<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, 2000
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
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(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 August 7, 2000 was 12,848,721 shares.
1
<PAGE>
RICA FOODS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Balance Sheets
as of June 30, 2000 (Unaudited) and September 30, 1999 ........ 3
Consolidated Condensed Statements of Operations for the
three and nine months ended June 30, 2000 and 1999
(Unaudited)......................................................... 4
Consolidated Condensed Statements of Cash
Flows for the nine months ended June 30, 2000 and 1999
(Unaudited)......................................................... 5
Notes to Unaudited Consolidated Condensed
Financial Statements.............................................. 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.......... 21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 22
ITEM 2. Changes in Securities and use of Proceeds.......................... 23
ITEM 6. Exhibits and Reports............................................... 23
2
<PAGE>
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
June 30, September 30,
2000 1999
----------- ------------------
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $2,456,930 $3,913,168
Short-term investments 761,890 32,747
Notes and accounts receivable, net 11,701,507 9,603,282
Due from related parties 3,035,368 2,954,579
Inventories, net 14,883,011 13,896,517
Prepaid expenses 1,096,328 366,221
----------- ----------
Total current assets 33,935,034 30,766,514
----------- ----------
Property, plant and equipment, net 42,977,875 31,923,486
Long-term notes receivable-trade 160,880 114,346
Long-term investment 3,995,161 4,260,663
Other assets 3,401,116 1,875,888
Cost in excess of net assets
of acquired business 3,971,541 1,382,226
----------- ----------
Total assets $ 88,441,607 $ 70,323,123
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 15,420,092 $12,084,992
Accrued expenses 3,625,813 3,604,397
Notes payable 11,487,739 7,582,890
Current installments of long-term debt 5,846,409 1,182,184
Due to stockholders 74,433 75,108
----------- ----------
Total current liabilities 36,454,486 24,529,571
----------- ----------
Long-term debt, net of current portion 20,342,926 21,443,589
Due to stockholders 16,667 16,715
Deferred income tax liability 2,994,426 1,764,735
----------- ----------
Total liabilities 59,808,505 47,754,610
----------- ----------
Minority interest 1,336,445 9,468,206
Stockholders' equity:
Common stock 12,849 7,486
Preferred stock 2,216,072 2,216,072
Additional paid-in capital 25,731,693 12,137,326
Cumulative translation adjustment (8,171,093) (6,828,500)
Retained earnings 8,877,905 6,481,305
----------- ----------
28,667,426 14,013,689
----------- ----------
Less:
Due from stockholders (1,102,375) (644,988)
Treasury stock, at cost (268,394) (268,394)
----------- ----------
Total stockholders' equity 27,296,657 13,100,307
----------- ----------
Total liabilities and stockholders'
equity $ 88,441,607 $ 70,323,123
=========== ==========
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
3
<PAGE>
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
Unaudited
---------
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Net sales $ 29,755,427 $27,732,390 $ 93,181,924 $ 89,292,662
Cost of sales 21,048,137 18,674,392 62,602,152 58,045,035
------------ ----------- ------------ ------------
Gross profit 8,707,290 9,057,998 30,579,772 31,247,627
------------ ----------- ------------ ------------
Operating expenses
Selling 4,718,249 4,299,455 14,013,274 12,514,607
General and
administrative 3,404,467 2,763,361 9,996,470 8,249,520
Amortization of cost
in excess of net
assets of acquired
businesses 266,147 101,137 687,680 297,804
------------ ----------- ------------ ------------
Total operating expenses 8,388,863 7,163,953 24,697,424 21,061,931
------------ ----------- ------------ ------------
Income from operations 318,427 1,894,045 5,882,348 10,185,696
Other expenses (income)
Interest expense 1,031,611 831,119 2,928,950 2,589,061
Interest income (575,509) (203,339) (922,008) (573,831)
Exchange losses 388,092 431,251 1,083,167 1,397,793
Miscellaneous-net (134,728) (149,645) (536,010) (267,502)
------------ ----------- ------------ ------------
Other expenses, net 709,466 909,386 2,554,099 3,145,521
Income (loss) before income taxes
and minority interest (391,039) 984,659 3,328,249 7,040,175
Provision (benefit) for income
taxes (143,594) 196,950 262,574 998,523
------------ ----------- ------------ ------------
Income (loss) before minority
interest (247,445) 787,709 3,065,675 6,041,652
------------ ----------- ------------ ------------
Minority interest 45,337 551,449 574,770 3,151,757
Net income (loss) (292,782) 236,260 2,490,905 2,889,895
------------ ----------- ------------ ------------
Preferred stock dividend 17,426 103,195 112,170 276,445
Net income (loss) applicable to
common stockholders $ (310,208) $ 133,065 $ 2,378,735 $ 2,613,450
============= ========= =========== ===========
Earnings(loss)per share:
Basic $ (0.02) $ 0.02 $ 0.21 $ 0.37
============= ========= =========== ===========
Diluted $ (0.02) $ 0.02 $ 0.21 $ 0.36
============= ========= =========== ===========
Weighted average number of shares
outstanding:
Basic 12,800,406 7,122,398 11,562,667 7,107,476
============= ========= =========== ===========
Diluted 12,800,406 7,312,732 11,567,038 7,249,097
============= ========= =========== ===========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
4
<PAGE>
RICA FOODS, INC. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For the nine months ended June 30, 2000 and 1999
Unaudited
---------
2000 1999
---- ----
Cash flows from operating activities:
Net income $2,490,905 $ 2,889,895
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,733,225 2,568,308
Production poultry 1,712,711 1,523,036
Amortization of cost in excess
of net assets of acquired
businesses 687,680 297,804
Stock options and grants issued to employees 130,735 -
Allowance for inventory obsolescence 27,138 21,787
Amortization of software development costs 137,117 110,205
Allowance for doubtful accounts 266,367 522,000
Gain on sale of productive assets (113,494) (121,332)
Deferred income tax benefit (237,143) (157,254)
Minority interest 574,790 3,151,757
Changes in operating assets and liabilities:
Notes and accounts receivable (2,420,831) (404,441)
Due from related parties (1,459,369) (1,435,791)
Inventories (2,673,296) (1,466,076)
Prepaid expenses (730,107) (526,885)
Long-term notes receivable-trade 53,299 (123,070)
Accounts payable 3,400,501 1,419,468
Accrued expenses 4,767 748,495
--------- ---------
Cash provided by operating activities 4,584,995 9,017,906
--------- ---------
Cash flows from investing activities:
Short-term investments (729,143) 69,079
Additions to property, plant and equipment (12,304,613) (5,891,103)
Proceeds from sale of productive assets 1,039,911 429,427
Increase in other assets (723,992) (219,620)
--------- ---------
Cash used for investing activities (12,717,837) (5,612,217)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in notes payable 3,904,849 (1,291,566)
Warrants exercised - 150,000
Preferred stock cash dividends (202,719) (276,445)
Long-term financing:
New loans 4,367,840 449,887
Payments (804,986) (2,266,145)
--------- ---------
Due from stockholders (492,232) (529,826)
--------- ---------
Cash provided by (used for)
financing activities 6,772,752 (3,764,095)
(Continued on next page)
5
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RICA FOODS, INC. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
For the nine months ended June 30, 2000 and 1999
Unaudited
---------
(Continued)
2000 1999
---- ----
Effect of exchange rate changes on cash and
cash equivalents (96,148) 151,094
--------- ---------
Decrease in cash and cash equivalents (1,456,238) (207,312)
Cash and cash equivalents at beginning
of period 3,913,168 3,973,017
--------- ---------
Cash and cash equivalents at end of period $ 2,456,930 $ 3,765,705
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,908,045 $ 2,011,764
========= =========
Income taxes $ 414,259 $ 321,864
========= =========
Supplemental schedule of non-cash financing
activities:
Acquisition of treasury stock through
financial agreement $ - $826,100
========= =========
Pipasa's preferred stock repurchased
in exchange for outstanding receivables $ 2,143,626 $ -
========= =========
As de Oros' preferred stock repurchased
in exchange for outstanding receivables $ 1,983,327 $ -
========= =========
Common stock dividends paid as preferred shares:
From Pipasa $ 2,143,626 $ 826,100
========= =========
From As de Oros $ 1,983,327 $ -
========= =========
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 the preparation of the financial statements and
related information of Rica Foods, Inc. and its 100% owned subsidiaries:
Corporacion Pipasa, S.A. and Subsidiaries ("Pipasa") and Corporacion As de Oros,
S.A. and Subsidiaries ("As de Oros") (collectively the "Company") 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
("United States" or "U.S."). The accompanying interim financial statements have
been prepared in accordance with the instructions to the Quarterly Report on
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, 1999, which are
included in the Annual Report on 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 three and nine months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
September 30, 2000. 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 financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1999.
NOTE 2 - RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the current
period presentation.
NOTE 3 - ACQUISITIONS
On November 22, 1999 and December 7, 1999, the Company acquired the remaining
43.62% and 40.44% minority interest of As de Oros and Pipasa, respectively, in
exchange for the issuance of 1,670,921 and 3,683,595 restricted shares of common
stock of the Company. The Company designated November 30, 1999 as the date of
acquisition for accounting purposes and as such, has consolidated 100% of
earnings for the month ended December 31, 1999 and the six months ended June 30,
2000.
7
<PAGE>
RICA FOODS, INC. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
The acquisition of Pipasa was accounted for at the value of the minority
interest as of the acquisition date, on the basis that the owner of the minority
interest of Pipasa is a major shareholder of the Company. The acquisition of As
de Oros was accounted for under the purchase method of accounting. The excess of
the purchase price of the minority interest of As de Oros over the fair market
value of net assets acquired was approximately $3.3 million, which is being
amortized over 5 years. The financial statements include results of operations
for Pipasa and As de Oros for the three and nine months ended June 30, 2000.
During October 1999, Pipasa merged with "Karpatos, S.A." ("Karpatos"), a Costa
Rican corporation, which is in the business of converting waste material from
the chicken farms into fertilizers. The transaction was accounted for under the
purchase method of accounting. The Company recorded assets with a fair market
value of approximately $700,000 and assumed liabilities for an equivalent
amount. The Company did not issue any shares of Company stock or cash as part of
this transaction. The acquisition of Karpatos is not material to these financial
statements.
During April 2000, the Company announced its intent to acquire 75% of the total
outstanding stock of a Nicaraguan poultry and animal feed concentrate company,
"INDAVINSA, S.A.". The Company will be carrying out a due diligence process
expected to be concluded in the near future, after which, the terms and
conditions of any potential acquisition will be determined.
In addition, the Company has also communicated its interest in entering the
Brazilian poultry market by means of an acquisition or a joint partnership. The
Company will continue in the future to seek new opportunities to acquire other
companies in other countries as a growth strategy.
During July 2000, the Company announced its intent to acquire an interest in
Poultryfirst.com, a Delaware corporation ("Poultryfirst.com"). Poultryfirst.com
is a virtual business-to-business poultry market place which provides leading
business tools and market data, using formats of auctions for fresh products and
catalogs for value-added products for the sale and commercialization of poultry
and poultry by-products over the Internet. Poultryfirst.com is owned by Jose
Pablo Chaves, who is the son of Calixto Chaves, a major stockholder and Chief
Executive Officer of the Company. Jose Chaves is also a current Director of the
Company and serves as Poultryfirst.com's Chief Operating Officer. The Company is
currently evaluating the terms and conditions of any potential acquisition.
8
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RICA FOODS, INC. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 4 - INVENTORIES AND 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. Production poultry or amortization of the hens is determined based
on the estimated poultry reproductive period.
Inventories consist of the following:
June 30, 2000 September 30, 1999
------------- ------------------
Finished products $3,449,386 $3,029,269
Poultry 3,613,155 3,035,678
Production poultry 3,528,044 3,329,784
Materials and supplies 2,227,091 2,165,074
Raw materials 2,317,184 1,757,125
In-transit 881,830 1,469,056
---------- ----------
16,016,690 14,785,986
---------- ----------
Less:
Production poultry (1,057,132) (836,849)
Allowance for obsolescence (76,547) (52,620)
---------- ----------
Inventories, net $14,883,011 $ 13,896,517
========== ==========
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
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 (loss)
and its components in financial statements. The components of the Company's
comprehensive income (loss) are as follows:
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net income (loss) $ (292,782) $ 236,260 $ 2,490,905 $ 2,889,895
Foreign currency
translation adjustment (300,094) (495,376) (1,342,593) (1,117,322)
---------- --------- ---------- ---------
Total comprehensive income
(loss) $ (592,876) $ (259,116) $ 1,148,312 $ 1,772,573
========== ========= ========== ==========
9
<PAGE>
RICA FOODS, INC. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 6 - EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are 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 (loss) per share. The minority interest in the income of subsidiaries
and dividends on preferred stock have been excluded from income available to
common stockholders.
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 (loss) per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) applicable
to common stockholders $ (310,208) $ 133,065 $ 2,378,735 $ 2,613,450
=========== ========= =========== ===========
Denominator:
Denominator for basic income
per share 12,800,406 7,122,398 11,562,667 7,107,476
Effect of dilutive securities:
Options to purchase common - 190,334 4,371 141,621
----------- --------- ---------- ----------
stock Denominator for
diluted earnings per share 12,800,406 7,312,732 11,567,038 7,249,097
=========== ========= =========== ===========
Earnings (loss)per share from
continuing operations:
Basic $ (0.02) $ 0.02 $ 0.21 $ 0.37
=========== ========= =========== ===========
Diluted $ (0.02) $ 0.02 $ 0.21 $ 0.36
=========== ========= =========== ===========
</TABLE>
The Company did not have any anti-dilutive securities outstanding as of June 30,
2000.
10
<PAGE>
RICA FOODS, INC. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 7 - STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan"), under which certain directors,
officers, employees and entities that provide services to the Company and its
Subsidiaries are eligible participants. In October 1999, the Company granted
7,400 shares of the Company's common stock, which vested upon issuance, to
seventy-four (74) officers and employees. Officers and employees are restricted
from selling such shares until one year from the date of exercise. In addition,
the Company issued 7,400 options to purchase shares of common stock of the
Company on the same date to those same officers and employees, at an exercise
price of $6.00 per share with a vesting period of one year, after which, such
officers and employees are restricted from selling such shares of common stock
for one additional year. Market price per share on the date of the grant and
issuance of the stock options was $11.20.
The Company applied Accounting Principles Board ("APB") Opinion No. 25 in
accounting for its stock options, and accordingly, compensation costs for the
shares granted and stock options issued have been expensed during the nine
months ended June 30, 2000.
NOTE 8 - SEGMENT INFORMATION (In millions):
Three months ended Nine months ended
------------------ -----------------
June 30, June 30, June 30, June 30,
------- ------- ------- -------
2000 1999 2000 1999
------- ------- ------- -------
Broiler chicken $ 17.42 $17.02 $55.75 $54.45
Animal feed 5.79 4.98 16.64 16.12
By products 2.86 2.30 8.82 7.22
Quick Service 1.59 2.02 6.24 7.16
Exports 1.06 0.82 3.21 2.57
Other 1.03 0.58 2.52 1.77
------- ------- ------- --------
Total Net Sales $ 29.75 $27.72 $93.18 $89.29
Broiler chicken $ 3.10 $ 3.41 $11.85 $13.19
Animal feed 0.50 0.47 1.86 2.27
By products 0.39 0.47 2.27 1.59
Quick Service (0.14) 0.08 0.11 0.62
Exports 0.04 0.20 0.17 0.70
Other 0.10 0.13 0.30 0.36
------- ------- ------- --------
Total gross profit
less selling
expense 3.99 4.76 16.56 18.73
------- ------- ------- --------
Other operating
expenses 3.67 2.86 10.68 8.55
Other expenses, net 0.71 0.76 2.55 2.76
------- ------- ------- --------
Income before
provision for
income taxes $(0.39) $ 1.14 $ 3.33 $ 7.42
======= ======= ======= =======
11
<PAGE>
RICA FOODS, INC. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
The Company measures segment profit as gross profit less selling expenses. The
Company operates in the production and marketing of poultry products, animal
feed and quick service chicken restaurants. The Company's Subsidiaries
distribute these products primarily throughout Costa Rica as well as in El
Salvador and Honduras, through subsidiaries whose activities are included in the
"Exports" segment. The Company also exports to other countries in Central
America and the Caribbean. The basis for determining the Company's operating
segments is the manner in which Management uses financial information in its
operations. Management operates and organizes the financial information
according to the types of products offered to its customers.
NOTE 9 - COMMON STOCK DIVIDENDS
On December 23, 1999, the Board of Directors of Pipasa declared a dividend of
637,000 series "TCA" shares of preferred stock of Pipasa, valued at $2,143,626,
to common stockholders of record as of September 30, 1999. Pipasa distributed
379,398 shares to the Company and 257,602 to Inversiones La Ribera, S.A. in
accordance with the Company's common stock ownership as of September 30, 1999.
The dividends distributed corresponding to earnings pertaining to the year ended
September 30, 1999.
Immediately after the issuance of the preferred stock, Pipasa repurchased such
stock for an amount equal to the value of such repurchased stock, i.e.,
$2,143,626, from the stockholders. The stockholders then used the proceeds of
the repurchase to cancel certain outstanding debts with Pipasa. Accordingly,
outstanding debts from Inversiones La Ribera, S.A. and the Company amounting to
$1,276,743 and $866,882, respectively, were cancelled.
On December 23, 1999, the Board of Directors of As de Oros declared a dividend
of 590,000 series "TCA" shares of preferred stock of As de Oros valued at
$1,983,327 to common stockholders of record as of September 30, 1999. As de Oros
distributed 332,642 shares to the Company and 257,358 shares to Comercial Angui,
S.A. in accordance with the Company's common stock ownership as of September 30,
1999. The dividends distributed correspond to earnings pertaining to fiscal
period 1999.
Immediately after the issuance of such preferred stock, As de Oros repurchased a
portion of the preferred stock issuance for an amount equal to the value of such
repurchased stock, i.e., $881,273 from the stockholders. The stockholders used
of the proceeds of the purchase to cancel outstanding debts with As de Oros. As
de Oros cancelled outstanding debts from Inversiones La Ribera, S.A. and the
Company amounting to $537,896 and $343,377, respectively.
12
<PAGE>
RICA FOODS, INC. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
NOTE 10 - LITIGATION
Pipasa is a defendant in a lawsuit brought in Costa Rica in which the plaintiff
seeks $3.6 million and Pipasa was served with prejudgment liens for $1.5
million. These liens were placed on some of Pipasa's cash accounts, which were
substituted for land owned by Pipasa with the approval of a Costa Rican court.
Such approval was subsequently appealed by the plaintiff, however, the Superior
Court ratified such substitution of collateral on November 11, 1999. As a
result, the prejudgment liens on cash accounts have been released and Pipasa has
received the funds originally attached. The same Plaintiff, relying on the same
cause(s) of action, has sued Pipasa in the United States of America in the State
of California and the State of Florida, respectively. Pipasa has moved to
dismiss the lawsuit in the State of Florida by filing a motion for lack of
personal jurisdiction in the State of Florida.
Subsequently, the California lawsuit has been suspended until the Florida court
rules on such motion. The plaintiff has filed in the Florida case requests for
the production of documents, for admissions and interrogatories, which have been
scheduled for August 21, 2000. While Pipasa still has time to answer the
complaints, the basis of the claim or the relief sought cannot be ascertained.
Pipasa believes the lawsuits are 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 other legal proceedings of a material nature exist to which the Company or
the Subsidiaries are a party, or were pending during the nine months ended June
30, 2000. The Company knows of no legal proceedings of a material nature pending
or threatened or judgments entered against any director or officer of the
Company in his capacity as such.
The 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.
13
<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 100% owned
subsidiaries, Corporacion Pipasa, S.A. and Subsidiaries ("Pipasa") and
Corporacion As de Oros, S.A. and Subsidiaries ("As de Oros"). The Company,
through 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 sale
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 a market
share of approximately 50% of the chicken meat market in Costa Rica. As de Oros,
founded in 1954, is Costa Rica's second largest poultry producer with a market
share of approximately 20% of the country's chicken meat market and is one of
the leaders in the Costa Rican animal feed market with a 27% market share. 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. As de Oros also owns and operates a
chain of 36 quick service restaurants in Costa Rica called "Restaurantes As de
Oros."
On November 22, 1999 and December 7, 1999, the Company acquired the remaining
43.62% and 40.44% minority interest of As de Oros and Pipasa, respectively, in
exchange for the issuance of 1,670,921 and 3,683,595 restricted shares of common
stock of the Company. The Company designated November 30, 1999 as the date of
acquisition for accounting purposes and as such, has consolidated 100% of
earnings for the month ended December 31, 1999 and the six months ended June 30,
2000. The acquisition of Pipasa was accounted for at the value of the minority
interest as of the acquisition date, on the basis that the owner of the minority
interest of Pipasa is a major shareholder of the Company. The acquisition of As
de Oros was accounted for under the purchase method of accounting.
Although Management believes that the disclosures contained herein are adequate
to make the information presented not misleading, these consolidated 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, 1999. Acquisitions
During April 2000, the Company has announced its intent to acquire 75% of the
outstanding stock of a Nicaraguan poultry and animal feed concentrate company,
"INDAVINSA, S.A.". The Company will be carrying out a due diligence process
expected to be concluded by next quarter, after which terms and conditions of
the acquisition will be determined.
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In addition, the Company has also communicated its interest in entering the
Brazilian poultry market by means of an acquisition or a joint partnership. The
Company will continue in the future to seek new opportunities to acquire other
companies in other countries as a growth strategy.
During July 2000, the Company announced its intent to acquire an interest in
Poultryfirst.com, a Delaware corporation ("Poultryfirst.com"). Poultryfirst.com
is a virtual business-to-business poultry market place which provides leading
business tools and market data, using formats of auctions for fresh products and
catalogs for value-added products for the sale and commercialization of poultry
and poultry by-products over the Internet. Poultryfirst.com is owned by Jose
Pablo Chaves who is the son of Calixto Chaves, a major stockholder and Chief
Executive Officer of the Company. Jose Chaves is also a current Director of the
Company and serves as Chief Operating Officer of Poultryfirst.com. The Company
is currently evaluating the terms and conditions of any potential acquisition.
Seasonality
The Company's subsidiaries have historically experienced and have come to expect
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. This variation is primarily
the result of holiday celebrations during this time of year, in which Costa
Ricans prepare traditional meals, which include dishes with chicken as the main
ingredient. The Company expects this seasonal trend to continue for the
foreseeable future.
Year 2000 Update
As described in the Annual Report on Form 10-K for the year ended September 30,
1999, the Company had developed plans to address the possible exposures related
to the impact on its computer systems of the Year 2000. Since entering the year
2000, the Company has not experienced any major disruptions to its business nor
is it aware of any significant Year 2000 related disruptions impacting its
customers and suppliers. Furthermore, the Company did not experience any
material impact on inventories as of June 30, 2000. The Company will continue to
monitor its critical systems over the next several months but does not
anticipate any significant impact due to Year 2000 exposures from its internal
systems as well as from the activities of its suppliers and customers. Costs
incurred to achieve Year 2000 readiness, which include contractor costs to
modify existing systems and costs of internal resources dedicated to achieving
Year 2000 compliance, were charged to expense as incurred. The Company has not
experienced any material change in total costs related to Year 2000 remediation
efforts since entering the year 2000. Environmental Compliance
At the present time, 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, the Company could become subject to material costs to
comply with new environmental laws or environmental regulations in jurisdictions
in which it conducts business. At the present time, the Company cannot assess
the potential impact of any such potential environmental regulations.
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During the nine months ended June 30, 2000, the Company has invested
approximately $1.65 million to remodel and expand its recycling and waste
treatment facilities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999.
The Company's operations resulted in $(0.02) diluted loss per share for the nine
months ended June 30, 2000, compared to $0.02 diluted earnings per share during
the comparative period for fiscal year 1999. Net sales generated by the
Company's operations for the three months ended June 30, 2000 increased by 7%,
compared to the three months ended June 30, 1999.
Broiler chicken: Sales of broiler chicken increased by 2% for the three months
ended June 30, 2000, compared to the three months ended June 30, 1999. This
increase is offset by a volume decrease of 7%, which is primarily due to (i) a
decrease in the consumption of chicken by the general consumer whose recent
income has been affected by adverse economic factors in Costa Rica, and (ii)
stronger market competition during this past period. Segment profit, defined as
gross profit less selling expenses, did not have significant variations this
past period.
Animal Feed: Sales for commercial animal feed for the three months ended June
30, 2000 increased by 16% compared to the three months ended June 30, 1999. The
increase is mainly due to an increase in tonnage of 20% as a result of new
distribution outlets and increased sales of pet food brands, offset by the
Company's policy not to increase sales prices for some products in this segment,
due to strong market competition. Segment profit increased by 6% mainly due to a
decrease in operating selling expense offset by an increase in imported raw
material.
By-products: Total sales for this segment for the three months ended June 30,
2000 increased by 24% compared to the three months ended June 30, 1999. This
increase is mainly due to a 20% increase in tonnage, in addition to sales to new
clients. Segment profit decreased by 17%, primarily due to an increase in new
vehicle leasing costs.
Quick Service: The quick service segment sales decreased by 21% for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999. The
decrease in sales is a result of the temporary closing of some restaurants due
to remodeling and also the result of strong market competition in this segment.
This resulted in a decrease in the segment profit of $220,000.
Exports: The Company's exports for the three months ended June 30, 2000
increased by 29% compared to the three months ended June 30, 1999. This increase
was primarily due to an increase of 14% in tonnage, primarily the result of
increased sales by Pipasa's subsidiary in Honduras and increased exports of
recycling material. Segment profit decreased $160,000 primarily due to broad
fluctuations with the less profitable products in the product mix.
Other: Sales of other for the three months ended June 30, 2000 increased by 78%
compared to the three months ended June 30, 1999. This increase is mainly due to
sales of recycling material, which the Company has begun to market during this
fiscal year. Segment profit decreased $30,000 primarily due to the result of
variations in the sales mix. Sales of other products represent 3% and 2% of
total sales for the three months ended June 30, 2000 and 1999, respectively.
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Operating expenses
Operating expenses for the three months ended June 30, 2000 increased by 17%
when compared to the three months ended June 30, 1999. The increase is primarily
attributable to increases in payroll expenses to prepare the executive
organizational structure of the Company for further international expansion in
addition to a general increase in employee payroll in accordance with the
Company's policy. There are also increases in vehicle fleet leasing costs
associated with the leasing of new vehicles and increases in the amortization of
cost in excess of net assets of acquired business associated with the
acquisition of the minority interest of As de Oros. As a percentage of sales,
operating expenses were 28% and 26% of sales for the three months ended June 30,
2000 and 1999, respectively.
Other expenses
Other expenses for the three months ended June 30, 2000 decreased by 22% when
compared to the three months ended June 30, 1999. The decrease is primarily the
result of an increase in interest income and dividends received from investments
made in other companies, offset by an increase in interest expense due to an
increase in debts. As a percentage of sales, other expenses were 2% and 3% for
the three months ended June 30, 2000 and 1999, respectively.
Provision for income taxes
Provision for income taxes for the three months ended June 30, 2000 decreased
approximately $340,000 when compared to the three months ended June 30, 1999.
The decrease is mainly due to lower taxable income.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 1999.
The Company's operations resulted in $0.21 diluted earnings per share for the
nine months ended June 30, 2000, compared to $0.36 during the comparative period
for 1999. Net sales generated by the Company's operations for the nine months
ended June 30, 2000 increased by 4% when compared to the nine months ended June
30, 1999.
Broiler chicken: Sales of broiler chicken for the nine months ended June 30,
2000 increased by 2%. This increase is primarily the result of a 6% increase in
tonnage offset by a stronger market competition in this segment and a decrease
in the consumption of chicken by the general consumer whose income has been
affected by adverse economic factors in Costa Rica. Segment profit decreased by
10% primarily due to (i) increased cost of raw materials, and (ii) broad
fluctuations with the less profitable products in the sales mix.
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Animal Feed: Sales for commercial animal feed for the nine months ended June 30,
2000 increased by 3% when compared to the nine months ended June 30, 1999. The
increase is mainly due to an increase in tonnage of 26% as a result of new
distribution outlets and increased sales of pet food products, offset by the
Company's policy not to increase sales prices for some products in this segment,
due to strong market competition. Due to these factors and increased costs of
raw materials, segment profit decreased by 18% during this period.
By-products: Total sales for this segment for the nine months ended June 30,
2000 increased by 22% compared to the nine months ended June 30, 1999, mainly
due to a 15% increase in tonnage together with increased sales prices and sales
to new clients. This resulted in an increase of $680,000 in the segment profit.
Quick Service: Sales for the quick service segment decreased by 13% for the nine
months ended June 30, 2000 when compared to the nine months ended June 30, 1999.
The decrease in sales is a result of strong market competition in this segment
together with the temporary closing of some restaurants due to remodeling. For
the nine months under analysis, these factors led to a decrease of $510,000 in
the segment profit during this period.
Exports: The Company's exports for the nine months ended June 30, 2000 increased
by 25% compared to the nine months ended June 30, 1999. This sales increase was
primarily due to an increase of 36% in sales volume, primarily the result of
increased sales at Pipasa's subsidiary in Honduras and an overall increase in
sales of pet food products, broiler chicken and recycling material. Segment
profit decreased $530,000 primarily due to broad fluctuations with the less
profitable products in the product mix.
Other: Sales of other for the nine months ended June 30, 2000 increased by 42%
compared to the nine months ended June 30, 1999. Sales for the nine months under
analysis include sales of recycling material, which the Company has begun to
market during this fiscal year. Segment profit for this segment decreased by
14%, mainly due to variations in the sales mix to less profitable products.
Sales of other products represent 3% and 2% of total sales for the nine months
ended June 30, 2000 and 1999.
Operating expenses
Operating expenses for the nine months ended June 30, 2000 increased by 17% when
compared to the nine months ended June 30, 1999. The increase is primarily
attributable to payroll expenses to prepare the executive organizational
structure of the Company for further international expansion, in addition to a
general increase in employee payroll in accordance with the Company's policy.
There are also increases in vehicle fleet leasing costs, the result of the
leasing of new vehicles, and in the amortization of cost in excess of net assets
of acquired businesses, due to the minority interest acquisition of As de Oros.
As a percentage of sales, operating expenses were 26% and 24% of sales for the
nine months ended June 30, 2000 and 1999, respectively.
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Other expenses
Other expenses for the nine months ended June 30, 2000 decreased by 19% when
compared to the nine months ended June 30, 1999. The decrease is primarily due
higher interest income and dividends received from investments in other
companies. In addition, increases in exchange rates were lower for fiscal 2000,
resulting in a decrease in exchange losses. This is offset by higher interest
expenses, due to an increase in debts. Other expenses were 3% and 4% of sales
for the nine months ended June 30, 2000 and 1999, respectively.
Provision for income taxes
Provision for income taxes for the nine months ended June 30, 2000 decreased
approximately $736,000 when compared to the nine months ended June 30, 1999. The
decrease is mainly due to lower taxable income.
FINANCIAL CONDITION
Operating activities:
As of June 30, 2000, the Company had $2.46 million in cash and cash equivalents.
The working capital deficit was $2.52 million as compared to a positive working
capital of $6.24 million at the end of fiscal year 1999. This decrease is
primarily due to an increase in short-term liabilities, which were a result of a
reclassification to current liabilities of the first amortization of the private
placement debt. The current ratios were 0.93 and 1.25 as of June 30, 2000 and
September 30, 1999, respectively.
Cash provided by operating activities was $4.58 million and $9.01 million during
the nine months ended June 30, 2000 and 1999, respectively. Cash flows from
operations decreased for the period under analysis in relation to its comparable
period in 1999 primarily due to an increase in inventories and in account
receivables.
Investing Activities:
Funds used for investing activities during the nine months ended June 30, 2000
were $12.72 million compared to $5.61 million during the same period of fiscal
1999. Investing cash flows reflect capital expenditures, which are primarily
related to purchases and improvements in production equipment and facilities.
The Company is investing in the expansion of the by-products processing plant to
increase production, and an animal feed plant to increase production for
internal consumption as a result of increase in projected sales. Investment in
the animal feed plants will position the Company as a leader in "pellet" animal
feed production in Central America. In addition, the Company is remodeling the
waste and recycling facilities and is also installing a communication network
between different locations of the Company's facilities. The Company anticipates
that it will spend approximately $4.5 million for capital expenditures during
the rest of fiscal year 2000 and expects to finance such expenditures mostly
with long-term financing.
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Financing Activities:
As of June 30, 2000, the Company had line of credit agreements with banks for a
maximum aggregate amount of $29.95 million, of which $19.46 million have been
used. Agreements may be renewed annually and bear interest at annual rates
ranging from 8.00% to 11.98%. Property and other collateral secure those
agreements.
During the nine months ended June 30, 2000, net cash provided by financing
activities was $6.78 million compared to $3.76 million required during the same
period of 1999. Cash provided by short-term debt funds was used as a bridge loan
to temporarily finance investment in property, plant and equipment. The Company
is in the process of completing long-term loans for these investments.
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
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.
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This management discussion and analysis of the financial condition and results
of operations of the Company 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 requirement; shifts in customer
demands; 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
Exchange Rate Risk:
The Company makes U.S. dollar payments for its bank facilities and imported raw
materials such as corn, soybean meal and reproduction birds. Given its U.S.
dollar exposure, the Company actively manages its exchange rate risk. The
Company uses a financial model to determine the best strategy to mitigate risks
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.
During the nine months ended June 30, 2000, the Company increased its sales
prices an average of 10.23%. The National devaluation rate in Costa Rica for
that same period was 8.85%. The Company plans to make additional sales price
increases during the rest of fiscal year 2000.
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Commodity Risk Management:
The Company imports all of its corn and soybean meal, the primary ingredients in
chicken feed, from the United States of America. The Company has been actively
hedging its exposure to corn since 1991 and its strategy is to hedge against
price increases in corn and soybean meal. The Company is not involved in
speculative trading. The average prices paid by the Company for corn and soybean
meal were approximately 1.7% below and 11.5% above its budgeted prices,
respectively, for the nine months ended June 30, 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
Pipasa is a defendant in a lawsuit brought in Costa Rica in which the plaintiff
seeks $3.6 million and Pipasa was served with prejudgment liens for $1.5
million. These liens were placed on some of Pipasa's cash accounts, which were
substituted for land owned by Pipasa with the approval of a Costa Rican court.
Such approval was subsequently appealed by the plaintiff, however, the Superior
Court ratified such substitution of collateral on November 11, 1999. As a
result, the prejudgment liens on cash accounts, have been released and Pipasa
has received the funds originally attached. The same Plaintiff, relying on the
same cause(s) of action, has sued Pipasa in the United States of America in the
State of California and the State of Florida, respectively. Pipasa has moved to
dismiss the lawsuit in the State of Florida by filing a motion for lack of
personal jurisdiction in the State of Florida. Subsequently, the California
lawsuit has been suspended until the Florida court rules on such motion. The
plaintiff has filed in the Florida case requests for the production of
documents, for admissions and interrogatories, which have been scheduled for
August 21, 2000. While Pipasa still has time to answer the complaints, the basis
of the claim or the relief sought cannot be ascertained. Pipasa believes the
lawsuits are 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 other legal proceedings of a material nature exist to which the Company or
the Subsidiaries are a party, or were pending during the nine months ended June
30, 2000. The Company knows of no legal proceedings of a material nature pending
or threatened or judgments entered against any director or officer of the
Company in his capacity as such.
The 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.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
On November 22, 1999, the Company concluded the acquisition for the purchase of
the remaining interest of As de Oros from Comercial Angui, S.A. (the "Final As
de Oros acquisition"). Pursuant to the Final As de Oros acquisition, the Company
issued a total of 1,670,921 shares of the Company's stock, for the remaining
43.62% of common stock ownership in As de Oros.
On December 7, 1999, the Company concluded the acquisition for the purchase of
the remaining interest of Pipasa from Inversiones La Ribera, S.A. (the "Final
Pipasa acquisition"). Pursuant to the Final Pipasa acquisition, the Company
issued 3,683,595 shares of the Company's stock, for the remaining 40.44% of
common stock ownership in Pipasa.
As of such dates, As de Oros and Pipasa are wholly owned subsidiaries of the
Company.
The Company filed timely reports of Form 8K and 8K/A for both acquisitions.
ITEM 6. EXHIBITS AND REPORTS:
(a) Exhibits: The following exhibits are filed with this report:
Exhibit No. Description
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27 Financial Data Schedule
(b) Current Report on Form 8-K: Two current Reports on form 8-K were
filed on February 2, 2000 and February 10, 2000, respectively,
and are hereby incorporated by reference.
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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.
Dated: August 21, 2000 /s/ Calixto Chaves
--------------------------------------
Calixto Chaves
Chief Executive Officer
Dated: August 21, 2000 /s/ Randall Piedra
--------------------------------------
Randall Piedra
Chief Financial Officer
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