U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996
Commission File No. 1-11282
PACESETTER OSTRICH FARM, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 72-1186845
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10135 Hereford Road, Folsom, Louisiana 70437
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(Address of Principal Executive Offices) (Zip Code)
(504) 796-5806
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock ($.001 par value) OTC Bulletin Board
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Securities registered under Section 12(g) of the Exchange Act: None
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports, and (2)
has been subject to such filing requirements for the past 90 days.
Yes ___ No ___ X___
This report contains a total of 47 pages.
The Exhibit Index appears on page 33.
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $831,964
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
Common Stock, par value $.001 per share ("Common
Stock"), was the only class of voting stock of the Registrant
outstanding on March 25, 1997. Based on the closing bid price
of the Common Stock on the OTC Bulletin Board as reported on
March 25, 1997 ($3/16), the aggregate market value of the
1,909,096 shares of the Common Stock held by persons other
than officers, directors and persons known to the Registrant
to be the beneficial owner (as that term is defined under the
rules of the Securities and Exchange Commission) of more than
five percent of the Common Stock on that date was
approximately $357,956. By the foregoing statements, the
Registrant does not intend to imply that any of these
officers, directors or beneficial owners are affiliates of the
Registrant or that the aggregate market value, as computed
pursuant to rules of the Securities and Exchange Commission,
is in any way indicative of the amount which could be obtained
for such shares of Common Stock.
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
3,590,224 shares of Common Stock, $.001 par value, as of March
25, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Report
Registration Statement on Form S-18, as IV
Amended, (Registration No. 33-49228-FW)
declared effective on December 15, 1992
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Pacesetter Ostrich Farm, Inc. (the "Company") is engaged in
the care, management, breeding and sale of ostriches and ostrich
products. The Company, which owns and operates one of the largest
ostrich farm facilities in the United States maintains and breeds
ostriches owned primarily by the Company as well as for investors. The
ostrich industry presently generates estimated revenues in excess of
$250 million for the Union of South Africa which controls 90% of the
worldwide market for unprocessed ostrich products. The ostrich, which
is part of the flightless ratite family of birds, is valued worldwide
for its meat (which has a beef like taste and consistency but with the
fat and cholesterol content comparable to fish and less than other farm
poultry), for its durable and ornamental hide and for its wing, tail
and body plumes which are used for decorative, dusting and filtration
purposes. Currently, ostrich components and elements are supplied for
the worldwide market predominantly by South Africa which regulates the
processing and dissemination of its raw material and ostrich products.
At December 31, 1996, the Company owned, boarded and/or
managed 1064 chicks, 234 yearlings, 32 coming breeders, and 229 adult
ostrich breeders of which 554 of such chicks, 125 yearlings, 10 coming
breeders, and 117 adult ostrich breeders were proprietary to the
Company. Sales of ostriches and related services provided the Company
with revenues of $831,964 for the year ended December 31, 1996. Dr.
John Wade, the Company's Chairman of the Board, President and Chief
Executive Officer, is a recognized veterinarian specializing in the
care and treatment of ostriches and other livestock birds and currently
a Director of the American Ostrich Association.
The Company was incorporated on February 4, 1992 and executed
a Plan and Agreement of Merger with Pacesetter Ostrich Farms, Inc., a
Louisiana corporation, on February 14, 1992. The predecessor
corporation was organized in Louisiana on February 22, 1989 under the
name Ostrich Breeders of North America, Inc., and unless the context
provides otherwise, all references to the Company include Pacesetter
Ostrich Farm, Inc., the predecessor corporation and the operations
previously undertaken by such predecessor corporation.
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During the course of the Company's past several fiscal years,
the Company has experienced substantial net operating losses as well as
significant reductions in cash flows. Following the Company's initial
public offering in December 1992, a rapid expansion of operating
facilities was commenced at the Willcox, Arizona facilities. Such
expansion initially produced expected net operating losses during 1993.
For 1996, however, the Company experienced net operating losses which
resulted from lower than expected revenues. Such decreases resulted
from the lack of additional shipments under its contract with Sichuan
Chengdu Ju Tong Company which received the first $1 million shipment of
ostriches in 1995 under its $3.7 million contract with the Company. The
Company was able to complete a separate shipment to China for a total
of approximately $575,000 which was made to a group of Chinese buyers
which are not related to the contract with Sichuan Chengdu Ju Tong
Company. Domestic prices for live ostriches remained approximately
equal to 1995 market conditions, but sales volumes of such sales were
very sporadic due to uncertainty about the future of the domestic
commercial market.
Background
While the ostrich industry has previously generated certain
interest in the United States as an alternative agricultural livestock
business, ostrich farming has never previously gained a strong foothold
in this country based on a general lack of knowledge and understanding
concerning the care and breeding of ostriches as well as an absence of
protocol and husbandry relative to their maintenance. For more than 100
years, however, the ostrich industry has been nurtured, developed and
monopolized by the Union of South Africa which controls an estimated
90% of the worldwide market for raw material ostrich products. It is
further estimated that the Union of South Africa receives revenues in
excess of $250 million from the worldwide distribution of ostrich
products. At an early stage, South Africa realized that the financial
benefits to be derived from the species were multi-dimensional. As a
consequence, the South African government has passed stringent laws
forbidding exportation of sexually viable birds or fertile eggs and has
established various protocols for the maintenance of its virtual
monopoly on ostrich development and commercial exploitation by limiting
the dissemination of information concerning ostrich farming and access
to ostrich rearing facilities. Despite these efforts, ostrich farming
is now becoming a growing alternative agricultural/livestock business
in the United States, Canada, Europe, and Australia. Even more
recently, various Asian countries have now begun acquiring ostriches
from the United
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States for the purpose of creating a new agri-business which produces a
low fat meat product which is less land intensive than cattle farming.
This is evidenced by the Company's shipment of approximately $1 million
of ostriches during late 1995, and the $575,000 shipment in late 1996.
Ostrich Data
The average adult ostrich is 7 to 9 feet tall and weighs in
the range of 300 to 450 pounds with the male being both the larger and
the more aggressive of the species. Following hatching and during their
rapid growth phase through six months, ostriches gain an average of one
foot of height per month and complete their growth by the end of 12
months. Adult feathering and coloration will generally begin at
approximately 12 to 14 months of age. Blue necks, rednecks, African
blacks and crosses are all acceptable as commercially viable breeds of
ostriches, although the African black is smaller than the other birds.
In the United States, ostriches normally breed from two to three years
of age and for a period of 30 or more years. The rate of lay for a
2-year old female may be from one to 30 eggs, while during their second
and subsequent year of laying, they may produce anywhere from 20 to 100
eggs per year. The eggs have generally a 42-day incubation period. The
eggs generally weigh up to 3 1/2 pounds and are 24 times the size of
the normal chicken egg. The rate of lay is generally attributable to
husbandry, nutrition, bonding and the overall comfort level of the hen.
The male ostrich achieves full fertility at two to three years of age
and generally increases with each subsequent year of breeding. While
ostrich breeding is generally confined to the period between March and
October of each calendar year, sales of ostriches occurs throughout the
year.
Ostriches are by nature calm and docile birds with very few
natural predators. Chicks, however, are subject to attack by predators
and are required to be protected and closely scrutinized for the first
six months of age at which time they will have achieved the majority of
their height and weight. It is generally believed that 30% of the eggs
laid in the United States will hatch and that a well organized and
sanitized farm facility will achieve successful hatching of
approximately 50% of eggs laid. Young chicks are generally vulnerable
to bacterial and other infections during the initial four months of
their existence during which time special precautions need to be
observed by the farming facility to minimize exposure to infection and
introduce the chicks to proper nutritional substances. Ostriches may be
bred under most climate conditions, but since cold weather will inhibit
egg laying, more temperate
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climates promote a longer breeding season. Consequently, while
ostriches exist and breed in all sections of North America, the
temperate climates of the lower United States contain the most ostrich
farms. Ostriches are vegetarians with eating habits similar to cows and
horses. They graze on grass and eat commercially prepared ostrich feed.
In general, it is estimated that each ostrich will consume
approximately $200 of commercial feed in each annual period and
consumes approximately two to four pounds of food per day.
Ostrich Products and Industry Economics
There is a potential market for almost every part of the
ostrich carcass. However, the most significant products of the ostrich
are its meat, leather, and feathers.
An 11 to 14 month old ostrich produces approximately 70 to 100
pounds of boneless meat which provides for wholesale prices of $4 to
$17 per pound following slaughter. The meat is served in certain
establishments under the menu designation "filet de comella" and is a
red meat with a flavor and appearance comparable to beef or veal. The
meat is highly valued in countries such as Japan and on the European
continent because of its flavor as well as its low fat and calories
which are comparable to fish and less than most poultry. The meat is
considered a favorable source of protein, vitamins and minerals.
Ostrich plumes or feathers bring $25 to $1,000 per pound based
on the color, quality and consistency and are used for dusters, fashion
accessories, pens and decorative purposes and most recently have been
introduced into the pristine surroundings of microelectronics plants
where the electrostatic quality of the feathers represents an optimal
precipitator of dust particles. The most sought after feathers are the
male ostrich's white plumes which are used primarily for decorative
purposes while the darker feathers are employed for dusting and
antiseptic functions. Feathers can be plucked commencing at six months
and thereafter at eight-month intervals. On an average, approximately
two pounds of feathers can be produced from an ostrich at each
plucking.
The tanned hides of the ostrich are valued both for their
beauty and their durability, and range in size from 10 to 18 square
feet bringing approximately $25 to $40 per square foot of hide. The
hide is tough, flexible and has a distinctive appearance which makes it
one of the premium exotic leathers in the high fashion and Western wear
markets. In the United States, ostrich boots range in price from $250
upwards to $2,000. The
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leather is also used for fashion accessories, briefcases, shoes and
clothing, with a full quill ostrich leather briefcase marketing for
generally above $1,600 in the absence of customizing.
At the present time and in contrast to prices to be received
for ostrich components, fertilized eggs cost between $75 to $100 per
egg, four to six month old chicks sell for $1,000 to $2,000 per pair,
yearlings sell for $3,000 to $4,000 per pair, two-year and older
"coming breeders" sell for $5,000 to $7,000 per pair and mature
producer breeders bring $8,000 to $10,000 or more per pair. These
amounts represent current pricing during a period of heightened
interest in ostrich breeding and farming. There can be no assurance,
however, that such interest in ostrich breeding and farming will
continue to increase or can be sustained at present levels. In contrast
to the above pricing for breeder livestock, prices for live slaughter
birds (approximately 1 year old) was approximately $330 to $380 per
bird during 1996.
The economics of entering into the ostrich breeding business
include investment in a land facility, strong fences of at least 6 feet
in height, an incubator costing a minimum of $6,000, hatchers starting
at approximately $4,000 and pens of one-third to one-half acre per pair
or trio of breeding birds. Feed generally costs approximately $200 per
bird each year, and other direct and indirect costs associated with the
care and maintenance of ostriches bring the total cost to approximately
$300 per bird per year.
At the present time the ostrich industry is in a transition
from a breeder market to a commercial livestock market. Although, the
breeder market can offer returns on investment which exceed the returns
that can be derived through commercial harvesting and processing, such
returns are based on prices which are difficult to predict and
generally not sustainable once sufficient numbers of ostrich livestock
are available for sale. This is evidenced by sales of live slaughter
birds made by the Company during 1996 ranging from $330 to $380 per
bird. Such pricing represents amounts which domestic processors of
ostrich are currently paying based on their expected recurring
wholesale sales of ostrich meat and leather. During 1995 the Company
began to develop a capability to produce and supply ostrich meat and
ostrich leather. However, the Company has continued to receive prices
for sales of live ostriches which exceed the returns from the
commercial processing of ostriches for meat, leather, and feathers,
particularly with respect to the Company's international sales of live
ostriches. As a result, the Company has concentrated its efforts on
such international sales and has
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sold most of its slaughter ostriches to independent processors at
prices previously stated.
In the judgment of management of the Company, the high value
of ostriches as breeding stock at this time has tended to inhibit the
development of a domestic market for meat, hides, feathers and other
ostrich products since the market value of such commodities is
currently less than the value of the live animal. During 1994 and 1995
the ostrich industry in the United States saw the first substantial
indications of development of meat and leather products. Most of this
production has been serviced by supplies of cosmetically damaged birds
which are acceptable for commercial use but are not acceptable for
breeder stock. It is anticipated that such market conditions will
continue for the next several years and provide increasing numbers of
ostrich livestock available for commercial processing. Ultimately,
management believes the ostrich industry will function much like other
livestock industries which normally are made up predominantly of
livestock for commercial use and a minority portion of which are bred
and sold for breeder purposes and flock improvement.
Pacesetter Ostrich Farm
Pacesetter Ostrich Farm was organized in November 1988 by John
Wade and Bob Clemons based on their recognition of the potential for
the industry in the United States. Mr. Clemons had previous experience
as a cattle farmer with over 100 registered herefords. Dr. Wade is a
practicing veterinarian with special expertise in the treatment of
ostriches and other avian or bird species.
In December 1992, the company's initial public offering was
concluded, providing net proceeds of $3,600,000 which financed the
planned substantial expansion of the company's breeding and chick
rearing facilities, as well as a substantial increase in the number of
proprietary breeder ostriches of various ages.
The Company has facilities located in Folsom, Louisiana and
Willcox, Arizona. The Louisiana facilities are located on 65 acres of
improved farmland approximately 60 miles north of New Orleans which was
previously employed for Mr. Clemons' cattle operations. These
facilities consist of a 1,500 square foot incubation facility, a 144
square foot portable incubation building, a 288 square foot portable
storage building, two barns comprising approximately 5,000 square feet,
office facilities and in excess of 7,000 square feet of fencing. During
1995, the Company consolidated its breeding and chick rearing
activities at
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its Arizona location. Consequently, the Company did not consistently
use the portions of its Louisiana location which were previously
dedicated to ostrich production. As a result, the Company moved much of
its equipment, fencing, and ostrich inventory to its Arizona facilities
and continued the use of its Louisiana location primarily for
administrative functions.
The Company's Arizona facilities, originally purchased in
1993, consist of approximately 320 acres of partially improved farmland
approximately 70 miles southeast of Tucson, Arizona. Through the course
of 1993 and 1994 the Company has invested over $1 million transforming
this property into a state-of-the-art ostrich breeding and chick
rearing facility including storage and feeding facilities, crop
acreage, fencing and irrigation wells. On April 21, 1993, the Company
repaid the note payable originally issued upon acquisition of the
property. As a result, both the expansion effort and property
acquisition were substantially completed during 1993 with existing
cash. Management selected this location for its favorable climate
relative to breeding and chick rearing as well as to expand the
Company's facilities to the Southwest and to facilitate marketing
efforts relative to the West Coast of the United States.
Management has introduced what it perceives to be state of the
art equipment, operating procedures and selective breeding systems
which it believes are in advance of those practices, procedures and
operating systems generally followed elsewhere in the industry. The
Company has worked closely with the Poultry Department of Louisiana
State University in designing and enhancing its present facilities. As
a result of the introduction of advanced procedures in ostrich
maintenance and husbandry, Pacesetter Ostrich Farm has experienced
hatch rates which equal or exceed the national averages generally
experienced by commercial farms in the United States. Dr. Wade has also
introduced a microchip identification system which is used throughout
the industry and which provides a practical and harmless procedure to
identify and track information relative to ostriches as a means to
avoid inbreeding as well as to document high producers. This system has
increased the efficiency and effectiveness of breeding practices for
Pacesetter Ostrich Farm as well as other farms.
The Company also enters into management agreements with
accredited investors and experienced bird owners pursuant to which the
Company assumes responsibility for the care, maintenance and breeding
of the ostriches, and the bird owner pays for the ostriches, insurance
and certain other extraordinary expenses as they arise. Until late
1995, the Company generally received the rights to one-half of the
resulting offspring as its
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management fee. However, as market pricing of live ostriches reduced
the potential profit margins compared to pricing in prior years, the
Company re-evaluated its management programs and began offering
programs which were based on charges for services rendered as opposed
to a chick splitting arrangement. The duration of these management
agreements is usually for a period of 12 months. The Company has no
liability or obligation with respect to eggs that are not hatched or
for the mortality of the chicks.
Marketing and Sales
The Company generally sells farm raised chicks, yearlings, and
coming breeder ostriches in the normal course of business. It sells
ostrich chicks commencing at birth. The Company warrants solely the sex
of the chicks, for a limited time, in relation to its sales. From time
to time, the Company has acted on behalf of bird owners in order to
identify, evaluate and/or acquire suitable ostriches for subsequent
sale to such bird owners or to purchasers identified by existing bird
owners based on the reputation of its management. The Company's
marketing program is undertaken through word of mouth referrals based
on its reputation in the industry, through speaking engagements and
articles by Dr. Wade, who is a frequent participant and contributor to
various industry programs and trade publications, and through Dr.
Wade's veterinary practice and microchip implant service.
In addition to sales of live ostriches, the Company began
limited sales of ostrich leather and ostrich meat during 1995. The
Company used a number of tanners in the U.S. during 1995 and received
acceptable tanned leather from several of these tanners. However, in
each case the Company experienced only limited and sporadic success
from U.S. tanners which to date have not completely resolved and
refined the process to equal that of South African tanning. As a
result, the Company has reduced its future plans regarding tanned
leather products until the quality and consistency provided by U.S.
tanners has reached a sufficient level.
In addition to leather the Company also began limited
processing and sales of ostrich meat in 1995. In November 1994, the
Company had received U.S.D.A. meat labeling approval to commercially
process ostrich meat. Since that time the Company began selling various
cuts of ostrich meat to upscale restaurants and specialty stores.
Although customer acceptance of the product has been very positive
based on quality, taste and tenderness, the Company did meet price
resistance at the initial
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pricing of $28 per pound. As processing and other costs have decreased,
the Company made adjustments in pricing. Such price reductions have
generally increased demand, but the Company experienced severe
limitations in the number of birds for which it could receive U.S.D.A.
inspection. By mid-1995 the limitation on available U.S.D.A. inspection
had caused the Company to experience difficulties in supplying
customers. In some cases, the Company purchased ostrich meat from other
processors in order to cover customer orders. As a result, the Company
had to discontinue processing of ostriches and forward its existing
ostrich meat customers to other processors until such time as the
inspection problem could be eliminated. Generally, this problem was
experienced throughout the ostrich industry because U.S.D.A. ostrich
inspection is voluntary, not mandatory, and can only be provided when
there are no scheduling conflicts with regard to inspection of
livestock with are classified under mandatory inspection. This industry
problem has been addressed by the American Ostrich Association which
has made great strides since 1995 to improve the availablity of
U.S.D.A. inspection for ostriches. Dr. Wade, as a member of the Board
of the American Ostrich Association has done extensive work on this
matter. Based on managements assessment of this matter, the Company
expects that the industry will receive improvements in the availiablity
of U.S.D.A. inspection and should have increased availability of
ostrich meat inspection by the end of 1997 to an acceptable level.
As a result of the various difficulties previously discussed
regarding sales of leather and meat, the Company has devoted much of
its time and resources to pursuing live ostrich sales outside of the
United States. As a result of these efforts, the Company completed a
shipment of approximately 225 ostriches to Chengdu, China for a total
price of approximately $1 million during 1995. In 1996 the company
completed an additional shipment of approximately 125 ostriches for a
total price of approximately $575,000 to China and is currently
preparing for additional shipments to both China and South America.
Competition and Price Uncertainty
While the Company believes that it is presently one of the
larger ostrich breeding and maintenance farms in existence in the
United States, it is anticipated there will be increasing competition
as interest in and recognition of the potential benefits and returns of
ostrich farming becomes known. It is possible that with increased
publicity and recognition of such benefits, the industry will attract
both experienced and inexperienced livestock farmers and speculators
which may result
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in substantial price increases and fluctuations. Furthermore, changes
in policies by the Union of South Africa and the United States
involving the relaxation of export and import restrictions could impact
price levels.
During 1995 the ostrich industry within the United States
experienced general price declines as bird populations increased and
relaxed the overall shortages of available ostriches which had been
experienced previously. Such pricing remained consistent in 1996 with
prior year 1995 pricing.
Business Regulations and Insurance
The Company is subject to various city and county occupational
licensing laws that apply to its business, but at the present time is
not subject to any regulations or laws pertaining to livestock
maintenance and care. The Company maintains general liability insurance
but in 1995 elected to eliminate its mortality and theft coverages for
ostiches as further price declines have made it more cost effective to
replace any of such losses from existing farm raised inventory. For
1996 and future years, the Company does not expect to insure any of its
proprietary ostriches.
Trademarks and Copyrights
While the Company does not believe at the present time that
its trademarks will be critical to the success of its operations, the
Company expects to file a trademark application for "Pacesetter Ostrich
Farm" in the future. The Company intends to protect any proprietary
data, forms, procedures, confidential information and trade secrets,
where available, through filings and procedures provided under the
Federal Copyright Laws and through use of confidentiality agreements
and restrictive covenants provisions in employment contracts with its
employees.
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Employees
As of December 31, 1996, the Company employed a total of 11
full time employees including three executive officers, seven
agricultural technicians and farm laborers, and one clerical person.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's present facilities include ostrich farms in both
Folsom, Louisiana and Willcox, Arizona.
The Louisiana location consists of improved farmland on 65
acres located approximately 60 miles north of New Orleans. The present
facilities consist of a 1,500 square foot incubation builing, a 144
square foot portable building, a 288 square foot portable storage
building, two barns comprising approximately 5,000 square feet, office
facilities and in excess of 7,000 feet of fencing. These facilities
were originally acquired from Mr. Clemons, the Company's Executive Vice
President and a principal stockholder. The Company currently leases the
portion of such property which is used for farm operations and the
Company's headquarters.
Effective November 1, 1992, the Company leased additional farm
facilities from Poderco Limited Partnership and the LBR Trust, both of
which are unaffiliated entities, consisting of approximately 320 acres
of partially improved farmland approximately 70 miles southeast of
Tucson, Arizona. In January 1993, the Company purchased this property
for $225,000 payable by the issuance of the Company's promissory note
in the principal amount of $134,000 and the application of prior lease
payments to the remaining balance. The promissory note was repaid on
April 21, 1993. Such facility, which was formerly used for agricultural
and livestock purposes, has been substantially improved and now
consists of state of the art breeding and chick rearing facilities
including approximately 90 acres of ostrich breeder facilities, 45
acres of ostrich chick and juvenile facilities, 90 acres of alfalfa
fields, incubation facilities, storage and feeding facilities, fencing,
irrigation wells, and approximately 90 acres of additional land
available for further expansion. The Company believes that its present
facilities are adequate for the Company's current level of operations.
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During early 1994, the Company received zoning approval
related to a house in Willcox, Arizona which functioned as a full
service veterinary clinic during 1995. The Company expanded its
previous level of veterinary services which were based out of existing
facilities on the Willcox farm during the course of the 1993 fiscal
year. However, by early 1996, many ostrich farmers began eliminating
the use of veterinary services related to ostriches in light of the
decline in market pricing. The Company is currently negotiating the
sale of this property to the previous employee/veterinarian which
supervised this facility.
ITEM 3. LEGAL PROCEEDINGS
On October 17, 1995, suit was filed against the Company for a
total of $59,230.53 by Mr. Melvin Axler and Ms. Joyce Cohen, related to
an original $40,000 of principal debt which was due on December 1,
1995. As of the date of this filing, the Company has negotiated a
settlement which does not materially exceed the principal amount of the
debt.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded on OTC Bulletin Board
under the symbol "POFM". Prior to December 15, 1992, there was no
market for the Company's securities. The following table sets forth the
high and low bid quotations for the Common Stock for the periods
indicated. These quotations reflect prices between dealers, do not
include retail mark-ups, mark-downs or commission and may not
necessarily represent actual transactions.
High Low
January 1-March 31, 1996 $0.50 $0.25
April 1-June 30, 1996 $0.88 $0.13
July 1-September 30, 1996 $0.38 $0.19
October 1-December 31, 1996 $0.31 $0.19
January 1-March 31, 1997 $0.38 $ .19
On March 25, 1997, the closing bid price for the Common Stock
was $0.19.
(b) On March 25, 1997, the number of holders of the Company's
Common Stock was in excess of 500.
(c) The Company has never paid cash dividends on its Common
Stock. The Company presently intends to retain future earnings, if any,
to finance the expansion of its business and does not anticipate that
any cash dividends will be paid in the foreseeable future. Future
dividend policy will depend on the Company's earnings, capital
requirements, expansion plans, financial condition and other relevant
factors.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company was incorporated on February 4, 1992 and executed
a Plan and Agreement of Merger with Pacesetter Ostrich Farms, Inc., a
Louisiana corporation, on February 14, 1992. The predecessor
corporation was organized in Louisiana on February 22, 1989 under the
name Ostrich Breeders of North America, Inc. All references to the
Company include Pacesetter Ostrich Farm, Inc., the predecessor
corporation, and the operations undertaken by such predecessor
corporation. The Company's financial statements reflect the operating
results for the Company's fiscal years ended December 31, 1996 and
1995.
Since the Company's public offering in December 1992, the
Company has assumed the risks associated with direct ownership of
ostriches which include lack of productivity, injury and mortality. The
Company does not currently maintain insurance on its proprietary
ostriches. Thus, in the case of death the company is exposed to the
risk of loss to the extent of the book value of livestock inventory. As
of December 31, 1996 and 1995, the Company incurred such losses related
ostrich mortality of $31,665 and $18,417 respectively.
Results of Operations
For the years ended December 31, 1996 and 1995, sales were
$831,964 and $1,366,621 respectively. The Company maintains and breeds
ostriches, both owned by the Company as well as for independent owners,
in return for which the Company generally receives a boarding fee based
on services rendered. Such services include egg collection, hatching,
chick boarding, and adult breeder boarding. Beginning in late 1995 and
continuing to present the company has discontinued most of its
contracts which were based on the Company providing services in
exchange for a management fee equal to one-half of the resulting
offspring.
Cost of sales as a percentage of sales was 58% for the year
ended December 31, 1996, compared to 118% for the year ended December
31, 1995. The decrease in cost of sales as a percentage of sales for
the year ended December 31, 1996 was attributable to an inventory
writedown of $572,000 in 1995 resulting from the decline in market
value of ostriches, as well as the increase in the number of farm
raised birds with limited inventory costs in 1996 and sales of
previously purchased birds which had limited
18
<PAGE>
costs due to the Company's inventory writedowns in 1995. The Company's
gross profit increased from a loss of $254,824 for the year ended
December 31, 1995 to a profit of $345,826 for the year ended December
31, 1996, representing an increase of $600,650 mostly as a result of
the $572,000 adjustment in 1995 for the decline in market value
previously described, and also because the Company increased the number
of farm raised birds sold for commercial processing of meat and
leather.
Operating expenses decreased from $820,727 for the year ended
December 31, 1995 to $680,432 for the year ended December 31, 1996
representing a decrease of $140,295 or 17% due primarily to various
cost cutting measures undertaken at the Company's Willcox, Arizona
location in light of the decline in prevailing market prices of
ostriches. The decreases in operating expenses were mostly attributable
to decreases in operating salaries and wages ($137,000), payroll and
other taxes ($11,000), veterinary expenses ($10,000), depreciation
($30,000), and insurance expense ($63,000). These decreases were
partially offset by increases in such operating expenses as bad debt
expense ($54,000) and feed expense ($90,000). Depreciation declined
primarily due to the prior year writedowns of depreciable assets. The
increase in bad debt expense relates mostly to 1995 receivables which
management determined to be uncollectible in 1996. Feed expense
increased partially due to the increase in prevailing prices of corn in
the United States compared to the prior year, and also due to the feed
costs of growing out a larger number of prior year 1995 chicks
(approximately 1250) during 1996 compared to the number of prior year
1994 chicks (approximately 270) grown out during 1995. General and
administrative expenses decreased from $288,431 for the year ended
December 31, 1995 to $132,987 for the year ended December 31, 1996 also
related to cost reduction strategies in response to the declines in
market prices of ostriches. The decreases in general and administrative
expenses were mostly attributable to decreases in salaries and related
payroll taxes ($65,000), and travel and telephone ($49,000). The
company reduced its travel and telephone expenses from the prior year
due primarily to a reduction in the amount of costs associated with its
international shipment of ostriches to China compared to the similar
costs of its shipment a year ago.
At December 31, 1996, the Company had for tax reporting
purposes, net operating loss carryforwards of $2,288,802 which expire
in 2007 through 2011. As the Company is engaged in a relatively new
business and has incurred operating losses for several years, it is
difficult to predict if and when such tax losses would be utilized.
Therefore, for financial reporting purposes, the Company has provided a
valuation allowance for the entire amount of the net deferred tax asset
resulting from these
19
<PAGE>
tax loss carryforwards, as detailed in Note 4 of the financial
statements.
The Company incurred a net loss of $72,696 or $0.02 per share
for the year ended December 31, 1996 compared to a net loss of
$1,361,348 or $0.38 per share for the year ended December 31, 1995. The
substantial net loss for 1995 was due primarily to 1) the significant
decline in market prices and writedown of inventory previously
described, 2) losses of approximately $173,000 due to the write down of
depreciable assets at the Company's Louisiana location which are no
longer continually used in the production of ostrich livestock, and 3)
the write-off of the Company's $61,000 investment in a 50% interest in
OMC, an ostrich breeding company in Namibia, Africa.
On April 26, 1995, the Company reported that it signed a $3.7
million contract with Sichuan Chengdu Ju Tong Company, Chengdu, Sichuan
Province, China ("Sichuan Chengdu") for a package of ostrich breeder
pairs and a provision of related services. Payments are to be made to
the Company in advance of each individual shipment of birds. In
November 1995 the Comapny completed its first shipment under the
contract and received approximately $1 million. However, during 1996
the Company was unable to obtain commitments for additional shipments
under this contract. As a result, there are no assurances that the
remainder of the contract will be honored by Sichuan Chengdu Ju Tong
Company.
During 1996, the Company received a number of new inquiries
related to its international shipments of ostriches to both China and
South America. During the fourth quarter of 1996 the Company completed
another shipment to China for approximately $575,000, to parties
unrelated to the contract with Sichuan Chengdu Ju Tong Company.
Although there can be no assurances that additional international sales
will be completed, management expects to make additional international
shipments in 1997 to China and South America. Management expects that
its international business will continue to be a major portion of its
gross revenue during 1997 and 1998 based on the continued substantial
interest in ostrich breeder livestock outside the United States. In
conjunction with such international business the Company plans to
continually increase its domestic sales of ostriches for commercial
slaughter thereby reducing its dependence on breeder market sales over
the next two years.
20
<PAGE>
Liquidity and Capital Resources
As discussed in Note 2 of the financial statements, the
Company has incurred substantial losses for several years and
experienced cash flow difficulties which have caused it not to meet
many of its obligations as they have come due. To date, the company has
not been able to reach a sufficient operating level to meet its
operating costs. There is no guarantee that the Company will ultimately
be able to acheive sufficient profitability in the slaughter market or
that the Company will continue to be able to make sales in the breeder
market. As a result, there can be no assurances that the Company will
continue as a going concern. The Company believes that its ostrich
inventory could be liquidated at an amount substantially in excess of
book value, if required. However, there is no guarantee that sales at
such prices would be possible.
Net cash provided by operating activities increased from
$1,138 for the year ended December 31, 1995 to $26,163 for the year
ended December 31, 1996 primarily as a result of a reduction in
operating and general and administrative expenses. For 1997, the
company expects to meet cash flow needs from continued sales of ostrich
livestock, particularly related to its international business. Since
inception, the Company has been financed by advances from its principal
executive officers. At December 31, 1996, such advances, which are
non-interest bearing with no specified maturity date, aggregated to
$169,317. The ratio of current assets to current liabilities increased
from 0.50:1 at December 31, 1995 to 0.59:1 at December 31, 1996
reflecting the small increase in current assets due to the increased
billings for boarding fees on managed birds.
Net cash provided/(used) in investing activities was $0 for
1996 compared to $1,154 for 1995. Cash outlays for capital expenditures
for property, plant and equipment decreased from $16,046 for the 1995
fiscal year to $0 for the Company's 1996 fiscal year. This decrease
reflects the reduction in expansion of the Company's Arizona breeding
facilities which were substantially completed during 1993 and 1994.
Between December 1991 and February 1992, the Company issued an
aggregate of $450,000 principal amount of its unsecured 10% promissory
notes and 499,983 shares of its Common Stock for a cash investment of
$450,000 by a group of private investors. Interest on the notes is
payable semiannually beginning July 1, 1992. The notes were due on
December 1, 1995, but the Company did not have sufficient cash to meet
such obligations at that time. These notes are now in default and the
Company is attempting to negotiate payment extensions. In 1995, holders
of
21
<PAGE>
$40,000 of such notes have filed suit against the Company. At December
31, 1996 the Company had reduced the principal amount of these notes
from $450,000 to $425,000 related to the private placement group.
The value of ostrich progeny produced by the Company's
proprietary ostriches or derived by the Company as a result of the
management of non-proprietary ostriches has not been reflected in the
Company's financial statements, nor has the appreciation in value of
ostrich chicks produced by the Company. In addition, no related costs
associated with the maintenance of progeny from the Company's ostriches
or independent owned ostriches have been assigned to inventory. At
December 31, 1996, the Company owned and managed ostrich inventory
levels as follows:
<TABLE>
<CAPTION>
Owned Managed Total
-------------------------- ------------------------- -------------------------
Hens Males Unk. Hens Males Unk. Hens Males Unk.
---- ----- ---- ---- ----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proven Breeders 77 40 0 63 49 0 140 89 0
Coming Breeders 2 6 2 7 6 9 9 12 11
Yearlings 85 32 8 92 16 1 177 48 9
Chicks 257 292 5 254 256 0 511 548 5
Eggs 0 0 0 0 0 0 0 0 0
</TABLE>
As of December 31, 1996, the Company held proprietary
livestock with an inventory cost of $370,775, which management
estimates, as of December 31, 1996, to have a current fair market value
of approximately $1,340,000. There can be no assurances, however, that
the Company will be able to realize such aggregate market value at the
time of sale or other disposition.
Inflation
While inflation has not had a material effect on the
operations of the Company in the past, at the present time there is a
substantial worldwide demand for ostrich products. It is anticipated
that such market conditions will continue for the next several years,
although as with any new commodity market, market trends and prices
could fluctuate substantially.
22
<PAGE>
Cautionary Statement
This report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. All statements other than
statements of historical fact included in this report, including,
without limitation, the statements under the headings "Managements
Discussion and Analysis or Plan of Operation" regarding the Company's
results of operations, liquidity and capital resources, future
development and production levels, business strategies, and other plans
and objectives of management of the Company for future operations and
activities, are forward-looking statements. Although management of the
Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. These statements are
based on certain assumptions and analyses made by the Compnay in light
of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes
are appropriate under the circumstances. Such statements are subject to
a number of assumptions, risks and uncertainties, including the risk
factors discussed below, the Company's other filings with the
Securities and Exchange Commission, general economic and business
conditions, business opportunities that may be presented to and pursued
by the Company, changes in law or regulations, and other factors, many
of which are beyond the control of the Company. Readers are cautioned
that any such statements are not guarantees of future performance and
the actual results or developments may differ materially from those
projected in the forward-looking statements. All subsequent writtten
and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety
by these cautionary statements. Important factors that could cause
actual results to differ materially include, among others:
o Fluctuations in the market price of ostriches.
o Fluctuations in the market price of feed.
o The political, social, and economic risks associated with
conducting business in China, South America, and other countries
where the company may conduct business and/or operations.
o General domestic and international economic and political
conditions.
o Unexpected weather conditions including but not limited to
droughts, flooding, or other extreme acts of nature where the
company conducts its business and/or operations.
o Unanticipated regulatory problems associated with the commercial
processing of ostriches, ostrich meat, and ostich leather.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included
under Item 13(a)(1) and (2) of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE UNDER SECTION 16(a) OF THE EXCHANGE ACT
The following persons are the Directors and the officers of
the Company. All Directors are elected annually by the stockholders to
serve until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Officers are elected
annually by the Board of Directors to serve at the pleasure of the
Board.
Name Position Age
---- -------- ---
John R. Wade Chairman of the Board, President 45
and Chief Executive Officer
Bob Clemons Executive Vice President, 55
Secretary and Director
Reid Green Treasurer, Chief Financial 38
Officer and Director
JOHN R. WADE, D.V.M. has served as Chairman of the Board and a
Director of the Company since its organization in February 1989 and
President since February 1991. Dr. Wade graduated from the School of
Veterinary Medicine at Louisiana State University in June 1980 and has
been a practicing veterinarian since graduation with an emphasis on
avian or bird care and medicine especially the care and treatment of
ostriches. Dr. Wade has completed in excess of 500 hours of continuing
education relative to avian care and medicine and 200 hours of
continuing education relative to the care and treatment of ostriches.
Dr. Wade is a frequent lecturer and contributor to various trade
publications and organizations, seminars and educational programs. On
February 1, 1992, Dr. Wade was elected as a Director of the American
Ostrich Association, the foremost trade association in the industry. In
addition, Dr. Wade has served as Vice President of the Louisiana
Ostrich Association and is involved with various ostrich research
projects with Louisiana State University including programs involving
nutrition, incubation and management of ostriches. Dr. Wade is also a
consultant for the Louisiana Department of Agriculture relative to the
establishment of guidelines for the funding and support of ostrich
facilities in Louisiana. Dr. Wade also holds offices in various other
national and local trade
25
<PAGE>
associations. Dr. Wade currently devotes substantially all of his
business time to the activities of the Company.
BOB CLEMONS has served as Executive Vice President, Secretary
and a Director of the Company since its organization in February 1989.
Mr. Clemons has been involved in the agriculture industry for in excess
of 20 years and was a principal of Clemons Hereford Farm, Folsom,
Louisiana which raised, exhibited and syndicated hereford cattle
throughout the United States. In addition, between 1982 and 1989, Mr.
Clemons owned and was the principal in Hitch-n-Tow, Mandeville,
Louisiana, which was engaged in trailer sales and services, U-Haul
rentals and custom hitches. Prior thereto between 1970 and 1982, Mr.
Clemons was involved in various executive capacities and ultimately as
President of U-Haul Co. of Southern LA, New Orleans, Louisiana, which
was also engaged in various trailer sales, services and U-Haul rentals.
At the present time, Mr. Clemons devotes all of his business time to
the activities of the Company.
WALTER REID GREEN, JR. was elected Treasurer and Chief
Financial Officer on January 29, 1993 of the Company as part of the
planned expansion of staff following the Company's initial public
offering in December 1992. Mr. Green received a B.S. in Accounting from
Southeastern Louisiana University in December 1983, successfully
completed the uniform CPA examination in July 1986 and has
approximately nine years of previous experience in the field of
accounting and taxation. His experience includes approximately two
years in public accounting, four years as an income tax auditor for the
Louisiana Department of Revenue and Taxation and three years as a tax
accountant for The Louisiana Land and Exploration Company. In September
1990, Mr. Green filed for personal bankruptcy pursuant to Chapter VII
of the federal bankruptcy laws as a result of his personal guarantee of
a loan related to his family's interest in a corporate real estate
development project constructed in Florida in 1984. Mr. Green did not
actively participate in the organization or management of this
operation. Mr. Green and Dr. Wade are first cousins. Mr. Green
currently devotes all of his business time to the activities of the
Company.
The underwriter of the Company's public offering has been
provided the right to designate an observer to the Company's Board of
Directors until December 15, 1997. The underwriter has not advised the
Company as to whether or when it intends to exercise this right or as
to the identity of any observer it intends to designate. It is not
anticipated that any Directors will receive an annual fee or other
compensation for serving as Directors for the immediately foreseeable
future. Directors,
26
<PAGE>
however, will be reimbursed for reasonable expenses incurred in
connection with their attendance at meetings.
ITEM 10. EXECUTIVE COMPENSATION
(a) Cash Compensation
Total cash compensation paid to all executive
officers as a group for services provided to the Company in all
capacities during the fiscal year ended December 31, 1996 aggregated to
$17,885. Set forth below is summary compensation table in the tabular
format specified in the applicable rules of the Securities and Exchange
Commission. As indicated, no officer of the Company or any of its
subsidiaries received total salary and bonus which exceeded $100,000
during the periods reflected.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other All
Name and Annual Restricted Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Award(s) SARs(#) Payouts sation
--------- ---- ------ ----- ------- --------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. John Wade 1996 $ 2,404 - - - - - $ -
Chairman, 1995 18,269 - - - 20,000 - -
President 1994 44,892 $15,000 - - - - -
and CEO
</TABLE>
(b)(1) Compensation Pursuant to Plans
See Employment Agreements below.
(b)(2) Employment Agreements
Dr. John Wade and Mr. Bob Clemons were parties to
employment agreements with the Company which expired on December 31,
1994 and which provided for annual salaries of $50,000. Such agreements
also provide for discretionary bonuses upon unanimous approval of the
Board of Directors (which consists of Messrs. Wade, Clemons, and
Green), which bonuses may not exceed 50% ($25,000) of the respective
base salaries. In consideraton of the Company's financial position, Dr.
Wade, Mr. Clemons, and Mr. Green have continued to work full-time for
the Company, without any employment agreements, at substantially
reduced levels of compensation. For the year ended December 31, 1996,
no cash bonuses were issued to any officers.
27
<PAGE>
(b)(3) Option Exercises and Values at Year End
AGGREGATED OPTION/SARS EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Option/SARs Option/SARs
at FY-End (#) at FY-End
------------- ------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
---- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
Dr. John Wade - - - -
</TABLE>
On February 7, 1992, the Company adopted the 1992 Incentive
Stock Option Plan (the "Plan") under which 200,000 shares of Common
Stock have been reserved for issuance to employees of the Company upon
exercise of options designated as "Incentive Stock Options" within the
meaning of Section 422A of the Internal Revenue Code of 1986. The
primary purpose of the Plan is to attract and retain capable executives
and employees by offering certain officers and employees a greater
personal interest in the Company's business by encouraging stock
ownership. Unless and until an executive committee of the Company's
Board of Directors is appointed, the Plan will be administered by the
Company's Board of Directors which will determine, among other things,
the persons to be granted options, the number of shares subject to each
option and the option price. The exercise price of any stock option
granted under the Plan to an eligible employee must be equal to the
fair market value of the shares on the date of grant, and with respect
to persons owning more than 10% of the outstanding Common Stock, the
exercise price may not be less than 110% of the fair market value of
the shares underlying such option on the date of grant. The Board will
determine the term of each option and the manner in which it may be
exercised provided that no option may be exercisable more than ten
years after the date of grant except for optionees who own more than
10% of the Company's Common Stock, in which case the option may not be
for more than five years. Further, a director of the Company will not
be eligible to receive benefits unless such director is also an
employee of the Company. From the date of grant until three months
prior to the exercise, the optionee must be an employee of the Company
in order to exercise any options. Options are not transferable except
upon the death of the optionee. The Board of Directors has the power to
impose
28
<PAGE>
additional limitations, conditions and restrictions in connection with
the grant of any option.
On May 25, 1994 the Company issued a total of 82,000 of such
options to 13 of its key employees. On January 16, 1995, the Company
issued an additional 99,500 of such options to 13 of its key employees.
As of the date of this filing, none of the options have been exercised.
The Company may adopt additional compensation programs at a
later date suitable for its executive personnel. The Company is unable
to predict at this time the format or manner of compensation to be
included in any such program.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) and (b) Security Ownership
The following table sets forth certain information regarding
the Company's Common Stock beneficially owned on March 25, 1997 (i) by
each person who is known by the Company to own beneficially or exercise
voting or dispositive control over 5% or more of the Company's Common
Stock, (ii) by each of the Company's Directors, and (iii) by all
executive officers and directors as a group. In general, a person is
deemed to be a "beneficial owner" of a security if that person has or
shares the power to vote or direct the voting of such security, or the
power to dispose or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within
sixty (60) days. At March 25, 1997, there were 3,590,224 shares of
Common Stock outstanding.
29
<PAGE>
No. of Shares of Percentage of
Name and Address or Common Stock Beneficial
Identity of Group Beneficially Owned Ownership(1)
------------------- ------------------ -------------
John Wade(2) 851,897 23.7%
10135 Hereford Road
Folsom, LA 70437
Robert Clemons(3) 518,505 14.4%
10135 Hereford Road
Folsom, LA 70437
Walter Reid Green, Jr.(4) -- --
10135 Hereford Road
Folsom, LA 70437
All Officers and
Directors as a
Group (3 Persons) 1,370,402 38.2%
(1) Does not include (i) up to 100,000 shares of Common Stock issuable
upon the exercise of the underwriters' warrants or (ii) up to
200,000 shares of Common Stock reserved for issuance upon exercise
of options under the Company's Incentive Stock Option Plan.
(2) Dr. Wade is the Chairman of the Board, President and Chief
Executive Officer of the Company.
(3) Mr. Clemons is Executive Vice President, Secretary and a Director
of the Company.
(4) Mr. Green is Chief Financial Officer, Treasurer, and a Director of
the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The Company was incorporated in Delaware on February
4, 1992 and on February 14, 1992 executed a Plan and Agreement of
Merger with Pacesetter Ostrich Farm, Inc., a Louisiana corporation, and
the Company's parent corporation and predecessor. In connection with
this merger, the Company exchanged 1,162,622 shares, 518,505 shares and
207,780 shares of
30
<PAGE>
Common Stock, respectively, to Dr. John Wade, Mr. Bob Clemons and Mr.
Bob Wade (retired in 1993) in exchange for their shares in the
predecessor corporation. In addition, the Company issued an aggregate
of 499,983 shares of its Common Stock to the participants in its
private placements of units of its securities completed between
December 1991 and February 1992.
During 1992, Dr. Wade and Mr. Clemons made periodic
advances of funds to the Company for working capital purposes. The
highest principal amount of such advances amounted to approximately
$15,000 in respect to Dr. Wade. All of such advances were non-interest
bearing and at December 31, 1994 aggregated to $56,421. In July 1993,
the company entered into a note receivable for $42,500 with Mr. Clemons
bearing 8% per annum with no specified maturity date.
Effective as of March 31, 1992, Mr. Bob Clemons quit
claimed and sold the land and facilities consisting of Pacesetter
Ostrich Farm to the Company in consideration for the issuance by the
Company of its promissory note in the principal amount of $310,000
payable in sixty monthly installments of interest only in the amount of
$2,066 and a final payment of the entire principal balance of $310,000
on March 31, 1997. Simultaneously therewith, the Company and Mr.
Clemons entered in a lease for the use of the residential portions of
such facilities by Mr. Clemons and providing for rental payments of
$1,400 per month through March 31, 1997. Mr. Clemons also received a
second mortgage on such property which is currently subject to a
primary mortgage with the Federal Land Bank in the aggregate amount of
approximately $55,000 and which involves monthly payments of $1,210
which Mr. Clemons will continue to pay. The property is also subject to
certain additional liens totaling approximately $23,000 previously
filed against Mr. Clemons. If the Company is required to make payments
under such prior mortgage or liens, the amount payable to Mr. Clemons
will be reduced by a corresponding amount, and the amount of the
installments of interest to be payable on a monthly basis will be
correspondingly reduced. The Company believes that it is unlikely that
it will be called upon or be required to satisfy such prior mortgage or
liens. While the Company believes that the transaction with Mr. Clemons
represents a beneficial transaction from the standpoint of satisfying
the Company's interests, there can be no assurance that the Company and
Mr. Clemons would have consummated the acquisition on the same terms if
Mr. Clemons had not been affiliated with the Company and the
transaction had been conducted on an arms-length basis. In March 1992,
the Company received an appraisal on such land and facilities from
Scoggin, McClure & Associates, Inc., an independent appraiser, which
estimated the Value In Use of such land and related facilities to
31
<PAGE>
be $435,000. "Value In Use" refers to the value of properties with
special purpose uses which is filling an economic demand for the
service it provides or which it houses, and due consideration is given
to the property's functional utility in best serving the purpose for
which it was constructed. Mr. Clemons acquired Pacesetter Ostrich Farm
in 1972, and thereafter Mr. Clemons and the Company constructed various
of the facilities and housing that comprise Pacesetter Ostrich Farm.
Mr. Clemons' adjusted basis in Pacesetter Ostrich Farm was $258,478 at
the time of the transaction. Adjustments to the purchase price were
made to give effect to improvements to the facilities that were
attributable to the Company. On May 16, 1994, the Company transferred
the property, consisting of $144,682 of buildings (net of $12,344 of
accumulated depreciation) and $101,422 of land back to Mr. Clemons in
consideration of cancellation of the $310,000 note payable.
As previously described, Dr. John Wade devotes
substantially all of his business time to the Company and the remaining
portion of his time to his veterinary practice which is conducted
primarily from his personal residence. As provided in Dr. Wade's
employment agreement with the Company, Dr. Wade will not charge the
Company for professional services rendered for the Company's
proprietary or managed ostriches.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Not applicable.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The financial statements listed on the index to
financial statements on page F-1 are filed as part of this Form 10-KSB.
(b) Reports on Form 8-K
None.
32
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
Exhibits Description of Document
-------- -----------------------
<S> <C>
1(a) Form of Underwriting Agreement(1)
2 Plan and Agreement of Merger(1)
3(a) Certificate of Incorporation(1)
3(b) By-Laws(1)
4(a) Specimen Certificate of Common Stock(1)
4(b) Form of Warrant Agreement and Warrant to be sold to Greenway Capital Corporation(1)
4(c) Form of 10% Promissory Note(1)
10(a) Employment Agreement with John Wade(1)
10(b) Employment Agreement with Robert Clemons(1)
10(c) Incentive Stock Option Plan(1)
10(d) Sale with Mortgage, Lease and Appraisal Summary(1)
10(e) Financial Consulting Agreement with Greenway Capital Corporation(1)
10(f) Lease Agreement with Poderco Limited Partnership and LBR Trust(1)
</TABLE>
(1) Filed as the same enumerated exhibit to the Registrant's
Registration Statement (File No. 33-49228-FW) previously filed.
33
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 3rd day of
February, 1997.
PACESETTER OSTRICH FARM, INC.
By: _________________________________
President and Chief Executive Officer
In accordance with the Exchange, this Report has been signed
below by the following person on behalf of the Registrant, and in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature
<S> <C> <C>
Chairman of the Board,
President, and Chief
____________________ Executive Officer March 25, 1997
John R. Wade
Executive Vice President,
_____________________ Secretary and Director March 25, 1997
Bobbie R. Clemons
Treasurer, Director, and Chief
_____________________ Financial and Accounting Officer March 25, 1997
Walter Reid Green, Jr.
</TABLE>
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheet as of December 31, 1996 F-3
Statements of Operations for the Years Ended December 31, 1996 and 1995 F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Pacesetter Ostrich Farm, Inc.:
We have audited the accompanying balance sheet of Pacesetter Ostrich Farm, Inc.
(a Delaware corporation) as of December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period 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 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 Pacesetter Ostrich Farm, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has suffered recurring operating losses and has had difficulty meeting its cash
flow requirements. In addition, current liabilities include notes payable in
default of $450,104, and significant past-due accounts payable. As a result,
there is a substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
New Orleans, Louisiana,
March 14, 1997
F-2
<PAGE>
PACESETTER OSTRICH FARM, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS 1996
- ------ -------------
CURRENT ASSETS:
Accounts receivable (net of
allowance for doubtful
accounts of $39,921) $ 129,521
Livestock inventory (Note 1) 370,775
-------------
Total current assets 500,296
PROPERTY AND EQUIPMENT, net (Note 3) 1,110,666
NOTE RECEIVABLE FROM STOCKHOLDER (Note 6) 42,500
OTHER ASSETS 3,173
-------------
$ 1,656,635
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 212,908
Notes payable (Note 5) 450,104
Accrued interest 11,253
Advances from stockholders (Note 6) 169,317
-------------
Total current liabilities 843,582
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 7 and 8):
Common stock, $.001 par value, 10,000,000
shares authorized, 3,590,244 issued
and outstanding 3,590
Additional paid-in capital 3,779,217
Accumulated deficit (2,969,754)
-------------
813,053
-------------
$ 1,656,635
=============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PACESETTER OSTRICH FARM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
OSTRICH SALES $ 831,964 $ 1,366,621
COST OF SALES (Note 1) 486,138 1,621,445
----------- -----------
Gross profit (loss) 345,826 (254,824)
OTHER OPERATING REVENUE 380,344 256,476
OPERATING EXPENSES:
Operating (680,432) (820,727)
General and administrative (132,987) (288,413)
----------- -----------
Operating loss (87,249) (1,107,488)
OTHER INCOME (EXPENSE):
Interest expense (Note 5) (46,686) (48,240)
Loss on retirement and write-down of fixed assets (Note 3) (14,726) (173,260)
Write-off of investment (Note 3) -- (61,000)
Miscellaneous 75,965 28,640
----------- -----------
LOSS BEFORE INCOME TAXES (72,696) (1,361,348)
INCOME TAX PROVISION (Note 4) -- --
----------- -----------
Net loss $ (72,696) $(1,361,348)
=========== ===========
NET LOSS PER SHARE $ (.02) $ (.38)
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 3,590,244 3,588,008
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PACESETTER OSTRICH FARM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
-------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ 3,542 $ 3,763,425 $ (1,535,710) $ 2,231,257
Issuance of 48,000 shares (Note 1) 48 15,792 15,840
Net loss - - (1,361,348) (1,361,348)
--------- ------------ ------------- -------------
BALANCE, December 31, 1995 3,590 3,779,217 (2,897,058) 885,749
Net loss - - (72,696) (72,696)
--------- ------------ ------------- -------------
BALANCE, December 31, 1996 $ 3,590 $ 3,779,217 $ (2,969,754) $ 813,053
========= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PACESETTER OSTRICH FARM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (72,696) $ (1,361,348)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities-
Depreciation 142,594 176,997
Change in deferred revenue - (5,000)
Loss on retirement or write-down of assets 14,726 186,072
Write-down of inventory - 572,000
Decrease (increase) in-
Accounts receivable, net (62,334) (25,042)
Livestock inventory (26,098) 384,582
Other current assets 9,733 8,880
Other assets - 60,999
Increase (decrease) in-
Accounts payable and accrued liabilities (7,372) (93,541)
Accrued interest payable 11,253 -
Borrowings from stockholders 16,357 96,539
------------- -------------
Net cash provided by operating activities 26,163 1,138
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment - (16,046)
Proceeds from sale of property - 17,200
------------- -------------
Net cash provided by investing activities - 1,154
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (26,163) (9,888)
------------- -------------
Net cash used in financing activities (26,163) (9,888)
------------- -------------
Net decrease in cash and short-term investments - (7,596)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR - 7,596
------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ - $ -
============ ===========
INCOME TAXES PAID $ - $ -
============ ===========
INTEREST PAID $ 34,446 $ 75,240
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
The Company was incorporated on February 4, 1992 and executed a Plan and
Agreement of Merger with Pacesetter Ostrich Farm, Inc., a Louisiana corporation,
on February 14, 1992. The predecessor corporation was organized in Louisiana on
February 22, 1989 under the name Ostrich Breeders of North America, Inc. All
references to the Company include Pacesetter Ostrich Farm, Inc., the predecessor
corporation and the operations undertaken by such predecessor corporation.
The accompanying financial statements of the Company reflect the combination of
the Company, Pacesetter Ostrich Farm, Inc., (the Louisiana corporation) and
Ostrich Breeders of North America, Inc. The reorganization has been accounted
for as a reorganization of entities under common control in a manner similar to
a pooling of interests.
The Company's inventory is located on approximately 320 acres of farmland
located in Willcox, Arizona. The Company also maintains office facilities and
approximately 65 acres of farmland in Folsom, Louisiana. The Company generally
sells farm-raised ostriches in the normal course of business primarily to
customers which are trying to build ostrich herds and also for slaughter
purposes. Recent sales and marketing efforts have been concentrated in foreign
breeder markets, particularly China and South America. The Company's marketing
relies primarily upon word-of-mouth referrals based on its reputation in the
industry. The Company is currently one of the larger ostrich breeding farms in
the United States.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Short-Term Investments
The Company considers investments in highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Livestock Inventory
The Company accounts for all of its livestock as inventory as the Company is
currently engaged primarily in the business of acquiring, breeding and selling
ostriches. While no permanent breeding stock has currently been identified, the
Company anticipates the focus of its operations will change to emphasize the
slaughter market within the next three years. At such time, the Company intends
to identify permanent breeding stock, which would be depreciated, and account
for chicks from such stock as slaughter livestock.
F-7
<PAGE>
The Company's inventory is valued at the lower of cost (under the specific
identification method) or market (including consideration of foreign breeder
sales) and consists of live ostriches. During 1995, due to a significant
deterioration in the ostrich market, the Company recorded a provision of
approximately $572,000 for the decline in market value of ostriches in
inventory. No such provision was recorded in 1996.
No costs have been deferred related to progeny from the Company's ostriches or
investor owned ostriches; thus, no value has been assigned thereto in the
Company's inventory. The Company manages investor-owned ostriches in return for
a boarding fee. During 1996, the Company sold certain investor-owned ostriches,
the proceeds of which, $65,501, were applied against boarding fees receivable
from the respective investors. Also, during 1995, the Company issued 48,000
shares of stock to two investors to acquire ostriches.
Due to the relative nascent stage of the ostrich industry, the price of
ostriches is subject to significant fluctuations. Further significant declines
in the value of ostriches would materially impact the valuation of the Company's
ostriches, as well as the Company's financial position.
The Company does not maintain insurance on its proprietary ostriches. Thus, in
case of death of the ostriches, the Company is exposed to the risk of loss to
the extent of the book value of the livestock inventory.
During 1996 and 1995, the Company incurred losses related to ostrich mortality
of $31,665 and $18,417, respectively.
Depreciation of Property, Plant and Equipment
The Company's buildings, equipment and fences are depreciated using the
straight-line method applied over the useful lives of the assets.
Income Taxes
For income tax reporting, the Company uses accounting methods that recognize
depreciation on an accelerated basis for buildings and equipment. As a result,
the basis for buildings and equipment for financial reporting exceeds its tax
basis by the cumulative amount that accelerated depreciation exceeds
straight-line depreciation. In addition, the Company has recorded write-downs in
value of inventory and property and equipment which are not currently deductible
for tax purposes. These and other temporary differences have been accounted for
under the provisions of Statement of Financial Accounting Standards No. 109.
Accounts Receivable
Accounts receivable are recorded at their estimated net realizable value. There
were write-offs (recoveries) of $14,023 and ($40,372) affecting bad debt expense
during 1996 and 1995, respectively. Accounts receivable represent primarily
amounts due for boarding fees on investor-owned birds where collection is
doubtful. Net realizable value is determined based upon the value of the
ostriches boarded by the respective investor.
Revenue
Revenue is recognized as ostriches are sold and delivered. The Company made
foreign sales of $575,000 and $1,000,000, in 1996 and 1995, respectively. In
1995, the Company also boards investor-owned mated pairs for either a daily
boarding fee or a management fee. Boarding and hauling fees are recognized as
other operating revenue as due and totalled approximately $380,000 and $145,000
in 1996 and 1995, respectively. In 1995, the Company's management fee consisted
of the receipt of one-half of the live chicks produced from such pairs.
F-8
<PAGE>
This fee is recognized as income when the chicks are sold and no costs are
deferred associated with the management of the pairs. In 1996, the Company
discontinued most of the management contracts based on chicks produced.
Management fees are currently recognized when services are rendered. Also
included in other operating revenue are fees charged for veterinarian services
of $40 and $112,000 in 1996 and 1995, respectively.
The Company provides no express warranty upon sales of livestock. However, in
the past the Company has replaced livestock or given refunds in order to
maintain its business reputation. As of December 31, 1996 and 1995, the Company
determined that no allowance for future returns or refunds was necessary.
Earnings Per Share
The earnings per share calculations are based on the weighted average number of
shares of common stock outstanding and common stock equivalents, unless their
effect would be anti-dilutive.
2. FINANCIAL AND OPERATING CONSIDERATIONS:
The Company has incurred substantial operating losses in 1992 through 1996. The
Company has also experienced severe cash flow difficulties and has been unable
to meet certain of its obligations as they have come due. Included in current
liabilities are $450,104 in notes payable which are in default (see Note 5) and
significant past-due accounts payable. To date, the Company has been unable to
reach a sufficient operating level to meet its operating costs, and it may be
unable to meet its future commitments. There is no guarantee that the Company
will ultimately be able to achieve sufficient profitability in the slaughter
market or that the Company will continue to be able to make sales in the breeder
market. As a result, there is substantial doubt about the ability of the Company
to continue as a going concern. The Company believes that its ostrich inventory
could be liquidated at an amount substantially in excess of book value, if
required. However, there is no guarantee that sales at such prices would be
possible. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists primarily of special-use assets for the
production and raising of ostriches. A summary of Company property and equipment
is as follows:
Estimated
1996 Years (Lives)
------------- -------------
Land $ 144,727 -
Buildings and improvements 1,027,995 10 to 30
Equipment 396,687 5 to 7
Vehicles 60,447 5
CIP 31,193 -
-------------
Total 1,661,049
Less: Accumulated depreciation (550,383)
-------------
Net property and equipment $ 1,110,666
=============
Effective December 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company
recorded a loss provision of approximately $173,000 in 1995 for the write-off
and retirement of fixed assets, which was not directly associated with this
adoption. In 1995, the Company also wrote off its $61,000 investment in an
ostrich partnership in Africa.
F-9
<PAGE>
In 1996, the Company decided to sell its veterinary clinic located in Willcox,
Arizona. As a result, the Company recorded a write-down of $14,726 to reduce the
net book value of this asset as of December 31, 1996 to the anticipated net
proceeds of the sale.
4. INCOME TAXES:
The reconciliation of the Federal statutory tax rate to the effective tax rate
is as follows:
1996 1995
---- ----
Statutory tax rate 34% 34%
State taxes 3% 3%
Benefit from NOL carryforward not recognized (37)% (37)%
----- -----
Effective tax rate 0% 0%
===== =====
Cumulative deferred taxes consist of the following temporary differences at an
estimated effective Federal and state tax rate of 37%:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities $ (30,500) $ (45,000)
------------ ------------
Deferred tax assets:
Net operating loss carryforward 846,857 826,014
Tax basis of inventory in excess of book
basis 211,640 211,640
Tax basis of property in excess of book basis 64,106 64,106
Less- valuation allowance (1,092,103) (1,056,760)
------------ ------------
Deferred tax asset 30,500 45,000
------------ ------------
Total deferred taxes $ - $ -
============ ============
</TABLE>
At December 31, 1996, the Company had, for tax reporting purposes, operating
loss carryforwards of approximately $2,289,000 which expire in 2007 through
2011.
The Company is engaged in a relatively new business and has generated losses
from operations in 1992 through 1996. In addition, it is difficult to predict if
and when the Company and the industry will reach sufficient size to support a
slaughter market (as opposed to a breeder market) and what impact this would
have on Company operations. As a result, the Company does not believe it is more
likely than not it will be able to realize the NOL carryforwards through
generation of future taxable income. Therefore, the Company has provided a
valuation allowance for the entire amount of the deferred tax asset.
F-10
<PAGE>
5. NOTES PAYABLE:
A summary of outstanding notes payable at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Private Placement Notes Payable (see description below) $ 425,735
Note payable for equipment purchase; original balance $14,035, interest at 13.2%
per annum, payable in monthly installments of principal and
interest through April 1, 1996 secured by the equipment purchased (past due) 7,636
Note payable for purchase and refurbishment of veterinary clinic; original
balance $36,000, interest at 8% per annum; payable in monthly installments of
principal and interest. No specified maturity date 16,733
-----------
Total notes payable $ 430,104
===========
</TABLE>
In late 1991, the Company commenced a private placement to accredited investors
which offered to sell up to 80 units at $5,000 per unit. In early 1992 an
additional private placement of 10 units was offered to one of the investors in
the previous private placement on terms identical to the previous private
placement. The Company received total subscriptions for 90 units ($450,000) upon
completion of these offerings. Each unit consisted of 5,555 shares of common
stock and a promissory note for $5,000 with interest thereon at 10% per annum
commencing at the closing. Interest is payable semi-annually. Of the proceeds of
the offering, $0.075 per share was attributed to the stock based upon
management's estimate of fair value, and the remainder was attributed to the
notes payable. The $37,505 discount on the notes payable resulting from the
portion of the proceeds allocated to the sale of stock has been fully amortized.
The principal portion of the notes was due upon the earlier of December 1, 1995
or receipt of sufficient proceeds by the Company under contracts for the sale of
ostrich livestock anticipated to be fulfilled commencing July 1, 1992 (such
determination to be made in the reasonable judgment of the Company's Board of
Directors). As of December 31, 1996, principal payments had been made on only a
small portion of these notes. As a result, the Company is in default on these
notes. Holders of $40,000 of these notes have filed suit against the Company for
collection (see Note 9).
In January 1997, the Company obtained a $150,000 line of credit which matures on
January 9, 1998, bears interest at 9%, and is secured by the Folsom property
which is owned by a major stockholder and the personal guarantees of two major
stockholders.
6. TRANSACTIONS WITH RELATED PARTIES:
In July 1993, the Company entered into a note receivable for $42,500 with a
significant stockholder. The note bears interest at 8% per annum, and has no
specified maturity date.
In April 1995, another stockholder loaned the Company an additional $25,000.
This amount is due on demand and is non-interest bearing.
Compensation paid to significant stockholders and officers was $17,885 and
$74,808 during 1996 and 1995, respectively. No bonuses were paid in 1996 and
1995. Compensation paid to employees who are related to significant stockholders
was $28,290 and $44,597 during 1996 and 1995, respectively.
The Company leases certain property in Folsom, Louisiana, from a major
stockholder, on which a portion of the Company's operations is located. The
lease is annually renewable and cancellable by the Company and stockholder.
Total rent paid in each of 1996 and 1995 was $8,400.
Advances from stockholders primarily consist of Company expenses paid by two
major stockholders. These advances are non-interest bearing with no specified
maturity date.
F-11
<PAGE>
7. INCENTIVE STOCK OPTION PLAN:
During February, 1992 the Company adopted the 1992 Incentive Stock Option Plan
(the "Plan") under which 200,000 shares of common stock have been reserved for
issuance to employees of the Company. The exercise price of any stock option
granted under the Plan to an eligible employee will be equal to the fair market
value of the shares on the date of grant and with respect to persons owning more
than 10% of the outstanding common stock, the exercise price will not be less
than 110% of the fair market value of the shares. On May 28, 1994, the Company
granted a total of 82,000 of such options to 13 of its key employees at $1.25
per share. None of these options were issued to Mr. Clemens (Vice President) or
Dr. Wade (President). On January 16, 1995, the Company granted an additional
99,500 options to 13 of its key employees, including 20,000 options to both Dr.
Wade and Mr. Clemens, at $0.75 per share. The 40,000 options issued to Dr. Wade
and Mr. Clemens expire in January, 2000. The remaining 59,500 options expire in
January, 2005.
A summary of the status of the Plan as of December 31, 1996 and 1995 and changes
during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995
------------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 138,500 $ .89 82,000 $ 1.25
Granted - - 99,500 .75
Exercised - - - -
Forfeited (24,000) .75 (43,000) 1.25
-------- ---------- --------- ----------
Outstanding at end of year 114,500 $ .92 138,500 $ .89
======== ====== ========= ======
Options exercisable at year end 114,500 $ .92 138,500 $ .89
======== ====== ========= ======
Weighted average fair value of
options granted during the year $ - $ .56
==== =====
</TABLE>
The Company applies APB Opinion 25 in accounting for its Plan. Accordingly, no
compensation cost has been recognized for the Plan. Had compensation cost for
the Plan been determined based on the fair value at the grant dates for awards
under the Plan made in 1995 consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
--------- -----------
Net loss as reported pro forma $(77,797) $(1,366,235)
======== ===========
Loss per share as reported pro forma $(.02) $(.38)
===== =====
For purposes of the above computation, compensation cost was estimated using the
Black-Scholes model with the following assumptions for 1995: no dividend yield;
on expected life of 5 to 10 years; expected volatility of 235.95 percent; and
risk-free interest rate of 5.58 percent.
F-12
<PAGE>
8. STOCKHOLDER'S EQUITY:
The Company made a public offering of 1,000,000 shares of newly issued common
stock in December 1992 at $4 per share. In addition, 100,000 warrants to
purchase common stock were issued to the underwriters at an exercise price of
120% of the initial offering price. The warrants were exercisable commencing one
year after the effective date of the registration of the shares and will expire
four years thereafter (December 1997). In connection with the offering, the
Company also agreed, under certain circumstances and at its sole expense, to
register or qualify the underwriters warrants and the warrant stock for sale.
In 1997, the Company issued 17,000 shares of stock in exchange for legal
services.
9. COMMITMENTS AND CONTINGENCIES:
In October 1995, holders of $40,000 of the Company's Private Placement notes
filed suit against the Company for $63,000, which includes payment of the notes
in default plus attorney fees and other costs. The Company is currently engaged
in settlement discussions. The Company believes the ultimate resolution of this
matter will not have a material impact on its financial condition.
The Company is subject to the possibility of other litigation in the ordinary
course of business. The Company is not aware of any other matters which would
have a significant impact on its financial condition or results of its
operations.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 215,115
<ALLOWANCES> 39,921
<INVENTORY> 370,775
<CURRENT-ASSETS> 0
<PP&E> 1,661,049
<DEPRECIATION> 550,383
<TOTAL-ASSETS> 1,656,635
<CURRENT-LIABILITIES> 843,582
<BONDS> 0
0
0
<COMMON> 3,590
<OTHER-SE> 809,463
<TOTAL-LIABILITY-AND-EQUITY> 1,656,635
<SALES> 831,964
<TOTAL-REVENUES> 907,929
<CGS> 486,138
<TOTAL-COSTS> 1,299,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,726
<INTEREST-EXPENSE> 46,686
<INCOME-PRETAX> (72,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,696)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
