GRUPO TRANSPORTACION FERROVIARIA
MEXICANA, S. A. DE C. V.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
GRUPO TRANSPORTACION FERROVIARIA
MEXICANA, S. A. DE C. V.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
INDEX
Contents Page
Report of Independent Accountants 1 and 2
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 to 28
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 16, 2001
To the Board of Directors and Stockholders of
Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V.
We have audited the accompanying consolidated balance sheets of Grupo
Transportacion Ferroviaria Mexicana, S. A. de C. V. and subsidiary as of
December 31, 2000 and 1999, and the related consolidated statements of
income, of changes in stockholders' equity and of cash flows for each of the
three years in the period ended December 31, 2000, all expressed in US
dollars. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with International Auditing Standards and
Auditing Standards Generally Accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and that they were prepared in accordance with International
Accounting Standards. 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 aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of
Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V. and subsidiary as
of December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with International Accounting
Standards.
International Accounting Standards differ in certain material respects from
Accounting Principles Generally Accepted in the United States of America (U.S.
GAAP). The application of the latter would have affected the determination of
the consolidated net income for each of the three years in the period ended
December 31, 2000, and the determination of consolidated stockholders' equity
and consolidated financial position as of December 31, 2000 and 1999, to the
extent summarized in Note 12 to the consolidated financial statements.
PricewaterhouseCoopers
Alberto Del Castillo V. Vilchis
Audit Partner
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands of US dollars)
December 31,
1999 2000
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 10,950 $ 33,038
Accounts receivable net of allowance for
doubtful accounts of $2,642 in 1999
and $4,160 in 2000 43,831 67,787
Amounts due from related parties (Note 7) 3,864
Other accounts receivable - Net 49,315 53,447
Materials and supplies 21,066 23,854
Other current assets 9,007 8,930
---------- ----------
Total current assets 134,169 190,920
Concession rights and related assets - Net (Note 3) 1,367,418 1,308,900
Property, machinery and equipment - Net (Note 4) 466,262 483,569
Investment held for operating purposes (Note 2) 7,100 7,081
Deferred financing costs 24,445 13,381
Other assets 567 707
Deferred income taxes (Note 9) 119,772 138,082
---------- ----------
Total assets $ 2,119,733 $ 2,142,640
========== ==========
Liabilities and stockholders' equity
Short-term liabilities:
Revolving credit facility (Note 5) $ 85,000
Current portion of long-term debt (Note 5) 90,450
Current portion of capital lease obligations (Note 10) 10,248 $ 4,227
Amounts due to related parties (Note 7) 6,535
Accounts payable and accrued expenses 63,457 76,318
---------- ----------
Total short-term liabilities 255,690 80,545
---------- ----------
Long-term portion of capital lease obligations (Note 10) 4,227
Long-term debt (Note 5) 664,322 811,324
Other long-term liabilities 4,364 6,453
---------- ----------
Total long-term liabilities 672,913 817,777
---------- ----------
Total liabilities 928,603 898,322
---------- ----------
Minority interest (Note 2) 359,872 370,376
---------- ----------
Commitments and contingencies (Note 10)
Subsequent events (Note 11)
Stockholders' equity (Note 8):
Common stock, 10,063,570 shares authorized, issued and
outstanding without par value 807,008 807,008
Retained earnings 24,250 66,934
---------- ----------
Total stockholders' equity 831,258 873,942
---------- ----------
Total liabilities and stockholders' equity $ 2,119,733 $ 2,142,640
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands of US dollars, except per share amounts)
Year ended December 31,
1998 1999 2000
------------ ------------ ------------
Transportation revenues $ 431,272 $ 524,541 $ 640,558
Operating expenses:
Salaries, wages and employee benefits 86,302 81,176 95,503
Purchased services 122,423 121,962 124,540
Fuel, material and supplies 42,817 48,487 69,292
Other costs 47,165 78,042 109,240
Depreciation and amortization 70,121 71,990 75,455
------------ ------------ ------------
Total operating expenses 368,828 401,657 474,030
------------ ------------ ------------
Operating income 62,444 122,884 166,528
------------ ------------ ------------
Other expenses - Net (8,073) (4,136) (22,966)
------------ ------------ ------------
Interest income 3,810 (*) 3,853 (*) 1,548
Interest expense (103,337) (*) (105,434) (*) (108,806)
Exchange loss - Net (10,865) (75) (1,424)
------------ ------------ ------------
Net comprehensive financing cost (110,392) (101,656) (108,682)
------------ ------------ ------------
(Loss) income before provision for deferred income
taxes and minority interest (56,021) 17,092 34,880
Deferred income tax benefit 72,783 41,318 18,310
------------ ------------ ------------
Income before minority interest 16,762 58,410 53,190
Minority interest (2,439) (12,025) (10,506)
------------ ------------ ------------
Net income for the year $ 14,323 $ 46,385 $ 42,684
============ ============ ============
Net income for the year per share (Note 2) $ 1.42 $ 4.61 $ 4.24
(*) These figures were reclassified to conform with 2000 classification.
The accompanying notes are an integral part of these consolidated financial
statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998, 1999 AND 2000
(amounts in thousands of US dollars)
Common (Deficit) retained
stock earnings Total
----- -------- -----
Balance at December 31, 1997 $ 807,008 ($ 36,458) $ 770,550
Net income for the year 14,323 14,323
----------- ----------- -----------
Balance at December 31, 1998 807,008 (22,135) 784,873
Net income for the year 46,385 46,385
Balance at December 31, 1999 807,008 24,250 831,258
Net income for the year 42,684 42,684
----------- ----------- -----------
Balance at December 31, 2000 $ 807,008 $ 66,934 $ 873,942
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands of US dollars)
Year ended December 31,
Cash flows from operating activities: 1998 1999 2000
--------- --------- ---------
Net income for the year $ 14,323 $ 46,385 $ 42,684
--------- --------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 70,121 71,990 75,455
Amortization of discount on senior secured debentures
and commercial paper 32,248 36,145 45,665
Deferred income tax benefit (72,783) (41,318) (18,310)
Provision for doubtful accounts 1,043 1,599 1,518
Amortization of deferred financing costs 5,830 6,166 14,307
Minority interest 2,439 12,025 10,506
Loss on sale of property, machinery and equipment - Net 4,661 4,861 23,435
Changes in other assets and liabilities:
Accounts receivable 41,305 (7,862) (25,474)
Other accounts receivable (13,344) (23,791) (4,132)
Materials and supplies (10,543) 6,465 (2,788)
Other current assets (4,561) 9 77
Amounts due to related parties (2,926) 3,158 (10,399)
Accounts payable and accrued expenses (1,474) (24,393) 12,861
Other non-current assets and long-term liabilities 1,662 646 (291)
--------- --------- ---------
Total adjustments 53,678 45,700 122,430
--------- --------- ---------
Net cash provided by operating activities 68,001 92,085 165,114
--------- --------- ---------
Cash flows from investing activities:
Sale of property, machinery and equipment 12,409 25,066 6,676
Acquisition of property, machinery and equipment (96,243) (49,412) (65,349)
--------- --------- ---------
Net cash used in investing activities (83,834) (24,346) (58,673)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from commercial paper - Net 280,662
Principal payment of senior secured credit facility (55,225) (269,769)
Proceeds from revolving credit facility 40,000 67,000 15,102
Principal payments under capital lease obligations (10,401) (10,617) (10,248)
Payments under revolving credit facility (15,000) (67,000) (100,100)
--------- --------- ---------
Net cash provided by (used in) financing activities 14,599 (65,842) (84,353)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents (1,234) 1,897 22,088
Cash and cash equivalents:
Beginning of the year 10,287 9,053 10,950
--------- --------- ---------
End of the year $ 9,053 $ 10,950 $ 33,038
========= ========= =========
Supplemental information
Cash paid during the year for interest $ 62,912 $ 60,935 $ 52,470
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(amounts in thousands of US dollars except number of shares)
NOTE 1 - THE COMPANY:
Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V. ("Grupo TFM") was
incorporated on July 12, 1996. In December 1996, Grupo TFM was awarded the right
to acquire (the "Acquisition") an 80% interest in TFM, S. A. de C. V. ("TFM or
the "Company"), formerly Ferrocarril del Noreste, S. A. de C. V. pursuant to a
stock purchase agreement.
The stock purchase agreement provided for a purchase price adjustment, within
180 days from June 23, 1997 ("commencement of operations"), in the event that
TFM incurred any difference greater than Ps30 million ($3.8 million at the
exchange rate of Ps7.89 per dollar) resulting from any undisclosed liability,
including labor related disputes or from the failure by the Mexican Government
(the "Government") to deliver any assets purchased under the asset purchase
agreement (see Note 4).
On December 19, 1997 Grupo TFM submitted to the Government and the Ministry of
Communications and Transport ("SCT") a claim seeking a $32 million purchase
price adjustment for non-delivery of certain railcars and equipment. Related
with this claim, during 1998 the Company received approximately $7 million for
non-delivery railcars plus $2 million of interest computed since the date of the
Acquisition. In respect with the remaining claim balance, the stock purchase
agreement provided for a non-appealable arbitration procedure in the event that
the parties involved do not agree with the claim. On September 1, 1999, the
arbitrator determined that there were additional non-delivery assets, consisting
mainly of railcars and equipment, amounting to $3.7 million which the Government
agreed to pay to TFM plus $2.2 million of interest computed since the date of
the Acquisition. The adjustments resulting from the non-delivery assets reduced
the value of the fixed assets acquired in the Acquisition and the interest were
credited to income in 1999.
Grupo TFM is a non-operating holding company with no material assets or
operations other than its investment in the Company and reports on a
calendar-year basis. The stockholders of Grupo TFM are TMM Multimodal, S. A. de
C. V. ("TMM Multimodal"), an indirect wholly owned subsidiary of Transportacion
Maritima Mexicana, S. A. de C. V. ("TMM"), Nafta Rail, S. A. de C. V. ("Nafta"),
an indirectly wholly owned subsidiary of Kansas City Southern Industries, Inc.
("KCSI"), Grupo Servia, S. A. de C. V. ("Grupo Servia") and the Government. See
Notes 8 and 11.
TFM lines are comprised of approximately 2,661 miles of track which form a
strategically important rail link within Mexico and to the North American Free
Trade Agreement corridor. TFM lines directly link Mexico City and Monterrey (as
well as Guadalajara through trackage rights) with the ports of Lazaro Cardenas,
Veracruz and Tampico and the Mexican/United States border crossings of Nuevo
Laredo-Laredo, Texas and Matamoros-Brownsville, Texas.
Approximately 71% of the Company's employees are covered under a collective
bargaining agreement dated July 1, 1999. Under this labor agreement, the
compensation terms of the collective bargaining agreement are subject to
renegotiation on an annual basis, whereas all other terms are to be renegotiated
every two years.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Grupo TFM and the Company prepare their financial statements in accordance with
International Accounting Standards ("IAS") expressed in U.S. dollars, which
differ in certain material respects from those under United States of America
Generally Accepted Accounting Principles (U.S. GAAP). See Note 12. The most
significant accounting policies are described below.
Consolidation
The consolidated financial statements include the accounts of Grupo TFM and the
Company. All intercompany balances and transactions have been eliminated.
Translation
Although Grupo TFM and TFM are required to maintain for tax purposes their books
and records in Mexican pesos ("Ps"), Grupo TFM and TFM keep records and use the
US dollar as their reporting currency.
Monetary assets and liabilities denominated in Mexican pesos are translated into
US dollars using current exchange rates. The difference between the exchange
rate on the date of the transaction and the exchange rate on the settlement
date, or balance sheet date if not settled, is included in the income statement
as a foreign exchange gain/loss. Non monetary assets or liabilities originally
denominated in Mexican pesos are translated into US dollars using the historical
exchange rate at the date of the transaction. Capital stock and minority
interest are translated at historical rates.
Cash and cash equivalents
Cash and cash equivalents represent highly liquid interest-bearing deposits and
investments with an original maturity of less than three months.
Materials and supplies
Materials and supplies, consisting mainly of fuel and items for maintenance of
property and equipment, are valued at the lower of the average cost or market.
Concession rights and related assets
Costs incurred by the Company to acquire the concession rights and related
assets were capitalized and are amortized on a straight-line basis over the
estimated useful lives of the related assets and rights acquired (see Notes 3
and 4). The purchase price to acquire the concession rights and related assets
was allocated to the identifiable assets acquired and liabilities assumed in
connection with the privatization process (see Note 3) based on their estimated
fair value.
The assets acquired and liabilities assumed include:
(i) The tangible assets acquired pursuant to the asset purchase agreement,
consisting of locomotives, rail cars and materials and supplies;
(ii) The rights to utilize the right of way, track structure, buildings and
related maintenance facilities of the TFM lines;
(iii) The 25% equity interest in the company established to operate the
Mexico City rail terminal facilities; and
(iv) Capital lease obligations assumed.
Property, machinery and equipment
Machinery and equipment acquired through the asset purchase agreement were
initially recorded at their estimated fair value. Subsequent acquisitions are
stated at cost. Depreciation is calculated by the straight-line method based on
the estimated useful lives of the respective fixed assets (see Note 4).
Recurring maintenance and repair expenditures are charged to operating expenses
as incurred. The cost of locomotives rebuilt is capitalized and is amortized
over the period in which benefits are expected to be received (eight years).
Foreign currency position
At December 31, 2000 Grupo TFM had monetary assets and liabilities denominated
in Mexican pesos of Ps478.8 million and Ps225.2 million (Ps627.5 million and
Ps189.20 million, at December 31, 1999), respectively. At December 31, 1999 and
2000 the exchange rate was Ps9.48 and Ps9.61 per US dollar, respectively. At
February 16, 2001, date of issuance of these consolidated financial statements,
the exchange rate was Ps9.68 per US dollar.
Derivative financial instruments
The Company enters into financial and commodity derivative instruments as a part
of its risk management program including currency exchange contracts, interest
rate arrangements and U.S. based fuel futures. Gains related to qualifying
hedged transactions are recognized when realized. Losses are recognized in
results of operations on a monthly basis. See Notes 6 and 11.
Investment held for operating purposes
TFM's 25% interest in the Mexico City rail terminal is accounted for using the
equity method of accounting. Effective May 1, 1998, the final non-Government
owned interest in the terminal was transferred. For the years ended December 31,
1999 and 2000, the equity in the income (loss) of Mexico City rail terminal
amounted $304 (unaudited) and ($19) (unaudited) and is included in other
expense-net in the statements of income.
Deferred financing costs
Includes fees and other related expenses paid by the Company to obtain long-term
debt (see Note 5). These deferred financing costs are amortized by the effective
interest method during the outstanding period of such long-term debt.
Income tax and employees' profit sharing
Income tax and employees' profit sharing are determined following interperiod
allocation procedures under the liability method.
Under this method the Company is required to make provision for deferred income
taxes on the revaluation of certain non-current assets and, in relation to an
acquisition on the difference between the acquisition cost of the net assets
acquired and their tax base.
Seniority premiums
Seniority premiums to which employees are entitled upon termination of
employment after 15 years of service are expensed in the years in which the
services are rendered. At December 31, 1999 and 2000, the Company had a
provision of $789 and $1,092, respectively.
Other compensations based on length of service to which employees may be
entitled in the event of dismissal or death, in accordance with the Mexican
Federal Law, are charged to income in the year in which they become payable.
Revenue recognition
Revenue is recognized proportionally as a shipment moves from origin to
destination.
Intangible and long-lived assets
The carrying value of intangible assets is periodically reviewed by the Company
and impairments are recognized when the expected future operating cash flows
derived from such intangible assets is less than their carrying value.
Minority interest
The minority interest reflects the 20% share of the Company held by the
Government.
Net income per share
Net income per share is calculated based on the weighted average number of
shares outstanding during the year. The weighted average number of shares
outstanding for the years ended December 31, 1998, 1999 and 2000 was 10,063,570.
Concentration of risk
Over 25% of the Company's transportation revenues are generated by the
automotive industry, which is made up of a relatively small number of customers.
In addition, the Company's largest customer accounted for approximately 10% of
transportation revenues. The Company performs ongoing credit valuations of its
customers' financial conditions and maintains an allowance for doubtful
accounts.
Use of estimates
The preparation of financial statements requires management to make estimates
and assumptions that could affect the reported amounts of assets and liabilities
at the date of the financial statements. Actual results could differ from these
estimates.
NOTE 3 - CONCESSION RIGHTS AND RELATED ASSETS:
In December 1996, the Government granted TFM the Concession (the "Concession")
to operate the northeast rail lines for an initial period of fifty years,
exclusive for thirty years, renewable, subject to certain conditions, for a
second period of equal length. Under the terms of the Concession, the Company
has the right to use and the obligation to maintain the right of way, track
structure, buildings and related maintenance facilities. Ownership of such
property and fixtures, however, has been retained by the Government.
Concession rights and related assets are summarized below:
December 31, Estimated
useful
1999 (1) 2000 lives (years)
------------ ------------ ------------
Land $ 132,878 $ 132,878 50
Buildings 33,113 33,113 27-30
Bridges 75,350 75,350 41
Tunnels 94,043 94,043 40
Rail 317,268 317,268 29
Concrete and wood ties 137,351 137,351 27
Yards 106,174 106,174 35
Ballast 107,189 107,189 27
Grading 391,808 391,808 50
Culverts 14,942 14,942 21
Signals 1,418 1,418 26
Other 61,792 61,792 5-50
------------ ------------
1,473,326 1,473,326
Accumulated amortization (105,908) (164,426)
------------ ------------
Concession rights and related assets - Net $ 1,367,418 $ 1,308,900
============ ============
Amortization of concession rights was $41.5 million in 1998 and 1999, and $40.5
million in 2000.
(1) On November 10, 1999, the SCT issued an official letter pursuant to which
it acknowledged the dismantling of the catenary running over the route
between Mexico City and the city of Queretaro, since it is considered
inefficient and because of the plans for the use of two and three-level
cars that would permit double-stack intermodal traffic and open new
intermodal facilities to promote this traffic. See Note 11. The value
assigned originally to the catenary was $91,591, which has been reallocated
among the other items under Concession. The effect of reassigning the value
of the catenary in the annual depreciation expense was not material.
NOTE 4 - PROPERTY, MACHINERY AND EQUIPMENT:
Pursuant to the asset purchase agreement, the Company obtained the right to
acquire locomotives and rail cars and various materials and supplies, formerly
owned by Ferrocarriles Nacionales de Mexico ("FNM"). The Company also agreed to
assume the outstanding indebtedness, as of the commencement of operations,
relating to certain locomotives originally acquired by FNM under capital lease
arrangements (see Note 10). Legal title to the purchased assets was transferred
to TFM at that time.
December 31, Estimated
useful
1999 2000 lives (years)
----------- ----------- ------------
Locomotives $ 175,579 $ 175,794 14
Freight cars 119,097 104,683 12-16
Machinery of workshop 16,650 16,817 8
Machinery of road 23,557 26,141 14
Furniture and equipment 124,020 154,277 1-15
Buildings 4,364 4,766 20
Other 47,441 57,226 8
----------- -----------
510,708 539,704
Less accumulated depreciation
and amortization (69,479) (101,530)
----------- -----------
441,229 438,174
Land 3,888 23,686
Construction in progress 21,145 21,709
----------- -----------
$ 466,262 $ 483,569
=========== ===========
Depreciation of property, machinery and equipment was $28.6 million in 1998, $30.4 million
in 1999 and $34.9 in 2000.
NOTE 5 - FINANCING:
Long-term debt is summarized as follows:
December 31,
1999 2000
----------- -----------
Senior credit facilities:
Tranche "A" $ 225,000
Tranche "B" 44,775
-----------
269,775
Less current portion of Senior credit facilities (90,450)
-----------
Long-term portion of Senior credit facilities 179,325
Senior notes 150,000 $ 150,000
Senior discount debentures 443,501 443,501
Commercial paper 290,000
----------- -----------
772,826 883,501
Less-discount on Senior discount debentures and
commercial paper (108,504) (72,177)
----------- -----------
$ 664,322 $ 811,324
=========== ===========
Interest expense related with the Senior credit facilities amounted to $38,155,
$36,859 and $24,125 during 1998, 1999 and 2000, respectively, at an average
interest rate of 9.5%.
Commercial paper
In September 2000, the Company issued commercial paper at a discount of $5
million from its principal amount of $290 million, as part of a two-year $310
million program. Interest rates on the outstanding commercial paper range around
6.54%. Proceeds from commercial paper were used to pay the Tranches "A" and "B"
of the Senior credit facilities and their respective revolving loan. The
deferred financing costs related with the Senior credit facilities were expensed
in 2000.
Senior notes
In June 1997 the Company issued US dollar denominated securities bearing
interest semiannually at 10.25% and maturing on June 15, 2007.
Senior discount debentures ("SDD")
The US dollar denominated SDD were sold in June 1997, at a substantial discount
from their principal amount of $443,501, and no interest will be payable thereon
prior to June 15, 2002. The SDD will mature on June 15, 2009. The price of the
SDD represents a yield to maturity of 11.75%, computed on the basis of
semiannual compounding and maturing on June 15, 2002. Interest on the SDD is
payable semiannually at 11.75%, commencing on December 15, 2002. The SDD are
redeemable at the option of the Company, in whole or in part, at any time on or
after June 15, 2002.
Pursuant to the provisions of the Registration Rights Agreement entered between
the Company and the Placement Agents, with respect to the Senior notes and the
SDD mentioned above, the Company registered the securities with the US
Securities and Exchange Commission in 1998.
Grupo TFM's total long-term debt matures as follows:
Year ending December 31,
2002 $ 290,000
2003 -
2004 -
2005 -
2006 and thereafter 593,501
-----------
$ 883,501
===========
Covenants
The agreements related to the above-mentioned loans include certain affirmative
and negative covenants and maintenance of certain financial conditions,
including, among other things, dividend and other payment restrictions affecting
restricted subsidiaries, with which Grupo TFM and subsidiary were in compliance
at December 31, 2000.
NOTE 6 - FINANCIAL INSTRUMENTS:
Interest rates agreements
The Company enters into various types of interest rate contracts in managing its
interest rate risk. The Company uses interest rates swaps to reduce the
potential impact of increases in its interest rates under its long-term debt
described in Note 5. Interest rate forward contracts are generally used by the
Company to offset changes in the rates received on short-term floating-rate
assets.
As a condition to the Senior credit facilities, the Company entered into an
interest rate swap, which expired on March 10, 2000. At the expiration date, the
Company recognized an additional cost of approximately $200.
Fuel futures contracts
The Company may seek to assure itself of more predictable fuel expenses through
U.S. fuel futures contracts, which are accounted for as hedges. TFM's fuel
hedging program covered approximately 25% of estimated 2000 fuel purchases.
Hedge positions are also closely monitored to ensure that they will not exceed
actual fuel requirements in any period.
Foreign exchange contracts
The purpose of the Company's foreign currency hedging activities is to limit the
risks arising from its peso-denominated monetary assets and liabilities.
The nature and quantity of any hedging transactions will be determined by
management of the Company based upon net assets exposure and market conditions.
As of December 31, 2000, the Company had one Mexican peso option outstanding in
the notional amount of $10 million based on the exchange rate of Ps11 per
dollar. This option will expire in October 10, 2001.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable and accounts
payable approximate carrying values because of the short maturity of these
financial instruments.
The related fair value based on the quoted market prices for the Senior notes
and SDD or similar issues at December 31, 2000 was $136,125 and $323,755,
respectively. The carrying amount of commercial paper approximates fair value.
NOTE 7 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
The amounts payable to (receivable from) related parties are as follows:
December 31,
1999 2000
-------- --------
Servicios Corporativos TMM, S. A. de C. V. $ 3,619
KCSI 2,961 $ 2,363
Terminal Ferroviaria del Valle del Mexico, S. A. de C. V. 2,707 632
TMM 536 5,093
Inmobiliaria TMM, S. A. de C.V . 24 15
Servicios de Transporte Especializado, S. A. de C. V. 425 610
The Texas Mexican Railway Company (3,737) (12,302)
TMM Logistics, S. A. de C. V. (275)
-------- --------
$ 6,535 ($ 3,864)
The most important transactions with related parties are summarized as follows:
Year ended December 31,
1998 1999 2000
-------- -------- --------
Transportation revenues $ 826 $ 7,391 $ 15,106
======== ======== ========
Services expenses ($ 1,939) ($ 2,866) ($ 3,326)
======== ======== ========
Management services ($ 2,500) ($ 2,500) ($ 2,500)
======== ======== ========
Locomotives leases revenues $ 1,564 $ 1,764 $ 1,854
======== ======== ========
Other (expenses) revenues ($ 3,257) $ 96 ($ 5,009)
======== ======== ========
TMM management services agreement
The Company and TMM entered into a management services agreement pursuant to
which TMM provides certain consulting and management services to the Company
commencing May 1997 for a term of 12 months and which may be renewed for
additional one-year periods by agreement of the parties. Under the terms of the
agreement, TMM is to be reimbursed for its costs and expenses incurred in the
performance of such services.
KCS Transportation Company ("KCSTC") management services agreement
The Company and KCSTC, a wholly owned subsidiary of KCSI, entered into a
management services agreement pursuant to which KCSTC makes available to the
Company certain railroad consulting and management services commencing May 1997
for a term of 12 months and which may be renewed for additional one-year periods
by agreement of the parties. Under the terms of the agreement, KCSTC is to be
reimbursed for its costs and expenses incurred in the performance of such
services.
The above mentioned agreements have not been renewed, and the Company has
accrued the payments due to TMM and KCSTC under these agreements through
December 31, 2000.
NOTE 8 - STOCKHOLDERS' EQUITY:
Grupo TFM's capital stock is variable with a fixed minimum of Ps50,000 and an
unlimited maximum. The capital stock of Grupo TFM is divided into series without
par value, whose principal differences relate to: a) Series "A" shares with
voting rights, which can be held only by persons or companies of Mexican
nationality and represent up to 51% of the capital stock of Grupo TFM; b) Series
"B" shares with voting rights, which can be held by persons or companies of
non-Mexican nationality and represent up to 49% of the capital stock of Grupo
TFM, unless authorized by the National Commission of Foreign Investments, in
which case the percentage can be higher, and c) Series "L" shares with
restricted voting rights, which are not entitled to a dividend preference.
At December 31, 2000 the capital stock of Grupo TFM is represented by 10,063,570
shares as follows:
Number of shares Number of shares
Stockholders (fixed portion of capital stock) (variable portion of capital stock)
- ------------ -------------------------------- -----------------------------------
Series "A" Series "A"
---------- ----------
TMM Multimodal 24,500 3,760,015
Grupo Servia 1,000 82,886
Series "B" Sub-series "B"
---------- --------------
Nafta 24,500 3,692,199
Sub-series "L"
--------------
FNM 2,478,470
---------- --------------
Total 50,000 10,013,570
========== ==============
The Sub-series "L-1" shares are entitled to elect one of Grupo TFM's eight
directors and his or her alternate director. Pursuant to the by-laws of Grupo
TFM, the voting rights attached to these shares are limited to the following
matters: (i) granting of any guaranty for the obligations of third parties not
made in Grupo TFM's ordinary course of business; (ii) extension of credit to
third parties not made in Grupo TFM's ordinary course of business; (iii)
acquisitions not made in the furtherance of Grupo TFM's corporate purpose and
not made in Grupo TFM's ordinary course of business for an amount exceeding $1
million, and (iv) the election of the director appointed by holders of Grupo TFM
Sub-series "L-1" shares. Except as described above, holders of Sub-series "L-1"
shares have no voting rights. Grupo TFM Sub-series "L-1" shares do not confer
upon the holders thereof any right to preference dividends.
On September 26, 2000, Grupo Servia entered into a stock purchase agreement and
agreed to sell its interest in Grupo TFM toTMM Multimodal. On December 28, 2000,
an addendum to such agreement was signed, after which as from December 31, 2000,
TMM Multimodal has voting rights on 51% of the capital stock of Grupo TFM.
TMM Multimodal and Nafta hold an option to acquire FNM's shares through July
31, 2002, which is exercisable at $198.8 million plus interest based upon
one year U. S. Treasury rates. See Note 11.
The Government has retained a 20% interest in TFM's shares and has reserved the
right to sell such shares by October 31, 2003 in a public offering. In the event
that such public offering does not occur by October 31, 2003, Grupo TFM may
purchase the Government's equity interest in TFM at a purchase price equal to
the per share price initially paid by Grupo TFM, indexed based on Mexican
inflation. If Grupo TFM does not purchase the Government's TFM interest, the
Government may require TMM and KCSI to purchase the TFM shares at the price
discussed above. See Note 11.
Dividends paid from retained earnings on which income tax has been previously
paid are not subject to tax withholding. If dividends are paid from retained
earnings which have not been previously taxed, they will give rise to tax
payable by the Company equivalent to 53.85% of the dividends paid. Additionally,
as from January 1, 1999, all dividends paid to individuals or residents abroad
are subject to income tax withholding at a rate equivalent to 7.69%. When
dividends are paid to residents of countries with which Mexico has signed a tax
treaty, tax is withheld as per the provisions of the said treaty in question.
Capital stock reductions in excess of capital contributions, indexed in
accordance with the procedures established in the Mexican Income Tax Law, are
accorded the same tax treatment as dividends.
NOTE 9 - INCOME TAX, EMPLOYEES' PROFIT SHARING, ASSET TAX AND TAX LOSS
CARRYFORWARDS:
Income tax
Grupo TFM and its subsidiary compute income tax on an individual basis.
Grupo TFM and its subsidiary had combined (losses)/income for tax purposes of
($195,795), $5,362 and ($135,816) for the years ended December 31, 1998, 1999
and 2000, respectively. The difference between tax losses and book income is due
principally to the inflation gain or loss recognized for tax purposes, the
difference between book and tax depreciation and amortization and temporary
differences for certain items that are reported in different periods for
financial reporting and income tax purposes.
Income tax attributable to taxable income in 1999 of Grupo TFM was not paid due
to the utilization of prior years tax loss carryforwards.
The benefit for income tax credited to income was as follows:
Year ended December 31,
1998 1999 2000
----------- ----------- -----------
Current $ - $ - $ -
Deferred (72,783) (41,318) (18,310)
----------- ----------- -----------
Net income tax benefit ($ 72,783) ($ 41,318) ($ 18,310)
=========== =========== ===========
Reconciliation of the income tax (benefit) expense based on the statutory income
tax rate to recorded income tax benefit was as follows:
Year ended December 31,
1998 1999 2000
----------- ----------- -----------
(Loss) income before income tax ($ 56,021) $ 17,092 $ 34,880
=========== =========== ===========
(Benefit) income tax at 34% in 1998 and 35% in
1999 and 2000 ($ 19,047) $ 5,982 $ 12,208
Decrease (increase) resulting from:
Effects of inflationary components (32,807) (16,261) (2,603)
Effects of inflation on tax loss
carryforwards (20,099) (29,984) (28,599)
Non-deductible expenses 375 1,177 672
Change in tax rate from 34% to 35% (2,159)
Other - Net (1,205) (73) 12
----------- ----------- -----------
Net deferred income tax benefit ($ 72,783) ($ 41,318) ($ 18,310)
=========== =========== ===========
The components of deferred tax assets and (liabilities) are comprised of the
following:
December 31,
1999 2000
----------- -----------
Tax-loss carryforwards $ 163,781 $ 241,503
Inventories and provisions 51,517 27,367
Machinery and equipment (9,503) 1,679
Concession rights (81,820) (133,107)
Other (4,203) 640
----------- -----------
Net deferred income tax asset $ 119,772 $ 138,082
=========== ===========
Employees' profit sharing
Employees' profit sharing is determined by the Company at the rate of 10% on
taxable income, adjusted as prescribed by the Mexican Income Tax Law. For the
years ended December 31, 1998, 1999 and 2000, there was no basis for employee's
profit sharing.
Asset tax
The Asset Tax Law establishes a minimum tax of 1.8% on the average of assets,
less certain liabilities, which is payable when it exceeds the income tax due.
In accordance with the Asset Tax Law, Grupo TFM and the Company are subject to
asset tax starting fiscal year 2001.
Tax loss carryforwards
At December 31, 2000 Grupo TFM and its subsidiary had the following combined tax
loss carryforwards, which under the Mexican Income Tax Law are inflation-indexed
through the date of utilization:
Inflation-indexed
Year in which amounts as of Year of
loss arose December 31, 2000 expiration
------- -- ----------------- ----------
1996 $ 14,357 2046
1997 233,253 2046
1998 290,035 2046
1999 6,167 2046
2000 146,195 2046
-----------
$ 690,007
===========
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
A) Commitments:
Concession duty
Under the Concession, the Government has the right to receive a payment from the
Company equivalent to 0.5% of the gross revenue during the first 15 years of the
Concession period and 1.25% during the remaining years of the Concession period.
For the years ended December 31, 1998, 1999 and 2000 the concession duty expense
amounted to $2,135, $2,751 and $3,334, respectively, which was recorded as
operating expense.
Capital lease obligations
At December 31, 2000 the outstanding indebtedness assumed by TFM pursuant to the
asset purchase agreement amounted to $4,227. This obligation will expire in
January 2001.
Locomotives operating leases
In May 1998 and September 1999, the Company entered into operating lease
agreements for 75 locomotives each, which expire over the next 18 and 19 years,
respectively. At the end of the contracts the locomotives will be returned to
the lessor. As of December 31, 2000, the Company had received 141 locomotives.
Rents under these agreements amounted $7.3 million in 1998, $10.6 million in
1999 and $18.6 million in 2000.
Future minimum payments, by year and in the aggregate, under the aforementioned
leases are as follows:
Year ending December 31,
2001 $ 28,720
2002 28,720
2003 28,720
2004 28,720
2005 and thereafter 408,011
-----------
$ 522,891
===========
Railcars operating leases
The Company leases certain railcars under agreements which are classified as
operating leases. The term of the contracts fluctuates between 3 and 15 years.
Future minimum rental payments at December 31, 2000, under these agreements are
shown in the next page.
Year ended December 31,
2001 $ 32,362
2002 28,294
2003 15,612
2004 14,840
2005 and thereafter 70,513
-----------
$ 161,621
===========
Locomotives maintenance agreements
The Company has entered into two locomotives maintenance agreements, which
expire in 2004 and 2018 with third-party contractors. Under current
arrangements, the contractors provide both routine maintenance and major
overhauls at an established rate in a range from four to five hundred dollars
per locomotive per day.
Track maintenance and rehabilitation agreement
In May 2000, the Company entered into a track maintenance and rehabilitation
agreement, which expires in 2012. Under this contract, the contractor provide
both routine maintenance and major rehabilitation to the Celaya - Lazaro
Cardenas stretch, which is comprised of approximately 350 miles. Maintenance and
rehabilitation expense amounted to $2.3 million in 2000. Under this agreement,
the Company will pay approximately $97 million in the following 12 years.
Fuel purchase agreement
On December 19, 1997, the Company entered into a fuel purchase agreement with
PEMEX REFINACION, under which the Company has the obligation to purchase at
market price a minimum of 29,550 cubic meters and a maximum of 42,400 cubic
meters per month of PEMEX diesel. The term of the agreement is indefinite but
can be terminated for justified cause by each party with a written notification
upon three months' notice.
B) Contingencies:
Grupo TFM and its subsidiary are parties to various legal actions and other
claims in the ordinary course of their business. Management does not believe
that any pending litigation against Grupo TFM and the Company will, individually
or in the aggregate, have a material adverse effect on their results of
operations or financial condition.
The Company has filed a claim for the refund of approximately $262 million (Ps
2,111 million) of value added tax paid in connection with the Acquisition (see
Note 1). However, a full valuation allowance has been provided in the
accompanying consolidated financial statements.
NOTE 11 - SUBSEQUENT EVENTS:
a. On February 9, 2001, the SCT issued statement 4.123. Under this statement,
the SCT and TFM agreed to transfer a line of the two-way Hercules-Mariscala
stretch to the Government in order to be included in the North Pacific
concession. In return for this stretch, TFM will receive approximately $67
million plus value added tax, at the latest, on the date in which TFM, Grupo
TFM or their stockholders acquire the 20% of the TFM capital stock or the
24.6% of the Grupo TFM's capital stock currently owned by FNM and the
Government, respectively, or October 31, 2003.
Government payment may be restated in accordance with an appraisal performed
by the "Comision de Avaluos de Bienes Nacionales", until the payment date.
b. On February 12, 2001, the SCT modified the Concession title granted to TFM
in regards with the transfer of the Hercules-Mariscala stretch described
above, and authorized the dismantling of the catenary running over the route
between Huehuetoca, State of Mexico and the City of Queretaro.
c. IAS 39 "Financial Instruments: recognition and measurement" should be
applied by the Company starting January 1, 2001. Under the provisions of
this standard, derivatives are always treated as held for trading unless
their use qualifies them for hedge accounting. All contractual rights or
obligations under derivatives are recognized on the balance sheet as assets
or liabilities. Further, gains and losses resulting from financial assets
and liabilities should be disclosed, whether included in the income
statement or in stockholders' equity. IAS 39 supplements the disclosure
requirements of IAS 32, "Financial Instruments: disclosure and
presentation". The Company does not believe the effect of adoption of this
statement will be significant.
NOTE 12 - RECONCILIATION OF DIFFERENCES BETWEEN IAS AND U.S. GAAP:
The Company's consolidated financial statements are prepared in accordance with
IAS which differ in certain material respects from U.S. GAAP. The principal
difference between IAS and U.S. GAAP, as it relates to the Company, is the
recognition of deferred income taxes. The deferred income tax included in the
consolidated financial statements was calculated in accordance with the IAS-12
(revised) which requires the recording of deferred taxes for fixed assets and
concession, including the effects of indexing for tax purposes.
U.S. GAAP prohibits recognition of deferred tax assets or liabilities for
differences related to assets and liabilities that are remeasured from the local
currency into the functional currency using historical exchange rates and that
result from changes in exchange rates or the indexation for tax purposes.
In Mexico, companies are obligated to pay their employees a portion of the net
income as defined by specific regulations. For U.S. GAAP purposes, deferred
profit sharing liabilities or assets would be recorded for temporary differences
that may arise in the determination of the
current liability based on the statutory rate of 10%. These temporary
differences are similar to those that exist for deferred income tax purposes.
IAS do not require the establishment of assets or liabilities for these
differences.
The differences in the net deferred income tax and employees' profit sharing
assets determined under U.S. GAAP and IAS at December 31, 1999 and 2000 are
summarized below:
Deferred income Deferred profit
tax assets sharing assets
1999 2000 1999 2000
---------- ---------- ---------- ----------
Amounts recorded under IAS $ 119,772 $ 138,082
Amount determined under U.S. 39,941 56,429 $ 10,951 $ 15,524
---------- ---------- ---------- ----------
Net difference $ 79,831 $ 81,653 $ 10,951 $ 15,524
========== ========== ========== ==========
a. Reconciliation of net income
Year Ended December 31,
1998 1999 2000
---------- --------- ----------
Net income under IAS $ 14,323 $ 46,385 $ 42,684
Deferred income tax (26,992) (52,839) (1,822)
Deferred employees' profit sharing 14,116 (3,165) 4,573
Effect of U.S. GAAP adjustment on minority interest 2,575 11,201 (550)
---------- ---------- ----------
Net income under U.S. GAAP $ 4,022 $ 1,582 $ 44,885
========== ========== ==========
b. Reconciliation of stockholders' equity
December 31,
1999 2000
---------- ----------
Stockholders' equity under IAS $ 831,258 $ 873,942
Deferred income tax (79,831) (81,653)
Deferred employees' profit sharing 10,951 15,524
Effect of U.S. GAAP adjustment on minority interest 13,776 13,226
---------- ----------
Stockholders' equity under U.S. GAAP $ 776,154 $ 821,039
========== ==========
Under U.S. GAAP, employee profit sharing would be considered as operating
expense.
c. Earnings per share
The weighted average number of shares outstanding for the years ended December
31, 1998, 1999 and 2000 was 10,063,570. The net income per share (basic and
diluted) under U.S. GAAP was $0.40 in 1998, $0.16 in 1999 and $4.46 in 2000.
d. Sales and disposals of fixed assets
In accordance with SAB 101, the sales and disposals of fixed assets should be
included in other operating expenses. Under IAS, these expenses are included in
other expenses - net. For the years ended December 31, 1998, 1999 and 2000 the
sales and disposals of fixed assets amounted to $6,003, $4,861 and $23,435,
respectively.
e. Extraordinary item
Under IAS, the deferred financing costs expensed for the pre-payment of the
Senior credit facilities for an amount of $9,227 were included in interest
expense, while under U.S. GAAP, it would be included in the income statement as
extraordinary item, net of taxes ($5,075).
f. Effect of recently issued accounting standards
In June 1998, the Financial Accounting Standard Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if so, if
it is, the type of hedge transaction. In June 2000, the FASB issued statement
No. 138 "Accounting for Derivative Instruments and Hedging Activities-an
Amendment of SFAS 133". This amendment addressed certain issues causing
implementation difficulties for entities that have adopted or will adopt SFAS
133. This statement is effective for fiscal years beginning after June 15, 2000.
The Company does not believe the effect of adoption of this statement will be
significant.
g. Condensed balance sheets and income statements
The following condensed balance sheets and income statements reflect the
effects of the principal differences between IAS and U.S. GAAP:
Condensed Balance Sheets
December 31,
1999 2000
------------- -------------
Total current assets $ 134,169 $ 190,920
Concession rights and related assets - Net 1,367,418 1,308,900
Property, machinery and equipment - Net 466,262 483,569
Deferred income taxes 50,892 71,953
Other non-current assets 32,112 21,169
------------- -------------
Total assets $ 2,050,853 $ 2,076,511
============= =============
Total short-term liabilities $ 255,690 $ 80,545
Total long-term liabilities 672,913 817,777
------------- -------------
Total liabilities 928,603 898,322
------------- -------------
Minority interest 346,096 357,150
Capital stock 807,008 807,008
(Deficit) retained earnings (30,854) 14,031
Total stockholders' equity 776,154 821,039
------------- -------------
Total liabilities and stockholders' equity $ 2,050,853 $ 2,076,511
============= =============
Condensed Statements of Income
Years ended December 31,
1998 1999 2000
------------ ------------ ------------
Transportation revenues $ 431,272 $ 524,541 $ 640,558
Total operating expenses 360,715 409,683 493,708
------------ ------------ ------------
Operating income 70,557 114,858 146,850
Other (expenses) income - net (2,070) 725 469
Comprehensive financing cost (110,392) (101,656) (99,455)
------------ ------------ ------------
(Loss) income before provision for
deferred income taxes, minority
interest and extraordinary item (41,905) 13,927 47,864
Deferred income tax benefit (expense) 45,791 (11,521) 13,152
Minority interest 136 (824) (11,056)
------------ ------------ ------------
Income before extraordinary item 4,022 1,582 49,960
Extraordinary item, net of taxes (5,075)
------------ ------------ ------------
Net income for the year $ 4,022 $ 1,582 $ 44,885
============ =========== ============