UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 33-89714
RED OAK HEREFORD FARMS, INC.
(Exact name of small business issuer as specified in its
charter)
NEVADA 84-1120614
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2010 Commerce Drive, Red Oak, Iowa 51566
(Address of principal executive offices)
(712) 623-9224
(Issuer's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports requiredto be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No
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At November 11, 1998, there were 15,050,165 shares of common
stock, $.001 par value, of the registrant outstanding.
1
INDEX
Page No.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements F-1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
PART II-OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3 Defaults Upon Senior Securities 14
Item 4. Results of Votes of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-7 attached.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The matters discussed in this Form 10-Q contain forward-looking
statements that involve risks and uncertainties including risk of
changing market conditions with regard to livestock supplies and demand
for products of Red Oak Hereford Farms, Inc. (the "Company"), domestic
and international regulatory risks, competitive and other risks over
which the Company has little or no control. Consequently, future
results may differ from management's expectations. Moreover, past
financial performance should not be considered a reliable indicator of
future performance.
This Form 10-Q contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-Q that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may", "will",
"expect", "believe", "anticipate", "estimate" or "continue" or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of
factors.
The Company operates through its subsidiaries, Red Oak
Farms, Inc. ("ROF"), Midland Cattle Company ("Midland"), Red Oak Feeders,
LLC ("Feeders") which has a 50% interest in a joint venture, Quality
Feeders ("Quality"), Here's The Beef, Corp. ("HTB") of which the Company
owns 80%, and My Favorite Jerky, LLC ("MFJ") of which the Company owns 60%.
CURRENT QUARTER DEVELOPMENTS
Currently, there are over 100 nationally known restaurants serving
CHB and the Company has increased its premium retail supermarket stores
from 79 as of June 30, 1998 to 102 as of September 30, 1998.
A sampling of the Company's supermarket and restaurant
clientele currently includes:
Retail Supermarkets
-------------------
Sutton Place Gourmet in New York, Connecticut and Washington, DC
Steele's Markets in Colorado
Sunshine Food Markets in South Dakota
Quillin's IGA Foodliners in Wisconsin
Hen House in Kansas City
Walts's in Illinois
Kowalski's in Minnesota
3
Bud's Family Foods in Oklahoma
Kincaid & Sons in Indiana
Restaurants
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The New York Hilton (2)
Newark Hilton
The Riviera in Las Vegas
The Fort in Denver
The Waldorf-Astoria in New York
Johnny's Cafe in Omaha
Stackwood Restaurant in Lincoln, NE
Veladi Ranch Steakhouse in Texas and Puerto Rico
Market Media. Market Media, a financial public relations service,
will continue to service the Company's 800 number for investor
information requests and maintain the Company's website
(www.redoakfarms.com).
Nebraska Beef Agreement. On March 25, 1998, the Company entered
into a three-year slaughter and fabrication agreement with Nebraska
Beef. Under this agreement, Nebraska Beef has agreed to slaughter and
fabricate 500 - 4,500 head of cattle per week. If the carcass count
falls below these numbers in any given week, Nebraska Beef has the
right to terminate the agreement. Nebraska Beef has also agreed to
purchase all carcasses that do not meet United States Department of
Agriculture ("USDA") specifications for CHB. The Company has met the
quota of beef processed as required in the agreement and is confident
they will continue to be in compliance with the agreement.
CPNM Agreement. The Company formed a Nevada Corporation; Here's
The Beef, Corp. ("HTB"), for the purpose of beginning a multi-media
distribution network. The Company owns 80% of HTB and a minority
shareholder, Cable/Print Network Marketing, Inc. ("CPNM") owns 20%.
HTB has an infomercial in production stage, which is tentatively
scheduled to air nationally in the fourth quarter with a print media
campaign currently under development.
McClellan Creek Gourmet Meats Agreement. The Company established
a new joint venture with McClellan Creek Gourmet Meats, Inc. to
produce, market and sell, nationwide, a natural style beef jerky
through My Favorite Jerky, LLC ("MFJ"). The agreement was finalized
during the third quarter of 1998 with the Company owning 60% and
McClellan Creek Gourmet Meats owning 40% of MFJ.
MFJ appointed Unicom Marketing Group as its marketing
agency. The final packaging design has been established and MFJ
anticipates productrole out to begin mid-November 1998.
Although production has not commenced, MFJ has incurred initial
operating expenses and start-up costs associated with developing the
product and coordinating production and selling activities.
Stubbs Barbeque Agreement. Stubbs Barbeque and the Company through
ROF have determined that it's in the best interest of both parties to
discontinue negotiations in a line of precooked beef products until a
future date.
4
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had a consolidated
cash and cash equivalents balance of $ 0.
The Company's sources of capital are primarily the issuance
of private debt, borrowings on lines of credit and the issuance of
equity securities. As the Company continues its investment in brand
development, these resources will be critical to the success of the
Company. The Company will require additional resources to move to the
next stage of development.
The Company has three notes payable to a major stockholder
and director totaling $410,000. The notes are payable on demand and
bear interest of 9%. Total interest expense related to these notes was
approximately $6,700 for the nine months ended September 30, 1998.
The Company commenced a private placement on January 14, 1998.
The private placement was for 840,000 Units at $4.00 per Unit. Each
Unit consists of one share of common stock of the Company and a
Warrant to purchase one share of common stock of the Company at $6.00
per share. The private placement was closed on September 14, 1998.
The Company raised $1,328,500 through the sale of 332,125 units before
deducting offering expenses of $152,352. The Company used the capital
raised from this offering for working capital.
Pursuant to the 1997 Stock Option Plan, options for 555,000 shares
have been granted to date. As of September 30, 1998, none of the
options granted pursuant to the 1997 Stock Option Plan have been
exercised.
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 $258,000 of compensation
expense.
On May 8, 1998, the Company's Board of Directors resolved that
all Directors shall receive as consideration for the participation in
each board meeting, 1,000 shares of common stock issued to such
Director for each regular meeting attended during the year. In
addition, the Board also granted all outside Directors stock options
for the purchase of 5,000 shares of common stock exercisable at $4.75
per share. The right to exercise the options shall vest upon
completion of each outside Director's one-year term, and shall be
exercisable for a period of five years.
On September 30, 1998, the Board amended the resolution such that
each Director will receive 1,000 shares of common stock for all board
meetings attended. As of September 30, 1998, the Company has
recognized a total of $75,760 in director compensation expense for all
board meetings held to date. Through September 30, 1998 the Company has
granted 24,000 shares and 25,000 options to Directors.
5
On September 30, 1998, the Company also granted 100,000 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 $172,000.
Cash used in operating activities decreased from $6,014,192
in the first nine months of 1997 to $2,486,976 in the first nine
months of 1998. The principle uses for the first nine months of 1998
were attributable to the Company's net loss and an increase in
inventory and accounts receivable which were partially offset by an
increase in accounts payable and accrued expenses.
Cash (used in)/provided by investing activities changed from
providing $32,609 during the first nine months of 1997 to using
($364,109) in the first nine months of 1998. The majority of the cash
used by investing activities in the first nine months of 1998 is
attributed to the Company's additional investment in Feeders, an
increase in other assets including contract fees and loan origination
fees and the purchase of property and equipment.
Cash provided from financing activities decreased from $5,981,583
in the first nine months of 1997 to $2,838,092 in the first nine months
of 1998. Sales of common stock and additional borrowings were the
primary sources of cash flows for financing activities in the first
nine months of 1998.
Revolving Lines of Credit. The Company continues to receive an
asset-based line of credit from KBK Capital Corporation ("KBK"). The
line of credit provides borrowings up to $2,500,000 for accounts
receivable and $1,500,000 for inventory, based on eligible assets.
The line of credit is collateralized by substantially all of ROF's
assets and personal guarantees of the Company's President and a
Director. The Company is in technical non-compliance on certain
financial conditions on 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.
IDED Loan. ROF is current on its long term loan obligation with
the Iowa Department of Economic Development ("IDED") and as of
September 30, 1998, the principal balance remaining on this loan was
approximately $463,098. Management believes that proceeds from capital
raising activities and product sales revenue will be adequate to
continue meeting this obligation.
MoorMan's Loan. ROF is in technical non-compliance on certain
non-financial conditions on its loan agreement with MoorMan's, the
Company's feed supplier (protein supplement), which gives MoorMan's
the right to call the loan. However, MoorMan's has given no indication
of any intention to call this obligation. The loan amount of
$1,000,000 is due October 2001, with interest only currently payable
monthly at approximately $9,000 per month. On November 1, 1998,
principal payments over a thirty-six (36) month period will commence.
The Company is currently meeting the payment obligations from proceeds
of capital raising activities and believes additional stock sales and
revenue from product sales will be sufficient to satisfy this
obligation.
6
AHA Contract. ROF is under contract with the American Hereford
Association ("AHA"), a non-profit organization, and has exclusive
license to market CHB. As of the reporting date the Company has not
met the pro-rata volume commitment necessary for the royalty
liability, however, the Company has accrued an amount representative of
the pro-rata liability as of the reporting date. The 1998 obligation
is for $725,000 of which $425,000 was due by August 31, 1998. The
Company had paid AHA $108,270 by August 31, 1998, with an additional
$25,608 paid in September. Subsequent to quarter end, the Company paid
AHA $116,730 with the remaining $174,392 unpaid. On September 8, 1998,
ROF was notified by AHA that ROF had failed to pay the royalty fees
according to the agreement and if such fees were not paid prior to
October 8, 1998 AHA may terminate the agreement at any time thereafter.
To date, ROF has not made all required payments and AHA has not
terminated the agreement.
Following discussion by the Board of Directors of Red Oak
Hereford Farms, Inc. and the Board of the American Hereford
Association the exclusive right to market Certified Hereford Beef was
terminated. A new non-exclusive agreement in principle has been agreed
upon by the AHA which Red Oak management believes is beneficial to Red
Oak Hereford Farms, Inc. Red Oak's financial responsibilities to the
AHA are reduced by the change which resulted from the negotiations.
Red Oak Farms, Inc. continues as the de facto exclusive marketing agent
but the AHA is allowed to entertain other relationships none of which
have been identified. This also facilitates the development of several
potential profit centers which have been evaluated by Red Oak Farms,
Inc. Management does not expect the change to materially affect the
Company's business in anything but a positive way, however, there can
be no assurance regarding the ultimate affect.
Capital Expenditures. ROF has made a capital commitment for
a management information system that will require payment of
approximately $56,000 to third party vendors. The majority of this
system cost will be financed through a lease from IBM. The Company
does not currently have any other capital expenditures commitments.
The Company anticipates initiating the management information system
during the fourth quarter of 1998.
Inflation. While inflation has not had a material effect on the
Company's operations in the past, there can be no assurance that the
Company will be able to continue to offset the effects of inflation on
the costs of its products or services through price increases to its
customers without experiencing a reduction in the demand for its
products; or that inflation will not have an overall effect on the beef
market that would have a material effect on the Company.
RESULTS OF OPERATIONS
The Company has suffered recurring losses and negative cash
flows from operations since its inception primarily due to its start-up
nature in establishing a premium branded Hereford beef product. The
Company has not yet been successful in establishing profitable
operations and is in technical noncompliance with certain loan
agreements. These factors raise substantial doubt about the ability of
the Company to continue as a going concern. In this regard, management
is considering a private placement offering, and increasing sales and
product awareness through marketing efforts to improve profitability
and cash flow. Efforts are being made to change the product mix of
sales to increase the volume percentage of branded versus commodity
sales. Management believes these steps will enhance the Company's
ability to achieve favorable operating results. There is no assurance
that the Company will be successful in raising additional capital or
achieving profitable operations. The condensed consolidated financial
statements do not include any adjustments that might result from the
outcome of these uncertainties.
Consolidated comparison for the three months ended September
30, 1998 and the three months ended September 30, 1997 and consolidated
comparison for the nine months ended September 30, 1998 and the nine
months ended September 30, 1997.
7
Red Oak Hereford Farms, Inc.
Net sales decreased to $51,074,294 in the first nine months of
1998 from $79,328,183 in the same period in 1997, a decrease of
$28,253,889 or 35.62%. Net sales decreased to $19,148,424 in the three
months ended September 30, 1998 from $29,354,525 in the same period in
1997, a decrease of $10,206,101 or 34.77%. Sales of CHB increased for
the three and nine months ended September 30, 1998; however, the
overall decrease resulted primarily from lower cattle sales volume.
Negative returns in the cattle feeding business weakened demand for
feeder cattle resulting in fewer feeder cattle brokerage sales. As the
Company anticipates additional increases in retail customers during
1998, the number of cattle processed should increase, resulting in an
increase in cattle brokerage sales and branded CHB sales.
Cost of goods sold decreased to $52,065,329 in the first nine
months of 1998 from $79,656,550 in the same period in 1997, a decrease
of $27,591,221 or 34.64%. The cost of goods sold as a percentage of
net sales measured 101.94 % in 1998 versus 100.41% in the first nine
months of 1997. For the three months ended September 30, 1998, cost of
goods sold decreased to $19,153,767 from $29,293,268 in the same period
in 1997, a decrease of $10,139,501 or 34.61%. The cost of goods sold
for the three months ended September 30, 1998 and 1997, represent
100.03% and 99.79% of net sales for that period. The decrease in cost
of goods sold resulted from a reduction in cattle brokerage
transactions, which correlates with reduction in sales demand for live
cattle. Although total cost of goods sold decreased, the costs
associated with CHB increased slightly as the demand for CHB increased
with the addition of more retail stores.
Gross loss increased $662,668 from a loss of $328,367 for the
first nine months of 1997, to a $991,035 loss for the first nine months
of 1998. These losses as a percentage of net sales measured 1.94% in
1998 versus 0.41% in the first nine months of 1997. The gross loss
increased $66,600 to a loss of $5,343 for the three months ended
September 30, 1998, from a profit of $61,257 for the same period in
1997, representing 0.03% and 0.21% of net sales for the three months
ended September 30, 1998 and 1997, respectively. The increase in gross
loss primarily resulted from a decrease in gross margin on the
Company's cattle brokerage business.
Selling, general and administrative expenses increased to
$3,020,830 in the first nine months of 1998 from $2,646,953 in the same
period in 1997, an increase of $373,877 or 14.12%. For the three
months ended September 30, 1998, selling, general and administrative
expenses increased to $1,299,262 from $1,072,874 in the same period in
1997, an increase of $266,388 or 21.10%. The increase results
primarily from an increase in compensation expense through the grants
of common stock described on pages 5 and 6 under the liquidity and
capital resources section of this Management Discussion and Analysis.
8
Losses from operations increased to $4,011,865 in the first nine
months of 1998 from $2,975,320 in the same period in 1997, an increase
of $1,036,545 or 25.84%. These losses as a percentage of sales
measured 7.85% in 1998 versus 3.75% in the first nine months of 1997.
For the three months ended September 30, 1998, the Company realized
$1,304,605 of losses from operations compared to $1,011,617 for the
three months ended September 30, 1997, an increase of $292,988 or
28.96%. These losses as a percentage of sales for the three months
ended measured 6.81% in 1998 versus 3.45% in 1997. The majority of the
increase is due to the reduction in sales volume, as well as, a
decrease in margins on these sales and an increase in stock
compensation expense.
Net other expense increased to $699,892 for the first nine months
of 1998 from $236,898 in the same period in 1997, an increase of
$462,994 or 195.44%. These expenses as a percentage of sales measured
1.37% in 1998 versus 0.30% in the first nine months of 1997. For the
three months ended September 30, 1998, the Company realized $358,767 of
expenses, an increase of $297,025 or 481.07% from $61,742 for the three
months ended September 30, 1997. This increase is due to the equity in
partnership losses in its investment of Quality Feeders, LC and an
increase in interest expense on borrowings.
As a result of the above, net loss for the first nine months of
1998 increased to $4,711,757 from $3,212,218 in the same period in
1997. These losses as a percentage of net sales measured 9.22% in 1998
versus 4.05% in the first nine months of 1997. For the three months
ended September 30, 1998, the Company realized $1,663,372 of losses.
This represents 8.69% of net sales for the period. For the same period
in 1997, the Company incurred losses of $1,073,359, an amount
representing 3.66% of sales. The loss per share increased to $0.33 for
the nine months ended September 30, 1998 from $0.24 for the same period
in 1997.
Additional comparison for the three months ended September 30,
1998 and the three months ended September 30, 1997 and comparison for
the nine months ended September 30, 1998 and the nine months ended
September 30, 1997.
Red Oak Farms, Inc.
ROF is the processor and distributor of CHB beef products
for Red Oak Hereford Farms, Inc. Net sales in the first nine months of
1998 were $26,478,847 compared to $24,163,018 for the same period in
1997. These figures represent a sales increase of $2,315,829 or 9.58%.
Net sales in the three months ended September 30, 1998 increased to
$11,604,971 from $7,651,871 for the same period in 1997, an increase of
$3,953,100 or 51.66%. The increase in net sales resulted from the
increase in retail stores and changes in customer's mix. ROF is making
progress in balancing the branded versus commodity sales by increasing
branded sales in 1998. ROF has been striving for a balance between
branded versus commodity sales with the goal to reach profitability by
selling more CHB at branded prices. Due to increased marketing and
sales efforts, ROF continues to increase its retail customers during
1998; therefore, the number of cattle processed should increase,
resulting in an increase of branded and overall sales. In addition,
ROF started to see an increase in export sales of CHB during the third
quarter of 1998 and anticipates export sales to continue to increase
during the fourth quarter.
9
Cost of goods sold increased in the first nine months from
$25,622,240 in 1997 to $27,270,125 in 1998, an increase of $1,647,885
or 6.43%. This increase resulted from the addition of more retail
customers and higher demand for CHB. Cost of goods sold represent
102.99% and 106.04% of net sales for the nine months ended September 30,
1998 and 1997, respectively. For the three months ended September 30,
1998, cost of goods sold increased to $11,601,055 from $7,996,922 in
the same period in 1997, an increase of $3,604,133 or 45.07%. As a
percentage of net sales, cost of goods sold were 99.97% and 104.51% for
the three months ended September 30, 1998 and 1997, respectively. The
cost of goods sold includes $286,596 and $508,357 in purchases from
Midland for the nine months ended September 30, 1998 and 1997,
respectively. The cost of goods sold includes $0 and $15,885 in
purchases from Midland for the three months ended September 30, 1998
and 1997, respectively. These amounts have been eliminated from the
accompanying financial statements.
Selling, general and administrative expenses at ROF for the first
nine months of 1998 were $1,339,878 compared to $1,123,308 for the same
period in 1997. This is a 19.28% increase from the first nine months
of 1997. For the three months ended September 30, 1998, selling,
general and administrative expenses decreased slightly to $443,164 from
$451,668 for the three months ended September 30, 1997, a decrease of
$8,504 or 1.89%. An increase in personnel and personnel related
expenses and an increase in selling costs to position ROF for current
and future sales growth were the primary contributors of the increase
in these expenses.
For the nine months ended September 30, 1998, ROF realized net
losses in the amount of $2,426,996, compared to $2,700,688 in net
losses for the same period in 1997. These losses as a percentage of
net sales measured 9.17% in 1998 versus 11.18% in the first nine
months of 1997. For the three months ended September 30, 1998, ROF
realized $584,443 in net losses representing 5.04% of net sales for
that period. For the three months ended September 30, 1997, ROF
incurred losses of $836,417, an amount representing 10.93% of net sales
for that period. Management attributes the continuing net loss to
decreased margins and to the current product mix, in which bulk beef
sales continues to be the dominant revenue source. During the first
nine months of 1998, the company has made advances in the retail sector
for premium CHB by adding 23 new retail stores during the third quarter
of 1998 and a total of 48 new retail stores for the nine months ended
September 30, 1998. ROF is continuing to develop retail prospects and
it is anticipated that several of these potential buyers will become
customers.
Midland Cattle Company
Midland is engaged in cattle brokerage activities and facilitates
the identification of CHB producers and feeders and supplies cattle
inventory for ROF. For the nine months ended September 30, 1998,
Midland had net sales of $24,882,043 versus $55,673,522 for the same
period in 1997. This represents a decrease of $30,851,479 or 55.41%
from 1997 to 1998. For the three months ended September 30, 1998, net
sales decreased to $7,543,453 from $21,183,380 in the same period in
1997, a decrease of $13,639,927 or 64.39%. The net sales include
$286,596 and $508,357 in sales to ROF for the nine months ended
September 30, 1998 and 1997, respectively. For the three months ended
September 30, 1998 and 1997, net sales include $0 and $15,885 in sales
10
to ROF, respectively. These amounts have been eliminated from the
accompanying financial statements.
Midland's customers continued to feed fewer cattle, therefore,
causing a decrease in volume for cattle revenue in the first nine
months of 1998. Cattle were also worth less per head resulting in a
decrease in total revenue. In addition, Midland sustained losses as a
result of Midland's effort to support ROF's demand for CHB cattle
supply.
As a result of the decreased volume in sales, Midland's cost of
goods sold for the first nine months of 1998 decreased to $25,081,800
versus cost of goods sold for the first nine months of 1997 of
$54,542,667. This represents a decrease of $29,460,867 or 54.01%
between the two periods. Cost of goods sold were 100.80% and 97.97% of
net sales for the nine months ended September 30, 1998 and 1997,
respectively. For the three months ended September 30, 1998, cost of
goods sold decreased to $7,552,712 from $20,777,072 for the same period
in 1997, a decrease of $13,224,360 or 63.65%. As a percentage of net
sales, cost of goods sold increased to 100.12% for the three months
ended September 30, 1998 from98.08% for the same period in 1997.
Selling, general and administrative expenses at Midland for the
first nine months of 1998 were $638,741 compared to $943,147 for the
same period in 1997. This represents a $304,406 or 32.28% decrease from
the first nine months of 1997. For the three months ended September 30,
1998, selling, general and administrative expenses decreased to
$203,837 from $323,633 for the same period in 1997, a decrease of
$119,796 or 37.02%. These decreases are primarily a result of
decreased selling costs consistent with decreased sales volumes for
1998.
For the nine months ended September 30, 1998, Midland realized a
net loss in the amount of $887,496, compared to a net profit of $54,921
for the same period in 1997. The net loss as a percentage of net sales
for the nine months ended September 30, 1998, measured 3.57%. The net
profit as a percentage of net sales for the nine months ended September 30,
1997, measured 0.09%. For the three months ended September 30, 1998,
Midland recognized a loss of $213,096, an amount equal to 2.82% of total
sales for the period. For the same three month period in 1997, Midland
recognized a net profit of $37,424, an amount equal to less than 1% of
total sales for the period. Management attributes the increased losses
in the nine months and three months ended September 30, 1998 to a
reduction in volume of cattle brokered compared to the nine months and
three months ended September 30, 1997. In an effort to minimize risk
of excessive losses, Midland decided not to aggressively broker cattle;
therefore, the volume of cattle brokered decreased approximately 50%.
Midland anticipates volume will expand as ROF's CHB program continues
to grow.
Red Oak Feeders, L.L.C.
Feeders has a 50% interest in a joint venture, Quality Feeders,
LLC ("Quality"), with MoorMan's and commenced operations in the latter
part of December 1997. For the nine months ended September 30, 1998,
Feeders net loss was $353,406, of which $308,359 resulted from losses
of Feeder's share of the joint venture and $45,047 resulted
operating and interest expenses. Feeders net loss for the three months
11
ended September 30, 1998 was $209,251 of which $195,626 resulted from
losses of Feeder's share of the joint venture and $13,625 from
operating and interest expenses.
Here's The Beef Corp.
HTB is owned 80% by the Company and 20% by CPNM. For the three
and nine months ended September 30, 1998, HTB had a net loss of $1,990
due to operating and start-up expenses incurred during the initial
planning period of the business.
My Favorite Jerky, L.L.C.
MFJ is owned 60% by the Company and 40% by McClellen Creek Gourmet
Meats. For the three and nine months ended September 30, 1998, MFJ
realized a loss of $3,742 from initial operating expenses and start-up
costs associated with developing the product and coordinating
production and selling activities.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A settlement was reached with the United States Department of
Agriculture regarding an administrative proceeding initiated on July 16,
1997 by the Grain Inspection Packers and Stockyards Administration.
The proceeding was initiated against Cimmaron Properties, Ltd., Wall
Lake Cattle Co., Inc., Midland Cattle Company and Gordon Reisinger and
alleged violations of 7 USC 181 et seq. by failing to pass on to
customers original purchase shrink weight allowances when reselling
livestock and failure to maintain adequate records. The respondents
Gordon Reisinger and Midland Cattle Co., Inc., denied the allegations
of the complaint, and stipulated to a cease and desist order which
provides that respondents deny they have in the past but shall
henceforth cease and desist from:
1. Arbitrarily adding weight to the actual purchase weight when
selling livestock to customers on an actual weight basis
under any circumstances;
2. Failing to pass to its customers the shrink weight allowances
when selling livestock to customers on an actual weight basis;
and
3. Falsifying records by listing on invoices to customers a sale
weight that is different from the weight at which the cattle
were purchased.
Further, the respondents were assessed a civil penalty in the amount of
$5,000.
12
ITEM 2. CHANGES IN SECURITIES
(a) Securities Sold - Exchanges
Date Title Price Per Unit Amount
---- ----- -------------- ------
March 14, 1997 Common Exchange 10,000,000*
*Plus options to purchase an additional 3,000,000 common shares
of the Company.
Date Title Price Per Unit Amount
---- ----- -------------- ------
May 19, 1997 Common Exchange 1,538,462
(b) Underwriters and other purchasers
March 14, 1997 Exchange. The exchange was with the shareholders
of Red Oak Farms, Inc.
May 19, 1997 Exchange. The exchange was with the shareholders of
Midland Cattle Company.
(c) Consideration
March 14, 1997 Exchange. The Company exchanged 10,000,000 common
shares of the Company plus options to purchase an additional 3,000,000
common shares of the Company for the total issued and outstanding
shares of Red Oak Farms, Inc., an Iowa Corporation.
May 19, 1997 Exchange. The Company exchanged 1,538,462 common
shares of the Company for all the issued and outstanding shares of
Midland Cattle Company.
(d) Exemption from Registration Claimed
For both exchange transactions, the securities were exchanged
pursuant to Section 4(2) under the Securities Act of 1933, as amended.
(e) Terms of Conversion or Exercise
March 14, 1997 Exchange. Each option entitles the holder thereof
to purchase one Share during the five year period commencing March 17,
1997 as follows; 1,000,000 of the Shares may be purchased at a price of
$8.00 per Share; 1,000,000 of the Shares may be purchased at a price of
$10.00 per Share; and 1,000,000 of the Shares may be purchased at a
price of $12.00 per Share. No option may be exercised unless such
exercise is registered or an exemption from registration exists.
13
(a) Securities Sold - Private Offerings
Date Title Price Per Unit Amount
---- ----- -------------- ------
March through Sept. 1997 Common $3.00* 1,500,000
*Each Unit consisted of one share of the Company's common stock
and a warrant to purchase a share of the Company's common stock
at $5.00 per share.
January through Sept. 1998 Common $4.00* 332,125
*Each Unit consisted of one share of the Company's common stock
and a warrant to purchase a share of the Company's common stock
at $6.00 per share.
(b) Underwriters and other purchasers
The securities were sold to accredited investors and to no more
than 35 non-accredited investors.
(c) Consideration
The aggregate offering price for the March offering was $4,500,000
and a total of $114,979 was paid in commission or finder's fees.
The aggregate offering price for the January offering is
$3,360,000 of which $1,328,500 has been realized through the sale of
332,125 Units. To date a total of $152,353 has been paid in
commissions for this offering.
(d) Exemption from Registration Claimed
The securities were sold pursuant to Regulation D, Rule 506 as
promulgated by the Securities and Exchange Commission under Section
4(2) of the Securities Act of 1933, as amended.
(e) Terms of Conversion or Exercise
March 1997 Offering. Each Warrant represents the right to
purchase one share of Common Stock at an initial exercise price of
$5.00 per share. The Warrants are exercisable during the period
commencing upon the closing date of the offering and ending three
from the date of the offering. Holders of Warrants may exercise their
Warrants for the purchase of shares of Common Stock only if the
purchase of such shares is exempt from federal registration
requirements and qualified for sale, or deemed to be exempt from
qualification under applicable state securities law. The Warrants are
redeemable, in whole or in part, at the option of the Company, upon not
fewer than 60 days notice, at a redemption price equal to $.10 per
Warrant at any time the Common Stock of the Company publicly trades at
a bid price of $8.00 or above for a period of ten consecutive trading
days.
14
January 1998 Offering. Each Warrant represents the right to
purchase one share of Common Stock at an initial exercise price of
$6.00 per share. The Warrants are exercisable during the period
commencing upon the closing date of the offering and ending three years
from the date of the offering. Holders of Warrants may exercise their
Warrants for the purchase of shares of Common Stock only if the
purchase of such shares is exempt from federal registration
requirements and qualified for sale, or deemed to be exempt from
qualification under applicable state securities law. The Warrants are
redeemable, in whole or in part, at the option of the Company, upon not
fewer than 60 days notice, at a redemption price equal to $.10 per
Warrant at any time the Common Stock of the Company publicly trades at
a bid price of $8.00 or above for a period of ten consecutive trading
days.
(a) Securities Sold - Stock Grants
Date Title Price Per Unit Amount
---- ------ -------------- ------
January 23, 1998 Common $5.00 5,000
May 8, 1998 Common $4.75 8,000
July 16, 1998 Common $3.00 8,000
September 29, 1998 Common $1.72 8,000
September 29, 1998 Common $1.72 100,000
September 29, 1998 Common $1.72 150,000
(b) Underwriters and other purchasers
The above stock grants were issued to consultants, officers and
directors of the Company.
(c) Consideration
The above stock grants were issued as compensation for services.
(d) Exemption from Registration Claimed
The securities were issued pursuant to Section 4(2) under the
Securities Act of 1933, as amended.
(e) Terms of Conversion or Exercise
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
Exhibit No. SEC Reference Title Location
----------- ------------- --------------------------- --------
10.01 10 My Favorite Jerky Agreement Attached
27 27 Financial Data Schedule Attached
(b) No reports were required to be filed on Form 8-K for the period
ending September 30, 1998.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
November 13, 1998
By:_______________________________________
Gordon Reisinger, President
November 13, 1998
By:_______________________________________
Harley Dillard, Chief Financial Officer
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf by the under signed thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
November 13, 1998 By:/s/ Gordon Reisinger
---------------------------------------
Gordon Reisinger, President
November 13, 1998 By:/s/ Harley Dillard
---------------------------------------
Harley Dillard, Chief Financial Officer
18
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
ASSETS
September 30, December 31,
1998 1997
------------ -----------
CURRENT ASSETS
Cash $ - $ 12,993
Accounts receivable
Trade, less allowance for doubtful
accounts of $10,000 3,856,821 2,920,939
Related parties 957,597 1,102,565
Inventories 1,478,027 989,190
Prepaid expenses and other assets 338,887 96,404
------------ -----------
Total current assets 6,631,332 5,122,091
------------ -----------
PROPERTY AND EQUIPMENT, At cost
Buildings and leasehold improvements 294,974 292,574
Vehicles and equipment 307,178 237,878
------------ -----------
602,152 530,452
Less accumulated depreciation (270,168) (224,088)
------------ -----------
Net book value 331,984 306,364
------------ -----------
OTHER ASSETS
Investment in partnership 391,640 500,000
Other assets 99,491 47,229
------------ -----------
Total other assets 491,131 547,229
------------ -----------
$ 7,454,447 $ 5,975,684
------------ -----------
------------ -----------
See Accompanying Notes to Consolidated Financial Statements
F-1
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
LIABILITIES
September 30, December 31,
1998 1997
------------ -----------
CURRENT LIABILITIES
Revolving bank lines of credit $ 2,482,016 $ 1,270,294
Note payable - related party 410,000
Current maturities of long-term debt 1,036,963 1,029,015
Accounts payable
Trade 2,038,220 546,691
Related parties 981,584 54,528
Accrued expenses 503,463 100,380
Current maturities of deferred income 300,000 100,000
------------ -----------
Total current liabilities 7,752,246 3,100,908
------------ -----------
LONG-TERM LIABILITIES
Deferred income 200,000
Long-term debt 1,003,968 971,694
------------ -----------
Total long-term liabilities 1,003,968 1,171,694
------------ -----------
Total liabilities 8,756,214 4,272,602
------------ -----------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, authorized
50,000,000 shares; issued and outstanding
14,762,815 and 14,429,290 shares 14,763 14,430
Cumulative preferred stock, $.001 par value,
authorized 5,000,000 shares; issued and
outstanding 200,000 shares 200 200
Additional paid-in capital 7,445,180 5,738,605
Retained earnings (deficit) (8,761,910) (4,050,153)
------------ -----------
Total stockholders' equity (1,301,767) 1,703,082
------------ -----------
$ 7,454,447 $ 5,975,684
------------ -----------
See Accompanying Notes to Consolidated Financial Statements
F-2
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30,1998 AND 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
NET SALES
Related parties $ 1,459,539 $ 7,285,207 $ 5,051,410 $ 11,122,543
Others 17,688,885 22,069,318 46,022,884 68,205,640
------------ ------------ ------------ ------------
19,148,424 29,354,525 51,074,294 79,328,183
------------ ------------ ------------ ------------
COST OF GOODS SOLD
Related parties 6,463,549 2,160,209 13,833,483 6,004,358
Others 12,690,218 27,133,059 38,231,846 73,652,192
------------ ------------ ------------ ------------
19,153,767 29,293,268 52,065,329 79,656,550
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (5,343) 61,257 (991,035) (328,367)
OPERATING EXPENSES 1,299,262 1,072,874 3,020,830 2,646,953
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,304,605) (1,011,617) (4,011,865) (2,975,320)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Equity in
partnership losses (195,626) (308,359)
Interest Income 5,132 23,207 5,792 26,875
Miscellaneous Income 1,562 1,562
Interest Expense (169,835) (84,949) (398,887) (263,773)
------------ ------------ ------------ ------------
(358,767) (61,742) (699,892) (236,898)
------------ ------------ ------------ ------------
NET LOSS (1,663,372) (1,073,359) (4,711,757) (3,212,218)
PREFERRED STOCK
DIVIDEND REQUIREMENT 36,513 114,466
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $ (1,699,885) $ (1,073,359) $ (4,826,223) $ (3,212,218)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC AND DILUTED
LOSS PER SHARE $ (0.12) $ (0.07) $ (0.33) $ (0.24)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE
SHARES OUTSTANDING 14,762,750 14,431,144 14,644,204 13,367,108
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See Accompanying Notes to Consolidated Financial Statements
F-3
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,711,757) $ (3,212,218)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 86,227 93,120
Equity in partnership losses 308,360
Stock compensation expense 530,760
Changes in:
Accounts receivable (790,914) 155,329
Inventories (488,837) (511,526)
Prepaid expenses (242,483) (361,631)
Accounts payable and accrued expenses 2,821,668 (2,177,266)
------------ ------------
Net cash used in operating activities (2,486,976) (6,014,192)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (71,700) (25,838)
Proceeds on sale of equipment 59,827
Change in other assets (92,409) (1,380)
Investment in partnership (200,000)
------------ ------------
Net cash (used in)/provided by
investing activities (364,109) 32,609
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,176,148 5,348,827
Net borrowings on line of credit 1,211,722 737,624
Proceeds on issuance of long term debt 115,018 125,000
Proceeds from issuance of shareholder debt 410,000
Payments on long-term debt (74,796) (138,409)
Purchase of treasury stock (31,000)
Distributions paid (60,459)
------------ ------------
Net cash provided by financing activities 2,838,092 5,981,583
----------- ------------
INCREASE (DECREASE) IN CASH (12,993) 0
CASH, BEGINNING OF PERIOD 12,993 0
------------ ------------
CASH, END OF PERIOD $ 0 $ 0
------------ ------------
------------ ------------
See Accompanying Notes to Consolidated Financial Statements
F-4
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE 1: NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements do not include all
footnotes and certain financial information normally presented annually under
generally accepted accounting principles and, therefore, should be read in
conjunction with the Company's December 31, 1997 10-KSB. Accounting
measurements at interim dates inherently involve greater reliance on
estimates than at year-end. The results of operations for the nine months
ended September 30, 1998 and 1997 arenot necessarily indicative of results
that can be expected for the full year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal
accruals) which, in the opinion of the Company, are necessary to present
fairly its consolidated financial position at September 30, 1998 and
December 31, 1997, and its consolidated results of operations and cash
flows for the interim periods September 30, 1998 and September 30, 1997.
The results of operations for the interim periods shown are not necessarily
indicative of the results for the entire fiscal year ending December 31,
1998.
During the third quarter, the Company incorporated 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.("CPNM") owns 20%. HTB was created for the purpose
of beginning a multi-media distribution network. MFJ is owned 60% by the
Company and 40% is owned by McClellen Creek Gourmet Meats, Inc. MFJ was
established to produce, market and sell, nationwide, a natural style beef
jerky.
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")
and its 80% owned subsidiary, Here's the Beef ("HTB") and its 60% owned
subsidiary My Favorite Jerky, LLC ("MFJ"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles and presented on a going
concern basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company has suffered
recurring losses and negative cash flows from operations since its inception
primarily due to its start-up nature in establishing a premium branded
Hereford beef product. The Company has not yet been successful in
establishing profitable operations and is in technical non-compliance with
certain loan agreements. These factors raise substantial doubt about the
ability of the Company to continue as a going concern. In this regard
management is in the process of considering a private placement offering,
and increasing sales and product awareness through marketing efforts to
improve profitability and cash flow. Efforts are being made to change the
product mix of sales to increase the volume percentage of branded versus
commodity sales. Management believes these steps will enhance the Company's
ability to achieve favorable operating results. There is no assurance that
the Company will be successful in raising additional capital or achieving
profitable operations. The condensed consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
F-5
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE 2: RELATED PARTY TRANSACTIONS
The Company sells cattle to certain companies, which are owned by
members of the Company's management or Board of Directors. The Company
also purchases cattle and feed from these same entities. Additionally, both
Midland and ROF utilize trucking companies that are owned by members of the
Company's management or Board of Directors. The activity between the Company
and these related parties for the nine months ended September 30, 1998 and
1997 are as follows:
September 30, 1998 September 30, 1997
------------------ ------------------
Sales $ 5,051,410 $11,122,543
Purchases 13,833,483 6,004,358
Additionally, during the nine months ended September 30, 1998 and 1997,
ROF purchased cattle from Midland in the amount of $286,596 and $305,593,
respectively. Such intercompany purchases are eliminated in consolidation.
The Company also has three notes payable to a major stockholder and a
director totaling $410,000. The notes are payable on demand and bear
interest of 9%. Total interest expense related to these notes was
approximately $6,700 for the nine months ended September 30, 1998.
NOTE 3: INVENTORIES
Inventories at September 30, 1998 and December 31, 1997 consisted of
the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Boxed beef $ 1,295,600 $ 639,411
Cattle 65,457 296,149
Other 116,970 53,630
------------------ -----------------
$ 1,478,027 $ 989,190
------------------ -----------------
------------------ -----------------
NOTE 4: DEBT
The Company continues to receive an asset-based line of credit from KBK
Capital Corporation ("KBK"). The line of credit provides borrowings up to
$2,500,000 for accounts receivable and $1,500,000 for inventory, based on
eligible assets. The line of credit is collateralized by substantially all
of ROF's assets and personal guarantees of the Company's President and a
Director. The Company is in technical non-compliance on certain financial
conditions on 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-6
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE 5: STOCKHOLDERS' EQUITY
On January 14, 1998, the Company began a private placement offering to
issue up to 840,000 units, each unit comprising one common share and one
common stock purchase warrant, for $4.00 per unit. The common stock purchase
warrants are callable at $.10 per share upon 60 days' notice and grant the
holder the right to purchase common stock at $6.00 per share. 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 $152,352.
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 $258,000 of compensation expense.
On May 8, 1998, the Company's Board of Directors resolved that all
Directors shall receive as consideration for the participation in each board
meeting, 1,000 shares of common stock issued to such Director for each regular
meeting attended during the year. In addition, the Board also granted all
outside Directors stock options for the purchase of 5,000 shares of common
stock exercisable at a strike price equal to the closing price of the stock on
May 8, 1998. The right to exercise the options shall vest upon completion of
each outside Director's one-year term, and shall be exercisable for a period
of five years.
On September 30, 1998, the Board amended the resolution such that each
Director will receive 1,000 shares of common stock for all board meetings
attended. As of September 30, 1998, the Company has recognized a total of
$75,760 in director compensation expense for all board meetings held to date.
Through September 30, 1998 24,000 shares and 25,000 options have been granted
to Directors.
On September 30, 1998, the Company also granted 100,000 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 $172,000.
NOTE 6: RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The financial statements for the quarter ended September 30, 1997 and the
nine months ended September 30, 1997 have been restated to reflect certain
marketing costs and professional fees reclassified as operating expenses
during the fourth quarter of 1997. The restatements resulted in the following
increase in the Company's operating expenses:
Quarter Ended September 30, 1997 $255,676
--------
--------
Nine Months Ended September 30, 1997 $542,738
--------
--------
F-7
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE 7: SUBSEQUENT EVENTS
Red Oak Farms, Inc. has a contract with the American Hereford
Association("AHA"), a non-profit organization, and has exclusive license to
market CHB. As of the reporting date the Company has not met the pro-rata
volume commitment necessary for the royalty liability, however, the Company
has accrued an amount representative of the pro-rata liability as of the
reporting date. The 1998 obligation is for $725,000 of which $425,000 was
due by August 31, 1998 with an additional $25,608 paid in September.
Subsequent to quarter end, the Company paid AHA $116,730 with the remaining
$174,392 unpaid. On September 8, 1998,ROF was notified by AHA that ROF had
failed to pay the royalty fees according to the agreement.
Following discussion by the Board of Directors of Red Oak Hereford Farms,
Inc. and the Board of the American Hereford Association the exclusive right to
market Certified Hereford Beef was terminated. A new non-exclusive agreement
in principle has been agreed upon by the AHA which Red Oak management believes
is beneficial to Red Oak Hereford Farms, Inc. Red Oak's financial
responsibilites to the AHA are reduced by the change which resulted from the
negotiations. Red Oak Farms, Inc. continues as the de facto exclusive
marketing agent but the AHA is allowed to entertain other relationships none
of which have been identified. This also facilitates the development of
several potential profit centers which have been evaluated by Red Oak Farms,
Inc. Management does not expect the change to materially affect the
Company's business in anything but a positive way, however, there can be no
assurance regarding the ultimate affect.
F-8