Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2004

OR

For the transition period from              to             

Commission file number: 0-18222

RICA FOODS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

As of February 14, 2005, the number of shares issued and outstanding of the Company’s common stock, par value $0.001 per share was 12,864,321.

Table of Contents

INDEX

2

Table of Contents

Item 1. FINANCIAL STATEMENTS

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

The accompanying notes form an integral part of these consolidated financial statements.

3

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

The accompanying notes form an integral part of these consolidated financial statements.

4

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the three months ended December 31, 2004 and 2003

(Unaudited)

(Continued on next page)

5

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the three months ended December 31, 2004 and 2003

(Unaudited)

(Continued)

The accompanying notes form an integral part of these consolidated financial statements.

6

Table of Contents

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 wholly-owned operating subsidiary Corporacion Pipasa, S.A. and its subsidiaries (“Pipasa”) (collectively, the “Company”) that appear in this Quarterly Report on Form 10-Q. During the fiscal year ended September 30, 2004, the Company’s operations were principally conducted through two wholly owned Costa Rican corporations, Pipasa and Corporacion As de Oros, S.A. (“As de Oros”) and their respective subsidiaries. Effective October 1, 2004, As de Oros merged with and into Pipasa (the “Merger”). Pursuant to the Merger and in accordance with Costa Rican law, all assets, liabilites, rights and obligations of As de Oros were transferred to and assumed by Pipasa. The Merger was accounted for as entities under common control, whereby Pipasa recognized the assets and liabilities of As de Oros that were merged at their book value as of the date of the Merger (i.e., there has been no step up in basis). In addition, the Company will continue to include at the consolidated level, the remaining goodwill that resulted from the Company’s initial acquisition of As de Oros, which acquisition was accounted for under the purchase method of accounting. Accordingly, the Merger did not have any effect on the consolidated financial statements of the Company. As of the date of the Merger, all of As de Oros’ issued preferred shares had been repurchased, and there was no minority interest outstanding in 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 audited consolidated financial statements for the fiscal year ended September 30, 2004, which are included in the Company’s Annual Report on Form 10-K. Management has included in the Company’s financial statements figures that are based on estimates and judgments, which management believes are reasonable under the circumstances. In the opinion of management, all adjustments, consisting only of normal and recurring items, 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, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year ending September 30, 2005. 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 audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

NOTE 2 – RECLASSIFICATIONS

Certain reclassifications in the statement of cash flows and balance sheet have been made to the prior period to conform to current period presentation.

NOTE 3 – MINORITY INTEREST

As of September 30, 2004, and December 31, 2004 Minority Interest was comprised of Pipasa’s subsidiary’s minority interest, amounting to $343. Minority Interest is presented as part of Accounts Payable on the balance sheets.

7

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 4 – INVENTORIES AND PRODUCTION POULTRY

Inventories consist of the following:

Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method, except for inventories in transit, which are valued at specific cost.

Live poultry inventory represents breeders and layer hens. Breeder hens produce baby chicks that will subsequently be sold as broiler and layer hens produce commercial eggs. Breeder and layer hen costs are accumulated during their production stage (approximately 20 weeks), which primarily consist of animal feed and labor costs. After breeder and layer hens complete their production stage, their accumulated costs are then 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. This amortization is recorded as part of the production costs of the broiler. Breeder and layer hens are not sold as final product. Baby chicks that will be sold as broiler are recorded as part of the in-process inventory while they are in their grow-out stage. After approximately 43 days, chicks in grow-out stage are transferred to the processing plants, where they will be transformed into finished product. 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.

The Company contracts farmers for its grow-out process. These farmers have a long-term contract with the Company to raise the baby chicks to adult birds. Ownership of the chickens is not transferred to the farmers, and all animal feed, medicine and other expenses incurred are accumulated as Live Poultry inventory. These farmers are paid according to the weight and quality of the chickens produced, which is recorded as inventory.

Production poultry amortization amounted to $1,045,864 and $924,747 for the three months ended December 31, 2004 and 2003, respectively, and is recorded as cost of sales. As of December 31, 2004 and September 30, 2004, the Company’s provision for inventory obsolescence amounted to $85,697 and $173,332, respectively.

NOTE 5 – IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2004, the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until after further deliberations by the FASB. The disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company has evaluated the impact of the adoption of the disclosure requirements of EITF 03-1 and does not believe the impact will be significant to the Company’s overall results of operations or financial position. Once the FASB reaches a final decision on the measurement and recognition provisions, the company will evaluate the impact of the adoption of EITF 03-1.

8

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company is in the process of evaluating whether the adoption of SFAS 151 will have a significant impact on the Company’s overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS 152) This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005 with earlier application encouraged. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company’s overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company is in the process of evaluating whether the adoption of SFAS 153 will have a significant impact on the Company’s overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment” Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and does not believe the impact will be significant to the Company’s overall results of operations or financial position.

9

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 6 – SEGMENT INFORMATION (Unaudited)

The following describes the performance by segment (in millions of U.S. dollars):

The Company uses segment profit margin information to analyze segment performance, which is defined as the ratio between the income or loss from operations associated with a segment and the net sales associated with the subject segment. Management operates and organizes the financial information according to the types of products offered to its customers. The Company operates in seven business segments:

Broiler Chicken: Poultry is a popular food item in Costa Rica because of its easy preparation, nutritional value and low price when compared to other available meats, according to information provided by the Junta de Fomento Avicola, a Costa Rican governmental institution. Poultry is a generic product, consumed at all social levels and is not defined by geographic markets. The Company’s brand name for broiler chicken, chicken parts, mixed cuts and chicken breasts is Pipasa(TM). Polls and consumer information gathered by the Company indicate that the majority of Costa Ricans eat chicken at least one to three times a week. Chicken is sold to institutional customers, schools, hospitals, hotels, supermarkets, restaurants and small grocery stores.

Animal Feed: Animal feed is made with imported raw materials, such as corn and soybean meal, along meat and bone meal and other vitamins and minerals. Animal feed is marketed for consumption by cows, pigs, birds, horses, shrimp and domestic pets. The Company’s animal feed products are sold through the Ascan(TM), Mimados(TM), Kan Kan (TM), Dog Pro^™, Aguilar y Solis(TM), Nutribel(TM) and Salvaganado^™ brand names. Customers for the commercial animal feed brands are mainly large wholesalers and high scale breeders. This customer group focuses on quality and price. Products marketed through Ascan(TM), Mimados(TM), Kan Kan (TM), Dog Pro^™ brand names are targeted towards veterinarians, pet stores and supermarkets and are sold typically to consumers with medium to high income levels.

By-products: By-products include sausages, bologna, chicken nuggets, chicken patties, frankfurters, salami and pate. The Zaragoza (TM) brand name includes chicken, beef and pork by-products. The Company’s chicken by-products are sold through the Kimby(TM), Tiquicia(TM), Chulitas(TM), Zaragoza(TM), Rocadinos^™ and As de Oros(TM) brand names and are sold to all social and economic levels. These products are sold mainly in supermarkets, and sales are predominantly driven by price. The Kimby(TM) brand name is the leading seller of chicken by-products in Costa Rica.

10

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

Exports: Subsidiaries of the Company export different products to all countries in Central America, Colombia and the Dominican Republic and make occasional exports to Hong Kong. The Company exports the majority of its products, including broiler chicken, by-products, animal feed and pet foods.

Quick Service: Planeta Dorado, S.A., subsidiary of Pipasa, operates 25 restaurants (the “Restaurants”) located in rural and urban areas throughout Costa Rica, including express delivery service in some restaurants. This segment is comprised of quick service restaurants, which offer a diversified menu of chicken meals. The Restaurants distinguish themselves from other quick service chains by offering dishes and using recipes and ingredients that appeal to the taste of consumers in Costa Rica. The quick service restaurant business is highly competitive in Costa Rica, as several other quick service chains operate in Costa Rica.

Corporate Segment: Corporate is responsible for the treasury, tax and legal operations of the Company’s businesses and maintains and/or incurs certain assets, liabilities, income, expenses, gains and losses related to the overall management of the Company which are not allocated to the other reportable segments. These items include general and administrative expenses and provision for contingencies. This segment does not generate any revenue for the Company.

Other: This segment includes sales of commercial eggs, non-recurring sales of fertile eggs, fertilizers and raw material, among others.

NOTE 7 – COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) are as follows (unaudited):

11

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

The Company uses futures to purchase corn and soy-bean meal, the primary ingredients in the chicken feed, as a strategy to hedge against price increases in corn and soy-bean meal. 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 is not involved in speculative trading and generally does not hedge anticipated transactions beyond 6 months.

The contracts that effectively meet risk reduction criteria are recorded using cash flow hedge accounting. As of September 30, 2004 and 2003, the Company’s outstanding open positions amounted to $12,204 and $37,275, respectively. As of December 31, 2004 and 2003, the Company’s outstanding open positions amounted to $312,542 and $23,925, respectively.

In July 2004, the Company entered into forward contracts with certain of its corn suppliers for the purchase of approximately $6.9 million of corn at the prevailing market price on the dates the contracts were entered into. Deliveries under such contracts commenced in November 2004. Pursuant to these contracts for corn, the Company is generally required to make payments under the contracts fifteen days prior to the date of shipment. The Company expects to finance such payment with funds from operations or short-term financing. As of December 31, 2004, the Company owed its suppliers approximately $1.6 million for deliveries pursuant to such contracts.

In addition, in July 2004, the Company entered into a forward contract with INOLASA for the purchase of approximately $5.2 million of soybean meal at the prevailing market price on the dates the contracts were entered into. Deliveries under such contracts commenced in November 2004. Payment under these forward contracts is due 22 days after receipt of the soybean meal. The Company expects to finance such payment with funds from operations or short-term financing. As of December 31, 2004, the Company owed its suppliers approximately $1.2 million for deliveries pursuant to such contracts.

NOTE 8 – LEGAL PROCEEDINGS

Pipasa was one of two defendants in a lawsuit brought in Costa Rica, pursuant to which the plaintiff in such action, Polaris Holding Company (“Polaris”) was seeking damages in an amount equal to $3.6 million. The other defendant in the litigation was Aero Costa Rica, S.A. (“Aero”), a corporation that, prior to entering into a receivership, was wholly owned by Mr. Chaves, the Company’s former Chief Executive Officer.

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 was dismissed without prejudice.

On December 29, 2003, Pipasa entered into a settlement agreement (the “Settlement Agreement”) with Polaris pursuant to which Mr. Chaves provided Polaris with a one-time payment in the amount of $1,950,000 (the “Settlement Amount”) in exchange for Polaris’ agreement to dismiss any and all litigation instituted against Pipasa and release any and all claims which they have or may have against Pipasa in connection with the litigation, except for any claim that may arise in connection with the Indemnification Obligation (as defined below). In addition, Polaris has agreed to release its security interest in the certain Collateral, which was valued at approximately $5 million at the time of settlement. Mr. Chaves has entered into an agreement with the Company pursuant to which he has acknowledged and agreed that his payment of the Settlement Amount is neither an equity investment in the Company nor a loan to the Company.

Pipasa has attempted to secure the participation of Aero in the settlement but Aero has been relatively unresponsive. Aero is the subject of a receivership action in Costa Rica and has not yet agreed to participate in the settlement.

12

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

Because Aero has not agreed to participate in the settlement, as a condition of the Settlement Agreement, Pipasa agreed to enter into an indemnification agreement with Polaris pursuant to which Pipasa has agreed to indemnify Polaris in the event that Aero initiates any claims against Polaris (the “Indemnification Obligation”). Pipasa and Polaris have filed the definitive settlement documents with the courts of Costa Rica and the state of Florida. In January 2004, the receiver of Aero filed an appeal with the Costa Rican court seeking Aero’s direct participation in the settlement seeking to enjoin the release of the security interest in the Collateral. The Aero receiver’s appeal was denied by the court on February 5, 2004. However, pursuant to Costa Rican law, the Aero receiver exercised its right to appeal the court’s denial of its appeal. After the appeal was again denied in February 2004, the Aero receiver, pursuant to Costa Rican law, filed an additional appeal in the Costa Rican Ad Quem Court against the court’s denial. This appeal is currently pending with the Ad Quem Court. The Company anticipates that the Ad Quem Court will make its ruling during fiscal 2005.

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.

NOTE 9 – DUE TO RELATED PARTY

Due to Related Party consists of the following:

As of December 31 2004, and September 30, 2004, short-term and long-term amounts due to Calixto Chaves include promissory notes (the “Notes”) owed to companies controlled by Calixto Chaves, the former Chief Executive Officer (the “Controlled Companies”), pursuant to the Company’s repurchase of preferred shares (the “Preferred Shares”) owed by the Controlled Companies, in exchange of the Notes. The Preferred Shares entitled the Controlled Companies to an annual dividend ranging from 10% to 14% of the Preferred Shares value, payable in perpetuity. The Notes are denominated in colones currency, bear interest at the annual rate of 10%, are payable in 5 consecutive annual payments beginning in August 2005 and are unsecured.

In January 2005, the Company paid Calixto Chaves the aggregate amount of the Notes outstanding as of December 31, 2004.

13

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 10 – EMPLOYEE, OFFICERS AND DIRECTORS BENEFIT PLAN

On May 29, 1998, the Company adopted the 1998 Stock Option Plan (the “Plan”). Under the Plan, 200,000 shares of the Company’s Common Stock are reserved for issuance upon the exercise of options. The Plan is designed to serve as an incentive for retaining and attracting persons and/or entities that provide services to the Company and its subsidiaries. As of September 30, 2004, there were no options outstanding under this Plan.

On November 29, 2004, the Board of Directors of the Company granted, effective as of October 15, 2004 (the “Grant Date”), a total of 120,000 options (the “Director Options”) to purchase shares of the Company’s common stock to two of its current directors. In addition, on the same date, as consideration for services to the Company, the Company granted 10,000 options (collectively with the Director Options, the “Options”) to purchase shares of the Company’s common stock to one of its former directors. The Options vested upon issuance and are exercisable at any time during the period (the “Exercise Period”) commencing on the three month (3^rd) anniversary of the Grant Date and terminating on the six month (6^th) anniversary of the Grant Date (the “Expiration Date”). The Options have an exercise price of $4.40 and the closing quoted market price per share on the date of grant was $5.21. As of September 30, 2004, the Company had accrued $12,855 for these services, which approximated the black scholes value of the 10,000 options on the date of grant.

The Company accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations. Compensation expense relating to employee stock options is recorded only if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company adopted the disclosure-only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”), which allows entities to continue to apply the provisions of APB No. 25 for transactions with employees and provide pro forma net income and pro forma earnings per share disclosures for employee stock options as if the fair value based method of accounting in SFAS No. 123 had been applied to these transactions.

Under APB No. 25 compensation cost of equity based awards granted to employees and directors, is recognized for stock options granted below market value and amortized over the appropriate service period. The 120,000 options granted on October 15, 2004 to the two current directors valued at $97,200 under APB No. 25, were fully expensed on the grant date, October 15, 2004. Had the Director Options value been determined as prescribed by SFAS No. 123, the Company’s net income available to common stockholders and earnings per share for the three months ended December 31, 2004, would have been as follows:

14

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

The following assumptions were used to estimate the fair value of the Directors Options under SFAS No. 123: dividend yield of 0%, an expected volatility of 33.26%, a risk-free interest rate of 4.07%, and an expected life of 6 months.

The 10,000 options granted to the former director have been accounted for in accordance with SFAS No. 123 using the fair value method of accounting. Accordingly, using the Black-Scholes option pricing model, the Company accrued $12,825 pertaining to such options, as compensation expense in fiscal year 2004. The following assumptions were used to estimate the fair value of such Options: dividend yield of 0%, an expected volatility of 33.26%, a risk-free interest rate of 4.07%, and an expected life of 6 months.

A summary of the activity of the Company’s stock based compensation plan described above is as follows:

NOTE 11 – EARNINGS PER SHARE

Earnings per share is computed on the basis of the weighted average number of common shares outstanding according to SFAS No. 128, “Earnings per Share” (“SFAS 128”) which is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding warrants and stock options using the treasury stock method. For the three months ended December 31, 2004, diluted earnings per share includes 130,000 incremental shares related to the 130,000 stock options issued on October 15, 2004 (See Note 9 for more information). For the three months ended December 31, 2003, the Company had a simple capital structure, and as a result, there was no dilutive effect.

The following is a reconciliation of the weighted average number of shares currently outstanding with the number of shares used in the computation of diluted earnings per share:

15

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 12 – PROVISION FOR CONTINGENCIES

As part of pay-roll related charges to the government of Costa Rica, the subsidiaries of the Company, are required to pay to the Instituto Nacional de Aprendizaje (“INA”), a Costa Rican Government institution, a monthly charge (the “INA Charge”) which is calculated by multiplying the subsidiaries’ total payroll by a percentage determined based upon the classification given to the Company’s operational activities (the “Percentage”). Since 1993, pursuant to a law enacted by the Costa Rican Congress, the Ministry of Agriculture has classified the Company’s operational activities as agricultural in nature.

However, in December 2003, the Company received an administrative petition from the INA (the “INA Petition”), indicating that, in accordance with article 19 of an administrative decree of the INA (the “Administrative Decree”), for purposes of determining the Percentage, the INA believes the Company’s operational activities should be classified as industrial in nature rather than agricultural in nature, and accordingly, the Company should have been applying the Percentage applicable to industrial companies when calculating the INA Charge, instead of the Percentage applicable to agricultural companies. The applicable Percentage for agricultural companies is 0.5% while the applicable Percentage for industrial companies is 1.5% (2.0% before March 2001).

The Company has objected to the INA Petition and is currently considering filing a claim with the Costa Rican Constitutional Supreme Court (the “Court”) challenging the constitutionality of the article 19 of the Administrative Decree. As there can be no assurances regarding the outcome of any claim the Company may file with the Court, during fiscal year 2004, the Company recorded a provision in the amount of $496,366 which the Company believes to be a reasonable estimate of the amount the Company would be required to pay in the event it was required to comply with the INA Petition based on an analysis of the subsidiaries’ payroll. However, the Company believes that the outcome of the objection to the INA Petition may range from no requirement to pay the INA Charge to a requirement to pay the INA up to $1 million in the event of an unfavorable outcome. In addition to the provision, the Company also recorded a deferred tax benefit in the amount of $154,319.

NOTE 13 – ACQUISITION OF ASSETS

In June 2004, the Company entered into a non-binding letter of intent with Industrias Avicolas Integradas, S.A (“Indavinsa”), a Nicaraguan corporation, regarding an investment in or acquisition of Indavinsa. In Nicaragua, Indavinsa is the fourth largest producer of broiler products, and the third largest producer of animal feed products. Pursuant to the letter of intent, the Company was granted the exclusive right for six months to negotiate with Indavinsa regarding an investment in or acquisition of Indavinsa.

On December 27, 2004, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Indavinsa pursuant to which the Company acquired (i) all of the property, plant and equipment related to Indavinsa’s animal feed concentrate segment valued at approximately $5.5 million according to appraisals performed by an independent appraiser and (ii) Trademarks, Formulas and Customer list (the “Intangible Assets”) valued at approximately $820,000 using a discounted cash flow projection, for an aggregate value of $6.3 million (the “Purchase Amount”), in exchange for (i) the Company’s cancellation of approximately $5.3 million of receivables owed by Indavinsa, which was the amount due to the Company from Indavinsa as of December 27, 2004 , and (ii) a payment from the Company to Indavinsa of approximately $1.0 million payable in the short-term, in cash or in exchange of products sold by the Company to Indavinsa.

16

Table of Contents

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

The Company recorded this purchase in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. The property, plant and equipment acquired include an animal feed plant, including silos for storage of grain, grow-out farms for chickens and feedlot facilities for cattle. The Company recorded such assets based on the value determined by the independent appraiser. The Company will depreciate the property, plant and equipment using the straight line-method, in accordance with their estimated remaining useful lives. The Company recorded the Intangible Assets in Other Assets in the balance sheet and allocated the purchase price based on the Company’s estimate of their contribution to future cash flows. Trademarks and Formulas have each been allocated a value of approximately $360,000. Trademarks and Formulas are deemed to have an indefinite life since according to Nicaraguan legislation, they can be renewed every 10 years, indefinitely at very little cost. Trademarks and Formulas will be reviewed for impairment periodically. Customer list has been allocated a value of approximately $100,000. Customer list is deemed to have a useful life of approximately 4 years based on the Company’s past experience, and will be amortized on a straight-line basis. The Company will begin to amortize the Customer list in January 2005 which amount will be of approximately $2,083 per month for the next four years.

None of the acquired assets are encumbered based upon background investigations performed on such assets. The Company believes that Indavinsa is the third largest producer of animal feed products in Nicaragua.

17

Table of Contents

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 accounting principles generally accepted in the United States of America (“GAAP”). Management has included in the Company’s consolidated financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances. The Company maintains a system of internal accounting policies, procedures and controls intended to provide reasonable assurance, at the appropriate cost, that transactions are executed in accordance with the Company’s authorization and are properly recorded and reported in the consolidated financial statements, and that assets are adequately safeguarded.

The Company’s operations are primarily conducted through its subsidiary Pipasa, which is the largest poultry company in Costa Rica. Pipasa also owns and operates a chain of quick service restaurants in Costa Rica called “Restaurantes As”. During the fiscal year ended September 30, 2004, the Company’s operations were principally conducted through two wholly owned Costa Rican corporations, Pipasa and Corporacion As de Oros, S.A. (“As de Oros”) and their respective subsidiaries. Effective October 1, 2004, As de Oros merged with and into Pipasa (the “Merger”). Pursuant to the Merger and in accordance with Costa Rican law, all assets, liabilities, rights and obligations of As de Oros were transferred to and assumed by Pipasa. The Merger was accounted for as entities under common control, whereby Pipasa recognized the assets and liabilities of As de Oros that were merged at their book value as of the date of the Merger (i.e., there has been no step up in basis). In addition, the Company will continue to include at the consolidated level, the remaining goodwill that resulted from the Company’s initial acquisition of As de Oros, which acquisition was accounted for under the purchase method of accounting. Accordingly, the Merger did not have any effect on the consolidated financial statements of the Company. As of the date of the Merger, all of As de Oros’ issued preferred shares had been repurchased, and there was no minority interest outstanding in As de Oros.

The following discussion addresses the financial condition and results of operations of the Company. This discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004 and with the Company’s unaudited consolidated interim financial statements as of December 31, 2004 and for the three month period ended December 31, 2004 and 2003 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 December, which fall in the first quarter 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, 2004, the Company did not incur any significant costs related to environmental compliance.

Results of operations for the three months ended December 31, 2004 compared to the three months ended December 31, 2003

For the three months ended December 31, 2004, the Company generated net income applicable to common stockholders of $1,400,969 ($0.11 diluted earnings per share) compared to net income applicable to common stockholders of $163,245 ($0.01 diluted earnings per share) for the three months ended December 31, 2003.

18

Table of Contents

For the quarter ended December 31, 2004, net sales and cost of sales increased by 22.7% and 25.0%, respectively when compared to the quarter ended December 31, 2003. The increase in sales is primarily attributable to increases in sales in the broiler, animal feed, by-products and export segments. Management believes the increase in sales is primarily due to increases in sales prices, increases in sales volume, marketing efforts and improvement in distribution logistics.

The increase in the cost of sales was primarily the result of the overall increase in sales volume and a higher cost of imported raw material. For the quarter ended December 31, 2004, the cost of imported corn and soybean meal increased by approximately 7.9% and 1.7%, respectively, when compared to the cost of such materials for the quarter ended December 31, 2003.

The Company uses segment profit (loss) margin information to analyze segment performance, which is defined as the ratio between the income or loss from operations associated with a segment and the net sales associated with the subject segment.

Broiler sales increased by 17.3% for the quarter ended December 31, 2004 when compared with the quarter ended December 31, 2003, primarily due to an increase in volume of approximately 11.2% and increase in sales prices. The profit margin for this segment increased from 16.3% in the quarter ended December 31, 2003 to 18.4% in the quarter ended December 31, 2004, primarily due to an increase in the sales prices, partially offset by an increase in the cost of imported raw material.

Animal feed sales increased by 41.2% for the quarter ended December 31, 2004 when compared with the quarter ended December 31, 2003, mainly attributable to an increase in volume of 37.0%. The increase in volume was primarily attributable to an increase in the number of distribution channels, an increase in the volume of purchases by current customers and an increase in the overall number of commercial feed brand customers. The profit margin for the animal feed did not vary significantly, decreasing from 12.5% in the quarter ended December 31, 2003 to 11.5% in the quarter ended December 31, 2004.

By-products sales increased by 30.8% for the quarter ended December 31, 2004 when compared with the quarter ended December 31, 2003, mainly due to an increase in the volume of by-product sales by 42.5%. The increase in sales is mainly attributable to the introduction of new product brands into the market and an increase in the volume purchased by current customers. The profit margin for by-products decreased from 19.5% in the quarter ended December 31, 2003 to 11.0% in the quarter ended December 31, 2004, primarily as a result in variations in the sales mix and an increase in the cost of imported raw material.

Export sales increased by 26.2% for the quarter ended December 31, 2004 when compared with the quarter ended December 31, 2003, mainly due to an increase in the volume of sales of broiler, pet foods and commercial animal feed to current customers and new customers outside of Costa Rica. The profit margin for the exports segment decreased from 20.2% in the quarter ended December 31, 2003 to 12.7% in the quarter ended December 31, 2004, mainly due to variations in the sales mix and an increase in the cost of imported raw material.

Quick service sales decreased by 6.1% for the quarter ended December 31, 2004 when compared with the quarter ended December 31, 2003. During fiscal year 2004, the Company closed certain of its quick service restaurants in order to relocate such restaurants to larger, more populated locations. The Company anticipates that such restaurants will become operational in their new locations during fiscal year 2005. This segment’s profit margin declined from 13.9% in the quarter ended December 31, 2003 to 11.5% in the quarter ended December 31, 2004, mainly as a result of the decrease in sales.

19

Table of Contents

Sales for the other products segment increased by 9.8% for the quarter ended December 31, 2004 when compared with the quarter ended December 31, 2003, mainly due to an increase in volume and an increase in the sales price of commercial eggs. This segment’s profit margin increased from 12.6% to 20.6%, mainly due to an increase in the sales prices of certain profitable products, partially offset by an increase in the cost of imported raw material.

Operating expenses decreased by 1.25% or $99,944 for the quarter ended December 31, 2004 when compared to the quarter ended December 31, 2003. Operating expenses represented 19.3% and 23.9% of net sales for the quarter ended December 31, 2004 and 2003, respectively.

For the quarter ended December 31, 2004, selling expenses increased by $719,292 or 15.5%, when compared to the quarter ended December 31, 2003, primarily due to an increase in payroll, payroll related charges related to the Company’s sales and marketing force, advertising and other expenses related to product distribution.

For the quarter ended December 31, 2004, general and administrative expenses decreased by $819,236, or 24.6%, when compared to the quarter ended December 31, 2003. This decrease in general and administrative expenses is mainly due to a reduction in the Company’s payroll and payroll related charges related to the Company’s administrative personnel, a decrease in the cost of consulting services, and a decrease in depreciation and amortization expenses.

Other expenses increased by 10.7 % for the quarter ended December 31, 2004, when compared to the quarter ended December 31, 2003, primarily as a result of a decrease in interest income, primarily due to the collection of approximately $6.2 million of indebtedness owed to the Company by Calixto Chaves, the former Chief Executive Officer in December 2003, which indebtedness, while outstanding, generated interest income and foreign exchange rate income, and a decrease in foreign exchange rate loss due to the restructure of the a significant portion of debt from US dollar currency to colones currency.

The Company’s provision for income tax was $536,105 for the quarter ended December 31, 2004, compared to $97,273 for the quarter ended December 31, 2003. The increase in income tax for the quarter ended December 31, 2004 was primarily due to an increase in taxable income. Effective tax rates for the fiscal quarters ended December 31, 2004 and 2003 were 27.7% and 32.0%, respectively.

Financial condition

As of December 31, 2004, the Company had approximately $3.4 million in cash and cash equivalents. As of December 31, 2004 and September 30, 2004, the Company had a working capital surplus of approximately $3.0 million and $5.6 million, respectively. The current ratios were 1.11 and 1.23 as of December 31, 2004 and September 30, 2004, respectively.

Cash provided by operating activities for the quarter ended December 31, 2004 amounted to approximately $6.1 million compared to cash used by operating activities of approximately $1.5 million for the quarter ended December 31, 2003.

The increase in cash provided by operating activities is primarily the result of:

The increase in cash provided by operating activities was partially offset by a decrease in the rate of cash collected for Notes and accounts receivable ($3.3 million).

20

Table of Contents

Cash provided by inventory amounted to approximately $530,000 in the first fiscal quarter of 2005, compared to cash used for Inventory of approximately $1.5 million in the first fiscal quarter of 2004. The decrease in the use of cash for Inventory was primarily due to a decrease in the amount of in-transit raw material ($1.2 million), a decrease in finished products ($615,000) and a decrease in the levels of in-process inventory ($335,000). This decrease was partially offset by the purchase of live poultry ($1.1 million) and a decrease in levels of raw material ($465,000). The increase in accounts payable is mainly due to an increase in payables to suppliers and an increase in income tax payable.

As of December 31, 2004, the Company had also recorded an account payable to Indavinsa for approximately $1.0 million, pursuant to a purchase of assets agreement (as discussed in greater detail below), payable in the short-term in cash or in exchange of products sold by the Company to Indavinsa.

Cash used by investing activities was $946,030 in the quarter ended December 31, 2004, compared to approximately $7.9 million of cash provided by investing activities in the quarter ended December 31, 2003. The Company’s decrease in cash provided by investing activities was primarily due to the liquidation of short term investments (approximately $2.5 million) during the first fiscal quarter of 2005, in addition to the repayment by Calixto Chaves, the former Chief Executive Officer, of his aggregate outstanding indebtedness to the Company ($6.9 million) during the first fiscal quarter of 2004. This decrease in cash provided by investing activities was partially offset by an increase in the cash provided by sales of assets ($582,000). For the quarter ended December 31, 2004, the use of cash for property, plant and equipment ($1.5 million) was primarily related to the Company’s purchase of production equipment and additions to the delivery vehicle fleet.

In the fiscal year ended September 30, 2003, the Company invested approximately $1.4 million in connection with the potential acquisition from Port Ventures, S.A. (“Port Ventures”) of 51% of the issued and outstanding shares of capital stock of Logistica de Granos, S.A (“Logistica”), a 19% shareholder of Sociedad Portuaria de Caldera, S.A. and Sociedad Portuaria Granelera de Caldera, S.A. (collectively, the “Port Companies”), two port companies that are seeking to acquire concessions (the “Concessions”) being granted by the Government of Costa Rica to refurbish and operate Puerto Caldera, a major seaport located on the Pacific coast of Costa Rica and considered by the Company as strategic to its raw material purchases. If and when the acquisition is consummated, the Company anticipates making an additional investment of approximately $1.1 million.

The Company believes it will need at a minimum funds of approximately $4.5 million for investment activities during the remainder of fiscal year 2005, in addition to $1.1 million of the Company’s remaining projected investment in Logistica.

Cash used by financing activities amounted to approximately $3.7 million for the quarter ended December 31, 2004, compared to cash provided by financing activities of approximately $31,000 for the quarter ended December 31, 2003. The cash used by financing activities was primarily generated by short-term financings ($8.1 million) and long-term financings ($4.0 million). These funds were principally used to repay and/or refinance short-term financings ($9.5 million), to refinance and/or repay long-term financings ($6.3 million) and to fund the Company’s operations.

Debt Utilization

The Company’s obligations under short-term debt, long-term debt, operating leases and other commitments as of December 31, 2004 are as follows:

21

Table of Contents

The Company projects that it will need to satisfy at least $16.0 million of short-term debt, long-term debt, purchase commitments, consulting agreements and operating lease payments within the twelve months ended December 31, 2005. The Company also projects that it will seek to acquire an additional $4.5 million of property, plant and equipment within fiscal 2005, the use of which equipment may be secured by purchase or lease.

In July 2004, the Company entered into forward contracts with certain of its corn suppliers for the purchase of approximately $6.9 million of corn at the prevailing market price on the dates the contracts were entered into. Deliveries under such contracts commenced in November 2004. The Company estimates that this supply will satisfy the Company’s needs for approximately four months. Pursuant to these contracts for corn, the Company is generally required to make payments under the contract fifteen days prior to the date of shipment. The Company expects to finance such payment with funds from operations or short-term financing. As of December 31, 2004, the Company owes its suppliers approximately $1.6 million for deliveries pursuant to such contracts.

In addition, in July 2004, the Company entered into a forward contract with INOLASA for the purchase of approximately $5.24 million of soybean meal at the prevailing market price on the dates the contracts were entered into. Deliveries under such contracts commenced in November 2004. The Company estimates that this supply will satisfy the Company’s needs for approximately four months. Payment under this forward contract is due 22 days after receipt of the soybean meal. The Company expects to finance such payment with funds from operations or short-term financing. As of December 31, 2004, the Company owes its suppliers approximately $1.2 million for deliveries pursuant to such contracts.

Pursuant to a consulting agreement, dated as of June 1, 2003, between SAMA Internacional, S.A., a Costa Rican corporation (“SAMA”), and the Company (the “Consulting Agreement”), various employees of SAMA began providing the Company with financial and strategic advisory services with respect to a variety of different matters related to the restructuring of the Company’s indebtedness. The Consulting Agreement has a three year term. Pursuant to the Consulting Agreement, as amended, the Company will compensate SAMA at the rate of up to $75,000 per month for services provided pursuant to the Consulting Agreement.

Debt Restructure

During fiscal year 2004 and the first fiscal quarter of 2005, the Company restructured a significant portion of its debt obligations, significantly decreasing its outstanding short-term indebtedness and correspondingly increasing its outstanding long-term indebtedness (the “Debt Restructuring”).

As of December 31, 2004, the Company’s aggregate outstanding indebtedness totaled approximately $42.6 million. As of December 31, 2004, approximately $39.5 million (the “Aggregate Participating Lenders’ Indebtedness”) of this $42.6 million was owed to four lenders: Banco Internacional de Costa Rica (“BICSA”), Banco Agricola de Cartago (“Agricola”), Banco de Costa Rica (“BCR”) and Banco Interfin (“Interfin”) (collectively, the “Participating Lenders”) as follows (in millions of US$):

22

Table of Contents

As of December 31, 2004, approximately $18.5 million of the approximately $39.5 million of Aggregate Participating Lenders’ Indebtedness was secured by a trust (the “Trust”) formed by the Company to which the Company contributed or pledged substantially all of the assets of the Company’s wholly-owned subsidiaries (the “Subsidiaries”) in accordance with the terms of a trust agreement entered into by the Company in September 2003 (the “Trust Agreement”). The Trust Agreement was amended on May 21, 2004 (as discussed in greater detail below). Of the approximately $21.0 million of Aggregate Participating Lenders’ Indebtedness that is not secured by the Trust (the “Non-Trust Indebtedness”), (i) approximately $12.2 million of such Non-Trust Indebtedness, owed to BICSA, is unsecured, (ii) approximately $5.7 million of such Non-Trust Indebtedness is guaranteed by parties related to the Company (as discussed in greater detail below) and (iii) approximately $3.1 million of such Non-Trust Indebtedness, owed to BCR and Agricola, is secured by property outside of the Trust, which property had an aggregate market value of approximately $5.3 million as of December 31, 2004.

Of the approximately $42.6 million of the Company’s aggregate outstanding indebtedness as of December 31, 2004, approximately $3.2 million was owed to certain of the Company’s lenders who were not signatories to the Trust Agreement (the “Non-Participating Lenders”). In addition, as of December 31, 2004, Transamerican Bank, a Non-Participating Lender holding liens aggregating to approximately $439,000, was collateralized with property with an estimated fair market value of approximately $532,000, and Banco Lafise, S.A. (“Lafise”), a Non-Participating Lender with an aggregate outstanding indebtedness of approximately $862,000 was collateralized with approximately $908,000 of the Company’s accounts receivables.

Indebtedness to BICSA

As of December 31, 2004, the Company’s outstanding indebtedness to BICSA totaled approximately $23.7 million (the “Aggregate BICSA Indebtedness”). Approximately $7.5 million of the Aggregate BICSA Indebtedness was short-term indebtedness (the “Short-term BICSA indebtedness”) payable to BICSA pursuant to (i) eight letters of credit amounting to $5.7 million, denominated in U.S. dollars, bearing interest rates that range from 6.50% to 6.75%, maturing between January 2005 and April 2005 and (ii) four letters of credit amounting to $1.8 million, pursuant to a to a $3.5 million revolving line of credit, denominated in U.S. dollars, bearing interest rates that range from 6.50% to 6.75%, maturing between January 2005 and May 2005. The line of credit will expire on April 30, 2005. Any borrowings made on the line of credit will be payable in six equal monthly installments, with the first payment commencing in the month after the borrowing. The Short-term BICSA indebtedness is mainly utilized by the Company as working capital.

As of December 31, 2004, the line of credit is secured by the Trust. In addition, as of December 31, 2004, Tendedora, S.A. (“Tenedora”) the parent company of the Company’s majority shareholder, Avicola Campesinos, Inc (“Avicola”) had guaranteed approximately $5.7 million of the Short-term BICSA indebtedness (the “Tenedora Gurantees”).

Tenedora did not receive in the past, nor currently receives any compensation for providing guarantees for the Tenedora Guarantees In addition, Tenedora does not have any contractual obligation to provide guarantee services to the Company in the future. There can be no assurances that Tenedora will continue providing guarantee services to the Company, that Tenedora will continue to provide guarantee services to the Company without compensation, that the Company will be able to locate alternative sources of financing without Tenedora’s provision of guarantees or that the Company will be able to locate another person or entity willing to provide guarantee services with or without compensation.

As of December 31, 2004, the Company had also borrowed approximately $16.2 million of long-term debt from BICSA (the “Long-term BICSA Indebtedness”), pursuant to (i) a $12.2 million promissory note that bears interest at a rate of 8.5%, maturing in March 30, 2006 and (ii) a $4.0 million loan denominated in U.S. dollars, bearing interest at a rate of 7.5%, with interest and principal payable every trimester and the last payment due in April 2009 and is secured by the Trust.

23

Table of Contents

Indebtedness to BCR

As of December 31, 2004, the Company’s outstanding indebtedness to BCR totaled approximately $8.9 million (the “Aggregate BCR Indebtedness”). Of the Aggregate BCR Indebtedness, approximately $2.1 million, denominated in colones and bearing interest at the rate of 18.25%, is payable on a trimester basis beginning in June 2005. This $2.1 million of the Aggregate BCR Indebtedness is due in June 2011 and is collateralized with property with an estimated fair market value of $3.3 million.

Of the Aggregate BCR Indebtedness, approximately $5.5 million, denominated in colones and bearing interest at the rate of 18.25%, is payable on a trimester basis beginning in August 2005. This $5.5 million of the Aggregate BCR Indebtedness is due in August 2011 and is secured by the Trust.

Of the Aggregate BCR Indebtedness, approximately $1.2 million, denominated in colones and bearing interest at the rate of 18.25%, is payable on a trimester basis beginning in September 2004. This $1.2 million of the Aggregate BCR Indebtedness is due in September 2009 and is secured by the Trust.

Indebtedness to Interfin

As of December 31, 2004, the Company’s outstanding indebtedness to Interfin totaled approximately $5.5 million (the “Aggregate Interfin Indebtedness”). Of the Aggregate Interfin Indebtedness, (i) $2.8 million of such indebtedness, denominated in U.S. dollars, bears interest an annual rate of 7.50% and (ii) $2.7 million of such indebtedness, denominated in Costa Rican colones, bears interest at an annual rate of 18.0%. Interest on the Aggregate Interfin Indebtedness will be payable on a trimester basis. The aggregate principal amount of the Aggregate Interfin Indebtedness plus all accrued interest will be due on May 21, 2009. As of December 31, 2004, the Aggregate Interfin Indebtedness was secured by the Trust.

Indebtedness to Agricola

As of December 31, 2004, the Company’s outstanding indebtedness to Agricola totaled approximately $1.4 million (the “Aggregate Agricola Indebtedness”). The Aggregate Agricola Indebtedness, denominated in colones, bears interest at the rate of 18.25%.

Interest and principal amount on the Aggregate Agricola Indebtedness is payable on a trimester basis. The final principal amount of the Agricola Indebtedness plus all accrued interest will be due in May 2009. As of December 31, 2004, $975,000 of the Aggregate Agricola Indebtedness was secured by property valued at $1.9 million and approximately $400,000 was secured by the Trust.

Trust Agreement

As part of the Debt Restructuring, on May 21, 2004, the Company entered into an amendment to the Trust Agreement (the “Trust Agreement Amendment”). The Trust Agreement Amendment modifies the Trust to reflect the current Participating Lenders: BICSA, Interfin, Agricola and BCR. Additionally, the Trust Agreement Amendment modifies certain other provisions of the Trust, some of which are described below. The Trust, as modified by the Trust Agreement Amendment, is hereinafter referred to as the “Modified Trust”.

The Modified Trust may secure up to an aggregate amount of US$39.0 million of indebtedness, which indebtedness could take the form of loans, bonds, or other extensions of credit.

24

Table of Contents

The Trust Agreement Amendment provides for a new Trustee, Banco Improsa, S.A. The Trust Agreement Amendment further modifies the Trust by granting certain rights to, as well as imposing certain obligations upon the Trustee, including granting to the Trustee the same rights as a creditor with regards to any mortgages transferred to the Trust and endorsed to the Trustee.

The assets of the Modified Trust currently include real estate properties and their corresponding mortgages, registered equipment and certain intellectual property (trademarks and brand names) of the Subsidiaries. All other types of assets currently in the Trust have been released from the Trust by the Trustee. However, the Subsidiaries may transfer new assets to the Modified Trust in order to increase the value of the Trust Assets.

The market value of the Trust Assets was determined by independent appraisers, pursuant to their inclusion in the Trust Agreement. The independent appraisers reported directly to the Participating Lenders and Trustee. The final value assigned to each of the Trust Assets was approved by each of the Participating Lenders and Trustee (the “Trust Assets Value”). The Trust Assets Value is comprised of (i) real estate properties, including building and facilities ($22.2 million); (ii) trademarks ($11.0 million); (iii) machinery ($9.5 million); and a (iv) certificate of deposit ($87,000). The Trust Assets Value was calculated in colones currency and its value in US dollars is translated using current exchange rate. As of December 31, 2004, the book value of machinery and real estate properties, including building and facilities in the Trust, amounted to $21.6 million.

The Trust Agreement Amendment modifies the Trust to require that the total value of the Trust Assets be, at all times, equal to or greater than 125% of the aggregate amount of the total indebtedness secured by the Trust (which, as mentioned above, cannot exceed the aggregate amount of US$39.0 million). So long as this 125% threshold is met and subject to certain other conditions set forth in the Modified Trust, the Subsidiaries may solicit the Trustee for the release of some of the Trust Assets.

The failure to maintain the 125% threshold, on the other hand, is grounds for the foreclosure and sale of the Trust Assets. Upon such an occurrence or the occurrence of any default of any credit agreement between a Principal Beneficiary and a Subsidiary, the Trustee may dispose of the Trust Assets in accordance with the terms and conditions and following the procedures set forth in the Trust Agreement, as amended by the Trust Agreement Amendment.

Pursuant to the terms of the Modified Trust, each of the Subsidiaries has agreed to certain negative covenants. For instance, without the prior written consent of the Board of Beneficiaries (as defined below), the Subsidiaries have agreed not to (i) distribute any annual dividends to its shareholders unless (A) its total debt to equity ratio is less than 60% and (B) the amount of the annual dividends is, in the aggregate, equal to or less than 50% of its profit for that year; (ii) make any change in its stock ownership; and (iii) make any “insider loans”. The Trust Agreement Amendment does permit the Subsidiaries to make loans of up to $2.5 million annually to the Company upon certain terms and conditions.

The Modified Trust requires that the Subsidiaries, with certain exceptions, (i) maintain an amount of paid-in share capital equal to or greater than its stated share capital and (ii) maintain a current ratio, defined as a ratio of current assets to short term liabilities, equal to or greater than 1.3.

In accordance with the Trust Agreement Amendment, a board of beneficiaries has been established to represent and protect the rights of the Participating Lenders under the Modified Trust (the “Board of Beneficiaries”). The Board of Beneficiaries is comprised of one representative of each of BICSA, Agricola, Interfin, BCR, and, in the event the Company issues certain debt securities, Sama Puesto de Bolsa S.A. The board will have certain rights vis-à-vis the Company and the Trustee including, without limitation, the right to receive and review certain financial information provided by the Subsidiaries; notify the Participating Lenders of a situation that might impair the Trust Assets; appoint a

25

Table of Contents

replacement Trustee (from three candidates chosen by the Subsidiaries); instruct the Trustee to cancel certain mortgages and other liens over the Trust Assets or to release certain Trust Assets; and represent the Participating Lenders in certain decisions, in each case in accordance with the conditions of the Modified Trust and applicable law. All decisions of the Board of Beneficiaries will be made upon a majority vote of its members, with the President of the Board of Beneficiaries having a tie-breaking vote.

All provisions of the Trust Agreement and the Trust not modified by the Trust Agreement Amendment are anticipated to remain unchanged.

The Trust Agreement Amendment provides that the Trust will terminate upon the performance by the Subsidiaries of all of their obligations under the credit agreements between the Participating Lenders and the Subsidiaries, including the repayment of all of the outstanding indebtedness owed to the Participating Lenders.

Short-term debt

As of December 31, 2004, the Company had issued short-term promissory notes with respect to an aggregate of approximately $8.5 million primarily to 2 lenders. These notes payable consist of the following:

The Company’s notes payable primarily originate from bank loans and are mainly utilized as working capital to support operations of the Company. As of December 31, 2004, of the $8.5 million of short-term debt, approximately $7.5 million was owed to BICSA. See the section above entitled “Outstanding BICSA Indebtedness” for more information regarding the BICSA Indebtedness. As of December 31, 2004, of the $8.5 million of short-term debt, approximately $860,000 of debt was owed to Lafise, which debt was secured by approximately $908,000 of the Company’s accounts receivable, and the remaining approximately $130,000 of unsecured debt was owed to five other lenders. Notes payable are generally due from January 2005 through June 2005 and bear annual interest rates ranging from 5.75% to 6.7% for notes denominated in dollars and from 19.75% to 22.75% for notes denominated in colones. Average interest rates as of December 31, 2004 were 6.5% for loans in US dollar, and 22.6% for loans in colones.

Long-term debt

As of December 31, 2004, the Company has incurred long-term debt in the aggregate amount of approximately $34.2 million to 9 lenders. Long-term debt consists of the following:

26

Table of Contents

Long-term debt is due from March 2005 to June 2011. Debt issuance costs are deferred and then amortized over the term of the debt. Interest rates for long-term debt are as follows:

Future payments on long-term debt as of December 31, 2004 are as follows:

$16.7 million of the long-term indebtedness is secured by the Trust and approximately $3.1 million of the long-term indebtedness owed to Participating Lenders is secured by Company’s property not included in the Trust, with an estimated fair market value of $5.3 million. Approximately $439,000 owed to one of the Non-Participating Lenders, Transamerican Bank, was collateralized with property with an estimated fair market value of approximately $532,000. The Company defers debt issuance costs and then amortizes such costs over the term of the debt. See the section above entitled “Debt Restructure” for more information regarding the Company’s long-term indebtedness. The remaining long-term debt amounting to approximately $13.3 million is unsecured.

Leasing Agreements

The Company regularly enters into agreements pursuant to which the Company leases production equipment, vehicles and other equipment. In December, 2004, the Company entered into a lease agreement (the “Lease Agreement”) with Arrendadora Improsa, S.A. for the lease of approximately $2.4 million of production equipment and computer equipment. Avicola has guaranteed the Company’s obligation under this Lease Agreement, which guarantee was valued at $2.4 million as of December 31, 2004.

Although the Company has restructured a substantial portion of its short-term indebtedness and entered into the Trust Agreement, the Company has not yet secured an alternative long-term financing source that would insulate it from the risks associated with the inability to satisfy its obligations as they come due or the loss of one of its relatively short-term financing sources. The Company is seeking to address its anticipated short-term funding requirements by various means including, but not limited to, entering into negotiations with the Participating Lenders to extend the maturity date on the short-term indebtedness owed to such Participating Lenders. In addition, the Company is seeking to secure long-term financing through the private or public issuance of debt instruments.

Although the Company has entered into discussions with a number of potential capital sources, there can be no assurances that the Company will be successful in its efforts to secure long-term financing on terms acceptable to the Company. The Company’s ability to maintain sufficient liquidity to meet its short-term cash needs is highly dependent on achieving these initiatives. There is no assurance that these initiatives will be successful, and failure to successfully complete these initiatives could have a material adverse effect on the Company’s liquidity and operations, and could require the Company to consider alternative measures, including, but not limited to, the deferral of planned capital expenditures and the further reduction of discretionary spending.

27

Table of Contents

In addition, there can be no assurances that neither Tenedora nor Avicola will continue providing guarantee services to the Company, that either Tenedora or Avicola will continue to provide guarantee services to the Company without compensation, that the Company will be able to locate alternative sources of financing without either Tenedora’s or Avicola’s provision of guarantees or that the Company will be able to locate another person or entity willing to provide guarantee services with or without compensation.

Acquisitions and Potential Acquisitions

In June 2004, the Company entered into a non-binding letter of intent with Industrias Avicolas Integradas, S.A (“Indavinsa”), a Nicaraguan corporation, regarding an investment in or acquisition of Indavinsa. In Nicaragua, Indavinsa is the fourth largest producer of broiler products, and the third largest producer of animal feed products. Pursuant to the letter of intent, the Company was granted the exclusive right for six months to negotiate with Indavinsa regarding an investment in or acquisition of Indavinsa.

On December 27, 2004, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Indavinsa, pursuant to which the Company acquired (i) all of the property, plant and equipment related to Indavinsa’s animal feed concentrate segment valued at approximately $5.5 million according to appraisals performed by an independent appraiser and (ii) Trademarks, Formulas and Customer list (the “Intangible Assets”) valued at approximately $820,000 using a discounted cash flow projection, for an aggregate value of $6.3 million (the “Purchase Amount”), in exchange for (i) the Company’s cancellation of approximately $5.3 million of receivables owed by Indavinsa, which was the amount due to the Company by Indavinsa as of December 27, 2004, and (ii) a payment from the Company to Indavinsa of approximately $1.0 million payable in the short-term, in cash or in exchange of products sold by the Company to Indavinsa.

The Company recorded this purchase in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. The property, plant and equipment acquired include an animal feed plant, including silos for storage of grain, grow-out farms for chickens and feedlot facilities for cattle.