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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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.)
1840 Coral Way, Suite 101, Miami, Fl 33145
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (305) 858-9480 Indicate by
check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [_] No [X]
As of February 19, 2003, the number of shares issued and outstanding of the
Company's common stock, par value $0.001 per share was 12,864,321.
RICA FOODS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2002 (Unaudited) and September 30,
2002 (Unaudited) ................................................................. 3
Consolidated Statements of Operations for the three months ended December 31,
2002 and 2001 (Unaudited) ........................................................ 4
Consolidated Statements of Cash Flows for the three months ended December 31,
2002 and 2001 (Unaudited) ........................................................ 5
Notes to Unaudited Consolidated Financial Statements ................................ 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................... 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 20
ITEM 4. Controls and Procedures ............................................................ 22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................................. 23
ITEM 2. Changes in Securities and use of Proceeds ......................................... 23
ITEM 3. Defaults upon Senior Securities ................................................... 23
ITEM 4. Submissions of Submissions of Matters to a Vote of Security Holders ............... 23
ITEM 5. Other Information ................................................................. 23
ITEM 6. Exhibits and Reports on Form 8-K .................................................. 23
2
ITEM 1. FINANCIAL SATEMENTS
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
December 31, 2002 September 30, 2002
----------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents $ 5,113,556 $ 2,728,293
Short-term investments 2,493,443 2,492,266
Notes and accounts receivable 19,367,867 16,542,374
Due from related parties 1,170,260 1,178,775
Inventories 12,781,474 14,145,070
Deferred income taxes 289,315 385,968
Prepaid expenses 442,238 417,234
------------ ------------
Total current assets 41,658,153 37,889,980
Property, plant and equipment 38,540,640 39,627,144
Long-term receivables-trade 722,056 901,009
Long-term investments 4,020,039 4,109,309
Other assets 7,262,851 6,564,408
Goodwill 1,701,291 1,723,414
------------ ------------
Total assets $ 93,905,030 $ 90,815,264
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 21,094,407 $ 18,975,032
Accrued expenses 2,785,655 3,428,708
Notes payable 19,695,511 17,074,336
Current portion of long-term debt 8,009,564 8,190,702
Due to stockholders 67,274 -
------------ ------------
Total current liabilities 51,652,411 47,668,778
Long-term debt, net of current portion 15,011,017 16,018,388
Deferred income tax liability 2,089,159 2,093,066
------------ ------------
Total liabilities 68,752,587 65,780,232
Minority interest 1,336,445 1,336,445
Stockholders' equity:
Common stock 12,865 12,865
Preferred stock 2,216,072 2,216,072
Additional paid-in capital 25,800,940 25,800,940
Accumulated other comprehensive loss (13,166,882) (12,206,661)
Retained earnings 14,719,477 13,654,202
------------ ------------
29,582,472 29,477,418
Less:
Due from stockholders (5,483,080) (5,495,437)
Treasury stock, at cost (283,394) (283,394)
------------ ------------
Total stockholders' equity 23,815,998 23,698,587
------------ ------------
Total liabilities and stockholders' equity $ 93,905,030 $ 90,815,264
============ ============
The accompanying notes to the unaudited financial statements are an integral
part of these balance sheets.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing. The
Company has not received a signed audit report with respect to the consolidated
balance sheets of the Company as of September 30, 2002. Accordingly, the balance
sheet for September 30, 2002 has been identified herein as "unaudited" and
should not be relied upon as an audited balance sheet.
3
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended December 31,
------------------------------
2002 2001
---- ----
Sales $ 35,158,870 $ 34,782,652
Cost of sales 23,644,264 22,357,774
------------ -------------
Gross profit 11,514,606 12,424,878
------------ -------------
Operating expenses:
Selling 5,026,519 5,059,589
General and administrative 3,340,657 3,392,612
------------ -------------
Total operating expenses 8,367,176 8,452,201
------------ -------------
Income from operations 3,147,430 3,972,677
Other expenses (income):
Interest expense 1,153,303 1,306,400
Interest income (421,522) (369,099)
Foreign exchange loss, net 814,318 821,414
Miscellaneous, net (22,498) (95,501)
------------ -------------
Other expenses, net 1,523,601 1,663,214
------------ -------------
Income before income taxes and minority
interest 1,623,829 2,309,463
Provision for income tax expense 504,161 441,433
------------ -------------
Income before minority interest 1,119,668 1,868,030
Minority interest 18,138 19,048
------------ -------------
Net income loss 1,101,530 1,848,982
Preferred stock dividends 36,252 35,705
------------ -------------
Net income loss applicable to common
stockholders $ 1,065,278 $ 1,813,277
============ =============
Basic earnings per share $ 0.08 $ 0.14
============ =============
Diluted earnings per share $ 0.08 $ 0.14
============ =============
Basic weighted average number of common
shares outstanding 12,811,469 12,811,469
============ =============
Diluted weighted average number of common
shares outstanding 12,811,469 12,811,469
============ =============
The accompanying notes to the unaudited financial statements are an integral
part of these statements.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing. The
Company has not received a signed audit report with respect to the consolidated
balance sheets of the Company as of September 30, 2002. Accordingly, the balance
sheet for September 30, 2002 has been identified herein as "unaudited" and
should not be relied upon as an audited balance sheet.
4
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended December 31, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 1,101,530 $ 1,848,982
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,189,998 1,195,573
Production poultry 866,705 864,769
Amortization of deferred costs of loans 50,194 36,318
Allowance for inventory obsolescence 9,769 5,913
Derivative unrealized loss (161,638) -
Gain on sale of productive assets (7,918) (80,915)
Deferred income tax benefit 84,114 (30,359)
Provision for doubtful receivables 27,649 135,574
Minority interest 18,138 19,048
Changes in operating assets and liabilities:
Notes and accounts receivable (2,877,784) (1,550,085)
Inventories 487,217 (916,924)
Prepaid expenses (25,004) 254,232
Accounts payable 2,119,374 3,254,184
Accrued expenses (643,053) (246,899)
Long-term receivables-trade 157,410 45,260
----------- -----------
Net cash provided by operating activities 2,396,701 4,834,671
----------- -----------
Cash flows from investing activities:
Short-term investments (1,177) 682,439
Long-term investments (18,675) (18,420)
Additions to property, plant and equipment (938,515) (2,382,691)
Proceeds from sales of productive assets 230,229 122,501
Increase in other assets (1,082,704) (2,494)
----------- -----------
Net cash used in investing activities (1,810,842) (1,598,665)
----------- -----------
Cash flows from financing activities:
Preferred stock cash dividends (54,390) (54,753)
Short-term financing:
New loans 6,107,133 6,516,173
Payments (3,478,828) (8,328,509)
(Continued on next page)
5
RICA FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended December 31, 2002 and 2001
(Unaudited)
(Continued)
2002 2001
---- ----
Long-term financing:
New loans - 2,868,986
Payments (1,193,082) (1,392,227)
Treasury stock acquired - (15,000)
Due from stockholders and related party 67,274 -
----------- -----------
Net cash provided by (used in) financing
activities 1,448,107 (405,330)
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents 351,297 222,989
----------- -----------
Increase in cash and cash equivalents 2,385,263 3,053,665
Cash and cash equivalents at beginning of period 2,728,293 4,920,870
----------- -----------
Cash and cash equivalents at end of period $ 5,113,556 $ 7,974,535
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 796,254 $ 945,774
=========== ===========
Income taxes $ 341,7555 $ 25,664
=========== ===========
The accompanying notes to the unaudited financial statements are an integral
part of these statements.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing. The
Company has not received a signed audit report with respect to the consolidated
balance sheets of the Company as of September 30, 2002. Accordingly, the balance
sheet for September 30, 2002 has been identified herein as "unaudited" and
should not be relied upon as an audited balance sheet.
6
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
NOTE 1 - GENERAL
Management is responsible for the preparation of the financial statements and
related information of Rica Foods, Inc. and its subsidiaries: Corporacion
Pipasa, S.A. and Subsidiaries ("Pipasa") and Corporacion As de Oros, S.A. and
Subsidiaries ("As de Oros") (collectively the "Company") that appear in this
Quarterly Report on Form 10-Q. Rica Foods, Inc. owns 100% of the outstanding
common stock of Pipasa and As de Oros. Management believes that the financial
statements fairly reflect the form and substance of transactions and reasonably
present the Company's financial condition and results of operations in
conformity with accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The accompanying unaudited consolidated interim financial
statements have been prepared in accordance with the instructions to the
Quarterly Report on Form 10-Q and, therefore, omit or condense certain footnotes
and other information normally included in the financial statements prepared in
conformity with U.S. GAAP. The accounting policies followed for interim
financial reporting are the same as those disclosed in Note 1 of the Notes to
Consolidated Financial Statements included in the Company's unaudited
consolidated financial statements for the fiscal year ended September 30, 2002,
which are included in the Company's Annual Report on Form 10-K/A. Management has
included in the Company's financial statements figures that are based on
estimates and judgments, which management believes are reasonable under the
circumstances. In the opinion of management, all adjustments necessary for the
fair presentation of the financial information for the interim periods reported
have been made. Results for the three months ended December 31, 2002 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending September 30, 2003. The Company maintains a system of internal accounting
policies, procedures and controls intended to provide reasonable assurance, at
an appropriate cost, that transactions are executed in accordance with
management's authorization and are properly recorded and reported in the
financial statements, and that assets are adequately safeguarded.
Although management believes that the disclosures are adequate to make the
information presented not misleading, these unaudited consolidated interim
financial statements should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KA for the fiscal year ended September 30, 2002.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing.
The Company's Form 10-K/A did not include a signed audit report with respect to:
(i) the consolidated balance sheets of the Company as of September 30, 2002; and
(ii) the related consolidated statement of income,. stockholders' equity and
cash flows for the year ended September 30, 2002 (the "2002 Financial
Statements"). Accordingly, the 2002 Financial Statements have been identified
herein as "unaudited" and should not be relied upon as audited financial
statements.
NOTE 2 - RECLASSIFICATIONS
Certain reclassifications in the statement of cash flows have been made to prior
period to conform to current presentation.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing.
7
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
NOTE 3 - INVENTORIES AND PRODUCTION POULTRY
Inventories consist of the following:
December 31, September 30,
------------ -------------
2002 2002
---- ----
(Unaudited) (Unaudited)
----------- -----------
Finished products $ 3,284,383 $ 4,290,293
Live poultry - net 5,360,243 5,519,611
Materials and supplies 1,996,452 1,798,148
Raw materials 1,810,859 2,214,286
In transit 336,728 322,732
------------ -----------
12,788,665 14,145,070
Less:
Allowance for obsolescence (7,192) -
------------ -----------
$ 12,781,474 $14,145,070
============ ===========
Inventories are stated at the lower of cost or market. Cost is determined using
the weight-average method, except for inventories in transit, which are valued
at specific cost. Live poultry inventory represents chicks in grow-out stage,
breeders and layer hens. Breeder and layer hen costs are accumulated up to the
production stage (approximately 20 weeks) and are amortized over the estimated
production lives (approximately 65 weeks for breeder and approximately 80 weeks
for layer hens) based on a percentage calculated according to the estimated
production cycle of the hen, including a residual value. After approximately 43
days, chicks in grow-out stage are transferred to the processing plants.
Accumulated costs consist primarily of animal feed and labor costs. Production
poultry represents the accumulated amortization of breeder and layer hens in
their productive stage.
NOTE 4 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure (SFAS 148). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
providing alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of FASB 123 and Accounting Principles Board
Opinion No. 28 "Interim Financial Reporting" (APB 28) to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Amendments to SFAS 123 related to the transition and
annual disclosures are effective for fiscal year ending after December 15, 2002.
Amendments to disclosure requirements of Opinion No.28 are effective for interim
periods beginning after December 15, 2002. The Company does not expect the
adoption of SFAS 148 will have a material impact on its financial position,
results of operations or cash flows.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing.
8
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
NOTE 5 - SEGMENT INFORMATION (in millions) (unaudited):
Three months ended December 31,
-------------------------------
2002 2001
---- ----
Net sales:
Broiler $ 16.07 $ 18.88
Animal feed 8.26 6.47
By-products 4.72 3.88
Exports 1.74 2.22
Quick service 2.21 1.78
Other 2.16 1.55
------- -------
Total net sales 35.16 34.78
------- -------
Segment profit:
Broiler 4.02 5.14
Animal feed 0.87 1.01
By-products 0.81 0.65
Exports 0.27 0.26
Quick service 0.18 0.18
Other 0.34 0.13
------- -------
Gross profit less selling expenses 6.49 7.37
------- -------
General and administrative expenses 3.34 3.39
Other non-operating expenses 1.52 1.66
------- -------
Income before provision for income
tax expenses and minority interest $ 1.63 $ 2.32
======= =======
The Company measures segment profit as gross profit less selling expenses, since
selling expenses and costs have a direct effect on sales per segment. The
Company operates in the production and marketing of poultry products, animal
feed and quick service chicken restaurants ("quick service"). The Company's
subsidiaries distribute these products primarily throughout Costa Rica. The
Company also exports primarily to other countries in Central America and the
Caribbean. The basis for determining the Company's operating segments is the
means in which management uses financial information in its operations.
Management operates and organizes the financial information according to the
types of products offered to its customers.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing.
9
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
NOTE 6 - COMPREHENSIVE INCOME (LOSS):
The components of comprehensive income (loss) are as follows (unaudited):
Three Months ended December 31,
-------------------------------
2002 2001
---- ----
Net income $1,101,530 $1,848,982
Derivative unrealized loss (161,638) -
Foreign currency translation adjustment (798,583) (610,487)
---------- ----------
Total comprehensive income $ 141,309 $1,238,495
========== ==========
NOTE 7 - LITIGATION
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 January 13, 2003 the Company filed a Form 10-K that appeared to include an
audit report of Deloitte & Touche. The Company recognizes that it was
potentially a violation of provisions of the Securities Exchange Act of 1934
(the "Exchange Act") for the Company to file the Form 10- K before it received a
signed audit report from Deloitte & Touche (the "Mistake"). Until very shortly
after the filing of the Form 10-K, the Company's Chief Financial Officer (the
"CFO") believed the Company was in the process of receiving the signed audit
report. Shortly after the Company learned that a signed audit report had not in
fact been received prior to filing the Form 10-K, the Company commenced the
process of collecting information regarding how the Mistake occurred and
initiated an internal investigation.
On January 24, 2003, the Staff (the "Staff") of the Securities and Exchange
Commission (the "Commission") notified the Company that it was conducting an
informal inquiry of the Company. In response to such notification, the Company
began providing the Staff information regarding the Mistake.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing
10
RICA FOODS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
On February 4, 2003, the Staff advised the Company that on February 7, 2003 the
Staff intended to recommend that the Commission bring a civil injunctive action
against the Company, alleging that the Company violated Sections 13(a),
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1
promulgated thereunder. The Staff further advised the Company that the Staff
intended to recommend that the Commission bring a civil injunctive action
against the Company's Chief Executive Officer (the "CEO") and CFO, alleging they
violated Section 13(b)(5) of the Exchange Act and Rules 13a-14, 13b2-1 and
13b2-2 promulgated thereunder, and that they aided and abetted the Company's
alleged violations.
The Company believes that the Mistake may constitute a violation of Section
13(a) of the Exchange Act and Rules 13a-1 and 12b-20 promulgated thereunder.
However, the Company does not believe that it has violated Sections 13(b)(2)(A)
or 13(b)(2)(B) of the Exchange Act and has so advised the Staff. The Company
believes it has been cooperating fully with the Staff and hopes to settle the
dispute prior to the Commission's initiation of any civil proceedings against
the Company. The Company and the Staff have been in detailed settlement
conversations since February 10, 2003. Nonetheless, there can be no assurance
that the Company and the Staff will agree to a settlement.
The Company is in the process of investigating whether there is a factual and
legal basis to the Staff's allegations that the CEO and CFO violated various
provisions of the Exchange Act. Based upon its internal investigation to date,
the Company believes that, until very shortly after the filing of the Form 10-K,
the CFO believed the Company was in the process of receiving the signed audit
report. The Company believes that the CEO and CFO have each recently retained
legal counsel to address the Staff's allegations.
Except for the legal proceedings discussed above, no legal proceedings of a
material nature, to which the Company or the subsidiaries are a party, exist or
were pending as of the date of this report. Except for the legal proceedings
disclosed above, the Company knows of no other legal proceedings of a material
nature pending or threatened or judgments entered against any director or
officer of the Company in his capacity as such.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of the Company's management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
The consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing
11
ITEM 2. 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-Q. 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 consolidated balance sheet as of December 31, 2002, the consolidated
statement of income for the three months ended December 31, 2002 and the
consolidated statement of cash flows for the three months ended December 31,
2002 contained within this Form 10-Q have not been reviewed by an independent
public accountant. Accordingly, these financial statements should not be relied
upon as reviewed, and do not meet the requirements of a Form 10-Q filing.
The Company's Form 10-K/A did not include a signed audit report with respect to:
(i) the consolidated balance sheets of the Company as of September 30, 2002; and
(ii) the related consolidated statement of income, stockholders' equity and cash
flows for the year ended September 30, 2002 (the "2002 Financial Statements").
Accordingly, the 2002 Financial Statements have been identified herein as
"unaudited" and should not be relied upon as audited financial statements.
The Company is seeking to engage a new independent public accounting firm, has
entered into discussions with a number of firms, but has not yet engaged a new
public accounting firm to perform an audit of its 2002 Financial Statements and
otherwise serve as its independent auditor. As of the date of the filing of this
report, the registrant had not engaged an independent public accountant to serve
as its auditor. Accordingly, paragraph 5 of the Section 302 certifications
contained within this report has been modified to exclude any reference to the
registrant's auditors.
Since the financial statements included in this Form 10Q do not meet the
requirements of a Form 10-Q filing, the Company's Chief Executive Officer and
Chief Financial Officer did not at the time of filing the Form 10-Q provide the
Securities and Exchange Commission with the certification required by Section
906 of the Sarbanes-Oxley Act of 2002.
12
The Company's operations are primarily conducted through its 100% owned
subsidiaries: Pipasa and As de Oros and their respective subsidiaries. The
Company, through its subsidiaries, is the largest poultry company in Costa Rica.
As de Oros also owns and operates a chain of quick service restaurants in Costa
Rica called "Restaurantes As"
The following discussion addresses the financial condition and results of
operations of the Company. This discussion should be read in conjunction with
the Company's Annual Report on Form 10-K/A for the fiscal year ended September
30, 2002 and with the Company's unaudited consolidated interim financial
statements as of December 31, 2002 and for the three-month period ended December
31, 2002 and 2001 contained herein.
Results for any interim periods are not necessarily indicative of results for
any full year.
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.
Environmental compliance
At the present time, the Company is not subject to any significant costs for
compliance with any environmental laws in any jurisdiction in which it operates.
However, in the future, the Company could become subject to significant costs to
comply with new environmental laws or environmental regulations in jurisdictions
in which it conducts business. At the present time, the Company cannot assess
the potential impact of any such potential environmental regulations.
During the three months ended December 31, 2002, the Company did not incur any
significant costs related to environmental compliance.
Results of operations for the three months ended December 31, 2002 compared to
the three months ended December 31, 2001.
For the three months ended December 31, 2002, the Company generated net income
applicable to common stockholders of $1,065,278 ($0.08 earnings per share),
compared to $1,813,276 ($0.14 earnings per share) for the three months ended
December 31, 2001. For the three months ended December 31, 2002, net sales
increased by 1.08% when compared to the three months ended December 31, 2001,
mainly due to increases in the sales of the animal feed, by-products, quick
service and others, offset by decrease in sales of broiler and export segments.
Cost of sales increased by 5.75%, mainly due to increases costs of imported raw
material and increase in volumes of primarily the animal feed segment.
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 14.89% primarily due to a volume decrease of 11.07%.
The Company believes that the decrease is mainly due to a relative reduction in
consumer purchasing power due to economic conditions in Costa Rica, which causes
a reduction in the consumption of the product of this particular segment. There
was also an increase domestic competition which resulted in a decrease in the
number of broiler customers. To counteract the effects of a decrease in the
demand of broiler, the Company offered temporary sales discounts, which resulted
in a lower sales price when compared to the three months ended December 31,
2001. The profit margin for the Broiler segment decreased from 27.23% to 25.00%,
primarily due to a decrease in the average sales prices of broilers.
13
Animal feed sales increased by 27.57%, mainly due to a volume increase of
28.72%. The Company believes the increase in volume is mainly attributable to
increase in the number of commercial animal feed customers. The profit margin
for animal feed decreased from 15.57% to 10.56%, mainly due to an increase costs
primarily due to increases in costs of imported raw material.
Sales of by-products increased by 21.52% mainly due to a volume increase of
27.85%. The Company believes the increase in volume is primarily due to an
improvement in the quality of the product and an increase in distribution
channels. The profit margin remained at approximately 17.15%.
Export sales decreased by 21.32%, which is mainly due to the discontinuation of
broiler exports to Honduras, due to the Honduran government restriction of
import of poultry related products. In addition, the Company did not export
broiler products to Hong Kong for the three months ended December 31, 2002. In
addition, there was a decrease in some products exported to Colombia, Nicaragua
and El Salvador. Profit margin increased from 11.50% to 15.43%, mainly due to a
shift in the sales mix to more profitable products sold.
Sales for the quick service segment increased by 24.32%, mainly as a result of a
sales price campaign to increase demand of the product. Profit margin decreased
from 10.20% to 8.38%, mainly due to sales price reductions in addition to an
increase in operating expenses such as promotional events, advertising and other
marketing strategies.
Sales for the other products segment increased by 39.12% mainly due to an
increase in sales of commercial eggs. Segment profit margin increased from 6.36%
to 15.52% due to variations in the sales mix and realization of certain
production economies of scale.
Operating expenses decreased by 1.91% for the three months ended December 31,
2002 when compared to the three months ended December 31, 2001. The decrease was
primarily a result of the Company's effort to adopt cost efficient measures in
its General and Administrative expenses. Likewise, the Company continues to seek
additional efficiencies in its Selling expenses by improving its distributions
logistics and adopting cost efficiencies measures. Operating expenses
represented 23.80% and 24.30% of net sales for the three months ended December
31, 2002 and December 31, 2001, respectively.
Other expenses decreased by 8.39% for the three months ended December 31, 2002,
as compared to the three months ended December 31, 2001. This decrease is mainly
due to a decrease in interest expenses, mainly due to a decrease in debt bearing
higher interest rates.
The provision for income tax expense for the three months ended December 31,
2002 amounted to $504,161 compared to $441,433 for the three months ended
December 31, 2001. This represents an increase in the effective income tax rate
from 19.11% to 31.05%. In December 2002, the government of Costa Rica enacted
temporary changes in the income tax law, applicable for the twelve months
beginning in January 2003 through December 2003. Such changes provide a
temporary increase in the tax rate from 30% to 34%, as part of the solutions to
decrease the actual governmental deficit.
Financial condition
Operating activities: As of December 31, 2002, the Company had $5.11 million in
cash and cash equivalents. The working capital deficit was $9.99 million and
$9.78 million as of December 31, 2002 and September 30, 2002, respectively. The
current ratio was 0.81 as of December 31, 2002 and 0.79 as of September 30,
2001.
Cash provided by operating activities amounted to approximately $2.40 million
and $4.83 million for the there months ended December 31, 2002 and December 31,
2001, respectively. The decrease in cash provided by operations is mainly due to
a decrease in net income, a relative decrease in the deferred payment of
accounts payables and a relative increase in the amounts of note and accounts
receivables paid. The relative decrease in cash provided by operations was,
partly offset by a decrease in inventories.
14
Funds used for investing activities for the three months ended December 31, 2002
totaled approximately $1.81 million, compared to $1.60 million for the three
months ended December 31, 2001. The Company invested $938,000 in property, plant
and equipment for the three months ended December 31, 2002 as well as $1.08 in
other assets, compared to $2.39 million for the three months ended December 31,
2001.
Historically, the Company has made significant capital investments in property,
plant and equipment in order to obtain operating efficiencies, facilitate
expansion into new markets and develop new products. The Company's capital
expenditures in the three months ended December 31, 2002 are primarily related
to replacing production equipment.
The Company intends to acquire, for an aggregate of $2.58 million a stake
participation of 51% in Logistica de Granos, S.A. ("Logistica"), from Port
Ventures, S.A. (the "Seller"), a Company owned by Jose Pablo Chaves, son of the
Company's Chairman and C.E.O. Notwithstanding, Jose Pablo Chaves is not an
insider nor officer of the Company. The Company has obtained a fairness opinion
valuation of the transaction which has been analyzed by the Audit Committee and
Board of Directors of the Company, the Board of Directors of Corporacion As de
Oros, S.A. as the proposed acquirer, and Pacific Life Insurance Company. The
transaction is subject to final approval of the stock purchase agreement by the
Board of Directors of the Company.
Logistica is a Costa Rican Company who holds a 19% minority participation in two
Costa Rican private companies who as part of modernization process of seaport
activity in Costa Rica, obtained a public bidding for the construction,
operation, maintenance, exploit and subsequent transfer to the Government, of a
new terminal for bulk in Puerto Caldera, and the operations, maintenance and
exploit of actual installations in Puerto Caldera. Puerto Caldera is the largest
Seaport in the Pacific Coast of Costa Rica. This acquisition will add further
expand the vertical integration of the Company, incorporating the disembarkment
of the imported grains to its process
The Company expects to close this transaction on or about April 2003, when the
definitive approval of the Government of Costa Rica is expected to be obtained.
In addition, the Company believes for the rest of fiscal year 2003, it will
invest in approximately an additional $4.4 million of property, plant and
equipment.
Cash provided by financing activities for the three months ended December 31,
2002 amounted to $1.45 million compared to cash provided by financing activities
amounting to $397,000 during the three months ended December 31, 2001. For the
three months ended December 31, 2002, the Company retired $4.67 million of
short-term and long-term debt compared to $9.71 million for its comparable
period during fiscal year 2002.
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 the 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.
15
Short-Term Debt
As of December 31, 2002, the Company had arranged 9 short-term lines of credit
and commitments (the "Lines of Credit") with banks and raw material suppliers
for a maximum aggregate principal amount of $ $24.5 million, of which $22.0
million has been utilized.
As of December 31, 2002, Notes payable amounted to $19.6 million, and were due
from January 2003 through December 2003 and bear annual interest at rates
ranging from 3.62% to 10.00% in U.S. dollars and from 16.2% to 20.0% in Costa
Rican colones. As of December 31, 2002, Lines of Credit with a maximum principal
balance of $7.0 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 December 31, 2002, $6.15 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 December 31, 2002, Long-term debt amounted to $23.0 million of which $8.0
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 2.15% to 11.96% in U.S. dollars and 24.00% in colones. As of December 31,
2002, Long-term debt amounting to $4.9 million was secured by property valued at
$4.8 million.
As of December 31, 2002, the Company had long-term line of credit agreements
with banks for a maximum aggregate amount of $1 million, which had not been
used, bearing interest rates of 8.75%, which is unsecured. Bank loans are due
from January 2003 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
December 31, 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
16
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,
a payment of $750,000 of interest in July 2002 and a payment of $4.7 million of
principal and interests on January 15, 2003. Thereafter, the principal amount of
Notes was being 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 "Affiliate 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.
Pursuant to the terms of the Amended Agreement, the Company is obligated to
furnish PacLife, within 120 days after the end of each fiscal year, audited
financial statements for the preceding fiscal year and an auditor's certificate
indicating that the auditor is not aware of any events of default under the
Amended Agreement (the "Financial Certifications"). The auditing firm must be of
recognized "national" standing.
As a result of the Company's inability to provide PacLife the Financial
Certifications on January 28, 2003, the Company has technically defaulted under
the Amended Agreement and has until February 27, 2003 to cure the event of
default. If the default is not cured PacLife has the right to declare all of the
outstanding Notes immediately due and payable and demand immediate payment of
the entire unpaid principal amount of such Notes, plus accrued and unpaid
interest thereon plus a yield maintenance amount.
The Company intends to request a waiver from PacLife. Although the Company is
seeking to engage new auditors and deliver the Financial Certifications, the
Company cannot predict when it will secure new auditors and be in a position to
deliver the Financial Certifications.
As of December 31, 2002, the Company's short term (within one year) payment
obligations under short-term and long-term debt and operating leases were as
follows:
Short-term debt $19,695,511
Long-term debt 8,009,564
Leases 1,160,966
Total $28,866,041
The Company projects that as of December 31, 2002, it will need to satisfy at
least $28.9 million of short-term debt, long-term debt and capital lease
payments within the next twelve months. The Company also projects that it will
seek to acquire the use of approximately an additional $4.4 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.
17
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, 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. 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.
Contingent liabilities: We account for contingencies in accordance with SFAS No.
5, "Accounting for Contingencies" which 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.
18
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. 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.
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 based on a
percentage calculated according to the estimated production cycle of the hen.
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.
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. The Company has reviewed
these guidelines and has deemed them appropriate based on assessments made by
engineers and past experience
19
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 3. 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.
20
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.
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 December 31, 2002, the Company had outstanding indebtedness of
approximately $42.72 million denominated in U.S. dollars. The potential foreign
exchange loss resulting from a hypothetical 10% increase for the three months
ended December 31, 2002 in the devaluation of the colon/dollar exchange rate
would be approximately $113,000. 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 increase would have on accounts receivable and other assets
denominated in U.S. dollars.
Interest Rate Risk
As of December 31,, 2002, the Company had outstanding a total of approximately
$42,72 million in loans and other debt, of which $30.72 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 for the three months
ended December 31, 2002, would result in a potential increase in interest
expense of $93,500. 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 0.13%
above and 0.40% below its budgeted prices, respectively, for the three months
ended December 31, 2002. The Company purchases its soybean meal through a
company in Costa Rica, INOLASA, in which
21
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 for the three months ended
December 31, 2002. The Company expects that losses in the amount of $258,627
recorded in other comprehensive loss as of , related to cash flow hedges, will
be recognized within the following 3 months. The Company generally does not
hedge anticipated transactions beyond 6 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 three months ended December 31, 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 $697,509.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Sections 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934, as amended). Based upon that
evaluation, the Company's Chief Executive Officer and its Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see Note 7: Litigation of the Notes to Unaudited Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report which text is incorporated
herein by reference
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Listing on American Stock Exchange
Although the Company's common stock is listed on the American Stock Exchange
("AMEX") under the symbol RCF, trading of the Company's common stock on the AMEX
has been halted. The Company has been advised by the AMEX that trading of the
Company's common stock on the AMEX is likely to be halted at least until the
Company has filed with Securities and Exchange Commission consolidated financial
statements for fiscal 2002 that include a signed audit report. The Company
believes that the AMEX is reviewing whether or not the Company's common stock
should continue to be listed on the AMEX. There can be no assurance that trading
of the Company's common stock will ever resume on the AMEX.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following is a list of Current Reports on Form 8-K filed during the first
quarter of fiscal 2003:
The Company filed a Current Report on Form 8-K dated November 20, 2002
under Item 5 relating to a press release disclosing the Company's Fitch rating
and the appointment of a new Chief Financial Officer.
The Company filed a Current Report on Form 8-K dated January 13, 2003
under Item 5 relating to the Company's filing of the Form 10-K for the year
ended September 30, 2002 without obtaining a signed audit report from Deloitte &
Touche.
The Company filed a Current Report on Form 8-K dated January 23, 2003
under Item 4 relating to the resignation of Deloitte & Touche as the Company's
independent public accountants.
The Company filed a Current Report on Form 8-K dated January 30, 2003
under Item 9 relating to the Chief Executive Officer and the Chief Financial
Officer's inability to make the certifications required by Section 906 of the
Sarbanes-Oxley Act in connection with the Company's filing of Amendment No. 1 to
the Form 10-K/A for the year ended September 30, 2002.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RICA FOODS, INC.
Date: February 19, 2003 /s/ CALIXTO CHAVES
----------------- ------------------
Calixto Chaves
Chief Executive Officer
Date: February 19, 2003 /s/ GINA SEQUEIRA
----------------- -----------------
Gina Sequeira
Chief Financial Officer
24
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Calixto Chaves, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rica Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
AS OF THE DATE OF THE FILING OF THIS REPORT, THE REGISTRANT HAD NOT ENGAGED AN
INDEPENDENT PUBLIC ACCOUNTANT TO SERVE AS ITS AUDITOR. ACCORDINGLY, PARAGRAPH 5
OF THE SECTION 302 CERTIFICATIONS CONTAINED WITHIN THIS REPORT HAS BEEN MODIFIED
TO EXCLUDE ANY REFERENCE TO THE REGISTRANT'S AUDITORS.
Date: February 19, 2003 /s/ CALIXTO CHAVES
----------------- ------------------
Calixto Chaves
Chief Executive Officer
25
I, Gina Sequeira, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rica Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
AS OF THE DATE OF THE FILING OF THIS REPORT, THE REGISTRANT HAD NOT ENGAGED AN
INDEPENDENT PUBLIC ACCOUNTANT TO SERVE AS ITS AUDITOR. ACCORDINGLY, PARAGRAPH 5
OF THE SECTION 302 CERTIFICATIONS CONTAINED WITHIN THIS REPORT HAS BEEN MODIFIED
TO EXCLUDE ANY REFERENCE TO THE REGISTRANT'S AUDITORS.
Date: February 19, 2003 /s/ GINA SEQUEIRA
----------------- -----------------
Gina Sequeira
Chief Financial Officer
26