SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d) Of the Securities Exchange Act of 1934
For the Fiscal Year Ended: September 30, 1997 Commission File No. 0-18222
COSTA RICA INTERNATIONAL, INC
Formerly known as
Quantum Learning Systems, Inc.
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(Exact Name of Small Business Issuer as specified in its charter)
Nevada 87-0432572
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation)
2525 SW 3rd Ave, Suite 303
Miami, Florida 33129
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(Address of principal executive offices) (zip code)
(305) 250-9938
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
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(Title of Class)
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:
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB.
Yes: X No:
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Registrant's revenues for its most recent fiscal year: $70,018,094.
The aggregate market value of the voting stock of the Registrant held by
non-affiliates as of December 15, 1997 was approximately $13,742,663. A total of
13,329,451 shares were owned by non-affiliates as of December 15, 1997.
The number of shares outstanding of the Registrant's common stock, as of the
latest practicable date, December 15, 1997 was 19,809,396.
DOCUMENTS INCORPORATED BY REFERENCE
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Documents incorporated by reference are found in Item 13. All documents related
to the reverse acquisition agreement disclosed in Part I, Item 1 (a) hereof have
been previously filled.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General Development of Business
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COSTA RICA INTERNATIONAL, INC., formerly known as Quantum Learning Systems, Inc.
(the "Registrant"), is a Nevada corporation. The main business address during
the reporting period was 2525 SW 3rd Ave. Suite 303, Miami, Florida 33129. Its
telephone numbers at this address were (305) 250-9938 and 250-9939. As of
December, 1997, the new main business address is 95 Merrick Way, Suite 507,
Coral Gables, Fl, 33134. The new telephone number is (305) 476-1757, telecopier
number is (305) 476-1760, email address [email protected].
The Company was incorporated under the laws of the State of Utah on February 6,
1986 under the name CCR, Inc. for the purpose of investing in any and all types
of assets, properties, and businesses. The Company completed a public offering
in 1987.
In April, 1996, the Company entered into a reverse acquisition agreement to
acquire at least 65% of the issued and outstanding shares of Corporacion Pipasa,
S.A. ("Pipasa"). This transaction was structured such that Pipasa would become a
partially owned subsidiary of the Company and the former shareholders of Pipasa
would become the owners of approximately 82.4% of the Company, if 100% of the
shares of Pipasa were acquired. This transaction was approved by the
shareholders of the Company on August 5, 1996 and concluded on September 30,
1996. The Company owns 59.56% of the issued and outstanding common shares of
Pipasa. As a part of the transaction and at the same time as shares of Pipasa
were exchanged for shares of the Company, the Company disposed of all of its
subsidiaries and assets by transferring them to InterCoast Financial, Inc.,a
shareholder of the Company and a company controlled by Mr. James K. Isenhour,
the Company's former President, in exchange for 50,000 common shares of the
Company, plus an indemnification from Mr. Isenhour and InterCoast Financial,
Inc. to indemnify and hold the Company harmless from and against any and all
actions or liabilities resulting from the Company's past ownership of these
subsidiaries and assets.
On August 5, 1996, the Company changed its name to Costa Rica International,
Inc. In March, 1997 the Registrant hired KPMG Peat Marwick in Costa Rica as
its external auditors and independent public accountants, for itself and for
Pipasa, substituting for T. Allan Walls and Associates, the former auditors
and accountant for the Company.
In March, 1997, the Company, with the assistance of KPMG Peat Marwick, first
detected and communicated via a press release that the September 30, 1996 10-KSB
filing was in error and that KPMG Peat Marwick was conducting a re-examination
of fiscal years 1994, 1995 and 1996 and corrected those errors in September,
1997. The nature of the errors could be traced to the financial statements
certified by Registrant's predecessor auditor for fiscal 1996 for the Registrant
and for Pipasa. Those financial statements had to be restated by the Company to
properly account for the following:
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1) The business combination of the Company and Pipasa was first recorded
according to the purchase method of accounting. As a result, the Company
recorded the assets of Pipasa at fair market value. The combination was
actually a reverse acquisition, whereby Pipasa should have been treated as
the accounting acquirer, and the Company as the legal acquirer. In
accordance with Generally Accepted Accounting Principles ("GAAP"), Pipasa
(the accounting acquirer) must account for its acquisition of the Company
as a reverse merger.
2) The Company, following the advice of its prior accountants, previously
reflected the results of operations of the Company as the historical
financial statements of the Company through the date of the merger. GAAP
requires that the historical financial statements of the entity after the
reverse merger be those of Pipasa, the accounting acquirer. Historical
financial statements of the Company have been restated accordingly.
3) The Company, under the advice of its prior accountants, mistakenly
accounted for a transfer of goodwill. A business combination between an
operating enterprise and a shell company, in which the shell company is the
issuer of securities and the operating enterprise is determined to be the
acquiring enterprise for financial reporting purposes, should be treated,
for financial reporting purposes, as an issuance of securities by the
operating enterprise. The company was in essence a shell company because
all of its assets were divested simultaneously with the merger. No goodwill
or intangible assets would be recognized in this transaction. The financial
statements of the Company were revised so as not to reflect any transfer of
goodwill.
4) The non-monetary assets and liabilities included in the financial
statements of Pipasa were translated from Costa Rican currency to U.S.
Dollars at historical exchange rates. As of December 31, 1984, Costa Rica
is no longer considered to be a highly inflationary country according to
the Statement of Financial Accounting Standards No. 52 parameters, and
consequently, the functional currency of Pipasa is the Costa Rican Colon.
These items should have been translated into U.S. Dollars using year-end
exchange rates. This error has been corrected and the balance sheet
adjusted to reflect a reduction in asset value of $24,142,964, due to the
currency translation error and use of the improper accounting methods
described above. The audit conducted by KPMG Peat Marwick resulted in the
following restated amounts, as reported in 1996 10-KSB:
Previously reported:
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Assets $62,351,671
Liabilities $18,919,347
Stockholders Equity and Minority Interest $43,432,324
As restated:
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Assets $38,208,707
Liabilities $22,690,396
Stockholders Equity and Minority Interest $15,518,311
Except as otherwise disclosed herein, the Company has not been subject to any
bankruptcy, receivership or similar proceeding.
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Operations.
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GENERAL
At the end of fiscal year 1997, the Company conducted business in the poultry
industry. The previous operations of the Company were sold in September, 1996.
It is the intention of the Company in the foreseeable future to focus on the
Pipasa core business. In its new configuration, the Company will continue to
look at new acquisitions in Costa Rica, but also in other locations and
industries, which the Company believes are profitable.
The original operations of Pipasa began in 1969. Pipasa was founded by Mr.
Calixto Chaves. The operations were in several Costa Rican corporations: Akron,
S.A., Industrias Derivados de Pollo, S.A.(Idepo, S.A.), Retisa, S.A., Servicios
Multiples Pipasa (Semupi, S.A.), Avicola Chacara, S.A., Concentrados Belen,
S.A., Empolladora Belen, S.A., Granja Avicola Monica, S.A., Planta Procesadora
de Aves, S.A., Grupo Pipasa, S.A., Productores de Huevo Fertil, S.A. (Prohufe,
S.A.), and El Polluelo, S.A. In 1991, all of these entities were merged into
Akron, S.A., a Costa Rican corporation, which changed its name to Corporacion
Pipasa, S.A. Pipasa has not been subject to any bankruptcy, receivership or
similar proceeding.
COMPANY OVERVIEW.
Pipasa is the largest poultry company in Costa Rica with a 50% market share of
the chicken meat market. The main activities of Pipasa are the production and
sales of broiler chickens, poultry meat, processed chicken products, commercial
eggs, and premixed feed and concentrate for livestock and domestic animals.
Pipasa has been in the poultry business for more than 27 years with more than 11
years of experience in exports. It owns 38 urban and rural outlets throughout
Costa Rica. Today, Pipasa enjoys a vertically integrated operation, which begins
with the fertilized egg and ends with the preparation and distribution of fresh
whole chickens to fast-frozen and cooked chicken patties and sausages.
HISTORY OF COSTA RICA INTERNATIONAL, INC. AND CORPORACION PIPASA, S.A.
The Company, formerly known as QLS (Quantum Learning Systems Inc.) was
incorporated under the laws of the State of Utah on February 6, 1986 and filed a
public offering in 1987. The Company's current jurisdiction is Nevada. In April,
1996, the Company entered into an acquisition agreement to acquire the majority
of the stock of Pipasa. With the Pipasa acquisition, the Company divested itself
of all other subsidiaries and focused solely on the operations of Pipasa. The
Company serves as the holding Company for Pipasa and will from time to time,
make strategic investments in Costa Rica and Central America which the Company
expects will bring value added to Pipasa's core business.
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RECENT ACQUISITIONS:
In April of this year, Pipasa completed the acquisition of the poultry division
and animal feed concentrate business of Coopemontecillos R.L. for approximately
$2,700,000. Pipasa acquired the assets, including plant, equipment, vehicle
fleet, inventory, hens and raw materials and some accounts receivable.
Coopemontecillos had a 6% market share of the Costa Rican poultry market but
was not a significant factor in the animal feed market.
CUSTOMERS:
Even with its strong market position, Pipasa is constantly striving to
strengthen it. It promotes its brand names through advertisements and marketing
events. Pipasa considers itself to be among the most recognized Central American
chicken producers securing agreements to supply chicken in Costa Rica to Burger
King, Pizza Hut, Subway, KFC, Gerber Products and to McDonalds in Central
America. Within the last two years, Pipasa has invested approximately $4,300,000
in assets that have increased efficiency and output, such as an automatic
de-boning machine, a new incubation plant (regarded as one of the most modern in
Central America), a nipple-type drinking system to feed birds and a new
distribution fleet.
STRONG DISTRIBUTION NETWORK:
Pipasa has a distribution fleet consisting of approximately 156 delivery trucks
specially designed to deliver poultry products. These trucks play an important
role in Pipasa's export business, as they give Pipasa the necessary fleet size
to export to other countries. These trucks deliver fresh products daily, thus
maintaining Pipasa's reputation for fresh quality products. Through its 38
outlets, Pipasa is able to distribute its products to customers in urban and
rural areas who may not have easy access to supermarkets. The majority of these
outlets are owned by Pipasa and are located in the urban areas.
EXCHANGE RATE RISK:
Pipasa makes U.S. Dollar payments for its raw materials and bank facilities.
This U.S. Dollar expense component is not unique to Pipasa, as all poultry
producers in Central America must rely on U.S. companies for raw materials like
corn, soybean meal and reproduction birds. Given its U.S. Dollar exposure,
Pipasa actively manages its exchange rate risk. It uses a financial model to
determine the best strategy to mitigate against Colones devaluation against the
U.S. Dollar. Pipasa systematically increases its yearly sales prices by a rate
that runs in pace with Colon devaluation against the Dollar. For the fiscal year
1997, the national devaluation rate was 11.60% and correspondingly, Pipasa
increased its prices 12.6%. Management believes that the Company's strong
market will allow for this type of price increase without sacrificing demand
and market share. The Company has successfully passed along such increases
for the last five years.
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Management plans to increase its export operations in order to increase its U.S.
Dollar revenue, as all export sales are made in U.S. Dollars. In 1997, Pipasa
generated $2,300,000 in export revenue, which represents 3.22% of total sales.
COMMODITY RISK:
Pipasa imports all of its corn, the primary ingredient in chicken feed, from the
United States. Movements in the price of corn can significantly affect Pipasa's
net profit margin. Pipasa has a department exclusively dedicated to hedging its
corn and soybean meal exposure and has been doing so for the last six years.
Pipasa is not involved in speculation and only hedges known exposure. The
department works closely with its broker dealers FIMAT and Prudential Securities
and confers with its internal hedging committee in order to employ the best
strategy to hedge corn exposure. Pipasa sets a conservative target price for its
corn, which is based on worst case assumption (i.e. adverse weather conditions,
thus high prices). The prices Pipasa paid for its corn and soybean meal in 1997
have consistently fallen below budgeted prices by 3.4% and 4.90%, respectively.
FOREIGN COMPETITION:
Pipasa's local market share could potentially be threatened by foreign
competition. Pipasa believes that this likelihood is low for several reasons.
Pipasa has a strong reputation for producing high quality products at a
reasonable price. Secondly, Costa Ricans prefer fresh chicken to frozen chicken
and due to transportation constraints and distance, foreign competitors would
have to sell frozen chicken if they were to sell it in Costa Rica.
The Agriculture Ministry in Costa Rica monitors all the chicken entering the
country, as it wants to prevent Newcastle Disease from entering the country. The
Costa Rican market is also protected by tariff agreements. Chicken importers
must pay duties as dictated by GATT agreements. These agreements were reached
during the GATT and Uruguay Round and are due to expire in 2004. They provide
that only 887 MT (metric tons) of whole chicken parts or chicken derivatives can
be imported to Costa Rica from countries outside of the Central American Common
Market. The Central American Common Market "MCCA" which originated in 1963, was
the integration of the political and economic system of the countries in Central
America. The purpose for the integration was to create a market large enough for
industries to benefit from greater economies of scale. Members of the MCCA
include Costa Rica, Guatemala, Nicaragua, El Salvador and Honduras. This quota
is taxed 39% and amounts in excess of this quota are subject to a 200% tariff.
This tax rate was based on the additional cost of producing poultry in Costa
Rica compared to cost of production in the U.S.
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COMMODITY RISK MANAGEMENT:
Pipasa's greatest cost components are corn and soybean meal, which are imported
from the United States. Pipasa purchased approximately $1,000,000 per month in
corn through the Chicago Board of Trade ("CBOT"). Corn and soybean meal
purchases represent approximately 50% of total cost of goods sold and 70% of raw
material costs. The price of corn and soybean meal, like most grain commodities,
is fairly volatile and requires consistent and daily hedging in order to
minimize the effect of price increases on its profit margin. The minimum
contract size for corn purchased through the CBOT is 5,000 bushels per contract
(delivery dates are September, December, March, May and July) and the tick size
for corn is $0.0025. The tick size indicates the volatility of a contract. In
the case of corn, a tick size of $0.0025 means that for each one-quarter cent
move on a contract, the price of corn on one contract, moves $12.50.
Pipasa has been actively hedging its exposure to corn since 1991. It has a
dedicated department whose sole responsibility is to evaluate, on a daily basis,
the price of corn and soybean meal. All hedging activities are headed by the
financial department, which has been trained at the CBOT and attends regular
seminars on commodities hedging strategies.
Hedging strategies must go through a hedging committee. The committee consists
of two analysts, as well as the Financial Director, Financial Manager and
General Vice President. The committee meets at least once a month to evaluate
Pipasa's exposure in corn and soybean meal. Pipasa's strategy is to hedge
against price increases in corn and soybean meal. It is not involved in
speculative trading. Contracts range from one month to six months. Pipasa will
buy directly from the spot market if market conditions are favorable, but as a
general rule, it purchases at least 50% of its corn through contracts. Pipasa's
hedging strategy is set by its yearly budget, which determines how much corn and
soybean meal it will need and the price it must pay in order to meet budget
forecasts. It uses an internal pricing model to run sensitivity models. Pipasa
bases its target prices on the worst case price assumptions (i.e. high corn
prices). On a historical basis, Pipasa's current prices paid for corn have
fallen 3.4% below its budgeted prices.
Pipasa has a $250,000 credit line with FIMAT and draws upon this credit line in
order to cover its initial margin deposit. The interest rate paid on this line
of credit is less than 10% on drawn amounts. Pipasa is in constant contact with
its brokers (at least three to four times a day) and receives advice from the
broker dealer's corn experts. Pipasa also installed a satellite dish in 1991
which enables it to receive real time information on the price of corn and
soybean meal via the Future Source Technical Services and the Futures World
News.
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Pipasa's soybean meal purchases total approximately $600,000 a month. The
hedging strategies for soybean meal purchases are identical to that of corn
purchases, except that Pipasa purchases its soybean meal through a Costa Rican
company, Inolasa, in which Pipasa holds a 10% equity ownership of the
outstanding stock. In Costa Rica, there exists a 5% tax for soybean meal
imports, which is not levied if purchased through Inolasa. If for any reason
Inolasa cannot deliver the soybean meal to Pipasa, Pipasa can buy its soybean
meal directly from the CBOT. Thus far, Pipasa has never had to go directly to
the CBOT to purchase soybean meal. On a historical basis, Pipasa's current
prices paid for soybean meal have been close to 5.0% below its budgeted prices.
EXCHANGE RATE RISK MANAGEMENT:
In addition to movements in the price of corn and soybean meal, due to weather
conditions or demand levels, Pipasa has exposure to fluctuations in exchange
rates, as payments for corn, soybean meal and reproduction birds are in U.S.
Dollars. Pipasa has an internal Economic Studies Division whose sole function is
to follow economic and industrial trends that influence foreign exchange levels.
This division examines areas such as poultry gross national product, GNP,
inflation, devaluation, export and import growth rates, growth in real wages,
unemployment and population rates.
The raw material purchases have an average payment period of 120 days, hence
exchange rate risk is for four months. During this time, accounts are paid and
costs are updated to reflect new exchange rates. In the event of a severe
devaluation of the Colon, or increases in international prices, the Company can
increase sales prices to recuperate its foreign exchange losses. In addition,
all of Pipasa's exports are denominated in U.S. Dollars (even exports within
Central America). Management expects that the strategy to increase exports
will increase Pipasa's U.S. Dollar revenues. Currently, Pipasa has financial
liabilities of $6,000,000. Pipasa uses a model to determine the maximum
devaluation possible before it considers taking on Colon-based debt. In effect,
Pipasa borrows in U.S. Dollars when the economies prove it to be less expensive
than borrowing in Colones.
PRICING:
In Costa Rica, there are no laws against monopolies, however, there are laws
against monopolistic practices. Companies, which have a dominant market share in
Costa Rica, cannot arbitrarily increase prices in order to take advantage of its
market position. Companies are also forbidden to work in conjunction with their
competitors in order to create price collusion. Given these guidelines, Pipasa's
pricing strategies are influenced by two main factors: industry conditions and
currency devaluation. As previously mentioned, Pipasa will use its financial
model to increase prices accordingly in order to mitigate devaluation of the
Colon. During the last 10 years, the Costa Rican Colon has devalued an average
of 13.5% per year, which Pipasa has mitigated by increasing prices on average by
14.0% per year for its chicken, meat by-products and animal feed segments.
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In terms of consumer reaction to price increases within the chicken broiler
segment, there is little differentiation for customers between one competitor
and another. Instead, customers are driven by price set by the leader, which in
the Costa Rican market is Pipasa. As the market and price leader, Pipasa has the
flexibility to increase its prices without losing significant market share.
Given the consistent increase in chicken prices over the past 12 years, Pipasa
believes it has excellent data on consumer reactions to price increases. It has
been Pipasa's experience that a significant increase in prices leads to a
temporary decrease in demand that lasts approximately two months.
MAIN BUSINESS SEGMENTS:
Poultry is a popular food item in Costa Rica because of its easy preparation,
nutritional value and low price when compared to other meats in the country. Per
capita consumption of poultry has increased from 16.2 kilos (35.6 lb.) in 1994
to 18.0 kilos (39.6 lb.) in 1996, an 11.11% increase during the two year period.
Poultry is consumed in all social levels and is not defined by geographic
markets. The popularity of poultry in Costa Rica extends beyond broiler
chicken (whole chicken) and includes chicken by-products like sausages and cold
cuts.
The following is a brief description of the main business segments of Pipasa:
BROILER CHICKEN:
Sales of broiler chicken represented approximately 63% of Pipasa's total sales
during fiscal 1997. Gross margins for locally sold broilers as a percent of
total broiler chicken sales was 26.20%.
CHICKEN BY-PRODUCTS:
Meat by-products include sausages, bologna, chicken nuggets, chicken patties,
frankfurters, salami and pate. Meat by-products represented a little over 11% of
Pipasa's total sales for fiscal 1997. It is a very profitable segment of the
business, with gross margins as a percent of total by-products sales of roughly
38%.
ANIMAL FEED:
Animal feed is made with imported raw materials such as corn and soybean meal,
along with the unused portions of chicken and other vitamins and minerals. It is
marketed for consumption by cows, pigs, birds, horses and domestic pets. Animal
feed represented approximately 17% of Pipasa's total sales during 1997.
OTHERS:
This segment includes sales of commercial eggs, fertile eggs, animal feed and
baby chicks to integrated producers, as well as raw materials and baby chicks to
third parties.
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POULTRY RAISING PROCESS, PROCESSING FACILITIES AND HEALTH GUIDELINES
POULTRY RAISING PROCESS:
The poultry raising process starts with the import of one-day old parent hens
from the United States. Once these hens reach their laying period, which takes
20 weeks, they produce fertile eggs, which are then incubated in order to
produce baby chicks. The hatching period lasts 21 days, which is divided into 19
days in hatching machines and two days in birth chambers. These baby chicks are
inoculated to prevent diseases. The chicks are then brought to Pipasa's own
raising house or to independent integrated producers who raise the chicken to
full size (typically a seven week process) providing basic elements such as
vitamins, formula, and a balanced ration of feed. The integrated producers are a
group of 72 farmers who own their own land and facilities. They have a long-term
contract with Pipasa to raise the baby chicks to adult birds with an average
weight of 1.87 kilograms (4.1lb.). Integrated producers supply 30% of the total
chicken needed by Pipasa and are paid according to the weight and quality of the
chicken produced and the mortality rate of the lot of chickens raised. Pipasa
provides free veterinary services and offers vaccines and chicken feed to the
farmers at wholesale prices. Regardless of whether Pipasa raises the chicken or
integrated producers do, the chickens are regularly inspected for immune
deficiencies, vitamin levels and general diseases. By working in conjunction
with these integrated producers, Pipasa has greater flexibility to increase or
decrease the number of chickens raised depending on Pipasa's growth objectives.
PROCESSING FACILITIES AND HEALTH GUIDELINES:
Once the chickens reach the desired weight, they are then taken to the
processing plant. Pipasa's processing house is among the most sophisticated and
largest in the country. The plant size is approximately 6,205 square meters and
has the capacity to process 7,000 broilers per hour. The processing plant is
where the chicken is slaughtered and the meat packaged or processed to make
chicken by-products. As with all animal processing facilities, the processing
plant must be kept clean in order to prevent the spread of bacteria. For this
reason, Pipasa's employees are required to wear protective masks, caps, boots,
gloves and coats at all times while in the processing plant. Each time an
employee enters or leaves the processing plant, boots must be soaked and rinsed
with bleach. All bathroom facilities are located outside of the plant and are
equipped with foot operated faucets. All new employees are trained as to the
proper procedures required in handling and preparing food.
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A government health inspector is at the plant 24 hours a day. The government
representatives inspect every step of the processing procedure and send samples
of the meat to government labs for analysis for bacteria and other organisms. In
addition to government inspectors, Pipasa has its own staff of inspectors who
also take samples of the meat at each step of the production process. These
samples are then sent to Pipasa's own labs for analysis. Because Costa Rica has
been declared free of Newcastle Disease, the Animal and Plant Health Inspection
Service (APHIS) surveys work in Pipasa's facilities to ensure that Costa Rica
continues to be free of Newcastle Disease. Pipasa recently adopted the
guidelines of Hazard Analysis Critical Control Points (HACCP) which are expected
to be fully implemented in the future. HACCP is a prevention based food
safety system used widely throughout the food industry in Total Quality
Management. It is a tool used to assess hazards and to establish controls based
on the prevention of food contamination. For example, temperature must be
carefully controlled as microbial growth is encouraged between 4-60 degrees
Celsius or 40-160 degrees Fahrenheit. HACCP encourages employees to gain an
in-depth understanding of total food production. The employees thus take an
active role in ensuring food quality and safety. By identifying critical points
in the process flow that could lead to contamination of food products and
applying control measures at each point, the likelihood of a food borne illness
is reduced.
BROILER CHICKENS CUSTOMERS:
The main brand name is Pipasa, which sells mostly broiler chickens, chicken
parts, mixed cuts and breasts. Broiler chicken is a generic product that is
directed to customers of all social and economic levels. It is estimated that
Costa Ricans eat chicken at least once a week. Chicken is sold to institutional
clients, schools, hospitals, restaurants and small grocery stores. Pipasa
currently supplies Burger King, Subway, Pizza Hut, Gerber Products, Rostipollos
and KFC in Costa Rica. Pipasa was recently selected by McDonalds to be its
poultry products supplier for all of Central America.
CHICKEN BY-PRODUCTS CUSTOMERS:
Pipasa's meat by-products are sold through the Kimby brand name and are sold to
all social and economic classes. The Kimby brand name is the leading seller in
chicken meat by-products in Costa Rica. These products are sold mainly in
supermarkets and sales of these products are predominantly driven by price. The
Kimby brand name is one of the leading sellers of chicken by-products and the
leading seller of chicken sausages in Costa Rica.
ANIMAL FEED CUSTOMERS:
Pipasa's animal feed products are sold through the Nutribel brand name. These
clients are mainly big wholesalers and high scale breeders. This customers group
is focused on quality and price. Products marketed through the Mimados brand
name, a division within Nutribel, targets veterinarians, pet stores and
supermarkets. These clients are typically among the medium to higher income
levels. The leader in this market is Dos Pinos (33% market share) which sells
animal feed exclusively to co-operatives. The rest of this market is very
fragmented.
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"OTHERS" CUSTOMERS:
Customers of this segment are mainly integrated producers, small farmers and
commercial egg distributors.
MARKETING:
Pipasa has a dedicated division for marketing. The marketing department's
responsibility is to disseminate Pipasa's various products and brand names. In
addition to television and radio advertisements, Pipasa works with its
distribution centers to give away posters, T-shirts and hats that promote the
Pipasa product brand names. In Costa Rica, the Pipasa brand name commonly
appears on major billboards and bus stops. There are more marketing techniques
available for use in meat by-products, as these items can be packaged in a more
effective manner in order to draw customers.
DISTRIBUTION:
Pipasa's distribution fleet consists of approximately 156 trucks. The fleet
delivers to over 11,200 clients. These trucks are specially designed to deliver
poultry and are equipped with refrigeration chambers. These vehicles typically
have a useful life of 5 years. Pipasa's products are sold not only through
supermarkets, but also through rural and urban retail outlets. A majority of
total distribution is conducted through its urban retail outlets, a smaller
portion through rural outlets and the remaining distribution is serviced
through the Company's processing plants. These retail outlets are dedicated to
the sale of Pipasa products exclusively. Prices for products sold in these
retail outlets are identical to prices quoted in supermarkets. The products sold
are fresh as these retail outlets are typically situated near Pipasa's
processing facilities which enables trucks to make deliveries on a daily basis.
Products may be sold by the unit or wholesale. Pipasa currently has 29
urban distribution outlets and 9 rural outlets. The rural outlets are
strategically located near major roadways, and are equipped with refrigeration
chambers that allow for storage of chicken. Pipasa plans to increase the
capacity of these cold room storage facilities in order to meet increased
production plans (specifically for chicken by-products). The increased capacity
will enable distribution trucks to make more deliveries, as trucks can simply
return to the nearest agency to reload their trucks, as opposed to returning to
the main plant in order to reload.
EMPLOYEES, COMPENSATION AND INCENTIVES:
The top management level at Pipasa has on average almost 15 years of experience
with Pipasa and has been able to grow Pipasa's market share to 50% by creating
efficient operations, making strategic acquisitions and producing high quality
products.
12
<PAGE>
<PAGE>
The success of the Employee's Solidarity Association (ASEPIPASA) and the fact
that there has never been a strike at Pipasa, reflects the quality of the
management team and its ability to keep its employees satisfied. ASEPIPASA
provides recreational facilities, healthcare and pension benefits as well as
financial services to its employees, Pipasa encourages its employees to make a
career at Pipasa.
As of September 30, 1997, Pipasa had approximately 1,990 full-time employees, of
whom 55 were in management and 247 were in administration. Private companies
typically support their own workers' associations instead of organized unions,
which provide certain services such as credit, recreational facilities,
subsidized housing, as well as healthcare benefits. Pipasa's employees created
ASEPIPASA in 1985. This association sits on land donated by Mr. Chaves and
is among the largest solidarity associations in Costa Rica. The association
has a swimming pool, soccer field, outdoor sports, sauna and a 1,000 seat
gymnasium facility. At Pipasa, all the employees participate in the association.
This level of participation is a direct reflection of the quality of services
and benefits available to Pipasa employees.
Salaries in Costa Rica are increased twice a year as dictated by the government
in order to counterbalance the effect of inflation and the cost of living. By
law, each year, companies are required to pay to the employees, 8.33% of an
employee's yearly gross salary as severance which must be paid upon termination
of a labor contract without just cause to a maximum of eight years. At Pipasa,
employees have the option to have the 8.33% paid to ASEPIPASA as part of a
savings incentive program for as long as they work for the Company, not just
8 years. Few other companies in Costa Rica offer this option. The savings
incentive program works as follows: Pipasa pays at each pay period to ASEPIPASA
5% of the employee's wage for that pay period. 5% is then matched by the
employee. Then, in February, Pipasa makes the final payment equal to 3.33% of
the employee's total yearly gross salary. Employees have the option to deposit
the remaining 3.33% due from Pipasa into pension fund Provida. ASEPIPASA
manages all the cash generated by the savings incentive program. It invests in
low risk vehicles like certificates of deposit and other AA rated or better
investment vehicles. Employees can borrow against the amount in their savings
at a local interest rate of 18% - 30%. Once an employee leaves Pipasa, the
employee is entitled to the total amount accumulated in their severance and
savings incentive account.
All employees are protected by obligatory insurance with the Caja Costarricense
de Seguro Social ("CCSS") and the Instituto Nacional de Seguros ("INS") which
are the government's social security and insurance programs. All companies in
Costa Rica must pay the CCSS 21% and the INS 1.74% of each employee's monthly
salary. These contributions serve as a policy for healthcare and employee
accidents. This policy has unlimited coverage. For example, if an employee
were to suffer serious injury while at work, the CCSS and INS will
provide hospitalization, rehabilitation and medicine. The CCSS pays 70% of
the employee's normal salary during the periods in which he or she is unable
to work. In addition to these benefits, employees must pay a total of 9% of
their monthly salary to the CCSS in order to receive healthcare, pension and
maternity care benefits.
13
<PAGE>
<PAGE>
Employees are provided with a profit sharing program. If Pipasa has a successful
year and generates profits in excess of budgeted levels, Pipasa will distribute
a percentage of its net income to its employees. This incentive is calculated
monthly and distributed every two months.
In conjunction with a local university, Pipasa offers a business administration
program for its employees. The main goal of the program is directed toward
developing Pipasa's future management team. Classes are held at Pipasa's
facilities.
BACKLOG:
At September 30, 1997, Pipasa had no backlogs.
PROPRIETARY INFORMATION:
Pipasa uses no material proprietary information in connection with its
operations.
ENVIRONMENTAL COMPLIANCE:
Pipasa is not subject to any material costs for compliance with any
environmental laws in any jurisdiction in which it operates. However, in the
future, Pipasa could become subject to material costs to comply with
environmental laws in jurisdictions in which it does not now do business. At the
present time, Pipasa cannot assess the potential impact of any such potential
environmental regulation. The Company has been and is practicing for several
years sustainable environmental policies such as reforesting approximately 500
hectares with hardwood trees, processing and recycling its wastes, producing
organic fertilizer, and building oxidation lagoons and sewage treatment plants.
GOVERNMENT REGULATION:
The poultry hatcheries and processing plants are subject to regulation under
Costa Rican law regarding cleanliness and health standards. Exports of Pipasa
poultry products are regulated in the countries in which Pipasa makes sales.
Such regulation is not considered to be a burden on Pipasa or to have a
material effect on Pipasa's ability to make a profit. Otherwise, Pipasa is not
subject to any material governmental regulation or approvals.
YEAR 2000 ISSUE
The Company established a formal Year 2000 oversight committee in December,
1997. The members of this committee are the Information System Manager, the
Corporate Auditor, the Administrative Director, an Information Systems Auditor,
and the Company's External Information Systems Adviser. Along with this
committee, the Company has a written certificate that its Information Systems
tools that are developed by Oracle are "FULLY COMPLIANT" with the Year 2000
changes. As follows, a list of tools that have been certified: RDBMS, Developer
2000, Developer 2000-Forms, Developer 2000-Reports, Developer 2000-Graphics,
SQL*Plus, Oracle*Bood Runtime, Oracle Data Browser.
14
<PAGE>
<PAGE>
The Company has begun the conversion, testing and implementation stages of
the entity's Year 2000 plan. This plan includes vendors, customers and
intermediaries. Management expects to complete its Year 2000 plan during
fiscal 1998 AND FISCAL 1999. To the extent that the Company could not implement
effectively the plan, adverse results could arise.
ITEM 2. DESCRIPTION OF PROPERTY:
PRODUCTION AREA:
This area has the following divisions: Reproduction, Incubation, Broiler Chicken
and Reproduction Hen, Processing Plant, Further Processing and Animal Feed
Plant.
REPRODUCTION DIVISION:
o Present capacity of production installed : 26,208,000 of fertile eggs
o Location: The installations are located in Sardinal de Puntarenas.
INCUBATION DIVISION:
o Present capacity of production installed: 24,401,520 youngsterschicks/year
469,260 youngsters chicks/week
o Location: The plant is located in Aranjuez de Puntarenas.
This plant is one of the most modern incubation plants in Central America, which
allows for an expansion of its halls of incubation and hatching, to increase
production, and fulfill future needs of customers for many years.
ANIMAL FEED DIVISION:
o Location: (1) San Rafael de Alajuela
(2) Sardinal de Puntarenas
o Present capacity installed: (1) 33 tons of animal feed per hour
(2) 13 tons of animal feed per hour
The plants perform the activities such as: Ground grains, flour mixing and
packing of different types of balanced food.
15
<PAGE>
<PAGE>
BROILER DIVISION:
o Present capacity: 20,500,000 youngsters/year
o Location of the farms: 63 farms owned and located in the central
area of the country.
o Youngsters are received of one day after birth. During this time the
chicks receive three types of diet according to growth requirements.
This growing stage lasts 43 days.
PROCESS DIVISION:
o Present capacity of process: 26,038,195 kilograms per year
o Location of the farms: The plant is located in San Rafael de Alajuela.
o The process is divided into slaughter and pluck, coolers and retailers,
packing and cuts, subproducts.
FURTHER PROCESSING:
o Present capacity: 2,900 ton/year
o Location: The plant is located in San Rafael de Alajuela
o The process is divided into sausage, formed, packing and hot zone (oven
and cooking tanks) areas.
MARKETING AREA:
o The chicken and further process products are distributed through nine
retail outlets using the vehicle fleet in rural zones and 27 owned
retailers in the central provinces of the country that carries all of our
products to more than 8,500 different clients. These include the majority
of the recognized supermarkets, suppliers, meat markets and other clients.
ADMINISTRATIVE AREA:
o Headquarters of Pipasa are located in La Ribera de Belen, Heredia.
16
<PAGE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS:
No legal proceedings of a material nature to which the Company is a party
were pending during the reporting period, and the Company knows of no
legal proceedings of a material nature pending or threatened or judgments
entered against any director or officer of the Company in his capacity as
such.
The Costa Rican income tax returns of Pipasa for 1993, 1994, and 1995
were were assessed for $39,354, $131,222, and $76,976, respectively. Due
to the disallowance by the Costa Rican tax authorities of approximately
26.03% in the aggregate of the deductions taken by Pipasa for 1993, 1994,
and 1995, the assessments have been contested by the Company. Management
does not believe this matter will be resolved in the next fiscal year.
No accrual has been made for any losses that may result from the
resolution of this uncertainty.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of Management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were submitted to a vote of the shareholders during the
fiscal year 1997. On March 23, 1997 the Company held an Annual Shareholders
Meeting to submit to the stockholders of the Company the ratification of KPMG
Peat Marwick as its external auditors and accountants, and the replacement of
James Kirk Isenhour as a Director of the Company, by electing The Honorable Luis
G. Guinot, Jr.
17
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) Main Market or Markets
----------------------
The Company's Common Stock has been listed on NASDAQ since May 25, 1990. Market
makers and other dealers provide bid and ask quotations of the Company's common
stock under the symbol "RICA".
The table below represents the range of high and low bid quotations of the
Common Stock of the Company as reported by NASDAQ during the reporting period
herein and the two prior years. The following bid price market quotations
represent prices between dealers and do not include retail markup, markdown,
or commissions; hence, they may not represent actual transactions.
Fiscal Year 1997
- ----------------
High Low
---- ---
First Quarter
Common Shares $ 2.250 $ 2.125
Second Quarter
Common Shares $ 1.625 $ 1.500
Third Quarter
Common Shares $ 1.688 $ 1.500
Fourth Quarter
Common Shares $ 1.500 $ 1.375
Fiscal Year 1996
- ----------------
High Low
---- ---
First Quarter
Common Shares $ 0.469 $ 0.125
Second Quarter
Common Shares $ 0.781 $ 0.219
Third Quarter
Common Shares $ 2.188 $ 0.375
Fourth Quarter
Common Shares $ 4.40 $ 1.04
18
<PAGE>
<PAGE>
Fiscal Year 1995
- ----------------
High Low
---- ---
First Quarter
Common Shares $ 0.4375 $ 0.25
Second Quarter
Common Shares $ 0.3125 $ 0.25
Third Quarter
Common Shares $ 0.6875 $ 0.1875
Fourth Quarter
Common Shares $ 0.6875 $ 0.344
(b) Approximate Number of Holders of Common Stock
---------------------------------------------
As of December 15, 1997, a total of 19,809,396 shares of the Company's common
stock were outstanding and the number of holders of record of the Company's
common stock at that date was approximately 500. However, the Company estimates
that it has a significantly greater number of shareholders because a substantial
number of the Company's shares are held in nominee names by the Company's market
makers and brokerage houses.
(c) Dividends
---------
The Company's stockholders of common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. The Company
paid no dividends on the common stock during the periods reported herein nor
does the Company anticipate paying dividends in the foreseeable future. Pipasa
has declared and distributed dividends to its stockholders over the years.
Fiscal 1997 is the first year that the Company is entitled to receive dividends
from its subsidiary. On December 20, 1996, a dividend of $1,226,447 was paid by
Pipasa which was equivalent to the retained earnings through the date of the
reverse merger. In accordance with a standing agreement, such dividend was
paid to existing stockholders of record of Pipasa as of the date of the reverse
merger. Pipasa's payments of dividend are based on profit as determined by Costa
Rican statutory financial statements (Costa Rican accounting principles). As of
September 30, 1997 Pipasa has retained earnings of $1,957,970 that can be
distributed to current stockholders, computed by applying the exchange rate as
of that date to retained earnings balance expressed in Costa Rican currency.
19<PAGE>
<PAGE>
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL:
Management is responsible for preparing the Company's financial statements and
related information that appears in this report. Management believes that the
financial statements fairly reflect the form and substance of transactions and
reasonably present the Company's financial condition and results of operations
in conformity with Generally Accepted Accounting Principles in the United
States. Management has included in the Company's financial statement amounts
that are based on estimates and judgements, which it believes are reasonable
under the circumstances. The Company maintains a system of internal
accounting policies, procedures and controls intended to provide reasonable
assurance, at appropriate cost, that transactions are executed in accordance
with Company authorization and are properly recorded and reported in the
financial statements, and that assets are adequately safeguarded.
Results of operations for the period ended September 30, 1997, reveal a year
of a strong growth in sales and strategic acquisitions, and a decrease in
international prices for corn and in interest rates. Among these economic and
financial issues that directly affect the Company's profitability, through
Pipasa and in general the whole poultry industry in the area, is the weather
phenomenon El Nino which had a negative effect in the breeding of
reproduction hens. This effect, among others of minor relevance, increased
Pipasa's cost of sales, due to a decrease in incubation rates and an increase
in the mortality rates in broiler chicken and reproduction hens.
Total sales for the fiscal 1997 increased 13.80% when compared to fiscal 1996.
Exports increased by 94.60% during this fiscal year when compared to fiscal
1996, due to a 96.21% increase in tonnage offset by a 1.61% decrease for
exchange rate variances. Among the export activities, was a temporary export
sales to Honduras, which was announced in a press release, and that
represented steady sales of dressed pounds of chicken through July, 1997.
To offset the negative effects of EL Nino on yields, Pipasa's management has
taken immediate measures and is in the process of installing a "Controlled
Environment" in the Broiler and Reproduction Divisions. This technique
involves creating regulated and controlled temperatures among the farms where
the reproduction and broiler birds are kept. The effect on cost of sales of
the weather-related technical problems has been mitigated by a decrease in
average CBOT prices of corn, the main ingredient in the birds' diet, combined
with a decrease in the amount of corn used in our feed formulation.
<PAGE>
<PAGE>
Cost of imported grains (corn and soybean meal) for the year ended September
30, 1997, represented 40.45% of the total cost of sales of broiler chicken and
by-products, compared to 45.09% of cost of sales in fiscal year 1996.
During the fiscal year 1997, the USDA declared Costa Rica free of Newcastle
Disease, an honor shared only with Chile, in Latin America. The declaration
means that Costa Rican chicken products meet the same stringent USDA standards
relative to this disease which are also imposed on U.S. poultry producers.
The Company is in the process of fulfilling the necessary requirements to
obtain permits to export to USDA regulated markets, such as compliance with
the HACCP standards and USDA certification of the Company's facilities.
The following table presents information related to the Company's operation:
<TABLE>
<CAPTION>
YEAR ENDED
1997 1996
- ----------------------------------------------------
<S> <C> <C>
Net Sales $70,018,094 $61,535,457
Operational
Profit $3,961,761 $5,167,302
- ----------------------------------------------------
</TABLE>
The following table presents certain items as a percentage of net sales for
the period indicated:
<TABLE>
<CAPTION>
YEAR ENDED
1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Net Sales 100% 100%
Cost of Sales 75.99% 73.85%
Gross Profit 24.01% 26.15%
Sales Expenses 9.71% 10.57%
General and Adm. 8.64% 7.18%
Operational Profit 5.66% 8.40%
- ---------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO
THE YEAR ENDED SEPTEMBER 30, 1996.
NET SALES:
General. Net sales generated by the company's operation for the year ended
September 30, 1997 were $70,018,094, an increase of $8,482,637 or 13.78%
compared with fiscal 1996. The following table shows sales amounts by segment
for the fiscal years ending September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Millions of dollars % Increase
- ----------------------------------------------------
PRODUCTS 1997 1996 96/97
- ----------------------------------------------------
<S> <C> <C> <C>
Chicken 44.28 41.24 7.38%
By Products 7.92 7.07 12.02%
Animal Feed 6.95 5.00 39.11%
Exports 2.30 1.19 94.61%
Others 9.00 7.03 21.38%
- ----------------------------------------------------
70.02 61.54 13.78%
</TABLE>
Broiler chicken sales for fiscal 1997 grew from $41,239,331 during fiscal
1996, to $44,284,164 for the same period of 1997, an increase of 7.38%. This
increase is due to a 4.72% increase in tonnage and the remaining 2.66% is due
to sales price increases.
By-products are the most profitable products of the Company. Total sales of
this segment were of $7,923,545 during fiscal 1997, an increase of $849,930 or
12.02% when compared with sales of fiscal 1996. This increase is due to a
3.66% increase in tonnage and the remaining 8.36% is due to price increases
among the products within this segment (patties, sausages, further-processed
products and maquila).
Animal Feed: Sales for commercial animal feed were $6,950,523 in fiscal 1997
and $4,996,541 during fiscal 1996. An increase of 39.11%. This sales
increase corresponds to a 27.80% increase in tonnage, with the remaining
11.31% due to price increases. Also, Kanin and Mimados , our pet food
brands gained market share. Management has committed promotional and other
resources to these products, which are among the Company's most profitable.
Exports: The Company's exports were $2,325,043 during fiscal 1997, an
increase of $1,130,300 or 94.60%, when compared to fiscal 1996. This
increase in exports was primarily due to the combined result of: an 11.88%
increase in net sales of chicken by products due to a 13.44% increase in total
dressed pounds, offset by an exchange rate effect on prices of -1.56%; a
154.42% increase in broiler chicken and chicken parts due to a 121.3% increase
in tonnage with the remaining 33.12% due to price increase; and the
introduction of the pet food MIMADOS during the fourth quarter of the year.
<PAGE>
<PAGE>
A significant contributor to the increase in exports was a transaction with
Honduras, which represented a one-time export sale to that country, running
through July 1997. Management expects that the success in 1997 will lead to
future opportunities in this market, and an increase through its exports to
Central America. The Company has opened its own distribution facility in El
Salvador, which includes cold storage, offering sausage, pate, bologna and
other chicken and turkey products under the Company's popular Pipasa(TM),
Kimby(TM) and Supremo(TM), brands. Pipasa has been fortunate to serve
McDonalds restaurants as a supplier in Costa Rica for several years.
Thanks to the excellent service that the Company has given to this
important client, during fiscal year 1997, Pipasa has been selected by
McDonalds as its supplier for poultry products for all of Central America.
Management expects that this relationship will increase exports to these
markets.
Others: Sales of Others were of $8,534,817 and $7,031,226 during fiscal
1997 and fiscal 1996 respectively. An increase of $1,503,591 or 21.40%. This
increase is due to a 13.29% increase in tonnage and an 8.11% increase in
prices.
The following table shows the Company's sales distribution, for fiscal years
1997 and 1996:
<TABLE>
<CAPTION>
SEGMENT 1997 1996
- ---------------------------------------------
<S> <C> <C>
Chicken 63.25% 67.02%
By products 11.32% 11.50%
Animal feed 9.93% 8.12%
Exports 3.32% 1.94%
Other 12.18% 11.42%
- ---------------------------------------------
Total 100.00% 100.00%
</TABLE>
COST OF SALES:
General. Fiscal 1997 cost of sales were $53,206,620, an increase of
$7,760,438 or 17.08% when compared to cost of sales during fiscal 1996. This
increase in cost of sales is due primarily to a 14.58% increase in tonnage
combined with the effect of a higher cost of raw materials and higher
production cost of broiler chicken and by-products segments. As a percentage
of sales, cost of sales was 75.99% for fiscal 1997 compared to 73.85% in
fiscal 1996, for an increase of 2.14%. The most significant variations were
in raw materials and indirect costs. Labor costs remained relatively
constant.
<PAGE>
<PAGE>
El Nino Effects: El Nino directly affected the percentage of cost of sales
over net sales for fiscal 1997. When mortality rates increased in the
Reproduction and Broiler Divisions, the company's fertile egg incubation rate
goal only reached 92% of hatchery capacity, consequently, the available amount
of baby chicks for growing and processing was less than projected, causing a
shortage of chicken pounds for sale.
To satisfy demand, it was necessary to import baby chicks for the broiler (or
growth) phase, leading to higher costs. This situation increased unit prices
and also affected the incubation rates. The goal for fiscal 1997 was an
86.25% incubation rate, and the Company achieved 84%. The ideal mortality
rate standard for birds in their growing phase is 3.5%, and the Company
experienced average 4.60% mortality during fiscal 1997. As the new regulated
and controlled environments are implemented among the different farms,
management expects the mortality rates to decrease almost immediately. When
implemented in the Company's experimental farms, mortality in the growing
phase (broiler chicken) decreased from 5.15% to 4.69%, or a 9% improvement.
In the Reproduction phase, the results were a decrease in mortality from
5.35% to 1.68% in August 1997, a 68.6% improvement. Management expects
to be able to offset the effects of EL Nino throughout fiscal year 1998.
Management decided to change the breeding of its reproduction hens in order to
have breeds with more weight with fewer weeks of feeding and growing. This
change in breeding temporarily affected the incubation rates. Although this
breeding process requires an adjustment period, it has fulfilled expectations
concerning weight. Nevertheless, management estimates that the adjustment
will be completed during the next fiscal year.
Other relevant facts that explain the increase in cost of sales as a
percentage of net sales are:
o Average soybean meal prices for 1997 increased by 28.70% when compared to
average prices in 1996.
o Inventory reconversion: Broiler chicken stored in freezing chambers that
had to be reconverted to other cuts such as breast, thighs and other
chicken parts. This was necessary to satisfy the demand increase from
exports, as well as in the domestic market for chicken and by-products;
o Import of 6,100 boxes of fertile eggs, which represent 8.90% of total
produced eggs. These eggs had an incubation rate of 76.70%, versus an
average 84.25% that the Company produces locally.
o Changes in diet formulation for the birds, with the purpose of increasing
weight.
Broiler Chicken: Cost of sales for broiler chicken for fiscal 1997 was
$32,554,735, an increase of $3,738,587 or 12.97% compared to fiscal 1996.
This difference is due to a 4.72% increase in dressed pounds sold and the
remaining was due to an increase in unit production costs in the incubation
and growing phases explained above.
<PAGE>
<PAGE>
By-Products: Cost of sales for chicken by-products was $4,870,400 during
fiscal 1997, an increase of $232,938 or 5.02% compared with fiscal 1996. This
is due to an increase of 3.66% in tonnage and increases in cost production
explained above.
Animal Feed: Cost of sales for animal feed was of $5,767,286 for fiscal 1997,
an increase of $1,325,361 or 29.84% when compared with fiscal 1996. This
difference is due to a 27.80% increase in tonnage and the higher soybean meal
prices.
Exports: Cost of sales for exports for fiscal 1997 was $1,719,261, $831,185
or 93.59% higher than cost of sales when compared with fiscal 1996. This
increase is due to a 94.60% increase in dressed pounds sold and higher
production costs of the products that were exported during the present fiscal
year.
Others: Cost of sales for Others was $8,294,938 during fiscal 1997, an
increase of $1,632,367 or 24.5% when compared with fiscal 1996. This increase
is due to a 13.29% increase in tonnage and increases in raw material costs.
GROSS PROFIT:
Gross profit for fiscal year 1997 was $16,811,474 or 4.49% higher than fiscal
1996. As a percentage of net sales, gross profit decreased to 24.01% during
fiscal 1997 from 26.15% in fiscal 1996, due to the issues discussed above.
The following table shows gross profit for each segment for the years ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED
SEGMENT 1997 1996
- ----------------------------------------------
<S> <C> <C>
Chicken 26.20% 30.12%
By-products 38.53% 34.44%
Animal feed 17.02% 11.10%
Exports 26.05% 25.67%
Others 2.81% 5.24%
- ----------------------------------------------
</TABLE>
GENERAL AND ADMINISTRATIVE EXPENSES:
General and Administrative expenses increased by $1,633,496, or 36.99% during
fiscal 1997, compared to fiscal 1996. As a percentage of net sales, this item
increased from 7.18% during fiscal 1996 to 8.64% during fiscal 1997. Among the
most significant increases were the amortization of the Company's information
system, which was internally developed, operating expenses and professional
external services such as legal and auditing fees.
<PAGE>
<PAGE>
SALES EXPENSES
Sales expenses increased by $294,244 or 4.52% for fiscal 1997, compared with
fiscal 1996. When the Coopemontecillos R.L. market portion was absorbed, the
Company was able to maintain its selling expense structure, and as a result,
this item as a percentage of net sales decreased from 10.57% during fiscal
1996 to 9.71% during 1997.
OTHER INCOME / EXPENSES (NET)
Other income and expenses (net) decreased by $572,106 or 26.59% during fiscal
1997, compared with fiscal 1996. The Company's interest revenues increased by
$387,049 or 88% during fiscal 1997, compared with fiscal 1996, income from
"miscellaneous net" increased by $111,846 or 56.73% during fiscal 1997 when
compared to fiscal 1996. Along with this increase, interest expense decreased
by $177,670 or 6.61% and exchange losses (gains) increased by $104,459 or
102.89% respectively during fiscal 1997, compared with fiscal 1996.
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD
ENDING SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
The Company's revenues increased from $57,138,759 in fiscal year 1995 to
$61,535,457 in fiscal year 1996, an increase of approximately 7% over the
previous year. Pipasa experienced increased revenues in its latest fiscal
year over the comparable previous year period as a result of its successful
efforts to increase the volume of sales of its poultry products.
Pipasa's operating expenses increased to $10,921,973 for the fiscal year 1996,
f r om $10,702,149 for the comparable fiscal year 1995. General and
administrative expenses increased slightly as a percentage of revenue,
relative to the previous fiscal year as a result of extraordinary expenses
related to the Company, such as professional fees and travel expenses which
were advanced to the Company.
Pipasa generated net income before income tax of $3,015,940 for fiscal year
1996, when compared to a net income before income tax of $3,754,349 for the
comparable fiscal year 1995. The reduction in net income resulted from rising
grain prices during the early part of fiscal year 1996. This rise in grain
prices affected the cost of sales and consequently reduced net income.
Management decided not to pass to its customers this increase in the sale
prices of its products, because it considered the increase in prices of the
raw material a typical market fluctuation and cost of doing business and did
not want to negatively impact its customers.
Management expects continued growth of revenues from its core business
activities. Management is continuing to expand its market operations and to
cut costs to maximize future profit potential.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity: The Company's liquidity is dependent upon cash flows from
operations and the ability to obtain additional financing from external
sources.
The Company's cash and cash equivalents totaled $1,388,290 at the end of
fiscal year 1997, a $3,741,022 decrease from the end of fiscal 1996 (a
$3,015,717 increase in 1996 compared to 1995). The decrease in cash and cash
equivalents in 1997 was primarily a result from additional capital
expenditures and investments. In 1996, the increase in cash and cash
equivalents was primarily due to external financing and a decrease in capital
expenditures.
<PAGE>
<PAGE>
OPERATING ACTIVITIES:
Cash provided by operating activities was $4,587,448, $2,039,457 and
$2,989,323 for 1997, 1996 and 1995. The increase in 1997 is explained mainly
by the increase in accounts payable compared to 1996 and 1995. This increase
is mainly due to important renegotiations in payment terms that the Company
made with significant suppliers and increase in purchases of raw materials.
During 1996, the Company presented a decrease in cash provided by operating
activities due to higher levels of finished goods at the end of 1996 and
higher costs of raw materials incurred in the production of those finished
goods.
INVESTMENT ACTIVITIES:
Cash used in investing activities was $9,515,111, $1,799,347 and $3,244,892
for 1997, 1996 and 1995 respectively. The Company has made investments
amounting to $3,973,736, $1,672,706 and $3,343,685 in property, plant and
equipment during the last 3 years and is constantly improving its facilities
and investing in new technology. Among the investments in 1997 were the
strategic acquisition of the assets of the poultry division of
Coopemontecillos R.L, which included plant and equipment. The poultry division
of Coopemontecillos was one of Costa Rica s six largest poultry supplier, with
a 6% market share. As a result of this transaction, Management expects as
much as a 15% sales increase (volume) during the next period, while still
allowing to realize efficiencies. The assets acquired, which include plant,
equipment and vehicle fleet are intended to be re-located with the purpose of
expanding the Company's operations in the Central American region in the
future. Other important investments included the Company's Reproduction
Module Number 8, built with the most advanced technology and that increased
incubation capacity, as well as vehicles used by the sales division, modern
computer systems and incubation equipment.
The Company invested $3,708,805 in long- term investments during 1997, mainly
for the acquisition of 10% equity in Inolasa - Adecsa. This company is the
only Costa Rican supplier of soybean meal. This investment is considered
strategic to assure continuous supply of this important raw material.
FINANCING ACTIVITIES:
During the three years under analysis, the Company obtained external financing
in order to carry out part of its operating and investing activities. During
fiscal 1996, the Company received more cash from external sources compared to
fiscal 1995. This situation explains the increase in funds provided by
financing activities. Cash provided by financing activities was $1,351,926,
$3,099,113 and $1,085,785 for the years 1997, 1996 and 1995 respectively. The
decrease in 1997 is mainly due to an increase in debt amortization, as well
as the repurchase of common stock. Management expects to continue to finance
operations with its normal operating activities and external sources, and that
there will be sufficient resources available to meet the Company's cash
requirements through the next year.
<PAGE>
Working Capital: As of September 30, 1997, working capital was ($2,288,838)
compared to working capital at the end of fiscal 1996, $(1,491,547) for a
<PAGE>
$797,291 decrease. At the end of fiscal 1995, working capital was
($1,336,514). The current ratios were 0.88, 0.92, and 0.96 as of September
30, 1997, 1996 and 1995 respectively.
As previously mentioned in the investing activities, during 1997 the Company
incurred an extensive use of cash in capital expenditures which are related to
the normal investing activities of the Company, the acquisition of 10% equity
in Inolasa-Adecsa, purchase of assets from Coopemontecillos and the
repurchase of common stock. This caused the indebtedness to increase 6% in
1997 when compared to 1996. Indebtedness increased 10% when comparing 1995 to
1996. Management is currently working on re-financing of Pipasa s debt.
Management believes that the Company's liquidity position will improve during
fiscal 1998.
Leverage ratio: Leverage as of September 30, 1997 was 3.29, compared to
2.53 at the end of fiscal 1996. This ratio increased due to the increase in
liabilities and a decrease in Stockholders Equity from $8,983,919 as of
September 30, 1996, to $7,289,434 at the end of fiscal 1997 resulting in a
decrease of $1,694,485 or 18.86%. This decrease in Stockholders' Equity is
due mainly to a 64% decrease for exchange rate adjustments in conversion to US
Dollars, explained in notes to financial statements, and a 50.04% decrease for
shares acquired by the Company which are held as treasury stock, offset by a
10.89% decrease in Due from Stockholders.
This management discussion and analysis of financial condition and results of
operations may include certain forward-looking statements, within the meaning
of Section 27E of the Securities Exchange Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including (without
limitations) statements with respect to anticipated future operations and
financial performance, growth and acquisition opportunity and other similar
forecast and statements of expectation. Words such as expects,
anticipates, intends, plans, believes, seeks, estimates and
should and various of those words and similar expressions are intended to
identify these forward-looking statements. Forward-looking statements made by
the Company and its management are based on estimates, projections, beliefs
and assumptions of management at the time of such statements and are not
guarantees of future performance. The Company disclaims any obligations to
update or review any forward-looking statements based on occurrence of future
events, the receipt of new information or otherwise.
Actual future performance outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of numbers of risks, uncertainties and assumptions.
Representatives examples of these factors include (without limitations)
general industrial and economic conditions, interest rates trends; cost of
capital and capital requirements; availability of real state property;
Compensation from National hospitality companies; shifts in customer demands;
changes in operating expenses, including employee wages, benefits and training
and governmental and public policy; Changes in the continued availability of
financial amounts and at the terns necessary to support the Company's future
business
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following financial information is filed as part of this report:
(1) Financial Statements
(2) Schedules: The financial statements listed in the accompanying index to
financial statements are files as a part of this annual report.
(3) Exhibits: The exhibits listed on the accompanying index to financial
statements.
<PAGE>
<PAGE>
COSTA RICA INTERNATIONAL, INC.
AND SUBSIDIARY
Consolidated Financial Statements
September 30, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders,
Costa Rica International, Inc.:
We have audited the accompanying consolidated balance sheets of Costa
Rica International, Inc. and Subsidiary as of September 30, 1997 and
1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period
ended September 30, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position
of Costa Rica International, Inc. and Subsidiary as of September
30, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended September 30,
1997, in conformity with generally accepted accounting principles.
San Jose, Costa Rica
December 5, 1997
<PAGE>
<PAGE>
COSTA RICA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
-------- ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,388,290 5,129,312
Short-term investments 1,935,671 260,339
Notes and accounts receivable, net
(note 2) 5,818,760 4,613,762
Due from related parties (note 3) 76,243 199,510
Inventories, net (note 4) 7,106,214 7,148,797
Prepaid expenses 130,088 157,889
------------ ------------
Total current assets 16,455,266 17,509,609
Long-term receivable-trade 176,520 211,362
Property, plant and equipment, net
(note 6) 14,350,427 13,604,108
Long-term investments (note 7) 4,385,197 4,894,146
Other assets 1,187,128 884,492
---------- ------------
Total assets $36,554,538 37,103,717
========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (note 8) $10,126,947 9,411,340
Due to stockholders (note 3) 36,870 3,924,114
Current installments of long- 1,251,127 1,461,118
term debt (note 9)
Accounts payable 5,191,923 2,562,129
Accrued expenses 2,137,237 1,642,455
------------ ------------
Total current liabilities 18,744,104 19,001,156
Long-term debt, excluding
current installments (note
9) 5,252,149 3,593,601
Due to stockholders (note 3) 20,489 -
Other liabilities - 95,639
------------ ------------
Total liabilities 24,016,742 22,690,396
------------ ------------
Minority interest 5,248,362 5,429,402
Stockholders' equity (note 10):
Common stock 19,810 19,560
Preferred stock 2,216,072 2,216,072
Additional paid-in capital 9,375,002 9,350,252
Cumulative translation
adjustment (4,675,549) (3,596,253)
Retained earnings 2,122,542 2,099,278
------------ ------------
9,057,877 10,088,909
<PAGE>
Less:
Due from stockholders
(note 3) (920,476) (1,104,990)
Less treasury stock, at
cost (847,967) -
---------- ------------
Stockholders' equity 7,289,434 8,983,919
---------- ------------
Total liabilities and
stockholders' equity $36,554,538 37,103,717
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
COSTA RICA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1997,1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Sales $ 70,018,094 61,535,457 57,138,759
Cost of sales 53,206,620 45,446,182 40,635,032
------------- ------------- -------------
Gross profit 16,811,474 16,089,275 16,503,727
Operating expenses:
General and administrative 6,049,338 4,415,842 4,180,417
Selling 6,800,375 6,506,131 6,521,732
------------- ------------- -------------
Total operating expenses 12,849,713 10,921,973 10,702,149
------------- ------------- -------------
Income from operations 3,961,761 5,167,302 5,801,578
------------- ------------- -------------
Other expenses (income):
Interest expense 2,509,131 2,686,801 2,638,497
Interest income (826,870) (439,821) (299,858)
Currency exchange losses, net 205,988 101,529 207,814
Miscellaneous, net (308,993) (197,147) (499,224)
------------- ------------- -------------
Other expenses, net 1,579,256 2,151,362 2,047,229
------------- ------------- -------------
Income before income taxes and
minority interest 2,382,505 3,015,940 3,754,349
Income taxes (note 12) 291,396 244,431 250,802
------------- ------------- -------------
Income before minority interest 2,091,109 2,771,509 3,503,547
Minority interest 1,164,877 1,121,630 1,417,885
------------- ------------- -------------
Net income $ 926,232 1,649,879 2,085,662
Preferred stock dividends 172,496 211,750 291,256
------------- ------------- -------------
Net income applicable to common stock $ 753,736 1,438,129 1,794,406
============= ============= =============
Earnings per share:
Net income per common share $ 0.04 - -
------------- ------------- -------------
Pro-forma earnings per share:
Net income per common share $ - 0.09 0.12
------------- ------------- -------------
Weighted average number of common
shares outstanding 19,776,063 15,573,571 15,573,571
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PAGE>
COSTA RICA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 926,232 1,649,879 2,085,662
Adjustment to reconcile net income to
net cash provided by operating
activities:
Minority interest 1,164,877 1,121,630 1,417,885
Depreciation 1,384,910 1,232,269 1,306,617
Loss (gain) on sale of productive (76,519) 77,461 (37,603)
assets
Increase in allowance for doubtful 213,000 154,868 -
receivables
Cash provided by (used for) changes in:
Notes and accounts receivable (1,989,098) (1,193,383) (1,171,739)
Due from related parties 108,143 496,513 (878,839)
Inventories (739,269) (2,074,586) (541,709)
Prepaid expenses 13,479 (20,165) 53,788
Accounts payable 2,956,628 468,898 129,844
Accrued expenses 611,497 168,059 463,078
Long-term receivable-trade 13,568 (36,986) 162,339
------------ -------------- -------------
Cash provided by operating activities 4,587,448 2,039,457 2,989,323
------------ -------------- -------------
Investing activities:
Short-term investments (1,795,778) (44,594) (193,322)
Additions to property, plant and (3,973,736) (1,672,706) (3,343,685)
equipment
Proceeds from sale of productive assets 90,597 1,013,574 211,953
and long-term investments
Increase in long-term investments (3,708,805) -
Decrease (increase) in other assets (127,389) (1,095,621) 80,162
------------ -------------- -------------
Cash used for investing activities (9,515,111) (1,799,347) (3,244,892)
------------ -------------- -------------
Financing activities:
Short-term financing-increase in notes 1,783,467 1,745,986 2,748,535
payable
Cash dividends paid by Pipasa (902,968) (380,349) (724,852)
Cash dividends paid by Pipasa to
minority interest (613,097) (255,779) (505,178)
Long-term financing:
Repayments (2,134,580) (1,344,403) (1,545,203)
New loans 3,134,004 3,415,700 1,255,269
Capital returns - (110,745) (19,796)
Increase in due to stockholders 60,424 - -
Decrease in due from stockholders 150,265 - -
Exercise of warrants 25,000 - -
Common stock acquired for treasury (150,589) - -
Increase (decrease) in other
liabilities - 28,703 (122,990)
------------ -------------- -------------
Cash provided by financing activities 1,351,926 3,099,113 1,085,785
------------ -------------- -------------
Effect of exchange rate changes on
cash and cash equivalents (165,285) (323,506) (24,296)
------------ -------------- -------------
Increase (decrease) in cash and cash
equivalents (3,741,022) 3,015,717 805,920
Cash and cash equivalents at
beginning of year 5,129,312 2,113,595 1,307,675
------------ -------------- -------------
Cash and cash equivalents at end
of year $ 1,388,290 5,129,312 2,113,595
============ ============== =============
</TABLE>
<PAGE>
<PAGE>
COSTA RICA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Supplementary disclosures of
cash flow information:
Cash paid during year for:
Interest $ 2,493,716 2,411,604 2,600,003
Income taxes $ 61,030 189,054 160,592
Non-cash activities:
Acquisition of treasury
stock through financing
agreement $ 697,378 - -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COSTA RICA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Treasury Additional Cumulative Total
Common Stock, Preferred Paid-In Translation Retained Due from Stockholders'
Stock at cost Stock Capital Adjustment Earnings Stockholders Equity
--------- --------- --------- ---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1994 $ 15,574 - 1,760,061 7,139,459 (1,115,392) 2,085,720 (1,044,666) 8,840,756
Return of capital
contributions - - - (19,796) - - - (19,796)
Issue of preferred stock
to existing stockholders - - 456,011 (271,462) - - - 184,549
Capitalization of retained
earnings - - - 417,927 - (417,927) - -
Cash dividends on
common stock of Pipasa - - - - - (433,596) - (433,596)
Cash dividends on
preferred stock of Pipasa - - - - - (291,256) - (291,256)
Net income - - - - - 2,085,662 - 2,085,662
Increase in due from
stockhholders - - - - - - (894,714) (894,714)
Translation adjustment - - - - (1,288,624) - - (1,288,624)
--------- --------- --------- ---------- ----------- ---------- ------------ -------------
Balance at September 30,
1995 15,574 - 2,216,072 7,266,128 (2,404,016) 3,028,603 (1,939,380) 8,182,981
Issuance of 4,152,694
common shares 4,153 - - - - - - 4,153
Agreement and Plan of
Reorganization dated
April 30, 1996:
116,869 common shares
returned and cancelled (117) - - - - - - (117)
Divestiture of assets-
50,000 common shares (50) - - (117,614) - - - (117,664)
Capital contributions - - - 2,883 - - - 2,883
Capitalization of retained
earnings - - - 2,198,855 - (2,198,855) - -
Cash dividends on common
stock of Pipasa - - - - - (168,599) - (168,599)
Cash dividends on preferred
stock of Pipasa - - - - - (211,750) - (211,750)
Net income - - - - - 1,649,879 - 1,649,879
Decrease in due from
stockholders - - - - - - 834,390 834,390
Translation adjustment - - - - (1,192,237) - - (1,192,237)
--------- --------- --------- ---------- ----------- ------------ ------------ -------------
Balance at September 30,
1996 19,560 - 2,216,072 9,350,252 (3,596,253) 2,099,278 (1,104,990) 8,983,919
Exercise of 250,000 issued
warrants 250 - - 24,750 - - - 25,000
Cash dividends on common
stock of Pipasa - - - - - (730,472) - (730,472)
Cash dividends on preferred
stock of Pipasa - - - - - (172,496) - (172,496)
Purchase of 564,986
common shares - (847,967) - - - - - (847,967)
Net income - - - - - 926,232 - 926,232
Decrease in due from
stockholders - - - - - - 184,514 184,514
Translation adjustment - - - - (1,079,296) - - (1,079,296)
--------- --------- --------- ---------- ----------- ---------- ------------ -------------
Balance at September 30,
1997 $ 19,810 (847,967) 2,216,072 9,375,002 (4,675,549) 2,122,542 (920,476) 7,289,434
========= ========= ========== ========== ============ ========== =========== =============
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
(1) Business and Summary of Significant Accounting Policies
-------------------------------------------------------
(a) Corporate Activity
------------------
Costa Rica International, Inc. (the "Company"), formerly Quantum Learning
Systems, Inc. was incorporated under the laws of the State of Utah on
February 6, 1986 and filed a public offering in 1987. In April 1994,
the Company changed its legal domicile from Utah to Nevada. In April
1996, the Company entered into an acquisition agreement to acquire the
majority of the stock of Corporacion Pipasa, S.A. (Pipasa). This
transaction was approved by the shareholders of the Company on August
5, 1996 and consummated on September 30, 1996. Simultaneously with the
acquisition of Pipasa, the Company divested itself of all other
subsidiaries.
(b) Agreement and Plan of Reorganization
-------------------------------------
On April 30, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") for the acquisition of Pipasa, and the
divestiture of all current subsidiaries and activities of the Company.
The shareholders approved the plan of reorganization on August 5, 1996.
Prior to the reorganization, the Company had three educational subsidiaries:
Cambridge Academy, Inc., Sentient, Inc., and Current Concept Seminars,
Inc., and a real estate development division. As a condition to the
Agreement and the underlying acquisition, the acquirer was required to
divest itself of all other operations, including the former subsidiary
corporations and the real estate division, by the delivery date of the
common shares.
Also, on April 30, 1996, the Company entered into an agreement with
InterCoast Financial Corporation (IFC) to sell the educational
subsidiaries to IFC. Control of the Company changed on August 5, 1996
by shareholder approval. The final documentation was completed on
September 30, 1996. Pursuant to the Agreement, IFC acquired the
subsidiaries in exchange for 50,000 shares of common stock of Costa
Rica International, Inc. and indemnification by IFC to the Company from
any liability, damage or deficiency, all actions, suits, proceedings,
demands, assessments, judgments, costs and expenses, including
attorney's fees, incident to the subsidiaries. The acquisition of the
shares was accounted at fair value.
<PAGE>
<PAGE>
Pursuant to the Agreement, as of September 30, 1996, the Company exchanged
15,573,571 shares of its common stock for approximately 59.56% of
Pipasa's common shares. The remaining 40.44% of Pipasa's common shares
were pledged by its majority shareholder for a personal loan and were
not available for transfer under the Agreement. The 15,573,571 shares
represent approximately 79% of the issued and outstanding shares of the
Company. The 40.44% interest not acquired in the merger transaction
has been accounted for as minority interest for all years presented.
(c) Operations of Corporacion Pipasa, S.A.
--------------------------------------
On January 7, 1991, Industrias Derivados de Pollo, S.A. (Idepo, S.A.), Retisa
S.A., Servicios Multiples Pipasa, S.A.(Semupi, S.A.), Avicola Chacara,
S.A., Concentrados Belen, S.A., Empolladora Belen, S.A., Granja Avicola
Monica, S.A., Planta Procesadora de Aves, S.A., Grupo Pipasa, S.A,
Productores Huevo Fertil, S.A. (Prohufe, S.A.) and El Polluelo, S.A.,
merged into the surviving entity, Akron, S.A. The articles of
incorporation were simultaneously amended to reflect the Company's new
name, Corporacion Pipasa, S.A. In January 1996, Rincon de los Toros,
S.A. merged with Corporacion Pipasa, S.A. Since the mergers were
between companies under common control, the net assets were recorded at
net carrying value.
Pipasa produces and markets poultry products on 33 farms and in 2 processing
plants located throughout Costa Rica. Pipasa's main market is within
Costa Rica and to a lesser extent in the countries of El Salvador,
Honduras, Nicaragua, and Colombia.
(d) Consolidation Principles
------------------------
The consolidated financial statements include the accounts of Costa Rica
International, Inc. and its 59.56% owned subsidiary, Corporacion
Pipasa, S.A.
The consolidated financial statements as of September 30, 1997 and 1996
reflect the acquisition of Pipasa as a reverse acquisition, whereby
Pipasa is treated as the accounting acquirer and the Company as the
legal acquirer. Accordingly, for financial reporting purposes, the
issuance of stock in the acquisition is treated as an issue made by
Pipasa and historical financial statements presented are those of
Pipasa.
All significant intercompany balances and transactions have been eliminated
in consolidation.
<PAGE>
(e) Accounting Principles
---------------------
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (USGAAP). Accounting records of Pipasa are kept according to
generally accepted accounting principles in Costa Rica and have been
converted to USGAAP in consolidation.
(f) Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements. Actual results may differ from those estimates.
(g) Foreign Currency Translation
----------------------------
Most business transactions of Pipasa take place in the Republic of Costa
Rica, where the local currency is the colon (colones). The parity
of the colon to the US dollar is determined in a free exchange
market, supervised by the Central Bank of Costa Rica. As of
September 30, 1997, 1996, and 1995, commercial exchange rates
were (colones)238.77, (colones)213.94, and (colones)187.62 to US$1.00,
respectively.
The financial statements of Corporacion Pipasa, S.A. have been translated into
US dollars on the basis of the colon (colones)as the functional
currency, as follows: assets and liabilities denominated in dollars
have been stated at nominal dollar amounts; assets and liabilities
denominated in Costa Rican colones have been translated at the
commercial exchange rates in effect on September 30, 1997 and 1996;
Stockholders' equity accounts have been translated at exchange rates in
effect when incurred or realized (historical exchange rates); income
and expenses have been translated at average exchange rates in effect
during each of the years in the three-year period ended September 30,
1997. Translation adjustments have been recorded as a separate
component of stockholders' equity.
(h) Cash Equivalents
----------------
Highly liquid investments with original maturities of 3 months or less are
treated as cash equivalents.
<PAGE>
<PAGE>
(i) Investments
-----------
The Company has investments in short-term debt securities which have been
classified under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115 as held to maturity.
Short-term investments consist primarily of commercial paper with original
maturities between 3 and 12 months, which bear interest ranging from 7%
to 9%, and are carried at cost, which approximates fair market value.
Long-term investments consist of nonmarketable equity securities and are
carried at cost, which management believes does not exceed fair market
value.
(j) Inventories and Allowance for Renewal of Production Poultry
-----------------------------------------------------------
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method, except for inventories in transit
which are valued at specific cost.
Allowance for renewal of production poultry is determined based on the
estimated poultry reproductive period.
(k) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Improvements to property
and equipment which extend their useful lives are capitalized.
Disbursements for maintenance, repairs and minor renewals are charged
to expense when incurred.
(l) Costs of Software Developed for Internal Use
--------------------------------------------
The Company capitalizes direct salaries and related costs as cost of computer
software developed for internal use. These costs are amortized over
three years using the straight-line method. During 1996 and 1995,
costs amounting to $148,678 and $126,550 respectively were capitalized.
No costs were capitalized during 1997. Software maintenance costs are
expensed as incurred.
(m) Depreciation and Amortization
-----------------------------
Depreciation is provided by the straight-line method, for both financial
reporting and tax purposes, over estimated useful lives as follows:
buildings-50 years; vehicles, machinery and equipment, furniture and
fixtures-between 5 and 20 years.
Cost of leasehold improvements on leased properties, accounted for as
operating leases, are amortized over 5 years (lease term) using the
straight-line method.
<PAGE>
(n) Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising costs amounted to
$295,768, $445,466, and $386,135 in 1997, 1996, and 1995, respectively.
<PAGE>
(o) Income Taxes
------------
The Company accounts for income taxes in accordance with statement of
financial accounting standards No. 109, Accounting for Income Taxes.
Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that includes
the enactment date.
(p) Earnings per Share and Proforma Earnings per Share
--------------------------------------------------
Earnings per share for the year ended September 30, 1997 and proforma
earnings per share for the years ended September 30, 1996 and 1995 have
been computed on the basis of the weighted-average number of common
shares outstanding, amounting to 19,776,063 for the year ended
September 30, 1997 and 15,573,571 for the years ended September 30,
1996 and 1995. The shares used in computing earnings per share for the
periods prior to the reverse merger are those shares issued by the
Company to effect the business combination. The minority interest in
the earnings of Pipasa and dividends on preferred stock have been
excluded from earnings available to common stockholders.
(q) Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of
------------------------------------
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which became effective for fiscal years
beginning after December 15, 1995. This Statement requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The Company adopted SFAS
No.121 as of October 1, 1996. The adoption of this standard did not
have a material effect on the Company's financial position, results of
operations or liquidity.
<PAGE>
(r) Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities
-----------------------------------------
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. It is to be applied
prospectively. This Statement provides accounting and reporting
standards based on consistent application of a financial-components
approach that focuses on control. It distinguishes between transfers
of financial assets that are sales and transfers that are secured
borrowings. The Company adopted SFAS No.125 for transactions occurring
after December 31, 1996. The adoption of this standard did not have a
material effect on the Company's financial position, results of
operations or liquidity.
(s) New Accounting Pronouncements Earnings per Share
------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings per Share, which gives instructions for the
computation, presentation, and disclosure of earnings per share and is
effective for both interim and annual periods ending after December 15,
1997. Management of the Company is currently evaluating the impact SFAS
No. 128 will have on its financial statements, if any.
<PAGE>
<PAGE>
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
- -------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued
SFAS No.129, Disclosure about Capital Structure, which
requires companies to present additional information about
securities, preferred stock and redeemable stock and is effective
for fiscal years beginning after December 15, 1997.
Management of the Company does not expect that adoption of SFAS No. 129 will
have a material impact on the Company's financial position, results of
operations, or liquidity.
REPORTING COMPREHENSIVE INCOME
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements and is
effective for fiscal years beginning after December 15, 1997.
Management of the Company believes that adoption of SFAS No. 130
will result primarily in including the difference between net income
and the annual changes in cumulative translation adjustment in
the statement of comprehensive income.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
- -------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 requires that public businesses report certain information in the
financial statements about their products, services, geographic areas in
which they operate, and their major customers, related to the operating
segments of a company. The statement is effective for fiscal years beginning
after December 15, 1997. Management of the Company does not expect that
adoption of SFAS No. 131 will have a material impact on the Company's
financial position, results of operations, or liquidity.
(t) Reclassifications
-----------------
Certain balances in the 1996 and 1995 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
<PAGE>
(2) Notes and Accounts Receivable
-----------------------------
Notes and accounts receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<C> <C>
Accounts receivable:
Trade $ 4,838,313 3,802,023
Other 1,212,879 845,917
--------------- -------------
6,051,192 4,647,940
Less allowance for doubtful accounts 380,791 212,872
--------------- -------------
5,670,401 4,435,068
Short-term notes-trade: 148,359 178,694
--------------- -------------
$ 5,818,760 4,613,762
=============== =============
</TABLE>
(3) Accounts and Transactions with Related Parties
----------------------------------------------
Balances and transactions with related parties consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------------- -------------
<S> <C> <C>
Due from stockholders $ 920,476 1,104,990
================= =============
Due from related parties $ 76,243 199,510
================= =============
Due to stockholders $ 36,870 3,924,114
================= =============
Due to stockholders-long-
term $ 20,489 -
================= =============
</TABLE>
The balance due to stockholders in 1996 originated from the agreement to
acquire equity ownership rights equivalent to 10% of the outstanding
common stock of Inolasa Group, which was owned by Inversiones La
Ribera, S. A., Pipasa's main stockholders.
Balance due from stockholders originates from non-interest bearing
loans made when the Company was still privately owned, mainly to
Inversiones La Ribera, S. A. and the Company's Chief Executive
Officer and shareholder; starting on October 1, 1996 such loans
bear interest at 24.5% per annum.
During the years ended September 30, 1997, 1996, and 1995, the
Company's purchase of soybean meal from Grupo Inolasa amounted
to $7,357,018, $6,324,883, and $5,436,278, respectively.
On June 30, 1996, Pipasa sold its 9% ownership in Cerveceria Americana, S.A.
to Inversiones La Ribera for $848,402, which was the carrying value as
of that date.
<PAGE>
<PAGE>
(4) Inventories, Net
----------------
Inventories, net consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Finished products $ 686,423 2,176,876
Poultry 2,269,993 1,770,714
Production poultry 1,708,071 1,452,607
Materials and supplies 1,134,115 1,361,296
Raw materials 1,639,527 786,848
In transit 131,188 19,929
--------------- --------------
7,569,317 7,568,270
Allowance for renewal of
production poultry (463,103) (419,473)
--------------- --------------
Inventories, net $ 7,106,214 7,148,797
=============== ==============
</TABLE>
(5) Fair Value of Financial Instruments
-----------------------------------
The following table presents the carrying amounts and estimated
fair values of the Company's financial instruments as of
September 30, 1997 and 1996. The fair value of a
financial instrument is the amount at which the
instrument may be exchanged in a current transaction
between willing parties.
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Current assets:
---------------
Cash and cash equivalents $ 1,388,290 1,388,290 5,129,312 5,129,312
Short-term investments 1,935,671 1,935,671 260,339 260,339
Notes and accounts receivable,
net 5,895,003 5,895,003 4,813,272 4,813,272
Long-term receivable-trade 176,520 176,520 211,362 211,362
Current liabilities:
Notes payable 10,163,817 10,163,817 13,335,454 13,335,454
Current installments of
long-term debt 1,251,127 1,251,127 1,461,118 1,461,118
Accounts payable 5,191,923 5,191,923 2,562,129 2,562,129
Long-term debt $ 5,252,149 5,252,149 3,593,601 3,593,601
============= ============ ============ ===========
</TABLE>
The data presented above represent Management's best estimates based on a
range of methodologies and assumptions, including the following:
<PAGE>
<PAGE>
o For cash and cash equivalents, short-term investments, accounts
payable, notes and accounts receivable and long-term receivable-
trade, the carrying amounts approximate fair value because of the
short maturity of those instruments.
o For notes payable, current installments of long-term debt and long-
term debt, the carrying amount approximates fair value because
interest rates are adjustable based on market interest rates.
Futures contracts for less than one year are used to hedge fluctuations in
corn and soybean meal prices. The Company does not enter into
derivative transactions for speculative purposes. Gain and losses on
commodity futures transactions are deferred until the futures contracts
are liquidated. As of September 30, 1997, the Company has hedged such
commodities for $1,924,962 with a fair value of $1,893,375.
(6) Property, Plant and Equipment, net
----------------------------------
Property, plant and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Land $2,253,591 2,444,323
Buildings and facilities 5,955,582 6,394,134
Machinery and equipment 7,576,726 6,687,936
Vehicles 2,406,672 1,685,967
Advertising signs and display 319,232 381,039
Machinery in transit - 5,380
Construction in process 782,812 441,130
---------- -----------
19,294,615 18,039,909
Less accumulated depreciation 4,944,188 4,435,801
---------- -----------
Property, plant and
equipment, net $14,350,427 13,604,108
---------- -----------
</TABLE>
Most of the above assets have been pledged in guarantee of certain
long-term debt (see note 9).
Depreciation expense in 1997, 1996, and 1995 amounted to $1,384,910,
$1,232,269, and $1,306,617, respectively.
<PAGE>
PAGE>
(7) Long-Term Investments
---------------------
Long-term investments consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Equity investments
Grupo Inolasa $ 4,353,667 4,858,956
Other 31,530 35,190
---------- -----------
$ 4,385,197 4,894,146
---------- -----------
</TABLE>
Investments in stock of Grupo Inolasa (a significant supplier of raw
materials for Pipasa), represent 10% ownership therein.
(8) Notes Payable
-------------
Notes payable consist of the following:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Loans payable $ 6,188,036 5,232,010
Bank overdrafts 371,193 545,118
Commercial paper 3,562,721 3,498,193
Other 4,997 136,019
-------------- -------------
$ 10,126,947 9,411,340
============== =============
</TABLE>
<PAGE>
Loans payable include lines of credit and letters of credit to support
commercial operations with suppliers of raw materials.
As of September 30, 1997, the Company has line of credit agreements with
banks for a maximum of $8.8 million, of which $4.4 million have already
been used ($8.9 million and $5.2 million, respectively for 1996).
Agreements may be renewed annually, and bear interest at rates ranging
between 9.25% and 12% per annum (9.75% and 10.75% for 1996). Those
agreements are secured by property.
Commercial paper represents unsecured debt certificates in colones registered
with the Costa Rican Securities Commission, with a maximum authorized
amount of $4.1 million (colones 1 billion). Commercial paper bears
annual interest rates ranging from 17.25% to 19.25% (from 20.25% to
39.75% in 1996).
<PAGE>
<PAGE>
(9) Long-Term Debt
--------------
Long-term debt is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Colones-denominated:
Bank loans $ 1,936,108 3,027,335
Commercial paper-unsecured 46,698 43,470
Other 396,426 25,780
----------- ---------
2,379,232 3,096,585
----------- ---------
US Dollar-denominated:
Bank loans 3,459,044 1,953,489
Other 665,000 4,645
----------- ---------
4,124,044 1,958,134
----------- ---------
6,503,276 5,054,719
Less current installments 1,251,127 1,461,118
----------- ---------
$ 5,252,149 3,593,601
=========== =========
</TABLE>
Banks loans are secured by most of the Company's land, building, machinery
and equipment and vehicles, and are due from January 1998 through April
2003.
Interest rates for long-term debt are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
US dollar loans 8.25% - 10% 8%-10.75%
Costa Rican colones loans 19% - 27% 23%-30.25%
Commercial paper-unsecured 18.56% 20%-34%
</TABLE>
Future payments on long-term debt as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
---------- --------------
<S> <C>
1998 $ 1,251,127
1999 3,657,713
2000 628,129
2001 461,350
2002 339,623
Thereafter 165,334
-------------
$ 6,503,276
=============
</TABLE>
<PAGE>
(10) Stockholders' Equity
--------------------
COSTA RICA INTERNATIONAL, INC. ("CRI")
COMMON STOCK
As of September 30, 1997 and 1996, 60,000,000 common shares at $0.001 par
value had been authorized. As of September 30, 1997, 19,809,396 shares
had been issued (19,559,396 in 1996).
PREFERRED STOCK
As of September 30, 1997 and 1996, 5,000,000 preferred shares of CRI were
authorized and no shares had been issued.
TREASURY STOCK
During 1997, CRI repurchased 564,986 common shares of which 475,000 shares
were acquired at $1.47 per share under a long-term financing agreement,
which matures in August 1999 and bears annual interest at prime rate.
The Company's repurchases of common stock are recorded as "Treasury Stock"
and result in a reduction of Stockholders' equity.
PIPASA
PREFERRED STOCK
As of September 30, 1997 and 1996, 82,169 Class "C" preferred shares were
authorized but not issued. No price in US dollars can be set for these
shares that are authorized but not issued. The price in US dollars for
these shares will depend on the prevailing exchange rate at the time
the shares are actually issued.
o A total of 317,831 Class "C" preferred shares amounting to
$2,216,072 were authorized and outstanding. The main
characteristics of Class "C" preferred shares are as follows:
o The 53,034 Class "C-A" shares, 60,702 Class "C-B" shares and
72,695 Class "C-D" shares receive a 10% annual dividend
payable monthly which is adjustable by the Board of
Directors.
<PAGE>
o The 131,400 Class "C-C" shares receive a dividend equal to
the prime rate set by the Central Bank of Costa Rica plus two
points, payable monthly.
As of September 30, 1997 and 1996, 200,000 Class "D" shares were authorized
but not issued.
RETAINED EARNINGS
Costa Rican legislation requires that 5% of annual net income (in local
currency) up to an amount equivalent to 20% of outstanding capital
stock be allocated to a legal reserve. As of September 30, 1997 and
1996, the Company has assigned earnings of $605,887 and $498,540,
respectively, for the creation of a legal reserve.
On December 20, 1996 a dividend of $1,226,447 was paid by Pipasa, which was
equivalent to the retained earnings through the date of the reverse
merger. In accordance with a standing agreement, such dividend was
paid to existing stockholders of record of Pipasa as of the date of the
reverse merger.
Pipasa's payment of dividends is based on profit as determined by Costa Rican
statutory financial statements (Costa Rican accounting principles).
As of September 30, 1997, Pipasa has retained earnings of $1,957,970 which
may be distributed to current stockholders, computed by applying the
exchange rate as of that date to retained earnings balance expressed in
Costa Rican currency.
(11) Operating Leases
----------------
The Company has operating leases for vehicles and cooling equipment. At the
end of lease terms, the Company has the option of returning the
equipment or buying the equipment at a depreciated price. A portion of
payments made during the lease terms will be applied against this
reduced purchase price.
<PAGE>
PAGE>
Under the lease terms, the Company is required to maintain a self-insurance
trust with the Lessor bank. An initial deposit is made with the bank
at the inception of the lease to create the self-insurance fund. After
an initial six month period, during which time the Company does not
need to make payments to the fund, the Company is required to make
monthly payments to the fund for the remainder of the lease term. In
case of accidents or major repairs to vehicles under the lease, the
Company submits to the Fund a request for reimbursement, less a
deductible. The life of each trust is equivalent to the duration of
the respective lease. At the end of the lease term, any remaining
funds will be returned to the Company. The Company established three
funds in May, July and August 1995, and no claims have been filed. The
balance of the self-insurance fund amounted to $148,970 and $80,736 as
of September 30, 1997 and 1996, respectively.
Future minimum lease payments for the year ended September 30, 1998 amounted
to $213,495.
Rent expense under operating leases amounted to $307,734, $276,740, and
$252,143, in 1997, 1996, and 1995, respectively.
(12) Income Taxes
------------
Income tax expense attributable to income from continuing operations for the
years ended September 30, 1997, 1996, and 1995 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
---------- -------- --------
<S> <C> <C> <C>
Year ended September 30, 1997: $ 291,396 - 291,396
Year ended September 30, 1996: $ 244,431 - 244,431
Year ended September 30, 1995: $ 250,802 - 250,802
</TABLE>
Income tax expense attributable to income from continuing operations differs
from the amounts computed by applying the Costa Rican corporate tax
rate of 30% to pretax income from continuing operations as a result of
the following:
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Computed "expected" income tax expense $ 714,752 904,782 1,125,704
Increase (reduction) in income taxes resulting
from:
Interest earned outside Costa Rica and other
income not subject to taxation (121,390) (106,994) (87,619)
Tax benefit under Costa Rica Income Tax Law
Article 8, Section T for Agricultural
Companies and Article 8, Section F (250,225) (356,136) (483,277)
Deduction for reinvestment of prior year earnings
in machinery and equipment under Costa Rica
Income Tax Law Article 8, Section T for
Agricultural Companies (127,232) (250,284) (302,332)
Non-deductible depreciation expense 109,647 57,792 40,432
Export incentives granted under Costa Rica Income
Tax Law Article 66 (2,298) (4,729) (2,258)
Other items (31,858) - (39,848)
----------- ---------- ----------
$ 291,396 244,431 250,802
=========== ========== ==========
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as
of September 30, 1997, 1996, and 1995 are presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 114,237 44,230 23,104
Revaluation of property, plant
and equipment, depreciable
for Costa Rican tax purposes 2,485,775 2,547,293 2,614,635
------------- ----------- ------------
Total gross deferred tax assets: 2,600,012 2,591,523 2,637,739
Less valuation allowance (2,600,012) (2,591,523) (2,637,739)
------------- ----------- ------------
Net deferred tax assets $ - - -
============= =========== ============
</TABLE>
<PAGE>
<PAGE>
The Company has not recognized a deferred tax asset for the current year or
prior years. The valuation allowance has been established at 100% of
the deferred tax asset balance. Under Costa Rica Income Tax Law, the
Company is subject to a 1% asset tax which may be credited against
current income tax liability. However, if the income tax is less than
the asset tax in the same tax year, the asset tax must still be paid in
full; any excess not off set can be carried forward for one year. The
deferred tax asset results primarily from the revaluation of the fixed
assets. The Company historically has reported a slightly higher asset
tax liability compared to the income tax liability. In addition, the
Company has significant tax incentives available in Costa Rica to
reduce future taxable income, thereby reducing the potential benefit of
the additional depreciation resulting from the tax asset revaluation.
Based on the above, Company's management does not believe that it is
more likely than not that the deferred tax asset will be realized in
the foreseeable future and thereby justify not recognizing a deferred
tax asset on the consolidated financial statements.
In accordance with Costa Rican income tax regulations, Pipasa is required to
file annual income tax returns for the twelve-month periods ended
September 30 of each year.
The income tax returns of Pipasa for the years ended September 30, 1997,
1996, 1995, and 1994 are open to inspection by the Costa Rican tax
authorities.
(13) Stock Warrants
--------------
On January 21, 1994, the Company entered into an investment banking agreement
with M. H. Meyerson & Co. The agreement required the Company to issue
warrants to purchase 300,000 shares of common stock with an exercise
price of $1.85 per warrant, with demand and piggyback registration
rights. The registration rights may not be demanded during the 18
months immediately following the date of the agreement. The rights
become exercisable 19 to 48 months after the date of the agreement.
On June 1, 1994, Management of the Company approved the issue of warrants to
purchase 200,000 shares of common stock at $.75 per share to an outside
consultant in exchange for services to be rendered to the Company.
<PAGE>
<PAGE>
On August 1, 1995, Management of the Company approved the sale of warrants to
two members of its Board of Directors and one independent consultant,
for the purchase price of $100 per warrant. The warrants are for the
purchase of a total of 250,000 shares of the Company's $0.001 common
stock at an exercise price of $0.10 per share. The warrants may be
exercised anytime from August 1, 1995 to August 1, 2000. Between
November and December 1996, 250,000 warrants were exercised and both
Directors and the independent consultant received 250,000 shares.
(14) Acquisition of Poultry Division and Animal
Feed Concentrate of Coopemontecillos, R.L.
------------------------------------------
On April 21, 1997, Pipasa acquired the assets of the poultry division and
animal feed concentrate business of Costa Rica-based Coopemontecillos,
R.L., for approximately $2.6 million in cash and financing. Under the
agreement, Pipasa acquired all the division's assets, including plant,
equipment, vehicle fleet, receivables, inventory, laying hens and raw
materials. Such assets were recorded at fair market value.
(15) Concentration of Risk
---------------------
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents, short-term
investments, and trade receivables.
The Company places its cash equivalents and short-term investments with high
credit quality financial institutions.
The majority of the Company's customers are located in Costa Rica. No single
customer accounted for more than five percent of the Company's net
sales in 1997, 1996, and 1995, and no account receivable from any
customer exceeded 5% of account receivable as of year end. Credit risk
is mitigated due to the fact that the Company's customer base is
diverse and geographically dispersed within Costa Rica. The Company
estimates an allowance for doubtful accounts based on the credit
worthiness of its customers as well as general economic conditions.
Consequently, an adverse change in these factors could affect the
Company's estimate of bad debts.
<PAGE>
<PAGE>
(16) Business Segment Information
----------------------------
The Company's operations have been classified into five business segments:
broiler chicken, animal feed, by-products, exports, and other.
Summarized financial information by business segment for 1997, 1996,
and 1995 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Net sales:
Broiler chicken $ 44.3 41.2 37.6
Animal feed 7.0 5.0 5.7
By-products 7.9 7.1 6.5
Exports 2.3 1.2 1.1
Other 8.5 7.0 6.2
---------- -------- --------
$ 70.0 61.5 57.1
---------- -------- --------
Cost of sales:
Broiler chicken $ 32.6 28.8 24.6
Animal feed 5.8 4.5 4.7
By-products 4.8 4.6 5.1
Exports 1.7 0.9 0.7
Other 8.3 6.6 5.5
---------- -------- --------
$ 53.2 45.4 40.6
---------- -------- --------
Gross profit:
Broiler chicken $ 11.7 12.4 13.0
Animal feed 1.2 0.6 1.0
By-products 3.1 2.4 1.5
Exports 0.6 0.3 0.3
Other 0.2 0.4 0.7
---------- -------- --------
$ 16.8 16.1 16.5
---------- -------- --------
Selling expenses:
Broiler chicken $ 4.4 4.2 4.9
Animal feed 0.2 0.2 0.4
By-products 1.5 1.3 1.0
Exports 0.2 0.2 0.2
Other - - -
Corporate 0.5 0.6 -
---------- -------- --------
$ 6.8 6.5 6.5
---------- -------- --------
General and administrative:
Corporate $ 6.0 4.4 4.2
---------- -------- --------
Income from operations
$ 4.0 5.2 5.8
---------- -------- --------
</TABLE>
<PAGE>
<PAGE>
The Company has not allocated its assets by segments due to its
impracticability.
(17) Commitments and Contingencies
The Company does not have damage insurance or a specific self-insurance fund
for vehicles that are not under lease agreements. The Company has
liability insurance to cover third parties through an umbrella policy
ranging from $41,881 to a maximum of $1,047,033.
The income tax returns of Pipasa for 1993, 1994, and 1995 were assessed at
$39,354, $131,222, and $76,976, respectively. Due to the
disallowance by the Costa Rican tax authorities of approximately 26% in
the aggregate of the deductions taken by Pipasa for 1993, 1994, and
1995, all assessments have been contested by the Company. Management
does not believe this matter will be resolved in the next fiscal year.
No accrual has been made for any losses that may result from the
resolution of this uncertainty.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of Management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations, or liquidity.
(18) Liquidity and Working Capital
-----------------------------
As of September 30, 1997, the Company has a working capital deficiency
amounting to $2,288,838.
Management is currently working on a debt restructuring option. Company's
Management believes that such debt restructuring, coupled with expected
operating cash flows for the 1998 fiscal year will improve the
Company's liquidity position.
<PAGE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no disagreements between the Company and its accountants during the
relevant period.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Directors and Executive Officers of the Company, their ages and present
positions held in the Company, as of September 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Calixto Chaves 51 Chief Executive
Officer, Chairman, President
and Director
(*) Oscar Barahona 81 Director
Federico Vargas 64 Director
Jorge M. Quesada 48 Chief Financial Officer, Treasurer and Director
Luis J. Lauredo 48 Director
Alfred E. Smith, IV 45 Director
Monica Chaves Zamora 26 Secretary
The Hon Luis G.Guinot 62 Director
</TABLE>
(*) Mr. Barahona resigned from the Board of Directors on August 1, 1997 and will
be replaced in the following Annual Shareholders Meeting of the Company.
The Company's Directors will serve in such capacity until the next annual
meeting of the Company's shareholders and until their successors have been
elected and qualified. The officers serve at the discretion of the Company's
Directors. Calixto Chaves and Monica Chaves are father and daughter. Jorge M.
Quesada is the brother-in-law of Calixto Chaves. Otherwise, there are no family
relationships among the Company's officers and directors, nor are there any
arrangements or understanding between any of the directors or officers of the
Company or any other person pursuant to which any officer or director was or is
to be selected as an officer or director.
31
<PAGE>
<PAGE>
CALIXTO CHAVES. He was the founder and President of Corporacion Pipasa, S.A.
from its inception in 1969 to the present. He is also the founder and first
President of Aero Costa Rica, S.A., a private Costa Rican airline until
early 1997. He is currently on the Boards of Directors of Central American Oils
and Derivatives, S.A., the Administrative Consultation of CODESA(Costa Rican
Development Corporation), and American Oleaginous Industry. From 1994 to 1996,
he was a Board member of Cerveceria Americana, a private brewery. In 1994, he
served as an advisor to the Ministry of Economic Business Affairs. From 1983 to
1985, he was a member of the Board of Directors of the Sugar Cane Agricultural
League. From 1982 to 1986, he served in the Costa Rican Ministry of Industry,
Energy and Mines and became the Minister of Natural Resources in 1986. From 1982
to 1986, he was a member of the Board of Directors of MINASA, a Costa Rican
mining Company. Mr. Chaves was the founder of the Chamber of Industries in the
Costa Rican province of Heredia. From 1973 to 1974, he was President of the
Board of Directors of Banco Nacional de Belen. He will devote a minimum of 48
hours per week to the affairs of the Company.
DR. FEDERICO VARGAS. He has served as a Professor of Economics and Social
Sciences at the University of Costa Rica from 1963 to the present. Dr. Vargas
has been involved in extensive political activities since 1974. From 1990 to
1994, he served as a Deputy in the Costa Rican Assembly. From 1993 to 1994, he
was Chairman of the Legislative Section of the National Liberation Party of
Costa Rica. Prior to 1990, Dr. Vargas held a number of political offices,
including Ambassador of Costa Rica to the United States, Ambassador of Costa
Rica to the Organization of American States, Counselor to the President of Costa
Rica in Finance and External Debt, with the rank of Minister, and Economics
Advisor to the President of Costa Rica. His teaching activities included serving
as the Chairman of Economists, Instituto de Investigaciones Economicas,
University of Costa Rica and Director of the Economics Department, School of
Economics and Social Sciences, University of Costa Rica. Dr. Vargas serves on
the Boards and advisory bodies of numerous charitable and educational
organizations and is the author of a number of publications in economic and
educational matters. He obtained his Bachelors in Business Administration from
Nichols College in Massachusetts in 1954 and his Ph.D. from the University of
Colorado in 1967. He has also attended the Wharton School of Finance and
Commerce at the University of Pennsylvania. He will devote such time as may be
necessary to fulfill his obligations as an outside director of the Company.
LIC. JORGE M. QUESADA CHAVES. He has held numerous positions with Corporacion
Pipasa, S.A. since 1985 and has been Executive Vice President since 1990. He has
been a member of the Boards of Directors of Banco Fomento Agricola since 1991
and of Aero Costa Rica, S.A. From 1987 to 1991, he was on the Board of Directors
of Financiera Belen, S.A. Mr. Quesada has conducted numerous seminars regarding
marketing issues. He obtained his Degree in Business Administration, with
emphasis on Public Accounting, from the University of Costa Rica in 1984. He
will devote a minimum of 48 hours per week to the affairs of the Company.
32
<PAGE>
<PAGE>
LUIS J. LAUREDO. From 1995 to the present, he has been the Director of the
International Consulting Group for the law firm of Greenberg Traurig, of Miami,
Washington, and New York. From 1994 to 1995, he was Executive Director of the
Summit of the Americas, a non-profit organization. From 1992 to 1994, he was a
Commissioner on the Florida Public Service Commission, as well as Chairman of
the International Relations Committee of the National Association of Regulatory
Utility Commissioners. From 1989 to the present, he has also been the owner of
Occidental Aviation, of Miami. In his career, Mr. Lauredo has held a number of
positions in the banking industry. He has served on numerous advisory
committees, including the export-import Bank of the U.S. He has represented the
President of the United States as special U.S. Ambassador to the inaugurations
of the Presidents of Colombia, Venezuela, Brazil, and Costa Rica. He also served
as a founding Director of the Hispanic Council on Foreign Affairs (Washington,
D.C.). Mr. Lauredo received his B.A. from Columbia University in New York City
and has attended the University of Madrid in Spain and Georgetown University Law
Center in Washington, D.C. He will devote such time as may be necessary to
fulfill his obligations as an outside director of the Company.
ALFRED E. SMITH, IV. Mr. Smith has been a director of the Company since June 1,
1994. He was a partner of the New York Stock Exchange member firm of Adler,
Coleman & Co., Inc. from 1979 to 1994. Since 1994, he has been with CMJ
Partners, a New York Stock Exchange member firm. In September, 1994, Adler,
Coleman & Co. sold the Adler, Coleman Clearing division to an unaffiliated third
party. In February, 1995, the entity which acquired the Adler, Coleman Clearing
division filed for bankruptcy protection under Chapter 11. Mr. Smith is a member
of the Government Relations Committee of the New York Stock Exchange, Director
and Secretary of the Alfred Emanuel Smith Memorial Foundation, Chairman of the
Cardinal's Committee for the Laity-Wall Street Division, Director of the Center
for Hope, a Trustee of St. Vincent's Hospital, and a Trustee of Iona Prep
School. He is a member of the New York City Advisory Board of the Enterprise
Foundation and the American Association of the Sovereign Military Order of
Malta. He has received numerous awards for his charity and humanitarian work.
Mr. Smith was educated at Villanova University. He will devote such time as may
be necessary to fulfill his obligations as an outside Director of the Company.
MONICA CHAVES. Ms Chaves is Secretary of the Board of Directors of Costa Rica
International, Inc. and is also member of the Board of Directors of Corporacion
Pipasa, CRI's main subsidiary. Mrs. Chaves joined Corporacion Pipasa as
assistant manager in the company's Financial Division in 1991; since 1993 she is
in charge of the Corporation's Special Investment Department. In 1996, when the
Company went public, Mrs. Chaves assumed the direction of this enterprise since
its origin and is currently Costa Rica International Inc.'s Investor
Relations manager. Mrs. Chaves received a bachelors degree in Business
Administration from Saint Michael's College, Vermont. She will devote such time
as may be necessary to fulfill her obligations as an outside director of the
Company.
33
<PAGE>
<PAGE>
As a subsequent event, Mr. Isenhour is no longer a Director nor an officer of
the registrant, and was substituted by Mr. Luis Guinot, Jr.
HONORABLE AMBASSADOR MR. LUIS GUINOT, JR.: Luis Guinot Jr. was born in San
Juan, Puerto Rico on April 8, 1935. He attended college in the mainland United
States, where he graduated from the Catholic University of America School of Law
in Washington, D.C. After completing his undergraduate studies at New York
University , he was commissioned and Ensign in the U.S. Navy where he served in
several billets-both shore and afloat - including a tour of duty as gunnery
officer of the destroyer USS Gearing (DD710) and Senior Shore Patrol officer of
the U.S, Site Fleet based in Naples, Italy. After completion of his military
obligation, Mr. Guinot entered the private practice of law in Washington, D,C.
Mr. Guinot has served as United States Ambassador to The Republic of Costa Rica,
as the Assistant General Counsel of the United States Department of Agriculture
and as Administrator of the Office of the Commonwealth of Puerto Rico in
Washington, D.C. Additionally, Mr. Guinot has also appeared as speaker and
lecturer on United States-Latin American Trade, NAFTA, and GATT related matters,
and he is the author of several newspaper articles on the same subjects. Guinot
is a member of the Commonwealth of Virginia and the District of Columbia Bar
Association and has been admitted to practice before the bar of the U.S. Supreme
Court, the 1st and 11th Circuit Court of Appeals, the Bars of the Southern
District of New York , and the Southern District of Florida, Eastern Districts
of Virginia, and the Court of military Appeals. Guinot is also a fellow of the
American Bar Foundation, a former member of the U.S. Presidential Commission on
Civil Disorders (Kerner Commission)and former member of the Board of Directors
of the Legal Services Corporation. Guinot was awarded the Grand Order of Juan
Mora (Silver Plaque) by the Government of Costa Rica. He has been featured
speaker on Conferences on the general subject of hemispheric free trade and
served as legal advisor to U.S. corporations doing business in Latin America as
well as legal advisor to ministries of Central and South American Countries. He
will devote such time as may be necessary to fulfill his obligations as an
outside Director of the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
- ---------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act") requires the
Company's officers and directors and persons owning more than ten percent of the
Company's Common Stock, to file initial reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Additionally,
Item 405 of Regulation S-K under the 34 Act requires the Company to identify in
its Form 10K and proxy statement those individuals for whom one of the above
referenced reports was not filed on a timely basis during the most recent fiscal
year or prior fiscal years. Given these requirements, the Company has the
following report to make under this section: All of the Company's officers or
directors, and all persons owning more than ten percent of its shares have filed
the subject reports on a timely basis during the past fiscal year.
34
<PAGE>
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the Summary Compensation Table for the Chief
Executive Officer and the four most highly compensated executive officers other
than the Chief Executive Officer who were serving as executive officers at the
end of the last completed fiscal year for the subsidiary Pipasa, due to the
fact that the Company has as of today, no compensation plan for its officers, or
directors. No other compensation not covered in the following table was paid or
distributed by the Company to such persons during the period covered. Directors
receive no additional compensation for service on the Board of Directors. In
May, 1994, Mr. Smith, an outside Director, received warrants to purchase 50,000
common shares of the Company at $.50 per share, for a period of five years. On
August 1, 1995, the Company approved the sale of 50,000 additional Warrants to
Mr. Smith and a total of 100,000 Warrants to Mr. Douglas Brown, the other
outside Director. Both Warrant packages were for five years, at an exercise
price of $0.10 per share. The warrants could have been exercised anytime from
August 1, 1995 to August 1, 2000. Mr. Smith exercised his 100,000 warrants in
December, 1996 and Mr. Brown exercised his 100,000 warrants in November 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
- -------------------------------------------------------------------------------------------
Name and YEARS Salary Bonus (2) Other Annual
- -------------------------------------------------------------------------------------------
Main Position Compensation(1) Compensation(2) Compensation(3)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $104,477.00 $5,098.00 1,121,633.75
Calixto Chaves Zamora 1996 $ 94,780.65 3,864.09 1,219,587.00
Chief Executive Officer 1995 $ 98,247.41 6,951.51 1,102,472.00
- -------------------------------------------------------------------------------------------
1997 $ 72,221.00 $6,088.00 10,654.00
Jorge Quesada Chaves 1996 $ 64,621.97 4,616.88 20,318.00
Chief Financial Officer 1995 $ 68,834.08 7,609.71 13,682.00
- -------------------------------------------------------------------------------------------
1997 $ 57,646.00 $4,930.00 6,408.00
Jose Zamora Viquez 1996 $ 48,714.65 4,143.33 17,262.00
Production Vice-president 1995 $ 47,647.22 6,681.19 10,484.00
- -------------------------------------------------------------------------------------------
1997 $ 39,672.00 $2,230.00 --
Luis Varela Conejo 1996 $ 35,702.32 1,088.42 --
Financial Director 1995 $ 34,040.30 2,453.24 --
- -------------------------------------------------------------------------------------------
1997 $ 30,633.00 $6,150.00 4,269.00
William Alvarez Gonzalez 1996 $ 26,821.36 800.44 14,414.00
Production Director 1995 $ 26,043.18 2,425.81 9,393.00
(1) All salary compensation was paid in Costa Rican Colones, rather than U.S. Dollars.
For the purposes of this presentation, all compensation has been converted to U.S.
Dollars at the then current exchange rate for Costa Rican Colones.
(2) Represents Director's fees payable for acting as a Director of Pipasa.
(3) Represents dividends paid on common and Preferred stock of Pipasa throughout each year.
(1) Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Company has a Compensation Committee consisting of Calixto Chaves, Chairman of the Board
and Jorge Quesada, Chief Financial Officer. This Committee makes the determinations for
stock issuance pursuant to the Company's compensation plans.The Company has no retirement,
pension or profit sharing plans covering its officers and directors, but does contemplate
implementing any such plan in the future through Pipasa.
</TABLE>
35
<PAGE>
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following sets forth the number of shares of the Company's $.001 par value
common stock beneficially owned by the person (i)each person who, as of December
15, 1997, was known by the Company to own beneficially more than five percent
(5%) of its common stock, (ii) the individual Directors of the Company, and
(iii) the Officers and Directors of the Company as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership(1)(2) Class
------------------- ----------------------------- ----------
<S> <C> <C>
Calixto Chaves 5,979,945 (3) 30.6%
Oscar Barahona 0 0
Federico Vargas 0 0
Jorge Quesada 156,885 (4) 0.8%
Luis J. Lauredo 0 0
Luis G. Guinot 0 0
Alfred E. Smith, IV(5) 100,000 (5) 0.5%
20 Broad Street, 16th Floor
New York, New York 10005
Teresa Chaves 156.885 (6) 0.8%
Jose Zamora 156.885 (7) 0.8%
Monica Chaves 400.000 (8) 2.0%
</TABLE>
(1) All ownership is beneficial and of record except as specifically indicated
otherwise.
(2) Beneficial owners listed above have sole voting and investment power with
respect to the shares shown unless otherwise indicated.
(3) Includes 2,044,145 owned of record by Mr. Chaves, 2,500,000 shares owned
by Inversiones Leytor, S.A., a Company owned by Mr. Chaves and wife, a
total of 539,800 shares owned by Mr. Chaves' wife, and 896,000 shares
owned of record by O.C.C., S.A., which is owned by Mr. Chaves and his
wife. The son of Mr. and Mrs. Chaves owns 837,971 shares, and the daughter
of Mr. and Mrs. Chaves owns 400,000 shares, each for which Mr. Chaves and
his wife disclaim any beneficial ownership.
36
<PAGE>
<PAGE>
(4) The wife and son of Mr. Quesada control Jorque, S.A., which owns 156,885
shares and for which Mr. Quesada may be deemed to have beneficial
ownership.
(5) In May, 1994, Alfred E. Smith, IV received warrants to purchase 50,000
common shares of the Company at $.50 per share for a period of five years.
In August 1995, Mr. Smith received warrants to purchase an additional
50,000 common shares of the Company at $.10 per share for a period of five
years. Mr. Smith exercised his warrants in December 1996, all at $0.10 per
share.
(6) Inversiones Wytalcha, S.A. owns 156,885 common shares of record. This is a
Company owned equally by Ms. Chaves, an officer of Corporacion Pipasa,
S.A., and her husband. She is a sister of Mr. Chaves, who disclaims any
beneficial ownership to these shares.
(7) Inversiones Zamora y Aguilar, SRL, a Company owned by Mr. Zamora and his
wife, and owns 156,885 shares of record. He is an officer of Pipasa, and
brother in law of Mr. Chaves, who disclaims any beneficial ownership to
these shares.
(8) Owned of record by Ms Chaves, who is the daughter of Mr. Chaves. Mr.
Chaves disclaims any beneficial ownership to these shares.
In August, 1995, A. Douglas Brown, Jr., a former member of the Board under the
past administration, received warrants to purchase 100,000 common shares of the
Company at $.10 per share for a period of five years. Mr. Brown exercised his
warrants in November 1996. Mr. Brown is no longer a director of the Company,
since August 5, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1994, Pipasa acquired 9% of the outstanding common stock of Cerveceria
Americana, S.A. (C.A.) from Inversiones La Ribera, S.A., Pipasa's main
stockholder, for approximately $1,080,000. On June 30, 1996, Pipasa sold its 9%
ownership in C.A. back to Inversiones La Ribera for $848,402, which was the
carrying value as of that date.
On August 26, 1996, Pipasa entered into an agreement with Inversiones La Ribera,
S.A. (main stockholder) to acquire, for $4,858,955, 10% of equity ownership
in Grupo Inolasa-Adecsa, an independent third party and a significant
supplier to Pipasa. As of September 30, 1996, Pipasa had made payments of
$934,842 in connection with its commitment; the unpaid balance was paid during
the year ended September 30, 1997.
37
<PAGE>
<PAGE>
Balances and transactions with related parties consist of the following:
1997 1996 1995
---- ---- ----
Due from stockholders $ 920,476 $ 1,104,990 $ 1,939,380
Due from related parties $ 76,243 $ 199,510 $ 172,170
Due to stockholders $ 36,870 $ 3,924,114 0
Due to stockholders long-term $ 20,489 0 0
Balance due to stockholders is originated from the agreement to acquire equity
ownership rights equivalent to 10% of the outstanding common stock of Inolasa
Group, which was owned by Inversiones La Ribera, S.A.
Balance due from stockholders originates from non-interest bearing loans made
when the Company was still privately owned mainly to Inversiones La Ribera, S.A.
and the company's Chief Executive Officer and shareholders; starting on October
1, 1996 such loans bear interest at market rates.
STOCKHOLDERS EQUITY
CRI
COMMON STOCK
As of December 15, 1997, 60,000,000 common shares at $0.001 par value were
authorized and 19,809,396 shares had been issued.
PREFERRED STOCK
As of December 15, 1997, 5,000.000 Preferred shares of CRI were authorized and
no shares had been issued.
PIPASA
PREFERRED STOCK
As of September 30, 1997, 82,169 Class "C" Preferred shares were authorized but
not issued. No price in US Dollars can be set for these shares that are
authorized but not issued. The price in US Dollars for these shares will depend
on the prevailing exchange rate at the time the shares are actually issued.
317,831 Class "C" Preferred shares amounting to $2,216,072 were authorized and
outstanding. The main characteristics of Class "C" Preferred shares are as
follows:
The 53,034 shares of Class "C-A", 60,702 shares of Class "C-B" and 72,695 shares
of Class "C-D" receive a 10% annual dividend payable monthly and adjustable by
the Board of Directors.
38
<PAGE>
<PAGE>
The 131,400 shares of Class "C-C" receive a dividend equal to the prime rate set
by the Central Bank of Costa Rica plus two points, payable monthly.
As of September 30, 1997, 200,000 Class "D" shares were authorized but not
issued.
RETAINED EARNINGS
Costa Rican legislation requires that 5% of annual net income (in local
currency) up to an amount equivalent to 20% of total capital stock be allocated
to a legal reserve. As of September 30, 1997 and 1996 the Company has set aside
earnings of $605,887 and $498,540 respectively, for the creation of this legal
reserve.
COMMITMENTS AND CONTINGENCIES
The Company does not have damage insurance or a specific self-insurance
fund for vehicles that are not under lease agreements. The Company has
liability insurance to cover third parties through an umbrella policy
ranging from $41,881 to a maximum of $1,047,033.
The income tax returns of Pipasa for 1993, 1994, and 1995 were assessed
at $39,354, $131,222, and $76,976 respectively. Due to the disallowance
by the Costa Rican tax authorities of approximately 26.03% in the
aggregate of the deductions taken by Pipasa for 1993, 1994, and 1995, the
assessments were contested by the Company. Management does not believe
this matter will be resolved in the next fiscal year. No accrual has been
made for any losses that may result from the resolution of this
uncertainty.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of Management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on form 8-K.
- --------------------
The Company filed 3 reports on Form 8-K during the last quarter of fiscal year
ended September 30, 1996.
39
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
COSTA RICA INTERNATIONAL, INC.
CHIEF EXECUTIVE OFFICER
Dated: December 31, 1997 By: /s/ Calixto Chaves Zamora
--------------------------------
Calixto Chaves Zamora
Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
CHIEF FINANCIAL OFFICER
Dated: December 31, 1997 By: /s/ Jorge M. Quesada
--------------------------------
Jorge M. Quesada
Treasurer
SECRETARY
Dated: December 31, 1997 By: /s/ Monica Chaves Zamora
-------------------------------
Monica Chaves Zamora
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COSTA RICA INTERNATIONAL, INC. FOR THE YEAR ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,388,290
<SECURITIES> 1,935,671
<RECEIVABLES> 6,199,551
<ALLOWANCES> 380,791
<INVENTORY> 7,106,214
<CURRENT-ASSETS> 16,455,266
<PP&E> 19,294,615
<DEPRECIATION> 4,944,188
<TOTAL-ASSETS> 36,554,538
<CURRENT-LIABILITIES> 18,744,104
<BONDS> 0
0
2,216,072
<COMMON> 19,810
<OTHER-SE> 5,053,552
<TOTAL-LIABILITY-AND-EQUITY> 36,554,538
<SALES> 70,018,094
<TOTAL-REVENUES> 70,018,094
<CGS> 53,206,620
<TOTAL-COSTS> 53,206,620
<OTHER-EXPENSES> 12,849,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,682,261
<INCOME-PRETAX> 2,382,505
<INCOME-TAX> 291,396
<INCOME-CONTINUING> 926,232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 926,232
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
