UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO 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.
(Name of small business issuer in its chapter)
Nevada 84-1120614
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2010 Commerce Drive, Red Oak, Iowa 51566
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (712)623-9224
Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
$.001 par value, common voting shares
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has
been subject to such filing requirements for the past 90 days.(1)Yes[X]No[ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB/A. [ ]
The issuer's revenue for its most recent fiscal year was: $105,325,693
The aggregate market value of the issuer's voting stock held as of April 10,
1998, by non-affiliates of the issuer was $21,678,714.
As of April 10, 1998, the issuer had 14,679,415 shares of its $.001 par value
common stock outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
Documents incorporated by reference: none
Page 1 of 36 consecutively numbered pages
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Red Oak Hereford Farms, Inc.
Annual Report on Form 10-KSB for the Year ended December 31, 1997
TABLE OF CONTENTS
PART I
ITEM 1 DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . .3
ITEM 2 DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . 14
ITEM 3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS. . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 17
ITEM 7 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . 22
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . 23
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT . . . . . . . . . . . . . . . . . . . 23
ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . 27
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . 30
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 32
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . 34
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 36
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PART I
This Form 10-KSB/A contains certain forward-looking statements.
For this purpose any statements contained in this Form 10-KSB/A that
are not statements of historical fact may be deemed to be forward-
looking statements. Without limiting the foregoing, words such as
"may," "will," "expect," "Believe," "anticipate," "estimate" or
"continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, and actual results may
differ materially depending on a variety of factors.
During the year ended December 31, 1997, the Company's
operations were impacted by a significant decrease in revenues.
The Company was unable to reduce costs to offset the revenue
decrease. In an effort to increase revenues, the Company is
attempting to expand its products to new markets. Unless the
Company is successful in the effort to increase revenues in the
future, the Company may be required to adjust its cost structure to
a level that could be supported by its revenues. There can be no
assurance that the Company will be able to develop additional
markets for its products or that revenue will remain at current
levels or increase in the future.
ITEM 1. DESCRIPTION OF BUSINESS
Red Oak Hereford Farms, Inc., (the "Company"), is a Nevada
corporation (previously named Wild Wings, Inc.) that is engaged
through its wholly-owed subsidiary, Red Oak Farms, Inc., ("ROF") in
the business of selling premium branded, fresh beef to retail and
food service markets and extends unsecured credit to customers
predominantly located in the southwest and midwest United States.
The principal offices of the Company are located at 2010 Commerce
Drive, Red Oak, Iowa 51566. The Company was incorporated under the
laws of the State of Colorado on July 7, 1989 originally as Winter
Ventures of Colorado, Inc. In December 1994, the Company's
shareholders approved a name change to Wild Wings, Inc., and a
change of corporate domicile from Colorado to Nevada.
In February 1997, Red Oak Farms, Inc. ("ROF") was formed with
the members of Mid-Ag, Inc., an LLC, contributing the assets and
liabilities of Mid-Ag to ROF in exchange for all of the outstanding
stock of ROF. On March 14, all of the outstanding stock of ROF 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,
ROF became a wholly-owned subsidiary of the Company. For
accounting purposes, ROF is deemed to be the acquiring corporation
and, therefore, the transaction is being accounted for as a reverse
acquisition of the Company by ROF. Prior to March 14, 1997, the
Company operated a hunting and sporting clays club and had
insignificant operations.
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On May 19, 1997, the Board of Directors of the Company
approved an Agreement to exchange Stock pursuant to which the
Company issued 1,538,462 restricted common shares of the Company in
exchange for all of the issued and outstanding shares of Midland
Cattle Company, Inc., an Iowa corporation ("Midland"). Started in
1985, Midland Cattle Company, as an Iowa joint venture, Midland
reorganized on May 19, 1997 as a corporation formed under the laws
of the state of Iowa. Midland is in the cattle brokerage business,
supplying area feedlots with feeder cattle and actively marketing
fed cattle. Midland's operations include acting as a broker for
individuals and organizations looking to buy or sell cattle and
Midland may purchase cattle short or long to cover customer
requirements.
On December 12, 1997, the Company formed another subsidiary,
Red Oak Feeders, LLC, an Iowa limited liability company,
("Feeders"). Feeders was formed to develop a supply of CHB by
financing the feeding of Hereford cattle for sale to ROF. On
December 30, 1997, Feeders entered into a Nebraska partnership,
"Quality Feeders", with MoorMan's, Inc. The partnership was formed
to feed and raise CHB. Feeders has a 50% interest in Quality
Feeders.
The primary business activities of the Company are conducted
through its subsidiaries, ROF and Midland. ROF is engaged in the
management and marketing of CHB products. In this effort, ROF
markets the CHB products and arranges the appropriate processing,
packaging and delivery. Midland is engaged in the production of
CHB cattle and in this effort Midland buys and sells feeder cattle
in wholesale markets and places Hereford feeder calves and
yearlings with feedlots approved for the CHB program.
AMERICAN HEREFORD ASSOCIATION AGREEMENT
The Company negotiated an Agreement with the American Hereford
Association ("AHA") whereby the AHA granted the Company the
exclusive marketing rights for the Association's CHB program.
Pursuant to the Agreement, the Company uses its best efforts to
procure, identify, distribute, market and sell CHB to licensed
users of the program. The Agreement imposes performance standards
on the Company; should the Company fail to meet the performance
standards for a specific calendar year, then the Company has the
option of paying a cash differential or allowing the AHA to
terminate the Agreement. In addition, the Agreement requires the
Company to pay the AHA a royalty fee calculated on CHB cattle
processed.
For the calendar year ended December 31, 1997, ROF certified
32,031 head of fed cattle as Certified Hereford Beef. Terms of the
Agreement with the AHA required a fee of $5.00 per certified head
with a minimum fee of $500,000 guaranteed by ROF to the AHA of
which $300,000 was due and payable by August 31, 1997 and the
balance of $200,000 due and payable by December 31, 1997. ROF fees
paid for certified cattle totaled $160,155. Additional fees paid
or accrued to meet minimum requirements of the Agreement totaled
$339,845.
For 1998, the Agreement requires fees of $6.00 per head for
the first 100,000 certified head processed with a minimum guarantee
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of $725,000 due and payable by December 31, 1998, of which $425,000
is due and payable by August 31, 1998. Per head fees will be
negotiated per terms of the Agreement for calendar year 1999 with
a minimum fee guarantee established at $850,000.
MOORMAN'S AGREEMENT
The Company entered into an exclusive Feed Supplement
Agreement with MoorMan's, Inc. to develop a specialized feeding
program to be a part of the Company's total quality management
program. A total quality management program is a defined and
documented plan which identifies and monitors all critical
processes, procedures or inputs which affect the quality of the end
product. Pursuant to the Agreement, the Company agreed to require
all sellers of cattle purchased by the Company as CHB to place and
maintain such cattle exclusively in feedlots and feed yards which
purchase, and have fed to such cattle for a minimum of one hundred
(100) days, all of their beef nutrient products from MoorMan's,
Inc. In consideration of requiring CHB sellers to feed MoorMan's
products, MoorMan's agreed to supply necessary capital resources to
help finance retained owner/investor cattle.
At December 31, 1997, ROF had a loan from MoorMan's in the
amount of $1,000,000, payable with interest at 1.75% over prime,
paid monthly. The principal payments start November 1, 1998 for a
period of thirty-six (36) months. The Company is current on its
obligation to MoorMan's, however, the Company is in technical
noncompliance with certain loan provisions.
NEBRASKA BEEF AGREEMENT
In November 1997, the Company changed its beef processing
company from Beef America to Nebraska Beef. On March 25, 1998, the
Company finalized a three year slaughter and fabrication agreement
with Nebraska Beef. Under this Agreement, Nebraska Beef has agreed
to slaughter and fabricate 500 - 4,500 head of cattle per week. If
the carcass count falls below these numbers in any given week,
Nebraska Beef has the right to terminate the agreement. Nebraska
Beef has also agreed to purchase all carcasses that do not meet
United States Department of Agriculture ("USDA") specification for
CHB.
BRANDED BEEF INDUSTRY AND COMPETITION
The Company is a new entry into "branded" beef marketing.
Branded or private label beef products have been in existence in
one form or another for about as long as the packing and retailing
industries. However, breed specific programs have developed
primarily in the last decade with the American Angus Association's
Certified Angus Beefregistered trademark Program ("CAB") leading the
field in sales.
Examples of branded products in other industries include
Starbucks registered trademark, Coke registered trademark, Kleenex
registered trademark, Tyson's registered trademark chicken and
Oscar Mayer registered trademark wieners.
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Historically, beef has been a generic product. There are
eighty-one known breeds of cattle and numerous cross-breeds. Many
of these breeds are better known for their strength or size rather
than for their culinary qualities. The USDA grading scale is based
on several factors including maturity, color and "marbling" (the
observed degree of intramuscular fat), regardless of breed. While
more marbling has been thought to represent more pleasing levels of
tenderness, juiciness, flavor and palatability, it is now believed
that marbling accounts for only about 10% of these qualities and
that genetics, not grades, are the primary determinant in
differences in taste and tenderness.
The Company's CHB is a premium branded beef product that
capitalizes on the consumer sensory qualities of tenderness,
juiciness, flavor and palatability inherent in Hereford cattle
genetics. Numerous studies and reports provide unbiased
documentation of the consistency and quality of Hereford beef,
including the AHA's landmark study in 1992. This study spanned
four years and the results proved Hereford beef consistently rated
superior to USDA upper and lower Choice and USDA Select in
tenderness, juiciness, flavor and palatability. These results
indicate that there is a definite need and opportunity for the
Company's CHB in the beef merchandising arena. The genetic
research, product development, promotion design, quality management
processes and consumer appeal of the product palatability
characteristics of CHB are all factors which suggest the Company's
CHB can compete not only in the commodity beef market, but on a par
with the most widely recognized U.S. branded beef product, CAB.
The Company's CHB is a unique beef product that differentiates
itself from commodity beef in many ways. The AHA has received U.S.
Trademark approval for the CHB name and logo. The name, logo and
program concepts have been created by and are solely the property
of the AHA. The Company is under contract with the AHA and has
exclusive license to market CHB. Only AHA approved and licensed
Company customers will be authorized to use the CHB name, logo and
program information. Through the AHA, the Company has access to
12,500 plus feeder calf suppliers for CHB program cattle.
The CHB program must satisfy standards established by the AHA
for genetics, breeding, appearance and feeding and then satisfy
USDA requirements during packing that confirm the characteristics
of the Hereford breed. The Company, as the exclusive licensee of
the CHB trademark, oversees the procurement, feeding and processing
of Hereford beef in conformance with AHA and USDA requirements.
AHA inspectors visually identify calves and yearlings as Hereford
or Hereford British cross breeds coming off the ranch or entering
the feedlot. When possible, calves are provided ear tags that
identify them as certified Herefords so their feed, growth and
processing can be monitored more closely. All CHB cattle are fed
a corn-based ration with uniform, vegetable based protein
supplements and no animal protein by-products to develop consistent
robust flavor and tenderness. A Company buyer will notify the
packing plant in advance of the arrival of CHB program cattle. CHB
personnel supervise the processing of CHB in each packing facility
in conjunction with grading by USDA inspectors. No CHB will
qualify for certification without satisfying AHA criteria and USDA
inspection and certification.
One of the difficulties with commodity beef is the
inconsistency of quality due to the inclusion of a wide variety of
breeds. CHB provides a consistent product with little variation in
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quality. To further this product consistency, CHB includes only
upper choice, lower choice and select grades. Prime grade Hereford
beef is sold to packers as a premium grade of commodity beef for
resale through commodity beef distribution channels.
In conjunction with providing a premium product, the Company
is pursuing a Total Quality Management ("TQM") program involving
complete process control throughout the entire production and
marketing system. Although not ISO certified, the Company is
employing techniques and procedures consistent with ISO-9000, the
international standard for quality control, allowing the Company to
bring to the beef industry a higher level of quality. This TQM
process involves unbiased third party oversight by the USDA. The
Company has conducted a pilot program with the USDA Agricultural
Marketing Service, Livestock and Seed Division, Meat Certification
and Grading Branch.
The most widely recognized branded beef product, CAB is the
largest competitor of the Company, although other private label
branded beef producers are also competitors. Some of these
competitors have been in existence longer than the Company and may
be better capitalized and have better access to financial and
marketing resources superior to those available to the Company.
In addition to direct competition with other branded beef
products, competition within the beef packing/processing industry
is concentrated among a small number of processors. The three
largest beef packers in the United States; Monfort, a subsidiary of
Con-Agra; Iowa Beef Processors; and Excel, a subsidiary of Cargill,
currently control approximately 80% of the processing market.
While these beef packers are primarily engaged in commodity beef
production, there is no assurance they will not attempt to increase
their presence in the branded beef segment of the market. With the
depth of financial resources and name recognition these packers
possess, their entry into the branded beef market would pose
serious competition to the Company.
MARKETING AND SALES
Potential customers of CHB consist primarily of quality and
value-oriented up-scale retail supermarket stores, food-service
outlets, high end restaurants and export accounts. The Company,
with full assistance from the AHA, coordinates market development
and initiates sales accounts. The Company, along with the AHA,
have developed marketing brochures and pamphlets to professionally
present the CHB program.
The Company currently has hotel, restaurant and institutional
customers as well as a number of distributors and retail customers.
As of December 31, 1997, the Company had a retail store base of 54.
A sampling of the Company's supermarket and restaurant clientele
includes:
SUPERMARKETS
Sutton Place Gourmet in New York, Connecticut
and Washington,DC
Steele's Markets in Colorado
Miller's Markets in Indiana
Sunshine Foods in South Dakota
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RESTAURANTS
The New York Hilton
The Riviera in Las Vegas
The Hilton Santa Fe
The Fort in Denver
The Waldorf-Astoria in New York
The Company employs regionally based field sales personnel and
in-house sales personnel to sell CHB products to its customers.
Emphasis is placed on professionally developed and personally
delivered sales presentations direct to retail supermarket chains
and food-service distributors. The Company also sells a small
amount of mail-order steaks to individuals and investors.
In late 1997, the Company was awarded the American Tasting
Institute's "Best Restaurant Beef in America" for the second year
running, as well as the Institute's "Best Supermarket Beef in
America" award for the first time. The Company participates in a
series of "Top 100" food-service product receptions/tastings the
Institute conducts in several large U.S. cities each year. From
time to time, the Company participates in trade show marketing
events in partnership with the AHA to promote CHB to the retail and
food-service industries.
For 1998, the Company has initiated distributor based sales
direct to food-service customers through Freshnex. This new
company is a "virtual distributor" who facilitates business to
business perishable sales transactions similar to the FedEx
delivery system, with one or two day delivery. The differentiating
element of Freshnex relative to FedEx is that Freshnex actually
assumes ownership of the product which is billed by the shipper,
extends that vendor's payment terms and invoices the customer on a
fee basis. Although still in the concept design and start-up
phase, Freshnex offers a new opportunity to develop sales direct to
food-service customers, by-passing the need to develop a large
distributor network.
The Company continually strives to develop a customer base
that maximizes carcass utilization. The ideal customer mix is a
cross-section of retail, food-service and export customers who
predominantly purchase different carcass product mixes. Sales
efforts of the Company are strategically designed to develop and
balance a broad customer base in the various customer segments for
CHB.
Because the Company is still in the process of building a
larger customer base, a significant portion of its sales of CHB are
to "commodity customers." The percent of "branded sales" (sales of
CHB to licensed customers) is an important barometer in measuring
the Company's financial performance. Since CHB is primarily sold
in a fresh state, the products must be sold relatively quickly.
Consequently, all product not sold to "branded customers" must be
sold to "commodity customers" who do not recognize the premium
value of CHB product and will only pay commodity prices.
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In January, 1997, the Company had two retail customers
purchasing Certified Hereford Beef. During January, Finast
Supermarkets, Inc., a division of Ahold, USA was merged into a
sister company and new management changed their beef merchandising
strategy. Finast was a very significant customer of the Company at
that time and the loss of their business was detrimental to the
performance of the Company. This single account represented over
90% of the Company's branded CHB sales to the retail supermarket
industry at that time.
As a result of this extraordinary loss in customer base, the
Company refocused its sales strategies. New sales efforts
concentrate on developing smaller independent supermarket groups
and small to mid-sized supermarket chains. In May, the Company
added Steele's Markets to its customer base and continued to
successfully grow the number of retail supermarket customers
through October. The end result of the shift in sales strategy is
allowing the Company to develop a broader customer mix, reducing
the percent of sales to any single customer and eliminating some of
the risk of concentration to the Company for customer attrition.
In August of 1996, the Company entered into a Supply Agreement
with the Veladi Ranch Steakhouse ("VRSH") chain in San Antonio,
Texas. This Supply Agreement expired effective December 31, 1997
and was not renewed. At the time the agreement was structured, it
complemented the retail branded sales of CHB to Finast with the
food-services sales to VRSH, with both entities very significant
customers of the Company.
During the period following the loss of the Finast account and
for much of the time the agreement remained in force, the Company
was obligated to process CHB cattle to fulfill the VRSH terms at
substantial economic loss to the Company. The product sales mix
was unfavorable and heavily skewed towards food-service, creating
a significant increase in lower priced commodity sales.
The Company increased the branded sales from approximately ten
percent in February 1997 to just over fifty percent in October and
November 1997. Late in 1997, the decline in foreign currencies
temporarily interrupted the Company's export sales to Korea. As a
result, branded sales (in pounds) dropped below forty percent for
the month of December. After nearly a four month void in export
shipments, the Company subsequently resumed shipments of CHB to
Korea in late March 1998 and anticipates further export sales to
both Korea and Japan.
The Company continues to target retail and food-service
customers with the goal of achieving eighty percent or more of its
product tonnage in branded CHB sales. Further branded business
development should allow the Company to reach its goal,
particularly with the increases in the retail supermarket customer
segment.
SOURCES AND AVAILABILITY OF RAW MATERIALS
ROF does not raise or feed cattle at the present time.
Midland, a sister company, is in the business of identifying,
sourcing, brokering and/or purchasing and reselling feeder and fed
cattle. Midland is primarily responsible for developing the supply
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of CHB for ROF and the CHB program. The cattle are fed in
participating feedlots, monitored by ROF and Midland personnel, and
inspected and approved by AHA personnel. ROF manages an extensive
computer database which tracks the available inventories of live
cattle potentially eligible for harvest as CHB. AHA personnel
assist in the sourcing of eligible feeder cattle. Nearly all the
cattle fed for the CHB program are in Nebraska and Iowa with a
small number fed in neighboring states. ROF requires participating
cattle feeders to feed corn-based rations, supplemented with
Vitamin E and free of animal protein by-products.
RESEARCH AND DEVELOPMENT
The Company has not spent any significant funds on Research
and Development activities in 1997 and does not have current plans
for allocating significant funds for such activities in 1998.
EMPLOYEES
The Company incurred additional overhead expenses in hiring
personnel and improving leased office space in support of the
Company going public in March 1997.
As of December 31, 1997, the Company employed a total of
twenty-seven (27) employees of which twenty (20) are at ROF and
seven (7) are at Midland. Two people are full time contract
employees and one person is a part time contract employee. One of
Midland's employees is a sales representative who receives a base
salary and commission for sales. Midland also pays commission to
approximately ten (10) independent sales people.
Approximately 40% of the Company's employees support sales and
marketing, 40% support administrative functions and 20% are
involved in operations.
During the latter part of 1997, the Company experienced some
attrition of several key employees. The Company has since replaced
these employees, however due to the loss of the employees and the
length of time it took to replace the employees, the Company
experienced some disruption in its operations. In an effort to
reduce the impact of any future employee attrition, the Company is
cross-training employees and implementing control procedures.
OPERATIONS OF THE COMPANY
COMPANY SUBSIDIARIES
The majority of the Company's business is transacted through
its wholly owned subsidiaries, Red Oak Farms and Midland Cattle
Company.
RED OAK FARMS, INC. ROF was originally established in August
1994 as Mid-Ag L.C., an Iowa limited liability company and was
reorganized as Red Oak Farms, Inc., an Iowa corporation on February
24, 1997. The Company acquired ROF as the result of a share
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exchange on March 14, 1997. ROF is in the business of processing,
slaughtering and marketing the Company's CHB products.
ROF is engaged in the following business practices and/or
activities related to the production and marketing of CHB:
* Slaughtering, fabricating and further processing of CHB
products
* Warehousing, inventory control and distribution of CHB
* Development of CHB retail and food service accounts, both
domestically and internationally through cooperation with
the AHA
* Sales, marketing, merchandising and promotion of CHB to
all accounts
ROF is primarily engaged in producing fresh CHB products for
domestic retail supermarket and restaurant customers. ROF also
exports some CHB products to Pacific Rim countries. The Company
sells to retail supermarket chains direct and/or through
distributors and wholesale cooperatives. ROF sells to restaurants
through various distributors, including some who further process
CHB products into food-service portions and other consumer beef
products. As part of the production process, ROF produces edible
and inedible carcass products such as variety meats and hides which
are typically sold to the processor contracted to provide
harvesting and fabrication services.
ROF customers include both "branded" and "commodity" customer
profiles. Branded customers are considered those who recognize the
"brand quality" status of CHB and pay premium prices for CHB
products compared to similar commodity products offered for sale by
ROF's competitors. Many of these branded customers become licensed
by the American Hereford Association, allowing them to promote the
CHB name and logo trademarks to consumers through their business
operations. A significant percentage of ROF's CHB production is
presently sold to "commodity" customers who have not subscribed to
the premium status of CHB products and consequently pay prices for
CHB products similar to those prices paid for ROF's competitor's
commodity products. The CHB products do not maintain their
"branded status" through commodity distribution and consumer
marketing channels and the products lose their brand name identity
at the consumer purchasing level.
ROF has a sales network to service its customers which
includes both in-house and regionally based sales persons. The
Company utilizes the service of brokers on a very limited basis to
represent its CHB products in certain markets.
ROF produces and markets CHB under an exclusive licensing
agreement with the AHA. The Agreement allows ROF to exclusively
represent and market CHB products worldwide pursuant to the
Company's ability to meet performance criteria outlined in the
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Agreement. The AHA is a non-profit breed registry for the Hereford
breed of cattle with about 10,000 members in the United States.
The Hereford breed of cattle is one of the most popular and
prominent breeds of cattle in the United States and the world.
"Certified Hereford Beef" and the associated logo are registered
trademarks of the AHA who has sole authority over their licensing
and usage.
ROF does not currently own, lease or operate any of its own
production or processing facilities for the production of CHB.
Rather, it contracts or otherwise arranges for "co-pack" or
"custom-packing" services provided on a fee basis by other
companies. These service providing companies invariably produce or
market branded and/or commodity products which represent some
competitive status relative to ROF's sales of CHB products. ROF's
primary processing activity is reducing live fed cattle eligible
for certification as CHB to carcass form. The carcasses are then
graded and submitted for certification by USDA graders before being
further fabricated and processed into fresh boxed beef primals and
associated trim, fat and bone products. Carcasses which do not
meet the established criteria for USDA Certification as CHB are
typically sold to the processor providing the processing service,
for similar fabrication into commodity beef products.
From January until November 1997, ROF maintained a processing
agreement with Beef America, Norfolk, Nebraska. During the time
frame from August through October 1997, Beef America had two USDA
product-recall incidents, which partially influenced ROF to seek
alternative processing. In November, ROF began using processing
services at Nebraska Beef, Omaha, Nebraska and continues to harvest
and fabricate CHB at this location. Nebraska Beef had formerly
processed CHB for ROF. In addition, ROF was able to negotiate
reduced processing fees at the time of the change. These factors
served as the determining factors for the change in processors.
A term of the Agreement with the AHA requires the Company to
maintain a beef processing agreement. To date, the Company has
been able to negotiate processing agreements on terms favorable to
the Company. Should the Company terminate its current beef
processing contract, there are numerous fabricating and processing
facilities in the area and the Company believes it could obtain a
replacement processor at favorable rates.
ROF purchases most CHB in dressed carcass form using a "grid"
schedule to determine the value of each individual carcass. The
grid is developed and changed periodically to provide incentive to
fed cattle suppliers to produce the most appropriate CHB product to
ROF. Each carcass is valued on a cents per pound basis on the hot
carcass weight, with premiums paid over an established market base
price at the time of harvest, according to specific yield and
quality grades. Discounts are applied to the base price for
carcasses which do not conform to the USDA G-10 Schedule
established by the AHA. As soon as the carcass data is recovered
and entered into a database, remittance is forwarded to the owner
of the cattle at the time of harvest. At times, ROF may pay a flat
base or premium price or buy the cattle on a live basis. ROF
personnel are routinely assigned to monitor the harvest,
certification and fabrication processes.
Sales personnel supervise the inventory, pricing, shipping and
other distribution of CHB products. CHB products are distributed
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nationally from the processing locations. ROF field sales
personnel further assist branded customers with training,
marketing, promotional and advertising functions.
MIDLAND CATTLE COMPANY. Midland was originally organized as
an Iowa joint venture in 1987. In May 1997, Midland was
reorganized as an Iowa corporation and acquired by the Company in
a stock for stock exchange. Midland is in the business of cattle
procurement and dealer organization and is the supplier of CHB for
the Company.
Midland is engaged in the following business practices and/or
activities related to the production of CHB:
* Genetic identification, sourcing and procurement of
cattle eligible for CHB
* Feedlot placement of cattle sourced for the CHB program
Midland is primarily engaged in the brokering or trading of
live feeder cattle from cow-calf producers and/or feeder cattle
stockers/backgrounders to cattle feeders. Midland sources and
procures feeder cattle from throughout the major cattle producing
areas of the United States and Northern Mexico. While most of
Midland's sales are represented by feeder calves and yearlings
destined for feedlots, Midland also periodically sells producing
cows and fed cattle to other producers and beef packers.
Midland utilizes in-house procurement agents, field
procurement agents, commission-based purchasing agents, and AHA
field representatives located in certain geographic regions of the
country and/or specific livestock auction markets to purchase
cattle. Midland maintains a broad and diverse network of cattle
market contacts with its agents to producers, auction markets and
feedlots throughout the United States.
Midland deals in commodity cattle of all types, but since the
inception of the CHB program has specialized in sourcing, procuring
and selling Hereford feeder cattle to participating CHB feedlots
located primarily in Iowa and Nebraska. Midland sources cattle in
large numbers from the Central and Southern Plains states, Texas
and the Southwest states, the Pacific Northwest states and the
Southeastern U.S. It has customers from Texas to the Dakotas, but
sells primarily to feedlots within a 300 mile radius of Omaha,
Nebraska, one of the more concentrated cattle feeding regions of
the U.S.
Cattle brokered by Midland may transfer direct from the ranch
or auction market to stockers or feedlot customers. Or they may be
delivered to sorting facilities owned and managed by the company in
Red Oak, Iowa to be rested, re-sorted into more homogeneous,
uniform lots and resold and shipped to customers on specification
orders.
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Midland's customer base is diverse, consisting of smaller
farmer/feeders, independent operators and large commercial
feedyards from the corn belt to the central plains. Midland is the
primary source for engaging feedlots to feed CHB and establishes
and maintains good relationships with a very competitive group of
feeding entities.
Midland is the primary source for developing the supply of
feeder cattle enrolled in the CHB program. Revenues are generated
by sales of all types of cattle and from fees collected for
enrollment and marketing services provided for cattle fed for and
marketed into the CHB program.
Midland serves as the procurement agent for fed cattle
destined for the CHB program. Midland personnel establish the base
price for which ROF assigns price values for each carcass using a
grid formula based on hot carcass weight and quality and yield
grade factors. They are also involved in assisting in the
maintenance of ROF's cattle on feed records and in maintaining the
quality, type and marketing timeliness of CHB program cattle.
RED OAK FEEDERS, LLC. Feeders, an Iowa limited liability
company, was formed on December 12, 1997. Feeders was formed to
develop a supply of CHB for the Company by financing the feeding of
CHB cattle for sale to ROF. Feeders intends to issue notes to
experienced cattle investors and use the proceeds for the limited
purpose of feeding cattle. Enterprises such as Feeders are
sometimes known as "feeder clubs" and are common in the cattle
business. Feeders commenced operations at the end of December
1997.
Feeders formed a Nebraska partnership with MoorMan's, Inc. on
December 30, 1997, known as "Quality Feeders." The Company has a
50% interest in the partnership. Quality Feeders will feed and
raise CHB and ultimately supply the Company with sufficient CHB to
meet customer demands. Quality Feeders buys cattle from Midland
and other cattle dealers (who identify the cattle as CHB) then
places the cattle on feedlots and oversees the feeding pursuant to
CHB standards. There are currently approximately 6,000 head in the
program.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases office space from Cimmaron Properties, an
entity owned by the Company's President, Gordon Reisinger and his
wife, Barbara. The annual cost of the one year lease is $48,000.
The Company believes the rental is at least as favorable as what it
could obtain from an unaffiliated party. The leased office space
of approximately 4,700 square feet, houses the Company's
subsidiaries.
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The Company, through its Midland subsidiary, leases a feedlot
in Red Oak, Iowa and owns the buildings, equipment and vehicles
located on the feedlot. The lease is for a fifteen year term of
which ten years remain and is at a rate of $3,300 per month. The
feedlot, cattle pens, barns and working facilities are contained
within approximately ten acres with additional pasture land
available.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management, there is no material
litigation pending or threatened against the Company or its
management. There is, however, an administrative proceeding before
the United States Department of Agriculture initiated on July 16,
1997, by the Grain Inspection Packers and Stockyards Administration
against Cimmaron Properties, Ltd., Wall Lake Cattle, Co., Inc.,
Midland Cattle Company and Gordon Reisinger. The complaint alleges
violation of 7 USC section 181 et seq. by failing to pass on to customers
original purchase shrink weight allowances when reselling livestock
in seven instances and failure to maintain adequate records. Legal
counsel has indicated that there is no evidence of a breach of the
statute. The Company believes the allegations are based on the
Government's mistaken belief that the Company was acting as a
broker, when, in fact, the Company owned the cattle involved. The
Company declined an opportunity to settle the case and intends to
vigorously defend itself.
The Company anticipates filing a Motion seeking summary
disposition of the case without an administrative hearing. If the
pre-hearing motion is not sustained, an administrative hearing will
be held on the merits.
The Company is not aware of any other material pending or
threatened litigation to which the Company or any directors,
officer or affiliate of the issuer is or would be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's
shareholders during the fourth quarter of the fiscal year ending
December 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Over-The-Counter
Bulletin Board under the symbol "HERF." As of December 31, 1997
the Company had 303 shareholders holding 14,679,415 common shares.
Of the issued and outstanding common stock, 1,359,300 are free
trading, the balance are "restricted securities" as that term is
defined in Rule 144 promulgated by the Securities and Exchange
Commission . The Company has never declared a dividend on its
common shares and does not intend to pay cash dividends on its
common shares in the near future.
The Company's COMMON stock began trading in November of 1996.
The published bid and ask quotations for the previous two fiscal
years are included in the chart below. These quotations represent
prices between dealers and do not include retail markup, markdown
or commissions. In addition, these quotations may not represent
actual transactions.
BID PRICES ASK PRICES
HIGH LOW HIGH LOW
1996
First Quarter ended March 31 N/A N/A N/A N/A
Second Quarter ended June 30 N/A N/A N/A N/A
Third Quarter ended Sept. 30 N/A N/A N/A N/A
Fourth Quarter ended Dec. 31 2.25 2.00 3.00 3.00
1997
First Quarter ended March 31 6.4375 2.00 6.5625 3.00
Second Quarter ended June 30 6.8125 6.375 6.875 6.500
Third Quarter ended Sept. 30 7.03125 6.500 7.125 6.625
Fourth Quarter ended Dec. 31 6.96875 3.4375 7.03125 3.625
The foregoing figures were furnished to the Company by the
National Quotation Bureau, 1 Penn Plaza, 15th Floor, New York, New
York 10001.
PREFERRED STOCK
The Company has authorized and issued 200,000 shares of Series
A Preferred Stock, par value $.001 per share with no voting rights.
The Series A Preferred Stock is senior to the Company's common
stock and provides dividends payable monthly at a rate of $0.042
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per Share of Series A Preferred Stock. Dividends are cumulative
and accrue interest at the rate of 10% per year. The Series A
Preferred Stock is redeemable by the Company upon notice for either
(a) $5.00 per share plus accrued dividends or (b) by conversion
into shares of common stock based on the market price of the common
stock on the date of conversion.
SALES OF UNREGISTERED EQUITY SECURITIES
In March 1997, the Company commenced a private offering
pursuant to the Securities and Exchange Commission Act of 1933, as
amended, Regulation D, Rule 506, for 1,500,000 Units at $3.00 per
Unit. 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 at $5.00 per share. The Company completed the offering in
September 1997.
In January 1998, the Company initiated a private offering
pursuant to Securities and Exchange Commission Act of 1933, as
amended, Regulation D, Rule 506, of Units at a price of $4.00 per
Unit. Each Unit consists of one share of the Company's common
stock and a warrant to purchase one share of the Company's common
stock at $6.00. The offering is for a minimum of $1,000,000
(250,000 Units) and a maximum of $3,360,000 (840,000 Units). As of
March 28, 1998, the Company has raised $1,000,500 through the sale
of 250,125 Units before deducting offering expenses of $112,896.
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
Red Oak Hereford Farms, Inc., (the "Company"), is a Nevada
corporation (previously named Wild Wings, Inc.) that is engaged
through its wholly-owed subsidiary, Red Oak Farms, Inc., ("ROF") in
the business of selling premium branded, fresh beef to retail and
food service markets and extends unsecured credit to customers
predominantly located in the southwest and midwest United States.
The principal offices of the Company are located at 2010 Commerce
Drive, Red Oak, Iowa 51566. The Company was incorporated under the
laws of the State of Colorado on July 7, 1989 originally as Winter
Ventures of Colorado, Inc. In December 1994, the Company's
shareholders approved a name change to Wild Wings, Inc., and a
change of corporate domicile from Colorado to Nevada.
In February 1997, Red Oak Farms, Inc. ("ROF") was formed with
the members of Mid-Ag, Inc., an LLC, contributing the assets and
liabilities of Mid-Ag to ROF in exchange for all of the outstanding
stock of ROF. On March 14, all of the outstanding stock of ROF 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,
ROF became a wholly-owned subsidiary of the Company. For
accounting purposes, ROF is deemed to be the acquiring corporation
and, therefore, the transaction is being accounted for as a reverse
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acquisition of the Company by ROF. Prior to March 14, 1997, the
Company operated a hunting and sporting clays club and had
insignificant operations.
On May 19, 1997, the Board of Directors of the Company
approved an Agreement to exchange Stock pursuant to which the
Company issued 1,538,462 restricted common shares of the Company in
exchange for all of the issued and outstanding shares of Midland
Cattle Company, Inc., an Iowa corporation ("Midland"). Started in
1985, Midland Cattle Company, as an Iowa joint venture, Midland
reorganized on May 19, 1997 as a corporation formed under the laws
of the state of Iowa. Midland is in the cattle brokerage business,
supplying area feedlots with feeder cattle and actively marketing
fed cattle. Midland's operations include acting as a broker for
individuals and organizations looking to buy or sell cattle and
Midland may purchase cattle short or long to cover customer
requirements.
On December 12, 1997, the Company formed another subsidiary,
Red Oak Feeders, LLC, an Iowa limited liability company,
("Feeders"). Feeders was formed to develop a supply of CHB by
financing the feeding of Hereford cattle for sale to ROF. On
December 30, 1997, Feeders entered into a Nebraska partnership,
"Quality Feeders", with MoorMan's, Inc. The partnership was formed
to feed and raise CHB. Feeders has a 50% interest in Quality
Feeders.
The primary business activities of the Company are conducted
through its subsidiaries, ROF and Midland. ROF is engaged in the
management and marketing of CHB products. In this effort, ROF
markets the CHB products and arranges the appropriate processing,
packaging and delivery. Midland is engaged in the production of
CHB cattle and in this effort Midland buys and sells feeder cattle
in wholesale markets and places Hereford feeder calves and
yearlings with feedlots approved for the CHB program.
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, ROF, Midland and
Feeders. The Company has suffered recurring losses and negative
cash flows from operations 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 and is in technical noncompliance with certain loan
agreements. Subsequent to year-end, the Company's lenders
terminated their relationships with the Company. These factors
raise substantial doubt about the ability of the Company to
continue as a going concern. Management is in the process of
renegotiating loan agreements, completing a private placement
offering and increasing product awareness through marketing efforts
to improve profitability and cash flow. Sales efforts are being
made to change the product mix of sales to increase the volume
percentage of branded versus commodity sales. In addition, the
Company has developed a more formal operating plan including
operating budgets to facilitate monthly analysis of operations.
Although there is no assurance that the Company will be successful
in achieving profitable operations, Management believes these steps
will enhance the Company's ability to achieve favorable operating
results. In addition, the report of the Company's Independent
Certified Public Accountants contains an explanatory paragraph,
expressing substantial doubt about the Company's ability to
continue as a going concern.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of capital include, but are not limited
to, cash flows from operations, the issuance of private debt, bank
borrowings, and the issuance of equity securities. As the Company
continues its investment in brand development, these resources will
be critical to the success of the Company. The Company will
require additional resources to move to the next stage of
development.
In March 1997, the Company initiated a private offering for
1,500,000 Units at $3.00 per Unit. Each Unit consisted of one share
of the Company's common stock and a warrant to purchase a share of
the Company's common stock at $5.00 per share. The Company
completed the offering in September 1997 and raised $4,500,000
before deducting $421,685 in offering costs.
On January 14, 1998, the Company commenced a private offering
of Units at a price of $4.00 per Unit. Each Unit consists of one
share of the Company's common stock and a warrant to purchase a
share of the Company's common stock at $6.00. The offering is
being made pursuant to Rule 506 of Regulation D of the Securities
and Exchange Commission Act of 1933, as amended. The offering is
for a minimum of $1,000,000 (250,000 Units) and a maximum of
$3,360,000 (840,000 Units). As of March 28, 1998, the Company has
raised $1,000,500 through the sale of 250,125 Units before
deducting offering expenses of $112,896. The Company anticipates
that capital raised from this offering will be used for working
capital and to implement the Company's marketing and consumer
awareness plans.
At December 31, 1997, ROF had a line of credit which provided
borrowings up to $1,500,000, with a maturity date of January 31,
1998. On January 31, 1998, ROF's line of credit agreement was
amended to extend the maturity date to February 28, 1998. The line
of credit was paid and terminated in March 1998. On February 26,
1998, ROF entered into a bridge financing agreement with A&J Cheese
Company. The agreement provides borrowings up to $15,000,000 and
bears an interest rate of 12.97%, with thirty days interest payable
in advance at the time of each loan advance.
On April 13, 1998, ROF entered into an agreement in principle
with KBK Capital Corporation to provide ROF an asset based line of
credit. The line of credit will provide borrowings up to
$4,000,000.
Throughout 1997, Midland had a line of credit which provided
borrowing up to $2,500,000. Midland's line of credit, as amended,
extended the maturity date to March 31, 1998, at which time the
bank terminated the line of credit. Midland is currently in the
process of liquidating the loan through collateralized lockbox
deposits and negotiating a new financing agreement with other
lenders.
ROF has made a capital commitment for a management information
system that will require approximately $56,000 to third party
vendors. The majority of this system cost will be financed through
a lease from IBM.
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ROF is exploring value added production alternatives likely to
be performed through third party processors. However, it may be
necessary to acquire or lease certain production facilities,
production equipment and or processes on a contractual basis to
acquire this production capacity. At year end 1997, the Company
did not have any capital commitments for value added production.
At December 31, 1997, the Company had cash on hand of $12,993
versus $-0- at December 31, 1996. Net cash used in operating
activities was $5.5 million for 1997 compared to $1.6 million for
1996, an increase of $3.9 million or 236.6%, primarily related to
the operating losses and the payment of related operating
liabilities.
Net cash used in investing activities primarily related to the
purchase of property, equipment and other assets of $80,000 and a
50% equity investment in Quality Feeders of $500,000.
Net cash provided by financing activities of approximately
$6,100,000 provided the resources in 1997 to fund the operating
and investing activities. Funds were provided through the sale of
common stock of $5.3 million, the issuance of notes payable of
$500,000 and the utilization of a revolving line of credit of
$400,000.
THE YEAR 2000 - MILLENNIUM BUG
This concern, known as "The Year 2000" problem or "The
Millennium Bug" is expected to effect a large number of computer
systems and programs after the year 1999. The concern is that any
computer function that requires a date calculation may produce
errors. The Company plans on taking all steps necessary to prevent
these errors from occurring. At present, the Company anticipates
upgrades or fixes for its computing system in order to avoid any
problems resulting from the Millennium Bug will cost approximately
$10,000.
RESULTS OF OPERATIONS
The Company, through its wholly-owned subsidiaries ROF and
Midland, is in the business of collecting, producing, distributing,
and marketing of CHB branded beef products. In late December 1997,
the Company formed another subsidiary, Feeders, to enhance the
supply of CHB cattle for sale to ROF. The objective of the Company
is to provide premium branded beef products to the consumer.
Channels of distribution are focused on retail, food service, and
export. The Company's customers are retail and wholesale
businesses that provide premium quality beef products to the
consumer.
Hereford Cattle are collected through Midland, Quality Feeders
and the direct purchase of CHB from cattle feeders. These cattle
are currently delivered to Nebraska Beef for processing.
Slaughtered cattle are classified as CHB and commodity cattle.
Commodity cattle and related by-products are sold to the third
party processor, Nebraska Beef, by ROF. CHB cattle are further
processed (fabricated) then made available for sale as CHB to the
Company's customers.
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COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997, WITH THE YEAR ENDED
DECEMBER 31, 1996.
NET SALES - Net Sales decreased to $105.3 million in 1997 from
$123.4 million in 1996, a decrease of $18.1 million or 14.7%. This
decrease is primarily from lower sales volume resulted from the
loss of a large retail customer and a shift in the revenue base
from the percent of "branded sales" to "commodity sales". Product
not sold to "branded customers" is normally sold to "commodity
customers" who do not recognize the premium value and will only pay
commodity prices.
COST OF GOODS SOLD - Cost of Goods Sold decreased to $105.9
million in 1997 from $123.7 million in 1996, a decrease of $17.8
million or 14.4%. This decrease resulted from lower sales volume
demand as the Company is producing a perishable branded product
that for the most part requires production that correlates with
sales demand.
GROSS PROFIT OR (LOSS) - Gross Loss increased $239,500 or
74.0% for 1997 from a loss of $323,500 for 1996, to a $563,000
loss for 1997. The increase in Gross Loss resulted from an overall
decline in sales and an increase of product sold at commodity
prices.
OPERATING EXPENSES - Operating expenses increased to $3.7
million in 1997 from $2.2 million in 1996, an increase of $1.5
million or 64.2%. This increase includes an increase in marketing
expenses, selling expenses and related staff to position the
Company for future sales growth. In addition, in the fourth
quarter, certain marketing expenses and professional fees, totaling
$717,000, previously charged to Additional Paid in Capital, were
charged to operating expenses materially increasing operating
expenses.
LOSSES FROM OPERATIONS - Losses from Operations increased to
$4.2 million in 1997 from $2.5 million in 1996, an increase of $1.7
million or 65.5%. Marketing expenses and professional fees
discussed above contributed $717,000 of this increase. Although
additional marketing and selling expenses incurred to position the
Company for significant sales growth contributed to the losses, the
majority of the losses can be attributed to the Company not selling
necessary volumes of product at "branded prices" to cover the
minimum operating expenses required to operate the Company
efficiently.
OTHER INCOME / EXPENSE - Net other expense of $358,900 for
1996 decreased to $280,300 for 1997, a decrease of $78,600,
primarily resulting from interest income. Interest expense
decreased by $15,500 or 4.3% for 1997 from 1996, to $343,400.
NET LOSS - As a result of the above, Net Losses increased by
$1.6 million or 54.7% for the Company in 1997 from 1996, to $4.5
million or to 4.3% of net sales for 1997. The loss per share
increased to $.33 from $.23.
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IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income". The new standard
discusses how to report and display income and is effective for
years beginning after December 15, 1997. When the Company adopts
this statement, it is not expected to have a material impact on the
presentation of the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". This standard requires enterprises to report
information about operating segments, their products and services,
geographic areas, and major customers. This standard is effective
for years beginning after December 15, 1997. When the Company
adopts this statements, it is not expected to have a material
impact on the presentation of the Company's consolidated financial
statements.
INFLATION
While inflation has not had a material effect on the Company's
operations in the past, there can be no assurance that the Company
will be able to continue to offset the effects of inflation on the
costs of its products or service through price increase to its
customers without experiencing a reduction in the demand for its
products; or that inflation will not have an overall effect on the
beef market that would have a material affect on the Company.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are filed as
a part of this report:
Reports of Independent Certified Public Accountants;
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996;
Consolidated Statements of Operations for the years ended
December 31, 1997 and December 31, 1996;
Consolidated Statements of Stockholders' Equity for the
years ended December 31,1997 and December 31, 1996;
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and December 31,1996;
Notes to Consolidated Financial Statements.
The financial statements of the Company are set forth
immediately following the signature page to this Form 10-KSB/A.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 22, 1997, Baird Kurtz & Dobson resigned as the
Independent Certified Public accountants of the Company. During
the two most recent fiscal years there have been no disagreements
with Baird Kurtz & Dobson on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure or any reportable events. Baird Kurtz & Dobson's report
on the financial statements for the past two years contained no
adverse opinion or disclaimer of opinion and was not qualified as
to audit scope or accounting principles. The accountant's report
contained an explanatory paragraph regarding substantial doubt
about the Company's ability to continue as a going concern for a
reasonable period of time.
On March 13, 1998, the Company retained BDO Seidman, LLP as
the Company's Independent Certified Public Accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth as of December 31, 1997 the
name, age, and position of each executive officer and director and
the term of office of each director of the Corporation.
Name Age Position Director or Officer Since
Gordon Reisinger 58 President, Director March 14, 1997
John Derner 47 Chairman of the Board, VP March 14, 1997
Charles Kolbe 56 Secretary, Director March 14, 1997
Harley Dillard 49 Treasurer, Chief Financial
Officer December 10, 1997
David Ellicott 39 Assistant Secretary March 14, 1997
James Powell 67 Director April 25, 1997
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Leo DeSpain 57 Director March 14, 1997
Gene Weise 68 Director April 25, 1997
Norman Peterson 57 Director October 24, 1997
Henry H. Dickenson 64 Director October 24, 1997
All officers hold their positions at the will of the Board of
Directors. All directors hold their positions for one year or
until their successors are elected and qualified.
Set forth below is certain biographical information regarding
each of the Company's executive officers and directors:
GORDON REISINGER, DIRECTOR AND PRESIDENT. Mr. Reisinger
resides at Rural Route 3, Red Oak, Iowa, 51566 and has been
involved in many aspects of the cattle business. Prior to its
acquisition by the Company, Mr. Reisinger was the managing partner
and a 33.33% owner in Midland Cattle Company in Red Oak, Iowa which
he formed in 1987. Midland is a cattle brokerage firm which buys
and sells feeder cattle nationwide, including cattle for the CHB
program. Mr. Reisinger was also a managing partner and a 33.33%
owner in Mid-Ag prior to its acquisition by the Company. Mr.
Reisinger has managed the Eldora Livestock auction his father built
in 1939 and has been active in family farming and cattle
operations, cattle feeding, commercial and farmer feedlot quality-
control auditing and nationwide cattle brokering his entire life.
Mr. Reisinger holds a Bachelors Degree in Animal Science from Iowa
State University.
JOHN DERNER, CHAIRMAN OF THE BOARD AND VICE-PRESIDENT. Mr.
Derner resides at 2353 213 Avenue, Milford, Iowa 51351 and owns and
manages an 8,000 head cattle feedlot and a substantial row crop
operation in West Lake Okoboji, Iowa. Mr. Derner also owns a
manufacturing company, Shell Rock Products, Inc. that manufactures
and distributes numerous ornamental concrete products nationwide.
Mr. Derner was also a 33.33% partner in Midland and Mid-Ag prior to
their acquisition by the Company.
CHARLES KOLBE, DIRECTOR AND SECRETARY. Mr. Kolbe resides at
2415 30th, Lake View, Iowa 51450 where he assumed ownership of a
family farming and cattle feeding operations after obtaining a
Bachelors Degree in Animal Science from Iowa State University. In
addition to farming and cattle feeding operations, Mr. Kolbe has
been active in the financial world, having held positions as a
director and principal of banks in Iowa and Minnesota. Mr. Kolbe
was a co-founder and 33.33% owner of Midland prior to its
acquisition by the Company. He is on the executive committee of
the Iowa Cattleman's Association, Iowa Beef Industry Council and
the National Livestock and Meat Board. He is past president of the
Iowa Cattleman's Association and past Chairman of the Iowa Beef
Industry Council.
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HARLEY DILLARD, TREASURER AND CHIEF FINANCIAL OFFICER. Mr.
Dillard's address is 10394 Zenobia Ct., Westminster, Colorado
80030. Mr. Dillard is relocating to Red Oak, Iowa. After
graduating from Colorado State University with a Bachelors of
Science Degree in Business, Mr. Dillard worked in public accounting
and then with Monfort of Colorado in several capacities, including
plant Controller for the Monfort Greeley Slaughter Plant and
Controller for the Monfort Portion Foods Division. He gained more
consumer product experience as Controller and director of finance
for the Denver based Coca-Cola Franchise. From 1984 until 1996,
Mr. Dillard held positions with Robertson Associates Manufacturing,
Inc., ("RAMI") an aluminum beverage packaging manufacturer. Mr.
Dillard joined RAMI as Controller and was promoted to Vice
President and Chief Financial Officer. Since 1996, Mr. Dillard was
General Manger of Cruisin Cuisine/WP&G Distributing, a privately
held manufacturer and distributor of wholesale food products. Mr.
Dillard is a Certified Public Accountant.
DAVID H. ELLICOTT, ASSISTANT SECRETARY. Mr. Ellicott resides
at RR2, Box 104, Red Oak, Iowa 51566. Mr. Ellicott is well-versed
in livestock production and marketing, particularly in areas of
manufacturing, processing, distribution and retail marketing and
merchandising. Previously an upper-level manager for King Soopers,
Inc., a Colorado based retail supermarket chain with over 14,000
employees, he is experienced in the fundamental needs and
requirements of Red Oak's primary customer base. Mr. Ellicott was
with King Soopers, Inc. for fourteen years. In September 1994, Mr.
Ellicott joined Mid-Ag and is currently general manager of Red Oak
Farms. Mr. Ellicott holds a Bachelors Degree in Animal Science
from Colorado State University.
JAMES POWELL, DIRECTOR. Mr. Powell's address is P. O. Box
98, Ft. McKavett, Texas 76841. Mr. Powell raises registered
Hereford and commercial Angus cattle on ranches in Texas and
Nebraska. Mr. Powell received a bachelor's degree from Rice
University in 1951 and did graduate work at the University of
Texas, Austin. He served as a lieutenant junior grade in the U.S.
Navy from 1952 to 1954. In 1962, Mr. Powell was president of the
Texas Sheep and Goat Raisers Association and president of the
National Wool Growers Association from 1969 to 1970. From 1960 to
1964, Mr. Powell was a member of the advisory committee for the
Packers and Stockyards Administration, USDA and in 1975, Mr. Powell
was named a member of the Secretary of Agriculture's technical
Advisory Committee for Multilateral Trade Negotiations. Mr. Powell
has been a member of the Governor's Small-Town Task Force,
President of the Board of Regents for the Texas State University
System, chairman of the Board of Regents for the University of
Texas System, chairman of the National Cattleman's Association Tax
Committee, and a member of the executive board of the National
Livestock Tax Committee. Mr. Powell has served on the Governor's's
Task Force on Agricultural Development, the Governor's Committee on
Water Resources Management, Concho Valley Boy Scout Council
Executive Committee and Rice Fund Council.
Mr. Powell is a recipient of the Outstanding Conservationist
Award of the Eldorado-Divide Soil and Water Conservation District
and also "Man of the Year in Texas Agriculture," presented by the
Texas County Agents Association. He was named 1987 "Man of the
Year in Texas Agriculture" by Progressive Farmer magazine. In
1990, Mr. Powell was inducted into the International Stockmen's
School Hall of Fame.
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Mr. Powell is a past director of Texas Commerce Bancshares,
Houston; Texas Commerce Bank of San Angelo ("TSCRA"); First
National Bank of Eldorado, Texas; and Crockett County National Bank
of Ozona, Texas. He has previously served as Chairman of First
National Bank of Mertzon and now serves as an advisory director.
Mr. Powell currently serves as a director on the board of Southwest
Bancshares, Inc. He has been a TSCRA director since 1975 and was
elected President in March 1988. He is a director of the Angelo
Community Foundation, San Angelo; elder of the First Presbyterian
Church, Chancellor's Council; the Board of Visitors for M.D.
Anderson Hospital, Houston; and is a member of Rice Associates.
Mr. Powell is currently a director of Central and Southwestern
Corporation.
LEO M. DESPAIN, DIRECTOR. Mr. DeSpain grew up on a small
dairy farm in southwest Missouri and now resides at 13910 West 55th
Terrace, Shawnee, Kansas 66216. Mr. DeSpain graduated from the
University of Tulsa with a degree in Marketing and has completed
course work toward a Masters degree at the University of Missouri
at Kansas City. He has thirty three years extensive work
experience in food sales and marketing, primarily for Oscar Mayer
Foods. Beginning his career with Oscar Mayer in 1964, Mr. DeSpain
has held the position of Sales Representative, Account Manager,
Territory Sales Manager and District Sales Manager. He has been
responsible for hiring, training and developing employees and has
special skills in developing long-term, solid business
relationships.
GENE WEISE, DIRECTOR. Mr. Wiese's address is P. O. Box 305,
Manning, Iowa 51455. Mr. Wiese attended Iowa State University and
graduated in 1951 with a degree in Animal Science. He is a partner
of Wiese & Sons, a cattle breeding firm that has produced Hereford
cattle since 1912. Mr. Wiese has an extensive history and
experience in producing, selling and judging beef breeding cattle
throughout the United States and abroad. He is a Board member of
the National Cattlemen's Beef Association and is Past President of
both the American Hereford Association and the Iowa Cattlemen's
Association.
NORMAN PETERSON, DIRECTOR. Mr. Peterson's address is 4001
West 104th Terrace, Overland Park, KS 66207. Mr. Peterson brings
over thirty years experience in the banking and finance industries
to the Company. Graduating from Bethel College with majors in
Business Administration and Speech, Mr. Peterson began his career
in 1963 with Lincoln Production Credit Association. From 1963 to
1969, Mr. Peterson was a Branch Manager, responsible for $10
million in agriculture loans and achieved National Field Office
Manager of the Year award for the fastest growing office in the
nation. In 1969, Mr. Peterson was promoted to Vice President and
was responsible for loans totaling in excess of $50 million. Mr.
Peterson remained at Lincoln Production Credit Association until
1980. From 1974 to 1980, Mr. Peterson was a senior officer,
director and major shareholder in a holding company that owned
Platte Valley Bank & Trust Company, a commercial bank in central
Nebraska with excess of $100 million in assets. Mr. Peterson
supervised and approved all loan activity, 95% of which was
agriculture. Mr. Peterson was also a majority stock owner in three
additional banks in Nebraska and Iowa. Since 1984, Mr. Peterson
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has been the president of a family owned corporation, Peterson &
Sons Holding Company, which is a corporation involved in financial
consulting and investing, primarily in the agriculture industry.
Peterson & Sons Holding Company is a large stockholder in Advanced
Financial, Inc., and has other various investments. Form 1988 to
1991, Mr. Peterson was a financial consultant and director for
Miller Feed Lot where he supervised the credit division which
loaned $25 million a month to borrowers who owned cattle in the
lot. Since 1984 Mr. Peterson has been the Chairman & CEO of AFI
Mortgage Corporation, a full service mortgage banking company with
105 employees nationwide. Since 1988, Mr. Peterson has been the
President & CEO of Advanced Financial, Inc., a public company
trading on the OTC Bulletin Board and the parent company of AFI
Mortgage Corporation.
HENRY H. DICKENSON, DIRECTOR. Mr. Dickenson's address is 3901
East 104th Terrace, Overland Park, Kansas, 66207. From 1974 to
1997, Mr. Dickenson was the Chief Executive Officer of the American
Hereford Association. Under his direction, the research study that
led to the development of Certified Hereford Beef was initiated and
completed. He is past president of the U.S. Beef Breeds Council
and the National Pedigree Livestock Council. Mr. Dickenson
received a Bachelor of Science degree in Animal Science from the VA
Tech. University.
There are no family relationships between any of the Company's
officers and directors. In addition, none of the officers and
directors have been involved in certain legal proceeding which
require disclosure in this annual report of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The issuer is not subject to the provisions of Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information
concerning the compensation paid or accrued over each of the
Registrant's last three fiscal years to the Company's, or its
principal subsidiaries, chief executive officers during such period
(as determined at December 31, 1997 the end of the Registrant's
last completed fiscal year).
27
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SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Other Restr- All
Annual icted Number LTIP Other
Name and Principal Compen- Stock of Payouts Compen
Position Year Salary Bonus sation Awards Options -sation
(1) (2) (3)
Gordon Reisinger(4) 1997 $100,000 $106,802 -0- -0- 5,000 -0- $121,500
President/ Treasurer/
Director
David N. Nemelka 1996 $6,000 $510 -0- 72,500 -0- -0-
CEO 1995 -0- $3,310 -0- $11,500
Brenda M. Hall 1996 $1,500 -0- -0- 2,500 -0- $1,257
CEO
Michael J. Roller(5)1997 $70,400 $50,000 -0- -0- 75,000 -0- -0-
Director
Harley Dillard (6) 1997 -0- -0- -0- -0- 100,000 -0- $5,500
Treasurer/Chief
Financial Officer
(1) In 1995, David N. Nemelka was paid a total of $3,310 in
sales commissions for soliciting the sale of memberships in Wild
Wings, Inc. In 1996, Mr. Nemelka was paid a total of $510 for
similar sales commissions.
(2)Values of Restricted Stock Awards shown in the Summary
Compensation Table are based on the average market price of the
Company's common stock on the date of the grant.
(3) Mr. Reisinger receives management fees from the Company
payable to Cimmaron Properties, a consultant to the Company, which
is owned by Mr. Reisinger in the amount of $100,000 per year. In
addition, as a member of the Board of Directors, Mr. Reisinger is
compensated for attending Board meetings at a rate of $500 per
meeting and which were held three times in 1997 for a total of
$1,500. The Company, pursuant to a consulting agreement, paid
$11,500 in consulting fees for services performed by McKinley
Capital during the period August through December of 1995, an
entity owned and controlled by Mr. Nemelka. In 1996, the Company
paid $1,257 to Dassity, a business owned by Mrs. Hall, for
bookkeeping fees and services performed from January to October of
1996. Mr. Derner received compensation for attending three Board
of Directors meetings at a rate of $500 per meeting for a total of
$1,500.
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(4) Mr. Reisinger received $106,802 paid to Cimmaron Properties
for management fees.
(5) Michael J. Roller resigned from the Company as Director
and as President and CEO of ROF, effective October 15, 1997.
(6) Mr. Dillard assumed his duties as Treasurer and Chief
Financial Officer for the Company on December 10, 1997
and received consulting fees in 1997. Mr. Dillard begins
regular salary of $84,000 annually in 1998.
BONUSES AND DEFERRED COMPENSATION
The Company does not have any bonus, deferred compensation,
employee benefit, or retirement plan. Such plans may be adopted by
the Company at such time as deemed reasonable by the board of
directors.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
% of Total
Options
Granted to Exercise Value at
Options Employees Price Per Expiration Date of
Name Granted in Fiscal Yr. Share Date Grant ($)
Gordon Reisinger(1) 5,000 .5 $6.75 July 25, 2007 $33,750
Harley Dillard(2) 100,000 11.79 $4.25 Dec. 10, 2007 $425,000
Michael J. Roller(3) 75,000 8.84 $6.50 April 25, 2007 $487,500
(1) Directors options issued pursuant to Board of Directors
resolution dated July 25, 1997.
(2) Options issued pursuant to the Company's 1997 Stock Option
Plan granted on December 10, 1997.
(3) Options issued pursuant to an employment agreement.
The Board of Directors adopted the 1997 Stock Option Plan and
reserved 1,000,000 Shares of Common Stock of the Company for
issuance upon the exercise of options which the Board of Directors
has the authority to grant to key employees, officers, directors
and consultants of the Company as part of the Plan. As of December
31, 1997, the Company has granted options for 758,000 shares
pursuant to this plan. To date, none of the options issued
pursuant to this plan have been exercised.
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COMPENSATION OF DIRECTORS
The Company pays each director $500 along with reimbursement
for travel and expenses for each Board of Directors meeting
attended. Further, the Company granted each director an option to
purchase up to 5,000 shares of the Company's restricted common
stock. The option may be exercised for the purchase of 1,000
shares per year over a period of five years following one year of
service on the Board of Directors. The option provides piggy-back
registration rights for the shares underlying the options. The
option exercise price is $6.75, based on the Fair Market Value of
the stock as of the day of grant, and the options expire ten years
from the date of grant.
Gordon Reisinger, President and Director of the Company
receives consulting fees from the Company for services provided by
Cimmaron Properties, an entity owned and controlled by Mr.
Reisinger.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
There are no compensatory plans or arrangements, including
payments to be received from the Company, with respect to any
person named in cash compensation set out above which would in any
way result in payments to any such person because of his
resignation, retirement, or other termination of such person's
employment with the company or its subsidiaries, or any change in
control of the Company, or a change in the person's
responsibilities following a changing in control of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1997 the
name and the number of shares of the Registrant's Common Stock, par
value $0.001 per share, held of record or beneficially by each
person who held of record, or was known by the Registrant to own
beneficially, more than 5% of the 14,679,415 issued and outstanding
shares of the Registrant's Common Stock, and the name and
shareholdings of each director and of all officers and directors as
a group.
Title of Name Of Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class
Common Gordon Reisinger 4,842,320 (1) 32.987
Rural Route 3
Red Oak, Iowa 51566
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Common Cimmaron Investments, LP 2,300,000 15.668
RR 3
Red Oak, Iowa 51566
Common John Derner 5,089,821 (2) 34.673
2353 213 Avenue
Milford, Iowa 51351
Common JKSBM, LP 2,300,000 15.668
2353 213 Avenue
Milford, Iowa 51351
Common Charles Kolbe 711,821 (3) 4.849
2415 30th
Lake View, Iowa 51450
Common David Ellicott 199,000 1.355
RR 2, Box 104
Red Oak, Iowa 51566
Common Harley Dillard -0- -0-
10394 Zenobia Ct.
Westminster, CO 80030
Common James Powell 10,000 0.0068
P. O. Box 98
Ft. McKavett, TX 76841
Common Leo DeSpain 10,000 0.0068
13910 West 55th Terrace
Shawnee, Kansas 66216
Common Gene Weise 10,000 0.0068
P. O. Box 305
Manning, IA 51455
Common Norm Peterson 15,000 (4) .0102
4001 West 104th Terrace
Overland Park, KS 66207
Common Henry H. Dickenson 4,333 0.0029
3901 West 104th Terrace
Overland Park, KS 66207
31
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Common All Officers, Directors
as a Group: 10,892,295 74.201
(10 persons)
(1) Includes 512,820 shares owned by Cimmaron Properties which is
owned and controlled by Gordon Reisinger and 2,300,000 shares owned
by Cimmaron Investments, LP, a family partnership controlled by
Gordon Reisinger.
(2) Includes 2,300,000 shares owned by JKSBM, a family limited
partnership, which is owned and controlled by John Derner and
512,821 shares owned by Derner's of Milford, a company controlled
by John Derner.
(3) Includes 512,821 shares owned by Wall Lake Cattle Company, a
company controlled by Charles Kolbe.
(4) These shares are owned by Peterson & Sons, of which Norman
Peterson is the President and is considered to have beneficial
ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS
Other than as described herein the Company is not expected to
have significant further dealings with affiliates. Presently none
of the officers and directors have any transactions which they
contemplate entering into with the Company, aside from the matters
described herein.
The Company acquired Midland Cattle Company, which was owned
by equal partners, Gordon Reisinger, Charles Kolbe and John Derner
who are now directors of the Company. As a part of the
acquisition, the Company effected a share exchange causing Midland
to become a wholly owned subsidiary of the Company. In exchange
for all of the issued and outstanding shares of Midland, the
Company issued 1,538,462 restricted common shares to the Midland
owners. In addition to the shares, the Company was obligated,
pursuant to the terms of the exchange, to pay the Midland owners a
return of capital in an aggregate amount of one million dollars.
The Company and the Midland owners renegotiated the return of
capital requirement and agreed to accept a total of 200,000 shares
of the Company's Series A Preferred Stock in lieu of the return of
capital. This Agreement was not negotiated at arms-length and may
present a conflict of interest; further, the shareholders of the
Company did not vote to approve this transaction nor did the
shareholders have the opportunity to object to this acquisition.
Nonetheless, the Company believes the terms were no more favorable
to the Midland owners than they would have negotiated with an
32
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unaffiliated entity. The Series A Preferred Stock does not have
any voting rights and is senior to the Common Stock of the Company.
The Series A Preferred Stock provides dividends payable monthly at
a rate of $0.042 per share of Series A Preferred Stock. Dividends
are cumulative and accrue interest at the rate of 10% per year.
The Series A Preferred Stock is redeemable by the Company upon
notice for either (a) $5.00 per share plus accrued dividends or (b)
by conversion into Shares of Common Stock based on the market price
of the Shares on the date of conversion.
The Company sells cattle to and/or purchases cattle from the
following parties: Cimmaron Properties which is owned by Gordon and
Barbara Reisinger; Derner's of Milford, owned 100% by John Derner;
Wall Lake Cattle Company which is owned 100% by Charles Kolbe; Gene
Weise, a Director of the Company; James Powell, a Director of the
Company; Reitkull, Inc., a company owned by Johnny Walker who is
a shareholder of the Company and General Manager of the Company's
subsidiary, Midland; Don Schomers, a shareholder of the Company
and an employee of Midland; Tom Feller, a shareholder of the
Company; and Greg Reisinger, a shareholder of the Company and the
brother of Gordon Reisinger. All cattle sale and purchase
contracts were negotiated based upon fair market value.
In connection with the related party cattle transactions,
Midland may finance the transaction and thus provide liquidity to
the related party under less than arms-length terms. A related
party may wish to purchase cattle from a rancher and finance the
purchase through Midland, who brokers the transaction. The cattle
are delivered to the related party; Midland collects funds from the
related party (or finances the transaction) and pays the rancher.
When the cattle are sold, payment from the sale flows through
Midland who settles the transaction by remitting payment to the
related party, less an interest factor (or possibly the reduction
of a receivable). Ownership risk of the cattle is never assumed by
Midland; and the amounts involved with the exception of any
interest, are pass-through in nature.
In addition, on cattle sales to related parties, the Company
may sometimes give more favorable repayment terms, such as extended
credit with no interest.
The Company contracts with Jock War, Ltd., a company owned by
Johnny Walker, an employee of the Company and son-in-law to Gordon
Reisinger, and in which Gordon Reisinger and Charles Kolbe each
have a 20% interest, for transporting cattle. Cimmaron West is
another company that Red Oak contracts with for freight on cattle.
Gordon Reisinger has a 25% interest and Johnny Walker has a 20%
interest in Cimmaron West. The Company also contracts with
Schwarg, a company owned by Johnny Walker (25%), Gordon Reisinger
(25%) and a third non-affiliated party. Freight contracts are no
less favorable to the Company than the current cattle freight
rates.
The Company's current office space and feedlot is leased from
Gordon and Barbara Reisinger at a rate of $4,000 per month, which
is no less favorable to the Company than what it could obtain in
the local market.
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The Company also employs Cimmaron Properties (owned by Gordon
Reisinger) as a consultant to the Company. For consulting
services, the Company pays management fees to Gordon Reisinger
through Cimmaron Properties.
Charles Kolbe, a director and officer of the Company receives
$5,000 per month as management fees through Wall Lake Cattle
Company (a consultant to the Company) for services to the Company.
Mr. Kolbe was recently disabled and the Board of Directors
approved continuing his compensation for six months during a
medical leave of absence from July through December 1997. In
January 1998, Mr. Kolbe resumed his duties for the Company.
Beginning November 1, 1997, John Derner, a director and
officer of the Company received $5,000 per month compensation for
services to the Company.
During the twelve months ended December 31, 1997, the Company
paid a total of $376,960 in management fees of which $368,960 was
paid to entities controlled by Gordon Reisinger, John Derner and
Charles Kolbe, directors and officers of the Company.
Mr. Reisinger and Mr. Derner have personally guaranteed loans
payable to MoorMan's Inc., in the total amount of $1,000,000, taken
by the Company. Further, Mr. Reisinger, Mr. Derner and Mr. Kolbe
have personally guaranteed the revolving lines of credit taken out
by Red Oak Farms and/or Midland Cattle Company as well as personal
guarantees on the loan from the Iowa Department of Economic
Development.
The Company is guarantor on a note payable of $1,000,000 for
Gordon Reisinger. The loan was taken out by the President to cover
costs for feeding and purchasing cattle for the CHB program.
Additionally, the Company through its subsidiary, Feeders, has a
note payable to a major shareholder in the amount of $250,000.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K.
The Company filed an 8-K Current Report on December 29, 1997
reporting the resignation of Baird Kurtz & Dobson as its certifying
accountant.
On March 13, 1998, the Company filed an 8-K Current Report
stating it had retained BDO Seidman, LLP as the Company's
certifying accountant.
(b) Exhibits. The following exhibits are included as part of this
report:
34
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SEC Exhibit
Exhibit Reference
Number Number Title of Document Location
3.01 3 Articles of Amendment to the Articles Incorporated
of Incorporation by reference*
3.02 3 Articles of Incorporation Incorporated
by reference*
3.03 3 Bylaws Incorporated
by reference*
10.01 10 Operating Agreement for Red Oak Attached
Feeders, LC
10.02 10 Quality Feeders Partnership Agreement Attached
10.03 10 Nebraska Beef Contract Attached
27.01 27 Financial Data Schedule Attached
*Incorporated by reference from the Registrant's registration
statement on Form SB-2, as amended, filed with the Commission, SEC
file no. 33-89714.
35
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
Dated: Red Oak Hereford Farms, Inc.
a Nevada corporation
5/27/98 By: /s/ Gordon Reisinger
Gordon Reisinger, President
DATE NAME AND TITLE SIGNATURE
5/27/98 Gordon Reisinger By: /s/ Gordon Reisinger
President/Director
Gordon Reisinger, President
5/27/98 By: /s/ Harley Dillard
Harley Dillard
Treasurer/Chief Financial
Officer
36
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<PAGE>
RED OAK HEREFORD FARMS, INC.
DECEMBER 31, 1997 AND 1996
CONTENTS
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORTS. . . . . 1-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . .. 3-4
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . . . . . . 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . 6
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . .7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . 8-19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Red Oak Hereford Farms, Inc.
Red Oak, Iowa
We have audited the accompanying consolidated balance sheet of
Red Oak Hereford Farms, Inc. as of December 31, 1997, and the
related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Red Oak Hereford Farms, Inc. at December 31, 1997,
and the results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has suffered recurring losses and
negative cash flows from operations since its inception, and is
in technical non-compliance with certain loan agreements. In
addition, subsequent to year-end, the Company's lenders
terminated their relationships with the Company. These factors
raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
/S/ BDO Seidman, LLP
Chicago, Illinois
March 28, 1998
1
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Red Oak Hereford Farms, Inc.
Red Oak, Iowa
We have audited the accompanying consolidated balance sheet
of RED OAK HEREFORD FARMS, INC. (formerly MID-AG, L.C. and
MIDLAND CATTLE COMPANY) as of December 31, 1996, and the related
statements of operations, changes in stockholders' equity and
cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of RED OAK HEREFORD FARMS, INC. as of December 31, 1996 and the
results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has
suffered recurring losses from operations and deficit cash flows,
and is in technical noncompliance with its loan and producer
license agreements. These matters raise substantial doubt about
the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/S/ BAIRD, KURTZ & DOBSON
Kansas City, Missouri
February 7, 1997
2
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RED OAK HEREFORD FARMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
CURRENT ASSETS
Cash $ 12,993 $
Accounts receivable
Trade, less allowance
for doubtful accounts
of $10,000 2,920,939 3,996,748
Related parties 1,102,565 497,433
Inventories 989,190 1,021,031
Prepaid expenses
and other assets 96,404 107,856
----------- -----------
Total current assets 5,122,091 5,623,068
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Buildings and
leasehold improvements 292,574 281,845
Vehicles and equipment 237,878 177,115
-------- -------
530,452 458,960
Less accumulated
depreciation 224,088 163,451
----------- -----------
Net book value 306,364 295,509
----------- -----------
OTHER ASSETS
Investment in partnership 500,000
Other assets 47,229 70,312
----------- -----------
Total other assets 547,229 70,312
----------- -----------
$ 5,975,684 $ 5,988,889
----------- -----------
See Accompanying Notes to Consolidated Financial Statements
3
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RED OAK HEREFORD FARMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES
1997 1996
CURRENT LIABILITIES
Revolving bank
lines of credit $ 1,270,294 $ 846,218
Current maturities
of long-term debt 1,029,015 1,018,063
Accounts payable
Trade 546,691 2,166,582
Related parties 54,528 160,923
Accrued expenses 100,380 128,713
Current maturities
of deferred income 100,000
--------- ---------
Total current
liabilities 3,100,908 4,320,499
--------- ---------
LONG-TERM LIABILITIES
Deferred income 200,000 300,000
Long-term debt 971,694 477,647
--------- ---------
Total long-term
liabilities 1,171,694 777,647
--------- ---------
Total liabilities 4,272,602 5,098,146
--------- ---------
Commitments, contingencies and other matters (Notes 2,3,5,7,8 and 11)
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
authorized 50,000,000 shares;
issued and outstanding
14,429,290 shares 14,430
Cumulative preferred stock,
$.001 par value, authorized
5,000,000 shares;
issued and outstanding
200,000 shares 200
Additional paid-in capital 5,738,605
Retained earnings (deficit) (4,050,153)
Members'/Partners' equity 890,743
----------- -------------
Total stockholders' equity 1,703,082 890,743
----------- -------------
$ 5,975,684 $ 5,988,889
----------- -------------
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
NET SALES
Related parties $ 13,100,627 $ 11,560,272
Others 92,225,066 111,860,449
----------- -----------
105,325,693 123,420,721
----------- -----------
COST OF GOODS SOLD
Related parties 8,591,917 14,099,265
Others 97,296,817 109,645,010
----------- -----------
105,888,734 123,744,275
----------- -----------
GROSS PROFIT (LOSS) (563,041) (323,554)
OPERATING EXPENSES 3,654,763 2,225,492
---------- ----------
LOSS FROM OPERATIONS (4,217,804) (2,549,046)
---------- ----------
OTHER INCOME (EXPENSE)
Interest Income 63,062
Interest Expense (343,404) (358,881)
--------- ---------
(280,342) (358,881)
--------- ----------
NET LOSS (4,498,146) (2,907,927)
PREFERRED STOCK
DIVIDEND REQUIREMENT (17,010) -
------------- -------------
NET LOSS APPLICABLE
TO COMMON STOCKHOLDERS $ (4,515,156) $ (2,907,927)
------------- -------------
BASIC AND DILUTED
LOSS PER SHARE $ (0.33) $ (0.23)
---------- ---------
WEIGHTED AVERAGE
SHARES OUTSTANDING 13,618,705 12,498,462
--------- ----------
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
<TABLE>
RED OAK HEREFORD FARMS, INC.
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PREDECESSOR ENTITIES RED OAK HEREFORD FARMS, INC.
--------------------- ----------------------------
CUMULATIVE ADD. RETAINED
MEMBERS' PARTNERS'COMMON PREFERRED PAID-IN EARNINGS
EQUITY EQUITY STOCK STOCK CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, $1,354,363 $954,307 $ $ $ $ $2,308,670
JANUARY 1,1996
CAPITAL 1,492,500 47,500 1,540,000
CONTRIBUTIONS
CAPITAL (50,000) (50,000)
DISTRIBUTIONS
NET INCOME(LOSS)(2,834,858) (73,069) (2,907,927)
--------- ------- ------ ------ ------ ----- ---------
BALANCE, DECEMBER 31,1996 12,005 878,738 890,743
PURCHASE OF (31,000) (31,000)
TREASURY STOCK
DISTRIBUTION (60,459) (60,459)
OF JOINT VENTURE
CONTRIBUTION
OF NET ASSETS
OF PREDECESSORS
TO RED OAK
HEREFORD FARMS,
INC.IN EXCHANGE 533,402 10,960 (517,500) 26,862
FOR COMMON STOCK
CONTRIBUTION OF NET ASSETS
OF MIDLAND CATTLE COMPANY,
INC. IN EXCHANGE FOR
COMMON STOCK (884,693) 1,538 200 882,955
ISSUANCE OF COMMON STOCK
SALE OF PRIVATE PLACEMENT 1,500 4,498,500 4,500,000
EXERCISE OF 400,000 STOCK
OPTIONS 400 1,199,600 1,200,000
ISSUE OF COMMON STOCK
FOR SERVICES 32 96,735 96,767
STOCK OFFERING COSTS (421,685) (421,685)
NET INCOME (LOSS)(514,407) 66,414 (4,050,153) (4,498,146)
--------- ------- ------ ----- -------- ----- ---------
BALANCE, $ $ $14,430 $200 5,738,605(4,050,153)1,703,082
DECEMBER 31, 1997 ------- ------- ------ ------ -------- -------- ---------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,498,146) $(2,907,927)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 93,564 78,179
Services rendered in
exchange for common stock 123,629
Changes in:
Accounts receivable 470,677 215,562
Inventories 31,841 438,388
Prepaid expenses 11,452 (55,317)
Accounts payable
and accrued expenses (1,754,620) 590,824
---------- ---------
Net cash used in
operating activities (5,521,603) (1,640,291)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property
and equipment (71,491) (50,387)
Change in other assets (9,844) (41,952)
Investment in partnership (500,000)
--------- --------
Net cash used
in investing activities (581,335) (92,339)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 1,540,000
Net proceeds from
issuance of common stock 5,278,315
Proceeds from issuance
of forgivable loan 200,000
Net borrowings (payments)
on line of credit 424,076 (1,453,080)
Proceeds on issuance
of long-term debt 524,560 1,500,000
Payments on long-term debt (19,561) (4,290)
Purchase of treasury stock (31,000)
Distributions paid (60,459) (50,000)
---------- ----------
Net cash provided
by financing activities 6,115,931 1,732,630
--------- ----------
INCREASE IN CASH 12,993 -
CASH, BEGINNING OF PERIOD - -
---------- ----------
CASH, END OF PERIOD $ 12,993 $ -
---------- ---------
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BUSINESS REORGANIZATION - REVERSE ACQUISITION
On March 14, 1997, Wild Wings, Inc. (known now as Red
Oak Hereford Farms, Inc., the "Company") entered into an
Agreement and Plan of Reorganization (the "Acquisition")
with Red Oak Farms, Inc., an Iowa Corporation, ("Red Oak").
Pursuant to the terms of the Acquisition, Wild Wings, Inc.
effected a reverse acquisition by acquiring all of the
issued and outstanding stock of Red Oak from the
stockholders of Red Oak in exchange for 10,000,000
restricted shares of the $.001 par value common stock plus
options to purchase an additional 3,000,000 shares of Wild
Wings, Inc. As a result of the Acquisition, Red Oak became
a wholly-owned subsidiary of Wild Wings, Inc. At a Special
Meeting of Shareholders held March 14, 1997, the
Shareholders approved the Acquisition and voted to change
the company name from Wild Wings, Inc. to Red Oak Hereford
Farms, Inc. 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 at historical cost. Prior to March 14,
1997, Wild Wings, Inc. operated a hunting club and had
insignificant operations and, accordingly, the accompanying
financial statements reflect the financial position and
results of operations of Red Oak.
NATURE OF OPERATIONS
The Company is a Nevada corporation 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, and is engaged in buying and selling
feeder cattle in the wholesale markets through its wholly-
owned subsidiary, Midland Cattle Company, Inc. , an Iowa
corporation ("Midland"). The Company extends unsecured
credit to customers predominantly located in the Southwest
and Midwest United States.
In February 1997, Red Oak was formed with the members
of Mid-Ag, LC, contributing the assets and liabilities of
Mid-Ag to Red Oak in exchange for all of the outstanding
stock of Red Oak. Red Oak was then acquired by the Company
in the transaction described above.
On May 19, 1997, as a condition of the Acquisition
stated above, the Board of Directors of the Company approved
an agreement to exchange stock pursuant to which the Company
issued 1,538,462 restricted common shares of the Company in
exchange for all of the issued and outstanding shares of
Midland. 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 interests,
whereby assets and liabilities are reported at historical
values. Accordingly, the financial statements have been
restated to include the accounts and operations of Midland.
On December 12, 1997, the Company formed a subsidiary,
Red Oak Feeders, LLC, an Iowa limited liability company
("Feeders"), to develop a supply of Certified Hereford Beef registered
trademark ("CHB") for the Company by financing the feeding of CHB
cattle for sale to Red Oak. Feeders intends to issue notes
to experienced cattle investors and use the proceeds for the
limited purpose of feeding cattle. Feeders commenced
operations at the end of December 1997, through a 50%
investment in a joint venture, Quality Feeders, a Nebraska
partnership with MoorMan's, Inc. Quality Feeders, whose
operations commenced in January 1998, will feed and raise
CHB to provide a supply of CHB cattle to meet customer
demands. Quality Feeders will buy cattle from Midland and
others, place the cattle in feedlots and oversee the feeding
pursuant to CHB standards. This investment is being
accounted for under the equity method of accounting.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment.
8
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Red Oak, Midland and Feeders. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
INVENTORY PRICING
All inventories are stated at the lower of cost or
market determined using the FIFO (first-in, first-out)
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and
depreciated over the estimated useful life of each asset,
primarily three to fifteen years. Leasehold improvements
are amortized over the shorter of the lease term or the
estimated useful lives of the improvements. Annual
depreciation and amortization are primarily computed using
accelerated methods.
OTHER ASSETS
The Company has various other assets, including
organization costs, grant performance costs, and loan and
grant origination costs. Amortization is computed using the
straight-line method over the following lives:
Organization costs 5 years
Loan and grant origination costs Life of agreements
DEFERRED INCOME
Deferred income consists of two grants from the Iowa
Department of Economic Development. The first was for
$100,000 received in 1995 to form the Certified Hereford
Beef Program. Red Oak is required, among other things, to
feed a certain number of cattle in Iowa by June 1998. When
Red Oak meets the conditions, grant repayment is permanently
waived and the income will be recognized. If the
requirements are not met, this deferred income becomes a
note payable.
In 1996, Red Oak received an additional grant for
$200,000 to plan, market or construct a new state-of-the-art
beef processing facility in southwest Iowa by June 2001.
This grant will be amortized into income at such time as the
plant is completed. If the requirements are not met, this
deferred income will become a note payable over five years
with interest at a rate of 8 1/4 %. The grants are
collateralized by substantially all of Red Oak's assets and
guaranteed by the Company's President.
9
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs, consisting primarily of marketing
material for the promotion of CHB and investor promotional
information, are expensed as incurred. Total advertising
costs were $762,762 and $149,297 in 1997 and 1996,
respectively.
INCOME TAXES
The Company effectively began operations as of March
14, 1997, and operates as a regular corporation. The
predecessor entities, Mid-Ag, a limited liability company,
and Midland Cattle Company, a joint venture, were taxed as
partnerships, with income tax liabilities on the taxable
income being assumed by the members and partners
respectively. Accordingly, no provision for income taxes
has been reflected in the accompanying consolidated
financial statements for these entities.
Deferred tax liabilities and assets are recognized for
the tax effects of differences between the financial
statement and tax bases of assets and liabilities. A
valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax
asset will not be realized.
BASIC AND DILUTED LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share", which the Company has
adopted. Pursuant to SFAS 128, the Company has replaced the
reporting of "primary" earnings per share ("EPS") with
"basic" EPS. Basic EPS is calculated by dividing the income
(loss) available to common stockholders by the weighted
average number of common shares outstanding for the period,
without consideration for potentially dilutive securities.
"Fully diluted" EPS has been replaced with "diluted" EPS
which is determined similarly to fully diluted EPS under the
provisions of APB Opinion No. 15.
For all periods presented in the Consolidated
Statements of Operations, the effect of including stock
options and warrants would have been antidilutive.
Accordingly, basic and diluted EPS for all periods presented
are equivalent.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income". The
new standard discusses how to report and display
comprehensive income and its components. This standard is
effective for years beginning after December 15, 1997. When
the Company adopts this statement, it is not expected to
have a material impact on the presentation of the Company's
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This standard requires
enterprises to report information about operating segments,
their products and services, geographic areas, and major
customers. This standard is effective for years beginning
after December 15, 1997. When the Company adopts this
statement, it is not expected to have a material impact on
the presentation of the Company's consolidated financial
statements.
10
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the
Company to concentrations of risk consist principally of
temporary cash investments and accounts receivable. The
Company invests its temporary cash balances in financial
instruments of highly rated financial institutions with
maturities of less than three months. The accounts
receivable are from numerous entities located throughout the
United States and the associated credit risks are evaluated
by management and considered limited. The carrying values
reflected in the balance sheets reasonably approximate the
fair values for cash, accounts receivable, payables,
accruals and debt.
NOTE 2: GOING CONCERN
The accompanying consolidated financial statements have
been presented on a going concern basis, which contemplates
the realization of assets and satisfaction of liabilities in
the normal course of business. The Company has suffered
recurring losses and negative cash flows from operations
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 and is in technical noncompliance with
certain loan agreements. Subsequent to year-end, the
Company's lenders terminated their relationships with the
Company (see Note 11). These factors raise substantial
doubt about the ability of the Company to continue as a
going concern. In this regard, management is in the process
of renegotiating loan agreements, completing a private
placement offering, and increasing product awareness through
marketing efforts to improve profitability and cash flow.
Sales efforts are being made to change the product mix of
sales to increase the volume percentage of branded versus
commodity sales. In addition, the Company has developed a
more formal operating plan including operating budgets to
facilitate monthly analysis of operations. Management
believes these steps will enhance the Company's ability to
achieve favorable operating results. There is no assurance
that the Company will be successful in raising additional
capital or achieving profitable operations. The
consolidated financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
NOTE 3: RELATED PARTY TRANSACTIONS
The Company sells cattle to certain companies which are
owned by members of the Company's management or Board of
Directors. The Company also purchases cattle and feed from
these same entities. Additionally, both Midland and Red Oak
utilize trucking companies that are owned by members of the
Company's management or Board of Directors. The activity
between the Company and these related parties at and for the
years ended December 31, 1997 and 1996 are as follows:
1997 1996
Sales $13,100,627 $11,560,272
Purchases 8,591,916 14,099,265
Accounts Receivable 1,102,565 497,433
Accounts Payable 54,528 160,923
Additionally, during the years ended December 31, 1997
and 1996, Red Oak purchased cattle from Midland in the
amount of $358,796 and $2,024,217, respectively. Such
intercompany purchases are eliminated in consolidation.
The Company leases office space owned by a related
party under a one-year lease dated March 1, 1997, which
provides for monthly rent payments of $4,000.
11
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3: RELATED PARTY TRANSACTIONS (CONTINUED)
During the years ended December 31, 1997 and 1996, the
Company paid management fees of $376,960 and $180,000,
respectively, to affiliates.
In addition, the Company is guarantor on a note payable
of $1,000,000 for its President. The loan was taken out by
the President to cover costs for feeding and purchasing
cattle for the CHB program.
The Company through its subsidiary, Feeders, also has a
note payable to a major stockholder for $250,000.
NOTE 4: INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of
the following:
1997 1996
Boxed beef $ 639,411 $ 860,810
Cattle 296,149 67,239
Other 53,630 92,982
----------- ----------
$ 989,190 $1,021,031
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT
Short-term notes payable consisted of the following at
December 31, 1997 and 1996:
1997 1996
Revolving line of credit (A) $1,254,638 $ 707,226
Revolving line of credit (B) 15,656 138,992
---------- ----------
$1,270,294 $ 846,218
Long-term debt consisted of the following at December
31, 1997 and 1996:
1997 1996
IDED installment note (C) $ 477,647 $ 495,710
Installment note, feed supplier (D) 1,000,000 1,000,000
Red Oak Feeders notes (E) 500,000
Other 23,062
--------- ---------
2,000,709 1,495,710
Less current maturities 1,029,015 1,018,063
----------- ----------
$ 971,694 $ 477,647
(A) At December 31, 1996, Midland had a revolving line of
credit which provided borrowing up to $2,500,000. The
loan was limited by levels of collateral and is
collateralized by substantially all of the subsidiary's
assets and personal guarantees of the major
stockholders of the Company. The revolving line, which
matured June 30, 1997, bore interest at the bank's
prime rate plus 1 1/2%.
12
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
On June 30, 1997, Midland's revolving line of credit
was amended to extend the maturity of the agreement to
January 31, 1998 (unless terminated earlier under terms
of the agreement). This line of credit was
subsequently amended through March 31, 1998 (see Note
11). The revolving line, which provides for borrowings
up to $2,500,000, limited by levels of collateral,
bears interest at the bank's prime rate plus 1 1/2% (10%
as of December 31, 1997), and is collateralized by
substantially all of the subsidiary's assets and
personal guarantees of the major stockholders of the
Company.
In connection with these lines of credit, Midland was
required, among other things, to maintain certain
financial conditions, including net worth of at least
$850,000. During the periods ended December 31, 1997
and 1996, Midland was in technical noncompliance with
certain of these requirements and the debt was callable
at the bank's option. Subsequent to year end, the
lender terminated their relationship with the Company
(see Note 11).
(B) Red Oak had a revolving line of credit which matured
August 15, 1996. The revolving loan provided
borrowings up to $2,500,000, which was collateralized
by substantially all of the subsidiary's assets and a
securities pledge agreement by the American Hereford
Association ("AHA"). The revolving line bore interest
at the bank's prime rate plus 2 1/2% and required a .5%
fee on the unused credit line, payable quarterly.
In August 1996, Red Oak replaced the line of credit
with a new line of credit at a different bank. The
line of credit provided for borrowings up to $4,000,000
and was secured by personal guarantees of two major
shareholders of the Company and was collateralized by
the same assets as the previous line. The revolving
line matured on June 30, 1997, and bore an interest
rate of 2% above the bank's prime rate and required a
fee of .25% of the unused credit line, payable
quarterly.
On June 30, 1997, Red Oak's revolving line of credit
was amended to extend the maturity of the agreement to
January 31, 1998 (unless terminated earlier under terms
of the agreement). This revolving line of credit was
subsequently amended through February 28, 1998 (see
Note 11). The revolving line, which provides for
borrowings up to $1,500,000, (after amendments) limited
by levels of collateral, bears interest at the bank's
prime rate plus 2% (10.5% as of December 31, 1997) and
is collateralized by substantially all of the
subsidiary's assets and personal guarantees of major
stockholders of the Company. Red Oak also held a
letter of credit for $415,000 issued by the bank in
connection with the line of credit. The letter of
credit expired January 31, 1998 and was not renewed.
Red Oak subsequently was issued a new letter of credit
for $415,000 by another bank.
In connection with these revolving lines of credit, the
subsidiary was required to, among other things,
maintain certain financial conditions, including
working capital requirements, as well as maintaining
minimum required level of combined equity and
subordinated debt, and a debt to tangible net worth
ratio below a specified level. During the periods
ended December 31, 1997 and 1996, Red Oak was in
technical noncompliance with certain of the
requirements and the debt was callable at the bank's
option. Subsequent to year end, the lender terminated
their relationship with the Company (see Note 11).
(C) Installment note payable to the Iowa Department of
Economic Development; due July 2001; payable in
quarterly installments of $14,602 including interest of
8 1/4%, with final payment in July 2001 of $409,716;
subordinated to line of credit to Red Oak. The note is
guaranteed by the Company's President.
13
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
(D) Due October 2001; interest only payable monthly through
November 1998 at 1.75% above a published prime rate
(10.25% at December 31, 1997), at which time the
interest rate will change retroactively to 1% above
same published rate and will continue to be paid
monthly until maturity. Principal is to be paid in 36
equal monthly installments commencing November 1998.
In connection with this note, the Company is required,
among other things, to purchase cattle from feedlots
which have fed the lenders' products to such cattle for
a minimum of 100 days unless specific exemption is
received; subordinated to line of credit to Red Oak.
The note is guaranteed by two major shareholders of the
Company.
In connection with this note payable, the Company is
also required, among other things, to remain in
compliance with the covenants set forth in the
installment note agreement discussed at (B) above, in
which the feed supplier is a participating lender. As
discussed at (B), Red Oak is in technical noncompliance
with the Bank loan agreements for December 31, 1997 and
1996, and thus this entire loan is classified as
current in the accompanying financial statements.
(E) On December 31, 1997, Feeders received proceeds from
the issuance of three loans to stockholders for
financing the feeding of CHB cattle. The loans are due
on December 31, 2000, and bear interest at the rate of
10% paid annually.
Aggregate annual maturities of notes payable and long-
term debt are as follows:
1998 $1,029,015
1999 31,465
2000 526,527
2001 413,702
2002 0
Thereafter 0
----------
$2,000,709
The carrying amount approximates fair value for the
above debt instruments because the interest rate is
primarily variable based on the prime rate.
NOTE 6: INCOME TAXES
The accompanying consolidated financial statements
contain no provision for income taxes due to net operating
losses. The effective tax rate differs from the U.S.
statutory federal income tax rate of 34% due to the fact
that tax benefits have been offset by the valuation
allowance described below due to the uncertainty of the
Company's ability to utilize them in future periods.
The tax effects of temporary differences related to
deferred taxes were:
1997
Deferred Tax Assets
Net operating loss carry forwards $1,701,604
Valuation allowance: (1,701,604)
----------
Net deferred tax asset $ 0
As of December 31, 1997, the Company had approximately
$4,000,000 of unused operating loss carry forwards which
expire in 2012.
14
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company leases certain office equipment and
property under noncancellable operating leases expiring in
various years. Future minimum lease payments at December
31, 1997 are as follows:
1998 $ 98,360
1999 56,829
2000 44,224
2001 44,224
2002 39,985
Thereafter 141,900
--------
Future minimum lease payments $425,522
Total rent expense related to these leases was $107,486
and $63,872 for 1997 and 1996, respectively.
EXCLUSIVE LICENSE AND ROYALTY AGREEMENT
The Company originally entered into an agreement on
September 6, 1994, with the AHA for the exclusive license
and right to process, distribute and sell CHB under the CHB
trademark. This original agreement was replaced by an
agreement dated March 14, 1997. The AHA works in
conjunction with the Company, providing marketing
assistance, as well as pricing and promotional strategies to
the Company's major customers. The agreement expires
December 31, 1999, and automatically renews for a three-year
period beginning January 1 of each calendar year commencing
on January 1, 2000 unless the Company fails to meet certain
criteria of the agreement. The agreement requires the
Company to maintain certain cattle processing standards and
process a certain number of CHB cattle. In addition, the
agreement requires the Company to pay the AHA a minimum
royalty fee calculated for CHB cattle processed of $500,000,
$725,000 and $850,000 for the years ended December 31, 1997,
1998, and 1999, respectively. In 1997, the Company
processed cattle resulting in approximately $160,155 of
royalty fees . As this amount was less than the pro rata
portion of minimum royalties for the year, the Company paid
$186,435 on August 31, 1997 and recorded a liability for
the shortfall of approximately $153,410 as of December 31,
1997 and which was paid in January 1998. The Company paid
approximately $213,000 for royalty fees to the AHA in 1996.
MAJOR CUSTOMERS
During 1996, Red Oak had sales to a customer accounting
for approximately 46% of Red Oak's revenues, and 5% of
revenues for 1997. For the years ended 1996 and 1997, the
accounts receivable balance for this customer was $635,890
and $0, respectively. During 1997, the customer ceased its
purchasing from Red Oak.
LEGAL PROCEEDINGS
To the knowledge of management, there is no material
litigation pending or threatened against the Company or its
management. There is, however, an administrative proceeding
before the United States Department of Agriculture initiated
on July 16, 1997, by the Grain Inspection Packers and
Stockyards Administration against Cimmaron Properties, Ltd.,
Wall Lake Cattle Co., Midland Cattle Company and Gordon
Reisinger. The complaint alleges violation of 7 USC section
181 et seq. by failing to pass on to customers original purchase
shrink weight allowances when reselling livestock in seven
instances and failure to maintain adequate records. Legal
counsel has indicated that there is no evidence of a breach
of the statute. The Company believes the allegations are
based on the Government's mistaken belief that the Company
was acting as a broker, when, in fact, the Company owned the
cattle involved. The Company declined an opportunity to
settle the case and intends to vigorously defend itself.
15
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company anticipates filing a Motion seeking summary
disposition of the case without an administrative hearing.
If the pre-hearing motion is not sustained, an
administrative hearing will be held on merits.
NOTE 8: STOCKHOLDERS' EQUITY
POTENTIAL ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Company is authorized to issue up to 5,000,000
shares of preferred stock, the rights and preferences of
which may be designated in series by the Board of Directors.
To the extent of such authorization, such designations may
be made without shareholder approval.
ISSUANCE OF COMMON STOCK
During 1997, the Company completed a private placement
offering and issued 1,500,000 units, each unit comprising
one common share and one common stock purchase warrant, for
$3.00 per unit. The common stock purchase warrants are
callable at $.001 per share on 30 days' notice and grant the
holder the right to purchase common stock at $5.00 per
share. The Company raised $4,500,000 through this offering
before deducting offering expenses of $421,685..
ISSUANCE OF PREFERRED STOCK
As part of the Company's acquisition of Midland, the
Company authorized issuance of 200,000 shares of 1997 Series
A non-voting preferred stock pursuant to an agreement with
the former stockholders of Midland. The rights and
preferences of the preferred stock include a liquidation
preference of $5 per share, plus an amount equal to any
accrued and unpaid dividends at a rate of $0.042 per share
per month, plus 10% interest to the payment date, before any
payment or distribution is made to the holders of common
stock. At December 31, 1997, cumulative dividends in
arrears aggregate $17,010 ($0.00 per share).
The Company has the right to redeem the Series A
preferred stock at any time for $5 per share plus accrued
dividends or in exchange for a payment of accrued dividends
plus an equal number of restricted shares of the Company's
common stock.
OUTSTANDING STOCK OPTIONS
In connection with the acquisition of Red Oak, the
Company has granted options to purchase 3,000,000 shares of
stock between March 17, 1997 and March 17, 2002. To date,
none of these options have been exercised. The shares are
exercisable as follows:
Shares Price Per Share
1,000,000 $8.00
1,000,000 $10.00
1,000,000 $12.00
In addition, the Company's board has authorized
issuance of options to purchase up to 5,000 shares at $6.75
per share to each director (for a total of 35,000 options)
in exchange for service on the board.
16
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8: STOCKHOLDERS' EQUITY (CONTINUED)
OUTSTANDING WARRANTS
In addition to the warrants issued with the private
placement discussed above, the Company's predecessor, Wild
Wings, Inc., had issued three series of warrants currently
outstanding as follows:
Series Shares 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 is in effect for the shares underlying the
warrants. The warrants may be exercised for a period of two
years after the date of the registration statements.
STOCK OPTION PLANS
The Company's predecessor, Wild Wings, Inc., had
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. These options were
exercised in 1997.
The Company has also adopted a 1997 Stock Option Plan
and has allocated 1,000,000 shares of common stock to the
Plan. To date, 758,000 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. The options may be exercised at the rate of 20%
per year beginning in March 1998.
The Company issued options to purchase 75,000 shares of
common stock, exercisable immediately, at $6.50 per share.
These options expire in 2007. As of December 31, 1997, none
of the options have been exercised.
The Company accounts for stock options under APB
Opinion No. 25, under which no compensation cost has been
recognized. Had compensation cost been determined
consistent with FASB Statement No. 123, the Company's net
loss and loss per share would have been increased to the
following pro forma amounts:
Net Loss: As Reported $(4,498,146)
Pro Forma (4,691,472)
Loss Per Share As Reported $ (0.33)
Pro Forma $ (0.35)
17
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8: STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's 1997 and 1995
Stock Option Plans at December 31, 1997 and changes during
the period then ended is presented below:
Weighted Average
----------------------
Exercise Price Per Remaining
Shares Price Share Life - Years
-------- ------- --------- ---------
OUTSTANDING, BEGINNING
OF PERIOD 400,000 $3.00
Granted 976,500 4.25-6.50 4.85 10
Canceled (218,500) (5.00) 5.00
Exercised (400,000) (3.00)
---------
OUTSTANDING, END OF PERIOD 758,000 $4.85 10
The fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option pricing
model. The following weighted-average assumptions were used
for the period ended December 31, 1997: risk-free interest
rates of 6.39%; expected dividend yields of 0%; expected
volatility of 62% for the period; expected option life - 5 years.
At December 31, 1997, none of the outstanding options were exercisable.
A total of 3,713,000 shares of common stock have been
reserved for outstanding stock options and warrants as of
December 31, 1997.
NOTE 9: SUPPLEMENTAL CASH FLOWS INFORMATION
1997 1996
Cash paid during the
year for interest $364,611 $358,881
During the year ended December 31, 1997, the Company
issued 32,230 shares of its common stock in exchange for
services with a value of $96,767.
NOTE 10: FOURTH QUARTER ADJUSTMENTS
Certain marketing costs and professional fees
previously treated as offering costs charged to additional
paid-in capital, totaling $717,723, were reclassed as
operating expenses during the fourth quarter of 1997. If
these expenses were recorded as operating expenses as
incurred they would have resulted in the following
additional operating expenses on the Company's quarterly
statements of operations:
Quarter Ended March 31, 1997 $ 44,000
Quarter Ended June 30, 1997 $243,000
Quarter Ended September 30, 1997 $256,000
18
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 11: SUBSEQUENT EVENTS
ADDITION TO CAPITAL
On January 14, 1998, the Company began a private
placement offering to issue up to 840,000 units, each unit
comprising one common share and one common stock purchase
warrant, for $4.00 per unit. The common stock purchase
warrants are callable at $.10 per share upon 60 days' notice
and grant the holder the right to purchase common stock at
$6.00 per share. Through March 28, 1998, the Company has
raised $1,000,500 through the sale of 250,125 units before
deducting offering expenses of $112,896.
CUSTOM SLAUGHTER AND FABRICATION AGREEMENT
On March 25, 1998, the Company entered into a three
year agreement with its major beef processor which expires
December 1, 2000. Under the agreement, the Company is
required to slaughter and process 500 to 4,500 head per
week. If the carcass count falls below these numbers in any
given week, the processor has the right to terminate the
agreement.
ISSUANCE OF NOTE PAYABLE
On January 16, 1998, Feeders received $100,000 in
proceeds from the issuance of a loan for financing the
feeding of CHB cattle through Quality Feeders. The loan
bears interest of 10% paid quarterly and is due January 16,
2001.
LINES OF CREDIT
On January 31, 1998, Red Oak's line of credit was
amended to extend the maturity date to February 28, 1998.
The line of credit was paid and terminated in March 1998.
On February 26, 1998, Red Oak entered into a bridge
financing agreement with A&J Cheese Company. The agreement
provides borrowings up to $15,000,000 and bears an interest
rate of 12.97% with 30 days interest payable in advance at
the time of each loan advance. Red Oak is currently
negotiating a new financing agreement with other potential
lenders.
On April 13, 1998, Red Oak entered into an agreement in
principle with KBK Capital Corporation to provide an asset
based line of credit. The line of credit will provide
borrowings up to $4,000,000, based on eligible assets. The
line of credit will be collateralized by substantially all
of the subsidiary's assets and personal guarantees of the
Company's President and Chairman.
On January 31, and February 28, 1998, Midland's line of
credit was amended to extend the maturity date to February
28, and March 31, 1998, respectively. Midland is currently
in the process of liquidating the loan through
collateralized lockbox deposits and negotiating a new
financing agreement with other potential lenders.
19
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 4,033
<ALLOWANCES> 10
<INVENTORY> 989
<CURRENT-ASSETS> 5,122
<PP&E> 530
<DEPRECIATION> 224
<TOTAL-ASSETS> 5,976
<CURRENT-LIABILITIES> 3,101
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 1,689
<TOTAL-LIABILITY-AND-EQUITY> 5,976
<SALES> 105,326
<TOTAL-REVENUES> 105,326
<CGS> 105,889
<TOTAL-COSTS> 105,889
<OTHER-EXPENSES> 3,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343
<INCOME-PRETAX> (4,498)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,498)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
OPERATING AGREEMENT
Of
RED OAK FEEDERS, L.C.
<PAGE>
TABLE OF CONTENTS
ARTICLE I. FORMATION AND TERM
ARTICLE II. OFFICES
2.1 Principal Office
2.2 Registered Office
ARTICLE III. MEMBERSHIP INTERESTS AND CAPITAL
CONTRIBUTIONS
3.1 Membership Interests
3.2 Initial Capital Contributions
3.3 Additional Capital Contributions
3.4 Loans by Members
3.5 Limitation of Liability
3.6 Capital Accounts
3.7 General
ARTICLE IV. PROFIT AND LOSS ALLOCATION
4.1 Net Profit or Net Loss
4.2 Allocations in General
4.3 Distribution of Cash
4.4 Allocations with Respect to Varying Interests
ARTICLE V. CERTIFICATES OF MEMBERSHIP INTEREST AND TRANSFER
5.1 Certificates
5.2 Certificate Register
5.3 Transfers of Membership Interests
5.4 Conditions Precedent to Transfer
5.5 No Dissolution or Termination
5.6 Prohibition of Assignment
ARTICLE VI. MANAGEMENT
ARTICLE VII. OFFICERS
7.1 Number, Tenure, and Qualifications
7.2 Vacancies
7.3 Removal
7.4 The President
7.5 The Vice President
7.6 The Secretary
7.7 Salaries
ARTICLE VIII. REMOVAL, WITHDRAWAL, DEATH, INCOMPETENCY
OR BANKRUPTCY OF A MEMBER
8.1 Dissolution of the Company and Continuance of the
Company's Business
8.2 Removal of a Member
8.3 Payment to a Removed, Deceased, Bankrupt or Incompetent
Member
ARTICLE IX. WAIVER OF PARTITION; COVENANT NOT TO CAUSE
DISSOLUTION
9.1 Waiver of Partition
9.2 Covenant Not to Withdraw or Dissolve
9.3 Consequences of Violation of Covenant
ARTICLE X. DISSOLUTION
ARTICLE XI. BOOKS AND RECORDS
11.1 Books and Records
11.2 Right of Inspection
ARTICLE XII. MEMBER MEETINGS
12.1 Annual Meeting
12.2 Regular Meetings
12.3 Special Meetings
12.4 Place of Meeting
12.5 Telephonic Meeting
12.6 Notice of Meeting
12.7 Quorum
12.8 Proxies
12.9 Voting by Certain Members
12.10 Manner of Acting
12.11 Presumption of Assent
12.12 Informal Action of Members
ARTICLE XIII. MISCELLANEOUS
13.1 Return of Capital Contribution
13.2 Limitation of Fiduciary Obligations
13.3 Applicable Law
13.4 Captions
13.5 Signatures
13.6 Validity
13.7 Binding Effect
13.8 Interpretation
13.9 Counterparts
13.10 Amendments
13.11 Voting of Interests
13.12 Notices
13.13 Waiver of Notice
13.14 Fiscal Year
<PAGE>
OPERATING AGREEMENT
OF
RED OAK FEEDERS, L.C.
This Operating Agreement ("Agreement") of Red Oak Feeders,
L.C. is entered into by and among the persons executing this
Agreement ("Members") (or any amendments or exhibits hereto as
additional or substituted Members).
WHEREAS, the Members who are signatory to this Agreement
desire to form a limited liability company under the laws of the
State of Iowa;
NOW, THEREFORE, the Members agree as follows:
ARTICLE I. FORMATION AND TERM
The Members agree to form or cause to be formed a limited
liability company (the "Company") pursuant to the Iowa Limited
Liability Company Act by and upon the filing of Articles of
Organization in the form of Exhibit "A" to this Agreement with the
office of the Iowa Secretary of State. The duration of this
limited liability company shall be perpetual unless sooner
dissolved:
(a) by agreement of the Members; or
(b) by operation of law, judicial decree, or as otherwise
provided in this Agreement.
ARTICLE II. OFFICES
2.1 Principal Office. The principal office of the Company in
the State of Iowa shall be located at 2010 Commerce Drive, Red Oak,
Iowa. The Company may have such other offices, either within or
without the State of Iowa, as the Members may designate or as the
business of the Company may from time to time require.
2.2 Registered Office. The registered office of the Company
to be maintained in the State of Iowa as required by the Iowa
Limited Liability Company Act, may, but need not, be identical with
the principal office of the Company in the State of Iowa. The
address of the initial registered office of the Company is Suite
1100 Two Ruan Center, 601 Locust Street, Des Moines, Iowa 50309,
and the name of its initial registered agent at such address is
Douglas E. Gross. The registered office and the registered agent
may be changed from time to time by action of the Members and by
filing the prescribed form with the Iowa Secretary of State.
ARTICLE III. MEMBERSHIP INTERESTS AND CAPITAL CONTRIBUTIONS
3.1 Membership Interests. A Member's Membership Interest in
the Company shall be in proportion to such Member's capital
contributions to the Company, as adjusted from time to time to
reflect additional contributions and withdrawals.
3.2 Initial Capital Contributions. The initial capital
contribution of each Member shall be as provided on Exhibit A
attached hereto and by this reference made a part hereof.
3.3 Additional Capital Contributions. It is the intention of
the Members that the Company's business and activities shall be
conducted in such a manner that additional capital contributions
shall not be required; to that end, the Members shall attempt to
conduct activities in such a way that the Company's business can be
conducted with the initial capital contributions as augmented by
debt financing and proceeds from operations. However, to the
extent that additional capital contributions are required, such
additional capital contributions may be called for by a vote of
sixty-six and two-thirds percent (66.67%) of the Membership
Interests outstanding. Such additional capital contributions shall
be payable by each Member in proportion to such Member's Membership
Interest, unless the Members should unanimously agree that
additional capital contributions should be made in a different
manner, in which event the Membership Interests of the Members
shall be adjusted accordingly. In the event any Member shall fail
to make any such additional capital contribution within ten (10)
days of written demand from the remaining Members, then such Member
shall be in breach of its obligations hereunder and the Company and
the other Members shall have the rights and remedies set forth in
this Agreement.
3.4 Loans by Members. Loans by Members to the Company shall
not be capital contributions to the Company nor shall loans be
credited to the Capital Account of the lending Member or entitle
such lending Member to any increase in such Member's share of the
Company's profits or of the distributions of the Company or subject
such Member to any greater proportion of the losses which the
Company may sustain. Loans in accordance with the foregoing
sentence shall be a debt due from the Company to such lending
Member and shall be, together with accrued interest thereon,
reimbursed to the Member making such loan prior to any distribution
to the Members in connection with the dissolution of the Company.
3.5 Limitation of Liability. A Member shall not be subject
to assessment nor shall a Member be personally liable for any of
the debts or obligations of the Company or any of the losses of the
Company beyond the Member's capital contributions and the Member's
share of undistributed net profits of the Company.
3.6 Capital Accounts. A separate Capital Account shall be
maintained for each Member. Each Member's Capital Account shall be
increased by:
(a) The cumulative amount of cash and the net fair market
value of any property that has been contributed to the capital of
the Company by such Member (or such Member's predecessors in
interest); and
(b) The cumulative amount of the Company's net profit that
has been allocated to such Member (or such Member's predecessors in
interest); and
shall be decreased by:
(a) The cumulative amount of the Company's net loss that have
been allocated to such Member (or predecessors in interest of such
Member);
(b) The cumulative amount of cash and the fair market value
of all other property that has been distributed to such Member (or
predecessors in interest of such Member).
3.7 General. No Member shall receive any interest, salary,
or drawing with respect to such Member's capital contributions or
Capital Account or for services rendered on behalf of the Company
or otherwise in such Member's capacity as a Member of the Company,
except as otherwise provided in this Agreement.
ARTICLE IV. PROFIT AND LOSS ALLOCATION
4.1 Net Profit or Net Loss. Net profit or net loss for any
fiscal year shall be allocated among the Members in proportion to
such Member's Membership Interests when compared to the total
Membership Interests of the Company (said proportional interest
shall hereinafter be referred to as the Members' "Percentage
Interest").
4.2 Allocations in General. Except as otherwise provided in
this Agreement, all items of Company income, gain, loss, deduction,
and any other allocations not otherwise provided for shall be
allocated among the Members in the same proportions as they share
net profit or net loss, as the case may be, for any fiscal year.
For purposes of determining the net profit, net loss or any other
items allocable to any period, net profit, net loss and any such
other items shall be determined on a daily, monthly, or other
basis, as determined by the Members using any permissible method
under Section 706 of the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations promulgated thereunder (the
"Regulations").
4.3 Distribution of Cash. Cash distributions shall be made
to the Members upon the approval of the Members holding at least
66.67% of the Membership Interests. All cash distributions made to
the Members shall be in accordance with their Percentage Interests.
4.4 Allocations with Respect to Varying Interests.
Allocations and distributions to persons who in any taxable year of
the Company were Members for less than the entire taxable year or
whose Percentage Interest varied during any taxable year shall be
made in accordance with whatever reasonable method the Members may
choose to implement the provisions of Sections 706(c) of the Code
or similar successor provisions. In order to accomplish this
result, the Members may elect not to allocate any net loss
attributable to any portion of the Company's taxable year before
such Member acquired such Member's interest in the Company.
ARTICLE V. CERTIFICATES OF MEMBERSHIP INTEREST AND TRANSFER
5.1 Certificates. Certificates representing each Member's
Membership Interest shall be in such form as shall be determined by
the Members. Such certificates shall be signed by the President
and Secretary and shall be consecutively numbered or otherwise
identified. Certificates shall bear a legend which indicates that
the Membership Interest represented by the certificate cannot be
transferred or assigned except in compliance with this Agreement.
In case of a lost, destroyed or mutilated certificate, a new one
may be issued upon such terms and indemnity to the Company as the
Members may prescribe.
5.2 Certificate Register. The name and address of the Member
to whom each certificate is issued, together with the capital
contribution and the date of issue, shall be entered in the
Certificate Register of the Company. Any and all changes in
Members or their amount of capital contribution shall be reflected
by the Secretary in the Certificate Register of the Company.
5.3 Transfers of Membership Interests. No Member shall sell,
exchange or transfer such Member's Membership Interest without the
unanimous written consent of the other Members.
5.4 Conditions Precedent to Transfer. Notwithstanding
Section 5.3, no transfer of a Member's Membership Interest shall be
effective unless and until all of the following conditions have
been satisfied;
(a) The instrument of transfer shall be in form and substance
satisfactory to the remaining Members;
(b) The transferor and transferee named therein shall execute
and acknowledge such other instrument or instruments as the
remaining Members may deem necessary or desirable to effectuate the
acceptance of the transferee as a Member;
(c) The transferee shall execute a written acceptance of all
of the terms and provisions of this Agreement as, and to the extent
that, the same may have been amended; and
(d) The transferor or transferee shall pay all reasonable
expenses connected with acceptance of a Member, including, but not
limited to, legal fees and costs.
5.5 No Dissolution or Termination. The transfer of a
Membership Interest in the Company pursuant to the terms of this
Article V shall not dissolve or terminate the Company. No Member
shall have the right to have the Company dissolved or to have such
Member's capital contribution returned except as provided in this
Agreement.
5.6 Prohibition of Assignment. Notwithstanding the foregoing
provisions of this Article V, no sale, exchange or transfer of a
Member's Membership Interest may be made if the Membership Interest
sought to be sold, exchanged or transferred, when added to the
total of all other Membership Interests sold, exchanged or
transferred within the period of twelve (12) consecutive months
prior thereto, would result in the termination of the Company under
Section 708 of the Code. In the event of a transfer of any
Membership Interest, the Members will determine, in their sole
discretion, whether or not the Company will elect pursuant to
Section 754 of the Code (or corresponding provisions of future law)
to adjust the basis of the assets of the Company.
ARTICLE VI. MANAGEMENT
The business of the Company shall be conducted under the
exclusive management of its Members, who shall have authority to
act for the Company in all matters. The Members may authorize any
officer or officers, agent or agents, to enter into any contract or
execute and deliver any instrument in the name of and on behalf of
the Company, and such authority may be general or confined to
specific instances.
ARTICLE VII. OFFICERS
7.1 Number, Tenure, and Qualifications. The officers of the
Company shall be a President, a Vice President and a Secretary and
such other officers as the Members shall determine. Any two or
more offices may be held by the same person. The initial officers
of the Company shall be named in the minutes of the organizational
meeting of the Members of the Company and shall hold office until
the first annual meeting of the Members. At the first annual
meeting of the Members and at each annual meeting thereafter the
Members shall elect officers to hold office for the term for which
elected, and until the successors of such officer shall have been
elected and qualified. Officers need not be residents of the State
of Iowa or Members of the Company.
7.2 Vacancies. Any vacancy occurring in an officer position
shall be filled by election at an annual meeting or at a special
meeting of Members called for that purpose. An officer elected to
fill a vacancy shall be elected for the unexpired term of such
officer's predecessor in office. Election or appointment of an
officer shall not of itself create contract rights.
7.3 Removal. Any officer elected or appointed by the Members
may be removed by the Members whenever in the judgment of the
Members the best interests of the Company would be served thereby,
but such removal shall be without prejudice to the contract rights,
if any, of the person so removed.
7.4 The President. The President of the Company shall be
responsible for the general overall supervision of the business and
affairs of the Company. The President may sign, on behalf of the
Company, such deeds, mortgages, bonds, contracts or other
instruments which have been appropriately authorized to be executed
by the Members, except in cases where the signing or execution
thereof shall be expressly delegated by the Members by this
Agreement or by law to some other officer or agent of the Company;
and, in general, the President shall perform such duties as may be
prescribed by the Members and/or Members from time to time. The
specific authority and responsibility of the President shall also
include the effectuation of this Agreement by executing and filing
with the Articles of Organization of the Company with the Iowa
Secretary of State.
7.5 The Vice President. If one or more vice presidents are
elected by the Members, the Vice President (or in the event there
be more than one vice-president, the vice president in the order
designated, or in the absence of any designation, then in the order
of their election) shall perform the duties of the President in the
event of the President's absence, death, inability or refusal to
act. When so acting, the Vice President shall have all the powers
of and be subject to all the restrictions upon the President; and
in addition thereto, shall perform such other duties as may be
assigned by the President or by the Members, or as may be
prescribed in this Agreement.
7.6 The Secretary. The Secretary shall: (a) keep the minutes
of the Members' meetings in one or more books provided for that
purpose; (b) see that all notices are duly given in accordance with
the provisions of this Agreement or as required by law; (c) be
custodian of the Company records; (d) have general charge of the
Certificate Register; and (e) in general, perform all duties
incident to the office of Secretary and such other duties as from
time to time may be assigned by the Members.
7.7 Salaries. The salaries of the officers shall be fixed
from time to time by the Members and no officer shall be prevented
from receiving such salary by reason of the fact that such officer
is also a Member of the Company.
ARTICLE VIII. REMOVAL, WITHDRAWAL, DEATH, INCOMPETENCY
OR BANKRUPTCY OF A MEMBER
8.1 Dissolution of the Company and Continuance of the
Company's Business. The removal, death or dissolution,
adjudication of incompetence or adjudication of bankruptcy of a
Member shall immediately dissolve the Company unless a majority in
interest of the remaining Members agree to continue the business of
the Company.
8.2 Removal of a Member. In the event that any Member has
breached its obligations hereunder, has committed any act of fraud,
or has committed and not, within a reasonable period of time
remedied, any act of bad faith or gross negligence in carrying out
its duties as a Member hereunder, then upon the unanimous
affirmative vote of the other Members, such breaching Member may be
removed, provided such removal will not jeopardize the tax status
of the Company.
8.3 Payment to a Removed, Deceased, Bankrupt or Incompetent
Member. If a Member has: (a) been removed pursuant to Section 8.2;
(b) died or been dissolved; (c) been adjudicated as incompetent or
(d) adjudicated as bankrupt (such Member and any legal successor
and/or representative of such Member to be referred to as a
"Terminated Member" and such an event to be referred to as a
"Terminating Event"), and if the business of the Company is
continued, the Terminated Member shall be entitled to receive from
the remaining Members an amount equal to the book value of all
Company assets as of the date of the Terminating Event, multiplied
by the Terminated Member's Percentage Interest.
ARTICLE IX. WAIVER OF PARTITION; COVENANT NOT TO CAUSE
DISSOLUTION
9.1 Waiver of Partition. Except as otherwise expressly
provided in this Agreement, no Member shall directly or indirectly
take any action to require partition or appraisal of the Company or
of any of its assets or properties or cause the sale of any Company
property, and, notwithstanding any provisions of applicable law to
the contrary, each Member hereby irrevocably waives any and all
rights to maintain any action for partition or to compel any sale
with respect to such Member's Membership Interest in the Company,
or with respect to any assets or properties of the Company.
9.2 Covenant Not to Withdraw or Dissolve. Notwithstanding
any provision of law, each Member hereby covenants and agrees that
the Members have entered into this Agreement based on their mutual
expectation that all Members will continue as Members and carry out
the duties and obligations undertaken by them hereunder and that,
except as otherwise expressly stated in this Agreement, no Member
shall withdraw from the Company, be entitled to demand or receive a
return of such Member's capital contributions or exercise any power
to dissolve the Company without the unanimous consent of the
Members.
9.3 Consequences of Violation of Covenant. If a Member
attempts to: (i) cause a partition in breach of Section 9.1 above
or (ii) withdraw from the Company or dissolve the Company in breach
of Section 9.2 hereof, the Company shall continue and the Member
attempted such a breach shall be liable to the Company and
remaining Members for any damages caused by said breach.
ARTICLE X. DISSOLUTION
Upon dissolution of the Company, the liabilities of the
Company shall be paid or otherwise provided for, and any remaining
assets shall be distributed as provided in Article IV of this
Agreement.
ARTICLE XI. BOOKS AND RECORDS
11.1 Books and Records. The books and records of the Company
shall be kept at the principal office of the Company or at such
other places, within or without the state of Iowa, as the Members
shall from time to time determine.
11.2 Right of Inspection. Any Member of the Company shall
have the right to examine at any reasonable time or times for any
purpose, the books and records of account, minutes and records of
Members and to make copies thereof. Such inspection may be made by
any agent or attorney of the Member. Upon the written request of
any Member of the Company, the Members shall mail to such Member
the Company's most recent financial statements, showing in
reasonable detail the Company's assets and liabilities and the
results of the Company's operations.
ARTICLE XII. MEMBER MEETINGS
12.1 Annual Meeting. The annual meeting of the Members shall
be held within one hundred twenty (120) days after the close of the
fiscal year of the Company each year for the purpose of electing
officers and for the transaction of such other business as may come
before the meeting. If the day fixed for the annual meeting shall
be a legal holiday, such meeting shall be held on the next
succeeding business day. If the election of officers shall not be
held on the day designated herein for the annual meeting of the
Members, or at any adjournment thereof, the Members shall cause the
election to be held at a special meeting of the Members as soon
thereafter as it may conveniently be held.
12.2 Regular Meetings. The Members may, by resolution,
prescribe the time and place for the holding of regular meetings
and may provide that the adoption of such resolution shall
constitute notice of such regular meetings. If the Members do not
prescribe the time and place for the holding of regular meetings,
such regular meetings shall be held at the time and place specified
by the Members in the notice of each such regular meeting.
12.3 Special Meetings. Special meetings of the Members, for
any purpose or purposes, unless otherwise prescribed by statute,
may be called by any two Members.
12.4 Place of Meeting. The Members may designate any place,
either within or without the State of Iowa, as the place of meeting
for any annual meeting or for any special meeting called by the
Members. If no designation is made, or if a special meeting be
otherwise called, the place of meeting shall be the registered
office of the Company in the State of Iowa.
12.5 Telephonic Meeting. Members of the Company may
participate in any meeting of the Members by means of conference
telephone or similar communication if all persons participating in
such meeting can hear one another for the entire discussion of the
matter to be voted upon. Participating in a meeting pursuant to
this Section shall constitute presence in person at such meeting.
12.6 Notice of Meeting. Notice shall be given for each
annual or special meeting to each Member entitled to vote at such
meeting stating the place, day and hour of the meeting and, in case
of a special meeting, the purpose or purposes for which the meeting
is called. Such notice shall be given not less than ten (10) nor
more than sixty (60) days before the date of the meeting in
writing, unless oral notice is reasonable under the circumstances.
If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the Member's
address as it appears on the membership list maintained by the
Company, with postage thereon prepaid.
12.7 Quorum. At any meeting of the Members, a majority of
the Membership Interests, as determined by reference to the
Certificate Register, represented in person or by proxy, shall
constitute a quorum. If less than said majority of the Membership
Interests are represented at a meeting, a majority of the
Membership Interests so represented may adjourn the meeting from
time to time without further notice. At such adjourned meeting at
which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as
originally notified. The Members present at a duly organized
meeting may continue to transact business until adjournment,
notwithstanding the subsequent withdrawal of Members to leave less
than a quorum.
12.8 Proxies. At all meetings of Members, a Member may vote
by proxy executed in writing by the Member or by such Member's duly
authorized attorney-in-fact. Such proxy shall be filed with the
President of the Company before or at the time of the meeting. No
proxy shall be valid more than three months from date of execution,
unless otherwise provided in the proxy.
12.9 Voting by Certain Members. Membership Interests held in
the name of a corporation, partnership or company may be voted by
such office, partner, agent or proxy as the Bylaws of such entity
may prescribed or, in the absence of such provision, as the Board
of Directors or other governing body of such entity may determine.
Membership Interests held by a trustee, personal representative,
administrator, executor, guardian or conservator may be voted by
such person, either in person or by proxy, without a transfer of
the Membership Interest into the name of such person.
12.10 Manner of Acting. The act of Members holding a
majority of the Membership Interests of the Company present at a
meeting at which a quorum is present shall be the act of the
Members; provided, however, that approval of all Members shall be
required for any of the following:
(a) To require an additional capital contribution from any
Member in excess of $10,000 or any series of capital contributions
from any member in any 12 month period in excess of $25,000.
(b) To approve the purchase of any capital asset or group of
capital assets with an aggregate cost in excess of $100,000.
12.11 Presumption of Assent. A Member present at a meeting
of the Members at which action on any matter is taken shall be
presumed to have assented to the action taken, unless the dissent
of such Member shall be entered in the minutes of the meeting or
unless such Member shall file a written dissent to such action with
the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by certified mail
to the secretary of the meeting immediately after the adjournment
of the meeting. Such right to dissent shall not apply to a Member
who voted in favor of such action.
12.12 Informal Action of Members. Unless otherwise provided
by law, any action required to be taken at a meeting of the
Members, or any other action which may be taken at a meeting of the
members, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all the
Members entitled to vote with respect the subject matter thereof.
ARTICLE XIII. MISCELLANEOUS
13.1 Return of Capital Contribution. A Member shall not have
the right to demand the return of capital contribution except upon
dissolution of the Company and liquidation of its assets; in no
event shall a Member have the right to demand and receive property
other than cash in return for its capital contribution.
13.2 Limitation of Fiduciary Obligations. None of the
Members shall have any fiduciary obligation with respect to the
Company or to any other Members to make business opportunities
available to the Company or to any other Members.
13.3 Applicable Law. This Agreement and the rights and
obligations of the parties hereunder shall be construed and
interpreted in accordance with the laws of the State of Iowa.
13.4 Captions. Paragraphs, titles, or captions in no way
define, limit, extend or describe the scope of this Agreement nor
the intent of any of its provisions.
13.5 Signatures. Any check, draft, contract, evidence of
indebtedness, deed, mortgage, deed of trust, lease, contract of
sale, bill of sale, or other similar document shall be executed for
the Company by the President and countersigned by the Secretary.
13.6 Validity. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall
be held invalid or unenforceable, the remainder of this Agreement,
or the application of such provision to persons or circumstances
other than those as to which it is held invalid or unenforceable,
shall not be affected thereby.
13.7 Binding Effect. This Agreement shall inure to and bind
all Members, as well as their estates, heirs, personal
representatives, successors and assigns.
13.8 Interpretation. As used herein, the masculine includes
the feminine and neuter and the singular includes the plural.
13.9 Counterparts. This Agreement or any certificate or
amendment pursuant thereto may be executed in counterparts, all of
which taken together shall be deemed one original agreement, and
shall be binding upon all parties hereto notwithstanding that all
parties are not signatory to the same counterpart.
13.10 Amendments. This Agreement may be altered, amended,
restated, or repealed and a new Operating Agreement may be adopted
by unanimous action of the Members, after notice and opportunity
for discussion of the proposed alteration, amendment, restatement,
or repeal.
13.11 Voting of Interests. Subject always to the specific
directions of the Members, any interest issued by any other legal
entity which is owned or controlled by the Company may be voted at
any meeting of such other entity by the President of the Company if
the President be present, or in absence of the President by the
Secretary of the Company. Whenever, in the judgment of the
President, or in absence of the President of the Secretary, that it
is desirable for the Company to execute a proxy or give a consent
in respect to any legal interest issued by any other entity and
owned by the Company, such proxy or consent shall be executed in
the name of the Company by the President of the Company and shall
be attested by the Secretary of the Company without necessity of
any authorization by the Members or Members. Any person or persons
designated in the manner above stated as the proxy or proxies of
the Company shall have full right, power, and authority to vote the
legal interest issued by such other entity and owned by the Company
the same as if such legal interest might be voted by the Company.
13.12 Notices. All notices under this Agreement shall be in
writing and shall be effective either upon personal delivery or if
sent by registered or certified mail, postage prepaid, addressed to
the last known address of the party to whom such notice is to be
given.
13.13 Waiver of Notice Whenever any notice is required to be
given pursuant to the provisions of the Act, the Articles of
Organization of the Company or this Agreement, a waiver thereof, in
writing, signed by the person or entity entitled to such notice,
whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
13.14 Fiscal Year. The fiscal year of the Company shall be
from January 1 through December 31 of each year.
RATIFICATION
The undersigned, being the sole Member of RED OAK FEEDERS,
L.C., an Iowa limited liability company, by signing below, hereby
evidence its adoption and ratification of the foregoing Agreement.
Executed by the Member on the date indicated.
RED OAK HEREFORD FARMS, INC.
By:
Gordon M. Reisinger, President
<PAGE>
Exhibit "A"
Member Contribution
1. Red Oak Hereford Farms, Inc. $100,000
PARTNERSHIP AGREEMENT
OF
QUALITY FEEDERS
This Partnership Agreement is made and entered into as of
, 1997, by and between Moorman's Quality Feeders,
LLC, an Illinois limited liability company ("Moorman") and Red Oak
Feeders, L.C., an Iowa limited liability company ("Red Oak")
(Moorman and Red Oak, collectively, the "Partners").
WITNESSETH:
WHEREAS, Moorman and Red Oak desire to organize and operate a
business for the purposes of purchasing, buying, feeding, raising
and selling cattle; and
WHEREAS, in order to organize and operate such business
Moorman and Red Oak have agreed to form a general partnership which
shall be conducted upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the
covenants and agreements hereinafter set forth, the Members hereby
agree as follows:
Section 1. The Partnership
1.01 Organization. The Partners agree to form and constitute
a partnership as a general partnership (the "Partnership")
pursuant to and in accordance with the Act.
1.02 Name. The name of the Partnership is Quality Feeders.
1.03 Principal Office. The address of the principal business
office of the Partnership within the State of Illinois shall be
1000 North 30th Street, Quincy, Illinois or such other address as
may be designated from time to time by the Management Committee.
1.04 Duration. The duration of the Partnership shall be
perpetual, unless the Partnership is earlier dissolved (i) in
accordance with either the provisions of this Agreement or the Act
or (ii) by either Partner, at any time, by written notice of such
dissolution given by the dissolving Partner to the other Partner(s)
not less than sixty (60) days prior to the dissolution date.
1.05 Purposes. The purposes of the Partnership is to engage
in the business of purchasing, buying, feeding, raising and selling
cattle, including acquiring option contracts and/or futures
contracts thereon; and to engage in such other activities and
businesses as may be necessary or desirable in furtherance of the
foregoing purposes or as may be incidental or related thereto.
<PAGE>
1.06 Purposes Limited. The Partnership is to be engaged in
business only for the purposes specified in Section 1.05 hereof.
Except as otherwise provided in this Partnership Agreement, the
Partnership shall not engage in any other activity or business and
no Partner shall have any authority to hold itself out as a general
agent of another Partner in any business or activity. The Partners
shall use the Partnership's credit and assets only for the benefit
of the Partnership and none of the Partnership's Assets shall be
transferred or encumbered for or in payment of any individual
obligation of a Partner.
1.07 Title To Property. All real and personal property owned
by the Partnership shall be owned by the Partnership as an entity
and, insofar as permitted by applicable law, no Partner shall ahve
any ownership interest in such property in its individual name or
right, and each Partner's interest in the Partnership shall be
personal property for all purposes
1.08 Definitions. The following capitalized terms used in
this Agreement shall have the following meanings:
(a) "Accountants" shall mean an independent firm of certified
public accountants to be agreed upon by Moorman and Red Oak.
(b) "Act" shall mean the Illinois Uniform Partnership Act, as
set forth in 805 ILCS 205/1 et. seq., as amended from time to time
(or any corresponding provision of succeeding law.)
(c) "Adverse Act" means, with respect to any Partner, any of
the following:
(i) A failure of such Partner to make any Capital
Contribution required pursuant to Sections 5.01 and 5.02 of
this Agreement and the election by the Nondefaulting Partner
under Section 5.03(a) or (b) to treat such failure as an
Adverse Act (to the extent that the provisions thereof are not
complied with by the Defaulting Partner);
(ii) A transfer of all or any portion of a Partner's
Interest in the Partnership except as permitted by this
Agreement;
(iii) An Event of Bankruptcy with respect to such
Partner;
(iv) Any termination (including a merger in which such
Entity is not the survivor) or dissolution of a Entity which
is a Partner unless substantially all assets of the terminated
or dissolved Person are transferred to a Person who is a
permitted transferee under Section 13.02;
(v) Any attempt by a Partner to (x) cause a partition in
breach of Section 13.06 hereafter, or (y) withdraw from the
Partnership, except as otherwise permitted herein or dissolve
the Partnership in breach of Section 13.07;
(vi) The failure of either party to furnish the
Certification provided for in Section 12.03 hereof, or the
submission of a false, inaccurate or fraudulent Certification;
(vii) Default by a Partner or an Affiliate of a
Partner under an Interested Party Contract as defined in
Section 10 (after giving effect to any applicable period of
grace); or
(viii) Default by a Partner in the performance of any
of its other obligations or duties hereunder, but only if such
default has a material adverse effect on the condition
(financial or other), business properties, net worth or
results of operations of the Partnership, taken as a whole.
(d) "Agreement" means this Agreement of Partnership, as
amended from time to time.
(e) "Affiliate" shall mean, with respect to any Person, (i)
any Person directly or indirectly controlling, controlled by or
under a common control with such Person, (ii) any Person owning or
controlling 10% or more of the outstanding voting securities of
such Person, (iii) any officer, director or general partner of such
Person, or (iv) any Person who is an officer, director, general
partner, trustee or holder of 10% or more of the voting securities
of any Person described in clauses (i) through (iii) of this
sentence.
(f) "Anniversary Date" shall mean the same day and month as
the date of this Agreement occurring in any subsequent year.
(g) "Capital Account" shall mean, with respect to any
Partner, the Capital Account maintained for such Person in
accordance with the provisions set forth in Section 7 hereof.
(h) "Capital Contribution" shall mean, with respect to any
Partner any contribution to the capital of the Partnership in cash
or property by a Partner whenever made. "Initial Capital
Contribution" shall mean the initial contribution, by a Partner to
the capital of the Partnership pursuant to this Agreement.
(i) "Code" shall mean the Internal Revenue Code of 1986, as
amended, or corresponding provisions of any subsequent superseding
federal revenue laws.
(j) "Distributable Cash" shall mean all cash, revenues and
funds received by the Partnership from Partnership operations, less
the sum of the following to the extent paid or set aside by the
Partnership: (i) all principal and interest payments on
indebtedness of the Partnership and all other sums paid to lenders;
(ii) all cash expenditures incurred in the normal operation of the
Partnership's business; (iii) such Reserves as the Management
Committee deem reasonably necessary for the proper operation of the
Partnership's business. "Distributable Cash" shall not be reduced
by depreciation or other similar non-cash allowances, but shall be
increased by any reduction of Reserves previously established.
(k) "Entity" shall mean any general partnership, limited
partnership, limited liability company, corporation, joint venture,
trust, business trust, cooperative, association, foreign trust or
foreign business organization.
(l) "Event of Bankruptcy" shall mean, with respect to any
Person, any of the following:
(i) Filing a voluntary petition in bankruptcy or for
reorganization or for the adoption of an arrangement under the
Bankruptcy Code (as now or in the future amended) or an
admission seeking the relief therein provided;
(ii) Making a general assignment for the benefit of
creditors;
(iii) Consenting to the appointment of a receiver for
all or a substantial part of such Person's property;
(iv) In the case of the filing of an involuntary petition
in bankruptcy, an entry of an order for relief;
(v) The entry of a court order appointing a receiver or
trustee for all or a substantial part of such Person's
property without its consent; or
(vi) The assumption of custody or sequestration by a
court of competent jurisdiction of all or substantially all of
such Person's property.
(m) "Fundamental Issue" shall mean decisions and actions
which would have a material impact on the Partnership including,
specifically, the following matters:
(i) Incurring, or becoming liable in respect of,
increasing, modifying, or extending any loan or other
indebtedness of the Partnership, whether secured or unsecured,
including borrowings for working capital purposes;
(ii) Acquiring, whether by purchase or otherwise, or
leasing, whether as lessor or lessee, any real property;
(iii) Acquiring or leasing any personal property
other than in the ordinary course of business;
(iv) Selling, leasing or otherwise conveying or
transferring any material Partnership Assets, other than in
the ordinary course of business, or granting any options,
rights of first refusal, mortgages, pledges, security
interests or other encumbrances with respect to such
Partnership Assets;
(v) Making any loans, extending any credit or becoming
a guarantor, surety or endorser, to or for any Person
(including any Partner) except for normal trade credit
extended, and customary endorsements for deposit of
instruments received, in the ordinary course of business;
(vi) Confessing any judgment against the Partnership,
releasing, compromising, assigning or transferring any claims,
rights or benefits of the Partnership, submitting a
Partnership claim to arbitration (other than pursuant to
customary trade association rules to which the Partnership
becomes subject in the ordinary course of business), or
submitting a Partnership claim to litigation;
(vii) Entering into, terminating or materially
amending any contract, commitment or obligation (other than
those contracts made in the ordinary course of business);
(viii) Entering into or engaging in any business other
than that described in Section 1.05 hereof;
(ix) Entering into or amending any Interested Party
Contracts as described in Section 10 hereof;
(x) Making any elections for tax purposes, including any
elections pursuant to Section 754 of the Code;
(xi) Distributing any cash or Partnership Assets, other
than as provided in this Agreement, or establishing any
Reserves;
(xii) Admitting a new Partner to the Partnership;
(xiii) Making additional Capital Contributions to the
Partnership, either proportionately or disproportionately;
(xiv) Doing any act in contravention of this
Agreement or which would make it impossible or unreasonably
burdensome to carry on the business of the Partnership; or
(xv) Entering into any amendment, modification, revision,
supplement, rescission or termination with respect to any of
the foregoing.
(n) "GAAP" shall mean United States generally accepted
accounting principles as in effect from time to time.
(o) "Impasse" shall mean the failure of the Partners or the
Management Committee to consent or agree upon a Fundamental Issue
which has been placed before the Partners or the Management
Committee for approval, provided that such failure to consent or
agree on such Fundamental Issue makes it impossible or unreasonably
burdensome to continue to carry on the business of the Partnership
as contemplated by this Agreement. An Impasse shall occur on the
day after the Management Committee or Partners, as the case may be,
fail to approve or act upon the Fundamental Issue being considered.
(p) "Management Committee" means the Management Committee of
the Partnership established pursuant to Section 2.01 of the Act.
(q) "Partners" shall mean those Persons who executes a
counterpart of this Agreement as a Partner and each of the parties
who may hereafter become Partners "Partner" means any one of the
Partners.
(r) "Partnership" means the general partnership formed by
this Agreement and the partnership continuing the business of this
Partnership in the event of dissolution as herein provided. Words
such as "herein", "hereafter", "hereto", "hereof" and
"hereunder" refer to this Agreement as a whole, unless the context
otherwise requires.
(s) "Partner's Interest" shall mean a Partner's entire
interest in the Partnership including, without limitation, the
right to participate in the management of the business and affairs
of the Partnership, including the right to vote on, consent to, or
otherwise participate in any decision or action of or by the
Partners granted pursuant to this Agreement and the Act.
(t) "Partnership Assets" shall mean all real and personal
property acquired by the Partnership and any improvements thereto,
and shall include both tangible and intangible property.
(u) "Percentage Interest" shall mean, for any Partner, its
percentage interest in the Partnership based upon its Capital
Contributions thereto as set forth in Section 5 and as the same may
be changed, from time to time, based upon additional Capital
Contributions made by one or more Partners as unanimously agreed to
by the Partners.
(v) "Person" shall mean any individual or Entity, and the
heirs, executors administrators, legal representatives, successors
and assigns of such "Person" where the context so permits.
(w) "Prime Interest Rate" shall mean the highest domestic
prime rate of interest per annum as reported or published from time
to time in the money rates section of the Midwest Edition of The
Wall Street Journal, or its successor.
(x) "Profits" and "Losses" shall mean, for each fiscal year
or other period, an amount equal to the Partnership's taxable
income or loss for such year or period, determined in accordance
with (i) Code 703(a) (for this purpose, all items of income, gain,
loss or deduction required to be stated separate pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss); and
(ii) GAAP employed under the accrual method of accounting.
(y) "Regulations" shall mean proposed, temporary and final
income tax regulations promulgated under the Code, as such
Regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
(z) "Reserves" shall mean funds set aside or amounts
allocated to reserves which shall be maintained in amounts deemed
sufficient by the Managers for working capital and to pay taxes,
insurance, debt service or other costs or expenses incident to the
ownership or operation of the Company's business.
Section 2 Management and Operations
2.01 Management Committee. The business and affairs of the
Partnership shall be managed by a Management Committee. Except as
may otherwise be provided herein, the Management Committee shall
(a) direct, manage and control the business, affairs and properties
of the Partnership; (b) have full and complete authority, power and
discretion with respect thereto; (c) make all decisions regarding
those matters; and (d) perform any and all other acts or activities
customary or incidental to the management of the Partnership's
business.
2.02 Number, Tenure and Qualifications. The Management
Committee shall consist of four (4) members, with each Partner
appointing two (2) such members. All appointments by a Partner of
its members to serve on the Management Committee shall be made by
written notice delivered to the other Partner. Each Partner may
remove and/or replace any or all of its members on the Management
Committee at any time by written notice to the other Partner. The
number of members of the Management Committee shall be fixed from
time to time by the unanimous vote of the Partners, but in no
instance shall there be less than two (2) members (i.e. one being
appointed by each Partner); and provided, further, that any
increase in the number of members of the Management Committee shall
be in multiples equal to the number of Partners which are then
parties to this Agreement.
2.03 Meetings. The Management Committee shall meet not less
frequently than quarterly at such time and place as they may
determine. Meetings of the Management Committee shall be called
by any two (2) members of the Management Committee upon written
notice to the other members at any time. Notice of such meetings
of the Management Committee shall be delivered to each member not
less than ten (10) business days before the date on which the
meeting is to be held, which notice shall specify the time,
location and, if a special meeting, the purpose thereof. Notice of
any meeting may be waived in writing by any member of the
Management Committee entitled thereto.
2.04 Quorum. The attendance of all members of the
Management Committee appointed by the Partners shall constitute a
quorum for the transaction of business.
2.05 Telephonic Meetings. A member of the Management
Committee may participate in any meetings thereof by means of
conference telephone or similar communications equipment enabling
all members of the Management Committee participating in the
meeting to hear one another. Participation in a meeting pursuant
to this section shall constitute presence in person at such
meeting.
2.06 Manner of Acting. All matters requiring an affirmative
vote or the approval of the Management Committee shall be deemed
approved only upon a majority vote of all members of the Management
Committee present at a meeting at which a quorum is present. Any
decision of the Management Committee may be made without a meeting
in person if all members of the Management Committee are notified
of the issue(s) to be decided and if such decision(s) are first
approved by the Management Committee, either in writing or during
a telephone conference call or similar means of communications
allowing the members of the Management Committee participating in
the meeting to hear each other at the same time. Any decisions or
actions so approved by the Management Committee, other than at a
meeting in which a quorum is present in person, shall be documented
by a consent in writing setting forth the actions or decisions
taken and signed by all of the Management Committee.
2.07 Certain Powers of Management Committee. Without limiting
the generality of Section 2.01, the Management Committee shall have
power and authority, on behalf of the Partnership, to decide all
Fundamental Issues to the extent allowed by the Act and otherwise:
(a) To purchase liability and other insurance to protect the
Partnership's Assets and business;
(b) To hold and own Partnership Assets in the name of the
Partnership;
(c) To invest Partnership funds in time deposits, short-term
governmental obligations, commercial paper or other
prudent, low risk money market investments;
(d) To execute on behalf of the Partnership all instruments
and documents, including, without limitation, checks;
drafts; notes and other negotiable instruments; mortgages
or deeds of trust; security agreements; financing
statements; documents providing for the acquisition,
mortgage or disposition of the Partnership's Assets; ass-
ignments, bills of sale; leases; and any other
instruments or documents necessary to the business of the
Partnership;
(e) To employ accountants, legal counsel, managing agents or
other experts to perform services for the Partnership;
and
(f) To do and perform all other acts as may be necessary or
appropriate to the conduct of the Partnership's business
consistent with its purposes.
Unless authorized to do so by this Agreement or by the
Management Committee, no attorney-in-fact, employee or other agent
of the Partnership shall have any power or authority to bind the
Partnership in any way, to pledge its credit or to render it liable
for any purpose. No Partner shall have any power or authority to
bind the Partnership unless the Partner has been authorized by the
Management Committee to act as an agent of the Partnership in
accordance with the previous sentence.
2.08. Liability for Certain Acts Indemnity. Each member
of the Management Committee shall perform his duties on behalf of
the Partnership in good faith, in a manner he reasonably believes
to be in the best interest of the Partnership, and with such care
as an ordinary prudent person in a like position would use under
similar circumstances. No member of the Management Committee or
other Person acting for the Partnership at the Management
Committee's request or direction shall be liable to the Partnership
or to the Partners for any actions taken or omitted to be taken by
such member or Person in exercising his duties or responsibilities
in that capacity, except to the extent any such act or omission was
attributable to such member's or Person's willful misconduct,
fraud, gross negligence or bad faith. The Partnership shall
indemnify the Management Committee and any other Person acting on
behalf of the Partnership at the Management Committee's request or
direction, their successors and assigns, from and against any
claims asserted and any losses, damages, costs or expenses,
including reasonable attorneys' fees and costs of suit incurred by
any member of the Management Committee and/or any such Person as a
result of actions taken or omitted to be taken by any such member
or Person in exercising his duties or responsibilities on behalf of
the Partnership with the exception that the Partnership shall not
indemnify any such member and/or Person to the extent any such
member's and/or Person's acts and/or omissions are the result of
any such Person's and/or member's wilful misconduct, fraud, gross
negligence or bad faith.
2.09 No Exclusive Duty to Partnership. A member of the
Management Committee shall not be required to manage the
Partnership have other business interests and engage in activities
in addition to those relating to the Partnership. Neither the
Partnership nor any Partner shall have any right, by virtue of this
Agreement, to share or participate in such other investments or
activities of any Partner or to the income or proceeds derived
therefrom.
2.10 Reimbursement for Expenses of Management Committee
Members, Employees and Other Agents. The Partnership shall, to the
maximum extent permitted by law, reimburse and make advances for
reasonable expenses to members of the Management Committee, its
employees and other agents.
2.11 Resignations, Removal and Vacancies. Any members of the
Management Committee may resign at any time by giving written
notice to the other Management Committee members and the Partners.
The resignation of any member of the Management Committee shall
take effect upon receipt of notice thereof or at such later date
specified in such notice; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make
it effective. A member of the Management Committee may not be
removed by the other Partner but may, as stated in Section 2.02, be
substituted, removed or replaced by the Partner (and only the
Partner) which originally appointed such member, at the sole and
absolute discretion of such Partner. Any vacancy occurring for any
reason in the number of members of the Management Committee as a
result of the resignation, removal or death of a member thereof
shall be filled by the Partner (and only the Partner) which
initially appointed such Person. Any positions to be filled by
reason of an increase in the number of Management Committee members
shall be filled by each Partner appointing an additional member or
members thereof, as necessary to fill, on an equal basis, the
number of additional members provided for by the unanimous action
of the Partners.
2.12 Salaries. The salaries and other compensation of the
members of the Management Committee, if any, shall be fixed from
time to time by a unanimous vote of the Partners. No member of the
Management Committee shall be prevented from receiving such salary
because he is either a Partner, or an officer, director or
employee, of a Partner or an Affiliate of a Partner.
Section 3. Rights and Obligations of Partners
3.01 Limitation of Liability. Each Partner's liability shall
be as set forth in this Agreement, the Act and other applicable
law.
3.02 List of Partners. Upon the written request of any
Partner, the Management Committee shall provide a list showing the
names, addresses and Partnership Interests of all Partners.
3.03. Approval of Sale of All Assets. The Partners shall
have the right, by unanimous agreement, to approve the sale,
exchange or other disposition of all, or substantially all, of the
Partnership's Assets which is to occur as part of a single
transaction or plan.
3.04 Partnership Company Books. The Management Committee shall
maintain and preserve, or cause to be maintained and preserved,
during the term of the Partnership, the accounts, books and other
relevant Partnership documents described in Section 12. Upon
reasonable written request, each Partner shall have the right, at
a time during ordinary business hours to inspect and copy, at the
requesting Partner's expense, the Partnership's books and records,
including but not limited to, tax returns and reports.
3.05 Priority and Return of Capital. Except as otherwise may
be expressly provided in this Agreement, no Partner shall have
priority over any other Partner, either as to the return of Capital
Contributions or as to Profits, Losses or distributions; provided
that this Section shall not apply to loans which a Partner has made
to the Partnership.
Section 4. Meetings of Partners
4.01 Meetings. Meetings of the Partners, for any purpose or
purposes, may be called by any two (2) members of the Management
Committee or by any one (1) Partner.
4.02 Place of Meetings. The Partners may designate any place,
either within or outside the State of Illinois, as the place of
meeting for any meeting of the Partners. If no designation is
made, or if a special meeting is otherwise called, the place of
meeting shall be the principal place of business of the Partnership
in the State of Illinois.
4.03 Annual Meetings. An annual meeting of the Partners shall
be held on the first Monday in April of each year or at such time
as the Partners may designate for the transaction of any business
which may come before the meeting. Special meetings of the
Partners may be called, from time to time, in the manner provided
in Section 4.01, for such purpose or purposes as stated in the call
of the meeting.
4.04 Notice of Meetings. Except as provided 4.05, written
notice stating the place, day and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) nor
more than thirty (30) days before the date of the meeting, either
personally or by mail, by or at the direction of the Partner or
Persons calling the meeting, to each Partner entitled to vote at
such meeting.
4.05 Meeting of All Partners. If all of the Partners shall
meet at any time or place, either within or outside the State of
Illinois, and consent to the holding of a meeting at such time and
place, such meeting shall be valid without call or notice, and at
such meeting any lawful action may be taken.
4.06 Record Date. For the purpose of determining Partners
entitled to notice of or to vote at any meeting of Partners or any
adjournment thereof, or Partners entitled to receive payment of any
distribution, or in order to make a determination of Partners for
any other purpose, the date on which notice of the meeting is
mailed or the date on which the resolution or written consent
declaring such distribution is adopted, as the case may be, shall
be the record date for such determination of Partners. When a
determination of Partners entitled to vote at any meeting of
Partners has been made as provided in this Section, such
determination shall apply to any adjournment thereof.
4.07 Quorum. Any meeting of Partners shall require that all
one hundred percent (100%) of the Percentage Interests be
represented at such meeting in person or proxy in order to
constitute a quorum for purposes of conducting business at such
meeting. A duly authorized officer, manager or representative of
any Partner which is an Entity may attend any meeting or act for
the Partner pursuant hereto. In the absence of a quorum at any
such meeting, the Partner or Partners present may adjourn the
meeting from time to time provided that a notice of the adjourned
meeting, including the date, time and place of the rescheduled
meeting, shall be given to each Partner which a quorum shall be
present or represented, any business may be transacted which might
have been transacted at the meeting as originally noticed. The
Partners present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal
during such meeting of any Percentage Interests whose absence would
cause less than a quorum.
4.08 Manner of Acting. If a quorum is present, the
affirmative vote of Partners holding one hundred percent (100%) of
the Percentage Interests shall be the act of the Partners.
4.09 Proxies. At all meetings of Partners, a Partner may vote
in person or by proxy executed in writing by the Partner or by a
duly authorized attorney-in-fact. Such proxy shall be filed with
the Management Committee before or at the time of the meeting. No
proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
4.10 Action by Partners Taken Without a Meeting. Any action
required or permitted to be taken at a meeting of Partners may be
taken without a meeting if the action is evidenced by one or more
written consents describing the action taken, signed by each
Partner entitled to vote and delivered to the Management Committee
for inclusion in the minutes or for filing with the Partnership
records. Any action taken under this Section is effective when all
Partners entitled to vote have signed the consent, unless the
consent specifies a different effective date.
4.11 Waiver of Notice. When any notice is required to be
given to any Partner, a waiver thereof in writing signed by the
Person entitled to such notice, whether before, at or after the
time stated therein, shall be equivalent to the giving of such
notice.
Section 5. Capital Contributions to the Company
5.01 Partners' Capital Contributions. Each Partner shall
contribute the following as its Capital Contribution to the
Partnership:
Form of
Capital Capital
Partner Contribution Contribution
Moorman Cash $1,500,000.00
Red Oak Cash $1,500,000.00
Such contributions shall be made at such time as determined by the
Management Committee upon not less than three (3) business days
advance written notice from the Management Committee to each
Partner. All such contributions shall be made on an equal basis by
the Partners in proportion to each Partner's Percentage Interest in
the Partnership. The Accountants for the Partnership shall
determine the fair market value of all property, other than cash,
contributed by the Partners.
5.02 Additional Capital Contributions. No Partner shall make
any additional Capital Contributions to the Partnership unless the
Management Committee agrees upon such additional Capital
Contributions. Such additional Capital Contributions shall be made
either proportionately or disproportionately as the Management
Committee determines. If disproportionately, then the Partners'
Percentage Interest in the Partnership shall be adjusted to take
into account such disproportionate additional Capital
Contributions. After the making of any such determination, each
Partner shall deliver to the Partnership on the date agreed to by
the Management Committee, its share thereof, if any. All
additional Capital Contributions shall be made in cash unless
otherwise agreed to by the Management Committee.
5.03 Actions Upon Default in Making a Capital Contribution.
In the event that any Partner fails to make a Capital Contribution
pursuant to the provisions of Sections 5.01 or 5.02 hereof on or
before the date on which it is due (hereinafter a "Defaulting
Partner"), then, in the event that the other Partner is obligated
to and has made its Capital Contribution as provided for under such
Section (hereinafter a "Nondefaulting Partner"), the Nondefaulting
Partner may, in its sole discretion, elect to take any one of the
following actions:
(a) The Nondefaulting Partner may give written notice
delivered to the Partnership and the other Partners demanding an
immediate return to it by the Partnership of an amount equal to the
defaulted Capital Contribution which was not made by the Defaulting
Partner, in which case the Partnership shall return such amount,
together with interest thereon at the Prime Interest Rate
calculated on a per diem basis (on a 360 day year) for the number
of days which lapsed between the date the Nondefaulting Partner
made its Capital Contribution and the date on which such sum is
returned. If a Nondefaulting Partner elects this option, then it
shall, for all purposes, be considered that the principal sum
returned to the Nondefaulting Partner was a loan to the Partnership
and not a Capital Contribution. In addition to receiving a return
of the above-described sum, the Nondefaulting Partner may in the
notice delivered pursuant to this Section 5.03(a), also give notice
that in the event the Defaulting Partner does not make the agreed
upon Capital Contribution, in full, within thirty (30) days
following the date of such notice (in which case the Nondefaulting
Partner shall also properly recontribute the principal sum returned
to it), the Nondefaulting Partner may deem such failure an Adverse
Act by the Defaulting Partner by giving such Defaulting Partner
notice to that effect.
(b) The Nondefaulting Partner may elect to advance directly
to the Partnership, as a loan to the Defaulting Partner, the amount
of Capital Contribution not made by the Defaulting Partner and the
loan shall bear interest at the per annum rate which is the lesser
of (i) the Prime Interest Rate plus two (2) percentage points, such
rate to be changed as often as the Prime Interest Rate changes, or
(ii) the maximum rate of interest permitted by Illinois law. As
long as any amount remains due with respect to any such loan, any
subsequent distributions made pursuant to this Agreement to which
the Defaulting Partner would otherwise be entitled shall be paid
directly to the Nondefaulting Partner, which distribution shall be
applied first to interest then due and then to principal until such
loan is paid in full. The payment of such a loan shall be secured
by the Defaulting Partner's Percentage Interest in the Partnership
and the Defaulting Partner hereby grants a security interest in
such Percentage Interest to the Nondefaulting Partner and hereby
appoints the Nondefaulting Partner as its attorney-in-fact with
full power and authority to prepare and execute any documents,
instruments and agreements including, but not limited to, any
financing statements, that may be necessary or appropriate to
perfect and continue such security interest in favor of the
Nondefaulting Partner. This power of attorney is coupled with an
interest and cannot be revoked. In the event such loan is not
repaid in full within one hundred twenty (120) days after it is
made, such nonpayment shall be deemed an Adverse Act by the
Defaulting Partner and the Nondefaulting Partner may exercise any
rights or remedies available hereunder or at law as in equity,
including the right to dissolve the Partnership pursuant to Section
15.
5.04. General.
(a) Except as otherwise provided in this Agreement, no
Partner shall demand or receive a return of its Capital Contribu-
tion unless agreed to by the Partners. Any and all Capital
Contributions returned to Partners shall be on an equal basis in
proportion to each Partner's Percentage Interest in the
Partnership. Under circumstances requiring a return of any Capital
Contributions, no Partner shall have the right to receive property
other than cash except as may be specifically provided herein.
(b) No Partner shall receive any interest, salary or draw
with respect to its Capital Contributions or its Capital Account or
for services rendered on behalf of the Partnership or otherwise in
its capacity as a Partner, except as otherwise provided in this
Agreement.
Section 6. Partnership Financing
6.01 Partnership Borrowings. The working capital and other
requirements of the Partnership which are not funded through the
earnings of the Partnership or through Capital Contributions made
pursuant to Sections 5.01 and 5.02 may be met by borrowings from
financial institutions or other Persons, in such amounts and upon
such terms and conditions as the Management Committee shall, from
time to time, deem appropriate.
6.02 Loans by Partners and Affiliates. No loans shall be made
to the Partnership by any Partner or an Affiliate of any Partner
other than pursuant to Section 5.03(b), without the prior consent
of all Partners, after full disclosure of the amount to be loaned,
the purpose of such financing, the interest rate and payment terms
offered, and the identification of any collateral to be pledged to
secure such loan. All Partners shall be given the opportunity to
participate in any such financing by loaning to the Partnership a
pro rata share of the amount to be financed in proportion to such
Partner's respective Percentage Interest in the Partnership at the
time of such financing; provided, however, that no Partner shall be
obligated to make any loan to the Partnership.
Section 7. Capital Accounts
7.01 Individual Capital Accounts. An individual Capital
Account shall be maintained for each Partner. The Capital Account
of each Partner shall consist of (a) the sum of: (i) cash
contributed by the Partner to the Partnership; (ii) the fair market
value of any property other than cash contributed by the Partner to
the Partnership; (iii) any Profits and any items in the nature of
income or gain allocated to the Partner pursuant to this Agreement;
and (iv) any other items required to be added thereto pursuant to
Regulation Section 1.704-1(b)(2)(iv), less (b) the sum of (i) the
amount of all cash distributions by the Partnership to the Partner;
(ii) the fair market value of any property other than cash
distributed by the Partnership to the Partner; (iii) any Losses and
any items in the nature of expenses, losses or deductions allocated
to the Partner pursuant to this Agreement, and (iv) any other items
required to be subtracted therefrom under Regulation Section 1.704-
1(b)(2)(iv).
7.02 Transfer of Capital Account. In the event of a permitted
sale or exchange of a Partnership Interest in the Partnership, the
Capital Account of the transferor shall become the Capital Account
of the transferee to the extent it relates to the transferred
Partnership Interest in accordance with Section 1.704-1(b)(2)(iv)
of the Regulations.
7.03 Manner of Maintaining Capital Accounts. The foregoing
provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b) and shall be interpreted and applied
in a manner consistent with such Regulations. If the Partnership
determines that the manner in which Capital Accounts are to be
maintained pursuant to the preceding provisions of his Section
should be modified in order to comply with Regulations Section
1.704-1(b), then notwithstanding anything to the contrary contained
in the preceding provisions of this Section 7, the method in which
Capital Accounts are maintained shall be so modified; provided,
however, that any change in the manner of maintaining Capital
Accounts shall not materially alter the economic agreement between
or among the Partners as set forth in this Agreement.
Section 8. Allocations
8.01 Profits. Profits for any fiscal year shall be allocated
fifty percent (50%) to Moorman and fifty percent (50%) to Red Oak.
8.02 Losses. Losses for any fiscal year shall be allocated
fifty percent (50%) to Moorman and fifty percent (50%) to Red Oak.
8.03 General.
(a) Except as otherwise provided in this Agreement, all items
of Partnership income, gain, loss, deduction, or any other
allocation not otherwise provided for shall be divided among the
Partners in the same proportion as they share Profits or Losses, as
the case may be, for the fiscal year.
(b) The Partners are aware of the income tax consequences of
the allocations made by this Section 8 and hereby agree to be bound
by the provisions of this Section 8 in reporting their shares of
Profits and Losses for income tax purposes.
(c) For purposes of determining the Profits, Losses, or any
other items allocable to any period, Profits, Losses and any such
other items as may determined on a daily, monthly or other basis,
shall be determined by the Management Committee using any
permissible method under Code Section 706 or any Regulations
thereof.
Section 9. Distributions
9.01 Distributable Cash. Except as provided in Section 15
hereof, relating to the liquidation and winding up of the
Partnership, and subject to the limitations of Sections 9.04 and
9.05, all distributions of cash, including Distributable Cash or
other property, shall be made, at such time or times as may be
determined by the Management Committee, fifty percent (50%) to
Moorman and fifty percent (50%) to Red Oak. Notwithstanding the
foregoing provision, the Partners agree that non-discretionary,
i.e., mandatory, distributions shall be made, from time to time, as
necessary to cover the Partners' income tax liabilities arising
from their proportionate share of the Partnership's gains and
Profits.
9.02 Distributions in Event of a Transfer. In the event a
Partnership Interest is transferred in accordance with the relevant
provisions of this Agreement relating to transfers, distributions
which are made on or before the date of a permitted transfer shall
be made to the transferor and all distributions thereafter shall be
made to the transferee, provided that proper notice of such
transfer has been delivered to the Partnership. Any attempt to
make a transfer which is not permitted under this Agreement shall
not give rise in any transferee to a right to receive any
distributions hereunder.
9.03 Amounts Withheld. All amounts withheld pursuant to the
Code or any provision of any state or local tax law with respect to
any payment or distribution by the Partnership to any Partners
shall be treated as amounts distributed to the Partners for
purposes of this Agreement.
9.04 Limitations Upon Distributions.
(a) No distributions or return of contributions shall be made
and paid if, after the distribution or return of contribution is
made either:
(i) the Partnership would be insolvent; or
(ii) the net assets of the Partnership would be less than
zero.
(b) The Management Committee may base a determination that a
distribution or return of contribution may be made under Section
9.04 in good faith reliance upon a balance sheet and profit and
loss statement of the Partnership represented to be correct by the
Person having charge of its books of account or certified by the
Accountants to fairly reflect the financial condition of the
Partnership.
Section 10. Related Party Transactions. The Partnership
may contract to purchase goods or services from any Partner or an
Affiliate of a Partner ("Interested Party Contracts"). All
Interested Party Contracts shall be negotiated, conducted and
handled in all respects on an arm's length basis and in good faith.
As of the date hereof the only Interested Party Contract is the
Management Agreement referred to in Section 11.
Section 11. Management Agreement. Simultaneously with the
execution of this Agreement, Moorman's, Inc., which is an Illinois
corporation and a member of Moorman, and the Partnership shall
enter into a Management Agreement with respect to the day to day
operations of the Partnership which Management Agreement shall be
in the form of Exhibit A attached hereto.
Section 12. Accounting and Records
12.01 Accounting Method. The Partnership shall use a
method of accounting, as approved by the Partnership, in the
preparation of its financial records and for tax purposes and shall
keep its books and records accordingly.
12.02 Accounting Records. Complete and accurate business
and accounting records shall be maintained reflecting all costs and
expenses incurred, all charges made, all credits made and received,
and all income derived in connection with the operation of the
Partnership's business in accordance with GAAP consistently
applied. The Partnership's books and records shall be maintained
at the principal place of business of the Partnership and each
Partner shall have the right, at its sole expense, to inspect,
examine, copy and/or audit the Partnership's Company's books and
records during normal business hours.
12.03 Financial Statements; Audit. As soon as
practicable, but not later than thirty (30) days after the end of
each month, the Management Committee shall furnish each Partner
with an unaudited balance sheet and an unaudited statement of
income or loss for the month and year to date, all in reasonable
detail, setting forth in each case in comparative form the figures
for the corresponding period (or periods) of the previous fiscal
year.
The Management Committee shall annually and upon dissolution
under Section 15, appoint Accountants to examine the Partnership's
financial statements as of the end of such fiscal year or upon
dissolution and to render its opinion as to whether those financial
statements present fairly the financial position and results of
operations and statement of cash flow of the Partnership. Each
Partner shall be furnished with a copy of such audited financial
statements and the Accountants' opinion within ninety (90) days
after the end of each fiscal year of the Partnership or after
dissolution.
Each Partner shall have the right, at its sole expense, to
review and verify all charges made for services rendered or goods
sold to the Partnership by any Partner or any Affiliate of a
Partner. Upon the request of either Partner, the other shall
prepare and submit to the requesting Partner (but not more often
than semi-annually) a certification detailing and itemizing such
charges during such period of time as specified in the request and
verifying the truth, completeness and accuracy thereof
("Certification"). The review and verification may include audits
by such independent certified public accountants as the Partner
conducting the review deems advisable. Upon request, each Partner
or such Partner's Affiliate shall make all records relating to the
charges in question available to the Partner doing the review, or
its representatives, during normal business hours at such Partner's
or such Partner's Affiliate's principal place of business.
12.04 Fiscal Year. The fiscal year of the Partnership
shall end on December 31 each calendar year during the term of the
Partnership, unless otherwise unanimously agreed to by the Partners
or required by the Internal Revenue Service.
12.05 Tax Matters Partner and Tax Returns.
(a) Tax Matters Partner. Moorman is hereby designated "Tax
Matters Partner" for the Partnership and shall be so designated in
each Federal information return filed on behalf of the Partnership.
The Tax Matters Partner shall not be liable to the Partnership or
any other Partner for any act or omission on behalf of the
Partnership, which act or omission was within the scope of
authority conferred on the Tax Matters Partner by this Agreement,
unless such act or omission constituted fraudulent or willful
misconduct, was performed or omitted in bad faith or constituted
gross negligence or a violation of law. Within five (5) business
days of receipt, each Partner shall give to each other Partner
written notice of the first Partner's receipt from any taxing
authority of any notification of an audit or investigation of or
involving the Partnership or the reporting of Profits or Losses
thereof. The Tax Matters Partner shall keep the other Partners
fully advised of the progress of any audit and shall promptly
supply the other Partners with copies of any written communication
received from the Internal Revenue Service or any other taxing
authority relating to any audit within ten (10) days of receipt
thereof, and shall at least ten (10) days prior to submitting any
materials to the Internal Revenue Service or other taxing authority
provide such materials to the other Partners. Each Partner shall
have the right to participate in (i) any audit or other administra-
tive proceeding relating to the determination of income, gains,
Profits, Losses, deductions or credits at the Partnership level and
(ii) any material discussions with the Internal Revenue Service or
other taxing authority relating to Partnership tax issues. No
position will be taken with respect to material tax issues, no
statute of limitations will be extended, no protest or petition
related to any tax issue will be filed and no settlement or
compromise of any tax issue related to the Partnership will be made
without the consent of all affected Partners, which consent shall
not be unreasonably withheld.
(b) Tax Returns. Acting pursuant to instructions of the
Management Committee, the Tax Matters Partner shall cause income
and other required federal, state and local tax returns for the
Partnership to be prepared in a manner consistent with the
provisions of this Agreement and sent to each Partner for review at
least ten (10) business days prior to filing, and to be timely
filed with the appropriate authorities. The Tax Matters Partner
and all affected Partners shall consult and cooperate in good faith
to resolve any objections to the manner in which any such return
has been prepared and to make appropriate changes before the
deadline for timely filing (taking into account any available
extensions). Unless each affected Partner agrees otherwise, the
Tax Matters Partner shall also prepare, submit for review and file
any amendment to or request for administrative adjustment to such
tax returns that may be necessary to reflect material adjustments
by federal, state or local tax authorities to the valuation or tax
basis of any of the Assets or of any Partner's Interest in the
Partnership. Acting pursuant to instructions of the Management
Committee, the Tax Matters Partner shall make such elections as it
shall deem to be in the best interests of the Partnership and the
Partners. The cost of preparation of such returns shall be borne
by the Partnership.
(c) Projections and Reports. The Tax Matters Partner shall
cause to be provided to each Partner not later than April 15 of
each year information concerning the Partnership's projected
taxable Profits or Losses and each class of income, gain, loss,
deduction or credit (and the allocation thereof under the
provisions of this Agreement) which is relevant to reporting a
Partner's share of Partnership Profits, gain, Losses, deduction or
credit for purposes of Federal or state income tax. If any Partner
questions the method or amount of any tax allocation made pursuant
to Section 8 hereof, the Partners shall consult in good faith and
agree on the proper allocation. Information required for the
preparation of a Partner's income tax returns, i.e. a Form K-1,
shall be furnished to the Partners as soon as possible after the
close of the Partnership's fiscal year.
(d) Cooperation. The Tax Matters Partner shall, from time to
time, upon request of any Partner, reasonably cooperate with such
Partner on any tax matters relating to the Partnership.
12.06 Bank Accounts. All funds contributed or advanced by
the Partners or borrowed for the account of the Partnership and all
other revenues received as a result of the conduct of the
Partnership's business shall be deposited in the name of the
Partnership in an account (or accounts) to be established at such
bank or banks as the Management Committee shall approve from time
to time. The funds of the Partnership shall not be commingled with
the funds of any other Person. Checks, drafts and other types of
transfers may be drawn on such accounts by signature or signatures
of and authorized by those Persons designated, from time to time,
by the Management Committee.
Section 13. Transfers of Interest
13.01 Restrictions on Transfers. Except as expressly
permitted or required by this Agreement, no Partner shall, directly
or indirectly, in any manner, sell, assign, pledge, transfer,
encumber, hypothecate, exchange or otherwise dispose of, either for
value or otherwise, all or any part of its Partnership Interest or
cause, permit or recognize any sale, transfer, assignment,
encumbrance or other disposition, directly or indirectly, of any of
its interest in the Partnership, nor shall any such interest be
subject, directly or indirectly, to sale, transfer, assignment,
encumbrance, hypothecation, exchange or other disposition by
operation of law or agreement, without the prior written consent of
all Partners. Any such transfer or attempted transfer in violation
of the preceding sentence shall be null and void and shall not be
recognized by the Partnership for any purpose whatsoever.
13.02 Permitted Transfers.
(a) Notwithstanding the foregoing limitations, each Partner
shall have the right to transfer all (but not less than all) of its
Partnership Interest in the Partnership as described in this
Section 13.02 (a Partner so transferring such interest, a
"Transferring Partner").
(b) A Partner may transfer its Partnership Interest (i) to
any Affiliate of such Partner; (ii) to any other Person approved by
all of the Partners; or (iii) to any other Person in compliance
with the procedure outlined in Section 13.03.
(c) It shall be a condition precedent to any transfer
described in this Section 13 that: (i) the transferee shall, by an
instrument or document in form satisfactory to the Partnership and
its counsel, become a party to and assume and agree to be bound by
all provisions of this Agreement, including the provisions of this
Section 13, and to assume all obligations of the transferor Partner
with respect to this Agreement and the Partnership Interest being
transferred; (ii) unless otherwise unanimously agreed to by the
Partners, the Partnership shall have received, prior to the
transfer, an opinion of counsel acceptable to the Management
Committee that such transfer will not terminate the Partnership for
federal income tax purposes; (iii) such transferee shall pay or
make satisfactory arrangements to pay, in the opinion of the
Management Committee, all reasonable costs and expenses incurred by
the Partnership in connection with such transfer and (iv) in the
case of a transfer to a Partner's Affiliate, that the Transferring
Partner advises the other Partner(s) in writing of such transfer
within seven (7) days following such transfer.
(d) Upon the transfer of its Partnership Interest in
accordance with this Section, a Transferring Partner shall
thereupon cease to be a Partner and shall be relieved of liability
hereunder; its transferee shall thereupon be substituted in its
place hereunder, and all references herein to Partners shall
include such transferee, but no such transfer shall otherwise
affect the rights or obligations of any of the parties hereto.
(e) The Partners intend that any transfer permitted hereby
shall not result in a termination of the Partnership and,
notwithstanding, any "dissolution" of the Partnership under the
Act, the Partnership shall continue to hold the Partnership Assets
in accordance with the terms of this Agreement and there shall be
no liquidation or winding up of the Partnership hereunder.
13.03 Right of First Refusal.
(a) If a Partner desires to sell all or any portion of its
Partnership Interest in the Partnership (the "Selling Partner") to
a third party purchaser (which must be other than an Affiliate of
the Selling Partner), the Selling Partner shall obtain from a third
party purchaser a bona fide written offer to purchase such
interest, stating the terms and conditions upon which the purchase
is to be made and the consideration offered (the "Written Offer").
The Selling Partner shall give written notification to the other
Partner(s) ("Remaining Partner(s)") by certified mail or personal
delivery, of its intention to so transfer such interest by
furnishing to the Remaining Partners a copy of the Written Offer to
purchase such interest.
(b) The Remaining Partners and each of them shall, on a basis
pro rata to their Percentage Interest in the Partnership or on a
basis pro rata to the Percentage Interests of those Remaining
Partners exercising their right of first refusal, have the right to
exercise a right of first refusal to purchase all (but not less
than all) of the interest proposed to be sold by the Selling
Partner upon the same terms and conditions as stated in the Written
Offer by giving written notification to the Selling Partner, by
certified mail or personal delivery, of their intention to do so
within forty-five (45) days after receiving the Written Offer from
the Selling Partner. Failure of the Remaining Partners to so
notify the Selling Partner of their desire to exercise this right
of first refusal within said forty-five (45) day period shall
result in the termination of the right of the first refusal and the
Selling Partner shall be entitled to consummate the sale of its
interest in the Partnership, to such third party purchaser,
provided that the sale shall be consummated in accordance with the
Written Offer and within sixty (60) days following the expiration
of the aforesaid forty-five (45) day period.
In the event the Remaining Partners (or any one or more of the
Remaining Partners) give written notice to the Selling Partner of
their desire to exercise this right of first refusal to purchase
all of the Selling Partner's interest in the Partnership which the
Selling Partner desires to sell upon the same terms and conditions
as are stated in the aforesaid Written Offer, the Remaining
Partners shall have the right to designate the time, date and place
of closing, provided that the date of closing shall be within sixty
(60) days after written notification to the Selling Partner of the
Remaining Partner or Partner's election to exercise their right of
first refusal.
13.04 Effective Date of Sale. Any sale or transfer of
Partnership Interest in compliance with this Section 13 shall
become effective as of the date which is the later of (i) the last
day of the calendar month in which the Remaining Partners' consent
is given or (ii) the date on which the transferee complies with the
conditions set forth in Section 13.02(c).
13.05 Reasonableness of Restrictions. Each Partner
acknowledges and agrees that the restrictions on the transfer of
Partnership Interest set forth in this Section 13 are reasonable in
view of the Partnership's purpose and the relationship of the
Partners. Accordingly, such restrictions shall be specifically
enforceable.
13.06 Waiver of Partition. No Partner shall, either
directly or indirectly, take any action to require partition or
appraisement of the Partnership or of any of its assets or
properties or cause the sale of any Partnership Assets, and
notwithstanding any provisions of applicable law to the contrary,
each Partner (and his legal representatives, successors or assigns)
hereby irrevocably waives any and all rights to maintain any action
for partition or to compel any sale with respect to its Partnership
Interest, or with respect to any assets or properties of the
Partnership, except as expressly provided in this Agreement.
13.07 Covenant Not to Withdraw or Dissolve.
Notwithstanding any provision of the Act, each member hereby
covenants and agrees that the Partners have entered into this
Agreement based on their mutual expectation that all Partners will
continue as Partners and carry out the duties and obligations
undertaken by them hereunder and that, except as otherwise
expressly provided in Sections 1.04 and 15.01, no Partner shall
withdraw or retire from the Partnership, be entitled to demand or
receive a return of such Partner's Profits (or a bond or other
security for the return of such Profits), or exercise any power
under the Act to dissolve the Partnership without the unanimous
consent of the Partners.
Section 14. Additional Partners
From and after the date of the formation of the Partnership,
any Person acceptable to the Partners by their unanimous vote
thereof, shall become a Partner of the Partnership, either through
the issuance by the Partnership of a Partnership Interest to such
Person for such consideration as the Partners by their unanimous
vote shall determine, or as a transferee of a Partner's Partnership
Interest, or any portion thereof, subject to the terms and
conditions of this Agreement. No new Partners shall be entitled to
any retroactive allocation of Profits, Losses, income or expense
deductions incurred by the Partnership. The Management Committee
may, at their option, at the time a Partner is admitted, close the
Partnership books (as though the Partnership's tax year had ended)
or make pro rata allocations of Profits, Losses, income and expense
deductions for the Partners for that portion of the Partnership's
tax year in which a Partner was admitted in accordance with the
provisions of Code Section 706(d) and the Regulations promulgated
thereunder. In the event another Partner is added, a supplemental
agreement, in terms satisfactory to all Partners, shall be executed
by all Partners setting forth: (a) the amount of capital and the
allocation thereof among the Partners; (b) the percentages in which
the Partnership's Profits and Losses shall be thereafter shared or
borne; and (c) a statement that all Partners shall be bound by this
Agreement as amended by the supplemental agreement. Every new
Partner shall contribute to the Partnership in cash or property at
the time of its admission, its portion of the capital account, as
set forth in the supplemental agreement.
Section 15. Dissolution and Termination
15.01 Dissolution Events. The Partnership shall dissolve
and commence winding up and liquidation upon the first to occur of
any of the following ("Liquidating Events"):
(a) The occurrence of an Impasse, which persists for a period
of forty-five (45) days;
(b) A Partner electing to dissolve the Partnership by written
notice to the other Partners after a Partner so notified committed
or sustained an Adverse Act which Adverse Act is not remedied by
the Partner committing or sustaining the same within sixty (60)
days of such Partner receiving notice thereof from the other
Partner.
(c) The Partnership is dissolved by either Partner pursuant
to Section 1.04 hereof;
(d) The sale of all or substantially all of the Partnership
Assets;
(e) The unanimous written agreement of all Partners;
(f) The happening of any other event that makes it unlawful
or impossible to carry on the business of the Partnership;
(g) The death, retirement, resignation, expulsion, Event of
Bankruptcy or dissolution of a Partner or occurrence of any other
event which terminates the continued membership of a Partner in the
Partnership (a "Withdrawal Event"), unless the business of the
Partnership is continued by the written consent of all remaining
Partners within ninety (90) days after the Withdrawal Event and
there are at least two (2) remaining Partners.
(h) Any event that causes there to be only one Partner,
unless within ninety (90) days of such event there is admitted to
the Partnership one or more new Partners who, under the Act, have
the authority to and do consent to the continuation of the business
of the Partnership.
The Partners agree that, notwithstanding any provisions of the
Act, the Partnership shall not dissolve prior to the occurrence of
a Liquidating Event. If it is determined, by a court of competent
jurisdiction, that the Partnership has dissolved prior to the
occurrence of a Liquidating Event, the Partners agree to continue
the business of the Partnership without a winding up or liquidation
and to take any steps necessary to continue the Partnership
pursuant to the terms of this Agreement.
15.02 Winding Up and Distribution of Assets. Upon the
occurrence of a Liquidating Event, the Partnership shall continue
solely for the purposes of winding up its affairs in an orderly
manner, liquidation its assets, and satisfying the claims of its
creditors and Partners. Thereupon, no Partner shall take any
action which is inconsistent with, or not necessary to, or
appropriate for, winding up the Partnership's business and affairs.
The Management Committee shall be responsible for overseeing the
winding up and liquidation of the Partnership and shall take full
account of the Partnership's liabilities and Partnership Assets,
and the Partnership Assets shall be liquidated as promptly as is
consistent with obtaining the fair value thereof, and the proceeds
therefrom, to the extent sufficient therefor, shall be applied and
distributed in the following order:
(a) First, to the payment and discharge of all of the
Partnership's debts and liabilities to creditors other than
Partners or their Affiliates, including expenses of liquidation and
winding up;
(b) Second, to the payment and discharge of all of the
Partnership's debts and liabilities to Partners and their
Affiliates; and
(c) The balance, if any, to the Partners in accordance with
their Capital Accounts, after giving effect to all contributions,
distributions and allocations for all periods.
Upon completion of the winding up, liquidation and
distribution of the Partnership Assets, the Partnership shall be
deemed terminated. The Management Committee shall comply with all
requirements of applicable law pertaining to the winding up of the
affairs of the Partnership and the final distribution of its
Partnership Assets.
15.03 Return of Contribution Non-Recourse to Other
Partners. Except as provided by law or as expressly provided in
this Agreement, upon dissolution, each Partner shall look solely to
the Partnership's Assets for the return of its Capital
Contribution. If the Partnership's Assets remaining after the
payment or discharge of the debts and liabilities is insufficient
to return the Capital Contribution of one or more Partners, such
Partner or Partners shall have no recourse against any other
Partner, except as otherwise provided by law.
15.04 Reserves. In the discretion of the Management
Committee, a prorata portion of the distributions that would
otherwise be made to the Partners pursuant to Section 15.02(c) may
be withheld to provide a reasonable reserve for Partnership
liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the Partnership,
provided that such withheld amounts shall be distributed to the
Partners as soon as practicable.
15.05 Deficit Restoration Provisions and Compliance with
Timing Requirements of Regulations. In the event the Partnership
or a Partner's interest in the Partnership is "liquidated" within
the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), then (a)
distributions shall be made pursuant to Section 15.02 to the
Partners who have positive Capital Accounts in compliance with
Regulations Section 1.704-1(b)(2)(ii)(b)(2), and (b) if any
Partner's Capital Account has a deficit balance (after giving
effect to all contributions, distributions and allocations for all
taxable years, including the year during which such liquidation
occurs), such Partners shall contribute to the capital of the
Partnership the amount necessary to restore such deficit balance to
zero in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3)
for the last day of the taxable year of the Partnership in which
the liquidation occurs or, if later, the date which is ninety (90)
days after the date of such liquidation. The proceeds of such
restoration payments shall be distributed as provided in Section
15.02.
Section 16. Representations and Warranties
Moorman, with respect to itself, represents and warrants to
Red Oak, and Red Oak, with respect to itself, represents and
warrants to Moorman:
(a) Moorman and Red Oak are each limited liability companies,
each of which is validly existing and in good standing under the
laws of its jurisdiction of organization, and each has the power to
own its assets and properties, carry on its business as now
conducted, and execute, deliver and perform this Agreement.
(b) Its execution, delivery and performance of this Agreement
has been duly authorized by all necessary company action, and is
valid and binding upon and enforceable against it in accordance
with the respective terms hereof. Neither the execution and
delivery of this Agreement nor the performance of this Agreement
will conflict with, result in a breach of, accelerate any
obligations under or give rise to a right of termination under the
terms of any agreement or instrument to which it is a party or by
which any of its assets or properties are bound or affected, or
will conflict with or violate any judgment, decree, order, statute
or other provision of law, or result in any charge, claim,
encumbrance or restriction on any of its assets or properties, or
conflict with any terms or provisions of its Articles of
Organization or Agreement.
(c) Without limiting the generality of the foregoing, any
required governmental approval of and permissions for its
execution, delivery and performance of this Agreement have been
duly obtained.
Section 17. General Provisions
17.01 Inconsistent Actions. Neither Partner shall take
any action, as Partners of the Partnership, whether permitted by
the laws of the State of Illinois or otherwise, inconsistent with
the terms of this Agreement.
17.02 Entire Agreement. This Agreement sets forth the
entire agreement and understanding of the Partners with respect to
the transactions contemplated by this Agreement and supersedes all
prior agreements and understandings between the Partners relating
to the subject matter of this Agreement.
17.03 Applicable Law. This Agreement and its
interpretation shall be governed exclusively by its terms and by
the laws of the State of Illinois, and specifically the Act.
17.04 Severability. The unenforceability, invalidity, or
illegality of any provision above shall not affect or impair any
other provision or render it unenforceable, invalid or illegal.
17.05 Interpretation. Whenever used in this Agreement,
unless the context clearly indicates otherwise, the use of the
singular includes the plural and vice versa; and the use of the
neuter or any gender is applicable to any other gender or the
neuter. The captions and the table of contents, if any, are for
convenience only and shall not affect the interpretation or
construction of this Agreement.
17.06 Incorporation by Reference. Every exhibit, schedule
and other appendix attached to this Agreement and referred to
herein is hereby incorporated in this Agreement by reference.
17.07 Waiver. A Partner's failure to enforce at any time
or for any period of time any provision of this Agreement or to
exercise any right or remedy does not constitute a waiver of such
provision, right or remedy, or prevent such party thereafter from
enforcing any or all provisions and exercising any and all rights
and remedies. The exercise of any right or remedy does not
constitute an election or prevent the exercise of any or all rights
or remedies otherwise available.
17.08 Expenses and Costs. Each Partner shall pay its own
expenses, incurred by or on behalf of it and in connection with the
authorization, preparation and signing of this Agreement,
including, without limitation, all fees and expenses of agents,
representatives, counsel and accountants.
17.09 Notice. Unless otherwise expressly provided, any
notice, demand, request, consent, approval or communication that a
Partner desires or is required to give to the other Partner (or any
other Person) hereunder must be in writing and shall be deemed
properly delivered and received: (i) on the date delivered if
delivered in person; (ii) three (3) business days after being
deposited in the U.S. mail, if sent by certified mail, return
receipt requested, postage prepaid; (iii) on the day received if
sent by facsimile or telefax transmission; and (iv) one (1)
business day after being properly delivered to a recognized
guaranteed overnight courier (e.g. Federal Express), with all
charges prepaid or billing thereof properly arranged to sender.
All such notices shall be addressed to the Partner at the address
set forth below or such other address as such Partner may designate
by written notice in accordance with this provision:
If to Moorman:
Moorman's Quality Feeders, LLC
1000 North 30th Street
P.O. Box C1
Quincy, Illinois 62305-3115
ATTENTION: Michael J. Foster, Manager
If to Red Oak:
Red Oak Feeders, L.C.
2010 Commerce Drive
PO Box 456
Red Oak, Iowa 51566
ATTENTION: Gordon Reisinger, President
If to the Partnership:
To all current members of the Management Committee.
17.10 Amendment. No amendment, modification, termination
or waiver of this Agreement or any provision thereof shall be
effective unless made in writing and signed by each Partner.
17.11 Indemnification. The Partnership shall indemnify,
and hold each Partner and each of its Affiliates harmless against,
to the full extent permitted by law, any loss, damage, cost or
expense (including court costs and reasonable attorney fees) which
such Partner or such Affiliates may sustain or incur by reason of
any claim, demand, suit or recovery by any Person or Entity (other
than such Partner or an Affiliate of such Partner) arising or
allegedly arising out of the Partnership's business, including the
Partner's management of the Partnership or the Partners' acts or
omissions in connection with the management of the Partnership.
17.12 Binding Effect. Unless otherwise expressly provided
in this Agreement, every covenant, term and provision of this
Agreement shall be binding upon and inure to the benefit of the
Partners and their respective legal representatives, successors,
transferee and assigns.
17.13 Counterparts. This Agreement may be signed in
several counterparts, including a photocopy or facsimile thereof,
each of which, including the signature thereon, shall be an
original and all of which together shall constitute one and the
same agreement.
17.14 Further Action. Each Partner agrees to perform all
further acts and execute, acknowledge and deliver any documents
which may be reasonably necessary, appropriate or desirable to
carry out the provisions of this Agreement.
IN WITNESS WHEREOF, the Partners hereto have caused their
signatures or the signatures of their duly authorized
representatives, to be set forth below as of the day and year first
above written.
PARTNERS:
Moorman's Quality Feeders, LLC Red Oak Feeders, L.C.
By: _________________________ By:___________________________
Its Manager Its President
March 13, 1998
TO WHOM IT MAY CONCERN:
This agreement is made and entered into this 11th day of November,
1997 by and between Nebraska Beef, Omaha, Nebraska
And
Red Oak Farms, Inc., Red Oak, Iowa 51566.
Whereas Nebraska Beef is engaged in the business of slaughtering
and fabricating beef and owns and operates a plant to do so in
Omaha, Nebraska which is subject to United States Department of
Agriculture (USDA) inspection. Nebraska Beef desires to provide
fee-based slaughter and fabrication services to Red Oak Farms, Inc.
as well as purchase designated offal; by products and cattle that
Red Oak may choose to sell them.
Whereas, Red Oak Farms is engaged in the business of purchasing
Certified Hereford Beef cattle and marketing and selling fabricated
beef. Red Oak Farms, Inc. desires to solicit slaughter and
fabrication services for beef animals meeting Certified Hereford
Beef certification. Red Oak Hereford Farms, Inc. desires to sell
to Nebraska Beef certain offal and by-product items of which Red
Oak Hereford Farms, Inc. does not market and sell at the present
time. Red Oak Hereford Farms also desires to sell to Nebraska Beef
certain carcasses that do not meet the USDA certification for
Certified Hereford Beef.
Now therefore in consideration of the promises and mutual covenants
set forth in the agreement the parties agree as follows:
Nebraska Beef will slaughter and fabricate 500 to 4,500 CHB
carcasses per week. Red Oak will make a best effort attempt to
harvest cattle each week.
Nebraska Beef and Red Oak Farms will negotiate premiums and
discounts on all cattle weekly.
Nebraska Beef will purchase offal and hide items at what they sell
theirs for on an average weekly basis.
Nebraska Beef will purchase from Red Oak Farms, Inc. all hides from
cattle under this agreement. The purchase price will be what
Nebraska Beef receives. Red Oak Farms retains the right to market
hides if they want.
Nebraska Beef's payment to Red Oak Farms, Inc. will be a net
payment (payment for non-certified cattle, plus offal, plus hides,
minus the slaughter and fabrication fee) closed out weekly with
check issued to Red Oak Hereford Farms, Inc. within seven (7) days
of slaughter.
<PAGE>
Nebraska Beef
March 13, 1998
Page (2)
Red Oak Farms, Inc. will pay Nebraska Beef $35.00 for every carcass
slaughtered but not fabricated (non-certified cattle). Red Oak
Farms, Inc. will pay Nebraska Beef according to the following
schedule which includes boxes and bags, slaughter and
fabrication.
Number of Head Fabricated Fee Per Head
First 1,500 $93.50
Next 1,000 $89.50
Next 1,000 $86.50
6a. Cost revised annually for actual cost increases
Red Oak Farms, Inc. will deliver the cattle for weekly or daily
slaughter to the plant either the evening before or the morning of
the slaughter to be scheduled with Nebraska Beef cattle buyers.
Red Oak Farms, Inc. will notify the Omaha office (Bill Ferral) as
to the number of cattle to be delivered each week.
Red Oak Farms will communicate with Nebraska Beef fabrication as to
fabrication instruction or changes each week.
Red Oak Farms Inc. will provide Nebraska Beef with boxed beef
shipping orders and truck schedules daily. Nebraska Beef will
store all boxes in their facility.
Red Oak Farms, Inc. will have a representative present at the plant
the day of slaughter, grading and also the day of fabrication.
Terms: This agreement commences this 1st day of December, 1997
and shall terminate December 1st, 2000, unless terminated or
extended sooner by a) mutual consent of both parties; b) if
either party becomes solvent or bankrupt; c) violation of the
terms of this agreement (with a 30 day continuation period); or d)
by either party for any reason after 120 day written notification.
Section c) is not applicable to paragraph 2.
Amendments: This agreement may be amended at any time by mutual
consent.
Binding Effect: This agreement shall be binding on the parties
hereto and their respective heirs, executors, successors, and
assigns.
______________________________ ______________________________
President Date President Date
Nebraska Beef Red Oak Farms, Inc.
GMR:kjt
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