SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Fiscal Year Ended: September 30, 1998
Commission File No. 0-18222
RICA FOODS, INC.
Formerly known as
Costa Rica International, Inc.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
Nevada 87-0432572
(State or other jurisdiction of (IRS Employer File Number)
incorporation)
95 Merrick Way, Suite 507
Coral Gables, Florida 33134
(Address of principal executive offices) (zip code)
(305) 476-1757, 476-1760
(Registrant's telephone and facsimile number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of Class)
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 / /
Check if there is no disclosure of delinquent files in response to Item 405 of
Regulation S-K contained in this form and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K.
Issuer's revenues for its most recent fiscal year $103,676,630.
The aggregate market value of the voting stock of the Registrant held by
non-affiliates as of December 30, 1998 was approximately $31,038,991. A total of
4,211,532 shares were owned by non-affiliates as of December 30, 1998.
The number of shares outstanding of the Registrant's common stock, as of the
latest practicable date, December 30, 1998, was 7,518,818.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders Parts I, II and IV
Portions of the Proxy Statement for the 1998 Annual
Meeting of Shareholders Parts I, III and IV
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PART 1
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ITEM 1. Description of Business
GENERAL DEVELOPMENT OF BUSINESS
Background
RICA FOODS, INC., formerly Costa Rica International, Inc. (the "Company")
was incorporated under the laws of the state of Utah on February 6, 1986 under
the name CCR, Inc. The Company undertook a public offering of its securities in
1987. In 1994, the Company changed its name to Quantum Learning Systems, Inc.
and its state of incorporation to Nevada. On August 5, 1996, the Company changed
its name to Costa Rica International, Inc., and on May 29, 1998 the Company
changed its name to RICA FOODS, INC. to better reflect its core business.
In April, 1996, Corporacion Pipasa, S.A. ("Pipasa"), a Costa Rican company,
entered into an agreement and plan of reorganization (the "First Pipasa
Agreement") with the Company, pursuant to which the Company acquired
approximately 60% of the common stock of Pipasa in exchange for the issuance of
15,573,571 pre-split (5,191,190 post-Split) shares of the Company's common stock
to the stockholders of Pipasa. The First Pipasa Agreement provided that the
Company could acquire the remaining approximately 40% of the common stock of
Pipasa on or before September 30, 1997. The additional purchase did not occur by
that date.
In July, 1998, an independent committee of the Company's stockholders and
Management of Pipasa resumed discussions concerning the acquisition by the
Company of the balance of Pipasa's common stock. On September 28, 1998, the
Company and Pipasa entered into an agreement (the "Final Pipasa Agreement")
providing for the purchase of the remaining common stock of Pipasa from
Inversiones La Ribera, S.A., a privately-held Costa Rican corporation controlled
by Mr. Calixto Chaves, the Company's chief executive officer and principal
shareholder, for 11,050,784 pre-split (3,683,595 post-Split) shares of the
Company's common stock. The Final Pipasa Agreement was amended on November 9,
1998, to provide that the transaction would be subject to (I) the receipt of an
opinion from an independent firm that the transaction was fair from a financial
point of view to the Company's stockholders and (II) approval of the transaction
by holders of a majority of the issued and outstanding common stock of the
Company.
On February 26, 1998, the Company consummated an agreement (the "Original
Oros Agreement") to purchase 56.38% of the outstanding common stock of
Corporacion As de Oros, S.A., a Costa Rican corporation ("As de Oros"), from
Comercial Angui, S.A., a privately-held Costa Rican corporation ("Comercial
Angui"), for consideration consisting of (A) a promissory note with a stated
amount of $2.4 million due in January, 2000, and (B) 2,447,058 pre-split
(815,686 post-Split) shares of the Company's common stock, having a then current
market value of approximately $2.6 million. Soon thereafter, an independent
committee of the stockholders and Management commenced discussions with
Comercial Angui and its sole shareholder, Antonio Echeverria, concerning the
possibility of purchasing the remaining shares of As de Oros from Comercial
Angui. The reason for this proposed transaction, as in the case of the agreement
to
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purchase the minority interest in Pipasa, was to eliminate the potential loss of
dividends to minority stockholders and to consolidate not only the operations
but the financial results of Pipasa and As de Oros (collectively, the
"subsidiaries") in the Company's financial statements. Subsequently, on
September 28, 1998, the Company and Comercial Angui entered into an agreement
(the "Final Oros Agreement") to purchase Comercial Angui's remaining interest in
As de Oros for 5,012,762 pre-split (1,670,921 post-Split) shares of the
Company's common stock. On November 9, 1998, the Company and Comercial Angui
entered into an amendment to the Final Oros Agreement which mirrored the
amendment to the Final Pipasa Agreement, that provided that the transaction
would not be consummated until holders of a majority of the Company's common
stock approved the transaction, and the Company received a fairness opinion to
the effect that the transaction was fair to the Company's shareholders from a
financial point of view.
The Company has not received an independent fairness opinion as of the date
hereof for either the transaction with the minority shareholder of Pipasa or the
transaction with the minority shareholder of As de Oros; however, holders of a
majority of the Company's common stock have approved both transactions. See
"Proxy Solicitation" below. The Company expects to receive fairness opinions and
to close the purchase of the remaining stock of Pipasa and As de Oros on or
before January 31, 1999.
Proxy Solicitation
On December 4, 1998, the Company sent to its stockholders of record on
November 20, 1998 a Consent Solicitation Statement soliciting written consent to
the Final Pipasa Agreement and Final Oros Agreement. Mr. Chaves and Comercial
Angui collectively held 37.86% of the Company's common stock as of November 20,
1998 and consented to the transactions. In addition, Mr. Chaves' adult son and
daughter, who own 837,971 pre-split (279,324 post-Split) and 400,000 pre-split
(133,333 post-Split) shares of the Company's common stock, representing 0.03%
and 0.01% of the common stock outstanding, respectively, consented to the
transactions. As of December 21, 1998, holders of more than a majority of the
Company's issued and outstanding shares consented to these transactions.
Consequently, the transactions have been approved by the consent of the
Company's shareholders and, upon receipt by the Company of fairness opinions
with respect to the transactions, and the final tabulation of consents, the
transactions will be consummated.
Financing
In February, 1998, the Company consummated the refinancing of a part of its
subsidiaries' short-term debt through the issuance of an aggregate of $20
million of the Company's 11.71% Series A Senior Notes and Series B Senior Notes
(the "Notes"), both due January 15, 2005. These Notes were placed through
Citicorp Securities, Inc. With the proceeds of these Notes, the Company repaid
$8 million and $12 million, respectively, of the short-term indebtedness of its
two subsidiaries, Pipasa and As de Oros.
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BUSINESS OF THE COMPANY
The Company's operations are largely conducted through Pipasa and As de
Oros, its two subsidiaries. Pipasa, founded in 1969, is the largest poultry
company in Costa Rica with approximately a 50% market share of the chicken meat
market in Costa Rica. The main activities of Pipasa are the production and sale
of broiler chickens (whole chickens), poultry meat, processed chicken products,
commercial eggs and premixed feed and concentrate for livestock and domestic
animals. Pipasa has been in the poultry business for more than 29 years with
more than 13 years of experience in exports. Pipasa owns 41 urban and rural
outlets throughout Costa Rica. Today, Pipasa enjoys a vertically-integrated
operation, which begins with the fertilized egg and ends with the preparation
and distribution of fresh whole chickens, fast-frozen and cooked chicken
patties, and sausages.
As de Oros, founded in 1954, is Costa Rica's second largest poultry
producer, comprising approximately a 20% of the country's poultry market. As de
Oros operates 13 urban and 4 rural outlets throughout Costa Rica. In addition to
the production and marketing of poultry and poultry by-products, As de Oros is
one of the leaders in the Costa Rican animal feed market with a 21% market
share. As de Oros also owns a chain of 36 fried chicken restaurants in Costa
Rica called Restaurantes As de Oros.
The Company promotes its brand names through advertisements and marketing
events. The Company considers Pipasa to be among the most recognized Central
American chicken producers. Pipasa supplies chicken in Costa Rica to Burger
King, Pizza Hut, Subway, and Kentucky Fried Chicken franchises and to Gerber
Products and the McDonald's Corporation in Central America. During the last
three years, the Company has invested approximately $4.3 million in assets that
have increased efficiency and output, that include, but are not limited to, an
automatic de-boning machine, a new incubation plant (regarded as one of the most
modern in Central America), a nipple-type drinking system to feed birds, and a
new distribution fleet for its subsidiaries.
Distribution Network
The Company has a distribution fleet consisting of approximately 230
delivery trucks specially designed to deliver poultry products. These trucks
play an important role in the Company's exports within Central America, as the
trucks provide the Company the necessary fleet size to export to other
countries. Locally, these trucks deliver fresh products daily, thus maintaining
the Company's reputation for fresh quality products. Through its outlets, the
Company is able to distribute its products to customers in urban and rural areas
who may not have easy access to supermarkets. The majority of these outlets are
rented by the Company and are located in urban areas.
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Exchange Rate Risk
The Company makes U.S. dollar payments for its raw materials and bank
facilities. This U.S. dollar expense component is not unique to the Company, as
all poultry producers in Central America must rely on U.S. companies for raw
materials such as corn, soybean meal and reproduction birds. Given its U.S.
dollar exposure, the Company actively manages its exchange rate risk. It uses a
financial model to determine the best strategy to mitigate against the
devaluation of the currency of Costa Rica, the colon, against the U.S. dollar.
The Company systematically increases its annual sales prices by a rate that is
consistent with the colon devaluation against the U.S. dollar. For the fiscal
years ended September 30, 1997 and 1998, the national devaluation rate was 11.6%
and 10.6%, respectively, and correspondingly, the Company increased its prices
12.6% and 13.03%, respectively. Management believes that the Company's strong
market will allow for this type of price increase without sacrificing demand and
market share. The Company has successfully passed along such increases for the
last five years. Management plans to increase its export operations in order to
increase its U.S. dollar revenues, as all export sales are made in U.S. dollars.
For the fiscal year ended September 30, 1998, exports increased 16.28% (in U.S.
dollars) compared to exports for the same period in 1997.
Foreign Competition
The Company currently does not have any significant domestic competition.
The Company's local market share, however, could potentially be threatened by
foreign competition. The Company believes that this likelihood is low for
several reasons. First, the Company has a strong reputation for producing high
quality products at a reasonable price. Secondly, Costa Ricans prefer fresh
chicken to frozen chicken. Due to transportation constraints and distance,
foreign competitors would have to sell frozen chicken if they were to sell it in
Costa Rica.
The Agriculture Ministry in Costa Rica monitors all chicken entering the
country, as it wants to prevent the spread of Newcastle Disease in Costa Rica.
The Costa Rican market currently is also protected by tariff agreements. Chicken
importers must pay duties as dictated by the General Agreement on Trade and
Tariffs ("GATT"). These agreements were reached at the Uruguay Round of the GATT
negotiations and are due to expire in 2004. They provide that only 942 metric
tons ("MT") of whole chicken parts or chicken derivatives can be imported to
Costa Rica from countries outside of the Central American Common Market. This
quota is taxed 34% and amounts in excess of this quota are subject to a 200%
tariff. This tax rate was based on the additional cost of producing poultry in
Costa Rica compared to cost of production in the U.S.
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Commodity Risk Management
The Company imports all of its corn, the primary ingredient in chicken
feed, from the United States. Movements in the price of corn can significantly
affect the Company's gross profit margin. The Company's greatest cost components
are corn and soybean meal, which are imported from the United States. The
Company purchases approximately $l.6 million of corn monthly through the Chicago
Board of Trade ("CBOT"). Corn and soybean meal purchases represent approximately
35% of total cost of goods sold and 70% of raw material costs. The price of corn
and soybean meal, like most grain commodities, is fairly volatile and requires
consistent and daily hedging in order to minimize the effect of price increases
on the Company's profit margin.
The Company has been actively hedging its exposure to corn since 1991. The
Company evaluates, on a daily basis, the price of corn and soybean meal. All
hedging activities are supervised by the financial department, whose employees
have been trained at the CBOT and attend regular seminars on commodities hedging
strategies.
Hedging strategies must be approved by the Company's hedging committee. The
committee consists of two analysts, the Financial Director, Financial Manager
and General Vice President. The committee meets at least once a month to
evaluate the Company's exposure in corn and soybean meal. The Company's strategy
is to hedge against price increases in corn and soybean meal. The Company is not
involved in speculative trading. Contracts range from one month to six months.
The Company will buy directly from the spot market if market conditions are
favorable, but as a general rule, it purchases at least 50% of its corn through
contracts. The Company's hedging strategy is set in its yearly budget, which
determines how much corn and soybean meal it will need and the price it must pay
in order to meet budget forecasts. The Company uses an internal pricing model to
prepare sensitivity models. The Company bases its target prices on the worst
case price assumptions (i.e. high corn prices). The prices paid by the Company
for corn were 4.72% below its budgeted prices as of September, 1998. Commodity
prices for fiscal 1998 have been below or equal to budgeted prices.
The Company has a $500,000 credit line with Futures U.S.A., Inc. ("FIMAT")
and draws upon this credit line in order to cover its initial margin deposit.
The interest rate paid on this line of credit is less than 10% on drawn amounts.
The Company is in constant contact with its brokers (at least three to four
times a day) and receives advice from the brokers' corn experts.
The Company's monthly soybean meal purchases total approximately $900,000.
The hedging strategies for soybean meal purchases are identical to that of corn
purchases, except that the Company purchases its soybean meal through a Costa
Rican company, Industrial de Oleaginosas, S.A. ("Inolasa"), in which the Company
holds a 10% equity ownership. In Costa Rica, there is a 5% tax for soybean meal
imports, which is not levied if purchased through Inolasa. If for any reason
Inolasa cannot deliver the soybean meal to the Company, the Company can buy its
soybean meal directly from the CBOT. Thus far, the Company has never had to go
directly to the CBOT to purchase soybean meal.
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Exchange Rate Risk Management
In addition to movements in the price of corn and soybean meal, the Company
has exposure to fluctuations in exchange rates, as payments for corn, soybean
meal, reproduction birds and bank facilities are in U.S. dollars. The Company
has an internal Economic Studies Division whose sole function is to follow
economic and industrial trends that influence foreign exchange levels. This
division examines areas such as poultry gross national product, gross national
product ("GNP"), inflation, devaluation, export and import growth rates, growth
in real wages, unemployment and population rates.
Raw material purchases have an average payment period of 120 days, hence
exchange rate risk is for four months. During this time, accounts are paid and
costs are updated to reflect new exchange rates. In the event of a severe
devaluation of the colon, or increases in international prices, the Company can
increase sales prices to recuperate its foreign exchange losses. In addition,
all of the Company's exports are denominated in U.S. dollars (even exports
within Central America). Management expects that the strategy to increase
exports will increase the Company's U.S. dollar revenues. The Company uses a
model to determine the maximum devaluation possible before it considers taking
on U.S.-based debt. In effect, the Company borrows in U.S. dollars when
economically proven to be less expensive than borrowing in colones.
Pricing
In Costa Rica, there are no laws against monopolies; however, there are
laws against monopolistic practices. Companies which have a dominant market
share in Costa Rica cannot arbitrarily increase prices in order to take
advantage of market position. Companies also are forbidden to work in
conjunction with their competitors in order to create price collusion. Given
these guidelines, the Company's pricing strategies are influenced by two main
factors: industry conditions and currency devaluation. As previously mentioned,
the Company will use its financial model to increase prices in order to mitigate
the effect of devaluation of the colon. During the last 10 years, the colon has
devalued an average of 13.5% annually, which the Company has mitigated by
increasing prices on average by 14.0% annually for its chicken, meat by-products
and animal feed segments.
In terms of consumer reaction to price increases within the chicken broiler
segment, there is little differentiation for customers between one competitor
and another. Instead, prices are set by the leader, which in the Costa Rican
market is the Company's subsidiary, Pipasa. Given the consistent increase in
chicken prices over the past 12 years, the Company believes it has excellent
data on consumer reactions to price increases. In the Company's experience, a
significant increase in prices leads to a temporary decrease in demand that
lasts approximately two months.
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Main Business Segments
Poultry is a popular food item in Costa Rica because of its easy
preparation, nutritional value and low price when compared to other available
meats. Per capita consumption of poultry has increased from 16.2 kilos (35.6
lb.) in 1994 to 18.5 kilos (40.7 lb.) in 1997, a 14.2% increase during that
period. Poultry is consumed by all social levels and is not defined by
geographic markets. The popularity of poultry in Costa Rica extends beyond
broiler chicken and includes chicken by-products like sausages and cold cuts.
The following is a brief description of the main business segments of the
Company:
Broiler Chicken
Sales of broiler chicken represented approximately 63% and 58% of the
Company's total sales during fiscal 1997 and 1998, respectively. Gross margins
for locally sold broilers as a percent of total broiler chicken sales was 26.20%
and 25.86% during fiscal 1997 and 1998, respectively.
Chicken By-Products
Chicken by-products include sausages, bologna, chicken nuggets, chicken
patties, frankfurters, salami and pate. Chicken by-products represented a little
over 11% and 9.07% of the Company's total sales for fiscal 1997 and 1998,
respectively. Chicken by-products are a very profitable segment of the business,
with gross margins as a percent of total by-products sales of roughly 43% for
fiscal 1998.
Animal Feed
Animal feed is made with imported raw materials, such as corn and soybean
meal, along with the unused portions of chicken and other vitamins and minerals.
Animal feed is marketed for consumption by cows, pigs, birds, horses and
domestic pets. Animal feed represented approximately 9.93% and 17.21% of the
Company's total sales during 1997 and 1998, respectively.
Other
This segment includes sales of commercial eggs, fertile eggs, animal feed
and baby chicks to integrated producers, as well as raw materials and baby
chicks to third parties.
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Diversity of products
The Company's subsidiaries do not depend on the sales of only one product
but a diversity of lines available at a range of prices and presentations, which
represent an important strategic strength of the subsidiaries.
Concentration of portfolio
From the total sales of the subsidiaries, 32.50% of sales are in cash and
67.50% of sales are in credit, with an average collection period of
approximately 32 days. The total credit portfolio is constituted by
approximately 10,450 direct clients with one client accounting for approximately
4% of the portfolio.
POULTRY RAISING PROCESS
The poultry raising process starts with the import of one-day old parent
hens from the United States. Once these hens reach their laying period, which
takes about 20 weeks, they produce fertile eggs, which are then incubated in
order to produce baby chicks. The hatching period lasts 21 days, which is
divided into 19 days in hatching machines and two days in birth chambers. These
baby chicks are inoculated to prevent diseases. The chicks are then brought to
the Company's own raising house or to independent integrated producers who raise
the chicken to full size (typically a seven week process) and provide basic
elements such as vitamins, formula and a balanced ration of feed. The integrated
producers are a group of 72 farmers who own their own land and facilities. They
have a long-term contract with the Company to raise the baby chicks to adult
birds with an average weight of 1.87 kilograms (4.1 1b.). Integrated producers
supply 30% of the total number of chickens needed by the Company and are paid
according to the weight and quality of the chicken produced and the mortality
rate of the chickens raised. The Company provides free veterinary services and
offers vaccines and chicken feed to the farmers at wholesale prices. Regardless
of whether the Company raises the chickens or integrated producers do, the
chickens are regularly inspected for immune deficiencies, vitamin levels and
general diseases. By working in conjunction with these integrated producers, the
Company has greater flexibility to increase or decrease the number of chickens
raised depending on the Company's growth objectives.
PROCESSING FACILITIES AND HEALTH GUIDELINES
Once the chickens reach the desired weight, they are taken to the
processing plant. The Company's processing houses are among the most
sophisticated and largest in the country. The plant's capacity of process is
approximately 46 million kilograms annually. The processing plant is where
chickens are slaughtered and the meat packaged or processed to make chicken
by-products. As with all animal processing facilities, the processing plant must
be kept clean in order to prevent the spread of bacteria. For this reason, the
Company's employees are required to wear protective masks, caps, boots, gloves
and coats at all times while in the processing plant. Each time an employee
enters or leaves the processing plant, boots must be soaked and rinsed with
bleach. All bathroom facilities are located outside of the plant and are
equipped with foot operated faucets. All new employees are trained as to the
proper procedures required in handling and preparing food.
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A government health inspector is at the plant 24 hours a day. Government
representatives inspect every step of the processing procedure and send samples
of the meat to government labs for analysis for bacteria and other organisms. In
addition to government inspectors, the Company has its own staff of inspectors
take samples of the meat at each step of the production process. These samples
are sent to Pipasa's own labs for analysis. Because Costa Rica has been declared
free of Newcastle Disease, the Animal and Plant Health Inspection Service
("APHIS"), a U.S. governmental agency, surveys work in the Company's facilities
to ensure that Costa Rica continues to be free of Newcastle Disease. The Company
recently adopted the guidelines of the Hazardous Analysis and Critical Control
Points ("HACCP") which are expected to be fully implemented in the future. HACCP
is a prevention-based food safety system used widely throughout the food
industry. It is a tool used to assess hazards and to establish controls based on
the prevention of food contamination. For example, temperature must be carefully
controlled as microbial growth is encouraged between 4-60 degrees Celsius or
40-160 degrees Fahrenheit. HACCP encourages employees to gain an in-depth
understanding of total food production. Employees thus take an active role in
ensuring food quality and safety. By identifying critical points in the process
flow that could lead to contamination of food products and applying control
measures at each point, the likelihood of a food borne illness is reduced.
CUSTOMERS
Broiler Chickens Customers
The Company's main brand names for broiler chicken, chicken parts, mixed
cuts and breasts are Pipasa and As de Oros. Broiler chicken is a generic product
that is directed to customers of all social and economic levels. It is estimated
that Costa Ricans eat chicken at least once a week. Chicken is sold to
institutional clients, schools, hospitals, restaurants and small grocery stores.
In Costa Rica, Pipasa currently supplies Burger King, Subway, Kentucky Fried
Chicken and Pizza Hut franchises and the Gerber Products and Rostipollos
companies. Pipasa was recently selected by the McDonald's Corporation to be its
poultry supplier for Central America.
Chicken By-Products Customers
The Company's chicken by-products are sold through the Kimby, Chulitas, and
As de Oros brand names and are sold to all social and economic classes. The
Kimby brand is the leading seller of chicken by-products in Costa Rica. These
products are sold mainly in supermarkets and sales are predominantly driven by
price. The Kimby brand name is one of the leading sellers of chicken by-products
and the leading seller of chicken sausages in Costa Rica.
Animal Feed Customers
The Company's animal feed products are sold through the Ascan, Aguilar y
Solis, Kanin and Nutribel brand names. Customers are mainly large wholesalers
and high scale breeders. This customer group is focused on quality and price.
Products marketed through the Mimados brand name, a division within Nutribel,
targets veterinarians, pet stores and supermarkets. Customers are typically at
the medium to higher income levels. The leader in this market is Dos
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Pinos with a 33% market share, which sells animal feed exclusively to
co-operatives. As de Oros has a 21% market share and Pipasa has a 9% market
share. The rest of this market is very fragmented.
"Other" Customers
Customers of this segment are mainly integrated producers, small farmers
and commercial egg distributors.
MARKETING
The Company has a dedicated division for marketing. The marketing
department's responsibility is to advertise the Company's various products and
brand names. In addition to television and radio advertisements, the Company
works with its distribution centers to distribute posters, T-shirts and hats
that promote the Company's brand names. In Costa Rica, the Company's brand names
commonly appear on billboards and bus stops. There are more marketing techniques
available for use in meat by-products, as these items can be packaged in a more
effective manner in order to draw customers.
DISTRIBUTION
The Company's distribution fleet consists of approximately 230 trucks of
which approximately 49 are leased. The fleet delivers to over 16,000 customers.
These trucks are specially designed to deliver poultry and are equipped with
refrigeration chambers. These vehicles typically have a useful life of 5 years.
The Company's products are sold not only through supermarkets, but also through
rural and urban retail outlets. A majority of total distribution is conducted
through the Company's urban retail outlets, a smaller portion through rural
outlets and the remaining distribution is serviced through the Company's
processing plants. Retail outlets are dedicated to the sale of the Company's
products exclusively. Prices for products sold in these retail outlets are
identical to prices quoted in supermarkets. The products sold are fresh as
retail outlets are typically situated near the Company's processing facilities,
which enables trucks to make deliveries on a daily basis. Products may be sold
by the unit or wholesale. The Company currently has 58 outlets. The rural
outlets are strategically located near major roadways and are equipped with
refrigeration chambers that allow for storage of chicken. The Company plans to
increase the capacity of these cold room storage facilities in order to meet
increased production plans (specifically for chicken by-products). The increased
capacity will enable distribution trucks to make more deliveries, as trucks can
simply return to the nearest agency to reload, as opposed to the main plant.
EMPLOYEES, COMPENSATION AND INCENTIVES
The top management level at the Company has on average almost 15 years of
experience with the Company and has been able to grow Pipasa's market share to
approximately 50% and As de Oros' market share to approximately 20% by creating
efficient operations, making strategic acquisitions and producing high quality
products.
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The success of the Employee's Solidarity Association ("ASEPIPASA") and the
fact that there has never been a strike at the Company's facilities, reflects
the quality of the management team and its ability to keep its employees
satisfied. ASEPIPASA provides recreational facilities, healthcare and pension
benefits as well as financial services to the Company's employees. The Company
encourages its employees to make a career at the Company.
As of September 30, 1998, the Company had approximately 3,000 full-time
employees (including employees of As de Oros), of whom 55 were in management and
247 were in administration. Private companies in Costa Rica typically support
their own workers' associations instead of organized unions. These associations
provide certain services such as credit, recreational facilities and subsidized
housing, and healthcare benefits. Pipasa employees created ASEPIPASA in 1985 and
on November 28, 1998 merged ASEPIPASA with the Associacion Solidarista de
Colaboradores de Pipasa, As y Afines ("ASERICA"). This association is located on
land donated by Mr. Chaves and is among the largest solidarity associations in
Costa Rica. The association has a swimming pool, soccer field, outdoor sports,
sauna and a 1,000-seat gymnasium facility. At Pipasa, all the employees
participate in the association and Management anticipates similar participation
from As de Oros' employees.
Salaries in Costa Rica are increased twice a year as dictated by the
government in order to counterbalance the effect of inflation and the cost of
living. By law, each year, companies are required to pay to the employees 8.33%
of an employee's yearly gross salary as severance which must be paid upon
termination of a labor contract without just cause to a maximum of eight years
of employment. At the Company, employees have the option to have the 8.33% paid
to ASERICA as part of a savings incentive program for as long as they work for
the Company, not just 8 years. Few other companies in Costa Rica offer this
option. The savings incentive program works as follows: Pipasa pays at each pay
period to ASERICA 5% of the employee's wage for that pay period. The 5% payment
by the Company is then matched by the employee. In February of each year, Pipasa
makes the final payment equal to 3.33% of the employee's total yearly gross
salary. Employees currently have the option to, but are not required to, deposit
the remaining 3.33% due from Pipasa into the pension fund Operadora de Fondos
Provida ("Provida"). ASERICA manages all the cash generated by the savings
incentive program. Provida invests in low risk financial instruments like
certificates of deposit and other highly rated or better investment financial
instruments. Employees can borrow against the amount in their savings at a local
interest rate of 18-30% and, once an employee leaves, the employee is entitled
to the total amount accumulated in his/her severance and savings incentive
account. Management intends to implement similar policies at As de Oros.
All employees in Costa Rica are protected by obligatory insurance with the
Caja Costarricense de Seguro Social ("CCSS") and the Instituto Nacional de
Seguros ("INS") which are the government's social security and insurance
programs. All companies in Costa Rica must pay the CCSS 21% and the INS 1.74% of
each employee's monthly salary. These contributions serve as a policy for health
and employee accidents. This policy has unlimited coverage. For example, if an
employee were to suffer serious injury while at work, the CCSS and INS will
provide hospitalization, rehabilitation and medicine. The CCSS pays 70% of the
employee's normal salary during the periods in which he or she is unable to
work. In addition to these benefits, employees must pay a total of 9% of their
monthly salary to the CCSS in order to receive healthcare, pension and maternity
care benefits.
-13-
Employees of Pipasa are provided with a profit sharing program. If Pipasa
has a successful year and generates profits in excess of budgeted levels, Pipasa
will distribute a percentage of its net income to its employees and intends to
implement the same policy at As de Oros. This incentive is calculated monthly
and distributed every two months. In conjunction with a local university, the
Company offers a business administration program for its employees. The main
goal of the program is directed toward developing the Company's future
management team. Classes are held at the Company's facilities.
BACKLOG
At September 30, 1998, the Company had no backlogged sales orders.
PROPRIETARY INFORMATION
The Company uses no material proprietary information in connection with its
operations.
ENVIRONMENTAL COMPLIANCE
The Company is not subject to any material costs for compliance with any
environmental laws in any jurisdiction in which it operates. However, in the
future, the Company could become subject to material costs to comply with
environmental laws in jurisdictions in which it does not now do business. At the
present time, the Company cannot assess the potential impact of any such
potential environmental regulation. The Company has been and is practicing
sustainable environmental policies such as reforesting approximately 500
hectares with hardwood trees, processing and recycling its waste, producing
organic fertilizer and building oxidation lagoons and sewage treatment plants.
GOVERNMENT REGULATION
The Company's poultry hatcheries and processing plants are subject to
regulation under Costa Rican law regarding cleanliness and health standards.
Exports of the Company's poultry products are regulated in the countries in
which the Company sells its products. Such regulation is not considered to be a
burden on the Company or to have a material effect on the Company's ability to
make a profit. Otherwise, the Company is not subject to any material
governmental regulation or approvals.
SUBSEQUENT EVENTS
On December 15, 1998, the Board of Directors declared a 1 for 3 reverse
stock split (the "Split") of the Company's common stock to be effective on
December 29, 1998. In connection with the Split, new share certificates will be
issued and those shareholders owning more than five shares of common stock, post
split, shall receive one full share for each fraction of a share to which they
would be entitled. Each shareholder holding less than 5 shares of common stock,
post split, shall receive the payment for the fractional share held by them
based on the mean of the bid and ask price on the effective date of the Split.
-14-
Item 2. PROPERTIES
The following contains descriptions of the principal facilities utilized by
the Company in its operations. All of these facilities are used by Pipasa and As
de Oros and are owned by them.
Production Area
This area has the following divisions: Reproduction, Incubation, Animal
Feed, Broiler, Process and Further Processing. All production numbers have been
approximated.
Reproduction Division
Pipasa As de Oros
o Present capacity of 30,000,000 fertile 20,000,000 fertile
production installed: eggs annually eggs annually
o Location: Sardinal de Puntarenas, Alajuela, Costa Rica
Costa Rica
Incubation Division
Pipasa As de Oros
o Present capacity of 30,000,000 chicks 10,800,000 chicks
production installed: annually annually
o Location: Aranjuez de Puntarenas, Heredia, Costa Rica
Costa Rica
Pipasa's incubation plant is one of the most modern incubation plants in
Central America. The Plant's incubation and hatching halls can be expanded to
increase production. It is expected that Pipasa's plant will fulfill the needs
of customers for many years.
Animal Feed Division
Pipasa As de Oros
o Present capacity (1) 165,525 tons of animal 111,750 tons of animal
installed: feed annually feed annually
(2) 32,448 tons of animal
feed annually
o Location: (1) San Rafael de Alajuela, Heredia, Costa Rica
Costa Rica, and
(2) Sardinal de Puntarenas,
Costa Rica
The two Pipasa plants and one As de Oros plant perform activities including
grinding grains, mixing flour and packing different types of animal feed.
-15-
Broiler Division
Pipasa As de Oros
o Present capacity 26,400,000 chickens 8,900,000 chickens
installed: annually annually
o Location of farms: 36 farms owned and 94 under 10 farms owned and 37
contract located in the under contract in
central area of Costa Rica Costa Rica
Chicks are received one day after birth. During this time the chicks
receive three types of diet according to growth requirements. The growth stage
lasts 43 days.
Process Division
Pipasa As de Oros
o Present capacity of 39,073,000 kilograms 6,750,000 kilograms
process: annually annually
o Location of plant: San Rafael de Alajuela, La Garita, Alajuela,
Costa Rica Costa Rica
The process is divided into slaughter and pluck, coolers and retailers,
packing and cuts, subproducts.
Further Processing
Pipasa As de Oros
o Present capacity: 4,420,000 kilograms Further processing is
per year performed by Pipasa.
o Location: San Rafael de Alajuela,
Costa Rica
The process is divided into sausage, formed, packing and hot zone (oven and
cooking tanks) areas.
Marketing Area
Distribution is through 58 retail outlets in Costa Rica. All retail outlets
are operated by the Company and a portion of the outlets are owned by the
Company although the majority of the outlets are rented. The majority of the
Company's trucks are owned by the Company although a portion are leased.
Administrative Area
Staff, administrative, and financial headquarters of Pipasa and As de Oros
are located in La Ribera de Belen, Heredia, Costa Rica.
-16-
Item 3. LEGAL PROCEEDINGS
The income tax returns for Pipasa for 1995, 1994 and 1993 were examined by
the tax authorities in Costa Rica and the Company was assessed $76,976, $131,222
and $39,354 respectively, as a result of the disallowance by the Costa Rican tax
authorities of approximately 26.03% in the aggregate of the deductions taken by
Pipasa for 1995, 1994 and 1993. Management does not believe this matter will be
resolved in the next fiscal year. Management believes that these assessments are
without merit and intends to vigorously contest these claims. Management does
not believe that the Company will incur a loss as a result of these assessments.
No accrual has been made for any losses that may result from the resolution of
this uncertainty.
The income tax returns of As de Oros were examined by the Costa Rican tax
authorities for fiscal year 1995 seeking $131,437 of additional income taxes.
Authorities have contested depreciation expense and income tax withholdings of
employees. As de Oros has appealed this decision and does not expect that the
final outcome will result in a material adverse effect on the operations or the
financial position of the Company.
During 1998, the Company settled a legal action in which $350,073 was
received. This amount is included in miscellaneous income in the statement of
income.
Pipasa is a defendant in a lawsuit brought in Costa Rica in which it was
served with prejudgment liens. Pipasa substituted collateral for these liens
with approval of the court, which approval is currently being appealed. Pipasa
has not yet been served with the Complaint in the case and, therefore, cannot
ascertain the basis of the claim or the relief sought, but it believes the
lawsuit is without merit and intends to assert a vigorous defense. At this time,
neither the Company nor Pipasa can evaluate the potential impact of this lawsuit
on the financial results of the Company.
No legal proceedings of a material nature to which the Company is a party
were pending during the fiscal year ending September 30, 1998 and the Company
knows of no legal proceedings of a material nature pending or threatened or
judgments entered against any director nor officer of the Company in his
capacity as such.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of Management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of fiscal year 1998.
-17-
PART II
- -------
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq SmallCap Market under
the symbol RICA. The following tables set forth the market price range of the
Common Stock for each quarter during the years ended September 30, 1997 and
1998, based on the high and low closing sale prices as reported on the Nasdaq
SmallCap Market. Such high and low sales prices reflect interdealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
Market Price Range(1)
-----------------------
High Low
---- ---
Fiscal 1997
First Quarter (10/1/96 to 12/31/96) $ 6.750 $6.375
Second Quarter (1/1/97 to 3/31/97) 4.875 4.500
Third Quarter (4/1/97 to 6/30/97) 4.914 4.500
Fourth Quarter (7/1/97 to 9/30/97) 4.500 4.125
Fiscal 1998
First Quarter (10/1/97 to 12/31/97) $ 3.468 $3.375
Second Quarter (1/1/98 to 3/31/98) 5.718 5.532
Third Quarter (4/1/98 to 6/30/98) 5.343 5.157
Fourth Quarter (7/1/98 to 9/30/98) 5.064 4.689
- -------------
(1) Prices have been adjusted to reflect the 1 for 3 reverse
stock split effective on December 29, 1998.
As of December 30, 1998, the Company had 7,518,818 shares of common stock
outstanding and approximately 1,500 holders of record of such stock. No shares
of preferred stock were outstanding.
Dividends
The Company has never paid any dividends on its common stock. The Company
does not anticipate paying cash dividends on common stock in the foreseeable
future based on its expected operating cash flow requirements (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.") The Nevada General Corporation Law prohibits
the Company from paying dividends or otherwise distributing funds to its
stockholders, except out of legally available funds. The declaration and payment
of dividends on the Company's common stock and the amount thereof will be
dependent upon the Company's results of operations, financial condition, cash
requirements,
-18-
future prospects and other factors deemed relevant by the Board of Directors. No
assurance can be given that the Company will pay any dividends on common stock
in the future.
No dividends for 1998 have been declared. Pipasa paid dividends to the
Company of $657,345 during fiscal 1997. For 1996, Pipasa paid dividends to the
original shareholders of that company of approximately $1.18 million.
Item 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
1998 1997 1996
---- ---- ----
Net sales $ 103,676 $ 70,018 $ 61,535
Cost of sales 76,347 53,206 45,446
Income from operations 6,155 3,962 5,167
Income before income taxes and
minority interest 3,641 2,382 3,016
Net income after minority interest 1,418 926 1,650
Earnings per common share 0.16 0.11 -
Pro forma earnings per common share - - 0.28
Total assets 63,005 36,554 37,103
Long-term debt 22,559 5,252 3,593
Dividends per common share - - -
Weighted average number of common
shares outstanding 7,078,949 6,592,021 5,191,190
Ratio of earnings to fixed charges 1.46 1.37 1.61
Ratio of earnings to fixed charges
and preferred dividends 1.38 1.28 1.50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General:
Management is responsible for preparing the Company's financial statements and
related information that appears in this report. Management believes that the
financial statements fairly reflect the form and substance of transactions and
reasonably present the Company's financial condition and results of operations
in conformity with Generally Accepted Accounting Principles in the United States
of America ("GAAP"). Management has included in the Company's financial
statements amounts that are based on estimates and judgements, which it believes
are reasonable under the circumstances. The Company maintains a system of
internal accounting policies, procedures and controls intended to provide
reasonable assurance, at appropriate cost, that transactions are executed in
accordance with Company authorization and are properly recorded and reported in
the financial statements, and that assets are adequately safeguarded.
-19-
The most significant events occurring during the year ended September 30, 1998
were:
(i) The refinancing of part of its subsidiaries' short-term debt, with a private
placement of US $20 million of the Company's 11.71% Series A Senior Notes and
Series B Senior Notes (the "Notes"), placed by Citicorp Securities, Inc., both
due January 15, 2005 although interest and principal payments are due as
follows:
YEAR
January 15, 2001 $ 4,000,000
January 15, 2002 4,000,000
January 15, 2003 4,000,000
January 15, 2004 4,000,000
January 15, 2005 4,000,000
Interest on outstanding principal is payable every six months commencing on July
14, 1998.
(ii) The company changed its name from Costa Rica International, Inc. to RICA
FOODS, INC.
(iii) The acquisition of a new subsidiary, Corporacion As de Oros, S.A. and
subsidiaries ("As de Oros"), a poultry and animal feed producer with a
significant market share of domestic and commercial animal feed among the Costa
Rican market. The Company reached an agreement (the "Original Oros Agreement")
to acquire 56.38% of the total outstanding common stock of As de Oros and its
wholly owned subsidiaries, Restaurantes As, S.A. and Corasa Estudiantes S.A.,
from Comercial Angui S.A. ("Angui") a Costa Rican privately-owned company and
the majority shareholder of As de Oros, for US $2.4 million in cash upon the
maturity of a promissory note due January 2000 and 815,686 post-Split shares of
Company common stock, then valued at approximately $2.6 million.
As de Oros was first founded in 1954. In 1970 the company focused its operations
towards the animal feed business and developed its poultry activities a few
years thereafter. As de Oros has subsequently become the second largest poultry
company in Costa Rica, (second to Pipasa) generating approximately US $48
million in sales annually. Like Pipasa, As de Oros has businesses in chicken
production, chicken by-products, further processed foods and animal feed. It
sells over 80 different chicken and sausage products, commercial eggs and 70
different animal feed formulas for poultry, hogs and cattle. As de Oros has been
in the poultry business for more than 35 years and has approximately 20% share
of the Costa Rican national market. As de Oros' strength is in animal feed
concentrates, where it has approximately 21% market share of the business. As de
Oros also operates one of the largest fast food chains in the country,
"Restaurantes As", which is comprised of 29 restaurants operating in the
metropolitan area of Costa Rica, and 7 restaurants in the rural area. As de Oros
currently employs approximately 1,300 people, has a distribution network of more
than 80 vehicles, and owns 17 urban and rural outlets.
-20-
Main Business Segments and Markets
The animal feed business, including processed feed and concentrates, represents
approximately 40% of total 1997 sales of As de Oros and 39% of total 1998 sales
(concentrates are used to feed birds, pigs, horses, dogs and tilapia).
Currently As de Oros has approximately 21% market share of the animal feed
business. This segment represents the bulk of As de Oros' activities. The
marketing and administrative costs associated with the animal feed business are
considerably lower than those associated with selling broiler chicken and meat
by-products. This segment is less price sensitive than the chicken meat market,
as sales are driven by quality. Quality of the feed is what ultimately
determines the size and weight of the hog, chicken or cow.
The broiler chicken segment represents approximately 40% of As de Oros' total
sales and approximately 21% of gross margin as a percent of chicken sales.
Prices in this segment are heavily influenced by the market leader, Pipasa.
As de Oros defines its target market for broiler chicken by areas within Costa
Rica as urban and rural. The urban area is the country's central plateau region
and customers in this market have certain characteristics and buying patterns.
Distribution in the urban area tends to be daily, compared to the distribution
in rural area. Chicken is sold through the typical conduits like supermarkets,
retail traders and restaurants, including "Restaurantes As de Oros." Management
is analyzing the possibility of selling Restaurantes As de Oros. If such sale
takes place, purchase accounting could change.
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998
COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
The Company's operations resulted in $0.16 basic earnings per share during
fiscal year 1998, compared to $0.11 during fiscal year 1997 and $0.28 during
fiscal year 1996.
The following table presents information related to the Company's sales:
RICA FOODS, INC. AND SUBSIDIARIES
NET SALES-YEAR ENDED
SEPTEMBER 30,
(millions)
1998 1997 1996 97-98 96-97
---- ---- ---- ------ ------
% %
Animal feed $ 17.84 6.95 5.00 156.69% 39.08%
Chicken by-products 9.41 7.92 7.07 18.81% 12.02%
Exports 2.70 2.33 1.19 15.88% 95.80%
Other 8.55 8.54 7.04 0.23% 21.34%
Broiler chicken 60.06 44.28 41.24 35.64% 7.37%
Restaurants 5.12 - - - -
- ------------------------------------------------------------------------------
TOTAL SALES $ 103.68 $70.02 $ 61.54 48.07% 13.80%
- ------------------------------------------------------------------------------
-21-
The following table presents certain items as a percentage of net sales for
the period indicated:
RICA FOODS, INC. AND SUBSIDIARIES
September 30,
1998 1997 1996
--------------------------------------
Net sales 100.00% 100.00% 100.00%
- -----------------------------------------------------------------------------
Cost of sales 73.64% 75.99% 73.85%
Gross profit 26.36% 24.01% 26.15%
General and administrative 11.76% 8.64% 7.18%
Selling 8.39% 9.71% 10.57%
Amortization of goodwill 0.28% -- --
Income from operations 5.94% 5.66% 8.40%
Interest expense 3.00% 3.58% 4.37%
Income before income taxes and
minority interest 3.51% 3.40% 4.90%
Provision for income taxes 0.18% 0.42% 0.40%
Net income applicable to
common stock 1.09% 1.08% 2.34%
NET SALES:
General: Net sales generated by the Company's operations for the year ended
September 30, 1998 were $103.68 million, an increase of $33.66 million or
48.07%, compared with fiscal year 1997.
The following table presents consolidated sales increase by business segment,
for the years ended September 30, 1998 and 1997, respectively:
RICA FOODS, INC. AND SUBSIDIARIES
(millions)
Year Ended September 30,
--------------------------------------------------- Increase Increase
1998 1997 (decrease) (decrease)
Segment Pipasa As de Oros Total Pipasa Pipasa Consolidated
- ---------------------------------------------------------------------------------------------------------
Animal feed $ 7.09 $ 10.75 $ 17.84 $ 6.95 2.01% 156.69%
By-products 8.52 0.89 9.41 7.92 7.58% 18.81%
Exports 2.70 - 2.70 2.33 17.39% 17.39%
Broiler chicken 50.03 10.03 60.06 44.28 12.99% 35.64%
Restaurants - 5.12 5.12 - N/A N/A
Other 8.16 0.39 8.55 8.54 (9.33%) (5.00%)
----------------------------------------------------------------------------------
TOTAL $ 76.50 $ 27.18 $103.68 $ 70.02 8.59% 47.16%
==================================================================================
-22-
Animal feed: Sales of animal feed were $17.84 million during the year ended
September 30, 1998 compared to $6.95 million during the same period of fiscal
1997, for an increase of 156.69%. This growth in sales was due to the
incorporation of sales of As de Oros for the period of March to September 30,
1998, whose core business is animal feed, combined with a volume increase in
Pipasa. Sales increase is mainly due to a 152.04% increase in volume and a
variance in product distribution.
By-products: Sales of chicken by-products increased 18.81% during the year ended
September 30, 1998. This increase is due to 0.33% volume increase combined with
price increase and product mix.
Exports: Exports increased 17.39% during the year ended September 30, 1998
compared to fiscal 1997. This is due to an average 1.53% price increase combined
with a 15.86% volume increase. This increase is mainly due to continued exports
to Central America, the introduction of pet food in this market, and
extraordinary exports to Hong Kong. The Company has strengthened sales to El
Salvador and Nicaragua, and expects to focus on Honduras during fiscal 1999.
Broiler chicken: Broiler chicken sales of $60.06 million represent a 35.64%
increase above broiler sales of fiscal year 1997. This increase is due to a
32.78% volume increase and a 2.86% price increase.
Restaurants: The newly acquired restaurant segment which represents
"Restaurantes As de Oros" had sales of $5.12 million during the period of seven
months since its acquisition.
Other: Sales of Other, which include animal feed and baby chicks to integrated
producers and commercial eggs, raw materials and baby chicks to third parties,
decreased 5.00% during the year ended September 30, 1998 compared to the same
period of fiscal year 1997. This decrease is mainly due to a reduction in sales
to integrated producers and commercial eggs.
Sales distribution, by segment, for the years ended September 30, 1998, 1997,
and 1996 were as follows:
RICA FOODS, INC. AND SUBSIDIARIES
Sales Distribution
For the years ended September 30,
1998 1997 1996
------ ------ ------
Animal feed 17.21% 9.93% 8.12%
By-products 9.07% 11.32% 11.50%
Exports 2.61% 3.32% 1.94%
Other 8.25% 12.18% 11.42%
Broiler chicken 57.93% 63.25% 67.02%
Restaurants 4.93% 0.00% 0.00%
- ------------------------------------------------------------------------------
TOTAL 100.00% 100.00% 100.00%
- ------------------------------------------------------------------------------
-23-
COST OF SALES:
General: Cost of sales for the year ended September 30, 1998 was $76.35 million,
compared to $53.21 million for fiscal year 1997, an increase of $23.08 million.
This increase was mainly due to volume increase and the incorporation of the new
subsidiary, As de Oros.
As a percentage of net sales, cost of sales represented 73.64% during fiscal
year 1998, compared to 75.99% during fiscal year 1997. During the first three
quarters of fiscal year 1998, cost of sales was slightly higher than the prior
fiscal year, due to the imports of fertile egg and chicken parts. These imports,
that took place during the months of January through June of 1998 were a
consequence of the low technical yields and high temperatures that were caused
by the El Nino weather phenomenon. The impact of these imports was strong, not
only in cost, but also technical yields as well. During the months of July to
September, 1998, the Company ceased imports and as a result, its technical
yields and cost of sales percentage improved.
Since "As de Oros" has been incorporated into the Company, Management decided to
change the breed of its reproduction hens in order to improve production yields.
This change in breeders, that temporarily affected the incubation rates, has
been stabilized into normal yields during the fourth quarter of fiscal 1998.
This has resulted in weight gain and improved conversion (amount of feed per
pound of grown meat). Management is satisfied with the results obtained.
Along with the improvement of technical yields came the reduction in
international prices of grains, specifically soy bean meal and corn. This
reduction contributed strongly to the cost of sales reduction from 75.99% to
73.64% of net sales.
Broiler chicken: Cost of sales for broiler chicken for fiscal year 1998 was
$44.53 million, compared to $32.55 million during the same period of fiscal year
1997, a 36.80% increase. This increase is due to a 32.78% increase in dressed
pounds sold and the remaining increase was due to an increase in unit production
costs. As a percentage of net sales, cost of sales was 74.04% during fiscal year
1998, compared to 73.59% during fiscal year 1997.
By-products: Cost of sales for chicken by-products was $5.38 million during
fiscal year 1998, an increase of $0.51 million or 10.47% compared with fiscal
1997. This variation is mainly due to a price increase which consequently
improved gross margin, offset by the tonnage decrease due to intercompany
elimination due to the consolidation of As de Oros during fiscal 1998. As a
percentage of net sales, cost of sales was 57.45% during fiscal year 1998,
compared to 60.76% during fiscal year 1997.
Animal feed: Cost of sales for animal feed was $13.98 million for fiscal year
1998, compared to $5.77 million during fiscal year 1997, an increase of $8.21
million or 142.29%. This variation is mainly due to the incorporation of As de
Oros' sales, which, as previously mentioned, has its main business among this
segment. As a percentage of net sales, cost of sales was 78.65% during fiscal
year 1998, compared to 82.86% during fiscal year 1997. The reduction in cost of
imported grains (soy bean meal and corn) contributed significantly to the
improvement in this ratio.
-24-
Exports: Cost of sales for exports for fiscal 1998 was $1.80 million compared to
$1.72 million during fiscal year 1997. This increase is mainly due to a 15.86%
volume increase combined with a 0.42% price increase. Volume increased mainly in
broiler chicken, by-products, mechanically deboned meat and pet food, which was
introduced as an export product at the end of fiscal year 1997. As a percentage
of net sales, cost of sales was 66.67% during fiscal year 1998, compared to
73.91% during fiscal year 1997. This improvement is mainly due to the
introduction of new products in general exports, that have a higher gross
margin.
Other: Cost of sales for "Other" was $7.95 million during fiscal year 1998,
compared to $8.29 million during fiscal year 1997, a decrease of $340,000 or
4%. This decrease is due to a decrease in sales to integrated producers and
decreased commercial eggs sales. As a percentage of net sales, cost of sales for
"Other" was 92.94% compared to 97.65% during fiscal year 1997.
GROSS PROFIT:
Gross profit for fiscal year 1998 was $27.33 million, compared to $16.81 million
during fiscal year 1997. A 62.57% increase. This increase is mainly due to a
volume increase and an improvement in the general cost of sales ratio.
As a percentage of net sales, gross profit increased from 24.01% in fiscal year
1997 to 26.37% during fiscal year 1998, due to the issues discussed above in
cost of sales.
The following table shows gross profit for each segment for the years ended
September 30, 1998, 1997 and 1996:
RICA FOODS, INC. AND SUBSIDIARIES
Gross Profit Margin
For the years ended September 30,
1998 1997 1996
------ ------ ------
Animal Feed 21.35% 17.02% 11.10%
By-products 42.55% 38.53% 34.44%
Exports 33.33% 26.05% 25.67%
Other 7.06% 2.81% 5.24%
Broiler Chicken 25.96% 26.20% 30.12%
Restaurants 47.06% -- --
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses were $8.69 million during fiscal year 1998,
compared to $6.05 million during fiscal year 1997, a 43.72% increase. This
increase is primarily due to expenses incurred in the As de Oros acquisition. As
a percentage of sales, this item decreased from 8.64% during fiscal 1997, to
8.39% during fiscal year 1998 mainly due to improved sales and efficiencies
resulting from the As de Oros acquisition.
-25-
SELLING EXPENSES:
Selling expenses increased 79.14% during fiscal year 1998, compared with fiscal
year 1997. As a percentage of net sales, these expenses increased from 9.71% in
1997 to 11.75% during the same period of fiscal year 1998.
The restaurant segment contributed to the increase in selling expenses as a
percentage of net sales. This is due to the nature of the restaurant business,
which has a high gross profit and high selling expenses. Selling expenses
amounted to approximately 14% of total consolidated sales for the restaurant
segment.
In connection with the acquisition of As de Oros, the Company recorded a charge
to administrative expenses relating to the amortization of cost in excess of net
assets acquired ("Goodwill"). The Company also recorded administrative expenses
pertaining to professional services, related to legal fees, financial printing,
auditing and other related charges.
OTHER EXPENSES (INCOME):
Other expenses (income) increased 59.20% during fiscal year 1998, compared with
fiscal year 1997. The Company's interest expense increased by 23.87% during
fiscal 1998, compared with fiscal 1997. Miscellaneous income increased during
fiscal 1998, when compared to fiscal 1997 and 1996. This is mainly due to
dividends received from investments made in other countries in the amount of
$153,073 and a legal settlement in the amount of $350,073. In addition, the
Company recorded gains for transporting products to clients in the amount of
$356,645.
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1997
COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996
NET SALES:
General: Net sales generated by the Company's operations for the year ended
September 30, 1997 were $70.02 million, an increase of $8,482,637 or 13.78%
compared with fiscal 1996.
Broiler chicken: Broiler chicken sales for fiscal 1997 increased from
$41,239,331 during fiscal 1996 to $44,284,164 for the same period of 1997, an
increase of 7.38%. This increase is due to a 4.72% increase in tonnage and the
remaining 2.66% is due to sales price increases.
By-products: By-products have traditionally been the most profitable products of
the Company. Total sales of this segment were of $7,923,545 during fiscal 1997,
an increase of $849,930 or 12.02% when compared with sales of fiscal 1996. This
increase is due to a 3.66% increase in tonnage and the remaining 8.36% is due to
price increases among the products within this segment (patties, sausages,
further-processed products and maquila).
Animal feed: Sales for commercial animal feed were $6,950,523 in fiscal 1997 and
$4,996,541 during fiscal 1996, an increase of 39.11%. This sales increase
corresponds to a 27.80% increase in tonnage, with the remaining 11.31% due to
price increases. Also, Kanin and Mimados, pet
-26-
food brands, gained market share. Management has committed promotional and other
resources to these products, which are among the Company's most profitable.
Exports: The Company's exports were $2,325,043 during fiscal 1997, an increase
of $1,130,300 or 94.60%, when compared to fiscal 1996. This increase in exports
was primarily due to the combined result of an 11.88% increase in net sales of
chicken by-products due to a 13.44% increase in total dressed pounds, offset by
an exchange rate effect on prices of 1.56%; a 154.42% increase in broiler
chicken and chicken parts due to a 121.3% increase in tonnage with the remaining
33.12% due to price increase; and the introduction of the pet food Mimados
during the fourth quarter of the year.
A significant contributor to the increase in exports was a transaction in
Honduras, which represented a one-time export sale to that country, running
through July 1997. Management expects that the success in 1997 will lead to
future opportunities in this market, and an increase through its exports to
Central America. The Company has opened its own distribution facility in El
Salvador, which includes cold storage, offering sausage, pate, bologna and other
chicken and turkey products under the Company's popular Pipasa(TM), Kimby(TM)
and Supremo(TM) brands. Pipasa has been fortunate to serve McDonald's
restaurants as a supplier in Costa Rica for several years. As a result of the
excellent service that the Company has provided to this important client, during
fiscal year 1997, Pipasa has been selected by McDonalds as its supplier for
poultry products for all of Central America. Management expects that this
relationship will increase exports to these markets.
Other: Sales of "Others" were $8,534,817 and $7,031,226 during fiscal 1997 and
fiscal 1996, respectively. An increase of $1,503,591 or 21.40%. This increase is
due to a 13.29% increase in tonnage and an 8.11% increase in prices.
COST OF SALES:
General: Fiscal 1997 cost of sales was $53.2 million, an increase of $7.76
million or 17.08% when compared to cost of sales during fiscal 1996. This
increase in cost of sales is due primarily to a 14.58% increase in tonnage
combined with the effect of a higher cost of raw materials and higher production
cost of broiler chicken and by-products segments. As a percentage of sales, cost
of sales was 75.99% for fiscal 1997 compared to 73.85% in fiscal 1996, for an
increase of 2.14%. The most significant variations were in raw materials and
indirect costs. Labor costs remained relatively constant.
El Nino Phenomenon: The El Nino weather phenomenon directly affected the
percentage of cost of sales over net sales for fiscal 1997. When mortality rates
increased in the Reproduction and Broiler Divisions, the Company's fertile egg
incubation rate goal only reached 92% of hatchery capacity, consequently, the
available amount of baby chicks for growing and processing was less than
projected, causing a shortage of chicken pounds for sale.
To satisfy demand, it was necessary to import baby chicks for the broiler (or
growth) phase, leading to higher costs. This situation increased unit prices and
also affected the incubation rates. The goal for fiscal 1997 was an 86.25%
incubation rate, and the Company achieved 84%. The ideal mortality rate standard
for birds in their growing phase is 3.5%, and the Company
-27-
experienced average 4.60% mortality during fiscal 1997. As the new regulated and
controlled environments are implemented among the different farms, Management
expects the mortality rates to decrease almost immediately. When implemented in
the Company's experimental farms, mortality in the growing phase (broiler
chicken) decreased from 5.15% to 4.69%, or a 9% improvement. In the Reproduction
phase, the results were a decrease in mortality from 5.35% to 1.68% in August
1997, a 68.6% improvement. Management expects to be able to offset the effects
of El Nino throughout fiscal year 1998.
Management decided to change the breeding of its reproduction hens in order to
have breeds with more weight with fewer weeks of feeding and growing. This
change in breeding temporarily affected the incubation rates. Although this
breeding process requires an adjustment period, it has fulfilled expectations
concerning weight. Nevertheless, Management estimates that the adjustment will
be completed during the next fiscal year.
Other relevant facts that explain the increase in cost of sales as a percentage
of net sales are:
o Average soybean meal prices for 1997 increased by 28.70% when compared to
average prices in 1996.
o Inventory reconversion: Broiler chicken stored in freezing chambers that
had to be reconverted to other cuts such as breast, thighs and other
chicken parts. This was necessary to satisfy the demand increase from
exports, as well as in the domestic market for chicken and by-products;
o Import of 6,100 boxes of fertile eggs, which represent 8.90% of total
produced eggs. These eggs had an incubation rate of 76.70%, versus an
average 84.25% that the Company produces locally.
o Changes in diet formulation for the birds, with the purpose of increasing
weight.
Broiler chicken: Cost of sales for broiler chicken for fiscal 1997 was
$32,554,735, an increase of $3,738,587 or 12.97% compared to fiscal 1996. This
difference is due to a 4.72% increase in dressed pounds sold and the remaining
was due to an increase in unit production costs in the incubation and growing
phases explained above.
By-products: Cost of sales for chicken by-products was $4,870,400 during fiscal
1997, an increase of $232,938 or 5.02% compared with fiscal 1996. This is due to
an increase of 3.66% in tonnage and increases in cost production explained
above.
Animal feed: Cost of sales for animal feed was of $5,767,286 for fiscal 1997, an
increase of $1,325,361 or 29.84% when compared with fiscal 1996. This difference
is due to a 27.80% increase in tonnage and the higher soybean meal prices.
Exports: Cost of sales for exports for fiscal 1997 was $1,719,261, an increase
of $831,185 or 93.59% higher than cost of sales when compared with fiscal 1996.
This increase is due to a
-28-
94.60% increase in dressed pounds sold and higher production costs of the
products that were exported during the present fiscal year.
Other: Cost of sales for "Other" was $8,294,938 during fiscal 1997, an increase
of $1,632,367 or 24.5% when compared with fiscal 1996. This increase is due to a
13.29% increase in tonnage and increases in raw material costs.
GROSS PROFIT:
Gross profit for fiscal year 1997 was $16,811,474 or 4.49% higher than fiscal
1996. As a percentage of net sales, gross profit decreased to 24.01% during
fiscal 1997 from 26.15% in fiscal 1996, due to the issues discussed above.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES:
Working capital: As of September 30, 1998, working capital was $4.82 million
compared to a working capital deficit at the end of fiscal 1997 of ($2.28)
million, a $7.1 million increase. The current ratios were 1.22 and 0.88 as of
September 30, 1998 and 1997, respectively. This increase is mainly due to debt
refinancing and an increase in cash and equivalents, as a result of the
incorporation of a new subsidiary.
Cash flows provided by operations was $7.87 million, $4.5 million and $5.14
million for the years ended 1998, 1997 and 1996, respectively. The decrease
during fiscal year 1997 is mainly due to a decrease in net income. The increase
in cash flows during fiscal year 1998 is mainly due to an increase in net
income, allowances, depreciation and a significant increase in minority
interest.
Change in operating assets and liabilities during fiscal year 1998 was
approximately $1.46 million which is mainly due to an increase in inventories
and a decrease in accounts payable.
INVESTING ACTIVITIES:
During the three years under analysis, the Company obtained external financing
in order to carry out part of its operating and investing activities.
During fiscal year 1997, the Company invested in operating assets and long-term
investments, mainly Inolasa - Adecsa, and As de Oros during fiscal year 1998.
FINANCING ACTIVITIES:
As previously mentioned in the investing and operating activities, during 1998,
the Company used cash mainly for capital expenditures and inventory, both of
which are related to the normal investing activities of the Company. In
addition, the Company invested in stock from other companies and acquisition of
its new subsidiary, As de Oros.
-29-
Management re-financed the Company's debt and improved its liquidity during
fiscal 1998. Increased liabilities are mainly the result of consolidating As de
Oros' debt and new loans.
Cash provided by (used in) financing activities was $(396,383), $1,351,926, and
$3,099,113 for the years ended September 30, 1998, 1997 and 1996, respectively.
The decrease in 1997 is mainly due to an increase in debt amortization, as well
as the repurchase of common stock. The decrease in 1998 is mainly due to
amortization of debt and a decrease in due from shareholders. Management expects
to continue to finance its operations with its normal operating activities and
external sources, and that there will be sufficient resources available to meet
the Company's cash requirements through the next year.
OTHER MATTERS:
ENVIRONMENTAL COMPLIANCE
The Company is not subject to any material costs for compliance with any
environmental laws in any jurisdiction in which the Company operates. However,
in the future, the Company could become subject to material costs to comply with
environmental laws in jurisdictions in which it does not now do business. At the
present time, the Company cannot assess the potential impact of any such
potential environmental regulation on cash flows, results of operations and
financial condition. The Company practices sustainable environmental policies
such as reforestation, processes and recycles its waste, produces organic
fertilizer, and is currently improving its oxidation lagoons and sewerage
treatment plants.
YEAR 2000 ISSUE
The Company established a formal Year 2000 oversight committee in December,
1997. The members of this committee are the Information Systems Manager, the
Corporate Auditor, the Administrative Director, an Information Systems auditor,
and the Company's external Information Systems Advisor. Along with this
committee, the Company has written certification that its Information Systems
tools that were developed by Oracle are "Fully Year 2000 Compliant". Other
applications that have been certified include: RDBMS, Developer 2000 - Forms,
Developer 2000 - Reports, Developer 2000 - Graphics, SQL*Plus, Oracle Bood
Runtime, Oracle Data Browser.
The Company has begun the conversion, testing and implementation stages of
its Year 2000 plan, and is in the process of the final integrated test with key
users. The plan will include vendors, customers and intermediaries. Management
expects to develop and complete its Year 2000 plan during fiscal 1999 and will
report on this project's progress. To the extent that the Company could not
implement such stages, adverse impact could arise.
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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The Company and its representatives may from time to time make written or oral
forward-looking statements with respect to their current views and estimates of
future economic circumstances, industry conditions, company performance and
financial results. These forward-looking statements are subject to a number of
factors and uncertainties, which could cause the Company's actual results and
experiences to differ materially from the anticipated results and expectations,
expressed in such forward-looking statements. The Company cautions readers not
to place undue reliance on any forward-looking statements, which speak only as
of the date made. Among the factors that may affect the operating results of the
Company are the following: (i) fluctuations in the cost and availability of raw
materials, such as feed grain costs in relation to historical levels; (ii)
market conditions for finished products, including the supply and pricing of
alternative proteins, all of which may impact the Company's pricing power; (iii)
risks associated with leverage, including cost increases due to rising interest
rates; (iv) changes in regulations and laws, including changes in accounting
standards, environmental laws, occupational, health and safety; currency
fluctuations; and (v) the effect of, or changes in, general economic conditions.
This management discussion and analysis of financial condition and results
of operations may include certain forward-looking statements, within the
meaning of Section 27E 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 and should and
various 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 a number of risks, uncertainties and assumptions. Representatives
examples of these factors include (without limitation) general industrial and
economic conditions; cost of capital and capital requirements; shifts in
customer demands; changes in the continued availability of financial amounts and
at the terms necessary to support the Company's future business.
ITEM 7. A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is located in this report under the heading
"Exchange Rate Risk," "Foreign Competition," "Commodity Risk Management," and
"Exchange Rate Risk Management."
-31-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is incorporated by reference to the
Independent Auditors' Report found on page F-2 and from the consolidated
financial statement and supplementary data on pages F-3 through F-22 of this
report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements between the Company and its accountants during
the fiscal year ended September 30, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Directors and Executive Officers of the Company, their ages and present
positions held in the Company, as of September 30, 1998, are as follows:
NAME Age POSITION HELD
- ---- --- -------------
Calixto Chaves 52 Chief Executive
Officer, Chairman, President
and Director
Federico Vargas 65 Director
Jorge M. Quesada 49 Chief Financial Officer,
Treasurer and Director
Luis J. Lauredo 49 Director
Alfred E. Smith, IV 47 Director
Monica Chaves 27 Secretary
The Honorable Luis Guinot 63 Director
Jose Pablo Chaves 26 Director
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The Company's Directors will serve in such capacity until the next annual
meeting of the Company shareholders and until their successors have been elected
and qualified. The officers serve at the discretion of the Company's Directors.
Calixto Chaves and Monica Chaves are father and daughter. Calixto Chaves and
Jose Pablo Chaves are father and son. Jorge M. Quesada is the brother-in-law of
Calixto Chaves. Otherwise, there are no family relationships among the Company's
officers and directors, nor are there any arrangements or understanding between
any of the directors or officers of the Company or any other person pursuant to
which any officer or director was or is to be selected as an officer or
director.
CALIXTO CHAVES. Mr. Chaves was the founder and President of Corporacion
Pipasa, S.A. from its inception in 1969 to the present. He was the founder and
President of Aero Costa Rica, S.A., a private Costa Rican airline. He is
currently on the Boards of Directors of Central American Oils and Derivatives,
S.A., and American Oleaginous Industry ("INOLASA"). From 1994 to 1996, he was a
Board member of Cerveceria Americana, a private brewery. In 1994, he served as
an advisor to the Ministry of Economic Business Affairs. From 1983 to 1985, he
was a member of the Board of Directors of the Sugar Cane Agricultural League.
From 1982 to 1986, he served in the Costa Rican Ministry of Industry, Energy and
Mines and became Minister of Natural Resources in 1986. From 1982 to 1986, he
was a member of the Board of Directors of MINASA, a Costa Rican mining company.
Mr. Chaves was founder of the Chamber of Industries in the Costa Rican province
of Heredia. From 1973 to 1974, he was President of the Board of Directors of
Banco Nacional de Belen. He devotes a minimum of 48 hours per week to the
affairs of the Company.
DR. FEDERICO VARGAS. He has served as a Professor of Economics and Social
Sciences at the University of Costa Rica from 1963 to the present. Dr. Vargas
has been involved in extensive political activities since 1974. From 1990 to
1994, he served as a Deputy in the Costa Rican Assembly. From 1993 to 1994, he
was Chairman of the Legislative Section of the National Liberation Party of
Costa Rica. Prior to 1990, Dr. Vargas held a number of political offices,
including Ambassador of Costa Rica to the United States, Ambassador of Costa
Rica to the Organization of American States, Counselor to the President of Costa
Rica in Finance and External Debt, with the rank of Minister, and Economics
Advisor to the President of Costa Rica. His teaching activities included serving
as the Chairman of Economists at the Instituto de Investigaciones Economicas,
University of Costa Rica and Director of the Economics Department, School of
Economics and Social Sciences, University of Costa Rica. Dr. Vargas serves on
the boards and advisory bodies of numerous charitable and educational
organizations and is the author of a number of publications on economic and
educational matters. He obtained his Bachelors in Business Administration from
Nichols College in Massachusetts in 1954 and his Ph.D. from the University of
Colorado in 1967. He has also attended the Wharton School of Finance and
Commerce at the Universe of Pennsylvania. He devotes such time as may be
necessary to fulfill his obligations as an outside director of the Company.
-33-
LIC. JORGE M. QUESADA. Mr. Quesada has held numerous positions with
Corporacion Pipasa, S.A. since 1985 and has been Executive Vice President since
1990. He was a member of the Boards of Directors of Banco Formento Agricola
since 1991 until 1997. From 1987 to 1991, he was on the Board of Directors of
Financiera Belen, S.A. Mr. Quesada has conducted numerous seminars regarding
marketing issues. He obtained his Degree in Business Administration, with
emphasis on Public Accounting, from the University of Costa Rica in 1984. He
devotes a minimum of 48 hours per week to the affairs of the Company.
LUIS J. LAUREDO. From 1995 to the present, he has been the Director of the
International Consulting Group for the law firm of Greenberg Traurig, of Miami,
Washington, and New York. From 1994 to 1995, he was Executive Director of the
Summit of the Americas, a non-profit organization. From 1992 to 1994, he was a
Commissioner on the Florida Public Service Commission, as well as Chairman of
the International Relations Committee of the National Association of Regulatory
Utility Commissioners. In his career, Mr. Lauredo has had a number of positions
in the banking industry. He has served on numerous advisory committees,
including the Export-Import Bank of the U.S. He has represented the President of
the United States as special U.S. Ambassador to the inaugurations of the
Presidents of Colombia, Venezuela, Brazil, and Costa Rica. He also served as a
founding Director of the Hispanic Council on Foreign Affairs, Washington, D.C.
Mr. Lauredo received his B.A. from Columbia University in New York City and has
attended the University of Madrid in Spain and Georgetown University Law Center
in Washington, D.C. He devotes such time as is necessary to fulfill his
obligations as an outside director of the Company.
ALFRED E. SMITH, IV. Mr. Smith has been a director of the Company since
June 1, 1994. He was a partner of the New York Stock Exchange member firm of
Adler, Coleman & Co., Inc. from 1979 to 1994. Since 1998, he has been with
Hunter Specialist, a New York Stock Exchange member firm. In September, 1994,
Adler, Coleman & Co. sold the Adler, Coleman Cleaning division to an
unaffiliated third party. In February, 1995, the entity which acquired the
Adler, Coleman Cleaning division filed for bankruptcy protection under Chapter
11. Mr. Smith is a member of the Government Relations Committee of the New York
Exchange, Director and Secretary of the Alfred Emanuel Smith Memorial
Foundation, Chairman of the Cardinal's Committee for the Laity-Wall Street
Division, Director of the Center for Hope, a Trustee of St. Vincent's Hospital
and a Trustee of Iona Prep School. He is a member of the New York City Advisory
Board of the Enterprise Foundation and the American Association of the Sovereign
Military Order of Malta. He has received numerous awards for his charity
humanitarian work. Mr. Smith was educated at Villanova University.
MONICA CHAVES. Mrs. Chaves is Secretary of the Board of Directors of the
Company and is also member of the Board of Directors of Pipasa. Mrs. Chaves
joined Pipasa as assistant manager in the Financial Division in 1991; since 1993
she has managed the Pipasa's Special Investment Department. Mrs. Chaves received
a Bachelor's degree in Business Administration from Saint Michaels College,
Vermont.
-34-
HONORABLE AMBASSADOR MR. LOUIS GUINOT, JR. Luis Guinot Jr. was born in San
Juan, Puerto Rico on April 8, 1935. He attended college in the United States,
where he graduated from the Catholic University of America School of Law in
Washington, D.C. After completing his undergraduate studies at New York
University, he was commissioned an Ensign in the U.S. Navy where he served in
several billets-both shore and afloat - including a tour of duty as gunnery
officer of the destroyer USS Gearing (DD710) and Senior Shore Patrol Officer of
the U.S. Sixth Fleet based in Naples, Italy. After completion of his military
obligation, Mr. Guinot entered the private practice of law in Washington, D.C.
Mr. Guinot has served as United States Ambassador to the Republic of Costa Rica,
as the Assistant General Counsel of the United States Department of Agriculture
and as Administrator of the Office of the Commonwealth of Puerto Rico in
Washington, D.C. Additionally, Mr. Guinot has also appeared as speaker and
lecturer on United States-Latin American Trade, North American Free Trade
Agreement ("NAFTA"), and GATT related matters, and he is the author of several
newspaper articles on the same subject. Mr. Guinot is a member of the
Commonwealth of Virginia and the District of Columbia Bar Association and has
been admitted to practice before the bars of the U.S. Supreme Court, the 1st and
the 11th Circuit Court of Appeals, the Bars of the Southern District of New
York, and the Southern District of Florida, Eastern Districts of Virginia, and
the Court of military appeals. Mr. Guinot is also a fellow of the American Bar
Foundation, a former member of the U.S. Presidential Commission on Civil
Disorders (Kerner Commission) and former member of the Board of Directors of the
Legal Services Corporation. Mr. Guinot was awarded the Grand Order of Juan Mora
(Silver Plaque) by the Government of Costa Rica. He has been featured speaker on
Conferences on the general subject of hemispheric free trade and served as legal
advisor to U.S. corporations doing business in Latin America as well as legal
advisor to ministries of Central and South American Countries. He is currently a
member of the U.S. law firm of Shapiro and Olander.
JOSE PABLO CHAVES. Mr. Chaves assists the Board of Directors of Pipasa and
As de Oros, as well as Restaurantes As de Oros, S.A., and is a board member of
the Company and the Company's Chief Operating Officer. Mr. Chaves studied
Business Administration with emphasis in Marketing in the U.S. (Babson College,
Massachusetts) and in Costa Rica. Mr. Chaves is the founder of three Costa Rican
Companies, and is the son of Calixto Chaves.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act")
requires the Company's officers and directors and persons owning more than ten
percent of the Company's common stock to file initial reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Additionally, Item 405 of Regulation S-K under the 34 Act requires the Company
to identify in its Form 10K and proxy statement those individuals for whom one
of the above referenced reports was not filed on a timely basis during the most
recent fiscal year or prior fiscal years. Given these requirements the Company
has the following report to make under this section. All of the Company's
officers or directors and all persons owning more than ten percent of its shares
have filed the subject reports on a timely basis during the past fiscal year.
-35-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the Summary Compensation Table for the Chief
Executive Officer and the most highly compensated executive officer other than
the Chief Executive Officer who was serving as executive officer at the end of
the last fiscal year:
SUMMARY COMPENSATION TABLE
Salary Bonus (2)
Name and Main Position Years Compensation (1) Compensation(2)
Calixto Chaves 1998 $126,780 $1,993
Chief Executive Officer 1997 104,477 5,098
1996 94,780 3,864
(1) All salary compensation was paid in Costa Rican colones, rather than U.S.
dollars. For the purposes of this presentation, all compensation has been
converted to U.S. dollars at the then current exchange rate for Costa Rican
colones.
(2) Represents Director's fees payable for action as a Director of Pipasa.
Compensation Committee Interlocks and Insider Participation
The Company has a Compensation Committee consisting of Calixto Chaves,
Chairman of the Board and Jorge Quesada, Chief Financial Officer. This Committee
makes the determinations for stock issuance pursuant to the Company's
compensation plans. The Company has no retirement, pension or profit sharing
plans covering its officers and directors, but does contemplate implementation
of any such plan in the future through Pipasa and As de Oros.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of post-Split shares of Common
Stock of the Company which were owned beneficially by (i) each person who is
known by the Company to own beneficially more than 5% of its common stock, (ii)
each director and nominee for director, (iii) certain executive officers of the
Company, and (iv) all directors and officers as a group, prior to the
acquisitions and after the acquisitions of 100% of Pipasa and As de Oros:
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Amount and Amount and
Nature of Percent of Nature of Percent of
Beneficial Shares Owned Beneficial Shares Owned
Name and Address of Ownership Prior to Prior to Ownership After After
Beneficial Owner(1) Acquisitions (2)(3) Acquisitions (2) Acquisitions (2)(3) Acquisitions (2)
- ----------------------------------------------------------------------------------------------------------------------------
Calixto Chaves......................... 1,993,315(4) 26.87% 5,676,910(5) 44.44%
Commercial Angui, S.A.................. 815,686 10.99% 2,486,607(6) 19.46%
c/o Bufete Chaverri, Soto & Asociados
Barrio Escalante de Cine Magaly,
400 Metros Este
San Jose, Costa Rica
Jorge M. Quesada....................... 52,295(7) * 52,295(7) *
Monica Chaves.......................... 133,333(8) * 133,333(8) *
Luis Guinot, Jr. ...................... 0 0 0 0
Luis J. Lauredo ....................... 0 0 0 0
Federico Vargas........................ 0 0 0 0
Alfred E. Smith IV..................... 33,333 * 33,333 *
Jose Pablo Chaves...................... 279,324 * 279,324 *
______________________
* Indicates less than 1% of outstanding shares owned.
(1) Unless otherwise indicated, the address of each beneficial owner is
RICA FOODS, INC., 95 Merrick Way, Suite 507, Coral Gables, Florida
33134.
(2) A person is deemed to be the beneficial owner of securities that can
be acquired by such person within 60 days from the date hereof upon
exercise of options, warrants and convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such
person (but not those held by any other person) and that are
exercisable within 60 days from the date hereof have been exercised.
(3) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares of common stock beneficially owned by them.
(4) Includes 861,315 shares of common stock owned of record by Atisbos de
Belen, S.A., a Costa Rican corporation wholly-owned by Mr. Chaves and
his wife, 833,333 shares of common stock owned of record by
Inversiones Leytor, S.A., a Costa Rican company wholly-owned by Mr.
Chaves, and 298,667 shares of common stock owned of record by OCC,
S.A., a Costa Rican company wholly-owned by Mr. Chaves and his wife.
Does not include 133,333 shares and 279,324 shares owned by his adult
daughter and adult son respectively.
(5) Includes 3,683,595 post-Split shares of common stock to be acquired
pursuant to the Pipasa Acquisition.
(6) Includes 1,670,921 post-Split shares of common stock to be acquired
pursuant to the As de Oros Acquisition.
(7) Includes 52,295 shares owned by Jorque, S.A., a closely-held Costa
Rican company whose principal shareholders are the wife and adult son
of Mr. Jorge Quesada.
(8) Owned of record by Moninternacional, S.A., a Costa Rican corporation
owned by Monica Chaves, the adult daughter of Mr. Chaves. Mr. Chaves
disclaims any beneficial ownership of these shares.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Balances and transactions with related parties consist of the following:
1998 1997
---- ----
Due from stockholders $ 170,413 $ 920,476
Due from related parties 656,904 76,243
Due to stockholders 75,671 36,870
Due to stockholders (long-term) 18,526 20,489
Balances due from stockholders originate from interest bearing loans, which
bear interest at market rates, made primarily to the Company's Chief Executive
Officer, other stockholders and to Inversiones La Ribera, S.A. ("Inversiones La
Ribera"), a company 100% owned by the Company's Chief Executive Officer.
Balance due to stockholders in 1998 and 1997 originate from notes payables
to the Company's Chief Executive Officer and other stockholders.
During June 1998, Inversiones La Ribera paid-off outstanding debts due to
Pipasa from related parties in the amount of $1,245,197, in exchange for 276,710
shares of Company's common stock. The Company recorded such shares as treasury
stock. In connection with this transaction, the Company agreed to a buy back
option agreement with Inversiones La Ribera, whereby Inversiones La Ribera can
buy back the 276,710 shares at a $4.50 strike price. This option can be
exercised any time within a period of one year from the date of the agreement.
The Company retained the law firm of Shapiro and Olander on November 5,
1998, to provide corporate legal advice on an ongoing basis. Director Luis
Guinot, Jr. is a member of the firm.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a) Documents filed for this item are filed as a separate section
following the signature page. Reference is made to the Consolidated Financial
Statements on page F-1.
(1) See Page No. F-1.
(2) Schedules, other than those listed on Page F-1 are omitted because of
the absence of conditions under which they are required or because the
information required is included in the consolidated financial
statements and notes thereto.
-38-
(3) Exhibits
Number Description Reference
- ------------------------------------------------------------------------------
(2) Acquisition Plans
2.1 Stock Purchase Agreement, dated as of
September 28, 1998, by and between
the Company and Inversiones La
Ribera, S.A. filed as Exhibit 10.1 to
Form 8-K filed on October 13, 1998 is
incorporated by reference herein.
2.2 Stock Purchase Agreement, dated as of
September 28, 1998, by and between
the Company and Comercial Angui, S.A.
filed as Exhibit 10.2 to Form 8-K
filed on October 13, 1998 is
incorporated by reference herein.
(3) 3.1 Articles of Incorporation Previously filed.
3.2 By-Laws Previously filed.
(4) Instrument defining rights See 3.1 above.
of security holders
(10) Material Contracts
10.1 Note Purchase Agreement, dated as of
January 1, 1998, filed as Exhibit 10.1
to Form 10-Q filed on May 20, 1998 is
incorporated by reference herein.
-39-
10.2 Stock Purchase Agreement dated as of
January 22, 1998 by and between the
Company and Comercial Angui, S.A.,
filed as Exhibit 10.2 to Form 10-Q
filed on May 20, 1998 is incorporated
by reference herein.
(21) Subsidiaries of registrant See page 73.
(27) Financial Data Schedule See page 74.
(b) Reports on form 8-K. During the last quarter of fiscal year ended
September 30, 1998, the Company filed one report on Form 8-K on July 14, 1998
pertaining to the replacement of the Company's auditors, and filed an amendment
to that report on August 3, 1998 submitting the auditor's letter concurring with
the Company's disclosure.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RICA FOODS, INC.
Dated: January 6, 1999 By: /s/ Calixto Chaves
-----------------------------
Chief Executive Officer
Dated: January 6, 1999 By: /s/ Randall Piedra
-----------------------------
Chief Financial Officer
Dated: January 6, 1999 By: /s/ Monica Chaves
-----------------------------
Secretary
-40-
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
Registrant and in the capacities and on the dates indicated.
/s/ Calixto Chaves January 6, 1999
- -------------------------------- --------------------------------
Calixto Chaves Zamora, Director
/s/ Federico Vargas January 6, 1999
- -------------------------------- --------------------------------
Federico Vargas, Director
/s/ Jorge M. Quesada January 6, 1999
- -------------------------------- --------------------------------
Jorge M. Quesada, Director
/s/ Jose Pablo Chaves January 6, 1999
- -------------------------------- ---------------------------------
Jose Pablo Chaves
-41-
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1998 and 1997
(With Independent Certified Public Accountants)
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Rica Foods, Inc.:
We have audited the accompanying consolidated balance sheet of Rica Foods, Inc.
and subsidiaries as of September 30, 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's Management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
Management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rica Foods, Inc. and
subsidiaries as of September 30, 1998 and the results of their operations and
their cash flows for the year ended September 30, 1998, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Miami, Florida,
December 11, 1998.
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders,
Costa Rica International, Inc.
We have audited the accompanying consolidated balance sheets of Costa Rica
International, Inc. and Subsidiary as of September 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Costa Rica
International, Inc. and Subsidiary as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
two-year period ended September 30, 1997, in comformity with generally accepted
accounting principles.
KPMG Peat Marwick
San Jose, Costa Rica
December 5, 1997
F-3
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and 1997
Assets 1998 1997
------ ---- ----
Current assets:
Cash and cash equivalents $ 3,290,757 $ 1,388,290
Short-term investments 101,892 1,935,671
Notes and accounts receivable, net 8,290,021 5,818,760
Due from related parties 656,904 76,243
Inventories, net 12,862,456 7,106,214
Prepaid expenses 648,918 130,088
------------ ------------
Total current assets 25,850,948 16,455,266
------------ ------------
Property, plant and equipment, net 28,494,233 14,350,427
Long-term receivable-trade 119,229 176,520
Long-term investments 4,720,335 4,385,197
Other assets 2,039,443 1,187,128
Cost in excess of acquired business, net 1,781,147 -
------------ ------------
Total assets $ 63,005,335 $ 36,554,538
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,510,750 $ 5,191,923
Accrued expenses 3,035,951 2,137,237
Notes payable 8,463,052 10,126,947
Current portion of long-term debt 1,940,073 1,251,127
Due to stockholders 75,671 36,870
------------ ------------
Total current liabilities 21,025,497 18,744,104
------------ ------------
Long-term debt, net of current portion 22,559,425 5,252,149
Due to stockholders 18,526 20,489
Deferred income tax liability 1,974,407 -
------------ ------------
Total liabilities 45,577,855 24,016,742
------------ ------------
Minority interest 6,078,595 5,248,362
Stockholders' equity:
Common stock 7,419 6,603
Preferred stock 4,323,025 2,216,072
Additional paid-in capital 11,987,393 9,388,209
Cumulative translation adjustment (5,630,035) (4,675,549)
Retained earnings 3,370,982 2,122,542
------------ ------------
14,058,784 9,057,877
Less:
Due from stockholders (170,413) (920,476)
Treasury stock, at cost (2,539,486) (847,967)
------------ ------------
Total stockholders' equity 11,348,885 7,289,434
------------ ------------
Total liabilities and stockholders' equity $ 63,005,335 $ 36,554,538
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-4
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended September 30,
1998 1997 1996
---- ---- ----
Sales, net $ 103,676,630 $ 70,018,094 $ 61,535,457
Cost of sales 76,346,857 53,206,620 45,446,182
------------- ------------ ------------
Gross profit 27,329,773 16,811,474 16,089,275
------------- ------------ ------------
Operating expenses:
General and administrative 8,694,664 6,049,338 4,415,842
Selling 12,182,757 6,800,375 6,506,131
Amortization of cost in excess of
net assets of acquired business 297,206 - -
------------- ------------ ------------
Total operating expenses 21,174,627 12,849,713 10,921,973
------------- ------------ ------------
Income from operations 6,155,146 3,961,761 5,167,302
Other expenses (income):
Interest expense 3,108,182 2,509,131 2,686,801
Interest income (614,211) (826,870) (439,821)
Foreign exchange losses, net 1,412,971 205,988 101,529
Miscellaneous, net (1,392,732) (308,993) (197,147)
------------- ------------ ------------
Other expenses (income), net 2,514,210 1,579,256 2,151,362
------------- ------------ ------------
Income before income taxes and
minority interest
3,640,936 2,382,505 3,015,940
Provision for income taxes 188,663 291,396 244,431
------------- ------------ ------------
Income before minority interest 3,452,273 2,091,109 2,771,509
Minority interest 2,034,100 1,164,877 1,121,630
------------- ------------ ------------
Net income 1,418,173 926,232 1,649,879
Preferred stock dividends 288,219 172,496 211,750
------------- ------------ ------------
Net income applicable to
common stockholders $ 1,129,954 $ 753,736 $ 1,438,129
============= ============ ============
Earnings per share:
Basic earnings per share $ 0.16 $ 0.11
============= ============
Diluted earnings per share $ 0.16 $ 0.11
============= ============
Pro forma earnings per share $ 0.28
============
Weighted average number of common
shares outstanding:
Basic 7,078,949 6,592,021
============= ============
Diluted 7,113,265 6,639,075
============= ============
Pro forma 5,191,190
============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1998, 1997 and 1996
Common Stock Treasury Stock
----------------- -------------- Additional Cumulative Total
---------- ---------- -----
Number of Number of Preferred Paid-In Due from Translation Retained Stockholders'
--------- --------- --------- ------- -------- ----------- -------- ------------
Shares Amount Shares Amount Stock Additional Stockholders Adjustment Earnings Equity
------ ------ ------ ------ ----- ---------- ------------ ---------- -------- ------
Balance, September
30, 1995 5,191,190 $5,191 - - $2,216,072 $7,276,511 ($1,939,380) ($2,404,016) $3,028,603 $8,182,981
Issuance of common
stock 1,384,231 1,384 - - - 2,769 - - - 4,153
Agreement and Plan
of Reorganization
dated April 30,
1996:
Common stock
returned and
canceled (38,955) (39) - - - (78) - - - (117)
Divestment of assets (16,667) (16) - - - (117,647) - - - (117,663)
Capital
contributions - - - - - 2,883 - - - 2,883
Capitalization of
retained
earnings - - - - - 2,198,855 - - (2,198,855) -
Cash dividends on
common stock of
Pipasa - - - - - - - - (168,599) (168,599)
Cash dividends on
preferred stock - - - - - - - - (211,750) (211,750)
Net income - - - - - - - - 1,649,879 1,649,879
Decrease in Due
from Stockholders - - - - - - 834,390 - - 834,390
Translation
adjustment - - - - - - - (1,192,237) - (1,192,237)
---------- ------ ------- ----------- ---------- ----------- ----------- ----------- ---------- -----------
Balance, September
30, 1996 6,519,799 6,520 - - 2,216,072 9,363,293 (1,104,990) (3,596,253) 2,099,278 8,983,920
Issuance of
common stock 83,333 83 - - - 24,916 - - - 24,999
Cash dividends on
common stock of
Pipasa - - - - - - - - (730,472) (730,472)
Cash dividends on
preferred
stock - - - - - - - - (172,496) (172,496)
Purchase of common
stock - - 188,329 (847,967) - - - - - (847,967)
Net income - - - - - - - - 926,232 926,232
Decrease in Due
from
Stockholders - - - - - - 184,514 - - 184,514
Translation
adjustment - - - - - - - (1,079,296) - (1,079,296)
---------- ------ ------- ---------- ---------- ----------- ----------- ----------- ---------- -----------
Balance, September
30, 1997 6,603,132 6,603 188,329 (847,967) 2,216,072 9,388,209 (920,476) (4,675,549) 2,122,542 7,289,434
Acquisition of
As de Oros 815,686 816 - - 1,003,287 2,599,184 - - - 3,603,287
(continued on next page)
F-6
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1998, 1997 and 1996
(continued)
Common Stock Treasury Stock
----------------- -------------- Additional Cumulative Total
---------- ---------- -----
Number of Number of Preferred Paid-In Due from Translation Retained Stockholders'
--------- --------- --------- ------- -------- ----------- -------- ------------
Shares Amount Shares Amount Stock Additional Stockholders Adjustment Earnings Equity
------ ------ ------ ------ ----- ---------- ------------ ---------- -------- ------
Cash dividends on
preferred
stock - - - - - - - - (169,733) (169,733)
Preferred stock
dividends
issued - - - - 1,103,666 - - - 1,103,666
Repurchase of
common stock - - 276,710 (1,245,197) - - - - - (1,245,197)
Company's stock
swapped for
Pipasa's "TCA"
preferred stock - - (146,077) 657,344 - - - - - 657,344
Repurchase of
Pipasa's "TCA"
preferred stock - - 282,958 (1,103,666) - - - - - (1,103,666)
Net income - - - - - - - - 1,418,173 1,418,173
Decrease in Due
from
Stockholders - - - - - - 750,063 - - 750,063
Translation
adjustment - - - - - - - (954,486) - (954,486)
---------- ------ ------- ---------- ---------- ----------- ---------- ----------- ---------- -----------
Balance, September
30, 1998 7,418,818 $7,419 601,920 $2,539,486) $4,323,025 $11,987,393 ($170,413) ($5,630,035) $3,370,982 $11,348,885
========== ====== ======= =========== ========== =========== ========== =========== ========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $1,418,173 $ 926,232 $ 1,649,879
---------- ---------- ------------
Adjustment to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,313,075 1,384,910 1,232,269
Renewal for production poultry 1,340,431 982,823 912,727
Allowance for inventory obsolescence 29,435 - -
Amortization of cost in excess of net assets
of acquired business 297,206 - -
Increase in provision for vacation accrual 123,063 - -
Amortization of software development costs 122,761 105,534 -
Loss (gain) on sale of productive assets (3,732) (76,519) 77,461
Deferred income tax benefit (122,308) - -
Provision for doubtful receivables 301,432 213,000 154,868
Minority interest 2,034,100 1,164,877 1,121,630
Changes in operating assets and liabilities:
Notes and accounts receivable 952,598 (1,989,098) (1,193,383)
Due from related parties 116,693 108,143 496,513
Inventories (1,891,920) (1,722,092) (2,987,313)
Prepaid expenses 967,717 13,479 (20,165)
Accounts payable (1,920,001) 2,956,628 468,898
Accrued expenses 256,847 611,497 163,059
Long-term receivable-trade 56,116 13,568 (36,986)
---------- ---------- ------------
Cash provided by operating
activities 6,391,686 4,692,982 2,039,457
---------- ---------- ------------
Investing activities:
Short-term investments 1,833,749 (1,795,778) (44,594)
Initial cash balance from subsidiary acquired 1,147,472 - -
Additions to property, plant and equipment (5,313,919) (3,973,736) (1,672,706)
Increase in long-term investments (2,135,614) (3,708,805) -
Proceeds from sales of productive assets and
long-term investments 348,818 90,597 1,013,574
Increase in other assets (723,579) (232,923) (1,095,621)
---------- ---------- ------------
Cash used in investing
activities (4,843,073) (9,620,645) (1,799,347)
---------- ---------- ------------
Financing activities:
Increase in notes payable 2,510,177 1,783,467 1,745,986
Preferred stock cash dividends (288,219) (172,496) (211,750)
Common stock cash dividends - 1,343,569) (424,378)
(continued on next page)
F-8
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
Years ended September 30,
1998 1997 1996
---- ---- ----
Long-term financing:
Payments (2,753,919) (2,134,580) (1,344,403)
New loans 2,344,966 3,134,004 3,415,700
Return of capital - - (110,745)
Due to related parties 205,546 60,424 -
Due from stockholders (2,414,934) 150,265 -
Exercise of warrants - 25,000 -
Repurchase of common stock - (150,589) -
Other liabilities - - 28,703
----------- ----------- -----------
Cash provided by (used in) financing
activities (396,383) 1,351,926 3,099,113
---------- ---------- ------------
Effect of exchange rate changes on cash
and cash equivalents 750,237 (165,285) (323,506)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 1,902,467 (3,741,022) 3,015,717
Cash and cash equivalents at beginning of year 1,388,290 5,129,312 2,113,595
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,290,757 $ 1,388,290 $ 5,129,312
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 2,482,826 $ 2,493,716 $ 2,411,604
=========== =========== ============
Income taxes $ 117,935 $ 61,030 $ 189,054
=========== =========== ============
Supplemental schedule of non-cash investing and
financing activities:
Acquisition of treasury stock through
financial agreement $ 1,245,197
===========
Dividends paid as preferred shares $ 1,103,666
===========
Acquisition of business:
Fair value of assets acquired $ 7,709,050
===========
Common stock issued $ 2,600,000
===========
Loan assumed $ 2,400,000
===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Rica Foods, Inc., (the "Company"), formerly Quantum Learning Systems, Inc.
was incorporated under the laws of the State of Utah on February 6, 1986 and
filed a public offering in 1987. In April 1994, the Company changed its legal
domicile from Utah to Nevada. In April 1996, the Company entered into an
acquisition agreement to acquire the majority of the stock of Corporacion
Pipasa, S.A. ("Pipasa"), a Costa Rican entity. This transaction was approved by
the stockholders of the Company on August 5, 1996 and consummated on September
30, 1996. Simultaneously with the acquisition of Pipasa, the Company divested
itself of all other subsidiaries.
On February 26, 1998, the Company consummated an agreement (the "Original
Oros Agreement") with Comercial Angui, S.A. ("Angui"), a Costa Rican privately
held company, and the majority stockholders of Corporacion As de Oros, S.A. ("As
de Oros") to purchase 56.38% of the outstanding common stock of As de Oros in
exchange for 815,686 shares of Company stock at a price of $3.19 per share, for
a total of $2.6 million, and for a $2.4 million face value promissory note
payable in cash upon its maturity in January 2000, accounted for at its present
value of $1,927,976.
On April 14, 1998, the Board of Directors of the Company adopted a proposal
which would change the Company's name from "Costa Rica International, Inc." to
"Rica Foods, Inc." The Board of Directors believes the name change is in the
best interests of the Company because it would enhance the Company's corporate
identity with a name that is more closely related to the poultry producing
business of its principal subsidiaries, Pipasa and As de Oros. The stockholders
of the Company approved the name change at the May 29, 1998 stockholders'
meeting.
Pipasa and As de Oros produce and market poultry products and animal feed,
mainly in the Republic of Costa Rica. As de Oros also owns a chain of fast food
fried chicken restaurants, which operate in Costa Rica. Pipasa exports its
products to El Salvador, Honduras, Nicaragua, and Colombia.
The Company's fiscal 1998, 1997 and 1996 years encompass the periods ending
September 30, 1998, 1997 and 1996, respectively.
F-10
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
AGREEMENT AND PLAN OF REORGANIZATION
On April 30, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "First Pipasa Agreement") for the acquisition of Pipasa, and
the divestiture of all the current subsidiaries and activities of the Company.
The stockholders of the Company approved the plan of reorganization on August 5,
1996. Pursuant to the Agreement, and as of September 30, 1996, the Company had
exchanged 5,191,190 shares of its common stock for approximately 59.56% of
Pipasa's common shares. The 40.44% interest not acquired in the merger
transaction has been accounted for as minority interest for all years presented.
ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America
("GAAP"). Accounting records of subsidiaries are maintained according to
generally accepted accounting principles in Costa Rica and have been converted
to GAAP in consolidation.
PRINCIPLES OF CONSOLIDATION RECLASSIFICATIONS
The consolidated financial statements include the accounts of Rica Foods,
Inc., and subsidiaries (subsidiaries include Pipasa and As de Oros). The
minority interest held by third parties in a majority owned subsidiary is
separately stated. All significant intercompany balances and transactions have
been eliminated in consolidation.
The consolidated financial statements as of September 30, 1998 and 1997
reflect the acquisition of Pipasa as a reverse acquisition, whereby Pipasa was
treated as the accounting acquirer and the Company as the legal acquirer.
Accordingly, for financial reporting purposes, the issuance of stock in the
acquisition is treated as an issuance by the operating company, Pipasa.
Accordingly, financial statements for fiscal 1996 are those of Pipasa (the
accounting acquiror), as required by GAAP.
The consolidated financial statements as of September 30, 1998, reflect the
acquisition of As de Oros using the purchase method of accounting. The excess
purchase price over the fair market value of the net assets acquired is being
amortized using the straight-line method over a period of five years.
Certain prior period balances have been reclassified to conform to the 1998
presentation.
F-11
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
Management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates made by Management
include but are not limited to the realization of inventories, the possible
outcome of outstanding litigation and ultimate collection of customer
receivables. Actual results in subsequent periods could differ from estimates.
FOREIGN CURRENCY TRANSLATION
Most business transactions of the Company's subsidiares take place in the
Republic of Costa Rica and are denominated in the local currency, the colon
([cent sign]). The exchange rate between the colon and the US dollar is
determined in a free exchange market, supervised by the Central Bank of Costa
Rica. As of September 30, 1998, 1997 and 1996, commercial exchange rates were
[cent sign]264.07, [cent sign]238.77 and [cent sign]213.94 to US$1.00,
respectively.
The financial statements of Pipasa and As de Oros have been translated into
US dollars on the basis of the colon ([cent sign]) as the functional currency,
as follows: assets and liabilities denominated in dollars have been stated at
nominal dollar amounts; assets and liabilities denominated in Costa Rican
colones have been translated at the commercial exchange rates in effect on
September 30, 1998 and 1997; stockholders' equity accounts have been translated
at historical exchange rates; income and expenses have been translated at
average exchange rates in effect during the years then ended. Translation
adjustments have been recorded as a separate component of stockholders' equity.
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less
are considered cash equivalents.
F-12
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
INVESTMENTS
Short-term investments consist primarily of commercial paper denominated in
U.S. dollars and colones, with original maturities between 3 and 12 months.
These investments bear interest at 6% in U.S. dollars and 18.6% in colones (from
7% to 9% in US dollars for 1997) and are carried at cost, which approximates
fair market value. The Company has investments in short-term debt securities
that have been classified under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as held to maturity.
INVENTORIES AND RENEWAL OF PRODUCTION POULTRY
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method, except for inventories in transit, which are
valued at specific cost. Costs pertaining to the growth period of reproductive
hens are capitalized and are subsequently amortized over the expected
reproductive life of the hen. Renewal of production poultry is determined based
on the estimated poultry reproductive period.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Improvements to property,
plant and equipment which extend the assets useful lives are capitalized. Cost
for maintenance, repairs and minor renewals are charged to expense when
incurred.
Depreciation is provided using the straight-line method over estimated
useful lives: buildings-50 years; vehicles, machinery and equipment, furniture
and fixtures-between 5 and 20 years.
Cost of leasehold rights on leased properties, accounted for as operating
leases, are amortized over the lease term agreement using the straight-line
method.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs amounted to
$815,699, $295,768 and $445,466 in 1998, 1997 and 1996, respectively.
Advertising expenses are included as part of selling expenses on the statement
of income.
F-13
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No.109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as income in the period that includes the enactment date.
NEW ACCOUNTING PRONOUNCEMENTS
Disclosure of Information about Capital Structure
- -------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure about Capital Structure," which requires companies to present
additional information about securities, preferred stock and redeemable stock
and is effective for fiscal years beginning after December 15, 1997.
Reporting Comprehensive Income
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements and is effective for fiscal years
beginning after December 15, 1997.
Disclosures about Segments of an Enterprise and Related Information
- -------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires that public businesses report certain information in the financial
statements about their products, services, geographic areas in which they
operate, and their major customers, related to the operating segments of the
company. The statement is effective for fiscal years beginning after December
15, 1997.
F-14
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Accounting for Derivative Instruments and for Hedging Activities
- ----------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. This statement is effective for financial statements for
fiscal years beginning after June 15, 1999. Management of the Company has not
yet quantified the impact of adopting SFAS No.133.
NOTE 2 - NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
1998 1997
---- ----
Accounts receivable:
Trade receivables $ 7,771,455 $4,838,313
Other 1,214,400 1,212,879
----------- ----------
8,985,855 6,051,192
Less: allowance for doubtful
accounts (727,005) (380,791)
----------- ----------
8,258,850 5,670,401
Short-term notes-trade 31,171 148,359
----------- ----------
$ 8,290,021 $ 5,818,760
=========== ===========
NOTE 3 - ACCOUNTS AND TRANSACTIONS WITH RELATED PARTIES
Balances and transactions with related parties consist of the following:
1998 1997
---- ----
Due from stockholders $ 170,413 $ 920,476
Due from related parties 656,904 76,243
Due to stockholders 75,671 36,870
Due to stockholders (long-term) 18,526 20,489
Balances due from stockholders originate from interest bearing loans, which
bear interest at market rates, made primarily to the Company's Chief Executive
Officer, other stockholders and to Inversiones La Ribera, S.A., ("Inversiones La
Ribera"), a company 100% owned by the Company's Chief Executive Officer.
Balance due to stockholders in 1998 and 1997 originate from notes payables
to the Company's Chief Executive Officer and other stockholders.
F-15
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
During June 1998, Inversiones La Ribera paid off outstanding debts due to
Pipasa from related parties in the amount of $1,245,197, in exchange for 276,710
shares of the Company's common stock. The Company recorded such shares as
treasury stock. In connection with this transaction, the Company agreed to a buy
back option agreement with Inversiones La Ribera, whereby Inversiones La Ribera
can buy back the 276,710 shares at a $4.50 strike price. This option can be
exercised any time within a period of one year from the date of the agreement.
NOTE 4 - INVENTORIES, NET
Inventories, net consist of the following:
1998 1997
---- ----
Finished products $ 3,038,319 $ 686,423
Poultry 2,713,040 2,269,993
Production poultry 3,141,980 1,708,071
Materials and supplies 1,710,071 1,134,115
Raw materials 2,849,126 1,639,527
In transit 204,681 131,188
------------ ----------
13,657,217 7,569,317
Renewal of production poultry (766,736) (463,103)
Allowance for obsolescence ( 28,025) -
------------ ----------
Inventories, net $ 12,862,456 $7,106,214
============ ==========
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, short-term investments,
accounts payable, notes and accounts receivable and long-term receivable-trade,
are a reasonable estimate of their fair value due to the short-term nature of
these instruments. The Company estimates that the carrying value of notes
payable, current installments of long-term debt and long-term debt, approximates
fair value because interest rates are adjustable based on market interest rates.
Futures contracts with original maturities of less than one year are used
to hedge fluctuations in corn and soybean meal prices. The Company does not
enter into derivative transactions for speculative purposes. Gains and losses on
commodity futures transactions are deferred until the futures contracts are
liquidated. As of September 30, 1998, the Company has futures contracts in place
to hedge purchases of such commodities for $713,600 with a fair value of
$673,200.
F-16
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, is summarized as follows:
1998 1997
---- ----
Land $ 7,835,150 $ 2,253,591
Buildings and facilities 11,000,373 5,955,582
Machinery and equipment 17,426,179 10,302,630
Machinery in transit 126,146 -
Construction in process 719,547 782,812
----------- ------------
37,107,395 19,294,615
Less: accumulated depreciation (8,613,162) (4,944,188)
----------- ------------
Property, plant and equipment, net $28,494,233 $ 14,350,427
=========== ============
Depreciation and amortization expense for the years ended September 30,
1998, 1997, and 1996 amounted to $2,313,075, $1,384,910, and $1,232,269,
respectively.
NOTE 7 - LONG -TERM INVESTMENTS
Long-term investments consist of the following:
1998 1997
---- ----
Grupo Industrias Oleaginosas S.A.
("Inolasa") (10% ownership) $3,936,551 $4,353,667
La Condesa, S.A. 757,375 -
Others (less than 50% ownership) 26,409 31,530
---------- ----------
$4,720,335 $4,385,197
========== ==========
Inolasa is the only Costa Rican supplier of soybean meal. During 1998, the
Company received cash dividends from Inolasa in the amount of approximately
$150,000. This is included in miscellaneous, net on the statement of income.
During 1998, the Company invested $757,375 in 200,000,000 preferred shares
of La Condesa S.A. Dividends on the preferred shares are payable annually at
5.62% in cash or in kind. La Condesa S.A. is a hotel located in Costa Rica.
Acccording to Costa Rican tax laws, 50% of the amounts invested in
tourism-related companies can be deducted from the income tax during the period
the transaction took place. Accordingly, the Company has deducted $399,122 from
its income tax payable for fiscal 1998.
Investments in companies are carried at cost, based on ownership
percentage. Dividends received from those companies are included in other
income.
F-17
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 8 - NOTES PAYABLE
Notes payable consist of the following:
1998 1997
---- ----
Loans payable $5,648,310 $ 6,188,036
Bank overdrafts 1,414,247 371,193
Commercial paper 1,075,736 3,562,721
Other 324,759 4,997
---------- -----------
$8,463,052 $10,126,947
========== ===========
Loans payable include lines of credit and commitments with banks for
letters of credit to support commercial operations with suppliers to acquire raw
materials. The Company has a $500,000 line of credit with the brokerage firm,
Futures U.S.A., Inc. ("FIMAT"), which is used to finance purchases of corn and
soybean.
As of September 30, 1998, the Company has line of credit agreements with
banks for a maximum of $11.6 million, of which $4.8 million has already been
used ($8.8 million for 1997, of which $4.4 million had already been used).
Agreements may be renewed annually, and bear interest at annual rates ranging
from 8% to 10% (9.25% and 12.00% for 1997). Those agreements are secured by
property.
Commercial paper consists of unsecured debt certificates denominated in
colones registered with the Comision Nacional de Valores ("Costa Rican Stock
Exchange"), with a maximum authorized amount of $3.7 million ([cent sign]1
billion). The Company's commercial paper bears annual interest rates ranging
from 18.50% to 24.50% and from 17.25% to 19.25%, in 1998 and 1997, respectively.
As of September 1998, the Costa Rican Stock Exchange approved the
withdrawal of Pipasa's debt certificates from the stock exchange market.
NOTE 9 - LONG TERM DEBT
Long-term consists of the following:
1998 1997
---- ----
Private placement $20,000,000 $ -
Bank loans 2,984,250 5,395,152
Commercial paper-unsecured 42,224 46,698
Other 1,473,024 1,061,426
----------- ----------
24,499,498 6,503,276
Less: current installments 1,940,073 1,251,127
----------- ----------
$22,559,425 $5,252,149
=========== ==========
F-18
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
As of September 30, 1998, bank loans in the amount of $1 million are
secured by the Company's equipment and vehicles in the amount of $1.5 million,
and are due from October 1998 to April 2005.
The Company completed a private placement (the "Private Placement") of $20
million in notes payable bearing an annual interest rate of 11.71%, comprised of
$8 million in Series "A" Senior Notes and $12 million in Series "B" Senior Notes
(collectively the "Notes"). The closing date of the agreement was on January 23,
1998 for series "A" and February 26, 1998 for series "B". No collateral was
pledged relating to the private placement. The Private Placement includes the
following terms, among others:
- - The Notes shall be payable annually in five consecutive principal
installments amounting to $4,000,000 each beginning on January 15, 2001.
The Notes have a two-year principal payment grace period.
- - The Company has signed covenants stating that there will be no significant
organizational changes and that the Company will comply with all federal
and local laws and regulations.
- - Financial and business information for the Company and its subsidiaries
will be remitted periodically.
- - The Company is committed to comply with several financial and operational
covenants, and to review the relevant terms included in the agreement to
prevent the existence of a default or event of default.
Interest rates for long-term debt are as follows:
1998 1997
---- ----
US dollar loans 8.5% - 11.71% 8.25% - 10%
Costa Rican colones loans - 19% - 27%
Commercial paper-unsecured 24% - 24.5% 18.56%
Future payments on long-term debt at September 30, 1998 are as follows:
Year Amount
---- ------
1999 $ 1,940,073
2000 1,447,986
2001 4,615,637
2002 4,445,554
2003 4,050,248
Thereafter 8,000,000
-----------
$24,499,498
===========
F-19
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 10 - EARNINGS PER SHARE AND PRO FORMA EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number
of common shares outstanding plus the effect of outstanding warrants and stock
options using the treasury stock method according to SFAS No. 128 "Earnings per
Share". Earnings per share pertaining to 1997 results of operations have been
restated to comply with this standard.
Earnings per share and weighted average amounts have been restated to
reflect reverse stock split effective on December 29, 1998.
Following is a reconciliation of the weighted average number of shares
currently outstanding with the number of shares used in the computations of
fully diluted earnings per share:
1998 1997 1996
---- ---- ----
Numerator:
- ---------
Income from continuing operations $1,129,954 $ 753,736
========== ==========
Pro forma earnings from continuing
operations $ 1,438,129
===========
Denominator:
- -----------
Denominator for basic income
per share 7,078,949 6,592,021
Effect of dilutive securities:
Options to purchase common stock 34,316 47,054 -
Denominator for diluted earnings
per share 7,113,265 6,639,075
========== ==========
Denominator for pro forma earnings
per share 5,191,190
===========
Earnings per share from continuing
operations:
Basic $ 0.16 $ 0.11
========== ===========
Diluted $ 0.16 $ 0.11
========== ===========
Pro forma $ 0.28
===========
The Company did not have any antidilutive securities outstanding as of
September 30, 1998 and 1997.
The shares used in computing pro forma earnings per share are those shares
issued by the Company to effect the business combination for the acquisition of
59.56% of the outstanding shares of Pipasa.
The minority interest in the income of subsidiaries and dividends on
preferred stock have been excluded from income available to common stockholders.
F-20
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 11 - PRO FORMA FINANCIAL INFORMATION
Following is pro forma financial information which presents results of
operations for the years ended September 30, 1998 and 1997, as if the
acquisition of 56.38% of As de Oros, consummated on February 26, 1998, had taken
place on October 1, 1996:
1998 1997
---- ----
Revenues $ 120,491,783 $ 116,532,789
Net income (loss) 854,178 (1,758,194)
Basic earnings per share:
Weighted average number of shares
outstanding 7,418,818 7,407,707
============= =============
Earnings (loss) per share $ 0.12 $ (0.24)
============= =============
Diluted earnings per share:
Incremental shares from assumed
conversions of warrants 34,316 47,054
Adjusted weighted average shares 7,453,134 7,454,761
============= =============
Diluted earnings (loss) per share $ 0.11 $ (0.24)
============= =============
Pro forma, basic and diluted weighted average outstanding shares and
earnings per share amounts, have been restated to reflect reverse stock split.
Basic and adjusted weighted average shares are computed assuming the stocks
issued for the acquisition of As de Oros, had taken place on October 1, 1996.
NOTE 12 - EMPLOYEE BENEFIT PLAN
On April 14, 1998, the Company adopted the 1998 Stock Option Plan (the
"Plan"). Under the Plan, 200,000 shares of the Company's common stock, par value
$.001 per share, are reserved for issuance upon exercise of options. The plan is
designed to serve as an incentive for retaining and attracting qualified persons
and/or entities that provide services. As of September 30, 1998, the Company had
not issued any options under the Plan.
F-21
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 13 - STOCKHOLDERS' EQUITY
COMMON STOCK
As of September 30, 1998 and 1997, 20,000,000 common shares at $.001 par
value were authorized. As of September 30, 1998 and 1997, 7,418,818 and
6,603,132 shares were authorized and issued, respectively. Outstanding shares as
of September 30, 1998 and 1997 were 7,099,856 and 6,414,803, respectively.
During February 1998, the Company issued 815,686 shares of common stock to
purchase 56.38% of As de Oros.
During November 1997, the Board of Directors authorized the repurchase of
up to 66,667 shares of the Company's common stock. The repurchase program
authorizes Management, at its discretion, to make purchases from time to time as
circumstances warrant. As of September 30, 1998, no stocks had been purchased
under this program.
PREFERRED STOCK
Rica Foods, Inc.
---------------
On September 30, 1998 and 1997, 1,000,000 preferred shares at $1.00 par
value of the Company were authorized. Such preferred shares to have such classes
and preferences as the Board of Directors of the Company determines from time to
time. No preferred shares had been issued as of September 30, 1998.
All subsidiary preferred stock outstanding as of September 30, 1998 and
1997 is included in preferred stock in the stockholders' equity section of the
balance sheet.
Pipasa
------
As of September 30, 1998, Pipasa had issued 600,789 shares of preferred
stock. Preferred stock was comprised of 317,831 Class "C" preferred shares and
282,958 series "TCA" amounting to $2,216,072 and $1,103,666, respectively. The
282,958 series "TCA" shares issued were repurchased in exchange for 146,077
shares of the Company's stock. This stock is held as a short-term investment by
Pipasa. "TCA" refer to "Titulos de Capital" which is a mechanism used by Costa
Rican corporations to document, among other things, but not limited to, retained
earnings, linked to equity ownership, with the same shareholder rights and
obligations of common stockholders. "TCA" can be used for the issuance of common
or preferred shares. The Series "TCA" preferred shares are included in the
treasury stock as of September 30, 1998. Dividends on these preferred shares are
based on the following terms:
- - 53,034 shares of Class "C-A", 60,702 shares of Class "C-B" and 72,695
shares of Class "C-D" receive a 10% annual dividend payable monthly
and adjustable by the Board of Directors.
- - 131,400 shares of Class "C-C" receive a dividend equal to the prime
rate set by the Central Bank of Costa Rica plus two percent, payable
monthly.
F-22
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
- - 282,958 shares series "TCA" receive a dividend in proportion to
dividends distributed to common stock.
As de Oros
----------
As of September 30, 1998, 1,200,000 Class "C" preferred shares issued by As
de Oros were authorized, of which 158,374 had been issued for a total of
US$1,003,287. The shares accrue a monthly dividend at the prime rate set by the
Central Bank of Costa Rica.
As of September 30, 1998, there are no dividends in arrears.
TREASURY STOCK
As of September 30, 1998 and 1997, 601,920 and 188,329 shares of the
Company's common stock, amounting to $2,539,486 and $847,967, respectively, were
held in treasury shares. As of September 30, 1998, these shares include 282,958
shares of preferred stock series "TCA" which amounted to $1,103,666.
RETAINED EARNINGS
Costa Rican legislation requires that 5% of annual net income (in local
currency) up to an amount equivalent to 20% of total capital stock be allocated
to a legal reserve. As of September 30, 1998 and 1997, the Company has reserved
earnings of $911,780 and $605,887 respectively, for the creation of a legal
reserve.
As of September 30, 1998, Pipasa has retained earnings of $4,805,871 which
may be distributed to current stockholders. As de Oros has an accumulated
deficit of $6,815,791. These amounts are computed by applying the exchange rate
as of the date of the balance sheet to the retained earnings (accumulated
deficit) balance expressed in colones.
During the year ended September 1998, subsidiaries of the Company paid
preferred stock dividends amounting to $288,219 of which $169,733 pertains to
the Company due to its ownership interest in subsidiaries. Pipasa distributed
282,958 series "TCA" of preferred stock as dividends to its common stockholders,
in the amount of $1,103,666.
NOTE 14 - OPERATING LEASES
The Company has operating leases for vehicles and cooling equipment. At the
end of the lease terms, the Company has the option of returning the equipment or
buying the equipment at estimated market value. A percentage of the money paid
during the lease terms will be applied to this purchase price.
Rental expenses for operating leases amounted to $550,627, $307,734 and
$276,740, for the fiscal years of 1998, 1997 and 1996, respectively.
F-23
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
The Company was obligated for the following minimum annual base rentals
under operating leases at September 30, 1998:
Fiscal Year Amount
----------- ------
1999 $ 407,490
2000 390,915
2001 92,564
Thereafter -
---------
$ 890,969
=========
NOTE 15 - INCOME TAXES
Income tax expense attributable to income from continuing operations for
the years ended September 30, 1998, 1997 and 1996 consists of:
Current Deferred Total
------- -------- -----
Year ended September 30, 1998: $ 310,971 $ (122,308) $ 188,663
Year ended September 30, 1997: 291,396 - 291,396
Year ended September 30, 1996: 244,431 - 244,431
Costa Rican income tax expense attributable to income from continuing
operations was $310,971, $291,396 and $244,431 for the years ended September 30,
1998, 1997 and 1996, respectively, and differs from the amounts computed by
applying the Costa Rican corporate tax rate of 30% to pretax income from
continuous operations as a result of the following:
1998 1997 1996
---- ---- ----
Computed statutory income tax
expense $ 1,092,281 $ 714,752 $904,782
Increase (reduction) in income taxes
resulting from:
Non-deductible (taxable) expenses
(income), net (281,330) (145,952) (116,772)
Increases (decreases) in provisions 41,926 (21,094) 20,778
Tax benefit under Costa Rica Income
Tax Law Article 8, Section T for
Agricultural Companies and Article 8,
Section F (122,667) (134,775) (151,960)
Deduction for reinvestment of prior
year earnings in machinery and equipment
under Costa Rica Income Tax Law
Article 8, Section T for Agricultural
Companies (276,524) (265,061) (250,284)
(continued on next page)
F-24
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
1998 1997 1996
---- ---- ----
Non-deductible depreciation expense 122,308 113,725 57,792
Deductible investments in tourism related
companies (399,122) - -
Depreciation revalued assets (237,755) (210,689) (219,905)
Amortization of cost in excess of
net assets of acquired business 89,162 - -
Other items 282,692 240,490 -
----------- --------- ---------
310,971 291,396 244,431
Deferred tax benefit (122,308) - -
----------- --------- ---------
$ 188,663 $ 291,396 $ 244,431
=========== ========= =========
Other items mainly consist of operating losses from subsidiaries,
intercompany profit elimination and foreign tax asset credits.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1998 and 1997 are presented below:
1998 1997
---- ----
Deferred tax assets:
- -------------------
Allowance for doubtful accounts: $ 218,102 $ 114,237
Revaluation of property, plant and equipment
depreciable for Costa Rican tax purposes 4,979,419 2,485,775
Loss carryforwards 1,266,058 -
Provision for social benefits 109,411 -
--------- ---------
Total gross deferred tax assets 6,572,990 2,600,012
Less valuation allowance (6,572,990) (2,600,012)
---------- ----------
$ - $ -
========== ==========
Deferred tax liability:
- ----------------------
Excess fair market value over book value of
assets acquired $1,974,407 $ -
========== ==========
The Company has established a valuation allowance equal to 100% of its
deferred tax asset for the current year and the prior years. Under Costa Rica
Income Tax Law, the Company is subject to a 1% asset tax which may be credited
against the regular income tax liability. However, if the income tax is less
than the asset tax liability in the same tax year, the asset tax must still be
paid in full. The deferred tax asset results primarily from the revaluation of
property, plant and equipment. The Company has a Costa Rican tax loss
carryforward for As de Oros of $1,266,058, which, if unused, will expire on
September 30, 2000. The Company has historically reported a slightly higher
asset tax liability compared to the income tax liability. In addition, the
Company has significant tax incentives available in Costa Rica which potentially
F-25
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
will reduce future taxable income thereby reducing the potential benefit of the
additional depreciation resulting from the tax asset revaluation. Based on the
above, the Company's Management does not consider that the deferred tax asset
will be realized in the foreseeable future. Accordingly, the recognition of a
deferred tax asset in the financial statements is not justified.
The recorded deferred tax benefit for the year ended September 30, 1998
consists of the amortization of the deferred tax liability resulting from basis
differences on property, plant and equipment resulting from the As de Oros
acquisition. The deferred tax liability is being amortized over a ten year
period which is consistent with the amortization period of the underlying
property, plant and equipment.
United States taxes have not been provided on undistributed earnings of
foreign subsidiaries, as such earnings are being retained indefinitely by such
subsidiaries for reinvestment.
In accordance with the Costa Rican income tax regulations, the companies
are required to file the annual income tax returns for the twelve-month period
ended September 30 of each year.
According to local laws in Costa Rica, the income tax returns of Pipasa and
As de Oros for the years ended September 30, 1998, 1997 and 1996, are open to
examination by the Costa Rican tax authorities.
NOTE 16 - STOCK WARRANTS
On May 27, 1994, Management of the Company approved the issuance of
warrants to purchase 66,666 shares of common stock at $2.25 per share to an
outside consultant in exchange for services to be rendered to the Company. These
warrants expire on May 27, 1999.
On August 1, 1995, the Management of the Company approved the sale of
warrants to two members of its Board of Directors and one independent
consultant, for the purchase price of $300 per warrant. The warrants are for the
purchase of a total of 83,333 shares of the Company's $0.001 common stock at an
exercise price of $0.10 per share. The warrants could be exercised anytime from
August 1, 1995 to August 1, 2000. Between November and December, 1996, 83,333
warrants were exercised and both Directors and the independent consultant
received 83,333 shares.
On June 15, 1998, the Management of the Company approved a buy back option
agreement with Inversiones La Ribera for 276,710 shares at a strike price of
$4.50 per share, which can be exercised any time within a period of one year
from the date of the agreement. These shares are considered as dilutive in the
earnings per share calculation.
F-26
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 17 - ACQUISITION OF POULTRY DIVISION AND ANIMAL FEED CONCENTRATE OF
COOPEMONTECILLOS, R.L.
On April 21, 1997, Pipasa acquired the poultry division and animal feed
concentrate business of Costa Rica-based Coopemontecillos R.L., for
approximately $2.6 million. Under the agreement, Pipasa acquired all the poultry
division's assets and operations of Coopemontecillos, including plant,
equipment, vehicle fleet, inventory, hens and raw material.
NOTE 18 - BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into six business segments:
broiler chicken, animal feed, by-products, exports, restaurants and other.
Summarized financial information by business segment for 1998, 1997 and 1996 is
as follows (in millions of dollars):
1998 1997 1996
---- ---- ----
Net sales:
Broiler chicken $ 60.1 $ 44.3 $ 41.2
Animal feed 17.8 7.0 5.0
By-products 9.4 7.9 7.1
Exports 2.7 2.3 1.2
Restaurants 5.1 - -
Other 8.5 8.5 7.0
----- ----- -----
103.6 70.0 61.5
----- ----- -----
Cost of sales:
Broiler chicken 44.5 32.6 28.8
Animal feed 14.0 5.8 4.5
By-products 5.4 4.8 4.6
Exports 1.8 1.7 0.9
Restaurants 2.7 - -
Other 7.9 8.3 6.6
----- ----- -----
76.3 53.2 45.4
----- ----- -----
Gross profit:
Broiler chicken 15.6 11.7 12.4
Animal feed 3.8 1.2 0.5
By-products 4.0 3.1 2.5
Exports 0.9 0.6 0.3
Restaurants 2.4 - -
Other 0.6 0.2 0.4
----- ----- -----
27.3 16.8 16.1
----- ----- -----
Selling expenses:
Broiler chicken 5.6 4.4 4.2
Animal feed 1.7 0.2 0.2
By-products 0.9 1.5 1.3
Exports 0.3 0.2 0.2
Restaurants 1.9 - -
Others 0.7 - -
Corporate 1.0 0.5 0.6
----- ----- -----
12.1 6.8 6.5
----- ----- -----
(continued on next page)
F-27
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
1998 1997 1996
---- ---- ----
General and administrative:
Corporate 8.7 6.0 4.4
Amortization of cost in excess
of net assets of acquired
business 0.3 - -
----- ----- -----
Income from operations $ 6.2 $ 4.0 $ 5.2
----- ----- -----
NOTE 19 - PURCHASE TRANSACTIONS
On September 28, 1998, the Company and Pipasa entered into an agreement
(the "Final Pipasa Agreement") providing for the purchase of the remaining
common stock of Pipasa from Inversiones La Ribera for 3,683,595 shares of the
Company's common stock. The Final Pipasa Agreement was amended on November 9,
1998 to provide that the transaction would be subject to (i) the receipt of an
opinion from an independent firm that the transaction was fair from a financial
point of view to the Company's stockholders and (ii) approval of the transaction
by holders of a majority of the issued and outstanding common stock of the
Company.
On September 28, 1998, the Company and Angui, entered into an agreement
(the "Final Oros Agreement") to purchase Angui's remaining interest in As de
Oros in exchange for 1,670,921 shares of the Company's common stock. Holders of
the majority of the Company's common stock approved the transaction and the
Company expects to receive fairness opinions and to close the purchase of the
remaining stock of As de Oros on or before January 31, 1999.
NOTE 20 - CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments and trade receivables. The Company places its cash equivalents and
short-term investments with high credit quality financial institutions.
The majority of the Company's customers are located in Costa Rica. No
single customer accounted for more than five percent of the Company's net sales
in 1998, 1997 and 1996, and no account receivable from any customer exceeded
$425,000. Credit risk is mitigated due to the fact that the Company's customer
base is diverse and is located throughout Costa Rica. The Company estimates an
allowance for doubtful accounts based on the credit worthiness of its customers,
as well as general economic conditions. Consequently, an adverse change in these
factors could affect the Company's estimate of the bad debt allowance.
F-28
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
NOTE 21 - COMMITMENTS AND CONTINGENCIES
VEHICLE SELF INSURANCE
The Company does not have damage insurance or a specific self-insurance
fund for vehicles that are not under lease agreements. The Company has liability
insurance to cover third parties through an umbrella policy ranging from
approximately $38,000 to a maximum of $947,000. While the ultimate amount of
claims incurred by third parties may be dependent on future developments, in
Management's opinion, insurance is adequate to cover any future claims
LITIGATION, CLAIMS AND ASSESSMENTS
The income tax returns for Pipasa for 1995, 1994 and 1993 were examined by
the tax authorities in Costa Rica and the Company was assessed $76,976, $131,222
and $39,354 respectively, as a result of the disallowance by the Costa Rican tax
authorities of approximately 26.03% in the aggregate of the deductions taken by
Pipasa for 1995, 1994 and 1993. Management does not believe this matter will be
resolved in the next fiscal year. Management believes that these assessments are
without merit and intends to vigorously contest these claims. Management does
not believe that the Company will incur a loss as a result of these assessments.
No accrual has been made for any losses that may result from the resolution of
this uncertainty.
The income tax returns of As de Oros were examined by the Costa Rican tax
authorities for fiscal year 1995 seeking $131,437 of additional income taxes.
Authorities have contested depreciation expense and income tax withholdings of
employees. As de Oros has appealed this decision and does not expect the final
outcome will result in a material adverse effect on the operations or the
financial position of the Company.
During 1998, the Company settled a legal action in which $350,073 was
received. This amount is included in miscellaneous income in the statement of
income.
Pipasa is a defendant in a lawsuit brought in Costa Rica in which it was
served with prejudgment liens. Pipasa substituted collateral for these liens
with approval of the court, which approval is currently being appealed. Pipasa
has not yet been served with the Complaint in the case and, therefore, cannot
ascertain the basis of the claim or the relief sought, but it believes the
lawsuit is without merit and intends to assert a vigorous defense. At this time,
neither the Company nor Pipasa can evaluate the potential impact of this lawsuit
on the financial results of the Company.
No legal proceedings of a material nature to which the Company is a party
were pending during the fiscal year ending September 30, 1998 and the Company
knows of no legal proceedings of a material nature pending or threatened or
judgments entered against any director nor officer of the Company in his
capacity as such.
F-29
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
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.
NOTE 22 - SUBSEQUENT EVENTS
REVERSE STOCK SPLIT
On December 15, 1998, the Board of Directors authorized a 1 for 3 reverse
stock split ("the Split") of the Company's common stock to be effective on
December 29, 1998. For twenty (20) days following the effective date of the
Split, NASDAQ will alter the trading symbol for the Company to read "RICAD". In
connection with the Split, new share certificates will be issued and those
shareholders owning more than five shares of common stock, post-Split, shall
receive one full share for each fraction of a share to which they would be
entitled. Each shareholder holding less than 5 shares of common stock,
post-Split, shall receive the payment for the fractional share held by them
based on the mean of the bid and ask price on the effective date of the Split.
All references in the accompanying financial statements to the number of
common shares and per-share amounts for 1998, 1997 and 1996 amounts have been
restated to reflect the Split.
F-30
EXHIBIT INDEX
Number Description Reference
- ------------------------------------------------------------------------------
(2) Acquisition Plans
2.1 Stock Purchase Agreement, dated as of
September 28, 1998, by and between
the Company and Inversiones La
Ribera, S.A. filed as Exhibit 10.1 to
Form 8-K filed on October 13, 1998 is
incorporated by reference herein.
2.2 Stock Purchase Agreement, dated as of
September 28, 1998, by and between
the Company and Comercial Angui, S.A.
filed as Exhibit 10.2 to Form 8-K
filed on October 13, 1998 is
incorporated by reference herein.
(3) 3.1 Articles of Incorporation Previously filed.
3.2 By-Laws Previously filed.
(4) Instrument defining rights See 3.1 above.
of security holders
(10) Material Contracts
10.1 Note Purchase Agreement, dated as of
January 1, 1998, filed as Exhibit 10.1
to Form 10-Q filed on May 20, 1998 is
incorporated by reference herein.
10.2 Stock Purchase Agreement dated as of
January 22, 1998 by and between the
Company and Comercial Angui, S.A.,
filed as Exhibit 10.2 to Form 10-Q
filed on May 20, 1998 is incorporated
by reference herein.
(21) Subsidiaries of registrant See page 73.
(27) Financial Data Schedule See page 74.
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