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, 1997
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
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(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.
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Yes No X
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This report contains a total of ___ pages.
The Exhibit Index appears on page ___.
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]
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State issuer's revenues for its most recent fiscal year. $920,084
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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 August 25, 1999. Based on
the closing bid price of the Common Stock on the OTC Bulletin Board as reported
on August 25, 1999 ($5/16), the aggregate market value of the 2,269,097 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 $709,093. 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
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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.
3,950,224 shares of Common Stock, $.001 par value, as of August 25, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Report
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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.
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.
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
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expected net operating losses during 1993. For 1997, however, the Company
experienced net operating losses which resulted from lower than expected
revenues. Such decreases resulted from the reduction in prices received from
international shipments and continued decreases in market prices for live
ostriches within the United States compared to prior year prices. In addition,
domestic sales volumes were very sporatic 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
originally passed stringent laws forbidding exportation of sexually viable birds
or fertile eggs and 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 became a
growing alternative agricultural/livestock business in the United States,
Canada, Europe, and Australia. Even more recently, due to the political
uncertainties within the country of South Africa, there has been a
disintegration of the monopolistic practices traditionally used in South Africa.
As a result, exportation of live ostriches from South Africa has now increased
and sales prices of ostrich products originating from South Africa have
decreased considerably. These developments have resulted in increased
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competition in the worldwide market for both live ostriches and ostrich
products.
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
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proper nutritional substances. Ostriches may be bred under most climate
conditions, but since cold weather will inhibit egg laying, more temperate
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 $1.50 to $10.00 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 $500 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
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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
$20 to $32 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 leather is also used for fashion
accessories, briefcases, shoes and clothing, with a full quill ostrich leather
briefcase marketing for generally above $1000 in the absence of customizing.
At the present time the market for ostrich components as well as live
ostriches is very sporadic within the United States. Prices to be received for
fertilized eggs are $20 to $50 per egg, four to six month old chicks sell for
$50 to $100 per bird, yearlings sell for $200 to $300 each, and mature producer
breeders bring $500 to $8,500 or per pair. However, the upper range of such
prices for mature breeders can only be realized through international shipments.
Although such prices are substantially lower than pricing received in prior
years, there are no assurances that prices will stabilize at these levels.
At the present time the ostrich industry has made most of the transition
from a breeder market to a commercial livestock market. As a result, most
ostrich farmers must now rely on a small number of processors for marketing
their live ostriches. For all practical purposes the sale of live ostriches can
no longer be relied upon as a substantial source of revenue within the United
States. 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 international pricing which is difficult
to predict and generally not sustainable once sufficient numbers of ostrich
livestock are available for sale within a given region.
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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 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 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
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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.
Marketing and Sales
The Company generally sells a combination of slaughter birds domestically
as well as limited numbers of international shipments of breeder ostriches. The
Company's marketing program is undertaken through word of mouth referrals based
on its reputation in the industry.
In addition to sales of live ostriches, the Company began limited sales of
ostrich leather and ostrich meat during 1995. The Company continued working with
a number of tanners in the U.S. 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 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
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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 management's assessment of this matter, the industry
has made improvements in the availability of U.S.D.A. inspection. However,
processing costs have remained unacceptably high due to the voluntary inspection
issue. To date, only proprietary ostrich processors have achieved acceptable
processing costs. Therefore, management has pursued a strategic alliance with
several of these processors. However, at this time such efforts have not been
successful.
Due to 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. During 1997 the
Company completed two international shipments to South America with represented
the majority of the Company's gross revenues for the year.
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 further decreases in pricing as the number of
commercial slaughter birds increases at a greater rate than the demand for
ostrich products. Furthermore, changes in policies by the Union of South Africa
and the United States involving the relaxation of export and import restrictions
could further impact price levels.
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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
The Company does not believe at the present time that its trademarks will
be critical to the success of its operations.
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Employees
As of December 31, 1997, the Company employed a total of 8 full time
employees including three executive officers, four 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
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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.
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. In May 1997 the Company completed 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 two private placement note holders, related to an original $40,000
of principal debt which was due on December 1, 1995. On April 18, 1997, the
Company completed a settlement which did 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
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January 1-March 31, 1997 $0.50 $0.25
April 1-June 30, 1997 $0.32 $0.13
July 1-September 30, 1997 $0.25 $0.06
October 1-December 31, 1997 $0.25 $0.16
January 1-March 31, 1998 $0.18 $ .06
On March 25, 1997, the closing bid price for the Common Stock was $0.06.
(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, 1997 and 1996.
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.
Results of Operations
For the years ended December 31, 1997 and 1996, sales were $920,084 and
$831,964 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 74% for the year ended December
31, 1997, compared to 58% for the year ended December 31, 1996. The increase in
cost of sales as a percentage of sales for the year ended December 31, 1997 was
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attributable to lower internatinal prices received in 1997 compared to the prior
year. The Company's gross profit decreased from $345,826 for the year ended
December 31, 1996 to $247,060 for the year ended December 31, 1997, representing
a decrease of $98,766 mostly as a result of the lower international pricing
previously described and the write-down of livestock inventory to market value.
Operating expenses decreased from $680,432 for the year ended December 31,
1996 to $614,212 for the year ended December 31, 1997 representing a decrease of
$66,220 due primarily to decreased volume in the ostrich business. General and
administrative expenses increased from $132,987 for the year ended December 31,
1996 to $214,487 for the year ended December 31, 1997. Such increases reflected
slight increases in outside accounting and legal costs. Additionally, during
1997, the company incurred a write-down on the assets used in its ostrich
segment of $248,706 to market value.
At December 31, 1997, the Company had for tax reporting purposes, net
operating loss carryforwards of $2,766,310 which expire in 2007 through 2014. As
the Company 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 tax loss
carryforwards, as detailed in Note F of the financial statements.
The Company incurred a net loss of $761,909 or $0.21 per share for the year
ended December 31, 1997 compared to a net loss of $72,676 or $0.02 per share for
the year ended December 31, 1996. The substantial net loss for 1997 was due
primarily to the significant decline in market prices and writedown of inventory
and losses on writedown of impaired assets as described in Note C of the
financial statements.
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 an additional shipment to China for
approximately $575,000, to parties unrelated to the contract with Sichuan
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Chengdu Ju Tong Company. Since this shipment the Company has not and at this
time does not expect to complete any other shipments of ostriches to China.
However, during 1997 the Company did complete two shipments of ostriches to
South America, which represent the majority of gross revenue generated for the
year. 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.
Liquidity and Capital Resources
As discussed in Note B 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.
Net cash used by operating activities was $200,847 for the year ended
December 31, 1997 compared to net cash provided from operations of $26,163 for
the year ended December 31, 1996 primarily as a result of the large increase in
net operating losses for 1997, partially offset by write-offs for loss on
impairment of assets and inventory write-downs. For 1998, the company expects to
meet cash flow needs from continued sales of ostrich livestock, particularly
related to its international business in South America. Since inception, the
Company has been financed by advances from its principal executive officers. At
December 31, 1997, such advances, which are non-interest bearing with no
specified maturity date, aggregated to $175,965. The ratio of current assets to
current liabilities decreased from 0.59:1 at December 31, 1996 to 0.08:1 at
December 31, 1997 reflecting the large write-downs in inventory.
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Net cash provided/(used) in investing activities was $109,052 for 1997
compared to $0 for 1996, reflecting cash received from the sale in 1997 of the
property previously used as a veterinary clinic. Cash outlays for capital
expenditures for property, plant and equipment increased slightly from $0 for
the 1996 fiscal year to $5,129 for the Company's 1997 fiscal year. This increase
reflects minor acquisitions necessary during 1997 to maintain operations at the
Willcox, Arizona facility.
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 1996
holders of $40,000 of such notes filed suit against the Company. In April of
1997 this suit was settled at approximately the principal amount of such debt.
At December 31, 1997 the Company had reduced the principal amount of these notes
from $450,000 to $384,263 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. 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, 1997, the Company owned and managed a
total of approximately 800 ostriches. However, due to the severe downturn in the
business and uncertainty about future marketability of ostriches the Company
recorded a provision of approximately $235,877 for the decline in market value
of ostriches in inventory.
20
<PAGE>
Inflation
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 supply of 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.
21
<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.
22
<PAGE>
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 ostrich 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. On February 1, 1992, Dr. Wade was elected as a
Director of the American Ostrich Association, the foremost trade association in
the industry. 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
25
<PAGE>
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. 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 was provided the right to
designate an observer to the Company's Board of Directors until December 15,
1997. The underwriter has never exercised this right. 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, however, will be
reimbursed for reasonable expenses incurred in connection with their attendance
at meetings.
26
<PAGE>
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, 1997 aggregated to $22,885. 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 1997 $ -- -- -- -- 282,000 -- $ --
Chairman, 1996 2,404 -- -- -- 20,000 -- --
President 1995 18,269 $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, 1997, no cash bonuses
were issued to any officers.
(b)(3) Option Exercises and Values at Year End
27
<PAGE>
AGGREGATED OPTION/SASR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
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
---- ------------ -------- ------------- -------------
Dr. John Wade - - - -
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
28
<PAGE>
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 additional limitations, conditions and restrictions in
connection with the grant of any option.
In 1994, the Company issued a total of 39,000 of such options to 13 of its
key employees, of which 37,000 of such options have not expired. In 1995, the
Company issued an additional 75,500 of such options to 13 of its key employees,
of which 62,000 of such options have not expired. During 1997, the Company
issued a total of 21,000 of such options of which none have expired. As of the
date of this filing, none of the options have been exercised.
In addition to the incentive stock options under the Company's 1992
Incentive Stock Option Plan, the Company issued non-qualified options to several
of its key personnel in lieu of compensation. During 1997, the Company issued a
total of 1,150,000 of such options to a total of 4 of its key personnel. As of
the date of this filing, none of these 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 August 25, 1999 (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
29
<PAGE>
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
August 25, 1999, there were 3,950,224 shares of Common Stock outstanding.
30
<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.
31
<PAGE>
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 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
32
<PAGE>
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 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 this 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.
33
<PAGE>
(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.
34
<PAGE>
(c) Exhibits
Exhibits Description of Document
- -------- -----------------------
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)
- ------------
(1) Filed as the same enumerated exhibit to the Registrant's Registration
Statement (File No. 33-49228-FW) previously filed.
35
<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 7th day of September, 1999.
PACESETTER OSTRICH FARM, INC.
By: S/S: John R. Wade
------------------------------------
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
S/S: John R. Wade Executive Officer September 7, 1999
------------------------
Executive Vice President,
S/S: Bobbie R. Clemons Secretary and Director September 7, 1999
------------------------
Treasurer, Director, and Chief
S/S: Walter R. Green, Jr. Financial and Accounting Officer September 7, 1999
------------------------
</TABLE>
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGES
-----
Independent Auditor's Report 38
Balance Sheets 39 - 40
Statements of Operations 41
Statements of Stockholders' Equity 42
Statements of Cash Flows 43
Notes to Financial Statements 44 - 51
37
<PAGE>
To the Stockholders of
Pacesetter Ostrich Farm, Inc.
Independent Auditor's Report
We have audited the accompanying balance sheet of PACESETTER OSTRICH FARM,
INC. (a Delaware corporation) as of December 31, 1997, and the related
statements of operations, stockholders' equity and cash flows for the year 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 audit. The financial statements of PACESETTER OSTRICH
FARM, INC. as of December 31, 1996, were audited by other auditors whose report
dated March 14, 1997, on those statements included an explanatory paragraph that
described the going concern uncertainty discussed in Note B to the financial
statements.
We conducted our audit 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 audit provides 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, 1997, and the results of its operations and its cash
flows for the year 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 B to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
LaPorte, Sehrt, Romig and Hand
A Professional Accounting Corporation
Metairie, LA
June 9, 1999
38
<PAGE>
PACESETTER OSTRICH FARM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ -- $ --
Accounts Receivable (Net of Allowance for Doubtful
Accounts of $47,603 for 1997 and $39,921 for 1996) 77,781 129,521
Livestock Inventory -- 370,775
---------- ----------
Total Current Assets 77,781 500,296
PROPERTY AND EQUIPMENT, Net 50,625 1,110,666
NOTES RECEIVABLE FROM STOCKHOLDER 42,500 42,500
OTHER ASSETS:
Net Assets of Discontinued Operations 796,220 --
Other 3,173 3,173
---------- ----------
799,393 3,173
---------- ----------
$ 970,299 $1,656,635
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Cash Overdraft $ 1,398 $ --
Accounts Payable and Other Accrued Liabilities 199,818 224,161
Notes Payable 541,899 450,104
Advances from Stockholders 175,965 169,317
----------- -----------
Total Current Liabilities 919,080 843,582
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common Stock, $.001 Par Value, 10,000,000 Shares
Authorized, 3,665,224 Issued and Outstanding December 31,
1997; 3,590,244 Issued and Outstanding December 31, 1996 3,665 3,590
Additional Paid-in Capital 3,779,217 3,779,217
Accumulated Deficit (3,731,663) (2,969,754)
----------- -----------
Total Stockholders' Equity 51,219 813,053
----------- -----------
$ 970,299 $ 1,656,635
=========== ===========
</TABLE>
40
<PAGE>
PACESETTER OSTRICH FARM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended
December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Ostrich Sales $ -- $ 831,964
COST OF SALES -- 486,138
----------- -----------
GROSS PROFIT -- 345,826
OTHER OPERATING REVENUE -- 380,344
OPERATING EXPENSES:
Selling, General and Administrative Expenses 295,272 860,105
----------- -----------
OPERATING LOSS (295,272) (133,935)
OTHER INCOME (EXPENSES):
Loss on Retirement of Fixed Assets -- (14,726)
Miscellaneous -- 75,965
----------- -----------
-- 61,239
----------- -----------
LOSS BEFORE INCOME TAXES (295,272) (72,696)
INCOME TAX PROVISION -- --
----------- -----------
LOSS FROM CONTINUING OPERATIONS (295,272) (72,696)
DISCONTINUED OPERATIONS:
Loss from Operations of Ostrich Segment Disposed of
September 30, 1998 (Net of Income Taxes of $-0-) (240,356) --
Loss on Disposal of Ostrich Segment (Net of Income
Taxes of $-0-) (248,706) --
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (784,334) (72,696)
EXTRAORDINARY ITEM:
Gain on Extinguishment of Debt (Net of Income Tax of $-0-) 22,425 --
----------- -----------
NET LOSS $ (761,909) $ (72,696)
=========== ===========
NET LOSS PER SHARE:
Loss from Continuing Operations $ (0.08) $ (0.02)
Loss from Discontinued Operations (0.07) --
Loss on Disposal of Business Segment (0) --
----------- -----------
Loss Before Extraordinary Item (0.22) (0.02)
Extraordinary Item 0.01 --
----------- -----------
Net Loss $ (0.21) $ (0.02)
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 3,647,142 3,590,244
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
PACESETTER OSTRICH FARM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
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
Issuance of 75,000 Shares 75 -- -- 75
Net Loss -- -- (761,909) (761,909)
------- ----------- ----------- --------
BALANCE, December 31, 1997 $ 3,665 $ 3,779,217 $(3,731,663) $ 51,219
======= =========== =========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
PACESETTER OSTRICH FARM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended
December 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (761,909) $ (72,696)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation 133,331 142,594
Loss on Retirement or Write-Down of Assets 282,887 14,726
(Increase) Decrease in Accounts Receivable, Net 51,740 (62,334)
Decrease in Livestock Inventory 143,508 (26,098)
Gain on Sale of Property and Equipment (34,181) --
Decrease in Other Current Assets -- 9,733
Acquisition of Trading Securities -- --
Loss on the Expiration of Trading Securities -- --
Increase (Decrease) in Accounts Payable and Accrued Liabilities (22,871) 3,881
Increase in Borrowings from Stockholders 6,648 16,357
---------- ----------
Net Cash Provided by (Used in) Operating Activities (200,847) 26,163
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES;
Acquisition of Property and Equipment (5,129) --
Proceeds from Sale of Property 114,181 --
---------- ----------
Net Cash Provided by Investing Activities 109,052 --
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock -- --
Proceeds from Issuance of Long-Term Debt 150,000 --
Repayment of Notes Payable (58,205) (26,163)
---------- ----------
Net Cash Provided by (Used in) Financing Activities 91,795 (26,163)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR -- --
---------- ----------
CASH AND CASH EQUIVALENTS -- END OF YEAR $ -- $ --
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid During the Year for:
Interest $ 23,015 $ 34,446
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTES A
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 entries
under common control in a manner similar to a pooling of interests.
The Company was formerly a breeder of ostriches with sales
primarily to foreign breeder markets in 1997. During 1997, this
business segment was discontinued and the ostrich inventory and related
property and equipment was sold (see Note J).
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 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 CASH EQUIVALENTS
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at their estimated net
realizable value. There were write-offs of $7,682 and $14,023 affecting
bad debt expense during 1997 and 1996, respectively.
LIVESTOCK INVENTORY
The Company's inventory, included in net assets of
discontinued operations during 1997, is valued at the lower of cost
(under the specific identification method) or market and consists of
live ostriches. During 1997, due to a significant deterioration in the
ostrich market, the Company recorded a provision of approximately
$235,877 for the decline in market value of ostriches in inventory.
DEPRECIATION
Depreciation is computed using the straight-line method for
financial reporting purposes over the estimated useful lives of the
respective assets which range from five to thirty years. Depreciation
charged to operations for the years ended December 31, 1997 and 1996
amounted to $133,331 and $142,594, respectively.
44
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTES A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
For income tax reporting, the Company uses accounting methods
that recognize depreciation on an accelerated basis for property and
equipment. As a result, the basis for property and equipment for
financial reporting exceeds its tax basis by the cumulative amount that
accelerated depreciation exceeds straight-line depreciation. These and
other temporary differences have been accounted for under the
provisions of Statement of Financial Accounting Standards No. 109.
REVENUE
Ostrich revenue is recognized as ostriches are sold and
delivered. The Company made foreign sales of $778,773 and $575,000 in
1997 and 1996, respectively. Boarding and hauling fees are recognized
as other operating revenue as due and totalled approximately $380,000
in 1996.
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.
NON-DIRECT RESPONSE ADVERTISING
The Company expenses advertising costs as incurred. Advertising
expense charged to operations totaled $263 and $254 for the years
ended December 31, 1997 and 1996, respectively.
NOTE B
FINANCIAL AND OPERATING CONSIDERATIONS
The Company has incurred substantial operating losses in 1992
through 1997. 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 at December 31,
1997 and 1996 are $391,899 and $450,104, respectively, in notes payable
which are in default (see Note E) 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. As a result, there is substantial doubt
about the ability of the Company to continue as a going-concern. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
45
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C
PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
1997 1996
--------- ----------
Land $ 27,000 $ 144,727
Buildings and Improvements 18,370 1,059,188
Equipment 55,276 396,687
Vehicles 33,799 60,447
--------- ----------
Total 134,445 1,661,049
Less: Accumulated Depreciation 83,820 550,383
--------- ----------
Property and Equipment, Net $ 50,625 $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
$282,887 in 1997 for the write-off and retirement of fixed assets,
which was not directly associated with this adoption.
NOTE D
TRANSACTIONS WITH RELATED PARTIES
In July 1993, the Company entered into a note receivable for
$42,400 with a significant stockholder. The note bears interest at 8%
per annum, and has no specified maturity date.
The Company leases certain property in Folsom, Louisiana, on a
month to month basis, from a major stockholder, on which a portion of
the Company's operations is located. Total rent paid for December 31,
1997 and 1996 was $8,400, respectively.
Advances from stockholders primarily consist of Company
expenses paid by two major stockholders. These advances are
non-interest bearing with no specified maturity date.
46
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E
NOTES PAYABLE
A summary of outstanding notes payable at December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Private Placement Notes Payable
(See Description Below) $384,263 $425,735
Notes payable for equipment purchase; 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 7,636
Line of Credit - Bank; Interest at 9%; Interest payable
monthly; Due March 30, 1999; Secured by second mortgage
from a major shareholder and guaranteed by two major
shareholders. 150,000 --
Note Payable for vet clinic purchase; Interest at
8%; Monthly payments of principal and interest;
No specified maturity date. -- 16,733
-------- --------
$541,899 $450,104
======== ========
</TABLE>
In late 1991, the Company commenced a private placement to
accredited investors, which offers 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
offers. 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.
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, 1997, principal of $384,263 was still outstanding.
As a result, the Company is in default on these notes.
Following are maturities of long-term debt:
December 31,
------------
1998 $541,899
========
47
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F
INCOME TAXES
The reconciliation of the Federal statutory tax rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory Tax Rate 34% 34%
State Taxes 3 3
Benefit from NOL Carryforward not Recognized (37) (37)
--- ---
Effective Tax Rate 0% 0%
=== ===
</TABLE>
Cumulative deferred taxes consist of the following temporary
differences at an estimated effective Federal and state tax rate of
37%.
<TABLE>
<CAPTION>
1997 1996
------------ --------
<S> <C> <C>
Deferred Tax Liabilities: $ -- $ (30,500)
------------ ---------
Deferred Tax Assets:
Net Operating Loss Carryforward 1,023,535 846,857
Accounts Receivable Allowance 17,613 -
Inventory Basis - 211,640
Property and Equipment 74,718 64,106
Less: Valuation Allowance (1,115,866) (1,092,103)
------------ -----------
Deferred Tax Assets -- --
------------ ----------
Total Deferred Taxes $ -- $ --
============ ==========
</TABLE>
At December 31, 1997, the Company had, for tax reporting
purposes, operating loss carryforwards of approximately $2,766,310
which expire in 2007 through 2014.
The Company has generated losses from operations in 1992
through 1997. 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 assets.
48
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G
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.
Clemons (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. Clemons,
at $0.75 per share. The 40,000 options issued to Dr. Wade and Mr.
Clemons 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, 1997
and 1996 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year 114,500 $ 0.92 138,500 $ 0.89
Granted 21,000 0.15 -- --
Exercised -- -- -- --
Forfeited -- -- (24,000) 0.75
------- ------ ------- ------
Outstanding at End of Year 135,500 $ 0.80 114,500 $ 0.92
======= ====== ======= ======
Options Exercisable at Year End 135,500 $ 0.80 114,500 $ 0.92
======= ====== ======= ======
Weighted Average Fair Value of
Options Granted During the Year $ 0.15 $ --
======= ========
</TABLE>
49
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G
INCENTIVE STOCK OPTION PLAN (Continued)
The Company applies APB Opinion 25 in accounting of 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:
1997 1996
--------- --------
Net Loss as Reported Pro Forma $(767,112) $(77,797)
========= ========
Loss Per Share as Reported Pro Forma $ (.21) $ (.02)
========= ========
For purposes of the above computation, compensation cost was
estimated using the Black-Scholes model with the following assumptions
for 1995 and 1997: 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.
NOTE H
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 underwriter's warrants and the
warrant stock for sale.
In 1997, the Company issued 75,000 shares of stock in exchange
for legal services.
NOTE I
COMMITMENTS AND CONTINGENCIES
The Company is subject to the possibility of litigation in the
ordinary course of business. The Company is not aware of any matters,
which would have a significant impact on its financial condition or
results of its operations.
50
<PAGE>
PACESETTER OSTRICH FARM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE J
DISCONTINUED OPERATIONS
During 1997, the Company sold substantially all of the assets
of its ostrich breeding segment. These assets consisted primarily of
property and equipment and livestock inventory. Net assets sold, at
their net realizable values, have been separately classified in the
accompanying balance sheet at December 31, 1997.
As described in Note C, property and equipment were written
down to fair value, resulting in a $282,887 charge to operations in
1997. Sale of property and equipment netted proceeds of $114,181 in
1997, resulting in a gain in 1997 on the sale of assets of $34,181.
As described in Note A, livestock inventory was adjusted to
fair value in 1997, resulting in a $235,877 charge to operations in
that year. Revenue generated from livestock sales totaled $778,773 and
$831,964 for the years ending December 31, 1997 and 1996, respectively.
NOTE K
TROUBLED DEBT RESTRUCTURING
Due to the severe cash flow problems, the Company issued
75,000 shares of the Company's $.001 par value stock in exchange for a
payable for legal services totaling $22,500 in 1997. This transaction
resulted in an extraordianry gain of $22,425 ($.01 per share), net of
income tax of $-0-.
51
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 77,781
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 849,845
<DEPRECIATION> 0
<TOTAL-ASSETS> 970,299
<CURRENT-LIABILITIES> 919,080
<BONDS> 0
0
0
<COMMON> 3,665
<OTHER-SE> 47,554
<TOTAL-LIABILITY-AND-EQUITY> 970,299
<SALES> 920,084
<TOTAL-REVENUES> 920,084
<CGS> 673,024
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 614,212
<LOSS-PROVISION> 489,062
<INTEREST-EXPENSE> 23,015
<INCOME-PRETAX> (295,272)
<INCOME-TAX> 0
<INCOME-CONTINUING> (295,272)
<DISCONTINUED> (489,062)
<EXTRAORDINARY> 22,425
<CHANGES> 0
<NET-INCOME> (761,909)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
