of AquaPro and the combined historical
financial statements of the Circle Creek Partnerships and the adjustments and
assumptions in the accompanying Notes to the Pro Forma Consolidated Financial
Statements. These Pro Forma Statements may not be indicative of the results
that actually would have occurred had the combination been in effect on the
dates indicated or of results which may be obtained in the future. The Pro
Forma Consolidated Financial Statements should be read in conjunction with the
Audited Financial Statements and Notes of AquaPro and the Circle Creek
Partnerships as of December 31, 1996 and for the years ended December 31, 1996
and 1995 contained elsewhere herein.
F-73
<PAGE> 128
AQUAPRO CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Partnerships
CCA V - CCA VIII
AquaPro Combined Pro Forma AquaPro
Historical Historical (A) Adjustments Pro Forma
------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 729,965 $ 25,438 $ 3,654 (B) $ 759,057
Trade accounts receivable 233,539 364,768 598,307
Receivables from affiliates 463,193 (435,195)(C) 27,998
Live fish inventories 2,137,767 2,465,101 (53,540)(D) 4,549,328
Prepaid expenses 3,753 3,753
------------------------------------------------------------
Total current assets 3,568,217 2,855,307 (485,081) 5,938,443
Land 965,644 815,434 1,781,078
Ponds and improvements 1,915,391 1,010,103 2,925,494
Buildings 96,161 183,942 280,103
Machinery and equipment 695,331 632,133 662,461 (B) 1,989,925
------------------------------------------------------------
3,672,527 2,641,612 662,461 6,976,600
Accumulated depreciation 1,088,195 229,491 233,049 (B) 1,550,735
------------------------------------------------------------
2,584,332 2,412,121 429,412 5,425,865
Investments in cooperatives 636,912 561,605 1,198,517
Investment in Circle Creek Seining Company 110,893 265,692 (376,585)(B)
Intangible assets, net 67,645 74,818 (31,941)(F) 110,522
------------------------------------------------------------
Total assets $6,967,999 $ 6,169,543 $ (464,195) $12,673,347
============================================================
LIABILITIES
Notes payable to banks $ 79,500 $ 79,500
Notes payable to officers and directors 161,254 161,254
Notes payable to others $ 293,525 203,267 $ 140,816 (B) 637,608
Accounts payable 169,097 14,979 184,076
Payable to affiliates 532,939 (532,939)(C)
Accrued expenses 295,265 26,759 13,409 (B) 335,433
Current maturities of long-term debt 29,284 82,389 111,673
------------------------------------------------------------
Total current liabilities 787,171 1,101,087 (378,714) 1,509,544
Long-term debt, less current maturities 960,661 2,930,492 3,891,153
------------------------------------------------------------
1,747,832 4,031,579 (378,714) 5,400,697
STOCKHOLDERS' EQUITY
Preferred stock 748,169 748,169
Common stock 6,321,492 2,247,031 (I) 8,568,523
Partners' Capital 2,137,964 (2,137,964)(I)
Unearned compensation (112,500) (112,500)
Retained earnings (deficit) (1,736,994) (194,548) (1,931,542)
------------------------------------------------------------
Total stockholders' equity 5,220,167 2,137,964 (85,481) 7,272,650
------------------------------------------------------------
Total liabilities and stockholders' equity $6,967,999 $ 6,169,543 $ (464,195) $12,673,347
============================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
F-74
<PAGE> 129
AQUAPRO CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Partnerships
CCA V - CCA VIII
AquaPro Combined Pro Forma AquaPro
Historical Historical (A) Adjustments Pro Forma
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,654,224 $ 1,667,751 $ (415,021)(B)(D)(G) $ 3,906,954
Management fees from affiliates 183,050 (165,050)(E) 18,000
--------------------------------------------------------------------------
Total revenue 2,837,274 1,667,751 (580,071) 3,924,954
Cost of products sold 2,492,682 1,526,989 (494,266)(D)(E) 3,525,405
Selling, general and administrative 1,027,654 384,932 (63,087)(B)(E)(F)(G)(H) 1,349,499
Impairment loss on long-lived assets 1,019,000 1,019,000
--------------------------------------------------------------------------
3,520,336 2,930,921 (557,353) 5,893,904
--------------------------------------------------------------------------
Operating loss (683,062) (1,263,170) (22,718) (1,968,950)
Interest expense (188,651) (353,715) (13,608)(B)(F) (555,974)
Other income (expense) (15,073) 24,072 9,070 (B)(G) 18,069
--------------------------------------------------------------------------
(203,724) (329,643) (4,538) (537,905)
--------------------------------------------------------------------------
Net loss $ (886,786) $(1,592,813) $ (27,256)(J) $(2,506,855)
==========================================================================
Net loss per common share $ (0.80) $ (1.35)
=========== ===========
Weighted average common shares
outstanding 1,115,087 1,837,319
=========== ===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
F-75
<PAGE> 130
AQUAPRO CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Partnerships
CCA V - CCA VIII
AquaPro Combined Pro Forma AquaPro
Historical Historical (A) Adjustments Pro Forma
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,172,908 $ 997,021 $ (177,642)(B)(D)(G) $ 2,992,287
Management fees from affiliates 146,868 (128,868)(E) 18,000
Fee income from affiliates 381,675 (381,675)(F)
--------------------------------------------------------------------------
Total revenue 2,701,451 997,021 (688,185) 3,010,287
Cost of products sold 1,645,946 910,155 (252,907)(D)(E) 2,303,194
Selling, general and administrative 1,311,629 259,132 (248,801)(B)(E)(F)(G)(H) 1,321,960
--------------------------------------------------------------------------
2,957,575 1,169,287 (501,708) 3,625,154
--------------------------------------------------------------------------
Operating loss (256,124) (172,266) (186,477) (614,867)
Interest expense (409,245) (252,130) (12,774)(B)(F) (674,149)
Other income (expense) (26,567) 15,675 33,227 (B)(G) 22,335
--------------------------------------------------------------------------
(435,812) (236,455) 20,453 (651,814)
Net loss $ (691,936) $ (408,721) $ (166,024)(J) $(1,266,681)
==========================================================================
Net loss per common share $ (1.09) $ (0.93)
=========== ===========
Weighted average common shares
outstanding 636,119 1,358,351
=========== ===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
F-76
<PAGE> 131
AQUAPRO CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(A) The combining balance sheets on the historical cost basis below set forth
the combined financial position at December 31, 1996 of the Circle Creek
Partnerships to be acquired:
COMBINING BALANCE SHEETS
December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
CCA V - CCA VIII
CCA V CCA VI CCA VII CCA VIII Combined
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 15,602 $ 5,736 $ 2,569 $ 1,531 $ 25,438
Trade accounts receivable 123,541 241,227 364,768
Live fish inventories 1,145,621 249,635 504,616 565,229 2,465,101
-----------------------------------------------------------------
Total current assets 1,284,764 496,598 507,185 566,760 2,855,307
Land 446,000 90,000 129,444 149,990 815,434
Ponds and improvements 373,654 180,588 160,703 295,158 1,010,103
Buildings 131,000 11,258 35,439 6,245 183,942
Machinery and equipment 286,148 121,804 104,501 119,680 632,133
-----------------------------------------------------------------
1,236,802 403,650 430,087 571,073 2,641,612
Accumulated depreciation 110,892 60,314 25,983 32,302 229,491
-----------------------------------------------------------------
1,125,910 343,336 404,104 538,771 2,412,121
Investments in cooperatives 309,755 145,900 43,950 62,000 561,605
Investment in Circle Creek Seining Company 98,167 48,123 57,336 62,066 265,692
Intangible assets, net 1,148 21,250 52,420 74,818
-----------------------------------------------------------------
Total assets $2,818,596 $1,035,105 $1,033,825 $1,282,017 $6,169,543
=================================================================
LIABILITIES
Notes payable to banks $ 79,500 $ 79,500
Notes payable to officers and directors $ 85,254 76,000 161,254
Notes payable to others 180,090 $ 23,177 203,267
Accounts payable 9,231 5,748 14,979
Payable to affiliates 344,664 72,810 61,755 $ 53,710 532,939
Accrued expenses 12,307 14,452 26,759
Current maturities of long-term debt 19,382 17,180 25,320 20,507 82,389
-----------------------------------------------------------------
Total current liabilities 650,928 265,690 110,252 74,217 1,101,087
Long-term debt, less current maturities 1,363,667 145,889 534,245 886,691 2,930,492
-----------------------------------------------------------------
2,014,595 411,579 644,497 960,908 4,031,579
Partners' capital 804,001 623,526 389,328 321,109 2,137,964
-----------------------------------------------------------------
Total liabilities and partners' capital $2,818,596 $1,035,105 $1,033,825 $1,282,017 $6,169,543
=================================================================
</TABLE>
F-77
<PAGE> 132
AQUAPRO CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(A) Continued
The combining statements of operations below on the historical cost basis set
forth the effects of the combined operations of the Circle Creek Partnerships
for the years ended December 31, 1996 and 1995.
COMBINING STATEMENTS OF OPERATIONS
Year Ended December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
CCA V - CCA VIII
CCA V CCA VI CCA VII CCA VIII Combined
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 797,748 $ 454,982 $ 335,863 $ 79,158 $ 1,667,751
Cost of products sold 792,125 357,994 304,171 72,699 1,526,989
Selling, general and administrative 195,211 76,291 56,276 57,154 384,932
Impairment loss on long-lived assets 498,000 73,000 262,000 186,000 1,019,000
---------------------------------------------------------------
1,485,336 507,285 622,447 315,853 2,930,921
---------------------------------------------------------------
Operating income (loss) (687,588) (52,303) (286,584) (236,695) (1,263,170)
Interest expense (172,783) (25,898) (59,334) (95,700) (353,715)
Other (13,922) 9,651 9,120 19,223 24,072
---------------------------------------------------------------
(186,705) (16,247) (50,214) (76,477) (329,643)
---------------------------------------------------------------
Net loss $ (874,293) $ (68,550) $ (336,798) $ (313,172) $(1,592,813)
===============================================================
</TABLE>
COMBINING STATEMENTS OF OPERATIONS
Year Ended December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
CCA V - CCA VIII
CCA V CCA VI CCA VII CCA VIII Combined
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 801,930 $ 195,091 $ 997,021
Cost of products sold 746,162 163,993 910,155
Selling, general and administrative 177,560 47,898 $ 26,740 $ 6,934 259,132
---------------------------------------------------------------
923,722 211,891 26,740 6,934 1,169,287
---------------------------------------------------------------
Operating loss (121,792) (16,800) (26,740) (6,934) (172,266)
Interest expense (138,932) (22,586) (46,366) (44,246) (252,130)
Other 24,810 5,139 5,579 (19,853) 15,675
---------------------------------------------------------------
(114,122) (17,447) (40,787) (64,099) (236,455)
---------------------------------------------------------------
Net loss $ (235,914) $ (34,247) $ (67,527) $ (71,033) $ (408,721)
===============================================================
</TABLE>
F-78
<PAGE> 133
AQUAPRO CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(B) AquaPro and each of the Circle Creek Partnerships collectively own all of
the outstanding stock of the Circle Creek Seining Company. This ownership
interest is accounted for by each of the entities using the equity method of
accounting. The following sets forth the effects at December 31, 1996 of the
entities investment in Circle Creek Seining Company on AquaPro's Pro Forma
Consolidated Balance Sheet.
<TABLE>
<CAPTION>
Increase
(Decrease)
--------
<S> <C>
Cash $ 3,654
Receivable from affiliates 97,744
Equipment 662,461
Accumulated depreciation (233,049)
Investment in Circle Creek Seining Company (376,585)
Notes Payable (140,816)
Accrued Expenses (13,409)
</TABLE>
The following sets forth the operations of Circle Creek Seining Company on
AquaPro's Pro Forma Consolidated Statements of Operations for the years ended
December 31.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
1996 1995
-----------------------
<S> <C> <C>
Net sales $(375,587) $(244,969)
Selling, general and administrative expenses 360,953 260,370
Interest expense 23,704 17,826
Other expense 17,256 6,128
-----------------------
Net loss $ 26,326 $ 39,355
=======================
</TABLE>
(C) Receivables and payables between AquaPro and the Partnerships CCA V through
CCA VIII and between Partnerships CCA V through CCA VIII are eliminated in
consolidation.
(D) Net sales of $87,464 and $101,779 in 1996 and 1995, respectively, between
AquaPro and Partnerships CCA V through CCA VIII and $327,557 and $75,863 in
1996 and 1995, respectively, between Partnerships CCA V through CCA VIII are
eliminated in consolidation. Such sales had a nine percent average gross profit
percentage for both 1996 and 1995. Thus, net sales of $415,021 and $177,642 in
1996 and 1995, respectively, are eliminated in consolidation from net sales and
$377,669 and $161,654 from cost of product sold in 1996 and 1995, respectively,
and $53,340 from live fish inventories at December 31, 1996.
(E) Management fees charged by AquaPro to Partnerships CCA V through CCA VIII
pursuant to the respective management agreements would be terminated upon
completion of the Proposed Consolidation. Thus, management fees charged by
AquaPro to the Circle Creek Partnerships of $165,050 and $128,868 in 1996 and
1995, respectively, were eliminated from management fee revenues and $116,597
and $91,253 from cost of products sold and $48,453 and $37,615 from selling,
general and administrative expenses in 1996 and 1995, respectively, in
consolidation.
(F) Fees and reimbursements were received by AquaPro from Partnerships CCA V,
CCA VII, and CCA VIII in connection with limited partnership offerings. The
fees in connection with the partnership offerings received by AquaPro of
$381,675 in 1995 are eliminated in consolidation from fee income from
affiliates and $31,393 from intangible assets resulting in an increase to
partners' capital of $350,282. The reimbursements of certain expenses by the
broker/dealers received by AquaPro of $80,557 in 1995 are eliminated in
consolidation from selling, general and administrative expenses and $15,696
from intangible assets resulting in an increase to partners' capital of
$64,861. The reduction of intangible assets totaling $47,089 resulted in the
elimination in consolidation of amortization expense (classified as interest
expense) of $10,096 and $5,052 in 1996 and 1995, respectively.
F-79
<PAGE> 134
(G) Seining and hauling fees charged by the Circle Creek Seining Company to
AquaPro and to Partnerships CCA V through CCA VIII will be terminated upon
completion of the Proposed Consolidation. Seining and hauling fees charged by
Circle Creek Seining Company of $375,587 and $244,969 in 1996 and 1995,
respectively, are eliminated in consolidation from net sales and selling,
general and administrative expenses. Net losses of Circle Creek Seining Company
of $26,326 and $39,355 in 1996 and 1995, respectively, are eliminated in
consolidation from other income (expense).
(H) In 1995, AquaPro incurred expenses in connection with services performed
for the limited partnership offerings of CCA V, CCA VII, and CCA VIII (see Note
F) of $307,144 which are eliminated in consolidation from selling, general and
administrative expenses and from partners' capital.
(I)The pro forma effect of the issuance of 722,232 Units in the Proposed
Consolidation was to increase Common Stock by $2,247,031.
(J) No income taxes (credits) have been provided due to net operating loss
carryovers of AquaPro and the uncertainty of the realization of those net
operating loss carryovers.
F-80
