<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, 2000.
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 033-89714
-----------------
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,
2000 was as follows:
Common Stock, $.001 par value: 16,019,165 shares
1
<PAGE>
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Financial Statements Contents
Condensed Consolidated Balance Sheets, as of March 31, 2000 and
December 31, 1999 3-4
Condensed Consolidated Statements of Operations, for three months
ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows, for three months
ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-9
2
<PAGE>
RED OAK HEREFORD FARMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 18,071 $ 17,067
Restricted cash 420,396 415,295
Accounts receivable
Trade, less allowance for doubtful accounts of $10,000 1,333,988 790,363
Related parties 285,259 364,372
Receivable due from factor 179,647 171,756
Receivable due from stock subscriptions 1,620,000 277,000
Inventories 3,504,897 3,142,825
Prepaid expenses and other assets 139,164 69,799
----------- -----------
TOTAL CURRENT ASSETS 7,501,422 5,248,477
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Buildings & leasehold improvements 294,974 294,974
Vehicles and equipment 409,789 384,635
----------- -----------
704,763 679,609
Less: accumulated depreciation (355,507) (334,475)
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT 349,256 345,134
----------- -----------
OTHER ASSETS
Receivables, noncurrent 192,591 192,591
Investment in partnership 24,600 24,600
Other assets 442,348 246,242
----------- -----------
TOTAL OTHER ASSETS 659,539 463,433
----------- -----------
TOTAL ASSETS $ 8,510,217 $ 6,057,044
=========== ===========
</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, 2000 and December 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Checks in excess of bank balance $ 526,004 $ 258,054
Accounts payable
Trade 1,160,179 538,177
Related parties 976,849 1,599,583
Accrued expenses 423,336 457,783
Notes payable 1,640,000 1,615,000
Current maturities of long-term debt 861,808 2,421,484
Current maturities of deferred income 100,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 5,688,176 6,990,081
------------ ------------
LONG-TERM LIABILITIES
Deferred income 200,000 200,000
Long-term debt, less current maturities 2,300,523 2,471,360
------------ ------------
TOTAL LONG-TERM LIABILITIES 2,500,523 2,671,360
------------ ------------
TOTAL LIABILITIES 8,188,699 9,661,441
MINORITY INTERESTS IN SUBSIDIARIES (250,795) (223,288)
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, authorized 50,000,000 shares;
issued and outstanding 16,025,415 shares 16,025 16,025
Cumulative preferred stock, series B, $0.001 par value, authorized
1,200,000 shares; issued and outstanding 1,200,000 shares for
March 31, 2000 and 678,450 for December 31, 1999 1,200 678
Preferred stock, series C, $0.001 par value, authorized
2,000,000 shares; issued and outstanding 352,489 shares for
March 31, 2000 and 13,201 for December 31, 1999 352 13
Additional paid-in capital 16,051,160 10,899,605
Retained deficit (15,496,424) (14,297,430)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 572,313 (3,381,109)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,510,217 $ 6,057,044
============ ============
</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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
NET SALES
Boxed beef $ 10,129,551 $ 11,657,326
Cattle trading 6,361,248 5,356,692
Cattle trading sales to related parties 714,422 1,071,713
------------ ------------
17,205,221 18,085,731
------------ ------------
COST OF GOODS SOLD
Cattle purchased for processing 6,003,091 6,385,666
Cattle purchased for processing from related parties 2,731,084 4,817,846
Cattle purchased for trading 6,817,439 6,041,681
Cattle purchased for trading from related parties 25,412 53,944
Other processing costs 1,222,500 378,532
Other trading costs 51,745 44,384
------------ ------------
16,851,271 17,722,053
------------ ------------
GROSS PROFIT 353,950 363,678
------------ ------------
OPERATING EXPENSES
Selling and distribution 692,849 654,883
General and administrative 697,291 523,437
------------ ------------
1,390,140 1,178,320
------------ ------------
LOSS FROM OPERATIONS (1,036,190) (814,642)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 35,421 1,659
Interest expense (197,067) (137,836)
Loss on sale of accounts receivable (28,665) (56,504)
Losses from cattle feeding joint venture -- (12,502)
------------ ------------
(190,311) (205,183)
------------ ------------
LOSS BEFORE MINORITY INTERESTS (1,226,501) (1,019,825)
MINORITY INTERESTS 27,507 19,509
------------ ------------
NET LOSS (1,198,994) (1,000,316)
PREFERRED STOCK DIVIDEND REQUIREMENT (49,324) (224,921)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,248,318) $ (1,225,237)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.08) $ (0.08)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 16,025,415 15,003,415
============ ============
</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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,198,994) $(1,000,316)
Items not requiring (providing) cash:
Depreciation and amortization 27,676 40,432
Loss from partnership -- 12,502
Minority interest in loss of susbsidiary (27,507) (19,509)
Changes in:
Accounts receivable (472,403) (936,361)
Inventories (362,072) (1,270,241)
Prepaid expenses (69,365) (76,718)
Accounts payable and accrued expenses 7,305 195,119
Checks in excess of bank balance 267,950 2,632,881
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,827,410) (422,211)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (25,154) (4,903)
Restricted cash (5,101) (1,649)
Change in other assets (202,750) (3,699)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (233,005) (10,251)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock 3,809,416 --
Net borrowings on line of credit 25,000 460,000
Payments on long-term debt (1,772,997) (27,012)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,061,419 432,988
----------- -----------
INCREASE IN CASH 1,004 526
CASH, BEGINNING OF PERIOD 17,067 16,079
----------- -----------
CASH, END OF PERIOD $ 18,071 $ 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, 2000 and 1999
(Unaudited)
(1) Nature of Operations and Principles of Consolidation
The condensed consolidated financial statements do not include all
footnotes and certain financial information normally presented annually under
generally accepted accounting principles and, therefore, should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year-ended December 31, 1999. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results of operations for the three months ended March 31,
2000 and 1999 are not necessarily indicative of results that can be expected for
the full year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal accruals)
which, in the opinion of Company, are necessary to present fairly its
consolidated financial position at March 31, 2000 and 1999. The results of
operations for the interim periods shown are not necessarily indicative of the
results for the entire fiscal year ending December 31, 2000.
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) 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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
---------------- -------------- ------------
<S> <C> <C> <C>
Sales $ 714,422 $ 1,071,713
Purchases 2,756,496 4,871,790
Accounts receivable 285,259 $ 364,372
Accounts payable 976,849 1,599,583
</TABLE>
Cattle financed by a related party for the Company under a financing
agreement totaled $214,388 and $308,296 for the quarters ended March 31, 2000
and 1999, respectively.
The Company has notes payable to stockholders totaling $3,233,290 and
$3,393,290 at March 31, 2000 and December 31, 1999, respectively. In addition,
the Company has notes payable to joint venture partners totaling $476,104 and
$1,976,103 at March 31, 2000 and December 31, 1999, respectively.
7
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
(3) Factoring Agreement
The Company continues to sell selected accounts receivable without
recourse to KBK Financial, Inc. ("KBK"). The Company received $3,822,000 and
$7,533,832 in proceeds from the transfer of its receivables during the quarters
ended March 31, 2000 and 1999, respectively. The reserve for delinquencies and
claims held by KBK at March 31, 2000 and December 31, 1999, was $179,647 and
$171,756, respectively. The Company paid $28,665 and $56,504 during the quarters
ended March 31, 2000 and 1999, respectively, for fixed discounts on sold
accounts.
(4) Inventories
Inventories at March 31, 2000 and December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Boxed beef $1,085,568 $1,029,808
Packaged jerky 117,935 0
Cattle 1,875,319 1,938,114
Other 426,075 174,903
---------- ----------
$3,504,897 $3,142,825
========== ==========
</TABLE>
(5) Stockholders' Equity
During the three months ending March 31, 2000, the Company received
$2,862,750 in proceeds from the sale of 572,550 shares of Series B 4% cumulative
convertible preferred stock. The total number of shares offered under the Series
B private placement is 1,200,000 preferred stock shares.
During the three months ending March 31, 2000, the Company received
$946,665 in proceeds from the sale of 126,222 shares of Series C convertible
preferred stock. The total number of shares offered under the Series C private
placement is 2,000,000 preferred stock shares.
At March 31, 2000, the Company had received subscriptions for preferred
stock purchases totaling $1,620,000.
8
<PAGE>
RED OAK HEREFORD FARMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
(6) Reportable Segments
Reportable segment profit or loss and segment assets and liabilities
for the quarter ended March 31, 2000, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
external customers $ 10,119,014 7,075,670 -- 10,537 -- 17,205,221
Intersegment revenues -- -- -- -- -- --
Segment profit (loss) $ (836,852) (13,097) (14,616) (137,533) (196,896) (1,198,994)
</TABLE>
Reconciliation of segment revenues, profit or loss, and assets for the
quarter ended March 31, 2000, was as follows:
<TABLE>
<S> <C>
Profit or loss
Total profit or loss for reportable segments $ (1,002,098)
Other profit or loss (196,896)
------------
Income before income taxes and extraordinary items $ (1,198,994)
============
</TABLE>
Reportable segment profit or loss and segment assets and liabilities
for the quarter ended March 31, 1999, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Boxed Cattle Cattle Beef All
Beef Trading Feeding Jerky Others Totals
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
external customers $ 11,656,766 6,458,275 -- 11,055 -- 18,126,096
Intersegment revenues 10,495 29,870 -- -- -- 40,365
Segment profit (loss) $ (833,997) 35,796 (42,959) (97,249) (61,907) (1,000,316)
</TABLE>
Reconciliation of segment revenues, profit or loss, and assets for the
quarter ended March 31, 1999, was as follows:
<TABLE>
<S> <C>
Profit or loss
Total profit or loss for reportable segments $ (938,409)
Other profit or loss (61,907)
------------
Income before income taxes and extraordinary items $ (1,000,316)
============
</TABLE>
(7) Subsequent Event
Effective April 1, 2000, the Company acquired the remaining 20%
minority interest in MFJ for $40,000 and MFJ became a wholly-owned subsidiary of
the Company.
9
<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 continues implementation of its strategy of using its
premium fresh beef program, Red Oak Farms' Premium Hereford Beef ("PHB"), as a
foundation from which to become a branded premium consumer food product
marketing company.
Brand equity development, as part of this strategy, continues in the
transition from Certified Hereford Beef ("CHB") to PHB. This transition resulted
in temporarily depressed fresh beef sales. The Company is striving to restore
these sales by attracting both hotel, restaurant and institutional ("HRI") and
retail supermarket customers with the resources and vision to effectively
operate the program. Customers of Red Oak Farms ("ROF") consist primarily of
quality and value-oriented up-scale retail supermarket stores, food-service
outlets, high-end restaurants and export accounts. The Company's fresh beef
products continue to be recognized for superior flavor and quality, and were
awarded the "Best Tasting" in the hotel and restaurant division and retail
division by the American Tasting Institute. ROF also won the `Best of the Show"
awards in their respective categories for the third year running over most
national beef brands.
During the past first quarter, the Company completed development of the
first four of its ten, planned, ROFs' precooked beef entrees. There has been
initial acceptance by retailers and distributors. The Company commenced
shipments to several prominent national distributors and retailers early in the
second quarter.
The Company increased its ownership of "My Favorite Jerky" ("MFJ") from
80% to 100% on April 1, 2000. With the results of the Company's new marketing
association, its meat snack line has been approved for distribution by two of
the large specialty food and snack distribution companies. The Company has
completed development of its 4 oz. bag, "MFJ", primarily for the retail
supermarket and mass retail trade classes and expects to begin shipping this
program late second quarter. To this end, the Company has a written
understanding of price and all other parameters with an established co-packer to
produce the "MFJ" items in Argentina and package them in the United States.
Royal Salmon of Norway, for which the Company has exclusive
distribution rights in the United States, will be sold in Europe on a
non-exclusive basis by Red Oak's European subsidiary. In the United States, the
smoked and marinated, farm-raised salmon products have been approved by one of
the largest wholesale grocers. As a result, the Company expects to have Royal
Salmon of Norway in stores during the second quarter of 2000.
10
<PAGE>
Red Oak's European subsidiary is manufacturing and shipping during the
second quarter "Euro" Beef Sticks through its distribution network presently in
place in 17 countries across Europe. Agreements are also now in negotiation for
the production and distribution of other Company products with some of the
largest grocery and snack companies in Europe.
During the first quarter the Company completed the modification of its
Northeast Service Center ("ROFNE"), more fully integrating it into the ROF
corporate fabric. This entity, which sells PHB primarily to the food service
industry has achieved excellent results placing PHB in many prestigious hotels,
restaurants, and country clubs on the East Coast. In addition, the General
Manager to ROFNE assumed responsibility for the nationwide sale of PHB. ROFNE
has been successful during the first quarter, 2000, in expanding PHB HRI sales
and distribution in key markets nationwide. Management believes that these high
profile customers reinforce the premium image of the Red Oak brand and aid in
securing customers for the entire array of Red Oak's premium food products.
The Company completed a preferred stock offering during the first
quarter of 2000. This, as well as ongoing equity raising activities, has
substantially improved the Company's financial position. Product development and
introduction activities were funded through this additional equity. The Company,
however, now requires continued funding during the initial rollout of Red Oak's
precooked line, "MFJ" and Beef Sticks, and Royal Salmon of Norway. Management
believes that because these activities were not financed with debt, the Company
will be more attractive to both debt financing and additional equity investment
to fund these operations.
Liquidity and Capital Resources
As of March 31, 2000 and December 31, 1999, the Company had
consolidated cash and cash equivalents balance of $18,071 and $17,067,
respectively.
Liquidity and Capital Resources Data:
As of March 31, 2000 and December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
-------- ------ --------
<S> <C> <C> <C>
Working Capital (Deficit) $ 1,813 204.1% $ (1,742)
Restricted Cash 420 1.2% 415
Increase (Decrease) in Cash 1 90.9% 1
Cash Beginning of Period 17 6.1% 16
Cash End of Period 18 5.9% 17
Stock and Additional Paid-In Capital $ 16,069 47.2% $ 10,916
</TABLE>
11
<PAGE>
As discussed above, the Company must have additional funds to meet
operational requirements on an ongoing basis. Management has plans, including
completion of a private placement and issuance of debt instruments, to provide
this cash until positive cash flows can be achieved. Management believes that
with reasonable funds available, the Company can move into profitability through
several planned steps.
o Achieve national distribution of its precooked products, "My
Favorite Jerky" and Royal Salmon of Norway.
o Add premium fresh beef accounts.
o Achieve sales in Europe of the Euro Beef Sticks, Royal Salmon of
Norway and precooked beef entrees.
o Continue to manage improving gross margins, through aggressive
cost control and product mix management.
o Continue to reduce the percentage of its product sold into the
commodity boxed beef trade.
Cash Flows from Operating Activities
The Company's cash flows from operating activities required cash of
$1,827,410 and $422,211 for the three months ended March 31, 2000 and 1999,
respectively. The following activities influenced operational performance:
o The Company continued increases in branded pricing for new retail
supermarket customers and refined management of promotional
pricing of feature items contributing to performance.
o Additional competition for CHB required several pricing
concessions early in the first quarter as we continue our
expansion of the PHB program, placing pressure on volume and
margins for boxed beef activity.
o Continued focus on PHB sales volume and a significant shift to
branded premium pricing continue to reflect opportunity for
favorable results.
The Company's transition to PHB and the continued expansion and
development of precooked consumer beef products required operating expenses of
$402,700 during the first quarter.
Operational losses, increases in accounts receivables, increases in
inventories, and a reduction in accounts payable and accrued expenses required
cash to continue operations for the three months ended March 31, 2000.
12
<PAGE>
Boxed beef customer demand continues to require increases in
receivables and inventories. On March 31, 2000, trade accounts receivable was
$1,333,988 as compared to $790,363 at December 31, 1999. Inventories increased
from $3,142,825 at December 31, 1999 to $3,504,897 at March 31, 2000.
Selected Cash Flow Data:
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % change 1999
--------- -------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (1,199) 19.9% $ (1,000)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation & amortization 28 (31.5)% 40
Loss from partnership 0 (100.0)% 13
Minority interest in subsidiaries (28) 41.0% (20)
Changes in:
Accounts receivables (472) (49.5)% (936)
Inventories (362) (71.5)% (1,270)
Prepaid expenses (69) (9.6)% (77)
Accounts payable and accrued expenses 7 (96.3)% 195
Checks in excess of bank balance 268 (89.8)% 2,633
--------- ---------
Net Cash Used in Operating Activities $ (1,827) 79.9% $ (422)
</TABLE>
Cash Flows from Investing Activities
Investing activities required cash of $233,005 and for the first
quarter of 2000 as compared to $10,251 for the quarter ended March 31, 1999. The
Company invested $200,000 in Red Oak Farms Europe, B.V. during the first quarter
of 2000.
Selected Cash Flow Data:
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------- -------- ---------
<S> <C> <C> <C>
Cash Flows from Investing Activities:
Purchases of equipment $ (25) 413.0% $ (5)
Restricted cash (5) 209.3% (2)
Changes in other assets (203) 5381.2% (4)
--------- ---------
Net Cash Used in Investing Activities $ (233) 2173.0% $ (10)
</TABLE>
13
<PAGE>
Cash Flows from Financing Activities
Financing activities provided cash of $2,061,419 for the first three
months of 2000 as compared to $432,988 for the quarter ended March 31, 1999.
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 April
15, 2000, the lender renewed the promissory note and the inventory line of
credit through July 15, 2000. The Company intends to extend and expand the
asset-based lending prior to July 15, 2000.
Affiliates and stockholders are continuing to extend credit to ROF
until such time as the Company secures adequate funding through the issuance of
preferred stock to accredited investors and expands the asset-based lending to
continue the development and growth of the Company.
On December 28, 1999 the Company entered into a settlement agreement to
restructure the Company's outstanding indebtedness to a supplier, and guarantees
on notes due the supplier from the Company's President and a related party
entity. The note is subordinated to the asset lender of ROF. $1,500,000 of this
obligation was paid during the first quarter of 2000. Monthly principal payments
of $24,050 plus 8.5% interest beginning March 1, 2000 through February 1, 2001
are due on the agreed note.
The Company has raised in the aggregate $3,809,416 from accredited
investors during the first quarter ended March 31, 2000 and an additional
$1,620,000 as of May 15, 2000.
The Company continues to finance operations through new equity, 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.
Selected Cash Flow Data:
Quarters Months Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net proceeds from issuance of preferred stock $ 3,809 -- $ 0
Net borrowing on line of credit 25 94.6% 460
Payments on long-term debt (1,773) 6463.7% (27)
------- -------
Net Cash Provided by Financing Activities $ 2,061 376.1% $ 433
</TABLE>
14
<PAGE>
Market Risk
The Company continues to be exposed to the impact of changes in
interest rates, foreign exchange rates, and commodity prices. The Company
manages such exposures through the use of contracts when deemed prudent.
Current financing is predominately fixed or related to U.S. prime
interest rates. As the performance of the Company improves, the risk premium
paid above prime on asset-based lending will be negotiated to lower levels.
Conversely, continued losses will continue the risk premium.
All exported products are currently sold in U.S. dollars to U.S.
trading companies for export. As the Asian economies continue to improve during
2000, the Company anticipates improved sales demand from Asia.
As the Company continues to nurture a selective and strategic customer
base, it needs to maintain a defensive position for the potential loss of any
key customer(s) from competition in the market place. The decision to move away
from the CHB program with our own branded product, PHB, creates a competitive
opportunity for those distributors and packers who may choose to participate in
the Certified Hereford program. As the Company grows the sales base of its own
branded product, PHB, the risk of a competitor using the PHB brand is
eliminated.
In the development of added-value branded consumer products, the
Company must invest significant management and capital resources for successful
supply chain development and management. These rollouts also require marketing
and distribution support essential to successful improvement in related product
margins. This process will require additional capital and asset-based lending.
There is risk that the Company may not receive sufficient funding for these
product developments.
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 the ROF beef
products. The procurement of yearlings and calves, reselling of the qualified
animals to feeders, purchasing of the fat cattle for processing, the related
dressed cattle on the rail and related by-products, the fabricated boxed
primals, and several of the subsequent value-added consumer products are all
affected by commodity market risk.
Hedging and contract purchases for cattle 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 qualified cattle
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.
15
<PAGE>
Results of Operations
Comparison of the three months ended March 31, 2000 and 1999.
Revenues-Net Sales
Net Sales. Net sales of $17.2 million and $18.1 million were generated
by the Company for the three months ended March 31, 2000 and 1999, respectively.
A net sales decrease of 4.9% from 1999 to 2000 was primarily attributable to a
13.1% decrease in boxed meat sales resulting from the loss of customers prior to
year end to CHB competitors, and a revenue increase of 10.1% from cattle trading
activities for the three-month period.
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------- ------ ---------
<S> <C> <C> <C>
Net Sales:
Boxed beef $ 10,130 (13.1)% $ 11,657
Percentage of sales 58.9% 64.5%
Cattle trading sales 6,361 18.8% 5,357
Percentage of sales 37% 29.6%
Cattle trading sales-related parties 714 (33.3)% 1,072
Percentage of sales 4.2% 5.9%
--------- ---------
Total Net Sales $ 17,205 (4.9)% $ 18,086
Percentage of sales 100.0% 100.0%
</TABLE>
Cost of Goods Sold.
Cost of Goods Sold. Cost of goods sold of $16.9 million and $17.7
million was generated by the Company for the three months ended March 31, 2000
and 1999, respectively. A cost of goods sold decrease of 4.9% from 1999 to 2000
was attributable to a 14.0% decrease in cattle purchases for boxed beef and
related changes in inventories and a 12.3% increase in cattle trading activities
for the three-month period.
Cattle purchased for processing, including processing costs for boxed
beef and inventory changes decreased to 57.9% of revenues for the three months
ended March 31, 2000, compared to 64.0% of revenues for the same period in 1999.
This reflects a reduction in boxed beef activities from the transition into PHB
branded consumer product marketing.
Cattle purchased for trading, including other trading costs increased
to 40.1% of revenues for the three months ended March 31, 2000, compared to
34.0% of revenues for the first quarter of 1999.
16
<PAGE>
Live cattle costs and related boxed beef costs increased approximately
10.6% and 13.5% for the three months ended March 31, 2000, as compared to 1999,
based on USDA and National Cattlemen's Beef Association Cattle-fax. These
commodity market based increases have improved the market values for boxed beef
products in 2000.
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
--------- ------ ---------
<S> <C> <C> <C>
Cost of Goods Sold:
Cattle purchased for processing $ 6,003 (6.0)% $ 6,386
Percentage of sales 34.9% 35.3%
Cattle purchased for processing-RP 2,731 (43.3)% 4,818
Percentage of sales 15.9% 26.6%
Cattle purchased for trading 6,817 12.8% 6,042
Percentage of sales 39.6% 33.4%
Cattle purchased for trading-RP 25 (52.9)% 54
Percentage of sales 0.2% 0.3%
Other processing costs 1,223 223.0% 379
Percentage of sales 7.1% 2.1%
Other trading costs 52 16.6% 44
Percentage of sales 0.3% 0.3%
--------- ---------
Total Cost of Goods Sold $ 16,851 (4.9)% $ 17,722
Percentage of sales 97.9% 98.0%
</TABLE>
Note: RP equals Related Parties
Gross Profit
Decreases in branded boxed meat sales from the transition to PHB from
CHB and increased costs in the development of precooked and other value-added
products placed pressure on gross profit for the three-months ended March 31,
2000, generating a slight reduction from the respective 1999 period.
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
------- ----- ------
<S> <C> <C> <C>
Gross Profit $ 354 (2.7)% $ 364
Percentage of sales 2.1% 2.0%
</TABLE>
17
<PAGE>
Operating Expenses
Selling and Distribution Expenses. Selling and distribution expenses
for the three months ended March 31, 2000 and 1999, were 4.0% and 3.6% of net
sales, respectively.
Selling and distribution expenses are somewhat variable. $201,100 of
expenses were included for marketing and product development of the new
added-value product line.
The Company has made a transition from an internal sales staff to
outsourcing to a top mass retail and club store marketer for added-value
products. This has generated a favorable expense strategy as related selling and
distribution expenses are predominately variable, reducing fixed expenses while
increasing our sales coverage to a national based system.
General and Administrative Expenses. General and administrative
expenses for the three months ended March 31, 2000 and 1999, were 4.0% and 2.9%
of net sales, respectively.
Administrative expenses included $201,600 of corporate expenses for
product development, startup of the European market through Red Oak Farms
Europe, B.V. and for the private placement of securities.
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
-------- ----- --------
<S> <C> <C> <C>
Operating Expenses:
Selling and distribution $ 693 5.8% $ 655
Percentage of sales 4.0% 3.6%
General and administrative 697 33.2% 523
Percentage of sales 4.0% 2.9%
-------- --------
Total Operating Expenses $ 1,390 18.0% $ 1,178
Percentage of sales 8.1% 6.5%
</TABLE>
Loss from Operations. Loss from operations of $1,036,190 and $814,642
for the quarters ended March 31, 2000, and the comparable period in 1999,
increased by 27.2%.
Although the transition to PHB branded products, development of
added-value precooked products, and the focused expansion into Europe with Beef
Sticks decreased performance in the first quarter, management believes we are
now positioned for significant improvement in the volume of both boxed beef and
added-value precooked products.
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
---------- ----- ------
<S> <C> <C> <C>
Loss from operations $ (1,036) 27.2% $ (815)
Percentage of sales (6.0)% (4.5)%
</TABLE>
18
<PAGE>
Other Income and Expense. Interest expense of $197,067 and $137,836 for
the quarters ended March 31, 2000, and the comparable period in 1999, increased
by 43.0%.
Loss on sale of accounts receivable of $28,665 and $56,504 for the
three months ended March 31, 2000, and the comparable period of 1999, decreased
by 49.3% as fewer export related sales were sold to the factor.
Increases in interest expense resulted from higher borrowing levels,
and from the reclassification of payables to long-term notes from affiliates.
The loss on sale of accounts receivable represents fixed discounts on
the accounts sold to the factor.
Quarters Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 % chg 1999
---------- ------- --------
<S> <C> <C> <C>
Other Income (Expenses):
Interest income $ 35 2035.1% $ 2
Percentage of sales 0.2% 0.01%
Interest expense (197) 43.0% (138)
Percentage of sales (1.15)% (0.8)%
Loss on sale of accounts receivable (29) (49.3)% (57)
Percentage of sales (0.2)% (0.3)%
Loss from joint venture -- (100.0)% (13)
Percentage of sales 0.0% (0.07)%
-------- --------
Total Other Income (Expenses) $ (190) (7.3)% $ (205)
Percentage of sales (1.1)% (1.1)%
Net Loss and Loss per Share
Quarters Ended March 31, 2000 and 1999
(in thousands)
2000 % chg 1999
--------- ------ ---------
Loss before minority interests $(1,227) 20.3% $ (1,020)
Percentage of sales (7.1)% (5.6)%
Minority interests 28 41.0% 20
-------- --------
Net loss (1,199) 19.9% (1,000)
Percentage of sales (7.0)% (5.5)%
Preferred stock dividend requirement (49) (225)
Percentage of sales (0.3)% (1.2)%
-------- --------
Net loss applicable to common (1,248) 1.9% (1,225)
Percentage of sales (7.3)% (6.8)%
======== ========
Basic and diluted loss per share $ (0.08) (4.6)% $ (0.08)
======== ========
Weighted Average Shares Outstanding 16,025 6.8% 15,003
======== ========
</TABLE>
19
<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.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Recent Sales of Unregistered Securities
For the quarter ended March 31, 2000 and through May 15, 2000 the
Company sold 346,289 units, with each unit consisting of one share of Series C
Convertible Preferred Stock. Each unit was priced at $7.50 per unit resulting in
the Company raising $ 2,597,165. The units were sold in a private placement
pursuant to Section 4(2) and Rule 506 of Regulation D promulgated under the
Securities Act of 1933, as amended. Each investor was an "accredited investor"
as defined in Regulation D.
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.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED OAK HEREFORD FARMS, INC.
May 15, 1999 By: /s/ Gordon Reisinger
-----------------------
Gordon Reisinger
President
May 15, 1999 By: /s/ Harley Dillard
-----------------------
Harley Dillard
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000939728
<NAME> RED OAK
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 18,071
<SECURITIES> 0
<RECEIVABLES> 1,808,894
<ALLOWANCES> 10,000
<INVENTORY> 3,504,897
<CURRENT-ASSETS> 7,501,422
<PP&E> 704,763
<DEPRECIATION> 355,507
<TOTAL-ASSETS> 8,510,217
<CURRENT-LIABILITIES> 5,688,176
<BONDS> 0
0
1,552
<COMMON> 16,025
<OTHER-SE> 554,736
<TOTAL-LIABILITY-AND-EQUITY> 8,510,217
<SALES> 17,205,221
<TOTAL-REVENUES> 17,205,221
<CGS> 16,851,271
<TOTAL-COSTS> 16,851,271
<OTHER-EXPENSES> 1,418,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197,067
<INCOME-PRETAX> (1,226,501)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,226,501)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,248,318)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
