<PAGE>   1





                    U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                  FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                                     1934

For the fiscal year ended: OCTOBER 31, 1996    Commission file number: 33-75432C
                          -----------------                           ----------

                         UNITED MARKET SERVICES COMPANY    
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

            DELAWARE                                   41-1642910    
--------------------------------------    --------------------------------------
   (State or other jurisdiction of        (IRS Employer Identification Number)
   incorporation or organization)        

            14500 BURNHAVEN DR-STE 141 BURNSVILLE, MINNESOTA  55337
                    (Address of principal executive offices)

                                  612/435-7788         
                          --------------------------
                          (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:
                                      NONE
                                    -------
         Securities registered under Section 12(g) of the Exchange Act:
                                      NONE
                                    -------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
 period that the issuer was required to file such reports), and (2) has been
          subject to such filing requirements for the past 90 days:
                               YES   X   NO
                                  ------    -----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
 the best of the registrant's knowledge, in definitive proxy or information
    statements incorporated by reference in Part III of this Form 10-KSB
                    or any amendment to this Form 10-KSB:
                                       X  
                                      ----
            State issuer's revenues for its most recent fiscal year:
                                   $7,247,399
                                   ----------
 State the aggregate market value of the voting stock held by non-affiliates of
                    the registrant as of January 13, 1997:
                                      NONE
                                      ----
  The number of shares outstanding of each of the issuer's classes of capital
                                  stock as of
                             January 13, 1997 was:
              4,717,608 SHARES OF COMMON STOCK ($0.001 PAR VALUE)
             ----------------------------------------------------
                    DOCUMENTS INCORPORATED BY REFERENCE:Non
             Transitional Small Business Issuer Disclosure Format:
                               YES       NO   X  
                                   -----    -----
<PAGE>   2
                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                                                          <C>
PART I, ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3 
    General   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3 
    Industry Overview   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3 
    Livestock Marketing   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4 
    Employees   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5 
    Competition   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6 
    Regulation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6 
    Discontinued Operations   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6 
                                                                                                                               
PART I, ITEM 2. DESCRIPTION OF PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7 
                                                                                                                               
PART I, ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8 
                                                                                                                               
PART I, ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8 
                                                                                                                               
PART II, ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .   8 
                                                                                                                               
PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  . . . . . . . . . . . . . . . . . . . . . . . .   9 
    Summary Consolidated Financial Information  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   9 
    Operating Results for the Years ended October 31, 1995 and 1996   . . . . . . . . . . . . . . . . . . . . . . . . . . .   9 
    Operating Results for the Years ended October 31, 1994 and 1995   . . . . . . . . . . . . . . . . . . . . . . . . . . .  11 
    Seasonality   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12 
    Liquidity and Capital Resources   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 
                                                                                                                               
PART II, ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15 
    Report of Independent Public Accountants  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15 
    Consolidated Balance Sheets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16 
    Consolidated Statements of Operations   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17 
    Consolidated Statements of Stockholders' Deficit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18 
    Consolidated Statements of Cash Flows   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19 
    Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20 

PART II, ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  . . . . . . . . . . . 24
                                                                                                                  
PART III, ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS  . . . . . . . . . . . . . . . . . . . . . . 25
                                                                                                                  
PART III, ITEM 10. EXECUTIVE COMPENSATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
    Executive Compensation   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
    Compensation Plans   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
    Employment Agreements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
                                                                                                                  
PART III, ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  . . . . . . . . . . . . . . . . . . . . . 29
                                                                                                                  
PART III, ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
                                                                                                                  
PART III, ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
                                                                                                                  
SIGNATURES   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
   PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS  . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>





                                       2
<PAGE>   3

                    PART I, ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

    United Market Services Company ("United" or the "Company") is a livestock
marketing company headquartered in Minnesota.  The Company owns and operates
five public livestock markets ("stockyards") located in Sioux Falls, South
Dakota: Sioux City, Iowa: Omaha, Nebraska: St. Joseph, Missouri; and Milwaukee,
Wisconsin.  The Company's stockyards include four of the eight such markets
that provide price and volume information for the daily report published by the
Agricultural Marketing Service of the U.S. Department of Agriculture (the
"USDA").  The Company was formed in 1989.

    The five stockyards operated by the Company provide the services and
facilities required to operate an independent market for sale of livestock.  In
addition, the stockyards sell feed and bedding and provide other services,
including truck washing and purebred sales for producer organizations.
Stockyard services and facilities include veterinary facilities, auction
arenas, auctioneers, weighmasters, and scales, feed and bedding and personnel
to safeguard livestock.  The livestock handled by the stockyards include
cattle, hogs, and to a lesser degree, sheep.  The Company receives yardage fees
for each head of livestock handled through its facilities.  These fees vary
depending upon the type of animal, the extent of services provided by the
stockyard and local competition.  Yardage revenues are not directly dependent
upon market prices, but rather are dependent upon the volume of livestock
handled.

    Due to, in part, unfavorable market conditions in the cattle industry, the
Company is currently experiencing severe financial strain.  The Company
retained the services of Business Consultants, Inc. to serve as the Company's
Chief Executive Officer and to assist the Company through the current financial
difficulties.  The Company has begun exiting its cattle financing business and
has reduced overhead expenses by reducing personnel.  In addition, the Company
defaulted on the interest payment due to its Noteholders on September 1, 1996,
and December 1, 1996 and is in default of the Net Worth Covenant under the
Indenture.

    The Company's current financial situation raises substantial doubt about
the Company's ability to continue as a going concern.  For the fiscal year
ended October 31, 1996, the Company experienced losses of approximately $4.9
million.  Subsequent to October 31, 1996, the Company made a settlement and
exchange offer to the bondholders to accept $331 in cash and the option to
receive 717 shares of the Company's common stock for each $1,000 outstanding
note.  As of January 15, 1997, over 97% of the bondholders have accepted the
offer. See Management's Discussion and Analysis or Plan of Operation -
Operating Results for the Years ended October 31, 1995 and 1996 - Subsequent
Events.

    Stockyard livestock volume is dependent upon the general conditions
affecting livestock production and upon commission companies which operate at,
but are independent of, the stockyards.  The Company seeks to offset the
adverse effect of the decline in the stockyard usage for marketing slaughter
livestock by providing additional stockyard services.  The Company promotes its
stockyard business through public relations efforts, advertising and personal
solicitation of producers.  In addition, the Company provides incentives to
commission companies and operates its own commission companies.

    The Company previously provided cattle financing to its customers.  The
Company's financing customers have primarily been the smaller farmers - the
ones who have been unable, due to their smaller volume, to obtain financing
from traditional sources.  High corn prices and low cattle prices have forced
some of the Company's customers to declare bankruptcy or to go out of business.
Consequently, the Company has determined that this is not an opportune time to
be engaged in the cattle financing business and has sought to reduce its
exposure by discontinuing the cattle financing business.  This also provides an
opportunity for the Company to reduce its corporate overhead expenses.  The
Company is now in the process of exiting its cattle financing operations and
closing its cattle financing contracts.  The Company has already terminated the
majority of such contracts and expects to discontinue its cattle financing
operations completely by February 15, 1997.

INDUSTRY OVERVIEW

    The livestock marketing business has many participants, with operations
ranging from local auction barns and small livestock dealers that specialize in
a particular species or breed to large full-line livestock dealers and
centralized public stockyards.   Stockyards charge a yardage fee on all
livestock using the facility.  Actual marketing transactions at a stockyard are
managed for livestock producers by independent commission companies to which
livestock are consigned.  These firms receive commissions from the seller upon
settlement of a transaction and the stockyard is paid the day after the sale.





                                       3
<PAGE>   4

              PART I, ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)

INDUSTRY OVERVIEW (CONTINUED)

    The advent of modern communications technologies, however, has made it
possible for many marketing transactions to occur away from the stockyards.
Today, many animals are bought and sold by telephone, video auction or over
computer networks, minimizing the need for costly transportation to a central
facility prior to sale.  As a result, stockyards continue to function as
centers of trade but are no longer the primary method of livestock exchange and
many farmers are reevaluating their reasons for doing business with a
stockyard.  The current trend is for larger farmers and feedlots to market
their cattle directly to the packing houses, rather than taking their cattle to
a stockyard.  Smaller farmers who are unable to go directly to the packing
houses due to their small volume, have continued to use stockyards.

    External market forces have forced many smaller farmers out of business
and many larger producers to improve operating efficiencies.  At times more
than $5.00 per bushel, the price of corn rose to an all-time high last summer.
At the same time, cattle prices have been depressed due to a record supply in
all kinds of meat products.  In addition, the U.S. government has discontinued
certain farm support programs which existed in the past.  Although there are
indications in the market that unfavorable price trends have slowly started to
recover, much of the damage has been done.

LIVESTOCK MARKETING

    The Company operates five of the 14 major stockyards in the United States,
including four of the eight providing price and volume information for the
daily report published by the USDA's Agricultural Marketing Service. The
Company's public livestock markets are located in Sioux Falls, Sioux City,
Omaha, St. Joseph, and Milwaukee.

    The livestock handled by the Company's stockyards include cattle, hogs, and
sheep. The Company's stockyards provide all services and facilities required to
operate an independent market for the sale of livestock, including veterinary
facilities, auction arenas, auctioneers, weighmasters and scales, feed and
bedding, and security personnel. In addition, the stockyards provide other
services including truck washing and purebred sales for producer organizations.
The Company promotes its stockyard business through public relations efforts,
advertising, and personal solicitation of producers.

    Some marketing transactions at a stockyard are managed for livestock
producers by independent commission companies to which livestock are consigned
for sale. These firms receive commissions from the seller upon settlement of a
transaction and the stockyard receives a yardage fee on all livestock using the
facility which is paid the day after the sale. As of January 22, 1997, 34
commission companies, including three owned by the Company, operated at the
Company's stockyards. Yardage fees vary depending upon the type of animal, the
extent of services provided by the stockyard, and local competition. Yardage
revenues are not directly dependent upon market prices, but rather are a
function of the volume of livestock handled. In general, stockyard livestock
volume is dependent upon conditions affecting livestock production and upon the
commission companies which operate at the stockyards.





                                       4
<PAGE>   5

              PART I, ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)

LIVESTOCK MARKETING (CONTINUED)

    The following table summarizes the volume of livestock handled by, and the
revenues of, the Company's livestock marketing operations for the periods
indicated.


<TABLE>
<CAPTION>
                                                                                 Years ended October 31,               
                                                                   -------------------------------------------------
                                                                         1994             1995             1996      
                                                                   ---------------- ---------------- ----------------
    <S>                                                            <C>               <C>              <C>
    HEAD OF LIVESTOCK HANDLED:
      Bulls   . . . . . . . . . . . . . . . . . . . . . . . . . .          13,851           11,180            8,441
      Cattle  . . . . . . . . . . . . . . . . . . . . . . . . . .         914,288          728,344          575,645
      Calves  . . . . . . . . . . . . . . . . . . . . . . . . . .          48,198           37,260           32,368
      Hogs  . . . . . . . . . . . . . . . . . . . . . . . . . . .       2,058,485        1,613,318        1,088,919
      Feeder pigs   . . . . . . . . . . . . . . . . . . . . . . .         336,166          246,546          164,055
      Sheep and lambs   . . . . . . . . . . . . . . . . . . . . .         195,610           99,100           96,345
                                                                          -------           ------           ------
        Total   . . . . . . . . . . . . . . . . . . . . . . . . .       3,566,598        2,735,748        1,965,773
                                                                        =========        =========        =========
    LIVESTOCK MARKETING REVENUES:
      Yardage fees:
        Bulls   . . . . . . . . . . . . . . . . . . . . . . . . .        $162,682         $140,541          $97,011
        Cattle  . . . . . . . . . . . . . . . . . . . . . . . . .       4,446,267        3,644,989        2,902,047
        Calves  . . . . . . . . . . . . . . . . . . . . . . . . .         170,772          135,000          110,375
        Hogs  . . . . . . . . . . . . . . . . . . . . . . . . . .       3,021,794        2,545,493        1,810,453
        Feeder pigs   . . . . . . . . . . . . . . . . . . . . . .         330,384          252,385          177,453
        Sheep and lambs   . . . . . . . . . . . . . . . . . . . .         234,350          150,674          155,052
                                                                        ---------        ---------       ----------
          Subtotal  . . . . . . . . . . . . . . . . . . . . . . .       8,366,249        6,869,082        5,052,391
      Other   . . . . . . . . . . . . . . . . . . . . . . . . . .       2,254,466        2,106,289        2,195,008
                                                                        ---------        ---------        ---------
            Total   . . . . . . . . . . . . . . . . . . . . . . .     $10,620,715       $8,975,371       $7,247,399
                                                                      ===========       ==========       ==========
    OTHER DATA:
      Animal marketing units handled (1)  . . . . . . . . . . . .       1,599,803        1,247,873          937,600
      Average yardage fee per animal marketing unit   . . . . . .           $5.22            $5.23            $5.50
</TABLE>

---------------
(1)  The Company defines an "animal marketing unit" to be equal to one
     bull, cow, steer, or heifer, two calves, four hogs or feeder pigs, or
     four sheep or lambs.



EMPLOYEES

    As of January 22, 1997, the Company had a total of 98 full-time and 37
part-time employees. Of its total work-force, one person serves as senior
management and five serve as stockyard general managers.  A total of 133
persons provide livestock marketing services, with 98 serving as hourly
stockyard employees, 13 functioning as supervisors, six serving as order
buyers, and 16 acting as clerical support staff. The Company does not expect to
add any additional livestock marketing personnel in 1997.

    Certain of the Company's hourly stockyard employees are covered by
collective bargaining agreements with the United Food and Commercial Workers
Union. These agreements expired or will expire as follows: May 1995 (Sioux
Falls stockyards), October 1996 (Milwaukee stockyards), June 1997 (St. Joseph
stockyards),  September 1997 (Sioux City stockyards), and August 1998 (Omaha
stockyards). The Company believes its labor relations are satisfactory and the
Company has experienced no work stoppages to date.





                                       5
<PAGE>   6

              PART I, ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)

COMPETITION

    Stockyards continue to function as centers of trade but are no longer the
primary method of livestock exchange and many farmers are reevaluating their
reasons for doing business with a stockyard.  The current trend is for larger
farmers and feedlots to market their cattle directly to the packing houses,
rather than taking their cattle to a stockyard.  Smaller farmers who are unable
to go directly to the packing houses due to their small volume, have continued
to use stockyards.

REGULATION

    The Company's livestock marketing services are regulated under the Packers
and Stockyards Act of 1921 (the "Stockyards Act"). Pursuant to the Stockyards
Act, the USDA has broad authority to prescribe trade practices in the marketing
of livestock. The Company's stockyards are also subject to a variety of
environmental regulations, including principally those related to water
quality. All stockyards operated by the Company are believed to be in
compliance with applicable federal requirements. Each of the Company's
stockyards is also subject to regulation in varying degrees by state and local
livestock and environmental authorities.

In April 1993, the Milwaukee Livestock Market received a notice of non
compliance ("NON") from the Wisconsin Department of Natural Resources ("WDNR").
The NON required that the livestock market submit a waste management plan.
During 1996, the Company conducted additional drilling to determine the depth
and scope of the contaminated plume.  The Company has continued to work with
the WDNR to finalize a mediation plan that is acceptable to the WDNR.  The
final mediation plan is being reviewed by the WDNR and it is expected that the
Company will be investing approximately $200,000 during 1997 to complete
cleanup of the property.  The Company is currently seeking a $200,000 note with
a financial institution that works with the WDNR, wherein the WDNR would
reimburse the financial institution in full (with the exception of the $7,500
deductible payment by the Company) following the completion of mediation.  It
is expected that the remediation plan will be executed and completed in its
entirety by the end of 1997.

DISCONTINUED OPERATIONS

    Brokerage and Livestock Trading.  On October 31, 1994, the Company
announced the discontinuance of its cash cattle and livestock futures brokerage
businesses and the transfer of such businesses to James Potts, a former
executive officer of, and consultant to, the Company. North Central Associates
("North Central") was a division of the Company that bought and sold feeder
cattle for ranchers and feedlot operators as a broker or dealer. United
Commodities Company, a subsidiary of the Company doing business as Great Plains
Commodities ("Great Plains"), provided commodities futures brokerage services
as an introducing broker concentrating on livestock futures contracts. United
Commodities Company was formally dissolved on August 7, 1995.

    Cattle Financing.  The Company previously provided cattle financing to its
customers.  The Company has determined that it is not an opportune time to be
engaged in the cattle financing business and has sought to reduce its exposure
by discontinuing its cattle financing business.  The Company is now in the
process of exiting its cattle financing operations and closing its financing
contracts.  The Company has already terminated the majority of such contracts
and expects to discontinue its cattle financing operations completely by
February 15, 1997.





                                       6
<PAGE>   7

                   PART I, ITEM 2. DESCRIPTION OF PROPERTIES

    The Company leases land and owns facilities at all of its stockyards except
Omaha, where it leases land and facilities. Stockyard facilities are similar
and consist of developed land, paved cattle pens and alleys, auction
facilities, truck loading docks and chutes, hog and sheep barns, water wells,
water and sewer systems, vaccinating facilities, office buildings, and other
related facilities. The Company also leases office space adjacent to each of
its stockyards, except in South St. Paul and leases its headquarters in
Burnsville. The Company believes that all facilities are in good condition for
their intended use, are adequately insured, and are sufficient to meet its
needs for the foreseeable future.

    Except for its Milwaukee location, the Company leases the land and
facilities described above pursuant to a Master Ground Lease which calls for
fixed monthly rents plus an additional annual charge based on the Company's
revenues and net cash flow from stockyard operations. The initial term of the
Master Ground Lease expires in October 1999, with the exception of that portion
related to Omaha. The Milwaukee land lease expired in October 1994 and while
negotiations are proceeding, the Company is paying a monthly rent of $4,479.

    The following table sets forth certain information with respect to the
Company's stockyards properties as of and for the fiscal year ended October 31,
1996.

<TABLE>
<CAPTION>
                                          Net book
                             Acres    value of capital
Stockyard                   leased      improvements      Total rent              Lease expiration and renewal          
----------------------      ------    ----------------  --------------      ------------------------------------------------
<S>                           <C>       <C>              <C>                <C>
South St. Paul (1)            30             $541,841         $360,852          October 1999 with 10 year renewal option
Sioux Falls                   31              491,388          281,070          October 1999 with 10 year renewal option
Sioux City                    24                  -0-          146,790          October 1999 with 10 year renewal option
St. Joseph                    38              130,061          134,280          October 1999 with 10 year renewal option
Omaha                         25                  736           24,000             May 1997 with monthly renewal option
Milwaukee                     13                6,768           53,752        Various months in 1997 with 60 days notice
                             ---           ----------       ----------                                                     
  Total                      161           $1,170,794       $1,000,744
                             ===           ==========       ==========
</TABLE>

---------------
(1) Subject to lease and sub-lease effective May 1, 1995.

    The Company's lease for its Burnsville headquarters space of approximately
700 square feet expires in October 1999. The Company also leases office space
adjacent to the stockyards in Milwaukee (2,600 square feet expiring with 60
days notice), Omaha (3,078 square feet expired in September 1995), Sioux City
(3,640 square feet expiring in October 1997), and St. Joseph (2,854 square feet
expiring in October 1997). Rents paid under all such leases totaled $32,830 in
fiscal 1996, which did not include the Burnsville location.

    As of October 31, 1996, the present value of the Company's future stockyard
and office lease payments was $2,443,602 discounted at 8%. The Company also
operates from office facilities it owns in Sioux Falls (1,250 square feet).

    The Company completed construction of the new hog marketing facility at the
South St. Paul location on July 31, 1995 at a net cost of $336,256. Financing
was provided internally and by the owner of the land underlying the facility.
Together with anticipated expenditures in connection with a renovation of the
sewer system under the market, the Company expects that its share of this
consolidation project will cost approximately $450,000.

    The Company is currently having discussions with Emmber, its landlord at
its Milwaukee location, with respect to construction and operation of a new
facility which Emmber plans to construct in place of the existing yard
facilities.





                                       7
<PAGE>   8

                       PART I, ITEM 3. LEGAL PROCEEDINGS

    During the fiscal year ended October 31, 1996, the Company was a party to
the legal proceedings described below.

    Phillip L. Kunkel, Trustee v. United Market Services Company d/b/a North
Central Associates, Case No. 4-95-274 (Bankr. D. Minn.). On September 13, 1995,
the Trustee in the Chapter 11 bankruptcy proceeding of John D. and Dorothy M.
Morken brought an adversary complaint against the Company seeking to void the
transfer to the Company of approximately 850 cattle involved in the  Chapter 7
bankruptcy proceedings of Spring Grove Livestock Exchange (the "Spring Grove
Bankruptcy") as well as a judgment for the value thereof. The Trustee amended
the complaint to join as a defendant the  trustee in the Spring Grove
Bankruptcy, which answered and asserted a cross-claim against the Company.  A
settlement on this matter was finalized on September 12, 1996, and the
complaint and cross-claim were voluntarily dismissed.

    Orville Molenaar v. United Cattle Company v. Michael J. Frank, Case No.
C2-94-10225 (Minn. D. Ct.). Mr. Molenaar  sued UCC in state court for
conversion of cattle he alleged to own. This action relates to cattle Mr.
Molenaar allegedly placed with Mr. Frank. Mr. Molenaar claims that cattle he
owned were part of the cattle UCC recovered from Mr. Frank pursuant to the
October 11, 1994 replevin orders. UCC filed a third party complaint against Mr.
Frank in this action. On September 14, 1995, a jury determined that UCC
committed conversion and was liable for $59,375 in compensatory damages and
$400,000 in punitive damages. On October 19, 1995, the punitive damages award
was vacated by the court and the compensatory claim was upheld. On December 20,
1995, UCC was granted summary judgment in its third party action against Mr.
Frank for indemnification, and UCC was awarded $59,375 in damages plus $9,000
for attorneys fees.  Mr. Molenaar filed an appeal with the Minnesota Court of
Appeals seeking to overturn the vacating of the punitive damages, and UCC filed
a cross-appeal with respect to the compensatory damage award.  In an order
dated July 30, 1996, the Court of Appeals reversed the trial court's decision
to vacate the punitive damages award and denied UCC's cross-appeal.  The Court
of Appeals remanded the matter to the district court to determine whether the
amount of the jury's punitive damages award was excessive.  On January 15,
1997, the district court held a hearing on that issue, at which time UCC asked
the court to reduce the award to a nominal amount based on UCC's financial
situation.  A decision is expected by April 15, 1997.

      PART I, ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended October 31, 1996.

   PART II, ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    The Company's common stock is not publicly traded. The Company has only one
class of common stock, of which there were 89 shareholders of record as of
January 13, 1997.

    The Company has never paid any cash dividends on its common stock and does
not anticipate making any such distributions in the foreseeable future. The
Company intends to retain future earnings to fund development and growth of its
business. In addition, the Company's previous bank lines of credit limited and
the Indenture governing its remaining subordinated notes limits the Company's
ability to pay dividends on its common stock.





                                       8
<PAGE>   9

   PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

SUMMARY CONSOLIDATED FINANCIAL INFORMATION


<TABLE>
<CAPTION>
                                                                                   Years ended October 31,               
                                                                     ----------------------------------------------
                                                                          1994             1995             1996      
                                                                      ------------     ------------      -----------
    <S>                                                                <C>              <C>              <C>
    STATEMENT OF OPERATIONS DATA:
    Livestock marketing
      Operating revenues  . . . . . . . . . . . . . . . . . . . .       10,620,715        8,975,367        7,247,399
      Direct operating costs and expenses   . . . . . . . . . . .        9,567,223        8,344,294        8,174,579
                                                                        ----------      -----------      -----------
      Operating income (loss)   . . . . . . . . . . . . . . . . .        1,053,492          631,073         (927,180)
    Corporate Costs and expenses  . . . . . . . . . . . . . . . .        1,472,359        2,317,082        3,058,282
      Loss from continuing operations
       before income taxes  . . . . . . . . . . . . . . . . . . .         (418,867)      (1,686,010)      (3,985,462)
      Income tax benefit(expense)   . . . . . . . . . . . . . . .           36,315          550,000         (438,000)
                                                                        ----------      -----------      -----------
      Net loss from continuing operations   . . . . . . . . . . .         (382,552)      (1,136,010)      (4,423,462)
      Net income (loss) from discontinued operations  . . . . . .         (250,844)          37,307         (487,958)
                                                                        ----------      -----------      -----------
      Net loss  . . . . . . . . . . . . . . . . . . . . . . . . .         (633,396)      (1,098,703)      (4,911,420)
        Dividends accrued on Preferred Stock, not paid  . . . . .           78,425           78,425           78,425
                                                                        ----------      -----------      -----------
      Net loss attributable to Common Stock   . . . . . . . . . .        ($711,821)     ($1,177,128)     ($4,989,845)
                                                                        ==========      ===========      ===========
      Net Loss per share attributable to Common Stock   . . . . .           ($0.88)          ($1.45)          ($6.15)
                                                                        ==========      ===========      =========== 
      Weighted average common shares outstanding  . . . . . . . .          811,777          811,777          811,777
                                                                        ==========      ===========      ===========

    OTHER DATA:
    Animal marketing units handled  . . . . . . . . . . . . . . .        1,599,803        1,247,873          937,600

</TABLE>

<TABLE>
<CAPTION>
                                                                                               October 31,            
                                                                                     ------------------------------
                                                                                         1995               1996      
                                                                                     -------------      ------------
    <S>                                                                                 <C>              <C>
    BALANCE SHEET DATA:
    Livestock marketing
      Net assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $3,422,028       $1,784,699
    Corporate
      Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        887,976        2,448,188
      Current liabilities (including current portion of long-term debt)   . . . . .      1,184,954        7,422,939
      Long-term liability, less current maturities  . . . . . . . . . . . . . . . .      6,050,000          280,567
      Preferred stockholders' investment  . . . . . . . . . . . . . . . . . . . . .      3,638,590             --
      Common stockholders' deficit  . . . . . . . . . . . . . . . . . . . . . . . .     (1,267,458)      (2,540,288)
        Net identifiable assets (liabilities)   . . . . . . . . . . . . . . . . . .      2,371,132       (2,540,288)
      Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      9,606,086        5,163,218

</TABLE>


OPERATING RESULTS FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1996

    The net losses incurred over the last three fiscal years, current year
losses of $4.9 million, the negative net worth position of the Company at the
end of fiscal 1996, and the Company's non-compliance with its debt covenants
have created significant uncertainties as to the ability of the Company to
continue as going concern and to finance future operations or to secure
adequate financing to support its future operations.  The accompanying
financial statements assume that the Company will continue as a going concern
and do not include any adjustments that might result should the Company be
unable to continue as a going concern.  See Liquidity and Capital Resources for
further discussion.

    The Company retained the services of Business Consultants, Inc. to serve as
the Company's Chief Executive Officer and to assist the Company through the
current financial difficulties.  The Company has begun exiting its cattle
financing business and has continuously reduced overhead expenses by reducing
personnel.





                                       9
<PAGE>   10


  PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                                  (CONTINUED)

OPERATING RESULTS FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1996 (CONTINUED)

Subsequent Events

    During the fourth quarter of fiscal 1996, the Company informed the
subordinated noteholders that it would not make its quarterly interest payment
due September 1, 1996 and subsequently did not pay the quarterly interest
payment due on December 1, 1996.  The Company has provided the bondholders
disclosures explaining the difficult financial position of the Company.  On
November 14, 1996, the Company made a settlement and exchange offer to the
bondholders to accept $331  in cash and the option to receive 717 shares of the
Company's common stock in exchange for each $1,000 outstanding note and the
forgiveness of all unpaid interest on the debt.  The offer was to expire
December 20, 1996 and was extended to January 15, 1997.  As of January 15, 1997
over 97% of the bondholders have accepted the offer, and of these,
approximately 86% have accepted the option to receive an equity interest in the
Company.

    As a result of this restructuring, the Company has paid to date $1,949,000
in cash, wrote off $404,000 of unamortized deferred financing costs, $240,000
of accrued interest expense and $5,887,000 of its long-term debt.  The Company
also issued to date 3,640,926 shares of common stock, valued at $0.20 per share
and recognized an extraordinary gain on extinguishment of debt of $3,022,000.
The Company has extended the above offer to the remaining 3% of the bondholders
until February 28, 1997, under the same terms and conditions as the original
offer.

    Prior to commencement of the settlement and exchange offer, all holders of
the Company's preferred stock converted their preferred stock into shares of
the Company's common stock.

Livestock Marketing

    Operating Revenues. For 1996, the Company's livestock marketing revenues,
principally yardage and commission revenues, were $7,247,399, down 19.3% from
the $8,975,367 of revenues earned in 1995. This decrease in revenues relates
primarily to  a 24.9% reduction in the number of animal marketing units handled
from 1,247,873 for 1995 to 937,600 for 1996 at the Company's stockyards.

    Direct Operating Costs and Expenses. Operating costs and expenses in the
Company's livestock marketing segment include labor and benefits, operating and
maintenance expenses, depreciation, and unit-level general and administrative
costs. For 1996, these costs and expenses totaled $8,174,579, a decrease of
2.0% from 1995's comparable figure of $8,344,294, reflecting the decreased
volume of business.  Depreciation and impairment expense increased 258.9% from
$443,914 in 1995 to $1,593,088 in 1996, primarily due to additional writedown
of assets at the Milwaukee, Sioux City, and St. Joseph locations, reflecting
reduced estimates of future cash flows from the use of such assets.

    Operating Income (Loss). Overall, as a result of the aforementioned
factors, operating loss from livestock marketing operations of $927,180 in 1996
represented a significant decrease from the $631,073 of operating income in
1995.

Corporate

    Costs and Expenses. Corporate-level costs and expenses include general and
administrative costs, interest expense on the Company's long- term debt, and
amortization of the offering costs associated with such debt. During 1996,
$625,000 (compared to $191,829 in 1995), consisting of an account receivable
and litigation costs associated with the Morken Bankruptcy and Molenaar action,
was charged to general and administrative expense as delays in the resolution
of these cases caused management to doubt the favorable outcome of these
matters.  Additional expenses of $188,563 relating to restructuring expenses
and $350,000 for post-retirement employee benefits was recorded in 1996.  See
"Part I, Item 1. Description of Business - Discontinued Operations" and "Part
I, Item 3. Legal Proceedings".





                                       10
<PAGE>   11

  PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                                  (CONTINUED)

OPERATING RESULTS FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1996 (CONTINUED)

    Corporate costs and expenses totaled $3,058,282 in 1996, up 32% from
$2,317,082 in 1995. Of such total, general and administrative expenses for 1996
accounted for $2,321,792, an increase of 46.8% over the $1,581,931 of such
items reported in 1995. Corporate interest expense totaled $574,875 in 1996,
and 1995.  Amortization expense for 1996 also increased to $161,615 from
$160,276.

    Loss from Continuing Operations Before Income Taxes. Due to the on-going
decline in stockyard volume, the pre-tax loss reported for 1996 from continuing
operations was $3,985,462 compared to a pre-tax loss from continuing operations
of $1,686,010 reported in 1995.

    Income (Loss) from Discontinued Operations. The Company incurred net losses
of $487,958 in 1996 relating to cattle financing compared to 1995 income of
$37,307.  The Company previously provided cattle financing to its customers.
The Company's financing customers have primarily been the smaller farmers - the
ones who have been unable, due to their smaller volume, to obtain financing
from traditional sources.  High corn prices and low cattle prices have forced
some of the Company's customers to declare bankruptcy or go out of business.
Consequently, the Company has determined that this is not an opportune time to
be engaged in the cattle financing business and has sought to reduce its
exposure by discontinuing the cattle financing business.  This also provides an
opportunity for the Company to reduce its corporate overhead expenses.  The
Company is now in the process of exiting its cattle financing operations and is
closing its cattle financing contracts.  The Company has already terminated
the majority of such contracts and expects to discontinue its cattle financing
operations completely by February 15, 1997.

    Income Taxes.  The Company recorded an income tax expense during 1996 of
$438,000 compared to an income tax benefit of $550,000 for 1995.  During 1996,
the Company recorded a valuation allowance due to the uncertainty regarding the
ability to realize certain tax benefits.

    Net Loss Attributable to Common Stock. The net loss reported for 1996 was
$4,911,420, compared to a net loss of $1,098,703 reported in 1995.  Net loss
attributable to the Company's Common Stock is affected by dividends accrued on
its Preferred Stock. The Company's 1994 and 1995 Preferred Stock has no current
dividend requirement. Total dividends of $0.05 per share or $78,425 in
aggregate were accrued on the Preferred Stock in both 1996 and 1995. For 1996,
the net loss attributable to the Company's Common Stock from both continuing
and discontinued operations was $4,989,845 compared to $1,177,128 in 1995.  See
"Subsequent Events."

OPERATING RESULTS FOR THE YEARS ENDED OCTOBER 31, 1994 AND 1995

    In general, the Company's operating results were less than anticipated in
1995 for several reasons.  Cattle market conditions and high feed costs during
the year, particularly during the Company's third and fourth quarters, were the
most difficult in the last 20 years. These factors, coupled with the events
described below and additional operating expenditures incurred to increase
capacity in the discontinued financial service business, caused a sharp
decrease in earnings.

    In 1994, the Company incurred significant losses in its discontinued cattle
brokerage and financial services  business with its largest customers.  In June
1994, John D. and Dorothy M. Morken, and their business, Spring Grove Livestock
Exchange, each filed for bankruptcy protection and the Company filed claims
totaling $344,608 in connection with such event.  Collectively, these parties
were the largest customers of the Company's cash cattle brokerage business and
livestock futures brokerage business.  See Part I, Item 3. Legal Proceedings.

    Separately, in October 1994, the Company discovered that one of its
financial services customers, Mr. Michael J. Frank of Pillager.  Minnesota, had
wrongfully and unlawfully sold certain of the Company's cattle in his
possession to a third party.  On October 11, 1994, the Company obtained a
replevin order from the Minnesota district court and on October 12 and 13,
1994, the Company collected 746 of its 1,362 cattle in Mr. Frank's possession.
See Part I. Item 3, Legal Proceedings.

    The Company did not incur significant cattle financing losses in 1995.





                                       11
<PAGE>   12

  PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                                  (CONTINUED)

OPERATING RESULTS FOR THE YEARS ENDED OCTOBER 31, 1994 AND 1995 (CONTINUED)

Livestock Marketing

    Operating Revenues. For 1995, the Company's livestock marketing revenues
were $8,975,367, down 15.5% from the $10,620,715 of such business recorded in
1994. This decrease related primarily to a 22% reduction in the number of
animal marketing units handled from 1,599,803 for 1994 to 1,247,873 during
1995. During 1995, the volume of animal marketing units handled was adversely
affected by volatile market conditions. While stockyards revenues are not
directly dependent upon market prices, when such prices are changing rapidly,
market participants tend to defer engaging in transactions in the hope of
near-term price movements favorable to their interests.

    Direct Operating Costs and Expenses. During 1995, operating costs and
expenses associated with the livestock marketing business totaled $8,344,298
down 12.8% from $9,567,223 in 1994.  Depreciation of $443,914 was recorded, up
16.8% from 1994's level of $380,024, principally due to the completion of the
hog facility in South St. Paul.

    Operating Income. Overall, the Company earned livestock marketing operating
income in 1995 of $631,073 (7% of revenues), down 40.1% when compared to 1994's
operating income of $1,053,492 (9.9% of revenues).

Corporate

    Total Costs and Expenses. General and administrative expenses for 1995
totaled $2,317,082, an increase of 57.4% over  the $1,472,359 of such costs
reported in 1994. Interest expense on long-term debt totaled $574,875 in 1995,
up 70.9% from $336,297 for 1994. Amortization expense for 1995 increased to
$160,276 from $102,592 in 1994 or by 56.2%.

    Loss from Continuing Operations Before Income Taxes. Due to the decline in
operating income brought about by the market circumstances and events of 1995,
the pre-tax loss reported for 1995 from continuing operations was $1,686,010
compared to pre-tax loss from continuing operations of $418,867 reported in
1994.

    Income Taxes. The Company recorded an income tax benefit from continuing
operations during 1994 of $36,315 based on its pre-tax loss for the period of
$418,867.  In 1995, the Company recorded an income tax benefit of $550,000.

    Income (Loss) from Discontinued Operations.  Income from Financial Services
in 1995 was $37,307, compared to income of $75,865 in 1994 offset by the
discontinued cattle brokerage loss of $326,709.

    Net Income (Loss). The net loss reported from operations for 1995 was
$1,098,703, as compared to a net loss from continuing operations of $633,396
for 1994.

    Net income or loss attributable to the Company's Common Stock is affected
by dividends accrued on its Preferred Stock, 1,568,500 shares of which were
outstanding as of October 31, 1994 and 1995. Total dividends of $0.05 per share
or $78,425 in aggregate were accrued in both 1994 and 1995. For 1995, the net
loss attributable to the Company's Common Stock from both continuing and
discontinued operations was $1,177,128 compared to net loss of $711,821 in
1994.

SEASONALITY

    Quarterly operating results are typically affected by seasonal factors
related to the cattle production cycle. Historically, since the revenues earned
by the Company's livestock marketing business are dependent upon the volume of
animals sold, the Company's first and second quarters are typically the most
profitable, reflecting increased numbers of animals brought to market during
such periods.





                                       12
<PAGE>   13

  PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                                  (CONTINUED)

SEASONALITY (CONTINUED)

    The following table sets forth certain quarterly financial information and
is derived from the unaudited financial statements of the Company which include
all normally recurring adjustments which management considers necessary for a
fair presentation of the results for such periods.


<TABLE>
<CAPTION>
                                                                         Years ended October 31   
                                        -----------------------------------------------------------------------------------------
                                                    1994                         1995                           1996       
                                        ---------------------------   ---------------------------   -----------------------------
                                        Qtr 1   Qtr 2  Qtr 3  Qtr 4   Qtr 1  Qtr 2  Qtr 3   Qtr 4   Qtr 1   Qtr 2   Qtr 3   Qtr 4
                                        -----   -----  -----  -----   -----  -----  -----   -----   -----   -----   -----   -----
                                                               (in thousands of dollars, except animal units)
  <S>                                   <C>     <C>    <C>    <C>     <C>    <C>    <C>    <C>       <C>    <C>    <C>    <C>
   STATEMENT OF OPERATIONS DATA:
   Livestock marketing

     Operating revenues . . . . . . .   2,937   2,803  2,355  2,526   2,856  2,449  1,832   1,838   2,055   1,986   1,653   1,553
     Operating income . . . . . . . .     490     341     74    148     400    163     56      12     205      93      33  (1,258)
   Corporate
     Total costs and expenses . . . .     254     417    409    393     426    704    457     730     518   2,006     806     272
     Net income (loss) from
      continuing operations . . . . .
                                          210     (16)  (199)  (302)     63   (286)  (317)   (559)   (313) (1,913)   (773) (1,530)
     Net income (loss) from
      discontinued operations . . . .
                                          128      57     12   (448)    125     94    (94)    (88)    (14)   (804)     85     245
                                        -----   -----  -----  -----   -----  -----  -----   -----   -----   -----   -----   -----
     Net income (loss)  . . . . . . .
                                          214       4   (204)  (648)     63   (286)  (317)   (559)   (327) (3,155)   (687)   (742)
     Net income (loss) attributable to
      Common Stock  . . . . . . . . .     194     (16)  (223)  (667)     43   (306)  (336)   (578)   (307) (3,174)   (706)   (724)
                                       ======   ===== =====  ======  ======  =====  =====   =====   =====   =====   =====   =====

   BALANCE SHEET DATA:
   Identifiable assets at period end
     Livestock marketing  . . . . . .   4,005   4,089 3,684   3,739   3,816  3,441  3,287   3,422   3,546   3,233   2,211   1,564
     Corporate (1)  . . . . . . . . .   3,453   4,170 5,929   6,036   6,483  5,521  4,564   6,184   5,254   4,073   3,674   3,599
                                        -----   ----- -----   -----   -----  -----  -----   -----   -----   -----   -----   -----
         Total  . . . . . . . . . . .   7,458   8,259 9,613  19,775  10,299  8,962  7,851   9,606   8,800   7,306   5,885   5,163
                                       ======   ===== =====  ======  ======  =====  =====   =====   =====   =====   =====   =====

   OTHER DATA:
   Animal marketing units handled . .     453     423   342     382     409    346    248     245     274     262     212     190
</TABLE>

---------------

(1)  Includes assets of discontinued operations net of associated liabilities.


LIQUIDITY AND CAPITAL RESOURCES

    The following table sets forth, as of the dates indicated, certain balance
sheet items as a percentage of total assets and the percentage increase or
decrease in such items from the prior date.

<TABLE>
<CAPTION>
                                                                                                         

                                                                                     October 31             1995
                                                                               -----------------------       vs.      
                                                                                  1995         1996         1996   
                                                                               ----------   ----------   ----------
    <S>                                                                              <C>        <C>         <C>
    Livestock marketing
      Net identifiable assets   . . . . . . . . . . . . . . . . . . . . . .          35.6%        34.6%       (47.9)%
    Corporate
      Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           9.2         47.4        175.7
      Discontinued Operations   . . . . . . . . . . . . . . . . . . . . . .          43.5         13.9        (82.8)
      Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          64.4         69.7        (41.8)
      Current liabilities, including current maturities   . . . . . . . . .          12.3        143.8        526.4
      Long-term debt, less current maturities   . . . . . . . . . . . . . .          63.0          5.4        (95.4)
    Preferred stockholders' investment  . . . . . . . . . . . . . . . . . .          37.9           --           --
    Common stockholders' deficit  . . . . . . . . . . . . . . . . . . .              (13.2)     (49.2)        100.4
    Net identifiable assets   . . . . . . . . . . . . . . . . . . . . . . .           24.7      (49.2)       (207.1)
</TABLE>

    The Company has no revolving credit facilities.  Due to the recurring
losses, significant uncertainties exist regarding the Company's ability to
obtain revolving credit facilities which it may need to support future
operations.





                                       13
<PAGE>   14


  PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                                  (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

    During the fourth quarter of fiscal 1996, the Company informed the
subordinated noteholders that it would not make its quarterly interest payment
due September 1, 1996 and subsequently did not pay the quarterly interest
payment due on December 1, 1996.  The Company and has provided the bondholders
disclosures explaining the difficult financial position of the Company.  On
November 14, 1996, the Company made a settlement and exchange offer to the
bondholders to accept $331  in cash and the option to receive 717 shares of the
Company's common stock in exchange for each $1,000 outstanding note and the
forgiveness of all unpaid interest on the debt.  The offer was to expire
December 20, 1996 and was extended to January 15, 1997.  As of January 15, 1997
over 97% of the bondholders have accepted the offer, and of these,
approximately 86% have accepted the option to receive an equity interest in the
Company.

    As a result of this restructuring, the Company has paid to date $1,949,000
in cash, wrote off $404,000 of unamortized deferred financing costs, $240,000
of accrued interest expense and $5,887,000 of its long-term debt.  The Company
also issued to date 3,640,926 shares of common stock, valued at $0.20 per share
and recognized an extraordinary gain on extinguishment of debt of $3,022,000.
The Company has extended the above offer to the remaining 3% of the bondholders
until February 28, 1997, under the same terms and conditions as the original
offer.

    Prior to commencement of the Settlement and Exchange Offer, all holders of
the Company's preferred stock converted their preferred stock into shares of
the Company's common stock.

    Management believes that it will be able to restructure the Company's
management and revise operating plans in order to achieve successful future
operations.  There can be no assurances that the Company will be successful in
achieving these initiatives.  If the Company is not successful in meeting these
initiatives, the Company may find it necessary to undertake further actions as
may be appropriate to preserve its business as a going concern.  Presently,
none of the Company's fixed assets are pledged to secure any borrowings.

    On October 31, 1995, the Company's assets aggregated $9,606,086 of which
43.5% related directly to net assets of financial services and 35.6% to
livestock marketing. The balance of 20.9% represented un-allocated corporate
assets.  As of October 31, 1996, assets totaled $5,163,218, of which 13.9% and
34.6% were attributable to the discontinued financial services and livestock
marketing businesses respectively.  The balance of 51.5% was accounted for by
un-allocated corporate assets, principally cash to be used for the subordinated
bond restructure.

    As of October 31, 1995 and 1996, the Company had working capital (current
assets less current liabilities) of $4,571,180 and ($3,862,702) respectively.
As of October 31, 1995 and 1996, the Company's current ratio (current assets
divided by current liabilities) was 4.86x and .48x respectively.

    For the year ended October 31, 1996, the Company generated $1,545,943 of
cash from its operations, principally from the decrease in its investments in
cattle under management within the discontinued financial services business.
The decrease in net assets of discontinued operations between October 31, 1995
and October 31, 1996, principally accounts receivable and inventories,
generated $3,457,930 of cash.

    On October 31, 1995, the Company held a final closing and completed the
offering of its 1995 Preferred Stock at $3.00 per share, raising $1,353,005 of
new capital.





                                       14
<PAGE>   15

                     PART II, ITEM 7. FINANCIAL STATEMENTS

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To United Market Services Company:

    We have audited the accompanying consolidated balance sheets of United
Market Services Company (a Delaware corporation) and Subsidiary as of October
31, 1995 and 1996 and the related consolidated statements of operations,
stockholders' deficit, and cash flows for each of the three years in the period
ended October 31, 1996. 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 United Market Services
Company and Subsidiary as of October 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended October 31, 1996 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 1 to the
financial statements, the Company has suffered recurring losses from operations
and has not negotiated a line of credit agreement.  These matters raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.



                                                            ARTHUR ANDERSEN LLP

Minneapolis, Minnesota
January 23, 1997





                                       15
<PAGE>   16

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                              October 31,            
                                                                                   --------------------------------
                                                                                        1995             1996      
                                                                                   ---------------- ----------------
    <S>                                                                               <C>               <C>
    ASSETS
      Current assets:
        Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $411,197       $2,398,188
        Restricted cash   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        476,779           50,000
        Accounts receivable   . . . . . . . . . . . . . . . . . . . . . . . . . . .        512,510          315,888
        Income tax refunds receivable   . . . . . . . . . . . . . . . . . . . . . .        124,045               --
        Inventories   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         31,535           38,341
        Prepaid expenses and other  . . . . . . . . . . . . . . . . . . . . . . . .         22,834           38,516
        Net assets of discontinued operations (Note 1)  . . . . . . . . . . . . . .      4,177,234          719,304
                                                                                        ----------       ----------
          Total current assets  . . . . . . . . . . . . . . . . . . . . . . . . . .      5,756,134        3,560,237

      Property and equipment:
        Yard improvements   . . . . . . . . . . . . . . . . . . . . . . . . . . . .      5,444,073        5,444,073
        Buildings   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        698,310          698,310
        Machinery and equipment   . . . . . . . . . . . . . . . . . . . . . . . . .        448,862          344,516
        Furniture and fixtures  . . . . . . . . . . . . . . . . . . . . . . . . . .         77,741           57,966
        Less: accumulated depreciation  . . . . . . . . . . . . . . . . . . . . . .     (3,850,835)      (5,374,071)
                                                                                        -----------      ---------- 
          Property and equipment, net   . . . . . . . . . . . . . . . . . . . . . .      2,818,151        1,170,794

      Other assets    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      1,031,801          432,187
                                                                                        ----------       ----------
            Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $9,606,086       $5,163,218
                                                                                        ==========       ==========

    LIABILITIES AND STOCKHOLDERS' DEFICIT
      Current liabilities:
        Current maturities of long-term debt      . . . . . . . . . . . . . . . . .     $       --       $6,050,000
        Checks written not yet presented for payment  . . . . . . . . . . . . . . .         81,434               --
        Accounts payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        773,956          186,825
      Accrued liabilities:
        Litigation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         60,000          585,000
        Other   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        269,564          601,114
                                                                                        ----------       ----------
          Total current liabilities   . . . . . . . . . . . . . . . . . . . . . . .      1,184,954        7,422,939

        Long-term post retirement obligation (Note 2)   . . . . . . . . . . . . . .             --          280,567
        Long-term debt, less current maturities   . . . . . . . . . . . . . . .   .      6,050,000               --
                                                                                        ----------       ----------

      Commitments and contingencies (Notes 1, and 6)  . . . . . . . . . . . . . . .             --               --
      Preferred stockholders' investment (Note 5) :
        Cumulative Redeemable Convertible Preferred Stock, including
         unpaid dividends, $0.001 par value, 1,568,500 shares authorized,
         issued and outstanding   . . . . . . . . . . . . . . . . . . . . . . . . .      2,045,585               --
        Series 1994 Redeemable Convertible Preferred Stock, $0.001 par
         value, 60,000 shares authorized, issued and outstanding  . . . . . . . . .        240,000               --
        Series 1995 Redeemable Convertible Preferred Stock, $0.001 par
         value, 451,000 shares authorized, issued, and outstanding  . . . . . . . .      1,353,005               --
                                                                                        ----------       ----------
          Total preferred stockholders' investment  . . . . . . . . . . . . . . . .      3,638,590               --
                                                                                        ----------       ----------
      Common stockholders' deficit (Note 5):
        Common Stock, $0.001 par value, 10,000,000 shares
         authorized, 811,777 and 2,891,277 shares issued and outstanding  . . . . .            812            2,891
        Additional paid-in capital  . . . . . . . . . . . . . . . . . . . . . . . .        911,688        4,626,624
        Accumulated deficit   . . . . . . . . . . . . . . . . . . . . . . . . . . .     (2,179,958)      (7,169,803)
                                                                                        ----------       ---------- 
          Total common stockholders' deficit  . . . . . . . . . . . . . . . . . . .     (1,267,458)      (2,540,288)
                                                                                        ----------       ---------- 
            Total liabilities and stockholders' deficit   . . . . . . . . . . . . .     $9,606,086       $5,163,218
                                                                                        ==========       ==========

</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets. 





                                       16
<PAGE>   17

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                             For the years ended October 31,           
                                                                   -------------------------------------------------
                                                                         1994             1995             1996      
                                                                   ---------------- ---------------- ----------------
    <S>                                                             <C>                <C>             <C>
    OPERATING REVENUES  . . . . . . . . . . . . . . . . . . . . .     $10,620,715       $8,975,367       $7,247,399
    OPERATING EXPENSES:
      Labor and related costs   . . . . . . . . . . . . . . . . .       3,938,469        3,532,981        2,752,540
      Operating and maintenance costs   . . . . . . . . . . . . .       4,943,077        4,092,170        3,583,040
      Selling, general, and administrative expenses   . . . . . .       1,339,123        1,857,161        2,567,703
      Depreciation and amortization expense   . . . . . . . . . .         482,616          604,190          634,884
      Impairment of long lived assets (Note 2)  . . . . . . . . .              --               --        1,119,818
                                                                      -----------      -----------      -----------
        Total costs and operating expenses  . . . . . . . . . . .      10,703,285       10,086,502       10,657,985
                                                                      -----------      -----------      -----------
    OPERATING LOSS  . . . . . . . . . . . . . . . . . . . . . . .         (82,570)      (1,111,135)      (3,410,586)
    NET INTEREST EXPENSE  . . . . . . . . . . . . . . . . . . . .         336,297          574,875          574,876
                                                                      -----------      -----------      -----------
    LOSS FROM CONTINUING OPERATIONS
      BEFORE INCOME TAXES   . . . . . . . . . . . . . . . . . . .        (418,867)      (1,686,010)      (3,985,462)
      Income tax benefit (expense) (Note 4)   . . . . . . . . . .          36,315          550,000         (438,000)
                                                                      -----------      -----------      -----------
                                                                        
    LOSS FROM CONTINUING OPERATIONS   . . . . . . . . . . . . . .        (382,552)      (1,136,010)      (4,423,462)
    INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
      net of tax benefit of $38,685 in 1994 (Note 1)  . . . . . .        (250,844)          37,307         (487,958)
                                                                      -----------      -----------      -----------

    NET LOSS  . . . . . . . . . . . . . . . . . . . . . . . . . .        (633,396)      (1,098,703)      (4,911,420)
      Dividends accrued on Preferred Stock, not paid  . . . . . .          78,425           78,425           78,425
                                                                      -----------      -----------      -----------
    NET LOSS ATTRIBUTABLE TO COMMON STOCK   . . . . . . . . . . .       ($711,821)     ($1,177,128)     ($4,989,845)
                                                                      ===========      ===========      =========== 

     LOSS PER SHARE:
      Loss from continuing operations   . . . . . . . . . . . . .          ($0.47)          ($1.40)          ($5.45)
      Income (loss) from discontinued operations  . . . . . . . .           (0.31)            0.05            (0.60)
                                                                      -----------      -----------      -----------
        Net loss  . . . . . . . . . . . . . . . . . . . . . . . .           (0.78)           (1.35)           (6.05)
      Dividends accrued on Preferred Stock, not paid  . . . . . .           (0.10)           (0.10)           (0.10)
                                                                      -----------      -----------      -----------
        Net loss attributable to Common Stock   . . . . . . . . .          ($0.88)          ($1.45)          ($6.15)
                                                                      ===========      ===========      =========== 
                                                                       
    COMMON WEIGHTED AVERAGE SHARES OUTSTANDING  . . . . . . . . .         811,777          811,777          811,777
                                                                      ===========      ===========      =========== 
                                                                       
</TABLE>




 The accompanying notes are an integral part of these consolidated statements.





                                       17
<PAGE>   18

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
              FOR THE YEARS ENDED OCTOBER 31, 1994, 1995, AND 1996




<TABLE>
<CAPTION>
                                                                       
                                        Preferred Stockholders'                Common Stockholders' Deficit        
                                             Investment                --------------------------------------------
                                       ------------------------                               Accumu-
                                          Shares        Amount        Shares      Amount    lated Deficit    Total    
                                       ------------   ---------    -----------   ---------- -------------  ---------
    <S>                                  <C>          <C>           <C>          <C>         <C>
    BALANCE, October 31, 1993   . . .     1,568,500   $1,888,735      811,777    $912,500    ($291,009)    $621,491
      Net loss  . . . . . . . . . . .            --           --           --          --     (633,396)    (633,396)
      Series 1994 Redeemable
       Convertible Preferred Stock
       issued   . . . . . . . . . . .        60,000      240,000           --          --           --           --
      Dividends on Cumulative
       Redeemable Convertible
       Preferred Stock    . . . . . .            --       78,425           --           --     (78,425)     (78,425)
                                         ----------   ----------    ---------  ----------  -----------  -----------
    BALANCE, October 31, 1994   . . .     1,628,500    2,207,160      811,777     912,500   (1,002,830)     (90,330)
      Net loss  . . . . . . . . . . .            --           --           --          --   (1,098,703)  (1,098,703)
      Series 1995 Redeemable
       Convertible Preferred Stock
       issued   . . . . . . . . . . .       451,000    1,353,005           --          --           --           --
      Dividends on Cumulative
       Redeemable Convertible
       Preferred Stock    . . . . . .            --       78,425          --           --      (78,425)     (78,425)
                                         ----------   ----------    ---------  ----------  -----------  -----------
    BALANCE, October 31, 1995   . . .     2,079,500    3,638,590      811,777     912,500   (2,179,958)  (1,267,458)
      Net loss  . . . . . . . . . . .            --           --           --          --   (4,911,420)  (4,911,420)
      Dividends on Cumulative
       Redeemable Convertible
       Preferred Stock    . . . . . .            --       78,425           --          --      (78,425)     (78,425)
      Conversion of Preferred to
       Common Stock (Note 5)    . . .    (2,079,500)  (3,717,015)   2,079,500   3,717,015           --    3,717,015
                                         ----------   ----------    ---------  ----------  -----------  -----------
    BALANCE, October 31, 1996   . . .            --           --    2,891,277  $4,629,515  ($7,169,803) ($2,540,288)
                                         ==========   ==========    =========  ==========  ===========  ===========

</TABLE>




 The accompanying notes are an integral part of these consolidated statements.





                                       18
<PAGE>   19

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                        For the years ended October 31,        
                                                                               ---------------------------------------------
                                                                                    1994            1995          1996      
                                                                                ------------   -------------  --------------
    <S>                                                                          <C>           <C>            <C>
    OPERATING ACTIVITIES:
      Net loss  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         ($633,396)    ($1,098,703)   ($4,911,420)
      Adjustments to reconcile net loss
       to net cash provided by (used in) operating activities:
        Depreciation, amortization and impairment expense   . . . . . . .           482,616         604,190      1,754,702
        Change in deferred taxes  . . . . . . . . . . . . . . . . . . . .                --        (438,000)       438,000
        Net cash provided by discontinued operations  . . . . . . . . . .           677,312         269,364      3,457,930
                                                                                 ----------     -----------    -----------
          Operating cash flow before working capital items  . . . . . . .           526,532        (663,149)       739,212
          Changes in operating assets and liabilities:                               
            Accounts receivable   . . . . . . . . . . . . . . . . . . . .           126,397          19,880        196,622
            Income tax refunds receivable   . . . . . . . . . . . . . . .           (45,264)          3,710        124,045
            Inventories   . . . . . . . . . . . . . . . . . . . . . . . .          (310,531)        276,827         (6,806)
            Prepaid expenses and other  . . . . . . . . . . . . . . . . .            50,520          29,466        (15,682)
            Checks written not yet presented for payment  . . . . . . . .          (722,479)       (700,951)       (81,434)
            Accounts payable and accrued liabilities  . . . . . . . . . .          (233,000)        277,260        589,986
                                                                                 ----------     -----------    -----------
                Net cash provided by (used in) operating activities . . .          (607,825)       (756,957)     1,545,943
                                                                                 ----------     -----------    ------------
                                                                                     
    INVESTING ACTIVITIES:                                                            
        Disposals of (additions to) property and equipment  . . . . . . .          (178,459)       (415,949)        14,269
                                                                                 ----------     -----------    -----------
                                                                                     
    FINANCING ACTIVITIES:                                                            
      Decrease (increase) in restricted cash  . . . . . . . . . . . . . .                --        (476,779)       426,779
      Net payments under revolving lines of credit  . . . . . . . . . . .        (1,500,000)             --             --
      Repayment of long-term debt   . . . . . . . . . . . . . . . . . . .        (2,716,597)             --             --
      Proceeds from issuance of long-term debt  . . . . . . . . . . . . .         6,050,000              --             --
      Payment of debt offering costs  . . . . . . . . . . . . . . . . . .          (712,718)        (50,454)            --
      Collection of stock subscriptions receivable  . . . . . . . . . . .                --         240,000             --
      Proceeds from issuance of preferred stock   . . . . . . . . . . . .                --       1,353,005             --
                                                                                 ----------     -----------    -----------
        Net cash provided by financing activities   . . . . . . . . . . .         1,120,685       1,065,772        426,779
                                                                                 ----------     -----------    -----------
                                                                                     
    INCREASE (DECREASE) IN CASH   . . . . . . . . . . . . . . . . . . . .           334,401        (107,134)     1,986,991
      CASH, beginning of year   . . . . . . . . . . . . . . . . . . . . .           183,930         518,331        411,197
                                                                                 ----------     -----------    -----------
      CASH, end of year   . . . . . . . . . . . . . . . . . . . . . . . .        $  518,331     $   411,197    $ 2,398,188
                                                                                 ==========     ===========    ===========
                                                                                     
    CASH PAID (RECEIVED) DURING THE YEAR FOR:                                        
      Interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $  913,384     $ 1,371,610    $   925,906
                                                                                 ==========     ===========    ===========
      Income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . .        $       --          $2,222      ($129,070)
                                                                                 ==========     ===========    ===========
    NON CASH FINANCING ACTIVITY:                                                                                     
      Conversion of preferred stock to common stock   . . . . . . . . . .        $       --     $        --    $ 3,717,015
                                                                                 ==========     ===========    ===========
</TABLE>



 The accompanying notes are an integral part of these consolidated statements.





                                       19
<PAGE>   20

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           OCTOBER 31, 1995 AND 1996

NOTE 1. ORGANIZATION, NATURE OF BUSINESS, AND GOING CONCERN CONSIDERATIONS

    United Market Services Company and Subsidiary ("United" or the "Company")
is one of  the largest livestock marketing companies in the United States.  The
Company operates five major stockyards located in Sioux Falls, South Dakota;
Sioux City, Iowa; Omaha, Nebraska; St. Joseph, Missouri; and Milwaukee,
Wisconsin. The Company's stockyards include four of the eight such markets that
provide price and volume information for the daily report published by the
Agricultural Marketing Service of the United States Department of Agriculture.

    The Company was formed in June 1989, and in October 1989, acquired the
United Stockyards Division of Canal Capital Corporation, ("Canal") a business
with over 100 years of history in livestock marketing.

    Effective October 31, 1994, the Company discontinued the operation of its
cash cattle brokerage division and its livestock futures brokerage business
conducted through United Commodities Company. The accompanying financial
statements reflect these activities as discontinued operations. The financial
statements of prior years have been restated to reflect the discontinuation.
Revenues of these businesses were $1,292,000 for the year ended October 31,
1994.

    Effective October 31, 1996, the Company discontinued its financial services
division operated through United Cattle Company, its wholly owned subsidiary.
The accompanying financial statements have been restated to reflect the
discontinuation.  The net assets of this division are included in the
accompanying balance sheet under the caption "Net assets of  discontinued
operations," and consist primarily of cattle inventory and receivables.  These
balances are expected to be realized in early fiscal 1997 upon expiration of
the remaining financing contracts.  Revenues of the financing division were
$1,594,000, $2,005,000, and $1,135,000 for the years ended 1994, 1995, and
1996.

    During the fourth quarter of fiscal 1996, the Company informed the
subordinated noteholders that it would not make its quarterly interest payment
due September 1, 1996 and subsequently did not pay the quarterly interest
payment due on December 1, 1996.  The Company and the trustee have provided the
bondholders disclosures explaining the difficult financial position of the
Company.  On November 14, 1996, the Company made a settlement and exchange
offer to the bondholders to accept $331  in cash and the option to receive 717
shares of the Company's common stock in exchange for each $1,000 outstanding
note and the forgiveness of all unpaid interest on the debt.  The offer was to
expire December 20, 1996 and was extended to January 15, 1997.  As of January
15, 1997 over 97% of the bondholders have accepted the offer, and of these,
approximately 86% have accepted the option to receive an equity interest in the
Company.

    As a result of this restructuring, the Company paid $1,949,000 in cash,
wrote off $404,000 of unamortized deferred financing costs, $240,000 of accrued
interest expense and $5,887,000 of its long-term debt.  The Company has also
issued, to date, 3,640,926 shares of common stock, valued at $0.20 per share
and recognized a pre-tax extraordinary gain on extinguishment of debt of
$3,022,000.  The Company has extended the above offer to the remaining 3% of
the bondholders until February 28, 1997, under the same terms and conditions as
the original offer.  These transactions have not been reflected in the
accompanying financial statements as of October 31, 1996.

     The accompanying financial statements have been prepared assuming the
Company will continue as a going concern.  The Company has incurred cumulative
net losses of $7,170,000, including net losses for fiscal 1996 of $4,911,000.
During fiscal 1996 the Company was not in compliance with its debt covenants
and significant uncertainties exist regarding the Company's ability to secure
adequate financing to support future operations. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

    Management believes that the restructuring discussed above will enable the
Company to generate cash sufficient to fund operations for the upcoming year.
Although management believes it will be successful in meeting future cash needs
and sustaining successful future operations, there can be no assurances that
the Company will be successful in achieving these initiatives.  If the Company
is not successful in meeting these initiatives, the Company may find it
necessary to undertake further actions as may be appropriate to preserve its
business as a going concern.





                                       20
<PAGE>   21

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation. The consolidated financial statements include the
accounts of United Market Services Company and its subsidiary, United Cattle
Company. All significant intercompany accounts and transactions have been
eliminated in consolidation.

     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 as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Ultimate results could differ from these
estimates.

     Financial Instruments and Concentration of Credit Risk. From time to time,
the Company may sell registered cattle futures contracts, purchase put options,
write call options, or enter into over-the-counter forward contracts for the
purchase of cattle to hedge its exposure to price changes. The results of these
hedging transactions become part of the Company's inventory costs. At October
31, 1995, the fair value of such financial instruments was $83,000.  No such
instruments were outstanding at October 31, 1996.

     The Company's stockyards collect yardage fees on a daily basis from bonded
commission firms and, as a result, credit risks associated with the receivables
arising from such activities are not significant.

     Restricted Cash.  Pursuant to the terms of its revolving line of credit
agreement in place at October 31, 1995, certain cash balances of the Company
were periodically restricted.  In 1996, in connection with the Company's
stockyard operations, certain  cash balances of the Company were restricted as
collateral for a letter of credit by the issuing bank.

     Inventories. Inventories at October 31, 1995 and 1996 consisted of cattle
feed.

     Property and Equipment. Property and equipment is stated at cost. Repairs
and maintenance costs which do not significantly extend asset lives are charged
to operations as incurred. For financial reporting purposes, depreciation and
amortization are computed using both accelerated and straight-line methods over
the estimated useful lives of the property and equipment, ranging from 5 to 31
years. For income tax purposes, accelerated methods of calculating depreciation
and amortization are used.  During fiscal 1996, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" which
requires entities to review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  As a result of the Company's financial performance, the
Company analyzed the carrying value of the long-lived assets in its stockyard
division and wrote off impaired assets totalling $1,120,000 in its Sioux City,
Milwaukee, St. Joseph, and Sioux Falls locations.  The fair value of the assets
was determined based on the expected future cash flows from the use of those
assets.

     Other Assets. Other assets include the cost of a covenant not to compete,
which is being amortized on a straight-line basis over 10 years, and
organizational and debt issuance costs, which are being amortized on a straight
line basis over 5 years. Accumulated amortization of all intangible assets was
$526,000 and $688,000 at October 31, 1995 and 1996, respectively.

      Post-Retirement Benefits.  During 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions." This statement applies to all
forms of post-retirement benefits and requires the accrual, during the years
the employees render the necessary service, or during the average remaining
life expectancy of plan participants, of the expected cost of providing those
benefits to employees and their beneficiaries.  During 1996, as a result of the
Company's financial performance, the Company reserved $350,000 to cover the
estimated total cost of these future retirement benefits.





                                       21
<PAGE>   22

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Fair Value of Financial Instruments.    For cash and income tax
receivable, the carrying amounts as reported in the balance sheets approximate
their fair values due to their short maturities. The fair value of the
Company's long-term debt as of October 31, 1995 was $5,613,000 and was
estimated based on quoted market prices for such instruments.  The fair value
of the Company's long term debt at October 31, 1996 was $2,653,000 and was
estimated based on the settlement and exchange transaction as described in Note
1 of these financial statements.

     Loss Per Common Share. Loss per common share is determined by dividing net
loss attributable to Common Stock by the weighted average number of common
shares outstanding.  For 1994, 1995 and 1996, the Preferred Stock, the Series
1994 Redeemable Convertible Preferred Stock (the "1994 Preferred Stock"), the
Series 1995 Redeemable Convertible Preferred Stock (the "1995 Preferred Stock")
and outstanding options are not included in the weighted average share
calculation because such inclusion would be anti-dilutive.

NOTE 3. LONG-TERM DEBT

     Long-Term Debt. In June through September 1994, the Company completed a
public offering and issued 6,050 Investment Units.  Each Investment Unit
consisted of a subordinated note in the principal amount of $1,000 and 67
warrants each to purchase one share of the Company's common stock.  These notes
were due June 1998, 1999, 2000, 2001, but were classified as a current
liability in 1996 as a result of the Company's non-compliance with its debt
covenants.  The warrants are not exercisable until the occurrence of certain
events, and therefore no value has been attributed to them.  Quarterly interest
payments at annual rates of 9%, 9-3/8%, 9-3/4%, and 10% were not made for the
September 1, 1996 and December 1, 1996 due dates.  The Company has provided for
five months of unpaid interest totalling $240,000 under the accrued liabilities
caption in the accompanying financial statements.

     Covenants. Under the Company's long-term debt agreement, the Company is
required to maintain minimum net worth  levels and other financial covenants.
The Company was not in compliance with its debt covenants  as of October 31,
1996.  As mentioned in Note 1, the Company is in the process of restructuring
its long-term debt.

NOTE 4. INCOME TAXES

     The income tax expense (benefit) from continuing operations consisted of
the following:


<TABLE>
<CAPTION>
                                                                                   Years ended October 31               
                                                                       -------------------------------------------
                                                                          1994           1995               1996      
                                                                       ---------       ---------          --------
    <S>                                                                 <C>            <C>                <C>
    Current   . . . . . . . . . . . . . . . . . . . . . . . . . .       ($36,315)      ($112,000)         $     --
    Deferred  . . . . . . . . . . . . . . . . . . . . . . . . . .             --        (438,000)          438,000
                                                                       ---------       ---------          --------
      Total   . . . . . . . . . . . . . . . . . . . . . . . . . .       ($36,315)      ($550,000)         $438,000
                                                                       =========       =========          ========
</TABLE>


     Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                                              1994               1995               1996    
                                                                       ----------------     --------------      ------------
         <S>                                                                <C>              <C>              <C>
         Statutory federal tax rate . . . . . . . . . . . . . . .           (34.0%)          (34.0%)          (34.0%)
         State income taxes, net of federal income tax
          benefit . . . . . . . . . . . . . . . . . . . . . . . .            (4.0%)           (4.0%)           (4.0%)
         Valuation allowance and deferred tax adjustments . . . .            27.0%             4.6%            64.6%
                                                                             -----           -----             ---- 
                                                                             (11.0%)         (33.4%)           26.6%
                                                                             =====           =====             ==== 
</TABLE>


     For 1995 net deferred tax assets consist primarily of net operating loss
carryforwards and depreciation.  During 1996  the Company provided a valuation
allowance against the net deferred tax assets and recorded a valuation allowance
against the tax benefits associated with current operating losses.





                                       22
<PAGE>   23

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. CAPITAL STOCK AND STOCK OPTION PLANS
    On October 31, 1996, all outstanding shares of preferred stock were
converted to common stock on a one for one basis. The following table
summarizes the conversion by class of preferred stock:

<TABLE>
<CAPTION>
                                                                        Number           Original
                                                                        of Shares           Cost
                                                                        ---------           ----
    <S>                                                                 <C>              <C>
    Cumulative Redeemable Preferred Stock   . . . . . . . . . . .       1,568,500        $1,568,500
    1994 Series Redeemable Convertible Preferred Stock  . . . . .          60,000           240,000
    1995 Series Redeemable Convertible Preferred Stock  . . . . .         451,000         1,353,005
                                                                        ---------         ---------
                                                                        2,079,500        $3,161,505
                                                                        =========        ==========
</TABLE>

    Unpaid Cumulative dividends of $555,510 on the cumulative redeemable
preferred stock were not paid and were included in the above conversion.

    Stock Option Plans. On February 15, 1994, the Company's Board of Directors
approved a new stock option plan to be administered by the Compensation and
Stock Option Committee of the Board of Directors which allows for the granting
of options for the purchase of up to 200,000 shares of Common Stock. On October
30, 1995, the Board of Directors increased the number of shares for which
options may be granted to 300,000.  Options may be granted with exercise
periods of between one and ten years and with exercise prices no less than fair
market value on the date of grant.

    During 1994, options for 105,000 shares vesting over five years and
exercisable for a ten year period were granted at an exercise price of $5.30
per share.  During 1995, options for 150,000 shares vesting over four years and
exercisable for a ten year period were granted at an exercise price of $1.50
per share.  During 1996, no options were granted or exercised, and 248,400
shares expired during the year. Total options outstanding were 305,400 at
October 31, 1995, and 57,000 at October 31, 1996.  Options exercisable at
October 31, 1996 totalled 56,300.

NOTE 6. COMMITMENTS AND CONTINGENCIES

    Litigation. The Company is a party to various claims, legal actions, and
other complaints arising in the ordinary course of business. In the opinion of
management, probable losses totalling $400,000 have been provided for in the
financial statements.

    Consulting Agreements. The Company retained the services of Business
Consultants, Inc. as its Chief Executive Officer in May, 1996.  The agreement
provides that Business Consultants, Inc., acting as an independent contractor,
will act as the Chief Executive Officer of the Company through January 31,
1997.  At that time, the agreement will either terminate or be renewed.  The
agreement between the Company and Business Consultants, Inc. provides for a
monthly compensation of $12,000.  In addition, Business Consultants, Inc. is
entitled to a performance based bonus of up to $125,000 on or after January 31,
1997.  The payment and the amount of the bonus depends on the achievement of
certain financial goals of the Company subsequent to October 31, 1996.

    Employee Benefit Plans. The Company has a 401(k) benefit plan for all
eligible employees. Employees can make voluntary contributions to the plan of
up to 10% of their compensation. The Company has agreed to match 100% of the
first 2.5% of compensation which the employee contributes.  The Company may
also make an additional annual contribution at the discretion of the Board of
Directors. Employees vest in Company contributions over a period of five years
of service. The Company charged approximately $58,000 in 1994, $50,000 in 1995,
and $36,000 in 1996 to expense related to the 401(k) plan.

    The Company also has a defined contribution pension plan for all eligible
employees. The Company makes monthly contributions which are specified in the
plan agreement. Employees can make voluntary non-deductible contributions. The
Company's contributions vest over a period of five years of service and qualify
for benefits upon reaching age 62 or completing at least five years of service.
The Company charged approximately $20,000 in 1994, $14,000 in 1995, and $11,000
in 1996  to expense related to this plan.





                                       23
<PAGE>   24

               PART II, ITEM 7. FINANCIAL STATEMENTS (CONTINUED)

                 UNITED MARKET SERVICES COMPANY AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

    Operating Leases. The Company leases land, buildings, office space,
machinery and equipment, and furniture and fixtures pursuant to certain
operating leases. Rent expense, consisting primarily of rents under the
Company's master ground lease with Canal which expires in October 1999, was
approximately $1,289,000 in 1994, $1,234,000 in 1995, and 1,182,00 in 1996.
Minimum future rents by year ending October 31 under non- cancelable leases are
as follows: 1997 - $965,000; 1998 - $940,000; 1999 - $938,000.  The Company has
accrued  $57,000 of unpaid supplemental lease payments due Canal. The Company
leases its stockyard in Milwaukee pursuant to a lease with Emmber Meats
Corporation assigned by Canal in October 1989.  Annual rental payments under
the Milwaukee lease are fixed at approximately $51,000.  Although the Milwaukee
lease expired in 1994, the Company renewed for successive 60-day periods at the
current rent adjusted for inflation.  The Company expects that it will continue
this lease for the foreseeable future.

    Effective May 1, 1995, the Company terminated its operations at the South
St. Paul stockyard and entered into a sub-lease with respect to the Company's
land at such location for an annual rental of $338,000. The term of the
transaction coincides with the base period of the Company's master ground
lease.



       PART II, ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE

    None.





                                       24
<PAGE>   25

 PART III, ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS

DIRECTORS AND EXECUTIVE OFFICERS

    The Company's executive officers, directors, and key employees are as
follows:

<TABLE>
<CAPTION>
    Name                              Age       Position                                                                      
    ------------------------------    ---      ----------------------------------------------------------------
    <S>                               <C>      <C>
    Dean Bachelor                     47       Chief Executive Officer, and Director
    H. Michael Blair                  51       Controller, Assistant Treasurer, and Assistant Secretary
    John Bergstrom                    36       Director
    Gail Tritle                       52       Chairman, Secretary, and Director
</TABLE>

    DEAN BACHELOR has, through Business Consultants, Inc., served as the
Company's CEO and director since May 1996.  He has been President of Business
Consultants, Inc., a Twin Cities based management consulting firm specializing
in turnarounds, bankruptcies and financially difficult situations since 1980.
He or his firm has acted as Chairman, CEO, President and/or CFO for more than
three dozen companies.  Mr. Bachelor is a director of nine other privately-held
companies.

    H. MICHAEL BLAIR has been Controller of the Company since October 1989 and
also serves as the Company's Assistant Treasurer and Assistant Secretary.  He
has also been Treasurer of United Cattle Company since May 1993.  Prior to
joining the Company, Mr. Blair operated a public accounting practice from 1987
to October 1989.

    JOHN BERGSTROM is President of RiverPoint Investments, Inc., a St.
Paul-based investment management and consulting firm.  Prior to forming
Riverpoint in 1995, Mr. Bergstrom was employed for ten years by Cherry Tree
Ventures, a Minneapolis-based venture capital firm, most recently as Vice
President.  He currently serves on the Board of Directors of nine privately
held companies in addition to being a member of the board of the Company.  He
has been a director of the Company since October 1989.  Cherry Tree Ventures is
a stockholder of the Company.

    GAIL TRITLE has been a Director of United Market Services since 1989.  Mr
Tritle served as the Company's President and Chief Executive Officer from 1989
to 1995.  Prior to joining the Company, he served as Executive Vice President
and director of Canal.  Prior to his experience with Canal, he was President of
Central Livestock Association, Inc., a livestock marketing company.

    Directors serve until the next annual meeting of stockholders at which
their successors are elected, or until their resignation, removal or
incapacity.  Executive officers serve indefinite terms which expire when their
successors are appointed, or until their resignation, removal, or incapacity.
Directors receive no compensation from the Company for their services as a
director.

    The Board of Directors has established a Compensation and Stock Option
Committee and an Audit Committee, on which Mr. Bergstrom serves as a member.
The Compensation and Stock Option Committee makes recommendations concerning
executive salaries and incentive compensation for employees of the Company,
subject to ratification of the full Board, and administers the Company's 1994
Long-Term Incentive and Stock Option Plan.  The Audit Committee reviews scope
and results of the audit and other services provided by the Company's
independent public accountants, as well as the Company's accounting principles
and its system of internal controls, and reports the results of their review to
the full Board and to management.





                                       25
<PAGE>   26

                   PART III, ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

    The following Summary Compensation Table contains summary information
concerning the compensation earned during the fiscal years ended October 31,
1996, 1995 and 1994 by the Company's executive officers:


<TABLE>
<CAPTION>
                                                                                                Long-term       
                                         Annual compensation                                    compensation:        All other
                                   ---------------------------------                                    
                                      Fiscal                                                           option        compen-
     Name and principal position      year                Salary                 Bonus             awards (1)        sation (2)
     ---------------------------   --------------     --------------     -----------------     --------------     ----------------
     <S>                                   <C>              <C>                   <C>                 <C>                 <C>
     Gail Tritle (5)                       1996             $128,333                  $--                  --             $3,208
       Chairman                            1995              140,000                   --                  --              3,500
                                           1994              140,000                   --                  --              3,500
                                                                         
     Business Consultants, Inc.            1996              $83,427                   --                  --                 --
       Dean Bachelor (4)                   1995                   --                   --                  --                 --
       Chief Executive Officer             1994                   --                   --                  --                 --
                                                                         
     H. Michael Blair                      1996              $58,500              $10,000                  --             $1,463
       Controller                          1995               58,500                   --                  --              1,463
                                           1994               58,500                   --                  --              1,463
                                                                         
     Craig P. Johns (3)                    1996              $75,833                  $--                  --             $1,896
       President and                       1995                1,000                5,000             150,000                 --
       Chief Operating Officer             1994                   --                   --                  --                 --
                                                                         
     Dana Hansen (5)                       1996              $82,500                  $--                  --             $2,063
       Vice President of                   1995               90,000                   --                  --              2,250
       Livestock Marketing                 1994               90,000                   --               8,500              2,250

</TABLE>
 (1)   In shares of Common Stock.
 (2)   The amounts shown represent contributions by the Company for the
       named executive officers to the Company's 401(k) Plan.
 (3)   Mr. Johns joined the Company as an executive officer on October 30,
       1995.  He resigned as an executive officer as of May 31, 1996.
 (4)   Pursuant to a letter agreement effective May 1996, the Company
       retained the services of Business Consultants, Inc. as its Chief
       Executive Officer.  The agreement provides that Business
       Consultants, Inc., acting as an independent contractor, will act as
       Chief Executive Officer of the Company through 1/31/97.  At that
       time, the agreement will either terminate or be renewed.  The
       agreement between the Company and Business Consultants, Inc.
       provides for a monthly compensation of $12,000.  In addition,
       Business Consultants, Inc. is entitled to a performance based bonus
       of up to $125,000 at January 31, 1997.  The payment and the amount
       of the bonus depends on the achievement of certain financial goals
       of the Company.
 (5)   Mr. Tritle and Mr. Hansen resigned as employees of the Company
       September 30, 1996.





                                       26
<PAGE>   27

             PART III, ITEM 10. EXECUTIVE COMPENSATION (CONTINUED)

EXECUTIVE COMPENSATION (CONTINUED)

     No options were granted during the fiscal year ended October 31, 1996.  In
addition, no options were exercised by the executive officers named in the
Summary Compensation Table during fiscal 1996. The following table summarizes
the number of options held by the executive officers named in the Summary
Compensation Table as of October 31, 1996.

<TABLE>
<CAPTION>
                                                  Number of shares                 Value of un-exercised
                                           underlying un-exercised options          in-the-money options      
                                           -------------------------------    ----------------------------------
    Name                                     Exercisable    Un-exercisable        Exercisable     Un-exercisable
    -------------------------------------  -------------------------------      ---------------   --------------
    <S>                                    <C>              <C>                       <C>             <C>
    Gail Tritle (2)                             20,000                  --                  $--              $--
    Craig P. Johns (1)                              --                  --                   --               --
    Dana Hansen (2)                              5,100                  --                   --               --
    H. Michael Blair                             8,800                 700                   --               --
                         
</TABLE>

---------------------
(1)  Mr. Johns resigned as an executive officer on May 31, 1996.
(2)  Mr. Tritle and Mr. Hansen resigned as employees of the Company
     September 30, 1996.

    No values have been provided in the table above, because the exercise price
of the options substantially exceeded the estimated market value per share for
the Company's common stock.

COMPENSATION PLANS

    1994 Long-Term Incentive and Stock Option Plan. In February 1994, the Board
of Directors and the stockholders of the Company adopted the 1994 Long-Term
Incentive and Stock Option Plan (the "1994 Plan") to provide for the granting
of stock options, stock appreciation rights, restricted stock awards, and
performance awards to officers, directors, employees, consultants, and
independent contractors of the Company and its subsidiaries. The 1994 Plan is
administered by the Compensation and Stock Option Committee of the Board of
Directors (the "Committee"). The Committee has discretion to select the
recipients of options and awards and to establish the terms and conditions of
each option and award, subject to the provisions of the 1994 Plan and the
applicable provisions of the Internal Revenue Code. Options and awards granted
under the plan are nontransferable except by will or by the laws of descent and
distribution, and are subject to various other conditions and restrictions.
Initially, the Company reserved 200,000 shares of its Common Stock for issuance
under the 1994 Plan and on October 31, 1995, the Board of Directors increased
such amount to 300,000 shares.
    The 1994 Plan provides for the granting of both incentive stock options
intended to qualify for preferential treatment under Section 422 of the
Internal Revenue Code of 1986, as amended ("incentive options"), and
non-qualified options that do not qualify for such treatment ("non- statutory
options"). The option price of an incentive option granted under the 1994 Plan
must not be less than the fair market value of the Company's Common Stock on
the date of the grant, and the term of an incentive option must not exceed ten
years. For an incentive option granted under the 1994 Plan to an optionee who
owns capital stock representing more than 10% of the voting rights of the
capital stock of the Company and its subsidiaries, however, the option price
must be at least 110% of the fair market value of the Company's Common Stock on
the date of the grant, and the term must not exceed five years. Incentive
options may only be granted to full-time or part-time employees of the Company
and its subsidiaries, including officers and directors.

    Stock appreciation rights ("SARs") may be granted under the 1994 Plan at
the time of grant of an option or award under the 1994 Plan, or at any other
time. Any such SAR may be exercised subject to restrictions set forth in an
agreement representing such SAR and approved by the Committee. The SAR exercise
amount may be paid in cash, shares of the Company's Common Stock, or a
combination thereof. At the time of an award of restricted stock under the 1994
Plan, a restricted period is established for each participant. During the
restricted period, the restricted stock may not be transferred, encumbered, or
sold unless the Committee determines otherwise. The participant, as owner of
such shares, will have the rights of a stockholder, including the right to
receive cash dividends and to vote. Performance awards under the 1994 Plan may
be payable in cash, common shares (including restricted stock), other
securities, other awards, or other property. The value of each award will be
determined by the Committee and will be payable to, or exercisable by, the
holder of the performance award upon his or her achievement of the performance
goals during the performance periods established by the terms of the award.





                                       27
<PAGE>   28

             PART III, ITEM 10. EXECUTIVE COMPENSATION (CONTINUED)

    The 1994 Plan will expire in February 2004, unless the Board of Directors
terminates the 1994 Plan earlier as provided in the 1994 Plan. No option or
award may be granted after such termination, but termination of the 1994 Plan
shall not, without the consent of the optionee or grantee, alter or impair any
rights or obligations under any option or award previously granted.

    1992 Stock Option Plan. Prior to the adoption of the 1994 Plan, the Company
was authorized to grant stock options to officers, directors, and key employees
of the Company and its subsidiaries under the 1992 Stock Option Plan (the "1992
Plan"). Options granted under the 1992 Plan could be either incentive options
or non-statutory options and could be granted under terms similar to those of
incentive and non-statutory options that may be granted under the 1994 Plan as
described above. Although the Company may not grant any more stock options
under the 1992 Plan, all outstanding stock options granted under the 1992 Plan
(representing 51,000 shares) remain outstanding in accordance with the terms
thereof.

    401(k) Plan. The Company has established a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering certain qualified employees of
the Company over the age of 21. The current 401(k) Plan was adopted in 1992.
Pursuant to the 401(k) Plan, employees may elect to contribute to the current
Plan a maximum of 10% of their compensation up to the statutorily prescribed
annual dollar limit as adjusted each year by the Internal Revenue Service. The
Company provides a matching contribution equal to 100% of the first 2.5% of
such compensation of contributing employees, and the Company has the discretion
to make separate non-matching contributions to all eligible employees. Amounts
contributed by the Company are subject to a schedule providing for vesting over
five years, and are fully vested earlier than five years upon death,
disability, or normal retirement. Amounts paid in fiscal 1994, 1995, and 1996
under the 401(k) Plan to executive officers of the Company are included in the
Summary Compensation Table under the column entitled "All other compensation".

EMPLOYMENT AGREEMENTS

    Messrs. Tritle and Hansen each had employment agreements with the Company.
The agreements with Messrs. Tritle and Hansen were for terms of one year, which
expired September 1996. These agreements were not extended.

    Pursuant to a letter agreement effective May 1996, the Company retained the
services of Business Consultants, Inc. as its Chief Executive Officer.  The
agreement provides that Business Consultants, Inc., acting as an independent
contractor, will act as Chief Executive Officer of the Company through 1/31/97.
At that time, the agreement will either terminate or be renewed.  The agreement
between the Company and Business Consultants, Inc. provides for a monthly
compensation of $12,000.  In addition, Business Consultants, Inc. is entitled
to a performance based bonus of up to $125,000 at January 31, 1997.  The
payment and the amount of the bonus depends on the achievement of certain
financial goals of the Company.





                                       28
<PAGE>   29

    PART III, ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                                  MANAGEMENT

    The following table sets forth, as of January 13, 1997, the number of
shares of the Company's capital stock beneficially owned by: (1) each person
who is known by the Company to beneficially own more than 5% of the Company's
common and common share equivalents; (2) each of the Company's officers named
in the Summary Compensation Table; (3) each director of the Company; and (4)
all officers and directors as a group.

<TABLE>
<CAPTION>
                                                          Number of common and              Percentage of common and
                                                      common share equivalents             common share equivalents
Name and address                                      beneficially owned (1,2)             beneficially owned (1,2)
--------------------------------------------       ---------------------------         -----------------------------
<S>                                                                <C>                                    <C> 
    Cherry Tree Ventures III                                        1,633,224                                  34.6%
      1400 Northland Plaza
      Minneapolis, Minnesota 55431
    Parsnip River Company                                           1,017,637                                  21.6
      4422 IDS Center
      Minneapolis, Minnesota 55402
    Gail Tritle (3)                                                   315,000                                     *
      5720 Smetana Drive, Suite 300
      Minnetonka, Minnesota 55343
    Dana Hansen (4)                                                    61,600                                     *
      7800 Metro Parkway, Suite 300
      Bloomington, Minnesota 55425
    H. Michael Blair (5)                                               16,300                                     *
      14500 Burnhaven Drive, Suite 141
      Burnsville, Minnesota 55337
    John Bergstrom (6)                                                  7,000                                     *
    Business Consultants, Inc.
      (Dean Bachelor)                                                      --                                     *
    All directors and officers as a group
      (three persons)                                                 338,300                                     *
</TABLE>

---------------------------
 *       Less than 1%.
(1)      A "beneficial owner" determined in accordance with the rules of the
         Securities and Exchange Commission possesses sole voting and
         investment power with respect to securities. Shares of common stock
         subject to options or warrants currently exercisable or exercisable
         within 60 days from the date of determination are deemed to be
         outstanding for purposes of computing the percentage of shares
         beneficially owned by the person holding such options or warrants, but
         are not deemed to be outstanding for purposes of computing such
         percentage for any other person. Except as indicated by footnote, each
         person or group identified has sole voting and investment power with
         respect to all common or common equivalent shares shown as
         beneficially owned by them.
(2)      Includes conversion of all of the Company's Preferred Stock, 1994
         Preferred Stock, and 1995 Preferred Stock into common stock.
(3)      The beneficial ownership of the Company's equity securities by Mr.
         Tritle includes 295,000 shares of common stock (less than 1% of common
         stock outstanding) and 20,000 shares of common stock issuable upon
         exercise of options.
(4)      The beneficial ownership of the Company's equity securities by Mr.
         Hansen includes 56,500 shares of common stock and 5,100 shares of
         common stock issuable upon exercise of options.
(5)      The beneficial ownership of the Company's equity securities by Mr.
         Blair includes 7,500 shares of common stock and 8,800 shares of common
         stock issuable upon exercise of options.
(6)      The beneficial ownership of the Company's equity securities by Mr.
         Bergstrom excludes common and common equivalent shares held by Cherry
         Tree, of which Mr. Bergstrom is an affiliate. Mr. Bergstrom disclaims
         beneficial ownership of such shares.


       PART III, ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    None.





                                       29
<PAGE>   30

                      This page intentionally left blank.





                                       30
<PAGE>   31


              PART III, ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

INDEX TO EXHIBITS

  "Part III, Item 12(a) - Exhibits" is submitted as Volume II of this Annual
Report on Form 10-KSB.

<TABLE>
<CAPTION>
       Exhibit                                                                                      Incorporation by reference
       number                         Description of exhibit                                    or location in report     
    ------------        ------------------------------------------------------     ------------------------------------------------
 <S>                                                                                <C>
 Articles of Incorporation and Bylaws
 ------------------------------------

         3.1          Restated Certificate of Incorporation                         See Exhibit 3.1 to the Company's Registration
                                                                                    Statement  on Form SB-2, SEC file no. 33-75432C

       3.1(a)         Certificate  of Amendment of  Certificate of Incorporation,   See Exhibit 3.1(a) to the  Company's Annual
                      filed October 30, 1995                                        Report on  Form 10-KSB for  the  fiscal year 
                                                                                    ended October  31, 1995,  SEC file no. 33-75432C

         3.2          Bylaws, as amended                                            See Exhibit 3.2 to the Company's Registration
                                                                                    Statement  on Form SB-2, SEC file no. 33-75432C

         3.3          Certificate of Designation of 60,000 shares of    1994        See Exhibit 3.3 to the Company's Annual Report
                      Series Redeemable Convertible Preferred Stock ($0.01          on Form 10-KSB for the fiscal year ended October
                      par value) filed December 21, 1994.                           31, 1994, SEC file no. 33-75432C

       3.3(a)         Certificate of Amendment of Designation for 1994 Series       See Exhibit 3.3(a) to the Company's Annual
                      Redeemable Convertible Preferred Stock, filed October 30,     Report on Form 10-KSB for the fiscal year ended
                      1995.                                                         October 31, 1995, SEC file no. 33-75432C

         3.4          Certificate of Designation of 451,000 shares of 1995          See Exhibit 3.4 to the Company's Annual Report
                      Series Redeemable Convertible Preferred Stock ($0.01 par      on Form 10-KSB for the fiscal year ended October
                      value) filed Oct. 30, 1995                                    31, 1995 

 Instruments Defining the Rights of Holders
 ------------------------------------------

         4.1          Indenture (including form of Note)                            See Exhibit 4.1 to  the Company's Registration
                                                                                    Statement on Form SB-2, SEC file no. 33-75432C

         4.2          Warrant Agreement (including form of Warrant)                 See Exhibit 4.2 to the Company's Registration
                                                                                    Statement  on Form SB-2, SEC file no. 33-75432C

         4.3          Deposit Agreement                                             See Exhibit 4.3 to  the Company's Registration
                                                                                    Statement on Form SB-2, SEC file no. 33-75432C

 Material Contracts
 ------------------

        10.1          Amended  Loan  Agreement  dated  February 2,  1995  by  and   See Exhibit 10.1  to the Company's Quarterly
                      between the Company and Norwest Bank South Dakota, N.A.       Report on Form 10-QSB for the  fiscal quarter
                                                                                    ended January  31, 1995, SEC file no. 33-75432C 

       10.1(a)        Note Modification  Agreement  dated  as  of  May  15,  1995   See Exhibit 10.1 to the  Company's Quarterly
                      between  United Market  Services Company  and Norwest  Bank   Report on Form 10-QSB for  the fiscal  quarter
                      South Dakota,  N.A. extending  the  Amended Loan  Agreement   ended  April 30,  1995  SEC file no. 33-75432C
                      dated February 2, 1995 to June 15, 1995.                   

</TABLE>





                                       31
<PAGE>   32

        PART III, ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)

<TABLE>
<CAPTION>
   Exhibit                                                                                Incorporation by reference
   number                       Description of exhibit                                         or location in report                
------------      ------------------------------------------------------        ----------------------------------------------------
   <S>            <C>                                                           <C>
   10.1(b)        Third Addendum to  Amended Loan Agreement dated as  of July    See  Exhibit 10.1 to the Company's Quarterly Report
                  15,  1995   between  United  Market  Services  Company  and    on Form 10-QSB  for the  fiscal quarter  ended  
                  Norwest Bank South Dakota,  N.A. extending the Amended Loan    July 31, 1995, SEC file no. 33-75432C
                  Agreement dated February 2, 1995 to August 15, 1995.          
                                                                                
   10.1(c)        Waiver  letter  dated October  20,  1995,  to Amended  Loan      See Exhibit 10.1(c) to the  Company's Annual
                  Agreement Fourth Addendum dated August 11, 1995                  Report on Form 10-KSB for the fiscal year ended
                  Assignment and  Amendment of  Amended Loan  Agreement dated      October 31, 1995

   10.1(d)        September  14,  1995,  from  Norwest Bank,  SD  to  Norwest      See Exhibit 10.1(d)  to the Company's Annual
                  Agricultural Credit, Inc.                                        Report on Form 10-KSB for the fiscal year ended
                                                                                   October 31, 1995
                     
    10.2          Amended Loan  Agreement  dated  February  2.  1995  by  and      See Exhibit 10.2 to the  Company's Quarterly
                  between  United Cattle  Company  and  Norwest  Agricultural      Report on Form 10-QSB for the fiscal  quarter
                  Credit, Inc.                                                     ended January 31,  1995, SEC file no. 33-75432C
                                                                                
   10.2(a)        Addendum  to Amended Loan Agreement and Security Agreement,      See Exhibit 10.2 to the  Company's Quarterly
                  both  dated  as  of  May 17,  1995,  between  United Cattle      Report on Form 10-QSB  for the  fiscal quarter
                  Company  and Norwest  Agricultural Credit,  Inc., modifying      ended April  30, 1995  SEC file no. 33-75432C
                  the Loan Agreement dated February 2, 1995                     
                                                                                
   10.2(b)        Fourth Addendum  to Amended  Loan  Agreement, dated  as  of      See Exhibit 10.2 to the Company's Quarterly 
                  August 11, 1995, between United Cattle Company and  Norwest      Report  on Form 10-QSB  for the  fiscal  quarter 
                  Agricultural  Credit,  Inc., modifying  the  Loan Agreement      ended  July 31,  1995, SEC file no. 33-75432C
                  dated February 2, 195.                                        

   10.2(c)        Waiver  Letter  dated October  20,  1995,  to Amended  Loan      See Sec. 10.1(c)
                  Agreement  Fourth Addendum  dated  August 11,  1995 by  and   
                  between Company and Norwest Agricultural Credit, Inc.         
                                                                                
   10.2(d)        Waiver letter dated  December 13, 1995,  to Loan  Agreement      See Exhibit 10.2(d)  to the Company's Annual
                  dated February 2,  1995 by and between  Company and Norwest      Report on Form 10-KSB for the fiscal year
                  Agricultural Credit, Inc.                                        ended October 31, 1995
                                                                                
   10.2(e)        Waiver  letter  dated March  14,  1996,  to Loan  Agreement      See Exhibit 10.2 to the  Company's Quarterly   
                  dated February 2, 1995, by and  between Company and Norwest      Report on Form 10-QSB for the fiscal  quarter  
                  Agricultural Credit, Inc.                                        ended January 31,  1996, SEC file no. 33-75432C

   10.2(f)        Fourth  Addendum to  Amended Loan Agreement  dated February      See Exhibit 10.2 to the Company's Quarterly 
                  2, 1995, by  and between Company  and Norwest  Agricultural      Report on Form 10-QSB  for the  fiscal quarter
                  Credit, Inc.                                                     ended  April 30, 1996, SEC file no. 33-75432C
</TABLE>





                                       32
<PAGE>   33


        PART III, ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)


<TABLE>
<CAPTION>
   Exhibit                                                                              Incorporation by reference
   number                    Description of exhibit                                         or location in report                
------------   ------------------------------------------------------        ------------------------------------------------------
  <S>          <C>                                                           <C>
   10.2(g)     Fifth Addendum to Amended  Loan Agreement dated February 2,   See Exhibit 10.2 to the  Company's Quarterly Report on
               1995,  by  and  between Company  and  Norwest  Agricultural   Form   10-QSB  for the fiscal  quarter ended  April 30,
               Credit, Inc.                                                  1996, SEC file no. 33-75432C
                                                                          
                                                                          
   10.2(h)     Fifth Addendum to Amended Loan Agreement dated February  2,   See Exhibit 10.2 to the Company's Quarterly Report on 
               1995,  by  and  between  Company  and Norwest  Agricultural   Form 10-QSB  for the  Fiscal  quarter ended  July 31,
               Credit, Inc.                                                  1996, SEC file no. 33-75432C
                                                                          
   10.2(i)     Sixth Addendum to Amended  Loan Agreement dated February 2,   See Exhibit 10.2 to the Company's Quarterly Report on
               1995,  by  and  between  Company and  Norwest  Agricultural   Form 10-QSB for  the fiscal  quarter  ended July  31,
               Credit, Inc.                                                  1996,  SEC file no. 33-75432C
                                                                          
    10.3       Master Ground  Lease dated  October  27, 1989  among  Canal   See Exhibit  10.7 to the  Company's Registration 
               Capital  Corporation, Omaha  Livestock Market,  Inc., Sioux   Statement on Form SB-2, SEC file no. 33-75432C
               Falls  Stockyards Company, and the Company, as supplemented
               and  amended  by  Letter  Agreement  dated  July  20,  1993
               between Canal Capital Corporation and the Company.         
                                                                          
    10.4       Stockyards  Lease dated  October  27, 1989  by and  between   See Exhibit  10.8 to the  Company's Registration
               Emmber Meats Corporation  (formerly Peck Foods Corporation)   Statement on Form SB-2, SEC file no. 33-75432C
               and Canal  Capital Corporation  as assigned to  the Company
               by  Assignment  and  Assumption  dated   October  27,  1989
               between Canal Capital Corp.                                
                                                                          
   10.4(a)     First  Amendment to  Lease Dated  September 6, 1994  by and   See Exhibit  10.6(a) to the Company's Annual Report on
               between Emmber Foods, Inc. and the Company.                   Form 10-KSB for the  year ended October  31, 1994, SEC
                                                                             file no. 33-75432C

    10.5*      United Market Services Company 1992 Stock Option Plan         See  Exhibit 10.9 to  the Company's  Registration     
                                                                             Statement on Form SB-2, SEC file no. 33-75432C        
                                                                                                                                   
    10.6*      United  Market Services  Company  1994 Long-Term  Incentive   See Exhibit 10.10  to the Company's  Registration     
               and Stock Option Plan                                         Statement on Form SB-2, SEC file no. 33-75432C        
                                                                                                                                   
    10.7*      United Market Services Company 1995  Incentive Compensation   See Exhibit  10.9 to  the Company's Annual  Report on 
               Program                                                       form 10-KSB for the  year ended October 31, 1994, SEC 
                                                                             file  no. 33-75432C                                   
                                                                                                                                   
  10.7(a)*     United Market Services  Company 1996 Incentive Compensation   See Exhibit 10.7(a) to the Company's Annual Report on 
               Program                                                       Form 10-KSB for the fiscal year ended October 31, 1995
                                                                                                                                   
                                                                             
</TABLE>

---------------
*   Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601(a) of Form 10-KSB.





                                       33
<PAGE>   34

        PART III, ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)

<TABLE>
<CAPTION>
   Exhibit                                                                                   Incorporation by reference
   number                       Description of exhibit                                           or location in report       
------------      ------------------------------------------------------        ---------------------------------------------------
   <S>            <C>                                                           <C>
    10.8          Stock  Purchase  Agreement  dated  June  26,  1989  by  and   See Exhibit 10.12  to the Company's Registration 
                  between  the  Company,  Cherry Tree  Ventures  III, Parsnip   Statement on Form SB-2, SEC file no. 33-75432C
                  River Company, Mark Derus,  John C. Bergstrom, Gail Tritle,
                  Dana Hansen,  and Gordon Wilkerson as  amended by Amendment
                  No. 1 to the Stock Purchase Agreement dated  June  26, 1989
                  (the "Stock Purchase Agreement")

   10.8(a)        Amendment,  Waiver,  and  Consent  to  the  Stock  Purchase   See Exhibit  10.10(a) to  the  Company's Annual 
                  Agreement dated December 22, 1994                             Report on Form 10-KSB for the year  ended October
                                                                                31, 1994, SEC  file no. 33-75432C

    10.9*         Employment  Agreement  dated  September  28,  1989  by  and   See Exhibit 10.13  to the Company's  Registration
                  between the Company and Gail Tritle                           Statement on Form SB-2, SEC file no. 33-75432C

   10.10*         Employment  Agreement  dated  September  28,  1989  by  and   See Exhibit  10.14 to the Company's  Registration
                  between the Company and Dana Hansen                           Statement on Form SB-2, SEC file no. 33-75432C

   10.11*         Employment Agreement dated February  3, 1994 by and between   See Exhibit 10.17  to the Company's Registration 
                  the Company and Wiley H. Sharp III                            Statement on Form SB-2, SEC file no. 33-75432C

    10.12         Agreement  dated  September 30,  1994  by  and between  the   See Exhibit 10.14  to the Company's  Annual Report
                  Company  (operating as  Sioux  City  Livestock Market)  and   on  Form 10-KSB for the  year ended October  31,
                  United Food  and  Commercial Workers,  International  Union   1994, SEC  file no. 33-75432C
                  AFL-CIO, CLC, on behalf of Local Union No. 222

    10.13         Agreement  effective  May  15,  1992  by  and  between  the   See Exhibit  10.19 to the Company's  Registration
                  Company   and   United    Food   and   Commercial   Workers   Statement on Form SB-2, SEC file no. 33-75432C
                  International Union, AFL-CIO No. 304A

    10.14         Agreement  dated October 2, 1992 by and between the Company   See Exhibit 10.20 to  the Company's Registration 
                  and United Food  and Commercial Workers  Local 22,  AFL-CIO   Statement on Form SB-2, SEC file no. 33-75432C
                  &CLC

    10.15         Memorandum of Agreement dated  June 7, 1992 by and  between   See Exhibit 10.21  to the Company's  Registration
                  the  Company  and   United  Food  and  Commercial   Workers   Statement on Form SB-2, SEC file no. 33-75432C
                  International Union, AFL-CIO-CLC, Local P-58

    10.16         Agreement dated  November  24,  1993  by  and  between  the   See Exhibit  10.22 to the  Company's Registration
                  Company   and   United    Food   and   Commercial   Workers   Statement on Form SB-2, SEC file no. 33-75432C
                  International Union Local 73A

</TABLE>

---------------
*   Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601(a) of Form 10-KSB.





                                       34
<PAGE>   35

        PART III, ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)

<TABLE>
<CAPTION>
       Exhibit                                                                                 Incorporation by reference
       number                         Description of exhibit                                      or location in report       
    ------------        ------------------------------------------------------      ------------------------------------------------
 <S>                  <C>                                                           <C>
        10.17         Agreement  dated August 24, 1994 by and between the Company   See  Exhibit 10.19 to  the Company's Annual 
                      and Prudential Securities Incorporated                        Report on Form 10-KSB for the year ended October
                                                                                    31, 1994 

 Other Exhibits
 --------------
        21.1          Subsidiaries of the Company                                   See Exhibit 21.1  to the  Company's Registration
                                                                                    Statement on Form SB-2, SEC file no. 33-75432C

</TABLE>

REPORTS OF FORM 8-K

    No reports on Form 8-K were filed by the Company during the fiscal year
ended October 31, 1996.


                                       35
<PAGE>   36

                                   SIGNATURES

    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.

                         UNITED MARKET SERVICES COMPANY


<TABLE>
<S>         <C>                                                 <C>
Dated:      January 27, 1997                                    By:   /s/Dean Bachelor                                     
       --------------------------                                   -------------------------------------------------------
                                                                Dean Bachelor
                                                                Chief Executive Officer
                                                                (Principal Executive Officer)



Dated:      January 27, 1997                                    By:   /s/ H. Michael Blair                                
       --------------------------                                   ------------------------------------------------------
                                                                H. Michael Blair
                                                                Assistant Treasurer and Asst. Secretary
                                                                (Principal Accounting and Financial Officer)
</TABLE>

    In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<S>                                                    <C>
Signature                                              Title                                                   Date                
----------------------------------------------------   ----------------------------------------------------    --------------------


/s/ Gail Tritle                                        Chairman, and Director                                  January 27, 1997
----------------------------------------------------                                                                  
Gail Tritle


/s/ Dean Bachelor                                      Chief Executive Officer, and                           January 27, 1997
----------------------------------------------------   Director                      
Dean Bachelor                                          (Principal Executive Officer)
                                                       

/s/ H. Michael Blair                                   Controller                                            January 27, 1997
-----------------------------------------------------  Assistant Treasurer and Assistant Secretary   
H. Michael Blair                                       (Principal Accounting and Financial Officer)
                                                       


/s/ John Bergstrom                                     Director                                             January 27, 1997
-----------------------------------------------------                                                                 
John Bergstrom
</TABLE>





                                       36
<PAGE>   37

                                   SIGNATURES

    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.

                         UNITED MARKET SERVICES COMPANY


<TABLE>
<S>         <C>                                                 <C>
Dated:      January 27, 1997                                    By:                                                          
       --------------------------                                   ---------------------------------------------------------
                                                                    Dean Bachelor
                                                                    Chief Executive Officer
                                                                    (Principal Executive Officer)



Dated:      January 27, 1997                                    By:                                                          
       --------------------------                                   ---------------------------------------------------------
                                                                    H. Michael Blair
                                                                    Assistant Treasurer and Assistant Secretary
                                                                    (Principal Financial Officer)
</TABLE>

    In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<S>                                            <C>
Signature                                      Title                                                  Date                
-------------------------------------------    ----------------------------------------------------   --------------------



-------------------------------------------    Chairman, and Director                                 January 27, 1997
Gail Tritle


-------------------------------------------    Chief Executive Officer, and                           January 27, 1997
Dean Bachelor                                  Director
                                               (Principal Executive Officer)



-------------------------------------------    Controller, Assistant Treas and Asst Sec.              January 27, 1997
H. Michael Blair                               (Principal Financial and Accounting Officer)


-------------------------------------------    Director                                               January 27, 1997
John Bergstrom

</TABLE>




                                       36
<PAGE>   38

          SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
     PURSUANT TO SECTION 15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

    The Company has not sent, and does not intend to send, an annual report to
security holders covering the Company's last fiscal year.  Further, the Company
has not sent, and does not intend to send, any proxy materials to more than ten
of the Company's security holders with respect to any annual or other meeting
of security holders.





                                       37