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, 2001
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.
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(Exact name of Company as specified in its charter)
Nevada 87-0432572
------ -----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
240 Crandon Blvd., Suite 115, Key Biscayne, FL 33149
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(Address of principal executive offices) (Zip Code)
(305) 365-9694 or (305) 365-8665
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(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.
X Yes No
--- ---
The number of shares outstanding of Company's common stock, par value $0.001 per
share, as of August 20, 2001 was 12,864,321 shares.
RICA FOODS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (Unaudited)
and September 30, 2000.......................................... 3
Consolidated Statements of Operations for the three and nine
month periods ended June 30, 2001 and 2000 (Unaudited).......... 4
Consolidated Statements of Cash Flows for the nine months
ended June 30, 2001 and 2000 (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........ 17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................. 18
ITEM 6. Exhibits and Reports.............................................. 19
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 September 30,
(Unaudited) 2000
Assets ------------- -------------
------
Current assets:
Cash and cash equivalents $ 2,822,762 $ 4,256,636
Short-term investments 185,061 86,557
Notes and accounts receivable 11,355,375 11,187,031
Due from related parties 1,400,013 39,618
Inventories 12,617,149 14,307,768
Prepaid expenses 992,808 557,519
------------ ------------
Total current assets 29,373,168 30,435,129
Property, plant and equipment 47,401,196 45,425,881
Long-term receivables-trade 746,717 640,222
Long-term investments 4,861,671 3,965,385
Other assets 4,467,308 4,010,364
Cost in excess of net assets of acquired business 2,382,973 3,705,392
------------ ------------
Total assets $ 89,233,033 $ 88,182,373
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 13,889,151 $ 16,161,076
Accrued expenses 4,088,907 3,862,659
Notes payable 16,037,733 12,878,147
Current portion of long-term debt 5,793,698 5,680,190
Due to stockholders 74,634 76,657
------------ ------------
Total current liabilities 39,884,123 38,658,729
Long-term debt, net of current portion 23,379,421 21,820,905
Due to stockholders 15,660 16,409
Deferred income tax liability 2,163,673 2,899,511
------------ ------------
Total liabilities 65,442,877 63,395,554
Minority interest 1,336,445 1,336,445
Stockholders' equity:
Common stock 12,865 12,855
Preferred stock 2,216,072 2,216,072
Additional paid-in capital 25,800,940 25,760,950
Accumulated other comprehensive loss (9,432,247) (8,758,737)
Retained earnings 9,786,527 9,388,127
------------ ------------
28,384,157 28,619,267
Less:
Due from stockholders (5,662,052) (4,900,499)
Treasury stock, at cost (268,394) (268,394)
------------ ------------
Total stockholders' equity 22,453,711 23,450,374
------------ ------------
Total liabilities and stockholders' equity $ 89,233,033 $ 88,182,373
============ ============
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these balance sheets.
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Sales $ 31,003,403 $ 29,755,427 $ 95,624,791 $ 93,181,924
Cost of sales 22,504,310 21,048,137 65,437,886 62,602,152
------------ ------------ ------------ ------------
Gross profit 8,499,093 8,707,290 30,186,905 30,579,772
------------ ------------ ------------ ------------
Operating expenses:
Selling 4,787,792 4,718,249 14,402,777 14,013,274
General and administrative 3,464,185 3,404,467 10,867,061 9,996,470
Amortization of cost in excess of net
assets of acquired business 196,884 266,147 590,652 687,680
------------ ------------ ------------ ------------
Total operating expenses 8,448,861 8,388,863 25,860,490 24,697,424
Income from operations 50,232 318,427 4,326,415 5,882,348
Other expenses (income):
Interest expense 1,122,938 1,031,611 3,524,977 2,928,950
Interest income (304,911) (378,722) (851,684) (725,221)
Foreign exchange loss, net 472,512 388,092 1,682,017 1,083,167
Miscellaneous, net (556,156) (331,515) (601,214) (732,797)
------------ ------------ ------------ ------------
Other expenses, net 734,383 709,466 3,754,096 2,554,099
------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interest (684,151) (391,039) 572,319 3,328,249
Provision for income taxes (107,929) (143,594) - 262,574
------------ ------------ ------------ ------------
Income (loss) before minority interest (576,222) (247,445) 572,319 3,065,675
Minority interest 20,385 45,337 58,005 574,770
------------ ------------ ------------ ------------
Net income (loss) (596,607) (292,782) 514,314 2,490,905
Preferred stock dividends 36,499 17,426 115,915 112,170
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders $ (633,106) $ (310,208) $ 398,399 $ 2,378,735
============ ============ ============ ============
Earnings (loss) per share:
Basic earnings (loss) per share $ (0.05) $ (0.02) $ 0.03 $ 0.21
============ ============ ============ ============
Diluted earnings (loss) per share $ (0.05) $ (0.02) $ 0.03 $ 0.21
============ ============ ============ ============
Weighted average number of common shares
outstanding:
Basic 12,810,305 12,800,406 12,807,814 11,562,667
============ ============ ============ ============
Diluted 12,810,305 12,800,406 12,807,814 11,567,038
============ ============ ============ ============
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these statements.
-2-
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended June 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 514,314 $ 2,490,905
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,617,502 2,870,342
Production poultry 2,054,757 1,712,711
Allowance for inventory obsolescence 18,702 27,138
Amortization of cost in excess of net assets of
acquired business 590,652 687,680
Stock options and grants issued to employees - 130,735
Gain on sale of productive assets (451,186) (113,494)
Deferred income tax benefit (2,905) (237,143)
Provision for doubtful receivables 67,998 266,367
Minority interest 58,005 574,790
Changes in operating assets and liabilities:
Notes and accounts receivable (680,207) (2,420,831)
Inventories (322,233) (2,673,296)
Prepaid expenses (435,290) (730,107)
Accounts payable (2,271,927) 3,400,501
Accrued expenses 345,270 4,767
Long-term receivables-trade (138,916) 53,299
------------ ------------
Net cash provided by operating activities 2,964,536 6,044,364
------------ ------------
Cash flows from investing activities:
Short-term investments (98,504) (729,143)
Long-term investments (707,670) -
Additions to property, plant and equipment (7,501,157) (12,304,613)
Proceeds from sales of productive assets and
long-term investments 706,954 1,039,911
Increase in other assets (947,201) (723,992)
------------ ------------
Net cash used in investing activities (8,547,578) (12,717,837)
------------ ------------
Cash flows from financing activities:
Short-term financing:
New loans 17,737,757 17,461,243
Payments (14,606,462) (13,464,690)
Preferred stock cash dividends (173,920) (202,719)
(Continued on next page)
-3-
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended June 30, 2001 and 2000
(Unaudited)
(Continued)
2001 2000
---- ----
Long-term financing:
New loans 7,361,968 4,367,840
Payments (5,599,187) (804,986)
Issuance of common stock 40,000 -
Due from stockholders and related party (2,124,384) (1,951,601)
------------ ------------
Net cash provided by financing activities 2,635,772 5,405,087
------------ ------------
Effect of exchange rate changes on cash and cash
equivalents 1,513,396 (187,851)
Decrease in cash and cash equivalents (1,433,874) (1,456,237)
Cash and cash equivalents at beginning of period 4,256,636 3,913,168
------------ ------------
Cash and cash equivalents at end of period $ 2,822,762 $ 2,456,931
============ ============
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 3,813,946 $ 2,908,045
============ ============
Income taxes $ 186,961 $ 414,259
============ ============
Supplemental schedule of non-cash investing activities:
Common stock dividends paid as preferred shares
From Pipasa $ - $ 2,143,626
============ ============
From As de Oros $ - $ 1,983,327
============ ============
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
============ ============
Acquisition of business:
Fair value of asses acquired $ - $ 4,600,000
============ ============
Common stock issued $ - $ 7,880,000
============ ============
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these statements.
-4-
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 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 Quarterly Report on Form 10-Q. 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") ("United States" or "U.S."). 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, 2000, 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 nine months ended
June 30, 2001 are not necessarily indicative of the results to be expected for
the entire fiscal year ending September 30, 2001. 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, 2000.
NOTE 2 - RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the current
period presentation.
NOTE 3 - 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.
-5-
Rica Foods, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Inventories consist of the following:
June 30, September 30,
2001 2000
-------- -------------
Finished products $ 2,150,822 $ 4,049,669
Poultry 4,075,315 3,655,554
Production poultry 2,955,322 3,191,343
Materials and supplies 2,073,228 1,939,597
Raw materials 2,392,470 2,180,936
In-transit 462,306 391,105
----------- ------------
14,109,463 15,408,204
------------ ------------
Less:
Production poultry (1,402,769) (1,025,754)
Allowance for obsolescence (89,545) (74,682)
------------ ------------
Inventories, net $ 12,617,149 $ 14,307,768
============ ============
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as follows:
Three months ended Nine months ended
June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $ (596,607) $ (292,782) $ 514,314 $ 2,490,905
Foreign currency translation adjustment
(500,609) (300,094) (673,510) (1,342,593)
------------ ---------- ---------- -----------
Total comprehensive income (loss) $ (1,097,216) $ (592,876) $ (159,196) $ 1,148,312
============ ========== ========== ===========
NOTE 5 - EARNINGS (LOSS) PER SHARE
Following is a reconciliation of the weighted average number of shares currently
outstanding with the number of shares used in the computations of fully diluted
earnings per share:
-6-
Rica Foods, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three months ended Nine months ended
June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Net income (loss) applicable to common
stockholders $ (633,106) $ (310,208) $ 398,399 $ 2,378,735
============= ============ ============= ============
Denominator:
Denominator for basic earnings (loss) per share 12,810,305 12,800,406 12,807,814 11,562,667
Effect of dilutive securities:
Options to purchase common stock - - - 4,371
------------- ------------ ------------- ------------
Denominator for diluted earnings (loss) per share 12,810,305 12,800,406 12,807,814 11,567,038
============= ============ ============= ============
Earnings (loss) per share from continuing operations:
Basic $ (0.05) $ (0.02) $ 0.03 $ 0.21
============= ============ ============= ============
Diluted $ (0.05) $ (0.02) $ 0.03 $ 0.21
============= ============ ============= ============
NOTE 6 - SEGMENT INFORMATION (In millions):
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Broiler $ 16.74 $ 17.42 $ 53.10 $ 55.75
Animal feed 6.32 5.79 18.39 16.65
By-products 3.40 2.86 10.15 8.81
Exports 1.79 1.06 4.39 3.21
Quick service 1.25 1.59 4.89 6.25
Others 1.50 1.03 4.70 2.52
------- ------- ------- -------
Total net sales $ 31.00 $ 29.75 $ 95.62 $ 93.18
------- ------- ------- -------
Broiler 2.35 3.03 11.11 11.78
Animal feed 0.57 0.45 1.99 1.81
By-products 0.44 0.39 1.50 2.26
Exports 0.18 0.03 0.27 0.11
Quick service 0.00 (0.01) 0.25 0.30
Others 0.17 0.10 0.67 0.30
------- ------- ------- -------
Total gross profit less
selling expenses $ 3.71 $ 3.99 $ 15.79 $ 16.57
Other operating expenses 3.66 3.67 11.46 10.69
Other expenses, net 0.73 0.71 3.75 2.55
------- ------- ------- -------
Income (loss) before
provision for income
taxes and minority
interest $ (0.68) $ (0.39) $ 0.58 $ 3.33
======= ======= ======= =======
-7-
Rica Foods, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
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.
NOTE 7 - ACQUISITIONS AND DISPOSALS OF ASSETS
In October 2000, the Company entered into a stock purchase agreement (the
"Indavinsa Acquisition") with Industrias Avicolas Integradas, S.A.
("Indavinsa"), a Nicaraguan company engaged in the production and distribution
of poultry and animal feed concentrate products. Pursuant to the terms and
conditions of the Indavinsa Acquisition agreement, the Company will acquire an
80% ownership interest of Indavinsa in exchange for 100,000 shares of common
stock of the Company and $300,000 in cash payable at the closing of the
transaction. The Company expects to close this transaction by the end of fiscal
year 2001, and is currently in the process of renegotiation of some of the terms
and conditions of the acquisition agreement, due to the time elapsed.
In October 2000, the Company announced it had reached an agreement with Stock
Management International ("SMI"), a British Virgin Islands corporation, to sell
an 81% controlling interest in the subsidiaries of As de Oros, Planeta Dorado,
S.A. and Corasa Estudiantes, S.A. (collectively, the "Restaurants"), in exchange
for a note receivable. Pursuant to the terms and conditions of the agreement,
the Company would receive $4.05 million over a five year period, with an annual
interest rate of 10.06%, payable every six months. Stock Management
International would have a grace period of one year and would subsequently make
four annual payments to the Company in the amount of $1,012,500 each. As a
condition of the agreement, As de Oros would continue to supply poultry products
to the Restaurants for a period of 12 years. The Company, with the consent of
SMI, has suspended the negotiations, pursuant to new terms and conditions and is
currently under negotiation with other third parties.
In December 2000, the Company announced its intent to acquire a majority stake
of the outstanding common stock of Avicola Core Etuba, Ltda. ("Core"), a
Brazilian company engaged in the production and distribution of poultry
products. In March 2001, the Company agreed to acquire a 75% stake in Core for
$3.5 million, and an option for the remaining 25% stake for $1.7 million.
NOTE 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. With the adoption of SFAS No. 142, positive goodwill is no
longer subject to amortization over its estimated useful life. Rather, goodwill
will be subject to at least an annual assessment for impairment by applying a
fair-value-based test. Additionally, negative goodwill is recognized as an
extraordinary gain at the time of the business combination.
SFAS Nos. 141 and 142 are effective for fiscal years beginning after December
31, 2001. However, if an entity's fiscal year begins after March 15, 2001 and
its first interim period financial statements have not been issued, then early
adoption is allowed. The Company plans to use early adoption of the new
standards effective October 1, 2001.
-8-
Rica Foods, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Presently, the Company does not anticipate that it will have to recognize any
impairments under SFAS No. 141, and it has no negative goodwill to be
eliminated. Further, it does not have any other identifiable intangible assets
whose amortization will be reduced.
On the other hand, annual goodwill amortization of $787,535 will be discontinued
with the adoption of SFAS-142 effective October 1, 2001.
NOTE 9 - INCOME TAXES
In July 2001, the government of Costa Rica enacted changes in the income tax
law, applicable for fiscal years ending after September 30, 2001. Such decree
provides, among other things, the following changes in the Costa Rican income
tax law:
o Eliminates the restatement of property, plant and equipment, thereby
significantly reducing the related tax depreciation.
o Eliminates the one-time deduction equivalent to 50% of the prior
year's investment in property, plant and equipment to be used in
agricultural and industrial activities.
These changes will result in a significant increase in the income tax expense of
Pipasa and As de Oros. However, the Company has not yet quantified the impact in
its financial position or results of operations.
NOTE 10 - LITIGATION
Pipasa is a defendant in a lawsuit brought in Costa Rica. As a result of this
lawsuit (in which the plaintiff seeks $3.6 million), Pipasa was served with
prejudgment liens amounting to $1.5 million. These monetary liens were
subsequently substituted for land owned by Pipasa with the approval of the court
in Costa Rica (Juzgado 6to Civil). Such substitution of collateral was
subsequently ratified by the Superior Court on November 11, 1999. The
prejudgment liens on assets and on cash have since been released and Pipasa has
received all of the funds originally attached by the Court. For the same reasons
and by the same plaintiff, Pipasa was sued in the United States of America, in
the States of California and Florida, respectively. The California lawsuit has
been dismissed without prejudice. The Florida lawsuit is still active and
Pipasa's defense is based on, among other things, a lack of personal
jurisdiction in the State of Florida. Interrogatories, a Request to Produce
Documents and a Request of Admissions have been answered by Pipasa. The Company
and its Chairman, as a non-related third party, are currently subject to a
Request to Produce Documents to the extent and only if they posses information
and or documents related to the case. The Company cannot ascertain the basis of
the claim or the relief sought by the plaintiff, but it intends to assert a
vigorous defense. At the present time, neither the Company nor Pipasa can
evaluate the potential impact of this lawsuit or assess the likelihood of an
unfavorable outcome.
No other legal proceedings of a material nature to which the Company is a party
exist, or were pending as of June 30, 2001. The Company is not aware of any
significant pending or threatened legal proceedings, nor is it aware of any
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.
-9-
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,
2000 and with the Company's unaudited consolidated interim financial statements
as of June 30, 2001 and for the three and nine month periods ended June 30, 2001
and 2000 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 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, 2001, the Company invested approximately
$620,000 to remodel and expand its recycling and waste treatment facilities.
Results of operations
- ---------------------
The Company's operations resulted in a $0.05 diluted loss per share for the
three months ended June 30, 2001, compared to a $0.02 diluted loss per share
during the comparative period for fiscal 2000. For the nine months ended June
30, 2001, the Company's operations resulted in a $0.03 diluted earnings per
share, compared to a $0.21 diluted earnings per share during the comparative
period for fiscal 2000.
Results of operations for the nine months ended June 30, 2001, when compared to
the same period for fiscal 2000, were negatively impacted by adverse economic
factors that have affected Costa Rica, as well as North and Central America.
According to information issued by the Central Bank of Costa Rica ("BCCR"),
commodity exports for Costa Rica for the nine months ended June 30, 2001
decreased by 22.41% when compared to the nine months ended June 30, 2000. This
decrease was mainly due to the economic slow-down in the United States, which
according to information issued by the BCCR,
-10-
purchased 52.5% of total exported commodities during fiscal year 2000. Other
external factors that have negatively impacted the Costa Rican economy include
increases in the international price of oil and a 33.17% decrease in
international investments during fiscal 2000, which has continued through fiscal
year 2001 according to information issued by the Ministry of Foreign Commerce of
Costa Rica.
However, the Costa Rican economy has recently experienced positive factors such
as a devaluation rate of only 4.80% for the nine months ended June 30, 2001,
which has been the lowest since March 1994, according to information issued by
the BCCR, while variations in the inflation rate during the same period have
been below the average for the same period.
In response to the adverse economic outlook, the Costa Rican government has
lowered interest rates beginning in the year 2001 in an effort to increase
consumption, investment and employment rates, and has implemented a plan to
promote the development of small and medium sized companies in Costa Rica.
Positive factors in the economy have been an increase in the tourism and
construction sector, which are intensive in employment.
The decrease in the Costa Rican consumer's purchasing power affects the overall
demand for goods and services in Costa Rica, including the demand for the
Company's products. In response, the Company has temporarily lowered the sale
price of certain products, increased volume discounts, and shifted its product
mix to include lower priced products which, in the aggregate, have contributed
to lower sales than were budgeted for the Company. Because of the present
economic outlook in Costa Rica, management expects this trend to continue in the
near future.
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.
Three months ended June 30, 2001 compared to three months ended June 30, 2000
- -----------------------------------------------------------------------------
Broiler sales decreased by 3.94% for the three months ended June, 2001, when
compared to the three months ended June 30, 2000. This decrease is attributed to
temporary sales discounts of certain products the Company offered during this
period to address the adverse economic outlook explained above. Volume sales for
this segment increase by 1.21%. Segment profit margin decreased from 17.42% for
the three months ended June 30, 2000, to 14.06% for the three months ended June
30, 2001, primarily due to a decrease in sales prices, partially offset by
operating efficiencies achieved in the processing plant as a result of the
acquisition of new equipment.
Animal feed sales increased by 9.14% for the three months ended June 30, 2001
when compared to the three months ended June 30, 2000. The increase was mainly
due to variation in the sales mix to more expensive and profitable lines of
products such as pet food and pellet feed, as a result of a larger coverage in
the market. Sales volume did not vary significantly. Segment profit margin
increased from 7.76% for the three months ended June 30, 2000 to 8.97% for the
three months ended June 30, 2001, mainly due to variations in the sales mix to
higher priced and more profitable products, offset by an increase in selling
expenses.
Sales of by-products increased by 19.20% for the three months ended June 30,
2001, when compared to the three months ended June 30, 2000, mainly due to an
increase in sales volume of 23.48%, offset by lower sales prices resulting from
discount rates offered by the Company during this period. Sales for the three
months ended June 30, 2001 include the Zaragoza line of products, a brand name
that was acquired during fiscal year 2001. Segment profit margin did not vary
significantly.
Exports sales increased by 68.37% for the three months ended June 30, 2001, when
compared to the three months ended June 30, 2000. This increase is mainly due to
higher sales of broilers to Honduras, fertile
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eggs and live chicks. Segment profit margin increased from 3.18% for the three
months ended June 30, 2000 to 10.21% for the three months ended June 30, 2001,
mainly due to increases in the sales mix of higher profit products. Sales for
the quick service segment, which consists of restaurant operations, decreased by
21.18% for the three months ended June 30, 2001, when compared to the three
months ended June 30, 2000. This decrease is mainly due to strong market
competition of this segment. Segment profit margin did not vary significantly.
As of the date of filing of this report on form 10-Q, the Company, has
suspended, with the consent of Stock Management International, the sale of 81%
of the common stock of the restaurants, pursuant to the new terms and
conditions. The Company is currently negotiating the sale of the restaurants
with other third parties.
Sales for the other segment increased by 45.31% for the three months ended June
30, 2001, when compared to the three months ended June 30 2000. This increase is
mainly due to the increase in the sale of commercial eggs which is expected to
continue through the end of fiscal year 2001. Segment profit margin increased
from 9.69% for the three months ended June 30, 2000 to 11.17% for the three
months ended June 30, 2001, due to operating efficiencies in the distribution of
commercial eggs and variations in the sales mix to more profitable products.
Sales of other products represented 4.85% and 3.48% of total net sales for the
three months ended June 30, 2001 and 2000, respectively.
Operating expenses increased by 0.72% for the three months ended June 30, 2001,
when compared to the three months ended June 30, 2000. Operating expenses
represented 27.25% and 28.19% of total net sales for the three months ended June
30, 2001 and 2000, respectively. The increase is primarily attributable to a
general increase in employee payroll, in accordance with the Company's policy,
and an increase in professional services, offset by a decrease in operating
expenses from the quick service and export segments.
Other expenses increased by 3.51% for the three months ended June 30, 2001, when
compared to the three months ended June 30, 2000. This increase is mainly due to
an increase in interest expense and foreign exchange rate loss as a result of
higher outstanding debt during fiscal 2001, offset by non-recurring gains
resulting from the sale of property during the three months ended June 30, 2001.
The provision for income taxes for the three months ended June 30, 2001 amounted
to a benefit of $(107,929) compared to a benefit of $(143,594) for the three
months ended June 30, 2000 resulting in effective income tax rates of 15.8% and
36.7%, respectively. The tax benefits in 2001 and 2000, are the result of
decreases in the projected annual taxable income from prior quarters.
Nine months ended June 30, 2001 compared to nine months ended June 30, 2000
- ---------------------------------------------------------------------------
Broiler sales decreased by 4.76% for the nine months ended June 30, 2001, when
compared to the nine months ended June 30, 2000. The decrease is attributable to
a reduction in sales volume of 3.87%, in addition to temporary discounts of
certain products offered by the Company during this period. The decrease in
profit margin due to discounts, was offset by operating efficiencies in the
production process. Segment profit margin did not vary significantly, decreasing
from 21.13% to 20.93%.
Animal feed sales increased by 10.48% for the nine months ended June 30, 2001,
when compared to the nine months ended June 30, 2000. The increase is
attributable to an increase in sales volume of 5.68% primarily in the pet food
and pellet line of products. Segment profit margin did not vary significantly.
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Sales of by-products increased by 15.15% for the nine months ended June 30,
2001, when compared to the nine months ended June 30, 2000. This increase was
primarily due to a sales volume increase of 36.69%, offset by an increase in
sales discounts offered by the Company. Sales for the nine months ended June 30,
2001 include sales of the new Zaragoza brand name. The increase in sales
discounts offered, variations in the sales mix to include more lower profit
products and an increase in the cost of raw materials contributed to a decrease
in the segment profit margin from 25.69% for the nine months ended June 30, 2000
to 14.88% for the nine months ended June 30, 2001.
Export sales increased by 36.69% for the nine months ended June 30, 2001, when
compared to the nine months ended June 30, 2000, mainly due to increased sales
of broiler to Honduras, fertile eggs, pet food products and live chicks. Segment
profit margin increased from 3.53% to 6.26% due to lower operating expenses and
variations in the sales mix to more profitable products.
Sales for the quick service segment continue to be negatively affected by
greater competition and market saturation. Sales for the nine months ended June
30, 2001 decreased by 21.61% when compared to the nine months ended June 30,
2000. Segment profit margin did not vary significantly.
Sales for the other segment increased by 86.97% for the nine months ended June
30, 2001, when compared to the nine months ended June 30, 2000. This increase is
attributable to the increase in the sale of commercial eggs. Segment profit
margin increased from 11.98% for the nine months ended June 30, 2000 to 14.20%
for the nine months ended June 30, 2001, primarily due to operating efficiencies
achieved in the distribution of commercial eggs and variations in the sales mix.
Sales of other products represented 4.92% and 2.70% of total net sales for the
nine months ended June 30, 2001 and 2000, respectively.
Operating expenses increased by 4.71% for the nine months ended June 30, 2001,
when compared to the nine months ended June 30, 2000. Operating expenses
represent 27.04% and 26.50% of net sales for the nine months ended June 30, 2001
and 2000, respectively. The increase is primarily due to general increases in
professional services, advertising, employee payroll in accordance with the
Company's policies, increase in vehicle leasing as a result of new distribution
routes and the substitution of old vehicles, offset by lower operating expenses
from the quick service and export segments.
Other expenses increased by 46.98% for the nine months ended June 30, 2001, when
compared to the nine months ended June 30, 2000. The increase is primarily due
to an increase in interest and a loss in the foreign exchange rate, which
combined, resulted in an increase in debt.
The Company has projected that it will not be required to pay any income taxes
for the fiscal year ending September 30, 2001, and has therefore not recorded
any income tax expense for the nine months ended June 30, 2001. The effective
income tax rates were 0.0% and 7.9% for the nine months ended June 30, 2001 and
2000, respectively. This projection is based on the amount of tax benefits that
will be available to the Company and the low results of operations projected for
the year.
However, recent changes in the tax law in Costa Rica that will go into effect
next year will eliminate these tax benefits (see Note 9 to the accompanying
unaudited consolidated financial statements).
Financial condition
- -------------------
Operating activities: As of June 30, 2001, the Company had $2.82 million in cash
and cash equivalents. The working capital deficit was $10.51 million and $8.22
million as of June 30, 2001 and September 30, 2000, respectively. The current
ratios were 0.74 and 0.79 as of June30, 2001 and September 30, 2000,
respectively.
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Cash provided by operating activities was $2.96 million and $6.04 million for
the nine months ended June 30, 2001 and 2000, respectively. The decrease is the
result of a decrease in net income, and a decrease in accounts payable related
to the acquisition of new equipment invested during last fiscal year, offset by
a lower increase in inventory levels during the present fiscal period and a more
efficient collection of commercial account receivables.
Investment activities: Funds used for investing activities for the nine months
ended June 30, 2001, totaled $8.55 million, compared to $12.71 million for the
nine months ended June 30, 2000. Cash flows from investing activities reflect
capital expenditures, which are primarily related to the production area and
have been primarily allocated to the construction of the second phase of the
extruded and rendering plant. In addition, the Company has acquired the Zaragoza
brand name and has acquired new vehicles through leasing agreements. The Company
has agreed with the lessor to create a self-insurance trust, which is included
in the short and long-term investment accounts. The Company anticipates that it
will spend approximately $470,000 for capital expenditures during the rest of
fiscal year 2001 and expects to finance such expenditures with internal cash
flows.
Financing activities: As of June 30, 2001, the Company arranged for line of
credit agreements with banks and raw material suppliers for a maximum aggregate
amount of $27.41 million, of which $24.17 million have been used. Agreements may
be renewed annually and bear interest at annual rates ranging from 7.06% to
11.75%. Property and other collateral secure these agreements.
During the nine months ended June 30, 2001, net cash provided by financing
activities was $2.64 million, compared to $5.40 million provided during the nine
months ended June 30, 2000. Financing activities reflect the payment of the
first $4 million annual amortization of the private placement of debt with
Pacific Life. Since the end of last fiscal year, the Company has been analyzing
different alternatives to restructure its debt from short-term to long-term. One
of these alternatives is the possible issuance by As de Oros of an aggregate of
$20 million preferred shares at a 9% rate. Such issuance was authorized by the
Superintendencia General de Valores (General Superintendence of Securities) on
November 29, 2000. However, due to a recent Costa Rican government issuance of
more than $250 million in bonds which decreased the liquidity in the Costa Rican
securities market, the Company plans to cancel the public offering of the bonds
by As de Oros during the next quarter. As another alternative, during the second
quarter of fiscal 2001, the Company signed an engagement letter with the
investment banking firm of Ladenburg Thalmann & Co. Inc. This firm has been
engaged to assist the Company in structuring its overall corporate and expansion
plans, including the possibility of issuing debt or equity securities, debt
restructuring and any project financing.
Management expects to continue to finance operations and capital expenditures
through 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 fiscal year 2001.
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,
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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 attributable to rising
interest rates; (iv) changes in regulations and laws, including changes in
accounting standards, environmental laws, occupational and labor laws, health
and safety regulations, and currency fluctuations; and (v) the effect of, or
changes in, general economic conditions.
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 exposure
to the volatility of the U.S. dollar, 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, 2001, the Company increased its
sales prices an average of 1.70%. However, the National devaluation rate in
Costa Rica for that same period was 4.80%. Due to the adverse economic climate,
the Company has temporarily decided not to make any significant increases to its
sales prices as a marketing strategy in order to best maintain sales and its
market share. The Company plans to make additional sales price increases during
the rest of fiscal year 2001 in areas where the market will bear such increases.
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 0.84% below and 2.47% above its budgeted prices,
respectively, for the nine months ended June 30, 2001.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pipasa is a defendant in a lawsuit brought in Costa Rica. As a result of this
lawsuit (in which the plaintiff seeks $3.6 million), Pipasa was served with
prejudgment liens amounting to $1.5 million. These monetary liens were
subsequently substituted for land owned by Pipasa with the approval of the court
in Costa Rica (Juzgado 6to Civil). Such substitution of collateral was
subsequently ratified by the Superior Court on November 11, 1999. The
prejudgment liens on assets and on cash have since been released and Pipasa has
received all of the funds originally attached by the Court. For the same reasons
and by the same plaintiff, Pipasa was sued in the United States of America, in
the States of California and Florida, respectively. The California lawsuit has
been dismissed without prejudice. The Florida lawsuit is still active and
Pipasa's defense is based on, among other things, a lack of personal
jurisdiction in the State of Florida. Interrogatories, a Request to Produce
Documents and a Request of Admissions have been answered by Pipasa. The Company
and its Chairman, as a non-related third party, are currently subject to a
Request to Produce Documents to the extent and only if they posses information
and or documents related to the case. The Company cannot ascertain the basis of
the claim or the relief sought by the plaintiff, but it intends to assert a
vigorous defense. At the present time, neither the Company nor Pipasa can
evaluate the potential impact of this lawsuit or assess the likelihood of an
unfavorable outcome.
No other legal proceedings of a material nature to which the Company is a party
exist, or were pending as of June 30, 2001. The Company is not aware of any
significant pending or threatened legal proceedings, nor is it aware of any
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.
ITEM 6. EXHIBITS AND REPORTS
(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 20, 2001 By: /s/ CALIXTO CHAVES
----------------------------------
Calixto Chaves
Chief Executive Officer
Dated: August 20, 2001 By: /s/ RANDALL PIEDRA
---------------------------------
Randall Piedra
Chief Financial Officer
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