UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ____________ to __________
Commission File Number 33-89714
RED OAK HEREFORD FARMS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 84-1120614
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2010 COMMERCE DRIVE, RED OAK, IOWA 51566
(Address of principal executive offices)
(712) 623-9224
(Issuer's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
At September 30, 1997, there were 14,396,583 shares of common stock of the
registrant outstanding.
Transitional Small Business Disclosure Format (check one): Yes ____ No __X__
<PAGE>
INDEX
Page No.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements F-1
Item 2. Management's Discussion and Analysis 3
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3 Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-7 attached.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
STATEMENTS
The matters discussed in this Form 10-QSB contain forward-looking statements
that involve risks and uncertainties including risk of changing market
conditions with regard to livestock supplies and demand for products of Red
Oak Hereford Farms, Inc. (the "Company"), domestic and international regulatory
risks, competitive and other risks over which the Company has little or no
control. Consequently, future results may differ from management's
expectations. Moreover, past financial performance should not be considered a
reliable indicator of future performance.
GENERAL
Red Oak Hereford Farms, Inc. operates through its two subsidiaries, Red Oak
Farms and Midland Cattle Company.
The Company was honored by receiving two prestigious American Tasting Institute
awards. In blind taste tests, the Company's Certified Hereford Beef ("CHB")
was awarded "The Best Restaurant Beef in America" and "The Best Supermarket
Beef in America". The Company believes that this recognition helps to bring
CHB to the attention of both restaurant buyers and consumers. Currently, there
are over 50 nationally known restaurants that serve CHB and the Company has
significantly increased its premium supermarket store customers from 20 as of
June 30, 1997 to 51 as of September 30, 1997. A sampling of the Company's
supermarket and restaurant clientele includes:
Red Apple Supermarkets in Washington
Sutton Place Gourmet in New York, Connecticut and Washington, DC
Treasure Island Foods of Chicago
Steele's Markets in Colorado
Miler's Markets in Indiana
Sunshine Foods in South Dakota
The New York Hilton
The Riviera in Las Vegas
The Hilton Sante Fe
The Fort in Denver
Veladi Ranch Steakhouses in Houston, Oklahoma City, Tulsa, Dallas and
San Antonio
<PAGE>
PERSONNEL. Subsequent to the date of this report the Company experienced a
turnover of key personnel. In mid-October, 1997, Mike Roller, the Company's
Chief Executive Officer, Ellen DeWitt, Red Oak Farm's Chief Financial Officer,
and Brian Dolphin, Midland Cattle Company's Chief Financial Officer left the
Company. The Company is actively seeking qualified people to fill these
positions.
GEMSBOK PROGRAMMING INC. Gemsbok Programming, Inc., ("Gemsbok") provides the
Company's financial public relations services. Gemsbok maintains the Company's
website (www.redoakfarms.com) and service investor requests at the Company's
800 number.
BEEF AMERICA CONTRACT. As of this reporting period, Red Oak has not met the
quota specified in its contract with Beef America and is technically in default
of the agreement. However, Beef America has not terminated the agreement and
is willing to work with the company as the CHB market develops. Further,
should Beef America terminate the contract, numerous processing and packing
plant facilities are available to Red Oak and should the need arise, the
company can establish a new relationship without serious consequence to
production of CHB.
AHA CONTRACT. Red Oak Farms is under contract with the American Hereford
Association and has exclusive license to market Certified Hereford Beef
("CHB"). As of the reporting date the Company has not met the pro-rata volume
commitment necessary for the royalty liability; however, the Company has
accrued an amount representative of the pro-rata liability as of the reporting
date. The 1997 obligation is for $500,000. The Company believes that
sufficient funds will be available to meet this obligation from proceeds of
stock sales and product sales revenue.
IDED LOAN. Red Oak Farms, Inc. is current on its long term loan obligation
with the Iowa Department of Economic Development (IDED) and as of September 30,
1997, the principal balance remaining on this loan was approximately $482,302.
Management believes that proceeds from capital raising activities and product
sales revenue will be adequate to continue meeting this obligation.
MOORMANS LOAN. Red Oak Farms, Inc. is in technical non-compliance on certain
non-financial conditions on its loan agreement with Moormans, the Company's
feed supplier, which gives Moormans the right to call the loan. However,
Moormans has given no indication of any intention to call this obligation. The
loan amount of $1,000,000 is due October 2001 with interest only payable
monthly at approximately $9,000 per month. The Company is currently meeting
the payment obligations from proceeds of capital raising activities and
believes additional stock sales and revenue from product sales will be
sufficient to satisfy this obligation.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had a consolidated cash and cash
equivalents balance of $753,467 and net working capital of $3,445,509.
On March 27, 1997, the Company commenced a private offering relying upon
Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder.
As of September 30, 1997, the Company has raised gross proceeds of
approximately $4,500,000 from the private offering. Subsequent to this
reporting period, the Company closed the private offering on October 17, 1997.
Also subsequent to this reporting period, the Company commenced a second
private placement on October 28, 1997. The private placement is for 840,000
Units at $4.00 per Unit. Each Unit consists of one share of common stock of
the Company and a Warrant to purchase one share of common stock of the Company
at $7.00 per share.
For the period ending September 30, 1997, all of the 400,000 shares allocated
and granted pursuant to the Company's 1995 Stock Option Plan have been
exercised at a price of $3.00 per share and the Company recognized $1,200,000
in gross proceeds. Pursuant to the 1997 Stock Option Plan, options for
394,000 shares have been granted to date. As of September 30, 1997, none of
the options granted pursuant to the 1997 Stock Option Plan have been exercised.
Cash flows for the Company from financing activities decreased from providing
$6,426,457 in the first nine months of 1996 to cash provided of $3,892,984 in
the first nine months of 1997. The majority of the decrease is due to a
decrease of borrowings by the Company which is partially offset by stock sales
from the private offering and exercise of stock options.
Cash used by investing activities changed from $46,266 in usage during the
first nine months of 1996 to $33,989 provided in the first nine months of 1997.
During the first nine months of 1997, the Company made no major purchases of
equipment and made no capital improvements, while during the first nine months
of 1996, the Company completed furnishing its office space with furniture, a
computing system and a telephone system. Because of the Company's growth, the
Company is currently expanding its office space which is scheduled for
completion in November, 1997.
REVOLVING LINES OF CREDIT. The Company, through its subsidiaries, has
revolving lines of credit that provide for borrowings up to $1.5 million for
Red Oak Farms and $2.5 million for Midland. These lines bear a floating rate
of interest equal to 2% and 1.5%, respectively, above the lender's prime rate
of interest (10.50% and 10.00% as of September 30, 1997). The Company is in
technical non-compliance with non-financial terms of the lines of credit. The
subsidiaries pay the lender a fee of .25% of the unused credit lines, payable
quarterly. The lines of credit are due to expire on January 31, 1998.
CAPITAL EXPENDITURES. The Company has no commitments for any significant
capital expenditures in the immediate future. However, should the Company be
successful in raising sufficient funds in the current private placement, the
Company will actively seek to lease or purchase a packaging facility.
<PAGE>
INFLATION. The Company does not believe that inflation has had a material
effect on its results of operations. However, there can be no assurance that
the Company's business will not be affected by inflation in the future.
The Company believes that through its marketing strategy and customer
acquisition plan it will recognize a growth in the retail account base,
increased CHB sales and a broader CHB product mix. With increased sales of
CHB, along with proceeds from the private offerings and the availability of
credit, the Company believes there will be adequate funds to meet the
Company's obligations.
RESULTS OF OPERATIONS
Comparison for the three months ended September 30, 1997 and the three months
ended September 30, 1996 and comparison for the nine months ended September 30,
1997 and the nine months ended September 30, 1996.
RED OAK HEREFORD FARMS, INC.
The Company was formerly Wild Wings, Inc., and is the holding company, owning
100% of Red Oak Farms and Midland Cattle Company. The Company as Wild Wings,
Inc. had insignificant operations in the prior year. For the nine months ended
September 30, 1997, the Company had $37,760 in operating expenses and $14,047
in interest income with a net loss of $23,713. For the three months ended
September 30, 1997, the Company had a net loss of $18,690.
RED OAK FARMS
Red Oak Farms is the processor and distributor of CHB beef products for Red
Oak Hereford farms, Inc. For the nine months ended September 30, 1997, Red Oak
Farms realized net losses in the amount of $2,700,688, compared to $2,142,929
in net loss for the same period in 1996. These losses as a percentage of net
sales measured 11.18% in 1997 versus 4.82% in the first nine months of 1996.
For the three months ended September 30, 1997, the Company realized $836,417
of losses. This represents 10.93% of net sales for the period. For the same
period in 1996, the Company incurred losses of $691,929, an amount representing
4.35% of sales. Management attributes the increased net loss to decreased
sales, increased costs of a public company and to the current product mix, in
which bulk beef sales continues to be the dominant revenue source. During the
third quarter, however, the company made some advances in the retail sector for
premium CHB by adding 31 new supermarket customers. While adding new retail
accounts in the third quarter 1997 improved the product mix, generated higher
average sales and slightly improved margins, additional retail growth must be
attained to reach profitability. Red Oak Farms is in various stages of
business development with numerous new retail prospects and it is anticipated
that several of these potential buyers will participate in the CHB program.
<PAGE>
During the first nine months of 1997, Red Oak Farms sales to 7 major customers
approximated 43.03% of Red Oak Farm's net sales. Sales for the first nine
months of 1997 decreased 45.67%, from $44,476,252 in 1996 to $24,163,018 in
1997, which resulted from a combination of market factors and the loss of a
large customer in January 1997. With the addition of the new retail stores over
the third quarter, Red Oak Farms has significantly reduced its risk of
dependency on one or two large customers. For the three months ended
September 30, 1997, sales decreased to $7,651,871 from $15,890,006 for the
three months ended September 30, 1996, a decrease of 51.84%.
For Red Oak Farms, the decline in sales resulted in reduced inventory and
production needs. As a consequence, the cost of goods sold decreased from
$45,762,369 in 1996 to $25,622,240 in 1997, a decrease of 44.01% in the first
nine months of 1997 as compared to the first nine months of 1996.
The cost of goods sold includes $508,357 and $1,189,899 in purchases from
Midland for the nine months ended September 30, 1997 and 1996 respectively.
These amounts have been eliminated from the accompanying financial statements.
For the three months ended September 30, 1997, the cost of goods sold decreased
to $7,996,922 from $16,169,743 for the three months ended September 30, 1996, a
decrease of 50.54%.
Selling, general and administrative expense at Red Oak Farms for the first
nine months of 1997 was $1,123,308 compared to $724,822 for the same period in
1996. This is a 54.98% increase from the first nine months of 1996 and is a
result of increased costs of a public company, primarily personnel and
personnel related expenses. For the three month period ended September 30,
1997, the selling, general and administrative expense was $451,668 compared to
$350,037 for the three months ended September 30, 1996, an increase of 29.03%.
During the first nine months of 1997, Red Oak Farms realized $704,670 in sales
to Korea. During the three month period ended September 30, 1997, Red Oak
Farms realized $198,404 in sales to Korea. There were no Korean sales made in
the first nine months of 1996. The Company is also continuing to pursue CHB
export opportunities in China and Japan and anticipates additional sales in the
Asian market in the fourth quarter of 1997 in response to a sampling program
the Company has promoted in Asia.
MIDLAND CATTLE COMPANY
Midland Cattle Company acts as a cattle broker and facilitates the
identification of producers and inventory for Red Oak Hereford Farms. For the
nine months ended September 30, 1997, Midland Cattle Company ("Midland") had
net income in the amount of $54,921, compared to $272,516 in net loss for the
same period in 1996. For the three months ended September 30, 1997, Midland
recognized net income of $37,424. For the same three month period in 1996,
Midland recognized net income of $199,447. Management attributes the overall
improvement in 1997 to increases in volume due to better availability of
cattle. Midland anticipates volume to continue to expand as the CHB program
continues to grow.
<PAGE>
Midland has seen revenue growth for the first nine months of 1997. For the
nine months ended September 30, 1997, Midland had net sales of $55,673,522
versus $41,157,762 for the same period in 1996. This represents an increase of
35.27% from 1996 to 1997. The Midland net sales amounts include $508,357 and
$1,189,899 in sales to Red Oak Farms for the nine months ended September 30,
1997 and 1996 respectively. These amounts have been eliminated from the
accompanying financial statements. For the three months ended September 30,
1997, net sales were $21,183,380 compared to $23,920,918 for the three months
ended September 30, 1996, a decrease of 11.44%. Midland has a wide customer
base that is continually expanding through networking and marketing efforts in
anticipation of the continued growth of the CHB program.
For Midland, as a result of the increase in sales, cost of goods sold for the
first nine months of 1997 increased to $54,542,667 versus cost of goods sold
for the first nine months of 1996 of $40,488,975. This represents an increase
of 34.71% between the two periods. For the three months ended September 30,
1997, cost of goods sold was $20,777,072 compared to $23,347,405 for the three
months ended September 30, 1996, a decrease of 11.01%.
Selling, general and administrative expenses at Midland for the first nine
months of 1997 was $943,147 compared to $822,097 for the same period in 1996.
This represents a 14.72% increase from the first nine months of 1996 and is
primarily a result of increased selling costs consistent with increased sales
volumes for 1997. For the three months ended September 30, 1997, selling,
general and administrative expenses were $323,633 compared to $328,536 for the
three months ended September 30, 1996, a decrease of 1.49%.
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
In reliance upon Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder, the Company offered 1,500,000 Units of which 160,000
Units were sold during the first quarter, 540,334 Units were sold during the
second quarter and 799,666 Units were sold for the period ended September 30,
1997. Each Unit consisted of one share of the Company's common stock and a
warrant to purchase one share of the Company's common stock. This offering
was made exclusively to persons who met the suitability standards established
by the Company.
400,000 shares of the Company's common stock were issued pursuant to the
exercise of outstanding stock options granted to employees under the Company's
1995 Stock Option Plan. The options were exercised at a price of $3.00 per
share. 109,430 options were exercised during the first quarter of 1997, 85,500
options were exercised during the second quarter of 1997 and 205,070 options
were exercised during the third quarter of 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
Exhibit No. SEC Reference Title Location
27 27 Financial Data Schedule Attached
(b) No reports on Form 8-K were filed, or required to be filed, by the
Company during the period ended September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
November 14, 1997 By:_____________________________
Gordon Reisinger, President
November 14, 1997 By:_______________________________
Gordon Reisinger, Chief Financial
Officer & Treasurer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
November 14, 1997 By: /s/ ____Gordon Reisinger________
Gordon Reisinger, President
November 14, 1997 By:/s/ ____Gordon Reisinger________
Gordon Reisinger, Chief Financial
Officer & Treasurer
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 753,467
Accounts receivable 4,338,275
Inventory 1,568,135
Prepaid expenses 457,832
____________
Total Current Assets 7,117,709
____________
PROPERTY AND EQUIPMENT, AT COST
Buildings and leasehold improvements 284,696
Vehicles and equipment 200,596
____________
485,292
Less: accumulated depreciation 201,076
____________
284,216
____________
OTHER ASSETS 81,284
____________
TOTAL ASSETS $ 7,483,209
____________
(Continued)
<PAGE>
RED OAK HEREFORD FARMS, INC.CONDENSED CONSOLIDATED BALANCE SHEET
(CONTINUED)SEPTEMBER 30, 1997(UNAUDITED)
LIABILITIES AND STOCKHOLDERS= EQUITY
</TABLE>
<TABLE>
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 981,996
Accrued expenses 87,547
Notes payable 2,583,841
Current maturities of long-term debt 18,816
____________
Total Current Liabilities 3,672,200
____________
LONG-TERM DEBT 463,486
____________
DEFERRED PAYABLE 1,000,000
____________
DEFERRED INCOME 300,000
____________
STOCKHOLDERS= EQUITY
Common stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding
14,396,583 shares 14,396
Common stock, subscribed, 31,107 shares 31
Additional paid-in capital 4,254,582
____________
Retained earnings (deficit) (2,221,486)
____________
TOTAL STOCKHOLDERS= EQUITY 2,047,523
____________
TOTAL LIABILITIES AND STOCKHOLDERS= EQUITY $ 7,483,209
____________
<PAGE>
RED OAK HEREFORD FARMS, INC.CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
NINE MONTHS AND THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
</TABLE>
<TABLE>
<S> <C> <C>
Three Months Ended Nine Months Ended
September 30 September 30
_______________________ _______________________
1997 1996 1997 1996
__________ __________ __________ __________
NET SALES $29,354,525 $38,621,026 $79,328,183 $83,683,590
COST OF GOODS 29,293,268 38,327,250 79,656,550 84,300,920
SOLD
__________ __________ __________ __________
GROSS PROFIT 61,257 293,776 (328,367) (617,330)
(LOSS)
OPERATING 817,198 678,573 2,104,215 1,546,919
EXPENSES __________ __________ __________ __________
LOSS FROM (755,941) (384,797) (2,432,582) (2,164,249)
OPERATIONS __________ __________ __________ __________
OTHER INCOME
(EXPENSE)
Interest income 23,207 26,875
Interest expense (84,949) (107,685) (263,773) (251,196)
__________ __________ __________ __________
(61,742) (107,685) (236,898) (251,196)
__________ __________ __________ __________
NET LOSS $ (817,683) $ (492,482) $(2,669,480) $(2,415,445)
__________ __________ __________ __________
EARNINGS (LOSS) $ (.06) $ (.04) $ (.20) $ (.19)
PER SHARE __________ __________ __________ __________
WEIGHTED
AVERAGE SHARES
OUTSTANDING 14,431,144 12,498,462 13,367,108 12,498,462
__________ __________ __________ __________
<PAGE>
RED OAK HEREFORD FARMS, INC.CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
</TABLE>
<TABLE>
<S> <C> <C>
1997 1996
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,669,480) $(2,415,445)
Items not requiring cash:
Depreciation and amortization 93,120 51,385
Changes in:
Accounts receivable 155,329 (2,674,095)
Inventories (511,526) (476,147)
Prepaid expenses (361,631) (219,601)
Accounts payable and accrued expenses 122,062 (803,120)
Deferred income 200,000
Other assets (1,380) (43,168)
__________ __________
Net cash used in
operating activities (3,173,506) (6,380,191)
__________ __________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (25,838) (46,266)
Proceeds from sale of equipment 59,827
__________ __________
Net cash provided by (used in) 33,989 (46,266)
investing activities __________ __________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable 125,000 500,000
Net borrowings on line of credit 737,624 1,474,036
Payments on long-term debt (138,409)
Net proceeds from issuance of
common stock 4,806,089
Purchase of treasury stock (31,000)
Capital contribution 1,267,500
Distributions paid (60,459)
Change in checks outstanding in
excess of bank balance (1,545,861) 3,184,921
__________ __________
Net cash provided by (used in)
financing activities 3,892,984 6,426,457
__________ __________
INCREASE IN CASH 753,467 0
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 0 0
__________ __________
CASH AND CASH EQUIVALENTS, $ 753,467 $ 0
END OF PERIOD __________ __________
<PAGE>
RED OAK HEREFORD FARMS, INC. AND PREDECESSOR
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Red Oak Hereford Farms, Inc. (the Company) is a Nevada corporation
(previously named Wild Wings, Inc.) that is engaged in the business of
selling premium, branded, fresh beef to retail and food service markets,
through its wholly-owned subsidiary, Red Oak Farms, Inc. (Red Oak), an Iowa
corporation, and is engaged in buying and selling feeder cattle in the
wholesale markets through its wholly-owned subsidiary, Midland Cattle
Company, Inc. (Midland). The Company extends unsecured credit to customers
predominantly located in the Southwest and Midwest United States.
In February 1997, Red Oak Farms, Inc. was formed with the members of Mid-Ag,
Inc., an LLC, contributing the assets and liabilities of Mid-Ag to Red Oak
in exchange for all of the outstanding stock of Red Oak. On March 14, 1997,
all of the outstanding stock of Red Oak was issued to the Company in exchange
for 10,000,000 restricted common shares of the Company plus options to
purchase an additional 3,000,000 shares of the Company. As a result of this
transaction, Red Oak became a wholly-owned subsidiary of the Company. For
accounting purposes, Red Oak is deemed to be the acquiring corporation and,
therefore, the transaction is being accounted for as a reverse acquisition of
the Company by Red Oak. Prior to March 14, 1997, the Company operated a
hunting club and had insignificant operations.
On May 19, 1997, the Company acquired Midland in a stock-for-stock
transaction. In exchange for all of the outstanding stock of Midland, the
Company issued 1,538,462 restricted shares of the Company to the former
shareholders of Midland. Additionally, a deferred payment of $1,000,000 is
due and payable to the former Midland shareholders. The payment will be
made at the rate of 25% of Midland=s profits until the $1,000,000 is reached.
As a result of this transaction, Midland became a wholly-owned subsidiary of
the Company. For accounting purposes, the Company and Midland were deemed
to be under common control and, therefore, the transaction is being
accounted for in a manner similar to pooling of interest, whereby assets
and liabilities are reported at historical values.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Red Oak Farms, Inc. and Midland
Cattle Company. All significant intercompany accounts and transactions
have been eliminated in consolidation. Earnings per share are calculated
using the weighted average shares outstanding and as if the shares of the
Company at September 30, 1997 had been outstanding for all periods presented.
<PAGE>
RED OAK HEREFORD FARMS, INC. AND PREDECESSOR
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
The condensed consolidated financial statements do not include all footnotes
and certain financial information normally presented annually under generally
accepted accounting principles and, therefore, should be read in conjunction
with the Company's December 31, 1996 year-end financials found in the
Company's Form 8-K (File No. 033-89714), dated March 14, 1997, and the
Company's Form 8-K dated May 19, 1997 and Form 8-K/A dated July 25, 1997
(amending the May 19, 1997 8-K report to include financial statements from
Midland and pro forma financial information). Accounting measurements at
interim dates inherently involve greater reliance on estimates than at
year-end. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of results that can be expected for the
full year.
The condensed consolidated financial statements included herein are unaudited;
however, they contain all adjustments (consisting of normal accruals) which,
in the opinion of the Company, are necessary to present fairly its
consolidated financial position at September 30, 1997, and its consolidated
results of operations and cash flows for the interim periods shown. The
results of operations for the interim periods shown are not necessarily
indicative of the results for the entire fiscal year ending December 31,
1997.
The Company entered into a revised agreement on March 21, 1997 with the
American Hereford Association (the AAHA@) for the exclusive license and
right to process, distribute and sell Certified Hereford Beef (ACHB@) under
the CHB trademark. The agreement expires December 31, 1999. The agreement
automatically renews for a three-year period beginning January 1 of each
calendar year commencing on January 1, 2000, provided the terms of the
agreement are met. The revised agreement also includes various operating
standards and requirements of the Company as well as minimum royalty fees of
$500,000, $725,000 and $850,000 for 1997, 1998 and 1999, respectively. As
of the reporting date, the Company has not met the pro rata volume
commitment necessary for the royalty liability; however, the Company has
accrued an amount representative of the pro rata liability as of the
reporting date.
Beginning in March 1997, the Company began a private placement to issue up to
1,500,000 units comprising 1,500,000 common shares and 1,500,000 common stock
purchase warrants for $3.00 per unit. The common stock purchase warrants
are callable at $.001 per share on 30 days= notice and grants the holder the
right to purchase common stock at $5.00 per share. As of September 30, 1997,
all units have been sold.
Also subsequent to this reporting period, the Company commenced a second
private placement on October 28, 1997. The private placement is for 840,000
units at $4.00 per unit. Each unit consists of one share of common stock of
the Company and a warrant to purchase one share of common stock of the
Company at $7.00 per share.
The Company is also authorized to issue up to $5,000,000 worth of preferred
stock.
<PAGE>
RED OAK HEREFORD FARMS, INC. AND PREDECESSOR
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
The Company has granted options to purchase 3,000,000 shares of stock between
March 17, 1997 and March 17, 2002. The shares are exercisable by the former
shareholders of Wild Wings as follows:
</TABLE>
<TABLE>
<S> <C>
Exercise
# of Shares Price
Per Share
___________
1,000,000 $ 8.00
1,000,000 $ 10.00
1,000,000 $ 12.00
In addition to the warrants issued with the private placement, the Company has
three series of warrants outstanding as follows:
</TABLE>
<TABLE>
<S> <C> <C>
Series # of Shares Exercise Price Per Share
A 960,000 $4.00
B 960,000 $4.50
C 960,000 $5.00
These warrants are not exercisable until a registration statement is filed
with the Securities and Exchange Commission and in effect for the stock
underlying the warrants. The warrants may be exercised for a period of
two years after the date of the registration statement.
The Company currently has allocated and issued options for 400,000 shares of
the Company=s common stock, exercisable at $3.00 per share, pursuant to the
1995 Stock Option Plan. Of these options, all have been exercised as of
September 30, 1997.
The Company has also adopted the 1997 Stock Option Plan and has allocated
1,000,000 shares of common stock to the Plan. To date, options for 394,000
shares of common stock of the Company, exercisable at $5.00 per share, have
been granted under the 1997 Stock Option Plan, none of which have been
exercised.
At the time of the conversion of Mid-Ag to Red Oak, total liabilities exceeded
total assets by $517,500. This deficit was recorded as excess of par value
over contributed assets. As capital has been raised during the nine months
ended September 30, 1997, the amount of capital in excess of par value was
credited to this deficit account with the remaining amount being credited to
additional paid-in capital.
<PAGE>
RED OAK HEREFORD FARMS, INC. AND PREDECESSOR
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. However, the
Company has incurred losses and deficit cash flows since its inception due
to its start-up nature in establishing a premium branded Hereford beef
product. The Company has not yet been successful in establishing profitable
operations. These factors raise substantial doubt about the ability of the
Company to continue as a going concern. In this regard, management is
proposing to raise additional funds through the re-negotiation of loan
agreements, completion of the private placement offering, and increase
product awareness through marketing efforts to attain a positive gross
profit. There is no assurance the Company will be successful in raising
this additional capital or achieving profitable operations. The condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 753
<SECURITIES> 0
<RECEIVABLES> 4,338
<ALLOWANCES> 0
<INVENTORY> 1,568
<CURRENT-ASSETS> 7,118
<PP&E> 485
<DEPRECIATION> 201
<TOTAL-ASSETS> 7,483
<CURRENT-LIABILITIES> 3,672
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 2,033
<TOTAL-LIABILITY-AND-EQUITY> 7,483
<SALES> 79,328
<TOTAL-REVENUES> 79,328
<CGS> 79,656
<TOTAL-COSTS> 79,656
<OTHER-EXPENSES> 2,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264
<INCOME-PRETAX> (2,669)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,669)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
