RICA FOODS INC - 10-Q Quarterly Report

UNITED STATES

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 March 31, 2005

¨	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

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

Wachovia Financial Center

200 South Biscayne Boulevard, Suite 4530 Miami, FL

33131

(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 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 May 13, 2005, the number of shares issued and outstanding of the Company’s common stock, par value $0.001 per share was 12,864,321.

INDEX


		Page
	PART I – FINANCIAL INFORMATION

ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and September 30, 2004	3
	Consolidated Statements of Operations for the three and six months ended March 31, 2005 and 2004 (Unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended March 31, 2005 and 2004 (Unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	35
ITEM 4.	Controls and Procedures	36

	PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	37
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
ITEM 3.	Defaults upon Senior Securities	37
ITEM 4.	Submissions of Matters to a Vote of Security Holders	37
ITEM 5.	Other Information	38
ITEM 6.	Exhibits	38

Item 1. FINANCIAL STATEMENTS

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	March 31, 2005			September 30, 2004
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,454,340		$	1,618,689
Short-term investments		267,445			25,840
Notes and accounts receivable		10,190,673			11,706,487
Inventories		13,340,506			15,008,770
Deferred income taxes		446,264			395,955
Prepaid expenses		686,942			870,984

Total current assets		27,386,170			29,626,725

Property, plant and equipment		38,305,105			35,022,854
Long-term receivables-trade		—			4,688,843
Long-term investments		2,644,649			2,982,605
Other assets		7,200,384			6,862,838
Goodwill		1,356,766			1,418,957

Total assets	$	76,893,074		$	80,602,822

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	10,167,112		$	8,864,384
Accrued expenses		2,668,218			3,128,835
Notes payable		8,331,450			9,886,130
Current portion of long-term debt		3,173,378			2,077,827
Due to stockholders		—			53,350

Total current liabilities		24,340,158			24,010,526

Long-term debt, net of current portion		29,782,356			34,676,984
Due to related party		—			297,181
Deferred income tax liability		1,874,835			1,960,045

Total liabilities		55,997,349			60,944,736

Stockholders’ equity:
Common stock - 20,000,000 shares authorized; 12,864,321 issued; 12,811,469 outstanding		12,865			12,865
Preferred stock - Class C: 20,000 issued and outstanding; 336,345 issued held in treasury		1,742,623			1,180,867
Additional paid-in capital		25,910,995			25,800,940
Accumulated other comprehensive loss		(16,535,482	)		(15,587,269	)
Retained earnings - unappropriated		10,640,675			6,474,537
Retained earnings - appropriated		1,017,588			3,107,930

		22,789,264			20,989,870

Less:
Treasury preferred stock Pipasa – Class C: 336,345 held in treasury preferred stock		(1,610,145	)		(1,048,390	)
Treasury common stock, at cost – 52,852 held in treasury		(283,394	)		(283,394	)

Total stockholders’ equity		20,895,725			19,658,086

Total liabilities and stockholders’ equity	$	76,893,074		$	80,602,822

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

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)


	Three months ended March 31,						Six months ended March 31,
	2005			2004			2005			2004
Sales	$	37,795,764		$	33,267,913		$	78,722,699		$	66,615,623
Cost of sales		26,828,620			24,854,797			56,193,519			48,342,960

Gross profit		10,967,144			8,413,116			22,529,180			18,272,663

Operating expenses:
Selling		5,919,682			4,679,993			11,292,794			9,333,813
General and administrative		2,361,828			3,135,901			4,879,803			6,473,112
Provision for contingencies		—			416,380			—			416,380

Total operating expenses		8,281,510			8,232,274			16,172,597			16,223,305

Income from operations		2,685,634			180,842			6,356,583			2,049,358
Other expenses (income):
Interest expense		1,250,936			990,135			2,602,126			2,194,736
Interest income		(71,003	)		(112,401	)		(159,905	)		(554,049	)
Foreign exchange loss, net		416,537			659,606			850,918			1,508,486
Miscellaneous, net		(24,613	)		(16,682	)		10,800			(63,650	)

Other expenses, net		1,571,857			1,520,658			3,303,939			3,085,523

Income (loss) before income taxes and minority interest		1,113,777			(1,339,816	)		3,052,644			(1,036,165	)
Provision (benefit) for income tax		437,140			(169,647	)		973,245			(72,374	)

Income (loss) before minority interest		676,637			(1,170,169	)		2,079,399			(963,791	)
Minority interest		—			13,092			—			28,382

Net income (loss)		676,637			(1,183,261	)		2,079,399			(992,173	)
Preferred stock dividends		1,807			23,133			3,600			50,976

Net income (loss) applicable to common stockholders	$	674,830		$	(1,206,394	)	$	2,075,799		$	(1,043,149	)

Basic earnings (loss) per share	$	0.05		$	(0.09	)	$	0.16		$	(0.08	)

Diluted earnings (loss) per share	$	0.05		$	(0.09	)	$	0.16		$	(0.08	)

Basic weighted average number of common shares outstanding		12,811,469			12,811,469			12,811,469			12,811,469

Diluted weighted average number of common shares outstanding		12,941,469			12,811,469			12,931,469			12,811,469

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

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the six months ended March 31, 2005 and 2004

(Unaudited)


	2005			2004
Cash flows from operating activities:
Net income (loss)	$	2,079,399		$	(992,173	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization		2,281,542			2,154,029
Production poultry		2,102,648			1,845,524
Allowance for inventory obsolescence		81,289			161,473
Derivative unrealized loss (gain)		8,400			(265,638	)
Gain on sale of productive assets		—			(27,642	)
Issuance of Stock Options		97,200			—
Deferred income tax		(180,785	)		(181,223	)
Provision for doubtful receivables		130,834			142,137
Amortization of deferred debt costs		11,443			36,745
Minority interest		—			28,382
Changes in operating assets and liabilities:
Notes and accounts receivable		766,289			3,061,067
Inventories		(515,673	)		(3,009,714	)
Prepaid expenses		186,671			34,542
Accounts payable		320,516			(9,366,594	)
Accrued expenses		(460,617	)		81,988
Long-term receivables-trade		—			364,039

Net cash provided (used) by operating activities		6,909,156			(5,933,058	)

Cash flows from investing activities:
Short-term investments		(241,605	)		2,419,681
Long-term investments		211,875			76,212
Additions to property, plant and equipment		(2,291,895	)		(2,270,402	)
Proceeds from sales of productive assets		1,053,894			213,878
Change in other assets		(60,680	)		(73,554	)
Due from stockholders and related party		—			6,857,535

Net cash (used) provided by investing activities		(1,328,411	)		7,223,350

Cash flows from financing activities:
Preferred stock cash dividends		(3,600	)		(79,358	)
Short-term financing:
New loans		15,925,551			34,428,924
Payments		(17,375,035	)		(34,950,480	)
Due to Related Party		(301,561	)		—

(Continued on next page)

RICA FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the six months ended March 31, 2005 and 2004

(Unaudited)

(Continued)


	2005			2004
Long-term financing:
New loans		3,932,620			3,038,335
Payments		(7,146,076	)		(6,049,438	)
Preferred shares repurchased		—			(513,232	)

Net cash used by financing activities		(4,968,101	)		(4,125,249	)

Effect of exchange rate changes on cash and cash equivalents		223,007			841,657
Increase (decrease) in cash and cash equivalents		835,651			(1,993,300	)
Cash and cash equivalents at beginning of period		1,618,689			3,343,255

Cash and cash equivalents at end of period	$	2,454,340		$	1,349,955

Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest	$	2,561,431		$	2,718,268

Income taxes	$	158,169		$	97,034

Supplemental schedule of non-cash activities:
Benefits to former Chief Executive Officer	$	—		$	70,673

Purchase of assets from Indavinsa in exchange of cancellation of account receivable from Indavinsa and the recording of an account payable to Indavinsa (See Note 13)	$	6,274,545		$	—

Cancellation of receivable from Indavinsa in exchange of assets purchased from Indavinsa (See Note 13)	$	5,225,481		$	—

Account payable to Indavinsa for the purchase of assets from Indavinsa (See Note 13)	$	1,049,064		$	—

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

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”). The Merger did not have any effect on the consolidated financial statements of the Company.

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 six months ended March 31, 2005 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 balance sheet, statement of income and statement of cash flows have been made to the prior period to conform to current period presentation.

NOTE 3 – MINORITY INTEREST

The Company included minority interests as a component of the Accounts Payable line item on the balance sheet. As of September 30, 2004 and March 31, 2005, aggregate minority interest equaled $343, comprised of Pipasa’s subsidiary’s minority interest.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 4 – INVENTORIES AND PRODUCTION POULTRY

Inventories consist of the following:


	March 31, 2005		September 30, 2004
	(Unaudited)
Finished products	$	2,890,854	$	3,490,690
In-process		3,106,891		3,365,775
Live poultry - net		3,320,134		3,547,030
Materials and supplies-net		1,640,911		1,542,846
Raw materials		1,907,056		1,632,137
In-transit		474,660		1,430,292

	$	13,340,506	$	15,008,770

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 long-term contracts 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 $2,102,648 and $1,845,524 for the six months ended March 31, 2005 and 2004, respectively, and is recorded in to cost of sales. As of March 31, 2005 and September 30, 2004, the Company’s provision for inventory obsolescence amounted to $229,318 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.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

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.

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.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment” (“Statement 123(R)”). 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. On April 14, 2005, the Securities and Exchange Commission announced the adoption of a rule that defers the required effective date of Statement 123(R) for registrants until the beginning of the first fiscal year beginning after June 15, 2005. The Company is in the process of evaluating whether the adoption of SFAS 123 (R) will have a significant impact on the Company’s overall results of operations or financial position.

In March 2005, the staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 “Share Based Payment” (“SAB 107”). The interpretations in SAB 107 express views of the staff regarding the interaction between Statement of Financial Accounting Standards Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement 123(R)”) and certain SEC rules and regulations and provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of Statement 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of Statement 123(R), the modification of employee share options prior to adoption of Statement 123(R) and disclosures in Management’s Discussion and Analysis subsequent to adoption of Statement 123(R). The Company is in the process of evaluating whether the adoption of SAB 107 will have a significant impact on the Company’s overall results of operations or financial position.

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):


	Three months ended March 31						Six months ended March 31
	2005			2004			2005			2004
Sales, net:
Broiler	$	16.04		$	14.74		$	33.47		$	30.03
Animal feed		9.74			7.92			20.67			15.66
By-products		4.82			3.41			9.70			6.72
Exports		2.69			2.59			5.33			4.68
Quick service		1.70			1.82			3.78			4.03
Other		2.80			2.79			5.77			5.50

Total net sales		37.79			33.27			78.72			66.62

Income (loss) per segment:
Broiler		2.81			1.86			6.03			4.69
Animal feed		0.98			0.60			2.24			1.57
By-products		0.34			0.34			0.88			0.69
Exports		0.48			0.49			0.81			0.91
Quick service		(0.06	)		0.21			0.18			0.52
Other		0.50			0.23			1.10			0.55
Corporate		(2.36	)		(3.55	)		(4.88	)		(6.89	)

Income from operations		2.69			0.18			6.36			2.04
Other expenses (income)		(1.57	)		(1.52	)		(3.30	)		(3.08	)

Income (loss) before income taxes and minority interest	$	1.12		$	(1.34	)	$	3.06		$	(1.04	)

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.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

Animal Feed: Animal feed is made with imported raw materials, such as corn and soybean meal, in addition to 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.

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.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 7 – COMPREHENSIVE INCOME (LOSS)

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


	Other Comprehensive Income (loss)									Total Comprehensive Income (loss) for the period
	Foreign currency translation adjustment			Derivatives			Sub-total			Total Comprehensive Income (loss) for the period
Beginning Balance, September 30, 2004	$	(15,578,869	)	$	(8,400	)	$	(15,587,269	)
Net income		—			—			—			1,402,762
Net Change in derivative unrealized gain (loss)		—			913			913			913
Derivative gain (loss) to be recognized in cost of production during the next three months		—			—			—			—
Deferred (gain) loss recognized in cost of production during the period		—			—			—			—
Translation adjustment		(501,987	)		—			(501,987	)		(501,987	)

Balance, December 31, 2004 (unaudited)		(16,080,856	)		(7,487	)		(16,088,343	)		901,688
Net income		—			—			—			676,637
Net Change in derivative unrealized gain (loss)		—			7,487			7,487			7,487
Derivative gain (loss) to be recognized in cost of production during the next three months		—			—			—			—
Deferred (gain) loss recognized in cost of production during the period		—			—			—			—
Translation adjustment		(454,626	)		—			(454,626	)		(454,626	)

Balance, March 31, 2005 (unaudited)	$	(16,535,482	)	$	—		$	(16,535,482	)	$	1,131,186

Beginning Balance, September 30, 2003	$	(15,375,091	)	$	(211,812	)	$	(15,586,903	)
Net loss		—			—			—			191,089
Net Change in derivative unrealized gain (loss)		—			13,350			13,350			13,350
Derivative gain (loss) to be recognized in cost of production during the next three months		—			—			—			—
Deferred (gain) loss recognized in cost of production during the period		—			174,537			174,537			174,537
Translation adjustment		(593,874	)		—			(593,874	)		(593,874	)

Balance, December 31, 2003 (Unaudited)		(15,968,965	)		(23,925	)		(15,992,890	)		(214,898	)
Net loss		—			—			—			(1,183,261	)
Net Change in derivative unrealized gain (loss)		—			(464,339	)		(464,339	)		(464,339	)
Derivative gain (loss) to be recognized in cost of production during the next three months		—			—			—			—
Deferred (gain) loss recognized in cost of production during the period		—			—			—			—
Translation adjustment		(566,372	)		—			(566,372	)		(566,372	)

Balance, March 31, 2004 (Unaudited)	$	(16,535,337	)	$	(488,264	)	$	(17,023,601	)	$	(2,428,870	)

The Company’s Accumulated Other Comprehensive Income (loss) for the six months ended March 31, 2005 and 2004, amounted to $2,032,874 and $(2,643,768) respectively. 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.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

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 March 31, 2005, the Company did not have any outstanding open positions. As of March 31, 2004, the Company’s outstanding open positions amounted to $488,264.

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 certain collateral, which was valued at approximately $5 million at the time of settlement (the “Collateral”). 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.

At the time of the Settlement Agreement, Pipasa had attempted to secure the participation of Aero in the settlement but Aero had not agreed to participate in the settlement. Because Aero had 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 (the “Ad Quo Court”) seeking Aero’s direct participation in the settlement and seeking to enjoin the release of the security interest in the Collateral. The Aero receiver’s appeal was denied by the Ad Quo Court on February 5, 2004. However, pursuant to Costa Rican law, the Aero receiver exercised its right to appeal the Ad Quo Court’s denial of its appeal. After the appeal was again denied by the Ad Quo Court in February 2004, the Aero receiver, pursuant to Costa Rican law, filed an additional appeal in the Costa Rican Ad Quem Court (the “Ad Quem Court”) against the Ad Quo Court’s denial.

On April 14, 2005 the Company received notice that the Ad Quem Court affirmed the Ad Quo Court’s ruling denying the Aero receiver’s appeal. On April 26, 2005 Pipasa received the release of the Collateral from the Ad Quo Court and transferred the Collateral to Banco Improsa, S.A. as trustee of the Amended Trust Agreement (as defined and discussed below in Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations).

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.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 9 – DUE TO RELATED PARTY

Due to Related Party consists of the following:


	March 31, 2005		September 30, 2004
	(Unaudited)
Short-term:
Calixto Chaves	$	—	$	40,495
Federico Vargas		—		12,855

	$	—	$	53,350

Long-term:
Calixto Chaves	$	—	$	297,181

As of September 30, 2004, short-term and long-term amounts due to Calixto Chaves included 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 for 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 were denominated in colones currency, and bore interest at the annual rate of 10%, were payable in 5 consecutive annual payments beginning in August 2005 and were unsecured.

In January 2005, the Company paid Calixto Chaves the aggregate amount of the Notes outstanding as of September 30, 2004. As of March 31, 2005, the Company did not have any outstanding indebtedness to related parties.

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. As of March 31, 2005, there were 130,000 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, Honorable Ambassador Luis Lauredo and Mr. Grant Jack Peeples. The Director Options vested upon issuance and, prior to the amendments discussed below, were 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 Director Options have an exercise price of $4.40 and the closing quoted market price per share on the Grant Date was $5.21.

On April 25, 2005, the Board of Directors approved the extension of (i) the Exercise Period of the Director Options granted to Mr. Lauredo until April 15, 2006 and (ii) the Exercise Period of the Director Options granted to Mr. Peeples until July 15, 2005. The closing quoted market price per share of the Company’s common stock on April 25, 2005, the date of the Board’s approval of the extensions of the Exercise Periods was $5.10. No additional expense was recorded for the extensions of the Exercise Periods in accordance with the requirements of Interpretation No.44 “Accounting for Certain Transactions Involving Stock Compensation”. In addition, the Company did not incur in any additional incremental costs associated with such extension.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

In addition, on November 29, 2004, the Board of Directors of the Company granted, effective as of the Grant Date, a total of 10,000 options (the “Former Director Options”) to purchase shares of the Company’s common stock to one of its former directors. The Former Director Options vested upon issuance and were exercisable at any time during the 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 Former Director Options have an exercise price of $4.40 and the closing quoted market price per share on the Grant Date was $5.21. The Former Director Options were not exercised prior to their expiration.

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 Director Options 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 and six month periods ended March 31, 2005, would have been as follows:


	Three months ended March 31, 2005		Six months ended March 31, 2005
Net income applicable to common stockholders as reported:	$	674,830	$	2,075,799
Add:
Stock-based directors’ compensation expense – net of tax effect, determined using the intrinsic value based method		—		97,200
Deduct:
Stock-based directors’ compensation expense – net of tax effect, determined using the fair value based method		—		(153,531	)

Pro forma net income applicable to common stockholders	$	674,830	$	2,019,468

Earnings per share:
Basic earnings per share	$	0.05	$	0.16

Pro-forma basic earnings per share	$	0.05	$	0.16

Diluted earnings per share	$	0.05	$	0.16

Pro forma diluted earnings per share	$	0.05	$	0.16

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 Former Director Options 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 Former Director 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.

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

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


	Number of Stock Options	Weighted Average Exercise Price		Weighted Average Fair Value
Outstanding, as of September 30, 2004	—
Granted	130,000	$	4.40	$	5.21
Exercised	—		—		—
Forfeited	—		—		—
Expired	—		—		—

Outstanding, as of March 31, 2005	130,000	$	4.40	$	5.21

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 six months ended March 31, 2005, diluted earnings per share includes 130,000 incremental shares related to the 130,000 stock options issued on October 15, 2004 (See Note 10 for more information). For the six months ended March 31, 2004, 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:


	Three months ended March 31,					Six months ended March 31,
	2005		2004			2005		2004
Numerator:
Net income (loss) applicable to common stockholders	$	674,830	$	(1,206,394	)	$	2,075,799	$	(1,043,149	)

Denominator:
Denominator for basic earnings (loss) per share		12,811,469		12,811,469			12,811,469		12,811,469
Effect of dilutive securities:
Options to purchase common stock		130,000		—			120,000		—

Denominator for diluted earnings (loss) per share	$	12,941,469	$	12,811,469		$	12,931,469	$	12,811,469

Earnings (loss) per share:
Basic	$	0.05	$	(0.09	)	$	0.16	$	(0.08	)

Diluted	$	0.05	$	(0.09	)	$	0.16	$	(0.08	)

NOTE 12 – PROVISION FOR CONTINGENCIES

RICA FOODS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

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

On December 27, 2004, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Industrias Avicolas Integradas, S.A, a Nicaraguan corporation (“Indavinsa”), pursuant to which the Company acquired $6.3 million of assets (the “Purchase Amount”) comprised of (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) certain of Indavinsa’s trademarks, formulas and customer lists (the “Intangible Assets”) valued at approximately $820,000 using a discounted cash flow projection, in exchange for (i) the Company’s cancellation of approximately $5.2 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 (collectively, the “Purchase Price”). In Nicaragua, Indavinsa is the fourth largest producer of broiler products, and the third largest producer of animal feed products.

The Company recorded the Intangible Assets acquired 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 is depreciating 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 the Other Assets line item on the balance sheet and allocated the Purchase Price based on the Company’s estimate of their contribution to future cash flows. The acquired trademarks and formulas have each been allocated a value of approximately $360,000. Such trademarks and formulas are deemed to have an indefinite life since, pursuant to Nicaraguan law, they can be renewed every 10 years indefinitely at very little cost. These acquired trademarks and formulas will be reviewed for impairment periodically. The acquired customer list has been allocated a value of approximately $100,000. This 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 began to amortize this customer list in January 2005. For the six months ended March 31, 2005, amortization with respect to the acquired customer listed has amounted to approximately $6,250. The annual amortization for fiscal years ended September 30, 2005, 2006 and 2007 will equivalent to approximately $18,750, $25,000 and $25,000, respectively.

Except for one parcel of land with an appraised value of $250,000, none of the acquired assets are encumbered based upon background investigations performed on such assets.

On January 3, 2005, the Company entered into an agreement with Indavinsa pursuant to which Indavinsa will lease from the Company the property, plant and equipment and Intangible Assets acquired pursuant to the Asset Purchase Agreement for a period of six months at a monthly fee of $17,713.

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”). The Merger did not have any effect on the consolidated financial statements of the Company.

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 March 31, 2005 and for the three and six month period ended March 31, 2005 and 2004 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 six months ended March 31, 2005, the Company did not incur any significant costs related to environmental compliance.

Results of operations for the three months ended March 31, 2005 compared to the three months ended March 31, 2004

For the three months ended March 31, 2005, the Company generated net income applicable to common stockholders of $674,830 ($0.05 diluted earnings per share) compared to a net loss applicable to common stockholders of $1,206,394 ($0.09 diluted loss per share) for the three months ended March 31, 2004.

For the quarter ended March 31, 2005, net sales and cost of sales increased by 13.6% and 7.9%, respectively, when compared to the quarter ended March 31, 2004. 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 volume, intensified marketing efforts and improvements in distribution logistics. The increase in the cost of sales was primarily the result of the overall increase in sales volume.

For the quarter ended March 31, 2005, the cost of imported corn and soybean meal decreased by approximately 9.5% and 25.5%, respectively, when compared to the cost of such materials for the quarter ended March 31, 2004.

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 8.8% for the quarter ended March 31, 2005 when compared with the quarter ended March 31, 2004, primarily due to an increase in sales volume of approximately 5.9% and an increase in sales prices. The profit margin for this segment increased from 12.7% in the quarter ended March 31, 2004 to 17.5% in the quarter ended March 31, 2005, primarily due to a decrease in the cost of imported raw material.

Animal feed sales increased by 23.0% for the quarter ended March 31, 2005 when compared with the quarter ended March 31, 2004, mainly attributable to an increase in sales volume of 27.8%. The increase in sales volume was primarily attributable to an increase in the number of distribution channels and an increase in the volume of purchases by current and new customers. The profit margin for the animal feed segment increased from 7.6% in the quarter ended March 31, 2004 to 10.1% in the quarter ended March 31, 2005, mainly due to a decrease in the cost of imported raw material.

By-products sales increased by 41.3% for the quarter ended March 31, 2005 when compared with the quarter ended March 31, 2004, mainly due to an increase in the volume of by-product sales by 57.4%. The increase in sales is mainly attributable to the introduction of new product brands into the market and improvement on the distribution logistics. The profit margin for the by-products segment decreased from 9.9% in the quarter ended March 31, 2004 to 7.0% in the quarter ended March 31, 2005, primarily as a result of variations in the sales mix, which was partially offset by a decrease in the cost of imported raw material.

Export sales increased by 4.0% for the quarter ended March 31, 2005 when compared with the quarter ended March 31, 2004, mainly due to an increase in the volume of sales of broiler and commercial animal feed products to current customers and new customers outside of Costa Rica. The profit margin for the exports segment decreased from 18.8% in the quarter ended March 31, 2004 to 17.8% in the quarter ended March 31, 2005, mainly due to variations in the sales mix, which was partially offset by a decrease in the cost of imported raw material.

Quick service sales decreased by 6.5% for the quarter ended March 31, 2005 when compared with the quarter ended March 31, 2004. During fiscal year 2004, the Company closed certain of its quick service restaurants in order to relocate them. In the last six months two of such restaurants were re-opened in more populated locations. Management does not expect to open additional restaurants in the near future. This segment’s profit margin declined from 11.9% in the quarter ended March 31, 2004 to a loss margin of -3.6% in the quarter ended March 31, 2005, mainly as a result of the decrease in sales.

Sales for the other products segment did not vary significantly, increasing by 0.3%for the quarter ended March 31, 2005 when compared with the quarter ended March 31, 2004, mainly due to an increase in the sales prices for such products. This segment’s profit margin increased from 8.1% to 17.8%, mainly due to an increase in the sales prices of certain profitable products.

Operating expenses increased by 0.6% or $ 49,236 for the quarter ended March 31, 2005 when compared to the quarter ended March 31, 2004. Operating expenses represented 21.9% and 24.5% of net sales for the quarter ended March 31, 2005 and 2004, respectively.

For the quarter ended March 31,2005, selling expenses increased by $1,239,689 or 26.5%, when compared to the quarter ended March 31, 2004, primarily due to an increase in payroll expenses related to the increase in sales and advertising expenses primarily related to the new Pet Food and Broiler marketing campaign.

As part of payroll 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% 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 the three months ended March 31, 2004, the Company recorded a provision in the amount of $416,380 which the Company believed 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. As of September 30, 2004, the Company reassessed the provision for the INA Charge and increased such provision to $504,248. However, the Company believes that the amount of the Company’s liability in the event of an unfavorable outcome may be as large as $1 million. In addition to the provision, the Company also recorded a deferred tax benefit in the amount of $151,274 related to the INA Charge.

For the quarter ended March 31, 2005, general and administrative expenses decreased by $ 774,074, or 24.7%, when compared to the quarter ended March 31, 2004. This decrease in general and administrative expenses is mainly due to a decrease in the cost of consulting services and the result of an overall restructuring process in the administrative area to.

Other expenses increased by 3.4% for the quarter ended March 31, 2005, when compared to the quarter ended March 31, 2004, primarily as a result of an increase in interest expense and an increase in miscellaneous expenses, offset by a decrease in foreign exchange rate loss. The increase in interest expense and the decrease in foreign exchange rate loss is primarily the result of the Company’s restructuring of a significant portion of its debt from US dollar currency to colones currency.

In accordance with income tax regulations in Costa Rica, the subsidiaries are required to file annual income tax returns for the twelve-month period ended September 30 of each year. Pursuant to Costa Rican tax law, such income tax returns are open to examination by the tax authorities in Costa Rica. In February 2005, the Company received a notice from the Costa Rican tax authorities informing the Company that they had reviewed Pipasa’s 1998 tax return (the “1998 Return”) and had reassessed approximately $155,000 of income tax credit reflected on the 1998 Return (the “Reassessed Amount”). The Reassessed Amount relates to a tourism tax benefit the Company had deducted in its 1998 Return in connection with an investment by Pipasa in the Hotel La Condesa. During the three months ended March 31, 2005, the Company recorded the Reassessed Amount as Provision (benefit) for income tax in its Statement of Operations.

The Company’s provision for income tax expense was $437,140 for the quarter ended March 31, 2005, compared to an income tax benefit of $ 169,647 for the quarter ended March 31, 2004. The increase in income tax for the quarter ended March 31, 2005 was primarily due to an increase in taxable income. The income tax benefit for the quarter ended March 31 2004, is primarily the result of a downward revision of the estimated income tax for the three months ended December 31, 2003 in addition to an increase in deferred income tax benefit. Effective tax rates for the fiscal quarters ended March 31, 2005 and 2004 were 39.2% and 12.7%, respectively. The increase in the effective tax rate is primarily due to an increase in taxable income, while recognizing similar tax credits.

Results of operations for the six months ended March 31, 2005 compared to the six months ended March 31, 2004

For the six months ended March 31, 2005, the Company generated net income applicable to common stockholders of $2,075,799 ($0.16 diluted earnings per share) compared to net loss applicable to common stockholders of $1,043,149 ($0.08 diluted loss per share) for the six months ended March 31, 2004.

For the six months ended March 31, 2005, net sales increased by 18.2% or $12,107,076 and cost of sales increased by 16.2% or $7,850,558 when compared to the six months ended March 31, 2004. The increase in overall sales is primarily attributable to increases in sales in the broiler, animal feed, by-products and export segments. For the six months ended March 31, 2005, the cost of imported corn and soybean meal decreased by approximately 1.2% and 12.8%, respectively, when compared to the cost of such materials for the six months ended March 31, 2004. Cost of sales was a lower percentage of sales for the six months ended March 31, 2005 (71.4%) as compared to the six months ended March 31, 2004 (72.6%) primarily due to decreases in the costs of imported raw material.

Broiler sales increased by 11.5% for the six months ended March 31, 2005 when compared with the six months ended March 31, 2004, primarily due to an increase in sales volume of approximately 7.7% and an increase in sales prices. The profit margin for this segment increased from 15.6% in the six months ended March 31, 2004 to 18.0% in the six months ended March 31, 2005, primarily due to a decrease in the cost of imported raw material.

Animal feed sales increased by 32.0% for the six months ended March 31, 2005 when compared with the six months ended March 31, 2004, mainly attributable to an increase in sales volume of 32.4%. 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 and new customers and an increase in the overall number of commercial feed brand customers. The profit margin for the animal feed segment increased slightly from 10.0% in the six months ended March 31, 2004 to 10.8% in the six months ended March 31, 2005.

By-products sales increased by 44.4% for the six months ended March 31, 2005 when compared with the six months ended March 31, 2004, mainly due to an increase in the volume of by-product sales by 59.1%. The increase in sales is mainly attributable to the introduction of new product brands into the market, improvement on the distribution logistics, and an increase in the volume of purchases by current customers. The profit margin for the by-products segment decreased from 10.3% in the six months ended March 31, 2004 to 9.0% in the six months ended March 31, 2005, primarily as a result in variations in the sales mix.

Quick service sales decreased by 6.1% for the six months ended March 31, 2005 when compared with the six months ended March 31, 2004. During fiscal year 2004, the Company closed certain of its quick service restaurants in order to relocate such restaurants to larger, more populated locations. Two restaurants were re-opened in new locations during the past six months. Management does not expect to open additional restaurants in the near future. This segment’s profit margin decreased from 13.0% in the six months ended March 31, 2004 to 4.7% in the six months ended March 31, 2005, mainly as a result of the decrease in sales.

Export sales increased by 13.9% for the six months ended March 31, 2005 when compared with the six months ended March 31, 2004, mainly due to an increase in the volume of sales of broiler, pet foods and commercial animal feed products to current and new customers outside of Costa Rica. The profit margin for the exports segment decreased from 19.4% in the six months ended March 31, 2004 to 15.3% in the six months ended March 31, 2005, mainly due to variations in the sales mix, which was partially offset by a decrease in the cost of imported raw material.

Sales for the other products segment increased by 4.9% for the six months ended March 31, 2005 when compared to the six months ended March 31, 2004, mainly due to an increase in sales volume sales prices. This segment’s profit margin increased from 10.0% to 19.1%, mainly due to an increase in the sales prices of certain profitable products.

Operating expenses did not vary significantly, decreasing 0.3% or $50,708 for the six months ended March 31, 2005 when compared to the six months ended March 31, 2004. Operating expenses represented 20.5% and 24.3% of net sales for the six months ended March 31, 2005 and 2004, respectively.

For the six months ended March 31,2005, selling expenses increased by $1,958,981 or 20.9%, when compared to the six months ended March 31, 2004, primarily due to an increase in sales personnel payroll expenses related to the increase in sales, advertising expenses primarily related to the new Pet Food and Broiler marketing campaign and other expenses related to product distribution.

For the six months ended March 31, 2005, general and administrative expenses decreased by $1,593,310, or 24.6%, when compared to the six months ended March 31, 2004. This decrease in general and administrative expenses is mainly due to a reduction in the Company’s administrative personnel payroll expenses, and a decrease in the cost of consulting services and an overall result of a restructuring process in the administrative area.

Other expenses increased by 7.1% or $218,414 for the six months ended March 31, 2005, when compared to the six months ended March 31, 2004, primarily as a result of an increase in interest expenses and miscellaneous expenses, which was partially offset by a decrease in foreign exchange rate loss. The increase in interest expense and decrease in foreign exchange rate loss, is mainly due to the Company’s restructuring of a significant portion of its debt from US dollar currency to colones currency.

The Company’s provision for income tax expense was $973,245 for the six months ended March 31, 2005, compared to an income tax benefit of $72,374 for the six months ended March 31, 2004. The increase in income tax for the six months ended March 31, 2005 was primarily due to an increase in taxable income. The provision for income tax for the six months ended March 31, 2005 includes the Reassessed Amount charge. Effective tax rates for the six months ended March 31, 2005 and 2004 were 31.9% and 6.9%, respectively. The increase in the effective tax rate is primarily due to an increase in taxable income, while recognizing similar tax credits.

Financial condition

As of March 31, 2005, the Company had approximately $2.5 million in cash and cash equivalents. As of March 31, 2005 and September 30, 2004, the Company had a working capital surplus of approximately $3.1 million and $5.6 million, respectively. The current ratios were 1.13 and 1.23 as of March 31, 2005 and September 30, 2004, respectively.

Cash provided by operating activities for the six months ended March 31, 2005 amounted to approximately $6.9 million compared to cash used by operating activities of approximately $5.9 million for the six months ended March 31, 2004.

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

•

an increase in net income ($3.0 million);

•

a reversal of the rate of cash used for inventory to cash provided by inventory ($2.5 million); and

•

the reversal of the rate of accounts payable reduction to accounts payable growth ($9.7 million).

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 ($2.3 million) and an increase in the cash used for accrued expenses ($542,605).

Cash used for inventory amounted to approximately $516,000 in the six months ended March 31, 2005, compared to cash used for Inventory of approximately $3.0 million in the six months ended March 31, 2004. The decrease in the use of cash for Inventory was primarily due to a decrease in the amount of in-transit raw material ($956,000), a decrease in finished products ($600,000) and a decrease in the levels of in-process inventory ($259,000). This decrease was partially offset by the purchase of live poultry ($2.2 million) and a decrease in levels of raw material ($275,000). 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 recorded an account payable to Indavinsa for approximately $1.0 million, pursuant to an Asset Purchase 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. As of March 31, 2005, such accounts payable to Indavinsa amounted to approximately $336,000.

Depreciation and amortization was a large, non-cash expense for the six months ended March 31, 2005 ($2.3 million) and March 31, 2004 ($2.2 million). Production poultry for March 31, 2005 and March 31, 2004 amounted to $2.1 million and $1.8 million, respectively, which represents the amortization of the breeder and layer hen costs during their productive life.

Cash used by investing activities was $1.3 million in the six months ended March 31, 2005, compared to approximately $7.2 million of cash provided by investing activities in the six months ended March 31, 2004. The primary use of cash for investing activities was for additions to property, plan and equipment ($2.3 million), more specifically in connection with the Company’s purchase of production equipment, primarily related to the construction of commercial animal feed facilities located in a strategic location, specifically in the production of strussed feed and aquaculture lines, to enhance the development of this commercial activity . The primary source of cash for investing activities was from proceeds from the sale of productive assets ($1.1 million).

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, if ever, the Company anticipates making an additional investment of approximately $1.1 million.

The Company believes it will need at a minimum funds of approximately $7.4 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 $4.9 million for the six months ended March 31, 2005, compared to cash used by financing activities of approximately $4.1 million for the six months ended March 31, 2004. The cash generated by financing activities was primarily short-term financings ($15.9 million) and long-term financings ($3.9 million). These funds were principally used to repay and/or refinance short-term financings ($17.4 million), to refinance and/or repay long-term financings ($7.1 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 March 31, 2005 are as follows:


			Payments due by Period
	Total		Less than 1 Year		1-3 years		4-5 years
Short-term debt	$	8,331,450	$	8,331,450	$	—	$	—
Long-term debt		32,955,734		3,173,378		24,404,257		5,378,099
Consulting Agreement - SAMA		700,000		700,000		—		—
Leases		3,187,121		816,290		1,994,458		376,373

Total	$	45,174,305	$	13,021,118	$	26,398,715	$	5,754,472

The Company projects that it will need to satisfy at least $13.0 million of short-term debt, long-term debt, consulting agreements and operating lease payments within the twelve months ended March 31, 2006. The Company also projects that it will seek to acquire an additional $7.4 million of property, plant and equipment during the remainder of fiscal 2005. The use of such equipment may be secured by purchase or lease.

Pursuant to a consulting agreement, dated as of June 1, 2003, between SAMA Internacional (G.S.), S.A., a Costa Rican corporation (“SAMA”), and the Company (the “Consulting Agreement”), SAMA began providing the Company with financial and strategic advisory services with respect to a variety of different matters, including, but not limited to the restructuring of the Company’s indebtedness. On May 12, 2005, the Consulting Agreement was amended to, among other things, accelerate the termination date of the Consulting Agreement from May 31, 2006 to September 30, 2005. Pursuant to the Consulting Agreement, as amended, the Company will compensate SAMA at the rate of up to $ 125,000 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 March 31, 2005, the Company’s aggregate outstanding indebtedness totaled approximately $ 41.3 million. As of March 31, 2005, approximately $ 38.8 million (the “Aggregate Participating Lenders’ Indebtedness”) of this $ 41.3 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$):


Lender:
BICSA	$	23.5
BCR		8.8
Interfin		5.2
Agricola		1.3

Total	$	38.8

As of March 31, 2005, approximately $19.1 million of the approximately $ 38.8 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 subsidiary (the “Subsidiary”) 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 $19.7 million of Aggregate Participating Lenders’ Indebtedness that is not secured by the Trust (the “Non-Trust Indebtedness”), (i) approximately $12.7 million of such Non-Trust Indebtedness, owed to BICSA, is unsecured, (ii) approximately $3.7 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 March 31, 2005.

Of the approximately $ 41.3 million of the Company’s aggregate outstanding indebtedness as of March 31, 2005, approximately $ 2.5 million was owed to certain of the Company’s lenders who were not signatories to the Trust Agreement (the “Non-Participating Lenders”). Non-Participating Lenders with an aggregate of approximately $1.1 million of indebtedness owed to them are secured by approximately $532,000 of the Company’s property and approximately $709,000 of the Company’s accounts receivable.

Indebtedness to BICSA

As of March 31, 2005, the Company’s outstanding indebtedness to BICSA totaled approximately $23.5 million (the “Aggregate BICSA Indebtedness”). Approximately $7.4 million of the Aggregate BICSA Indebtedness was short-term indebtedness (the “Short-term BICSA indebtedness”) payable to BICSA pursuant to (i) six letters of credit amounting to $4.2 million, denominated in U.S. dollars, bearing variable interest rates that range from 5.0% to 7.25%, maturing between May 2005 and January 2006 and (ii) eight letters of credit amounting to $ 3.2 million, pursuant to a $3.5 million revolving line of credit, denominated in U.S. dollars, bearing variable interest rates that range from 7.0% to 7.25%, maturing between April 2005 and July 2005.

The line of credit expired on April 30, 2005. The borrowings made on the line of credit are payable in six equal monthly installments, with the first payment commencing in the month after the borrowing. The Company is currently in negotiations with BICSA with regards to a one-year extension of this revolving line of credit. However, there can be no assurances that the Company and BICSA will reach an agreement with respect to such an extension. The Short-term BICSA indebtedness is mainly utilized by the Company as working capital and for the purchase of grain and other raw materials.

As of March 31, 2005, the line of credit is secured by the Trust. In addition, as of March 31, 2005, Tendedora, S.A. (“Tenedora”) the parent company of the Company’s majority shareholder, Avicola Campesinos, Inc (“Avicola”) had guaranteed approximately $7.4 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 March 31, 2005, the Company had also borrowed approximately $16.0 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 variable rate of 8.75%, maturing in September 30, 2007 and (ii) a $3.8 million loan denominated in U.S. dollars, bearing variable interest at a rate of 7.25%, with interest and principal payable every trimester and the last payment due in April 2009. This $3.8 million loan is secured by the Trust.

Indebtedness to BCR

As of March 31, 2005, the Company’s outstanding indebtedness to BCR totaled approximately $8.8 million (the “Aggregate BCR Indebtedness”). Of the Aggregate BCR Indebtedness, approximately $2.1 million, denominated in colones and bearing interest at the variable interest rate of 19.0%, 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 variable interest at the variable rate of 18.25%, is payable on a trimesterly 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 variable interest rate of 19.0%, is payable on a trimesterly 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.

On May 5, 2005 BCR approved (i)an additional loan of approximately $6 million, which funds have not yet been disbursed by the bank, denominated in colones, bearing variable interest rate of a minimum of 19%, with interest and principal payable every trimester, and secured by the Trust, (ii) a line of credit of approximately $2.2 million, denominated in colones, bearing variable interest rate of 19%, with a maturity of 1 year, and any borrowings made on the line of credit payable every trimester and (iii) an available line of credit of approximately $320,000 that serves as a guarantee for governmental bids, denominated in colones and with a commission charge of 1% of the guaranteed amount.

Indebtedness to Interfin

As of March 31, 2005, the Company’s outstanding indebtedness to Interfin totaled approximately $5.2 million (the “Aggregate Interfin Indebtedness”). Of the Aggregate Interfin Indebtedness, (i) $2.7 million of such indebtedness, denominated in U.S. dollars, bears interest at an annual variable rate of 8.0% and (ii) $2.5 million of such indebtedness, denominated in Costa Rican colones, bears interest at an annual variable rate of 18.25%. Interest on the Aggregate Interfin Indebtedness will be payable on a trimesterly basis. The aggregate principal amount of the Aggregate Interfin Indebtedness plus all accrued interest will be due on May 21, 2009. As of March 31, 2005, the Aggregate Interfin Indebtedness was secured by the Trust.

Indebtedness to Agricola

As of March 31, 2005, the Company’s outstanding indebtedness to Agricola totaled approximately $1.3 million (the “Aggregate Agricola Indebtedness”). The Aggregate Agricola Indebtedness, denominated in colones, bears interest at the variable rate of 18.75%.

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 March 31, 2005, $ 922,000 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$37.4 million of indebtedness, which indebtedness could take the form of loans, bonds, or other extensions of credit.

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. Following the definitive release of the Collateral held by the Ad Quo Court in connection with the litigation with Polaris described in Note 8 above, such Collateral was delivered to the Trustee to be held in accordance with the Modified Trust. 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 ($26.6 million); (ii) trademarks ($10.4 million); and (iii) machinery ($9.7 million). The Trust Assets Value was calculated in colones currency and its value in US dollars is translated using current exchange rate. As of March 31, 2005, the book value of machinery and real estate properties, including building and facilities in the Trust, amounted to $24.1 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$37.4 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 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 March 31, 2005, the Company had issued short-term promissory notes with respect to an aggregate of approximately $8.2 million primarily to 3 lenders. These notes payable consist of the following:


	March 31, 2005		September 30, 2004
Loans payable in U.S. Dollars	$	7,515,810	$	8,704,378
Loans payable in Colones		815,640		1,181,752

	$	8,331,450	$	9,886,130

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 March 31, 2005, of the $8.3 million of short-term debt, approximately $7.4 million was owed to BICSA and the balance was owed to three lenders. See the section above entitled “Indebtedness to BICSA” for more information regarding the BICSA Indebtedness. Notes payable are generally due from April 2005 through January 2006 and bear annual interest rates ranging from 5% to 7.25% for notes denominated in dollars and from 19% to 22.5% for notes denominated in colones. Average interest rates as of March 31, 2005 were 6.9% for loans in US dollar, and from 20% to 22.2% for loans in colones.


	March 31, 2005	September 30, 2004
U.S.$ dollar loans	2.29% - 8.75%	1.98% - 8.75%
Costa Rican colon loans	10% - 19%	10% - 18.25%

Future payments on long-term debt as of March 31, 2005 are as follows:


Year	Amount
2006	$	3,173,378
2007		3,761,912
2008		16,205,343
2009		4,437,002
2010		2,801,701
Thereafter		2,576,398

$15.9 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 $399,000 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 $13.6 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 storage freezers. Avicola has guaranteed the Company’s obligation under this Lease Agreement, which guarantee was valued at $2.8 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.

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

On December 27, 2004, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Industrias Avicolas Integradas, S.A, a Nicaraguan corporation (“Indavinsa”), pursuant to which the Company acquired $6.3 million of assets (the “Purchase Amount”) comprised of (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) certain of Indavinsa’s trademarks, formulas and customer lists (the “Intangible Assets”) valued at approximately $820,000 using a discounted cash flow projection, 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 (collectively, the “Purchase Price”). In Nicaragua, Indavinsa is the fourth largest producer of broiler products, and the third largest producer of animal feed products.

Except for one parcel of land with an appraised value of $250,000, none of the acquired assets are encumbered based upon background investigations performed on such assets.

On February 20, 2003, Port Ventures, S.A. (“Port Ventures”) and As de Oros, a wholly owned subsidiary of the Company prior to its merger with Pipasa in fiscal 2004, entered into a Stock Purchase Agreement pursuant to which As de Oros agreed to acquire from Port Ventures 2,040 shares of common stock of Logistica, representing 51% of the issued and outstanding shares of capital stock of Logistica, for a purchase price of US $2,580,000. Subsequently, As de Oros merged with Pipasa and Pipasa assumed any and all rights and obligations under this Stock Purchase Agreement. The Company expects to obtain more information regarding when, and if, the definitive approval of the Government of Costa Rica is expected to be obtained during fiscal year 2005 and to re-evaluate its alternatives at such time. No assurances can be made as to whether and when this acquisition is going to be concluded and the effect such acquisition would have on the financial condition of the Company if concluded.

In April 14, 2005, the Company entered into a non-binding letter of intent with Indavinsa, regarding an investment in or acquisition in Indavinsa, which primarily operates a poultry segment . Pursuant to the letter of intent, the Company has been granted the exclusive right for an indefinite period, however management estimates a negotiation period will take up to approximately 6 months with Indavinsa regarding an investment in or acquisition of Indavinsa, which primarily operates a poultry segment. Under the letter of intent, Indavinsa has agreed for an indefinite period to, among other things (i) provide the Company audited financial statements; (ii) disclose to the Company any information requested by the Company regarding Indavinsa’s business, operations, licenses, assets, debts and liabilities; (iii) continue to maintain its operations in good faith; and (iv) refrain from entering into any agreement to sell, dispose or transfer its business, assets or controlling shares, with any party other than the Company. There can be no assurances that Rica and Indavinsa will ever agree to consummate any form of transaction and, if a transaction is consummated, the timing of such transaction.

In April 14, 2005, the Company entered into a non-binding letter of intent with Avicola Core Etuba Ltda. (“Core”), a Brazilian corporation engaged in the production and distribution of poultry, regarding an investment in or acquisition of Core. Pursuant to the letter of intent, the Company has been granted the exclusive right for six months to negotiate with Core regarding an investment in or acquisition of Core. Under the letter of intent, Core has agreed for a period of six months to, among other things (i) provide the Company audited financial statements; (ii) disclose to the Company any information requested by the Company regarding Core’s business, operations, licenses, assets, debts and liabilities; (iii) continue to maintain its operations in good faith; and (iv) refrain from entering into any agreement to sell, dispose or transfer its business, assets or controlling shares, with any party other than the Company. There can be no assurances that Rica and Core will ever agree to consummate any form of transaction and, if a transaction is consummated, the timing of such transaction.

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 acquisition 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 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 whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If impairment indicators are present, the Company must measure the fair value of the assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-lived Assets” to determine if adjustments are to be recorded. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective asset.

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’s internal and external legal counsel to determine the amount of any claims and the likelihood that such claims will be successful. Accounting for contingencies such as environmental and legal matters requires us to use our judgment. The outcome of some of these cases and the monetary or other awards can be very difficult to estimate, so that an error in the estimate can have very significant, but unpredictable effects on the Company.

Provision for severance pay: At the present time, labor laws in Costa Rica require all companies to make a severance payment under certain conditions. This law requires all companies in Costa Rica to make a payment equivalent to 5.83% of an employee’s yearly gross salary for every year of employment up to 8 years of labor, as part of a severance payment upon the termination of an employee. This benefit is payable after the employee’s death, retirement, or termination without cause. An employee who resigns voluntarily or is terminated for cause forfeits his right to any severance benefit. Since 1991, the Company has waived the 8-year limit dictated by the labor law, and pays severance based on years of service. The Company is also required by Costa Rican law to deposit an additional 3% of each employee’s yearly gross salary into a pension fund. The Company deposits every month 4.0% 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.

Financial instruments: 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 is not involved in speculative trading and generally does not hedge anticipated transactions beyond 6 months. The Company accounts for its futures transactions in accordance with the Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Company must asses whether contracts effectively meet risk reduction criteria according to Company’s policy to determine proper accounting for the transaction.

Contingent liabilities: In the course of its operations, the Company could be subject to lawsuits and other claims which would require to assess the likelihood of any adverse judgments or outcomes, as well as potential ranges of probable losses. The Company accounts for contingent liabilities in accordance with SFAS 5 “ Accounting for Contingencies” (“SFAS 5”) and must assess whether a contingent liability meet the criteria required by SFAS 5, to record a provision. A determination of the amount of provision for these contingencies that would be required, if any, are made after considerable analysis of each individual issue. The provisioned amounts may change in the future due to changes in the Company’s assumptions, the effectiveness of strategies or other factors beyond the Company’s control.

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 subsidiary’ actual results in any particular year will not differ from the amounts indicated below.

Foreign Exchange Risk

The subsidiaries of the Company operate in Costa Rica and are exposed to market risk from changes in U.S. currency exchange rates. Foreign exchange risk derives from the fact that the Company makes its payments in U.S. dollars for the majority of its imported raw materials and bank facilities, and its revenues are mostly denominated in colones. The Company does not currently maintain a trading portfolio and does not utilize derivative financial instruments to manage such risks. To mitigate its exposure to variations in devaluations, the Company periodically increases sales prices of some of its products during the year, varies the product mix to those with higher profit and seeks efficiencies in its costs. In addition, the company seeks to increase its exports sales.

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 (“BCCR”). For the last 20 years, the BCCR has utilized the crawling peg method whereby the colon is devalued daily on a systematic basis.

As of March 31, 2005, the Company had outstanding indebtedness of approximately $27.7 million denominated in U.S. dollars. The potential foreign exchange loss resulting from a hypothetical 10% increase during the six months ended March 31, 2005 in the devaluation of the colon/dollar exchange rate would be approximately $124,000. 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 March 31, 2005, the Company had outstanding a total of approximately $41.0 million in loans which bear variable interest rates, based primarily on LIBOR or Prime Rate for loans in U.S. dollars and the Basic Rate as established by the BCCR for loans in colones. A hypothetical, simultaneous and unfavorable change of 10% in the Company’s variable rate in effect for the six months ended March 31, 2005, would result in a potential increase in interest expense of approximately $256,000. The sensitivity analysis model may overstate the impact of the Company’s interest rate risk, as uniform increases of all interest rates applicable to its financial liabilities are unlikely to occur simultaneously.

Commodity Risk

The Company imports all of its corn and soybean meal, the primary ingredients in chicken feed, from the United States. Fluctuations in the price of corn may significantly affect the Company’s profit margin. The price of corn and soybean meal, like most grain commodities, is fairly volatile and requires constant and daily hedging in order to minimize the effect of price increases on the Company’s profit margin.

The Company purchases its corn using commodity futures contract prices dictated by 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 generally 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 Company purchases its soybean meal through a company in Costa Rica, INOLASA, in which the Company holds a 10% equity interest. In Costa Rica, there is an applicable 5% tax for soybean meal imports, which is not levied if such imports are purchased through INOLASA. If for any reason INOLASA cannot deliver the soybean meal to the Company, the Company can buy its soybean meal directly from the CBOT. Thus far, the Company has never had to purchase soybean meal directly from the CBOT.

The Company accounts for its futures transactions in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The contracts that effectively meet risk reduction criteria are recorded using hedge accounting. Derivatives that are not hedges are adjusted to fair value through income. No ineffectiveness was recognized on cash flow hedges during the six months ended March 31, 2005 and 2004 Any gains or losses related to cash flow hedges, are generally recognized within the following month.

For the six months ended March 31, 2005, 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 $1,477,000.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the 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 Section 13a-15(e) and 15d-15(3) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls over financial reporting that occurred during the Company’s second fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002 require an assessment of the effectiveness of the Company’s internal controls over financial reporting beginning with our Annual Report on Form 10-K for the fiscal year ending September 30, 2006. The Company’s independent auditors will be required to confirm in writing whether management’s assessment of the effectiveness of the internal controls over financial reporting is fairly stated in all material respects, and separately report on whether they believe management maintained, in all material respects, effective internal control over financial reporting as of September 30, 2006.

This process will be resource and time consuming, and will require significant attention of management. Management is currently in the process of interviewing outside consultants to assist in this process. Management cannot state that material weaknesses in internal controls will not be determined. Management also cannot state that the process of evaluation and the auditor’s attestation will be completed on time. If a material weakness is discovered, corrective action may be time consuming, costly and further divert the attention of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market’s confidence in the Company’s financial statements and harm the Company’s stock price, especially if a restatement of financial statements for past periods is required.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Please see “Note 8 – Legal Proceedings” 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. UNREGISTERED SALES OF EQUITY 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

On March 4, 2005 the Company held its 2005 Annual Meeting of Shareholders (the “2005 Annual Meeting”), at 12 noon EST, at the offices of Pipasa in Belen, Heredia, Costa Rica, to consider and vote upon the following matters:

To elect eight members to the Company’s Board of Directors to serve until the next Annual Meeting of Shareholders of the Company or until their successors are duly elected and qualified; and

To consider and vote upon a proposal to approve and ratify the selection of Stonefield Josephson, Inc as the Company’s independent auditors for the fiscal year ended September 30, 2005.

The number of outstanding shares of the Company’s common stock as of January 26, 2005, the record date for the 2005 Annual Meeting, was 12,864,321, out of which a total of 12,683,025 shares were represented in person or proxy at the 2005 Annual Meeting.

The following directors were elected at the 2005 Annual Meeting: (i) Victor Oconitrillo, (ii) Eladio Villalta, (iii) Carlos Ceciliano, (iv) Alfonso Gutierrez, (v) Alfred Smith, IV, (vi) Luis Lauredo, (vii) Jack Peeples and (viii) Manuel Escobar.

The following table sets forth the number of votes cast for, against or withheld for each director nominee, as well as the number of abstentions and broker non-votes as to each such director nominee:


Director Nominee	Votes Cast For	Votes Cast Against	Votes Withheld	Abstentions	Broker Non-Votes
Victor Oconitrillo	12,675,045	—	7,980	—	—
Eladio Villalta	12,675,045	—	7,980	—	—
Carlos Ceciliano	12,675,045	—	7,980	—	—
Alfonso Gutierrez	12,675,045	—	7,980	—	—
Alfred Smith	12,675,045	—	8,080	—	—
Luis Lauredo	12,675,199	—	7,826	—	—
Jack Peeples	12,675,199	—	7,826	—	—
Manuel Escobar	12,674,949	—	8,076	—	—

With respect to the proposal to approve of and ratify the selection of Stonefield Josephson, Inc. as the Company’s independent auditors for the fiscal year ending September 30, 2005: (i) 12,674,474 votes were cast for such proposal, (ii) 812 votes were cast against such proposal and (ii) 7,739 shares abstained from voting on such proposal. No votes were withheld nor were there any broker non-votes with respect to such proposal. Accordingly, the proposal to approve of and ratify the Stonefield Josephson, Inc. as the Company’s independent auditors for the fiscal year ended September 30, 2005 was approved by the shareholders.

ITEM 5. OTHER INFORMATION

Central American Free Trade Agreement Update

The United States has concluded negotiations with the Dominican Republic and five Central American countries, including Costa Rica, Guatemala, Honduras, Nicaragua and El Salvador, to establish a Central American Free Trade Agreement (“RD-CAFTA”), which among other things, the establishment of quotas for chicken imports to Costa Rica. All of the RD-CAFTA participants have reached an agreement addresses the reduction of restrictions on the export of broiler meat by the United States to these Central American countries. The Costa Rican poultry industry has been actively participating in the CAFTA negotiations with respect to with respect to quotas for poultry imports. Pursuant to such agreement, quotas for poultry imports will gradually increase over a period from approximately twelve to seventeen years. Currently, the respective Congress of Guatemala, Honduras and El Salvador have ratified the RD-CAFTA. The respective Congress of the United States and Nicaragua have began the process of ratifying the RD-CAFTA . The Costa Rican government has not yet submitted the RD-CAFTA for Congress approval.

ITEM 6. EXHIBITS

The following exhibits are filed with this report


Exhibit No.		Exhibit Description
3.1		Amended and Restated Articles of Incorporation of the Company (1)

3.2		Amended and Restated Bylaws of the Company (2)

10.1		Trust Agreement, dated September 22, 2003, by and between Corporacion Pipasa, S.A. and Corporacion As de Oros, S.A., as Trustors, Consultores Financieros Cofin S.A., as Trustee and various of the Company’s lenders (translated from Spanish), as amended (3)

10.2		Amendment to Trust Agreement, dated May 21, 2004, by and between Corporacion Pipasa, S.A. and Corporacion As de Oros, S.A., as Trustors, Banco Improsa, S.A. as Trustee and various of the Company’s lenders (translated from Spanish) (4)

10.3		Consulting Agreement by and between the Corporacion Pipasa, S.A. and Grupo SAMA, S.A.*

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

*	Filed herewith

**	Furnished herewith.

1	Incorporated by Reference to the Company’s 10-K/A, as filed with the Commission on July 28, 2003.

2	Incorporated by Reference to the Company’s 10-K, as filed with the Commission on January 3, 2005.

3	Incorporated by Reference to the Company’s Form 8-K/A, as filed with the Commission on October 9, 2003.

4	Incorporated by Reference to the Company’s Form 10-Q, as filed with the Commission on August 16, 2004.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	RICA FOODS, INC.

Dated: May 13, 2005	By	/s/ PEDRO DOBLES
		Pedro Dobles
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Dated: May 13, 2005		/s/ PEDRO DOBLES
		Pedro Dobles
		Chief Executive Officer


Dated: May 13, 2005		/s/ GUSTAVO BARBOZA
		Gustavo Barboza
		Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Exhibit Description
10.3		Consulting Agreement by and between the Corporacion Pipasa, S.A. and Grupo SAMA, S.A.*

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

*	Filed herewith

**	Furnished herewith

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