Following the July 17, 2002 assertion by the Chairman that the exports of feed to Suriname which commenced in February 2001 “had continued to increase” the 2002 report indicates that market held steady. It also referred to the fact that the company had commenced the hatching of eggs. Last year’s report had indicated that the company had purchased a state-of-the-art parboiled plant but this year’s report alludes to significant capital expenditure work-in-progress on a state-of-the-art parboiled rice plant.

The reader has to assume that the two references are to the same plant which when it comes on stream in October 2003 would have taken almost two years to become operational. While in both years reference is made to projected revenue of US$8Mn and profits of US$1.2Mn, there is no indication of the amount expended to date or the funds required to complete the plant. Consequently it is difficult to assess the potential rate of return on this significant investment.

The financial results for 2002 indicate that the company has stumbled although it generated a significant volume of profit, earnings per share, profitability and cash flows have declined dramatically. The serious problems of governance continue and the company continues to battle opponents of its controversial plant. Reports in the press indicate that the company may still have a number of hurdles to overcome before this plant can be put into operation. Already the plant appears to be behind schedule and further delays could have serious implications for the company. Mr. Badal continues in the 2002 report to call for the stock market (which has since been established) and laments the inability of companies “growing at the rate of Guyana Stockfeeds” to access cheap capital.

It is informative and unsurprising that the company, whose Chief Executive Officer controls 85.7% of the voting shares, has had no activity in its shares since the advent of the stock market for which Mr. Badal has been vocal in his support. Prospective shareholders would be justifiably concerned when a single individual can exert this much influence over an entity. Mr. Badal’s criticisms of the Government would have sounded less hollow had he paid even passing acknowledgement to the Securities Industry Act, which became operational since July 2002, by ensuring that the report provided all the disclosures required under the Act.

Governance
The Companies Act requires companies to hold their annual general meetings not later than six months after the end of the accounting year and the company complied with this requirement. Again the financial statements did not disclose as is required under the law and relevant International Accounting Standards, the remuneration of the executive directors including the Chairman, which is no less acceptable because it is a problem not uncommon in Guyana. Despite remonstrations to the contrary, the International Accounting Standards are explicit on this issue.

The company has had only four directors since February 28 2002 when Chartered Accountant Mr. Noel Narine, head of PKF Barcellos, Narine & Company resigned. One of the remaining Directors is an associate of the company’s Legal Advisors with whom presumably there would be transactions. Neither this relationship nor any details of transactions with the firm of Legal Advisors, which must surely be considered a related party requiring disclosure under International Accounting Standards, has been disclosed in the financial statements.

It is also noteworthy that there is not even a cursory reference to any issues of governance in either the Chairman’s or Directors’ reports. The paucity in the content of both these reports leaves one with the impression that they were merely prepared to satisfy a requirement rather than to provide shareholders with useful information about the operations of the company, its performance and its prospects. This disdainful message cannot be lost on prospective shareholders.

For reasons which are far from apparent the company continues to transact significant volume and value of its transactions with companies owned privately by its controlling shareholder without fully disclosing “the types of transactions and the elements of the transactions necessary for an understanding of the financial statements.”(IAS 24). The reader is left to wonder about the pricing policies affecting the transactions and the profits that may be derived therefrom.

The Annual Report did not acknowledge the legal battle between the company and the Government currently before the court. This involves a rights and bonus issue of shares which saw Mr. Badal’s interest increase from 35% to 85.7% and the Government’s interest marginalized. Business Page fails to understand why the Privatisation Unit did not intervene in the payment of $60Mn in dividends in 2002 of which $51Mn would have been paid to Mr. Badal. By way of contrast over the three year period to December 31, 2002 the total cash received from the issue of shares was a mere $37.5Mn although the share capital moved from $2.8Mn to $379Mn.

The business
The activities of the company include the manufacture and sale of poultry and livestock feeds and it is also part of the business interests of the controlling shareholder that involve National Edible Oil and Fats Inc., El Dorado Rice Mills Inc. and El Dorado Restaurants. It has also commissioned its hatchery through which it intends to supply eggs to poultry farmers and cement its role as a partner in the poultry business rather than a mere feed supplier.

We summarise below the 2002 financial results of the company which are extracted from the audited accounts included in the Report and offer some indicators which may be useful to readers.

                                                              Profit and Loss Account

                                                         2002                                2001                               change
                                                       (G$’M)                            (G$’M)                                %

Sales                                                1,984                                1,873                                  6
Profit before Tax                                 123                                   258                               (52)
Taxation                                                47                                     95                               (51)
Profit after Tax                                      75                                   163                               (54)
Dividends                                             48                                      24                              100
Earnings per
Share (in $)                                       1.07                                    2.31                              (54)

                                                                               Profitability

                                                               2002                            2001

Net Profit Margin (%)                                  4                                 9
Return on assets (%)                                  10                               19
Return on equity(%)                                   18                               36
The turnover of the company increased by 6% which one can only assume is the result of increased volumes since the report indicates that the company was unable to increase prices, while pre-tax profits declined by 52% from 2001 levels as opposed to a 244% increase in 2001 over 2000. The Chairman reported that this decrease was due mainly to the increase in grain prices as well as increased provisioning for bad debts and higher depreciation charges. The higher grain prices would be reflected in the cost of sales which increased by only 8%. This implies that the “more than 30 %” increase in grain prices was offset by efficiencies and compensating cost savings elsewhere in the production process.

The financial statements disclosed no information on the provisions for bad debts but it was noted that receivables declined from $97.6Mn to $54.5Mn while the depreciation charges for the year increased by $16.6Mn. Even in the unlikely event that the entire change of $43.1Mn in the receivables balance was due to provisioning, these two factors do not explain the $111.2Mn or 78% increase in administrative expenses. Neither the information provided in the financial statements nor the reports of the Chairman or Directors provide shareholders with any acceptable explanation of why the company “saw its pre-tax profits adjusted downwards from $258Mn to $76Mn” (this should be $123Mn) as stated in the Chairman’s report.

The “policy of stringent cost controls as well as cost-reducing investments in 2000” alluded to in the 2001 report have obviously not had the same result in 2002.

Dividends per share increased by 100% from $0.34 per share to $0.68 per share and with a payout of $48Mn will consume 63% of after tax earnings, which appear excessive in view of the company’s expansion plans. In the preceding year, dividends of $24Mn represented 14.7% of after-tax earnings.

This is all the more disconcerting when one considers that operating cash flow decreased by $547.4Mn, a whopping 97% decline and net cash from operations was a negative $9.4Mn as opposed to positive $561Mn in 2001. When one considers its working capital position (current assets to current liabilities), the company will not be able to generate adequate funds from internal sources to fund its operations and expansion projects and additional financing will be necessary. These funds will have to come from either bank financing, which the chairman has already indicated is not a viable proposition, or the equity market where issues with the control of the company’s shares and governance of the entity will certainly arise.

                                                         Balance Sheet


                                             2002                                2001                            change
                                           (G$’M)                            (G$’M)                           %

Current Assets                       256                                   323                               (21)
Current Liabilities                   277                                   449                               (38)
Working Capital                    (21)                                 (126)                                83
Fixed Assets                        1,067                               1,053                                  1
Equity                                   761                                   734                                   4

The balance sheet remains strong with shareholders equity increasing by $27Mn and the debt to equity ratio at .37. Current assets have decreased from $323Mn. to $256Mn.and current liabilities have been reduced from $449Mn to $277Mn with the company managing to shave $209Mn dollars from its trade creditors and other payable balances. The company has utilized a significant portion of its internally generated funds to eliminate some of its short-term liabilities. This has resulted in an improved current ratio from .72 in 2001 to .92 in 2002 but without any information on provisions for bad debts and inventory obsolescence it is impossible to evaluate the true strength of the company’s working capital position.

During 2002 the company entered into a credit facility agreement for a term loan of US$677,599 mainly to finance the acquisition of plant, machinery and equipment at a rate of interest of 2.86% which is extremely favourable and is indicative of the company’s ability to source low cost financing outside of the local banking system. The almost 90% increase in the level of overdraft, the interest rate on which is not disclosed, to $74Mn is of some concern since neither the operating margins nor the profit return indicators support the adoption of a strategy that utilizes expensive short term money to fund either operations or longer term capital expenditure.

Fixed Assets increased by 9% due mainly to acquisition of land and buildings amounting to $49.9Mn and Work-In-Progress related to the state-of-the-art Parboiled Rice Plant of $53.4Mn.which the company expects to result in increased sales and profits by US$8M and US$1.2M respectively per annum. Given the increased competition as a result of the entry into the market by Didco Trading, these expectations seem over-optimistic and failure to achieve them may lead to overtrading.

Conclusion
The company’s performance in 2002 has been significantly less impressive than its stellar previous year results and although it generated after-tax profits of $75.5Mn, a 6% increase in sales is hardly a realistic measure of “good performance” and “laudable results”. The high level of administrative expenses, even though there has been some reclassification of 2001 amounts ($13.9Mn to cost of sales and 6Mn to interest expense), casts doubts over management’s attention to this area. With the exception of Gross Margin, all of the company’s profitability and return indicators have declined by at least 50% and this should be of concern to both management and the minority shareholders.

In addition despite the majority shareholding held by Mr. Badal, it should not be forgotten that this is a public company. It must therefore adhere to the principles of good corporate governance that would ensure protection of the interest of all its shareholders.

In managing the post-privatisation period the Government has not only failed to protect its and by extension taxpayers’ interests but has also exposed minority shareholders as well. It is not too late for this to be corrected.