20-F 1 bi2985.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 20-F ---------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 Commission File Number: 333-7480 INDUSTRIAS BACHOCO, S.A. DE C.V. (Exact name of Registrant as specified in its charter) BACHOCO INDUSTRIES (Translation of Registrant's name into English) THE UNITED MEXICAN STATES (Jurisdiction of incorporation or organization) Avenida Tecnologico No. 401 Ciudad Industrial C.P. 38010 Celaya, Guanajuato, Mexico (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------------------------ ----------------------------------------- American Depositary Shares, each New York Stock Exchange representing six Units, each Unit consisting of one Series B Share and one Series L Share. Securities Registered or to be Registered pursuant to Section 12(g) of the Act: None. Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None. Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: Series B Capital Stock 450,000,000 Shares Series L Capital Stock 150,000,000 Shares 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 which financial statement item the registrant has elected to follow: Item 17 [ ] Item 18 [X] ================================================================================ TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS....................... 1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..................................... 1 ITEM 3. KEY INFORMATION............................................................. 1 ITEM 4. INFORMATION ON THE COMPANY.................................................. 10 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................ 26 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................................. 40 ITEM 7. MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS........................... 47 ITEM 8. FINANCIAL INFORMATION....................................................... 49 ITEM 9. THE OFFER AND LISTING....................................................... 51 ITEM 10. ADDITIONAL INFORMATION...................................................... 54 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................. 70 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...................... 72 PART II ITEM 13. DEFAULT, DIVIDEND, ARREARAGES AND DELINQUENCIES............................. 72 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 72 ITEM 15. CONTROLS AND PROCEDURES..................................................... 72 ITEM 16. [RESERVED].................................................................. 73 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT............................................ 73 ITEM 16B. CODE OF ETHICS.............................................................. 73 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................... 73 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.................. 74 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS...... 74 PART III ITEM 17. FINANCIAL STATEMENTS........................................................ 74 ITEM 18. FINANCIAL STATEMENTS........................................................ 74 ITEM 19. EXHIBITS.................................................................... 74 INDEX OF EXHIBITS........................................................................ 74
i Industrias Bachoco, S.A. de C.V. is a holding company with no operations other than holding the stock of its subsidiaries. Its principal operating subsidiary is Bachoco, S.A. de C.V. ("BSACV"), which owns the principal operating assets of Industrias Bachoco, S.A. de C.V. and accounted for 92.4% of consolidated total assets on December 31, 2004. References herein to "Bachoco," "we," "us," "our", "its" or the "Company" are, unless the context requires otherwise, to Industrias Bachoco, S.A. de C.V. and its consolidated subsidiaries as a whole. We are incorporated under the laws of the United Mexican States ("Mexico"), and all of our operations are in Mexico. Our principal executive offices are located at Avenida Tecnologico No. 401, Ciudad Industrial C.P. 38010, Celaya, Guanajuato, Mexico, and our telephone number is (011) (52) (461) 618-3500. PRESENTATION OF INFORMATION We publish our financial statements in Mexican pesos and present our financial statements in accordance with generally accepted accounting principles in Mexico ("Mexican GAAP"). Mexican GAAP requires restatement of all financial statements to constant pesos as of the date of the most recent balance sheet presented. Except as otherwise indicated, all data in both the financial statements included below in Item 18 (which together with the attached notes constitute the "consolidated financial statements") and the selected financial information included throughout this Form 20-F (this "Annual Report") have been restated in constant pesos as of December 31, 2004. Mexican GAAP differs in certain respects from generally accepted accounting principles in the United States ("U.S. GAAP"). For a discussion of certain significant differences between Mexican GAAP and U.S. GAAP as they relate to us, together with a reconciliation of operating income, net income and total stockholders' equity to U.S. GAAP, and a condensed statement of cash flows under U.S. GAAP, see Note 17 to the consolidated financial statements. The effect of price-level restatement under Mexican GAAP has not been reversed in the reconciliation to U.S. GAAP. See Note 17 to the consolidated financial statements. References herein to "U.S. dollars," "U.S.$" or "$" are to the lawful currency of the United States. References herein to "pesos" or "Ps." are to the lawful currency of Mexico. This Annual Report contains translations of certain peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, such U.S. dollar amounts have been translated from pesos at an exchange rate of Ps.11.154 to U.S.$1.00, the exchange rate on December 31, 2004. As used herein, the term "tonnes" refers to metric tons of 1,000 kilograms (equal to 2,204.6 pounds) and the term "billion" refers to one thousand million (1,000,000,000). One square meter is equivalent to 10.764 square feet. MARKET DATA This Annual Report contains certain statistical information regarding the Mexican chicken, beef, egg, feed and swine markets and our market share. We have obtained this information from a variety of sources, including the producers' associations Union Nacional de Avicultores ("UNA"); Consejo Nacional Agropecuario ("CNA") and Consejo Mexicano de Porcicultura ("CMP"), as well as Banco de Mexico ("Mexican Central Bank"); Secretaria de Agricultura, Ganaderia, Desarrollo Rural, Pesca y Alimentos ("Ministry of Agriculture, Livestock, Rural Development, Fishing and Food" or "SAGARPA") and publications of the U.S. Department of Agriculture ("USDA"). The producers' associations rely principally on data provided by their members. Information for which no source is cited was prepared by us on the basis of our knowledge of the Mexican chicken, egg, feed and swine markets and the wide variety of information available regarding these markets. The methodology and terminology used by different sources are not always consistent, and data from different sources are not readily comparable. ii FORWARD-LOOKING STATEMENTS We may from time to time make written or oral forward-looking statements in our periodic reports to the Securities and Exchange Commission on Forms 20-F and 6-K, in our annual report to stockholders, in offering circulars and prospectuses, in press releases and other written materials and in oral statements made by one of our officers, directors or employees to analysts, institutional investors, representatives of the media and others. Examples of such forward-looking statements include, but are not limited to: (i) projections of revenues, income (or loss), earnings (or loss) per share, capital expenditures, dividends, capital structure or other financial items or ratios; (ii) statements of our plans, objectives or goals or those of our management, including those relating to new contracts; (iii) statements about future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believe," "anticipate," "plan," "expect," "intend," "target," "estimate," "project," "predict," "forecast," "guideline," "should" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve inherent risks and uncertainties, and a number of unexpected changes could cause actual results to deviate from our plans, objectives, expectations, estimates and intentions. We recognize that the accuracy of our predictions and our ability to follow through on our intentions depend on factors beyond our control. The potential risks are many and varied, but include unexpected changes in to: . economic, weather and political conditions; . raw material prices; . competitive conditions; and . demand for chicken, eggs, feed and swine. iii PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. ITEM 3. KEY INFORMATION SELECTED FINANCIAL DATA The information set forth below is derived from Bachoco's consolidated financial statements, which are included in Item 18. In this disclosure, we explain the figures and year-to-year changes in our consolidated financial statements. In preparing the consolidated financial statements, we followed Mexican GAAP, which differs in certain respects from U.S. GAAP. Note 17 to the consolidated financial statements provides a description of the main differences between Mexican GAAP and U.S. GAAP as they relate to us; a reconciliation to U.S. GAAP of total stockholders' equity, net income and operating income, and a condensed statement of cash flows under U.S. GAAP as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004. Our financial statements were prepared pursuant to Bulletin B-10, as amended, and Bulletin B-12, issued by the Mexican Institute of Public Accountants, which became effective on January 1, 1990. Bulletin B-10 is designed to account for the effects of inflation on financial disclosures by requiring us: . restate non-monetary assets at current replacement cost or by using the Mexican National Consumer Price Index ("NCPI"); . restate non-monetary liabilities using the NCPI; . restate the components of stockholders' equity using the NCPI; and . record gains or losses in purchasing power that result from the monetary liabilities or assets that we hold. Bulletin B-10 also requires restatement of all financial statements in constant pesos as of the date of the most recent balance sheet presented. Except as otherwise indicated, we have restated all financial information taken from the financial statements or derived from them, as explained below, in constant pesos as of December 31, 2004. Bulletin B-12 requires that the statement of changes in financial position reconcile the differences between the restated historical balance sheet and the current balance sheet. The effects of price-level restatement under Mexican GAAP have not been reversed in the reconciliation to U.S. GAAP. See Note 17 to the consolidated financial statements.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2000 2001 2002 --------------- --------------- ---------------- (millions of constant pesos as of December 31, 2004)(1) INCOME STATEMENT DATA Mexican GAAP: Net revenues ........................... Ps. 11,090.0 Ps. 11,158.6 Ps. 11,328.8 Cost of sales ........................ 7,922.4 8,167.9 8,403.7 --------------- --------------- ---------------- Gross profit ......................... 3,167.5 2,990.7 2,925.0 Operating income ..................... 1,809.3 1,492.4 1,358.4 Comprehensive financing income (loss) 163.7 127.7 15.7 Majority Net income .................. 1,478.0 1,249.4 1,619.3 Majority Net income per Unit(3) ...... 4.97 4.19 5.43 Majority Net income per ADS(4) ....... 29.8 25.1 32.6 Dividends per Unit(5) ................ 0.66 1.25 1.02 Weighted average Units outstanding (thousands) ......................... 296,124 297,454 297,898 U.S. GAAP: Net revenues ........................... Ps. 11,090.0 Ps. 11,158.6 Ps. 11,328.8 Cost of sales ........................ 7,922.4 8,167.9 8,403.7 --------------- --------------- ---------------- Gross profit ......................... 3,167.5 2,990.7 2,925.0 Operating income ..................... 1,810.0 1,490.5 1,372.8 Comprehensive financing income (loss) 129.6 100.4 12.0 Majority Net income .................. Ps. 1,507.3 Ps. 1,265.0 Ps. 1,638.1 Majority Net income per Unit(3) ...... 5.1 4.25 5.50 Majority Net income per ADS(4) ....... 30.5 25.5 33.0 Dividends per Unit(5) ................ 0.66 1.25 1.02 STATEMENT OF FINANCIAL POSITION DATA Mexican GAAP: Cash and cash equivalents ............ Ps. 1,442.0 Ps. 1,352.2 Ps. 1,855.0 Property, plant and equipment ........ 7,576.0 7,858.6 7,800.6 Total assets ......................... 11,621.4 12,172.9 12,648.5 Short-term debt(6) ................... 199.8 171.8 128.7 Long-term debt ....................... 717.3 180.0 80.2 Stockholders' equity ................. 8,448.2 9,131.4 10,362.1 U.S. GAAP: Cash and cash equivalents ............ Ps. 1,442.0 Ps. 1,352.2 Ps. 1,855.0 Property, plant and equipment ........ 7,583.1 7,893.1 7,837.3 Total assets ......................... Ps. 11,628.7 Ps. 12,200.0 Ps. 12,702.6 Short-term debt(6) ................... 199.8 171.8 128.7 Long-term debt ....................... 717.3 180.0 80.2 Stockholders' equity ................. 8,410.2 9,112.4 10,365.4 SELECTED OPERATING DATA Sales volume (thousands of tonnes): Chicken ............................ 601.1 662.2 665.4 Eggs ............................... 70.0 85.6 131.7 Swine .............................. 9.0 9.0 9.0 Feed ............................... 292.4 346.0 324.7 Gross margin(%) ...................... 28.6% 26.8% 25.8% Operating margin(%) .................. 16.3% 13.4% 12.0% Net margin(%) ........................ 13.3% 11.2% 14.3% Total employees ...................... 16,396 18,482 18,306 AS OF AND FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2003 2004 2004(2) --------------- --------------- ---------------- (millions of constant pesos as (millions of of December 31, 2004)(1) U.S. dollars)(2) INCOME STATEMENT DATA Mexican GAAP: Net revenues ........................... Ps. 11,309.3 Ps. 13,299.4 U.S.$ 1,192.3 Cost of sales ........................ 9,200.0 10,785.7 967.0 --------------- --------------- ---------------- Gross profit ......................... 2,109.3 2,513.7 225.4 Operating income ..................... 454.6 853.7 76.5 Comprehensive financing income (loss) 131.6 -71.5 -6.4 Majority Net income .................. 567.5 706.6 63.4 Majority Net income per Unit(3) ...... 1.88 2.34 0.21 Majority Net income per ADS(4) ....... 11.3 14.0 1.26 Dividends per Unit(5) ................ 1.07 0.82 0.07 Weighted average Units outstanding (thousands) ......................... 299,369 299,630 299,630 U.S. GAAP: ............................. . Net revenues ........................... Ps. 11,331.9 Ps. 13,320.6 U.S.$ 1,194.2 Cost of sales ........................ 9,200.0 10,785.7 967.0 --------------- --------------- ---------------- Gross profit ......................... 2,131.9 2,534.9 227.2 Operating income ..................... 491.3 887.2 79.5 Comprehensive financing income (loss) 122.4 -63.5 -5.7 Majority Net income .................. Ps. 529.2 Ps. 740.3 U.S.$ 66.4 Majority Net income per Unit(3) ...... 1.77 2.47 0.22 Majority Net income per ADS(4) ....... 10.6 14.8 1.33 Dividends per Unit(5) ................ 1.07 0.82 0.07 STATEMENT OF FINANCIAL POSITION DATA Mexican GAAP: Cash and cash equivalents ............ Ps. 1,650.7 Ps. 2,338.1 U.S.$ 209.6 Property, plant and equipment ........ 8,210.0 8,228.0 737.7 Total assets ......................... 13,048.7 13,436.9 1,204.7 Short-term debt(6) ................... 61.1 99.7 8.9 Long-term debt ....................... 97.7 72.5 6.5 Stockholders' equity ................. 10,582.0 10,875.5 975.0 U.S. GAAP: Cash and cash equivalents ............ Ps. 1,650.7 Ps. 2,338.1 U.S.$ 209.6 Property, plant and equipment ........ 8,254.2 8,278.4 742.2 Total assets ......................... Ps. 13,066.0 Ps. 13,499.1 1,210.3 Short-term debt(6) ................... 61.1 99.7 8.9 Long-term debt ....................... 97.7 72.5 6.5 Stockholders' equity ................. 10,552.9 10,886.3 976.0 SELECTED OPERATING DATA Sales volume (thousands of tonnes): Chicken ............................ 655.4 733.0 Eggs ............................... 132.1 138.08 Swine .............................. 8.5 9.07 Feed ............................... 316.2 320.7 Gross margin(%) ...................... 18.7% 18.9% Operating margin(%) .................. 4.0% 6.4% Net margin(%) ........................ 5.0% 5.3% Total employees ...................... 18,495 18,896
(1) Except per Unit and per ADS amounts and operating data. (2) Peso amounts have been translated into U.S. dollars, solely for the convenience of the reader, at the rate of Ps.11.154 per U.S. dollar. (3) Net income per Unit has been computed based on the weighted average number of common shares outstanding. (4) Net income per ADS has been computed by multiplying net income per Unit by six, to reflect the ratio of six Units per ADS. (5) Dividends per Unit has been computed by dividing the total amount of dividends paid (in constant pesos as of December 31, 2004) by the weighted average units outstanding. (6) Includes notes payable to banks and current portion of long-term debt. 2 EXCHANGE RATES After the events of September 11th, the volatility of the peso increased. In November and December 2001, however, the peso's volatility subsided and the peso appreciated against the U.S. dollar. The Mexican peso remained stable during the first four months of 2002. Its volatility increased, however, during the rest of the year. Growth in the Mexican economy was sluggish in 2002 and the beginning of 2003, and the peso depreciated by 12.2% against the U.S. dollar between December 31, 2001 and December 31, 2002. The Mexican peso showed high levels of volatility during the first four months of 2003; it appreciated and remained stable at the middle of the year and in the last four months of the year the Mexican peso increased in its volatility. Overall, the peso declined in 2003. In 2004, the Mexican peso showed volatility for the first four months of the year with a general trend to depreciate with respect to the U.S. dollar; in the following months the Mexican peso fluctuated around the same level, and finally showed a general trend to appreciate with respect to the U.S. dollar, mainly in the last two months of the year. At the end of 2004, it finished stronger compared with respect to the end of 2003. We cannot assure you that the Mexican government will maintain its current strategies to the peso, or that the value of the peso will not fluctuate significantly in the future. The following table sets forth for the periods indicated the high, low, average and period-end exchange rates for the purchase and sale of U.S. dollars (presented in each case as the average between such purchase and sale rates).
EXCHANGE RATE(1) (in current pesos per U.S. dollar) ----------------------------------------------- YEAR ENDED DECEMBER 31, HIGH LOW AVERAGE(2) YEAR END ---------------------------- ---------- ---------- ---------- -------- 2000 .................... 10.09 9.18 9.47 9.62 2001 .................... 9.97 8.95 9.33 9.16 2002 .................... 10.43 9.00 9.66 10.43 2003 .................... 11.41 10.11 10.79 11.24 2004 .................... 11.64 10.81 11.29 11.15
(1) The exchange rates are the noon buying rates in New York City for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York (the "noon buying rate"). (2) Average of month-end rates for each period shown. EXCHANGE RATE(1) (in current pesos per U.S. dollar) ----------------------- PERIOD HIGH LOW ---------------------------- ---------- ---------- November 2004 ........... 11.53 11.24 December 2004 ........... 11.33 11.11 January 2005 ............ 11.41 11.17 February 2005 ........... 11.21 11.04 March 2005 .............. 11.33 10.98 April 2005 .............. 11.23 11.04 May 2005 ................ 11.03 10.89 ---------- (1) The exchange rates are the noon buying rates in New York City for cable transfers in pesos as certified for customs purposes by the Federal Reserve Bank of New York. 3 RISK FACTORS RISKS RELATING TO MEXICO, OTHER EMERGING MARKET COUNTRIES AND THE U.S. ECONOMY Mexico has experienced adverse economic conditions Mexico has experienced a prolonged period of slow growth since 2001, primarily as a result of the downturn in the U.S. economy. In 2002, Mexico's gross domestic product, or GDP, increased by 0.9% and the inflation rate was 5.7%. In 2003, GDP increased by 1.3% and the inflation rate was 3.98%. In 2004, Mexico's domestic product improved and increased by 4.4% and the inflation rate was 5.19%. For 2005, the Mexican government has estimated that GDP growth will be 4.0% and the inflation rate will be between 3.0% and 4.0%, though these estimates may not prove to be accurate. If the Mexican economy falls into a recession or if inflation and interest rates increase significantly, consumers may find it difficult to pay for the products we offer. This and other effects of recession or increased inflation and interest rates could have serious adverse consequences on our business, financial condition and results of operations. Depreciation or fluctuation of the peso relative to the U.S. dollar could adversely affect our financial condition and results of operations The single largest component of our cost of sales, our feed, is comprised partially of ingredients we purchase in the United States, where prices are denominated in U.S. dollars. In addition, the prices of ingredients we purchase in Mexico may be influenced by U.S. commodity markets. Therefore, should the peso fall relative to the U.S. dollar, both the cost of our operations and our debt payments would increase. Any future depreciation or devaluation of the peso may result in further net foreign exchange losses. In 2004, the Mexican peso appreciated with respect to the U.S. dollar by 0.8% at year end, whereas the average value of the Mexican peso against the U.S. dollar was 4.4% lower, since the peso appreciated at the end of the year. In 2003, the peso depreciated against the U.S. dollar by 7.3% at year-end, and the average value of the peso against the U.S. dollar during 2003 was 10.5% lower than in 2002. In 2002, the peso depreciated against the U.S. dollar by 12.2% at year-end, and the average value of the peso against the U.S. dollar during 2002 was 3.4% lower than in 2001. In 2001, the peso appreciated against the U.S. dollar by 5.0% at year-end, and the average value of the peso against the U.S. dollar during 2001 was 1.5% higher than in 2000. Severe devaluation or depreciation of the peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert pesos into U.S. dollars for the purpose of making timely payments of interest and principal on our indebtedness. While the Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer other currencies out of Mexico, the government could institute restrictive exchange rate policies in the future. Currency fluctuations will probably continue to affect our revenues and expenses. Furthermore, fluctuations in the exchange rate between the peso and the U.S. dollar will also affect the U.S. dollar equivalent of the peso price of the Units (one "Series B Share" and one "Series L Share") on the Mexican Stock Exchange and the price of American Depository Shares ("ADSs") on the New York Stock Exchange. Because we pay cash dividends in pesos, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of American Depository Receipts ("ADRs") upon conversion of such cash dividends by the Depositary. 4 High levels of inflation and high interest rates in Mexico could adversely affect our financial condition and results of operations Mexico has experienced high levels of inflation and high domestic interest rates. The annual rate of inflation, as measured by changes in the National Consumer Price Index was 5.19% in 2004, 3.98% in 2003, and 5.7% in 2002. Inflation for the first four months of 2005 was 1.15% according to the Mexican Central Bank. Interest rates on 28-day Mexican treasury bills, or Cetes, averaged during 2004, 6.82%; 6.23% during 2003, according to Banamex. On May 10, 2005, the 28-day Cetes rate was 9.81%. High interest rates in Mexico could adversely affect our costs. Our earnings may also be affected by changes in interest rates due to the impact those changes have on our variable-rate debt instruments and beneficed by the interest we earn in our cash balance. Political events in Mexico, including transition to a new presidential administration, could affect Mexican economic policy and our operations The national elections held in July 2000 ended 71 years of rule by the Institutional Revolutionary Party ("PRI") with the election of President Vicente Fox, a member of the National Action Party ("PAN"), and resulted in the increased representation of opposition parties in the Mexican Congress and in mayoral and gubernatorial positions. There has been a lack of alignment between the legislature and the President that has resulted in deadlock and has prevented the timely implementation of economic reforms, which we believe has had an adverse impact on the Mexican economy. Further delays may continue to materially adversely affect the Mexican economy and our business. We will have a new presidential election in 2006. Developments in other emerging market countries may adversely affect our business or the market price of our securities The market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Mexico, investors' reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers. The recent economic crisis in Argentina did not have a significant adverse effect on the Mexican economy and the value of Mexican securities. We cannot assure you that the market value of our securities will not be adversely affected by events elsewhere, especially in emerging markets. Developments in the U.S. economy may adversely affect our business Economic conditions in Mexico are heavily influenced by the condition of the U.S. economy due to various factors, including commercial trade pursuant to the North American Free Trade Agreement ("NAFTA"), U.S. investment in Mexico and emigration from Mexico to the United States. Events and conditions affecting the U.S. economy may adversely affect our business, results of operations, prospects and financial condition. 5 RISKS RELATING TO OUR ORGANIZATION The chicken industry is characterized by long-term price declines and cyclical periods The Mexican chicken industry, like the chicken industry in other countries, has been characterized by a long-term decline in prices in real terms. The industry has undergone cyclical periods of higher prices and profitability, followed by overproduction, leading to periods of lower prices and profitability. Real prices for eggs and swine in Mexico have also declined over the long term and have varied cyclically. The market that we serve is subject to volatility with respect to supply, which affects prices. We cannot assure you that future cyclicality, excess supply and downturns in real prices will not adversely affect our results. The price of feed ingredients is subject to significant volatility The largest single component of our cost of sales is the cost of ingredients used to prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and, for certain chicken products, marigold extract. The price of most of our feed ingredients is subject to significant volatility resulting from weather, the size of harvests, transportation and storage costs, governmental agricultural policies, currency exchange rates and other factors. Given the long-term declining trends in real chicken prices, we may experience difficulty or delays in passing any increase in grain costs to customers. Accordingly, increases in the prices of the main ingredients used in the preparation of feed may have a material adverse effect on our margins and results of operations. Since we purchase many feed ingredients in U.S. dollars, from time to time we may acquire financial instruments to protect us against exchange rate fluctuations. Our operations depend on raising animals and meat processing, which are subject to risks such as disease, contamination and adverse weather conditions Our operations involve raising animals and are subject to a variety of risks, including disease, contamination and adverse weather conditions. Chickens, in particular, are susceptible to infections by a variety of microbiological agents. Since 1983, the avian influenza virus ("AIV") has been widespread in the United States and in Mexico. During 2003, AIV was widespread in Asian countries and the United States, and Mexico, to avoid having the disease spread from the United States, imposed certain restrictions on the importation of chicken from affected U.S. states. During 2004 AIV was still present in Asian countries and the United States; during 2004, Mexico has been eliminating some restrictions on the importation of chicken from certain U.S. states, as the sanitary condition in those states improve. In the past we have experienced limited outbreaks of various diseases that have resulted in higher mortality rates. Meat and eggs are subject to contamination during processing and distribution. We do not believe that contamination of individual shipments during distribution would have a material adverse effect on our operations. Contamination during processing, however, could affect a larger number of our poultry products and therefore could have a more significant impact on operations. In 2002, we experienced a loss of chickens at our Peninsula Complex due to the effects of Hurricane Isidore. Future hurricanes or other adverse weather conditions could result in additional losses of inventory and damage to our plants and equipment. Our facilities near Mexico's coast are most subject to the risk of severe weather. The use of nutritional supplements and possibility of contamination expose us to risk of loss of consumer confidence in the chicken industry 6 To reduce contamination, we use specialized feedstock and nutritional supplements that have been approved by the Mexican government and meet international industry standards. We cannot assure you, however, that in the future we will not be materially adversely affected by claims or consumer concerns arising out of the use of these products in raising our animals. Our sales are entirely dependent on consumer preferences, and the loss of consumer confidence in the products sold by Mexican meat and egg producers as a result of disease, contamination or other reasons, even if not related to our own products, could have a material adverse effect on our results of operations. We face significant competition from other chicken producers in all of our geographic markets and product lines We are Mexico's largest chicken producer, but we face significant competition from other producers in all of the markets in which we sell our products. In 2004, we accounted for approximately 30.7% of total chicken production in Mexico. There are two other major vertically integrated chicken producers in Mexico, which together with Bachoco account for more than 50.0% of Mexican chicken production, with the balance distributed among approximately two hundred small- and medium-sized integrated and non-integrated producers. Each of the two other major companies has substantial financial resources and strengths in particular product lines and regions. We expect to continue to face strong competition in every market, as our existing or new competitors are likely to broaden their product lines and extend their geographic coverage. Accordingly, we cannot assure you that our performance will not be adversely affected by increased competition. We face increased competition from U.S. producers In January 2003, import quotas and most tariffs on poultry, eggs and swine were eliminated, as NAFTA. Poultry producers in the United States have developed extremely low-cost production methods and have been successful in exporting primarily frozen and further-processed poultry to other countries, especially in periods of overcapacity in the United States. As tariff barriers decline under NAFTA, U.S. producers can be expected to increase exports to Mexico, which could have a material adverse effect on our performance. In January 2003 the Mexican government imposed temporary restrictions on chicken leg quarters imported from the U.S. and both governments confirmed this safeguard in July 2003. The safeguard consists of a five-year limited poultry import measure. The measure, which became effective in 2003, includes quotas and an initial tariff of 98.8% on chicken leg quarters which will slowly decrease until it reaches 0% in 2008. We are a holding company with no substantial operations and depend on our subsidiaries for cash flow We are a holding company with no substantial operations and, consequently, we are dependent on dividends and other payments from subsidiaries for virtually all of our cash flow, including cash flow to pay taxes, service debt, make equity investments, finance the growth of subsidiaries and pay dividends to stockholders. Together with Mexican law, our ability to pay dividends may, in the future, be limited by financial covenants in debt instruments that we, or our subsidiaries, may acquire. 7 RISKS RELATING TO THE ADSS, THE UNITS AND THE SHARES The Robinson Bours family controls our management and their interests may differ from other security holders Certain members of the Robinson Bours family hold the power to elect a majority of the members of our board of directors and have the power to determine the outcome of certain other actions requiring the approval of our stockholders, including whether or not dividends are to be paid and the amount of such dividends. The Robinson Bours family has established two Mexican trusts, which they control ("Control Trust"), that together hold 496,500,000 Shares outstanding on December 31, 2004, including Units and B Units (consisting of two "Series B Shares") representing approximately 65.5% of the Series L Shares and 88.5% of the Series B Shares outstanding. Future sales of Units by the controlling stockholders may affect prevailing market prices for the ADSs and the Units The prevailing market prices for the ADSs and the Units could decline if either: . the Robinson Bours family were to sell substantial amounts of the Units, whether . directly, or . indirectly, through the Mexican trusts through which they hold the Units; or . the perception arose that such a sale could occur. The protections afforded to minority stockholders in Mexico are different from those in the United States Under Mexican law, the protections afforded to minority stockholders are different from those in the United States. In particular, the law concerning fiduciary duties of directors is not well developed, there is no procedure for class actions or stockholder derivative actions, and there are different procedural requirements for bringing stockholder lawsuits. As a result, in practice it may be more difficult for our minority stockholders of Bachoco to enforce their rights against us or our directors or our controlling stockholder than it would be for stockholders of a U.S. company. Our bylaws restrict the ability of non-Mexican stockholders to invoke the protection of their governments with respect to their rights as stockholders As required by Mexican law, our bylaws provide that non-Mexican stockholders shall be considered as Mexicans with respect to their ownership interests in Bachoco and shall be deemed to have agreed not to invoke the protection of their governments in certain circumstances. Under this provision, a non-Mexican stockholder is deemed to have agreed not to invoke the protection of its own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the stockholder's rights as a stockholder, but is not deemed to have waived any other rights it may have, including any rights under the U.S. securities laws, with respect to its investment in Bachoco. If you invoke such governmental protection in violation of this agreement, your shares could be forfeited to the Mexican government. 8 Our bylaws may only be enforced in Mexico Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws may be brought only in Mexican courts. As a result, it may be difficult for non-Mexican stockholders to enforce their stockholder rights pursuant to the bylaws. It may be difficult to enforce civil liabilities against us or our directors, officers and controlling persons We are organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, all of our assets and their assets are located in Mexico. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them. This pertains also to any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws. Holders of L Shares and L Share ADSs have limited voting rights Pursuant to our bylaws, holders of Series L Shares are entitled to vote only with respect to certain limited matters specified therein. Holders of Series L Shares can only vote on certain matters specified in our bylaws. With regard to those matters, holders of ADRs may instruct the depositary as to the exercise of the voting rights pertaining to the Series L Shares constituting the Units represented by the ADSs. Holders of Series L Shares are generally not entitled to vote in the election of the board of directors, but holders of Series L Shares do have the right to elect or appoint two directors to the board, which was reduced in April 2003 to 10 members. Members of the Robinson Bours family with ownership interests in Bachoco ("Robinson Bours Stockholders") are the beneficial owners of 65.5% of the outstanding Series L Shares and therefore have the power to elect or appoint the two directors. In addition, holders of Series L Shares are not entitled to vote on the declaration of dividends. Under Mexican law and our bylaws, the declaration, amount and payment of annual dividends are determined at a meeting of our stockholders by a majority vote of the holders of Series B Shares, usually on the recommendation of the board of directors. Non-Mexican stockholders may not be entitled to participate in future preemptive rights offerings Under Mexican law and our bylaws, if we issue new shares for cash as a part of a capital increase, we must grant our stockholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in the Company ("preemptive rights"). We can allow holders of ADSs in the United States to exercise preemptive rights in any future capital increase only in one of the following two circumstances: . we file a registration statement with the Securities and Exchange Commission with respect to that future issuance of shares; or . the offering qualifies for an exemption from the registration requirements of the Securities Act. We make no promises that we will file a registration statement with the Securities and Exchange Commission to allow holders of ADSs in the United States to participate in a preemptive rights offering. As a result, the equity interests of such holders in the Company may be diluted proportionately. In addition, under current Mexican law, it is not practicable for the depositary to sell preemptive rights and distribute the proceeds from such sales to ADS holders. 9 Corporate disclosure and accounting in Mexico may differ from other countries There may be less, or different, publicly available information about issuers of securities in Mexico than is regularly published by or about issuers of securities in other countries with highly developed capital markets. In addition, due to country-by-country differences in accounting and other reporting principles and standards, our corporate disclosures may differ in content from disclosures made under other principles and standards, such as U.S. GAAP. ITEM 4. INFORMATION ON THE COMPANY GENERAL Our legal name is Industrias Bachoco, S.A. de C.V., and we frequently refer to ourselves commercially as Bachoco. We were incorporated in Mexico on April 17, 1980. Our headquarters are located at Avenida Tecnologico No. 401, Ciudad Industrial 38010, Celaya, Guanajuato, Mexico, telephone (011) (52) (461) 618-3500. We have four principal product lines: chicken, eggs, commercial animal feed and swine. We are the largest poultry producer in Mexico. In 2004, we produced approximately 7.7 million chickens per week and accounted for approximately 30.7% of total chicken production in Mexico. As a vertically integrated producer, we control virtually all aspects of the production and distribution process, which enables us to exercise cost controls and to maintain high standards of quality, service and efficiency. With over 700 production and distribution facilities dispersed throughout Mexico, our operations include the following: . preparing feed; . breeding, hatching and growing chickens; and . processing, packaging and distributing chicken products. Sales of chicken products accounted for 78.5% of our net revenues in 2004. We are also a significant producer of commercial animal feed. We sell our feed both through distributors and directly to small producers. We began producing feed in 2000 as a result of the acquisition of 100% of the stock of Grupo Campi, S.A. de C.V. ("Grupo Campi") on December 22, 1999 for Ps.1,591.7 million. Operating principally in southeastern Mexico and the Yucatan Peninsula, Grupo Campi was the fourth largest chicken producer in Mexico and an important producer of animal feed. In 2004, we sold approximately 6,150 tonnes of feed per week to external customers, which amounted to 6.6% of our total revenues for that year. In February 2001, we reached an agreement with Avicola Cotaxtla, a broiler producer located in Veracruz, with a capacity of approximately 3 million chickens per cycle. The agreement was in a part a lease of assets and in part a contract grower agreement. As a result of this agreement, we strengthened our presence in this region of the country. 10 In September 2001, we acquired most of the assets of the egg operations of both Avicola Nochistongo and Avicola Simon Bolivar, two important producers of eggs in Mexico. With these acquisitions we emerged as one of the largest producers of eggs in Mexico: we now produce approximately 3.6 million dozen eggs per week. We are an innovator in packaging and marketing eggs. Egg sales accounted for 10.9% of our net revenues in 2004. In July 2004, we reached an agreement for renting the facilities of UPAVAT and UPATEC, a small producer of table eggs in the state of Puebla, south of Mexico city, with a capacity of about 0.75 million of lying hens. We also sell swine on the hoof to meat packers for pork product production. In 2004, sales of swine accounted for 1.1% of our net revenues. The remaining portion of our net revenues in 2004 consisted of miscellaneous poultry-related products. The following table sets forth, for each of the periods presented, the volume of chicken, feed, eggs and swine that we sold. BACHOCO SALES VOLUME (in thousands of tonnes) YEAR ENDING DECEMBER 31, ---------------------------------------------------- 2000 2001 2002 2003 2004 -------- -------- -------- -------- -------- Chicken ................. 601.1 662.2 665.4 655.5 733.0 Eggs .................... 70.0 85.6 131.7 132.1 138.1 Swine ................... 9.0 9.0 9.0 8.5 9.1 Feed .................... 292.4 346.0 324.7 316.2 320.7 Due to acquisitions, internal growth and improved efficiency, the volume of chicken we sold in 2004 showed an increase of 76.3 % over the volume we sold in 1999 (compared to an increase of 33.9% in chicken production in Mexico overall). Over the same period, our share of overall Mexican chicken production increased from 23.3% to approximately 30.7%. We improved the efficiency of the facilities we acquired to take full advantage of production capacity and distribution opportunities. The Mexican poultry industry varies regionally, and few producers operate in multiple regions. We believe we have the broadest geographic market coverage in the Mexican poultry industry and that we are one of the largest poultry suppliers in the Mexico City metropolitan region (which accounts for a significant portion of overall Mexican chicken consumption). We currently sell in every major product category and channel of distribution for poultry products within the regions that we serve. We expect to continue to do so in order to meet growing consumer demand. BACKGROUND AND OWNERSHIP STRUCTURE Founded in 1952 by the Robinson Bours family as a small commercial egg operation in the state of Sonora, we grew by expanding our existing facilities and acquiring additional facilities from other poultry producers. In 1974, we established operations in Celaya, located in the agricultural region of Bajio, to begin serving the Mexico City metropolitan region. Beginning in 1988, our management recognized the potential for growth in Mexican chicken consumption, as well as the advantages of a large, vertically integrated operation. As a result, we began to seek opportunities for geographic expansion and to increase production capacity and market share. We extended our market coverage (particularly in 1993 and 1994) by purchasing fixed assets and inventory from major regional producers that faced financial difficulties. Following each acquisition, we made substantial investments to apply our production and distribution methods and reap the benefits of vertical integration and economies of scale, improving the performance of the acquired facilities. 11 In April 1995 Robinson Bours Stockholders created a trust (the "Control Trust"), the principal purpose of which was to hold a controlling interest in our Series B Shares. Our common stock ("Common Stock") consists of Series B Shares ("Series B Shares") and Series L Shares of limited voting stock ("Series L Shares") (collectively, the "Shares"). The Shares are grouped into units. Each Unit ("Unit") consists of one Series B Share and one Series L Share. Each B Unit ("B Unit") consists of two Series B Shares. The Shares constituting each Unit or B Unit will not be separable until September 2007, at which time the Units and B Units will automatically separate into their component shares. In September 1997, we made an initial public offering of Units representing 17.25% of the outstanding Shares. Following such offering, the Control Trust held Units and B Units representing 68.0% of the outstanding Series B Shares. As of December 31, 2004, the Robinson Bours Stockholders owned Units and B Units representing 88.5% of the Series B Shares outstanding. As a result, the Robinson Bours Stockholders continue to have the power to control our Company. Members of the Robinson Bours family, together with certain of our executive officers, hold a majority of the seats on our board of directors. In April 2002, Javier Robinson Bours Castelo assumed the position of Chairman of the board of directors, replacing Enrique Robinson Bours Almada. In November 1998, we approved a stock repurchase plan (the "Repurchase Plan"), which allows us to repurchase up to 3% of the total Shares outstanding and trading on the Mexican Stock Exchange (Bolsa Mexicana de Valores), in accordance with Mexican securities laws. To execute the Repurchase Plan, we created a reserve of Ps.272.4 million (expressed in constant pesos as of December 31, 2004), which reduced retained earnings on our balance sheet. As of May 15, 2005, we had repurchased no Units. On December 22, 1999, we acquired 100% of the stock of Grupo Campi for Ps.1,591.7 million. The fourth largest chicken producer in Mexico and an important producer of animal feed, Grupo Campi operates principally in the southeastern region of Mexico and the Yucatan Peninsula. We made this acquisition as part of our overall strategy to extend our distribution network to cover the southern part of Mexico. Because the Grupo Campi production centers are located in a region where we can grow broilers efficiently, we also integrated two new complexes there. We have now completed the coordination and integration of the operations at these new complexes with the operations at the rest of our complexes. On September 20, 2001, we acquired most of the assets of the eggs business of Avicola Nochistongo, one of the ten largest producers of eggs in Mexico with operations located in the La Laguna region in north-central Mexico and a capacity of about 3 million laying hens. At the end of September 2001, we acquired most of the assets of Avicola Simon Bolivar, one of the fifteen largest producers of eggs in Mexico and a producer of broilers, with operations located in the La Laguna region in north-central Mexico with a production capacity of about 2 million laying hens and approximately 120,000 chickens per week. The assets we acquired included farms, a feed mill, a processing plant and several distribution centers. 12 With these acquisitions, we have become one of the largest producers and distributors of eggs in Mexico with a market share of approximately 8.5% in terms of volume, and we have also reinforced our leading position in the broiler industry in Mexico. During 2003, we implemented two important projects to expand the facilities at our Northwest Complex and Yucatan Peninsula Complex to increase production capacity in our chicken business. Both of these projects were completed by the end of the third quarter of 2004. These facilities are ideally suited for the expansion projects due to their sanitary status and their geographical location. Both complexes were expanded to increase capacity by approximately 50%, which will increase opportunities for potential future exports as well as for meeting consumer demand in those regions and in other regions in Mexico. The new facilities in both complexes have been equipped with the best technology available. These projects were financed with internal resources generated by our own operations. In July 2004, we reached an agreement for renting the facilities of UPAVAT and UPATEC, a small producer of table eggs in the state of Puebla, south of Mexico city, with a capacity of about 0.75 million of lying hens. This operation allows us to start the production of table eggs in southern Mexico. On February 23, 2005, the Company announced that it is evaluating the possibilities of a business relationship with Sanjor, a producer located in the Yucatan Peninsula. The Company expects to reach a decision by the end of June 2005. BUSINESS STRATEGY Over the past decade we have substantially increased our chicken production, establishing ourselves in every major product category and distribution channel for chicken and expanding to cover a geographic market in Mexico that is more widespread than any other chicken producer. We have also increased the efficiency of our production process and built a reputation for the freshness of our chicken products and quality of our customer service. The Mexican poultry industry has experienced considerable consolidation in recent years, in which we have participated. We continue to evaluate possible acquisitions of other poultry producers or production facilities from time to time and may pursue certain opportunities consistent with our business strategy. The key elements of our business strategy are as follows: . Increased market penetration through expanded distribution. We have an extensive distribution network, supported by our own transportation fleet, superior knowledge of existing wholesale channels and strategically located cold storage warehouses and facilities. Since 1992, we have substantially increased our distribution routes. We plan to continue to develop and improve our distribution network and systems in every product category and throughout our expanded geographic coverage in Mexico. . Increased service and market responsiveness. We seek to remain a leader in the Mexican poultry market by maintaining high standards of customer service and continuing to be responsive to the changing needs of varying market segments. As part of this strategy, we have structured our operations in such a way as to enable us to vary the size, weight and color of our chicken products, depending upon the particular demands of the market segment. In addition, we have decentralized order and sales services from our headquarters to our cold storage warehouses and facilities, which serve as midpoints in the distribution chain to wholesalers and local customers. This strategy allows us to stay closer to our customer base and to better cultivate growing customer segments, such as food-service operators, supermarkets and food wholesale clubs. 13 . Low-cost production and operating efficiency. We are among Mexico's lowest-cost producers and distributors of chicken, due in part to economies of scale and vertically integrated operations. We pursue on-going programs to increase operating efficiencies and reduce operating costs. . Continued brand differentiation. We have developed a brand image for premium fresh chicken and eggs in Mexico. Building on the success of our branded products to date, we seek to continue to promote our brand name through billboards, packaging, special publicity campaigns and through development of brand loyalty among wholesale and retail distributors. CAPITAL EXPENDITURES Over the last three years, we have financed our capital expenditures with resources generated by our operations. We made the following capital expenditures during the last three years: . In 2002, we made capital expenditures of Ps.288.7 million net, with which we: . continued to update our transportation fleet, farms, processing plants and feed mills; . improved our distribution network; . increased production capacity in our Northwest Complex, which is located in Culiacan. . In 2003, we made capital expenditures of Ps.794.8 million net, with which we: . continued to update our transportation fleet, farms, processing plants and feed mills; . improved and expanded our distribution network; . increased production capacity in our Northwest Complex and Yucatan Peninsula Complexs. . In 2004, we made capital expenditures of Ps.438.2 million net, with which we: . continued to update our transportation fleet, farms, processing plants and feed mills; . improved and expanded our distribution network; . increased capacity projects in our Northwest and Yucatan Peninsula Complex; and . increased production capacity of table eggs in our Northwest Complex, at Mexicali, near the border with the U.S. 14 BUSINESS OVERVIEW CHICKEN MARKET Mexican consumers value distinct characteristics in their chicken. Virtually all chicken sold by us and other major chicken producers in Mexico is fresh. Fresh chicken is a central ingredient in many traditional Mexican dishes and the leading meat consumed in Mexico according to data from UNA. Further-processed chicken, such as heat-and-serve products, frozen dinners, chicken nuggets and other similar foods, has found limited acceptance among Mexican consumers due to historical consumer preferences for fresh chicken and the fact that many Mexicans have limited freezer capacity and limited access to microwaves or other types of ovens. In the last five years, we have noticed an increased preference although limited, among Mexican consumers for further-processed fresh chicken products--mostly marinated and pre-formed chicken products. We participate significantly in the provision of these products. We estimate that further-processed chicken products currently account for approximately 5.0% of the chicken sold in Mexico. Mexican consumers, mainly in central and south Mexico, also generally prefer chicken with pronounced yellow skin pigmentation, a characteristic found mainly in our public-market and supermarket-broiler chicken products that we attain by including marigold extract in our chicken feed. We have also noticed an increased demand for smaller, whole, fresh chicken from various fast-food outlets, principally chicken roasting shops (rosticerias and asaderos), which have developed rapidly in recent years. According to data obtained from the UNA, total Mexican chicken consumption per capita increased by 17.8% from 2000 to 2004. Chicken is the leading meat consumed in Mexico, and it accounted for approximately 47.0% of all meat produced in Mexico in 2004. The following table sets forth total Mexican production of chicken, pork and beef for 2000 to 2004. MEXICAN PRODUCTION OF CHICKEN, BEEF AND PORK (in thousands of tonnes)* 2000 2001 2002 2003 2004 -------- -------- -------- -------- -------- Chicken ................. 1,936 2,067 2,187 2,290 2,390 Beef .................... 1,408 1,428 1,451 1,496 1,543 Pork .................... 1,034 1,065 1,085 1,100 1,150 *Sources: UNA for chicken and beef; USDA for pork. The Mexican chicken industry, like chicken industries in other countries, is characterized by a long-term decline in real prices in real terms in conjunction with cyclical periods of higher profitability leading to overproduction followed by periods of lower prices and lower profitability. The price recovered slightly in 2000 due to reduced supply in the first part of the year. During 2001, chicken prices declined as a result of excess supply during the first half of the year, the economic slowdown experienced by the country at the end of the year and a decrease in the cost of the main feed ingredients. In 2002, chicken prices increased slightly by approximately 2.5% over 2001, as a result of the worldwide increase in the cost of feed ingredients at the end of the year. In 2003, chicken prices decreased by approximately 4.0% over 2002, mainly due to an oversupply in domestic production that was present mainly in the second half of the year and a decrease in the purchasing power of the average consumer. In 2004, chicken prices increased by approximately by 6.7%, mainly as a result of an increase in the cost of the main feed ingredients worldwide, and a more normalized supply in Mexico during the second half of the year. We believe that Mexican chicken prices may decline further in real terms and that prices for chicken may also vary cyclically. 15 We believe that changes in Mexican chicken consumption correlate closely with changing chicken prices and their effect on consumer purchasing power. Chicken consumption increased 8.5% in 2000 due to declines in chicken prices, an increase in supply and improved economic conditions in Mexico. Consumption increased further by 6.7% in 2001 due to further declines in chicken prices and increased supply. The trend in increased consumption continued in 2002 with an increase of 5.8% due to increased supply, in 2003 with an increase of 6.1% and in 2004 with an increase of 3.4% due to a further increase of supply coming mainly from domestic production CHICKEN PRODUCTS Five principal product categories exist for fresh chicken in Mexico: live, public market, rotisserie, chicken parts and supermarket broiler. "Live" chicken is delivered alive to small independent slaughtering operations or to wholesalers that contract with independent slaughtering operations for processing. The freshly slaughtered chicken is then sold to chicken shops and other specialized retailers for sale to consumers and in some areas is sold directly to consumers by the slaughterhouse. According to UNA, live chicken accounts for approximately 30.0% by volume of the chicken sold by producers in Mexico. "Public Market" chicken is a whole broiler presented uneviscerated, generally sold within 48 hours after slaughter in public markets throughout Mexico, but primarily concentrated in the Mexico City metropolitan region. According to UNA, public market chicken accounts for approximately 26.0% by volume of the chicken sold by producers in Mexico. "Rotisserie" chicken is a whole broiler presented eviscerated and ready to cook. Rotisserie chicken is sold by wholesalers and directly by producers to small shops, stands (rosticerias or asaderos) and supermarkets, which cook the chicken and sell it whole and freshly cooked to the end-consumer, providing an economical form of fast-food. According to UNA, rotisserie chicken accounts for approximately 23.0% by volume of the chicken sold by producers in Mexico. "Chicken Parts" refers to cut-up fresh chicken parts sold wrapped in trays or in bulk principally to supermarket chains, the fast-food industry and other institutional food-service providers. Producers generally sell directly to the supermarket chains and deliver the chicken directly to the outlet. Sales to the institutional market often require customized cutting and presentation. According to UNA, chicken parts account for approximately 11.0% by volume of the chicken sold by producers in Mexico. "Supermarket Broiler" chicken is a fresh whole broiler presented with the edible viscera packed separately. In most cases it is sold directly by producers to supermarkets and, in some regions, to other independent food shops. Mexican consumers' preference for freshness requires regular deliveries of chicken to supermarkets and other food shops. According to UNA, supermarket broiler chicken accounts for approximately 5.0% of the volume of the chicken sold by producers in Mexico. We also sell further-processed chicken products to supermarkets and other retailers. The following table sets forth, for the periods indicated, the sales volume in tonnes and as a percentage of the total volume of chicken sold for each of our principal lines of chicken products. 16
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2000 2001 2002 ------------------- ------------------- ------------------- % OF % OF % OF VOLUME TOTAL VOLUME TOTAL VOLUME TOTAL -------- -------- -------- -------- -------- -------- (thousands of tonnes, except percentages) Public Market and Rotisserie ....... 336.4 56.0 339.3 51.3 307.1 46.2 Supermarket Broiler, Chicken Parts and Other(1) ......... 138.7 23.0 151.3 22.8 191.6 28.8 Live ............... 126.0 21.0 171.6 25.9 166.7 25.0 -------- -------- -------- -------- -------- -------- Total .............. 601.1 100.0% 662.2 100.0% 665.4 100.0% ======== ======== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 2003 2004 ------------------- ------------------- % OF % OF VOLUME TOTAL VOLUME TOTAL -------- -------- -------- -------- (thousands of tonnes, except percentages) Public Market and Rotisserie ....... 288.1 44.0 319.1 43.5 Supermarket Broiler, Chicken Parts and Other(1) ......... 194.9 29.7 219.6 30.0 Live ............... 172.5 26.3 194.4 26.5 -------- -------- -------- -------- Total .............. 655.5 100.0% 733.1 100.0% ======== ======== ======== ========
---------- (1) "Other" comprises sales of further-processed poultry products, viscera and other products. Our product mix varies from region to region, reflecting different consumption and distribution patterns. Based on market demand, we believe that fresh, rather than frozen, chicken will continue to dominate the Mexican market. Furthermore, we believe that consumer demand for value-added fresh chicken products, such as rotisserie chicken, supermarket broilers and chicken parts, will increase over time. Accordingly, we continue to focus principally on producing fresh chicken, including value-added fresh chicken products. CHICKEN MARKETING, SALES AND DISTRIBUTION We have developed an extensive distribution system that we believe is the largest and most modern of any chicken or egg producer in Mexico. We use various distribution channels in every major product category to service different market segments. For example, in the Mexico City area, we transport most public market chicken directly to wholesalers, who then transport the chicken to retail sellers. We use our own fleet to transport the majority of rotisserie chickens, supermarket broilers and other chicken products to our customers. We try to cooperate with existing distribution channels and do not compete with wholesale distributors, except in areas where we supply our own distribution capacity where needed for market penetration. We distribute products from our seven processing plants (located in Celaya, Culiacan, Puebla, Lagos de Moreno, Coatzacoalcos, Merida and Gomez Palacio) to our cold-storage facilities and warehouses, which serve as a mid-point in distribution to wholesalers and local customers. From our cold-storage facilities, we service wholesalers (who in turn deliver to their customers) and transport certain products directly to supermarkets and food-service operations. Our distribution infrastructure includes 59 cold-storage warehouses and facilities and a large fleet of vehicles. The decentralized sales force permits us to remain attuned to developments in the regions we serve and to develop close relationships with customers. Through recent acquisitions and production agreements, we have expanded our distribution network, which now covers almost all of Mexico: . In 2001, through an agreement with Avicola Cotaxtla, a broiler producer located in Veracruz, we strengthened our presence in that important region of the country. . By acquiring most of the assets of both Avicola Nochistongo and Avicola Simon Bolivar in September 2001, we further expanded and consolidated our distribution network, mainly in the northeastern part of Mexico. 17 . In 2002, we consolidated our presence in the northeastern part of the country, mainly in the state of Nuevo Leon, due to the consolidation of our recent acquisitions, made at the end of 2001. . During 2003 we implemented two important projects to expand the facilities at our Northwest Complex and Peninsula Complex to increase production capacity in our chicken business. These facilities are ideally suited for the expansion projects due to their sanitary status and their geographical location. Both complexes were expanded in the third quarter of 2004 by approximately 50%, which increased opportunities for future exports as well as for meeting consumer demand in those regions and in other regions in Mexico. . During 2004, we finished our projects to expand the facilities at our Northwest Complex and Peninsula Complex, and on February 23, 2005, we announced that we are evaluating the possibilities of a business relationship with Sanjor, a producer located in the Yucatan Peninsula. We expect to reach a conclusion about this relationship by the end of June 2005. In the following paragraphs we provide a description of our marketing, sales and distribution strategies for each of our major chicken products. . Live chicken - We sell live chicken primarily to wholesalers, which contract out the processing to independent slaughterhouses and then resell the processed product as public market chicken. To a lesser extent, we sell to small independent slaughterhouses in the southeast, where live chicken continues to be the standard for consumption. Additionally, customers can purchase live chicken directly from us on our farms. However, we believe that the market as a whole is moving away from live chicken. . Public market chicken - We believe that we are the largest producer of public market chicken in Mexico. This is supported by information published by UNA and our own internal information. We regularly sell to more than 50 of the approximately 200 whole fresh chicken wholesalers operating in the Mexico City region. Most of our wholesale customers rely primarily on us for public market chicken, although we have no exclusive supply agreements. Our principal focus in this market has been to provide superior distribution and service to selected wholesalers in order to maintain and further develop loyalty. Public market chicken is ordinarily sold to consumers without any packaging or other identification of the producer, but our distribution system encourages wholesalers to sell to retailers from our own "Bachoco" trailers, reinforcing our reputation for freshness and efficiency of service and fostering brand loyalty among retailers. We believe we have developed excellent relationships with the wholesalers we serve. . Rotisserie chicken - Rotisserie chicken has been one of our fastest growing products since we first started producing it in 1988. We sell rotisserie chicken directly to rosticerias, asaderos and supermarkets. We attribute the growth in our sales of rotisserie chicken in large part to the rapid growth of the market for freshly cooked chicken sold by rosticerias and asaderos and in the rotisserie sections of supermarkets. We expect this market to continue to grow because of an ever-increasing consumer demand for convenient, low-priced and high-quality fast food. Success in supplying rotisserie chicken depends on consistency and good service, and only larger producers with more modern processing facilities and distribution capacity can compete in this market. We increased our market share by consistently providing high-quality products and by using our own trucking fleet to deliver directly to retailers on a punctual and dependable basis. We expect to expand sales of rotisserie chicken by leveraging our increasingly developed transportation and distribution network. 18 . Supermarket broiler chicken - We sell supermarket broilers, as well as chicken parts and eggs, directly to the principal supermarkets, convenience store chains and wholesale clubs in Mexico. In order to build consumer loyalty for our supermarket broiler chicken, we emphasize our brand image as well as our superior service, reinforced by frequent delivery to ensure freshness. Each chain negotiates purchases centrally, but we deliver directly to every point of sale, ordinarily at least once every 48 hours. We believe that we lead the market in frequency of deliveries to supermarkets. . Chicken parts - We sell chicken parts principally to supermarkets, using the same marketing strategy that we use for supermarket broiler chicken. We are also an important supplier of chicken parts to the growing franchise fast-food and institutional food-service industries. We continue to develop custom-cutting processes to help meet demand from fast-food and institutional customers for a wider variety of chicken parts. . Frozen and further-processed poultry . Frozen, heat-and-serve and other further-processed poultry products make up only a small proportion of total Mexican poultry consumption today. Mexican consumers have a greater preference for fresh chicken than their U.S. counterparts, and they are less likely to have refrigerators or microwave or regular ovens needed to store and cook frozen and processed poultry. However, the potential for substantial growth in this market is large, and we believe that our distribution network, our large market share for supermarket chicken sales, our brand name and our experience in a wide range of existing Mexican distribution channels will be important competitive strengths in this area. . Our 2004 sales of fresh further-processed poultry products increased approximately 30% over 2003 sales. We are moving to produce and introduce various fresh further-processed poultry products in Mexico, which we have developed in accordance with Mexican customer preferences. We will continue to do so as this market grows. EGGS Annual per capita egg consumption in Mexico is relatively high compared to other countries. In 2004, annual per capita consumption of eggs in Mexico was approximately 21.5 kg, according to data from UNA. Mexican egg consumption per capita increased 7.5% from 2000 to 2004. This high level of consumption is due in part to the fact that eggs are a relatively inexpensive source of protein. The Mexican egg industry is more fragmented than the broiler industry but has experienced some degree of consolidation in recent years, including acquisitions by us. According to UNA, the nine largest producers of eggs in Mexico now account for approximately 39% of the market. As a result of our September 2001 acquisitions of Avicola Nochistongo and Avicola Simon Bolivar, two of the 15 largest egg producers, we have become one of the largest egg producers in Mexico with an estimated market share of 6.3% in 2004. Our marketing strategy for egg products is to increase brand recognition by increasing sales of cartons with the "Bachoco" brand printed on them. In addition, we aim to differentiate our eggs by their high quality and freshness. 19 Eggs in Mexico have traditionally been distributed in large 360-egg cases through wholesalers to retailers. The retailers, which are typically small grocery shops, in turn sell the eggs by weight to consumers. At present, approximately 22.0% of the eggs sold in Mexico are sold in packaged form, 7% are sold in processed form and approximately 71% are sold in bulk to wholesalers. The trend in recent years has been towards packaged egg sales. We expect that the convenience, the development of brand loyalty and the growth of supermarket chains will contribute to the continuance of this trend toward packaged eggs. We sell both brown and white eggs. Brown eggs presently account for approximately 8.0% of Mexican egg consumption. The branded carton of brown eggs is a premium product in the Mexican market. The Company believes that brown eggs are less vulnerable to price fluctuations than white or unbranded eggs, because consumers perceive them to be of higher quality. Brown eggs command a small premium over white eggs. We are by far the leading producer of brown eggs in Mexico and estimate that our production accounts for approximately 31.1% of the Mexican brown egg market and 80.0% of the Mexican branded brown egg market. In some regions, however, we have reallocated part of our production from brown eggs to white eggs due to local market preferences. In addition, the recently acquired operations of Avicola Nochistongo and Avicola Simon Bolivar produce mainly white eggs. Our main strategy in the eggs business is to gradually move from bulk to packaged white eggs. Packaged eggs are less vulnerable to price fluctuation and create brand loyalty. In 2004, we started a project to increase production capacity of table eggs in our Northwest complex, at Mexicali, near the border with U.S. We have designed our egg distribution system to transport eggs from our laying farms at Celaya, Los Mochis, Ciudad Obregon, Mexicali and La Laguna regions to customers in all sales regions. We sell packaged eggs directly to all of the principal supermarket chains in Mexico, with daily deliveries directly to their outlets. FEED According to Camara Nacional de la Industria de Transformacion ("CANACINTRA"), Mexican production of feed increased from 18.3 million tonnes in 1998 to 22.7 million tonnes in 2003. In 2003, Mexico was ranked the sixth largest producer of feed in the world and the second largest in Latin America. Local production is composed of commercial and integrated manufacturers. Commercial manufacturers produce for the market, while integrated manufacturers that mostly produce for themselves and occasionally for other producers. Integrated producers account for approximately 64.3% of total production. Imports of feed come almost entirely from the United States and represent approximately 1.7% of the total consumption in Mexico. We entered the feed business as a result of our acquisition of Grupo Campi at the end of 1999. We sell to small livestock producers and through a network of small distributors located mainly in central and southern Mexico. We have benefited from economies of scale and synergies derived from producing feed both for our own internal consumption and for sale to third parties. To promote this business, in 2000 we opened a new mill in the state of Veracruz dedicated exclusively to producing feed. We estimate that our feed business comprises approximately 3.9% of the market share of the commercial (non-integrated) feed business in Mexico. 20 SWINE We purchase breeder swine live from the United States and breed them at facilities in Navojoa. We then raise swine to maturity at our farms in Celaya and three other locations in Mexico. Mature swine is sold on the hoof to Mexican swine meat packers for the production of pork products. In 2002, our swine prices decreased by 21.3% as a result of an oversupply in the swine market due primarily to increased imports from the United States. In 2003, swine prices began to recover, increasing by 7.0%, due mostly to the fact that there was very modest growth in domestic production and imports, and in 2004 our swine prices increase by more than 20.0% as a result of increase in the cost of feed ingredients and a more normalized supply and imports. Traditionally, Mexicans consume less swine and swine products than chicken and other meats. We do not currently intend to make material investments in this line of business. RAW MATERIALS We purchase our breeding stock for broilers and layers from high-quality suppliers. All of our breeder swine currently come from one supplier, but we have changed suppliers from time to time and have numerous alternative sources of supply. The largest single component of our cost of sales is the cost of ingredients used in the preparation of feed including, principally, sorghum, soy meal, corn, fish meal, meat meal, and for certain chicken products, marigold extract. The price of these ingredients is subject to significant volatility resulting from weather, the size of harvests, transportation and storage costs, governmental agricultural policies, currency exchange rates and other factors. To reduce the potential adverse effect of grain price fluctuations, we vary the composition of our feed to take advantage of current market prices for the various types of ingredients used. Beginning in 1992, the Mexican government lifted various procedural restrictions on importing grains, and it is currently eliminating price supports in favor of direct subsidies for domestic farmers. Under NAFTA, the government eliminated the tariff on sorghum effective January 1, 1994, and eliminated tariffs on all other grains that we use, except corn, on January 1, 2003. Corn tariffs will be eliminated by 2008. We expect these developments to have a positive effect on our cost of production as the cost of our ingredients more closely track prices in the international commodity markets. At present, we take advantage of lower cost feed ingredients from Mexican sources, when available. In 2004, we obtained approximately 35.0% of our total grain needs from the domestic market. We believe that the quality of local feed ingredients, particularly sorghum, is superior to that of imported feed ingredients. In addition, the use of local feed ingredients allows us to save on transportation costs and import duties. However, in southern Mexico where Grupo Campi's complexes are located, domestic crops and feed ingredients are not available. As such, these complexes use mainly imported grain. We may, from time to time, engage in hedging of our feed costs in the future. COMPETITION CHICKEN Although we are Mexico's largest chicken producer, we face significant competition from other producers in all of the markets in which we sell our products. When combined with our two largest vertically integrated competitors, we account for approximately 52.0% of total Mexican poultry production; the balance is distributed among approximately two hundred small and medium-sized integrated and non-integrated producers. Mexico's two other major chicken producers are Pilgrim's Pride de Mexico, S.A. de C.V., a subsidiary of the U.S. chicken producer Pilgrim's Pride Corporation, and Trasgo, S.A. de C.V., which since April 1994 has been controlled by the U.S. chicken producer Tyson Foods, Inc. The major producers, including Bachoco, have substantial cost advantages over smaller, non-integrated producers arising from economies of scale and control of feed preparation. To varying degrees, each of these companies has substantial financial resources and strengths in particular product lines and regions. We believe, however, that we have substantial competitive strengths over our competitors, including a broader range of chicken products and broader geographic coverage. 21 Furthermore, there are considerable barriers to entry into large-scale chicken production and distribution in Mexico, including, among others, the consumer preference for fresh chicken, the weaknesses of transportation infrastructure and varying regional consumer preferences among the various product categories. The channels for distribution of chicken products, in particular, are highly specialized and varied, and they call for in-depth experience in market practices. Nonetheless, we expect that we will continue to face strong competition in every market and that existing or new competitors are likely to broaden their product lines and to extend their geographic coverage. Poultry producers in the United States have developed low-cost production techniques and have been successful in exporting primarily frozen and further-processed poultry to other countries, especially in periods of overcapacity in the United States. As tariff barriers have declined under NAFTA, we have experienced increased competition from U.S. poultry producers. According to UNA, in 2004, imports of poultry products increased 0.1% in volume over imports in 2003. This lower increase was caused in part by continued short-term effects like temporary bans of imports by sanitary and health authorities, and a recovery in prices in the U.S. markets. Mechanically de-boned poultry accounted for approximately 42.8% of the imports. We expect that competition from U.S. exporters will continue to increase. However, Mexican consumer acceptance of frozen or frozen further-processed poultry products is low, and we do not anticipate that it will grow significantly in the near future or that fresh chicken can be distributed throughout Mexico from processing facilities in the United States in a cost-effective fashion. EGGS We are one of the largest producers of eggs in Mexico, with approximately 6.3% of total Mexican egg production at the end of 2004. According to UNA, the top nine producers together accounted for approximately 39.0% of total Mexican egg production, with the balance distributed among hundreds of smaller producers. FEED Of the registered producers of feed in Mexico, integrated firms produce approximately 64.3% of total production for their internal use, and the remaining 35.7% is produced for sale to third parties. We estimate a market share of approximately 3.9% in our feed product line. SWINE The Mexican swine industry is highly fragmented, and no producer has more than 2.5% of the market. On December 31, 2004, we had less than 1.0% of the Mexican market share in swine. U.S. producers already compete in this market in Mexico because tariff barriers on swine are moderate. 22 MEXICAN REGULATION MEXICAN IMPORT REGULATION AND PRICE CONTROLS NAFTA became effective on January 1, 1994. Prior to NAFTA, the Mexican poultry and egg markets were protected from foreign imports by a licensing and quota system. Under NAFTA, Mexico implemented a transitional tariff rate quota system for imports of poultry, eggs and swine from the United States. U.S. exports to Mexico were duty-free up to the quota amount and were subject to an ad valorem tax on all imports above that amount. As required by NAFTA, the Mexican government eliminated all permanent quotas and tariffs on poultry, eggs and swine in January 2003. With certain specific exceptions described below, there are now no quotas or tariffs on imports of poultry, eggs and swine from the U.S. We expect the elimination of these trade protections to stabilize the level of imports over time and to permit improved private control over imports, which may result in increased competition from importers. The pre-2003 scheme of quotas and tariffs, which has now been eliminated, was as follows: . The quota for chicken was 120.3 thousand tonnes, which represents 5.7% of national consumption. Above the quota, imports were taxed ad valorem at 49.4%. . Within the chicken quota, there were sub-quotas for whole chicken (16.6 thousand tonnes), poultry parts (31.6 thousand tonnes), whole turkeys, turkey parts, and de-boned chicken. Imports above the quota were also taxed at 49.4%. There was no quota amount for further-processed chicken; all imports were taxed at 49.4%. . The quota for eggs was 8.2 thousand tonnes, which is less than 1% of national consumption. Imports above the amount were taxed at 9.5% ad valorem. . Imports of swine were subject to a quota of 80.3 thousand tonnes of fresh, frozen, and chilled meat, but were also taxed 2% on amounts below the quota (this tax was 4% in 2001). Amounts above the quota were taxed at 10% in 2002. Import limits and short-term tariffs that remain after January 2003 are as follows: The Mexican government has put in place a number of short-term tariffs and import limits on poultry, eggs and swine: . In January 2003, the Mexican government announced a temporary safeguard to stabilize the flow of poultry imports, which included an initial tariff of 98.8% on imports of chicken leg quarters. This safeguard was confirmed in July 2003 and will decrease annually until it reaches 0% in 2008. All other chicken products from the United States, including whole chicken, chicken parts other than leg quarters and eggs remain tariff-free. . According to the safeguard, for 2004 the tariff in effect was 59.3%, for imports of chicken leg quarter above the quota of 102,010 tonnes. . In late 2003, Mexico imposed temporary bans on chicken products coming from certain states of the United States due to avian influenza cases present in those states. Most of these bans have been eliminated. 23 . In October 1999, Mexico imposed an anti-dumping compensatory duty of $ 0.351 per kilogram (48% ad valorem) on swine and pork imports, in addition to the import tariff. The Mexican government announced the elimination of this duty on May 23, 2003. In addition to NAFTA, Mexico has entered into free trade agreements with several other countries including Chile, Europe, Colombia and Venezuela. Although such agreements may result in lower tariffs on our own products, we believe that imports from such countries will not increase substantially in the future due to high transportation and distribution costs. ANTITRUST REGULATIONS The Ley Federal de Competencia Economica ("Mexican Economic Competition Law"), which took effect on June 22, 1993, regulates monopolies and monopolistic practices. Under this law, all companies (including Bachoco) are required to notify the Comision Federal de Competencia ("Federal Competition Commission") of all proposed transactions exceeding specified threshold amounts as set forth in the Mexican Economic Competition Law. The Federal Competition Commission can impose conditions on, and prevent or unwind, any such transactions by Mexican companies. We have complied with all requirements under this law. ENVIRONMENTAL AND SANITARY REGULATION Our operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment. The principal laws are Ley General de Equilibrio Ecologico y Proteccion Ambiental (General Law of Ecological Balance and Environmental Protection--the "Environmental Law") and Ley de Aguas Nacionales ("National Waters Law"). The Secretaria del Medio Ambiente y Recursos Naturales (Ministry of Environment and Natural Resources, or, "Semarnat"), administers the Environmental Law, and Comision Nacional del Agua ("National Water Commission") administers the National Waters Law. The Environmental Law regulates water pollution, air pollution, noise control and hazardous substances. Semarnat can bring administrative and criminal proceedings against companies that violate environmental laws, and after certain administrative procedures, it also has the power to close non-complying facilities. Every company in Mexico is required to provide Semarnat with periodic reports regarding compliance with the Environmental Law and the regulations thereunder. The level of environmental regulation in Mexico has increased in recent years, and enforcement of the law is improving. We expect this trend to continue and to intensify with international agreements between Mexico and the United States. In particular, Mexican environmental laws set forth standards for water discharge that are applicable to poultry processing operations. Our processing plants have water treatment facilities that comply with Mexican environmental standards. We are implementing other investment projects in anticipation of stricter environmental requirements in the future. We do not expect that compliance with those Mexican federal environmental laws or Mexican state environmental laws will have a material effect on our financial condition or performance. The production, distribution and sale of chicken, eggs and swine are subject to Mexican federal and state sanitary regulations. The principal legislation is Ley General de Salud ("General Health Law") and Ley Federal de Sanidad Animal ("Federal Animal Health Law"). The Federal Animal Health Law was enacted in 1993, and, since then, we have been working closely with Mexican authorities to develop regulatory standards and inspection methods for chicken processing. Currently, Mexican authorities do not monitor production or inspect products to the same degree as sanitary authorities in other countries, such as the USDA in the United States. However, we believe that we are in compliance with all applicable sanitary regulations. 24 ORGANIZATIONAL STRUCTURE We are a holding company with no operations other than holding the stock of our subsidiaries, all of which are incorporated in Mexico, and engaging in transactions with our subsidiaries. Our principal operating subsidiary is BSACV, which owns our principal operating assets, and which accounted for 92.4% of consolidated total assets as of December 31, 2004, and 92.5% of our consolidated revenues for the year ended December 31, 2004. The following table shows our main subsidiaries as of December 31, 2002, 2003 and 2004:
PERCENTAGE EQUITY INTEREST -------------------------------- 2002 2003 2004 -------- -------- -------- Bachoco, S.A. de C.V. ("BSACV") .................. 100% 100% 100% Operadora de Servicios de Personal, S.A. de C.V. . 100 100 100 Servicios de Personal Administrativo, S.A. de C.V. 100 100 100 SECBA, S.A. de C.V. .............................. - - 100 SEPETEC, S. A. de C.V. ........................... 100 100 100 Acuicola Bachoco, S.A. de C.V. ................... 100 100 100 Huevo y Derivados, S.A. de C.V. .................. 97 97 97 Pecuarius Laboratorios, S.A. de C.V. ............. 64 64 64 Aviser, S.A. de C.V. ............................. 100 100 100 Campi Comercial, S.A. de C.V. .................... 100 - - Campi Alimentos, S.A. de C.V. .................... - 100 100
In November 2004, the Company acquired all the shares of SECBA, S.A. de C.V. from a related party for Ps. 13.9 million. As of the date of the acquisition, the figures of SECBA, S.A. de C.V. have been consolidated with the Company's figures. The excess of the purchase price paid over the book value of this investment amounted to Ps. 0.3 million, which was recorded in other income. In December 2003, Campi Comercial, S.A. de C.V. merged into BSACV (the surviving company). After the merger, a spin-off from BSACV was approved to create a new company known as Campi Alimentos, S.A. de C.V. These transactions have had no effect on the consolidated amounts on our balance sheet. In April 2002, we sold our subsidiary, SECBA, S.A. de C.V., for Ps. 5.6 million to a related party, generating a gain of Ps. 0.8 million; consequently, this subsidiary's figures were not consolidated from the date of sale. The effects of the deconsolidation of this subsidiary were immaterial and did not affect the comparability of the accompanying financial statements. SECBA, S.A. de C.V. continued to render administrative services to the Company. PROPERTY, PLANTS AND EQUIPMENT Our production and storage facilities are located throughout the regions we serve in order to ensure freshness and minimize transportation time and costs. The most extensive facilities are grouped in seven complexes that include farms and processing plants. The largest of our complexes is in Celaya, where we have broiler grow-out farms, a broiler processing plant and egg production farms. The complex at Culiacan includes broiler grow-out farms and a broiler processing plant, as do the complexes located in Puebla, Lagos de Moreno, Coatzacoalcos and Merida. There are smaller egg production farms at Los Mochis, Ciudad Obregon and Mexicali. As a result of the acquisitions made in the second half of 2001, a new complex was formed in Gomez Palacio, Durango (in La Laguna Region). The complex consists of broiler grow-out farms, a broiler processing plant and egg production farms representing more than half of our total egg production capacity. 25 The following table summarizes the types and number of each type of our production facilities. BACHOCO PRODUCTION FACILITIES TYPE NUMBER ----------------------------------------------------- ------- Chicken breeding farms............................... 153 Broiler grow-out farms............................... 428 Broiler processing plants............................ 7 Egg incubation plants................................ 17 Egg production farms................................. 103 Swine breeding farms................................. 1 Swine grow-out farms................................. 11 Feed plants.......................................... 15 On September 22, 2002, Hurricane Isidore hit the Yucatan Peninsula and affected approximately 60% of our chicken growing farms in the region. The remainder of our facilities in the area, including a poultry processing plant, feed mills, breeder farms and incubator plants, suffered minor damages. The chicken growing farms in this region represent approximately 7% of our total capacity in our chicken business. We were able to divert products from our other facilities to maintain a consistent level of service to our customers in this region. The Company repaired its Peninsula Complex on schedule and by the end of 2003 the complex had returned to the level of capacity maintained prior to sustaining the damage caused by Hurricane Isidore. In 2003 the Company implemented projects to expand the facilities at the Peninsula Complex as well as the Northwest Complex. Both complexes were expanded to increase capacity by approximately 50% by the third quarter of 2004. These projects were financed with internal resources generated by our own operations. We currently operate 15 feed plants for our own chickens, feed sales to third parties and egg and swine operations. The total production capacity of our feed plants is approximately 325,000 tonnes per month. We estimate that we are the largest producer of animal feed in Mexico. Our other facilities include two poultry manure-processing plants. Our headquarters are located in Celaya, and we have 60 sales centers throughout the regions we serve. While we own most of our facilities, we lease a limited number of farms and sales centers. We also employ a network of contract growers. Our fleet of trucks carries feed from feed mills to farms, live chicken from farms to processing plants, day-old chickens from egg incubation plants to farms, eggs from farms to distribution centers and, ultimately, products from distribution centers to customers. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion should be read in conjunction with our consolidated financial statements. The consolidated financial statements have been prepared in accordance with Mexican GAAP, which differs in certain respects from U.S. GAAP. Note 17 to the consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of total stockholders' equity, net income and operating income, a consolidated statement of changes in stockholders' equity and a condensed statement of cash flows under U.S. GAAP as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004. 26 In accordance with Mexican GAAP rules on price-level restatement of financial statements, the financial statements included with this disclosure recognize certain effects of inflation. In addition, the financial statements and, unless otherwise specified, the other financial data included herein are restated in constant pesos as of December 31, 2004. The effects of price-level restatement in accordance with Mexican GAAP have not been reversed in the reconciliation to U.S. GAAP. GENERAL In the following discussion we describe various trends and how they affected our results of operations for the years ended December 31, 2002, 2003 and 2004. MEXICAN ECONOMIC CONDITIONS In 2001, according to statistics from the Mexican Central Bank and the Secretaria de Hacienda y Credito Publico ("Ministry of Finance"), the Mexican economy was affected by a global economic slowdown, and in particular by the downturn in the U.S. economy in the aftermath of the terrorist attacks on September 11, 2001. As a result, in 2001, Mexico's GDP fell by 0.3%. Interest rates on 28-day Cetes decreased to an average of 11.3% (6.3% in the last month of the year), inflation decreased to a rate of 4.4% and the peso appreciated against the U.S. dollar by 5.0%. During 2002, the Mexican economy continued to be sluggish due to the effects on Mexico of the continuing slowdown in the U.S. economy. Mexico's GDP increased 0.9% in 2002. Financial markets in Mexico remained relatively stable most of the year, experiencing an increase in volatility in the last quarter. Interest rates on 28-day Cetes in 2002 decreased to an average of 7.3%, inflation increased to a rate of 5.7% and the peso depreciated against the U.S. dollar by 12.2%. Most of the peso depreciation occurred at the end of the year. In 2003, the Mexican economy continued to show signs of slowdown; GDP growth was 1.3%, which was lower than initial expectations. Interest rates on 28-days Cetes decreased to an average of 6.23% and inflation decreased to a rate of 4.0%, and the peso depreciated against the U.S. dollar by 7.3%. In 2004, the Mexican economy showed signs of recovery; GDP growth was 4.4%, which was better than initial expectations. Interest rates on 28-days Cetes increased to an average of 6.82% for the year and an average of 8.50% in the last month of the year. Inflation increased to a rate of 5.19%, and the peso appreciated against the U.S. dollar by 0.8% at year end. In addition to the effects that the Mexican economy has on our business and results of operations, Mexican political events may significantly affect our operations and the performance of Mexican securities generally. See Item 3. "Key Information - Risk Factors." A downturn in Mexico's economic conditions, civil unrest or other adverse social, political or economic developments in or affecting Mexico could adversely affect our business, results of operations, financial condition, ability to obtain financing and prospects for future business. 27 The Mexican economy and financial and securities markets are, to varying degrees, influenced by economic conditions in other countries. Economic or financial conditions in one country or region may undermine investors' confidence in other countries, such as Mexico, and decrease the attractiveness of securities investments in such countries. See Item 3. "Key Information - Risk Factors." EFFECTS OF ECONOMIC CONDITIONS ON THE COMPANY Mexican economic conditions have had a strong impact on Mexico's chicken market. Feed costs constitute a substantial portion of the cost of goods sold and are priced with reference to U.S. dollars. In 2001, average producer prices decreased 13.8% due to a decline in the worldwide cost of feed ingredients, and a 6.7% increase in domestic supply and oversupply conditions. In 2002, average producer prices increased slightly by 2.5% as a result of a global increase in the cost of feed ingredients at the end of the year, partially offset by a slowing economy. In 2003, average producer prices increased significantly by 10.6%, due primarily to an increase in raw materials prices during most of the year. In 2004, average producer prices increased by 6.7%, due mainly to strong increases in the cost of feed ingredients, in particular soybean meal, and a moderate increase of supply in the Mexican market. We have a small part of our liabilities denominated in U.S. dollars. On December 31, 2004, only 0.2% of our outstanding indebtedness of Ps.172.2 million was denominated in U.S. dollars, as compared to 3.0% at December 31, 2003, (see note 6 in our financial statements for details). We have assets and liabilities denominated in U.S. dollars, so future depreciation or devaluation of the peso against the U.S. dollar may result in foreign exchange losses or gains depending on our net position. In 2004, we had foreign exchange gains of Ps.45.1 million due to fluctuations of the peso against the U.S. dollar, as compared to a foreign exchange gain of Ps.72.6 million in 2003 and a foreign exchange gain of Ps.45.4 million in 2002. Any erosion of the purchasing power of Mexican consumers may adversely affect demand for our products and, as a result, our net revenues and profitability. Inflation and changing prices affect our ability to raise prices as well as consumer demand, supplier prices and other costs and expenses, consumer purchasing power and competitive factors, all of which in turn affect our net revenues and operating results. Peso devaluations and high inflation levels could further adversely affect our operations and financial position. VOLUME OF CHICKEN SOLD The volume of our chicken sold increased over the previous year by 0.5% in 2002, decreased by 1.5% in 2003, and increased 11.8% in 2004. The increase in the volume of chicken sold in 2002 was mainly due to productivity improvements made in our production facilities. Such increase, however, was partially offset by the negative effects of Hurricane Isidore that temporarily shut down production and resulted in damages and loss of product at our Peninsula Complex during the last four months of 2002. The decrease in volume in 2003 was mainly due to the effects of Hurricane Isidore on our Peninsula Complex during most of 2003. The increase in 2004 was due mainly to the completion of growing projects in our Northwest and Peninsula complexes, and productivity improvements in the rest of our operations. 28 TRENDS IN PRODUCT PRICES Our results of operations are significantly affected by the cyclical and volatile nature of Mexican prices for chicken, feed, eggs and swine. During 2002, our chicken prices decreased 0.8% due to the downturn in demand in our sales regions provoked by a slowing economy, stable cost of feed ingredients throughout most of the year and continued changes in our product mix. In 2003, the Company was affected by higher feed ingredient costs and oversupply conditions due to an increase in domestic production. The continued weakness of the Mexican economy affected the purchasing power of customers, and as a result the Company was unable to increase its prices. During 2003, our chicken prices decreased 2.7% primarily as a result of oversupply conditions in the domestic chicken market as well as a decrease in consumer purchasing power. In 2004, our chicken prices increased by 6.4%, mainly as a result of i) an increase in the cost of our main feed ingredients which pushed the prices up in the industry, ii) a moderate supply of chicken in the Mexican market, mainly in the second part of the year and, iii) our commercial and marketing strategies. Prices for feed tend to follow trends in prices of feed ingredients, which we discuss below. After a three-year decline, egg prices began to improve in 2003. Egg prices declined in 2001 by 0.4% following the decline in the price of feed ingredients, and in 2002 our egg prices continued to decline by 17.1%, due to heavy oversupply conditions in the domestic egg market. In 2003, egg prices increased by 17.5% mainly due to a reduced supply of this product in the market. In 2004, our egg prices increased by 7.3%, mainly due to an increase in the price of feed ingredients and a moderate supply during the first part of the year in the Mexican market. Bachoco continues to work to improve its sales mix by introducing a packaged product with brand identification with better profit margins. During 2002, our swine prices decreased by 21.3% as a result of an oversupply in the swine market due primarily to increased import competition from the United States. In 2003, swine prices began to recover, increasing by 7.0%, due mostly to the fact that there was very modest growth in domestic production and imports. In 2004, our swine prices increased by 25.8%, mainly due to a moderate supply in the Mexican market. We believe that, among other factors, industry price competition may continue to exert downward pressure on real chicken prices, and that prices for chicken, feed, eggs and swine are also likely to remain volatile and subject to cyclical variation. Due to the time needed to complete the chicken growth cycle, chicken producers generally cannot adjust production to respond immediately to cyclical variations, and, accordingly, in times of oversupply, prices may decline due to overproduction. TRENDS IN PRICES OF FEED INGREDIENTS The single largest component of our cost of sales is the cost of ingredients used to prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and, for certain chicken products, marigold extract. The prices of these feed ingredients are subject to significant volatility due to a number of variables, including, among other factors, weather, harvest size, transportation and storage costs, government agricultural policies and currency exchange rates. The price at which we may obtain feed ingredients from Mexican producers relative to U.S. producers is also subject to volatility depending on these variables. 29 At present, Mexican feed prices tend to parallel U.S. and international prices. From 1996 through 1999, we increased the percentage of feed ingredients that we obtained from Mexican producers. In 2000, however, this trend reversed with the acquisition of Grupo Campi because the Grupo Campi complexes are located in regions with low corn production, and consequently they must look to international markets for most of their supply of feed ingredients. The percentage of feed ingredients that we purchased from Mexican producers in 2001 remained approximately at the same level as in 2000. In 2001, approximately 40% of grain, our main feed ingredient, came from local markets. In 2002, the percentage of grain purchased from local markets fell to 30.1%, with the remaining imported primarily from the United States. In 2003, the percentage of grain purchased from domestic markets was 38.3%, and in 2004 it was approximately 35.0%. Due to low inventories worldwide, at the end of 2003 and most of 2004, soybean meal reached historically high prices worldwide; consequently, the price of other sources of protein including grain, increased. As a result, the cost of our feed increased substantially. It was not possible for us to pass these increases to our customers, leading us to poor results during the first part of the year. In the second part of the year, mainly in the last quarter, prices resumed more normalized levels, allowing us to improve our results. In recent years, reductions in tariffs under NAFTA have generally resulted in reductions of our costs of importing feed ingredients, except as discussed above in 2004. ACQUISITIONS & DISPOSITIONS Our operations have been affected during the periods we discuss herein, by a series of acquisitions and production arrangements that we have made in recent years. . In February 2001, we entered into an agreement consisting of a lease of assets and a contract grower agreement with Avicola Cotaxtla, a large producer of broiler chicken. . In the second half of 2001, we acquired two significant egg and chicken producers. These producers are Avicola Nochistongo, one of the 10 largest egg producers in Mexico operating within the Laguna region, and Avicola Simon Bolivar, one of the 15 largest egg producers and a producer of chicken. During 2002, such acquisitions and production agreements contributed to the expansion and consolidation of our leadership position in the egg and chicken industries in Mexico. Through these acquisitions, we expanded our distribution network throughout almost the entire country and increased our market presence in both La Laguna and the northeastern regions of Mexico. We financed these acquisitions through our own working capital resources. As a result of these acquisitions and production agreements, our results of operations in 2001 and 2002 reflect increasing volumes of chicken and egg sales and increased cost of sales due to higher volumes and changes in product mix. Changes in the product mix continued to increase cost of sales in 2003. The integration of these operations and the changes in product mix has also resulted in an increase in selling, general and administrative expenses over all periods. In April 2002, Secba, S.A. de C.V., a subsidiary of Industrias Bachoco, S.A. de C.V., was sold for Ps.5.6 million to a related party generating a gain of Ps.0.8 million, which is included in the consolidated financial statements under the heading "Other income." We do not believe that this item materially effects our financial statements or their comparability with previous years' statements. During 2003, we implemented two important projects to expand the facilities at our Northwest Complex and Peninsula Complex to increase production capacity in our chicken business. These facilities are ideally suited for the expansion projects due to their sanitary status and their geographical location. Both complexes were expanded to increase capacity by approximately 50% and were completed by the third quarter of 2004, which will increase opportunities for future exports as well as for meeting consumer demand in those regions and in other regions in Mexico. The new facilities in both complexes have been equipped with the best technology available. 30 In July 2004, we reached an agreement for renting the facilities of UPAVAT and UPATEC, a small producer of table eggs in the state of Puebla, south of Mexico City, with a annual capacity of about 0.75 million of lying hens. In November 2004, the Company acquired all the shares of SECBA, S.A. de C.V. from a related party for Ps.13.9 million. The excess of the purchased price paid over the book value of this investment amounted to Ps. 0.3 million, which was recognized in other income. SEASONALITY Our sales are moderately seasonal, with the highest levels of sales, in general, in the second and fourth quarter due to higher chicken consumption during the holiday season and lower sales levels earlier in the year during Lent (particularly in the week prior to Easter). SUMMARY OF RESULTS OF OPERATIONS The following table sets forth, selected components of our results of operations as a percentage of net revenues for each of the periods indicated.
YEAR ENDED DECEMBER 31, ---------------------------------- 2002 2003 2004 -------- -------- -------- (percentage of net revenues) Net revenues .......................................... 100% 100% 100% Cost of sales ......................................... (74.2) (81.4) (81.1) Gross profit .......................................... 25.8 18.7 18.9 Operating income ...................................... 12.0 4.0 6.4 Comprehensive financing (cost) income ................. 0.1 1.2 (0.5) Income tax, asset tax and employee profit sharing ..... 1.8 (1.0) (0.8) Net income ............................................ 14.3 5.0 5.3
The following table sets forth, for each of the periods indicated, our net revenues of chicken, feed, eggs, swine and other products as a percentage of total net revenues in each period.
YEAR ENDED DECEMBER 31, ---------------------------------- 2002 2003 2004 -------- -------- -------- (percentage of net revenues) Chicken ............................................... 81.0% 77.7% 78.5% Feed .................................................. 6.9% 7.1% 6.6% Eggs .................................................. 9.4% 11.1% 10.9% Swine ................................................. 0.9% 0.9% 1.1% Other products ........................................ 1.8% 3.2% 2.9% -------- -------- -------- Total ................................................. 100% 100% 100.0% ======== ======== ========
31 RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 GENERAL In 2004, the Mexican economy showed signs of recovery; GDP growth was 4.4%, which was better than initial expectations. The annual inflation increased to a rate of 5.19%, and the Mexican peso appreciated against the U.S. dollar by 0.8% at year end. According to UNA, the production volume of the Mexican chicken industry grew approximately 4.4% in 2004. This moderate increase in supply in the chicken industry, combined with the improvement in the Mexican economy, and the increase in the cost of main raw materials, resulted in an increase in chicken prices. As the prices of our primary raw materials increased significantly, the cost of sales of our main product lines increased impacting negatively operating income. With respect to the egg industry, domestic production increased by almost 6.5%, which created oversupply conditions mainly at the end of the year. In spite of a significant increase in certain raw material prices, we were able to increase our sales volume in all our main product lines; we market our entire production, and had an operating margin of 6.4%. NET REVENUES Consolidated net revenues during 2004 amounted to Ps.13.3 billion, an increase of Ps.2.0 billion (or 17.6% in constant pesos) from Ps.11.3 billion in 2003. This increase was mostly due to increases in the sales of all our main product lines, resulting from increases in volume and prices of those lines. Our chicken sales increased by 18.9%, due to an increase in price of 6.4% and in volume of 11.8%. The latter was brought on by our growth projects that were launched last year, one in the Northwest and the other in the Peninsula de Yucatan, in addition to productivity improvements in the rest of the operations. Our revenues from egg increased by 14.9% in 2004, as a result of a 9.9% price increase, and our sales volume increased of 4.5%. This increase in sales volume was generated by productivity improvements, our growing project in our Northwest Complex and the additional production we began in the Southeastern region. Balanced-feed sales grew by 10.3% compared to 2003, mainly due to a 8.7% price increase, and an increase in volume sold of 1.4%. COST OF SALES The consolidated cost of sales in 2004 was Ps.10.8 billion, representing an increase over 2003 of Ps.1.6 billion, or 17.2%. The rise in cost of sales resulted primarily from increased volumes in all our main product lines and increases in all our unit costs of sales. The increase in unit cost of sales was mostly due to a significant increase worldwide in raw-material prices, including grain and soybean meal, mainly during the first part of the year, which were partially offset by improvements in productivity, mainly in our chicken and pork lines. 32 GROSS PROFIT Gross profit increased by 19.2%, from Ps.2.1 billion in 2003 to Ps.2.5 billion in 2004. As a percentage of net revenues, gross profit increased from 18.7% in 2003 to 18.9% in 2004. The increase in our gross profit and profit margins resulted mainly from price increases in of our main business lines. Even though the increase in the unit costs of our main raw materials was larger than the increase in the unit prices of our main product lines, the overall unit cost increase was lower than the price increase, due to productivity improvements. SALES, GENERAL AND ADMINISTRATIVE EXPENSES Sales and administrative expenses in 2004 amounted to Ps.1.7 billion, representing an increase of only 0.3% over 2003. The higher sales and administrative expenses were principally due to higher sales volume partially offset by lower administrative expenses. As a percentage of net revenues, selling, general and administrative expenses decreased to 12.5% in 2004, compared to 14.6% in 2003. OPERATING INCOME Consolidated operating income in 2004 increased year-over-year by 87.8% to Ps.853.7 million, as a result of the improvement in gross profit, while keeping sales, general and administrative expenses at practically the same level as 2003. As a percentage of net revenues, operating margin increased from 4.0% in 2003 to 6.4% in 2004. COMPREHENSIVE FINANCING INCOME (COST) Comprehensive financing income (cost) represents the net effect of interest expense, interest income, foreign exchange gain (loss) and gain (loss) on net monetary position, which arises from the effect of inflation on the average net balance of monetary assets and liabilities. Comprehensive financing income was Ps. 131.6 million in 2003 and we had a comprehensive financing cost of Ps.71.5 million in 2004. The result in 2004 was due mainly to interest expense and a negative result in monetary position, partially offset by financial products and foreign exchange gains. The main difference in our 2004 result as compared with the result in 2003, was due to interest expenses from Ps. 26.0 million in 2003 to Ps. 121.5 million in 2004, mainly due to interest expenses and financial instruments used for purchasing of feed ingredients. OTHER INCOME, NET Other income in both 2004 and 2003 was attributable mainly to sales of used equipment, income from government support, cancellation of payments to suppliers and miscellaneous services. It represented other income of Ps.30.9 million in 2004 as compared to other income of Ps.23.5 million in 2003. The increase was mainly due to higher net income resulted from sales of used equipment. INCOME BEFORE PROVISION FOR INCOME TAX, ASSET TAX, EMPLOYEE PROFIT SHARING AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE Income before provision for income tax, asset tax, employee profit sharing and cumulative effect of accounting change increased by 33.4% from Ps.609.7 million in 2003 to Ps.813.1 million in 2004, due primarily to an increase in operating income. 33 NET INCOME Majority Net income for 2004 increased by 24.8% to Ps.702.8 million compared to 563.0 million in 2003. The increase was mainly due to better operating results. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003 GENERAL In 2003, Mexico's economy showed signs of slowdown. The Mexican GDP grew only slightly by 1%. From December 31, 2002 to December 31, 2003, Mexico's inflation rate reached 3.98%, and the peso-U.S. dollar exchange rate depreciated by 7.3%. This depreciation occurred primarily in the second part of the year. According to UNA, the production volume of the Mexican chicken industry grew approximately 5.4% in 2003. This increase in supply in the chicken industry, combined with a sluggish economy, created an oversupply in chicken products, which resulted in a decrease in chicken prices. Additionally, the prices of our primary raw materials increased significantly, which increased the cost of sales and negatively impacted operating income. These factors were not significantly offset by the fact that during 2003, Mexico imposed import limits and tariffs on chicken legs and thighs from the United States, which will be in effect until December 31, 2007. With respect to the egg industry, conditions improved in 2003 compared to 2002. Domestic production decreased by almost 4.1%, which helped reduce the oversupply that existed during most of 2002. In spite of sluggish economic conditions, an oversupply in some of our dominant product lines and a significant increase in certain raw material prices, the Company was able to maintain most of its sales volume, market its entire production, and have an operating margin of 4.0%. NET REVENUES Consolidated net revenues during 2003 amounted to Ps.11.3 billion, a slight decrease of Ps.19.5 million (or 0.17% in constant pesos) from Ps.11.3 billion in 2002. This decline was mostly due to the application of Bulletin E-1 and, to a lesser extent, the result of reduction in chicken sales, which was only partially offset by increases in the sales from the other businesses. For a discussion of Bulletin E-1, see Note 2 to the consolidated financial statements. Our chicken sales decreased by 4.2%, due mainly to price reduction and slightly lower volumes. Chicken prices suffered a reduction as a result of an excess of supply in the domestic market and the continued slowdown in the Mexican economy, which affected the purchasing power of customers. Our revenues from eggs sales increased by 17.9% in 2003, as a result of a 17.5% price increase; sales volume increased by 0.3%. This increase in sales was due to a more stable supply during most of the year as a result of lower domestic production. Balanced-feed sales grew by 2.2% compared to 2002, mainly due to a 4.9% price increase that was partially offset by a slight reduction in volumes of 2.6%. 34 COST OF SALES The consolidated cost of sales in 2003 was Ps.9.2 billion, representing an increase over 2002 of Ps.796.3 million, or 9.5%. The rise in cost of sales resulted primarily from higher unit costs in chicken, which led to an increase of Ps.560.3 million in the cost of chicken. The cost of eggs also increased by Ps.66.1 million, while other lines and balanced feed had an increase in costs of Ps.148.1 million and Ps.24.8 million, respectively. This was partially offset by a reduction of Ps.3.1 million in cost of sales of swine. The increase in the cost of sales was mostly due to a significant increase in raw material prices, including grain and soybean meal, during most of the year. The cost of sales also increased as a result of an expansion of our chicken product lines, which involve increased processing, and to a lesser extent, to increased electricity and utility costs. GROSS PROFIT Gross profit decreased by 27.9%, from Ps.2.9 billion in 2002 to Ps.2.1 billion in 2003. As a percentage of net revenues, gross profit decreased from 25.8% in 2002 to 18.7% in 2003. The decrease in our gross profit and profit margins resulted mainly from price declines in chicken and the increase in cost of sales of our main business lines. SALES, GENERAL AND ADMINISTRATIVE EXPENSES Sales and administrative expenses in 2003 amounted to Ps.1.7 billion, representing a Ps.88.0 million increase (or 5.6%) over 2002. The higher sales and administrative expenses were principally due to higher sales volume and increased distribution costs, in part because we increased our mix of product lines toward more processed products which require greater administrative resources and additional distribution expenses. As a percentage of net revenues, selling, general and administrative expenses increased 14.6% in 2003, compared to 13.8% in 2002. OPERATING INCOME Consolidated operating income in 2003 decreased year-over-year by 66.5% to Ps.454.6 million, as a result of the decrease in gross operating margin and higher sales and administrative expenses. As a percentage of net revenues, operating margin decreased from 12.0% in 2002 to 4.0% in 2003. COMPREHENSIVE FINANCING INCOME (COST) Comprehensive financing income (cost) represents the net effect of interest expense, interest income, foreign exchange gain (loss) and gain (loss) on net monetary position, which arises from the effect of inflation on the average net balance of monetary assets and liabilities. Comprehensive financing income showed a gain of Ps.131.6 million in 2003, compared to a gain of Ps.15.7 million in 2002. The result in 2003 was due mainly to interest income and foreign exchange gains, partially offset by a loss on net monetary position and interest expense. The difference in our 2003 results as compared with the result in 2002, were due mainly to an increase in interest income, from Ps. 118.2 million to Ps. 162.8 million, lower interest expenses from Ps. 34.3 million to Ps. 26.0 million, foreign exchange gain from Ps. 45.4 million to Ps. 72.6 million and a lower result loss on our net monetary position. 35 OTHER INCOME (EXPENSE), NET Other income (expense) in both 2002 and 2003 was attributable to sales of used equipment , income from government supports, income from insurances and miscellaneous services. It represented other income of Ps.23.5 million in 2003 as compared to other income of Ps.44.2 million in 2002. The, decrease was mainly due to the fact that in 2002 we received insurance proceeds for the damage caused to our Peninsula Complex as a result of Hurricane Isidore that were included in other income in 2002 and a larger income of sales of one day old chick. INCOME BEFORE PROVISION FOR INCOME TAX, ASSET TAX, EMPLOYEE PROFIT SHARING AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE Income before provision for income tax, asset tax, employee profit sharing and cumulative effect of accounting change decreased by 57% from Ps.1,418.4 million in 2002 to Ps.609.7 million in 2003, due primarily to a decline in operating income. NET INCOME Mayority net income for 2004 decreased by 65% to Ps.563.0 million compared to Ps.1,617.1 million in 2002. The decrease was mainly due to the reduction in our operating income in 2003, compensate in part by the aplication of Bulletin E-1. For a discussion of Bulletin E-1, see Note 2 to the consolidated financial statements. INCOME TAX, ASSET TAX AND EMPLOYEE PROFIT SHARING For a more detailed discussion on this topic, please see note 13 of our consolidated financial statements. We and each of our subsidiaries file individual tax returns and may be subject to different tax regimes. Until December 31, 2001, BSACV, our principal operating subsidiary, was subject to corporate income tax under the provisions of the simplified statutory regime (the "Simplified Regime"), which was applicable to a company engaged in agriculture and certain other activities that derives no more than 10% of its net revenues from unrelated activities or from the production of "processed" products, as defined in the statutory regime. On January 1, 2002, a new income tax law came into effect that substantially modified the procedure for determining taxable income under the simplified regime (the "New Simplified Regime"). Instead of determining income tax solely based on certain types of transactions, such as dividend payments or loans, the New Simplified Regime determines taxable income based on revenues collected net of deductible expenses paid. This new tax base does not allow for the deduction of the value of fixed assets as of December 31, 2001 or of inventories existing as of December 31, 2001. The New Simplified Regime taxes corporate income at a rate of 35% for 2002, with a gradual yearly decrease of one percent, until the tax rate is reduced to 32% in 2005; however, companies subject to the New Simplified Regime also receive a 50% reduction on the above corporate rate. In December 2004, a reduction in the 33% income tax rate was approved, so that the rate will be 30% in 2005, 29% in 2006 and 28% in 2007 and succeeding years. As of January 1, 2005, the tax rate for taxpayers that pay income tax under the new simplified regime will be determined by applying the reduction of 46.67% in 2005, 44.83% in 2006 and 42.86% in 2007 to the regular income tax rates of 30%, 29% and 28% for each of the respective years, resulting in a fixed rate of 16%. The effect of this tax rate reduction represented a credit to results of operations of Ps 10.1 millions in 2004. 36 In order to transition to the New Simplified Regime, companies paying taxes under the old regime had to determine either the total amount of earnings for fiscal years prior to January 1, 2002 on which taxes need to be paid or the available tax loss carryforward. As a result of this requirement, our subsidiary BSACV determined a tax loss carryforward of Ps.3,247.2 million, as of January 1, 2002. At December 31 2004, the Company had a Ps 217.5 million tax loss carryforward. In addition to income tax, we, along with our subsidiaries, are also subject to an alternative minimum tax known as "asset tax", which is assessed on the average value of most assets, net of certain liabilities. The general asset tax rate is 1.8%; BSACV is subject to a 0.9% rate pursuant to the New Simplified Regime (unchanged from the Simplified Regime). We benefit from special rules that exclude a number of assets from the asset tax and from tax incentives in connection with certain of our investments. We (together with our subsidiaries) are subject to asset tax if the amount of asset tax exceeds the computed income tax liability. Asset tax can be credited against income tax in subsequent years (up to ten years). As of December 31, 2004, we had asset tax payable in the amount of Ps.12.7 million. We credited against this amount the income tax paid (Ps.10.7 million). As of December 31, 2004, we had, at nominal value, Ps 7.7 million in asset tax credits. In 2004, we recognized a total income tax and asset tax charge of Ps.103.5 million, compared to a total income and asset tax charge of Ps.111.4 million in 2003, and a credit of Ps. 202.6 million in 2002. Neither Industrias Bachoco, S.A. de C.V. nor BSACV have employees, but each of our other subsidiaries is required under Mexican law to pay employees, in addition to their compensation and benefits, profit sharing in an aggregate amount equal to 10% of such subsidiary's taxable income subject to certain adjustments. LIQUIDITY AND CAPITAL RESOURCES Our working capital (current assets less current liabilities) increased year-over-year from Ps.3.5 billion on December 31, 2003 to Ps.3.8 billion on December 31, 2004. We believe that our working capital is sufficient for our present requirements. The ratio of current assets to current liabilities on December 31, 2004 was 6.1, as compared to the ratio of 6.3 on December 31, 2003. Cash and cash equivalents were Ps.2.3 billion at December 31, 2004, representing an increase of Ps.687.4 million from the previous year primarily due to cash generated by operations and lower capital expenditures than in 2003. Inventories were Ps.1.5 billion as of December 31, 2004, representing a decrease of Ps.167.7 million from the previous year. Notes payable to banks, including the current portion of long-term debt, equaled Ps.99.7 million as of December 31, 2004, an increase of Ps.38.6 million from December 31, 2003. Stockholders' equity increased to Ps.10.9 billion on December 31, 2004 from Ps.10.6 billion on December 31, 2003. 37 Long-term debt on December 31, 2004 represented 0.7% of our capitalization, as compared to 0.9% on December 31, 2003. In 2004, capital investments amounted to Ps.438.2 million, all of which were financed from resources generated from our own operations. These capital investments were allocated mainly to renew the transportation fleet, productivity projects and to finance internal growing capacity. We are a holding company with no significant operations of our own. We will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries, principally BSACV. The amount of dividends payable by our subsidiaries and us is also subject to general limitations under Mexican corporate law. We expect to finance our capital expenditures and debt service obligations from our current liquidity and capital resources, cash flows and from additional borrowings from our existing sources of debt financing, although we will also consider other sources of debt financing if they are available on advantageous terms. Our major categories of indebtedness included the following: . Notes payable to banks: Short-term peso-denominated unsecured notes. As of December 31, 2004 we had Ps.75.4 million outstanding. At December 31, 2004 the weighted average interest rate on short-term notes payable was 4.9%. . Long-term debt to banks: Peso-denominated secured debt and U.S. dollar-denominated unsecured debt. As of December 31, 2004 we had Ps.96.8 million outstanding maturing from 2005 to 2010. At December 31, 2004 the weighted average interest rate on long-term debt was 9.35%. The following table summarizes certain contractual liabilities as of December 31, 2004. The table does not include short-term debt, accounts payable or pension liabilities.
PAYMENTS DUE BY PERIOD (millions of constant pesos as of December 31, 2004) ------------------------------------------------------------------ LESS THAN 1 TO 3 3 TO 5 5 OR MORE CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS ------------------------------------- ---------- --------- --------- --------- --------- Long-term debt....................... Ps. 96.8 Ps. 24.3 Ps. 48.5 Ps. 11.8 Ps. 12.2 Operating leases..................... 98.9 28.6 49.5 12.8 8.0 ---------- --------- --------- --------- --------- Total................................ Ps. 195.7 Ps. 52.9 Ps. 98.0 Ps. 24.6 Ps. 20.2 ========== ========= ========= ========= =========
OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements of the type that we are required to disclose under Item 5.E of Form 20-F. RECONCILIATION TO U.S. GAAP The principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, concern (i) deferred income taxes, (ii) capitalization of financing costs, (iii) biological assets and agricultural products valuation at fair value, (iv) the amortization of goodwill (see Note 17 to the consolidated financial statements for a detailed description). Each of these differences also affects our balance sheet. 38 Our consolidated net income under U.S. GAAP was Ps.1,638.2 million in 2002, Ps.529.2 million in 2003 and Ps.740.3 million in 2004, compared to Ps.1,619.3 million, Ps.567.5 million and Ps.706.6 million, respectively, under Mexican GAAP. For further explanation, please see Note 17 to the consolidated financial statements. USE OF ESTIMATES IN CERTAIN ACCOUNTING POLICIES In preparing our financial statements, we make estimates concerning a variety of matters. Some of these matters are highly uncertain, and the estimates involve judgments based on the information available to us. The discussion below identifies matters for which the financial presentation would be materially affected (a) if we relied on different estimates that we could reasonably use, or (b) if in the future we change our estimates in response to changes that are reasonably likely to occur. The discussion below addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates would not be material to our financial presentation. ESTIMATED USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT We estimate the useful lives of our property, plant and equipment in order to determine the amount of depreciation expense to be recorded in each period. The current estimates of useful lives are based on estimates made by an independent appraiser in 1996. Those estimates have been adjusted when applicable, based on historical experience with similar assets that we own. Comprehensive financing cost related to the construction of assets is capitalized and then amortized over the estimated useful lives of the assets. Accumulated depreciation expense for property, plant and equipment in 2004 amounted to Ps.4,922.1 million. As applied to our 2004 financial results, the depreciation was Ps.420.3 million, or 3.16% of our net revenues. For further explanation, see Notes 2 and 4 to the consolidated financial statements. ALLOWANCE FOR PRODUCTIVITY DECLINES In estimating the inventory value of our breeder birds, swine and layers, we make allowances for productivity declines. We estimate such allowances based on expected future production and deduct them from inventories. The estimates of future production are based on standards for the breeder line and the performance of the most recent flocks. We refer to the standards provided by the company that sells us the breeder line in question. Each company that sells breeder lines publishes its own particular standards for its proprietary breeder line. INVENTORY VALUATION Prior to the adoption of Bulletin E-1 on January 1, 2003, for Mexican GAAP purposes, our inventories are valued using market prices. According to Bulletin E-1, biological assets and agricultural products (the latter at the time of their harvesting) are to be valued at their fair value, net of estimated costs at point of sale. The Bulletin also establishes that whenever the fair value cannot be determined in a reliable, verifiable and objective manner, the assets are to be valued at their production cost, net of accumulated impairment. 39 Poultry being fattened (with less than 6.5 weeks old), incubatable eggs for fattening, pigs and laying hens, are valued at production cost since it is not possible to determine their fair value in a reliable, verifiable and objective manner. Poultry being fattened from age 6.5 weeks to the time birds are ready for sale, is valued at fair value net of estimated costs at point of sale, considering the sales price per kilogram of processed chicken at the date of valuation. Laying hens are depreciated based on eggs produced using an estimated factor for productive useful life. Processed chicken and commercial eggs, are valued at their fair value net of costs at point of sale, considering the sales price per kilogram of processed chicken and commercial eggs at the time such items are considered agricultural products, from this date, the valuation is considered to be cost up to the time of sale, not in excess of net realizable value. For more detail, see "Inventories and biological assets" in Note 3 and Note 2 p to the consolidated financial statements. ALLOWANCE FOR DOUBTFUL ACCOUNTS We periodically and systematically review the aging and collection of our accounts receivable. As a result of this procedure, we set up an allowance for doubtful accounts of Ps. 35.1 millions, in 2004 that represents 0.3% of our total annual sales. See Note 2e of our Audited Financial Statements. The estimates are based on information available and focusing on expected trends and estimated default rates, identification of potential problems and exposure to major customers. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES DIRECTORS The board of directors is responsible for the management of our business. The board of directors consists of an odd number of directors, never less than five, and corresponding alternate directors, each of whom is elected for a term of one year. The holders of Series B Shares may elect directors and alternate directors at a general ordinary stockholders' meeting. The holders of Series L Shares have the right to appoint or elect two directors and two alternate directors to the board of directors. Alternate directors elected by the holders of Series B Shares are authorized to serve on the board of directors in place of directors who are unable to attend meetings or otherwise participate in the activities of the board of directors. Likewise, alternate directors appointed or elected by the holders of Series L Shares are authorized to serve on the board of directors in place of directors appointed or elected by the holders of Series L Shares who are unable to attend meetings or otherwise participate in the activities of the board of directors. The following table identifies our directors, alternate directors, Honorary Chairman of the board and Secretary of the board as of June 20, 2005, their positions and their years of service. 40
YEARS AS NAME POSITION DIRECTOR ---------------------------------------------- ------------------------------------- -------- Enrique Robinson Bours Almada................. Honorary Chairman of the board 51 Francisco Javier R. Bours Castelo............. Chairman of the board and Proprietary Director 23 Mario Javier Robinson Bours Almada............ Proprietary Director 51 Juan Bautista Salvador Robinson Bours......... Proprietary Director 51 Arturo Bours Griffith......................... Proprietary Director 11 Jose Eduardo Robinson Bours Castelo........... Alternate Director 11 Jesus Enrique Robinson Bours Munoz............ Proprietary Director 11 Juan Salvador Robinson Bours Martinez......... Alternate Director 11 Jose Francisco Bours Griffith................. Alternate Director 11 Guillermo Pineda Cruz......................... Alternate Independent Director 11 Ricardo Aguirre Borboa........................ Independent Director 11 Cristobal Mondragon Fragoso................... Secretary of the board 9 Avelino Fernandez Salido...................... Independent Director 2 Octavio Robinson Bours Griffith............... Proprietary Director 8 Humberto Schwarzbeck Noriega.................. Independent Director 2 Jesus Rodolfo Robinson Bours Munoz............ Proprietary Director 3
Enrique Robinson Bours, Mario Javier Robinson Bours and Juan Bautista Salvador Robinson Bours are brothers. Francisco Javier R. Bours Castelo and Jose Eduardo Robinson Bours Castelo are sons of Mario Javier Robinson Bours. Arturo Bours Griffith, Jose Francisco Bours Griffith and Octavio Robinson Bours are nephews of Enrique Robinson Bours, Mario Javier Robinson Bours and Juan Bautista Salvador Robinson Bours. Jesus Enrique Robinson Bours Munoz and Jesus Rodolfo Robinson Bours Munoz are sons of Enrique Robinson Bours. Juan Salvador Robinson Bours Martinez is the son of Juan Bautista Salvador Robinson Bours. Guillermo Pineda Cruz is the son-in-law of Enrique Robinson Bours, and Ricardo Aguirre Borboa is the son-in-law of Juan Bautista Salvador Robinson Bours. Our bylaws provide for the creation of an executive committee of the board of directors, which may exercise certain of the board's powers in full, subject to certain limitations. Our stockholders elect members of the executive committee for one-year terms. In 2004, there were four members of the executive committee: Francisco Javier R. Bours Castelo, Jesus Enrique Robinson Bours Munoz, Arturo Bours Griffith and Juan Salvador Robinson Bours Martinez. In April 2002, we announced the retirement of Mr. Enrique Robinson Bours Almada, Chairman of the board and co-founder of the Company. Mr. Bours led Industrias Bachoco S. A. de C.V. for 50 years. The board named as his successor Mr. Javier Robinson Bours Castelo, Mr. Enrique Robinson Bours's nephew. Mr. Bours Castelo has been at Bachoco for 23 years as a member of the board and served as Vice-Chairman for nine years. Mr. Bours Castelo was named Chairman of the board in 2002. 41 In order to fully comply with current Mexican Corporate and Securities Market Laws as well as other recent regulatory amendments in the various markets in which Bachoco's shares are traded, we appointed a new board of directors at our ordinary stockholder meeting held on April 30, 2003. We ratified our board of directors at our stockholder meeting held on April 27, 2005. Our board, as of June 20, 2005, is composed of the following members: Proprietary Directors: ---------------------- Francisco Javier R. Bours Castelo (Chairman of the board of directors) Mario Javier Robinson Bours Almada Juan Bautista S. Robinson Bours Almada Jesus Enrique Robinson Bours Munoz Jesus Rodolfo Robinson Bours Munoz Arturo Bours Griffith Octavio Robinson Bours Griffith Alternate Directors: -------------------- Jose Eduardo Robinson Bours Castelo Juan Salvador Robinson Bours Martinez Jose Francisco Bours Griffith Independent Directors: ---------------------- Ricardo Aguirre Borboa Avelino Fernandez Salido Humberto Schwarzbeck Noriega Alternate Independent Director: ------------------------------- Guillermo Pineda Cruz Francisco Javier R. Bours Castelo, Chairman of the board of directors, has been a member of the board for 23 years, and has been Chairman since April 2002. Before that, he was Vice-Chairman for several years. Mr. Bours holds a degree in Civil Engineering from the Instituto Tecnologico y de Estudios Superiores Monterrey (ITESM). He currently serves as Chairman of the boards of directors of the following companies: Grupo Megacable, S.A. de C.V., Congeladora Horticola, S.A. de C.V., Inmobiliaria of Trento S.A. de C.V., Acuicola Boca S.A. de C.V., Agriexport S.A. de C.V., Taxis Aereos del Noroeste S.A. de C.V., Industrias Boca, S.A. de C.V., Promotora Empresarial del Noroeste, S.A. de C.V., Sonora Spa Resort, S.A. de C.V., among others. Mario Javier Robinson Bours Almada, Proprietary Director, has been a member of the board for 51 years, and is a co-founder of Industrias Bachoco S.A. de C.V. Juan Bautista S. Robinson Bours Almada, Proprietary Director, has been a member of the board for 51 years and is a co-founder of Industrias Bachoco S.A. de C.V. Jesus Enrique Robinson Bours Munoz, Proprietary Director, has been a member of the board for 11 years, having previously served as Production Director and Divisional Manager. Mr. Robinson Bours holds a degree in Engineering from the University of Arizona. He is also a member of the board of directors of San Luis Corporacion S.A. de C.V., and Megacable S.A. de C.V. He has spent his entire career in the agricultural sector. Jesus Rodolfo Robinson Bours Munoz, Proprietary Director, has been a member of the board for three years. Mr. Robinson Bours previously served in the Company as Production Manager in the Northwest and Bajio divisions, Commercial Manager in Northwest Division and Purchasing Manager at the Bajio Division. Mr. Robinson Bours holds a degree in Agricultural Engineering from the University of Arizona. He has business experience in agriculture and raising livestock with Agricola Monte Cristo S.A. de C.V., Agricola Rio Yaqui S.P.R. de R.L., Agricola Nacapul S.P.R. de R.L. and Ganadera Cocorena S.P.R. de R.L. Arturo Bours Griffith, Proprietary Director, has been a member of the board for 11 years. Mr. Bours Griffith completed professional studies at the University of Arizona, he is also chairman of the board of Qualyplast, S.A. de C.V., and a member of the board of Megacable, S.A. de C.V., Promotora Empresarial del Noroeste, S.A. de C.V., Taxis Aereos del Noroeste, S.A. de C.V., among others. 42 Octavio Robinson Bours Griffith, Proprietary Director, has been a member of the board for eight years. Mr. Robinson Bours holds a degree in Agricultural Engineering from the Instituto Tecnologico y de Estudios Superiores de Monterrey (ITESM). He has experience in producing swine, and is also member of the board of Choya, S.A. de C.V., and Granos Santa Fe, S.A. de C.V.. Jose Eduardo Robinson Bours Castelo, Alternate Director, has been a member of the board for 11 years. Mr. Robinson Bours holds a degree in Industrial Engineering from the Instituto Tecnologico y de Estudios Superiores de Monterrey (ITESM). He was previously Commercial Director of Industrias Bachoco, a Senator of the Mexican Congress and is currently governor of the state of Sonora. Juan Salvador Robinson Bours Martinez, Alternate Director, has been a member of the board for 11 years, and has served Bachoco as Purchasing Manager. Mr. Robinson Bours holds a degree in Industrial Engineering from the Instituto Tecnologico y de Estudios Superiores de Monterrey (ITESM). His other appointments include Chairman of the board and CEO of Llantas y Accesorios, S.A. de C.V. Jose Francisco Robinson Bours Griffith, Alternate Director, has been a member of the board for 11 years. He holds a degree in Civil Engineering from the Universidad Autonoma de Guadalajara. Mr. Robinson Bours has worked at Bachoco as Engineering Manager, and is currently dedicated to agricultural operations. Ricardo Aguirre Borboa, Independent Director, has been a member of the board for 11 years. He is also a member of the board of directors of the newspaper El Debate and he holds a degree in Agricultural Engineering from the Instituto Tecnologico y de Estudios Superiores Monterrey (ITESM). He has experience in agriculture and pork production. Mr. Aguirre Borboa is also member of the board of Gasolinera Servicios del Valle del Fuerte S.A. de C.V., Periodico el Debate de los Mochis, Tepeyac Produce, Inc. among others. Avelino Fernandez Salido, Independent Director, was named a member of the board on April 30, 2003. He is also a member of the board of Banco Nacional de Mexico, BBVA Bancomer, and Banca Serfin. His business experience is in the marketing of grains. Humberto Schwarzbeck Noriega, Independent Director, was named a member of the board on April 30, 2003.He holds a degree in economics from the Instituto Tecnologico y de Estudios Superiores de Monterrey. He is currently CEO of Yeso Industrial de Navojoa S.A. de C.V. a private company dedicated to production of plaster for the construction industry and Chief of the Board of Promotora de Manufacturas S.A. de C.V., a private company dedicated to production of automotive parts. Guillermo Pineda Cruz, Alternate Independent Director, has been a member of the board for 11 years. He is also a member of the board of directors of Banamex and was a regional member of the board of directors of Grupo Financiero Serfin, Inverlat and Invermexico. He holds several appointments in public interest organizations, including President of the board of directors of Cajeme 2020 AC since 2000, President of the board of directors of Cruz Roja Mexicana en Ciudad Obregon (1997-2001). Mr. Pineda holds a degree in Civil Engineering from the Instituto Tecnologico y de Estudios Superiores de Monterrey (ITESM) and a master's degree in Business Administration from the Instituto Tecnologico y de Estudios Superiores de Sonora (ITSON). He co-founded Edificadora Pi-Bo, S.A. de C.V. in 1983, and is its President and CEO. At the ordinary annual stockholders' meeting held on April 27, 2005 all of the members of the board were ratified in their charges. Mr. Cristobal Mondragon Fragoso was confirmed as Secretary of the board of directors and Mr. Felizardo Gastelum Felix was appointed the Company's statutory auditor. 43 EXECUTIVE OFFICERS Our executive officers as of December 31, 2004 are set forth in the table below. NAME POSITION AGE ---- -------- --- Cristobal Mondragon Fragoso............. Chief Executive Officer 59 Daniel Salazar Ferrer................... Chief Financial Officer 40 David Gastelum Cazares.................. Director of Marketing 53 Jose Luis Lopez Lepe.................... Director of Personnel 57 Rodolfo Ramos Arvizu.................... Director of Production 47 Ernesto Salmon Castelo.................. Director of Industries 43 Francisco Javier Espinoza Teja.......... Director of Supply Chain 37 Cristobal Mondragon Fragoso, Chief Executive Officer, joined us in 1982 and assumed his current position in 2001. Previously, Mr. Mondragon served as Administration Manager, as Manager of Corporate Finance and as Chief Financial Officer. Before joining us, Mr. Mondragon worked as an accountant for three years. Later he joined La Hacienda, S.A. de C.V. where he held the positions of Auditor, Accountant, Head of Processing Systems, Audit Manager, Administration Manager and Comptroller. Mr. Mondragon holds an Accounting degree from Universidad Nacional Autonoma de Mexico (UNAM). Daniel Salazar Ferrer, Chief Financial Officer, joined us in 2000 and assumed his current position in January 2003. Previously Mr. Salazar worked for four years as Chief Financial Officer at Grupo Covarrubias and as Comptroller at Negromex, a company of Grupo Desc. Mr. Salazar holds an Accounting degree from Universidad Tecnologica de Mexico and a master's degree in Business Administration from Instituto Tecnologico de Estudios Superiores de Monterrey (ITESM). David Gastelum Cazares, Director of Marketing, joined us in 1979 and assumed his current position in 1992. Previously, Mr. Gastelum served as a pullet salesman in the states of Sonora and Sinaloa, National Sales Manager of Live Animals and Eggs, Manager of the Northwest Division, Manager of the Mexico City Division and National Sales Manager. Before joining us, Mr. Gastelum worked at La Hacienda, S.A. de C.V. as Technical Advisor and as Area Officer for the Southeast Division. Mr. Gastelum holds a degree in Veterinary Medicine from the school of Veterinary of Medicine of Universidad Nacional Autonoma de Mexico (UNAM). Jose Luis Lopez Lepe, Director of Personnel, joined us in 1993. Previously, Mr. Lopez worked as a teacher in several institutions as well as with Grupo Condumex, where he was Director of Personnel. Mr. Lopez holds a degree in Physics and Chemistry from the Escuela Normal Superior and a degree in Business Administration from Instituto Tecnologico Autonomo de Mexico. Rodolfo Ramos Arvizu, Technical Director, joined us in 1980. Previously, Mr. Ramos held positions in the Egg Quality Control Training Program and in Poultry Management as well as serving as Supervisor of the Commercial Egg Production Training Program, Manager of Raw Material Purchasing and as a Director of Production. Mr. Ramos holds a degree in Agricultural Engineering from Instituto Tecnologico de Estudios Superiores de Monterrey (ITESM). Ernesto Salmon Castelo, Director of Industries, joined us in 1991 and assumed his current position in 2000. Previously, Mr. Salmon worked for Gamesa, S.A. de C.V. and for us as Sales Manager in Sonora, Northwestern Distribution Manager, Manager of the Processing Plant in Celaya, Southeastern Division Manager and Bajio Division Manager. Mr. Salmon holds a degree in Chemical Engineering from Instituto Tecnologico de Sonora and a master's degree in Business Administration from Instituto Tecnologico de Estudios Superiores de Monterrey (ITESM). 44 Francisco Javier Espinoza Teja, Director of Supply Chain, joined us in 2004. Previously, Mr. Espinoza worked at Procter & Gamble and at the Coca-Cola Company in Mexico. He holds a Chemical Engineering degree from the Universidad Autonoma de Guadalajara and a master's degree in International Finance from Instituto Tecnologico de Estudios Superiores de Monterrey (ITESM). STATUTORY AUDITOR The statutory auditor generally reviews our affairs and reports to the stockholders at the ordinary general meeting as to the accuracy of the financial information presented to them by the board of directors. The statutory auditor is also authorized to do the following: (i) call ordinary or extraordinary stockholders' meetings; (ii) place items on the agenda for meetings of stockholders or the board of directors; (iii) attend meetings of stockholders or the board of directors (without the right to vote); and (iv) request monthly reports from the board of directors regarding our financial condition, including statements of results of operations. As of December 31, 2003, Francisco Jose Sanchez Gonzalez was the statutory auditor. In April 2004, Felizardo Gastelum Felix replaced him as statutory auditor. AUDIT COMMITTEE In January 2001, a Mexican Commission of Business Leaders (Consejo Coordinador Empresarial), with the support of the Comision Nacional Bancaria y de Valores (Mexican Banking and Securities Commission, or, "CNBV"), issued a Codigo de Mejores Practicas Corporativas ("Code of Best Practices") for publicly traded Mexican companies, recommending certain actions with respect to various areas of corporate governance. Subsequently, the Securities Market Law was amended effective June 2001, to require that all publicly traded Mexican companies have an audit committee. The mandate of the audit committee is to establish and monitor procedures and controls in order to ensure that the financial information we distribute is useful, appropriate and reliable and accurately reflects our financial position. In particular, pursuant to our bylaws and Mexican law, the audit committee must do the following: (a) Submit an annual report to the board of directors; (b) Provide the board of directors with its opinion regarding any transaction with a related party that is outside the ordinary course of our business (the board is required to seek the audit committee's opinion on such matters); and (c) Assist the board of directors in selecting candidates for auditor and reviewing the scope and terms of the auditor's engagement. 45 In order to fully comply with current Mexican Corporate and Securities Market Laws as well as other recent regulatory amendments in the various markets in which Bachoco's shares are traded, we named an audit committee during our annual ordinary stockholders' meeting on April 30, 2003. The audit committee is currently comprised of the following four members: Ricardo Aguirre Borboa (President) Francisco Javier R. Bours Castelo Avelino Fernandez Salido Humberto Schwarzbeck Noriega This committee was named during our annual ordinary stockholders' meeting held on April 28, 2004, and ratified on our annual ordinary stockholders' meeting held on April 27,2005. Francisco Javier R. Bours Castelo, represents the controlling shareholders and has no voting rights in the audit committee. COMPENSATION OF DIRECTORS AND OFFICERS For the year ended December 31, 2004, we paid approximately Ps.23.2 million in aggregate compensation to our directors and executive officers, for services they rendered in their respective capacities. BOARD PRACTICES In 2001, we began to review our board practices to bring them into compliance with the recent requirements for companies listed on the Mexican Stock Exchange. As a result of this review, we have changed the composition of our board and appointed an audit committee. See "Directors" and "Audit Committee." EMPLOYEES As of December 31, 2002, 2003 and 2004, we had approximately 18,306; 18,495 and 18,896 employees, respectively. In 2004, approximately 62% of employees were members of labor unions. Labor relations with our employees are governed by 52 separate collective labor agreements, each relating to a different group of employees and negotiated on behalf of each such group by a different labor union. As is typical in Mexico, wages are renegotiated every year while other terms and conditions of employment are renegotiated every two years. We seek to attract dependable and responsible employees to train at each of our plants and facilities. We offer our employees attractive salary and benefit packages, including a pension and savings plan. We believe that we have good relations with our employees. We have not experienced significant work stoppages as a result of labor problems. SHARE OWNERSHIP To the best of our knowledge, no individual director or managers holds share ownership of more than one percent of any of the class Shares subject to this report. At this time, we have not developed a share options plan for our employees. 46 COMPARISON OF OUR CORPORATE GOVERNANCE RULES AND THE RULES OF THE NYSE APPLICABLE TO U.S. COMPANIES On November 4, 2003, the SEC approved the final corporate governance rules of the NYSE. According to such rules, foreign private issuers are subject to a more limited set of requirements regarding corporate governance than those imposed on U.S. domestic issuers. As a foreign private issuer, we must comply with three rules imposed by the NYSE: . prior to July 31, 2005, we must comply with the requirements set forth by the SEC concerning audit committees; . our CEO must promptly notify the NYSE in writing after any executive officer becomes aware of any material non-compliance with any of the applicable NYSE corporate governance rules; and . we shall provide a brief description disclosing any significant ways in which our corporate governance practices differ from those followed by U.S. companies under NYSE listing standards. A brief description disclosing the significant ways in which our corporate governance practices differ from those followed by U.S. companies under NYSE listing standards is available in our webpage www.bachoco.com.mx/english/inversionistas/corporate.asp. ITEM 7. MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS. Our Common Stock consists of 450,000,000 Series B Shares and 150,000,000 Series L Shares. Holders of Series B Shares are entitled to one vote at any general meeting of our stockholders for each Series B Share held. Holders of Series L Shares are entitled to one vote for each Series L Share held, but only with respect to certain matters. Each Unit consists of one Series B Share and one Series L Share. Each B Unit consists of two Series B Shares. As of December 31, 2004, 91.3% of our Series B and 74.0% of our Series L, shares were held in Mexico. In April 1995, the Robinson Bours Stockholders created the Control Trust to hold certain Units owned by members of the Robinson Bours family. The Robinson Bours Stockholders, through the Control Trust and a separate trust established in connection with our 1997 initial public offering (the "Family Trust"), owned Units and B Units representing approximately 65.5% of the Series L Shares and 88.5% of the Series B Shares outstanding on December 31, 2004. In total, the Control Trust and the Family Trust owned 496,500,000 Shares outstanding on December 31, 2004. The table below sets forth certain information regarding the direct or indirect ownership of outstanding Shares by the Control Trust and the Family Trust as of December 31, 2004. 47
TITLE OF CLASS IDENTITY OF GROUP AMOUNT OWNED PERCENT OF CLASS --------------- ------------------------------ ------------ ---------------- Series B(1) Control Trust and Family Trust 398,250,000 88.5% Series L(2) Control Trust and Family Trust 98,250,000 65.5% All Classes(3) Control Trust and Family Trust 496,500,000 82.8%
---------- (1) Percentage is based on 450,000,000 Series B Shares, including 300,000,000 Shares not registered under Section 12 of the Securities and Exchange Act of 1934. (2) Percentage is based on 150,000,000 Series L Shares. (3) Percentage is based on 600,000,000 Shares. Apart from the ownership set forth in the table above, at the end of April 2005, Fidelity Low Priced Stock Fund and Fidelity Management & Research Co. own 5.03% each of our Common Stock. In November 1998, in accordance with rules established by the CNBV, we established a reserve in the amount of Ps.180.0 million (Ps.272.4 million in constant pesos as of December 31, 2004 purchasing power) for the repurchase of shares. We may repurchase our shares in the Mexican Stock Exchange at prevailing prices to the extent of the balance remaining in the reserve account or up to 3% of the total shares outstanding. Any shares so repurchased will not be deemed to be outstanding for purposes of calculating a quorum or for voting at any stockholders' meeting during the time that we own the shares. During our stockholders' meeting of April 27, 2005, we capped the share repurchase program for 2005 to a maximum amount of Ps.162.0 million, equivalent to approximately 6.0 million units (or 1.0 million ADS). As of May 15, 2005, we had repurchased no Units. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS It is our policy not to engage in any transaction with or for the benefit of any stockholder or member of the board of directors, or any entity controlled by such a person or in which such a person has a substantial economic interest, unless (i) the transaction is related to our business and (ii) the price and other terms are at least as favorable to us as those that could be obtained on an arm's-length basis from a third party. We have engaged in a variety of transactions with entities owned by members of the Robinson Bours family, all of which we believe were consistent with this policy and not material to our business and results of operations. All of these transactions are described below. See Note 8 to the consolidated financial statements. We expect to engage in similar transactions in the future. We regularly purchase vehicles and related equipment from distributors owned by various members of the Robinson Bours family. The total amount spent on such purchases was Ps.52.6 million, Ps.49.8 million and Ps.37.8 million for the years ended December 31, 2002, 2003 and 2004, respectively. The distribution of vehicles and related equipment is a highly competitive aspect of business in the areas in which we operate. We are not dependent on affiliated distributors and are able to ensure that the pricing and service we obtain from affiliated distributors are competitive with those available from other suppliers. The Robinson Bours Stockholders own Taxis Aereos del Noroeste, S.A. de C.V. ("TAN"), an air transport company that provides transportation for members of the board of directors to and from meetings at our headquarters in Celaya. We paid TAN Ps.3.7 million, Ps.4.8 million and Ps.2.7 million for the years ended December 31, 2002, 2003 and 2004, respectively, for such transportation. 48 We purchased feed and packaging materials from enterprises owned by the family of Enrique Robinson Bours and the family of Juan Bautista Robinson Bours. The cost of such purchases was Ps.107.1 million, Ps.161.1 million and Ps.196.0 million for the years ended December 31, 2002, 2003 and 2004, respectively. Our accounts payable to related parties totaled Ps.2.6 million and Ps.6.1 million as of ended December 31, 2003 and 2004, respectively. These transactions took place among companies owned by the same set of stockholders. See Note 8 to the consolidated financial statements. In November 2004, the Company acquired all the shares of SECBA, S.A. de C.V. from a related party for Ps. 13.9 million. As of the date of the acquisition, the figures of SECBA, S.A. de C.V. have been consolidated with the Company's figures. The excess of the purchase price paid over the book value of this investment amounted to Ps. 0.3 million, which was recorded in other income. In April 2002, we sold our subsidiary, SECBA, S.A. de C.V., for Ps. 5.6 million to a related party, generating a gain of Ps. 0.8 million; consequently, this subsidiary's figures were not consolidated from the date of sale. The effects of the deconsolidation of this subsidiary were immaterial and did not affect the comparability of the accompanying financial statements. SECBA, S.A. de C.V. continued to render administrative services to the Company. Neither we nor our subsidiaries have loaned any money to any of our directors or officers. ITEM 8. FINANCIAL INFORMATION Our consolidated financial statements are included in Item 18. The financial statements were audited by an independent registered public accounting firm, auditor and are accompanied by an audit report. The financial statements include a consolidated balance sheet, consolidated statements of income, consolidated statements of changes in stockholders' equity, consolidated statements of changes in financial position and Notes relating to the consolidated financial statements. The consolidated financial statements have been prepared in accordance with Mexican GAAP, which differs in certain respects from U.S. GAAP. Note 17 to the consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us and a reconciliation to U.S. GAAP of total stockholders' equity, operating income and net income, a consolidated statement of changes in stockholders' equity and a condensed cash flow statement under U.S. GAAP as of December 31, 2003 and 2004, and for the years ended December 31, 2002, 2003 and 2004. LEGAL PROCEEDINGS We are a party to certain legal proceedings in the ordinary course of our business. We believe that none of these proceedings, individually or in the aggregate, is likely to have a material adverse effect on us. DIVIDENDS POLICY Pursuant to Mexican law and our bylaws, the declaration, amount and payment of annual dividends are determined by a majority vote of the holders of Series B Shares, generally but not necessarily on the recommendation of the board of directors. Holders of Series L Shares are not entitled to vote with respect to the declaration of dividends. 49 We declared and paid dividends in nominal pesos of Ps.267.8 million in 2002, Ps.297.7 million in 2003 and Ps.238.9 million in 2004. Although there can be no assurance as to the amount or timing of future dividends, we expect to pay an annual dividend pro rata to holders of outstanding Shares in an amount up to approximately 20% of the prior year's net income. The declaration and payment of dividends will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the board of directors and the holders of Series B Shares, including debt instruments which may limit our ability to pay dividends. Because we are a holding company with no significant operations of our own, we will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries, principally BSACV. Accordingly, there can be no assurance that we will pay dividends or of the amount of any such dividends. BSACV, our principal operating subsidiary, could, in the future, enter into loan agreements containing covenants whose terms limit its ability to pay dividends under certain circumstances. Mexican law requires that 5% of our net income each year (after profit sharing and other deductions required by Mexican law) be allocated to a legal reserve fund until such fund reaches an amount equal to at least 20% of our capital stock. Mexican corporations may pay dividends only out of earnings (including retained earnings after all losses have been absorbed or paid up) and only after such allocation to the legal reserve fund. The level of earnings available for the payment of dividends is determined under Mexican GAAP. SIGNIFICANT CHANGES IN ACCOUNTING PRACTICES Treatment of Biological Assets Prior to the adoption to bulletin E-1, on January 1, 2003, the Company adopted the requirements of the new Bulletin E-1 under Mexican GAAP. The Bulletin changes the way biological assets, including animals like chicken and swine, are treated under Mexican GAAP. Starting in January 2003, changes in the fair market value of these assets must be included as a potential profit in a company's financial statements before they are harvested. We have to estimate the potential profit for these animals at a reasonable market price minus expected costs and operating expenses. That estimate may be higher or lower than the actual profits realized. The effect of Bulletin E-1 may be positive or negative for any particular period, depending on the price and inventories of animals in that period. For a more detailed description please see Note 2-p and Note 3 in our Consolidated Audited Financial Statements. Business acquisitions In May 2004, the Mexican Institute issued Mexican accounting Bulletin B-7, Business Acquisitions. The observance of Bulletin B-7 is mandatory for fiscal years beginning on or after January 1, 2005, although earlier observance is recommended. Bulletin B-7 addresses the financial accounting and reporting for business and entity acquisitions and requires that all business combinations be accounted for using only the purchase method. Bulletin B-7 also eliminates the amortization of goodwill and provides specific rules related to the acquisition of minority interest and to the transfer of net assets or exchange of equity interests between entities under common control. We believe that the adoption of this accounting pronouncement will increase the Company's net income in 2005 by Ps 17.5 million, derived from the elimination of goodwill amortization. 50 Financial instruments In April 2004, the Mexican Institute amended Mexican accounting Bulletin C-2, Financial Instruments. The amendments establish that changes in the fair value of instruments classified as available for sale be disclosed in the holder's stockholders' equity. The amended Bulletin C-2 also provides the requirements and rules for the accounting treatment of transfers between financial asset categories. The amendments are also more precise in establishing the guidelines for the accounting treatment to be given to impairment in the fair value of financial instruments. Furthermore, the amended bulletin requires that such instruments be classified as either short-term or long-term and clarifies the rules for presenting in the statement of changes in financial position changes associated with the purchase, sale and maturity of financial instruments. Finally, the amendments broaden the disclosure rules established under Bulletin C-2. The observance of the amendments to Bulletin C-2 is mandatory for fiscal years beginning on or after January 1, 2005, although earlier observance is permitted. We do not believe the adoption of this new accounting requirement will have a material effect on the Company's financial position or on its results of operations. Accounting for derivative instruments and hedging activities In April 2004, the Mexican Institute issued Bulletin C-10, Accounting for Derivative Instruments and Hedging Activities. Bulletin C-10 establishes the defining characteristics that financial instruments must have to be considered derivatives, as well as the conditions that must be met for specifically designating derivatives as hedges. Bulletin C-10 also provides guidelines for assessing the effectiveness of hedging derivatives and the rules for their valuation and the accounting for changes in their fair value. Finally, this bulletin provides guidelines for disclosing and presenting hedges in the financial statements. We do not believe the adoption of this new accounting requirement will have a material effect on the Company's financial position or on its results of operations. Labor Obligations In January 2004, the Mexican Institute issued the revised accounting Bulletin D-3, Labor Obligations. The revised bulletin establishes the overall rules for the valuation, presentation and disclosure of so-called "other post-retirement benefits and the reduction and early extinguishment of such benefits", thus nullifying the provisions of Circular 50. Bulletin D-3 also provides rules applicable to employee termination pay. The observance of these new rules is mandatory for fiscal years beginning on or after January 1, 2005. We do not believe the adoption of this new accounting requirement will have a material effect on the Company's financial position or on its results of operations. ITEM 9. THE OFFER AND LISTING The Units (each comprised of one Series B Share and one Series L Share) are listed on the Mexican Stock Exchange, and the American Depositary Shares ("ADSs," each comprised of six Units) are listed on the New York Stock Exchange. The ADSs are evidenced by American Depositary Receipts ("ADRs") issued by The Bank of New York, as Depositary under a Deposit Agreement among the Company, the Depositary and the holders from time to time of ADRs. On December 31, 2003, there were 6,495,012 ADSs outstanding, representing 8.7% of the outstanding Series B Shares and 26.0% of the outstanding Series L Shares, which were held by five holders (including the Depositary Trust Company) with registered addresses in the United States. 51 The Units and the ADSs commenced trading on September 19, 1997. The following tables set forth for each year from 2000 to 2004, for each quarter from 2003 and 2004 and for each complete month from December 2004 to May 2005, the high, low and period end sales prices of the Units on the Mexican Stock Exchange as reported by the Mexican Stock Exchange and the high, low and period end sales price of the ADSs on the New York Stock Exchange as reported by the New York Stock Exchange. MEXICAN STOCK EXCHANGE (Nominal pesos per Unit) YEAR HIGH LOW CLOSE ---------------------------------------- ---------- ---------- ---------- 2000 ................................... 16.06 9.51 10.19 2001 ................................... 13.00 8.17 11.10 2002 ................................... 16.00 10.98 14.50 2003 ................................... 19.30 14.00 18.90 2004 ................................... 26.70 17.00 26.20 NEW YORK STOCK EXCHANGE (U.S.$ per ADS) YEAR HIGH LOW CLOSE ---------------------------------------- ---------- ---------- ---------- 2000 ................................... 10.75 6.50 7.06 2001 ................................... 8.60 5.45 7.35 2002 ................................... 10.00 7.15 8.52 2003 ................................... 10.78 7.73 10.45 2004 ................................... 14.19 8.80 14.19 MEXICAN STOCK EXCHANGE (Nominal pesos per Unit) PERIOD HIGH LOW CLOSE ---------------------------------------- ---------- ---------- ---------- First Quarter 2003 ..................... 14.80 14.00 14.70 Second Quarter 2003 .................... 17.50 14.70 17.09 Third Quarter 2003 ..................... 17.40 16.40 16.90 Fourth Quarter 2003 .................... 19.30 17.30 18.90 First Quarter 2004 ..................... 24.00 19.45 21.30 Second Quarter 2004 .................... 21.50 17.00 18.75 Third Quarter 2004 ..................... 21.50 18.00 21.50 Fourth Quarter 2004 .................... 26.70 21.50 26.20 NEW YORK STOCK EXCHANGE (U.S.$ per ADS) PERIOD HIGH LOW CLOSE ---------------------------------------- ---------- ---------- ---------- First Quarter 2003 ..................... 8.85 7.74 8.05 Second Quarter 2003 .................... 10.90 9.20 10.35 Third Quarter 2003 ..................... 10.40 9.60 9.95 Fourth Quarter 2003 .................... 10.71 9.40 10.30 First Quarter 2004 ..................... 13.28 10.64 11.40 Second Quarter 2004 .................... 11.45 8.80 10.00 Third Quarter 2004 ..................... 11.41 9.75 11.41 Fourth Quarter 2004 .................... 14.19 10.86 14.19 52 MEXICAN STOCK EXCHANGE (Nominal pesos per Unit) MONTH HIGH LOW CLOSE ---------------------------------------- ---------- ---------- ---------- December 2004 .......................... 26.20 24.00 26.20 January 2005 ........................... 27.00 24.45 25.20 February 2005 .......................... 28.00 24.45 27.55 March 2005 ............................. 28.00 26.00 27.00 April 2005 ............................. 28.50 27.00 28.50 May 2005 ............................... 29.60 27.50 28.00 NEW YORK STOCK EXCHANGE (U.S.$ per ADS) PERIOD HIGH LOW CLOSE ---------------------------------------- ---------- ---------- ---------- December 2004 .......................... 14.19 13.31 14.19 January 2005 ........................... 14.60 12.87 13.01 February 2005 .......................... 15.20 13.43 15.11 March 2005 ............................. 15.25 13.99 14.70 April 2005 ............................. 16.00 14.40 14.70 May 2005 ............................... 16.21 15.41 15.60 TRADING ON THE MEXICAN STOCK EXCHANGE The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico. Founded in 1894, the Mexican Stock Exchange is organized as a corporation whose shares are held by brokerage houses, which are currently the only entities allowed to own them. These brokerage houses are currently the only entities authorized to trade on the floor of the Mexican Stock Exchange. Trading on the Mexican Stock Exchange takes place principally through an automated inter-dealer quotation system known as SENTRA, which is open for trading between the hours of 8:30 a.m. and 3:00 p.m., Mexico City time, each business day. Each trading day is divided into six trading sessions with ten-minute periods separating each session. Trades in securities listed on the Mexican Stock Exchange can, subject to certain requirements, also be realized off the Exchange. Due primarily to Mexican tax considerations, however, most transactions in listed securities are effected through the Exchange. The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a means of controlling excessive price volatility, but under current regulations this system does not apply to securities such as the Units that are directly or indirectly (for example, through ADSs) quoted on a stock exchange outside Mexico. Settlement is effected two business days after a share transaction on the Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not permitted without the approval of the CNBV. Most securities traded on the Mexican Stock Exchange are on deposit with S.D. Indeval, S.A. de C.V., Institucion para el Deposito de Valores (Central Securities Depository for the Mexican Securities Market, or, "Indeval"), a privately-owned central securities depositary that acts as a clearing house, depositary, custodian and registrar for Mexican Stock Exchange transactions, eliminating the need for physical transfer of securities. The Mexican Stock Exchange is one of Latin America's largest exchanges in terms of market capitalization, but it remains relatively small and illiquid compared to major world markets and is therefore subject to greater volatility. There is no formal over-the-counter market for securities in Mexico. The market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. 53 MARKET REGULATION The predecessor of the CNBV was established in 1946 to regulate stock market activity. The Ley del Mercado de Valores ("Securities Market Law") of 1975, as amended, regulates the securities markets and brokerage houses and sets standards for the registration of brokers in the Intermediaries Section of the Registro Nacional de Valores e Intermediarios (National Registry of Securities and Intermediaries, or, "RNVI"), a prerequisite to becoming a member of the Mexican Stock Exchange. Prior to registration in the RNVI, the brokerage houses must be authorized by the Ministry of Finance upon the recommendation of the CNBV. Legislative provisions under NAFTA allow foreign securities firms in a NAFTA country to establish and control brokerage firms in Mexico. There are several foreign brokerage houses authorized to operate in Mexico. In addition, a number of other foreign brokerage firms have submitted preliminary applications to be authorized to operate in the Mexican Stock Exchange. The Securities Market Law also empowers the CNBV to regulate the public offering and trading of securities. The governing committee of the CNBV is composed of representatives of the Ministry of Finance, the Mexican Central Bank, the Comision Nacional de Seguros y Fianzas ("National Insurance and Bonding Commission"), the Comision Nacional del Sistema de Ahorro para el Retiro ("National Retirement Savings Fund Commission") and the CNBV. Under the Mexican Securities Market Law, the CNBV must be notified before stockholders of a company listed on the Mexican Stock Exchange effect one or more simultaneous or successive transactions resulting in the transfer of 10% or more of such company's capital stock. The holders of the shares being transferred in the transactions are also obligated to inform the CNBV of the results of the transactions within three days of completion of the last transaction, or that the transactions have not been completed. The CNBV will notify the Mexican Stock Exchange of such transactions, without specifying the names of the parties involved. The CNBV and the Mexican Stock Exchange must also be notified in the event of any of the following contingencies: . on the following day of operation if any stockholder of a company listed on the Mexican Stock Exchange effects one or more transactions resulting in the ownership of more than 10% and less of 30% of capital stock; . on the following day of operation if any Related Person increases his ownership of the stock of a company; and . at least 15 days before the operation becomes effective if any stockholder of a company listed on the Mexican Stock Exchange, undertakes in a Public Offering one or more transactions resulting in the ownership of more than 30% and less than 50% of capital stock. ITEM 10. ADDITIONAL INFORMATION MEMORANDUM AND ARTICLES OF ASSOCIATION Information regarding the memorandum and articles of association was included in the Initial Registration Form F-1, submitted on September 1997. In April 2002, we made changes to our bylaws, which were reported in our annual report for year 2002. In December 2003 we made further changes; the majority of which are summarized below. Aside from these changes, the information contained in the Initial Registration Form F-1 is applicable to this Annual Report. 54 The discussion set forth below contains information concerning our capital stock and a brief summary of the material provisions of the bylaws and applicable Mexican law. This summary does not purport to be complete and is qualified in its entirety by reference to the bylaws and the applicable provisions of Mexican law. GENERAL Industrias Bachoco, S.A. de C.V., was incorporated on April 17, 1980, as a variable capital corporation (sociedad anonima de capital variable) under the laws of Mexico. In 1995, our stockholders authorized the issuance of up to 15,525,000 additional Series B Shares and 15,525,000 additional Series L Shares, all constituting fixed capital, to be issued in connection with the global offering of shares that took place on September 19, 1997 (the "Global Offering"). On April 21, 1997 we restructured our capital by (i) declaring a four-to-one stock split of the 106,678,125 Series B Shares and 35,559,375 Series L Shares outstanding, (ii) converting 7,762,500 Series L Shares (on a post-split basis) into Series B Shares and (iii) combining all of the 434,475,000 Series B Shares and 134,475,000 Series L Shares outstanding (in each case, on a post-split basis) into 134,475,000 Units and 150,000,000 B Units. Each Unit consists of one Series B Share and one Series L Share. Holders of Units will be entitled to exercise all the rights of holders of the Series B Shares and Series L Shares underlying their Units. Each B Unit consists of two Series B Shares. B Units entitle the holders thereof to exercise all the rights of holders of the Series B Shares underlying such B Units. Immediately prior to the Global Offering, our outstanding capital stock consisted of 434,475,000 Series B Shares and 134,475,000 Series L Shares, all of which were duly authorized, validly issued and are fully paid and non-assessable. For a period of 10 years after the Global Offering, the Series B Shares will be issuable only in the form of Units and B Units, and the Series L Shares will be issuable only in the form of Units. Commencing 10 years from the date of the Global Offering, Units will automatically separate into their component Series B Shares and Series L Shares, B Units will automatically separate into their component Series B Shares, and each Series L Share underlying the Units will automatically convert into one Series B Share. The Series B Shares generally will represent at least 75% of our Common Stock and will have full voting rights. See "--Foreign Investment Legislation." The Series L Shares may not represent more than 25% of our capital stock. As further described below, the Series B Shares and the Series L Shares have the same economic rights. Each Series B Share entitles the holder thereof to one vote at any general meeting of the stockholders. The Series L Shares are entitled to vote only with respect to certain limited matters as described under "--Voting Rights and Stockholders' Meetings." The Robinson Bours Stockholders have advised us that they intend to ensure that the Control Trust will hold at least 51% of the Series B Shares at any time outstanding. See "--Foreign Investment Legislation." REGISTRATION AND TRANSFER The Units and B Units are evidenced by certificates in registered form, which may have dividend coupons attached. We maintain a registry and, in accordance with Mexican law, we recognize as stockholders only those holders listed in the stock registry. Stockholders may hold their Units or B Units in the form of physical certificates (which, together with notations made in our stock registry, evidence ownership of the Units and B Units) or through book entries with institutions that have accounts with Indeval. Indeval is the holder of record in respect of Units and B Units held through it. Accounts may be maintained at Indeval by brokerage houses, banks and other entities approved by the CNBV. Ownership of Units and B Units maintained at Indeval is evidenced through Indeval's records and through lists kept by Indeval participants. See "Description of American Depositary Receipts." 55 In accordance with Article 130 of the Ley General de Sociedades Mercantiles ("Mexican Companies Law"), the board of directors must authorize any transfer of stock, or any securities based on such stock, when the number of shares sought to be transferred in one act or a succession of acts, without limit of time or from one group of interrelated stockholders or stockholders who act in concert, constitutes 10% or more of the voting stock issued by the Company. If the board of directors refuses to authorize such a transfer, the board must designate one or more purchasers of the stock, who must pay the interested party the prevailing price on the Mexican Stock Exchange. If the shares are not registered with Indeval the price will be determined in accordance with Article 130 of the Mexican Companies Law. If any person participates in a transaction that would have resulted in the acquisition of 10% or more voting stock of the Company without having obtained the board's prior approval they must pay the Company a fine equal to the market value of the shares. Any person who participates in an act that violate the terms of Article 130 discussed in the preceding paragraph will be obligated to pay the Company a fine in an amount equal to the value of the shares owned directly or indirectly by the stockholder, or the value of the shares involved in the prohibited transaction, if such person does not own shares issued by the Company. In the case of a prohibited transaction that would have result in the acquisition of 10% or more of the voting stock of the Company, the fine will be equal to the market value of those shares, provided that board authorization was not obtained in advance. According to our bylaws, a majority of the members of the board of directors must authorize in writing, by a resolution made at a board of directors' meeting, any change in the control of the Company. Our board of directors has the right to decide if a person or a group of persons is acting for the purpose of acquiring control of the Company. VOTING RIGHTS AND STOCKHOLDERS' MEETINGS Each Series B Share entitles the holder thereof to one vote at any general meeting of the stockholders. Holders of Series B Shares are currently entitled to elect all members of the board of directors, with the exception of those members that holders of Series L Shares are entitled to elect. Our bylaws provide that the board of directors shall consist of at least 5 members, which minimum number may be decreased at an extraordinary general meeting of stockholders by majority vote of the holders of Series B Shares. At year-end 2002, the board of directors consisted of 15 members. Our board was reformed in April 2003, and now consists of seven proprietary Directors and three independent Directors. The stockholders also appointed four alternate directors to the board of directors, three of whom are proprietary and one of whom is independent. Each Series L Share entitles the holder thereof to the following rights: (i) the rights described below with respect to the appointment or election of up to two directors; (ii) one vote at a special stockholders' meeting with respect to the cancellation of the registration of the Series L Shares with the RNVI or with any Mexican or foreign stock exchange; and 56 (iii) one vote at an extraordinary general stockholders' meeting with respect to the following matters only: (a) transformation of the Company from one type of corporate form to another; (b) any merger of the Company with another company where we are not the surviving entity; (c) cancellation of the registration of the Shares with the RNVI or in any Mexican or foreign stock exchange; and (d) amendment to the controlling stockholders' obligation under the bylaws to repurchase Shares and certain other provisions in the event of delisting. Holders of Series L Shares are not entitled to attend or to address stockholders' meetings at which they are not entitled to vote. Under Mexican law, the holders of Shares of any series are also entitled to vote at a special meeting on any action that would prejudice the rights of such holders, and such a holder would be entitled to judicial relief against any such action taken without the approval of holders at such a meeting. Special meetings are meetings called by holders of a certain series, like the L Series, in order to reach a consensus on an issue or issues prior to an extraordinary meeting. Any determination that an action does not require a vote at a special meeting would be subject to judicial challenge by an affected stockholder, and a Mexican court of competent jurisdiction would determine whether the challenged action required a vote at a special meeting. Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination. General stockholders' meetings may be ordinary or extraordinary meetings. Extraordinary general meetings are meetings called to consider the matters specified in Article 182 of the Mexican Companies Law and the bylaws including changes in the fixed portion of the capital stock and other amendments to the bylaws, liquidation, merger, transformation from one type of corporate form to another, change in nationality, change of corporate purpose and those other matters on which the holders of the Series L Shares are entitled to vote. General meetings called to consider all other matters, including election of directors and the statutory auditor, are ordinary meetings. An ordinary general meeting of the Company must be held at least annually during the four months following the end of the preceding fiscal year to consider certain matters specified in Article 181 of the Mexican Companies Law, including, principally, the election of directors and the statutory auditor, the approval of the report of the board of directors regarding their company's performance, the company's financial statements for the preceding fiscal year and the allocation of the profits and losses of the preceding year. Any holder or group of holders of Series L Shares representing 10% or more of our outstanding capital stock has the right to appoint one member and one alternate member of the board of directors by written notice delivered to the Chairman or the Secretary of the board at least two days prior to the date of a general stockholders' meeting to be held for the election of directors. If no directors are so appointed, holders of Series L Shares are entitled to vote at a special stockholders' meeting to elect two members and two alternate members of the board of directors; similarly, if only one director is so appointed, holders of Series L Shares are entitled to vote at a special stockholders' meeting to elect one additional member and one alternate member of the board of directors. The holders of Series L Shares can only revoke the appointment of a member of the board that they elected, but only if the appointment of all the other members of the board is also revoked. Other than the Robinson Bours Stockholders, no person or persons own Series L Shares representing 10% or more of our outstanding capital stock. 57 Under our bylaws, the quorum on first call for a general ordinary meeting is at least 50% of the outstanding Series B Shares, and action may be taken by a majority of the Series B Shares present. If a quorum is not available on first call, a second meeting may be called at which action may be taken by a majority of the Series B Shares present, regardless of the number of such shares. The quorum on first call for a general extraordinary meeting or a special meeting is 75% of the outstanding Shares with voting rights on the matters to be addressed in that meeting. If a quorum is not available on first call, a second meeting may be called, provided that at least 50% of the outstanding Shares with voting rights on the matters to be addressed in that meeting are represented. Whether on first or subsequent call, adoption of a resolution at a general extraordinary meeting requires the favorable vote of the holders of at least 50% of the outstanding Shares with voting rights on the matters to be addressed by that extraordinary meeting. In addition, any action taken at an extraordinary general meeting, on first or subsequent call, at which holders of Series L Shares are entitled to vote, requires the favorable vote of the holders of the majority of the outstanding Series B Shares voting separately as a class, and any action taken at an extraordinary general meeting, on first or subsequent call, with respect to the cancellation of the registration of the Series L Shares with the RNVI or with any Mexican or foreign stock exchange, requires the favorable vote of the holders of Series L Shares at a special meeting. Whether on a first or subsequent call, for a special meeting to take action, the favorable vote of at least 50% of the outstanding Shares of the corresponding Series is required; provided, however, that special meetings of holders of Series L Shares which are called to elect and remove directors and to vote with respect to the cancellation of the registration of the Series L Shares with the RNVI or with any Mexican or foreign stock exchange do not have a quorum requirement and action may be taken by a majority of the Series L Shares present, regardless of the number of such shares. Our bylaws require the approval of holders of at least 95% of the outstanding Shares and the approval of the CNBV for the amendment of the controlling stockholders' obligation under the bylaws to repurchase Shares and certain other provisions in the event of delisting. See "--Other Provisions--Repurchase in the Event of Delisting." Holders of ADRs are entitled to instruct the Depositary as to the exercise of the voting rights pertaining to the Series B Shares and the Series L Shares constituting the Units represented by the ADSs. See "Description of American Depositary Receipts--Voting of Deposited Securities." According to our bylaws, stockholders with a right to vote, including a limited right to vote, who hold at least 10% of the shares represented in a stockholders' meeting, may ask to postpone a vote on any matters on which they believe they do not have enough information as defined by Article 199 of the Mexican Companies Law. Stockholders with a right to vote, including a limited right to vote, who hold at least 20% of the capital stock, may legally object to the decisions of a general stockholder's meeting, with respect to matters in which they have rights, as defined by Articles 201 and 202 of the Mexican Companies Law. In addition, stockholders with or without a right to vote, representing at least 10% of the stockholders equity, can appoint a commissary. They can revoke the commissary they appointed, but only when all others commissaries are revoked. The board of directors, the Chairman of the board of directors, the Secretary of the board of directors, the statutory auditor or any Mexican court of competent jurisdiction may call a stockholders' meeting. The board of directors or the statutory auditor may be required to call a meeting of stockholders by holders of at least 10% of the Series B Shares or, in the case of a stockholders' meeting at which holders of Series L Shares would be entitled to vote, by the holders of at least 10% of our outstanding capital stock. In addition, the board of directors or the statutory auditor must call a stockholders' meeting at the written request of any holder of Series B Shares if no ordinary general stockholders' meeting has been held for two consecutive years or if in any meetings held during such a period the stockholders have not considered the items mentioned in Article 181 of the Mexican Companies Law, discussed above. 58 The board of directors or the statutory auditor must call a stockholders' meeting at the written request of any holder of Series L Shares if no ordinary general stockholders' meeting has been held for two consecutive years for the election of directors. In the event that a meeting is not called within 15 days following the date of such a request, a Mexican court may require such meeting to be called. At least 15 days prior to the meeting, notice of the meeting must be published in the Diario Oficial de la Federacion ("Official Gazette") or in a newspaper of general circulation in Mexico City. Stockholders' meetings may be held without such publication provided that 100.0% of the outstanding Shares with voting rights on the matters to be addressed by such meeting are represented. From the moment that a call for a stockholders' meeting is made public, all the information related to the meeting must be available to the stockholders. In order to attend a stockholders' meeting, a stockholder must request and obtain an admission card by furnishing, at least 24 hours before the time set for holding the stockholders' meeting, appropriate evidence of ownership of Shares in us and depositing such Shares with our corporate secretary or with an institution authorized to accept such deposit. If so entitled to attend the meeting, a stockholder may be represented by proxy signed before two witnesses. Additionally, the stockholder may be represented at the stockholders' meetings by a person named by proxy, on a printed form that we issue, which, under Mexican law, must identify our company and indicate clearly the matters to be addressed in the meeting, with enough space for the instructions that the stockholder specifies. We are obliged to make information on the upcoming meeting available to the intermediaries in the stock market, for the time specified in Article 173 of the Mexican Law, in order to give the intermediaries time to send it to the stockholders they represent. The Secretary of the board of directors must verify that this requirement is met and report on this matter at the stockholders meeting. See "--Registration and Transfer." MEMBERS OF THE BOARD Under the Mexican Companies Law, a board of directors must conform to the following requirements: (i) The board must have at least five and no more than 20 proprietary directors; (ii) For every member of the board, an alternate member of the board must be named; an alternate director of an independent proprietary director must be also independent; (iii) At least 25% of the members of the board must be independents according to the article 14 Bis 3 of the Ley del Mercado de Valores ("Securities Market Law"). Apart from satisfying all of the requirements mentioned above, failure to meet these standards for any reason will not constitute grounds for judicial action challenging any act, contract, or agreement undertaken by the board, an intermediate committee or other delegated authority. Furthermore, such standards will not be mandatory for the validity or existence of such acts. The board of directors must meet at least every three months at our address or any other place in Mexico and on the dates that the board determines. Meetings previously scheduled in accordance with a schedule pre-approved by the board do not need to be called. Meetings must be called by at least 25% of the members of the board of directors, the Chairman of the board of directors, the Vice-Chairman of the board of directors or in the case of a commissary, the Secretary or the alternate Secretary of the board. Members of the board must be notified via e-mail or in writing at least five calendar days in advance of a meeting. The Commissaries must be called to every meeting of the board, where they have the right to speak, but not the right to vote. 59 STATUTORY AUDITOR As determined by Mexican law, the statutory auditor's role is to verify information on the company, to audit its operations and to report on the company to stockholders at the annual stockholders' meeting. Any stockholder with at least 10% of our capital stock--even a stockholder without the right to vote--has the right to designate a statutory auditor. In the case of a statutory auditor appointed by a minority of stockholders, the majority may revoke that appointment provided that it revokes the appointment of all other statutory auditors as well. A statutory auditor does not need to be a stockholder and maintains his or her position for one year, but may continue to fulfill his or her duties until the replacement takes over the position. A statutory auditor may be reelected. A substitute statutory auditor may assume the duties of any statutory auditor who, for any reason, cannot perform his or her duties. DIVIDEND AND DISTRIBUTIONS At the annual ordinary general stockholders' meeting, the board of directors submits our financial statements for the previous fiscal year, together with a report thereon by the board, to the holders of Series B Shares for their consideration. The holders of Series B Shares, once they have approved the financial statements, determine the allocation of our net profits, if any, for the preceding year. They are required by law to allocate 5% of such net profits to a legal reserve, which is not thereafter available for distribution until the amount of the legal reserve equals 20% of our historical capital stock (before giving effect to the restatement thereof in constant pesos). As of December 31, 2004, our legal reserve fund was equal to at least 20% of our paid-in capital stock. Amounts in excess of those allocated to the legal reserve fund may be allocated to other reserve funds as the stockholders determine, including a reserve for the repurchase of our Shares. The remaining balance of net profits, if any, is available for distribution as dividends. No dividends may be paid, however, unless losses for prior fiscal years have been paid or absorbed. Holders of Units and B Units and, accordingly, holders of ADSs will have equal rights, on a per Share basis, to dividends and other distributions, including any distributions we make upon liquidation. Partially paid Units or Shares participate in any distribution to the extent that such Units or Shares have been paid at the time of the distribution or, if not paid, only with respect to the proportion paid. CHANGES IN CAPITAL STOCK An increase of capital stock may generally be effected through the issuance of new Units or Shares for payment in cash or in kind, by capitalization of indebtedness or by capitalization of certain items of stockholders' equity. An increase of capital stock generally may not be realized until all previously issued and subscribed Units or Shares of capital stock have been fully paid. Generally, a reduction of capital stock may be effected to absorb losses, to redeem Units or Shares, or to release stockholders from payments not made. A reduction of capital stock to redeem Units or Shares is effected by reimbursing holders of Units or Shares pro rata or by lot. Stockholders may also approve the redemption of fully paid Units or Shares with retained earnings. Such a redemption would be effected by a repurchase of Units or Shares on the Mexican Stock Exchange (in the case of Units or Shares listed thereon) and would be subject to the limitation that the Series L Shares may not at any time represent more than 25% of our capital stock. 60 Except under limited circumstances, the bylaws require that any capital increase effected pursuant to a capital contribution be represented by new Series B Shares and Series L Shares in proportion to the number of Shares of each such Series outstanding. The fixed portion of our capital stock may only be increased or decreased by resolution of a general extraordinary meeting and an amendment to the bylaws, whereas the variable portion of our capital stock may be increased or decreased by resolution of a general ordinary meeting. See "Other Provisions--Fixed and Variable Capital." No resolution by the stockholders is required for decreases in capital stock resulting from exercise of our right to withdraw variable shares or from our repurchase of our own Shares or for increases in capital stock resulting from our sale of Shares we previously purchased. See "Other Provisions--Purchase by the Company of its Shares" and "Other Provisions--Appraisal Rights." In order for any capital increase for payment in cash to take place, holders of at least 85% of the Trust Shares must instruct the trustee of the Control Trust to vote in favor of such capital increase. PREEMPTIVE RIGHTS Except in certain limited circumstances, in the event of a capital increase through the issuance of new Shares for payment in cash or in kind, a holder of existing Shares of a given Series at the time of the capital increase has a preferential right to subscribe for a sufficient number of new Shares of the same Series to maintain the holder's existing proportionate holdings of Shares of that Series or, in the event of a capital increase through the issuance of limited-voting or non-voting stock only, to subscribe for a sufficient number of the shares to be issued to maintain the holder's existing proportionate holdings of our capital stock. Preemptive rights must be exercised within 15 days following the publication of notice of the capital increase in the Diario Oficial de la Federacion (Official Gazette) or following the date of the stockholders' meeting at which the capital increase was approved if all stockholders were represented at such meeting; otherwise such rights will lapse. Under Mexican law, preemptive rights cannot be waived in advance by a stockholder, except under limited circumstances and cannot be represented by an instrument that is negotiable separately from the corresponding share. The Robinson Bours Stockholders, including the Selling Stockholders, have waived all preemptive rights with respect to the Series B Shares and Series L Shares comprised in the Units underlying the ADSs being offered in the Global Offering. Holders of ADRs that are U.S. citizens or are located in the United States may be restricted in their ability to participate in the exercise of preemptive rights. See "Description of American Depositary Receipts--Dividends, Other Distributions and Rights." FOREIGN INVESTMENT LEGISLATION Ownership by foreigners of shares of Mexican companies is regulated by the Ley de Inversion Extranjera ("Foreign Investment Law") and by the Reglamento de la Ley para Promover la Inversion Mexicana y Regular la Inversion Extranjera ("Foreign Investment Regulations"). The Ministry of Commerce and Industrial Development and the Foreign Investment Commission are responsible for the administration of the Foreign Investment Law. The Foreign Investment Law reserves certain economic activities exclusively for the Mexican state and certain other activities exclusively for Mexican individuals or Mexican corporations and limits the participation of foreign investors to certain percentages in regard to enterprises engaged in activities specified therein. Foreign investors may own up to 100% of the capital stock of Mexican companies or entities, except for companies (i) engaged in reserved activities as referred to above or (ii) with assets exceeding an amount to be established annually by the Foreign Investment Commission (which has been set at Ps.394 million), in which case an approval from the Foreign Investment Commission will be necessary in order for foreign investment to exceed 49% of the capital stock. Mexican and non-Mexican nationals will be entitled to hold and to exercise the rights of a holder of the Units, the Series B Shares and the Series L Shares. The Robinson Bours Stockholders have advised us that they intend to maintain a control position directly in the form of B Units. Pursuant to our bylaws, foreigners may only own Series B Shares up to 49% of such series. 61 OTHER PROVISIONS Fixed and Variable Capital. As a sociedad anonima de capital variable, we are permitted to issue shares constituting fixed capital and shares constituting variable capital. The issuance of variable capital shares, unlike the issuance of fixed capital shares, does not require an amendment of the bylaws, although it does require approval at a general ordinary stockholders' meeting. No shares representing variable capital are currently outstanding or will be issued in connection with the Global Offering. The outstanding variable capital shares, if any, may be fully withdrawn by the holders thereof. Except as otherwise provided under "--Appraisal Rights" below, the Minimum Capital cannot be withdrawn. A holder of variable capital stock that wishes to effect a total or partial withdrawal of such stock is required to notify us in an authenticated written notice to that effect. If notice of withdrawal is received prior to the last quarter of the fiscal year, the withdrawal becomes effective at the end of the fiscal year in which the notice was given. Otherwise, the withdrawal becomes effective at the end of the following fiscal year. Redemption of our variable capital stock is made at the lower of (i) 95% of the average share price quoted on the Mexican Stock Exchange during the 30 business days prior to the date on which the withdrawal is to become effective or if the number of the days that the shares were negotiated is less than 30 days we will consider only the days in when the shares were effectively negotiated (ii) the book value per variable capital share as calculated from our consolidated balance sheets (as approved at a general ordinary stockholders' meeting) for the previous fiscal year in which the withdrawal became effective. Any such amount to be paid by us would become due on the day following the general ordinary stockholders' meeting referred to in clause (ii) above. Forfeiture of Shares. As required by Mexican law, our bylaws provide that our current and future foreign stockholders are formally bound to the Mexican Secretaria de Relaciones Exteriores ("Ministry of Foreign Relations") to consider themselves as Mexican nationals with respect to our Units and Shares that they may acquire or of which they may be owners, and with respect to the property, rights, concessions, participations or interests that we may own or rights and obligations that are based on contracts to which we are party with the Mexican authorities, and not to invoke the protection of their government under penalty, should they do so, of forfeiting to the Mexican State the corporate participation that they may have acquired. In the opinion of Franck, Galicia, Duclaud & Robles, S.C., our special Mexican counsel, under this provision a non-Mexican stockholder (including a non-Mexican holder of ADSs) is deemed to have agreed not to invoke the protection of his own government by requesting such government to interpose a diplomatic claim against the Mexican government with respect to the stockholder's rights as a stockholder, but is not deemed to have waived any other rights it may have with respect to its investment in us, including any rights under U.S. securities laws. If the stockholder should invoke such governmental protection in violation of this agreement, its Units could be forfeited to the Mexican State. Mexican law requires that such a provision be included in the bylaws of all Mexican corporations unless such bylaws prohibit ownership of capital stock by foreign investors. 62 Exclusive Jurisdiction. Our bylaws provide that legal actions relating to any conflict between our stockholders and us, or among the stockholders in connection with matters related to us, may be brought only in courts in Mexico City. Therefore, our stockholders are restricted to the courts of Mexico City. Duration. The duration of our existence under our bylaws is indefinite. Repurchase of our own Shares. We may repurchase our Units on the Mexican Stock Exchange at any time at the then-prevailing market price. Any repurchases will be charged to the Stockholders Equity as long as these shares belong to the same company, or to the Capital Stock in the event that we convert these shares to treasury stock, and in this last case no resolution of the stockholders' meeting is required. At each annual ordinary stockholders' meeting, the maximum amount of resources that may be used to repurchase shares will be expressly defined. The board of directors will name the persons responsible for the operation of the repurchase process. The shares that belong to the Treasury Stock or us can be resold among the public stockholders; in the latter case, no resolution of a stockholders meeting is necessary for an increase in capital. The economic and voting rights corresponding to such repurchased Units or Shares may not be exercised during the period in which such Units or Shares are owned by us, and such Units or Shares are not deemed to be outstanding for purposes of calculating any quorum or vote at any stockholders' meeting during such period. Any repurchase of our own Units or Shares is subject to the limitation that the Series L Shares may not at any time represent more than 25% of our capital stock. Repurchase in the Event of Delisting. Our shares are registered with the National Registry for Securities, as required under the Securities Market Law and regulations issued by the CNBV. If we wish to cancel our registration, or if it is cancelled by the CNBV, the stockholders having the majority of the ordinary shares or that may, on any basis, impose decisions at stockholders' meetings, or appoint the majority of the board of directors of the Company at that time, will be required to make a public offer to purchase all outstanding shares prior to such cancellation. Under our bylaws, if after the public offer is concluded there are still outstanding shares held by the general public, the stockholders that control the Company will be required to create a trust for a minimum period of six months, into which such controlling stockholders will be required to contribute funds in an amount sufficient to purchase, at the same price as the offer price, the number of outstanding shares held by the general public. Non-Subscribed Shares. With prior authorization of the CNBV, we may issue non-subscribed shares provided that such shares will be held by a depositary institution and that there is compliance with the conditions of Article 81 of the Ley del Mercado de Valores ("Mexican Securities Law"). In any extraordinary stockholders' meeting at which this issuance of non-subscribed Shares is approved, the preference rights established by Article 132 of the Mexican Companies Law must be respected. With a quorum at the meeting, the approval of the issuance will take effect, even with respect to stockholders that were not present at the meeting, such that we will be free to issue these shares with no prior publication. When a minority of stockholders representing at least 25% of the voting capital stock, vote against the issuance of these shares, such issuance can not be made. Any stockholder that votes against this issuance at the stockholders meeting will have the right to request that we sell its shares before issuing the new non-subscribed shares. In such event, we will have the obligation to sell first the shares belonging to such stockholders, at the same price that the non-subscribed shares are to be offered to the public. Stockholder Conflicts of Interest. Under Mexican law, any stockholder that has a conflict of interest with respect to any transaction must abstain from voting thereon at the relevant stockholders' meeting. A stockholder that votes on a business transaction in which its interest conflicts with that of ours may be liable for damages if the transaction would not have been approved without such stockholder's vote. 63 Board Member Conflicts of Interest. Under Mexican law, any member of the board of directors who has a conflict of interest with us in any transaction must disclose such fact to the other members of the board of directors and abstain from voting. Any member of the board of directors who violates such provision may be liable for damages caused to us. Additionally, members of the board of directors and statutory auditors may not represent other stockholders at any stockholders' meeting. Appraisal Rights. Whenever the stockholders approve a change of corporate purpose, a change in our nationality or transformation from one type of corporate form to another, any stockholder entitled to vote on such change or transformation who has voted against it has the right to withdraw from us and receive the amount calculated as specified under Mexican law attributable to its Shares, provided such stockholder exercises its right to withdraw within 15 days following the adjournment of the meeting at which the change or transformation was approved. Under Mexican law, the amount that a withdrawing stockholder is entitled to receive is equal to its proportionate interest in our capital stock according to the most recent balance sheet that has been approved by an ordinary general meeting of stockholders. Because the Series L Shares may not vote with respect to a change of corporate purpose or change of nationality, appraisal rights with respect to such changes are not available to holders of Series L Shares. Actions Against Directors. Under Mexican law, an action for civil liabilities against members of the board of directors may be initiated by resolution of an ordinary stockholders' meeting. In the event the ordinary stockholders' meeting decides to bring such an action, the persons against whom such action is brought will immediately cease to be members of the board of directors. Additionally, stockholders representing not less than 33.0% of our outstanding Shares may directly take such action against members of the board of directors, provided that (i) such stockholders have not voted against taking such action at the relevant stockholders' meeting and (ii) the claim in question covers damage alleged to have been caused to us and not merely to the individual plaintiffs. Any recovery of damages with respect to such action will be for our benefit and not for the stockholders bringing the action. AUDIT COMMITTEE Under our bylaws the board of directors is required to create an audit committee under the terms and conditions outlined below: 1) The audit committee will consist of members of the board. The President of the audit committee and a majority of the audit committee members must be independent, as independence is defined under the Mexican Securities Market Law. In addition, the audit committee must have auditors who attend every meeting and have the right to participate but not to vote. 2) The audit committee will have, among others, the following functions: a) To prepare a report about its activities and present it to the board of directors. b) Provide its opinion regarding any transaction with related parties, which is outside the scope of ordinary business. c) Recommend independent consultants or auditors to provide their opinion regarding any transactions with related parties that are outside the scope of ordinary business, which the Company or any of its subsidiaries seek to engage in. 64 Transactions that depart from the ordinary course of business and which would be entered into by and between subsidiaries of the Company and its stockholders, with persons who form part of the management of the Company's subsidiaries or with those with whom such persons maintain monetary ties or, if applicable, have a family relationship of consanguinity or affinity up to the second degree, a spouse or concubine; which represent the purchase or sale of 10% or more of assets; the granting of guaranties in an amount in excess of 30% of assets, as well as transactions other than the foregoing which represent more than 1% of the Company's assets, shall be submitted for the opinion of the Company's audit committee and for approval by the Company's board of directors. EXCHANGE CONTROLS Ownership by foreigners of Mexican companies is regulated by Foreign Investment Law and by the Foreign Investment Regulations. The Ministry of Commerce and Industrial Development and the Foreign Investment Commission are responsible for the administration of the Foreign Investment Law. The Foreign Investment Law reserves certain economic activities exclusively for the Mexican state and certain other activities exclusively for Mexican individuals or Mexican corporations and limits the participation of foreign investors to certain percentages in regard to enterprises engaged in activities specified therein. Foreign investors may own 100% of the capital stock of Mexican companies or entities, except for companies (i) engaged in reserved activities as referred to above or (ii) with assets exceeding an amount to be established annually by the Foreign Investment Commission (which has been set at Ps.411.3 million), in which case an approval from the Foreign Investment Commission shall be necessary in order for foreign investment to exceed 49% of the capital stock. Mexican and non-Mexican nationals will be entitled to hold and to exercise the rights of a holder of the Units, the Series B Shares and the Series L Shares. The Robinson Bours Stockholders have advised us that they intend to maintain a control position directly in the form of B Units. Pursuant to our bylaws, foreigners may only own Series B Shares up to 49% of such Series. TAXATION The following is a general summary of the principal U.S. federal tax consequences and the principal Mexican federal tax consequences of the acquisition, ownership and disposition of Units or ADSs. This summary does not purport to address all material tax consequences that may be relevant to holders of Units or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, partnerships and other pass-through entities, investors liable for the U.S. alternative minimum tax, investors that own or are treated as owning 10% or more of our voting stock, investors that hold units or ADSs as part of a straddle, hedge, conversion transaction or other integrated transaction and U.S. Holders (as defined below) whose functional currency is not the U.S. dollar) may be subject to special tax rules. In addition, this summary is based in part upon the representations of the Depositary and the assumption that each obligation in the deposit agreement, and in any related agreement, will be performed in accordance with its terms. For purposes of this discussion, a "U.S. Holder" is any beneficial owner of Units or ADSs that, for U.S. federal income tax purposes, is: 1. an individual who is a citizen or resident of the United States, 2. a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States, any state thereof, or the District of Columbia, 65 3. an estate the income of which is subject to U.S. federal income tax without regard to its source, or 4. a trust that is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons, or that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.This summary is based on the federal income tax laws and regulations of the United States and Mexico, judicial decisions, published rulings and administrative pronouncements all as in effect on the date hereof, and all of which are subject to change, and such changes may have retroactive effect. Prospective purchasers of Units or ADSs should consult their own tax advisors as to the U.S., Mexican or other tax consequences of the purchase, ownership and disposition of Units or ADSs, including, in particular, the effect of any non-U.S. non-Mexican, state or local tax laws. A Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and a Protocol thereto, between the United States and Mexico (the "Tax Treaty") took effect on January 1, 1994. The Tax Treaty was amended by a second Protocol signed November 26, 2002, the provisions of which took effect in part on September 1, 2003, and in part on January 1, 2004. The United States and Mexico have also entered into an agreement concerning the exchange of information with respect to tax matters. In general, for U.S. federal income tax purposes, holders of ADRs evidencing ADSs will be treated as the beneficial owners of the Units represented by those ADSs. U.S. FEDERAL INCOME TAXATION U.S. HOLDERS The following discussion is a summary of the principal U.S. federal income tax consequences to holders of our Units and of ADSs that are U.S. Holders and that hold those Units or ADSs as capital assets (generally, for investment purposes). TAXATION OF DIVIDENDS Cash dividends paid with respect to the Shares constituting the Units or Units represented by ADSs to the extent paid out of our earnings and profits (as determined under U.S. federal income tax principles) will be included in the gross income of a U.S. Holder as ordinary income on the day on which the dividends are received by the U.S. Holder, in the case of Units, or the Depositary, in the case of Units represented by ADSs, and will not be eligible for the dividends-received deduction allowed to corporations under the Internal Revenue Code of 1986, as amended (the "Code"). Dividends paid in pesos will be included in the gross income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day they are received by the U.S. Holder, in the case of Units, or the Depositary, in the case of Units represented by ADSs (regardless of whether such pesos are in fact converted into U.S. dollars on such date). If such dividends are converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividends. U.S. Holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any pesos received which are converted into U.S. dollars on a date subsequent to receipt. 66 Subject to certain exceptions for short-term and hedged positions, and provided that we are not a passive foreign investment company (as discussed below), dividends received by certain U.S. Holders (including individuals) prior to January 1, 2009 with respect to the Units or ADSs will be subject to U.S. federal income taxation at a maximum rate of 15%. However, the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which shareholders (and intermediaries) will be permitted to rely on certifications from issuers to establish that dividends qualify for the reduced rate of U.S. federal income taxation. Because such procedures have not yet been issued, we are not certain that we will be able to comply with them. U.S. Holders of Units or ADSs should consult their own tax advisors regarding the availability of the reduced rate in the light of their own particular circumstances. Distributions to U.S. Holders of additional Unitsrelating to Units with respect to their Units or ADSs that are made as part of a pro rata distribution to all of our stockholders generally will not be subject to U.S. federal income tax. If holders of the ADSs are restricted in their ability to participate in the exercise of preemptive rights, the preemptive rights may give rise to a deemed distribution to holders of the Units under Section 305 of the Code. Any deemed distributions will be taxable as a dividend in accordance with the general rules of the income tax treatment of dividends discussed above. TAXATION OF CAPITAL GAINS Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of Units or ADSs generally will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between such U.S. Holder's adjusted tax basis in the Units or ADSs and the amount realized on the disposition. A U.S. Holder generally will have an adjusted tax basis in a Unit or an ADS equal to its U.S. dollar cost. Gain or loss recognized by a U.S. Holder on the sale or other disposition of Units or ADSs will generally be long-term gain or loss if, at the time of disposition, the U.S. Holder has held the Units or ADSs for more than one year. Certain U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deduction of a capital loss is subject to limitations under the Code. Gain realized by a U.S. Holder on a sale or other disposition of Units or ADSs generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, if any Mexican withholding tax is imposed on the sale or disposition of the Units, a U.S. holder that does not receive significant foreign source income from other sources may not be able to derive effective U.S. foreign tax credit benefits in respect of these Mexican taxes. U.S. holders should consult their own tax advisors regarding the application of the foreign tax credit rules to their investment in, and disposition of, the Units or ADSs. Deposits and withdrawals of Units by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes. PASSIVE FOREIGN INVESTMENT COMPANIES A non-U.S. corporation generally will be classified as a passive foreign investment company (a "PFIC") for U.S. federal income tax purposes in any taxable year in which, after applying look-through rules, either (1) at least 75% of its gross income is passive income, or (2) on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. The PFIC determination is made annually and generally is based on the value of a non-U.S. corporation's assets (including goodwill) and composition of its income. 67 We do not believe that we are a PFIC for U.S. federal income tax purposes, and we intend to continue our operations in such a manner that we will not become a PFIC in the future although no assurances can be made regarding determination of our PFIC status in the current or any future taxable year. If we become a PFIC, U.S. Holders could be subject to additional U.S. federal income taxes on gain recognized with respect to the Units or ADSs and on certain distributions. In addition, an interest charge may apply to the portion of the U.S. federal income tax liability on such gains or distributions treated under the PFIC rules as having been deferred by the U.S. Holder. Moreover, dividends that a U.S. Holder receives from us will not be eligible for the reduced U.S. federal income tax rates described above if we are a PFIC either in the taxable year of the distribution or the preceding taxable year (and instead will be taxable at rates applicable to ordinary income). Prospective investors should consult their own tax advisors regarding the potential application of the PFIC rules to Units or ADSs. NON-U.S. HOLDERS The following discussion is a summary of the principal U.S. federal income tax consequences to beneficial holders of Units or ADSs that are neither U.S. Holders nor partnerships for U.S. federal income tax purposes ("Non-U.S. Holders"). Subject to the discussion below under "Backup Withholding and Information Reporting", a Non-U.S. Holder generally will not be subject to any U.S. federal income or withholding tax on distributions received in respect of Units or ADSs unless the distributions are effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States (and, if an applicable tax treaty requires, is attributable to a U.S. permanent establishment or fixed base of such Non-U.S. Holder). Subject to the discussion below under "U.S. Backup Withholding and Information Reporting", a Non-U.S. Holder of Units or ADSs will not be subject to U.S. federal income or withholding tax on gain realized on the sale of Units or ADSs, unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States or (ii) in the case of gain realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met. U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING A U.S. Holder of Units or ADSs may, under certain circumstances, be subject to "backup withholding" with respect to certain payments to such U.S. Holder, such as dividends paid by us or the proceeds of a sale of Units or ADSs, unless such holder (i) is a corporation or comes within certain other exempt categories, and demonstrates this fact when so required or (ii) provides a correct taxpayer identification number, certifies that it is a U.S. person and that it is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules will be creditable against the U.S. Holder's U.S. federal income tax liability. While Non-U.S. Holders generally are exempt from backup withholding, a Non-U.S. Holder may, in certain circumstances, be required to comply with certain information and identification procedures in order to prove this exemption. 68 MEXICAN TAXATION The Mexican tax rules governing the taxation of gains of holders who are not Mexican Residents (as defined below) on dispositions of their shares or ADSs were amended during 2002. Holders who are not Mexican Residents who disposed of their Units or ADSs during or after 2003 should consult their own Mexican tax advisors on the Mexican tax treatment of such dispositions. A Mexican citizen is presumed to be a resident of Mexico for tax purposes unless such person can demonstrate otherwise. If a person is deemed to have a permanent establishment or fixed base in Mexico for tax purposes, such person shall be required to pay taxes in Mexico on income attributable to such permanent establishment or fixed base, in accordance with applicable tax laws. TAXATION OF DIVIDENDS Dividends, either in cash or in any other form, paid with respect to the Shares constituting the Units or the ADSs will not be subject to Mexican withholding tax. TAXATION OF CAPITAL GAINS Gain on the sale or other disposition of ADSs by holders who are not Mexican Residents will not be subject to Mexican income tax. Deposits of Units in exchange for ADSs and withdrawals of Units in exchange for ADSs will not give rise to Mexican income tax. Gain on the sale of Units by a holder who is not a Mexican Resident (as defined below) will not be subject to Mexican tax if the transaction is carried out through the Mexican Stock Exchange or other securities markets approved by the Mexican Ministry of Finance, and provided certain requirements set forth by the Mexican Income Tax Law are complied with. Sales or other dispositions of Units made in other circumstances generally would be subject to Mexican tax, except to the extent that a holder is eligible for benefits under an income tax treaty ("Tax Treaty") to which Mexico is a party. Under the Tax Treaty, gain on the sale or other disposition of Units by a U.S. resident (if eligible for benefits under the Tax Treaty) who is a holder of less than 25% of our capital stock during the 12-month period preceding such sale or disposition will not be subject to Mexican tax, unless either (i) 50% or more of the fair market value of our assets consist of "immovable property" (as defined in the Tax Treaty) situated in Mexico, or (ii) such gains are attributable to a permanent establishment or fixed base of such U.S. resident in Mexico. For a holder that is not a Mexican Resident and that does not meet the requirements referred to above, gross income realized on the sale of Units will be subject to a 5% Mexican withholding tax if the transaction is carried out through the Mexican Stock Exchange. Alternatively, a holder that is not a Mexican Resident can choose to be subject to a 20% withholding rate on the net gain obtained, as calculated pursuant to Mexican Income Tax Law provisions. In both cases the tax will be withhold by a withholding agent. For purposes of Mexican taxation (Ley del Impuesto sobre la renta), an individual is a resident of Mexico (a "Mexican Resident") if he or she has established his or her home in Mexico, unless he or she has also a home in other country, and less that 50% of their total income comes from his or her operations in Mexico and such individual can demonstrate that he or she has become a resident of that country for tax purposes. 69 A legal entity is a Mexican Resident if it has been incorporated under Mexican law. A company is also considered to be a Mexican Resident if the main management of the company is located in Mexico or if the "effective direction" of the company is located in Mexico. The "effective direction" of the company is considered to be located in Mexico if among others factors: the shareholders meetings of the company or its board of directors meeting are held in Mexico; the main decisions regarding the control and management of the company are made by Mexican Residents or Persons with an office located in Mexico; there is an office in Mexico where the main control and management decisions are made; all its accounting information resides in Mexico. OTHER MEXICAN TAXES There are no Mexican inheritance, succession or similar taxes applicable to the ownership, transfer or disposition of ADSs or Units by holders that are not Mexican Residents; provided, however, that gratuitous transfers of Units may in certain circumstances cause a Mexican federal tax to be imposed on the recipient. There are no Mexican stamp, issue, registration or similar taxes or duties payable by holders of ADSs or Units. However, brokerage fees on securities transactions carried out through the Mexican Stock Exchange are subject to a 15% valued added tax. DOCUMENTS ON DISPLAY The documents concerning us which are referred to in this document are available at the our company headquarters, located at Ave. Tecnologico No.401, Cd. Industrial, Celaya, Guanajuato, 38010, Mexico, for any inspection required. Part of this information is available on our web page, at www.bachoco.com.mx. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of our business, we hold or issue various financial instruments that expose us to financial risks involving fluctuations in currency exchange rates and interest rates. Also, we are exposed to commodity price risk in connection with fluctuations in the prices for our feed ingredients. CURRENCY FLUCTUATION Our exposure to market risk associated with changes in foreign currency exchange rates relates primarily our debt obligations and other expenses which are denominated in U.S. dollars. Since we have significant liabilities denominated in U.S. dollars, we are exposed to foreign exchange losses when the peso declines in value against the U.S. dollar. The peso has been subject to significant volatility in the past and may be subject to significant fluctuations in the future. All of our sales are priced in Mexican pesos, and we have significant expenses in U.S. dollars. A significant portion of our feed purchases is priced in U.S. dollars, and other purchases may be influenced by U.S. dollar prices. A devaluation of the peso will accordingly affect our earnings. In addition, the Mexican peso exchange rate can directly and indirectly impact our results of operations and financial position in several manners, including potential economic recession in Mexico resulting from a devalued peso. Part of our debt is denominated in U.S. dollars, However, we experienced foreign exchange gains of Ps.45.4 million in 2002, Ps.72.6 million in 2003 and Ps.45.1 million in 2004, due to the net position of our liabilities and assets that are denominated in U.S. dollars, since we had more assets, (cash and cash equivalents), than liabilities denominated in U.S. dollars. 70 No assurance can be given as to the future valuation of the Mexican peso and how further movements in the peso could affect our future earnings. We manage our exchange rate exposure primarily through management of our financial structure, specifically by maintaining most of our debt through long-term debt instruments. We engage in only limited hedging of our exposure to foreign exchange risk, since hedging instruments have historically not been economically feasible. We plan over a six-month period into the future and, depending on the expected uncertainty for that period, decide if it is economically advisable to purchase or sell any hedging instrument. During 2003 and 2004, we have observed different strategies with respect to derivatives which involve call and put options in U.S. dollars. At December 31, 2003, we had entered into exchange-rate options, which expired during 2004. At December 31, 2003, we had a call option of $ 33.5 (million of usd), for which we paid a premium of Ps 17.8 million, as well as put options of $ 84.6 (million of usd), for which we received a premium of Ps 22.1 million. Considering the fair value of these transactions, the closing of the call-option position was Ps 18.0 million and the put- option position was Ps 15.8 million, thus giving rise to a gain of Ps 6.6 million, which was recorded in the caption foreign exchange gain, net. At December 31, 2004, we maintain positions in several financial instrument derivatives, for details please see note 7 to our Consolidated Financial Statement. Based on our position in December 2004, please see note 15 in our Consolidated Financial Statements, we estimate that an hypothetical 10% devaluation of the Mexican peso against the U.S. dollar, would result in losses of Ps.8.8 million and gains of Ps.102.6 million in our Foreign Exchange Results. INTEREST RATES Our earnings may also be affected by changes in interest rates due to the impact those changes have on our variable-rate debt instruments. As of December 31, 2004, we had borrowings of approximately Ps.172.2 million pursuant to variable rate debt instruments, representing approximately 1.3% of our total assets. Based on our position on December 31, 2004, we estimate that a hypothetical interest rate variation of 250 basis points on our U.S. dollar denominated debt would result in increased interest expenses of approximately Ps.0.01 million per annum, and a hypothetical interest rate variation of 0.5% on our Mexican peso denominated debt would result in increased interest expenses of approximately Ps. 0.9 million per annum. Any such increase would likely be offset by an increase in interest income due to our significant cash and cash equivalent position. Based on our Cash and Cash equivalents on December 31, 2004, we estimate that a hypothetical interest rate variation of 0.5%, will affect our interest income by Ps. 11.7 millions. FEED INGREDIENTS The largest single component of our cost of sales is the cost of ingredients used to prepare feed, including principally, sorghum, soy meal, corn, fish meal, meat meal and, for certain chicken products, marigold extract. The price of these ingredients is subject to significant volatility resulting, among other factors, from weather, the size of harvests, transportation and storage costs, governmental agricultural policies and currency exchange rates. In order to reduce the potential adverse effect of grain price fluctuations, we vary the composition of our feed to take advantage of current market prices for the various types of ingredients used. 71 Previously, we took advantage of the lower cost of feed ingredients available from Mexican sources and increased the portion of our total needs that we source locally, from approximately 40% in 1995 to approximately 60% in 1999. We believe that local feed, particularly sorghum, is of superior quality compared to imported feed ingredients. In addition, the use of local feed allows us to save on transportation costs and import duties. Our feed costs were favorably affected by changes in the Mexican government's agricultural policy, beginning in 1991, that eliminated price supports for domestic farmers and reduced procedural restrictions on importing grains, and by the reduction in tariffs with the implementation of NAFTA beginning in 1994. However, this trend reversed in 2000, when only 45.0% of feed ingredients were purchased from local sources. The change occurred mainly because grain for the acquired Grupo Campi complexes is supplied from international markets due to a lack of domestic supply in southern Mexico. In general, costs of domestic feed ingredients tend to follow the international markets, although cost adjustments do not occur simultaneously. In 2001, we purchased approximately 40.6% of grain from local sources, while in 2002 we purchased approximately 30.1% of grain from local sources. In 2003 the percentage of grain purchased from domestic markets was 38.3%, and in 2004 it was approximately 35.0%. Based on results for 2004, we estimate that an hypothetical variation of 10% in the cost of our feed ingredients would have an impact of Ps.646.9 million, or 6.0%, on total cost of sales. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. PART II. ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS None. ITEM 15. CONTROLS AND PROCEDURES We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2004. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act is recorded, processed, summarized and reported as and when required. 72 There has been no change in our internal control over financial reporting during 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 16. [RESERVED] ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Currently, no member of our audit committee possesses all the characteristics included in the definition of an "audit committee financial expert" within the meaning of this Item 16A. We consider that the combined financial expertise of the members of our audit committee meet much of this requirement. Our audit commits has the authority and appropriated funding to obtain outside advice, as it deems necessary, to carry out its duties. Also, pursuant to local law, we have a statutory auditor who is responsible for reviewing financial matters and, beginning in 2005, he will be responsible for reviewing and analyzing all financial data provided to our audit committee. ITEM 16B. CODE OF ETHICS We have adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer, controller and persons performing similar functions, as well as to other officers and employees. Our code of ethics is available free of charge upon request through our website www.bachoco.com.mx. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer, controller and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT AND NON-AUDIT FEES The following table sets forth the fees billed to us by our independent auditors, Mancera, S.C., a member practice of Ernst & Young Global independent registered public accounting firm, during the fiscal years ended December 31, 2004 and 2003: YEAR ENDED DECEMBER 31, ---------------------------- 2004 2003 ------------ ------------ Audit fees ............................... Ps.2,698,629 Ps.3,495,007 Audit-related fees ....................... -- -- Tax fees ................................. 711,200 691,274 All other fees ........................... -- -- ------------ ------------ Total fees ............................... Ps.3,409,829 Ps.4,186,281 ============ ============ Audit fees in the above table are the aggregate fees billed by Mancera, S.C. in connection with the audit of our annual financial statements and statutory and regulatory audits. Tax fees in the above table are fees billed by Mancera, S.C. for services related to tax refund claims. 73 AUDIT COMMITTEE APPROVAL POLICIES AND PROCEDURES Our audit committee has not established pre-approval policies and procedures for the engagement of our independent auditors for services. Our audit committee expressly approves on a case-by-case basis any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or to us. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. Not applicable. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. Not applicable. PART III. ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS See the Audited Financial Statements including notes, incorporated herein by reference. ITEM 19. EXHIBITS Documents filed as exhibits to this Form 20-F: EXHIBIT NO. DESCRIPTION -------- ---------------------------------------------------------------- 8.1 List of subsidiaries. 12.1 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 12.2 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 13.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 74 SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchanges Act of 1934, the registrant certifies that it meets all requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. INDUSTRIAS BACHOCO, S.A. de C.V. By: /s/ DANIEL SALAZAR FERRER -------------------------------- Daniel Salazar Ferrer Chief Financial Officer Date: June 29, 2005 75 INDUSTRIAS BACHOCO, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2003 and 2004 With Report of Independent Registered Public Accounting Firm INDUSTRIAS BACHOCO, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2003 AND 2004 CONTENT Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Changes in Financial Position Notes to the Consolidated Financial Statements F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders of Industrias Bachoco, S.A. de C.V. We have audited the accompanying consolidated balance sheets of Industrias Bachoco, S.A. de C.V. and subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of income, changes in stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in conformity with accounting principles generally accepted in Mexico. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Industrias Bachoco, S.A. de C.V., and subsidiaries at December 31, 2003 and 2004, and the consolidated results of their operations, their changes in stockholders' equity and changes in their financial position for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in Mexico, which differ in certain respects from those followed in the United States of America (see Note 17). As mentioned in Note 2p to the accompanying consolidated financial statements, effective January 1, 2003, the Company adopted the new requirements of Mexican accounting Bulletin E-1, Agriculture, issued by the Mexican Institute of Public Accountants. The effects are described in Note 3. Mancera, S.C. A Member Practice of Ernst & Young Global C.P.C. Francisco Jose Sanchez Gonzalez Mexico City, Mexico March 18, 2005 F-2 INDUSTRIAS BACHOCO, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of constant Mexican pesos as of December 31, 2004)
DECEMBER 31, --------------------------------------------------- (Thousands of U.S. dollars) (Note 2) --------------- --------------- --------------- 2003 2004 2004 --------------- --------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents Ps 1,650,659 Ps 2,338,102 $ 209,620 --------------- --------------- --------------- Accounts receivable: Trade, net 421,480 379,835 34,054 Value added and other recoverable taxes 235,728 183,493 16,451 --------------- --------------- --------------- Total accounts receivable 657,208 563,328 50,505 --------------- --------------- --------------- Inventories, net - Note 3 1,621,597 1,453,879 130,346 Biological current assets -Note 3 173,044 171,438 15,370 Prepaid expenses and other current assets 75,570 47,073 4,219 --------------- --------------- --------------- Total current assets 4,178,078 4,573,820 410,060 --------------- --------------- --------------- Property, plant and equipment, net - Note 4 8,209,996 8,227,955 737,668 Biological non-current assets -Note 3 346,765 329,830 29,571 Other assets 12,017 9,108 817 Intangible assets - Note 10 13,008 24,874 2,230 Goodwill, net- Note 5 288,840 271,318 24,325 --------------- --------------- --------------- TOTAL ASSETS Ps 13,048,704 Ps 13,436,905 $ 1,204,671 =============== =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to banks - Note 6 Ps 33,083 Ps 75,350 $ 6,755 Current portion of long-term debt - Note 6 27,990 24,303 2,179 Accounts payable 429,960 446,528 40,033 Related parties - Note 8 2,625 6,109 548 Income tax 16,284 12,944 1,160 Other taxes payable and other accruals - Note 9 153,384 188,021 16,857 --------------- --------------- --------------- Total current liabilities 663,326 753,255 67,532 --------------- --------------- --------------- LONG-TERM LIABILITIES: Long-term debt - Note 6 97,681 72,535 6,503 Deferred income tax - Note 13 1,673,523 1,681,231 150,728 Labor obligations - Note 10 32,173 54,374 4,875 --------------- --------------- --------------- TOTAL LIABILITIES 2,466,703 2,561,395 229,638 --------------- --------------- --------------- COMMITMENTS AND CONTINGENCIES- NOTE 11 STOCKHOLDERS' EQUITY - NOTE 12 Majority stockholders' equity Capital stock 2,057,083 2,056,877 184,407 Paid-in capital 635,647 648,169 58,111 Reserve for repurchase company stock 176,754 153,203 13,735 Retained earnings 11,401,160 11,717,065 1,050,481 Net income for the year 562,978 702,821 63,011 Minimum seniority premium liability adjustment Note 10 (1,908) (1,012) (91) Deficit from restatement of stockholders' equity (3,024,900) (3,174,419) (284,599) Cumulative effect of deferred income tax -Note 13 (1,268,318) (1,268,318) (113,710) --------------- --------------- --------------- Total majority stockholders' equity 10,538,496 10,834,386 971,345 --------------- --------------- --------------- Minority interest 43,505 41,124 3,688 --------------- --------------- --------------- Total stockholders' equity 10,582,001 10,875,510 975,033 --------------- --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Ps 13,048,704 Ps 13,436,905 $ 1,204,671 =============== =============== ===============
See accompanying notes. F-3 INDUSTRIAS BACHOCO, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of constant Mexican pesos as of December 31, 2004)
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- (Thousands of U.S. dollars) (Note 2) -------------- -------------- -------------- -------------- 2002 2003 2004 2004 -------------- -------------- -------------- -------------- Net revenues Ps 11,328,770 Ps 11,309,297 Ps 13,299,404 $ 1,192,344 Cost of sales (8,403,686) (9,200,033) (10,785,711) (966,981) -------------- -------------- -------------- -------------- Gross profit 2,925,084 2,109,264 2,513,693 225,363 Selling, general and administrative expenses (1,566,661) (1,654,685) (1,660,002) (148,826) -------------- -------------- -------------- -------------- Operating income 1,358,423 454,579 853,691 76,537 Comprehensive financing income (cost): Interest income 118,152 162,822 101,842 9,130 Interest expense (34,321) (26,021) (121,508) (10,894) -------------- -------------- -------------- -------------- Net interest income (expense) 83,831 136,801 (19,666) (1,764) Foreign exchange gain, net 45,354 72,576 45,052 4,039 Loss on net monetary position (113,501) (77,813) (96,878) (8,685) -------------- -------------- -------------- -------------- 15,684 131,564 (71,492) (6,410) -------------- -------------- -------------- -------------- Other income, net 44,197 23,515 30,865 2,767 -------------- -------------- -------------- -------------- Income before income tax and asset tax, employee profit sharing and cumulative effect of change in accounting principle 1,418,304 609,658 813,064 72,894 Income tax and asset tax - Note 13 202,549 (111,412) (103,456) (9,275) Employee profit sharing - Note 13 (1,569) (1,880) (2,977) (266) -------------- -------------- -------------- -------------- Income before cumulative effect of accounting change 1,619,284 496,366 706,631 63,353 Cumulative effect of change in accounting principle, net of taxes - Note 3 - 71,093 - - -------------- -------------- -------------- -------------- NET INCOME Ps 1,619,284 Ps 567,459 Ps 706,631 $ 63,353 ============== ============== ============== ============== Majority net income Ps 1,617,100 Ps 562,978 Ps 702,821 $ 63,011 Minority net income 2,184 4,481 3,810 342 -------------- -------------- -------------- -------------- NET INCOME Ps 1,619,284 Ps 567,459 Ps 706,631 $ 63,353 ============== ============== ============== ============== Weighted average units outstanding (in thousands) 297,898 299,369 299,630 299,630 -------------- -------------- -------------- -------------- NET MAJORITY INCOME PER UNIT Ps 5.43 Ps 1.88 Ps 2.34 $ .21 ============== ============== ============== ==============
See accompanying notes. F-4 INDUSTRIAS BACHOCO, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 (Thousands of constant Mexican pesos as of December 31, 2004)
NUMBER OF RESERVE FOR UNITS OF REPURCHASE CAPITAL STOCK PAID-IN OF COMPANY RETAINED (thousands) CAPITAL STOCK CAPITAL STOCK EARNINGS -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2001 298,154 Ps 2,056,105 Ps 554,455 Ps 222,507 Ps 9,163,989 Transfer of prior year's net income - - - - 1,245,117 Repurchase of stock (2,534) (1,409) - (40,144) (387) Sales of repurchased stock 1,846 1,026 29,706 - - Cash dividends paid - - - - (303,782) Comprehensive income, net of tax - - - - - -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2002 297,466 2,055,722 584,161 182,363 10,104,937 Transfer of prior year's net income - - - - 1,617,100 Repurchase of stock (300) (158) - (5,609) - Sales of repurchased stock 2,834 1,519 51,486 - - Cash dividends paid - - - - (320,877) Comprehensive income, net of tax - - - - - -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2003 300,000 2,057,083 635,647 176,754 11,401,160 Transfer of prior year's net income - - - - 562,978 Repurchase of stock (1,110) (573) - (23,551) - Sales of repurchased stock 710 367 12,522 - - Cash dividends paid - - - - (247,073) Comprehensive income, net of tax - - - - - -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2004 (Note 12) 299,600 Ps 2,056,877 Ps 648,169 Ps 153,203 Ps 11,717,065 ============== ============== ============== ============== ============== MINIMUM SENIORITY DEFICIT FROM CUMULATIVE TOTAL NET PREMIUM RESTATEMENT OF EFFECT OF MAJORITY INCOME FOR LIABILITY STOCKHOLDERS' DEFERRED STOCKHOLDERS' THE YEAR ADJUSTMENT EQUITY INCOME TAX EQUITY -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2001 Ps 1,245,117 Ps (725) Ps (2,887,954) Ps (1,268,318) Ps 9,085,176 Transfer of prior year's net income (1,245,117) - - - - Repurchase of stock - - - - (41,940) Sales of repurchased stock - - - - 30,732 Cash dividends paid - - - - (303,782) Comprehensive income, net of tax 1,617,100 (22) (70,129) - 1,546,949 -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2002 1,617,100 (747) (2,958,083) (1,268,318) 10,317,135 Transfer of prior year's net income (1,617,100) - - - - Repurchase of stock - - - - (5,767) Sales of repurchased stock - - - - 53,005 Cash dividends paid - - - - (320,877) Comprehensive income, net of tax 562,978 (1,161) (66,817) - 495,000 -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2003 562,978 (1,908) (3,024,900) (1,268,318) 10,538,496 Transfer of prior year's net income (562,978) - - - - Repurchase of stock - - - - (24,124) Sales of repurchased stock - - - - 12,889 Cash dividends paid - - - - (247,073) Comprehensive income, net of tax 702,821 896 (149,519) - 554,198 -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2004 (Note 12) Ps 702,821 Ps (1,012) Ps (3,174,419) Ps (1,268,318) Ps 10,834,386 ============== ============== ============== ============== ============== TOTAL MINORITY STOCKHOLDERS' INTEREST EQUITY -------------- -------------- Balance at December 31, 2001 Ps 46,164 Ps 9,131,340 Transfer of prior year's net income - - Repurchase of stock - (41,940) Sales of repurchased stock - 30,732 Cash dividends paid - (303,782) Comprehensive income, net of tax (1,210) 1,545,739 -------------- -------------- Balance at December 31, 2002 44,954 10,362,089 Transfer of prior year's net income - - Repurchase of stock - (5,767) Sales of repurchased stock - 53,005 Cash dividends paid - (320,877) Comprehensive income, net of tax (1,449) 493,551 -------------- -------------- Balance at December 31, 2003 43,505 10,582,001 Transfer of prior year's net income - - Repurchase of stock - (24,124) Sales of repurchased stock - 12,889 Cash dividends paid - (247,073) Comprehensive income, net of tax (2,381) 551,817 -------------- -------------- Balance at December 31, 2004 (Note 12) Ps 41,124 Ps 10,875,510 ============== ==============
See accompanying notes. F-5 INDUSTRIAS BACHOCO, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Thousands of constant Mexican pesos as of December 31, 2004)
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------- (Thousands of U.S. dollars) (Note 2) -------------- 2002 2003 2004 2004 -------------- -------------- -------------- -------------- OPERATING ACTIVITIES: Net income Ps 1,619,284 Ps 567,459 Ps 706,631 $ 63,353 Adjustments to reconcile net income to Resources provided by operating activities: Depreciation 346,719 384,220 420,275 37,679 Deferred income tax (257,045) 69,397 80,934 7,256 Goodwill amortization 17,503 17,606 17,522 1,571 -------------- -------------- -------------- -------------- 1,726,461 1,038,682 1,225,362 109,859 Changes in operating assets and liabilities: Accounts receivable 43,779 (56,174) 93,880 8,417 Inventories and biological assets (111,766) (319,863) (42,678) (3,826) Prepaid expenses and other current assets (113,136) 93,432 28,498 2,555 Accounts payable (178,567) 143,072 16,568 1,485 Related parties 3,933 (19,427) 3,484 312 Taxes payable and other accruals (119,163) 28,199 31,297 2,806 Labor obligations, net (8,430) 2,428 11,231 1,006 -------------- -------------- -------------- -------------- RESOURCES PROVIDED BY OPERATING ACTIVITIES 1,243,111 910,349 1,367,642 122,614 FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - 41,039 4,074 365 Proceeds from issuance of notes payable to banks 54,687 77,211 310,895 27,873 Repayment of long-term debt and notes payable (178,585) (160,423) (293,701) (26,331) Constant pesos effect on notes payable to banks and long term-debt (18,972) (7,990) (7,834) (702) Cash dividends paid (303,782) (320,877) (247,073) (22,151) Sales (repurchases) of Company's own stock, net (11,208) 47,238 (11,235) (1,007) -------------- -------------- -------------- -------------- RESOURCES USED IN FINANCING ACTIVITIES (457,860) (323,802) (244,874) (21,953) INVESTING ACTIVITIES: Acquisition of property, plant and equipment, net (288,692) (794,828) (438,234) (39,289) Other assets 6,169 3,968 2,909 261 -------------- -------------- -------------- -------------- RESOURCES USED IN INVESTING ACTIVITIES (282,523) (790,860) (435,325) (39,028) -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 502,728 (204,313) 687,443 61,633 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,352,244 1,854,972 1,650,659 147,987 -------------- -------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR Ps 1,854,972 Ps 1,650,659 Ps 2,338,102 $ 209,620 ============== ============== ============== ==============
See accompanying notes. F-6 INDUSTRIAS BACHOCO, S.A. DE C.V. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 (Thousands of constant Mexican pesos as of December 31, 2004, except per unit amounts) 1. ORGANIZATION AND BUSINESS ACTIVITY Industrias Bachoco, S.A. de C.V. and subsidiaries (collectively "Bachoco" or the "Company") are engaged in the breeding, processing and marketing of poultry (chicken and eggs) swine and other products (principally feed). Poultry sales represent 90%, 89% and 90% of net revenues for the years ended December 31, 2002, 2003 and 2004, respectively. All sales activities are carried out in Mexico, mainly through retailers, wholesalers and self-service outlets. 2. ACCOUNTING POLICIES AND PRACTICES The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in Mexico ("Mexican GAAP"). The accounting policies and practices followed by Bachoco in the preparation of its consolidated financial statements are the following: a) ESTIMATES IN FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. b) CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. The ownership interests of other stockholders in such subsidiaries are reflected as minority interest. Intercompany balances, investments and transactions have been eliminated in consolidation. F-7 The accompanying consolidated financial statements include the following consolidated subsidiaries as of December 31, 2002, 2003 and 2004:
PERCENTAGE EQUITY INTEREST ------------------------------ 2002 2003 2004 -------- -------- -------- % % % Acuicola Bachoco, S.A. de C.V. 100 100 100 Aviser, S.A. de C.V. 100 100 100 Bachoco, S.A. de C.V. ("BSACV") 100 100 100 Campi Alimentos, S.A. de C.V. - 100 100 Campi Comercial, S.A. de C.V 100 - - Huevo y Derivados, S.A. de C.V. 97 97 97 Operadora de Servicios de Personal, S.A. de C.V. 100 100 100 Pecuarius Laboratorios, S.A. de C.V. 64 64 64 Secba, S.A. de C.V. - - 100 Sepetec, S. A. de C.V. 100 100 100 Servicios de Personal Administrativo, S.A. de C.V. 100 100 100
In November 2004, the Company acquired all the shares of Secba, S.A. de C.V. from a related party for Ps 13,905. As of the date of the acquisition, the figures of Secba, S.A. de C.V. have been consolidated with the Company's figures. The excess of the purchase price paid over the book value of this investment amounted Ps 330 was taken other income. In April 2002, the subsidiary Secba, S.A. de C.V. was sold for Ps 5,551 to a related party generating a gain of Ps 790, which is included in other income; consequently, this subsidiary's figures were not consolidated from the date of sale. Secba, S.A. de C.V. continued to render administrative services to the Company. The effects of the deconsolidation of this subsidiary were immaterial and did not affect the comparability of the accompanying financial statements. In December 2003, Campi Comercial, S.A. de C.V. merged into BSACV (the surviving company). After the merger, a spin-off from BSACV was approved to create a new company known as Campi Alimentos, S.A. de C.V. The aforementioned transactions had no effect on the consolidated amounts. c) RECOGNITION OF THE EFFECTS OF INFLATION ON FINANCIAL INFORMATION The Company recognizes the effects of inflation on financial information as required by Mexican Accounting Principles Bulletin B-10, "Accounting Recognition of the Effects of Inflation on Financial Information", issued by the Mexican Institute of Public Accountants (the "Mexican Institute"). Consequently, the amounts shown in the accompanying financial statements and in these notes are expressed in thousands of constant Mexican pesos as of December 31, 2004. The December 31, 2004 restatement factor applied to the financial statements at December 31, 2002 and 2003 was 1.0937 and 1.0520, which represent the rate of inflation from December 31, 2002 and December 31, 2003 up to December 31, 2004, respectively, based on the Mexican National Consumer Price Index (NCPI) published by Banco de Mexico (the Central Bank). F-8 Property, plant and equipment were carried at replacement cost, determined annually by an independent appraiser, through 1996. The fifth amendment to Bulletin B-10 (as modified), which is applicable to financial statements for periods beginning on or after January 1, 1997, disallows the use of appraisals. Based on such amendment, the Company restated the appraisal value at December 31, 1996 and property, plant and equipment purchases since January 1, 1997 are carried at cost adjusted by the NCPI. Comprehensive financing cost related to the construction in progress, is capitalized during the installation or preoperating period and amortized over the estimated useful lives of the assets. Depreciation of property, machinery and equipment is computed on restated values using the straight-line method, based on the estimated useful lives of the related assets (see Note 4). Inventories are valued at average cost of acquisition or production, which approximates estimated replacement cost, not in excess of net realizable value. Other non monetary assets were restated using adjustment factors obtained from the NCPI. Capital stock, paid-in capital, reserve for stock repurchase of Company's own shares and retained earnings were restated using adjustment factors obtained from the NCPI. The deficit from restatement of stockholders' equity comprises the accumulated monetary position loss at the time the provisions of Bulletin B-10 were first applied and the subsequent gain or loss from holding nonmonetary assets, principally property, plant and equipment and inventories. A gain or loss from holding nonmonetary assets originates when the replacement cost of these assets is higher or lower than the cost of these assets restated by the NCPI. The net monetary gain (loss) represents the impact of inflation on monetary assets and liabilities. The net monetary gain (loss) of each year is included in the statements of income as a part of the comprehensive financing income (cost). The comprehensive financing income includes interest earned and paid, as well as the results of exchange differences and the gain or loss on monetary position. Bulletin B-12, "Statement of Changes in Financial Position", specifies the appropriate presentation of the statement of changes in financial position based on financial statements restated in constant pesos in accordance with Bulletin B-10. Bulletin B-12 identifies the sources and applications of resources representing differences between beginning and ending financial statement balances in constant pesos. In accordance with this bulletin, monetary and foreign exchange gains and losses are not treated as noncash items in the determination of resources provided by operations. d) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist basically of bank deposits and highly liquid investments with maturities of less than 90 days. Such investments are stated at acquisition cost plus accrued interest, similar to market value. F-9 e) ACCOUNTS RECEIVABLE The Company periodically and systematically reviews the aging and collection of its accounts receivable. As a result of this procedure, the Company set up an allowance for doubtful accounts of Ps 40,105 and Ps 35,130 as of December 31, 2003 and 2004, respectively. The recoverable value added tax is related to purchases of certain raw materials, property, plant and equipment and services charged by suppliers, which is subject to reimbursement. f) CONCENTRATION OF RISK The Company invests a portion of its surplus cash in cash deposits in financial institutions with strong credit ratings and has established guidelines related to diversification and maturities that the Company believes maintains safety and liquidity. The Company has not experienced any losses on its cash equivalents. The Company does not believe it has significant concentrations of credit risks in its accounts receivable, because the Company's customer base is geographically diverse, thus spreading the credit risk. g) LABOR OBLIGATIONS Under Mexican labor law, employees are entitled to a compensation payment ("seniority premium") upon death, dismissal or at retirement after 15 or more years of service. The Company accounts for this obligation in accordance with Bulletin D-3 Labor Obligations issued by the Mexican Institute; consequently, seniority premium costs are recognized periodically during the years of service by employees, based on actuarial computations. Also, in accordance with Mexican labor law, the Company is contingently liable for severance payments to employees who are unjustifiably dismissed. Such payments are charged to income in the year in which the decision to dismiss an employee is made. Bachoco has established a defined benefit pension plan which has been accounted for in accordance with the requirements of Bulletin D-3. This Bulletin defines, among other things, the accounting treatment of pensions and seniority premiums. Bachoco implemented a defined benefit retirement pension plan that covers all non-unionized employees. Participating employees are required to contribute with a minimum of 1% of their salary. Such percentage may be increased based on years of service up to a maximum of 5%. h) INCOME TAXES AND EMPLOYEE PROFIT SHARING The Company recognizes deferred taxes on all temporary differences in balance sheet accounts for financial and tax reporting purposes, using the enacted income tax rate at the balance sheet date of the lastest financial statements issued, as required by Mexican accounting Bulletin D-4, "Accounting for Income Tax, Asset Tax and Employee Profit Sharing", issued by the Mexican Institute. The annual change in the deferred tax liability is presented in the statement of operations, except for the portion that corresponds to the holding of non-monetary assets, which is to be presented under stockholders' equity and has been included in the deficit from holding non-monetary assets. F-10 Current year income tax is charged to results of operations and represents a liability due and payable in less than one year. The Company evaluates periodically the possibility of recovering deferred tax assets and if necessary, establishes a reserve. Bulletin D-4 requires that asset tax be included in the deferred income tax balance, after consideration of its recovery. In conformity with this Bulletin, deferred employee profit sharing should be recognized only on temporary differences determined in the reconciliation of current year net income for financial and tax reporting purposes, provided there is no indication that the related liability or asset will not be realized in the future. Current year employee profit sharing is charged to results of operations and represents a liability due and payable in a period of less than one year. The accumulated deferred income tax effect included in stockholders' equity corresponds to the deferred income tax determined at the time the requirements of Bulletin D-4 were first applied, which was Ps 1,268,318. i) REVENUE RECOGNITION Revenue is recognized as earned, when all of the following criteria are met: - Persuasive evidence of an arrangement exists - Delivery has occurred - The seller's price to the buyer is fixed or determinable - Collectibility is reasonably assured j) NET INCOME PER UNIT Net income per unit has been computed based on majority net income and on the weighted average number of units outstanding. k) COMPREHENSIVE INCOME As established in Mexican accounting Bulletin B-4, "Comprehensive Income", comprehensive income consists of the net income, plus the result from holding non-monetary assets and the effect of deferred taxes applied directly to stockholders equity, minimum seniority premium liability adjustment and the effect of minority interest. l) FINANCIAL INSTRUMENTS In order to reduce its financial costs, the Company uses financial instruments (derivatives), which are valued using the same method as the one used to value the assets and liabilities being hedged. The valuation effect of such instruments is recognized in the statement of income, net of costs, expenses or income derived from the hedged assets and liabilities. These instruments not acting as hedges are presented at market value and gains and losses resulting from changes in such market values are recorded in results of operations, as required by Mexican accounting Bulletin C-2, Financial Instruments, issued by the Mexican Institute. The market value of financial instruments has been included in cash equivalents due to its immateriality (Ps 6,614 in 2003 and Ps 14,235 in 2004). F-11 m) CAPITALIZED SOFTWARE The Company capitalizes software development when the product under development has reached technological feasibility. Costs incurred prior to the establishment of technological feasibility are charged to product development expense. The Company capitalizes qualifying internal and external costs incurred during the application development stage. Costs incurred during the preliminary project stage and post implementation stage/operation stage are expensed as incurred. n) GOODWILL Goodwill represents the excess of the purchase price paid for acquired subsidiaries and affiliates over the fair value of the net assets acquired. Goodwill is amortized using the straight-line method over a twenty-year period. Amortization will be discontinued in 2005 on explained after under paragraph Note 2v. o) FOREIGN EXCHANGE DIFFERENCES Transactions in foreign currency are recorded at the prevailing exchange rate on the day of the related transactions. Foreign currency denominated assets and liabilities are translated at the prevailing exchange rate at the balance sheet date. Exchange differences determined from such date to the time foreign currency denominated assets and liabilities are settled or translated at the balance sheet date are charged or credited to operations. See Note 15 for the Company's foreign currency position at the end of each year and the exchange rates used to translate foreign currency denominated balances. p) AGRICULTURE Effective January 1, 2003, the Company adopted the requirements of Mexican accounting Bulletin E-1, Agriculture, which establishes the rules for recognizing, valuing, presenting and disclosing biological assets and agricultural products, it also establishes the treatment to be given to government subsidies on biological assets. This bulletin establishes that biological assets and agricultural products (the latter at the time of their harvesting) are to be valued at their fair value, net of estimated costs at point of sale. Also, the Bulletin establishes that whenever the fair value cannot be determined in a reliable, verifiable and objective manner, the assets are to be valued at their production cost, net of accumulated impairment. The Company's biological assets consist of poultry in its different stages, incubatable eggs and breeding pigs. Agricultural products are processed chicken, commercial eggs and commercial pigs. Poultry being fattened (with less than 6.5 weeks old), incubatable eggs for fattening, pigs and laying hens, are valued at production cost since it is not possible to determine their fair value in a reliable, verifiable and objective manner. Poultry being fattened from age 6.5 weeks to the time birds are ready for sale, is valued at fair value net of estimated costs at point of sale, considering the sales price per kilogram of processed chicken at the date of valuation. F-12 Laying hens are depreciated based on eggs produced using an estimated factor for productive useful life. Processed chicken and commercial eggs, are valued at their fair value net of costs at point of sale, considering the sales price per kilogram of processed chicken and commercial eggs at the time such items are considered agricultural products, from this date, the valuation is considered to be cost up to the time of sale, not in excess of net realizable value. The Company is exposed to financial risks due to changes in the price of chicken. The Company does not expect any significant decrease in the price of chicken in the future; therefore it has not contracted any financial instruments (derivatives) or any other hedges against the risk of a decrease in the price of chicken. The Company frequently reviews the prices of chicken to determine the need for a financial asset to address the risk. With the adoption of the requirements of Bulletin E-1, biological assets and agricultural products were classified as current and non-current assets depending on their availability and the business cycle. q) INTANGIBLE ASSETS Effective January 1, 2003, the Company adopted the requirements of Mexican accounting Bulletin C-8, Intangible Assets, issued by the Mexican Institute. Bulletin C-8 specifies, among other things, that project development costs are to be capitalized if they meet certain established requirements with respect to their recognition as assets. Pre-operating costs are to be recognized as an expense of the period and intangible assets with indefinite useful lives, are not to be amortized, but instead evaluated annually for impairment. Unamortized balances of pre-operating expenses capitalized through December 31, 2003 in terms of the previous Bulletin C-8, are to continue to be amortized as specified in such bulletin. The effects of the adoption of this new bulletin were not material for the Company. r) LIABILITIES, PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND COMMITMENTS Effective January 1, 2003, the Company adopted the requirements of Mexican accounting Bulletin C-9, Liabilities, Provisions, Contingent Assets and Liabilities and Commitments, issued by the Mexican Institute. This bulletin is more precise in defining provisions, accrued liabilities and contingent liabilities, the use of the present value and the early retirement of debt securities or their replacement by a new issue. Such bulletin establishes the rules for valuing and presenting liabilities, as well as provisions. F-13 s) SEGMENTS Requirements of Bulletin B-5, Segments, issued by the Mexican Institute of Public Accountants, went into effect in April 2003. This bulletin establishes the rules for disclosing financial information by segment. Bulletin B-5 cancels the supplementary requirements of International Accounting Standard No. 14, which applied through December 31, 2002. In the case of the Company, Bulletin B-5 and the International Accounting Standard are the same. Financial information by segment is prepared based on a management's approach, in conformity with Bulletin B-5, considering a segment to be an operating component that is subject to risks and benefits that are different from other business segments. The financial information by activity is disclosed in Note 14. The financial information related to clients is not disclosed, as such information is not available. t) ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS Effective January 1, 2004, the Company adopted the requirements of Mexican accounting Bulletin C-15, Accounting for the Impairment or Disposal of Long-lived Assets, issued by the Mexican Institute in March 2003. Bulletin C-15 establishes that if there are any indications of impairment in the value of long-lived assets, the related loss should be determined based on the recovery value of the related asset, which is defined as the difference between the asset's net selling price and its carrying amount. An impairment loss is recognized if the net carrying amount of the asset exceeds the recovery value. The application of this new pronouncement had no effect on the Company's financial position or on its results of operations. u) FINANCIAL INSTRUMENTS In April 2003, the Mexican Institute of Public Accountants issued Bulletin C-12, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, the objective of which is to specify the differences between liabilities and equity. Bulletin C-12 also establishes the rules for classifying and valuing the initial recognition of the components of liabilities and equity of combined instruments, as well as the rules for disclosing such financial instruments. The observance of Bulletin C-12 is compulsory for fiscal years beginning on or after January 1, 2004. Company management has concluded that the adoption of this new accounting pronouncement does not have any effect on the Company's financial position or on its results of operations, since the Company has not entered into any agreements involving financial instruments. F-14 v) NEW ACCOUNTING PRONOUNCEMENTS Business acquisitions In May 2004, the Mexican Institute issued Mexican accounting Bulletin B-7, Business Acquisitions. The observance of Bulletin B-7 is mandatory for fiscal years beginning on or after January 1, 2005, although earlier observance is recommended. Bulletin B-7 addresses the financial accounting and reporting for business and entity acquisitions and requires that all business combinations be accounted for using only the purchase method. Bulletin B-7 also eliminates the amortization goodwill and provides specific rules related to the acquisition of minority interest and to the transfer of net assets or exchange of equity interests between entities under common control. Management believes that the adoption of this accounting pronouncement will increase the Company's net income in 2005 by Ps 17,522, derived from the elimination of goodwill amortization. Financial instruments In April 2004, the Mexican Institute amended Mexican accounting Bulletin C-2, Financial Instruments. The amendments establish that changes in the fair value of instruments classified as available for sale be disclosed in the holder's stockholders' equity. The amended Bulletin C-2 also provides the requirements and rules for the accounting treatment of transfers between financial asset categories. The amendments are also more precise in establishing the guidelines for the accounting treatment to be given to impairment in the fair value of financial instruments. Furthermore, the amended bulletin requires that such instruments be classified as either short-term or long-term and clarifies the rules for presenting in the statement of changes in financial position changes associated with the purchase, sale and maturity of financial instruments. Finally, the amendments broaden the disclosure rules established under Bulletin C-2. The observance of the amendments to Bulletin C-2 is mandatory for fiscal years beginning on or after January 1, 2005, although earlier observance is permitted. Management does not believe the adoption of this new accounting requirement will have a material effect on the Company's financial position or on its results of operations. Accounting for derivative instruments and hedging activities In April 2004, the Mexican Institute issued Bulletin C-10, Accounting for Derivative Instruments and Hedging Activities. Bulletin C-10 establishes the defining characteristics that financial instruments must have to be considered derivatives, as well as the conditions that must be met for specifically designating derivatives as hedges. Bulletin C-10 also provides guidelines for assessing the effectiveness of hedging derivatives and the rules for their valuation and the accounting for changes in their fair value. Finally, this bulletin provides guidelines for disclosing and presenting hedges in the financial statements. Management does not believe the adoption of this new accounting requirement will have a material effect on the Company's financial position or on its results of operations. F-15 Labor Obligations In January 2004, the Mexican Institute issued the revised accounting Bulletin D-3, Labor Obligations. The revised bulletin establishes the overall rules for the valuation, presentation and disclosure of so-called "other post-retirement benefits and the reduction and early extinguishment of such benefits", thus nullifying the provisions of Circular 50. Bulletin D-3 also provides rules applicable to employee termination pay. The observance of these new rules is mandatory for fiscal years beginning on or after January 1, 2005. Management does not believe the adoption of this new accounting requirement will have a material effect on the Company's financial position or on its results of operations. w) CONVENIENCE TRANSLATION United States dollar amounts as of December 31, 2004, shown in the accompanying consolidated financial statements, have been included solely for the convenience of the reader and are translated from Mexican pesos to US dollars as a matter of arithmetic computation only, at an exchange rate of Ps 11.154 to one U.S. dollar, which was the exchange rate at December 31, 2004. Such translation should not be construed as a representation that the Mexican peso amounts could have been or could be converted into U.S. dollars at this or any other rate. x) RECLASSIFICATIONS Some amounts shown in the 2002 and 2003 financial statements have been reclassified for uniformity of presentation with 2004. 3. INVENTORIES AND BIOLOGICAL ASSETS a) Inventories consist of the following: 2003 2004 -------------- -------------- Raw materials and byproducts Ps 691,205 Ps 629,085 Medicine, materials and spare parts 238,815 286,934 Finished feed 35,565 30,708 -------------- -------------- 965,585 946,727 -------------- -------------- Agricultural products: Live chicken 422,261 387,052 Processed chicken 212,609 102,745 Commercial egg 21,142 17,355 -------------- -------------- 656,012 507,152 -------------- -------------- Total Ps 1,621,597 Ps 1,453,879 ============== ============== F-16 b) Biological assets at December 31, 2003 and 2004 consist of the following: Current biological assets 2003 2004 ------------- ------------- Breeder chicken Ps 102,640 Ps 101,679 Breeder pigs 18,268 15,848 Incubatable eggs for fattening 52,136 53,911 ------------- ------------- Total current biological assets 173,044 171,438 ------------- ------------- Non-current biological assets Laying and breeder hens 37,367 50,302 Incubatable eggs for laying hens 1,471 1,610 Pigs 26,348 26,608 Laying hens 438,139 434,894 Allowance for productivity declines (156,560) (183,584) ------------- ------------- Total non-current biological assets 346,765 329,830 ------------- ------------- Total inventories and biological assets $ 2,141,406 $ 1,955,147 ============= ============= c) The cumulative effect of the adoption of Mexican accounting Bulletin E-1 at January 1, 2003 resulted in an increase of biological assets for Ps 84,634 (Ps 71,093 net of taxes), which is presented in the consolidated statement of income as a cumulative effect of accounting change. The increase in the historical cost of biological assets and agricultural products to bring them to their fair value at December 31, 2003 aggregated Ps 61,984. The difference between fair values of beginning and ending inventories of Ps 22,650 was recognized in the net revenues caption in the consolidated statement of income. Had Bulletin E-1 been in force before January 1, 2002, the unaudited pro forma net revenues, net income and net income per unit would be as follows:
2002 2003 2004 --------------- --------------- --------------- Net revenues as reported Ps 11,328,770 Ps 11,309,297 Ps 13,299,404 Effect of valuation at fair value of biological assets and agricultural products (12,540) - - --------------- --------------- --------------- Pro forma net revenues Ps 11,316,230 Ps 11,309,297 Ps 13,299,404 =============== =============== =============== Net income as presented Ps 1,619,284 Ps 567,459 Ps 706,631 Effect of valuation at fair value of biological assets and agricultural products net of taxes (11,827) - - Minority interest (2,184) - - --------------- --------------- --------------- Pro forma net income Ps 1,605,273 Ps 567,459 Ps 706,631 =============== =============== =============== Net income per unit as report Ps 5.43 Ps 1.88 Ps 2.34 Pro forma net income per unit as reported 5.39 1.88 2.34
F-17 4. PROPERTY, PLANT AND EQUIPMENT a) Property, plant and equipment consists of the following as of December 31:
USEFUL LIVES 2003 2004 --------------- --------------- --------------- Land - Ps 688,287 Ps 704,704 Buildings, farm structures and 8-28 equipment years 10,523,640 10,968,194 Office, furniture and equipment 3 213,070 219,439 Transportation equipment 7 1,091,199 1,066,783 --------------- --------------- 12,516,196 12,959,120 Accumulated depreciation (4,590,949) (4,922,140) --------------- --------------- Net 7,925,247 8,036,980 Construction in progress 284,749 190,975 --------------- --------------- Total Ps 8,209,996 Ps 8,227,955 =============== ===============
b) As described in Note 2, the Company capitalizes comprehensive financing cost on assets under construction during the construction period. In 2002, 2003 and 2004, there was no capitalization of net financing cost. c) Depreciation expense for the years ended December 31, 2002, 2003 and 2004, was Ps 346,719, Ps 384,220 and Ps 420,275, respectively. 5. GOODWILL Goodwill was generated in 1999, as a result of acquiring the shares of Grupo Campi, S.A. de C.V., for the amount of Ps 359,291. At December 31, 2003 and 2004, accumulated amortization aggregates Ps 70,451 and Ps 87,973, respectively. Amortization expense for the years ended December 31, 2002, 2003 and 2004, was Ps 17,503, Ps 17,606 and Ps 17,522, respectively. 6. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT a) Notes payable to banks and long-term debt, as of December 31, consists of the following: 2003 2004 ------------- ------------- Unsecured notes payable to banks: Denominated in Mexican pesos, interest rate 2003 and 2004: CETES FIRA rate less 3.5 points. Ps 33,083 Ps 35,350 Denominated in Mexican pesos, interest rate: TIIE FIRA rate less .75 points - 40,000 ------------- ------------- Total notes payable to bank Ps 33,083 Ps 75,350 ============= ============= F-18 The weighted average interest rate on short-term notes payable at December 31, 2003 and 2004 was 2.50% and 4.93%, respectively.
2003 2004 --------------- --------------- Long-term debt to banks: Secured by equipment: Denominated in Mexican pesos, repayable in monthly instalments: Through 2010, at CETES rate plus 2 points Ps 64,061 Ps 55,000 Maturing in 2005, at interbank equilibrium (TIIE) rate plus 4 points or CETES rate plus 2 points 8,653 4,117 Maturing in 2007, fix rate of 10.45% 48,212 33,340 Unsecured: Maturing in 2004 LIBOR rate plus 20% 4,320 - Maturing in 2005 LIBOR rate plus 20% 425 402 Denominated in Mexican pesos, at TIIE FIRA rate less 3.30 points, with minimum rate of 2.70% - 3,979 --------------- --------------- Total 125,671 96,838 Less current portion (27,990) (24,303) --------------- --------------- Total long-term debt Ps 97,681 Ps 72,535 =============== ===============
Weighted average interest rates on long-term debt at December 31, 2003 and 2004 were approximately 8.11% and 9.35%, respectively. The weighted average interest rate on the Company's total debt at December 31, 2003 and 2004 was 6.94% and 7.18%, respectively. b) At December 31, 2003 and 2004, unused lines of credit totaled Ps 1,266,773 and Ps 944,213, respectively. In 2003 and 2004, the Company did not pay any fee for unused lines of credit. c) The book value of assets collateralizing long-term debt was Ps 252,101 at December 31, 2003 and Ps 243,032 at December 31, 2004. d) Maturities of long-term debt as of December 31, 2004 are as follows: YEAR AMOUNT ---- ------------ 2006 Ps 20,793 2007 17,662 2008 10,022 2009 11,811 2010 12,247 ------------ Ps 72,535 ============ F-19 7. FINANCIAL INSTRUMENTS During 2003 and 2004, the Company has observed different strategies with respect to derivatives. At December 31, 2003, the Company had entered into exchange-rate options, which expired during 2004. At December 31, 2003, the Company had a call option of $ 35,239 (thousand of usd), for which the Company paid a premium of Ps 17,760, as well as put options of $ 89,040 (thousand of usd), for which the Company received a premium of Ps 22,111. Considering the fair value of these transactions, the closing of the call-option position was Ps 18,039 and the put- option position was Ps 15,775, thus giving rise to a gain of Ps 6,614, which was recorded in the caption foreign exchange gain, net. At December 31, 2004, the Company maintains positions in the following financial instrument derivatives:
FINANCIAL INSTRUMENT NOTIONAL AMOUNT / MARKET VALUE GAIN DERIVATIVES TYPE POSITION NUMBER OF CONTRACTS (loss) --------------------------- ---- -------- ------------------- ----------------- Exchange rate options Put Short Usd. 35,200 Ps (8,738) Exchange rate options Put Long Usd 134,100 27,439 Exchange rate options Call Short Usd 148,420 (24,851) Exchange rate options Call Long Usd 161,220 23,645 Corn, bean and soy futures Short 374 (1,291) Corn, bean and soy futures Long 329 1,623 Corn, bean and soy options Put Short 441 (1,298) Corn options Call Long 160 202 Peso futures Long 500 1,602 Peso futures Short 500 (1,115) Peso options Put Short 125 (452) Peso options Put Long 125 820 Peso options Call Short 295 (3,351) ----------------- Total Ps 14,235 =================
At December 31, 2003 and 2004, the derivative financial instruments were valued at their market value, because they do not qualify as hedges, based on rules established by Bulletin C-2. F-20 8. RELATED PARTIES a) A summary of related party accounts payable as of December 31, is as follows:
RELATION 2003 2004 ----------- ------------- ------------- Llantas y Accesorios, S.A. de C.V. Affiliate Ps - Ps 25 Maquinaria Agricola, S.A. de C.V. Affiliate - 113 Vimifos, S.A. de C.V. Affiliate 2,563 5,920 Autos y Accesorios, S.A. de C.V. Affiliate 62 51 ------------- ------------- Ps 2,625 Ps 6,109 ============= =============
All of these companies are considered as related parties, as the Company's main shareholders are also directly or indirectly, shareholders of these companies. b) For the years ended December 31, 2002, 2003 and 2004, the Company had the following transactions with related parties:
2002 2003 2004 ----------- ------------- ------------- Airplane leasing expenses Ps 3,702 Ps 4,776 Ps 2,731 Purchases of vehicles, tires and spare parts 52,558 49,788 37,787 Purchases of feed, raw materials and packing supplies 107,088 161,108 195,992 Administrative services 335,199 350,855 346,240
c) BSACV has an open contract with Secba, S.A. de C.V., in which the latter provides administrative services, including management and operations services. The amount of the consideration paid is determined as a function of expenses incurred by Secba, S.A. de C.V. for the rendering of the services. As of the date of acquisition of the shares of Secba, operations with this subsidiary are eliminated in the consolidated financial statements. 9. OTHER TAXES PAYABLE AND OTHER ACCRUALS a) An analysis of other taxes payable and other accruals presented in the financial statements is as follows: 2003 2004 ----------- ------------- Expenses payable Ps 103,217 Ps 101,999 Interest payable 237 1,386 Tax payable 2,308 5,238 Salaries payable 8,839 16,537 Rights payable 14,388 18,086 Social Securities 17,454 20,996 Employee profit sharing 2,454 3,645 Other accounts payable 4,487 20,134 ----------- ------------- Total Ps 153,384 Ps 188,021 =========== ============= F-21 b) Expenses payable at December 31, 2003 and 2004, include expense provisions analysed as follows:
BALANCES AT INCREASES BALANCES AT DECEMBER 31, DURING THE DECEMBER 31, 2003 YEAR PAYMENTS 2004 ------------- --------------- --------------- --------------- Office expenses (light and power, water, telephone) Ps 101,433 Ps 350,621 Ps 350,819 Ps 101,235 Fees 1,784 211 1,231 764 ------------- --------------- --------------- --------------- Ps 103,217 Ps 350,832 Ps 352,050 Ps 101,999 ============= =============== =============== ===============
BALANCES AT INCREASES BALANCES AT DECEMBER 31, DURING THE DECEMBER 31, 2002 YEAR PAYMENTS 2003 ------------- --------------- --------------- --------------- Office expenses (light and power, water, telephone) Ps 82,629 Ps 480,561 Ps 461,757 Ps 101,433 Fees - 29,212 27,428 1,784 ------------- --------------- --------------- --------------- Ps 82,629 Ps 509,773 Ps 489,185 Ps 103,217 ============= =============== =============== ===============
10. LABOR OBLIGATIONS The analysis of the net period cost, the funded status and the assumptions considered in the pension plan and the seniority premium obligation at December 31, 2003 and 2004 is as follows:
PENSION PLAN -------------------------------------------------- 2002 2003 2004 -------------- -------------- -------------- NET PERIOD COST: Labor cost Ps 3,581 Ps 3,585 Ps 8,805 Return on plan assets (964) (1,278) (5,167) Amortization of past service costs 556 447 2,309 Interest cost 1,330 1,413 6,396 -------------- -------------- -------------- Net period cost Ps 4,503 Ps 4,167 Ps 12,343 ============== ============== ============== LABOR OBLIGATIONS: Accumulated benefit obligation Ps 22,690 Ps 116,958 -------------- --------------
F-22 Projected benefit obligation Ps 26,234 Ps 130,860 Plan assets (22,387) (96,085) Unrecognized prior service cost (4,044) (24,200) Actuarial gains 13,674 20,427 Unrecognized changes or improvements (9,289) (18,595) --------------- --------------- Net projected benefit obligation 4,188 12,407 --------------- --------------- Unfunded accumulated benefit obligation Ps 734 Ps 22,760 --------------- --------------- Unfunded accumulated benefit obligation less than net projected seniority premium in some subsidiaries Ps 3,527 Ps 3,161 Additional liability Ps 74 Ps 13,512 --------------- --------------- Intangible assets Ps 74 Ps 13,512 --------------- --------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year Ps 26,033 Ps 26,234 Incorporation of the subsidiary Secba - 100,547 --------------- --------------- 26,033 126,781 Service cost 3,585 8,805 Interest cost 1,413 6,396 Actuarial differences (4,128) (7,019) Benefits paid (669) (4,103) --------------- --------------- Projected benefit obligation at end of year Ps 26,234 Ps 130,860 =============== =============== CHANGES IN PLAN ASSETS: Fair value of plan assets at beginning of the year Ps 16,220 Ps 22,387 Incorporation of the subsidiary Secba - 67,960 --------------- --------------- 16,220 90,347 Actual return on plan assets 1,278 5,167 Employer contribution 3,700 13,342 Actuarial differences 1,858 (8,668) Benefits paid (669) (4,103) --------------- --------------- Fair value of plan assets at end of year Ps 22,387 Ps 96,085 =============== ===============
SENIORITY PREMIUM --------------------------------------------------- 2002 2003 2004 -------------- --------------- --------------- NET PERIOD COST: Labor cost Ps 2,465 Ps 2,508 Ps 2,932 Amortization of past service costs 1,694 2,119 2,767 Interest cost 1,419 1,494 1,739 -------------- --------------- --------------- Net period cost Ps 5,578 Ps 6,121 Ps 7,438 ============== =============== =============== LABOR OBLIGATIONS: Accumulated benefit obligation Ps 27,912 Ps 28,453 --------------- ---------------
F-23 Projected benefit obligation Ps 32,154 Ps 36,238 Unrecognized prior service cost (7,024) (7,372) Actuarial losses (5,920) (8,292) Unrecognized improvements to the plan (6,140) (4,495) --------------- --------------- Net projected seniority premium 13,070 Ps 16,079 --------------- --------------- Unfunded accumulated benefit obligation Ps 27,912 Ps 28,453 --------------- --------------- Additional liability Ps 14,842 Ps 12,374 Intangible assets Ps 12,934 Ps 11,362 --------------- --------------- Minimum seniority premium liability Adjustment Ps (1,908) Ps (1,012) =============== =============== Change in benefit obligation: Benefit obligation at beginning of year Ps 28,984 Ps 32,154 Incorporation of the subsidiary Secba - 3,139 --------------- --------------- 28,984 35,293 Service cost 2,508 2,932 Interest cost 1,494 1,739 Actuarial differences 2,689 1,650 Benefits paid (3,521) (5,376) --------------- --------------- Projected benefit obligation at end of year Ps 32,154 Ps 36,238 =============== ===============
The Company used December 31, 2002, 2003 and 2004 measurement date for pension plan and seniority premium. The prior service cost, the past service costs and actuarial differences assumptions will be amortized over a period ranging from 21 to 25 years (the average remaining working life of employees). The asset allocation for the Company's pension plan at the end of 2002, 2003 and 2004 and the target allocation for 2005 by asset category are as follows:
TARGET PERCENTAGE OF PLAN AT YEAR END ALLOCATION --------------------------------------------------- -------------- 2002 2003 2004 2005 -------------- --------------- --------------- -------------- Fixed-income securities 85% 76% 79% 80% Fixed-variable income securities 15% 24% 21% 20%
Target asset allocations reflect its investment strategy of maximizing the rate of return on plan assets and the resulting funded status, within an appropriate level of risk. The rates considered in the actuarial study were in 2002, 2003 and 2004 as follows:
2002 2003 2004 -------------- --------------- --------------- Labor obligations discount 5.50% 5.25% 5.50% Future salary increases 2.50% 1.50% 1.50% Return on assets 6.50% 6.00% 6.50%
F-24 Information about the expected cash flow for the pension benefit plant and seniority premium follows: SENIORITY PENSION PLAN PREMINUM -------------- --------------- Expected benefit payment: 2005 Ps 4,010 Ps 4,333 2006 4,660 4,678 2007 5,495 4,842 2008 6,143 4,870 2009 7,013 4,908 2010-2014 48,529 24,934 -------------- --------------- Total Ps 75,850 Ps 48,565 ============== =============== The above table reflects the total benefits expected to be paid from the plan. 11. CONTINGENCIES AND COMMITMENTS a) Bachoco has entered into operating leases for certain offices, production sites, automotive and computer equipment. Most leases contain renewal options. Rental expense was as follows: YEARS ENDED DECEMBER 31 -------------- 2002 Ps 33,451 2003 24,168 2004 28,564 b) Future minimum annual rental payments under existing operating leases with initial terms in excess of one year as of December 31, 2004, are as follow: YEARS ENDED DECEMBER 31 -------------- 2005 Ps 28,564 2006 21,911 2007 14,796 2008 12,821 2009 12,821 2010 and thereafter 8,009 -------------- Total Ps 98,922 ============== 12. STOCKHOLDERS' EQUITY a) In April 1997, Bachoco had a stock split and created so-called "BL" units, which consist of one series "B" share and one series "L" share, and so-called "BB" units, which consist of two series "B" shares. Series "L" shares have limited voting rights. F-25 b) In 2002, 2003 and 2004, the Company declared and paid cash dividends at nominal values of Ps 267,834, Ps 297,738 and Ps 238,925, respectively (Ps 303,782, Ps 320,877 and Ps 247,073, in constant Mexican pesos) or Ps .90, Ps .99 and Ps .80, respectively, per unit in nominal pesos. c) The Mexican Corporation Act requires that at least 5% of each year's net income be appropriated to increase the legal reserve until such reserve is equal to 20% of capital stock issued and outstanding. The balance of the legal reserve at December 31, 2003 and 2004, included in retained earnings, was Ps 184,412. d) The Company approved a stock repurchase plan in 1998, in conformity with the Mexican Securities Trading Act, providing a stock repurchase reserve for that purpose of Ps 180,000 (Ps 272,368 expressed in constant Mexican pesos) through the appropriation of retained earnings in 1998. During 2002, 2003 and 2004, the Company repurchased 2,534 thousand, 300 thousand and 1,110 thousand units for Ps 41,940, Ps 5,767 and Ps 24,124, respectively. In 2002, 2003 and 2004, the Company sold 1,846 thousand, 2,834 thousand and 710 thousand of units, respectively, previously repurchased; the sales value of latter was for Ps 30,732 Ps 53,005 and Ps 12,889 respectively. e) The Company is required to pay taxes on dividends distributed to stockholders only to the extent the payment made exceeds the balance of the net tax profit account (CUFIN), which is used to control earnings on which income tax has already been paid. Income tax paid on dividends refers to a tax payable by corporate entities and not by individuals. The Company obtains the majority of its revenues and net profit from BSACV. For the years 2002 through 2004, pretax income of BSACV, represented between 87% and 92% of Bachoco's consolidated pretax income. Dividends on which BSACV has paid income tax will be credited to the Company's "CUFIN" account and, accordingly, no further income tax will be paid when such amounts are distributed as dividends to the Company's stockholders. f) The corporate income tax rate for the year was 34% in 2003 (35% in 2002 and 2001). However, from 1999 through 2001, corporate taxpayers had the option of deferring a portion so that the tax payable represented 30% of taxable income. The earnings on which there was a deferral of taxes had to be controlled in a so-called "net reinvested tax profit account" ("CUFINRE"). This was basically to clearly identify the earnings on which the taxpayer had opted to defer payment of corporate income tax. Since the Company opted for this tax deferral, earnings will be considered to be distributed first from the "CUFINRE" account and any excess will be paid from the "net tax profit account" ("CUFIN") so as to pay the 5% deferred tax. Effective January 1, 2002, the above-mentioned option of deferring a portion of income tax was eliminated. F-26 13. INCOME TAX, ASSET TAX AND EMPLOYEE PROFIT SHARING a) The Company and each of its subsidiaries file separate income tax returns. BSACV, the Company's principal operating subsidiary, is subject to payment of corporate income tax under the provisions of the simplified regime, which is applicable to companies engaged exclusively in agriculture, cattle-raising, fishing, forestry and certain other activities the income tax law establishes that are exclusive when the companies obtain no more than 10% of their revenues from the production of processed products, with which rule BSACV has complied. Effective January 1, 2002, the Mexican Congress passed a new Income Tax Law that substantially modified the procedure for determining taxable income of those entities that pay taxes under the previous simplified regime. As of that date, taxable income in the simplified regimen is determined based on income collected, less deductions paid. The corporate tax rates for 2002, 2003, and 2004 were 35%, 34% and 33% respectively. However, Companies engaged exclusively in agriculture, cattle-raising, fishing, forestry and certain other activities, have a 50% reduction in the tax payable. In December 2004, a reduction in the 33% income tax rate was approved, so that the rate will be 30% in 2005, 29% in 2006 and 28% in 2007 and succeeding years. The effect of this tax rate reduction represented a credit to results of operations of $ 10,092 in 2004. As of January 1, 2005, the tax rate for taxpayers that pay income tax under the simplified regime will be determined by applying the reduction of 46.67% in 2005, 44.83% in 2006 and 42.86% in 2007 to the regular income tax rates of 30%, 29% and 28% for each of the respective years, resulting in a fixed rate of 16%. In addition to the decrease in income tax rate, the tax reforms passed in December 2004 include the elimination, as of 2005, of the taxable deduction of purchases so as to permit only the deduction of cost sales. Such change is not applicable to BSACV, since the Company pays income tax under the simplified regime. Taxpayers that were under the simplified regimen in force through 2001, must determine the total amount of earnings of prior years on which taxes need to be paid or the available tax loss carryforward at the date on which it was enacted. As a result of this requirement, the Company determined a tax loss carryforward in the amount of Ps 3,247,167, as of January 1, 2002. At December 31 2004, the Company had a Ps 217,450 tax loss carryforward. b) In addition to income tax, the Company and its subsidiaries are also subject to an alternative minimum tax known as the asset tax, which is assessed on the average value of most assets, net of certain liabilities. The general asset tax rate is 1.8%. This Asset Tax Law permits companies that have the right to reduce their income tax to reduce the asset tax in the same proportion; therefore, BSACV is subject to a 0.9% rate and to special rules excluding many assets from the determination of asset tax and a tax incentive derived from the investment in assets. The asset tax in 2002, 2003 and 2004 amounted to Ps 14,176, Ps 13,498 and Ps 12,747, respectively. In each of the three years the Company credited against these amounts the income tax paid in such years of Ps 10,625, Ps 11,842 and Ps 10,689 respectively. The Company and its subsidiaries are required to pay asset tax if the amount of asset tax exceeds the computed income tax liability. Asset tax paid can be credited against income tax in subsequent years (up to ten years). At December 31, 2004, the Company had, at nominal value, Ps 7,651 in asset tax credits. F-27 c) For the years ended December 31, 2002, 2003 and 2004, income tax charged (credited) to results of operations was as follows: 2002 2003 2004 -------------- -------------- -------------- Current year income tax Ps 50,946 Ps 40,360 Ps 20,048 Current year asset tax 3,550 1,655 2,058 Deferred income tax (257,045) 69,397 81,350 -------------- -------------- -------------- Total income tax Ps (202,549) Ps 111,412 Ps 103,456 ============== ============== ============== As explained above, the Company's main subsidiary pays taxes under the simplified regime. Effective January 1, 2002, the related income tax is payable on the basis of revenues collected net of deductible expenses paid, as well as on dividends paid, to the extent they exceed the net tax profit account (see Note 12 e). The component of the Company's the deferred income tax (assets) and liabilities are as follows: 2003 2004 -------------- -------------- Assets: Accounts payable Ps (103,506) Ps (78,180) Recoverable asset tax (5,382) (70,347) Tax loss carry forward for simplified regimen in force through December 31, 2001 (173,841) (34,792) -------------- -------------- (282,729) (183,319) -------------- -------------- Liabilities: Inventories 383,080 276,198 Accounts receivable 67,461 70,676 Fixed assets 1,277,938 1,143,130 Additional liability from stockholders equity 227,773 374,546 -------------- -------------- 1,956,252 1,864,550 -------------- -------------- Total deferred income tax liability, net Ps 1,673,523 Ps 1,681,231 ============== ============== As of December 31, 2003 and 2004, the deferred tax liability was determined based on the difference between the book and the tax value of stockholders' equity and is greater than that determined using the asset and liability method. Consequently, the Company recognized an additional liability in the amount of Ps 374,546, (Ps 227,773 in 2003), so as to recognize the greater of the amount of the deferred tax determined by the asset and liability method, and the amount determined by considering the capital earned, as the only temporary item. The most significant items that gave rise to a difference between the total amount of current year income tax and the current year deferred tax determined at the statutory rate are as follows: 2002 2003 2004 ------ ------ ------ % % % Statutory income tax rate 17.50 17.00 16.50 Effect of companies outside simplified regime 1.48 1.27 3.19 Effect of non-taxable book items (4.63) - (5.72) Benefit derived from change in law effective in 2002 and changes in tax rate (28.63) - (1.24) ------ ------ ------ Effective income tax rate (14.28) 18.27 12.73 ====== ====== ====== F-28 d) At December 31, 2003 and 2004, the tax value of the Company's equity, which will not be subject to taxation, is comprised of the following: 2003 2004 ------------- ------------- Restated contributed capital (CUCA) Ps 1,682,866 Ps 1,682,866 Net tax profit (CUFIN) and net reinvested tax profit (CUFINRE) 155,589 315,239 ------------- ------------- Total Ps 1,838,455 Ps 1,998,105 ============= ============= e) The Company and BSACV have no employees, but each of the subsidiaries of the Company that had employees is required under Mexican law to pay employees, in addition to their compensation and benefits, profit sharing in an aggregate amount equal to 10% of such subsidiary's taxable income subject to certain adjustments. 14. SEGMENTS During 2002, 2003 and 2004, there were no intersegment transactions required to be eliminated. The information included in the column "Others" is basically related to swine and feed. The disclosures required are as follows:
As of and for the year ended December 31, 2002 ----------------------------------------------- Poultry Others Total ------------- ------------- ------------- Net revenues Ps 10,231,591 Ps 1,097,179 Ps 11,328,770 Cost of sales 7,459,374 944,312 8,403,686 Gross profit 2,772,217 152,867 2,925,084 Interest income 112,066 6,086 118,152 Interest expense (32,547) (1,774) (34,321) Loss on net monetary position (112,837) (664) (113,501) Income tax and asset tax 247,137 (44,588) 202,549 Majority net income 1,532,590 84,510 1,617,100 Property, plant and equipment, net 7,482,215 318,339 7,800,554 Total assets 12,095,853 552,651 12,648,504 Total liabilities 2,210,657 75,754 2,286,411 Capital expenditures 288,692 - 288,692 Expenses not requiring cash disbursement: Depreciation 334,676 12,043 346,719 Amortization of good will 17,503 - 17,503
F-29
As of and for the year ended December 31, 2003 ----------------------------------------------- Poultry Others Total ------------- ------------- ------------- Net revenues Ps 10,041,516 Ps 1,267,781 Ps 11,309,297 Cost of sales 8,052,468 1,147,565 9,200,033 Gross profit 1,989,048 120,216 2,109,264 Interest income 213,635 (50,813) 162,822 Interest expense (22,210) (3,811) (26,021) Loss on net monetary position (76,585) (1,228) (77,813) Income tax and asset tax (89,809) (21,603) (111,412) Majority net income 533,551 29,427 562,978 Property, plant and equipment, net 7,805,535 404,461 8,209,996 Total assets 12,540,283 508,421 13,048,704 Total liabilities 2,322,577 144,126 2,466,703 Capital expenditures 794,828 - 794,828 Expenses not requiring cash disbursement: Depreciation 368,501 15,719 384,220 Amortization of good will 17,606 - 17,606
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2004 ----------------------------------------------- POULTRY OTHERS TOTAL ------------- ------------- ------------- Net revenues Ps 11,891,789 Ps 1,407,615 Ps 13,299,404 Cost of sales 9,483,599 1,302,112 10,785,711 Gross profit 2,408,190 105,503 2,513,693 Interest income 120,269 (18,427) 101,842 Interest expense (117,819) (3,689) (121,508) Loss on net monetary position (96,878) - (96,878) Income tax and asset tax (75,319) (28,137) (103,456) Majority net income 661,280 41,541 702,821 Property, plant and equipment, net 8,029,149 198,806 8,227,955 Total assets 12,939,762 497,143 13,436,905 Total liabilities 2,426,647 134,748 2,561,395 Capital expenditures 438,234 - 438,234 Expenses not requiring cash disbursement: Depreciation 410,644 9,631 420,275 Amortization of good will 12,396 5,126 17,522
As of and for the year ended December 31, 2002 ----------------------------------------------- Chicken Egg Total ------------- ------------- ------------- Net revenues Ps 9,163,353 Ps 1,068,238 Ps 10,231,591 As of and for the year ended December 31, 2003 ----------------------------------------------- Chicken Egg Total ------------- ------------- ------------- Net revenues Ps 8,782,310 Ps 1,259,206 Ps 10,041,516 AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2004 ----------------------------------------------- CHICKEN EGG TOTAL ------------- ------------- ------------- Net revenues Ps 10,445,428 Ps 1,446,361 Ps 11,891,789
F-30 15. FOREIGN CURRENCY POSITION a) A summary of the Company's assets and liabilities denominated in U.S. dollars (the only foreign currency) as of December 31: (Thousands U.S. dollars) ----------------------------- 2003 2004 ------------- ------------- ASSETS: Cash and cash equivalents $ 64,091 $ 75,643 Advances to suppliers (included in inventories and property, plant and equipment) 20,051 16,184 ------------- ------------- 84,142 91,827 LIABILITIES: Notes payable to banks and long-term debt (422) (36) Accounts payable (12,532) (7,839) ------------- ------------- (12,954) (7,875) ------------- ------------- Net long position $ 71,188 $ 83,952 ============= ============= b) As of December 31, 2003 and 2004, the exchange rate was Ps 11.230 and Ps 11.175 per dollar, respectively. c) Assets from foreign origin included in the consolidated balance sheets as of December 31, 2003 and 2004, were: (Thousands of U.S. dollars) ----------------------------- 2003 2004 ------------- ------------- Inventories $ 19,401 $ 16,064 Property, plant and equipment 123,290 128,685 d) Imported raw materials, in thousands of U.S. dollars, were $ 137,233 in 2002, $ 84,633 in 2003 and $ 115,245 in 2004. Interest expense, in thousands of U.S. dollars from debt denominated in U.S. dollars was $ 363 in 2002, $ 93 in 2003 and $ 235 in 2004. 16. HURRICANE ISIDORE In September of 2002, hurricane Isidore affected the company's complex located in the peninsula of Yucatan, and approximately 60% of the chicken farms operating in that region. The Company started the repair of their farms in this area immediately and, according to its plan, this was finished during 2003. Other facilities such as breeder farms, processing plant and balance feed plants suffered no material damage. The assets were duly covered under an insurance policy, so in 2002 the Company credited Ps 21,842 to results of operations under the caption other income. During 2003, Bachoco concluded the related procedures with the insurance company and as a result of the final settlement, the Company recognized in 2003 an additional credit to results of operations of Ps 21,113. F-31 17. DIFFERENCES BETWEEN MEXICAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES This consolidated financial statement are prepared in accordance with "Mexican GAAP", which differ in certain respects from United States generally accepted accounting principles ("U.S. GAAP"). The accompanying reconciliation to U.S. GAAP does not include the reversal of the adjustments to the financial statements for the effects of inflation required under Bulletin B-10, as amended, because the application of Bulletin B-10 represents a comprehensive measure of the effects of price level changes in the Mexican economy and, as such, is considered a more meaningful presentation than historical cost based financial reporting for both Mexican and U.S. accounting principles. The principal differences between Mexican GAAP and U.S. GAAP, as they relate to the Company, are described below together with an explanation, where appropriate, of the method used to determine the adjustments that affect consolidated operating income, net income, stockholders' equity and changes in financial position for each of the three years ended December 31, 2002, 2003 and 2004. DEFERRED INCOME TAX AND EMPLOYEE PROFIT SHARING The Company follows the requirements of Mexican accounting Bulletin D-4, "Accounting for Income Tax, Asset Tax and Employee Profit Sharing", issued by the Mexican Institute. Bulletin D-4 requires the recognition of deferred taxes on all temporary differences in balance sheet accounts for financial and tax reporting purposes, using the enacted income tax rate at the time the financial statements are issued. Bachoco has applied Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes", for all periods presented, which requires that deferred income taxes be determined using the liability method for all temporary differences between financial reporting amounts and the tax basis of assets and liabilities, and that deferred taxes on such differences be measured at the enacted income tax rates for the year in which such taxes are expected to be payable or refundable. In the Company's case the application of both rules did not generate a reconciling difference in 2002, 2003 and 2004; therefore, there is no difference between Mexican and US GAAP in those years. In addition, as described in Note 13, under Mexican labor law, the Company is required to pay employee profit sharing. As of December 31, 2002, 2003 and 2004, the Company did not recognize deferred employee profit sharing, due to its immateriality. Employee profit sharing expense has been included in operating expenses for US GAAP presentation purposes. The deferred tax adjustment included in net income and stockholders' equity reconciliations, represent the effect of deferred taxes on other U.S. GAAP adjustments reflected in the respective summaries. F-32 CAPITALIZED FINANCING COST Under Mexican GAAP, capitalization of comprehensive financing cost on assets under construction or in the pre-operating stage is allowed but not required. Bachoco has elected to capitalize such comprehensive financing cost. Under U.S. GAAP, interest expense incurred during the construction period on qualifying expenditures must be considered an additional cost to be capitalized. Under U.S. GAAP when financing is in Mexican pesos, the monetary gain is included in this computation; when financing is denominated in U.S. dollars, only the interest is capitalized and exchange losses are not included. The amount of interest or net financing cost capitalized for US GAAP purposes was determined by reference to the Companies average cost of outstanding debt and to construction progress during the years presented. MINORITY INTEREST Under Mexican GAAP, minority interest is presented as a component of stockholders' equity, immediately after total majority stockholders' equity. Under US GAAP, this concept is presented out of stockholders' equity. For US GAAP purposes the Company reclassified minority interest from stockholders' equity, decreasing its total stockholders' equity by Ps 43,505 and Ps 41,124 at December 31, 2003 and 2004, respectively, and reclassified minority interest from the income statement decreasing net income by Ps 2,184, Ps 4,481 and Ps 3,810 for the years ended December 31, 2002, 2003 and 2004, respectively. EFFECT OF INFLATION ACCOUNTING ON U.S. GAAP ADJUSTMENTS To determine the net effect on the consolidated financial statements of recognizing U.S. GAAP adjustments, it is necessary to recognize the effects of applying Mexican GAAP inflation accounting provisions (described in Note 2) to the U.S. GAAP adjustments. REPORTING COMPREHENSIVE INCOME The Company has adopted for purposes of the U.S. GAAP reconciliation SFAS No. 130, "Reporting Comprehensive Income" SFAS 130 establishes rules for the reporting and disclosure of comprehensive income and its components. SFAS 130 requires the minimum seniority premium liability adjustment, the deficit from restatement of stockholders' equity, and deferred taxes on the difference between indexed cost and replacement cost and on the minimum seniority premium liability adjustment, to be included in other comprehensive income. The U.S. GAAP statements of changes in stockholders' equity include the disclosure requirements of SFAS 130. Cumulative amounts of the deficit from restatement of stockholder's equity net of tax and the minimum seniority premium liability adjustment included in other comprehensive income decreased stockholders' equity at December 31, 2004 by Ps 4,322,355 and Ps 1,012 respectively. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", information is provided about the fair value of certain financial instruments for which it is practicable to estimate that value. F-33 The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, notes payable and accrued liabilities approximate their fair values, due to the short maturity of these instruments. The fair value of long-term debt, based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities, approximates their carrying amounts. EFFECT OF STATEMENT 133 Bulletin C-2 ("Financial Instruments"), sets general rules for the assessment, presentation, and disclosure of financial information that issuers of financial instruments should follow. Among said rules are the conditions that have to be met in order to be able to offset financial assets and liabilities. Likewise, it is established that financial instruments should be assessed at their fair value, with the exception of those that have been classified as held to maturity. The latter should be valued at their cost of acquisition. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivate's change in fair value will be immediately recognized in earnings. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" to provide clarification on the financial accounting and reporting for derivative instruments and hedging activities and requires similar accounting treatment for contracts with comparable characteristics. The adoption of SFAS 149, effective primarily for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, had no impact on the financial statements. All derivative instruments held by the Company at December 31, 2003 and 2004, are considered of a speculative nature; therefore, there are no differences between the Mexican and US GAAP accounting treatment for the Company's derivative instruments. BUSINESS COMBINATIONS In June 2001, the FASB issued SFAS No. 141, "Business Combinations" (Statement 141), and No. 142, "Goodwill and Other Intangible Assets". Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, Statement 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. F-34 The Company adopted the provisions of SFAS 142 on January 1, 2002, and consequently ceased amortizing goodwill. As of that date, the Company has effected impairment tests, determining no impairment of goodwill. Under Mexican GAAP, Goodwill is amortized using the straight-line method over a twenty-year period. The 2002, 2003 and 2004 reconciliation shows the application of the non amortization provisions applied to goodwill, resulting in adjustments of Ps 17,503, Ps 17,606 and Ps 17,522, respectively. IMPAIRMENT OF ASSETS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. SFAS 144 is effective for fiscal years that begun after December 15, 2001. The Company adopted the requirements of Statement 144 on January 1, 2002 and has not recorded any adjustments to the carrying value of its long lived assets. AGRICULTURE Effective January 1, 2003, the Company adopted the requirements of the Mexican accounting Bulletin E-1, Agriculture, which establishes the rules for recognizing, valuing, presenting and disclosing biological assets and agricultural products; it also establishes the treatment to be given to government subsidies on biological assets. This bulletin establishes that biological assets and the agricultural products (the latter at the time of their harvesting) are to be valued at their fair value, net of estimated costs at point of sale. Also, the Bulletin establishes that whenever the fair value cannot be determined in a reliable, verifiable and objective manner, the assets are to be valued at their production cost, net of accumulated impairment, if any. For US GAAP purposes, biological asset and agricultural products are valued at cost. Therefore, the 2003 and 2004 reconciliation shows the reversal of biological assets valuation at fair value resulting in a net charge (credit) of Ps 61,984 and (Ps 21,154) respectively, leaving inventories of biological assets and agricultural products stated at average cost of production, which approximates estimated replacement cost and not in excess of net realizable value. F-35 EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS SFAS 132 (revised 2003) requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations and cash flows related to a Company's pensions and other postretirement benefits. It also requires disclosure of the components of net periodic benefit cost recognized in interim periods and, if significantly different from previously disclosed amounts, the projected contributions to fund pension and other postretirement benefit plans. The Company adopted the disclosure requirements of SFAS 132 (revised 2003) in December 2003 and has included them in Note10 of the accompanying Mexican GAAP financial Statements. CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulleting No. 51, "Consolidated Financial Statements" and in December 2003, issued a revised interpretation (FIN No. 46-R). FIN No. 46, as revised, requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company has no investments in variable participation entities in which the Company is the primary beneficiary. RECENT ACCOUNTING PRONOUNCEMENTS IN THE US In November 2004, the FASB issued SFAS No. 151, Inventory Costs--an Amendment of ARB No. 43, Chapter 4, which is the result of the FASB's efforts to converge U.S. accounting standards for inventory with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs, and waste material to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a material impact on its results of operations. Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the Company's financial statements. CASH FLOW INFORMATION Under Mexican GAAP, the Company presents consolidated statements of changes in financial position, as described in Note 2. In accordance with Mexican GAAP, the change in current and long-term debt due to restatements in constant Mexican pesos, including the effect of exchange differences, is presented in the statements of changes in financial position in the financing activities section. F-36 The gain from monetary position and the exchange gain or loss are not presented in the operating activities section as a reconciling adjustments, as they are included in the respective monetary asset or liability line. Statement of Financial Accounting Standards No. 95 ("SFAS 95"), "Statement of Cash Flows", does not provide guidance with respect to price-level restated financial statements. The Company has adopted, for its US GAAP presentation of cash flow information, the guidance issued by the AICPA SEC Regulations Committee's International Practices Task Force in its meeting held on November 24, 1998, requiring foreign registrants that file price level adjusted financial statements to provide cash flow statements that show separately the effects of inflation on cash flows. CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2002 2003 2004 -------------- -------------- -------------- OPERATING ACTIVITIES: Net income Ps 1,638,174 Ps 529,178 Ps 740,302 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 348,266 385,908 422,423 Deferred income tax (258,533) 66,209 87,991 -------------- -------------- -------------- 1,727,907 981,295 1,250,716 Changes in assets and liabilities: Accounts receivable 9,245 (80,834) 63,049 Inventories and biological assets (375,071) (444,898) (301,872) Prepaid expenses and other accounts Receivable (119,255) 88,806 25,413 Accounts payable (157,567) 157,300 38,769 Related parties 5,043 (18,976) 3,708 Other taxes payable and other accruals (107,918) 34,320 40,703 Labor obligations, net (7,390) (4,274) (11,574) Loss (gain) on net monetary position 113,587 77,939 97,244 -------------- -------------- -------------- Cash flows provided by operating activities 1,088,581 790,678 1,206,156 FINANCING ACTIVITIES: Proceeds from issuance of notes payable to banks 63,061 140,655 198,951 Repayment of long-term debt and notes Payable (205,930) (190,818) (185,517) Cash dividends paid (303,782) (320,877) (247,073) Repurchase (sale) of stock (11,028) 47,238 (11,235) -------------- -------------- -------------- Cash flows used in financing activities (457,859) (323,802) (244,874) INVESTING ACTIVITIES: Acquisition of property, plant and Equipment (292,410) (804,033) (446,610) Other assets 6,169 3,968 2,909 -------------- -------------- -------------- Cash flows used in investing activities (286,241) (800,065) (443,701) -------------- -------------- --------------
F-37
2002 2003 2004 -------------- -------------- -------------- Effect of inflation accounting 158,247 128,876 169,862 Net increase (decrease) in cash and cash equivalents 502,728 (204,313) 687,443 Cash and cash equivalents at beginning of year 1,352,244 1,854,972 1,650,659 -------------- -------------- -------------- Cash and cash equivalents at end of year Ps 1,854,972 Ps 1,650,659 Ps 2,338,102 ============== ============== ============== Interest paid Ps 13,018 Ps 8,099 Ps 8,400 Income tax paid 63,942 40,360 90,394 Asset tax paid 1,901 1,657 2,058
SUMMARY OF ADJUSTMENTS TO RECONCILE MEXICAN GAAP AND U.S. GAAP The following is a summary of net income adjusted to take into account certain material differences between Mexican GAAP and U.S. GAAP.
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2002 2003 2004 -------------- -------------- -------------- Net income as reported under Mexican GAAP Ps 1,619,284 Ps 567,459 Ps 706,631 Adjustments to reconcile net income to U.S. GAAP: Interest cost capitalized 3,717 9,205 8,376 Depreciation of capitalized interest (1,547) (1,688) (2,148) Deferred income tax on US GAAP Adjustments 1,487 3,187 (7,057) Amortization of goodwill 17,503 17,606 17,522 Effect of inflation accounting on U.S. GAAP adjustments (86) (126) (366) Biological assets and agricultural products valuation at fair value - (61,984) 21,154 Minority interest (2,184) (4,481) (3,810) -------------- -------------- -------------- Net income under U.S. GAAP Ps 1,638,174 Ps 529,178 Ps 740,302 ============== ============== ============== Weighted average number of units outstanding (thousands) 297,898 299,369 299,930 Net income per unit Ps 5.49 Ps 1.77 Ps 2.47
After the foregoing adjustment for the depreciation of capitalized interest, the reclassification of employee profit sharing, the non amortization of goodwill and biological assets and agricultural products valuation at fair value operating income under U.S. GAAP would be Ps 1,372,808, Ps 491,268 and Ps 887,242 in 2002, 2003 and 2004, respectively. F-38 Total assets under U.S. GAAP were Ps 13,066,041 at December, 31 2003 and Ps 13,499,146 at December 31, 2004 The difference in total assets between Mexican GAAP and U.S. GAAP is comprised of the foreign exchange loss and the monetary gain on financing in U.S. dollars capitalized in assets under construction net of accumulated depreciation, biological assets and agricultural products valuation at fair value and the amortization of goodwill. The reconciliation of the stockholders' equity between Mexican GAAP and US GAAP is as follows: YEARS ENDED DECEMBER 31, ---------------------------- 2003 2004 ------------- ------------- Majority stockholders' equity as reported under Mexican GAAP Ps 10,538,496 Ps 10,834,386 Adjustments to reconcile majority stockholders' equity to U.S. GAAP: Accumulated differences between the financing cost capitalized for Mexican GAAP and U.S. GAAP purposes 51,332 59,708 Accumulated depreciation on the above items (7,120) (9,268) Deferred income taxes on U.S. GAAP adjustments (2,901) (10,324) Accumulated amortization of goodwill 35,109 52,631 Biological assets and agricultural products valuation at fair value (61,984) (40,830) ------------- ------------- Majority stockholders' equity as reported under U.S. GAAP Ps 10,552,932 Ps 10,886,303 ============= ============= The effects of the above adjustments do not have any impact on minority interest. F-39 The consolidated statements of changes in stockholders' equity in accordance with U.S. GAAP is as follows:
STOCK REPURCHASE RETAINED CAPITAL STOCK PAID IN CAPITAL RESERVE EARNINGS ------------- --------------- -------------- -------------- Balance at December 31, 2001 Ps 2,056,105 Ps 554,455 Ps 222,507 Ps 10,315,886 Repurchase of stock (1,409) (40,144) (387) Sales of repurchased stock 1,026 29,706 - - Cash dividends paid - - - (303,782) Comprehensive income Net income for the year - - - 1,638,174 Components of other comprehensive income: - - - - Deficit from holding of non monetary assets - - - - Minimum seniority premium liability adjustment - - - - Other comprehensive income, net of taxes - - - - Comprehensive income - - - - ------------- --------------- -------------- -------------- Balance at December 31, 2002 2,055,722 584,161 182,363 11,649,891 Repurchase of stock (158) - (5,609) Sales of repurchased stock 1,519 51,486 - - Cash dividends paid - - - (320,877) Comprehensive income - - - - Net income for the year - - - 529,178 Components of other comprehensive income: - - - - Deficit from holding of non monetary assets - - - - Minimum seniority premium liability adjustment - - - - Other comprehensive income, net of taxes - - - - Comprehensive income - - - - ------------- --------------- -------------- -------------- Balance at December 31, 2003 2,057,083 635,647 176,754 11,858,192 Repurchase of stock (573) - (23,551) - Sales of repurchased stock 367 12,522 - - Cash dividends paid - - - (247,073) Comprehensive income - - - - Net income for the year - - - 740,302 Components of other comprehensive income: - - - - Deficit from holding of non monetary assets - - - - Minimum seniority premium liability adjustment - - - - Other comprehensive income, net of taxes - - - - Comprehensive income - - - - - - - - ------------- --------------- -------------- -------------- Balance at December 31, 2004 Ps 2,056,877 Ps 648,169 Ps 153,203 Ps 12,351,421 ============= =============== ============== ============== OTHER TOTAL COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS INCOME INCOME EQUITY -------------- -------------- -------------- Balance at December 31, 2001 Ps (4,036,615) - Ps 9,112,338 Repurchase of stock - - (41,940) Sales of repurchased stock - - 30,732 Cash dividends paid - - (303,782) Comprehensive income - Net income for the year - $ 1,638,174 1,638,174 Components of other comprehensive income: - - Deficit from holding of non monetary assets (70,129) (70,129) (70,129) Minimum seniority premium liability adjustment (22) (22) (22) -------------- Other comprehensive income, net of taxes - (70,151) Comprehensive income - Ps 1,568,023 -------------- ============== -------------- Balance at December 31, 2002 (4,106,766) - 10,365,371 Repurchase of stock - - (5,767) Sales of repurchased stock - 53,005 Cash dividends paid - - (320,877) Comprehensive income - - Net income for the year - 529,178 529,178 Components of other comprehensive income: - - Deficit from holding of non monetary assets (66,817) (66,817) (66,817) Minimum seniority premium liability adjustment (1,161) (1,161) (1,161) -------------- Other comprehensive income, net of taxes - (67,978) Comprehensive income - 461,200 -------------- ============== -------------- Balance at December 31, 2003 (4,174,744) - 10,552,932 Repurchase of stock - - (24,124) Sales of repurchased stock - 12,889 Cash dividends paid - - (247,073) Comprehensive income - - Net income for the year - 740,302 740,302 Components of other comprehensive income: - - Deficit from holding of non monetary assets (149,519) (149,519) (149,519) Minimum seniority premium liability adjustment 896 896 896 -------------- Other comprehensive income, net of taxes - (148,623) -------------- Comprehensive income - $ 591,679 ============== - -------------- -------------- Balance at December 31, 2004 Ps (4,323,367) Ps 10,886,303 ============== ==============
F-40