John L. Thomas, Esquire
18 Beth Drive
Moorestown, NJ 08057
856.234.0960 (Tel) 856.234.2098 (Fax)
October 4, 2000
U.S. Securities and Exchange Commission
450 Fifth St. N.W.
Washington, DC 20549
Re: Red Oak Hereford Farms, Inc. (Commission File No. 233-45550)
Dear Madam or Sir:
On behalf of my client, Red Oak Hereford Farms, Inc., enclosed please
find pre-effective amendment no. 1 to registration statement on Form S-1.
Any communications may be directed to the undersigned at the address
and telephone numbers set forth above.
Sincerely,
By: /s/ John L. Thomas
----------------------
John L. Thomas
<PAGE>
As filed with the Securities and Exchange Commission on October 4, 2000
Registration No. 333-45550
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
RED OAK HEREFORD FARMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 5147 84-1120614
------ ---- ----------
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classifi- Identification
cation Code Number) Number)
2010 Commerce Drive
Red Oak, Iowa 51566
712/623-9224
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Harley Dillard
Chief Financial Officer
Red Oak Hereford Farms, Inc.
2010 Commerce Drive
Red Oak, Iowa 51566
712/623-9224
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies of all communications to:
John L. Thomas, Esquire
18 Beth Drive
Moorestown, NJ 08057
856/234-0960
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box./ /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(
c ) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated October 4, 2000
2
<PAGE>
PROSPECTUS
16,714,653 shares of Common Stock
-------------------------------------
RED OAK HEREFORD FARMS, INC.
This is an offering of 16,714,653 shares of common stock of Red Oak
Hereford Farms, Inc., held by certain of the Company's Securityholders. Of the
16,714,653 shares being offered by the Selling Securityholders, 4,705,873 shares
are issuable upon exercise of Warrants owned by certain of the Selling
Securityholders, 2,940,000 shares are issuable upon exercise of stock options
offered by certain of the Selling Securityholders, and 9,068,780 shares are
issuable upon the conversion of preferred stock owned by certain of the Selling
Securityholders. The Company will not receive any proceeds from the sale of the
shares, but they will receive proceeds from the Selling Securityholders if they
exercise their Warrants and or options.
The Company's common stock is quoted on the OTC Bulletin Board under
the symbol "HERF". On September 15, 2000, the closing bid price per share of
common stock as reported by the OTC Bulletin Board was $2.19 per share.
This investment involves a high degree of risk. You should purchase
shares only if you can afford a complete loss of your investment. See "Risk
Factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is , 2000
3
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary............................................5-8
Risk Factors..................................................9-12
Forward-Looking Statements....................................12
Dividend Policy...............................................13
Price Range of Common Stock...................................13
Use of Proceeds...............................................14
Capitalization................................................14
Selected Consolidated Financial Data..........................15
Management's Discussion and Analysis of
Financial Condition and Results of Operations........17
Business......................................................42
Management....................................................49
Certain Relationships and Related Transactions................54
Principal.....................................................55
Description of Capital Stock..................................57
Shares Eligible for Future Sale...............................58
Selling Securityholders.......................................59
Legal Matters.................................................68
Experts.......................................................68
Additional Information........................................68
Index to Financial Statements.................................F-1
4
<PAGE>
ABOUT THE PROSPECTUS
Investors should rely only on the information contained in this
prospectus. Red Oak Hereford Farms has not authorized anyone to provide any
different or additional information. This prospectus is not an offer to sell or
a solicitation of an offer to buy the Company's common stock in any jurisdiction
where it is unlawful. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of common stock.
The Company has applied for a registered trademark for Red Oak Farms
and the oak tree logo. The Company has also applied for "Hot `N Chili," "Smokin'
Hickory," "Teriyaki Twist", "Give Your Taste Buds a Jerk," "and Peppered-Up" for
use with boxed jerky and beef sticks products and "Premium Hereford Beef." This
prospectus also includes trademarks and trade names of other parties.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus.
Red Oak Hereford Farms
Company Business
The Company procures, harvests and processes selected, qualified cattle
for sale as fresh branded beef. The Company further processes beef for its
precooked and beef jerky products. The Company sells to the Hotel, Restaurant,
Institutional Trade; Retail Supermarkets, Mass Retail and Club Stores and
Convenience Stores.
To procure, harvest, and process selected, qualified cattle for their
beef and related products for branded marketing/sale through 1) Hotel,
Restaurant, Institutional, 2) Retail Supermarket, Mass Retail, Club Store, 3)
Convenience Stores, 4) Direct sale through telephone order, 5) and supply for E
Commerce channels.
This enterprise is executed by the following: in-house staff,
subsidiaries, contracted cattle harvest professionals, and food manufacturers.
The sales process is conducted by a contracted, nationally recognized
organization for mass, club, and retail accounts and by contracted "sub broker"
for conventional retail supermarket accounts. In house-personnel also
participate in marketing, sales, service and product promotion activities.
Packaging, research development, delivery, and quality assurance are
also managed and monitored by in-house personnel in conjunction with USDA and
contract processor personnel.
All other functions including, but not limited to accounting, financial
management, SEC reporting, planning and other general administrative activities
are executed by in-house personnel, augmented where necessary, by outside
consulting professionals.
5
<PAGE>
The Company's Market Opportunity
--------------------------------
The food business, and particularly commodities like beef, has been
driven, in large part, by cost and selling price. Research shows that consumers
now seek and will pay more, for high quality, branded and convenient food
products. Several factors greatly enhance the Company's probability for success.
They include the following:
o The continuing strong economy.
o The resulting shift in consumer demographics toward an upscale gourmet food
product.
o A heightened consumer sensitivity to quality and consistency.
o The ever increasingly busy life styles of today's consumers.
o A gradual return of consumer predisposition for beef.
o The latest nutritional research, indicating the value of a high protein
diet, particularly among healthy, active people.
o The fastest growing population sector is the over 50 set, traditionally the
greatest consumers of beef.
The Company's opportunity, therefore, lies in fulfilling these consumer
preferences with all of their products through multiple channels of
distribution.
The Company Strategy
--------------------
The Company strategy is to build upon credibility and track record in
premium quality beef, which was established through the introduction and market
acceptance of Red Oak Farms' beef, with an array of convenient, premium, branded
beef products. Components of this strategy include:
o Distinguishing the Company's products from the commodity beef by using
consistently higher standards, innovative merchandising and strong package
design.
o Offering a product that excels in its convenience and is competitively
priced while yielding improved margins.
o Exerting maximum quality control of raw material procurement and processing
to assure a consistent quality consumer product line
o Building of product demand and brand equity, beginning in those markets
where the Company's products are presently available.
o Adopting a branded consumer product marketing approach; to free ourselves
from a "commodity" mindset and position the Company in the higher margin,
branded and consumer product arena.
o Eventual consumer advertising and brand promotion using events, team
sponsorship, as well as conventional advertising and promotion techniques
to expand and support demand and brand equity.
The Company is now implementing as much of this marketing strategy as
financial and other resources allow.
6
<PAGE>
The Offering
================================================================================
Common stock offered by the selling securityholders 16,714,653 shares
Common stock outstanding after this offering 32,733,818 shares
OTC Market symbol HERF
================================================================================
Additional Information
The Company was formed in 1989 and changed its name from Wild Wings,
Inc. to Red Oak Hereford Farms, Inc. in 1997, when the Company acquired both
cattle procurement and branded beef operations. The executive offices are
located at 2010 Commerce Drive, Red Oak, Iowa, 51566, and the telephone number
is (712) 623-9224. The Company maintains a site on the World Wide Web at
www.redoakfarms.com. The information found on the site, however, is not a part
of this prospectus and should not be relied upon when making a decision to
invest in the common stock.
Summary Consolidated Financial Information
The following summary of historical consolidated financial data has
been derived from the audited and unaudited consolidated financial statements
and is not necessarily indicative of future anticipated results of operations.
This financial data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the
consolidated, annual financial statements and notes thereto, as well as the
other information contained in this prospectus.
7
<PAGE>
Selected Consolidated Financial Information
Fiscal Year Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six Months
Ended
June 30, 2000 1999 1998 1997 1996 1995(1)
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Total net sales $29,690 $71,568 $68,762 $105,326 $123,421 $104,267
Total cost of goods sold 28,931 68,723 67,566 103,293 121,023 100,901
-------------- -------------- ------------- -------------- -------------- --------------
Gross Profit 759 2,845 1,196 2,033 2,398 3,366
Total operating expenses 3,044 5,345 5,912 6,251 4,947 3,433
Total other income (expenses) (426) (1,291) (1,963) (280) (359) (173)
Minority Interests (28) 168 104 - - -
-------------- -------------- ------------- -------------- -------------- --------------
Net loss $(2,739) $(3,622) $(6,576) $(4,498) $(2,908) $(240)
Preferred stock dividend (109) (10) (165) (17) - N/A
requirement -------------- -------------- ------------- -------------- -------------- --------------
Net loss applicable to common $(2,848) $(3,633) $(6,741) $(4,515) $(2,908) N/A
shareholders ============== ============== ============= ============== ============== ==============
Basic and diluted loss per
share $ (0.18) $(0.23) $(0.46) $(0.33) $(0.23) N/A
============== ============== ============= ============== ============== ==============
Weighted average shares
outstanding 16,019,783 15,538,631 14,719,092 13,618,705 12,498,462 N/A
</TABLE>
(1) 1995 Proforma Selected Consolidated Financial data was prepared from the
audited financial statements of Mid-Ag, a LLC and MCC, a partnership in
accordance with GAAP as if they had been a consolidated entity.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and other
information in this prospectus before making an investment decision. If any of
the following risks actually occur, the business, financial condition or results
of operations could be materially, adversely, affected. As a result, the trading
price of the common stock may decline, and you may lose all or part of your
investment.
Product Risks
-------------
Pricing benchmarks are tied to commodity market prices.
While the Company has some control over relationships with many of the
Company's cattle suppliers, the prices for raw material (cattle and beef) are
still tied to the "commodity" beef markets, which have experienced some
historical volatility.
There may be times when availability of the Company's breed specific cattle may
be limited.
The Company's fresh beef and precooked products are premium branded
beef items. As such, the Company only uses breed specific cattle, namely
Hereford or British based cattle. As the Company's sales volume increases and as
it adds more customers, the need to purchase more breed specific cattle will
increase.
The Company depends on a small group of contract manufacturers.
All of the products produced are under contract by other companies. The
Company, thus, competes for line time with other similarly situated companies
and there may be times when demands exceeds capacity. In addition, job actions
and other events, beyond the Company's control, may occur and interrupt product
flow.
Business Risks
The Company's growth depends on expanding its customer base.
The Company currently serves a limited number of customers. The Company
plans to greatly increase that number for all of the products. The success of
the expansion is very important because increased sales and achievement of the
Company's goal of becoming a national brand will give the required sales volume
necessary for long-term survival.
Limited job seniority of some of the Company's current management.
Some of the officers and senior managers have been with the Company for
only a short time. As a result, a comprehensive and focused business plan is
only now being implemented. The Company's inability in the past to hire and
retain managers who were experienced in start up and new process marketing sales
and distribution has hindered creation and launch of valve added products.
9
<PAGE>
The Company is relatively unproven to its target retail account base.
In today's retail environment, the larger accounts are cautious about
placing, a major program with an unproven supplier.
The Company is somewhat unknown to consumers and they may be reluctant to buy
their products.
The Company is not well known to consumers. As such, they may be
reluctant to buy its products. An extensive program to generate awareness and
initial trial may be required to overcome this unfamiliarity.
The Company competes with many others in the beef product markets.
The Company competes with beef producers that have far greater
resources and as it brings new successful products to market, the Company
expects other companies to do the same. Some of the Company's competitors, such
as American Angus Association's CAB program are established and well known.
Hormel and Harris Ranch, for example, already sell pre-cooked products, while
Jack Links and Oberto are well established in the beef jerky market. Should any
of these competitors, many of whom are large consumer food companies, decide to
challenge the Company directly, they may have considerably more resources to do
so.
The Company must effectively manage the growth.
In order to follow the Company's business plan, they must grow
significantly. This rate of growth will place a significant strain on personnel,
management systems and resources. To this end, the Company has recently hired a
Chief Operating Officer, Vice President of Fresh Beef Sales, and a contracted,
nationally recognized, sales force. These parties must become fully integrated
as a management team. Furthermore, to support this new team and planned growth,
the Company must continue to improve operational and financial systems,
managerial controls and procedures.
Financial Risks
History of Losses - The Company has a history of losses.
The Company has incurred continued losses since inception. As of
December 31, 1999, the Company has an accumulated deficit of approximately $14.3
million. The Company's net loss in 1999 was $3,622,334 and the Company expects,
at least in the near future, to show additional losses. The Company however,
hopes to be profitable by the end of the fourth quarter, 2000. Their ability to
become profitable is dependent upon several factors, specifically, obtaining
outside funding and a significant increase in sales. If they are not able to
obtain this funding in a timely manner and, concurrently, increase sales, losses
will continue.
10
<PAGE>
The Company will need more outside funding for growth.
In order to continue growth the Company needs additional outside
funding. The Company must purchase more cattle to meet increased sales before
sales force can accept orders from large customers because the Company must have
product sufficient to meet those orders. In addition, the Company must continue
to supply existing customers. To do all this the Company needs additional
outside funding, as it cannot fund growth from current revenues.
Risks Related to the Industry
-----------------------------
Contamination of beef products.
Beef products are susceptible to various forms of contamination. E-coli
and Listeria Monocytogenes are two well-known varieties. Company products can be
contaminated at the packing plant or contract processor or at retail. Likewise,
another beef producer could have a widely publicized contamination problem. The
fall-out from such an incident might well temporarily depress demand for beef
products in general.
The Company products are perishable.
The Company's fresh beef and pre-cooked beef products are highly
perishable and lose direct control of their handling and storage once they are
placed in distribution. It is possible that somewhere in that system products
could be mishandled. Any incident of the Company's product being contaminated or
spoiled could harm growth plans.
Risks Related to the Offering
-----------------------------
The Company stock price has been volatile.
The Company's stock has traded as high as $7.81 and as low as $0.68. It
began trading in March 1997 at $2.00 per share. The market price for the Company
stock may continue to be volatile, both because of performance and conditions in
the economy or the financial markets.
One possible reason for the volatility of the Company stock may well be
that there are as yet, relatively few shares in the hands of the public, making
its stock a relatively illiquid investment. The Company cannot guarantee that
the additional number of outstanding shares that may result from this offering
will significantly ease this illiquidity. The Company cannot predict how many
shares will actually be sold by the Selling Securityholders.
The Company does not plan to pay dividends in the foreseeable future.
As a result, stockholders will need to sell shares to realize a return on their
investment.
The Company has never declared or paid cash dividends on its common
stock and intends to retain future earnings to finance operation and expansion
of the business. Thus, the Company does not anticipate paying cash dividends in
the foreseeable future. Therefore, you will need to sell your shares of common
stock in order to realize a return on your investment and you may not be able to
sell those shares at or above the price you paid for them.
11
<PAGE>
There is only a limited market for the Company stock and the Company cannot
assure a more significant market will develop.
The Company securities are currently not listed on any exchange or the
NASDAQ. Rather, the common stock is traded on the OTC Bulletin Board under the
symbol "HERF". As a result, an investor may find it more difficult to dispose of
or to obtain accurate quotations as to the market value of the Company's common
stock.
The Company common stock is subject to "penny stock" trading requirements.
The Company's common stock is subject to the "penny stock" regulations
which impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors. Consequently, the ability of broker-dealers to sell the Company
common stock to prospective purchasers and your ability to sell your common
stock in the secondary market may be limited.
Shares Eligible for Future Sale - If the Company's current stockholders sell
significant amounts of additional shares of the Company's common stock, the
Company's stock price may decline.
The market price of the Company common stock could decline, as a result
of sales of a large number of shares in the market after this offering, or the
perception that such sales could occur. Approximately 12,788,731 shares of
common stock that are currently outstanding, will not be sold in the offering,
but are eligible for sale without registration pursuant to Rule 144 under the
Securities Act.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere. These
forward-looking statements include statements about the following:
o implementing business strategy
o managing growth
o employee costs
o business and growth strategies
o other statements that are not historical facts
When used in this prospectus, the words "anticipate," "believe,"
"estimate," "expect," "seek," "intend," "may" and similar expressions are
generally intended to identify forward-looking statements. There are important
factors, detailed in the "Risk Factors" section that could cause actual results
to differ materially from those expressed or implied by such forward-looking
statements including:
o The risk that the Company will be unable to obtain sufficient funding.
o The risk that the Company will be unable to implement its business
strategy.
o The risk that the Company will be unable to manage its growth.
12
<PAGE>
DIVIDEND POLICY
The Company has not paid cash dividends on its common stock. The
Company does not currently anticipate paying cash dividends, as the Company
currently intends to retain future earnings to fund the development and growth
of its business. Future decisions regarding cash dividends on its common stock
will be made in a timely manner by the Board of Directors. These decisions will
depend on results of operations, financial position, capital requirements,
general business conditions and restrictions imposed by any financing
arrangements.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed on the Over-The-Counter Bulletin
Board under the symbol "HERF," and began trading in March 1997. The published
bid and ask quotations for the previous two fiscal years are detailed 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.
<TABLE>
<CAPTION>
Bid Prices Ask Prices
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal Year 1998
First Quarter 7.8125 4.59375 8.125 4.75
Second Quarter 6.25 3.00 6.375 3.0625
Third Quarter 4.125 1.3125 4.375 1.50
Fourth Quarter 1.7812 .6875 1.875 .8125
Fiscal Year 1999
First Quarter 2.50 .9375 2.625 1.125
Second Quarter 1.50 1.062 1.625 1.325
Third Quarter 1.46 .968 1.59 1.03
Fourth Quarter 2.125 1.25 2.25 1.3125
Fiscal Year 2000
First Quarter 2.50 1.31 2.68 1.375
Second Quarter 2.25 1.62 2.56 1.75
Third Quarter (through September 15) 2.31 1.84 2.50 1.94
</TABLE>
The foregoing figures were furnished to the Company by the National
Quotation Bureau, 1 Penn Plaza, 15th Floor, New York, New York 10001.
On September 15, 2000, the last reported sale price for the Company's
common stock was $2.19 per share. As of August 28, 2000, there were
approximately 298 holders of record of the common stock.
13
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale of the Shares by the
Selling Securityholders. The Company will receive net proceeds of approximately
$40,578,410 if all Options and Warrants are exercised. Many of the Options and
Warrants have exercise prices in excess of the current market price for the
Company's Common Stock.
The Company currently intends to use the proceeds, assuming all
Warrants and Options are exercised, for the purpose set forth below:
Use Amount
--- ------
New Product Development $ 8,164,000
Marketing Programs-all products & brand 8,164,000
Product Procurement 16,088,410
New Fresh Beef Program Development 4,081,000
Working Capital 4,081,000
The foregoing represents the Company's best estimate of the allocation
of the proceeds of the offering based upon the present state of business,
operations, plans, and current business conditions. Accordingly, the Company
will have broad discretion to determine the use of a substantial portion of the
proceeds from this offering. Conditions may develop that could cause the Company
to reallocate proceeds from the categories listed above.
Pending the above uses, the Company will invest the net proceeds in
government securities and other short-term, investment-grade, interest-bearing
instruments.
CAPITALIZATION
The following table sets forth the Company's total capitalization as of June 30,
2000.
<TABLE>
<CAPTION>
(Unaudited)
-----------
<S> <C>
Current maturities of long-term debt $ 516,518
Long-term debt less current maturities 3,173,464
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, authorized 100,000,000 shares;
issued and outstanding 16,012,915 shares 16,013
Cummulative preferred stock series B, $0.001 par value, authorized,
issued and outstanding 1,200,000 shares 1,200
Preferred stock, series C $0.001 par value, authorized
2,000,000 shares; issued and outstanding 370,956 shares 371
Preferred stock, series D $0.001 par value, authorized
1,000,000 shares; to be issued 2,500 shares for June 30,2000 3
Additional paid-in-capital 16,214,651
Retained deficit (17,225,367)
----------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (993,129)
----------------------
TOTAL CAPITALIZATION $ 2,696,853
======================
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for each of the years in
the three-year period ended December 31, 1999, 1998 and 1997 and unaudited
consolidated statements for the six months ended June 30, 2000 are derived from
the consolidated financial statements which are included elsewhere in this
prospectus. The consolidated statement of operations data for each of the years
in the two-year period ended December 31, 1996 and 1995, and the balance sheet
data as of December 31, 1997, 1996 and 1995 have been derived from the audited
financial statements which are not included in this prospectus. The historical
results are not necessarily indicative of results to be expected for any future
period. The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and the notes
thereto.
15
<PAGE>
Selected Consolidated Financial Data
Years Ended December 31,
<TABLE>
<CAPTION>
(Unaudited)
Six months ended Proforma
June 30, 2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET SALES
Boxed Beef $ 19,551,250 $ 45,614,347 $ 36,545,948 $ 31,984,251 $ 60,366,258
Cattle Trading 9,188,357 22,169,023 28,016,784 60,249,120 51,499,264
Cattle Trading sales -Related Parties 950,150 3,784,429 4,199,028 13,092,322 11,555,199
------------- ------------- ------------- ------------- -------------
TOTAL NET SALES 29,689,757 71,567,799 68,761,760 105,325,693 123,420,721
------------- ------------- ------------- ------------- -------------
COST OF GOODS SOLD
Cattle Purchased for processing 10,066,287 19,307,758 17,601,849 24,942,513 43,541,034
Cattle Purchased for processing-RP 4,736,778 17,980,350 14,698,225 5,036,217 10,358,549
Cattle Purchased for trading 9,685,204 24,503,449 30,299,854 66,707,330 56,145,582
Cattle Purchased for trading from-RP 48,070 27,395 1,176,782 3,555,699 3,740,716
Other Processing Costs 4,321,902 6,402,533 3,569,205 2,628,937 6,690,335
Other Trading Costs 72,761 163,458 220,372 422,156 546,637
Loss on expired inventory 0 337,663 -- -- --
------------- ------------- ------------- ------------- -------------
TOTAL COST OF GOODS SOLD 28,931,002 68,722,606 67,566,287 103,292,852 121,022,853
------------- ------------- ------------- ------------- -------------
GROSS PROFIT 758,755 2,845,193 1,195,473 2,032,841 2,397,868
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling & Distribution 1,417,829 2,891,880 3,075,737 3,414,137 3,599,957
General and Administrative 1,626,123 2,453,065 2,836,510 2,836,508 1,346,957
------------- ------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 3,043,952 5,344,945 5,912,247 6,250,645 4,946,914
------------- ------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (2,285,197) (2,499,752) (4,716,774) (4,217,804) (2,549,046)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest Income 9,750 18,812 9,395 63,062 --
Interest Expense (366,065) (1,007,884) (432,271) (343,404) (358,881)
Loss on Sale of A/R (70,216) (233,079) (154,367) -- --
Loss from cattle feeding joint venture - (68,398) (1,386,247) -- --
------------- ------------- ------------- ------------- -------------
(426,531) (1,290,549) (1,963,490) (280,342) (358,881)
------------- ------------- ------------- ------------- -------------
Loss Before Minority Interests (2,711,728) (3,790,301) (6,680,264) (4,498,146) (2,907,927)
Minority Interest (27,507) 167,967 103,822 -- --
------------- ------------- ------------- ------------- -------------
Net Loss (2,739,235) $ (3,622,334) $ (6,576,442) $ (4,498,146) $ (2,907,927)
Preferred Stock Dividend Required (109,097) (10,234) (164,649) (17,010) --
------------- ------------- ------------- ------------- -------------
Net Loss applicable to Common
Stockholders $ (2,848,322) $ (3,632,568) $ (6,741,091) $ (4,515,156) $ (2,907,927)
============= ============= ============= ============= =============
Basic and Diluted Loss Per Share $ (0.1778) $ (0.2338) $ (0.4580) $ (0.3315) $ (0.2327)
============= ============= ============= ============= =============
Weighted Ave Shares Outstanding 16,019,783 15,538,631 14,719,092 13,618,705 12,498,462
============= ============= ============= ============= =============
</TABLE>
16
<PAGE>
Selected Consolidated Financial Data
Years Ended December 31,
(continued)
1995(1)
-------------
NET SALES
Boxed Beef $ 34,278,255
Cattle Trading 56,688,296
Cattle Trading sales -Related Parties 13,300,000
-------------
TOTAL NET SALES 104,266,551
-------------
COST OF GOODS SOLD
Cattle Purchased for processing 18,165,431
Cattle Purchased for processing-RP 8665,843
Cattle Purchased for trading 67,994,217
Cattle Purchased for trading from-RP 214,000
Other Processing Costs 3,999,473
Other Trading Costs 1,861,710
Loss on expired inventory --
-------------
TOTAL COST OF GOODS SOLD 100,900,674
-------------
GROSS PROFIT 3,365,877
-------------
OPERATING EXPENSES
Selling & Distribution 2,239,298
General and Administrative 1,193,717
-------------
TOTAL OPERATING EXPENSES 3,433,015
-------------
LOSS FROM OPERATIONS (67,138)
-------------
OTHER INCOME (EXPENSES)
Interest Income 3,574
Interest Expense (176,800)
Loss on Sale of A/R --
Loss from cattle feeding joint venture --
-------------
(173,226)
-------------
Loss Before Minority Interests (240,364)
Minority Interest --
-------------
Net Loss $ (240,364)
Preferred Stock Dividend Required N/A
-------------
Net Loss applicable to Common N/A
=============
Basic and Diluted Loss Per Share N/A
=============
Weighted Ave Shares Outstanding N/A
=============
16A
<PAGE>
Year Ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six months ended
June 30, 2000 1999 1998 1997 1996 1995(1)
------------- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and Restricted Cash $ 494 $ 432 $ 225 $ 13 $ - $ -
Working Capital (Deficit) 1,490 (1,742) (2,646) 2,021 1,303 2,057
Total Assets 7,857 6,057 2,971 5,976 5,989 6,573
Current Liabilities 5,484 6,990 4,938 3,101 4,321 4,165
Long-term debt, net of current portion 3,373 2,671 1,364 1,172 778 100
Minority Interest (7) (223) (104) - - -
Total Stockholders' Equity (Deficit) $ (993) $(3,381) $(3,227) $ 1,703 $ 891 $ 2,309
</TABLE>
(1) 1995 Proforma Selected Consolidated Financial data was prepared from the
audited financial statements of Mid-Ag, a LLC and MCC, a partnership in
accordance with Generally Accepted Accounting Principles as if they had been a
consolidated entity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected
Consolidated Financial Data," consolidated financial statements and the notes to
those financial statements included elsewhere in this prospectus. In addition to
historical information, this discussion contains forward-looking information
that involves risks and uncertainties including, without limitation, the
uncertainties concerning the Company's ability to continue to raise capital
sufficient for the execution of its business plan, the risk of changing market
conditions with regard to livestock supplies and demand for products of Red Oak
Hereford Farms, Inc. (the "Company"), the domestic and international regulatory,
competitive and growth risks, and other risks discussed under the "Risk Factors
Section," and elsewhere in this prospectus that may cause the Company's actual
results to differ materially from management's expectations. Moreover, past
financial performance should not be considered a reliable indicator of future
performance.
Fiscal years ended December 31, 1999 and 1998
Liquidity and Capital Resources
As of December 31, the Company had consolidated cash and cash
equivalents balance of $17,067, $16,079, and $12,993 for 1999, 1998, and 1997,
respectively.
Liquidity and Capital Resources Data:
Fiscal Years Ended December 31, 1999, 1998, and 1997
----------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) $(1,742) (34)% $ (2,646) (231)% $2,021
Increase in Cash 1 (68)% 3 (76)% 13
Cash Beginning of Period 16 24% 13 - -
Cash End of Period 17 6% 16 24% 13
Stock and Additional Paid-In Capital $10,916 48% $ 7,400 29% $5,753
</TABLE>
17
<PAGE>
The Company requires additional cash to meet operational requirements
on an ongoing basis. Their sources of cash include issuance of Common and
Preferred Stock, sales of accounts receivable, borrowings on asset-based lines
of credit, issuance of private debt, and equipment leases. Management has
plans, including selling securities in private placements, and continuing the
issuance of debt to affiliated parties, to provide this cash until positive cash
flows can be achieved. Management believes that with this cash, the Company can
move into profitability through several planned steps.
o Regaining lost volume and increase volume and sales in Red Oak beef and
other products.
o Continuing to implement pricing changes in both branded and commodity boxed
beef.
o Growing sales of Red Oak Farms' Precooked products.
o Continuing to reduce the percentage of product sold into the commodity beef
trade.
o Continuing to monitor and improve gross margins.
o Securing the customers presently identified necessary to increase volume to
a profitable level.
o Continuing to bring on higher margin products, such as beef jerky and other
gourmet products, to increase the overall gross margins.
Management believes that the Company requires a minimum of $5,000,000
to launch the precooked, jerky, and other products. Additional capital and
asset-based lending will be required as these new product lines are expanded and
the related sales base continues to grow. Although the Company continues to
receive capital, there are no assurances that they will receive the necessary
funding to accomplish the successful maintenance and growth of the sales base.
The Company continues to invest in premium branded beef product
development and other quality synergistic products. The Company requires
additional resources to move to the next stage of development. Cash resources
will be critical to its success.
Cash Flows from Operating Activities. The cash flows from operating
activities required cash of $3,983,000, $206,000, and $5,522,000 in fiscal 1999,
1998, and 1997, respectively. Operating losses resulted primarily from the
following six factors:
o Pricing concessions are used in new retail supermarket customer recruitment
including discounts to full branded price and provision of feature items.
o Maintaining inventories adequate to supply existing and new customers is
essential as the Company attempts to continue expanding its customer base
and product demand to levels, which will cover operating expenses.
o Although significant improvement in the percentage of branded versus
commodity sales was achieved by late 1999, losses were generated by
commodity sales of product produced by cattle harvested to fulfill customer
demand for less than all of the various cuts from each animal.
18
<PAGE>
o In late 1999, loss of significant customers, because of the initiation of a
competing Certified Hereford Beef ("CHB") program by a former strategic
ally of the Company, had a negative influence on otherwise improved margins
and related cash flow. Management is developing a defensive posture to
minimize the impact of losing a significant customer as the Company
continues to focus on the expansion of the selective customer base.
o The continued development of Beef Jerky during 1999 required additional
resources to market and distribute the Company'sr new consumer snack
products. Unsuccessful sales attempts required absorbing not only
production and development costs during 1999, but also a significant
writedown of expired inventory. This product line contributed $ 838,000 to
the 1999 operating losses. However, through restructuring this product line
and additional capital support, they plan another rollout during 2000.
o Losses have been incurred from implementing the Company's strategy of
realigning its customers into an efficiently served customer base,
including both retail supermarkets and food service market channels. A
significant shift in retail supermarkets to branded premium pricing
continues to reflect opportunity for favorable results. The Company
continue to expand the development and marketing of value-added consumer
beef products.
Increases in depreciation and amortization, services for Common Stock,
loss from partnership, loss on disposal of assets, increases in checks in excess
of bank balances, and issuance of Preferred Stock provided cash to absorb the
majority of the operational losses for 1999.
At December 31, 1999, accounts receivable was $1.6 million compared to
$1.0 million in 1998, primarily as a result of an increase in sales. During
1998, the Company entered into an agreement whereby selected account receivables
are sold without recourse to a factor. The immediate sale of receivables to the
factor contributed to the significant decrease in accounts receivables during
1998. All receivables are not sold to the factor, contributing to the increase
in receivables for 1999. See Note 5 of Notes to Consolidated Financial
Statements.
Selected Cash Flow Data:
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(3,622) (45)% $(6,576) 46% $(4,498)
Adjustments to reconcile cash used
in operating activities:
Depreciation & Amortization 122 (7)% 130 39% 94
Services for Common Stock 26 (95)% 472 281% 124
Loss from Partnership 16 (98)% 659 -- --
Minority Interest in Subsidiaries (168) 62% (104) -- --
Loss on Disposal of Assets 2 -- -- -- --
Change in:
Accounts Receivable (755) (125)% 2,983 534% 471
Inventories (2,223) (3,288)% 70 119% 32
Prepaid Expenses 37 (459)% (10) (190)% 11
Checks in Excess of Bank Balances 139 (205)% (132) (90)% (1,301)
Accounts Payable and Accrued
Expenses 2,445 6% 2,303 (608)% (454)
------- ------- ------- ------- -------
Net Cash Used in Operating Activities $(3,983) (1,834)% $ (206) (96)% $(5,522)
</TABLE>
19
<PAGE>
Cash Flows from Investing Activities. Investing activities required
cash of $283,000, $769,000, and $581,000 in fiscal 1999, 1998, and 1997,
respectively. In fiscal 1999, the Company used cash to acquire assets, to
purchase intangible assets, and to reserve funds for compliance with the
"Packers and Stockyards Act".
Selected Cash Flow Data:
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
--------------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash Flows from Investing Activities:
Proceeds from sale of property -- (100)% $ 17 -- --
Purchases of PP&E (82) 31% (62) (13)% (71)
Purchase of Intangible Assets (8) (97)% (250) -- --
Restricted Cash (207) (1)% (209) -- --
Changes in Other Assets 13 (119)% (65) 560% (10)
Investment in Partnership -- (100)% (200) (60)% (500)
--------------- ----------- ------------ ---------- -----------
Net Cash Used in Investing Activities $ (283) (63)% $ (769) 32% $ (581)
</TABLE>
Cash Flows from Financing Activities. Financing activities provided
cash of $4,267,000, $978,000, and $6,116,000 in fiscal 1999, 1998, and 1997
respectively. Cash from financing activities in fiscal 1999 was derived from
borrowing on the line of credit and proceeds from the issuance of notes payable
to affiliates. Also, a private placement offering, as of December 31, 1999, has
raised in the aggregate $3,491,000. See Consolidated Statements of Changes in
Stockholders Equity in Financial Statements and Consolidated Statements of Cash
Flows.
The Company continues to receive an asset-based line of credit, which
provides borrowings up to $1.5 million based on eligible inventory.
Substantially all of a subsidiary's assets and personal guarantees of the
Company's President and a Director collateralize the line of credit. The Company
is in technical non-compliance on certain financial conditions on this loan.
However, the lender has given no indication of intention to call this
obligation. See Note 7, paragraph A of Notes to Consolidated Financial
Statements.
During 1998, a major stockholder provided $410,000 through notes
payable to the Company. During 1999, another stockholder provided $1,000,000
through a revolving line of credit. See Note 7, paragraphs B & C of Notes to
Consolidated Financial Statements. Additionally, affiliates are continuing to
extend credit to ROF.
The Company entered into a settlement agreement to restructure its
outstanding indebtedness to a creditor. See Note 7, paragraph E of Notes to
Consolidated Financial Statements.
Equipment lease financing, issuance of a long-term note payable for
investment in product development, and issuance of long-term notes for cattle
procurement provided funding resources for the continued growth and development
of premium branded beef products.
20
<PAGE>
The Company continues to develop financing through the issuance of
equity, sale of accounts receivables, and the expansion of asset-based debt.
Capital formation is critical to operations and continued growth and development
of premium branded beef products. Capital is also critical to the marketing and
distribution of other quality synergistic products under development. Additional
revolving credit will be required as they continue to grow the customer revenue
and related inventory requirements.
Selected Cash Flow Data:
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash Flows from Financing Activities:
Net Proceeds from Issuance of Common Stock $ -- (100)% $ 1,175 (78)% $ 5,278
Net Proceeds from Issuance of Preferred Stock 3,491 -- -- -- --
Net Borrowing on Line of Credit 175 (121)% (830) (296)% 424
Proceeds from Issuance of Notes Payable 1,000 52% 656 -- --
Repayment of Notes Payable -- (100)% (246) -- --
Proceeds from Long-Term Debt 19 (95)% 350 (33)% 525
Payments on Long-Term Debt (418) 231% (126) 546% (20)
Purchases of Treasury Stock -- -- -- (100)% (31)
Distributions Paid -- -- -- (100)% (60)
------- ------- ------- ------- -------
Net Cash Provided by Financing Activities $ 4,267 336% $ 978 (84)% $ 6,116
</TABLE>
Market Risk
The Company is exposed to the impact of changes in interest rates,
foreign exchange rates, and commodity prices. The Company manages such exposures
through the use of fixed-rate, contracts when deemed prudent.
Current financing is predominately fixed or related to United States
prime interest rates. As their performance improves, the risk premium paid above
prime on asset based lending will be negotiated to lower levels. Conversely,
continued losses will continue the risk premium.
All exported products are currently sold in United States dollars to
United States trading companies for export. As the Asian economies continue to
improve during 2000, the Company anticipates improved sales demand from Asia.
Red Oak Hereford Farms, Inc. previously entered the marketplace through
the marketing distribution, and promotion of Red Oak Farms' Certified Hereford
Beef ("CHB"), the CHB name, logo and program for which were created by and are
the property of the American Hereford Association ("AHA"). In the fourth quarter
of 1999, the AHA engaged in unacceptable competitive action, and the Company
experienced erosion of its customer base as a result. Red Oak responded by
executing a plan to increase its own brand equity by instituting a proprietary
United States Department of Agriculture (USDA)-certified program-Red Oak Farms
Premium Hereford Beef-for its fresh boxed beef product, changing the name under
which the product is sold to "Red Oak Farms Premium Hereford Beef-for its fresh
boxed beef product. The Red Oak Farms retail label is the outgrowth of this
program.
21
<PAGE>
As the Company continues to nurture a selective and strategic customer
base, the Company needs to maintain a defensive position for the potential loss
of any key customer(s) from competition in the marketplace. The decision to move
away from the CHB program with their own branded product, Premium Hereford Beef,
creates a competitive opportunity for those distributors and packers who may
choose to participate in the Certified Hereford program. As they grow the sales
base of their own branded product, the risk of a competitor's using the PHB
brand is lessened.
In the development of added-value branded consumer products, the
Company must invest significant management and capital resources for successful
supply chain development and management. These rollouts also require marketing
and distribution support essential to successful improvement in related product
margins. This process will require additional capital and asset-based lending.
There is risk that the Company may not receive sufficient funding for these
product developments.
Hereford cattle purchased by Midland and ROF for further marketing,
processing, and distribution is exposed to the impact of changing commodity
prices. Commodity risk is present at various levels of their business cycle
including procurement, production, processing, and distribution of the beef
products. The procurement of yearlings and calves, reselling of the qualified
animals to feeders, purchasing of the fat cattle for processing, the related
dressed cattle on the rail and related by-products, the fabricated boxed
primals, and several of the subsequent value-added consumer products are all
affected by commodity market risk.
The Company uses hedging and contract purchases for cattle to minimize
market risk and to ensure that adequate supply of qualified Hereford cattle is
available to meet the current and growing sales demand.
The Company pays a market premium to the feeder for producing qualified
cattle that comply with certain genetic, diet, weight parameters, and certain
grading specifications. This premium above market generates market risk, as this
additional cost must be passed on to the distributor and ultimately the consumer
for this premium branded consumer product. While developing brand equity,
consumer demand, and consumer loyalty, they have been investing in market
penetration through pricing, which provides lower than preferred margins.
Results of Operations
Comparison of the years ended December 31, for the fiscal years ended 1999,
1998, and 1997.
Revenues-Net Sales
Net Sales. The Company generated net sales of $71.6 million, $68.8
million, and $105.3 million for the fiscal years ended 1999, 1998, and 1997,
respectively. Net sales increased 4% from 1998 to 1999 and decreased 35% from
1997 to 1998. The 1998 decreases were primarily attributable to lower volume and
market prices in cattle trading operations. During 1999, the increase in net
sales resulted from increases in the volume of boxed beef sales and an
improvement in related branded beef margins.
22
<PAGE>
Net sales of branded beef products increased to 64% of net sales for
1999 from 53% for 1998. The Company continued to focus on growth in volume
during 1999 through increases in the customer base. Emphasis is placed on growth
of branded beef product sales while continuing efforts to integrate value-added
products with significantly higher gross margins. However, the Company lost
customers to pricing concessions from a competitor, reflecting the marketing and
distribution risk in the marketplace. The loss of these customers diluted the
momentum that they were achieving in the fourth quarter through improved margins
and volume, slowing the otherwise improved performance.
Cattle trading net sales decreased to 36% of net sales for 1999 from
47% for 1998. Midland has been refocused to have responsibility for developing
the supply of qualified Hereford cattle. Volume in 1999 was reduced due to a
reduction of non-program cattle business. The gross revenue Management generated
by trading is substantial but the small margins available have led the Company
to refocus some of Midland's personnel and activities by moving them into ROF to
assist with the procurement function. Midland will continue to place cattle in
ROF's supply channel and engage in some non-ROF cattle trade.
Cattle trading-Related Party decreased an additional 10% in 1999 from
1998, as compared to a reduction of 68% from 1997. This is a continuation of the
Company's strategy to refocus the core business to marketing and distributing of
branded Premium Hereford Beef and synergistic added value products.
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales:
Boxed beef $ 45,614 25% $ 36,546 14% $ 31,984
Percentage of sales 64% 53% 31%
Cattle Trading 22,169 (21)% 28,017 (54)% 60,249
Percentage of sales 31% 41% 58%
Cattle Trading Sales-Related Parties 3,784 (10)% 4,199 (68)% 13,092
Percentage of sales 5% 6% 13%
-------- -------- -------- -------- --------
Total Net Sales $ 71,568 4% $ 68,762 (35)% $105,326
Percentage of sales 100% 100% 100%
</TABLE>
23
<PAGE>
Operating Expenses
------------------
Cost of Goods Sold. The Company generated cost of goods sold of $68.7
million, $67.6 million, and $103.3 million for the fiscal years ended 1999,
1998, and 1997, respectively. The 1998 decreases are attributable to lower
volume and market prices in cattle trading operations. Cost of Goods Sold as a
percentage of sales was constant for 1998 and 1997. The 1999 decrease resulted
from improved gross margins in boxed beef and cattle trading. In the development
and rollout of the beef jerky products, the Company absorbed an expired
inventory from under-performing sales commitments, resulting in an inventory
writedown of $338,000, decreasing improvement in gross margin of boxed beef.
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cost of Goods Sold:
Cattle Purchased for Processing $ 19,308 10% $ 17,602 (29)% $ 24,943
Percentage of sales 27% -- 26% -- 24%
Cattle Purchased for Processing-RP 17,980 22% 14,698 192% 5,036
Percentage of sales 25% -- 21% -- 5%
Cattle Purchased for Trading 24,503 (19)% 30,300 (55)% 66,707
Percentage of sales 34% -- 44% -- 63%
Cattle Purchased for Trading -RP 27 (98)% 1,177 67% 3,556
Percentage of sales 0.04% -- 2% -- 3%
Other Processing Costs 6,403 79% 3,569 36% 2,629
Percentage of sales 9% -- 5% -- 2%
Other Trading Costs 163 (26)% 220 (48)% 422
Percentage of sales 0.23% -- 0.32% -- 0.4%
Other-expired inventory 338 -- -- -- --
Percentage of sales 0.47% -- -- -- --
-------- -------- -------- -------- --------
Total Cost of Goods Sold $ 68,723 2% $ 67,566 (35)% $103,293
Percentage of sales 96% -- 98% -- 98%
Note: RP equals Related Parties
</TABLE>
Cattle purchased for processing, including processing costs for boxed
beef increased to 61% of revenues for 1999 compared to 52% of revenues for 1998
reflecting the continuing shift from cattle activities into branded consumer
product marketing of Premium Hereford Beef. Cattle purchased for trading,
including other trading costs decreased to 35% of revenues for 1999 compared to
46% of revenues for 1998.
Live cattle costs and related boxed beef costs increased approximately
6% and 11%, respectively, for 1999 compared to 1998 based on USDA and National
Cattlemen's Beef Association Cattle-fax. These commodity market based increases
have raised the market values of both revenues and cost of goods sold for boxed
beef products in 1999.
24
<PAGE>
Selling and Distribution Expenses. Selling and distribution expenses
for fiscal 1999 of $2.9 million, $3.1 million for 1998 and $3.4 million for 1997
decreased by 6% and 10%, respectively. Selling and distribution expenses were
4%, 4%, and 3% of net sales, respectively, for 1999, 1998, and 1997. Selling and
distribution expenses are somewhat variable and were reduced as a result of
several factors. Some advertising and co-op marketing expenses were replaced
with pricing concessions and discounted feature items. In late 1999 the sales
salary expenses were reduced when the Company retained an outside sales
organization to provide broader access to consumer market channels.
The Company is committed to providing the necessary marketing and
merchandising support and there will be ongoing cash investment in developing,
marketing, and distributing of branded beef products and related synergistic
products.
General and Administrative Expenses. General and administrative
expenses were $2.5 million, $2.8 million, and $2.8 million for 1999, 1998, and
1997, respectively. Administrative expenses were 3%, 4%, and 3% of net sales for
1999, 1998, and 1997, respectively, due primarily to staff changes necessary to
achieve profitable volume levels and new product development. During 1998,
substantial general and administrative expenses were incurred through stock
compensation to consultants and certain directors.
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
1999 % chg 1998 % chg 1997
------ ------ ------ ------ ------
Operating Expenses:
Selling and Distribution $2,892 (6)% $3,076 (10)% $3,414
Percentage of sales 4% -- 4% -- 3%
General and Administrative 2,453 (14)% 2,837 -- 2,837
Percentage of sales 3% -- 4% -- 3%
------ ------ ------ ------ ------
Total Operating Expenses $5,345 (10)% $5,912 (5)% $6,251
Percentage of sales 7% -- 9% -- 6%
Loss from Operations. Loss from operations of $2.5 million, $4.7
million, and $4.2 million, for 1999, 1998, and 1997, respectively, decreased by
47% in 1999 and increased by 12% for 1998. While gross margin improved in late
1998, increased cattle supply costs (cattle feeding and procurement costs)
contributed to the loss from operations. Negative gross margins for boxed beef
during early 1998 were also part of the cause of operational losses. The Company
believes improvement from negative gross margins in early 1998 to positive gross
margins in late 1998 reflected progress towards improved performance. Also, the
operational production costs and expenses necessary to create and maintain a
profitable volume level generate losses until those volume levels are achieved.
Nineteen ninety-nine continued to show progress with improvement in gross
margins, however, in late 1999 when transitioning to the Company's own branded
beef program, a loss of significant customers had a negative influence on
otherwise improved margins and related cash flow.
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
1999 % chg 1998 % chg 1997
------- ------- ------- ------- -------
Loss from Operations $(2,500) (47)% $(4,717) 12% $(4,218)
------- ------- ------- ------- -------
Percentage of sales (3)% -- (7)% -- (4)%
25
<PAGE>
Other Income and Expense. Interest expense of $1,008,000, $432,000, and
$343,000 for fiscal 1999, 1998, and 1997, respectively, increased by 133% for
1999 and increased 26% in 1998. Interest expense increases resulted from higher
borrowing levels and a factoring agreement for receivable sales. See Note 5 of
Notes to Consolidated Financial Statements. The loss on sale of accounts
receivable of $ 233,000 and $154,000 represents fixed discounts on the accounts
sold to a factor for 1999 and 1998 respectively. The loss from joint venture
resulted from feeding activities necessary to provide a consistent supply of
qualified beef for the programs in 1998 with a carryover into 1999.
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Other Income (Expenses):
Interest Income $ 19 100% $ 9 (85)% $ 63
Percentage of sales .03% .01% .06%
Interest Expense (1,008) 133% (432) 26% (343)
Percentage of sales (1.4)% (.63)% (.33)%
Loss on Sale of A/R (233) 51% (154) - 0
Percentage of sales (.33)% (.22)% 0.0%
Loss from Joint Venture (68) (95)% (1,386) - 0
Percentage of sales (.10)% (2.0)% 0.0%
----------- --------- ----------- ---------- ----------
Total Other Income (Expenses) $(1,291) (34)% $ (1,963) 600% $ (280)
Percentage of sales (1.8)% (2.9)% (.27)%
</TABLE>
Net Loss and Loss per Share
Fiscal Years Ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998 % chg 1997
----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loss Before Minority Interest $ (3,790) (43)% $ (6,680) 49% $ (4,498)
Percentage of sales (5)% (10)% (4)%
Minority Interest 168 62% $ 104 - -
----------- --------- ----------- ---------- ----------
Net Loss $ (3,622) (45)% $(6,576) 46% $ (4,498)
Percentage of sales (5)% (10)% (4)%
Preferred Stock Dividend Required (10) (94)% (165) 871% (17)
Percentage of sales (.01)% (.24)% (.02)%
----------- --------- ----------- ---------- ----------
Net Loss Applicable to Common $ (3,633) (46)% $ (6,741) 49% $ (4,515)
Percentage of sales (5)% (10)% (4)%
=========== ========= =========== ========== ==========
Basic and Diluted Loss per Share (.23) (51)% (0.46) 38% (0.33)
=========== ========= =========== ========== ==========
Weighted Average Shares Outstanding 15,539 6% 14,719 8% 13,619
=========== ========= =========== ========== ==========
</TABLE>
26
<PAGE>
Income Taxes
The consolidated financial statements include no provision for income
taxes due to net operating losses. See Note 9 of Notes to Consolidated Financial
Statements.
Three Months and Six Months Ended June 30, 2000 Compared to June 20, 1999
Current Quarter Developments
----------------------------
During the three months ended June 30, 2000, the Company continued
implementation of its strategy of using its premium fresh beef program, Red Oak
Farms' Premium Hereford Beef ("PHB"), as a foundation from which to become a
branded, premium marketer of retail and consumer food products.
Brand equity development, as part of this strategy, continues in the
transition from Certified Hereford Beef ("CHB") to PHB. The Company is striving
to restore these sales by attracting hotel, restaurant and institutional ("HRI")
and retail supermarket customers with the resources and commitment to
effectively operate the program. Customers of Red Oak Farms ("ROF") consist
primarily of quality and value-oriented upscale retail supermarket stores,
food-service outlets, high-end restaurants and export accounts. The Company's
fresh beef products continue to be recognized for superior flavor and quality,
and were awarded the "Best Tasting" in the hotel and restaurant division and
retail division by the American Tasting Institute. ROF precooked products also
won the "Best of the Show" awards in their respective categories for the third
consecutive year.
During the second quarter 2000, there was initial acceptance by
retailers and distributors of the first four of ten planned ROF precooked beef
entrees. The Company commenced shipments to several prominent national
distributors and retailers.
On April 1, 2000, the Company increased its ownership of "My Favorite
Jerky" ("MFJ") from 80% to 100%. The Company has completed development of its
4-oz. bag "MFJ". The Company has a written understanding with an established
co-packer to produce the "MFJ" items in Argentina and package them in the United
States and plans to commence shipment to the retail supermarket and mass retail
trade classes during the latter part of the third quarter.
Royal Salmon of Norway, for which the Company has exclusive
distribution rights in the United States, will be sold in Europe on a
non-exclusive basis by Red Oak's European subsidiary, Red Oak Farms Europe B.V.
("ROFE"). The Company expects to make preliminary shipment of the smoked and
marinated, farm-raised salmon products during the third quarter of 2000.
ROFE is manufacturing and commenced shipping on June 30, 2000 "Euro"
Beef Sticks through its European distribution network.
Red Oak Farms Northeast Service Center ("ROFNE") sells PHB primarily to
the food service industry and has been effective in placing PHB in hotels,
restaurants, and country clubs on the East Coast. ROFNE continued during the
second quarter 2000 to expand PHB HRI sales and distribution in key markets
nationwide. Management believes that these high-profile customers reinforce the
premium image of the Red Oak brand and aid in securing customers for the entire
array of Red Oak's premium food products.
27
<PAGE>
The Company closed two preferred stock offerings during the six months
ended June 30, 2000. This, as well as ongoing equity raising activities, has
improved the Company's financial position. Product development and introduction
activity for precooked products was funded through this additional equity. The
Company will require continued funding during the initial rollout of Red Oak's
precooked line, "MFJ", and Beef Sticks. The Company received approval from the
asset based lenders in July 2000 to increase the accounts receivable purchase
facility and the revolving inventory notes to levels that will accommodate the
Company's planned sales growth. The Company will require additional equity to
provide the working capital to support this growth.
Liquidity and Capital Resources
-------------------------------
As of June 30, 2000 and December 31, 1999, the Company had consolidated
cash and cash equivalents balances of $92,932 and $17,067 respectively.
Liquidity and Capital Resources Data:
As of June 30, 2000 and December 31, 1999
(in thousands)
2000 % chg 1999
-------- --------- --------
Working Capital (Deficit) $ 1,490 185.5% $ (1,742)
Restricted Cash 401 (3.4)% 415
Increase (Decrease) in Cash 76 7500.0% 1
Cash Beginning of Period 17 6.1% 16
Cash End of Period 93 444.5% 17
Stock and Additional Paid-In Capital $ 16,232 48.7% $ 10,916
-------- --------- --------
To help meet its capital requirements, management anticipates the
completion of a private placement, issuance of debt instruments, increasing the
accounts receivable purchase facility, and the revolving inventory notes.
Management believes the Company can move into profitability through several
planned steps as follows:
o Obtain additional equity to fund marketing and distribution systems,
o Achieve national distribution of its precooked products and "My
Favorite Jerky;"
o Add premium fresh beef accounts;
o Achieve sales in Europe of the Euro Beef Sticks, Royal Salmon of Norway
and precooked beef entrees;
o Continue to manage gross margins through aggressive cost control and
product mix management;
o Minimize product sold into the commodity boxed beef trade.
28
<PAGE>
Cash Flows from Operating Activities
------------------------------------
The Company's cash flows from operating activities required cash of
$4,150,958 and $498,984 for the six months ended June 30, 2000 and 1999,
respectively.
Operational losses, increases in accounts receivable, increases in
inventories, increases in prepaid and other assets, and a reduction in accounts
payable and accrued expenses required cash to continue operations for the six
months ended June 30, 2000.
The following activities influenced operational performance:
o The Company's continued expansion and development of precooked consumer
beef products required operating expenses that were not offset with
anticipated increases in sales. Several customers have deferred the
timing of product placement in retail stores to the third quarter.
o Competition required pricing concessions during the second quarter as
the Company continued its expansion of the PHB program. Continued focus
on the growth of this PHB sales volume and a focus on branded premium
pricing reflect an opportunity for favorable results.
o Growth of retail sales of PHB boxed beef at premium prices is required
for profitability. Several anticipated customers have deferred the
timing on placement of Red Oak Farms PHB product in their retail
stores.
Boxed beef customer demand continues to require increases in
receivables and inventories. On June 30, 2000, trade accounts receivable was
$1,744,103 compared to $1,326,491 at December 31, 1999. Inventories increased
from $3,142,825 at December 31, 1999 to $4,129,468 at June 30, 2000. Prepaid
expenses and Other Assets increased from $69,799 at December 31, 1999 to
$605,717 at June 30, 2000. Other Assets include packaging development and
start-up costs for Red Oak Farms Europe B.V. to be allocated over the remainder
of 2000.
29
<PAGE>
Selected Cash Flow Data:
For the Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % change 1999
--------------- --------------- -----------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net loss $(2,712) 47.9% $ (1,833)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation & amortization 55 (15.7)% 66
Services for common stock - (100.0)% 8
Loss from partnership - (100.0)% 16
Minority interest in subsidiaries - (100.0)% (46)
Changes in:
Accounts receivable (418) (61.0)% (1,070)
Inventories (987) (14.6)% (1,155)
Prepaid expenses (536) 433.7% (100)
Accounts payable and accrued expenses (142) (221.7)% 117
Checks in excess of bank balance 588 (83.2)% 3,499
--------------- --------------- -----------------
Net Cash Used in Operating Activities (4,151) 731.9% $ (499)
</TABLE>
Cash Flows from Investing Activities
------------------------------------
Investing activities required cash of $116,411 and $32,599 for the
first six months of 2000 and 1999, respectively.
Selected Cash Flow Data:
For the Six Months Ended June 30, 2000 and 19999
(in thousands)
2000 % chg 1999
------ -------- ------
Cash Flows from Investing Activities:
Purchases of equipment $ (87) 99.3% $ (44)
Restricted cash 14 (955.8)% (2)
Changes in other assets (44) (447.2)% 13
------ -------- ------
Net Cash Used in Investing Activities $(116) 257.1% $ (33)
30
<PAGE>
Cash Flows from Financing Activities
------------------------------------
Financing activities provided cash of $4,343,234 and $555,436 for the
first six months of 2000 and 1999, respectively.
The Company continues to receive an asset-based line of credit, which
provides borrowings up to $1.5 million based on eligible inventory.
Substantially all of ROF assets and personal guarantees of the Company's
president and a director collateralize the line of credit. The Company is in
technical non-compliance on certain financial conditions on this loan. On August
14, 2000, the lender renewed the promissory note and the inventory line of
credit for $2,050,000 through September 15, 2000. The Company has obtained
approval to increase this line during the third quarterto $3.0 million.
Affiliates and stockholders are continuing to extend credit to ROF
until such time as the Company secures adequate funding through the issuance of
preferred stock to accredited investors and expands the asset-based lending to
continue the development and growth of the Company.
On December 28, 1999 the Company entered into a settlement agreement to
restructure the Company's outstanding indebtedness to a supplier, and guarantees
on notes due the supplier from the Company's president and a related party. The
note is subordinated to the asset lender of ROF. $1,500,000 of this obligation
was paid during the first six months of 2000. Monthly principal payments of
$24,050 plus 8.5% interest beginning March 1, 2000 through February 1, 2001 are
due on the agreed note.
A director, through a long-term convertible note, has recently loaned
the Company $1,540,000 as of August 28, 2000 including $500,000 during the
second quarter ended June 30, 2000. The Company raised $5,592,916 in the
aggregate from accredited investors during the six months ended June 30, 2000,
including $1,783,500 during the second quarter ended June 30, 2000, and an
additional $50,000 as of August 14, 2000.
The Company continues to finance operations through new equity, the
sale of accounts receivable and the asset-based loan. Capital formation is
critical for the continuation of daily operations, for continued growth and
development of premium branded beef products, and for the marketing and
distribution of other quality synergistic products under development by the
Company.
Selected Cash Flow Data:
For the Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
-------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net proceeds from issuance of preferred stock $ 5,593 - $ -
Net borrowing on line of credit 835 169.4% 310
Proceeds from issuance of Notes Payable 699 158.8% 270
Repayment of notes payable (1,000) - -
Proceeds from long-term debt - (100.0)% 19
Payments on long-term debt (1,783) 3978.3% (44)
-------------- ------------- -------------
Net Cash Provided by Financing Activities $ 4,343 682.0% $ 555
</TABLE>
31
<PAGE>
Market Risk
-----------
The Company continues to be exposed to the impact of changes in
interest rates, foreign exchange rates, and commodity prices. The Company
manages such exposures through the use of contracts at fixed rates when deemed
prudent.
Current financing is predominately fixed or related to U.S. prime
interest rates. As the performance of the Company improves, the risk premium
paid above prime on asset-based lending will be negotiated to lower levels.
Conversely, continued losses will continue the risk premium.
All exported products are currently sold in U.S. dollars to U.S.
trading companies for export. Assuming the Asian economies continue to improve
during 2000, the Company anticipates improved revenue from Asia.
As the Company continues to nurture a selective and strategic customer
base, it must maintain a defensive position for the potential loss of any key
customer(s) to Red Oak's competition in the marketplace. The decision to move
away from the CHB program with Red Oak's own branded product, PHB, creates a
competitive opportunity for those distributors and packers who may choose to
participate in the CHB program. As the Company grows the sales base of its own
branded product, PHB, the risk that a competitor might use its proprietary PHB
brand is lessened.
In the development of added-value branded consumer products, the
Company must invest significant management and capital resources for successful
supply chain development and management. Product rollouts also require marketing
and distribution support essential to ensure success and the achievement of
suitable or acceptable product margins. This process will require additional
capital and asset-based loans. There is risk that the Company may not receive
sufficient funding for these product developments.
Cattle purchased by Midland and ROF for further marketing, processing,
and distribution is exposed to the impact of changing commodity prices.
Commodity risk is present at various levels of the Company's business cycle
including procurement, production, processing, and distribution of the ROF beef
products. The procurement of yearlings and calves, reselling of the qualified
animals to feeders, purchasing of the fat cattle for processing, the related
dressed cattle on the rail and related by-products, the fabricated boxed
primals, and several of the subsequent value-added consumer products are all
affected by commodity market risk.
ROF periodically utilizes hedging and contract purchases for cattle to
minimize market risk and to ensure that adequate supply of qualified Hereford
cattle is available to meet the current and growing sales demand.
ROF pays a market premium to the feeder for producing qualified cattle
with certain genetic, diet, weight, and grading specifications. This premium
above market generates market risk, as this additional cost must be passed on to
the distributor and ultimately to the consumer. While developing its brand,
consumer demand, and consumer loyalty, ROF has been investing in market
penetration through pricing initiatives, which provide lower than preferred
margins.
32
<PAGE>
Results of Operations
---------------------
Comparison of the three months and six months ended June 30, 2000 and 1999.
Revenues-Net Sales
Three Months. Net sales of $18.2 million and $16.7 million were
generated by the Company for the three months ended June 30, 2000 and 1999,
respectively. A net sales increase of 9.3% from 1999 to 2000 was primarily
attributable to a revenue increase from cattle trading activities that exceeded
the 27.3% decrease in boxed meat sales resulting from the loss of customers
prior to year end to CHB competitors.
Three Months Ended June 30,
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Sales:
Boxed beef/Consumer Beef Products $ 9,422 (27.3)% $ 12,966
Percentage of sales 51.7% 77.8%
Cattle trading sales 8,031 145.6% 3,270
Percentage of sales 44.1% 19.6%
Cattle trading sales-related parties 763 78.5% 427
Percentage of sales 4.2% 2.6%
--------------- --------------- ---------------
Total Net Sales $ 18,216 9.3% $ 16,663
Percentage of sales 100.0% 100.0%
</TABLE>
Six Months. Net sales of $29.7 million and $34.7 million were generated
by the Company for the six months ended June 30, 2000 and 1999, respectively. A
net sales decrease of 14.6% from 1999 to 2000 was primarily attributable to the
20.6% decrease in boxed meat sales resulting from the loss of customers prior to
year end to CHB competitors.
Six Months Ended June 30,
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Sales:
Boxed beef/Consumer Beef Products $ 19,551 (20.6)% $ 24,623
Percentage of sales 65.8% 70.9%
Cattle trading sales 9,188 6.5% 8,627
Percentage of sales 30.9% 24.8%
Cattle trading sales-related parties 950 (36.6)% 1,499
Percentage of sales 3.2% 4.3%
--------------- --------------- ---------------
Total Net Sales $ 29,690 (14.6)% $ 34,749
Percentage of sales 100.0% 100.0%
</TABLE>
33
<PAGE>
Cost of Goods Sold.
Three Months. Cost of goods sold of $17.7 million and $16.1 million
were generated by the Company for the three months ended June 30, 2000 and 1999,
respectively. A cost of goods sold increase of 9.9% from 1999 to 2000 was
attributable to a 26.9% decrease in cattle purchases for boxed beef and related
changes in inventories and a 140.2% increase in cattle trading activities for
the three-month period.
Cattle purchased for processing, including processing costs for boxed
beef and inventory changes decreased to 50.3% of revenues for the three months
ended June 30, 2000, compared to 75.2% of revenues for the same period in 1999.
This reflects a reduction in boxed beef activities from the transition into PHB
branded consumer product marketing.
Cattle purchased for trading, including other trading costs increased
to 46.7% of revenues for the three months ended June 30, 2000, compared to 21.2%
of revenues for the first quarter of 1999.
Live cattle prices and related boxed beef prices increased
approximately 9.3% and 10.8%, respectively for the three months ended June 30,
2000 versus the comparable period of 1999, based on USDA and National
Cattlemen's Beef Association Cattle-fax. These commodity market based increases
have improved the market values for boxed beef products in 2000.
Three Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Cost of Goods Sold:
Cattle purchased for processing $ 4,063 (25.5)% $ 5,455
Percentage of sales 22.3% 32.7%
Cattle purchased for processing-RP 2,006 (63.8)% 5,537
Percentage of sales 11.1% 33.2%
Cattle purchased for trading 8,395 140.6% 3,489
Percentage of sales 46.1% 20.9%
Cattle purchased for trading-RP 41 211.9% 13
Percentage of sales 0.2% 0.1%
Other processing costs 3,100 100.6% 1,545
Percentage of sales 17.0% 9.3%
Other trading costs 64 76.6% 36
Percentage of sales 0.3% 0.2%
--------------- --------------- ---------------
Total Cost of Goods Sold $ 17,669 9.9% $ 16,076
Percentage of sales 97.0% 96.5%
Note: RP equals Related Parties
</TABLE>
34
<PAGE>
Six Months. Cost of goods sold was $28.9 million and $33.8 million for
the six months ended June 30, 2000 and 1999, respectively. A cost of goods sold
decrease of 14.4% from 1999 to 2000 was attributable to a 20.7% decrease in
cattle purchases for boxed beef and related changes in inventories and a 1.3%
increase in cattle trading activities for the six-month period.
Live cattle prices and related boxed beef prices increased
approximately 10.0% and 12.1% for the six months ended June 30, 2000, versus the
comparable periods of 1999, based on USDA and National Cattlemen's Beef
Association Cattle-fax. These commodity market based increases have improved the
market values for boxed beef products in 2000.
Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Cost of Goods Sold:
Cattle purchased for processing $ 10,066 (15.0)% $ 11,841
Percentage of sales 33.9% 34.1%
Cattle purchased for processing-RP 4,737 (54.3)% 10,355
Percentage of sales 15.9% 29.8%
Cattle purchased for trading 9,685 1.6% 9,531
Percentage of sales 32.6% 27.4%
Cattle purchased for trading-RP 48 (28.5)% 67
Percentage of sales 0.2% 0.2%
Other processing costs 4,322 124.6% 1,924
Percentage of sales 14.6% 5.5%
Other trading costs 73 (9.9)% 81
Percentage of sales 0.2% 0.2%
--------------- --------------- ---------------
Total Cost of Goods Sold $ 28,931 (14.4)% $ 33,798
Percentage of sales 97.4% 97.3%
Note: RP equals Related Parties
</TABLE>
35
<PAGE>
Gross Profit
Decreases in branded boxed meat sales resulting from the transition to
PHB from CHB and increased costs in the development of precooked and other
value-added products placed pressure on gross profit for the three-months and
six months ended June 30, 2000, resulting in a reduction from the comparable
1999 periods.
Three Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
------------------- --------------- -----------------
<S> <C> <C> <C>
Gross Profit $ 547 (6.9)% $ 587
Percentage of sales 3.0% 3.5%
</TABLE>
Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
------------------- --------------- -----------------
<S> <C> <C> <C>
Gross Profit $ 759 (20.2)% $ 951
Percentage of sales 2.6% 2.7%
</TABLE>
36
<PAGE>
Operating Expenses
Three Months Selling and Distribution Expenses. Selling and
distribution expenses for the three months ended June 30, 2000 and 1999, were
4.9% and 4.2% of net sales, respectively.
The Company has made a transition from an internal sales staff to a top
mass retail and club store marketer for added-value products. This has generated
a favorable expense strategy, with related selling and distribution expenses
proportionate to sales. However, minimum fees must be absorbed until such time
as additional sales revenues are generated from the nationally based system.
Three Months General and Administrative Expenses. General and
administrative expenses for the three months ended June 30, 2000 and 1999, were
5.0% and 3.2% of net sales, respectively.
Administrative expenses included corporate expenses for product
development, startup of the European market through Red Oak Farms Europe, B.V.
and for the private placement of securities.
Three Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- ------------ --------------
<S> <C> <C> <C>
Operating Expenses:
Selling and distribution $ 892 28.7% $ 693
Percentage of sales 4.9% 4.2%
General and administrative 903 68.4% 536
Percentage of sales 5.0% 3.2%
--------------- ------------ --------------
Total Operating Expenses $ 1,794 46.0% $ 1,229
Percentage of sales 9.8% 7.4%
</TABLE>
37
<PAGE>
Six Months Selling and Distribution Expenses. Selling and distribution
expenses for the six months ended June 30, 2000 and 1999, were 4.8% and 3.9% of
net sales, respectively.
Selling and distribution expenses are somewhat variable. Marketing and
product development of the new added-value product line are included.
The Company has made a transition from an internal sales staff to a top
mass retail and club store marketer for added-value products. This has generated
a favorable expense strategy, with related selling and distribution expenses
proportionate to sales.
Six Months General and Administrative Expenses. General and
administrative expenses for the six months ended June 30, 2000 and 1999, were
5.5% and 3.1% of net sales, respectively.
Administrative expenses include corporate expenses for product
development, startup of the European market through Red Oak Farms Europe, B.V.
and for the private placement of securities.
Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- ------------ --------------
<S> <C> <C> <C>
Operating Expenses:
Selling and distribution $ 1,418 5.2% $ 1,348
Percentage of sales 4.8% 3.9%
General and administrative 1,626 53.5% 1,060
Percentage of sales 5.5% 3.1%
--------------- ------------ --------------
Total Operating Expenses $ 3,044 26.4% $ 2,407
Percentage of sales 10.2% 6.9%
</TABLE>
38
<PAGE>
Three Months Loss from Operations. Loss from operations of $1,247,091
and $641,553 for the three months ended June 30, 2000, and the comparable period
in 1999, increased by 94.4%.
Although investments related to the transition to PHB branded products,
development of added-value precooked products, and the expansion into Europe
adversely impacted gross revenue and margins in the second quarter, management
believes that the Company is positioned for improvement in the volume of both
boxed beef and added-value precooked products. However, until the Company
achieves profitable sales volume levels, the Company continues to require
additional funds to support current operations, marketing, development of
distribution channels, and to meet trade receivable and inventory requirements.
Three Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- ------------ --------------
<S> <C> <C> <C>
Loss from operations $(1,247) 94.4% $ (642)
Percentage of sales (6.8)% (3.9)%
</TABLE>
Six Months Loss from Operations. Loss from operations of $2,285,197 and
$1,456,165 for the six months ended June 30, 2000, and the comparable period in
1999, increased by 56.9%.
Although investments related to the transition to PHB branded products,
development of added-value precooked products, and the expansion into Europe
adversely impacted gross revenue and margins in the first months, management
believes that the Company is positioned for improvement in the volume of both
boxed beef and added-value precooked products. However, until the Company
achieves profitable sales volume levels, the Company continues to require
additional funds to support current operations, marketing, development of
distribution channels, and to meet trade receivable and inventory requirements.
Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- ------------ --------------
<S> <C> <C> <C>
Loss from operations $ (2,285) 56.9% $(1,456)
Percentage of sales (7.7)% (4.2)%
</TABLE>
39
<PAGE>
Other Income and Expense. Interest expense of $215,497 and $145,893 for
the three months ended June 30, 2000, and the comparable period in 1999,
increased by 47.7%. Interest expense of $366,065 and $283,729 for the six months
ended June 30, 2000 and the comparable period in 1999 increased by 29.0%.
Increases in interest expense resulted from higher borrowing levels.
Loss on sale of accounts receivable of $41,551 and $68,001 for the
three months ended June 30, 2000, and the comparable period of 1999, decreased
by 38.9% as fewer export related sales were sold to the factoring service. Loss
on sale of accounts receivable of $70,216 and $124,505 for the six months ended
June 30, 2000 and comparable period in 1999 decreased 43.6%. The loss on sale of
accounts receivable represents fixed discounts on the accounts sold to the
factoring service.
Three Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Other Income (Expenses):
Interest income $ 5 500.0% $ -
Percentage of sales 0.03% 0.00%
Interest expense (215) 47.7% (146)
Percentage of sales (1.18)% (0.88)%
Loss on sale of accounts receivable (42) (38.9)% (68)
Percentage of sales (0.23)% (0.41)%
Loss from joint venture - (100.0)% (4)
Percentage of sales 0.00% (0.02)%
--------------- --------------- ---------------
Total Other Income (Expenses) $ (252) 16.0% $ (218)
Percentage of sales (1.38)% (1.31)%
</TABLE>
Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Other Income (Expenses):
Interest income $ 10 400.0% $ 2
Percentage of sales 0.03% 0.00%
Interest expense (366) 29.0% (284)
Percentage of sales (1.23)% (0.82)%
Loss on sale of accounts receivable (70) (43.6)% (125)
Percentage of sales (0.24)% (0.36)%
Loss from joint venture - (100.0)% (16)
Percentage of sales 0.00% (0.05)%
--------------- --------------- ---------------
Total Other Income (Expenses) $ (427) 1.0% $ (423)
Percentage of sales (1.44)% (1.22)%
</TABLE>
40
<PAGE>
Net Loss and Loss per Share
Three Months Ended June 30, 2000 and 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Loss before minority interests $ (1,500) 74.5% $ (859)
Percentage of sales (8.2)% (5.2)%
Minority interests -- (100.0)% 26
--------------- --------------- ---------------
Net loss (1,500) 80.0% (833)
Percentage of sales (8.2)% (5.0)%
Preferred stock dividend requirement (60) --
Percentage of sales (0.3)% 0.0%
--------------- --------------- ---------------
Net loss applicable to common (1,560) 87.2% (833)
Percentage of sales (8.6)% (5.0)%
=============== =============== ===============
Basic and diluted loss per share $ (0.097) 75.5% $ (0.056)
=============== =============== ===============
Weighted Average Shares Outstanding 16,014 6.7% 15,014
=============== =============== ===============
</TABLE>
Six Months Ended June 30, 2000 and 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 % chg 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Loss before minority interests $ (2,712) 44.3% $ (1,879)
Percentage of sales (9.1)% (5.4)%
Minority interests (28) (160.2)% 46
--------------- --------------- ---------------
Net loss (2,740) 49.4% (1,833)
Percentage of sales (9.2)% (5.3)%
Preferred stock dividend requirement (109) --
Percentage of sales (0.4)% 0.0%
--------------- --------------- ---------------
Net loss applicable to common (2,849) 55.4% (1,833)
Percentage of sales (9.6)% (5.3)%
=============== =============== ===============
Basic and diluted loss per share $ (0.179) 45.6% $ (0.122)
=============== =============== ===============
Weighted Average Shares Outstanding 16,020 6.7% 15,009
=============== =============== ===============
</TABLE>
41
<PAGE>
BUSINESS
OPERATIONS OF THE COMPANY
Red Oak Hereford Farms, Inc. Red Oak Hereford Farms, Inc. was founded
for the purpose of creating a vertically integrated business enterprise to
market and sell Red Oak Farms' premium branded products and other quality
synergistic products. Activities include procuring, producing, processing,
marketing, and distributing of these products. Red Oak Farms, Inc. (ROF), a
wholly owned subsidiary, had initially been establishing market share and
customer base through the marketing, distribution, and promotion of Red Oak
Farms' Certified Hereford Beef ("CHB"). The CHB name, logo, and program,
however, were created by and are the property of the American Hereford
Association ("AHA").
The Premium Hereford Beef ("PHB") name, logo, and program are the
Company's property. During the fourth quarter of 1999, the AHA authorized
procurement, harvest and sales of CHB product that competed with the Company's
CHB program. In response, the Company immediately executed plans to increase its
own brand equity by changing its fresh box beef product to "Red Oak Farms'
Premium Hereford Beef." As a result, the Company initially lost some customers,
staff, and approximately one half of fresh beef volume during this transition.
The Company is restoring the lost volume through the efforts of in-house sales
and trade contacts of contracted sales organizations. This plan is bringing
specific accounts onto the Red Oak Farms' Premium Hereford Beef program. In
fact, the initial group has already begun using Premium Hereford Beef in their
stores and has, or will, phase into complete adoption of PHB, based upon market
acceptance, which includes verification of the positive attributes of the
products. Specifically, these are superior taste, tenderness, juiciness, and
extended shelf appearance, which is achieved from the anti-oxidation effects of
Vitamin E supplemented feed regimen.
Red Oak Farms' Premium Hereford Beef, the Company's premium branded
beef-product, capitalizes on the consistent consuming qualities inherent in
Hereford and Hereford British based cattle, bred for centuries specifically for
the eating quality of their beef. In addition, the program was designed to
ensure the unique, premium, quality of PHB through a combination of United
States Department of Agriculture ("USDA") and internal monitoring of cattle
genetics, feeding, harvest, and fabrication. The Company harvest and fabricates
qualified cattle at its contract packing plant and then sells fresh, frozen, and
further processed beef through traditional retail, food service, and other
channels.
The Company has postponed its marketing of other related gourmet food
products in North America, Europe and Asia in order to fully focus on the
complexities of rolling out precooked beef entrees and related beef snack
programs.
The Company was originally incorporated in 1989 and began its current
business in 1997 with the acquisition of its cattle and branded beef operations.
42
<PAGE>
Branded Beef Products
The Company slaughters, fabricates, and further processes Premium
Hereford Beef and now also produces convenience meals. Examples of these are:
ROF Premium Beef precooked products, frozen beef patties, additional precooked
offerings, beef jerky and beef sticks and other items designed to reduce
consumer shopping and preparation time.
The Company's branded PHB sales come primarily from the following
categories: fresh wholesale boxed beef in traditional subprimals such as
tenderloins, beef ribs, strip loins, rounds, top sirloins, brisket, etc., frozen
boxed subprimals, primarily for export, and portion controlled beef for food
service and mail order. The Company receives a premium to the commodity beef
market price for these branded products. Some products are sold into the
commodity market to hedge against fluctuating demand for those particular
products from "branded" customers. The Company acquires qualified cattle based
on a pricing formula for the carcass, which is applied after setting an initial
price at the top of the commodity cattle market. Its branded prices are then set
at a premium to the commodity beef prices.
Cattle Procurement. Midland is in the business of identifying,
sourcing, purchasing and reselling feeder and fed cattle. Midland is primarily
responsible for developing the Company's supply of cattle and serves as the
agent for fed cattle destined for the Company's beef 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. Midland also has primary responsibility for the
maintenance of the Company's cattle on feed records and in maintaining the
quality, type, and marketing timeliness of the program cattle. Midland also
deals in commodity cattle of all types, and since the inception of the beef
program has specialized in sourcing, procuring and selling qualified feeder
cattle to participating feedlots located primarily in Iowa and Nebraska.
The Company now concentrates more on branded consumer product marketing
and less on cattle trading. The gross revenue generated by trading is
substantial but the small margins available have led management to refocus some
of Midland's personnel by moving them into ROF to assist with the procurement
function. Midland will continue to place cattle in ROF's supply channel and
engage in some non-PHB cattle trade.
Red Oak Feeders, LLC was formed to develop a supply of qualified
cattle. It has lost money in this activity in each of its two years of
existence. Those losses were due to market circumstances and an ill-fated cattle
feeding arrangement with a feed company. However, management believes that as
the Company's volume of fresh beef business grows through retail supermarket and
food service channels it is important to own some of the qualified Hereford and
Hereford British cross cattle on feed for the Company's program. This practice
prevents predatory practice by feeders holding qualified supplies and helps
ensure adequate numbers of qualified cattle for the program.
43
<PAGE>
Harvest and Processing. Cattle from all over the United States that
have been identified in the field as genetically qualified for the Company
program are brought into the Midwest to be fed primarily within a 200-mile
radius of the contract packing plant in Omaha, Nebraska. Qualified cattle are
delivered to the packing plant, where the USDA and the Company's personnel
approve them prior to slaughter. The Company monitors the harvest, breaking,
fabrication, and boxing processes. Primals are placed in Red Oak Farms' boxes
and aged in a refrigerated public warehouse. Occasionally, beef is frozen for
the export market or to build inventory for future sale. The Company's products
are then released, by its personnel, for shipment in refrigerated public
carriers to customers. Hides, non-qualifying carcasses, and some trim are sold
back to the packing plant. The agreement with the contract processor provides
capacity of a minimum and maximum number of cattle to be harvested per week. The
plant is inspected, approved, and audited by the USDA and monitored by the
Company as part of the Company's total quality management plan and program
specifications.
Sales. Throughout the life of the PHB program, consistent sales of a
broad product mix and recruitment of new retail supermarket accounts that can
effectively operate the program have been a challenge. During the fourth quarter
of 1999, the Company lost a good portion of its in-house sales force, in part
due to the change over from the CHB program, and replaced it by contracting with
an outside sales group. The Company also hired a in-house sales force to sell
its fresh beef products. The Company's contract sales group will operate a
full-scale marketing and sales effort in the mass and club formatted stores, and
they have contracted with another group to manage sales efforts in the
conventional retail supermarket industry. The Company plans to expand market
presence and sales of PHB and other ROF products through brand identity and
traditional marketing methods. These methods include direct calls on potential
distributors, retail supermarket and food service customers, advertising and
promotion activities, provision of feature items, point of sale material, and
training of store personnel. The Company's sales personnel and distributors also
participate in the sales, service, and follow-up function. The Company sells its
beef at a premium to the commodity beef market because of the higher cost of the
cattle and the higher quality and value of their products. Beef has rarely been
marketed like other consumer products. Independent research and the Company's
experience have shown that certain consumers will pay more for consistently
tender, tasty, and juicy beef. In the past, the Company's strategy brought
retail supermarket customers on at less than full branded price. The price was
then increased to full branded as the retail supermarket and its consumers
realized the value of the product; i.e., reduced shrink (markdown due to
discoloration) reduced trim, consistent tenderness, tastiness, and juiciness,
and consumer demand. This process required approximately three to twelve months.
Presently, depending upon product mix and volume, new stores are brought on at
full or near full branded price. The Company expects price resistance to
diminish somewhat, as customers experience the benefits, which should allow the
Company to receive higher premiums and increase gross margins. It is the
Company's intention to market its products at the highest value and premium
price through the most beneficial channels of marketing and sales.
44
<PAGE>
The Company's customers consist primarily of quality and value-oriented
up-scale retail supermarket stores, food-service outlets, high-end restaurants
and export accounts. To support this customer base, the Company has added the
personnel and systems to manage the orderly processing, marketing and sales of
product lines. Using and expanding this mix of customer classes, the Company
continually strives to market and sell its products in a way that maximizes
carcass utilization. The ideal customer mix is a cross-section of retail, food
service, export, and direct sale customers that purchase different carcass
product mixes. This main component of the Company's business places new emphasis
on marketing through a broadened product mix, including Precooked Products, and
"My Favorite Jerky" Beef Sticks, as well as improved point-of-purchase, beef
counter organization, further processed products, and advanced labeling as to
cooking methods and recipes. These efforts are consistent with the Company's
plan to increase gross margin by improved marketing.
Branded Beef Industry and Competition. The Company is a "branded"
consumer product marketing company with PHB as its lead product. Branded or
private label beef and other 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 Beef(R) Program ("CAB") leading the
field in sales.
The most widely recognized branded beef product, CAB, is the Company's
largest competitor, although other private label branded beef producers are also
competitors. Some of these competitors have been in existence far longer, are
better capitalized and have access to financial and marketing resources superior
to those available to us. However, the Company believes that none of its
competitors have as consistently tender, tasty, and juicy beef products.
In the direct sales arena, "Omaha Steaks", has created a large market
for its mail order beef and other food items. "Omaha Steaks" has a large
well-established customer base and while offering formidable competition, they
validate the potential in the mail order beef business.
"Laura's Lean" is another branded beef competitor, which sells a very
lean mix of beef and is offering a branded program to the retail supermarket
industry.
In the consumer products area, Hormel and Harris Ranch are the main
competition to the Company's pre-cooked items; Jack Links and Oberto in the
jerky category; and a myriad of Nova Scotian, Scottish, Alaskan, and other
salmon / seafood imports versus the Company's Norwegian seafood program.
45
<PAGE>
Red Oak Farms' Value-Adding
The Company devoted new emphasis to value-adding research and
development, and implementation of further processing, packaging and creative
marketing during 1999. Customers have requested certain value-added products,
and the Company is proceeding to produce them. Gross margins in many beef
products can be increased through these processes. The branded beef business
becomes one of the suppliers for the value-adding further processing. Cuts that
are difficult to include in the branded product mix can be utilized at branded
or near branded price, and then demand a strong margin in the value-added arena.
Precooked Products. The Company plans to offer ten or more precooked
consumer packaged beef products, some of which may be packed with other
microwave-ready products for combination meals. Product development, which began
in early 1999, is now complete and production underway for four microwaveable
precooked products; "Family Size" 16 oz. Pot Roast, four individual servings (6
oz.) Pot Roast (24 oz. per package), Barbecued Beef Ribs (16 oz.), and a 16 oz.
Tri-Tip (sirloin) roast. These initial four precooked products received approval
at several of the largest retail supermarket distributors during 1999, and they
are now in production and are being shipped. Both Pot Roasts and the Barbecued
Ribs won the "Best of Show" Award for 2000 from the American Tasting Institute.
The Company has contracts with cooking-packaging operations in Omaha and
Chicago, and it is negotiating with others. The Company believes that these
products have excellent volume potential and can "open doors" for its other
lines.
Packaged Beef Products. The Company monitors development of case-ready
packaging and has evaluated two contract case-ready plants. The largest retail
chain in the United States and largest packers have recently announced
collaboration toward that end. Demand among the Company's current customer base
may provide an opportunity to bring these products to the market and begin to
meet demand from other customers.
46
<PAGE>
Further Processed Beef Products. Further processing means fresh or
frozen boxed beef undergoes value enhancing "processes" like cutting, complete
or partial cooking, convenient portion packaging, and combining with other food
products. During the last half of 1998, the Company introduced My Favorite
Jerky, ("MFJ") which leads its entry into the shelf stable, branded, consumer
product market with this high-protein, natural style beef jerky. Due to limited
working capital and staff constraints, MFJ failed to achieve substantial
distribution in 1999. Unsuccessful sales attempts required absorbing not only
production and development costs during 1999, but also a significant writedown
of expired inventory. As a result of these events, this product line contributed
significantly to the Company's 1999 operating losses.
Efforts for the Company's MFJ in trade sales activities, including
tradeshows, customer calls, event promotions, and sampling programs were often
costly; however, management believes that the continuing exposure was valuable.
Broadening its meat snack line into the popular "meat stick" portion of the
snack category, the Company completed test runs at its co-packer in December
1999. Subsequently, marketing efforts are underway. While the start-up has been
expensive and slow, as a part of the growing meat snack business, the growth
prospects combine with excellent margins to make MFJ a potential profit center
for the Company. MFJ is contract processed and packaged using a proprietary
formula and is free of nitrates, added MSG, and artificial preservatives. Other
further process value-adding activities including: cooking, stuffing, and other
pre-preparation techniques, which respond to the consumer demand for convenience
and quality. This value-adding segment of the business benefits also from the
Company's access to other goods for use in the value-added business.
Certain financial information about company segments is required for
the last three fiscal years, including revenue, operating losses, and
identifiable assets. The Company has four reportable segments: boxed beef,
cattle trading, cattle feeding, and beef jerky. See Note 14 of Notes to
Consolidated Financial Statements.
Red Oak Farms' Import-Export
The Company's Korean export business had strong sales in 1999, relative
to 1998, amounting to approximately 7% of total boxed beef sales. Distribution
into other Pacific Rim countries continues to be developed by an import-export
distributor in business with the Company; however, the process is slow in this
part of the world. The Company plans to supply beef for export to Europe through
its European Division and has identified a European Union (EU) approved contract
packer and prepared systems to supply these beef products. However, certain EU
policies place prohibitive conditions on this business presently, including
prohibition of beef from hormone-implanted cattle. To overcome this, the Company
is working on a system based on natural enzyme replacements for the hormone
implants now in use. The Company expects to be able to meet significant demand
for PHB in Europe.
47
<PAGE>
European Division
During 1999, the Company created Red Oak Farms Europe, BV. It is
headquartered in Utrecht, Netherlands. The Company has agreements with a meat
packer, processor, distributors, investors and other synergistic individuals and
entities. During the second quarter of 2000, Red Oak Farms Europe ("ROFE") was
positioned to sell Red Oak Farms' "My Favorite Jerky" Beef Sticks, and Royal
Salmon of Norway through its European distribution network. ROFE is
manufacturing and commenced shipping on June 30, 2000 "Euro" Beef Sticks through
its European distribution network. ROFE expects to make preliminary shipment of
salmon products during the third quarter 2000.
Marketing and Distribution
Marketing, distributing and selling premium beef and other food
products is the Company's central aim. Using the best beef in the world today as
the initial product and capitalizing on the quality of that product by improving
the beef margin through value-adding and creative market channels should help
the Company become profitable. This will be accomplished through the marketing
and sale of high-margin, branded consumer food products. Limited financial
resources and limited contacts by in-house sales/marketing staff made the
Company unable to improve all aspects of retail supermarket and food service
marketing. Looking forward, the Company has dedicated considerable resources to
discovering and developing new market channels where higher margins are
possible, and it hired an outside sales group to help identify and execute in
those arenas.
The Company has completed the new product and packaging development of
the precooked line of products, Beef Sticks, and 4 oz. Jerky.
Presently, the Company advertises its products on its web site, but
almost exclusively to industry and investor customers.
The Company's primary activity remains beef focused, and includes
development of new products. Led by their Premium Hereford Beef and precooked
products, and in Europe by "My Favorite Jerky" Beef Sticks, the Company
continued to recast itself as a consumer products business with a broad enough
base to withstand market variances in individual product categories.
Government Regulations
The Company is subject to certain government regulations. The USDA
"Packers and Stockyards Act" mandates the maintenance of particular records and
bonds for both Midland and ROF as buyers of cattle. The USDA's Packers and
Stockyards Administration performs an annual audit to ensure compliance.
The Company's brand PHB is an USDA-approved marketing program having
unique live animal and grade specifications. The Company is charged with
ensuring that all harvested cattle comply with these qualifications. The USDA
audits every phase at the packing plant for specification compliance. The USDA
also administers the regulations of Food Safety Inspection Service to which the
Company and its suppliers are subject.
48
<PAGE>
Employees
The Company employs a total of 27 people of which 25 are at ROF and 2
are at Midland. Two people are full-time contract employees and one person is a
part-time contract employee. Midland also pays commissions to approximately ten
independent sales people. In addition, the Company has outsourced the majority
of its sales and sales management functions. It compensates these contract
service providers through commissions based upon sale of products to the
accounts they service.
Properties
The Company leases office space from the Company's President and his
spouse. The annual cost of the one-year lease is $48,000. The leased office
space of approximately 4,700 square feet houses management and general
administrative functions.
Through Midland the Company leases approximately 30 acres as a cattle
collection, holding and sorting facility near Red Oak, Iowa, and the Company
owns the buildings, equipment and vehicles located on the property. The lease is
for an 11-year term of which 10 years remain and is at a rate of $3,300 per
month. Adjacent to this leasehold, the Company owns a 10-acre tract with a
residence for an employee.
Legal Proceedings
In the normal course of business, the Company is engaged from time to
time in legal proceedings. There are no pending material legal proceedings to
their knowledge at this time.
Management
Directors and Executive Officers
The following table sets forth as of September 15, 2000 the name, age,
and position of each executive officer and director and the date each began
service for the Company.
<TABLE>
<CAPTION>
Name Age Position Director or Officer Since
---- --- -------- -------------------------
<S> <C> <C> <C>
Gordon Reisinger 60 President, Director March 14, 1997
John Derner 49 Vice President, Director March 14, 1997
Charles Kolbe 58 Chairman of the Board, March 14, 1997
Director
Dwayne Lewis 68 Director May 8, 1998
Jack Holden 35 Director May 8, 1998
Ron Daggett 53 Director May 8, 1998
Johan Smit 46 Director May 26, 1999
Torgil Hagman 64 Director September 12, 2000
John Schiering 54 Chief Operating Officer, January 1, 2000
Red Oak Farms, Inc.
Harley Dillard 51 Treasurer, Chief Financial Officer December 10, 1997
Peter Hudgins 45 Vice President-Special Projects November 1, 1997
</TABLE>
49
<PAGE>
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 duly 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. Prior to the acquisition of
Midland Cattle Company by the Company, Mr. Reisinger was the managing partner
and a 33.33% owner in Midland, which he formed in 1987. Midland is a cattle
trader, which buys and sells feeder cattle nationwide, including cattle for the
PHB program. Mr. Reisinger was also a managing partner and a 33.33% owner in
Mid-Ag prior to its reverse acquisition of 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. Mr.
Reisinger has a Bachelor's Degree in Animal Science from Iowa State University.
John Derner, Director and Vice President. Mr. Derner owns and manages
an 8,000 head cattle feedlot and a large row crop operation in West Lake
Okoboji, Iowa. Mr. Derner also owns a manufacturing company, Shell Rock
Products, Inc., which manufactures and distributes numerous ornamental concrete
products nationwide. Mr. Derner was also a 33.33% partner in Midland and Mid-Ag
prior to their being acquired by the Company.
Charles Kolbe, Director and Chairman of the Board. Mr. Kolbe owns a
family farming and cattle feeding operation in Lake View, Iowa. 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. Mr. Kolbe has been appointed to
the IRS Oversight Board. He has a Bachelor's Degree in Animal Science from Iowa
State University.
Dwayne Lewis, Director. Mr. Lewis operates Lewis Feedlot. He currently
runs approximately 17,000 cattle in this operation. He has been active in the
Nebraska Livestock Feeders Association and chaired the Environmental Committee
for the National Feeders Association. He has been a member of National
Cattlemen's Beef Association and Nebraska Cattlemen's Association.
Mr. Lewis' quarter horse operation is recognized as one of the top
stables in the United States. He has served as President of the Nebraska Quarter
Horse Association and a member of the Board of Directors of the American Quarter
Horse Association.
Along with his cattle feeding and quarter horse operations, Mr. Lewis
and his two sons operate 3,500 acres of irrigated farmland. He has also served
as Chairman of the Board of Gibbon Bank for 12 years. His community service
includes 20 years as a member and a term as President of the local School Board
in his district near Kearney, Nebraska.
50
<PAGE>
Jack B. Holden, Director. Mr. Holden manages his family's Hereford
operation, Holden Herefords, on a 2,000-acre ranch near Valier, Montana. Mr.
Holden is active in the National Cattleman's Beef Association, Montana
Stockgrowers and its Seedstock Committee. He is also active in the American
Hereford Association and the Montana Farm Bureau. He serves as Director of the
Montana Hereford Association, and Vice President and Director of the Pondera
County Canal and Reservoir Company.
Ron Daggett, Director. Mr. Daggett served as a First Vice President,
Sales for Dean Witter from 1994 to 1997. For the past two years, Mr. Daggett has
served as First Vice President, Sales for First Union Securities.
Johan Alexander Smit, Director. Mr. Smit is Managing Director of
Smitfort Steel. As director of Smitfort-Staal BV, Mr. Smit manages a worldwide
steel company. He attended the London School of Economics and received his
Masters in Business Administration from the University of Neyerrode. Mr. Smit is
an honorary member of the Dutch Export Federation, a board member of Business
Club Zwijndrecht (ovz) and a supervisory board member of the Dutch Trading
Company.
Torgil Hagman, Director. Mr. Hagman is director of Deloitte & Touche
Corporate Finance in Sweden. He joined Deloitte & Touche in 1991. He previously
held a number of executive positions, including marketing director of a publicly
traded Swedish investment company. During his tenure, funds under management
increased from $30 million to $900 million annually. Mr. Hagman, a noted
lecturer, is a mergers and acquisitions and corporate finance specialist, whose
professional experience also includes retail operations and international trade.
John Schiering, Chief Operating Officer, Red Oak Farms, Inc. Mr.
Schiering was appointed to his position in January of 2000. Since 1995, he has
been a management consultant working primarily on confectionery projects. From
1985 to 1995, he was Vice President and General Manager of Borden Candy
Products. Mr. Schiering has a B.A. degree from Brown University and J.D. degree
from the New England School of Law. Mr. Schiering is admitted to practice law in
the Commonwealth of Massachusetts.
Harley Dillard, Treasurer and Chief Financial Officer. 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
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 until he
joined the Company, Mr. Dillard was General Manager of Cruisin Cuisine/WP&G
Distributing, a privately held manufacturer and distributor of wholesale food
products. Mr. Dillard is a Certified Public Accountant.
Pete Hudgins, Vice President-Special Projects. Mr. Hudgins' lifelong
cattle industry experience began with his participation as the fifth generation
of a commercial Hereford ranching and cattle buying business in Texas. Mr.
Hudgins joined the Company November 1997. From 1995 until late 1997, Mr. Hudgins
was a sales person with Natures Technology Inc., sellers of biological products.
Among his responsibilities are investor, customer, and producer relations, which
draw on substantial cattle organization and capital formation experience. He
also coordinates projects with Mr. Reisinger and other management in various
areas of the enterprise.
51
<PAGE>
Board Committees
The Board Of Directors has a compensation committee and an audit
committee. The compensation committee is comprised of John Derner, Chairman,
Gordon Reisinger, and Jack Holden. The audit committee is comprised of Ron
Daggett, Chairman, John Derner, Gordon Reisinger, and Johan Smit. The
compensation committee is responsible for the administration of all salary and
incentive compensation plans for the officers, including bonuses and options
granted under the option plans. The audit committee is responsible for reviewing
with management the financial controls and accounting and reporting activities.
In addition, the audit committee will review the qualifications of the
independent auditors, make recommendations to the Board Of Directors regarding
the selection of independent auditors, review and scope, fees and results of any
audit and review any non-audit services and related fees.
Compensation of Directors
Directors receive 1,250 shares of Common Stock for participation at
each quarterly meeting, shares to be granted at the end of each year of service
provided the director serves a full year. Outside directors on grant date
receive 5,000 stock options under the 2000 stock option plan. These options are
vested and exercisable at the end of their term and expire five years there
after. No other fee is paid to them.
Executive Compensation
The following table sets forth certain summary information concerning
the compensation paid to or accrued for the Company's Chief Executive Officer
and Chief Financial Officer during the last fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-term Compensation
Annual Compensation Awards Payouts
(1)
Name and Principal Other Annual Restricted Number of LTIP All Other
Position Year Salary Bonus Compensation Stock Awards Options Payouts Compensation
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gordon Reisinger 1999 $ 120,000 -0- $16,667 $3,500 -0- -0- $451
President/ Chief 1998 $ 120,000 -0- $53,333 $97,970 -0- -0- -0-
ExecutiveOfficer/ 1997 $ 100,000 $106,802 -0- -0- 5,000 -0- $121,500
Director
Harley Dillard 1999 $ 125,000 -0- -0- -0- 60,000 -0- -0-
Treasurer/Chief 1998 $ 110,000 -0- -0- $25,000 140,000 -0- -0-
Financial Officer
</TABLE>
--------------------------------------------------------------------------------
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.
52
<PAGE>
Stock Option and Stock Appreciation Rights Plans
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
-----------------
<TABLE>
<CAPTION>
% of Total Potential Realization
Options Value at Assumed
Granted to Exercise Annual Rates of Stock
Options Employees Price Per Expiration Price Appreciation for
Name Granted in Fiscal Yr. Share Date Option Terms(1)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
Harley 60,000 100 % $1.50 2009 $ 56,600 $ 143,436
Dillard,
CFO
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts reported in the column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
Common Stock over the term of the options. These numbers are calculated based on
rules promulgated by the Securities and Exchange Commission and do not represent
the estimate of future Common Stock price. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the timing of such exercise
and the future market price of the Common Stock. There can be no assurance the
rates of appreciation assumed in this table can be achieved or amounts reflected
will be received by the individuals. This table does not take into account any
appreciation in the price of the Common stock from the date of grant to the
present date. The values shown are net of the exercise price, but do not include
deductions for taxes or other expenses associated with the exercise.
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 the
Company's key employees, officers, directors and consultants as part of the
Plan. The Board of Directors adopted the 1998 Stock Option Plan and reserved
1,000,000 shares under the Plan for the same purposes as the 1997 Plan. As of
August 28, 2000, the Company granted options for 748,000 shares pursuant to the
1997 Plan and 885,000 pursuant to the 1998 Plan. In May 2000, the stockholders
approved the 2000 Stock Option Plan and reserved 2,000,000 shares. To date, none
of the options issued pursuant to any of the Plans have been exercised.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Reisinger is part owner of a company that leases an office building
to the Company for corporate offices. The lease payments made in 1999 were
$48,000. He was also issued 3,000 shares of Common Stock for his services as a
director. In February 2000, Mr. Reisinger was granted options to purchase
500,000 shares of Common Stock. During 1999, the Company purchased cattle
totaling $389,881 from Mr. Reisinger and a company owned by Mr. Reisinger.
During 1999, the Company provided an automobile for Mr. Reisinger. Compensation
to Mr. Reisinger for vehicle costs totaled $451 in 1999.
Mr. John Walker, Mr. Reisinger's son-in-law, works for the Company. He
buys and sells cattle and was paid $60,000 for his services in 1999. Mr. Walker
and his wife, Mrs. Kathy Walker, own an entity that buys cattle from the
Company. During 1999, cattle purchases by Mr. and Mrs. Walker from the Company
were approximately $849,016. In order to ensure a sufficient supply of qualified
cattle, the Company enters into financing arrangements; i.e., repurchase
agreements, with related parties. The Company retains the benefit from any gains
on the cattle and the risk of any losses. In addition, the Company reimburses
the related party for any costs incurred on the cattle, such as grain, vet,
yardage, etc., as well as pay interest on the funds advanced by the related
party to "purchase" the cattle and to pay other expenses related to the cattle.
The Company purchases the cattle for meat processing. During 1999, the Company
paid the entity $448,342 under this arrangement. Mrs. Walker works as a
part-time bookkeeper for the company and for those services the Company paid
$5,400 in 1999.
Mr. Todd Reisinger, Mr. Reisinger's son, was a meat salesman for the
Company and was paid $27,500 in 1999.
Mr. Charles Kolbe, a director and employee, received 3,000 shares as
director fees in 1999. Mr. Kolbe also received consulting fees from the Company
totaling $16,667 in 1999. Mr. Kolbe also received $60,000 for work performed for
us. During 1999, the Company purchased cattle totaling $302,305 from Mr. Kolbe
and Mr. Kolbe's company purchased cattle from them totaling $199,369.
Mr. Reisinger, Mr. Walker, and Mr. Kolbe are owners of a trucking
business that transported cattle for us. During 1999, this entity was paid
$148,403 for its services.
Mr. Reisinger and Mr. Walker are part owners of a trucking company that
transports cattle for us. During 1999, this entity was paid $8,927.
Mr. Dwayne Lewis, a director, was issued 3,000 shares of Common Stock
for services as a director. During 1999, the Company sold cattle to his entity
totaling $1,507,130 and purchased cattle totaling $12,073,894 from his entity.
Mr. John Derner was paid a consulting fee of $16,667 in 1999. He was
also paid a salary of $60,000 as an employee. He was issued 3,000 shares of
Common Stock for his services as a director of the Company. Mr. Derner is an
owner of an entity that purchases cattle from the Company. In 1999, such
purchases totaled approximately $860,088. Also during 1999 the Company purchased
cattle totaling $4,743,111 from a company owned by Mr. Derner. Mr. Derner also
provided an airplane for the use by the Company, which pays Mr. Derner rent on
the airplane. The Company pays for the pilot, fuel, and expenses to third
parties on an as-used basis. The total of rent expense paid for 1999 was
$21,000.
Messrs. Holden and Daggett each were issued 3,000 shares of Common
Stock for their services as directors of the Company. Mr. Smit was issued 1,000
shares of Common Stock for his services as a director during 1999.
Mr. Harley Dillard, the Company's Chief Financial Officer, received
compensation in 1999 totaling $125,000. Mr. Dillard was also granted options to
purchase 60,000 shares of Common Stock during 1999.
Mr. John Schiering, the Chief Operating Officer of Red Oak Farms, Inc.
has an employment agreement that provides for a monthly salary of $11,250. The
initial term of the agreement is six months effective January 1, 2000. The
agreement may be renewed upon the mutual consent of both parties for an
additional two years. Mr. Schiering commutes from his home in Carmel, Indiana.
Upon the signing of the agreement, Mr. Schiering was granted options to purchase
25,000 shares of Common Stock. The options were granted and vested on January 1,
2000, and will expire on January 1, 2001. In the event Mr. Schiering is
terminated without cause, he will be entitled to his regular pro-rated salary
for a one hundred and twenty-day period following notice of termination.
Mr. Pete Hudgins was paid $61,333 during 1999 in salary. The Company
provided Mr. Hudgins with an automobile. Compensation to Mr. Hudgins for vehicle
costs totaled $1,610 in 1999. During 1999, Mr. Hudgins and another employee of
the Company sold the Company cattle totaling $158,984.
Management believes that all of the foregoing transactions have been on
terms no less favorable to them than could have been obtained from unaffiliated
third parties in arms-length transactions under similar circumstances.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's common stock as of September 15, 2000.
o the Company's Chairman of the Board and Chief Executive Officer and
each director
o all of its directors and executive officers as a group
o each person known to the Company to own beneficially more than 5% of
its outstanding shares
A person has beneficial ownership of shares if the individual has the
power to vote or dispose of the shares. This power can be exclusive or shared,
direct or indirect. In addition, a person beneficially owns shares underlying
options or warrants that are presently exercisable or will become exercisable
within 60 days of the date of this prospectus.
The address for all directors and executives is 2010 Commerce Drive,
Red Oak, Iowa 51566.
As of September 15, 2000, there were 16,019,165 shares of the Company's
common stock outstanding.
To calculate a stockholder's percentage of beneficial ownership, one
must include in the numerator and denominator those shares underlying options
beneficially owned by that stockholder. Options, warrants or other derivative
securities held by other stockholders, however, are disregarded in this
calculation. Therefore, the denominator used in calculating beneficial ownership
among the Company's stockholders may differ.
55
<PAGE>
Gordon Reisinger 6,812,653 (2) 38%
Rural Route 3
Red Oak, Iowa 51566
Cimarron Investments, LP 2,433,333 15%
RR 3
Red Oak, Iowa 51566
John Derner 8,698,055 (3) 45%
2353 213th Avenue
Milford, Iowa 51351
JKSBM, LP 2,175,000 14%
2353 213th Avenue
Milford, Iowa 51351
Charles Kolbe 1,112,154 (4) 7%
Dwayne Lewis 82,000 (5) *
Charles Wilson 2,061,165 (6) 11%
2016 Forest Ave NW
Red Oak, IA 51566
Johan Smit 324,000 (7) *
Torgil Hagman 0 *
Jack Holden 32,000 (8) *
Ron Daggett 74,000 (9) *
All Officers and Directors as 17,275,412 (10) 79%
a Group: (11 persons)
--------------------------------------------------------------------------------
* Represents less than 1%
(1) Beneficial ownership has been determined pursuant to Rule 13(d)-3 (d) (1)
under the Securities Exchange Act of 1934, as amended.
(2) Includes 512,820 shares owned by Cimarron Properties which is owned and
controlled by Gordon Reisinger and 2,433,333 shares owned by Cimarron
Investments, LP, a family partnership controlled by Mr. Reisinger. Also,
includes 1,880,000 stock options held by Mr. Reisinger.
(3) Includes 2,175,000 shares owned by JKSBM, a family limited partnership,
which is owned and controlled by Mr. Derner, and 512,821 shares owned by
Derner's of Milford, a company controlled by Mr. Derner and 265,000 shares
owned by the Derner Foundation which Mr. Derner controls. Also, includes
1,380,000 stock options held by Mr. Derner, 324,650 Common Stock purchase
warrants and 322,150 Series B Preferred Stock convertible into 1,610,750
shares of Common Stock.
(4) Includes 512,821 shares owned by Wall Lake Cattle Company, a company
controlled by Mr. Kolbe and includes 60,000 stock options.
(5) Includes 5,000 stock options and warrants to purchase 10,000 shares of
Common Stock.
(6) Includes 220,000 shares of Series B Preferred Stock convertible into
1,100,000 shares of Common Stock and 137,233 Series C Stock which is
convertible into 686,165 shares of Common Stock, and 226,250 warrants to
purchase Common Stock.
56
<PAGE>
(7) Includes 54,000 shares of Series B Preferred Stock convertible into 270,000
shares of Common Stock and 54,000 common stock purchase warrants.
(8) Includes options to purchase 5,000 shares of Common Stock and 10,000 Common
Stock purchase warrants.
(9) Includes 10,000 shares of Common Stock held jointly with Mr. Daggett's
spouse. Also includes jointly held warrants to purchase 10,000 shares of
Common Stock, and stock options to purchase 5,000 shares of Common Stock.
Also includes 7,000 Series B Preferred shares convertible into 35,000
shares of Common Stock, and 7,000 Common Stock purchase warrants.
(10) Includes warrants to purchase 649,000 shares of Common Stock, options to
purchase 3,428,000 shares of Common Stock, 604,750 shares of Series B
Preferred Stock and 140,033 shares of Series C Preferred Stock both
convertible into Common Stock at a ratio of 5 to 1.
DESCRIPTION OF CAPITAL STOCK
The Company's Authorized Capital Stock at September 15, 2000
o 100 million shares of common stock, par value $0.001 per share
o 10 million shares of preferred stock, par value $0.001 per share
Common Stock
Voting:
o one vote for each share held of record on all matters submitted to a vote
of stockholders
o no cumulative voting rights
o election of directors by plurality of votes cast
o all other matters by majority of the votes cast
Dividends:
o subject to preferential dividend rights, if any, of outstanding shares of
preferred stock, common stockholders are entitled to receive ratably
declared dividends
o the board of directors may declare dividends out of only legally available
funds
Additional Rights:
o subject to the preferential liquidation rights, if any, of outstanding
shares of preferred stock, common stockholders are entitled to receive
ratably net assets, available after the payment of all debts and
liabilities, upon the Company's liquidation, dissolution or winding up
o no preemptive rights
o no subscription rights
o no redemption rights
o no sinking fund rights
o no conversion rights
The rights and preferences of common stockholders are subject to the
right of any series of preferred stock the Company may issue in the future.
57
<PAGE>
PREFERRED STOCK
The Company may, by resolution of its board of directors, and without
any further vote or action by its stockholders, authorizes and issues, subject
to certain limitations prescribed by law, up to an aggregate of 10 million
shares of preferred stock. The preferred stock may be issued in one or more
classes or series of shares of any class or series. With respect to any classes
or series, the board of directors may determine the designation and the number
of shares, preferences, limitations and special rights, including dividend
rights, conversion rights, voting rights, redemption rights and liquidation
preferences. Because of the rights that may be granted, the issuance of
preferred stock may delay, defer or prevent a change of control.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's common stock is
Interwest Transfer Co., Inc.
Rule 144
Shares Eligible for Future Sale
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of the Company's common stock for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
o one percent of the number of shares of the Company's common stock then
outstanding, which will equal approximately 328,000 shares immediately
after this offering
o the average weekly trading volume of the Company's common stock on the OTC
Bulletin Board during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Approximately 12,788,731 shares of the Company's common stock is
eligible for sale under Rule 144.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of the
Company's affiliates at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately.
Stock Options
There are presently options to purchase 10,146,333 shares issued and
outstanding under the Company's stock option plans or other writings. All of
these shares will be eligible for sale in the public market from time to time,
subject to vesting provisions and Rule 144 volume limitations applicable to
affiliates.
58
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth, for each Selling Securityholder, the
amount of Common Stock of the Company owned, the number of shares of Common
Stock offered hereby, and the number of shares of Common Stock owned after the
offering (assuming the sale of all shares offered under this prospectus).
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles Dean Adams 540,000 540,000 0
Douglas/Carol Allensworth 775 775 0
Robert Poe Ames 2,666 2,666 0
Mickey Anderson 6,667 6,667 0
Paul Anderson 1,200 1,200 0
Ernest/Carrie Andrew 1,000 1,000 0
Pierre Antoine Anthamatten 67,000 67,000 0
William G. Artherholt 12,000 12,000 0
D.J.A. Bakker 120,000 120,000 0
Daniel M. Baris 6,250 6,250 0
Jeff Bateman 300 300 0
Tammy Bateman 300 300 0
David G. Beard 3,125 3,125 0
Jeff Behrens 1,200 1,200 0
Doug Bennett 1,667 1,667 0
Benson Land Co.,LLC 45,834 45,834 0
Richard Berendes 1,200 1,200 0
Shirley Berendes 1,200 1,200 0
Steven J. Berendes 10,000 10,000 0
Vicki L. Berger 1,800 1,800 0
Orville & Joan Beyea 10,000 10,000 0
Clarence L. Boettcher 10,000 10,000 0
Mary Ann Boggess 20,000 10,000 10,000
Hans H. Bonnett 12,000 12,000 0
Ashby Boyle 300 300 0
E.H. Brainard II 6,250 6,250 0
William K. Brand 30,000 30,000 0
William/Edith Breeding 2,000 2,000 0
Richard Brevik 2,400 2,400 0
Cathy and Mike Brincks 1,200 1,200 0
Richard Brincks 1,200 1,200 0
Bockman Ltd. 24,000 24,000 0
Douglas R. Brown 10,000 10,000 0
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Julaine A. Burchett 1,800 1,800 0
Calvin Clark Burns 20,000 20,000 0
Phillip/Gayanne Burns 10,000 10,000 0
Don/Beverly Burtenshaw 10,000 10,000 0
Jay Bush 12,000 12,000 0
Billy Bushelle 12,000 12,000 0
Rita Cagle 6,000 6,000 0
Capital Trade/MA Rayton 10,000 10,000 0
Sherry/Todd Carrick 700 700 0
Cede & Co. 99,000 99,000 0
Donald/Verona Chaffin 12,400 12,400 0
Jonathan D. Chaffin 1,800 1,800 0
Kimberly A. Chaffin 1,800 1,800 0
Tom Chambers 20,000 10,000 10,000
Ciro Cirrincione 45,000 12,500 32,500
Douglas B. Clausen 60,600 60,600 0
James M. Cofer 14,000 12,000 2,000
Colony Capital Inc. 35,000 30,000 5,000
Cookies Food Products 100,000 100,000 0
James Courtney 8,333 8,333 0
Thomas Courtney 8,334 8,334 0
Creative Investment Services 24,000 24,000 0
Heber Crockett 300 300 0
Greg Crooker 8,334 8,334 0
C. Cultuur 611,110 611,110 0
Ron Daggett (3) 74,000 52,000 22,000
Dangelmayr Bros Ranch 3,334 3,334 0
Rhonda Dardashi 3,000 3,000 0
Davis Taylor Insurance 3,334 3,334 0
Glynn/Bobbie Debter 1,666 1,666 0
E.C. Decker 6,000 6,000 0
John J. Derner (3) 8,698,055 3,315,400 5,382,655
Leo/Dana Despain 10,000 10,000 0
Ellen Dewitt 750 750 0
H.H./Mary Dickenson 3,333 3,333 0
Cheryl Dicks 1,000 1,000 0
Harley Dillard (3) 60,600 9,100 51,500
Paul Dixon 25,000 12,500 12,500
Dudley Bros. LTD 1,667 1,667 0
Dorothy Dutton 20,000 10,000 10,000
Arthur Dykstra 10,000 10,000 0
Richard P. Ellis 60,000 60,000 0
Arik Eshel 3,000 3,000 0
Kristen Evans 300 300 0
Matt Evans 300 300 0
Robert Falsone 3,333 3,333 0
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chris Fanelli 300 300 0
Linda J. Fasse 500 500 0
Tom Feller 60,000 60,000 0
Claude Feninger 3,125 3,125 0
Dennis Finger 10,000 10,000 0
Bob Fitzpatrick 1,500 1,500 0
Neil W. Flanagan 10,000 10,000 0
Jared Fleming 300 300 0
Michael Fleming 300 300 0
Rudolf E. & Maria Fluck 14,800 11,300 3,500
4-G Farms Inc. 3,333 3,333 0
Charles P. Foutz 3,000 3,000 0
Jamie Friend 43,400 41,400 2,000
David Frisbie 5,000 5,000 0
Edward Garza 3,600 3,600 0
J. Richard Giacoletto 12,500 6,250 6,250
Erik and Roland Giebels 6,665 6,665 0
Martien Giebels 6,665 6,665 0
Givens Feedlot Inc. 123,000 123,000 0
Susan Gluck 300 300 0
W.R. Goddard 18,000 18,000 0
William R. Goddard Jr. 41,000 28,000 13,000
Dale L. Goff 13,500 6,250 7,250
Enrico Graber 30,000 30,000 0
Richard Greenfield 10,000 10,000 0
Dale L. Gross 6,000 6,000 0
Grosvenor Trust Co 470,000 470,000 0
Jeffrey S. Gyurcsik 22,000 12,000 10,000
De Heer M. Hagenaar 25,000 25,000 0
Brenda Hall 300 300 0
Fred Hall 300 300 0
Haskell R. Hammontree 1,000 1,000 0
Arthur Handel Jr. 4,000 4,000 0
Bob Harrell Jr. 2,000 2,000 0
Denis Hatenboer 210,000 210,000 0
Roger H. Haugen 6,000 6,000 0
John B. Hewlett 10,000 10,000 0
Troy Alan Hoffman 24,000 24,000 0
Cory Hofman 300 300 0
Stacey Hofman 300 300 0
Holden Herefords Corp. (4) 32,000 10,000 22,000
Lee Hudgins 12,000 12,000 0
Nancy E. Hudgins 10,000 10,000 0
Pete Hudgins(3) 39,950 6,000 33,950
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard/Susan Hughes 10,000 10,000 0
Scott Huntsman 300 300 0
Jamison Herefords 3,334 3,334 0
David P. John 3,125 3,125 0
Brooke Johnson 1,200 1,200 0
Bruce E. Johnson 15,000 15,000 0
Marline K. Johnson 15,000 15,000 0
Travis Johnson 1,200 1,200 0
Williams Johnson 1,200 1,200 0
Ronald Jolley 7,000 7,000 0
Holly Kaplan 3,000 3,000 0
Jerry Kaplan 3,000 3,000 0
Robert Kaplan 6,000 6,000 0
Stanley Kaplan 3,000 3,000 0
Francis Kelly Jr. 51,500 42,500 9,000
Mike Kleckner 2,400 2,400 0
Klippenstein Family Farm 1,666 1,666 0
Clifford L Knight 3,000 3,000 0
Chuck Kolbe(3) 1,112,154 60,000 1,052,154
James W. Kruse 12,000 12,000 0
Williams R. Kuehn 12,000 12,000 0
Lackaff Cattle Corp. (4) 1,667 1,667 0
Roberto Lall 300 300 0
Tom Lambert 2,400 2,400 0
Richard Landress 27,000 15,000 12,000
C. Langerak 300,000 300,000 0
David/Freda Largent 5,000 5,000 0
Joseph E. Lazzara 3,125 3,125 0
Wallace L. Lee 3,333 3,333 0
Thomas A. Leister 112,500 72,500 40,000
Roy Levy 13,000 10,000 3,000
Lewis Feedlot Inc.(4) 82,000 10,000 72,000
P.A.A.M. Liebregts 16,665 16,665 0
Robert Linden 120,000 120,000 0
Robert/Evelyn Lindsay 4,000 4,000 0
Craig Lipsay 300 300 0
Jeff Logan 300 300 0
Thomas G. Maddi 12,000 12,000 0
George E. Maher 7,500 7,500 0
J. Patrick Maher 3,125 3,125 0
Debra/Larry Manz 10,000 10,000 0
Mapleton of Colorado 98,400 98,400 0
Estelle S. Matasovic 5,000 5,000 0
Marilyn Matasovic 5,000 5,000 0
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Timothy F. Matorella 1,500 1,500 0
Gary J. McAdam 717,000 717,000 0
Martin/Sherry McBee 6,250 6,250 0
Jack/Delores McCaffery 5,000 5,000 0
CH McCall 2,000 2,000 0
Brad McCasland 1,200 1,200 0
Mark/Teresa McClintock 10,000 10,000 0
Ray A. McCollum Jr. 185,770 129,000 56,770
McKinley Capital 33,000 33,000 0
Willard Mears 3,125 3,125 0
Brent Meeks 10,000 10,000 0
Mildred E. Meeks 10,000 10,000 0
Judy/David Meister 16,000 16,000 0
A.M. Micallef 20,000 20,000 0
Scott Mijares 440,000 440,000 0
Buck J. Miller 22,000 22,000 0
Greg A. Mohr 42,000 42,000 0
Monahan Cattle Company 10,000 10,000 0
Melvin Montana 300 300 0
Dan Morgan 1,000 1,000 0
Marius Morin 33,335 33,335 0
Robert L Morrow Jr 3,125 3,125 0
Neal Livestock GP 6,666 6,666 0
David Neal 833 833 0
Deborah Neal 833 833 0
Wilma Neal 1,666 1,666 0
Arianne Nemelka 30,000 30,000 0
Heather Nemelka 300 300 0
John Nemelka Jr 300 300 0
Mary Lou Nicholson 15,000 15,000 0
Michael Nutik 50,000 50,000 0
Oakview Companies Inc. 46,500 46,500 0
John O'Neil 12,500 6,250 6,250
Owen and Assoc. Inc. 100,000 100,000 0
Owen Enterprises LLC 10,000 10,000 0
Greg Pappajohn 600 600 0
Ervin Pauley Jr. 4,000 4,000 0
Samuel A. Peak 3,125 3,125 0
Pedretti Family Trust 5,000 5,000 0
Nancy Pellett 27,000 27,000 0
Douglas C. Perks 5,000 5,000 0
Peterson & Sons Holding Co. 110,000 110,000 0
Phoenix Inc. LLC 338,000 338,000 0
Joseph Pick 20,000 20,000 0
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marek Potocki 100,000 100,000 0
James L. Powell 10,000 10,000 0
Prewitt & Company LLC 15,000 15,000 0
Neil Ragin 6,000 6,000 0
Edythe Rahas 13,500 12,500 1,000
Rand L. Redfern 6,250 6,250 0
Gordon Reisinger(3) 6,812,653 1,380,000 5,432,653
Gregg E. Reisinger 47,000 47,000 0
Barbara Reitman 5,000 5,000 0
James R. Rice 3,125 3,125 0
James Richard Riddle 90,000 90,000 0
Robert Rietema 6,000 6,000 0
Thomas J. Roberson 3,000 3,000 0
R-Odyssey Ventures Inc. 315,000 315,000 0
Barbara J.Roller 2,500 2,500 0
Donald H. Roller 2,500 2,500 0
ROS Paper Sales Inc. 36,000 36,000 0
Abe Salaman 30,000 30,000 0
Jan Sandin 120,000 120,000 0
Jim W. Schaben Jr. 2,000 2,000 0
Chris Scharbauer 10,000 10,000 0
Ken Schechinger 10,000 10,000 0
June Schibilia 7,000 3,500 3,500
John H. Schiering(3) 39,000 14,000 25,000
Melvin/Fern Schlender 3,333 3,333 0
Norman/Gloria Schmitz 5,000 5,000 0
Schomers Land Corp. 132,000 132,000 0
David Schomers 13,200 13,200 0
Donald Schomers 790,000 575,000 215,000
Jerry/Patricia Schomers 182,600 132,600 50,000
Randy Schomers 30,000 30,000 0
Schomers' Bros. Inc. 120,000 120,000 0
Jan Schrasser 6,000 6,000 0
Daryll Schwieger 6,000 6,000 0
Robert Schwieger 32,000 32,000 0
Roger Schwieger 32,000 32,000 0
John Scowcroft 300 300 0
Jana Shafer 6,250 6,250 0
Greg/Cleo Shaw 3,000 3,000 0
Tom/Mary Shaw 2,000 2,000 0
Shooters Wholesale 30,000 30,000 0
Gary H. Shores 10,000 10,000 0
Shovel Dot Ranch 3,332 1,666 1,666
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kevin Singer 300 300 0
James H./Jean M. Sitton 3,000 3,000 0
SKG Enterprises Inc. 9,000 9,000 0
Barry Slosberg 12,500 6,250 6,250
Johan A. Smit(3) 324,000 324,000 0
Ona S. Smith 3,600 3,600 0
Laura Lee Sorenson 60,000 60,000 0
Amy Sostek 5,000 5,000 0
Richard Steen 10,000 10,000 0
Marion & Clement Stein 36,250 36,250 0
Amy Streit 6,000 6,000 0
Daniel H. Sterke 37,500 17,500 20,000
Roy/June Stewart 1,667 1,667 0
Ron Stevens 5,000 5,000 0
Stonehaven International Corp. 20,000 20,000 0
James/Shirley Stormont 23,250 18,125 5,125
Stuber Ranch 6,667 6,667 0
Roger Stuber 3,333 3,333 0
John A. Sturm 6,250 6,250 0
Summer Ventures Inc. 283,000 283,000 0
Howard H. Swanson 1,667 1,667 0
Stanley/Deborah Swanson 1,500 1,500 0
King/Becky Terry 10,000 10,000 0
Texoma Accts. Mngmt Inc. 5,000 5,000 0
John C. Thompson 6,000 6,000 0
Tono Farms LTD Corp 5,000 5,000 0
Scott/Monica Torrance 2,000 2,000 0
Tradeco Corp. 60,300 60,300 0
John Richard Trinity 12,000 12,000 0
Joseph Udall 300 300 0
Timothy/Karen Valles 6,250 6,250 0
J. Blom van Assendelft 30,000 30,000 0
R.A.M. van de Voort 33,335 33,335 0
Robert van Ekeren 33,340 33,340 0
Mart T. van Ginkel 17,500 17,500 0
B.A.A. van Leent 90,000 90,000 0
Joe Varner 12,000 12,000 0
Vaquillas Investments LTD 12,500 6,250 6,250
Donna/Ward Veale 20,000 10,000 10,000
Dale/Nancy Venhuizen 5,000 5,000 0
Kris/Gary Vetter 1,000 1,000 0
Merwin Viner 10,000 5,000 5,000
Tom Wageman 2,000 2,000 0
John P. Walker 64,107 64,107 0
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares that May be Beneficially Owned After
Selling to this Offering Offered Pursuant to this this Offering
Securityholder Prospectus (1)(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kathryn M. Walker 30,000 30,000 0
Chad Warren 300 300 0
Christy Warren 300 300 0
Johny R. Warren 3,410 3,125 285
David/Deanna Waters 3,500 3,500 0
Peter Weltchek 300 300 0
Jamie Wendelsdorf 2,400 2,400 0
Rand Werbitt 5,000 5,000 0
Ronnie L. Whaley 12,000 12,000 0
Donald W.White 10,000 10,000 0
Whitehead Properties Inc. 10,000 10,000 0
Gene Whitehead 10,000 10,000 0
Gene L. Wiese 10,000 10,000 0
Charles W. Wilson 2,061,165 2,012,415 48,750
William G. Wittmann 25,000 25,000 0
Chris Wolfe 10,000 10,000 0
James Wolfe 300 300 0
Ken Woods 10,000 10,000 0
ZDN LLC 300 300 0
Robert Zykofsky 5,000 2,500 2,500
TOTALS 29,434,911 16,714,653 12,720,258
</TABLE>
(1) Assumes that all of the Company's preferred stock is converted into
shares and all of the Company's Warrants are exercised into shares of
Common Stock. No assurance can be given as to the timing of the
conversion of the Preferred Stock or the exercise of the Warrants or as
to whether all or any of the preferred stock will be converted or all
any of the Warrants will be exercised.
(2) Assumes that all Options are exercised into Shares. No assurance can be
given as to the timing of the exercise of the Options or as to whether
all or any of the Options will be exercised.
(3) Denotes a director or executive officer of the Company.
(4) Denotes an entity controlled by a director.
66
<PAGE>
PLAN OF DISTRIBUTION
--------------------
The securities registered pursuant to this prospectus (the "Offered
Stock") may be sold from time to time by the Selling Securityholders or by
pledgees, donees, transferees or other successors-in-interest. The Offered Stock
may be sold in transactions on the OTC Bulletin Board, in privately negotiated
transactions, through the writing of Options on the shares, or a combination of
such methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of the sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Securityholders may effect such
transactions by the sale of the Offered Stock to or through broker-dealers, and
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Offered Stock for whom such broker-dealers may act as agent or
to whom they may sell as principal, or both.
The Selling Securityholders may also pledge the Offered Stock to a
broker-dealer and upon default under such pledge the broker-dealer may effect
sales of the Offered Stock pledged pursuant to this Prospectus. In addition, the
Offered Stock covered by this Prospectus may be sold in private transactions or
under Rule 144, rather than pursuant to this Prospectus.
The Company will not receive any of the proceeds from the sale of the
Offered Stock by the Selling Securityholders. The Company will receive the
exercise price of the Warrants and Options, if such Warrants and Options are
exercised, but will receive no proceeds from the resale of the underlying
shares, which may be offered hereby.
In order to comply with the securities laws of certain states, if
applicable, the Offered Stock will be sold in jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Offered Stock or an exemption from the registration or qualification requirement
is available and is complied with.
The Selling Securityholders and any broker-dealers or agents that
participate with the Selling Securityholders in the distribution of the Offered
Stock may be deemed to be "underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act of 1933 as amended (the "Securities Act").
The Company will pay all costs and expenses incurred in connection with
the registration under the Securities Act. This includes:
o all registration and filing fees;
o printing expenses; and
o fees and disbursements of the Company's counsel and accountants.
The Selling Securityholders will bear all commissions and discounts, if
any, attributable to sales of the Offered Stock.
The Selling Securityholders are under no obligation to sell all or any
of the Offered Stock. The Selling Securityholders are not restricted as to the
prices at which they may sell their shares and sales of such shares at less than
the market price may depress the market price of the Company's common stock.
67
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon
by John L. Thomas Esquire, Moorestown, New Jersey. Mr. Thomas beneficially owns
50,000 shares of Common Stock.
EXPERTS
The Company's consolidated financial statements as of December 31, 1999
and 1998 and for the years then ended have been included in this prospectus and
in the registration statement in reliance upon the reports of HLB Gross Collins,
P.C., independent certified public accountants, appearing elsewhere herein, upon
the authority of said firm as experts in accounting and auditing. The financial
statements included in this Prospectus and in the Registration Statement have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their reports appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
CHANGE IN ACCOUNTANTS
On December 4, 1998, BDO Seidman, LLP resigned as the Company's
certifying accountants. During the most recent fiscal year for which BDO
Seidman, LLP issued a report (1997), there were no disagreements with BDO
Seidman, LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable events.
BDO Seidman, LLP's report on the financial statements for the year ended
December 31, 1997, contained no adverse opinion or disclaimer of opinion and was
not qualified as to audit scope or accounting principles. The accountants'
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 January 18, 1999, the Company retained HLB Gross Collins, P.C. as
the Company's certifying accountants.
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission. This prospectus, which forms a part of the
registration statement, does not contain all of the information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and the Company's exhibits. With respect to
references made in this prospectus to any contract or other document of the
Company's, such references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract or document. The Company files annual, quarterly and special reports,
proxy statements and other information with the Commission.
You may review copies of the registration statements, any reports,
proxy statements, or any other information at the Securities and Exchange
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices in Chicago, Illinois, and New York, New York.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The Company's
Securities and Exchange Commission filings including the registration statement
can also be reviewed by accessing the Securities and Exchange Commission's
Internet site at http://www.sec.gov.
68
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998, and 1997
CONTENTS
Pages
-----
Independent Auditors' Reports F-2 - F-2A
Consolidated Financial Statements
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Equity F-6 - F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9 - F-26
Condensed Consolidated Balance Sheets, as of June 30, 2000
and December 31, 1999 F-27 - F-28
Condensed Consolidated Statements of Operations, for three
months and six months ended June 30, 2000 and 1999 F-29
Condensed Consolidated Statements of Cash Flows, for six
months ended June 30, 2000 and 1999 F-30
Notes to Condensed Consolidated Financial Statements F-31 - F-34
F-1
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998, and 1997
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Red Oak Hereford Farms, Inc.
We have audited the accompanying consolidated balance sheets of
RED OAK HEREFORD FARMS, INC.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Red
Oak Hereford Farms, Inc. as of December 31, 1999 and 1998, and the results of
its operations, changes in stockholders' equity, and its cash flows for the
years ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
/s/ HLB Gross Collins, P.C.
Atlanta, Georgia
March 1, 2000, except as to Note 15
which date is as of April 19, 2000
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Red Oak Hereford Farms, Inc.
Red Oak, Iowa
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Red Oak Hereford Farms, Inc. for the
year ended December 31, 1997. 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 results of operations and cash flows of
Red Oak Hereford Farms, Inc. for the year ended December 31, 1997, 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
noncompliance 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.
By: /s/ BDO Seidman, LLP
------------------------
BDO Seidman, LLP
Chicago, Illinois
March 28, 1998
F-2A
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 17,067 $ 16,079
Restricted cash 415,295 208,742
Accounts receivable
Trade, less allowance for doubtful accounts of
$10,000 at December 31, 1999 and 1998 790,363 765,262
Receivable due from factor 171,756 262,102
Related parties 364,372 13,379
Receivable due from stock subscriptions 277,000 --
Inventories 3,142,825 919,459
Prepaid expenses and other assets 69,799 106,668
----------- -----------
TOTAL CURRENT ASSETS 5,248,477 2,291,691
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Buildings and leasehold improvements 294,974 294,974
Equipment and vehicles 384,635 335,383
----------- -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 679,609 630,357
Less accumulated depreciation (334,475) (286,787)
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT 345,134 343,570
----------- -----------
OTHER ASSETS
Receivables, noncurrent 192,591 --
Investment in partnership 24,600 40,961
Other assets 246,242 294,480
----------- -----------
TOTAL OTHER ASSETS 463,433 335,441
----------- -----------
TOTAL ASSETS $ 6,057,044 $ 2,970,702
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Checks in excess of bank balance $ 258,054 $ 119,490
Accounts payable
Trade 538,177 264,814
Related parties 1,599,583 1,846,680
Accrued expenses 457,783 641,334
Notes payable 1,615,000 850,000
Current maturities of long-term debt 2,421,484 1,115,424
Current maturities of deferred income 100,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 6,990,081 4,937,742
------------ ------------
LONG-TERM LIABILITIES
Deferred income 200,000 200,000
Long-term debt, less current maturities 2,471,360 1,163,815
------------ ------------
TOTAL LONG-TERM LIABILITIES 2,671,360 1,363,815
------------ ------------
TOTAL LIABILITIES 9,661,441 6,301,557
MINORITY INTERESTS IN SUBSIDIARIES (223,288) (103,822)
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, authorized 50,000,000 16,025 15,003
shares; issued and outstanding 16,025,415 shares for
1999 and 15,003,415 shares for 1998
Cumulative preferred stock, series A, $0.001 par value, -- 200
authorized 200,000 shares; issued and outstanding
200,000 shares for 1998
Cumulative preferred stock, series B, $0.001 par value, 678 --
authorized 1,200,000 shares; issued and outstanding
678,450 shares for 1999
Preferred stock, series C, $0.001 par value, authorized 13 --
2,000,000 shares; issued and outstanding 13,201 shares
for 1999
Additional paid-in capital 10,899,605 7,384,359
Retained deficit (14,297,430) (10,626,595)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (3,381,109) (3,227,033)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,057,044 $ 2,970,702
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
NET SALES
<S> <C> <C> <C>
Boxed beef $ 45,614,347 $ 36,545,948 $ 31,984,251
Cattle trading 22,169,023 28,016,784 60,249,120
Cattle trading sales to related parties 3,784,429 4,199,028 13,092,322
------------- ------------- -------------
TOTAL NET SALES 71,567,799 68,761,760 105,325,693
------------- ------------- -------------
COST OF GOODS SOLD
Cattle purchased for processing 19,307,758 17,601,849 24,942,513
Cattle purchased for processing from related 17,980,350 14,698,225 5,036,217
parties
Cattle purchased for trading 24,503,449 30,299,854 66,707,330
Cattle purchased for trading from related 27,395 1,176,782 3,555,699
parties
Other processing costs 6,402,533 3,569,205 2,628,937
Other trading costs 163,458 220,372 422,156
Loss on expired inventory 337,663 -- --
------------- ------------- -------------
TOTAL COST OF GOODS SOLD 68,722,606 67,566,287 103,292,852
------------- ------------- -------------
GROSS PROFIT 2,845,193 1,195,473 2,032,841
------------- ------------- -------------
OPERATING EXPENSES
Selling and distribution 2,891,880 3,075,737 3,414,137
General and administrative 2,453,065 2,836,510 2,836,508
------------- ------------- -------------
TOTAL OPERATING EXPENSES 5,344,945 5,912,247 6,250,645
------------- ------------- -------------
LOSS FROM OPERATIONS (2,499,752) (4,716,774) (4,217,804)
------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest income 18,812 9,395 63,062
Interest expense (1,007,884) (432,271) (343,404)
Loss on sale of accounts receivable (233,079) (154,367) --
Loss from cattle feeding joint venture (68,398) (1,386,247) --
------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSES) (1,290,549) (1,963,490) (280,342)
------------- ------------- -------------
LOSS BEFORE MINORITY INTERESTS (3,790,301) (6,680,264) (4,498,146)
MINORITY INTERESTS 167,967 103,822 --
------------- ------------- -------------
NET LOSS (3,622,334) (6,576,442) (4,498,146)
PREFERRED STOCK DIVIDEND REQUIREMENT (10,234) (164,649) (17,010)
------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (3,632,568) $ (6,741,091) $ (4,515,156)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.23) $ (0.46) $ (0.33)
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 15,538,631 14,719,092 13,618,705
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Predecessors' Entities Red Oak Hereford Farms, Inc.
---------------------------- ---------------------------------------------------------
Members' Partners' Common Preferred Stock
Equity Equity Stock Series A Ser B Ser C Capital
----------- ----------- ----------- ----------- ----- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 12,005 $ 878,738 $ -- $ -- $-- $ -- $ --
Purchase of treasury stock (31,000) -- -- -- -- -- --
Distribution of joint venture -- (60,459) -- -- -- -- --
Contributions of net assets of 533,402 -- 10,960 -- -- -- (517,500)
predecessors to Red Oak
Hereford Farms, Inc. in exchange
for common stock
Contributions of net assets of -- (884,693) 1,538 200 -- -- 882,955
Midland Cattle Company, Inc. in
exchange for common stock
Issuance of common stock
Sale of private placement -- -- 1,500 -- -- -- 4,498,500
Exercise of 400,000 -- -- 400 -- -- -- 1,199,600
stock options
For services -- -- 32 -- -- -- 96,735
Stock offering costs -- -- -- -- -- -- (421,685)
Net income (loss) (514,407) 66,414 -- -- -- -- --
----------- ----------- ----------- ----------- ----- ------ -----------
BALANCE, DECEMBER 31, 1997 $ -- $ -- $ 14,430 $ 200 $-- $ -- $ 5,738,605
</TABLE>
Additional
Paid-In Retained
Deficit Total
----------- -----------
BALANCE, DECEMBER 31, 1996 $ -- $ 890,743
Purchase of treasury stock -- (31,000)
Distribution of joint venture -- (60,459)
Contributions of net assets of -- 26,862
predecessors to Red Oak
Hereford Farms, Inc. in exchange
for common stock
Contributions of net assets of -- --
Midland Cattle Company, Inc. in
exchange for common stock
Issuance of common stock
Sale of private placement -- 4,500,000
Exercise of 400,000 -- 1,200,000
stock options
For services -- 96,767
Stock offering costs -- (421,685)
Net income (loss) (4,050,153) (4,498,146)
----------- -----------
BALANCE, DECEMBER 31, 1997 $(4,050,153) $ 1,703,082
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997 (Continued)
<TABLE>
<CAPTION>
Predecessors' Entities Red Oak Hereford Farms, Inc.
---------------------------- ---------------------------------------------------------------
Additional
Members' Partners' Common Cumulative Preferred Stock Paid-In
Equity Equity Stock Series A Series B Series C Capital
----- ------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $-- $ -- $ 14,430 $ 200 $ -- $ -- $ 5,738,605
Issuance of common stock
Sale of private placement -- -- 332 -- -- -- 1,328,168
For services -- -- 241 -- -- -- 471,351
Stock offering costs -- -- -- -- -- -- (153,765)
Net loss -- -- -- -- -- -- --
----- ------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 -- -- 15,003 200 -- -- 7,384,359
Issuance of common stock
For services -- -- 22 -- -- -- 25,478
Conversion of preferred stock
Series A -- -- 1,000 (200) -- -- (800)
Issuance of preferred stock
Series B -- -- -- -- 678 -- 3,391,571
Series C -- -- -- -- -- 13 98,997
Increase in ownership of Subsidiary -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
----- ------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 $-- $ -- $ 16,025 $ -- $ 678 $ 13 $ 10,899,605
===== ====== ============ ============ ============ ============ ============
</TABLE>
Retained
Deficit Total
------------ ------------
BALANCE,DECEMBER 31, 1997 $ (4,050,153) $ 1,703,082
Issuance of common stock
Sale of private placement -- 1,328,500
For services -- 471,592
Stock offering costs -- (153,765)
Net loss (6,576,442) (6,576,442)
------------ ------------
BALANCE, DECEMBER 31, 1998 (10,626,595) (3,227,033)
Issuance of common stock
For services -- 25,500
Conversion of preferred stock
Series A -- --
Issuance of preferred stock
Series B -- 3,392,249
Series C -- 99,010
Increase in ownership of Subsidiary (48,501) (48,501)
Net loss (3,622,334) (3,622,334)
------------ ------------
BALANCE, DECEMBER 31, 1999 $(14,297,430) $ (3,381,109)
============ ============
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,622,334) $ (6,576,442) $ (4,498,146)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 121,607 130,460 93,564
Services rendered in exchange for common stock 25,500 471,592 123,629
Loss from partnership 16,361 659,038 -
Minority interest in loss of subsidiary (167,967) (103,822) -
Loss on disposal of assets 1,872 - -
Changes in:
Accounts receivable (755,339) 2,982,761 470,677
Inventories (2,223,366) 69,731 31,841
Prepaid expenses 36,869 (10,264) 11,452
Checks in excess of bank balances 138,564 (131,969) (1,301,470)
Accounts payable and accrued expenses 2,445,290 2,302,688 (453,150)
-------------- -------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (3,982,943) (206,227) (5,521,603)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property - 17,417 -
Purchase of property and equipment (81,907) (62,406) (71,491)
Purchase of intangible assets (7,500) (250,000) -
Increase in restricted cash (206,553) (208,742) -
Change in other assets 12,602 (65,012) (9,844)
Investment in partnership - (200,000) (500,000)
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (283,358) (768,743) (581,335)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 1,174,735 5,278,315
Net proceeds from issuance of preferred stock 3,491,259 - -
Net borrowings (payments) on lines of credit 175,000 (830,294) 424,076
Proceeds from issuance of notes payable 1,000,000 656,326 -
Principal payments on notes payable - (246,326) -
Proceeds from issuance of long-term debt 19,181 350,000 524,560
Principal payments on long-term debt (418,151) (126,385) (19,561)
Purchase of treasury stock - - (31,000)
Distributions paid - - (60,459)
-------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,267,289 978,056 6,115,931
-------------- -------------- --------------
INCREASE IN CASH 988 3,086 12,993
CASH, BEGINNING OF YEAR 16,079 12,993 -
-------------- -------------- --------------
CASH, END OF YEAR $ 17,067 $ 16,079 $ 12,993
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(1) Summary of significant accounting policies
Nature of business and organization - Red Oak Hereford
Farms, Inc. (the "Company") is a Nevada corporation engaged in the
business of selling premium, branded, fresh beef to retail and food
service markets through its wholly owned subsidiary, Red Oak Farms, Inc.
("ROF"), buying and selling feeder cattle in the wholesale markets
through its wholly owned subsidiary, Midland Cattle Company, Inc., an
Iowa corporation ("Midland"), and producing and selling beef jerky to
retail markets through its 80% owned subsidiary, My Favorite Jerky, LLC
("MFJ").
On March 14, 1997, Wild Wings, Inc. (now known as Red Oak
Hereford Farms, Inc.) entered into an Agreement and Plan of
Reorganization (the "Acquisition") with ROF. Pursuant to terms of the
Acquisition, Wild Wings, Inc. effected a reverse acquisition by acquiring
all of the issued and outstanding stock of ROF from the stockholders of
ROF in exchange for 10,000,000 restricted shares of the $0.001 par value
common stock plus options to purchase an additional 3,000,000 shares of
Wild Wings, Inc. As a result of the Acquisition, ROF 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, 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 at historical cost. Prior to
March 14, 1997, Wild Wings, Inc. operated a hunting club and had
insignificant operations; accordingly, the accompanying financial
statements reflect the financial position and results of ROF.
In February 1997, ROF was formed with members of Mid-Ag,
LLC, a limited liability company, contributing the assets and liabilities
of Mid-Ag, LLC to ROF in exchange for all of the outstanding stock of
ROF. ROF was 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 Premium Hereford Beef ("PHB") for the Company by
financing the feeding of PHB cattle for sale to ROF. Feeders issued notes
to experienced cattle investors and used the proceeds for a joint
venture, Quality Feeders ("Quality"), a Nebraska partnership with
MoorMan's, Inc. ("MoorMan"). Quality, whose operations commenced in
January 1998, feeds and raises PHB to provide a supply of PHB cattle to
meet customer demands. Quality buys cattle from Midland and others,
places the cattle in feedlots and oversees the feeding pursuant to PHB
standards. This investment is being accounted for under the equity method
of accounting.
During the third quarter 1998, the Company formed two new
subsidiaries, Here's The Beef Corp. ("HTB") and My Favorite Jerky, LLC
("MFJ"). The Company owns 80% of HTB and a minority shareholder, Cable
Print Network/Marketing, Inc., owns 20%. HTB was created for the purpose
of beginning a multi-media distribution network. MFJ was originally owned
60% by the Company and 40% by McClellan Creek Gourmet Meats, Inc.
("McClellan"). The Company acquired an additional 20% ownership interest
in MFG on January 1, 1999. MFJ was established to produce, market and
sell a natural style beef jerky.
The Company extends unsecured credit to customers
predominantly located in the Southwest and Midwest United States.
F-9
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(1) Summary of significant accounting policies (continued)
Revenue recognition - The Company recognizes revenue upon
shipment.
Principles of consolidation - The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, ROF, Midland, Feeders, and its 80% owned subsidiaries, HTB
and MFJ. 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 - All inventories are stated at the lower of cost
or market determined by the first-in, first-out (FIFO) method. During
1998, the Company began hedging cattle inventories and fed cattle
purchase contracts to the extent considered practicable for minimizing
risks from market price fluctuations. Realized and unrealized gains and
losses on futures and option contracts that qualify as hedges are
deferred until the related inventories are sold or purchase contracts are
settled. Those realized and unrealized gains and losses are considered in
determining net realizable value for lower of cost or market calculations
for related inventories.
Property and equipment - Property and equipment are stated
at cost and depreciated over the estimated useful life of each asset,
primarily 3 to 15 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 a licensing agreement and loan and grant origination costs.
Amortization is computed using the straight-line method over the
following lives: licensing agreement, 15 years; loan and grant
origination costs, the life of the 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 a Certified Hereford Beef Program. If
ROF meets certain conditions, grant repayment will be permanently waived
and the income will be recognized. If the requirements are not met, this
deferred income will become a note payable.
In 1996, ROF 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 8.25%.
The grants are collateralized by substantially all of ROF's
assets and guaranteed by the Company's president.
Advertising costs - Advertising costs, consisting primarily
of marketing material for the promotion of beef and jerky products and
for investor promotional information, are expensed as incurred. Total
advertising costs were $227,415, $279,698, and $762,762 in 1999, 1998 and
1997, 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.
F-10
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(1) Summary of significant accounting policies (continued)
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 No. 128 ("SFAS 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 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging
activities and is effective for fiscal years beginning after June 15,
2000, as amended by SFAS No. 137. The Company believes that adoption of
this pronouncement will have no material impact on the Company's
financial position and results from operations.
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.
Reclassifications - Certain amounts in the 1998 and 1997
financial statements have been reclassified to agree with the 1999
presentation.
(2) Operating losses
The Company has suffered recurring losses since its
inception due to its start-up nature in establishing a premium branded
Hereford beef product.
Negative factors for the Company in addition to recurring
operating losses include working capital deficiencies, negative net
worth, negative cash flows from operations, technical noncompliance with
certain financial conditions of its inventory line of credit, and new
competition in the Hereford beef market. Positive factors for the Company
include additional capital infusions and conversions of short-term debt
to long-term debt (Notes 7 and 11), an increase in beef sales and gross
margin in 1999 compared to 1998, and a decrease in the net loss for 1999
compared to 1998.
F-11
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(2) Operating losses (continued)
Management is in the process of completing private placement
offerings of preferred stock and conversions of debt to equity (Note 15).
Sales efforts are being made to effect changes in the product mix of
premium beef sales and to increase the volume percentage of branded
versus commodity sales. In addition, REW Marketing, Inc., the Company's
sales broker, has indicated substantial purchase commitments from
customers at profitable margins for new products such as pre-cooked beef,
deli beef, beef jerky sticks, beef jerky in 4 oz. bags, and imported
salmon. The Company has developed an 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.
(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 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
years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Sales $ 3,784,429 $ 4,199,028 $ 13,092,322
Purchases 18,007,745 15,875,007 8,591,916
Accounts receivable 364,372 13,379 1,102,565
Accounts payable 1,599,583 1,846,680 54,528
</TABLE>
Additionally, during the years ended December 31, 1999, 1998
and 1997, ROF purchased cattle from Midland in the amounts of $23,912,
$442,084, and $358,796, respectively. During the years ended December 31,
1999 and 1998, MFJ purchased beef from ROF in the amounts of $10,495 and
$41,750, respectively. Such intercompany purchases are eliminated in
consolidation.
The Company leases office space owned by a related party
under two one-year leases dated March 1, 1999, which provide for monthly
rent payments totaling $4,000. On March 1, 2000, the Company renewed its
corporate office leases for an additional year for the same monthly rent
payments.
During the years ended December 31, 1999, 1998 and 1997, the
Company paid management fees of $80,000, $179,999, and $376,960,
respectively, to affiliates.
During 1998 and 1997, the Company adopted various stock
based compensation plans through which it granted stock options to
officers, directors, and employees (Note 11).
To insure a sufficient supply of PHB, the Company entered
into financing arrangements, i.e. repurchase agreements, with related
parties. The cattle are purchased by the Company and then "sold" to a
related party for feeding. When the cattle are the correct weight, they
are repurchased by the Company for meat processing. The Company's
agreement with the related party is that the Company retains the benefit
from any gains on the cattle and the risk of any losses. In addition, the
Company reimburses the related party for any costs incurred on the
cattle, such as grain, vet, yardage, etc., as well as pays interest on
the funds advanced by the related party to "purchase" the cattle and to
pay other expenses related to the cattle. Cattle financed under these
agreements totaled $1,161,469 and $1,089,028 for the years ended December
31, 1999 and 1998, respectively. Additional feeding costs paid to related
parties totaled $284,006 and $841,217 for the years ended December 31,
1999 and 1998, respectively.
F-12
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(3) Related party transactions (continued)
In conjunction with the Company's cattle feeding joint
venture with MoorMan, Cimarron Properties, Ltd. (Cimarron), which is
owned by the Company's president, purchased cattle for the PHB program.
The Company incurred feeding costs of $52,037, and $727,209 on these
cattle during the years ended December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, the Company has notes payable
to stockholders totaling $3,393,290 and $1,070,000, respectively. In
addition, the Company has notes payable to joint venture partners
totaling $1,976,103 and $1,210,000 at December 31, 1999 and 1998,
respectively.
On December 28, 1999, the Company entered into a settlement
agreement to restructure the Company's outstanding indebtedness to
MoorMan and Quality, and guarantees on notes due MoorMan from the
Company's president and from Cimarron, with outstanding balances at
December 28, 1999 of $966,971 and $1,095,810, respectively. Subsequent to
the settlement, the Company and the Company's president will guarantee a
note payable of $311,396 to MoorMan from Cimarron. (Note 7).
(4) Restricted cash
Restricted cash of $325,295 represents certificates of
deposit which secure a letter of credit of $415,000. The letter of credit
is also secured by property owned by the Company's president and the
guarantees of the president and a director. The letter of credit expires
on February 22, 2001.
Restricted cash of $90,000 represents certificates of
deposit which are required as a payment guarantee by Budelpack
Co-Packers, B.V., which will package jerky for European markets.
(5) Factoring agreement
On April 20, 1998, the Company entered into an agreement
whereby it sells selected accounts receivable without recourse to KBK
Financial, Inc. ("KBK"). The Company received $31,077,233 and $20,581,776
in proceeds from the transfer of its receivables during the years ended
December 31, 1999 and 1998, respectively. KBK maintains a reserve for
delinquencies and claims. The amounts held by KBK at December 31, 1999
and 1998 were $171,756 and $262,102, respectively, which are reflected as
due from factor on the balance sheet. The agreement provides for a 0.75%
fixed discount on the accounts sold . These discounts totaled $233,079
and $154,367 during the years ended December 31, 1999 and 1998,
respectively, and are presented on the statements of operations as loss
from sale of accounts receivables. In addition, the agreement provides
for an interest charge of KBK's base rate plus two percent per annum on
amounts advanced but not yet collected by KBK.
(6) Inventories
Inventories at December 31, 1999 and 1998 consisted of the
following:
1999 1998
----------------- ----------------
Boxed beef $ 1,029,808 $ 635,202
Packaged jerky - 33,945
Cattle 1,938,114 121,454
Other 174,903 128,858
----------------- ----------------
Total inventory $ 3,142,825 $ 919,459
================= ================
Loss on expired inventory, presented on the statements of
operations in cost of goods sold, represents jerky inventory which was
near expiration at December 31, 1999.
F-13
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(7) Notes payable and long-term debt
Short-term notes payable consisted of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Revolving line of credit (A) $ 615,000 $ 440,000
Note payable to stockholder (B) - 410,000
Note payable to stockholder (C) 1,000,000 -
----------------- ----------------
Total short-term notes payable $ 1,615,000 $ 850,000
================= ================
</TABLE>
Long-term debt consisted of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Note payable to stockholder (B) $ 466,480 $ -
IDED installment note (D) 436,447 458,047
MoorMan's, Inc. (E) 1,788,604 1,000,000
Feeders' notes (F) 450,000 550,000
Equipment notes (G) 56,323 61,192
McClellan Creek Gourmet Meat (H) 187,500 210,000
Wall Lake Cattle Company (I) 325,924 -
Note payable to stockholder (J) 1,181,566 -
----------------- ----------------
Subtotal 4,892,844 2,279,239
Less current maturities (2,421,484) (1,115,424)
----------------- ----------------
Total long-term debt, less current maturities $ 2,471,360 $ 1,163,815
================= ================
</TABLE>
Aggregate annual maturities of notes payable and long-term
debt are as follows:
2000 $ 4,036,487
2001 475,809
2002 1,987,868
2003 7,680
-----------------
Total $ 6,507,844
=================
The carrying amounts approximate fair value for the above
debt instruments since the interest rates vary based on the prime rate.
(A) On April 20, 1998, ROF entered into an agreement with KBK to
provide an asset based line of credit. The line provides
borrowings up to $1,500,000 based on eligible inventory. The line
of credit was renewed January 15, 2000 and matures on April 15,
2000, with interest due on the 15th day of each month. Interest is
based on a fluctuating rate per annum (13.50% at December 31,
1999). The line of credit is collateralized by substantially all
of the subsidiary's assets and personal guarantees of the
Company's president and a director. The Company is in technical
noncompliance on certain financial conditions of its loan
agreement with KBK, which gives KBK the right to call the loan.
However, KBK has given no indication of any intention to call this
obligation.
F-14
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(7) Notes payable and long-term debt (continued)
(B) A major stockholder loaned the Company $150,000 on June 25,
1998, and an additional $260,000 on August 13, 1998. The
short-term notes payable were restructured as long-term debt
during 1999. Principal and interest of 9.00% per annum are due
October 15, 2002. Accrued interest of $56,480 is noncurrent and is
reflected in the note payable balance. The Company granted a
security interest to the stockholder in all of the common stock of
HTB that the Company owns.
(C) On September 15, 1999, the Company entered into an agreement
with a stockholder to provide a revolving line of credit which
matures on March 16, 2000. The line provides borrowings of up to
$1,000,000 with interest chargeable at 20.00% per annum. As
additional compensation, the stockholder has the option to convert
the value of the interest on this line of credit into common stock
at $1.50 per share through September 15, 2001.
(D) Installment note payable to the Iowa Department of Economic
Development; payable in quarterly installments of $14,602
including interest of 8.25%, with final payment due on July 15,
2001 of $409,716. The note is subordinated to KBK line of credit
(A) of ROF and is guaranteed up to $300,000 by the Company's
president.
(E) On December 28, 1999, the Company entered into a settlement
agreement to restructure the Company's outstanding indebtedness to
MoorMan and Quality, and guarantees on notes due MoorMan from the
Company's president and from Cimarron, with outstanding balances
at December 28, 1999 of $966,971 and $1,095,810, respectively.
Subsequent to the settlement, the Company and the Company's
president will guarantee a note payable of $311,396 to MoorMan
from Cimarron. Under the terms of the agreement, MoorMan
restructured various debts of the Company into one note, repayable
at $250,000 on December 28, 1999, $1,500,000 on February 15, 2000
and monthly principal payments of $24,050 plus 8.50% interest
beginning March 1, 2000 through February 1, 2001. The note is
subordinated to the KBK line of credit (A) of ROF.
(F) On December 31, 1997, Feeders received proceeds of $500,000
from the issuance of three loans payable to stockholders for
financing the feeding of PHB cattle. The loans are due on December
31, 2000, and bear interest at the rate of 10.00% paid annually.
On January 14, 1998, Feeders received an additional $100,000 from
a fourth loan with the same terms. An early payment of $50,000 was
made on one of the loans in 1998. During 1999, one of the loans
was paid in full with a principal payment of $100,000 plus accrued
interest.
(G) Three installment notes due in monthly payments totaling
$1,796 in 1999 and $1,389 in 1998. The interest rates vary between
0.90% and 8.95%. The notes are secured by vehicles. In addition,
the Company entered into a lease agreement to obtain computer
equipment on March 26, 1998. This agreement is classified as a
capital lease. The lease is payable $829 per month through June 1,
2003.
(H) On July 1, 1998, an agreement was entered into by the
Company, McClellan and MFJ. McClellan agreed to transfer and
assign to MFJ all its rights to its natural style beef jerky. In
partial consideration for such conveyance, MFJ agreed to pay
$250,000 to McClellan as follows: $10,000 upon execution of the
agreement, four $10,000 monthly installments beginning August
1998, $12,500 on December 1, 1998, $50,000 on December 31, 1999,
and $137,500 on December 31, 2000.
F-15
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(7) Notes payable and long-term debt (continued)
(I) During the year ended December 31, 1999, the Company
converted $286,240 of cattle payables due to a company owned by
the Company's Chairman to long-term debt. Principal and interest
of 9.00% per annum are due October 15, 2002. Accrued interest of
$39,684 is noncurrent and is reflected in the note payable
balance.
(J) During the year ended December 31, 1999, the Company
converted $1,159,550 of cattle payables due to a major stockholder
to long-term debt. Principal and interest of 9.00% per annum are
due October 15, 2002. Accrued interest of $22,016 is noncurrent
and is reflected in the note payable balance.
(8) Financial instruments and hedging activities
The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes. They
are used to manage well-defined commodity price risks. Specifically, the
Company uses futures and option contracts to reduce price volatility of
fed cattle. These contracts permit settlement by delivery of commodities.
At December 31, 1999, there were no unsettled futures or options
contracts. The Company had outstanding cattle purchase contracts for fed
cattle totaling approximately 1,245,000 pounds, purchased on the rail.
Since these contracts qualify as hedges and correlate to
price movements of inventory and cattle contracts, any gains or losses
resulting from market changes will be offset by losses or gains on the
Company's hedged inventory purchase contracts. Total unrealized gains for
the Company's cattle hedging activities were approximately $35,600 at
December 31, 1998. Total realized gains for the Company's cattle hedging
activities were $26,968 for the year ended December 31, 1999.
(9) 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%
and the Iowa income tax rate of 12% 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:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Deferred tax assets
Net operating loss carry forwards $ 5,965,680 $ 4,452,000
Valuation allowance (5,965,680) (4,452,000)
---------------- ---------------
Net deferred tax assets $ - $ -
================ ===============
</TABLE>
As of December 31, 1999, the Company had approximately
$14,204,000 of unused operating loss carryforwards which expire by
December 31, 2019.
F-16
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(10) Commitments and contingencies
Noncancellable operating leases - The Company leases certain
office equipment and property under noncancellable operating leases
expiring in various years. Future minimum lease payments at December 31,
1999, are as follows:
2000 $ 133,231
2001 116,980
2002 39,985
2003 39,600
2004 39,600
-----------
Future minimum lease payments $ 369,396
===========
Total rent expense related to these leases was $171,428,
$66,494, and $107,486 for 1999, 1998 and 1997, 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
Certified Hereford Beef ("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 required the Company to maintain certain cattle
processing standards and process a certain number of CHB cattle. In
addition, the agreement required the Company to pay the AHA a minimum
royalty fee calculated for CHB cattle processed of $850,000, $725,000 and
$500,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company incurred royalty fees to the AHA of
approximately $524,000 and $500,000 in 1998 and 1997.
On January 1, 1999, ROF terminated its prior agreement with
AHA and entered into a new agreement. As part of the termination
agreement, ROF agreed to pay $24,195 of accrued royalty fees and an
additional $200,000 payable in four quarterly installments of $50,000
beginning March 31, 1999. The additional $200,000 was accrued and charged
to operations for the year ended December 31, 1998. The new nonexclusive
license agreement provides for a per head fee for each head of cattle
processed as CHB. Pursuant to the license agreement, ROF may use the AHA
trademark and program information. The agreement automatically renews for
one year on the anniversary date. The Company incurred $202,855 for
royalty fees in 1999. The balance due AHA including interest as of
December 31, 1999 and 1998 was $202,062 and $224,195, respectively.
Major customers and suppliers - During 1999, pursuant to its
slaughter and fabrication agreement, the Company's meat packer purchased
cattle and other products representing 16.7% of total revenues. In
addition, two related party feeders supplied cattle totaling 28.6% of
cost of goods sold and an additional feeder supplied cattle totaling
10.1% of cost of goods sold. During 1998, pursuant to its slaughter and
fabrication agreement, the Company's meat packer purchased cattle and
other products representing 12.0% of total revenues. In addition, one
feeder supplied cattle totaling 10.0% of cost of goods sold. For the year
ended December 31, 1997, there were no customers or suppliers which
exceeded 10.0% of revenues or cost of goods sold.
Legal proceedings - To the knowledge of management, there is
no material litigation pending or threatened against the Company or its
management.
Purchase contracts - In order to ensure a steady supply of
PHB and to keep the cost of products stable, the Company has entered into
contracts with producers for the purchase of cattle. Under these
contracts, the Company is committed at December 31, 1999 to purchase
cattle at an estimated cost of $1,395,000 in 2000.
F-17
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(11) Stockholders' equity
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
$0.001 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.
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. The private placement offering was closed on September
14, 1998. The Company raised $1,328,500 through the sale of 332,125 units
before deducting offering expenses of $153,585.
On September 30, 1998, the Company's Board of Directors
granted 150,000 shares of common stock to three directors in recognition
of the outstanding service provided by each individual. As a result of
the grant of common stock, the Company recognized $257,892 of
compensation expense. Also, on September 30, 1998, the Company granted
50,000 shares of common stock for consulting services to Andrew Glashow
and Empire Management Ltd. As a result of this grant, the Company
recorded an expense totaling $86,000.
In 1999 and 1998, the Company's Board of Directors resolved
that each director shall receive 1,000 shares of common stock for each
meeting attended during the year as consideration for participation in
each board meeting. As of December 31, 1999 and 1998, the Company had
granted 22,000 and 32,000 shares, respectively, and recognized a total of
$25,500 and $87,708, respectively, in director compensation expense for
all board meetings held to date.
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 stockholder approval.
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 nonvoting 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 $5.00 per share, plus
an amount equal to any accrued and unpaid dividends at a rate of $0.042
per share per month, plus 10.0% interest to the payment date, before any
payment or distribution is made to the holders of common stock. At
December 31, 1998, cumulative dividends in arrears plus interest
aggregate $164,649 ($0.01 per share).
On June 23, 1999, the Company ratified the redemption of the
200,000 issued and outstanding shares of nonvoting preferred stock Series
A in exchange for 1,000,000 shares of restricted common stock according
to a 5:1 conversion ratio. In addition, it was resolved and authorized
that no accrued dividends will be paid on the nonvoting preferred stock
Series A as per the agreement with the holders of such stock.
F-18
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(11) Stockholders' equity (continued)
On September 29, 1998, the Company's board of directors
approved a private placement offering of 800,000 shares of Series B 4%
cumulative convertible nonvoting preferred stock at $5.00 per share. On
November 5, 1998, the offering was amended to increase the number of
shares to 1,200,000 and to include one common stock warrant with each
share of preferred stock sold. In addition, the offering time was
extended to February 22, 1999. On December 7, 1999, the Company extended
its offering of Series B 4% convertible preferred stock until January 29,
2000. The placement offering broke escrow on November 11, 1999.
Cumulative dividends in arrears plus interest aggregated $10,234 at
December 31, 1999.
On July 30, 1999, the Company's board of directors approved
a private placement offering of 2,000,000 shares of Series C convertible
nonvoting preferred stock at $7.50 per share. On December 20, 1999, the
Company extended its offering of Series C convertible preferred stock
until March 22, 2000.
Outstanding warrants - The Company had the following classes
of warrants outstanding at December 31, 1999:
Class Shares Price per Share
------------------------- ----------- --------------------
A 960,000 $4.00
B 960,000 $4.50
C 960,000 $5.00
1998 private placement 1,500,000 $5.00
1999 private placement 332,125 $6.00
Class A, B and C 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.
Outstanding stock options - In connection with the
acquisition of ROF, 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 1997, the Company's board 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.
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.
In 1997, the Company adopted the 1997 Stock Option Plan and
allocated 1,000,000 shares of common stock to the Plan. At December 31,
1999, 1998 and 1997, options to purchase 378,000, 548,000 and 758,000
shares of common stock of the Company, exercisable at $4.25 to $6.75 per
share, were outstanding under this plan. The options vest over one to
five years and expire in five to ten years.
F-19
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(11) Stockholders' equity (continued)
On May 8, 1998, the Company adopted the 1998 Stock Option
Plan and allocated 1,000,000 shares of Company stock to the plan. At
December 31, 1999 and 1998, options to purchase 635,000 and 670,000
shares, respectively, of the Company's common stock, exercisable at $1.50
to $5.00 per share, were outstanding under this plan. The options vest
over one to five years and expire in five to ten years.
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net Loss As Reported $ (3,622,334) $ (6,576,492) $ (4,498,146)
Pro Forma $ (3,688,364) $ (6,869,862) $ (4,691,472)
Loss Per Share As Reported $ (0.23) $ (0.46) $ (0.33)
Pro Forma $ (0.24) $ (0.47) $ (0.35)
</TABLE>
A summary of the status of the Company's stock option plans
at December 31, 1999, 1998, and 1997, and changes during the years then
ended is presented below:
<TABLE>
<CAPTION>
Weighted Average
--------------------------
Exercise Price per Remaining
Shares Price Share Life - Years
------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996 400,000 $ 3.00
Granted 976,500 $ 4.25-$6.50 $ 4.85 10.0
Forfeited (218,500) $ 5.00 $ 5.00
Exercised (400,000) $ 3.00
-------------
Outstanding, December 31, 1997 758,000 $ 4.85 10.0
Granted 750,000 $ 1.75-$4.75 $ 2.41 10.0
Forfeited (205,000) $ 4.75-$5.00 $ 5.00
-------------
Outstanding, December 31, 1998 1,303,000 $3.37 9.6
Granted 165,000 $ 1.50-$2.50 $ 2.11 10.0
Forfeited (455,000) $ 1.75-$5.00 $ 3.32
-------------
Outstanding, December 31, 1999 1,013,000 $ 3.02 8.8
=============
</TABLE>
The fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for the years ended December
31, 1999, 1998 and 1997, respectively: risk-free interest rates of 5.70%,
5.60% and 6.39%; expected dividend yields of 0.00% in all three years;
expected volatility of 136%, 88% and 62%, respectively; and expected
option life of five years in all three years. At December 31, 1999,
387,200 of the outstanding options were exercisable.
As of December 31, 1999, a total of 2,000,000 shares of
common stock has been reserved for outstanding stock options granted
under the 1998 and 1997 Stock Option Plans.
F-20
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(12) Losses from cattle feeding joint venture
Losses from cattle feeding joint ventures for the years
ended December 31, 1999 and 1998, consisted of losses from Quality of
$16,361 and $659,038, respectively, and additional losses of $53,285 and
$727,209, respectively, incurred in feeding cattle which was purchased
for sale to Quality.
(13) Supplemental cash flows information
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash paid during the year for interest $ 706,765 $ 361,204 $ 364,611
</TABLE>
Noncash transactions:
During the year ended December 31, 1998, the Company
financed the acquisition of computer equipment with a $39,897 capital
lease and the acquisition of a vehicle with a $15,018 note.
During 1999, 1998 and 1997, the Company issued common stock
in exchange for services rendered totaling $25,500, $471,592 and
$123,629, respectively.
Effective January 1, 1999, the Company acquired additional
20% ownership in one of its subsidiaries. As a result, the deficit in
minority interest carried forward from the year ended December 31, 1998,
was reduced and the deficit in retained earnings was increased by
$48,501.
On December 28, 1999, the Company entered into a settlement
agreement in order to restructure the Company's outstanding indebtedness
to MoorMan. As a result, accounts payable, related parties of $318,972, a
note payable of $386,517 and accrued interest of $333,115 have been
consolidated with a single note payable to MoorMan (Note 7 - E).
During the year ended December 31, 1999, the Company
converted cattle payables of $386,517, $286,240 and $1,159,550, to
long-term debt (Note 7 - E, I, J).
During the year ended December 31, 1999, the Company
converted $410,000 of short-term notes payable to long-term debt (Note 7
- B).
(14) Reportable segments
The Company has four reportable segments: boxed beef, cattle
trading, cattle feeding and beef jerky. The boxed beef segment produces
and sells branded fresh beef to retail and food service markets. The
cattle trading segment buys and sells feeder cattle in wholesale markets.
The cattle feeding segment feeds Hereford cattle to insure a consistent
supply of PHB. The beef jerky segment commenced activities in 1998 and
produces and sells beef jerky to wholesale and retail food distributors.
The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The
Company evaluates performance based on profit or loss from operations
before income taxes. The Company accounts for intersegment sales and
transfers as if the sales or transfers were to third parties, that is, at
current market rates. The Company's reportable segments are strategic
business units that offer different products and services. They are
managed separately because each business requires different management
and marketing strategies.
F-21
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(14) Reportable segments (continued)
Reportable segment profit or loss and segment assets and
liabilities for the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
------------------------------------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 45,500,167 $ 25,953,452 $ - $ 114,180 $ - $ 71,567,799
Intersegment revenues 10,495 61,740 - - - 72,235
Interest revenue 6,520 - - - 12,292 18,812
Interest expense 756,313 40,407 75,872 - 135,292 1,007,884
Equity in net loss of joint - - (16,362) - - (16,362)
venture
Depreciation and amortization 75,881 23,075 1,281 19,495 1,875 121,607
Segment profit (loss) (2,226,447) 116,193 (102,363) (838,546) (571,171) (3,622,334)
Other significant noncash items:
Fees paid with common stock - - - - 7,875 7,875
Loss from partnership - - 52,037 - - 52,037
Segment assets 2,933,324 2,635,065 1,424,990 487,726 6,247,108 13,728,213
Expenditures for segment assets 48,737 14,373 - 18,797 - 81,907
</TABLE>
Reconciliation of segment revenues, profit or loss, and
assets for the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Revenues
<S> <C>
Total revenues for reportable segments $ 71,640,034
Other revenues -
Elimination of intersegment revenues (72,235)
---------------
Total consolidated revenue $ 71,567,799
===============
Profit or loss
Total profit or loss for reportable segments $ (3,051,163)
Other profit or loss (571,171)
---------------
Income before income taxes and extraordinary items $ (3,622,334)
===============
Assets
Total assets for reportable segments $ 7,481,105
Other assets 6,247,108
Elimination of intersegment receivables (7,671,169)
---------------
Consolidated total $ 6,057,044
===============
</TABLE>
F-22
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(14) Reportable segments (continued)
<TABLE>
<CAPTION>
Segment Consolidated
Totals Adjustments Totals
-------------- -------------- -----------------
<S> <C> <C> <C>
Interest revenue $ 6,520 $ 12,292 $ 18,812
Interest expense 872,592 135,292 1,007,884
Expenditures for assets 81,907 - 81,907
Depreciation and amortization 119,732 1,875 121,607
</TABLE>
Adjustments consist of revenues and expenses of the parent
company.
Reportable segment profit or loss and segment assets and
liabilities for the year ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
-------------- --------------- ------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 36,545,948 $ 32,215,812 $ - $ - $ - 68,761,760
Intersegment revenues 41,750 400,334 - - - 442,084
Interest revenue 9,026 - (1,850) - 2,219 9,395
Interest expense 307,403 50,502 58,045 - 16,321 432,271
Equity in net loss of joint
venture - - (659,038) - - (659,038)
Depreciation and amortization 87,161 28,061 1,281 8,333 5,624 130,460
Segment loss (2,871,808) (247,678) (2,290,887) (242,505) (923,564) (6,576,442)
Other significant noncash items
Fees paid with common - - - - 471,592 471,592
stock
Loss from partnership - - (659,038) - - (659,038)
Segment assets 1,879,402 2,217,884 145,939 357,541 2,441,462 7,042,228
Expenditures for assets 62,406 - 200,000 - - 262,406
</TABLE>
F-23
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(14) Reportable segments (continued)
Reconciliation of segment revenues, profit or loss, and
assets for the year ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenues
Total revenues for reportable segments $ 69,203,844
Other revenues -
Elimination of intersegment revenues (442,084)
---------------
Total consolidated revenue $ 68,761,760
===============
Profit or loss
Total profit or loss for reportable segments $ (5,652,878)
Other profit or loss (923,564)
---------------
Income before income taxes and extraordinary items $ (6,576,442)
===============
Assets
Total assets for reportable segments $ 4,600,766
Other assets 2,441,462
Elimination of intersegment receivables (4,071,526)
--------------
Consolidated total $ 2,970,702
===============
</TABLE>
<TABLE>
<CAPTION>
Segment Consolidated
Totals Adjustments Totals
-------------- -------------- -----------------
<S> <C> <C> <C>
Interest revenue $ 7,176 $ 2,219 $ 9,395
Interest expense 415,950 16,321 432,271
Expenditures for assets 262,406 - 262,406
Depreciation and amortization 124,836 5,624 130,460
</TABLE>
Adjustments consist of revenues and expenses of the parent
company.
F-24
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(14) Reportable segments (continued)
Reportable segment profit or loss and segment assets and
liabilities for the year ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle All
Beef Trading Feeding Others Totals
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 31,984,251 $ 73,341,442 $ - $ - $ 105,325,693
Intersegment revenues - 358,796 - - 358,796
Interest revenue 18,245 24,436 - 20,381 63,062
Interest expense 171,447 171,957 - - 343,404
Depreciation and amortization 55,106 26,484 - 11,974 93,564
Segment profit (loss) (3,638,685) 414,325 (475,757) (798,029) (4,498,146)
Equity in net loss of joint
venture - - - - -
Other significant noncash items
Fees paid with common stock - - - - -
Loss from partnership - - - - -
Segment assets 2,267,945 3,672,373 608,253 1,390,415 7,938,986
Expenditures for assets 42,414 32,518 506,403 - 581,335
</TABLE>
Reconciliation of segment revenues, profit or loss, and
assets for the year ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenues
Total revenues for reportable segments $ 105,684,489
Other revenues -
Elimination of intersegment revenues (358,796)
--------------
Total consolidated revenues $ 105,325,693
==============
Profit or loss
Total profit or loss for reportable segments $ (3,700,117)
Other profit or loss (798,029)
--------------
Income before income taxes and extraordinary items $ (4,498,146)
==============
Assets
Total assets for reportable segments $ 6,548,571
Other assets 1,390,415
Elimination of intersegment receivables (1,963,302)
--------------
Consolidated total $ 5,975,684
==============
</TABLE>
<TABLE>
<CAPTION>
Segment Consolidated
Totals Adjustments Totals
-------------- -------------- -----------------
<S> <C> <C> <C>
Interest revenue $ 44,531 $ 18,531 $ 63,062
Interest expense 343,404 - 343,404
Expenditures for assets 581,335 - 581,335
Depreciation and amortization 81,590 11,974 93,564
</TABLE>
Adjustments consist of revenues and expenses of the parent
company.
F-25
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(15) Subsequent events
On March 1, 2000, the Company renewed its corporate office
leases for an additional year with monthly rent payments totaling $4,000.
From January 1, 2000 through April 19, 2000, the Company
obtained subscriptions for 521,550 shares of Series B 4% convertible
preferred stock in the amount of $2,607,750, of which $2,585,750 was
received. In addition, the Company obtained subscriptions for 216,789
shares of Series C convertible preferred stock in the amount of
$1,625,915, of which $1,544,665 was received.
On February 4, 2000, the Company's Board of Directors
approved the placement of 1,000,000 shares of Series D convertible
preferred stock to accredited investors. The shares are convertible at
any time into common stock at a ratio of five shares of common stock for
every one share of Series D convertible preferred stock.
Effective April 1, 2000, the Company acquired the 20%
minority interest of McClellan in MFJ for $40,000 and MFJ became a
wholly-owned subsidiary of the Company.
F-26
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31,
CURRENT ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Cash $ 92,932 $ 17,067
Restricted cash 401,174 415,295
Accounts receivable
Trade, less allowance for doubtful accounts of $10,000 1,324,047 790,363
Related parties 154,977 364,372
Receivable due from factor 265,079 171,756
Receivable due from stock subscriptions -- 277,000
Inventories 4,129,468 3,142,825
Prepaid expenses and other assets 605,717 69,799
----------- -----------
TOTAL CURRENT ASSETS 6,973,394 5,248,477
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Buildings & leasehold improvements 294,974 294,974
Vehicles and equipment 471,417 384,635
----------- -----------
766,391 679,609
Less: accumulated depreciation (376,539) (334,475)
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT 389,852 345,134
----------- -----------
OTHER ASSETS
Receivables, noncurrent 192,591 192,591
Investment in partnership 24,600 24,600
Other assets 276,705 246,242
----------- -----------
TOTAL OTHER ASSETS 493,896 463,433
----------- -----------
TOTAL ASSETS $ 7,857,142 $ 6,057,044
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
CURRENT LIABILITIES 2000 1999
------------ ------------
<S> <C> <C>
Checks in excess of bank balance $ 845,825 $ 258,054
Accounts payable
Trade 1,714,772 538,177
Related parties 459,879 1,599,583
Accrued expenses 396,893 457,783
Notes payable 1,450,000 1,615,000
Current maturities of long-term debt 516,518 2,421,484
Current maturities of deferred income 100,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 5,483,887 6,990,081
------------ ------------
LONG-TERM LIABILITIES
Deferred income 200,000 200,000
Long-term debt, less current maturities 3,173,464 2,471,360
------------ ------------
TOTAL LONG-TERM LIABILITIES 3,373,464 2,671,360
------------ ------------
TOTAL LIABILITIES 8,857,351 9,661,441
MINORITY INTERESTS IN SUBSIDIARIES (7,080) (223,288)
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, authorized 50,000,000 shares;
issued and outstanding 16,012,915 shares for June 30, 2000
and 16,025,415 for December 31, 1999 16,013 16,025
Cumulative preferred stock, series B, $0.001 par value, authorized
1,200,000 shares; issued and outstanding 1,200,000 shares for
June 30, 2000 and 678,450 for December 31, 1999 1,200 678
Preferred stock, series C, $0.001 par value, authorized
2,000,000 shares; issued and outstanding 352,489 shares for
June 30, 2000 and 13,201 for December 31, 1999 371 13
Preferred stock, series D, $0.001 par value,
authorized 1,000,000 shares, to be issued 2,500 shares for
June 30, 2000 3 --
Additional paid-in capital 16,214,651 10,899,605
Retained deficit (17,225,367) (14,297,430)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (993,129) (3,381,109)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,857,142 $ 6,057,044
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET SALES
<S> <C> <C> <C> <C>
Boxed beef and consumer beef products $ 9,421,700 $ 12,965,528 $ 19,551,250 $ 24,622,854
Cattle trading 8,031,064 3,270,435 9,188,357 8,627,127
Cattle trading sales to related parties 763,108 427,443 950,150 1,499,156
------------ ------------ ------------ ------------
18,215,872 16,663,406 29,689,757 34,749,137
------------ ------------ ------------ ------------
COST OF GOODS SOLD
Cattle purchased for processing 4,063,196 5,455,286 10,066,287 11,840,952
Cattle purchased for processing from related parties 2,005,695 5,536,659 4,736,778 10,354,505
Cattle purchased for trading 8,394,694 3,488,961 9,685,204 9,530,642
Cattle purchased for trading from related parties 41,444 13,289 48,070 67,203
Other processing costs 3,099,548 1,545,385 4,321,902 1,923,917
Other trading costs 64,240 36,384 72,761 80,768
------------ ------------ ------------ ------------
17,668,817 16,075,964 28,931,002 33,797,987
------------ ------------ ------------ ------------
GROSS PROFIT 547,055 587,442 758,755 951,150
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling and distribution 891,509 692,876 1,417,829 1,347,759
General and administrative 902,637 536,119 1,626,123 1,059,556
------------ ------------ ------------ ------------
1,794,146 1,228,995 3,043,952 2,407,315
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,247,091) (641,553) (2,285,197) (1,456,165)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 4,602 44 9,750 1,703
Interest expense (215,497) (145,893) (366,065) (283,729)
Loss on sale of accounts receivable (41,551) (68,001) (70,216) (124,505)
Losses from cattle feeding joint venture -- (3,760) -- (16,262)
------------ ------------ ------------ ------------
(252,446) (217,610) (426,531) (422,793)
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTERESTS (1,499,537) (859,163) (2,711,728) (1,878,958)
MINORITY INTERESTS -- 26,211 (27,507) 45,720
------------ ------------ ------------ ------------
NET LOSS (1,449,537) (832,952) (2,739,235) (1,833,238)
PREFERRED STOCK DIVIDEND REQUIREMENT (59,773) -- (109,097) --
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLERS $ (1,559,310) $ (832,952) $ (2,848,332) $ (1,833,238)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.0974) $ (0.0555) $ (0.1778) $ (0.1221)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 16,014,151 15,014,481 16,019,783 15,008,979
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $(2,711,728) $(1,833,238)
Items not requiring (providing) cash:
Depreciation and amortization 55,351 65,664
Loss from partnership -- 16,262
Services rendered in exchange for common stock -- 7,874
Minority interest in loss of subsidiary -- (45,720)
Changes in:
Accounts receivable (417,612) (1,069,908)
Inventories (986,643) (1,155,163)
Prepaid expenses (535,918) (100,413)
Accounts payable and accrued expenses (142,179) 116,817
Checks in excess of bank balance 587,771 3,498,841
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (4,150,958) (498,984)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (86,782) (43,550)
Restricted cash 14,121 (1,650)
Change in other assets (43,750) 12,601
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (116,411) (32,599)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock 5,592,916 --
Net borrowings on line of credit 835,000 310,000
Proceeds from issuance of note payable 698,738 269,985
Repayment of notes payable (1,000,000) --
Proceeds from issuance of long-term debt -- 19,181
Payments on long-term debt (1,783,420) (43,730)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,343,234 555,436
----------- -----------
INCREASE IN CASH 75,865 23,853
CASH, BEGINNING OF PERIOD 17,067 16,079
----------- -----------
CASH, END OF PERIOD $ 92,932 $ 39,932
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(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 financial statements included in the Company's Annual
Report on Form 10-K for the year-ended December 31, 1999. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results of operations for the six months ended June 30,
2000 and 1999 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 June 30, 2000 and December 31, 1999, and its
consolidated results of operations and cash flows for the interim periods June
30, 2000 and 1999.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries Red Oak Farms, Inc. ("ROF"),
Midland Cattle Company ("Midland"), Red Oak Feeders, LLC ("Feeders"), My
Favorite Jerky ("MFJ"), Red Oak Farms Europe B.V., and its 80% owned subsidiary,
Here's The Beef Corp. ("HTB"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
(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 six months ended June 30, 2000 and 1999 and at December 31, 1999 are as
follows:
June 30, December 31, June 30,
2000 1999 1999
---- ---- ----
Sales $ 2,513,260 -- $ 1,449,156
Purchases 6,347,958 -- 10,421,708
Accounts receivable 154,977 $ 364,372 49,715
Accounts payable 459,879 1,599,583 1,953,764
Cattle financed by a related party for the Company under a financing
agreement totaled $6,735 and $28,766 for the quarter ended June 30, 2000 and
1999, and $221,573 and $377,237 for the six months ended June 30, 2000 and 1999,
respectively.
The Company has notes payable to stockholders totaling $2,545,790 and
$3,393,290 at June 30, 2000 and December 31, 1999, respectively. In addition,
the Company has notes payable to joint venture partners totaling $476,104 and
$1,976,103 at June 30, 2000 and December 31, 1999, respectively.
F-31
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(3) Factoring Agreement
The Company continues to sell selected accounts receivable without
recourse to KBK Financial, Inc. ("KBK"). The Company received $5,540,169 and
$9,362,133 in proceeds from the transfer of its receivables during the three and
six months ended June 30, 2000, respectively. For the three and six months ended
June 30, 1999, the Company received $9,066,800 and $16,600,704 in proceeds from
the transfer of its receivables. The reserve for delinquencies and claims held
by KBK at June 30, 2000 was $265,079. The Company has paid $41,551 and $68,001
for the quarters ended June 30, 2000 and 1999, respectively, and $70,216 and
$124,505 for the six months ended June 30, 2000 and 1999, respectively, for
fixed discounts on sold accounts.
(4) Inventories
Inventories at June 30, 2000 and December 31, 1999 consisted of the
following:
June 30, December 31,
2000 1999
---------- ----------
Boxed Beef $1,577,753 $1,029,808
Beef Precooked Products 1,693,479 --
Packaged Jerky and Sticks 276,465 --
Cattle 313,940 1,938,114
Other 267,831 174,903
---------- ----------
$4,129,468 $3,142,825
========== ==========
(5) Stockholders' Equity
During the six months ended June 30, 2000, the Company received
$2,884,750 in proceeds from the sale of 576,950 shares of Series B 4% cumulative
convertible preferred stock. The total number of shares offered and sold under
the Series B private placement that closed on January 29, 2000, was 1,200,000
preferred stock shares with a total of $6,000,000 in proceeds.
During the six months ended June 30, 2000, the Company received
$2,683,165 in proceeds from the sale of 357,755 shares of Series C convertible
preferred stock private placement.
During the six months ended June 30, 2000, the Company received $25,000
in proceeds from the sale of 2,500 shares of Series D convertible preferred
stock. During July 2000, the Company received an additional $50,000 in proceeds
from the sale of 5,000 shares. The total number of shares being offered under
the Series D private placement is 1,000,000 preferred stock shares.
F-32
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(6) Reportable Segments
Reportable segment profit or loss and segment revenues for the three
months ended June 30, 2000, were as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
---------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $ 9,392,540 $ 8,794,172 - $ 29,160 $ - $ 18,215,872
Intersegment revenues - - - - - -
Segment profit (loss) (1,050,839) (32,828) (28,259) (142,823) (272,295) (1,527,044)
</TABLE>
Reconciliation of segment profit or loss for the three months ended
June 30, 2000, were as follows:
Profit or loss
Total profit or loss for reportable segments $ (1,254,749)
Other profit or loss (272,295)
-------------
Income before income taxes and extraordinary items $ (1,527,044)
=============
Reportable segment profit or loss and segment revenues for the six
months ended June 30, 2000, were as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
---------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $19,511,553 $10,138,507 - $39,697 $ - $29,689,757
customers
Intersegment revenues - - - - - -
Segment profit (loss) (1,887,691) (43,152) (31,339) (280,356) (469,190) (2,711,728)
</TABLE>
Reconciliation of segment profit or loss for the six months ended June
30, 2000, were as follows:
Profit or loss
Total profit or loss for reportable segments $ (2,242,538)
Other profit or loss (469,190)
-------------
Income before income taxes and extraordinary items $ (2,711,728)
=============
F-33
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
Reportable segment profit or loss and segment revenues for the three
months ended June 30, 1999, were as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
---------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $12,944,573 $3,697,878 $ - $ 20,955 $ - $ 16,663,406
customers
Intersegment revenues - - - - - -
Segment profit (loss) (552,131) (22,865) (22,995) (130,055) (104,906) (832,952)
</TABLE>
Reconciliation of segment profit or loss for the three months ended
June 30, 1999, were as follows:
Profit or loss
Total profit or loss for reportable segments $ (728,046)
Other profit or loss (104,906)
-----------
Income before income taxes and extraordinary items $ (832,952)
===========
Reportable segment profit or loss and segment revenues for the six
months ended June 30, 1999, were as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
---------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $ 24,601,339 $ 10,126,283 $ - $ 21,515 $ - $ 34,749,137
customers
Intersegment revenues - - - - - -
Segment profit (loss) (1,386,128) 12,961 (65,954) (227,304) (166,813) (1,833,238)
</TABLE>
Reconciliation of segment profit or loss for the six months ended June
30, 1999, were as follows:
Profit or loss
Total profit or loss for reportable segments $ (1,666,425)
Other profit or loss (166,813)
-------------
Income before income taxes and extraordinary items $ (1,833,238)
=============
F-34
<PAGE>
16,714,653 Shares
Common Stock
--------------------------------------------------------------------------------
PROSPECTUS
2000
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with
the issuance and distribution of the securities being registered. All amounts
shown are estimated except the Securities and Exchange Commission registration
fee.
SEC registration fee.....................................$ 9,213
Transfer agent and registrar fees........................$ 2,000
Printing and engraving...................................$ 6,000
Legal fees...............................................$ 10,000
Accounting fees..........................................$ 15,000
Miscellaneous............................................$ 15,700
Total...........................................$ 57,913
Item 14. Indemnification of Directors and Officers.
Under Section 78 of the Nevada General Corporation Law, as amended, a
corporation has the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
being a director or officer of the corporation if it is determined that the
director or officer acted in accordance with the applicable standard of conduct
set for the in such statutory provision. Article XI of Red Oak Hereford Farms,
Inc. Amended and Restated Certificate of Incorporation provides that no director
or officer shall be personally liable to Red Oak or its stockholders for
monetary damages for any breach of fiduciary duty except for acts or omissions
which involve intentional misconduct, fraud or a knowing violation of laws.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
In October 1997, the Company sold 1,500,000 units with each unit
comprising one share of Common Stock and one Common Stock purchase warrant for a
total amount of $4,500,000. The units were sold in a private placement pursuant
to Section 4 (2) and rule 506 of Regulation D promulgated under the Securities
Act of 1933, as amended. Each investor was an "accredited investor" as defined
in Regulation D.
In June 1998, the Company sold 332,125 units with each unit consisting
of one share of Common Stock and one Common Stock purchase warrant for a total
amount of $1,328,500. The units were sold in a private placement pursuant to
Section 4 (2) and Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended. Each investor was an "accredited investor" as defined in
Regulation D.
In September 1998, the Company granted 150,000 shares of Common Stock
to three directors and 50,000 shares of Common Stock to a consultant for
services rendered. The Company recognized a total of $343,892 of compensation
expense. The sale was made pursuant to Section 4 (2) of the Act and Rule 506 of
Regulation D promulgated under the Act.
In January 1999, the Company completed the sale of 1,200,000 units with
each unit consisting of one share of Series B 4% Cumulative Convertible
Preferred Stock and one Common Stock purchase warrant for a total amount of $ $
6,000,000. The units were sold in a private placement pursuant to Section 4 (2)
and Rule 5 or 6 of Regulation D promulgated under the Securities Act of 1933, as
amended. Each investor was an "accredited investor" as defined in Regulation D.
In June 2000, the Company completed the sale of 357,755 units with each
unit consisting of one share of Series C Convertible Preferred Stock for a total
amount of $2,683,165. The units were sold in a private placement pursuant to
Section 4 (2) and Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended. Each investor was an "accredited investor" as defined in
Regulation D.
As of September 20, 2000, the Company had sold 17,000 units with each
unit consisting of one share of Series D Convertible Preferred Stock for a total
amount of $170,000. The units were sold in a private placement pursuant to
Section 4 (2) and Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended. Each investor was an "accredited investor" as defined in
Regulation D.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibits marked by an (*) have been previously filed. (Exhibits marked
by a (+) are filed herewith. Exhibits marked by a (**) are incorporated by
reference from the registrants registration statement filed on S-8 (file no.
333-4332)
Exhibit
Number Description
------ -----------
3.0** Amended and Restated Certificate of Incorporation and by-laws
10.0** 1997 Stock Option Plan
10.2** 1998 Stock Option Plan
10.3** 2000 Stock Option Plan
10.4* Agreement dated January 1, 2000 by and between Red Oak Farms, Inc. and
John Schiering
21.0* Subsidiaries of Registrant
23.1* Consent of HLB Gross Collins P.C. independent public accountants
23.2* Consent of BDO Seidman, LLP, independent public accountants
23.3+ Opinion and Consent of John L. Thomas, Esq.
27.1* Financial Data Schedule
II-3
<PAGE>
(b) Financial Statement Schedules
Schedules have been omitted because information required to be set
forth therein is not applicable or is shown in the financials statements or
related notes.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by Red Oak Hereford Farms of expenses incurred or paid
by a director, officer, or controlling person of Red Oak Hereford Farms in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, Red Oak Hereford Farms will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Red Oak Hereford Farms hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act, the information omitted for the form of prospectus filed
as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by Red Oak
Hereford Farms pursuant to Rule 424 (b) (1) or (4) or 497 (h)
under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared
effective.
(ii) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Red Oak Hereford Farms, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Red Oak,
Iowa on this 28th day of September, 2000.
RED OAK HEREFORD FARMS, INC.
By: /s/ Gordon M. Reisinger
----------------------------
Gordon M. Reisinger
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Date Name and Title Signature
September 28, 2000 Gordon Reisinger,
President/Director (Principal
Executive Officer) /s/ Gordon Reisinger
---------------------
September 28, 2000 Harley Dillard,
Treasurer/Chief Financial
Officer (Principal
Accounting Officer) /s/ Harley Dillard
-------------------
September 28, 2000 Charles Kolbe,
Director, Chairman
of the Board /s/ Charles Kolbe
------------------
September 28, 2000 John Derner,
Director, Vice President /s/ John Derner
----------------
September 28, 2000 Jack Holden,
Director /s/ Jack Holden
----------------
September 28, 2000 Dwayne Lewis,
Director /s/ Dwayne Lewis
-----------------
September 28, 2000 Ron Daggett,
Director /s/ Ron Daggett
----------------
September 28, 2000 Johan Smit,
Director /s/ Johan Smit
---------------
September 28, 2000 Torgil Hagman,
Director *
---------------
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
23.3 Opinion and Consent of John L. Thomas, Esquire
II-6
