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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL
REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-18222
RICA FOODS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 87-0432572
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
240 Crandon Boulevard, Suite 150 33149
Key Biscayne, Florida (Zip Code)
(Address of Registrant's Principal
Executive Offices)
Registrant's telephone number, including area code: (305) 365-9694
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.001 per share
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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 or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting and nonvoting common equity held by
non-affiliates of the Registrant, as of the latest practicable date, January 6,
2003, was approximately $4.479,276
The number of shares outstanding of the Registrant's common stock, par value
$0.001 per share (the Common Stock), as of the latest practicable date, January
6, 2003, was 12,864,321. There are no shares of preferred stock of the
Registrant outstanding.
RICA FOODS, INC.
TABLE OF CONTENTS
Page
PART I
Item 1 Business .................................................................. 3
Item 2 Properties ................................................................ 8
Item 3 Legal Proceedings ......................................................... 9
Item 4 Submission of Matters to a Vote of Security Holders .......................
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder
Matters ................................................................. 10
Item 6 Selected Financial Data ................................................... 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................... 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk ................ 21
Item 8 Financial Statements and Supplementary Data ............................... 23
Item 9 Changes in or Disagreements with Accountants on Accounting and
Financial Disclosures ...................................................
PART III
Item 10 Directors and Executive Officers, Promoters and Control Persons ........... 23
Item 11 Executive Compensation .................................................... 26
Item 12 Security Ownership of Certain Beneficial Owners and Management ............ 29
Item 13 Certain Relationships and Related Party Transactions ...................... 30
PART IV
Item 14 Controls and Procedures ................................................... 31
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 32
PART I
ITEM 1. BUSINESS
Background
Rica Foods, Inc. (the "Company") was incorporated under the laws of the State of
Utah on February 6, 1986 and undertook a public offering of its securities in
1987. In April 1994, the Company changed its state of incorporation from Utah to
Nevada.
Business of the Company
The Company's operations are principally conducted through two, wholly owned
Costa Rican corporations, Corporacion Pipasa, S.A. ("Pipasa") and Corporacion As
de Oros, S.A. ("As de Oros") and their respective subsidiaries. Pipasa, founded
in 1969, is the largest poultry company in Costa Rica with a market share of
approximately 50% of the chicken meat market in Costa Rica, according to
information provided by the Costa Rican Chamber of Poultry Producers, Camara
Nacional de Avicultores de Costa Rica ("CANAVI"). The main activities of Pipasa
include the production and sale of fresh and frozen poultry, processed chicken
products, commercial eggs and concentrate for livestock and domestic animals.
Pipasa has been in the poultry business for more than 30 years with more than 15
years of experience in exports.
As de Oros, founded in 1954, is Costa Rica's second largest poultry producer,
comprising approximately 20% of the country's poultry market, according to
information provided by CANAVI and several Company surveys, and is one of the
leaders in the Costa Rican animal feed market with a market share of
approximately 28%. As de Oros subsidiaries' also operate a chain of 27 fried
chicken quick service restaurants in Costa Rica called Restaurantes As, and Don
Amado, operated by Planeta Dorado, S.A, a Costa Rican corporation.
The Company's subsidiaries own a total of 87 urban and rural outlets throughout
Costa Rica, three modern processing plants and three animal feed plants. Due to
similar business activities, the combined operations of the subsidiaries permit
the Company to achieve operational efficiencies.
The Company promotes its brand names through advertisements and marketing events
and considers its subsidiaries to be among the most recognized Central American
chicken producers, supplying chicken in Costa Rica to Burger King, McDonalds,
Quizno's, Church's Chicken, Denny's, Tony Roma's, Hardee's, Kentucky Fried
Chicken, Pizza Hut franchises, Price Smart, Taco Bell and Gerber Products
companies. In addition, the Company, through its subsidiaries, was selected by
the McDonald's Corporation to be one of its poultry suppliers for all of Central
America.
The Company's subsidiaries do not depend on the sales of only one product but
rather a diversity of products available at a range of prices and presentations,
which represent an important strategic strength of the subsidiaries. The Company
produces and markets over 950 different products to meet consumer demands.
Segments
Information regarding the Company's segments for the last three fiscal years is
set forth in Note 15 to the Company's fiscal year 2002 audited consolidated
financial statements. Such information is incorporated herein by reference. The
following is a brief description of the main business segments of the Company:
Broiler Chicken: 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, according to information provided by the Junta de Fomento
Avicola, a Costa Rican governmental institution. Poultry is a generic product,
consumed at 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, such as sausages and cold cuts. The Company's main brand
names for broiler chicken, chicken parts, mixed cuts and chicken breasts are
Pipasa(TM), As de Oros(TM) and Zaragoza(TM). Polls and consumer information
gathered by the Company indicate that Costa Ricans eat chicken at least once a
week. Chicken is sold to institutional customers, schools, hospitals,
restaurants and small grocery stores.
3
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. The Company's animal feed products are sold through the
Ascan(TM), Aguilar y Solis(TM), Kanin(TM), Mimados(TM) and Nutribel(TM) brand
names. Customers for the commercial animal feed brands are mainly large
wholesalers and high scale breeders. This customer group focuses on quality and
price. Products marketed through the Mimados(TM), Kanin(TM) and Ascan(TM) brand
names are targeted towards veterinarians, pet stores and supermarkets and are
sold typically to consumers with medium to higher income levels. The Company is
currently the leader in the animal feed market in Costa Rica, with an
approximate 28% market share.
Chicken By-products: Chicken by-products include sausages, bologna, chicken
nuggets, chicken patties, frankfurters, salami and pate. Chicken by-products are
one of the most profitable segments of the Company. The Company's chicken
by-products are sold through the Kimby(TM), Chulitas(TM), Zaragoza(TM), Pimpollo
(TM) and As de Oros(TM) brand names and are sold to all social and economic
levels. These products are sold mainly in supermarkets, and sales are
predominantly driven by price. The Kimby(TM) brand name is the leading seller of
chicken by-products in Costa Rica.
Exports: Subsidiaries of the Company export different products to all countries
in Central America and the Caribbean and make occasional exports to Hong Kong
and Colombia. The Company exports the majority of its products, including
broiler chicken, animal feed and pet foods.
Quick Service: Corporacion Planeta Dorado, S.A. and subsidiaries ("Restaurants")
operate 27 restaurants located in rural and urban areas throughout Costa Rica,
including express delivery service in some restaurants. This segment is
comprised of quick service restaurants, which offer a diversified menu of
chicken meals. The Restaurants distinguish themselves from other quick service
chains by offering dishes and using recipes and ingredients that appeal to the
taste of consumers in Costa Rica. The quick service restaurant business is
highly competitive in Costa Rica, as several other quick service chains operate
in Costa Rica.
Other: This segment includes sales of commercial eggs, non-recurring sales of
fertile eggs, fertilizers and raw material, among others.
Distribution Network
The Company has a distribution fleet consisting of approximately 260 product
distribution trucks and supervision vehicles. Poultry delivery trucks are
equipped with refrigeration chambers to ensure delivery of fresh products daily,
thus maintaining the Company's reputation for fresh quality products. In
addition, the Company uses independent distributors to deliver larger quantities
of animal feed to some of its customers.
The Company's products are sold throughout Costa Rica, through owned or leased
delivery trucks, urban and rural retail outlets that may also be owned or
leased, supermarket chains and independent distributors. A majority of the total
distribution of the Company's products is conducted through the Company's urban
retail outlets and delivery trucks, with a smaller portion through rural
outlets. The remaining distribution is serviced through the Company's processing
plants. The retail outlets, mostly located in urban areas, are exclusively
dedicated to the sale of the Company's products and most of these outlets are
leased by the Company. As of September 30, 2002, the Company had a customer
database of approximately 26,000 customers who purchase products on a regular
and occasional basis.
Seasonality
The Company's subsidiaries have historically experienced and have come to expect
seasonal fluctuations in net sales and results of operations. The Company's
subsidiaries have generally experienced higher sales and operating results in
the months from October to January, which fall in the first and second quarters
of each fiscal year. This variation is primarily due to holiday celebrations
that occur during these periods in which Costa Ricans prepare traditional meals,
which include dishes with chicken as the main ingredient. The Company expects
this seasonal trend to continue for the foreseeable future.
4
Raw Materials
The primary raw material and main component for the Company's products consists
primarily of corn and soybean meal. Corn and soybean meal purchases represent
approximately 35% of the total cost of goods sold and approximately 60% of raw
material costs. Historically, the Company has been able to obtain a satisfactory
supply of these materials.
The Company imports all of its corn from the United States of America through
the Chicago Board of Trade ("CBOT") and uses commodity futures and forward
purchasing for hedging purposes to reduce the effect of changing commodity
prices on a portion of its commodity purchases. The price of corn and soybean
meal, like most grain commodities, is fairly volatile and requires constant and
daily hedging in order to minimize the effect of price increases on the
Company's profit margin. Changes in the price of corn can significantly affect
the Company's profit margin.
The Company purchases its soybean meal through Industrias Oleaginosas, S.A.
("INOLASA"), a Costa Rican corporation, in which the Company holds a 10% equity
interest. In Costa Rica, there is an applicable 5% tax for soybean meal imports,
which is not levied if such imports are 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 purchase soybean meal directly from the CBOT.
Customer Relations
The majority of the Company's customers are located in Costa Rica. No single
customer accounted for more than 10% of total consolidated sales, and the
Company believes that the loss of any single customer would not have a material
adverse effect on the Company's business.
Backlog of Orders
As of September 30, 2002, the Company had no material backlog of sales orders.
Competition
Although the Company is significantly larger and better established than any one
of its domestic competitors, the Company believes it does face competitive
pressures. The Company's principal competitors are other vertically integrated
chicken companies domiciled in Costa Rica, who the Company believes have a
market share of approximately 30% of the broiler market. The Company believes
that its experience, economies of scale, and brand recognition are the primary
barriers to entry for other domestic competitors. The Company's local market
share also could potentially be threatened by foreign competition. The Company
believes that the likelihood of a threat by foreign competitors is low for
several reasons. First, the Company has a strong reputation for producing high
quality products at a reasonable price. Additionally, consumers in Costa Rica
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 chicken in Costa Rica.
The Agriculture Ministry in Costa Rica together with the private industry sector
of Costa Rica monitors all chicken entering the country to prevent the spread of
Newcastle Disease in Costa Rica. The market in Costa Rica is also assisted by
tariff agreements at the present time. Chicken importers must pay duties as
dictated by the World Commerce Organization ("WCO") (Formerly, General Agreement
on Trade and Tariffs). These agreements were reached at the Uruguay Round of the
GATT negotiations, which are scheduled to end in 2004, after which it is
probable that similar negotiations will continue. The agreements and current
negotiations that are being carried out with the present Costa Rican government
provide quotas and scaled tariffs, and permit only certain broiler chicken cuts
to enter the Costa Rican market.
These agreements provide that for fiscal year 2003, only 1,227 metric tons
("MT") of poultry meat and 143 MT of poultry by-products of whole chicken parts
or chicken derivatives can be imported to Costa Rica from countries outside of
the Central American Common Market. This quota is taxed at a rate of 34% for
poultry, 29% for poultry sausages and 19% for poultry patties. Amounts in excess
of these quotas are subject to a 150% tariff, except for whole chicken, patties
and breast cuts, which are subject to a 40% tariff.
5
Pricing
In Costa Rica, there are no laws against monopolies; however, there are laws
against monopolistic practices. Companies that 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. The Company's pricing strategies
have been influenced by the devaluation of the Costa Rican colon, economic
conditions and the supply and demand of the product in the market. Historically,
the Company has consistently increased its sales prices in order to help
mitigate the effect of the devaluation of the colon. The Company believes it has
reliable historical data on consumer reactions with respect to price increases
and uses this information in its strategy to counteract the devaluation of the
colon.
Marketing
The Company has a division dedicated to 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's distribution
centers promote the Company's brand names by distributing posters, T-shirts and
hats with the Company's logo. In Costa Rica, the Company's brand names commonly
appear on billboards and bus stops. Other marketing techniques used by the
Company include packaging presentations, promotions and sponsoring of special
national events.
Research and Development
The Company conducts continuous research and development activities to improve
the quality of the diet fed to poultry during their growing stage. The annual
cost of such research and development programs is less than one percent of total
consolidated annual sales and is expensed as incurred.
Employee Compensation and Incentives
As of November 2002, the Company employed approximately 3,300 persons.
The Company believes it has good relations with its employees. Private companies
in Costa Rica typically support their own workers' associations instead of
organized unions. These associations offer various benefits for their employees.
The success of the worker's association, Asociacion Solidarista de Empleados de
Rica Foods ("ASERICA"), 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 the Company's employees satisfied. ASERICA provides certain
recreational facilities, healthcare and pension benefits as well as financial
services to the Company's employees. This association is located on land donated
by Mr. Chaves and is among the largest workers' associations in Costa Rica.
Salaries in Costa Rica are increased twice a year as dictated by the government
in order to counterbalance the effect of inflation and increases in the cost of
living.
At the present time, labor laws in Costa Rica require all companies to make a
severance payment under certain conditions. This law requires all companies in
Costa Rica to make a payment equivalent to 5.6% of an employee's yearly gross
salary for every year of employment up to 8 years of labor, as part of a
severance payment upon the termination of an employee. This benefit is payable
after the employee's death, retirement, or termination without cause. An
employee who resigns voluntarily or is terminated for cause forfeits his right
to any severance benefit. Since 1991, the Company has waived the 8 year limit
dictated by the labor law, and pays severance based on years of service. The
Company is also required by Costa Rican law to deposit an additional 3% of each
employee's yearly gross salary into a pension fund.
The Company deposits every month in ASERICA 5.33% of each employee's yearly
gross salary as part of severance pay, and the employees are required to make a
monthly deposit equivalent to 4% of their monthly salary as part of a savings
program. Every February of each year, ASERICA pays each employee 1.33% of the
5.33% initially deposited. Amounts paid or transferred to ASERICA may not
completely cover the severance payment at the time the employee leaves, since
the severance payment calculation is based on the average of the last 6 months'
salary. Any remaining amount owed by the Company must be settled when the
employee is terminated. As of September 30, 2002, the Company has recorded an
accrual in the amount of approximately $138,000 for future severance payments,
which has been included in accrued expenses. The Company believes this amount
is adequate based on past experience.
6
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,
respectively. All companies in Costa Rica must pay the CCSS and the INS 21% and
1.74% of each employee's monthly salary, respectively. The CCSS pays 60% of the
employee's normal salary during the periods in which the employee is unable to
work. In addition to these benefits, employees must pay a total of 8% of their
monthly salary to the CCSS in order to receive healthcare, pension and maternity
care benefits, and 1% to the Banco Popular into an obligatory savings account.
Employees of the Company are provided with a profit sharing program. If either
one of the Company's subsidiaries has a successful year and generates profits in
excess of certain budgeted levels, that entity will distribute a percentage of
its net income to its employees. This incentive is calculated monthly and
distributed every two months. The Company encourages its employees to develop a
career with the Company, and accordingly, in conjunction with a local
university, the Company offers preferential rates for its employees. The main
goal of the program is developing the Company's future management team. In
addition, the Company's human resources department offers in-house and outside
training for its employees in various fields, in order to assure quality in all
areas. As of September 30, 2002, the Company had accrued approximately $73,000
for the profit sharing program, which was paid to employees during November
2002.
On May 29, 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
Under the Plan, 200,000 shares of the Company's Common Stock are reserved for
issuance upon the exercise of options. The plan is designed to serve as an
incentive for retaining and attracting persons and/or entities that provide
services to the Company and its subsidiaries. As of September 30, 2002, there
were no options outstanding under this Plan.
Poultry Raising Process
The poultry raising process starts with the import of one-day old breeder hens
from the United States. These breeder hens produce hens (or "mother hens") that
will either lay commercial eggs or fertile eggs. After approximately 24 weeks
the mother hens reach their egg laying period. Fertile eggs are 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 grow-out contract farmers who raise the
chicken to full size (for approximately 43 days) and provide basic elements such
as vitamins, formula and a balanced ration of feed.
The grow-out contract farmers are a group of 158 farmers who own their own land
and facilities. These farmers have a long-term contract with the Company to
raise the baby chicks to adult birds. During fiscal year 2002, grow-out contract
farmers supplied approximately 58% of the total number of chickens needed by the
Company. These farmers are paid according to the weight and quality of the
chickens produced and the mortality rate of the chickens raised. The Company
provides veterinary services and offers vaccines and chicken feed to the farmers
at wholesale prices. Regardless of whether the Company or grow-out contract
farmers raise the chickens, they are regularly inspected for immune
deficiencies, vitamin levels and general diseases. By working in conjunction
with these grow-out contract farmers, the Company has greater flexibility to
increase or decrease the number of chickens raised depending on the Company's
growth objectives.
Once the chickens reach the desired weight, they are taken to one of the
processing plants. At the processing plants, the chickens are slaughtered and
the meat packaged or processed to make chicken by-products. The Company believes
that its processing facilities are among the most sophisticated and largest in
the country.
Costa Rica has been declared free of Newcastle Disease, and additionally, the
Company has been implementing the guidelines of the Hazardous Analysis and
Critical Control Points ("HACCP"). 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.
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 food borne illness is reduced. All new employees are trained as to
the proper procedures required in handling and preparing food.
7
Regulations
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. The Company has strict sanitary processes in order to
provide consumers with product integrity, safety and quality and is in
compliance with all health regulations.
Environmental Compliance
The Company has been and is practicing appropriate environmental policies such
as reforesting, processing and recycling of waste, producing organic fertilizer,
building oxidation lagoons and sewage treatment plants. The Company's compliance
with environmental laws and regulations relating to the discharge of material
into the environment or otherwise relating to the protection of the environment
has not had a material effect on the Company's financial position and results of
operations. For fiscal year 2002, the Company invested approximately $400,000 in
environmental projects, such as waste treatment facilities and systems to
control dust and noise pollution.
At the present time, the Company is not subject to any material costs for
compliance with any environmental laws in any jurisdiction in which it operates.
However, in the future, the Company could become subject to material costs to
comply with new environmental laws or environmental regulations in jurisdictions
in which it might conduct business. At the present time, the Company cannot
assess the potential impact of any such potential environmental regulations.
ITEM 2. PROPERTIES
The Company conducts its operations through its production facilities and
executive offices, which are all located in Costa Rica. All facilities are owned
by the Company's subsidiaries, Pipasa and As de Oros. The Company owns six
processing plants, two hatcheries, and various other grow-out farms, retail
outlets, and restaurants. Corporate offices of the subsidiaries and most
important processing plants are located in the central valley of Costa Rica.
Grow-out farms are located in urban and rural areas. The Company has pledged
property and equipment of approximately $8.8 million. Each of the Company's five
business segments utilizes all of the Company's primary properties. The
following contains descriptions of the principal facilities:
Production Area
The production area includes the following divisions: Animal Feed Production,
Breeder, Hatcheries, Grow-out division, Broiler Processing, and By-products
Processing. The production capacities are described below:
The Company owns three processing plants for its Animal Feed division. These
plants perform activities that include grinding grains, mixing flour and packing
different types of animal feed products. The facilities have a maximum capacity
to produce an aggregate of approximately 391,500 tons of animal feed annually.
The Breeder division facilities are composed of galleys, which have a maximum
capacity to produce approximately 62 million fertile eggs annually. The breeder
hens are imported from the United States when they are one-day old.
The Hatchery division consists of two incubation plants, which the Company
believes are among the most modern in Central America. The plants' incubation
and hatching halls can be expanded to increase production. The Company expects
that these plants will fulfill production needs for many years. The incubation
facilities produce approximately 43 million chicks annually.
One day after birth, chicks are transferred to the Grow-out division. During
this stage, the chicks receive three types of diet, according to growth
requirements. The growth stage lasts approximately 43 to 45 days. The Company
owns 23 grow-out farms, and leases 158 contracted grow-out farms where owners of
these farms provide service needed to grow the chicks. The Company transfers
these farmers one-day old chicks, animal feed, and provides veterinary services,
technical advice and other services. Once chicks reach a target weight, the
Company pays the farmers an agreed upon fee for the chickens. The facilities
production capacity is approximately 31 million chickens annually, which
includes grow-out farmers.
8
The Broiler division is divided into slaughter and pluck, coolers and retailers,
packing and cuts and sub-products processes. The facilities have a maximum
production capacity of approximately 59 million kilograms annually.
The By-products processing division is divided into sausage, formed, packaging,
oven and cooking areas. The facilities have a maximum production capacity of
approximately 9.8 million kilograms annually.
Distribution
Distribution is conducted through retail outlets in Costa Rica, the majority of
which are leased. There are a total of 27 restaurants, the majority of which are
also leased.
Administrative Area
Administrative offices of the Company are located in Key Biscayne, Florida.
Staff, administrative, and financial headquarters of Pipasa and As de Oros are
located in La Ribera de Belen, Heredia, Costa Rica.
ITEM 3. LEGAL PROCEEDINGS
Pipasa is a defendant in a lawsuit brought in Costa Rica, pursuant to which the
plaintiff in such action is seeking damages in an amount equal to $3.6 million.
Pipasa was served with prejudgment liens for $1.5 million and, with the approval
of the Juzgado Sexto Civil, the court with jurisdiction over the lawsuit,
certain parcels of real estate owned by Pipasa have been substituted for such
liens. This approval was ratified by the Superior Court on November 11, 1999,
and all funds initially attached have been released and returned to Pipasa.
Costa Rica law requires the posting of guarantees by a plaintiff seeking
prejudgment liens and, in connection with this lawsuit, Pipasa has filed
objections to the guarantee filed by the plaintiff. A ruling on these objections
is pending. Pipasa has also filed pleadings in opposition to the underlying
lawsuit; a ruling on these pleadings also remains pending.
In connection with this pending lawsuit, the plaintiff also brought suit against
Pipasa in the State of California and the State of Florida. The California
lawsuit has been dismissed without prejudice. The Florida lawsuit is still
pending and Pipasa's defense is based on, among other things, a lack of personal
jurisdiction in the State of Florida. Interrogatories, Request to Produce
Documents and Request for Admissions have been answered by Pipasa. The Company
and its Chairman, Calixto Chaves, as a non-related third party, were subject to
a Request to Produce Documents to the extent each possesses information and/or
documents related to the case. The Company cannot ascertain the basis of the
claim or the relief sought, but believes the lawsuits are without merit and
intends to assert an appropriate defense. At the present time, neither the
Company nor Pipasa can evaluate the potential impact of this lawsuit on the
financial results of the Company, nor can the Company assess the likelihood of
an unfavorable outcome.
On or about January 8, 2002 Richard W. Baldwin, individually and on behalf of
all others similarly situated, filed a putative class action lawsuit against the
Company, Calixto Chaves, Jose Pablo Chaves, Randall Piedra and Monica Chaves
(collectively the "Defendants"). Specifically, the plaintiffs alleged violations
of Section 10(b) and Section 20(A) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder. The plaintiffs in the Class Actions sought
class certification, compensatory damages, pre-judgment and post-judgment
interest, attorneys' fees and costs and such other relief as the Court might
deem appropriate.
On July 24, 2002, the Court granted the Company's' Motion to Dismiss, without
prejudice. On August 7, 2002, Baldwin filed an Amended Complaint against the
Company and the individual Defendants identified above. On August 12, 2002, the
Company filed a Motion to Dismiss the Amended Complaint. On November 14, 2002,
the Court dismissed, with prejudice, the class action lawsuit.
No legal proceedings of a material nature, to which the Company or the
subsidiaries are a party, exist or were pending during the fiscal year ended
September 30, 2002. The Company, except for the legal proceedings disclosed
above, knows of no other legal proceedings of a material nature pending or
threatened or judgments entered against any director or officer of the Company
in his capacity as such.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of the Company's management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol RCF. The following table presented below sets forth the market
price range of the Common Stock for each quarter during the years ended
September 30, 2002 and 2001, based on the high and low closing sale prices as
reported on the AMEX. Such high and low sales prices reflect inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
Market Price Range
------------------
High Low
---- ---
Fiscal Year 2002
----------------
First Fiscal Quarter (10/1/01 to 12/31/01) 3.89 1.30
Second Fiscal Quarter (01/1/02 to 03/31/02) 1.50 0.45
Third Fiscal Quarter (04/1/02 to 06/30/02) 1.56 1.00
Fourth Fiscal Quarter (07/1/02 to 09/30/02) 1.02 0.70
Fiscal Year 2001
----------------
First Fiscal Quarter (10/1/00 to 12/31/00) $ 17.44 $ 5.00
Second Fiscal Quarter (01/1/01 to 03/31/01) 5.38 2.40
Third Fiscal Quarter (04/1/01 to 06/30/01) 5.15 2.65
Fourth Fiscal Quarter (07/1/01 to 09/30/01) 4.55 3.60
As of January 6, the Company had 12,811,469 shares of Common Stock outstanding
and approximately 1,500 holders of record of such stock, and no shares of
preferred stock were outstanding as of that date.
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, 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.
Subsidiaries' Legal Reserve
Current legislation in Costa Rica 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, 2002 and 2001, the Company's
Subsidiaries have allocated retained earnings of $2,039,806 and $1,853,159,
respectively, for the creation of a legal reserve.
10
Securities Authorized For Issuance Under Equity Compensation Plans
Number of
Number of securities
---------- ----------
securities to be Weighted- average remaining available
----------------- ------------------ -------------------
issued upon exercise price of for issuance under
------------ ------------------ ------------------
exercise of outstanding equity compensation
------------ ------------ -------------------
outstanding options options plans
------------------- ------- -----
Equity compensation plans approved by security
holders ........................................ 0 n/a 192,400
-------------------- ------------------- ---------------------
Equity compensation plans not approved by
security holders ............................... n/a n/a n/a
-------------------- ------------------- ---------------------
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below should be read in conjunction with
the consolidated financial statements and related notes, Management's Discussion
and Analysis of Financial Condition and Results of Operations and the other
financial information included elsewhere in this Form 10-K. The data as of
September 30, 2002 and 2001 and for the fiscal years ended September 30, 2002,
2001 and 2000, are derived from the Company's audited consolidated financial
statements included elsewhere in this Form 10-K. The data as of September 30,
2000, 1999 and 1998 and for the fiscal years ended September 30, 1999 and 1998
is derived from the Company's audited financial statements not included in this
Form 10-K.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands of U.S. dollars, except share and per share data)
Sales 130,665 127,336 123,628 118,550 98,794
Cost of sales 87,487 86,841 83,757 77,275 71,464
Income from operations 9,908 5,694 6,385 12,427 6,155
Income before income taxes and
minority interest 4,180 1,188 3,725 8,174 3,641
Net income applicable to
stockholders 2,917 1,349 2,889 3,041 1,130
Basic earnings per common share $ 0.23 $ 0.11 $ 0.24 $ 0.43 $ 0.16
Diluted earnings per common share $ 0.23 $ 0.11 $ 0.24 $ 0.42 $ 0.16
Total assets 96,311 97,106 93,082 70,968 63,175
Lon-term debt, net of current portion 16,018 21,890 21,821 21,444 22,559
Basic weighted average number of
shares outstanding 12,811,469 12,810,021 11,874,190 7,122,170 7,078,949
Diluted weighted average number of
shares outstanding 12,811,469 12,810,021 11,878,474 7,269,769 7,113,265
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Management is responsible for preparing the Company's consolidated financial
statements and related information that appears in this Form 10-K. Management
believes that the consolidated financial statements fairly reflect the form and
substance of transactions and reasonably present the Company's consolidated
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 consolidated financial statements
amounts that are based on estimates and judgments, 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 the appropriate cost, that transactions are executed in accordance
with the Company's authorization and are properly recorded and reported in the
consolidated financial statements, and that assets are adequately safeguarded.
The Company's operations are primarily conducted through its 100% owned
subsidiaries, Pipasa and As de Oros and their respective subsidiaries. The
Company is the largest poultry company in Costa Rica. As de Oros also owns and
operates a chain of quick service restaurants in Costa Rica operated under the
name Restaurantes As and Don Amado.
Seasonality
The Company has historically experienced and has come to expect seasonal
fluctuations in net sales and results of operations. The Company has generally
experienced higher sales and operating results in the months from October to
January, which fall in the first and second quarters of each fiscal year. This
variation is primarily due to holiday celebrations that occur during these
periods in which Costa Ricans prepare traditional meals that include dishes with
chicken as the main ingredient. The Company expects this seasonal trend to
continue for the foreseeable future.
Fiscal Year 2002 compared to Fiscal Year 2001
For the year ended September 30, 2002, the Company generated net income
applicable to common stockholders of $2,917,291 ($0.23 earnings per share),
compared to $1,348,784 ($0.11 earnings per share) for the year ended September
30, 2001. For fiscal year 2002, net sales increased by 2.61% when compared to
fiscal year 2001, mainly due to increases in the sales of the animal feed,
by-products and export segments. Consolidated segment profit margin has also
increased due to lower production costs as a result of efficiencies due to new
investments in production facilities and equipments made during fiscal years
2001 and 2000.
For 2002, the trend of economic slow down continued from 2001. According to the
Banco Central of Costa Rica ("BCCR"),the Gross Domestic Product increased by
2.8%, which was the same increase experienced in 2001. The inflation rate was
10% for calendar year 2002 compared to 11% for calendar 2001. The devaluation of
the colon with respect to the U.S. dollar reached 10.8% for calendar year 2002,
compared to 7.4% for calendar year 2001. Exports increased 3.5% in calendar year
2002 compared to a decrease of 13.9% for calendar year 2001. External
investments in the country reached approximately $642 million compared to $454
million during 2001. The deficit of the government of Costa Rica increased from
4.3% in 2002 compared to 2.9% in 2001.
12
The following describes the performance by segment (in millions of U.S.
dollars):
Segments: 2002 2001
---- ----
Broiler $ 67.87 $ 70.20
Animal Feed 26.00 24.62
By-Products 14.78 13.74
Exports 7.94 6.18
Quick Service 5.58 6.47
Other 8.50 6.13
-------- -------
Total net sales 130.67 127.34
-------- -------
Broiler 16.89 14.74
Animal Feed 3.40 2.82
By-Products 2.68 2.02
Exports 0.80 0.45
Quick Service 0.06 0.36
Other 0.13 0.64
-------- -------
Gross profit less selling expenses 23.96 21.03
-------- -------
General and administrative expenses and
goodwill amortization 14.05 15.34
Other non-operating expenses 5.73 4.50
-------- -------
Income before taxes and minority
interest $ 4.18 $ 1.19
======== =======
The Company uses segment profit margin information to analyze segment
performance, which is defined as gross profit less selling expenses as a
percentage of sales, since selling expenses and costs have a direct effect on
sales per segment.
Broiler sales decreased by 3.3%, mainly due to a 5.7% decrease in volume. The
Company believes this decrease is mainly due to a relative reduction in consumer
purchasing power due to economic conditions in Costa Rica, which causes a
reduction in the consumption of Broiler Chickens. The profit margin of this
segment increased from 21.0% to a 24.9%, mainly due to production efficiencies
and better distribution logistics, which resulted in lower costs.
Animal Feed sales increased by 5.6% for fiscal year 2002 when compared to fiscal
year 2001, which reflects a relative increase in volume and per unit sales
prices. Segment profit increased from 11.5% for fiscal year 2001 to 13.1% for
fiscal year 2002, mainly due to a shift in product mix to more profitable
products, production efficiencies and change to more efficient distribution
logistics.
By-product sales increased by 7.6% for fiscal year 2002 when compared to fiscal
year 2001, mainly due to relative increase in volume and per unit sales prices.
Production efficiencies and a change in the product mix to more profitable
products also contributed to an increase in segment profit from 14.7% for fiscal
year 2001 to 18.1% for fiscal year 2002.
Export sales increased by 28.5% for fiscal year 2002 when compared to fiscal
year 2001, mainly due to an increase in sales of extruded feed and pellet feed,
pet foods and baby chicks. This increase was partly offset by a decrease in the
exports of broiler chickens, but not other chicken related products, to
Honduras. Since March 2002, exports to the country of Honduras have been
suspended due to a Honduran restriction on the import of broiler chickens. The
Company is working with Governmental authorities in Costa Rica to reestablish
broiler chicken exports to Honduras. Profit margin increased from 7.3% for
fiscal year 2001 to 10.1% for fiscal year 2002, mainly due to a variation in the
product mix to more profitable products.
Quick service sales decreased by 13.8% for fiscal year 2002 when compared to
fiscal year 2001, mainly due to strong market competition. The Company believes
that strong market competition also resulted in a decrease in profit margin from
5.6% to 1.1%.
13
Sales for the other products segment increased by 38.7% for fiscal year 2002
when compared to fiscal year 2001, mainly due to an increase in the sale of raw
material. Profit margin decreased from 10.4% for fiscal year 2001 to a 1.5% for
fiscal year 2002, mainly due to variations in the sales mix to less profitable
products.
Operating expenses decreased by 4.4% or $1.53 million for fiscal year 2002 when
compared to fiscal year 2001. The decrease was mainly due to the discontinuation
of the amortization of goodwill in fiscal year 2002. General and Administrative
and Selling expenses decreased mainly due to the Company's effort to improve
efficiencies and adopt cost reduction measures. Operating expenses represented
25.5% and 27.3% of net sales for fiscal years 2002 and 2001, respectively.
For fiscal year 2002, non-operating expenses increased by 27.1%, mainly due to
an increase in the devaluation rate in Costa Rica, which resulted in an increase
in the foreign exchange loss, and the absence of offsetting gains from the sale
of fixed assets in fiscal year 2002 when compared to fiscal year 2001.
The Company's income tax expense was $1,041,596 for fiscal year 2002, compared
to a benefit of $390,833 for fiscal year 2001. Effective rates for fiscal years
2002 and 2001 were 24.9% and -32.9%, respectively. The variation is mainly due
to the elimination of significant tax benefits in Costa Rica and an increase in
taxable income for fiscal year 2002. During 2001, the government of Costa Rica
enacted changes in the income tax law, applicable for fiscal years ending after
September 30, 2001. Such changes provide, among other things, the elimination of
the restatement of property, plant and equipment, thereby significantly reducing
the related tax depreciation; and elimination of the one-time deduction
equivalent to 50% of the prior year's investment in property, plant and
equipment to be used in agricultural and industrial activities.
For September 30, 2002 and 2001 the Company established a full valuation
allowance for the tax depreciation resulting from the restatement of property,
plant and equipment. The Company believes that it is more likely than not that
this depreciation will continue to be deductible in the future, and has
therefore, recorded a full valuation allowance.
The Company also included the effect of net operating loss carry forwards
related to operations in the United States to determine the valuation allowance
for 2002 and 2001. Management believes that it is more likely than not that
these net operating losses will not be utilized in the future, based on the
projected financial performance of Rica Foods, Inc. in the United States.
Fiscal Year 2001 Compared to Fiscal Year 2000
The Company's operations resulted in a $0.11 diluted earnings per share for the
fiscal year ended September 30, 2001, as compared to a $0.24 diluted earnings
per share during the fiscal year ended September 30, 2000. Results of operations
for fiscal year 2001, when compared to fiscal year 2000, were negatively
impacted by adverse economic factors that have affected Costa Rica, as well as
North and Central America. According to information issued by the BCCR,
commodity exports for Costa Rica for the year ended September 30, 2001 decreased
by 18.97% when compared to the year ended September 30, 2000. This decrease was
mainly due to the economic slow-down in the United States, which according to
information issued by the BCCR, purchased 52.5% of total exported commodities
during fiscal year 2000. Other external factors that have negatively impacted
the Costa Rican economy include increases in the international price of oil,
decrease in international prices of coffee and banana and investments from
external sources during fiscal year 2000, which has continued through fiscal
year 2001 according to information issued by the Ministry of Foreign Commerce of
Costa Rica. However, the Costa Rican economy has recently experienced positive
factors such as a devaluation rate of only 6.77% for the year ended September
30, 2001, which had been the lowest since March 1994, according to information
issued by the BCCR, while variations in the inflation rate during the same
period have been below the average for the same period.
In response to the adverse economic outlook, the Costa Rican government has
lowered interest rates beginning in 2001 in an effort to increase consumption,
investment and employment rates, and has implemented a plan to promote the
development of small and medium sized companies in Costa Rica. Additionally, the
current government plans to continue to keep increases in devaluation rates
within normal parameters.
The decrease in the Costa Rican consumer's purchasing power affects the overall
demand for goods and services in Costa Rica, including the demand for the
Company's products. As a result, sales for some segments of the Company, mainly
the broiler and by-products segments, fell short of expectations. In response,
the Company has
14
temporarily lowered the sales price of certain products, mainly in the broiler
and by-products segments, and shifted its product mix to include lower priced
products which, in the aggregate, have contributed to lower sales for fiscal
year 2001, than those that were budgeted for the Company. During the quarter
ended September 30, 2001, the Company increased sales prices of those products
directed towards customers with higher purchasing power, which resulted in an
increase in sales and profit ratios. The Company plans to increase its sales
prices periodically during the next fiscal year, depending on the economic
outlook of the Company.
Broiler sales decreased by 4.5% for fiscal year 2001 when compared to fiscal
year 2000. The decrease is attributable to a reduction in sales volume of 3.5%,
in addition to temporary decreases of sales prices of certain products offered
by the Company during this period. The decrease in profit margin due to
discounts was offset by operating efficiencies in the production process.
Segment profit margin did not vary significantly, increasing from 20.5% to
21.0%.
Animal feed sales increased by 9.8% for fiscal year 2001 when compared to fiscal
year 2000. The increase is attributable to an increase in sales volume of 6.5%,
primarily in the pet food and pellet line of products, resulting from an
increase in market share and increase in sales of higher profit products.
Segment profit margin increased from 10.9% for fiscal year 2000 to 11.5% for
fiscal year 2001, mainly due to operating efficiencies as a result of capital
investments and a shift in the product mix to higher profit products.
Sales of by-products increased by 17.5% for fiscal year 2001 when compared to
fiscal year 2000. This increase was primarily due to a sales volume increase of
29.9%, offset by temporary decreases of sales prices for some products offered
by the Company. Sales for fiscal 2001 include sales of the new Zaragoza brand
name. The temporary decrease in sales prices offered, variations in the sales
mix to include more lower profit products and an increase in the cost of raw
materials contributed to a decrease in the segment profit margin from 23.1% for
fiscal 2000 year to 14.7% for fiscal year 2001.
Export sales increased by 35.5% for fiscal year 2001 when compared to fiscal
year 2000, mainly due to increased sales of broilers to Honduras, fertile eggs,
pet food products and live chicks. Segment profit margin increased from 0.4% to
7.3% due to lower operating expenses and variations in the sales mix to more
profitable products and increases in the sales volume.
Sales for the quick service segment continue to be negatively affected by
greater competition and market saturation. Sales for fiscal year 2001 decreased
by 19.4% when compared to fiscal year 2000. Segment profit margin increased from
4.1% for fiscal year 2000 to 5.6% for fiscal year 2001, mainly due to an
increase in operating efficiencies and lower production costs.
Sales for the other segments increased by 77.7% for fiscal year 2001 when
compared to fiscal year 2000. This increase is attributable to the increase in
the sale of commercial eggs. Segment profit margin decreased slightly from 11.0%
for fiscal year 2000 to 10.4% for fiscal year 2001, primarily due to variations
in the sales mix. Sales of other products represented 4.8% and 2.8% of total net
sales for the years ended September 30, 2001 and 2000, respectively.
Operating expenses increased by 3.9% for fiscal year 2001 when compared to
fiscal year 2000. Operating expenses represent 27.1% of net sales for the years
ended September 30, 2001 and 2000. The increase is primarily due to general
increases in professional services, advertising, employee payroll in accordance
with the Company's policies, increase in vehicle leasing as a result of new
distribution routes and the substitution of old vehicles, offset by lower
operating expenses from the quick service and export segments.
Other expenses increased by 69.4% for fiscal year 2001 when compared to fiscal
year 2000. The increase is primarily due to an increase in interest expense and
foreign exchange losses resulting from an overall increase in debt.
The Company's income tax resulted in a benefit of $390,833 for fiscal year 2001,
compared to an expense of $80,223 for fiscal year 2000. The tax benefit for
fiscal year 2001 is the result of deferred income taxes. The benefit is mainly
the result of temporary differences recognized between the financial statement
and tax basis.
15
Financial condition
As of September 30, 2002, the Company had $2.73 million in cash and equivalents.
The working capital deficit was $9.78 million and $10.31 million as of September
30, 2002 and 2001, respectively. The current ratios were 0.79 and 0.76 as of
September 30, 2002 and 2001, respectively.
Cash provided by operating activities amounted to approximately $6.29 million
and $4.01 million for fiscal years 2002 and 2001, respectively. The increase is
mainly due to increases in net income and accounts payable, partly offset by
increases in accounts receivables and inventories. Due to the Company's
increased use of vendor financing in lieu of credit facilities, accounts payable
balances have increased as inventory balances have increased.
Funds used for investing activities for fiscal year 2002 totaled approximately
$6.09 million, compared to $8.80 million for fiscal year 2001. The Company
invested $5.0 million in property, plant and equipment for fiscal year 2002,
compared to $8.40 million for fiscal year 2001. Historically, the Company has
made significant capital investments in property, plant and equipment in order
to obtain operating efficiencies, allow expansion into international markets and
develop new products. As a result, capital expenditures for fiscal year 2002 are
primarily related to replacing equipment. In June 2002, the Company
sold assets for approximately $2 million, which was originally acquired with
external financing. This sale was used as a financial strategy to decrease
outstanding debt. During fiscal year 2002, the Company also invested in other
assets of strategic importance. Although the book value of the Company's
property, plant and equipment has decreased since September 30, 2001, the
Company believes the productive capacity has not been materially impacted. The
book value of property, plant and equipment decreased mainly as a result of
translation adjustment, depreciation, and retirement or sale of assets.
Cash used for financing activities for fiscal year 2002 amounted to $4.41
million compared to cash provided by financing activities amounting to $3.35
million during fiscal year 2001. In the fiscal year ended September 30, 2002,
the Company retired $27.6 million and $10.1 million of short-term and long-term
debt, respectively, and incurred $26.5 million and $6.1 million of new
short-term and long-term debt, respectively.
The Company owns virtually all of the property, plant and equipment it uses in
its production facilities and financial headquarters in Costa Rica, of which
some assets are pledged as security for the credit facilities described below
aggregating to $6.9 million. In addition, $1.9 million of assets are being
pledged as collateral for Polaris litigation. The Company leases or rents
virtually all of the assets it uses in its distribution and retail operations.
The Company has operating leases for vehicles, cooling equipment and building
facilities for its restaurants and retail outlets
The Company has been reliant and continues to rely upon cash from operations,
short-term bank lines of credit, vendor financing, and long-term debt to provide
cash to finance its operational, investing and financial activities.
Short-Term Debt
As of September 30, 2002, the Company had arranged 11 short-term lines of credit
and commitments (the "Lines of Credit") with banks and raw material suppliers
for a maximum aggregate principal amount of $25.8 million, of which $23.2
million has been utilized.
As of September 30, 2002, Notes payable amounted to $17.1 million, and are due
from October 2002 through September 2003 and bear annual interest at rates
ranging from 4.53% to 11.50% in U.S. dollars and from 16.2% to 20.0% in Costa
Rican colones. As of September 30, 2002, Lines of Credit with a maximum
principal balance of $7.04 million were secured by property with an estimated
market value of approximately $2.14 million. The other Lines of Credit are not
secured by assets of the Company.
As of September 30, 2002, $7.27 million of the Lines of Credit with raw material
suppliers are included in accounts payable on the Company's balance sheet.
Long-Term Debt
As of September 30, 2002, Long-term debt amounted to $24.2 million of which $8.2
million in principal amount was due in the short-term. As of September 30, 2001,
Long-term debt amounted to $28.1 million, of which $7.2 million in principal
amount was due in the short-term. Long-term debt is primarily denominated in
U.S. dollars and bears interest at rates that range from 2.47% to 11.96% in U.S.
dollars and 24.00% to 24.5% in colones. As of September 30, 2002, Long-term debt
amounting to $4.9 million was secured by property valued at $4.8 million.
16
As of September 30, 2002, the Company had long-term line of credit agreements
with banks for a maximum aggregate amount of $3.2 million, of which $1.7 million
had been drawn, bearing interest rates of 8.75% and 10.83%, and are unsecured.
Bank loans are due from November 2002 to October 2008.
As a general practice in Costa Rica, banks require high-ranking executives of
the companies to serve as guarantors of loans. Accordingly, Mr. Calixto Chaves
and/or Mr. Jorge Quesada personally guaranteed (the "Guarantee Services") the
repayment of Lines of Credit, and the Short and Long-Term Bank Lines. As of
September 30, 2002, Mr. Chaves and Mr. Quesada had provided Guarantee Services
with respect to bank lines with a maximum principal balance of $27,279,083 and
$13,349,083, respectively. The Company believes that it is, and in the near
future will be substantially dependent on Mr. Chaves, Mr. Quesada, or another
third party to provide the Guarantee Services in order for the Company to secure
financing on terms comparable to the terms provided by the Lines of Credit and
Long-Term Bank Lines. Neither Mr. Chaves nor Mr. Quesada have an obligation to
provide Guarantee Services to the Company in the future.
During the first quarter of 1998, the Company completed a private placement with
Pacific Life Insurance Company ("PacLife") of $20 million in notes payable
bearing an annual interest rate of 11.71%, (11.96% beginning in January 2001)
and comprised of $8 million in Series A Senior Notes and $12 million in Series B
Senior Notes (collectively, the "Notes"). The Notes are not secured by the
Company's assets. However, Pipasa and As de Oros serve as guarantors of the
Notes. The principal amount of the Notes is payable in five consecutive annual
installments of $4 million each commencing January 15, 2001. Interest is payable
semiannually on the unpaid balance until the principal amount is paid in full.
In connection with the issuance of the Notes, the Company entered into certain
negative covenants (the "Negative Covenants") in favor of PacLife. More
specifically, among other things, the Company covenanted to refrain from
participating in any material transaction, except transactions in the ordinary
course of business with arms-length terms with any person (other than a
subsidiary) which directly or indirectly through one or more intermediaries
controls, is controlled by, or is in common control with the Company. The
Company further agreed that it would not incur additional debt unless that ratio
of the Company's consolidated total debt to the Company's consolidated earnings
before interest, taxes, depreciation, and amortization ("EBITDA") was less than
3 to 1. (the "New Debt Covenant"). Likewise, the Company agreed to restrict its
subsidiaries from incurring any additional debt unless the sum of (i) the total
debt outstanding of all subsidiaries and (ii) debt secured by liens does not
exceed .5 times the Company's EBITDA (the "Subsidiary Debt Covenant"). The
Company also covenanted that it would not create or incur any lien securing its
consolidated total debt unless the sum of (i) the debt secured by such liens and
(ii) the debt incurred by the Company's subsidiaries pursuant to the Subsidiary
Debt Covenant would not exceed .5 times the Company's consolidated earnings
before interest, taxes, depreciation, and amortization and the debt could be
incurred by the Company pursuant to the New Debt Covenant. The Notes contain a
provision requiring the Company to pay PacLife a fee in the event the Notes are
satisfied prior to their scheduled maturity.
The Company has paid PacLife all principal and interest due under the Notes in
accordance with the term of the Notes.
As of January 14, 2002, the Company obtained a waiver of certain possible
breaches of the Negative Covenants contained in the amended and restated note
purchase agreement dated December 28, 2001, among Rica, Pipasa, As de Oros, and
PacLife (the "Amended Agreement"). The potential breaches did not involve any
payment violation. The Company has made all required payments to PacLife,
including a payment of $4.96 million of principal and interest in January 2002
and a payment of $750,000 of interest in July 2002. In addition, the Company
expects to make the next required principal and interest payment of $4.7 million
by January 15, 2003. Thereafter, the principal amount of Notes will be reduced
to $8 million.
As of September 30, 2002 and December 31, 2002, the Company had regained
compliance with the provisions of all except one of the Note's covenants
regarding transactions with affiliates (the "Affilitate Covenant"). However,
PacLife has granted the Company a conditional waiver with respect to the
Company's breach of the Affiliate Covenant. As a condition to the waiver, the
Company has agreed that the aggregate amount of the loans to affiliates shall
not be increased at any time, and, if any of such loans are repaid, neither the
Company nor any of its subsidiaries shall make any additional affiliate loans.
17
Obligations under short-term and long-term debt and operating leases as of
September 30, 2002 are as follows:
Payments due by Period
----------------------
Total Less than 1 Year 1-3 years 4-5 years
----- ---------------- --------- ---------
Short-term debt $ 17,074,336 $ 17,074,336 $ - $ -
Long-term debt 24,209,090 8,190,702 14,948,084 1,070,304
Leases 1,778,467 1,337,982 440,485 -
------------ ------------ ------------ ----------
Total $ 43,061,893 $ 26,603,020 $ 15,388,569 $1,070,304
The Company projects that it will need to satisfy at least $26.6 million of
short-term debt, long-term debt and capital lease payments within the fiscal
year ended September 30, 2003. The Company also projects that it will seek to
acquire the use of additional $6 million of property, plant and equipment within
fiscal 2003, the use of which equipment may be secured by purchase or lease.
Aside from cash generated from operations and the financing sources previously
described, the Company has not secured financing to satisfy the Company's
projected capital needs.
The Company expects to continue to generate cash from operations and has been
seeking to conserve its capital resources by leasing and renting items of
property, plant and equipment. The Company has used lines of credit as a means
of financing for more than 25 years, and has historically been able to increase
limits on its lines of credit when necessary.
Although the Company has been exploring more cost efficient and longer term
sources of capital, the Company has not yet secured an alternative long-term
financing source that would insulate it from the risks associated with a loss of
one of its relatively short-term capital sources. Nevertheless, management
expects that there will be sufficient resources available to meet the Company's
cash requirements for the next 12 months.
Potential Acquisitions
The Company is continuing to explore the acquisition of majority of the
outstanding common stock of Industrias Avicolas Integradas, S.A. ("Indavinsa"),
and Avicola Core Etuba Ltda. ("Core"), both engaged in the production and
distribution of poultry. The Company is closely evaluating the performance of
these companies to determine if, when and how the Company should integrate its
business with the acquisition targets, and has postponed indefinitely
investments in these two companies.
As with any business acquisition, there can be no assurance that the Company
will close these acquisitions and there can be no assurance that these
acquisitions efforts will prove to be beneficial to the Company. Even if the
Company's board of directors, audit committee and management team believe the
Company should pursue a development or acquisition opportunity and successfully
negotiate the contracts critical to such venture, the Company anticipates that
it may be required to seek the consent of PacLife and potentially certain other
third parties before initiating development efforts or concluding an
acquisition. The Company will continue to evaluate financial performance and
giving the necessary collaboration in order to obtain the necessary judging
elements to arrive to a definite decision.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
Company to make estimates and assumptions. The Company believes that of its
significant accounting policies (see Note 1 to the Company's audited
consolidated financial statements), the following may involve a higher degree of
judgment and complexity.
Impairment of long-lived assets and goodwill: The Company assesses long-lived
assets for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future cash
flows expected to result from its use and eventual disposition. If impairment
indicators are present, the Company must measure the fair value of the assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets" to determine if
adjustments are to be recorded. Management must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the
respective asset.
18
Although to date the Company's assessment has not required it to record any
impairments of long-lived assets, if the estimates and assumptions used to make
such assessment should change in the future, the Company could be required to
record impairment charges. On October 1, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," and was required to assess its goodwill
for impairment issues upon adoption, and then at least annually thereafter.
During the year ended September 30, 2002, the Company was not required to record
any impairment losses related to goodwill and other intangible assets.
Contingent liabilities: We account for contingencies in accordance with SFAS No.
5, "Accounting for Contingencies". SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of our financial statements indicates that it is probable that a
liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Management's judgment is based
on a review of all cases brought against it in collaboration with the Company
internal and external legal council to determine the amount of any claims and
the likelihood that such claim will be successful. Accounting for contingencies
such as environmental and legal matters requires us to use our judgment. The
outcome of some of these cases and the monetary or other awards can be very
difficult to estimate, so that an error in the estimate can have very
significant, but unpredictable effects on the Company. As of September 30, 2002,
the Company performed an analysis of these contingencies and estimated that no
reserve was required.
Provision for severance pay: At the present time, labor laws in Costa Rica
require all companies in Costa Rica to make a payment equivalent to 5.6% of an
employee's yearly gross salary for every year of employment, as part of a
severance payment upon the termination of an employee. The Company deposits
every month 5.33% of each employee gross salary, of which 1.33% is paid every
February of each year, and the remaining 4% deposited in ASERICA is paid upon
termination. Amounts paid or transferred to ASERICA may not completely cover the
severance payment at the time the employee leaves, since the severance payment
calculation is based on the average of the last 6 months' salary. Any remaining
amount owed by the Company must be settled when the employee is terminated. As
of September 30, 2002, the Company has accrued approximately $138,000 for future
severance payment which is included in accrued expenses. The Company believes
the amount is adequate based on past experience. The Company must assess the
adequacy of the provisioned amount, which is estimated using historical
experience and other critical factors. The assumptions used to arrive at
provisioned amounts are reviewed regularly by management. However, actual
expenses could differ from these estimates and could result in adjustments to be
recognized.
Income taxes: The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. SFAS No. 109 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax asset will not be realized. In assessing a valuation
allowance for a deferred tax asset, the Company estimates future taxable income
and provides a valuation allowance when it is more likely than not to be
recovered. Future taxable income could be materially different than amounts
estimated, in which case the valuation allowance would need to be adjusted. As
of September 30, 2002 and 2001, the Company had valuation allowances amounting
to $2,921,271 and $3,646,594, respectively.
Allowance for doubtful accounts: The allowance for doubtful accounts reflects
estimated losses resulting from the inability to collect required payments from
our customers. The allowance for doubtful accounts is based on management's
review of the overall condition of accounts receivable balances and review of
significant past due accounts. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventory: Inventories are stated at the lower of cost or market and their cost
is determined using the weighted-average method, except for inventories in
transit, which are valued at specific cost. The costs associated with breeder
hens during their growth period are capitalized as inventories until they reach
their production stage, which is approximately 20 weeks after they hatch.
Capitalized costs are amortized over the productive life of the hens utilizing
the unit of production method. The productive life of hens is estimated based on
historical data. Finished products, raw materials and other supplies are
regularly evaluated to determine that market conditions are correctly reflected
in their recorded carrying value. An inventory obsolescence provision is
provided based upon conditions such as aged products, low turnover, or damaged
or obsolete products.
19
Property, plant and equipment: Property, plant and equipment are recorded at
cost. Property plant and equipment acquired through purchase method accounting
reflect market value at the date of acquisition. Management must evaluate
whether improvements to property, plant and equipment that extend their useful
lives are capitalized or expensed. The Company uses the straight-line method
over the estimated useful live. Useful lives assigned to depreciable assets are
based on guidelines used for manufacturing companies.
Impact of Recently Issued Accounting Standards
Effective July 1, 2001 and January 1, 2002, the Financial Accounting Standard
Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets," respectively. SFAS No. 141 requires all
business combinations entered into after June 30, 2001 to be accounted for under
the purchase method and specifies the types of acquired intangible assets that
are required to be recognized and reported separate from goodwill. The Company
elected to early adopt the provisions of SFAS No. 142 effective October 1, 2001.
SFAS No. 142 requires that goodwill and intangible assets with indefinite lives
no longer be amortized, but instead tested for impairment at least annually and
written down with a charge to operations when the carrying amount exceeds the
estimated fair value. The cost of intangible assets with determinable useful
lives continues to be amortized over the useful lives of the assets. In
connection with the transition provisions for adopting this standard, the
Company performed a transitional impairment test using discounted cash flows and
found no impairment. In accordance with SFAS No. 142, the Company discontinued
the amortization of goodwill and indefinite-lived intangible assets effective
October 1, 2001. Had the provisions of SFAS No. 142 been in effect during fiscal
years 2001 and 2000, a reduction of amortization expense and an increase in net
income of $787,535 and $953,828 or an increase of $0.06 and $0.08 per share,
respectively, would have been recorded.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company adopted SFAS No. 143 on October
1, 2002 and does not expect it to have a material impact on the Company's
financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived assets and for Long-Lived Assets to Be Disposed
Of," and establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS No. 144 requires that
long-lived assets to be disposed of by sale, including those of discontinued
operations, be measured at the lower of carrying value or fair value less costs
to sell, whether reported in continuing operations or in discontinued
operations. Discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet been incurred.
SFAS No. 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company adopted SFAS No. 144 on October 1,
2002 and does not expect it to have a material effect on the Company's financial
position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for the
fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statement periods ending
after December 15, 2002. The Company does not expect the adoption of FIN 45 will
have a material impact on its financial position, results of operations or cash
flows.
20
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Company and its representatives may, from time to time, make written or oral
forward-looking statements with respect to their current views and estimates of
future economic circumstances, industry conditions, company performance and
financial results. These forward-looking statements are subject to a number of
factors and uncertainties which could cause the Company's actual results and
experiences to differ materially from the anticipated results and expectations
expressed in such forward-looking statements. The Company cautions readers not
to place undue reliance on any forward-looking statements, which speak only as
of the date made. Among the factors that may affect the operating results of the
Company are the following: (i) fluctuations in the cost and availability of raw
materials, such as feed grain costs in relation to historical levels; (ii)
market conditions for finished products, including the supply and pricing of
alternative proteins which may impact the Company's pricing power; (iii) risks
associated with leverage, including cost increases attributable to rising
interest rates; (iv) changes in regulations and laws, including changes in
accounting standards, environmental laws, occupational and labor laws, health
and safety regulations, and currency fluctuations; and (v) the effect of, or
changes in, general economic conditions.
This management discussion and analysis of the financial condition and results
of operations of the Company may include certain forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements with respect to anticipated future operations and
financial performance, growth and acquisition opportunity and other similar
forecasts and statements of expectation. Words such as expects, anticipates,
intends, plans, believes, seeks, estimates, should and variations of those words
and similar expressions are intended to identify these forward-looking
statements. Forward-looking statements made by the Company and its management
are based on estimates, projections, beliefs and assumptions of management at
the time of such statements and are not guarantees of future performance. The
Company disclaims any obligations to update or review any forward-looking
statements based on the occurrence of future events, the receipt of new
information or otherwise.
Actual future performance outcomes and results may differ materially from those
expressed in forward-looking statements made by the Company and its management
as a result of a number of risks, uncertainties and assumptions. Representative
examples of these factors include, without limitation, general industrial and
economic conditions; cost of capital and capital requirements; shifts in
customer demands; changes in the continued availability of financial amounts and
the terms necessary to support the Company's future business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
General
Market risks relating to the Company's operations result primarily from changes
in currency exchange rates, interest rates and commodity prices. The sections
below describe the Company's exposure to interest rates, foreign exchange rates
and commodities prices. The sensitivity analyses presented below are
illustrative and should not be viewed as predictive of future financial
performance. Additionally, the Company cannot assure that the Company's and/or
its subsidiaries' actual results in any particular year will not differ from the
amounts indicated below.
Foreign Exchange Risk
The subsidiaries of the Company operate in Costa Rica and are exposed to market
risk from changes in U.S. currency exchange rates. Foreign exchange risk derives
from the fact that the Company makes its payments in U.S. dollars for the
majority of its imported raw materials and bank facilities, and its revenues are
mostly denominated in colones. The Company does not currently maintain a trading
portfolio and does not utilize derivative financial instruments to manage such
risks. To mitigate its exposure to variations in devaluations, the Company
periodically increases sales prices of some of its products during the year,
varies the product mix to those with higher profit and seeks efficiencies in its
costs. In addition, the company seeks to increase its exports sales. For fiscal
year 2002, export sales increased by 28.48% when compared to fiscal year 2001.
21
The exchange rate between the colon and the U.S. dollar is determined in a free
exchange market, supervised by the Banco Central de Costa Rica (Banco Central).
For the last 20 years, Banco Central has utilized the crawling peg method
whereby the colon is devalued daily on a systematic basis.
As of September 30, 2002, the Company had outstanding indebtedness of
approximately $41.5 million denominated in U.S. dollars. The potential foreign
exchange loss resulting from a hypothetical 10% increase during the year in the
devaluation of the colon/dollar exchange rate would be approximately $408,000.
This loss would be reflected in the balance sheet as increases in the principal
amount of its dollar-denominated indebtedness and in the income statement as an
increase in foreign exchange losses, reflecting the increased cost of servicing
dollar- denominated indebtedness. This analysis does not take into account the
positive effect that the hypothetical decline would have on accounts receivable
and other assets denominated in U.S. dollars.
Interest Rate Risk
As of September 30, 2002, the Company had outstanding a total of approximately
$41.5 million in loans and other debt, of which $29.5 million bore variable
interest rates, based primarily on LIBOR or U.S. Prime Rate for its colones and
dollar-denominated indebtedness. A hypothetical, simultaneous and unfavorable
change of 10% in the Company's variable rate in effect as of September 30, 2002
would result in a potential increase in interest expense of $309,000. The
sensitivity analysis model may overstate the impact of the Company's interest
rate risk, as uniform increases of all interest rates applicable to its
financial liabilities are unlikely to occur simultaneously.
Commodity Risk
The Company imports all of its corn and soybean meal, the primary ingredients in
chicken feed, from the United States. Fluctuations in the price of corn may
significantly affect the Company's profit margin. The price of corn and soybean
meal, like most grain commodities, is fairly volatile and requires constant and
daily hedging in order to minimize the effect of price increases on the
Company's profit margin.
The Company purchases its corn through the Chicago Board of Trade ("CBOT") and
has been actively hedging its exposure to corn price fluctuations since 1991.
The Company's strategy is to hedge against price increases in corn and soybean
meal, and it is not involved in speculative trading. Contract terms range from
one month to six months. The Company buys directly from the spot market if
market conditions are favorable, but as a general rule, the Company purchases
most of its corn through contracts. The Company's hedging strategy is set in its
annual budget, which determines how much corn and soybean meal the Company will
need and the price the Company must pay in order to meet budget forecasts. The
Company uses an internal pricing model to prepare sensitivity analyses. The
Company bases its target prices on the worst case price assumptions (i.e. high
prices). The prices paid by the Company for corn and soy bean meal were 0.95%
and 0.02% below its budgeted prices, respectively, for the year ended September
30, 2002. The Company purchases its soybean meal through a company in Costa
Rica, INOLASA, in which the Company holds a 10% equity interest. In Costa Rica,
there is an applicable 5% tax for soybean meal imports, which is not levied if
such imports are 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 purchase soybean
meal directly from the CBOT.
The Company accounts for its futures transactions in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The contracts that effectively
meet risk reduction criteria are recorded using hedge accounting. Derivatives
that are not hedges are adjusted to fair value through income. No
ineffectiveness was recognized on cash flow hedges during fiscal 2002 or 2001.
The Company expects that losses in the amount of $96,989 recorded in other
comprehensive loss as of September 30, 2002, related to cash flow hedges, will
be recognized within the following 3 months.
The Company has a $500,000 credit line with Futures U.S.A., Inc. ("FIMAT") and
draws upon this credit line to cover its initial margin deposit. The interest
rate paid on this line of credit averages an annual rate of less than 10% on
drawn amounts.
For the year ended September 30, 2002, a hypothetical 10% increase in the
monthly price of corn and soybean meal would have resulted in an increase in
cost of sales of approximately $2.14 million.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information required by this item is incorporated by reference to the
Independent Auditor's Report included on page F-2 and from the consolidated
financial statements and supplementary data on pages F-3 through F-27 on this
Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The directors and executive officers of the Company, their ages and present
positions held in the Company, as of the date hereof, are as follows:
Name Age Position Held
Calixto Chaves ............................. 56 Chairman, Chief Executive
Officer, and President and
Director
Carlos Zamora .............................. 41 Chief Operating Officer
Federico Vargas ............................ 69 Director and Chairman of the
Audit Committee
Jorge M. Quesada ........................... 53 Director, Treasurer and
Executive President of
Pipasa and As De Oros
Luis J. Lauredo ............................ 53 Director and Member of the
Audit Committee
Alfred E. Smith, IV ........................ 50 Director
Monica Chaves .............................. 30 Director and Secretary,
Gina Sequeira .............................. 32 Chief Financial Officer
Pedro De Mattheu ........................... 61 Director and Member of the
Compensation Committee
Grant "Jack" Peeples ....................... 71 Director and Member of the
Audit Committee
Jose Zamora ................................ 49 Production Vice President
The Company's directors will serve in such capacity until the next annual
meeting of stockholders of the Company 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. Monica
Chaves, Jose Pablo Chaves, Carlos Zamora and Jorge M. Quesada are the daughter,
son, cousin and brother-in-law of Calixto Chaves, respectively. Otherwise, there
are no family relationships among the Company's officers and directors, nor are
there any arrangements or understandings 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.
Mr. Calixto Chaves. Mr. Chaves is Chairman of the Board, Chief Executive Officer
and President of the Company and has served as such since 1996. Mr. Chaves also
founded Pipasa in 1969 and has since served as its Chairman of the Board. He
currently serves on the board of directors of Central American Oils and
Derivatives, S.A. and American Oleaginous Industry. From 1994 to 1996, he was a
board member of Cerveceria Americana, a private brewery. In 1994, he served as
an advisor to the President of Costa Rica and 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 as Minister of the
Costa Rican Ministry of Industry, Energy and Mines and became Minister of
Natural Resources in 1986.
23
Dr. Carlos Zamora. Dr. Zamora has served as the Chief Operating Officer of the
Company since July 2001. Dr. Zamora served as the Vice President of the Live
Production division of Pipasa from 1999 to July 2001. From 1997 until 1998, Dr.
Zamora served as the general vice president of As de Oros, and was responsible
for the merger and integration of Pipasa and As de Oros. For ten years prior to
the merger, Dr. Zamora served in various capacities in the Company's Integrated
Poultry Production Systems. Dr. Zamora obtained his Doctorate degree in
Veterinary Medicine from the Universidad Nacional of Costa Rica in 1988.
Dr. Federico Vargas. Dr. Vargas has been a member of the Board of Directors
since August 1996 and Chairman of the Audit Committee. Dr. Vargas has also
served on the board of directors of Pipasa since January 1995, served on the
board of directors of Restaurante As de Oros, a subsidiary of As de Oros, from
November 1999 until June 2001, and served as a member of the board of directors
of Financiera Belen from February 1999 until July 2001. 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 extensively involved in 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 Partido Liberacion Nacional of Costa Rica. Prior to 1990, Dr. Vargas held a
number of political offices including Minister of Finance on two occasions,
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 of Economics, and Advisor
to the President of Costa Rica. Dr. Vargas serves on the boards of directors and
advisory bodies of numerous charitable and educational organizations and is the
author of a number of publications in economic and educational matters. He
obtained his Bachelor's degree 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
University of Pennsylvania. Dr. Vargas graduated from the University of Costa
Rica with a degree in Business Administration.
Mr. Jorge M. Quesada. Mr. Quesada has been a member of the Board of Directors of
the Company since August 1996 and was the Company's Chief Financial Officer from
August 1996 to September 1998. Mr. Quesada served on the Company's Audit
Committee from August 1996 until June 2001. Mr. Quesada has held numerous
positions with Corporacion Pipasa, S.A. since 1985, and was its Executive Vice
President from 1990 to 1999. Mr. Quesada served as the Executive President of
Pipasa and Corporacion As de Oros, S.A. ("As de Oros") since March 1, 1999. He
was a member of the board of directors of Banco de Fomento Agricola (d/b/a Banco
Cuscatlan) from 1991 to 1996. From 1987 to 1991, he was on the board of
directors of Financiera Belen, S.A. Mr. Quesada has conducted numerous seminars
regarding marketing topics. He obtained his Degree in Business Administration,
with emphasis on Public Accounting, from the University of Costa Rica in 1984.
Honorable Ambassador Luis Lauredo. Mr. Lauredo has served as Director and a
member of the Audit Committee of the Company since August 2001. Mr. Lauredo also
served as a director from August 1996 until December 1999, at which time he
resigned to serve as the United States Ambassador to the Organization of
American States. Mr. Lauredo served as Ambassador until June 2001. Mr. Lauredo
served as the Chairman of the Audit Committee from August 1996 to July 2000. Mr.
Lauredo joined the law firm of Hunton & Williams in July 2001 and works out of
its Miami and Washington, D.C. offices, focusing on international trade and
governmental affairs. Mr. Lauredo is and has served as a director of Colonial
Bank of South Florida since October, 2001. From 1995 to 1999, Mr. Lauredo was
President of Greenberg Traurig Consulting, Inc., an affiliate of the
international law firm, Greenberg Traurig, Hoffman, Lipoff, Rosen & Quentel.
From 1994 to 1995, he was Executive Director of the Summit of the Americas. 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
held a number of positions in the banking industry, including Senior Vice
President of the Export-Import Bank of the United States of America. He has
represented the President of the United States as special U.S. Ambassador to the
inaugurations of the Presidents of Columbia, 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.
Mr. Alfred E. Smith, IV. Mr. Smith has been a member of the Board of Directors
of the Company since June 1, 1994. Mr. Smith has been the Managing Director of
the Wall Street firm of Bear Wagner since April 2001 and was the Managing
Director of Hunter Specialists, LLC, New York, from January 1997 to April 2001.
From 1979 to 1996, he was with CMJ Partners, a New York Stock Exchange member
firm. Mr. Smith is the Chairman of the Government Relations Committee of the New
York Stock Exchange,
24
Director and Secretary of the Alfred Emanuel Smith Memorial Foundation, Chairman
of the Cardinal's Committee for the Laity-Wall Street Division since 1985,
Founder and Chairman of Hackers for Hope since 1989, Director of the Center for
Hope since 1989, a Director at the Catholic Youth Organization until 1997,
member of the President's Council of Memorial Sloan Kettering Hospital since
1986, and a member of the New York City Advisory Board of the Enterprise
Foundation. Mr. Smith is also a member of the Board of Trustees of St. Vincent's
Hospital and Medical Center, since 1986, and the Cavalry Hospital since 1998,
and was a member of the Board of Trustees of Iona Prep School, Saint Agnes
Hospital, and Our Lady of Mercy Medical Center. Mr. Smith is a member of the
Association of the Sovereign Military Order of Malta. He has received numerous
awards for his charity humanitarian work, including "Wall Street 50" Honoree
Humanitarian Award, Terence Cardinal Cooke Center in 1999; Man of the Year Award
at Iona Prep in 1986, Club of Champions Gold Medal Award of the Catholic Youth
Organization, Ellis Island Medal of Honor, the National Brotherhood Award of the
National Conference of Christians and Jews, the Graymoor Community Service Award
by the Franciscan Friars of the Atonement, the American Cancer Society's Gold
Sword of Hope Award, and the Terence Cardinal Cooke Humanitarian Award by Our
Lady of Mercy Medical Center. Mr. Smith was educated at Villanova University.
Ms. Monica Chaves. Ms. Chaves has served as a Director and the Secretary of the
Company since 1996 and as a director of Pipasa since October 1999. Ms. Chaves
joined Pipasa as assistant manager in the company's Finance Division in 1991
where she was in charge of Pipasa's Special Investment Department. In 1996, when
the Company went public, Ms. Chaves assumed the Company's Investor Relations
Department. Ms. Chaves has served as the Vice President of Administration of
Pipasa and As de Oros since March 1, 1999. Ms. Chaves received a Bachelor's
degree in Business Administration from Saint Michaels College, Vermont. Ms.
Chaves is the daughter of Mr. Calixto Chaves.
Ms. Gina Sequeira. Ms. Sequeira was appointed Chief Financial Officer on
November 8, 2002. Ms. Gina joined the Company in April 1996 and has served in
the financial /accounting area of the Company. She obtained her degree in
accounting from the Universidad Internacional de las Americas in 1994, and has
been a member of the Institute of Certified Public Accountants of Costa Rica for
4 years. Ms. Sequeira worked in external auditing before joining the Company.
Mr. Pedro J. De Matheu. Mr. De Matheu has served as a Director and a Member of
the Compensation Committee of the Company since August 2001. Mr. De Matheu was
born in Santa Ana, El Salvador. He attended college at the University of Arizona
where he obtained his Bachelor's degree in Agriculture Science in 1964, and his
Master's degree in Science, focused on Animal Nutrition, in 1966. After
completing his studies at the University of Arizona, Mr. De Matheu became
Hoffman Taff Western's (of Ontario, California) Technical Service
Representative. He also served as a Technical Director and Assistant to the
President, as well as Consultant of the biggest feed mill in California and
Arizona. He introduced the Feed Formulation Least Cost Linear Programming
method, and developed antibiotic, vitamin and mineral pre-mix formulas. He also
coordinated the technical staff activities such as sales and feed mill. From
December 1970 until November, 1999, Mr. De Matheu served as the Manager of the
Animal Health Division, at Pfizer, A.S. for Central America and Panama, where he
developed, among other activities: a small business in Central America which
rose quickly to become number one in the field; established a marketing and
sales department; coordinated the development and implementation of marketing
plans, including launching of new products that are still leaders in the field;
worked as a poultry advisor for Central American poultry integrations; created
animal health symposiums for the Central American and the Caribbean area, and
participated as an orator in National and International Congresses about Animal
Health and Agriculture. From December, 1999 until December 2000 Mr. De Matheu
served as Pfizer's Director of the Animal Health Group in NOLA (Mexico, Central
America and Venezuela), where he established the basis for a new stage of Animal
Health Group. Mr. De Matheu currently manages a family business in El Salvador.
Mr. Grant "Jack" Peeples. Mr. Peeples has served as a Director and a member of
the Audit Committee since August 2001. He served in the Korean War as an
Airborne Infantry Officer and Rifle Company Commander. He was awarded Combat
Infantryman Badge, Bronze Star for Valor and Purple Heart. He graduated from the
University of Florida College of Law in 1957, joined the law firm of former
Governor Leroy Collins in Tallahassee, Florida. Mr. Peeples was appointed as
Legislative Counsel to Governor Collins in 1958 and appointed to the Governor's
Cabinet as State Beverage Director in 1959. Mr. Peeples returned to the private
practice of law in 1961, specializing in legislative and administrative practice
in Tallahassee, Florida; founding partner in Peeples, Earl & Blank in 1970
specializing in environmental law, and Senior Trial Counsel in numerous landmark
environmental and regulatory cases. Retired from Peeples, Earl & Blank in 1994
and joined White & Case as Of Counsel. Served as Campaign Chairman and Chairman
of Transition Team for Governor
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Lawton Chiles and Legislative and Senior Counsel to the Governor. Vice-Chairman
of Governor's Commission on Governance, Vice-Chairman of Governor's Commission
on the Homeless, Chairman of Florida Aviation Commission, Co-Chairman of the
Dade County Homeless Trust, Board Member of the Florida Independent College
Fund, Member of the Board of Overseers, University of Florida Medical School,
and representative of the Governor and Cabinet on the Downtown Development
Authority. He has also served as General Counsel and member of the Board of
Directors of Deltona Corporation, a NYSE company, as member of the Board of
Directors and Chairman of the Audit Committee of United Petroleum Group, a Hunt
family company, as Senior Counsel and member of the Board of Directors of Senior
Networks, Inc.
Jose Zamora. Mr. Zamora joined the Company in 1974 and has served as production
Vice-President since 1991. Mr. Zamora is affiliated with the Costa Rican Poultry
Chamber and has been a member of the Junta de Fomento Avicola de Costa Rica.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Sec 16(a) of the Securities Exchange Act 1934, as amended (the "1934 Act"),
requires the Company's directors and executive officers, and persons who own
more than ten percent (10%) of the Company's outstanding Common Stock, to file
with the Securities and Exchange Commission (the "SEC") initial reports of
ownership and report changes in ownership of Common Stock. Such persons are
required by SEC regulations to furnish the Company with copies of all such
reports they file.
To our knowledge, based solely on a review of the copies of reports furnished to
us and written or oral representations that no other reports were required for
such persons, all Section 16(a) filing requirements applicable to our officers,
directors and greater than ten percent (10%) beneficial owners have been
complied with, except for a late filing of a Form 4 required to be filed by
Comercial Angui, S.A. in December 2001.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended September 30, 2002,
2001 and 2000 the aggregate compensation awarded to, earned by or paid to Mr.
Chaves, the Company's Chief Executive Officer. The table also sets forth the
aggregate compensation awarded to, earned by or paid to the other three most
highly compensated officers for the fiscal year ended September 30, 2002. No
Executive Officer of the Company or its subsidiaries, other than Mr. Chaves,
earned compensation in excess of $100,000 during the fiscal years ended
September 30, 2000 and 2001. The Company neither granted any restricted stock
awards or stock appreciation rights to nor made any long-term incentive plan
payouts to any of the Named Executive Officers during the fiscal years ended
September 30, 2000, 2001, and 2002.
Fiscal Salary Bonus All Other
Name and Principal Position Year Compensation(1) Compensation Compensation(2)
- --------------------------- ---- --------------- ------------ ---------------
Calixto Chaves 2002 $160,336 $3,491 $18,133
Chief Executive Officer 2001 $145,233 $ 7,179
2000 $136,764 $ 5,633
Jorge Quesada Chaves
Treasurer, Director and 2002 $124,796 $3,106 $15,764
Executive President
Jose Zamora
Production Vice-president 2002 $ 88,159 $2,229 $12,806
Carlos Zamora
Chief Operating Officer 2002 $ 93,362 $2,389 $13,380
(1) Salary compensation was paid in Costa Rican colones and in 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 and
other incentive compensation.
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Compensation of Directors
The Company reimburses all members of the Board of Directors for their expenses
in connection with their activities as Directors of the Company. Directors of
the Company receive additional compensation for their services as Directors at a
rate of $200 for each Board Meeting that they attend.
Employment Agreements and Change in Control Agreements
The Company has no employment agreements and no change in control agreements
with any executive officer.
Compensation Committee Interlocks and Insider Participation
The Company has a Compensation Committee consisting of Mr. de Matheu, and Mr.
Lauredo. Neither Mr. de Matheu nor Mr. Lauredo is or ever was an officer of the
Company. This Committee makes the determinations for stock issuances pursuant to
the Company's compensation plans. The Company has no retirement, pension or
profit sharing plans covering its officers and directors, but has contemplated
the implementation of such a plan in the future.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors (the "Committee") is
responsible for establishing and administering the policies for the Company's
compensation programs and for approving the compensation levels of the
executives and managers of the Company and its subsidiaries, including its Chief
Executive Officer. The Committee also reviews with the Chief Executive Officer
guidelines for salaries and bonus awards applicable to the Company's employees
other than its executives and managers.
Statement of Philosophy of Executive Compensation
The executive compensation program of the Company is designed to (i) provide
base compensation reasonably comparable to that offered by other leading
companies to their executives and managers so as to attract and retain talented
personnel, (ii) motivate certain executives and managers to achieve the
strategic goals set by the Company, and (iii) further align the interests of the
executives and managers with the long-term interests of the Shareholders. To
implement this philosophy, the Company offers its executives and managers
compensation packages that include a mix of salary, the opportunity to receive
discretionary incentive bonus awards, and, at times, stock options.
In determining the level and form of executive compensation to be paid or
awarded, the Committee relies primarily on the recommendations of the Human
Resources Department, which provides the Committee an assessment of the subject
executive's performance and the Company's performance in light of its strategic
objectives. The Committee considered a number of factors in establishing
compensation in the fiscal year ended September 30, 2002, none of which was
quantified, ranked or assigned relative weight.
. The Company's retention of its position as one of the leading
producers and distributors of poultry products in Costa Rica.
. The further diversification, expansion, and broadening of the
Company's core business and new service offerings.
. Individual performance and contributions to the Company.
. Individual compensation history.
Salary
The base salary of executives and managers is determined initially by analyzing
and evaluating the responsibilities of the position and comparing the proposed
base salary with that of executives and managers in comparable positions in
other companies. Adjustments are determined by objective factors such as the
Company's performance and the individual's contribution to that performance and
subjective considerations such as additional responsibilities taken on by the
executive or manager. The Committee awarded increases in base salary to certain
of the executive officers and managers of the Company, including the Chief
Executive Officer.
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Incentive Awards
In addition to