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**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-KSB**

 

**ý****     ANNUAL REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended:  December 31, 2003**

 

**o****     TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                  to                  **

 

**Commissionfile number 333-88484**

 

**WESTERN FEED MILLS, INC.**

(Name of small business issuer in its charter)

 
| **KANSAS**                                                     |   | **40-0978853**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **Route 1, Sale Barn Road, PO Box 596, Cedar  Vale, KS 67204** |
| (Address of principal executive offices) (Zip Code)            |

 

Issuer’stelephone number:  **(620) 758-2283**

 

Securitiesregistered under Section 12(b) of the Exchange Act:

 

| **Title of each class** |   | **Name of each exchange on which registered** |
|-------------------------|--------|-----------------------------------------------|
| NONE                    |   |                                          |

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

NONE

 

(Title of class)

 

Check whetherthe issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   ýYes   o No

 

SEC 2337(12-03)

 

**Personswho are to respond to the collection of information contained in this form arenot required to respond unless the form displays a currently valid OMB controlnumber.**

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bis not contained in this form, and no disclosure will be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB.   **ý**

 

State issuer’srevenues for its most recent fiscal year. **3,358,136**

 

State theaggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas sold, or the average bid and asked price of such common equity, as of aspecified date within the past 60 days. (See definition of affiliate in Rule12b-2 of the Exchange Act.)

 

Note: Ifdetermining whether a person is an affiliate will involve an unreasonableeffort and expense, the issuer may calculate the aggregate market value of thecommon equity held by non-affiliates on the basis of reasonable assumptions, ifthe assumptions are stated.

 

There are1,991,276 shares of voting common stock held by non-affiliates.  There is no active market for these sharesby which to reference a market value. The last purchase of shares occurred six months ago in an isolatedtransaction by an affiliate from a non-affiliate at $.08 per share. The current book value of the shares is $.07 per share.  The book value of these 1,991,276 shares is$139,389.32.

 

**(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGSDURING THE PAST FIVE YEARS)**

 

Check whetherthe issuer has filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act after the distribution ofsecurities under a plan confirmed by a court. o   Yes    o   No

 

**(APPLICABLE ONLY TO CORPORATE REGISTRANTS)**

 

State thenumber of shares outstanding of each of the issuer’s classes of common equity,as of the latest practicable date.

 

**5,842,596 shares of common stock**

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

If thefollowing documents are incorporated by reference, briefly describe them andidentify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into whichthe document is incorporated: (1) any annual report to security holders; (2) anyproxy or information statement; and (3) any prospectus filed pursuant to Rule424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listeddocuments should be clearly  describedfor identification purposes (e.g., annual report to security holders for fiscalyear ended December 24, 1990).

 

TransitionalSmall Business Disclosure Format (Check one): Yes   o;No   ý

 

 

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**PART I**

 

**Item1. Description of Business****.**

 

Western Feed Mills, Inc. (“WFM”), is a Kansas Corporation that wasoriginally organized in 1984 as a subchapter S corporation.  It was subsequently converted to asubchapter C corporation.  It hasmanufactured and distributed processed animal feeds and feed supplements since1987.  Over the past few years, WFM hasinvestigated areas for profitable business expansion that could be verticallyor horizontally integrated into its existing business.  WFM has focused its interest onparticipation in the dairy industry. Management anticipated that such activity could increase both theprofitability and the utilization of WFM’s existing feed mill.

 

On May 14, 2003, the Company commenced an offering of a minimum of35,000,000 shares of its common stock at a price of $.40 per share, minimumoffering proceeds of $7,000,000 and maximum offering proceeds of $14,000,000for the purpose of undertaking the construction of a vertically integrateddairy operation.  This offering wasregistered with the Securities and Exchange Commission in a RegistrationStatement on Form SB-2 (Commission File No. 333-88-484) which the Commissiondeclared effective on May 13, 2003. The offering commenced on May 14, 2003.  The offering was conducted by Company management and also by Carey,Thomas, Hoover & Breault, a registered broker-dealer and NASD memberfirm as selling agent, on a best efforts basis.  No shares were sold under the offering, and no proceeds werereceived from this offering.  TheCompany incurred no expenses for its account in connection with the offering,and no underwriting discounts and commissions, finders fees were paid to or forunderwriters, nor were other expenses paid in connection with theoffering.  The Company made applicationto the Commission to withdraw the offering pursuant to C.F.R. §230.477 onNovember 18, 2003 and no objection to that application was filed by theCommission.

 

**Feed Mill Business Strategy**

 

In addition to attempting to develop a strategy with respect to theintegrated dairy operation, WFM has continued its focus on increasing sales andprofits from its feed mill operations by (i) producing higher margin specialtyfeed mill products, (ii) continuing its emphasis upon customer service andproduct quality, and (iii) expanding its development of custom feeds to meetspecific customer requirements.  TheFeed Mill employs an animal nutritionist to monitor the feed ingredients,develop new formulations, and meet with customers to determine the nutritionalneeds of animals serviced by WFM’s food stock.

 

Strategically located near its customer base, WFM intends to enhanceits feed mill operation by continuing to concentrate on sales of specialty andcustom livestock feed formulations, thereby achieving profit margins greaterthan the industry standard, emphasizing its customer service, and developingcustom needs to meet specific customer requirements.  WFM does not compete with the major volume/price feed milloperations and believes its service distinguishes it from the volume/price feedmill 

 

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operations.  Rather WFMconcentrates on the specialty and custom feed market.  Customers more desirous of gaining timely attention in receivingspecialty or custom feed products are targeted by WFM rather than pricesensitive users.

 

Illustrative of WFM’s specialty feed formulation practice is itsprocedure of working in cooperation with the customer’s veterinarian whereWFM’s nutritionist formulates specific feed for customer requirements.  WFM believes its ability to have itson-staff nutritionist at a customer’s operation within a few hours of initialcustomer inquiry, combined with WFM’s ability to deliver specialty or customfeed products within 24 hours of the order, provides WFM with the desiredcustomer loyalty.  Daily productioncapacity at WFM’s feed mill facility approximates 80 tons of pelletized feedand 80 tons of processed meal feed.  Itcurrently produces a variety of specialty animal feed formulas for sale to bothcontract dealers and various types of livestock operators, including cow/calfoperators, swine producers, and dairy and sheep producers.

 

To WFM’s knowledge, feed mill industry statistics are generally notavailable.  WFM believes that theindustry is highly competitive based on price, which typically varies by regiondue to product transportation costs, and experiences seasonal sales due to theavailability of natural feedstuffs.

 

**Feed Mill Facility**

 

The feed mill facility, constructed in 1986, is located in Cedar Vale,Kansas, 90 miles southeast of Wichita, Kansas, and 90 miles northwest of Tulsa,Oklahoma.  Management chose the locationin order to be centrally located both near its potential customer base and theraw materials required to manufacture animal feed such as wheat, corn and milo.

 

The facility is located on seven and one-half acres.  Although the land is divided by two publicstreets, WFM has a fifty year lease ending September 6, 2034, to utilizeone of the streets for downloading the finished feed product into either WFM orcustomer trucks.  A public street fromthe feed mill facility separates the corporate offices, truck storage andmaintenance facility and truck fuel warehouse.

 

Currently, the facility operates at 100% capacity of pelletized feed,twelve hours per day, five and one half days per week during the fall-wintermonths, October through March, and at 20% capacity during thespring-summer months, April through September.  The variance in feed mill capacity utilization is due to feedmill customers’ access to natural feed staffs (grazing) during the summermonths.

 

WFM currently produces 16,000 to 18,000 tons of feed annually.  The proposed dairy operation would havecreated a demand for an additional 5,256 tons of feed annually. WFM currentlyhas the capacity to produce 48,000 tons of feed annually, which consists of24,000 tons of meal feed and 24,000 tons pelletized feed.  The existing capacity is able to meet thedemand created by a proposed dairy operation with a minimum outlay for capitalimprovements of $100,000 for the addition of a bulk storage bin.  Current feed mill capacity is large enoughto support the feed meal requirements for 

 

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several animal agriculture facilities while simultaneously meeting theneeds of WFM’s current pelletized feed customers.  The existing real property is sufficient to permit expanding thecapacity of the feed mill to 250 tons of feed product output per day, a 26%increase over existing capacity.  Thefeed mill operation contains approximately 50,000 square feet of feed millfacility and has nearly 400 tons of feed product warehouse capacity.  There are three 23,000-bushel grain storagetanks, one each for wheat, corn and milo. The feed mill facility also has seventeen additional raw material binswith total capacity of 500 tons.  Withinthe feed mill is a limited access storage area for regulated drugs and feedsupplement items.  WFM maintainsapproximately twenty-five drugs for use as feed supplements that are regulatedby the Kansas Department of Agriculture. A modern computer system monitors the percentage of raw materialsutilized to produce specialty and custom feed formulas.  The feed mill computer also monitorsinventory levels of all raw materials and finished goods.  Electricity, natural gas and water arereadily available at the feed mill facility.

 

The delivery of raw grains into an underground pit commences the animalfeed manufacturing process.  The grainis then piped into the grain storage bins through steel augers and is storeduntil ready to be milled.  Piped throughseparate augers into the feed grinder and roller, the grinder mills the grainand the roller forms the feed into pellets. The pellets are then cooked in the cooker between 100 degrees and 140degrees Fahrenheit, depending upon the type of feed product beingproduced.  The pellets are then cooledand the fine pellets (those pellets that are smaller than the desired finishedproduct) are removed for reprocessing. The entire process takes approximately four hours.  In the event that only feed meal is required(i.e., not pelletized) the entire milling process takes approximatelyten minutes.

 

A finished product is either bagged into fifty-pound bags or is storedin bulk for truck bulk load delivery. Every bag of feed product has an analysis tag that describes bypercentages the feed ingredients.  Feedthat is delivered by the truckload is delivered with an ingredient analysissheet.

 

WFM stores and performs minor maintenance on its trucks in the truckwarehouse, which is a covered sheet metal building.  A separate truck fuel building is adjacent to the truckwarehouse.  The fuel building contains a3,000-gallon above ground tank utilized for diesel fuel and a 1,200-gallonabove ground tank utilized for gasoline storage.

 

**Feed Mill Products**

 

WFM manufactures four different pellet sizes as well as a meal productfor swine consumption.  Twelve differentflavorings are utilized by the feed mill operation.  WFM produces a variety of specialty animal feed mill products.  Specialty feed products are those productsmanufactured for a certain type of animal, like generic feed products; however,specialty feed products are further formulated based upon the local/regionalclimate, natural food sources and disease prevalence.

 

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Custom feed formulations, accounting for approximately only 16% ofWFM’s feed mill sales in 2001 achieve higher profit margins than specialtyanimal feed products.  WFM intends tofocus on additional custom feed product development to achieve these higherprofit margins, including products for dairy cattle, swine versus the lowerprofit margins realized on feed products for beef cattle and horses.

 

Custom feed products are formulated by WFM’s nutritionist incooperation with the customer, his veterinarian and/or nutritionist based uponthe particular needs of the customer’s herd. The products’ raw materials include grains (mainly wheat, corn andmilo), vitamins, minerals and drugs. WFM typically purchases grain from local grain elevators during themonths of August through February, and typically purchases corn fromregional terminal grain elevators in northern Kansas and Nebraska during themonths of March through July.  In2003, WFM purchased approximately 14,000 tons of various grains as rawmaterials and purchased approximately $510,000 of drugs, vitamins and mineralsfrom five suppliers for the feed mill operations.

 

WFM’s typical feed mill product has a storage life, if stored in a feedbin, of one month during the summer months and three months during the wintermonths.  The feed products may bedamaged by exposure to humidity or moisture.

 

**Feed Mill Marketing**

 

WFM targets medium sized feed users (eight tons or greater perdelivery) that desire personal attention and either custom or specialty feedproducts.  WFM does not attempt tocompete based on price alone.  StaffNutritionist availability to customers within a few hours of the initialcustomer inquiry evidences WFM’s quick response to its customers’ needs.  Such quick review and the analysis of thedesired formulation of a feed product, coupled with the ability of WFM toproduce the product within a next day turnaround, gives WFM a marketing edgeover its major competitors.

 

**Sales Concentration/Seasonality**

 

WFM’s customer base is diversified. Its ten largest customers accounted for about 20% of WFM’s 2003sales.  As mentioned previously,approximately 78% of WFM’s total feed sales are to cow/calf operators.  WFM’s top ten customers would largelyreflect that balance.  WFM turns itsinventory approximately twenty-three times per year.  WFM experiences seasonality in its sales in that approximately68% of its 2003 sales were delivered during the months of November throughMarch, with the sales being recommitted during the months of July throughOctober.

 

Of the 16,000 tons of feed sold annually, approximately 7,000 tons isproduced and sold pursuant to back-to-back contracts with suppliers ofingredients and feed purchases. Suppliers agree to provide the ingredients for this amount of feed at afixed price on forward contracts covering October through March.  Purchasers agree in advance to buy the feedduring this period at a pre-determined price which reflects these fixedcosts.  The remainder of the feedproduced (9,000 tons) is marketed through spot 

 

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sales.  The cost of ingredientsand the price charged for this feed varies with the market price foringredients.

 

WFM has also established a network of dealers that target smallercattle ranchers and feed users that WFM deems too small in overall feed usageto economically justify direct contact. During 2003, WFM sold approximately 74% of its sales directly and 26% ofits sales through dealers.

 

WFM’s suppliers are numerous and varied.  The feed manufacturing business is rather complex in its varietyand type of material used to manufacture animal feed products.  Consequently, WFM must maintainrelationships with principal and primary suppliers of ingredients as well aswith companies that supply sound and reliable alternatives and replacements tobasic feed ingredients.  This isnecessary in order to manage cost and maintain the quality component of thefeed.   WFM’s suppliers includewell-known names such as The Archer Daniels Midland Company, ConAgra, Cargill,IMC Global, Tyson Foods, IBP, National By-Products, AmPro, Quaker Oats, OxyChemical, Pitman Moore and Riceland Foods. There are numerous other larger and second tier suppliers.  WFM is not reliant on any one company tosource its ingredients needs.  If a keysupplier were to no longer be available for whatever reason, a replacementcould be quickly found without business interruption.  About one-half of WFM’s feed ingredients and other feed inputsare purchased with cash on delivery of products at WFM’s choice.  All other purchases are generally made withdelivery to the feed mill followed by an invoice that is due on receipt.  Discounts that are made available to WFM aretaken on a regular basis in the normal course of business and representsstandard operating procedures.  Mostingredients purchases will increase by at least 25% to 30% as a result of theproposed Dairy Operation.  WFMManagement believes that this additional volume will give them bargaining powerwith certain suppliers in arranging volume discounts.

 

**Credit Management**

 

As of December 31, 2003, Western Feed Mills, Inc. reportedAccounts Receivable of $189,425 of which 92% was current.

 

**Feed Mill Competition**

 

WFM’s main feed mill competitors are two large national feed mills, aswell as smaller regional competitors. Ralston Purina, located in Wichita, Kansas, and Cargill, Inc., locatedin McPherson, Kansas are the two nationwide competitors.  Most of WFM’s competitors sell generic feedproducts, whereas WFM has concentrated on specialty and custom feed products.  WFM’s dealers compete with other dealersthat typically sell multiple brands.

 

**Transportation**

 

Approximately 90% of WFM’s 2003 sales were delivered by bulk truckloadand 10% of WFM’s sales were by bagged product. Because a majority of the sales made by WFM are within 150 radial milesof Cedar Vale, Kansas and the farthest current 

 

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customer is approximately 250 miles from the feed mill facility, WFMutilizes four trucks to deliver the feed products to customers and to transportraw grain materials.  WFM presently ownsfour trucks: a twenty-four ton tractor trailer rig and three other vehicleswith capacities of 4 tons, 8 tons and 14 tons, respectively.  The tractor truck is utilized with trailers,one for bulk feed and two for bagged feed. There is no rail service to the feed mill; moreover, WFM does notcurrently utilize rail service and it does not anticipate any need for thesame.

 

**Government Regulation**

 

WFM’s feed mill business is subject to federal, state and local lawsand regulations, including, but not limited to, the Kansas Department ofAgriculture and the United States Food and Drug Administration concerning theuse and storage of certain drugs in the feed mill operation.

 

The Kansas Department of Agriculture conducts unannounced inspectionsonce or twice a year to review compliance with applicable federal and statelaws including environmental laws.  WFMhas always been found to be in compliance with all applicable laws.  To date, compliance has not resulted in anyextraordinary or separately identifiable costs or expenses, and any associatedexpense is absorbed under general operating costs.

 

**Possible Future Expansion**

 

In the belief that WFM can benefit from economies of scale if WFM’s feedmill can provide animal feed products to a variety of animal operations ownedand operated by WFM, WFM may in the future consider the construction andoperation of additional animal agriculture facilities.   Those facilities could include dairyoperations or other animal agricultural operations.  In considering any such future expansion, WFM’s Board ofDirectors will carefully analyze the market for the products produced by anysuch expanded facility and the costs and benefits of the participation in theapplicable industry.

 

**Item 2. Description of Property.**

 

WFM presently conducts its business operations from a feed millfacility constructed in 1986.  Thefacility is located in Cedar Vale, Kansas which is located 90 miles northwestof Tulsa, Oklahoma.  WFM owns fee simpletitle to three contiguous tracts of real estate and improvements.

 

The facility is located on seven and one-halfacres.  Although the land is divided bytwo public streets, WFM has a fifty year lease ending September 6, 2034,to utilize one of the streets for downloading the finished feed product intoeither WFM or customer trucks.  A publicstreet from the feed mill facility separates the corporate offices, truckstorage and maintenance facility and truck fuel warehouse.  The existing real property is sufficient topermit expanding the capacity of the feed mill to 200 tons of feed productoutput per day, a 25% increase over existing capacity.

 

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The feed mill operation contains approximately 50,000 square feet offeed mill facility and has nearly 400 tons of feed product warehousecapacity.  There are three 23,000-bushelgrain storage tanks, one each for wheat, corn and milo.  The feed mill facility also has seventeenadditional raw material bins with total capacity of 500 tons.

 

Within the feed mill is a limited access storage area for regulateddrugs and feed supplement items.  WFMmaintains approximately twenty-five drugs for use as feed supplements that areregulated by the Kansas Department of Agriculture.

 

A modern computer system monitors the percentage of raw materialsutilized to produce specialty and custom feed formulas.  The feed mill computer also monitorsinventory levels of all raw materials and finished goods.  Electricity, natural gas and water arereadily available at the feed mill facility.

 

**Item3. Legal Proceedings.**

 

On December 27, 2000 WFM and its ChiefExecutive Officer, Fred W. Raybourn, consented to the issuance of a Cease andDesist Order (“Consent Order”) by the Kansas Securities Commissioner(“Commissioner”).  The Commissioneralleged that WFM sold common stock in violation of the registration provisionsof the Kansas Securities Act (“Act”). At issue were seven sales which occurred between April andDecember of 1997.  WFM believed thesales were allowed under an exemption provided in the Act.  The availability of the exemption turned ona question of compensation paid certain individuals in part for the referral ofthe purchasers to WFM.  It was alsoalleged that Respondents were not duly registered as agents or broker-dealersunder the Act and that misrepresentations or omissions were made in violationof the Act.

 

WFM agreed to  a Consent Order,without admitting or denying the Commissioner’s allegation, to avoid theexpense and time-consuming diversion which litigation would have entailed.  Under the terms of the Consent Order WFM andMr. Raybourn were each fined $2,500 and were ordered to refrain from anyviolations of the Act.  This ConsentOrder finally resolved the matters raised by the Commissioner’s administrativeinquiry.

 

WFM is not involved in any other material litigation nor aware of anysuch litigation that is threatened as of the date of this Prospectus.

 

**Item4. Submission of Matters to a Vote of Security Holders.**

 

The Company did not submit anymatter to a vote of its securely holders through the solicitation of proxies orotherwise during the fourthquarter.

 

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**PART II**

 

**Item5. Market for Common Equity and Related Stockholder Matters.**

 

WFM is authorized to issue Fifty Million (50,000,000) shares of CommonStock and Thirty Million (30,000,000) shares of Preferred Stock.  WFM has 5,842,596 shares of Common Stock, nopar value, issued and outstanding.  It hasnot issued any shares of Preferred Stock.

 

**Common Stock**

 

Holders of Common Stock are entitled to one vote for each share held inthe election of directors and on all other matters submitted to a vote ofstockholders.  Cumulative voting ofshares of Common or Preferred Stock is not allowed.  Accordingly, holders of a majority of the shares entitled to votein any election of directors may elect all of the directors standing forelection.

 

Holders of Common Stock are entitled to receive ratably such dividends,if any, as may be declared by the Board of Directors out of funds legallyavailable therefore.  See “DividendPolicy.”  Upon the liquidation,dissolution or winding up of WFM, the holders of Common Stock, are entitled toreceive ratably the net assets of WFM available after payment of all debts andother liabilities.  Holders of CommonStock have no preemptive, subscription, redemption or conversion rights.

 

WFM’s Articles of Incorporation authorize the board of directors toissue preferred stock without a vote of the common shareholders.  To date, no preferred shares have beenissued.

 

**Certain Anti-Takeover Matters**

 

WFM’s Restated and Amended Articles of Incorporation provide thatdirectors may be removed from office, but only for cause and that any actiontaken by stockholders to remove one or more directors for cause may only betaken by the affirmative vote of the holders of at least two-thirds of thestockholders at a meeting called for such purpose.  However, if the Company’s Board of Directors, by an affirmativevote of at least two-thirds of all members of the Board of Directors then inoffice, recommends removal of a director or directors to the stockholders, suchremoval may be effected by the affirmative vote of a majority of thestockholders at a meeting of the stockholders called for that purpose.  Likewise, the Company’s Restated and AmendedArticles of Incorporation provide that any action taken by the stockholders toamend, alter, change or repeal the Restated and Amended Articles of Incorporationbe approved by the affirmative vote of at least two-thirds of all stockholdersprovided, however, that if the Board of Directors, by an affirmative vote of atleast two-thirds of all members of the Board of Directors then in office,recommends the advisability of the amendment, such amendment may be effected bya majority vote of the stockholders. The Company’s Bylaws may be adopted, amended or repealed by a two-thirdsvote of (i) the stockholders, or (ii) the full Board of Directors.

 

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WFM’s Restated and Amended Articles of Incorporation require, inaddition to any vote required by law or agreement, the affirmative vote by atleast two-thirds of either (i) the outstanding shares of the “voting stock” (asdefined therein), or (ii) the Board of Directors, in order to approve,authorize, adopt or consummate by the Company and any of its subsidiaries, ifany, any “business combination” (as defined therein) with a “related person”(as defined therein).  A “businesscombination” includes (i) any merger or consolidation with a “related person,”(ii) any transfer of a substantial part (20%) of the assets of the Company toor with a “related person,” (iii) any transfer of a substantial part (20%) ofthe assets of a “related person” to or with the Company, (iv) the issuance ofany securities of the Company to a “related person,” (v) certainreclassifications and recapitalizations, (vi) any partial or completeliquidation, spin-off, split off, or split up or similar transaction of theCompany involving a related person, and (vii) any transaction, event,agreement, contract, commitment or other arrangement that provides for, isintended to or is likely to have an effect similar to the above.  A “related person” includes, but is notlimited to, any person that owns or is the beneficial owner of 5% or more ofthe outstanding shares of the Company’s voting stock.  A “related person’s” voting stock is excluded from the calculationof such stockholder votes.

 

**Limitation on Liability**

 

As authorized by the Kansas General Corporation Code, WFM’s Restatedand Amended Articles of Incorporation provide that WFM’s directors will have nopersonal liability to WFM or its stockholders for monetary damages for breachof fiduciary duty as a director.  Thisprovision has no effect on director liability for (i) a breach of thedirectors’ duty of loyalty to WFM or its stockholders, (ii) acts or omissionsnot in good faith or which involve intentional misconduct or a knowingviolation of law, (iii) payment of certain unlawful dividends or unlawful stockpurchases or redemptions, (iv) any transaction from which a director derives animproper personal benefit, or (v) an act or omission for which the liability ora director is expressly provided by an applicable statute.

 

**Limited Transferability and Lack ofMarketability**

 

There is no public market for the Shares and there can be no assurancethat a market will develop or that purchasers will be able to resell theirShares at the offering price or any other price.  Holders of the Shares should assume that it will be difficult toliquidate their investment and that if they try to do so, the price and/orother terms of any such liquidation may be unsatisfactory.  Accordingly, for the aforesaid reasons andothers set forth herein, the Shares should be purchased for long-terminvestment purposes only.

 

There are a total of forty-one (41) shareholders who hold the aggregate5,842,596 shares of common stock.  Ofthis number, thirty-three (33) shareholders, who hold in the aggregate1,999,276 shares as non-affiliates, are free to sell those shares withoutrestriction under Rule 144(k) of the Securities Act.  The remaining eight (8) shareholders, who hold in the aggregate3,051,320 shares, are affiliates and would be eligible to sell shares underRule 144 subject to compliance with all the requirements of that rule 

 

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including the availability of current public information required underRule 144(c) and compliance with the volume limitations of Rule 144(e).

 

On May 14, 2003, the Company commenced an offering of a minimum of35,000,000 shares of its common stock at a price of $.40 per share, minimumoffering proceeds of $7,000,000 and maximum offering proceeds of $14,000,000for the purpose of undertaking the construction of a vertically integrateddairy operation.  This offering wasregistered with the Securities and Exchange Commission in a RegistrationStatement on Form SB-2 (Commission File No. 333-88-484) which the Commissiondeclared effective on May 13, 2003. The offering commenced on May 14, 2003.  The offering was conducted by Company management and also Carey,Thomas, Hoover & Breault, a registered broker-dealer and NASD memberfirm as selling agent, on a best efforts basis.  No shares were sold under the offering, and no proceeds werereceived from this offering.  TheCompany incurred no expenses for its account in connection with the offering,and no underwriting discounts and commissions, finders fees were paid to or forunderwriters, nor were other expenses paid in connection with theoffering.  The Company made applicationto the Commission to withdraw the offering pursuant to C.F.R. §230.477 onNovember 18, 2003 and no objection to that application was filed by theCommission.

 

**Item6. Management’s Discussion and Analysis or Plan of Operation****.**

 

WFM’s discussion of its financial condition and operating results andplan of operations includes forward-looking statements.  Forward-looking statements are necessarilybased upon estimates and assumptions that are inherently subject to significantbusiness, economic and competitive uncertainties and contingencies, many ofwhich are beyond the Company’s control and are subject to change.  Actual operating and financial results ofthe Company and the Company’s actual plan of operations may differ materiallyfrom the stated plan of operations.

 

**Cautions aboutForward-Looking Statements**

 

The following cautionary statement is made for the purpose of taking advantageof any defenses that may exist under the law, including common law.  Forward-looking statements includestatements concerning plans, objectives, goals, strategies, expectations,future events or performance and underlying assumptions and other statementsthat are not statements of historical facts. This document contains forward-looking statements which can beidentified by the use of the words such as “intend,” “anticipate,” “believe,”“estimate,” “project,” or “expect” or other similar statements.  These forward-looking statements involverisks and uncertainties which could cause actual results or outcomes to differmaterially from those expressed in the forward-looking statements.  The Company’s expectations, beliefs andprojections are expressed in good faith and are believed by the Company to havea reasonable basis, including without limitation, management’s examination ofhistorical operating trends, data contained in the Company’s records and dataavailable from first parties.  However,there can be no assurance that management’s expectations, beliefs orprojections will occur or be achieved or accomplished.

 

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**General**

 

WFM has experienced modest growth in revenues since it commenced itsfeed mill operation in November 1986. WFM has sought to improve its financial performance by increasingrevenues and improving the efficiency of its feed mill operation.  WFM showed a profit of $101,923 for the yearended December 31, 2003.  WFM hasan accumulated deficit of $2,280,688 as of December 31, 2003.

 

There can be no assurances that WFM will be able to earn any profits ormaintain profitable operations if they are initially attained.  See “RISK FACTORS” – Negative OperatingHistory and Accumulated Deficit” of the Offering Prospectus.

 

WFM’s feed mill operations are seasonal.  Approximately 75% of WFM’s 2003 sales were delivered during themonths of October through March, with the sales being pre-committed duringthe months of June through September. The feed mill’s customers have access to natural feed stuffs (grazing)during the spring and summer months, April through September.  WFM expects such seasonality to continue asto non-dairy products; however, WFM anticipates that it will experience constantdemand for its dairy feed meal product throughout the year after thedevelopment of its dairy operation, because of the demand for feed provided bythe integrated dairy operation.

 

**Planof Operation**

 

The Company believes that it could benefit from economies of scale ifits feed mill operation could provide animal feed products to a variety ofanimal operations owned by the Company. The Company continues to consider plans to construct or acquireadditional animal agricultural operation. Those facilities could include dairy operations or other animalagricultural operations.  In consideringsuch future expansion, the Company’s Board will carefully analyze the marketfor the products produced by any such expanded facility and the costs andbenefits of participation in the applicable industry.

 

**YearEnded December 31, 2003 Compared to Year Ended December 31, 2002**

 

Net sales increased by $409,951 or 14%, to $3,358,136 in 2003, from$2,948,185 in 2002.  This increase wasdue to additional new customers.  Cost ofsales increased by $313,856 or 14%, primarily due to increase in sales volume.

 

Delivery expenses increased by $57,947 or 39%, to $207,291 in 2003,from $149,344 in 2002, as a result of an increase in deliveries and fuel costs.

 

General and administrative expense increase by $7,452 or 2%, to$358,587 in 2003, from $351,135 in 2002 due primarily to costs associated withthe Offering.

 

As a result of the foregoing, WFM’s operating income increase by$23,488

 

12

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In view of the above factors, WFM’s net income increased by $22,230 toa profit of $101,923 in 2003, from a profit of $79,693 in 2002.

 

**SignificantAccounting Policies Effecting Financial Disclosures**

 

Critical accounting policies effecting financial disclosures includeestimates of useful life on property and equipment and the recognition ofrevenue on an accrual basis when products are sold.  It is unlikely that materially different amounts would bereported using different conditions, policies or assumptions.  Estimated useful lives are based onhistorical information and WFM has not experienced material problems withcollecting accounts receivable.

 

**Liquidityand Capital Resources**

 

Cash and cash equivalents were $64,552 at December 31, 2003, anincrease of $28,307 from $36,245 at December 31, 2002.

 

Net cash provided used by operating activities was $274,765 for theperiod ended December 31, 2003, compared to net cash provided by operatingactivities for the period ended December 31, 2002 of $123,410.  In general, changes from period to period incash flow from operations are primarily due to changes in the net profit orloss experienced by WFM.  In addition,changes in accounts receivable, inventories, prepaid expenses and deposits,accounts payable and customer deposits affect period to period cash flow fromoperations.  Many of these fluctuationsare due to the timing of cash receipts or payments.

 

In 2003, net cash used in investment activities increased to $533,560from $74,690 in 2002.

 

In 2003, use of cash for making principal payments on long-term debtfor the period ended December 31, 2003 was $60,000 compared to $96,818 in2002.

 

WFM’s current long-term debt consists of: 1) a $504,000 note payable toa bank due in semi-annual installments of $28,200 and 2) deferred compensationowed to the President and Chairman of the Board of Directors of WFM, which hasbeen deferred by his verbal agreement not to demand payment before 2005, exceptin the case of death or termination. The amount of the deferred compensation owed including interest is$435,350.  *See*Certain Relationshipsand Related Transactions section of the Prospectus, p. 33.  WFM does not anticipate any significantcapital expenditure requirements.  It iscurrently funding its debt payment from operating revenue.  It does not currently need a line of creditand does not anticipate needing one.  Ifone is required, WFM management is confident a line of credit could beobtained.  WFM has a long-termrelationship with U.S. Bank, National Association, and they have indicated awillingness to establish a line of credit.

 

13

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**Item7. Financial Statements****.**

 

Western Feed Mills, Inc. auditedfinancial statements, described as follows, are appended to the signature pageof this response.

 

•                                          IndependentAuditor’s Report

 

•                                          BalanceSheets – December 31, 2003 and 2002

 

•                                          Statementof Operations – December 31, 2002 and 2002

 

•                                          Statementof Stockholders’ Equity – December 31, 2003 and 2002

 

•                                          Statementof Cash Flows – December 31, 2003 and 2002

 

**Item8. Changes In and Disagreements With Accountants on Accounting and FinancialDisclosure****.**

 

To the best of our knowledge,there are no disagreements with accountants on accounting and financialdisclosure.

 

**Item8A. Controls and Procedures****.**

 

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) areresponsible for establishing and maintaining the company’s disclosure controlsand procedures.  These controls andprocedures were designed to ensure that material information relating to thecompany and its subsidiaries are communicated to the CEO and the CFO.  We evaluated these disclosure controls andprocedures as of the end of the period covered by this report under thesupervision of our CEO and CFO.  Basedon this evaluation, our CEO and CFO concluded that our disclosure controls andprocedures are effective in timely alerting them to material informationrequired to be included in our periodic reports filed wit the Securities andExchange Commission.  There has been nochange in our internal controls over financial reporting during the periodcovered by this report that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

14

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**PART III**

 

**Item9. Directors, Executive Officers, Promoters and Control Persons; ComplianceWith Section 16(a) of the Exchange Act****.**

 

The directors, officers and significant employees of WFM collectivelyprovide experience that will enable WFM to implement its businessstrategies.  Several of WFM’s directorsand officers have held leadership positions in a wide variety of agriculturaland nonagricultural companies as well as significant experience in the cattleindustry.  Although WFM has nothistorically done business in the dairy industry, WFM believes that theexperience and strong leadership qualities of its directors, executive officersand significant employees will enable WFM to successfully enter the dairyindustry if it chooses to do so.

 

WFM does not have a financial expert serving on its auditcommittee.  WFM has not adopted aseparate code of Ethics that applies to the Company’s Officers and directorsfor the reason that the registered public offering was abandoned.

 

The following table sets forth the information with respect to thedirectors and executive officers of the Company:

 
| **Name, Address,  Telephone** |   | **Age** |   | **Occupation**                                                        |   | **Background**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------------|--------|---------|--------|-----------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Fred W. Raybourn         |   | 62      |   | Chairman of Board of Directors, President and Chief Financial Officer |   | Mr. Raybourn has more than thirty-five (35) years of business  development and management experience in the Agriculture Industry including  agricultural finance, grain buying, feed ingredient merchandising and  livestock management.  In the 1980’s  Mr. Raybourn acquired three inactive agricultural businesses and  re-established operations to generate more than $18 million in annual  sales.  These businesses were Gardner  Grain WFM, Gardner, Kansas; Centerview Grain and Feed, Centerview, Kansas;  and Missouri Feed and Farm Supply in Liberal, Missouri.  Raybourn has also been actively involved  in professional and community organizations throughout his life.  These include: Past Board Member of the  Citizen’s Bank at Nevada, Missouri; Past Chairman of the Board of Missouri  Agricultural Industries Council; member of the National Pork Producers  Council; member of the Kansas Pork Producers Council; active member of the  National Cattlemen’s Association; active member of the Kansas Livestock  Association; and member of the Oklahoma Grain and Feed Association.  He has also been elected to School Boards,  City Councils, and has served, honorably, for four years in the U.S. Marine  Corps. |
|                          |   |    |   |                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| T.E. Branscum                 |   | 68      |   | Ranch owner                                                           |   | Mr. Branscum is the Secretary, Treasurer and a Director of WFM and is  involved in several ventures in addition to WFM, including Branscum  Ranch.  Mr. Branscum is a Director of  and investor in the State                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

15

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| **Name, Address,  Telephone** |   | **Age** |   | **Occupation**             |   | **Background**                                                                                                                                                                                                                                                                                                                                                                     |
|-------------------------------|--------|---------|--------|----------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |   |    |   |                       |   | Bank, Winfield, Kansas.  Mr.  Branscum is a graduate of the Harvard University Advanced Management Program  and holds a degree in Chemistry from Northeastern State University.                                                                                                                                                                                               |
|                          |   |    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                               |
| E.C. Peper                    |   | 66      |   | Grain company owner        |   | Mr. Peper as served as a Director of WFM since December 1988 and  owns Peper Grain Company, Inc. and Peper Ranch, respectively, commodity and  cattle ranch operations located in Prior, Oklahoma.  Mr. Peper also serves as Director and stockholder of the Adair  State Bank, Adair, Oklahoma.                                                                         |
|                          |   |    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                               |
| Joe C. Donohue                |   | 62      |   | Seed company owner         |   | Mr. Donohue has been a Director of WFM since August 1988, and is  involved in several swine and cattle businesses.  Mr. Donohue owns Greeley Seed Company, a seed processing  concern, and Donohue Trucking Service, Inc., a regional trucking service,  both of Greeley, Kansas.  Mr. Donahue  owns 12,000 to 13,000 acres of agricultural land in eastern Kansas. |
|                          |   |    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                               |
| Don Ryan                      |   | 66      |   | Distributing company owner |   | Mr. Ryan has been a Director of WFM for two years.  Mr. Ryan resides in Norton, Kansas, owns                                                                                                                                                                                                                                                                                  |

 

16

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| **Name, Address,  Telephone** |   | **Age** |   | **Occupation** |   | **Background**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-------------------------------|--------|---------|--------|----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |   |    |   |           |   | Western Distributing, Inc. and is involved in several other  businesses in that area.  Mr. Ryan  owns and operates two Budweiser distributorships; one in Norton, Kansas and  one in Nebraska.  He also own a  substantial farming operation.                                                                                                                                                                                                                                                                    |
|                          |   |    |   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Jerry Lee Thurman             |   | 60      |   | Sales Manager  |   | Mr. Thurman has been employed by WFM since July 1991, has been  its Sales Manager since March 1994.   Mr. Thurman previously owned and assisted in the management of family  owned cattle and/or swine operations in Stillwater, Oklahoma.  Mr. Thurman is a member of the Chester  White Organization, a national swine association, and the Oklahoma Swine  Association.  Mr. Thurman received a  Bachelor of Science degree in Agricultural Education from Oklahoma State  University in 1964. |

 

Directors are elected annually at the annual meeting ofshareholders.  All directors serveone-year terms.  Their terms are notstaggered and each director must be re-elected annually.  There are no family relationships among anyof the executive officers, directors or significant employees of WFM.

 

17

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**Item10. Executive Compensation****.**

 

The following table sets forth the compensation paid by WFM to thenamed executive officer for services rendered to WFM in all capacities duringthe period from January 1, 1996 to December 31, 2002.

 

**Summary Compensation Table**

 
|                                     |   |     |   | **Compensation**   |    |
|------------------------------------------|--------|----------|--------|--------------------|---------|
| **Name and Principal Position**          |   | **Year** |   | **Annual  Salary** |    | **Other  Compensation(3)** |   |
| Fred W. Raybourn, President and Chairman |   | 1996     |   | $                  | 99,275  |   | $ | 6,240 |   |
|                                     |   |     |   |               |    |   |   |   |   |
|                                     |   | 1997     |   | $                  | 104,238 |   | $ | 6,960 |   |
|                                     |   |     |   |               |    |   |   |   |   |
|                                     |   | 1998     |   | $                  | 109,395 |   | $ | 6,960 |   |
|                                     |   |     |   |               |    |   |   |   |   |
|                                     |   | 1999     |   | $                  | 90,000  |   | $ | 6,960 |   |
|                                     |   |     |   |               |    |   |   |   |   |
|                                     |   | 2000     |   | $                  | 90,000  |   | $ | 6,960 |   |
|                                     |   |     |   |               |    |   |   |   |   |
|                                     |   | 2001     |   | $                  | 90,000  |   | $ | 9,260 |   |
|                                     |   |     |   |               |    |   |   |   |   |
|                                     |   | 2002     |   | $                  | 90,000  |   | $ | 9,260 |   |
|                                     |   |     |   |               |    |   |   |   |   |
|                                     |   | 2003     |   | $                  | 90,000  |   | $ | 9,260 |   |
|                                          |        |          |        |                    |         |  |  |  |  |  |

 

----

(3)                                  Mr. Raybourn, WFM’s President and Chairman,receives personal benefits, including health insurance for which premiumamounts are reflected in this column.

 

18

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**Employment Arrangements**

 

WFM and Mr. Raybourn entered into an employment agreement, dated May19, 2000, for a term of one year, with provision for automatic renewal forsuccessive one year periods, unless either party elects not to renew theemployment agreement during any renewal period.  Advance notice of one year is required to terminate the agreementby either WFM or Raybourn.  Mr. Raybournis required to devote his full time and efforts to the business and affairs ofWFM.

 

Mr. Raybourn is also eligible to participate in any group benefit plansor performance incentive or bonus plans WFM may establish.  WFM pays Mr. Raybourn’s health insurancepremiums and provides a WFM vehicle for Mr. Raybourn’s use.  The employment agreement sets forth anoncompete provision: as long as Mr. Raybourn is an employee of WFM and for aperiod of two years thereafter, he cannot engage in certain activities incompetition with WFM.

 

##### **Compensationof Directors**

##### ** **

Since 1993, any director who is not an employee ofWFM has received a fee in the amount of $200 for each Board of Directors’meeting attended.

 

**Non-Qualified Stock Grant Plan**

 

In 1994, WFM adopted a non-qualified stock option plan whereby WFM’sPresident, in the President’s discretion, may grant up to 10,000 shares ofWFM’s Common Stock to any five key employees of WFM (a total of 50,000 shares),at no cost to such employees, which shares vest after five years.  Also, if an employee purchases WFM’s CommonStock at $1.25 per share, then WFM’s President may grant up to 10,000 matchingshares of WFM’s Common Stock to any five key employees of WFM (a total of 50,000shares), at no cost to such employees, which shares vest after a five yearperiod.  All of such grant shares andmatching shares are subject to being repurchased by WFM for nominalconsideration if the applicable employment relationship is terminated (the“Non-Qualified Stock Option Plan”).

 

**Indemnification Arrangements**

 

WFM’s Restated and Amended Articles of Incorporationand Bylaws provide that WFM shall indemnify all directors and officers of WFMto the fullest extent permitted by the Kansas general corporation code.  Under such provisions, any director orofficer, who in his capacity as such, is made or threatened to be made, a partyto any suit or proceeding, shall be indemnified if it is determined that such directoror officer acted in good faith and in a manner he reasonably believed to be inor not opposed to the best interests of WFM. Insofar as indemnification for liabilities arising under the Securities 

 

19

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Act of 1933 (the “Act”) may be permitted todirectors, officers and controlling persons of WFM pursuant to the foregoingprovisions, or otherwise, WFM has been advised that in the opinion of theSecurities and Exchange Commission such indemnification is against publicpolicy as expressed in the Act and is, therefore, unenforceable.

 

**Employees**

 

The current feed mill operation employs thirteen employees during thesummer months and fifteen employees during the winter months.  The four sales and marketing employees arecompensated on a salary basis.  WFMbelieves that the City of Cedar Vale and the surrounding area will continue toprovide a sufficient labor supply.  Uponthe successful completion of this Offering, WFM anticipates hiring a full-timechief financial officer.

 

**Item11. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters****.**

 

The following table represents certain information as ofDecember 31, 2003, with respect to the beneficial ownership of CommonStock by (i) each director of WFM, (ii) each executive officer of WFM, (iii)each person known by WFM to own beneficially five percent (5%) or more of theCommon Stock and (iv) all directors, executive officers and five percentshareholders of WFM as a group.  Unlessotherwise noted, the persons listed below have sole voting and investment powerwith respect to such shares.

 
|                                             |   | **Number of  Shares Beneficially Owned** |   | **Percentage  Beneficially Owned** |   |
|--------------------------------------------------|--------|------------------------------------------|--------|------------------------------------|--------|
|                                             |   |                                     |   |                               |   |
| Fred W. Raybourn                            |   | 626,664                                  |   | 10.7                               | %      |
| 801 North A Street                          |   |                                     |   |                               |   |
| Arkansas City, Kansas 67005                      |   |                                     |   |                               |   |
|                                             |   |                                     |   |                               |   |
| Donald E. Lehman                            |   | 618,664                                  |   | 10.6                               | %      |
| 109 E. Main                                 |   |                                     |   |                               |   |
| Gardner, Kansas  66030                      |   |                                     |   |                               |   |
|                                             |   |                                     |   |                               |   |
| T.E. “Gene” Branscum              |   | 440,000                                  |   | 7.5                                | %      |
| 9 Lake Park Drive                           |   |                                     |   |                               |   |
| Winfield, Kansas 67156                           |   |                                     |   |                               |   |
|                                             |   |                                     |   |                               |   |
| C.G. Delozier                               |   | 586,664                                  |   | 10.0                               | %      |
| Rural Route 3, Box 4A                       |   |                                     |   |                               |   |
| Chelsea, Oklahoma 74016                          |   |                                     |   |                               |   |
|                                             |   |                                     |   |                               |   |
| E.C. Peper                                  |   | 626,664                                  |   | 10.7                               | %      |
| Rural Route 1, Box 98                       |   |                                     |   |                               |   |
| Adair, Oklahoma 74330                            |   |                                     |   |                               |   |
|                                             |   |                                     |   |                               |   |
| Joe Donohue                                 |   | 140,000                                  |   | 2.4                                | %      |
| Box 177                                     |   |                                     |   |                               |   |
| Greeley, Kansas 66033                            |   |                                     |   |                               |   |
|                                             |   |                                     |   |                               |   |
| Ashok and Jasu Shah                         |   | 492,664                                  |   | 8.4                                | %      |
| 3201 Regency Drive                          |   |                                     |   |                               |   |
| Independence, Kansas 67301                       |   |                                     |   |                               |   |
|                                             |   |                                     |   |                               |   |
| Don Ryan (Oro Holdings)                          |   | 320,000                                  |   | 5.5                                | %      |
|                                             |   |                                     |   |                               |   |
| All directors and executive persons, as a  group |   | 3,851,320                                |   | 65.9                               | %      |

 

20

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**Item12. Certain Relationships and Related Transactions.**

 

WFM sells feed products to entities affiliated with E.C. Peper and T.E.“Gene” Branscum.  Both are shareholdersand Directors of WFM.  These feed salesamounted to less than four percent of WFM’s total feed sales (approximately$94,000) during 2001.  WFM sold thisfeed at its current, retail list price and without any discount.  Since then Peper has ceased doing businessin the cattle business and no longer buys feed from WFM.

 

WFM is also currently obligated on a note owed to Fred Raybourn, CEO,shareholder and Chairman of the Board of Directors.  The note accrues interest at 5.5%.  As of December 31, 2003 the principal and accrued intereston the note was $435,350.  The noterepresents the amount of deferred compensation owed Mr. Raybourn for years 1991through 2003.  The note is  an unsecured demand note.  Mr. Raybourn verbally has agreed not todemand payment before February 1, 2005, except in case of death ortermination.  (See Notes to Financial Statements,Note 3).

 

**Item13. Exhibits and Reports on Form 8-K.**

 

(a)                                  Exhibits.  See Exhibit Index.

 

(b)                                 Reportson Form 8-K.  None.

 

**Item 14**.  **Controlsand Procedures**

 

Our Chief Executive Officer andChief Financial Officer, after evaluating the effectiveness of our disclosurecontrols and procedures (as defined in Rule 15d-14(c) under Securities ExchangeAct of 1934, as amended), as of the date (the “Evaluation Date”) within 90 daysbefore the filing date of this annual report, have concluded that our disclosurecontrols and procedures are effective in ensuring that material informationrequired to be disclosed is included in the reports that we file with theSecurities and Exchange Commission.

 

21

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**Changes in Internal Controls**

 

There were no significant changesin our internal controls or in other factors that could significantly affectthese controls subsequent to the date of the Evaluation Date referred to above.

 

**Item15. Principal Accountant Fees and Services.**

 

WFM has paid an annual fee of $8,000 for professional services renderedby its principal accountant, Varney & Associates, CPAs, LLC.  This fee is a combined fee for the year-endannual audit and preparation of its annual corporate tax returns.  There are no other fees paid forprofessional services rendered by its principal accountant.

 

22

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**SIGNATURES**

 

**Inaccordance with Section 13 or 15(d) of Securities Exchange Act of 1934 theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.**

 

 
|   | WESTERN FEED MILLS, INC. |
|--------|--------------------------|
|   |                     |   |
|   |                     |   |
|   | **By:**                  | /s/ Fred W. Raybourn |   |
|   |                     | **Fred W. Raybourn, President** |

 

 

**Pursuant tothe requirements of the Securities Act of 1933, this Registration Statement onForm SB-2 has been signed by the following persons in the capacities indicatedon the dates stated**

 
| **Signature**        |   | **Date** |   | **Title**                                                                                                       |
|----------------------|--------|----------|--------|-----------------------------------------------------------------------------------------------------------------|
|                 |   |     |   |                                                                                                            |
| /s/ Fred W. Raybourn |   | 3/29/04  |   | President, Chief Executive Officer, Chief  Financial Officer Comptroller and Chairman of the Board of Directors |
| Fred W. Raybourn     |   |     |   |
|                 |   |     |   |                                                                                                            |
|                 |   | 3/29/04  |   | Director                                                                                                        |
| T.E. Branscum        |   |     |   |                                                                                                            |
|                 |   |     |   |                                                                                                            |
| /s/ E.C. Peper       |   | 3/29/04  |   | Director                                                                                                        |
| E.C. Peper           |   |     |   |                                                                                                            |
|                 |   |     |   |                                                                                                            |
| /s/ Joe C. Donahue   |   | 3/29/04  |   | Director                                                                                                        |
| Joe C. Donahue       |   |     |   |                                                                                                            |
|                 |   |     |   |                                                                                                            |
|                 |   | 3/29/04  |   | Director                                                                                                        |
| Don Ryan             |   |     |   |                                                                                                            |

 

23

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**EXHIBITINDEX**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                   |   | **Filed  Herewith** |   | **Incorporated Herein by Reference  to**                                                                         |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------------------------------------------------------------------------------------------------|
| 1.1             |   | Underwriting Agreement                                                                                                                                            |   |                |   | Exhibit 1.1 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484)  |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 3.1             |   | Articles of Organization                                                                                                                                          |   |                |   | Exhibit 3.1 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484)  |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 3.2             |   | Bylaws                                                                                                                                                            |   |                |   | Exhibit 3.2 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484)  |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 5.1             |   | Opinion of Morris, Laing, Evans, Brock  & Kennedy, Chartered                                                                                                  |   |                |   | Exhibit 5.1 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484)  |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 10.1            |   | Stock Option Plan dated September 1,  1994                                                                                                                   |   |                |   | Exhibit 10.1 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 10.2            |   | Restated Employment Agreement with Fred  Raybourn signed January 1, 1994                                                                                     |   |                |   | Exhibit 10.2 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 10.3            |   | Subscription Agreement                                                                                                                                            |   |                |   | Exhibit 10.3 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 10.4            |   | Escrow Agreement                                                                                                                                                  |   |                |   | Exhibit 10.4 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 10.5            |   | Indication of Interest in Debt Financing -  U.S. Bank National Association                                                                                        |   |                |   | Exhibit 10.5 to the Issuer’s Form SB-2 filed with the Commission on May 13,  2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 10.6            |   | Indication of Interest in Debt Financing -  Metropolitan Life Insurance Company                                                                                   |   |                |   | Exhibit 10.6 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 10.7            |   | Indication of Interest in Debt Financing -  Farm Credit of Southwest Kansas, ACA                                                                                  |   |                |   | Exhibit 10.7 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 23.1            |   | Consent of Morris, Laing, Evans, Brock  & Kennedy, Chartered                                                                                                  |   |                |   | Exhibit 23.1 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 23.2            |   | Consent of Varney & Associates, CPA’s,  LLC                                                                                                              |   |                |   | Exhibit 23.2 to the Issuer’s Form SB-2 filed with the Commission on  May 13, 2003 (File No. 333-88484) |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 31.1            |   | Certification of the Chief Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                           |   | ý              |   |                                                                                                             |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 31.2            |   | Certification of the Chief Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                           |   | ý              |   |                                                                                                             |
|            |   |                                                                                                                                                              |   |                |   |                                                                                                             |
| 32              |   | Certification of Chief Executive Office and  Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. § 1350) |   | ý              |   |                                                                                                             |

 

24

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**WESTERN FEED MILLS, INC.**

 

**Cedar Vale, Kansas**

 

 

**FINANCIAL STATEMENTS**

**WITH**

**REPORT OF CERTIFIED PUBLIC ACCOUNTANTS**

 

**December 31, 2003 and 2002**

 

 

VARNEY & ASSOCIATES, CPAs, LLC

Manhattan, Kansas

 

25

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***Certified PublicAccountants’ Report***

 

February 16, 2004

 

 

To the Board of Directors

Western Feed Mills, Inc.

Cedar Vale, Kansas

 

**INDEPENDENT AUDITORS’REPORT**

 

We have audited the accompanying balance sheets of Western Feed Mills,Inc. as of December 31, 2003 and 2002, and the related statements ofoperations, stockholders’ equity and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Western Feed Mills,Inc. as of December 31, 2003 and 2002 and the results of its operationsand cash flows for the years then ended, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

Certified Public Accountants

Manhattan, Kansas

 

26

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***Financial Statements***

 

**WESTERN FEED MILLS, INC.**

Cedar Vale, Kansas

**BALANCE SHEETS**

December 31,

 
|                                                                                                          |   | **2003**   |      | **2002**   |   |
|---------------------------------------------------------------------------------------------------------------|--------|------------|-----------|------------|--------|
| **ASSETS**                                                                                                    |   |       |      |       |   |
| **Current Assets**                                                                                            |   |       |      |       |   |
| Cash and cash equivalents                                                                                     |   | $          | 64,552    |       | $      | 36,245 |   |
| Trade receivables                                                                                             |   | 189,425    |      | 194,994    |   |
| Payroll tax receivable                                                                                        |   | —     |      | 2,906      |   |
| Inventories                                                                                                   |   | 154,928    |      | 120,969    |   |
| **Total Current  Assets**                                                                                     |   | $          | 408,905   |       | $      | 355,114 |   |
|                                                                                                          |   |       |      |       |   |
| **Property and  Equipment**                                                                                   |   |       |      |       |   |
| Land                                                                                                          |   | $          | 42,500    |       | $      | 34,000 |   |
| Buildings and grain bins                                                                                      |   | 897,910    |      | 609,139    |   |
| Machinery and equipment                                                                                       |   | 948,815    |      | 947,396    |   |
| Automobiles and trucks                                                                                        |   | 657,750    |      | 424,998    |   |
| Office furniture and fixtures                                                                                 |   | 91,334     |      | 89,216     |   |
| **Subtotal**                                                                                                  |   | $          | 2,638,309 |       | $      | 2,104,749 |   |
| Less:   Accumulated depreciation                                                                         |   | 1,581,871  |      | 1,460,575  |   |
| **Total Property and  Equipment**                                                                             |   | $          | 1,056,438 |       | $      | 644,174 |   |
|                                                                                                          |   |       |      |       |   |
| **Other Assets**                                                                                              |   |       |      |       |   |
| Deposits                                                                                                      |   | $          | 10,000    |       | $      | 10,000 |   |
|                                                                                                          |   |       |      |       |   |
| **TOTAL ASSETS**                                                                                              |   | $          | 1,475,343 |       | $      | 1,009,288 |   |
|                                                                                                          |   |       |      |       |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                 |   |       |      |       |   |
| **Current Liabilities**                                                                                       |   |       |      |       |   |
| Accounts payable                                                                                              |   | $          | 27,650    |       | $      | 13,400 |   |
| Accrued expenses                                                                                              |   | 6,767      |      | 5,088      |   |
| Payroll tax payable                                                                                           |   | 374        |      | 1,259      |   |
| Sales tax payable                                                                                             |   | 138        |      | 178        |   |
| Customer deposits on orders                                                                                   |   | 116,157    |      | 54,131     |   |
| Current maturities of long-term liabilities                                                                   |   | 56,400     |      | 47,857     |   |
| **Total Current  Liabilities**                                                                                |   | $          | 207,486   |       | $      | 121,913 |   |
|                                                                                                          |   |       |      |       |   |
| **Long-Term  Liabilities**                                                                                    |   |       |      |       |   |
| Long-term liabilities, less current  maturities                                                               |   | $          | 882,950   |       | $      | 604,391 |   |
|                                                                                                          |   |       |      |       |   |
| **TOTAL LIABILITIES**                                                                                         |   | $          | 1,090,436 |       | $      | 726,304 |   |
|                                                                                                          |   |       |      |       |   |
| **Stockholders’  Equity**                                                                                |   |       |      |       |   |
| Preferred stock, no par value; 30,000,000  shares authorized in 2003 and 2002; 0 issued                       |   | $          | —    |       | $      | — |   |
| Common stock, no par value; 50,000,000  shares authorized in 2003 and 2002; 5,842,596 issued in 2003 and 2002 |   | 2,665,595  |      | 2,665,595  |   |
| Accumulated (deficit)                                                                                         |   | (2,280,688 | )         | (2,382,611 | )      |
|                                                                                                          |   |       |      |       |   |
| **TOTAL STOCKHOLDERS’  EQUITY**                                                                          |   | $          | 384,907   |       | $      | 282,984 |   |
|                                                                                                          |   |       |      |       |   |
| **TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                          |   | $          | 1,475,343 |       | $      | 1,009,288 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

27

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**WESTERN FEED MILLS, INC.**

Cedar Vale, Kansas

**STATEMENTS OF OPERATIONS**

For The Years Ended December 31,

 
|                            |   | **2003**  |      | **2002**  |   |
|---------------------------------|--------|-----------|-----------|-----------|--------|
|                            |   |      |      |      |   |
| **NET SALES**                   |   | $         | 3,358,136 |      | $      | 2,948,185 |   |
|                            |   |      |      |      |   |
| **Cost of Sales**               |   | 2,481,181 |      | 2,167,325 |   |
|                            |   |      |      |      |   |
| **Gross Profit**                |   | $         | 876,955   |      | $      | 780,860 |   |
|                            |   |      |      |      |   |
| **OPERATING EXPENSES**          |   |      |      |      |   |
| Delivery                        |   | $         | 207,291   |      | $      | 149,344 |   |
| Depreciation                    |   | 61,660    |      | 56,930    |   |
| Selling                         |   | 112,248   |      | 109,770   |   |
| General and administrative      |   | 358,587   |      | 351,135   |   |
| **Total Operating  Expenses**   |   | $         | 739,786   |      | $      | 667,179 |   |
|                            |   |      |      |      |   |
| **OPERATING INCOME**            |   | $         | 137,169   |      | $      | 113,681 |   |
|                            |   |      |      |      |   |
| **OTHER EXPENSES  (INCOME)**    |   |      |      |      |   |
| Interest                        |   | $         | 35,246    |      | $      | 33,988 |   |
|                            |   |      |      |      |   |
| **NET INCOME**                  |   | $         | 101,923   |      | $      | 79,693 |   |
| Other comprehensive income      |   | —    |      | —    |   |
| Comprehensive income            |   | 101,923   |      | 79,693    |   |
|                            |   |      |      |      |   |
| Basic earnings per common share |   | $         | 0.02      |      | $      | 0.01 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

28

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**WESTERN FEED MILLS, INC.**

Cedar Vale, Kansas

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

For The Years Ended December 31, 2003 and 2002

 
|                                  |   | **Common  Stock**                  |   |       |      |                       |   |
|---------------------------------------|--------|------------------------------------|--------|------------|-----------|----------------------------|--------|
|                                  |   | **Number  of Shares  Outstanding** |   | **Amount** |      | **Accumulated  (Deficit)** |   | **Total** |   |
|                                  |   |                               |   |       |      |                       |   |   |   |
| **Balance -  December 31, 2001** |   | 5,842,596                          |   | $          | 2,665,595 |                       | $      | (2,462,304 | ) | $ | 203,291 |   |
|                                  |   |                               |   |       |      |                       |   |   |   |
| Net income                            |   | —                             |   | —     |      | 79,693                     |   | 79,693 |   |
|                                  |   |                               |   |       |      |                       |   |   |   |
| **Balance -  December 31, 2002** |   | 5,842,596                          |   | $          | 2,665,595 |                       | $      | (2,382,611 | ) | $ | 282,984 |   |
|                                  |   |                               |   |       |      |                       |   |   |   |
| Net income                            |   |                               |   |       |      | 101,923                    |   | 101,923 |   |
|                                  |   |                               |   |       |      |                       |   |   |   |
| **Balance -  December 31, 2003** |   | 5,842,596                          |   | $          | 2,665,595 |                       | $      | (2,280,688 | ) | $ | 384,907 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

29

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**WESTERN FEED MILLS, INC.**

Cedar Vale, Kansas

**STATEMENTS OF CASH FLOWS**

For The Years Ended December 31,

 
|                                                                              |   | **2003** |     | **2002** |   |
|-----------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
|                                                                              |   |     |     |     |   |
| **INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                             |   |     |     |     |   |
|                                                                              |   |     |     |     |   |
| **CASH FLOWS FROM  OPERATING ACTIVITIES**                                         |   |     |     |     |   |
| Net income                                                                        |   | $        | 101,923  |     | $      | 79,693 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |   |     |     |     |   |
| Depreciation expense                                                              |   | $        | 121,296  |     | $      | 92,606 |   |
| Change in assets and liabilities                                                  |   |     |     |     |   |
| (Increase) decrease in trade receivables                                          |   | 5,569    |     | (85,302  | )      |
| (Increase) decrease in payroll tax  receivable                                    |   | 2,906    |     | (2,906   | )      |
| (Increase) decrease in inventories                                                |   | (33,959  | )        | 3,830    |   |
| Increase (decrease) in accounts payable                                           |   | 14,250   |     | (8,052   | )      |
| Increase (decrease) in accrued expenses                                           |   | 1,679    |     | 1,167    |   |
| Increase (decrease) in payroll tax payable                                        |   | (885     | )        | 1,259    |   |
| Increase (decrease) in sales tax payable                                          |   | (40      | )        | 178      |   |
| Increase (decrease) in customer deposits on  orders                               |   | 62,026   |     | 40,937   |   |
| **Total Adjustments**                                                             |   | $        | 172,842  |     | $      | 43,717 |   |
|                                                                              |   |     |     |     |   |
| **NET CASH PROVIDED  BY OPERATING ACTIVITIES**                                    |   | $        | 274,765  |     | $      | 123,410 |   |
|                                                                              |   |     |     |     |   |
| **CASH FLOWS FROM  INVESTING ACTIVITIES**                                         |   |     |     |     |   |
| Purchase of property and equipment                                                |   | $        | (533,560 | )        | $      | (74,690 | ) |
|                                                                              |   |     |     |     |   |
| **CASH FLOWS FROM  FINANCING ACTIVITIES**                                         |   |     |     |     |   |
| Increase in deferred compensation                                                 |   | $        | 18,102   |     | $      | 18,102 |   |
| Proceeds from long-term debt                                                      |   | 329,000  |     | —   |   |
| Principal payments on long-term debt                                              |   | (60,000  | )        | (96,818  | )      |
| **Net Cash Provided  by (Used in) Financing Activities**                          |   | $        | 287,102  |     | $      | (78,716 | ) |
|                                                                              |   |     |     |     |   |
| **NET INCREASE IN  CASH AND EQUIVALENTS**                                         |   | $        | 28,307   |     | $      | (29,996 | ) |
|                                                                              |   |     |     |     |   |
| **CASH AND  EQUIVALENTS - BEGINNING**                                             |   | 36,245   |     | 66,241   |   |
|                                                                              |   |     |     |     |   |
| **CASH AND  EQUIVALENTS - ENDING**                                                |   | $        | 64,552   |     | $      | 36,245 |   |
|                                                                              |   |     |     |     |   |
| **SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION**                            |   |     |     |     |   |
| Cash payments for interest                                                        |   | $        | 35,246   |     | $      | 33,988 |   |

 

**DISCLOSURE OF ACCOUNTING POLICY**

For purposes of the statement of cash flows,the Company considers cash and all highly liquid debt instruments purchasedwith a maturity of three months or less to be cash and cash equivalents.

 

Theaccompanying notes are an integral part of these financial statements.

 

30

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***Notes to FinancialStatements***

 

**WESTERN FEED MILLS, INC.**

Cedar Vale, Kansas

**NOTES TO FINANCIAL STATEMENTS**

December 31, 2003 and 2002

 

**Note 1:  Nature of Business and Significant Accounting Policies**

**Nature of Business**

The Company is engaged in the manufacturing and sale of livestockfeed.  Sales are primarily to customersin the agribusiness industry in Kansas and Oklahoma.  The Company’s sales are seasonal with approximately 75% of salesdelivered in the first and last quarters of the year.  The Company’s sales and cost of sales are dependent on commodityprices.

 

**Significant Accounting Policies**

***AccountingEstimates and Assumptions***

The preparation of financial statements, in conformity with accountingprinciples generally accepted in the United States of America, requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities at thedate of the financial statements, and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

***RevenueRecognition***

Sales are recorded when the customer picks up feed at the feed mill orfeed is delivered to the customer.

 

***EarningsPer Common Share***

Basic earnings per common share (EPS) is computed by dividing incomeavailable to common stockholders by the weighted-average number of commonshares outstanding for the period.  Theweighted average number of common shares outstanding for computing basic EPSwas 5,842,596 for both years ended December 31, 2003 and 2002.  There were no potentially dilutivesecurities at December 31, 2003 or 2002.

 

***Inventories***

Inventories are stated at the lower of cost (first-in, first-outmethod) or market.  Inventory costsinclude raw materials, direct labor, and direct overhead.  Direct labor costs include payroll, payrolltaxes, and fringe benefits of employees directly related to the production ofinventories.  Direct overhead includesall cost directly associated with the operation of the feed mill used for theproduction of inventories.

 

***Propertyand Equipment***

Property and equipment are stated at cost.  Depreciation is computed primarily by the straight-line methodover the following estimated useful lives:

 
|                          |   | **Years** |   |
|-------------------------------|--------|-----------|--------|
| Buildings and grain bins      |   | 25        |   |
| Machinery and equipment       |   | 12        |   |
| Automobiles and trucks        |   | 3 - 7     |   |
| Office furniture and fixtures |   | 7         |   |

 

***Accountingfor the Impairment or Disposal of Long-Lived Assets***

The Company’s policy is to recognize an impairment loss if the carryingamount of a long-lived asset to be disposed of is not recoverable from itsundiscounted cash flows.  The impairmentloss will be measured by the difference between the carrying amount and thefair value of the assets.

 

31

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Fair value is based on an estimated amount that would be obtainable inthe marketplace over a reasonable period of time.

 

Management reviews the status of long-lived and assesses for impairmentwhenever events or changes in circumstances indicate the carrying value may notbe recoverable.

 

***IncomeTaxes***

Deferred taxes are provided on a liability method whereby deferred taxassets are recognized for deductible temporary differences and operating loss,and tax credit carryforwards and deferred tax liabilities are recognized fortaxable temporary differences. Temporary differences are the differences between the reported amountsof assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

**Note 2:  Inventories**

Inventories at December 31 were composed of thefollowing:

 
|                          |   | **2003** |    | **2002** |   |
|-------------------------------|--------|----------|---------|----------|--------|
| Commercial feed ingredients   |   | $        | 94,696  |     | $      | 53,486 |   |
| Manufactured commercial feeds |   | 60,232   |    | 67,483   |   |
|                          |   | $        | 154,928 |     | $      | 120,969 |   |

 

**Note 3:  PledgedAssets and Long-Term Liabilities**

The Company’s long-term liabilitiesconsisted of the following at December 31,:

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **2003** |    | **2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Note payable to a bank, due in semi-annual  installments of $23,929, plus variable rate interest at LIBOR plus 3% due  quarterly.  The note is collateralized  by the general assets of the Company and contains loan covenants disclosed  below.  This note was amended  June 2003 to increase the amount of borrowing available to a total of  $564,000.  The semi-annual principal  installment was increased to $28,200.   The maturity date was extended to April 15, 2008.  The other loan terms remained the same. |   | $        | 504,000 |     | $      | 235,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |     |    |     |   |
| Deferred compensation payable to an officer  and shareholder of the Corporation with an agreement to not demand payment  before 2005, except in the case of death or termination.  This carries a 5.5% interest rate and is  unsecured.                                                                                                                                                                                                                                                                                                                 |   | 435,350  |    | 417,248  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $        | 939,350 |     | $      | 652,248 |   |
| Less:   Current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 56,400   |    | 47,857   |   |
| **Total**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $        | 882,950 |     | $      | 604,391 |   |

 

32

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The note payable to the bank containsthe following loan covenants

 

1.               The Company willnot incur additional indebtedness of more than $25,000 without prior approvalfrom the bank.

 

2.               The Company willnot merge with another entity without prior approval from the bank.

 

3.               The Company willmaintain adequate liability and property insurance.

 

4.               The Company willmaintain a Fixed Charge Coverage Ratio of net less than 1 to 1.

 

5.               The Company willnot make any advances or loans to affiliated persons or entities.

 

Failure to meet these covenants could result inforeclosure proceedings or the covenant could be waived.

 

The Company was in compliance with all loan covenantsat December 31, 2003 and 2002.

 

Aggregate maturities of long-term liabilities areas follows at December 31,:

 
|                          |   | **2003** |    | **2002** |   |
|-------------------------------|--------|----------|---------|----------|--------|
| Year ending December 31, |   |     |    |     |   |
| 2003                          |   | $        | —  |     | $      | 47,857 |   |
| 2004                          |   | 56,400   |    | 47,857   |   |
| 2005                          |   | 56,400   |    | 47,857   |   |
| 2006                          |   | 56,400   |    | 91,429   |   |
| 2007                          |   | 56,400   |    | —   |   |
| 2008                          |   | 278,400  |    | —   |   |
| Thereafter                    |   | 435,350  |    | 417,248  |   |
|                          |   |     |    |     |   |
| **Total**                     |   | $        | 939,350 |     | $      | 652,248 |   |

 

**Note 4:  Income Taxes**

A reconciliation of income taxes computed at the United States federalstatutory income tax rate (15% to 34%) to the provision (benefit) for incometaxes reflected in the Statements of Operations for the years endedDecember 31, 2003 and 2002 is as follows:

 
|                                                                |   | **2003** |   | **2002** |   |
|---------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Provision for income taxes at United States  federal statutory rate |   | $        | 18,153 |     | $      | 13,909 |   |
| State and local income taxes                                        |   | 5,170    |   | 4,224    |   |
| Use of net operating losses carried forward                         |   | (23,323  | )      | (18,133  | )      |
|                                                                |   |     |   |     |   |
| **Income Taxes**                                                    |   | $        | — |     | $      | — |   |

 

33

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Deferred tax assets and liabilities consist of thefollowing components as of December 31,:

 
|                                                         |   | **2003** |    | **2002** |   |
|--------------------------------------------------------------|--------|----------|---------|----------|--------|
| **Deferred Tax Assets**                                      |   |     |    |     |   |
| Net operating loss carryforwards                             |   | $        | 268,000 |     | $      | 305,000 |   |
| Less:   Valuation allowance                             |   | 226,000  |    | 267,000  |   |
|                                                         |   | $        | 42,000  |     | $      | 38,000 |   |
| Deferred tax liability, property and  equipment depreciation |   | 42,000   |    | 38,000   |   |
| **Net Deferred Tax**                                         |   | $        | —  |     | $      | — |   |

 

At December 31, 2003 and 2002, net operating loss carryforwards ofapproximately $671,000 and $762,000, respectively, expire for tax purposesduring the years ending December 31, 2006 through 2020.  Federal and State statutory tax rates totalapproximately 40%; however, the Company has not previously incurred Federal orState income taxes.

 

**Note 5:  Commitment**

During the years ended December 31, 2003 and 2002, the Companyentered into contracts with certain vendors to purchase a set amount ofcommodities at a set price during the following year.  The Company also entered into offsetting contracts with certaincustomers to sell a set amount of related products during the following year.  The Company considers these normal purchasesand normal sales and does not use hedging instruments.

 

**Note 6:  Related Party Transactions**

The balance sheets include the related partytransactions detailed in Note 3.  Thestatements of operations include the following approximate amounts of incomeand expenses with related parties for the years ended December 31,:

 
|                     |   | **2003** |   | **2002** |   |
|--------------------------|--------|----------|--------|----------|--------|
| Sales of  livestock feed |   | $        | 97,226 |     | $      | 95,252 |   |
| Interest expense         |   | 18,102   |   | 18,102   |   |
|                          |        |          |        |          |        |  |  |

 

**Note 7:  Deferred Compensation**

The employment agreement with the Corporation’s President, originallyentered into January 1, 1994, was restated and adopted by the Board ofDirectors of Western Feed Mills, Inc. on May 19, 2000.  This agreement restates its intent to allowthe President to defer a portion of his compensation and to defer interest onthe unpaid amount at the rate of 8% per year. The 8% rate was in effect through December 31, 2001.  It was agreed that the interest rate bechanged to 5.5% effective January 1, 2002.  The deferred amount is unsecured.  None of the President’s compensation was deferred for the yearsended December 31, 2003 and 2002. The President has verbally agreed to not demand payment beforeFebruary 1, 2005.

 

34

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