UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 33-89714
RED OAK HEREFORD FARMS, INC.
----------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 84-1120614
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2010 Commerce Drive, Red Oak, Iowa 51566
------------------------------------------
(Address of principal executive offices)
(712) 623-9224
--------------
(Issuer's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
At May 7, 1998, there were 14,679,415 shares of common stock, $.001 par value,
of the registrant outstanding.
1<PAGE>
INDEX Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements F-1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 13
Item 4. Results of Votes of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
2<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-7 attached.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The matters discussed in this Form 10-Q contain forward-looking statements
that involve risks and uncertainties including risk of changing market
conditions with regard to livestock supplies and demand for products of Red Oak
Hereford Farms, Inc. (the "Company"), domestic and international regulatory
risks, competitive and other risks over which the Company has little or no
control. Consequently, future results may differ from management's
expectations. Moreover, past financial performance should not be considered a
reliable indicator of future performance.
The Company operates through its subsidiaries, Red Oak Farms, Inc. ("ROF"),
Midland Cattle Company ("Midland") and Red Oak Feeders, LLC ("Feeders").
CURRENT QUARTER DEVELOPMENTS
The Company was honored by receiving two prestigious American Tasting
Institute awards. In blind taste tests, the Company's Certified Hereford Beef
("CHB") was awarded "The Best Restaurant Beef in America" and "The Best
Supermarket Beef in America" for 1998. The Company believes this recognition
helps bring CHB to the attention of restaurants, retail supermarkets and
consumers. Currently, there are over 50 nationally known restaurants serving
CHB and the Company has increased its premium retail supermarket stores from 54
as of December 31, 1997 to 58 as of March 31, 1998. A sampling of the
Company's supermarket and restaurant clientele currently includes:
Retail 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
Quillin's IGA Foodliners in Wisconsin
Restaurants
-----------
The New York Hilton (2)
Newark Hilton
The Riviera in Las Vegas
The Hilton Santa Fe
The Fort in Denver
The Waldorf-Astoria in New York
3<PAGE>
Market Media. The Company is currently negotiating an agreement with
Market Media, a financial public relations service. The Company anticipates,
upon satisfactory negotiations, that Market Media will service the Company's 800
number investor information requests and maintain the Company's website
(www.redoakfarms.com).
Nebraska Beef Agreement. On March 25, 1998, the Company entered 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") specifications for CHB. To date, the Company has met
the quota of beef processed as required in the agreement.
CPNM Agreement. The Company is negotiating a joint-venture marketing
agreement with Cable Print Network Marketing ("CPNM"). CPNM is an established
leader in multi-media marketing; Television, radio, magazines, direct mail and
newspaper fliers. The Company and CPNM will market CHB through consumer direct
marketing channels and look to create a Beef of the Month Club for customers
throughout the United States. The CPNM venture will provide nationwide consumer
marketing following test results in a selected major market.
McClellan Creek Meat Company Agreement. The Company is finalizing
negotiations to establish a new joint venture with McClellan Creek Meat Company
to produce, market and sell, nationwide, a natural style beef jerky. This
product has had extensive market research, flavor profile, product safety and
packaging development and has received favorable reception at national food
shows and conventions. The Company has accomplished successful production test
runs and has screened potential co-packers.
Stubbs Barbeque Agreement. ROF, along with Stubbs Barbeque, is developing
a line of precooked beef products, which will be marketed under the Stubbs
label. Stubbs Barbeque has a nationally known product line with brand
identification in over 10,000 retail supermarkets. ROF is working to source a
cooking facility to smoke our selected CHB products on a co-pack basis. ROF
would provide a complete finished package to Stubbs at the regular "branded" raw
product price plus further processing costs. Stubbs would then market the
product to the retail trade, splitting profit with ROF. The Company is in the
process of finalizing negotiations with Stubbs.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had a consolidated cash and cash
equivalents balance of $-0- and net working capital of $1,172,926.
4<PAGE>
The Company's sources of capital include, but are not limited to, cash
flows from operations, the issuance of private debt, borrowings on lines of
credit 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.
The Company commenced a private placement on January 14, 1998. The private
placement is for 840,000 Units at $4.00 per Unit. Each Unit consists of one
share of common stock of the Company and a Warrant to purchase one share of
common stock of the Company at $6.00 per share. As of March 31, 1998, the
Company had raised $1,000,500 through the sale of 250,125 Units before deducting
offering expenses of $113,953. 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.
Pursuant to the 1997 Stock Option Plan, options for 758,000 shares
have been granted to date. As of March 31, 1998, none of the options granted
pursuant to the 1997 Stock Option Plan have been exercised.
Cash used in operating activities decreased from $1,329,669 in the
first three months of 1997 to $1,102,905 in the first three months of 1998. The
principle uses for the first three months of 1998 were attributable to the
Company's net loss and an increase in inventory which were offset by an increase
in accounts payable and a decrease in accounts receivable.
Cash provided from financing activities increased slightly from
$1,334,299 in the first three months of 1997 to $1,335,081 in the first three
months of 1998. Sales of common stock and additional borrowings were the
primary sources of cash flows for financing activities in the first three
months of 1998.
Cash used by investing activities changed from $340 during the first
three months of 1997 to $198,818 in the first three months of 1998. The
majority of the increase in the first three months of 1998 is attributed to
the Company's additional investment in Feeders.
The Company believes that through its marketing strategy and business
development plan it will recognize an increase in the retail account base,
increased CHB sales and a broader CHB product mix. With increased sales of CHB,
along with proceeds from the private offerings and the availability of credit,
the Company believes there will be adequate funds to meet the Company's
obligations.
Revolving Lines of Credit. 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 terminated and
paid in March 1998. On February 26, 1998, ROF entered into a bridge financing
agreement with A&J Cheese Company. The agreement provided borrowings up to
$15,000,000 and had an interest rate of 12.97% with thirty days interest payable
in advance at the time of each loan advance. ROF is in the process of
liquidating the loan with A&J Cheese Company. 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 provides borrowings up to
$4,000,000. The KBK Capital Corporation began funding ROF on April 24, 1998.
5<PAGE>
Throughout 1997, Midland had a line of credit which provided borrowings 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. The
line of credit was paid in April 1998. Midland is currently in the process of
negotiating new financing arrangements with other lenders.
IDED Loan. ROF is current on its long term loan obligation with the Iowa
Department of Economic Development ("IDED") and as of March 31, 1998, the
principal balance remaining on this loan was approximately $472,896. Management
believes that proceeds from capital raising activities and product sales revenue
will be adequate to continue meeting this obligation.
MoorMan's Loan. ROF is in technical non-compliance on certain non-financial
conditions on its loan agreement with MoorMan's, the Company's feed
supplier (protein supplement), which gives MoorMan's the right to call the
loan. However, MoorMan's has given no indication of any intention to call this
obligation. The loan amount of $1,000,000 is due October 2001, with interest
only currently payable monthly at approximately $9,000 per month. On November
1, 1998, principal payments over a thirty-six (36) month period will commence.
The Company is currently meeting the payment obligations from proceeds of
capital raising activities and believes additional stock sales and revenue from
product sales will be sufficient to satisfy this obligation.
AHA Contract. ROF is under contract with the American Hereford Association
("AHA"), a non-profit organization, and has exclusive license to market CHB. As
of the reporting date the Company has not met the pro-rata volume commitment
necessary for the royalty liability; however, the Company has accrued an amount
representative of the pro-rata liability as of the reporting date. The 1998
obligation is for $725,000 of which $425,000 is due by August 31, 1998. The
Company believes that sufficient funds will be available to meet this obligation
from proceeds of stock sales and product sales revenue.
Capital Expenditures. 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. The Company does not currently have any other capital expenditures
commitments.
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
services through price increases 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.
6<PAGE>
RESULTS OF OPERATIONS
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. In addition, during the first quarter of 1998 the
Company was notified that their lenders were terminating their relationships
with the Company. 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. 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 condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Consolidated comparison for the three months ended March 31, 1998 and the three
months ended March 31, 1997.
Red Oak Hereford Farms, Inc.
The Company was formerly Wild Wings, Inc., and is the holding company,
owning 100% of ROF, Midland and Feeders. The Company, separate from its
subsidiaries, had operating expenses for the first three months of 1998 of
$194,358, consisting primarily of the costs of a public company and promotional
expenses, compared to similar expenses of $44,000 for the same period in 1997.
The following information consists of the consolidated results of operations of
the Company and its operating subsidiaries.
Net sales decreased to $16,499,033 in the first three months of 1998 from
$27,460,575 in the same period in 1997, a decrease of $10,961,542 or 39.9%.
This decrease is primarily from lower sales volume resulting from changes in CHB
customer and product mix and from fewer CHB cattle processed. Additionally,
negative returns in the cattle feeding business weakened demand for feeder
cattle resulting in fewer feeder cattle brokerage sales. Net sales also
decreased as the Company attempted to shift to a higher percentage of "branded
sales" versus "commodity sales", with the goal to reach profitability by selling
more CHB at branded prices. As the Company anticipates an increase in retail
customers during 1998, the number of cattle processed should increase, resulting
in an increase of branded sales.
Cost of goods sold decreased to $16,947,994 in the first three months of
1998 from $27,501,174 in the same period in 1997, a decrease of $10,553,180 or
38.4%. This decrease resulted from lower sales volume demand as the Company is
producing a perishable branded product and dealing with live cattle which for
the most part require production and processing that correlates with sales
demand.
7<PAGE>
Gross loss increased $408,362 from a loss of $40,599 for the first three
months of 1997, to a $448,961 loss for the first three months of 1998. The
increase in gross loss resulted from a decrease in gross margin due to reduced
selling prices relative to costs.
Selling, general and administrative expenses increased to $913,344 in the
first three months of 1998 from $610,069 in the same period in 1997, an increase
of $303,275 or 49.7%. This increase includes an increase in costs of a public
company, primarily personnel and personnel related expenses and increased
selling expenses to position the Company for future sales growth.
Losses from operations increased to $1,362,305 in the first three months of
1998 from $650,668 in the same period in 1997, an increase of $711,637 or
109.4%. The majority of this increase is due to decreased margins on sales and
an increase in selling and personnel related expenses.
Net other expense increased to $155,111 for the first three months of 1998
from $88,772 in the same period in 1997, an increase of $66,339 or 74.7%. This
increase is due to the equity expense in a partnership and an increase in
interest expense on borrowings.
As a result of the above, net loss for the first three months of 1998
increased to $1,517,416 from $739,440 in the same period in 1997. Net losses as
a percentage of net sales for the first three months of 1998 and 1997 were 9.2%
and 2.7%, respectively. The loss per share increased to $.11 from $.07.
Additional comparison for the three months ended March 31, 1998 and the three
months ended March 31, 1997 for the Company's subsidiaries.
Red Oak Farms
ROF is the processor and distributor of CHB beef products for Red Oak
Hereford Farms, Inc. For the three months ended March 31, 1998, ROF realized
net losses in the amount of $931,417, compared to $754,842 in net loss for the
same period in 1997. These losses as a percentage of net sales measured 14.53%
in 1998 versus 8.92% in the first three months of 1997. Management attributes
the increased net loss to decreased margins, increased costs of a public company
and to the current product mix, in which bulk beef sales continue to be the
dominant revenue source. During the first quarter of 1998, however, the company
made some advances in the retail sector for premium CHB by adding 4 new retail
stores. ROF is in various stages of business development with numerous new
retail prospects and it is anticipated that several of these potential buyers
will become customers of ROF.
8<PAGE>
Net sales in the first three months of 1998 were $6,408,515 compared to
$8,464,897 for the same period in 1997. These figures represent a sales
decrease of 24.29% which resulted from fewer cattle processed and changes in
customer's mix. ROF has been striving for a balance between branded versus
commodity sales with the goal to reach profitability by selling more CHB at
branded prices. During the first three months of 1997, ROF had a processing
agreement which required a minimum of 800 head a week to be slaughtered, and
therefore, product was forced to be sold at unprofitable commodity prices.
However, during the first three months of 1998, the new processing agreement
requires a minimum of 500 head per week which allows ROF to process less cattle
and increase its percentage of branded sales. As ROF anticipates an increase in
retail customers during 1998, the number of cattle processed should increase,
resulting in an increase of branded sales.
Cost of goods sold decreased in the first three months from $8,917,106 in
1997 to $6,814,546 in 1998, a decrease of 23.58%. This decrease resulted from
lower sales volume. The cost of goods sold includes $231,935 and $89,855 in
purchases from Midland for the three months ended March 31, 1998 and 1997,
respectively. These amounts have been eliminated from the accompanying
financial statements.
Selling, general and administrative expenses at ROF for the first three
months of 1998 was $475,174 compared to $253,959 for the same period in 1997.
This is an 87.28% increase from the first three months of 1997, and is a result
of increased costs of a public company, primarily personnel and personnel
related expenses and increased selling expenses.
During the first three months of 1998, ROF realized $51,850 in sales to
Korea. During the three month period ended March 31, 1997, ROF realized
$134,333 in sales to Korea. The Company attributes the decrease in Korean sales
to the decline in the Korean economy. The Company is also continuing to pursue
CHB export opportunities in China and Japan and anticipates additional sales in
the Asian market in 1998 in response to a sampling program the Company has
promoted in Asia.
Midland Cattle Company
Midland is engaged in cattle brokerage activities and facilitates the
identification of CHB producers and feeders and supplies cattle inventory for
ROF. For the three months ended March 31, 1998, Midland had a net loss in the
amount of $329,670, compared to a net income of $59,402 for the same period in
1997. This represents a decrease in earnings of $389,072. Management
attributes the first quarter loss in 1998 to a reduction in volume of cattle
brokered compared to the three months ended March 31, 1997. For the first three
months ended 1998, Midland's volume of cattle brokered decreased approximately
50%. In addition, fed cattle losses sustained by Midland were nearly $50,000
higher than a year ago. These factors combined were the primary contributors to
the loss incurred by Midland during the three months ended March 31, 1998.
Midland anticipates volume will expand as the CHB program continues to grow.
9<PAGE>
The decrease in volume for cattle revenue in the first quarter occurred
during perhaps the worst sustained cattle feeding losses ever witnessed in the
history of the cattle feeding business. As reported in a recent Feedstuffs, The
Weekly Newspaper for Agribusiness, the Livestock Marketing Information Center
reported that April close-outs (on fed cattle) lost $71.50 per head - the 12th
consecutive month of red ink. Numerous cattle feeders withheld feeder cattle
placements to avoid further equity losses during this time frame. The losses
are attributed to sharply lower USDA feeder cattle placements in each of these
two quarters with some months showing placements at approximately 15% to 20%
below last year's levels. Due to these circumstances and an environment where
cattle feeding customers were negative about placing cattle on feed, Midland
opted to decrease forward contracting of feeder cattle and consequently
contracted substantially fewer cattle than during the same period the previous
year. In addition, the losses sustained in cattle feeding by Midland were the
result of Midland's effort to support ROF's demand for CHB cattle supply.
For the three months ended March 31, 1998, Midland had net sales of
$10,322,453 versus $19,085,533 for the same period in 1997. This represents a
decrease of 45.91% from 1997 to 1998. Midland's net sales amounts include
$231,935 and $89,855 in sales to ROF for the three months ended March 31, 1998
and 1997, respectively. These amounts have been eliminated from the
accompanying financial statements. Midland has a wide customer base that is
continually expanding through networking and marketing efforts in anticipation
of continued growth of the CHB program.
As a result of the decreased volume in sales, Midland's cost of goods sold
for the first three months of 1998 decreased to $10,365,383 versus cost of goods
sold for the first three months of 1997 of $18,673,923. This represents a
decrease of 44.49% from first quarter 1997 to first quarter 1998.
Selling, general and administrative expenses at Midland for the first three
months of 1998 was $242,036 compared to $312,110 for the same period in 1997.
This represents a 22.45% decrease from the first three months of 1997 and is
primarily a result of decreased selling costs consistent with decreased sales
volumes for 1998.
Midland's operating history has been cyclical and management is optimistic
about its continued expertise as a procurement agency, as well as supplying a
large feeding club and supporting ROF's increase in customer and cattle demands.
Red Oak Feeders, LLC
Feeders has a 50% interest in a joint venture with MoorMan's (Quality
Feeders) and commenced operations in the latter part of December 1997. For the
three months ending March 31, 1998, Feeders' net loss was $62,484, of which
$46,351 resulted from operations of Feeders' share of the joint venture, $1,766
from operating expenses and $14,357 from interest expense.
10<PAGE>
PART II - OTHER INFORMATION
TEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(a) Securities Sold - Exchanges
<TABLE>
<CAPTION>
Date Title Price Per Unit Amount
-------------- -------- -------------- -------------
<S> <C> <C> <C>
March 14, 1997 Common Exchange 10,000,000*
</TABLE>
*Plus options to purchase an additional 3,000,000 common shares of the
Company.
<TABLE>
<CAPTION>
Date Title Price Per Unit Amount
-------------- --------- -------------- -------------
<S> <C> <C> <C>
May 19, 1997 Common Exchange 1,538,462
</TABLE>
(b) Underwriters and other purchasers
March 14, 1997 Exchange. The exchange was with the shareholders of Red Oak
Farms, Inc.
May 19, 1997 Exchange. The exchange was with the shareholders of Midland
Cattle Company.
(c) Consideration
March 14, 1997 Exchange. The Company exchanged 10,000,000 common shares of
the Company plus options to purchase an additional 3,000,000 common shares of
the Company for the total issued and outstanding shares of Red Oak Farms, Inc.,
an Iowa corporation.
May 19, 1997 Exchange. The Company exchanged 1,538,462 common shares of
the Company for all the issued and outstanding shares of Midland Cattle Company.
(d) Exemption from Registration Claimed
For both exchange transactions, the securities were exchanged pursuant to
Section 4(2) under the Securities Act of 1933, as amended.
11<PAGE>
(e) Terms of Conversion or Exercise
March 14, 1997 Exchange. Each option entitles the holder thereof to
purchase one Share during the five year period commencing March 17, 1997 as
follows; 1,000,000 of the Shares may be purchased at a price of $8.00 per Share;
1,000,000 of the Shares may be purchased at a price of $10.00 per Share; and
1,000,000 of the Shares may be purchased at a price of $12.00 per Share. No
option may be exercised unless such exercise is registered or an exemption from
registration exists.
(a) Securities Sold - Private Offerings
<TABLE>
<CAPTION>
Date Title Price Per Unit Amount
------------------------ --------- -------------- ---------------
<C> <C> <C> <C>
March through Sept. 1997 Common $3.00* 1,500,000
</TABLE>
*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.
<TABLE>
<C> <C> <C> <C>
January through March 1998 Common $4.00* 250,125
*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 $6.00 per share.
</TABLE>
(b) Underwriters and other purchasers
The securities were sold to accredited investors and to no more than 35
non-accredited investors.
(c) Consideration
The aggregate offering price for the March offering was $4,500,000 and a
total of $114,979 was paid in commission or finder's fees.
The aggregate offering price for the January offering is $3,360,000 of
which $1,000,500 has been realized through the sale of 250,125 Units. To date
a total of $92,950 has been paid in commissions for this offering.
(d) Exemption from Registration Claimed
The securities were sold pursuant to Regulation D, Rule 506 as promulgated
by the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
12<PAGE>
(e) Terms of Conversion or Exercise
March 1997 Offering. Each Warrant represents the right to purchase one
share of Common Stock at an initial exercise price of $5.00 per share. The
Warrants are exercisable during the period commencing upon the closing date
of the offering and ending three years from the date of the offering. Holders
of Warrants may exercise their Warrants for the purchase of shares of Common
Stock only if the purchase of such shares is exempt from federal registration
requirements and qualified for sale, or deemed to be exempt from qualification
under applicable state securities law. The Warrants are redeemable, in whole or
in part, at the option of the Company, upon not fewer than 60 days notice, at a
redemption price equal to $.10 per Warrant at any time the Common Stock of the
Company publicly trades at a bid price of $8.00 or above for a period of ten
consecutive trading days.
January 1998 Offering. Each Warrant represents the right to purchase one
share of Common Stock at an initial exercise price of $6.00 per share. The
Warrants are exercisable during the period commencing upon the closing date
of the offering and ending three years from the date of the offering.
Holders of Warrants may exercise their Warrants for the purchase of shares of
Common Stock only if the purchase of such shares is exempt from federal
registration requirements and qualified for sale, or deemed to be exempt from
qualification under applicable state securities law. The Warrants are
redeemable, in whole or in part, at the option of the Company, upon not
fewer than 60 days notice, at a redemption price equal to $.10 per Warrant at
any time the Common Stock of the Company publicly trades at a bid price of
$8.00 or above for a period of ten consecutive trading days.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
<TABLE>
<CAPTION>
Exhibit No. SEC Reference Title Location
----------- ------------- ------------------------ --------
<S> <C> <C> <C>
27 27 Financial Data Schedule Attached
</TABLE>
13<PAGE>
(b) On March 13, 1998, the Company filed a report on Form 8-K for Item 4.
Changes in Registrant's Certifying Accountant, identifying the Company
had retained BDO Seidman, LLP as its certifying accountant. No other
reports on Form 8-K were filed, or required to be filed, by the Company
during the period ended March 31, 1998.
14<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
May 15, 1998 By:_____________________________
Gordon Reisinger, President
May 15, 1998 By:_______________________________
Harley Dillard, Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
May 15, 1998 By: /s/ Gordon Reisinger
___________________________
Gordon Reisinger, President
May 15, 1998 By:/s/ Gordon Reisinger
_______________________________________
Harley Dillard, Chief Financial Officer
15<PAGE>
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
- --------------
Cash $ - $ 12,993
Accounts receivable
Trade, less allowance for doubtful
accounts of $10,000 3,064,921 2,920,939
Related parties 856,250 1,102,565
Inventories 1,135,659 989,190
Prepaid expenses and other assets 117,515 96,404
------------- -------------
Total current assets 5,174,345 5,122,091
PROPERTY AND EQUIPMENT, At cost
- -------------------------------
Buildings and leasehold improvements 292,574 292,574
Vehicles and equipment 285,636 237,878
------------- -------------
578,210 530,452
Less accumulated depreciation 239,440 224,088
------------- -------------
Net book value 338,770 306,364
------------- -------------
OTHER ASSETS
- ------------
Investment in partnership 653,649 500,000
Other assets 41,803 47,229
------------- -------------
Total other assets 695,452 547,229
------------- -------------
$ 6,208,567 $ 5,975,684
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-1<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
- -------------------
Revolving bank lines of credit $ 1,364,747 $ 1,270,294
Note payable - related party 246,326 -
Current maturities of long-term debt 1,173,529 1,029,015
Accounts payable
Trade 521,905 546,691
Related parties 306,046 54,528
Accrued expenses 288,866 100,380
Current maturities of deferred income 100,000 100,000
------------- -------------
Total current liabilities 4,001,419 3,100,908
------------- -------------
LONG-TERM LIABILITIES
- ---------------------
Deferred income 200,000 200,000
Long-term debt 934,935 971,694
------------- -------------
Total long-term liabilities 1,134,935 1,171,694
------------- -------------
Total liabilities 5,136,354 4,272,602
------------- -------------
STOCKHOLDERS' EQUITY
---------------------
Common stock, $.001 par value,
authorized 50,000,000 shares;
issued and outstanding 14,679,415
and 14,429,290 shares 14,681 14,430
Cumulative preferred stock,
$.001 par value, authorized 5,000,000
shares; issued and outstanding 200,000 shares 200 200
Additional paid-in capital 6,624,901 5,738,605
Retained earnings (deficit) (5,567,569) (4,050,153)
------------- -------------
Total stockholders' equity 1,072,213 1,703,082
------------- -------------
$ 6,208,567 $ 5,975,684
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-2<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
NET SALES
- ---------
Related parties $ 2,021,596 $ 1,228,622
Others 14,477,437 26,231,953
------------- -------------
16,499,033 27,460,575
------------- -------------
COST OF GOODS SOLD
- ------------------
Related parties 3,368,494 2,701,725
Others 13,579,500 24,799,449
------------- ------------
16,947,994 27,501,174
------------- ------------
GROSS PROFIT (LOSS) (448,961) (40,599)
OPERATING EXPENSES 913,344 610,069
LOSS FROM OPERATIONS (1,362,305) (650,668)
------------- ------------
OTHER INCOME (EXPENSE)
- ----------------------
Equity in partnership (46,351) -
Interest Income 605 235
Interest Expense (109,365) (89,007)
------------- ------------
(155,111) (88,772)
NET LOSS (1,517,416) (739,440)
PREFERRED STOCK DIVIDEND REQUIREMENT (43,050) -
------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(1,560,466) $(739,440)
BASIC AND DILUTED LOSS PER SHARE $(0.11) $(0.07)
WEIGHTED AVERAGE SHARES OUTSTANDING 14,433,469 10,960,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-3<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (1,517,416) $ (739,440)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 18,189 18,270
Equity in partnership 46,351
Changes in:
Accounts receivable 102,333 316,614
Inventories (146,469) (494,621)
Prepaid expenses (21,111) 7,783
Accounts payable and accrued expenses 415,218 (438,275)
------------ ------------
Net cash used in operating activities (1,102,905) (1,329,669)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchase of property and equipment (47,758) (2,912)
Change in other assets 2,589 2,572
Investment in partnership (200,000) -
------------ ------------
Net cash used in investing activities (245,169) (340)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from issuance of common stock 886,547 748,737
Net borrowings (payments) on line of credit 94,453 525,399
Proceeds on issuance of long-term debt 361,344 125,000
Payments on long-term debt (7,263) (4,378)
Distributions paid - (60,459)
------------ ------------
Net cash provided by financing activities 1,335,081 1,334,299
------------ ------------
INCREASE (DECREASE) IN CASH (12,993) 4,290
CASH, BEGINNING OF PERIOD 12,993 -
------------ ------------
CASH, END OF PERIOD $ - $ 4,290
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(Unaudited)
NOTE 1: NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
- ------------------------------------------------------------
The condensed consolidated financial statements do not include all
footnotes and certain financial information normally presented annually under
generally accepted accounting principles and, therefore, should be read in
conjunction with the Company's December 31, 1997 10-KSB. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results of operations for the three months ended March
31, 1998 and 1997 are not necessarily indicative of results that can be expected
for the full year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal accruals)
which, in the opinion of the Company, are necessary to present fairly its
consolidated financial position at March 31, 1998 and December 31, 1997, and its
consolidated results of operations and cash flows for the interim periods March
31, 1998 and 1997. The results of operations for the interim periods shown are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 1998.
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 ("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.
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Red Oak Farms, Inc. ("ROF"), Midland
and Red Oak Feeders, LCC ("Feeders"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles and 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. In addition, during the
first quarter of 1998 the Company was notified that their lenders were
terminating their relationships with the Company. 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. 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 condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
F-5<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(Unaudited)
NOTE 2: 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 ROF
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 three months ended March 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
--------------- ---------------
<S> <C> <C>
Sales $ 2,021,595 $ 1,228,622
Purchases 3,368,494 2,701,725
</TABLE>
Additionally, during the three months ended March 31, 1998 and 1997, ROF
purchased cattle from Midland in the amount of $231,935 and $89,855,
respectively. Such intercompany purchases are eliminated in consolidation.
The Company through its subsidiary, ROF, also has a note payable to a major
stockholder for $246,326 at March 31, 1998.
NOTE 3: INVENTORIES
- -------------------
Inventories at March 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Boxed beef $ 869,900 $ 639,411
Cattle 171,817 296,149
Other 93,942 53,630
-------------- --------------
$ 1,135,659 $ 989,190
============== ==============
</TABLE>
NOTE 4: DEBT
- ------------
On January 31, 1998, ROF'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. ROF entered into a bridge financing agreement with A&J Cheese
Company on February 26, 1998. The agreement provided borrowings up to
$15,000,000 and bore an interest rate of 12.97% with 30 days interest payable in
advance. The agreement was terminated on March 26, 1998 and ROF is in the
process of liquidating the loan.
On April 13, 1998, ROF entered into an agreement in principle with KBK
Capital Corporation ("KBK") to provide an asset based line of credit. The line
of credit will provide borrowings up to $2,500,000 for accounts receivable and
$1,500,000 for inventory, based on eligible assets. The line of credit is
collateralized by substantially all of the subsidiary's assets and personal
guarantees of the Company's President and Chairman. KBK began funding ROF on
April 24, 1998.
F-6
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(Unaudited)
NOTE 4: DEBT (Continued)
- ------------------------
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.
The line of credit was terminated and paid in April 1998. Midland is currently
negotiating new financing arrangements with other potential lenders.
NOTE 5: STOCKHOLDERS' EQUITY
- ----------------------------
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 31, 1998, the
Company has raised $1,000,500 through the sale of 250,125 units before deducting
offering expenses of $113,953.
F-7<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000939728
<NAME> RED OAK HEREFORD FARMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,931
<ALLOWANCES> 10
<INVENTORY> 1,136
<CURRENT-ASSETS> 5,174
<PP&E> 578
<DEPRECIATION> 239
<TOTAL-ASSETS> 6,209
<CURRENT-LIABILITIES> 4,001
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 1,057
<TOTAL-LIABILITY-AND-EQUITY> 6,209
<SALES> 16,499
<TOTAL-REVENUES> 16,499
<CGS> 16,948
<TOTAL-COSTS> 16,948
<OTHER-EXPENSES> 913
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> (1,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,517)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
