<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 June 30, 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 June 30, 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 June 30, 1999
(Unaudited) and September 30, 1998.......................... 3
Consolidated Condensed Statements of Operations for the
three months and nine months ended June 30, 1999 and
1998 (Unaudited)........................................... 4
Consolidated Condensed Statements of Cash Flows for the nine
months ended June 30, 1999 and 1998 (Unaudited)............ 5
Notes to Consolidated Condensed Financial Statements for the
nine months ended June 30, 1999 and 1998(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.. 26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 29
ITEM 2. Changes in Securities and use of Proceeds.................... 29
ITEM 4. Submission of Matters to a vote of Security Holders.......... 30
ITEM 5. Other Information............................................ 30
ITEM 6. Exhibits and Reports......................................... 31
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<PAGE>
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
June 30, September 30,
----------- -------------
1999 1998
---- ----
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents ................. $ 3,765,705 $ 3,290,757
Short-term investments .................... 32,816 101,892
Notes and accounts receivable, net ........ 8,674,585 8,290,021
Due from related parties .................. 1,266,806 656,904
Inventories, net .......................... 12,848,630 12,862,456
Prepaid expenses .......................... 867,108 648,918
------------ ------------
Total current assets .................. 27,455,650 25,850,948
------------ ------------
Property, plant and equipment, net ........... 29,891,301 28,494,233
Long-term notes receivable, trade ............ 228,784 119,229
Long-term investment ......................... 4,340,426 4,720,335
Other assets ................................. 1,880,679 2,039,443
Cost in excess of net assets of acquired
business 1,483,363 1,781,147
------------ ------------
Total assets .......................... $ 65,280,203 $ 63,005,335
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .......................... $ 8,994,689 $ 7,510,750
Accrued expenses .......................... 3,784,446 3,035,951
Notes payable ............................. 7,190,730 8,463,052
Current installments of long-term debt .... 1,199,090 1,940,073
Due to stockholders ....................... 75,108 75,671
------------ ------------
Total current liabilities ............. 21,244,063 21,025,497
------------ ------------
Long-term debt, net of current portion ....... 21,623,025 22,559,425
Due to stockholders .......................... 17,060 18,526
Deferred income tax liability ................ 1,817,153 1,974,407
------------ ------------
Total liabilities ..................... 44,701,301 45,577,855
------------ ------------
Minority interest ............................ 7,999,595 6,078,595
Stockholders' equity:
Common stock .......................... 7,486 7,419
Preferred stock ....................... 5,149,125 4,323,025
Additional paid-in capital ............ 12,137,326 11,987,393
Cumulative translation adjustment ..... (6,747,356) (5,630,035)
Retained earnings ..................... 6,098,551 3,370,982
------------ ------------
16,645,132 14,058,784
------------ ------------
Less:
Due from stockholders .................. (700,239) (170,413)
Treasury stock, at cost ................ (3,365,586) (2,539,486)
------------ ------------
Total stockholders' equity .................... 12,579,307 11,348,885
------------ ------------
Total liabilities and stockholders' equity ....$ 65,280,203 $ 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 Operations
Unaudited
---------
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 27,732,390 $ 30,151,295 $ 89,292,662 $ 73,584,850
Cost of sales 18,674,392 22,564,801 58,045,035 55,257,799
------------ ------------ ------------ ------------
Gross profit 9,057,998 7,586,494 31,247,627 18,327,051
------------ ------------ ------------ ------------
Operating expenses
Selling 4,449,596 3,725,773 12,897,740 8,038,560
General and administrative 2,763,361 2,407,188 8,249,520 5,644,648
Amortization of cost in excess of
net assets of acquired business 101,137 144,742 297,804 190,647
------------ ------------ ------------ ------------
Total operating expenses 7,314,094 6,277,703 21,445,064 13,873,855
Income from operations 1,743,904 1,308,791 9,802,563 4,453,196
Other expenses (Income)
Interest expense 831,119 896,835 2,589,061 2,078,607
Interest income (203,339) (140,930) (573,831) (449,528)
Exchange losses 431,251 549,782 1,397,793 817,493
Miscellaneous, net (299,786) (420,730) (650,635) (910,990)
------------ ------------ ------------ ------------
Other expenses, net 759,245 884,957 2,762,388 1,535,582
------------ ------------ ------------ ------------
Income before income taxes and minority
interest 984,659 423,834 7,040,175 2,917,614
Income taxes 196,950 6,224 998,523 414,460
------------ ------------ ------------ ------------
Income before minority interest
787,709 417,610 6,041,652 2,503,154
Minority interest 551,449 447,702 3,151,757 1,379,008
------------ ------------ ------------ ------------
Net income (loss) 236,260 (30,092) 2,889,895 1,124,146
Preferred stock dividend 103,195 128,857 276,445 201,521
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders
$ 133,065 $ (158,949) $ 2,613,450 $ 922,625
============ ============ =========== ============
Earnings (loss) per share:
Basic $ $ 0.02 $ (0.02) $ 0.37 $ 0.13
============ ============ =========== ============
Diluted $ $ 0.02 $ (0.02) $ 0.36 $ 0.13
============ ============ =========== ============
Weighted average number of shares
outstanding:
Basic 7,122,398 7,230,489 7,107,476 6,777,330
============ ============ =========== ============
Diluted 7,312,732 7,273,020 7,249,097 6,807,877
============ ============ =========== ============
</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 nine months ended June 30, 1999 and 1998
Unaudited
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Cash flows from operating activities:
Net income ................................................. $ 2,889,895 $ 1,124,146
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 2,568,308 1,575,545
Renewal for production poultry ......................... 1,523,036 896,720
Amortization of cost in excess of net assets of acquired
business ........................................... 297,804 190,647
Allowance for inventory obsolescence ................... 21,787 --
Allowance for doubtful accounts ........................ 522,000 128,285
Gain (loss) on sale of productive assets ............... (121,332) 12,666
Deferred income tax benefit ............................ (157,254) (69,890)
Minority interest ...................................... 3,151,757 1,379,008
Changes in operating assets and liabilities:
Notes and accounts receivable ....................... (404,441) (1,187,082)
Due from related parties ............................ (1,435,791) (548,528)
Inventories ......................................... (1,466,076) (2,867,498)
Prepaid expenses .................................... (526,885) 733,649
Accounts payable .................................... 1,419,468 780,755
Accrued expenses .................................... 748,495 640,285
Long-term notes receivable, trade ................... (123,070) 49,189
----------- -----------
Cash provided by operating activities ............. 8,907,701 2,837,897
----------- -----------
Cash flows from investing activities:
Short-term investments ..................................... 69,076 1,554,092
Initial cash balance from subsidiary acquired .............. -- 1,147,472
Increase in long-term investment ........................... -- (1,339,368)
Additions to property, plant and equipment ................. (5,891,103) (2,434,615)
Proceeds from sale of productive assets .................... 429,427 304,755
Decrease in other assets ................................... (109,415) (931,666)
----------- -----------
Cash used for investing activities ................ (5,502,015) (1,699,330)
----------- -----------
Cash flows from financing activities:
Decrease in notes payable .................................. (1,291,566) (3,851,015)
Preferred stock cash dividends ............................. (276,445) (201,521)
Warrants exercised ......................................... 150,000 --
Long-term financing:
New loans .............................................. 449,887 8,844,647
Payments ............................................... (2,266,145) (3,827,810)
Due from stockholders ...................................... (529,826) (739,492)
----------- -----------
Cash provided by (used for) financing activities (3,764,095) 224,809
----------- -----------
Continued on next page
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<PAGE>
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the nine months ended June 30, 1999 and 1998
Unaudited
(Continued)
1999 1998
---- ----
Effect of exchange rate changes on cash and
cash equivalents 151,097 392,026
Increase (decrease) in cash and cash equivalents (207,312) 1,755,402
Cash and cash equivalents at beginning of period 3,973,017 1,388,290
----------- -----------
Cash and cash equivalents at end of period $ 3,765,705 $ 3,143,692
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $2,011,764 $ 1,093,702
=========== ===========
Income taxes $ 321,864 $ 127,643
=========== ===========
Non cash activities:
Acquisition of treasury stock through financial agreement $ 826,100 $ -
=========== ===========
Common stock dividends paid as preferred shares $ 826,100 $ -
=========== ===========
</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
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - GENERAL
Management is responsible for preparing Rica Foods, Inc. and Subsidiaries:
Corporacion Pipasa, S.A. and Subsidiaries ("Pipasa") and Corporacion As de Oros,
S.A. and Subsidiaries ("As de Oros") (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 of America. 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 nine months ended
June 30, 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.
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<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 lives
of the hens. Renewal of production poultry or depreciation of the hens, is
determined based on the estimated poultry reproductive period.
Inventories consist of the following:
June 30, 1999 September 30, 1998
------------- ------------------
Finished products $ 3,120,359 $ 3,038,319
Poultry 2,778,902 2,713,040
Production poultry 3,255,710 3,141,980
Materials and supplies 1,824,591 1,710,071
Raw materials 2,168,805 2,849,126
In transit 481,560 204,681
------------ ------------
13,629,927 13,657,217
------------ ------------
Renewal of production poultry (734,564) (766,736)
Allowance for obsolescence (46,733) (28,025)
------------ ------------
Inventories, net $ 12,848,630 $ 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:
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
-------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ............................... $ 236,260 $ (30,092) $ 2,889,895 $ 1,124,146
Foreign currency translation
adjustment (495,376) (339,129) (1,117,322) (816,976)
----------- ----------- ----------- -----------
Total comprehensive income
(loss) ...................................... $ (259,116) $ (369,221) $ 1,772,573 $ 307,170
=========== =========== =========== ===========
</TABLE>
-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". SFAS
128 provides guidance for the computation, presentation and disclosure of
earnings per share. Earnings per share pertaining to the three and nine months
ended June 30, 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 Nine months ended
------------------ ------------------
June 30, June 30,
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income applicable to common
stockholders $ 133,065 $ (158,949) $ 2,613,450 $ 922,625
=========== =========== =========== ===========
Denominator:
Denominator for basic income per
share ..................................................... 7,122,398 7,230,489 7,107,476 6,777,330
Effect of dilutive securities:
Options to purchase common
stock ................................................. 190,334 42,531 141,621 30,547
------------ ------------ ------------ ------------
Denominator for diluted earnings
per share ................................................. 7,312,732 7,273,020 7,249,097 6,807,877
============ ============ ============ ============
Earnings per share from continuing
operations:
Basic ...................................................... $ 0.02 $ (0.02) $ 0.37 $ 0.13
=========== =========== =========== ===========
Diluted .................................................... $ 0.02 $ (0.02) $ 0.36 $ 0.13
=========== =========== =========== ===========
</TABLE>
The Company did not have any anti-dilutive securities outstanding as of
June 30, 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.
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<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 nine months ended June 30, 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 $93,205,982
===========
Net income $ 2,088,051
===========
Basic earnings per share:
Weighted average number of shares outstanding 7,215,974
===========
Earnings per share $ 0.29
===========
Diluted earnings per share:
Incremental shares from assumed conversion
of warrants 30,547
-----------
Adjusted weighted average shares 7,246,521
===========
Diluted earnings per share $ 0.29
===========
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 was an equivalent
decrease in sales and cost of sales of approximately $3,230,000 and $8,555,000
for the three and nine months ended June 30, 1999, respectively. The statements
of operations for June 1998, have not been restated to reflect the new method of
accounting. There was no effect in the net income for the three months and nine
months ended June 30, 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 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
property and equipment 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
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 by
the plaintiff. The Court appointed an independent impartial expert to determine
the proper value of the collateral presented by Pipasa, which resulted in a
favorable opinion to Pipasa.
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<PAGE>
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. Directly
related with this lawsuit, the plaintiff also filed lawsuits in Miami-Dade,
Florida and Northern District, California Civil Courts to seek relief of the
alleged breach of contract. At the present time, neither the Company nor Pipasa
can evaluate the potential impact of this lawsuit on the financial statements of
the Company, and due to the preliminary stage of the lawsuits, Pipasa is in the
process of determining the defense strategy, and intends to continue its
vigorous defense. Rica Foods is not a party in these proceedings.
No legal proceedings of a material nature, other than the matter in the
preceding paragraph to which the Company or its subsidiaries is a party, were
pending during the nine months ended June 30, 1999 nor are any pending as of the
date of this filing. In addition, the Company knows of no legal proceedings of a
material nature pending or threatened nor have any judgments been entered
against any director or 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. and Subsidiaries ("Pipasa") and Corporacion As de Oros,
S.A. and Subsidiaries ("As de Oros"). The Company, though its subsidiaries,
represents the largest poultry company in Costa Rica with a market share of
approximately 70% of the chicken meat market. The Company's subsidiaries'
primary business is derived from the production and sales of broiler chickens,
processed chicken by-products, commercial eggs, and premixed feed and
concentrate for livestock and domestic animals. 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. As de Oros, founded in 1954, is Costa
Rica's second largest poultry producer, comprising approximately 20% of the
country's poultry market and is one of the leaders in the Costa Rican animal
feed market with a 21% market share. As de Oros also owns and operates a chain
of 36 fried chicken fast food restaurants in Costa Rica called "Restaurantes As
de Oros."
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 permit 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, 1998.
SEASONALITY
The Company's subsidiaries have historically experienced and expect to continue
to experience seasonal fluctuations in net sales and results of operations. The
Company's subsidiaries have generally experienced higher sales and operating
results in the first and second quarters of the fiscal period, and the Company
expects this seasonal trend may continue for the foreseeable future.
-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 the end of 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 Year 2000 issues will be 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 but not limited to, 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 their analysis, the Company's subsidiaries have undergone significant
strategic upgrades in 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 Financial 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 the end of fiscal
year 1999. Testing is being performed concurrently with remediation activities
and final testing is expected to be substantially complete in the same
timeframe.
-14-
<PAGE>
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 adequate assurances from such 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 the end of
fiscal year 1999.
To date, the Company expects to spend approximately $500,000 to $750,000 to
complete the Year 2000 project, which 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 costs
are 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 but not limited to, the
availability of certain resources, third party compliance information. 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 regarding third
party suppliers. Additionally, Year 2000 expenditures vary significantly in
project phases and depending on the remediation method used. Past expenditures
in relation to total estimated costs
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<PAGE>
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 plants belonging to the
Company's subsidiaries are subject to regulation under Costa Rican law with
respect to 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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<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998
The following table presents certain items as a percentage of net sales for the
period indicated:
Three months ended June 30,
---------------------------
1999 1998
---- ----
Net sales 100.00% 100.00%
Cost of sales 67.34% 74.84%
Gross profit 32.66% 25.16%
Total operating expenses 26.37% 20.82%
Operating income 6.29% 4.34%
Other expenses, net 2.74% 2.94%
Income before income taxes and minority interest 3.55% 1.41%
Income taxes 0.71% 0.02%
Income before minority interest 2.84% 1.39%
Minority interest 1.99% 1.48%
Net income (loss) 0.85% (0.10)%
Preferred stock dividend 0.37% 0.43%
Net income (loss) applicable to common stock holders 0.48% (0.53)%
Prior and subsequent to the acquisition of As de Oros, there have been
transactions between Pipasa and As de Oros consisting of sales of raw materials
and finished products. These transactions have been eliminated in consolidation.
NET SALES:
General: Net sales generated by the Company's operations for the quarters ended
June 30, 1999 and 1998 were $27.73 million and $30.15 million, respectively, a
decrease of $2.42 million or 8.03%. The following table shows sales amounts by
segment for each quarter (in millions):
Three months ended June 30,
---------------------------
1999 1998
---- ----
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Broiler Chicken $ 17.02 61.38% $ 16.34 54.19%
Animal Feed 4.99 18.00% 5.99 19.86%
By-products 2.30 8.29% 2.25 7.46%
Restaurants 2.02 7.28% 2.10 6.97%
Other 0.58 2.09% 2.68 8.89%
Exports 0.82 2.96% 0.79 2.63%
------- ------ ------- ------
Total Sales $ 27.73 100.00% $ 30.15 100.00%
------- ------ ------- ------
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Broiler chicken: Sales of broiler chicken were $17.02 million and $16.34 million
for the three months ended June 30, 1999 and 1998, respectively. The increase of
4.16% is primarily due to a 13.60% increase in tonnage offset a combination of a
variation in sales mix of lower priced products, which products has resulted in
an average sales price decrease. Increase in tonnage include sales to new
important customers.
Animal Feed: Sales for commercial animal feed were $4.98 million and $5.99
million for the quarters ended June 30, 1999 and 1998 respectively, a decrease
of $1.01 million or 16.86%. The sales decrease is primarily a result of a 6.77%
decrease in tonnage, due to eliminations of customers to improve the client
portfolio of this segment and a decrease in average sales prices. During this
quarter, the cost of raw material decreased significantly, resulting in a
general sales price decrease in the market. The Company will maintain lower
sales prices to be able to compete in the market.
By-products: Total sales for this segment were of $2.30 million and $2.25
million for the three months ended June 30, 1999 and 1998, respectively. The
2.22% increase is mainly due to a 4.60% volume increase offset by a decrease in
average sales prices. In general, there has been a strong market pressure to
lower sales prices in order to establish and maintain sales volume, and as a
result, a redistribution of sales mix toward lower priced products.
Restaurants: The restaurant segment had sales of $2.02 million and $2.10 million
during the three months ended June 30, 1999 and 1998 respectively, for a
decrease of $80,000 or 3.81%. During the 1999 period, the competition has
introduced into the market new fast food restaurants, which have resulted in a
decrease in sales. The Company has begun a marketing strategy to increase sales
of this segment by remodeling its restaurants, investing in new world class
cooking equipment to improve the quality of the chicken, promoting some of its
products and opening new restaurants during the 1999 period. The Company plans
to open new restaurants in rural and urban areas and expects that through this
marketing strategy, sales will begin to increase in the foreseeable future.
Other: Sales of other items, which include commercial eggs, raw materials and
baby chicks, were $580,000 and $2.68 million during the three months ended June
30, 1999 and 1998, respectively, a 78.36% decrease. This decrease is primarily
the result of the change in the method in which transactions with integrated
producers are recorded. Integrated producers are local farmers who raise and
feed poultry on behalf of the Company. At present, transactions as of June 30,
1999 are recorded as a production poultry inventory transfer as opposed to a
sale of raw materials and purchases of raised live chickens, zwhich is how the
transaction was recorded during the quarter ended June 30, 1998.
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<PAGE>
Exports: The Company's exports were $820,000 and $790,000 during the quarters
ended June 30, 1999 and 1998 respectively, an increase of 3.79%. This increase
in exports was due to a 110.51% increase in export volume offset by variations
in sales mix towards lower priced products. The Company intends to market pet
food products aggressively, and has begun exporting this product to Dominican
Republic.
COST OF SALES
General. Cost of sales was $18.67 million and $22.56 million for the quarters
ended June 30, 1999 and 1998, respectively, a decrease of $3.89 million or
17.24%. This decrease in cost of sales was due primarily to the lower cost of
raw materials such as imported corn and soybean meal, which represent a high
percentage of the poultry feed diet, the main ingredient in animal feed products
and a change in the method of accounting of integrated producers. The Company
has recovered from the harsh effects of the "El Nino" weather phenomenon that
took place during the comparable period last year. The higher temperatures of
"El Nino" affected the cost of sales in several ways: low reproduction and
incubation rates, higher mortality rates and low weight gains. The combination
of these factors required the Company to import fertile eggs and chicken parts,
at a higher cost, to cover demand. As a percentage of sales, cost of sales was
67.34% for the three months ended June 30, 1999 compared to 74.84% in the same
period of 1998, a net decrease of 7.37%.
GROSS PROFIT
Gross profit for the three months ended June 30, 1999 and 1998 was $9.06 million
and $7.59 million, respectively, an increase of $1.47 million or 19.37%. As a
percentage of net sales, gross profit was 32.66% and 25.16% for the third
quarters of fiscal 1999 and 1998, respectively, reflecting the factors discussed
above.
OPERATING EXPENSES
Operating expenses increased from $6.3 to $7.3 million, an increase of $1.00
million or 15.87% during the three months ended June 30, 1999 when compared with
the same period of fiscal year 1998. The increase is primarily due to higher
payroll and marketing expenses such as advertising and vehicle fleet leasing and
the inclusion of new subsidiaries of Pipasa in El Salvador and Honduras. As a
percentage of net sales, operating expenses were 26.37% and 20.82% for the three
months ended June 30, 1999 and 1998, respectively.
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<PAGE>
NON-OPERATING EXPENSES
Non-operating expenses decreased from $885,000 to $759,000, a decrease of
$126,000 or 19.24% during the three months ended June 30, 1999,
when compared with the same period of fiscal year 1998. As a percentage of net
sales, non-operating expenses were 2.74% and 2.94% for the three months ended
June 30, 1999 and 1998, respectively.
ESTIMATED INCOME TAX
Estimated income taxes were $197,000 compared to $6,000 during the three months
ended June 30, 1999 and 1998, respectively. The lower estimated tax rate in the
prior period results mainly from the utilization of tax credits and loss carry
forwards.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
JUNE 30, 1999 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1998
The following table presents certain items as a percentage of net sales for the
period indicated:
Nine months ended June 30,
--------------------------
1999 1998
Net sales 100.00% 100.00%
Cost of sales 65.01% 75.09%
Gross profit 34.99% 24.91%
Total operating expenses 24.02% 18.85%
Operating income 10.98% 6.05%
Other expenses, net 3.09% 2.09%
Income before income taxes and
minority interest 7.88% 3.96%
Income taxes 1.12% 0.56%
Income before minority interest 6.77% 3.40%
Minority interest 3.53% 1.87%
Net income 3.24% 1.53%
Preferred stock dividend 0.31% 0.27%
Net income applicable to common
stock holders 2.93% 1.25%
Prior and subsequent to the acquisition of As de Oros, there have been
transactions between Pipasa and As de Oros consisting of sales of raw materials
and finished products. These transactions have been eliminated in consolidation.
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<PAGE>
NET SALES:
General. Net sales generated by the Company's operations for the nine months
ended June 30, 1999 and June 30, 1998 were $89.29 million and $73.59 million,
respectively, an increase of $15.70 million or 21.33%. Sales for fiscal year
1998 consolidates the results of As de Oros for only four months, compared to
nine months for 1999 due to the February, 1998 acquisition of this subsidiary.
Increase in sales for some segments are partially due to this factor. The
following table shows sales amounts by segment for each period. (in millions):
Nine months ended June 30,
--------------------------
1999 1998
---- ----
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Broiler Chicken $ 54.45 60.98% $ 43.10 58.57%
Animal Feed 16.11 18.05% 10.77 14.64%
Restaurants 7.17 8.02% 2.84 3.86%
By Products 7.22 8.09% 7.17 9.74%
Exports 2.58 2.88% 1.92 2.61%
Other 1.76 1.98% 7.78 10.58%
------- ------ ------- ------
TOTAL SALES $ 89.30 100.00% $ 73.58 100.00%
------- ------ ------- ------
Broiler chicken: Sales of broiler chicken were $54.45 million and $43.10 million
for the nine months ended June 30, 1999 and 1998, respectively. The increase of
26.33% is primarily due to an increase in tonnage and the inclusion of As de
Oros, which offset the promotions of some products and caused variations in the
sales mix creating lower priced products.
Animal Feed: Sales for commercial animal feed were $16.11 million and $10.77
million for the nine months ended June 30, 1999 and 1998, respectively,
representing an increase of $5.34 million or 49.58%. This increase is primarily
due to increase in tonnage of 38.05% which is mainly due to the inclusion of As
de Oros. As de Oros' core business, animal feed sales, significantly contributed
to the sales increase reflected in this segment. Additionally, sales of pet food
have increased due to a more aggressive sales strategy.
By-products: Total sales for this segment were $7.22 million and $7.17 million
for the nine months ended June 30, 1999 and 1998, respectively. The 0.70%
increase is mainly due to an 8.87% volume increase offset by promotions of some
products and variations of sales mix towards lower priced products. During
fiscal 1999, the Company has lowered prices of certain key products as a
marketing strategy to maintain sales volume due to strong market competition.
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<PAGE>
Exports: The Company's exports were $2.58 million and $1.92 million during the
nine months ended June 30, 1999 and 1998, respectively, an increase of $660,000
or 34.37%. This increase is primarily due to a 78.38% volume increase, offset by
variations in sales mix toward lower priced products. During fiscal 1999,
increases in tonnage have been mainly due to 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, which were introduced to the Central American market and the Dominican
Republic market at the end of fiscal year 1998 and during the third quarter of
fiscal year 1999, respectively.
Other: Sales of other items, which include commercial eggs, raw materials and
baby chicks, were $1.77 million and $7.78 million during the nine months ended
June 30, 1999 and 1998, respectively, a decrease of $6.01 millions or 77.24%.
This decrease is mainly the result of the change in the method in which
transactions with integrated producers are recorded. Additionally, there is an
important decrease due to the elimination of inter-company sales, since prior to
the acquisition of As de Oros in February 1998, there were transactions between
Pipasa and As de Oros consisting mainly of sales of raw materials.
Restaurants: The restaurant segment had sales of $7.17 million during the nine
months ended June 30, 1999 compared to $2.84 million during the nine months
ended June 30, 1998, an increase of $4.33 million or 152.46%. This increase is
mainly due to the consolidation of As de Oros' results for nine months during
1999, compared to four months during 1998. During fiscal 1999, new fast food
restaurants from competitors have been introduced in the market, which have
resulted in a decrease in sales. The Company has begun a marketing strategy to
increase sales in this segment. The Company plans to open new restaurants in
rural and urban areas and expects that through this marketing strategy, sales
will increase in the foreseeable future.
COST OF SALES
General. Cost of sales was $58.05 million and $55.26 million for the nine months
ended June 30, 1999 and 1998 respectively, an increase of $2.79 million or
5.05%. As a percentage of sales, cost of sales was 65.01% for the nine months
ended June 30, 1999 compared to 75.09% for the same period of 1998, a net
decrease of 10.08%. The increase in cost of sales was primarily due to the
inclusion of As de Oros. The decrease in cost of sales margin was due primarily
to the effect of lower cost of imported raw materials, which represents a high
percentage of the poultry feed diet, the main ingredient of animal feed product,
and the change in the method of accounting of integrated producers.
Additionally, the cost margin decreased due to the Company's recovery from the
harsh effects of the "El Nino" weather
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<PAGE>
phenomenon and the use of a lower cost diet formula used during the nine months
ended June 30, 1999.
GROSS PROFIT
Gross profit for the nine months ended June 30, 1999 and 1998 was $31.25 million
and $18.33 million respectively, an increase of $12.92 million or 70.49%. As a
percentage of net sales, gross profit was 34.99% and 24.91%, respectively, for
the first three-quarters of fiscal 1999 and 1998 respectively, due to the
factors discussed above.
OPERATING EXPENSES
Operating expenses were $21.44 million and $13.87 million for the nine months
ended June 30, 1999 and 1998, respectively, an increase of $7.57 million or
54.58%. The increase is primarily due to the inclusion of As de Oros, acquired
in February 1998, and higher payroll and marketing expenses. Also, the
introduction of Pipasa's subsidiaries in El Salvador and Honduras, respectively,
contributed to the increase of operating expenses. As a percentage of net sales,
operating expenses were 24.02% and 18.85% for the nine months ended June 30,
1999 and 1998, respectively.
NON-OPERATING EXPENSES
Non-operating expenses were $2.76 million and $1.54 million, an increase of
$1.22 million or 79.22% during the nine months ended June 30, 1999 compared to
same period of fiscal year 1998. As a percentage of net sales, non-operating
expenses were 3.09% and 2.09% for the nine months ended June 30, 1999 and 1998,
respectively. Non-operating expenses increased mainly as a result of higher
interest expense and exchange rate losses, which increased by $1.09 million due
to the consolidation of As de Oros.
ESTIMATED INCOME TAX
Estimated income taxes were $998,000 compared to $414,000 during the nine months
ended June 30, 1999 and 1998, respectively. The lower estimated tax rate in the
prior period results mainly from the utilization of tax credits and loss carry
forwards.
FINANCIAL CONDITION
Operating activities:
As of June 30, 1999, the Company had $3.77 million in cash and cash equivalents.
Working capital was $6.21 million as compared to $4.83 at the end of fiscal year
1998, a $1.4 million increase. This increase is primarily due to an increase in
current assets and a slight decrease
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<PAGE>
in short term liability. The current ratios were 1.29 and 1.23 as of June 30,
1999 and September 30, 1998 respectively.
Cash provided by operating activities was $8.90 million during the nine months
ended June 30, 1999 compared to $2.84 million during the nine months ended June
30, 1998. Cash flows from operations improved due to increased operating
earnings and non-cash charges such as depreciation and amortization expenses,
which were of $7.80 million compared to $4.11 million during the nine months
ended June 30, 1998.
Investing Activities:
Cash used for investing activities during the nine months ended June 30, 1999
was $5.5 million compared to $1.70 million 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. In
addition, the Company has remodeled some of its fast food restaurants as part of
a marketing strategy. The Company anticipates that it will spend approximately
$1.20 million for capital expenditures during the rest of fiscal year 1999 and
expects to finance such expenditures with long-term financing.
Financing Activities:
As of June 30, 1999, the Company had line of credit agreements with banks for a
maximum aggregate amount of $24 million, of which $6.6 million have already been
used. Agreements may be renewed annually and bear interest at annual rates
ranging from 6.92% to 10.50%. Property and other collateral secure those
agreements.
During the nine months ended June 30, 1999, the company used $3.77 million for
financing activities compared to $225,000 provided during the same period of
fiscal year 1998. Net cash used in financing activities primarily consists of
cash outflows for payment of short-term and long-term debt amortization compared
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 also
expects that there will be sufficient resources available to meet the Company's
cash requirements through the rest of the fiscal year.
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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<PAGE>
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 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. Representative
examples of these factors include (without limitation) general industrial and
economic conditions; cost of capital and capital requirements; shifts in
customer demands; changes in the continued availability of financial amounts and
at the terms necessary to support the Company's future business.
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<PAGE>
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 nine months ended June 30, 1999, the
national devaluation was 8.55%. The Company increased its prices approximately
7% during the first quarter and plans to increase its sales prices during the
last quarter of fiscal year 1999. 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 nine months ended June 30, 1999, exports increased
34.37% 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 the international
prices. Chicken importers must pay duties as dictated by the General Agreement
on Trade and Tariffs ("GATT"). These
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<PAGE>
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 at
a rate of 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 of America. 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 both 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 once a week 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 7% below its budgeted
prices as of June 1999. Commodity prices for nine months ended June 30, 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 all 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
growth 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.
-28-
<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 is currently being appealed by the
plaintiff. The Court appointed an independent impartial expert to determine the
proper value of the collateral presented by Pipasa, which resulted in a
favorable opinion to Pipasa.
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. Directly
related with this lawsuit, the plaintiff also filed lawsuits in Miami-Dade,
Florida and Northern District California Civil Courts to seek relief of the
alleged breach of contract. At the present time, neither the Company nor Pipasa
can evaluate the potential impact of this lawsuit on the financial statements of
the Company and, due to the preliminary stage of the lawsuits, Pipasa is in the
process of determining the defense strategy, and intends to continue its
vigorous defense. Rica Foods is not a party in these proceedings.
No legal proceedings of a material nature, other than the matter in the
preceding paragraph to which the Company or its subsidiaries is a party, were
pending during the nine months ended June 30, 1999 nor are any pending as of the
date of this filing. In addition, the Company knows of no legal proceedings of a
material nature pending or threatened nor have any judgments been entered
against any director or 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 PROCEEDS:
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
-29-
<PAGE>
fractional share held by them based on the mean of the bid and ask prices on the
effective date of the Split.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On June 18, 1999, the Company held its Annual Meeting of Shareholders, at the
Sheraton Biscayne Bay Hotel, 495 Brickell Avenue, Miami, Florida, for the
following purposes: a) To elect seven members of the Company's Board of
Directors to hold office until the Company's 2000 Annual Meeting of Shareholders
or until their successors are duly elected and qualified; b) To consider and
vote upon a proposal to ratify the selection of Arthur Andersen LLP as the
Company's independent auditors for the fiscal year ended September 30, 1998; and
c) To transact such other business as may properly come before the Annual
Meeting or any adjournments or postponements thereof.
All matters submitted were approved and the final tabulation of votes was: a)
For the election of the seven current members of the Board, 6,867,764 shares
voted for all seven members of the Board, 404 votes against, no votes abstained;
b) For the ratification of Arthur Andersen LLP as the Company's independent
auditors for the fiscal year ended September 30, 1998, 6,868,062 voted for, 102
votes against, and 4 votes abstained; c) As other business properly presented
before the Annual Meeting was presented no sole item, the proposal of
ratification of Arthur Andersen LLP as the Company's independent auditors for
the fiscal year ended September 30, 1999, which proposal was approved and voted
by the proxies as follows: For the ratification of Arthur Andersen LLP as the
Company's independent auditors for the fiscal year ended September 30, 1999:
6,868,062 votes for, 102 votes against and 4,000 votes abstained.
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.
-30-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS:
(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.
-31-
<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: August 16, 1999 -------------------------------------
- ----- Calixto Chaves
Chief Executive Officer
Dated: August 16, 1999 -------------------------------------
- ----- Randall Piedra
Chief Financial Officer
-32-
<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 JUNE 30, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,765,705
<SECURITIES> 32,816
<RECEIVABLES> 9,470,657
<ALLOWANCES> 796,072
<INVENTORY> 12,848,630
<CURRENT-ASSETS> 27,455,650
<PP&E> 40,018,346
<DEPRECIATION> 10,127,045
<TOTAL-ASSETS> 65,280,203
<CURRENT-LIABILITIES> 21,244,063
<BONDS> 0
0
5,149,125
<COMMON> 7,486
<OTHER-SE> 7,422,696
<TOTAL-LIABILITY-AND-EQUITY> 65,280,203
<SALES> 89,292,662
<TOTAL-REVENUES> 89,292,662
<CGS> 58,045,035
<TOTAL-COSTS> 58,045,035
<OTHER-EXPENSES> 21,445,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,589,061
<INCOME-PRETAX> 7,040,175
<INCOME-TAX> 998,523
<INCOME-CONTINUING> 2,613,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,613,450
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.33
</TABLE>
