As Filed with the Securities and Exchange Commission on June 27, 2000.
SECURITIES AND EXCHANGE COMMISSION
----------------------------------------------
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, 1999
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)
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 COMERCIAL, S.A. de C.V. ELEKTRAFIN COMERCIAL, S.A. de C.V.
(Exact name of Registrant (Exact name of Registrant as
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 (Jurisdiction of Incorporation
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
Grupo Elektra, S.A. de C.V.: Registered
- ---------------------------- ----------
Global Depositary Shares New York Stock Exchange
("GDSs") evidenced by Global
Depositary Receipts, each
Global Depositary Share
representing ten Certificados
de Participacion Ordinarios No
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 New York Stock Exchange*
Ordinarios No Amortizables
(Ordinary Participation
Certificates ("CPOs")), each of
which represents financial
interests 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.
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 Comercial, S.A. de C.V.: None
- --------------------------------
Elektrafin Comercial, 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 2,017,502,853
Series L Shares without par value 396,289,707
Elektra Comercial, S.A. de C.V.:
- --------------------------------
Series A Shares without par value 1,000
Series B Shares without par value 3,000
Elektrafin Comercial, S.A. de C.V.:
- -----------------------------------
Series A Shares without par value 1,000
Series B Shares without par value 5,000
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 |_| Item 18 |X|
================================================================================
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Description of Business.......................................3
Item 2. Description of Property......................................44
Item 3. Legal Proceedings............................................45
Item 4. Control of Registrant........................................46
Item 5. Nature of Trading Market.....................................48
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders...................................50
Item 7. Taxation.....................................................53
Item 8. Selected Financial Data......................................59
Item 9. Management's Discussion and Analysis
of Financial Condition and Results of
Operations...................................................66
Item 9A. Qualitative and Quantitative Disclosure
about Market Risks...........................................78
Item 10. Directors and Executive Officers.............................80
Item 11. Compensation of Directors and Officers.......................81
Item 12. Options to Purchase Securities from
Registrant or Subsidiaries...................................81
Item 13. Interest of Management in Certain Transactions...............82
PART II
*Item 14. Description of Securities to be Registered..................84
PART III
*Item 15. Defaults upon Senior Securities.............................84
Item 16. Changes in Securities and Changes in
Security for Registered Securities..........................84
PART IV
**Item 17. Financial Statements.......................................84
Item 18. Financial Statements.......................................85
Item 19. Financial Statements and Exhibits..........................85
- ------------
* Omitted because the item is inapplicable or the answer is negative.
** TheRegistrant 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
Comercial, S.A. de C.V. ("Elektra") and Elektrafin Comercial, 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 for all periods throughout this
Annual Report, unless otherwise noted, have been restated in constant Pesos as
of December 31, 1999.
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. 9.48 to US$1.00, the noon buying rate for pesos on December 31, 1999 as
published by the Federal Reserve Bank of New York (the "Noon Buying Rate"). On
May 31, 2000, the Noon Buying Rate was Ps. 9.51 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.
PART I
Item 1. Description of Business
RISK FACTORS
Risks Associated with Grupo Elektra
Our business is highly dependent on the Mexican economy
The success of our business is to a very large extent subject to the cycles
of the Mexican economy which in turn are very much influenced by the economy of
the United States. Downturns of the Mexican economy directly impact the
purchasing power of our target market and the quality of our receivables
portfolio. The macroeconomic environment in which we operate is beyond our
control. It is a major risk of our business and could materially adversely
affect the success of our operations.
Our success depends on our retention of certain key personnel, our
ability to hire additional key personnel and the maintenance of good
labor relations
We depend on the performance of our executive officers and key employees. In
particular, our senior management has significant experience in the retail
clothing, electronics, appliance, white goods and household furniture
industries, and the loss of any of them could negatively affect our ability to
execute our business strategy. Additionally, we do not have "key person" life
insurance policies on any of our employees.
Our future success also depends on our continuing ability to identify, hire,
train and retain other qualified sales, marketing and managerial personnel.
Competition for such qualified personnel is intense and we may be unable to
attract, assimilate or retain them. Our businesses will be harmed if we cannot
attract this necessary personnel. In addition approximately 26% of our employees
are members of various unions, and we could incur higher ongoing labor costs and
disruptions in our operations in the event of a strike or other work stoppage.
Our international operations expose us to numerous risks
We have retail operations in various foreign countries, including Peru, the
Dominican Republic, El Salvador, Honduras and Guatemala, and we intend to pursue
opportunities that may arise in these and other countries. Net sales in these
foreign countries represented approximately 7.0% of our net revenues in fiscal
1999. We are subject to the risks inherent in conducting business across
national boundaries, any one of which could negatively impact our business.
These risks include:
o economic downturns;
o currency exchange rate fluctuations;
o changes in governmental policy;
o international incidents;
o military outbreaks;
o government instability;
o nationalization of foreign assets; and
o government protectionism.
We cannot assure you that one or more of these factors will not impair our
current or future international operations and, as a result, harm our overall
business.
We are not certain that we will be able to use the tax loss
carry-forwards of Grupo SyR.
In 1999, we acquired Grupo SyR. Grupo SyR including its subsidiaries has tax
loss carry forwards of approximately US$385.5 million, with a tax effected
benefit of US$135 million. We cannot assure you that we will be able to have the
benefit of these loss carry-forwards and be able to set-off our earnings against
Grupo SyR's historical operating losses. Failure to complete the merger of Grupo
Elektra with Grupo SyR in accordance with the regulations of the Mexican tax
authorities, or a change in law, could prevent us from having such benefit.
We may have difficulty in obtaining enough quality, low-cost merchandise
Our future success depends on our ability to select and purchase quality
merchandise at attractive prices. We have historically been able to locate and
purchase quality merchandise, but such merchandise may not be available in the
future, or it may not be available in quantities necessary to accommodate our
expanding businesses, or it may become subject to higher import taxes than it
currently is. We are not generally dependent on any single supplier or group of
suppliers. Nonetheless, for white goods, Grupo Mabe and Grupo Vitro, and for
electronics, Aiwa, represent a very significant portion of our supplies. Our
business and results of operations may be adversely affected by a disruption in
the availability of sufficient quantities of high quality, affordable
merchandise.
Our future prospects depend on whether we can deliver our products to
our stores in a timely and cost-efficient manner
Our future prospects depend on whether we can deliver our products to
our stores in a timely and cost-efficient manner. Substantially all of our
inventory is shipped or picked up directly from suppliers and delivered to our
nine regional distribution centers in Mexico, and to our distribution centers in
each of the other countries where we operate. The inventory is then processed
and distributed to our stores. The orderly operation of our receiving and
distribution process depends on effective management of our distribution centers
and strict adherence to shipping schedules. Our rapid growth puts significant
pressure on our distribution and receiving systems. Some of the factors that
could have an adverse effect on our distribution and receiving systems are:
o expansion, replacement and addition of distribution centers to
accommodate our growth;
o shipping disruptions; and
o natural or other disasters. A fire, explosion, hurricane, tornado,
flood, earthquake or other disaster at our distribution facilities
could result in a significant disruption in the receipt and
distribution of goods.
We may not be successful in completely integrating Grupo SyR into our
existing businesses
Part of our business development relies on our successful integration of the
Grupo SyR business into our business scheme. If we cannot completely integrate
Grupo SyR into our existing businesses, our financial performance, growth
strategy and prospects may be adversely affected.
We may not be successful in fully converting Hecali into "The One"
Part of our future prospects depend on our successful conversion of the
Hecali stores into "The One." If we cannot successfully complete this
conversion, our financial performance, growth strategy and prospects may be
adversely affected by such failure.
We may not be successful in our new financial services ventures
We may not be able to proceed with the new financial service ventures which
we contemplate (such as the home finance venture currently considered) or such
venture may not be successful. Failure to implement such financial ventures may
negatively affect our financial performance, our growth strategy and prospects.
Our financing arrangements contain restrictions that may limit management's
discretion in the operations of our businesses
Our existing financing arrangements impose financial and other restrictions
on us, including:
o limitations on the incurrence of additional debt; o the ability to
create liens; and o the ability to dispose of assets.
Our debt and these financial restrictions are likely to make us more
vulnerable to economic downturns, limit our ability to withstand competitive
pressures and reduce our flexibility to respond to changing business or economic
conditions. See Item 1--Description of Business--Risks Associated with Mexico.
We rely on our relationship with our affiliates, and any impairment of that
relationship may affect our businesses
Our main controlling shareholders are Hugo Salinas Rocha's heirs and Esther
Pliego de Salinas, who, together with Ricardo B. Salinas Pliego, are also the
controlling shareholders of TV Azteca, the second largest Mexican commercial TV
broadcaster. Advertising through the facilities of TV Azteca is an important
element of our marketing strategy. Any impairment of our ability to obtain
advertising on attractive conditions may have a material adverse effect on our
business, results of operations or financial condition.
We often engage in a variety of transactions with companies owned by our
controlling shareholders which may cause conflicts of interest
We have engaged and will continue to engage in a variety of transactions
with TV Azteca, Biper, Unefon and other entities owned or controlled by Ricardo
B. Salinas Pliego and our other controlling shareholders. See Item 13--Interest
of Management in Certain Transactions. While we intend to continue to transact
business with related parties on an arms-length basis, we cannot assure you that
such transactions will be unaffected by conflicts of interest between such
parties and us. We have agreed to terms governing our indebtedness which
restrict our ability to engage in transactions with our affiliates.
Loss of existing or future market share to competitors may adversely affect
our performance
Our businesses are highly competitive in all product categories 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 local, independent retail stores, modern formats
such as retail chains and department stores, as well as informal outlets such as
street vendors and outdoor markets. In general, our competitors in this business
include other specialty stores, independent clothing, electronics and appliance
stores and department stores, some of which are national and international in
scope and may have greater resources than we possess in that specific country.
Also, certain major U.S. retailers have established joint ventures with Mexican
retailers and have opened stores in Mexico. We expect that other U.S. retailers
could do so in the future. Moreover, we believe 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 make it easier for
U.S. retailers to enter the Mexican market. The free trade agreement between
Mexico and the European Union, which is expected to become effective on July 1,
2000, will also make it easier for European retailers to enter the Mexican
market. We also face significant competition from the informal economy and
parallel imports for the products that we carry. There can be no assurance that
our performance will not be adversely affected by increased competition,
consolidation of the retail sector and more sophisticated competitors from these
and other sources.
There may be an adverse impact on our margins from pricing pressure
Pricing competition in the specialty retailing sector is intense. Pricing
pressure from competitors is increasing as the sector consolidates and more
competitors are able to benefit from economies of scale and reduce their prices
to consumers. We also face pressure on the pricing of the credit we extend to
our customers as part of our installment sales program. There can be no
assurance that we will be able to maintain or increase our current margins, the
reduction of which could have a material adverse effect on our business.
We may not be able to finance our working capital needs
We use non-committed short-term credit lines from Mexican banks. Termination
of such lines by these lenders would require us to refinance these short-term
loans. We cannot assure you that such refinancing can be arranged on favorable
conditions, or otherwise, on short notice. Similarly, we rely on our receivables
securitization programs for part of our working capital needs. A downgrading or
worsening of the quality of the receivables portfolio would prevent us from
using such receivables securitization programs on an ongoing basis, and could
have a material adverse effect on our business.
Our operating results are likely to fluctuate in future periods and,
therefore, are difficult to predict
Our annual and quarterly operating results are likely to fluctuate
significantly in the future as a result of numerous factors, many of which are
outside our control. These factors include seasonal factors. Historically, we
have experienced increased demand during the second and fourth quarters, as
customers increase spending for Mother's Day and the Christmas holiday relative
to other times of the year. Our results of operations for any one quarter are
not necessarily indicative of our annual results of operations.
Our internet strategy may not succeed, which will impede our growth
We are pursuing opportunities to sell our products over the internet. This
is a relatively new business and marketing strategy for us and involves risks
and uncertainties. We may not succeed in marketing our products over the
internet. In addition, our internet strategy will require us to significantly
increase our advertising and marketing expenditures. If these expenditures do
not result in significant sales, our results of operations will be adversely
affected.
Risks Related to the Laws of the Countries in Which We Operate
A change in consumer-related laws and regulations may have an adverse
effect on our financial performance
The Ley Federal de Proteccion al Consumidor (the "Consumer Protection Act"),
which regulates consumer installment sales in Mexico, became effective on
December 25, 1992. This Act does not set a limit on the interest rate a merchant
may charge a consumer in an installment sale. It does not require the merchant
to inform the consumer of the effective rate of interest charged. The effective
interest rate which we charge for electronics, appliances, furniture and
clothing is fixed at the time of the installment purchase. We cannot assure you
that in the future, the Mexican Government will not impose limitations or
additional informational requirements regarding such rates of interest. A
substantial portion of our revenues and operating cash flow is generated by our
installment sales program, and any such limitations or additional information
requirements could have a material adverse effect on our financial performance.
Furthermore, our financial performance could be materially adversely affected by
any material change in the regulations governing our collection practices and
repossession procedures. The consumer protection laws and their enforcement in
the other Latin American countries where we do business are comparable to
Mexican law. However, a change in the regulatory environment in Mexico, or in
the other countries where we operate, or the imposition of authorization
requirements could materially adversely affect our operations and our financial
performance.
The Mexican Antitrust Law could prevent us from consummating business
combinations which could have an adverse effect on our businesses
The Ley Federal de Competencia Economica, the Mexican Antitrust Law,
provides for various antitrust regulations and requires approval of the Comision
Federal de Competencia, the Mexican Federal Competition Commission, for certain
mergers, acquisitions and other corporate activities. We cannot guarantee that
we will not be investigated by the Comision Federal de Competencia and, as a
result thereof, be prevented from consummating business combinations or engaging
in certain types of commercial activities in the future, or that such events
would not have an adverse effect on our businesses.
Differences between Mexican GAAP and U.S. GAAP may have an impact on the
presentation of our financial information
Our consolidated financial statements are audited and published annually,
and are prepared according to Mexican GAAP, which differs in certain significant
respects from U.S. GAAP. See Note 16 to our financial statements, which provides
a description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to us.
Risks related to our GDSs
Preemptive rights may be unavailable to GDS holders.
Under Mexican law, whenever we issue new shares for cash, we generally must
grant preemptive rights to our shareholders, giving them the right to purchase a
sufficient number of shares to maintain their existing ownership percentage. We
may not be able to offer shares to U.S. holders of GDSs pursuant to preemptive
rights granted to our shareholders in connection with any future issuance of
shares unless:
o a registration statement under the Securities Act of 1933, as amended
(the "Securities Act") is effective with respect to such rights and
shares; or
o an exemption from the registration requirements of the Securities Act
is available.
We intend to evaluate at the time of any rights offering the costs and
potential liabilities associated with a registration statement to enable U.S.
holders of GDSs to exercise their preemptive rights, the indirect benefits of
enabling U.S. holders of GDSs to exercise preemptive rights and any other
factors that we consider appropriate at the time. We will then decide whether to
file such a registration statement.
We cannot assure you that a registration statement would be filed. In
addition, although the Depositary (as defined under Item 5--Nature of Trading
Market) is permitted, if at the time it is both lawful and feasible, to sell
preemptive rights and distribute the proceeds of the sale to holders of GDSs who
are entitled to the proceeds, sales of preemptive rights are not lawful in
Mexico at this time. As a result, U.S. holders of GDSs may not be able to
exercise their preemptive rights in connection with future issuances of Grupo
Elektra shares. In this event, the interest of holders of GDSs in the total
equity of Grupo Elektra would decrease in proportion to the size of the
issuance. Depending on the price at which shares are offered, such an issuance
could result in dilution to holders of GDSs.
Holders of GDSs and CPOs have limited voting rights.
The CPOs of the Company have been issued by Banco del Atlantico, S.A. as
trustee (the "CPO Trustee") for a Mexican trust (the "CPO Trust"). Each CPO
represents financial interests in, and limited voting rights with respect to,
two B Shares and one L Share. The GDSs have been issued by The Bank of New York
as depositary (the "Depositary"). Each GDS represents 10 CPOs.
Under the CPO Trust agreement, holders of CPOs who are not Eligible Mexican
Holders have no voting rights with respect to the underlying B Shares. Eligible
Mexican Holders are Mexican individuals and Mexican corporations whose charters
contain a prohibition on ownership by non-Mexicans of the corporation's capital
stock. For Mexican law purposes, the Depositary is considered the owner of the
CPOs which are represented by the GDSs. Since the Depositary does not qualify as
an Eligible Mexican Holder, the Depositary and, consequently, the holders of
GDSs have no voting rights with respect to the underlying B shares. The B Shares
that are held in the CPO Trust on behalf of holders of CPOs who are not Eligible
Mexican Holders are voted in the same manner as the respective majority of the B
Shares are voted at the relevant meeting. Given that a majority of the B Shares
are 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
held in the CPO Trust on behalf of holders of CPOs who are not Eligible Mexican
Holders in the same manner as the B Shares held by the Controlling Shareholders
are voted. See Item 6--Exchange Controls and Other Limitations Affecting
Security Holders--Limitations on Voting Rights.
All holders of GDSs and CPOs, whether or not they are Eligible Mexican
Holders, are entitled to give instructions as to the manner in which the CPO
Trustee shall vote the L Shares whenever the holders of L Shares are entitled to
vote. In the case of the holders of GDSs, those instructions must be given to
the Depositary (who in turn conveys them to Banca Serfin, S.A., as Common
Representative of the holders of the CPOs (the "Common Representative")). In the
case of the holders of CPOs, the instructions must be given directly to the
Common Representative. In both cases the Common Representative must receive the
voting instructions at least five business days prior to the relevant meeting.
See Item 6--Exchange Controls and Other Limitations Affecting Security
Holders--Limitations on Voting Rights. Under our by-laws and Mexican law,
holders of L Shares are entitled to vote only in limited circumstances. Holders
of L Shares are each entitled to elect one of our nine directors and the
corresponding alternate. See Item 10--Directors and Executive
Officers--Directors. Holders of L Shares are entitled to vote on the following
matters:
o transforming Grupo Elektra from one type of company to another;
o any merger in which Grupo Elektra is not the surviving entity;
o de-listing of the L shares or securities representing them from the
Mexican Stock Exchange or any foreign stock exchange or cancellation
of the registration of such shares with the Mexican Registro Nacional
de Valores e Intermediarios (National Securities Registry); and
o actions that would prejudice the rights of holders of such series but
not the rights of holders of other series.
The payment and amount of dividends are subject to covenant restrictions
and to the determination of our controlling shareholders.
The payment and amount of dividends are subject to the recommendation of our
Board of Directors and approval by our shareholders As long as our controlling
shareholders continue to own a majority of these shares, they will have as a
result the ability to determine whether or not dividends are to be paid and the
amount of any dividends. In addition, our indentures contain covenants that
restrict, among other things, our payment of dividends.
The significant share ownership of the controlling shareholder may have an
adverse effect on the future market price of the CPOs.
Actions by our controlling shareholders with respect to the disposition of
the shares they beneficially own, or the perception that such actions might
occur, may adversely affect the trading price of the CPOs on the Mexican Stock
Exchange and the market price of the GDSs. See Item 4--Control of Registrant.
Holders of shares may experience dilution as a result of the exercise of
stock options with exercise prices substantially below the market price of
the shares.
At December 31, 1999, we had outstanding stock options with respect to
approximately 31 million CPOs at exercise prices ranging from approximately
US$2.50 to US$4.00 per CPO. In addition to the options currently outstanding, we
have in the past issued options at substantially below the then-prevailing
market price of our CPOs, and we continue to actively consider doing so in the
future. See Item 12--Options to Purchase Securities from Registrant or
Subsidiaries.
There are risks associated with the Mexican Stock Exchange.
The Mexican securities market is not as large or as active as the securities
markets in the United States and certain other developed market economies. As a
result, the Mexican securities market has been less liquid and more volatile
than other markets. To control excess price volatility, the Mexican Stock
Exchange operates a system that suspends dealing in shares of a particular
issuer when changes in the price of such shares (expressed as a percentage of
that day's opening price) exceed certain levels. Under current regulations, this
system does not apply to the CPOs so long as the GDSs are listed on the New York
Stock Exchange or another foreign market.
Developments in other emerging market countries may affect the prices for
our securities.
The market value of securities of Mexican companies is, to varying degrees,
affected by economic and market conditions in other emerging market countries.
Although economic conditions in such countries may differ significantly from
economic conditions in Mexico, investors' reactions to developments in any of
these other countries may have an adverse effect on the market value of
securities of Mexican issuers. We cannot assure you that the market value of our
securities would not be adversely affected by events elsewhere, especially in
emerging market countries.
Risks Associated with Mexico
Volatile Mexican Economic Conditions and Effect of Government Policies
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. In the late 1980s and early 1990s, Mexico's
growth rate increased, the inflation rate declined significantly and the U.S.
dollar/peso exchange rate was relatively stable. Beginning in December 1994 and
continuing through 1995, Mexico experienced an economic crisis characterized by
the following:
o exchange rate instability and devaluation of the peso; o high
inflation; o high domestic interest rates;
o negative economic growth;
o reduced consumer purchasing power; and o high unemployment.
The economic crisis occurred in the context of a series of internal disruptions
and political events, including:
o a large current account deficit;
o civil unrest in the southern state of Chiapas;
o the assassination of two prominent political figures;
o a substantial outflow of capital; and
o significant devaluation of the peso.
In response, the Mexican government implemented a broad economic reform program.
Economic conditions in Mexico have improved since 1996. Nevertheless, the
decline in the price of oil and resulting reduction of federal revenues
(petroleum taxes and duties account for approximately 33% of federal revenues)
led to a slowdown in Mexico's economic recovery. Other factors that had a
negative effect on Mexican economic conditions during 1998 included the
volatility in the international financial markets resulting from the economic
crises in Asia and Russia and the financial turmoil in countries such as Brazil
and Venezuela. In addition:
o as a result of decreased revenues from oil exports, the Mexican
government passed a series of spending cuts that reduced public
expenditures below their originally budgeted levels;
o the annual rate of inflation was 18.6% during 1998; o interest rates
on 28-day Cetes averaged 24.8% during 1998;
o the Mexican government estimates that real GDP growth for the full
year 1998 was 4.8%; and
o the peso suffered a 18.1% devaluation during 1998.
In 1999, the annual rate of inflation declined to 12.3% and the interest rate on
28-day Cetes averaged 21.4%. Also, in the same period the peso appreciated 4.4%
and the country experienced a 3.7% GDP growth.
In the future, the Mexican economy could continue to suffer from declines in
foreign direct and portfolio investment due to international financial crises,
inflationary pressures, high short-term interest rates and low oil prices. A
deterioration in Mexico's economic conditions, or social instability, political
unrest or other adverse social developments in or affecting Mexico could
adversely affect our businesses, results of operations, financial condition
and/or prospects. Presidential elections are scheduled for July 2, 2000, and a
new governor for the Federal District of Mexico City will be elected on the same
date. The outcome and consequences of these elections are uncertain. These
factors may, however, lead to increased volatility in the foreign exchange and
financial markets and thereby affect our ability to obtain and service foreign
debt.
In addition, the Mexican government has exercised, and continues to
exercise, significant influence over the Mexican economy. Accordingly, Mexican
companies (including us), market conditions, prices and returns on Mexican
securities (including ours) could be significantly affected by Mexican
governmental actions.
The exchange rate of the peso has been and may continue to be volatile, and
this may affect our operations
The peso has suffered significant devaluations against the U.S. dollar in
the past and may be subject to significant fluctuations in the future. The value
of the peso:
o declined by 41.7% against the U.S. dollar during 1994, from Ps.3.11 to
Ps.5.33 per U.S. dollar.
o depreciated by 30.3% to Ps.7.64 per U.S. dollar in 1995, fluctuating
between Ps.5.33 and Ps.7.64.
o weakened slightly in 1996, and was Ps.7.85 per U.S. dollar on December
31, 1996.
o weakened again slightly in 1997, and was Ps.8.06 per U.S. dollar at
December 31, 1997.
o experienced another significant decline in 1998, depreciating by 18.1%
to Ps.9.93 per U.S. dollar as of December 31, 1998.
o appreciated 4.4% during 1999, ending the year at Ps.9.48 per U.S.
dollar; and
o was Ps.9.51 per U.S. dollar on May 31, 2000.
As of December 31, 1999, we had approximately US$267.0 million indebtedness
denominated in U.S. dollars and the equivalent of US$55.1 million denominated in
other currencies. We may in the future incur additional non-peso-denominated
debt. Both the interest costs in pesos of our non-peso-denominated debt and the
cost in pesos of our other non-peso-denominated expenditures are increased by
declines in the value of the peso relative to other currencies. Such declines
would also result in foreign exchange losses. Substantially all of our revenue
is denominated in pesos, and such increased costs will not be offset by an
exchange-related increase in revenue. The value of our assets, our liquidity and
our results of operations were materially adversely affected by the devaluation
of the peso in 1994 and 1995 and additional devaluations of the peso could also
have a material adverse effect. Our operations in other countries in Latin
America are increasingly important. The revenue stream derived from our
operations outside of Mexico may be impacted adversely by the volatility of the
currencies of the countries where we operate.
Changes in Mexican exchange controls may affect our businesses
From late 1982 until November 10, 1991, Mexico maintained a dual foreign
exchange rate system, with both an exchange rate controlled by the Mexican
government and a free market rate. During the four-month period from September
1, 1982 to December 20, 1982, the Mexican government imposed strict exchange
control policies which limited the right to exchange pesos for U.S. dollars.
From October 1992 to December 21, 1994, the Mexican central bank intervened in
foreign exchange markets to maintain the peso-dollar exchange rate within a
Mexican government-controlled band that widened daily. On December 21, 1994, the
Mexican government suspended Banco de Mexico's foreign exchange market
operations and thus allowed the peso to float freely against the U.S. dollar.
While the Mexican government does not currently restrict the ability of
persons to convert pesos into dollars or other currencies, we cannot assure you
that the Mexican government will not again impose a restrictive exchange control
policy. Such a policy could prevent us from paying our obligations in foreign
currency. Nor can we assure you that the Mexican government will maintain its
current policies with regard to the peso or that the peso's value will not
fluctuate significantly in the future.
Political conditions and events may affect the Mexican economy and our
businesses
In July 1997, national elections were held in Mexico in which parties
opposed to the ruling Institutional Revolutionary Party ("PRI") increased their
representation in the Mexican legislature, and the PRI lost its Congressional
majority for the first time in over 70 years. Opposing parties also captured the
mayoralty of Mexico City and the governorships of several states of Mexico.
Although the term of President Zedillo, a member of the PRI, is scheduled to
continue until December 2000, we cannot predict whether the increased political
power of parties opposed to the PRI will not result in changes in Mexico's
economic policies or impede the ability of the Zedillo administration to
implement policies similar to those it has supported in the past. In addition,
in the recent past, the transfer of power after presidential elections has been
accompanied by a significant adverse effects on the economy. Presidential and
Congressional elections are scheduled for July 2000, and the subsequent transfer
of power may be accompanied by political instability, which could trigger, among
other events, currency instability. These changes could have a material adverse
effect on our businesses, results of operations, financial condition and
prospects.
OVERVIEW
General
In what follows, we first discuss our business common to all our operations
and then we discuss the specifics of our subsidiaries and affiliates and their
products and services.
We were founded in 1950 and are now the largest specialty retailing group in
terms of number of stores and revenues in Mexico and one of the largest in Latin
America, with a significant presence in Peru, El Salvador, Guatemala, Honduras
and the Dominican Republic. As of December 31, 1999, we operated 946 retail
stores of which 99 are located in five other countries in Latin America. We
believe that through our 50 years of operations we have established a leading
brand name and market position with regard to all our major products in Mexico.
We have developed a standardized system for operating our Grupo Elektra
stores. The system includes procedures for information technology, inventory
management, transaction processing, customer relations, store administration,
merchandise display and installment sales policies. As part of this effort, we
have developed and maintain operating manuals outlining our procedures relating
to maintenance, security and accounting.
Our store operations are organized in operating areas. Our management
structure provides that store managers generally report to regional managers,
who report to area managers who, in turn, report to management at our
headquarters in Mexico City.
We operate four store formats that provide specific product mixes to well
defined target markets. Our four formats are (i) traditional Elektra stores (ii)
MegaElektra stores (iii) Salinas y Rocha stores and (iv) The One/Hecali stores.
The traditional Elektra and MegaElektra stores sell brand name consumer
electronics, white goods, small appliances and furniture targeting low and
middle income segments of the Mexican and Latin American population. The Salinas
y Rocha stores offer a similar line of products as the Elektra stores but are
oriented to a higher socioeconomic bracket, and The One/Hecali stores sell
fashionable clothing targeting mainly younger consumers. This segmentation of
our target markets allows us to attract and retain customers throughout their
lives.
We also provide consumer finance in the form of installment sales, which is
often the only financing option available to the majority of our customers. We
believe that our installment sales program increases the number of potential
customers, their loyalty and their purchasing power, thereby increasing overall
sales and providing low-risk financing income, which results in increased
profitability. We are currently considering a joint venture whereby a Mexican
financial institution could offer mortgage services through our network.
Our Target Market
Our target market is the middle class of Mexico and Latin America. In
Mexico, we define the middle class as the 83% of the population that controls
76% of Mexico's household income. The Mexican Association of Research Agencies
has done studies dividing the Mexican population into demographic groups based
on household income:
Demographic Group Household Income per Month Percentage of Total
- ----------------- -------------------------- -------------------
Population
----------
A/B More than Ps.61,000 7.3%
C+ Between Ps.24,000 and Ps.61,000 7.4%
C Between Ps.7,000 and Ps.24,000 25.6%
D+ Between Ps.4,000 and Ps.7,000 22.5%
D Between Ps.1,700 and Ps.4,000 27.5%
E Under Ps.1,700 9.7%
Our stronghold is the C and D groups. We believe that our "typical" customer
is a person who is employed, owns his own home and has a household income of
approximately US$6,000 per year, but does not own a car and therefore shops in
his neighborhood or at locations served by public transportation. Our target
market in all the countries of Latin America is determined following similar
criteria, modified as necessary depending on the specific social and economic
conditions of each country.
Merchandising and Marketing
Pricing Policy
Our pricing policy is to offer products at cash prices that are competitive
in our target market. In addition, we design the installment sales program to
provide our customers with financing for our products at an affordable weekly
cost. Our marketing department monitors prices at competing stores and adjusts
our cash and installment sales prices as necessary to keep them competitive. In
some regions, individual store managers have the flexibility to match the prices
of local competitors.
Customer Service
We believe that our commitment to customer service is a significant factor
in providing us with a loyal and expanding customer base. Grupo Elektra offers a
wide range of customer services, including among others, a guaranteed 30-day
repair service for consumer electronics and appliances and a supplemental,
limited warranty on all of our products other than furniture. We also operate a
state-of-the-art customer service call-center that is open 365 days a year with
approximately 80 agents. This call-center helps us deliver on our commitment to
customer service.
Advertising
Our marketing strategy emphasizes nine factors in attracting and retaining
customers: strong brands, quality service, merchandise variety, convenient store
locations, installment sales availability, low prices, product availability,
customer satisfaction, and functional display formats. We reinforce our
marketing strategy through an aggressive advertising program utilizing
television, radio and in-store promotional circulars, all of which are designed
and prepared by our in-house advertising department. We vary the volume and
specific media of our advertising efforts to match the size and customer
profiles of our markets. Our advertising programs are designed to (i) highlight
our broad selection of quality and brand name merchandise, (ii) introduce new
products, and (iii) publicize special promotions and events. We have
supplemented our advertising strategy through the implementation of a direct
marketing program using our database of customers.
In July 1993, our controlling shareholders, together with an investor group,
completed the acquisition of certain media assets including two national
television networks, a chain of movie theater properties and a television and
movie production studio. In March 1996, we acquired 35.8% of the capital stock
of Comunicaciones Avanzadas, S.A. de C.V. ("Casa"), the indirect controlling
shareholder of TV Azteca, one of the two national broadcasters in Mexico.
Elektra and Television Azteca (a subsidiary of TV Azteca) entered into a 10-year
agreement pursuant to which Television Azteca agreed to air at least 300
commercial spots for Elektra per week, totaling 100 minutes per week or 5,200
minutes per year, during otherwise unsold airtime. Grupo Elektra pays US$1.5
million annually for such advertising time.
In December 1998, Elektra entered into a separate 5-year agreement pursuant
to which TV Azteca agreed to air commercial spots for Elektra at discount rates
based on the gross rating points assigned to the airtime chosen by Elektra for
each commercial spot. At least 60% of the commercial spots must be aired during
"stellar" airtime, i.e. from 7:00 p.m. to midnight, and half of this 60% (30%)
of all commercial spots must be aired during "prime" airtime, i.e. from 9:00
p.m. to 11:00 p.m. The remaining 40% may be aired during airtime other than from
7:00 p.m. to midnight. Under this agreement Elektra determines each year how
much airtime to purchase from TV Azteca for that particular year. In 1999,
Elektra purchased US$4 million of airtime under this agreement. During 2000,
Elektra expects to purchase US$5 million of airtime under this agreement.
We believe that our in-house advertising department provides us with
valuable cost savings. Our annual expenditures for advertising were 2.0%, 2.1%
and 2.1% of total revenues during 1997, 1998 and 1999, respectively.
Approximately 32.2% of the Company's advertising expenditures in 1999 was spent
on television advertising, 17.4% was spent on radio advertising, and the
remainder was spent on various other forms of advertising, including the
printing of promotional circulars. We traditionally offer certain seasonal
promotions, on predetermined dates each year, including Christmas and Mother's
Day.
We believe our relationship with TV Azteca enhances our ability to effect
our promotion strategy relative to other national and regional specialty
retailers and to develop brand awareness of all our brands.
Suppliers
Three of Elektra's and Salinas y Rocha's suppliers, Grupo Mabe, Aiwa and
Grupo Vitro, together accounted for more than 45% of our aggregate purchases of
merchandise in the year ended December 31, 1999. Grupo Mabe accounted for 18.6%
of merchandise, Aiwa accounted for 13.8% and Grupo Vitro accounted for 13%. No
other supplier represented in excess of 12% of our purchases.
Installment Sales Program
We finance customer purchases through our Elektrafin subsidiary. Our pricing
strategy is to provide customers with a choice of a cash price or an alternative
installment purchase price.
The effective rate of interest charged by Grupo Elektra for its merchandise
is determined at the time of an installment purchase and is a fixed rate. We
believe that the weekly payments charged to our customers are competitive with
those of competitors who offer similar programs. Grupo Elektra does not provide
a statement of the effective interest rate included in the installment sales
price to the customer. The installment sales program is regulated by the
consumer protection legislation of the countries where the respective customers
are located. In Mexico, the Consumer Protection Act imposes no ceiling on the
interest rate a merchant may charge a consumer in an installment sale and does
not require disclosure of the effective rate of interest charged by the
merchant. The following table sets forth certain information concerning the
consolidated installment sales program for all our operations:
As of and for the Year
Ended December 31,
------------------
1997 1998 1999
---- ---- ----
(in millions of Ps. as of December
31, 1999)
Accounts receivable retail
customers-net (at period end)(1)................... 1,720.6 1,344.3 1,678.8
Installment sales as a percentage
of merchandise revenues(2)......................... 65.9% 66.9% 66.4%
Total number of open accounts
(at period-end)(1)................................. 948,054 682,163 812,676
Average balance per retail
customer (Pesos)................................... 1,814.9 1,970.7 2,065.8
Reserve for doubtful accounts
after reduction for write-offs as a percentage
of gross retail receivables after write-offs(3).... 3.2% 6.4% 4.8%
Annualized weighted average cost of receivables
financing(4)....................................... 23.4% 16.7% 17.7%
- --------------
(1) Net of receivables securitization and net of allowance for doubtful
accounts.
(2) Includes mark-up on installment sales.
(3) Net of receivable securitization.
(4) Includes factoring and unsecured bank debt used to finance the receivables.
We have provided in-store credit to our customers in our Elektra stores
since 1957 and have introduced the same system in the other store formats
through the years. Since our target customers are the segment of the Mexican
population that typically has not had access to consumer credit, we have found
the availability of an installment sales program to be an important factor in
customers' purchasing decisions. We believe that the availability of an
installment sales program also strengthens customer loyalty and increases
overall revenues and provides us with additional income from a relatively
low-risk credit portfolio.
Credit Approval
Approval for an installment purchase of electronics, appliances, white goods
or furniture requires the customer to complete an application form, execute a
credit contract and a promissory note, provide an official form of
identification containing a photograph, a recent payroll receipt or income tax
payment receipt, where an individual is self-employed, 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. We investigate the
customer's and second party's credit prior to delivering the merchandise.
Generally, we will not grant the customer credit if the weekly payments would be
in excess of 20% of the customer's weekly gross income, or 12.5% at The
One/Hecali. A regional manager must approve installment sales where the amount
being financed is in excess of Ps.5,500 and an area manager must approve
installment sales where the amount being financed is in excess of Ps.9,000.
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. Although these policies and procedures are generally applied
throughout our 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 verification period usually takes less than 24 hours. If
approved for credit, the customer makes weekly payments in cash at the Grupo
Elektra store where he made the purchase. Due to the lack of widespread
telephone service among our customers, we personally visit many of our credit
customers. We have processed and carried out investigations on over four million
credit applications since 1993, creating a valuable computerized database of
information on our customers.
Installment sales on products sold through our 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 we use in our
operations in Mexico are regulated under the Mexican Commercial Code, the
Consumer Protection Act and the Mexican Civil Code. In Latin America, we are
regulated by each country's commercial, civil and consumer protection laws and
regulations. Our collection operations are implemented and monitored at the
individual store level. Each 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.
Our accounting policy is to record five percent of the value of the cash
price of the merchandise sold pursuant to our installment sales program, plus
the mark-up, less the downpayment, if any, as a provision for doubtful accounts.
We write-off all the outstanding balance of accounts receivable once the amount
past due becomes equal to 13 weekly payments but we continue collection efforts
after writing off accounts receivable.
Information Systems
We have developed in-house a state-of-the-art point-of-sale information
system, which allows centralized real time seamless management of sales, costs,
expenses, cash, services and inventory of stores. This system facilitates the
flow of information between our stores and from our stores to our headquarters,
thereby improving distribution of merchandise and facilitating the expansion of
our installment sales operations. We are continuously designing new systems and
improving existing systems with an in-house team of approximately 300 software
engineers. In addition to point-of-sale systems, we are making a significant
effort to improve distribution and logistics systems. These systems allow us to
efficiently manage our distribution systems as well as the logistics and
fulfillment of store merchandise. We have also established electronic data
interchanges with the vast majority of our major suppliers to facilitate
replenishment of inventory.
Capital expenditures for information systems were Ps.294.6 million (US$31.1
million) in 1997, Ps.117.3 million (US$12.4 million) in 1998 and Ps.73.7 million
(US$7.8 million) in 1999.
Employees
As of December 31, 1999, we employed approximately 18,500 people on a
full-time basis in our operations. None of our operating companies has any
employees directly. Personnel services are provided by our other subsidiaries.
We employ part-time employees to meet seasonal needs as necessary.
Each employee's compensation package is comprised of a fixed salary and
commission, based on company profit, operation volume and personal performance.
If the employee does not meet the minimum personal performance standard, the
employee only receives a fixed salary. Newer employees, during the first three
months of their employment, usually receive only their fixed salary. After 3
months, most employees surpass the minimum personal performance standards and
receive their fixed salary in addition to compensation based on performance. On
average, an employee's fixed salary is 35% of his total compensation, with the
remaining 65% of the compensation based on a variable scheme. This structure
applies to salespeople, collectors and investigators. The employee's total
variable compensation is unlimited.
Credit, store, regional and area managers are compensated by a combination
of a fixed salary and performance bonuses for each business unit they manage,
sales, credit, money transfers, savings, etc. The performance bonus that a
manager can receive from each unit is capped. Administrative personnel and the
executive level employees are evaluated each trimester based on pre-established
financial and operational goals, and based on the results, receive a performance
bonus. On average, the fixed salary of an employee at this level represents 65%
of their total compensation, and the bonus represents the remaining 35%.
This compensation program has contributed to the successful implementation
of our business strategies, and our successful employees receive a compensation
package well above the market average.
We recruit employees through advertisements at each store and by sending
managers to high schools and universities to give conferences on our business
and the opportunities we offer. Our policy is to hire store employees from
within the local community where the store is located to offer better customer
service.
Training of Personnel
We consider the training of our staff a high priority to ensure the highest
levels of customer service. We recognize that the success of our retail
operations ultimately 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 our operations as a whole. Since
1997, we have trained more than 20,000 employees at Elektra University, our
in-house school of excellence, which includes model Elektra and The One/Hecali
stores and offers over 120 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 our 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 manages and credit managers, as well as new
sales and credit regional managers, receive one month on average of training at
Elektra University. In addition, we offer continuing education programs to our
existing employees. During 1999, there were 20 of these programs, known as
"Diplomados", that consisted of 230-hour-long courses designed to develop
management skills for our store, regional and administrative managers. During
1999, more than 500 managers undertook these courses. 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.
Trademarks
Our trademarks, including "Elektra", "MegaElektra", "Salinas y Rocha" and
"The One", are registered with the Mexican Institute of Intellectual Property of
the Ministry of Commerce and Industrial Development. We continue to invest in
strengthening the protection of our trademarks through registration with the
appropriate authorities in each country where we do business. Also, we have an
ongoing program in all countries in which we have businesses to protect our
brand names against piracy.
Our Strategy
We seek to further expand our sales and increase our profitability by
capitalizing on our position as a leading distributor of electronics, basic
household goods, clothing and services in Mexico and elsewhere in Latin America
and by leveraging our distribution network and customer base to offer new
financial services, and to launch new ventures.
Key elements of our strategy include:
Mass Market Focus. We provide affordable goods and services to our target
market which is young and growing, and includes the majority of the population
in Mexico and those countries where we operate. The Mexican middle class, which
we have served for the past 50 years, is made up of 78 million Mexicans. We
target young customers, who are establishing new households every year and are
relying on Elektra for their furniture, consumer electronics, appliances and
white goods.
Growth Strategy. We believe that with 946 stores as of the end of 1999, we
have reached the size and market exposure necessary to establish our leadership
in the specialty retail sector in Mexico and in the countries of Latin America
where we have a presence. In this regard, we will have conservative growth in
the future. We are focusing on a qualitative growth approach, including the
conversion of all of our traditional stores into MegaElektra stores. The pillars
to our growth strategy are:
o Investment in Technology. We will continue to develop information and
merchandise management systems that will allow us to achieve even more
efficient management of our high-volume operations and to take full
advantage of the satellite communications network that links most of
our stores.
o Investment in our Employees. Through our state-of-the-art training
center, Elektra University, which offers actual store environments and
multi-media computer equipment, and in our stores, we will continue to
emphasize the individual responsibility of our employees while
providing them with extensive training in our corporate standards of
excellence. We will also continue to motivate our employees with
career advancement opportunities and with cash bonuses, incentive
programs, public recognition and a company-wide stock option program.
We firmly believe that our workforce is an essential element in the
future success of our business.
o Exploiting the Benefits of Our Extensive Store Network. We intend to
continue to exploit the benefits of our extensive store network with
the introduction of new products and services. We develop products and
services that we believe will best capitalize on our current retail
and consumer finance competencies, while providing benefits to
customers and increasing traffic in our stores.
International Growth. In 1997, we began to operate stores outside of Mexico.
As of the end of 1999, we operated 99 MegaElektra stores in El Salvador,
Guatemala, Honduras, Peru and the Dominican Republic. Elektra follows a
"cookie-cutter" strategy through which it transports its store formats and
marketing strategies to countries that have similar demographics to those of
Mexico. As of the end of 1999, international operations represented
approximately 7% of consolidated revenues, and we believe this figure will grow,
given our expected expansion in those areas.
E-commerce. We believe that e-commerce will be an important source of our
growth. We believe that a dramatic increase in internet access and usage among
our traditional target market will occur over the next few years, resulting from
lower-cost or free access to the internet, internet access in the workplace, and
an anticipated rise in the purchasing power of the middle class. We intend to
contribute to and benefit from this increase by distributing internet access and
by selling personal computers and low-cost web appliances. The virtual world is
a natural extension of our existing "brick & mortar" business units. Our
e-commerce effort will focus on the same product lines found in our stores.
However, the virtual store will allow for more breadth within the existing
product lines.
We believe that we are well positioned to translate our real-world business
strengths into e-commerce business strengths on the internet for the following
reasons:
o We have strong brands;
o We have volume and critical mass to attain immediate economies of
scale;
o We have strong relationships with suppliers;
o We have access to the customer in the real world through our store
network for both distribution and delivery of goods and customer
service;
o We have advanced logistics systems, including "last mile"
distribution; and
o Our payment system, including our credit program, will make internet
shopping easier for the customer.
We began our e-commerce operations with apparel products through our
www.theone.com.mx virtual store. This site was launched on February 29, 2000. We
launched the e-commerce business of Elektra on May 31, 2000. The internet site
for this business can be found on our website at www.elektra.com.mx. Through
these websites, we offer an extended line of products, including high-end
merchandise that is not found in our stores. Initially, merchandise ordered
through these sites may be paid for with a credit card or a bank deposit and
shipped to the customer at the customer's expense or picked-up by the customer
at a conveniently located Elektra store. In the future, we plan to introduce our
installment programs and other means of payment for the internet site. We
believe that this service will appeal both to members of our target market who
have access to computers either at home or at their workplace, as well as to
customers with incomes greater than those of our traditional target market. We
can give no assurances that our e-commerce ventures will be successful.
On May 9, 2000, we signed a five-year strategic alliance with Todito.com, an
internet portal and marketplace for North American Spanish-speakers. Through our
indirect shareholding in TV Azteca, we currently own 9.3% of Todito. The
agreement covers the establishment of Todito Internet kiosks in our stores,
reciprocal on-line promotion, as well as bilateral e-commerce support. The
kiosks will sell low-cost computers and web appliances packaged with a Todito
Internet connection service. Qualified customers will be able to purchase
computer/Internet Service Provider/education packages through our consumer
credit program. As part of the alliance, we were granted options to acquire up
to 3% of Todito's capital stock over an eighteen-month period. Within the first
six months of the alliance, we intend to determine with Todito the number of
additional options that will be used to create incentives for Elektra employees.
Customer Loyalty. We want to attract the young Latin American consumers with
affordable products at Elektra, Salinas y Rocha and The One/Hecali and, as they
mature and their preferences and incomes change, retain their loyalty through
the whole store network. In addition to providing credit to support the
purchasing habits of our target market, we have developed loyalty programs, such
as "cliente amigo", which are aimed at rewarding frequent users of our money
transfer services and to encourage future use of such services.
Invest in Advertising and Publicity. We invest in advertising and publicity
to achieve further consumer recognition and deeper market penetration, in
particular, through television advertising on TV Azteca, our affiliate.
Branding. We have implemented a new program called "Building Strong Brands",
which focuses on enhancing our brand names. The program consists of several
strategies. One such strategy is developing individual brand philosophies and
concepts that underline our core values (closeness to the consumer, loyalty,
trendiness and trust-worthiness). Our advertising campaign has been redesigned
to depart from our traditional focus on low prices and is now stressing consumer
value. Finally, we are training our top 100 executives so that they better
understand the importance of "branding." We believe that stronger brands will
result in the customer's willingness to pay a premium and thus higher margins
for the Company.
Enhance Consumer Financing Opportunities. We will further emphasize
installment sales to increase the number of our potential customers and the
purchasing power of those customers, and effectively manage our installment
sales program to maintain the profitability and quality of our credit portfolio.
We are considering additional opportunities in the finance area that permit us
to leverage our customer base, our store network and our consumer finance
competencies. We are currently considering a joint venture whereby a Mexican
financial institution could offer mortgage services through our network. We can
give no assurances that these projects will proceed and/or succeed.
Corporate Governance
In October of 1999, our shareholders approved amendments to our by-laws
which enacted significant changes in our corporate governance policies. These
changes were designed to increase our transparency and accountability to our
shareholders and to encourage good communications with our minority
shareholders. The shareholders approved a decrease in the size of the Board of
Directors, from 14 directors to nine. Also, the number of independent directors
increased from three to four. Of the nine directors, no more than five may be
nominated by or affiliated with the Controlling Shareholders or with our
management, providing for greater representation of minority shareholders. The
shareholders also authorized the creation of new board committees. Each of the
committees is comprised of three members, two of whom must be independent
directors. These include committees in the following areas:
o investments;
o audit; and
o management compensation.
The shareholders also approved amendments to the by-laws which formalize the
existence of the committee on related party transactions. In addition, the
shareholders approved a corporate governance charter and a requirement that
beginning with the 2000 annual report, our annual report will contain a section
on corporate governance and on the work of each of the Board committees during
that fiscal year.
ELEKTRA
Stores
In Mexico we operate (i) 232 "traditional" Elektra stores, 50 of which are
operated under our "Bodega de Remates" outlet format, and (ii) 366 "MegaElektra"
superstores, in which we offer a broad range of internationally-recognized brand
name consumer electronics, small appliances, white goods and household
furniture. In Peru, El Salvador, Honduras, Guatemala, and the Dominican Republic
we operate 99 MegaElektra superstores.
Our traditional Elektra stores have an average size of 4,900 square feet. In
1992, we introduced our MegaElektra superstore format. The MegaElektra stores
have an average size of approximately 9,400 square feet. The MegaElektra format
allows us to increase our on-site inventory levels, increase the amount of floor
space dedicated to our higher margin furniture product line, take advantage of
certain economies of scale and lower our out-of-stock position. We have expanded
the size of our newer traditional stores to increase the number of items (Stock
Keeping Units or "SKUs") and the amount of furniture in those stores. Each of
the MegaElektra stores offers approximately 505 SKUs, while each traditional
Elektra store typically offers approximately 289 SKUs.
Merchandising and Marketing
Merchandise Selection
We offer our products at several different price points with the greatest
inventory depth at the middle to low price levels. In addition, we sell
Elektra-brand products at prices that are generally lower than the
internationally-recognized brand name products that we sell in the same product
category. Consumer electronics, which consist of video and audio equipment, as
well as pagers, constitute our leading product category. We purchase the
products that we sell from various domestic and international suppliers. See
Item 1--Description of Business--Merchandise and Marketing, and Item
1--Description of Business--Elektra--Elektra in Latin America--Merchandise and
Marketing.
Purchasing
An important element of our marketing strategy is our ability to offer a
wide selection of brand name products to our customers. We currently have a
network of approximately 170 suppliers for our electronics, appliances and
furniture products. Approximately 5% of these products are imported directly. We
have developed strong relationships with the world's major suppliers of
electronics and household appliances, as well as with well-established local
manufacturers of furniture and household goods. We always maintain an offering
of our product lines through a variety of vendors.
Customer Service
Among the customer services we offer is a guaranteed 30-day repair service
for consumer electronics and appliances we sell. Under this program, if a
product cannot be repaired within 30 days, we provide 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. We also
supplement the manufacturer's warranty with a limited warranty that provides a
minimum of 12 months of warranty coverage on all of our 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. See Item
1--Description of Business--Additional Services--Extended Warranties. Since
January 1997 through May 2000, we have sold 1,087,495 extended warranty
policies. We also offer a 30-day refund and exchange policy on all of our
products and operate in Mexico a state-of-the-art customer service call center
that allows us to attend to customer inquiries and needs.
Installment Sales Program
Credit Sales
Elektra customers can choose to pay for merchandise on a weekly basis for a
period ranging from 13 to 53 weeks.
Elektra's total credit sales in 1999 represented 66.4% of our consolidated
merchandise revenues. As of December 31, 1999, 53-week plan sales represented
11.0%, the 39-week plan sales represented 47.0%, the 26-week plan sales
represented 37.0% and the 13-week term plan sales represented 5.0% of the total
amount of Elektra's installment sales.
During the second half of 1999, Elektra promoted the 26-week plan in an
effort to gradually reduce its average portfolio length to 28 weeks. This plan
reduced the amount of working capital we used and resulted in a higher portfolio
turnover, which reduced our working capital needs. As a result, the average
payment term was 34 weeks as of the end of 1999.
Collection
Elektra currently has approximately 3,000 employees dedicated to installment
sales collections and investigations for purchases of merchandise at its Elektra
stores. Customers make their weekly installment payments in person at the
Elektra stores, which are open seven days a week, from 9:00 a.m. to 9:00 p.m. In
the event that the customer misses two consecutive weekly installment payments,
our collectors 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 13 weekly
payments, the matter is referred to our legal department, which sends 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, we may institute judicial procedures to settle the claim by
obtaining a court order for attachment of the customer's assets. However, our
policy is to attempt first to reach an agreement with the customer whereby the
customer resumes payment or the merchandise is returned. Returned merchandise is
refurbished and transferred, together with floor models withdrawn from display,
to Bodega de Remates, our chain of outlet stores created especially for this
purpose.
ELEKTRA IN MEXICO
Stores
At December 31, 1999, we operated a total of 598 Elektra stores in Mexico,
including 366 MegaElektra superstores and 232 traditional Elektra stores (50 of
which are operated as Bodega de Remates outlet stores), reflecting an increase
of 17 stores since December 31, 1998. As of December 31, 1999, the total store
area of Elektra stores in Mexico was 4,580,372 square feet, which reflects a
16.9% compound annual growth rate since 1995. At December 31, 1999, we owned 51
Elektra stores and leased 547 Elektra stores under one-year leases that
typically allow us to renew such leases automatically for up to nine successive
years.
The following table sets forth certain statistics for traditional Elektra
and MegaElektra stores in Mexico as of December 31, 1999:
Traditional
Elektra(1) MegaElektra Total
---------- ----------- -----
Number of stores........................... 232 366 598
Aggregate store area (square feet)......... 1,140,886 3,439,486 4,580,372
Number of store employees(2)............... 1,818 2,983 4,801
- -------------
(1) Including 50 Bodega de Remates outlet stores.
(2) Does not include our corporate or collections staff. Elektra does not have
any employees. Personnel services are provided by other subsidiaries.
Location
We operate Elektra stores in 31 Mexican states and the Federal District. The
following table sets forth information with respect to the distribution of our
traditional and MegaElektra stores in Mexico as of December 31, 1999:
Number of Stores Store Area (square feet)(1)
---------------- ---------------------------
% of all % of Total
Zone Traditional(3) MegaElektra Stores Traditional MegaElektra Sales Areas
---- ------------- ----------- ------ ----------- ----------- -----------
Mexico City(2). 60 80 23.4 302,400 767,657 23.4
Center......... 16 47 10.6 73,668 413,765 10.6
Northeast...... 26 32 9.7 111,869 313,994 9.3
Pacific........ 21 39 10.0 116,315 365,467 10.5
West........... 33 31 10.7 158,768 290,938 9.8
South.......... 20 34 9.0 97,736 286,019 8.4
Southeast...... 22 36 9.7 104,313 344,757 9.8
Bajio.......... 25 35 10.0 137,670 309,861 9.8
Border......... 9 32 6.9 38,147 347,028 8.4
----- ---- ------- ----------- ----------- -------
Total.......... 232 366 100.0% 1,140,887 3,439,486 100.0%
=== === ===== ========= ========= =====
- --------------
(1) Based on total surface area of each store.
(2) Includes the metropolitan area.
(3) The Traditional format includes 50 Bodega de Remates outlet stores
nationwide.
Expansion Plan
We anticipate opening approximately 16 additional MegaElektra stores in
Mexico in 2000. In addition, we intend to convert all of our existing
traditional Elektra stores in Mexico to the MegaElektra superstore format either
by renovation or relocation within the next two years.
The average cost of opening a new MegaElektra store in Mexico is
approximately Ps.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 Ps.1.4 million. The average time required to set
up a new store is approximately three months. The traditional Elektra stores and
MegaElektra stores utilize standardized modular racking, tiles, lighting and
equipment. The modular design of our stores allows us 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 Mexico's middle class neighborhoods.
Criteria for the location of an Elektra store usually include 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. We
also consider automobile traffic in selecting store sites, although we believe
that the majority of Elektra consumers walk to our stores or travel to the store
by public transportation. We have in the past located our new stores primarily
in the major metropolitan areas of Mexico. However, as the Mexican population
outside the major metropolitan areas continues to increase rapidly, we believe
that it will become increasingly important to locate stores in small-to-medium
sized population areas of the country.
We continuously evaluate our Elektra stores and close those stores that do
not meet performance targets. We generally negotiate provisions in our leases
for Elektra store locations that permit us to terminate our leases on three
months' notice.
The following table provides a history of our traditional and MegaElektra
stores in Mexico since 1997:
1997 1998 1999
---- ---- ----
Traditional Stores:
Number of stores open at beginning of period......... 261 254 235
Number of new stores opened.......................... 19 2 5
Number of stores converted to MegaElektra stores..... (25) (2) (6)
Number of stores closed.............................. (1) (19) (2)
----- ------ --
Number of Traditional stores open at end of period... 254 235 232
MegaElektra Stores:
Number of stores open at beginning of period......... 197 272 346
Number of new stores opened.......................... 50 56 16
Number of stores opened by conversion of 25 19 6
Traditional stores...................................
Number of stores closed.............................. 0 (1) (2)
----- ----- -----
Number of MegaElektra stores open at end of period... 272 346 366
Traditional Stores and MegaElektra Stores:
Number of stores open at beginning of period......... 458 526 581
Total number of stores open at end of period......... 526 581 598
Store Operations
Our 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 fifteen stores. Our management structure provides that
store managers generally report to regional managers, who report to area
managers who, in turn, report to management at our headquarters in Mexico City.
Elektra stores in Mexico are open every day of the year, 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 to 20, depending on the size of the store.
We centralize the investigation and collection functions of our 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. Our sales personnel operate on a sales
commission basis, and store managers typically receive quarterly bonuses based
on the profitability of the stores. Credit investigators and collectors are
compensated based on the performance of their credit portfolios.
Merchandise and Marketing
Our centralized merchandising and buying group for Mexico consists of a
staff of seven buyers. Buyers are assisted by a sophisticated management
information system that provides them with current inventory, price and unit
sales information by SKU, thus allowing us to react quickly to market changes
and to avoid inventory shortages or surpluses. We believe that our centralized
purchasing system enhances our buying power and increases our ability to obtain
favorable pricing and delivery terms from our suppliers.
We currently distribute products to our 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 Elektra stores are made primarily by
contract trucking carriers, although Grupo Elektra has a nominal number of
trucks at each distribution center for movement of merchandise between stores
and for special delivery requirements. Management believes that our distribution
centers and support facilities significantly reduce freight costs and delivery
time by providing warehouse space relatively close to our stores. Our
distribution network is also a key element of our e-commerce business.
Quality Control
We operate quality control laboratories at our distribution centers,
conducting random testing of products and approving new products as part of our
on-going effort to ensure the quality of the products we sell.
Installment Sales Program
The following table sets forth certain information concerning the
installment sales program of Elektra's operations in Mexico:
As of and for the year
ended December 31,
------------------
1997 1998 1999
---- ---- ----
(in millions of Ps. as of December 31, 1999)
Accounts receivable retail customers - net
(at period end)(1) Ps. 1,603.4 Ps. 953.6 Ps. 1,079.0
Installment sales as a percentage of
merchandise revenues(2) 68.7% 68.3% 67.0%
Total number of open accounts (at period
end) (1) 850,765 376,030 383,258
Average balance per retail customer
(Pesos) 1,884.7 2,535.9 2,815.4
Reserve for doubtful accounts after
reduction
for write-offs as a percentage of
gross
retail receivables after write-offs(3) 3.1% 6.2% 4.3%
Annualized weighted average cost of
receivables financing(4) 23.4% 16.7% 16.9%
- --------------
(1) Net of receivables securitization and net of allowance for doubtful accounts.
(2) Includes mark-up on installments.
(3) Net of receivable securitization.
(4) Includes factoring and unsecured bank debt used to finance the receivables.
Competition
Our electronics, appliance and furniture retail business is highly
competitive. Including cash and credit operations, Elektra's margins are among
the highest in the retail sector of Mexico. 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
highly fragmented and consumers are served by a number of formats, including
traditional formats such as local, 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 we
possess. Also, department stores and discount clubs that carry the same
merchandise lines generally offer less product variety than we do.
Certain international retailers have established joint ventures with Mexican
retailers and have opened stores in Mexico. We expect that other international
retailers will do so in the future. Moreover, we believe 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 free trade
agreement between Mexico and the European Union, which is expected to become
effective July 1, 2000, will also facilitate the entry of European retailers
into the Mexican market. We also compete against a significant informal market
for our products. We believe that our brand recognition, goodwill in our name,
50 years of experience, extended warranties, repair service and credit
availability provide us with a competitive advantage over the lower-priced goods
sold in this informal market.
On March 10, 1999, we were declared the winner of an auction to acquire a
94.3% equity interest in our most significant competitor in Mexico, GSyR. See
Item 1--Description of Business--Grupo SyR. We continue to face strong
competition from Singer, Viana, Coppel, Famsa, several regional chains and an
estimated 7,000 local, independent retail stores. The following table sets forth
certain information concerning what we believe are our primary competitors in
Mexico.
Estimated Primary Region Number of
Store of Operations Stores(1)
----- ------------- ---------
Elektra Nation-wide 688(2)
Singer Nation-wide 176
Famsa Northeast 143
Coppel Northwest 100
Ceteco Southeast 38
Independent retail stores Nation-wide Approx. 7,000
- ---------------
(1) Estimates of Grupo Elektra, as of December 31, 1999.
(2) Includes Elektra and Salinas y Rocha stores.
With 151 Elektra stores in the Mexico City metropolitan area, we believe
that we are a leading specialty retailer of consumer electronics, small
appliances, white goods and household furniture in that region. In Mexico City,
we consider Singer to be our major competitor in the electronics, small
appliances and white goods retail market. Except for Singer, in regions of the
country outside Mexico City, most of our formal competitors are regional and
local department and specialty stores. We believe that, through our Elektra
operations, we are well-positioned to compete in all of our markets in Mexico.
Employees
As of December 31, 1999, we employed approximately 10,000 people on a
full-time basis at our Elektra operations in Mexico. Approximately 25% of our
employees who worked in Elektra stores worked in Mexico City and the remaining
employees were located throughout the rest of the country. Approximately 26% of
our full-time employees who worked in Elektra stores were represented by one of
five unions. We have a collective bargaining contract with each of our unions.
Mexican labor laws require union contracts to be reviewed and renegotiated
yearly, with respect to salaries, and every other year with respect to fringe
benefits. 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 above the average inflation rate in Mexico. We believe our relations
with the employees involved in Elektra and Elektrafin operations are good; we
have not experienced a strike since 1983.
Portfolio Securitization Program
We utilize Elektrafin, a subsidiary of Grupo Elektra, to securitize our
receivables. In July 1997, we completed our initial securitization of Ps.625
million (nominal), and in December 1997, we completed a second offering of
Ps.241 million (nominal) in Ordinary Participation Certificates ("CPOs") on the
Mexican Stock Exchange. These two programs have been fully repaid. In April
1998, we launched a Ps.793.3 million (nominal) four-year revolving
securitization program, the first of its kind in Mexico. The yield is based on
28-day-Cetes rate plus 225 basis points. In December 1998, we launched a
two-year revolving securitization of receivables in an offering of Ps.200
million (nominal) with a yield of Tasa de Interes Interbancaria de Equilibrio
("TIIE") plus 125 basis points. In September 1999, we issued a three-year
revolving securitization of receivables in an offering of Ps.200 million
(nominal), at a rate equal to the higher of TIIE plus 150 basis points or a
yield indexed to the UDI (inflation indexed units of accounts) over 28 days. In
April 2000, we launched a four-year revolving securitization of receivables in
an offering of 127 million UDIs, equivalent to Ps.350.8 million (nominal), with
a yield of 91-day UDI plus 8.35%. Nacional Financiera, S.N.C., Fiduciary
division, acted as the fiduciary issuer of the CPOs. Our first three revolving
securitizations programs were rated "AA," "AAA," and "AA+" by Fitch IBCA, and
"MAA," "MAAA," and "MAA" by Duff and Phelps, respectively. Our last revolving
securitization program was rated AAA(mex) by Fitch IBCA. Our securitization
programs provide attractive financing alternatives. The proceeds are used
primarily to pay short-term debt and to finance our working capital. Our
securitization programs are arranged on a non-recourse basis. Maintenance of the
programs and reinvestment of collection proceeds in new receivables requires
compliance with certain overcollateralization, quality and receivables
performance standards. See Item 9--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources.
In the future, we may enter into additional securitization programs.
ELEKTRA IN LATIN AMERICA
General
In April 1997, we began our 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 outside Mexico, namely in
Guatemala, El Salvador, Honduras, the Dominican Republic and Peru.
At December 31, 1999, we operated 99 international Elektra stores,
reflecting an increase of 16 stores since December 31, 1998. The total store
area of these Elektra stores was in excess of 841,060 square feet. We owned four
of these Elektra stores and leased the others under mid-term leases that
typically contain terms from five to ten years.
We believe that our strengths in management, credit and marketing expertise,
technological infrastructure and merchandising will enable us to compete
successfully in various markets in Latin America and, over time, become a
leading competitor in the region.
For our expansion into Latin America, we have established in each of the
five countries a corporation organized under the laws of such country. These
corporations are owned by Elektra Centroamerica, S.A. de C.V., a subsidiary of
Grupo Elektra, which is organized under the laws of Mexico. Our Latin American
retail operations headquarters are located in San Salvador, the capital of El
Salvador.
Target Market
Our target market for our international retail operations is similar to the
target market for our domestic retail operations. The profile of our "typical"
customer for our international operations is that of a person who is employed or
is self-employed and owns his or her home, but does not own a car and therefore
shops in his neighborhood or at locations served by public transportation.
The populations in the Latin America countries other than Mexico in which we
currently operate--Guatemala, El Salvador, Honduras, the Dominican Republic and
Peru--are young. According to the Latin American and Caribbean Demographic
Center, approximately 50% of the population of these countries is less than 24
years of age. We estimate that over 70% of the population of these countries is
in the middle class, as we define it, with our stronghold being represented by
the lower middle class.
Stores
The following table sets forth certain operating statistics for our Latin
America Elektra stores (outside Mexico) as of December 31, 1999:
Dominican
Guatemala El Salvador Honduras Republic Peru
--------- ----------- -------- -------- ----
Number of stores......... 26 14 15 23 21
Aggregate store area
(square feet)......... 230,618 122,762 125,184 192,265 170,231
Number of store employees 198 135 137 108 221
(1)...................
Average selling space
(square feet)......... 8,870 8,769 8,346 8,359 8,106
-----------------
(1) Exclusive of corporate and collections staff.
As of the end of 1999, Elektra had 99 MegaElektra stores and 5 distribution
centers outside of Mexico, one distribution center in each of the foreign
countries in which we operate (El Salvador, Guatemala, Honduras, Peru and the
Dominican Republic).
Expansion Plan
We anticipate opening approximately 13 additional new international Elektra
stores by the end of 2000 in the countries where we currently operate.
The average cost of opening a new international Elektra store has been
approximately Ps.3.1 million, excluding the cost of inventory and real estate.
The average time required to set up a new store is approximately 3 months.
Store Operations
The management structure for our international operations provides that
store managers report directly to management at our headquarters, which is
usually located in each country's capital (with the exception of Honduras, where
our headquarters are located in the town of San Pedro Sula instead of the
capital, Tegucigalpa).
Our international Elektra stores are open every day of the year, except New
Year's Day, usually from 8 a.m. to 8 p.m. A typical international Elektra store
has the same staff composition as a MegaElektra store in Mexico. See Item
1--Description of Business--Elektra--Elektra in Mexico--Store Operations.
Merchandising and Marketing
Purchasing and Distribution
Our centralized merchandising and buying group for our international retail
operations consists of a staff of five buyers who purchase substantially all
electronics, appliances and household 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 and from suppliers of major appliances such as Mabe, Vitro, Tappan,
Atlas and Bosch. Household furniture, 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.
We currently distribute products to our international Elektra stores from a
leased central warehouse and distribution facility that operate in each country.
Deliveries to Elektra stores are made primarily by contract trucking carriers.
The following table sets forth certain information regarding the warehouses
from which Grupo Elektra 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
The computerized management information system we developed for our 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, our Latin
America operations headquarters (located in San Salvador) and our main
headquarters in Mexico City.
Our policies for our international retail operations with regard to pricing,
customer service and advertising are practically the same as those applied to
our operations in Mexico. See Item 1--Description of Business--Elektra--Elektra
in Mexico--Merchandise and Marketing. One difference, however, is that every
international Grupo Elektra store has an Express Service stand that offers the
customer a fast repair service for small appliances and consumer electronics.
Installment Sales Program
The following table sets forth certain information concerning our
installment sales program for our Latin America operations:
As of and for the year ended December 31, 1999
----------------------------------------------
(in millions of Ps. as of December 31, 1999)
El Dominican
Guatemala Salvador Honduras Republic Peru
--------- -------- -------- -------- ----
Accounts receivable retail
customers-net (at period end)..... 52.5 49.1 64.1 63.6 68.1
Installment sales as a percentage of
merchandise revenues(1)........... 66.4% 75.4% 79.2% 77.5% 76.8%
Total number of open accounts (at
period-end) 34,502 21,841 27,933 32,717 26,946
Average balance per retail customer
(in Pesos)........................ 1,521 2,248 2,292 1,945 2,529
Reserve for doubtful accounts as a
percentage of gross retail
receivables....................... 3.2% 3.0% 2.6% 3.1% 1.7%
Annualized weighted average cost of
receivables financing (2)......... 21.6% 15.1% 30.8% 25.5% 16.1%
-------------
(1) Includes mark-up on installment sales
(2) Includes unsecured bank debt used to finance the receivables.
Credit Sales
Total credit sales in 1999 represented 74.3% of our total sales in our
international operations.
Competition
Our electronics, appliance and furniture retail businesses in Latin America
face numerous competitors in all product categories. 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.
The competition from organized competitors in these regions is relatively
weak. This situation provides us with an added opportunity for growth, and over
the medium-term, we envision expanding our presence to other Spanish-speaking
countries in Latin America.
We also face significant competition from the informal economy and parallel
imports for the products we carry. We believe that our extended warranties,
repair service and credit availability provide us with a competitive advantage
over lower-priced goods sold in this informal market.
The following table sets forth certain information as estimated by the
Company concerning our primary competitors in the five Latin American countries
outside Mexico in which we operate:
Country Competitor Estimated Number of Stores
Guatemala Curacao 31
--------- ------- --
Tropigas 14
El Salvador Curacao 18
Prado 19
Tropigas 11
Honduras Curacao 16
Tropigas 14
Dominican Republic Curacao 22
Corripio 11
Electro Land 16
Antillana 18
Peru Carsa 45
Curacao 25
Employees
As of December 31, 1999, we employed approximately 1,777 people on a
full-time basis in our international operations. We employ part-time employees
to meet seasonal demand as necessary. None of our employees in the Latin
American countries outside of Mexico in which we operate is represented by a
union. We believe that our relations with these international employees have
been good since inception in 1997. Grupo Elektra has never been subject to a
strike by our international employees.
Training
We have an extensive in-house education program to train new employees, keep
current employees informed of additions and modifications to our operating
procedures and demonstrate new products. New store employees generally receive
two weeks of training prior to assuming responsibilities, and new store
managers, credit managers, sales and credit regional managers receive three
months of training at the Elektra University located in Mexico City. In
addition, we offer continuing education programs to our existing employees.
Training consists of both product training and classes focused on the social and
personal attributes important for the particular position.
GRUPO SyR
Acquisition of Grupo SyR
On March 10, 1999, a syndicate of banks holding a majority equity interest
in GSyR, together with certain individual shareholders of GSyR, declared Grupo
Elektra the winner of an auction to acquire a 94.3% equity interest in GSyR.
Grupo Elektra won the auction with a bid of approximately US$77.7 million. In
addition, Grupo Elektra acquired tax losses of GSyR of approximately US$385.5
million, with a tax effected benefit of US$135 million. Subject to completing
the merger between Grupo Elektra and GSyR, Grupo Elektra expects to use these
tax credits over the next two to three years.
At the time of its acquisition by Grupo Elektra, GSyR was a holding company
whose principal subsidiary, Salinas y Rocha, was engaged in the sale of
furniture, household goods and clothing through 86 traditional stores and 11
department stores. In addition, Salinas y Rocha provided in-store credit lines
to its customers through the issuance of Salinas y Rocha credit cards.
Throughout the last three quarters of 1999, we consolidated the 86
traditional Salinas y Rocha stores into Grupo Elektra, sold ten department
stores to El Puerto de Liverpool, S.A. de C.V. ("Liverpool"), and converted the
remaining department store into a Salinas y Rocha superstore. We streamlined the
operations of Salinas y Rocha and retrained Salinas y Rocha employees to comply
with our standards. In addition, we installed our information and inventory
management systems and telecommunications infrastructure in Salinas y Rocha
stores, all of which were remodeled and received additional inventory. We also
converted the Salinas y Rocha credit program into Elektra's CrediFacil program.
Finally, we developed promotional radio and television advertising aimed
specifically at Salinas y Rocha's target customers. Management is also in the
process of selling non-core assets, including certain unprofitable real estate
holdings.
Our management believes that the acquisition of GSyR will result in an
increase in the competitiveness and profitability of both the Elektra and
Salinas y Rocha chain of stores. Since their acquisition by Grupo Elektra, the
GSyR operations have experienced a positive turn-around. Our management has
restructured GSyR by reducing costs, creating more efficient operations and
introducing systems and business strategies proven in Elektra operations. Some
stores and real estate have been sold, and the remaining stores have been
remodeled. Also, our management has reduced the GSyR workforce while imposing
efficiencies by introducing store operations similar to those employed by
Elektra. Finally, installment sales programs have been reintroduced, following
the program used by Elektrafin.
Strength of Retail Brand Name. The "Salinas y Rocha" brand name enjoys
strong national recognition among Mexico's middle class. The acquired stores,
which will continue to operate under the Salinas y Rocha name, specialize in
sales of furniture and home appliances and cater to a demographic group with
more purchasing power than the traditional Elektra customers. As a result, we
are increasing our penetration of a higher income sector. While Elektra has
typically been associated with easy access and affordability, Salinas y Rocha is
recognized as a lifestyle brand name.
Opportunities for Creating New Value in Salinas y Rocha. Our management
believes that it can successfully offer a number of our products and services in
Salinas y Rocha stores, including the credit services traditionally offered at
Elektra stores. Management has already begun converting Salinas y Rocha
customers from the Salinas y Rocha credit system to Elektra's credit system. In
addition, we will increase our television advertising efforts in order to
promote products offered in Salinas y Rocha stores. As a result, management
believes that the expanded variety of products offered at Salinas y Rocha stores
will result in higher levels of sales and customer satisfaction.
Target Market
The target market of Salinas y Rocha's traditional stores is the Mexican
middle and upper-middle class, consumers whom management believes have household
income between US$8,000 and US$24,000 per year and between US$24,000 and
US$61,000 per year, respectively. Salinas y Rocha's target market is therefore
more affluent and has more purchasing power than Elektra's traditional target
market, the Mexican lower-middle and middle classes.
The Salinas y Rocha brand name is highly recognized among the middle
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.
Property
As of December 31, 1999, Salinas y Rocha leased 70 stores and owned 20
stores.
Merchandise
Salinas y Rocha stores sell a combination of electronic goods, small
appliances, white goods and furniture. Furniture provides larger profit margins
than electronics and appliances. As a result of the fact that Salinas y Rocha
stores sell a higher percentage of furniture (approximately 30% of Salinas y
Rocha's total sales) relative to the percentage of furniture sold in Elektra
stores (approximately 17% of Elektra's total sales), the potential consolidated
gross margins for Grupo Elektra could be enhanced.
The sales distribution of Salinas y Rocha, before and after the sale of the
department stores (described below), for the year ended December 31, 1999 is set
forth in the following table:
-------------------- -------------------
Before the After the
Sale of the Sale of the
Department Stores Department Stores
-----------------------------------------
Percentage
Electronics................. 20% 35%
Household appliances........ 20% 25%
Furniture................... 24% 30%
Clothes and accessories..... 26% 0%
Other....................... 10% 10%
---- ----
Total....................... 100% 100%
=== ===
Installment Sales Program
Salinas y Rocha has offered in-store credit to its customers, in the form of
installment sales and revolving credit lines, since 1936. Prior to its
acquisition by Grupo Elektra, Salinas y Rocha's credit operations, unlike those
of Elektra stores, involved the issuance of a Salinas y Rocha credit card, which
could be used to purchase merchandise at any Salinas y Rocha store. In addition,
Salinas y Rocha's credit operations were managed by regional credit centers, as
opposed to the individual store supervision conducted by Elektra stores. Since
we acquired GSyR, Salinas y Rocha has discontinued its credit program and has
implemented an installment sales program that is identical in all significant
respects to the credit program conducted by Elektra stores, except that payments
are made biweekly.
Salinas y Rocha stores currently provide to customers a choice of a cash
price or an alternative biweekly installment purchase price. Salinas y Rocha
customers can choose to pay for merchandise on a biweekly basis for periods of
12, 24, 40 or 48 weeks. For the year ended December 31, 1999, Salinas y Rocha's
total credit sales represented approximately 54.9% of Salinas y Rocha's total
sales. As of the same date, 48-week plan sales represented 5.0%, 40-week plan
sales represented 57.0%, 24-week plan sales represented 24.0% and 12 week plan
sales represented 14.0% of the total amount of Salinas y Rocha's installment
sales. In addition, as of the same date, 48-week receivables represented 0.3%,
40-week plan receivables represented 74.4%, 24-week receivables represented
15.4% and 12-week receivables represented 9.9% of Salinas y Rocha's installment
sales receivables portfolio.
The following table sets forth, as of December 31, 1999, certain information
regarding Salinas y Rocha's installment sales operations under our ownership:
December 31, 1999
-----------------
(in millions of
pesos as
of December 31, 1999)
Accounts receivable retail customers (at period end) (1)................ Ps. 185.7
Installment sales as a percentage of merchandise revenues(2)............ 62.3%
Total number of open accounts (at period end) 65,666
Average balance per retail customer (in Pesos).......................... 2,828.2
Reserve for doubtful accounts after reduction for write-offs as a
percentage of gross retail receivables before write-offs............ 11.4%
Annualized weighted average cost of receivables financing(3)............ 16.9%
- ---------------
(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.
Credit Approval and Collection
Prior to Grupo Elektra's acquisition of GSyR, Salinas y Rocha's credit
approval and collection procedures were conducted through regional credit
centers, each of which was responsible for the implementation of these
procedures for a number of Salinas y Rocha stores. After Grupo Elektra's
acquisition of Salinas y Rocha, the operations of the regional credit centers
were discontinued. Credit approval and collection procedures of Salinas y
Rocha's installment sales program are now conducted by credit managers,
investigators and collectors located in each Salinas y Rocha store. In addition,
credit approval and collection procedures are now substantially similar to those
of Elektra's installment sales program, except that Salinas y Rocha offers
customers biweekly installment credit programs. See Item 1--Description of
Business--Elektra--Installment Sales Program--Credit Sales and Item
1--Description of Business--Elektra--Installment Sales Program--Collection.
Employees
At December 31, 1999, approximately 1,423 employees worked in Salinas y
Rocha's operations, approximately 4.8% of which belonged to labor unions. GSyR
has never experienced a labor strike, and management believes that it has good
employee and labor relations. During 1999, management began converting all
employee compensation to the system currently utilized by Grupo Elektra, which
provides for a higher percentage of performance-based compensation. In addition,
management is converting all employee benefit plans to those currently provided
by Grupo Elektra, including medical, life and pension benefits.
Corporate Reorganization--Merger
After the acquisition of GSyR, Grupo Elektra initiated a corporate
reorganization to take advantage of certain tax loss carry-forwards reported by
GSyR, and to make the corporate structure more efficient. We acquired
approximately US$385.5 million in tax losses, with a tax effected benefit of
US$135.5 million, and we expect to use these tax losses over the next two to
three years. We intend to complete as soon as practicable a merger between us
and GSyR. This merger will permit us to take full advantage of these loss
carry-forwards.
The corporate reorganization has thus far consisted of the following steps:
o On July 30, 1999, Salinas y Rocha spun off three operating companies:
(i) Salinas y Rocha, (ii) Elektra Comercial, S.A. de C.V., and (iii)
Elektrafin Comercial, S.A. de C.V.;
o On November 12, 1999, Corporacion Diprofin, S.A. de C.V. and Articulos
Domesticos al Mayoreo, S.A. de C.V., subsidiaries of Grupo Elektra,
respectively, merged with and into GSyR;
o On December 8, 1999, Elektra, S.A. de C.V. and Elektrafin, S.A. de
C.V. merged with and into Elektra Comercial, S.A. de C.V. and
Elektrafin Comercial, S.A. de C.V., respectively.
As a result of this corporate reorganization, we own 99% of GSyR, which has
Elektra Comercial, S.A. de C.V., Elektrafin Comercial, S.A. de C.V., Salinas y
Rocha and The One/Hecali as its main operating companies.
In order to utilize most efficiently the tax losses of GSyR, we intend to
merge Grupo Elektra into and with GSyR as the final step in the series of
intercompany reorganizations described above. Upon completion of this merger,
the name of Grupo SyR would be changed into Grupo Elektra and all the operating
companies will be its subsidiaries, including Elektra, Elektrafin, Salinas y
Rocha and The One/Hecali.
THE ONE/HECALI
The One/Hecali is our chain of clothing stores. At December 31, 1999, The
One/Hecali had 159 stores throughout Mexico. Our strategy at The One/Hecali is
to expand our store network and support the stores with strong management,
automated material handling, state-of-the-art information systems and
communications, credit, substantial television advertising and selling space.
Conversion of Hecali to "The One"
During the second quarter of 1999, we initiated a conversion of the name and
format of our Grupo Hecali, S.A. de C.V. ("Hecali") stores to "The One", a new
apparel chain providing high-quality basic garments for the entire family. We
expect to convert all Hecali stores into The One. As of the end of 1999, the
Company had already converted 76 stores with the remaining 83 stores expected to
be converted by the end of 2000. Conversion to the new format costs
approximately US$100,000 per store.
The One stores feature a higher quality and broader range of products within
each line than Hecali stores. This change permits us to reduce the number of
suppliers we deal with and lowers our inventory levels. Because the products are
of a higher quality, prices at The One stores will generally be higher than
those at Hecali stores, and we expect to earn higher profit margins. The One
stores also provide us the opportunity to develop private labels. We offer
financing to customers similar to the financing provided to Hecali customers.
On February 29, 2000, The One/Hecali launched an Internet web-site
(www.theone.com.mx), which may be accessed by customers at home or at The One
stores. The web-site allows customers to place orders for The One products,
which will be delivered to customers anywhere in Mexico.
Stores
At December 31, 1999, there were 159 The One/Hecali stores in operation. At
December 31, 1999, The One/Hecali owned four stores and leased 155 stores under
mid-term leases that typically contain terms from five to ten years. The
One/Hecali stores range in size from 1,195 to 10,269 square feet with an average
3,853 square feet of selling space.
The following table sets forth certain operating statistics for The
One/Hecali stores as of, and for the year ended, December 31, 1999:
Sales (Ps. Millions)(1)....................... 690.2
Number of stores.............................. 159
Aggregate store area (sq. ft.)..............612,767.9
Number of store employees(2).................. 2,323
-------------
(1) Excluding mark-up on installment sales.
(2) Exclusive of corporate and collections staff.
Location
The One/Hecali operates stores in 65 cities in 29 Mexican states. The
following table sets forth information with respect to the distribution of The
One/Hecali stores in Mexico as of December 31, 1999:
Number of Stores Store Area (sq. ft.)
---------------- --------------------
% of
The % of all The Total
Zone One/Hecali Stores One/Hecali Stores
---- ---------- ------ ---------- ------
South.................. 58 36.5 221,801.1 36.2%
Mexico City............ 29 18.2 100,298.1 16.4%
West................... 26 16.4 105,626.3 17.2%
Pacific................ 21 13.2 85,713.0 14.0%
North.................. 25 15.7 99,329.4 16.2%
--- ----- -------- -----
Total.......... 159 100% 612,767.9 100%
=== ==== ========= ====
Expansion Plan
The One/Hecali anticipates opening approximately seven additional stores in
Mexico by the end of 2000. The average cost of opening a new The One/Hecali
store is approximately Ps.2.3 million, excluding the cost of inventory and real
estate. The average time required to set up a new The One/Hecali store is
approximately three months.
The following table provides a history of The One/Hecali store program as of
December 31, 1997, 1998 and 1999.
1997 1998 1999
---- ---- ----
The One/Hecali Stores:
Number of stores open at beginning of period....... 63 110 155
Number of new stores opened........................ 48 50 5
Number of stores closed............................ (1) (5) (1)
---- ---- ----
Number of The One/Hecali stores open at end of period 110 155 159
=== === ===
Merchandising and Marketing
Merchandise Selection
The One/Hecali stores, which average approximately 3,853 square feet of
selling space, offer a broad range of basic and sports apparel and shoes for
men, women and children at different price levels with the greatest inventory 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 The One/Hecali's principal product lines for
1997, 1998 and 1999:
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Men's clothing................. 63.3% 57.9% 56.2%
Children's clothing............ 18.8 16.7 20.6
Ladies' clothing............... 6.7 17.5 20.2
Sport shoes.................... 11.2 7.9 3.0
------ ------- -------
Total.................. 100.0% 100.0% 100.0%
===== ===== =====
Pricing Policy
The policy for The One/Hecali operations is to offer its products at cash
prices that are competitive in its targeted markets. In addition, its
installment sales plan is designed to provide its customers at its The
One/Hecali stores with financing for the products offered at an affordable
weekly cost.
Purchasing and Distribution
An important element of The One/Hecali's marketing strategy is its ability
to offer a wide selection of brand name products to its customers. As of
December 31, 1999, The One/Hecali had a network of approximately 102 suppliers,
18 of which supplied the majority of its products.
The centralized merchandising and buying group consists of a specialized
staff of buyers who purchase substantially all merchandise for The One/Hecali
stores.
The One/Hecali currently distributes products to its stores from its Toluca
warehouse. Deliveries to The One/Hecali stores are made primarily by 17 contract
trucking carriers, although Grupo Elektra has a nominal number of trucks at the
distribution center for movement of merchandise between stores and special
delivery requirements. The One/Hecali's contract carriers employ a fleet of
approximately 77 trucks to deliver merchandise to stores. Merchandise for The
One/Hecali can be sourced from a large number of suppliers (including private
label manufacturers).
Installment Sales Program
Operations
The One/Hecali has developed a system to extend credit for smaller ticket
purchases, and has provided in-store credit to its customers since January 1996.
The following table sets forth certain information concerning the
installment sales program on The One/Hecali's products:
As of and for the Year
Ended December 31,
------------------
1997 1998 1999
---- ---- ----
(in millions of Ps. as of December
31, 1999)
Accounts receivable retail customers-net (at period end) Ps. 36.3 Ps. 80.7 Ps.116.7
Installment sales as a percentage of merchandise 27.0% 39.3% 52.9%
revenues(1).......................................
Total number of open accounts (at period-end)........ 64,263 181,320 219,813
Average balance per retail customer (in Pesos)....... 564.6 445.2 530.9
- ---------
(1) Includes mark-up on installment sales.
Collection
The One/Hecali collection practices are implemented and monitored at the
individual store level. The One/Hecali currently has approximately 450 employees
dedicated to installment sales collections and investigations.
Competition
In general, The One/Hecali'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 One/Hecali. We believe the main competitors for The One/Hecali are Super
Jeans, Edoardos and the private labels of department stores.
Employees
As of December 31, 1999, The One/Hecali employed approximately 3,478 people
on a full-time basis. Approximately 4.9% of The One/Hecali full-time employees
were, as of December 31, 1999, represented by one of five unions. Mexican labor
laws require union contracts to be reviewed and renegotiated yearly, with
respect to salaries, and every other year with respect to fringe benefits. We
believe that our relations with these employees are good; since assuming control
of The One/Hecali in 1996, Grupo Elektra has not been subject to a strike by its
employees who work at The One/Hecali stores.
ADDITIONAL SERVICES
Money Transfer Business
Through our operations in Mexico, we participate in two separate sectors of
the money transfer business. Through "Dinero en Minutos", Grupo Elektra acts as
paying agent in Mexico of electronic money transfers initiated by agents of
Western Union Financial Services, Inc. to transfer funds electronically from
abroad, primarily originating in the United States, to Mexico. Elektra and The
One/Hecali stores offer customers electronic money transfer services within
Mexico. During 1999, we generated Ps.347.6 million in revenue from Dinero en
Minutos and Dinero Express.
Dinero en Minutos
In October 1993, we 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 us with the benefit of increased customer traffic in our
stores and also generated U.S. Dollar revenue. 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."
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 a ten-year
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. Grupo
Elektra 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 Grupo Elektra (the "Western Union
Transaction"). These subsidiaries in turn applied the funds to repay short-term
debt of Grupo Elektra, to reduce accounts payable to our suppliers, to pay a
portion of the cash consideration of our 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. Grupo Elektra transferred the
equivalent of US$532.8 million in 1997, US$570.7 million in 1998 and US$643.4
million in 1999. We believe that, based on 1999 volume, we are the 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 also 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 and the Inbound Agency Agreement, until January 11, 2000 Elektra
received approximately 2.5% of the monies transferred into Mexico, as
compensation for acting as the transfer agent and, pursuant to the agreement, we
now receive approximately 6% of such monies. The exact percentage depends on the
spreads realized by Western Union in respect of foreign exchange transactions
and the commission charged to its customers. The net foreign exchange gain for
each month is paid in U.S. Dollars.
Elektra is the largest paying agent for Western Union in Mexico. Western
Union operates approximately 35% of the total volume of electronic money
transfer operations to Mexico, and transfers approximately 39% of the total
amount of dollars transferred to Mexico electronically.
Competition
We believe that Western Union 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 we believe 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. We believe 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.
Dinero Express
We believe that Dinero Express is the first standardized intra-Mexico money
transfer service offered to Elektra's customer group by a major enterprise. From
the startup of Dinero Express's operations in February 1996 through December 31,
1999, 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 46%
during 1999. We believe 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.
Savings Accounts Services
In August 1997, we launched in Mexico a savings account service in alliance
with Serfin. Through this alliance, we promote savings by Elektra's low to
middle income customer base. This savings account service enables Elektra's
customers to open Serfin bank savings accounts named "Guardadito" at small
kiosks located within stores throughout Mexico. These small kiosks act as a
limited Serfin branch, and Serfin hires and pays the employees who staff these
kiosks. We believe 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.
We view the Guardadito product as providing further opportunities for
customers to visit our stores, as well as providing increased profits from
commissions from Serfin. A minimum deposit of Ps.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. Under its agreement with Serfin,
Grupo Elektra is entitled to a commission equivalent to 50% of the profit made
by Serfin from Guardadito savings accounts. The profit is determined by
multiplying the total deposits in Guardadito accounts by the difference between
the TIIE rate and the rate paid by Serfin to Guardadito account holders, less
any expenditures of Serfin in connection with the Guardadito savings account
service. This commission is paid on a monthly basis.
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 Ps.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, 1999 there were approximately one million "Guardadito"
savings accounts maintained by Serfin with an average balance of approximately
Ps.200.
Photo Products and Processing Services
In January 1997, we began offering photo processing services at selected
Elektra stores in Mexico under the trademark of "Fotofacil." The photography
kiosks at 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 108 square feet (ten
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, 1999, we had installed Fotofacil kiosks in 130 Elektra
stores which generated a total of Ps. 58.8 million in revenue.
Unefon Agreement
We market and distribute the telephony services of Unefon to the public. As
a result of the current nationwide network deployment plan, Unefon hopes to
deploy the network in as many as 20 cities throughout Mexico year-end. Unefon's
network is currently available in Toluca, Acapulco, Leon and parts of Mexico
City. Unefon base stations and network equipment can be found on the premises of
certain Elektra stores.
The principal target market for Unefon's telephony services is the same as
our customer base, the primarily middle to lower-income individuals and small to
microbusinesses that do not own a telephone, but can afford one. Unefon believes
that this potential market is comprised of 10 million households and businesses.
We also administer Unefon subscriber payment transactions and serve as Unefon's
collection agent for all its prepaid services. Our installment sales program is
made available to customers for the purchase of the phone terminal and
accessories.
Under our current renewable ten-year contract with Unefon, as compensation
for our services, we are to receive 3% of Unefon's gross revenue annually and 2%
of total receipts paid by subscribers at our stores. Unefon would also pay to us
a subscriber registration fee of US$3 (Ps.28.4) for every new subscriber, a
subscriber investigation fee of US$3 (Ps.28.4) for every subscriber application
and, in the lending commercial plan, a fee of US$3 (Ps.28.4) for each successful
collection from subscribers who have not prepaid their service at the end of the
relevant period. We also receive an annual fee of US$3,000 (Ps.28,440) for each
store where Unefon's radio base stations or other transmission equipment is
located.
Unefon is entitled to defer payment of all amounts due under the agreement
(except the US$3 per subscriber registration fee) during the initial three years
of operations to the end of the fifth year of operations and amounts due in the
fourth or fifth year of operations to the end of the sixth year of operations,
in each case, with interest charged on deferred amounts at a rate equal to the
average annual rate of our peso-denominated debt. Starting with the sixth year
of operations, these payments are due on a current basis. Unefon's ability to
make payments for services rendered during the first five years of operations
under the Unefon Agreement (except for the US$3 subscriber acquisition fee) is
subject to limitations under the terms of its outstanding indebtedness.
Unefon has launched several commercial plans that vary from its original
business plan. Its original commercial plan provided for handsets to be lent to
customers, and the customer would pay an activation fee and would commit to a
minimum monthly payment. Under the new commercial plan, the customer may select
one of the following options: (i) to borrow the handset, at no charge, and pay
an activation fee and a minimum monthly payment for the Unefon services; (ii) to
purchase the handset, in which case no activation fee or minimum monthly payment
is due for the Unefon services; or (iii) to purchase the handset using Elektra
credit, in which case no activation fee or minimum monthly payment is due for
the Unefon services.
At present, Unefon sells airtime for local calls and domestic and
international long-distance calls only through prepaid calling cards. Unefon,
however, expects also to offer customers the option of paying for calls after
calls are made once Unefon's billing system permits it to offer this option.
As part of its investment in Casa and in TV Azteca through Casa, Grupo
Elektra indirectly owns 9.3% of Unefon.
Extended Warranties
In September 1997, we launched in Mexico our extended warranty service that
includes warranty certificates and additional service contracts under the
trademark of "Milenia." This service is becoming a more prominent contributor to
our overall revenues.
The extension of a product warranty is only available for electronics and
appliance merchandise. There are three terms of extended warranties: two, three
and five years. The program's goal is for Grupo Elektra's customers to rely on a
professional product maintenance service and for the program to achieve a
penetration of six percent of Elektra's total sales. Under the extended warranty
program, Grupo Elektra independently repairs and provides maintenance for
products when they are not covered by the manufacturer's warranty. This program
is currently offered only to a limited number of products at the Elektra stores,
but there are plans to introduce it to other product lines as well as in Salinas
y Rocha stores. Grupo Elektra's customers can pay the price of the warranty
through Grupo Elektra's installment sales program on the same credit terms that
apply to the merchandise.
As of December 31, 1999, we have sold 1.1 million extended warranties with
an average price of Ps.322 for the two-year warranty, Ps.520 for the three-year
warranty and Ps.686 for the five-year warranty. The extended warranties
generated Ps.87.1 million (US$9.2 million) in revenue in 1999.
Strategic Investments
Casa
On March 26, 1996, we purchased 35.8% of the capital stock of Casa, a
holding company through which our Controlling Shareholders own their interests
in TV Azteca and Grupo COTSA S.A. de C.V. ("Grupo COTSA"). Casa indirectly owns
(through Azteca Holdings, S.A. de C.V., an intermediate holding company)
approximately 58.1% of the outstanding common stock of TV Azteca and 26.2% of
the outstanding common stock of Grupo COTSA. We acquired our interests in Casa
in exchange for capitalizing US$45.4 million of accounts receivable due to us
from Casa and its subsidiaries, and paying US$62.2 million in cash, which Casa
used to repay bank debt incurred in connection with the acquisition of interests
in TV Azteca and Grupo COTSA. We acquired non-voting "N" Shares in Casa,
together with the right to exchange such "N" Shares into shares of TV Azteca and
of Grupo COTSA. We have the right to exchange all of the Casa "N" Shares for TV
Azteca shares representing approximately 9.3% of TV Azteca's capital stock and
for Grupo COTSA shares representing 14.2% of its outstanding capital stock.
Elektra may make such exchange, in whole or in part, at any time prior to March
26, 2006.
TV Azteca
In July 1993, an investor group, including the Controlling Shareholders of
Grupo Elektra, acquired a controlling interest in TV Azteca, one of Mexico's two
over-the-air television broadcasters. TV Azteca owns and operates two national
networks and more than 250 commercial repeater stations.
TV Azteca is the second largest television broadcasting company in Mexico.
TV Azteca is a holding company with three principal subsidiaries: 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.
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.
Todito.com
On May 9, 2000, we signed a five-year strategic alliance with Todito.com,
an internet portal and marketplace for North American Spanish-speakers. Through
our indirect shareholding in TV Azteca, we currently own 9.3% of Todito. See
Item 1--Overview--E-commerce.
Unefon
As part of its investment in Casa and in TV Azteca through Casa, Grupo
Elektra indirectly owns 9.3% of Unefon. See Item 1--Description of
Business--Additional Services--Unefon Agreement.
COTSA
On September 30, 1999, Inmuebles Ardoma, S.A. de C. V. (a wholly-owned
subsidiary of GSyR) acquired approximately 71% of the capital stock of Compania
Operadora de Teatros, S.A. de C.V. ("COTSA") through the capitalization of
Ps.324.9 million of accounts receivable due from COTSA. Before their
acquisition, COTSA was a subsidiary of Grupo COTSA. The main assets of COTSA are
86 buildings, most of which are being converted to Elektra and The One/Hecali
stores. Among its assets, COTSA owns 48 theaters which will be transformed into
Elektra and The One/Hecali stores.
Item 2. Description of Property
As of December 31, 1999, the Company operated a total of 946 retail stores:
598 Elektra stores in Mexico, which operate in 31 Mexican states and the Federal
District; 159 The One/Hecali stores in Mexico; 26 Elektra stores in Guatemala;
14 Elektra stores in El Salvador; 15 Elektra stores in Honduras; 23 Elektra
stores in the Dominican Republic; and 21 Elektra stores in Peru.
As of December 31, 1999, the Company owned 51 Elektra stores in Mexico, 4
The One/Hecali stores in Mexico and 4 Elektra stores in the Latin American
countries outside Mexico in which it operates, and leased 547 Elektra stores and
155 The One/Hecali stores in Mexico as well as 95 Elektra stores in Latin
American countries outside Mexico, under leases typically with 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 operated 96 Salinas y Rocha stores throughout Mexico, of which 75
were leased and 21 were owned. Throughout the last three quarters of 1999, we
consolidated the 86 traditional Salinas y Rocha stores into Grupo Elektra, sold
ten department stores to Liverpool, and converted the remaining department store
into a Salinas y Rocha superstore.
For a further description of the Company's principal facilities, see Item
1--Description of Business--Elektra--Elektra in Mexico--Stores, Item
1--Description of Business--Elektra--Elektra in Latin America--Stores, Item
1--Description of Business--The One/Hecali--Stores, and Item 1--Description of
Business--Grupo SyR.
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, 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 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 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.
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,
1999, 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 Series "L" shares. At December 31, 1999, 1,249,127,610 Series "A"
shares were issued and outstanding, 2,017,502,853 Series "B" shares were issued
and outstanding and 396,289,707 Series "L" shares were issued and outstanding.
The following table sets forth, as of December 31, 1999, 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.
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 477,520,529 38.2 620,063,200 30.7 7,101,285 1.8 30.1
Rocha's heirs(1)
Esther Pliego de 650,307,870 52 60,570,340 3 30,285,170 7.6 20.2
Salinas(2)
All executive 1,127,828,399 90.3 1,326,005,450 65.7 44,777,590 11.2 68.2
Officers and
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 May 31, 2000 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 1,127,828,399 A Shares, representing 90.3% of the currently
outstanding A Shares, and 1,326,005,450 B Shares, representing approximately
65.7% of the currently outstanding B Shares. In addition, the Controlling
Shareholders own 44,777,590 L Shares, representing approximately 11.3% of the
outstanding L Shares. The Controlling Shareholders thus control approximately
74% of our equity, while 26% is owned by outside investors. 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 8 of the Company's 9 directors and to determine whether or
not dividends will be paid.
Elektra Comercial, S.A. de C.V., Elektrafin Comercial, S.A. de C.V.
Elektra Comercial, S.A. de C.V. and Elektrafin Comercial, S.A. de C.V., the
successor registrants to Elektra S.A. de C.V. and Elektrafin, S.A. de C.V. are,
directly or indirectly, controlled by the Company. The Company is the beneficial
owner of 98.50% of the outstanding capital stock of Elektra Comercial, S.A. de
C.V. and 99.08% of the outstanding capital stock of Elektrafin Comercial, S.A.
de C.V.. See Item 1--Description of Business--Grupo SyR--Corporate
Reorganization--Merger.
Item 5. Nature of Trading Market
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 GDSs have been issued by the Depositary. On
August 15, 1997, the Company's shareholders approved a ten-for-one split of the
Company's stock. Prior to October 3, 1997, the effective date of this stock
split, each GDS represented 2 CPOs. Thereafter and as of December 31, 1999, each
GDS represented 10 CPOs, as issued by the CPO Trustee for 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, 1999, there were 106,594,440 CPOs
represented by 10,659,444 GDSs. The proportion of the total CPOs held in the
form of GDSs was 26.89 at December 31, 1999. 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 of 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
---- --- ---- ---
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
1999:
First Quarter Ps. 6.70 Ps. 3.80 US$ 7.06 US$3.50
Second Quarter 7.42 5.22 8.00 5.43
Third Quarter 4.04 5.54 5.93 4.37
Fourth Quarter 9.46 4.30 8.37 4.43
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.
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 31 licensed brokerage firms. These firms are exclusively
authorized to trade on the Mexican Stock Exchange. On January 11, 1999, the
Mexican Stock Exchange and the CNBV implemented an automatic trading system that
replaced trading 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.
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.
The Mexican Stock Exchange can also 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, 1999, 190 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 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 value of securities of many Mexican
companies declined sharply in 1998. This decline was reflected in a 24.3%
decline in the Mexican Stock Exchange Index (in peso terms) from January 1, 1998
to December 31, 1998, and was initially a result of declines in the Hong Kong
securities market and persisted as a consequence of economic crises in Asia,
Russia and Brazil. The market value of securities of many Mexican companies
increased in 1999, as a result of an increase in demand for Mexican companies'
securities and the general stability of the Mexican economy. This increase was
reflected in an 86% increase in the Mexican Stock Exchange Index (in peso terms)
from January 4, 1999 to December 31, 1999. There can be no assurance that the
market value of the Company's CPOs would not be adversely affected by events
elsewhere, especially in developing 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. In 1999, the peso appreciated to Ps.9.48 per U.S. dollar at
December 31, 1999. During the first quarter of 2000, the peso increased by 1.8%
appreciating from Ps.9.48 per U.S. dollar on December 31, 1999 to Ps.9.31 per
U.S. dollar on March 31, 2000. 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, 1999, the Company had approximately US$267 million
indebtedness denominated in U.S. dollars and the equivalent of US$55.1 million
denominated in other currencies, and the 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 devaluation 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
Prior to June 4, 1999, the by-laws of the Company limited the ownership of
Series A shares to eligible Mexican holders and credit institutions acting as
trustees. The Company's by-laws did not impose any limitations on the ownership
of Series B shares and Series L shares or on the ownership of CPOs.
On June 4, 1999, the Company amended its by-laws and removed all foreign
investment restrictions on ownership of Series A shares. As a result of such
amendment, the Company's by-laws contain no restrictions on the ownership of
Company's shares or on the ownership of CPOs (subject to certain limitations on
voting rights described below).
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 y del Registro Nacional de
Inversiones Extranjeras (the "Foreign Investment Regulations").
The Foreign Investment Law and Regulations 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
Under the CPO Trust agreement, holders of CPOs who are not Eligible Mexican
Holders have no voting rights with respect to the underlying B Shares. For
Mexican law purposes, the Depositary is considered the owner of the CPOs which
are represented by the GDSs. Since the Depositary does not qualify as an
Eligible Mexican Holder, the Depositary and, consequently, the holders of GDSs
have no voting rights with respect to the underlying B shares. The B Shares that
are held in the CPO trust on behalf of holders of CPOs who are not Eligible
Mexican Holders are voted in the same manner as the respective majority of the B
Shares are voted at the relevant meeting. Given that a majority of the B Shares
are 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
held in the CPO Trust on behalf of holders of CPOs who are not Eligible Mexican
Holders in the same manner as the B Shares held by the Controlling Shareholders
are voted.
All holders of GDSs and CPOs, whether or not they are Eligible Mexican
Holders, are entitled to give instructions as to the manner in which the CPO
Trustee shall vote the L Shares whenever the holders of L Shares are entitled to
vote. In the case of the holders of GDSs, those instructions must be given to
the Depositary (who in turn conveys them to the Common Representative). In the
case of the holders of CPOs, the instructions must be given directly to the
Common Representative. In both cases the Common Representative must receive the
voting instructions at least five business days prior to the relevant meeting.
Under our Bylaws and Mexican law, holders of L Shares are entitled to vote
only in limited circumstances. Holders of L Shares are entitled to elect, at a
special stockholders meeting of such series, one of the Company's nine
directors, and the corresponding alternate directors. Holders of L Shares are
entitled to vote at general extraordinary stockholders meetings on the following
corporate actions: (i) transforming Grupo Elektra from one type of company to
another, (ii) any merger in which Grupo Elektra is not the surviving entity, and
(iii) de-listing of the L Shares or securities representing them from the
Mexican Stock Exchange or any foreign stock exchange or cancellation of the
registration of such shares with the National Securities Registry. Holders of L
Shares are also entitled to vote at special stockholders meetings of such series
on actions that would prejudice the rights of holders of such series but not the
rights of holders of other 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.
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.
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 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 12-3/4% Notes)
or the 12% Senior Notes due 2008 (the "2008 Notes")(together, 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, (except for
public officers or governmental employees) 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
or if it has its principal place of business or its place of effective
management in Mexico. A Mexican 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 generally will be subject to a Mexican withholding tax assessed
at a rate of 10% if, as expected, the Notes are registered in the Special
Section of the National Registry of Securities and Intermediaries (the
"Registry"). Foreign Holders residing in the United States should be aware that
such Holders may be eligible under the Tax Treaty for purpose of qualifying for
the Reduced Rate. Other Foreign Holders should consult their tax advisors
regarding whether they reside in a country that has entered into a treaty for
avoidance of double taxation with Mexico which is effective, and, if so, the
conditions and requirements for obtaining benefits under such treaty.
Notwithstanding the foregoing, under Rule 3.31.9 of the general rule issued
by the Ministry of Finance published in the Diario Oficial de la Federacion on
March 6, 2000, which rule is subject to amendment or repeal but is expected to
remain in effect until March 5, 2001 (the "Reduced Rate Regulations") payments
of interest made by the Company in respect of the Notes to Foreign Holders,
regardless of the place or residence or the tax regime applicable to the Foreign
Holder recipient of the interest, are subject to the Reduced Tax Rate, if that
are subject to a withholding tax will be subject to a reduced tax rate (the
"Reduced Rate") if (i) the Notes, as expected, are registered with the Special
Section of the RNVI (and the copies of the approval of such registration are
provided to the Ministry of Finance), (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) jointly or individually, directly or indirectly, is
the effective beneficiary of 5.0% or more of the aggregate amount of each such
interest payment, and (iv) the company maintains record which evidence
compliance with items (i), (ii) and (iii) above. The company expects that such
conditions will be met and, accordingly, expects to withhold Mexican tax from
interest payments of the Notes made to Foreign Holders at the reduced Rate
during the effectiveness of such rule. The Reduced Rate Regulation, together
with other tax regulations, are promulgated on an annual basis, thus, no
assurances can be given that the Reduced Rate Regulations will be extended or
that equivalent rules will be enacted.
Under the Tax Treaty, the Mexican withholding rate applicable to interest
payment on the notes made to US Holders which are eligible for benefits under
the Tax Treaty is 4.9%. In addition, under a transitory provision of the law,
for the first semester of 2000 the applicable withholding tax rate on the
payment of interest to foreign holders which are residents of any country with
which Mexico has entered into a tax treaty to avoid double taxation will be
4.9%. No assurance can be given that this transitory provision will be extended
beyond June 30, 2000.
Under the law, 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 the 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,
(iv) is the effective beneficiary of such payments of interest.
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 ("Additional Amounts"). 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 the event that the specified information or documentation
concerning the holder or beneficial owner, if requested, is not provided on a
timely basis, the obligation of the Company 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 will not be subject to Mexican income or other taxes.
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."
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 (other than an exchange for registered 2008 Notes as
provided above), 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
Mexican Tax Considerations
Effective January 1, 2000 dividends paid to Foreign Holders with respect to
the Shares, CPOs or GDSs, are subject to Mexican withholding tax at a rate of
approximately 7.7% (i.e., 5 % of the dividend amount, grossed-up by the Mexican
corporate tax on the dividend earnings).
U.S. Tax Considerations
Cash dividends paid with respect to the Shares represented by GDSs or CPOs
(before reduction for Mexican withholding tax), 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 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.
Mexican tax withheld from dividend distributions will be treated as a
foreign income tax that, subject to generally applicable limitations under U.S.
tax law, is eligible for credit against a United States Holder's federal income
tax liability or, at the United States Holder's election, may be deducted in
computing taxable income.
Under rules enacted by Congress in 1997 and other guidance recently enacted
by the U.S. 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-U.S. taxes, is insubstantial. United States Holders
should consult their own advisors concerning the implications of these rules in
light of their particular circumstances.
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.
Taxation of Capital Gains
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.
Gain on the sale of CPOs 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. Gain on sales or other dispositions of CPOs or Shares made in
other circumstances generally would be subject to Mexican Tax, regardless of the
nationality or residence of the transferor. However, under the Tax Treaty, a
holder that is eligible to claim the benefits of the Tax Treaty will be exempt
from Mexican tax on gains realized on a sale or other disposition of CPOs or
Shares in a transaction that is not carried out through the Mexican Stock
Exchange or such other approved securities markets, so long as the holder did
not own, directly or indirectly, 25% or more of the capital stock of the company
(including ADSs) within the 12 month period proceeding such sale or other
disposition.
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.
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.
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.
Commissions paid in brokerage transactions for the sale of CPOs on the
Mexican Stock Exchange are subject to a value added tax of 15%.
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 our Consolidated Financial Statements, and the notes
thereto, included elsewhere in this Annual Report. The Consolidated Financial
Statements have been audited by PricewaterhouseCoopers, our independent
accountants.
Our Consolidated Financial Statements have been prepared in accordance with
Mexican GAAP, which differ in certain respects from U.S. GAAP. See Note 16 to
our financial statements, which provides a description of the principal
differences between Mexican GAAP and U.S. GAAP as they relate to Grupo Elektra
and a reconciliation to U.S. GAAP of net income (loss) and stockholders' equity.
Our 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 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, 1999.
The effects of inflation described above has not been reversed in the
reconciliation to U.S. GAAP. See Note 16 to the Consolidated Financial
Statements.
At and for the year-ended December 31,
--------------------------------------
1995 1996 1997 1998 1999 1999 (1)
---- ---- ---- ---- ---- --------
(millions of U.S. dollars or constant Ps. as of December 31, 1999
purchasing power, except per share data and percentages)
Income Statement Data
Mexican GAAP:
Merchandise, service
revenue and other (3)...... Ps.4,710.3 Ps.6,431.2 Ps.8,298.0 Ps.10,188.6 Ps.11,467.2 US$1,209.6
Cost of merchandise sold
and services (3)........... 2,363.7 3,984.6 5,083.4 6,044.3 6,783.2 715.5
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................. 2,346.6 2,446.6 3,214.6 4,144.3 4,684.0 494.1
Administrative and selling
expenses................... 1,341.5 1,683.3 2,007.5 2,652.4 2,946.9 310.8
Depreciation and
amortization............... 113.1 127.0 204.7 384.9 483.1 51.0
---------- ---------- ---------- ---------- ---------- ----------
Operating income............. 892.0 636.3 1,002.4 1,107.0 1,254.0 132.3
---------- ---------- ---------- ---------- ---------- ----------
Interest income........... 248.1 128.0 41.5 92.0 157.4 16.6
Interest expense.......... (602.1) (62.1) (247.6) (487.1) (711.6) (75.1)
Foreign exchange (loss) gain (121.7) (86.2) (86.5) (396.1) 23.0 2.4
Gain on net monetary
position................ 223.0 189.1 143.2 259.1 256.9 27.1
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive
financial (cost) income
- Net (4).................. (252.7) 168.8 (149.4) (532.1) (274.3) (29.0)
---------- ---------- ----------- ---------- ---------- ----------
Income before income taxes
and employees' statutory
profit sharing............. 639.3 805.1 853.0 574.9 979.7 103.3
Taxes and employees'
statutory profit sharing... (84.5) (142.7) (122.5) (120.3) (96.6) (10.2)
Equity in earnings
(losses) of affiliated
companies - Net (3)........ 39.4 122.6 149.4 (215.7) (81.2) (8.5)
Extraordinary item (2)....... 172.2
--------- ----------
Net income................... 594.2 957.2 879.9 238.9 801.9 84.6
Income of minority
stockholders............... 16.8 21.7 4.5 21.9 2.3
--------- ---------- ---------- ---------- ---------- ----------
Income of majority
stockholders............... Ps. 594.2 Ps. 940.4 Ps. 858.2 Ps. 234.4 Ps. 780.0 US$ 82.3
========== ========== ========== ========== ========== ==========
Basic and diluted earnings
per share.................. 0.164 0.262 0.241 0.067 0.227 0.024
Weighted average shares
outstanding (in
millions) (5).............. 3,628.0 3,595.5 3,553.6 3,574.7 3,440.5 3,440.5
U.S. GAAP
Sales and money transfer
services 4,199.4 5,567.3 6,803.1 8,292.5 9,323.0 983.4
Interest earned from
customer credit card
operations 1,643.8 1,382.9 1,836.1 2,222.7 2,388.2 251.9
Operating income 1,520.9 1,288.8 1,140.0 1,611.1 1,722.1 181.7
Income before income taxes 627.6 857.2 579.8 691.8 1,203.0 126.9
Net income (loss) 306.3 733.2 312.9 295.0 1,032.6 108.9
Basic and diluted earnings
(loss) per share (5) 0.08 0.2 0.09 0.08 0.30 0.03
Basic weighted average
shares outstanding (in
millions (5) 3,628.0 3,595.5 3,553.6 3,574.8 3,440.5 3,440.5
At and for the year-ended December 31,
--------------------------------------
1995 1996 1997 1998 1999 1999 (1)
---- ---- ---- ---- ---- --------
(millions of U.S. dollars or constant Ps. as of December 31,
1999 purchasing power,
except per share data and percentages)
Balance Sheet Data
Mexican GAAP:
Accounts receivable due
from customers - Net....... Ps.1,847.0 Ps.2,644.1 Ps.1,766.5 Ps.1,393.7 Ps.1,681.6 US$ 177.4
Accounts receivable due
from related parties -
Net........................ 1,113.1 263.5 189.8 230.2 202.7 21.4
Inventories.................. 1,628.3 1,740.4 2,560.2 2,404.1 2,424.8 255.8
Total current assets......... 4,814.3 5,207.7 5,604.7 6,151.4 6,029.6 636.0
Property, machinery and
equipment - Net............ 830.6 940.1 2,029.6 2,408.9 3,468.9 365.9
Total assets................. 6,216.0 8,465.2 10,320.7 11,068.9 11,817.6 1,246.6
Total current liabilities.... 3,531.6 2,490.0 4,327.0 4,297.3 5,059.2 533.7
Short-term debt.............. 2,104.6 957.4 2,169.3 1,731.9 2,053.0 216.6
Long-term debt............... 142.0 1,324.1 1,107.9 2,435.2 1,538.2 162.3
Total debt................... 2,246.6 2,281.5 3,277.2 4,167.1 3,591.2 378.8
Total stockholders' equity... 2,531.0 4,635.1 4,862.6 4,198.9 4,687.1 494.4
U.S. GAAP
Accounts receivable from
customers-Net 1,847.0 2,644.1 2,926.8 2,854.1 3,522.5 371.6
Inventories 1,628.3 1,740.4 2,524.1 2,404.1 2,424.8 255.8
Total assets 5,917.5 7,185.0 10,036.9 10,670.5 11,640.7 1,227.9
Short-term debt 2,104.5 957.5 3,154.3 1,731.9 2,253.0 237.7
Long-term debt 1,216.3 1,073.9 3,516.3 2,494.8 263.2
Majority stockholders'
equity 1,722.3 871.8 1,061.8 344.7 1,232.6 130.0
Other Financial Data
(unaudited):
Capital expenditures......... 492.4 378.9 1,047.2 682.3 457.9 48.3
Gross margin................. 49.8% 38.0% 38.7% 40.7% 40.8% 40.8%
Operating income margin...... 18.9% 9.9% 12.1% 10.9% 10.9% 10.9%
Stores opened at period end.. 400 521 680 819 946 946
Number of open installment
accounts................... 532,452 889,921 948,054 682,163 812,676 812,676
Store space (square feet).... 2,450,447 3,315,909 4,559,129 5,699,129 6,965,660 6,965,660
Earnings-to-fixed charges.... 1.6x 2.5x 2.4x 1.7x 1.9x 1.9x
- ----------------
(1) The U.S. dollar amounts represent the peso amounts as of December 31, 1999,
translated at the exchange rate of Ps.9.48 per U.S. dollar (Noon Buying Rate)
and are unaudited.
(2) The extraordinary item in 1996 results from the sale of Servicio Mexicano de
Entregas, S.A. de C.V. to American Rapid Corporation for Ps.172.2 million.
(3) Up to December 31, 1999, the Company included equity in income (loss) of
Casa as part of Merchandise, services and other revenues, and the
amortization of Casa goodwill was included in Cost of merchandise sold and
of services. As of January 1, 2000, the Company changed the presentation of
both items to include them in a separate line after the income after taxes.
For purposes of this table, all periods are presented using the current
presentation.
(4) Comprehensive financing cost does not include interest income and expense
associated with our receivables portfolio. See Item 9--Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Accounting for Installment Sales.
(5) After giving effect to the ten-to-one split of the Company's common stock,
which was authorized on August 15, 1997, each GDS currently represents 10
CPOs, while each CPO continues to represent two B shares and one L share.
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
- ----------------------- ---- --- ------- ---
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 9.24 9.90
1999 10.60 9.24 9.56 9.48
2000 (As of May 31, 2000) 9.64 9.18 9.44 9.51
- -------------------
(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 and B 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, 2000, the Company declared a dividend of Ps.0.0975 per CPO or
Ps.0.0325 per A Share, and B and L Share not deposited in the CPO trust. This
dividend, which was paid on April 7, 2000, was equal to 16.5% of net profit for
the year ended December 31, 1999 or Ps.132.3 million (approximately
US$13,000,000). The dividend payment per GDS in 1997 was Ps.0.951 per GDS, in
1998 was Ps.0.828 and in 1999 was Ps.0.975 (all figures are expressed in nominal
pesos).
Under the terms of its indebtedness, 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.
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, our Consolidated Financial Statements
and the Notes thereto included elsewhere herein. The Company's financial
statements have been prepared in accordance with Mexican GAAP, which differ 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.
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 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, 1999 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 non-monetary 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 3 to our Consolidated Financial Statements.
In accordance with Bulletin B-10, we are required to report, as a gain or
loss on our net monetary position, the effects of inflation on monetary assets
and liabilities. This net amount reflects the gain or loss arising from holding
a net monetary liability or asset 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. Our operations
continually generate monetary assets (primarily from our installment sales)
while our accounts payable and borrowings to finance capital expenditures result
in monetary liabilities.
Accounting for Installment Sales
We sell products through our Elektra stores for cash and for credit under an
installment sales program.
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 our current marketing objectives. If stated interest is used, we disclose the
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.
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 contract; and
(iv) penalty interest on past due installment sales payments is recorded as
merchandise revenue when collected.
As of January 1, 1997, we modified the presentation of our 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 accounts
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. The cost of financing our
installment sales program is calculated by applying our average financing rate
to the portion of our portfolio financed by bank debt.
When an installment sale is made for products at Elektra, Salinas y Rocha or
The One/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 downpayment. At the time of the sale, the equivalent
cash price of the merchandise is booked as merchandise revenues, and a net
account receivable is generated in the amount of the installment-sale-equivalent
cash price minus any downpayment. 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 our 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 transaction. If the customer is late
with a weekly payment, the mark-up and stated interest portion of the missed
payment is recognized as merchandise revenue 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 the
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 the
installment sale includes the remaining equivalent cash price portion (minus the
downpayment) 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 through June 30, 1999, most of our
Elektra installment sales were made on a 39-week term. Since the second half of
1999, we have promoted the 26-week plan, instead of the 39-week term, in an
effort to gradually reduce our average portfolio length to 28 weeks.
Reserve for Doubtful Accounts
Since the fourth quarter of 1996, we have 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, we
require a ten percent downpayment for all installment sales but we waive this
requirement from time to time for marketing purposes. After giving effect to
write-offs, the reserve for doubtful accounts was 4.8% of accounts receivable
(net of securitization) due from retail customers as of December 31, 1999 and
6.4% of accounts receivable (net of securitization) due from retail customers as
of December 31, 1998. We believe that our reserve policy for installment sales
is sufficient to cover potential write-offs. Moreover, we continue 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 our financial condition and results of operations.
Interest rates in Mexico increased substantially, thus increasing the cost of
borrowing. In addition, the Mexican government, in response to the adverse
effects of the devaluation, established an economic recovery program that was
designed to tighten the money supply, increase domestic savings, discourage
consumption and reduce public spending generally. Foreign investment in Mexico
by private sources declined significantly.
Economic conditions in Mexico generally improved in 1997, 1998 and 1999,
with gross domestic product increasing by 7.0%, 4.8% and 3.7%, respectively, in
each case as compared to the prior year. Interest rates on 28-day Cetes were
19.8%, 24.8% and 21.4% in 1997, 1998 and 1999, respectively. Inflation during
1997, 1998 and 1999 was 15.7%, 18.6% and 12.3%, respectively. In 1997, the peso
weakened to Ps. 8.06 per U.S. dollar at December 31, 1997, a 2.2% decrease in
value relative to the dollar compared to December 31, 1996. In 1998, the peso
weakened to Ps. 9.90 per U.S. dollar at December 31, 1998, an 18.6% decrease in
value relative to the dollar since December 31, 1997. In 1999, however, the peso
strengthened, closing at Ps. 9.48 per U.S. dollar on December 31, 1999, a 4.2%
increase in value relative to the prior year end. Through May 31, 2000, the peso
has decreased in value to Ps. 9.51 per U.S. dollar. See Item 8--Selected
Financial Data--Exchange Rates.
For a description of our accounting policies related to inflation, see Note
3 to the Consolidated Financial Statements.
Revenues
We have increased prices to 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 our customers. As a result, many
customers have begun to select lower-priced merchandise or have delayed
purchasing decisions. Our gross profits do not vary materially within each of
our consumer electronics product lines, although we 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. The introduction
of, and emphasis on, furniture and clothing in the product mix has resulted in
higher gross profits, since these products carry higher margins than the core
electronic lines that we carry.
Depreciation and Amortization Expense
Prior to 1997, Bulletin B-10 required property, machinery, equipment and
other non-monetary assets, such as our stores and inventory, to be restated
based upon replacement cost or the NCPI. We generally restated assets 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 3a to the
Consolidated Financial Statements.
Comprehensive Financing Cost
As of December 31, 1997, 1998 and 1999, we had approximately US$ 218.6
million, US$241.4 million and US$267.0 million of monetary liabilities
denominated in U.S. dollars, respectively. Virtually all our monetary
liabilities represented our outstanding indebtedness for borrowed money. Our
U.S. dollar-denominated monetary assets as of December 31, 1997, 1998 and 1999
amounted to approximately US$19.6 million, US$30.7 million and US$33.6 million,
respectively. At December 31, 1997, 1998 and 1999, there were also assets and
liabilities denominated in several Latin American currencies. Those assets were
equivalent to US$16.7 million, US$41.4 million and US$40.0 million, and the
liabilities were equivalent to US $39.6 million, US$65.5 million and US$55.1
million, respectively. Interest income and interest expense associated with our
receivables portfolio are reflected in revenue and cost of goods sold, and are
not reflected as part of comprehensive financing cost.
Interest expense. Interest on our foreign currency-denominated indebtedness
exposes us 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 and other currencies.
Interest income. Interest income is positively affected by inflation as we
receive higher rates of return on our temporary investments, which are primarily
fixed-rate short-term peso deposits with Mexican banks.
Exchange (loss) gain. We record 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. Our U.S.
dollar-denominated monetary liabilities, which principally consist of our U.S.
dollar-denominated indebtedness for borrowed money, substantially exceed our
U.S. dollar-denominated monetary assets, which principally consist of U.S.
dollar bank deposits. As a result, we have 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 net monetary position. Gain or loss on net 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
our monetary liabilities exceeded our monetary assets in 1997, 1998 and 1999, we
recorded a gain on monetary position in those periods.
We present penalty interest as part of our revenues, and for the years ended
December 31, 1997, 1998 and 1999, the amounts for penalty interest were Ps.249.6
million, Ps.237.4 million and Ps.324.5 million, respectively.
We also allocate a portion of interest expense as part of cost of sales.
Interest expense on funding our installment sales program, presented as part of
our cost of sales was Ps.279.5 million, Ps.256.6 million and Ps.273.1 million
for the years ended December 31, 1997, 1998 and 1999, respectively.
Loss on monetary position from accounts receivables included in revenues for
the years ended December 31, 1997, 1998 and 1999 was Ps.341.2 million, Ps.326.5
million and Ps.244.1 million, respectively. Gain on monetary position on loans
obtained to finance the installment sales program were Ps.221.8 million,
Ps.212.2 million and Ps.158.6 million for the years ended December 31, 1997,
1998 and 1999.
Investment in Casa
Since January 1, 1997, we have presented our statement of income to show the
income associated with our investment in Casa, a holding company through which
our Controlling Shareholders own the controlling interest in TV Azteca and Grupo
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. This
presentation was consistent with Mexican GAAP.
We have decided, as of January 1, 2000, to present the equity in income of
Casa, net of the amortization of the goodwill related to the Casa acquisition,
as a net item below income after taxes. Consequently, in the 1999 consolidated
financial statements and the summary consolidated financial information, the
equity in earnings of Casa and the related goodwill amortization have been
reclassified to conform to the current presentation, which is equally consistent
with Mexican GAAP.
Seasonality of Sales
We have historically experienced, and expect to continue to experience,
seasonal fluctuations in sales, reaching highs in the months of May and
December. Such seasonality results mainly from increases in general consumption
associated with Mother's Day and the Christmas season. We typically experience
lows in February and September.
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, 1997, 1998 and 1999:
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Merchandise, service and other revenues......... 100% 100% 100%
Cost of merchandise sold and of services........ (61.3) (59.3) 59.2)
Gross profit.................................... 38.7 40.7 40.8
Administrative and selling expenses............. (24.2) (26.0) 25.7)
Depreciation and amortization................... (2.4) (3.8) (4.2)
Operating income................................ 12.1 10.9 10.9
Comprehensive financing income (expense)........ (1.8) (5.2) (2.4)
Income before income taxes and employees'
statutory profit
sharing...................................... 10.3 5.6 8.5
Consolidated net income......................... 10.6 2.3 7.0
Year ended December 31, 1999 compared to year ended December 31, 1998
Total revenues in 1999 increased 12.5%, or Ps.1,278.6 million, to
Ps.11,467.2 million from Ps.10,188.6 million in 1998. Merchandise revenues
(which includes mark-up on installment sales and penalty interest) accounted for
99.1% of total revenues in 1999, and 99.8% in 1998. Money transfer services
decreased to 3.0% of total revenues in 1999 from 3.3% in 1998. Those items were
offset by a monetary loss on accounts receivable, which decreased to (2.1)% of
total revenues in 1999 from (3.1)% of total revenues in 1998.
Merchandise revenues in 1999 increased 11.7%, or Ps.1,192.8 million, to
Ps.11,363.7 million from Ps.10,170.9 million in 1998. Merchandise revenues were
realized primarily through Elektra's retail network, with 6.7% being realized
through The One/Hecali's retail network, 6.1% through the recently acquired
Salinas y Rocha and 0.7% through wholesale sales to related parties and
governmental institutions. The increase in merchandise revenues was mainly due
to: (i) a 1.7% increase in same store sales at our Elektra stores in Mexico,
(ii) the consolidation since the second quarter of 1999 of sales from the 86
Salinas y Rocha stores acquired, and (iii) the opening of 41 net new retail
stores (including 16 new stores in Central and South America), representing a
22% increase in store space. This was partially offset by a 5.3% same-store
sales decrease at The One/Hecali stores. Consolidated same-store contribution
for the year rose 0.9% year-over-year. The slight increase in same store
contribution reflected our efforts to focus on higher margins rather than growth
of sales. Monetary loss on accounts receivable in 1999 decreased 25.2% or
Ps.82.4 million to Ps.244.1 million from Ps.326.5 million in 1998 due to a lower
inflation rate (12.3%) for 1999, compared to the inflation rate for 1998
(18.6%).
Out of the total 1999 merchandise revenues, 66.4% were installment sales
compared to 66.9% in 1998, and the remaining 33.6% and 33.1% were cash sales,
respectively. Our aggregate revenue from mark-up on installment sales and
penalty interest, which is included in merchandise, service and other revenues,
was Ps.2,222.7 million and Ps.2,388.2 million in 1998 and 1999, respectively,
reflecting a 7.5% increase. Included in these amounts are mark-ups on
installment sales of Ps.1,985.3 million and Ps.2,063.8 million, and penalty
interest of Ps.237.4 million and Ps.324.5 million in 1998 and 1999,
respectively. The increase between 1998 and 1999 was primarily due to the
consolidation of Salinas y Rocha's accounts receivable and a special effort to
increase the collection of the overall credit portfolio.
Revenue from electronic money transfer services in 1999 increased only 1.0%
or Ps.3.4 million to Ps.347.6 million from Ps.344.2 million due to increased
competition in the market and the appreciation of the Mexican peso, from Ps.9.93
per US$1.00 at December 31, 1998, to Ps.9.48 per US$1.00 at December 31, 1999.
Gross profit as a percentage of total revenues increased to 40.8% in 1999
from 40.7% in 1998 primarily as a result of the consolidation of Salinas y Rocha
(which provides us with higher merchandise margins as a result of the higher
percentage of furniture to our total sales), higher mark-up and penalty
interest, and a lower provision for doubtful accounts. Excluding mark-up,
penalty interest, money transfer services, and the monetary loss on receivables,
gross margin on merchandise revenues increased to 30.6% in 1999 from 30.1% in
1998 due to: (i) higher merchandise margins from Salinas y Rocha; (ii) margin
improvement at our apparel store format resulting from its conversion from
Hecali to The One; and (iii) better terms and conditions offered by suppliers.
Cost of merchandise sold increased 12.1% or Ps.677.1 million to Ps .6,229.9
million in 1999 from Ps.5,552.8 million in 1998, primarily as a result of
increased unit sales. The credit gross margin declined from 73.7% in 1998, to
72.4% in 1999.
Interest on funding the installment sales allocated in the cost of sales
increased Ps.16.5 million or 6.4% from Ps.256.6 million in 1998 to Ps.273.1
million in 1999, due to an increase of our weighted average cost of receivables
financing from 16.7% in 1998 to 17.7% in 1999.
The provision for doubtful accounts decreased 1.5%, or Ps.6.5 million, in
1999, from Ps.430.7 million in 1998 to Ps.424.2 million in 1999, due to a
decrease in mark-up rates that affected the second half of 1999 resulting in a
lower average credit portfolio and leaving a net allowance for doubtful accounts
of Ps.84.2 million at December 31, 1999.
The repair provision for extended warranties increased 143.4% or Ps.15.4
million to Ps.26.1 million in 1999 from Ps.10.7 million in 1998 due to a 143.3%
increase in the sales of extended warranties.
Administrative and selling expenses, which include salaries, rent and other
occupancy costs, advertising costs and sales and collections commissions,
increased 11.1% as a result of the opening of 41 new stores and the
consolidation of the 86 stores acquired from Salinas y Rocha. As a percentage of
total revenues, administrative and selling expenses decreased to 25.7% in 1999
from 26.0% in 1998.
Depreciation and amortization increased 25.5% or Ps.98.2 million to Ps.483.1
million in 1999, from Ps.384.9 million in 1998. This increase was due primarily
to a Ps.457.9 million increase in net capital expenditures associated with the
opening of new stores, the transformation of Hecali stores into the The One
format and the acquisition of Salinas y Rocha.
Comprehensive financing expenses decreased 48.5% or Ps.257.8 million in 1999
to Ps.274.3 million from Ps.532.1 million in 1998, due to a 46.1% increase in
net interest expenses and a 0.8% decrease in monetary gains which were more than
offset by the foreign exchange gain for 1999. Interest income increased from
Ps.92.0 million in 1998 to Ps.157.4 million in 1999 as a result of higher
interest rates in the Mexican market. Interest expense increased to Ps.711.6
million in 1999 from Ps.487.1 million in 1998, due primarily to the Salinas y
Rocha acquisition, the funding of the store expansion program and major
investments in information technology. The foreign exchange gain was Ps.23.0
million in 1999 compared to a loss of Ps.396.1 million in 1998, due to the fact
that the exchange rate of the U.S. dollar against the Mexican peso decreased
4.4% over 1999. Finally, gains in the net monetary position decreased from
Ps.259.1 million in 1998 to Ps.256.9 million in 1999 due to a lower Mexican
inflation rate of 12.3% for 1999, compared with the 18.6% rate for 1998.
Income before taxes and employees' statutory profit sharing increased 70.4%
or Ps.404.8 million to Ps.979.7 million in 1999 from Ps.574.9 million in 1998.
Provision for income tax and employees' statutory profit sharing decreased
19.7% or Ps.23.7 million in 1999 to Ps.96.6 million from Ps.120.3 million in
1998. As a percentage of pre-tax income, the provision for income tax, asset tax
and employees' statutory profit sharing decreased to 9.9% in 1999 from 20.9% in
1998 due mainly to the effect of the mergers of Elektra Comercial, S.A. de C.V.
with Elektra, S.A. de C.V. and Elektrafin Comercial, S.A. de C.V. with
Elektrafin, S.A. de C.V. which allowed us to pay less income taxes as a result
of tax loss carry-forwards. See Note 13 to the Consolidated Financial
Statements. We will need to complete the merger of Grupo Elektra with GSyR to
maximize benefits from tax loss carry-forwards for the future.
We have several operating subsidiaries with tax loss carry forwards. Our
subsidiaries file individual income tax returns, although GSyR files a
consolidated tax return which includes all of its subsidiaries. As of 1999, the
Mexican Income Tax Law changed the regulations for tax consolidation purposes by
limiting consolidation from 100% to 60% of net operating losses generated in the
future.
Income of minority stockholders in 1999 was Ps.21.9 million, an increase of
383.4% from Ps.4.5 million in 1998. The income of minority stockholders is
related to the investment of funds put in escrow pursuant to the Western Union
Transaction in shares of Elektra affiliates, and for 1997 and part of 1998, the
residual claim of the minority shareholders in Hecali. See Note 2 of the
Company's Consolidated Financial Statements and Item 1--Description of
Business--Additional Services--Money Transfer Business--Dinero en Minutos.
Minority interest also results to a minor extent from the Salinas y Rocha
acquisition.
Net Income of majority stockholders increased 232.6% to Ps.780.0 million in
1999 from Ps.234.4 million in 1998.
Year ended December 31, 1998 compared to year ended December 31, 1997
Total revenues in 1998 increased 22.8%, or Ps.1,890.6 million, to
Ps.10,188.6 million from Ps.8,298.0 million in 1997. Merchandise revenues (which
includes mark-up on installment sales and penalty interest) accounted for 99.8%
of total revenues in 1998 and 100.3% in 1997. Money transfer services decreased
to 3.3% of total revenues in 1998 from 3.8% in 1997. Those items were offset by
a monetary loss on accounts receivable, which decreased to (3.2%) of total
revenues in 1998 from (4.1%) of total revenues in 1997.
Merchandise revenues in 1998 increased 22.2%, or Ps.1,848.3 million to
Ps.10,170.9 million from Ps.8,322.6 million in 1997. Merchandise revenues were
realized primarily through Elektra's retail network, with 6.9% being realized
through Hecali's retail network and 0.9% through wholesale sales to related
parties and governmental institutions. The increase in merchandise revenues was
mainly due to: (i) a 1.4% increase in same-store sales at Elektra stores in
Mexico, and (ii) the opening of 139 net new retail stores (including 39 new
stores in Latin America), representing a 25.0% increase in store space. This was
partially offset by a 2.0% same-store sales decrease at Hecali stores. The 19%
year-on-year rise in same-store contribution reflected an overall improvement in
consumer patterns. Monetary loss on accounts receivable in 1998 decreased 4.3%
or Ps.14.7 million to Ps.326.5 million from Ps.341.2 million due to a smaller
net portfolio of accounts receivable resulting from the Company's receivables
securitization program, despite a higher inflation rate in 1998 as compared to
1997.
Out of 1998 merchandise revenues, 66.9% were installment sales, as compared
to 65.9% in 1997, with the remainder 33.1% and 34.1%, respectively, representing
cash sales. Our aggregate revenue from mark-up on installment sales and penalty
interest, which is included in merchandise, service and other revenues, was
Ps.2,222.7 million and Ps.1,836.1 million in 1998 and 1997, respectively,
representing a 21.1% year-on-year increase. Included in these amounts are
mark-ups on installment sales of Ps.1,985.3 million and Ps.1,586.5 million, and
penalty interest of Ps.237.5 million and Ps.249.6 million in 1998 and 1997,
respectively. The increases between 1998 and 1997 were primarily due to the
increases in mark-up rates during 1998 and a better performance in credit
portfolio collection, which gave rise to less penalty interest.
Revenue from electronic money transfer services in 1998 increased 8.7% or
Ps.27.5 million to Ps.344.2 million from Ps.316.7 million in 1997.
Gross profit as a percentage of total revenues increased to 40.7% in 1998
from 38.7% in 1997 primarily as a result of higher sales and mark-up, offset by
a higher provision for doubtful accounts. Excluding mark-up, penalty interest,
money transfer services and monetary loss on receivables, 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
passing on to customers any increase in costs from suppliers. Cost of
merchandise sold increased 18.6% or Ps.868.9 million to Ps.5,552.9 million in
1998 from Ps.4,684.0 million in 1997, as a result of increased unit sales and
the increase in prices of imported goods. Included in the cost of merchandise
sold, is the repair provision for extended warranties, which increased 1,710.3%
or Ps.10.1 million to Ps.10.7 million in 1998 from Ps.0.6 million in 1997, due
to an increase of 1,701.2% in the sale of extended warranties. Also included in
the cost of merchandise sold is the interest cost associated with the
receivables portfolio.
Interest included in costs (interest on funding the installment sales
program) decreased Ps.22.9 million or 8.2%, to Ps.256.6 million in 1998 from
Ps.279.5 million in 1997, due to a decline on our weighted average cost of
receivables financing from 23.4% in 1997 to 16.7% in 1998.
The provision for doubtful accounts increased 30.6% or Ps.100.9 million in
1998, due to a 24.8% increase in installment sales plus mark-up and a 17.8%
increase in the receivables written off over the year, leaving a net allowance
for doubtful accounts of Ps.92.5 million at December 31, 1998.
Administrative and selling expenses, which include 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 of new
employees, creating an expanded corporate training program, and incurring
expenses associated with the beginning of operations in Peru. As a percentage of
total revenues, administrative and selling expenses increased to 26.0% in 1998
from 24.2% in 1997.
Depreciation and amortization increased 88.0% or Ps.180.2 million to
Ps.384.9 million in 1998, from Ps.204.7 million in 1997. This increase was due
primarily to an increase of Ps.682.3 million in net capital expenditures
associated with opening of new stores and initiating operations abroad.
Comprehensive financing expense increased 256.2% or Ps.382.7 million in 1998
to Ps.532.1 million from Ps.149.4 million in 1997, due to a 96.7% increase in
interest expense and a 358.1% increase in the foreign exchange loss. These were
partially offset by a 80.9% increase in the monetary gain and a 121.3% increase
in interest income. Interest income increased from Ps.41.5 million in 1997 to
Ps.92.0 million as a result of higher investment rates in the Mexican market.
Interest expense increased to Ps.487.1 million in 1998 from Ps.247.6 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
Ps.396.2 million in 1998 from Ps.86.5 million primarily due to the fact that the
year-end exchange rate of the U.S. dollar for 1998 appreciated 23.2% and our
average 1998 dollar liabilities increased compared to the average 1997
liabilities. Finally, gain on net monetary position increased from Ps.143.2
million in 1997 to Ps.259.1 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 32.6%
or Ps.278.1 million to Ps.574.9 million in 1998 from Ps.853.0 million in 1997.
Provision for income tax and employees' statutory profit sharing decreased
1.8% or Ps.2.2 million in 1998 to Ps.120.3 million from Ps.122.5 million in
1997. As a percentage of pre-tax income, the provision for income tax, asset tax
and employees' statutory profit sharing increased to 20.9% in 1998 from 14.4% in
1997 due mainly to the increase of depreciation and amortization. See Note 13 of
the Consolidated Financial Statements.
We had several operating subsidiaries with tax loss carry forwards. Tax
losses within a subsidiary offset taxable income only to the extent that taxable
profits are generated by such subsidiary. In 1997 and 1998, we were not able to
utilize any tax loss carry forwards.
Income of minority stockholders was Ps.4.5 million, a decrease of 79.1% from
Ps.21.7 million in 1997. The income of minority stockholders is related to the
investment of funds put in escrow pursuant to the Western Union Transaction in
shares of Elektra affiliates and for 1997 and part of 1998, the residual claim
of the minority shareholders in Hecali. See Note 2 of our Consolidated Financial
Statements and Item 1--Discussion of Business--Additional Services--Money
Transfer Business--Dinero en Minutos.
Net Income of majority stockholders decreased 72.7% to Ps.234.4 million in
1998 from Ps.858.2 million in 1997.
Liquidity and Capital Resources
Liquidity
Our net working capital decreased to Ps.970.4 million as of December 31,
1999, compared to Ps.1,854.1 million as of December 31, 1998. The decrease in
our working capital during 1999 was principally attributable to a Ps.321.1
million increase in short-term bank loans and other short-term borrowings used
to finance our domestic and international expansion. In light of the capital
expenditures required for our expansion program, in December 1997, we entered
into a five year US$150 million revolving credit agreement with Citibank as
agent. As of December 31, 1999, we had drawn down the full amount under this
facility and we had paid U.S.$30 million of the full amount. On March 22, 2000,
we prepaid all amounts outstanding under this facility with part of the proceeds
of the offering of the 2008 Notes.
Our cash and cash equivalents were Ps.793.2 million as of December 31, 1999,
as compared to Ps.1,345.3 million as of December 31, 1998.
We fund our operations through cash flow from operations, and borrowings.
Cash flow provided by operations in 1999 was Ps.1,373.4 million as compared to
Ps.1,130.2 million in 1998 and Ps.243.1 million in 1997.
We also meet our working capital requirements through the financing of
accounts receivable. Net receivables balances of Ps.1,681.6 million and
Ps.1,393.7 million were on our books as of December 31, 1999 and 1998,
respectively.
We utilize Elektrafin to securitize our receivables. In July 1997, we
completed our initial securitization of Ps.625 million (nominal), and in
December 1997, we completed a second offering of Ps.241 million (nominal) in
CPOs on the Mexican Stock Exchange. These two programs have been fully paid off.
In April 1998, we launched a Ps.793.3 million (nominal) 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 basis points. In December 1998, we
launched our second two-year revolving securitization of receivables in an
offering of Ps.200 million (nominal) with a spread of TIIE plus 125 basis
points. In September 1999, we issued another three-year revolving securitization
of receivables in an offering of Ps.200 million (nominal), with the rate being
the higher of TIIE plus 150 basis points or the yield of the UDI over 28 days.
In April 2000, we launched a four-year revolving securitization of receivables
in an offering of 127 million UDIs equivalent to Ps.350.8 million (nominal) with
a yield of 91-day UDI plus 8.35%. Nacional Financiera, S.N.C., Fiduciary
division, acted as the fiduciary issuer of the CPOs. Our first three revolving
securitizations programs were rated "AA," "AAA," and "AA+" by Fitch IBCA, and
"MAA," "MAAA," and "MAA" by Duff and Phelps, respectively. Our most recent
revolving securitization program was rated AAA by Fitch IBCA. Our securitization
programs provide attractive financing alternatives. The proceeds are used
primarily to pay short-term debt and to finance our working capital. Our
securitization programs are arranged on a non-recourse basis. Maintenance of the
programs and reinvestment of collection proceeds in new receivables requires
compliance with certain overcollateralization, quality and receivables
performance standards. See Item 1--Description of Business-- Elektra--Elektra in
Mexico--Portfolio Securitization Program. In the future, we may enter into
additional securitization programs.
As of December 31, 1999, we had uncommitted revolving credit facilities of
Ps.189.8 million. The unused availability under the uncommitted facilities is
subject to termination by the financial institutions at any time.
In May 1996, we completed an offering of US$100 million aggregate principal
amount of our 12 3/4% Senior Notes due 2001, resulting in net proceeds to us of
US$97.1 million. We converted the net proceeds into Pesos and used a majority of
the net proceeds to repay a substantial portion of our then existing
indebtedness. On March 22, 2000, we placed into a defeasance trust securities in
amounts sufficient to satisfy at their stated maturity date the principal and
each installment of interest on our 12-3/4% Senior Notes and thus to accomplish
a partial or covenant defeasance of these notes.
Our total debt at December 31, 1999 matures as follows. The second column
shows how our debt matures, adjusted for the prepayment of the Citibank facility
in March 2000.
Year ended December 31
Actual Adjusted
------ --------
2000..................................... US$ 215.5 US$ 155.5
2001..................................... US$ 101.9 US$ 101.9(1)
2002..................................... US$ 60.0 --
2008..................................... -- US$ 275.0
- --------------------
(1) Including US$ 100 million Senior Guaranteed Notes due in 2001 that
have been defeased.
In 1997, 1998 and 1999, we advanced an aggregate of Ps.2.5 million, Ps.26
million, and Ps.18.7 million, respectively, to affiliates. Outstanding advances
to affiliates, including accrued interest, were Ps.10.7 million, Ps.37.2 million
and Ps.30.6 million at December 31, 1997, 1998 and 1999, respectively. Certain
advances were financed by short-term bank loans. As of December 31, 1999, we
also had accounts receivable of Ps.172.1 million that arose in the ordinary
course of business with affiliates.
In March 2000, we completed an offering of U.S.$275 million aggregate
principal amount of our 2008 Notes, resulting in net proceeds to us of
U.S.$268,125,000. We used the majority of the net proceeds to pay a substantial
portion of our then existing indebtedness and to accomplish a partial defeasance
(or covenant defeasance) of our 12-3/4% Notes. The Indenture governing the 2008
Notes imposes significant operating and financial restrictions on us. Such
restrictions affect, and in many respects limit or prohibit, among other things,
our ability to pay dividends, incur indebtedness, create liens, enter into
transactions with affiliates and consummate certain asset sales.
Capital Expenditures
Capital expenditures for the years ended December 31, 1997, 1998 and 1999
were Ps.1,047.2 million, Ps 682.3 million and Ps.457.9 million, respectively.
Capital expenditures for store openings and improvements were Ps.315.1 million
in 1997, Ps.129.8 million in 1998 and Ps.160.8 million in 1999. Other capital
expenditures for distribution centers, data processing equipment and trucks
totaled Ps.732.1 million in 1997, Ps.552.5 million in 1998 and Ps.297.1 million
in 1999. 1997 was a year of heavy investments in distribution, stores and
information systems. The acquisition of Salinas y Rocha during 1999 involved a
capital expenditure of Ps.871.3 million or US$91.9 million. Our capital
expenditures are expected to be approximately Ps.600 million for 2000, including
the cost of opening new stores, expanding our operations in the Latin American
countries in which we already operate, finishing the transformation of the
Hecali format into The One, expanding existing stores, enlarging our
distribution and satellite networks, as well as investing in training and
computer hardware and software.
Although we anticipate that cash flow from operations will remain positive,
we will continue to require financing for our expansion plan and the anticipated
growth of our receivables portfolio under our installment sales program. We
expect that, absent a material adverse change in the Mexican economy, financing
will be available, but there can be no assurance that it will be available on
favorable terms.
Recent Developments
On March 17, 2000, our shareholders declared a dividend of US$13,000,000.
During 1999, our shareholders declared a dividend of US$11,869,000.
Since January 1, 2000, we directly and indirectly increased our net holdings
of our own shares by 121,299,211 Series A shares, 90,000 Series B shares, 5,000
Series L shares, and 19,708,288 CPOs, in dollar-denominated transactions for a
total net amount of US$18,405,763 and peso-denominated transactions for a total
net amount of Ps.174,533,905.
Other Items
Income Tax
The Mexican corporate income tax rate for the period from 1997 through 1998
was 34%, and it became 35% on January 1, 1999. Our income tax expense as a
percentage of income before taxes, and employees' statutory profit sharing was
13.8% in 1997, 19.9% in 1998 and 9.9% in 1999.
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.
Revised Statement D-4 "Accounting for Income Taxes and Employee Profit
Sharing" is effective for fiscal years beginning January 1, 2000. This statement
significantly changes the accounting treatment of income tax, eliminating the
previous approach, known as the partial scope liability method, and replacing it
with the full scope method of assets and liabilities. Under this method, a
deferred tax is initially recognized for all the differences between the book
and tax values of the assets and liabilities.
In accordance with this statement, the accrued tax effects as of
January 1, 2000 will be recorded directly to stockholders' equity. Management
has not yet determined the impact of this new bulletin on the financial
statements of the Company.
Asset Tax
Since 1995, an asset tax is payable at the rate of 1.8% on the net amount of
certain assets and liabilities, but only when the amount of asset tax thus
calculated 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 our subsidiaries for the years
1997, 1998 and 1999 was Ps.8.9 million, Ps.2.8 million and Ps.0.0 million,
respectively, representing 1.0% , 0.5% and 0.0% of our income before taxes.
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,
1999 purchasing power for each of the three years in the period ended December
31, 1999, and the determination of consolidated stockholders' equity at December
31, 1998 and 1999, also expressed in pesos of December 31, 1999 purchasing
power, to the extent summarized in Note 16 to the Consolidated Financial
Statements. 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.6,803.1 million,
Ps.8,292.5 million and Ps.9,323.0 million for the fiscal years 1997, 1998 and
1999, respectively, compared with merchandise, service revenue and other under
Mexican GAAP of Ps.8,298.0 million, Ps.10,188.6 million and Ps. 11,467.2 million
for the comparable periods. Operating income under U.S. GAAP as of December 31,
1997, 1998 and 1999 was Ps.1,140.0 million, Ps.1,611.1 million and Ps.1,722.1
million, respectively, compared to Ps.1,002.4 million, Ps.1,107.0 million and
Ps.1,254.0 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 and (ii) 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 the loss on monetary position from accounts receivable.
Net income under U.S. GAAP was Ps.312.9 million (Ps.0.09 per share),
Ps.295.0 million (Ps.0.08 per share) and Ps.1,032.6 million (or Ps.0.30 per
share) for the fiscal years 1997, 1998 and 1999, respectively, compared with
income of majority stockholders under Mexican GAAP of Ps.858.2 million (Ps.0.24
per share), Ps. 234.4 million (Ps.0.07 per share) and Ps.780.0 million (Ps.0.23
per share) for the comparable periods. Majority stockholders' equity under U.S.
GAAP as of December 31, 1997, 1998 and 1999 was Ps.1,061.8 million, Ps. 344.7
million and Ps.1,232.6 million, respectively, as compared to Ps.4,770.8 million,
Ps. 4,102.6 million and Ps. 4,503.2 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; (iii)
deferred income taxes; (iv) accounting for the acquisition of GSyR; and (v)
accounting for derivative and hedging transactions. 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; (iv) goodwill in connection with other
acquisitions; and (v) derivative and hedging transactions.
Item 9A. Qualitative and Quantitative Disclosure about Market Risks
We are exposed to market risk from changes in interests rates and foreign
currency exchange rates. Additionally, as of December 31, 1999, we held forward
foreign exchange contracts to hedge a portion of our outstanding indebtedness
and equity derivative contracts for investment purposes. Our risks and the
potential gains and losses associated with these risks and instruments, are
discussed below.
Interest Rate Risk
Interest rate risk exists principally with respect to our indebtedness that
bears interest at floating rates. At December 31, 1999, we had outstanding
Ps.3,581.5 million (US$377.8 million) of indebtedness, of which 26.5% bore
interest at fixed interest rates and 73.5% bore interest at variable rates. Of
the total variable rate debt, 52.2% was denominated in United States dollars,
30.1% was denominated in pesos and 17.7% was denominated in other currencies.
A hypothetical instantaneous 10% increase in the average interest rate
applicable to our variable rate debt held at December 31, 1999, would have
increased our interest expense in 1999 by approximately Ps. 41.1 million.
We do not hedge or enter into derivative transactions with respect to our
interest rate exposure.
Foreign Exchange Risk
Our principal foreign currency exchange risk involves changes in the value
of the peso relative to the United States dollar. Provided below is a summary of
our net foreign currency exposure. U.S. dollar denominated assets represent
principally cash and cash equivalents and accounts receivable. The U.S. dollar
denominated liabilities represent primarily bank loans and long-term notes and
amounts due to our suppliers.
At December 31, 1999
--------------------
(in million)
U.S. dollar denominated assets....................... US$ 33.6
U.S. dollar denominated liabilities.................. (267.0)
----------
Net liability position............................... US$ 233.4
==========
The cash flow required to service our liabilities is generated primarily in
Mexican pesos. A hypothetical, instantaneous and unfavorable devaluation of the
Mexican peso to Ps.10.50 from the December 31, 1999 Noon Buying Rate (Ps.9.48
per U.S. dollar) would have resulted in estimated exchange losses based on our
net U.S. dollar liability position at December 31, 1999 of Ps.238.1 million.
We manage our exchange rate risk on our net liability position by entering
from time to time into forward exchange contracts and options to hedge a portion
of our net liability position.
At December 31, 1999 we had forward exchange contracts to purchase US$45
million at a cost of Ps.485.9 million. The contracts mature in June 2000 and in
December 2000. The estimated fair value of these contracts was determined using
the current exchange rate as of December 31, 1999 of Ps.9.48 and totaled Ps.59.3
million.
In addition, we provided a third party with an option to enter into a
forward exchange contract with us. If exercised, we would be obligated to
purchase US$30 million at a cost of Ps.321.0 million in December 2000. The
option was exercised in June 2000. The estimated fair value of this contract was
determined using the current exchange rate as of December 31, 1999 of Ps.9.48
and totaled Ps.36.6 million.
Based on our contract positions (including the option contract) at December
31, 1999, we estimate that a hypothetical instantaneous unfavorable 10% change
in the value of the peso against the US dollar would result in an exchange loss
of Ps.16.1 million.
Equity Swaps
As of December 31, 1999, we had also entered into two equity swap agreements
that are currently outstanding. We were authorized by our stockholders to
repurchase our own stock up to Ps.350 million (nominal pesos as of 1996) through
a stock repurchase fund. In order to comply with corresponding tax and legal
requirements, we regularly sell stock from the repurchase fund. Our way of doing
this is by selling the stock thus repurchased, and engaging in limited equity
swap transactions whereby we transfer to the swap counterparty a number of
shares against payment of a notional amount, established on the basis of the
market price of the shares transferred. Over the term of the swap contract
(which may vary from a couple of months up to three years), we pay interest, or
interest accrues on the notional amount, typically at a floating rate. Upon
expiration of the transaction, a cash settlement payment is made equal to the
difference between the notional amount (plus, as the case may be, accreted
interest, minus dividends) and the end-date market value of the underlying
stock, from Grupo Elektra to the counterparty if positive, and from the
counterparty to us, if negative. In one of the transactions, a collar feature is
included so that our upside or downside risk of increases or decreases in our
share price is limited to the specified floor and cap. Our maximum market risk
under our equity swap portfolio is equal to the initial market value of the
underlying shares, capped, in one of the transactions, under the embedded
collar. In one dollar-denominated transaction, we also bear the currency risk of
the devaluation of the peso. Set forth below is our maximum market risk exposure
under our equity swap portfolio at December 31, 1999.
Maximum
risk
Initial scenario Maximum market
Underlying shares Price Notional amount price risk exposure Fair Value
- ---------------------------------------------------------------------------------------------------
6,822,660 Elektra CPOs US$ 0.68 US$ 4.6 million 0.41 US$ 1.8 million US$ 2.1 million
32,587,000 Elektra CPOs Ps. 6.43 Ps. 209.5 million 0.00 Ps. 209.5 million Ps. 94.8 million
The potential gain or loss in the fair value of our equity derivative
instruments held at December 31, 1999 that would have resulted from a
hypothetical instantaneous 10% change in the stock market price of our CPOs
would have been approximately Ps.125.6 million.
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 nine members and their alternates is
elected at our ordinary meeting of stockholders. Eight of the members are
elected by the holders of Class A Shares and Class B Shares voting as a single
class. The remaining member is appointed by the holders of Class L Shares. Four
of the directors appointed by the Class A and Class B shareholders and the
director appointed by the Class L shareholders must be independent directors who
are not employed by or affiliated with us. The following table lists our current
directors, their position, their principal occupation and the year of their
appointment to the board. On January 26, 2000, our shareholders elected a new
Board of Directors, comprised of the following persons:
Name Principal Occupation Director Since Age
- ---- -------------------- -------------- ---
Appointed by A and B Stockholders
Ricardo B. Salinas Pliego.......... Chairman of the Board of Grupo 1993 44
Elektra
Hugo Salinas Price................. Honorary President of Grupo Elektra 1993 68
Pedro Padilla Longoria............. Chief Executive Officer of Grupo 1993 34
Elektra
Elisa Salinas Gomez................ Director of Production, Azteca Digital 1993 35
Guillermo Salinas Pliego........... President of Dataflux, S.A. de C.V. 1993 40
David Williams..................... Chairman of Alliance Capital 2000 68
Management Corporation
Carlos Fernandez Gonzalez.......... Vice Chairman & Chief Executive 2000 34
Officer of Grupo Modelo S.A. de C.V.
Robert Bowman...................... Chief Executive Officer of Outpost.com 2000 55
Appointed by L Stockholders
Roberto Servitje Achutegui......... Vice-president of Grupo Industrial 1993 47
Bimbo, S.A. de C.V.
Statutory Auditor
In addition to the Board of Directors, our 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 of our
Board of Directors and shareholder meetings. We currently have one statutory
auditor, Francisco Javier Soni Ocampo, a partner at PricewaterhouseCoopers who
has held the position since 1993.
Executive Officers
The following table lists each of our senior executive officers, his
position, years of service as an executive officer (with us or our predecessor
entities), and age, as of May 31, 2000:
Years as
Name Position Executive Officer Age
- ---- -------- ----------------- ---
Ricardo B. Salinas Pliego......... Chairman of the Board and President 17 44
Pedro Padilla Longoria............ President and Chief Executive Officer 9 34
Arturo Ramos Ochoa................ Chief Operating Officer 7 49
Mario Gonzalez Gonzalez........... Vice President Marketing 9 months 46
Javier Sarro Cortina.............. Vice President Financial Services 5 39
Gustavo Vega Vazquez.............. Vice President Information Technology 7 49
Alvaro Rodriguez Arregui.......... Chief Financial Officer 6 months 32
Cesar Nieves Trejo................ Director E-Commerce 10 months 32
Item 11. Compensation of Directors and Officers
Compensation of Directors and Officers
For the year ended December 31, 1999, the aggregate compensation paid to our
executive officers (a total of 53 persons in senior and middle-level management)
for services in all capacities was approximately Ps.54.7 million (approximately
US$5.7 million). Traditionally, a token compensation was paid by Grupo Elektra
to each member of the Board of Directors represented by one gold coin
(centenario) per meeting attended. In the shareholders meeting held on January
26, 2000, it was resolved to pay each director an annual fee of US $25,000. In
1994, we established a non-contributory pension plan for our employees,
including our officers. During 1997, 1998 and 1999, the charges to income
related to such pension plan and seniority premiums were approximately Ps.7.4
million, Ps.5.8 million and Ps.6.6 million, respectively. As of December 31,
1999, the liabilities related to seniority premiums and such pension plan were
Ps.34.9 million.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
On February 28, 1994, our 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 Ps.2.50 per CPO. The Stock
Option Plan also allowed employees whose employment date was during 1994 or 1995
to receive options beginning in 1996 and 1997, respectively, at an exercise
price of Ps.3.25 (1994 employees) or Ps.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 our 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 our net profits over the previous year is more
than 25%. If we fail 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.
As of December 31, 1999, options to acquire 70,311,187 CPOs at prices of
Ps.2.50, Ps.3.25 or Ps.4.00 per CPO (depending on the relevant employment date)
had been granted to 457 executives and key employees, of which 31,869,709 have
been exercised. See Note 12 to our Consolidated Financial Statements.
Set forth below are the number of CPO options, their exercise price and the
expiration dates of all options outstanding as of December 31, 1999:
Number of
Unexercised Current Expiration
Options Exercise Prices Dates
------- --------------- -----
29,094,406 2.50 February 28, 2001
1,070,565 3.25 February 28, 2001
876,507 4.00 February 28, 2001
----------
Total 31,041,478
==========
Item 13. Interest of Management in Certain Transactions
Historically, we have engaged, and we expect to continue to engage, in a
variety of transactions with our affiliates, including entities owned or
controlled by our Controlling Shareholders. Since 1995, we have had a committee
on related party transactions to provide an independent review of transactions
with affiliates to determine whether these transactions are related to our
business and are consummated on terms that are at least as favorable to us 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. In October of 1999, our shareholders approved amendments to our by-laws
which enacted significant changes in our corporate governance policies. These
changes were designed to increase our transparency and accountability to our
shareholders and to encourage good communications with our minority
shareholders. Among these changes, the shareholders approved amendments to the
by-laws which formalize the existence of the committee on related party
transactions. The committee is comprised of three members, two of whom must be
independent directors. On January 26, 2000, we appointed independent directors
to the related party transactions committee. We anticipate that we will continue
to engage in transactions with affiliates and that our current arrangements and
any future renewals of these arrangements with our affiliates will receive a
favorable review from the new committee. We have also agreed to terms governing
our indebtedness which restrict our ability to engage in transactions with
affiliates.
Loans to Affiliates
From time to time, we have made loans to our affiliates. However, as of May
31, 2000, there were no material loans to affiliates outstanding.
Purchase of Casa "N" Shares
On March 26, 1996, we purchased 35.8% of the capital stock of Casa, a
holding company through which our controlling shareholders own their interests
in TV Azteca and Grupo COTSA. Casa indirectly owns (through Azteca Holdings,
S.A. de C.V., an intermediate holding company) approximately 58.1% 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 Grupo COTSA. We
acquired our interest in Casa in exchange for capitalizing US$45.4 million of
accounts receivable due from Casa and its subsidiaries to Grupo Elektra, 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 Grupo COTSA. We acquired non-voting "N" shares in Casa, together with the
right to exchange such "N" shares into shares of TV Azteca and of Grupo COTSA.
We have 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 Grupo COTSA "N" shares (representing 14.2% of
the capital stock of Grupo COTSA). We may make such exchange, in whole or in
part, at any time prior to March 26, 2006.
TV Azteca Advertising Agreements
In connection with the investment in Casa, the shareholders of Casa caused
subsidiaries of TV Azteca to enter into a Television Advertising Time Agreement
with us on March 25, 1996 (the "Unsold Airtime Agreement"). Under the Unsold
Airtime Agreement, TV Azteca 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, Elektra agreed to pay TV Azteca US$1.5 million
each year, payable in advance each year. TV Azteca may not terminate the Unsold
Airtime Agreement. However, we may terminate the Unsold Airtime Agreement at any
time upon at least 90 days' notice. Our rights under the Unsold Airtime
Agreement may be transferred to third parties.
On December 22, 1998, we entered into a Television Advertising Time
Agreement with TV Azteca (the "Prime Airtime Agreement"). Under the Prime
Airtime Agreement, TV Azteca has agreed to air commercial spots for Elektra at
discounted rates based on the gross rating points assigned to the airtime chosen
by us for each commercial spot. At least 60% of the commercial spots must be
aired on "stellar" airtime, i.e. from 7:00 p.m. to midnight, and half of this
60% (30%) of all commercial spots must be aired on "prime" airtime, i.e. from
9:00 p.m. to 11:00 p.m. The remaining 40% may be aired on airtime other than
from 7:00 p.m. to midnight. Under the Prime Airtime Agreement, we determine each
year how much airtime to purchase from TV Azteca for that particular year. In
1999, we purchased US$4 million of airtime under this agreement. During the year
2000, we expect to purchase US$5 million of airtime under the Prime Airtime
Agreement. The Prime Airtime Agreement was executed for a term of five years.
The Prime Airtime Agreement may not be terminated by Elektra. However, the Prime
Airtime Agreement may be terminated at any time by TV Azteca upon at least 15
business days' notice. Our rights under the Prime Airtime Agreement may not be
transferred to third parties.
COTSA
On September 30, 1999, Inmuebles Ardoma, S.A. de C.V. (a wholly-owned
subsidiary of GSyR) acquired approximately 71% of the capital stock of COTSA in
exchange for capitalizing Ps.324.9 million of accounts receivable due from
COTSA. See Item 1--Description of Business--Strategic Investments--Casa.
Unefon Agreement
As part of our investment in CASA and, through CASA, in TV Azteca, we
indirectly own 9.3% of Unefon. We market and distribute the telephony services
of Unefon to the public. Although Grupo Elektra's current agreement with Unefon
may be amended to reflect Unefon's revised commercial plans, the material terms
of the arrangement between these two companies are not expected to change. See
Item 1--Description of Business--Additional Services--Unefon Agreement.
Biper
Elektra's relationship with Biper is governed by two separate agreements:
On March 31, 1996, Elektra and Biper entered into an Agency Agreement
pursuant to which Elektra acts as Biper's agent to promote Biper's paging and
message delivery services, sign-up Biper's subscribers, provide customer support
and carry out collection. In exchange, Elektra is entitled to 2.5% of every
payment received by Elektra from Biper's customers, plus an additional 5%
whenever Elektra carries out collection services. The Agency Agreement was
entered into for an undetermined duration and may be terminated by either party
upon at least 30 days notice.
On March 15, 1997, Elektra and Biper entered into an Exclusive Distribution
Agreement. In exchange for an exclusivity commitment by Elektra, Biper makes
Elektra its first channel of distribution for new products or services. The
Exclusive Distribution Agreement was entered into for a 10-year term.
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
On July 30, 1999, as part of Grupo Elektra's corporate reorganization,
Salinas y Rocha spun off Elektra Comercial, S.A. de C.V. and Elektrafin
Comercial, S.A. de C.V. On December 8, 1999, Elektra S.A. de C.V. and Elektrafin
S.A. de C.V., the guarantors of Grupo Elektra's 12-3/4% Guaranteed Senior Notes
Due 2001 and prior registrants, merged with and into Elektra Comercial, S.A. de
C.V. and Elektrafin Comercial, S.A. de C.V., respectively. Elektra Comercial,
S.A. de C.V. and Elektrafin Comercial, S.A. de C.V., as legal successors to
Elektra S.A. de C.V. and Elektrafin S.A. de C.V., have assumed the obligations
of their predecessors, and are now the guarantors of Grupo Elektra's 12-3/4%
Guaranteed Senior Notes Due 2001 and are now registrants.
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
Consolidated Financial Statements for Grupo Elektra, S.A. de C.V. and
Subsidiaries
Page
----
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-3
Consolidated Statements of Income for the Years Ended December 31, 1997, 1998 and F-4
1999
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended F-5
December 31, 1997, 1998 and 1999
Consolidated Statements of Changes in Financial Position for the Years Ended F-6
December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements F-7
Financial Statements for Elektra Comercial, S.A. de C.V. (subsidiary of
Grupo Elektra, S.A de C.V.)(formerly Elektra, S.A. de C.V)
Page
----
Report of Independent Accountants F-47
Balance Sheets as of December 31, 1998 and 1999 F-49
Statements of Income for the Years Ended December 31, 1997, 1998 and 1999 F-50
Statements of Changes in Stockholders' Equity for the Years Ended December 31, F-51
1997, 1998 and 1999
Statements of Changes in Financial Position for the Years Ended December 31, 1997, F-52
1998 and 1999
Notes to the Financial Statements F-53
Financial Statements for Elektrafin Comercial, S.A. de C.V. (subsidiary of
Grupo Elektra, S.A de C.V.)(formerly Elektrafin, S.A. de C.V)
Page
----
Report of Independent Accountants F-75
Balance Sheets as of December 31, 1998 and 1999 F-77
Statements of Income for the Years Ended December 31, 1997, 1998 and 1999 F-78
Statements of Changes in Stockholders' Equity for the Years Ended December 31, F-79
1997, 1998 and 1999
Statements of Changes in Financial Position for the Years Ended December 31, 1997, F-80
1998 and 1999
Notes to the Financial Statements F-81
Consolidated Financial Statements for Comunicaciones Avanzadas, S.A. de
C.V. and Subsidiaries
Page
----
Report of Independent Accountants F-100
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-102
Consolidated Statements of Income for the Years Ended December 31, 1997, 1998 and F-103
1999
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended F-104
December 31, 1997, 1998 and 1999
Consolidated Statements of Changes in Financial Position for the Years Ended F-105
December 31, 1997, 1998 and 1999
Notes to the Consolidated Financial Statements F-106
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.
(b) List of Exhibits
3.1 English translation of Amended and Restated By-laws of Grupo Elektra,
S.A. de C.V. as currently in effect.
3.2 English translation of By-laws of Elektra Comercial, S.A. de C.V.,
together with Amendment, as currently in effect.
3.3 English translation of By-laws of Elektrafin Comercial, S.A. de C.V.,
together with Amendment, as currently in effect.
4.4.1 English translation of Amendment to form of CPO Trust Deed.
10.21 English translation of Current Option Plan for Grupo Elektra
employees.
10.23 English translation of Promissory Contract dated as of April 21, 1999
between Puerto de Liverpool, S.A. de C.V. and Grupo Elektra, S.A. de
C.V.
10.24 English translation of Acquisition Agreement dated as of March 3,
1999, among Banco Bilbao Vizcaya-Mexico, S.A., Institucion de Banca
Multiple, Grupo Financiero BBV-Probursa, Division Fiducaria, in its
character of fiduciary institution in the irrevocable trust number
fifty five thousand seventy one, Banco Santander Mexicano, S.A.,
Institucion de Banca Multiple, Grupo Financiero Santander Mexicano
(before Banco Mexicano, S.A., Institucion de Banca Multiple, Grupo
Financiero InverMexico), Banca Serfin, S.A., Institucion de Banca
Multiple, Grupo Financiero Serfin, Citibank Mexico, S.A., Institucion
de Banca Multiple, ABACO Grupo Financiero, and Bancomer, S.A.,
Institucion de Banca Multiple, Grupo Financiero, AND Grupo Elektra,
S.A. de C.V.
21 Current list of subsidiaries of Grupo Elektra, S.A. de C.V.
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 to be signed on its behalf
by the undersigned, thereunto duly authorized, in Mexico City, Mexico, D.F.
June 27, 2000 GRUPO ELEKTRA, S.A. DE C.V.
ELEKTRA COMERCIAL, S.A. DE C.V.
ELEKTRAFIN COMERCIAL, S.A. DE C.V.
/s/ Alvaro Rodriguez Arregui
----------------------------
Alvaro Rodriguez Arregui
Chief Financial Officer
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
Consolidated Financial Statements for Grupo Page
Elektra, S.A. de C.V. and Subsidiaries
Report of Independent Accountants..........................................F-1
Consolidated Balance Sheets as of
December 31, 1998 and 1999..............................................F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999........................................F-4
Consolidated Statements of Changes in Stockholders'
equity for the years ended December 31, 1997, 1998 and 1999.............F-5
Consolidated Statements of Changes in Financial Position for
the years ended December 31, 1997, 1998 and 1999........................F-6
Notes to the Consolidated Financial Statements.............................F-7
Financial Statements for Elektra Comercial, S.A. de C.V.
(Subsidiary of Grupo Elektra, S.A. de C.V.)
(formerly Elektra, S.A. de C.V.)
Report of Independent Accountants..........................................F-47
Balance Sheets.............................................................F-49
Statements of Income.......................................................F-50
Statements of Changes in Stockholders' equity..............................F-51
Statements of Changes in Financial Position................................F-52
Notes to the Financial Statements..........................................F-53
Financial Statements for Elektrafin Comercial, S.A. de C.V.
(Subsidiary of Grupo Elektra, S.A. de C.V.)
(formerly Elektrafin, S.A. de C.V.)
Report of Independent Accountants..........................................F-75
Balance Sheets.............................................................F-77
Statements of Income.......................................................F-78
Statements of Changes in Stockholders' equity..............................F-79
Statements of Changes in Financial Position................................F-80
Notes to the Financial Statements..........................................F-81
Consolidated Financial Statements for
Comunicaciones Avanzadas, S.A. de C.V. and Subsidiaries
Report of Independent Accountants..........................................F-100
Consolidated Balance Sheets................................................F-102
Consolidated Statements of Income..........................................F-103
Consolidated Statements of Changes in Stockholders' equity.................F-104
Consolidated Statements of Changes in Financial Position...................F-105
Notes to the Consolidated Financial Statements.............................F-106
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 25, 2000, except for paragraph b. of Note 15 for which the
date is March 22, 2000.
To the Stockholders of
Grupo Elektra, S. A. de C. V. and subsidiaries
We have audited the consolidated balance sheets of Grupo Elektra, S. A. de C. V.
and subsidiaries (collectively the "Company") as of December 31, 1998 and 1999,
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, 1999, all expressed in constant pesos of December 31,
1999 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.
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, 1998 and 1999, and the
results of their operations, the changes in their stockholders' equity and in
their financial position for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant
respects from generally accepted accounting principles in the United States of
America. The application of generally accepted accounting principles in the
United States of America would have affected the determination of consolidated
net income, for each of the three years in the period ended December 31, 1999
and the determination of consolidated stockholders' equity as of December 31,
1998 and 1999 to the extent summarized in Note 16 to the consolidated financial
statements.
PricewaterhouseCoopers
Javier Soni
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED BALANCE SHEETS
Thousands of Mexican pesos of December 31, 1999
purchasing power
December 31,
-----------------------------------------
1998 1999
------------- ------------------------
Thousands
of U.S.
dollars (*)
Assets -----------
CURRENT ASSETS:
Cash and cash equivalents........................................... Ps1,345,317 Ps 793,202 US$ 83,671
----------- ----------- -----------
Accounts receivable:
Customers - Net (Note 5)............................................ 1,393,688 1,681,620 177,386
Amounts due from related parties - Net (Note 9)..................... 230,226 202,741 21,386
Recoverable taxes................................................... 144,820 35,701 3,766
Other receivables................................................... 173,182 180,345 19,024
----------- ----------- -----------
1,941,916 2,100,407 221,562
----------- ----------- -----------
Deposits on securitized receivables (Note 5)........................ 379,290 684,297 72,183
----------- ----------- -----------
Prepaid expenses.................................................... 80,736 26,932 2,841
----------- ----------- -----------
Inventories (Note 6)................................................ 2,404,151 2,424,766 255,777
----------- ----------- -----------
Total current assets................................................ 6,151,410 6,029,604 636,034
PROPERTY, FURNITURE, EQUIPMENT AND INVESTMENT
IN STORES - Net (Note 7)............................................ 2,408,915 3,468,936 365,921
GOODWILL, less accumulated amortization of Ps322,256 in 1998
and Ps383,271 in 1999............................................... 1,315,241 1,243,764 131,199
INVESTMENT IN SHARES (Note 8)....................................... 893,946 797,529 84,128
OTHER ASSETS........................................................ 299,437 277,766 29,300
----------- ----------- -----------
Ps11,068,949 Ps11,817,599 US$1,246,582
Liabilities and Stockholders' Equity
CURRENT LIABILITIES WITH FINANCIAL COST:
Bank loans and other credits (Note 10).............................. Ps1,696,416 Ps2,044,925 US$ 215,709
Capitalized lease obligations....................................... 35,471 8,054 850
----------- ----------- -----------
1,731,887 2,052,979 216,559
----------- ----------- -----------
CURRENT LIABILITIES WITHOUT FINANCIAL COST:
Suppliers........................................................... 1,954,187 2,235,310 235,792
Other accounts payable and accrued expenses......................... 577,380 635,460 67,031
Income and asset tax payable and employees' statutory profit
sharing payable..................................................... 33,855 135,437 14,287
----------- ----------- -----------
2,565,422 3,006,207 317,110
----------- ----------- -----------
Total current liabilities........................................... 4,297,309 5,059,186 533,669
----------- ----------- -----------
LONG-TERM LIABILITIES WITH FINANCIAL COST:
Bank loans and long-term notes (Note 10)............................ 2,428,310 1,536,534 162,082
Capitalized lease obligations....................................... 6,864 1,694 178
----------- ----------- -----------
2,435,174 1,538,228 162,260
----------- ----------- -----------
LONG-TERM LIABILITIES WITHOUT FINANCIAL COST:
Other liabilities................................................... 39,358 4,152
Labor obligations................................................... 28,308 34,867 3,678
----------- ----------- -----------
28,308 74,225 7,830
----------- ----------- -----------
DEFERRED CREDITS:
Unearned income for extended warranties............................. 109,243 329,483 34,755
Negative goodwill - Net (Note 2).................................... 129,351 13,645
----------- ----------- -----------
109,243 458,834 48,400
----------- ----------- -----------
Total liabilities................................................... 6,870,034 7,130,473 752,159
----------- ----------- -----------
STOCKHOLDERS' EQUITY (Note 12):
Capital stock....................................................... 545,638 546,030 57,598
Paid-in capital..................................................... 1,772,959 1,480,499 156,171
Retained earnings................................................... 2,955,738 3,611,762 380,988
Legal reserve....................................................... 85,136 85,136 8,981
Reserve for repurchase of shares.................................... 290,198 606,487 63,975
Loss from holding nonmonetary assets................................ (1,553,660) (1,821,574) (192,149)
Effect of translation of foreign subsidiaries....................... 6,564 (5,098) (538)
----------- ----------- -----------
Majority stockholders............................................... 4,102,573 4,503,242 475,026
Minority stockholders............................................... 96,342 183,884 19,397
----------- ----------- -----------
Total stockholders' equity.......................................... 4,198,915 4,687,126 494,423
SUBSEQUENT EVENT (Note 15)..........................................
----------- ----------- -----------
Ps11,068,949 Ps11,817,599 US$1,246,582
=========== =========== ===========
(*) The U.S. dollar figures represent the Mexican pesos amounts of
December 31, 1999 translated at the exchange rate of December 31, 1999
of Ps9.48 per U.S. dollar and are unaudited.
The accompanying notes are an integral part of these consolidated financial
statements.
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED STATEMENTS OF INCOME
Thousands of Mexican pesos of December 31, 1999
purchasing power (except per share amounts)
Year ended December 31,
----------------------------------------------------------
1997 1998 1999
----------- ------------- ----------------------------
Thousands
of U.S.
dollars (*)
-------------
Merchandise, services and other revenues (Note 3b.)... Ps8,298,029 Ps10,188,642 Ps 11,467,184 US$ 1,209,618
Cost of merchandise sold and of services (Note 3b.)... 5,083,441 6,044,277 6,783,168 715,524
----------- ----------- ------------- -------------
Gross profit.......................................... 3,214,588 4,144,365 4,684,016 494,094
----------- ----------- ------------- -------------
Administrative and selling expenses................... 2,007,457 2,652,378 2,946,899 310,854
Depreciation and amortization......................... 204,714 384,939 483,157 50,966
----------- ----------- ------------- -------------
2,212,171 3,037,317 3,430,056 361,820
----------- ----------- ------------- -------------
Operating income...................................... 1,002,417 1,107,048 1,253,960 132,274
----------- ----------- ------------- -------------
Comprehensive financing cost:
Interest income ...................................... 41,585 92,009 157,384 16,602
Interest expense...................................... (247,662) (487,060) (711,561) (75,059)
Foreign exchange (loss) gain - Net.................... (86,480) (396,152) 22,956 2,421
Gain on net monetary position......................... 143,190 259,098 256,940 27,103
----------- ----------- ------------- -------------
(149,367) (532,105) (274,281) (28,933)
----------- ----------- ------------- -------------
Income before taxes and employees' statutory profit
sharing
and equity in the results of affiliated companies..... 853,050 574,943 979,679 103,341
Taxes and employees' statutory profit sharing (Note 13) 122,529 120,280 96,583 10,188
----------- ----------- ------------- -------------
Income before equity in the results of affiliated 730,521 454,663 883,096 93,153
companies.............................................
Equity in income (loss) of Comunicaciones Avanzadas,
S. A. de C. V. - Net.................................. 149,431 (215,666) (81,214) (8,567)
----------- ----------- ------------- -------------
Consolidated net income............................... Ps 879,952 Ps 238,997 Ps 801,882 US$ 84,586
=========== =========== ============= =============
Income of minority stockholders....................... Ps 21,667 Ps 4,521 Ps 21,855 US$ 2,305
=========== =========== ============= =============
Income of majority stockholders....................... Ps 858,285 Ps 234,476 Ps 780,027 US$ 82,281
=========== =========== ============= =============
Basic and dilutive earnings per share (Note 3o.)...... Ps 0.241 Ps 0.067 Ps 0.227 US$ 0.024
=========== =========== ============= =============
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31,
1999 translated at the exchange rate of December 31, 1999 of Ps9.48 per U.S.
dollar and are unaudited.
The accompanying notes are an integral part of these consolidated financial
statements.
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, 1999
purchasing power (except per share amounts)
Number of
common Authorized but
shares Capital unsubscribed Paid-in Retained
outstanding stock stock Total capital earnings
----------- ----- ----- ----- ------- --------
Balances at January 1, 1997.................... 3,577,075,970 Ps 615,865 (Ps 73,625) Ps 542,240 Ps 2,014,096 Ps 2,151,830
Reduction of paid-in capital resulting from
repurchase of shares of subsidiaries........... (152,495)
Issuance of capital stock...................... 63,770,280 3,028 3,028 101,019
Payment of dividends........................... (163,492)
Repurchase of shares - Net..................... (59,148,320)
Consolidated net income........................ 858,285
Loss from holding nonmonetary assets...........
---------------- ----------- ------------- ------------- ------------ -----------
Balances at December 31, 1997.................. 3,581,697,930 615,865 (70,597) 545,268 1,962,620 2,846,623
Reduction of paid-in capital resulting from
repurchase of shares of subsidiaries........... (194,739)
Issuance of capital stock...................... 8,937,849 370 370 5,078
Payment of dividends........................... (125,361)
Repurchase of shares - Net..................... (24,714,000)
Consolidated net income........................ 234,476
Effect of translation of foreign subsidiaries..
Loss from holding nonmonetary assets...........
---------------- ----------- ------------- ------------- ------------ -----------
Balances at December 31, 1998.................. 3,565,921,779 615,865 (70,227) 545,638 1,772,959 2,955,738
Reduction of paid-in capital resulting from
repurchase of shares of subsidiaries........... (172,840)
Issuance of capital stock...................... 11,526,831 392 392 9,775
Payment of dividends (124,003)
Sale of repurchased shares - Net............... 84,439,560 (180,539)
Consolidated net income........................ 780,027
Effect of translation of foreign subsidiaries..
Increase in minority interest as a result
of the acquisition of Grupo SyR and Cotsa......
Gain on derivative transaction (Note 12)....... 51,144
Loss from holding nonmonetary assets...........
---------------- ----------- ------------- ------------- ------------- -----------
Balances at December 31, 1999.................. 3,661,888,170 Ps 615,865 (Ps 69,835) Ps 546,030 s 1,480,499 Ps 3,611,762
============= =========== ============= ========== =========== ==========
Reserve
for Loss Effect of
Repurchase from holding translation
Legal of nonmonetary of foreign Minority
Reserve Shares assets subsidiaries stockholders Total
------ ------- ------ --------- ---------- -----
Balances at January 1, 1997...... Ps 85,136 Ps 389,850 (Ps 639,563) Ps 91,518 Ps 4,635,107
Reduction of paid-in capital
resulting from repurchase
of shares of subsidiaries........ (152,495)
Issuance of capital stock........ 104,047
Payment of dividends............. (163,492)
Repurchase of shares - Net....... (28,036) (28,036)
Consolidated net income.......... 21,667 879,952
Loss from holding nonmonetary
assets........................... (391,077) (21,364) 412,441)
------------- --------------- --------------- ------------- ----------------
Balances at December 31, 1997.... 85,136 361,814 (1,030,640) 91,821 4,862,642
Reduction of paid-in capital
resulting from repurchase of
shares of subsidiaries........... (194,739)
Issuance of capital stock........ 5,448
Payment of dividends............. (125,361)
Repurchase of shares - Net....... (71,616) (71,616)
Consolidated net income.......... 4,521 238,997
Effect of translation of
foreign subsidiaries............. Ps 6,564 6,564
Loss from holding nonmonetary
assets........................... (523,020) (523,020)
------------- --------------- --------------- ---------- ------------- ---------------
Balances at December 31, 1998.... 85,136 290,198 (1,553,660) 6,564 96,342 4,198,915
Reduction of paid-in capital
resulting from repurchase of
shares of subsidiaries........... (172,840)
Issuance of capital stock........ 10,167
Payment of dividends (124,003)
Sale of repurchased shares - Net. 316,289 135,750
Consolidated net income.......... 21,855 801,882
Effect of translation of
foreign subsidiaries............ (11,662) (11,662)
Increase in minority interest
as a result of the acquisition of
Grupo SyR and Cotsa.............. 159,235 159,235
Gain on derivative transaction
(Note 12)........................ 51,144
Loss from holding nonmonetary
assets........................... (267,914) (93,548) (361,462)
------------- --------------- --------------- ------------- ------------ -------------
Balances at December 31, 1999.... Ps 85,136 Ps 606,487 (Ps 1,821,574) (Ps 5,098) Ps 183,884 Ps 4,687,126
============ =============== ============ ========== ============ =============
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Current year net income (loss):
Parent company.......... (Ps 29,445) Ps 67,036 (Ps 58,873)
Subsidiaries............ 887,730 167,440 838,900
--------------- --------------- ---------------
Ps 858,285 Ps 234,476 Ps 780,027
=============== =============== ===============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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, 1999
purchasing power
Year ended December 31,
-----------------------
1997 1998 1999
--------------- --------------- ---------------
Thousands
of U.S.
dollars (*)
-----------
Consolidated net income................................. Ps 879,952 Ps 238,997 Ps 801,882 US$ 84,586
Charges (credits) to income not affecting resources:
Depreciation and amortization........................... 204,714 384,939 483,157 50,966
Allowance for doubtful accounts......................... 329,765 430,744 424,193 44,746
Accruals for seniority premiums and pension plan........ 7,433 5,880 6,559 692
Equity in the results of Comunicaciones Avanzadas, S.A. de (149,431) 215,666 81,214 8,567
C.V.-Net................................................
Provision for repairs................................... 593 10,732 26,118 2,755
Net change in accounts receivable, inventories, other
assets,
accounts payable, related parties and unaccrued income for
extended warranties..................................... (1,029,884) (156,785) (449,733) (47,440)
----------- ----------- ----------- -----------
Resources provided by operations........................ 243,142 1,130,173 1,373,390 144,872
---------- ---------- ---------- ----------
Financing:
- ---------
Paid - in capital (own and subsidiaries' shares)........ (152,495) (194,739) (172,840) (18,232)
Bank loans and other credits - Net...................... 1,284,567 915,336 (196,538) (20,732)
Issuance of capital stock............................... 104,047 5,448 10,167 1,072
Payment of dividends.................................... (163,492) (125,361) (124,003) (13,080)
Gain on derivative transaction (Note 12)................ 51,144 5,395
Sale of repurchased shares.............................. (28,036) (71,616) 135,750 14,320
----------- ----------- ---------- ----------
Resources provided by (used in) financing activities.... 1,044,591 529,068 (296,320) (31,257)
---------- ---------- ----------- -----------
Investing:
- ---------
Acquisition of property, furniture, equipment
and investment in stores - Net.......................... (1,047,177) (682,327) (457,856) (48,297)
Investment in shares.................................... (177,119)
Acquisition of Grupo SyR, S.A. de C. V., net of cash
acquired (Note 2a.)..................................... (871,388) (91,919)
Acquisition of Compania Operadora de Teatros, S. A. de
C.V., net of cash acquired (Note 2d.)................... (459,176) (48,436)
Increase in minority stockholders as a result of the
acquisition of Grupo SyR and Cotsa...................... 159,235 16,797
------------ --------------- ---------- ---------
Resources used in investing activities.................. (1,047,177) (859,446) (1,629,185) (171,855)
------------ ----------- ------------ -----------
Increase (decrease) in cash and cash equivalents........ 240,556 799,795 (552,115) (58,240)
Cash and cash equivalents at beginning of year.......... 304,966 545,522 1,345,317 141,911
---------- ---------- ---------- ----------
Cash and cash equivalents at end of year................ Ps 545,52 Ps 1,345,317 Ps 793,202 US$ 83,671
========== ============ ========== ==========
- --------------------
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31,
1999 translated at the exchange rate of December 31, 1999 of Ps9.48 per
U.S. dollar and are unaudited.
The accompanying notes are an integral part of these consolidated financial
statements.
GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES
----------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(monetary figures expressed in thousands of Mexican
pesos of December 31, 1999 purchasing power, except
foreign currency figures, exchange rates in
Note 4 and share amounts)
NOTE 1 - COMPANY OPERATIONS:
The main activities of Grupo Elektra, S. A. de C. V. ("Grupo Elektra")
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. The
Company operates the following stores:
December 31,
------------
1998 1999
---- ----
Elektra Mexico............... 581 598
Elektra Latin America........ 83 99
Salinas y Rocha.............. 90
Hecali....................... 155 83
The One...................... 76
--- ---
819 946
=== ===
After the restructuring mentioned in Note 2c., the Company's main
subsidiaries are the following:
Subsidiary Percentage of equity
---------- --------------------
Grupo SyR, S.A. de C.V. (GSyR)............................ 99%
Elektra Comercial, S.A. de C.V. (Elektra Comercial)....... 98%
Elektrafin Comercial, S.A. de C.V. (Elektrafin Comercial). 99%
Salinas y Rocha, S.A. de C.V.(SyR)........................ 100%
Importaciones Electronicas Ribesa, S.A. de C.V............ 98%
Grupo Hecali, S.A. de C.V. and subsidiaries (Hecali)...... 100%
Mi Garantia Extendida, S.A. de C.V........................ 100%
Elektra Centroamerica, S.A. de C.V........................ 100%
NOTE 2 - ACQUISITION AND SALE OF SUBSIDIARIES AND INTERCOMPANY REORGANIZATION:
a. Acquisition of GSyR -
On April 8, 1999, Grupo Elektra acquired the rights on GSyR's debt and
94.3% of the outstanding shares of GSyR for US$77.7 million (Ps793 million
nominal). GSyR is a specialty retailer in Mexico and its main activities are the
purchase and sale of consumer electronics, major appliances, household furniture
and clothing. At the date of acquisition, GSyR operated 97 stores, of which 86
were traditional stores and 11 were department stores.
The GSyR acquisition was recorded under the purchase method of
accounting. The financial statements of the Company as of and for the year ended
December 31, 1999 include the assets, liabilities and results of operations of
GSyR from the acquisition date through December 31, 1999.
Net GSyR assets acquired were as follows:
Working capital, other than cash acquired............. Ps 183,591
Property, furniture and equipment..................... 968,960
Excess of net assets acquired over
the purchase price (negative goodwill)................ (359,250)
-----------
793,301
Expenses related to the acquisition................... 78,087
-----------
Net cash used to acquire GSyR......................... Ps 871,388
===========
The following unaudited proforma information for the years ended
December 31, 1998 and 1999 presents the combined results of operations of the
Company and GSyR as if the acquisition of GSyR had occurred on January 1, 1998:
Year ended
December 31,
------------
1998 1999
---- ----
Total revenues............................ Ps 12,329,417 Ps 11,762,098
Costs and expenses........................ 11,281,632 10,517,879
------------- --------------
Operating income.......................... 1,047,785 1,244,219
Comprehensive financing cost-Net.......... (532,104) (212,512)
Taxes and statutory profit sharing........ (134,586) (105,445)
Equity in the results of affiliated
companies-Net............................. (215,666) (81,212)
------------- --------------
Consolidated net income................... Ps 165,429 Ps 845,050
============= ==============
This unaudited pro forma information has been prepared for comparative
purposes only and does not purport to be indicative of the results of operations
which would have actually resulted had the acquisition occurred on January 1,
1998, or of future results of operations.
b. Asset sales -
In June 1999, GSyR sold the buildings, inventories, accounts receivable
and leasing rights of 10 department stores to El Puerto de Liverpool, S. A. de
C. V. ("Liverpool") for Ps463,330. Additionally, Liverpool assumed certain
liabilities related to the employees assigned to the department stores. The
Company recorded a Ps158,587 loss on the sale against the negative goodwill
generated from the acquisition of GSyR.
The Company recorded a Ps43,386 loss on the sale of GSyR's
manufacturing assets, which was also applied to reduce the negative goodwill
noted above.
c. Intercompany reorganization -
In 1999, the Company initiated an intercompany reorganization as
follows:
i. On July 30, 1999, Salinas y Rocha, S. A. de C. V. spun-off its assets into
three operating subsidiaries: Salinas y Rocha, Elektra Comercial and
Elektrafin Comercial.
ii. On November 12, 1999, Corporacion Diprofin, S. A. de C. V. and Articulos
Domesticos al Mayoreo, S. A. de C. V., former subsidiaries of Grupo
Elektra, merged with and into GSyR with GSyR as the surviving entity.
iii. On December 8, 1999, Elektra, S. A. de C. V. and Elektrafin, S. A. de C.
V., former subsidiaries of Corporacion Diprofin, S. A. de C. V., merged
with and into the newly created subsidiaries of SyR, Elektra Comercial and
Elektrafin Comercial, respectively, with Elektra Comercial and Elektrafin
Comercial as the surviving entities. In the following notes to the
financial statements, all references to Elektra and Elektrafin are to
Elektra Comercial and Elektrafin Comercial.
As a result of the above reorganization, Grupo Elektra increased its
equity in GSyR from 94.3% to 99.9%.
d. Acquisition of Compania Operadora de Teatros, S. A. de C. V. ("Cotsa") -
On September 30, 1999, Inmuebles Ardoma, S. A. de C. V. (a wholly-owned
subsidiary of GSyR) acquired 71% of the capital stock of Compania Operadora de
Teatros, S. A. de C. V. (a wholly-owned subsidiary of Grupo Cotsa, S. A. de C.
V.), a company controlled by certain stockholders of Grupo Elektra, through the
capitalization of Ps324,946 in receivables due the Company. Cotsa's main assets
are represented by 86 buildings and related land. The buildings will be used to
open Elektra and Hecali stores. The accompanying consolidated financial
statements include the assets, liabilities and results of operations of Cotsa
from October 1, 1999 through December 31, 1999. At the date of acquisition, the
net book value of Cotsa's assets acquired was Ps462,565.
e. Hecali -
In 1998, Grupo Elektra increased its ownership interest in Hecali
giving rise to goodwill of Ps177,119. In 1999, the Company converted 76 Hecali
stores to The One stores.
f. Western Union agreement -
In January 1996, Elektra entered into a revised agreement with Western
Union for the transfer of money from the United States to Mexico, under which
Elektra 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 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Below is a summary of the significant accounting policies, including
the concepts, methods and criteria related to the recognition of the effects of
inflation on the financial statements:
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, 1999 and have
been prepared in conformity with accounting principles generally accepted 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 from the dates on which capital was contributed and
earnings were generated and reflects the amounts necessary to maintain the
stockholders' investment at the purchasing power of the original amounts.
- - The gain 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.
- - The loss from holding nonmonetary assets represents the decrease in
nonmonetary assets as compared to 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 231.886, 275.038 and 308.919 as of December 31, 1997, 1998
and 1999, respectively.
b. Presentation of the statement of income
In order to allow for better matching of revenues with the costs needed
to produce them, revenues include income resulting from the sale 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 and the cost of financing the installment sales program, less
the monetary gain on financing of receivables.
Below is an analysis of revenues and of cost of sales:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Revenues:
- --------
Sales of Merchandise.............................. Ps 6,484,530 Ps 7,912,416 Ps 8,888,405
Accrued income for extended warranties............ 1,985 35,778 87,056
Accrued mark-up................................... 1,586,472 1,985,274 2,063,750
Penalty interest.................................. 249,599 237,451 324,476
Loss on monetary position from....................
Accounts receivable............................... (341,235) (326,523) (244,081)
Revenues from money transfer services............. 316,678 344,246 347,578
------------ ------------ ------------
Ps 8,298,029 Ps 10,188,642 Ps 11,467,184
============ ============ ============
Costs:
- -----
Cost of merchandise sold.......................... Ps 4,683,441 Ps 5,542,149 Ps 6,203,738
Provision for repairs............................. 593 10,732 26,118
Interest expense on loans......................... 279,487 256,640 273,062
Interest on money transfer funding................ 11,957 16,288 14,709
Allowance for doubtful accounts................... 329,765 430,744 424,193
Gain on monetary position on loans obtained to
finance the installment sales program............. (212,240) (158,652)
--------------- ------------- -------------
(221,802)
------------
Ps 5,083,441 Ps 6,044,277 Ps 6,783,168
============ ============ ==============
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. Allowance for doubtful accounts
The Company increases the allowance for doubtful accounts at the time
of any installment sale by an amount equal to five percent of the cash price of
the merchandise sold, plus the mark-up, less the down payment, if any. This
method of estimating the allowance for doubtful accounts is based on the
historical experience of the Company and represents management's best estimate.
The Company follows the policy of writing-off all customer balances outstanding
more than 90 days against the allowance for doubtful accounts.
g. 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 3a. Amounts so determined do
not exceed current market value (See Note 6).
h. Property, furniture, equipment and investment in stores
Property, furniture and equipment are expressed at acquisition cost and
are restated as explained in Note 3a. Investment in stores represents major
improvements necessary for the opening of stores, and is restated as mentioned
in Note 3a.
Depreciation is calculated by the straight-line method, based on the
estimated useful lives and the values of the Company's fixed assets.
Amortization of investment in stores is calculated by the straight-line method
over periods no longer than five years (See Note 7).
i. Investments in shares
The investment in Comunicaciones Avanzadas, S. A. de C. V. (CASA) is
accounted for by the equity method. The equity in income (loss) of CASA is shown
net of the amortization of the related goodwill, in the consolidated statements
of income. The amortization of CASA goodwill amounted to Ps51,383 in each of the
years ended December 31, 1997, 1998 and 1999.
Other investments in shares of companies in which the Company's
interest is less than 10% are stated originally at cost, and subsequently
restated by applying factors derived from the NCPI.
j. Goodwill and negative 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 historical cost.
Negative goodwill is amortized over five years and is also restated by
applying factors derived from the NCPI to historical cost. The related negative
goodwill amortization for the year ended December 31, 1999, amounted to Ps22,827
and is included in depreciation and amortization expense.
k. 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, 1998 and 1999, there
were no temporary differences that require the recognition of deferred income
tax.
l. 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, 1997, 1998 and 1999, 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 the
event of dismissal or death, in accordance with the Mexican Federal Labor Law,
is charged to income in the year in which it becomes payable.
m. 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). The provision for repairs is determined by
applying 30% to the income from extended warranty services and represents
management's best estimate of potential repairs.
n. 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 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 4).
Figures of the subsidiaries in Central and South America are translated
by using the methodology established in Statement B-15 "Transactions in Foreign
Currency and Translation of Financial Statements of Foreign Subsidiaries." In
accordance with the provisions of that statement, 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 and 1999 amounted to
Ps6,564 and (Ps11,662), respectively, and were recorded as part of stockholders'
equity.
o. 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 1997 (3,553,643,026), 1998
(3,574,753,543) and 1999 (3,440,460,171). 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 did not have a
material effect on the calculation of diluted earnings per share.
p. Derivative financial instruments
Forward exchange contracts
The Company has entered into short-term and medium-term forward
currency exchange contracts to reduce the risk of adverse movements in the
exchange rate between the Mexican Peso and the U.S. dollar. Realized and
unrealized gains and losses on forward currency contracts are recognized in
income of the period and are included in comprehensive financing cost. For the
year ended December 31, 1999, these operations resulted in a Ps58.8 million
loss.
The Company does not enter into financial instruments for trading or
speculative purposes. Counterparties to its derivatives transactions are
normally major financial institutions who also participate in the Company's bank
credit facilities. Credit loss from counterparty non-performance is not
anticipated.
Instruments Indexed to the Company's Stock
Gains and losses on these types of contracts are recognized in the
financial statements when realized. Any resulting gain or loss is recorded in
stockholders' equity.
q. Description of leasing arrangements
The Company conducts a major part of its operations from leased
facilities, which include 865 stores, seven warehouses, distribution centers and
the building housing the Company's headquarters. 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 on store facilities are based on a minimum
rental or a percentage of the store's sales (contingent rentals).
In most cases, management expects leases to be renewed or replaced by
other assets.
r. 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.
s. Reclassifications
Certain reclassifications have been made to prior period amounts for
them to conform to the current presentation.
NOTE 4 - 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.
The Company had the following foreign currency monetary assets and
liabilities:
December 31, 1998
------------------------------------------------
Central and
Mexico South 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)
============= ============== ==============
December 31, 1999
------------------------------------------------
Central and
Mexico South America (1) Total
------ ----------------- -----
Assets................. US$ 33,625 US$ 40,000 US$ 73,625
Liabilities............ (267,025) (55,099) (322,124)
-------------- ------------- -------------
Net short position..... (US$ 233,400) (US$ 15,099) (US$ 248,499)
============== ============= =============
- ----------------
(1) Denominated in different currencies, which were translated to U.S. dollars
at the exchange rates in effect on December 31, 1998 and 1999.
At December 31, 1998 and 1999 the exchange rate was Ps9.93 and Ps9.48,
respectively, to the U.S. dollar. At February 25, 2000, date of issuance of the
consolidated financial statements, the exchange rate was Ps9.41 to the U.S.
dollar.
The Company has entered into forward currency exchange contracts to
hedge various bank loans for US$45 million.
Below is a summary of the principal foreign currency transactions
carried out by the Company's subsidiaries in 1997, 1998 and 1999:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Money transfer services....... US$ 24,008 US$ 24,270 US$ 27,140
Sales......................... 21,117 71,260 82,911
Imported merchandise.......... (57,202) (105,231) (66,766)
Interest expense.............. (16,103) (24,611) (33,229)
Fees.......................... (7,878) (21,132) (25,192)
Other......................... (6,642) (11,728) (10,437)
----------- ------------ -----------
Net........................... (US$ 42,700) (US$ 67,172) (US$ 25,573)
============ =========== ============
NOTE 5 - BALANCES DUE FROM CUSTOMERS, NET AND SECURITIZATION OF RECEIVABLES:
Customer account balances at December 31, 1998 and 1999 are as follows:
December 31,
------------
1998 1999
---- ----
Gross retail receivables - Net of securitization...Ps 1,832,030 Ps 2,195,510
Less: Past due receivables written-off in the year... (395,210) (432,520)
----------- -----------
Net retail receivables............................... 1,436,820 1,762,990
Wholesale receivables................................ 49,380 2,815
----------- -----------
Total................................................ 1,486,200 1,765,805
Less: Allowance for doubtful accounts................ (92,512) (84,185)
----------- -----------
Ps 1,393,688 Ps 1,681,620
============= =============
Accounts receivable from retail customers are shown net of the unearned
installment sales mark-up. The unearned installment sales mark-up was Ps494,144
and Ps308,975 at December 31, 1998 and 1999, respectively.
The movement of the allowance for doubtful accounts is as follows:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Beginning balance......... Ps 62,626 Ps 56,978 Ps 92,512
Provisions................ 329,765 430,744 424,193
Write-offs................ (335,413) (395,210) (432,520)
----------- ------------ -----------
Ending balance............ Ps 56,978 Ps 92,512 Ps 84,185
=========== =========== ===========
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"
("CPO's"). The public offering is affected by the issuance of preferred and
subordinated CPO's acquired by public investors and Elektrafin, respectively.
The subordinated CPO's are referred to as deposits on securitized receivables on
our balance sheet. In 1998, Elektrafin completed two separate offerings, one on
April 15, 1998 ("EKTFIN-981") and one on December 31, 1998 ("EKTFIN-982"), for
Ps793,000 (nominal) and Ps200,000 (nominal), respectively.
Duff and Phelps de Mexico, S. A. de C. V. (DPM) and Fitch IBCA Mexico,
S. A. de C. V. (FIM) rated the securitized receivables as "mAA" and "AA",
respectively. On December 21, 1999, FIM and DPM increased their rating of the
Elektrafin second revolving securitized receivables ("EKTFIN-982") to AAA and
mAAA, respectively.
In September 1999 Elektrafin completed its most recent offering of
CPO's for Ps200,000 (nominal). This offering was rated "AA+" and "mAA" by FIM
and DPM, respectively.
Elektrafin collects the securitized receivables on behalf of the trust
and deposits such collections in the trust fund. The three separate offerings of
CPO's will mature in April 2000, December 2002 and August 2002. The preferred
CPO's will be repaid at their nominal value, and the subordinated CPO's will be
covered with the remaining cash held by the trust.
NOTE 6 - INVENTORIES:
December 31,
------------
1998 1999
---- ----
Brand name merchandise..................... Ps 2,077,871 Ps 2,194,274
Other merchandise.......................... 224,469 139,465
Merchandise in transit..................... 70,002 90,816
Other finished products.................... 32,391 8,316
------------- -------------
2,404,733 2,432,871
Less-Allowance for obsolete inventories.... (582) (8,105)
------------- -------------
Ps 2,404,151 Ps 2,424,766
============= =============
NOTE 7 - PROPERTY, FURNITURE, EQUIPMENT AND INVESTMENT IN STORES:
Average
annual depreciation
and amortization
December 31, rate (%)
------------ --------
1998 1999
---- ----
Buildings......................... Ps 370,872 Ps 2,012,968 3
Computer equipment................ 715,012 921,769 30
Communication equipment........... 242,889 282,218 10
Transportation equipment.......... 277,141 344,586 23
Furniture and fixtures............ 346,134 493,473 14
Machinery and equipment........... 245,685 302,749 10
------------- -------------
2,197,733 4,357,763
Less-Accumulated depreciation..... (676,962) (2,343,487)
------------- -------------
1,520,771 2,014,276
Land.............................. 219,109 817,804
Construction in progress.......... 42,915
-------------
1,782,795 2,832,080
Investment in stores - Net........ 626,120 636,856 20
------------- -------------
Ps 2,408,915 Ps 3,468,936
============= =============
NOTE 8 - INVESTMENT IN SHARES:
Percentage
December 31, of equity (%)
------------ -------------
1998 1999
---- ----
Comunicaciones Avanzadas,
S.A. de C.V....................... Ps 650,784 Ps 580,181 35.8
Biper, S.A. de C. V............... 90,122 68,084 5.0
Other............................. 153,040 149,264
------------- -------------
Ps 893,946 Ps 797,529
============= =============
NOTE 9 - DUE FROM RELATED PARTIES, NET:
December 31,
------------
1998 1999
---- ----
Biper, S.A. de C.V. ("Biper")................ Ps 64,905 Ps 36,914
Radiocel, S.A. de C.V. ("Radiocel").......... 74,284 107,402
Grupo Cotsa, S.A. de C. V.................... 25,564 1,563
Other........................................ 65,473 56,862
--------- ----------
Ps 230,226 Ps 202,741
========== ==========
The principal transactions with related parties are as follows:
Merchandise sales
Revenues from sales of television sets, video cassette recorders and
furniture to related parties and affiliated companies amounted to Ps98,837,
Ps89,537 and Ps69,914 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Interest income
For the years ended December 31, 1997, 1998 and 1999 the Company
extended short-term loans to Biper and Radiocel. Interest income under these
arrangements amounted to Ps15,402, Ps14,657 and Ps10,426, respectively.
Advertising expenses
In 1996 the Company entered into a ten-year agreement with TV Azteca
whereby Elektra will purchase at least 5,200 minutes per year of advertising
time from TV Azteca, to be transmitted during otherwise unsold time. The price
is US$1.5 million per year for ten years. For the years ended December 31, 1997,
1998 and 1999, the Company recorded advertising expenses of Ps16,961, Ps24,435
and Ps48,167, respectively, under this arrangement.
In 1998 Elektra and TV Azteca entered into a separate five-year
agreement (pursuant to which TV Azteca will air commercial spots for Elektra at
commercial rates based on the gross rating points assigned during premium
airtime, i.e., from 7:00 p.m. to 12:00 a.m. Under the 1998 agreement, Elektra
determines each year how much airtime to purchase from TV Azteca for that
particular year. In 1999, Elektra purchased Ps20 million of airtime under the
1998 agreement.
Unefon Agreement
On October 15, 1999, Elektra entered into a renewable ten-year
agreement with Unefon (the "Unefon Agreement"), under which Unefon will have
ready access to its target market through Elektra's nationwide network of stores
in Mexico. Pursuant to the Unefon Agreement, Elektra will market and distribute
Unefon's telephone services to the public on an exclusive basis, dedicate space
within its stores for customer services, administer all subscriber payment
transactions and serve as its collection agent. Elektra will also allow Unefon
to install its base stations and certain other network equipment on the premises
of Elektra's stores.
As compensation for these services, Elektra will receive 3% of Unefon's
gross annual revenues and 2% of total receipts paid by subscribers at Elektra's
stores. Unefon will also pay to Elektra a subscriber acquisition fee of US$3 for
every new subscriber, a subscriber investigation fee of US$3 for every
subscriber application and a fee of US$3 for each successful collection from
subscribers who have not renewed their service at the end of the relevant
prepaid period. Elektra will also receive an annual fee of US$3,000 for each
store in which Unefon radio stations or other transmission equipment is located.
Unefon is entitled to defer payment of all amounts due under the Unefon
Agreement (except the US$3 per subscriber acquisition fee) during the initial
three years of operations to the end of the fifth year of operations and amounts
due in the fourth or fifth years of operations to the end of the sixth year of
operations, in each case, with interest charged on deferred amounts at a rate
equal to the average annual rate of Elektra's peso-denominated debt. Starting in
the sixth year of Unefon operations, these payments will come due on a current
basis.
The Company has an indirect 9.3% interest in Unefon through the
Company's interest in CASA.
At December 31, 1999, no balances or transactions are included in the
accompanying financial statements, since Unefon started operations on February
10, 2000.
NOTE 10 - BANK LOANS AND OTHER DEBT:
Average rate at
December 31, December 31,
------------ ------------
1998 1999 1998 1999
---- ---- ---- ----
Loans in Mexican Pesos........... Ps 967,637 Ps 791,729 35.96% 23.51%
Loans in U.S. dollars............ 358,559 234,878 7.85% 9.35%
Long-term notes ................. 1,048,417 949,000 12.75% 12.75%
Syndicated loan.................. 948,037 1,138,800 7.50% 9.07%
and 7.34%
Loans in other currencies (1).... 609,333 417,794 21.00% 23.80%
Other............................ 192,743 49,258
------------ ------------
4,124,726 3,581,459
Less-current portion............. 1,696,416 2,044,925
------------- -------------
Long-term debt................... Ps 2,428,310 Ps 1,536,534
============= =============
- ---------------
(1) Lempiras (Honduras), Colones (El Salvador), Dominican Pesos (Dominican
Republic), Soles (Peru) and Quetzales (Guatemala).
Following is the maturity of the long-term loans at December 31, 1999:
Year Amount
---- ------
2001 Ps 967,134
2002 569,400
--------------
Long-term notes Ps 1,536,534
=================
In May 1996, the Company issued long-term notes for US$100 million on
international markets, payable in the year 2001, subject to interest at 12.75%
per annum, payable semiannually.
Syndicated loan
The Company entered into a five-year US$150 million committed unsecured
guaranteed revolving credit agreement with Citibank, N. A. as agent. At December
31, 1998, the Company had borrowed US$85 million under this agreement. The
Company borrowed the remaining amount available under the credit facility of
US$65 million on March 18, 1999. The amounts borrowed were repayable on December
3, 1999, June 30, 2000, December 3, 2000, June 30, 2002 and December 3, 2002.
This credit agreement includes certain financial covenants, the most significant
of which are "Interest Coverage Ratio", "Leverage Ratio", "Current Assets Ratio"
and "Fixed Charge Coverage Ratio."
As of June 30, 1999 and September 30, 1999 the Company was not in
compliance with the "Current Assets Ratio" specified in the credit agreement. On
October 22, 1999, the Company and the banks agreed to amend the credit agreement
and waive the covenant violations in exchange for: a) the prepayment of the
installment due on December 3, 1999, b) payment of an additional fee to each
bank amounting to 5/8 of 1% of the aggregate outstanding balance of the loan
after giving effect to the aforementioned prepayment, c) an increase in the
applicable margin used to determine the interest rate, and d) to limit the
Company's capital expenditures to US$ 60 million beginning in 2000.
On October 22, 1999, the Company also obtained from the banks a waiver
of certain covenants for December 31, 1999.
NOTE 11 - OPERATING LEASES:
Below 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, 1999:
Year ending December 31:
2000............................................ Ps 255,796
2001............................................ 210,367
2002............................................ 180,170
2003............................................ 159,017
2004 and thereafter............................. 143,606
----------
Total minimum payments required................. Ps 948,956
==========
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,
-----------------------
1997 1998 1999
---- ---- ----
Minimum rentals......................... 163,030 Ps 233,934 Ps 295,406
Contingent rentals...................... 20,535 25,497 28,852
---------- ---------- ----------
183,565 Ps 259,431 Ps 324,258
========== ========== ==========
NOTE 12 - 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 (CPO)
(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, 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
Less: authorized but unsubscribed
and/or unpaid shares:
Series "A" Shares............................... (220,279,440)
Series "B" Shares............................... (324,902,637)
Series "L" Shares............................... (91,126,323)
--------------
(636,308,400)
Less - Repurchased shares....................... (26,649,420)
--------------
(662,957,820)
--------------
Net authorized shares subscribed and
paid as of December 31, 1999.................. 3,661,888,170
=============
The Company's by-laws provide that all series of shares are
unrestricted as to ownership. Series "L" shares have restricted voting rights.
At December 31, 1999, 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........................ (21,210)
----------
Capital stock expressed in nominal pesos................... 122,951
Effect of restatement...................................... 423,079
----------
Capital stock expressed in Mexican pesos of
December 31, 1999 purchasing power......................... Ps 546,030
==========
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
parties resident abroad are subject to a maximum tax withholding equivalent to
7.69%, regardless of any previous taxation of such dividends. Capital stock
reductions in excess of the sum of the balances of the 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, 1999, the balance of
previously taxed retained earnings, determined in accordance with the tax
regulations in effect, amounted to Ps42,766.
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
employees options to acquire up to 70 million CPO's of the Company at a price
between Ps2.5 and Ps4.0 (nominal) per CPO. 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 or the options may be postponed
or limited. The option price per CPO was determined based on each employee's
employment date. At February 25, 2000, date of issuance of the audited
consolidated financial statements, options to acquire 31,869,709 CPO's were
exercised.
Stock options under the plan Number of CPO's Exercise price
- ---------------------------- -------------------------------------
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
Exercised................................ (3,842,277)
------------
Outstanding on December 31, 1999......... 31,041,478
============
Exercisable at December 31, 1999......... 28,210,353
============
The following table summarizes information concerning stock options
outstanding and exercisable at December 31, 1999:
Options Number of
Exercise price outstanding exercisable options
-------------- ----------- -------------------
2.50 29,094,406 27,373,224
3.25 1,070,565 520,728
4.00 876,507 316,401
----------- -----------
31,041,478 28,210,353
========== ==========
On October 12, 1999, Grupo Elektra entered into a derivative operation
with third parties under which Grupo Elektra will receive or repay at maturity
date, the difference (increase or decrease, as the case may be) between the
market value of 32,587,000 CPO's of Grupo Elektra and the initial value of the
operation (Ps4.635578 per CPO) minus cash dividends, paid by these CPO's, plus
interest computed on the notional amount using the monthly average interest rate
for Certificados de la Tesoreria (Mexican Treasury Certificates) ("CETES") minus
two points . On December 16, 1999, both parties agreed to amend the contract and
Grupo Elektra received a cumulative net gain of Ps51,144 at that date, which was
recorded against paid-in capital. The new maturity date is June 15, 2000 and the
new initial value of the operation is Ps6.426924 per CPO, minus cash dividends
paid by these CPO's, plus interest determined using the "Tasa de Interes
Interbancaria de Equilibrio" ("TIIE") plus four points. At December 31, 1999 and
at the date of issuance of the consolidated financial statements, the market
value of the Grupo Elektra CPO was Ps9.34 and Ps11.08, respectively.
In November 1999, the Company entered into a second "equity swap" under
which, the Company will receive all dividends from the 6,822,660 Elektra CPO
shares during the period of the swap. Additionally, the Company will receive or
repay at the maturity date, the increase or decrease, as the case may be,
between the market value of the shares and the nominal value of each swap with a
90% Cap and a 60% Floor. The transaction matures in the year 2002. The Company
pays interest on the swap notional amount at LIBOR plus 6%.
At December 31, 1999, retained earnings include Ps167,868 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 13 - INCOME TAX, ASSET TAX AND EMPLOYEES' STATUTORY PROFIT SHARING:
Income tax, asset tax and employees' statutory profit sharing charged
to income for the periods presented are as follows:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Income tax........................ Ps 111,639 Ps 114,540 Ps 96,583
Asset tax......................... 8,879 2,815
Employees' statutory
profit sharing.................... 2,011 2,925
---------- ----------
Ps 122,529 Ps 120,280 Ps 96,583
========== ========== ==========
For the years ended December 31, 1997, 1998 and 1999, 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.
Effective January 1, 1999, the corporate income tax rate was increased
from 34% to 35%.
At December 31, 1999, certain subsidiaries had tax loss carryforwards
that expire as shown below:
Year of December 31,
expiration 1999
---------- ----------
2004 Ps 411,358
2005 676,971
2006 970,862
2007 735,167
2008 215,144
2009 130,064
------------
Ps 3,139,566
==============
The tax loss carryforwards are restated by applying factors derived
from the NCPI until they are utilized. The Company's subsidiaries file
individual income tax returns and the Company does not prepare a consolidated
income tax return, thus tax loss carryforwards of the subsidiaries can only be
utilized by the subsidiaries generating the carryforwards. As from 1999 the
Mexican Income Tax Law changed the regulations for tax consolidation by limiting
consolidation to 60% of share participation (previously 100%).
Certain subsidiaries paid asset tax for which a refund can be requested
if income tax determined in any of the following ten years exceeds asset tax for
those years. At December 31, 1999, the Company had Ps352,470 of recoverable
asset tax, expiring as shown below:
Year of
expiration Amount
---------- ------
2000 Ps 4,224
2001 5,131
2002 4,013
2003 4,453
2004 106,022
2005 94,063
2006 70,717
2007 31,189
2008 19,423
2009 13,235
----------
Ps 352,470
NOTE 14 - SEGMENT INFORMATION:
Elimination
Commercial Credit International CASA Other entries Consolidated
---------- ------ ------------- ---- ----- ------- ------------
As of and for the year ended
December 31, 1997
Revenues from
external customers........... Ps 5,853,457 Ps 1,484,329 Ps 222,000 Ps 200,814 Ps 738,243 (Ps 200,814) Ps 8,298,029
Depreciation and
amortization................. 905 11,181 5,422 187,206 204,714
Operating income (loss)...... 685,827 812,112 (12,043) 149,431 (483,479) (149,431) 1,002,417
Total assets................. 2,590,775 1,783,867 631,644 1,823,839 3,490,691 10,320,796
As of and for the year
ended December 31,
1998
Revenues from external
customers.................... Ps 6,604,980 Ps 1,747,805 Ps 794,789 (Ps 164,283) Ps 1,041,068 Ps 164,283 Ps 10,188,642
Depreciation and
amortization................. 1,964 11,400 57,948 313,627 384,939
Operating income (loss)...... 876,011 1,006,412 18,202 (215,666) (793,577) 215,666 1,107,048
Total assets................. 2,254,576 1,462,948 1,116,679 1,584,937 4,649,809 11,068,949
As of and for the year ended
December 31, 1999
Revenues from external
customers.................... Ps 7,630,756 Ps 1,926,143 Ps 786,821 (Ps 29,831) Ps 1,123,464 Ps 29,831 Ps 11,467,184
Depreciation and a
mortization.................. 33,080 15,297 75,223 359,557 483,157
Operating income (loss)...... 989,067 1,079,389 (24,473) (21,552) (849,684) 81,213 1,253,960
Total assets................. 2,285,801 1,384,240 970,359 632,940 6,544,259 11,817,599
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 concerning
which separate financial information is regularly evaluated by the Company's
management in deciding how to allocate resources. 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 and 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.
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 Company's investment in CASA stated
by the equity method net of the corresponding goodwill amortization.
The Company's other operating segment includes a chain of clothing
stores (Hecali and The One) that offer a broad range of basic and sports apparel
and sport shoes for men, ladies and children; 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 15 - SUBSEQUENT EVENT:
a. Revised statement D-4 "Accounting Treatment of Income Tax and Employees'
Profit Sharing" is effective for fiscal years beginning January 1, 2000. This
statement significantly changes the accounting treatment of income tax,
eliminating the previous approach, known as the partial scope liability method,
and replacing it with the full-scope method of assets and liabilities. Under
this method, deferred taxes are initially recognized, for all the differences
between the book and tax values of the assets and liabilities and for tax loss
carryforwards and asset tax carryforwards that have a high probability of
realization.
In accordance with the statement, the accrued effects as of January 1, 2000 will
be recorded directly to stockholders' equity. The company estimates that said
accrued effect will require the recognition of a net asset for deferred tax of
approximately Ps265 million and a net credit to stockholders' equity for the
same amount. The deferred income tax generated as from January 1, 2000 will be
recorded as part of the net income (loss) of each year.
b. On March 22, 2000, Grupo Elektra completed a private placement offering of
US$275 million in Senior Notes due 2008, resulting in net proceeds of
US$268.1 million. A portion of the proceeds was used to prepay the US$120
million outstanding balance on the syndicated US$150 million guaranteed
revolving credit facility and to purchase securities of US$110.9 million.
The securities were placed into trust and will be used to pay the scheduled
interest and principal at maturity on the US$100 million 12.75% Senior Notes
due 2001. The Indenture governing the US$275 million in Senior Notes due
2008 imposes significant operating and financial restrictions on the
Company. Such restrictions affect, and in many respects limit or prohibit,
among other things, the Company's ability to pay dividends, incur
indebtedness, create liens, enter into transactions with affiliates and
consummate certain asset sales. The notes are guaranteed by all of the
Company's subsidiaries.
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 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,
-----------------------
1997 1998 1999
---- ---- ----
Net income related to majority stockholders under
Mexican GAAP Ps 858,285 Ps 234,476 Ps 780,027
Deferred income tax effects (206,007) (30,159) (89,768)
Deferred employees' profit sharing 840 629 665
Amortization of goodwill relating to other subsidiaries
acquisitions 21,762 14,970 21,615
Amortization of goodwill relating to CASA acquisition 51,383 51,383 51,383
Difference in equity in earnings of CASA (124,320) (77,836) 68,291
Capitalized exchange losses and interest expense 3,622 3,622 3,622
Stock options granted to employees (297,495) 100,584 (74,076)
Reversal of depreciation of property, plant and equipment
acquired in the GSyR acquisition 39,398
Additional amortization of negative goodwill from the
GSyR acquisition 103,720
Net gain on derivative and hedging transactions 128,344
Effect on minority stockholders of U.S. GAAP adjustments 4,899 (2,703) (644)
----------- ---------- -------------
Net income under U.S. GAAP Ps 312,969 Ps 294,966 Ps 1,032,577
=========== ========== =============
Basic and diluted earnings per share (in pesos) Ps 0.09 Ps 0.08 Ps 0.30
=========== ========== =============
Basic weighted average number of common shares
outstanding (in millions) 3,553.6 3,574.8 3,440.5
============= =========== =============
b. Reconciliation of consolidated stockholders' equity:
December 31,
------------
1998 1999
---- ----
Majority stockholders' equity under Mexican GAAP Ps 4,102,573 Ps 4,503,242
Deferred income tax effects (983,986) 523,397
Negative goodwill resulting from the recognition of
deferred tax benefits acquired from GSyR (1,597,151)
Deferred employees' profit sharing 2,815 3,480
Participation in net equity of CASA (313,747) (206,570)
Goodwill relating to CASA acquisition (893,127) (841,744)
Goodwill relating to other subsidiaries acquisitions (248,717) (227,102)
Capitalized exchange losses and interest expense (21,588) (17,966)
Deferred income (1,319,820) (1,146,980)
Net gain on derivative and hedging transactions 77,200
Amortization of additional negative goodwill from
the GSyR acquisition 103,720
Reversal of depreciation of property, plant and equipment
acquired in the GSyR acquisition 39,398
Effect on minority stockholders of U.S. GAAP
adjustments 20,320 19,676
------------- --------------
Stockholders' equity under U.S. GAAP Ps 344,723 Ps 1,232,600
============= ==============
An analysis of the changes in consolidated stockholders' equity under U.S. GAAP
is shown below:
1997 1998 1999
---- ---- ----
Balance at beginning of year Ps 871,808 Ps 1,061,789 Ps 344,723
Net income 312,969 294,966 1,032,577
Loss from holding nonmonetary assets (333,002) (726,483) (229,028)
Repurchase and sale of Grupo Elektra shares (28,036) (71,616) 135,750
Payment of dividends (163,492) (125,361) (124,003)
Exercise of stock options 104,047 5,448 10,167
Stock options granted to employees 297,495 (100,584) 74,076
Effect of translation of foreign subsidiaries 6,564 (11,662)
-------------- -------------- ---------------
Balance at end of year Ps 1,061,789 Ps 344,723 Ps 1,232,600
============== ============== ===============
c. Significant differences between U.S. GAAP and Mexican GAAP:
i. Acquisition of subsidiaries and affiliates:
1. CASA
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.
The reconciliations of net income and stockholders' equity also include
adjustments in order to reconcile the equity in the income of CASA under
Mexican GAAP to US GAAP. The principal reconciling items between the
equity in the income of CASA under Mexican GAAP and US GAAP are: (i) the
deferred tax effects, (2) the compensation cost from stock options, and
(3) the effect of fifth amendment to statement "B-10".
Also in the Mexican GAAP financial statements the equity in the income
(loss) of CASA is presented net of the related goodwill amortization.
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.
3. Acquisition of GSyR
On April 8, 1999, the Company acquired 94.3% of the capital stock of GSyR
and replaced the syndicate of banks as creditor on GSyR's bank loans for
an aggregate payment of US$77.7 million (approximately Ps850 million) plus
transaction costs of Ps78 million. For U.S. GAAP purposes, the Company
recorded the transaction using the purchase method of accounting.
The total purchase cost of Ps928 million was initially allocated to the
assets acquired (including tax loss carryforwards of Ps3,654,930 and
recoverable asset tax of Ps317,925) and liabilities assumed based on their
estimated fair values at the acquisition date and to the recognition of
the acquired deferred tax assets that became realizable as a result of the
acquisition and planned reorganization of the Company. The initial
purchase price allocation resulted in the generation of negative goodwill,
a portion of which was allocated to reduce the noncurrent assets (other
than the deferred tax assets and the assets sold to Liverpool and other
third parties) to zero. The assets sold to Liverpool and other third
parties were recorded at their sale price. The remaining excess negative
goodwill will be amortized over five years. The final purchase price
allocation at the acquisition date is as follows:
Purchase price Ps 927,770
===========
Allocated to:
Current assets 594,027
Property, furniture and equipment 169,726
Deferred tax assets 1,597,151
Negative goodwill (848,748)
-----------
Total assets 1,512,156
Liabilities (584,386)
-----------
Net assets acquired Ps 927,770
===========
The reconciliation to U.S. GAAP net income and stockholders' equity as of
and for the year ended December 31, 1999 include: 1) a net adjustment to
reflect the differences in basis between Mexican and U.S. GAAP; 2) an
adjustment to the negative goodwill amortization as a result of the basis
difference; and 3) an adjustment to reverse the depreciation expense
recorded on the property, plant and equipment that were allocated a
reduced or zero value.
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 3k., 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 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 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.
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,
-----------------------
1997 1998 1999
---- ---- ----
Current Ps 111,639 Ps 114,540 Ps 96,583
Deferred 206,007 30,159 89,768
Asset tax 8,879 2,815
---------- ----------
Ps 326,525 Ps 147,514 Ps 186,351
========== ========== ==========
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,
-----------------------
1997 1998 1999
---- ---- ----
Statutory income tax rate 34% 34% 35%
Effects of inflation 10% (10%) (9%)
Asset tax 2% 1%
Non deductible expenses 6% 5% (5%)
Other 3% (9%) (6%)
------ ----- ------
Effective income tax rate 55% 21% 15%
====== ===== ======
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 below:
December 31,
------------
1998 1999
---- ----
Deferred income tax liabilities:
Inventories Ps 841,453 Ps 848,668
Property, machinery and equipment 243,366 6,547
Other 101,855 114,375
----------- ----------
1,186,674 969,590
----------- ----------
Deferred income tax assets:
Allowance for doubtful accounts 32,380 29,465
Operating loss carryforwards 119,426 1,098,848
Asset tax carryforwards 40,974 352,470
Other 9,908 12,204
------------ -----------
202,688 1,492,987
------------ -----------
Net deferred income tax liabilities
(assets) Ps 983,986 (Ps 523,397)
=========== ============
Deferred employees' profit sharing:
Property, machinery and equipment Ps 15 Ps 7
Other (2,830) (3,487)
------------ -----------
Net deferred employees' profit sharing
assets (Ps 2,815) (Ps 3,480)
============= ============
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, 1997, 1998 and 1999
the amount of installment sales mark-up earned for U.S. GAAP purposes was
Ps1,586,472, Ps1,985,274, and Ps2,063,750, 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 other financing
expense. For the years ended December 31, 1997, 1998, and 1999 the loss on
monetary position from accounts receivable was Ps341,235, Ps326,523, and
Ps244,081, 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,
-----------------------
1997 1998 1999
---- ---- ----
Consumer credit income:
Mark-up from installment sales Ps 1,586,472 Ps 1,985,274 Ps 2,063,750
Finance charges 249,599 237,451 324,476
---------------- --------------- ---------------
1,836,071 2,222,725 2,388,226
---------------- --------------- ---------------
Consumer credit expenses:
Interest 279,487 256,640 273,062
Payroll 177,106 222,562 262,494
Provision for doubtful accounts 329,765 430,744 424,193
Other credit and collection
expenses 101,440 83,246 131,747
---------------- --------------- ---------------
Total operating expenses 887,798 993,192 1,091,496
---------------- --------------- ---------------
Earnings from consumer credit
operations Ps 948,273 Ps 1,229,533 Ps 1,296,730
================ =============== ===============
vi. Deferred income
As described in Note 2f., the Company received US$142 million in 1996
relating to the Company's revised contractual agreements with Western
Union, which was 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.
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, 1998 and 1999
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, 1998 and
1999 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
Extinguishment of Liabilities". Consequently, under U.S. GAAP the Company
reestablished on its balance sheets as of December 31, 1997, 1998 and
1999, receivables of Ps1,087,232, Ps1,460,399 and Ps1,840,917,
respectively, which include Ps102,289, Ps379,290 and Ps684,297,
respectively, that correspond to the guarantee on the securitized
receivables.
The Company also recorded as of December 31, 1997, 1998 and 1999
liabilities of Ps984,944, Ps1,081,109 and Ps1,156,620, 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, 1997, 1998 and 1999 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 6,466
Exchange losses 40,882
------------
47,348
Amount capitalizable under U.S. GAAP (11,127)
------------
Difference Ps 36,221
============
The depreciation of this item amounted to Ps3,622 in each of the years ended
December 31, 1997, 1998 and 1999.
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 for the years ended December 31, 1997, 1998, and 1999 was Ps297,495,
(Ps100,584), and Ps74,076, respectively.
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, 1997, 1998 and 1999 would have been Ps349,305, Ps26,675, and
Ps16,430 respectively, and the net income per share would have been
reduced or increased to the proforma amounts as follows:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Net income as reported Ps 312,969 Ps 294,966 Ps 1,032,577
============= ============ ===============
Net income proforma Ps 261,159 Ps 167,707 Ps 1,090,223
============= ============ ===============
Basic and diluted
earnings per share
as reported Ps 0.09 Ps 0.08Ps 0.30
============= ============ ===============
Basic and diluted
earningsper share
proforma Ps 0.07 Ps 0.05Ps 0.32
============= ============ ===============
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 1999
---- ---- ----
Expected volatility 0.533 0.7706 0.5137
Risk-free interest rate 18.00% 29.99% 18.67%
Expected life of options in years 1.15 1.00 1.00
Expected dividend yield 15% 15% 15%
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 847 stores in Mexico and 99
Elektra stores in several Latin American countries at December 31, 1999.
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 5% of these products. Three of the Company's suppliers
together accounted for more than 45% of its aggregate purchases of
merchandise in the year ended December 31, 1999.
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 judgment
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.
The carrying value of loans to related parties at December 31, 1998 and
1999 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, 1998 and 1999 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 are as follows:
December 31,
-------------
1998 1999
---- ----
Carrying value US$ 100,000,000 US$ 100,000,000
Fair value US$ 92,650,000 US$ 107,000,000
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.
The estimated fair value of forward exchange contracts to purchase US$45
million at a cost of Ps485.9 million, was determined using the current
exchange rate as of December 31, 1999 of Ps9.48 and totaled Ps59.3
million. The contracts mature in June 2000 and in December 2000.
In addition, Grupo Elektra provided a third party with an option to enter
into a forward exchange contract. If exercised, Grupo Elektra would be
obligated to purchase US$30 million at a cost of Ps321.0 million in
December 2000. The option expires in June 2000. The estimated fair value
of this contract was determined using the current exchange rate as of
December 31, 1999 of Ps9.48 and totaled Ps36.6 million.
As of December 31, 1999, Grupo Elektra had entered into two equity swap
agreements. Set forth below is the fair value of the Company's equity swap
portfolio at December 31, 1999:
Initial Notional
Underlying shares price Amount Fair value
----------------- ----- ------ ----------
6,822,660Elektra CPOs US$0.68 US$4.6 million US$ 2.1 million
32,587,000Elektra CPOs Ps 6.43 Ps. 209.5 million Ps. 94.8 million
xii. Comprehensive income
Effective January 1, 1998, the Company adopted for U.S. GAAP purposes
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. Derivative financial instruments
Forward foreign currency exchange contracts and option
As mentioned in Note 3p., under Mexican GAAP, the Company has recorded in
earnings the gains and losses on forward foreign currency exchange
contracts resulting from the differences between the forward peso rates
and the peso spot rate as of December 31, 1999.
The Company also granted to a third party the option to enter into a
forward foreign currency contract at pre-established exchange rates. No
amounts have been recorded in the financial statements for this option.
Under U.S. GAAP, the differences between the forward peso rates and the
spot rates on the dates the forward foreign currency exchange contracts
were entered into (premium or discount) are amortized to earnings over the
contract term. In addition, gains and losses are recognized in earnings
for the gain or loss resulting from the differences between the forward
peso rates and the peso spot rate as of December 31, 1999. This difference
did not result in a material reconciling item as of December 31, 1999.
Also, under U.S. GAAP the Company recognized a liability and a loss of
Ps36,600 for the difference between the option contract forward rate and
spot rate on December 31, 1999.
Instruments indexed to the Company's stock
As mentioned in Note 12, under Mexican GAAP gains or losses on these types
of contracts are recognized in the financial statements when realized. Any
resulting gain or loss is recorded in stockholders' equity.
Under U.S. GAAP, contracts that are indexed to a Company's stock that
require settlement in cash are reflected in earnings. An asset or
liability with a corresponding gain or loss would be recorded for the
difference between the market price of Grupo Elektra stock and the
contract price (as defined) as of December 31, 1999. The Company recorded
receivables and gains of Ps113,800 on these contracts. In addition, for
U.S. GAAP purposes, the payment received in partial settlement of one of
the contracts of Ps51,144 was recorded in earnings.
New pronouncements
In February 2000, the MIPA issued statement C-2 "Financial Instruments",
which is effective for fiscal years beginning January 1, 2001. The
accounting and disclosure for financial instruments under this statement
is essentially similar to U.S. GAAP.
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") establishes a
new model for the accounting of derivatives and hedging activities and
supercedes and amends a number of existing standards. Upon SFAS 133's
initial application, all derivatives are required to be recognized in the
statement of financial position as either assets or liabilities and
measured at fair value. In addition, all hedging relationships must be
designated, reassessed and documented pursuant to the provisions of SFAS
133. Financial Accounting Standard No. 137 "Deferral of the Effective Date
of SFAS No. 133" defers the effective date of SFAS 133, to fiscal years
beginning after June 15, 2000. Management has not assessed the impact of
this new standard on the operations of the Company.
xiv. Recently issued accounting standards
Beginning January 1, 1999 the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities". 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 adoption of this SOP has not had a material
impact on the Company's consolidated financial position or results of
operations.
xv. 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,
------------
1998 1999
---- ----
Cash and cash equivalents Ps 1,345,317 Ps 793,202
Accounts receivable due from
customers - Net 2,854,087 3,522,537
Related parties 230,226 202,741
Inventories 2,404,151 2,424,766
Other current assets 398,738 337,786
------------- --------------
Total current assets 7,232,519 7,281,032
Property, machinery and equipment - Net 2,387,327 2,589,022
Deferred income tax 1,431,171
Other assets 713,677 687,370
Investment in CASA 337,037 373,611
Negative goodwill (721,436)
------------- --------------
Total assets Ps 10,670,560 Ps 11,640,770
============= ==============
Short-term debt Ps 1,731,887 Ps 2,252,979
Deferred income - Current portion 188,546 159,428
Suppliers 1,954,187 2,235,310
Deferred income tax 785,174 907,774
Other current liabilities 611,235 807,497
------------- --------------
Total current liabilities 5,271,029 6,362,988
Long-term debt 3,516,283 2,494,848
Other long-term liabilities 132,417 398,574
Deferred income tax 198,812
Deferred income 1,131,274 987,552
------------- --------------
Total liabilities 10,249,815 10,243,962
------------- --------------
Minority interest 76,022 164,208
------------- --------------
Majority stockholders 344,723 1,232,600
------------- --------------
Total liabilities and stockholders'
equity Ps 10,670,560 Ps 11,640,770
============= ==============
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Revenues:
Sales and money transfer services Ps 6,803,193 Ps 8,292,440 Ps 9,323,039
Interest earned from consumer credit
operations 1,836,071 2,222,725 2,388,226
-------------- -------------- -------------
8,639,264 10,515,165 11,711,265
-------------- -------------- -------------
Costs and expenses:
Cost of sales (4,684,034) (5,552,881) (6,229,856)
Selling, general and administrative (2,484,281) (2,918,141) (3,335,777)
Allowance for doubtful accounts (329,765) (430,744) (424,193)
Employees' statutory profit sharing (1,171) (2,296) 665
-------------- -------------- -------------
(7,499,251) (8,904,062) (9,989,161)
-------------- -------------- -------------
Operating income 1,140,013 1,611,103 1,722,104
Interest paid for consumer credit operations (279,487) (256,640) (273,062)
Other financing expense (280,758) (662,640) (246,075)
-------------- -------------- -------------
Income before taxes equity in earnings and
minority interest 579,768 691,823 1,202,967
Income and asset tax (326,525) (147,514) (186,351)
-------------- -------------- -------------
Income before equity in earnings and
minority interest 253,243 544,309 1,016,616
Equity in income (loss) of CASA 76,494 (242,119) 38,460
-------------- -------------- -------------
Income before minority interest 329,737 302,190 1,055,076
Minority interest (16,768) (7,224) (22,499)
-------------- -------------- -------------
Net income of majority stockholders 312,969 294,966 1,032,577
Effect of translation of foreign subsidiaries 6,564 (11,662)
Loss from holding non-monetary assets (235,342) (368,697) (138,895)
-------------- -------------- -------------
Comprehensive income (loss) Ps 77,627 (Ps 67,167) Ps 882,020
============== ============== =============
xvi. 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.
Presented below is statement of cash flows for the year ended December
31, 1997, prepared after considering the impact of U.S. GAAP adjustments.
The cash flow statement is net of certain non cash transactions but
includes the effects of inflation on cash flow and has been restated to
pesos of December 31, 1999, purchasing power:
Year ended December 31,
-----------------------
Cash flows from operating activities: 1997
- ------------------------------------ ----
Net income Ps 312,969
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 179,330
Allowance for doubtful accounts 329,765
Equity in income of affiliated company (76,494)
Accrual for seniority premiums 7,433
Monetary gain from financing activities (23,757)
Deferred income tax and employees' profit sharing 205,167
Stock options granted to employees 297,495
Deferred income from Western Union agreement (152,495)
Other (142,456)
Net changes in working capital (1,684,775)
------------
Net cash used in operating activities (747,818)
------------
Cash flows from investing activities:
Acquisition of property, furniture, equipment and
investment in stores (1,047,177)
------------
Cash flows from financing activities:
Proceeds from short-term and long-term debt 2,067,219
Proceeds from securitization of receivables - Net 984,944
Repayment of short-term debt (867,402)
Capitalized lease obligations (61,729)
Issuance of capital stock 104,047
Repurchase and sale of Grupo Elektra shares (28,036)
Payment of dividends (163,492)
------------
Net cash provided by financing activities 2,035,551
------------
Increase in cash and cash equivalents 240,556
Cash and cash equivalents at beginning of year 304,966
------------
Cash and cash equivalents at end of year Ps 545,522
============
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 539,106
============
Income tax Ps 121,893
============
Presented below are statements of cash flow for the years ended December
31, 1998 and 1999, prepared after considering the impact of U.S. GAAP
adjustments. The cash flow statements present nominal cash flow during the
periods, adjusted to pesos of December 31, 1999, purchasing power.
Year ended
December 31,
------------
1998 1999
---- ----
Cash flows from operating activities:
Net income Ps 294,966 Ps1,032,577
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 366,346 418,522
Amortization of negative goodwill (103,720)
Allowance for doubtful accounts 430,744 424,193
Equity in loss of affiliated company 242,119 (38,460)
Provision for repairs 10,732 26,118
Minority stockholders 7,224 22,499
Accrual for seniority premiums 5,880 6,559
Monetary gain from financing activities (144,814) (171,511)
Deferred income tax and employees' profit sharing 29,530 89,103
Compensation expense from stock options
granted to employees (100,584) 74,076
Recognition of deferred income from
Western Union agreement (158,378) (134,758)
Unrealized exchange loss (gain) - Net 241,725 (139,650)
Unrealized net gain on derivative
and hedging transactions (77,200)
Unaccrued income from extended warranties 102,243 232,222
Net changes in working capital (457,226) (1,186,609)
----------- -----------
Net cash provided by operating activities 870,507 473,961
----------- -----------
Cash flows from investing activities:
Acquisition of property, furniture, equipment
and investment in stores (629,347) (438,348)
Proceeds from disposal of assets 463,330
Investments in shares (167,491)
Acquisition of GSyR, net of cash acquired (883,164)
----------- -----------
Net cash used in investing activities (796,838) (858,182)
----------- -----------
Cash flows from financing activities:
Short-term and long-term loans received 2,289,311 4,790,334
Repayment of short-term and long-term debt (1,139,926) (4,779,960)
Proceeds from securitization of receivables - Net 1,081,109 194,094
Repayment of securitization receivables (984,944)
Issuance of capital stock 5,448 10,167
Repurchase and sale of Grupo Elektra shares (71,616) 135,750
Payment of dividends (125,361) (124,003)
Gain or derivative transactions 51,144
----------- -----------
Net cash provided by financing activities 1,054,021 277,526
----------- -----------
Effects of inflation and exchange rate changes on cash (327,895) (445,420)
----------- -----------
Increase (decrease) in cash and cash equivalents 799,795 (552,115)
Cash and cash equivalents at beginning of year 545,522 1,345,317
----------- -----------
Cash and cash equivalents at end of year Ps1,345,317 Ps 793,202
=========== ===========
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 611,462 Ps 539,106
=========== ===========
Income tax Ps 134,238 Ps 121,893
=========== ===========
Non cash transactions:
The Company recorded capital lease obligations of Ps2,192 during 1998,
related to the acquisition of property.
In the year ended December 31, 1999, the Company acquired 71% of the
capital stock of Cotsa through the capitalization of Ps324,946 in
receivables due the Company.
ELEKTRA COMERCIAL, S. A. DE C. V.
---------------------------------
(Subsidiary of Grupo Elektra, S. A. de C. V.)
(formerly Elektra, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
ELEKTRA COMERCIAL, S. A. DE C. V.
---------------------------------
(Subsidiary of Grupo Elektra, S. A. de C. V.)
(formerly Elektra, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
INDEX
Contents
Financial Statements Page
- -------------------- ----
Report of Independent Accountants.........................F - 47
Balance Sheets............................................F - 49
Statements of Income......................................F - 50
Statements of Changes in Stockholders' Equity.............F - 51
Statements of Changes in Financial Position...............F - 52
Notes to the Financial Statements.........................F - 53
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 25, 2000, except for paragraph b. of Note 10 for which the
date is March 22, 2000.
To the Stockholders of
Elektra Comercial, S. A. de C. V.
(formerly Elektra, S. A. de C. V.)
1. We have audited the balance sheets of Elektra Comercial, S. A. de C. V.,
formerly Elektra, S. A. de C. V. (the "Company") as of December 31, 1998
and 1999, 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, 1999, all expressed in constant pesos of
December 31, 1999 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. As mentioned in Note 1 to the financial statements, at the Extraordinary
Meeting held on December 8, 1999, the stockholders approved the merger of
Elektra Comercial, S. A. de C. V. and Elektra, S. A. de C. V. ("Elektra"),
both of which were subsidiaries of Grupo Elektra, S. A. de C. V., with
Elektra Comercial, S. A. de C. V. as the surviving entity for legal and tax
purposes. For accounting purposes, the merger has been accounted for as a
recapitalization of the Company.
3. In our opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of Elektra Comercial, S. A.
de C. V. at December 31, 1998 and 1999, and the results of its operations,
and the changes in stockholders' equity and in its financial position for
each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in Mexico.
4. Accounting principles generally accepted in Mexico vary in certain
significant respects from generally accepted accounting principles in the
United States of America. The application of generally accepted accounting
principles in the United States of America would have affected the
determination of net income for each of the three years in the period ended
December 31, 1999, and the determination of stockholders' equity as of
December 31, 1998 and 1999 to the extent summarized in Note 11 to the
financial statements.
PricewaterhouseCoopers
Javier Soni
ELEKTRA COMERCIAL, S. A. DE C. V.
---------------------------------
(formerly Elektra, S. A. de C. V.)
BALANCE SHEETS
(Note 1)
Thousands of Mexican pesos of
December 31, 1999 purchasing power
December 31,
------------
Assets: 1998 1999
- ------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents Ps 1,010,689 Ps 651,807
------------ ------------
Accounts receivable:
Customers, less allowance for doubtful accounts
of Ps9,748 in 1998, Ps13,018 in 1999 34,923 44,215
Related parties (Note 4) 2,656,543 3,941,713
Recoverable taxes 87,505 433
Other receivables 223,833 236,085
------------ ------------
3,002,804 4,222,446
Inventories (Note 5) 1,901,699 1,959,857
------------ ------------
Prepaid expenses 245,055 109,718
------------ ------------
Total current assets 6,160,247 6,943,828
RELATED PARTIES (Note 4) 777,722
INVESTMENT IN STORES, TRANSPORTATION
EQUIPMENT AND OTHER EQUIPMENT, less accumulated
depreciation of Ps232,825 in 1998, Ps302,829 in 1999 236,226 371,833
INVESTMENT IN SHARES 48,194 44,051
GOODWILL, less accumulated amortization of Ps1,825 in 1998,
Ps8,975 in 1999 144,219 137,071
OTHER ASSETS 26,727 22,501
------------ ------------
Ps 6,615,613 Ps 8,297,006
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Bank loans (Note 6) Ps 1,272,770 Ps 939,812
Suppliers 1,378,247 1,682,295
Related parties (Note 4) 1,178,609 1,377,398
Accounts payable and accrued expenses 197,869 377,777
------------ ------------
Total current liabilities 4,027,495 4,377,282
RELATED PARTIES (Note 4) 793,842 675,466
------------ ------------
4,821,337 5,052,748
STOCKHOLDERS' EQUITY (Notes 1 and 7):
Capital stock 87,014 187,229
Legal reserve 43,736
Paid-in capital 544,110 3,265,059
Retained earnings 2,706,553 2,487,166
Loss from holding nonmonetary assets (1,543,401) (2,738,932)
------------ ------------
1,794,276 3,244,258
CONTINGENCY (Note 9)
SUBSEQUENT EVENTS (Note 10)
Ps 6,615,613 Ps 8,297,006
The accompanying notes are an integral part of these financial statements.
ELEKTRA COMERCIAL, S. A. DE C. V.
---------------------------------
(formerly Elektra, S. A. de C. V.)
STATEMENTS OF INCOME
(Notes 1 and 4)
Thousands of Mexican pesos of
December 31, 1999 purchasing power
Year ended December 31,
-----------------------
Revenues: 1997 1998 1999
- -------- ---- ---- ----
Net sales Ps 6,092,474 Ps 6,219,366 Ps 6,951,826
Money transfer services 316,677 361,418 336,493
Services rendered to affiliated companies - Net 228,032 339,891 306,239
Other income - Net 198,718 3,464 26,989
------------ ------------ ------------
6,835,901 6,924,139 7,621,547
------------ ------------ ------------
Costs:
- -----
Cost of sales 4,448,203 4,523,211 4,951,026
Administrative and selling expenses 1,358,859 1,647,129 1,684,044
------------ ------------ ------------
5,807,062 6,170,340 6,635,070
------------ ------------ ------------
Operating income 1,028,839 753,799 986,477
------------ ------------ ------------
Comprehensive financing cost:
Interest income 172,438 235,174 388,245
Interest expense (639,243) (435,962) (434,689)
Foreign exchange (loss) gain - Net (60,188) (307,703) 52,505
(Loss) gain on net monetary position (85,861) 97,425 (17,196)
------------- ----------- -------------
(612,854) (411,066) (11,135)
------------ ------------ -------------
Income before taxes, equity in affiliated
company and extraordinary items 415,985 342,733 975,342
Asset tax and income tax (Note 8) 15,937 54,331 265,795
------------ ------------ ------------
Income before equity in affiliated company
and extraordinary items 400,048 288,402 709,547
Equity in income of affiliated company 12,094 3,986
------------ ------------ ------------
Income before extraordinary items 400,048 300,496 713,533
Benefit from realization of prior years'
tax loss carryforwards (Note 8) 6,271 234,794
------------ ------------ ------------
Net income Ps 400,048 Ps 306,767 Ps 948,327
============ ============ ============
The accompanying notes are an integral part of these financial statements.
ELEKTRA COMERCIAL, S. A. DE C. V.
---------------------------------
(formerly Elektra, S. A. de C. V.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Notes 1 and 7)
Thousands of Mexican pesos of December 31,
1999 purchasing power
Loss from
holding
Capital Legal Paid-in Retained nonmonetary
stock reserve capital earnings assets Total
----- ------- ------- -------- ------ -----
Balances at January 1, 1997 Ps 87,014 Ps 544,110 Ps2,109,920 (Ps1,044,156) Ps1,696,888
Payment of dividends (91,997) (91,997)
Net income 400,048 400,048
Loss from holding nonmonetary assets (209,365) (209,365)
--------- -------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 87,014 544,110 2,417,971 (1,253,521) 1,795,574
Payment of dividends (18,185) (18,185)
Net income 306,767 306,767
Loss from holding nonmonetary assets (289,880) (289,880)
--------- -------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 87,014 544,110 2,706,553 (1,543,401) 1,794,276
Initial capital contribution of Elektra
Comercial, S. A. de C. V. 100,215 43,736 2,720,949 (1,120,981) (981,853) 762,066
Payment of dividends (46,733) (46,733)
Net income 948,327 948,327
Loss from holding nonmonetary assets (213,678) (213,678)
--------- -------- ---------- ---------- ---------- ----------
Balances at December 31, 1999 Ps187,229 Ps43,736 Ps3,265,059 Ps2,487,166 (Ps2,738,932) Ps3,244,258
========= ======== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
ELEKTRA COMERCIAL, S. A. DE C. V.
---------------------------------
(formerly Elektra, S. A. de C. V.)
STATEMENTS OF CHANGES IN FINANCIAL POSITION
Thousands of Mexican pesos of
December 31, 1999 purchasing power
Year ended December 31,
-----------------------
Operations: 1997 1998 1999
- ---------- ---- ---- ----
Income before extraordinary items Ps 400,048 Ps 300,496 Ps 713,533
Charges (credits) to income not
affecting resources:
Depreciation and amortization 77,527 99,118 78,754
Allowance for doubtful accounts 9,033 2,022 4,467
Equity in income of affiliated company (12,094) (3,986)
Variation in inventories, accounts receivable
and payable, related parties and other assets (1,314,471) 1,208,754 (774,311)
------------ ------------ ------------
Resources (used in) provided by operations
before extraordinary items (827,863) 1,598,296 18,457
Benefit from realization of prior years' tax
loss carryforwards (Note 8) 6,271 234,794
------------ ------------ ------------
Resources (used in) provided by operations (827,863) 1,604,567 253,251
------------ ------------ ------------
Financing:
- ---------
Borrowings received from (repaid to) related parties 207,734 (175,706) (777,722)
Payment of dividends (91,997) (18,185) (46,733)
Bank loans received (paid) 1,014,655 (517,594) (332,973)
Initial capital contribution of Elektra Comercial,
S. A. de C. V. 762,066
------------ ------------ ------------
Resources provided by (used in) financing activities 1,130,392 (711,485) (395,362)
------------ ------------ ------------
Investment:
- ----------
Investment in shares (182,145)
Acquisition of equipment and investment
in stores - Net (81,064) (117,420) (216,771)
------------ ------------ ------------
Resources used in investment activities (81,064) (299,565) (216,771)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 221,465 593,517 (358,882)
Cash and cash equivalents at beginning of year 195,707 417,172 1,010,689
------------ ------------ ------------
Cash and cash equivalents at end of year Ps 417,172 Ps 1,010,689 Ps 651,807
============ ============ ============
The accompanying notes are an integral part of these financial statements.
ELEKTRA COMERCIAL, S. A. DE C. V.
---------------------------------
(formerly Elektra, S. A. de C. V.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(monetary figures expressed in thousands of Mexican pesos
of December 31, 1999 purchasing power, except foreign
currency figures and exchange rates)
NOTE 1 - DESCRIPTION OF BUSINESS, COMPANY MERGER AND BASIS OF PRESENTATION:
Elektra Comercial, S. A. de C. V. was incorporated on July 30, 1999, as a result
of the spin-off of the assets of Salinas y Rocha, S. A. de C. V. (SyR - related
party) into three subsidiaries. The initial capital of Elektra Comercial, S. A.
de C. V. amounted to Ps762,066 and was represented by a loan to a related party.
Additionally, Elektra Comercial, S. A. de C. V. received from SyR, tax loss
carryforwards and recoverable asset tax of Ps1,965,142 and Ps192,285,
respectively.
At the Extraordinary Meeting held on December 8, 1999, the stockholders approved
the merger of Elektra Comercial, S. A. de C. V. and Elektra, S. A. de C. V.
("Elektra") with Elektra Comercial, S. A. de C. V. as the surviving entity for
legal and tax purposes. Prior to the merger Elektra Comercial, S. A. de C. V.'s
operations were not material. For accounting purposes, the merger has been
accounted for as a recapitalization of Elektra, S. A. de C. V. The recapitalized
entity and its predecessor are referred to as the Company.
The Company is a 98% subsidiary of Grupo Elektra, S.A. de C.V. and its main
operations are the sale of consumer electronics, major appliances and household
furniture through the operation of 598 stores nationwide. Sales are made to an
affiliated company that resells the merchandise to the customers on the
installment plan. 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.
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 on the next page.
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 and the assets' restated value. Amortization of the
investment in stores is calculated by the straight-line method over periods
no longer than five years.
d. Investment in shares is accounted for 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. The 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, 1999, there were no temporary differences that require 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. (See Note 3).
h. Capital stock, legal reserve, paid-in capital and retained earnings
represent the amounts of these items expressed in pesos of purchasing power
as of December 31, 1999 and are determined by applying factors derived from
the NCPI to the historical amounts.
i. 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.
j. 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.
k. Revenue from product sales is recognized upon shipment to customers.
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.
m. Certain prior period amounts have been reclassified to conform with the
current year presentation.
NOTE 3 - FOREIGN CURRENCY POSITION:
- ----------------------------------
The Company had the following monetary assets and liabilities in thousands of US
dollars:
December 31,
------------
1998 1999
---- ----
Assets US$ 39,012 US$ 64,630
Liabilities (174,815) (194,455)
--------------- ---------------
Short net position (US$ 135,803) (US$ 129,825)
=============== ===============
At December 31, 1999, the exchange rate was Ps9.48 to the US dollar (Ps9.93 at
December 31, 1998). At February 25, 2000, date of issuance of the financial
statements, the exchange rate was P9.41 to the US dollar.
Below is a summary of the principal transactions denominated in foreign
currencies carried out by the Company:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Money transfer services US$ 26,965 US$ 27,260 US$ 26,725
Interest expense (3,190) (4,201) (2,745)
-------------- -------------- --------------
US$ 23,775 US$ 23,059 US$ 23,980
============== ============== ==============
NOTE 4 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
a. Current:
December 31,
------------
1998 1999
---- ----
Accounts receivable:
- -------------------
Grupo Elektra, S. A. de C. V. Ps 530,737 Ps 802,975
Inmuebles Ardoma, S. A. de C. V. 245,921 438,875
Mercadotecnia Tezontle, S. A. de C. V. 232,082 406,837
Direccion de Administracion Central, S. A. de C. V. 199,275 201,988
Grupo SyR, S. A. de C. V. (parent company) 836,786 1,377,817
Grupo Hecali, S. A. de C.V. 199,540 250,074
Other 412,202 463,147
-------------- ---------------
Ps 2,656,543 Ps 3,941,713
============== ==============
Accounts payable:
Elektrafin Comercial, S. A. de C. V. (formerly
Elektrafin, S. A. de C. V.) Ps 1,045,374 Ps 1,199,695
Other 133,235 177,703
-------------- --------------
Ps 1,178,609 Ps 1,377,398
============== ==============
b. Long-term receivables (payables)
with related parties:
Grupo SyR, S. A. de C. V. Ps 777,722
==============
Grupo Elektra, S. A. de C. V. (Ps 793,842) (Ps 675,466)
============== ==============
Long-term loan granted to Grupo SyR, S. A. de C. V. (GSyR)
As mentioned in Note 1, the initial capital of Elektra Comercial, S. A. de C. V.
amounted to Ps762,066 and was represented by a long-term loan extended to GSyR.
The loan is subject to a 9% interest rate and is repayable in ten years
beginning in 2001. Accrued and unpaid interest amounted to Ps15,656 at December
31, 1999.
Long-term loan received from Grupo Elektra, S. A. de C. V.
In 1996 the Company received a long-term loan of US$71 million from Grupo
Elektra, S. A. de C. V. (the "Grupo Elektra loan"), subject to interest at 13%
per annum and payable in May 2001.
Sales
Beginning in 1997, sales on the installment plan are made initially to
Elektrafin Comercial, S. A. de C. V. (formerly Elektrafin, S. A. de C. V.),
which subsequently resells the merchandise to the final customer. In 1997, 1998
and 1999 sales to Elektrafin amounted to Ps3,200,800, Ps3,318,940 and
Ps3,945,733, respectively.
Interest income
During the years ended December 31, 1997, 1998 and 1999 the Company recorded
interest income from short-term and long-term loans to Grupo Elektra, S. A. de
C. V. and other related parties of Ps208,668, Ps206,946 and Ps235,471,
respectively.
Administrative services
During the years ended December 31, 1997, 1998 and 1999 the Company rendered
administrative services to Elektrafin Comercial, S. A. de C. V. (formerly
Elektrafin, S. A. de C. V.) and to other related parties, of Ps839,186,
Ps878,450 and Ps773,964, respectively.
Interest expense
In 1996 and 1997, certain related parties extended short-term loans to the
Company, most of which were repaid during 1998. Interest expense incurred under
the Grupo Elektra loan and other arrangements amounted to Ps416,476, Ps172,561
and Ps169,827 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Purchases of merchandise
During the years ended December 31, 1997, 1998 and 1999 the Company purchased
imported merchandise from Importaciones Electronicas Ribesa, S. A. de C. V. for
Ps301,269, Ps341,801 and Ps224,084, respectively.
Rentals and other services
For the years ended December 31, 1997, 1998 and 1999 the Company paid to certain
related parties rentals and other services of Ps542,855, Ps538,559 and
Ps442,441, respectively.
Advertising expenses
In 1996, the Company and TV Azteca entered into a ten-year agreement pursuant to
which 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. For the years ended December 31, 1997, 1998 and 1999 the Company recorded
advertising expenses of Ps16,961, Ps24,435 and Ps48,167, respectively, under
this arrangement.
In December 1998 the Company and TV Azteca entered into a separate five-year
agreement (pursuant to which TV Azteca will air commercial spots for the Company
at commercial rates based on the gross rating points assigned during premium
airtime, i.e., from 7:00 p.m. to 12:00 a.m. Under the 1998 agreement, the
Company determines each year how much airtime to purchase from TV Azteca for
that particular year. There was no airtime purchased in 1998 under this
arrangement. In 1999, the Company purchased Ps40 million of airtime under the
1998 agreement.
Unefon Agreement
On October 15, 1999, the Company entered into a renewable ten-year agreement
with Unefon (the "Unefon Agreement"), under which Unefon will have ready access
to its target market through the Company's nationwide network of stores in
Mexico. Pursuant to the Unefon Agreement, the Company will market and distribute
Unefon's telephone services to the public on an exclusive basis, dedicate space
within its stores for customer services, administer all subscriber payment
transactions and serve as its collection agent. The Company will also allow
Unefon to install its base stations and certain other network equipment on the
premises of Elektra's stores.
As compensation for these services, the Company will receive 3% of Unefon's
gross annual revenues and 2% of total receipts paid by subscribers at Elektra's
stores. Unefon will also pay to the Company a subscriber acquisition fee of US$3
for every new subscriber, a subscriber investigation fee of US$3 for every
subscriber application and a fee of US$3 for each successful collection from
subscribers who have not renewed their service at the end of the relevant
prepaid period. The Company will also receive an annual fee of US$3,000 for each
store in which Unefon radio stations or other transmission equipment is located.
Unefon is entitled to defer payment of all amounts due under the Unefon
Agreement (except the US$3 per subscriber acquisition fee) during the initial
three years of operations to the end of the fifth year of operations and amounts
due in the fourth or fifth years of operations to the end of the sixth year of
operations, in each case, with interest charged on deferred amounts at a rate
equal to the average annual rate of Elektra's peso-denominated debt. Starting in
the sixth year of Unefon operations, these payments will come due on a current
basis.
At December 31, 1999, no balances or transactions are included in the
accompanying financial statements, since Unefon started operations on February
10, 2000.
NOTE 5 - INVENTORIES:
December 31,
------------
1998 1999
---- ----
Name brand merchandise Ps 1,633,518 Ps 1,783,488
Other merchandise 204,710 144,302
Merchandise in transit 64,053 32,585
--------------- ---------------
1,902,281 1,960,375
Less - Allowance for
obsolete inventories (582) (518)
--------------- ---------------
Ps 1,901,699 Ps 1,959,857
=============== ===============
NOTE 6 - SHORT-TERM BANK LOANS:
- ------------------------------
December 31,
------------
Interest
rate 1998 1999
---- ---- ----
Unsecured loans payable in:
Mexican pesos 21.1% to 39.7% Ps 923,088 Ps 700,358
US dollars 8.09% to 9.50% 349,682 239,454
------------- ------------
Ps 1,272,770 Ps 939,812
============= ============
NOTE 7 - STOCKHOLDERS' EQUITY:
- -----------------------------
The capital stock of Elektra as of December 31, 1998, amounted to Ps87,014 and
was represented by 17,972,326 common shares of one peso par value each.
The initial capital stock of Elektra Comercial, S. A. de C. V. amounted to
Ps100,215 (Ps72,000 nominal) and was represented by 1,000 Series "A" common
nominative shares without par value. As a result of the merger mentioned in Note
1, the stockholders approved a Ps87,014 (Ps17,973 nominal) increase in the
variable portion of the capital stock, through the issuance of 3,000 Series "B"
common nominative shares without par value, in exchange for the 17,972,326
common shares of Elektra.
As of December 31, 1999 the capital stock is represented by 4,000 common
nominative shares without par value, distributed as follows:
Amount
------
Fixed minimum capital stock, represented by 1,000
Series "A" shares Ps 72,000
Variable portion, represented by 3,000 Series "B" shares 17,973
------------
89,973
Restatement increase 97,256
------------
Capital stock expressed in Mexican pesos of December 31,
1999 purchasing power Ps 187,229
============
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 withholding 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.
NOTE 8 - INCOME TAX AND ASSET TAX:
In 1999 and 1998 the Company had taxable income of Ps748,989 and Ps155,231,
respectively, which were offset by tax loss carryforwards of Ps670,840 and
Ps17,917, respectively. The related tax benefits amounted to Ps234,794 in 1999
and Ps6,271 in 1998 and are presented in the statement of income as
extraordinary items.
In the year ended December 31, 1997, the Company had a tax loss of Ps20,040.
For the years ended December 31, 1997, 1998 and 1999, 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.
Effective January 1, 1999, the corporate income tax rate was increased from 34%
to 35%.
At December 31, 1999, and after the merger mentioned in Note 1, the Company had
tax loss carryforwards amounting to Ps1,294,302, expiring as shown below:
Year of
expiration Amount
---------- ------
2005 Ps 212,117
2006 694,543
2007 387,642
--------------
Ps 1,294,302
Tax loss carryforwards are restated by applying factors derived form the NCPI
until they are utilized.
At December 31, 1997, 1998 and 1999 the Company recorded asset tax of Ps15,937,
Ps22,710 and Ps3,649, respectively.
The Company has paid asset tax for which a refund can be requested, provided
income tax determined in any of the following ten years exceeds asset tax for
those years. At December 31, 1999, the Company had Ps196,454 of recoverable
asset tax expiring as shown on the following page.
Year of
expiration Amount
---------- ------
2004 Ps 54,796
2005 49,317
2006 33,344
2007 25,862
2008 22,711
2009 10,424
-------------
Ps 196,454
NOTE 9 - CONTINGENCY:
The Company is the guarantor of long-term publicly traded notes amounting to
US$100 million issued by Grupo Elektra, S. A. de C. V.
NOTE 10 - SUBSEQUENT EVENTS:
- ---------------------------
a. Revised Statement D-4 "Accounting Treatment of Income Tax and Employees'
Profit Sharing" is effective for fiscal years beginning January 1, 2000.
This statement significantly changes the accounting treatment of income tax,
eliminating the previous approach, known as the partial scope liability
method, and replacing it with the full-scope method of assets and
liabilities. Under this method, deferred taxes are initially recognized, for
all the differences between the book and tax values of the assets and
liabilities and for tax loss carryforwards and asset tax carryforwards that
have a high probability of realization.
In accordance with the statement, the accrued effects as of January 1, 2000
will be recorded directly to stockholders' equity. The Company has not yet
determined the impact of this new statement on the financial statements of
the Company. The deferred income tax generated as from January 1, 2000 will
be recorded as part of the net income (loss) of each year.
b. On March 22, 2000, Grupo Elektra, S. A. de C. V. completed a private
placement offering of US$275 million in 12% Senior Notes due 2008. The
Company is a guarantor of these notes.
NOTE 11 - 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 US 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
US GAAP do not include the reversal of such inflationary effects.
The principal differences between Mexican GAAP and US 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:
Year ended December 31,
-------------------------------
1997 1998 1999
---- ---- ----
Net income under Mexican GAAP Ps 400,048 Ps 306,767 Ps 948,327
Deferred income tax effects (197,433) 19,502 (270,396)
Monetary loss on receivables from related
parties (182,047) (147,168) (76,832)
Effect of sales mark-up on installment sales 1,921
-------------
Net income under US GAAP Ps 22,489* Ps 179,101 Ps 601,099
============= ============= ===============
b. Reconciliation of stockholders' equity:
December 31,
-------------------------
1998 1999
---- ----
Stockholders' equity under Mexican
GAAP Ps 1,794,276 Ps 3,244,258
Deferred income tax effects (663,456) (933,852)
Contribution of deferred tax assets 880,085
Reclassification of capital contribution
to deferred income (544,762) (544,762)
--------------- ---------------
Stockholders' equity under US GAAP Ps 586,058 Ps 2,645,729
=============== ===============
An analysis of the changes in stockholders' equity under US GAAP is as follows:
Year ended December 31,
--------------------------------------
1997 1998 1999
---- ---- ----
Balance at beginning of year Ps 664,680 Ps 567,854 Ps 586,058
Net income 22,489 179,101 601,099
Payment of dividends (91,997) (18,185) (46,733)
Loss from holding nonmonetary assets (27,318) (142,712) (136,846)
Initial capital contribution of Elektra
Comercial, S. A. de C. V. 1,642,151
------------- ------------ --------------
Balance at end of year Ps 567,854* Ps 586,058 Ps 2,645,729
============= ============ ==============
* Restated from prior years.
c. Restatement of prior year amounts:
During 1998 the Company determined that various differences occurred in the
determination of net income and stockholders' equity under US GAAP as of and for
the year ended December 31, 1997. These differences relate principally to the
recognition of deferred income, the recognition of cash advances to related
parties and the effect of sales mark-up on installment sales. The effect of
these differences on previously reported amounts is as shown on the next page.
Net income for the year Stockholders' equity
ended December 31, at December 31,
1997 1997
---- ----
As previously reported Ps 474,129 Ps 1,112,616
------------- ---------------
Effect of differences
relating to:
Reclassification of
capital contribution
to deferred income (544,762)
Monetary loss on receivables
from related parties (182,047)
Effect of sales mark-up on
installment sales - Net (269,593)
-------------
(451,640) (544,762)
------------- ---------------
As restated Ps 22,489 Ps 567,854
============= ===============
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.
d. Significant differences between US GAAP and Mexican GAAP:
i. Deferred income tax
As stated in Note 2f., 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.
US 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 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.
As mentioned in Note 1, the Company received tax loss carryforwards and
recoverable asset tax benefits of Ps1,965,142 and Ps192,285, respectively.
Through December 31, 1999, Mexican GAAP does not require the recording of
deferred income taxes for tax loss carryforwards and recoverable asset tax
before the benefits are utilized. Under US GAAP, the Company recognized as
an additional capital contribution the deferred tax effects of Ps880,085
since it is more likely than not that the tax benefits will be utilized.
The significant components of income tax expense under US GAAP are as
follows:
Year ended December 31,
--------------------------------------
1997 1998 1999
---- ---- ----
Current Ps 48,060 Ps 27,352
Deferred Ps 197,433 (19,502) 270,396
Asset tax 15,937 3,649
------------- ------------- -------------
Ps 213,370 Ps 28,558 Ps 301,397
============= ============= =============
The items shown in the following page 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,
-----------------------
1997 1998 1999
---- ---- ----
Statutory income tax rate 34% 34% 35%
Inflationary effects (6%) (15%) (3%)
Non deductible expenses 2% 1% 2%
Other (1%) (5%)
---- ----- --------
Effective income tax rate 29% 15% 34%
==== ===== =====
The tax effects of significant items comprising the Company's net deferred
tax assets and liabilities under US GAAP are shown below:
December 31,
------------
1998 1999
---- ----
Deferred income tax liabilities:
-------------------------------
Inventories Ps 646,578 Ps 685,950
Transportation and other equipment (47,633) (16,569)
Other 83,319 38,402
------------- -------------
682,264 707,783
------------- -------------
Deferred income tax assets:
--------------------------
Tax loss carryforwards 453,006
Allowance for doubtful accounts 3,315 4,556
Asset tax carryforwards 15,493 196,454
------------- -------------
18,808 654,016
------------- -------------
Net deferred income tax liabilities Ps 663,456 Ps 53,767
============= =============
ii. Deferred income
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 2% of
the 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 US 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, 1997, 1998 and 1999 of Ps182,047, Ps147,168, and
Ps76,832 respectively. The US GAAP reconciliations for 1997 have been
restated to reflect the above treatment (see Note 11c.).
iii. 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, 1998 and 1999 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.
Long-term loan from Grupo Elektra. The fair value of the loan from Grupo
Elektra, S. A. de C. V. cannot be determined, since there is no market for
this type of debt.
Long-term receivable from GSyR. The fair value of the loan made to GSyR
cannot be determined since there is no market for this type of receivable.
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 were available to the Company at December 31, 1998 and 1999 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.
iv. Concentration of credit risk
The Company is a retailer of consumer electronics, major appliances,
household furniture and other products with 598 Elektra stores in Mexico,
at December 31, 1999.
The Company currently has a network of approximately 170 suppliers for its
electronics, appliances and furniture products. Three of the Company's
suppliers together accounted for more than 45% of its aggregate purchases
of merchandise in the year ended December 31, 1999.
v. Revenue recognition
For Mexican GAAP purposes, the Company accounted for the installment sales
mark-up in 1997 as sales when the merchandise was delivered to the
customer. Under GAAP, the mark-up was deferred and amortized over the life
of the installment sales contract. The US GAAP reconciliations for 1997
have been restated to reflect the above treatment (see Note 11c.).
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
During June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Deferral of the Effective Date of SFAS No. 133", which defers the
effective date of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), to fiscal years beginning after June 15,
2000. SFAS 133 establishes a new model for the accounting for derivatives
and hedging activities and supercedes and amends a number of existing
standards. Upon SFAS 133's initial application, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS 133. The Company is not currently involved in derivative
or hedging activities. As a result, management does not believe that the
adoption of this statement will significantly impact the financial
statements of the Company.
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.
CONDENSED BALANCE SHEETS
At December 31,
---------------
1998 1999
---- ----
Cash and cash equivalents Ps 1,010,689 Ps 651,807
Accounts receivable from customers - Net 34,923 44,215
Inventories 1,901,699 1,959,857
Related parties 2,845,087 4,076,471
Other current assets 556,393 346,236
--------------- ---------------
Total current assets 6,348,791 7,078,586
Property, furniture, equipment and investment
in stores - Net 236,226 371,833
Related parties 855,459 1,498,423
Deferred income and asset tax 18,808 654,016
Other assets 219,140 203,623
--------------- ---------------
Ps 7,678,424 Ps 9,806,481
=============== ===============
Short-term debt Ps 1,272,770 Ps 939,812
Deferred income-current portion 188,544 134,758
Other current liabilities 1,576,116 2,060,072
Related parties 1,178,609 1,377,398
Deferred income tax 682,264 707,783
--------------- ---------------
Total current liabilities 4,898,303 5,219,823
--------------- ---------------
Long-term liabilities:
Related parties 793,842 675,466
Deferred income 1,400,221 1,265,463
--------------- ---------------
Total long-term liabilities 2,194,063 1,940,929
--------------- ---------------
Stockholders' equity 586,058 2,645,729
--------------- ---------------
Ps 7,678,424 Ps 9,806,481
=============== ===============
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Revenues:
- --------
Net sales Ps 5,971,837 Ps 6,219,366 Ps 6,951,826
Money transfer services 325,736 361,418 336,493
Services rendered to affiliated
companies - Net 228,032 339,891 306,239
Other income - Net 189,659 3,464 26,989
--------------- -------------- ---------------
6,715,264 6,924,139 7,621,547
--------------- -------------- ---------------
Costs:
- -----
Cost of sales (4,448,203) (4,523,211) (4,951,026)
Administrative and selling (1,358,859) (1,647,129) (1,684,044)
--------------- -------------- ---------------
(5,807,062) (6,170,340) (6,635,070)
--------------- -------------- ---------------
Operating income 908,202 753,799 986,477
Other financing expense (672,343) (558,234) (87,967)
--------------- -------------- ---------------
Pretax income 235,859 195,565 898,510
Income and asset tax (213,370) (28,558) (301,397)
Earnings of equity investment 12,094 3,986
--------------- -------------- ---------------
Net income 22,489 * 179,101 601,099
Loss from holding nonmonetary assets (27,318) (142,712) (136,846)
--------------- -------------- ---------------
Comprehensive (loss) income (Ps 4,829) Ps 36,389 Ps 464,253
=============== ============== ===============
*Restated from prior years.
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 on the following page is the statement of cash flow for the year ended
December 31, 1997 prepared after considering the impact of US GAAP adjustments.
The cash flow statement is net of certain non cash transactions but includes the
effects of inflation on cash flow and has been restated to pesos of December 31,
1999 purchasing power.
Year ended
December 31,
------------
1997
Cash flow from operating activities:
Net income Ps 22,489
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 77,527
Monetary loss 267,908
Deferred income tax 197,433
Deferred income (152,493)
Allowance for doubtful accounts 9,033
Net changes in working capital (1,402,253)
----------------
Net cash used in operating activities (980,356)
----------------
Cash flow from investing activities:
Acquisition of equipment and investment in
stores - Net (81,063)
Borrowings repaid by related parties 152,492
----------------
Net cash provided by investing activities: 71,429
----------------
Cash flows from financing activities:
Borrowings from related parties 207,734
Short-term loans received 1,014,655
Payments of dividends (91,997)
----------------
Net cash provided by financing activities 1,130,392
----------------
Increase in cash and cash equivalents 221,465
Cash and cash equivalents at beginning of year 195,707
----------------
Cash and cash equivalents at end of year Ps 417,172
================
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 191,656
================
Income tax Ps 22,556
================
Presented on the following page are statements of cash flow for the years ended
December 31, 1998 and 1999, prepared after considering the impact of US GAAP
adjustments. The cash flow statements present nominal cash flows during the
periods, adjusted to pesos of December 31, 1999 purchasing power.
Year ended December 31,
-----------------------
1998 1999
---- ----
Cash flow from operating activities:
Net income Ps 179,101 Ps 601,099
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 99,118 78,754
Monetary loss 49,743 94,028
Deferred income tax (19,502) 270,396
Amortization of deferred income (189,317) (188,544)
Allowance for doubtful accounts 2,022 4,467
Equity in income of subsidiary (12,094) (3,986)
Net changes in working capital 1,309,256 (969,582)
--------------- --------------
Net cash provided by (used in) operating activities 1,418,327 (113,368)
--------------- --------------
Cash flow from investing activities:
Acquisition of transportation equipment and
investment in stores - Net (123,699) (260,171)
Borrowings repaid by related parties 189,317
Investment in affiliate (182,145)
---------------
Net cash used in investing activities (116,527) (260,171)
--------------- --------------
Cash flows from financing activities:
Borrowings repaid to related parties (175,706) (35,159)
Short-term loans repaid (236,685) (217,173)
Payment of dividends (18,185) (46,733)
--------------- --------------
Net cash used in financing activities (430,576) (299,065)
--------------- --------------
Effects of inflation and exchange rate changes on cash (277,707) 313,722
--------------- --------------
Increase (decrease) in cash and cash equivalents 593,517 (358,882)
Cash and cash equivalents at beginning of year 417,172 1,010,689
--------------- --------------
Cash and cash equivalents at end of year Ps 1,010,689 Ps 651,807
=============== ==============
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 218,648 Ps 404,524
=============== ==============
Income tax Ps 56,659 Ps 28,387
=============== ==============
Non cash transaction:
In the year ended December 31, 1999 the capital contribution of Elektra
Comercial, S. A. de C. V. was represented by a loan to a related party of
Ps762,066 and deferred tax benefits of Ps880,085.
ELEKTRAFIN COMERCIAL, S. A. DE C. V.
------------------------------------
(Subsidiary of Grupo Elektra, S. A. de C. V.)
(formerly Elektrafin, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
ELEKTRAFIN COMERCIAL, S. A. DE C. V.
------------------------------------
(Subsidiary of Grupo Elektra, S. A. de C. V.)
(formerly Elektrafin, S. A. de C. V.)
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
INDEX
-----
Contents
Financial Statements Page
- -------------------- ----
Report of Independent Accountants..................F-75
Balance Sheets.....................................F-77
Statements of Income...............................F-78
Statements of Changes in Stockholders' Equity......F-79
Statements of Changes in Financial Position........F-80
Notes to the Financial Statements..................F-81
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 25, 2000, except for paragraph b. of Note 9 for which the
date is March 22, 2000.
To the Stockholders of
Elektrafin Comercial, S. A. de C. V.
(formerly Elektrafin, S. A. de C. V.)
1. We have audited the balance sheets of Elektrafin Comercial, S. A. de C. V.,
formerly Elektrafin, S. A. de C. V. (the "Company") as of December 31, 1998
and 1999, 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, 1999, all expressed in constant pesos of
December 31, 1999 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 December 8, 1999, the stockholders approved the merger of
Elektrafin Comercial, S. A. de C. V. and Elektrafin, S. A. de C. V.
("Elektrafin"), both of which were subsidiaries of Grupo Elektra, S. A. de
C. V., with Elektrafin Comercial, S. A. de C. V. as the surviving entity
for legal and tax purposes. For accounting purposes, the merger has been
accounted for as a recapitalization of the Company.
3. In our opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of Elektrafin Comercial, S.
A. de C. V. at December 31, 1998 and 1999, and the results of its
operations, and the changes in stockholders' equity and in its financial
position for each of the three years in the period ended December 31, 1999,
in conformity with accounting principles generally accepted in Mexico.
4. Accounting principles generally accepted in Mexico vary in certain
significant respects from generally accepted accounting principles in the
United States of America. The application of generally accepted accounting
principles in the United States of America would have affected the
determination of net loss, for each of the three years in the period ended
December 31, 1999 and the determination of stockholders' equity as of
December 31, 1998 and 1999, to the extent summarized in Note 10 to the
financial statements.
PricewaterhouseCoopers
Javier Soni
ELEKTRAFIN COMERCIAL, S. A. DE C. V.
------------------------------------
(formerly Elektrafin, S. A. de C. V.)
BALANCE SHEETS
(Note 1)
Thousands of Mexican pesos of
December 31, 1999 purchasing power
December 31,
------------
Assets 1998 1999
- ------ ---- ----
CURRENT ASSETS:
Cash Ps 1,943 Ps 3,387
------------- -------------
Accounts receivable:
Customers - Net (Note 4) 1,070,437 1,198,161
Related parties (Note 5) 1,108,625 1,297,307
Other 17,381 1,295
------------- -------------
2,196,443 2,496,763
------------- -------------
Deposits on securitized
receivables (Note 4) 379,291 684,297
------------- -------------
Total current assets 2,577,677 3,184,447
RELATED PARTIES (Note 5) 188,566
INVESTMENTS IN JOINT VENTURES 234,770
OTHER ASSETS 28,265 23,084
------------- -------------
Ps 2,840,712 Ps 3,396,097
============= =============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Income tax and asset tax payable Ps 78,659 Ps 124,662
Other accounts payable and accrued expenses 185,630 136,674
Related parties (Note 5) 955,002 1,321,212
------------- -------------
Total current liabilities 1,219,291 1,582,548
------------- -------------
RELATED PARTIES (Note 5) 289,988 246,740
------------- -------------
Total liabilities 1,509,279 1,829,288
------------- -------------
STOCKHOLDERS' EQUITY (Notes 1 and 6):
Capital stock 158,886 193,209
Paid-in capital 1,305,975 2,072,732
Legal reserve 15,187
Deficit (128,256) (370,730)
Loss from holding nonmonetary assets (5,172) (343,589)
-------------- -------------
1,331,433 1,566,809
CONTINGENCY (Note 8)
SUBSEQUENT EVENTS (Note 9)
Ps 2,840,712 Ps 3,396,097
============= =============
The accompanying notes are an integral part of these financial statements.
ELEKTRAFIN COMERCIAL, S. A. DE C. V.
------------------------------------
(formerly Elektrafin, S. A. de C. V.)
STATEMENTS OF INCOME
(Notes 1 and 5)
Thousands of Mexican pesos of
December 31, 1999 purchasing power
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Net sales Ps 3,354,530 Ps 4,097,626 Ps 4,154,780
Cost of sales 3,233,869 3,857,976 4,075,207
------------ ------------ -------------
120,661 239,650 79,573
------------ ------------ -------------
Operating expenses and other:
Administrative services and other 981,125 1,274,699 1,034,717
Administrative expenses 184,355 259,773 281,130
Allowance for doubtful accounts 320,365 371,106 359,197
Other expenses (income) - Net 18,796 (7,543) (46,012)
------------ ------------- -------------
1,504,641 1,898,035 1,629,032
------------ ------------ -------------
Operating loss (1,383,980) (1,658,385) (1,549,459)
------------ ------------ -------------
Comprehensive financing income:
Interest income - Net 1,384,871 1,728,686 1,701,904
Foreign exchange (loss) gain - Net (6,521) (28,044) 15,835
Loss on monetary position (240,158) (242,958) (158,623)
------------- ------------ -------------
1,138,192 1,457,684 1,559,116
------------ ------------ -------------
(Loss) income before income tax and extraordinary item (245,788) (200,701) 9,657
Income tax (Note 7) (24,685) (57,009) (34,590)
Asset tax (Note 7) (2,411)
------------- ------------- -------------
Loss before extraordinary item (270,473) (257,710) (27,344)
Extraordinary item - Benefit from realization of prior
years' tax loss carryforwards (Note 7) 57,009 5,838
------------ ------------ -------------
Net loss (Ps 270,473) (Ps 200,701) (Ps 21,506)
============= ============ =============
The accompanying notes are an integral part of these financial statements.
ELEKTRAFIN COMERCIAL, S. A. DE C. V.
------------------------------------
(formerly Elektrafin, S. A. de C. V.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Notes 1 and 6)
Thousands of Mexican pesos of December 31,
1999 purchasing power
Loss
from holding
Capital Paid-in Legal nonmonetary
stock capital reserve Deficit assets Total
----- ------- ------- ------- ------ -----
Balances at January 1, 1997 Ps158,886 Ps1,305,975 Ps377,852 (Ps 2,823) Ps1,839,890
Payment of dividends (24,818) (24,818)
Net loss (270,473) (270,473)
Loss from holding nonmonetary
assets (102) (102)
--------- ----------- --------- --------- --------- -----------
Balances at December 31, 1997 158,886 1,305,975 82,561 (2,925) 1,544,497
Payment of dividends (10,116) (10,116)
Net loss (200,701) (200,701)
Loss from holding nonmonetary
assets (2,247) (2,247)
--------- ----------- --------- --------- --------- -----------
Balances at December 31, 1998 158,886 1,305,975 (128,256) (5,172) 1,331,433
Application of the paid-in capital
to retained earnings (178,043) 178,043
Payment of dividends (6,254) (6,254)
Initial capital contribution of
Elektrafin Comercial, S. A.
de C. V. 34,323 944,800 Ps 15,187 (392,757) (341,089) 260,464
Net loss (21,506) (21,506)
Loss from holding nonmonetary
assets 2,672 2,672
--------- ----------- -------- --------- --------- -----------
Balances at December 31, 1999 Ps193,209 Ps2,072,732 Ps15,187 (Ps370,730) (Ps343,589) Ps1,566,809
========= =========== ======== ========= ========= ===========
The accompanying notes are an integral part of these financial statements.
ELEKTRAFIN COMERCIAL, S. A. DE C. V.
------------------------------------
(formerly Elektrafin, S. A. de C. V.)
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Note 1)
Thousands of Mexican pesos of
December 31, 1999 purchasing power
Year ended December 31,
-----------------------
Operations: 1997 1998 1999
- ---------- ---- ---- ----
Net loss before extraordinary item (Ps 270,473) (Ps 257,710) (Ps 27,344)
Charges to income not affecting resources:
Allowance for doubtful accounts 320,365 371,106 359,197
Net changes in accounts receivable, other assets,
accounts payable and other liabilities 133,828 (35,542) (329,993)
---------- ----------- ----------
Resources provided by operations before extraordinary item 183,720 77,854 1,860
Extraordinary item - Benefit from realization of
prior years' tax loss carryforwards 57,009 5,838
---------- ---------- -----------
Resources provided by operations 183,720 134,863 7,698
---------- ---------- -----------
Financing:
- ---------
Bank loans repaid (31,605)
Payment of dividends (24,818) (10,116) (6,254)
---------- ----------- -----------
Resources used in financing activities (56,423) (10,116) (6,254)
----------- ---------- -----------
Investment:
- ----------
(Investments in) proceeds from joint ventures (126,759) (125,386)
---------- ----------
Increase (decrease) in cash 538 (639) 1,444
Cash at beginning of year 2,044 2,582 1,943
---------- ---------- -----------
Cash at end of year Ps 2,582 Ps 1,943 Ps 3,387
========== ========== ============
The accompanying notes are an integral part of these financial statements.
ELEKTRAFIN COMERCIAL, S. A. DE C. V.
------------------------------------
(formerly Elektrafin, S. A. de C. V.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(monetary figures expressed in thousands of Mexican
pesos of December 31, 1999 purchasing power, except foreign
currency figures and exchange rates in Note 3)
NOTE 1 - DESCRIPTION OF BUSINESS, COMPANY MERGER AND BASIS OF PRESENTATION:
Elektrafin Comercial, S. A. de C. V. was incorporated on July 30, 1999, as a
result of the spin-off of the assets of Salinas y Rocha, S. A. de C. V. (SyR -
related party) into three subsidiaries. The initial capital of Elektrafin
Comercial, S. A. de C. V. amounted to Ps260,464 including a loan to Grupo SyR,
S. A. de C.V. and accounts receivable to other related parties. Additionally,
Elektrafin Comercial, S. A. de C. V. received from SyR, tax loss carryforwards
and recoverable asset tax of Ps679,060 and Ps68,575, respectively.
At the Extraordinary Meeting held on December 8, 1999, the stockholders approved
the merger of Elektrafin Comercial, S. A. de C. V. and Elektrafin, S. A. de C.
V. ("Elektrafin") with Elektrafin Comercial, S. A. de C. V. as the surviving
entity for legal and tax purposes. Prior to the merger, Elektrafin Comercial, S.
A. de C. V.'s operations were not material. For accounting purposes, the merger
has been accounted for as a recapitalization of Elektrafin. The recapitalized
entity and its predecessor are referred to as the Company.
The Company is a 99% subsidiary of Grupo Elektra, S. A. de C. V. and its main
activity is the sale in installments of electrodomestic appliances and household
furniture. The Company has no employees, and the services necessary to carry out
its operations are rendered by affiliated companies.
In 1999 the Company terminated certain joint ventures created during 1997 and
1998. There was no gain or loss generated as a result of the termination of the
joint ventures.
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:
a. 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.
b. The Company increases the allowance for doubtful accounts at the time of any
installment sale by an amount equal to five percent of the cash price of the
merchandise sold, plus the mark-up, less the down payment, if any. This
method of estimating the allowance for doubtful accounts is based on the
historical experience of the Company and represents management's best
estimate. The Company follows the policy of writing-off all customer
balances outstanding more than 90 days against the allowance for doubtful
accounts.
c. Inventories and cost of sales are originally determined by the average cost
method and are restated by applying replacement costs and by applying
factors derived from the National Consumer Price Index (NCPI), respectively.
Amounts so determined do not exceed current market value.
d. The 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, 1999 and 1998, there were no 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,
1999, and are determined by applying factors derived from the 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.
j. Certain prior period amounts have been reclassified to conform with the
current year presentation.
NOTE 3 - FOREIGN CURRENCY POSITION:
The Company had monetary assets and liabilities expressed in thousands of U.S.
dollars, as shown below:
December 31,
------------
1998 1999
---- ----
Assets US$ 9,207 US$ 5
Liabilities (27,875) (27,325)
-------------- --------------
Net short position (US$ 18,668) (US$ 27,320)
============== ==============
At December 31, 1999, the exchange rate was Ps9.48 to the U.S. Dollar (Ps9.93 at
December 31, 1998). At February 25, 2000, date of issuance of the financial
statements, the exchange rate was Ps9.41 to the U.S. dollar.
NOTE 4 - BALANCES DUE FROM CUSTOMERS, NET AND SECURITIZATION OF RECEIVABLES:
Customer account balances are as follows:
December 31,
------------
1998 1999
---- ----
Customers Ps 1,138,381 Ps 1,251,985
Less - Allowance for doubtful accounts (67,944) (53,824)
-------------- ----------------
Ps 1,070,437 Ps 1,198,161
============== ================
Accounts receivable from retail customers are shown net of the unearned
installment sales mark-up. The unearned installment sales mark-up was Ps494,144
and Ps308,975 at December 31, 1998 and 1999, respectively.
The movement of the allowance for doubtful accounts is as follows:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Beginning balance Ps 53,260 Ps 56,978 Ps 67,944
Provisions 320,365 371,106 359,197
Write-offs (316,647) (360,140) (373,317)
------------- ------------ ------------
Ps 56,978 Ps 67,944 Ps 53,824
============= ============ ============
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"
("CPOs"). The public offering is affected by the issuance of preferred and
subordinated CPOs acquired by public investors and the Company, respectively.
The subordinated CPOs are referred to as deposits on securitized receivables on
our balance sheet. In 1998, the Company completed two separate offerings one on
April 15, 1998 ("EKTFIN-981") and one on December 17, 1998 ("EKTFIN-982") for
Ps793,000 (nominal) and Ps200,000 (nominal), respectively.
Duff and Phelps de Mexico, S. A. de C. V. (DPM) and Fitch IBCA Mexico, S. A. de
C. V. (FIM) rated the securitized receivables as "mAA" and "AA", respectively.
On December 21, 1999 FIM and DPM increased their rating of the Company's second
revolving securitized receivables ("EKTFIN-982") to AAA and mAAA, respectively.
In September 1999 the Company completed its most recent offering of CPOs for
Ps200,000 (nominal). This offering was rated "AA+" and "mAA" by FIM and DPM,
respectively.
The Company collects the securitized receivables on behalf of the trust and
deposits such collections in the trust fund. The three separate offerings of
CPOs will mature in April 2000, December 2002 and August 2002. The preferred
CPOs will be repaid at their nominal value, and the subordinated CPOs will be
covered with the remaining cash held by the trust.
NOTE 5 - ACCOUNTS RECEIVABLE FROM AND PAYABLE TO RELATED PARTIES:
- ----------------------------------------------------------------
a. Current
December 31,
------------
Accounts receivable: 1998 1999
------------------- ---- ----
Elektra Comercial, S. A. de C. V. (formerly Elektra,
S. A. de C. V.) Ps 1,045,374 Ps 1,199,695
Other 63,251 97,612
--------------- ---------------
Ps 1,108,625 Ps 1,297,307
=============== ===============
Accounts payable:
----------------
Elmex Superior, S. A. de C. V. Ps 376,697 Ps 491,348
Garantias Extendidas, S. A. de C. V. 208,091 420,661
Other 370,214 409,203
--------------- ---------------
Ps 955,002 Ps 1,321,212
=============== ===============
b. Long-term receivables (payables) with related parties:
Grupo SyR, S. A. de C. V. Ps 188,566
=============
Grupo Elektra, S. A. de C. V. (Ps 289,988) (Ps 246,740)
=========== =============
Long-term loan granted to Grupo SyR, S. A. de C. V. (GSyR)
As mentioned in Note 1, the initial capital contribution of Elektrafin
Comercial, S. A. de C. V. included a long-term loan extended to GSyR of
Ps188,566. The loan is subject to a 9% interest rate and is repayable in ten
years beginning in 2001.
The principal transactions with related parties are as follows:
Commissions and interest earned
In the year ended December 31, 1997 the Company earned commissions from Elektra
Comercial, S. A. de C. V. (Elektra Comercial) and Hecali, S. A. de C. V.
amounting to Ps351,254, for the trade of their accounts receivable. In 1998 and
1999 the Company earned interest income from certain related parties amounting
to Ps37,970 and Ps102,973, respectively.
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. For the years ended December 31, 1997, 1998 and 1999,
the Company's purchases from Elektra Comercial amounted to Ps3,233,869,
Ps3,857,976 and Ps4,075,207, respectively.
Administrative services
The services necessary to carry out the Company's operations are rendered by
Elektra Comercial such as accounting and tax computation services. In the years
ended December 31, 1997, 1998 and 1999, the Company incurred administrative
services of Ps728,292, Ps1,031,845 and Ps1,029,890, 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 and payable in May
2001. For the years ended December 31, 1997, 1998 and 1999, the Company incurred
interest to Grupo Elektra of Ps51,609, Ps42,159, and Ps33,578, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY:
The capital stock of Elektrafin as of December 31, 1998, amounted to Ps158,886
and was represented by 73,111,233 common shares of one peso par value each.
The initial capital stock of Elektrafin Comercial, S. A. de C. V. amounted to
Ps34,323 (Ps25,000 nominal) and was represented by 1,000 Series "A" common
nominative shares without par value. As a result of the merger mentioned in Note
1, the stockholders approved a Ps158,886 (Ps73,111 nominal) increase in the
variable portion of the capital stock, through the issuance of 5,000 Series "B"
common nominative shares without par value, in exchange for the 73,111,233
common shares of Elektrafin.
As of December 31, 1999 the capital stock is represented by 6,000 common
nominative shares without par value, distributed as follows:
Amount
------
Fixed minimum capital stock, represented by 1,000
Series "A" shares Ps 25,000
Variable portion, represented by 5,000 Series "B" shares 73,111
-------------
Capital stock expressed in nominal pesos 98,111
Restatement increase 95,098
-------------
Capital stock Ps 193,209
=============
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 withholding 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.
NOTE 7 - INCOME TAX:
For the years ended December 31, 1997, 1998 and 1999, the Company had taxable
income of Ps73,303, Ps149,282 and Ps16,681, respectively. The income tax for
1998 and 1999 was reduced by Ps57,009 and Ps5,838, respectively due to the
utilization of tax loss carryforwards. This benefit 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.
Effective January 1, 1999, the corporate income tax rate was increased from 34%
to 35%.
At December 31, 1999, and after the merger mentioned in Note 1, the Company had
tax loss carryforwards amounting to Ps662,379, expiring as shown below:
Year of
expiration Amount
2005 Ps 286,621
2006 241,160
2007 134,598
-------------
Ps 662,379
==================
Tax loss carryforwards are restated by applying factors derived form the NCPI
until they are utilized.
The Company has paid asset tax for which a refund can be requested, provided
income tax determined in any of the following ten years exceeds asset tax for
those years. At December 31, 1999, the Company had Ps70,992 of recoverable asset
tax expiring as shown below:
Year of
expiration Amount
---------- ------
2004 Ps 19,026
2005 17,124
2006 11,578
2007 8,980
2008 7,886
2009 6,398
-----------
Ps 70,992
NOTE 8 - CONTINGENCY:
The Company is the guarantor of long-term publicly traded notes amounting to
US$100 million issued by Grupo Elektra, S. A. de C. V.
NOTE 9 - SUBSEQUENT EVENTS:
a. Revised Statement D-4 "Accounting Treatment of Income Tax and Employees'
Profit Sharing" is effective for fiscal years beginning January 1, 2000.
This statement significantly changes the accounting treatment of income tax,
eliminating the previous approach, known as the partial scope liability
method, and replacing it with the full-scope method of assets and
liabilities. Under this method, deferred taxes are initially recognized, for
all the differences between the book and tax values of the assets and
liabilities and for tax loss carryforwards and asset tax carryforwards that
have a high probability of realization.
In accordance with the statement, the accrued effects as of January 1, 2000
will be recorded directly to stockholders' equity. The company has not yet
determined the impact of this new statement on the financial statements of
the Company. The deferred income tax generated as from January 1, 2000 will
be recorded as part of the net income (loss) of each year.
b. On March 22, 2000, Grupo Elektra, S. A. de C. V. completed a private
placement offering of US$275 million in 12% Senior Notes due 2008. The
Company is a guarantor of these notes.
NOTE 10 - 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 loss:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Net loss under Mexican GAAP (Ps 270,473) (Ps 200,701) (Ps 21,506)
Deferred income tax effects (12,160) 160,047 (6,126)
Effect of sales mark-up on installment sales 54,043
-------------
Net loss under U.S. GAAP (Ps 228,590) (Ps 40,654) (Ps 27,632)
============= ============ ============
b. Reconciliation of stockholders' equity:
--------------------------------------
December 31,
1998 1999
---- ----
Stockholders' equity under Mexican GAAP Ps 1,331,433 Ps 1,566,809
Deferred income tax effects 13,464 7,338
Contribution of deferred tax assets 306,246
-------------- ---------------
Stockholders' equity under U.S. GAAP Ps 1,344,897 Ps 1,880,393
============== ===============
An analysis of the changes in stockholders' equity under U.S. GAAP is as
follows:
Year ended December 31,
-------------------------------------
1997 1998 1999
---- ---- ----
Balance at beginning of year Ps 1,651,424 Ps 1,397,914 Ps 1,344,897
Net loss (228,590) (40,654) (27,632)
Loss from holding nonmonetary assets (102) (2,247) 2,672
Payment of dividends (24,818) (10,116) (6,254)
Initial capital contribution of Elektrafin
Comercial, S. A. de C. V. 566,710
-------------- --------------- --------------
Balance at end of year Ps 1,397,914 Ps 1,344,897 Ps 1,880,393
============== =============== ==============
c. Significant differences between U.S. GAAP and Mexican GAAP:
i. Deferred income tax
As stated in Note 2d., 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 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.
As mentioned in Note 1, the Company received tax loss carryforwards and
recoverable asset tax benefits of Ps679,060 and Ps68,575, respectively.
Through December 31, 1999, Mexican GAAP does not require the recording
of deferred income taxes for tax loss carryforwards and recoverable
asset tax before the benefits are utilized. Under US GAAP, the Company
recognized as an additional capital contribution the deferred tax
effects of Ps306,246 since it is more likely than not that the tax
benefits will be utilized.
The significant components of income tax expense (benefit) under U.S.
GAAP are as follows:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Current Ps 24,685 Ps 28,752
Deferred provision (benefit) 12,160 (Ps 160,047) 6,126
Asset tax 2,411
----------- ------------ ------------
Ps 36,845 (Ps 160,047) Ps 37,289
=========== ============ ============
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,
-----------------------
1997 1998 1999
---- ---- ----
Statutory income tax rate (34%) (34%) 35%
Effect of inflationary component 11% (5%) 3%
Asset tax 5%
Nondeductible expenses 38% (40%) 4%
Other 6% (1%) (6%)
---- ---- --
Effective income tax rate 21% (80%) 41%
==== === ===
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,
------------
1998 1999
---- ----
Deferred income tax (liabilities) assets:
Prepaid expenses Ps 9,637) (Ps 8,079)
Allowance for doubtful accounts 23,101 18,838
Tax loss carryforwards 231,833
Asset tax carryforwards 70,992
---------- -------------
Net deferred income tax assets Ps 13,464 Ps 313,584
========== =============
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 Ps54,043 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
interest income. Also, under Mexican GAAP any stated and penalty
interest is also included in interest income.
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, 1997,
1998 and 1999, the amount of installment sales mark-up earned for U.S.
GAAP purposes, was Ps508,139, Ps396,818 and Ps343,189, respectively.
iii.Securitization of receivables.
Under Mexican GAAP the Company accounted for the 1997, 1998 and 1999
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, 1998 and
1999 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, 1998 and 1999 receivables of Ps1,087,232, Ps1,460,399 and
Ps1,840,917, respectively, which include Ps102,289, Ps379,290 and
Ps684,297, respectively, that correspond to the guarantee on the
securitized receivables.
The Company also recorded as of December 31, 1997, 1998 and 1999
liabilities of Ps984,944, Ps1,081,108 and Ps1,156,620, 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, 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 borrowing received
from related parties. The carrying value of accounts payable at
December 31, 1998 and 1999 are a reasonable estimate of their fair
value. The fair value of the loan from Grupo Elektra, S. A. de C. V.
can not be determined since there is no market for this type of debt.
Long-term receivable from GSyR. The fair value of the loan made to GSyR
can not be determined since there is no market for this type of
receivable.
v. Concentration of credit risk.
The Company provides financing to the customers of an affiliated company
which has 597 stores at December 31, 1999 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 for U.S. GAAP purposes
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.
vii.Recently issued accounting standards.
During June 1999, the Financial Accounting Standards Board issued SFAS
No. 137, "Deferral of the Effective Date of SFAS No. 133", which defers
the effective date of SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), to fiscal years beginning after
June 15, 2000. SFAS 133 establishes a new model for the accounting for
derivatives and hedging activities and supercedes and amends a number of
existing standards. Upon SFAS 133's initial application, all derivatives
are required to be recognized in the statement of financial position as
either assets or liabilities and measured at fair value. In addition,
all hedging relationships must be designated, reassessed and documented
pursuant to the provision of SFAS 133. The Company is not currently
involved in derivative or hedging activities. As a result, management
does not believe that the adoption of this statement will significantly
impact the financial statements of the Company.
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,
------------
1998 1999
---- ----
Accounts receivable from customers and related parties Ps 3,639,461 Ps 4,336,385
Deferred income tax 13,464 10,759
Other current assets 19,324 4,682
--------------- ---------------
Total current assets 3,672,249 4,351,826
Investments in joint ventures 234,770
Related parties 188,566
Deferred tax assets 302,825
Other assets 28,265 23,084
--------------- ---------------
Total assets Ps 3,935,284 Ps 4,866,301
=============== ===============
Current liabilities Ps 264,289 Ps 461,336
Related parties 955,002 1,321,212
--------------- ---------------
1,219,291 1,782,548
--------------- ---------------
Long-term liabilities 1,081,108 956,620
Related parties 289,988 246,740
--------------- ---------------
1,371,096 1,203,360
--------------- ---------------
Total liabilities 2,590,387 2,985,908
Stockholders' equity 1,344,897 1,880,393
--------------- ---------------
Total liabilities and stockholders' equity Ps 3,935,284 Ps 4,866,301
=============== ===============
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Revenues:
- --------
Net sales Ps 3,354,530 Ps 4,097,626 Ps 4,154,780
Cost of sales (3,233,869) (3,857,976) (4,075,207)
--------------- --------------- ---------------
120,661 239,650 79,573
--------------- --------------- ---------------
Operating expenses and other:
- ----------------------------
Administrative services received from
affiliates (981,125) (1,274,699) (1,034,717)
Administrative expenses (184,355) (259,773) (281,130)
Allowance for doubtful accounts (320,365) (371,106) (359,197)
Other (expenses) income - Net (18,796) 7,543 46,012
--------------- --------------- ---------------
(1,504,641) (1,898,035) (1,629,032)
--------------- --------------- ---------------
Operating loss (1,383,980) (1,658,385) (1,549,459)
--------------- --------------- ---------------
Interest income 1,438,914 1,728,686 1,701,904
Other financing expenses (246,679) (271,002) (142,788)
--------------- --------------- ---------------
1,192,235 1,457,684 1,559,116
--------------- --------------- ---------------
Pretax (loss) income (191,745) (200,701) 9,657
Income tax (provision) benefit and asset tax (36,845) 160,047 (37,289)
--------------- --------------- ---------------
Net loss (228,590) (40,654) (27,632)
Loss from holding nonmonetary assets (102) (2,247) 2,672
--------------- --------------- ---------------
Comprehensive loss (Ps 228,692) (Ps 42,901) (Ps 24,960)
=============== =============== ===============
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 in the following page is a statement of cash flows for the year ended
December 31, 1997 prepared after considering the impact of U.S. GAAP
adjustments. The cash flow statement is net of certain non cash transactions but
includes the effects of inflation on cash flow and has been restated to pesos of
December 31, 1999, purchasing power.
Year ended December 31,
-----------------------
Cash flow from operating activities: 1997
- ----------------------------------- ----
Net loss (Ps 228,590)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowance for doubtful accounts 320,365
Monetary loss 240,158
Deferred income tax 12,160
Net changes in working capital (1,042,074)
-----------------
Net cash used in operating activities (697,981)
-----------------
Cash flow from investing activities:
Investments in joint ventures (126,759)
-----------------
Cash flows from financing activities:
Short-term loans paid - Net (31,605)
Borrowings from related parties (103,243)
Proceeds from securitization of receivables - Net 984,944
Payment of dividends (24,818)
-----------------
Net cash provided by financing activities 825,278
-----------------
Increase in cash 538
Cash at beginning of year 2,044
-----------------
Cash at end of year Ps 2,582
=================
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 106,405
=================
Income tax Ps 8,033
=================
Presented below are statements of cash flow for the years ended December 31,
1998 and 1999, prepared after considering the impact of U.S. GAAP adjustments.
The cash flow statements present nominal cash flows during the periods, adjusted
to pesos of December 31, 1999 purchasing power.
Year ended December 31,
-----------------------
Cash flow from operating activities 1998 1999
- ----------------------------------- ---- ----
Net loss (Ps 40,654) (Ps 27,632)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Allowance for doubtful accounts 371,106 359,197
Monetary loss 242,958 158,623
Deferred income tax (160,047) 6,126
Net changes in working capital (208,557) (753,357)
---------------- ---------------
Net cash provided by (used in) operating activities 204,806 (257,043)
---------------- ---------------
Cash flow from investing activities:
Investments in joint ventures (145,180)
----------------
Cash flows from financing activities:
Repayment of securitization of receivables - Net (984,944)
Borrowings from related parties (306,452)
Proceeds from securitization of receivables - Net 1,081,109 194,094
Payment of dividends (10,116) (6,254)
---------------- ---------------
Net cash used in financing activities (220,403) 187,840
---------------- ---------------
Effect of inflation and exchange rate changes on cash 160,138 70,647
---------------- ---------------
(Decrease) increase in cash (639) 1,444
Cash at beginning of year 2,582 1,943
---------------- ---------------
Cash at end of year Ps 1,943 Ps 3,387
================ ===============
Supplemental disclosure:
Cash paid during the year for:
Interest Ps 153,499 Ps 326,437
================ ===============
Income tax Ps 15,660 Ps 12,127
================ ===============
Non cash transaction:
- --------------------
In the year ended December 31, 1999 the capital contribution of Elektrafin
Comercial was represented mainly by a loan to a related party of Ps260,464 and
deferred tax benefits of Ps306,246.
COMUNICACIONES AVANZADAS, S. A.
DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
COMUNICACIONES AVANZADAS, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
Contents
Consolidated Financial Statements: Page
----
Report of Independent Accountants..........................................F-100
Consolidated Balance Sheets................................................F-102
Consolidated Statements of Income..........................................F-103
Consolidated Statements of Changes in Stockholders' Equity.................F-104
Consolidated Statements of Changes in Financial Position...................F-105
Notes to the Consolidated Financial Statements.............................F-106
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, March 31, 2000, except for Note 18 which is dated as of April 28,
2000
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, 1998 and 1999 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, 1999 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 did not audit the consolidated financial statements of
Unefon, S. A. de C. V. and subsidiaries, a 50% owned affiliate that is in a
pre-operating stage. TV Azteca's investment in Unefon, S. A. de C. V. and
subsidiaries accounted for under the equity method constituted 10% of total
consolidated assets of the Company at December 31, 1999. The consolidated
financial statements of Unefon, S. A. de C. V. and subsidiaries were audited
by other independent accountants whose report dated March 8, 2000 has been
furnished to us, and our opinion insofar as it relates to amounts included
for Unefon, S. A. de C. V. and subsidiaries is based solely on the report of
the other independent accountants.
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, based on our audits and on the report of the other
independent accountants referred to above, 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, 1998 and 1999, 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.
3. Accounting principles generally accepted in Mexico vary in certain
significant respects from generally accepted accounting principles in the
United States of America. The application generally accepted accounting
principles in the United States of America would have affected the
determination of consolidated net income (loss), for each of the three years
in the period ended December 31, 1999 and the determination of consolidated
stockholders' equity as of December 31, 1998 and 1999 to the extent
summarized in Note 19 to the consolidated financial statements.
PricewaterhouseCoopers
Javier Soni
COMUNICACIONES AVANZADAS, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Thousands of Mexican pesos of
December 31, 1999 purchasing power
At December 31,
---------------
Assets 1998 1999
- ------ ---- ----
Current assets:
Cash and cash equivalents Ps 1,184,415 Ps 1,002,739
Pledged securities (Notes 5 and 10) 444,831 136,713
Accounts receivable (Note 6) 3,534,664 3,236,714
Due from related parties (Note 9) 226,155 595,688
Exhibition rights 888,342 671,146
Inventories 336,941 213,166
-------------- ---------------
Total current assets 6,615,348 5,856,166
Accounts receivable from Unefon, S. A. de C. V. 1,898,000
Exhibition rights 821,196 631,206
Property, machinery and equipment - Net (Note 7) 3,619,437 3,163,868
Television concessions - Net (Note 3k.) 3,516,619 3,367,314
Pledged securities (Notes 5 and 10) 143,820
Investment in Unefon, S. A. de C. V. (Note 8) 1,853,196
Goodwill - Net (Note 3i.) 1,303,380 1,147,635
Other assets (Note 8) 454,736 531,223
-------------- ---------------
Total assets Ps 16,474,536 Ps 18,448,608
============== ===============
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term promissory notes (Note 11) 10,618 9,851
Current portion of long-term bank loans (Note 10) Ps 139,039 Ps 88,262
Short-term debt (Note 10) 314,611 673,095
Interest payable 250,668 234,431
Exhibition rights payable 444,289 385,620
Accounts payable and accrued expenses 673,507 736,061
Due to related parties (Note 9) 107,518 165,707
-------------- ---------------
Total current liabilities 1,940,250 2,293,027
-------------- ---------------
Long - term liabilities:
Senior notes (Note 10) 7,566,820 6,460,000
Bank loans (Note 10) 1,136,932 1,072,165
Promissory notes (Note 11) 27,474 10,926
Advertising advances (Note 3o.) 2,584,388 3,080,882
Unefon advertising advance (Note 8) 1,890,667
Exhibition rights payable 398,059 272,033
-------------- ---------------
Total long-term liabilities 11,713,673 12,786,673
-------------- ---------------
Total liabilities 13,653,923 15,079,700
-------------- ---------------
Stockholders' equity (Note 13):
Capital stock 1,724,586 1,724,586
Paid-in capital 1,027,807 1,027,807
Contributions for future capital stock increases 4,625 4,625
Deficit (936,933) (986,787)
Gain (loss) from holding nonmonetary assets (454,951) (438,031)
-------------- ---------------
Majority stockholders 1,365,134 1,332,200
Minority stockholders 1,455,479 2,036,708
-------------- ---------------
Total stockholders' equity 2,820,613 3,368,908
Commitments and contingencies (Note 15)
Subsequent events (Note 18)
-------------- ---------------
Total liabilities and stockholders' equity Ps 16,474,536 Ps 18,448,608
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
COMUNICACIONES AVANZADAS, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Thousands of Mexican pesos of
December 31, 1999 purchasing power
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Net revenue Ps 5,018,231 Ps 5,205,740 Ps 4,194,094
------------- ------------- -------------
Programming, production, exhibition and
transmission costs 1,481,590 1,756,158 1,973,004
Sales and administrative expenses 824,235 825,896 808,208
------------- ------------- -------------
Total costs and expenses 2,305,825 2,582,054 2,781,212
------------- ------------- -------------
Depreciation and amortization 726,459 887,936 633,947
------------- ------------- -------------
Operating income 1,985,947 1,735,750 778,935
------------- ------------- -------------
Other income (expenses) - Net (Note 16) 17,008 (228,344) (779,441)
------------- ------------- -------------
Comprehensive financing (cost) income:
Interest expense - Net (714,426) (687,010) (744,816)
Exchange loss - Net (154,329) (1,583,601) 355,085
Other financing expenses (227,906) (98,341)
Gain on monetary position 458,188 854,315 604,560
------------- ------------- -------------
(410,567) (1,644,202) 116,488
------------- ------------- -------------
Income (loss) before provision for income tax and
extraordinary items 1,592,388 (136,796) 115,982
Provision for income tax (Note 14) (595,309) (411,232) (349,093)
------------- ------------- -------------
Income (loss) before extraordinary items 997,079 (548,028) (233,111)
Extraordinary item - Income tax benefit from
utilization of prior years' tax-loss carryforwards
(Note 14) 298,343 111,062 73,993
Other extraordinary items (Note 14)
Net income (loss) Ps 1,295,422 (Ps 436,966) (Ps 159,118)
============= ============= =============
Net income (loss) of majority stockholders Ps 678,379 (Ps 403,802) (Ps 49,854)
Net income (loss) of minority stockholders 617,043 (33,164) (109,264)
------------- ------------- -------------
Ps 1,295,422 (Ps 436,966) (Ps 159,118)
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
COMUNICACIONES AVANZADAS, S. A. DE C. V.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Thousands of Mexican pesos of June 30, 1999 purchasing power
Contributions
for future ca-
Capital Paid-in pital stock
stock capital increases Deficit
----- ------- --------- -------
Balances at January 1, 1997 Ps 1,873,345 Ps1,027,807 Ps4,625 (Ps1,211,509)
Decrease of capital stock (148,759)
Net income 678,379
Redemption of capital of
subsidiaries paid to minority
stockholders
Increase in minority interest
relating to purchase of additional
shares of subsidiary (Note 9)
Gain from holding nonmonetary assets
------------ ----------- ------- ----------
Balances at December 31, 1997 1,724,586 1,027,807 4,625 (533,130)
Net loss (403,803)
Redemption of capital of subsidiaries
paid to minority stockholders
Adjustment from repurchase, valuation
and options of shares of TV Azteca,
S. A. de C. V. (TVA), subsidiary
(Loss) gain from holding nonmonetary
assets
------------ ----------- ------- ----------
Balances at December 31, 1998 1,724,586 1,027,807 4,625 (936,933)
Net income (49,854)
Redemption of capital of subsidiaries
paid to minority stockholders
Effect relating to capital stock increase
and premium on issuance of capital stock
of TVA
Adjustment from repurchase, valuation
and option of shares of TV Azteca
Loss from holding nonmonetary assets
------------ ----------- ------- ----------
Balances at December 31, 1999 Ps 1,724,586 Ps1,027,807 Ps4,625 (Ps 986,787)
============ =========== ======= ==========
(Loss) gain
from holding
nonmonetary Majority Minority
assets stockholders stockholders Total
------ ------------ ------------ -----
Balances at January 1, 1997) (Ps171,202) Ps 1,523,066 Ps 1,547,690 Ps 3,070,756
Decrease of capital stock (148,759) (148,759)
Net income 678,379 617,042 1,295,421
Redemption of capital of
subsidiaries paid to minority
stockholders (1,152,013) (1,152,013)
Increase in minority interest
relating to purchase of additional
shares of subsidiary (Note 9) 22,428 22,428
Gain from holding nonmonetary assets 219,117 219,117 52,197 271,314
--------- ----------- ------------ -----------
Balances at December 31, 1997 47,915 2,271,803 1,087,344 3,359,147
Net loss (403,803) (33,164) (436,967)
Redemption of capital of subsidiaries
paid to minority stockholders (19,352) (19,352)
Adjustment from repurchase, valuation
and options of shares of TV Azteca,
S. A. de C. V. (TVA), subsidiary (158,610) (158,610) (88,061) (246,671)
(Loss) gain from holding nonmonetary
assets (344,256) (344,256) 508,712 164,456
--------- ----------- ------------ -----------
Balances at December 31, 1998 (454,951) 1,365,134 1,455,479 2,820,613
Net income (49,854) (109,264) (159,118)
Redemption of capital of subsidiaries
paid to minority stockholders (21,951) (21,951)
Effect relating to capital stock
increase and premium on issuance of
capital stock of TVA 303,223 303,223 950,681 1,253,904
Adjustment from repurchase, valuation
and option of shares of TV Azteca (8,061) (8,061) (6,768) (14,829)
Loss from holding nonmonetary assets (278,242) (278,242) (231,469) (509,711)
--------- ----------- ------------ -----------
Balances at December 31, 1999 (Ps438,031) Ps1,332,200 Ps 2,036,708 Ps3,368,908
========= =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
COMUNICACIONES AVANZADAS, S. A DE C. V.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Thousands of Mexican pesos of December 31,
1999 purchasing power
Year ended December 31,
-----------------------
Operations: 1997 1998 1999
- ---------- ---- ---- ----
Income (loss) before extraordinary items Ps 997,079 (Ps 548,028) (Ps 233,111)
Charges to income not affecting resources:
Gain on sale of subsidiaries (117,312) (34,542)
Amortization of concessions and goodwill 446,766 462,892 202,820
Depreciation 279,693 425,044 431,127
Net change in accounts receivable, inventories,
exhibition rights, related parties, accounts payable
and accrued expenses (2,182,849) (95,496) (1,494,132)
Advertising advances 801,272 (1,132,503) 496,494
Unefon advertising advance 1,890,667
------------ ----------- ------------
Resources provided by (used in) operations
before extraordinary items 224,649 (888,091) 1,259,323
Income tax benefit from utilization of prior
years' tax loss carryforwards 298,343 111,062 73,993
Other extraordinary items
Resources provided by (used in) operations 522,992 (777,029) 1,333,316
------------ ----------- ------------
Financing:
- ---------
Capital stock decrease (148,759)
Senior notes 7,307,745 259,075 (1,106,820)
Bank loans - Net (2,755,731) 398,458 242,940
Promissory notes - Net (4,574) (15,523) (17,315)
Adjustment in minority interest from repurchase,
valuation and options of shares of TV Azteca
subsidiary (88,061) (6,768)
Effect relating to capital stock increase and premium
on issuance of capital stock of TV Azteca, S. A. de
C. V. (TVA) subsidiary 950,681
Dividends of subsidiaries paid to minority
stockholders (1,152,013) (19,352) (21,951)
------------ ----------- ------------
Resources provided by financing activities 3,246,668 534,597 40,767
------------ ------------ ------------
Investment:
- ----------
Acquisition of property, machinery and
equipment - Net (1,678,805) (540,269) (164,595)
Deferred costs related to the acquisition of
subsidiaries' shares
Restricted cash, cash equivalents and pledged securities (727,926) 139,276 451,938
Investment in Unefon (1,853,196)
Disposition (acquisition) of shares 58,608 (13,083) 10,094
------------ ------------ ------------
Resources used in investment activities (2,348,123) (414,076) (1,555,759)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,421,537 (656,508) (181,676)
Cash and cash equivalents at beginning of year 419,386 1,840,923 1,184,415
------------ ------------ ------------
Cash and cash equivalents at end of year Ps 1,840,923 Ps 1,184,415 Ps 1,002,739
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
COMUNICACIONES AVANZADAS, S. A DE C. V.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(monetary amounts expressed in thousands of Mexican pesos (Ps) of
December 31, 1999 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 limited voting right Series "N" shares. 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 were held in the Nafin Trust. Under the terms of the Nafin Trust, these
shares could not 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.
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. Azteca now owns, directly, 54% 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 were held in the Nafin Trust, and (ii) the Bursamex Group's refund rights
were proportionately reduced (by approximately 43%) to reflect the CPOs sold by
the Bursamex Group.
The Nafin Trust terminated in July 1998 and the above mentioned shares were
returned to the Company.
In May 1999 TV Azteca sold its interest in Compania Chilena de Television, S.A.
for US$12,100 and recognized a gain of US$3,626 (Ps34,542).
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 Mexican Institute of
Public Accountants. The translation effect was not significant.
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, deferred
charges 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".
- 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, 1999.
The NCPI used to recognize the effects of inflation in the financial statements
were 231.886, 275.038 and 308.919 as of December 31, 1997, 1998 and 1999,
respectively.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------
The significant accounting policies are summarized below:
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, 1997, 1998 and 1999, net revenue derived from barter
transactions amounted to Ps544,732, Ps501,609 and Ps271,445, respectively.
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.
In 1999, TV Azteca cancelled Ps283,148 of exhibition rights that were not
expected to be used prior to their expiration (see Note 16)
At December 31, 1997, 1998 and 1999 the allowance for unused exhibition rights
amounted to Ps9,324, Ps68,462 and Ps68,572, respectively, which represents
management's estimate of exhibition rights which were not expected to be used
prior to their expiration.
Exhibition rights at December 31, 1998 and 1999 also include Ps233,202 and
Ps196,354, respectively, associated with internally produced programming. Costs
of internally produced programming are expensed when the programs are initially
aired, except in the case of the telenovelas, where the costs are amortized over
a maximum period of four years.
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, 1996 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 Company.
h. Investment in shares -
Investments in affiliates are recorded by the equity method and included in the
balance sheet as other assets. TV Azteca owns 50% of the voting shares of
Unefon, S. A. de C. V. (Unefon) and has the ability to exercise significant
influence over, but not control, of Unefon. Accordingly, the TV Azteca's
investment in Unefon is accounted for by the equity method and is presented in
the balance sheet as investment in Unefon.
i. Goodwill -
The excess of cost over the book value of subsidiaries acquired in 1998 and
prior years is amortized using the straight-line method over 20 years and
restated by applying factors derived from the NCPI to its historical cost.
Amortization expense for the years ended December 31, 1997, 1998 and 1999
amounted to Ps41,541, Ps62,450 and Ps101,109, 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 Ps240,870 (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
Ps23,640. The negative goodwill was eliminated when RTC was merged into TV
Azteca on July 17, 1997.
k. Television concessions -
The aggregate value of the 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. Until the end of 1998 television concessions
were amortized by the straight-line method over the relevant concession periods
then in existence.
Effective January 1, 1999, TV Azteca changed the amortization periods for its
television concessions. The new amortization periods for the concessions reflect
the recent renewal of a concession as well as the long-term nature of TV
Azteca's recently completed Tower Agreement with American Tower Corporation
(ATC) (see Note 10) for the commercialization of unused space on its
transmission tower that are subject to the television concessions. The
amortization periods of TV Azteca's television concessions are shown below:
Prior amortization period Current amortization period
July 2, 1989 to July 2, 1999 July 2, 1989 to June 30, 2033
April 29 and September 29, 1991 to April 29 and September 29, 1991 to
April 29 and September 29, 2006 June 30, 2033
May 10, 1993 to May 9, 2008 May 10, 1993, to June 30, 2033
Amortization expense for the years ended December 31, 1997, 1998 and 1999
amounted to Ps398,118, Ps400,442 and Ps97,892, respectively. The difference
between the charge for amortization in 1999 and that for 1998 is due to the
above-mentioned change in amortization rates.
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. See Note 12.
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.
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, 1997, 1998 and 1999 there were no timing
differences that require the recognition of deferred income taxes.
Starting on January 1, 2000, the Company will adopt the provisions of revised
Statement D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees'
Profit Sharing". This statement significantly changes the accounting treatment
for income tax, eliminating the previous approach, known as the partial
liability method, and replacing it with the integral asset and liability
approach. Under this method, deferred tax assets or liabilities are recognized,
in principle, for all differences between the book value and the tax value of
assets and liabilities.
In accordance with this statement, the cumulative effect as of January 1, 2000
will be charged directly to stockholders' equity. The Company estimates that the
adoption of this statement will require the recognition of a net deferred tax
liability of approximately Ps107,605 and a net charge to majority stockholders'
equity in the same amount.
The principal temporary items that give rise to the recording to deferred taxes
are as follows:
Inventories Ps 959,582
Property, machinery and equipment - Net 841,555
Allowance for bad debts (114,981)
Cost related to the issuance of guaranteed senior notes 159,137
Payment to Corporacion de Noticias e Informacion,
S. A. de C. V. 173,004
Television concessions 236,811
Advertising advances (585,695)
Tax loss carry forwards (951,228)
Other 80,505
---------------
Tax base Ps 798,690
Applicable income tax rate 35%
---------------
Estimated effect as of January 1, 2000 Ps 279,541
===============
Estimated effect as of January 1, 2000
Applicable to majority stockholders Ps 107,605
===============
n. Net revenue -
-----------
Net revenue includes revenue from advertisers less sales commissions payable and
revenue from movie theaters. During the years ended December 31, 1997, 1998 and
1999 sales commissions payable amounted to Ps146,059, Ps166,646 and Ps227,208,
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 of the date in which they sign the advertising agreements. 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
amounts 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 with 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 TV Azteca employees are given effect when the options
are exercised by crediting paid-in capital stock.
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.
s. Deferred costs
Deferred costs relate primarily to the issuance of TV Azteca Notes and Senior
Secured Notes and are amortized over the life of the notes. See Notes 8 and 10.
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, 1999, the
exchange rate used by the Company for financial purposes was Ps9.48 per dollar
(Ps9.93 and Ps8.07 at December 31, 1998 and 1997, respectively). As a result the
Company had exchange (losses) an income-net of (Ps154,329), (Ps1,583,601) and
Ps355,085 during the years ended December 31, 1997, 1998 and 1999, respectively,
which are shown as a component of comprehensive financing (cost) income.
At March 31, 2000, date of issuance of the consolidated financial statements,
the exchange rate was Ps9.00 per dollar.
At December 31, 1998 and 1999, CASA and subsidiaries had monetary assets and
liabilities denominated in foreign currencies as shown below:
December 31,
------------
1998 1999
---- ----
Assets US$ 162,619 US$ 339,093
Liabilities (921,290) (971,192)
--------------- --------------
Net short position (US$ 758,671) (US$ 632,099)
=============== ==============
At December 31, 1998 and 1999, CASA and subsidiaries had no hedge contracts for
protection against foreign exchange risks.
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 from April
16, 1998 to April 16, 1999. This investment required initial collateral of
US$10,500 (Ps116,782) and, due to the adverse variations in the prices of these
instruments, TV Azteca was required to increase the amount of collateral to
US$12,181 (Ps135,478). At December 31, 1998 TV Azteca recorded a charge to
results in the amount of Ps135,478, accounted for as a component of the
Company's comprehensive financing cost, as a result of changes in the market
value of this 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, TV Azteca was required
to pay US$15 million, and to maintain the initial collateral of US$10,500. On
May 28, 1999 TV Azteca concluded this operation with derivative financial
instruments, which resulted in an incremental loss in 1999 of US$3,475
(Ps49,447), and the return of the initial collateral of US$10,500.
b. Capital -
During 1998 and 1999 Azteca purchased and sold options on TV Azteca CPO's and
ADR's and Grupo Elektra, S. A. de C. V. (Elektra) ADR's. The aforementioned
transactions are listed below:
Position
in the Type of Underlying Notional Exercise Maturity
operation Operation security value price date
- --------------------------------------------------------------------------------------------------------
Sell European Put TV Azteca US$ 4,605 US$ 17.50 Second half of 1999
- --------------------------------------------------------------------------------------------------------
Sell European Put TV Azteca Ps 163,492 Ps 8.89 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
ADR's without being
exercised
- --------------------------------------------------------------------------------------------------------
The decline in market value of the European Put options resulted in a loss of
Ps31,451 during 1998 and a loss of Ps59,323 in 1999. These amounts were
recognized as a charge to TV Azteca stockholders' equity reducing the premium on
the issuance of capital stock.
TV Azteca recognized a charge to 1998 results from the European Cap Call on
Elektra ADR's in the amount of US$444 (Ps4,937), accounted for as a
component of the Company's comprehensive financing cost. Additionally, in
1998, the premium paid by TV Azteca for the European Cap Call on its own
ADR's was recognized as a charge to TV Azteca stockholders' equity by
reducing the premium on the issuance of capital stock in the amount of
US$6,666 (Ps74,147).
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, 1999, TV Azteca
recognized a charge to results of operations of Ps20,000 (Ps87,000 in 1998),
accounted for as a component of TV Azteca's comprehensive financing cost,
due to the decline in the market value of the aforementioned investment.
NOTE 6 - ACCOUNTS RECEIVABLE:
December 31,
------------
1998 1999
---- ----
Amounts due from advertisers Ps 3,194,128 Ps 2,986,471
Recoverable taxes 138,473 77,222
Prepaid expenses 57,278 37,877
Other accounts receivable 201,336 250,125
--------------- --------------
3,591,215 3,351,695
Allowance for bad debts (56,551) (114,981)
--------------- --------------
Ps 3,534,664 Ps 3,236,714
=============== ==============
Amounts due from barter transactions included in amounts due from advertisers
amounted to Ps347,638 and Ps349,549 as of December 31, 1998 and 1999,
respectively.
NOTE 7 - PROPERTY, MACHINERY AND EQUIPMENT:
December 31,
------------ Annual
depreciation
1998 1999 rates
---- ---- -----
Buildings Ps 2,240,129 Ps 2,260,214 5%
Machinery and operating equipment 2,542,091 2,243,057 4% and 16%
Furniture and office equipment 142,999 158,202 7% and 10%
Transportation equipment 180,605 197,696 20%
Other fixed assets 300,561 353,066 18% and 25%
-------------- --------------
5,406,385 5,212,235
Accumulated depreciation (2,731,092) (2,975,300)
-------------- --------------
2,675,293 2,236,935
Land 887,493 901,480
Construction in progress 56,651 25,453
-------------- --------------
Ps 3,619,437 Ps 3,163,868
============== ==============
NOTE 8 - OTHER ASSETS:
December 31,
------------
1998 1999
---- ----
Investment in affiliates Ps 67,642 Ps 53,092
Deferred costs related to the issuance of
TV Azteca Notes and Senior Secured
Notes - Net 191,721 159,134
Advances to Corporacion de Noticias e
Informacion, S. A. de C. V. 95,193 173,004
Other assets 100,180 145,993
------------ ---------------
Ps 454,736 Ps 531,223
============ ===============
Investment in Unefon Ps 1,853,196
===============
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 provide advisory services to TVM and CNI regarding television
operations of Channel 40 for a period of 10 years or until the expiration o
TVM's television concession, whichever is shorter.
2. Under a Programming, Promotion and Commercialization Agreement with TVM, CNI
will cede 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 the joint venture's earnings before interest, taxes, depreciation
and amortization (EBITDA) on a quarterly basis, with an advance payment of
US$15,000 which will be applied against future EBITDA generated from the
operation of Channel 40, over a maximum period of ten years. At December 31,
1999 TV Azteca has made advances of US$15,000 (US$8,375 at December 31,
1998).
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 principal and
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 basis points. As security for the loan, 51% of the capital stock of
TVM owned by Mr. Javier Moreno Valle was pledged as collateral. At March 31,
2000, date of these financial statements, CNI had drawn down US$6,500 under
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 based on a valuation of 100% of the stock of TVM equal
to the greater of US$100,000 (which amount increases gradually over time)
and 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 TV Azteca
for the same purchase price per share 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 of this CNI-determined programming
through Channel 40, TV Azteca will pay CNI, during the first year, US$5.0
for each 60 minute program or its equivalent broadcast and, after the second
year, US$1.65 for each rating point generated by the broadcast of
CNI-determined programming on Channel 40. During 1998 and 1999, US$428
(Ps4,814) and US$1,727 (Ps17,188), respectively, were paid for these
services.
6. To improve the efficiency of Channel 40' operations, TV Azteca has agreed to
provide accounting, administrative, computer, technical or any other advice
that will improve the operations and administration of Channel 40.
Unefon
On May 14, 1999 TV Azteca signed an agreement (stockholders' agreement) with
Ricardo Salinas Pliego and Moises Saba Masri to invest in Unefon and its
subsidiaries. Unefon is a telecommunications company that is in the process of
setting up a fixed digital wireless network designed to provide local telephone
service in Mexico. The stockholders' agreement establishes that Unefon must be
operated and managed as a joint venture, initially between Ricardo Salinas and
Moises Saba. The agreement requires each of Ricardo Salinas and Moises Saba to
contribute US$186.5 million to Unefon's capital, for a total of US$373 million
in capital stock. These capital contributions to Unefon were completed on June
15, 1999.
Before signing the stockholders' agreement, Ricardo Salinas made a contribution
to Unefon's capital of approximately US$88.6 million, through Corporacion RBS,
S. A. de C. V. (CRBS) (a company controlled by him), which was used to make an
advance payment to the Mexican government for the acquisition of wireless
concessions and for pre-operating expenses. Mr. Salinas made the balance of the
contribution required by the stockholders' agreement with funds borrowed from
the Company, a holding company controlled by Mr. Salinas. The Company obtained
part of the funds for this loan from the sale of 218 million of the CPOs of TV
Azteca owned by the Company to a group of private Mexican investors. The Company
obtained the remaining funds for the loan from the sale by the Company of 44
million TV Azteca CPO's to the Company's wholly-owned subsidiary, Compania
Operadora de Teatros, S. A. de C. V.
On October 28, 1999 TV Azteca acquired Ricardo Salinas' interest in Unefon at
cost (including financial costs) of US$189,793 and funded through (i) proceeds
from the issuance of shares (as described below); (ii) the payment of US$35,108
in cash and (iii) the cancellation of debts of US$43,067 owed to TV Azteca by
CRBS, a company controlled by Ricardo Salinas.
At the extraordinary stockholders' meeting held on June 10, 1999, the
stockholders agreed to increase TV Azteca's capital stock by up to Ps1,500
million. TV Azteca offered the new shares to the Company, to Mexican investors
and to qualified institutional buyers in an offering of preferential rights,
under which current stockholders had until July 2, 1999 to purchase a portion of
the capital stock increase in proportion to their interest in the shares of TV
Azteca at June 11, 1999.
At December 31, 1999 Unefon had not yet commenced operations.
Dataflux, S. A. de C. V. (Dataflux)
TV Azteca had an investment in Dataflux, a related party, which was sold on
December 31, 1997 resulting in a gain of Ps117,312 which was accounted for as
other income in the results of operations for 1997.
Todito.com, S. A. de C. V. (Todito)
The Board of Directors of TV Azteca, in its meeting held on February 9, 2000,
approved an investment in Todito for US$100,000. In exchange, TV Azteca will
receive 50% of the capital stock of Todito. TV Azteca will pay for the Todito
capital stock with advertising, programming and services. TV Azteca is currently
negotiating the corresponding agreements with Todito.
Todito operates the Internet commerce site "Todito.com" that was launched in
August 1999. Todito's website brings e-commerce and other services to Mexico and
the Hispanic population in the United States and Canada.
NOTE 9 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
The Company had the following amounts due from and payable to related parties:
December 31,
------------
1998 1999
---- ----
Accounts receivable:
- -------------------
Unefon, S. A. de C. V. Ps 78,002
Corporacion RBS, S. A. de C. V. Ps 307,118
Corporacion de Medios de Comunicacion, S. A. de C. V. 115,752
Corporacion de Comunicaciones, S. A. de C. V. 37,629 16,835
Club Atletico Morelia, S. A. de C. V. 36,591 84,127
Other 73,933 88,131
------------ ------------
Ps 226,155 Ps 611,963
============ ============
Accounts payable:
- ----------------
Corporacion RBS, S. A. de C. V. (Ps 43,623)
Elektra Comercial, S. A. de C. V. (32,230) (Ps 17,491)
Inmuebles Ardoma, S. A. de C.V. (133,207)
Other (31,665) (31,284)
------------ ------------
(Ps 107,518) (Ps 181,982)
============ ============
In addition to the amounts due from and due to related parties shown above, TV
Azteca recorded an accounts receivable of Ps1,898,000 from Unefon at December
31, 1999, as a result of an advertising agreement described below.
At a General Stockholders' Meeting of Compania Operadora de Teatros, S. A. de C.
V. (Teatros), a wholly-owned subsidiary of Grupo COTSA, held on September 30,
1999, Teatros' stockholders approved the transfer of certain assets and
liabilities to two new subsidiaries of Grupo COTSA, Alternativas Cotsa, S. A. de
C. V. and Inmobiliaria Cotsa, S. A. de C. V. Pursuant to Mexican law, this
transaction is subject to certain registration and publication requirements.
In a General Stockholders' Meeting held on October 1, 1999, Teatros'
stockholders approved an increase in capital and the acquisition by Inmuebles
Ardoma, S. A. de C. V. (Ardoma), a subsidiary of Grupo Elektra, S. A. de C. V.,
of 71% of the capital stock of Teatros in exchange for capitalizing
approximately Ps324.9 million in advances previously made by Ardoma to Teatros.
The gain or loss from this transaction will not be material.
The principal transactions with related parties are as follows:
Advertising revenue
Revenue from airing advertising for related parties amounted to Ps40,067,
Ps50,771 and Ps91,351 during the years ended December 31, 1997, 1998 and 1999,
respectively.
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 for 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$1,500 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.
On December 22, 1998, TV Azteca entered into another Television Advertising Time
Agreement with Elektra (the "Prime Airtime Agreement"). Under this agreement, TV
Azteca agreed to air commercial spots for Elektra at discounted rates based on
the gross rating points assigned to the airtime chosen by Elektra for each
commercial spot. At least 60% of the commercial spots must be aired on "stellar"
airtime (from 7:00 p.m. to midnight) and half of this 60% of all commercial
spots must be aired on "prime" airtime (from 9:00 p.m. to 11:00 p.m.). The
remaining 40% may be aired on any other airtime. Under the Prime Airtime
Agreement, Elektra determines each year how much airtime to purchase from TV
Azteca. In 1999, Elektra purchased US$4,000. The Prime Airtime Agreement was
executed for a term of five years and may not be terminated by Elektra. However,
it may be terminated by TV Azteca upon at least 15 days' notice. Elektra's
rights under this agreement may not be transferred to third parties.
Effective September 30, 1996, TV Azteca entered into a Television Advertising
Time Agreement with a wholly-owned subsidiary of COTSA (the "COTSA Advertising
Agreement") under which COTSA or any of COTSA's subsidiaries has the right to 42
commercials per week on Channel 7 or 13 for a period of 10 years, each spot with
20 seconds average duration, totaling 782 minutes each year, but only in
otherwise unsold airtime. In exchange for the advertising time, COTSA has agreed
to pay TV Azteca US$210 each year. The COTSA Advertising Agreement may not be
terminated by TV Azteca; however, it may be terminated by COTSA at any time upon
at least 90 days' notice.
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 TV Azteca 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.
On June 30, 1998, TV Azteca signed an advertising agreement with Unefon (Unefon
advertising agreement), which was amended on October 15, 1999. Under the terms
of agreement, Unefon has the right to advertising spots on Channels 13 and 7 and
their national networks, as well as any other open television channel operated
or commercialized by TV Azteca, either directly or indirectly through its
affiliates or subsidiaries. The advertising spots that are the subject of the
Unefon advertising agreement will total 120,000 GRPs (a GRP is a Gross Rating
Point-Minute, which is the number of ratings points the broadcast of 60-second
commercial or proportional fraction thereof) over a ten-year period.
Each year during the term of the agreement, Unefon will be able to make use of
up to 35,000 GRPs. Unefon must submit a request for air time, specifying dates
and hours of show-time, to TV Azteca in advance.
Unefon is obligated to make use of 100% of the GRPs over a period of ten years.
Any balance remaining after ten years will be automatically cancelled and TV
Azteca will have no further obligations to Unefon. Unefon will pay TV Azteca a
total of US$200,000 for the advertising services in installments as advertising
is aired. These payments will be made by Unefon in quarterly installments of 3%
of Unefon's gross revenues for billed telephone services in each quarter. The
agreement provides that Unefon may defer making payments until the third year of
the agreement. Moreover, Unefon will pay interest on any advertising aired but
still unpaid, at the rate per annum of the average annual CPP (Costo Porcentual
Promedio de Captacion) plus three points. Upon conclusion of the ten-year
period, any balance of the US$200,000 that remains outstanding will be paid by
Unefon in installments on a quarterly basis. At December 31, 1999, TV Azteca had
recorded an accounts receivable and a corresponding advertising advance pursuant
to this agreement.
Interest expense
During the years ended December 31, 1997, 1998 and 1999, Azteca received
short-term loans from related parties. Interest expense incurred under these
arrangements amounted to Ps39,162, Ps112 and Ps10,841, respectively.
Interest income
During the years ended December 31, 1997, 1998 and 1999 TV Azteca extended
short-term loans to certain related parties. Interest income under these
arrangements amounted to Ps4,274, Ps16,757 and Ps15,874, respectively.
Donations
In the years ended December 31, 1997 and 1998 Azteca made donations to a
non-profit organization managed by a related party of Ps64,422 and Ps89,097,
respectively. The related party has permission from tax authorities to collect
donations and issue the corresponding receipts.
Loan granted to stockholder
On January 26, 1999, TV Azteca lent US$40,000 to its principal shareholder, Mr
Ricardo Salinas, secured by approximately 192 million of TV Azteca's CPOs held
by the Company. The loan was subject to interest at an annual rate of 12% and
was repaid in its entirety, including accrued interest, on March 26, 1999.
TV Azteca made a US$40,000 loan to Corporacion RBS, S. A. de C. V., a company
controlled by Mr. Ricardo Salinas, on April 15, 1999, subject to a 12% annual
interest rate and guaranteed by approximately 192 million of TV Azteca's CPOs
held by the Company. This loan was cancelled as part of the consideration for TV
Azteca's purchase from Mr. Salinas of his interest in Unefon (See Note 7).
On December 23, 1999, three loans were granted to Mr. Salinas for on aggregate
amount of US$2,367 with terms of one year. The Company made loans to Mr. Salinas
of Ps49,416 and US$2,000 in 1998 and Ps18,658 in 1997. In connection with the
two loans granted in 1998, the Ps49,416 loan was paid in full on the same day it
was made, and at December 31, 1998 the outstanding balance was US$2,000. The
1997 loan was paid on December 31, 1997. Two of the loans granted in 1999 bore
interest at the rate of 12% on the other one bore interest at the rate of
11.05%, the 1998 loans bore interest at the rates of 35.10% and 11.05%,
respectively, and the 1997 loan bore interest at a rate of 20%.
Building leasing income
In May 1998, TV Azteca signed a building lease agreement with Operadora Unefon,
S. A. de C. V. (Ounefon) (formerly Sistemas Profesionales de Comunicacion, S. A.
de C. V.), a related party. The lease has a term 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 Ps1,681 a
month, payable in advance each month. During the years ended December 31, 1998
and 1999 the aggregate lease income received by TV Azteca amounted to Ps12,125
and Ps20,566, respectively.
In 1999, Teatros signed several building lease agreements with Grupo Elektra, S.
A. de C. V. and Hecali, S. A. de C. V., related parties. Most of the leases have
a term of one year, starting January 1, 1999. The rents under lease agreements
are for different amounts, payable in advance each month. During the year ended
December 31, 1999 the aggregate lease income received by Teatros amounted to
Ps29,748.
NOTE 10 - SHORT-TERM AND LONG-TERM BANK LOANS:
At December 31, 1998 and 1999 short-term debt for equipment financing amounted
to Ps314,611, and Ps673,095, respectively, representing unsecured loans in US
dollars with Mexican and foreign banks, with an average interest rate of 12.50%
and 9.14% at December 31, 1998 and 1999, respectively.
Long-term bank loans are analyzed as follows:
December 31,
------------
1998 1999
---- ----
Building and equipment financing Ps 1,275,971 Ps 590,427
Loan from ATC 570,000
Less-current portion 139,039 88,262
--------------- ----------------
Long-term bank loans Ps 1,136,932 Ps 1,072,165
=============== ================
TV Azteca notes Ps 4,729,263 Ps 4,037,500
Azteca notes 2,837,557 2,422,500
--------------- ----------------
Total senior notes Ps 7,566,820 Ps 6,460,000
=============== ================
Maturity of long-term bank loans:
Year ending at December 31, Amount
2001 Ps 89,100
2002 76,700
2003 300,400
2004 31,700
Thereafter 574,265
--------------
Ps 1,072,165
=========
TV Azteca Notes
On February 5, 1997, TV Azteca issued unsecured long-term Series "A" and Series
"B" Guaranteed Senior Notes (TV Azteca Notes) in the international markets in an
amount of US$125 million, payable in the year 2004, bearing interest rate of
10.125% per annum and of US$300 million, payable in the year 2007, bearing
interest 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
August 15, 1997. Substantially all of TV Azteca's 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. The parent company is a non-operating holding
company with no assets, liabilities or operations other than its investments in
its subsidiaries. Separate financial statements of each guarantor subsidiary
have not been presented because management of TV Azteca has determined that they
are not material to investors.
Senior Secured Notes
On June 12, 1997, the Company 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 is
payable semi-annually on June 15 and December 15 each year, commencing December
15, 1997. The Secured Notes were 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 the Company except for the Elektra reserved
shares, representing 41% of the capital stock of TV Azteca. At December 31,
1999, 224 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
the Company, 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 the Company, 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,
the Company 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, the
Company 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 the Company
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 for
approximately US$21.5 million at an annual interest rate of LIBOR plus 2.25% and
approximately US$2.7 million at an annual interest rate of LIBOR plus 4.25%
(7.62% and 9.62% at December 31, 1999, respectively). Both Exim Bank-guaranteed
loans are payable in 14 semi-annual payments beginning in June 1996. At December
31, 1999, payments on the aforementioned credits have been made amounting to
US$12.3 and US$1.5 million, respectively (US$9.2 and US$1.1 million in 1998,
respectively).
On September 18, 1997, TV Azteca obtained a mortgage loan for the acquisition of
an office building amounting to US$25 million from Banco Bilbao Vizcaya, S. A.
(BBV). TV 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.
In March 1999, TV Azteca obtained a line of credit from Exim Bank. Under this
credit line, Exim Bank will first make 180-day bridge loans to TV Azteca. These
bridge loans will then be consolidated into a single loan with a term of five
years, under which TV Azteca will make payments every six months. Disbursements
may be made through letters of credit, through reimbursements of payments
already made to the creditor, or through direct payments to the creditor. The
line of credit is for US$30,239, subject to interest at LIBOR plus 0.75% for the
bridge loans, and at LIBOR plus 1.00% for the consolidated loan, plus a
commission of US$4.79 for every US$100 borrowed. TV Azteca will use the proceeds
of the loan to acquire fixed assets. This loan is guaranteed by certain
subsidiaries of TV Azteca. At December 31, 1999, TV Azteca had drawn down funds
in the amount of US$16,681 under the Exim Bank credit line.
In May 1999, TV Azteca obtained a line of credit from Standard Chartered Bank
for US$10,000, with a period of availability from May 28, 1999 to May 28, 2000.
The interest rate is variable, and is determined as funds are drawn down (the
average interest rate for funds drawn down under this line of credit was 8.76%
in 1999). The purpose of the loan is to finance the acquisition of fixed assets.
At December 31, 1999, US$3,423 had been drawn.
Syndicated loan
On January 19, 1999, TV Azteca obtained a revolving loan (syndicated loan) from
a syndicate of banks headed by Bank of Boston for US$90,000, maturing in 364
days and subject to interest at LIBOR plus 3.75% in the first six months and
LIBOR plus 4.75% in the second six months. The principal was to be repaid in a
single payment upon termination of the agreement. The proceeds of the loan were
used to refinance short-term loans outstanding at December 31, 1998 in the
amounts of US$50,000 from Bank of Boston and US$30,000 from the West Merchant
Bank and for other corporate purposes. The syndicated loan imposed certain
financial conditions to be complied with during the loan period. Because the
loan was used to repay the short-term loans mentioned above, these were
classified as long-term at December 31, 1998. The syndicated loan was prepaid in
two payments: US$30,000 in July 1999 with funds obtained from the issuance of a
short-term Euro-commercial Paper Program (described below), and US$60,000 in
October 1999 with funds obtained from a loan from American Tower Corporation
(ATC), as described below.
Loan from ATC
In September 1999, TV Azteca signed a financing agreement with ATC (the ATC
Interim Facility) for up to US$60,000 over a six-month term, with annual
interest payments of US$13,900. At December 31, 1999, TV Azteca had drawn the
full US$60,000.
On February 11, 2000, TV Azteca entered into a long-term credit facility for up
to US$119,800 with a Mexican subsidiary of ATC (the ATC Long-Term Facility). The
Facility is composed of a US$91,800 unsecured term loan and a US$28,000 working
capital loan secured by certain of TV Azteca's real estate properties. The
interest rate on the loans is 12.877%, subject to reduction during the first
eighteen months of the term of the loans based on the amount of rent paid by TV
Azteca's affiliates pursuant to the Global Tower Project Agreement. In no event
will the interest rate fall below 12.277%. TV Azteca's payment obligations under
the ATC Long-Term Facility are guaranteed by three principal subsidiaries of TV
Azteca that also guarantee TV Azteca's payment obligations under the TV Azteca
Notes. The initial term of the unsecured term loan under the ATC Long-Term
Facility is 20 years, which term may be extended, so long as the Global Tower
Project Agreement (described below) remains outstanding, for up to an additional
50 years. The term of the working capital loan is one year, which term may be
renewed annually for successive one-year periods so long as the Global Tower
Project Agreement remains outstanding.
On February 11, 2000, TV Azteca drew down US$71,800 of the unsecured term loan
and the full US$28,000 under the working capital loan. TV Azteca intends to draw
down the remainder of the term loan upon completion by ATC of a transmission
tower arrangement with Unefon, which is a condition to the availability of the
remaining US$20,000. A portion of the proceeds under the ATC Long-Term Facility
was used to repay the ATC Interim Facility in its entirety. The balance of the
proceeds from the ATC Long-Term Facility will be used for general corporate
purposes of TV Azteca and its subsidiaries.
In February 2000, TV Azteca, together with its subsidiary Television Azteca, S.
A. de C. V., entered into a 70-year Global Tower Project Agreement with a
Mexican subsidiary of ATC regarding space not used by TV Azteca in its
operations on up to 190 of TV Azteca's broadcast transmission towers. In
consideration for the payment of a US$1,500 annual fee and for a loan of up to
US$119,800 to TV Azteca under the ATC Long-Term Facility, TV Azteca granted ATC
the right to market and lease TV Azteca's unused tower space to third parties as
well as to TV Azteca's affiliates and to collect for ATC's account all revenue
related thereto. TV Azteca retains full title to the towers and remains
responsible for the operation and maintenance thereof. The Secretaria de
Comunicaciones y Transports (CST) approved the parties' agreement on February
10, 2000. After the expiration of the initial 20-year term of the ATC Long-Term
Facility, TV Azteca has the right to purchase from ATC at fair market value all
or any portion of the revenues and assets related to the commercialization
rights at any time upon the proportional repayment of the outstanding principal
amount under the ATC Long-Term Facility.
Euro-Commercial Paper Program
On May 14, 1999, TV Azteca entered into a US$75,000 Euro-Commercial Paper
Program (the "ECP Program") with ABN AMRO Bank, N.V., as the principal arranger
and dealer. The size of the ECP Program was increased to US$130,000 in July
1999. Notes issued under the ECP Program are issued at a discount and do not
bear interest. TV Azteca's payment obligations under the ECP Program are
guaranteed by three principal subsidiaries of TV Azteca that also guarantee TV
Azteca's payment obligations under the TV Azteca notes. The maturity of the
notes issued under the ECP Program may not be more than 365 days. There is no
commitment to purchase notes to be issued under the ECP Program. As of December
31, 1999, the aggregate principal amount of the notes outstanding under the ECP
Program was US$47,500, which is payable in a series of installments ending in
June 2000.
NOTE 11 - PROMISSORY NOTES:
On April 8, 1987 COTSA signed an agreement with the Fundacion Mary Street
Jenkins for the acquisition 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 (Ps205,291), of which US$8.8 million (Ps99,973)
corresponds to interest calculated at an annual rate of 9.7% and US$9.2 million
(Ps105,319) corresponds to principal.
At December 31, 1999, US$1 million (Ps9,851) is to be paid currently and US$1
million (Ps10,926) come due in 2001.
This liability is guaranteed by Banobras, S.N.C. (a bank of the Mexican
government).
NOTE 12 - LABOR OBLIGATIONS:
- ---------------------------
Below is a summary of the main financial data of the seniority Company's premium
plan:
At December 31,
---------------
1998 1999
---- ----
Accumulated benefit obligation (same as
accumulated liabilities) Ps 2,153 Ps 2,535
Net projected liability 2,086 1,529
---------- ----------
Intangible asset Ps 67 Ps 1,006
========== ==========
Net cost for the year Ps 338 Ps 644
========== ==========
NOTE 13 - 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 Ps148,759 (US$13 million) represented by 92,505
shares.
At December 31, 1999, the capital stock of the Company is represented by
1,037,245 common shares with no par value as follows:
Number of
shares Description Amount
------ ----------- ------
Representing the fixed portion of the
50 capital stock Ps 50
Representing the variable portion of
1,037,195 the capital stock 626,094
--------- --------------
1,037,245 626,144
=========
Restatement 1,098,442
--------------
Capital stock in pesos of purchasing power
at December 31, 1999 Ps 1,724,586
==============
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.
Due to changes in the income tax law, effective January 1, 1999, dividends paid
to nonresident shareholders are subject to a 7.7% withholding tax (i.e., 5% of
the dividend amount grossed-up by the Mexican corporate tax on the distributed
earnings).
In 1999, net gains in the amounts of Ps303,223 and Ps950,681 were generated in
the Company and in minority interest, respectively, from both the capital stock
increase and the corresponding premium resulting from the issuance of capital
stock by TV Azteca.
In the years ended December 31, 1998 and 1999, there were various premium paid
on stock repurchases, repurchases of shares, sale of treasury shares, valuation
of shares and stock options exercised amounting to Ps158,610 and Ps8,061,
respectively, in TV Azteca, which were reflected by the Company as a charge in
the loss from holding nonmonetary assets. The effect in minority interest for
1998 and 1999 was Ps88,061 and Ps6,768, respectively.
b. Employee stock option plan
In the fourth quarter of 1997, TV Azteca adopted an employee stock option
plan 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 to these options range from US$0.29 to US$0.39 per
CPO with a more significant number of options being granted to TV Azteca's
senior management and key actors, presenters and creative personnel.
The options, which relate to an aggregate of 76 million CPOs, 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 may be cancelled, in the case employment years after 1996,
if TV Azteca's operating profit before deducting depreciation and
amortization in that year has not increased by at least 15% as compared to
the previous fiscal year. An employee's options in respect 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. TV Azteca also granted options in the fourth quarter of 1997
exclusively to senior management with respect to 8 million CPOs at an
exercise price of US$0.39 per CPO.
In 1999, options with respect to 0.5 million CPOs were exercised (3 million
CPOs in 1998) under the general option plan, at a price of US$0.29 per CPO.
Under the top executive plan, options with respect to 40 million CPOs were
granted (none in 1998) and exercised during 1999, at a price of US$0.0815
per CPO.
The activity of employee stock option plans was as follows:
At December 31,
---------------
Options
1998 1999
---- ----
Millions of CPOs
----------------
Granted (cumulative) 76 116
Exercised (cumulative) (11) (51)
---- ------
Outstanding 65 65
==== ======
Available to grant 164 124
==== ======
Total authorized 240 240
==== ======
c. NBC warrants
In May 1994, TV Azteca and Radio Televisora del Centro, S.A. 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$7,000 over a three-year period
ended June 30, 1997. TV Azteca recorded the cost of the programming obtained
from NBC as exhibition rights and amortizes the related costs as the
programs are aired.
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 then fully
diluted outstanding shares of TV Azteca post-exercise (the warrants). The
total warrant exercise price was US$120,000 before June 30, 1994, and
accreted at 2.75% compounded quarterly thereafter until it reached
US$160,000 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 was 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$5,552, the balance of the
US$7,000 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 1.5% 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 deducted from retained earnings.
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, 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. If TV
Azteca is unsuccessful in the arbitration, it may be required to pay, in
addition to the amounts described above, an amount based on the value of the
shares that NBC would have acquired on its partial exercise of the warrant
as a result of TV Azteca's market capitalization exceeding the specific
level due to the proposed public offering, or to issue such additional
shares to NBC.
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 answer 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. See Note 17.
NOTE 14 - INCOME TAX AND TAX LOSS CARRYFORWARDS:
During the years ended December 31, 1997, 1998 and 1999, 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
Ps298,343, Ps111,062 and Ps73,993 during the years ended December 31, 1997, 1998
and 1999, respectively, and is shown in the consolidated statement of income as
an extraordinary item.
At December 31, 1999, the Company and its subsidiaries have combined tax loss
carryforwards amounting to Ps951,228 which expire as follows:
Tax loss Year of
carryforwards expiration
------------- ----------
Ps 320,613 2004
106,649 2005
3,977 2006
167,715 2007
340,430 2008
11,844 2009
-------------
Ps 951,228
=============
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, 1999, the Company and its subsidiaries have tax-loss
carryforwards for an amount of Ps951 millions, of which Ps525 millions was
incurred in Azteca, Ps424 millions was incurred in CASA and Ps2 millions was
incurred in COTSA. These tax-loss carryforwards can only be amortized by the
incurred company.
NOTE 15 - COMMITMENTS AND CONTINGENCIES:
TV Azteca leases the use of satellite transponders. Total rent expense under
such leases included in operating costs and expenses was Ps33,736, Ps34,334 and
Ps31,969 during the years ended December 31, 1997, 1998 and 1999, respectively.
Combined rental obligations under these agreements are US$200 per month. Each
lease agreement expires in May 2005 but can be terminated by the supplier 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 results of operations or
financial condition.
NOTE 16 - OTHER INCOME (EXPENSE):
Below is a summary of the main items of other income (expense):
Year ended December 31,
------------------------------------------------------
1997 1998 1999
---- ---- ----
Cancellation of exhibition rights (1) (Ps 283,148)
Cancellation of doubtful accounts (2) (179,544)
Cancellation of other inventories (3) (65,138)
Equity method of affiliates (Ps 6,855) (Ps 93,408) (9,989)
Donations (see Note 9) (67,030) (93,370) (106,065)
Miscellaneous expenses non-deductible for
tax purposes (49,791)
Legal advisory services(litigation expenses) (52,747) (42,935)
Amortization of costs related to the issuance
of TV Azteca Notes and Secured Notes (52,307)
Gain on the sale of Dataflux shares (see Note 8) 117,312
Others (26,419) 63,488 (42,831)
----------- -------------- -------------
Ps 17,008 (Ps 228,344) (Ps 779,441)
=========== ============= =============
(1) In 1999 TV Azteca cancelled programming (including motion pictures,
television series, telenovelas and entertainment programs) which, due to
their nature, no longer fit into the TV Azteca's new programming
strategy that was developed to increase audience ratings, or whose rights
to be shown terminated in 1999.
(2) This comprises cancellation of unrecoverable amounts due to their nature,
significance or age.
(3) Cancellation of other inventories include the cancellation inventories in
the general warehouse and barter inventories which can no longer be
utilized because of physical deterioration.
NOTE 17 - BUSINESS SEGMENTS:
The Company operates in two principal business segments, television and movie
theaters. Substantially all of the Company's activities are in Mexico.
Relevant information on these business segments follows:
Year ended December 31,
----------------------------------------------------------
1997 1998 1999
---- ---- ----
Net revenue:
Television Ps 4,845,476 Ps 5,065,780 Ps 4,112,553
Movie theaters 172,755 139,960 81,541
----------------- ----------------- ----------------
Ps 5,018,231 Ps 5,205,740 Ps 4,194,094
================= ================= ================
Operating income (loss):
Television Ps 2,065,725 Ps 1,835,158 Ps 897,283
Less elimination entries and others (39,884) (58,363) (61,312)
----------------- ----------------- ----------------
2,025,841 1,776,795 835,971
----------------- ----------------- ----------------
Movie theaters (18,649) (33,987) (49,977)
Less elimination entries and other (21,245) (7,058) (7,059)
----------------- ----------------- ----------------
(39,894) (41,045) (57,036)
----------------- ----------------- ----------------
Ps 1,985,947 Ps 1,735,750 Ps 778,935
================= ================= ================
Capital expenditures:
- --------------------
Television Ps 1,710,389 Ps 535,314 Ps 158,685
Movie theaters (31,584) 4,955 5,910
----------------- ----------------- ----------------
Ps 1,678,805 Ps 540,269 Ps 164,595
================= ================= ================
Total assets (at year end):
Television Ps 14,210,872 Ps 14,210,317 Ps 16,367,615
Less elimination entries and others 1,803,444 1,422,882 1,036,274
----------------- ----------------- ----------------
16,014,316 15,633,199 17,403,889
Movie theaters 786,368 841,337 1,044,719
----------------- ----------------- ----------------
Ps 16,800,684 Ps 16,474,536 Ps 18,448,608
================= ================= ================
NOTE 18- SUBSEQUENT EVENTS (unaudited):
a. NBC warrants
In February 2000, TV Azteca and NBC commenced discussions regarding the possible
settlement of all claims raised in the ICC arbitration proceeding. Based on the
progress of those discussions, on March 21, 2000, TV Azteca and NBC jointly
notified the ICC tribunal that settlement discussions were taking place and
requested that the ICC tribunal withhold any decision in the matter for a period
of 30 days, unless the ICC tribunal was informed by either party within that
30-day period that settlement discussions had been abandoned. This 30-day period
was extended through April 28, 2000.
On April 28, 2000, TV Azteca and NBC entered into a binding settlement
agreement. Pursuant to the settlement agreement, the arbitration proceeding
before the ICC tribunal has been terminated with prejudice and all claims by TV
Azteca against NBC and NBC Europe, and all claims by NBC and NBC Europe against
TV Azteca, have been fully released and discharged. Under the terms of the
settlement agreement, TV Azteca paid NBC the sum of US$46,170 in cash. This
settlement will be recorded as an extraordinary item in the second quarter of
2000.
b. NBC investment
In April 2000, TV Azteca and NBC-TVA Holding, Inc., a subsidiary of NBC
("NBC-TVA"), entered into a subscription agreement (the "Subscription
Agreement") pursuant to which NBC-TVA agreed to purchase from TV Azteca 2
million TV Azteca's ADSs. NBC-TVA will pay TV Azteca US$13.085 per ADS, for an
aggregate price of US$26,170. NBC-TVA's obligations under the Subscription
Agreement are guaranteed by NBC. In connection with the Subscription Agreement,
NBC and TV Azteca entered into a registration rights agreement pursuant to which
TV Azteca has agreed to use commercially reasonable best efforts to register TV
Azteca's ADSs to be purchased by NBC-TVA pursuant to a registration statement
under the Securities Act. NBC-TVA's obligations under the Subscription Agreement
are subject to, among other conditions precedent, the accuracy of TV Azteca's
representations and warranties and the registration statement being declared
effective by the Securities and Exchange Commission on or before July 31, 2000.
NOTE 19 - 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,
-----------------------
1997 1998 1999
---- ---- ----
Net income (loss) applicable to majority
stockholders under Mexican GAAP Ps 678,379 (Ps403,803) (Ps 49,854)
Stock dividend 18,536
Amortization of loan discount (8,468)
Amortization of goodwill (164,165) (164,165) (164,165)
Deferred income taxes (202,751) (198,583) 1,140,626
Exchange loss on NBC Warrant (6,366) (56,719) 10,828
Gain on monetary position of NBC Warrant 41,058 46,945 29,885
Accretion of NBC Warrant (8,838)
Equity in loss of Unefon (6,427)
Compensation cost from stock options (387,645) (124,625) (251,592)
Effect of fifth amendment to B-10 (175,065) 16,000 (406,682)
Effect on minority stockholders of US GAAP
adjustments 446,977 208,700 (195,190)
---------- -------- ----------
Net income (loss) under US GAAP Ps 231,652 (Ps676,250) Ps 107,429
========== ========= ==========
b. Reconciliation of stockholders' equity:
Year ended December 31,
-----------------------
1998 1999
---- ----
Majority stockholders' equity under
Mexican GAAP Ps 1,365,134 Ps 1,332,200
Deferred income tax effects (1,529,807) (389,182)
Goodwill 1,066,916 902,909
Equity in loss of Unefon (6,427)
Unefon acquisition - excess basis 88,151
Effect of fifth amendment to B-10 264,155 313,258
Effect on minority stockholders of
US GAAP adjustments (92,559) (395,892)
-------------- --------------
Stockholders' equity under US GAAP Ps 1,073,839 Ps 1,845,017
============== ==============
c. An analysis of the changes in stockholders' equity under US GAAP is as
follows:
1997 1998 1999
---- ---- ----
Balance at beginning of year Ps 1,666,383 Ps 2,383,322 Ps 1,073,839
Decrease of capital stock (148,759)
Net income (loss) 213,652 (676,250) 107,429
Effects from repurchase, valuation, option
shares and increase of capital of TV Azteca (158,610) 295,162
Gain (loss) from holding nonmonetary assets 652,046 (474,623) 368,587
-------------- -------------- --------------
Balance at end of year Ps 2,383,322 Ps 1,073,839 Ps 1,845,017
============== ============== ==============
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 Ps201,723, 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 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.
required TV Azteca to issue 1% of its outstanding shares to NBC upon
attainment of the performance goals consisting of specified market
share levels or the market capitalization of TV Azteca of at least US$
1,400 if a public offering of TV Azteca's stock occurred prior to 1998
and US$ 1,800 if a public offering occurs subsequently. 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 certain options granted in connection
with the syndicated loan, as discussed in Note 9, that was repaid in
1997 would be recorded as additional paid-in capital and 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 Ps45,165,
at the date of grant, based on an independent appraisal. During the
years ended December 31, 1997, the annual amount of related loan
discount amortization under US GAAP would be Ps8,467.
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 license agreements are signed. At
December 31, 1998 and 1999, Ps369,688 and Ps311,942, 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. Unefon advertising advance payment
TV Azteca recorded the advertising contract signed with Unefon (see
Note 7) in a manner similar to other advertising contracts that TV
Azteca has entered into with related and third parties (see Note 8).
The Unefon advertising contract is a long-term contract which
originated a long-term account receivable of Ps1,890,667 and an
advertising advance for the same amount. For US GAAP purposes, this
long-term receivable represents an obligation to provide services in
the future which would not be recorded in the balance sheet, and
consequently both the asset and the advertising advance would not be
recorded under US GAAP. Under Mexican inflation accounting rules, the
account receivable is a US dollar denominated monetary item that
exposes TV Azteca to exchange gains and losses as well as to monetary
losses, which were immaterial during 1999. Advertising advances are
considered non-monetary items under Mexican inflation accounting rules
and restated in accordance with the effects of inflation.
vii. 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.
viii. Effects of fifth amendment to statement B-10
As mentioned in Note 2a., the Company 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 statements, and consequently the Company has
determined the effects in exhibition rights and equipment of foreign
and current year depreciation and amortization and reflected them in
its results of operations and financial position under US GAAP.
ix. Comprehensive income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards Number 130, Reporting Comprehensive Income ("SFAS
130"). During the periods presented, the Company had no change in
equity from transactions or other events and circumstances from
non-owner sources. Accordingly, a statement of comprehensive income
(loss) has not been provided as comprehensive income (loss) equals net
income (loss) for all periods presented.
x. Deferred income tax
As stated in Note 2o., income tax is recorded under Mexican GAAP
following inter-period allocation procedures under the partial
liability method. Under this method, deferred income tax is recognized
only in respect of identifiable, non-recurring 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, (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 non-monetary 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 non-monetary assets. The significant
components of income tax (expense) benefit under US GAAP were as
follows:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Current Ps 296,966 Ps 300,170 Ps 275,100
Deferred 202,751 198,583 (1,140,626)
------------- ------------ ---------------
Total provision Ps 499,717 Ps 498,753 (Ps 865,526)
During 1999, TV Azteca and its external legal and tax advisers
evaluated the deductibility of the concession rights and concluded that
such rights are deductible for tax purposes, over the period granted by
such concessions. Based on this conclusion and a confirmation received
from the Mexican tax authorities in March 2000, TV Azteca adjusted the
previously recorded deferred tax liability.
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,
-----------------------
1997 1998 1999
---- ---- ----
Income (loss) before income tax
(benefit) expense Ps 901,502 (Ps 419,314) (Ps 468,178)
============ ========== ==========
Income tax (tax benefit) at statutory rate 322,727 (142,565) (163,862)
Non deductible stock dividends 6,302
Effects of inflation components 176,124 389,200 152,078
Change in deductibility of TV Concession (929,895)
Inventories 135,686 143,106
Gain on sale of capital stock (5,436)
Other 116,432 (66,953)
------------ ---------- ----------
Income tax (benefit) expense Ps 499,717 Ps 498,753 (Ps865,526)
============ ========== =========
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,
------------
1998 1999
---- ----
Deferred income tax liabilities:
Television concessions Ps 1,148,160 Ps 82,884
Inventories and provisions 369,054 528,277
Property, machinery and equipment 517,709 356,187
-------------- ------------
2,034,923 967,348
-------------- ------------
Deferred income tax assets:
Advertising advances (193,821) (245,237)
Operating loss carryforwards (311,295) (332,929)
-------------- ------------
(505,116) (578,166)
-------------- ------------
Net deferred income tax liabilities Ps 1,529,807 Ps 389,182
============== ============
At the effective date of the privatization in 1993 in connection with
which TV Azteca was formed, additional goodwill of Ps1,969,720 was
recorded due to the deferred net income tax liability, relating
primarily to the nondeductibility of the television concessions,
required under US GAAP. The additional goodwill will be amortized over
12 years.
xi. 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, 1998 and 1999 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.
TV Azteca Notes and Secured Notes ("notes"). The carrying value of the
Company's notes and the related fair value based on the quoted market
prices for the same or similar issues at December 31, 1999 was
Ps6,460,000 and Ps5,693,328, respectively (Ps7,566,820 and Ps6,551,963,
respectively at December 31, 1998).
xii. Property, machinery and equipment
Under US GAAP advances for the acquisition of machinery and equipment
would be classified as prepayments. As of December 31, 1998 and 1999
the Company had advances of Ps31,693 and Ps26,140, respectively.
xiii. Unefon investment
TV Azteca acquired a 50% interest in Unefon, S. A. de C. V., a
telecommunication company on October 28, 1999. Unefon has not yet
commenced operations at December 31, 1999, and accordingly for Mexican
GAAP purposes, all the preoperating expenses have been capitalized.
Unefon also capitalized gain from monetary position relating to the
liability incurred in connection with the acquisition of the
concessions. For US GAAP purposes both effects would be recorded as
part of Unefon's results of operation. The effect of these US GAAP
differences to the results of operations of Unefon, since the date of
acquisition, has been included in the Company's US GAAP reconciliation.
The stockholders' equity of Unefon at the date of acquisition under US
GAAP was Ps88,151 greater than the amount under Mexican GAAP due to the
pre-operating costs and capitalized monetary gain, previously
discussed. This excess would result in an increase to Unefon's
stockholders' equity under US GAAP. Since this was an acquisition of an
entity under common control the difference between the book value
acquired and the amount paid would be considered a contribution from
the shareholder.
Summarized financial information at December 31, 1999 under Mexican
GAAP for Unefon, stated in Mexican pesos, is as follows:
Current assets Ps 253,150
Noncurrent assets 4,600,750
Current liabilities 248,541
Noncurrent liabilities 898,966
Stockholders' equity 3,706,393
xiv. 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", 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.
xv. Employee stock option plans
The granting of 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
Ps388 million, Ps125 million and Ps252 million for 1997, 1998 and 1999,
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 exercisable 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 TV Azteca's compensation
expense would have been Ps229,939, Ps51,676 and Ps127,221 for 1997,
1998 and 1999, respectively, and the net income (loss) and net income
per share would have been reduced to the proforma amounts indicated
below:
Year ended December 31,
----------------------------------------------
1997 1998 1999
---- ---- ----
Net income (loss) as reported Ps 231,652 (Ps 676,250) Ps 152,448
============ ============ ============
Net income (loss) pro forma Ps 393,458 (Ps 662,801) Ps 302,079
============ ============ ============
Net income (loss) per share as reported Ps 0.29 (Ps 0.92) Ps 0.22
============ ============ ============
Pro forma net income (loss) per share Ps 0.48 (Ps 0.83) Ps 0.38
============ ============ ============
The effect on net income (loss) and net income (loss) 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 of the Black-Scholes option pricing model and simple
binomial model with the following assumptions:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Expected volatility .302 .302 .339
Risk-free interest rate 18% 18% 16.25%
Expected life of options (in years) 5 5 5
Expected dividend yield 10% 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 TV Azteca's stock option
plans as of December 31, 1997, 1998 and 1999 (post-split):
Number of options Weighted-average
(thousands of CPOs) exercise price
----------------- --------------
Granted 76,564 US$0.34
Exercised (8,180) 0.29
---------
Outstanding at December 31, 1997 68,384 0.32
Granted - -
Exercised (2,814) 0.29
---------
Outstanding at December 31, 1998 65,570 0.32
Granted 43,600 0.08
Exercised (40,458) 0.09
-------
Outstanding at December 31, 1999 68,712 0.32
Outstanding options exercisable at
December 31,
1997 4,866 0.29
=========
1998 9,514 0.32
=========
1999 10,820 0.32
=========
xvi. Effect of recently issued accounting standards
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which
requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings of other comprehensive
income, depending on whether a derivatives is designated as part of a
hedge transaction and, if it is, the type of hedge transaction. The
Company is currently involved in derivate or hedging activities. This
statement is effective for fiscal years beginning after June 15, 2000.
e. Condensed balance sheet and income statements under US GAAP:
The condensed balance sheets and income statements reflect the effects of
the principal differences between Mexican GAAP and US GAAP as shown below:
CONDENSED BALANCE SHEETS
At December 31,
---------------
1998 1999
---- ----
Current assets Ps 6,515,331 Ps 6,189,575
Television concessions - Net 3,516,619 3,367,314
Property, machinery and equipment - Net 3,675,059 3,313,847
Goodwill and other assets 3,658,557 4,869,424
Deferred income tax assets 311,295 332,929
---------------- -----------------
Total assets Ps 17,676,861 Ps 18,073,089
================ =================
Short-term debt Ps 314,611 Ps 771,208
Advertising advances 2,584,388 3,080,882
Deferred income tax payable 369,054 528,277
Other current liabilities 1,677,855 1,498,049
---------------- -----------------
Total current liabilities 4,945,908 5,878,416
---------------- -----------------
Guaranteed senior notes and senior
secured notes 8,703,752 7,532,165
Long-term debt 55,878 10,926
Long-term deferred income tax 1,665,868 439,071
---------------- -----------------
Total long-term liabilities 10,425,498 7,982,162
---------------- -----------------
Minority interest 1,231,616 2,367,494
---------------- -----------------
Stockholders' equity 1,073,839 1,845,017
---------------- -----------------
Total liabilities and stockholders' equity Ps 17,676,861 Ps 18,073,089
================ =================
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Net revenue Ps 5,018,231 Ps 5,205,740 Ps 4,194,094
Cost and expenses:
Programming, exhibition and
transmission costs 1,634,354 1,750,253 2,258,910
Selling and administrative expenses 1,197,707 943,452 1,059,800
Depreciation and amortization 919,737 1,052,065 918,888
--------------- ------------- ----------------
Operating income (loss) 1,266,433 1,459,970 (43,504)
Comprehensive financing income
(cost) (381,543) (1,653,976) 356,528
Other (expenses) income - Net 16,612 (225,308) (781,202)
--------------- ------------- ----------------
Income (loss) before provision
for income tax benefit (expense) 901,502 (419,314) (468,178)
Income tax benefit (expense) (499,717) (498,753) 865,526
--------------- ------------- ----------------
Net income (loss) before minority
interest 401,785 (918,067) 397,348
Minority interest (188,133) 241,817 (289,919)
--------------- ------------- ----------------
Net income (loss) Ps 213,652 (Ps 676,250) Ps 107,429
=============== ============= ================
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.
During the year ended December 31, 1997 the net cash flow operating,
investing and financing activities under US GAAP were as follows:
Year ended
December 31,
------------
1997
----
Cash flows from operating activities:
Net income Ps 213,652
Adjustments to reconcile net income to net
cash provided by operating activities:
Compensation cost from stock options 387,611
Minority interest 188,133
Monetary gain relating to financing activities (543,880)
Foreign exchange loss-net of monetary gain
on NBC Warrant (34,689)
Foreign exchange loss on bank loans and
promissory notes 142,509
Amortization of television concessions,
goodwill and exhibition rights 979,500
Depreciation 302,021
Deferred loan discount 8,467
Accretion of NBC Warrant 8,837
Deferred income tax 202,751
Changes in working capital (737,664)
------------
Net cash provided by operating activities 1,117,248
------------
Cash flows from investing activities:
Pledged securities (727,926)
Acquisition of machinery and
equipment - Net (1,406,646)
Advance payment for the acquisition of
subsidiaries' shares
(Acquisition) disposition of shares 58,608
Exhibition rights purchased (895,280)
------------
Net cash used in investing activities (2,971,244)
------------
Cash flows from financing activities:
Guaranteed senior notes and senior secured
notes received 7,136,150
Bank loans paid (2,832,486)
Bank loans received 650,365
Increase of capital stock (148,759)
Decrease of capital stock
Paid-in capital
Promissory notes paid (4,574)
Due to related parties (150,206)
Redemption of capital of subsidiary paid
to minority stockholders (1,152,012)
Deferred financing costs (222,945)
------------
Net cash provided by financing activities 3,275,533
------------
Increase in cash and cash equivalents 1,421,537
Cash and cash equivalents at beginning of year 419,385
------------
Cash and cash equivalents at end of year Ps 1,840,922
============
For the years ended December 31, 1998 and 1999, 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
statements:
Year ended
December 31,
------------
1998 1999
---- ----
Cash flows from operating activities:
Net (loss) income (Ps 676,250) Ps 107,429
Adjustments to reconcile net loss
to net cash provided by operating activities:
Minority interest (241,817) 289,919
Compensation cost from stock options 124,625 251,592
Amortization of television concessions,
goodwill and exhibition rights 1,133,926 918,888
Gain on sale of subsidiary (34,542)
Acquisition of shares - Net (13,080) 14,553
Foreign exchange loss - Net of monetary (gain)
on NBC Warrant 9,774 (40,713)
Foreign exchange loss net of monetary gain relating
to financial activities 1,454,668 (339,669)
Monetary gain (915,368) (634,445)
Deferred income tax 198,583 (1,140,626)
Net changes in working capital (90,072) 1,174,830
------------- -------------
Net cash provided by operating activities 984,989 567,216
------------- -------------
Cash flows from investing activities:
Investment in Unefon (1,934,920)
Pledged securities 25,116 380,084
Acquisition of machinery and equipment - Net (518,762) (138,457)
Exhibition rights purchased (991,760) (324,132)
------------- -------------
Net cash used in investing activities (1,485,406) (2,017,425)
------------- -------------
Cash flows from financing activities:
Debt received 536,677 1,306,517
Debt paid (8,002) (839,931)
Effects from repurchase and valuation of capital
of subsidiary (88,061) (6,768)
Dividends paid to minority interest (19,352) (21,951)
Effect relating to capital stock increase and premium
on issuance of capital stock of TV Azteca 950,681
-------------- --------------
Net cash provided by financing activities 421,262 1,388,548
------------- -------------
Effects of inflation and exchange rates changes
on cash (288,641) (120,015)
------------- -------------
Decrease in cash and cash equivalents (367,796) (181,676)
Cash and cash equivalents at beginning of year 1,552,211 1,184,415
------------- -------------
Cash and cash equivalents at end of year Ps 1,184,415 Ps 1,002,739
============= =============