<PAGE>
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended March 31 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ____________
Commission File No. 0-18222
Rica Foods, Inc
-----------------------------------------------------
(Exact name of Company as specified in its charter)
Nevada 87-0432572
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
95 Merrick Way, Suite 507, Coral Gables, Fl, 33134
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
(305) 476-1757 or (305) 476-1758
(Company's telephone number including area code)
Indicate by check mark whether the Company (1) had 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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of Company's common stock, par value $0.001 per
share, as of May 7, 1999 was 7,419,138 shares.
<PAGE>
RICA FOODS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Condensed Balance Sheets as of March 31, 1999 (Unaudited)
and September 30, 1998 ........................................... 3
Consolidated Condensed Statements of Income for the three months and
six months ended March 31, 1999 and 1998 (Unaudited).............. 4
Consolidated Condensed Statements of Cash Flows for the six months
ended March 31, 1999 and 1998 (Unaudited)......................... 5
Notes to Consolidated Condensed Financial Statements (Unaudited)..... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.......... 25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................... 28
ITEM 2. Changes in Securities and use of Proceeds .......................... 28
ITEM 4. Submission of Matters to a vote of Security Holders................. 28
ITEM 5. Other Information .................................................. 29
ITEM 6. Exhibits and Reports................................................ 29
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<PAGE>
RICA FOODS, INC. and Subsidiaries
Consolidated Condensed Balance Sheets
March 31, September 30,
1999 1998
--------- -------------
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents ................. $ 6,270,716 $ 3,290,757
Short-term investments ................... 37,955 101,892
Notes and accounts receivable, net ........ 8,953,986 8,290,021
Due from related parties .................. 701,724 656,904
Inventories, net .......................... 12,444,336 12,862,456
Prepaid expenses .......................... 832,053 648,918
----------- -----------
Total current assets .................. 29,240,770 25,850,948
----------- -----------
Property, plant and equipment, net ........... 29,082,841 28,494,233
Long-term notes receivable-trade ............. 216,376 119,229
Long-term investment ......................... 4,465,219 4,720,335
Other assets ................................. 1,660,791 2,039,443
Cost in excess of net assets of acquired business 1,584,500 1,781,147
----------- -----------
Total assets .......................... $ 66,250,497 $ 63,005,335
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .......................... $ 11,354,106 $ 7,510,750
Accrued expenses .......................... 2,844,420 3,035,951
Notes payable ............................. 6,054,250 8,463,052
Current installments of long-term debt .... 1,321,208 1,940,073
Due to stockholders ....................... 75,108 75,671
---------- ----------
Total current liabilities ............. 21,649,092 21,025,497
---------- ----------
Long-term debt, net of current portion ....... 21,686,296 22,559,425
Due to stockholders .......................... 17,530 18,526
Deferred income tax liability ................ 1,869,571 1,974,407
---------- ----------
Total liabilities ..................... 45,222,489 45,577,855
---------- ----------
Minority interest ............................ 7,851,680 6,078,595
Stockholders' equity:
Common stock .......................... 7,419 7,419
Preferred stock ....................... 5,149,125 4,323,025
Additional paid-in capital ............ 11,987,393 11,987,393
Cumulative translation adjustment ..... (6,251,981) (5,630,035)
Retained earnings ..................... 5,923,982 3,370,982
---------- ----------
16,815,938 14,058,784
---------- ----------
Less:
Due from stockholders ................. (274,024) (170,413)
Treasury stock, at cost ............... (3,365,586) (2,539,486)
---------- ----------
Total Stockholders' equity ................... 13,176,328 11,348,885
---------- ----------
Total liabilities and stockholders' equity ... $ 66,250,497 $ 63,005,335
========== ==========
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
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<PAGE>
RICA FOODS, INC. and Subsidiaries
Consolidated Condensed Statements of Income
Unaudited
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
March, 31, March, 31,
---------- ----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 29,908,477 $ 22,607,527 $ 61,560,272 $ 43,433,554
Cost of sales 19,363,821 17,082,899 39,370,643 32,692,997
---------- ---------- ---------- ----------
Gross profit 10,544,656 5,524,628 22,189,629 10,740,557
---------- ---------- ---------- ----------
Operating expenses
Selling 4,201,926 2,453,376 8,448,144 4,312,787
General and administrative 2,877,716 1,772,183 5,486,158 3,239,176
Amortization of cost in excess
of net assets of acquired business 106,185 22,094 196,667 22,094
---------- ---------- ---------- ----------
Total operating expenses
7,185,827 4,247,653 14,130,969 7,574,057
Income from Operations 3,358,829 1,276,975 8,058,660 3,166,500
Other expenses (Income)
Interest expense 677,023 549,813 1,757,942 1,297,015
Interest income (189,122) (181,081) (370,492) (423,840)
Exchange losses 432,017 218,948 966,542 267,711
Miscellaneous-net (31,512) (421,096) (350,848) (490,261)
---------- ---------- ---------- ----------
Other expenses, net 888,406 166,584 2,003,144 650,625
---------- ---------- ---------- ----------
Income before income taxes and
minority interest 2,470,423 1,110,391 6,055,516 2,515,875
Income taxes 463,285 160,040 801,573 408,236
---------- ---------- ---------- ----------
Income before minority interest 2,007,138 950,351 5,253,943 2,107,639
Minority interest 987,182 434,709 2,654,541 931,305
---------- ---------- ---------- ----------
Net income 1,019,956 515,642 2,599,402 1,176,334
Preferred stock dividend 40,192 37,295 173,250 72,664
---------- ---------- ---------- ----------
Net income applicable to common
stockholders $979,764 $ 478,347 $2,426,152 $ 1,103,670
========== ========== ========== ===========
Earnings per share:
Basic $ 0.13 $ 0.07 $ 0.33 $ 0.16
========== ========== ========== ===========
Diluted $ 0.13 $ 0.07 $ 0.32 $ 0.16
========== ========== ========== ===========
Weighted average number of shares
outstanding:
Basic 7,419,138 6,875,027 7,418,978 6,739,080
========== ========== ========== ===========
Diluted 7,582,660 6,900,983 7,536,242 6,763,634
========== ========== ========== ===========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
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<PAGE>
RICA FOODS, INC. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For the six months ended March 31, 1999 and 1998
Unaudited
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 2,599,402 $1,176,334
----------- ----------
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,660,392 932,629
Renewal for production poultry 1,048,124 558,053
Amortization of cost in excess
of net assets of acquired business 196,667 22,094
Allowance for inventory obsolescence 14,730 13,721
Allowance for doubtful accounts 398,243 91,500
Gain on sale of productive assets (33,719) (62,662)
Deferred income tax benefit (104,836) (17,473)
Minority interest 2,654,541 931,305
Changes in operating assets and liabilities:
Notes and accounts receivable (463,562) (1,373,591)
Due from related parties (931,505) (1,672,343)
Inventories (601,206) (1,899,866)
Prepaid expenses (597,094) 577,238
Accounts payable 3,803,638 445,061
Accrued expenses (191,529) (408,118)
Long-term notes receivable-trade (105,848) 33,216
--------- ---------
Cash provided by (used for) operating
activities 9,346,438 (652,902)
--------- ---------
Cash flows from investing activities:
Short-term investments 63,938 914,191
Initial cash balance from subsidiary acquired - 1,147,472
Increase in long-term investment - (245,000)
Additions to property, plant and equipment (3,408,318) (982,067)
Proceeds from sale of productive assets 121,741 270,202
Increase (decrease) in other assets 205,162 (693,688)
--------- ---------
Cash provided by (used for)
investing activities (3,017,477) 411,110
--------- ---------
Cash flows from financing activities:
Decrease in notes payable (2,417,968) (4,027,084)
Preferred stock cash dividends (173,252) (72,665)
Long-term financing:
New loans 328,843 9,799,254
Payments (1,988,782) (3,644,343)
Due to related party - (35,999)
Due from stockholders (103,611) (211,757)
--------- ---------
Cash provided by (used for)
financing activities (4,354,770) 1,807,406
--------- ---------
Continued on next page
-5-
<PAGE>
RICA FOODS, INC. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For the six months ended March 31, 1999 and 1998
Unaudited
(Continued)
1999 1998
---- ----
Effect of exchange rate changes on cash and
cash equivalents 323,508 184,082
--------- ---------
Increase in cash and cash equivalents 2,297,699 1,749,696
Cash and cash equivalents at beginning
of period 3,973,017 1,388,290
--------- ---------
Cash and cash equivalents at end of period $6,270,716 $3,137,986
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $1,555,584 $1,047,320
========== ==========
Income taxes $ 95,972 $ 64,354
========== ==========
Non cash activities:
Acquisition of treasury stock through
financial agreement $ 826,100 $ -
========== ==========
Common stock dividends paid
as preferred shares $ 826,100 $ -
========== ==========
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
-6-
<PAGE>
RICA FOODS, INC and Subsidiaries.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - GENERAL
Management is responsible for preparing Rica Foods, Inc. and Subsidiaries
(collectively the "Company") financial statements and related information that
appear in this Form 10-Q 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.
The accompanying interim financial statements have been prepared in accordance
with the instructions to Form 10-Q and, therefore, omit or condense certain
footnotes and other information normally included in the financial statements
prepared in accordance with generally accepted accounting principles. The
accounting policies followed for interim financial reporting are the same as
those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's audited financial statements for the fiscal year ended
September 30, 1998, which are included in Form 10-K. Management has included in
the Company's financial statements amounts that are based on estimates and
judgements, which it believes are reasonable under the circumstances. In the
opinion of Management, all adjustments necessary for the fair presentation of
the financial information for the interim periods reported have been made.
Results of the six months ended March 31, 1999 are not necessarily indicative of
the results to be expected for the entire fiscal year ending September 30, 1999.
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 Management's authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Although Management believes that the disclosures are adequate to make the
information presented not misleading, these unaudited consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10K for the fiscal year ended September 30, 1998.
NOTE 2 - RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current year presentation.
-7-
<PAGE>
RICA FOODS, INC and Subsidiaries.
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 3 - INVENTORIES AND 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. Costs pertaining to the growth period of reproductive
hens are capitalized and are subsequently amortized over the expected
reproductive life of the hen. Renewal of production poultry or depreciation of
the hens, is determined based on the estimated poultry reproductive period.
Inventories consist of the following:
March 31, September 30,
--------- -------------
1999 1998
---- ----
Finished products $2,640,757 $3,038,319
Poultry 2,651,915 2,713,040
Production poultry 3,169,656 3,141,980
Materials and supplies 1,783,905 1,710,071
Raw materials 2,761,692 2,849,126
In transit 216,687 204,681
---------- ----------
13,224,612 13,657,217
---------- ----------
Renewal of production poultry (739,424) (766,736)
Allowance for obsolescence (40,852) (28,025)
---------- ----------
Inventories, net $ 12,444,336 $ 12,862,456
=========== ===========
NOTE 4 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income", effective January 1, 1998. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in financial statements. The components of the Company's
comprehensive income are as follows:
Three months ended March 31, Six months ended March 31,
---------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 1,019,956 $ 515,642 $ 2,599,402 $ 1,176,334
Foreign currency
translation adjustment (391,571) (224,092) (621,946) (477,847)
------------ ----------- ------------ ------------
Total comprehensive income $ 628,385 $ 291,550 1,977,456 $ 698,487
============ =========== ============ ===========
-8-
<PAGE>
RICA FOODS, INC and Subsidiaries.
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 5 - EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number
of common shares outstanding plus the effect of outstanding warrants and stock
options using the treasury stock method in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share",
effective December 15, 1997. SFAS 128 gives instructions for the computation,
presentation and disclosure of earnings per share. Earnings per share
pertaining to the three and six months ended March 31, 1998 have been restated
to reflect the reverse stock split effective on December 29, 1998.
Following is a reconciliation of the weighted average number of shares
currently outstanding with the number of shares used in the computations of
fully diluted earnings per share.
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income applicable to common
stockholders $979,764 $478,347 $ 2,426,152 $1,103,670
========= ========= ========== =========
Denominator:
Denominator for basic income per
share 7,419,138 6,875,027 7,418,978 6,739,080
Effect of dilutive securities:
Options to purchase common stock 163,522 25,956 117,264 24,554
--------- --------- --------- ---------
Denominator for diluted earnings
per share 7,582,660 6,900,983 7,536,242 6,763,634
========= ========= ========== =========
Earnings per share from continuing
operations:
Basic $ 0.13 $ 0.07 $ 0.33 $ 0.16
========= ========= ========== =========
Diluted $ 0.13 $ 0.07 $ 0.32 $ 0.16
========= ========= ========== =========
</TABLE>
The Company did not have any anti-dilutive securities outstanding as of
March 31, 1999 and 1998.
The minority interest in the income of subsidiaries and dividends on
preferred stock have been excluded from income available to common stockholders.
-9-
<PAGE>
RICA FOODS, INC and Subsidiaries.
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 6 - PRO FORMA FINANCIAL INFORMATION
Following is pro forma financial information which presents results of
operations for the six months ended March 31, 1998 as if the acquisition of
56.38% of As de Oros, consummated on February 26, 1998, had taken place on
October 1, 1997:
Revenues $ 63,054,687
Net income 585,830
Basic earnings per share
Weighted average number of shares outstanding 7,418,818
==========
Earnings per share $ 0.08
==========
Diluted earnings per share
Incremental shares from assumed conversion of warrants 24,555
----------
Adjusted weighted average shares 7,443,373
==========
Diluted earnings per share $ 0.08
==========
NOTE 7 - CHANGE IN METHOD OF ACCOUNTING
For fiscal year 1999, the Company changed its method of accounting for
sales and purchases from Integrated Producers. Integrated Producers are local
farmers who raise and feed poultry on behalf of the Company. The new method
adopted on October 1, 1998, reflects chickens and materials transferred to
Integrated Producers as inventory. The method used until September 30, 1998,
reflected transfers of chicken and materials to the Integrated Producers as
sales at cost. The effect of the change in accounting method for the three and
six months ended March 31, 1999, was a decrease of sales and cost of sales of
approximately $2,500,000 and $5,325,000, respectively. The statements of income
for March 1998, have not been restated to reflect the new method of accounting.
There was no material effect in the net income for the three months and six
months ended March 31, 1999.
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<PAGE>
RICA FOODS, INC and Subsidiaries.
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 8 - COMMON STOCK DIVIDEND
During February 1999, Pipasa distributed 227,607 series "TCA" shares of
preferred stock valued at $826,100, as dividends to its common stockholders. The
dividends declared were distributed in accordance with common stock ownership in
Pipasa, with 135,563 shares or $492,025 distributed to the Company and 92,044
shares or $334,075 distributed to Pipasa's minority interest owner, Inversiones
La Ribera, S.A., a company owned by Mr. Calixto Chaves, chairman of the Company.
During February 1999, Inversiones La Ribera, S.A. and the Company paid off
outstanding debts to Pipasa in the amount of $334,075 and $492,025,
respectively, in exchange for the same preferred shares received as dividends
during that same month.
NOTE 9 - RELATED PARTY TRANSACTIONS
During October 1998, As de Oros transferred its poultry incubation and
raising operations to Pipasa. As part of this transfer, Pipasa assumed all of As
de Oro's inventory related to its poultry incubation and raising operations,
which amounted to $1.9 million. As de Oros has maintained ownership of all the
fixed assets related to its poultry and rents these assets to Pipasa on a
monthly basis. The transfer and rental of these assets was approved by the board
of directors of both Pipasa and As de Oros. Any effect related to this transfer
is eliminated in consolidation.
During October 1998, Pipasa transferred the production and marketing of
animal feed to As de Oros. As part of this transfer As de Oros assumed all of
Pipasa's animal feed inventory and accounts receivable from this segment, which
amounted to $39,000 and $265,000, respectively. The transfer of these assets was
approved by the board of directors of both Pipasa and As de Oros. Any effect
related to this transfer is eliminated in consolidation.
NOTE 10 - LITIGATION
Pipasa is a defendant in a lawsuit brought in Costa Rica in which it was
served with prejudgment liens. Pipasa substituted collateral for these liens
with the approval of the court, which approval is currently being appealed.
Pipasa has not yet been served with the Complaint in the case and therefore,
cannot ascertain the basis of the claim or the relief sought, but it believes
the lawsuit is without merit and intends to vigorously contest theses claims. At
the present time, neither the Company nor Pipasa can evaluate the potential
impact of this lawsuit on the financial results of the Company.
-11-
<PAGE>
No legal proceedings of a material nature, other than the matter in the
preceding paragraph, to which the Company is a party were pending during the six
months ended March 31, 1999, nor as of the date of this filing, and the Company
knows of no legal proceedings of a material nature pending or threatened or
judgements entered against any director nor officer of the Company in his
capacity as such.
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.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's operations are largely conducted through its subsidiaries
Corporacion Pipasa, S.A. ("Pipasa") and Corporacion As de Oros, S.A. and
Subsidiaries ("As de Oros"), Pipasa, founded in 1969, is the largest poultry
company in Costa Rica with approximately a 50% market share of the chicken meat
market in Costa Rica. The main activities of Pipasa are the production and sale
of broiler chickens (whole chickens), poultry meat, processed chicken products,
commercial eggs and premixed feed for domestic animals. Pipasa has been in the
poultry business for more than 29 years with more than 13 years of experience in
exports. Pipasa owns 41 urban and rural retail 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, fast-frozen and cooked chicken patties, and sausages.
As de Oros, founded in 1954, is Costa Rica's second largest poultry producer,
comprising approximately 20% of the country's poultry market. As de Oros
operates 13 urban and 4 rural retail outlets throughout Costa Rica. In addition
to the production and marketing of poultry and poultry by-products, As de Oros
is one of the leaders in the Costa Rican animal feed market with a 21% market
share. As de Oros also owns a chain of 36 fried chicken restaurants in Costa
Rica called "Restaurantes As de Oros."
The Company's operating subsidiaries, combined, are the largest poultry
companies in Costa Rica with a market share of approximately 70% of the chicken
meat market. The main activities of the Company's subsidiaries 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.
The Company's subsidiaries own 58 urban and rural outlets throughout Costa Rica,
three modern processing plants and three animal feed plants. Due to similar
business activities, the combined operations of the subsidiaries permits the
Company to achieve operational efficiencies.
Although Management believes that the disclosures contained herein are adequate
to make the information presented not misleading, these consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest Form 10K
for the fiscal year ended September 30, 1988.
-13-
<PAGE>
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs and other business
systems being written using two digits rather than four digits to represent the
year. Many of the time sensitive applications and business systems of the
Company and its business partners may recognize a date using "00" as the year
1900 rather than the year 2000, which could result in system failure or
disruption of operations. Although the Year 2000 problem will impact the Company
and its business partners, a preliminary assessment of the Year 2000 exposure
has been made by the Company and, primarily because the Company's major
management information systems were developed with a Year 2000 certified
application, the Company believes it will be able to achieve Year 2000 readiness
for its internal systems by mid-fiscal year 1999. The Company has also developed
a plan of communication with significant business partners to obtain appropriate
assurances that the Company's operations will not be disrupted through these
relationships and that the Year 2000 issues are resolved in a timely manner. The
Company believes that it will satisfactorily resolve all significant Year 2000
problems and that the related costs will not be material. However, estimates of
Year 2000 related costs are based on numerous assumptions, including the
continued availability of certain resources, the ability to acquire accurate
information regarding third party suppliers, and the ability to correct all
relevant applications and third party modification plans. There is no guarantee
that the estimates will be achieved and actual costs could differ materially
from those anticipated. Moreover, the failure of a major vendor's systems to
operate properly with respect to the Year 2000 problem on a timely basis or a
Year 2000 conversion that is incompatible with the Company's systems could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Information Systems and Technology
- ----------------------------------
Based on the analysis of the Company's subsidiaries, the following critical
applications in As de Oros' systems areas are the focus of the Company's Year
2000 compliance efforts: Operational budget, statistics, accounts receivable,
animal feed billing, sales, orders and logistics. The Company's subsidiaries
have undergone significant strategic upgrades in its application systems in
order to improve business processes. Merchandising, production planning, and
financial systems were selected for improved business functionality and are
vendor certified as Year 2000 compliant. The Human Resources and Financials
systems were implemented during 1996. All critical applications will be tested
to ensure compliance. Additionally, the hardware and communications
infrastructure has been inventoried, assessed, and, where necessary, is
currently being upgraded and tested. The remediation phase is expected to be
complete by mid 1999. Testing is being performed concurrently with remediation
activities
-14-
<PAGE>
and final testing is expected to be substantially complete in the same
timeframe.
The Company's operations are dependent on the Year 2000 readiness of third
parties. The Company relies on third-party suppliers for infrastructure elements
such as telephone services, electric power, water, and banking facilities, as
well as merchandise suppliers.
The vendor relations area of the project refers to the Year 2000 status
evaluation of key merchandise and service vendors. As part of the Year 2000
initiative, merchandise and service vendors have been surveyed to determine
their readiness and the Company is in the process of obtaining or negotiating to
obtain appropriate assurances from these vendors. In addition, because the
Company has a select group of merchandise vendors, the Company will conduct more
in depth assessments of certain of these mission critical vendors to further
assess such vendor's progress. Where necessary, contingency plans will be
developed to be used in the event of supplier delivery delay or failure.
Although the Company has not been put on notice that any known third party's
problem will not be resolved, the Company has limited information and no
assurance that any additional information concerning the Year 2000 readiness of
third parties will be made available. The resulting risks of the Company's
business are very difficult to assess; however, the inability to obtain
merchandise from one or more key vendors on a timely basis could have a material
adverse effect on the Company's results of operations.
The Company is developing contingency plans and identifying what actions would
be required if a critical system, service or merchandise supplier were not Year
2000 compliant. The company expects these plans to be finalized by mid 1999.
To date, the Company expects to spend approximately $500,000 to $750,000 to
complete the Year 2000 project, which amounts will be funded through operating
cash flows or external financing. Operating costs related to Year 2000
compliance projects will be incurred over several quarters and will be expensed
as incurred. Costs associated with business system solutions for improved
business processes are not included in these amounts since they will not have a
material adverse effect on the Company's financial condition or operating
results. The costs of the project and the date on which the Company plans to
complete the work are based on Management's best estimates, which were derived
from numerous assumptions about future events, including the availability of
certain resources, third party compliance information, and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause material differences include, but are not limited to, the
availability and cost of trained personnel, the ability to identify and correct
all relevant technologies, and the ability to acquire accurate information
-15-
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regarding third party suppliers. Additionally, Year 2000 expenditures vary
significantly in project phases and vary depending on the remediation method
used. Past expenditures in relation to total estimated costs should not be
considered or relied on as a basis for estimating progress to completion for any
element of the Year 2000 project.
The Company presently believes, that upon remediation of its business software
applications, hardware, and other equipment with embedded technology, the Year
2000 issue will not present a materially adverse risk to the Company's future
consolidated results of operations, liquidity, and capital resources. However,
if such remediation is not completed in a timely manner or the level of timely
compliance by key suppliers or vendors is not sufficient, the Year 2000 issue
could have a material impact on the Company's operations including, but not
limited to, failure to or delays in delivery of merchandise resulting in a loss
of the Company's business.
ENVIRONMENTAL COMPLIANCE:
The Company is not subject to any material costs for compliance with any
environmental laws in any jurisdiction in which it operates. However, in the
future, it 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,
the Company cannot assess the potential impact of any such potential
environmental regulation. The Company has been practicing sustainable
environmental policies for several years, 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.
GOVERNMENTAL REGULATION:
The poultry hatcheries, feeding farms and processing belonging to the Company's
subsidiaries, 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 sales are made. Such regulation is not
considered to be a burden on the Company's subsidiaries, or to have a material
effect on their ability to make a profit. Otherwise, the subsidiaries are not
subject to any material governmental regulation or approvals.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998
The following table presents certain items as a percentage of net sales for the
period indicated:
Three months ended March 31,
----------------------------
1999 1998
---- ----
Net sales 100.00% 100.00%
Cost of sales 64.74% 75.56%
Gross profit 35.26% 24.44%
Total operating expenses 24.03% 18.79%
Operating income 11.23% 5.65%
Other expenses, net 2.97% 0.74%
Income before income taxes and minority
interest 6.71% 4.91%
Income taxes 1.55% 0.71%
Income before minority interest 8.30% 4.20%
Minority interest 3.30% 1.92%
Net income 3.41% 2.28%
Preferred stock dividend 0.13% 0.16%
Net income applicable to common stockholders 3.28% 2.12%
Prior to the acquisition of As de Oros, there were transactions between Pipasa
and As de Oros consisting of sales of raw materials, and finished products.
These transactions have been eliminated for consolidation purposes.
NET SALES:
General: Net sales generated by the Company's operations for the quarters ended
March 31, 1999 and 1998 were $29.90 million and $22.60 million, respectively, an
increase of $7.30 million or 32.3%. The following table shows sales amounts by
segment for each quarter (in millions):
Three months ended March 31,
----------------------------
1999 1998
---- ----
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Broiler Chicken 18.49 61.84% 13.58 60.09%
Animal Feed 5.25 17.56% 3.06 13.54%
By Products 2.35 7.86% 2.34 10.35%
Restaurants 2.29 7.66% 0.72 3.19%
Other 0.96 3.21% 2.31 10.22%
Exports 0.56 1.87% 0.59 2.61%
------ ------- ------ -------
Total Sales $29.90 100.00% $22.60 100.00%
------ ------- ------ -------
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Broiler chicken: Sales of broiler chicken were $18.49 million and $13.58 million
for the three months ended March 31 1999 and 1998, respectively. The increase of
36.16% mainly is due to a 24.68% increase in tonnage combined with the net
effect of price increase and a more profitable sales mix.
Animal Feed: Sales for commercial animal feed were $5.25 million and $3.06
million for the quarters ended March 31, 1999 and 1998 respectively, an increase
of $2.19 or 71.57%. The sales increase is primarily a result of a 51.58%
increase in tonnage, combined with a 19.99% effect of a more profitable sales
mix. .
By-products: Total sales for this segment were of $2.35 million and $2.34
million for the three months ended March 31, 1999 and 1998, respectively. The
0.43% increase is mainly due to an 11.85% volume increase offset by exchange
rate variation and stable sales prices, due to certain market characteristics,
such as competition and promotions that are necessary to establish a market
presence with important clients such as supermarket chains. In general, there
has been a strong market pressure to lower sales prices and as a result, a
redistribution of sales mix toward lower priced products.
Restaurants: The restaurant segment had sales of $2.29 million and $720,000
during the three months ended March 31 1999 and 1998. The amount presented for
fiscal year 1998 includes one month, since the acquisition of the subsidiary As
de Oros, was dated February 26, 1998.
Other: Sales of Other, which include commercial eggs, raw materials and baby
chicks, were of $960,000 $2.31 million during the three months ended March 31,
1999 and 1998, respectively, a 58.44% decrease. This decrease is primarily the
result of the change in the method in which the transactions with integrated
producers are recorded. At present, transactions are registered as an inventory
transfer, as opposed to a sale. Additionally, there is an important reduction in
sales of Others, due to the elimination of inter company sales, since prior to
the acquisition of As de Oros, there were transactions between Pipasa, and As de
Oros consisting of sales of raw materials, and finished products. These
transactions have been eliminated for consolidation purposes.
Exports: The Company's exports were $560,000 and $590,000 during the quarters
ended March 31, 1999 and 1998 respectively, a decrease of 5.08%. This decrease
in exports was due to a 16.08% decrease in export volume offset by the combined
effects of a price increase and a more profitable sales mix.
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<PAGE>
COST OF SALES
General. Cost of sales was $19.36 million and $17.08 million for the quarters
ended March 31, 1999 and 1998, respectively, a 13.35% increase. This increase in
cost of sales was due primarily to a volume increase resulting from additional
sales by As de Oros, offset by the effect of lower cost of raw materials, such
as imported corn and soybean meal which represent a high percentage of the
regular animal feed diet formulation. Additionally, cost margin decreased due to
higher volume production, as a result of higher capacity utilization. For the
three months under analysis, the Company obtained the expected technical yields
in comparison with the results obtained during the same period of fiscal year
1998. The Company has recovered from the harsh effects of the "El Nino" weather
phenomenon that took place during the comparable period last year. El Nino
affected cost of sales in several ways: High temperatures decreased technical
yields, which caused low reproduction and incubation rates, high mortality rates
and low weight gains. The combination of these low technical yields required the
Company to import fertile eggs and chicken parts to cover the demand, at a
higher cost. As a percentage of sales, cost of sales was 64.74% for the three
months ended March 31, 1999 and 1998 compared to 75.56% in the same period of
1998, for a net decrease of 10.82%.
Gross profit for the three months ended March 31, 1999 and 1998 was $10.54
million and $5.53 million, respectively, an increase of $5.01 million or 90.60%.
As a percentage of net sales, gross profit was 35.26% and 24.44% for the second
quarters of fiscal 1999 and 1998, respectively, reflecting the factors discussed
above.
Operating expenses increased from $4.25 to $7.18, an increase of $2.93 or 68.94%
during the three months ended March 31, 1999 when compared with the same period
of fiscal year 1998. The increase is primarily due to the inclusion of As de
Oros. As a percentage of net sales, operating expenses were of 24.03% and 18.79%
for the three months ended March 31, 1999 and 1998, respectively.
Non-operating expenses increased from $166,000 to $888,000, an increase of
$722,000 or 435% during the three months ended March 31, 1999, when compared
with the same period of fiscal year 1998. Interest expense and exchange losses
increased primarily due to the consolidation of As de Oros. As a percentage of
net sales, non operating expenses were 3.97% and 0.74% for the three months
ended March 31, 1999 and 1998, respectively.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31 1999
COMPARED TO THE SIX MONTHS ENDED MARCH 31 1998
The following table presents certain items as a percentage of net sales for the
period indicated:
Six months ended
----------------
March 31,
--------
1999 1998
---- ----
Net sales 100.00% 100.00%
Cost of sales 63.95% 75.27%
Gross profit 36.05% 24.73%
Total operating expenses 22.95% 17.44%
Operating income 13.09% 7.29%
Other expenses, net 3.25% 1.50%
Income before income taxes and
minority interest 9.84% 5.79%
Income taxes 1.30% 0.94%
Income before minority interest 8.53% 4.85%
Minority interest 4.22% 2.14%
Net income 4.31% 2.71%
Preferred stock dividend 0.28% 0.17%
Net income applicable to common stock
stockholders 3.90% 2.54%
NET SALES:
General. Net sales generated by the Company's operations for the six months
ended March 31 1999 and 1998 were $61.56 million and $43.43 million,
respectively, an increase of $18.13 million or 41.75%. The following table shows
sales amounts by segment for each period. (in millions):
Six months ended March 31,
--------------------------
1999 1998
---- ----
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Broiler Chicken 37.42 60.79% 26.78 61.66%
Animal Feed 11.13 18.08% 4.75 10.94%
Restaurants 5.14 8.35% 0.73 1.68%
By Products 4.92 7.99% 4.93 11.35%
Exports 1.76 2.86% 1.13 2.60%
Other 1.19 1.93% 5.11 11.77%
------ ------- ------ -------
TOTAL SALES $61.56 100.00% $43.43 100.00%
------ ------- ------ -------
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<PAGE>
Broiler chicken: Sales of broiler chicken were $37.42 million and $26.78 million
for the six months ended March 31 1999 and 1998, respectively. The increase of
39.73% is primarily due to a 13.61% decrease in tonnage combined with the net
effect of price increases and a more profitable sales mix.
Animal Feed: Sales for commercial animal feed were $11.13 million and $4.75
million for the six months ended March 31 1999 and 1998, respectively,
representing an increase of 134.32%. The sales increase is mainly explained by a
96.01% increase in tonnage, offset by a 38.31% decrease due to the effect of a
less profitable sales mix and a price reduction that was the result of low raw
materials prices. Animal feed sales is As de Oros' core business, and this
subsidiaries' contribution to sales increase in this segment has been
significant. Additionally, the Company's sales of pet food have increased due to
a more aggressive sales strategy.
By-products: Total sales for this segment were $4.92 million and $4.93 million
for the six months ended March 31 1999 and 1998, respectively. The 0.20%
decrease is mainly due to an 18.72% volume increase offset by exchange rate
variations and stable sales prices, which are due to certain market
characteristics, such as competition and promotions that are necessary to
acquire a market presence with important clients such as supermarket chains. In
general, there has been strong market pressure to lower prices and as a result,
a redistribution of the sales mix towards lower priced products.
Exports: The Company's exports were $1.76 million and $1.13 million during the
six months ended March 31 1999 and 1998, respectively, an increase of 55.75%.
This increase is primarily due to a slight increase in exports of chicken by
products and broiler chicken to Honduras, and non-recurring exports made to Hong
Kong during the months of October and November 1998. There was also an increase
of pet food exports. Pet food which was introduced to the Central American
market at the end of fiscal year 1998.
Other: Sales of Other, which commercial eggs, raw materials and baby chicks,
were $1.19 million and $5.11 million during the six months ended March 31 1999
and 1998, respectively, a 76.71% decrease. This decrease is mainly the result of
the change in the method in which transactions with integrated producers are
recorded. At present, transactions are registered as an inventory transfer, as
opposed to a sale. Additionally, there is an important reduction in sales of
Others, due to the elimination of inter company sales, since prior to the
acquisition of As de Oros, there were transactions between Pipasa and As de Oros
consisting mainly of sales of raw materials. These transactions have been
eliminated for consolidation purposes.
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<PAGE>
Restaurants: The restaurant segment had sales of $5.14 million during the six
months ended March 31 1999 compared to $730,000 million during the six months
ended March 31 1998, an increase of $4.41 million or 604%. During the previous
year, the Company recorded sales of only one month, due to the February 1998
acquisition of As de Oros.
COST OF SALES
General. Cost of sales was $39.37 million and $32.69 million for the six months
ended March 31, 1999 and 1998 respectively, a 20.43% increase. This increase in
cost of sales was due primarily to a volume increase resulting from additional
sales by As de Oros, offset by the effect of lower cost of raw materials, such
as imported corn and soybean meal which represent a high percentage of the
regular animal feed diet formulation. Additionally, the cost margin decreased
due to higher volume production, as a result of higher capacity utilization. For
the six months under analysis, the Company obtained the expected technical
yields in comparison with the results obtained during the same period of fiscal
year 1998. The Company has recovered from the harsh effects of the "El Nino"
weather phenomenon, which took place during the last fiscal year. El Nino
affected cost of sales in several ways: high temperatures decreased technical
yields, which caused low reproduction and incubation rates, high morality rates
and low weight gains. The combination of these low technical yields obligated
the Company to import fertile eggs and chicken parts to cover the demand, at a
high cost. Furthermore, during the six months ended March 1998 the use of a high
energy diet formula increased production cost in comparison with a regular
formula used during the six months ended March 31,1999. As a percentage of
sales, cost of sales was 63.95% for the six months ended March 31 1999 compared
to 75.27% for the same period of 1998, for a net decrease of 11.32%.
GROSS PROFIT
Gross profit for the six months ended March 31 1999 and 1998 was $22.19 million
and $10.74 million respectively, an increase of $11.45 million or 107%, as a
percentage of net sales. Gross profit was 36.05% and 24.73%, respectively for
the first half of fiscal 1999 and 1998 respectively, due to the issues discussed
above.
Operating expenses were $14.13 million and $7.57 million for the six months
ended March 31, 1999 and 1998 respectively, an increase of $6.56 million or
86.67%. The increase is primarily due to the inclusion of the acquired business
As de Oros in February 1998 and higher advertising expenses. As a percentage of
net sales, operating expenses were of 22.95% and 17.44% for the six months ended
March 31, 1999 and 1998 respectively.
Non-operating expenses were $2.0 million and $650,000 million, an increase of
$1.44 million or 208% during the six months ended March
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<PAGE>
31, 1999 compared to same period of fiscal year 1998. Interest expense and
exchange losses increased primarily due to the consolidation of As de Oros. As a
percentage of net sales, non operating expenses were 3.25% and 1.50% for the six
months ended March 31, 1999 and 1998, respectively.
FINANCIAL CONDITION
Operating activities:
As of March 31, 1999, the Company had $6.27 million in cash and cash
equivalents. Working capital was $7.59 million compared to $4.82 at the end of
fiscal year 1998, a $2.77 million increase. This is primarily due to an increase
in cash and cash equivalents, attributable to increased sales. The current
ratios were 1.35 and 1.23 as of March 31, 1999 and September 30, 1998
respectively.
Cash provided by operating activities was $9.35 million during the six months
ended March 31, 1999 compared to $652,000 used during the six months ended March
31, 1998. Cash flows from operations improved due to increased operating
earnings and non cash charges such as depreciation and amortization expenses,
which were of $8.43 million compared to $3.65 million during the six months
ended March 31, 1998.
Investing Activities:
Cash used for investing activities during the six months ended March 31, 1999
was $3.01 million compared to $411,000 provided during the same period of fiscal
year 1998. Investing cash flows reflect capital expenditures, which are
primarily related to the acquisition of an enterprise resource planning system
and purchases and improvements in production equipment and facilities.
Financing Activities:
During the six months ended March 31, 1999, the Company used $4.35 million for
financing activities compared to $1.81 million provided during the same period
of fiscal year 1998. Net cash used in financing activities primarily consists of
cash outflows for payment of short and long-term debts, as opposed to cash
provided by the debt restructuring that took place during January and February
of 1998.
Management expects to continue to finance operations and capital expenditures
with its normal operating activities and external sources. Management expects
that there will be sufficient resources available to meet the Company's cash
requirements through the rest of the fiscal year.
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<PAGE>
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company and its representatives may from time to time make written or oral
forward-looking statements with respect to their current views and estimates of
future economic circumstances, industry conditions, company performance and
financial results. These forward-looking statements are subject to a number of
factors and uncertainties, which could cause the Company's actual results and
experiences to differ materially from the anticipated results and expectations,
expressed in such forward-looking statements. The Company cautions readers not
to place undue reliance on any forward-looking statements, which speak only as
of the date made. Among the factors that may affect the operating results of the
Company are the following: (i) fluctuations in the cost and availability of raw
materials, such as feed grain costs in relation to historical levels; (ii)
market conditions for finished products, including the supply and pricing of
alternative proteins, all of which may impact the Company's pricing power; (iii)
risks associated with leverage, including cost increases due to rising interest
rates; (iv) changes in regulations and laws, including changes in accounting
standards, environmental laws, occupational, health and safety; currency
fluctuations; and (v) the effect of, or changes in, general economic conditions.
This management discussion and analysis of financial condition and results of
operations may include certain forward-looking statements, within the meaning of
Section 27A of the Securities 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 forecasts and
statements of expectation. Words such as expects, anticipates, intends, plans,
believes, seeks, estimates, should and variations 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 a number of risks, uncertainties and assumptions. Representatives
examples of these factors include (without limitation) general industrial and
economic conditions; cost of capital and capital requirements; shifts in
customer demands;
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<PAGE>
changes in the continued availability of financial amounts and at the terms
necessary to support the Company's future business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is located in this report under the heading
"Exchange Rate Risk," "Foreign Competition," "Commodity Risk Management," and
"Exchange Rate Risk Management."
Exchange Rate Risk:
The Company makes U.S. dollar payments for its raw materials and bank
facilities. This U.S. dollar expense component is not unique to the Company, as
all poultry producers in Central America must rely on U.S. companies for raw
materials such as corn, soybean meal and reproduction birds. Given its U.S.
dollar exposure, the Company actively manages its exchange rate risk. It uses a
financial model to determine the best strategy to mitigate against the
devaluation of the currency of Costa Rica, the colon, against the U.S. dollar.
The Company systematically increases its annual sales prices by a rate that is
consistent with the colon devaluation against the U.S. dollar. For the fiscal
years ended September 30, 1997 and 1998, the national devaluation rate was 11.6%
and 10.6%, respectively, and correspondingly, the Company increased its prices
12.6% and 13.03%, respectively. For the six months ended March 31, 1999, the
national devaluation was 5.68%. The Company increased its prices approximately
7% during the first quarter. Management believes that the Company's strong
market share 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. Management plans to increase its export
operations in order to increase its U.S. dollar revenues, as all export sales
are made in U.S. dollars. For the six months ended March 31, 1999, exports
increased 2.6% when compared to exports for the same period in 1998.
Foreign Competition:
The Company currently does not have any significant domestic competition. The
Company's local market share, however, could potentially be threatened by
foreign competition. The Company believes that this likelihood is low for
several reasons. First, the Company has a strong reputation for producing high
quality products at a reasonable price. Secondly, Costa Ricans prefer fresh
chicken to frozen chicken. 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 chicken entering the
country, as it wants to prevent the spread of Newcastle Disease in Costa Rica.
The Costa Rican market has tariff agreements that balance
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<PAGE>
the international prices. Chicken importers must pay duties as dictated by the
General Agreement on Trade and Tariffs ("GATT"). These agreements were reached
during the Uruguay Round of the GATT negotiations and are due to expire in 2004.
They provide that only 942 metric tons ("MT") of whole chicken parts or chicken
derivatives can be imported to Costa Rica from countries outside of the Central
American Common Market. This quota is taxed 34% and amounts in excess of this
quota are subject to a 170% 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.
Commodity Risk Management:
The Company imports all of its corn, the primary ingredient in chicken feed,
from the United States. Movements in the price of corn can significantly affect
the Company's gross profit margin. The Company's greatest cost components are
corn and soybean meal, which are imported from the United States of America. The
Company purchases approximately $l.6 million of corn monthly through the Chicago
Board of Trade ("CBOT"). Corn and soybean meal purchases represent approximately
35% of the 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 the Company's profit margin. The Company has been actively hedging
its exposure to corn since 1991. The Company evaluates, on a daily basis, the
price of corn and soybean meal. All hedging activities are supervised by the
financial department, whose employees have been trained at the CBOT and attend
regular seminars on commodities hedging strategies.
Hedging strategies must be approved by the Company's hedging committee. The
committee consists of two analysts, the Financial Director, Financial Manager
and Financial vice-president. The committee meets at least twice a month to
evaluate the Company's exposure in corn and soybean meal. The Company's strategy
is to hedge against price increases in corn and soybean meal. The Company is not
involved in speculative trading. Contracts range from one month to six months.
The Company 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. The Company's hedging strategy is set in 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. The Company uses an internal pricing model to
prepare sensitivity models. The Company bases its target prices on the worst
case price assumptions (i.e. high corn prices). The average prices paid by the
Company for corn and soybean meal were approximately 6% below its budgeted
prices as of March 1999. Commodity prices for six months ended March 31, 1999
have been below or equal to budgeted prices.
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<PAGE>
The Company has a $500,000 credit line with Futures U.S.A., Inc. ("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. The
Company is in constant contact with its brokers (at least three times a day) and
receives advice from the brokers' commodities experts.
The Company's monthly soybean meal purchases total approximately $900,000. The
hedging strategies for soybean meal purchases are identical to that of corn
purchases, except that the Company purchases its soybean meal through a Costa
Rican company, Industrial de Oleaginosas, S.A. ("Inolasa"), in which the Company
holds a 10% equity ownership. In Costa Rica, there is 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 the Company, the Company can buy its
soybean meal directly from the CBOT. Thus far, the Company has never had to go
directly to the CBOT to purchase soybean meal.
Exchange Rate Risk Management:
In addition to movements in the price of corn and soybean meal, the Company has
exposure to fluctuations in exchange rates, as payments for corn, soybean meal,
reproduction birds and bank facilities are in U.S. dollars. Management has the
responsibility to follow economic and industrial trends that influence foreign
exchange levels. This department examines areas such as poultry gross national
product, gross national product ("GNP"), inflation, devaluation, export and
import growth rates, growth in real wages, unemployment and population rates.
Raw material purchases have an average payment period of 120 days, hence
exchange rate risk is for four months. During this period 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 the Company's exports are denominated in U.S. dollars (even exports
within Central America). Management expects that the strategy to increase
exports will increase the Company's U.S. dollar revenues. The Company uses a
model to determine the maximum devaluation possible before it considers taking
on U.S.-based debt. In effect, the Company borrows in U.S. dollars when
economically proven to be less expensive than borrowing in colones.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation: Pipasa is a defendant in a lawsuit brought in Costa Rica in which it
was served with prejudgment liens. Pipasa substituted collateral for these liens
with the approval of the court, which approval is currently being appealed.
Pipasa has not yet been served with the Complaint in the case and therefore,
cannot ascertain the basis of the claim or the relief sought, but it believes
the lawsuit is without merit and intends to assert a vigorous defense. At the
present time, neither the Company nor Pipasa can evaluate the potential impact
of this lawsuit on the financial results of the Company.
No legal proceedings of a material nature, other than the matter in the
preceding paragraph, to which the Company is a party were pending during the six
months ended March 31, 1999, nor as of the date of this filing, and the Company
knows of no legal proceedings of a material nature pending or threatened or
judgements entered against any director nor officer of the Company in his
capacity as such.
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 2. CHANGES IN SECURITIES AND USE OF PROCEED.
The Company effectuated a 1 for 3 reverse stock split (the "Split") of the
Company's common stock to be effective on December 29, 1998. In connection with
the Split, new certificates will be issued and those shareholders owning more
than five shares of common stock, post Split, shall receive one full share of
each fraction of a share to which they would be entitled. Each shareholder
holding less than five shares of common stock, post Split, shall receive the
payment for the fractional share held by them based on the mean of bid and ask
prices on the effective date of the Split.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 1998, the Company sent to its stockholders of record on November
29, 1998, a Consent Solicitation Statement soliciting written consent for the
acquisitions of the remaining interest in Pipasa and As de Oros, respectively.
As of December 28, 1998 (the "Action Date") holders of more than a majority of
the Company's issued and outstanding shares consented to these transactions.
Consequently, the transactions have been approved by the consent of the
Company's shareholders and, upon receipt by the Company of the fairness opinions
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<PAGE>
with respect to the transactions, which have not been yet received by the
Company, but which are expected to be received during fiscal year 1999. The
final tabulation of consents, as of the Action Date, was 14,368,386 consents
for, 335 consents against, and 5,441 consents abstained, for the acquisition of
Pipasa, and 14,368,384 consents for, 337 consents against, and 5,441 consents
abstained, for the acquisition of As de Oros.
ITEM 5. OTHER INFORMATION
Effective on December 29, 1998, the Company amended its Articles of
Incorporation by filing Articles of Amendment with the Secretary of State of the
State of Nevada, changing the number of authorized shares of the Corporation to
20,000,000 shares of common stock, with a par value a $0.001, and 1,000,000
shares of preferred stock with a par value of $0.001. In connection with the
Split, new certificates will be issued and those shareholders owning more than
five shares of common stock, post Split, shall receive one full share of each
fraction of a share to which they would be entitled. Each shareholder holding
less than five shares of common stock, post Split, shall receive payment for the
fractional share held by them based on the mean of bid and ask prices on the
effective date of the Split.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits: The following exhibits are filed with this report:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Report on Form 8-K: One report on form 8-K was filed on October 13,
1998 and amended on November 18, 1998.
-29-
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company that duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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 Company and in
the capacities and on the dates indicated.
RICA FOODS, INC. AND SUBSIDIARIES
Dated: May 11, 1999 --------------------------------------
Calixto Chaves
Chief Executive Officer
Dated: May 11, 1999 --------------------------------------
Randall Piedra
Chief Financial Officer
-30-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RICA FOODS, INC. FOR THE QUARTER ENDED MARCH 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 6,270,716
<SECURITIES> 37,955
<RECEIVABLES> 9,704,270
<ALLOWANCES> 750,284
<INVENTORY> 12,444,336
<CURRENT-ASSETS> 29,240,770
<PP&E> 38,894,816
<DEPRECIATION> 9,811,975
<TOTAL-ASSETS> 66,250,497
<CURRENT-LIABILITIES> 21,649,092
<BONDS> 0
0
5,149,125
<COMMON> 7,419
<OTHER-SE> 8,019,784
<TOTAL-LIABILITY-AND-EQUITY> 66,649,092
<SALES> 29,908,477
<TOTAL-REVENUES> 29,908,477
<CGS> 19,363,821
<TOTAL-COSTS> 19,363,821
<OTHER-EXPENSES> 7,185,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 677,023
<INCOME-PRETAX> 2,470,423
<INCOME-TAX> 463,285
<INCOME-CONTINUING> 1,019,956
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,019,956
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
