================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________________ to __________________.
Commission File Number 33-89714
-------------------
RED OAK HEREFORD FARMS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 84-1120614
- ------------------------------- ---------------------------------
(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
(Registrant's telephone number)
-----------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
The number of shares outstanding of the Registrant's common stock as of
November 15, 1999, was as follows:
Common Stock, $.001 par value: 16,016,665 shares
================================================================================
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Financial Statements Contents
Condensed Consolidated Balance Sheets, as of September 30, 1999 and
December 31, 1998 4-5
Condensed Consolidated Statements of Operations, for three months
and nine months ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows, for nine months
ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8-12
3
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
CURRENT ASSETS
Cash $ 62,764 $ 16,079
Restricted cash 250,295 208,742
Accounts receivable
Trade, less allowance for doubtful
accounts of $10,000 1,285,804 765,262
Related parties 317,086 13,379
Receivable due from factor 310,288 262,102
Inventories 2,500,129 919,459
Prepaid expenses and other assets 291,652 106,668
---------- ----------
TOTAL CURRENT ASSETS 5,018,018 2,291,691
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Buildings & leasehold improvements 294,974 294,974
Vehicles and equipment 398,984 335,383
---------- ----------
693,958 630,357
Less: accumulated depreciation (328,204) (286,787)
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 365,754 343,570
---------- ----------
OTHER ASSETS
Investment in partnership 24,745 40,961
Other assets 250,557 294,480
---------- ----------
TOTAL OTHER ASSETS 275,302 335,441
---------- ----------
TOTAL ASSETS $5,659,074 $2,970,702
========== ==========
The accompanying notes are an integral part of these financial statements.
4
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
CURRENT LIABILITIES
Notes payable $ 2,414,985 $ 850,000
Current maturities of long-term debt 1,056,076 1,115,424
Checks in excess of bank balance 3,057,547 -
Accounts payable
Trade 517,216 483,626
Related parties 2,190,650 1,747,358
Accrued expenses 517,272 641,334
Current maturities of deferred income 100,000 100,000
-------------- -------------
TOTAL CURRENT LIABILITIES 9,853,746 4,937,742
-------------- -------------
LONG-TERM LIABILITIES
Deferred income 200,00 200,000
Long-term debt, less current maturities 1,186,885 1,163,815
-------------- -------------
TOTAL LONG-TERM LIABILITIES 1,386,885 1,363,815
-------------- -------------
TOTAL LIABILITIES 11,240,631 6,301,557
MINORITY INTERESTS IN SUBSIDIARIES (176,072) (103,822)
-------------- -------------
STOCKHOLDERS' EQUITY
Common stock $0.001 par value, authorized
50,000,000 shares; issued and outstanding
16,010,415 shares for September 30, 1999
and 15,003,415 shares for December 31, 1998 16,010 15,003
Cumulative preferred stock, $0.001 par value,
authorized 5,000,000 shares: issued and
outstanding 0 shares for September 30, 1999
and 200,000 shares for December 31, 1998 - 200
Additional paid-in capital 7,391,426 7,384,359
Retained deficit (12,812,921) (10,626,595)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY (5,405,485) (3,227,033)
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,659,074 $ 2,970,702
============== =============
The accompanying notes are an integral part of these financial statements.
5
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
NET SALES
Boxed beef $12,853,324 $11,604,971 $37,476,178 $26,478,847
Cattle trading 6,051,754 6,661,731 14,678,881 22,420,212
Cattle trading sales to related parties 456,841 1,004,047 1,955,997 2,717,129
----------- ----------- ----------- -----------
19,361,919 19,270,749 54,111,056 51,616,188
----------- ----------- ----------- -----------
COST OF GOODS SOLD
Cattle purchased for processing 5,083,018 4,002,022 16,923,970 11,970,037
Cattle purchased for processing from related parties 4,405,640 6,189,232 14,760,145 12,102,771
Cattle purchased for trading 6,101,523 7,221,018 15,632,165 24,157,626
Cattle purchased for trading from related parties 38,931 49,807 105,120 776,846
Other processing costs 2,450,379 1,114,889 4,374,296 1,877,603
Other trading costs 20,328 49,881 102,110 142,568
----------- ----------- ----------- -----------
18,099,819 18,626,849 51,897,806 51,027,451
----------- ----------- ----------- -----------
GROSS PROFIT 1,262,100 643,900 2,213,250 588,737
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling and distribution 829,634 900,871 2,177,393 2,445,205
General and administrative 580,860 1,047,634 1,640,416 2,155,397
----------- ----------- ----------- -----------
1,410,494 1,948,505 3,817,809 4,600,602
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (148,394) (1,304,605) (1,604,559) (4,011,865)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 4,948 6,694 6,651 7,354
Interest expense (166,736) (109,298) (450,465) (300,418)
Loss on sale of accounts receivable (69,481) (60,537) (193,986) (98,469)
Losses from cattle feeding joint venture 45 (195,626) (16,217) (308,359)
----------- ----------- ----------- -----------
(231,224) (358,767) (654,017) (699,892)
----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTERESTS (379,618) (1,663,372) (2,258,576) (4,711,757)
MINORITY INTERESTS 26,530 17,947 72,250 17,947
----------- ----------- ----------- -----------
NET LOSS (353,088) (1,645,425) (2,186,326) (4,693,810)
PREFERRED STOCK DIVIDEND REQUIREMENT -- (36,513) -- (114,466)
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (353,088) $(1,681,938) $(2,186,326) $(4,808,276)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.11) $ (0.14) $ (0.33)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 16,010,415 14,762,750 15,346,459 14,644,204
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
6
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,186,326) $(4,693,810)
Items not requiring (providing) cash:
Depreciation and amortization 78,381 86,227
Loss from partnership 16,217 308,360
Services rendered in exchange for common stock 7,874 530,760
Minority interest in loss of subsidiary (72,250) (17,947)
Changes in:
Accounts receivable (872,435) (790,914)
Inventories (1,580,670) (488,837)
Prepaid expenses (184,984) (242,483)
Accounts payable and accrued expenses 352,820 2,821,668
Checks in excess of bank balance 3,057,547 --
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (1,383,826) (2,486,976)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (63,602) (71,700)
Investment in partnership -- (200,000)
Restricted cash (41,553) --
Change in other assets 6,959 (92,409)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (98,196) (364,109)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 1,176,148
Net borrowings on line of credit 295,000 1,211,722
Proceeds from issuance of note payable 1,269,985 410,000
Proceeds from issuance of long-term debt 19,181 115,018
Payments on long-term debt (55,459) (74,796)
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,528,707 2,838,092
----------- ------------
INCREASE (DECREASE) IN CASH 46,685 (12,993)
CASH, BEGINNING OF PERIOD 16,079 12,993
----------- ------------
CASH, END OF PERIOD $ 62,764 $ --
=========== ============
The accompanying notes are an integral part of these financial statements.
7
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1999 and 1998
(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, 1998. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal accruals)
which, in the opinion of management, are necessary to present fairly its
consolidated financial position at September 30, 1999 and December 31, 1998, and
its consolidated results of operations and cash flows for the interim periods
ended September 30, 1999 and 1998. The results of operations for the interim
periods shown are not necessarily indicative of the results for the entire
fiscal year ending December 31, 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"), and its
80% owned subsidiaries, My Favorite Jerky ("MFJ") and Here's The Beef Corp.
("HTB"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
(2) Going Concern
The accompanying condensed consolidated financial statements have been
presented on a going concern basis which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. The Company
has suffered recurring losses and negative cash flows from operations since its
inception due to its start-up nature in establishing a premium branded Hereford
beef product. The Company has not yet been successful in establishing profitable
operations and is in technical noncompliance with certain loan agreements. These
factors raise substantial doubt about the ability of the Company to continue as
a going concern.
Management is in the process of completing a private placement
offering. Efforts are also underway to increase product awareness and broaden
product lines, including changing brand identity through marketing efforts,
which should improve profitability and cash flow. Sales efforts are being made
to effect changes in the product mix of Hereford Beef sales and to increase the
volume percentage of branded versus commodity sales. In addition, management 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.
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.
8
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(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 nine months ended September 30, 1999 and 1998, and at December 31, 1998 are
as follows:
September 30, December 31, September 30,
1999 1998 1998
------------- ------------ -------------
Sales $ 1,995,997 $ 2,717,129
Purchases 14,865,265 12,879,617
Accounts receivable 317,086 $ 13,379
Accounts payable 2,190,650 1,747,358
Additionally, ROF purchased cattle from Midland in the amount of $0 and
$286,596 for the nine months ended September 30, 1999 and 1998, respectively.
For the quarters ended September 30, 1999 and 1998, there were no cattle
purchased from Midland by ROF. During the quarter and nine months ended
September 30, 1999, MFJ purchased $0 and $10,495, respectively, of beef from
ROF. Such intercompany purchases are eliminated in consolidation.
Cattle financed by a related party for the Company under a financing
agreement totaled $255,535 and $748,031 for the quarters ended September 30,
1999 and 1998, and $592,598 and $2,852,317 for the nine months ended September
30, 1999 and 1998, respectively.
The Company has notes payable to stockholders totaling $1,029,985 and
$860,000 at September 30, 1999 and December 31, 1998, respectively. In addition,
the Company has notes payable to joint venture partners totaling $1,187,500 and
$1,210,000 at September 30, 1999 and December 31, 1998, respectively.
(4) Factoring Agreement
The Company continues to sell selected accounts receivable without
recourse to KBK Financial, Inc. ("KBK"). The Company received $9,264,133 and
$25,864,800 in proceeds from the transfer of its receivables during the three
and nine months ended September 30, 1999, respectively. For the three and nine
months ended September 30, 1998, the Company received $8,071,609 and
$13,129,197, respectively, in proceeds from the transfer of its receivables. The
reserve for delinquencies and claims held by KBK at September 30, 1999 was
$310,288. The Company has paid $69,481 and $60,537 for the quarters ended
September 30, 1999 and 1998, respectively, and $193,986 and $98,469 for the nine
months ended September 30, 1999 and 1998, respectively, for fixed discounts on
sold accounts.
9
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(5) Inventories
Inventories at September 30, 1999 and December 31, 1998 consisted of
the following:
September 30, December 31,
1999 1998
--------------- ------------
Boxed beef $ 1,480,631 $ 635,202
Packaged jerky 570,078 33,945
Cattle 319,817 121,454
Other 129,603 128,858
--------------- ------------
$ 2,500,129 $ 919,459
============== ============
(6) Inventory Line of Credit
The inventory line of credit provided from KBK Financial provides
borrowings up to $1,500,000 based on eligible inventory. On August 15, 1999, the
lender renewed the promissory note and the inventory line of credit through
October 22, 1999. On October 28, 1999, the lender renewed the promissory note
and the inventory line of credit through January 15, 2000.
(7) Stockholders' Equity
On June 23, 1999, the Company's Board ratified the redemption of the
Company's issued and outstanding 200,000 shares of 1997 Series A Preferred Stock
in exchange for 1,000,000 shares of restricted common stock. In addition, the
Company's Board resolved and authorized that no accrued dividends will be paid
on the Series A Preferred Stock as per the agreement with the holders of such
stock.
The redemption value of the series A Preferred Stock was $ 5.00 per
share plus accrued dividends. The fair market value of the common stock shares
was $ 1.03 on May 17, 1999, the date of redemption. In consideration of
forfeiting dividends by the preferred shareholders, a 5 to 1 conversion to
common shares was agreed upon.
10
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(8) Reportable Segments
Reportable segment profit or loss and segment revenues for the three
months ended September 30, 1999, were as follows:
Boxed Cattle Cattle All
Beef Trading Feeding Others Totals
--------------- -------------- ------------- ------------ ----------
Revenues from external
customers $12,814,081 6,508,595 - 39,243 19,361,919
Intersegment revenues - - - - -
Segment profit (loss) $ (152,375) 54,225 9,502 (264,440) (353,088)
Reconciliation of reportable segment profit or loss for the three
months ended September 30, 1999, was as follows:
Profit or loss
Total profit or loss for reportable segments $ (88,648)
Other profit or loss (264,440)
-----------
Income before income taxes and extraordinary items $ (353,088)
===========
Reportable segment profit or loss and segment revenues for the nine
months ended September 30, 1999, were as follows:
Boxed Cattle Cattle All
Beef Trading Feeding Others Totals
---------------- -------------- -------- ------------ -----------
Revenues from external
customers $37,404,925 16,634,878 - 71,253 54,111,056
Intersegment revenues 10,495 61,740 - - 72,235
Segment profit (loss) $(1,538,503) 67,186 (56,452) (658,557) (2,186,326)
Reconciliation of reportable segment profit or loss for the nine months
ended September 30, 1999, was as follows:
Profit or loss
Total profit or loss for reportable segments $ (1,527,769)
Other profit or loss (658,557)
-------------
Income before income taxes and extraordinary items $ (2,186,326)
=============
11
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Reportable segment profit or loss and segment revenues for the three
months ended September 30, 1998, were as follows:
Boxed Cattle Cattle All
Beef Trading Feeding Others Totals
---------------- -------------- ------------ ------------ ---------------
Revenues from external
customers $11,604,971 7,665,778 - - 19,270,749
Intersegment revenues - - - - -
Segment loss $ (584,443) (90,771) (331,576) (638,635) (1,645,425)
Reconciliation of reportable segment profit or loss for the three months ended
September 30, 1998, was as follows:
Profit or loss
Total profit or loss for reportable segments $ (1,006,790)
Other profit or loss (638,635)
-------------
Income before income taxes and extraordinary items $ (1,645,425)
=============
Reportable segment profit or loss and segment revenues for the nine
months ended September 30, 1998, were as follows:
Boxed Cattle Cattle All
Beef Trading Feeding Others Totals
---------------- -------------- ------------- --------------- ---------------
Revenues from external
customers $26,478,847 25,137,341 - - 51,616,188
Intersegment revenues - 286,596 - - 286,596
Segment loss $(2,426,996) (345,602) (895,300) (1,025,912) (4,693,810)
Reconciliation of reportable segment profit or loss for the nine months
ended September 30, 1998, was as follows:
Profit or loss
Total profit or loss for reportable segments $ (3,667,898)
Other profit or loss (1,025,912)
-------------
Income before income taxes and extraordinary items $ (4,693,810)
=============
12
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward Looking Statements
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.
Current Quarter Developments
The Company continues to focus on managing gross margins and securing
strategic customers necessary to increase volumes to a profitable level for its
boxed beef activity. This has resulted in significant operational improvement in
the performance of Red Oak Farms during the third quarter.
Through strategic marketing analysis, the Company is evaluating the
brand name of its consumer beef. Management believes this will further goals of
developing brand identity and exclusivity of Red Oak Farms Premium Hereford Beef
products. The genotypical and phenotypic (live animal) specifications for beef
products will remain the same and minor adjustments will likely be made to the
carcass specifications.
The Company continues development of added value products. Several beef
based products will be market tested during the fourth quarter with planned
rollout to customers during early 2000. These precooked products focus on
consumer convenience and high-quality eating experience.
On September 17, 1999, Home Shopping Network offered a Red Oak Farms
Beef package in two segments. Management believes nominal sales of these
packages were secondary to the nationwide exposure estimated at more than 20
million households. The Company will continue to test various premium direct
sale opportunities for its products.
Letters of understanding have been signed which will lead to
manufacturing and distribution of My Favorite Jerky Beef Sticks in Europe.
Other initiatives include the signing of an exclusive right to market
products including Royal Salmon of Norway and other seafood products in Europe
and the United States. Management believes the addition of this premium line
improves its product range and offers excellent margin potential. Several
current and prospective customers have expressed interest in the smoked and
fresh seafood lines.
Included in the above mentioned letters of understanding are the
commitments of three of the businesses to invest under certain terms in the
Company's private placement offering.
13
Fourth Quarter Developments
After strategic marketing analysis, the Company has decided to change
the brand name of its consumer beef to Red Oak Farms Premium Hereford Beef.
Management believes that this will further goals of developing brand identity
and exclusivity of Red Oak Farms products. The genotypical and phenotypic (live
animal) specifications for its beef products remain the same and minor
adjustments were made to the carcass specifications. This brand name and product
refinements was accomplished after extensive negotiations with the American
Hereford Association resulted in a refusal of the association to allow changes
that management believed necessary. Subsequently the Company received notice on
October 4, 1999 of termination of its nonexclusive agreement with the American
Hereford Association effective December 31, 2000. This transition will begin in
early 2000. The Company and its new marketing and sales broker group, H.L.
Jackson & Associates, consider this decision essential to the marketing and
growth of distribution of its branded consumer products.
In November 1999, the Company closed on the first phase of a private
placement stock offering, receiving $1,000,000.
Liquidity and Capital Resources
As of September 30, 1999 and December 31, 1998, the Company had
consolidated cash and cash equivalents balance of $62,764 and $16,079,
respectively.
Liquidity and Capital Resources Data:
As of September 30, 1999 and December 31, 1998
(in thousands)
1999 % chg 1998
---------- ------- ----------
Working Capital (Deficit) $ (4,836) 82.8% $ (2,646)
Increase (Decrease) in Cash 47 459.3% (13)
Cash Beginning of Period 16 23.8% 13
Cash End of Period 63 - -
Stock and Additional Paid-In Capital $ (5,405) 67.5% $ (3,227)
The Company must have additional funds to meet operational requirements
on an ongoing basis. Management has plans, including completion of a private
placement and continuing issuance of debt to affiliated parties, to provide this
cash until positive cash flows can be achieved. Management believes that with
funds, the Company can move into profitability through several planned steps.
o Continue to increase pricing in both branded and commodity beef through
refined management of promotional activity.
o Continue to reduce the percentage of its product sold into the commodity
beef trade.
o Continue to manage improving gross margins, through product mix management.
14
o Secure strategic customers presently identified necessary to increase volume
to a profitable level.
o Continue to bring on higher margin products, such as beef jerky, to increase
the overall gross margins.
The Company's sources of cash have included issuance of Common and
Preferred Stock, sales of accounts receivable, and borrowings on asset based
lines of credit. The Company is committing funds to develop the Red Oak Farms
Premium Hereford Beef Brand and other quality synergistic products. The Company
requires additional resources to move to the next stage of development. Funding
will be critical to the continuing operations of the Company, and management is
engaged in discussions with sources of capital, as well as, conducting a private
placement offering.
Cash Flows from Operating Activities
The Company's cash flows from operating activities required cash of
$1,383,826 and $2,486,976 for the nine months ended September 30, 1999 and 1998,
respectively. Reductions in operating losses resulted primarily from the
following activities:
o Increases in branded pricing for new retail supermarket customers and
refined management of promotional pricing of feature items have contributed
to improved performance.
o Significant improvement in the percentage of branded versus commodity sales
was achieved during the first nine months of 1999 as compared to substantial
losses generated by commodity sales of product produced by cattle harvested
to fulfill customer demand for various cuts during the respective 1998
period.
o Losses were reduced through a realignment of the customer base into a more
efficiently served customer mix during the first nine months of 1999. The
1998 losses were in part from implementing the Company's strategy of
building a track record and reputation for reliability into the retail
supermarket and food service industry. Continued increases in sales volume
and a significant shift to branded premium pricing continue to reflect
opportunity for favorable results.
o Losses were reduced through refocusing cattle trading activities, to
developing the supply of Hereford Beef.
The Company continues to expand the development and marketing of
value-added consumer beef products.
15
Increases in depreciation and amortization, services for common stock,
losses from partnership, increases in credit from affiliates through accounts
payable, accrued expenses, and checks in excess of bank balances provided the
cash to absorb the reduction in operational losses during the nine months ended
September 30, 1999 and for the same period in 1998.
Boxed beef customer demand continues to require increases in
receivables and inventories. On September 30, 1999, accounts receivable was
$1,913,178 compared to $1,040,743 at December 31, 1998. Inventories increased
from $919,459 at December 31, 1998 to $2,500,129 at September 30, 1999.
Selected Cash Flow Data:
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % change 1998
------------ --------- ----------
Cash Flows from Operating Activities:
Net loss $ (2,186) (53.4)% $ (4,694)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation & amortization 78 (9.1)% 86
Services for common stock 16 (94.7)% 308
Loss from partnership 8 (98.5)% 531
Minority interest in subsidiaries (72) 302.6% (18)
Changes in:
Accounts receivables (872) 10.3% (791)
Inventories (1,581) 223.3% (489)
Prepaid expenses (185) (23.7)% (242)
Accounts payable and accrued expenses 353 (87.5)% 2,822
Checks in excess of bank balance 3,058 - -
------------ ----------
Net Cash used in Operating Activities $ (1,384) (79.7)% $ (2,487)
Cash Flows from Investing Activities
Investing activities required cash of $98,196 and $364,109 for the
first nine months of 1999 and 1998, respectively. The Company used cash to
acquire assets, to invest in product procurement activities, and to reserve
funds for compliance with the "Packers and Stockyards Act".
16
Selected Cash Flow Data:
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
------- ------- --------
Cash Flows from Investing Activities:
Purchases of equipment $ (64) (11.3)% $ (72)
Restricted cash (42) - -
Changes in other assets 7 (107.5)% (92)
Investment in partnership - (100.0)% (200)
------- ---------
Net Cash used in Investing Activities $ (98) (90.7)% $ (364)
Cash Flows from Financing Activities
Financing activities provided cash of $1,528,707 and $2,838,092 for
the first nine months of 1999 and 1998, 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
15, 1999, the lender renewed the promissory note and the inventory line of
credit through October 22, 1999. On October 28, 1999, the lender renewed the
promissory note and the inventory line of credit through January 15, 2000. The
Company intends to extend or secure another asset-based lender prior to January
15, 2000.
Affiliates and stockholders are continuing to extend credit to ROF
until the Company secures other funding.
The Company, through ROF, is in technical non-compliance on its loan
agreement with MoorMan's, a feed company and cattle supplier, which gives
MoorMan's the right to call the loan. The loan amount of $1 million is due
October 2001. As of September 30, 1999, the loan is in default and is classified
as a current liability on the balance sheet. As of May 25, 1999, the Company
executed an agreement in principle with Archer Daniel's Midland Company ("ADM")
for the repayment of this obligation. The Company has not made payments to ADM
and continues to discuss with them alternatives for repayment or refinancing.
This agreement does not change the current classification of this loan.
Issuance of notes payable for investment in product development and
cattle procurement, provided funding resources for the continued growth and
development of premium branded beef products.
The Company continues to finance operations through the sale of
accounts receivable and the asset based debt. 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.
17
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
-------- -------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock $ - (100.0)% $ 1,176
Net borrowing on line of credit 295 (75.7)% 1,212
Proceeds from issuance of notes payable 1,270 209.8% 410
Proceeds from long-term debt 19 (83.3)% 115
Payments on long-term debt (55) (25.9)% (75)
------- --------
Net Cash Provided by Financing Activities $ 1,529 (46.1)% $ 2,838
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 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 US dollars to US trading
companies for export. Asian currencies have improved during the first nine
months of 1999 compared to the first nine months of 1998. The Company has
increased sales to Asia during the first nine months of 1999.
Hereford cattle purchased by Midland and ROF for further marketing,
processing, and distribution, are 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 Red
Oak Farms Premium Hereford Beef. The procurement of yearlings and calves,
reselling of the certified 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.
Hedging and contract purchases for the Hereford animals are
periodically utilized by ROF to minimize market risk and to insure 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 a qualified
Hereford that complies 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, ROF has been investing in market
penetration through pricing initiatives, which provides lower than preferred
margins.
18
Results of Operations
Comparison of three months and nine months ended September 30, 1999 and 1998.
Revenues-Net Sales
Three Months - Net sales of $19.4 million and $19.3 million were
generated by the Company for the three months ended September 30, 1999 and 1998,
respectively. A net sales increase of 0.5% from 1998 to 1999 was primarily
attributable to a 10.8% increase in boxed meat sales that exceeded a 15.1%
decrease in cattle trading activities for the three-month period.
Three Months Ended September 30, 1999
(in thousands)
1999 % chg 1998
---------- ------- ---------
Net Sales:
Boxed beef $ 12,853 10.8% $ 11,605
Percentage of sales 66.4% 60.2%
Cattle trading sales 6,052 (9.2)% 6,662
Percentage of sales 31.3% 34.6%
Cattle trading sales-related parties 457 (54.5)% 1,004
Percentage of sales 2.4% 5.2%
---------- ----------
Total Net Sales $ 19,362 0.5% $ 19,271
Percentage of sales 100.0% 100.0%
Nine Months - Net sales of $54.1 million and $51.6 million were
generated by the Company for the nine months ended September 30, 1999 and 1998,
respectively. A net sales increase of 4.8% from 1998 to 1999 was primarily
attributable to a 41.5% increase in boxed meat sales that exceeded a 33.8%
decrease in cattle trading activities for the nine-month period.
The Company focused on growth in volume during the three months and
nine months ended September 30, 1999, and continues to increase its customer
base with emphasis on growth of branded beef product sales while continuing
efforts to integrate value-added products with significantly higher gross
margins.
The Company's cattle trading activities decreased for the three month
and nine month periods ended September 30, 1999. Midland Cattle Company has been
refocused to have responsibility for developing the supply of Hereford Beef for
feeding. Volume in both 1999 and 1998 continued to be reduced due to a reduction
of non-Hereford Beef cattle business. Midland will continue to place cattle in
the ROF supply channel and engage in nominal non-Hereford Beef cattle trade.
19
Nine Months Ended September 30, 1999
(in thousands)
1999 % chg 1998
--------- -------- ---------
Net Sales:
Boxed beef $ 37,476 41.5% $ 26,479
Percentage of sales 69.2% 51.3%
Cattle trading sales 14,679 (34.5)% 22,420
Percentage of sales 27.2% 43.4%
Cattle trading sales-related parties 1,956 (28.0)% 2,717
Percentage of sales 3.6% 5.3%
--------- ---------
Total Net Sales $ 54,111 4.8% $ 51,616
Percentage of sales 100.0% 100.0%
Cost of Goods Sold.
Three Months - Cost of goods sold of $ 18.1 million and $ 18.6 million
was generated by the Company for the three months ended September 30, 1999 and
1998, respectively. A cost of goods sold decrease of 2.8% from 1998 to 1999 was
primarily attributable to a 6.9% decrease in cattle purchases for boxed beef and
increases in other processing costs of 119.8% (predominately increases in
volume) that exceeded a 15.5% decrease in cattle trading activities for the
three months period.
Cattle purchased for processing, including processing costs for boxed
beef and inventory changes increased to 61.8% of revenues for the three months
ended September 30, 1999 compared to 58.7% of revenues for 1998, reflecting the
continuing shift from cattle activities into branded consumer product marketing.
Cattle purchased for trading, including other trading costs decreased
to 31.8% of revenues for the three months ended September 30, 1999, compared to
38.0% of revenues for 1998.
Live cattle costs and related boxed beef costs increased approximately
10.4% and 13.5%, respectively, for the three months ended September 30, 1999, as
compared to 1998, 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 1999.
20
Three Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
---------- -------- ----------
Cost of Goods Sold:
Cattle purchased for processing $ 5,083 27.0% $ 4,002
Percentage of sales 26.3% 20.8%
Cattle purchased for processing-RP 4,406 (28.8)% 6,189
Percentage of sales 22.8% 32.1%
Cattle purchased for trading 6,102 (15.5)% 7,221
Percentage of sales 31.5% 37.5%
Cattle purchased for trading -RP 39 (21.8)% 49
Percentage of sales 0.2% 0.3%
Other processing costs 2,450 119.8% 1,115
Percentage of sales 12.7% 5.8%
Other trading costs 20 (59.2)% 50
Percentage of sales 0.1% 0.3%
---------- ----------
Total Cost of Goods Sold $ 18,100 (2.8)% $ 18,627
Percentage of sales 93.5% 96.7%
Note: RP equals Related Parties
Nine Months - Cost of goods sold of $ 51.9 million and $ 51.0 million
was generated by the Company for the nine months ended September 30, 1999 and
1998, respectively. A cost of goods sold increase of 1.7% from 1998 to 1999 was
primarily attributable to a 31.6% increase in cattle purchases for boxed beef
and increases in other processing costs of 133.0% (predominately increases in
volume) that exceeded a 36.9% decrease in cattle trading activities for the nine
months period.
The 1999 increases resulted from increased volume in boxed meat and
other processing costs that exceeded significant decreases in cattle trading
activities.
Cattle purchased for processing, including processing costs for boxed
beef and inventory changes increased to 66.6% of revenues for the nine months
ended September 30, 1999, compared to 50.3% of revenues for 1998, reflecting the
continuing shift from cattle activities into branded consumer product marketing.
Cattle purchased for trading, including other trading costs decreased
to 29.3% of revenues for the nine months ended September 30, 1999, compared to
48.6% of revenues for 1998.
Live cattle costs and related boxed beef costs increased approximately
4.0% and 9.0%, respectively, for the nine months ended September 30, 1999, as
compared to 1998, based on USDA and National Cattlemen's Beef Association
Cattle-fax. These commodity market based increases have improved the market
values of revenue for boxed beef products in 1999.
21
Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
---------- ------- ---------
Cost of Goods Sold:
Cattle purchased for processing $ 16,924 41.4% $ 11,970
Percentage of sales 31.3% 23.2%
Cattle purchased for processing-RP 14,760 22.0% 12,103
Percentage of sales 27.3% 23.4%
Cattle purchased for trading 15,632 (35.3)% 24,158
Percentage of sales 28.9% 46.8%
Cattle purchased for trading -RP 105 (86.5)% 777
Percentage of sales 0.2% 1.5%
Other processing costs 4,374 133.0% 1,878
Percentage of sales 8.1% 3.6%
Other trading costs 102 (28.4)% 143
Percentage of sales 0.2% 0.3%
---------- ----------
Total Cost of Goods Sold $ 51,898 1.7% $ 51,027
Percentage of sales 95.9% 98.9%
Gross Profit
Increases in branded boxed meat sales and realignment of cattle trading
activities for the three-month and nine-month periods ended September 30, 1999,
contributed to the improvement in gross margin over the comparable 1998 periods.
Three Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
---------- ------ ----------
Gross Profit $ 1,262 96.0% $ 644
Percentage of sales 6.5% 3.3%
Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
----------- ------ ----------
Gross Profit $ 2,213 275.9% $ 589
Percentage of sales 4.1% 1.1%
22
Operating Expenses
Three Months - Selling and distribution expenses for the three months
ended September 30, 1999 and 1998, were 4.3% and 4.7% of net sales,
respectively.
Selling and distribution expenses are somewhat variable.
For the rights to market and distribute Certified Hereford Beef, the
Company pays a per head fee to the American Hereford Association, "AHA". The AHA
used some of those funds to provide cattle inspection, customer licensing,
customer personnel training, and marketing materials development and production.
Three Months - General and administrative expenses for the three
months ended September 30, 1999 and 1998, were 3.0% and 5.4% of net sales,
respectively.
Three Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
-------- --------- --------
Operating Expenses:
Selling and distribution $ 830 (7.9)% $ 901
Percentage of sales 4.3% 4.7%
General and administrative 581 (44.6)% 1,048
Percentage of sales 3.0% 5.4%
-------- ---------
Total Operating Expenses $1,411 (27.6)% $ 1,949
Percentage of sales 7.3% 10.1%
Nine Months - Selling and distribution expenses for the nine months
ended September 30, 1999 and 1998, were 4.0% and 4.7% of net sales,
respectively.
The Company is committed to providing the necessary support and there
will be ongoing cash investment in developing, marketing, and distributing
branded beef products and related synergistic products.
Nine Months - General and administrative expenses for the nine months
ended September 30, 1999 and 1998, were 3.0% and 4.2% of net sales,
respectively.
The Company is committed to providing the necessary administrative
support to successfully build and manage the Company's products at the highest
value.
23
Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
------- ------- --------
Operating Expenses:
Selling and distribution $ 2,177 (11.0)% $ 2,445
Percentage of sales 4.0% 4.7%
General and administrative 1,640 (23.9)% 2,155
Percentage of sales 3.0% 4.2%
--------- ---------
Total Operating Expenses $ 3,818 (17.0)% $ 4,601
Percentage of sales 7.1% 8.9%
Loss from Operations. Loss from operations of $148,394 and $1,304,605
for the three months ended September 30, 1999, and the comparable period in
1998, decreased by 88.6%.
Management believes continued improvement in the branded price mix will
be reflected in gross margins along with growth in volume will eventually turn
losses from operations into profits.
Loss from operations of $1,604,559 and $4,011,865 for the nine months
ended September 30, 1999 and the comparable period in 1998, decreased by 60.0%
Three Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
------- ------- --------
Loss from operations $ (148) (88.6)% $ (1,304)
Percentage of sales (0.7)% (6.8)%
Nine Months Ended September 30, 1999 and 1998
1999 % chg 1998
------- ------- --------
Loss from operations $ (1,605) (60.0)% $ (4,012)
Percentage of sales (3.0)% (7.8)%
Other Income and Expense. Interest expense of $166,736 and $109,298 for
the three months ended September 30, 1999, and the comparable period in 1998,
increased by 52.6%.
Interest expense of $450,465 and $300,418 for the nine months ended
September 30, 1999, and the comparable period in 1998, increased by 49.9%.
24
Loss on sale of accounts receivable of $69,481 and $60,537 for the
three months ended September 30, 1999, and the comparable period in 1998,
increased by 14.8%.
Loss on sale of accounts receivable of $193,986 and $98,469 for the
nine months ended September 30, 1999, and the comparable period in 1998,
increased by 97.0%.
Increases in interest expense and loss on sale of accounts receivable
resulted from higher borrowing levels.
The loss on sale of accounts receivable represents fixed discounts on
the accounts sold to the factor.
Three Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
--------- ------- ------
Other Income (Expenses):
Interest income $ 5 (26.1)% $ 7
Percentage of sales 0.0% 0.0%
Interest expense $(167) 52.6% $(109)
Percentage of sales (0.9)% (0.7)%
Loss on sale of accounts receivable (69) 14.8% (60)
Percentage of sales (0.4)% (0.3)%
Loss from joint venture - (100.0)% (196)
Percentage of sales 0.0% (1.0)%
------- -------
Total Other Income (Expenses) $ (231) (35.6)% $ (359)
Percentage of sales (1.2)% (1.9)%
Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
--------- ------- ------
Other Income (Expenses):
Interest income $ 7 (9.6)% $ 7
Percentage of sales 0.0% 0.0%
Interest expense (450) 49.9% (300)
Percentage of sales (0.8)% (0.6)%
Loss on sale of accounts receivable (194) 97.0% (98)
Percentage of sales (0.4)% (0.2)%
Loss from joint venture (16) (94.7)% (308)
Percentage of sales 0.0% (0.6)%
--------- -------
Total Other Income (Expenses) $ (654) (6.5)% $ (700)
Percentage of sales (1.2)% (1.4)%
25
Net Loss and Loss per Share
Three Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
--------- -------- ---------
Loss before minority interests $ (380) (77.2)% $(1,663)
Percentage of sales (2.0)% (8.6)%
Minority interests 27 47.8% 18
--------- ---------
Net loss (353) (79.0)% (1,645)
Percentage of sales (1.8)% (8.5)%
Preferred stock dividend required - (100.0)% (37)
Percentage of sales 0.0% (0.2)%
--------- ---------
Net loss applicable to common (353) (79.0)% (1,682)
Percentage of sales (1.8)% (8.7)%
========= =========
Basic and diluted loss per share $ (0.02) (80.7)% $ (0.11)
========= =========
Weighted Average Shares Outstanding 16,010 8.5% 14,763
========= =========
Nine Months Ended September 30, 1999 and 1998
(in thousands)
1999 % chg 1998
---------- ------- -----------
Loss before minority interests $ (2,259) (52.1)% $ (4,712)
Percentage of sales (4.2)% (9.1)%
Minority interests 72 302.6% 18
---------- ----------
Net Loss (2,186) (53.4)% (4,694)
Percentage of sales (4.0)% (9.1)%
Preferred stock dividend required - (100.0)% (114)
Percentage of sales 0.0% (0.2)%
---------- ----------
Net loss applicable to common (2,186) (54.5)% (4,808)
Percentage of sales (4.0)% (9.3)%
========== ==========
Basic and diluted loss per share $ (0.14) (55.6)% $ (0.33)
========== ==========
Weighted Average Shares Outstanding 15,346 2.5% 14,644
========== ==========
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
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.
26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Recent Sales of Unregistered Securities
On November 16, 1999, the Company closed on the first phase of the
registrants Preferred Stock Series B offering by selling 200,000 shares to
accredited investors for the aggregate amount of $ 1,000,000. The transaction
was made pursuant to Section 4(2) and Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Results of Votes of Security Holders
None
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Financial data.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter
ended September 30, 1999.
27
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 19, 1999 By: /s/ Gordon Reisinger
----------------------------
Gordon Reisinger
President
November 19, 1999 By: /s/ Harley Dillard
----------------------------
Harley Dillard
Chief Financial Officer
28