<PAGE>
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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 March 31, 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 May 15,
1999, was as follows:
Common Stock, $.001 par value: 15,009,665 shares
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Financial Statements Contents
Condensed Consolidated Balance Sheets, as of March 31, 1999 and
December 31, 1998 3-4
Condensed Consolidated Statements of Operations, for three months
ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows, for three months
ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-10
2
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 16,605 $ 16,079
Restricted cash 210,391 208,742
Accounts receivable
Trade, less allowance for doubtful accounts of $10,000 1,647,410 765,262
Related parties 7,712 13,379
Receivable due from factor 321,982 262,102
Inventories 2,189,700 919,459
Prepaid expenses and other assets 183,386 106,668
------------ -----------
TOTAL CURRENT ASSETS 4,577,186 2,291,691
PROPERTY, PLANT AND EQUIPMENT, at cost
Buildings & leasehold improvements 294,974 294,974
Vehicles and equipment 340,285 335,383
------------ -----------
635,259 630,357
Less: accumulated depreciation (300,011) (286,787)
------------ -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 335,248 343,570
------------ -----------
OTHER ASSETS
Investment in partnership 28,460 40,961
Other assets 270,971 294,480
------------ -----------
TOTAL OTHER ASSETS 299,431 335,441
------------ -----------
TOTAL ASSETS $ 5,211,865 $ 2,970,702
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As Of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 1,310,000 $ 850,000
Current maturities of long-term debt 1,116,724 1,115,424
Accounts payable
Trade 3,235,187 483,626
Related parties 2,012,600 1,747,358
Accrued expenses 452,531 641,334
Current maturities of deferred income 100,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 8,227,042 4,937,742
------------ ------------
LONG-TERM LIABILITIES
Deferred income 200,000 200,000
Long-term debt, less current maturities 1,135,503 1,163,815
------------ ------------
TOTAL LONG-TERM LIABILITIES 1,335,503 1,363,815
------------ ------------
TOTAL LIABILITIES 9,562,545 6,301,557
MINORITY INTERESTS IN SUBSIDIARIES (123,331) (103,822)
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value per share, authorized 50,000,000 shares;
issued and outstanding 15,003,415 shares 15,003 15,003
Preferred stock, $.001 par value per share, authorized
5,000,000 shares; 1997 Series A preferred stock; issued and
outstanding 200,000 shares 200 200
Additional paid-in capital 7,384,358 7,384,359
Retained deficit (11,626,910) (10,626,595)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (4,227,349) (3,227,033)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,211,865 $ 2,970,702
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NET SALES
Boxed beef $ 11,657,326 $ 6,408,514
Cattle trading sales to non-related parties 5,356,692 7,096,391
Cattle trading sales to related parties 1,071,713 2,021,596
------------ ------------
18,085,731 15,526,501
------------ ------------
COST OF GOODS SOLD
Cattle purchased for processing from non-related parties 6,385,666 3,641,252
Cattle purchased for processing from related parties 4,817,846 2,274,165
Cattle purchased for trading from non-related parties 6,041,681 7,877,266
Cattle purchased for trading from related parties 53,944 1,297,699
Other processing costs 378,532 371,775
Other trading costs 44,384 46,663
------------ ------------
17,722,053 15,508,820
------------ ------------
GROSS PROFIT 363,678 17,681
------------ ------------
OPERATING EXPENSES
Selling and distribution 654,883 804,383
General and administrative 523,437 575,602
------------ ------------
1,178,320 1,379,985
------------ ------------
LOSS FROM OPERATIONS (814,642) (1,362,304)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 1,659 604
Interest expense (137,836) (109,365)
Loss on sale of accounts receivable (56,504) --
Losses from cattle feeding joint venture (12,502) (46,351)
------------ ------------
(205,183) (155,112)
------------ ------------
LOSS BEFORE MINORITY INTERESTS (1,019,825) (1,517,416)
MINORITY INTERESTS 19,509 --
------------ ------------
NET LOSS (1,000,316) (1,517,416)
PREFERRED STOCK DIVIDEND REQUIREMENT (224,921) (43,050)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,225,237) $ (1,560,466)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.08) $ (0.11)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 15,003,415 14,433,469
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,000,316) $(1,517,416)
Items not requiring (providing) cash:
Depreciation and amortization 40,432 18,189
Loss from partnership 12,502 46,351
Minority interest in loss of susbsidiary (19,509)
Changes in:
Accounts receivable (936,361) 102,333
Inventories (1,270,241) (1,322,371)
Prepaid expenses (76,718) (21,112)
Accounts payable and accrued expenses 2,828,000 1,591,121
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (422,211) (1,102,905)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,903) (47,758)
Investment in Quality Feeders -- (200,000)
Restricted cash (1,649) --
Change in other assets (3,699) 2,589
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (10,251) (245,169)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 886,547
Net borrowings (payments) on line of credit 460,000 94,453
Proceeds from issuance of note payable -- 361,344
Payments on long-term debt (27,012) (7,263)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 432,988 1,335,081
------------ -----------
INCREASE IN CASH 526 (12,993)
CASH, BEGINNING OF PERIOD 16,079 12,993
------------ -----------
CASH, END OF PERIOD $ 16,605 $ --
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 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 results of operations for the three months ended March 31,
1999 and 1998 are not necessarily indicative of results that can be expected for
the full year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal accruals)
which, in the opinion of the Company, are necessary to present fairly its
consolidated financial position at March 31, 1999 and 1998. The results of
operations for the interim period 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 through marketing efforts which should improve profitability and
cash flow. Sales efforts are being made to effect changes in the product mix of
CHB sales and to increase the volume percentage of branded versus commodity
sales. In addition, the Company has developed an operating plan including
operating budgets to facilitate monthly analysis of operations. Management
believes these steps will enhance the Company's ability to achieve favorable
operating results.
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.
7
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 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 quarters ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
----------------- ------------------- --------------------
<S> <C> <C> <C>
Sales $ 1,071,713 $ 2,021,596
Purchases 4,871,790 3,571,864
Accounts receivable 7,712 $ 13,379
Accounts payable 2,012,600 1,747,358
</TABLE>
Cattle financed by a member of the Company's management and a
Director for the Company under a financing agreement totaled $308,296 and
$1,137,969 for the quarters ended March 31, 1999 and 1998, respectively.
The Company has notes payable to stockholders totaling $760,000 and
$860,000 at March 31, 1999 and December 31, 1998, respectively. In addition, the
Company has notes payable to joint venture partners totaling $1,193,500 and
$1,210,000 at March 31, 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 $7,533,832 in
proceeds from the transfer of its receivables during the quarter ended March 31,
1999. The reserve for delinquencies and claims held by KBK at March 31, 1999 was
$321,982. The Company has paid $56,504 during the quarter ended March 31, 1999
for fixed discounts on sold accounts.
8
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
(5) Inventories
Inventories at March 31, 1999 and 1998 consisted of the following:
March 31, December 31,
1999 1998
----------- ----------
Boxed beef $ 1,295,457 $ 635,202
Packaged jerky 269,453 33,945
Cattle 450,415 121,454
Other 174,375 128,858
----------- ----------
$ 2,189,700 $ 919,459
=========== ==========
(6) Stockholders' Equity
Potential issuance of additional preferred stock - The proposed private
placement offering will likely have a dilutive effect to common shareholders.
(7) Reportable Segments
Reportable segment profit or loss for the quarter ended March 31, 1999,
was as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle All
Beef Trading Feeding Others Totals
-------------- --------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues from external $11,656,766 $6,458,275 $ - $ 11,055 $ 18,126,096
customers
Intersegment revenues 10,495 29,870 40,365
Segment profit (loss) (833,997) 35,796 (42,959) (158,360) (999,520)
</TABLE>
9
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
(7) Reportable Segments (Continued)
Reconciliation of segment profit or loss for the quarter ended March
31, 1999, was as follows:
<TABLE>
<CAPTION>
<S> <C>
Profit or loss
Total profit or loss for reportable segments $ (841,160)
Other profit or loss (158,360)
-----------
Income or loss before income taxes and extraordinary items $ (999,520)
===========
</TABLE>
Reportable segment profit or loss for the quarter ended March 31, 1998,
was as follows:
<TABLE>
<CAPTION>
Boxed Cattle Cattle All
Beef Trading Feeding Others Totals
-------------- -------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues from external $ 6,408,514 $ 9,117,987 $ - $ - $15,526,501
customers
Intersegment revenues 231,935 231,935
Segment loss (931,417) (126,299) (265,854) (193,846) (1,517,416)
</TABLE>
Reconciliation of segment profit or loss for the quarter ended March
31, 1998, was as follows:
<TABLE>
<CAPTION>
<S> <C>
Profit or loss
Total profit or loss for reportable segments $ (1,323,570)
Other profit or loss (193,846)
-------------
Income or loss before income taxes and extraordinary items $ (1,517,416)
=============
</TABLE>
(8) Subsequent Event
On May 10, 1999, ROF received notification that the inventory line of
credit provided by KBK Financial, Inc. was not renewed. The revolving credit
promissory note provided borrowings up to $1,500,000 based on eligible inventory
and expired on April 19, 1999. The lender has agreed to renew the promissory
note and the inventory line of credit will be available to the Company through
July 15, 1999. ROF is currently in the process of negotiating new financing
agreements with other potential lenders. On March 31, 1999, the outstanding
balance was $900,000.
10
<PAGE>
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 was once again chosen over a large field of competitors to
receive the American Tasting Institute's 1999 "Best Restaurant" and "Best
Supermarket Beef in America" and its My Favorite Jerky received the group's 1999
"Best Tasting Jerky in America". This recognition has helped the Company grow
its retail supermarket base to over 130 stores in the first quarter of 1999 from
54 stores in the first quarter of 1998. Included in this retail supermarket
growth are Hen House Stores of Kansas City and Coborn's and Cashwise of
Minnesota which have successfully promoted Red Oak Farms' Certified Hereford
Beef.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1999 and December 31, 1998, the Company had
consolidated cash and cash equivalents balance of $16,605 and $16,079,
respectively.
Liquidity and Capital Resources Data:
As of March 31, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
--------------- ------------- ---------------
<S> <C> <C> <C>
Working Capital (Deficit) $ (3,650) 27.5% $ (2,646)
Increase in Cash 1 - 3
Cash Beginning of Period 16 18.8% 13
Cash End of Period 17 6.3% 16
Stock and Additional Paid-In Capital $ 4,227 23.7% $ 3,227
</TABLE>
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.
11
<PAGE>
o Continue to implement pricing changes in both branded and commodity
beef.
o Continue to reduce the percentage of its product sold into the
commodity beef trade.
o Continue to monitor the gross margins, which continued to improve
during the first quarter of 1999.
o Secure the 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 include issuance of Common and Preferred
Stock, sales of accounts receivable, borrowings on asset based lines of credit,
and equipment leases. The Company continues its investment in premium branded
beef product development 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 $422,211 for the three months ended March
31, 1999. Operating losses resulted primarily from the following three
activities:
o Pricing concessions were used in new retail supermarket customer
recruitment including discounts to full branded price and provision
of feature items. Inventory adequate to supply existing and new
customers was essential as the Company attempted to raise its
customer base and product demand to levels which would cover overhead
and generate profit.
o Although significant improvement in the percentage of branded versus
commodity sales was achieved during the first quarter, substantial
losses were generated by commodity sales of product produced by
cattle harvested to fulfill customer demand for various cuts.
12
<PAGE>
o Finally, losses were incurred in a realignment of the customer base
into a more efficiently served customer mix. These losses come from
implementing the Company's strategy of building a track record and
reputation for reliability into the retail supermarket and food
service industry. An increase in sales volume and a significant shift
to branded premium pricing continue to reflect opportunity for
favorable results.
The Company continues to expand the development and marketing of
value-added consumer beef products.
Increases in depreciation and amortization, loss from partnership,
increases in credit from affiliates through accounts payable and trade payables,
and increases in accrued expenses provided the cash to absorb the majority of
the operational losses and support increases in both inventories and accounts
receivables for the first quarter of 1999.
At March 31, 1999, accounts receivable was $1,977,104 compared to
$1,040,743 at December 31, 1998. Receivable increases resulted from increases in
boxed beef sales. Increased boxed beef sales also required an increase in
inventories from $ 919,459 at December 31, 1998 to $2,189,700 at March 31, 1999.
Selected Cash Flow Data:
For the Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % change 1998
---------------- --------------- ----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (1,000) (34.1)% $(1,517)
Adjustments to reconcile cash used
in operating activities:
Depreciation & Amortization 40 122.3 % 18
Loss from Partnership 13 (73.0)% 46
Minority Interest in Subsidiaries (20) - 0
Change in
Accounts Receivables (936) (1051.0)% 102
Inventories (1,270) (3.9)% (1,322)
Prepaid Expenses (77) 263.4 % (21)
Accounts Payable and Accrued Expenses 2,828 77.7 % 1,591
---------------- --------------- ----------------
Net Cash used in Operating Activities $ (422) (161.2)% $(1,103)
</TABLE>
Cash Flows from Investing Activities. Investing activities required
cash of $10,251 for the first quarter of 1999. 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".
13
<PAGE>
Selected Cash Flow Data:
For the Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Investing Activities:
Purchases of Equipment (5) (89.7)% (48)
Restricted Cash (2) - 0
Changes in Other Assets (4) (242.9)% 3
Investment in Partnership 0 (100)% (200)
-------------- -------------
Net Cash used in Investing Activities $ (10) (95.8)% $ (245)
</TABLE>
Cash Flows from Financing Activities. Financing activities provided
cash of $432,988 in the first quarter of 1999 from a line of credit.
The Company continues to receive an asset based line of credit, which
provides borrowings up to $1.5 million based on eligible inventory.
Substantially all of a subsidiary's assets and personal guarantees of the
Company's President and a Director collateralize the line of credit. The Company
is in technical non-compliance on certain financial conditions on this loan. The
lender has decided to terminate this loan on July 15, 1999. The Company intends
to secure another asset based lender prior to July 15, 1999. See Note 8 of
Condensed Consolidated Financial Statements.
Affiliates 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 March 31, 1999, the loan is in default and is classified as
a current liability on the balance sheet.
Equipment lease financing, issuance of a long-term note payable for
investment in product development, and issuance of long-term notes for cattle
procurement provided funding resources for the continued growth and development
of premium branded beef products.
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.
14
<PAGE>
Selected Cash Flow Data:
For the Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
--------------- ------------ -------------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net Proceeds from Issuance of Common Stock 0 (100)% 887
Net Borrowing on Line of Credit 460 387.0% 94
Proceeds from Issuance of Notes Payable 0 (100)% 361
Payments on Long-Term Debt (27) 271.9% (7)
--------------- ------------ -------------
Net Cash Provided by Financing Activities $ 433 (67.6)% $ 1,335
</TABLE>
Market Risk
- -----------
The Company is exposed to the impact of changes in interest rates,
foreign exchange rates, and commodity prices. The Company manages such exposures
through the use of 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 quarter of
1999 compared to the first quarter of 1998. The Company has increased sales to
Asia during the first quarter 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' Certified 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 Certified Hereford Cattle is available to meet the current and growing
sales demand.
ROF pays a market premium to the feeder for producing a Certified
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
15
<PAGE>
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, which provides lower than
preferred margins.
Results of Operations
- ---------------------
Comparison of the three months ended March 31, 1999 and the three months ended
March 31, 1998.
Revenues-Net Sales
Net Sales. Net sales of $18.1 million and $15.5 million were generated
by the Company for the three months ended March 31, 1999, and 1998,
respectively. A net sales increase of 16% from 1998 to 1999 was primarily
attributable to a significant increase in boxed meat sales.
Net sales of branded beef products increased to 64% of net sales for
the first quarter of 1999 from 41% for 1998. The first quarter of 1998 was a
repositioning quarter as the Company realigned its customer base. The Company
focused on growth in volume during the first quarter of 1998 and continues to
increase its customer base during the first quarter of 1999. Emphasis is placed
on growth of branded beef product sales while continuing efforts to integrate
value-added products with significantly higher gross margins.
Cattle trading net sales decreased to 35% of net sales for the three
month period ended March 31, 1999 from 59% for the similar 1998 period. Midland
has been refocused to have responsibility for developing the supply of Certified
Hereford Beef for ROF. Volume in both 1999 and 1998 continued to be reduced due
to a reduction of non-Certified Hereford Beef cattle business. The gross revenue
generated by trading is substantial, however, the small margins available have
led the Company to refocus some of Midland's personnel and activities by moving
them into ROF to assist with the procurement function. Midland will continue to
place cattle in ROF's supply channel and engage in some non-Certified Hereford
Beef cattle trade.
Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
----------------- -------------- -----------------
<S> <C> <C> <C>
Net Sales:
Boxed beef $ 11,657 81.9% $ 6,409
Percentage of sales 64.5% 41.3%
Cattle Trading Sales-Non Related Parties 5,357 (24.5)% 7,096
Percentage of sales 29.6% 45.7%
Cattle Trading Sales-Related Parties 1,072 (47.0)% 2,022
Percentage of sales 5.9% 13.0%
----------------- -----------------
Total Net Sales $ 18,086 16.5% $ 15,527
Percentage of sales 100.0% 100.0%
</TABLE>
16
<PAGE>
Cost of Goods Sold
Cost of Goods Sold. Cost of goods sold of $17.7 million and $15.5
million was generated by the Company for the first quarter ended March 31, 1999
and for the corresponding period in 1998, respectively. The 1999 increases
resulted from increased volume in boxed meat. Cost of Goods Sold as a percentage
of sales decreased slightly in the first quarter of 1999, resulted from an
increase in branded boxed meat sales.
Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Cost of Goods Sold:
Cattle Purchased for Processing-Non RP $ 6,386 75.4% $ 3,641
Percentage of sales 35.3% 23.5%
Cattle Purchased for Processing-RP 4,818 111.9% 2,274
Percentage of sales 26.6% 14.7%
Cattle Purchased for Trading-Non RP 6,042 (23.3)% 7,877
Percentage of sales 33.4% 50.7%
Cattle Purchased for Trading -RP 54 (95.8)% 1,298
Percentage of sales 0.3% 8.4%
Other Processing Costs 378 1.8% 372
Percentage of sales 2.1% 2.4%
Other Trading Costs 44 (4.9)% 47
Percentage of sales 0.3% 0.3%
--------------- ---------------
Total Cost of Goods Sold $ 17,722 14.3% $ 15,509
Percentage of sales 98.0% 99.9%
</TABLE>
Note: RP equals Related Parties
Cattle purchased for processing, including processing costs for boxed
beef increased to 62% of revenues for the first quarter of 1999 compared to 38%
of revenues for 1998 reflecting the continuing shift from cattle activities into
branded consumer product marketing of CHB. Cattle purchased for trading,
including other trading costs decreased to 34% of revenues for 1999 compared to
59% of revenues for 1998.
Live cattle costs and related boxed beef costs increased approximately
.9% and 3.6%, respectively, for the first quarter of 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.
17
<PAGE>
Gross Profit
Gross Profit. Gross Profits of $363,678 and $17,681 were generated for
the first quarter ended March 31, 1999 and for the corresponding 1998 period,
respectively. Gross profits were 2.0% and .11% of net sales for the first
quarter of 1999 and 1998, respectively.
Increases in boxed meat sales and branded product mix for the first
quarter ended March 31, 1999 contributed to the improvement in gross margin over
the comparable 1998 period.
Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
------------------- --------------- -----------------
<S> <C> <C> <C>
Gross Profit $ 363,678 1956.9% $ 17,681
Percentage of sales 2.0% 0.1%
</TABLE>
Operating Expenses
Selling and Distribution Expenses. Selling and distribution expenses
for the first quarter ended March 31, 1999 of $654,883 and $804,383 for the
comparable period for 1998 decreased by 18%. Selling and distribution expenses
were 3.6% and 5.2% of net sales, respectively, for the quarter ended March 31,
1999 and 1998. Selling and distribution expenses are somewhat variable and were
reduced as a result of several factors. Some advertising and coop marketing
expenses were replaced with pricing concessions and discounted feature items.
The customer mix was realigned to improve freight efficiency, which reduced
expenses.
For the rights to market and distribute Certified Hereford Beef, the
Company pays a per head fee to the American Hereford Association, "AHA".
Marketing activity cooperation with the AHA and its members was maximized to
reduce cash requirements. The AHA used some of those funds to provide cattle
inspection, customer licensing, customer personnel training, and marketing
materials development and production. 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.
General and Administrative Expenses. General and administrative
expenses were $523,437 and $575,602 for the first quarter ended March 31, 1999
and the comparable period in 1998, respectively. Administrative expenses were
2.9% and 3.7% of net sales for the first quarter of 1999 and 1998, respectively.
The Company is committed to providing the necessary administrative support to
successfully build and manage the Company's products at the highest value.
18
<PAGE>
Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
--------------- ------------ --------------
<S> <C> <C> <C>
Operating Expenses:
Selling and Distribution $ 655 (18.6)% $ 804
Percentage of sales 3.6% 5.2%
General and Administrative 523 (9.1)% 576
Percentage of sales 2.9% 3.7%
--------------- --------------
Total Operating Expenses $ 1,178 (14.6)% $1,380
Percentage of sales 6.5% 8.9%
</TABLE>
Loss from Operations. Loss from operations of $814,642 and $1,362,304
for the first quarter ended March 31, 1999 and the comparable period in 1998,
respectively, decreased by 40% for 1999. Management believes continued
improvement in the branded price mix will be reflected in improvement in gross
margins eventually turning losses from operations into profits.
Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
--------------- -------------- ------------
<S> <C> <C> <C>
Loss from Operations $ (815) (40.2)% $ (1,362)
Percentage of sales (4.5)% (8.8)%
</TABLE>
Other Income and Expense. Interest expense of $148,172 and $109,365 for
the first quarter ended March 31, 1999 and the comparable period in 1998,
respectively, increased by 35% for 1999. Interest expense increases resulted
from higher borrowing levels and a factoring agreement for receivable sales. The
loss on sale of accounts receivable of $56,504 for the first quarter of 1999
represents fixed discounts on the accounts sold to a factor.
19
<PAGE>
Quarters Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 % chg 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Other Income (Expenses):
Interest Income $ 2 174.7% $ 1
Percentage of sales .01% .00%
Interest Expense (138) 35.5% (109)
Percentage of sales (.76)% (.70)%
Loss on Sale of Accounts Receivable (57) - 0
Percentage of sales (.31)% .00%
Loss from Joint Venture (13) - (46)
Percentage of sales (.07)% (.30)%
--------------- ---------------
Total Other Income (Expenses) $ (205) 32.3% $ (155)
Percentage of sales (1.13)% (1.0)%
Net Loss and Loss per Share
Quarters Ended March 31, 1999 and 1998
(in thousands)
1999 % chg 1998
------------- --------------- ---------------
Loss Before Minority Interest $ (1,020) (32.8)% $ (1,517)
Percentage of sales (5.6)% (9.8)%
Minority Interest $ 20 0.0% $ 0
------------- ---------------
Net Loss $(1,000) (33.2)% $ (1,517)
Percentage of sales (5.5)% (9.6)%
Preferred Stock Dividend Required (225) 80.9% (43)
Percentage of sales (1.2)% (0.3)%
------------- ---------------
Net Loss Applicable to Common $ (1,225) 20.5% $ (1,560)
Percentage of sales (6.8)% (9.9)%
====== ======
Basic and Diluted Loss per Share (0.08) (23.5)% (0.11)
====== ======
Weighted Average Shares Outstanding 15,003 4.0% 14,433
====== ======
</TABLE>
20
<PAGE>
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.
Compliance With Section 16(a)
- -----------------------------
All Directors and Executive Officers, as of December 31, 1998, have
inadvertently omitted filing Form 3 within ten days of election. The Form 3 for
each Director and Executive Officer is in the process of being filed.
The Directors and Executive Officers include: Gordon Reisinger, John
Derner, Charles Kolbe, Dwayne Lewis, Jack Holden, Ron Daggett, Harley Dillard,
and Pete Hudgins.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes In Securities
None.
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 March 31, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
May 24, 1999 By: /s/ Gordon Reisinger
--------------------------------------
Gordon Reisinger, President
May 24, 1999 By: /s/ Harley Dillard
--------------------------------------
Harley Dillard, Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 1,987
<ALLOWANCES> 10
<INVENTORY> 2,190
<CURRENT-ASSETS> 4,577
<PP&E> 635
<DEPRECIATION> 300
<TOTAL-ASSETS> 5,212
<CURRENT-LIABILITIES> 8,227
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> (4,242)
<TOTAL-LIABILITY-AND-EQUITY> 5,212
<SALES> 18,086
<TOTAL-REVENUES> 18,086
<CGS> 17,722
<TOTAL-COSTS> 17,722
<OTHER-EXPENSES> 1,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138
<INCOME-PRETAX> (1,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,000)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
