SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 number: 0-18222
RICA FOODS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 87-0432572
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
240 Crandon Boulevard, Suite 115, Key Biscayne, Florida 33149
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (305) 365-8665
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of August 19, 2002, the number of shares issued and outstanding of the
Company's common stock, par value $0.001 per share was 12,864,321.
RICA FOODS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (Unaudited)
and September 30, 2001 ................................................. 3
Consolidated Statements of Operations for the three and nine-month
periods ended June 30, 2002 and 2001 (Unaudited) ....................... 4
Consolidated Statements of Cash Flows for the nine-month periods
ended June 30, 2002 and 2001 (Unaudited) ............................... 5
Notes to Unaudited Consolidated Financial Statements ...................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ................ 18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ......................................................... 19
ITEM 6. Exhibits and Reports on Form 8-K .......................................... 20
2
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 September 30,
------------- -------------
(Unaudited) 2001
----------- ----
Assets
------
Current assets:
Cash and cash equivalents $ 4,762,486 $ 4,920,870
Short-term investments 1,859,125 851,905
Notes and accounts receivable 17,245,302 12,277,131
Due from related parties 1,178,775 1,421,812
Inventories 14,623,297 12,833,325
Deferred income taxes 430,659 412,854
Prepaid expenses 824,518 852,185
------------- -------------
Total current assets 40,924,162 33,570,082
Property, plant and equipment 39,540,747 45,827,917
Long-term receivables-trade 339,098 595,596
Long-term investments 4,232,377 4,312,411
Other assets 6,164,821 4,606,546
Cost in excess of net assets of acquired business 2,186,090 2,186,090
------------- -------------
Total assets $ 93,387,295 $ 91,098,642
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 19,818,508 $ 14,444,895
Accrued expenses 3,891,103 3,917,787
Notes payable 16,842,278 18,194,649
Current portion of long-term debt 8,338,904 7,281,460
Due to stockholders - 74,634
------------- -------------
Total current liabilities 48,890,793 43,913,425
Long-term debt, net of current portion 16,842,695 21,054,044
Due to stockholders - 15,368
Deferred income tax liability 2,127,693 2,162,090
------------- -------------
Total liabilities 67,861,181 67,144,927
------------- -------------
Minority interest 1,336,445 1,336,445
Stockholders' equity:
Common stock 12,865 12,865
Preferred stock 2,216,072 2,216,072
Additional paid-in capital 25,800,940 25,800,940
Accumulated other comprehensive loss (11,397,066) (9,625,035)
Retained earnings 13,335,690 10,736,911
------------- -------------
29,968,501 29,141,753
Less:
Due from stockholders (5,495,438) (6,256,089)
Treasury stock, at cost (283,394) (268,394)
------------- -------------
Total stockholders' equity 24,189,669 22,617,270
------------- -------------
Total liabilities and stockholders' equity $ 93,387,295 $ 91,098,642
============= =============
The accompanying notes to the unaudited financial statements are an integral
part of these balance sheets.
3
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales $31,925,390 $31,003,403 $97,307,003 $95,624,791
Cost of sales 21,545,795 22,504,310 63,978,371 65,437,886
----------- ----------- ----------- -----------
Gross profit 10,379,595 8,499,093 33,328,632 30,186,905
----------- ----------- ----------- -----------
Operating expenses:
Selling 4,645,867 4,787,792 14,378,327 14,402,777
General and administrative 3,557,634 3,464,185 10,514,533 10,867,061
Amortization of cost in excess of net assets
of acquired business - 196,884 - 590,652
----------- ----------- ----------- -----------
Total operating expenses 8,203,501 8,448,861 24,892,860 25,860,490
----------- ----------- ----------- -----------
Income from operations 2,176,094 50,232 8,435,772 4,326,415
Other expenses (income):
Interest expense 1,152,874 1,122,938 3,579,125 3,524,977
Interest income (341,741) (304,911) (1,036,178) (851,684)
Foreign exchange loss, net 828,744 472,512 2,451,340 1,682,017
Miscellaneous, net 43,440 (556,156) (145,492) (601,214)
----------- ----------- ----------- -----------
Other expenses, net 1,683,317 734,383 4,848,795 3,754,096
----------- ----------- ----------- -----------
Income (loss) before income taxes and minority
interest 492,777 (684,151) 3,586,977 572,319
Provision (benefit) for income taxes (85,544) 107,929 (820,906) -
----------- ----------- ----------- -----------
Income before minority interest 407,233 (576,222) 2,766,071 572,319
Minority interest (18,931) (20,385) (57,388) (58,005)
----------- ----------- ----------- -----------
Net income (loss) 388,302 (596,607) 2,708,683 514,314
Preferred stock dividends (39,066) (36,499) (109,900) (115,915)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stockholders $ 349,236 $ (633,106) $ 2,598,783 $ 398,399
=========== =========== =========== ===========
Earnings per share $ 0.03 $ (0.05) $ 0.20 $ 0.03
=========== =========== =========== ===========
Weighted average number of common shares outstanding 12,864,321 12,810,305 12,864,321 12,807,814
=========== =========== =========== ===========
The accompanying notes to the unaudited financial statements are an integral
part of these statements.
4
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 2,708,683 $ 514,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,765,289 3,617,502
Production poultry 2,571,491 2,054,757
Allowance for inventory obsolescence 26,731 18,702
Amortization of cost in excess of net assets of
acquired business - 590,652
Gain on sale of productive assets (141,768) (451,186)
Deferred income taxes (47,394) (2,905)
Provision for doubtful receivables 377,028 67,998
Minority interest 57,388 58,005
Changes in operating assets and liabilities:
Notes and accounts receivable (5,344,489) (680,207)
Inventories (4,381,609) (322,233)
Prepaid expenses 27,667 (435,290)
Accounts payable 5,373,613 (2,271,927)
Accrued expenses (26,685) 345,270
Long-term receivables-trade 222,562 (138,916)
------------ ------------
Net cash provided by operating activities 5,188,507 2,964,536
------------ ------------
Cash flows from investing activities:
Short-term investments (1,007,219) (98,504)
Long-term investments (286,581) (707,670)
Additions to property, plant and equipment (1,970,153) (7,501,157)
Proceeds from sales of productive assets 2,993,186 706,954
Increase in other assets (2,491,355) (947,201)
------------ ------------
Net cash used in investing activities (2,762,122) (8,547,578)
------------ ------------
Cash flows from financing activities:
Short-term financing:
New loans 19,266,945 17,737,757
Payments (20,276,595) (14,606,462)
Preferred stock cash dividends (167,288) (173,920)
(Continued on next page)
5
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended June 30, 2002 and 2001
(Unaudited)
(Continued)
2002 2001
---- ----
Issuance of common stock - 40,000
Purchase of common stock (15,000) -
Long-term financing:
New loans 5,048,940 7,361,968
Payments (8,509,300) (5,599,187)
Due from stockholders and related party 914,244 (2,124,384)
-------------- --------------
Net cash provided by (used in) financing activities (3,738,054) 2,635,772
-------------- --------------
Effect of exchange rate changes on cash and cash
equivalents 1,153,285 1,513,396
-------------- --------------
Net decrease in cash and cash equivalents (158,384) (1,433,874)
Cash and cash equivalents at beginning of period 4,920,870 4,256,636
-------------- --------------
Cash and cash equivalents at end of period $ 4,762,486 $ 2,822,762
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 3,415,532 $ 3,813,946
============== ==============
Income taxes $ 212,704 $ 186,961
============== ==============
The accompanying notes to the unaudited financial statements are an integral
part of these statements.
6
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited 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 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
Quarterly Report on Form 10-Q. Rica Foods, Inc. owns 100% of the outstanding
common stock of Pipasa and As de Oros. 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 accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The accompanying unaudited consolidated 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
conformity with U.S. GAAP. 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 consolidated
financial statements for the fiscal year ended September 30, 2001, which are
included in the Company's Annual Report on Form 10-K. Management has included in
the Company's financial statements figures that are based on estimates and
judgments, which management 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 for the three and nine months ended June 30, 2002 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
September 30, 2002. The Company maintains a system of internal accounting
policies, procedures and controls intended to provide reasonable assurance, at
an 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 interim
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, 2001.
NOTE 2 - 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.
7
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Inventories consist of the following:
June 30, 2002 September 30,
------------- -------------
(Unaudited) 2001
----------- ----
Finished products $ 3,625,980 $ 2,523,036
Poultry 4,344,914 4,257,973
Production poultry 2,625,811 3,169,012
Materials and supplies 1,922,404 1,951,687
Raw materials 1,855,371 2,140,563
In transit 1,711,652 274,279
------------- ------------
16,086,132 14,316,550
Less:
Production poultry (1,363,583) (1,396,406)
Allowance for obsolescence (99,252) (86,819)
------------- ------------
$ 14,623,297 $12,833,325
============= ============
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows (unaudited):
Three Months ended Nine Months ended
------------------ -----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 388,302 $ (596,607) $ 2,708,683 $ 514,314
Foreign currency translation
adjustment (392,509) (500,609) (1,772,031) (673,430)
----------- ------------ ------------ -----------
Total comprehensive income (loss) $ (4,207) $(1,097,216) $ 936,652 $ (159,116)
=========== ============ ============ ===========
8
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
NOTE 4 - SEGMENT INFORMATION (in millions) (unaudited):
Three Months ended Nine Months ended
------------------ -----------------
June 30, June 30,
-------- --------
SEGMENT 2002 2001 2002 2001
- ------- ---- ---- ---- ----
Broiler $16.47 $16.73 $52.07 $53.10
Animal Feed 6.57 6.32 18.84 18.39
By-products 3.67 3.40 11.08 10.15
Exports 1.98 1.79 5.86 4.39
Quick Services 1.18 1.25 4.29 4.89
Other 2.06 1.51 5.17 4.70
------ ------ ------ ------
Total Net Sales $31.93 $31.00 $97.31 $95.62
Broiler 4.16 2.35 13.62 11.11
Animal Feed 0.83 0.57 2.63 1.98
By-products 0.57 0.44 1.81 1.50
Exports 0.22 0.18 0.60 0.27
Quick Services (0.08) 0.00 0.19 0.25
Other 0.03 0.17 0.10 0.67
------ ------ ------ ------
Total gross profit less selling
expenses $ 5.73 $ 3.71 $18.95 $15.78
------ ------ ------ ------
Other operating expenses 3.56 3.66 10.51 11.46
Other expenses, net 1.68 0.73 4.85 3.75
------ ------ ------ ------
Income (loss) before provision for
income taxes $ 0.49 ($0.68) $ 3.59 $ 0.57
====== ====== ====== ======
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 ("quick service"). The Company's
subsidiaries distribute these products primarily throughout Costa Rica and in
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
means 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.
9
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
NOTE 5 - LITIGATION
Pipasa is a defendant in a lawsuit brought by Polaris Holding Company in Costa
Rica, pursuant to which the plaintiff in such action is seeking damages in an
amount equal to $3.6 million. Pipasa was served with prejudgment liens for $1.5
million and, with the approval of the Juzgado Sexto Civil, the court with
jurisdiction over the lawsuit, certain parcels of real estate owned by Pipasa
have been substituted for such liens. This approval was ratified by the Superior
Court on November 11, 1999, and all funds initially attached have been released
and returned to Pipasa. Costa Rican law requires the posting of guarantees by a
plaintiff seeking prejudgment liens and, in connection with this lawsuit, Pipasa
has filed objections to the guarantee filed by the plaintiff. A ruling on these
objections is pending. Pipasa has also filed pleadings in opposition to the
underlying lawsuit; a ruling on these pleadings also remains pending.
In connection with this pending lawsuit, the plaintiff also brought suit against
Pipasa in the State of California and the State of Florida. The California
lawsuit has been dismissed without prejudice. The Florida lawsuit alleges that
Aero Costa Rica, a third party, breached an aircraft lease agreement and
consequently seeks recovery of remedies and damages from Pipasa, as alleged
guarantor of the aircraft lease agreement. The amount sought by the plaintiff is
$3.6 million. The Florida lawsuit is still pending and Pipasa's defense is based
on, among other things, a lack of personal jurisdiction in the State of Florida.
Interrogatories, Request to Produce Documents and Request for Admissions have
been answered by Pipasa. The Company and its Chairman, Calixto Chaves, as an
unrelated third party, were subject to a Request to Produce Documents to the
extent each possesses information and/or documents related to the case. A
hearing has been scheduled for October 2002 with respect to the defendants
motion to dismiss for lack of personal jurisdiction. The Company believes the
lawsuits are without merit and continues to assert an appropriate defense.
Additionally, the following putative class actions were filed in the United
States District Court for the Southern District of Florida in the early part of
2002; 1) on or about January 8, 2002, Richard W. Baldwin, individually and on
behalf of all others similarly situated, filed a putative class action lawsuit
against Rica Foods, Inc., Calixto Chaves, Jose Pablo Chaves, Randall Piedra and
Monica Chaves (collectively the "Defendants") (the "Baldwin Action"), Case No.
02-20070-CIV-HUCK; 2) on or about January 16, 2002, Richard Young, individually
and on behalf of all others similarly situated, filed a putative class action
lawsuit against Rica Foods, Inc., Calixto Chaves, Jose Pablo Chaves, Randall
Piedra and Monica Chaves (collectively the "Defendants") (the "Young Action"),
Case No. 02-20182-CIV-GRAHAM; 3) on or about February 13, 2002, Robert Hotle,
individually and on behalf of all others similarly situated, filed a putative
class action lawsuit against Rica Foods, Inc., Calixto Chaves, Jose Pablo
Chaves, Randall Piedra and Monica Chaves (collectively the "Defendants") (the
"Hotle Action"), Case No. 02-20482-CIV-UNGARO BENAGES; 4) on or about February
20, 2002, David Masterjohn, individually and on behalf of all other similarly
situated, filed a putative class action lawsuit against Rica Foods, Inc.,
Calixto Chaves, Jose Pablo Chaves, Randall Piedra and Monica Chaves
(collectively the "Defendants") (the "Masterjohn Action"), Case No.
02-20542-CIV-JORDAN; and 5) on or about March 6, 2002, Jeffrey L. Bell and
Victoria Bell, individually and on behalf of all other similarly situated, filed
a putative class
10
action lawsuit against Rica Foods, Inc., Calixto Chaves, Jose Pablo Chaves,
Randall Piedra and Monica Chaves (collectively the "Defendants") (the "Bell
Action"), Case No. 02-20699-CIV-LENARD (collectively the "Class Actions").
The Class Actions are almost identical and all allege violations of the federal
securities laws. Specifically, the plaintiff(s) in each action allege(s)
violations of Section 10(b) and Section 20(A) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The plaintiffs in the Class Actions
seek class certification, compensatory damages, pre-judgement and post-judgement
interest, attorneys' fees and costs and such other relief the Court may deem
appropriate.
On April 29, 2002, the Young Action, Hotie Action, Masterjohn Action, and Bell
Action were voluntarily dismissed without prejudice. In the Baldwin Action, the
sole remaining proceeding, on May 13, 2002, Rica Foods, Inc. filed a Motion to
Dismiss Complaint and Supporting Memorandum of Law ("Motion to Dismiss") seeking
dismissal of the Complaint on numerous grounds and requesting the Court to
strike all of Baldwin's class action allegations. On July 15, 2002, the Court
dismissed the Individual Defendants named in the Initial Baldwin Complaint,
without prejudice. On July 24, 2002, the Court granted Rica Foods' Motion to
Dismiss, without prejudice. On August 7, 2002 Baldwin filed an Amended Complaint
against Rica Foods and the Individual Defendants. On August 12, 2002, Rica Foods
filed a Motion to Dismiss the Amended Complaint. A ruling on the Motion to
Dismiss the Amended Complaint is currently pending and discovery has been stayed
until the Court rules on Rica Foods' Motion to Dismiss the Amended Complaint.
Regardless of the Court's ruling, Rica Foods believes the Amended Complaint is
without merit and will continue to contest it and vigorously defend itself.
Except for the legal proceedings discussed above, no legal proceedings of a
material nature, to which the Company or the subsidiaries are a party, exist or
were pending during the nine months ended June 30, 2002. Except for the legal
proceedings disclosed above, the Company knows of no other 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 the Company's 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company's operations are primarily 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, is the largest poultry company in Costa Rica. As de
Oros also owns and operates a chain of quick service restaurants in Costa Rica
called "Restaurantes As de Oros."
The following discussion addresses the financial condition and results of
operations of the Company. This discussion should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2001 and with the Company's unaudited consolidated interim financial statements
as of June 30, 2002 and for the three and nine-month periods ended June 30, 2002
and 2001 contained herein.
Results for any interim periods are not necessarily indicative of results for
any full year.
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 months from October to January, which fall in the first and second quarters
of each fiscal year. This variation is primarily due to holiday celebrations
that occur during these periods in which Costa Ricans prepare traditional meals
that include dishes with chicken as the main ingredient. The Company expects
this seasonal trend to continue for the foreseeable future.
Environmental compliance
At the present time, the Company is not subject to any significant costs for
compliance with any environmental laws in any jurisdiction in which it operates.
However, in the future, the Company could become subject to significant 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.
During the nine months ended June 30, 2002, the Company did not incur any
significant costs related to environmental compliance.
Results of operations for the three months ended June 30, 2002 compared to the
three months ended June 30, 2001.
For the three months ended June 30, 2002 the Company generated $349,236 of net
income available to common stockholders ($0.03 earnings per share), compared to
a net loss of $633,106, ($0.05 loss per share) for the three months ended June
30, 2001.
12
For the three months ended June 30, 2002, net sales increased by 2.97%, mainly
due to increases in the sale of animal feed, by products and export segments.
The Company uses segment profit margin information to analyze segment
performance, which is defined as gross profit less selling expenses as a
percentage of sales.
Broiler sales decreased by 1.57% primarily due to a volume decrease of 5.45%.
The Company believes that the decrease is mainly due to a relative reduction in
consumer purchasing power due to economic conditions in Costa Rica, which causes
a reduction in the consumption of the product of this particular segment. The
profit margin for the Broiler segment has increased from 14.06% to 25.24%,
mainly due to production process efficiencies and a relative decrease in selling
expenses.
Animal feed sales increased by 3.96%, mainly due to a volume increase of 3.46%.
The Company believes the increase in volume is mainly attributable to higher
sales of pet food and extruder products, offset by a decrease in sales of
commercial animal feed. The decrease in commercial animal feed sales is mainly
due to the acquisition of production machinery by the Company's customers to
produce their own feed. The profit margin for animal feed increased from 8.97%
to 12.59%, mainly due to variations in the product mix, production process
efficiencies and a decrease in relative selling expenses.
Sales of by-products increased by 7.71% mainly due to a volume increase of 4.75%
and a shift to higher revenue generating items. A shift in the product mix sold
also resulted in an increase in the segment profit margin from 13.06% to 15.65%.
Export sales increased by 11.10%, which is mainly due to an increase in sales of
extruded animal feed, pellet animal feed, pet foods and live chicks. Segment
profit margin did not vary significantly, increasing from 10.21% to 11.18%.
Since March 2002, exports to the country of Honduras have been negatively
affected by a Honduran restriction on the import of poultry related products.
The Company has held several meetings with the Honduran government, and as a
result, the Company expects that the restriction will be eliminated or reduced
within the next couple of months.
Sales for the quick service segment decreased by 5.61%, mainly due to strong
market competition. The Company believes strong market competition also resulted
in a decrease in segment profit margin from a 0.03% to a negative 6.50%.
Sales for the other products segment increased by 36.16% mainly due to an
increase in sales of raw material, which consist mainly of corn. Segment profit
margin decreased from an 11.17% to a 1.44% due to variations in the sales mix,
and higher revenue products sold in the comparable period for fiscal 2001.
Operating expenses decreased by 2.90% for the three months ended June 30, 2002
as compared to the three months ended June 30, 2001. For the three months ended
June 30, 2002, the Company determined that goodwill has not been impaired and,
accordingly, did not record any impairment charges, as compared to the required
amortization in 2001. Operating expenses represented 25.70% and 27.25% of net
sales for the three months ended June 30, 2002 and 2001, respectively.
Other expenses increased by 129.22% for the three months ended June 30, 2002, as
compared to the three months ended June 30, 2001. This decrease is mainly due to
an increase in devaluation rates of the Costa Rican colon that resulted in
greater foreign exchange losses, and the absence of offsetting gains like the
gains the Company recognized in the three months ended June 30, 2001 in
connection with the sales of assets.
13
The provision for income taxes for the three months ended June 30, 2002 amounted
to $85,544, compared to a benefit of $107,929 for the three months ended June
30, 2001. This represents an increase in the effective income tax rate from
15.8% in 2001 to 17.4% in 2002, primarily as a result of the elimination of
certain tax benefits in Costa Rica for fiscal 2002.
Results of operations for the nine months ended June 30, 2002 compared to the
nine months ended June 30, 2001.
For the nine months ended June 30, 2002 the Company generated $2,598,783 of net
income available to stockholders ($0.20 earnings per share), compared to net
income available to stockholders of $398,399 ($0.03 earnings per share) for the
nine months ended June 30, 2001.
For the nine months ended June 30, 2002, net sales increased by 1.76%, mainly
due to increases in the by products and export segments. Broiler sales decreased
by 1.94%, mainly due to a volume decrease of 5.64%, caused by a relative
reduction in consumer purchasing power due to economic conditions in Costa Rica
which caused a reduction in the consumption of this product. The profit margin
for the Broiler segment increased from 20.92% to 26.15%, mainly due to
production process efficiencies and a relative decrease in selling expenses.
Animal feed sales increased by 2.45% despite a volume decrease by 0.79%,
primarily as a result of variations in the sales mix. The profit margin for
animal feed increased from 10.77% to 13.97% mainly due to variations in the
product mix, production process efficiency and a decrease in relative selling
expenses.
Sales of the by-products segment increased by 9.21%, mainly due to a 5.68%
increase in volume and sales price increases. The increased number of sales
outlets has contributed to volume increase. Segment profit margin increased from
14.88% to 16.32% due to price increases and changes in product mix to more
profitable products.
Sales for the exports segment increased by 33.63%, mainly due to increased
volume and new customers. Segment profit margin increase from 6.26% to 10.29%,
mainly due to changes in the sales mix to more profitable products.
Sales for the quick service segment decreased by 12.53%, as a result of
increased market competition. Segment profit margin decreased slightly from
4.99% to 4.55%.
Sales for the other products segment increased by 9.88% mainly due to an
increase in sales of raw material which, along with other variations in the mix
sold, contributed to a decrease in the segment profit margin from a 14.20% to a
1.85%
Operating expenses decreased by 3.74%. The Company determined that goodwill has
not been impaired and, accordingly, did not record any impairment charges, as
compared to the required amortization in 2001. As a result, operating expenses
represented 25.58% and 27.04% of net sales for the nine months ended June 30,
2002 and 2001, respectively.
Other expenses increased by 29.16%. This decrease is mainly due to an increase
in the devaluation rate of the Costa Rican colon, which was partially offset by
gains on sales of assets recorded during the nine months ended June 30, 2001.
14
The provision for income taxes for the nine months ended June 30, 2002 amounted
to $820,906 representing an effective income tax rate for the nine months ended
June 30, 2002 of 22.89%. For the nine months ended June 30, 2001, no provision
was recorded as the Company had projected that it would not pay income taxes for
the fiscal year due to its low taxable income and available tax benefits.
Financial condition
Operating activities: As of June 30, 2002, the Company had $4.76 million in cash
and cash equivalents. The working capital deficit was $7.96 million and $10.34
million as of June 30, 2002 and September 30, 2001, respectively. The current
ratio was 0.84 as of June 30, 2002 and 0.77 as of September 30, 2001.
Cash provided by operating activities was $5.19 million and $2.96 million for
the nine months ended June 30, 2002 and 2001, respectively. The increase was
primarily due to an increase in net income and accounts payable, which was
partly offset by an increase in notes and accounts receivable and inventories.
Inventories increase mainly as a result of large vendor financed purchase of raw
materials.
Investing activities: For the nine months ended June 30, 2002, the Company used
$2.76 million for investing activities, as compared to $8.55 million used for
the nine months ended June 30, 2002. For the nine months ended June 30, 2002,
the Company invested $1.97 million in property, plant, and equipment compared to
$7.50 million during the nine months ended June 30, 2001. During fiscal 2000 and
2001, the Company made significant capital investments in additions to property,
plant and equipment in order to maintain cost efficient production capacity,
expand into international markets and develop new products, as a result,
requirements for capital investments for 2001, consisted mainly of recurring
replacement of equipment. In June 2002, the Company sold extruder equipment to a
third party for approximately $2 million. The Company is currently renting this
equipment. For the nine months under analysis, the Company also invested in
assets in areas of strategic importance for development. For the rest of fiscal
year 2002, the Company anticipates that it will spend approximately an
additional $1.20 million for capital expenditures and expects to finance these
expenditures with cash flows from operations and external financing. Although
the book value of the Company's property, plant and equipment has decreased
since September 30, 2001, the Company believes the productive capacity has not
been affected.
Financing activities: As of June 30, 2002, the Company had line of
credit agreements with banks and raw material suppliers for a maximum aggregate
amount of $27.33 million, of which $23.35 million was being used. Agreements may
be renewed annually and bear interest at annual rates ranging from 4.09% to
10.83%. Property and other collateral secure these agreements.
During the nine months ended June 30, 2002, net cash used for financing
activities totaled $3.74 million, as compared to $2.64 million provided during
the nine months ended June 30, 2001. Financing activities reflect partial
restructuring from short-term to long-term debt. The Company will continue to
analyze different alternatives to restructure its debt. Additionally, financing
activities reflect a payment of $4 million to Pacific Life Insurance Company
(PacLife) in January 2002.
15
As stated in the Company's Annual Report on Form 10-K for the year ended
September 30, 2001, on January 14, 2002, the Company obtained a waiver of
certain possible breaches of several negative covenants (the "Covenants")
contained in an amended and restated note purchase agreement (the "Agreement")
with Pacific Life Insurance Company (PacLife) dated December 28, 2001. The
potential breaches did not involve any failure to pay principal or interest
pursuant to the terms of the Agreement. The Company has made all required
payments to PacLife including principal of $4 million and interest of $960,000
and $750,000 in January 2002 and July 2002, respectively. The payment
amortization reduced the principal amount owed to PacLife to $12.0 million.
The Company believes that as of the date of this Report the Company had regained
compliance with the provisions of all except one of the Covenants. As of August
16, 2002, PacLife has granted the Company a conditional waiver with respect to
such Covenant.
The company is continuing to explore the development and/or acquisition of
strategic business opportunities that it perceives as complementary with its
core business. In October 2000, the Company entered into a stock purchase
agreement with Industries Avicolas Integradas, S.A. ("Indavinsa") a Nicaraguan
company engaged in the production and distribution of poultry and animal feed
concentrate products. Similarly, the Company is also continuing to explore the
acquisition of a majority of the outstanding common stock of Avicola Core Etuba
Ltda. ("Core"), a Brazilian company engaged in the production and distribution
of poultry products, from the Company's Chief Executive Officer. The Company is
evaluating closely the performance of these companies to determine if, when and
how the Company should integrate its business with the acquisition targets. The
Company is currently in the process of renegotiating several material terms of
the proposed acquisition agreements with Indavinsa. The Company hopes to
conclude the acquisition of the common stock of Core by the end of first
Calendar quarter of 2003.
As with any business acquisition, there can be no assurance that the Company
will close these acquisitions and there can be no assurance that these
acquisitions efforts will prove to be beneficial to the Company. Even if the
Company's board of directors, audit Committee and management team believe the
Company should pursue a development or acquisition opportunity and successfully
negotiate the contracts critical to such venture, the Company anticipates that
it may be required to seek the consent of PacLife and potentially certain other
third parties before initiating development efforts or concluding an
acquisition.
The Company is dependent on cash generated by operations, vendor financing and
short term bank lines of credit to finance it operations and other uses of cash.
Although the Company has continued to explore more cost efficient and longer
term sources of capital, the Company has not yet secured an alternative, long
term financing source that would insulate it from the risks associated with a
loss of one of its relatively short term capital sources. Management also
expects that there will be sufficient resources available to meet the Company's
cash requirements for the next twelve months.
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
16
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) the
level of consumer demand for the Company's various products; (iii) the level of
competition with the Company's various products; (iv) market conditions for
finished products, including the supply and pricing of alternative proteins
which may impact the Company's pricing power; (v) risks associated with
leverage, including cost increases attributable to rising interest rates; (vi)
changes in regulations and laws, including changes in accounting standards, tax,
environmental , occupational and labor laws, health and safety regulations, and
(vii)changes exchange rates and currency fluctuations; and (viii) the effect of,
or changes in, general economic conditions.
This 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.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Risk
The subsidiaries of the Company operate in Costa Rica and are exposed to market
risk from changes in U.S. currency rates. To mitigate its exposure to
devaluations, the Company systematically increases its sales prices by a rate
that is in line with the devaluation rate. For the nine months ended June 30,
2002, the Company increased sales prices of some products, resulting in an
average sales price increase of 0.26%. The colon, the national currency of Costa
Rica, experienced a devaluation of 7.53% during the same period. The devaluation
rate of the colon for the nine months ended June 30, 2001 was 4.80%. For fiscal
2002, the Company mix shifted to an increase in sales of higher revenue
products, when compared to fiscal 2001. The Company expects to increase its
sales prices of some of its products during the rest of the fiscal year 2002.
The potential foreign exchange loss resulting from a hypothetical 10% decline in
the colon/U.S. dollar exchange would have been approximately $306,000 for the
nine months ended June 30, 2002, which would not have resulted in a significant
impact on the results of operations or the financial position of the Company.
While such a potential foreign exchange loss is not anticipated, there can be no
assurance that a devaluation that could have a material impact on the Company
will not occur.
Interest Rate Risk
As of June 30, 2002, the Company had outstanding debt of $42 million, of which
$30 million had variable interest rates. A hypothetical increase of 10% in the
interest rates would have resulted in an increase in the interest expense of
approximately $237,000 for the nine months ended June 30, 2002, which would not
have resulted in a significant impact on the results of operations or the
financial position of the Company. While such an interest rate fluctuation is
not anticipated, there can be no assurances that interest rates will not
increase less than 10% in any relevant quarter or annual period.
Commodity Risk
The Company imports all of its corn and soybean meal, the primary ingredients in
chicken feed, from the United States. Fluctuations in the prices of corn may
significantly affect the Company's profit margin. For the nine months ended June
30, 2002, sales prices for corn and soybean meal were 2.14% above and 2.25%%
below budget prices, respectively. A hypothetical increase of 6% in the purchase
price of corn and soybean meal, would have resulted in an increase in cost of
sales of approximately $1.1 million for the nine months ended June 30, 2002,
which would not have resulted in a significant impact on the results of
operations of the Company.
Stock Market
The stock market in general and the market for shares in companies that do
business in Central America have recently experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
the affected companies. The Company's common stock may experience significant
fluctuations that may be adverse and unrelated to the Company's operating
performance.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pipasa is a defendant in a lawsuit brought by Polaris Holding Company in Costa
Rica, pursuant to which the plaintiff in such action is seeking damages in an
amount equal to $3.6 million. Pipasa was served with prejudgment liens for $1.5
million and, with the approval of the Juzgado Sexto Civil, the court with
jurisdiction over the lawsuit, certain parcels of real estate owned by Pipasa
have been substituted for such liens. This approval was ratified by the Superior
Court on November 11, 1999, and all funds initially attached have been released
and returned to Pipasa. Costa Rica law requires the posting of guarantees by a
plaintiff seeking prejudgment liens and, in connection with this lawsuit, Pipasa
has filed objections to the guarantee filed by the plaintiff. A ruling on these
objections is pending. Pipasa has also filed pleadings in opposition to the
underlying lawsuit; a ruling on these pleadings also remains pending.
In connection with this pending lawsuit, the plaintiff also brought suit against
Pipasa in the State of California and the State of Florida. The California
lawsuit has been dismissed without prejudice. The Florida lawsuit alleges that
Aero Costa Rica, a third party, breached an aircraft lease agreement and
consequently seeks recovery of remedies and damages from Pipasa, as alleged
guarantor of the aircraft lease agreement. The amount sought by the plaintiff is
$3.6 million. The Florida lawsuit is still pending and Pipasa's defense is based
on, among other things, a lack of personal jurisdiction in the State of Florida.
Interrogatories, Request to Produce Documents and Request for Admissions have
been answered by Pipasa. The Company and its Chairman, Calixto Chaves, as an
unrelated third party, were subject to a Request to Produce Documents to the
extent each possesses information and/or documents related to the case. A
hearing has been scheduled for October 2002 with respect to the defendants
motion to dismiss for lack of personal jurisdiction. The Company believes the
lawsuits are without merit and continues to assert an appropriate defense.
Additionally, the following putative class actions were filed in the United
States District Court for the Southern District of Florida in the early part of
2002; 1) on or about January 8, 2002, Richard W. Baldwin, individually and on
behalf of all others similarly situated, filed a putative class action lawsuit
against Rica Foods, Inc., Calixto Chaves, Jose Pablo Chaves, Randall Piedra and
Monica Chaves (collectively the "Defendants") (the "Baldwin Action"), Case No.
02-20070-CIV-HUCK; 2) on or about January 16, 2002, Richard Young, individually
and on behalf of all others similarly situated, filed a putative class action
lawsuit against Rica Foods, Inc., Calixto Chaves, Jose Pablo Chaves, Randall
Piedra and Monica Chaves (collectively the "Defendants") (the "Young Action"),
Case No. 02-20182-CIV-GRAHAM; 3) on or about February 13, 2002, Robert Hotle,
individually and on behalf of all others similarly situated, filed a putative
class action lawsuit against Rica Foods, Inc., Calixto Chaves, Jose Pablo
Chaves, Randall Piedra and Monica Chaves (collectively the "Defendants") (the
"Hotle Action"), Case No. 02-20482-CIV-UNGARO BENAGES; 4) on or about February
20, 2002, David Masterjohn, individually and on behalf of all other similarly
situated, filed a putative class action lawsuit against Rica Foods, Inc.,
Calixto Chaves, Jose Pablo Chaves, Randall Piedra and Monica Chaves
(collectively the "Defendants") (the "Masterjohn Action"), Case No.
02-20542-CIV-JORDAN; and 5) on or about March 6, 2002, Jeffrey L. Bell and
Victoria Bell, individually and on behalf of all other similarly situated, filed
a putative class action lawsuit against Rica Foods, Inc., Calixto Chaves, Jose
Pablo Chaves, Randall Piedra and
19
Monica Chaves (collectively the "Defendants") (the "Bell Action"), Case No.
02-20699-CIV-LENARD (collectively the "Class Actions").
The Class Actions are almost identical and all allege violations of the federal
securities laws. Specifically, the plaintiff(s) in each action allege(s)
violations of Section 10(b) and Section 20(A) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The plaintiffs in the Class Actions
seek class certification, compensatory damages, pre-judgement and post-judgement
interest, attorneys' fees and costs and such other relief the Court may deem
appropriate.
On April 29, 2002, the Young Action, Hotie Action, Masterjohn Action, and Bell
Action were voluntarily dismissed without prejudice. In the Baldwin Action, the
sole remaining proceeding, on May 13, 2002, Rica Foods, Inc. filed a Motion to
Dismiss Complaint and Supporting Memorandum of Law ("Motion to Dismiss") seeking
dismissal of the Complaint on numerous grounds and requesting the Court to
strike all of Baldwin's class action allegations. On July 15, 2002, the Court
dismissed the Individual Defendants named in the Initial Baldwin Complaint,
without prejudice. On July 24, 2002, the Court granted Rica Foods' Motion to
Dismiss, without prejudice. On August 7, 2002, Baldwin filed an Amended
Complaint against Rica Foods and the Individual Defendants. On August 12, 2002,
Rica Foods filed a Motion to Dismiss the Amended Complaint. A ruling on the
Motion to Dismiss the Amended Complaint is currently pending and discovery has
been stayed until the Court rules on Rica Foods' Motion to Dismiss the Amended
Complaint. Regardless of the Court's ruling, Rica Foods believes the Amended
Complaint is without merit and will continue to contest it and vigorously defend
itself.
Except for the legal proceedings discussed above, no legal proceedings of a
material nature, to which the Company or the subsidiaries are a party, exist or
were pending during the nine months ended June 30, 2002. Except for the legal
proceedings disclosed above, the Company knows of no other 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 the Company's 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed with this report:
None.
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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.
RICA FOODS, INC. AND SUBSIDIARIES
Dated: August 19, 2002 By: /s/ CALIXTO CHAVES
----------------------------------
Calixto Chaves
Chief Executive Officer
Dated: August 19, 2002 By: /s/ NESTOR SOLIS
----------------------------------
Nestor Solis
Chief Financial Officer
21