SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2001
Commission File number 1-9273
PILGRIM'S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1285071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 SOUTH TEXAS, PITTSBURG, TX 75686-0093
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (903) 855-1000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
TITLE OF EACH CLASS WHICH REGISTERED
Class A Common Stock, Par Value $0.01 New York Stock Exchange
Class B Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Class B Common Stock, $0.01
par value, and Class A Common Stock, $0.01 par value, held by non-
affiliates of the Registrant as of November 15, 2001, was $133,152,552 and
$41,760,798, respectively. For purposes of the foregoing calculation only,
all directors, executive officers and 5% beneficial owners have been deemed
affiliates.
27,589,250 shares of the Registrant's Class B Common Stock, $.01 par value,
were outstanding as of November 15, 2001.
13,523,429 shares of the Registrant's Class A Common Stock, $.01 par value,
were outstanding as of November 15, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the annual meeting of
stockholders to be held January 30, 2002 are incorporated by reference into
Part III.
PILGRIM'S PRIDE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business........................................................ 4
Item 2. Properties......................................................22
Item 3. Legal Proceedings...............................................26
Item 4. Submission of Matters to a Vote of Security Holders.............27
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters......................................................28
Item 6. Selected Financial Data.........................................29
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.............................................31
Item 7a. Quantitative and Qualitative Disclosures About Market Risk......38
Item 8. Financial Statements and Supplementary Data
(see Index to Financial Statements and Schedules below)......40
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................40
PART III
Item 10. Directors and Executive Officers of Registrant..................41
Item 11. Executive Compensation..........................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management..41
Item 13. Certain Relationships and Related Transactions..................41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.41
Signatures...............................................................48
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Ernst & Young LLP, Independent Auditors........................49
Consolidated Balance Sheets as of September 29, 2001 and
September 30, 2000....................................................50
Consolidated Statements of Income for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............51
Consolidated Statements of Stockholders' Equity for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............52
Consolidated Statements of Cash Flows for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............53
Notes to Consolidated Financial Statements...............................54
Schedule II - Valuation and Qualifying Accounts for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............67
PART I
ITEM 1. BUSINESS
GENERAL
We are the second largest producer of poultry in both the United States
and Mexico and have one of the best known brand names in the poultry
industry. In the United States, WE PRODUCE BOTH PREPARED AND FRESH CHICKEN
AND TURKEY, WHILE IN MEXICO, WE PRODUCE EXCLUSIVELY FRESH CHICKEN. THROUGH
VERTICAL INTEGRATION, WE CONTROL THE BREEDING, HATCHING AND GROWING OF
CHICKENS AND TURKEYS AND THE PROCESSING, PREPARATION, PACKAGING AND SALE OF
OUR PRODUCT LINES, WHICH WE BELIEVE HAS MADE US ONE OF THE HIGHEST QUALITY,
LOWEST-COST PRODUCERS OF POULTRY IN NORTH AMERICA. WE HAVE CONSISTENTLY
APPLIED A LONG-TERM BUSINESS STRATEGY OF FOCUSING OUR GROWTH EFFORTS ON THE
HIGHER-VALUE, HIGHER-MARGIN PREPARED FOODS PRODUCTS AND HAVE BECOME A
RECOGNIZED INDUSTRY LEADER IN THIS MARKET SEGMENT. ACCORDINGLY, OUR SALES
EFFORTS HAVE TRADITIONALLY BEEN TARGETED TO THE FOODSERVICE INDUSTRY,
PRINCIPALLY CHAIN RESTAURANTS AND FOOD PROCESSORS. SOME OF OUR LARGEST
CUSTOMERS INCLUDE WENDY'S(TM), STOUFFERS(TM), ARBY'S(TM), KFC(TM) AND WAL-
MART(TM). WE HAVE CONTINUALLY MADE INVESTMENTS TO ENSURE THAT OUR PREPARED
FOODS CAPABILITIES REMAIN STATE-OF-THE-ART AND HAVE COMPLEMENTED THESE
INVESTMENTS WITH A SUBSTANTIAL AND SUCCESSFUL RESEARCH AND DEVELOPMENT
EFFORT. IN FISCAL 2001, WE SOLD 2.6 BILLION POUNDS OF DRESSED CHICKEN AND
296.1 MILLION POUNDS OF DRESSED TURKEY AND GENERATED NET SALES OF $2.2
BILLION AND EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION,
("EBITDA") OF $147.7 MILLION. IN FISCAL 2001, OUR U.S. OPERATIONS
ACCOUNTED FOR 85.4% OF OUR NET SALES, WITH THE REMAINING 14.6% ARISING FROM
OUR MEXICO OPERATIONS.
On January 27, 2001, we acquired WLR Foods, Inc. (formerly Nasdaq: WLRF)
for $239.5 million and the assumption of $45.5 million of indebtedness. WLR
FOODS WAS THE SEVENTH LARGEST POULTRY COMPANY IN THE UNITED STATES WITH
$836.9 MILLION OF REVENUE IN CALENDAR YEAR 2000. THE ACQUISITION WAS
ACCOUNTED FOR AS A PURCHASE. THE WLR FOODS ACQUISITION PROVIDED US WITH (1)
CHICKEN PROCESSING FACILITIES IN THE EASTERN UNITED STATES, WHERE WE
PREVIOUSLY HAD NO FACILITIES, WHICH CAN DELIVER POULTRY PRODUCTS WITHIN ONE
DAY TO MARKETS ACCOUNTING FOR APPROXIMATELY 40% OF THE U.S. POPULATION; (2)
SIGNIFICANT OPPORTUNITIES TO REALIZE SYNERGIES BETWEEN WLR FOODS AND OUR
PRE-EXISTING CHICKEN OPERATIONS; AND (3) DIVERSIFICATION OF OUR REVENUE
STREAM INTO THE $8 BILLION TURKEY INDUSTRY, WHERE WE CAN CAPITALIZE ON OUR
PREPARED FOODS PROCESSING EXPERTISE. TO DATE, WE ARE ACTIVELY INTEGRATING
THE WLR FOODS OPERATIONS AND HAVE REALIZED SIGNIFICANT ANNUALIZED COST
SAVINGS AND BELIEVE OPPORTUNITIES FOR SIGNIFICANT ADDITIONAL COST SAVINGS
EXIST AS OUR INTEGRATION EFFORTS CONTINUE. CURRENTLY, WLR FOODS' CHICKEN
SALES MIX CONSISTS MOSTLY OF LOWER MARGIN FRESH CHICKEN PRODUCTS. HOWEVER,
WE INTEND TO CONVERT WLR FOODS' CHICKEN SALES INTO HIGHER MARGIN, FRESH AND
PREPARED CHICKEN PRODUCTS. BY CONSISTENT AND CONTINUED APPLICATION OF OUR
LONG-TERM BUSINESS STRATEGY TO BOTH OUR RECENTLY ACQUIRED AND OUR EXISTING
FRESH CHICKEN MIX, WE BELIEVE THAT OUR OVERALL PRODUCT MIX WILL RETURN TO
THE LEVELS EXISTING PRIOR TO THE WLR FOODS ACQUISITION WITHIN THREE YEARS.
OUR OBJECTIVES ARE (1) TO INCREASE SALES, PROFIT MARGINS AND EARNINGS
AND (2) OUTPACE THE GROWTH OF, AND MAINTAIN OUR LEADERSHIP POSITION IN, THE
POULTRY INDUSTRY. TO ACHIEVE THESE GOALS, WE PLAN TO CONTINUE TO PURSUE THE
FOLLOWING STRATEGIES AND APPLY THESE STRATEGIES TO THE RECENTLY ACQUIRED
WLR FOODS OPERATIONS:
- CAPITALIZE ON ATTRACTIVE U.S. PREPARED FOODS MARKET. We focus our
U.S. growth initiatives on sales of prepared foods to the foodservice
market because it continues to be one of the fastest growing and most
profitable segments in the poultry industry. Products sold to this
market segment require further processing, which enables us to charge
a premium for our products, reduces the impact of feed ingredient
costs on our profitability and improves and stabilizes our profit
margins. Feed ingredient costs typically decrease from approximately
30-50% of total production cost for fresh chicken products to
approximately 16-25% for prepared chicken products. Our sales of
prepared chicken products to the foodservice market grew from $349.0
million in fiscal 1997 to $642.2 million in fiscal 2001, a compounded
annual growth rate of 16.5%. In addition, these sales increased as a
percentage of our total U.S. chicken revenues from 40.5% to 43.6%
during the same five-year period. As a result of the acquisition of
WLR Foods, whose operations were focused primarily on fresh chicken
products, this percentage has decreased to 43.6% from 56.5% in fiscal
2000. Over the last 24 months, we have invested approximately $79
million to expand our prepared foods operations, which increased our
prepared foods production capacity by approximately 50%. We believe
that we will realize the benefits from this additional production
capacity over the next 18 to 24 months and that these investments will
be the primary investments necessary to enable us to return the
percentage of our overall product mix derived from prepared foods
products to the levels existing before the acquisition of WLR Foods.
- EMPHASIZE CUSTOMER-DRIVEN RESEARCH AND TECHNOLOGY. We have a long-
standing reputation for customer-driven research and development in
designing new products and implementing advanced processing
technology. This enables us to better meet our customers' changing
needs for product innovation, consistent quality and cost efficiency.
In particular, customer-driven research and development is integral to
our growth strategy for the prepared foods market in which customers
continue to place greater importance on value-added services. Our
research and development personnel often work directly with
institutional customers in developing products for these customers,
which we believe helps promote long-term relationships. Approximately
$248.0 million, or 24.1%, of our chicken sales to foodservice
customers in fiscal 2001 consisted of products that we did not sell in
fiscal 1997.
- ENHANCE U.S. FRESH CHICKEN PROFITABILITY THROUGH VALUE-ADDED,
BRANDED PRODUCTS. Our U.S. fresh chicken sales accounted for $612.5
million, or 41.6%, of our U.S. chicken sales for fiscal 2001. In
addition to maintaining the sales of mature, traditional fresh chicken
products, our strategy is to shift the mix of our U.S. fresh chicken
products by continuing to increase sales of higher margin, faster
growing products, such as marinated chicken and chicken parts. Most of
our fresh chicken products are sold under the Pilgrim's
Pride brand name, which is one of the best known
brands in the chicken industry.
- IMPROVE OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST-
EFFECTIVE BASIS. As production and sales grow, we continue to focus
on improving operating efficiencies by investing in state-of-the-art
technology, processes and training and our total quality management
program. Specific initiatives include:
- standardizing lowest-cost production processes across our various
facilities;
- centralizing purchasing and other shared services; and
- upgrading technology where appropriate.
In addition, we have a proven history of increasing capacity while
improving operating efficiencies at acquired properties both in the
U.S. and Mexico. As a result, according to industry data, since 1993
we have consistently been one of the lowest cost producers of chicken
in the U.S., and we also believe we are one of the lowest cost
producers of chicken in Mexico. With respect to our WLR Foods
acquisition, we have already begun realizing significant operating
efficiencies by reducing administrative expenses and focusing on live
production and plant operations, sales, marketing, freight and
procurement. To date, we have realized significant annualized cost
savings with WLR Foods and believe additional opportunities for
significant cost savings exist.
- CONTINUE TO PENETRATE THE GROWING MEXICAN MARKET. We seek to leverage
our leading market position and reputation for freshness and quality
in Mexico by focusing on the following four objectives:
- to be one of the most cost-efficient producers and processors of
chicken in Mexico by applying technology and expertise utilized in
the U.S.;
- to continually increase our distribution of higher margin, more
value-added products to national retail stores and restaurants;
- to continue to build and emphasize brand awareness and capitalize
on Mexican consumers' preference for branded products and their
insistence on freshness and quality; and
- to ensure that, as Mexican tariffs on imported chicken are
eliminated by 2003, a significant portion of the chicken imported
from the U.S. will be distributed through our existing and
planned distribution facilities. The location of our U.S.
operations in the Southwest gives us a strategic advantage to
capitalize on exports of U.S. chicken to Mexico.
- LEVERAGE OUR RECENTLY ACQUIRED TURKEY OPERATIONS. We seek to take
advantage of our leading market position and reputation as a high
quality, high service provider of chicken products to purchasers of
turkey products by focusing on the following four objectives:
- to cross-sell prepared turkey products to existing chicken
customers;
- to develop new and innovative prepared turkey products by
capitalizing on our research and development expertise;
- to improve operating efficiencies in our turkey operations by
applying proven management methodologies and techniques employed
historically in our chicken operations; and
- to capitalize on the unique opportunity to establish, develop and
market turkey products under the Pilgrim's Pride
brand name.
- CAPITALIZE ON EXPORT OPPORTUNITIES. We intend to continue to focus
on international opportunities to complement our U.S. poultry
operations and capitalize on attractive export markets. According to
the USDA, the export of U.S. poultry products has grown 25.5% and 4.6%
for chicken and turkey, respectively, from 1996 through 2000. We
believe that U.S. poultry exports will continue to grow as worldwide
demand increases for high-grade, low-cost protein sources. According
to USDA data, the export market is expected to grow at 57.7% and 8.1%
for chicken and turkey, respectively, from 2000 to 2005. Historically,
we have targeted international markets to generate additional demand
for our chicken and turkey dark meat, which is a natural by-product of
our U.S. operations given our concentration on prepared foods products
and the U.S. customers' general preference for white meat. As part of
this initiative, we have created a significant international
distribution network into several markets, including Mexico, which we
now utilize not only for dark meat distribution, but also for various
higher margin prepared foods and other poultry products. Historically,
WLR Foods has utilized a direct international sales force compared to
our primary use of export brokers. Our key international markets
include Canada, Mexico, Eastern Europe and the Far East. We believe
that we have substantial opportunities to expand our sales to these
markets by capitalizing on WLR Foods' direct international
distribution channels supplemented by our existing export broker
relationships. Exports accounted for approximately 5.1% of our net
sales in fiscal 2001.
Our chicken products consist primarily of:
(1) Prepared chicken products, which are products such as portion-
controlled breast fillets, tenderloins and strips, delicatessen
products, frankfurters, salads, formed nuggets and patties and bone-in
chicken parts. These products are sold either refrigerated or frozen and
may be fully cooked, partially cooked or raw. In addition, these
products are breaded or non-breaded and either pre-marinated or non-
marinated.
(2) Fresh chicken, which is refrigerated (non-frozen) whole or cut-up
chicken sold to the foodservice industry either pre-marinated or non-
marinated. Fresh chicken also includes prepackaged chicken, which
includes various combinations of freshly refrigerated, whole chickens
and chicken parts in trays, bags or other consumer packs labeled and
priced ready for the retail grocer's fresh meat counter.
(3) Export and other products, which are primarily parts and whole
chicken, either refrigerated or frozen for U.S. export or domestic use.
(4) Our Mexico products consist primarily of value-added products such
as eviscerated chicken and chicken parts and basic products such as New
York dressed (whole chicken with only feathers and blood removed) and
live birds.
Our turkey products consist primarily of:
(1) Prepared turkey products, which are products such as turkey
sausages, ground turkey, turkey hams and roasts, ground turkey breast
products, frankfurters, salads and flavored turkey burgers. We also have
an array of cooked, further processed deli products.
(2) Fresh turkey, which includes fresh traypack products, turkey
burgers, frankfurters and fresh and frozen whole birds, as well as semi-
boneless whole turkey, which has all bones except the drumsticks
removed.
(3) Export and other products, which are parts and whole turkey
products, either refrigerated or frozen, and frankfurters for U.S.
export or domestic use.
Our chicken and turkey products are sold primarily to:
(1) Foodservice customers, which are customers such as chain
restaurants, food processors, foodservice distributors and certain other
institutions. We sell to our foodservice customers products ranging from
portion-controlled refrigerated poultry parts to fully-cooked and
frozen, breaded or non-breaded poultry parts or formed products.
(2) Retail customers, which are customers such as grocery store chains,
wholesale clubs and other retail distributors. We sell to our retail
customers branded, pre-packaged cut-up and whole poultry, and fresh
refrigerated or frozen whole poultry and poultry parts in trays, bags or
other consumer packs.
The following table sets forth, for the periods since fiscal 1997, net
sales attributable to each of our primary product lines and markets served
with those products. Consistent with our long-term strategy, we have
emphasized our U.S. growth initiatives on sales of prepared foods products,
primarily to the foodservice market, because this product and market
segment has experienced, and we believe will continue to experience,
greater growth than fresh chicken products. We based the table on our
internal sales reports and their classification of product types and
customers.
FISCAL YEAR ENDED
Sept. 29 Sept. 30, Oct. 2, Sept. 26 Sept. 27,
2001(a) 2000 1999 1998 1997
(52 WEEKS) (52 WEEKS) (53 WEEKS) (52WEEKS) (52WEEKS)
U.S. Chicken Sales: (IN THOUSANDS)
Prepared Foods:
Foodservice $642,220 $593,586 $528,566 $420,396 $348,961
Retail 111,969 48,059 28,275 46,400 42,289
Total Prepared
Foods 754,189 641,645 556,841 466,796 391,250
Fresh Chicken:
Foodservice 387,836 202,297 205,997 220,804 259,349
Retail 224,693 148,977 163,387 162,283 153,554
Total Fresh
Chicken 612,529 351,274 369,384 383,087 412,903
Export and Other 105,622 57,468 37,271 64,469 56,784
Total
U.S.Chicken 1,472,340 1,050,387 963,496 914,352 860,937
MEXICO CHICKEN SALES 323,678 307,362 254,500 278,087 274,997
Total Chicken
Sales 1,796,018 1,357,749 1,217,996 1,192,439 1,135,934
U.S. TURKEY SALES:
Prepared Foods:
Foodservice 90,777 -- -- -- --
Retail 48,407 -- -- -- --
Total 139,184 -- -- -- --
Prepared Foods
Fresh Turkey:
Foodservice 18,614 -- -- -- --
Retail 69,557 -- -- -- --
Total Fresh
Turkey 88,171 -- -- -- --
Export and Other 11,480 -- -- -- --
Total U.S.
Turkey Sales 238,835 -- -- -- --
SALES OF OTHER
U.S. PRODUCTS 179,859 141,690 139,407 139,106 141,715
Total Net Sales $2,214,712 $1,499,439 $1,357,403 $1,331,545 $1,277,649
(a) The acquisition of WLR Foods on January 27, 2001 has been accounted
for as a purchase, and the results of operations for this acquisition
have been included in our consolidated results of operations since the acquisition date.
The following table sets forth, since fiscal 1997, the percentage of net
U.S. chicken and turkey sales attributable to each of our primary product
lines and the markets serviced with those products. We based the table and
related discussion on our internal sales reports and their classification
of product types and customers.
FISCAL YEAR ENDED
U.S. Chicken Sales:
Prepared Foods:
Foodservice 43.6% 56.5% 54.9% 46.0% 40.5%
Retail 7.6 4.6 2.9 5.1 4.9
Total Prepared
Foods 51.2 61.1 57.8 51.1 45.4
Fresh Chicken:
Foodservice 26.3 19.2 21.3 24.2 30.1
Retail 15.3 14.2 17.0 17.7 17.9
Total Fresh
Chicken 41.6 33.4 38.3 41.9 48.0
Export and Other 7.2 5.5 3.9 7.0 6.6
Total U.S. Chicken
Sales Mix 100.0% 100.0% 100.0% 100.0% 100.0%
FISCAL YEAR ENDED
Sept. 29 Sept. 30, Oct. 2, Sept. 26 Sept. 27,
2001(a) 2000 1999 1998 1997
U.S. Turkey Sales:
Prepared Foods:
Foodservice 38.0% -- -- -- --
Retail 20.3 -- -- -- --
Total Prepared
Foods 58.3 -- -- -- --
Fresh Turkey:
Foodservice 7.8 -- -- -- --
Retail 29.1 -- -- -- --
Total Fresh
Turkey 36.9 -- -- -- --
Export and Other 4.8 -- -- -- --
Total U.S. Turkey
Sales Mix 100.0% -- -- -- --
(a) The acquisition of WLR Foods on January 27, 2001 has been accounted
for as a purchase, and the results of operations for this acquisition
have been included in our consolidated results of operations since the acquisition date.
UNITED STATES
PRODUCT TYPES
CHICKEN PRODUCTS
PREPARED FOODS OVERVIEW. During fiscal 2001, $754.2 million of our
net U.S. chicken sales were in prepared foods products to foodservice
customers and retail distributors, as compared to $391.3 million in fiscal
1997. These numbers reflect the strategic focus for our growth. The market
for prepared chicken products has experienced, and we believe will continue
to experience, greater growth, higher average sales prices and higher
margins than fresh chicken products. Also, the production and sale in the
U.S. of prepared foods products reduce the impact of the costs of feed
ingredients on our profitability. Feed ingredient costs are the single
largest component of our chicken cost of goods sold, representing
approximately 29.9% of our U.S. cost of goods sold for the year ended
September 29, 2001. The production of feed ingredients is positively or
negatively affected primarily by weather patterns throughout the world, the
global level of supply inventories and demand for feed ingredients, and the
agricultural policies of the United States and foreign governments. As
further processing is performed, feed ingredient costs become a decreasing
percentage of a product's total production cost, thereby reducing their
impact on our profitability. Products sold in this form enable us to charge
a premium, reduce the impact of feed ingredient costs on our profitability
and improve and stabilize our profit margins.
We establish prices for our prepared chicken products based primarily
upon perceived value to the customer, production costs and prices of
competing products. The majority of these products are sold pursuant to
agreements with varying terms that either set a fixed price for the
products or set a price according to formulas based on an underlying
commodity market, subject in many cases to minimum and maximum prices.
FRESH CHICKEN OVERVIEW. Our fresh chicken business is an important
component of our sales and accounted for $612.5 million, or 41.6%, of our
total U.S. chicken sales for fiscal 2001. In addition to maintaining sales
of mature, traditional fresh chicken products, our strategy is to shift the
mix of our U.S. fresh chicken products by continuing to increase sales of
higher margin, faster growing products, such as marinated chicken and
chicken parts.
Most fresh chicken products are sold to established customers based
upon certain weekly or monthly market prices reported by the USDA and other
public price reporting services, plus a markup, which is dependent upon the
customer's location, volume, product specifications and other factors. We
believe our practices with respect to sales of fresh chicken are generally
consistent with those of our competitors. Prices of these products are
negotiated daily or weekly and are generally related to market prices
quoted by the USDA or other public reporting services.
EXPORT AND OTHER CHICKEN PRODUCTS OVERVIEW. Our export and other
products consist of whole chickens and chicken parts sold primarily in
bulk, non-branded form either refrigerated to distributors in the U.S. or
frozen for distribution to export markets. In fiscal 2001, approximately
$105.6 million of our sales were attributable to U.S. chicken export and
other. These exports and other products have historically been
characterized by lower prices and greater price volatility than our more
value-added product lines.
TURKEY PRODUCTS
PREPARED FOODS OVERVIEW. During fiscal 2001, $139.2 million, or
58.3%, of our total turkey sales were prepared turkey products sold to
foodservice customers and retail distributors. Like the U.S. chicken
markets, the market for prepared turkey products has experienced greater
growth and higher margins than fresh turkey products and the production and
sale of prepared turkey products reduce the impact of the costs of feed
ingredients on our profitability. Feed ingredient costs are the single
largest component of our turkey division cost of goods sold, representing
approximately 29.5% of our turkey cost of goods sold in fiscal 2001.
Similarly with the chicken business, as further processing is performed,
feed ingredient costs become a decreasing percentage of a product's total
production cost, thereby reducing their impact on our profitability.
We establish prices for our prepared turkey products based primarily
upon perceived value to the customer, production costs and prices of
competing products. The majority of these products are sold pursuant to
agreements with varying terms that either set a fixed price or are subject
to a market driven formula.
FRESH TURKEY OVERVIEW. Our fresh turkey business is an important
component of our sales and accounted for $88.2 million, or 36.9%, of our
total turkey sales in fiscal 2001. As is typical for the industry, a
significant portion of the sales of fresh and frozen whole turkeys is
seasonal in nature, with the height of sales occurring during the
Thanksgiving and Christmas holidays. In addition to maintaining sales of
mature, traditional fresh turkey products, our strategy is to shift the mix
of our fresh turkey products by continuing to increase sales of higher
margin, faster growing value-added turkey products, such as deli meats,
ground turkey, turkey burgers and sausage, roasted turkey, frankfurters and
salads and a new line of flavored turkey burgers.
Most fresh turkey products are sold to established customers pursuant
to agreements with varying terms that either set a fixed price or are
subject to a market driven formula with some agreements based upon market
prices reported by the USDA and other public price reporting services, plus
a markup, which is dependent upon the customer's location, volume, product
specifications and other factors. We believe our practices with respect to
sales of fresh turkey are
generally consistent with those of our competitors with similar programs.
Prices of these products are generally negotiated daily or weekly.
EXPORT AND OTHER TURKEY PRODUCTS OVERVIEW. Our export and other
products consist primarily of turkey parts sold primarily in bulk, non-
branded form frozen for distribution to export markets and refrigerated and
frozen frankfurters sold in a branded form. In fiscal 2001, approximately
$11.5 million, or 5.1%, of our total turkey sales were attributable to
export and other sales. These exports and other products have historically
been characterized by lower prices and greater price volatility than our
more value-added product lines.
MARKETS FOR CHICKEN PRODUCTS
FOODSERVICE. The majority of our U.S. chicken sales are derived from
products sold to the foodservice market. This market principally consists
of chain restaurants, food processors and certain other institutions
located throughout the continental United States. We are the largest
supplier of chicken to Wendy's and
Stouffers, and we are a major supplier of chicken to Burger
King, Arby's, and KFC. We
supply chicken products ranging from portion-controlled refrigerated
chicken parts to fully cooked and frozen, breaded or non-breaded chicken
parts or formed products.
We believe Pilgrim s Pride is well-positioned to be the primary or
secondary supplier to many national and international chain restaurants who
require multiple suppliers of chicken products. Additionally, we are well
suited to be the sole supplier for many regional chain restaurants.
Regional chain restaurants often offer better margin opportunities and a
growing base of business.
We believe we have significant competitive strengths in terms of full-
line product capabilities, high-volume production capacities, research and
development expertise and extensive distribution and marketing experience
relative to smaller and to non-vertically integrated producers. While the
overall chicken market has grown consistently, we believe the majority of
this growth in recent years has been in the foodservice market. According
to the National Chicken Council, during the 1996 through 2000 period, sales
of chicken products to the foodservice market grew at a compounded annual
growth rate of approximately 7.8%, versus 3.3% growth for the chicken
industry overall. Foodservice growth is anticipated to continue as food-
away-from-home expenditures continue to outpace overall industry rates.
According to the National Restaurant Association, food-away-from-home
expenditures grew at a compounded annual growth rate of approximately 5.3%
during the 1996 through 2000 period and are projected to grow at a 4.3%
compounded annual growth rate from 2000 through 2010. As a result, the
food-away-from-home category is projected by the National Restaurant
Association to account for 53% of total food expenditures by 2010, as
compared with 46% in 2000. Our sales to the foodservice market from fiscal
1997 through fiscal 2001 grew at a compounded annual growth rate of 14.1%
and represented 70.0% of the net sales of our U.S. chicken operations in
fiscal 2001.
FOODSERVICE - PREPARED FOODS. THE majority of our sales to the
foodservice market consist of prepared foods products. Our prepared chicken
products sales to the foodservice market were $642.2 million in fiscal 2001
compared to $349.0 million in fiscal 1997, a compounded annual growth rate
of approximately 16.5%. We attribute this growth in sales of prepared
chicken products to the foodservice market to a number of factors:
FIRST, there has been significant growth in the number of foodservice
operators offering chicken on their menus and the number of chicken items
offered.
SECOND, foodservice operators are increasingly purchasing prepared
chicken products, which allow them to reduce labor costs while providing
greater product consistency, quality and variety across all restaurant
locations.
THIRD, there is a strong need among larger foodservice companies for
an alternative or additional supplier to our principal competitor in the
prepared chicken products market. A viable alternative supplier must be
able to ensure supply, demonstrate innovation and new product development
and provide competitive pricing. We have been successful in our objective
of becoming the alternative supplier of choice by being the primary or
secondary prepared chicken products supplier to many large foodservice
companies because:
- We are vertically integrated, giving us control over supply of
chicken and chicken parts;
- Our further processing facilities are particularly well suited to
the high-volume production runs necessary to meet the capacity and
quality requirements of the foodservice market; and
- We have established a reputation for dependable quality, highly
responsive service and excellent technical support.
FOURTH, as a result of the experience and reputation developed with
larger customers, we have increasingly become the principal supplier to
mid-sized foodservice organizations.
FIFTH, our in-house product development group follows a customer-
driven research and development focus designed to develop new products to
meet customers' changing needs. Our research and development personnel
often work directly with institutional customers in developing products for
these customers. Approximately $248.0 million, or 24.1%, of our sales to
foodservice customers in fiscal 2001 consisted of new products which were
not sold by us in fiscal 1997.
SIXTH, we are a leader in utilizing advanced processing technology,
which enables us to better meet our customers' needs for product
innovation, consistent quality and cost efficiency.
FOODSERVICE - FRESH CHICKEN. We produce and market fresh,
refrigerated chicken for sale to U.S. quick-service restaurant chains,
delicatessens and other customers. These chickens have the giblets removed,
are usually of specific weight ranges, and are usually pre-cut to customer
specifications. They are often marinated to enhance value and product
differentiation. By growing and processing to customers' specifications, we
are able to assist quick-service restaurant chains in controlling costs and
maintaining quality and size consistency of chicken pieces sold to the
consumer.
RETAIL. The retail market consists primarily of grocery store chains,
wholesale clubs and other retail distributors. We concentrate our efforts
in this market on sales of branded, prepackaged cut-up and whole chicken to
grocery store chains and retail distributors in the midwestern,
southwestern, western and, since the acquisition of WLR Foods, eastern
regions of the United States. This regional marketing focus enables us to
develop consumer brand franchises and capitalize on proximity to the trade
customer in terms of lower transportation costs, more timely, responsive
service, and enhanced product freshness. For a number of years, we have
invested in both trade and retail marketing designed to establish high
levels of brand name awareness and consumer preferences.
We utilize numerous marketing techniques, including advertising, to
develop and strengthen trade and consumer awareness and increase brand
loyalty for consumer products marketed under the Pilgrim's
Pride brand. Our founder, Lonnie "Bo" Pilgrim, is the
featured spokesman in our television, radio and print advertising, and a
trademark cameo of a person wearing a Pilgrim's hat serves as the logo on
all of our primary branded products. As a result of this marketing
strategy, Pilgrim's Pride is a well-known brand name in several
southwestern markets, including Dallas/Fort Worth, Houston and San Antonio,
Texas, Oklahoma City, Oklahoma, Denver, Colorado, Phoenix, Arizona and Los
Angeles and San Diego, California. We believe our efforts to achieve and
maintain brand awareness and loyalty help to provide more secure
distribution for our products. We also believe our efforts at brand
awareness generate greater price premiums than would otherwise be the case
in certain southwestern markets. We also maintain an active program to
identify consumer preferences. The program primarily consists of testing
new product ideas, packaging designs and methods through taste panels and
focus groups located in key geographic markets.
RETAIL - PREPARED FOODS. We sell retail-oriented prepared chicken
products primarily to grocery store chains located in the midwestern,
southwestern, western and, since the acquisition of WLR Foods, eastern
regions of the U.S. We believe that our growth in this market segment will
remain relatively modest, however, as we concentrate our efforts primarily
on the faster-growing, higher-margin foodservice market segment.
RETAIL - FRESH CHICKEN. Our prepackaged retail products include
various combinations of freshly refrigerated, whole chickens and chicken
parts in trays, bags or other consumer packs labeled and priced ready for
the retail grocer's fresh meat counter. We believe the retail, prepackaged
fresh chicken business will continue to be a large and relatively stable
market, providing opportunities for product differentiation and regional
brand loyalty.
EXPORT AND OTHER CHICKEN PRODUCTS. Our export and other chicken
products consist of whole chickens and chicken parts sold primarily in
bulk, non-branded form either refrigerated to distributors in the U.S. or
frozen for distribution to export markets. In the U.S., prices of these
products are negotiated daily or weekly and are generally related to market
prices quoted by the USDA or other public price reporting services. We also
sell U.S.-produced chicken products for export to Canada, Mexico, Eastern
Europe, the Far East and other world markets. Historically, we have
targeted international markets to generate additional demand for our
chicken dark meat which is a natural by-product of our U.S. operations
given our concentration on prepared foods products and the U.S. customers'
general preference for white meat. We have also begun selling prepared
chicken products for export to the international divisions of our U.S.
chain restaurant customers. We believe that U.S. chicken exports will
continue to grow as worldwide demand increases for high-grade, low-cost
protein sources. We also believe that worldwide demand for higher margin
prepared foods products will increase over the next five years.
Accordingly, we believe we are well positioned to capitalize on such
growth. Also included in this categories are chicken and turkey by-
products, which are converted into protein products sold primarily to
manufacturers of pet foods.
MARKETS FOR TURKEY PRODUCTS
FOODSERVICE. A portion of our turkey sales are derived from products
sold to the foodservice market. This market principally consists of chain
restaurants, food processors, foodservice distributors and certain other
institutions located throughout the continental United States. We supply
turkey products ranging from portion-controlled refrigerated turkey parts
to ready-to-cook turkey, fully cooked formed products, delicatessen
products such as deli meats and sausage, salads, ground turkey and turkey
burgers, frankfurters and other foodservice products.
We believe Pilgrim's Pride is well-positioned to be the primary or
secondary supplier to many national and international chain restaurants
that require multiple suppliers of turkey products. Additionally, we are
well suited to be the sole supplier for many regional chain restaurants.
We believe we have significant competitive strengths in terms of full-
line product capabilities, high-volume production capacities, research and
development expertise and extensive distribution and marketing experience
relative to smaller and to non-vertically integrated producers.
FOODSERVICE - PREPARED FOODS. The majority of our turkey sales to the
foodservice market consist of prepared turkey products. Our prepared turkey
sales to the foodservice market were $90.8 million of our sales in fiscal
2001. We believe that future growth in this segment will be attributable to
the same six factors described above relating to the growth of prepared
chicken sales to the foodservice market.
FOODSERVICE - FRESH TURKEY. We produce and market fresh, refrigerated
and frozen turkey for sale to foodservice distributors, restaurant chains
and other customers. These turkeys are usually of specific weight ranges,
and are usually whole birds to customer specifications. They are often
marinated to enhance value and product differentiation. Our semi-boneless
turkey, unique to Pilgrim's Pride, is becoming very popular with
cruiselines and other customers where visual presentation of the whole
turkey is critical.
RETAIL. A significant portion of our turkey sales are derived from
products sold to the retail market. This market consists primarily of
grocery store chains, wholesale clubs and other retail distributors. We
concentrate our efforts in this market on sales of branded, prepackaged
cut-up and whole turkey to grocery store chains and retail distributors in
the eastern region of the United States. This regional marketing focus
enables us to develop consumer brand franchises and capitalize on proximity
to the trade customer in terms of lower transportation costs, more timely
and responsive service and enhanced product freshness.
We utilize numerous marketing techniques, including advertising, to
develop and strengthen trade and consumer awareness and increase brand
loyalty for consumer products marketed under the Pilgrim's
Pride and Wampler brands. We believe our
efforts to achieve and maintain brand awareness and loyalty help to provide
more secure distribution for our products. We also believe our efforts at
brand awareness generate greater price premiums than would otherwise be the
case in certain eastern markets. We also maintain an active program to
identify consumer preferences. The program primarily consists of testing
new product ideas, packaging designs and methods through taste panels and
focus groups located in key geographic markets.
RETAIL - PREPARED FOODS. We sell retail-oriented prepared turkey
products primarily to grocery store chains located in the eastern U.S. We
also sell these products to the wholesale club industry.
RETAIL - FRESH TURKEY. Our prepackaged retail products include
various combinations of freshly refrigerated and frozen, whole turkey and
turkey parts in trays, bags or other consumer packs labeled and priced
ready for the retail grocer's fresh meat counter, ground turkey or sausage
and turkey burgers. We believe the retail prepackaged fresh turkey business
will continue to be a large and relatively stable market, providing
opportunities for product differentiation and regional brand loyalty with
large seasonal spikes in the holiday seasons.
EXPORT AND OTHER TURKEY PRODUCTS. Our export and other products
consist of whole turkeys, turkey franks and turkey parts sold in bulk form,
either non-branded or under the Wampler and
Rockingham brands. These products are primarily sold frozen
either to distributors in the U.S. or for distribution to export markets.
In the U.S., prices of these products are negotiated daily or weekly and
are generally related to market prices quoted by the USDA or other public
price reporting services. We also sell U.S.-produced turkey products for
export to Canada, Mexico, Eastern Europe, the Far East and other world
markets. Historically, we have targeted international markets to generate
additional demand for our turkey dark meat, and frankfurters made from
turkey dark meat, which is a natural by-product of our U.S. operations
given our concentration of prepared foods products and the U.S. customers'
general preference for white meat. We believe that U.S. turkey exports will
continue to grow as worldwide demand increases for high-grade, low-cost
protein sources. We also believe that worldwide demand for higher margin
prepared turkey products will increase over the next five years.
Accordingly, we believe we are well positioned to capitalize on such
growth, especially in Mexico where we have established distribution
channels.
MARKETS FOR OTHER U.S. PRODUCTS
We market fresh eggs under the Pilgrim's Pride brand
name as well as private labels in various sizes of cartons and flats to
U.S. retail grocery and institutional foodservice customers located
primarily in Texas. We have a housing capacity for approximately 2.3
million commercial egg laying hens which can produce approximately 42
million dozen eggs annually. U.S. egg prices are determined weekly based
upon reported market prices. The U.S. egg industry has been consolidating
over the last few years, with the 25 largest producers accounting for more
than 54% of the total number of egg laying hens in service during 2000. We
compete with other U.S. egg producers primarily on the basis of product
quality, reliability, price and customer service.
In 1997, we introduced a high-nutrient egg called EggsPlus . This egg
contains high levels of Omega-3 and Omega-6 fatty acids along with Vitamin
E, making the egg a heart-friendly product. Our marketing of EggsPlus has
received national recognition for our progress in being an innovator in the
functional foods category.
In addition, we produce and sell livestock feeds at our feed mills in
Pittsburg and Mt. Pleasant, Texas and at our farm supply store in
Pittsburg, Texas to dairy farmers and livestock producers in northeastern
Texas, as well as engage in similar sales activities at our other U.S. feed
mills.
MEXICO
BACKGROUND
The Mexican market represented approximately 14.6% of our net sales in
fiscal 2001. Recognizing favorable long-term demographic trends and
improving economic conditions in Mexico, we began exploring opportunities
to produce and market chicken in Mexico. In fiscal 1988, we acquired four
vertically integrated chicken production operations in Mexico for
approximately $15.1 million. From fiscal 1988 through fiscal 2001, we made
acquisitions and capital expenditures in Mexico totaling $240.5 million to
modernize our production technology, improve our distribution network and
expand our operations. In addition, we have transferred experienced
management personnel from the U.S. and developed a strong local management
team. As a result of these expenditures, we have increased weekly
production in our Mexican operations by over 400% since our original
investment in fiscal 1988. We are now the second largest producer of
chicken in Mexico. We believe our facilities are among the most
technologically advanced in Mexico and that we are one of the lowest cost
producers of chicken in Mexico.
PRODUCT TYPES
While the market for chicken products in Mexico is less developed than
in the United States, with sales attributed to fewer, more basic products,
the market for value-added products is increasing. Our strategy is to lead
this trend. The products currently sold by us in Mexico consist primarily
of value-added products such as eviscerated chicken and chicken parts and
basic products such as New York dressed (whole chickens with only feathers
and blood removed) and live birds. We have increased our sales of value-
added products, primarily through national retail chains and restaurants,
and it is our business strategy to continue to do so. In addition, we
remain opportunistic, utilizing our low cost production to enter markets
where profitable opportunities exist.
MARKETS
We sell our Mexico chicken products primarily to large wholesalers and
retailers. Our customer base in Mexico covers a broad geographic area from
Mexico City, the capital of Mexico with a population estimated to be over
20 million, to Saltillo, the capital of the State of Coahuila, about 500
miles north of Mexico City, and from Tampico on the Gulf of Mexico to
Acapulco on the Pacific, which region includes the cities of San Luis
Potosi and Queretaro, capitals of the states of the same name.
In Mexico, where product differentiation has traditionally been
limited, product quality and price have been the most critical competitive
factors. The North American Free Trade Agreement, which went into effect on
January 1, 1994, requires annual reductions in tariffs for chicken and
chicken products in order to eliminate those tariffs by January 1, 2003.
While the extent of the impact of the elimination of tariffs is
uncertain, we believe we are uniquely positioned to benefit from this
elimination. We have an extensive distribution network in Mexico which
distributes products to 19 of the 32 Mexican states, encompassing
approximately 74% of the total population of Mexico. Our distribution
network is comprised of eight distribution centers utilizing approximately
126 company-owned vehicles. We believe this distribution network will be an
important asset in distributing our own, as well as other companies', U.S.-
produced chicken into Mexico.
COMPETITION
The chicken and turkey industries are highly competitive and some of
our competitors have greater financial and marketing resources than we do.
In the United States and Mexico, we compete principally with other
vertically integrated chicken and turkey companies.
In general, the competitive factors in the U.S. chicken and turkey
industries include price, product quality, product development, brand
identification, breadth of product line and customer service. Competitive
factors vary by major market. In the foodservice market, competition is
based on consistent quality, product development, service and price. In the
U.S. retail market, we believe that product quality, brand awareness and
customer service are the primary bases of competition. There is some
competition with non-vertically integrated further processors in the U.S.
prepared food business. We believe we have significant, long-term cost and
quality advantages over non-vertically integrated further processors.
In Mexico, where product differentiation has traditionally been
limited, product quality and price have been the most critical competitive
factors. The North American Free Trade Agreement, which went into effect on
January 1, 1994, requires annual reductions in tariffs for chicken and
chicken products in order to eliminate those tariffs by January 1, 2003. As
such tariffs are reduced, we expect greater amounts of chicken to be
imported into Mexico from the U.S., which could negatively affect the
profitability of Mexican chicken producers and positively affect the
profitability of U.S. exporters of chicken to Mexico.
While the extent of the impact of the elimination of tariffs is
uncertain, we believe we are uniquely positioned to benefit from this
elimination for two reasons. First, we have an extensive distribution
network in Mexico which distributes products to 19 of the 32 Mexican
states, encompassing approximately 74% of the total population of Mexico.
We believe this distribution network will be an important asset in
distributing our own, as well as other companies', U.S.-produced chicken
into Mexico. Second, we have the largest U.S. production and distribution
capacities near the Mexican border, which will provide us with cost
advantages in exporting U.S. chicken into Mexico. These facilities include
our processing facilities in Mt. Pleasant, Pittsburg, Lufkin, Nacogdoches,
Dallas and Waco, Texas, and distribution facilities in San Antonio and El
Paso, Texas and Phoenix, Arizona.
OTHER ACTIVITIES
We have regional distribution centers located in Arlington, El Paso,
Mt. Pleasant and San Antonio, Texas, Phoenix, Arizona, and Oklahoma City,
Oklahoma that distribute our own poultry products along with certain
poultry and non-poultry products purchased from third parties to
independent grocers and quick service restaurants. Our non-poultry
distribution business is conducted as an accommodation to our customers and
to achieve greater economies of scale in distribution logistics. The store-
door delivery capabilities for our own poultry products provide a strategic
service advantage in selling to quick service, national chain restaurants.
REGULATION AND ENVIRONMENTAL MATTERS
The chicken and turkey industries are subject to government
regulation, particularly in the health and environmental areas, including
provisions relating to the discharge of materials into the environment, by
the Centers for Disease Control, the United States Department of
Agriculture, the Food and Drug Administration and the Environmental
Protection Agency in the United States and by similar governmental agencies
in Mexico. Our chicken processing facilities in the U.S. are subject to on-
site examination, inspection and regulation by the USDA. The FDA inspects
the production of our feed mills in the U.S. Our Mexican food processing
facilities and feed mills are subject to on-site examination, inspection
and regulation by a Mexican governmental agency, which performs functions
similar to those performed by the USDA and FDA. Since commencement of
operations by our predecessor in 1946, compliance with applicable
regulations has not had a material adverse effect upon our earnings or
competitive position and such compliance is not anticipated to have a
materially adverse effect in the future. We believe that we are in
substantial compliance with all applicable laws and regulations relating to
the operations of our facilities.
We anticipate increased regulation by the USDA concerning food safety,
by the FDA concerning the use of medications in feed and by the EPA and
various other state agencies concerning the disposal of chicken by-products
and wastewater discharges. Although we do not anticipate any regulations
having a material adverse effect upon us, a material adverse effect may
occur.
EMPLOYEES AND LABOR RELATIONS
As of September 29, 2001, we employed approximately 19,900 persons in
the U.S. and 4,600 persons in Mexico. Approximately 2,500 employees at our
Lufkin and Nacogdoches, Texas facilities are members of collective
bargaining units represented by the United Food and Commercial Workers
Union. However, our Lufkin employees have recently filed a de-certification
petition, which is presently being reviewed by the National Labor Relations
Board. None of our other U.S. employees have union representation.
Collective bargaining agreements with the United Food and Commercial
Workers Union expired on August 10, 2001 with respect to our Lufkin
employees, where we are currently operating without a contract, and
expires in October 2004 with respect to our Nacogdoches employees. We
believe that the terms of the Nacogdoches agreement are no more favorable
than those provided to our non-union U.S. employees. In Mexico, most of our
hourly employees are covered by collective bargaining agreements, as are
most employees in Mexico. We have not experienced any work stoppage since a
two-day work stoppage, with no significant operation disruption, at our
Lufkin facility in May 1993. We believe our relations with our employees
are satisfactory.
FORWARD-LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for
the future, denoted by the words "anticipate," "believe," "estimate,"
"expect," "project," "imply," "intend," "foresee" and similar expressions,
are forward-looking statements that reflect our current views about future
events and are subject to risks, uncertainties and assumptions. Such risks,
uncertainties and assumptions include the following:
- Matters affecting the poultry industry generally, including
fluctuations in the commodity prices of feed ingredients, chicken
and turkey;
- Management of our cash resources, particularly in light of our
substantial leverage;
- Restrictions imposed by, and as a result of, our substantial
leverage;
- Currency exchange rate fluctuations, trade barriers, exchange
controls, expropriation and other risks associated with foreign
operations;
- Changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures;
- Inability to effectively integrate WLR Foods or realize the
associated cost savings and operating synergies currently
anticipated; and
- The impact of uncertainties of litigation as well as other risks
described in our filings with the Securities and Exchange Commission.
Actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, among others, many
of which are beyond our control.
ITEM 2. PROPERTIES
Chicken Operations
BREEDING AND HATCHING
We supply all of our chicks in the U.S. by producing our own hatching
eggs from domestic breeder flocks in the U.S. These flocks are owned by us,
and approximately 13.9% of them are maintained on 43 company-owned breeder
farms. In the U.S., we currently own or contract for approximately 14.2
million square feet of breeder housing on approximately 417 breeder farms.
In Mexico, all of our breeder flocks are maintained on company-owned farms
totaling approximately 4.1 million square feet.
We own eleven chicken hatcheries in the United States. These
hatcheries are located in Nacogdoches, Center and Pittsburg, Texas, DeQueen
and Nashville, Arkansas, Broadway, Virginia, Concord, North Carolina and
Moorefield, West Virginia, where eggs are incubated and hatched in a
process requiring 21 days. Once hatched, the day-old chicks are inspected
and vaccinated against common poultry diseases and transported by our
vehicles to grow-out farms. Our eleven hatcheries in the U.S. have an
aggregate production capacity of approximately 15.5 million chicks per
week. In Mexico, we own seven hatcheries, which have an aggregate
production capacity of approximately 3.5 million chicks per week.
GROW-OUT
We place our U.S. grown chicks on approximately 1,500 contract grow-
out farms located in Texas, Arkansas, Virginia, West Virginia, North
Carolina and Oklahoma, some of which are owned by our affiliates. These
contract grow-out farms contain approximately 5,360 chicken houses with
approximately 78.4 million square feet of growing facilities. Additionally,
we own and operate grow-out farms containing approximately 390 chicken
houses with approximately 4.4 million square feet of growing facilities in
the U.S., which account for approximately 5% of our total annual U.S.
chicken capacity. On the contracted grow-out farms, the farmers provide the
facilities, utilities and labor. We supply the chicks, the feed and all
veterinary and technical services. Contract grow-out farmers are paid based
on live weight under an incentive arrangement. In Mexico, we place our
grown chicks on contract grow-out farms containing approximately 732
chicken houses with approximately 10.2 million square feet of growing
facilities. Additionally, we own and operate grow-out farms containing
approximately 632 chicken houses with approximately 9.2 million square feet
of growing facilities in Mexico, which account for approximately 56.5% of
our total annual Mexican chicken capacity. Arrangements with independent
farmers in Mexico are similar to our arrangements with contractors in the
United States. The average grow-out cycle of our chickens is six to seven
weeks.
FEED MILLS
An important factor in the production of chicken is the rate at which
feed is converted into body weight. The quality and composition of the feed
is critical to the conversion rate. Accordingly, we formulate and produce
our own feed. We purchase feed ingredients on the open market. The primary
feed ingredients include corn, milo and soybean meal, which historically
have been the largest component of our total production costs. In the U.S.,
we operate nine feed mills located in Nacogdoches, Tenaha and Pittsburg,
Texas, Nashville and Hope, Arkansas, Harrisonburg, Virginia, Wingate, North
Carolina and Moorefield, West Virginia. In the U.S., we currently have
annual feed requirements of approximately 3.4 million tons and the capacity
to produce approximately 6.1 million tons. We own four feed mills in
Mexico, which produce all of the requirements of our Mexico operations.
Mexico's annual feed requirements are approximately 0.7 million tons with a
capacity to produce approximately 1.0 million tons. In fiscal 2001,
approximately 67% of the feed ingredients used by us in Mexico were
imported from the United States, but this percentage fluctuates based on
the availability and cost of local feed ingredient supplies.
PROCESSING
Once the chickens reach processing weight, they are transported in our
trucks to our processing plants. These plants utilize modern, highly
automated equipment to process and package the chickens. We periodically
review possible application of new processing technologies in order to
enhance productivity and reduce costs. We have ten U.S. processing plants,
two of which are located in Mt. Pleasant, Texas, and the remainder of which
are located in Dallas, Nacogdoches and Lufkin, Texas, DeQueen, Arkansas,
Broadway and Alma, Virginia, Marshville, North Carolina and Moorefield,
West Virginia. These processing plants have the capacity, under present
USDA inspection procedures, to slaughter approximately 11.9 million head of
chicken per week, assuming a five-day work week. Our three processing
plants located in Mexico have the capacity to slaughter approximately 3.3
million head of chicken per week, assuming a six-day work week, which is
typical in Mexico.
TURKEY OPERATIONS
BREEDING AND HATCHING
We purchase breeder poults, which we place with growers who supply
labor and housing to produce breeder flocks. These breeder flocks are owned
by us, and approximately 16.2% of them are maintained on three company-
owned breeder farms. We currently own or contract for approximately 2.0
million square feet of turkey breeder housing on approximately 40 breeder
farms which produce eggs that are taken to the company-owned turkey
hatchery. Our breeder flocks provide approximately 69% of our poult supply
for grow-out. We own and operate one turkey stud farm with approximately
50,000 square feet, which houses 3,600 breeder males and supplies semen for
52% of our breeder production. The balance of our poults for grow-out are
purchased from third parties.
We own and operate one turkey hatchery, which is located in
Harrisonburg, Virginia, where eggs are incubated and hatched in a process
requiring 28 days. Once hatched, the day-old poults are inspected and
vaccinated against common poultry diseases and transported by our vehicles
to grow-out farms. Our turkey hatchery has an aggregate production
capacity of approximately 450,000 poults per week.
GROW-OUT
We place our turkey poults on approximately 350 contract grow-out
farms located in Virginia, West Virginia, Pennsylvania, Maryland and North
and South Carolina. These contract grow-out farms contain approximately
1,260 turkey houses with approximately 23.6 million square feet of growing
facilities. In addition, we own and operate a grow-out farm containing 20
turkey houses with approximately 251,000 square feet of growing facilities
in the U.S., which accounts for approximately 1.1% of our total annual
turkey capacity. On the contracted grow-out farms, the farmers provide the
facilities, utilities and labor. We supply the poults, the feed and all
veterinary and technical services. Contract grow-out farmers are paid
based on live weight under an incentive arrangement. The average grow-out
cycle of our turkeys is 20 to 26 weeks.
FEED MILLS
An important factor in the production of turkey is the rate at which
feed is converted into body weight. The quality and composition of the feed
is critical to the conversion rate. Accordingly, we formulate and produce
our own feed. We purchase feed ingredients on the open market. The primary
feed ingredients include corn, milo and soybean meal, which historically
have been the largest component of our total production costs. We own and
operate a turkey feed mill located in Harrisonburg, Virginia. We currently
have the capacity to annually produce approximately 520,000 tons of turkey
feed at this mill. We also produce turkey feed when required at our other
three eastern division mills or purchase it on the open market.
PROCESSING
Once the poults reach processing weight, they are transported in our
trucks to our processing plants. These plants utilize modern, highly
automated equipment to process and package the turkeys. We periodically
review possible application of new processing technologies in order to
enhance productivity and reduce costs. Our three turkey processing plants,
located in Harrisonburg and Hinton, Virginia and New Oxford, Pennsylvania,
have the capacity, under present USDA inspection procedures, to process
approximately 450,000 turkeys per week, assuming a five-day work week.
PREPARED FOODS OPERATIONS
We operate five prepared foods plants. Four of these plants process
primarily chicken prepared foods products and are located in Mt. Pleasant,
Waco, Dallas and Nacogdoches, Texas. Substantially all of our turkey
prepared foods products are processed in our plant located in Franconia,
Pennsylvania. In line with our stated business strategy to capitalize on
the attractive U.S. prepared foods market, we have increased our prepared
foods production capacity through expansion and acquisitions. The U.S.
prepared foods market continues to be one of the fastest growing and most
profitable segments in the poultry industry. Further processed prepared
foods products include items such as portion-controlled breast fillets,
tenderloins and strips, formed nuggets and patties, turkey hams and roasts,
salads and bone-in chicken parts. Prepared foods are sold frozen and may be
either fully cooked, partially cooked or raw, breaded or non-breaded, pre-
marinated or non-marinated or smoked. We measure our operating capacity of
our prepared foods plants on the basis of running two shifts per day, six
days per week.
Our largest prepared foods plant is located in Mt. Pleasant, Texas and
was constructed in 1986 and has been expanded significantly since that
time. This facility includes 281,000 square feet and employs approximately
2,300 people. This facility has de-boning lines, marinating systems,
batter/breading systems, fryers, ovens, both mechanical and cryogenic
freezers, a variety of packaging systems and cold storage including four
fully-cooked lines and three ready-to-cook/par-frying/Individually Quick
Frozen ("IQF") lines and one batter-breaded/IQF line and eight spiral
freezers. This facility has capacity to produce approximately 350 million
pounds of further processed product annually and is currently operating at
full capacity.
Our Waco, Texas prepared foods plant was purchased in 1999 and
expanded in fiscal year 2000 and again in fiscal 2001. It is functionally
equivalent to the Mt. Pleasant plant and includes 150,146 square feet and
employs approximately 700 people. This state of the art facility has
marinating systems, batter/breading systems, fryers, ovens, both mechanical
and cryogenic freezers, a variety of packaging systems and cold storage
including two fully-cooked lines and two ready-to-cook lines and four
spiral freezers. This facility has capacity to produce approximately 270
million pounds of further processed product annually and is currently
operating at approximately 80% of capacity.
Our Franconia, Pennsylvania prepared foods plant was acquired in
January 2001 and further processes chicken and turkey products, including
grinding, marinating, spicing and cooking, producing premium delicatessen,
foodservice and retail products, including roast turkey, frankfurters and
salads. This facility includes approximately 170,000 square feet and
employs approximately 775 people. Our Franconia facility employs the
batching system of production as opposed to line-production used in our
other plants. This plant has approximately 95 million annual pounds of oven
capacity, 26 million annual pounds of frankfurter capacity and 17 million
annual pounds of salad capacity for a total capacity of approximately 138
million pounds of further processed product annually and is currently
operating at approximately 80% of capacity.
Our Dallas, Texas prepared foods plant was constructed in 1999 and
includes 84,000 square feet and employs approximately 900 people. This
facility has de-boning and portioning capability, marinating systems,
batter/breading and frying systems and IQF capabilities. This plant is
currently running one par-frying line and one IQF production line, each
with a spiral freezer. This facility has the capacity to produce
approximately 105 million pounds of further processed product annually and
is currently operating at full capacity.
Our Nacogdoches, Texas prepared foods plant was constructed in fiscal
2001. It is functionally equivalent to our Dallas, Texas prepared foods
plant and includes 115,465 square feet and employs approximately 1,850
people. This facility has de-boning and portioning capability, marinating
systems, batter/breading and frying systems and IQF capabilities. This
plant is currently running one par-frying line with a spiral freezer and
two IQF lines each with a spiral freezer with capability of making them
par-fry lines as sales dictate. This facility has capacity to produce
approximately 80 million pounds of further processed product annually and
is currently operating at approximately 80% of capacity.
EGG PRODUCTION
We produce table eggs at three farms near Pittsburg, Texas. One farm
is owned by us, while two farms are leased from an entity owned by our
major stockholder. The eggs are cleaned, sized, graded and packaged for
shipment at processing facilities located on the egg farms. The farms have
a housing capacity for approximately 2.3 million producing hens and are
currently housing approximately 1.9 million hens.
OTHER FACILITIES AND INFORMATION
We operate three rendering plants that convert by-products into
protein products, located in Mt. Pleasant, Texas, Broadway, Virginia and
Moorefield, West Virginia. These rendering plants currently process by-
products from approximately 13.1 million chickens and 0.6 million turkeys
weekly into protein products. These products are used in the manufacture of
poultry and livestock feed and pet foods. We operate a commercial feed mill
in Mt. Pleasant, Texas, which produces various bulk and sacked livestock
feed sold to area dairies, ranches and farms. We also operate a feed supply
store in Pittsburg, Texas, from which we sell various bulk and sacked
livestock feed products, a majority of which is produced in our Mt.
Pleasant commercial feed mill. We own an office building in Pittsburg,
Texas, which houses our executive offices, an office building in Mexico
City, which houses our Mexican marketing offices, and an office building in
Broadway, Virginia, which houses our Eastern Division sales and marketing,
research and development, and corporate activities.
Substantially all of our U.S. property, plant and equipment is pledged
as collateral on our secured debt.
ITEM 3. LEGAL PROCEEDINGS
SINCE MARCH 23, 1999, THE COMPANY HAS BEEN A PLAINTIFF IN TWO ANTITRUST
LAWSUITS IN U.S. DISTRICT COURT IN WASHINGTON, D.C. ALLEGING A WORLD-WIDE
CONSPIRACY TO CONTROL PRODUCTION CAPACITY AND RAISE PRICES OF COMMON
VITAMINS SUCH AS A, B-4, C AND E. ON NOVEMBER 3, 1999, A SETTLEMENT, WHICH
WAS ENTERED INTO AS PART OF A CLASS ACTION LAWSUIT TO WHICH THE COMPANY WAS
A MEMBER, WAS AGREED TO AMONG THE DEFENDANTS AND THE CLASS, WHICH WOULD
PROVIDE FOR A RECOVERY OF BETWEEN 18-20% OF VITAMINS PURCHASED FROM THE
DEFENDANTS FROM 1990 THROUGH 1998. ON MARCH 28, 2000, THE JUDGE PRESIDING
OVER THE CASE ACCEPTED THE NEGOTIATED SETTLEMENT BETWEEN THE PARTIES;
HOWEVER, APPEALS FROM VARIOUS SOURCES ARE IN PROCESS. THE COMPANY HAS
FILED DOCUMENTATION SHOWING THAT VITAMIN PURCHASES MADE DURING THE RECOVERY
PERIOD TOTALED APPROXIMATELY $14.9 MILLION. DURING FISCAL 2001, THE
COMPANY RECEIVED $3.3 MILLION IN FINAL SETTLEMENT OF ITS CLAIM.
IN JANUARY OF 1998, SEVENTEEN OF OUR CURRENT AND/OR FORMER EMPLOYEES
FILED THE CASE OF "OCTAVIUS ANDERSON, ET AL. V. PILGRIM'S PRIDE
CORPORATION" IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT
OF TEXAS, LUFKIN DIVISION CLAIMING PILGRIM'S PRIDE VIOLATED REQUIREMENTS OF
THE FAIR LABOR STANDARDS ACT. THE SUIT ALLEGED PILGRIM'S PRIDE FAILED TO
PAY EMPLOYEES FOR ALL HOURS WORKED. THE SUIT GENERALLY ALLEGED THAT (1)
EMPLOYEES SHOULD BE PAID FOR TIME SPENT TO PUT ON, TAKE OFF, AND CLEAN
CERTAIN PERSONAL GEAR AT THE BEGINNING AND END OF THEIR SHIFTS AND BREAKS
AND (2) THE USE OF A MASTER TIME CARD OR PRODUCTION "LINE" TIME FAILS TO
PAY EMPLOYEES FOR ALL TIME ACTUALLY WORKED. PLAINTIFFS SOUGHT TO RECOVER
UNPAID WAGES PLUS LIQUIDATED DAMAGES AND LEGAL FEES. APPROXIMATELY 1,700
CONSENTS TO JOIN AS PLAINTIFFS WERE FILED WITH THE COURT BY CURRENT AND/OR
FORMER EMPLOYEES. DURING MARCH 2001, THE CASE WAS TRIED IN THE FEDERAL
COURT OF THE EASTERN DISTRICT OF TEXAS, LUFKIN, TEXAS. THE COMPANY
PREVAILED AT THE TRIAL WITH A JUDGMENT ISSUED BY THE JUDGE, WHICH FOUND NO
EVIDENCE PRESENTED TO SUPPORT THE PLAINTIFFS' ALLEGATIONS. THE PLAINTIFFS
HAVE FILED AN APPEAL IN THE FIFTH CIRCUIT COURT OF APPEALS TO REVERSE THE
JUDGE'S DECISION. THE PLAINTIFF'S BRIEF WAS SUBMITTED TO THE COURT ON
NOVEMBER 5, 2001. PILGRIM'S PRIDE'S RESPONSE TO THE PLAINTIFF'S BRIEF TO
THE FIFTH CIRCUIT COURT OF APPEALS IS DUE ON DECEMBER 5, 2001. NEITHER THE
LIKELIHOOD OF AN UNFAVORABLE OUTCOME NOR THE AMOUNT OF ULTIMATE LIABILITY,
IF ANY, WITH RESPECT TO THIS CASE CAN BE DETERMINED AT THIS TIME. THE
COMPANY DOES NOT EXPECT THIS MATTER, INDIVIDUALLY OR COLLECTIVELY, TO HAVE
A MATERIAL IMPACT ON OUR FINANCIAL POSITION, OPERATIONS OR LIQUIDITY.
SUBSTANTIALLY SIMILAR SUITS HAVE BEEN FILED AGAINST FOUR OTHER INTEGRATED
POULTRY COMPANIES, INCLUDING WLR FOODS, ONE OF WHICH RESULTED IN A FEDERAL
JUDGE DISMISSING MOST OF THE PLAINTIFFS' CLAIMS IN THAT ACTION WITH FACTS
SIMILAR TO OUR CASE.
IN AUGUST OF 2000, FOUR OF OUR CURRENT AND/OR FORMER EMPLOYEES FILED THE
CASE OF "BETTY KENNELL, ET AL. V. WAMPLER FOODS, INC." IN THE UNITED STATES
DISTRICT COURT FOR THE NORTHERN DISTRICT OF WEST VIRGINIA, CLAIMING WE
VIOLATED REQUIREMENTS OF THE FAIR LABOR STANDARDS ACT. THE SUIT GENERALLY
MAKES THE SAME ALLEGATIONS AS ANDERSON V. PILGRIM'S PRIDE DISCUSSED ABOVE.
PLAINTIFFS SEEK TO RECOVER UNPAID WAGES PLUS LIQUIDATED DAMAGES AND LEGAL
FEES. APPROXIMATELY 150 CONSENTS TO JOIN AS PLAINTIFFS WERE FILED WITH THE
COURT BY CURRENT AND/OR FORMER EMPLOYEES. NO TRIAL DATE HAS BEEN SET. TO
DATE, ONLY LIMITED DISCOVERY HAS BEEN PERFORMED. NEITHER THE LIKELIHOOD OF
AN UNFAVORABLE OUTCOME NOR THE AMOUNT OF ULTIMATE LIABILITY, IF ANY, WITH
RESPECT TO THIS CASE CAN BE DETERMINED AT THIS TIME. WE DO NOT EXPECT THIS
MATTER, INDIVIDUALLY OR COLLECTIVELY, TO HAVE A MATERIAL IMPACT ON OUR
FINANCIAL POSITION, OPERATIONS OR LIQUIDITY.
THE COMPANY IS SUBJECT TO VARIOUS OTHER LEGAL PROCEEDINGS AND CLAIMS,
WHICH ARISE IN THE ORDINARY COURSE OF ITS BUSINESS. IN THE OPINION OF
MANAGEMENT, THE AMOUNT OF ULTIMATE LIABILITY WITH RESPECT TO THESE ACTIONS
WILL NOT MATERIALLY AFFECT THE FINANCIAL POSITION OR RESULTS OF OPERATIONS
OF THE COMPANY.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
QUARTERLY STOCK PRICES AND DIVIDENDS
High and low sales prices of and dividends on the Company's Class B
and Class A common stock for the periods indicated were:
Prices Prices
2001 2000 DIVIDENDS
QUARTER HIGH LOW HIGH LOW 2001 2000
Class B Common Stock
First $8.15 $6.03 $9.00 $6.25 $.01 $.01
Second 12.33 7.67 8.56 6.25 .01 .01
Third 12.55 9.43 8.31 6.75 .01 .01
Fourth 15.35 11.90 7.81 6.63 .01 .01
Class A Common Stock
First 5.72 4.46 7.00 4.63 .01 .01
Second 8.42 5.47 6.63 4.50 .01 .01
Third 8.74 6.63 6.13 4.06 .01 .01
Fourth $10.98 $7.50 $5.69 $4.81 $.01 $.01
The Company's Class B common stock (ticker symbol "CHX") and Class A
common stock (ticker symbol "CHX.A") are traded on the New York Stock
Exchange. The Company estimates there were approximately 21,800 and 23,925
holders (including individual participants in security position listings)
of the Company's Class A and Class B common stock, respectively, as of
November 8, 2001. See Note F-Common Stock, of the Notes to Consolidated
Financial Statements for additional discussion of the Company's common
stock.
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) TEN YEARS ENDED SEPTEMBER 29, 2001
2001(a) 2000 1999(b) 1998 1997
INCOME STATEMENT DATA: early
Net Sales $2,214,712 $1,499,439 $1,357,403 $1,331,545 $1,277,649
Gross margin 213,950 165,828 185,708 136,103 114,467
Operating income
(loss) 94,542 80,488 109,504 77,256 63,894
Income (loss) before
income taxes and
extraordinary
charge 63,294 62,786 90,904 56,522 43,824
Interest expense,
net 30,775 17,779 17,666 20,148 22,075
Income tax expense
(benefit) 21,263 10,442 25,651 6,512 2,788
Income (loss)before
extraordinary
charge 42,031 52,344 65,253 50,010 41,036
Extraordinary charge--
early repayment of
debt, net
of tax (894) -- -- -- --
Net income (loss) 41,137 52,344 65,253 50,010 41,036
PER COMMON SHARE DATA(C)
Income (loss)before
extraordinary
charge $ 1.02 $ 1.27 $ 1.58 $ 1.21 $ 0.99
Extraordinary
charge -
early repayment
of debt (0.02) -- -- -- --
Net income (loss) 1.00 1.27 1.58 1.21 0.99
Cash dividends 0.06 0.06 0.045 0.04 0.04
Book Value 9.27 8.33 7.11 5.58 4.41
BALANCE SHEET SUMMARY:
Working capital $ 203,450 $124,531 $154,242 $147,040 $133,542
Total assets 1,215,695 705,420 655,762 601,439 579,124
Notes payable and
current maturities of
long-term debt 5,099 4,657 4,353 5,889 11,596
Long-term debt, less
current
maturities 467,242 165,037 183,753 199,784 224,743
Total stockholders'
equity 380,932 342,559 294,259 230,871 182,516
CASH FLOW SUMMARY:
Operating cash
flow $87,833 $130,803 $81,452 $85,016 $49,615
Depreciation &
amortization(d) 55,390 36,027 34,536 32,591 29,796
Capital
expenditures 112,632 92,128 69,649 53,518 50,231
Business
acquisitions 239,539 -- -- -- --
Financing
activities, net 254,382 (22,619) (19,634) (32,498) 348
CASHFLOW RATIOS:
EBITDA(e) 147,666 115,356 142,043 108,268 94,782
EBITDA/interest
expense, net 4.80x 6.49x 8.04x 5.37x 4.29x
Senior secured
debt/EBITDA 1.84x .69x .67x 1.02x 1.45x
Total debt/EBITDA 3.20x 1.47x 1.32x 1.90x 2.49x
KEY INDICATORS (AS A PERCENTAGE OF NET SALES):
Gross margin 9.7% 11.1% 13.7% 10.2% 9.0%
Selling,
general and
administrative
expenses 5.4% 5.7% 5.6% 4.4% 4.0%
Operating
income (loss) 4.3% 5.4% 8.1% 5.8% 5.0%
Interest
expense, net 1.4% 1.2% 1.3% 1.5% 1.7%
Net income (loss) 1.9% 3.5% 4.8% 3.8% 3.2%
(See page 30 for footnotes.)
(IN THOUSANDS, EXCEPT PER SHARE DATA) TEN YEARS ENDED SEPTEMBER 29, 2001
1996 1995 1994 1993(b) 1992
Income Statement Data:
Net sales $1,139,310 $931,806 $922,609 $887,843 $817,361
Gross margin 70,640 74,144 110,827 106,036 32,802
Operating income
(loss) 21,504 24,930 59,698 56,345 (12,475)
Income (loss) before
income taxes and
extraordinary
charge 47 2,091 42,448 32,838 (33,712)
Interest expense,
net 21,539 17,483 19,175 25,719 22,502
Income tax expense
(benefit) 4,551 10,058 11,390 10,543 (4,048)
Income (loss) before
extraordinary
charge (4,504) (7,967) 31,058 22,295 (29,664)
Extraordinary charge--
early repayment
of debt, net
of tax (2,780) -- -- (1,286) --
Net income (loss) (7,284) (7,967) 31,058 21,009 (29,664)
Per Common Share Data(c)
Income (loss) before
extraordinary
charge $ (0.11) $ (0.19) $ 0.75 $ 0.54 $(0.83)
Extraordinary charge--
early repayment
of debt (0.07) -- -- (0.03) --
Net income (loss) (0.18) (0.19) 0.75 0.51 (0.83)
Cash dividends 0.04 0.04 0.04 0.02 0.04
Book value 3.46 3.67 3.91 3.20 2.71
Balance Sheet Summary:
Working capital 88,455 88,395 99,724 72,688 11,227
Total assets $536,722 $497,604 $438,683 $422,846 $434,566
Notes payable and
current maturities
of long-term
debt 35,850 18,187 4,493 25,643 86,424
Long-term debt, less
current
maturities 198,334 182,988 152,631 159,554 131,534
Total stockholders'
equity 143,135 152,074 161,696 132,293 112,112
Cash Flow Summary:
Operating cash
flow $11,391 $32,712 $60,664 $44,970 $(1,573)
Depreciation &
ammortization(d) 28,024 26,127 25,177 26,034 24,090
Capital
expenditures 34,314 35,194 25,547 15,201 18,043
Business
acquisitions -- 36,178 -- -- --
Financing
activities, net 27,313 40,173 (30,291) (40,339) 25,110
Cashflow Ratios:
EBITDA(e) 47,849 49,811 83,658 79,222 10,955
EBITDA/interest
expense, net 2.22x 2.85x 4.36x 3.08x .48x
Senior secured debt/
EBITDA 2.26x 1.79x .70x .94x 9.40x
Total debt/EBITDA 4.89x 4.04x 1.88x 2.34x 20.17x
Key Indicators (as a percentage of net sales):
Gross margin 6.2% 8.0% 12.0% 11.9% 4.0%
Selling, general and
administrative
expenses 4.3% 5.3% 5.5% 5.6% 5.7%
Operating income
(loss) 1.9% 2.7% 6.5% 6.3% (1.6%)
Interest expense, net 1.9% 1.9% 2.1% 2.9% 2.8%
Net income (loss) (0.6%) (0.9%) 3.4% 2.4% (3.6%)
(A) THE COMPANY ACQUIRED WLR FOODS ON JANUARY 27, 2001 FOR $239.5 MILLION
AND THE ASSUMPTION OF $45.5 MILLION OF INDEBTEDNESS. THE ACQUISITION
HAS BEEN ACCOUNTED FOR AS A PURCHASE, AND THE RESULTS OF OPERATIONS
FOR THIS ACQUISITION HAVE BEEN INCLUDED IN OUR CONSOLIDATED RESULTS
OF OPERATIONS SINCE THE ACQUISITION DATE.
(B) FISCAL 1999 AND 1993 HAD 53 WEEKS
HISTORICAL PER SHARE AMOUNTS REPRESENT BOTH BASIC AND DILUTED AND HAVE
(C) BEEN RESTATED TO GIVE EFFECT TO A STOCK DIVIDEND ISSUED ON JULY 30,
1999. SEE NOTE F OF THE CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY.
(D) INCLUDES AMORTIZATION OF CAPITALIZED FINANCING COSTS OF APPROXIMATELY
$0.9 MILLION, $1.2 MILLION, $1.1 MILLION, $1.0 MILLION, $0.9 MILLION,
$1.8 MILLION, $1.1 MILLION, $1.3 MILLION, $1.6 MILLION AND $0.5
MILLION IN FISCAL YEARS 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994,
1993 AND 1992, RESPECTIVELY.
(E) "EBITDA" IS DEFINED AS THE SUM OF NET INCOME (LOSS) BEFORE EXTRAORDINARY
CHARGES, INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA IS
PRESENTED BECAUSE WE BELIEVE IT IS FREQUENTLY USED BY SECURITIES
ANALYSTS, INVESTORS AND OTHER INTERESTED PARTIES IN THE EVALUATION OF
COMPANIES. EBITDA IS NOT A MEASUREMENT OF FINANCIAL PERFORMANCE UNDER
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND SHOULD NOT BE CONSIDERED AS
AN ALTERNATIVE TO CASH FLOW FROM OPERATING ACTIVITIES OR AS A MEASURE OF
LIQUIDITY OR AN ALTERNATIVE TO NET INCOME AS INDICATORS OF OUR OPERATING
PERFORMANCE OR ANY OTHER MEASURES OF PERFORMANCE DERIVED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for
the future, denoted by the words "anticipate," "believe," "estimate,"
"expect," "project," "imply," "intend," "foresee" and similar expressions,
are forward-looking statements that reflect our current views about future
events and are subject to risks, uncertainties and assumptions. Such risks,
uncertainties and assumptions include the following:
- Matters affecting the poultry industry generally, including
fluctuations in the commodity prices of feed ingredients, chicken
and turkey;
- Management of our cash resources, particularly in light of our
substantial leverage;
- Restrictions imposed by, and as a result of, our substantial
leverage;
- Currency exchange rate fluctuations, trade barriers, exchange
controls, expropriation and other risks associated with foreign
operations;
- Changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures;
- Inability to effectively integrate WLR Foods or realize the
associated cost savings and operating synergies currently
anticipated; and
- The impact of uncertainties of litigation as well as other risks
described in our filings with the Securities and Exchange
Commission.
Actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, among others, many
of which are beyond our control.
GENERAL
Profitability in the poultry industry is materially affected by the
commodity prices of feed ingredients, chicken and turkey, which are
determined by supply and demand factors. As a result, the chicken and
turkey industries are subject to cyclical earnings fluctuations. Cyclical
earnings fluctuations can be mitigated somewhat by:
- Business strategy;
- Product mix;
- Sales and marketing plans; and
- Operating efficiencies.
In an effort to reduce price volatility and to generate higher, more
consistent profit margins, we have concentrated on the production and
marketing of prepared foods products. Prepared foods products generally
have higher profit margins than our other products. Also, the production
and sale in the U.S. of prepared foods products reduce the impact of the
costs of feed ingredients on our profitability. Feed ingredient purchases
are the single largest component of our cost of goods sold, representing
approximately 30.1% of our consolidated cost of goods sold in fiscal 2001.
The production of feed ingredients is positively or negatively affected
primarily by weather patterns throughout the world, the global level of
supply inventories and demand for feed ingredients, and the agricultural
policies of the United States and foreign governments. As further
processing is performed, feed ingredient costs become a decreasing
percentage of a product's total production cost, thereby reducing their
impact on our profitability. Products sold in this form enable us to charge
a premium, reduce the impact of feed ingredient costs on our profitability
and improve and stabilize our profit margins.
BUSINESS SEGMENTS
Since the acquisition of WLR Foods on January 27, 2001, we operate in
two reportable business segments as (1) a producer of chicken and other
products and (2) a producer of turkey products.
Our chicken and other products segment primarily includes sales of
chicken products we produce and purchase for resale in the United States
and Mexico, but also includes the sale of table eggs, and feed. Our
chicken and other products segment conducts separate operations in the
United States and Mexico and is reported as two separate geographical
areas. Our turkey segment includes sales of turkey products produced in
our turkey operation recently acquired from WLR Foods, whose operations are
exclusively in the United States.
Inter-area sales and inter-segment sales, which are not material, are
accounted for at prices comparable to normal trade customer sales.
Corporate expenses are included with chicken and other products.
The following table presents certain information regarding our segments:
FISCAL YEAR ENDED
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2,
2001(A) 2000 1999
(52 WEEKS) (52 WEEKS) (53 WEEKS)
(IN THOUSANDS)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $1,652,199 $1,192,077 $1,102,903
Mexico 323,678 307,362 254,500
Sub-total 1,975,877 1,499,439 1,357,403
Turkey 238,835 -- --
Total $2,214,712 $1,499,439 $1,357,403
OPERATING INCOME:
Chicken and Other Products:
United States $ 78,096 $ 45,928 $ 88,177
Mexico 12,157 34,560 21,327
Sub-total 90,253 80,488 109,504
Turkey 4,289 -- --
Total $ 94,542 $ 80,488 $ 109,504
Depreciation and Amortization(b)
Chicken and Other Products:
United States $ 38,155 $ 24,444 $ 23,185
Mexico 11,962 11,583 11,351
Sub-total 50,117 36,027 34,536
Turkey 5,273 -- --
Total $ 55,390 $ 36,027 $ 34,536
(a) The acquisition of WLR Foods has been accounted for as a purchase,
and the results of operations for this acquisition have been included in
our consolidated results of operating since January 27, 2001, the
acquisition date.
(b) INCLUDES AMORTIZATION OF CAPITALIZED FINANCING COSTS OF APPROXIMATELY
$0.9 MILLION, $1.2 MILLION AND $1.1 MILLION IN FISCAL YEARS 2001, 2000
AND 1999, RESPECTIVELY.
The following table presents certain items as a percentage of net sales for
the periods indicated:
2001 (a) 2000 1999
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 90.3 88.9 86.3
Gross profit 9.7 11.1 13.7
Selling, general and
administrative expense 5.4 5.7 5.6
Operating income 4.3 5.4 8.1
Interest expense, net 1.4 1.2 1.3
Income before income taxes 2.9 4.2 6.7
Net income 1.9 3.5 4.8
(a) The acquisition of WLR Foods has been accounted for as a purchase,
and the results of operations for this acquisition have been included
in our consolidated results of operating since January 27, 2001, the
acquisition date.
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
On January 27, 2001, we completed the acquisition of WLR Foods, a
vertically integrated producer of chicken and turkey products located in
the eastern United States. Accordingly, 35 weeks of operations of the
former WLR Foods are included in our results for fiscal 2001.
CONSOLIDATED NET SALES. Consolidated net sales were $2.2 billion for
fiscal 2001, an increase of $715.3 million, or 47.7%, from fiscal 2000. The
increase in consolidated net sales resulted from a $422.0 million increase
in U.S. chicken sales to $1.5 billion, a $238.8 million increase in turkey
sales, a $38.2 million increase in sales of other U.S. products to $179.9
million and by a $16.3 million increase in Mexico chicken sales to $323.7
million. The increase in U.S. chicken sales was primarily due to a 35.6%
increase in dressed pounds produced, which resulted primarily from the
acquisition of WLR Foods, and to a 3.4% increase in total revenue per
dressed pound produced. The increase in turkey sales was due to the
acquisition of WLR Foods. The $38.2 million increase in sales of other U.S.
products to $179.9 million was primarily due to the acquisition of WLR
Foods and higher prices in our commercial egg operations. The $16.3 million
increase in Mexico chicken sales was primarily due to a 13.4% increase in
dressed pounds produced offset partially by a 7.1% decrease in average
revenue per dressed pound produced, primarily due to lower prices caused by
an over supply of chicken.
COST OF SALES. Consolidated cost of sales were $2.0 billion in
fiscal 2001, an increase of $667.2 million, or 50.0%, compared to fiscal
2000. The U.S. operations accounted for $630.8 million of the increase in
the cost of sales and our Mexico operations accounted for $36.4 million of
the increase.
The cost of sales increase in our U.S. operations of $630.8 million
was due primarily to the acquisition of WLR Foods, $222.6 million of which
related to the turkey operations, but also resulted from increased
production of higher cost prepared foods products, higher energy costs and
higher feed ingredient costs.
The $36.4 million cost of sales increase in our Mexico operations was
primarily due to a 13.4% increase in dressed pounds produced.
GROSS PROFIT. Gross profit was $214.0 million for fiscal 2001, an
increase of $48.1 million, or 29.0%, over the same period last year, due
primarily to the acquisition of WLR Foods. Gross profit as a percentage of
sales decreased to 9.7% in fiscal 2001, primarily from 11.1% in fiscal 2000
due primarily to lower sale prices in Mexico.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $119.4 million in fiscal 2001 and
$85.3 million in fiscal 2000. The $34.1 million increase was due primarily
to the acquisition of WLR Foods and certain integration costs related
thereto. Consolidated selling, general and administrative expenses as a
percentage of sales decreased in fiscal 2001 to 5.4%, compared to 5.7% in
fiscal 2000, due primarily to synergies resulting from the WLR acquisition.
OPERATING INCOME. Consolidated operating income was $94.5 million for
fiscal 2001, an increase of $14.1 million when compared to fiscal 2000,
resulting primarily from higher volumes from the acquisition of WLR Foods
and higher sales prices in U.S.
INTEREST EXPENSE. Consolidated net interest expense increased 73.1%
to $30.8 million in fiscal 2001, when compared to $17.8 million for fiscal
2000, due to higher outstanding balances incurred for the acquisition of
WLR Foods.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 2001
increased to $21.3 million compared to an expense of $10.4 million in
fiscal 2000. This increase resulted from higher U.S. pre-tax earnings in
fiscal 2001 than in fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999:
NET SALES. Consolidated net sales were $1.5 billion for fiscal 2000,
an increase of $142.0 million, or 10.5%, from fiscal 1999. The increase in
consolidated net sales resulted from an $86.9 million increase in U.S.
chicken sales to $1.1 billion, a $52.9 million increase in Mexico chicken
sales to $307.4 million and a $2.3 million increase of sales of other U.S.
products to $141.7 million. The increase in U.S. chicken sales was
primarily due to an 8.6% increase in dressed pounds produced . The
increase in Mexico chicken sales was primarily due to a 13.7% increase in
revenue per dressed pound and to a 6.2% increase in dressed pounds
produced. The $2.3 million increase in sales of other U.S. products was
primarily due to higher selling prices in our Poultry By-Products
division.
COST OF SALES. Consolidated cost of sales was $1.3 billion in fiscal
2000, an increase of $161.9 million, or 13.8%, compared to fiscal 1999. The
increase resulted primarily from a $125.9 million increase in the cost of
sales of our U.S. operations and from a $36.0 million increase in the cost
of sales in our Mexico operations.
The cost of sales increase in our U.S. operations of $125.9 million was
due primarily to an 8.6% increase in dressed pounds produced, a 4.0%
increase in feed ingredient costs, increased production of higher-cost
prepared food products, losses associated with the late January 2000 ice
storm and a $5.8 million write-off of accounts receivable from AmeriServe,
which filed bankruptcy on January 31, 2000. AmeriServe was a significant
distributor of products to fast food and casual dining restaurant chains,
several of which are customers of the Company. The $36.0 million cost of
sales increase in our Mexico operations was primarily due to a 6.2%
increase in dressed pounds produced and a 9.8% increase in average costs of
sales per dressed pound produced caused primarily by the continued shift of
production to a higher-valued product mix.
GROSS PROFIT. Gross profit was $165.8 million for fiscal 2000, a
decrease of $19.9 million, or 10.7%, over the same period last year. Gross
profit as a percentage of sales decreased to 11.1% in fiscal 2000 from
13.7% in fiscal 1999. The lower gross profit resulted from lower net
margins in our U.S. operations primarily due to lower selling prices
realized for fresh chicken products, higher feed ingredient costs, losses
associated with the late January 2000 ice storm and the AmeriServe write-
off, discussed above, offset in part by increased volume of prepared food
chicken sales.
Beginning in the fourth quarter of fiscal 1999, commodity chicken
margins in the U.S. have been under pressure due, in part, to increased
levels of chicken production in the U.S. To the extent that these trends
continue, subsequent periods' gross margins could be negatively affected to
the extent not offset by other factors such as those discussed under "-
General" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $85.3 million in fiscal 2000 and
$76.2 million in fiscal 1999. Consolidated selling, general and
administrative expenses as a percentage of sales remained relatively stable
in fiscal 2000 at 5.7% compared to 5.6% in fiscal 1999. The $9.1 million
increase in consolidated selling, general and administrative expenses was
due to increased costs relating to our higher sales volumes.
OPERATING INCOME. Consolidated operating income was $80.5 million for
fiscal 2000, a decrease of $29.0 million, or 26.5%, when compared to fiscal
1999, resulting primarily from lower net U.S. margins due to lower selling
prices realized for fresh chicken products, higher feed ingredient costs,
losses associated with the late January 2000 ice storm and the AmeriServe
write-off, discussed above, offset in part by increased volume of prepared
food chicken sales.
INTEREST EXPENSE. Consolidated net interest expense increased 0.6% to
$17.8 million in fiscal 2000, when compared to $17.7 million for fiscal
1999, due to higher interest rates experienced in fiscal 2000 on lower
outstanding debt levels.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 2000
decreased to $10.4 million compared to an expense of $25.7 million in
fiscal 1999. This decrease resulted from lower U.S. earnings in fiscal 2000
than in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
WE MAINTAIN $130.0 MILLION IN REVOLVING CREDIT FACILITIES AND $400.0
MILLION IN A SECURED REVOLVING/TERM BORROWING FACILITY. THE $400.0 MILLION
REVOLVING/TERM BORROWING FACILITY PROVIDES FOR $285.0 MILLION AND $115.0
MILLION OF 10-YEAR AND 7-YEAR COMMITMENTS, RESPECTIVELY. BORROWINGS UNDER
THESE FACILITIES ARE SPLIT PRO RATA BETWEEN THE 10-YEAR AND 7-YEAR
MATURITIES AS THEY OCCUR. THE CREDIT FACILITIES PROVIDE FOR INTEREST AT
RATES RANGING FROM LIBOR PLUS FIVE-EIGHTHS PERCENT TO LIBOR PLUS TWO AND
THREE-QUARTERS PERCENT, DEPENDING UPON OUR TOTAL DEBT TO CAPITALIZATION
RATIO. INTEREST RATES ON DEBT OUTSTANDING UNDER THESE FACILITIES AS OF
SEPTEMBER 29, 2001 RANGED FROM LIBOR PLUS ONE AND ONE-QUARTER PERCENT TO
LIBOR PLUS TWO AND ONE-QUARTER PERCENT. THESE FACILITIES ARE SECURED BY
INVENTORY AND FIXED ASSETS OR ARE UNSECURED.
AT SEPTEMBER 29, 2001, $86.0 MILLION WAS AVAILABLE UNDER THE REVOLVING
CREDIT FACILITIES AND $225.0 MILLION WAS AVAILABLE UNDER THE REVOLVING/TERM
BORROWING FACILITY.
ON SEPTEMBER 7, 2001, WE AMENDED AND RESTATED OUR REVOLVING CREDIT
AGREEMENT FOR MEXICO, INCREASING THE COMMITMENT FROM $20.0 MILLION TO $30.0
MILLION. OUTSTANDING BORROWINGS UNDER THIS FACILITY ARE PRESENTLY $30.0
MILLION, THE PROCEEDS OF WHICH WERE USED TO REDUCE CERTAIN OTHER DEBT.
ON JUNE 26, 1998, WE ENTERED INTO AN ASSET SALE AGREEMENT TO SELL UP
TO $60 MILLION OF ACCOUNTS RECEIVABLE. IN CONNECTION WITH THE ASSET SALE
AGREEMENT, WE SELL, ON A REVOLVING BASIS, CERTAIN OF OUR TRADE RECEIVABLES
(THE "POOLED RECEIVABLES") TO A SPECIAL PURPOSE CORPORATION WHOLLY OWNED BY
US, WHICH IN TURN SELLS A PERCENTAGE OWNERSHIP INTEREST TO THIRD PARTIES.
AT SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000, AN INTEREST IN THESE POOLED
RECEIVABLES OF $58.5 MILLION AND $35.4 MILLION, RESPECTIVELY, HAD BEEN SOLD
TO THIRD PARTIES AND IS REFLECTED AS A REDUCTION IN ACCOUNTS RECEIVABLE.
THESE TRANSACTIONS HAVE BEEN RECORDED AS SALES IN ACCORDANCE WITH FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 140, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. THE GROSS
PROCEEDS RESULTING FROM THE SALE ARE INCLUDED IN CASH FLOWS FROM OPERATING
ACTIVITIES IN OUR CONSOLIDATED STATEMENTS OF CASH FLOWS. LOSSES ON THESE
SALES WERE IMMATERIAL.
ON JUNE 29, 1999, THE CAMP COUNTY INDUSTRIAL DEVELOPMENT CORPORATION
ISSUED $25.0 MILLION OF VARIABLE-RATE ENVIRONMENTAL FACILITIES REVENUE
BONDS SUPPORTED BY LETTERS OF CREDIT OBTAINED BY PILGRIM'S PRIDE. WE MAY
DRAW FROM THESE PROCEEDS OVER THE CONSTRUCTION PERIOD FOR NEW SEWAGE AND
SOLID WASTE DISPOSAL FACILITIES AT A POULTRY BY-PRODUCTS PLANT TO BE BUILT
IN CAMP COUNTY, TEXAS. WE ARE NOT REQUIRED TO BORROW THE FULL AMOUNT OF THE
PROCEEDS FROM THE BONDS. ALL AMOUNTS BORROWED FROM THESE FUNDS WILL BE DUE
IN 2029. THE AMOUNTS THAT WE BORROW WILL BE REFLECTED AS DEBT WHEN RECEIVED
FROM THE CAMP COUNTY INDUSTRIAL DEVELOPMENT CORPORATION. THE INTEREST RATES
ON AMOUNTS BORROWED WILL CLOSELY FOLLOW THE TAX-EXEMPT COMMERCIAL PAPER
RATES. PRESENTLY, THERE ARE NO BORROWINGS OUTSTANDING UNDER THE BONDS.
ON AUGUST 9, 2001, PILGRIM'S PRIDE ISSUED $200.0 MILLION IN SENIOR
UNSECURED NOTES WITH AN INTEREST RATE OF 9 5/8% MATURING ON SEPTEMBER 15,
2011. THE PROCEEDS FROM THE NOTES OFFERING WERE USED TO REDEEM THE
REMAINING $90.8 MILLION OUTSTANDING OF OUR 10 7/8% SENIOR SUBORDINATED
NOTES DUE 2003. THE BALANCE OF THE PROCEEDS WAS USED TO REDUCE
INDEBTEDNESS UNDER OUR $400.0 MILLION REVOLVING/TERM BORROWING FACILITY.
AT SEPTEMBER 29, 2001, OUR WORKING CAPITAL INCREASED TO $203.5 MILLION
AND OUR CURRENT RATIO INCREASED TO 1.85 TO 1, COMPARED WITH WORKING CAPITAL
OF $124.5 MILLION AND A CURRENT RATIO OF 1.86 TO 1 AT SEPTEMBER 30, 2000
AND WAS PRIMARILY DUE TO THE ACQUISITION OF WLR FOODS.
TRADE ACCOUNTS AND OTHER RECEIVABLES WERE $95.0 MILLION AT SEPTEMBER 29,
2001, COMPARED TO $50.3 MILLION AT SEPTEMBER 30, 2000. THE 89.0% INCREASE
IN TRADE ACCOUNTS AND OTHER RECEIVABLES WAS PRIMARILY DUE TO THE
ACQUISITION OF WLR FOODS' TRADE RECEIVABLES AND OTHER ACCOUNTS PARTIALLY
OFFSET BY THE SALE OF RECEIVABLES UNDER THE ASSET SALE AGREEMENT DISCUSSED
ABOVE. EXCLUDING THE SALE OF RECEIVABLES, TRADE ACCOUNTS AND OTHER
RECEIVABLES WOULD HAVE INCREASED TO $153.5 MILLION IN FISCAL 2001 FROM
$85.7 MILLION IN FISCAL 2000.
INVENTORIES WERE $314.4 MILLION AT SEPTEMBER 29, 2001, COMPARED TO
$181.2 MILLION AT SEPTEMBER 30, 2000. THE $133.2 MILLION, OR 73.5%,
INCREASE IN INVENTORIES WAS PRIMARILY DUE TO THE ACQUISITION OF WLR FOODS.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES WERE $229.9 MILLION AT SEPTEMBER
29, 2001, COMPARED TO $139.8 MILLION AT SEPTEMBER 30, 2000. THE 64.5%
INCREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES WAS PRIMARILY DUE TO THE
ACQUISITION OF WLR FOODS.
CAPITAL EXPENDITURES OF $112.6 MILLION, $92.1 MILLION AND $69.6 MILLION,
FOR FISCAL YEARS 2001, 2000 AND 1999, RESPECTIVELY, WERE PRIMARILY INCURRED
TO ACQUIRE AND EXPAND CERTAIN FACILITIES, IMPROVE EFFICIENCIES, REDUCE
COSTS AND FOR THE ROUTINE REPLACEMENT OF EQUIPMENT. WE ANTICIPATE SPENDING
APPROXIMATELY $65.0 MILLION IN FISCAL 2002 TO IMPROVE EFFICIENCIES AND FOR
THE ROUTINE REPLACEMENT OF EQUIPMENT. WE EXPECT TO FINANCE SUCH
EXPENDITURES WITH AVAILABLE OPERATING CASH FLOWS AND EXISTING CREDIT
FACILITIES.
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES WERE $87.8 MILLION, $130.8
MILLION AND $81.5 MILLION FOR THE FISCAL YEARS 2001, 2000 AND 1999,
RESPECTIVELY. THE DECREASE IN CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
IN FISCAL 2001 COMPARED TO FISCAL 2000, WAS PRIMARILY DUE TO AN OVERALL
INCREASE OF ACCOUNTS RECEIVABLE, DUE PRIMARILY TO A HIGHER LEVEL OF SALES
ACTIVITY; INCREASED INVENTORIES, DUE PRIMARILY TO HIGHER LEVELS OF LIVE
POULTRY AND FROZEN TURKEY INVENTORIES RESULTING PRIMARILY FROM SEASONAL
VARIATIONS IN THE LIVE PRODUCTION CYCLE AND SALES OF TURKEY PRODUCTS, BOTH
OF WHICH WERE PRIMARILY A RESULT OF THE WLR FOODS ACQUISITION AND LOWER NET
INCOME FOR FISCAL 2001. THE $24.0 MILLION DECREASE IN CASH FLOWS PROVIDED
BY OPERATING ACTIVITIES THAT RESULTED FROM ACCOUNTS RECEIVABLE WAS
PARTIALLY OFFSET BY A $23.1 INCREASE IN SALES OF ACCOUNTS RECEIVABLE FROM
$35.4 MILLION AT FISCAL 2000 YEAR END TO $58.5 MILLION AT FISCAL 2001 YEAR
END. THE INCREASE IN CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FOR
FISCAL 2000, COMPARED TO FISCAL 1999, WAS PRIMARILY DUE TO THE SALE OF
$35.4 MILLION IN ACCOUNTS RECEIVABLE UNDER THE ASSET SALE AGREEMENT
MENTIONED ABOVE AND INCREASES IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES
OFFSET PARTIALLY BY AN INCREASE IN INVENTORIES AND A DECREASE IN OPERATING
INCOME.
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES WERE $254.2
MILLION, ($22.6) MILLION AND ($19.6) MILLION FOR THE FISCAL YEARS 2001,
2000 AND 1999, RESPECTIVELY. THE INCREASE IN CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES FOR FISCAL 2001, WHEN COMPARED TO FISCAL 2000,
REFLECTS THE NET PROCEEDS FROM BORROWINGS TO FINANCE THE ACQUISITION OF WLR
FOODS. THE INCREASE IN CASH USED IN FINANCING ACTIVITIES FOR FISCAL 2000,
WHEN COMPARED TO FISCAL 1999 PRIMARILY REFLECTS THE NET PAYMENTS ON NOTES
PAYABLE AND LONG-TERM FINANCING AND DEBT RETIREMENTS.
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price
of feed ingredients, foreign currency exchange rates and interest rates as
discussed below. The sensitivity analyses presented do not consider the
effects that such adverse changes may have on overall economic activity,
nor do they consider additional actions our management may take to mitigate
our exposure to such changes. Actual results may differ.
FEED INGREDIENTS
We purchase certain commodities, primarily corn and soybean meal. As a
result, our earnings are affected by changes in the price and availability
of such feed ingredients. As market conditions dictate, we will from time
to time lock-in future feed ingredient prices using various hedging
techniques, including forward purchase agreements with suppliers and
futures contracts. We do not use such financial instruments for trading
purposes and are not a party to any leveraged derivatives. Market risk is
estimated as a hypothetical 10% increase in the weighted-average cost of
our primary feed ingredients as of September 29, 2001. Based on our feed
consumption during fiscal 2001, such an increase would have resulted in an
increase to cost of sales of approximately $60.2 million, excluding the
impact of any hedging in that period. As of September 29, 2001, we had
hedged 9.1% of our 2002 feed requirements.
FOREIGN CURRENCY
Our earnings are affected by foreign exchange rate fluctuations related
to the Mexican peso net monetary position of our Mexico subsidiaries
denominated in Mexican pesos. We manage this exposure primarily by
attempting to minimize our Mexican peso net monetary position, but from
time to time we have also considered executing hedges to help minimize this
exposure. Such instruments, however, have historically not been
economically feasible. We are also exposed to the effect of potential
exchange rate fluctuations to the extent that amounts are repatriated from
Mexico to the United States. However, we currently anticipate that the cash
flows of our Mexico subsidiaries will continue to be reinvested in our
Mexico operations. 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. The impact on our financial position and results of
operations of a hypothetical change in the exchange rate between the U.S.
dollar and the Mexican peso cannot be reasonably estimated. Foreign
currency exchange gains and losses, representing the change in the U.S.
dollar value of the net monetary assets of our Mexico subsidiaries
denominated in Mexican pesos, was a loss of $0.1 million in fiscal 2001 and
a gain of $0.1 million and $0.2 million in fiscal 1999 and 2000,
respectively. On November 15, 2001, the Mexican peso closed at 9.20 to 1
U.S. dollar, strengthening from 9.54 at September 29, 2001. No assurance
can be given as to how future movements in the peso could affect our future
earnings.
INTEREST RATES
Our earnings are also affected by changes in interest rates due to the
impact those changes have on our variable-rate debt instruments. The
acquisition of WLR Foods substantially increased our outstanding balances
of variable rate debt. We have variable-rate debt instruments representing
approximately 39.6% of our long-term debt at September 29, 2001. Holding
other variables constant, including levels of indebtedness, a 25 basis
points increase in interest rates would have increased our interest expense
by $0.5 million for fiscal 2001. These amounts are determined by
considering the impact of the hypothetical interest rates on our variable-
rate long-term debt at September 29, 2001.
Market risk for fixed-rate long-term debt is estimated as the
potential increase in fair value resulting from a hypothetical 25 basis
points decrease in interest rates and amounts to approximately $3.3 million
as of September 29, 2001, using discounted cash flow analysis.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 "GOODWILL AND OTHER INTANGIBLE
ASSETS" ("SFAS No. 142"). SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 and requires that goodwill and certain
intangible assets will no longer be amortized upon adoption. SFAS No. 142
also establishes new standards for evaluating impairment of goodwill and
certain intangible assets. The adoption of this statement is not expected
to have a material effect on the Company.
On October 1, 2000, we adopted Financial Accounting Standards Board
Statement ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. This statement requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings, or
recognized in other comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value is recognized in earnings. The adoption of SFAS No. 133 had no
impact on the Company as of October 1, 2000.
IMPACT OF INFLATION
Due to moderate inflation in the U.S. and our rapid inventory turnover
rate, the results of operations have not been significantly affected by
inflation during the past three-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements together with the report of
independent auditors, and financial statement schedule are included on
pages 49 through 68 of this document. Financial statement schedules other
than those included herein have been omitted because the required
information is contained in the consolidated financial statement or related
notes, or such information is not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Reference is made to "Election of Directors" on pages 3 through 5 of the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders,
which section is incorporated herein by reference.
Reference is made to "Compliance with Section 16(a) of the Exchange Act"
on page 9 of the Company's Proxy Statement for its 2001 Annual Meeting of
Stockholders, which section is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to Items 11, 12 and 13 is incorporated by
reference from the sections entitled "Security Ownership", "Election of
Directors", "Executive Compensation" and "Certain Transactions" of the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) The financial statements listed in the accompanying index to
financial statements and schedules are filed as part of this report.
(2) All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under
the related instructions or are not applicable and therefore have
been omitted.
(3) The financial statements schedule entitled "Valuation and
Qualifying Accounts and Reserves" is filed as part of this report on
page 67.
(4) Exhibits
(b) Reports on Form 8-K
(1) Pilgrim's Pride filed a Form 8-K on July 23, 2001, to report
the proposed offering of $200,000,000 aggregate principal amount of
its senior unsecured notes due in 2011 (the "Notes") under its
registration statement on Form S-3 (No. 333-84861), (The
"Registration Statement"), and for the purpose of filing as an
exhibit the Form T-1 of The Chase Manhattan Bank in connection with
the Registration Statement and the public offering of the Notes.
(2) Pilgrim's Pride filed a Form 8-K on August 9, 2001, to report
the sale of $200,000,000 aggregate principal amount of its 9 5/8%
Notes (the "9 5/8% Notes") due September 15, 2011 under the
Registration Statement, and to file as exhibits the Underwriting
Agreement, the Indenture, the First Supplemental Indenture, the form
of Note and the opinion of Baker & McKenzie in connection with the
Registration Statement and the public offering of the 9 5/8% Notes.
(c) Exhibits
EXHIBIT NUMBER
2.1 Agreement and Plan of Reorganization dated September 15, 1986, by
and among Pilgrim's Pride Corporation, a Texas corporation;
Pilgrim's Pride Corporation, a Delaware corporation; and Doris
Pilgrim Julian, Aubrey Hal Pilgrim, Paulette Pilgrim Rolston,
Evanne Pilgrim, Lonnie "Bo" Pilgrim, Lonnie Ken Pilgrim, Greta
Pilgrim Owens and Patrick Wayne Pilgrim (incorporated by reference
from Exhibit 2.1 to the Company's Registration Statement on Form
S-1 (No. 33-8805) effective November 14, 1986).
2.2 Agreement and Plan of Merger dated September 27, 2000
(incorporated by reference from Exhibit 2 of WLR Foods, Inc.'s
Current Report on Form 8-K (No. 000-17060) dated September 28,
2000).
3.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 of the Company's Registration Statement
on Form S-1 (No. 33-8805) effective November 14, 1986).
3.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride
Corporation, a Delaware Corporation, effective May 14,1999
(incorporated by reference from Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the three months ended July 3,
1999).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 1 of the Company's
Form 8-A, filed with the SEC on July 20, 1999).
4.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 of the Company's Registration Statement
on Form S-1 (No. 33-8805) effective November 14, 1986).
4.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride
Corporation, a Delaware Corporation, effective May 14, 1999,
(incorporated by reference from Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the three months ended July 3,
1999).
4.3 Form of Indenture between the Company and Ameritrust Texas
National Association relating to the Company's 10 7/8% Senior
Subordinated Notes Due 2003 (incorporated by reference from
Exhibit 4.6 of the Company's Registration Statement on Form S-1
(No. 33-59626) filed on March 16, 1993).
4.4 Form of 10 7/8% Senior Subordinated Note Due 2003 (incorporated by
reference from Exhibit 4.8 of the Company's Registration Statement
on Form S-1 (No. 33-61160) filed on June 16, 1993).
4.5 Certificated of Amendment to Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 1 of the Company's
Form 8-A, filed with the SEC on July 20, 1999).
4.6 Indenture dated as of August 9, 2001 by and between Pilgrim's
Pride Corporation and The Chase Manhattan Bank relating to
Pilgrim's Pride's 9 5/8% Senior Notes Due 2011 (incorporated by
reference from Exhibit 4.1 to Pilgrim's Pride's Current Report on
Form 8-K (No. 001-09273) dated August 9, 2001).
4.7 First Supplemental Indenture dated as of August 9, 2001 by and
between Pilgrim's Pride Corporation and The Chase Manhattan Bank
relating to Pilgrim's Pride's 9 5/8% Senior Notes Due 2011
(incorporated by reference from Exhibit 4.2 to Pilgrim's Pride's
Current Report on Form 8-K (No. 001-09273) dated August 9, 2001).
4.8 Form of 9 5/8% Senior Note Due 2011 (incorporated by reference
from Exhibit 4.3 to Pilgrim's Pride's Current Report on Form 8-K
(No. 001-09273) dated August 9, 2001).
10.1 Pilgrim's Industries, Inc. Profit Sharing Retirement Plan,
restated as of July 1, 1987 (incorporated by reference from
Exhibit 10.1 of the Company's Form 8 filed on July 1, 1992).
10.2 Bonus Plan of the Company (incorporated by reference from Exhibit
10.2 to the Company's Registration Statement on Form S-1 (No. 33-
8805) effective November 14, 1986).
10.3 Employee Stock Investment Plan of the Company (incorporated by
reference from Exhibit 10.28 of the Company's Registration
Statement on Form S-1 (No. 33-21057) effective May 2, 1988).
10.4 Second Amended and Restated Loan and Security Agreement dated July
31, 1995, by and among the Company, the banks party thereto and
Creditanstalt-Bankverein, as agent (incorporated by reference from
Exhibit 10.38 of the Company's Annual Report on Form 10-K for the
fiscal year ended September 28, 1996).
10.5 Revolving Credit Loan Agreement dated March 27, 1995 by and among
the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the fiscal year ended September 28,
1996).
10.6 First Supplement to Revolving Credit Loan Agreement dated July 6,
1995 by and among the Company and Agricultural Production Credit
Association (incorporated by reference from Exhibit 10.40 of the
Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996).
10.7 Second Supplement to Revolving Credit Loan Agreement dated June
28, 1996 by and among the Company and Agricultural Production
Credit Association (incorporated by reference from Exhibit 10.44
of the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1996).
10.8 Third Supplement to Revolving Credit Loan Agreement dated August
22, 1996 by and among the Company and Agricultural Production
Credit Association (incorporated by reference from Exhibit 10.45
of the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1996).
10.9 Note Purchase Agreement dated April 14, 1997 by and between John
Hancock Mutual Life Insurance Company and Signature 1A (Cayman),
Ltd. And the Company (incorporated by reference from Exhibit 10.46
of the Company's Quarterly Report on Form 10-Q for the three
months ended March 29, 1997).
10.10 Aircraft Lease Extension Agreement between B.P. Leasing Co., (L.A.
Pilgrim, Individually) and Pilgrim's Pride Corporation (formerly
Pilgrim's Industries, Inc.) effective November 15, 1992
(incorporated by reference from Exhibit 10.48 of the Company's
Quarterly Report on Form 10-Q for the three months ended March 29,
1997).
10.11 Broiler Grower Contract dated May 6, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farm 30) (incorporated by
reference from Exhibit 10.49 of the Company's Quarterly Report on
Form 10-Q for the three months ended March 29, 1997).
10.12 Commercial Egg Grower Contract dated May 7, 1997 between Pilgrim's
Pride Corporation and Pilgrim Poultry G.P. (incorporated by
reference from Exhibit 10.50 of the Company's Quarterly Report on
Form 10-Q for the three months ended March 29, 1997).
10.13 Agreement dated October 15, 1996 between Pilgrim's Pride
Corporation and Pilgrim Poultry G.P. (incorporated by reference
from Exhibit 10.23 of the Company's Quarterly Report on Form 10-Q
for the three months ended January 2, 1999).
10.14 Heavy Breeder Contract dated May 7, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farms 44, 45 & 46)
(incorporated by reference from Exhibit 10.51 of the Company's
Quarterly Report on Form 10-Q for the three months ended March 29,
1997).
10.15 Broiler Grower Contract dated January 9, 1997 by and between
Pilgrim's Pride and O.B. Goolsby, Jr. (incorporated by reference
from Exhibit 10.25 of the Company's Registration Statement on Form
S-1 (No. 333-29163) effective June 27, 1997).
10.16 Broiler Grower Contract dated January 15, 1997 by and between
Pilgrim's Pride Corporation and B.J.M. Farms. (incorporated by
reference from Exhibit 10.26 of the Company's Registration
Statement on Form S-1 (No. 333-29163) effective June 27, 1997).
10.17 Broiler Grower Agreement dated January 29, 1997 by and between
Pilgrim's Pride Corporation and Clifford E. Butler (incorporated
by reference from Exhibit 10.27 of the Company's Registration
Statement on Form S-1 (No. 333-29163) effective June 27, 1997).
10.18 Second Amendment to Second Amended and Restated Loan and Security
Agreement dated September 18, 1997 by and among the Company, the
banks party thereto and Creditanstalt-Bankverein, as agent.
10.19 Revolving Credit Agreement dated March 2, 1998 by and between
Pilgrim's Pride de Mexico, S.A. de C.V., (the borrower); Avicola
Pilgrim's Pride de Mexico, S.A. de C.V. (the Mexican Guarantor),
Pilgrim's Pride Corporation (the U.S. Guarantor), and COAMERICA
Bank (the bank), (incorporated by reference from Exhibit 10.32 of
the Company's Quarterly report on form 10-Q for the three months
ended March 28, 1998.
10.20 Receivables Purchase Agreement between Pilgrim's Pride Funding
Corporation, as Seller, Pilgrim's Pride Corporation, as Servicer,
Pooled Accounts Receivable Capital Corporation, as Purchaser, and
Nesbitt Burns Securities Inc., as Agent (incorporated by reference
from Exhibit 10.33 of the Company's Quarterly report on form 10-Q
for the three months ended June 27, 1998).
10.21 Purchase and Contribution Agreement Dated as of June 26, 1998
between Pilgrim's Pride Funding Corporation and Pilgrim's Pride
Corporation (incorporated by reference from Exhibit 10.34 of the
Company's Quarterly report on form 10-Q for the three months ended
June 27, 1998).
10.22 Second Amendment to Security Agreement Re: Accounts Receivable,
Farm Products and Inventory between Pilgrim's Pride Corporation
and Harris Trust and Savings Bank (incorporated by reference from
Exhibit 10.35 of the Company's Quarterly report on form 10-Q for
the three months ended June 27, 1998).
10.23 Second Amended and Restated Secured Credit Agreement between
Pilgrim's Pride Corporation and Harris Trust and Savings Bank,
individually and as agent and the lenders from time to time
parties hereto as lenders, dated November 5, 1999.
10.24 Guaranty Fee Agreement between Pilgrim's Pride Corporation and
Pilgrim Interests, LTD., dated June 11, 1999.
10.25 Heavy Breeder Contract dated October 27, 1999 between Pilgrim's
Pride Corporation and David Van Hoose (Timberlake Farms).
10.26 Credit Agreement dated December 14, 1999 by and between Pilgrim's
Pride Corporation and Cobank, ACB, individually and as agent, and
the lenders from time to time parties thereto as lenders.
10.27 Revolving Credit Agreement, made as of September 7, 2001 by and
between Grupo Pilgrim's Pride Funding S. de R.L. de C.V., Comerica
Bank, and Comerica Bank Mexico, S.A., Institucion de Banca
Multiple.*
10.28 Third Amendment to Second Amended and Restated Secured Credit
Agreement dated as of November 5, 1999, as amended, between
Pilgrim's Pride Corporation and Harris Trust and Savings Bank,
individually and as agent and the lenders from time to time
parties thereto as lenders, dated as of September 26, 2001.*
12 Ratio of Earnings to Fixed Charges for the years ended September
29, 2001, September 30, 2000, October 2, 1999, September 26, 1998
and September 27, 1997.*
21 Subsidiaries of Registrant.*
23 Consent of Ernst & Young LLP.*
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on the
21th day of November 2001.
PILGRIM'S PRIDE CORPORATION
/s/ Richard A. Cogdill
By:
Richard A. Cogdill
Chief Financial Officer
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
________________________ Chairman of the Board 11/21/2001
Lonnie "Bo" Pilgrim
_______________________ Vice Chairman of the Board 11/21/2001
Clifford E. Butler
________________________ Chief Executive Officer 11/21/2001
David Van Hoose President
Chief Operating Officer
Director
(Principal Executive Officer)
_______________________ Executive Vice President 11/21/2001
Richard A. Cogdill Chief Financial Officer
Secretary and Treasurer
Director
(Principal Financial and Accounting
Officer)
SIGNATURE TITLE DATE
_______________________ Senior Vice President 11/21/2001
Lonnie Ken Pilgrim Director of Transportation
Director
_______________________ Director 11/21/2001
Charles L. Black
_______________________ Director 11/21/2001
S. Key Coker
______________________ Director 11/21/2001
Vance C. Miller
______________________ Director 11/21/2001
James J. Vetter, Jr.
_______________________ Director 11/21/2001
Donald L. Wass, Ph.D.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders, the Board of Directors and
Pilgrim's Pride Corporation
We have audited the accompanying consolidated balance sheets of
Pilgrim's Pride Corporation and subsidiaries as of September 29, 2001 and
September 30, 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended September 29, 2001. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pilgrim's Pride Corporation as of September 29, 2001 and September 30,
2000, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended September 29, 2001, in
conformance with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements, taken as a
whole, presents fairly in all material respects the information set forth
therein.
Dallas, Texas Ernst & Young LLP
October 29, 2001
{Consolidated Balance Sheets
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT SHARE AND PER SEPTEMBER 29, SEPTEMBER 30,
SHARE DATA) 2001 2000
Assets
Current Assets :
Cash and cash equivalents $ 20,916 $ 28,060
Trade accounts and other
receivables, less allowance
for doubtful accounts 95,022 50,286
Inventories 314,400 181,237
Other current assets 12,934 9,387
Total Current Assets 443,272 268,970
OTHER ASSETS 20,067 18,576
PROPERTY, PLANT AND EQUIPMENT:
Land 36,350 26,137
Buildings, machinery and equipment 929,922 565,034
Autos and trucks 53,264 48,187
Construction-in-progress 71,427 68,743
1,090,963 708,101
Less accumulated depreciation 338,607 290,227
752,356 417,874
$1,215,695 $705,420
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 151,265 $105,078
Accrued expenses 83,558 34,704
Current maturities of long-term debt 5,099 4,657
Total Current Liabilities 239,922 144,439
LONG-TERM DEBT, LESS CURRENT MATURITIES 467,242 165,037
DEFERRED INCOME TAXES 126,710 52,496
MINORITY INTEREST IN SUBSIDIARY 889 889
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 shares; none
issued -- --
Common stock - Class A, $.01 par value,
authorized 100,000,000 shares; and
13,794,529 shares issued and outstanding
in 2001 and 2000, respectively; 138 138
Common stock - Class B, $.01 par value,
authorized 60,000,000 shares; 27,589,250
issued and outstanding in 2001 and 2000 276 276
Additional paid-in capital 79,625 79,625
Retained earnings 302,758 264,088
Accumulated other comprehensive
income (loss) (297) --
Less treasury stock, 271,100 shares (1,568) (1,568)
Total Stockholders' Equity 380,932 342,559
$1,215,695 $705,420
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE YEARS ENDED SEPTEMBER 29, 2001
2001 2000 1999
NET SALES $2,214,712 $1,499,439 $1,357,403
COST AND EXPENSES:
Cost of sales 2,000,762 1,333,611 1,171,695
Selling, general and administrative 119,408 85,340 76,204
2,120,170 1,418,951 1,247,899
Operating Income 94,542 80,488 109,504
OTHER EXPENSES (INCOME):
Interest expense, net 30,775 17,779 17,666
Foreign exchange (gain) loss 122 (152) (50)
Miscellaneous, net 351 75 984
31,248 17,702 18,600
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE 63,294 62,786 90,904
INCOME TAX EXPENSE 21,263 10,442 25,651
INCOME BEFORE EXTRAORDINARY CHARGE 42,031 52,344 65,253
EXTRAORDINARY CHARGE, NET OF TAX 894 -- --
NET INCOME $41,137 $52,344 $65,253
INCOME PER COMMON SHARE BEFORE EXTRAORDINARY
CHARGE - BASIC AND DILUTED $ 1.02 $ 1.27 $ 1.58
EXTRAORDINARY CHARGE, NET OF TAX (.02) -- --
NET INCOME PER COMMON SHARE-BASIC
AND DILUTED $ 1.00 $ 1.27 $ 1.58
See Notes to Consolidated Financial Statements
{Consolidated Statements of Stockholders' Equity
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
SHARES OF TOTAL ADDITIONAL OTHER
COMMON STOCK PAR PAID-IN RETAINED COMPREHENSIVE TREASURY
CLASS A CLASS B VALUE CAPITAL EARNINGS LOSS STOCK TOTAL
Balance at September
26, 1998 -- 27,589,250 $276 $79,763 $150,832 $ -- $ -- $230,871
Dividend of Class A
Common Stock 13,794,529 -- 138 (138)
Net income for year 65,253 65,253
Cash dividends declared
($.045 per share) (1,865) (1,865)
Balance at October 2,
1999 13,794,529 27,589,250 414 79,625 214,220 294,259
Treasury stock
purchased (271,100) (1,568) (1,568)
Net income for year 52,344 52,344
Cash dividends declared
($.06 per share) (2,476) (2,476)
Balance at September 30,
2000 13,523,426 27,589,250 414 79,625 264,088 (1,568) 342,559
Net income for year 41,137 41,137
Other comprehensive income (loss):
Losses on commodity hedging (994) (994)
Hedging losses reclassified as earnings 697 697
Total comprehensive income 40,840
Cash dividends declared
($.06 per share) (2,467) (2,467)
Balance at September 29,
2001 13,523,429 27,589,250 $414 $79,625 $302,758 ($297) ($1,568)$380,932
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Pilgrim's Pride Corporation
(IN THOUSANDS) THREE YEARS ENDED SEPTEMBER 29, 2001
2001 2000 1999
Cash Flows From Operating Activities:
Net income $41,137 $52,344 $65,253
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 55,390 36,027 34,536
Loss on property disposals 301 1,093 2,668
Deferred income taxes 12,737 444 (5,595)
Extraordinary charge 1,434 -- --
Changes in operating assets and
liabilities:
Accounts and other receivables 10,445 34,082 (2,555)
Inventories (26,952) (13,202) (26,351)
Other current assets (4,494) 245 (474)
Accounts payable and accrued expenses (1,030) 19,982 14,195
Other (1,135) (212) (225)
Cash Provided by Operating Activities 87,833 130,803 81,452
INVESTING ACTIVITIES:
Acquisitions of property, plant
and equipment (112,632) (92,128) (69,649)
Business acquisition (239,539) -- --
Proceeds from property disposals 2,472 2,319 1,178
Other, net 571 (6,055) (2,822)
Cash Used in Investing Activities (349,128) (95,864) (71,293)
FINANCING ACTIVITIES:
Borrowing for acquisition 285,070 -- --
Repayment on WLR Foods debt (45,531) -- --
Proceeds from notes payable to banks 136,000 71,000 24,500
Repayments on notes payable to banks (136,000) (71,000) (24,500)
Proceeds from long-term debt 425,423 20,047 15,258
Payments on long-term debt (408,316) (38,622) (33,027)
Purchase of treasury stock -- (1,568) --
Cash dividends paid (2,467) (2,476) (1,865)
Cash Provided By (Used In)Financing
Activities 254,179 (22,619) (19,634)
Effect of exchange rate changes on
cash and cash equivalents (28) 37 53
Increase (decrease) in cash and cash
equivalents (7,144) 12,357 (9,422)
Cash and cash equivalents at beginning
of year 28,060 15,703 25,125
Cash and cash equivalents at end of
year $20,916 $28,060 $15,703
SUPPLEMENTAL DISCLOSURE INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $26,948 $17,178 $18,130
Income taxes $ 7,255 $13,258 $31,835
See Notes to Consolidated Financial Statements
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PILGRIM'S PRIDE CORPORATION (REFERRED TO HEREIN AS "THE COMPANY", "WE",
"US", "OUR", OR SIMILAR TERMS) IS THE SECOND LARGEST PRODUCER OF POULTRY IN
BOTH THE UNITED STATES AND MEXICO. IN THE UNITED STATES, WE PRODUCE BOTH
PREPARED AND FRESH CHICKEN AND TURKEY, WHILE IN MEXICO, WE PRODUCE
EXCLUSIVELY FRESH CHICKEN. THROUGH VERTICAL INTEGRATION, WE CONTROL THE
BREEDING, HATCHING AND GROWING OF CHICKENS AND TURKEYS AND THE PROCESSING
AND PREPARATION, PACKAGING AND SALE OF OUR PRODUCT LINES.
OUR PREPARED CHICKEN PRODUCTS INCLUDE PORTION-CONTROLLED BREAST FILLETS,
TENDERLOINS AND STRIPS, DELICATESSEN PRODUCTS, FRANKFURTERS, SALADS, FORMED
NUGGETS AND PATTIES AND BONE-IN CHICKEN PARTS. THESE PRODUCTS ARE SOLD
EITHER REFRIGERATED OR FROZEN AND MAY BE FULLY COOKED, PARTIALLY COOKED OR
RAW. IN ADDITION, THESE PRODUCTS ARE BREADED OR NON-BREADED AND EITHER
PRE-MARINATED OR NON-MARINATED.
THE COMPANY ALSO SELLS FRESH CHICKEN PRODUCTS TO THE FOODSERVICE AND RETAIL
MARKETS. OUR FRESH CHICKEN PRODUCTS CONSIST OF REFRIGERATED (NON-FROZEN)
WHOLE OR CUT-UP CHICKEN, EITHER PRE-MARINATED OR NON-MARINATED, AND PRE-
PACKAGED CHICKEN, WHICH INCLUDES VARIOUS COMBINATIONS OF FRESHLY
REFRIGERATED, WHOLE CHICKENS AND CHICKEN PARTS.
On January 27, 2001, we acquired WLR Foods, Inc. (formerly Nasdaq: WLRF)
for $239.5 million and the assumption of $45.5 million of indebtedness. The
purchase price and refinancing were provided by borrowings on the Company's
existing secured term borrowing facility (see Note C). WLR operations have
been included since the acquisition on January 27, 2001. The acquisition
is being accounted for under the purchase method of accounting and the
purchase price, which is still preliminary, has been allocated based on the
estimated fair value of assets and liabilities. THE WLR FOODS ACQUISITION
PROVIDED US WITH CHICKEN AND TURKEY PROCESSING FACILITIES IN THE EASTERN
UNITED STATES.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information has been presented as if the
acquisition of WLR Foods, Inc. had occurred as of the beginning of each
period presented. In addition, certain reclassifications have been made to
the WLR historical financial statements to conform to the presentation used
by the Company.
IN THOUSANDS, EXCEPT PER SHARE DATA YEAR ENDED
2001 2000
Net Sales $2,479,259 $2,311,666
Operating Income 99,128 86,017
Interest Expense, Net 39,790 44,820
Income Before Taxes 58,607 42,209
Income before Extraordinary Charge 39,171 39,792
Net Income $ 38,277 $ 39,792
Income per Common Share before
Extraoridnary Charge - Basic and Diluted $ 0.95 $ 0.97
Extraordinary Charge, Net of Tax (0.02) --
Net Income per Common Share $ 0.93 $ 0.97
Other Information:
Depreciation and Amortization $ 64,565 $ 63,892
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Pilgrim's
Pride Corporation and its wholly and majority owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
The Company reports on the basis of a 52/53-week fiscal year, which ends on
the Saturday closest to September 30. As a result, fiscal year 1999 had 53
weeks, while fiscal years 2001 and 2000 each had 52 weeks.
The financial statements of the Company's Mexico subsidiaries are
remeasured as if the U.S. dollar were the functional currency.
Accordingly, assets and liabilities of the Mexico subsidiaries are
translated at end-of-period exchange rates, except for non-monetary assets,
which are translated at equivalent dollar costs at dates of acquisition
using historical rates. Operations are translated at average exchange
rates in effect during the period. Foreign exchange losses are separately
stated as a component of "Other Expenses (Income)" in the Consolidated
Statement of Income.
REVENUE RECOGNITION
The Company generally recognizes revenue when the product is shipped to the
customer and shipping and handling expenses are included in cost of goods
sold.
CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Live poultry inventories are stated at the lower of cost or market and
breeder hens at the lower of cost, less accumulated amortization, or
market. The costs associated with breeder hens are accumulated up to the
production stage and amortized over the productive lives using the unit-of-
production method. Finished poultry products, feed, eggs and other
inventories are stated at the lower of cost (first-in, first-out method) or
market. Occasionally, the Company hedges a portion of its purchases of
major feed ingredients using futures contracts to minimize the risk of
adverse price fluctuations. The changes in market value of such agreements
have a high correlation to the price changes of the feed ingredients being
hedged. Gains and losses on the hedge transactions are deferred and
recognized as a component of cost of sales when products are sold. Gains
and losses on the futures contracts would be recognized immediately were
the changes in the market value of the agreements cease to have a high
correlation to the price changes of the feed ingredients being hedged.
Statement of Accounting Standards No. 133; ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), was adopted on October 1,
2000. No transitional impact resulted from the adoption of SFAS 133. The
Company recognizes all derivatives on the balance sheet at fair value.
Derivatives that are not hedges are adjusted to fair value through income.
If the derivative is a hedge, changes in the fair value of derivatives are
offset against the change in fair value of the hedged 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 derivative's change in fair value is immediately recognized in
earnings. No significant ineffectiveness was recognized in 2001. The
Company evaluates the effectiveness of the risk reduction and correlation
criteria based on forecasted future purchases (primarily corn and soybean)
and continues to evaluate the effectiveness of the hedge until the
transaction is closed.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of these
assets. Depreciation expense was $54.4 million, $34.7 million and $33.4
million in 2001, 2000 and 1999, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of September 29, 2001, accumulated other comprehensive income consists
of mark-to-market adjustments on open commodity future contracts.
Comprehensive income for the year ended September 29, 2001 was net of the
related tax benefit of $179,000.
NET INCOME PER COMMON SHARE
Net income per share is based on the weighted average number of shares of
common stock outstanding during the year. The weighted average number of
shares outstanding (basic and diluted) and per-share amounts included
herein were 41,112,679 in 2001, 41,289,142 in 2000 and 41,383,779 in 1999
after adjustment for the common stock dividend referred to in Note F.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"
(SFAS 142). SFAS 142 is effective for fiscal years beginning after
December 15, 2001 and requires that goodwill and certain intangible assets
will no longer be amortized upon adoption. SFAS 142 also establishes new
standards for evaluating impairment of goodwill and certain intangible
assets. The adoption of this statement is not expected to have a material
effect on the Company.
NOTE B - INVENTORIES
Inventories consist of the following:
(IN THOUSANDS) 2001 2000
Chicken:
Live chicken and hens $97,073 $72,438
Feed, eggs and other 77,970 54,627
Finished chicken products 70,493 54,172
245,536 181,237
Turkey:
Live turkey and hens 30,694 --
Feed, eggs and other 3,906 --
Finished turkey products 34,264 --
68,864 --
Total Inventory $314,400 $181,237
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
At September 29, 2001, the Company maintained $130.0 million in revolving
credit facilities and $400.0 million in secured revolving/term borrowing
facilities. The $400.0 million revolving/term borrowing facilities provide
for $285.0 million and $115.0 million of 10 year and 7 year commitments,
respectively. Borrowings under these facilities are split pro rata between
the 10 year and 7 year maturities as they occur. The credit facilities
provide for interest at rates ranging from LIBOR plus five-eighths percent
to LIBOR plus two and three-quarters percent, depending upon the Company's
total debt to capitalization ratio. Interest rates on debt outstanding
under these facilities at September 29, 2001 ranged from LIBOR plus one and
one-quarter percent to LIBOR plus two and one-quarter percent. These
facilities are secured by inventory and fixed assets or are unsecured. At
September 29, 2001, $86.0 million was available under the revolving credit
facilities and $225.0 million was available under the term borrowing
facilities. Annual maturities of long-term debt for the five years
subsequent to September 29, 2001 are: 2002 -- $5.1 million; 2003 -- $7.1
million; 2004 -- $16.2 million; 2005 -- $15.6 million; and 2006 -- $55.0
million.
On June 29, 1999, the Camp County Industrial Development Corporation issued
$25.0 million of variable-rate environmental facilities revenue bonds
supported by letters of credit obtained by the Company. The Company may
borrow from these proceeds over the construction period of its new sewage
and solid waste disposal facilities at a poultry by-products plant to be
built in Camp County, Texas. The Company is not required to borrow the
full amount of the proceeds from the bonds. All amounts borrowed from
these funds will be due in 2029. The amounts the Company borrows will be
reflected as debt when received from the Camp County Industrial Development
Corporation. The interest rates on amounts borrowed will closely follow
the tax-exempt commercial paper rates. Presently, there are no borrowings
outstanding under these bonds.
On August 9, 2001, the Company issued $200.0 million in senior unsecured
notes with an interest rate of 9 5/8% maturing on September 15, 2011. The
proceeds from note offering were used to redeem the remaining $90.8 million
outstanding of our 10 7/8% senior subordinated notes due 2003. The balance
of the proceeds was used to reduce outstanding under our $400.0 million
revolving/term borrowing facility. As a result of the Company's decision
to retire all of the 10 7/8% Senior Subordinated Notes due 2003, the
Company has recorded an extraordinary loss of $894,000, net of a tax
benefit of $539,000.
On September 7, 2001, we amended and restated our revolving credit
agreement for Mexico, increasing the commitment from $20.0 million to $30.0
million. The entire amount matures in three years. The facility provides
for interest rates ranging from LIBOR plus one and one-quarter to LIBOR
plus one and one-half percent. At September 29, 2001, $30.0 million was
outstanding, the proceeds of which were used to reduce existing credit
facilities.
The Company is required, by certain provisions of its debt agreements, to
maintain levels of working capital and net worth, to limit dividends to a
maximum of $3.4 million per year, and to maintain various fixed charge,
leverage, current and debt-to-equity ratios. Substantially all of the
Company's domestic property, plant and equipment is pledged as collateral
on its long-term debt and credit facilities. The Mexico debt is secured by
accounts receivable, inventories and certain fixed assets.
Total interest was $38.9 million, $21.7 million and $20.8 million in 2001,
2000 and 1999, respectively. Interest related to new construction
capitalized in 2001, 2000 and 1999 was $7.2 million, $3.3 million and $2.0
million, respectively.
LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
(IN THOUSANDS) Maturity 2001 2000
Senior unsecured notes, interest at 9 5/8% 2011 $200,000 $ -
Revolving term/credit facility - 10 year
tranche at LIBOR plus 2 .25% 2009 124,688 5,600
Notes payable to an insurance company
at 7.07% - 7.21% 2006 65,474 70,121
Revolving term/credit facility - 7 year
tranche at LIBOR plus 2.0% 2006 50,313 2,400
Notes payable to a bank at 2004 30,000 --
LIBOR plus 1.25 to 1.50
Other notes payable Various 1,866 1,078
Senior subordinated notes,
interest at 10 7/8% 2003 -- 90,495
472,341 169,694
Less current maturities 5,099 4,657
$467,242 $165,037
The fair value of long-term debt, at September 29, 2001 and September 30,
2000 based upon quoted market prices for the same or similar issues where
available or by using discounted cash flow analysis, was approximately
$469.6 million and $166.2 million, respectively.
NOTE D - INCOME TAXES
Income before income taxes after allocation of certain expenses to foreign
operations for 2001, 2000 and 1999 was $57.8 million, $32.7 million and
$76.6 million, respectively, for U.S. operations and $5.5 million, $30.0
million and $14.3 million, respectively, for foreign operations. The
provisions for income taxes are based on pre-tax financial statement
income.
The components of income tax expense (benefit) are set forth below:
(IN THOUSANDS) 2001 2000 1999
Current:
Federal $6,045 $ 9,239 $28,449
Foreign 1,594 138 318
State and other 348 621 2,480
7,987 9,998 31,247
Deferred 12,737 444 (5,596)
$20,724 $10,442 $25,651
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
The following is a reconciliation between the statutory U.S. federal
income tax rate and the Company's effective income tax rate:
(IN THOUSANDS) 2001 2000 1999
Federal income tax rate 35.0% 35.0% 35.0%
State tax rate, net 2.4 1.4 1.3
Difference in U.S. statutory tax rate and
Mexico's effective tax rate (3.9) (19.8) (8.1)
33.5% 16.6% 28.2%
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
(IN THOUSANDS) 2001 2000
Deferred tax liabilities:
Tax over book depreciation $97,667 $24,390
Inventory valuation 27,926 --
Prior use of cash accounting 26,625 27,470
Other 2,419 2,849
Total deferred tax liabilities 154,637 54,709
Deferred tax assets:
Expenses deductible in different years 23,027 8,469
Total deferred tax asset 23,027 8,469
Net deferred tax liabilities $131,610 $46,240
The Company has not provided any U.S. deferred income taxes on the
undistributed earnings of its Mexico subsidiaries based upon its
determination that such earnings will be indefinitely reinvested. As of
September 29, 2001, the cumulative undistributed earnings of these
subsidiaries were approximately $164.4 million. If such earnings were not
considered indefinitely reinvested, deferred U.S. and foreign income taxes
would have been provided, after consideration of estimated foreign tax
credits. However, determination of the amount of deferred federal and
foreign income taxes is not practical.
NOTE E - ACCOUNTS RECEIVABLE
The Company does not believe it has significant concentrations of credit
risk in its accounts receivable, which are generally unsecured. Credit
evaluations are performed on all significant customers and updated as
circumstances dictate. Allowances for doubtful accounts were $3.9 million
and $4.1 million at September 29, 2001 and September 30, 2000,
respectively.
On June 26, 1998, the Company entered into an Asset Sale Agreement to sell
up to $60.0 million of accounts receivable. In connection with the Asset
Sale Agreement, the Company sells, on a revolving basis, certain of its
trade receivables (the "Pooled Receivables") to a special purpose
corporation wholly owned by the Company, which in turn sells a percentage
ownership interest to third parties. At September 29, 2001, an interest in
these Pooled Receivables of $58.5 million had been sold to third parties
and is reflected as a reduction to accounts receivable. These transactions
have been recorded as sales in accordance with FASB Statement No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. The gross proceeds resulting from the sale
are included in cash flows from operating activities in the Consolidated
Statements of Cash Flows. Losses on these sales were immaterial.
NOTE F - COMMON STOCK
The Company has two series of authorized common stock, Class A common stock
and Class B common stock. The shares have substantially the same rights,
powers and limitations, except that each share of Class B common stock
entitles the holder thereof to 20 votes per share, except as otherwise
provided by law, on any matter submitted for a stockholder vote, while each
share of Class A common stock entitles the holder thereof to one vote per
share on any such matter.
On July 2, 1999, the Company's Board of Directors declared a stock dividend
of the Company's Class A common stock. Stockholders of record on July 20,
1999 received one share of the Company's Class A common stock for every two
shares of the Company's Class B common stock held as of that date. The
additional shares were issued on July 30, 1999. Per share and weighted
average shares outstanding amounts for periods prior to July 30, 1999 have
been restated to give effect to the stock dividend.
During 2000, the Company repurchased 271,100 shares of Class A common stock
at a total cost of $1.6 million.
NOTE G - SAVINGS PLAN
The Company maintains a Section 401(k) Salary Deferral Plan (the
"Plan"). Under the Plan, eligible U.S. employees may voluntarily
contribute a percentage of their compensation. The Plan provides for a
contribution of up to four percent of compensation subject to an overall
Company contribution limit of five percent of the U.S. operation's income
before taxes. Under this plan, the Company's expenses were $3.7 million,
$2.3 million and $4.6 million in 2001, 2000 and 1999, respectively.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
NOTE H - RELATED PARTY TRANSACTIONS
The major stockholder of the Company owns an egg laying and a chicken
growing operation. Transactions with related entities are summarized as
follows:
(IN THOUSANDS) 2001 2000 1999
Contract egg grower fees to
major stockholder $ 1,537 $ 5,100 $ 4,501
Lease payment to major
stockholder 564 -- --
Chick, feed and other
sales to major stockholder 38,771 31,879 25,076
Live chicken purchases from
major stockholder 39,784 31,979 26,899
On December 29, 2000 the Company entered into an agreement to lease a
commercial egg property and assume all of the ongoing costs of the
operation from the Company's major stockholder. The Company had previously
purchased the eggs produced from this operation pursuant to a contract
grower arrangement. The lease term runs for ten years with a monthly lease
payment of $62,500. The Company has an option to extend the lease for an
additional five years, with an option at the end of the lease to purchase
the property at fair market value as determined by an independent
appraisal.
The Company leases an airplane from its major stockholder under an
operating lease agreement. The terms of the lease agreement require
monthly payments of $33,000 plus operating expenses. Lease expense was
$396,000 for each of the years 2001, 2000 and 1999. Operating expenses
were $234,066, $127,680, $135,786 in 2001, 2000 and 1999, respectively.
The Company had accounts receivable of approximately $0.1 million at
September 30, 2000, from related parties, including its major stockholder.
On February 14, 2000, the Company purchased substantially all of the assets
of a chicken litter disposal and fertilizer business operated by the
Company's major stockholder's son for approximately $8.5 million.
NOTE I - COMMITMENTS
The Consolidated Statements of Income include rental expense for operating
leases of approximately $28.7 million, $22.4 million and $17.3 million in
2001, 2000 and 1999, respectively. The Company's future minimum lease
commitments under non-cancelable operating leases are as follows: 2002 --
$22.1 million; 2003 -- $19.7 million; 2004 -- $16.8 million; 2005 -- $14.2
million; 2006 -- $11.1 million and thereafter $15.4 million.
At September 29, 2001, the Company had $14.0 million in letters of credit
outstanding relating to normal business transactions.
NOTE J - CONTINGENCIES
Since March 23, 1999, the Company has been a plaintiff in two antitrust
lawsuits in U.S. District Court in Washington, D.C. alleging a world-wide
conspiracy to control production capacity and raise prices of common
vitamins such as A, B-4, C and E. On November 3, 1999, a settlement, which
was entered into as part of a class action lawsuit to which the Company was
a member, was agreed to among the defendants and the class, which would
provide for a recovery of between 18-20% of vitamins purchased from the
defendants from 1990 through 1998. On March 28, 2000, the judge presiding
over the case accepted the negotiated settlement between the parties;
however, appeals from various sources are in process. The Company has
filed documentation showing that vitamin purchases made during the recovery
period totaled approximately $14.9 million. During fiscal 2001, the
Company received $3.3 million in final settlement of its claim.
In January of 1998, seventeen of our current and/or former employees filed
the case of "Octavius Anderson, et al. v. Pilgrim's Pride Corporation" in
the United States District Court for the Eastern District of Texas, Lufkin
Division claiming Pilgrim's Pride violated requirements of the Fair Labor
Standards Act. The suit alleged Pilgrim's Pride failed to pay employees
for all hours worked. The suit generally alleged that (1) employees should
be paid for time spent to put on, take off, and clean certain personal gear
at the beginning and end of their shifts and breaks and (2) the use of a
master time card or production "line" time fails to pay employees for all
time actually worked. Plaintiffs sought to recover unpaid wages plus
liquidated damages and legal fees. Approximately 1,700 consents to join as
plaintiffs were filed with the court by current and/or former employees.
During the week of March 5, 2001, the case was tried in the Federal Court
of the Eastern District of Texas, Lufkin, Texas. The Company prevailed at
the trial with a judgment issued by the judge, which found no evidence
presented to support the plaintiffs' allegations. The plaintiffs have
filed an appeal in the Fifth Circuit Court of Appeals to reverse the
judge's decision. The plaintiff's brief was submitted to the court on
November 5, 2001. Pilgrim's Pride's response to the plaintiff's brief to
the Fifth Circuit Court of Appeals is due on December 5, 2001. Neither the
likelihood of an unfavorable outcome nor the amount of ultimate liability,
if any, with respect to this case can be determined at this time. The
Company does not expect this matter, individually or collectively, to have
a material impact on our financial position, operations or liquidity.
Substantially similar suits have been filed against four other integrated
poultry companies, including WLR Foods, one of which resulted in a federal
judge dismissing most of the plaintiffs' claims in that action with facts
similar to our case.
In August of 2000, four of our current and/or former employees filed the
case of "Betty Kennell, et al. v. Wampler Foods, Inc." in the United States
District Court for the Northern District of West Virginia, claiming we
violated requirements of the Fair Labor Standards Act. The suit generally
makes the same allegations as Anderson v. Pilgrim's Pride discussed above.
Plaintiffs seek to recover unpaid wages plus liquidated damages and legal
fees. Approximately 150 consents to join as plaintiffs were filed with the
court by current and/or former employees. No trial date has been set. To
date, only limited discovery has been performed. Neither the likelihood of
an unfavorable outcome nor the amount of ultimate liability, if any, with
respect to this case can be determined at this time. We do not expect this
matter, individually or collectively, to have a material impact on our
financial position, operations or liquidity.
The Company is subject to various other legal proceedings and claims, which
arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not materially affect the financial position or results of operations
of the Company.
NOTE K - FINANCIAL INSTRUMENTS
The Company is a purchaser of certain commodities, primarily corn and
soybeans. The Company periodically uses commodity futures and options for
hedging purposes to reduce the effect of changing commodity prices and as a
mechanism to procure the grains. The contracts that effectively meet risk
reductions and correlation criteria are recorded using hedge accounting.
Gains and losses on closed hedge transactions are recorded as a component
of the underlying inventory purchase.
At September 29, 2001, (there were no outstanding contracts at September
30, 2000), the Company held the following commodity contracts consisting of
delivery contracts settling between October 2001 and July 2002. The
following table provides information about the Company's financial
instruments that is sensitive to changes in commodity prices:
Dollars in thousands, except per unit contract/strike prices
Notional Weighted Average
Units Amount Contract/Strike Price Fair Value
Hedging Position:
Long positions
in corn Bushels 14,860 $2.22 ($476)
NOTE L - BUSINESS SEGMENTS
Since the acquisition of WLR Foods on January 27, 2001, the Company
operates in two reportable business segments as (1) a producer of chicken
and other products and (2) a producer of turkey products.
The Company's chicken and other products segment primarily includes sales
of chicken products the Company produces and purchases for resale in the
United States and Mexico, and also includes table eggs and feed. The
Company's chicken and other products segment conducts separate operations
in the United States and Mexico and is reported as two separate
geographical areas. The Company's turkey segment includes sales of turkey
products produced in our turkey operation recently acquired from WLR Foods,
whose operations are exclusively in the United States.
Inter-area sales and inter-segment sales, which are not material, are
accounted for at prices comparable to normal trade customer sales. Total
assets by segment and geographic area are those assets which are used in
the Company's operations in each segment or area. Corporate assets and
expenses are included with chicken and other products.
The following table presents certain information regarding our segments:
FISCAL YEAR ENDED
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2,
2001(A) 2000 1999
(52 WEEKS) (52 WEEKS) (53 WEEKS)
(IN THOUSANDS)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $1,652,199 $1,192,077 $1,102,903
Mexico 323,678 307,362 254,500
Sub-total 1,975,877 1,499,439 1,357,403
Turkey 238,835 -- --
Total $2,214,712 $1,499,439 $1,357,403
OPERATING INCOME:
Chicken and Other Products:
United States $ 78,096 $ 45,928 $ 88,177
Mexico 12,157 34,560 21,327
Sub-total 90,253 80,488 109,504
Turkey 4,289 -- --
Total $ 94,542 $ 80,488 $ 109,504
Depreciation and Amortization(b)
Chicken and Other Products:
United States $ 38,155 $ 24,444 $ 23,185
Mexico 11,962 11,583 11,351
Sub-total 50,117 36,027 34,536
Turkey 5,273 -- --
Total $ 55,390 $ 36,027 $ 34,536
TOTAL ASSETS:
Chicken and Other Products:
United States $ 764,073 $ 496,173
Mexico 247,681 209,247
Sub-total 1,011,754 705,420
Turkey 203,941 --
Total $1,215,695 $ 705,420
CAPITAL EXPENDITURES: (A)
Chicken and Other Products
United States $ 80,173 $ 69,712
Mexico 29,425 22,417
Sub-total 109,598 92,129
Turkey 3,034 --
Total $ 112,632 $ 92,129
(A) EXCLUDES BUSINESS ACQUISITION COST OF $239,539, INCURRED IN CONNECTION
WITH THE ACQUISITION OF WLR FOODS ON JANUARY 27, 2001.
(B) INCLUDES AMORTIZATION OF CAPITALIZED FINANCING COSTS OF APPROXIMATELY
$0.9 MILLION, $1.2 MILLION, AND $1.1 MILLION IN FISCAL YEAR 2001, 2000
AND 1999, RESPECTIVELY.
AS OF SEPTEMBER 29, 2001, THE COMPANY HAD NET ASSETS IN MEXICO OF $199.0
MILLION. THERE WERE NO CUSTOMERS REPRESENTING 10% OR MORE OF REVENUE IN
FISCAL 2001. DURING 2000 AND 1999, REVENUE FROM ONE CUSTOMER REPRESENTED
13.5% AND 13.9%, RESPECTIVELY, OF CONSOLIDATED NET SALES.
NOTE M - QUARTERLY RESULTS
Quarterly Results (Unaudited)
(IN THOUSANDS, EXCEPT PERSHARE DATA) YEAR ENDED SEPTEMBER 29, 2001
First Second Third Fourth Fiscal
Quarter Quarter(a) Quarter Quarter Year
Net sales $386,032 $541,593 $645,836 $641,251 $2,214,712
Gross profit 47,166 29,216 75,625 61,943 213,950
Operating income
(loss) 23,211 (5,272) 45,486 31,117 94,542
Income (loss)before
extraordinary
charge 12,737 (9,802) 25,267 13,829 42,031
Extraordinary charge,
net of tax -- -- -- 894 894
Net income (loss) 12,737 (9,802) 25,267 12,934 41,137
Per Share:
Net income (loss) .31 (.24) .61 .32 1.00
Cash dividends .015 .015 .015 .015 .06
(IN THOUSANDS,EXCEPT PER SHARE DATA)YEAR ENDED SEPTEMBER 30, 2000
First Second Third Fourth Fiscal
Quarter Quarter(b) Quarter Quarter Year
Net sales $354,825 $373,260 $391,979 $379,375 $1,499,439
Gross profit 45,477 34,029 46,665 39,657 165,828
Operating income 25,222 13,282 26,349 15,635 80,488
Net income 14,858 9,023 17,144 11,319 52,344
Per Share:
Net income .36 .22 .41 .28 1.27
Cash dividends .015 .015 .015 .015 .06
(a) The Company acquired WLR Foods on January 27, 2001 for $239.5 million
and the assumption of $45.5 million of indebtedness. The acquisition
has been accounted for as a purchase, and the results of operations
for this acquisition have been included in our
consolidated results of operations since the acquisition date.
(b) The second quarter of 2000 includes a $5.8 million write-off of
accounts receivable from AmeriServe, which filed bankruptcy on
January 31, 2000.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
Additions Deductions Balance at
Balance at Charged Charged to Describe end of
Beginning to Costs Other Accounts- Period
Description and Expenses Describe
YEAR ENDED SEPTEMBER 29, 2001:
RESERVES AND ALLOWANCES DEDUCTED
FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $4,086,000 $1,132,000 $-- $1,257,000(1)$3,961,000
YEAR ENDED SEPTEMBER 30, 2000:
RESERVES AND ALLOWANCES DEDUCTED
FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $4,703,000 $(611,000) $-- $6,000(1)$4,086,000
YEAR ENDED OCTOBER 2, 1999:
RESERVES AND ALLOWANCES DEDUCTED
FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $3,694,000 $1,122,000 $-- $113,000(1)$4,703,000
(1) UNCOLLECTABLE ACCOUNTS WRITTEN OFF, NET OF RECOVERIES.
EXHIBIT 12
PILGRIM'S PRIDE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 26, SEPTEMBER 27,
2001 2000 1999 1998 1997
(AMOUNTS IN THOUSANDS, EXCEPT RATIO)
EARNINGS:
Income before income taxes
and extraordinary
charge $63,294 $62,786 $90,904 $56,522 $43,824
Add: Total fixed charges
(see below) 48,406 29,168 26,706 27,987 27,647
Less: Interest
Capitalized 7,153 3,313 2,032 1,675 502
Total Earnings $104,547 $88,641 $115,578 $82,834 $70,969
FIXED CHARGES:
Interest (1) $38,852 $21,712 $ 20,889 $23,239 $23,889
Portion of rental expense
representative of the
interest
factor(2) 9,554 7,456 5,817 4,748 3,758
Total fixed
charges $48,406 $29,168 $ 26,706 $27,987 $27,647
Ratio of earnings
to fixed charges 2.16 3.04 4.33 2.96 2.57
(1) Interest includes amortization of capitalized financing fees.
(2) One-third of rental expenses is assumed to be representative of the
interest factor.
EXHIBIT 22- SUBSIDIARIES OF REGISTRANT
1. AVICOLA PILGRIM'S PRIDE DE MEXICO S.A. DE C.V.
2. COMPANIA INCUBADORA HIDALGO S.A. DE C.V.
3. INMOBILIARIA AVICOLA PILGRIM'S PRIDE, S. DE R.L.
4. PILGRIM'S PRIDE S.A. DE C.V.
5. GALLINA PESADA S.A. DE C.V.
6. PILGRIM'S PRIDE FUNDING CORPORATION
7. PILGRIM'S PRIDE INTERNATIONAL INC.
8. PPC OF DELAWARE BUSINESS TRUST
9. PPC MARKETING, LTD.
10. PILGRIM'S PRIDE AFFORDABLE HOUSING CORPORATION
11. GRUPO PILGRIM'S PRIDE FUNDING HOLDINGS S. DE R.L. DE C.V.
12. GRUPO PILGRIM'S PRIDE FUNDING S. DE R.L. DE C.V.
13. ROCKINGHAM POULTRY, INC.
14. ROCKINGHAM POULTRY, INC. (FOREIGN SALES CORP.)
15. VALLEY RAIL SERVICE, INC.
16. WAMPLER SUPPLY COMPANY, INC.
17. PILGRIM'S PRIDE OF NEVADA, INC.
18. PILGRIM'S PRIDE DUTCH FUNDING B.V.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 3-12043 and Form S-3 No. 333-84861) of Pilgrim's Pride
Corporation, and in the related Prospectuses, of our report dated October
29, 2001, with respect to the consolidated financial statements and
schedule of Pilgrim's Pride Corporation included in this Annual Report
(Form 10-K) for the year ended September 29, 2001.
Dallas, Texas ERNST & YOUNG LLP
November 14, 2001
{\rtf1\ansi\ansicpg1252\deff0{\fonttbl{\f0\fnil\fcharset0 Courier New;}}
\viewkind4\uc1\pard\lang1033\f0\fs20\par
\par
PILGRIM'S PRIDE CORPORATION\par
\par
THIRD AMENDMENT TO SECOND AMENDED AND RESTATED SECURED CREDIT AGREEMENT\par
\par
\par
\par
Harris Trust and Savings Bank\par
Chicago, Illinois\par
\par
The Lenders From Time to Time Parties\par
to the Credit Agreement Described Below\par
\par
Ladies and Gentlemen:\par
\par
Reference is hereby made to that certain Second Amended and Restated\par
Secured Credit Agreement dated as of November 5, 1999, as amended (the\par
"CREDIT AGREEMENT"), among the undersigned, Pilgrim's Pride Corporation, a\par
Delaware corporation (the "COMPANY"), you (the "BANKS") and Harris Trust\par
and Savings Bank, as agent for the Banks (the "AGENT"). All defined terms\par
used herein shall have the same meanings as in the Credit Agreement unless\par
otherwise defined herein.\par
\par
The Company, the Agent and the Banks now wish to amend the Credit\par
Agreement to permit optional prepayments of Eurodollar Loans and to amend\par
certain other covenants to the Credit Agreement, all on the terms and\par
conditions and in the manner set forth in this Amendment.\par
\par
1. AMENDMENTS.\par
\par
Upon satisfaction of all of the conditions precedent set forth in\par
Section 2 hereof, the Credit Agreement shall be amended as follows:\par
\par
1.1. Section 3.3 of the Credit Agreement shall be amended to read as\par
follows:\par
\par
"SECTION 3.3. OPTIONAL PREPAYMENTS (a) DOMESTIC RATE LOANS.\par
The Company shall have the privilege of prepaying without premium or\par
penalty and in whole or in part (but if in part, then in a minimum\par
principal amount of $2,500,000 or such greater amount which is an\par
integral multiple of $100,000) any Domestic Rate Loan at any time upon\par
prior telex or telephonic notice to the Agent on or before 12:00 Noon\par
on the same Business Day.\par
\par
(b) FIXED RATE LOANS. The Company may prepay any borrowing of\par
Fixed Rate Loans without premium or penalty, upon telephonic notice\par
(which shall be promptly confirmed in writing by facsimile\par
communication, telex or telegraph) by no later than 11:00 a.m.\par
(Chicago time) on the third Business Day prior to the date of such\par
prepayment from the Company to the Agent, such prepayment to be made\par
by the payment of the principal amount to be prepaid and accrued\par
interest thereon and any compensation required by Section 9.4 hereof,\par
if applicable; PROVIDED, HOWEVER, that any such prepayment shall be in\par
a principal amount of no less than $3,000,000 or such greater amount\par
which is an integral multiple of $1,000,000, and after giving effect\par
to any such prepayment the outstanding principal amount of any such\par
borrowing of Eurodollar Loans or CD Rate Loans prepaid in part shall\par
not be less than $3,000,000 or such greater amount which is an\par
integral multiple of $1,000,000.\par
\par
(c) Any amount prepaid under the Revolving Credit may, subject to\par
the terms and conditions of this Agreement, be borrowed, repaid and\par
borrowed again."\par
\par
1.2. Section 7.29 of the Credit Agreement shall be amended to read as\par
follows:\par
\par
"SECTION 7.29. NEW SUBSIDIARIES. The Company will not, directly\par
or indirectly, create or acquire in any Fiscal Year any Subsidiary\par
unless (a) after giving effect to any such creation or acquisition,\par
the total assets (determined in accordance with generally accepted\par
accounting principles, consistently applied) of all such Subsidiaries\par
would not exceed 5% of the Total Assets of the Company and its\par
Subsidiaries, and (b) all Inventory of such Subsidiaries (other than\par
any such Subsidiaries that are organized under the laws of any\par
jurisdiction other than the United States of America, any State, the\par
District of Columbia or Puerto Rico) are pledged to the Agent for the\par
benefit of the Banks pursuant to a security agreement substantially\par
identical to the Security Agreement."\par
\par
1.3. The Required Banks hereby agree that the Company may form a\par
wholly-owned Subsidiary under the laws of the State of Nevada ("NEVADA\par
CO.") without granting the Agent a security interest in its inventory as\par
required by Section 7.29(b) of the Credit Agreement, PROVIDED THAT Nevada\par
Co. shall own no Inventory unless it first complies with Section 7.29(b).\par
\par
1.4. The Required Banks hereby waive the requirements of Section 3(b)\par
of the Security Agreement with respect to the Inventory acquired by the\par
Company as a result of the merger of WLR with and into the Company.\par
\par
2. CONDITIONS PRECEDENT.\par
\par
The effectiveness of the Amendment is subject to the satisfaction of\par
all of the following conditions precedent:\par
\par
2.1. The Company and each of the Banks shall have executed this\par
Amendment (such execution may be in several counterparts and the several\par
parties hereto may execute on separate counterparts).\par
\par
2.2. Each of the representations and warranties set forth in Section 5\par
of the Credit Agreement shall be true and correct.\par
\par
2.3. The Company shall be in full compliance with all of the terms and\par
conditions of the Credit Agreement and no Event of Default or Potential\par
Default shall have occurred and be continuing thereunder or shall result\par
after giving effect to this Amendment.\par
\par
3. REPRESENTATIONS AND WARRANTIES.\par
\par
3.1. The Company, by its execution of this Amendment, hereby represents\par
and warrants the following:\par
\par
(a) each of the representations and warranties set forth in\par
Section 5 of the Credit Agreement is true and correct as of the date\par
hereof, except that the representations and warranties made under\par
Section 5.3 shall be deemed to refer to the most recent annual report\par
furnished to the Banks by the Company;\par
\par
(b) the Company is in full compliance with all of the terms and\par
conditions of the Credit Agreement and no Event of Default or\par
Potential Default has occurred and is continuing thereunder; and\par
\par
(c) the Company's organizational number is 2101254.\par
\par
4. MISCELLANEOUS.\par
\par
4.1. The Company has heretofore executed and delivered to the Agent\par
that certain Security Agreement Re: Accounts Receivable, Farm Products and\par
Inventory dated as of May 27, 1993, as amended (the "SECURITY AGREEMENT")\par
and the Company hereby agrees that the Security Agreement shall secure all\par
of the Company's indebtedness, obligations and liabilities to the Agent and\par
the Banks under the Credit Agreement as amended by this Amendment, that\par
notwithstanding the execution and delivery of this Amendment, the Security\par
Agreement shall be and remain in full force and effect and that any rights\par
and remedies of the Agent thereunder, obligations of the Company thereunder\par
and any liens or security interests created or provided for thereunder\par
shall be and remain in full force and effect and shall not be affected,\par
impaired or discharged thereby. Nothing herein contained shall in any\par
manner affect or impair the priority of the liens and security interests\par
created and provided for by the Security Agreement as to the indebtedness\par
which would be secured thereby prior to giving effect to this Amendment.\par
\par
4.2. Except as specifically amended herein the Credit Agreement and the\par
Notes shall continue in full force and effect in accordance with their\par
original terms. Reference to this specific Amendment need not be made in\par
any note, document, letter, certificate, the Credit Agreement itself, the\par
Notes, or any communication issued or made pursuant to or with respect to\par
the Credit Agreement, any reference to the Credit Agreement being\par
sufficient to refer to the Credit Agreement as amended hereby.\par
\par
4.3. The Company agrees to pay all out-of-pocket costs and expenses\par
incurred by the Agent and Banks in connection with the preparation,\par
execution and delivery of this Amendment and the documents and transactions\par
contemplated hereby, including the fees and expenses of Messrs. Chapman and\par
Cutler.\par
\par
4.4. This Amendment may be executed in any number of counterparts, and\par
by the different parties on different counterparts, all of which taken\par
together shall constitute one and the same Agreement. Any of the parties\par
hereto may execute this Amendment by signing any such counterpart and each\par
of such counterparts shall for all purposes be deemed to be an original.\par
\par
4.5. (A) THIS AMENDMENT AND THE RIGHTS AND DUTIES OF THE PARTIES\par
HERETO, SHALL BE CONSTRUED AND DETERMINED IN ACCORDANCE WITH THE INTERNAL\par
LAWS OF THE STATE OF ILLINOIS, EXCEPT TO THE EXTENT PROVIDED IN\par
SECTION 4.5(b) HEREOF AND TO THE EXTENT THAT THE FEDERAL LAWS OF THE UNITED\par
STATES OF AMERICA MAY OTHERWISE APPLY.\par
\par
(b) NOTWITHSTANDING ANYTHING IN SECTION 4.5(a) HEREOF TO THE CONTRARY,\par
NOTHING IN THIS AMENDMENT, THE CREDIT AGREEMENT, THE NOTES, OR THE OTHER\par
LOAN DOCUMENTS SHALL BE DEEMED TO CONSTITUTE A WAIVER OF ANY RIGHTS WHICH\par
THE COMPANY, THE AGENT OR ANY OF THE BANKS MAY HAVE UNDER THE NATIONAL BANK\par
ACT OR OTHER APPLICABLE FEDERAL LAW.\par
\par
\par
\par
\par
- 1 -\par
\par
\par
\par
\par
\par
Dated as of September ___, 2001.\par
\par
\par
PILGRIM'S PRIDE CORPORATION\par
\par
\par
By\par
Its\par
\par
Accepted and Agreed to as of the day and year last above written.\par
\par
HARRIS TRUST AND SAVINGS BANK individually\par
and as Agent\par
\par
\par
By\par
Its\par
\par
U.S. BANCORP AG CREDIT, INC.\par
\par
\par
By\par
Its\par
\par
COBANK, ACB\par
\par
\par
By\par
Its\par
\par
SUNTRUST BANK (formerly known as SunTrust\par
Bank, Atlanta)\par
\par
\par
By\par
Its\par
\par
CREDIT AGRICOLE INDOSUEZ\par
\par
\par
By\par
Its\par
\par
\par
By\par
Its\par
\par
\par
______________________________________________________________________________
______________________________________________________________________________
REVOLVING CREDIT AGREEMENT
BY AND BETWEEN
GRUPO PILGRIM'S PRIDE FUNDING, S. DE R.L. DE C.V.
(THE "COMPANY" OR "BORROWER")
COMERICA BANK
("COMERICA")
AND
COMERICA BANK MEXICO, S.A.,
INSTITUCIN DE BANCA MLTIPLE
( "CBM")
SEPTEMBER 7, 2001
______________________________________________________________________________
______________________________________________________________________________
REVOLVING CREDIT AGREEMENT
THIS REVOLVING CREDIT AGREEMENT, is made as of the 7{th} day of
September, 2001, by and between GRUPO PILGRIM'S PRIDE FUNDING S. de R.L. de
C.V., a SOCIEDAD DE RESPONSABILIDAD LIMITADA DE CAPITAL VARIABLE duly
organized and validly existing under the laws of the United Mexican States
("Mexico"), having its corporate domicile in Queretaro, Mexico ("Company"
or "Borrower"), and COMERICA BANK ("Comerica"), a banking corporation duly
organized and validly existing under the laws of the State of Michigan, of
Detroit, Michigan and COMERICA BANK MEXICO, S.A., INSTITUCIN DE BANCA
MLTIPLE a banking institution organized and existing under the laws of
Mexico ("CBM;" collectively with Comerica, the "Bank").
WITNESSETH:
WHEREAS, Company has requested Bank to provide it with a revolving
loan in the amount of Thirty Million Dollars ($30,000,000) which shall
include a Seven Million Dollar ($7,000,000) sublimit in equivalent Pesos,
and Bank is willing to do so upon the terms and conditions of this
Agreement.
NOW, THEREFORE, Company and Bank agree to the following:
1. DEFINITIONS
For the purposes of this Agreement the following terms will have the
following meanings:
"Accounts" means, with respect to any Person, all accounts
receivables, monies and book debts at any time owed to such Person, and all
instruments, chattel paper and other documents evidencing or securing any
such accounts receivable, monies or book debts.
"Advance" shall mean a borrowing requested by Borrower and made by
Comerica with respect to Dollars and CBM with respect to Pesos, pursuant
hereto.
"Affiliates" shall mean (i) any Subsidiary of Avicola; (ii) U.S.
Guarantor; and (iii) any Subsidiary of U.S. Guarantor.
"Applicable Interest Rate" shall mean, with respect to indebtedness
outstanding hereunder or under the Notes in Dollars the LIBOR-based Rate or
if required in accordance with the terms and conditions set forth in this
Agreement the Federal Funds-based Rate, as the alternative base rate, and
in respect to indebtedness outstanding hereunder or under the Notes in
Pesos the TIIE-based rate, or if required in accordance with the terms and
conditions set forth in this Agreement the CETES-based Rate.
"Avicola" shall mean Avicola Pilgrim's Pride de Mexico, S.A. de C.V.,
a SOCIEDAD ANNIMA DE CAPITAL VARIABLE duly organized under the laws of
Mexico.
"Business Day" shall mean (i) with respect to any borrowing, payment
or rate selection of LIBOR-based Loans, any day, other than Saturday,
Sunday or holiday on which commercial banks generally are open in Detroit,
Michigan for the conduct of all or substantially all of their commercial
lending activities and on which dealings in U.S. Dollars are carried on in
the London interbank market, (ii) with respect to any borrowing, payment or
rate selection of TIIE-based Loans or CETES-based Loan, any day, other than
Saturday, Sunday or holiday on which commercial banks generally are open in
Mexico City, Mexico for the conduct of all or substantially all of their
commercial lending activities and (ii) for all other purposes, a day (other
than a Saturday or Sunday) on which commercial banks generally are open in
Detroit, Michigan and Mexico City, Mexico for the conduct of all or
substantially all of their commercial lending activities.
"Capital Lease" shall mean, with respect to any Person, any lease of
any property (whether real, personal or mixed) by such Person as lessee
that, in accordance with GAAP, would be required to be classified and
accounted for as a capital lease on a balance sheet of such Person or
otherwise would be disclosed as such in a note to such balance sheet.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee in
respect of such Capital Lease or otherwise be disclosed in a note to such
balance sheet.
"CETES-based Loan" shall mean any portion of the Loan which bears
interest at the CETES-based Rate.
"CETES-based Rate" shall mean, with respect to any CETES-based Loan
outstanding under this Agreement bearing interest at the CETES-based Rate
for an applicable Interest Period, a per annum interest rate which is equal
to the quotient achieved by dividing (i) the sum of the CETES Margin plus
the CETES Rate, by (ii) the difference of 1.0 minus the rate of Mexican
income tax withholding rate applicable to payment of interest receivable
hereunder, expressed as a decimal number applicable to interest payments
hereunder.
"CETES Margin" shall mean:
(a) to the extent the outstanding principal balance of all Loans is
$15,000,000 (or the Equivalent Amount in Pesos) or less, 1.25%;
and
(b) to the extent the outstanding principal balance of all Loans is
greater than $15,000,000 (or the Equivalent Amount in Pesos),
1.5%.
"CETES Rate" shall mean, with respect to any CETES based loan
outstanding under this Agreement, the average weighted value of all primary
placement rates of the Certificados de la Tesorera de la Federacin
having a maturity of 28 days or such term as may substitute such 28 day
term in case the maturity of such instrument is not a Business Day,
published in the "Economic Indexes" Section of the Official Gazette on any
day that the CETES Rate shall be the applicable interest rate with respect
to the indebtedness outstanding hereunder.
"Collateral" means all Accounts, Inventory, Equipment and Real Estate
of Operating Company, and any substitutions for, or replacements of, any of
the foregoing.
"Consolidated" or "consolidated" shall mean when used with reference
to any financial term in this Agreement, the aggregate for two or more
Persons of the amounts signified by such term for all such Persons
determined on a consolidated basis in accordance with GAAP. Unless
otherwise specified herein, references to "consolidated" financial
statements or data of Borrower, Operating Company or Avicola includes
consolidation with the Subsidiaries of such Person in accordance with GAAP.
"Credit Party" shall mean Borrower and Guarantors.
"Current Ratio" shall mean, as of any applicable date of
determination, the ratio of current assets to current liabilities, each
determined in accordance with GAAP.
"Default" shall mean any condition or event which, with the giving of
notice or the passage of time, or both, would constitute an Event of
Default.
"Dollars" and "$" shall mean lawful currency of the United States of
America.
"EBITDA" shall mean as of any date, with respect to any Person for a
period of six consecutive fiscal quarters of such Person ending at the
close of the fiscal quarter most recently ended of such Person, operating
income of such Person for such period PLUS, any amounts with respect to
depreciation or amortization, all determined in accordance with GAAP.
"Effective Date" shall mean the date of this Agreement.
"Eligible Accounts" shall mean an Account arising in the ordinary
course of the Operating Company's business which meets each of the
following requirements:
(a) to the extent it is not owing more than ninety (90) days after
the date of the original invoice or other writing evidencing such
Account;
(b) it arises from the sale or lease of goods and such goods have
been shipped or delivered to the account debtor; or it arises
from services rendered and such services have been performed;
(c) it is evidenced by an invoice, dated not later than 5 days of the
date of shipment or performance, rendered to the account debtor,
or some other evidence of billing acceptable to Bank;
(d) it is not evidenced by any note, trade acceptance, draft or other
negotiable instrument or by any chattel paper, unless such note
or other document or instrument previously has been endorsed and
delivered or otherwise legally conveyed to Bank;
(e) it is a valid, legally enforceable obligation of the account
debtor thereunder, and to the extent it is not subject to any
offset, counterclaim or other defense on the part of such account
debtor or to any claim on the part of such account debtor denying
liability thereunder in whole or in part;
(f) it is not an Account billed in advance, payable on delivery, for
consigned goods, for guaranteed sales, for unbilled sales, for
progress billings, payable at a future date in accordance with
its terms, or to the extent it is not subject to a retainage or
holdback by the account debtor or insured by a surety company;
(g) the Account is subject to a duly perfected lien in favor of the
Bank pursuant to the Security Documents ranking in priority to
all other liens, which lien has been duly registered, filed or
recorded in all applicable jurisdictions and all other steps
necessary have been taken to create, perfect and maintain such
lien, to the extent such actions are required under applicable
law;
(h) the Account does not constitute an obligation of (i) any Person
whose principal place of business is, or who is organized under
the laws of, any jurisdiction other than a jurisdiction included
in the United States or Mexico, (ii) an Affiliate of Operating
Company, or (iii) any governmental entity;
(i) the Account has not arisen out of a written order or contract
with or from an account debtor which by its nature or terms
prevents, restricts, forbids or makes void or unenforceable the
assignment to the Bank of such Account, or requires notice to, or
the consent of, the account debtor(unless such consent has been
secured or such notice has been given).
An Account which is at any time an Eligible Account, but which
subsequently fails to meet any of the foregoing requirements, shall
forthwith cease to be an Eligible Account.
"Eligible Inventory" shall mean all finished animal feed, corn,
soybean, soybean meal and imported sorghum of Operating Company, excluding:
(a) Consigned goods;
(b) Inventory covered by or subject to a title retention agreement or
a seller's right to repurchase, or any consensual or
nonconsensual lien (including without limitation purchase money
security interests) other than in favor of Bank; and
(c) any Inventory which is not subject to a duly perfected lien in
favor of the Bank ranking in priority to all other liens, which
lien has been duly registered, filed or recorded in all
applicable jurisdictions and all other steps necessary have been
taken to create, perfect and maintain such liens, to the extent
such actions are required under applicable law.
Inventory shall be valued at the lower of cost or market value as
determined in accordance with GAAP or appraisals as determined by Bank in
its reasonable credit judgment, and Inventory which is at any time Eligible
Inventory, but which subsequently fails to meet any of the foregoing
requirements, shall forthwith cease to be Eligible Inventory.
"Environmental Complaint" shall have the meaning set forth in Section
5.15(c) hereof.
"Environmental Law(s)" shall mean all applicable laws, codes,
ordinances, rules, regulations, orders, decrees and directives issued by
any federal, state, local, foreign or other governmental or quasi-
governmental authority or body (or any agency, instrumentality or political
subdivision thereof) in which Borrower, Avicola, Operating Company or any
of their respective Subsidiaries conducts business pertaining to Hazardous
Materials, including without limitation, any hazardous materials or wastes,
toxic substances, flammable, explosive or radioactive materials, asbestos,
and/or other similar materials; or any portion thereof including, without
limitation, those relating to soil, surface, subsurface ground water
conditions and the condition of the ambient air; and any other federal,
state, foreign or local statute, law, ordinance, code, rule, regulation,
order or decree regulating, relating to, or imposing liability or standards
of conduct concerning, any hazardous, toxic, radioactive, flammable or
dangerous waste, substance or material, as now or at any time hereafter in
effect.
"Equipment" shall mean all machinery and equipment of Operating
Company located on the Real Estate.
"Equivalent Amount" shall mean (i) with respect to each Advance made
or carried (or to be carried) in Dollars, the principal amount thereof and
(ii) with respect to each Advance made or carried (or to be made or
carried) in Pesos, the amount of Dollars which is equivalent to such amount
of Pesos at the fixed exchange rate established by the Central Bank of
Mexico and published in the Official Gazette for the sale of Dollars for
such Pesos two (2) Business Days before determination of such Equivalent
Amount is to be made.
"Event of Default" shall mean each of the Events of Default specified
in Section 8.1 of this Agreement.
"Federal Funds-based Loan" shall mean an Advance which bears an
interest at the Federal Funds-based Rate.
"Federal Funds-based Rate" shall mean a per annum interest rate which
is equal to the quotient achieved by dividing (i) the sum of the Federal
Funds Margin plus the Federal Funds Rate, by (ii) the difference of 1.0
minus the rate of Mexican income tax withholding rate applicable to
payments of interest receivable hereunder, expressed as a decimal number
applicable to interest payments hereunder.
"Federal Funds Margin" shall mean:
(a) to the extent the outstanding principal balance of all Loans is
$15,000,000 (or the Equivalent Amount in Pesos) or less, 1.25%;
and
(b) to the extent the outstanding principal balance of all Loans is
greater than $15,000,000 (or the Equivalent Amount in Pesos),
1.5%.
"Federal Funds Rate" shall mean a per annum rate of interest
determined on the basis of quotations for overnight federal funds
transactions appearing on Page 60 of the Knight-Ridder Moneycenter News
Services (Garvin GuyButler-Domestic Composite Indicators - Term Federal
Funds for Domestic Banks), on any day that the Federal Funds Rate shall be
the applicable interest rate with respect to the indebtedness outstanding
hereunder. If, for any reason, such rates do not appear on said Page 60 of
the Knight-Rider Moneycenter News Services (or otherwise on such service),
the "Federal Funds Rate" shall be determined by reference to such other
publicly available service for displaying Federal Funds Rates, as shall be
designated by the Bank from time to time.
"Fixed Assets" shall mean the Equipment and Real Estate.
"Formula Amount" shall mean as of the date of any determination
thereof the sum of:
(a) 70% of the Eligible Accounts; plus
(b) the lesser of (i) 60% of the Eligible Inventory or (ii)
$10,000,000; plus
(c) 60% of the "net market value" of the Fixed Assets, determined
pursuant to appraisals, in form and substance reasonably
satisfactory to Bank.
"Funded Debt" shall mean with respect to any Person, all Indebtedness
for borrowed money evidenced by notes, bonds, debentures, or similar
evidences of Indebtedness and which by its terms matures more than one year
from, or is directly or indirectly renewable or extendible at such Person's
option under a revolving credit or similar agreement obligating the lender
or lenders to extend credit over a period of more than one year from the
date of creation thereof, and specifically including Capital Lease
Obligations, current maturities of long-term debt, revolving credit and
short-term debt extendible beyond one year at the option of the debtor.
"GAAP" shall mean generally accepted accounting principles in Mexico,
applied on a consistent basis.
"Guarantor(s)" shall mean Operating Company, Avicola, Holding,
Inmobiliaria, US Guarantor and any Replacement Guarantor.
"Guaranty" shall mean to guaranty agreement and the (FIANZA SOLIDARIA)
executed and delivered to Bank by the Guarantors in form and substance
satisfactory to Bank pursuant to which:
(a) Operating Company, Avicola and Holding guaranty all of Company's
obligations and indebtedness to Bank hereunder, with respect to
the Loans and under the other Loan Documents;
(b) US Guarantor guarantees $15,000,000 of the principal balance of
the Loans, plus interest accruing thereon and cost of
collections.
"Hazardous Material" shall mean and include any hazardous, toxic or
dangerous waste, substance or material defined as such in, or for purpose
of, any Environmental Laws.
"Holding" means Grupo Pilgrim's Pride Funding Holding, S. de R.L.de
C.V., a SOCIEDAD DE RESPONSABILIDAD LIMITADA DE CAPITAL VARIABLE duly
organized under the laws of Mexico.
"Indebtedness" of any Person shall mean: (i) all indebtedness of such
Person for borrowed money; (ii) all obligations evidenced by notes, bonds,
debentures or similar instruments; (iii) all indebtedness created or
arising under any conditional sale or other title retention agreements with
respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property); (iv) all
Capital Lease Obligations; (v) all guaranteed indebtedness; and (vi) all
indebtedness referred to in clauses (i), (ii), (iii), (iv) or (v) above
secured by (or for which the holder of such indebtedness has an existing
right, contingent or otherwise, to be secured by) any lien upon or in
property (including accounts and contract rights) owned by such Person,
even though such Person has not assumed or become liable for the payment of
such indebtedness.
"Indebtedness Ratio" shall mean, as of any applicable date of
determination, the ratio of Total Liabilities to the sum of Total
Liabilities and Net Worth.
"Indenture" shall mean that certain Indenture dated as of August 9,
2001 by US Guarantor, as Issuer and The Chase Manhattan Bank, as Trustee
relating to $200,000,000, 9-5/8% Senior Notes due 2011 and additional notes
evidencing an additional aggregate principal amount of up to $200,000,000
and all amendments and supplements thereto.
"Inmobiliaria" shall mean Immobiliaria Avicola Pilgrim's Pride, S. de
R.L. de C.V., a SOCIEDAD DE RESPONSABILIDAD LIMITADA DE CAPITAL VARIABLE
duly organized under the laws of Mexico.
"Interest Coverage Ratio" shall mean, as of any applicable date of
determination, the ratio of EBITDA to Interest Expense, measured on a
rolling 6 fiscal quarters basis.
"Interest Expense" shall mean, the interest expense of a Person,
determined in accordance with GAAP.
"Interest Period" shall mean for:
(A) a LIBOR-based Loan, an interest period of one (1), two (2) or
three (3) months as selected by Borrower;
(B) a TIIE-based Loan, an interest period of one (1) month;
provided however for (A) and (B) above that:
(a) any Interest Period which would otherwise end on a day which is
not a Business Day shall be extended to the next succeeding
Business Day, except that if the next succeeding Business Day
falls in another calendar month, the Interest Period shall end on
the next preceding Business Day, and when an Interest Period
begins on a day which has no numerically corresponding day in the
calendar month during which such Interest Period is to end, it
shall end on the last Business Day of such calendar month; and
(b) no Interest Period shall extend beyond the Maturity Date.
"Inventory" shall mean all finished animal feed, corn, soybean,
soybean meal and imported sorghum of Operating Company.
"LIBOR-based Loan" shall mean any portion of the Loan which bears
interest at the LIBOR-based Rate.
"LIBOR-based Rate" shall mean, with respect to any LIBOR-based Loan
outstanding under this Agreement bearing interest at the LIBOR-based Rate
for an applicable Interest Period, a per annum interest rate which is equal
to the quotient achieved by dividing (i) the sum of the LIBOR Margin plus
the LIBOR Rate, by (ii) the difference of 1.0 minus the rate of Mexican
income tax withholding rate applicable to payments of interest receivable
by the Bank hereunder, expressed as a decimal number applicable to interest
payments hereunder.
"LIBOR Lending Office" shall mean any Comerica office located in the
Cayman Islands, British West Indies, or such other branch of Bank, domestic
or foreign, as it may hereafter designate as its LIBOR Lending Office by
notice to Borrower or any office of CBM located in Mexico.
"LIBOR Margin" shall mean:
(a) to the extent the outstanding principal balance of all Loans is
$15,000,000 (or the Equivalent Amount in Pesos) or less, 1.25%;
and
(b) to the extent the outstanding principal balance of all Loans is
greater than $15,000,000 (or the Equivalent Amount in Pesos),
1.5%.
"LIBOR Rate" shall mean, with respect to any LIBOR-based Loan
outstanding under this Agreement, the per annum rate of interest determined
on the basis of the rate for deposits in United States Dollars for a period
equal to the relevant Interest Period for such Advance, commencing on the
first day of such Interest Period, appearing on Page BBAM of the Bloomberg
Financial Markets Information Service as of 11:00 a.m. (Detroit, Michigan
time) (or soon thereafter as practical), two (2) Business Days prior to the
first day of such Interest Period.
"Loan" or "Loans" shall mean the borrowings requested by Company and
to be made by Bank under this Agreement, including any refunding of such
borrowing pursuant to Section 2.11 hereof.
"Loan Documents" shall mean collectively, this Agreement, the Notes,
the Guaranty (FIANZA), the Security Documents and any other documents,
instruments or agreements executed pursuant to or in connection with the
Loans, this Agreement or the other Loan Documents, as such documents may be
amended from time to time.
"Material Adverse Effect" shall mean with respect to the Credit
Parties other than the US Guarantor, taken as a whole or with respect to
the US Guarantor: (i) a material adverse effect on (a) the business,
assets, operations or financial or other condition of such applicable
parties, (b) such applicable party's ability to pay or perform the
obligations under the Loan Documents to which such Credit Party is a party
in accordance with the terms thereof, or (c) Bank's rights and remedies
under the Agreement and the other Loan Documents.
"Maturity Date" shall mean September 7, 2004.
"Mexican Guarantors" shall mean the Guarantors other than the US
Guarantor.
"Mortgage" shall mean the first priority mortgage to be granted in
favor of Comerica and CBM by: (i) Inmobiliaria in respect to the real
estate in which the farm known as Granja la Pursima, which is located
in Municipio de Coln, Estado de Queretaro, substantially in the terms
of Exhibit E; (ii) Operating Company in respect to the real estate in which
the farm known as Granja el Coyote, which is located in Municipio de
Ezequiel Montes, Estado de Queretaro, substantially in the terms of Exhibit
E, (iii) Operating Company in respect to the real estate in which the farm
known as Granja Nogales, which is located in Municipio de Coln, Estado
de Queretaro, substantially in the terms of Exhibit E, (iv) Operating
Company in respect to the real estate in which the farm known as Granja
Buenos Aires, which is located in Municipio de Coln, Estado de
Queretaro, substantially in the terms of Exhibit E, (v) Operating Company
in respect to the real estate in which the farm known as Granja Atongo I,
which is located in Municipio del Marquez, Estado de Queretaro,
substantially in the terms of Exhibit E, and (vi) by Operating Company in
respect to the real estate in which the farm known as Granja Cerro Prieto,
which is located in Municipio del Marquez, Estado de Queretaro,
substantially in the terms of Exhibit E.
"Net Worth" shall mean:
(a) With respect to Operating Company on a consolidated basis, its
Total Assets (other than patents, patent rights, trademarks,
trade names, copy rights, franchises, licenses, goodwill and
similar general intangible assets) less: (i) advances to and/or
accounts receivables owing from Affiliates (other than Operating
Company and its Subsidiaries); and (ii) Total Liabilities; and
(b) With respect to Avicola on a consolidated basis, its Total Assets
(other than patents, patent rights, trademarks, trade names, copy
rights, franchises, licenses, goodwill and similar general
intangible assets) less: (i) advances to and/or accounts
receivables owing from Affiliates (other than Avicola and its
Subsidiaries); (ii) Total Liabilities; and (iii) loans made to
third parties other than to Affiliates.
"Note(s)" or "Note" shall mean the Promissory Notes (PAGARS)
evidencing the Loans made by Bank pursuant to Section 2.1 hereof in the
form of Exhibit "A" attached to this Agreement executed and delivered by
the Company as of date of and evidencing each requested Advance, or if
applicable, the Federal Funds-based Rate Note executed and delivered by
Company in accordance with Section 2.6 below (in the form attached hereto
as Exhibit "B"), or if applicable, the TIIE-based Rate Note or the CETES-
based Rate Note (in the forms attached hereto as Exhibit C) and in all
events guaranteed (por aval) by the Guarantors.
"Official Gazzete" shall mean the DIARIO OFICIAL DE LA FEDERACIN
of Mexico.
"Operating Company" shall mean Pilgrim's Pride, S.A. de C.V. a
SOCIEDAD ANNIMA DE CAPITAL VARIABLE duly organized and validly existing
under the laws of Mexico.
"Payment Date" shall mean the last day of the Interest Period selected
for each Note.
"Permitted Liens" shall mean those liens, security interests and
encumbrances expressly permitted by Section 7.1.
"Person" shall mean any individual, corporation, partnership, limited
liability company, trust, incorporated or unincorporated organization,
joint venture, joint stock company, or a government (whether foreign,
federal, state, country, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof) or any
agency or political subdivision thereof or other entity of any kind.
"Pesos" shall mean Mexican pesos, the lawful currency of Mexico.
"Pesos Subfacility" shall mean Advances requested to be made by CBM in
Pesos, in an aggregate amount not to exceed the Pesos Subfacility Maximum
as may be reduced pursuant to Section 2.19.
"Pesos Subfacility Maximum" shall mean up to the Equivalent Amount of
US $7,000,000, in Pesos as may be reduced pursuant to Section 2.19.
"Premises" shall have the meaning set forth in Section 5.15 and shall
include the Real Estate.
"Process Agent" shall mean CT Corporation System or its successors or
assigns, or any other person or entity acting on behalf of the Company and
Mexican Guarantor as agent for the service of process in respect of any
lawsuits or proceedings initiated in the United States of America in
connection with the Loan Documents.
"Real Estate" shall mean the real estate described in the Mortgage.
"Replacement Guarantor" shall mean any Subsidiary created by Operating
Company or US Guarantor to be the primary importer and/or distributor in
Mexico of poultry product exported by US Guarantor to Mexico.
"Request for Loan" shall mean a Request for Loan issued by Company
under this Agreement in the form annexed to this Agreement as Exhibit "D".
"Reserve Requirements" shall mean the stated maximum rate (expressed
as a decimal) of all reserve requirements (including, without limitation,
any marginal, emergency, supplemental, special or other reserves) that is
specified at any time during such Interest Period by the Board of Governors
of the Federal Reserve System (or any successor agency thereto) for
determining the maximum reserve requirements with respect to eurodollar
funding (currently referred to as "eurocurrency liabilities") in Regulation
D of such Board maintained by a member bank of such System; all as
conclusively determined by Bank, absent manifest error.
"Revolving Loan" or "Revolving Loans" shall mean the revolving credit
loans to be advanced and readvanced to the Borrower pursuant to Section 2.1
hereof.
"Revolving Loan Commitment" shall mean Thirty Million Dollars
($30,000,000), as may be reduced pursuant to Section 2.19.
"Revolving Maximum" shall mean, as of any date the lesser of the
Revolving Loan Commitment or the Formula Amount, provided, however, that a
portion of the Revolving Maximum may be designated by the Borrower in the
Equivalent Amount of Pesos, not to exceed the Pesos Subfacility Maximum.
"Revolving Maximum - Dollars" shall mean the Revolving Maximum less
the Equivalent Amount of the aggregate Advances outstanding under the Pesos
Subfacility.
"Revolving Maximum - Pesos" shall mean the Revolving Maximum less the
aggregate Advances under the Revolving Maximum - Dollars facility, but not
to exceed the amount of the Pesos Subfacility Maximum.
"Security Documents" shall mean the Mortgage and that certain Contrato
de Prenda ("Pledge Agreement") to be executed by Operating Company in favor
of the Bank in substantially the same form as set forth on the attached
Exhibit F.
"Subsidiary" of any Person shall mean any corporation, association,
joint stock company or business trust of which more than fifty percent
(50%) of the voting stock or other voting interest is owned either directly
or indirectly by such Person and/or one or more of its Subsidiaries.
"TIIE-based Loan" shall mean any portion of the Loan which bears
interest at the TIIE-based Rate.
"TIIE-based Rate" shall mean, with respect to any TIIE-based Loan
outstanding under this Agreement bearing interest at the TIIE-based Rate
for an applicable Interest Period, a per annum interest rate which is equal
to the quotient achieved by dividing (i) the sum of the TIIE Margin plus
the TIIE Rate, by (ii) the difference of 1.0 minus the rate of Mexican
income tax withholding rate applicable to payments of interest receivable
hereunder, expressed as a decimal number applicable to interest payments
hereunder.
"TIIE Lending Office" shall mean any CBM office located in Mexico
"TIIE Margin" shall mean:
(a) to the extent the outstanding principal balance of all Loans is
$15,000,000 (or the Equivalent Amount in Pesos) or less, 1.25%;
and
(b) to the extent the outstanding principal balance of all Loans is
greater than $15,000,000 (or the Equivalent Amount in Pesos),
1.5%.
"TIIE Rate" shall mean, the average rate equivalent to the "Tasa de
Inters Interbancaria de Equilibrio" for 28 (twenty eight) day periods
as published by Banco de Mexico in the Official Gazette. The Interest Rate
shall be modified or updated pursuant to the TIIE Rate variations published
by Banco de Mxico.
"Total Assets" shall mean, as of the date of any determination
thereof, all assets of Company, determined on a consolidated basis in
accordance with GAAP.
"Total Liabilities" shall mean, as of the date of any determination
thereof, all liabilities and other obligations of Company, determined on a
consolidated basis in accordance with GAAP.
"US Guarantor" means Pilgrim's Pride Corporation, a corporation duly
organized under the laws of the State of Delaware.
2. REVOLVING CREDIT
2.1 COMMITMENT. Subject to the terms and conditions of this
Agreement: (a) Comerica agrees to lend to Borrower from time to time
from the date of this Agreement until the Maturity Date, Revolving
Loans, with such Advances to be made in Dollars in the aggregate
principal amount outstanding at any time not to exceed the Revolving
Maximum - Dollars; and (b) CBM agrees to lend to Borrower from time to
time from the date of this Agreement until the Maturity Date,
Revolving Loans, with such Advances to be made in Pesos in the
aggregate principal amount outstanding at any time not to exceed the
Revolving Maximum - Pesos. At no time shall the aggregate Advances
requested by Borrower and outstanding hereunder exceed the Revolving
Maximum.
2.2 NOTES (PAGARS). Each Advance shall be evidenced by a
separate Note (pAGAR), duly executed by Borrower in the principal
amount of the Advance requested, bearing interest at the Applicable
Interest Rate, indicating the Interest Period and signed POR AVAL by
the Guarantors..
2.3 REPAYMENT. Each Note, and all principal outstanding
thereunder, shall bear interest at its Applicable Interest Rate. The
principal amount of and the interest accrued under each Note made by
Borrower pursuant to Section 2.2 above shall be repaid, converted or
rolled over by the Borrower on the Payment Date indicated in the
applicable Request for Loan, but in no event later than ninety (90)
days after the date of advance for such Note. At the Maturity Date,
the entire balance of all Notes then outstanding and all then accrued
and unpaid interest thereon, shall be due and payable. The amount and
date of each Loan, the Applicable Interest Rates, the Interest Periods
and the amount and date of any repayment shall be noted on Bank's
records, which records will be conclusive evidence thereof, absent
manifest error; provided, however, any failure by Bank to record any
such information shall not relieve Company of its obligations to repay
the outstanding principal amount of the Loans, accrued interest
thereon, and any other amounts payable by Company hereunder in
accordance with the terms of this Agreement. All payments by Company
to Bank under or pursuant to this Agreement or any of the other Loan
Documents, whether principal, interest or otherwise, shall be made
without setoff, deduction or counterclaim on the date specified for
such payment, in immediately available funds, (i) if payment is due in
Dollars, to Comerica at Comerica Tower at Detroit Center, 500 Woodward
Avenue, Detroit, Michigan, account no. 1851-355014 and (ii) if payment
is due in Pesos, to CBM, at account no. 7336-0201. Principal amounts
repaid may be subsequently reborrowed provided no Advance may mature
after the Maturity Date. Each payment by or on behalf of the Borrower
hereunder shall, unless a specific determination is made by Bank with
respect thereto, be applied (A) first, to any fees, costs, expenses
and other amounts (other than principal and interest) due Bank; (B)
second, to accrued and unpaid interest and fees due Bank; and (C)
third, to principal due Bank.
2.4 REQUESTS FOR LOANS. Borrower may request Advances under the
Revolving Loans by delivery to Bank of a Request for Loan form
executed by an authorized officer of Borrower and subject to the
following:
(A) EACH SUCH REQUEST FOR LOAN SHALL INDICATE THE CURRENCY TO WHICH
IT RELATES AND SHALL SET FORTH ALL OTHER INFORMATION REQUIRED ON
THE REQUEST FOR LOAN FORM;
(B) EACH SUCH REQUEST FOR LOAN SHALL BE DELIVERED TO BANK BY 10:00
A.M. (DETROIT TIME) THREE (3) BUSINESS DAYS PRIOR TO THE PROPOSED
DATE OF LOAN, EXCEPT IN THE CASE OF A TIIE-BASED LOAN, FOR WHICH
THE REQUEST FOR LOAN MUST BE DELIVERED BY 10:00 A.M. (MEXICO CITY
TIME) ON SUCH PROPOSED DATE;
(C) THE PRINCIPAL AMOUNT OF SUCH ADVANCE, SHALL BE AT LEAST $500,000
(OR THE EQUIVALENT AMOUNT OF PESOS);
(D) A REQUEST FOR LOAN, ONCE DELIVERED TO BANK, SHALL NOT BE
REVOCABLE BY BORROWER;
(E) EACH REQUEST FOR LOAN SHALL CONSTITUTE A CERTIFICATION BY THE
BORROWER AS OF THE DATE THEREOF THAT ALL OF THE CONDITIONS SET
FORTH IN SECTION 4.15 HEREOF ARE SATISFIED AS OF THE DATE OF SUCH
REQUEST AND SHALL BE SATISFIED AS OF THE DATE SUCH ADVANCE IS
REQUESTED; AND
(F) THE PRINCIPAL AMOUNT REQUESTED, TOGETHER WITH THE PRINCIPAL
AMOUNT OF ALL OTHER OUTSTANDING ADVANCES UNDER THE REVOLVING LOAN
SHALL NOT EXCEED THE REVOLVING MAXIMUM AND IF THE REQUEST FOR
LOAN IS FOR AN ADVANCE IN PESOS, THEN THE PRINCIPAL AMOUNT
REQUESTED TOGETHER WITH THE PRINCIPAL AMOUNT OF ALL OTHER
OUTSTANDING PESOS ADVANCES SHALL NOT EXCEED THE PESOS SUBFACILITY
MAXIMUM.
2.5 LIBOR-BASED RATE. Interest on each LIBOR-based Loan shall
accrue at the LIBOR-based Rate, and shall be payable on the last day
of the Interest Period applicable thereto. Interest accruing at the
LIBOR-based Rate shall be computed on the basis of a 360 day year and
shall be assessed for the actual number of days elapsed from the first
day of the Interest Period applicable thereto to, but not including
the last day thereof.
2.6 FEDERAL FUNDS-BASED RATE. In the event that the Federal
Funds-based Rate is required to be the Applicable Interest Rate
pursuant to this Agreement, interest on the unpaid balance of the Loan
from time to time outstanding shall accrue until paid at a per annum
rate equal to the Federal Funds-based Rate, and shall be payable
monthly on the first Business Day closest to the first day of each
succeeding month and in such event Company shall execute and deliver
to Bank a note (in the form attached hereto as Exhibit B; the "Federal
Funds-based Rate Note") evidencing the Federal Funds-based Rate as the
Applicable Interest Rate on or before 48 hours prior to the
commencement of such period in which the Federal Funds-based Rate is
the Applicable Interest Rate. Interest accruing at the Federal Funds-
based Rate shall be computed on the basis of a 360 day year and shall
be assessed for the actual number of days elapsed (including the first
day, but not the last day that the Federal Funds-based Rate is
applicable), and in such computation, effect shall be given to any
change in the Federal Funds-based Rate on the date of each such
change.
2.7 TIIE-BASED RATE. Interest on each TIIE-based Loan shall
accrue at the TIIE-based Rate, and shall be payable on the last day of
the Interest Period applicable thereto. Interest accruing at the TIIE-
based Rate shall be computed on the basis of a 360 day year and shall
be assessed for the actual number of days elapsed from the first day
of the Interest Period applicable thereto to, but not including the
last day thereof.
2.8 CETES-BASED RATE. Interest on the unpaid balance of each
CETES-based Loan from time to time outstanding shall accrue until paid
at a per annum rate equal to the CETES-based Rate, and shall be
payable monthly on the first Business Day closest to the first day of
each succeeding month and in such event Company shall execute and
deliver to Bank a note (in the form attached hereto as Exhibit C; the
"CETES-based Rate Note") evidencing the CETES-based Rate as the
Applicable Interest Rate on or before 48 hours prior to the
commencement of such period in which the CETES-based Rate is the
Applicable Interest Rate. Interest accruing at the CETES-based Rate
shall be computed on the basis of a 360 day year and shall be assessed
for the actual number of days elapsed (including the first day, but
not the last day that the CETES-based Rate is applicable), and in such
computation, effect shall be given to any change in the CETES-based
Rate on the date of each such change.
2.9 INTEREST PAYMENTS UPON REFUNDINGS. Notwithstanding anything
to the contrary set forth in this Agreement, all accrued and unpaid
interest on any Loan which is refunded pursuant to Section 2.11 hereof
shall be due and payable in full on the date such Loan is refunded,
together with any amounts payable under Section 3.1 hereof if a
refunding of a TIIE-based Loan occurs on any day other than the last
day of the Interest Period applicable thereto.
2.10 DEFAULT INTEREST. Notwithstanding anything to the contrary
set forth herein, in the event that and so long as there exists any
default in payment hereunder (including, without limitation, failure
to pay indebtedness under the Loan on any accelerated date for payment
thereof), (a) interest shall be payable on the principal amount of all
LIBOR-based Loans from time to time outstanding at a per annum rate
equal to the Applicable Interest Rate for each such Loan plus two
percent (2%) per annum, (b) at all other times when the Federal Funds-
based Rate is in effect, interest shall be payable at a per annum rate
equal to the Federal Funds-based Rate plus two percent (2%), (c) at
all other times when the TIIE-based Rate is in effect, interest shall
be payable at a per annum rate equal to the TIIE-based Rate plus two
percent (2%), and (d) at all other times when the CETES-based Rate is
in effect, interest shall be payable at a per annum rate equal to the
CETES-based Rate plus two percent (2%). Any interest accruing under
this Section 2.10 shall be payable upon demand.
2.11 REFUNDINGS. Subject to the payment of any break-funding
reimbursements/prepayment premiums set forth in Section 3.1, as to any
outstanding LIBOR-based Loan or TIIE-based Loan, Borrower may convert
any LIBOR-based Loan to a TIIE-based Loan (provided there is
availability under Pesos Subfacility) or convert any TIIE-based Loan
to a LIBOR-based Loan or continue a LIBOR-based Loan or TIIE-based
Loan, by making a written request therefore to the Comerica or CBM, as
the case may be, by facsimile, specifying (a) the principal amount
that is to bear interest at the LIBOR Rate or TIIE-based Rate and
(b) the Interest Period selected by Borrower during which the LIBOR
Rate or TIIE-based Rate, as the case may be, is to be applied. Any
conversion requested by Borrower must be in an amount not less than
$500,000 or the Equivalent Amount of Pesos. Following the expiration
of the Interest Period for any LIBOR-based Loan or TIIE-based Loan, as
the case may be, interest shall automatically accrue (x) if such Loan
is a LIBOR-based Loan, at the Federal Funds Rate unless Borrower
requests and receives another LIBOR-based Loan as provided in this
Section 2.11 or (y) if such Loan is a TIIE-based Loan, at the CETES
Rate unless Borrower requests and receives another TIIE-based Loan as
provided in this Section 2.11.
2.12 PREPAYMENTS. Company may prepay (without premium or penalty
but subject to Article 3) all or part of the outstanding balance of
the Loan at any time during any period when it bears interest at the
Federal Funds-based Rate or the CETES-based Rate. Upon two (2)
Business Days prior written notice to Bank, Company may prepay all or
part of any LIBOR-based Loan or any TIIE-based Loan, provided that:
(a) the amount of any such partial prepayment shall be at least
$500,000 (or the Equivalent Amount of Pesos) or the outstanding
balance of such Loan, whichever is less; and (b) if such prepayment
occurs on other than the last day of the Interest Period therefore,
Company shall pay accrued interest on the amount prepaid and such
other amounts as are required pursuant to Section 3.1 hereof, together
with such prepayment.
2.13 PAYMENTS ON NON-BUSINESS DAY. Subject to the definition of
"Interest Period" in this Agreement, in the event that any payment of
principal, interest, fees or any other amounts payable by Company
under this Agreement is due on any day which is not a Business Day,
such due date shall be extended to the next succeeding Business Day,
and, to the extent applicable, interest shall continue to accrue and
be payable for any such extension.
2.14 REVIEW DATE. Without commitment by either party, Bank and
Borrower agree to review the Agreement prior to the Maturity Date and
consider an extension of the Maturity Date, subject to Bank's
satisfaction, with the financial performance and economic situation of
Borrower.
2.15 UPFRONT FEE. Borrower shall pay CBM on the Effective Date:
(i) an up-front fee equal to US $150,000.00, calculated by applying
0.5% to US $30,000,000.00; and (ii) US $22,500.00 representing the
VAT on such fee. CBM agrees to promptly deliver to Borrower an
original official invoice with respect to such payment in accordance
with applicable laws.
2.16 COMMITMENT FEE. Unless this Agreement is sooner terminated
(in which case the Commitment Fee shall be prorated and payable upon
such termination), following the first anniversary of this Agreement,
Borrower shall pay Bank a commitment fee calculated by multiplying
0.250% by the average monthly unutilized amount of US $30,000,000.00
measured from the first anniversary date from the execution of this
Agreement to the second anniversary date from the execution of this
Agreement and each anniversary date thereof until the Maturity Date.
2.17 RECEIPT OF PAYMENTS. Any payments hereunder received by Bank
after: (i) 2:00 p.m. Detroit time for payments in Dollars, and (ii)
2:00 p.m. Mexico City time for payments in Pesos, shall be deemed
received by Bank on the next Business Day.
2.18 USE OF LOAN PROCEEDS. Borrower shall use the principal
amount of the Loan for its and its Subsidiaries' working capital needs
and the general corporate needs of the Affiliates.
2.19 REDUCTIONS OF REVOLVING LOAN COMMITMENT. Upon at least five
(5) days' prior written notice (or telephonic notice promptly
confirmed in writing) from the Borrower to the Bank, the Borrower
shall have the right, without premium or penalty, to reduce the
Revolving Loan Commitment in part or to terminate the Revolving Loan
Commitment in whole, provided that (i) any partial termination
pursuant to this Section 2.19 shall be in an amount of at least
$1,000,000 (or the Equivalent Amount of Pesos) and integral multiples
of $500,000 (or the Equivalent Amount of Pesos), and (ii) no such
reduction shall be permitted which would reduce the Revolving Loan
Commitment to an amount less than the aggregate outstanding principal
amount of the Revolving Loans. If the Revolving Loan Commitment is
reduced to amount less than the Pesos Subfacility Maximum, the Pesos
Subfacility Maximum shall automatically be deemed reduced to an amount
equal to the Revolving Loan Commitment.
3. SPECIAL PROVISIONS, CHANGES IN CIRCUMSTANCES AND YIELD PROTECTION
3.1 BREAK-FUNDING REIMBURSEMENTS/PREPAYMENT PREMIUMS. If Company
makes any payment of principal with respect to any LIBOR-based Loan or
any TIIE-based Loan on any day other than the last day of the Interest
Period applicable thereto (whether voluntarily, by acceleration, or
otherwise), or if Company fails to borrow any LIBOR-based Loan or
TIIE-based Loan after notice has been given by Company to Bank in
accordance with the terms of this Agreement requesting such Loan,
Company shall reimburse Bank, within thirty (30) days of Bank's
demand, for any resulting loss, cost or expense incurred by Bank as a
result thereof, including, without limitation, any such loss, cost or
expense incurred in obtaining, liquidating, employing or redeploying
deposits from third parties (but excluding any loss of anticipated
margin over Bank's cost of funds). Such amount payable by Company to
Bank may include, without limitation, an amount equal to the excess,
if any, of (a) the amount of interest which would have accrued on the
amount so prepaid, or not so borrowed or refunded, for the period from
the date of such prepayment or of such failure to borrow or refund,
through the last day of the relevant Interest Period, at the
Applicable Interest Rate for said Loan provided under this Agreement,
over (b) the amount of interest (as reasonably determined by Bank)
which would have accrued to Bank on such amount by placing such amount
on deposit for a comparable period with leading banks in the relevant
interbank market. Calculation of any amounts payable to Bank under
this Section 3.1 shall be made as though Bank shall have actually
funded or committed to fund the relevant LIBOR-based Loan or TIIE-
based Loan through the purchase of an underlying deposit in an amount
equal to the amount of such Loan and having a maturity comparable to
the relevant Interest Period; provided, however, that Bank may fund
any LIBOR-based Loan or TIIE-based Loan in any manner it deems fit and
the foregoing assumptions shall be utilized only for the purpose of
the calculation of amounts payable under this Section. Upon the
written request of Company, Bank shall deliver to Company a
certificate setting forth the basis in reasonable detail for
determining such losses, costs and expenses, which certificate shall
be conclusively presumed correct, absent manifest error.
3.2 ILLEGALITY. If, after the date hereof, the introduction of,
or any change in, any applicable law, rule or regulation or in the
interpretation or administration thereof by any governmental authority
charged with the interpretation or administration thereof, or
compliance by Bank (or its LIBOR Lending Office or TIIE Lending
Office) with any request or directive (whether or not having the force
of law) of any such authority, shall make it unlawful or impossible
for Bank (or its LIBOR Lending Office or TIIE Lending Office) to honor
its obligations hereunder to make or maintain any LIBOR-based Loan or
TIIE-based Loan under this Agreement, Bank shall forthwith give notice
thereof to Company. Thereafter, until Bank notifies Company that the
circumstance giving rise to such suspension no longer exists (a) the
obligation of Bank to make LIBOR-based Loans or TIIE-based Loans and
the right of Company to request LIBOR-based Loans or TIIE-based Loans
and to convert a Loan or refund a Loan as a LIBOR-based Loan or TIIE-
based Loan shall be suspended, and thereafter, the Federal Funds-based
Rate shall be the Applicable Interest Rate, and (b) if Bank may not
lawfully continue to maintain a LIBOR-based Loan or a TIIE-based Loan
to the end of the then current Interest Period applicable thereto, the
Federal Funds-based Rate shall be the Applicable Interest Rate for the
remainder of such Interest Period for such LIBOR-based Loan and the
CETES-based Rate for such TIIE-based Loan as applicable. To the extent
that doing so will not be, in Bank's sole judgment, disadvantageous to
Bank, if doing so will eliminate the need to suspend LIBOR-based Loan
CETES-based Loan availability pursuant to this Section 3.2 Bank will
designate a different LIBOR Lending Office or TIIE Lending Office for
the Loans hereunder.
3.3 INCREASED COSTS. If the adoption after the date hereof, or
any change after the date hereof in, any applicable law, rule or
regulation of any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or
compliance by Bank (or its LIBOR Lending Office or TIIE Lending
Office) with any request or directive (whether or not having the force
of law) made by any such authority, central bank or comparable agency
after the date hereof:
(A) SHALL SUBJECT BANK (OR ITS LIBOR LENDING OFFICE OR TIIE LENDING
OFFICE) TO ANY TAX, DUTY OR OTHER CHARGE WITH RESPECT TO ANY
LOAN, THE NOTES, OR ANY OF THE INDEBTEDNESS UNDER THIS AGREEMENT,
OR SHALL CHANGE THE BASIS OF TAXATION OF PAYMENTS TO BANK (OR ITS
LIBOR LENDING OFFICE OR TIIE LENDING OFFICE) OF THE PRINCIPAL OF
OR INTEREST ON ANY LOAN, THE NOTES, OR ANY OF THE INDEBTEDNESS
UNDER THIS AGREEMENT, OR ANY OTHER AMOUNTS DUE UNDER THIS
AGREEMENT IN RESPECT THEREOF (EXCEPT FOR CHANGES IN THE RATE OF
TAX ON THE OVERALL NET INCOME OF BANK OR ITS LIBOR LENDING OFFICE
OR TIIE LENDING OFFICE IMPOSED BY THE JURISDICTION IN WHICH
BANK'S PRINCIPAL EXECUTIVE OFFICE OR LIBOR LENDING OFFICE OR TIIE
LENDING OFFICE IS LOCATED); OR
(B) SHALL IMPOSE, MODIFY OR DEEM APPLICABLE ANY RESERVE (INCLUDING,
(TO THE EXTENT NOT PROVIDED ELSEWHERE IN THIS AGREEMENT) WITHOUT
LIMITATION, ANY IMPOSED BY THE BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM), SPECIAL DEPOSIT OR SIMILAR REQUIREMENT AGAINST
ASSETS OF, DEPOSITS WITH OR FOR THE ACCOUNT OF, OR CREDIT
EXTENDED BY BANK (OR ITS LIBOR LENDING OFFICE) OR SHALL IMPOSE ON
BANK (OR ITS LIBOR LENDING OFFICE) OR THE FOREIGN EXCHANGE AND
INTERBANK MARKETS ANY OTHER CONDITION AFFECTING ANY LOAN, THE
NOTES, OR ANY INDEBTEDNESS UNDER THIS AGREEMENT;
and the result of any of the foregoing is to increase the cost to Bank of
maintaining any part of the indebtedness hereunder or to reduce the amount
of any sum received or receivable by Bank under this Agreement, the Notes,
or any of the indebtedness hereunder, by an amount reasonably deemed by
Bank to be material, then Company shall pay to Bank, within thirty (30)
days of Company's receipt of written notice from Bank demanding such
compensation, such additional amount or amounts as will reasonably
compensate Bank for such increased cost or reduction. Bank will promptly
notify Company of any event of which it has knowledge which will entitle
Bank to compensation pursuant to this Section 3.3. A certificate of Bank
setting forth the basis in reasonable detail for determining such
additional amount or amounts necessary to compensate Bank shall be
conclusively presumed to be correct, absent manifest error.
3.4 CAPITAL ADEQUACY. In the event that after the Effective Date,
any applicable law, treaty, rule or regulation (whether domestic or
foreign) now or hereafter in effect and whether or not presently
applicable to Bank, or any interpretation or administration thereof by
any governmental authority charged with the interpretation or
administration thereof, or compliance by Bank with any guideline,
request or directive of any such authority (whether or not having the
force of law), including any risk-based capital guidelines, affects or
would affect the amount of capital required or expected to be
maintained by the Bank (or any corporation controlling the Bank), and
the Bank determines that the amount of such capital is increased by or
based upon the existence of any obligations of the Bank hereunder or
the making or maintaining any Loans, and such increase has the effect
of reducing the rate of return on Bank's (or such controlling
corporation's) capital as a consequence of such obligations or the
making or maintaining such Loans to a level below that which the Bank
(or such controlling corporation) could have achieved but for such
circumstances (taking into consideration its policies with respect to
capital adequacy), then Company shall pay to Bank, within thirty (30)
days of Company's receipt of written notice from Bank demanding such
compensation, additional amounts sufficient to compensate the Bank (or
such controlling corporation) for any increase in the amount of
capital and reduced rate of return which Bank reasonably determines to
be allocable to the existence of any obligations of Bank hereunder or
to the making or maintaining any Loans hereunder or otherwise in
respect of any of the indebtedness hereunder. A certificate of Bank
setting forth the basis in reasonable detail for determining such
additional amounts necessary to compensate Bank shall be conclusively
presumed correct, absent manifest error. Notwithstanding the
foregoing, Company shall not be required to compensate Bank pursuant
to this Section for any period prior to the ninetieth (90th) day
preceding the date of Bank's demand for such compensation.
3.5 TAXES. Notwithstanding anything to the contrary contained
herein, all payments to be made by Company under this Agreement and
the Notes shall be made without set-off or counterclaim, as aforesaid,
and without deduction for or on account of any present or future
withholding or other taxes of any nature imposed by any governmental
authority of Mexico or of any political subdivision thereof or any
federation or organization of which such governmental authority may at
the time of payment be a member, unless Company is compelled by law to
make payment subject to such tax. In such event, Company shall:
(A) PAY TO THE BANK SUCH ADDITIONAL AMOUNTS AS MAY BE NECESSARY TO
ENSURE THAT THE BANK RECEIVES A NET AMOUNT IN DOLLARS OR PESOS,
AS THE CASE MAY BE, EQUAL TO THE FULL AMOUNT WHICH WOULD HAVE
BEEN RECEIVABLE HAD PAYMENT NOT BEEN MADE SUBJECT TO SUCH TAX;
AND
(B) REMIT SUCH TAX TO THE RELEVANT TAXING AUTHORITIES ACCORDING TO
APPLICABLE LAW, AND SEND TO BANK WITHIN FORTY FIVE (45) DAYS
FOLLOWING THE DATE IN WHICH SUCH TAX IS DUE AND PAYABLE SUCH
CERTIFICATES OR CERTIFIED RECEIPTS AS BANK SHALL REASONABLE
REQUIRE AS PROOF OF THE PAYMENT BY THE COMPANY OF ANY SUCH TAXES;
PROVIDED, THAT BANK SHALL PROMPTLY REIMBURSE TO BORROWER AN
AMOUNT IN DOLLARS EQUAL TO THE AMOUNT, IF ANY, OF ANY SUCH TAX
CREDITS ACTUALLY USED BY BANK TO OFFSET ITS TAX LIABILITIES IN
THE UNITED STATES OF AMERICA ON ITS FOREIGN SOURCE INCOME, IN
ACCORDANCE WITH UNITED STATES OF AMERICA TAX REGULATIONS. IN
CONNECTION THEREWITH, BANK SHALL ENDEAVOR TO OBTAIN FROM THE TAX
AUTHORITIES OF THE UNITED STATES OF AMERICA A TAX CREDIT ON ANY
MEXICAN INCOME TAX WITHHELD FROM INTEREST PAYMENTS RECEIVED BY
BANK HEREUNDER AND THE NOTES.
THE PROVISIONS OF THIS SECTION SHALL SURVIVE TERMINATION HEREOF.
As used herein, the terms "tax", "taxes" and "taxation" include all
existing taxes, levies, imposts, duties, charges, fees, deductions and
withholdings and any restrictions or conditions resulting in a charge
together with interest thereon and fines and penalties with respect thereto
which may be imposed by any governmental authority of Mexico or of any
political subdivision thereof or any federation or organization of which
such governmental authority may at the time of payment be a member by
reason of any violation or default with respect to the law regarding such
tax, assessed as a result of or in connection with the transactions in
Dollars or Pesos, as the case may be, the payment or delivery of funds into
or out of any jurisdiction other than the United States of America or to
non-Mexican residents (whether assessed against Company or Bank).
Notwithstanding the foregoing or anything contained herein or in any other
Loan Document to the contrary, it is understood and agreed that the CETES-
based Rate, the Federal Funds-based Rate, the LIBOR-based Rate and the
TIIE-based Rate expressly provides for the payment by Borrower of
withholding for Mexican Income taxes applicable to interest payments to
Bank hereunder and the Notes.
3.6 CURRENCY INDEMNITY. The Bank will make all advances and
disbursements in Dollars or Pesos, as the case may be, and Company is
bound to repay the Loan in Dollars, if such advance was disbursed by
the Company in Dollars and in Pesos if such advance was disbursed by
the Company in Pesos, accordingly, the parties agree that:
(A) IN THE EVENT OF A JUDGMENT OR ORDER BEING RENDERED BY ANY COURT
OR TRIBUNAL HAVING JURISDICTION THEREOF, FOR THE PAYMENT OF ANY
AMOUNTS OWED TO THE BANK UNDER A LIBOR-BASED LOAN, OR FOR THE
PAYMENT OF DAMAGES RESULTING FROM ANY BREACH OF THIS LOAN OR OF
THE LOAN DOCUMENTS AND IF SUCH JUDGMENT OR ORDER IS BEING
EXPRESSED IN A CURRENCY OTHER THAN DOLLARS ("JUDGMENT CURRENCY"),
THE COMPANY HEREBY AGREES TO INDEMNIFY AND HOLD HARMLESS THE BANK
AGAINST ANY DEFICIENCY IN TERMS OF DOLLARS IN THE AMOUNT RECEIVED
BY THE BANK ARISING OUT OR RESULTING FROM ANY VARIATION IN (I)
THE RATE OF EXCHANGE AT WHICH DOLLARS ARE CONVERTED INTO THE
JUDGMENT CURRENCY AND, (II) THE RATE OF EXCHANGE AT WHICH THE
BANK IS ABLE TO PURCHASE DOLLARS WITH THE AMOUNT OF THE JUDGMENT
CURRENCY ACTUALLY RECEIVED BY THE BANK ON THE BUSINESS DAY
FOLLOWING SUCH RECEIPT.
(B) THE ABOVE INDEMNITY SHALL CONSTITUTE A SEPARATE AND INDEPENDENT
OBLIGATION OF THE COMPANY FROM ITS OTHER OBLIGATIONS ASSUMED
HEREUNDER OR UNDER THE LOAN DOCUMENTS AND SHALL APPLY
IRRESPECTIVE OF ANY INDULGENCE GRANTED BY THE BANK AND NO PROOF
OR EVIDENCE OF ANY ACTUAL LOSS SHALL BE REQUIRED BY THE COMPANY.
THE ABOVE INDEMNITY SHALL ALSO APPLY IN THE EVENT FOR ANY REASON
THE COMPANY MAKES PAYMENT TO THE BANK IN A CURRENCY OTHER THAN
DOLLARS, EXCEPT FOR PAYMENTS IN PESOS MADE UNDER A TIIE-BASED
LOAN OR CETES-BASED LOAN.
(C) THE TERM RATE OF EXCHANGE SHALL INCLUDE ANY PREMIUMS, COMMISSIONS
AND COSTS OF EXCHANGE PAYABLE IN CONNECTION WITH THE PURCHASE OF,
OR CONVERSION INTO DOLLARS.
3.7 ALTERNATIVE INTEREST RATE. Notwithstanding anything to the
contrary contained herein:
(a) If Bank determines that by virtue of circumstances affecting the
LIBOR market or in the event that such rate does not appear on
Page BBAM of the Bloomberg Financial Markets Information Service
(or otherwise on such Service) or if the Reserve Requirements are
applicable to Bank or for any other reason set forth in this
Section 3, adequate and reasonable means do not exist to
determine or maintain the LIBOR Rate applicable to the Loan or
such event has the effect of reducing the Bank's rate of return,
Bank shall notify Borrower that the LIBOR-based Rate shall no
longer be the Applicable Interest Rate and Federal Funds-based
Rate shall be the Applicable Interest Rate. In such event, on or
before 48 hours prior to the commencement of such period in which
the Federal Funds-based Rate is the Applicable Interest Rate,
Borrower shall execute and deliver to Bank the Federal Funds-
based Rate Note. Thereafter, until it is reasonably determined
by Bank and notified to Borrower that such circumstances no
longer exist, the right of Borrower to request the applicability
of a LIBOR-based Rate on the Loan shall be suspended and Borrower
shall only be permitted to request the applicability of a Federal
Funds-based Rate on the Loan.
(b) Borrower hereby agrees that in the event Borrower does not accept
the Federal Funds-based Rate or fails to execute and deliver the
Federal Funds-based Rate Note in accordance with this Section,
then Bank shall be released from its obligation to maintain the
Loan. In such an event Borrower shall pay without any penalty,
precisely on the next succeeding date in which the payment of
interest is due, the principal amount of Loan, together with
interest accrued to the date of such payment, in accordance with
the Notes. Borrower hereby also agrees that in the event of such
payment all of Bank's obligations hereunder shall terminate
immediately without any liability for Bank. Bank hereby also
agrees that in the event of payment in full of all Borrower's
obligations hereunder, Borrower's obligations shall terminate
immediately without any liability for Borrower.
(c) If Bank determines that by virtue of circumstances affecting the
TIIE market or in the event that such rate is not published in
the Official Gazette or if the Reserve Requirements are
applicable to Bank or for any other reason set forth in this
Section 3, adequate and reasonable means do not exist to
determine or maintain the TIIE Rate applicable to the Loan or
such event has the effect of reducing the Bank's rate of return,
Bank shall notify Borrower that the TIIE-based Rate shall no
longer be the Applicable Interest Rate and CETES-based Rate shall
be the Applicable Interest Rate. In such event, on or before 48
hours prior to the commencement of such period in which the
CETES-based Rate is the Applicable Interest Rate, Borrower shall
execute and deliver to Bank the CETES-based Rate Note.
Thereafter, until it is reasonably determined by Bank and
notified to Borrower that such circumstances no longer exist, the
right of Borrower to request the applicability of a TIIE-based
Rate on the Loan shall be suspended and Borrower shall only be
permitted to request the applicability of a CETES-based Rate on
the Loan.
(a)Borrower hereby agrees that in the event Borrower does not accept the
CETES-based Rate or fails to execute and deliver the CETES-based Rate Note
in accordance with this Section, then Bank shall be released from its
obligation to maintain the Loan. In such an event Borrower shall pay
without any penalty, precisely on the next succeeding date in which the
payment of interest is due, the principal amount of Loan, together with
interest accrued to the date of such payment, in accordance with the Notes.
Borrower hereby also agrees that in the event of such payment all of Bank's
obligations hereunder shall terminate immediately without any liability for
Bank. Bank hereby also agrees that in the event of payment in full of all
Borrower's obligations hereunder, Borrower's obligations shall terminate
immediately without any liability for Borrower.
1. CONDITIONS
A. The obligation of Bank to enter into this Agreement is subject to
the following conditions precedent:
1.1 EXECUTION OF THIS AGREEMENT. Company and the Credit Parties,
as applicable, shall have executed and delivered to Bank, or caused to
have been executed and delivered to the Bank, this Agreement, the
Guaranty (FIANZA SOLIDARIA), and all other applicable Loan Documents
(except the Security Documents), (including all schedules, exhibits,
certificates, opinions, financial statements and other documents to be
delivered pursuant hereto), and such Loan Documents (when executed and
delivered to Bank) shall be in full force and effect and binding and
enforceable obligations of Company and any other Credit Parties who
may be parties thereto, except to the extent limited by applicable
bankruptcy, insolvency or other insolvency laws.
1.2 COMPANY AUTHORITY DOCUMENTS. Bank shall have received
certified copies of Company's charter and estatutos sociales and
powers of attorney in form acceptable to Bank.
1.3 GUARANTOR'S AUTHORITY DOCUMENTS. Bank shall have received
certified copies of each Mexican Guarantor's estatutos sociales and
powers of attorney in form acceptable to Bank. With respect to the US
Guarantor, Bank shall have received a certificate of good standing
from the Secretary of State for the State of Delaware and such other
documentation as Bank may reasonably request to confirm that the
Guaranty executed by the US Guarantor has been duly authorized,
executed and delivered.
1.4 CERTIFICATES. Bank shall have received a Certificate of
Secretary and an Officer's Certificate from each of the Company and
Guarantors (other than the US Guarantor) in the form set forth in
Schedule 4.4(A), attached hereto.
1.5 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Company, and any other Person who is a party to any
of the Loan Documents, under this Agreement or any of the Loan
Documents, and the representations and warranties of any of the
foregoing made to Bank which are contained in any certificate,
document or financial or other statement furnished at any time
hereunder or thereunder or in connection herewith or therewith, shall
have been true and correct in all material respects when made.
1.6 COMPLIANCE WITH CERTAIN DOCUMENTS AND AGREEMENTS. Company and
any other Person who is a party to any of the Loan Documents shall
have each performed and complied in all material respects with all
agreements and conditions contained in the Loan Documents applicable
to it which have been (or will be) delivered pursuant to the terms
hereunder and are then in effect.
1.7 OPINION OF COUNSEL. Company shall have furnished Bank
opinions of counsel to Company and the Guarantors, dated the date
hereof, and covering such matters as required by Bank in substantially
the form attached hereto as Schedule 4.7, provided, however, that all
opinions with respect to the Notes and Security Documents shall be
condition to the funding of the initial Loan under Article 4 B below.
1.8 NO MATERIAL ADVERSE EFFECT; NO DEFAULT. No Default or Event
of Default shall have occurred and be continuing and there shall have
been no Material Adverse Effect with respect to the condition
(financial or otherwise), properties, business, results or operations
of the Credit Parties since the date of the financial statements of
Company and/or Guarantors mentioned in Section 5.17 hereof.
1.9 PROCESS AGENT APPOINTMENT. The Company has furnished to the
Bank evidence that the Process Agent has been duly appointed, and that
the Process Agent has accepted such designation.
1.10 SPECIAL POWER OF ATTORNEY. The Company and the Mexican
Guarantors have granted an irrevocable special power of attorney under
Mexican law in favor of the Process Agent.
1.11 LIEN SEARCHES. Bank shall have received such evidence
satisfactory to Bank indicating that upon the filing and/or recording
of the Security Documents, Bank's shall have a first priority,
perfected lien and/or security interest in the Collateral.
1.12 COMPLIANCE WITH INDENTURE. Bank shall have received an
opinion of counsel to the US Guarantor and a certificate from an
officer of the US Guarantor, in form and substance satisfactory to
Bank, indicating that this Agreement does not violate the terms of the
Indenture.
1.13 OTHER DOCUMENTS AND INSTRUMENTS. Bank shall have received
such other instruments and documents (not inconsistent with the terms
hereof) as Bank may reasonably request in connection with the making
of the Loans hereunder, and all such instruments and documents shall
be reasonably satisfactory in form and substance to the Bank.
1.14 POWER OF ATTORNEY. The Board of Directors of Company shall
have granted a special power of attorney authorizing and identifying
those individuals of Company authorized to sign the Loan Documents.
B. THE OBLIGATIONS OF BANK TO MAKE THE INITIAL LOAN UNDER THIS
AGREEMENT SHALL BE SUBJECT TO THE FOLLOWING CONDITIONS PRECEDENT:
1.15 EXECUTION OF NOTES AND SECURITY DOCUMENTS. Company and the
Credit Parties, as applicable, shall have executed and delivered to
Bank, or caused to have been executed and delivered to the Bank the
Note or Notes (PAGARS) as may be necessary to evidence the Loans
and the Security Documents and all other applicable Loan Documents,
(including all schedules, exhibits, certificates, opinions, financial
statements and other documents to be delivered pursuant hereto), not
executed and delivered under Article 4 A. above, the receipt by Bank
of evidence that the Security Documents shall have been filed for
registration with the applicable governmental authorities, and such
Loan Documents (when executed and delivered to Bank) shall be in full
force and effect and binding and enforceable obligations of Company
and any other Credit Parties who may be parties thereto, except to the
extent limited by applicable bankruptcy, insolvency or other
insolvency laws. Additionally, the Mortgages (i) shall have been duly
granted by the applicable Guarantors; (ii) shall have been filed for
registration with the relevant Public Registry of Property; (iii) all
registration and notary public fees have been paid; and (iv) and shall
constitute a first priority line in favor of the Bank.
1.16 CERTIFICATES. Bank shall have received an Officer's
Certificate from each of the Company and Guarantors (other than the US
Guarantor) in the forms set forth in Schedule 4.4(B) attached hereto.
1.17 COMPLIANCE WITH CERTAIN DOCUMENTS AND AGREEMENTS. Company
and any other Person who is a party to any of the Loan Documents shall
have each performed and complied in all material respects with all
agreements and conditions contained in the Loan Documents applicable
to it which have been delivered pursuant to the terms hereunder and
are then in effect.
1.18 OPINION OF COUNSEL. Company shall have furnished Bank
opinions of counsel to Company and the Guarantors, dated the date
hereof, with respect to the execution, delivery and enforceability of
the Notes and Security Documents in substantially the form attached
hereto as Schedule 4.7.
C. THE OBLIGATIONS OF BANK TO MAKE A LOAN UNDER THIS AGREEMENT
(INCLUDING THE INITIAL LOAN) SHALL BE SUBJECT TO THE FOLLOWING
CONDITIONS PRECEDENT:
1.19 NO EVENT OF DEFAULT. As of the date of such Loan, no default
or Event of Default shall have occurred and be continuing and there
shall have been no Material Adverse Effect with respect to the
condition (financial or otherwise), properties, business, results or
operations of the Credit Parties, taken as a whole, since the last
date of the financial statements of Company and/or Guarantors
delivered to Bank in accordance with Section 6.1 hereof.
1.20 REPRESENTATIONS AND WARRANTIES. As of the date of such Loan,
the representations and warranties made by Company, and any other
Credit Party under this Agreement or any of the Loan Documents, and
the representations and warranties of any of the foregoing made to
Bank which are contained in any certificate, document or financial or
other statement furnished at any time hereunder or thereunder or in
connection herewith or therewith, shall have been true and correct in
all material respects when made.
2. REPRESENTATIONS AND WARRANTIES
Company, and to the extent applicable, each Guarantor, represents and
warrants, and such representations and warranties shall be deemed to be
continuing representations and warranties during the entire life of this
Agreement, as follows:
2.1 DUE INCORPORATION. The Borrower and the Mexican Guarantor,
are corporations duly incorporated and validly existing under the laws
of Mexico, the US Guarantor is a corporation duly incorporated,
validly existing and in good standing under the laws of the United
States, and such corporations are duly qualified to do business.
2.2 CORPORATE AUTHORITY. Both the Borrower and the Guarantors
have all requisite power and authority, corporate or otherwise, to
conduct their business, to own their properties and to execute and
deliver, and to perform all of their obligations under this Agreement
and the Note(s).
2.3 DUE EXECUTION. The execution, delivery and performance of
this Agreement and the Note(s) have been duly authorized by all
necessary corporate and/or shareholder action of both the Borrower and
the Guarantors in the case of this Agreement, and the respective
Guarantors in the case of the Guaranty(s), and do not and will not (i)
violate any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award presently in
effect having applicability to the Borrower or the Guarantors or the
estatutos sociales, charter or by-laws of the Borrower or the
Guarantors, (ii) result in a breach or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower or the Guarantors are a party or by
which their properties may be bound or affected or (iii) result in, or
require the creation or imposition of any mortgage, deed of trust,
pledge, lien, security interest or other charge or encumbrance of any
nature upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower or the Guarantors, and the Borrower
and the Guarantors are not in default under any such law, rule,
regulation, order, writ, judgment, injunction, decree, determination,
indenture or agreement, lease or instrument; the result of which would
render such Loan Document void or ineffective or result in a Material
Adverse Effect.
2.4 ENFORCEABILITY. This Agreement constitutes, and the Note(s)
when executed and delivered by the Borrower and the respective
Guarantors, as applicable, will constitute, the legal, valid and
binding obligations of the Borrower and of the Guarantors, enforceable
against the Borrower and against the Guarantors in accordance with
their terms.
2.5 PARI PASSU. The obligations of the Borrower, Avicola and
Holding under this Agreement and the Note(s) will rank at least pari
passu with all other present and future indebtedness of the Borrower,
Avicola and Holding other than the obligations secured by Permitted
Liens.
2.6 LITIGATION. Except as disclosed on Schedule 5.6, there is no
action, suit or proceeding pending against, or, to the knowledge of
the Borrower and/or the Guarantors, threatened against or affecting
the Borrower or the Guarantors before any court or arbitrator or any
governmental body, agency or official in which there is a reasonable
possibility of an adverse decision which could result in a Material
Adverse Effect.
2.7 TAXES. The Borrower and the Mexican Guarantors have filed all
federal (or State of organization) income tax returns and all other
material tax returns which are required to be filed and have paid all
such taxes due pursuant to such returns or pursuant to any assessment
received by the Borrower and by the Mexican Guarantors. The charges,
accruals and reserves on the books of the Borrower and of the Mexican
Guarantors in respect of taxes or other governmental charges are, in
the opinion of the Borrower and of the Mexican Guarantors, adequate.
2.8 COMPLIANCE WITH LAWS. The Borrower and the Mexican Guarantors
have complied with all applicable laws, ordinances, rules,
regulations, and requirements of governmental authorities (including,
without limitation, environmental laws, social security laws, housing
and pension provisions) and have made payment of all quotas or
contributions required to be made thereunder, except where
non-compliance thereof would not reasonably be expected to result in a
Material Adverse Effect.
2.9 TITLE TO PROPERTY. Each Credit Party has, good and valid
title to all property and assets purported to be owned by it,
including those assets identified on the financial statements most
recently delivered to and accepted by Bank.
2.10 ENCUMBRANCES. There are no security interests in, liens,
mortgages, or other encumbrances on and no financing statements on
file with respect to, any of the Collateral other than the Permitted
Liens.
2.11 NON-CONTRAVENTION. The execution, delivery and performance
of this Agreement and the Loan Documents and any other documents and
instruments required under or in connection with this Agreement by
Company or the Guarantors are not in contravention of the terms of any
indenture, agreement or undertaking to which Company or the
Guarantors, as the case may be, is a party or by which it is bound,
the result of which would render such Loan Document void or
ineffective or result in a Material Adverse Effect.
2.12 CONSENTS, APPROVALS AND FILINGS ETC. Except as have been
previously obtained, no authorization, consent, approval, license,
qualification or formal exemption from, nor any filing, declaration or
registration with, any court, environmental agency or regulatory
authority or other governmental body or any securities exchange and no
material authorization, consent or approval from any other person is
required in connection with the execution, delivery and performance of
any Loan Documents by Company or the Guarantors, except for the
registration of the Security Documents which must be recorded therein
in accordance with applicable laws. All such authorizations, consents,
approvals, licenses, qualifications, exemptions, filings, declarations
and registrations which have previously been obtained or made, as the
case may be, are in full force and effect and are not the subject of
any attack, or to the knowledge of Company, any threatened attack (in
any material respect), by appeal or direct proceeding or otherwise.
2.13 CONTRACTS, AGREEMENTS AND LEASES. Neither Company nor any of
its Subsidiaries (if any) is in default in complying with any
provision of any material contract, agreement, indenture, lease or
instrument to which it is a party or by which it is or those of its
properties or assets the default of which would have a Material
Adverse Effect, and, to the best of Company's knowledge, each such
contract, commitment, undertaking, agreement, indenture and instrument
is in full force and effect and is valid and legally binding.
2.14 NO MARGIN STOCK. No Credit Party is engaged principally, or
as one of its important activities, directly or indirectly, in the
business of extending credit for the purpose of purchasing or carrying
margin stock, and none of the proceeds of any of the Loans or other
indebtedness hereunder will be used, directly or indirectly, to
purchase or carry any margin stock or made available by a Credit Party
in any manner to any other Person to enable or assist such Person in
purchasing or carrying margin stock, or otherwise used or made
available for any other purpose which might violate the provisions of
Regulations G, T, U, or X of the Board of Governors of the Federal
Reserve System.
2.15 HAZARDOUS MATERIALS.
(A) NO CREDIT PARTY HAS USED HAZARDOUS MATERIALS ON OR AFFECTING ANY
REAL PROPERTY OWNED OR OPERATED BY BORROWER OR ANY MEXICAN
GUARANTOR (COLLECTIVELY AND SINGULARLY THE "PREMISES") IN ANY
MANNER WHICH VIOLATES ANY ENVIRONMENTAL LAWS, AND, TO THE BEST OF
EACH CREDIT PARTY'S KNOWLEDGE, NO PRIOR OWNER OF THE PREMISES OR
ANY CURRENT OR PRIOR OCCUPANT HAS USED HAZARDOUS MATERIALS ON OR
AFFECTING THE PREMISES IN ANY MANNER WHICH VIOLATES ANY
ENVIRONMENTAL LAWS, EXCEPT WHERE SUCH VIOLATION WOULD NOT
REASONABLY BE EXPECTED TO RESULT IN A MATERIAL ADVERSE EFFECT.
EACH CREDIT PARTY COVENANTS AND AGREES THAT NEITHER IT, NOR ANY
OCCUPANT OF ANY OF THE PREMISES SHALL USE, INTRODUCE OR MAINTAIN
HAZARDOUS MATERIALS ON THE PREMISES IN ANY MANNER, UNLESS, IN ALL
MATERIAL RESPECTS, DONE IN STRICT COMPLIANCE WITH ALL
ENVIRONMENTAL LAWS.
(B) EACH CREDIT PARTY SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS BANK,
ITS EMPLOYEES, AGENTS, OFFICERS AND DIRECTORS, FROM AND AGAINST
ANY AND ALL CLAIMS, DEMANDS, PENALTIES, FINES, LIABILITIES,
SETTLEMENTS, DAMAGES, COSTS AND EXPENSES OF WHATEVER KIND OR
NATURE ARISING OUT OF OR RELATED TO (I) THE PRESENCE, DISPOSAL,
RELEASE OR THREATENED RELEASE OF ANY HAZARDOUS MATERIALS ON, FROM
OR AFFECTING THE PREMISES OR THE SOIL, WATER, VEGETATION,
BUILDINGS, PERSONAL PROPERTY, PERSONS OR ANIMALS THEREON, (II)
ANY PERSONAL INJURY (INCLUDING WRONGFUL DEATH) OR PROPERTY DAMAGE
(REAL OR PERSONAL) ARISING OUT OF OR RELATED TO SUCH HAZARDOUS
MATERIALS, (III) ANY LAWSUIT BROUGHT OR THREATENED, SETTLEMENT
REACHED OR GOVERNMENTAL ORDER RELATING TO SUCH HAZARDOUS
MATERIALS, (IV) THE COST OF REMOVAL OF ALL SUCH HAZARDOUS
MATERIALS FROM ALL OR ANY PORTIONS OF THE PREMISES, (V) TAKING
NECESSARY PRECAUTIONS TO PROTECT AGAINST THE RELEASE OF HAZARDOUS
MATERIALS ON OR AFFECTING THE PREMISES, (VI) COMPLYING WITH ALL
ENVIRONMENTAL LAWS, AND/OR (VII) ANY VIOLATION OF ENVIRONMENTAL
LAWS OR REQUIREMENTS OF BANK, WHICH ARE BASED UPON OR IN ANY WAY
RELATED TO SUCH HAZARDOUS MATERIALS, INCLUDING, WITHOUT
LIMITATION, REASONABLE ATTORNEYS' AND CONSULTANTS' FEES (SAID
ATTORNEYS AND CONSULTANTS TO BE SELECTED BY BANK), INVESTIGATION
AND LABORATORY FEES, ENVIRONMENTAL STUDIES REQUIRED BY BANK
(WHETHER PRIOR TO FORECLOSURE OR OTHERWISE), AND COURT COSTS AND
LITIGATION EXPENSES. UPON REQUEST OF BANK, A CREDIT PARTY SHALL
EXECUTE, A SEPARATE INDEMNITY COVERING THE SAME MATTERS SET FORTH
HEREIN.
(C) AS OF THE EFFECTIVE DATE, NO CREDIT PARTY HAS RECEIVED ANY NOTICE
("ENVIRONMENTAL COMPLAINT") OF ANY VIOLATIONS OF ENVIRONMENTAL
LAWS (AND, WITHIN FIVE (5) DAYS OF RECEIPT OF ANY ENVIRONMENTAL
COMPLAINT ARISING HEREAFTER, SUCH PARTY SHALL GIVE BANK A COPY
THEREOF), AND TO THE BEST OF EACH CREDITOR PARTY'S KNOWLEDGE,
THERE HAVE BEEN NO ACTIONS COMMENCED OR THREATENED BY ANY PARTY
FOR NONCOMPLIANCE BY A CREDIT PARTY WITH ANY ENVIRONMENTAL LAWS.
(D) THE PROVISIONS OF SECTION 5.15 (B) SHALL BE IN ADDITION TO ANY
AND ALL OTHER OBLIGATIONS AND LIABILITIES A CREDIT PARTY MAY HAVE
TO BANK AT COMMON LAW OR PURSUANT TO ANY OTHER AGREEMENT AND,
NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY, SHALL
SURVIVE (I) THE REPAYMENT OF ALL SUMS DUE UNDER THE NOTE AND THE
OTHER LOAN DOCUMENTS AND THE REPAYMENT OF ALL OTHER INDEBTEDNESS
HEREUNDER, AND (II) THE SATISFACTION OF ALL OF THE OTHER
OBLIGATIONS OF SUCH CREDIT PARTY HEREUNDER AND UNDER THE OTHER
LOAN DOCUMENTS.
2.16 LABOR DISPUTES AND CASUALTIES. LABOR MATTERS. As of the
Effective Date, there are no strikes or other labor disputes against
Borrower or any Mexican Guarantor that are pending or, to any Credit
Party's knowledge, threatened. All payments due from Borrower or any
Mexican Guarantor on account of employee health and welfare insurance
have been and will continue to be paid or accrued as a liability on
the books of such Credit Party. Except as set forth on Schedule 5.16,
as of the Effective Date (a) there is no organizing activity involving
Borrower or any Mexican Guarantor pending or, to any Credit Party's
knowledge, threatened by any labor union or group of employees; (b)
there are no representation proceedings pending or, to any Credit
Party's knowledge, threatened with the National Labor Relations Board
or any analogous organization in Mexico such as the JUNTA FEDERAL DE
CONCILIACIN Y ARBITRAJE or the JUNTA LOCAL DE CONCILIACIN Y
ARBITRAJE; and (c) no labor organization or group of employees of
Borrower or any Mexican Guarantor has pending any demand for
recognition, and each Credit Party shall give to Bank prompt written
notice of any of the foregoing occurring after the Effective Date.
2.17 ACCURACY OF INFORMATION. As of the Effective Date, the
financial statements of the Credit Parties dated June 30, 2001,
previously furnished to Bank by such Credit Parties, are complete and
correct in all material respects and fairly present the financial
condition of such Credit Party, and the results of its operations for
the periods covered thereby; and since the date of said financial
statements, there has been no Material Adverse Effect.
2.18 SOLVENCY. Company and Guarantors are solvent, able to pay
its debts as they mature, has capital sufficient to carry on its
business and has assets the fair market value of which exceed its
liabilities, and neither Company nor Guarantors will be rendered
insolvent, under-capitalized or unable to pay debts generally as they
become due by the execution or performance of this Agreement, or any
of the other Loan Documents to which it is party.
3. AFFIRMATIVE COVENANTS
Company, and to the extent applicable, each Guarantor, covenants and
agrees that it will, and it will cause each of its Subsidiaries of Borrower
and Mexican Guarantors (if any) to, so long as Bank is committed to make
any Loans pursuant to this Agreement, and thereafter, so long as any
indebtedness remains outstanding under or pursuant to this Agreement or the
Notes:
3.1 REPORTING. Furnish to the Bank:
(A) AS SOON AS POSSIBLE AND IN ANY EVENT WITHIN 10 (TEN) DAYS AFTER
OBTAINING KNOWLEDGE OF THE OCCURRENCE OF EACH EVENT OF DEFAULT,
OR EACH EVENT WHICH WITH THE GIVING OF NOTICE OR LAPSE OF TIME OR
BOTH WOULD REASONABLY EXPECTED TO CONSTITUTE AN EVENT OF DEFAULT,
WHICH IS CONTINUING ON THE DATE OF SUCH STATEMENT, THE STATEMENT
OF AN AUTHORIZED OFFICER OF THE BORROWER OR THE GUARANTORS
SETTING FORTH DETAILS OF SUCH EVENT OF DEFAULT OR EVENT WHICH
WOULD CONSTITUTE AN EVENT OF DEFAULT, AND THE ACTION WHICH THE
BORROWER OR THE GUARANTORS PROPOSE TO TAKE WITH RESPECT THERETO;
(B) AS SOON AS AVAILABLE AND IN ANY EVENT WITHIN 60 (SIXTY) DAYS
AFTER THE END OF EACH OF THE QUARTERS OF EACH FISCAL YEAR OF THE
BORROWER AND OF THE GUARANTORS (EXCLUDING THE LAST FISCAL QUARTER
OF BORROWER'S AND GUARANTOR'S FISCAL YEAR), A CONSOLIDATED
BALANCE SHEET OF THE BORROWER AND THE GUARANTORS AS OF THE END OF
SUCH QUARTER AND STATEMENTS OF INCOME AND RETAINED EARNINGS OF
THE BORROWER AND OF THE GUARANTORS FOR THE PERIOD COMMENCING AT
THE END OF THE PREVIOUS FISCAL YEAR AND ENDING WITH THE END OF
SUCH QUARTER, (I) IN DOLLARS AND IN PESOS FOR THE BORROWER AND
THE MEXICAN GUARANTORS, AND (II) IN DOLLARS FOR THE US GUARANTOR,
ALL IN REASONABLE DETAIL AND DULY CERTIFIED (SUBJECT TO YEAR END
AUDIT ADJUSTMENTS) BY AN OFFICER OF THE BORROWER OR OF THE
GUARANTORS, AS THE CASE MAY BE, AS HAVING BEEN PREPARED IN
ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
MEXICO OR IN THE UNITED STATES, AS THE CASE MAY BE, CONSISTENTLY
APPLIED, AND TOGETHER WITH (X) A CERTIFICATE OF SAID OFFICER
STATING THAT THE COVENANTS SET FORTH IN SECTIONS 6.7, 6.8, 6.9
AND 6.10 ARE BEING COMPLIED WITH, TOGETHER WITH A SHEET SETTING
FORTH THE CALCULATIONS TO DETERMINE THE FOREGOING, AND (Y) A
CERTIFICATE OF SAID OFFICER STATING THAT HE HAS NO KNOWLEDGE THAT
AN EVENT OF DEFAULT, OR AN EVENT WHICH WITH THE GIVING OF NOTICE
OR LAPSE OF TIME OR BOTH WOULD CONSTITUTE AN EVENT OF DEFAULT,
HAS OCCURRED AND IS CONTINUING OR, IF AN EVENT OF DEFAULT OR SUCH
EVENT HAS OCCURRED AND IS CONTINUING, A STATEMENT AS TO THE
NATURE THEREOF AND THE ACTION WHICH THE BORROWER OR THE
GUARANTORS PROPOSE TO TAKE WITH RESPECT THERETO. NOTWITHSTANDING
ANYTHING TO THE CONTRARY CONTAINED HEREIN, AS LONG AS THE US
GUARANTOR FILES ITS "10-K" AND "10-Q" STATEMENTS WITH THE
SECURITIES AND EXCHANGE COMMISSION, IT WILL NOT BE REQUIRED TO
SUBMIT TO BANK THE STATEMENTS SET FORTH IN THIS SECTION OTHER
THAN THE CERTIFICATES SET FORTH IN (X) AND (Y);
(C) AS SOON AS AVAILABLE AND IN ANY EVENT WITHIN 135 (ONE HUNDRED
THIRTY FIVE) DAYS AFTER THE END OF EACH FISCAL YEAR OF THE
BORROWER AND OF THE GUARANTORS, A COPY OF THE AUDITED
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND RETAINED
EARNINGS FOR THE BORROWER AND FOR THE GUARANTORS (PROVIDED,
HOWEVER, THAT BORROWER AND GUARANTORS SHALL USE REASONABLE
EFFORTS TO DELIVER PRELIMINARY STATEMENTS WITHIN 120 DAYS AFTER
THE END OF EACH SUCH FISCAL YEAR), (I) IN DOLLARS AND IN PESOS
FOR THE BORROWER AND THE MEXICAN GUARANTOR, AND (II) IN DOLLARS
FOR THE U.S. GUARANTOR IN EACH CASE CERTIFIED BY INDEPENDENT
PUBLIC ACCOUNTANTS OF RECOGNIZED STANDING ACCEPTABLE TO THE BANK,
TOGETHER WITH (X) A CERTIFICATE OF AN OFFICER OF THE BORROWER AND
OF THE GUARANTORS, STATING THAT THE COVENANTS SET FORTH IN
SECTIONS 6.7, 6.8, 6.9 AND 6.10 ARE BEING COMPLIED WITH, TOGETHER
WITH A SHEET SETTING FORTH THE CALCULATIONS TO DETERMINE THE
FOREGOING, AND (Y) A CERTIFICATE OF AN OFFICER OF THE BORROWER
AND OF THE GUARANTORS STATING THAT HE HAS NO KNOWLEDGE THAT AN
EVENT OF DEFAULT, OR AN EVENT WHICH WITH NOTICE OR LAPSE OF TIME
OR BOTH WOULD CONSTITUTE AN EVENT OF DEFAULT, HAS OCCURRED AND IS
CONTINUING, OR IF, IN THE OPINION OF SUCH OFFICER, AN EVENT OF
DEFAULT OR SUCH AN EVENT HAS AND IS CONTINUING, A STATEMENT AS TO
THE NATURE THEREOF AND THE ACTION WHICH THE BORROWER OR THE
GUARANTORS PROPOSE TO TAKE WITH RESPECT THERETO. NOTWITHSTANDING
ANYTHING TO THE CONTRARY CONTAINED HEREIN, AS LONG AS THE US
GUARANTOR FILES ITS "10-K" AND "10-Q" STATEMENTS WITH THE
SECURITIES AND EXCHANGE COMMISSION, IT WILL NOT BE REQUIRED TO
SUBMIT TO BANK THE STATEMENTS SET FORTH IN THIS SECTION OTHER
THAN THE CERTIFICATES SET FORTH IN (X) AND (Y);
(D) IMMEDIATELY AFTER THE COMMENCEMENT THEREOF, NOTICE IN WRITING OF
ALL ACTIONS, SUITS AND PROCEEDINGS ADVERSELY PENDING IN ANY COURT
OF COMPETENT JURISDICTION AGAINST BORROWER OR A MEXICAN GUARANTOR
IN EXCESS OF US $5,000,000.00 (FIVE MILLION DOLLARS OF THE UNITED
STATES OF AMERICA);
(E) IN THE CASE OF THE OPERATING COMPANY, ON A MONTHLY BASIS WITHIN
THE FIRST 15 (FIFTEEN) BUSINESS DAYS, A REPORT LISTING THE THIRD
PARTY ACCOUNTS RECEIVABLE, ANY RESERVES FOR DOUBTFUL ACCOUNTS AND
INVENTORY;
(F) INTENTIONALLY OMITTED;
(G) IN THE CASE OF THE BORROWER AND AVICOLA, UPON SUBMISSION OF THE
DOCUMENTATION MENTIONED IN PARAGRAPHS (B) AND (C) ABOVE, AND TO
THE EXTENT APPLICABLE, SUBMIT TO THE BANK A CALCULATION OF THE
FINANCIAL COVENANTS, AS WELL AS A COMPLIANCE CERTIFICATE STATING
THE FULFILLMENT OF THE BORROWER TO ALL THE OBLIGATIONS STATED
HEREIN; AND
(H) SUCH OTHER INFORMATION RESPECTING THE BUSINESS, PROPERTIES OR THE
CONDITIONS OF OPERATIONS, FINANCIAL OR OTHERWISE OF THE BORROWER
AND THE GUARANTORS AS THE BANK MAY FROM TIME TO TIME REASONABLY
REQUEST.
3.2 TAXES. Duly pay and discharge all taxes, assessments and
governmental charges or levies imposed upon the Borrower and the
Guarantors or upon their income or profits, or upon any properties
belonging to the them, by Mexico, the United States, or by any other
jurisdiction, or any political subdivision thereof, prior to the date
on which penalties are attached thereto, and all lawful claims which,
if not paid, may become a lien or charge upon any properties of the
Borrower or of the Guarantors, PROVIDED, HOWEVER, that the Borrower
and the Guarantors shall not be required to pay any such tax,
assessment, charge, levy or claim which is being contested in good
faith and by proper legal proceedings.
3.3 INSURANCE. Obtain prior to the initial Loan and thereafter,
maintain insurance with responsible and reputable insurance companies
or associations in such amounts and covering such risks as is usually
carried by companies engaged in similar businesses and owning similar
properties in the same general areas in which the Borrower and the
Mexican Guarantors operate and such other insurance as may be required
by law, all of which Insurance shall be in such amounts, containing
such terms, in such form, for such purposes, prepaid for such time
period, and written by such companies as shall be reasonably
satisfactory to the Bank. All such policies covering the Collateral
shall contain a provision whereby they may not be canceled for non
payment of premiums (unless substitute insurance in compliance with
this Section 6.3 is obtain and provided on or before the date of such
cancellation) except upon thirty (30) days' prior written notice to
the Bank. The Operating Company will promptly deliver to the Bank, at
the Bank's request, evidence satisfactory to the Bank that such
insurance has been so procured and, with respect to casualty
insurance, endorsed with a loss payable clause in favor of the Bank.
If the Operating Company fails to maintain satisfactory insurance
covering the Collateral as herein provided, the Bank shall have the
option to do so, and the Borrower agrees to repay the Bank upon
demand, with interest at the Federal Funds-based Rate then in effect
for the Revolving Loan, all amounts so expended by the Bank. Upon an
Event of Default or with respect to any loss in excess of US
$2,500,000, the Operating Company appoints the Bank or any employee or
agent of the Bank as the Operating Company's attorney-in-fact, which
appointment is coupled with an interest and irrevocable, and
authorizes the Bank or any employee or agent of the Bank, on behalf of
the Operating Company, to adjust and compromise any loss under said
insurance covering the Collateral (which adjustment or compromise
shall only be made with the Operating Company's consent if an Event of
Default has not occurred and is not continuing hereunder)and to
endorse any check or draft payable to the Operating Company in
connection with returned or unearned premiums on said insurance or the
proceeds of said insurance, and any amount so collected shall be
applied toward repair and/or replacement of the Collateral to which
such casualty occurred or satisfaction of the indebtedness hereunder
in accordance in accordance with the provisions governing such
application in the Security Documents pursuant to which Bank's liens
on such Collateral were granted.
3.4 CORPORATE EXISTENCE. Preserve and maintain their corporate
existence, rights, franchises and privileges in Mexico or the United
States, as the case may be; except (i) when said rights, franchises
and privileges shall be terminated by operation of law or order of
authority; (ii) or the termination of such rights, franchises and
privileges would not reasonably be expected to result in a Material
Adverse Effect .
3.5 MAINTENANCE OF PROPERTIES. Maintain and preserve all of their
properties necessary or useful in the proper conduct of their business
in good working order and condition, ordinary wear and tear excepted,
provided, however, that no Credit Party will be prevented by this
covenant from discontinuing those operations or disposing of or
suspending the maintenance of those properties which, in the
reasonable judgment of such Credit Party, is no longer necessary or
useful in the conduct of such Credit Party's business or would not
result in a Material Adverse Effect.
3.6 COMPLIANCE WITH LAWS. Comply with all applicable laws and
regulations of any governmental entity and the terms of any indenture,
contract or other instrument to which the Borrower or the Guarantors
may be a party or under which their respective properties may be bound
or affected, if non-compliance would reasonably be expected to have a
Material Adverse Effect, except where contested in good faith and by
proper proceedings.
3.7 CURRENT RATIO. In the case of the Operating Company,
maintain, in accordance with its consolidated balance sheet, a minimum
Current Ratio of 1.25 to 1.0 for the interim quarterly and annual
audited financial statements, during the term hereof. In the case of
Avicola, maintain, in accordance with its consolidated balance sheet,
a minimum Current Ratio of 1.25 to 1.0 for the interim quarterly and
annual audited financial statements, during the term hereof.
3.8 INDEBTEDNESS RATIO. In the case of the Operating Company,
maintain, in accordance with its consolidated balance sheet, a maximum
Indebtedness Ratio of 0.50 to 1.0 for interim quarterly financial
statements and annual audited financial statements during the term
hereof. In the case of Avicola, maintain, in accordance with its
consolidated balance sheet, a maximum Indebtedness Ratio ratio of 0.50
to 1.0 for interim quarterly financial statements and annual audited
financial statements during the term hereof.
3.9 INTEREST COVERAGE RATIO. In the case of the Operating
Company, maintain, in accordance with its consolidated quarterly and
annual financial statements, a minimum Interest Coverage Ratio of 2.25
to 1.0. In the case of Avicola, maintain, in accordance with its
consolidated quarterly and annual quarterly and annual financial
statements, a minimum Interest Coverage Ratio of 2.25 to 1.0.
3.10 MINIMUM NET WORTH. In the case of the Operating Company,
maintain, in accordance with its consolidated financial statements on
an interim quarterly and annual basis, a minimum Net Worth of the sum
of US $100,000,000.00 (One Hundred Million Dollars) plus that amount
of Funded Debt of Operating Company in excess of the indebtedness
hereunder. In the case of Avicola, maintain, in accordance with its
consolidated financial statements on an interim quarterly and annual
basis, a minimum Net Worth of the sum of US $125,000,000.00 (One
Hundred Twenty Five Million Dollars) plus that amount of Funded Debt
of Operating Company in excess of the indebtedness hereunder.
3.11 SUBORDINATED CLAIMS. To the extent not prohibited by the
Indenture, if there is an Event of Default by Borrower or the Mexican
Guarantor that exists hereunder, then any claims that the US Guarantor
may have against them will be subordinated to the Loan.
3.12 INDENTURE. Subject to Section 7.11, notwithstanding anything
in this Agreement to the contrary, provided there is not an Event of
Default, or event which with the giving of notice or the lapse of time
or both, would constitute an Event of Default hereunder, nothing
contained herein shall be deemed to prohibit, encumber, restrict or
prevent Borrower or Mexican Guarantors or any of their respective
Subsidiaries from making any payments, loans, advances, dividends,
distributions or transfers to US Guarantor or any Subsidiary of US
Guarantor (each, a "Restricted Payment").
3.13 Intentionally omitted.
3.14 KEEPING OF BOOKS. Keep proper books of record and account in
which full and correct entries shall be made of all of its financial
transactions and its assets and businesses so as to permit the
presentation of financial statements prepared in accordance with GAAP;
and permit Bank, or its representatives, at reasonable times and
intervals, to visit all of its offices, discuss its financial matters
with its officers, employees, directors and independent certified
public accountants, and by this provision, Company authorizes such
officers, employees, directors and accountants to discuss the finances
and affairs of Company and examine any of its books and other
corporate records, subject only to reasonable security and
confidentiality procedures and provided that such requests and
visitations shall be related to and limited to matters relevant to
this Agreement and the transactions contemplated hereunder and shall
be during normal business hours and shall not unreasonably interfere
with or interrupt operations of the Company or the Guarantors.
3.15 INDEMNIFICATION. Indemnify and save Bank harmless from all
losses, costs, damages, liabilities and expenses, including, without
limitation, reasonable attorneys' fees, incurred by Bank by reason of
any Default or Event of Default hereunder, or its enforcing the
obligations of Company or any other Credit Party under this Agreement
or the Loan Documents; provided that no Credit Party shall have an
obligation to indemnify Bank hereunder to the extent the foregoing
results from the Bank's gross negligence or willful misconduct.
3.16 GOVERNMENTAL AND OTHER APPROVALS. Apply for, obtain and/or
maintain in effect, as applicable, all authorizations, consents,
approvals, licenses, qualifications, exemptions, filings, declarations
and registrations (whether with any court, governmental agency,
regulatory authority, securities exchange or otherwise) which are
necessary in connection with the execution, delivery and performance
by each Credit Party, of this Agreement, the Loan Documents, or any
other documents or instruments to be executed and/or delivered by such
Credit Party in connection therewith or herewith and all of the
obligations performed or contemplated to be performed, and material
transactions consummated or to be consummated thereunder.
3.17 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge or
cause to be paid and discharged all obligations to Bank under this
Agreement or any of the Loan Documents in a timely manner.
3.18 Intentionally omitted.
3.19 YEARLY AUDIT/APPRAISAL. Operating Company shall cooperate
with Bank in a yearly audit of the Inventory (the average annual cost
of which shall not exceed $3,000) and appraisal of the Fixed Assets,
the cost of which shall be borne by Borrower.
4. NEGATIVE COVENANTS
Borrower and Guarantors covenant and agree that, so long as Bank is
committed to make any Loans, and thereafter, so long as any indebtedness
remains outstanding under or pursuant to this Agreement or the Notes, it
will not and it will not permit any of its Subsidiaries of Borrower or
Mexican Guarantors (if any) to, without Bank's prior consent:
4.1 ENCUMBRANCES. In the case of the Operating Company, create,
incur, assume or suffer to exist any mortgage, deed of trust, pledge,
lien, security interest or other charge or encumbrance of any nature
to any third party, upon or with respect to the Collateral other than:
(A) LIENS IN FAVOR OF THE BANK;
(B) LIENS EXISTING ON THE DATE OF THIS AGREEMENT AND DISCLOSED
ON SCHEDULE 7.1;
(C) ANY LIEN ON ANY PROPERTY (BUT EXCLUDING THE COLLATERAL)
SECURING INDEBTEDNESS INCURRED OR ASSUMED FOR THE PURPOSE OF
FINANCING ALL OR ANY PART OF THE ACQUISITION COST OF SUCH
PROPERTY OR SECURING ANY CAPITAL LEASE OBLIGATIONS, PROVIDED
THAT such lien does not extend to any other property and
secures Indebtedness and Capital Lease Obligations;
(d) (i) liens for taxes not yet due, or (ii) liens for taxes,
which are being contested in good faith by appropriate
proceedings;
(e) statutory liens of landlords and liens of carriers,
warehousemen, mechanics, materialmen, worker's, repairman's,
miner's, agister's, attorney's and other liens imposed by
law created in the ordinary course of business for amounts
not yet due or which are being contested in good faith by
appropriate proceedings;
(f) liens under workers' compensation, unemployment insurance,
social security or similar legislation, or to secure
payments of premiums for insurance purchased in the ordinary
course of business, or to secure the performance of tenders,
statutory obligations, surety and appearance bonds and bids,
bonds for release of an attachment, stay of execution or
injunction, leases, government contracts, performance and
return-of-money bonds and other similar obligations, all of
which are incurred in the ordinary course of business and
not in connection with the borrowing of money);
(g) any attachment or judgment lien, the time for appeal or
petition for rehearing of which shall not have expired or in
respect of which a Credit Party or any of its Subsidiaries
is protected in all material respects by insurance, provided
that the execution or other enforcement of such liens is
effectively stayed and the claims secured thereby are being
contested in good faith by appropriate proceedings and with
respect to which adequate reserves are being maintained in
accordance with GAAP consistently applied; and
(h) easements, rights-of-way, restrictions, encroachments,
covenants, servitudes, zoning and similar encumbrances
which, in the aggregate, do not materially interfere with
the occupation, use and enjoyment by a Credit Party or any
Subsidiary of the property or assets encumbered thereby in
the normal course of its business or materially impair the
value of the property subject thereto.
4.2 ADDITIONAL INDEBTEDNESS. In the case of the Borrower or the
Mexican Guarantor, incur additional indebtedness made available on the
basis of the Collateral (other than to Bank or Indebtedness secured by
Permitted Liens).
4.3 MERGER & CONSOLIDATION. In the case of Borrower or the
Mexican Guarantors, (i) merge or consolidate with another corporation,
unless Borrower or the Mexican Guarantors, as the case may be, is the
surviving entity and PROVIDED, HOWEVER, that the Borrower or
Guarantors are not in default of any of their obligations hereunder or
under the Note(s); or (ii) assign or transfer its assets into trust.
4.4 SALE OF ASSETS. Sell, assign, lease, transfer or in any other
manner dispose of (whether in one transaction or in a series of
transactions) all or substantially all of their assets (whether now
owned or hereafter acquired).
4.5 CHANGE OF BUSINESS. (i) Engage in any material respects in
any business activity or operations other than operations or
activities (a) in the poultry industry, (b) processing, packaging,
distribution and wholesales of poultry products, or (c) which are not
substantially different from or are related to its present business
activities or operations; or (ii) Operating Company fails to be the
primary importer or distributor in Mexico of poultry product exported
by US Guarantor to Mexico; provided that US Guarantor, Mexican
Guarantors or Operating Company may create a Subsidiary for the
purpose of the distribution and sale of such product to third parties
without the consent of the Bank so long as such Subsidiary executes
and delivers to Bank (i) a guaranty of the obligations under this
Agreement in substantially the same form as the Guaranty and (ii) a
security agreement granting a security interest in the Accounts of
such Subsidiary, which security interest shall secure the obligations
under this Agreement.
4.6 CHANGE IN OWNERSHIP. Change the participation of the current
shareholders of the Borrower or the Mexican Guarantors in a manner
that the Guarantors (other than the Operating Company) cease to
maintain, directly or indirectly, a majority interest in the capital
stock of the Borrower, unless the Bank has given the Borrower and
Guarantors, prior written approval of such changes which will not be
unreasonably withheld.
4.7 LIENS. In the case of the Borrower and the Mexican
Guarantors, carry out any arrangements to finance the Collateral
(other than Indebtedness securing Permitted Liens), and will not
create any security interest granted herein to any party (other than
Permitted Liens).
4.8 GUARANTY. In the case of the Borrower and the Mexican
Guarantors, to the extent not prohibited by the Indenture, that it and
its Affiliates will not guarantee, endorse or become secondarily
liable for the debt of the US Guarantor, other than guarantees of the
Indebtedness of US Guarantor under the Indenture.
4.9 CAPITAL STRUCTURE, BUSINESS OBJECTS OR PURPOSE. In the case
of the Borrower and the Mexican Guarantors, purchase, acquire or
redeem any of its capital stock, or enter into any reorganization or
recapitalization or reclassify its capital stock, or (and also with
respect to the US Guarantor) make any material change in its general
business objects or purpose unless (i) required due to changes in GAAP
procedures; or (ii) such changes do not cause a Material Adverse
Effect.
4.10 ENCUMBRANCES - CONTRACTS, NOTES. With respect to Borrower,
create, incur, assume or suffer to exist any mortgage, pledge,
encumbrance, security interest, lien or charge upon any of its
contracts, notes or other evidence of indebtedness owing to it,
whether now owned or hereafter acquired, or create, suffer or permit
to exist any lien, security interest in, or encumbrance thereon other
than the Permitted Liens.
4.11 RESTRICTED PAYMENTS. So long as Bank is committed to make a
Loan, and thereafter, so long as any indebtedness remains outstanding
under or pursuant to this Agreement or the Notes, Borrower and Mexican
Guarantors will not and will not permit any of their respective
Subsidiaries (if any) to, without Bank's prior consent declare or pay
or make any Restricted Payments (other than to Borrower or a Mexican
Guarantor) while any Event of Default, or event which with the giving
of notice or the passage of time, or both, would constitute an Event
of Default under this Agreement has occurred and is continuing or
would occur as a result of the making of such Restricted Payment;
provided that nothing contained in this Agreement shall be deemed to
restrict, prohibit or prevent the payment or reimbursement (at prices
reflecting arms-length transactions) by Borrower or a Mexican
Guarantor to US Guarantor or its Subsidiaries in respect of: (x) the
sale of inventory, including without limitation, grain and hatching
eggs, sold in the ordinary course of business, (y) trade payables,
overhead, operating expenses and similar expenses incurred on behalf
of Borrower or a Mexican Guarantor by US Guarantor or its
Subsidiaries, and (z) sale of goods and equipment upon terms that are
no less favorable to Borrower or such Mexican Subsidiary than those
that could be obtained in a comparable transaction with an unrelated
Person.
5. EVENTS OF DEFAULT
5.1 If any of the following events shall occur and be continuing
(each an "Event of Default"), the Bank may declare all of its
obligations hereunder to be terminated, whereupon the commitment of
the Bank hereunder shall forthwith terminate and the Bank may declare
the entire unpaid principal amount of the Loan, together with all
interest and fees accrued and unpaid thereon and all other amounts
payable hereunder to be forthwith due and payable, whereupon the Loan,
all such accrued interest, fees and all such amounts shall become and
be forthwith due and payable without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived
by the Borrower and the Guarantors:
(A) THE BORROWER SHALL FAIL TO PAY THE ADVANCES WITHIN 5 DAYS FROM
WHEN DUE, OR SHALL FAIL TO PAY ANY INTEREST ON THE ADVANCES
WITHIN 5 DAYS FROM WHEN DUE; OR
(B) ANY REPRESENTATION OR WARRANTY MADE BY THE BORROWER OR BY THE
GUARANTORS IN THIS AGREEMENT OR IN ANY CERTIFICATE, AGREEMENT,
INSTRUMENT OR STATEMENT CONTEMPLATED HEREBY OR THEREBY SHALL
PROVE TO HAVE BEEN INCORRECT WHEN MADE IN ANY MATERIAL RESPECT;
OR
(C) THE BORROWER OR THE GUARANTORS SHALL FAIL TO PERFORM OR OBSERVE
ANY OTHER TERM, COVENANT OR AGREEMENT CONTAINED IN THIS AGREEMENT
AND SUCH FAILURE CONTINUES FOR A PERIOD OF 15 DAYS AFTER THE
BORROWER'S OR GUARANTOR'S LEARNING OF SUCH FAILURE TO COMPLY; OR
(D) THE FAILURE OF BORROWER OR GUARANTOR TO PAY WHEN DUE, OR FAILURE
TO PERFORM OR OBSERVE ANY OTHER OBLIGATION OR CONDITION WITH
RESPECT TO ANY OF THE FOLLOWING OBLIGATIONS TO ANY PERSON, BEYOND
ANY PERIOD OF GRACE UNDER THE INSTRUMENT CREATING SUCH
OBLIGATION: (I) ANY INDEBTEDNESS FOR BORROWED MONEY OR FOR THE
DEFERRED PURCHASE PRICE OF PROPERTY OR SERVICES, (II) ANY
OBLIGATIONS UNDER LEASES WHICH HAVE OR SHOULD HAVE BEEN
CHARACTERIZED AS CAPITAL LEASES, OR (III) ANY CONTINGENT
LIABILITIES, SUCH AS GUARANTIES AND LETTERS OF CREDIT, FOR THE
OBLIGATIONS OF OTHERS RELATING TO INDEBTEDNESS FOR BORROWED MONEY
OR FOR THE DEFERRED PURCHASE PRICE OF PROPERTY OR SERVICES OR
RELATING TO OBLIGATIONS UNDER LEASES WHICH HAVE OR SHOULD HAVE
BEEN CHARACTERIZED AS CAPITAL LEASES; PROVIDED THAT NO SUCH
FAILURE WILL BE DEEMED TO BE AN EVENT OF DEFAULT HEREUNDER UNLESS
THE AMOUNT OWING UNDER THE OBLIGATION WITH RESPECT TO WHICH SUCH
FAILURES HAVE OCCURRED AND ARE CONTINUING IS AT LEAST (X)
$5,000,000.00 WITH RESPECT TO BORROWER AND MEXICAN GUARANTORS, OR
(Y) $10,000,000 WITH RESPECT TO US GUARANTOR; OR
(E) THE OPERATING COMPANY OR AVICOLA, AS THE CASE MAY BE, FAILS TO
MAINTAIN ANY OF THE RATIOS AND/OR FINANCIAL COVENANTS SET FORTH
IN SECTION 6.7, 6.8, 6.9 OR 6.10 AND SUCH FAILURE CONTINUES FOR A
PERIOD OF 7 DAYS AFTER SUCH PARTIES' LEARNING OF SUCH FAILURE TO
COMPLY; OR
(F) THE PARTICIPATION OF THE CURRENT SHAREHOLDERS OF THE BORROWER OR
THE MEXICAN GUARANTORS, ARE MODIFIED IN ANY WAY WHATSOEVER
RESULTING, IN THE GUARANTORS (OTHER THAN THE OPERATING COMPANY)
CEASING TO MAINTAIN, DIRECTLY OR INDIRECTLY, A MAJORITY INTEREST
IN THE CAPITAL STOCK OF THE BORROWER, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE BANK GIVEN TO THE BORROWER AND THE MEXICAN
GUARANTOR WHICH WILL NOT BE UNREASONABLY WITHHELD; OR
(G) THIS AGREEMENT OR THE NOTE(S) SHALL AT ANY TIME FOR ANY REASON
CEASE TO BE IN FULL FORCE AND EFFECT OR SHALL BE DECLARED TO BE
NULL AND VOID OR THE VALIDITY OR ENFORCEABILITY THEREOF SHALL BE
CONTESTED BY THE BORROWER OR THE GUARANTORS OR THE GOVERNMENT OF
MEXICO, OR ANY POLITICAL SUBDIVISION OR AGENCY THEREOF, OR THE
BORROWER OR THE GUARANTORS SHALL DENY THAT IT IS ANY FURTHER
LIABILITY OR OBLIGATION HEREUNDER; OR
(H) AFTER THE FILING AND RECORDING THEREOF, IF THE MORTGAGE OR THE
SECURITY DOCUMENTS CEASE TO CONSTITUTE A VALID FIRST PRIORITY
LIEN IN FAVOR OF THE BANK; OR
(I) IF A CREDITORS' COMMITTEE, INTERVENTOR, VISITADOR, CONCILIADOR OR
A SNDICO SHALL HAVE BEEN APPOINTED FOR THE BUSINESS OF
COMPANY OR A GUARANTOR; OR IF COMPANY OR A GUARANTOR SHALL HAVE
MADE A GENERAL ASSIGNMENT FOR THE BENEFIT OF CREDITORS OR SHALL
HAVE BEEN ADJUDICATED BANKRUPT, OR SHALL HAVE FILED A VOLUNTARY
PETITION IN CONCURSO MERCANTIL OR BANKRUPTCY OR FOR
REORGANIZATION OR TO EFFECT A PLAN OR ARRANGEMENT WITH CREDITORS
OR SHALL FAIL TO PAY ITS DEBTS GENERALLY AS SUCH DEBTS BECOME DUE
IN THE ORDINARY COURSE OF BUSINESS (EXCEPT AS CONTESTED IN GOOD
FAITH AND FOR WHICH ADEQUATE RESERVES ARE MADE IN SUCH PARTY'S
FINANCIAL STATEMENTS); OR SHALL FILE AN ANSWER TO A CREDITOR'S
PETITION OR OTHER PETITION FILED AGAINST IT, ADMITTING THE
MATERIAL ALLEGATIONS THEREOF FOR AN ADJUDICATION IN BANKRUPTCY,
CONCURSO MERCANTIL OR FOR REORGANIZATION; OR SHALL HAVE APPLIED
FOR OR PERMITTED THE APPOINTMENT OF A RECEIVER, INTEVENTOR,
VISITADOR, CONCILIADOR, SNDICO, TRUSTEE OR CUSTODIAN FOR ANY
OF ITS PROPERTY OR ASSETS; OR SUCH CREDITORS COMMITTEE, RECEIVER,
SNDICO, TRUSTEE OR CUSTODIAN SHALL HAVE BEEN APPOINTED FOR
ANY OF ITS PROPERTY OR ASSETS (OTHERWISE THAN UPON APPLICATION OR
CONSENT OF COMPANY OR A GUARANTOR), AND SUCH RECEIVER,
INTERVENTOR, VISITADOR, CONCILIADOR, TRUSTEE, SNDICO OR
CUSTODIAN SO APPOINTED SHALL NOT HAVE BEEN DISCHARGED WITHIN
SIXTY (60) DAYS AFTER THE DATE OF SUCH APPOINTMENT, OR IF AN
ORDER FOR RELIEF OR OTHERWISE APPROVING ANY PETITION FOR
REORGANIZATION OF COMPANY OR THE RELEVANT GUARANTOR, SHALL BE
ENTERED AND SHALL NOT BE DISMISSED OR STAYED WITHIN SIXTY (60)
DAYS FROM THE DATE OF ENTRY; OR
(J) THE RENDERING OF ONE OR MORE JUDGMENTS OR DECREES AGAINST A
CREDIT PARTY FOR THE PAYMENT OF MONEY OR THE ATTACHMENT OR FILING
OF ANY LIEN OR CHARGE AGAINST A CREDIT PARTY OR ANY OF ITS
PROPERTY IN EXCESS OF $5,000,000 WITH RESPECT TO BORROWER OR
MEXICAN GUARANTORS OR $10,000,000 WITH RESPECT TO US GUARANTOR,
THAT IS NOT COVERED BY INSURANCE AND SUCH JUDGMENT(S), DECREE(S),
LIEN(S) OR CHARGE(S) SHALL REMAIN UNPAID, UNVACATED, UNBONDED OR
UNSTAYED BY APPEAL OR OTHERWISE OR NOT DISCHARGED OR RELEASED FOR
A PERIOD OF SIXTY (60) CONSECUTIVE DAYS, AFTER DATE OF ENTRY,
FILING OR ATTACHMENT; OR
(K) A BREACH BY A GUARANTOR UNDER ITS RESPECTIVE GUARANTY; OR
(L) SHOULD THE OPERATING COMPANY FAIL TO BE THE PRIMARY IMPORTER OR
DISTRIBUTOR IN MEXICO OF POULTRY PRODUCT EXPORTED BY US GUARANTOR
TO MEXICO WITHOUT THE US GUARANTOR OR OPERATING COMPANY CREATING
A SUBSIDIARY FOR THE PURPOSE OF THE DISTRIBUTION AND SALE OF SUCH
PRODUCT TO THIRD PARTIES AND SUCH SUBSIDIARY EXECUTES AND
DELIVERS TO BANK (I) A GUARANTY OF THE OBLIGATIONS UNDER THIS
AGREEMENT IN SUBSTANTIALLY THE SAME FORM AS THE GUARANTY AND (II)
A SECURITY AGREEMENT GRANTING A SECURITY INTEREST IN THE ACCOUNTS
OF SUCH SUBSIDIARY, WHICH SECURITY INTEREST SHALL SECURE THE
OBLIGATIONS UNDER THIS AGREEMENT; OR
(M) SHOULD BORROWER FAIL TO EXECUTE AND DELIVER A FEDERAL FUNDS-BASED
RATE NOTE OR A CETES-BASED NOTE, AS THE CASE MAY BE, IN
ACCORDANCE WITH ARTICLE 3.7 WITHIN 5 DAYS AFTER THE DATE SUCH
NOTE IS DELIVERED TO BORROWER IN EXECUTABLE FORM; OR
(N) SHOULD THE LOANS OR GUARANTEES PROVIDED FOR HEREIN BE IN
VIOLATION OF THE INDENTURE.
5.2 REMEDIES. Upon the occurrence and during the continuation of
any Event of Default, unless such Event of Default, Bank may give
notice to Company declaring all outstanding indebtedness hereunder to
be due and payable in full, whereupon all indebtedness hereunder shall
immediately become due and payable without further notice or demand,
as the case may be, and Bank's commitment to make further Loans or to
extend additional credit to Company under this Agreement or otherwise
and Bank may exercise any remedies it has under the Security Documents
as provided for therein and/or under applicable law. Notwithstanding
the foregoing, in the case of an Event of Default under Section 8.1(i)
hereof, and notwithstanding the lack of any notice, demand or
declaration by Bank, the entire unpaid indebtedness hereunder shall
become automatically due and payable in full and any commitment by
Bank to make Loans shall be automatically and immediately terminated,
without any requirement of notice or demand by Bank upon Company, each
of which are hereby expressly waived by Company. The right of Bank to
terminate its commitment to make Loans and or to accelerate
indebtedness shall expire with respect to any particular Event of
Default of which Bank has been given actual notice, if such Event of
Default is cured prior to Bank's exercise of such right to terminate
and/or accelerate.
5.3 SETOFF. During the continuance of any Event of Default
hereunder, Bank may, in accordance with any applicable requirements of
law, during any period when an uncured Event of Default is existing,
setoff and apply against the indebtedness (whether or not then due),
any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by
Bank to or for the credit or for the account of a Credit Party and any
property at the time in possession or control of Bank, irrespective of
whether or not Bank shall have made any demand hereunder and although
such obligations may be contingent and unmatured. In the event any
Bank exercises any such right of setoff, Bank shall use reasonable
efforts to notify the corresponding Credit Party affected by such
setoff in sufficient detail within five (5) Business Days as of the
date such setoff has occurred.
5.4 WAIVER OF DEFAULTS. No Default or Event of Default shall be
waived by Bank except in a written instrument specifying the scope and
terms of such waiver and signed by an authorized officer of Bank and
shall be effective only for the specific time and purpose given. No
single or partial exercise of any right, power or privilege hereunder,
nor any delay in the exercise thereof, shall preclude other or further
exercise of Bank's rights. No waiver of any Default or Event of
Default shall extend to any other or further Default or Event of
Default. No forbearance on the part of Bank in enforcing any of Bank's
rights or remedies hereunder or any of the other Loan Documents shall
constitute a waiver of any of its rights or remedies. Company
expressly agrees that this Section 8.4 may not be waived or modified
by Bank by course of performance, estoppel or otherwise.
6. MISCELLANEOUS
6.1 ACCOUNTING PRINCIPLES. Where the character or amount of any
asset or liability or item of income or expense is required to be
determined or any consolidation or other accounting computation is
required to be made for the purposes of this Agreement, it shall be
done in accordance with GAAP. Furthermore, all accounting terms not
specifically defined in this Agreement shall be construed in
accordance with GAAP.
6.2 EXECUTIVE TITLE. This Agreement, jointly with the account
statement certified by the duly authorized accountant of CBM,
constitutes an execution title pursuant to article 68 of the Credit
Institutions Law.
6.3 RESTRICTIONS. Pursuant to article 294 of the General Law of
Negotiable Instruments and Credit Transactions, the Bank shall
maintain the right to restrict the disbursements term or the amount of
the Loan or the disbursements and the amount of the Loan, by simple
written communication to the Borrower, limiting or terminating the
right to use non disbursed amounts.
6.4 INTEREST. In the event the obligation of Company to pay
interest on the principal balance of any Note is or becomes in excess
of the maximum interest rate which Company is permitted by law to
contract or agree to pay, giving due consideration to the execution
date of this Agreement, then, in that event, the rate of interest
applicable hereunder shall be deemed to be immediately reduced to such
maximum rate and all previous payments in excess of the maximum rate
shall be deemed to have been payments in reduction of principal and
not of interest.
6.5 BINDING EFFECT; ASSIGNMENT. This Agreement shall become
effective when it shall have been executed by the Company and the
Bank, and thereafter shall be binding upon and inure to the benefit of
the Company and the Bank and their respective successors and assigns,
except that the Company shall not have the right to assign its rights
hereunder or any interest herein without the prior written consent of
the Bank, and that Bank shall not have the right to transfer, assign
or convey, whether by participation or otherwise, its rights hereunder
or any interest herein without the prior written consent of Company,
unless (a) Bank complies with the provisions of Section 9.10 and (b)
such transfer, assignment or conveyance is in favor of a financial
institution which is subject to a Mexican Income tax withholding rate
payable under the Loans equal to no more than the Mexican Income tax
withholding rate payable by Bank as of the date of any such
conveyance.
6.6 GOVERNING LAW.
(A) THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF MICHIGAN, UNITES STATES OF AMERICA, AND FOR ALL PURPOSES
SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE;
PROVIDED, HOWEVER that if any action or proceeding in connection
with the Note is brought in the courts of Mexico, such Note shall
be governed by the laws of Mexico;
(b) Any suit, action or proceeding with respect to this Agreement or
the Note or any judgement entered by any court in respect thereof
may be brought in the courts of the State of Michigan in the
United States and, in the case of suits, actions or proceedings
with respect to the Note, in the Courts of Mexico City, Mexico.
Each party hereby submits to the jurisdiction of such courts for
the purpose of any such suit, action, proceeding or judgement
(and waives for such purpose any other preferential jurisdiction
by reason of its present of future domicile or otherwise). Each
party hereby irrevocably waive any objection which they may now
or hereafter have to the laying of the venue of any suit, action
or proceeding arising out of or relating to this Agreement or the
Note brought in any such court as being brought in an
inconvenient forum. To the extent that a party has or hereafter
may acquire any immunity from jurisdiction of any court or from
any legal process (whether from service or notice, attachment
prior to judgement, attachment in aid of execution, execution or
otherwise) with respect to itself or its property, such party
hereby irrevocably waives such immunity in respect of its
obligations under this Agreement or the Notes.
6.7 COSTS AND EXPENSES. Subject to Section 6.19, Company shall
pay Bank, promptly, all reasonable and documented costs and expenses
incurred by Bank in connection with this Agreement, the Loan Documents
and the indebtedness, hereunder and the consummation and the closing
of the loans and transactions contemplated hereby, including, by way
of description and not limitation, reasonable attorneys' fees and
advances, appraisal and accounting fees, title and lien search fees.
All costs, including, without limitation, reasonable attorneys' fees
and costs and expenses to any environmental consultants retained by
Bank hereunder, incurred by Bank hereunder or in perfecting, revising,
protecting or enforcing any of its rights against Company, or incurred
by Bank in connection with any Default or Event of Default or the
enforcement of the indebtedness hereunder, including by way of
description and not limitation, (a) such charges in any court or
bankruptcy proceedings or (b) arising out of any claim or action by
any person against Bank which would not have been asserted were it not
for Bank's lending relationship with Company hereunder or otherwise,
shall also be promptly paid by Company to Bank. If not promptly paid,
all of such costs, expenses and other sums payable by Company to Bank
under this Section 9.7 shall bear interest at the highest per annum
interest rate applicable to any of the Loans at such time.
6.8 NOTICES. All notices and other communications provided for
herein or in any document contemplated hereby, given hereunder or
required by law to be given, shall be in writing (unless expressly
provided to the contrary). Subject to Section 9.22, if personally
delivered or delivered by facsimile transmission, such notices shall
be effective when delivered or transmitted, and in the case of
courier, such notices shall be effective four (4) Business Days after
sending by international courier service, in each case addressed to
the parties as set forth on the signature page of this Agreement, or
to such other address as a party shall have designated to the other in
writing in accordance with this Section. The giving of at least five
(5) days' notice before Bank shall take any action described in any
notice shall conclusively be deemed reasonable for all purposes;
provided, that this shall not be deemed to require Bank to give five
(5) days' notice or any notice if not specifically required in this
Agreement. IF ANY LEGAL PROCEEDING ARISES OR IS INITIATED BY THE BANK
IN THE UNITED STATES IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR
THE GUARANTY (FIANZA), then all notices and other communications shall
be delivered to the Process Agent.
6.9 FURTHER ACTION. Each Credit Party, from time to time, upon
written request of Bank, will promptly make, execute, acknowledge and
deliver, or cause to be made, executed, acknowledged and delivered,
all such further and additional instruments, and promptly take all
such further action as may be reasonably required to carry out the
intent and purpose of this Agreement.
6.10 SUCCESSORS AND ASSIGNS; PARTICIPATIONS. This Agreement shall
be binding upon and shall inure to the benefit of Company and Bank and
their respective successors and assigns. The foregoing shall not
authorize any assignment or transfer by Company of its rights or
duties hereunder, and such assignments or transfers being expressly
prohibited. Subject to the limitations set forth in Section 9.5, Bank
may assign, whether by assignment, participation or otherwise, its
rights and obligations hereunder, and is hereby authorized to disclose
(subject to reasonable security and confidentiality procedures) to any
such assignee or participant any financial or other information in its
knowledge or possession regarding Company, or the indebtedness
hereunder. Notwithstanding the foregoing (i) in connection with any
participation granted by Bank, Bank shall remain primarily obligated
to Company hereunder and Company shall be entitled to deal directly
with Bank with respect to all matters related hereto, and (ii) with
respect to any assignment by Bank, so long as no Event of Default has
occurred and is existing at the time of such assignment Bank shall be
required to obtain the prior written consent of Company and Guarantors
to such assignment (which consent shall not be unreasonably withheld
or delayed). In the event of any assignment made or participation
granted by Bank under this Agreement, neither the Company nor the
Guarantors shall be required to indemnify, or pay additional amounts
to, any such assignee or participant in excess of the amount that
would have been payable under this Agreement had no such assignment
occurred or participation granted.
6.11 INDULGENCE. No delay or failure of Bank in exercising any
right, power or privilege hereunder or under any of the Loan Documents
shall affect such right, power or privilege nor shall any single or
partial exercise thereof preclude any further exercise thereof, nor
the exercise of any other right, power or privilege. The rights of
Bank hereunder are cumulative and are not exclusive of any rights or
remedies of Bank.
6.12 COUNTERPARTS. This Agreement may be executed in several
counterparts, and each copy shall constitute an original instrument,
but such counterparts shall together constitute but one and the same
instrument.
6.13 AMENDMENT AND WAIVER. No amendment or waiver of any
provision of this Agreement or any Loan Document, nor consent to any
departure by Company therefrom, shall in any event be effective unless
the same shall be in writing and signed by Bank, and then such waiver
or consent shall be effective only in the specific instance and for
the specific purpose for which given.
6.14 SEVERABILITY. In case any one or more of the obligations of
Company or any party to this Agreement, the Note or any of the other
Loan Document shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the
remaining obligations of Company or such other party shall not in any
way be affected or impaired thereby, and such invalidity, illegality
or unenforceability in one jurisdiction shall not affect the validity,
legality or enforceability of the obligations of Company or such other
party under this Agreement, the Notes or any of the other Loan
Documents in any other jurisdiction.
6.15 HEADINGS AND CONSTRUCTION OF TERMS. The headings of the
various subdivisions hereof are for convenience of reference only and
shall in no way modify or affect any of the terms or provisions
hereof. Where the context herein requires, the singular number shall
include the plural, and any gender shall include any other gender.
6.16 CONSTRUCTION OF CERTAIN PROVISIONS. If any provision of this
Agreement or any of the Loan Documents refers to any action to be
taken by any Person, or which such Person is prohibited from taking,
such provision shall be applicable whether such action is taken
directly or indirectly by such Person, whether or not expressly
specified in such provision.
6.17 INDEPENDENCE OF COVENANTS. Each covenant hereunder shall be
given independent effect so that if a particular action or condition
is not permitted by any such covenant, the fact that it would be
permitted by an exception to, or would be otherwise within the
limitations of, another covenant shall not avoid the occurrence of any
Default or Event of Default.
6.18 RELIANCE ON AND SURVIVAL OF VARIOUS PROVISIONS. All terms,
covenants, agreements, representations and warranties of Company or
any other Person who is a party to any of the Loan Documents made
herein or in any of the Loan Documents or in any certificate, report,
financial statement or other document furnished by or on behalf of
Company in connection with this Agreement or any of the Loan Documents
shall be deemed to have been relied upon by the Bank, notwithstanding
any investigation heretofore or hereafter made by Bank or on Bank's
behalf.
6.19 WAIVER OF JURY TRIAL. BANK, COMPANY AND EACH CREDIT PARTY,
AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH
COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A
TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT,
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTION OF ANY OF
THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN
ANY RESPECT OR RELINQUISHED BY THE BANK OR COMPANY EXCEPT BY A WRITTEN
INSTRUMENT EXECUTED BY ALL OF THEM.
6.20 COMPLETE AGREEMENT; CONFLICTS. This Agreement, the other
Loan Documents, any agreements certificates, or other documents given
in connection with the Loans and any commitment letter previously
issued by Bank with respect thereto contain the entire agreement of
the parties thereto, and none of the parties shall be bound by
anything not expressly in writing. In the event that and to the extent
that any of the terms, conditions or provisions of any of the other
Loan Documents are inconsistent with or in conflict with any of the
terms, conditions or provisions of this Agreement, the applicable
terms, conditions and provisions of this Agreement shall govern and
control.
6.21 CONFIDENTIALITY. Bank agrees that all non-public information
made available by Credit Parties to it pursuant to this Agreement and
the Loan Documents shall (except to the extent required by legal,
regulatory authority or government process) be held in confidence by
Bank except to the extent use and or disclosure is necessary in
connection with the enforcement of the indebtedness hereunder.
6.22 SERVICE OF PROCESS. The Borrower hereby irrevocably
designates the Process Agent, having its registered domicile at 30600
Telegraph Road, Bingham Farms, Michigan 48025, as agent to receive,
for and on behalf of the Borrower, service of process in the State of
Michigan and absolutely and in connection therewith, irrevocably
appoints the Process Agent as its true and lawful attorney-in-fact,
coupled with an interest, in its name and stead to receive such
process, as such appointment shall be evidenced by a duly notarized
power-of-attorney, granted pursuant to Mexican law. Service upon the
Borrower shall, for purposes of preserving the Bank's right to bring
an action or proceeding or enforcing a judgment in connection with the
Loan Documents in any court within Mexico, be deemed complete upon
personal delivery of service to the Process Agent, otherwise and for
all other purposes, service upon the Borrower will be deemed complete
upon delivery of the summons and complaint in accordance with Section
9.6., provided such notices, if delivered in connection with a court
procedure comply with Mexican procedural due process and public
policy laws. The Borrower shall continue said appointment of Process
Agent in full force and effect or appoint another agent so that the
Borrower will at all times have an agent for service of process for
the above purposes in Detroit, Michigan. The Borrower further
irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by any method
described in Section 9.6, such service of process to be effective upon
receipt of such registered mail (or as otherwise required under
Mexican procedural due process and public policy laws). Nothing
herein shall affect the right of the Borrower or the Bank to serve
process in any other manner permitted by applicable law or to commence
legal proceedings or otherwise proceed against Borrower in the State
of Michigan of the United States of America, the Federal District of
Mexico, or any other jurisdiction in which Borrower may be subject to
suit. The Borrower shall pay to Process Agent such compensation as
shall be required to be paid to Process Agent for its services
hereunder. In the event of the transfer of all or substantially all
of the assets and business of Process Agent to any other corporation,
by consolidation, merger, sale of assets or otherwise, such other
corporation shall be substituted hereunder for Process Agent with the
same effect as if named herein in place of CT Corporation System, in
which case such replacement in the appointment shall be evidenced by a
duly notarized power-of-attorney, granted pursuant to Mexican law.
Company shall be liable for the compliance of such obligation only as
of the date CT Corporation System notifies the occurrence of such
transfer to Company.
6.23 INDEMNIFICATION - INTEREST RATE. If the interest rate set
forth in any of the Notes is inconsistent with the interest rate as
determined pursuant to the terms of this Agreement, then the terms of
this Agreement with respect to the rate of interest payable by
Borrower shall control. If, as a result of any assignment or
participation by Bank, any Credit Party would be obligated to pay such
participant, assignee or other acquiror of any Note a rate of interest
higher than what any Credit Party would be obligated to pay under the
terms of this Agreement, then Bank shall indemnify the Credit Parties
against the costs and expenses incurred by the Credit Parties as a
result of such higher interest rate.
WITNESS THE DUE EXECUTION HEREOF AS OF THE DAY AND YEAR FIRST
ABOVE WRITTEN.
COMERICA BANK GRUPO PILGRIM'S PRIDE FUNDING, S.
de RL, de C.V.
By: By:
Its:________________________________ Its: Attorney-In-Fact
By:
International Dept. - Latin Group Its: Attorney-In-Fact
500 Woodward Ave. Avenida 5 de Febrero No. 1408
Detroit, Michigan 48226-3330 Queretaro, Queretaro, Mexico
Facsimile: __________________ Facsimile: 011 42 17 97 80
Attn: Fernando Urresta
Comerica Bank Mexico, S.A.
By:_______________________________
Its:_______________________________
_____________________________
_____________________________
_____________________________
ACKNOWLEDGEMENT
The undersigned are signatories to this Agreement in their capacity as
Credit Parties and not as a Borrower. Each of the undersigned who also are
Guarantors hereby: (i) acknowledge and consent to the execution, delivery
and performance of this Agreement; (ii) confirm the truth and validity of
the representations and warranties set forth herein, to the extent such
representations an warranties pertain to the undersigned, respectively, and
(iii) ratify and agree to perform the covenants and agreements set forth in
this Agreement, to the extent such covenants and agreements specifically
pertain to the undersigned, respectively.
GRUPO PILGRIM'S PRIDE FUNDING AVICOLA
PILGRIM'S PRIDE DE
HOLDING, S. de RL de C.V. MEXICO, S.A. de C.V.
By: By:
Its: Attorney-In-Fact Its: Attorney-In-Fact
By: By:
Its: Attorney-In-Fact Its: Attorney-In-Fact
Address: Same as Borrower Address: Same as Borrower
PILGRIM'S PRIDE, S.A. de C.V. PILGRIM'S PRIDE CORPORATION
By: By:
Its: Attorney-In-Fact Its:
Address:
By: 110 South Texas Street
Pittsburg, Texas 75686
Its: Attorney-In-Fact Facsimile: 001 903 856 7505
Attn: Rick Cogdill
Address: Same as Borrower
EXHIBIT "A"
FORM OF LIBOR NOTE
[To be attached]
Exhibit B
EXHIBIT "B"
FORM OF FEDERAL FUNDS NOTE
[To be attached]
- 1 -
EXHIBIT "C"
FORM OF CETES NOTE
[To be attached]
- 2 -
EXHIBIT "D"
REQUEST FOR LOAN
Pursuant to the Revolving Credit Agreement dated as of ___________,
2001 (herein called "Agreement"), the undersigned hereby requests COMERICA
BANK and/or COMERICA BANK MEXICO, S.A. to make a ________-Based Loan to the
undersigned on ____________________, ________, in the amount of
__________________ (____________) and the currency requested is
_____________. The LIBOR Interest Period for the requested Loan, if
applicable, shall be ________ months.
The undersigned certifies that there exists no Default or Event of
Default under the Agreement and none will exist upon the making of the Loan
requested hereunder. The undersigned further certifies that upon advancing
the sum requested hereunder, the aggregate amount of indebtedness (under
the Agreement) will not exceed the Revolving Maximum (as defined in the
Agreement) and with respect to a request for a Pesos Advance, the aggregate
amount of Pesos Advances shall not exceed the Pesos Subfacility Maximum. If
the aggregate amount of the indebtedness under the Agreement shall at any
time exceed the Revolving Maximum and/or the Pesos Subfacility Maximum, the
undersigned will pay such excess amount on demand.
The undersigned hereby authorizes said Bank to disburse the proceeds
of this Request for Loan by crediting the account of the undersigned with
Bank separately designated by the undersigned or as the undersigned may
otherwise direct.
Dated this day of _______________, 2001.
GRUPO PILGRIM'S PRIDE FUNDING, S. de RL de
C.V.
By:
Its:
- 3 -
EXHIBIT "E"
FORM OF MORTGAGE
[To be attached]
- 4 -
EXHIBIT "F"
FORM OF CONTRATO DE PRENDA
[To be attached]
Schedule 4.4(A)
SCHEDULE 4.4(A)
FORM OF CERTIFICATE OF SECRETARY
I, _____________________________, Secretary of [APPLICABLE CREDIT
PARTY] , a SOCIEDAD DE RESPONSABILIDAD LIMITADA DE CAPITAL VARIABLE duly
organized and validly existing under the laws of the United Mexican States
(the "Company"), hereby certify that:
1. Attached hereto as Exhibit A is a true, correct and complete copy
of the estatutos sociales of the Company certified by a notary public;
2. Attached hereto as Exhibit B is a true, correct and complete copy
of the powers of attorney of the Company certified by a notary public, and
granted to persons acting on behalf of the Company in connection with the
execution and delivery of the Loan Documents to which it is a party;
3. The persons named below are duly qualified and acting officers of
the Company; that such Persons, acting together, have sufficient authority
to sign, execute and deliver on behalf of the Company each of the Loan
Documents; that each such Person has been duly elected to the indicated
office; that set forth opposite each such Person's name is his or her true
and genuine signature.
Name Office Signature
____________________________ _______________________ _____________________
____________________________ _______________________ _____________________
capitalized terms used, but not defined herein have the meanings ascribed
to them in the Revolving Credit Agreement, dated as of
____________________, 2001, among GRUPO PILGRIM'S PRIDE FUNDING, S. de RL
de C.V. and Comerica Bank.
IN WITNESS WHEREOF, I have hereunto signed by name.
____________________________________________
By:
Name:
Dated:_________________ Title: Secretary
I, ______________________, the duly elected, qualified and acting
_______________ of the Company, hereby certify that
_________________________ is the duly, qualified and acting Secretary of
the Company and that the signature appearing above is his true and genuine
signature.
__________________________________________________
By:
Name:
Its:
Dated: , 2001
SCHEDULE 4.4(B)
FORM OF OFFICER'S CERTIFICATE
I, __________________________, hereby certify that I am the duly
elected and authorized ___________________ of [APPLICABLE CREDIT
PARTY] , a SOCIEDAD DE RESPONSABILIDAD LIMITADA DE CAPITAL VARIABLE duly
organized and validly existing under the laws of the United Mexican States
(the "Company"), and pursuant to Section 4 of the Revolving Credit
Agreement, dated as of ____________, 2001 (the "Credit Agreement"), between
GRUPO PILGRIM'S PRIDE FUNDING, S. de RL de C.V. and Comerica Bank, further
certify as follows:
1. All representations and warranties of the Company contained in
the Agreement are true and correct as of the date hereof.
2. No event has occurred and is continuing that constitutes an Event
of Default (as defined in the Credit Agreement).
3. The Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied under the Credit
Agreement at or prior to the Closing Date.
IN WITNESS WHEREOF, I have executed this certificate in the name and
on behalf of the Company this ______ day of _______________, 2001.
_________________________________________
By:
Name:
Title:
SCHEDULE 4.7
Form of Opinion Letter
___________, 2001
Comerica Bank
Comerica Bank Mexico, S.A.,
Institucion de Banca Multiple
One Detroit Center
500 Woodward Avenue
Detroit, Michigan 48226
Re: Credit Agreement dated as of ____________, 2001 between ______________
(the "Borrower") and Comerica Bank and Comerica Bank Mexico, S.A.,
Institucion de Banca Multiple ("Lender")
Ladies and Gentlemen:
We have acted as counsel to (i) the Borrower, (ii) ___________,
______________ (collectively, the "Guarantors") in connection with the
preparation, execution and delivery of (A) the Credit Agreement, (B) the
promissory note dated ____________, 2001 (the "Note") made by the Borrower
in favor of Lender, (C) the Guarantee dated _______________, 2001 (the
"Guarantee") made by each of the Guarantors in favor of the Lender, and (D)
the form of notes (collectively with the Note, the "Notes") which may be
delivered after the date hereof. The Credit Agreement, the Notes, the
Guarantee and such other documents executed in connection therewith are
sometimes collectively referred to herein as the "Credit Documents".
Unless otherwise defined herein, terms defined in the Credit Agreement are
used herein as therein defined.
This opinion is furnished to you pursuant to Section ____ of the
Credit Agreement.
In connection with the opinion expressed below, I have reviewed:
(1) the Credit Documents;
(2) forms of the Notes to be delivered after the date hereof; and
(3) such other documents as I have deemed relevant or appropriate in
connection with the giving of this opinion.
I have assumed, without any independent investigation or verification
of any kind, (i) the due authorization, execution and delivery by the
Lender of the Credit Agreement; (ii) the validity, binding effect and
enforceability of the Credit Documents under the laws of the State of
Michigan, United States of America; (iii) the genuineness and authenticity
of all opinions, documents and papers submitted to me as well as the
signature contained therein; and (iv) that copies of all opinions,
documents and papers submitted to me are complete and conform to the
originals thereof.
I express no opinion as to any laws other than the laws of the United
Mexican States ("Mexico") and I have assumed that there is nothing in any
other law that affects my opinion which is delivered based upon Mexican law
applicable to the date hereof. In particular, I have made no independent
investigation of the laws of the United States of America or any state or
other political subdivision thereof or therein as a basis for the opinions
stated herein and do not express or imply any opinion on or based on such
laws.
Based upon the foregoing and subject to the further qualifications,
exceptions, assumptions and limitations stated herein, and upon such
investigations as I have deemed necessary, I am of the opinion that:
(a)The Borrower and each of the Guarantors is a corporation (sociedad
anonima de capital variable) duly organized and validly existing under the
laws of Mexico and has the corporate power and authority to enter into,
perform and comply with its obligations under the Credit Documents.
(b)The execution, delivery and performance by the Borrower and each of the
Guarantors of the Credit Documents to which such Borrower or Guarantor is a
party have been duly authorized by all necessary corporate action and do
not violate any material contractual obligation, the Estatutos Sociales
requirement of law or judgment, license or order, binding upon the Borrower
or the Guarantors or result in the creation or imposition of any lien on
any asset of the Borrower or the Guarantors other than the liens intended
to be created by such Credit Documents.
(c)No authorization or approval, notice to or filing with, any Governmental
Authority in Mexico is required for the execution, delivery and performance
by the Borrower and each of the Guarantors of the Credit Documents except
for such consents, approvals, authorizations, notices, filings or
qualifications which have been obtained prior to the date hereof, for the
validity or enforceability of the Credit Documents for the performance of
their obligations thereunder.
(d)The Credit Documents have been duly executed and delivered by the
Borrower and the Guarantors, as the case may be, and constitute valid and
binding obligations of the Borrower and the Guarantors, as the case may be,
enforceable against them in accordance with their respective terms, subject
to the suspension of payments, bankruptcy, insolvency, liquidation,
moratorium and other similar laws of general application relating to or
affecting the rights generally.
(e)Neither the Borrower, the Guarantors, nor any of their respective
property, has any immunity from the jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise) under any
applicable law in Mexico in respect of their obligations under the Credit
Documents, as the case may be.
(f)There are no legal or governmental proceedings pending or, to the best
of my knowledge, threatened to which the Borrower, the Guarantors or any of
their respective subsidiaries are a party or of which any property of the
Borrower, the Guarantors or any of their respective subsidiaries are the
subject which, if determined adversely to the Borrower, the Guarantors or
any of their respective subsidiaries, would individually or in the
aggregate, have a Material Adverse Effect.
(g)It is not necessary under the laws of Mexico (i) in order to enable the
Lender to enforce its rights under the Credit Documents or (ii) solely by
reason of the execution, delivery or performance of the Credit Documents,
that the Lender be licensed, qualified or entitled to carry on business in
Mexico.
(h)Under currently existing Mexican law and regulations the Lender will not
be deemed resident, domiciled, carrying on business or subject to taxation
in Mexico, by reason solely of the execution, delivery, performance or
enforcement of the Credit Documents, provided that the Lender does not have
a permanent establishment in Mexico, for tax purposes, it being understood
that the mere performing of its obligations under such Credit Documents
would not result in the existence of such permanent establishment.
(i)Each Guarantor's obligations under the Guaranty rank and will under
current law, rank at least pari passu in priority of payment and in all
other respects with all its other present or future unsecured and
unsubordinated Indebtedness, except for obligations preferred by mandatory
provisions of law including, among others, labor claims, claims of tax
authorities for unpaid taxes, duties, social security quotas, retirement
funds quotas, and workers' housing funds quotas which have preference over
claims arising from the Notes and other Credit Documents.
(j)There is no tax, impost, deduction or withholding imposed by Mexico or
any political subdivision thereof on or by virtue of the execution,
delivery, enforcement or performance of the Credit Documents, except for
withholding taxes imposed on payments of interest and fees made under the
Credit Agreement and the Notes by the Borrower to the Lender that is not a
resident of Mexico for tax purposes, imposed under the Mexican Income Tax
Law (Ley del Impuesto sobre la Renta).
(k)To endure the legality, validity, enforceability or admissibility in
evidence of the Credit Documents in Mexico, it is not necessary that the
Credit Documents or any other document be filed or recorded with any court
or other Governmental Authority in Mexico.
(l)The choice of Michigan law as the governing law of the Agreement is a
valid choice of law. The submission by the Borrower to the jurisdiction of
the competent United States Federal District Court in the State of Michigan
and to the jurisdiction of the courts of the State of Michigan is valid and
binding on the Borrower and not subject to revocation.
(m)The Notes qualify as "Pagares" for the purposes of the Mexican General
Law of Credit Instruments and Transactions ("ley General de Titulos y
Operaciones de Credito") and may be enforced through executory proceedings.
(n)Any final judgment obtained against the Borrower or the Guarantors in
any of the courts specified in the Credit Documents, in respect of any sum
payable by the Borrower or the Guarantors under the Credit Documents would
be recognized and enforced by the courts of Mexico without reexamination of
the issues, pursuant to Articles 569 and 571 of the Mexican Federal Code of
Civil Procedure ("Codigo Federal de Procedimientos Civiles") and Article
1347A of the Mexican Commerce Code ("Codigo de Comerico"), which provide,
inter alia, that any judgment rendered outside Mexico may be enforced by
Mexican courts, provided that:
(i)such judgment is obtained in compliance with legal requirements of the
jurisdiction of the court rendering such judgment and in compliance with
all legal requirements of the Agreement;
(ii)such judgment is strictly for the payment of a certain sum of money and
has been rendered in a "in personam" action as opposed to an "in rem"
action:
(iii)service of process was made personally on the Borrower or on the
appropriate process agent (a court of Mexico would consider the service of
process upon the duly appointed agent, by means of a notarial instrument,
to be personal service of process meeting procedural requirements of
Mexico), provided such service of process is personally made upon the
process agent:
(iv)such judgment does not contravene Mexican law, public policy of Mexico,
international treaties or agreements binding upon Mexico or generally
accepted principles of international law;
(v)the applicable procedural requirements under the law of Mexico with
respect to the enforcement of foreign judgments (including the issuance of
letters rogatory by the competent authority of such jurisdiction and the
certification of such judgment as authentic by the corresponding
authorities of such jurisdiction in accordance with the laws thereof), are
complied with;
(vi)such judgment is final in the jurisdiction where obtained;
(vii)the action in respect of which such judgment is rendered is not the
subject matter of a lawsuit among the same parties, pending before a
Mexican court; and
(viii)any such foreign courts would enforce final judgments issued by the
federal or state courts of Mexico as a matter of reciprocity;
The opinion is subject to the following qualifications:
(a)Enforcement may be limited or affected by suspension of payments,
bankruptcy, insolvency, liquidation, reorganization, moratorium and other
similar laws of general application relating to or affecting the rights of
creditors generally; also pursuant to the laws of Mexico, labor claims,
claims of tax authorities for unpaid taxes, Social Security quotas,
Workers' Housing Fund quotas and Retirement Fund quotas will have priority
over claims of the Lender;
(b)I note that the payment of interest on interest is prohibited by Mexican
law;
(c)In the event that proceedings are brought in Mexico seeking performance
of the Borrower's obligations in Mexico, pursuant to Article 8 of the
Mexican Monetary Law ("Ley Monetaria de los Estados Unidos Mexicanos"), the
Borrower may discharge its obligations by paying any sums due in the
currency other than Mexican currency, in Mexican currency at the rate of
exchange fixed by Banco de Mexico in Mexico for the date when payment is
made;
(d)In the event that any legal proceedings are brought in the courts of
Mexico, a Spanish translation of the documents required in such proceedings
prepared by a court-approved translator would have to be approved by the
court after the defendant had been given an opportunity to be heard with
respect to the accuracy of the translation, and proceedings would
thereafter be based upon the translated documents.
This opinion is addressed to you solely for your benefit and it is not
to be transmitted to anyone else nor is it to be relied upon by anyone else
or for any other purpose or quoted circulated, filed or referred to in any
public document or filed with anyone without my express written consent.
Very truly yours,