SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form 20-F
----------------------
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
-----------
Commission file number: 1-13200
GRUPO ELEKTRA, S.A. de C.V.
(Exact name of Registrant as specified in its charter)
3 N/A
(Translation of registrant's name into English)
UNITED MEXICAN STATES
(Jurisdiction of Incorporation or Organization)
Commission file number: 333-5392-01 Commission file number: 333-5392-02
ELEKTRA, S.A. de C.V. ELEKTRAFIN, S.A. de C.V.
(Exact name of Registrant as (Exact name of Registrant as
specified in its charter) specified in its charter)
N/A N/A
(Translation of registrant's (Translation of registrant's
name into English) name into English)
UNITED MEXICAN STATES UNITED MEXICAN STATES
(Jurisdiction of Incorporation (Jurisdiction of Incorporation
or Organization) or Organization)
Edificio Parque Cuicuilco (Esmeralda)
Insurgentes Sur, No. 3579
Col. Tlalpan La Joya
14000 Mexico, D.F.
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
------------------- ------------------------------
Registered
----------
Grupo Elektra, S.A. de C.V.:
- ----------------------------
Global Depositary Shares evidenced by Global Depositary Receipts, each Global
Depositary Share representing two Certificados de Participacion Ordinarios No New York Stock Exchange
Amortizables, each of which represents financial interests in and limited voting
rights with respect to two Series B Shares, without par value, and one Series L
Share, without par value, of Grupo Elektra, S.A. de C.V.
Certificados de Participacion Ordinarios No Amortizables (Ordinary Participation
Certificates ("CPOs")), each of which represents financial interests and limited New York Stock Exchange*
voting rights with respect to two Series B Shares, without par value, and one
Series L Share, without par value, of Grupo Elektra, S.A. de C.V.
Series B Shares without par value New York Stock Exchange*
Series L Shares without par value New York Stock Exchange*
- ------------------
* Not for trading, but only in connection with the registration of
Global Depositary Shares, pursuant to the requirements of the
Securities and Exchange Commission.
Elektra, S.A. de C.V.: None
Elektrafin, S.A. de C.V.: None
-------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
--------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
Title of Each Class
12-3/4% Guaranteed Senior Notes Due 2001
================================================================================
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
Grupo Elektra, S.A. de C.V.:
Series A Shares without par value 1,249,127,610
Series B Shares without par value 1,953,234,140
Series L Shares without par value 358,302,980
Elektra, S.A. de C.V.:
Series A Shares without par value 8,982,569
Series B Shares without par value 8,989,757
Elektrafin, S.A. de C.V.:
Series A Shares without par value 10,735,500
Series B Shares without par value 62,325,733
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 |_| Item 18 |X|
ii
================================================================================
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business...............................................................................3
Item 2. Description of Property..............................................................................43
Item 3. Legal Proceedings....................................................................................44
Item 4. Control of Registrant................................................................................45
Item 5. Nature of Trading Market.............................................................................46
Item 6. Exchange Controls and Other Limitations Affecting Security Holders...................................49
Item 7. Taxation.............................................................................................52
Item 8. Selected Financial Data..............................................................................57
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations................61
Item 9A. Qualitative and Quantitative Disclosure about Market Risks...........................................73
Item 10. Directors and Executive Officers....................................................................74
Item 11. Compensation of Directors and Officers..............................................................75
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......................................76
Item 13. Interest of Management in Certain Transactions......................................................77
PART II
*Item 14. Description of Securities to be Registered.........................................................77
PART III
*Item 15. Defaults upon Senior Securities....................................................................78
*Item 16. Changes in Securities and Changes in Security for Registered Securities............................78
PART IV
**Item 17. Financial Statements..............................................................................78
Item 18. Financial Statements................................................................................78
Item 19. Financial Statements and Exhibits...................................................................78
- ------------
* Omitted because the item is inapplicable or the answer is negative.
** The Registrant has responded to Item 18 in lieu of this Item.
Presentation of Financial and Other Information
Grupo Elektra, S.A. de C.V. ("Grupo Elektra" or the "Company"), Elektra,
S.A. de C.V. ("Elektra") and Elektrafin, S.A. de C.V. ("Elektrafin") are each a
corporation (sociedad anonima de capital variable) organized under the laws of
the United Mexican States. Grupo Elektra was formed in 1950 as a manufacturer of
radios and became involved in retailing in 1957 when it opened its first Elektra
store.
In this Annual Report on Form 20-F (this "Annual Report"), references to
"US$," "$," "Dollars" and "U.S. Dollars," are to United States dollars. In this
Annual Report, all references to pesos are to the legal Mexican currency, and
references to "P$," "Ps" or "Pesos" are to Mexican pesos.
The Company maintains its books and records in Pesos and prepares its
consolidated financial statements in Pesos. The Mexican Institute of Public
Accountants has issued Bulletin B-10, "Recognition of the Effects of Inflation
on Financial Information," and Bulletin B-12, "Statement of Changes in Financial
Position." These bulletins outline the inflation accounting methodology
mandatory for all Mexican companies reporting under generally accepted
accounting principles in Mexico ("Mexican GAAP"). Pursuant to Mexican GAAP,
financial data for all periods in the financial statements included in Item 18
(the "Consolidated Financial Statements") and
1
for all periods throughout this Annual Report, unless otherwise noted, have been
restated in constant Pesos as of December 31, 1998.
Accounting principles generally accepted in Mexico differ in certain
important respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
Consolidated Financial Statements. See Note 16 of the Company's Consolidated
Financial Statements. This Annual Report contains translations of certain Peso
amounts into Dollars at specified rates solely for the convenience of the
reader. These translations should not be construed as representations that the
Peso amounts actually represent such Dollar amounts or could be converted into
Dollars at the rates indicated or at any other rate. Unless otherwise indicated,
U.S. Dollar amounts have been translated from Mexican pesos at an exchange rate
of Ps. 9.901 to US$1.00, the noon buying rate for pesos on December 31, 1998 as
published by the Federal Reserve Bank of New York (the "Noon Buying Rate"). On
June 22, 1999, the Noon Buying Rate was Ps. 9.358 to US$1.00.
The term "billion" as used in this Annual Report means one thousand
million.
Forward-looking Statements
This Annual Report contains words, such as "believe," "expect" and
"anticipate" and similar expressions, that identify forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements reflect the Company's views about future events and
financial performance. Actual results could differ materially from those
projected in such forward-looking statements as a result of various factors that
may be beyond the Company's control, including but not limited to effects on the
Company from competition, limitations on the Company's access to sources of
financing on competitive terms, significant economic or political developments
in Mexico, and changes in the Company's regulatory environment, particularly
developments affecting the regulation of consumer installment sales.
Accordingly, readers are cautioned not to place undue reliance on these
forward-looking statements. In any event, these statements speak only as of
their dates, and the Company undertakes no obligation to update or revise any of
them, whether as a result of new information, future events or otherwise.
2
PART I
Item 1. Description of Business
OVERVIEW
General
Grupo Elektra, S.A. de C.V. ("Grupo Elektra" or the "Company") operates one
of the largest retailing groups in Latin America with 819 retail stores as of
December 31, 1998, of which 83 are located outside Mexico.
The Company's retail operators sell a wide variety of name brand consumer
electronics, major appliances, household furniture and clothing in Mexico, and
in five other countries in Latin America: Guatemala, El Salvador, Honduras, the
Dominican Republic, and Peru. The Company operates its electronics, appliance
and furniture retail operations in Mexico through Elektra, S.A. de C.V.
("Elektra"), an indirect subsidiary of the Company. With 581 Elektra stores
located throughout Mexico, the Company believes it has the largest distribution
network in the Mexican electronics, home appliances and household furniture
market, measured by number of retail stores. The Company's electronics,
appliance and furniture retail operations outside Mexico are operated through
corporations established and organized under the laws of each country where it
has operations. The Company operates its retail clothing operations through
stores acquired in the Company's September 1996 acquisition of Grupo Hecali,
S.A. de C.V. ("Hecali").
The Mexican retail sector is fragmented and consumers are served by a
number of formats, including traditional formats such as independent retail
stores, modern formats such as retail chains and department stores, and informal
outlets such as street vendors and markets. The Company believes that consumer
preferences are shifting from smaller, traditional and informal outlets toward
larger, standardized retail chains that offer consumers superior value through
greater merchandise selection and convenience, and better prices through the
chains' greater purchasing power. The Company believes that there is
considerable potential for growth as the Mexican retail sector continues this
trend towards modernization. The Company also believes that similar trends are
underway in many other Latin American countries. The Company's strategy is
designed to capitalize on these trends. Additionally, the Company believes that
the increasing purchasing power of the middle class in Mexico and elsewhere in
Latin America -- will benefit the retail sector in the short and long terms.
Elektrafin, S.A. de C.V. ("Elektrafin"), an indirect subsidiary of the
Company, finances purchases of consumer merchandise at Elektra and Hecali stores
and collects receivables arising from such purchases. Neither Elektra nor
Elektrafin have any employees. A more detailed description of the retail
operations of Elektra and Hecali and the financing operations of Elektrafin is
provided below.
The Company believes that it has certain distinguishing characteristics and
strengths, which include:
o Leading Market Share. The Company believes it has established a
leading market share position in Mexico City, its major market, as
well as in other regions of the country. The Company also believes
that for most of its customers, its stores are the most convenient
source of many household goods and that its pricing and terms are
consistent with such consumers' income levels and consumption
patterns. Outside Mexico the Company, through its international
Elektra store network, competes successfully against local and
international retailers in the five countries where it has
established operations.
o Advanced Distribution and Technology. With point of sale (POS)
scanners at every check-out and real-time inventory control and
sales monitoring systems at most of its stores both within and
outside Mexico, and through the use of satellite systems linking
all of its stores with Company headquarters in Mexico City, the
Company utilizes advanced retail technology comparable to that
3
of leading retailers worldwide. The Company's distribution
network incorporates up-to-date technology and distribution
logistics that enable it to effectively manage its large network
of stores.
o Experienced Management. The Company's management has demonstrated
an ability to implement successfully the Company's strategy and
to manage the Company's expansion, both in Mexico and throughout
Latin America.
o Diversified Product Lines. The Company's focus on the middle-class
customer has allowed it to offer a wide range of innovative
products. The Company has capitalized on its multinational network
of retail stores to offer new products and services in order to
increase store traffic and generate additional revenue. The
Company offers electronic money transfer services and other
financial services in its stores as well as photographic
development services.
Objective and Strategy
The Company seeks to further expand its sales and increase its
profitability by capitalizing on its position as a leading distributor of basic
household goods and services in Mexico and elsewhere in Latin America. Key
elements of the Company's strategy include:
o Local and International Growth: Increase the number of stores
throughout Mexico and certain other Latin America countries,
including El Salvador, Guatemala, Honduras, the Dominican
Republic, Peru and Chile. The Company's growth strategy is
intended to take advantage of the fragmented nature of the Mexican
and Latin American retail markets and to strengthen the Company's
market penetration.
o Technology: Continue to develop information and merchandise
management systems that will allow the Company to achieve even
more efficient management of its high-volume operations and to
take full advantage of the satellite communications network that
links all of the Company's stores.
o Emphasis on Employees: Continue to emphasize the individual
responsibility of the Company's employees while providing them
with extensive training and corporate standards of excellence. The
Company firmly believes that its workforce is an essential element
in the future success of its business.
o Investment in Advertising and Publicity: Invest heavily in
advertising and publicity to achieve further consumer recognition
and deeper market penetration, in particular, through television
advertising on TV Azteca, S.A. de C.V. ("TV Azteca"), an
affiliate of the Company. See Item 13, "Interest of Management in
Certain Transactions--TV Azteca Advertising Agreement."
o Enhancement of Credit Opportunities: Further emphasize installment
sales to increase the number of its potential customers and the
purchasing power of those customers, and effectively manage its
installment sales program to maintain the profitability and
quality of the Company's credit portfolio.
Target Market
The Company's target market is the middle class of Mexico and of
certain Central American and Andean Pact countries of South America. In Mexico,
the middle class is defined by the Company as the 88% of the population that
controls 76% of Mexico's household income. The Company believes that its
"typical" customer is a person who is employed, owns his own home and has a
family income of approximately US$6,000 a year,
4
but does not own a car and therefore shops in his neighborhood or at locations
served by public transportation. The Company believes that these customers have
been under-served by other large retailers and represent a market segment that
will continue to grow in size and in purchasing power.
The Company's target customer has not typically had access to consumer
credit. Company management estimates that only a small percentage of its target
market utilizes banking services and that a low percentage of the Company's
customers possess credit cards. Customers who might not otherwise be able to
purchase the Company's products for a single cash payment are nevertheless able,
through the Company's installment sales program, to purchase products through
affordable fixed weekly payments. The Company believes that its installment
sales program increases the number of potential customers and the purchasing
power of those customers, and thereby increases overall sales. See "--Elektra
Operations in Mexico--Installment Sales Program," and "Elektra Operations in
Latin America-Installment Sales Program."
The Mexican population is young. According to figures from the 1990 Mexican
census, approximately 32% of the Mexican population is between the ages of 20
and 40, the age when marriages occur and households are formed, and
approximately 46% of the Mexican population is less than 20 years of age. With
over 700,000 marriages a year and the maturing of Mexico's young population, the
Company anticipates continued demand for the basic household products and
services it offers.
The population in the other Latin America countries, in which the Company
currently operates --Guatemala, El Salvador, Honduras, the Dominican Republic,
and Peru-- are also young. According to the Latin American Center for
Demographic Studies (CELADE), approximately 50% of the population is less than
24 years of age in these countries. The Company estimates that more than 70% of
the population of these countries falls within the middle class, as defined by
the Company.
ELEKTRA OPERATIONS IN MEXICO
Merchandising and Marketing
Merchandise Selection
The Company, through Elektra's (i) "traditional" Elektra stores that
average approximately 4,900 square feet and (ii) "MegaElektra" superstores that
average approximately 9,300 square feet, offers a broad range of
internationally-recognized brand-name consumer electronics products, major
appliances and household furniture. The Company offers its products at several
different price points with greatest inventory depth at the middle to low price
levels, and also operates certain outlet centers. In addition, the Company sells
its Elektra-brand products at prices that are generally lower than the
internationally-recognized brand-name products that the Company sells in the
same product category.
The following table sets forth the approximate percentages of Elektra's
total revenue for retail merchandise in Mexico (excluding mark-up for
installment sales) from its principal product categories for the periods
indicated:
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Consumer electronics.................... 41.4% 43.1% 41.8%
Major appliances........................ 30.5 30.9 31.4
Household furniture..................... 16.4 15.8 15.7
Other products.......................... 11.7 10.2 11.1
------ ------ ----
Total revenues............ 100.0% 100.0% 100.0%
===== ===== =====
5
Consumer electronics, which consist of video and audio equipment, as well
as pagers, constitutes the Company's leading product category. Video equipment
includes televisions and videocassette recorders. Audio products include
stereos, portable stereos and radios. The Company sells brand name consumer
electronics such as Sony, Daewoo, Panasonic, Hitachi and Aiwa. The Company also
sells the pagers of a wide variety of vendors, including Motorola, and collects
the pager service (airtime) of Biper, S.A. de C.V.
The Company also sells consumer electronics and certain other products
manufactured by GoldStar, Samsung, Daewoo and Zenith under the Elektra brand
name. Elektra brand products represented 8.3%, 6.5% and 5.8% of merchandise
revenues (excluding mark-up on installment sales) for 1996, 1997 and 1998,
respectively. The Company attributes the decrease in percentage of total sales
represented by Elektra brand products to the increased availability of, and
consumer demand for, imported brand name products.
The Company's major appliances category includes microwave ovens, washing
machines, dryers, refrigerators, freezers, ranges, stoves and complete kitchen
units. Brand names in this category include Whirlpool, Supermatic, General
Electric, Mabe, IEM and Acros.
Household furniture consists of bedroom, living room and dining room
furniture. Bedroom furniture includes mattresses, box springs, bed frames and
dressers. Living room and dining room furniture includes sofas, tables, chairs,
dinettes, end tables and coffee tables. Products in this category are
manufactured under local brand names such as Mimo, Disa, Simmons and Literas
Lala.
The Company's other products category includes blenders, mixers, toaster
ovens, typewriters, irons, fans, vacuum cleaners, telephones, personal
computers, electronic games and bicycles.
The following table sets forth the Company's estimate of the store area
devoted to its principal product categories in its traditional Elektra and
MegaElektra stores in Mexico:
Traditional Stores MegaElektra Stores
------------------ ------------------
Consumer electronics.............. 16% 12%
Major appliances................... 20 20
Household furniture................ 58 64
Other products..................... 6 4
---- ----
Total..................... 100% 100%
==== ====
The Company has devoted significantly greater selling area to household
furniture in Elektra and MegaElektra stores because of the higher margins
obtained on household furniture sales as compared to other product categories,
and because the Company believes that household furniture is traditionally less
subject to comparison shopping and pricing pressures than other merchandise.
Pricing Policy
The Company's pricing policy for its Elektra operations is to offer
products at cash prices that are the lowest or among the lowest in a given
market. In addition, the Company designs the installment sales program at its
Elektra stores to provide its customers with financing for its products at an
affordable weekly cost. The Company's marketing department monitors prices at
competing stores and adjusts its cash and installment sales prices as necessary
to adhere to a lowest price policy. The Company's practice is to match its
competitors' lowest advertised prices on all products. The Company typically
does not engage in promotional advertising that emphasizes "sale" pricing, but
rather emphasizes its policy of consistent everyday low prices. Pricing
decisions
6
are generally made centrally by the Company's marketing department, but each
store manager has the authority, within certain guidelines, to adjust prices to
meet local market conditions. Due to the Company's strategy of everyday low
prices, the Company believes that it relies on markdowns of inventory to a
lesser extent than many other Mexican retailers. Ordinarily, only a small
percentage of Company merchandise is determined to be obsolete and marked down
below the Company's normal margin.
Customer Service
The Company believes that the commitment to customer service in its Elektra
operations is a significant factor in providing it with a loyal and expanding
customer base. Included among these services is a guaranteed 30-day repair
service for consumer electronics and appliances sold by the Company. Under this
program, if a product is not repaired within 30 days, the Company provides the
customer with a replacement product until the original product has been
repaired. During the period of repair, payments and interest on the product are
suspended. The Company also supplements the manufacturer's warranty with a
limited warranty that provides a minimum of 12 months of warranty coverage on
all of its products other than furniture (which carries a 90-day warranty on
materials and workmanship) and 18 months of warranty coverage on most
televisions and major appliances. The Company also offers a 30-day refund and
exchange policy on all of its products and has established a centralized
customer satisfaction office with a toll-free number.
Advertising
The Company's marketing strategy for its Elektra operations emphasizes
eight factors in attracting and retaining customers: quality service,
merchandise variety, convenient store locations, installment sales availability,
low prices, product availability, customer satisfaction, and functional display
formats. The Company reinforces its marketing strategy through an aggressive
advertising program utilizing radio, television, pre-printed newspaper inserts,
direct mail, newspapers and in-store promotional circulars, all of which are
designed and prepared by the Company's in-house advertising department. The
Company varies the volume and specific media of its advertising efforts to match
the size and customer profiles of its markets. The Company's advertising
programs are designed to (i) highlight the Company's broad selection of quality,
name-brand merchandise and its low price policies, (ii) introduce new products
and (iii) publicize special promotions and events. The Company has supplemented
its advertising strategy through the implementation of a direct marketing
program using the Company's database of customers.
The Company believes that its in-house advertising department provides the
Company with valuable cost savings. The Company's annual expenditures for
advertising were 2.1%, 2.0% and 2.1% of total revenues during 1996, 1997, and
1998, respectively. Approximately 13.8% of the Company's advertising
expenditures in 1998 was spent on television advertising, 21.8% was spent on
radio advertising, 41.1% was spent on direct mail, including the printing of
promotional circulars, and the remainder was spent on newspaper advertising and
various other forms of advertising. The Company traditionally offers certain
seasonal promotions, on predetermined dates each year, including Christmas and
Mother's Day.
In July 1993, the Controlling Shareholders of the Company (as defined in
Item 4, "Control of Registrant," together with an investor group, completed the
acquisition of a package of media assets including two national television
networks, a chain of movie theater properties and a production studio. TV Azteca
serves as one of two national television broadcasters in Mexico. In March 1996,
the Company acquired 35.8% of the capital stock of Comunicaciones Avanzadas,
S.A. de C.V. ("Casa"), the indirect controlling shareholder of TV Azteca, and
the Company and TV Azteca entered into a 10-year agreement pursuant to which
Television Azteca, S.A. de C.V. ("Television Azteca") and Impulsora de
Television del Centro, S.A. de C.V., the two network subsidiaries of TV Azteca,
agreed to air at least 300 commercial spots for the Company per week, totaling
100 minutes per week or 5,200 minutes per year, during otherwise unsold airtime.
The Company pays US$1.5 million annually for such advertising time. The Company
believes that this relationship enhances its ability to effect its promotion
strategy relative to other national and regional specialty retailers. See
"--Investment in
7
Comunicaciones Avanzadas, S.A. de C.V." and Item 13, "Interest of Management in
Certain Transactions--Purchase of Casa `N' Shares" and "--TV Azteca Advertising
Agreement."
Installment Sales Program
This section describes the Company's installment sales policies and
procedures for the electronics, appliance and furniture retail operations of its
Elektra stores, as in effect on December 31, 1998. Although these policies and
procedures are generally applied throughout the Company's Elektra retail sales
network, store managers and credit managers have the discretion to deviate,
within certain limits, from these policies when they find it is appropriate. The
Company finances purchases of consumer merchandise at its Elektra stores through
Elektrafin.
Operations
The Company has provided in-store credit to its customers in its Elektra
stores since 1957. Between the mid-1980s and 1991, during a period of financial
instability in Mexico, the Company suspended its installment sales program
because commercial credit was generally not available in Mexico to fund such a
program. In 1991, as the Mexican economy improved and credit became more
available to the Company, it reintroduced an installment sales program for its
Elektra customers. Since the Company's target customers for its Elektra
operations are the segment of the Mexican population that typically has not had
access to consumer credit, the Company has found the availability of an
installment sales program to be an important factor in customers' purchasing
decisions. The Company believes that the availability of an installment sales
program also strengthens customer loyalty and increases overall revenues.
The following table sets forth certain information concerning the
consolidated installment sales program, including Elektra stores outside of
Mexico :
As of and for the Year
Ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
(in millions of Ps. as of December 31, 1998)
Accounts receivable retail customers-net (at period end)(1) ........... P$ 2,163.1 P$ 1,531.9 P$1,196.9
Installment sales as a percentage of merchandise revenues(2) .......... 68.8% 65.9% 66.9%
Total number of open accounts (at period-end)(1) ...................... 889,921 948,054 682,163
Average balance per retail customer (at period-end) ................... P$ 2,430.7 P$ 1,615.8 P$1,754.5
Write-offs as a percentage of gross retail receivables(1) before
write-offs ........................................................ 9.4% 15.9% 21.6%
Reserve for doubtful accounts after reduction for write-offs as a
percentage of gross retail receivables after write-offs ........... 2.5% 3.2% 6.4%
Weighted average cost of receivables financing(3) ..................... 30.9% 23.4% 16.7%
- --------------------------------------------------------------------------------------------------------------------
(1) Net of receivables securitization and net of allowance for doubtful
accounts.
(2) Includes mark-up on installment sales
(3) Includes factoring and unsecured bank debt used to finance the receivables.
8
The following table sets forth certain information concerning the Elektra
installment sales program in Mexico:
As of and for the Year
Ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
(in millions of Ps. as of December 31, 1998)
Accounts receivable retail customers-net (at period end)(1)...... P$ 2,163.1 P$ 1,427.5 P$ 849.0
Installment sales as a percentage of merchandise revenues(2)..... 71.0% 68.7% 68.3%
Total number of open accounts (at period-end)(1)................. 889,921 850,765 376,030
Average balance per retail customer (at period-end).............. P$ 2,430.7 P$ 1,678.0 P$ 2,257.7
Write-offs as a percentage of gross retail receivables(1) before
write-offs................................................... 9.4% 16.5% 26.0%
Reserve for doubtful accounts after reduction for write-offs as a
percentage of gross retail receivables after write-offs...... 2.5% 3.1% 6.2%
Weighted average cost of receivables financing(3)................ 30.9% 23.4% 16.7%
- -------------------------------------------------------------------------------------------------------------------
(1) Net of receivables securitization and net of allowance for doubtful
accounts.
(2) Includes mark-up on installment sales.
(3) Includes factoring and unsecured bank debt used to finance the receivables.
The following table sets forth certain information concerning the Elektra
installment sales program in Latin America, excluding Mexico:
As of and for the Year
Ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
(in millions of Ps. as of December 31, 1998)
Accounts receivable retail customers-net (at period end)(1)...... N/A P$ 72.0 P$ 276.0
Installment sales as a percentage of merchandise revenues(2)..... N/A 49.7% 75.5%
Total number of open accounts (at period-end)(1)................. N/A 33,026 124,813
Average balance per retail customer (at period-end).............. N/A P$ 2,181.3 P$ 2,211.5
Write-offs as a percentage of gross retail receivables(1) before
write-offs................................................... N/A 0% 2.2%
Reserve for doubtful accounts after reduction for write-offs as a
percentage of gross retail receivables after write-offs...... N/A 4.7% 7.3%
Weighted average cost of receivables financing(3)................ N/A 18.6% 19.5%
- --------------------------------------------------------------------------------------------------------------------
(1) Net of allowance for doubtful accounts.
(2) Includes mark-up on installment sales.
(3) Includes factoring and unsecured bank debt used to finance the receivables.
Since the fourth quarter of 1996, the Company's accounting policy on its
Elektra operations has been to record five percent of the value of the cash
price of the merchandise sold pursuant to the Company's installment sales
program, plus the mark-up, less the down payment, if any, as a provision for
doubtful accounts. During the first three quarters of 1996, the provision was
calculated on the basis of cash price only. Write-offs increased in 1997 and
1998 primarily due to the Company's accounts receivable securitization
transactions, which involved
9
the securitization of some of the Company's receivables, generally those with
the highest credit quality. See "--Portfolio Securitization Program."
The Company's accounting policy on its Elektra operations is to write off
accounts receivable for accounts once the amount past due becomes equal to 13
weekly payments. The Company continues collection efforts after writing off
accounts receivable. See Item 9, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The profitability of the Company's installment sales operations is affected
by many factors, including its cost of funds, the credit quality of its
receivables, the availability to consumers of alternate credit sources, the
impact of inflation on receivables balances and borrowings to fund those
balances, and the cost of administering the installment sales operations. See
Item 9, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Credit Sales
The Company's pricing strategy for its Elektra operations is to provide
customers with a choice of a cash price or an alternative weekly installment
purchase price. Elektra customers can choose to pay for merchandise on a weekly
basis for a period ranging from 13 to 53 weeks. The Company believes that the
weekly payments charged to its Elektra customers are generally lower than those
of competitors who offer similar programs. No statement of the effective
interest rate included in the installment sales price is provided to the
customer.
Elektra's total credit sales in 1998 represented 68.3% of the total sales
of the Company in Mexico. Currently, the 39-week installment sales plan is the
most popular term chosen by customers of Elektra, and the Company expects the
39-week plan to remain constant as a percentage of the customer receivables
portfolio until interest rates decline substantially in Mexico. As of December
31, 1998, 53-week plan sales represented 7.3%, the 39-week plan sales
represented 62.3%, the 26-week plan sales represented 26.4% and the 13-week term
plan sales represented 4.0% of the total amount of Elektra's installment sales.
As of December 31, 1998, 39-week and 53-week receivables represented 66.5%
and 9.8% of the customer receivable portfolio, respectively, while 26-week
receivables represented 21.2% of the portfolio and 13-week receivables
represented 2.5% of such portfolio.
The Ley Federal de Proteccion al Consumidor (the "Consumer Protection
Act"), that became effective on December 25, 1992, regulates consumer
installment sales. The Consumer Protection Act imposes no ceiling on the
interest rate a merchant may charge a consumer in an installment sale. It does
not require disclosure of the effective rate of interest charged. The effective
interest rate charged by the Company for electronics, appliances and furniture
is fixed at the time of the installment purchase. There can be no assurance that
limitations or additional disclosure with respect to such rates of interest will
not be imposed by the Mexican Government in the future. Due to the substantial
portion of the Company's revenues and operating cash flow generated by its
installment sales program, any limitations or additional disclosure with respect
to the rates of interest charged by the Company could have a material adverse
effect on the Company's financial performance. Furthermore, any material change
in the regulations governing the Company's collection practices and repossession
procedures could also have a material adverse effect on its financial
performance.
Credit Approval
Approval for an installment purchase of electronics, appliances or
furniture requires the customer to complete an application form, execute a
credit contract and a promissory note, and provide an official form of
identification containing a photograph, a recent payroll receipt and evidence of
home ownership such as a receipt for property taxes. In addition, a second party
is normally required to guarantee the promissory note if the customer does not
meet the applicable financial requirements or does not own a home. The
customer's and
10
second party's credit is investigated prior to delivery of the merchandise.
Generally, the customer will not be granted credit if the weekly payments would
be in excess of 20% of the customer's weekly gross income. A regional manager
must approve installment sales where the amount being financed is in excess of
P$5,500 and an area manager must approve installment sales where the amount
being financed is in excess of P$9,000. The verification period can take several
hours or several days, depending on a number of factors including store location
and customer availability. Since there is no credit bureau in Mexico that
reports on consumer credit (other than on more affluent consumers with credit
cards), an employee personally visits the customer's residence to confirm the
accuracy of the credit application. If approved for credit, the customer makes
weekly payments in cash at the Elektra store where he made the purchase. Due to
the lack of widespread telephone service among the Company's customers, the
Company must give personal attention to its credit customers. The Company has
processed and carried out investigations on over five million credit
applications since 1993, creating a valuable computerized database of
information on its customers.
Installment sales on products sold through Elektra stores are documented by
credit contracts and fixed-term promissory notes with fixed weekly payments and
stated interest, if any. These promissory notes provide that a penalty interest
rate be assessed in the event that payments are not made when due. Such penalty
interest is computed daily on the past due payments until the payments are
current.
Collection
The collection practices and repossession procedures used by the Company
operations in Mexico are regulated under the Mexican Commercial Code, the
Consumer Protection Act and the Mexican Civil Code. The Company's collection
operations are implemented and monitored at the individual store level. The
Company currently has approximately 3,700 employees dedicated to installment
sales collections and investigations for purchases of merchandise at its Elektra
stores. Each Elektra store has an installment sales manager who, under the
regional manager's supervision, is responsible for extending credit and
collecting that store's outstanding accounts in accordance with corporate
guidelines. Customers make their weekly installment payments in person at the
Elektra stores, which are open seven days a week. In the event that the customer
falls into arrearages greater than two weekly installment payments, a Company
collector will begin to visit the customer in person at least once a week. If
total arrearages exceed eight weekly payments, an installment sales supervisor
will visit the customer weekly. When the customer's arrearages exceed 12 weekly
payments, the matter is referred to the Company's legal department, which will
send an attorney to the customer's house or place of business to attempt to
settle the collection matter. In the event that a customer's total arrearages
exceed 16 weekly payments, the Company may institute judicial procedures to
settle the claim by obtaining a court order for attachment of the customer's
assets. However, the Company's policy is to attempt first to reach an agreement
with the customer whereby the customer resumes payment or the merchandise is
repossessed. Repossessed merchandise is reconditioned and transferred, together
with floor models withdrawn from display, to Company outlet stores created
especially for this purpose.
Portfolio Securitization Program
The Company utilizes Elektrafin, a subsidiary of Grupo Elektra, to
securitize its receivables. In July 1997, the Company completed its initial
securitization of Ps. 625 million (nominal), and on December 1997, completed a
second offering of Ps. 241 million (nominal) in Ordinary Participation
Certificates ("CPO's") on the Mexican Stock Exchange. These two programs have
been fully paid. In April 1998, the Company issued a Ps. 793.3 million four-year
revolving securitization program, the first of its kind in Mexico. The spread on
the yield is based on 28-day-cetes rate plus 225 bps. In December 1998, the
Company again issued its second two-year revolving securitization of receivables
in an offering of Ps. 200 million with a spread of Tasa de Interes Interbancaria
y de Equilibrio ("TIIE") plus 125 bps. Nacional Financiera S.N.C, Fiduciary
division, acted as the fiduciary issuer of the CPO's. Operadora de Bolsa Serfin,
S.A., Casa de Bolsa, executed the placement. The high quality and performance of
the Company's two revolving securitizations programs have enabled Grupo Elektra
to maintain a strong monthly "AA" rating by Duff and Phelps and "MAA" rating by
Fitch Investors Service. Thus, there has
11
been a strong demand for both active issuances providing attractive financing
alternatives for Elektra where the proceeds are used primarily to pay short-term
debt and to finance the Company's international expansion. See Item 9,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Stores
At December 31, 1998, the Company operated a total of 581 Elektra stores in
Mexico, including 346 MegaElektra superstores. The number of Elektra stores the
Company operates has grown at a 13.62% compound annual rate since 1992. As of
December 31, 1998, the total store area of the Company's Elektra stores in
Mexico was 408,009 square meters (approximately 4,392,000 square feet), which
reflects an 11.1% compound annual growth rate since 1992. At December 31, 1998,
the Company owned 52 Elektra stores and leased 529 Elektra stores under mid-term
leases that typically contain terms from five to ten years. Historically, the
Company has not had difficulty in either renewing its expiring leases or finding
alternate locations on comparable terms. The Company intends to continue its
policy of primarily leasing sites for store locations, attempting to secure
ten-year leases whenever possible. However, the Company may face increased
competition for suitable store sites in the future.
The following table sets forth certain operating statistics for traditional
Elektra and MegaElektra stores in Mexico as of, and for the year ended, December
31, 1998:
Traditional
Elektra MegaElektra Total
----------- ----------- -----
Sales (millions)(1).................................... P$2,014.8 P$3,781.0 P$5,795.8
Number of stores....................................... 235 346 581
Aggregate store area (m2).............................. 107,552 301,309 408,860
Number of store employees(2)........................... 3,474 6,121 9,595
- -------------------
(1) Excluding mark-up on installment sales.
(2) Does not include Grupo Elektra corporate or collections staff. Elektra does
not have any employees. Personnel services are provided by other
subsidiaries of the Company.
Store Format
The Company's traditional Elektra stores range in size from 517 to 20,451
square feet, with an average of 4,927 square feet. In 1992, the Company
introduced its MegaElektra superstore format. The Company's MegaElektra stores
range in size from 2,045 to 27,179 square feet, with a target size of 8,611
square feet and an average size of approximately 9,373 square feet. The
MegaElektra format allows the Company to increase its on-site inventory levels,
increase the amount of floor space dedicated to its higher margin furniture
products line, take advantage of certain economies of scale and lower the
Company's out-of-stock position. The Company has expanded the size of its newer
traditional stores in order to increase the number of items (Stock Keeping Units
or "SKUs") and the amount of furniture in those stores. Each of the Company's
MegaElektra stores offers approximately 410 SKUs, while each of its traditional
Elektra stores typically offers approximately 190 SKUs.
12
Location
The Company operates Elektra stores in 247 cities in all 31 Mexican states.
The following table sets forth information with respect to the distribution of
the Company's traditional and MegaElektra stores in Mexico as of December 31,
1998:
Number of Stores Store Area(m2)(1)
------------------------------------------ --------------------------------------------
% of all % of Total
Zone Traditional MegaElektra Stores Traditional MegaElektra Sales Areas
- ------------------ ----------- ----------- ------ ----------- ----------- -----------
Mexico City(2).... 69 91 27.5% 31,686.5 79,139.5 27.1%
Center............ 33 47 13.8 17,767.3 37,820.0 13.6
Northeast......... 27 53 13.8 11,220.6 51,487.0 15.3
Pacific........... 22 33 9.5 10,047.0 29,245.0 9.6
Guadalajara....... 29 28 9.8 12,237.9 25,072.0 9.1
South............. 23 51 12.7 11,109.5 42,252.0 13.0
Southeast......... 32 43 12.9 13,483.0 36,293.1 12.2
--- --- ----- --------- --------- -----
Total............. 235 346 100.0% 107,551.7 301,308.6 100.0%
=== === ===== ========= ========= =====
- ---------------------
(1) Based on total area of each store. The Company does not maintain records of
selling space, but estimates that the selling space in its stores ranges
from 85% to 95% of total store area.
(2) Includes the metropolitan area.
Expansion Plan
The Company anticipates opening approximately 15 additional MegaElektra
stores and four additional outlet stores in Mexico by the end of 1999. The
Company also expects to continue its expansion strategy in Latin America in 1999
by opening 20 new MegaElektra stores in five countries: El Salvador, Guatemala,
Honduras, the Dominican Republic and Peru. In addition, the Company intends to
evaluate which of its existing traditional Elektra stores in Mexico could
benefit from a conversion to the MegaElektra superstore format either by
renovation or relocation. As of December 31, 1998, the Company had not
specifically identified any such stores for conversion.
The average cost of opening a new MegaElektra store in Mexico is
approximately P$2.9 million, excluding the cost of inventory and real estate,
while the cost of converting a traditional existing store into the MegaElektra
format varies depending upon available space and required renovation and has in
the past averaged approximately P$1.4 million. The average time required to set
up a new store is approximately three months. The Company's traditional Elektra
stores and MegaElektra stores utilize standardized modular racking, tiles,
lighting and equipment. The modular design of the Company's stores allows it to
quickly and inexpensively close under-performing stores and move the furniture,
fixtures and inventory from such stores to new locations.
Elektra stores are typically located in neighborhoods of Mexico's middle
class. Criteria for the location of an Elektra store usually includes pedestrian
traffic of at least 200 persons per hour during peak hours for a traditional
Elektra store and 250 persons per hour during peak hours for a MegaElektra
store. The Company also considers automobile traffic in selecting store sites,
although the Company believes that the majority of Elektra consumers walk to its
stores or travel to the store by public transportation. The Company has in the
past located its new stores primarily in the major metropolitan areas of Mexico.
However, as the Mexican population outside the major metropolitan areas
continues to increase rapidly, the Company believes that it will become
increasingly important to locate stores in small-to-medium sized population
areas of the country.
13
The Company evaluates its Elektra stores on a continuous basis and closes
those stores that do not meet performance targets. The Company generally
negotiates provisions in its leases for Elektra store locations that permit the
Company to terminate its leases on three months' notice.
The following table provides a history of the Company's traditional and
MegaElektra stores in Mexico since 1996:
Year ended December 31,
-----------------------------
1996 1997 1998
---- ---- ----
Traditional Stores:
Number of stores open at beginning of period.................... 296 261 254
Number of new stores opened..................................... 10 19 2
Number of stores converted to MegaElektra stores................ (39) (25) (2)
Number of stores closed......................................... (6) (1) (19)
---- ---- -----
Number of Traditional stores open at end of period.............. 261 254 235
MegaElektra Stores:
Number of stores open at beginning of period.................... 104 197 272
Number of new stores opened..................................... 54 50 56
Number of stores opened by conversion of Traditional stores..... 39 25 19
Number of stores closed......................................... 0 0 (1)
----- ----- -----
Number of MegaElektra stores open at end of period.............. 197 272 346
Traditional Stores and MegaElektra Stores:
Number of stores open at beginning of period.................... 400 458 526
Total number of stores open at end of period.................... 458 526 581
Store Operations
The Company has developed a standardized system for operating its Elektra
stores. The system includes procedures for inventory management, transaction
processing, customer relations, store administration, merchandise display and
installment sales policies. As part of this effort the Company has developed and
maintains operating manuals outlining the Company's procedures relating to, for
instance, maintenance, security and accounting. The Company's store operations
in Mexico are organized into nine operating areas. The operating areas contain
four to five geographical regions, with each region consisting of nine to 15
stores. The Company's management structure provides that store managers
generally report to regional managers who report to area managers who, in turn,
report to management at the Company's headquarters in Mexico City.
The Company's Elektra stores in Mexico are open every day of the year,
except New Year's Day, usually from 9:00 a.m. to 9:00 p.m. A typical traditional
Elektra store is staffed by a full-time manager, one installment sales manager,
one credit investigator and two collectors and, on average, five sales and
support personnel. A typical MegaElektra store has the same staff composition
except that the number of sales and support employees ranges from 15-20,
depending on the size of the store. The Company centralizes the investigation
and collection functions of its Elektra operations within a city when doing so
is more efficient than handling such function at the individual store level. In
Mexico City and Guadalajara, the credit investigation function has been
centralized and is performed by a staff of 51 and 11 investigators,
respectively. The Company's sales personnel operate on a sales commission basis,
and store managers typically receive quarterly bonuses based on the
profitability of the stores.
Training and Standardization
The Company considers the training of its staff at its Elektra
operations a high priority to ensure the highest levels of customer service. The
Company recognizes that the success of a retail operation ultimately
14
depends in large measure on the level of service provided by its personnel.
Every employee from a cashier to a division manager receives a description of
his or her responsibilities and on-going training to help them develop the
professional and personal characteristics necessary to provide Elektra's
customers with the highest level of service. Employees are regularly briefed on
the performance of their store and of the Company as a whole. In 1998,
approximately 20,500 Company employees received training at Elektra University
temporary education sites set up throughout the country. The Company's in-house
school of excellence, which includes model Elektra and Hecali stores and offers
over 1,156 educational programs. Elektra University also provides employees with
skills training designed to train new employees and to keep current employees
informed of changes and modifications to the Company's operating procedures as
well as to demonstrate new products. New store employees generally receive two
weeks of training at Elektra University prior to assuming responsibilities, and
new store managers and credit managers, as well as new sales and credit regional
managers, receive one month on average of training at Elektra University. In
addition, the Company offers continuing education programs to its existing
employees. During 1998, there were 12 of these programs, known as "Diplomados",
that consisted of 230-hour-long courses designed to develop management skills
for the Company's store, regional and administrative managers. These courses are
taught at the Centro de Desarrollo Empresarial y Ejecutivo of the Instituto
Tecnologico y de Estudios Superiores de Monterrey, one of the most prestigious
business schools in Mexico.
The Company operates quality assurance laboratories at its distribution
centers in order to conduct random testing of products and approve new products
as part of the Company's on-going efforts to ensure the quality of the products
it sells.
Information Systems
The Company employs 180 computer professionals and has developed a
computerized management information system for its Elektra operations in order
to improve the efficiency of its accounting, control and financial management
operations. The system operates a proprietary software package on an IBM AS/400
System. The system permits the Company's management across the Company's entire
store network to generate daily information on sales, gross margins, shrinkage
and inventory levels by store and by SKU. The system also allows the Company to
compare current performance against historical performance and the current
year's budget and goals. The Company's system not only permits the Company to
track inventory levels and replacement requirements, but also permits the
Company's management to make projections of the expected sales performance by
store and by SKU, considering among other variables their seasonal index, the
economic cycle and sales trends. These projections allow the Company to
determine more efficiently the stock and mix of merchandise in each store.
The Company has implemented a system to provide real-time satellite
communications between the individual Elektra stores and the Company's
headquarters. This system utilizes point-of-sale technology from which sales
information is collected on a real-time basis. This system facilitates the flow
of information between the Company's stores and from the Company's stores to its
headquarters, thereby improving distribution of merchandise and facilitating the
expansion of the Company's installment sales operations. In addition, the
Company is continuing to design new systems and modifies existing systems,
particularly in the distribution areas. The Company has also established
electronic data interchanges with all of its major suppliers to facilitate
replenishment of inventory.
Capital expenditures for information systems were P$90.1 million in 1996,
P$262.3 million in 1997 and P$104.4 million in 1998.
Purchasing and Distribution
An important element of the Company's marketing strategy is its ability to
offer a wide selection of name brand products to its customers. The Company
currently has a network of approximately 170 suppliers for its
15
electronics, appliances and furniture products and directly imports
approximately 10.5% of these products. The Company typically does not maintain
long-term purchase contracts with suppliers and principally operates on a
purchase order basis. Although certain vendors are significant to the Company's
business because of their name recognition, the Company does not believe that
its business is dependent upon any one vendor or particular group of vendors.
The Company's operations have not been materially adversely affected by any
limitation on, or loss of the supply of any merchandise. However, world
political and economic events, such as export-import controls and the value of
the Peso relative to other currencies, over which the Company has no control,
affect the Company's cost of goods sold. Changes in any of these variables could
negatively affect the Company and its results of operations.
The Company's centralized merchandising and buying group for Mexico
consists of a staff of seven buyers who purchase substantially all merchandise
for the Company's Elektra stores. Buyers are assisted by a sophisticated
management information system that provides them with current inventory, price
and unit sales information by SKU, thus allowing the Company to react quickly to
market changes and to avoid inventory shortages or surpluses. The Company
believes that its centralized purchasing system enhances its buying power and
increases its ability to obtain favorable pricing and delivery terms from its
suppliers.
The Company currently distributes products to its Elektra stores from a
215,278 square foot warehouse and distribution facility located in Mexico City
with satellite distribution centers in Guadalajara (50,590 sq. ft.), Monterrey
(39,826 sq. ft.), Tijuana (24,219 sq. ft.), and Chihuahua (21,527 sq. ft.), and
a support facility in Laredo, Texas. Deliveries to the Company's Elektra stores
are made primarily by contract trucking carriers, although the Company has a
nominal number of trucks at each distribution center for movement of merchandise
between stores and for special delivery requirements. Management believes that
the Company's distribution centers and support facilities significantly reduce
freight costs and delivery time by providing warehouse space relatively close to
the Company's stores.
Competition
The Company's electronics, appliance and furniture retail business is
highly competitive in all product categories and is characterized by high
inventory turnover and low profit margins (profit as a percentage of sales).
Earnings primarily depend upon the maintenance of high per-store sales volumes,
efficient product purchasing and distribution and cost-effective store
operations. The Mexican retail sector is fragmented and consumers are served by
a number of formats, including traditional formats such as independent retail
stores, modern formats such as retail chains and department stores, and informal
outlets such as street vendors and markets. Management believes, however, that
no competing business has the combination of a specialization in consumer
electronics, major appliances and household furniture, national coverage,
availability of an installment sales program and experience selling to the
middle class that the Company possesses. Also, department stores and discount
clubs that carry the same merchandise lines as the Company generally offer less
product variety than the Company.
Certain major U.S. retailers have established joint ventures with Mexican
retailers and have opened stores in Mexico. The Company expects that other U.S.
retailers will do so in the future. Moreover, the Company believes that NAFTA,
which established a North American "free trade" zone and generally eliminates
import duties, tariffs and barriers among Mexico, the United States and Canada,
will facilitate the entry of U.S. retailers into the Mexican market. The Company
also competes against a significant informal or "black" market for the products
it carries. The Company believes that its extended warranties, repair service
and credit availability provide it with a competitive advantage over the
lower-priced goods sold in this informal market. Although the Company is a
leading specialty retailer that is well positioned to effect its strategy, there
can be no assurance that the Company's performance will not be adversely
affected by increased competition from these and other sources.
The Company acquired its most significant competitor in Mexico, Salinas y
Rocha, S.A. ("SyR") on March 10, 1999. See "Description of Business-Salinas y
Rocha." The Company continues to face strong
16
competition from Singer, Muebleria Nueva and Famsa. The Company also faces
competition from several regional chains. The following table sets forth certain
information concerning what the Company believes are its primary competitors in
Mexico.
Competitor Estimated Primary Region of Operations Number of Stores(1)
- ---------- -------------------------------------- ------------------
Singer National 176
Famsa Central and Northeast Mexico 110
Electro Muebles Central and Western Mexico 110
Salinas y Rocha(2) Central and Northeast Mexico 96
Coppel Northwestern Mexico 42
La Curacao Southeast 34
Viana Mexico City and Metropolitan Area 34
Ahorra$I Mexico City and Metropolitan Area 22
Distribuidora Rodriguez Northeast 14
Muebleria America Guadalajara 13
Ekar de Gas Western 11
- ---------------
(1) Estimates of the Company, as of December 31, 1998.
(2) The Company acquired Salinas y Rocha on March 10, 1999. See "Salinas y
Rocha."
The Company, with 162 Elektra stores in the Mexico City metropolitan area,
believes it is a leading specialty retailer of consumer electronics, major
appliances and home furniture in that region. In Mexico City, the Company
considers its major competitor to be Singer in the electronics, appliance and
furniture retail market. Except for Singer, in regions of the country outside
Mexico City, most of the Company's formal competitors are regional and local
department and specialty stores. The Company believes that, through its Elektra
operations, it is well positioned to compete in all of its markets in Mexico.
Money Transfer Business
General
Through its Elektra operations in Mexico, the Company participates in two
separate sectors of the money transfer business. Through "Dinero en Minutos,"
the Company is involved in a business association with Western Union Financial
Services, Inc. to transfer funds electronically from abroad, primarily the
United States, to Mexico. Through the Company's wholly-owned subsidiary "Dinero
Express," Elektra stores offer customers electronic money transfer services
within Mexico. During 1998, Elektra generated P$306.5 million in revenue from
Dinero en Minutos and Dinero Express.
Dinero en Minutos
In October 1993, Elektra entered into certain joint arrangements (the
"Joint Venture Arrangement") with Western Union Financial Services, Inc.
("Western Union") to provide electronic money transfer services in Mexico. These
arrangements provided the Company with the benefit of increased customer traffic
in its stores and also generated U.S. Dollar revenue for the Company. Under the
Joint Venture Arrangement, Western Union's worldwide network of agents
originated electronic money transfers to Mexico, and Elektra's domestic network
of stores, as well as certain banks and other retailers that do not compete
directly with the retail operations of Elektra, distributed such electronic
money transfers as agents in Mexico. Western Union's Will Call Money Transfer
Service (the "Will Call Service") was marketed through the Joint Venture
Arrangement in Mexico under the trade name "Dinero en Minutos."
17
Western Union is a wholly-owned subsidiary of First Data Corporation, a
leading provider of non-bank money transfer and bill payment services throughout
the world, with a network of over 50,000 agents in over 160 countries. The
Company believes that Western Union is the largest provider of electronic money
transfer services to Mexico, with over 50% of the total market, transferring the
equivalent of over US$1.5 billion per year into Mexico (the total amount
transferred into Mexico was U$2.9 billion for 1998).
In January 1996, Elektra sold its interests in the entities established
pursuant to the Joint Venture Arrangement to American Rapid Corporation Inc., a
wholly-owned subsidiary of Western Union ("American Rapid"), for US$20 million
and received its share of all undistributed net profits in the form of a
dividend. In addition, Elektra and Western Union entered into an Exclusive
Services Agreement dated January 11, 1996 (the "Exclusive Services Agreement"),
which provided the framework for the continued service by Elektra as an agent
for Western Union's Will Call Service in Mexico. Pursuant to the Exclusive
Services Agreement, Elektra received US$142 million, which was deposited in
escrow with First Bank, National Association (the "Escrow Agent"), in
consideration for (i) the services to be rendered pursuant to the agency
agreements described below, (ii) terminating the prior agreement relating to
foreign exchange gains and (iii) agreeing to certain noncompete covenants. The
Company has caused the money deposited in escrow to be invested in 2% of the
capital stock of each of Elektra, Elektrafin and Importaciones Electronicas
Ribesa, S.A. de C.V., each a subsidiary of the Company. These subsidiaries in
turn applied the funds to repay short-term debt of the Company, to reduce
accounts payable to suppliers of the Company, to pay a portion of the cash
consideration of the Company's investment in Casa and for general corporate
purposes.
Under the Inbound Agency Agreement, dated January 11, 1996 (the "Inbound
Agency Agreement"), between Elektra and American Rapid (entered into pursuant to
the Exclusive Services Agreement between Elektra and Western Union), Elektra
acts as one of the authorized agents used by Western Union to implement and
provide the Will Call Service in Mexico. This service consists of the transfer
of money originating outside Mexico by persons who pay Western Union's agents an
amount in U.S. Dollars (or an appropriate local currency) to be sent to persons
in Mexico who receive such amount in Pesos. The Company transferred the
equivalent of US$532.8 million in 1997 and US$570.7 million in 1998. The Company
believes that, based on its 1998 volume, it is the third-largest money transfer
agent in Mexico. Elektra receives an agency fee in U.S. Dollars in respect of
the transactions completed during each month.
Western Union and Elektra entered into a Foreign Exchange Agreement, dated
January 11, 1996 (the "F/X Agreement"), whereby Elektra receives a percentage of
the net foreign exchange gain with respect to the portion of the money transfer
business for which Elektra provides services. Under the F/X Agreement, until
January 11, 2000 Elektra will receive a reduced percentage of the net foreign
exchange gain on monies transferred into Mexico for which Elektra acts as the
agent and thereafter such percentage shall be increased. The net foreign
exchange gain for each month is paid in U.S. Dollars.
Competition
The Company believes that Western Union, through the Inbound Agency
Agreement and, pursuant to a separate agreement, through Telecomm, a
decentralized agency of the Ministry of Communications and Transportation of
Mexico, accounted for over 50.7% of the electronic money transfer business into
Mexico in 1998. Western Union's major competitor in the electronic money
transfer business to Mexico is MoneyGram. MoneyGram has an agreement with Banco
Nacional de Mexico, S.A., and the Company believes that MoneyGram transacts
approximately 20.4% of the electronic money transfers to Mexico. First Data
Corporation, which in 1996 owned a controlling interest in both Western Union
and MoneyGram, disposed of its interest in MoneyGram in December 1996 pursuant
to a consent decree. The Company believes that the remainder of the market
consists primarily of relatively small, often family-run, operations and some
smaller money transfer chains, primarily located in California and Florida,
which generally have less than 50 agents each.
18
Dinero Express
The Company believes that Dinero Express is the first standardized
intra-Mexico money transfer service offered to Elektra's customer demographic by
a large company. From the startup of Dinero Express's operations in February
1996 through December 31, 1998, the number of money transfers handled by Dinero
Express grew at a compounded average monthly rate of 9.2%. The number of money
transfers grew 38% during 1998. The Company believes that Dinero Express has
brought an increase in store traffic, and that television advertising through TV
Azteca has been a large factor in the success of this business.
New Products
Savings Accounts Services
In August 1997, the Company launched in Mexico its savings account service
as part of a strategic alliance with Grupo Financiero Serfin ("Serfin"). Through
this alliance the Company promotes savings by Elektra's low to middle income
customer base. This savings account service enables Elektra's customers to open
Serfin Bank savings accounts in the Company's network of stores throughout
Mexico. The Company believes that this venture increases the financial products
and services being offered to the middle class consumer in Mexico, the majority
of whom have formerly depended primarily on informal savings mechanisms.
Elektra offers a savings account named "Guardadito" ("Little Savings"). The
Company views this product as providing further opportunities for customers to
visit the Company's stores as well as providing increased profits from
commissions from Serfin. A minimum deposit of P$20 is required to open an
account, but there are no direct commissions or fees paid by the customer, and
the savings in the account generate interest.
There are two different types of "Guardadito" accounts: "Guardadito
Ahorro," which consists of a passbook savings account that generates interest,
and "Guardadito Tanda," which consists of a savings club whereby the customer
deposits a fixed amount of cash (a minimum of P$20) on a weekly basis for a
certain term (8 to 52 weeks) after which the customer receives the total amount
of cash saved along with the earned interest.
As of December 31, 1998 there were 452,000 "Guardadito" savings accounts
maintained by Serfin with an average balance of approximately P$200.
Extended Warranties
In September 1997, the Company launched in Mexico its extended warranty
service that includes warranty certificates and additional service contracts
under the trademark of "Milenia."
The extension of a product warranty is only available for electronics and
appliances merchandise. There are three terms of extended warranties: two, three
and five year. The program's goal is for the Company's customers to rely on a
professional product maintenance service and to achieve a penetration of six
percent of Elektra's total sales. Under the extended warranty program the
Company independently repairs and provides maintenance for products when they
are not covered by the manufacturer's warranty. The Company's customers can pay
the price of the warranty through the Company's installment sales program on the
same credit terms that apply to the merchandise.
As of December 31, 1998, the Company sold 317,000 extended warranties with
an average price of P$425.
19
Photo Products and Processing Services
In January 1997, the Company began offering photo processing services at
selected Elektra stores in Mexico under the trademark of "Fotofacil." The
photography kiosks at the Company's Elektra stores offer products such as film,
cameras, photo albums, batteries, frames and audiocassettes, as well as services
such as film development and ID photography. The space required in Elektra
stores for installation of photography minilabs is approximately 107.6 square
feet (10 square meters). Generally, two specialized salespersons staff each
minilab. The average development time for a roll of film is one hour.
As of December 31, 1998 the Company had installed Fotofacil kiosk in 80
Elektra stores which generated a total of P$12.0 million in revenue. The Company
expects to install 50 additional Fotofacil kiosks in its Elektra stores by the
end of 1999.
Investment in Comunicaciones Avanzadas, S.A.
Casa
On March 26, 1996, the Company purchased 35.8% of the capital stock of
Comunicaciones Avanzadas, S.A. ("Casa"), a holding company through which the
Controlling Shareholders (as defined in Item 4, "Control of Registrant") own
their interests in TV Azteca and COTSA (as defined below). Casa indirectly owns
40.4% of the outstanding common stock and 51% of the voting stock of TV Azteca
and 40.4% of the outstanding common stock and 50.0% of the voting stock of
COTSA. The Company acquired its interest in Casa in exchange for capitalizing
US$45.4 million of accounts receivable due from Casa and its subsidiaries to the
Company, and payment of US$62.2 million in cash which was applied by Casa to the
repayment of bank debt incurred in connection with the acquisition of interests
in TV Azteca and COTSA. The Company acquired non-voting "N" shares in Casa,
together with the right to exchange such "N" shares into "N" shares of TV Azteca
and of COTSA. The Company has the right to exchange all of the Casa "N" shares
for approximately 170 million TV Azteca shares (representing 9.3% of the capital
stock of TV Azteca) and up to approximately 44 million COTSA "N" shares
(representing 14.2% of the capital stock of COTSA). Elektra may make such
exchange, in whole or in part, at any time prior to March 26, 2006. See Item 13,
"Interest of Management in Certain Transactions--Purchase of Casa `N' Shares."
TV Azteca
In July 1993, an investor group, including the Controlling Shareholders of
the Company, acquired a controlling interest in TV Azteca, a multi-media
communications company that is one of Mexico's two over-the-air television
broadcasters. TV Azteca owns and operates two national networks and more than
250 commercial annual-and-operatedrepeater stations.
TV Azteca is the second largest television broadcasting company in Mexico.
TV Azteca is a holding company with three principal subsidiaries: Television
Azteca, S.A. de C.V. ("Television Azteca"), Azteca Digital, S.A. de C.V.
("Azteca Digital") and Grupo TV Azteca, S.A. de C.V. ("Grupo TV Azteca").
Television Azteca and Azteca Digital own and operate all TV Azteca's broadcast
assets, including the licenses to operate television transmitters, TV Azteca's
transmission equipment and TV Azteca's headquarters and production studios in
Mexico City. Substantially all payments to TV Azteca from advertisers are made
through Grupo TV Azteca.
TV Azteca owns and operates two national television networks through two
anchor stations in Mexico City and numerous other stations located throughout
Mexico that rebroadcast the signals of TV Azteca's Mexico City stations.
Although most of the stations outside Mexico City are repeater stations that
solely rebroadcast the anchor stations' signals, stations in 31 of Mexico's
larger metropolitan areas broadcast local programming and advertising in
addition to the national programming and advertising broadcast by the anchor
stations.
20
Azteca 7 in Mexico City is broadcast throughout Mexico (the "Azteca 7
Network"), 20-24 hours a day, seven days a week. The programming on the Azteca 7
Network primarily consists of situation comedies, children's programs,
entertainment news programs, game shows and sports. In 1998, TV Azteca produced
approximately 55% of Azteca 7's weekday, prime-time programming hours, and 31%
of its total programming hours.
Azteca 13 in Mexico City is broadcast throughout Mexico (the "Azteca 13
Network"), 20-24 hours a day, seven days a week. The programming for the Azteca
13 Network primarily consists of soap operas ("telenovelas"), news, talk shows,
musical variety programs and sports. In 1998, TV Azteca produced approximately
96% of Channel 13's weekday, prime-time programming hours, and 67% of its total
programming hours.
Most of the stations of the Azteca 7 and Azteca 13 Networks outside Mexico
City are repeater stations that solely rebroadcast programming received from the
Mexico City anchor stations and do not have any sales or programming personnel.
With respect to 30 of its local broadcast facilities outside Mexico City,
including its Monterrey, Guadalajara, Tijuana, and Veracruz facilities, however,
TV Azteca developed its stations into part time broadcasters of local
programming and advertising. For 24 of its local stations outside Mexico City,
TV Azteca has entered into contracts with local business partners pursuant to
which they may sell advertising time to local advertisers. In each case, the
local partners are required to provide their own office facilities and to
purchase the necessary equipment to block the national signal and insert a local
signal. TV Azteca controls the time periods during which the national signals
may be blocked and also restricts the sale of local air-time to its national
advertisers. TV Azteca receives the majority of local advertising sales
generated by these local stations and has the right to terminate the
relationship at any time by returning the partners' investment in the insertion
equipment. TV Azteca operates six of its local stations outside Mexico City
without local partners.
In addition to the insertion of local advertisements, certain of the
Company's local stations broadcast programs produced and financed by the local
partners. Locally-produced programs include news, game shows, sports and other
programs. In 1996, 1997 and 1998, the Company's local television stations
produced approximately 4,600, 5,000 and 7,100 combined hours, respectively, of
programming for viewing on those stations.
TV Azteca believes that its ability to provide a diverse mix of quality
programming has been, and will continue to be, one of the primary factors in
maintaining and increasing its overall ratings and share of the Mexican
television audience. Since 1994, TV Azteca has focused on acquiring and
producing programming that appeals to most Mexican television viewers, rather
than targeting specific segments of the Mexican television audience.
COTSA
The Controlling Shareholders have also acquired a controlling interest in
Grupo COTSA, S.A. de C.V. ("COTSA"), whose principal business is the ownership
and operation of a chain of movie theater properties.
As of December 31, 1998, COTSA operated 24 movie theaters in large cities
throughout Mexico with a total of 98 screens. Fifteen of COTSA's movie theaters
are located in Mexico City. According to Camara Nacional de la Industria
Cinematografica (the Mexican movie theater industry trade organization), Mexican
movie theater ticket sales amounted to approximately P$1,281 million, P$1,991
million and P$1,335 million in 1996, 1997 and 1998 respectively. COTSA's ticket
sales declined during this period, however, from P$192 million in 1995 to P$75
million in 1998, principally due to the closing of a number of COTSA's
unprofitable movie theaters. COTSA's ticket sales continue to decline due to the
closing of additional movie theaters.
Of the movie theaters operated by COTSA as of December 31, 1998, four were
owned, four were rented from private parties under leases of varying duration,
and 16 were rented from Fideicomiso Liquidador de
21
Instituciones y Organizaciones Auxiliares de Credito (FIDELIQ), a Mexican
government trust, under a long-term lease that grants COTSA a right to purchase
the theaters at fair market value any time prior to the end of 1999. COTSA
expects to purchase a number of these theaters in 1999. COTSA spent
approximately US$0.28 million for the refurbishment of its movie theaters in
1998 and plans to remodel some of its theaters into the multiplex format.
During the years ended December 31, 1996,1997 and 1998 COTSA operated 63,
108 and 98 screens, respectively. COTSA management's current strategy is to
increase its revenue and operating cash flow by continuing to operate its most
successful movie theaters and closing or ceasing to rent movie theaters whose
ticket sales are declining.
TV Azteca Expansion into Latin America
The Company considers TV Azteca's expansion plan into Central and South
America as a key component for the implementation of its own expansion strategy
in the region.
Television Channel 12 in El Salvador
In 1997, TV Azteca purchased a 75% interest in Canal 12 de Television, S.A.
de C.V. ("Channel 12"), which owns and operates an over-the-air national
television network in El Salvador. Under the terms of the agreement, TV Azteca
agreed to pay a total purchase price of approximately US$7 million,
approximately US$2 million of which was paid on April 1, 1997. TV Azteca agreed
to pay the remainder of the purchase price in five equal annual installments
through December 2001, with interest paid quarterly at an annual rate of 11.5%.
UHF Channel 35 in Guatemala
In 1997, TV Azteca purchased a 75% interest in a UHF broadcast license for
Channel 35 in Guatemala City, Guatemala ("Channel 35"). TV Azteca paid a total
purchase price of approximately US$200,000.
Television Channel 4 in Chile
In January 1998, TV Azteca purchased a 75% interest in Compania Chilena de
Television, a Chilean television network popularly known as "La Red" which owns
and operates an over-the-air national television network in Chile, and
broadcasts on Channel 4 in Santiago ("Channel 4"). Under the terms of the
agreement, TV Azteca agreed to pay a total purchase price of approximately
US$10.3 million, approximately US$5 million of which was paid on January 18,
1998. TV Azteca will pay the remainder of the purchase price in two equal annual
installments through 2000, with interest paid quarterly at an annual rate of 9%.
Television Channel 4 in Costa Rica
In June 1998, TV Azteca purchased a 35% interest in Canal 4 de Costa Rica,
an over-the-air national television network in Costa Rica, which broadcasts on
Channel 4 in San Jose. Under the terms of the agreement, TV Azteca paid a total
purchase price of approximately US$2 million and controls management and
operations of Canal 4 de Costa Rica.
Employees
As of December 31, 1998, the Company, in maintenance of its Elektra and
Elektrafin operations in Mexico, employed approximately 9,200 people on a
full-time basis. Neither Elektra nor Elektrafin directly has any employees;
personnel services are provided by other subsidiaries of the Company. The
Company employs part-time employees to meet seasonal needs as necessary. At
December 31, 1998, approximately 26% of the
22
Company's employees who worked in Elektra stores worked in Mexico City and the
remaining employees were located throughout the rest of the country.
Approximately 65.9% of the Company's full-time employees who worked in Elektra
stores were, as of December 31, 1998, represented by one of nine unions. Mexican
labor laws require that union contracts must be reviewed yearly and fringe
benefits must be reviewed every other year. The average salary increase
contained in each of the new collective bargaining agreements during the past
year for the union employees referred to above was below the average inflation
rate in Mexico. The Company believes its relations with the employees involved
in Elektra and Elektrafin operations; it has not experienced a strike since
1983.
Trademarks
The Company's "Elektra" and "MegaElektra" trademarks are registered with
the Mexican Institute of Intellectual Property (Instituto Mexicano de la
Propiedad Industrial) of the Ministry of Commerce and Industrial Development
(Secretaria de Comercio y Fomento Industrial).
ELEKTRA'S OPERATIONS IN LATIN AMERICA
General
In April 1997, the Company began its electronics, appliances and furniture
retail operations in Latin America through the opening of four stores in
Guatemala. This was the first step of an expansion process that has, as of
December 31, 1998, resulted in the Company opening 83 Elektra stores outside
Mexico.
The Company believes that its strengths in management, credit and marketing
expertise, technological infrastructure, margins and other factors will enable
it to compete successfully in various markets in Latin America and, over time,
become a leading competitor in the region.
The following table sets forth certain demographics and economic
information with respect to each one of the four Latin America countries (other
than Mexico) in which the Company operates:
Annual Gross Domestic Per Capita Gross
Population Population Literacy Product Domestic Product
(millions) Growth Rate Rate (US$ billions) (US$)
---------- ----------- ---- -------------- -----------------
Guatemala 12.0 2.71% 55.6% $45.8 $4,000
El Salvador 5.8 1.57% 71.5% $17.8 $3,000
Honduras 5.8 2.33% 72.7% $12.7 $2,200
Dominican Republic 8.0 1.63% 82.1% $38.3 $4,700
Peru 26.1 1.97% 88.7% $110.2 $4,420
Source: The World Factbook 1998, Central Intelligence Agency.
For its expansion into Latin America, the Company established in each
one of the five countries in which it operated as of December 31, 1998 a
corporation organized under the laws of such country. These corporations are
owned by Elektra Centroamerica, S.A. de C.V., an indirect subsidiary of the
Company, which is organized under the laws of the United Mexican States. The
Company's Latin American retail operations headquarters are located in San
Salvador, the capital of El Salvador.
23
The names of the corporations through which the Company operates in each
country are as follows:
Country Corporation First Store Opening Date
- ------------------------- -------------------------------------------------------------- ---------------------------------
Guatemala Mercantil Agricola, S.A. April 25,1997
El Salvador Importadora y Exportadora Elektra de El Salvador, S.A. June 20, 1997
Honduras Comercializadora EKT, S.A. November 14, 1997
Dominican Republic Elektra Dominicana, S.A. November 28, 1997
Peru Elektra del Peru, S.A. September 18, 1998
Target Market
The Company's target market for its international retail operations is
similar to the target market for its domestic retail operations. See
"Overview--Target Market." The profile of the Company's "typical" customer for
its international operations is that of a person who is employed and owns his
own home, but does not own a car and therefore shops in his neighborhood or at
locations served by public transportation.
The population in the Latin America countries other than Mexico in which
the Company currently operates--Guatemala, El Salvador, Honduras, the Dominican
Republic and Peru--is young: approximately 50% of the population is less than 24
years of age in these countries, according to the Latin American Center for
Demographic Studies (CELADE), and the Company estimates that more than 70% of
the population of these countries is in the middle class, as defined by the
Company.
Merchandising and Marketing
Merchandise Selection
The Company, through its international Elektra stores that average
approximately 807.9 square meters (8,696 square feet) of selling space, offers a
broad range of internationally-recognized brand-name consumer electronics
products, major appliances and household furniture at many different price
points, with greatest inventory depth at the middle-to-lower price levels,
generally similar to those offered in Elektra's domestic stores. The Company
also sells its Elektra brand products at prices that are generally lower than
the internationally- recognized brand-name products that the Company sells in
the same product category.
The following table sets forth the approximate percentages of total retail
merchandise revenues (excluding mark-up for installment sales) from each of
Elektra's principal product lines for its 1998 international operations:
Year Ended December 31, 1998
---------------------------------------------------------------------------------
Dominican
Guatemala El Salvador Honduras Republic Peru
---------------- --------------- ------------------ ----------------- ----------
Consumer electronics............. 47% 43% 42% 48% 63%
Major appliances................. 17% 22 18 20 7
Household furniture.............. 29% 20 33 28 24
Other products................... 7% 15 7 4 6
--- --- --- --- ---
Total................... 100% 100% 100% 100% 100%
=== === === === ===
24
These product lines are very similar to those of Elektra's domestic
operations. The Company also sells in these Latin America countries consumer
electronics and certain other products manufactured by GoldStar, Samsung and
Daewoo under the Elektra brand name. Elektra brand products represented 3.4% of
merchandise revenues in the Company's Latin America operations (excluding
mark-up on installment sales) in 1998.
The following table sets forth the Company's estimate of the store area
devoted to its principal product lines in its international Elektra stores:
Dominican
Guatemala El Salvador Honduras Republic Peru
---------------------- ------------------- ---------------- ----------------- ---------------
Consumer electronics............. 10% 13% 11% 15% 31%
Major appliances................. 20 21 19 24 53
Household furniture.............. 64 60 67 58 13
Other products................... 6 6 3 3 3
--- --- --- --- ----
Total.................. 100% 100% 100% 100% 100%
=== === === === ====
In 1998, the Company devoted significantly greater selling area to
household furniture in its international stores because of the higher margins
obtained on household furniture sales as compared to other product categories
and because household furniture is traditionally less subject to comparison
shopping and pricing pressures than other merchandise.
Pricing Policy, Customer Service and Advertising
The Company's policies for its international retailer operations in regards
to pricing, customer service and advertising are practically the same as those
applied to its operations in Mexico. See "Elektra Operations in Mexico--Pricing
Policy", "--Customer Service" and "--Advertising." One difference, however, is
that every international Elektra store has an Express Service stand that offers
to the customer a fast repair service for small appliances and consumer
electronics.
Installment Sales Program
The Company's installment sales policies and procedures for its
international retailer operations are the same as those applied to its
operations in Mexico. See "Elektra Operations in Mexico--Installment Sales
Program."
25
The following table sets forth certain information concerning the Company's
installment sales program for its Latin America operations:
As of and for the Year Ended December 31, 1998
(in millions of Ps. as of December 31, 1998)
---------------------------------------------------------------------------
Dominican
Guatemala El Salvador Honduras Republic Peru
-------------- ---------------- -------------- -------------- -------------
Accounts receivable retail customers-net (at
period end)...................................... P$ 80.4 P$ 41.1 P$ 64.3 P$ 64.4 P$ 25.8
Installment sales as a percentage of merchandise
revenues(1)...................................... 68.1% 75.0% 76.2% 85.1% 78.3%
Total number of open accounts (at period-end) 37,642 21,539 26,871 30,938 7,823
Average balance per retail customer (at period-end).. P$2,133.4 P$ 1,910.7 P$2,393.6 P$ 2,082.6 P$ 3,299.4
Reserve for doubtful accounts as a percentage of
gross retail receivables......................... 5.57% 12.20% 7.02% 6.78% 6.76%
Weighted average cost of receivables financing(2).... 12.14% 14.03% 29.07% 28.34% 14.07%
- ---------------
(1) Includes mark-up on installment sales
(2) Includes unsecured bank debt used to finance the receivables.
The Company's accounting policy with respect to its Latin American retail
operations is to record five percent of the value of the cash price of the
merchandise sold pursuant to the Company's installment sales program, plus the
mark-up, less the down payment, if any, as a provision for doubtful accounts.
The following tables provide certain information concerning the Company's
credit sales in the Latin American countries (other than Mexico) in which it
operates:
Installment sales as a percentage of total sales as of December 31, 1998:
Guatemala 68.1%
El Salvador 75.0
Honduras 76.2
Dominican Republic 85.1
Peru: 78.3
----
Average: 75.5%
Credit sales by term as a percentage of the face amount of the installment
sales as of December 31, 1998.
13 Weeks 26 Weeks 39 Weeks 53 Weeks
-------- -------- -------- --------
Guatemala.......................................... 1.9% 6.3% 73.0% 18.7%
El Salvador........................................ 0.9% 4.3% 9.18% 85.8%
Honduras........................................... 0.9% 8.1% 12.6% 78.4%
Dominican Republic................................. 0.8% 6.2% 90.9% 2.1%
Peru............................................... 0.5% 2.1% 30.5% 66.9%
Total Average...................................... 1.0% 5.4% 43.2% 50.4%
26
Distribution of customer receivables portfolio at period end by term
Credit Sales
The Company's pricing strategy for its international retailing operations
is to provide customers with a choice of a cash price or an alternative weekly
installment purchase price. Elektra customers in Latin America pay for
merchandise on a weekly basis for a period ranging from 13 to 53 weeks. No
statement of the effective interest rate included in the installment sales price
is provided to the customer.
Total credit sales in 1998 represented 75.5% of the Company's total sales
for its international operations. Currently, 39-week installment sales plan is
the most prevalent term utilized by customers of Elektra, and the Company
expects the 39-week plan to remain constant as a percentage of the customer
receivable portfolio until there are macroeconomic changes in the countries
where the Company does business. As of December 31, 1998, 53-week plan sales
represented 36%, 39-week plan sales represented 42.5%, 26-week plan sales
represented 15.3% of installment sales, and 13-week plan sales represented 6.2%
of the installment sales.
Credit Approval
Approval for an installment purchase of electronics, appliances or
furniture in Elektra's international operations is similar to the process of
credit approval for its domestic operation. See "Elektra Operations in
Mexico--Installment Sales Program--Credit Approval." The Company requires the
customer to complete an application form, execute a credit contract and a
promissory note, and provide an official identification containing a photograph,
a recent payroll receipt and evidence of home ownership such as a receipt for
property taxes. In addition, a second party is normally required to guarantee
the promissory note if the customer does not meet the applicable financial
requirements or does not own a home. The customer's and second party's credit
will be investigated prior to delivery of the merchandise. Generally, the
customer will not be granted credit if the weekly payments would be in excess of
20% of the customer's weekly gross income. The management at the Company's
headquarters in each country must approve installment sales where the cash
portion is in excess of P$9,000. After a verification period (which can be as
rapid as several hours or may take two or three days depending on a number of
factors including store location and customer availability), during which an
employee physically examines the customer's residence to check the accuracy of
the application, the customer may be approved for the installment purchase.
Installment sales on products sold through Elektra's international stores
are documented by credit contracts and fixed-term promissory notes with fixed
weekly payments and stated interest, if any. These promissory notes provide for
a penalty interest rate in the event that payments are not made when due. Such
penalty interest is computed daily on the past due payments until the payments
are current.
Collection
The collection practices and repossession procedures used by the Company in
its international retailer operations are regulated under each country's
Commercial Code, Consumer Protection Act or similar law and the Civil Code. The
Company's collection procedures for its Elektra international operations are
implemented and monitored at the individual store level. At December 31, 1998,
the Company had approximately 469 employees dedicated to installment sales
collections and investigations for purchases in its international stores (144
credit employees in Guatemala, 87 in El Salvador, 86 in Honduras, 112 in
Dominican Republic and 40 in Peru). Each international Elektra store has an
installment sales manager who, under the supervision of the management at the
Company's headquarters in each country, is responsible for extending credit and
collecting that store's outstanding accounts in accordance with corporate
guidelines. Customers make their weekly installment payments at the
international Elektra stores, which are open seven days a week. In the event
that the customer falls into arrearages greater than two weekly installment
payments, a Company collector will begin to visit the customer at least once a
week. If total arrearages exceed eight weekly payments, an installment sales
supervisor
27
will visit the customer weekly. When the customer's arrearages exceed 12 weekly
payments, the matter is referred to the Company's legal department, which will
send an attorney to the customer's house to settle the collection matter. In the
event that a customer's total arrearages exceed 16 weekly payments, the Company
may institute judicial procedures to settle the claim by obtaining a court order
for attachment of the customer's assets. This procedure is parallel to the
procedure for collection that Elektra uses in its domestic operations. See
"Elektra Operations in Mexico--Installment Sales Program--Collection."
Stores
At December 31, 1998, the Company operated 83 international Elektra stores.
The total store area of these Elektra stores was in excess of 67,056 square
meters (approximately 722,000 square feet). The Company owned four of these
Elektra stores and leased the other 40 under mid-term leases that typically
contain terms from five to ten years.
The following table sets forth certain operating statistics for the
Company's Latin America Elektra stores (outside Mexico) as of, and for the year
ended December 31, 1998:
Dominican
Guatemala El Salvador Honduras Republic Peru
------------- --------------- --------------- ---------------- ------------
Sales (millions)(1).................... P$.206.3 P$ 68.2 P$ 124.0 P$ 140.3 P$ 36.7
Number of stores....................... 24 14 14 21 10
Aggregate store area (m2).............. 19,888 11,405 10,930 16,258 8,575
Number of store employees(2)...........
Average selling space (m2)............. 829 815 781 774 858
- ---------------
(1) Excluding mark-up on installment sales.
(2) This number is exclusive of corporate and collections staff.
Store Format
The Company's international Elektra stores range in size from 4,252 to
19,246 square feet, with an average of 8,696 square feet of selling space.
Elektra stores in Latin America offer approximately 500 SKUs.
28
Location
The Company operates Elektra stores in 44 cities in five Latin America
countries outside Mexico. The following table sets forth information with
respect to the distribution of the Company's stores in Latin America as of
December 31, 1998:
Guatemala
Number of % of Total Store Area % of Total
City Stores Num. Stores (m2)(1) Store Area
-------------------------------------------------------
Guatemala 9 37.5% 8,052 40.49%
Chimaltenango 1 3.6 708 4.2
Coban 1 4.2 1,279 6.4
Huehuetenango 1 4.2 759 3.8
Jutiapa 1 4.2 734 3.7
Quetzaltenango 2 8.3 1,587 8.0
Retalhuleu 1 4.2 781 3.9
Santa Lucia 1 4.2 868 4.4
Escuintla 1 4.2 752 3.8
Mazatenango 1 4.2 473 2.4
Chiquimula 1 4.2 872 4.4
Pto. Barrios 1 4.2 800 3.9
Jalapa 1 4.2 768 3.9
Santa Rosa 1 4.2 868 4.4
Zacapa 1 4.2 587 3.0
============================================================================================
Total 24 100.0% 19,888 100.00%
El Salvador
Number of % of Total Store Area % of Total
City Stores Num. Stores (m2)(1) Store Area
-------------------------------------------------------
Sonsonate 1 7.1% 1,029 9.0%
San Miguel 1 7.1 814 5.3
Sta. Tecla 1 7.1 530 4.7
Usulutan 1 7.1 887 7.8
San Salvador 6 42.9 5,062 44.4
Santa Ana 2 14.3 1,881 16.5
Cojutepeque 1 7.1 602 5.3
Zacatecoluca 1 7.1 600 5.3
============================================================================================
Total 14 100.0% 8,737 100.00%
29
Honduras
Number of % of Total Store Area % of Total
City Stores Num. Stores (m2) (1) Store Area
-----------------------------------------------------
La Ceiba 1 7.1% 755 6.9%
Tegucigalpa 8 57.1 6,501 59.5
San Pedro Sula 3 21.4 2,001 18.3
Choluteca 1 7.1 800 7.3
Juticalpa 1 7.1 873 8.0
============================================================================================
Total 14 100.0% 10,930 100.00%
Dominican Republic
Number of % of Total Store Area % of Total
City Stores Num. Stores (m2) (1) Store Area
----------------------------------------------------------
Higuey 1 4.8% 500 3.1%
La Vega 1 4.8 783 4.8
Puerto Plata 1 4.8 738 4.5
Santiago Rodriguez 1 4.8 900 5.5
Sto. Domingo 7 33.3 6,094 37.5
S. Pedro Macoris 1 4.8 750 4.6
S.Fco. del Macoris 1 4.8 868 5.3
Barahona 1 4.8 563 3.5
Haina 1 4.8 679 4.2
San Cristobal 1 4.8 515 3.2
San Juan de la Maguana 1 4.8 709 4.4
Santiago de los Caballeros 2 9.5 1,600 9.8
Santiago la Rotonda 1 4.8 769 4.8
Santiago Tabacalera 1 4.8 790 4.9
============================================================================================
Total 21 100.0% 16,258 100.00%
Peru
Number of % of Total Store Area % of Total
City Stores Num. Stores (m2) (1) Store Area
Lima 10 100% 8,575 100%
============================================================================================
Total 10 100.0% 8,575 100.0%
Total International 83 67,056
- ---------------
(1) Based on total area of each store. The Company does not maintain records of
selling space, but estimates that the selling space in its stores ranges
from 85% to 95% of total store area.
30
Expansion Plan
The Company anticipates opening approximately 20 additional new
international Elektra stores by the end of 1999, comprised of approximately two
stores in Guatemala, one store in El Salvador, three stores in Honduras, one
store in the Dominican Republic and 13 stores in Peru.
The average cost of opening a new international Elektra store has been
approximately P$3.1 million, excluding the cost of inventory and real estate.
The average time required to set up a new store is approximately three months.
Store Operations
The Company applies in its international retailer operations the same
standardized system that it uses to operate its Elektra stores in Mexico. See
"Elektra Operations in Mexico--Store Operations." The system includes procedures
for inventory management, transaction processing, customer relations, store
administration, merchandise display and installment sales policies. The
Company's management structure for its international operations provides that
store managers report directly to management at the Company's headquarters,
which is usually located in each country's capital (with the exception of
Honduras, where the Company's headquarters are located in the town of San Pedro
Sula instead of the capital, Tegucigalpa).
The Company's international Elektra stores are open every day of the year,
except New Year's Day, usually from 8:00 a.m. to 8:00 p.m. A typical
international Elektra store has the same staff composition as a MegaElektra
store in Mexico. See "Elektra Operations in Mexico--Store Operations."
Training
For its international retailer operations, the Company has established in
each country a training center and has an extensive in-house education program
to train new employees, keep current employees informed of additions and
modifications to its operating procedures and demonstrate new products. New
store employees generally receive two weeks training in each country's training
center prior to assuming responsibilities, and new store managers, credit
managers, as well as sales and credit regional managers receive three months of
training at the Elektra University located in Mexico City. In addition, the
Company offers continuing education programs to its existing employees. Training
consists of both product training and classes focused on the social and personal
attributes important for the particular position.
Purchasing and Distribution
The Company's centralized merchandising and buying group for its
international retailer operations consists of a staff of five buyers who
purchase substantially all electronics, appliances and furniture merchandise for
the international Elektra stores. All electronics and appliance merchandise is
purchased in each country from local suppliers of brand name consumer
electronics such as Sony, GoldStar, JVC, Aiwa, Samsung and Daewoo, and from
local suppliers of major appliances such as Mabe, Vitro, Tappan, Atlas and
Bosch. Household furniture merchandise such as living room furniture, complete
kitchen units, dressers and mattresses are purchased in each country from local
suppliers whereas bedroom furniture, dinettes, tables and chairs are generally
purchased from Mexican suppliers.
The Company currently distributes products to its international Elektra
stores from a central warehouse and distribution facility that operates in each
country. These warehouses are leased by the Company.
31
The following table sets forth certain information regarding the warehouses
from which the Company distributes products to its international Elektra stores:
Country Warehouse Location (City) Warehouse Area (Sq. feet)
------- ------------------------- -------------------------
Guatemala Guatemala City 53,819.5
El Salvador San Salvador 21,527.8
Honduras San Pedro Sula 26,909.8
Dominican Republic Santo Domingo 64,583.5
Peru Lima 76,746,7
Deliveries to the Company's Elektra stores are made primarily by
contract trucking carriers, although the Company has a nominal number of trucks
at each distribution center for movement of merchandise between stores and for
special deliveries.
The computerized management information system developed by the Company for
its Mexican Elektra operations has been adapted to meet the various subtle
differences in terminology in each country as well as the unique tax
requirements of each country. The system provides real-time satellite
communication among the individual Elektra stores, each country's Company
headquarters, the Company's Latin America operations headquarters (located in
San Salvador) and the Company's main headquarters in Mexico City.
Competition
The Company's electronics, appliance and furniture retail business is
highly competitive in all product categories and is characterized by high
inventory turnover and small profit margins as a percentage of sales. Earnings
primarily depend on the maintenance of high per-store sales volumes, efficient
product purchasing and distribution and cost-effective store operations. The
retail sector throughout Latin America is fragmented and consumers are served by
a number of formats, including traditional formats such as independent retail
stores, modern formats such as retail chains and department stores, as well as
informal outlets such as street vendors and markets. In general, the Company's
competitors in this business include other specialty stores, independent
electronics and appliance stores and department stores, some of which are
national and international in scope and may have greater resources than the
Company in that specific country.
The Company also competes internationally against a significant informal or
"black" market for the products it carries. The Company believes that its
extended warranties, repair service and credit availability provide it with a
competitive advantage over lower-priced goods sold in this informal market.
Although the Company is well positioned, as a specialty retailer, to implement
its strategy, there can be no assurance that the Company's performance will not
be adversely affected by increased competition from these and other sources.
32
The following table sets forth certain information concerning the
Company's primary competitors in the four Latin American countries outside
Mexico in which it operates:
Country Competitor Estimated Number of Stores
------- ---------- --------------------------
Guatemala La Curacao 18
Tropigas 17
Agencias Way 60
Alvarenga 14
El Salvador Prado 22
La Curacao 24
Tropigas 10
Honduras La Curacao 24
Tropigas 14
Dominican Republic La Curacao 20
Frank y Ray Muebles 15
Corripio 8
Plaza Lama 5
Peru CARSA 55
La Curacao 24
Tiendas Efe 15
Mabila 13
Saga Favela 4
Hiraoka 3
Ripley 1
Employees
As of December 31, 1998, the Company through its international Elektra
operations employed approximately 875 people on a full-time basis. The Company
employs part-time employees to meet seasonal needs as necessary. No employees of
the Company are represented by any union in the Latin American countries outside
Mexico in which it operates. The Company believes that its relations with these
international employees have been good since its inception in 1997; the Company
has never been subject to a strike by its international employees.
HECALI
During the year ended December 31, 1996, the Company acquired 72% of the
capital stock of Grupo Hecali, S.A. de C.V. ("Hecali") for Ps.58.3 million
(nominal). During 1997, Hecali purchased capital stock from certain of its
shareholders, thereby increasing the Company's equity stake to 94% of the
capital stock of Hecali. In October 1998, the Company acquired the remaining 6%
of Hecali's shares through the capitalization of debt in the aggregate principal
amount of Ps. 155.4 million and a cash payment of Ps. 10.1 million.
Hecali is a chain of clothing stores in Mexico that targets the same
customers that comprise Elektra's target market. See "Overview--Target Market."
At December 31, 1998, Hecali had 155 stores throughout Mexico. Hecali's
pre-acquisition management has remained responsible for day-to-day operations
and has remained as minority shareholders. The Company has applied the Elektra
strategy at Hecali to expand the store network and has supported the
organization with strong management, automated material handling,
state-of-the-art information systems and communications, credit, intensive TV
advertising and selling space leverage.
33
Merchandising and Marketing
Merchandise Selection
The Company, through its Hecali stores, which average approximately 3,560
square feet of selling space, offers a broad range of basic and sports apparel
for men, ladies and children and sport shoes at many different price points,
with greatest inventory depth at the middle-to-lower price levels. The following
table sets forth the approximate percentages of total retail merchandise
revenues (excluding mark-up for installment sales) from each of Hecali's
principal product lines for 1996, 1997 and 1998:
Year Ended December 31,
-------------------------------------
1996 1997 1998
------ ------ ------
Men's clothing .................... 65.1% 63.4% 57.9%
Children's clothing ............... 16.7 18.8 16.7
Ladies' clothing .................. 3.3 6.7 17.5
Sport shoes ....................... 14.9 11.2 7.9
------ ------ ------
Total .................... 100.0% 100.0% 100.0%
====== ====== ======
The following table sets forth the Company's estimate of the store area
devoted to its principal product lines in its Hecali stores as of December 31,
1998:
Men's clothing................. 35.0%
Children's clothing............ 12.5
Ladies' clothing............... 30.0
Sport shoes.................... 22.5
-----
Total................. 100.0%
=====
Pricing Policy
The Company's policy for its Hecali operations is to offer its products at
cash prices that are the lowest or among the lowest in its markets. In addition,
the Company designs its installment sales plan to provide its customers at its
Hecali stores with financing for the products offered at an affordable weekly
cost.
Due to the Company's strategy of everyday low prices, the Company believes
that it relies on markdowns of inventory at its Hecali stores to a lesser extent
than many other retailers. A very small percentage of merchandise at Hecali's
stores is determined to be obsolete and marked down.
Advertising
The Company's marketing strategy for its Hecali operations is very similar
to Elektra's, emphasizing the same factors in attracting and retaining
customers: quality service, merchandise variety, convenient store locations,
installment sales availability, low prices, product availability, customer
satisfaction and functional display format. The Company reinforces its marketing
strategy through an aggressive advertising program utilizing television, radio,
and in-store promotional circulars, all of which are designed and prepared by
the Company's in-house advertising department.
34
Installment Sales Program
This section describes the Company's installment sales policies and
procedures for its Hecali operations as of December 31, 1998. Although these
policies and procedures are generally applied throughout the Company's retail
sales network, store managers and credit managers have the discretion to deviate
within certain limits from these procedures when they find it is appropriate.
Operations
Hecali has provided in-store credit to its customers since January 1996.
The Company has found that the availability of an installment sales program is
an important factor in customer purchasing decisions, while at the same time
strengthening customer loyalty and increasing overall revenues.
The following table sets forth certain information concerning the Company's
installment sales program on Hecali's products:
As of and for the Year
Ended December 31,
--------------------------------------------
1996 1997 1998
------------- ------------- ----------------
(in millions of Ps. as of December 31, 1998)
Accounts receivable retail customers-net (at period end)......... N/A Ps. 32,301.1 Ps. 71,862.0
Installment sales as a percentage of merchandise revenues(1)..... 15.0% 27.0% 39.3%
Total number of open accounts (at period-end).................... N/A 64,263 181,320
Average balance per retail customer (at period-end).............. N/A Ps. 502.6 Ps. 396.3
- ----------------------------------------------------
(1) Includes mark-up on installment sales.
The Company's accounting policy for its Hecali operations is to allocate
five percent of the value of the cash price of the merchandise sold pursuant to
the Company's installment sales program, plus the mark-up, less the down
payment, if any, as a provision for doubtful accounts.
Credit Sales
The Company's pricing strategy for its Hecali operations is to provide
customers with a choice of a cash price or an alternative weekly installment
purchase price. In May 1998, the Company established a revolving credit sales
program, which offers a credit line to the client and establishes a schedule of
equal payments in a maximum period of 13 weeks. The Company does not provide the
customer with a statement of the effective interest rate included in the
installment sales price.
Credit Approval
Approval for an installment purchase requires the customer to complete an
application form, execute a credit contract and a promissory note, and provide
an official form of identification containing a photograph, a recent payroll
receipt and evidence of home ownership such as a receipt for property taxes. To
guarantee a promissory note, the customer is required to provide the invoice of
a home appliance or an electronic product endorsed to the Company. In addition,
a second party is normally required to guarantee the promissory note if the
customer does not meet the applicable financial requirements or does not own a
home. The customer and the second party's credit will be investigated prior to
delivery of the merchandise. Generally, the customer will not be granted credit
if the weekly payments would be in excess of the 15% of the customer's weekly
gross income.
35
Installment sales are documented by credit contracts and fixed-term
promissory notes with fixed weekly payments and stated interest, if any. The
promissory notes provide for a penalty interest rate to be assessed in the event
that payments are not made when due. Such penalty interest is computed daily on
the past due payments until the payments are current.
Collection
The collection practices and repossession procedures used by the Company
are regulated under the Mexican Commercial Code, the Consumer Protection Act and
the Mexican Civil Code. The Company's collection procedures for its Hecali
retail operations are implemented and monitored at the individual store level.
The Company currently has approximately 130 employees dedicated to installment
sales collections and investigations in connection with Hecali operations.
Stores
At December 31, 1998, the Company operated 155 Hecali stores. As of
December 31, 1998, the total store area of the Company's Hecali stores was in
excess of 36,422 square meters. At December 31, 1998, the Company owned four
Hecali stores and leased 151 Hecali stores under mid-term leases that typically
contain terms from five to ten years. Historically, the Company has not had
difficulty in either renewing its expiring leases for its Elektra stores or
finding alternate locations on comparable terms. Thus, the Company does not
believe it will have difficulty in renewing its leases for the Hecali stores or
finding alternate locations on comparable terms in the future. The Company
intends to continue its policy of primarily leasing sites for store locations,
attempting to secure ten-year leases whenever possible. However, it is possible
that the Company may face increased competition for suitable store sites in the
future.
The following table sets forth certain operating statistics for Hecali
stores as of, and for the year ended, December 31, 1998:
Sales (millions)(1).....................................P$588.5
Number of stores........................................ 155
Aggregate store area (m2)..............................53,617.9
Number of store employees(2)............................ 1,905
-------------------
(1) Excluding mark-up on installment sales.
(2) This number is exclusive of corporate and collections staff.
Store Format
The Company's Hecali stores range in size from 1,195 to 10,268.7 square
feet with an average 3,724.3 square feet of selling space.
36
Location
The Company operates Hecali stores in 109 cities in 28 Mexican states. The
following table sets forth information with respect to the distribution of the
Company's Hecali stores in Mexico as of December 31, 1998:
Number of Stores Store Area (m2)
------------------------------ -----------------------
% of
% of all Total
Zone Hecali Stores Hecali Stores
---------------------- --------------- -------------- ------------ -----------
South.......................................... 55 35.5% 18,872 35.0%
Mexico City.................................... 29 18.7 9,420 17.5
West........................................... 25 16.1 8,328 15.4
Pacific........................................ 21 13.5 8,058 14.9
North.......................................... 25 16.3 9,247 17.2
------ -------- ------- ------
Total................................. 155 100.0% 53,925 100.0%
=== ===== ====== =====
Expansion Plan
The Company anticipates opening approximately 20 additional Hecali stores
in Mexico by the end of 1999. The average cost of opening a new Hecali store is
approximately P$0.93 million, excluding the cost of inventory and real estate.
The average time required to set up a new Hecali store is approximately three
months.
The following table provides a history of the Company's Hecali store
program as of December 31, 1996, 1997 and 1998.
Year Ended December 31,
--------------------------------------
1996 1997 1998
------------ ------------- -----------
Hecali Stores:
Number of stores open at beginning of period.................. 40 63 110
Number of new stores opened................................... 23 48 50
Number of stores closed....................................... 0 (1) (5)
- --- ---
Number of Hecali stores open at end of period................. 63 110 155
== === ===
Store Operations
The Company has developed a standardized system for operating its Hecali
stores. The system includes procedures for inventory management, transaction
processing, customer relations, store administration, merchandise display and
installment sales policies.
The Company's Hecali stores open every day of the year, except New Year's
Day, usually from 9:00 a.m. to 9:00 p.m. A typical Hecali store is staffed by a
full time manager, one installment sales manager, one credit investigator and
two collectors and, on average, five sales and support personnel. The Company's
sales personnel at its Hecali stores operate on a sales commission basis, and
store managers typically receive quarterly bonuses based on the profitability of
the stores.
Training
Hecali store employees undergo the same training program as employees of
Elektra stores. See "Elektra Operations in Mexico--Store Operations--Training
and Standardization." This training consists of two weeks
37
training prior to assuming responsibilities, while new managers receive three
months of training. In addition, the Company offers continuing education
programs to its existing employees.
Purchasing and Distribution
An important element of the Company's marketing strategy is its ability to
offer a wide selection of name brand products to its customers. As of December
31, 1998, the Company had a network of approximately 500 suppliers, 68 of which
supplied the majority of its Hecali products. The Company typically does not
maintain long-term purchase contracts with suppliers and operates principally on
a purchase order basis. Although certain vendors are significant to the
Company's Hecali operations because of their name recognition, the Company does
not believe that this business is dependent upon any one vendor or particular
group of vendors. The Company's Hecali operations have not been materially
adversely affected by any limitation on, or loss of, any supplier. World
political and economic events, such as export-import controls and the value of
the Peso relative to other currencies, over which the Company has no control,
affect the Company's cost of goods sold.
The Company's centralized merchandising and buying group for its Hecali
operations consists of a staff of seven buyers who purchase substantially all
merchandise for the Company's Hecali stores.
The Company currently distributes products to its Hecali stores from its
Mexico City warehouse. Deliveries to the Company's Hecali stores are made
primarily by 17 contract trucking carriers although the Company has a nominal
number of trucks at the distribution center for movement of merchandise between
stores and special delivery requirements. The Company's contract carriers employ
a fleet of approximately 77 trucks to deliver merchandise to stores. Management
believes that the Company's distribution centers and support facilities
significantly reduce freight costs and delivery time by providing warehouse
space closer to the Company's Hecali stores.
Competition
In general, the Company's competitors in the clothing retailer business
include other specialty stores, department stores and warehouse clubs, some of
which are national and international in scope and have greater resources than
the Company.
The following table sets forth the name and number of stores of the
principal competitors in Mexico.
Estimated Number of
Stores
Competitor (as of December 31, 1998)
---------- -------------------------
Gigante.............................. 116
Milano............................... 101
Comercial Mexicana................... 81
Bodega Aurrera 58
Melody............................... 44
Bodega Gigante....................... 40
Tiendas del Sol...................... 36
Almacenes Garcia..................... 28
Bodega Comercial Mexicana............ 26
El Armario........................... 17
Mega Comercial Mexicana.............. 14
Although the Company is a leading specialty retailer that is well
positioned to effect its strategy for Hecali, there can be no assurance that the
Company's performance in its Hecali operations will not be adversely
38
affected by increased competition from these and other sources. With 15 Hecali
stores in the Mexico City metropolitan area, the Company believes it can achieve
Hecali's goal of addressing the clothing needs of Elektra's customer base and
providing fashionable attire for the entire Mexican family.
Employees
As of December 31, 1998, the Company, through its Hecali operations,
employed approximately 3,304 people on a full-time basis. At December 31, 1998,
61% of the Company's Hecali employees worked in Mexico City, while the remaining
employees were located throughout the rest of the country. Approximately 100% of
the Company's full-time Hecali employees were, as of December 31, 1998,
represented by seven of nine unions. Mexican labor laws require that union
contracts must be reviewed each year and fringe benefits must be reviewed every
other year. The Company believes that its relations with these employees are
good; since assuming control of Hecali in 1996, the Company has not been subject
to a strike by its employees who work at Hecali stores.
SALINAS Y ROCHA
On March 10, 1999, Grupo Elektra was announced as the winner of an auction
held by a syndicate of banks in order to acquire a 94.3% stake in Grupo Salinas
y Rocha, S.A. de C.V. ("GSyR') and the assumption of certain bank debt of
Salinas y Rocha, S.A. de C.V. ("Salinas y Rocha" or "SyR"), a wholly-owned
subsidiary of GSyR, in the aggregate principal amount of approximately U.S.$84.2
million. The Company won the auction with a bid of US$77.7 million.
The predecessor of GSyR started operations in 1906 by manufacturing and
selling furniture. Beginning in 1915, it expanded its line of business by
manufacturing mattresses (an operation which has been discontinued). In 1920 it
became the first company in Mexico to offer a credit program, opened traditional
stores in various regions of the country and became the first chain with
national coverage. GSyR's department store business commenced with the opening
of a store in Monterrey in 1943, and a second store in Mexico City in 1945.
Today, GSyR is a retail holding company, whose main wholly-owned
subsidiary, SyR, sells furniture, household goods and clothes through two
different formats: traditional stores and department stores. In addition, GSyR
operates a credit business that has promoted and complemented its retail
business
GSyR is the specialty retailer with the longest track record in the Mexican
market. Its brand name, "Salinas y Rocha" enjoys a high recognition among the
middle and middle-low socioeconomic segments of the Mexican population.
Regardless of the financial difficulties experienced by GSyR in recent years,
the name "Salinas y Rocha" is still associated with "broad selection", "quality"
and "accessibility" and has a significant share of mind among its target market.
GSyR was, at the time of its acquisition by the Company, one of the largest
specialty retailers in Mexico. It currently owns and operates a chain comprised
of 96 stores, of which 86 are traditional stores and 10 are department stores.
GSyR also has 21 warehouses and three distribution centers throughout Mexico.
The following table sets forth certain operating data of GSyR:
No. of stores Surface Leased stores
------------- ------- -------------
Traditional stores 86 80,898 68
Department stores 10 65,974 7
---- ----
Total 96 146,872 75
39
At December 31, 1998, GSyR and its subsidiaries had 3,485 employees, of
whom 369 belonged to labor unions.
Although GSyR will be operated independently from other subsidiaries of the
Company, the Company expects that GSyR will benefit from being part of a group
of companies with the largest number of the retail locations throughout Mexico.
Including GSyR's stores, the Company has more than five times the number of
stores of the next largest competitor in the industry.
In June 1999, the Company entered into an agreement with El Puerto de
Liverpool, S.A. de C.V. ("Liverpool"), in order to dispose the real estate,
inventories, accounts receivable and the leasing rights of GSyR's department
stores. The aggregate principal amount of this operation is 115.8 million
Unidades de Inversion ("UDIs") (or the equivalent of Ps. 253.7 million or
approximately U.S.27 million, as of June 22, 1999). In addition, Liverpool will
substitute GSyR as the employer of those employees assigned to the department
store operations.
The Company's management cited the following key factors in acquiring GSyR:
Strength of Retail Brand Name. The acquired stores will continue to operate
under the nationally-recognized Salinas y Rocha brand name. Salinas y Rocha,
which specializes in furniture and small appliances, caters to a different
demographic group than the Company's current Elektra and Hecali stores. As a
result, the acquisition may allow Grupo Elektra to increase its penetration of a
higher income sector.
Opportunities for Efficiency Gains. Management of the Company has stated
that it intends to convert the Salinas y Rocha stores and warehouses to the
Elektra system and organization within a few months of the acquisition. In 1998,
the Company developed a new business management system that has the flexibility
and capacity to meet the demands of the new chain.
Opportunities for Creating New Value in Salinas y Rocha. The credit system
managed by the Company will be gradually implemented in the Salinas y Rocha
chain, and the same is expected to happen with some of the products and services
offered by the Company. In addition, the Company will increase its television
advertising efforts in order to promote the products offered in Salinas y Rocha
stores.
The sales distribution of GSyR is set forth in the following table:
Percentage
----------
Electronics 18.0%
Household appliances 21.0%
Furniture 20.4%
Clothes and accessories 36.1%
Other 4.4%
----
Total 100%
40
MEXICAN ECONOMIC CONDITIONS AND GOVERNMENT POLICIES
The Company's financial results are generally affected by the strength of
the Mexican economy. In December l994, Mexico began a period of economic crisis
that continues, albeit to a much lesser extent, today. Mexico's economic crisis
was characterized by exchange rate volatility and devaluation of the peso
against the U.S. dollar, increased inflation, high domestic interest rates,
negative economic growth, reduced consumer purchasing power and high
unemployment. This crisis continues to have an adverse effect on the Company's
business and its financial results.
During the period from 1982 through 1987, Mexico experienced periods of
slow or negative growth, high inflation, large devaluations of the peso and
limited availability of foreign exchange. During the late 1980s and early 1990s,
as a result of Mexican government initiatives and the attendant increase in
foreign investment, the growth rate of Mexico's economy increased, Mexico's
inflation rate was reduced significantly and the U.S. dollar/peso exchange rate
was relatively stable.
Beginning December 1994, Mexico experienced an economic crisis caused in
part by a series of internal disruptions and political events, including a large
current account deficit (7.8% of gross domestic product in 1994), civil unrest
in the southern state of Chiapas, the assassination of two prominent political
figures and significant devaluation of the peso against the U.S. dollar.
These events undermined the confidence of investors in Mexico during 1994
and, combined with an increase in international interest rates, led to a
substantial outflow of capital. In addition, Mexico experienced a rate of
inflation of 52.0% in 1995 (as compared to 7.1% in 1994) and a liquidity crisis
affecting the ability of the Mexican government and the banking system to
refinance or refund maturing debt issues. According to government figures,
Mexico's gross domestic product for 1995 was 6.9% lower than the gross domestic
product for 1994. Mexico's gross international reserves fell sharply at the end
of 1994.
Interest rates increased sharply in 1995, both domestically and externally,
on Mexican public-sector and private-sector debt, which significantly reduced
opportunities for refinancing or refunding maturing debt issues. Mexican
interest rates, which reached a low of 8.8% per annum for 28-day Cetes, or
Mexican treasury bills, in February 1994, rose throughout most of 1994 and have
increased substantially since December 1994. The highest interest rate on 28-day
Cetes in the period from January 1, 1994 to December 31, 1994 was 18.0% and the
average 28-day Cetes rate for 1994 was 14.1%. During 1995, interest rates on
28-day Cetes ranged from a low of 32.6% to a high of 82.7% and averaged 48.5%.
In response to these developments, the administration of President Ernesto
Zedillo announced in January 1995 an emergency economic recovery and
stabilization plan and an accord among the government, business and labor. In
order to reinforce this program, on March 9, 1995, the Mexican government
announced a successor emergency economic plan. Together, these programs sought
to achieve the following: stabilization of the peso/dollar exchange rate and
maintenance of the floating-rate exchange policy that continues to prevail
today; stabilization of the Mexican banking sector; an increase in public-sector
revenues by, among other measures, increasing the general rate of the value
added tax for certain goods and services from 10% to 15%; an increase in the
prices of fuel oil, natural gas and electricity; and an increase in the minimum
wage (minimum wage increases of 7% and 12% were implemented in the beginning of
1995 and on April 1, 1995, respectively).
In addition, the Mexican government sought to minimize inflation by
promoting the gradual implementation of price increases. As part of its efforts
to control inflation, the Mexican government also reduced public spending by
4.9% in 1995, primarily through departmental rationalization, staff reductions
and
41
hiring freezes, as well as the postponement of new infrastructure projects. On
May 31, 1995, the Mexican government announced the Plan Nacional de Desarrollo
(the "National Development Plan") for the 1995-2000 period. The National
Development Plan includes the implementation of a foreign exchange policy that
will maintain a floating exchange regime and a restrictive monetary policy in
order to stabilize the peso and reduce inflation.
On October 29, 1995, the Mexican government signed an economic pact with
representatives of the business, labor and agricultural sectors of the economy,
which sets forth wage and price policies while maintaining a restrictive
monetary policy. The most recent pact between the Mexican government and Mexican
business and labor leaders, Alianza para el Crecimiento (Alliance for Growth),
was established on October 26, 1996 and sets forth new wage and price policies,
as well as a plan to stimulate investment in Mexico.
Furthermore, declines in growth, high rates of inflation and high interest
rates in Mexico all have a generally adverse effect on the Company's business.
The slower the growth of the Mexican economy, the slower the growth of consumer
retail market. The continuation of such negative economic trends would further
decrease consumer purchasing power, thereby adversely affecting the Company's
revenue, as well as increasing the Company's costs. As a result, if inflation in
Mexico were to remain at high levels while economic growth remained depressed,
the Company's results of operations, financial condition, ability to obtain
financing and the market price of the Company's securities would be adversely
affected.
In December of 1997, a violent incident occurred in the municipality of
Chenalho, in the Mexican state of Chiapas, which resulted in a large number of
fatalities. The Mexican government is pursuing a strategy to bring about the
disarmament of armed non-governmental groups in Chiapas and to achieve peace in
the Chiapas region as soon as practicable. There can be no assurance that this
strategy will ultimately prove successful or that outbreaks of violence will not
occur in the future. Any such outbreak of violence could have an adverse impact
on the Mexican financial markets.
Economic conditions in Mexico improved in 1996 and 1997, with gross
domestic product in 1997 7.0% higher than gross domestic product in 1996, and
5.1% higher in 1996 than gross domestic product in 1995. Interest rates on
28-day Cetes in 1997 declined to an average of 19.8% compared to an average of
30.8% in 1996 and 48.8% in 1995. Inflation in 1997 declined to a rate of 15.7%
from a rate of 27.7% in 1996 and 52.0% in 1995. Net international reserves at
December 31, 1997 increased to US$28.0 billion from US$17.5 billion at December
31, 1996 and US$15.7 billion at December 31, 1995.
In 1998, economic crisis in developing countries other than Mexico,
including Russia and the countries of Southeast Asia, undermined the confidence
of investors in Mexico, leading to a substantial outflow of capital. This
situation, combined with a steep decline in the price of petroleum (a principal
Mexican export and source of foreign currency), resulted in a slight
deterioration of economic conditions in Mexico.
In 1998, Mexico's GDP increased by 4.8% in real terms as compared with
1997, however, inflation was 18.6% for 1998, compared to 15.7% in 1997. During
1998, the average rate on 28-day Cetes was 24.6% (compared to 22.6% during 1997)
and on December 31, 1998 the 28-day Cetes rate was 31.2%.
A reversal of the improvement in the Mexican economy since 1995, as well as
social instability or other adverse social, political or economic developments
in or affecting Latin America, and globally, could further adversely affect the
Company's business, results of operations, financial condition, ability to
obtain financing and prospects. In addition, the Mexican government has
exercised, and continues to exercise, significant influence
42
over the Mexican economy. Accordingly, Mexican governmental actions could have a
significant effect on Mexican companies (including the Company), market
conditions, prices and returns on Mexican securities (including those of the
Company).
The value of the peso has been subject to significant fluctuations with
respect to the U.S. dollar in the past and may be subject to significant
fluctuations in the future. The value of the peso declined by 60.8% against the
U.S. dollar, from Ps.3.11 at December 31, 1993 to Ps.5.00 at December 31, 1994.
Between January 1, 1995 and December 31, 1996, the Mexican peso depreciated an
additional 57.6% to Ps.7.88 per U.S. dollar and fluctuated from a high, relative
to the U.S. dollar, of Ps.5.00 to a low, relative to the U.S. dollar, of
Ps.8.14.
The peso/dollar exchange rate was relatively stable during much of 1997,
although volatility increased during October and November, and was present at
times in 1998, largely due to the effects of the economic crisis in developing
countries other than Mexico. From January 1, 1998 to December 31, 1998, the peso
depreciated 23% from Ps.8.07 per U.S. dollar to Ps.9.90 per U.S. dollar. As of
June 22, 1999, the peso/U.S. dollar exchange rate was Ps. 9.36 per U.S. dollar,
and no assurance can be given that the peso will not further depreciate in value
relative to the U.S. dollar in the future.
As of December 31, 1998, substantially all of the Company's indebtedness
was denominated in U.S. dollars, and the Company may in the future incur
additional non-peso-denominated indebtedness. A significant portion of the
Company's operating costs and other expenditures are also dollar-denominated.
These costs include amounts the Company pays for the purchases of merchandise
and capital equipment.
Declines in the value of the peso relative to the U.S. dollar increase the
interest costs in pesos to the Company related to its non-peso-denominated
indebtedness and increase the cost in pesos of its other dollar-denominated
expenditures. Since substantially all of the Company's revenue is denominated in
pesos, such increased costs will not be offset by any exchange-related increase
in revenue. As a result, the significant devaluation of the peso in 1994 and
1995 had a material adverse effect on the Company's financial results.
Additional devaluations of the peso could have a material adverse effect on the
Company's liquidity and results of operations.
In 1996 and 1997, the Company experienced net foreign exchange losses of
Ps. 76.8 million and Ps. 77.0 million, respectively. For the year ended December
31, 1998, the Company experienced a foreign exchange loss of Ps. 352.7 million,
due to a 23% devaluation of the peso during 1998. The Company does not currently
hedge against the risk of exchange rate fluctuations and has no current plans to
do so.
The Mexican economy has suffered balance of payment deficits and shortages
in foreign exchange reserves. While the Mexican government does not currently
restrict the ability of Mexican or foreign persons or entities to convert pesos
to U.S. dollars, no assurance can be given that the Mexican government will not
institute a restrictive exchange control policy in the future. Any such
restrictive exchange control policy could adversely affect the ability of the
Depositary to convert dividends received in pesos into U.S. dollars for purposes
of making distributions to holders of ADSs, and could also have a material
adverse effect on the Company's business and financial condition.
Item 2. Description of Property
As of December 31, 1998, the Company operated a total of 819 retail stores:
581 Elektra stores in Mexico, which operate in 260 cities in all 31 Mexican
states; 155 Hecali stores in Mexico, which operate in 109 cities in 29 Mexican
states; 24 Elektra stores in Guatemala, which operate in 14 cities; 14 Elektra
stores in El Salvador, which operate in eight cities; 14 Elektra stores in
Honduras, which operate in 10 cities, 21 Elektra stores in the Dominican
Republic, which operate in 11 cities, and 10 Elektra stores in Peru, which
operate only in the city of Lima.
43
As of December 31, 1998, the Company owned 52 Elektra stores in Mexico, 4
Hecali stores in Mexico and 2 Elektra stores in the Latin American countries
outside Mexico in which it operates, and leased 529 Elektra stores and 151
Hecali stores in Mexico as well as 81 Elektra stores in Latin American countries
outside Mexico, under mid-term leases that typically contain terms from five to
ten years. In addition, the Company owns its warehouse and distribution facility
located in Mexico City as well as satellite distribution centers in Guadalajara,
Monterrey, Tijuana and Chihuahua, and a support facility in Laredo, Texas. The
Company leases each of its 5 warehouses and distribution facilities located in
the Latin American countries outside Mexico in which it operates. Elektrafin
does not own or lease any property. The corporate offices of the Company are
located in Mexico City, Mexico at Edificio Parque Cuicuilco (Esmeralda)
Insurgentes Sur, No. 3579, Col. Tlalpan La Joya 14000 Mexico, D.F., Mexico. The
general corporate telephone number of the Company is (525) 629-9000.
In addition, in March, 1999, the Company acquired GSyR, whose wholly-owned
subsidiary SyR operates 96 Salinas y Rocha stores throughout Mexico, of which 75
are leased and 21 are owned.
For a further description of the Company's principal facilities, see Item
1, "Description of Business--Elektra's Operations in Mexico--Stores,"
"--Elektra's Operations in Latin America--Stores," "--Hecali--Stores." and
"--Salinas y Rocha."
Item 3. Legal Proceedings
The Company does not believe that any legal proceedings to which it or any
subsidiary is a party will, individually or in the aggregate, have a material
adverse effect on the Company's business, financial condition or results of
operation.
Suspension of Payments
In September 1983, Elektra Mexicana, S.A. de C.V. ("Elektra Mexicana") and
certain subsidiaries of Elektra Mexicana were subject to suspension of payments
proceedings in Mexico as a result of the inability to pay debts due to the
devaluation of the peso in the early 1980s. Elektra Mexicana is currently a
subsidiary of the Company and, at the time of the suspension of payments
proceedings, Elektra Mexicana was the owner and operator of the Company's
Elektra stores. In 1984, the Mexican court having jurisdiction over the
suspension of payments proceedings approved a plan of reorganization (the
"Plan") for Elektra Mexicana and its subsidiaries. As a result of the suspension
of payments proceedings, the Company and its current operating subsidiaries were
formed to operate the Company's business. Elektra Mexicana has paid the
settlement claims stipulated in the Plan and is in the process of proving the
payment of such claims to the authorities. Once payment has been proven, the
suspension of payments process will be formally terminated. The Company is aware
of three creditors who did not consent to the Plan. Two of these creditors have
filed no objection to the Plan and have not sought to collect any amounts owed
to them. One financial institution (the "Financial Institution") has sought to
enforce repayment of a promissory note in the original principal amount of
US$3,375,000, together with accrued interest and penalty interest to the date of
repayment. Under the terms of the Plan, the Financial Institution is entitled to
receive Ps.444,251. The Financial Institution has instituted two separate
proceedings in the Mexican federal courts seeking to enforce the promissory
note. Each of these proceedings has been dismissed, the court holding that the
suspension of payments proceeding is the appropriate forum for the Financial
Institution to pursue its claim. The last of these proceedings was dismissed on
August 12, 1993. Since such date, the Financial Institution has taken no further
action to enforce its claim, and the Company believes that such claim would now
be barred by the statute of limitations. The Company believes that the maximum
amount for which Elektra Mexicana may be liable to the three creditors who did
not consent to the Plan is Ps.1.7 million, which the Company has recorded as a
liability. Based on the advice of the Company's legal counsel, the Company
believes its potential liability does not exceed the amount already recorded. If
the Financial Institution were to prevail for amounts significantly in excess of
the amount recorded by the Company and if Elektra Mexicana could not otherwise
satisfy the Financial Institution's claim, a court could order the sale of
certain property leased to the
44
Company (including a warehouse and a small number of stores). There can be no
assurance that the Company would be able to renew any such leases on the same or
similar terms.
Tax Claims
Electronica del Moral, S.A. de C.V. ("Electronica") and Articulos
Domesticos al Mayoreo, S.A. de C.V. ("Articulos"), each a wholly owned
subsidiary of the Company, are involved in disputes with the Mexican federal
taxing authorities as a result of alleged unreported purchases of inventory. The
federal taxing authority alleges that the Company purchased inventory from two
different suppliers and omitted to report purchases from one of them. In
February 1996, a Federal Circuit Court (Tribunal Colegiado de Circuito), on
remand from the Supreme Court of Mexico (Suprema Corte de Justicia de la
Nacion), ruled in favor of the Company in a similar case involving the alleged
unreported purchases of inventory.
In addition, Elektra Mexicana is involved in a dispute with the federal
taxing authority that alleges that Elektra Mexicana underpaid certain federal
income and asset taxes in 1988 as a consequence of (i) impermissible deductions
of interest expense relating to a loan extended by a factoring financial
institution to the Company and (ii) failure by the Company to reevaluate its
real estate assets for purposes of the determination of the applicable basis for
the asset tax. Articulos is also involved in another dispute with the federal
taxing authority, which alleges that Articulos underpaid certain federal income
and other taxes relating to certain losses.
The Company believes that if any of the above referenced tax claims were to
be resolved unfavorably against the Company, the maximum liability derived
therefrom would be not material. See Note 14 to the Company's Consolidated
Financial Statements.
General
Manufacturers of defective products in Mexico may be subject to liability
for loss and injury caused by such products, but the Mexican laws providing for
such liability have been rarely invoked. Mexican law does not recognize product
liability claims against a seller of a defective product that did not
manufacture the product. Because the Company does not currently manufacture any
of its products, the Company does not believe it will be exposed to future
product liability claims.
Item 4. Control of Registrant
Grupo Elektra, S.A. de C.V.
As a result of a ten for one stock split in October 1997, at December 31,
1998, the Company had 4,324,845,990 shares of capital stock authorized, of which
1,495,024,470 were Series "A" shares, 2,342,405,490 were Series "B" shares and
487,416,030 were Series "L" shares. At December 31, 1998, 1,249,127,610 Series
"A" shares were issued and outstanding, 1,953,234,140 Series "B" shares were
issued and outstanding and 358,302,980 Series "L" shares were issued and
outstanding. The following table sets forth, as of December 31, 1998, certain
information with respect to the beneficial ownership of the Company's capital
stock of (i) each person who is known by the Company to own more than 10% of
either the currently outstanding A Shares, B Shares or L Shares and (ii) all
executive officers and directors as a group.
45
SHARES OWNED
--------------------------------------------------------------------------------------
SERIES "A" SHARES SERIES "B" SHARES SERIES "L" SHARES
--------------------- --------------------- --------------------
Aggregate
Percentage of
Percentage Percentage Percentage Outstanding
Identity of Owner Number of Class Number of Class Number of Class Shares
- ----------------------------- ------------- ------------ ------------- ---------- ---------- ------------- -------------
Hugo Salinas Rocha's heirs(1) 598,819,740 46% 620,063,200 31.97% 7,101,285 2.02% 34.38%
Esther Pliego de Salinas(2) 650,307,870 51% 60,570,340 3.12% 30,285,170 8.62% 18.31%
All executive Officers and 1,249,127,610 97% 1,326,005,450 68.37% 44,777,590 12.74% 73.47%
Directors of the Group(3)
(1) In February 1997, Mr. Hugo Salinas Rocha, Honorary President of the Board
of Directors of Grupo Elektra, S.A. de C.V., grandfather of Ricardo B.
Salinas Pliego (the current President of the Company and Chairman of the
Board of Directors), father of Mr. Hugo Salinas Price and father-in-law of
Esther Pliego de Salinas, died, distributing the capital stock of
Corporacion HSR, S.A. de C.V, the company through which he principally held
Grupo Elektra's shares, to his children. Therefore, the heirs of Mr.
Salinas Rocha as a group control his shares.
(2) Upon Mr. Hugo Salinas Rocha's death, a hereditary trust terminated and the
shares held in trust were delivered to Esther Pliego de Salinas.
(3) In this item are included the shares of Hugo Salinas Rocha's heirs and
Esther Pliego de Salinas as well as those in a trusteeship related to
Sheung Wong Co. Ltd., a company controlled by the Controlling Shareholders.
The stock structure of Grupo Elektra, as of June 22, 1999 is the same as
set forth in the above table.
The controlling beneficial shareholders of the Company are the heirs of
Hugo Salinas Rocha, including Ricardo B. Salinas and Esther Pliego de Salinas
(collectively, the "Controlling Shareholders"). The Controlling Shareholders
collectively own 1,249,127,610 A Shares, representing 97% of the currently
outstanding A Shares, and 1,326,005,450 B Shares, representing approximately 68%
of the currently outstanding B Shares. In addition, the Controlling Shareholders
own 44,777,590 L Shares, representing approximately 13% of the outstanding L
Shares. Through ownership of these shares, the Controlling Shareholders have the
power to determine the outcome of substantially all actions requiring
shareholder approval, including the power to elect 14 of the Company's 16
directors and to determine whether or not dividends will be paid.
Elektra, S.A. de C.V. and Elektrafin, S.A. de C.V.
Elektra and Elektrafin are, directly or indirectly, controlled by the
Company. The Company is the beneficial owner of all of the outstanding capital
stock of Elektra and Elektrafin.
Item 5. Nature of Trading Market
The Ordinary Participation Certificates (the "CPOs") of the Company are
traded on the Mexican Stock Exchange. Each CPO represents financial interests
in, and limited voting rights with respect to, two B Shares and one L Share. The
Global Depositary Shares ("GDSs") have been issued by The Bank of New York as
depositary (the "Depositary"). Prior to October 3, 1997, the effective date of
the stock split described below, each GDS represented 2 CPOs. As of December 31,
1998, each GDS represented 10 CPOs, as issued by Banco del Atlantico, S.A. as
trustee (the "CPO Trustee") for a Mexican trust (the "CPO Trust"). The GDSs are
traded on the New York Stock Exchange (the "NYSE"). The GDSs are also quoted on
the Stock Exchange Automated Quotation system of the International Stock
Exchange of the United Kingdom and the Republic of Ireland, Ltd. (SEAQ
International).
The Company's A, B and L Shares (together, "the Shares") are also listed on
the Mexican Stock Exchange. The A and B Shares have traded infrequently. Since
the initial issuance of L Shares by the Company on December 13, 1993, the L
Shares have been traded on Subsection "A" of the Mexican Stock Exchange.
Subsequent to the restructuring of the Company's capital effected on July 12,
1994 (the "Recapitalization"), the CPO has replaced the L Share as the principal
form of equity security of the Company traded in Mexico. In December 1994, the
Company completed a Level II listing in the form of GDRs on the NYSE and is
traded under the symbol EKT. At December 31, 1998, there were 69,562,440 CPOs
represented by 3,478,122 GDSs. The
46
proportion of the total CPOs held in the form of GDSs was 58.5% at December 31,
1998. As most of the GDSs are held by a nominee of The Depository Trust Company,
it is not practicable for the Company to determine the number of GDSs or Shares
beneficially owned in the United States.
The following tables set forth, for the periods indicated, the reported
high and low sales prices of the Company's principal form of equity security on
the Mexican Stock Exchange and GDRs on the New York Stock Exchange. Prices have
not been restated in constant currency units or to reflect the stock split
described below.
Mexican Stock Exchange New York Stock Exchange US$ per GDS
Nominal Pesos Per CPO
High Low High Low
---- --- ---- ---
1997:
First Quarter Ps.79.66 Ps.60.74 US$ 20.75 US$ 15.00
Second Quarter 90.00 70.40 22.75 17.75
Third Quarter 126.10 86.80 32.68 22.00
Fourth Quarter(1) 14.30 6.50 37.12 23.00
1998:
First Quarter Ps.14.40 Ps.11.90 US$ 18.00 US$ 13.94
Second Quarter 13.28 8.60 15.63 9.69
Third Quarter 10.40 3.18 11.94 2.88
Fourth Quarter 5.90 3.61 6.00 3.50
- ---------------
(1) Price of the CPO after the ten-to-one split.
On August 15, 1997, the Company's shareholders approved a ten-for-one split
of the Company's stock. The split was declared effective on October 3, 1997. As
a result of the split, each GDS represents 10 CPOs and each CPO represents two B
Shares and one L Share.
At the Company's annual ordinary and extraordinary meeting of shareholders
held on April 25, 1998, the Company's shareholders approved the establishment of
a reserve in its stockholders' equity account in the amount of Ps.6.7 million
for the repurchase of its stock, in accordance with rules established by the
Comision Nacional Bancaria y de Valores, the Mexican banking and securities
commission (the "CNBV"). The Company may purchase its CPOs on the Mexican Stock
Exchange and its GDSs on the New York Stock Exchange at prevailing prices to the
extent of funds remaining in this reserve account. Any shares so repurchased
will not be deemed to be outstanding for purposes of calculating any quorum or
voting at a shareholders' meeting during the period in which such shares are
owned by the Company. As of December 31, 1998 and June 15, 1999, the company had
repurchased 37,029,660 and 46,842,800 CPOs, respectively.
Trading on the Mexican Stock Exchange
The Mexican Stock Exchange, which was founded in 1894, is located in Mexico
City and is Mexico's only stock exchange. It ceased operations in the early
1900s, but has operated continuously since 1907.
The Mexican Stock Exchange is organized as a corporation with its shares
being held by 33 licensed brokerage firms. These firms are exclusively
authorized to trade on the floor of the Mexican Stock Exchange. Trading of
securities registered on Subsection "A" of the Registro Nacional de Valores e
Intermediarios ("RNVI") is effected on the Mexican Stock Exchange each business
day between 8:30 a.m. and 3:00 p.m., Mexico City time. Each trading day is
divided into six trading sessions with ten-minute periods separating each
session. The size of trading lots is 1,000 shares. Brokerage firms are permitted
to trade in odd lots only through a parallel computerized odd-lot trading
system.
47
The Mexican Stock Exchange publishes a daily official price list that
includes price information on each listed security. For most issuers, the
Mexican Stock Exchange operates on a system of automatic suspension of trading
in shares of a particular issuer as a means of controlling excessive price
volatility.
Each day a price band is established, with the upper and lower limits
generally being 5% above and below a reference price, which is initially the
day's opening price. If during the day a bid or offer is accepted at a price
outside this band, trading in the shares is automatically suspended for one
hour. When trading resumes, the high point of the previous band becomes the new
reference price in the event of a rise in the price of a security and the low
point of the previous band becomes the new reference price in the event of a
fall in the price of a security. If it becomes necessary to suspend trading on a
subsequent occasion on the same day, the suspension period lasts one and
one-half hours. Suspension periods in effect at the close of trading are not
carried over to the next trading day.
However, in accordance with the rules of the Mexican Stock Exchange, the
CPOs are not subject to this system because they trade outside Mexico in the
form of GDSs. In addition, the Mexican Stock Exchange can suspend trading in a
security (including those not subject to the automatic suspension system
described above) for up to five days if it determines that disorderly trading is
occurring with respect thereto. The CNBV must approve any increase in the length
of the suspension period beyond five days.
Settlement is effected two trading days after a share transaction on the
Mexican Stock Exchange. Deferred settlements, even if by mutual agreement, are
not permitted without the approval of the CNBV. Most securities traded on the
Mexican Stock Exchange are on deposit with S.D. Indeval, S.A. de C.V.,
Institucion para el Deposito de Valores ("Indeval"), a central securities
depositary owned by Mexican financial intermediaries that acts as a clearing
house, depositary, custodian, settlement, transfer and registration institution
for Mexican Stock Exchange transactions, eliminating the need for physical
transfer of securities.
As of December 31, 1998, 141 Mexican companies, excluding mutual funds, had
equity listed on the Mexican Stock Exchange. Although there is substantial
participation by the public in the trading of securities on the Mexican Stock
Exchange, a major part of such activity reflects transactions by institutional
investors. There is no over-the-counter market for securities in Mexico, but
trades in securities listed on the Mexican Stock Exchange can, subject to
certain requirements, also be effected off of the Mexican Stock Exchange.
However, due primarily to Mexican tax considerations relating to capital gains,
most transactions in listed Mexican securities are effected on the Mexican Stock
Exchange.
The Mexican Stock Exchange and the CNBV have started to implement an
automated trading system intended to eventually replace trading on the floor of
the Mexican Stock Exchange.
The Mexican Stock Exchange is Latin America's second largest exchange by
market capitalization, but it remains relatively small and illiquid compared to
major world markets and is subject to significant volatility. During 1994, for
example, the Indice de Precios y Cotizaciones (the "Mexican Stock Exchange
Index") (which is based on the share prices of 35 major Mexican issuers,
including Grupo Elektra) experienced one-day declines (in peso terms) of
approximately 6% and 15%, respectively, following events in the State of Chiapas
in southern Mexico and the assassination of Luis Donaldo Colosio Murrieta, the
presidential candidate of the Institutional Revolutionary Party. Furthermore,
following the devaluation of the peso in December 1994, the Mexican Stock
Exchange Index declined (in peso terms) by approximately 36% from December 20,
1994 to February 27, 1995, and on several occasions in 1995, the Mexican Stock
Exchange Index declined by more than 5% (in peso terms) in one day.
The market value of securities of Mexican companies is, to varying degrees,
affected by economic and market conditions in other emerging market countries.
Although economic conditions in such countries may differ significantly from
economic conditions in Mexico, investors' reactions to developments in any of
these other countries may have an adverse effect on the market value of
securities of Mexican companies. The market
48
value of securities of many Mexican companies declined sharply in late October
1997, reflected in a 20.6% decline in the Mexican Stock Exchange Index (in peso
terms) from October 21, 1997 to October 27, 1997, as a result of declines that
began initially in the Hong Kong securities market. These values have continued
to react adversely to negative economic news from Asia. There can be no
assurance that the market value of the CPOs will not be adversely affected by
events elsewhere, especially in emerging market countries.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
Exchange Controls
From 1982 through November 10, 1991, Mexican residents and companies were
entitled to purchase and obligated to sell foreign currencies for certain
purposes at a controlled rate of exchange (the "Controlled Rate") that was set
daily by Banco de Mexico. For all transactions to which the Controlled Rate did
not apply, foreign currencies could also be purchased, if they were available,
or sold at the free-market exchange rate, which was generally higher than the
Controlled Rate.
The price of one U.S. dollar at the Controlled Rate increased at a regular
rate of 1.00 peso per day from January 1, 1989 to May 28, 1990, 0.80 pesos per
day from May 29 to November 12, 1990 and 0.40 pesos per day from November 13,
1990 to November 11, 1991. Banco de Mexico intervened from time to time in the
foreign exchange market to minimize temporary disparities between the
free-market rate and the Controlled Rate.
Since November 11, 1991, Mexico has had a free market for foreign exchange.
Prior to December 21, 1994, Banco de Mexico kept the peso-U.S. dollar exchange
rate within a range prescribed by the Mexican government through intervention in
the foreign exchange market. Within the band, Banco de Mexico generally
intervened to reduce day-to-day fluctuations in the exchange rate. From November
11, 1991 through October 20, 1992, the upper limit of the prescribed range,
expressed in terms of pesos per U.S. dollar, rose by Ps.0.0002 per day,
equivalent to a maximum devaluation of the peso with respect to the U.S. dollar
of approximately 2.4% per year. From October 20, 1992 until December 20, 1994,
the upper limit of the prescribed band increased by Ps.0.0004 per day,
equivalent to a maximum devaluation of the peso of approximately 4.9% per year.
On December 20, 1994, the Mexican government increased the ceiling of the
trading band by Ps.0.53, equivalent to an effective devaluation of 15.3%.
On December 21, 1994, the Mexican government announced its decision to
suspend intervention by Banco de Mexico and to allow the peso to float freely
against the U.S. dollar. Factors contributing to the decision included the
growing size of Mexico's current account deficit, the declining level of Banco
de Mexico's foreign exchange reserves, rising interest rates for other
currencies, especially the U.S. dollar, and reduced confidence in the Mexican
economy on the part of international investors due to political uncertainty. By
December 31, 1994 the exchange rate was Ps.5.00 per U.S. dollar, as compared to
Ps. 3.47 per U.S. dollar on December 19, 1994. Between January 1, 1995 and
December 31, 1995, the Mexican peso depreciated to Ps. 7.74 per U.S. dollar,
fluctuating between Ps. 5.27 and Ps. 8.05 per U.S. dollar. Between January 1,
1996 and September 30, 1996, the peso strengthened slightly, and was Ps. 7.55
per U.S. dollar on September 30, 1996. Subsequent to September 30, 1996, the
peso continued to depreciate against the dollar and was Ps.7.88 per U.S. dollar
on December 31, 1996. In 1997, the peso weakened to Ps.8.07 per U.S. dollar at
December 31, 1997. In 1998, the peso weakened to Ps. 9.90 per U.S. Dollar at
December 31, 1998. During the first quarter of 1999, the peso increased by 4%,
appreciating from Ps. 9.90 per U.S. dollar on December 31, 1998 to Ps. 9.52 per
U.S. dollar on March 31, 1999. On June 22, 1999 the Noon Buying Rate stood at
Ps. 9.358 per U.S. dollar. There can be no assurance that the Mexican government
will maintain its current policies with regard to the peso or that the peso will
not further depreciate or appreciate significantly in the future.
As of December 31, 1998, the Company had approximately US$241.4 million
indebtedness denominated in U.S. dollars and the equivalent of US$65.5 million
denominated in other currencies, and the
49
Company may in the future incur additional non-peso-denominated indebtedness.
Declines in the value of the peso relative to other currencies increase the
interest costs in pesos to the Company related to its non-peso-denominated
indebtedness and increase the cost in pesos of its other non-peso-denominated
expenditures and will also result in foreign exchange losses. Since
substantially all of the revenue of the Company is denominated in pesos, such
increased costs will not be offset by an exchange-related increase in revenue.
As a result, the devaluation of the peso in 1994 and 1995 had a material adverse
effect, and additional devaluations of the peso could have a material adverse
effect, on the value of the Company's assets, its liquidity and its results of
operation.
The Mexican economy has suffered balance of payment deficits and shortages
in foreign exchange reserves. While the Mexican government does not currently
restrict the ability of Mexican or foreign persons or entities to convert pesos
to U.S. dollars, no assurance can be given that the Mexican government will not
institute a restrictive exchange control policy in the future. Any such
restrictive exchange control policy could adversely affect the ability of the
Company to meet its U.S. dollar obligations, and could have a material adverse
effect on, the Company's business and financial condition.
Limitations Affecting Security Holders
Ownership by non-Mexicans of shares of Mexican enterprises is regulated by
the Ley de Inversion Extranjera (the "Foreign Investment Law") and the
Reglamento de la Ley de Inversion Extranjera (the "Foreign Investment
Regulations").
The Foreign Investment Law reserves certain economic activities exclusively
for the Mexican state and reserves certain other activities exclusively for
Eligible Mexican Holders, consisting of Mexican individuals and Mexican
corporations, the charters of which contain a prohibition on ownership by
non-Mexicans of the corporation's capital stock (a "foreign exclusion clause").
However, the Foreign Investment Law provides that the General Directorate of
Foreign Investment may authorize the issuance of "neutral" shares or other
"neutral" equity securities ("N Shares"). Investment in N Shares or Securities
by foreign entities is not considered to be a foreign investment, but rather a
"neutral" investment. Pursuant to the Foreign Investment Law, holders of Series
N Shares may or may not have voting rights; if they have voting rights, they
must be limited. Series N Series may be owned by domestic or foreign entities.
In order to comply with these restrictions, the Company has limited the
ownership of its A Shares to Eligible Mexican Holders and credit institutions
acting as trustees (such as the CPO Trustee) in accordance with the Foreign
Investment Law and Regulations, and the Company has obtained the authorization
from the General Directorate of Foreign Investment to issue the B Shares, the L
Shares and the CPOs, all of which qualify as Series N Shares. L Shares may not
represent more than 25% of the capital stock of the Company. A holder that
acquires A Shares in violation of the restrictions on non-Mexican ownership will
have none of the rights of a shareholder with respect to those A Shares.
The Foreign Investment Law and Regulations also require that the Company
register any non-Mexican owner of CPOs, or the applicable depositary with
respect to any Global Depositary Shares, with the National Registry of Foreign
Investment. A non-Mexican owner of CPOs who has not been registered is not
entitled to vote any shares underlying the CPOs that he otherwise would have the
right to vote or to receive dividends with respect to the shares underlying the
CPOs. The Company has registered the Depositary for this purpose with respect to
the GDSs and the CPOs (and the B Shares and L Shares, as applicable, represented
thereby).
Limitations on Voting Rights
Holders of GDSs may give instructions as to the manner in which the CPO
Trustee shall vote the B Shares and L Shares underlying the CPOs represented by
such holder's GDSs to the extent they have voting rights with respect thereto.
Holders of the CPOs (including CPOs which are represented by GDSs) who are not
50
Mexican nationals will have the same voting rights with respect to the
underlying L Shares as those granted to holders of L Shares under the Company's
Bylaws, provided that they must give voting instructions to Banca Serfin, S.A.,
the Common Representative of the holders of CPOs (the "Common Representative")
at least five business days prior to the relevant meeting. Holders of CPOs
(including CPOs which are represented by GDSs) who are not Mexican nationals
will have no voting rights with respect to the B Shares underlying the CPOs.
Voting rights with respect to the B Shares owned by non-Mexican nationals held
in the CPO Trust will be exercised by the CPO Trustee, which is required to vote
such shares in the same manner as the majority of all B Shares are voted at the
relevant meeting. Given that a majority of the B Shares will be owned by the
Controlling Shareholders, if the Controlling Shareholders vote the same way on a
matter, the CPO Trustee will be required to vote the B Shares underlying the
CPOs held by non-Mexican nationals in the CPO Trust in the same manner as the B
Shares held by the Controlling Shareholders are voted.
Under the Company's Bylaws and Mexican law, holders of L Shares will be
entitled to vote only in limited circumstances. Holders of L Shares will be
entitled to elect, at a special stockholders meeting of such series, two of the
Company's 16 directors, and the corresponding alternate directors. Holders of L
Shares are and will be entitled to vote at general extraordinary stockholders
meetings on the following corporate actions: (i) transformation of the Company
from one type of company to another, (ii) any merger in which the Company is not
the surviving entity, and (iii) removal of the L Shares or securities
representing them from listing on the Mexican Stock Exchange or any foreign
stock exchange. Holders of L Shares will also be entitled to vote at special
stockholders meetings of such series on actions that would prejudice the rights
of holders of such series.
Limitation on Rights to Withdraw Underlying Securities
Holders of CPOs may not withdraw the B Shares and L Shares underlying such
CPOs until July 1, 2004. At such time, such securities may continue to be
represented by CPOs until the expiration of the CPO Trust or, at the option of
the holder and subject to certain conditions described herein, the B Shares and
L Shares represented by the CPOs may be removed from the CPO Trust and may be
traded separately. B Shares which are so removed and held by non-Mexican
nationals must be placed in a trust similar to the CPO Trust or otherwise be
made subject to arrangements which comply with Mexican law regulating ownership
of such shares by foreigners. The Company does not anticipate sponsoring a trust
relating to shares which are so removed.
Restrictions Imposed by Bylaws, CPO Trust Agreement and Mexican Law
The Company's Bylaws provide that legal actions relating to the execution,
interpretation or performance of the Bylaws may be brought only in courts in
Mexico, D.F. The CPO Trust Agreement provides that all disputes arising
therefrom must be submitted to courts located in Mexico, D.F., and that all
parties to the CPO Trust Agreement, including CPO holders, agree that they will
not submit such disputes to any other courts.
The Company's Bylaws and the CPO Trust Agreement provide that non-Mexican
stockholders and CPO holders, respectively, of the Company formally agree with
the Foreign Affairs Ministry (i) to be considered as Mexicans with respect to
the shares or the CPOs, as the case may be, of the Company that they acquire or
hold as well as with respect to the property, rights, concessions, participation
or interests owned by the Company and with respect to the rights and obligations
derived from any agreements the Company has with the Mexican Government and (ii)
not to invoke the diplomatic protection or intervention of their own
governments. If a non-Mexican stockholder or CPO holder should invoke
governmental diplomatic protection or intervention in violation of this
agreement, its shares or CPOs, as the case may be, could be forfeited to the
Mexican Government. Under Mexican law, it is not clear what actions would
constitute invoking governmental protection or intervention that would result in
forfeiture of shares or CPOs or what process would be implemented in connection
with the forfeiture provisions; however, institution of judicial proceedings in
a foreign country would not be deemed an invocation of diplomatic protection or
intervention which would result in a forfeiture of shares.
51
In the event of a capital increase, holders of existing shares have a
preferential right to subscribe for a number of shares sufficient to maintain
the holders' existing proportionate holding of shares, except in limited
circumstances. Holders of GDSs may be restricted under Mexican law in their
ability to participate in the exercise of preemptive rights to acquire shares or
rights of any other nature and as a result their economic interest in the
Company could be diluted in the event of a capital increase.
Whenever the stockholders approve a change of corporate purposes, change of
nationality of the corporation or transformation from one form of company to
another, any stockholder entitled to vote on such change that has voted against
it has appraisal rights whereby it may withdraw from the Company and receive an
amount, attributable to its shares calculated as specified under Mexican law,
such appraisal rights must be exercised within 15 days following the relevant
shareholders meeting. Because the L Shares may vote only on certain matters,
such appraisal rights will only be available to such holders of L Shares,
including L Shares underlying the CPOs (or GDSs), in the case of transformation
of the Company from one type of Company to another. In addition, because the CPO
Trustee is required by the terms of the CPO Trust Agreement to vote the B Shares
held by non-Mexican nationals in the CPO Trust in the same manner as the
majority of B Shares are voted at the relevant meeting, appraisal rights will
not be available to non-Mexican holders of B Shares represented by CPOs (and
GDSs).
Item 7. Taxation
The following summary contains a description of the principal Mexican and
United States federal income tax consequences of the purchase, ownership and
disposition of the 12 3/4% Guaranteed Senior Notes due 2001 (the "Notes"), the
CPOs or the GDSs, but does not purport to be a complete analysis of all the
potential tax considerations relating thereto. This summary is based on the tax
laws of Mexico and the United States in force on the date of this Annual Report,
including the provisions of the income tax treaty between the United States and
Mexico (the "Tax Treaty"), which are subject to change. This summary deals only
with holders that will hold Notes, CPOs or GDSs as capital assets and does not
address tax considerations applicable to investors that may be subject to
special tax rules, such as banks, tax-exempt organizations, insurance companies,
dealers in securities or currencies, persons that will hold the Notes, CPOs or
GDSs as part of an integrated investment (including a "straddle") comprised of
Notes, CPOs or GDSs and one or more other positions, persons that have a
"functional currency" other than the U.S. Dollar and persons that own or are
treated as owning 10% or more of the voting shares (including CPOs) of the
Company, nor does it address the tax treatment of holders of Notes who did not
acquire the Notes at their issue price as part of their initial distribution.
Holders of Notes, CPOs or GDSs should consult their own tax advisors as to
the United States federal, Mexican or other tax consequences of the purchase,
ownership and disposition of Notes, CPOs or GDSs, including, in particular, the
effect of any foreign, state or local tax laws.
As used herein, the term "United States Holder" means the beneficial owner
of Notes, CPOs or GDSs that is, for United States income tax purposes, (i) an
individual citizen or resident of the United States, (ii) a United States
domestic corporation or (iii) otherwise subject to United States federal income
tax on a net income basis in respect of Notes, CPOs or GDSs.
As used herein, the term "Foreign Holder" means a holder that is not a
resident of Mexico and that will not hold Notes, CPOs or GDSs or a beneficial
interest therein in connection with the conduct of a trade or business through a
permanent establishment in Mexico.
For purposes of Mexican taxation, an individual is a resident of Mexico if
he has established his domicile in Mexico, unless he has resided in another
country for more than 183 calendar days, whether consecutive or not, in any one
calendar year and can demonstrate that he has become a resident of that country
for tax purposes, and a legal entity is a resident of Mexico if it is
incorporated under Mexican law. A Mexican
52
citizen pursuant to Mexican law is presumed to be a resident of Mexico for tax
purposes unless such person or entity can demonstrate otherwise. If a person has
a permanent establishment or fixed base in Mexico, such permanent establishment
or fixed base shall be required to pay taxes in Mexico on income attributable to
such permanent establishment or fixed base in accordance with relevant tax
provisions.
In general, for United States federal income tax purposes, holders of GDSs
or CPOs will be treated as the beneficial owners of the Series B Shares and
Series L Shares represented by those GDSs or CPOs.
Tax Considerations Relating to the Notes
Mexican Taxation
Taxation of Interest and Principal
Under the Mexican Income Tax Law, payments of interest made by the Company
in respect of the Notes (including payments of principal in excess of the issue
price of such Notes, which, under Mexican law, are deemed to be interest) to a
Foreign Holder will generally be subject to a Mexican withholding tax assessed
at a rate of 10% if the relevant Notes are registered with the Special Section
of the National Registry of Securities and Intermediaries (the "Registry"). For
these purposes, the difference between the amount payable at maturity on a Note
and the amount paid by a Foreign Holder for its purchase at issuance will
constitute interest subject to Mexican withholding at the time of payment.
Pursuant to the Mexican Income Tax Law, payments of interest made by the
Company in respect of the Notes to a Foreign Holder that are subject to a
withholding tax will be subject to a reduced 4.9% Mexican withholding tax rate
(the "Reduced Rate") if (i) the effective beneficiary is a resident of a country
which has entered into a treaty to avoid double taxation with Mexico, (ii) the
requirements for the application of a lower rate established in the applicable
treaty are satisfied, and (iii) the Notes are registered with the Special
Section of the Registry. This Reduced Rate provision will expire on December 31,
1999 or when the authority stipulates another term. After that time, however, as
discussed below, the Mexican withholding tax rate may be reduced under other
provisions.
Pursuant to general rules (the "Reduced Rate Regulations") issued by the
Ministry of Finance, payments of interest made by the Company to Foreign Holders
with respect to the Notes that are subject to withholding tax will be subject to
withholding taxes imposed at the Reduced Rate, regardless of the place or
residence or tax regime applicable to the Foreign Holder recipient of such
interest, if (i) the Notes are registered with the Special Section of the
Registry, (ii) the Company timely files with the Ministry of Finance certain
information relating to the issuance of the Notes, (iii) the Company timely
files with the Ministry of Finance, after the date of each interest payment
under the Notes, information representing that no party related to the Company
(defined under the Reduced Rate Regulations as parties that are (x) shareholders
of the Company that own, directly or indirectly, individually or collectively
with related persons (within the meaning of the Reduced Rate Regulations) more
than 10% of the voting stock of the Company or (y) corporations more than 20% of
the stock of which is owned, directly or indirectly, individually or
collectively, by related persons of the Company), directly or indirectly, is the
effective beneficiary of 5% or more of the aggregate amount of each such
interest payment, and (iv) the Company maintains records that evidence
compliance with (i), (ii) and (iii) above. The Reduced Rate Regulations,
together with other tax regulations, are promulgated on an annual basis, and
there can be no assurance that the Reduced Rate Regulations described above for
the application of the Reduced Rate will be extended beyond March 31, 2000.
Apart from the Reduced Rate, other special rates of Mexican withholding tax
may apply. In particular, under the Tax Treaty, the Mexican withholding tax rate
applicable to interest payments on the Notes is reduced to 4.9% (the "Treaty
Rate") for certain holders that are residents of the United States (within the
meaning of the Tax Treaty) under certain circumstances contemplated therein. The
Treaty Rate is reduced to 4.9% on January 1, 1999. The Tax Treaty
53
provides that United States Holders will be subject to this rate independently
from the Reduced Rate Regulations.
Payments of interest made by the Company with respect to the Notes to
non-Mexican pension or retirement funds will be exempt from Mexican withholding
taxes, provided that any such fund (i) is duly incorporated pursuant to the laws
of its country of origin, (ii) is exempt from income tax in such country and
(iii) is registered with the Ministry of Finance for that purpose and (iv) there
is reciprocity in similar circumstances for Mexican pension or retirement funds
in such country.
The Company has agreed, subject to specified exceptions and limitations, to
pay Additional Amounts to the holders of the Notes in respect of the Mexican
withholding taxes mentioned above. If the Company pays Additional Amounts in
respect of such Mexican withholding taxes, any refunds received with respect to
such Additional Amounts will be for the account of the Company.
Holders or beneficial owners of Notes may be requested to provide certain
information or documentation necessary to enable the Company to establish the
appropriate Mexican withholding tax rate applicable to such holders or
beneficial owners in respect of interest payments under the Notes. In the event
that the specified information or documentation concerning the holder or
beneficial owner, if requested, is not provided on a timely basis, the Company
may withhold Mexican tax from such interest payments to such holder or
beneficial owner at the maximum applicable rate (currently 10%) but its
obligation to pay Additional Amounts will be limited.
Under existing Mexican law and regulations, a Foreign Holder will not be
subject to any Mexican taxes in respect of payments of principal made by the
Company with respect to the Notes.
Taxation of Dispositions
Capital gains resulting from the sale or other disposition of the Notes by
a Foreign Holder may be subject to a tax at a rate of 10%. However, pursuant to
rule 3.32.26 published by the Ministry of Finance which is in effect until March
4, 2000, no income tax will apply on any capital gains resulting from the sale
or other disposition of the Notes, as long as (i) the income tax applicable to
interest payments under the Notes is duly withheld and paid to the Ministry of
Finance by the Issuer in accordance with the Law and (ii) the Notes, as
expected, are registered under the Special Section of the Registry. No assurance
can be given that the aforementioned rule 3.32.26 will be extended or that an
equivalent rule will be enacted.
Transfer and Other Taxes
There are no Mexican stamp, registration, or similar taxes payable by a
Foreign Holder in connection with the purchase, ownership or disposition of the
Notes. A Foreign Holder of Notes will not be liable for Mexican estate, gift,
inheritance or similar tax with respect to the Notes.
United States Taxation
Taxation of Interest and Additional Amounts
A United States Holder will treat the gross amount of interest and
Additional Amounts (i.e., without reduction for Mexican withholding taxes)
received in respect of the Notes as ordinary interest income at the time such
interest and Additional Amounts is received or accrued, in accordance with such
Holder's method of accounting for United States federal income tax purposes.
Mexican withholding taxes paid at the appropriate rate applicable to the United
States Holder will be treated as foreign income taxes eligible for credit
against such United States Holder's United States federal income tax liability,
subject to generally applicable limitations and conditions, or, at the election
of such United States Holder, for deduction in computing such United States
Holder's taxable income. Interest and Additional Amounts will constitute income
from sources without the United States for foreign tax credit purposes. Such
income generally will constitute "passive income" or, in the case of certain
United States Holders, "financial services income" for United States foreign tax
credit purposes unless the Mexican withholding tax rate applicable to the United
States Holder is imposed at a rate of at least 5%, in which case such income
generally will constitute "high withholding tax interest."
54
The calculation of foreign tax credits and, in the case of a United States
Holder that elects to deduct foreign taxes, the availability of deductions,
involves the application of rules that depend on a United States Holder's
particular circumstances. Under new rules enacted by Congress in 1997 and other
guidance recently released by the United States Treasury, foreign tax credits
will not be allowed for withholding taxes imposed in respect of certain
short-term or hedged positions in securities or in respect of arrangements in
which a United States Holder's expected economic profit, after non-United States
taxes, is insubstantial. United States Holders should consult their own tax
advisors regarding the availability of foreign tax credits and the treatment of
Additional Amounts in light of their particular circumstances.
A holder or beneficial owner of Notes that is, with respect to the United
States, a foreign corporation or a nonresident alien individual (a "Non-United
States Holder") generally will not be subject to United States federal income or
withholding tax on interest income or Additional Amounts earned in respect of
Notes, unless such income is effectively connected with the conduct by the
Non-United States Holder of a trade or business in the United States.
Taxation of Dispositions
Upon the sale, exchange, retirement (including a redemption by the Company)
or other disposition of a Note, a United States Holder generally will recognize
capital gain or loss equal to the difference between the amount realized on the
sale, exchange, redemption or other disposition (except to the extent such
amount is attributable to accrued interest, which will be treated as such) and
such Holder's adjusted tax basis in the Note. A United States Holder's adjusted
tax basis in a Note generally will equal the cost of such Note to such holder.
Such capital gain or loss will be long-term capital gain or loss if, at the time
of the disposition, the United States Holder's holding period in the Note is
more than one year. The distinction between capital gain or loss and ordinary
income or loss is important for purposes of the limitations on a United States
Holder's ability to offset capital losses against ordinary income and because
United States Holders that are individuals may be entitled to a preferential
rate on long-term capital gains. Long-term capital gain realized by a United
States Holder that is an individual generally is subject to a maximum rate of 20
percent in respect of property held for more than one year.
A Non-United States Holder of Notes will not be subject to United States
federal income or withholding tax on gain realized on the sale or other
disposition of Notes unless (i) such gain is effectively connected with the
conduct by the Non-United States Holder of a trade or business in the United
States or (ii) in the case of gain realized by an individual Non-United States
Holder, the Non-United States Holder is present in the United States for 183
days or more in the taxable year of the sale and certain other conditions are
met.
Tax Considerations Relating to CPOs or GDSs
Taxation of Dividends
U.S. Tax Considerations
Cash dividends paid with respect to the Shares represented by GDSs or CPOs,
to the extent paid out of the Company's current or accumulated earnings and
profits, as determined for United States tax purposes, generally will be
includible in the gross income of a United States Holder as ordinary income on
the day on which the dividends are received by the CPO Trustee and will not be
eligible for the dividends received deduction allowed to corporations. Dividends
paid in pesos will be included in the income of a United States Holder in a U.S.
dollar amount calculated in general by reference to the exchange rate in effect
on the day they
55
are received by the CPO Trustee. United States holders should consult their own
tax advisors regarding the treatment of foreign currency gain or loss, if any,
on any pesos that are converted into U.S. dollars on a date subsequent to the
date of receipt by the CPO Trustee. Dividends generally will constitute foreign
source "passive income" or, in the case of certain United States holders,
"financial services income" for United States foreign tax credits purposes.
Distributions to Holders of additional Shares with respect to their GDSs or
CPOs that are made as part of a pro rata distribution to all shareholders of the
Company generally will not be subject to United States federal income tax.
A Non-United States Holder of CPOs or GDSs generally will not be subject to
United States federal income or withholding tax on dividends received on CPOs or
GDSs, unless such income is effectively connected with the conduct by the
Non-United States Holder of a trade or business in the United States.
Mexican Tax Considerations
There is no Mexican withholding or other tax levied on Foreign Holders of
the Shares, CPOs or GDSs, on dividends paid, either in cash or any other form,
by the Company.
Taxation of Capital Gains
U.S. Tax Considerations
Upon the sale, exchange or other disposition of GDSs or CPOs, a United
States Holder generally will recognize gain or loss in an amount equal to the
difference between the amount realized on the disposition of such GDSs or CPOs
and such United States Holder's tax basis in the GDSs or CPOs. Such gain or loss
recognized by such United States Holder generally will be long-term capital gain
or loss if the United States Holder has held the GDS or CPO for more than one
year at the time of the disposition. The distinction between capital gain or
loss and ordinary income or loss is important for purposes of the limitations on
a United States Holder's ability to offset capital losses against ordinary
income and because United States Holders that are individuals may be entitled to
a preferential tax rate on long-term capital gains. Long-term capital gain
realized by a United States Holder that is an individual generally is subject to
a maximum rate of 20 percent in respect of property held for more than one year.
Deposits and withdrawals of CPOs by United States Holders in exchange for
GDSs will not result in the realization of gain or loss for United States
federal income tax purposes.
A Non-United States Holder of CPOs or GDSs will not be subject to United
States federal income or withholding tax on gain realized on the sale of CPOs or
GDSs, unless (i) such gain is effectively connected with the conduct by the
Non-United States Holder of a trade or business in the United States or (ii) in
the case of gain realized by an individual Non-U.S. Holder, the Non-United
States Holder is present in the United States for 183 days or more in the
taxable year of the sale and certain other conditions are met.
Mexican Tax Considerations
Gain on the sale or other disposition of GDSs by Foreign Holders will not
be subject to Mexican tax. Deposits of CPOs in exchange for GDSs and withdrawals
of CPOs in exchange for GDSs will not give rise to any Mexican tax or transfer
duties.
56
Provided the Ministry of Finance determines that CPOs are held by the
investing public at large, gains from the sale of CPOs carried out by Foreign
Holders through the Mexican Stock Exchange or any other stock exchange or
securities market in Mexico or abroad that is recognized by the Ministry of
Finance will generally be exempt from Mexican taxes. If, however, the Ministry
of Finance withdraws such determination, sales of CPOs by Foreign Holders will
be subject to Mexican federal withholding at a rate of 20% of the gross sales
price, unless (i) the determination of the Ministry of Finance was in effect at
the time of purchase of the CPOs being sold, in which case there will be no
Mexican federal withholding tax or (ii) the seller is a resident of a qualifying
country (including, among others, the United States), appoints a representative
in Mexico for income tax purposes related to the sale and elects to pay Mexican
federal income tax at a rate of 30% of the gain on the sale.
Under the Tax Treaty, gains of a United States Holder that is eligible for
benefits under the Tax Treaty on the disposition of CPOs generally will not be
subject to Mexican tax, unless such gains are attributable to a permanent
establishment or fixed base of such United States Holder in Mexico. Gains of
Non-United States Holders eligible for benefits under a treaty to which Mexico
is a party may be exempt (in whole or in part) from Mexican tax under such
treaty.
United States Backup Withholding and Information Reporting
A United States Holder of Notes, CPOs or GDSs may, under certain
circumstances, be subject to "backup withholding" at the rate of 31% with
respect to certain payments to such United States Holder, such as dividends or
interest paid by the Company or the proceeds of a sale or disposition of Notes,
CPOs or GDSs, unless such holder (i) is a corporation or comes within certain
exempt categories, and demonstrates this fact when so required, or (ii) provides
a correct taxpayer identification number, certifies that it is not subject to
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. Any amount withheld under these rules will be allowed
as a refund or credit against the holder's United States federal income tax
liability provided the required information is furnished to the Internal Revenue
Service. While Non-United States Holders generally are exempt from backup
withholding, a Non-United States Holder may, in certain circumstances, be
required to comply with certain information and identification procedures in
order to prove this exemption.
Other Mexican Taxes
There are no inheritance, gift, succession or value added taxes applicable
to the ownership, transfer, exchange or disposition of GDSs or CPOs by Foreign
Holders, although gratuitous transfers of CPOs may, in certain circumstances,
cause a Mexican federal tax to be imposed upon the recipient. There are no
Mexican stamp, issue, registration or similar taxes or duties payable by holders
of GDSs or CPOs.
Item 8. Selected Financial Data
The following table presents selected consolidated financial information
for each of the periods indicated. The selected consolidated financial
information set forth below should be read in conjunction with, and is qualified
in its entirety by reference to, the Company's Consolidated Financial
Statements, and the notes thereto, included elsewhere herein.
The Company's Consolidated Financial Statements have been prepared in
accordance with Mexican GAAP, which differs in certain respects from U.S. GAAP.
Note 16 to the Consolidated Financial Statements provides a description of the
principal differences between Mexican GAAP and U.S. GAAP as they relate to the
Company and a reconciliation to U.S. GAAP of net income (loss) and stockholders'
equity.
The Company's financial statements were prepared giving effect to Bulletin
B-10 and Bulletin B-12 issued by the Mexican Institute of Public Accountants.
Bulletin B-10 is designed to provide for the
57
recognition of certain effects of inflation by requiring the Company generally
to restate non-monetary assets and liabilities and the components of
stockholders' equity using the National Consumer Price Index (the "NCPI") and to
record gains or losses in purchasing power from holding monetary liabilities or
assets. Bulletin B-12 requires that the statement of changes in financial
position reflect changes from the restated historical balance sheet to the
current balance sheet. Pursuant to Mexican GAAP, the selected consolidated
financial information set forth below, and all data in the Consolidated
Financial Statements, have been restated in constant pesos as of December 31,
1998.
The effect of the inflation accounting principles described above has not
been reversed in the reconciliation to U.S. GAAP. See Note 16 to the
Consolidated Financial Statements.
Year ended December 31, U.S.$
1994 1995 1996 1997 1998 1998 (1)
---- ---- ---- ---- ---- --------
(millions of constant Ps. as of December 31, 1998 purchasing power, except
per share data and percentages)
Income Statement Data:
Mexican GAAP
Merchandise, service and other revenues(2) 5,491.3 4,228.7 5,869.2 7,566.6 8,924.8 901.4
Cost of merchandise sold and services (2) 3,505.6 2,104.4 3,581.8 4,571.6 5,427.0 548.1
Gross profit 1,985.7 2,124.3 2,287.4 2,995.0 3,497.8 353.3
Administrative and selling expenses 1,248.5 1,194.4 1,498.7 1,787.2 2,361.5 238.5
Other expenses (income) 19.1
Depreciation and amortization 69.4 100.7 113.1 182.3 342.7 34.6
Operating income 648.7 829.2 675.6 1,025.5 793.6 80.2
Comprehensive financing income (expense)-net (59.0) (225.0) 150.3 (133.0) (473.7) (47.8)
Income before income taxes and employees' 589.7 604.2 825.9 892.5 319.9 32.3
Taxes and employees' statutory profit sharing 94.6 75.2 127.0 109.1 107.1 10.8
Extraordinary item (22.2) (153.3)
Consolidated net income (3) 517.3 529.0 852.2 783.4 212.8 21.5
Income of minority stockholders 14.9 19.3 4.0 0.4
Income of majority stockholders 517.3 529.0 837.3 764.1 208.8 21.1
Earnings per share (4) 0.14 0.15 0.23 0.22 0.06 0.01
Earnings per CPO (4) 0.43 0.44 0.70 0.65 0.18 0.02
Weighted average shares outstanding
(in millions) (4) 3,591.0 3,591.0 3,595.6 3,553.6 3,574.7 3,574.7
Weighted average CPOs outstanding
(in millions) (4) 1,197.0 1,197.0 1,198.5 1,184.5 1,191.6 1,191.6
U.S. GAAP
Sales and money transfer services 3,995.7 3,738.8 4,956.6 6,056.9 7,382.9 745.7
Interest earned from customer credit operations 1,544.8 1,463.5 1,231.2 1,634.7 1,978.9 199.9
Operating income 845.5 1,354.1 1,147.4 1,014.9 1,434.4 144.9
Income before income taxes and employees'
statutory profit sharing 556.2 558.8 763.2 516.2 615.9 62.2
Net income
(132.1) 272.7 652.8 278.6 262.6 26.5
Basic earnings (loss) per share (4)
(0.04) 0.08 0.18 0.08 0.07 0.01
Basic weighted average shares outstanding
(in millions) (4) 3,518.0 3,628.0 3,595.5 3,553.6 3,574.7 3,574.7
58
Year ended December 31, U.S.$
1994 1995 1996 1997 1998 1998 (1)
---- ---- ---- ---- ---- --------
(millions of constant Ps. as of December 31, 1998 purchasing power, except
per share data and percentages)
Balance Sheet Data:
Mexican GAAP
Accounts receivable due from customers-Net(5) 1,402.3 1,644.4 2,354.1 1,572.7 1,240.8 125.3
Accounts receivable due from related
parties-Net 798.7 991.0 234.6 169.0 204.9 20.7
Inventories
1,377.4 1,449.7 1,549.5 2,279.4 2,140.4 216.2
Total current assets
3,992.6 4,286.2 4,636.5 4,989.9 5,476.7 553.1
Property, machinery and equipment-Net
623.7 739.5 837.0 1,807.0 2,144.7 216.6
Total assets
5,115.6 5,534.2 7,536.7 9,188.7 9,854.8 995.3
Total current liabilities
1,760.3 1,873.7 2,216.9 3,852.3 3,528.1 356.3
Long-term debt
192.6 126.4 1,178.9 986.4 2,465.9 249.1
Majority stockholders' equity
1,931.7 2,253.4 4,126.7 4,247.5 3,652.6 368.9
U.S. GAAP
Accounts receivable due from customers-Net
1,402.3 1,644.4 2,354.1 2,605.8 2,541.0 256.6
Inventories
1,377.4 1,449.7 1,549.5 2,247.2 2,140.4 216.2
Total assets
4,794.7 5,268.4 6,396.9 8,936.0 9,500.1 959.5
Short-term debt
1,679.6 1,873.7 852.5 2,808.3 1,244.0 125.6
Long-term debt
79.8 1,082.9 956.1 3,428.5 346.3
Majority stockholders' equity
1,520.8 1,533.4 776.2 945.3 306.9 31.0
Other Financial Data:
Mexican GAAP
Gross margin(6) 36.2% 50.2% 39.0% 39.6% 39.2% 39.2%
Operating income margin(7) 11.8% 19.6% 11.5% 13.6% 8.9% 8.9%
Capital expenditures
249.0 438.4 337.3 932.3 607.5 61.4
Stores open at period end
354 400 521 680 819 82.7
Number of open installment accounts
586,528 532,452 889,921 948,054 668,772 668,772
Store space (square meters)
179,031 227,654 308,058 423,557 529,535 529,535
Net sales per square meter
29.32 20.52 18.53 16.97 16.70 1.69
- ----------------
(1) The U.S. dollar amounts represent the peso amounts as of December 31, 1998,
expressed as of December 31, 1998 purchasing power, translated at an
exchange rate of Ps. 9.901 per U.S. dollar, the Noon Buying Rate on
December 31, 1998. These transactions should not be considered as
representations that the peso amounts actually represent such U.S. dollar
amount, or could be converted into U.S. dollars at the rates indicated or
at any other rate.
(2) Includes for all periods the effects of a change in the method used by the
Company in accounting for installment sales and certain reclassifications
made by the Company to show all the revenues and costs associated with the
installment sales program within merchandise, services and other revenue
and cost of merchandise sold and services to allow a better matching of
revenues with the costs needed to produce them. Also includes for all
periods the effects of a reclassification of the Company's equity in Casa
as part of merchandise, services and other revenue to allow a better
matching of such revenue with the amortization of goodwill of such
investment. See Item 9, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Accounting for Installment Sales" and
"--Investment in Casa."
(3) Reflects an extraordinary item in 1994 relating to the utilizing of tax
loss carryforwards of Ps.18.7 million, respectively. Also reflects other
income in 1995 relating to Ps. 29.5 million equity in income in Servicio
Mexicano de Entregas and other income in 1996 relating to the sale of
Servicio Mexicano de Entregas to American Rapid Corporation (Western Union)
for Ps. 129.3 million. There were no extraordinary items or other income in
1997.
(4) After giving effect to the ten to one split of the Company's stock, which
was authorized on August 15, 1997. As a result of the split, each GDS
currently represents 20 CPOs; while each CPO continues to represent two B
Shares and one L Share.
(5) Accounts receivables from retail customers are shown net of the unearned
installment sales markup. See Item 9, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Accounting for
Installment Sales."
(6) Gross margin is calculated by dividing gross profit by merchandise,
services and other revenues. (7) Operating income margin is calculated by
dividing operating income by merchandise, services and other revenues.
59
Exchange Rates
The following table sets forth, for the periods indicated, the period-end,
average, high and low, Noon Buying Rate, expressed in pesos per U.S. dollar,
published by the Federal Reserve Bank of New York. The rates have not been
restated in constant currency units. All amounts are stated in pesos.
Free Market Rate(1)
----------------------------------------------
Period
Year Ended December 31, High Low Average(2) End
- ---------------------- ---- --- --------- ------
1994 Ps.5.75 Ps.3.11 Ps.3.48 Ps.5.00
1995 8.05 5.27 6.53 7.74
1996 8.05 7.33 7.63 7.88
1997 8.41 7.71 7.96 8.07
1998 10.63 8.04 9.15 9.90
1999 (As for June 22, 1999) 10.60 9.24 9.70 9.36
- -------------------
(1) Source: Federal Reserve Bank of New York.
(2) Average of end-of-month rates.
Dividends
The declaration, amount and payment of dividends are determined by majority
vote of the holders of the A Shares and generally, but not necessarily, on the
recommendation of the Board of Directors. Dividends are declared in the first
quarter of each fiscal year based on the audited financial statements of the
Company for the preceding fiscal year. The amount of any such dividend would
depend on, among other things, the Company's operating results, financial
condition and capital requirements, and on general business conditions.
Under the Company's Amended and Restated By-laws and the Mexican Companies
Law, the gross profits of the Company are applied as follows:
At the annual ordinary general meeting of the shareholders of the Company,
the Board of Directors submits the financial statements of the Company for the
previous fiscal year, together with the report thereon by the Board, to the
holders of A Shares for approval. Once the financial statements have been
approved by the holders of A Shares, the holders of A and B Shares determine the
allocation of the Company's net profits for the preceding year. They are
required by law to allocate at least 5% of such net profits to a legal reserve,
which is not available for distribution except as a stock dividend until the
amount of the legal reserve equals 20% of the Company's historical capital stock
(before the effect of restatement). Thereafter, the holders of A and B Shares
may determine and allocate a certain percentage of net profits to any general or
special reserve, including a reserve for open-market purchases of the Company's
shares. The remainder of net profits is available for distribution in the form
of dividends to the shareholders provided that the holders of A and B Shares
resolve favorably for the distribution of dividends. Holders of B Shares and L
Shares (directly or through CPOs) have equal rights, on a per share basis, to
dividends.
On March 17, 1999, the Company declared a dividend of Ps.0.0975
(US$0.00975) per CPO or Ps.0.0325 (US$0.00325) per A Share, and B and L Share
not deposited in the CPO trust. This dividend, which was paid on March 31, 1999,
was equal to 55.4% of net profit for the year ended December 31, 1998 or
approximately Ps.115.7 million. The dividend payment per GDS in 1995 was
Ps.0.249 (US$0.0249), in 1996 was Ps.0.458 (US$0.0458) per GDS, in 1997 was
Ps.0.951 (US$0.0951) per GDS, in 1998 was Ps.0.828 (US$0.0828).
Under the terms of the indenture for the 12 3/4 Guaranteed Senior Notes due
2001 and the US$150 million unsecured guaranteed revolving credit agreement with
Citibank as agent, the Company is subject to certain financial covenants that
directly or indirectly restrict the payment of dividends. See Item 9,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
60
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere herein. This Annual Report
includes "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Annual Report, including, without
limitation, statements of the Company's and management's expectations,
intentions, plans and beliefs, including those contained in or implied by Item
1, "Description of Business," or Item 9, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Notes to Consolidated
Financial Statements, are forward-looking statements, and are dependent on
certain events, risks and uncertainties that may be outside the Company's
control. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations include
certain governmental, economic and political factors in the United Mexican
States and in other countries where the Company has operations, including,
without limitation, factors related to the devaluation of the Peso, inflation
and interest rates and exchange control policies, the Company's dependence on
installment sales, the availability of funding for future financing needs,
certain potential adverse effects of competition, the Company's dependence on
key personnel, potentially more restrictive consumer protection laws in Mexico,
certain factors related to the Company's related party transactions and the risk
factors described from time to time in the Company's other documents and reports
filed with the Securities and Exchange Commission. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by such factors.
Basis of Presentation
The Consolidated Financial Statements have been prepared on a consolidated
basis to reflect the financial condition and the results of operations of Grupo
Elektra, S.A. de C.V. and its consolidated subsidiaries.
Mexican GAAP requires that the Consolidated Financial Statements recognize
certain effects of inflation. Financial information for all periods in the
Consolidated Financial Statements has been restated in constant Pesos as of
December 31, 1998 in accordance with the Third Amendment to Bulletin B-10 of the
Mexican Institute of Accountants. Effective January 1, 1997, the Fifth Amendment
to Bulletin B-10 modified the method of restatement of nonmonetary assets for
the effects of inflation. Accordingly, the percentage increases discussed herein
are adjusted for the general effects of inflation to permit period-to-period
comparisons. See Note 2 to the Company's Consolidated Financial Statements.
In accordance with Bulletin B-10, the Company is required to report, as a
gain or loss on its net monetary position, the effects of inflation on its
monetary assets and liabilities. This net amount reflects the gain or loss
arising from holding a net liability or asset monetary position in an
inflationary period, since over time a monetary liability can be settled for
units of less purchasing power whereas a monetary asset decreases in value in
real terms. The Company's operations continually generate monetary assets
(primarily from its installment sales) while the Company's accounts payable and
borrowings to finance capital expenditures result in monetary liabilities.
Accounting for Installment Sales
The Company sells products through its Elektra stores for cash and for
credit under an installment sales program. Revenues from Elektra installment
sales are accounted for as follows: (i) an amount equivalent to the cash price
of the merchandise is recorded as merchandise revenue at the time of sale; (ii)
the installment sales mark-up, as described below, is recorded as merchandise
revenue ratably over the life of the installment sale contract; (iii) stated
interest, if any, is recorded as merchandise revenue ratably over the life of
the installment sale
61
contract; and (iv) penalty interest on past due installment sales payments is
recorded as merchandise revenue when paid.
The cost to the customer of merchandise purchased under the Elektra
installment sales program includes a cash price component plus a mark-up
component and, in certain circumstances, a stated interest component depending
on the Company's current marketing objectives. If stated interest is used, the
Company discloses such applicable interest rate; however, the implicit cost of
financing due to the mark-up is not disclosed to the customer. Mark-up and, if
included, stated interest represent the costs associated with providing the
installment sales program plus a profit margin. Such costs include the cost of
financing, the cost of credit investigations and the cost of collection and
legal process relating to bad debts.
As of January 1, 1997 the Company modified the presentation of its
statement of income to show all the revenues and costs associated with the
installment sales program within merchandise, services and other revenue and
cost of merchandise sold and services, thus allowing a better matching of
revenues with the costs needed to produce them. Accordingly, the cash price,
mark-up, stated interest and penalty interest on installment sales are part of
merchandise services and other revenues as well as operating income. Also, parts
of the revenues from installment sales are subject to a loss on monetary
position from account receivable. Cost of sales includes the cost of merchandise
sold, the cost of financing the installment sales program and the allowance for
doubtful accounts, less any monetary gain on financing of receivables.
When an installment sale is made for products at the Company's Elektra or
Hecali stores, the customer signs a promissory note in the amount of the
equivalent cash price of the merchandise plus the mark-up and, if applicable,
stated interest minus any down payment. At the time of the sale, the equivalent
cash price of the merchandise is booked as merchandise revenues, and an account
receivable is generated in the amount of the installment sale equivalent cash
price minus any down payment. During the term of the installment sale contract,
each weekly payment is applied proportionately among the equivalent cash price,
the mark-up and the stated interest. The portion of the weekly payment allocated
to the equivalent cash price is applied to reduce the account receivable and has
no effect on the Company's income statement. The portions allocated to mark-up
and stated interest are recognized as merchandise revenues, in each case ratably
over the term of the installment. If the customer is late with a weekly payment,
the mark-up and stated interest portion of the missed payment are recognized as
merchandise revenues and the account receivable is increased by both amounts.
Penalty interest is charged on amounts that are past due and is recognized when
paid as merchandise revenues. Payments are applied first to any penalty interest
balances. In summary, if a customer is current on the repayment of an
installment sale, the account receivable associated with such installment sale
includes only the equivalent cash price portion of the sale (minus the down
payment) and is amortized weekly in equal amounts during the term of the
installment sale. To the extent that a customer is late on the payments of an
installment sale, the account receivable associated with such installment sale
includes the remaining equivalent cash price portion (minus the down payment)
and any accrued but unpaid mark-up and stated interest.
During 1995, most installment sales were made on a 53-week term. Beginning
in the second half of 1996, and continuing until December 31, 1998, most of the
Company's Elektra installment sales were made on a 39-week term. During 1995,
the Company adjusted its marketing strategy to eliminate the stated interest
component in all of its installment sales terms.
Reserve for Doubtful Accounts
Since the fourth quarter of 1996 the Company has recorded a provision for
doubtful accounts at the time of any installment sale in an amount equal to five
percent of the cash price of the merchandise sold, plus the markup, less the
down payment, if any. During 1995 and for the first three-quarters of 1996, this
provision was calculated on the basis of the cash price only. Normally, the
Company requires a ten percent down payment for all installment sales but waives
such requirement from time to time for marketing purposes.
62
After giving effect to write-offs, the reserve for doubtful accounts was
6.4% of account receivable due from retail customers as of December 31, 1998 and
3.2% of accounts receivable due from retail customers as of December 31, 1997.
Management believes that its reserve policy for its installment sales program is
sufficient to cover potential write-offs. The Company continues collection
efforts after writing off accounts receivable.
Effects of the Peso Devaluation and Inflation
General
The Mexican government's decision on December 20, 1994 to increase
significantly the range within which Mexican pesos would be exchanged for U.S.
dollars and to subsequently permit the peso to float freely against the U.S.
dollar caused a significant devaluation of the peso against the U.S. dollar. The
devaluation produced a number of adverse effects on the Mexican economy that, in
turn, adversely affected the financial condition and results of operations of
the Company. Interest rates in Mexico increased substantially, thus increasing
the cost of borrowing. In addition, the Mexican government has, in response to
the adverse effects of the devaluation, established an economic recovery program
that is designed to tighten the money supply, increase domestic savings,
discourage consumption and reduce public spending generally. Foreign investment
in Mexico by private sources has also been reduced significantly.
For the year ended December 31, 1998, the Mexican economy moderately
improved, with gross domestic product growth of 4.5% compared to 1997.
Nonetheless, economic crises in developing countries other than Mexico did have
a negative impact on Mexico. Interest rates on 28-day Cetes in 1998 increased to
an average of 24.6%, compared to an average of 19.8% in 1997, and the peso
devalued 23% to Ps.9.90 per US$1.00 at the end of 1998 from Ps.8.07 per US$1.00
at the end of 1997. Inflation increased to a rate of 18.6% from a rate of 15.7%
in 1997. For a description of the Company's accounting policies related to
devaluation and inflation, see Note 2 to the Consolidated Financial Statements.
Revenues
The Company has increased prices to substantially offset the increases in
the cost of merchandise sold and operating expenses. However, the rather
significant levels of inflation in Mexico have reduced the purchasing power of
the Company's customers. As a result, many customers have begun to select lower
priced merchandise or have delayed purchasing decisions. The Company's gross
profits do not vary materially within each of the Company's consumer electronics
product lines, although the Company does realize a greater gross profit from the
sale of Elektra brand products, which typically are the lowest priced
merchandise in the consumer electronics product line.
Depreciation and Amortization Expense
Prior to 1997, Bulletin B-10 required property, machinery, equipment and
other non-monetary assets, such as the Company's stores and inventory, to be
restated based upon replacement cost or the NCPI; the Company generally restated
based on replacement cost. Commencing 1997, the Fifth Amendment to Bulletin B-10
requires non-monetary assets of Mexican origin to be restated based on the NCPI
but permits those of non-Mexican origin to be restated based on the devaluation
of the Mexican peso against the relevant foreign currency after applying the
inflation factor of the relevant foreign country. See Note 2a to the
Consolidated Financial Statements.
Comprehensive Financing Cost
As of December 31, 1996, 1997 and 1998, the Company had approximately
US$128.7 million, US$218.6 million and US$241.4 million of monetary liabilities
denominated in U.S. dollars, respectively. Virtually all of such monetary
liabilities represented outstanding indebtedness of the Company for borrowed
63
money. The Company's U.S. dollar-denominated monetary assets as of December 31,
1996, 1997 and 1998 amounted to approximately US$2.0 million, US$19.6 million
and US$30.7 million, respectively. At December 31, 1998, there were also assets
and liabilities denominated in several Latin American currencies, which were
equivalent to US$41.4 million and US$65.5 million, respectively.
Interest expense. Interest on the Company's U.S. dollar-denominated
indebtedness exposes the Company to exchange rate fluctuations, with the peso
cost of interest payments on such indebtedness increasing as the peso's value
declines against the U.S. dollar.
Interest income. Interest income is positively affected by inflation as the
Company receives higher rates of return on its temporary investments, which are
primarily fixed short-term peso deposits in Mexican banks.
Exchange (loss) gain. The Company records a foreign exchange gain or loss
with respect to U.S. dollar-denominated monetary assets or liabilities when the
peso appreciates or depreciates in relation to the U.S. dollar. The Company's
U.S. dollar-denominated monetary liabilities, which principally consist of U.S.
dollar-denominated indebtedness of the Company for borrowed money, substantially
exceed its U.S. dollar-denominated monetary assets, which principally consist of
U.S. dollar bank deposits. As a result, the Company has recorded a foreign
exchange loss during each period in which the peso depreciated in relation to
the U.S. dollar and vice versa.
Gain on monetary position. Gain or loss on monetary position refers to the
gains or losses, due to the effects of inflation, from holding net monetary
liabilities or assets. A gain on monetary position results from holding net
monetary liabilities during periods of inflation, as the purchasing power
represented by nominal peso liabilities declines over time. Accordingly, since
the Company's monetary liabilities exceeded its monetary assets in 1998, 1997
and 1996, the Company recorded a gain on monetary position in those periods,
particularly in 1996 due to relatively high levels of inflation.
Investment in Casa
As of January 1, 1997 the Company modified, for internal purposes, the
presentation of its statement of income to show the income associated with the
Company's investment in Casa, a holding company through which the Controlling
Shareholders of the Company own the controlling interest in TV Azteca and COTSA,
as part of merchandise, service revenue and other in order to emphasize this
item within results of operations and to allow a better matching of such income
with the amortization of goodwill related to such investment.
64
Seasonality of Sales
The Company has historically experienced, and expects to continue to
experience, seasonal fluctuations in sales, reaching highs in the months of May
and December. Such seasonality results from increases in general consumption
associated with Mother's Day and the Christmas season.
Results of Operations
The following table sets forth certain consolidated financial information
of the Company expressed as a percentage of total revenues (merchandise, service
and other revenues) for the three years ended December 31, 1996, 1997 and 1998:
Year Ended December 31,
-------------------------------------
1996 1997 1998
------------- --------------- --------
Merchandise, service and other revenues.......................... 100.0% 100.0% 100%
Cost of merchandise sold and of services......................... (61.0) (60.4) (60.8)
Gross profit..................................................... 39.0 39.6 39.2
Administrative and selling expenses.............................. (25.6) (23.6) (26.5)
Depreciation and amortization.................................... (1.9) (2.4) (3.8)
Operating income................................................. 11.5 13.6 8.9
Comprehensive financing income (expense)......................... 2.6 (1.8) (5.3)
Income before income taxes and employees' statutory profit
sharing........................................................
14.1 11.8 3.6
Consolidated net income.......................................... 14.5 10.4 2.4
65
Year ended December 31, 1998 compared to year ended December 31, 1997.
Total revenues in 1998 increased 17.9%, or P$1,358.2 million, to P$8,924.8
million from P$7,566.6 million in 1997. Merchandise revenues (which includes
mark-up on installment sales and penalty interest) accounted for 98.3% of total
revenues (excluding monetary loss on accounts receivable) in 1998. Merchandise
revenues were realized primarily through Elektra's retail network, with 6.5%
being realized through Hecali's retail network and 0.9% through wholesale sales
to related parties and governmental institutions. Money transfer services
decreased to 3.3% of total revenues (excluding monetary loss on accounts
receivable) in 1998 from 3.6% in 1997. Equity in loss of Casa represented (1.6%)
of total revenues (excluding monetary loss on accounts receivable) in 1998,
instead of a revenue of 2.3% in 1997. Those items were offset by a monetary loss
on accounts receivable, which decreased to 3.3% of total revenues in 1998 from
4.0% of total revenues in 1997.
Merchandise revenues in 1998 increased 23.0% or P$1,656.4 million to
P$6,059.8 million from P$4,814.6 million in 1997. The increase in merchandise
revenues was mainly due to 1.4% increase in same store sales at its Elektra
stores, but offset by a decrease of 2.0% of same-store sales at its Hecali
stores, and the opening of 139 (net) new retail stores (including 39 new stores
in Central and South America), representing a 25% increase in store space. The
slight increase in same store sales reflected the effects of the global economic
turmoil which caused a deceleration of the Mexican economy (interest rates on
28-day Cetes in 1998 increased to an average of 24.6%, compared to an average of
19.8% in 1997, and the peso devalued 23% to Ps.9.93 per U.S. dollar from Ps.8.06
per U.S. dollar, inflation increased to a rate of 18.6% from a rate of 15.7%).
Revenue from electronic money transfer services in 1998 increased 8.7% or P$24.6
million to P$306.5 million from P$281.9 million due to increased competition in
the market. Monetary loss on accounts receivable in 1998 decreased 4.3% or
P$13.1 million to P$290.7 million from P$303.8 million due to a smaller
portfolio of accounts receivable due to the Company's receivables securitization
program. Equity in income of Casa in 1998 decreased by 181.8% or P$325.0 million
to a loss of P$146.3 million from an income of P$178.8 million in 1997 due
primarily to higher exchange losses in Casa direct and indirect subsidiaries.
Of 1998 merchandise revenues, 66.9% were installment sales, as compared to
65.9% in 1997, and the remainder were cash sales. The Company's aggregate
revenue from mark-up on installment sales and penalty interest, which is
included in merchandise, service and other revenues, was P$1,978.9 million and
P$1,634.6 million in 1998 and 1997, respectively. Included in these amounts are
mark-ups on installment sales of P$1,767.5 million and P$1,412.4 million, and
penalty interest of P$211.4 million and P$222.2 million in 1998 and 1997,
respectively. The increase between 1998 and 1997 was primarily due to the
increases in mark-up rates during 1998 and a better performance in credit
portfolio collection, which caused minor penalty interest.
Gross profit as a percentage of total revenues decreased to 39.2% in 1998
from 39.6% in 1997 primarily as a result of the equity in the loss of Casa and a
higher provision for doubtful accounts, offset by higher sales and mark-up,
Excluding mark-up, penalty interest, money transfer services, monetary loss on
receivables and the equity in loss of Casa, gross margin on merchandise revenues
increased to 30.1% in 1998 from 27.8% in 1997 due to better conditions offered
from suppliers, and due to the policy followed during 1998 of charging the
customer with every increase charged by the Company's suppliers. Cost of
merchandise sold increased 18.3% or P$764.5 million to P$4,934.2 million in 1998
from P$4,169.7 million in 1997, as a result of increased unit sales. The repair
provision for extended warranties increased 1,710.3% or P$9.0 million to P$9.5
million in 1998 from P$0.5 million due to an increase of 1701.2% in the sales of
extended warranties.
The provision for doubtful accounts increased 30.6% or Ps.89.9 million, in
1998, from Ps.293.6 million in 1997 to Ps.383.5 million in 1998, due to an
increase of 24.8% in installment sales plus mark-up and an increase of 17.8% in
the receivables charged off during 1998, leaving a net allowance for doubtful
accounts of Ps.82.4 million at December 31, 1998.
Administrative and selling expenses, which includes salaries, rent and
other occupancy costs, advertising costs and sales and collections commissions,
increased 32.1% as a result of the opening of 139 new stores, hiring
66
of new employees, and incurring expenses associated with the beginning of
operations in Peru. As a percentage of total revenues, administrative and
selling expenses increased from 23.6% in 1997 to 26.5% in 1998.
Depreciation and amortization increased 88.0% or P$160.5 million to P$342.7
million in 1998, from P$182.2 million in 1997. This increase was due primarily
to a 53.5% increase in net capital expenditures associated with opening of new
stores and initiating operations in Peru.
Comprehensive financing expense increased 256.2% or P$340.7 million in 1998
to P$473.7 million from P$133.0 million in 1997, due to an increase of 96.7% in
interest expense and an increase of 358.1% in the foreign exchange loss, offset
by an increase of 80.9% in gain on net monetary position, and an increase of
121.3% in interest income. Interest income increased from P$37.0 million in 1997
to P$81.9 million in 1998 as a result of higher investment rates in the Mexican
market. Interest expense increased to P$433.6 million in 1998 from P$220.5
million in 1997, due primarily to the funding of the store expansion program and
major investments in information technology. The foreign exchange loss increased
to P$352.7 million in 1998 from P$77.0 million primarily due to the fact that
the year-end exchange rate of the U.S. dollar for 1998 changed 23.2% and that
the Company's average 1998 dollar liabilities increased compared with the
average 1997 liabilities. Finally, gain on net monetary position increased from
P$127.5 million in 1997 to P$230.7 million in 1998 due to a higher Mexican
inflation rate of 18.6% for 1998, compared with the 15.7% rate for 1997.
Income before taxes and employees' statutory profit sharing decreased 64.2%
or P$572.7 million to P$319.9 million in 1998 from P$892.6 million in 1997.
Provision for income tax and employees' statutory profit sharing decreased
1.8% or P$2.0 million in 1998 to P$107.1 from P$109.1 million in 1997. As a
percentage of pre-tax income, the provision for income tax, asset tax and
employees' statutory profit sharing increased to 33.5% in 1998 from 12.2% in
1997 due mainly to the increase of depreciation and amortization and the equity
in loss of Casa. See Note 13 of the Consolidated Financial Statements.
The Company has several operating subsidiaries with tax loss carryforwards.
Under Mexican tax law, the Company and its subsidiaries may not file
consolidated tax returns except with specific authorization. Tax losses within a
subsidiary offset taxable income only to the extent that taxable profits are
generated by such subsidiary. In 1997 and 1998, the Company was not able to
utilize any tax loss carryforwards.
Income of minority stockholders was P$4.0 million, a decrease of 79.2% from
P$19.3 million in 1997. The income of minority stockholders is related to the
Western Union Transaction and for 1997 and part of 1998, the residual claim of
the minority shareholders in Hecali. See Note 1 of the Company's Consolidated
Financial Statements and Item 1, "Description of Business-Hecali."
Net Income of majority stockholders decreased 72.7% to P$208.7 million in
1998 from P$764.1 in 1997.
Year ended December 31, 1997 compared to year ended December 31, 1996
Total revenues in 1997 increased 28.9%, or Ps.1,697.3 million, to
Ps.$7,566.6 million from Ps.5,869.3 million in 1996. Merchandise revenues (which
includes mark-up on installment sales and penalty interest) accounted for 94.1%
of total revenues (excluding monetary loss on accounts receivable) in 1997.
Merchandise revenues were realized primarily through Elektra's retail network,
with 5.1% being realized through Hecali's retail network and 1.3% through
wholesale sales to related parties and governmental institutions. Money transfer
services decreased to 3.6% of total revenues (excluding monetary loss on
accounts receivable) in 1997 from 4.7% in 1996. Equity in income of Casa
represented 2.3% of total revenues (excluding monetary loss on accounts
receivable) in 1997 and 1996. Those items were offset by a monetary loss on
accounts receivable, which decreased to (4.0%) of total revenues in 1997 from
(7.9%) of total revenues in 1996.
67
Merchandise revenues in 1997 increased 25.9% or P$1,477.0 million to
P$7,187.4 million from P$5,710.4 million in 1996. The increase in merchandise
revenues was mainly due to 8.5% and 1.8% increases in same store sales at its
Elektra and Hecali stores, respectively, and the opening of 159 (net) new retail
stores (including 44 new stores in Central America), representing a 37% increase
in store space. The increase in same store sales reflected primarily the
improvement of the Mexican economy and the effectiveness of the Company's
advertising campaigns. Revenue from electronic money transfer services in 1997
decreased 4.7% or P$14.0 million to P$281.9 million from P$295.9 million due to
increased competition in the market. Monetary loss on accounts receivable in
1997 decreased 34.2% or P$158.1 million to P$303.8 million from P$461.9 million
due to a lower inflation rate in 1997 as compared to 1996 and a smaller
portfolio of accounts receivable due to the Company's receivables securitization
program. Equity in income of Casa in 1997 increased 24.6% or P$35.3 million to
P$178.8 million from P$143.5 million in 1996 due primarily to higher sales of
television advertising.
Of 1997 merchandise revenues, 65.9% were installment sales, as compared to
68.8% in 1996, and the remainder were cash sales. The Company's aggregate
revenue from mark-up on installment sales and penalty interest, which is
included in merchandise, service and other revenues, was P$1,634.6 million and
P$1,231.1 million in 1997 and 1996, respectively. Included in these amounts are
mark-ups on installment sales of P$1,412.4 million and P$1,049.9 million, and
penalty interest of P$222.2 million and P$181.2 million in 1997 and 1996,
respectively. The increases between 1997 and 1996 were primarily due to the
change in the installment sales mix, which in 1997 favored the 39-week term over
the 53-week term that was popular in 1996. The increased popularity of the
39-week term allowed the Company to recognize in 1997 the earned mark-up of
higher installment sales in a shorter period than in 1996.
Gross profit as a percentage of total revenues increased to 39.6% in 1997
from 39.0% in 1996 primarily as a result of higher mark-up, increased penalty
interest and the greater equity in income of Casa. Excluding mark-up, penalty
interest, money transfer services, monetary loss on receivables and the equity
in income of Casa, gross margin on merchandise revenues decreased to 27.8% in
1997 from 29.4% in 1996 due to the slight devaluation of the Mexican peso and
the increase in prices of imported goods from abroad, particularly from Asian
countries. Cost of merchandise sold increased 26.8% or P$881.9 million to
P$4,169.9 million in 1997 from P$3,288.0 million in 1996, as a result of
increased unit sales and the increase in prices of imported goods. During 1997,
a repair provision amounting P$0.5 million was accounted as part of the cost,
and it is calculated as a fixed percentage (30%) of the accrued sales of
extended warranties.
The provision for doubtful accounts increased 57.2% or P$ 106.8 million, in
1997, due to an increase of 20.7% in installment sales plus mark-up and an
increase of 30.2% in the receivables charged off during 1997, leaving a net
allowance for doubtful accounts of P$50.7 million at December 31, 1997.
Administrative and selling expenses, which includes salaries, rent and
other occupancy costs, advertising costs and sales and collections commissions,
increased 19.1% as a result of the opening of 159 new stores, hiring of new
employees, creating an expanded corporate training program, and incurring
expenses associated with the beginning of operations in four countries in
Central America. As a percentage of total revenues, administrative and selling
expenses decreased from 25.6% in 1996 to 23.6% in 1997.
Depreciation and amortization increased 61.2% or P$69.2 million to P$182.3
million in 1997, from P$113.1 million in 1996. This increase was due primarily
to a 276.4% increase in net capital expenditures associated with opening of new
stores and initiating operations abroad.
Comprehensive financing expense was P$133.0 million in 1997, instead of
comprehensive income of P$150.3 million as in 1996, due to a decrease of 67.5%
in interest income, an increase of 298.9% in interest expense and a decrease of
24.3% in the gain on net monetary position. Interest income decreased from
P$113.9 million in 1996 to P$37.0 million as a result of lower investment rates
in the Mexican market. Interest expense increased to P$220.5 million in 1997
from P$55.3 million in 1996, due primarily to the funding of the store expansion
program and major investments in information technology. The foreign exchange
loss increased 0.3% primarily
68
due to the fact that the year-end exchange rate of the U.S. dollar for 1997
changed only 2.2% and that the Company's average 1997 dollar liabilities
remained almost equal to the average 1996 liabilities. Finally, gain on net
monetary position decreased from P$168.4 million in 1996 to P$127.5 million in
1997 due to a lower Mexican inflation rate of 15.7% for 1997, compared with the
27.7% rate for 1996.
Income before taxes and employees' statutory profit sharing increased 8.1%
or P$66.6 million to P$892.5 million in 1997 from P$825.9 million in 1996.
Provision for income tax and employees' statutory profit sharing decreased
14.1% or P$18.0 million in 1997 to Ps.109.1 million from Ps.127.1 million in
1996. As a percentage of pre-tax income, the provision for income tax, asset tax
and employees' statutory profit sharing decreased to 12.2% in 1997 from 15.4% in
1996 due mainly to a tax reserve of Ps.34.3 million recorded by the Company in
1996 for tax assessments from the Mexican Government. See Note 14 of the
Consolidated Financial Statements.
The Company has several operating subsidiaries with tax loss carryforwards.
Under Mexican tax law, the Company and its subsidiaries may not file
consolidated tax returns except with specific authorization. Tax losses within a
subsidiary offset taxable income only to the extent that taxable profits are
generated by such subsidiary. In 1996 and 1997, the Company was not able to
utilize any tax loss carryforwards.
Income of minority stockholders was P$19.3 million, an increase of 29.2%
from P$14.9 million in 1996. The income of minority stockholders is related to
the Western Union Transaction and the residual claim of the minority
shareholders in Hecali. See Note 1 of the Company's Consolidated Financial
Statements and Item 1, "Description of Business-Hecali."
Net Income of majority stockholders decreased 8.7% to P$764.1 million in
1997 from P$837.3 in 1996.
Liquidity and Capital Resources
Liquidity
The Company's net working capital increased to P$1,948.6 million as of
December 31, 1998 as compared to P$1,137.6 million as of December 31, 1997. The
increase in the Company's working capital during 1998 was principally
attributable to a P$811.1 million decrease in short-term bank loans and other
short-term borrowings used to finance the Company's domestic and international
expansion. In light of the capital expenditures required for the Company's
expansion program, in December 1997 the Company entered into a five year US$150
million revolving credit agreement with Citibank as agent described below, and
as of December 31, 1998 the Company had drawn down US$85 million under this
facility.
The Company's cash and cash equivalents were P$1,197.7 million as of
December 31, 1998, as compared to P$485.7 million as of December 31, 1997. The
Company funds its operations through cash flow from operations and borrowings.
Cash flow provided by operations in 1998 was P$1,006.2 million, as compared to
P$216.5 million in 1997 and P$469.1 million in 1996.
Historically, the Company has satisfied certain of its working capital
requirements through the financing of accounts receivable. Net receivables
balances of P$1,240.8 million and P$1,572.7 million were on the Company's books
as of December 31, 1998 and 1997, respectively.
As of December 31, 1998, the Company had uncommitted revolving credit
facilities of P$1,740.8 million. Also, as of December 31,1998, the Company had
no uncommitted capital lease financing facilities, whereby the Company has lines
of credit available for future acquisitions of equipment by means of a financial
69
lease. The unused availability under the uncommitted facilities is subject to
termination by the financial institutions at any time.
On December 2, 1997, the Company entered into a five year US$150 million
committed unsecured guaranteed revolving credit agreement with Citibank as agent
(the "Citibank Credit Agreement"). As of June 22, 1999, the Company had borrowed
the maximum amount available under the Citibank Credit Agreement.
On January 12, 1996, the Company sold its interests in a joint venture
engaged in money transfer services to a wholly owned subsidiary of Western Union
for US$20 million and also received a P$37.2 million dividend, representing its
share of all undistributed net profits from the joint venture. In addition, the
Company and Western Union entered into an agreement to provide for the continued
service by the Company as an agent for Western Union's Will Call Service in
Mexico. Also, pursuant to the agreement, the Company received US$142 million,
which was deposited in escrow. Under the escrow arrangements, the Company has
caused the money deposited in escrow to be invested in the capital stock of
certain of the Company's subsidiaries, which in turn applied the funds to repay
indebtedness of the Company and accounts payable to suppliers, to make a portion
of the Company's cash investment in Casa and for general corporate purposes. See
Item 1, "Description of Business--Elektra's Operations in Mexico--Money Transfer
Business."
In May 1996, the Company completed an offering of US$100 million aggregate
principal amount of its 12 3/4% Guaranteed Senior Notes due 2001 (the "Notes"),
resulting in net proceeds to the Company of US$97.1 million. The Company
converted the net proceeds into Pesos and used a majority of the net proceeds to
repay a substantial portion of its then existing indebtedness.
Elektrafin securitized a portion of its accounts receivable portfolio
(P$831.2 million, P$308.4 million, P$793.0 million and P$200.0 million (nominal
figures), on July 9, 1997, December 3, 1997, April 15, 1998 and December 17,
1998, respectively) through a trust (Nacional Financiera, S.N.C.) and received
an aggregate of P$739.3 million in 1997 and P$926.1 million in 1998 (nominal
figures) in cash. This securitization consists of the sale of a portion of the
receivables portfolio of Elektrafin to the public, and has been qualified as
"mAA" by Duff and Phelps and "AA" by Fitch Investor Services. Elektrafin will
remain responsible for the collection of the relevant accounts receivable.
The ability of the Company to make scheduled semiannual interest payments
on, and retire the principal at maturity of, the Notes, the Citibank Credit
Agreement and its other indebtedness will be dependent on the Company's future
performance. The Company's performance is subject to financial, economic and
other factors affecting the Company, many of which are beyond its control. In
addition, the Indenture governing the Notes and the Citibank Credit Agreement
impose significant operating and financial restrictions on the Company. Such
restrictions will affect, and in many respects limit or prohibit, among other
things, the ability of the Company to pay dividends, incur indebtedness, create
liens and to apply the proceeds from certain asset sales.
The Company's total debt at December 31, 1998 matures as follows:
Year ended December 31, (in millions)
-----------------------
1999....................................... US$ 122.5
2000....................................... US$ 67.8
2001....................................... US$ 94.3
2002 and thereafter........................ US$ 86.4
In 1996, 1997 and 1998, the Company advanced an aggregate of P$40.9
million, P$2.2 million, and P$23.4 million, respectively, to affiliates.
Outstanding advances to affiliates, including accrued interest, were P$90.7
million, P$9.5 million and P$33.1 million at December 31, 1996, 1997 and 1998,
respectively. Certain
70
advances were financed by short-term bank loans. As of December 31, 1998, the
Company also had accounts receivable of P$171.9 million that arose in the
ordinary course of business with affiliates.
Capital Expenditures
Capital expenditures for the years ended December 31, 1996, 1997 and 1998
were P$337.3 million, P$932.3 million and P$607.5 million, respectively. Capital
expenditures for store openings and improvements were P$72.6 million in 1996,
P$280.5 million in 1997 and P$115.6 million in 1998. Other capital expenditures
for distribution centers, data processing equipment and trucks totaled P$264.7
million in 1996, P$651.8 million in 1997 and P$491.9 million in 1998. The
Company's capital expenditures are expected to be approximately P$500 million
for 1999, including the costs of opening new stores, expanding into other Latin
American countries, expanding existing stores, enlarging its distribution and
satellite networks, as well as investments in computer hardware and software.
Although the Company anticipates that cash flow from operations will remain
positive, the Company will continue to require financing for its expansion plan
and the anticipated growth of its receivables portfolio under its installment
sales program. The Company expects that, absent a material adverse change in the
Mexican economy, such financing will be available, but there can be no assurance
that it will be available on favorable terms.
Other Items
Income Tax
The Mexican corporate income tax rate for the period from 1996 through 1998
was 34%. Income tax expense as a percentage of income before taxes, and
employees' statutory profit sharing was 13.7% in 1996, 11.1% in 1997 and 31.9%
in 1998.
Taxable income normally differs significantly from accounting income due to
(i) the effect of the deduction for tax purposes of inventory purchases, offset
by the non-allowable deduction of cost of sales, (ii) differences with respect
to the amounts recorded to reflect the effects of inflation and (iii) certain
nondeductible expenses.
Asset Tax
An asset tax equivalent to an alternate minimum tax is payable at the rate
of 1.8% since 1995 on the net amount of certain assets and liabilities, but only
when the amount of asset tax exceeds the income tax due. Asset tax paid may be
recovered in the following ten years, to the extent income tax exceeds asset tax
in those years. The total amount paid for such asset taxes by the Company's
subsidiaries in the years of 1996, 1997 and 1998 was Ps.11.9 million, Ps.7.9
million and Ps.2.5 million, respectively, representing 1.4%, 0.9% and 0.8% of
the Company's income before taxes, and statutory profit sharing, respectively.
U.S. GAAP Reconciliation
Accounting principles generally accepted in Mexico differ in certain
important respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of consolidated net income, expressed in pesos of December 31,
1998 purchasing power for each of the three years in the period ended December
31, 1998, and the determination of consolidated stockholders' equity at December
31, 1997 and 1998, also expressed in pesos of December 31, 1998 purchasing
power, to the extent summarized in Note 16 to the Consolidated Financial
Statements. As discussed in Note 16(c) to the Company's Consolidated Financial
Statements, the U.S. GAAP stockholders' equity and net income amounts as of and
for the years ended December 31, 1996 and 1997 have
71
been restated. Pursuant to Mexican GAAP, the Company's financial statements
recognize certain effects of inflation in accordance with Bulletin B-10 and
Bulletin B-12; these effects have not been reversed in the reconciliation to
U.S. GAAP.
Sales and money transfer services under U.S. GAAP was Ps.4,956.6 million,
Ps.6,056.9 million and Ps.7,382.9 million for the fiscal years 1996, 1997 and
1998, respectively, compared with merchandise, service revenue and other under
Mexican GAAP of Ps.5,869.2 million, Ps.7,566.6 million and Ps.8,924.8 million
for the comparable periods. Operating income under U.S. GAAP as of December 31,
1996, 1997 and 1998 was Ps.1,147.4 million, Ps.1,014.9 million and Ps.1,434.4
million, respectively, compared to Ps.675.6 million, Ps.1,025.5 million and
Ps.793.6 million, respectively, under Mexican GAAP.
The principal difference between merchandise, service revenues and other
under Mexican GAAP and sales and money transfer services under U.S. GAAP relates
to the exclusion from sales and money transfer services of (i) the mark-up on
installment sales and stated and penalty interest, which are included in
operating income under U.S. GAAP in the line item interest earned from consumer
credit operations, (ii) equity in income in Casa, which is included in equity in
income of affiliated company and (iii) loss on monetary position from accounts
receivable, which is included in other financing expense. The principal
differences between Mexican GAAP and U.S. GAAP that affect the Company's
operating income relate to the inclusion, for purposes of calculating operating
income under Mexican GAAP but not U.S. GAAP, of (i) loss on monetary position
from accounts receivable, (ii) equity in the income of Casa, and (iii) the
amortization of goodwill in respect of the acquisition of Casa.
Net income under U.S. GAAP was P$652.8 million (P$0.18 per share), P$278.6
million (P$0.08 per share) and P$325.2 million (or P$0.09 per share) for the
fiscal years 1996, 1997 and 1998, respectively, compared with income of majority
stockholders under Mexican GAAP of P$837.3 million (P$0.23 per share), P$764.1
million (P$0.21 per share) and P$208.7 million (P$0.06 per share) for the
comparable periods. Majority stockholders' equity under U.S. GAAP as of December
31, 1997 and 1998 was P$945.3 million and P$425.2 million, respectively, as
compared to P$4,045.2 million, P$4,247.5 million and P$3,652.6 million,
respectively, under Mexican GAAP.
The principal differences between Mexican GAAP and U.S. GAAP that affect
the Company's net income relate to the treatment of the following items: (i)
stock options granted to employees; (ii) acquisition of the interest in Casa;
and (iii) deferred income taxes. The principal differences between Mexican GAAP
and U.S. GAAP that affect the Company's majority stockholders' equity relate to
the treatment of the following items: (i) deferred income; (ii) deferred income
taxes; (iii) goodwill relating to the acquisition of the interest in Casa; and
(iv) goodwill in connection with other acquisitions.
YEAR 2000 ISSUE
The Company has conducted a comprehensive review of its computer systems to
identify areas that require Year 2000 ("Y2K") compliance. Y2K compliance refers
to the inability of certain computer systems to recognize dates commencing on
January 1, 2000. Such inability has the potential to materially adversely affect
the operation of computer systems, and consequently, may have a material adverse
effect on the Company's financial condition and results of operations because
the Company relies extensively on computer technology to manage its financial
information and serve its customers. The Company believes that its computer
systems are able to process accurately time sensitive data beyond the year 1999.
However, there can be no assurance that the systems of other companies on which
the Company may rely will be timely converted or that the failure to convert by
another company would not have an adverse effect on the Company.
The Company has developed various plans focused on Y2K compliance, and has
taken steps, using specialized personnel, to adjust the principal computer
applications and systems affecting its operations, such as those related to the
control of customers, production, distribution, treasury functions and
communications. The Company expects all such applications and systems to be
fully tested or otherwise validated as Y2K compliant by December 1999. In
addition, the Company has contacted its principal suppliers, financial
institutions and other third parties to understand the extent to which such
parties are addressing Y2K issues and to determine to what effect, if any, the
Company's operations might be adversely affected by Y2K issues as a result of
its relations with such parties. The Company has received responses from
approximately 80% of its principal suppliers and approximately 85% of its
principal financial institutions indicating that such parties are Y2K compliant
or expect to be Y2K compliant on a timely basis. Although the Company has not
been notified that any known third party's problem will not be resolved, the
Company has obtained limited information regarding such parties and has no
assurance of receiving additional information concerning the Y2K readiness of
third parties.
As of the date hereof, approximately 90% of the Company's information
technology systems and non-information technology systems have been fully tested
or otherwise validated as Y2K compliant. Of the systems tested thus far, certain
minor compliance problems were encountered with respect to the Company's point
of sale applications in its Hecali stores. The Company is addressing these
problems by converting these applications into Y2K compliant applications, a
process which the Company expects to complete in September 1999. Furthermore,
the Company has recently implemented the SAP R/3 system, which is expected to
resolve potential mission critical problems related to Y2K issues with respect
to treasury functions, including accounting and accounts payable functions.
The cost of Y2K compliance, which as of December 31, 1998 amounted to
US$301,000, has been charged against income for the year. The Company estimates
that the total cost will amount to US$735,000, of which approximately
U.S.$450,000 has been spent as of the date hereof and the remainder will be
spent prior to year end. The Company's budget for Y2K expenditures consists
predominantly of expenditures for the upgrading or replacement of hardware and
software systems. The Company does not anticipate that these amounts will have a
material adverse effect on the Company's financial condition or operating
results. The Company's Y2K costs have been, and are expected to be, funded with
cash flow from operating activities. No significant information systems project
has been deferred because of the Year 2000 effort.
An experienced consulting firm has been engaged to provide objective
project management and technical expertise to assist the Company in the
completion of its Year 2000 project. Approximately U.S.$230,000 of the Company's
Y2K compliance costs relate to the engagement of such consultants.
72
Y2K compliance depends, among other things, on the Company and relevant
third parties detecting and correcting all their significant implications in a
timely manner. Although all critical systems over which the Company has control
are expected to be Y2K compliant and tested before the Year 2000, the Company
has identified certain systems most at risk of non-compliance with Year 2000
issues, including CRM (a personal identification number management system used
in the provision of beeper services) and Centriphone (an automated telephone
calling system used in telemarketing and collection activities). The Company is
currently in the process of developing internal Y2K compliant systems capable of
providing such functions.
In addition, the Company has identified certain areas of concern in a worst
possible scenario. These areas include a systems failure beyond the control of
the Company, including a loss of electricity from its electricity supplier,
thereby impeding the ability of the Company to operate its stores and conduct
its business. Such a failure could lead to lost revenues, increased operating
costs, a loss of customers and other business interruptions of a material
nature. In addition, such a failure could lead to potential claims of
mismanagement, misrepresentation and breach of contract. As of the date hereof,
the Company is in the process of assessing these risks and uncertainties and
finalizing appropriate contingency plans and procedures in an attempt to
minimize the effects of the worst case scenario. The Company expects to finalize
these contingency plans in September 1999.
The Company expects to have completed all stages of its Y2K compliance
project, including the testing of all systems and the establishment of
appropriate contingency plans, in December 1999. Upon the completion of the Y2K
compliance project, Management expects that the Company's business and
operations will not be materially adversely affected as a result of identified
Year 2000 issues. Due to the general uncertainty inherent in evaluating Year
2000 issues and the inability to anticipate all potential risks associated with
such issues, including those associated with third parties, however, the Company
cannot ensure its ability to resolve on a timely and cost-effective manner all
difficulties that may arise in connection with Year 2000 issues and that may
affect the Company's operations, business and exposure to third party liability.
This discussion regarding Year 2000 issues above contains forward-looking
statements, including, without limitation, statements relating to the Company's
business plans, strategies, objectives, expectations, intentions and resources,
made pursuant to the "safe harbor" provisions of the Private Litigation Reform
Act of 1995. The Company cautions all readers that forward-looking statements
contained in this Year 2000 discussion are based on certain assumptions that may
vary from actual results. In particular, the dates on which the Company
anticipates the completion and implementation of Year 2000 compliant systems and
contingency plans are based on the best estimates of Company Management. These
estimates were derived by utilizing numerous assumptions of future events,
including the continued availability of resources, third-party Year 2000
compliance modification plans and other factors. As a result, the Company cannot
ensure that the estimates and objectives described herein will be achieved, or
that all stages of the Year 2000 Program will be implemented on schedule. In
addition, for the same reasons, the Company cannot ensure that the costs
associated with the Year 2000 Program will remain at levels described herein.
Item 9A. Qualitative and Quantitative Disclosure about Market Risks
The Company is exposed to market risk, principally interest rate and
foreign exchange risk. Interest earned on the Company's cash and cash
equivalents as well as interest paid on its debt and lease obligations, are
sensitive to changes in interest rates. A portion of the Company's long-term
debt is principally variable rate debt, however the Company believes its
potential exposure to interest rate is not material to the Company's financial
position or the results of its operations.
The Company is exposed to foreign currency exchange risk through its debt
denominated in U.S. dollars. As mentioned in Note 3 to the Consolidated
Financial Statements, at December 31, 1998 the Company and its subsidiaries had
dollar denominated liabilities of US$306.9 million, which are due as follows:
1999 US$144.8 million
2000 34.1 million
2001 94.0 million
2002 34.0 million
---- ----------------
Total US$306.9 million
The cash flow required to service the liabilities is generated primarily in
Mexican pesos. Using the year end 1998 Noon Buying Rate (Ps. 9.601 per U.S.
dollar), the cash flow in Mexican pesos to pay the liabilities due in 1999 would
have been Ps. 1,433.4 million. A devaluation of the Mexican peso to Ps. 10.0 per
U.S. dollar would require cash flow of Ps. 1,447.8 million to pay the
liabilities due in 1999. If the Mexican peso devalued to Ps. 10.5 per U.S.
dollar, the cash flow in Mexican pesos to pay the liabilities due in 1999 would
be Ps. 1,520.2 million.
The Company continuously evaluates its exposure in US dollars, including an
assessment of the current and future economic environment. The Company has not
entered into any derivative financial instruments to hedge this exposure, and
believes its potential exposure is not material
73
to the Company's financial position or its results of operations.
Item 10. Directors and Executive Officers
The following sets forth-certain information regarding the directors and
executive officers of the Company and its subsidiaries.
Directors
A Board of Directors composed of 16 members and their alternates is elected
at the Company's ordinary meeting of stockholders. Fourteen of the members are
elected by the holders of Class A Shares and Class B Shares voting as a single
class. The remaining two members are appointed by the holders of Class L Shares.
The following table lists the current directors of the Company (and their
alternates), their position, their principal occupation and their year appointed
to the board.
Name Principal Occupation Director Since
- ---- -------------------- --------------
Appointed by A and B Stockholders
Ricardo B. Salinas Pliego.................... Chairman of the Board and President of the 1993
Company
Hugo Salinas Price........................... Honorary President of the Company 1993
Carlos F. Autrey Maza........................ Vice Chairman of the Board of Directors of 1993
Grupo Financiero Inverlat, S.A. de C.V.
Pedro Padilla Longoria....................... Chief Executive Officer of the Company 1993
Fernando Sada Malacara....................... Board Member of Grupo Cydsa, S.A. de C.V. 1993
Elisa Salinas Gomez.......................... Director of Production, Azteca Digital 1993
Guillermo Salinas Pliego..................... President of Dataflux, S.A. de C.V. 1993
Ricardo Salinas Price........................ Private Investor 1993
Roberto Salinas Price........................ Private Investor 1993
Roberto Servitje Achutegui................... Vice-president of Grupo Industrial Bimbo, S.A. 1993
de C.V.
Roberto Salinas Leon......................... Director of Economic Strategy of TV Azteca 1993
Juan Diego Gutierrez Cortina................. Director General, Grupo Gutsa, S.A. de C.V. 1995
Luis J. Echarte.............................. Chief Financial Officer of the Company 1995
Gustavo Vega Vazquez......................... Vice-president of Corporate Services 1997
Appointed by L Stockholders
As of December 31, 1998 and June 30, 1999, the two seats appointed by Class
L stockholders were vacant, pending the appointment by vote in the corresponding
special stockholders meeting.
Alternate Members Appointed by A and B
Stockholders
Arturo Ramos Ochoa........................... Vice-president of Retail operations 1995
Javier Sarro Cortina......................... Vice-president of Telecommunications 1995
Gabriel Roqueni Rello........................ Secretary of the Board 1995
Statutory Auditor
Francisco Javier Soni O...................... Statutory Auditor 1993
74
Hugo Salinas Price, Roberto Salinas Price, Ricardo Salinas Price and Elisa
Salinas Gomez are the children of Hugo Salinas Rocha. Ricardo Salinas Pliego and
Guillermo Salinas Pliego are the sons of Hugo Salinas Price. Roberto Salinas
Leon is the son of Roberto Salinas Price. Fernando Sada Malacara is Ricardo
Salinas Pliego's father-in-law.
Statutory Auditor
In addition to the Board of Directors, the Company's by-laws provide for a
statutory auditor elected at the ordinary general meeting of shareholders and,
if determined at such meeting, an alternate statutory auditor. Under Mexican
law, the duties of statutory auditors include, among other things, the
examination of the operations, books, records and any other documents of a
company and the presentation of a report of such examination at the annual
ordinary general meeting of shareholders. The statutory auditor is required to
attend all Board of Directors and shareholder meetings of the Company. The
Company currently has one statutory auditor, Francisco Javier Soni, a partner of
PricewaterhouseCoopers.
Committee on Related Party Transactions
Historically, the Company has engaged in a variety of transactions with
certain of its affiliates, including entities owned or controlled by the
Controlling Shareholders, and may do so in the future. To assure that an
independent review of such transactions is conducted on behalf of the Company,
the Board of Directors established the Committee on Related Party Transactions
at the October 1995 board meeting. The members of this committee are Roberto
Servitje Achutegui, Eduardo Creel Cobian and Juan Diego Gutierrez Cortina. No
member of this committee may be employed by the Company or affiliated or
associated with the Controlling Shareholders or any executive officer of the
Company. This committee reviews certain proposed transactions between the
Company and certain entities affiliated with the Controlling Shareholders to
assure that all such transactions are related to the Company's business and are
consummated on terms that are at least as favorable to the Company as terms that
would be obtainable at the time for a comparable transaction or series of
similar transactions in arm's-length dealings with an unrelated third person.
Executive Officers
The following table lists each senior executive officer of the Company, his
position at December 31, 1998 and years of service as an executive officer (with
the Company or its predecessor entities):
Years as
Name Position Executive Officer
- ---- -------- -----------------
Ricardo B. Salinas Pliego................ Chairman of the Board and President 16
Pedro Padilla Longoria................... Chief Executive Officer 8
Gustavo Vega V........................... Vice President of Operations 13
Luis J. Echarte.......................... Chief Financial Officer 3
Arturo Ramos............................. Vice-president of Retail Operations 5
Javier Sarro Cortina..................... Vice-president of Telecommunications 2
Pablo Collado............................ Vice-president of Financial Services 2
Item 11. Compensation of Directors and Officers
For the year ended December 31, 1998, the aggregate compensation paid by
the Company to its executive officers (a total of 45 persons in senior and
middle level management) for services in all capacities was approximately
Ps.46.0 million (approximately US$4.6 million). The aggregate compensation paid
by the Company to all members of the Board of Directors during the same period
was approximately Ps.100,000 (approximately US$10,000). In 1994, the Company
established a non-contributory pension plan for its
75
employees, including its officers. During 1996, 1997 and 1998, the charges to
income related to such pension plan and seniority premiums were approximately
Ps.4.0 million, Ps.6.6 million and Ps.5.2 million, respectively. As of December
31, 1998, the liabilities related to seniority premiums and such pension plan
were Ps.25.2 million.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
On February 28, 1994, the Company's Board of Directors adopted an executive
stock option plan (the "Stock Option Plan") through which store managers and all
personnel senior to store managers employed prior to January 1, 1994 were
granted options to purchase CPOs at the price of P$2.50 per CPO. The Stock
Option Plan also allows employees whose employment date was during 1994 or 1995
to receive options beginning in 1996 and 1997, respectively, at an exercise
price of P$3.25 (1994 employees) or P$4.00 (1995 employees) per CPO. The Stock
Option Plan authorizes the sale of up to a total of 70 million CPOs (after
giving effect to the ten to one split of the Company's stock authorized on
August 15, 1997). Options granted under the Stock Option Plan are exercisable
ratably over each year in the five-year period after the date on which they were
granted as long as the rate of increase in the Company's net profits over the
previous year is more than 25%. If the Company fails to meet this performance
target in any given year, the options that would have been exercisable in such
year are eligible to be exercised in the following year and the five-year term
of options is extended one year.
Under Mexican GAAP, the granting of these options has no effect on the
Company's results of operations, cash flow or financial condition. Under US
GAAP, because their exercise price was below fair market value on the date that
they were granted, the granting of these options gives rise to non-cash
compensation expense in 1996 and 1997 of approximately P$131.9 million and
P$264.9 million, respectively, and a non-cash compensation revenue of Ps.89.5
million, in 1998. The revenue originated during 1998 was due to a decrease in
the market value of the Elektra CPO, which fell from P$14.00 at December 31,
1997 to P$5.08 at December 31, 1998. The Company expects that the amount of
non-cash compensation expense arising in future periods under U.S. GAAP from the
granting of these options also will be relatively large.
As of April 23, 1999, options to acquire 70,311,187 CPOs at prices of
P$2.50, P$3.25 or P$4.00 per CPO (depending on the relevant employment date) had
been granted to 457 executives and key employees, of which 28,027,432 have been
exercised. See Note 11 to the Company's Consolidated Financial Statements.
Set forth below are the number of CPOs, the exercise prices and the
expiration dates of all options outstanding as of June 15, 1998:
Number of Exercise Prices Current
CPOs Granted --------------- Expiration Dates
------------ ------------------
55,017,437 P$2.50 February 28, 1999
218,750 P$3.20 February 28, 1999
3,700,000 P$2.50 February 28, 2000
1,150,000 P$3.25 February 28, 2000
8,550,000 P$2.50 February 28, 2001
1,169,532 P$4.00 February 28, 2001
----------
Total 62,911,187
Item 13. Interest of Management in Certain Transactions
Historically, the Company has engaged in a variety of transactions with its
affiliates, including entities owned or controlled by the Controlling
Shareholders. See Note 8 to the Consolidated Financial Statements. The Company
anticipates that it will continue to engage in transactions with affiliates. The
Company has agreed in
76
the Indenture and in the Citibank Credit Agreement to certain restrictions on
transactions with affiliates. Set out below is a description of certain
transactions between the Company and its affiliates.
Loans to Affiliates
From time to time, the Company has made loans to its affiliates. As of
December 31, 1998, there were no material loans to affiliates outstanding.
Purchase of Casa "N" Shares
On March 26, 1996, Casa consummated a transaction with the Company,
pursuant to which the Company purchased and Casa issued 260,536 shares of
non-voting Series "N" capital stock of Casa ("Casa `N' Shares"), representing
35.8% of the total outstanding capital stock of Casa. As further consideration
for the purchase of the Casa "N" Shares, the shareholders of Casa caused Azteca
Holdings to enter into an exchange agreement (the "Exchange Agreement") with the
Company on March 25, 1996, pursuant to which Azteca Holdings agreed to exchange
169,869,472 TV Azteca "N" Shares, representing, at December 31, 1998, 9.3% of
the outstanding capital stock of TV Azteca, and 43,509,512 COTSA "N" Shares,
representing, at December 31, 1998 14.2% of the outstanding capital stock of
COTSA, for all of the Casa "N" Shares held by the Company. See Item 1,
"Description of Business--Elektra's Operations in Mexico--Investment in Casa."
The Company may make such exchange at any time prior to the tenth anniversary of
the date of the Exchange Agreement.
TV Azteca Advertising Agreement
During 1994, Television Azteca, S.A. de C.V., a subsidiary of TV Azteca,
provided certain advertising and media products and services to the Company in
exchange for cash, services or electronics products. In connection with the
investment in Casa, the shareholders of Casa caused Television Azteca, S.A. de
C.V. and Azteca Holdings de Television del Centro, S.A. de C.V. (collectively,
"Television Azteca") to enter into a Television Advertising Time Agreement with
the Company on March 25, 1996 (the "Advertising Time Agreement"). Under the
Advertising Time Agreement, Television Azteca has agreed to air not less than
300 commercial spots per week for a period of 10 years, each spot with
20-seconds average duration, totaling 5,200 minutes each year, in otherwise
unsold airtime. In exchange for such television advertising time, the Company
has agreed to pay Television Azteca US$1.5 million each year, payable in advance
each year. See Item 1, "Description of Business--Elektra's Operations in
Mexico--Merchandising and Marketing--Advertising." The Advertising Time
Agreement may not be terminated by Television Azteca. However, the Advertising
Time Agreement may be terminated by the Company at any time upon at least 90
days' notice. The Company's rights under the agreement may be transferred to
third parties.
PART II
Item 14. Description of Securities to be Registered
None
PART III
Item 15. Defaults upon Senior Securities
None
Item 16. Changes in Securities and Changes in Security for Registered Securities
None
77
PART IV
Item 17. Financial Statements
The Company has responded to Item 18 in lieu of this item.
Item 18. Financial Statements
Reference is made to Item 19(a) for a list of all financial statements
filed as part of this Annual Report.
Item 19. Financial Statements and Exhibits
(a) List of Financial Statements
78
Consolidated Financial Statements for Grupo Elektra, S.A. de C.V. and
Subsidiaries
Page
----
Report of Independent Accountants F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-5
Consolidated Statements of Income for the Years Ended December 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, F-7
1997 and 1998
Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 1996, 1997 F-8
and 1998
Notes to Consolidated Financial Statements F-9
Financial Statements for Elektra, S.A. de C.V. (subsidiary of Grupo
Elektra, S.A de C.V.)
Page
----
Report of Independent Accountants F-44
Balance Sheets as of December 31, 1997 and 1998 F-46
Statements of Income for the Years Ended December 31, 1996, 1997 and 1998 F-47
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998 F-48
Statements of Changes in Financial Position for the Years Ended December 31, 1996, 1997 and 1998 F-49
Notes to the Financial Statements F-50
Financial Statements for Elektrafin, S.A. de C.V. (subsidiary of Grupo Elektra,
S.A de C.V.)
Page
----
Report of Independent Accountants F-68
Balance Sheets as of December 31, 1997 and 1998 F-70
Statements of Income for the Years Ended December 31, 1996, 1997 and 1998 F-71
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998 F-72
Statements of Changes in Financial Position for the Years Ended December 31, 1996, 1997 and 1998 F-73
Notes to the Financial Statements F-74
Consolidated Financial Statements for Comunicaciones Avanzadas, S.A. de
C.V. and Subsidiaries
Page
----
Report of Independent Accountants F-91
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-93
Consolidated Statements of Income for the Years Ended December 31, 1996, 1997 and 1998 F-94
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, F-95
1997 and 1998
Consolidated Statements of Changes in Financial Position for the Years Ended
December 31, 1996, 1997 and 1998 F-96
Notes to the Consolidated Financial Statements F-97
The registrant agrees to furnish to the Securities and Exchange Commission,
upon request, copies of any instruments that define the rights of holders of
long-term debt of the registrant that are not filed as exhibits to this annual
report.
79
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report be signed on its
behalf by the undersigned, thereunto duly authorized, in Mexico City, Mexico,
D.F.
June 30, 1999 GRUPO ELEKTRA, S.A. DE C.V.
ELEKTRA, S.A. de C.V.
ELEKTRAFIN, S.A. de C.V.
/s/ LUIS J. ECHARTE
--------------------------
Luis J. Echarte
Vice President and
Chief Financial Officer
80
GRUPO ELEKTRA, S. A. DE C. V.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
F-1
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
INDEX
Contents Page
Report of Independent Accountants F-3
Consolidated financial statements:
Balance sheets F-5
Statements of income F-6
Statements of changes in stockholders' equity F-7
Statements of changes in financial position F-8
Notes to the consolidated financial statements F-9
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 28, 1999, except for Note 15 to the financial statements,
which is dated March 10, 1999.
To the Stockholders of
Grupo Elektra, S. A. de C. V.
1. We have audited the consolidated balance sheets of Grupo Elektra, S. A. de
C. V. and subsidiaries (collectively the "Company") as of December 31, 1997
and 1998, and the related consolidated statements of income, of changes in
stockholders' equity and of changes in financial position for each of the
three years in the period ended December 31, 1998, all expressed in
constant pesos of December 31, 1998 purchasing power. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Mexico, which are similar in all material respects with
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
generally accepted accounting principles. 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.
2. In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial
position of Grupo Elektra, S. A. de C. V. and subsidiaries at December 31,
1997 and 1998, and the results of their operations, changes in
stockholders' equity and changes in their financial position for each of
the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in Mexico.
3. Accounting principles generally accepted in Mexico differ in certain
important respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of consolidated net income, expressed in pesos of
December 31, 1998 purchasing power for each of the three years in the
period ended December 31, 1998 and the determination of consolidated
stockholders' equity at December 31, 1997 and 1998 also expressed in pesos
of December 31, 1998 purchasing power to the extent summarized in Note 16
to the consolidated financial statements.
PricewaterhouseCoopers
Javier Soni O.
F-4
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED BALANCE SHEETS
Thousands of Mexican pesos of December 31, 1998
purchasing power
December 31,
--------------------------------------------------
1997 1998
---- ------------------------------
Thousands
of U.S.
dollars (*)
-----------
Assets
CURRENT ASSETS:
Cash and cash equivalents Ps 485,685 Ps1,197,754 US$120,620
----------- ----------- ----------
Accounts receivable:
Customers - Net (Note 4) 1,572,734 1,240,819 124,956
Amounts due from related parties - Net (Note 8) 168,981 204,973 20,642
Recoverable taxes 169,708 128,935 12,984
Other receivables 200,174 154,186 15,528
----------- ----------- ----------
2,111,597 1,728,913 174,110
----------- ----------- ----------
Guarantee on securitized receivables (Note 4) 91,069 337,687 34,007
----------- ----------- ----------
Prepaid expenses 22,071 71,880 7,238
----------- ----------- ----------
Inventories (Note 5) 2,279,492 2,140,448 215,554
----------- ----------- ----------
Total current assets 4,989,914 5,476,682 551,529
PROPERTY, FURNITURE, EQUIPMENT AND
INVESTMENT IN STORES - Net (Note 6) 1,807,030 2,144,689 215,981
GOODWILL, less accumulated amortization of Ps219,933 in
1997 and Ps286,909 in 1998 1,080,245 1,170,977 117,923
INVESTMENT IN SHARES (Note 7) 1,073,708 795,892 80,150
OTHER ASSETS 237,864 266,593 26,847
----------- ----------- ----------
Ps9,188,761 Ps9,854,833 US$992,430
=========== =========== ==========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES WITH FINANCIAL COST:
Bank loans and other credits (Note 9) Ps1,840,473 Ps1,212,443 US$122,099
Capitalized lease obligations (Note 10) 90,954 31,580 3,180
----------- ----------- ----------
1,931,427 1,244,023 125,279
----------- ----------- ----------
CURRENT LIABILITIES WITHOUT FINANCIAL COST:
Suppliers 1,490,878 1,739,838 175,210
Other accounts payable and accrued expenses 392,256 514,048 51,767
Income and asset tax payable and employees' statutory
profit sharing payable 37,782 30,142 3,036
----------- ----------- ----------
1,920,916 2,284,028 230,013
----------- ----------- ----------
Total current liabilities 3,852,343 3,528,051 355,292
----------- ----------- ----------
LONG-TERM LIABILITIES WITH FINANCIAL COST:
Bank loans and long-term notes (Note 9) 956,115 2,459,856 247,720
Capitalized lease obligations (Note 10) 30,208 6,111 615
----------- ----------- ----------
986,323 2,465,967 248,335
----------- ----------- ----------
LABOR OBLIGATIONS 20,818 25,203 2,538
----------- ----------- ----------
UNEARNED INCOME FOR EXTENDED WARRANTIES 97,261 9,795
----------- ----------- ----------
4,859,484 6,116,482 615,960
----------- ----------- ----------
STOCKHOLDERS' EQUITY (Note 11):
Capital stock 485,460 485,789 48,921
Paid-in capital 1,747,346 1,578,489 158,962
Retained earnings 2,534,387 2,631,533 265,008
Legal reserve 75,798 75,798 7,633
Reserve for repurchase of shares 322,128 258,367 26,019
Loss from holding nonmonetary assets (917,592) (1,383,244) (139,299)
Effect of translation of foreign subsidiaries 5,844 588
----------- ----------- ----------
Majority stockholders 4,247,527 3,652,576 367,832
Minority stockholders 81,750 85,775 8,638
----------- ----------- ----------
Total stockholders' equity 4,329,277 3,738,351 376,470
----------- ----------- ----------
CONTINGENCY (Note 14)
Ps9,188,761 Ps9,854,833 US$992,430
=========== =========== ==========
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31,
1998 purchasing power translated at the exchange rate of Ps9.93 per U.S.
dollar and are not covered by the Report of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED STATEMENTS OF INCOME
Thousands of Mexican pesos of December 31, 1998
purchasing power (except per share amounts)
Year ended December 31,
-----------------------------------------------------------------
1996 1997 1998
---- ---- ------------------------------
Thousands
of U.S.
dollars (*)
-----------
Merchandise, services and other revenues (Note 2b.) Ps 5,869,288 Ps 7,566,634 Ps 8,924,821 US$ 898,773
Cost of merchandise sold and of services (Note 2b.) 3,581,884 4,571,603 5,427,048 546,530
------------ ------------- ------------- ------------
Gross profit 2,287,404 2,995,031 3,497,773 352,243
------------ ------------- ------------- ------------
Administrative and selling expenses 1,498,706 1,787,266 2,361,448 237,809
Depreciation and amortization 113,077 182,260 342,716 34,514
------------ ------------- ------------- ------------
1,611,783 1,969,526 2,704,164 272,323
------------ ------------- ------------- ------------
Operating income 675,621 1,025,505 793,609 79,920
------------ ------------- ------------- ------------
Comprehensive financing cost:
Interest income (expense) - Net 58,673 (183,473) (351,719) (35,420)
Foreign exchange losses - Net (76,760) (76,994) (352,699) (35,518)
Gain on net monetary position 168,413 127,484 230,678 23,230
------------ ------------- ------------- ------------
150,326 (132,983) (473,740) (47,708)
------------ ------------- ------------- ------------
Income before taxes and employees' statutory profit
sharing and extraordinary item 825,947 892,522 319,869 32,212
Taxes and employees' statutory profit sharing (Note 12) 127,087 109,089 107,087 10,784
------------ ------------- ------------- ------------
Income before extraordinary item 698,860 783,433 212,782 21,428
Gain on sale of shares of affiliated company 153,344
------------ ------------- ------------- ------------
Consolidated net income Ps 852,204 Ps 783,433 Ps 212,782 US$ 21,428
============ ============= ============= ============
Income of minority stockholders Ps 14,934 Ps 19,290 Ps 4,025 US$ 405
============ ============= ============= ============
Income of majority stockholders Ps 837,270 Ps 764,143 Ps 208,757 US$ 21,023
============ ============= ============= ============
Basic and dilutive earnings per share (Note 2n.) Ps 0.23 Ps 0.22 Ps 0.06 US$ 0.006
============ ============= ============= ============
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31,
1998 purchasing power translated at the exchange rate of Ps9.93 per U.S.
dollar and are not covered by the Report of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Thousands of Mexican pesos of December 31, 1998
purchasing power
Number of
common Authorized but
shares Capital unsubscribed Paid-in Retained
outstanding stock stock Total capital earnings
----------- ------- -------------- ----- ------- --------
Balances at January 1, 1996 3,589,657,490 Ps548,313 (Ps66,202) Ps482,111 Ps290,503 Ps1,711,305
Increase in reserve for repurchase of
shares (543,799)
Issuance of capital stock 12,925,140 653 653 18,473
Payment of dividends (88,973)
Contribution of minority stockholders 1,484,200
Repurchase of shares (25,506,660)
Consolidated net income 837,270
Loss from holding nonmonetary assets
------------- --------- -------- --------- ----------- -----------
Balances at December 31, 1996 3,577,075,970 548,313 (65,549) 482,764 1,793,176 1,915,803
Reduction of paid-in capital resulting from
repurchase of shares of subsidiaries (135,768)
Issuance of capital stock 63,770,280 2,696 2,696 89,938
Payment of dividends (145,559)
Repurchase of shares (59,148,320)
Consolidated net income 764,143
Loss from holding nonmonetary assets
------------- --------- -------- --------- ----------- -----------
Balances at December 31, 1997 3,581,697,930 548,313 (62,853) 485,460 1,747,346 2,534,387
Payment of dividends (111,611)
Issuance of capital stock 8,937,849 329 329 4,521
Repurchase of shares (24,714,000)
Reduction of paid-in capital resulting from
repurchase of shares of subsidiaries (173,378)
Consolidated net income 208,757
Effect of translation of foreign subsidiaries
Loss from holding nonmonetary assets
------------- --------- -------- --------- ----------- -----------
Balances at December 31, 1998 3,565,921,779 Ps548,313 (Ps62,524) Ps485,789 Ps1,578,489 Ps2,631,533
============= ========= ======== ========= =========== ===========
Reserve Loss Effect of
for from holding translation
Legal repurchase nonmonetary of foreign Minority
reserve of shares assets subsidiaries stockholders Total
------- --------- ------------ ------------ ------------ -----
Balances at January 1, 1996 Ps75,798 Ps20,226 (Ps 326,574) Ps2,253,369
Increase in reserve for repurchase of
shares 543,799
Issuance of capital stock 19,126
Payment of dividends (88,973)
Contribution of minority stockholders Ps67,234 1,551,434
Repurchase of shares (216,936) (216,936)
Consolidated net income 14,934 852,204
Loss from holding nonmonetary assets (242,837) (687) (243,524)
-------- --------- ----------- ------- -------- -----------
Balances at December 31, 1996 75,798 347,089 (569,411) 81,481 4,126,700
Reduction of paid-in capital resulting from
repurchase of shares of subsidiaries (135,768)
Issuance of capital stock 92,634
Payment of dividends (145,559)
Repurchase of shares (24,961) (24,961)
Consolidated net income 19,290 783,433
Loss from holding nonmonetary assets (348,181) (19,021) (367,202)
-------- --------- ----------- ------- -------- -----------
Balances at December 31, 1997 75,798 322,128 (917,592) 81,750 4,329,277
Payment of dividends (111,611)
Issuance of capital stock 4,850
Repurchase of shares (63,761) (63,761)
Reduction of paid-in capital resulting from
repurchase of shares of subsidiaries (173,378)
Consolidated net income 4,025 212,782
Effect of translation of foreign subsidiaries Ps5,844 5,844
Loss from holding nonmonetary assets
(465,652) (465,652)
-------- --------- ----------- ------- -------- -----------
Balances at December 31, 1998 Ps75,798 Ps258,367 (Ps1,383,244) Ps5,844 Ps85,775 Ps3,738,351
======== ========= =========== ======= ======== ===========
Year ended December 31,
1996 1997 1998
---- ---- ----
Current year net income (loss):
Parent Company Ps 9,579 (Ps26,215) 59,683
Subsidiaries 827,691 790,358 149,074
--------- --------- -------
Ps837,270 Ps764,143 208,757
========= ========= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Thousands of Mexican pesos of December 31, 1998
purchasing power
Year ended December 31,
----------------------------------------------------------
1996 1997 1998
---- ---- ---------------------------
Thousands
of U.S.
dollars (*)
-----------
Operations:
Income before extraordinary item Ps 698,860 Ps 783,433 Ps 212,782 US$ 21,428
Charges (credits) to income not affecting
resources:
Depreciation and amortization 147,400 228,007 388,463 39,120
Allowance for doubtful accounts 186,823 293,594 383,497 38,620
Accruals for seniority premiums and pension plan 4,005 6,618 5,235 528
Equity in (income) loss of affiliated company (143,490) (178,787) 146,263 14,729
Net change in accounts receivable, inventories,
other assets, accounts payable, related parties
and unaccrued income for extended warranty (424,488) (916,392) (130,031) (13,095)
----------- ----------- ------------ ------------
Resources provided by operations before
extraordinary item 469,110 216,473 1,006,209 101,330
Sale of shares of subsidiary 153,345
----------- ----------- ------------ ------------
Resources provided by operations 622,455 216,473 1,006,209 101,330
----------- ----------- ------------ ------------
Financing:
Long-term notes 1,082,946
Paid - in capital (own and subsidiaries shares) 1,484,200 (135,768) (173,378) (17,460)
Bank loans and other credits - Net (1,051,767) 1,143,667 814,936 82,068
Issuance of capital stock 19,126 92,634 4,850 488
Payment of dividends (88,973) (145,559) (111,611) (11,240)
Repurchase of shares (216,936) (24,961) (63,761) (6,420)
Contribution of minority stockholders 67,234
----------- ----------- ------------ ------------
Resources provided by financing activities 1,295,830 930,013 471,036 47,436
----------- ----------- ------------ ------------
Investment:
Acquisition of property, furniture, equipment
and investment in stores - Net (337,348) (932,316) (607,485) (61,177)
Investment in shares (1,343,627) (157,691) (15,880)
----------- ----------- ------------ ------------
Resources used in investment activities (1,680,975) (932,316) (765,176) (77,057)
----------- ----------- ------------ ------------
Increase in cash and cash equivalents 237,310 214,170 712,069 71,709
Cash and cash equivalents at beginning of year 34,205 271,515 485,685 48,911
----------- ----------- ------------ ------------
Cash and cash equivalents at end of year Ps 271,515 Ps 485,685 Ps 1,197,754 US$ 120,620
=========== =========== ============ ============
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31,
1998 purchasing power translated at the exchange rate of Ps9.93 per U.S.
dollar and are not covered by the Report of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998
(monetary figures expressed in thousands of Mexican pesos of
December 31, 1998 purchasing power, except foreign
currency figures and exchange rates in Note 3)
NOTE 1 - COMPANY OPERATIONS:
The main activities of Grupo Elektra, S. A. de C. V. and its subsidiaries
(collectively the "Company") are the purchase and sale, distribution,
importation and exportation of consumer electronics, major appliances, household
furniture and clothing. A significant portion of the Company's revenues is
comprised of installment sales. Additionally, the Company offers a series of
complementary products and services, the most important of which are money
transfer services from the United States to Mexico and within Mexico, and the
extended warranty services for electronics and appliances. At December 31, 1998,
the Company operated 581 Elektra stores and 155 Hecali stores in Mexico, and 83
Elektra stores in several countries in Central and South America.
The main subsidiaries of the Company are the following:
Percentage of
Subsidiary equity
---------- -------------
Corporacion Diprofin, S. A. de C. V. (Diprofin) 100%
Articulos Domesticos al Mayoreo, S. A. de C. V. (Ardoma) 100%
Elektra, S. A. de C. V. (Elektra) 98%
Elektrafin, S. A. de C. V. (Elektrafin) 98%
Importaciones Electronicas Ribesa, S. A. de C. V. (Ribesa) 98%
Grupo Hecali, S. A. de .C. V. (Hecali) 100%
Mi Garantia Extendida, S. A. de C. V. (Mi Garantia) 100%
On March 26, 1996, the Company acquired for Ps1,343,627 a 35.8% interest in
Comunicaciones Avanzadas, S. A. de C. V. (CASA), a company controlling several
subsidiaries engaged in the broadcasting and production of television programs
and the sale of advertising time (TV Azteca), and the operation of movie
theaters and production studios (Grupo Cotsa). This investment was realized
through the capitalization of a US$45.4 million receivable from CASA and a cash
contribution of US$62.2 million, paying an excess of cost over book value
(goodwill) of Ps915,290.
F-9
In 1996, the Company acquired 72% of the capital stock of Hecali, which is
engaged in the trading and distribution of clothing and shoes, for Ps69,123. In
1997, Hecali made a capital stock reacquisition from certain stockholders, thus
increasing the Company's ownership interest from 72% to 94%. In October 1998,
the Company acquired the remaining 6% of the Hecali shares, through the
capitalization of debt amounting to Ps155,437 and cash payments of Ps10,135,
giving rise to goodwill of Ps157,691.
In January 1996, the Company sold to Western Union its interest in Servicio
Mexicano de Entregas, S. A. de C. V. recording a net gain of Ps153,344 after
deducting the related income tax of Ps40,604 and received dividends of Ps37,207
from the Company immediately prior to its sale.
In January 1996, the Company entered into a revised agreement with Western Union
for the transfer of money from the United States to Mexico, under which, the
Company will receive US$14.2 million annually over ten years. For this purpose,
Western Union deposited US$142 million into an escrow account, which in turn
invested this amount by purchasing 2% of the shares of three consolidated
subsidiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies, including the concepts, methods and
criteria related to the recognition of the effects of inflation on the financial
statements, are summarized below:
a. Recognition of the effects of inflation
The consolidated financial statements and the notes thereto are expressed in
constant pesos of purchasing power as of December 31, 1998 and have been
prepared in conformity with generally accepted accounting principles in Mexico,
in accordance with the following policies:
- - Inventory is restated by the replacement cost method; cost of sales is
restated by applying factors derived from the National Consumer Price Index
(NCPI).
- - Property, furniture and equipment and investment in stores are restated by
applying factors derived from the NCPI.
- - The components of stockholders' equity are also restated by using factors
derived from the NCPI.
- - The gain (loss) on net monetary position represents the effect of
inflation, as measured by the NCPI, on the monthly net monetary liabilities
and assets during the year, restated to pesos of purchasing power as of the
end of the most recent period.
F-10
- - The loss from holding nonmonetary assets represents the decrease in
nonmonetary assets compared with the inflation rate measured in terms of
the NCPI, and is included in stockholders' equity under the caption "loss
from holding nonmonetary assets".
- - The NCPI used to recognize the effects of inflation in the financial
statements was 200.388, 231.886 and 275.038 as of December 31, 1996, 1997
and 1998, respectively.
b. Presentation of the statement of income
In order to allow better matching of revenues with the costs needed to produce
them, as from 1997, revenues include those resulting from sales of merchandise
and from the installment sales program (that is, accrued mark-up, stated
interest and penalty interest less the monetary loss on receivables).
Cost of sales includes the cost of merchandise sold, the allowance for doubtful
accounts, the cost of financing the installment sales program less the monetary
gain on financing of receivables.
Below is an analysis of merchandise and service revenues, and of the cost of
merchandise sold and of services:
December 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
Revenues:
Sales of Elektra merchandise Ps4,440,476 Ps5,399,707 Ps6,455,993
Sales of Hecali merchandise 220,066 373,557 588,536
Accrued income for extended warranties 1,768 31,854
Accrued mark-up 1,049,990 1,412,457 1,767,516
Penalty interest 181,211 222,221 211,406
Loss on monetary position from
accounts receivable (461,923) (303,806) (290,708)
Equity in income of
Comunicaciones Avanzadas, S. A. de C. V. 143,490 178,787 (146,263)
Revenues from money transfer services 295,978 281,943 306,487
----------- ----------- -----------
Ps5,869,288 Ps7,566,634 Ps8,924,821
=========== =========== ===========
Costs:
Cost of Elektra merchandise sold Ps3,134,861 Ps3,912,007 Ps4,574,692
Cost of Hecali merchandise sold 153,226 257,723 359,558
Provision for repairs 528 9,555
Interest expense on credits 357,953 248,831 228,458
Interest on money transfer funding 15,792 10,646 14,501
Allowance for doubtful accounts 186,823 293,594 383,497
Amortization of CASA goodwill 34,323 45,747 45,747
Gain on monetary position on
loans obtained to finance the
installment sales program (301,094) (197,473) (188,960)
----------- ----------- -----------
Ps3,581,884 Ps4,571,603 Ps5,427,048
=========== =========== ===========
F-11
c. Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
d. Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of
less than three months to be cash equivalents, and states them at market value.
e. Revenue recognition
The Company recognizes revenue on the accrual basis when goods are delivered to
customers. Interest and installment sales mark-up are credited to income on the
straight-line basis over the life of the respective installment contracts.
f. Inventories and cost of sales
Inventories and cost of sales are originally determined by the average cost
method and are restated as mentioned in Note 2a. Amounts so determined do not
exceed current market value. (See Note 5).
g. Property, furniture, equipment and investment in stores
Property, furniture and equipment are expressed at acquisition cost, and are
restated as explained in Note 2a. Investment in stores represents major
improvements necessary for the opening of Elektra and Hecali stores, and is
restated as mentioned in Note 2a.
Depreciation is calculated by the straight-line method, based on the estimated
useful lives and the values of the Company's net fixed assets. Amortization of
investment in stores is calculated by the straight-line method over periods no
longer than five years. (See Note 6).
h. Investments in shares
The investment in CASA is stated by the equity method. (See Note 7).
Other investments in shares of companies in which the Company owns less than 10%
of the capital are stated originally at cost, and are subsequently restated by
applying factors derived from the NCPI.
F-12
i. Goodwill
The excess of cost over the book value of the shares of subsidiaries and equity
investees acquired (goodwill) is amortized over 20 years and is restated by
applying factors derived from the NCPI to its historical cost.
j. Income tax and employees' statutory profit sharing
The charges to income for income tax and employees' statutory profit sharing are
based on financial pretax income, after adjustment for items excluded by law
from the determination of taxable profits (permanent differences) and for
temporary differences, the realization of which is uncertain in a definite
period of time. At December 31, 1997 and 1998, there were no temporary
differences that require the recognition of deferred income tax.
k. Labor obligations
Seniority premiums to which employees are entitled upon termination of
employment after 15 years of service, as well as benefits from the retirement
plans established by the Company's subsidiaries for their employees, to which
they do not contribute, are recognized as expenses of the years in which the
services are rendered. based on actuarial studies.
Plan benefits are primarily based on employees' years of service, which the
Company estimates to be an average of 25 years, and remuneration at retirement.
As of and for the years ended December 31, 1996, 1997 and 1998, the net cost for
the period charged to income and the respective liability were not significant.
Other severance compensation to which employees may be entitled in case of
dismissal or death, in accordance with the Mexican Federal Labor Law, is charged
to income in the year in which it becomes payable.
l. Revenues from extended warranty services
Revenues from extended warranty services are recorded as deferred income on the
date the corresponding warranty certificates are sold, and are credited to
income using the straight line method over the terms of extended warranties
(from two to five years).
m. Transactions in foreign currencies and translation of transactions carried
out abroad
Transactions in foreign currencies are recorded at the rates of exchange
prevailing on the dates they are entered into. Assets and liabilities
denominated in these currencies are stated at the Mexican peso equivalents
resulting from applying the year-end rates. Exchange
F-13
differences arising from fluctuations in the exchange rates between the dates on
which transactions are entered into and those on which they are settled or the
balance sheet dates, are charged or credited to income. (See Note 3.)
Figures of the subsidiaries in Central and South America are translated by using
the methodology established by Statement B-15 "Transactions in Foreign Currency
and Translation of Financial Statements of Foreign Subsidiaries". In accordance
with the provisions thereby set, the figures of those subsidiaries are restated
by applying inflation factors of the country of origin. The resulting monetary
and nonmonetary assets and liabilities, as well as the income and expenses, are
translated at the exchange rate in effect on the balance sheet date. Differences
arising from the translation of the subsidiaries' financial statements as of
December 31, 1998 amounted to Ps5,844 and was recorded as part of stockholders'
equity.
n. Earnings per share
Earnings per share is computed in accordance with Statement B-14 "Earnings per
Share", by dividing the income of majority stockholders by the weighted average
number of shares outstanding in 1996 (3,595,556,000) 1997 (3,553,643,026) and
1998 (3,574,753,543). Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then share in the earnings of the entity. The effect of stock options
granted to the Company's employees on earnings per share computation is not
material.
o. Description of leasing arrangements
The Company conducts a major part of its operations from leased facilities which
include 759 stores, 2 warehouses and distribution centers and the Company's
headquarters building. These facilities are under operating leases that expire
over the next ten years. Most of the operating leases are renewable for periods
of three to five years.
Some of the rental payments under store facilities are based on a minimum rental
or a percentage of the store's sales (contingent rentals).
In most cases, management expects that in the normal course of business, leases
will be renewed or replaced by other assets.
p. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affects the amounts reported in the financial statements. Actual results could
differ from those estimates.
F-14
q. Reclassifications
Certain reclassifications have been made to prior period amounts to conform to
the current presentation.
NOTE 3 - FOREIGN CURRENCY POSITION:
The following information is expressed in thousands of U.S. dollars, since this
is the currency in which most of the Company's foreign currency transactions are
carried out.
At December 31, 1998, the Company and its subsidiaries had the following foreign
currency monetary assets and liabilities:
Central and
South
Mexico America (1) Total
----------- ----------- -----------
Assets US$ 30,687 US$ 41,430 US$ 72,117
Liabilities (241,430) (65,467) (306,897)
----------- ---------- -----------
Net short position (US$ 210,743) (US$ 24,037) (US$ 234,780)
=========== ========== ============
(1) Denominated in different currencies, which were translated to US dollars at
the exchange rates prevailing on December 31, 1998.
At December 31, 1998, the exchange rate was Ps9.93 to the U.S. dollar (Ps8.06 at
December 31, 1997). At February 28, 1999, date of issuance of the consolidated
financial statements, the exchange rate was Ps10.10 to the U.S. dollar.
Below is a summary of the principal transactions denominated in foreign
currencies carried out by the Company's subsidiaries in 1996, 1997 and 1998:
1996 1997 1998
---- ---- ----
Money transfer services US$ 23,649 US$ 24,008 US$ 24,270
Export sales 21,117 71,260
Imported merchandise (30,068) (57,202) (105,231)
Interest expense (9,135) (16,103) (24,611)
Fees (8,619) (7,878) (21,132)
Other (6,642) (11,728)
---------- ---------- -----------
Net (US$ 24,173) (US$ 42,700) (US$ 67,172)
========== ========== ===========
F-15
NOTE 4 - BALANCES DUE FROM CUSTOMERS, NET AND SECURITIZATION OF RECEIVABLES:
Customer account balances at December 31,1997 and 1998 are as follows:
December 31,
------------
1997 1998
---- ----
Gross retail receivables - Net of
securitization Ps1,881,237 Ps1,631,080
Less: Past due receivables written-off
in the year (298,623) (351,860)
----------- -----------
Net retail receivables 1,582,614 1,279,220
Wholesale receivables 40,848 43,964
----------- -----------
Total 1,623,462 1,323,184
Less: Allowance for doubtful accounts (50,728) (82,365)
----------- -----------
Ps1,572,734 Ps1,240,819
=========== ===========
The Company follows the policy of writing-off against the allowance for doubtful
accounts all customer balances outstanding more than 90 days.
Accounts receivable from retail customers are shown net of the unearned
installment sales mark-up. The unearned installment sales mark-up was Ps572,141
and Ps439,943 at December 31, 1997 and 1998, respectively.
The movement of the allowance for doubtful accounts is as follows:
Year ended December 31,
1996 1997 1998
---- ---- ----
Beginning balance Ps 98,312 Ps 55,757 Ps 50,728
Provisions 186,823 293,594 383,497
Write-offs (229,378) (298,623) (351,860)
---------- ---------- ----------
Ending balance Ps 55,757 Ps 50,728 Ps 82,365
========== ========== ==========
F-16
Securitization of receivables
Elektrafin has established a four-year revolving securitization program, to
securitize its receivables. Under the program, Elektrafin transfers its
receivable collection rights to a trust fund incorporated by Nacional
Financiera, S. N. C. (NAFIN) in exchange for cash resources obtained from the
public offering of "Ordinary and Amortizable Participation Certificates"
("OPCs"). The public offering is affected by the issuance of preferred and
subordinated OPCs which are acquired by public investors and Elektrafin,
respectively. During 1998 Elektrafin completed two separate offerings, one on
April 15 and one on December 17, 1998 for Ps793,000 (nominal pesos) and
Ps200,000 (nominal pesos), respectively.
Duff and Phelps de Mexico, S. A. de C. V. , Fitch IBCA Mexico, S. A. de C. V.
and Clasificadora de Riesgos, S. A. de C. V. rated the securitized receivables
as mAA, AA and AA, respectively.
Elektrafin collects the securitized receivables on behalf of the trust and
deposits such collections in the trust fund. The two separate offerings of OPCs
will mature in April 2000 and in December 2002. The preferred OPCs will be
repaid at their nominal value, and the subordinated OPCs with the remaining cash
held by the trust.
NOTE 5 - INVENTORIES:
December 31,
------------
1997 1998
---- ----
Brand name merchandise Ps1,943,395 Ps1,849,956
Elektra brand name merchandise 74,497 73,429
Other merchandise 169,895 126,419
Merchandise in transit 30,034 62,324
Other finished products 29,950 28,838
----------- -----------
2,247,771 2,140,966
Less-Allowance for obsolete inventories (616) (518)
----------- -----------
2,247,155 2,140,448
Advances to suppliers 32,337
----------- -----------
Ps2,279,492 Ps2,140,448
=========== ===========
F-17
NOTE 6 - PROPERTY, FURNITURE, EQUIPMENT AND INVESTMENT IN STORES:
December 31, Annual depreciation
and amortization
1997 1998 rate (%)
---- ---- -------------------
Buildings Ps 173,887 Ps 330,192 2.0
Computer equipment 518,453 636,584 16.6
Communication equipment 181,358 216,247 10.0
Transportation equipment 205,019 246,742 10.3
Furniture and fixtures 219,931 308,168 8.5
Machinery and equipment 94,693 218,737 5.3
----------- -----------
1,393,341 1,956,670
Less-Accumulated depreciation (426,556) (602,708)
----------- -----------
966,785 1,353,962
Land 219,489 195,076
Construction in progress 83,378 38,208
----------- -----------
1,269,652 1,587,246
Investment in stores - Net 537,378 557,443 20.0
----------- -----------
Ps1,807,030 Ps2,144,689
=========== ===========
The above items include capital leases as shown in Note 10.
NOTE 7 - INVESTMENT IN SHARES:
December 31,
Percentage
1997 1998 of equity
---- ---- ----------
Comunicaciones Avanzadas,
S. A. de C. V. Ps 788,599 Ps621,630 35.8%
Biper, S. A. de C. V. 182,324 80,237 5.0%
Other 102,785 94,025
----------- ---------
Ps1,073,708 Ps795,892
=========== =========
F-18
NOTE 8 - ACCOUNTS RECEIVABLE AND SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES:
December 31,
------------
1997 1998
---- ----
Biper, S. A. de C. V. (Biper) Ps 45,808 Ps 57,786
Operadora Radiocel, S. A. de C. V. (Operadora) 40,257 66,136
Compania Operadora de Teatros, S. A. de C. V. 22,760
TV Azteca, S. A. de C. V. (TV Azteca) 29,902 10,923
Other 53,014 47,368
--------- ---------
Ps168,981 Ps204,973
========= =========
The principal transactions with related parties are as follows:
Merchandise sales
Revenues from sales of televisions, video cassette recorders and furniture to
related parties and affiliated companies amounted to Ps142,136, Ps87,996 and
Ps79,716 during the years ended December 31, 1996, 1997 and 1998, respectively.
Interest income
In the years ended December 31, 1996, 1997 and 1998 the Company extended
short-term loans to Biper, Operadora and TV Azteca. Interest income under these
arrangements amounted to Ps55,105, Ps13,713 and Ps13,049, respectively.
Interest expense
In the years ended December 31, 1996, 1997 and 1998 the Company received
short-term loans from Grupo Cotsa and other related parties. Interest expense
incurred under these arrangements amounted to Ps11,346, Ps13,199 and Ps18,973,
respectively.
Advertising expenses
In March 1996, the Company entered into an agreement with TV Azteca whereby
Elektra will purchase 5,200 minutes per year of advertising time from TV Azteca,
to be transmitted in otherwise unsold time, for US$1.5 million per year for each
of the next ten years. For the years ended December 31, 1996, 1997 and 1998 the
Company recorded advertising expenses of Ps24,704, Ps15,101 and Ps21,755,
respectively under this arrangement. Under the agreement the Company may
purchase additional minutes at the same contract terms.
F-19
Purchase of computer equipment
In 1996 and 1997, the Company acquired computer equipment amounting to Ps49,087
and Ps68,852, respectively, from Dataflux, S. A. de C. V., a former affiliate of
TV Azteca.
NOTE 9 - BANK LOANS AND OTHER DEBT:
Average rate at
December 31, December 31,
------------ ---------------
1997 1998 1997 1998
---- ---- ---- ----
Loans in Mexican pesos Ps1,058,707 Ps 861,500 21.29% 35.96%
Loans in U.S. dollars 477,797 319,230 8.81% 7.85%
Long-term notes (1) 956,115 933,420 12.75% 12.75%
Syndicated loan (2) 844,050 7.50% and 7.34%
Loans in other currencies(3) 287,103 542,497 15.32% 21.00%
Other 16,866 171,602
----------- -----------
2,796,588 3,672,299
Less-current portion 1,840,473 1,212,443
----------- -----------
Long-term debt Ps 956,115 Ps2,459,856
=========== ===========
Following is the maturity of the long-term loans:
Year Amount
---- ------
2000 Ps 671,463
2001 933,420
2002 854,973
-----------
Ps2,459,856
===========
(1) In May 1996, the Company issued long-term notes in international markets
for US$100 million, payable in the year 2001, subject to interest at 12.75%
per annum payable semiannually. The terms of the notes contain certain
financial covenants with which the Company is in compliance at December 31,
1997 and 1998. In 1998, the Company repurchased notes worth US$6 million
(par value) for US$4.9 million, which were deducted from the aggregate
principal amount.
(2) The Company entered into a five-year US$150 million committed unsecured
revolving credit agreement with Citibank, N. A. as agent. The commitment is
reduced to the outstanding balance under the credit agreement as of June
30, 1999. At December 31, 1998, the Company borrowed US$85 million under
this agreement. The remaining amount of the credit will be used to repay
short-term loans, which were entered into to finance its national and
international expansion; as a result, US$65 million of the Company's
short-term loans have been classified as long-term bank loans. This credit
agreement imposes operating and financial restrictions on the Company, with
which it is in compliance as of December 31, 1998.
(3) Mainly Lempiras, Colones, Dominican Pesos and Quetzales.
F-20
NOTE 10 - CAPITAL AND OPERATING LEASES:
The Company has acquired the assets mentioned below by entering into capital
lease contracts, with purchase options ranging from two to five years.
December 31,
------------
1997 1998
---- ----
Land and buildings Ps 64,108 Ps 53,878
Computer equipment 104,633 32,804
Communication equipment 147,582 147,582
Transportation equipment 53,762 17,289
Furniture and fixtures 48,828 9,785
Machinery and equipment 12,571 4,568
--------- ---------
431,484 265,906
Less: accumulated amortization (79,724) (70,565)
--------- ---------
Ps351,760 Ps195,341
========= =========
The liabilities under these contracts mature as follows:
Year ending December 31:
- ------------------------
1999 Ps 31,965
2000 7,348
2001 2,993
---------
Total liabilities 42,306
Less-unaccrued interest (4,615)
Net minimum lease payments 37,691
Less-current portion (31,580)
Long-term portion Ps 6,111
=========
F-21
The following is a schedule by years of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 1998:
Year ending December 31:
1999 Ps236,075
2000 214,683
2001 173,625
2002 148,078
2003 and thereafter 134,209
---------
Total minimum payments required Ps906,670
=========
The following schedule shows the composition of total rental expense for all
operating leases except those with terms of a month or less that were not
renewed:
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Minimum rentals Ps112,309 Ps145,147 Ps208,275
Contingent rentals 15,675 18,283 22,700
--------- --------- ---------
Ps127,984 Ps163,430 Ps230,975
========= ========= =========
NOTE 11 - STOCKHOLDERS' EQUITY:
On August 15, 1997, a special stockholders' meeting was held to authorize a
ten-for-one stock split of Series "A", "B" and "L" shares and a ten-for-one
stock split of each Ordinary Participation Certificate (OPC) (comprised of two
Series "B" shares and one Series "L" share).
After this stock split, the capital stock is represented by shares with no par
value, fully subscribed and paid, distributed as shown below:
Authorized shares:
Series "A" Shares 1,495,024,470
Series "B" Shares 2,342,405,490
Series "L" Shares 487,416,030
-------------
4,324,845,990
-------------
F-22
Less: authorized but unsubscribed and/or unpaid shares:
Series "A" Shares (220,279,440)
Series "B" Shares (328,744,914)
Series "L" Shares (98,810,877)
-------------
(647,835,231)
Less - Repurchased shares (111,088,980)
-------------
Net authorized shares subscribed and paid 3,565,921,779
=============
The Company's by-laws provide that Series "A" shares may only be held by Mexican
nationals. Series "B" and "L" shares are unrestricted as to ownership. Series
"L" shares have restricted voting rights.
At December 31, 1998, the capital stock is represented by the following fixed
minimum capital:
Amount
------
Series "A" shares Ps 49,834
Series "B" shares 78,080
Series "L" shares 16,247
---------
Fixed minimum capital stock 144,161
Subscribed but unpaid capital stock (21,595)
---------
Capital stock expressed in nominal pesos 122,566
Effect of restatement 363,223
---------
Capital stock expressed in Mexican pesos
of December 31, 1998 purchasing power Ps485,789
=========
No variable capital has been subscribed.
In the event that dividends are paid from retained earnings which have not
previously been taxed, a tax equivalent to 53.85% of the dividend will be
payable by the Company. Additionally, dividends paid to individuals or to
foreign residents are subject to a maximum tax witholding equivalent to 7.69%,
regardless of any previous taxation of such dividends. Capital stock reductions
in excess of the sum of the balances of capital contributions accounts, net tax
income and reinvested net tax income, inflation-indexed in accordance with the
procedures established by the Income Tax Law, are accorded the same tax
treatment as dividends. At December 31, 1998, the balance of previously taxed
retained earnings determined in accordance with the tax regulations in effect
amounted to Ps60,415.
In February 1994, the Company and its stockholders approved the creation of the
Partner 2000 Stock Option Plan ("the Plan") for key employees of the Company and
its subsidiaries. Under the Plan the Company may grant to the employees options
to acquire up to 70 million OPCs of
F-23
the Company at a price between Ps2.5 and Ps4.0 (nominal) per OPC. Options
granted under the Plan vest pro-ratably over a five-year period from the date of
grant if the Company achieves annual established performance goals. If the
annual established performance goals are not achieved the vesting of the option
may be postponed or limited. The option price per OPC was determined based on
each employee's employment date. At February 28, 1999, date of issuance of the
consolidated financial statements options to acquire, 28,027,432 OPC's were
exercised.
Stock options Number of OPCs Exercise price
- ------------- -------------- --------------
Outstanding on December 31, 1995 55,236,187
----------
Granted: 3,700,000 2.50
1,655,468 3.25
Exercised (3,808,390)
Outstanding on December 31, 1996 56,783,265
----------
Granted: 1,150,000 2.50
1,169,532 4.00
Exercised (19,768,759)
Outstanding on December 31, 1997 39,334,038
Exercised (4,450,283)
----------
Outstanding on December 31, 1998 34,883,755
==========
Exercisable at December 31, 1998 21,295,821
==========
The following table summarizes information about the stock options outstanding
and exercisable at December 31, 1998:
Number of
Options exercisable
Exercise price outstanding options
-------------- ----------- -----------
2.50 32,751,225 20,527,197
3.25 1,164,528 502,341
4.00 968,002 266,283
---------- ----------
34,883,755 21,295,821
========== ==========
F-24
At December 31, 1998, retained earnings include Ps176,013 corresponding to
retained earnings of subsidiaries and affiliated companies. In order for the
Company to pay a dividend from profits derived from affiliate earnings, the
earnings must be previously declared as dividends by the subsidiaries and
affiliated companies.
NOTE 12 - INCOME TAX, ASSET TAX AND EMPLOYEES' STATUTORY PROFIT SHARING:
Income tax, asset tax and employees' statutory profit sharing charged to income
for the year are as follows:
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Income tax Ps113,053 Ps 99,394 Ps101,977
Asset tax 11,969 7,905 2,506
Employees' statutory
profit sharing 2,065 1,790 2,604
--------- --------- ---------
Ps127,087 Ps109,089 Ps107,087
========= ========= =========
For the years ended December 31, 1996, 1997 and 1998, the differences between
taxable and financial income are mainly due to the effect of the deduction for
tax purposes of inventory purchases, offset by the non-allowable deduction of
cost of sales, to the difference between the effect of the inflationary
component determined for book and tax purposes, and to nondeductible expenses.
At December 31, 1998, certain subsidiaries of the Company had tax loss
carryforwards amounting to Ps303,792, that expire as shown below:
Year of
expiration Amount
---------- ---------
2003 Ps 7,353
2004 4,062
2005 1,352
2006 105,509
2007 162,947
2008 22,569
---------
Ps303,792
=========
F-25
Since the Company does not prepare a consolidated income tax return tax losses
carryforwards can only be utilized by the subsidiaries generating the
carryforwards. The tax loss carryforwards are restated by applying factors
derived from the NCPI until they are utilized.
In 1998, certain subsidiaries paid asset tax totaling Ps36,480 (restated for tax
purposes), for which a refund can be requested, provided that the income tax
determined in any of the next ten years exceeds asset tax for those years.
NOTE 13 - SEGMENT INFORMATION:
Elimination
Commercial Credit International CASA Other entries Consolidated
---------- ------ ------------- ---- ----- ----------- ------------
As of and for the year ended
December 31, 1996
Revenues from external customers Ps4,440,476 Ps769,264 Ps143,487 Ps516,061 Ps5,869,288
Depreciation and amortization 504 6,810 105,763 113,077
Operating income (loss) 583,825 318,191 (Ps39,420) 109,163 (296,138) 675,621
Total assets 1,858,578 2,724,165 35,278 501,088 3,602,375 8,721,484
As of and for the year ended
December 31, 1997
Revenues from external customers Ps5,211,411 Ps1,321,518 Ps197,650 Ps178,787 Ps657,268 Ps7,566,634
Depreciation and amortization 806 9,955 4,827 166,672 182,260
Operating income (loss) 610,601 723,034 (10,722) 133,040 (430,448) 1,025,505
Total assets 2,306,602 1,588,201 562,361 4,995,424(1) 3,107,791 (Ps3,371,618)(1) 9,188,761
As of and for the year ended
December 31, 1998
Revenues from external customers Ps5,880,502 Ps1,556,094 Ps707,611 (Ps146,263) Ps926,877 Ps8,924,821
Depreciation and amortization 1,748 10,150 51,592 279,226 342,716
Operating income (loss) 779,924 896,022 16,205 (192,010) (706,532) 793,609
Total assets 2,007,279 1,302,482 994,194 1,058,213(1) 4,139,787 Ps352,878(1) 9,854,833
(1) Beginning in 1997 for internal purposes the Company states its investment
in CASA, whose main asset is the investment in Azteca Holdings, S. A. de C.
V. (holding of TV Azteca) at 80% of its market value, adjusted by the
proportional part of liabilities of Azteca Holdings, recording the
variations in this value in stockholders' equity and eliminating the equity
in the results of CASA and the corresponding goodwill amortization. For
external reporting purposes these adjustments have been eliminated to
reflect the investment in CASA under the equity method.
The Company is reporting segment sales and services and operating income in the
same format reviewed by the Company's management. An operating segment is
defined as a component of the Company that engages in business activities from
which it may earn revenues and incur expenses, and about which separate
financial information is regularly evaluated by the Company's management in
deciding how to allocate resources. Except for the valuation of the investment
in CASA, the accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
Certain assets and expenses such as property, furniture and equipment and other
assets, corporate overhead, depreciation, intangible amortization, interest
expense, income taxes are not allocated to the segments and have been included
in the other column. The Company evaluates segment performance based upon income
or loss before the aforementioned expenses. All the Company's operations are
located in Mexico, except for the Latin American operations which are located in
Guatemala, El Salvador, Dominican Republic, Honduras and Peru.
F-26
The Commercial Business Unit includes sales of a wide variety of brand name
consumer electronics, major appliances and household furniture in Mexico.
The Credit Business Unit consists of expenses incurred to finance the Company's
installment sales program and to administer the installment sales operations, as
well as the mark-up and stated or penalty interest earned by the Company.
The International Business Unit represents the Company's electronics, appliance
and furniture retail operations in five countries of Latin America, Guatemala,
El Salvador, Honduras, Dominican Republic and Peru.
The CASA Business Unit includes the equity in income (loss) of CASA as well as
the amortization of the related goodwill.
The Company's other operating segment includes a chain of clothing stores
(Hecali) that offers a broad range of basic and sports apparel for men, ladies
and children and sport shoes; Money Transfer Services from abroad, primarily the
United States, to Mexico, and within Mexico; Savings Account Services; Extended
Warranties and Photo Products and Processing Services.
NOTE 14 - CONTINGENCY:
The tax authorities are claiming the payment of taxes, fines and surcharges
totaling Ps284,962, omitted in the 1993, 1994 and 1995 periods. The Company's
management and its legal advisors have applied all the necessary legal
resources, and consider that there is sufficient evidence to obtain a favorable
resolution.
NOTE 15 - SUBSEQUENT EVENT:
On March 4, 1999, the Company won a bid to acquire a 94.3% interest in Salinas y
Rocha, S. A. de C. V. The acquisition price was US$77.7 million, of which the
Company paid 25% on March 10, 1999. The Company will incur additional debt to
pay the remaining 75% of the aggregate purchase price.
NOTE 16 - RECONCILIATION BETWEEN MEXICAN (MEXICAN GAAP) AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP):
The Company's consolidated financial statements are prepared in accordance with
Mexican GAAP, which differs in certain significant respects from U.S. GAAP. The
Mexican GAAP consolidated financial statements include the effects of inflation
as provided for under Statement B-10, "Recognition of the Effects of Inflation
on Financial Information". The application of this statement represents a
comprehensive measure of the effects of price level changes in the Mexican
economy, which for many years was hyperinflationary, and is considered to result
in a more meaningful presentation than historical cost-based financial reporting
for both Mexican and
F-27
U.S. accounting purposes. Therefore the following reconciliations to U.S. GAAP
do not include the reversal of such inflationary effects.
The principal differences between Mexican GAAP and U.S. GAAP are summarized
below with an explanation, where appropriate, of the effects on consolidated net
income and stockholders' equity. The various reconciling items are presented net
of any price level gain (loss):
a. Reconciliation of consolidated net income:
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Net income related to majority stockholders under
Mexican GAAP Ps 837,270 Ps 764,143 Ps 208,757
Deferred income tax effects (211,117) (183,411) (26,851)
Deferred employees' profit sharing 4,725 748 560
Amortization of goodwill 19,132 19,375 13,328
Amortization of goodwill relating to CASA acquisition 34,323 45,747 45,747
Effect of net income of CASA prior to acquisition 61,627
Difference in equity in earnings of CASA 19,458 (110,684) (69,298)
Capitalized exchange losses and interest expense 3,193 3,225 3,225
Stock options granted to employees (131,919) (264,864) 89,551
Effect on minority stockholders of U.S. GAAP adjustments 16,137 4,362 (2,407)
---------- ----------- ----------
Net income under U.S. GAAP Ps 652,829 Ps 278,641 Ps 262,612
========== =========== ==========
Income per share (in pesos) Ps 0.18 Ps 0.08 Ps 0.07
========== =========== ==========
Basic weighted average number of common shares
outstanding (in millions) 3,595.5 3,553.6 3,574.8
========== =========== ==========
b. Reconciliation of consolidated stockholders' equity:
December 31,
------------
1997 1998
---- ----
Majority stockholders' equity under Mexican GAAP Ps 4,247,527 Ps 3,652,576
Deferred income tax effects (849,205) (876,056)
Deferred employees' profit sharing 1,946 2,506
Participation in net equity of CASA (28,890) (279,333)
Goodwill relating to CASA acquisition (840,910) (795,163)
Goodwill (239,335) (226,007)
Capitalized exchange losses and interest expense (22,445) (19,220)
Deferred income (1,348,432) (1,175,054)
Pension plan and seniority premiums 4,571 4,571
Effect on minority stockholders of U.S. GAAP
adjustments 20,498 18,091
------------ ------------
Stockholders' equity under U.S. GAAP Ps 945,325 Ps 306,911
============ ============
F-28
An analysis of the changes in consolidated stockholders' equity under U.S. GAAP
is shown below:
1996 1997 1998
---- ---- ----
Balance at beginning of year Ps1,533,397 Ps 776,182 Ps 945,325
Net income 652,829 278,641 262,612
Excess cost over basis acquired in CASA (858,177)
Loss from holding nonmonetary assets (397,003) (296,476) (646,797)
Repurchase of shares (216,936) (24,961) (63,761)
Payment of dividends (88,973) (145,559) (111,611)
Exercise of stock options 19,126 92,634 4,850
Stock options granted to employees 131,919 264,864 (89,551)
Effect of translation of foreign subsidiaries 5,844
----------- ---------- ----------
Balance at end of year Ps 776,182 Ps 945,325 Ps 306,911
=========== ========== ==========
c. Significant differences between U.S. GAAP and Mexican GAAP:
i. Acquisition of subsidiaries and affiliates:
1. CASA
As discussed in Note 1 the Company acquired a 35.8% interest in CASA
in 1996. For U.S. GAAP purposes, this acquisition is considered to be
of a Company under common control and was accounted for at recorded
amounts in a manner similar to a pooling of interest. Consequently no
goodwill would be reflected under U.S. GAAP. For Mexican GAAP
purposes, the acquisition has been accounted for as a purchase of
shares.
At the date of acquisition the excess cost over the basis acquired in
CASA, under U.S. GAAP, was Ps858,177, which has been recorded in the
above reconciliation as a distribution of equity. Also in the Mexican
GAAP financial statements the equity in the income of CASA and the
amortization of the goodwill are included as revenues and cost of
sales.
2. Other subsidiaries
In 1991, the Company acquired various companies controlled by the
principal stockholders, and under Mexican GAAP recorded goodwill for
the excess of the amounts paid over the book value of the companies
acquired. Under U.S. GAAP these acquisitions would have been recorded
as combinations of companies under common control and no goodwill
would have been recorded.
F-29
ii. Employees' profit sharing
Under U.S. GAAP, employees' profit sharing would be considered an
operating expense.
iii. Deferred income tax and employees' profit sharing
As stated in Note 2j., income tax and employees' profit sharing are
recorded under Mexican GAAP following interperiod allocation
procedures under the partial liability method. Under this method,
deferred tax and profit sharing are recognized only in respect of
nonrecurring timing differences between taxable and book income which
are expected to reverse at a definite future date. Also, under Mexican
GAAP the benefit from utilizing tax loss carryforwards and assets tax
credits are not recognized until utilized, at which time it is
presented as an extraordinary item.
U.S. GAAP Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes", ("FAS No. 109"), requires an asset and
liability approach for financial accounting and reporting for income
tax under the following basic principles: (a) a current tax liability
or asset is recognized for the estimated taxes payable or refundable
on tax returns for the current year, (b) a deferred tax liability or
asset is recognized for the estimated future tax effects attributable
to temporary differences and carryforwards, (c) the measurement of
current and deferred tax liabilities and assets is based on provisions
of the enacted tax law and the effects of future changes in tax laws
or rates are not anticipated, and (d) the measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.
Under this method, deferred tax and profit sharing are recognized in
respect of all temporary differences, and the benefit from utilizing
tax loss carryforwards and asset tax credits is recognized in the year
in which the loss or credits arise (subject to a valuation allowance
in respect of any tax benefits not expected to be realized). The
subsequent realization of this benefit does not affect income.
Consequently, they do not represent extraordinary items for U.S. GAAP
purposes.
The temporary differences under FAS No. 109 are determined based on
the difference between the indexed tax-basis amount of the asset or
liability and the related stated amount reported in the financial
statements. Except as indicated in the following paragraph, the
deferred tax expense or benefit is calculated as the difference
between (a) the deferred tax assets and liabilities at the end of the
current period determined as indicated above and (b) the deferred tax
assets and liabilities reported at the end of the prior period
remeasured to units of current general purchasing power at the end of
the current period. The deferred profit sharing expense or benefit is
calculated similarly.
F-30
Gains and losses from holding non-monetary assets are recorded in
stockholders' equity. It is the Company's policy to reflect the
deferred income taxes and profit sharing that arise as a result of
such gains (losses) from assets or liabilities which do not currently
affect income in the results of operations.
The significant components of income tax expense under U.S. GAAP are
as follows:
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Current Ps113,053 Ps 99,394 Ps101,977
Deferred 211,117 183,411 26,851
Asset tax 11,969 7,905 2,506
--------- --------- ---------
Ps336,139 Ps290,710 Ps131,334
========= ========= =========
The following items represent the principal differences between income
tax computed under U.S. GAAP at the statutory tax rate and the
Company's provision for income tax in each year:
Year ended December 31,
1996 1997 1998
---- ---- ----
Statutory income tax rate 34% 34% 34%
Effects of inflation (4) 10 (10)
Asset tax 2 2 1
Non deductible expenses 10 6 5
Effect of accounting losses of subsidiaries (1) 8
Non-taxable earnings of foreign subsidiary (6)
Other 3 3 (9)
-- -- --
Effective income tax rate 47% 55% 21%
== == ==
(1) Since the Company does not prepare consolidated income tax returns,
the losses of some subsidiaries do not reduce, for tax purposes, the
profits of the rest of the subsidiaries.
The tax and profit sharing effects of significant items comprising the
Company's net deferred tax and profit sharing assets and liabilities under
U.S. GAAP are shown on the following page.
F-31
December 31,
------------
1997 1998
---- ----
Deferred income tax liabilities:
Inventories Ps 760,239 Ps 749,157
Property, machinery and equipment 185,183 216,672
Deferred installment sales for income
tax purposes 56,017
Other 67,003 90,683
----------- -----------
1,068,442 1,056,512
----------- -----------
Deferred income tax assets:
Allowance for doubtful accounts 17,247 28,828
Operating loss carryforwards 138,748 106,327
Asset tax carryforwards 56,162 36,480
Other 7,080 8,821
----------- -----------
219,237 180,456
----------- -----------
Net deferred income tax liabilities Ps 849,205 Ps 876,056
=========== ===========
Deferred employees' profit sharing:
Property, machinery and equipment Ps 136 Ps 14
Other (2,082) (2,520)
----------- -----------
Net deferred employees' profit sharing
assets (Ps 1,946) (Ps 2,506)
=========== ===========
iv. Revenue recognition
Under Mexican GAAP the mark-up on installment sales is deferred and
amortized over the life of the installment sales contracts for all years,
and is included as part of merchandise, services and other revenues since
it is included in the sales price. Under Mexican GAAP any stated and
penalty interest is also included in merchandise, services and other
revenues. Under U.S. GAAP the installment sales mark-up earned along with
stated and penalty interest would be classified as interest earned from
consumer credit operations. During the years ended December 31, 1996, 1997
and 1998 the amount of installment sales mark-up earned for U.S. GAAP
purposes was Ps1,049,990, Ps1,412,457 and Ps1,767,516, respectively.
Under Mexican GAAP the loss on monetary position from accounts receivable
is included in merchandise, services and other revenues since such accounts
receivable relate to the installment sales contracts. Under U.S. GAAP the
loss on monetary position from accounts receivable would not be part of
operating income, but would be classified as an other financing expense.
For the years ended December 31, 1996, 1997 and 1998 the loss on
F-32
monetary position from accounts receivable was Ps461,923, Ps303,806 and
Ps290,708, respectively.
v. Consumer credit operations
The results of the Company's consumer credit operations which are included
in the consolidated results of operations are as follows:
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Consumer credit income:
Mark-up from installment sales Ps1,049,990 Ps1,412,457 Ps1,767,516
Finance charges 181,211 222,221 211,406
----------- ----------- -----------
1,231,201 1,634,678 1,978,922
----------- ----------- -----------
Consumer credit expenses:
Interest 357,953 248,831 228,458
Payroll 160,472 157,680 198,150
Provision for doubtful accounts 186,823 293,594 383,497
Other credit and collection expenses 71,733 90,313 74,147
Provision for income taxes and
employees profit sharing 199,853
----------- ----------- -----------
Total operating expenses 976,834 790,418 884,252
----------- ----------- -----------
Earnings from consumer credit
operations Ps 254,367 Ps 844,260 Ps1,094,670
=========== =========== ===========
vi. Deferred income
As described in Note 1, the Company received US$142 million in 1996
relating to the Company's revised contractual agreements with Western Union
which were deposited in an escrow fund and subsequently (at the direction
of the Company) transferred to the Company via purchase, by the escrow
account, of shares of various consolidated subsidiaries. Under Mexican
GAAP, the escrow fund is treated as an independent, unconsolidated entity
and the US$142 million relating to the shares purchased by the escrow fund
is accounted for as minority interest (US$5.6 million) and the remainder
(US$136.4 million) is treated as additional paid-in capital which are both
components of consolidated stockholders' equity. The minority interest and
additional paid-in capital will be reduced annually by an aggregate of
US$14.2 million with a corresponding credit to revenue, as escrowed amounts
are released to the Company under terms of the escrow agreement. Income tax
expense will be recorded at the time of revenue recognition.
F-33
Under U.S. GAAP, the escrow arrangement would be treated as a special
purpose consolidated entity, with the US$142 million accounted for as
deferred income to be recognized as revenue over periods up to 10 years in
accordance with the contractual agreements. Income taxes will be recorded,
as appropriate, under FAS No. 109.
vii. Securitization of receivables
Under Mexican GAAP the Company accounted for the 1997 and 1998
securitizations of receivables as sales of the receivables and derecognized
from its balance sheets the receivables transferred under the programs
against the proceeds received.
Under U.S. GAAP, the transfer of the receivables in the 1997 and 1998
securitization programs have been accounted for as secured borrowings in
accordance with Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Consequently, under U.S. GAAP the Company
reestablished on its balance sheets as of December 31, 1997 and 1998,
receivables of Ps967,978 and Ps1,300,213, respectively, which include
Ps91,069 and Ps337,687, respectively, that correspond to the guarantee on
the securitized receivables. The Company also recorded as of December 31,
1997 and 1998 a short-term and long-term liabilities of Ps876,909 and
Ps962,526, respectively.
viii. Capitalized interest
The Company capitalized exchange losses and interest incurred from
borrowings obtained for construction projects in 1994. For the years ended
December 31, 1996, 1997 and 1998 the Company did not capitalize exchange
losses or interest. Under U.S. GAAP exchange losses are not capitalized and
interest is capitalized by applying the weighted average interest rate paid
by the Company to the capitalized costs related to the construction
projects.
Amount capitalized under Mexican GAAP:
Interest (net of monetary gain) Ps 5,757
Exchange losses 36,398
--------
42,155
Amount capitalizable under U.S. GAAP (9,907)
--------
Difference Ps32,248
========
The depreciation computed on this amount for the years ended December 31,
1996, 1997 and 1998 was Ps3,193, Ps3,225 and Ps3,225, respectively.
F-34
ix. Employee stock option plan
The Company's stock option plan under U.S. GAAP would be considered a
variable plan since the number of shares exercisable is contingent on the
Company achieving its performance goals. Once the Company has determined
the number of options to be exercisable in a particular year compensation
expense is determined as the difference between the quoted market price and
the option exercise price times the number of shares exercisable during the
year. Compensation expense (income) relating to the Employee Stock Option
Plan determined under Accounting Principles Board Opinion No. 25 was
Ps131,919 in 1996, Ps264,864 in 1997, and (Ps89,551) in 1998.
Had compensation cost for the Company's Employee Stock Option Plan been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", ("FAS No.
123"), the Company's compensation expense for the years ended December 31,
1996, 1997 and 1998 would have been Ps77,607, Ps310,991 and Ps23,749,
respectively, and the net income per share would have been reduced to the
proforma amounts as follows:
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Net income as reported Ps652,829 Ps278,641 Ps262,612
========= ========= =========
Net income proforma Ps707,142 Ps232,511 Ps149,312
========= ========= =========
Net income per share as reported Ps 0.18 Ps 0.08 Ps 0.07
========= ========= =========
Net income per share proforma Ps 0.19 Ps 0.07 Ps 0.04
========= ========= =========
The effect on net income and net income per share is not expected to be
indicative of the effects in future years. The fair value of each option
grant is estimated on the date of grant using the weighted average
Black-Scholes option pricing model and simple binomial model with the
assumptions presented below:
Year ended December 31,
-----------------------
1997 1998
---- ----
Expected volatility 0.533 0.7706
Risk-free interest rate 18% 29.99%
Expected life of options in years 1.15 1.00
Expected dividend yield 15% 15%
F-35
The Black-Scholes option valuation model and simple binomial model were
developed for use in estimating the fair value of traded options. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
For Mexican GAAP purposes stock options granted to employees are given
effect when exercised by crediting to paid-in capital stock the exercise
price. Under Mexican GAAP the granting of the options has no effect on the
Company's results of operations, cash flow or financial condition.
x. Concentration of credit risk
The Company is a retailer of consumer electronics, major appliances,
household furniture and other products with 581 Elektra stores in Mexico,
155 Hecali stores in Mexico and 83 Elektra stores in several Latin American
countries at December 31, 1998. The Company regularly makes installment
sales to its customers and credit operations are managed by each store
based on established credit policies developed by the Company.
Due to the significant number of installment sales customers and store
locations the Company believes that it is not dependent on any geographical
area or customer base and therefore has no significant concentration of
credit risk.
The Company currently has a network of approximately 170 suppliers for its
electronics, appliances and furniture products and directly imports
approximately 10.5% of these products. The Company typically does not
maintain long-term purchase contracts with suppliers and principally
operates on a purchase order basis. Although certain vendors are
significant to the Company's business because of their name recognition,
the Company does not believe that its business is dependent upon any one
vendor or particular group of vendors.
xi. Fair value information
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS No. 107"). The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgement is
required in interpreting market data to develop estimates of fair value.
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable is a reasonable estimate of their fair value.
F-36
The carrying value of loans to related parties at December 31, 1997 and
1998 is a reasonable estimate of their fair value based on the interest
rates that are currently available to the related parties for issuance of
notes with similar terms and remaining maturities.
The Company's bank loans and other debt bear interest at variable rates and
their terms are generally representative of those which are currently
available to the Company at December 31, 1997 and 1998 for the issuance of
debt with similar terms and remaining maturities, and therefore the
carrying values of these loans and other debt are a reasonable estimate of
their fair value.
The fair value of the Company's long-term notes is based on quoted market
prices. The estimated fair value of these instruments at December 31, are
as follows:
1997 1998
---- ----
Carrying value US$100,000,000 US$100,000,000
Fair value US$110,080,000 US$ 92,650,000
The long-term notes are thinly traded financial instruments accordingly,
their market price at any balance sheet date may not be representative of
the price which would be derived from a more active market.
xii. Comprehensive income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", ("FAS No.
130"), which establishes new standards for reporting and displaying
comprehensive income and its components. It was not practical to determine
the cumulative comprehensive income as of January 1, 1998.
xiii. Recently issued accounting standards
In April 1998, Financing Accounting Standards Board ("FASB") issued
Statement of Position 98-5, "Reporting on the Costs of Sart-up Activities"
which is effective for fiscal years beginning after December 15, 1998. This
statement of position provides guidance on the financial reporting of
start-up costs and organization costs. It requires cost of start-up
activities and organization costs to be expensed as incurred. The Company
does not believe that the adoption of this SOP will have a material impact
on its consolidated financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS No. 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 of other
F-37
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company does not believe that the adoption of this standard will have a
material impact on its consolidated financial position or results of
operations.
xiv. Condensed balance sheets and income statements under U.S. GAAP:
The following condensed balance sheets and statements of income reflect the
effects of the principal differences between Mexican GAAP and U.S. GAAP.
CONDENSED BALANCE SHEETS
December 31,
------------
1997 1998
---- ----
Cash and cash equivalents Ps 485,685 Ps1,197,754
Accounts receivable due from customers - net 2,605,766 2,541,032
Inventories 2,247,155 2,140,448
Other current assets 593,270 559,974
----------- -----------
Total current assets 5,931,876 6,439,208
Property, machinery and equipment - net 1,247,208 2,125,469
Other assets 997,242 593,167
Investment in CASA 759,709 342,297
----------- -----------
Total assets Ps8,936,035 Ps9,500,141
=========== ===========
Short-term debt Ps2,808,336 Ps1,244,023
Deferred income - current portion 168,554 167,865
Other current liabilities 2,645,106 2,983,078
----------- -----------
Total current liabilities 5,621,996 4,394,966
Long-term debt 956,115 3,428,493
Other long-term liabilities 171,469 294,898
Deferred income 1,179,878 1,007,189
----------- -----------
Total liabilities 7,929,458 9,125,546
----------- -----------
Minority interest 61,252 67,684
----------- -----------
Majority stockholders 945,325 306,911
----------- -----------
Total liabilities and stockholders' equity Ps8,936,035 Ps9,500,141
=========== ===========
F-38
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Revenues:
Sales and money transfer services Ps 4,956,520 Ps 6,056,975 Ps 7,382,870
Interest earned from consumer credit operations 1,231,201 1,634,678 1,978,922
Other income 154,642
------------ ------------ ------------
6,342,363 7,691,653 9,361,792
------------ ------------ ------------
Costs and expenses:
Cost of sales (3,288,089) (4,170,258) (4,943,805)
Selling, general and administrative (1,722,676) (2,211,790) (2,598,060)
Allowance for doubtful accounts (186,823) (293,594) (383,497)
Employees' statutory profit sharing 2,660 (1,043) (2,043)
------------ ------------ ------------
(5,194,928) (6,676,685) (7,927,405)
------------ ------------ ------------
Operating income 1,147,435 1,014,968 1,434,387
Interest paid for consumer credit operations (357,960) (248,831) (228,458)
Other financing expense (26,284) (249,963) (589,990)
------------ ------------ -------------
Income before taxes, equity in earnings and minority
interest 763,191 516,174 615,939
Income and asset tax (336,139) (290,710) (131,334)
------------ ------------ -------------
Income before equity in earnings and minority interest 427,052 225,464 484,605
Equity in income (loss) of CASA 224,574 68,105 (215,561)
------------ ------------ -------------
Income before minority interest 651,626 293,569 269,044
Minority interest 1,203 (14,928) (6,432)
------------ ------------ -------------
Net income of majority stockholders 652,829 278,641 262,612
Effect of translation of foreign subsidiaries (5,844)
Loss from holding non-monetary assets (96,816) (209,529) (328,256)
------------ ------------ -------------
Comprehensive income (loss) Ps 556,013 Ps 69,112 (Ps 71,488)
============ ============ =============
xv. Cash flow information
Under US GAAP a statement of cash flow is prepared based on provisions of
Statement of Financial Accounting Standards No. 95, "Statement of Cash
Flows" ("FAS No. 95"). This statement does not provide guidance for the
preparation of cash flow statements for price level adjusted financial
statements.
F-39
Presented below are statements of cash flows for the years ended December
31, 1996 and 1997, prepared after considering the impact of U.S. GAAP
adjustments. The cash flow statements are net of certain non cash
transactions but include the effects of inflation on cash flow and have
been restated to pesos of December 31, 1998, purchasing power.
Year ended December 31,
-----------------------
1996 1997
---- ----
Cash flows from operating activities:
Net income Ps 652,829 Ps 278,641
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 90,752 159,660
Allowance for doubtful accounts 186,823 293,594
Equity in income of affiliated company (224,574) (68,105)
Gain on sale of shares of affiliated company (153,345)
Accrual for seniority premiums 4,005 6,618
Monetary gain from financing activities (7,585) (21,151)
Deferred income tax and employees' profit sharing 206,392 182,663
Stock options granted to employees 131,919 264,864
Deferred income from Western Union agreement 1,484,200 (135,768)
Other (126,831)
Net changes in working capital (1,437,146) (1,499,977)
------------ ------------
Net cash provided by (used in) operating activities 934,270 (665,792)
------------ ------------
Cash flows from investing activities:
Acquisition of property, furniture, equipment and
investment in stores (337,348) (932,316)
Investments in shares (459,853)
Dividend received from affiliated company 37,207
Proceeds from sale of shares of affiliated company 253,285
------------ ------------
Net cash used in investing activities (506,709) (932,316)
------------ ------------
Cash flows from financing activities:
Proceeds from short-term and long-term debt 1,855,206 1,840,473
Proceeds from securitization of receivables - Net 876,909
Repayment of short-term debt (1,797,327) (772,260)
Capitalized lease obligations (26,694) (54,958)
Issuance of capital stock 19,126 92,634
Repurchase of capital stock (216,936) (24,961)
Payment of dividends (88,973) (145,559)
Contribution from minority stockholders 65,345
------------ ------------
Net cash (used in) provided by financing activities (190,253) 1,812,278
------------ ------------
Increase in cash and cash equivalents 237,308 214,170
Cash and cash equivalents at beginning of year 34,207 271,515
------------ ------------
Cash and cash equivalents at end of year Ps 271,515 Ps 485,685
============ ============
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 429,012 Ps 479,973
============ ============
Income Tax Ps 92,772 Ps 108,523
============ ============
Non cash transactions:
During 1996 the Company financed certain capital expenditures totaling
Ps125,683 through the issuance of capital leases.
F-40
Presented below is a statement of cash flow for the year ended December 31,
1998, prepared after considering the impact of U.S. GAAP adjustments. The
cash flow statement presents nominal cash flow during the period, adjusted
to pesos of December 31, 1998, purchasing power.
Year ended
December 31,
1998
------------
Cash flows from operating activities:
Net income Ps 262,612
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 326,163
Allowance for doubtful accounts 383,497
Equity in loss of affiliated company 215,561
Minority stockholders 6,432
Accrual for seniority premiums 5,235
Monetary gain from financing activities (128,930)
Deferred income tax and employees' profit sharing 26,291
Stock options granted to employees (89,551)
Deferred income from Western Union agreement (141,006)
Unrealized exchange losses - Net 215,211
Net changes in working capital (306,490)
------------
Net cash provided by operating activities (775,025)
------------
Cash flows from investing activities:
Acquisition of property, furniture, equipment and investment in stores (560,316)
Investments in shares (149,120)
------------
Net cash used in investing activities (709,436)
------------
Cash flows from financing activities:
Short-term loans received 551,294
Proceeds from long-term debt 1,486,911
Proceeds from securitization of receivables - Net 962,526
Repayment of securitzation of receivables (876,909)
Repayment of short-term debt (890,552)
Repurchase of long-term notes (59,880)
Capitalized lease obligations (64,460)
Issuance of capital stock 4,850
Repurchase of capital stock (63,761)
Payment of dividends (111,611)
------------
Net cash provided by financing activities 953,165
------------
Effects of inflation (291,928)
Increase in cash and cash equivalents 712,069
Cash and cash equivalents at beginning of year 485,685
Cash and cash equivalents at end of year Ps 1,197,754
============
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 544,393
============
Income tax Ps 119,514
============
Non cash transactions:
The Company recorded capital lease obligations of Ps1,952 during 1998,
related to the acquisition of property.
F-41
ELEKTRA, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
F-42
ELEKTRA, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
INDEX
Contents Page
- -------- ----
Report of independent accountants F - 44
Financial statements:
Balance sheets F - 46
Statements of income F - 47
Statements of changes in stockholders' equity F - 48
Statements of changes in financial position F - 49
Notes to the financial statements F - 50
F-43
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 28, 1999
To the Stockholders of Elektra, S. A. de C. V.
1. We have audited the balance sheets of Elektra, S. A. de C. V. (the
"Company") as of December 31, 1997 and 1998, and the related statements of
income, of changes in stockholders' equity and of changes in financial
position for each of the three years in the period ended December 31, 1998,
all expressed in constant pesos of December 31, 1998 purchasing power.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Mexico, which are similar in all material respects with
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
generally accepted accounting principles. 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 statements presentation. We believe that
our audits provide a reasonable basis for our opinion.
2. In our opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of Elektra, S. A. de C. V. at
December 31, 1997, and 1998, and the results of its operations, changes in
its stockholders' equity and changes in its financial position for each of
the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in Mexico.
F-44
3. Accounting principles generally accepted in Mexico differ in certain
important respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income, expressed in pesos of December 31, 1998,
purchasing power for each of the three years in the period ended December
31, 1998, and the determination of stockholders' equity at December 31,
1997 and 1998 also expressed in pesos of December 31, 1998 purchasing
power, to the extent summarized in Note 9 to the financial statements.
PricewaterhouseCoopers
Javier Soni O.
F-45
ELEKTRA, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
BALANCE SHEETS
Thousands of Mexican pesos of
December 31, 1998 purchasing power
December 31,
-------------------------
1997 1998
----------- -----------
Assets:
CURRENT ASSETS:
Cash and cash equivalents Ps 371,418 Ps 899,841
----------- -----------
Accounts receivable:
Customers, less allowance for doubtful accounts
of Ps21,821 in 1997 and Ps 8,679 in 1998 24,898 31,093
Related parties - Net (Note 3) 2,283,662 1,315,840
Recoverable taxes 138,150 77,908
Other receivables 107,165 199,284
----------- -----------
2,553,875 1,624,125
----------- -----------
Inventories (Note 4) 1,699,419 1,693,128
----------- -----------
Prepaid expenses 179,236 218,178
----------- -----------
Total current assets 4,803,948 4,435,272
TRANSPORTATION EQUIPMENT, OTHER EQUIPMENT
AND INVESTMENT IN STORES, less accumulated depreciation
of Ps119,043 in 1997 and Ps207,290 in 1998 232,204 210,317
INVESTMENT IN SHARES (Note 1) 42,908
GOODWILL, less accumulated amortization of Ps1,625 (Note 1) 128,402
OTHER ASSETS 13,323 23,796
----------- -----------
Ps5,049,475 Ps4,840,695
=========== ===========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Bank loans (Note 5) Ps1,594,004 Ps1,133,178
Suppliers 992,367 1,227,085
Accounts payable and accrued expenses 180,529 176,026
----------- -----------
Total current liabilities 2,766,900 2,536,289
RELATED PARTIES (Note 3) 680,439 706,777
OTHER LONG-TERM LIABILITIES 3,493 142
----------- -----------
3,450,832 3,243,208
----------- -----------
STOCKHOLDERS' EQUITY (Note 6):
Capital stock 77,471 77,471
Paid-in capital 484,434 484,434
Retained earnings 2,152,778 2,409,709
Loss from holding nonmonetary assets (1,116,040) (1,374,127)
----------- -----------
1,598,643 1,597,487
----------- -----------
CONTINGENCY (Note 8)
Ps5,049,475 Ps4,840,695
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-46
ELEKTRA, S. A. DE C. V.
STATEMENTS OF INCOME
(Note 3)
Thousands of Mexican pesos of
December 31, 1998 purchasing power
Year ended December 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
Net sales Ps5,229,490 Ps5,424,276 Ps5,537,250
Money transfer services 295,977 281,945 321,779
Cost of sales (3,004,455) (3,960,342) (4,027,123)
----------- ----------- -----------
2,521,012 1,745,879 1,831,906
----------- ----------- -----------
Sale and administrative expenses 1,001,710 1,209,824 1,466,478
Expenses (income) pertaining to services received from
or rendered to affiliated companies 921,827 (203,022) (302,613)
Other expenses (income) - Net 1,681 (176,923) (3,084)
----------- ----------- -----------
1,925,218 829,879 1,160,781
----------- ----------- -----------
Operating income 595,794 916,000 671,125
----------- ----------- -----------
Comprehensive financing cost:
Interest income 247,882 153,526 209,381
Interest expense (613,752) (569,134) (388,147)
Exchange loss - Net (47,982) (53,587) (273,956)
Gain (loss) on net monetary position 29,051 (76,444) 86,740
----------- ----------- -----------
(384,801) (545,639) (365,982)
----------- ----------- -----------
Income before taxes, equity in affiliated
company and extraordinary items 210,993 370,361 305,143
Asset tax and income tax (Note 7) 51,693 14,189 48,372
----------- ----------- -----------
Income before equity in affiliated company and
extraordinary items 159,300 356,172 256,771
Equity in income of affiliated company 10,768
----------- ----------- -----------
Income before extraordinary items 159,300 356,172 267,539
Sale of shares of affiliated company - Net (Note 1) 227,379
Benefit from realization of prior years' tax loss
carryforwards (Note 7) 34,842 5,583
----------- ----------- -----------
Net income Ps 421,521 Ps 356,172 Ps 273,122
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-47
ELEKTRA, S. A. DE C. V.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Thousands of Mexican pesos of December 31,
1998 purchasing power
Loss from
holding
Capital Paid-in Retained nonmonetary
stock capital earnings assets Total
-------- --------- ------------ ----------- -----------
Balances at January 1, 1996 Ps76,890 Ps 1,456,991 (Ps 475,285) Ps1,058,596
Issuance of capital stock 581 Ps484,434 485,015
Net income 421,521 421,521
Loss from holding nonmonetary
assets
(454,352) (454,352)
-------- --------- ------------ ----------- -----------
Balances at December 31, 1996 77,471 484,434 1,878,512 (929,637) 1,510,780
Payment of dividends (81,906) (81,906)
Net income 356,172 356,172
Loss from holding nonmonetary
assets (186,403) (186,403)
Balances at December 31, 1997 77,471 484,434 2,152,778 (1,116,040) 1,598,643
-------- --------- ------------ ----------- -----------
Payment of dividends (16,191) (16,191)
Net income 273,122 273,122
Loss from holding nonmonetary assets (258,087) (258,087)
-------- --------- ------------ ----------- -----------
Balances at December 31, 1998 Ps77,471 Ps484,434 Ps2,409,709 (Ps1,374,127) Ps1,597,487
======== ========= ============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-48
ELEKTRA, S. A. DE C. V.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
Thousands of Mexican pesos of
December 31, 1998 purchasing power
Year ended December 31,
------------------------------------------
1996 1997 1998
---------- ---------- ----------
Operations:
Income before extraordinary items Ps 159,300 Ps356,172 Ps 267,539
Charges (credits) to income not affecting resources:
Depreciation and amortization 51,041 69,024 88,247
Allowance for doubtful accounts 3,055 8,042 1,800
Equity in income of affiliated company (10,768)
Variation in inventories, accounts receivable and
payable, related parties and other assets (1,082,298) (985,356) 919,749
---------- --------- ----------
Resources (used in) provided by operations before
extraordinary items (868,902) (552,118) 1,266,567
Sale of shares of affiliated company - Net 227,379
Benefit from realization of prior years tax loss
carryforwards 34,842 5,583
---------- --------- ----------
Resources (used in) provided by operations (606,681) (552,118) 1,272,150
---------- --------- ----------
Financing:
Increase in capital stock 485,015
Related parties 680,439
Payment of dividends (81,906) (16,191)
Bank loans (paid) received (349,393) 903,372 (460,826)
---------- --------- ----------
Resources provided by (used in) financing activities 816,061 821,466 (477,017)
---------- --------- ----------
Investment:
Investment in shares (162,168)
Acquisition of equipment and investment in stores - Net (80,020) (72,173) (104,542)
---------- --------- ----------
Resources used in investment activities (80,020) (72,173) (266,710)
---------- --------- ----------
Increase in cash and cash equivalents 129,360 197,175 528,423
Cash and cash equivalents at beginning of year 44,883 174,243 371,418
---------- --------- ----------
Cash and cash equivalents at end of year Ps 174,243 Ps371,418 Ps 899,841
========== ========= ==========
The accompanying notes are an integral part of these financial statements.
F-49
ELEKTRA, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(monetary figures expressed in thousands of Mexican pesos
of December 31, 1998 purchasing power, except Note 7)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The main operations of Elektra, S. A. de C. V. (Elektra or the "Company") is the
sale of consumer electronics, major appliances and household furniture through
the operation of 581 stores nationwide. Additionally, the Company provides money
transfer services from the United States of America to Mexico and within Mexico.
Due to the fact that the Company has no employees, all services related with its
activity are rendered by affiliated companies.
Until 1996, the Company made installment sales to customers and the related
accounts receivable were sold to an affiliated Company. As from 1997, sales are
made to the affiliated Company that resells the merchandise to the customers on
the installment plan.
In January 1996, the Company sold its equity in Servicio Mexicano de Entregas,
S. A. de C. V. to Western Union at a profit of Ps227,379 after deducting the
related income tax and the receipt of dividends of Ps36,970 from the affiliated
Company.
In January 1996, the Company entered into a revised agreement with Western Union
for the transfer of money from the United States to Mexico, under which, the
Company will receive US$14.2 million annually over ten years. For this purpose,
Western Union deposited US$142 million into an escrow account, which in turn
invested this amount by purchasing 2% of the shares of Elektra and two
affiliated companies.
The Company is a subsidiary of Corporacion Diprofin, S. A. de C. V., which is a
subsidiary of Grupo Elektra, S. A. de C. V. In August, 1998, the Company
acquired 6% of the capital stock of Grupo Hecali, S. A. de C. V. for Ps162,168,
giving rise to goodwill of Ps130,028.
The financial statements are prepared in conformity with accounting principles
generally accepted in Mexico.
F-50
The significant accounting policies including the concepts, methods and criteria
related to the recognition of the effects of inflation on the financial
statements, are summarized below:
a. The Company considers all highly liquid investments with original
maturities of less than three months to be cash equivalents, and states
them at market value.
b. Inventories and cost of sales are originally determined through the average
cost method and are restated at their replacement costs and by applying
factors derived from the National Consumer Price Index (NCPI),
respectively. Amounts so determined do not exceed current market value.
c. Transportation and other equipment are restated by applying factors derived
from the NCPI to the acquisition cost of equipment acquired. Investment in
stores represents major improvements necessary for the opening of Elektra
Stores. These investments are recorded at acquisition cost and are restated
by applying factors derived from the NCPI.
Depreciation is calculated by the straight-line method based on the
estimated useful lives of the assets. Amortization of investment in stores
is calculated by the straight-line method over periods no longer than five
years.
d. Investment in shares is restated by the equity method, based on the audited
financial statements of the companies in which investments are held.
e. The excess of cost over book value of shares of subsidiaries acquired
(goodwill) is amortized over 20 years and is restated by applying factors
derived from the NCPI to the historical amounts.
f. Charges to income for income tax are based on financial pretax income after
adjustment for items excluded by law from the determination of taxable
profits (permanent differences) and for temporary differences the
realization of which is uncertain in a definite period of time. At December
31, 1997 and 1998, there were no significant temporary differences that
required the recognition of deferred income tax.
g. Transactions in foreign currencies are recorded at the rate of exchange
prevailing on the dates they are entered into. Assets and liabilities
denominated in these currencies are stated at the Mexican peso equivalents
resulting from applying the year-end rates. Exchange differences arising
from fluctuations in the exchange rates between the dates on which
transactions are entered into and those on which they are settled, or the
balance sheet date, are charged or credited to income.
h. Capital stock, paid-in capital and retained earnings represent the amounts
of these items expressed in pesos of purchasing power as of December 31,
1998 and are determined by applying factors derived from the NCPI to the
historical amounts.
F-51
i. The Company recognizes revenue on the accrual basis when goods are
delivered to customers.
j. The gain or loss on net monetary position represents the effect of
inflation, as measured by the NCPI, on the Company's average monthly net
monetary liabilities or assets, respectively, during the year, as restated
in pesos of purchasing power at the end of the most recent period.
k. The loss from holding nonmonetary assets represents the amount by which the
increase in the values of nonmonetary assets fell short of the inflation
rate, measured in terms of the NCPI.
l. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affects the amounts reported in the financial statements.
Actual results could differ from those estimates.
NOTE 2 - FOREIGN CURRENCY POSITION:
At December 31, 1997 and 1998, the Company had the following monetary assets and
liabilities in US dollars:
Thousands of US dollars
---------------------------
1997 1998
----------- ----------
Assets US$ 16,635 US$ 18,415
Liabilities (125,297) (31,352)
----------- ----------
Short net position (US$ 108,662) (US$ 12,937)
=========== ==========
At December 31, 1998, the exchange rate was Ps9.93 to the US dollar (Ps8.06 at
December 31, 1997). At February 28, 1999, date of issuance of the financial
statements, the exchange rate was Ps10.10 to the U.S. dollar.
Below is a summary of the principal transactions denominated in foreign
currencies carried out by the Company in 1996, 1997 and 1998:
1996 1997 1998
---------- ---------- ----------
Money transfer services US$ 23,649 US$ 24,008 US$ 24,270
Interest expense (2,840) (3,740)
---------- ---------- ----------
US$ 23,649 US$ 21,168 US$ 20,530
========== ========== ==========
F-52
NOTE 3 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
a. Balances:
December 31,
---------------------------
1997 1998
----------- -----------
Accounts receivable from:
Grupo Elektra, S. A. de C. V Ps1,183,886 Ps 472,528
Corporacion Diprofin, S. A. de C. V 426,799 745,008
Inmuebles Ardoma, S. A. de C. V 204,380 218,947
Mercadotecnia Tezontle, S. A. de C. V 143,476 206,627
Elektra Centroamerica, S. A. de C. V 81,401 31,890
Hecali, S. A. de C. V 85,200 177,654
Other 396,463 512,518
----------- -----------
Ps2,521,605 Ps2,365,172
----------- -----------
Accounts payable to:
Elektrafin, S. A. de C. V Ps 123,785 Ps 930,711
Other 114,158 118,621
----------- -----------
237,943 1,049,332
----------- -----------
Net balance Ps2,283,662 Ps1,315,840
=========== ===========
Long-term borrowings from related parties Ps 680,439 Ps 706,777
=========== ===========
The principal transactions with related parties are as follows:
Sales
Beginning in 1997, sales on the installment plan are made initially to
Elektrafin, S. A. de C. V., which subsequently resells the merchandise to the
final customer. In 1997 and 1998 sales to Elektrafin amounted to Ps2,818,153 and
Ps2,954,932, respectively.
Interest income
During the years ended December 31, 1996, 1997 and 1998 the Company extended
short-term loans to Grupo Elektra, S. A. de C. V and to other related parties.
Interest income under these arrangements amounted to Ps179,867, Ps185,782 and
Ps184,249, respectively.
Administrative services
During the years ended December 31, 1996, 1997 and 1998, the Company provided
administrative services to Elektrafin, S. A. de C. V. and to other related
parties, of Ps168,708, Ps747,147, and Ps782,105, respectively.
F-53
Interest expense
In 1996 the Company received a long-term loan of US$71 million and payable in
May 2001 from Grupo Elektra, S. A. de C. V., subject to interest at 13% per
annum. In 1996 and 1997, other related parties extended short-term loans to the
company, most of which were repaid during 1998. Interest expense incurred under
this and previous arrangements amounted to Ps384,553, Ps370,799 and Ps153,635
for the years ended December 31, 1996, 1997 and 1998, respectively.
Purchases of merchandise
During the years ended December 31, 1996, 1997 and 1998, the Company purchased
imported merchandise from Importaciones Electronicas Ribesa, S. A. de C. V. for
Ps308,323, Ps268,227 and Ps304,314, respectively.
Rentals and other services
For the years ended December 31, 1996, 1997 and 1998 the Company paid to certain
related parties rentals and other services of Ps411,096, Ps483,317 and
Ps479,492, respectively.
Advertising expenses
In March 1996, the Company entered into an agreement with TV Azteca whereby
Elektra will purchase 5,200 minutes per year of advertising time from TV Azteca,
to be transmitted in otherwise unsold time for US$1.5 million per year for each
of the next ten years. For the years ended December 31, 1996, 1997 and 1998 the
payments under this arrangement amounted to Ps24,704, Ps15,101 and Ps21,755,
respectively. Under the agreement the Company may purchase additional minutes at
the same contract terms.
NOTE 4 - INVENTORIES:
December 31,
----------------------------
1997 1998
----------- -----------
Name brand merchandise Ps1,429,197 Ps1,454,360
Other merchandise 169,897 125,267
Elektra brand name merchandise 74,346 56,991
Merchandise in transit 26,593 57,028
----------- -----------
1,700,033 1,693,646
Less - Allowance for obsolete inventories (614) (518)
----------- -----------
Ps1,699,419 Ps1,693,128
=========== ===========
F-54
NOTE 5 - SHORT-TERM BANK LOANS:
December 31,
----------------------------
Interest
rate 1997 1998
-------------- ----------- -----------
Unsecured loans payable in:
Mexican pesos 36.6% to 39.7% Ps1,099,752 Ps 821,848
US dollars 8.09% to 8.30% 494,252 311,330
----------- -----------
Ps1,594,004 Ps1,133,178
NOTE 6 - STOCKHOLDERS' EQUITY:
At an Extraordinary Meeting held on March 21, 1996, the stockholders approved a
Ps581 (Ps359 nominal) increase in the variable portion of the capital stock
through the issuance of 359,446 common shares of one peso par value each, which
were paid for in cash, including an excess of par value of Ps484,434 (Ps299,453
nominal).
After this increase, the capital stock as of December 31, 1997 and 1998, is
represented by 17,972,326 common registered shares of one peso par value each,
distributed as shown below:
Amount
--------
Fixed minimum capital stock, represented by 8,982,569
Series "A" shares Ps 8,983
Variable portion, represented by 8,989,757 Series "B" shares 8,990
--------
17,973
Restatement increase 59,498
--------
Capital stock expressed in Mexican
pesos of December 31, 1998 purchasing power Ps77,471
========
In accordance with the Company's by-laws, at least 51% of the capital stock must
be held by Mexican nationals.
In the event that dividends are paid from retained earnings which have not
previously been taxed, a tax equivalent to 53.85% of the dividend will be
payable by the Company. Additionally, dividends paid to individuals or to
parties resident abroad are subject to a maximum tax witholding of 7.69%,
regardless of any previous taxation of such dividends. Capital stock reductions
in excess of the sum of the balances of capital contributions accounts, net tax
income and reinvested net tax income, inflation-indexed in accordance with the
procedures established in the Income Tax Law, are accorded the same tax
treatment as dividends.
F-55
NOTE 7 - INCOME TAX AND ASSET TAX:
Amounts in this note are expressed in nominal pesos.
In the year ended December 31, 1998, the Company had income for tax purposes of
Ps130,265, which was partially offset by tax loss carryforwards of Ps15,042. The
tax benefit amounted to Ps5,583 and is presented in the statement of income as
an extraordinary item.
For the years ended December 31, 1996, 1997 and 1998, the difference between
taxable and financial income is mainly due to the effect of the tax deduction of
inventory purchases, offset by the non-allowable deduction of cost of sales, to
the difference between the effect of the inflationary component determined for
book and tax purposes, and to nondeductible expenses.
At December 31, 1996, 1997 and 1998 the Company determined asset tax of Ps5,334,
Ps11,963 and Ps21,976, respectively. At December 31, 1998, recoverable asset tax
amounted to Ps11,963.
NOTE 8 - CONTINGENCY:
The Company is the guarantor of long term notes amounting to US$100 million
issued by Grupo Elektra, S. A. de C. V. (holding company).
NOTE 9 - RECONCILIATION BETWEEN MEXICAN (MEXICAN GAAP) AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP):
The Company's financial statements are prepared in accordance with Mexican GAAP,
which differ in certain significant respects from U.S. GAAP. The Mexican GAAP
financial statements include the effects of inflation as provided for under
Statement B-10, "Recognition of the Effects of Inflation on Financial
Information". The application of this Statement represents a comprehensive
measure of the effects of price level changes in the Mexican economy, which for
many years was hyperinflationary, and is considered to result in a more
meaningful presentation than historical cost-based financial reporting for both
Mexican and U.S. accounting purposes. Therefore the following reconciliation to
U.S. GAAP do not include the reversal of such inflationary effects.
The principal differences between Mexican GAAP and U.S. GAAP are summarized
below with an explanation, where appropriate, of the effects on net income and
stockholders' equity. The various reconciling items are presented net of any
price level gain (loss).
F-56
a. Reconciliation of net income and stockholders' equity:
Year ended December 31,
--------------------------------------------------
1996 1997 1998
---------- ---------- -----------
Net income under Mexican GAAP Ps 421,521 Ps 356,172 Ps 273,122
Deferred income tax effects (112,229) (175,779) 17,363
Monetary loss on receivables from related
parties (372,843) (162,081) (131,027)
Effect of sales mark-up on installment sales 128,481 1,710
---------- ---------- -----------
Net income under US GAAP Ps 64,930* Ps 20,022* Ps 159,458
========== ========== ==========
December 31,
----------------------------
1997 1998
----------- -----------
Stockholders' equity under Mexican
GAAP Ps1,598,643 Ps1,597,487
Deferred income tax effects (608,054) (590,691)
Reclassification of capital contribution
to deferred income (485,015) (485,015)
----------- -----------
Stockholders' equity under US GAAP Ps 505,574* Ps 521,781
=========== ===========
An analysis of the changes in stockholders' equity under US GAAP is as follows:
1996 1997 1998
--------- --------- ---------
Balance at beginning of year Ps608,359 Ps591,780 Ps505,574
Net income 64,930 20,022 159,458
Payment of dividends (81,906) (16,191)
Loss from holding nonmonetary assets (81,509) (24,322) (127,060)
--------- --------- ---------
Balance at end of year Ps591,780* Ps505,574* Ps521,781
========= ========= =========
* Restated from prior years
b. Restatement of prior year amounts:
During 1998 the Company determined that various differences occurred in the
determination of net income (loss) and stockholders' equity under US GAAP as of
and for the year ended December 31, 1996 and 1997. These differences relate
principally to the recognition of deferred income, the recognition of cash
advance to related parties and the effect of sales mark up on installment sales.
The effect of these differences on previously reported amounts is shown on the
following page.
F-57
Net income (loss) Stockholders' equity
-------------------------- --------------------------
Year ended December 31, At December 31,
-------------------------- --------------------------
1996 1997 1996 1997
--------- --------- --------- ---------
As previously reported Ps307,582 Ps422,128 Ps836,770 Ps990,589
Effect of differences relating to:
Reclassification of capital contribution
to deferred income (485,015) (485,015)
Monetary loss on receivables from
related parties (372,843) (162,081)
Effect of sales mark-up on
installment sales-Net 130,191 (240,025) 240,025
--------- --------- --------- ---------
(242,652) (402,106) (244,990) (485,015)
--------- --------- --------- ---------
As restated Ps 64,930 Ps 20,022 Ps591,780 Ps505,574
========= ========= ========= =========
Previously reported amounts did not include any adjustments for deferred income,
monetary loss on receivables from related parties, and the recognition of the
effect of sales mark-up on installment sales in each year.
c. Significant differences between US GAAP and Mexican GAAP:
i. Deferred income tax.
As stated in Note 1f., income tax is recorded under Mexican GAAP following
interperiod allocation procedures under the partial liability method. Under
this method, deferred tax is recognized only in respect of nonrecurring
timing differences between taxable and book income, which are expected to
reverse at a definite future date. Also, under Mexican GAAP the benefit
from utilizing tax loss carryforwards and asset tax credits are not
recognized until utilized, at which time it is presented as an
extraordinary item.
U.S. GAAP Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("FAS No. 109") requires an asset and liability approach
for financial accounting and reporting for income tax under the following
basic principles: (a) a current tax liability or asset is recognized for
the estimated taxes payable or refundable on tax returns for the current
year; (b) a deferred tax liability or asset is recognized for the estimated
future tax effects attributable to temporary differences and carryforwards;
(c) the measurement of current and deferred tax liabilities and assets is
based on provisions of the enacted tax laws and the effects of future
changes in tax laws or rates are not anticipated, and (d) the measurement
of deferred tax assets is reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are not expected to be
realized. Under this method, deferred tax is recognized in respect of all
temporary differences, and the benefit from utilizing tax loss
carryforwards and asset tax
F-58
credits is recognized in the year in which the loss or credits arise
(subject to a valuation allowance in respect of any tax benefits not
expected to be realized). The subsequent realization of this benefit does
not affect income. Consequently, they do not represent extraordinary items
for US GAAP purposes.
The temporary differences under FAS No. 109 are determined based on the
difference between the indexed tax-basis amount of the asset or liability
and the related stated amount reported in the financial statements. Except
as indicated in the following paragraph, the deferred tax expense or
benefit is calculated as the difference between: (a) the deferred tax
assets and liabilities at the end of the current period determined as
indicated above, and (b) the deferred tax assets and liabilities reported
at the end of the prior period remeasured to units of current general
purchasing power at the end of the current period.
Gains and losses from holding nonmonetary assets are recorded in
stockholders' equity. It is the Company's policy to reflect the deferred
income taxes that arise as a result of such gains (losses) from assets or
liabilities which do not currently affect income in the results of
operations.
The significant components of income tax expense under US GAAP are as follows:
Year ended December 31,
------------------------------------------
1996 1997 1998
--------- --------- --------
Current Ps 16,851 Ps42,789
Deferred 112,229 Ps175,779 (17,363)
Asset tax 14,189
--------- --------- --------
Ps129,080 Ps189,968 Ps25,426
========= ========= ========
The items shown below represent the main differences between income tax computed
under US GAAP at the statutory tax rate and the Company's provision for income
tax in each period:
Year ended December 31,
--------------------------------
1996 1997 1998
---- ---- ----
Statutory income tax rate 34% 34% 34%
Inflationary effects 26% (6%) (15%)
Non deductible expenses 6% 2% 1%
Other (4%) (1%) (5%)
-- -- --
Effective income tax rate 62% 29% 15%
== == ==
F-59
The tax effects of significant items comprising the Company's net deferred tax
assets and liabilities under US GAAP are shown below:
December 31,
-----------------------
1997 1998
--------- ---------
Deferred income tax liabilities:
Inventories Ps577,803 Ps575,664
Transportation and other equipment 2,842 (42,409)
Other 55,235 74,181
--------- ---------
635,880 607,436
--------- ---------
Deferred income tax assets:
Allowance for doubtful accounts 7,419 2,951
Operating loss carryforwards 6,218
Asset tax carryforwards 14,189 13,794
--------- ---------
27,826 16,745
--------- ---------
Net deferred income tax liabilities Ps608,054 Ps590,691
========= =========
ii. Deferred income
As described in Note 1, the Company received US$142 million in 1996
relating to the Company's revised contractual agreements with Western Union
which were deposited in an escrow fund and subsequently (at the direction
of the Company) transferred to the Company via purchase, by the escrow
account, of shares of the Company and of two affiliated companies. Under
Mexican GAAP, the escrow fund is treated as an independent entity and the
US$142 million relating to the shares purchased by the escrow fund is
accounted for as a capital contribution by each company. The aggregate
capital contribution will be reduced annually by an aggregate of US$14.2
million with a corresponding credit to revenue, as escrowed amounts are
released to the Company under terms of the escrow agreement. Income tax
expense will be recorded at the time of revenue recognition.
Under U.S. GAAP, the escrow arrangement would be treated as a special
purpose consolidated entity, with the US$142 million accounted for as
deferred income to be recognized as revenue over periods up to 10 years in
accordance with the contractual agreements. The capital contribution
received by two affiliated companies from the escrow has been recorded by
the Company as long-term receivables which are to be repaid as escrowed
amounts are released. The recognition of the long-term receivables also
results in the recognition of a loss on monetary position for the years
ended December 31, 1996, 1997 and 1998 of Ps372,843, Ps162,081 and
Ps131,027, respectively. The US GAAP reconciliations for 1996 and 1997 have
been restated to reflect the above treatment (see Note 9a.).
F-60
iii. Revenue recognition
For Mexican GAAP purposes, the Company accounts for the installment sales
mark-up as sales when the merchandise was delivered to the customer. Under
U.S. GAAP, the mark-up is deferred and amortized over the life of the
installment sales contract. The US GAAP reconciliations for 1996 and 1997
have been restated to reflect the above treatment (see Note 9a.)
iv. Fair value information.
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS No. 107"). The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop estimates of fair value.
Cash and cash equivalents, accounts receivable and accounts payable. The
carrying value of these items is a reasonable estimate of their fair value.
Notes receivable from related parties. The carrying value of notes
receivable at December 31, 1997 and 1998, is a reasonable estimate of their
fair value based on the interest rates that are currently available to the
related parties for issuance of notes with similar terms and remaining
maturities.
Bank loans and other debt. The Company's bank loans and other debt bear
interest at variable rates and their terms are generally representative of
those which are currently available to the Company at December 31, 1998 for
the issuance of debt with similar terms and remaining maturities; and
therefore, the carrying values of these loans and other debt are a
reasonable estimate of their fair value.
v. Concentration of credit risk
The Company is a retailer of consumer electronics, major appliances,
household furniture and other products with 581 Elektra stores in Mexico,
at December 31, 1998.
The Company currently has a network of approximately 170 suppliers for its
electronics, appliances and furniture products. The Company typically does
not maintain long-term purchase contracts with suppliers and principally
operates on a purchase order basis. Although certain vendors are
significant to the Company's business because of their name recognition,
the Company does not believe that its business in dependent upon any one
vendor or particular group of vendors.
F-61
vi. Comprehensive income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", ("FAS No.
130"), which establishes new standards for reporting and displaying
comprehensive income and its components. It was not practical to determine
the cumulative comprehensive income as of January 1, 1998.
vii. Recently issued accounting standards
In April 1998, Financing Accounting Standards Board ("FASB") issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
which is effective for fiscal years beginning after December 15, 1998. This
statement of position provides guidance on the financial reporting of
start-up costs and organization costs. It requires cost of start-up
activities and organization costs to be expensed as incurred. The Company
does not believe that the adoption of this SOP will have a material impact
on its financial position or results of operations.
In June 1998, the FASB issued statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 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 of other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transactions.
The Company does not believe that the adoption of this Standard will have a
material impact on its financial position or results of operations.
d. Condensed balance sheets and income statements under US GAAP.
The following condensed balance sheets and income statements reflect the
effects of the principal differences between Mexican GAAP and US GAAP.
F-62
CONDENSED BALANCE SHEETS
At December 31,
---------------------------------
1997 1998
----------- -----------
Accounts receivable from customers - Net Ps 24,898 Ps 31,093
Inventories 1,699,419 1,693,128
Related parties 168,554 167,865
Other current assets 2,427,018 2,021,019
----------- -----------
Total current assets 4,319,889 3,745,240
Property, furniture, equipment and investment in stores - Net 232,204 210,317
Related parties 929,501 761,636
Other assets 13,323 195,107
----------- -----------
Ps5,494,917* Ps5,080,165
=========== ===========
Short-term debt Ps1,594,004 Ps1,133,178
Deferred income-current portion 168,554 167,865
Other current liabilities 1,808,776 2,010,548
----------- -----------
Total current liabilities 3,571,334 3,311,591
----------- -----------
Long-term liabilities 3,493 142
Deferred income 1,414,516 1,246,651
----------- -----------
Total long-term liabilities 1,418,009 1,246,793
----------- -----------
Stockholders' equity 505,574 521,781
----------- -----------
Ps5,494,917* Ps5,080,165
=========== ===========
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
------------------------------------------------------
1996 1997 1998
------------ ------------ ------------
Revenues:
Sales Ps 4,185,726 Ps 5,316,868 Ps 5,537,250
Other income 523,356 290,011 321,779
------------ ------------ ------------
4,709,082 5,606,879 5,859,029
------------ ------------ ------------
Cost and expenses:
Cost of sales (3,004,455) (3,960,342) (4,027,123)
Selling, general and administrative (2,217,170) (1,006,802) (1,163,865)
Other (expenses) income (1,679) 168,858 3,084
------------ ------------ ------------
5,223,304 4,798,286 5,187,904
------------ ------------ ------------
Operating (loss) income (514,222) 808,593 671,125
Other financing income (expense) 708,232 (598,603) (497,009)
------------ ------------ ------------
Pretax income 194,010 209,990 174,116
Income and asset tax (129,080) (189,968) (25,426)
Earnings of equity investment 10,768
------------ ------------ ------------
Net income 64,930* 20,022* 159,458
Loss from holding nonmonetary assets (81,509) (24,322) (127,060)
------------ ------------ ------------
Comprehensive income (loss) (Ps 16,579) (Ps 4,300) Ps 32,398
============ ============ ============
* Restated from prior years
F-63
Cash flow information.
Under US GAAP a statement of cash flow is prepared based on provisions of
FAS 95, "Statement of Cash Flows". This statement does not provide guidance
for the preparation of cash flow statements for price level adjusted
financial statements.
Presented below are statements of cash flows for the years ended December
31, 1996 and 1997 prepared after considering the impact of U.S. GAAP
adjustments. The cash flow statements are net of certain non cash
transactions but include the effects of inflation on cash flow and have
been restated to pesos of December 31, 1998, purchasing power.
Year ended December 31,
----------------------------
1996 1997
------------ ------------
Cash flow from operating activities:
Net income Ps 64,930 Ps 20,022
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 51,041 69,024
Monetary loss 343,792 238,525
Deferred income tax 112,229 175,779
Deferred income 1,718,838 (135,768)
Allowance for doubtful accounts 3,055 8,042
Gain on sale of shares of affiliated company (227,379)
Net changes in working capital (1,260,216) (1,063,490)
------------ ------------
Net cash provided by (used in) operating activities 806,290 (687,866)
------------ ------------
Cash flow from investing activities:
Acquisition of equipment and investment in stores - Net (80,020) (72,173)
Borrowings (extended to) repaid by related parties (1,233,823) 135,768
Proceeds received from sale of shares of affiliated
company 253,285
------------ ------------
Net cash (used in) provided by investing activities: (1,060,558) 63,595
------------ ------------
Cash flows from financing activities:
Short-term loans (repaid) received (296,811) 903,372
Borrowings from related parties 680,439
Payment of dividends (81,906)
------------ ------------
Net cash provided by financing activities 383,628 821,466
------------ ------------
Increase in cash and cash equivalents 129,360 197,175
Cash and cash equivalents at beginning of year 44,883 174,243
------------ ------------
Cash and cash equivalents at end of year Ps 174,243 Ps 371,418
============ ============
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 148,338 Ps 170,636
============ ============
Income tax Ps 0 Ps 20,082
============ ============
F-64
Presented below is a statement of cash flow for the year ended December 31,
1998, prepared after considering the impact of U.S. GAAP adjustments. The cash
flow statement presents nominal cash flows during the period, adjusted to pesos
of December 31, 1998, purchasing power.
Year ended
December 31, 1998
-----------------
Cash flow from operating activities:
Net income Ps 159,458
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 88,247
Monetary gain 44,287
Deferred income tax (17,363)
Amortization of deferred income (168,554)
Allowance for doubtful accounts 1,800
Equity in income of subsidiary (10,768)
Net changes in working capital 1,010,455
----------
Net cash provided by operating activities 1,107,562
----------
Cash flow from investing activities:
Acquisition of transportation equipment and
investment in stores - Net (110,133)
Borrowings repaid by related parties 168,554
Investment in affiliate (162,168)
----------
Net cash used in investing activities (103,747)
----------
Cash flows from financing activities
Short-term loans repaid (210,726)
Payment of dividends (16,191)
Net cash used in financing activities (226,917)
----------
Effects of inflation and exchange rate changes
on cash (248,475)
----------
Increase in cash and cash equivalents 528,423
Cash and cash equivalents at beginning of year 371,418
Cash and cash equivalents at end of year Ps 899,841
==========
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 194,668
==========
Income tax Ps 50,445
==========
F-65
ELEKTRAFIN, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
F-66
ELEKTRAFIN, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
INDEX
Contents Page
- -------- ----
Report of independent accountants F-68
Financial statements:
Balance sheets F-70
Statements of income F-71
Statements of changes in stockholders' equity F-72
Statements of changes in financial position F-73
Notes to the financial statements F-74
F-67
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 28, 1999
To the Stockholders of
Elektrafin, S. A. de C. V.
1. We have audited the balance sheets of Elektrafin, S. A. de C. V. as of
December 31, 1997 and 1998, and the related statements of income, of
changes in its stockholders' equity and of changes in its financial
position for each of the three years in the period ended December 31, 1998,
expressed in constant pesos of December 31, 1998 purchasing power. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Mexico, which are similar in all material respects with
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
generally accepted accounting principles. 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.
2. As mentioned in Note 1 to the financial statements, at the Extraordinary
Meeting held on January 31, 1997, the stockholders approved the merger of
Credielektra, S. A. de C. V. (Credielektra) and Elektrafin, S. A. de C. V.
(Elektrafin), affiliated company. The merger was effective as from that
date, with Credielektra surviving and changing its name to Elektrafin, S.
A. de C. V. (the "Company"). The operations of Credielektra prior to the
merger were not material.
Since Credielektra and Elektrafin had the same controlling stockholders,
this business combination was accounted for in a manner similar to the
pooling of interest method. Accordingly, the accompanying financial
statements of Elektrafin at December 31, 1997 include the figures as though
the companies had been combined as of the beginning of the year. Also, the
financial statements of 1996 were restated on a combined basis for
comparative purposes.
F-68
3. In our opinion, the aforementioned financial statements present fairly in
all material respects, the financial position of Elektrafin, S. A. de C. V.
at December 31, 1997 and 1998, and the results of its operations, changes
in stockholders' equity and changes in its financial position for each of
the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in Mexico.
4. Accounting principles generally accepted in Mexico differ in certain
important respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income (loss), expressed in pesos of December 31,
1998 purchasing power for each of the three years in the period ended
December 31, 1998 and the determination of stockholders' equity at December
31, 1997 and 1998, also expressed in pesos of December 31, 1998 purchasing
power, to the extent summarized in Note 9 to the financial statements.
PricewaterhouseCoopers
Javier Soni O.
F-69
ELEKTRAFIN, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
BALANCE SHEETS
(Note 1)
Thousands of Mexican pesos of
December 31, 1998 purchasing power
December 31,
----------------------------
Assets 1997 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents Ps 2,299 Ps 1,730
----------- -----------
Accounts receivable:
Customers - Net (Note 4) 1,456,284 953,024
Related parties 136,773
Recoverable taxes 56,758 13,234
Other 555 2,241
----------- -----------
1,513,597 1,105,272
----------- -----------
Guarantee on securitized receivables (Note 4) 91,069 337,688
Prepaid expenses 65,054
Inventories (finished products) 261,017
----------- -----------
Total current assets 1,933,036 1,444,690
INVESTMENTS IN JOINT VENTURES 97,385 209,019
OTHER ASSETS 9,593 25,165
----------- -----------
Ps2,040,014 Ps1,678,874
=========== ===========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Related parties - Net (Note 5) Ps 220,262
Income tax and asset tax payable 17,860 Ps 70,031
Other accounts payable and accrued expenses 178,246 165,271
----------- -----------
Total current liabilities 416,368 235,302
----------- -----------
RELATED PARTIES (Note 5) 248,559 258,180
----------- -----------
Total liabilities 664,927 493,482
----------- -----------
STOCKHOLDERS' EQUITY (Notes 1 and 6):
Capital stock 141,458 141,458
Paid-in capital 1,162,727 1,162,727
Retained earnings (deficit) 73,506 (114,188)
Loss from holding nonmonetary assets (2,604) (4,605)
----------- -----------
1,375,087 1,185,392
CONTINGENCY (Note 8)
Ps2,040,014 Ps1,678,874
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-70
ELEKTRAFIN, S. A. DE C. V.
STATEMENTS OF INCOME
(Notes 1 and 5)
Thousands of Mexican pesos of
December 31, 1998 purchasing power
Year ended December 31,
-----------------------------------------------
1996 1997 1998
---- ---- ----
Net sales Ps 574,023 Ps 2,986,583 Ps 3,648,171
Cost of sales 267,973 2,879,157 3,434,808
----------- ------------ ------------
306,050 107,426 213,363
----------- ------------ ------------
Operating expenses and other:
Administrative services received from affiliates 202,643 873,509 1,134,882
Administrative expenses 147,901 164,134 231,279
Allowance for doubtful accounts 181,001 285,225 330,401
Other (income) expenses - Net (49,338) 16,734 (6,716)
----------- ------------ ------------
482,207 1,339,602 1,689,846
----------- ------------ ------------
Operating loss (176,157) (1,232,176) (1,476,483)
----------- ------------ ------------
Comprehensive financing cost:
Interest income - Net 803,850 1,232,969 1,539,072
Exchange losses - Net (17,663) (5,806) (24,968)
Loss on monetary position (246,477) (213,816) (216,309)
----------- ------------ ------------
539,710 1,013,347 1,297,795
----------- ------------ ------------
Income (loss) before income tax and extraordinary item 363,553 (218,829) (178,688)
Income tax (Note 7) (25,668) (21,977) (50,756)
------------ ------------ -------------
Income (loss) before extraordinary item 337,885 (240,806) (229,444)
Extraordinary item - Benefit from realization of prior years'
tax loss carryforwards (Note 7) 50,756
----------- ------------ ------------
Net income (loss) Ps 337,885 (Ps 240,806) (Ps 178,688)
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-71
ELEKTRAFIN, S. A. DE C. V.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Note 1)
Thousands of Mexican pesos of
December 31, 1998 purchasing power
Gain (loss)
(Deficit) from holding
Capital Paid-in retained nonmonetary
stock capital earnings assets Total
---------- ----------- ---------- ------------ -----------
Balances at January 1, 1996 Ps 192,319 (Ps 4,515) Ps 634 Ps 188,438
Increase in capital stock 2,372 Ps1,162,727 1,165,099
Absorption of deficit (53,233) 53,233
Payment of dividends (50,195) (50,195)
Net income 337,885 337,885
Loss from holding nonmonetary assets (3,147) (3,147)
---------- ----------- ---------- ------- -----------
Balances at December 31, 1996 141,458 1,162,727 336,408 (2,513) 1,638,080
Payment of dividends (22,096) (22,096)
Net loss (240,806) (240,806)
Loss from holding nonmonetary assets (91) (91)
---------- ----------- ---------- ------- -----------
Balances at December 31, 1997 141,458 1,162,727 73,506 (2,604) 1,375,087
Payment of dividends (9,006) (9,006)
Net loss (178,688) (178,688)
Loss from holding nonmonetary assets (2,001) (2,001)
---------- ----------- ---------- ------- -----------
Balances at December 31, 1998 Ps 141,458 Ps1,162,727 (Ps 114,188) (Ps4,605) Ps1,185,392
========== =========== ========== ======= ===========
The accompanying notes are an integral part of these financial statements.
F-72
ELEKTRAFIN, S. A. DE C. V.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Note 1)
Thousands of Mexican pesos of
December 31, 1998 purchasing power
Year ended December 31,
--------------------------------------------------
Operations: 1996 1997 1998
---- ---- ----
Net income (loss) before extraordinary item Ps 337,885 (Ps 240,806) (Ps 229,444)
Charges to income not affecting resources:
Allowance for doubtful accounts 181,001 285,225 330,401
Net changes in accounts receivable and accounts
payable (1,277,038) 119,149 (31,641)
------------ ------------ ------------
Resources (used in) provided by operations before
extraordinary item (758,152) 163,568 69,316
Extraordinary item - Benefit from realization of prior
years' tax loss carryforwards 50,756
------------ ----------- ------------
Resources (used in) provided by operations (758,152) 163,568 120,072
------------ ----------- ------------
Financing:
Borrowings from related parties 248,559
Bank loans repaid (603,645) (28,138)
Increase in capital stock 1,165,099
Payment of dividends (50,195) (22,096) (9,006)
------------ ----------- ------------
Resources provided by (used in) financing activities 759,818 (50,234) (9,006)
------------ ----------- ------------
Investment:
Investments in joint ventures (112,855) (111,635)
----------- ------------
Increase (decrease) in cash and cash equivalents 1,666 479 (569)
Cash and cash equivalents at beginning of year 154 1,820 2,299
------------ ----------- ------------
Cash and cash equivalents at end of year Ps 1,820 Ps 2,299 Ps 1,730
============ =========== ============
The accompanying notes are an integral part of these financial statements.
F-73
ELEKTRAFIN, S. A. DE C. V.
(subsidiary of Grupo Elektra, S. A. de C. V.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(monetary figures expressed in thousands of Mexican
pesos of December 31, 1998 purchasing power, except Note 7)
NOTE 1 - COMPANY MERGER AND MAIN OPERATIONS:
At the Extraordinary Meeting held on January 31, 1997, the stockholders approved
the merger of Elektrafin, S. A. de C. V. (Elektrafin), into Credielektra, S. A.
de C. V. (Credielektra), which subsequently changed its name to Elektrafin, S.
A. de C. V. (the "Company"). The operations of Credielektra prior to the merger
were not material. Since Credielektra and Elektrafin had the same controlling
stockholders, this business combination was accounted for in a manner similar to
the pooling of interest method. Accordingly, the accompanying financial
statements of Elektrafin at December 31, 1997 include the figures as though the
companies had been combined as of the beginning of the year. Also, the 1996
financial statements were restated on a combined basis for comparative purposes.
As from August 1996, the Company's main activity is the sale in installments of
electrodomestic appliances and household furniture. Up to July 31, 1996, the
Company was engaged in the acquisition, purchase, sale and trade of accounts
receivable supported by notes, invoices and other documents.
The Company is a subsidiary of Corporacion Diprofin, S. A. de C. V., which is a
subsidiary of Grupo Elektra, S. A. de C. V. The Company has no employees, and
the services necessary to carry out its operations are rendered by affiliated
companies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements are prepared in conformity with accounting principles
generally accepted in Mexico.
The significant accounting policies, including the concepts, methods and
criteria related to the recognition of the effects of inflation on the financial
statements, are summarized as follows:
F-74
a. The Company considers all highly liquid investments with original
maturities of less than three months to be cash equivalents.
b. The Company recognizes revenue on an accrual basis when goods are delivered
to customers. Interest and the installment sales mark-up are credited to
income as they come due on a straight-line basis over the life of the
respective installment contracts.
c. Inventories and cost of sales are originally determined by the average cost
method and are restated by applying replacement costs. Amounts so
determined do not exceed current market value.
d. The charges to income for income tax are based on financial pretax income,
adjusted for items excluded by law from the determination of taxable
profits (permanent differences) and for temporary differences, the
realization of which is uncertain in a definite period of time. At December
31, 1997 and 1998, there were no significant temporary differences that
required the recognition of deferred income tax.
e. Transactions in foreign currencies are recorded at the rates of exchange
prevailing on the dates they are entered into. Assets and liabilities
denominated in these currencies are stated at the Mexican peso equivalents
resulting from applying the year-end rates. Exchange differences arising
from fluctuations in the exchange rates between the dates on which
transactions are entered into and those on which they are settled, or the
balance sheet dates, are charged or credited to income. (See Note 3.)
f. Capital stock, paid-in capital and retained earnings represent the amounts
of these items expressed in pesos of purchasing power as of December 31,
1998, and are determined by applying factors derived from the National
Consumer Price Index (NCPI) to the historical amounts.
g. The loss on monetary position represents the effect of inflation, as
measured by the NCPI, on the Company's average monthly net monetary assets
during the year, as restated in pesos of purchasing power at the end of the
most recent period.
h. The gain or loss from holding nonmonetary assets represents the amount by
which the increase in the value of nonmonetary assets exceeded or fell
short of the inflation rate, measured in terms of the NCPI.
i. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affects the amounts reported in the financial statements.
Actual results could differ from those estimates.
F-75
NOTE 3 - FOREIGN CURRENCY POSITION:
At December 31, 1997 and 1998, the Company had monetary assets and liabilities
expressed in thousands of US dollars, as shown below:
December 31,
--------------------------------------
1997 1998
---- ----
Assets US$ 9,207
Liabilities (US$ 26,587) (27,875)
-------------- -------------
Net short position (US$ 26,587) (US$ 18,668)
============== =============
At December 31, 1998, the exchange rate was Ps9.93 to the U.S. Dollar (Ps8.06 at
December 31, 1997). At February 28, 1999, date of issuance of the financial
statements, the exchange rate was Ps10.10 to the dollar.
NOTE 4 - BALANCES DUE FROM CUSTOMERS, NET AND SECURITIZATION OF RECEIVABLES:
Customer account balances at December 31, 1997 and 1998 are as follows:
December 31,
-------------------------------
1997 1998
---- ----
Customers Ps1,507,012 Ps1,013,516
Less - Allowance for doubtful accounts (50,728) (60,492)
----------- -----------
Ps1,456,284 Ps 953,024
=========== ===========
The Company follows the policy of writing-off all customer balances outstanding
more than 90 days against the allowance for doubtful accounts.
Accounts receivable from retail customers are shown net of the unearned
installment sales mark-up. The unearned installment sales mark-up was Ps452,403
and Ps353,293 at December 31, 1997 and 1998, respectively.
The movement of the allowance for doubtful accounts is a follows:
Year ended December 31,
-----------------------------------------------
1996 1997 1998
---- ---- ----
Beginning balance Ps 89,973 Ps 47,418 Ps 50,728
Provisions 186,822 285,225 330,401
Write-offs (229,377) (281,915) (320,637)
---------- ---------- ----------
Ps 47,418 Ps 50,728 Ps 60,492
========== ========== ==========
F-76
Securitization of receivables
The Company has established a four year revolving securitization program to
securitize its receivables. Under the program, the Company transfers its
receivable collection rights to a trust fund incorporated by Nacional
Financiera, S. N. C. (NAFIN) in exchange for cash resources obtained from the
public offering of "Ordinary and Amortizable Participation Certificates"
("OPCs"). The public offering is affected by the issuance of preferred and
subordinated OPCs which are acquired by public investors and the Company,
respectively. During 1998, the Company completed two separate offerings one on
April 15 and one on December 17, 1998, for Ps793,000 (nominal pesos) and
Ps200,000 (nominal pesos), respectively.
Duff and Phelps de Mexico, S. A. de C. V., Fitch IBCA Mexico, S. A. de C. V. and
Clasificadora de Riesgos, S. A. de C. V. rated the securitized receivables as
mAA, AA and AA, respectively.
The Company collects the securitized receivables on behalf of the trust and
deposits such collections in the trust fund. The two separate offerings of OPCs
will mature in April 2000 and in December 2002. The preferred OPCs will be
repaid at their nominal value, and the subordinated OPCs with the remaining cash
held by the trust.
NOTE 5 - ACCOUNTS RECEIVABLE FROM AND PAYABLE TO RELATED PARTIES:
December 31,
--------------------------
Accounts receivable: 1997 1998
---- ----
Elektra, S. A. de C. V. Ps123,785 Ps930,711
Comercios Elektra, S. A. de C. V. 53,702 45,277
Other 20,059 11,036
--------- ---------
197,546 987,024
--------- ---------
Accounts payable:
Elmex Superior, S. A. de C. V. 245,163 335,354
Corporacion Diprofin, S. A. de C. V. 48,067 185,881
Garantias Extendidas, S. A. de C. V. 42,606 185,267
Other 81,972 143,749
--------- ---------
417,808 850,251
--------- ---------
Net (liabilities) receivables balances (Ps220,262) Ps136,773
========== =========
Long-term borrowings from related parties Ps248,559 Ps258,180
========= =========
F-77
The principal transactions with related parties are as follows:
Commissions and interest earned
During the years ended December 31, 1996 and 1997 the Company earned commissions
from Elektra and Hecali amounting to Ps702,224 and Ps312,726, respectively, for
the trade of their accounts receivable. In 1998 the Company earned interest from
certain related parties amounting to Ps33,694.
Purchase of merchandise
As mentioned in Note 1, the Company's main activity is the sale in installments
of electrodomestic appliances and household furniture. All merchandise are
purchased from Elektra, S. A. de C. V. ("Elektra"). For the years ended December
31,1996, 1997 and 1998 the Company's purchases from Elektra amounted to
Ps263,698, Ps3,079,094 and Ps3,169,681, respectively.
Administrative services
The services necessary to carry out the Company's operations are rendered by
Elektra such as accounting and tax computation services. In the years ended
December 31, 1996, 1997 and 1998 the Company incurred administrative services of
Ps202,642, Ps684,408 and Ps918,665, respectively.
Interest expense
In 1996 the Company received a long-term loan of US$26 million from Grupo
Elektra, S. A. de C. V., subject to interest at 13% per annum. For the years
ended December 31, 1996, 1997 and 1998 the Company incurred interest to Grupo
Elektra of Ps22,177, Ps91,896 and Ps37,535, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY:
At the Extraordinary Meeting of January 31, 1997, the stockholders approved the
modification of the par value of the common and nominative shares from Ps100 to
one Mexican peso each.
As a result of the merger mentioned in Note 1, the stockholders approved the
issuance of 73,061,263 common and nominative shares with a par value of one
Mexican peso each, representing the variable part of the capital stock.
At several meetings held in 1996, 1997 and 1998, the stockholders agreed:
a. To increase the variable portion of the capital stock by Ps2,372 (Ps1,467
nominal) in 1996 through the issuance of common and nominative shares with
a par value of one Mexican peso
F-78
each, which were paid for in cash. The 1996 capital increase gave rise to
paid-in capital of Ps1,162,727 (Ps715,644 nominal).
b. To absorb the deficit of Ps53,233 (Ps32,907 nominal) in 1996.
c. To pay dividends of Ps50,195 (Ps31,028 nominal) through the assignment of
accounts receivable from Elektra, S. A. de C. V. (affiliated company)
amounting to Ps14,024 nominal and the payment of cash dividends of Ps36,171
(Ps22,358 nominal).
d. To pay cash dividends of Ps22,096 (Ps17,000 nominal), and Ps9,006 (Ps7,989,
nominal) in 1997 and 1998, respectively.
The capital stock as of December 31, 1998 is represented by 73,111,233
registered shares with a par value of one Mexican peso each, distributed as
shown below:
Amount
------
Fixed minimum capital stock, represented by 50,000 Series "A"
shares Ps 50
Variable portion, represented by 73,061,263 Series "B" shares 73,061
---------
Capital stock expressed in nominal pesos 73,111
Restatement increase 68,347
---------
Capital stock expressed in Mexican pesos of December 31,
1998 purchasing power Ps141,458
=========
In accordance with the Company's by-laws, Series "A" shares may only be held by
Mexican nationals. Series "B" shares ownership is unrestricted.
In the event that dividends are paid from retained earnings which have not
previously been taxed, a tax equivalent to 53.85% of the dividend will be
payable by the Company. Additionally, dividends paid to individuals or to
foreign residents are subject to a maximum tax witholding equivalent to 7.69%,
regardless of any previous taxation of such dividends. Capital stock reductions
in excess of the sum of the balances of capital contributions accounts, net tax
income and reinvested net tax income, inflation-indexed in accordance with the
procedures established by the Income Tax Law, are accorded the same tax
treatment as dividends.
F-79
NOTE 7 - INCOME TAX:
Amounts in this note are expressed in nominal pesos.
For the years ended December 31, 1996, 1997 and 1998, the Company determined
taxable income of Ps54,996, Ps73,303 and Ps149,282, respectively. The amount for
1998 was reduced by Ps50,756 due to the utilization of tax loss carryforwards.
The benefit from this is presented in the statement of income as an
extraordinary item.
Taxable income differs from financial pretax income mainly due to the effect of
deduction for tax purposes of purchases offset against the non-deduction of cost
of sales, differences in treatment of the effects of inflation for tax and
financial purposes, the deduction of results from joint ventures and the effect
of nondeductible expenses.
NOTE 8 - CONTINGENCY:
The Company is the guarantor of the issuance of long-term notes amounting to
US$100 million issued by Grupo Elektra, S. A. de C. V. (holding company).
NOTE 9 - RECONCILIATION BETWEEN MEXICAN (MEXICAN GAAP) AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP):
The Company's financial statements are prepared in accordance with Mexican GAAP,
which differ in certain significant respects from U.S. GAAP. The Mexican GAAP
financial statements include the effects of inflation as provided for under
Statement B-10, "Recognition of the Effects of Inflation on Financial
Information". The application of this Statement represents a comprehensive
measure of the effects of price level changes in the Mexican economy, which for
many years was hyperinflationary, and is considered to result in a more
meaningful presentation than historical cost-based financial reporting for both
Mexican and U.S. accounting purposes. Therefore the following reconciliations to
U.S. GAAP do not include the reversal of such inflationary effects.
The principal differences between Mexican GAAP and U.S. GAAP are summarized
below with an explanation, where appropriate, of the effects on net income and
stockholders' equity. The various reconciling items are presented net of any
price level gain (loss).
a. Reconciliation of net income (loss):
Year ended December 31,
-----------------------------------------
1996 1997 1998
---- ---- ----
Net income under Mexican GAAP Ps 337,885 (Ps240,806) (Ps178,688)
Deferred income tax effects (147,484) (10,826) 142,492
Effect of sales mark-up on installment sales (48,115) 48,115
---------- --------- ---------
Net income (loss) under U.S. GAAP Ps 142,286 (Ps203,517) (Ps 36,196)
========== ========= =========
F-80
b. Reconciliation of stockholders' equity:
December 31,
------------------------------
1997 1998
---- ----
Stockholders' equity under Mexican GAAP Ps1,375,087 Ps1,185,392
Deferred income tax effects (130,505) 11,987
----------- -----------
Stockholders' equity under U.S. GAAP Ps1,244,582 Ps1,197,379
=========== ===========
An analysis of the changes in stockholders' equity under U.S. GAAP is as
follows:
1996 1997 1998
---- ---- ----
Balance at beginning of year Ps 216,243 Ps1,470,286 Ps1,244,582
Net income (loss) 142,286 (203,517) (36,196)
Issuance of common stock 1,165,099
Loss from holding nonmonetary assets (3,147) (91) (2,001)
Payment of dividends (50,195) (22,096) (9,006)
----------- ----------- -----------
Balance at end of year Ps1,470,286 Ps1,244,582 Ps1,197,379
=========== =========== ===========
c. Significant differences between U.S. GAAP and Mexican GAAP:
i. Deferred income tax.
As stated in Note 1d., income tax is recorded under Mexican GAAP
following interperiod allocation procedures under the partial
liability method. Under this method, deferred tax is recognized only
in respect of nonrecurring timing differences between taxable and book
income which are expected to reverse at a definite future date. Also,
under Mexican GAAP, the benefit from utilizing tax loss carryforwards
and asset tax credits are not recognized until utilized, at which time
it is presented as an extraordinary item.
U.S. GAAP Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes", (FAS No. 109") requires an asset and
liability approach for financial accounting and reporting for income
tax under the following basic principles: (a) a current tax liability
or asset is recognized for the estimated taxes payable or refundable
on tax returns for the current year, (b) a deferred tax liability or
asset is recognized for the estimated future tax effects attributable
to temporary differences and carryforwards, (c) the measurement of
current and deferred tax liabilities and assets is based on provisions
of the enacted tax law and the effects of future changes in tax laws
or rates are not anticipated, and (d) the
F-81
measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not
expected to be realized under this method; deferred tax is recognized
in respect of all temporary differences, and the benefit from
utilizing tax loss carryforwards and asset tax credits is recognized
in the year in which the loss or credits arise subject to a valuation
allowance in respect of any tax benefits not expected to be realized.
The subsequent realization of this benefit does not affect income.
Consequently, the above do not represent extraordinary items for U.S.
GAAP purposes.
The temporary differences under FAS No. 109 are determined based on
the difference between the indexed tax-basis amount of the asset or
liability and the related stated amount reported in the financial
statements. Except as indicated in the following paragraph, the
deferred tax expenses or benefit is calculated as the difference
between: (a) the deferred tax assets and liabilities at the end of the
current period determined as indicated above and (b) the deferred tax
assets and liabilities reported at the end of the prior period
remeasured to units of current general purchasing power at the end of
the current period.
Gain and losses from holding nonmonetary assets are recorded in
stockholders' equity. It is the Company's policy to reflect the
deferred income taxes that arise as a result of such gains (losses)
from assets or liabilities which do not currently affect income in the
results of operations.
The significant components of income tax expense under U.S. GAAP are
as follows:
Year ended December 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
Current Ps 25,668 Ps 21,977
Deferred 147,484 10,826 (Ps 142,492)
------------ ---------- ------------
Ps 173,152 Ps 32,803 (Ps 142,492)
============ ========== ============
The items shown below represent the main differences between income
tax computed under U.S. GAAP at the statutory tax rate and the
Company's provision for income tax in each period.
Year ended December 31,
--------------------------------
1996 1997 1998
---- ---- ----
Statutory income tax rate 34% (34%) (34%)
Effect of inflationary component 2% 11% (5%)
Nondeductible expenses 17% 38% (40%)
Other 2% 6% (1%)
---- ---- ---
Effective income tax rate 55% 21% (80%)
=== === ===
F-82
The tax effects of significant items comprising the Company's net
deferred tax assets and liabilities under U.S. GAAP are as follows:
December 31,
-----------------------------
1997 1998
---- ----
Deferred income tax (liabilities) assets:
Inventories (Ps 88,745)
Prepaid expenses (2,991) (Ps 8,580)
Deferred installment sales for income tax purposes (56,017)
Allowance for doubtful accounts 17,248 20,567
Operating loss carryforwards 50,756
--------- ---------
(79,749) 11,987
Valuation allowance (50,756)
--------- ---------
Net deferred income tax (liabilities) assets (Ps130,505) Ps 11,987
ii. Revenue recognition.
Prior to January 1, 1997 for Mexican GAAP purposes, the Company
accounted for the installment sales mark-up as sales when the
merchandise was delivered to the customer. Under U.S. GAAP, the
mark-up is deferred and amortized over the life of the installment
sales contract. The unamortized mark-up amounted to Ps48,115 in 1996.
This amount was recognized in income for U.S. GAAP in 1997.
Subsequent to January 1, 1997 under Mexican GAAP the mark-up on
installment sales is deferred and amortized over the life of the
installment sales contracts for all years, and is included as part of
net sales, since it is included in the sales price. Also under Mexican
GAAP any stated and penalty interest is also included in net sales.
Under US GAAP, the installment sales mark-up earned along with stated
and penalty interest would be classified as interest earned from
consumer credit operations. During the years ended December 31, 1996,
1997 and 1998, the amount of installment sales mark-up earned for U.S.
GAAP purposes, was Ps167,906, Ps452,403, and Ps353,293, respectively.
iii. Securitization of receivables
Under Mexican GAAP the Company accounted for the 1997 and 1998
securitizations of receivables as sales of the receivables and
derecognized from its balance sheets the receivables transferred under
the programs against the proceeds received.
Under U.S. GAAP, the transfer of the receivables in the 1997 and 1998
securitization programs have been accounted for as secured borrowings
in accordance with Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Consequently, under U.S. GAAP the
Company reestablished on its balance sheets as of December 31, 1997
and 1998, receivables of Ps967,978 and Ps1,300,213, respectively,
which include Ps91,069 and Ps337,687, respectively, that correspond to
the guarantee on the securitized receivables.
F-83
The Company also recorded as of December 31, 1997 and 1998 a short
term and long term liabilities of Ps876,909 and Ps962,526,
respectively.
iv. Fair value information.
The following disclosure of the estimated fair value of financial
instruments is based on the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS No. 107"). The estimated fair value
amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to
develop estimates of fair value.
Cash and cash equivalents, accounts receivable and accounts payable.
The carrying value of these items is a reasonable estimate of their
fair value.
Accounts payable to related parties and long-term borrowings received
from related parties. The carrying value of these items at December
31, 1997 and 1998 is a reasonable estimate of their fair value based
on the interest rates that are currently available to the Company with
similar terms and maturities.
v. Concentration of credit risk.
The Company provides financing to the customers of an affiliated
company which has 581 stores at December 31, 1998 throughout Mexico.
Credit operations are managed by each store based on established
credit policies.
Due to the significant number of customers and their location, the
Company considers that it is not dependent on any geographical area or
customer base, and therefore, has no significant concentration of
risk.
vi. Comprehensive income.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No .130, "Reporting Comprehensive Income", ("FAS
No. 130"), which establishes new standards for reporting and
displaying comprehensive income and its components. It was not
practical to determine the cumulative comprehensive income as of
January 1, 1998.
vii. Recently issued accounting standards
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 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 of other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company does not believe that the
F-84
adoption of this Standard will have a material impact on its financial
position or results of operations.
F-85
d. Condensed balance sheets and income statements under U.S. GAAP:
The following condensed balance sheets and income statements reflect the effects
of the principal differences between Mexican GAAP and U.S. GAAP.
CONDENSED BALANCE SHEETS
December 31,
----------------------------
1997 1998
---- ----
Accounts receivable from customers - Net Ps2,333,193 Ps1,915,550
Inventories 261,017
Deferred income tax 17,248 20,567
Other current assets 124,666 17,205
----------- -----------
Total current assets 2,736,124 1,953,322
Investments in joint ventures 97,385 209,019
Other assets 100,662 362,853
----------- -----------
Total assets Ps2,934,171 Ps2,525,194
=========== ===========
Current liabilities Ps1,689,589 Ps 365,289
----------- -----------
Long-term liabilities 962,526
-----------
Stockholders' equity 1,244,582 1,197,379
----------- -----------
Total liabilities and stockholders' equity Ps2,934,171 Ps2,525,194
=========== ===========
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
---------------------------------------------
1996 1997 1998
---- ---- ----
Revenues:
Net sales Ps 574,023 Ps 2,986,583 Ps 3,648,171
Other income (expenses) - Net 49,338 (16,734) 6,716
----------- ------------ ------------
623,361 2,969,849 3,654,887
----------- ------------ ------------
Cost of sales 267,973 2,879,157 3,434,808
Selling, general and administrative expenses 350,544 1,037,643 1,366,161
Allowance for doubtful accounts 181,001 285,225 330,401
----------- ------------- -------------
799,518 4,202,025 5,131,370
----------- ------------ ------------
Operating loss (176,157) (1,232,176) (1,476,483)
Interest income 755,735 1,281,084 1,539,072
Financing expenses (264,140) (219,622) (241,277)
----------- ------------ ------------
Pretax income (loss) 315,438 (170,714) (178,688)
Income tax and asset tax (173,152) (32,803) 142,492
----------- ------------ ------------
Net income (loss) 142,286 (203,517) (36,196)
Loss from holding nonmonetary assets (3,147) (91) (2,001)
----------- ------------ ------------
Comprehensive income (loss) Ps 139,139 (Ps 203,426) (Ps 38,197)
=========== ============ ============
F-86
Cash flow information
Under U.S. GAAP a statement of cash flow is prepared based on provisions of
Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows"
("FAS No. 95"). This statement does not provide guidance for the preparation of
cash flow statements for price level adjusted financial statements.
Presented below are statements of cash flows for the years ended December 31,
1996 and 1997, prepared after considering the impact of U.S. GAAP adjustments.
The cash flow statements are net of certain non cash transactions but include
the effects of inflation on cash flow and have been restated to pesos of
December 31, 1998, purchasing power. Year ended December 31,
Cash flow from operating activities: 1996 1997
---- ----
Net income (loss) Ps 142,286 (Ps 203,517)
Adjustments to reconcile net income to net cash provided
by operating actitivites:
Allowance for doubtful accounts 181,001 285,225
Monetary loss 246,477 213,816
Deferred income tax 147,484 10,826
Net changes in working capital (978,282) (927,772)
----------- -----------
Net cash used in operating activities (261,034) (621,422)
----------- -----------
Cash flow from investing activities:
Investments in joint ventures (112,855)
-----------
Cash flows from financing activities:
Short-term loans paid - Net (377,625) (28,138)
Repayment of receivable financing arrangements (226,020)
Borrowings from related parties (248,559) (91,919)
Proceeds from securitization of receivables - Net 876,909
Capital contribution 1,165,099
Payment of dividends (50,195) (22,096)
----------- -----------
Net cash provided by financing activities 262,700 734,756
----------- -----------
Increase in cash and cash equivalents 1,666 479
Cash and cash equivalents at beginning or year 154 1,820
----------- -----------
Cash and cash equivalents at end of year Ps 1,820 Ps 2,299
=========== ===========
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 68,455 Ps 94,734
=========== ===========
Income tax Ps 12,177 Ps 7,152
=========== ===========
F-87
Presented below is a statement of cash flow for the year ended December 31,
1998, prepared after considering the impact of U.S. GAAP adjustments. The cash
flow statement presents nominal cash flows during the period, adjusted to pesos
of December 31, 1998, purchasing power.
Year ended December 31,
1998
----------
Cash flow from operating activities:
Net loss (Ps 36,196)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Allowance for doubtful accounts 330,401
Monetary loss 216,309
Deferred income tax (142,492)
Net changes in working capital (185,681)
----------
Net cash provided by operating activities 182,341
----------
Cash flow from investing activities:
Investments in joint ventures (129,256)
----------
Cash flows from financing activities:
Borrowings from related parties (273,856)
Proceeds from securitization of receivables - Net 962,526
Repayment of securitization of receivables (876,909)
Payment of dividends (9,006)
----------
Net cash used in financing activities (196,227)
----------
Effect of inflation and exchange rate changes on cash 143,591
----------
Decrease in cash and cash equivalents (569)
Cash and cash equivalents at beginning of year 2,299
----------
Cash and cash equivalents at end of year Ps 1,730
==========
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 136,662
==========
Income tax Ps 13,942
==========
F-88
COMUNICACIONES AVANZADAS, S. A.
DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
F-89
COMUNICACIONES AVANZADAS, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
Contents Page
- -------- ----
Report of independent accountants F-91
Consolidated financial statements:
Consolidated balance sheets F-93
Consolidated statements of income F-94
Consolidated statements of changes in stockholders' equity F-95
Consolidated statements of changes in financial position F-96
Notes to the consolidated financial statements F-97
F-90
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, May 25, 1999
To the Stockholders of
Comunicaciones Avanzadas, S. A. de C. V.
1. We have audited the consolidated balance sheets of Comunicaciones
Avanzadas, S. A. de C. V. and subsidiaries (collectively "the Company") as
of December 31, 1997 and 1998 and the related consolidated statements of
income, of changes in stockholders' equity and of changes in financial
position for each of the three years in the period ended December 31, 1998
all expressed in constant pesos of December 31, 1998 purchasing power.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Mexico, which are similar in all material respects with
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
accounting principles generally accepted in Mexico. 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.
2. In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial
position of Comunicaciones Avanzadas, S. A. de C. V. and subsidiaries at
December 31, 1997 and 1998, and the consolidated results of their
operations and the changes in stockholders' equity and in their financial
position for each of the three years in the period ended December 31, 1998,
in conformity with accounting principles generally accepted in Mexico.
F-91
3. Accounting principles generally accepted in Mexico differ in certain
important respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of consolidated net income (loss), expressed in pesos of
December 31, 1998 purchasing power, for each of the three years in the
period ended December 31, 1998 and the determination of consolidated
stockholders' equity and consolidated financial position as of December 31,
1997 and 1998 also expressed in pesos of December 31, 1998 purchasing power
to the extent summarized in Note 17 to the consolidated financial
statements.
PricewaterhouseCoopers
Javier Soni O.
F-92
COMUNICACIONES AVANZADAS, S. A. DE C. V. AND SUBISIDIARIES
CONSOLIDATED BALANCE SHEETS
Thousands of Mexican pesos of
December 31, 1998 purchasing power
At December 31,
----------------------------
1997 1998
------------ ------------
Assets
Current assets:
Cash and cash equivalents Ps 1,639,143 Ps 1,054,594
Pledged securities (Notes 5 and 10) 280,797 396,074
Accounts receivable (Note 6) 3,506,224 3,147,239
Due from related parties (Note 9) 298,178 201,367
Exhibition rights 288,293 790,973
Inventories 181,478 300,010
------------ ------------
Total current assets 6,194,113 5,890,257
Property, machinery and equipment - Net (Note 7) 3,100,574 3,222,720
Television concessions - Net (Note 3k.) 3,361,288 3,131,172
Pledged securities (Notes 5 and 10) 367,343 128,056
Exhibition rights 431,052 731,187
Goodwill - Net (Note 3i.) 1,186,625 1,160,520
Other assets (Note 8) 318,210 404,894
------------ ------------
Total assets Ps14,959,205 Ps14,668,806
============ ============
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term bank loans (Note 10) Ps 76,539 Ps 123,800
Current portion of long-term promissory notes (Note 11) 17,665 9,454
Short-term debt (Note 10) 478,747 280,127
Interest payable 194,288 223,193
Exhibition rights payable 212,919 395,592
Accounts payable and accrued expenses 469,732 599,685
Due to related parties (Note 9) 8,903 95,733
------------ ------------
Total current liabilities 1,458,793 1,727,584
------------ ------------
Long - term liabilities:
Senior notes (Note 10) 6,506,762 6,737,441
Bank loans (Note 10) 506,173 1,012,316
Promissory notes (Note 11) 30,077 24,466
Advertising advances (Note 3o.) 3,309,493 2,301,120
Exhibition rights payable 156,947 354,425
------------ ------------
Total long-term liabilities 10,509,452 10,429,768
------------ ------------
Total liabilities 11,968,245 12,157,352
------------ ------------
Stockholders' equity (Note 12):
Capital stock 1,535,559 1,535,559
Paid-in capital 915,152 915,152
Contributions for future capital stock increases 4,118 4,118
Deficit (474,695) (834,238)
Gain (loss) from holding nonmonetary assets 42,663 (405,085)
------------ ------------
Majority stockholders 2,022,797 1,215,506
Minority stockholders 968,163 1,295,948
------------ ------------
Total stockholders' equity 2,990,960 2,511,454
Commitments and contingencies (Note 14)
------------ ------------
Total liabilities and stockholders' equity Ps14,959,205 Ps14,668,806
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-93
COMUNICACIONES AVANZADAS, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Thousands of Mexican pesos of
December 31, 1998 purchasing power
Year ended December 31,
----------------------------------------
1996 1997 1998
----------- ----------- -----------
Net revenue Ps2,760,411 Ps4,468,196 Ps4,635,154
----------- ----------- -----------
Programming, production, exhibition and
transmission costs 809,543 1,319,197 1,563,671
Sales and administrative expenses 619,113 733,893 735,373
----------- ----------- -----------
Total costs and expenses 1,428,656 2,053,090 2,299,044
----------- ----------- -----------
Depreciation and amortization 496,310 646,834 790,612
----------- ----------- -----------
Operating income 835,445 1,768,272 1,545,498
----------- ----------- -----------
Other (expenses) income - Net (4,470) 15,144 (203,316)
----------- ----------- -----------
Comprehensive financing income (cost):
Interest expense - Net (481,643) (636,120) (1,158,669)
Exchange loss - Net (3,678) (137,414) (1,410,027)
Other financing expenses 344,035
Gain on monetary position 885,935 407,968 760,676
----------- ----------- -----------
400,614 (365,566) (1,463,985)
----------- ----------- -----------
Income (loss) before provision for income tax and
extraordinary items 1,231,589 1,417,850 (121,803)
Provision for income tax (Note 13) (366,137) (530,059) (366,158)
----------- ----------- -----------
Income (loss) before extraordinary items 865,542 887,791 (487,961)
Extraordinary item - Income tax benefit from
utilization of prior years' tax-loss carryforwards
(Note 13) 353,583 265,643 98,889
Other extraordinary items (Note 13) 12,554
----------- ----------- -----------
Net income (loss) Ps1,231,589 Ps1,153,434 (Ps 389,072)
=========== =========== ===========
Net income (loss) of majority stockholders Ps 572,899 Ps 604,024 (Ps 359,543)
Net income (loss) of minority stockholders 658,690 549,410 (29,529)
----------- ----------- -----------
Ps1,231,589 Ps1,153,434 (Ps 389,072)
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-94
COMUNICACIONES AVANZADAS, S. A. DE C. V.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Thousands of Mexican pesos of December 31, 1998, purchasing power
Contributions
for future
Capital Paid-in capital stock
stock capital increases Deficit
----- ------- --------- -------
Balances at January 1, 1996 Ps1,246,554 Ps 4,118 (Ps1,651,618)
Increases of capital stock 421,459 Ps 915,152
Net income 572,899
Loss from holding nonmonetary
assets
----------- ----------- ----------- -----------
Balances at December 31, 1996 1,668,013 915,152 4,118 (1,078,719)
Decrease of capital stock (132,454)
Net income 604,024
Redemption of capital of subsidiaries
paid to minority stockholders
Gain from holding nonmonetary
assets
----------- ----------- ----------- -----------
Balances at December 31, 1997 1,535,559 915,152 4,118 (474,695)
Net loss (359,543)
(Loss) gain from holding nonmonetary
assets
----------- ----------- ----------- -----------
Balances at December 31, 1998 Ps1,535,559 Ps 915,152 Ps 4,118 (Ps 834,238)
=========== =========== =========== ==========
Majority Minority
stockholders stockholders Total
------------ ------------ -----
Balances at January 1, 1996 Ps 14,667 Ps1,487,425 Ps1,502,092
Increases of capital stock 1,336,611 1,336,611
Net income 572,899 658,690 1,231,589
Loss from holding nonmonetary
assets (568,050) (768,064) (1,336,114)
----------- ----------- -----------
Balances at December 31, 1996 1,356,127 1,378,051 2,734,178
Decrease of capital stock (132,454) (132,454)
Net income 604,024 549,410 1,153,434
Redemption of capital of subsidiaries
paid to minority stockholders (1,025,829) (1,025,829)
Gain from holding nonmonetary
assets 195,100 66,531 261,631
----------- ----------- -----------
Balances at December 31, 1997 2,022,797 968,163 2,990,960
Net loss (359,543) (29,529) (389,072)
(Loss) gain from holding nonmonetary
assets (447,748) 357,314 (90,434)
----------- ----------- -----------
Balances at December 31, 1998 Ps1,215,506 Ps1,295,948 Ps2,511,454
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-95
COMUNICACIONES AVANZADAS, S. A DE C. V.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Thousands of Mexican pesos of December 31,
1998 purchasing power
Year ended December 31,
----------------------------------------
1996 1997 1998
----------- ----------- -----------
Operations:
Income (loss) before extraordinary items Ps 865,552 Ps 887,791 (Ps 487,961)
Charges to income not affecting resources:
Amortization of concessions and goodwill 317,273 397,797 412,156
Depreciation 179,037 249,037 378,456
Net change in accounts receivable, inventories,
exhibition rights, related parties, accounts payable
and accrued expenses (1,997,866) (2,027,026) (9,426)
Advertising advances 1,056,208 713,447 (1,088,383)
----------- ----------- -----------
Resources provided by (used in) operations
before extraordinary items 420,204 221,046 (795,158)
Income tax benefit from utilization of prior
years' tax loss carryforwards 353,583 265,643 98,889
Other extraordinary items 12,554
----------- ----------- -----------
Resources provided by (used in) operations 786,341 486,689 (696,269)
----------- ----------- -----------
Financing:
Increase (decrease) of capital stock 421,459 (132,454)
Paid-in capital 915,152
Senior notes 6,506,762 230,679
Bank loans - Net (1,036,194) (2,474,703) 354,784
Promissory notes - Net (23,669) (4,073) (13,822)
Adjustment for movements in TV Azteca, subsidiary,
for repurchase, valuation and option of stock (78,409)
Dividends of subsidiaries paid to minority
stockholders (1,025,743) (17,231)
----------- ----------- -----------
Resources provided by financing activities 276,748 2,869,789 476,001
----------- ----------- -----------
Investment:
Acquisition of property, machinery and
equipment - Net (383,848) (1,494,796) (476,640)
Deferred costs related to the acquisition of
subsidiaries' shares (582,758)
Pledged securities (648,140) 124,011
(Acquisition) disposition of shares (12,907) 52,184 (11,652)
----------- ----------- -----------
Resources used in investment activities (979,513) (2,090,752) (364,281)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 83,576 1,265,726 (584,549)
Cash and cash equivalents at beginning of
year 289,841 373,417 1,639,143
----------- ----------- -----------
Cash and cash equivalents at end of year Ps 373,417 Ps1,639,143 Ps1,054,594
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-96
COMUNICACIONES AVANZADAS, S. A DE C. V.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(monetary amounts expressed in thousands of
Mexican pesos (Ps) of December 31, 1998
purchasing power, except exchange rates)
NOTE 1 - THE COMPANY AND GROUP STRUCTURE:
Comunicaciones Avanzadas, S. A. de C. V. (collectively "CASA" or the "Company")
is a Mexican holding Company established on November 4, 1993 and which began
operating in 1995. The main activities of CASA and its subsidiaries are the
broadcasting and production of television programs, the sale of advertising time
and the operation of movie theaters and production studios. The Company has no
employees and all administrative services are rendered by an affiliated company.
In 1995 CASA acquired 90% of the shares comprising the capital stock of Azteca
Holdings, S. A. de C. V. (Azteca) which during 1993 had acquired interests in
various subsidiaries in connection with the Mexican government's privatization
of certain television stations, movie theaters and related assets.
The subsidiaries which comprised the consolidated group as of December 31, 1996
included Azteca, Radiotelevisora del Centro, S. A. (RTC), TV Azteca, S. A. de C.
V. (TV Azteca) and Grupo COTSA, S. A. de C. V. (COTSA). As of December 31, 1996,
Azteca owned 50% of RTC's ordinary voting capital stock (and the Company's
controlling shareholder, Ricardo Salinas, owned 1% of RTC's ordinary voting
capital stock) and also directly owned 24% and 27% of TV Azteca's and COTSA's
capital stock in the form of Series "N" shares with limited voting right. RTC
directly owned 100% of TV Azteca's and COTSA's Series "A" shares, which
represented in the aggregate approximately 49% and 43%, respectively, of TV
Azteca's and COTSA's outstanding capital stock, and the Series "N" shares
represented the remainder.
Pursuant to the terms of the privatization mentioned above, a portion of the
voting shares of all companies that directly or indirectly own the privatized
businesses was deposited in a trust administered by Nacional Financiera, S. N.
C. (the "Nafin Trust"). As of December 31, 1997, 100% of TV Azteca's and COTSA's
Series "A" shares, 51% of the capital stock of TV Azteca's and COTSA's
subsidiaries at the time of privatization, and 100% of the capital stock of
Azteca are held in the Nafin Trust. Under the terms of the Nafin Trust, these
shares cannot be removed without the government's approval until July 1998. This
mechanism was conceived to prevent Azteca from selling control of TV Azteca and
COTSA within five years of the privatization without the government's approval.
F-97
On July 17, 1997, an amendment to TV Azteca's by-laws was approved at a General
Extraordinary Stockholders' Meeting of TV Azteca, pursuant to which each of the
three outstanding Series "N" shares were converted into a CPO consisting of one
Series "A" share, one Series "D-A" share and one Series "D-L" share. This
recapitalization became effective concurrently with the consummation of TV
Azteca's initial public offering (the TV Azteca IPO). At such meeting the
stockholders also approved the issuance by TV Azteca of up to 12,670 thousand
CPOs in the TV Azteca IPO. On August 20, 1997, TV Azteca made an initial public
offering of its capital stock in the form of approximately 115 million CPOs sold
by TV Azteca and certain stockholders of TV Azteca. Simultaneous with the TV
Azteca IPO, the capital stock of COTSA owned by RTC was spun-off to a
newly-created entity, RTC-Cines, S. A. de C. V. (RTC-Cines), also a subsidiary
of Azteca, and RTC was merged into TV Azteca. Between July, 1997 and October,
1997, a wholly-owned subsidiary of COTSA purchased 50.4% of the capital stock of
COTSA. (See Note 11). Azteca now owns, directly, 63% of the capital stock of TV
Azteca and, directly or indirectly through RTC-Cines, 99% of the capital stock
of COTSA. Also, in connection with the TV Azteca IPO: (i) the Nafin Trust,
mentioned above, was amended to allow less than all of TV Azteca's Series "A"
shares to be held in the Nafin Trust, provided that at least a majority of the
Series "A" shares is held in the Nafin Trust and (ii) the Bursamex Group's
refund rights (mentioned in Note 12) have been proportionately reduced (by
approximately 43%) to reflect the CPOs sold by the Bursamex Group.
NOTE 2 - ACCOUNTING FOR EFFECTS OF INFLATION:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles as promulgated by the Mexican Institute
of Public Accountants (MIPA). The recognition of the effects of inflation on the
financial information is in accordance with the following rules:
- Inventories, property, machinery and equipment of Mexican origin,
television concessions, exhibition rights of Mexican origin, and other
non-monetary assets and liabilities are restated by applying factors
derived from the National Consumer Price Index (NCPI), issued by the
Banco de Mexico.
- Exhibition rights and machinery and equipment of foreign origin
(mainly from the United States of America and Japan) are restated on
the basis of the devaluation of the Mexican peso against the foreign
currencies, and by applying inflation factors of the countries in
which they originate.
- The components of stockholders' equity are restated using factors
derived from the NCPI.
- The cumulative gain or loss from holding non-monetary assets which are
not restated using factors derived from the NCPI is included in
stockholders' equity under the caption "Gain (loss) from holding
non-monetary assets".
F-98
- The purchasing power gain or loss from holding monetary liabilities
and assets is included in net comprehensive financing income (cost).
- All consolidated financial statements presented are expressed in
constant pesos of purchasing power as of December 31, 1998.
The NCPI used to recognize the effects of inflation in the financial statements
were 200.388, 231.886 and 275.028 as of December 31, 1996, 1997 and 1998,
respectively.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies are summarized on the following pages.
a. Principles of consolidation
The accompanying consolidated financial statements include those related to CASA
and the aforementioned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The financial statements of the subsidiaries residing abroad included in the
consolidation are translated in conformity with the requirements of Statement
B-15 issued by the Accounting Principles Commission of the MIPA.
b. Foreign currency transactions
Transactions in foreign currencies are recorded at the rates of exchange
prevailing on the dates they are entered into and/or settled. Assets and
liabilities denominated in these currencies are stated at the Mexican peso
equivalents resulting from applying exchange rates at the balance sheet dates.
Exchange differences arising from fluctuations in the exchange rates between the
dates on which transactions are entered into and those on which they are
settled, or the balance sheet dates, are charged or credited to income.
c. Cash and cash equivalents -
The Company considers all highly liquid investments with original maturities of
less than three months to be cash equivalents.
d. Barter transactions -
Barter transactions represent non-cash transactions in which TV Azteca sells
advertising time to a third-party or related party in return for assets or
services. These transactions are accounted for on the basis of the fair market
value of the assets or services specified in the barter contracts. During the
years ended December 31, 1996, 1997 and 1998, net revenue derived from barter
transactions amounted to Ps377,995, Ps485,025 and Ps446,629, respectively.
F-99
e. Exhibition rights -
Exhibition rights represent primarily the acquired rights to the transmission of
programming and events under license agreements and the cost of internally
produced programming. The rights acquired and the obligations incurred are
recorded as an asset and liability when the license agreements are signed. The
cost of exhibition rights acquired are amortized (on an accelerated basis when
the rights relate to multiple broadcasts) as the programming and events are
broadcast. At December 31, 1996, 1997 and 1998 the allowance for unused
exhibition rights amounted to Ps45,260, Ps8,302 and Ps60,958, respectively,
which represents management's estimate of exhibition rights which may not be
utilized prior to their expiration.
Exhibition rights at December 31, 1996, 1997 and 1998 also include Ps76,920
Ps126,437 and Ps207,641, respectively, associated with internally produced
programming. Costs of internally produced programming are fully amortized when
the programs are initially aired, except in the case of the telenovelas, where
amortization is over a maximum of a three - year period.
f. Inventories and costs -
Inventories of merchandise, materials and spare parts, and their related costs,
are stated at average costs and are restated by using factors derived from the
NCPI.
g. Property, machinery and equipment -
Property, machinery and equipment acquired through December 31, 1996 and the
related depreciation were stated at net replacement cost determined on the basis
of appraisals performed by independent appraisers. Property, machinery and
equipment acquired on or after January 1, 1997 are initially stated at cost.
Both the replacement costs of assets of Mexican origin acquired through December
31, 1996 and the cost of assets of Mexican origin acquired on or after January
1, 1997 are restated by applying factors derived from the NCPI. Assets of
non-Mexican origin acquired through December 31, 1997 and thereafter are
restated on the basis of the devaluation of the Mexican peso against the foreign
currency and by applying inflation factors of the countries in which they
originate.
Depreciation was calculated by the straight-line method, based on the estimated
useful lives of the Company's net fixed assets as estimated by the appraisers.
h. Investment in shares -
Investment in affiliates is recorded by the equity method and is included in the
balance sheet as other assets.
F-100
i. Goodwill -
The excess of cost over the book value of subsidiaries acquired in 1998 and
years before is amortized using the straight-line method over 20 years and
restated by applying factors derived from the NCPI to its historical cost. As a
result of the transaction described in Note 10 (syndicated loan) relating to the
purchase of additional shares in TV Azteca, Azteca recorded additional goodwill
of approximately Ps1,008 million (including the Ps585 million related to the
total cost associated with the termination of the option agreement described in
Note 10). Amortization expense for the years ended December 31, 1996, 1997 and
1998 amounted to Ps2,953, Ps36,988 and Ps55,605, respectively. The Company
periodically reviews the realization of its intangible assets based on estimated
gross future cash flows from its operations. To date there has been no
indication that such recorded amounts will not be realized from future
operations.
j. Negative goodwill -
In 1994, TV Azteca received a total of Ps214,469 (Ps78,157 nominal) from the
Mexican government as settlement for disputed amounts received from the
government in connection with the privatization process. Such amounts were
recorded as negative goodwill which will be amortized over a period of five
years. Amortization income for the year ended December 31, 1997 amounted to and
Ps21,049.
The negative goodwill was eliminated when RTC was merged into TV Azteca on July
17, 1997.
k. Television concessions -
The aggregate value of television concessions was determined based on the excess
of the purchase price paid for the assets of TV Azteca over their book value at
the time of privatization. Television concessions are amortized by the
straight-line method over the relevant concession periods, which end on July 2,
1999, April 29, 2006, September 29, 2006 and May 9, 2008. Amortization expense
for the years ended December 31, 1996, 1997 and 1998 amounted to Ps357,217,
Ps354,481 and Ps356,551, respectively.
l. Labor benefits -
Seniority premiums to which employees are entitled upon termination of
employment after seven years of service are expensed in the years in which the
services are rendered. The related obligation is determined in accordance with
Statement D-3 "Labor Obligations", issued by the MIPA based on actuarial
studies. The related obligation was not material at December 31, 1996, 1997 and
1998.
Other compensation based on length of service, to which employees may be
entitled in the event of dismissal or death, in accordance with the Federal
Labor Law, is charged to income in the year in which it becomes payable.
F-101
m. Income tax and employees' profit sharing -
Income tax and employees' profit sharing are recorded using interperiod
allocation procedures under the partial liability method. Under this method, the
effect on income tax and employees' profit sharing of non-recurring timing
differences between taxable income and financial pretax income which are
expected to reverse in an identifiable time period is recorded as deferred
income tax. As of December 31, 1996, 1997 and 1998 there were no timing
differences that require the recognition of deferred income taxes.
n. Net revenue -
Net revenue includes revenue from advertisers less sales commissions payable and
revenue from movie theaters. During the years ended December 31, 1996, 1997 and
1998 sales commissions payable amounted to Ps123,174, Ps130,050 and Ps148,381,
respectively.
o. Advertising advances -
TV Azteca enters into two principal types of advance advertising agreements with
clients. The Azteca plan generally requires advertisers to pay in full within
four months from the date they sign the agreement. The Mexican plan allows
clients to pay for advertising in installments, which are generally supported by
promissory notes, over the period during which the advertising is aired. TV
Azteca records cash or other assets received, and the balance due, and its
obligation to deliver advertising under both types of advance advertising
agreements when the contracts are signed. The amounts represented by such
advertising advances are credited to net revenue as the contracted advertising
is aired. Such obligations in respect of advertising advances are considered
non-monetary liabilities and are restated by applying factors derived from the
NCPI.
p. 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 amounts reported in the financial statements. Actual results could
differ from those estimates.
q. Stock option plan for employees -
Stock options granted to employees are given effect when exercised by crediting
to paid-in capital stock the exercise price.
r. Derivative financial instruments -
The Company recognizes on its balance sheet as assets or liabilities at fair
value all of its contractual rights and obligations, under derivative financial
instruments to which the Company is a party. See Note 5.
F-102
s. Deferred charges
Deferred charges are amortized over a ten-year period. See Note 8.
t. Net revenue
Net revenue includes revenue from advertisers less sales commissions payable and
revenue from movie theaters. During the years ended December 31, 1996, 1997 and
1998 sales commissions payable amounted to Ps123,174, Ps130,050 and Ps148,381,
respectively.
NOTE 4 - FOREIGN CURRENCY POSITION:
Monetary amounts in this note are expressed in thousands of US dollars (US$)
except exchange rates, since this is the currency in which most of the Company's
foreign currency transactions are carried out.
In December 1994, the Mexican government devalued the peso and allowed it to
float freely in the foreign exchange market. Since that time, the fluctuations
in the foreign exchange market have continued and at December 31, 1998, the
exchange rate was Ps9.93 per dollar (Ps8.07 and 7.89 at December 31, 1997 and
1996, respectively). As a result, the Company had net exchange losses of
Ps3,678, Ps137,453 and Ps1,409,577 during the years ended December 31, 1996,
1997 and 1998, respectively, which are shown as a component of comprehensive
financing (cost) income.
At May 25, 1999, date of issuance of the consolidated financial statements, the
exchange rate was Ps9.30 per dollar.
At December 31, 1997 and 1998, CASA and subsidiaries had monetary assets and
liabilities denominated in foreign currencies as shown below:
December 31,
----------------------------
1997 1998
---------- -----------
Assets US$118,739 US$162,619
Liabilities (852,652) (921,290)
---------- -----------
Net short position (US$733,913) (US$758,671)
========== ==========
At December 31, 1997 and 1998, CASA and subsidiaries had no hedge contracts for
protection against foreign exchange risks.
F-103
NOTE 5 - OPERATIONS WITH DERIVATIVE FINANCIAL INSTRUMENTS:
a. Debt -
At December 31, 1998 Azteca held an investment in a swap whose return was based
on the difference in price between a basket of bonds issued by several Latin
American companies and United States Treasury bonds. The notional value of
investment reached US$30,000, and the swap's original maturity was April 16,
1999. This investment required an initial collateral of US$10,500 (Ps103,982),
however, due to the adverse variations in the prices of these instruments,
additional collateral reaching an aggregate of US$12,181 (Ps120,629) was
required.
At December 31, 1998, the initial collateral was registered as restricted cash
on the balance sheet and the additional collateral of Ps120,629 was recognized
as a charge to results of operations accounted for as a component of Azteca's
comprehensive financing cost, due to the market value of the aforementioned
investment.
On January 15, 1999 Azteca decided to restructure the aforementioned investment
making it an investment whose return was based solely on the prices of a basket
of Latin American bonds. As a term of the restructuring, Azteca was required to
pay an amount equal to the decrease in the price of the bonds during the period
of the initial swap investment. The maturity date of this restructured swap is
July 19, 1999.
b. Capital -
During the fiscal year 1998 Azteca purchased and sold options on TV Azteca CPO's
and ADR's and Elektra ADR's. The aforementioned transactions are listed below:
- ------------------------------------------------------------------------------------------------------------
Position in
the operation Type of Underlying Notional Exercise Maturity
operation security value price date
- ------------------------------------------------------------------------------------------------------------
Sell European Put TV Azteca US$ 4,605 US$17.50 Second half of 1999
ADR's
- ------------------------------------------------------------------------------------------------------------
Sell European Put TV Azteca Ps 145,973 Ps 7.92 Second half of 1999
CPO's
- ------------------------------------------------------------------------------------------------------------
Buy European Cap Call Elektra ADR's US$ 9,191 US$ 8.49 May and June of 1999
- ------------------------------------------------------------------------------------------------------------
Buy European Cap Call TV Azteca US$ 80,000 US$15.96 Expired in 1998 without
ADR's being exercised
- ------------------------------------------------------------------------------------------------------------
F-104
The market value of the European Put options at December 31, 1998 resulted in a
loss of Ps28,004. This amount was recognized as a charge to stockholders' equity
reducing the premium on the issuance of capital stock.
The premium paid by Azteca for the European Cap Call on its own ADR's was
recognized as a charge to the stockholders' equity by reducing the premium on
the issuance of capital stock in the amount of US$6,666 (Ps66,020). Azteca
recognized a charge to 1998 results from the European Cap Call on Elektra's
ADR's in the amount of US$444 (Ps4,396), accounted for as a component of
Azteca's comprehensive financing cost.
c. Bancrecer
In November 1996, TV Azteca entered into a two year advertising contract with
Bancrecer, S. A. ("Bancrecer") in the amount of Ps.119 million. In exchange for
advertising, Bancrecer issued to TV Azteca 2.6% of its publicly-traded stock.
During the year ended December 31, 1998, TV Azteca recognized a charge to
results of operations of Ps.77 million, accounted for as a component of TV
Azteca's comprehensive financing cost, due to the market value of the
aforementioned investment. TV Azteca risks further losses to its earnings should
the market value of Bancrecer further decline.
NOTE 6 - ACCOUNTS RECEIVABLE:
December 31,
------------------------------
1997 1998
----------- -----------
Amounts due from advertisers Ps3,100,846 Ps2,844,028
Recoverable taxes 131,465 123,295
Prepaid expenses 40,977 51,000
Other accounts receivable 263,878 179,269
----------- -----------
3,537,166 3,197,592
Allowance for bad debts (30,942) (50,353)
----------- -----------
Ps3,506,224 Ps3,147,239
=========== ===========
Amounts due from barter transactions included in amounts due from advertisers
amounted to Ps464,375 and Ps309,535 as of December 31, 1997 and 1998,
respectively.
F-105
NOTE 7 - PROPERTY, MACHINERY AND EQUIPMENT:
December 31, Annual
---------------------------- depreciation
1997 1998 rates
----------- ----------- --------------
Buildings Ps1,797,229 Ps1,994,594 2 and 3%
Machinery and operating equipment 1,728,527 2,263,459 4%, 11% and 25%
Furniture and office equipment 104,281 127,325 7%, 9% and 10%
Transportation equipment 122,797 160,809 16%
Other fixed assets 284,711 267,618 8% and 14%
----------- -----------
4,037,545 4,813,805
----------- -----------
Accumulated depreciation (1,897,593) (2,431,744)
----------- -----------
2,139,952 2,382,061
Land 787,886 790,217
Machinery and equipment in transit 21,107
Advance payments for the acquisition
of machinery and equipment 151,629
Construction in progress 50,442
----------- -----------
Ps3,100,574 Ps3,222,720
=========== ===========
NOTE 8 - OTHER ASSETS:
December 31,
-----------------------
1997 1998
--------- ---------
Investment in affiliates (Note 3h.) Ps 48,576 Ps 60,228
Deferred costs related to the issuance of
guaranteed senior notes and senior secured
notes - Net 198,493 170,707
Advances to Corporacion de Noticias e
Informacion, S. A. de C. V 84,759
Other assets 71,141 89,200
--------- ---------
Ps318,210 Ps404,894
========= =========
F-106
Corporacion de Noticias e Informacion, S. A. de C. V. (CNI)
On December 10, 1998, TV Azteca and a subsidiary signed a Joint Venture
agreement with CNI (the owner of the concession for UHF Channel 40 in Mexico
City), and Televisora del Valle de Mexico, S. A. de C. V. (TVM) with the
following terms:
1. TV Azteca will advise TVM and CNI to improve the television operations of
Channel 40 for a period of 10 years or until the expiration o TVM's
television concession, which ever is shorter.
2. Under a Programming, Promotion and Commercialization Agreement with TVM,
CNI will sede TV Azteca the rights and obligations, originally established
in favor of CNI, to program and operate Channel 40. TV Azteca agreed to pay
to CNI 50% of CNI's earnings before interest, taxes, depreciation and
amortization (EBITDA) on a quarterly basis during the first three years of
the Joint Venture, with an advance payment of US$15,000. At December 31,
1998, US$8,375 has been advanced under the terms of this agreement and was
recognized as a deferred charge that will be amortized for a maximum period
of ten years. The balance will be advanced to CNI by July 31, 1999.
3. TV Azteca has provided a US$10,000 credit facility in favor of CNI for a
period of ten years with a grace period for the payment of interest of
three years. The interest, will accrue and the annual interest rate will be
determined based on the maximum interest rate paid by TV Azteca plus .25
points. As security for the loan, 51% of the capital stock of TVM owned by
Mr. Javier Moreno Valle was pledged as collateral. At February 15, 1999,
date of these financial statements, CNI had not drawn upon this credit
facility.
4. Under a purchase option contract, TV Azteca may acquire up to 51% of the
capital stock of TVM beginning in November 2002. The sale price of the
capital stock will be the greater of US$100,000 or ten times the EBITDA of
the 12 months preceding the exercise of the purchase option. This contract
also gives Mr. Javier Moreno Valle S. and Mr. Hernan Cabalceta Vara the
right to put their CNI capital stock to the company under certain
circumstances.
5. TV Azteca will determine all Channel 40 programming except for 16 and
one-half hours per week that will be made up of CNI determined programming.
In return for the transmission rights through Channel 40, TV Azteca will
pay CNI US$5.0 for each 60 minute program or its equivalent broadcast and
US$1.65 for each rating point generated by programming broadcast on Channel
40.
6. To improve the efficiency of Channel 40' operations, TV Azteca has agreed
to provide accounting, administrative, computer, technical or any other
advise that will improve the operations and administration of Channel 40.
F-107
Dataflux, S. A. de C. V. (Dataflux)
The Company had an investment in Dataflux, a related party, which was sold on
December 31, 1997 resulting in the Azteca recognizing a gain of Ps104,453 that
was accounted for as other income in the results of operations for 1997.
NOTE 9 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
The Company had the following amounts due from and payable to related parties:
December 31,
-----------------------
1997 1998
--------- ---------
Accounts receivable:
Elektra, S. A. de C. V Ps 74,794
Unefon, S. A. de C. V Ps 69,452
Corporacion de Comunicaciones, S. A. de C. V 33,505
Club Atletico Morelia, S. A. de C. V 32,580
Club Deportivo Veracruz, S. A. de C. V 85,642 25,220
Dataflux 94,211
Other 43,531 40,610
--------- ---------
Ps298,178 Ps201,367
========= =========
Accounts payable:
Corporacion RBS, S. A. de C. V (Ps38,842)
Elektra, S. A. de C. V (Ps 5,009) (28,697)
Other (3,844) (28,194)
--------- ---------
(Ps 8,903) (Ps95,733)
========= =========
The principal transactions with related parties are as follows:
Advertising revenue
Revenue from airing advertising for related parties and affiliated companies
amounted to Ps58,010, Ps35,675 and Ps45,206 during the years ended December 31,
1996, 1997 and 1998, respectively.
F-108
Advertising contracts
In March 1996, TV Azteca entered into a Television Advertising Time Agreement
with Elektra under which Elektra (or any company in which Elektra has an equity
interest) has the right to not less than 300 advertising spots per week for a
period of 10 years, each spot with a 20 second duration, totaling 5,200 minutes
annually, but only in otherwise unsold airtime. In exchange for the television
advertising airtime TV Azteca will receive US$1.5 million per year. The
agreement may not be terminated by TV Azteca but may be terminated by Elektra,
which may also transfer its rights under this agreement to third parties.
Effective September 30, 1996, TV Azteca entered into a Television Advertising
Time Agreement with Nueva Icacos, S. A. de C. V. ("Nueva Icacos"), a company
that operates a Hyatt hotel in Acapulco (the "Nueva Icacos Advertising
Agreement"). Under the Nueva Icacos Advertising Agreement, Nueva Icacos has the
right to 14 advertising spots per week on Channel 7 or 13 for a period of 10
years, each spot with 20 seconds average duration, totaling 235 minutes each
year, but only in otherwise unsold airtime. In exchange for the advertising
time, Nueva Icacos has agreed to pay US$68 annually, payable in advance each
year. The Nueva Icacos Advertising Agreement may not be terminated by TV Azteca;
however, it may be terminated by Nueva Icacos at any time upon at least 90 days'
notice.
Effective September 30, 1996, TV Azteca entered into a Television Advertising
Time Agreement with Dataflux (the "Dataflux Advertising Agreement") under which
Dataflux or any of its subsidiaries has the right to 480 advertising spots per
month on Channel 7 or 13 for a period of 10 years, each spot with 30 seconds
average duration, totaling 2,880 minutes each year, but only in otherwise unsold
airtime. In exchange for the advertising time, Dataflux has agreed to pay the
Company US$831 annually, payable in advance each year. The Dataflux Advertising
Agreement may not be terminated by TV Azteca; however, it may be terminated by
Dataflux at any time upon at least 90 days' notice.
In 1997, TV Azteca entered into a multi-year advertising agreement with Biper,
S. A. de C. V. ("Biper") (the "Biper Advertising Agreement"), a paging company
controlled by Ricardo Salinas. Under the Biper Advertising Agreement, Biper has
the right to 138 minutes in 1997, 172 minutes in 1998, 207 minutes in 1999 and
240 minutes in 2000 on the Azteca 7 or 13 Networks, each commercial to have an
average duration of 20 second, but only in otherwise unsold advertising time. In
exchange for the advertising time, Biper has agreed to pay 1.5% of its yearly
pager sales to TV Azteca. Biper's rights under the agreement may be assigned to
third parties. Biper also provides paging services to TV Azteca and leases
transmission sites from TV Azteca.
Interest expense
During the years ended December 31, 1996, 1997 and 1998, Azteca received
short-term loans from Grupo Elektra, S. A. de C. V. and Elektra. Interest
expense incurred under these arrangements amounted to Ps65,872, Ps34,870 and
Ps100, respectively.
F-109
Interest income
During the years ended December 31, 1996, 1997 and 1998 TV Azteca extended
short-term loans to certain related parties. Interest income under these
arrangements amounted to Ps17,805, Ps3,806 and Ps14,920, respectively.
Guarantee fee arrangements
In connection with a syndicated loan agreement (See Note 9) certain related
parties provided guarantees and other credit supports on behalf of TV Azteca. As
consideration for providing this credit support TV Azteca has agreed to
compensate the related parties at an annual rate of 2.4% of the average amount
outstanding under the syndicated loan agreement. Fees due to the related parties
under these guarantee arrangements, which are included in interest expense,
amounted to Ps2,089 during the year ended December 31, 1997. With the net
proceeds from the issuance of the TV Azteca Notes mentioned in Note 10, TV
Azteca paid the amounts outstanding of such fees, and aggregate of approximately
Ps181 million.
Donations
In the years ended December 31, 1997 and 1998 Azteca made donations to a
non-profit organization managed by a related party of Ps60,112 and Ps83,136,
respectively. The related party has permission from tax authorities to collect
donations and issue the corresponding receipts.
Loan granted to stockholder
During the year ended December 31, 1998, Ps44,000 and US$2,000 (US$716 and
Ps16,613 during the years ended December 31, 1996 and 1997, respectively) were
loaned to the principal stockholder of the Company. Ps44,000 was paid on the
same day it was lent, and at December 31, 1998 the outstanding balance was
US$2,000. The 1996 and 1997 loans were paid on December 31, 1996 and 1997
respectively. The 1998 loans bore interest at the rates of 35.10% and 11.05%,
respectively, and the 1996 and 1997 loans bore interest at a rate of Libor plus
7.125% and 20%, respectively.
Building leasing income
In May 1998, Azteca signed a building lease agreement with Sistemas
Profesionales de Comunicacion, S. A. de C. V. (SPC), a related party. Said
contract has a duration of ten years, starting June 1998 with a one-time right
to renew for an additional ten years upon notice of at least 180 days prior to
expiration. The rent under the lease is Ps1,463 a month, payable in advance each
month. During year ended December 31, 1998 the aggregate lease income received
from SPC by Azteca amounted to Ps10,796.
F-110
NOTE 10 - SHORT-TERM AND LONG-TERM BANK LOANS:
At December 31, 1997 and 1998 short-term debt for equipment financing amounted
to Ps478,747, and Ps280,127, respectively, representing unsecured loans in U.S.
dollars with Mexican banks, with an average interest rate of 9.28% and 12.50% at
December 31, 1997 and 1998, respectively.
Short-term and long-term bank loans are analyzed as follows:
December 31,
----------------------------
1997 1998
----------- -----------
Building and equipment financing Ps 582,712 Ps1,136,116
Less-current portion 76,539 123,800
----------- -----------
Long-term bank loans Ps 506,173 Ps1,012,316
=========== ===========
TV Azteca notes Ps4,066,726 Ps4,210,901
Azteca notes 2,440,036 2,526,540
----------- -----------
Total senior notes Ps 6,506,762 Ps6,737,441
============ ===========
Maturity of long-term bank loans:
Year ending at December 31, Amount
--------------------------- ------
2000 Ps 642,593
2001 60,651
2002 47,218
2003 10,996
Thereafter 250,858
-----------
Ps1,012,316
===========
Syndicated loan
In November 1993, TV Azteca entered into a loan agreement (the syndicated loan)
with a banking syndicate headed by Grupo Financiero GBM-Atlantico for
US$226,000, which matured on November 9, 1997 with interest at Libor plus 7%
(12.5% at December 31, 1996). On September 26, 1995, due to an increase in the
interest rate applicable to the loan in 1995,
F-111
resulting from the economic crisis in Mexico, TV Azteca negotiated certain
revisions to the syndicated loan including the deferral of US$12,600 of interest
until the maturity of the loan. The syndicated loan is guaranteed by various
related parties. (See Note 9).
In connection with the syndicated loan agreement, Azteca and TV Azteca entered
into an option agreement on November 5, 1993 and amended on September 26, 1995,
in which the lenders and the agent were granted an option to purchase from
Azteca 608,626 thousand series "N-5" common shares of TV Azteca's capital stock
and 143,375 thousand series "N-5" common shares of COTSA's capital stock at an
exercise price to be determined as the product of the base price (US$0.3209 per
share) times an applicable factor depending on the exercise date.
On November 8, 1996 Azteca, TV Azteca, the lenders and their agent negotiated
the termination of the option agreement. In consideration for the termination of
the option agreement, TV Azteca agreed to pay US$44 million and to provide the
lenders and the agent with the equivalent of US$10 million at that date in
advertising airtime over a three year period beginning on January 1, 1997 and
Azteca subsequently agreed to reimburse TV Azteca for these amounts. The total
cost associated with the termination of the option agreement (US$54 million) was
deferred at December 31, 1996 (See Note 8) and was included as part of Azteca's
cost basis of the 630,597 thousand Series "N-5" shares of TV Azteca, upon their
acquisition, pursuant to a pre-existing subscription agreement.
On April 22, 1997 Azteca paid Ps814 million for the 631 million Series "N"
shares of TV Azteca which had been subscribed in December 1994. In addition,
Azteca advised TV Azteca that it would increase the aggregate purchase price
from Ps814 million, the aggregate purchase price under Azteca existing
subscription aggrement, to approximately US$300.5 million, the aggregate
exercise price under the lenders' options if they had been exercised prior to
May 10, 1997.
On June 18, 1997, Azteca paid US$54 million to TV Azteca as reimbursement for
certain payments made and obligations undertaken by TV Azteca in connection with
the termination of the options granted to the lenders of the syndicated loan and
paid a premium of Ps1,743,190 (nominal) on the issuance of 630,597 thousand
Series "N-5" Shares subscribed to on April 22, 1997. On the same date, TV Azteca
decreased the fixed part of its capital stock by Ps2,373,789 (nominal) through
the pro-rata distribution of capital. The direct and indirect proceeds received
by TV Azteca amounted to approximately Ps1,568,837 (nominal).
The goodwill resulting from this transaction, amounts to Ps1,008 million
(including the Ps585 million related to the total cost associated with the
termination of the option agreement described above) and will be amortized over
a period of 20 years.
F-112
Bridge loan
On November 8, 1997 TV Azteca entered into a US$44 million bridge loan
agreement, at an interest rate of Libor plus 7%, which was paid on February 6,
1997. Such funds were used to pay amounts due in connection with the termination
of the option agreement mentioned above.
Classification of long-term bank loans
On January 19, 1999 the Company entered into a syndicated loan facility with a
bank syndicate headed by ABN-AMRO Bank, N.V. for a principal amount of
US$90,000, maturing in 364 days, at an interest rate of Libor plus 3.75% during
the first semester and Libor plus 4.25% during the second. The payment of
principal will be made in one payment upon the maturity of the loan. The
proceeds of the syndicated loan facility were used to repay US$80,000 of
short-term debt out-standing at December 31, 1998 and for other corporate
purposes. Since the facility effectively refinanced this short-term debt to a
maturity after December 31, 1999, these repaid loans were classified as
long-term at December 31, 1998.
TV Azteca Notes
On February 5, 1997, TV Azteca issued unsecured long-term Series A and Series B
Guaranteed Senior Notes (the TV Azteca Notes) in the international markets in an
amount of US$125 million, payable in the year 2004, bearing interest of 10.125%
per annum and of US$300 million, payable in the year 2007, bearing interest rate
of 10.50% per annum, respectively. Interest on the TV Azteca Notes will be
payable semi-annually on February 15 and August 15 each year, commencing on
August 15, 1997. Substantially all of the TV Azteca subsidiaries have fully and
unconditionally guaranteed the TV Azteca Notes on a joint and several basis. The
guarantor subsidiaries are all wholly-owned subsidiaries of TV Azteca. The
direct and indirect non-guarantor subsidiaries of TV Azteca are individually and
in the aggregate inconsequential.
Azteca Notes
On June 12, 1997, Azteca issued senior secured notes (Secured Notes) in the
international capital markets in an amount of US$255 million, payable in the
year 2002, bearing interest of 11% per annum. Interest on the secured notes will
be payable semi-annually on June 15 and December 15 each year, commencing
December 15, 1997. The Secured Notes will be secured initially by (i) a
portfolio of US Government Obligations purchased with approximately US$80
million of the net proceeds of the offering (the Pledged Securities) and (ii)
all of the Series N shares of TV Azteca owned by Azteca except for the Elektra
reserved shares, representing 41% of the capital stock of TV Azteca. At December
31, 1998, US$56 million TV Azteca CPOs remain pledged to secure the Secured
Notes.
The Secured Notes will be redeemable on or after June 15, 2000 at the option of
Azteca, in whole or in part, at the redemption prices set forth herein plus
accrued interest to the date of redemption. The Secured Notes also will be
redeemable prior to June 15, 2000, at the option of
F-113
Azteca, in whole or in part, at a redemption price equal to the greater of (i)
101% of their principal amount and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date of redemption on a semi-annual basis (assuming a 360-day year consisting of
twelve 30-day months) at the treasury rate plus 50 basis points, plus in each
case accrued interest to the date of redemption. In addition, on or prior to
June 15, 2000, Azteca may redeem up to 35% of the original principal amount of
the secured
notes with the net cash proceeds of one or more common stock offerings, at a
redemption price of 111% of the principal amount thereof plus accrued interest
to the date of redemption. Upon the occurrence of a change of control, Azteca
will be required to make an offer to purchase the Secured Notes at a purchase
price equal to 101% of the principal amount thereof plus accrued interest to the
date of repurchase. In the event of certain changes affecting the Mexican
taxation of the Secured Notes, the Secured Notes will also be redeemable at any
time in whole, but not in part, at the option of Azteca at 100% of the principal
amount thereof plus accrued interest to the date of redemption.
Building and equipment financing
In 1995, TV Azteca borrowed US$28 million to finance the acquisition of
equipment, of which approximately US$24 million was guaranteed by the
Export-Import Bank of the United States of America ("Exim Bank") on January 31,
1996. The Exim Bank-guaranteed funds were comprised of two separate loans of
approximately US$21.5 million at an annual interest rate of Libor plus2.25% and
approximately US$2.7 million at an annual interest rate of Libor plus 4.25%
(8.30% and 10.30% at December 31, 1998, respectively). Both Exim Bank-guaranteed
loans are payable in 14 semi-annual payments beginning in June 1996. At December
31, 1998, payments on the aforementioned credits have been made amounting to
US$9.2 and US$1.1 million, respectively.
On September 18, 1997, Azteca obtained a mortgage loan for the acquisition of an
office building amounting to US$25 million from Banco Bilbao Vizcaya, S. A.
(BBV). Azteca is required to pay BBV annual interest of 8.5%, payable on
December 31 of each year beginning on December 31, 1997. Payment of the
principal must be made by November 30, 2003.
NOTE 11 - PROMISSORY NOTES:
On April 8, 1987 COTSA signed an agreement with the Fundacion Mary Street
Jenkins for the acquisiton of 102 buildings where its movie theaters are located
and subscribed 30 promissory notes which mature every six months, for a total of
US$18 million (Ps188,805), of which US$8.8 million (Ps89,015) corresponds to
interest calculated at an annual rate of 9.7% and US$9.2 million (Ps93,775)
corresponds to principal.
At December 31, 1998, US$1 million (Ps9,454) is to be paid currently and US$2
million (Ps24,460) come due as shown in the following page.
F-114
Year Amount
---- --------
2000 US$1,231
2001 1,231
--------
US$2,462
========
This liability is guaranteed by Banobras, S.N.C. (a bank of the Mexican
government).
NOTE 12 - STOCKHOLDERS' EQUITY:
a. Capital stock
The Company's capital stock is variable with a fixed minimum of Ps50
(nominal) and an unlimited maximum.
In an Extraordinary Meeting held on February 14, 1997 the stockholders
approved:
i. An increase in the number of shares from 726, 885 old shares to
1,129,750 new shares.
ii. An elimination of the shares' par value; and
iii.A reduction in the variable portion of the capital stock through the
reimbursement of Ps132,454 (US$13 million) represented by 92,505 shares.
At December 31, 1998, the capital stock of the Company is represented by
634,380 common shares with par value of one thousand pesos each as follows:
Number of
shares Description Amount
------ ----------- ------
Representing the fixed portion of the
50 capital stock Ps 50
Representing the variable portion of
634,330 the capital stock 634,330
------- -----------
634,380 634,380
=======
Restatement 1,877,074
-----------
Capital stock in pesos of purchasing power
at December 31, 1998 Ps2,511,454
===========
F-115
Any capital reduction is subject to income tax payable by the Company
equivalent to 51.5% of the portion of capital stock exceeding contributions
made, as per the procedures set forth in the Income Tax Law.
b. Bursamex agreement
In October 1993, TV Azteca and COTSA entered into a share subscription
agreement with Bursamex, S. A. de C. V. acting for a group of investors
(Bursamex Group) under which the Bursamex Group acquired 167,508 thousand
Series "N-3" shares for Ps379,194 (Ps167,508 nominal) and 42,823 thousand
Series "N-3" shares for Ps167,492 (Ps42,823 nominal), respectively. The
agreement provides certain conditions under which TV Azteca and Elektra
agreed to refund the Bursamex Group's original investment plus interest if
TV Azteca or COTSA fail to comply with any of the obligations under the
share subscription agreement or TV Azteca or COTSA make certain
extraordinary business decisions, or enter into certain extraordinary
business transactions without the approval of the their respective Board of
Directors, or upon the loss of control by the controlling stockholders of
TV Azteca or COTSA. This agreement, which was amended on April 10, 1995,
provided the Bursamex Group with the right to collect annual in-kind
interest equivalent to 6% of the shares originally acquired for a four
year-period beginning on October 28, 1993. In connection with this
agreement TV Azteca and COTSA authorized the issuance of 40,202 thousand
and 9,882 thousand Series "N-3" shares, respectively, and issued 20,102
thousand and 5,138 thousand series "N-3" shares, respectively, in 1995 and
10,051 thousand and 2,569 thousand Series "N-3" shares, respectively,
during the year ended December 31, 1996 and 10,050 thousand Series "N-3" TV
Azteca's shares during 1997. The value of the shares issued by the
subsidiaries under the terms of this agreement was recorded as interest
expense and amounted to Ps12,583, during the year ended December 31, 1997.
Between July 31, 1997 and October, 1997, a wholly-owned subsidiary of COTSA
purchased 50.4% of the capital stock of COTSA (including the Bursamex
Group's interest in COTSA) for US$36 million. The purchase was funded in
part by a US$25 million loan from a subsidiary of TV Azteca that bears
interest at an annual rate of 11.5% and that matures on December 27, 1997.
In August 1997, TV Azteca completed an initial public offering in the
domestic and international capital markets and, as a result, the Bursamex
subscription agreement was terminated.
c. NBC warrants
In May 1994, TV Azteca and RTC entered into an agreement with National
Broadcasting Company, Inc. (NBC) in which the companies agreed to pay NBC,
for the license of specific programs and advisory and other services, a
total of US$7 million over a three-year period ended June 30, 1997. TV
Azteca records the cost of the programming obtained from NBC as exhibition
rights and amortizes the related costs as the programs are aired.
F-116
As additional consideration for the advisory and other services related to
NBC's association, TV Azteca provided NBC with the right to purchase Series
"N-6" shares (non-voting) of TV Azteca equal to up to 10% of all the then
fully diluted outstanding shares of TV Azteca, post-exercise (the
warrants). The total warrant exercise price was US$120 million before June
30, 1994 accreted at 2.75% compounded quarterly thereafter until it reached
US$160 million at expiration of the warrants. The warrants were to be
exercised, in whole or in part, from time to time until May 6, 1997. To the
extent not exercised during that period, NBC had the right, during the
sixty-day period after the expiration of the option period, to require TV
Azteca to purchase any unexercised portion of the warrants for up to US$25
million, and had the right to collect the warrant put price at any time
during the option period if it is determined that the warrants could not,
as a legal matter, be exercised. Any amounts that could have been required
to purchase the unexercised portion of the warrants would have been added
to accumulated deficit when paid.
On April 3, 1997 NBC notified TV Azteca that it would exercise its rights
under the warrants to purchase Series "N-6" shares of TV Azteca, equivalent
to 1% of its total right to purchase 10% of all the fully diluted
outstanding shares of TV Azteca for an amount of US$16 million which was
required to be paid on May 5, 1997. Subsequently, NBC advised TV Azteca
that TV Azteca was required to purchase the unexercised portion of the
warrant for US$22.5 million and owed an additional US$5.5 million, the
balance of the US$7 million owed by TV Azteca for unpaid programming as of
May 6, 1997 (plus accrued interest).
The agreement with NBC also provides that TV Azteca is required to issue to
NBC Series "N-6" shares in an amount equal to 1% of all the then fully
diluted outstanding capital stock of TV Azteca upon the first to occur of
various events relating to the achievement of specific market share and
capitalization levels through May 6, 2002. If these shares are issued,
their fair value at date of issue would be added to accumulated deficit.
On April 29, 1997, TV Azteca filed a request for arbitration with the
International Chamber of Commerce (ICC) in Paris pursuant to the
arbitration clauses in its agreements with NBC and NBC Europe. In its
request, TV Azteca seeks the rescission of all of its agreements with NBC,
including the cancellation of its outstanding programming purchase
obligations, the cancellation of the warrants granted to NBC Europe and
NBC's right to require TV Azteca to repurchase the unexercised portion of
the warrants, and the return of all amounts previously paid to NBC, on the
grounds that NBC did not fulfill its obligations under its agreements with
TV Azteca. On July 14, 1997, NBC and NBC Europe filed an answer with the
ICC in which NBC and NBC Europe assert that they performed their
obligations under these agreements and are entitled to all benefits
provided by them. Should TV Azteca be unsuccessful in the arbitration, it
may be required to pay NBC an additional amount based on the value of the
shares that NBC would have acquired on its partial exercise of the warrant
as a result of the TV Azteca's market capitalization exceeding the specific
level due to the proposed public offering, or to issue such additional
shares to NBC.
F-117
On July 29, 1997, NBC and NBC Europe filed an amended answer and
counterclaim to TV Azteca's request for arbitration. NBC's principal new
claim is that, notwithstanding the expiration of NBC Europe's warrant, NBC
Europe should be given the right to exercise the entire unexercised portion
of the warrant (representing the right to purchase 9% of the fully-diluted
outstanding capital stock of TV Azteca as of May 6, 1997) or, at NBC
Europe's election, to recover lost profits based on the difference between
the fair market value and the aggregate exercise price in respect of the
unexercised portion of NBC Europe's warrant. NBC bases this claim on the
allegation that TV Azteca misled NBC in order to dissuade NBC Europe from
exercising its warrant in full. NBC also claims that NBC Europe has been
deprived of the value of an additional equity bonus of 0.5% of the
fully-diluted outstanding capital stock of TV Azteca to which NBC Europe
would have been entitled had it exercised its warrants for more than 5% of
TV Azteca's outstanding stock (rather than for only 1%). Although no
assurance can be given that the arbitration panel will agree, both TV
Azteca and its special Mexican counsel believe that the new claims and
requests for damages contained in NBC's amended and counterclaim are
without merit.
In summary, should NBC prevail in the arbitration, (i) NBC Europe may be
entitled to acquire up to 21.5% of the outstanding capital stock of TV
Azteca, (ii) any portion of that 21.5% not attributable to the NBC IPO
Allocation Right (i.e., up to 11.5% of the outstanding capital stock of TV
Azteca) could be acquired by NBC Europe at a price below the price payable
to TV Azteca in TV Azteca's initial public offering and (iii) NBC and NBC
Europe would be entitled to damages, which may be substantial. Although no
assurance can be given, management believes TV Azteca will prevail in the
arbitration, and accordingly, no reserve has been established with respect
to these proceedings.
d. TV Azteca employee stock option plans
In the fourth quarter of 1997, TV Azteca adopted employee stock option
plans pursuant to which options were granted to all current permanent
employees who were employed by TV Azteca as of December 31, 1996. The
exercise prices assigned during 1998 and 1997 range from US$0.29 to US$0.39
per CPO, with a more significant number of options being granted to the TV
Azteca's senior management and key actors, presenters and creative
personnel.
The options, which relate to an aggregate of approximately of 76 million
CPO's were granted in equal portions in respect of each employee's first
five years of employment with TV Azteca (whether prior to or after adoption
of the plans), but these options will be cancelled, in the case employment
years after 1996, if TV Azteca's operating profit before deducting
depreciation and amortization in that years has not increased by at least
15% as compared to the previous fiscal year. An employee's option in respect
to of any employment year become exercisable five years later, unless the
employee is no longer employed by TV Azteca, in which case those options
will be reassigned. The options expire on the fifth anniversary of the date
on which they become exercisable.
F-118
TV Azteca also granted options in the fourth quarter of 1997 exclusively to
senior management with respect to 8 million CPO's at an exercise price of
US$0.39 per CPO. These options were exercised in October 1997 using funds
obtained from nonrecourse loans provided by TV Azteca. In 1998, options for
an additional 3 million CPO's were exercised at an exercise price of
US$0.39 per CPO.
The activity of employee stock option plans was as shown as follows:
At December 31,
---------------
Options Millions of CPO's
------- -----------------
1997 1998
---- ----
Granted (cumulative) 76 76
Exercised (8) (11)
---- ----
Outstanding 68 65
==== ====
Available for grant 164 164
==== ====
Total authorized 240 240
==== ====
NOTE 13 - INCOME TAX AND TAX LOSS CARRYFORWARDS:
During the years ended December 31, 1996, 1997 and 1998, various subsidiaries
had taxable income, which was offset against the tax loss carryforwards. The
benefit of the utilization of these tax loss carryforwards amounted to
Ps353,583, Ps265,643 and Ps98,889 during the years ended December 31, 1996, 1997
and 1998, respectively, and is shown in the consolidated statement of income as
an extraordinary item.
At December 31, 1998, the Company and its subsidiaries have combined tax loss
carryforwards amounting to Ps815,219 which expire as follows:
Tax loss Year of
carryforwards expiration
------------- ----------
Ps318,924 2004
93,463 2005
2,583 2006
136,265 2007
263,984 2008
---------
Ps815,219
=========
F-119
Accrued tax loss carryforwards can be restated by applying factors derived from
the NCPI from the year in which they arise to the year prior to that in which
they are amortized.
As of December 31, 1998, the Company and its subsidiaries have tax-loss
carryforwards for an amount of Ps815 millions, of which Ps450 millions was
incurred in Azteca, Ps354 millions was incurred in CASA and Ps11 millions was
incurred in COTSA. These tax-loss carryforwards can only be amortized by the
incurred company.
During 1997, COTSA's income tax liability was offset against the asset tax paid
in prior years in an amount of Ps12,554 which is shown in the consolidated
statements of income as an extraordinary item.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
TV Azteca leases the use of satellite transponders property from Satelites
Mexicanos, S. A. de C. V. (Satmex) under two separate agreements. Total rent
expense under such leases included in operating cost and expenses was Ps25,479,
Ps30,038 and Ps30,571 during the years ended December 31, 1996, 1997 and 1998,
respectively. Combined rental obligation under these agreements is US$200,000
per month. Each lease agreement expires in May 2005 but can be terminated by
Satmex at any time for justified cause upon 30 days' notice.
The Company and its subsidiaries 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 the Company will, individually or in the
aggregate, have a material adverse effect on its business or financial
condition.
NOTE 15 - SUBSEQUENT EVENTS:
On January 26, 1999, TV Azteca made a US$40 million loan to Mr. Salinas, secured
on a non-recourse basis by approximately 167 million CPOs of TV Azteca owned by
Azteca Holdings. The loan accrued interest at an annual rate of 12% and was
repaid in full, including accrued interest, on March 26, 1999.
TV Azteca made a US$40 million loan to Corporacion RBS, S. A. de C. V., a
company controlled by Mr. Salinas, on April 15, 1999, at an annual interest rate
of 12%, with a maturity of June 25, 1999. The loan is secured on a non-recourse
basis by approximately 127 million CPOs of TV Azteca owned by Azteca Holdings.
On May 14, 1999, the Company entered into an agreement (the "Joint Venture
Agreement") with Ricardo Salinas Pliego and Moises Saba Mosri to invest in
Unefon, S. A. de C. V. (together with its wholly-owned subsidiaries, "Unefon"),
a telecommunications company that intends to establish a nationwide digital
fixed wireless personal communications network to provide local telephony
services in Mexico. The Joint Venture Agreement provides for Unefon to be
operated
F-120
and governed as a joint venture, initially between Ricardo Salinas and Moises
Saba. The Joint Venture Agreement requires that each of Ricardo Salinas and
Moises Saba contribute US$180 million to the capital of Unefon, for a total
capital of Unefon of US$360 million. These capital contributions to Unefon were
completed on June 15, 1999.
Prior to entering into the Joint Venture Agreement, Ricardo Salinas contributed
approximately US[$93] million to the capital of Unefon for purposes of making a
down-payment to the Mexican government for the acquisition of wireless
concessions and for pre-operating expenses. Mr. Salinas satisfied the balance of
his capital contribution obligation under the Joint Venture Agreement with funds
obtained from a loan made by Azteca Holdings. Azteca Holdings borrowed the funds
for this loan from a group of private Mexican investors, secured by [339]
million of the TV Azteca CPOs owned by Azteca Holdings.
The Company has made arrangements pursuant to which, subject to appropriate bank
approvals or refinancing, it will acquire at cost the equity interest of Ricardo
Salinas in Unefon. The Company will fund this acquisition through (i) proceeds
from the issuance of shares (as described below); (ii) the use of approximately
US$40 million of its cash, and (iii) the cancellation of an existing US$40
million obligation owed to TV Azteca by Corporacion RBS, S. A. de C. V., a
company controlled by Ricardo Salinas.
In an extraordinary meeting of stockholders held on June 10, 1999, the
stockholders agreed to increase the capital stock of the Company by up to
Ps1,500 million. After giving effect to the capital stock increase, the
Company's authorized shares will consist of 10,816 million shares of which 5,408
million are Series A Shares, 2,704 million are Series D-A Shares and 2,704
million are Series D-L Shares.
The Company offered a portion of the new shares issued on June 10, 1999 to
Azteca Holdings in exchange for the shares temporarily loaned by Azteca Holdings
to a group of Mexican investors. The remaining new shares were offered to
qualified institutional buyers in a preemptive rights offering whereby current
shareholders have until July 2, 1999 to purchase a portion of the capital
increase in proportion to their ownership of the Company's shares at June [10],
1999.
NOTE 16 - BUSINESS SEGMENTS:
The Company operates in two principal business segments, television and movie
theaters. Substantially all of the Company's activities are in Mexico.
F-121
Relevant information on these business segments follows:
Year ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
Net revenue:
Television Ps 2,570,738 Ps 4,314,376 Ps 4,510,534
Less elimination entries and others (45,330)
------------ ------------ ------------
2,525,408 4,314,376 4,510,534
Movie theaters 235,003 153,820 124,620
------------ ------------ ------------
Ps 2,760,411 Ps 4,468,196 Ps 4,635,154
============ ============ ============
Operating (loss) profit:
Television Ps 813,388 Ps 1,839,306 Ps 1,634,011
Less elimination entries and others (3,911) (35,512) (51,966)
------------ ------------ ------------
809,477 1,803,794 1,582,045
------------ ------------ ------------
Movie theaters (32,333) (16,605) (30,262)
Less elimination entries and other 58,301 (18,917) (6,285)
------------ ------------ ------------
25,968 (35,522) (36,547)
------------ ------------ ------------
Ps 835,445 Ps 1,768,272 Ps 1,545,498
============ ============ ============
Capital expenditures:
Television Ps 349,460 Ps 1,522,918 Ps 476,640
Movie theaters 34,388 (28,122)
------------ ------------ ------------
Ps 383,848 Ps 1,494,796 Ps 476,640
============ ============ ============
Total assets (at year end):
Television Ps 8,706,505 Ps12,653,256 Ps12,652,761
Less elimination entries and others (103,341) 1,605,773 1,266,926
------------ ------------ ------------
8,603,164 14,259,029 13,919,687
Movie theaters 945,753 700,176 749,119
------------ ------------ ------------
Ps 9,548,917 Ps14,959,205 Ps14,668,806
============ ============ ============
F-122
NOTE 17 - RECONCILIATION BETWEEN MEXICAN (MEXICAN GAAP) AND UNITED STATES (US
GAAP) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The Company's consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in certain significant respects from US GAAP. The
Mexican GAAP consolidated financial statements include the effects of inflation
as provided for under Statement B-10, "Recognition of the Effects of Inflation
on Financial Information". The application of this statement represents a
comprehensive measure of the effects of price level changes in the Mexican
economy, and is considered to result in a more meaningful presentation for both
Mexican and US accounting purposes. Therefore the following reconciliations to
US GAAP do not include the reversal of such inflationary effects.
The principal differences between Mexican GAAP and US GAAP are summarized in the
following pages with an explanation, where appropriate, of the effects on
consolidated net income (loss) and stockholders' equity. The various reconciling
items are presented net of any price level gain (loss).
a. Reconciliation of net income (loss):
Year ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
Net income (loss) applicable to majority
stockholders under Mexican GAAP Ps572,899 Ps604,024 (Ps359,543)
Stock dividend 19,168 16,504
Amortization of loan discount (10,054) (7,539)
Amortization of goodwill (146,139) (146,139) (146,139)
Deferred income taxes 219,712 (180,528) (176,817)
Exchange loss on NBC Warrant (5,046) (5,668) (50,499)
Gain on monetary position of NBC Warrant 68,561 36,555 41,796
Accretion of NBC Warrant (28,256) (7,869)
Compensation cost from stock options (345,126) (110,955)
Effect of fifth amendment to B-10 (155,877) 14,246
Effect on minority stockholders of US GAAP
adjustments (63,545) 381,897 185,783
--------- --------- ---------
Net income (loss) under US GAAP Ps627,300 Ps190,234 (Ps602,128)
========= ========= =========
F-123
b. Reconciliation of stockholders' equity:
Year ended December 31,
----------------------------
1997 1998
------------ ------------
Majority stockholders' equity under
Mexican GAAP Ps 2,022,797 Ps 1,215,506
Deferred income tax effects (1,185,312) (1,362,129)
Goodwill 1,096,037 949,974
Effect of fifth amendment to B-10 235,184 (46,539)
Effect on minority stockholders of
US GAAP adjustments (46,614) 199,326
------------ ------------
Stockholders' equity under US GAAP Ps 2,122,092 Ps 956,138
============ ============
c. An analysis of the changes in stockholders' equity under US GAAP is as
follows:
1996 1997 1998
----------- ----------- -----------
Balance at beginning of year Ps 112,762 Ps1,483,735 Ps2,122,092
Increase of capital stock 421,459
Decrease of capital stock (132,454)
Net income (loss) 627,300 190,234 (602,128)
Paid-in capital 915,152
(Loss) gain from holding nonmonetary assets (592,938) 580,577 (563,826)
----------- ----------- -----------
Balance at end of year Ps1,483,735 Ps2,122,092 Ps 956,138
=========== =========== ===========
d. Significant differences between US GAAP and Mexican GAAP:
i. Bursamex in-kind interest
The in-kind interest due under the terms of the agreement would be
accounted for in a manner similar to a stock dividend, which would
result in a charge to TV Azteca and COTSA stockholders' equity.
ii. NBC warrant
Under US GAAP, the NBC warrant, discussed in Note 12, would have been
initially recorded at its estimated fair value, at the date of the
initial agreement, of Ps179,613, as determined based on an independent
appraisal, as deferred operating costs representing the value of the
technical advisory services to be provided by NBC at the date of the
agreement. Under US GAAP, the Company would have amortized the
deferred operating
F-124
costs over the agreement period. However, at December 31, 1995 the
Company wrote-off the unamortized deferred operating costs associated
with the agreement, based on management's opinion that there were no
future benefits to be derived under the terms of the agreement.
Due to the nature of the Company's obligations with respect to the NBC
warrant, it would be considered a monetary item under US GAAP and the
foreign exchange losses, the accretion of the NBC warrant obligation
and monetary gains related to the warrant would be reflected in
results of operations.
iii. Bonus right relating to NBC warrants
The terms of the warrant agreement with NBC as discussed in Note 12c.
require TV Azteca to issue 1% of its outstanding shares to NBC upon
attainment of performance goals consisting of specified market share
levels or the market capitalization of TV Azteca of at least US$1.4
million if a public offering of the TV Azteca's stock occurs prior to
1998 and US$ 1.8 million if a public offering occurs subsequently. In
August 1997, TV Azteca completed an initial public offering in the
domestic and international capital markets, which gave TV Azteca a
market capitalization in excess of US$2.2 million, as a result TV
Azteca would (subject to the outcome of the arbitration referred to in
Note 12c.) be required to issue the additional shares to NBC. Under US
GAAP TV Azteca is required to recognize an expense, based on the fair
value of the shares to be issued, when the issuance of the shares
relating to the bonus rights becomes probable. However, as a result of
the arbitration proceedings with NBC, in which TV Azteca expects to
prevail , the ultimate resolution of this matter is not expected to
have a material effect on the Company's results of operations, cash
flow or financial condition.
iv. Loan discount
Under US GAAP the fair value of the options granted in connection with
the syndicated loan, as discussed in Note 10, would be recorded as an
incremental loan discount, which would be amortized over the period of
the syndicated loan using the interest method. The estimated fair
value of the options granted to the bank syndicate and its agents was
Ps40,215, at the date of grant, based on an independent appraisal.
During the years ended December 31, 1996 and 1997 the amount of
related loan discount amortized under US GAAP would be Ps10,054, and
Ps7,539, respectively.
v. Exhibition rights
A license agreement for program material is reported as an asset and a
liability, under US GAAP, when the license period begins and all of
the following conditions are met: the cost of each program is known or
reasonably determinable, the program material has been accepted by the
licensee and the program is available for its first showing or
telecast. Under Mexican GAAP the rights acquired and obligations
incurred are recorded when the
F-125
license agreements are signed. At December 31, 1997 and 1998,
Ps161,603 and Ps329,138, respectively, of deferred exhibition rights
would not be recorded under US GAAP, since the related program
material was not yet available to the Company. Since the Company's
obligations under the license agreements and the deferred exhibition
rights are considered monetary and nonmonetary items, respectively,
under the Mexican inflation accounting rules, the early recognition of
the Company's obligations, prior to the period in which the program
material is available for its first showing, overstates the monetary
gain and exchange losses related to these obligations under US GAAP.
However, since the obligations are US dollar denominated, the net
effect of the related exchange losses and monetary gains, under US
GAAP, are immaterial during the periods presented.
vi. Negative goodwill
Under US GAAP the amounts refunded by the Mexican government in 1994
would have been recorded as an adjustment to the purchase price paid
to acquire the subsidiaries in connection with the privatization
process. Such adjustment would have been reflected as an adjustment to
the cost of TV concessions. However, the net effect of the related
amortization, under US GAAP, is immaterial.
vii. Effects of fifth amendment to statement B-10
As mentioned in Note 3, TV Azteca decided to restate its exhibition
rights and equipment of foreign origin based on the devaluation of the
Mexican peso against the foreign currencies, and by applying inflation
factors of the countries in which they originate. This methodology
does not comply with Rule 3-20 of the SEC's Regulation S-X for
presenting price level financial statement, and consequently the
Company has determined the effects in exhibition rights and equipment
of foreign origin and current year depreciation and amortization and
reflected them in its results of operations and financial position
under US GAAP.
F-126
viii. Deferred income tax
As stated in Note 3m., income tax is recorded under Mexican GAAP
following interperiod allocation procedures under the partial
liability method. Under this method, deferred income tax is recognized
only in respect of identifiable, nonrecurring timing differences
between taxable and book income. This substantially eliminates all
deferred taxes under Mexican GAAP. Also, under Mexican GAAP the
benefit from utilizing tax loss carryforwards and asset tax credits is
not recognized until utilized, at which time it is presented as an
extraordinary item.
The Company follows Statement of Financial Accounting Standards (FAS)
No. 109 for US GAAP reconciliation purposes. This statement requires
an asset and liability approach for financial accounting and reporting
for income tax under the following basic principles: (a) a current tax
liability or asset is recognized for the estimated taxes payable or
refundable on tax returns for the current year, (b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and tax loss and tax credit
carryforwards, (c) the measurement of current and deferred tax
liabilities and assets is based on provisions of the enacted tax law,
and the effects of future changes in tax laws or rates are not
anticipated, and (d) the measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized. Under this
method, deferred tax is recognized with respect to all temporary
differences, and the benefit from utilizing tax loss carryforwards and
asset tax credits is recognized in the year in which the loss or
credits arise (subject to a valuation allowance with respect to any
tax benefits not expected to be realized). The subsequent realization
of this benefit does not affect income. Consequently, there are no
extraordinary items from this concept for US GAAP purposes.
The temporary differences under FAS 109 are determined based on the
difference between the indexed tax-basis amount of the asset or
liability and the related stated amount reported in the financial
statements. Except as indicated in the following paragraph the
deferred tax expense or benefit should be calculated as the difference
between: (a) deferred tax assets and liabilities reported at the end
of the current year determined as indicated above, and (b) deferred
tax assets and liabilities reported at the end of the prior year,
remeasured to units of current general purchasing power at the end of
the current period.
Gains and losses from holding nonmonetary assets are recorded in
stockholders' equity. It is the Company's policy to reflect in results
of operations the deferred income taxes that arise as a result of such
gains (losses) from holding nonmonetary assets.
The significant components of income tax (benefit) expense under US
GAAP were as shown in the following page.
F-127
Year ended December 31,
----------------------------------------
1996 1997 1998
--------- --------- ---------
Current Ps264,416 Ps267,269
Deferred (Ps219,712) 180,528 176,817
--------- --------- ---------
Total provision (Ps219,712) Ps444,944 Ps444,086
========= ========= =========
The following items represent the principal differences between income
tax computed under US GAAP at the statutory tax rate and the Company's
provision for income tax in each period:
Year ended December 31,
-------------------------------------------
1996 1997 1998
----------- --------- ---------
Income (loss) before income tax
(benefit) expense Ps1,129,823 Ps802,691 (Ps373,354)
=========== ========= =========
Income tax (tax benefit) at statutory rate 384,140 287,354 (126,940)
Non deductible stock dividends 6,518 5,611
Effects of inflation components (640,167) 156,819 346,542
Gain on sale of capital stock 9,677 (4,840)
Other 20,120 224,484
----------- --------- ---------
Income tax (benefit) expense (Ps 219,712) Ps444,944 Ps444,086
=========== ========= =========
The income tax effects of significant items comprising the Company's
net deferred tax assets and liabilities under US GAAP are as follows:
December 31,
-------------------------
1997 1998
----------- -----------
Deferred income tax liabilities:
Television concessions Ps1,142,934 Ps1,022,313
Inventories and provisions 207,799 328,603
Property, machinery and equipment 228,519 460,964
----------- -----------
1,579,252 1,811,880
Deferred income tax assets:
Advertising advances (230,885) (172,577)
Operating loss carryforwards (163,055) (277,174)
----------- -----------
(393,940) (449,751)
Net deferred income tax liabilities Ps1,185,312 Ps1,362,129
=========== ===========
F-128
At the effective date of the privatization, additional goodwill of
Ps1,753,668 would have been recorded due to the deferred income tax
liability relating primarily to the television concessions required
under US GAAP. The additional goodwill would be amortized over 12
years.
ix. Fair value information
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FAS No.
107, "Disclosures about fair value of financial instruments". The
estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair value.
Cash and cash equivalents, accounts receivable and accounts payable.
The carrying value of these items is a reasonable estimate of their
fair value.
Bank loans and documents payable. The Company's bank loans and
documents payable bear interest at variable rates and their terms are
generally representative of those which are currently available to the
Company at December 31, 1996, 1997 and 1998 for the issuance of debt
with similar terms and remaining maturities, and therefore the
carrying values of these loans are a reasonable estimate of their fair
value.
Guaranteed senior notes and senior secured notes ("notes"). The
carrying value of the Company's notes and the related fair value based
on the quoted market similar prices for the same or similar issues at
December 31, 1998 was Ps6,737,441 and Ps5,833,820, respectively
(Ps6,506,762 and Ps6,719,427 respectively in 1997).
x. Property, machinery and equipment
Under US GAAP advances for the acquisition of machinery and equipment
would be classified as prepayments. At December 31, 1997 the Company
had advances of Ps151,629.
xi. Other employee benefits
The Company has no post-retirement health care insurance or other
benefit plans. Therefore, FAS No.106, "Employers' Accounting for
Post-retirement Benefits other than Pensions", and FAS No.112,
"Employers' Accounting for Post-employment Benefits", and FAS No. 132
"Employers' Disclosure about Pension and other Post-retirement
Benefits" would have no effect on the Company's financial position.
F-129
xii. Employee stock option plans
The granting of the stock options in the fourth quarter of 1997 by TV
Azteca at exercise prices below the current market prices of CPOs will
result in non-cash compensation cost under US GAAP of approximately
Ps345 million and Ps111 million for 1997 and 1998, respectively as
determined under Accounting Principles Board Opinion No. 25. The
majority of the options granted were pursuant to plans which would be
considered variable plans under US GAAP, since the number of shares
execisable is contingent upon TV Azteca achieving specified financial
goals and employees' performance. TV Azteca expects to record non-cash
compensation expense in future periods in connections with these
plans.
Had compensation cost for TV Azteca's employees stock option plans
been determined based on the fair value at the grant dates for awards
under those plans consistent with FAS No. 123, the Company's
compensation expense would have been Ps341million and Ps196 million
for 1997 and 1998, respectively and the net income would have been
reduced to the proforma amounts indicated below:
Year ended December 31,
-------------------------
1997 1998
--------- ---------
Net income (loss) as reported Ps190,234 (Ps602,128)
========= =========
Net income (loss) proforma Ps182,718 (Ps687,173)
========= =========
The effect on net (loss) income is not expected to be indicative of
the effects in future years. The fair value of each option grant is
estimated on the date of grant using the weighted average
Black-Scholes option pricing model and simple binomial model with the
following assumptions:
1997 1998
---- ----
Expected volatility .302 .258
Risk-free interest rate 18.0% 19%
Expected life of options (in years) 5 5
Expected dividend yield 10% 10%
The Black-Scholes option valuation model and simple binomial model
were developed for use in estimating the fair value of traded options.
In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
The following table summarizes activity under the TV Azteca's stock
option plans as of December 31, 1997 and 1998 (post split):
F-130
Number of options Weighted-average
thousands of OPCs) exercise price
------------------ --------------
Granted 76,564 US$0.34
Exercised (8,180) 0.39
---------
Outstanding on December 31, 1997 68,384 0.33
=========
Exercised (2,814) 0.29
---------
Outstanding on December 31, 1998 65,570 0.32
=========
Outstanding options exercisable
at December 31, 1997 4,866 0.29
=========
1998 9,514 0.31
=========
xiii.Effect of recently issued accounting standards
In April 1998, Financial Accounting Standards Board (FASB) issued
Statement of Position 98-5 "Reporting on the cost of start-up
activities" which is effective for fiscal years beginning after
December 15, 1998. This statement of position provides guidance on the
financial reporting of start-up activities costs and organization
costs. It requires cost of start-up activities and organization costs
to be expensed and incurred. TV Azteca does not believe that the
adoption of this SOP will have a material impact on its consolidated
financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 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 of other comprehensive
income, depending on whether a derivatives is designated as part of
hedge transaction and, if it is, the type of hedge transaction. The
Company has not yet determined the impact that the adoption of FAS 133
will have on its earnings of financial position. The Company is
required to adopt FAS 133 on January 1, 2000.
F-131
e. Condensed balance sheet and income statements under US GAAP:
The following condensed balance sheets and income statements reflect the
effects of the principal differences between Mexican GAAP and US GAAP:
CONDENSED BALANCE SHEETS
At December 31,
----------------------------
1997 1998
------------ ------------
Current assets Ps6,575,206 Ps6,078,378
Television concessions - Net 3,361,288 3,131,172
Property, machinery and equipment - Net 3,039,661 3,181,775
Goodwill and other assets 3,548,123 3,045,561
Deferred income tax assets 163,055 277,174
------------ ------------
Total assets Ps16,687,333 Ps15,714,060
============ ============
Short-term debt Ps 478,747 Ps 280,127
Advertising advances 3,309,493 2,301,120
Deferred income tax payable 207,799 328,603
Other current liabilities 1,139,960 1,493,950
------------ ------------
Total current liabilities 5,135,999 4,403,800
------------ ------------
Guaranteed senior notes and senior
secured notes 6,506,762 6,737,441
Long-term debt 536,250 1,036,782
Long-term deferred income tax 1,371,453 1,483,277
------------ ------------
Total long - term liabilities 8,414,465 9,257,500
------------ ------------
Minority interests 1,014,777 1,096,622
------------ ------------
Stockholders' equity 2,122,092 956,138
------------ ------------
Total liabilities and stockholders' equity Ps16,687,333 Ps15,714,060
============ ============
F-132
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
---------------------------------------------
1996 1997 1998
------------ ----------- ------------
Net revenue Ps 2,760,411 Ps4,468,196 Ps 4,635,154
Cost and expenses:
Programming, exhibition and
transmission costs 809,543 1,455,217 1,558,413
Selling and administrative expenses 619,113 1,066,430 840,043
Depreciation and amortization 642,449 818,927 936,751
------------ ----------- ------------
Operating income 689,306 1,127,622 1,299,947
Comprehensive financing income
(cost) 444,998 (339,723) (1,472,688)
Other (expenses) income - Net (4,481) 14,792 (200,613)
------------ ----------- ------------
Income (loss) before provision
for income tax benefit (expense) 1,129,823 802,691 (373,354)
Income tax benefit (expense) 219,712 (444,944) (444,086)
------------ ----------- ------------
Net income (loss) before minority
interest 1,349,535 357,747 (817,440)
Minority interest (722,235) (167,513) (215,312)
------------ ----------- ------------
Net income (loss) Ps 627,300 Ps 190,234 (Ps 602,128)
============ =========== ============
Cash flow information
Under US GAAP, a statement of cash flows is prepared bases on provision of
FAS 95, "Statement of Cash Flows". This statement does not provide specific
guidance for the preparation of cash flow statements for price level
adjusted financial statements. Cash flows from operating, investing and
financing activities have been adjusted for the effects of inflation on
monetary items.
F-133
During the years ended December 31, 1996 and 1997 the net cash flow
operating, investing and financing activities under US GAAP were shown as
follows:
Year ended December 31,
--------------------------
1996 1997
----------- -----------
Cash flows from operating activities:
Net income Ps 627,300 Ps 190,234
Adjustments to reconcile net income to net
cash provided by operating activities:
Compensation cost from stock options 345,126
Minority interest 722,235 167,513
Monetary gain relating to financing activities (715,725) (484,267)
Foreign exchange loss, net of monetary gain
on NBC Warrant (63,515) (30,887)
Foreign exchange loss on bank loans and
promissory notes 49,981 126,889
Amortization of television concessions,
goodwill and exhibition rights 848,288 872,140
Depreciation 179,067 268,917
Deferred loan discount 10,054 7,539
Accretion of NBC warrant 28,256 7,869
Deferred income tax (219,712) 180,528
Changes in working capital (116,625) (656,811)
----------- -----------
Net cash provided by operating activities 1,349,604 994,790
----------- -----------
Cash flows from investing activities:
Pledged securities (648,140)
Acquisition of machinery and
equipment - Net (383,848) (1,252,467)
Advance payment for the acquisition of
subsidiaries' shares (582,758)
(Acquisition) disposition of shares (15,092) 52,184
Exhibition rights purchased (673,204) (797,151)
----------- -----------
Net cash used in investing activities (1,654,902) (2,645,574)
----------- -----------
Cash flows from financing activities:
Guaranteed senior notes and senior secured
notes received 6,353,976
Bank loans paid (860,852) (2,522,025)
Bank loans received 474,425 579,080
Increase of capital stock 421,459
Decrease of capital stock (132,454)
Paid-in capital 915,152
Promissory notes paid (7,736) (4,073)
Due to related parties (553,574) (133,742)
Redemption of capital of subsidiary paid
to minority stockholders (1,025,743)
Deferred financing costs (198,509)
----------- -----------
Net cash provided by financing activities 388,874 2,916,510
----------- -----------
Increase in cash and cash equivalents 83,576 1,265,726
Cash and cash equivalents at beginning of year 289,841 373,417
----------- -----------
Cash and cash equivalents at end of year Ps 373,417 Ps1,639,143
=========== ===========
F-134
For the year ended December 31, 1998, the Company has further segregated
the effects of exchange rate changes and inflationary effects on cash from
other cash flow activities as provided in the following condensed cash flow
statement:
Year ended December
31, 1998
-------------------
Cash flows from operating activities:
Net loss (Ps 602,128)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Minority interest (215,312)
Compensation cost from stock options 110,955
Amortization of television concessions,
goodwill and exhibition rights 1,009,639
Monetary gain relating to financing activities
Foreign exchange loss, net of monetary (gain)
on NBC Warrant 8,703
Foreign exchange loss net of monetary gain relating
to financial activities 260,259
Depreciation
Deferred income tax 176,817
Net changes in working capital (412,201)
-----------
Net cash provided by operating activities 336,732
-----------
Cash flows from investing activities:
Pledged securities 124,011
Acquisition of machinery and
equipment - Net (461,905)
Acquisition of shares (11,652)
Exhibition rights purchased (883,056)
-----------
Net cash used in investing activities (1,232,602)
-----------
Cash flows from financing activities:
Net cash provided by financing activities 311,383
-----------
Effects of inflation and exchange rates changes
on cash 257,004
Decrease in cash and cash equivalents (327,483)
Cash and cash equivalents at beginning of year 1,382,077
Cash and cash equivalents at end of year Ps1,054,594
===========
Supplemental disclosure:
Cash paid during the period for:
Interest
Income tax
F-135