EXHIBIT 1
DESC, S.A. DE C.V.
Financial Statements For the Years Ended
December 31, 2002 and 2001,
Expressed in Thousands of Mexican Pesos, and
Independent Auditors' Report
4
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF
DESC, S.A. DE C.V.:
We have audited the accompanying balance sheet of Desc, S.A de C.V. (the
"Company") as of December 31, 2002, and the related statements of loss, changes
in stockholders' equity and changes in financial position for the year then
ended, all expressed in thousands of Mexican pesos of purchasing power as of
December 31, 2002. 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 audit. The financial statements of the Company
as of December 31, 2001 and for the year then ended were audited by other
auditors who expressed an unqualified opinion in their report dated March 12,
2002.
The financial statements of the chemical segment (formerly Girsa, S.A. de C.V.
and Subsidiaries), Agroken, S.A. de C.V. and Subsidiaries, Corfuerte, S.A. de
C.V. and Subsidiaries (formerly Grupo Corfuerte, S.A. de C.V. and Subsidiaries),
and Authentic Acquisition Corporation, Inc. were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the reports of such
other auditors. Those statements reflect total assets and total revenues
constituting 42% and 53%, respectively, of the related consolidated totals as of
and for the year ended December 31, 2002. The Company's investment in those
entities, is accounted for by use of the equity method in the accompanying
financial statements, and its equity in the aforementioned entities' net assets
and net income as of and for the year ended December 31, 2002 reflect 39% and
89%, respectively, of the related totals.
We conducted our audit in accordance with auditing standards generally accepted
in Mexico. 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 are prepared in conformity 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 audit and the reports of the other
auditors provide a reasonable basis for our opinion.
As discussed in Note 2, the accompanying financial statements have been prepared
in compliance with legal regulations that require presentation of the Company's
financial statements as a legal entity. Accordingly, investment in shares of
subsidiaries is valued by the equity method. Consolidated financial statements
are presented separately, on which we issued an unqualified opinion on March 25,
2003, and should be consulted for decision- making purposes.
In our opinion, based on our audit and the reports of the other auditors, such
financial statements present fairly, in all material respects, the financial
position of Desc, S.A. de C.V. as of December 31, 2002, and the results of its
operations, changes in its stockholders' equity and changes in its financial
position for the year then ended in conformity with accounting principles
generally accepted in Mexico.
The accompanying financial statements have been translated into English for the
convenience of users.
/s/ Deloitte & Touche
March 25, 2003
5
DESC, S.A. DE C.V.
BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
EXPRESSED IN THOUSANDS OF CONSTANT
MEXICAN PESOS
2002 2001
---- ----
ASSETS
- ------
CURRENT:
Cash and cash equivalents $ 1,263,835 $ 104,464
Accounts receivable from subsidiaries 4,762,376 2,650,926
Other accounts receivable 360,638 472,906
Real estate assets available for sale - 18,861
-------------- --------------
Total current assets 6,386,849 3,247,157
INVESTMENT IN SHARES OF:
Subsidiaries 11,041,879 11,608,014
Associated companies 103,700 56,007
-------------- --------------
11,145,579 11,664,021
PROPERTY, NET 296,123 175,003
DEFERRED INCOME TAXES - 232,324
OTHER ASSETS, NET 412,397 282,099
-------------- --------------
$ 18,240,948 $ 15,600,604
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT:
Bank loans $ 1,737,590 $ 541,266
Accounts payable and accrued liabilities 628,059 802,263
Accounts payable to subsidiaries 607,678 568,201
-------------- --------------
Total current liabilities 2,973,327 1,911,730
LONG-TERM DEBT 7,619,690 4,869,918
DEFERRED INCOME TAXES 32,623 -
-------------- --------------
Total liabilities 10,625,640 6,781,648
STOCKHOLDERS' EQUITY:
Capital stock 11,223,862 11,223,862
Paid-in surplus 1,170,390 1,170,390
Retained earnings 19,011,555 20,467,245
Reserve for repurchase of shares 958,783 958,783
Cumulative effect of initial recognition of deferred income taxes (1,815,243) (1,815,243)
Adjustment of additional employee retirement liability of subsidiaries (148,221) -
-------------- --------------
Cumulative effect of restatement (22,785,818) (23,186,079)
-------------- --------------
Total stockholders' equity 7,615,308 8,818,958
-------------- --------------
$ 18,240,948 $ 15,600,604
============== ==============
The accompanying notes are part of these financial statements.
6
DESC, S.A. DE C.V.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
EXPRESED IN THOUSANDS OF CONSTANT MEXICAN PESOS
2002 2001
---- ----
REVENUE:
Equity in net income (loss) of subsidiaries $ (214,281) $ 134,391
Equity in net loss of discontinued operations of subsidiaries (433,994) (244,169)
------------------ -----------------
Equity in net losses of subsidiaries (648,275) (109,778)
ADMINISTRATIVE EXPENSES 62,880 54,528
OTHER INCOME (EXPENSES) 54,177 (49,270)
INTEGRAL FINANCIAL COST:
Interest income 352,331 125,314
Interest expense (606,747) (361,380)
UDIS variation (116,041) (105,109)
Exchange gain (loss), net (282,150) 40,934
Monetary position gain 194,753 112,432
------------------ -----------------
(457,854) (187,809)
Loss before provisions and extraordinary items (1,114,832) (401,385)
PROVISIONS FOR:
Deferred income taxes (71,699) (320,742)
Effect of tax consolidation - (232,509)
------------------ -----------------
(71,699) (553,251)
------------------ -----------------
Income (loss) before extraordinary items (1,043,133) 151,866
EXTRAORDINARY ITEMS - (108,155)
------------------ -----------------
Net income (loss) for the year $ (1,043,133) $ 43,711
================== =================
The accompanying notes are part of these financial statements.
7
DESC, S.A. DE C.V.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS
CAPITAL STOCK
NUMBER OF ------------------------------- PAID-IN RETAINED
SHARES HISTORICAL RESTATEMENT SURPLUS EARNINGS
------ ---------- ----------- ------- --------
BALANCES, JANUARY 1, 2001 1,368,998,270 $ 17,797 $ 11,206,030 $ 1,169,800 $ 20,854,605
Increase in capital stock due to merger 81,106 1 34 590 -
Dividends declared - - - - (431,071)
Comprehensive income (loss) - - - - 43,711
-------------- ------------ -------------- -------------- --------------
BALANCES, DECEMBER 31, 2001 1,369,079,376 17,798 11,206,064 1,170,390 20,467,245
Dividends declared - - - - (412,557)
Comprehensive income (loss) - - - - (1,043,133)
-------------- ------------ -------------- -------------- --------------
BALANCES, DECEMBER 31, 2002 1,369,079,376 $ 17,798 $ 11,206,064 $ 1,170,390 $ 19,011,555
============== ============ ============== ============== ==============
The accompanying notes are part of these financial statements.
** TABLE CONTINUED... **
8(a)
CUMULATIVE ADJUSTMENT
EFFECT OF INITIAL OF ADDITIONAL
RECOGNITION OF EMPLOYEE
RESERVE FOR DEFERRED RETIREMENT CUMULATIVE TOTAL
REPURCHASE INCOME LIABILITY EFFECT OF STOCKHOLDERS'
OF SHARES TAXES OF SUBSIDIARIES RESTATEMENT EQUITY
--------- ----- --------------- ----------- ------
BALANCES, JANUARY 1, 2001 $ 958,783 $ (1,815,243) $ - $ (22,446,895) $ 9,944,877
Increase in capital stock due to merger - - - - 625
Dividends declared - - - - (431,071)
Comprehensive income (loss) - - - (739,184) (695,473)
----------- -------------- ------------- --------------- --------------
BALANCES, DECEMBER 31, 2001 958,783 (1,815,243) - (23,186,079) 8,818,958
Dividends declared - - - - (412,557)
Comprehensive income (loss) - - (148,221) 400,261 (791,093)
----------- -------------- -------------- --------------- --------------
BALANCES, DECEMBER 31, 2002 $ 958,783 $ (1,815,243) $ (148,221) $ (22,785,818) $ 7,615,308
=========== ============== ============== =============== ==============
The accompanying notes are part of these financial statements.
** TABLE COMPLETE **
8(b)
DESC, S.A. DE C.V.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income (loss) for the year $ (1,043,133) $ 43,711
Add (deduct)- Items which do not require (generate) resources-
Equity in net losses of subsidiaries 648,275 109,778
Depreciation and amortization 41,643 10,571
Deferred income taxes (71,699) (320,742)
-------------------- --------------------
(424,914) (156,682)
Changes in operating assets and liabilities-
Accounts receivable and other items 131,129 (342,398)
Accounts payable and accrued liabilities (163,011) 458,372
Accounts receivable from subsidiaries, net (2,071,973) (1,392,144)
-------------------- --------------------
(2,103,955) (1,276,170)
-------------------- --------------------
Net resources applied to operating activities (2,528,869) (1,432,852)
FINANCING ACTIVITIES:
Increase in short-term debt 1,225,512 281,978
Proceeds from short-term bank loans 2,255,485 532,487
Increase in bank loans and long-term debt due to merger 756,903 1,194,114
Effect of the variance on constant pesos on short-term bank loans
and long term debt (291,804) 10,494
Deferred income taxes 336,646 (51,312)
Increase in capital stock due to merger - 625
Dividends paid (423,650) (219,605)
Adjustment of additional employee retirement liability of subsidiaries (148,221) -
-------------------- -------------------
Net resources generated by financing activities 3,374,225 1,748,781
INVESTING ACTIVITIES:
Shares of subsidiaries and associated companies 552,520 (677,602)
(Increase) decrease in stockholders' equity of subsidiaries (218,659) 511,260
Dividends received 275,188 113,933
Retirements of properties, net 16,424 54,370
Increase in properties due to merger (140,791) -
Other assets (121,027) (241,307)
Other assets due to merger (49,640) -
-------------------- -------------------
Net resources generated by (applied to) investing activities 314,015 (239,346)
-------------------- --------------------
Net increase in cash and cash equivalents 1,159,371 76,583
CASH AND CASH EQUIVALENTS
Balance at the beginning of the year 104,464 27,881
-------------------- --------------------
Balance at the end the year $ 1,263,835 $ 104,464
=================== ===================
The accompanying notes are part of these financial statements.
9
DESC, S.A. DE C.V.
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS
1. PRINCIPAL ACTIVITIES AND SIGNIFICANT EVENTS
ACTIVITIES- Desc, S.A. de C.V. (DESC or the Company) is the controlling
stockholder of a group of companies engaged mainly in the manufacture and sale
of autoparts, chemicals and food. It is also engaged in the acquisition, sale,
development and leasing of real estate. The Company has no employees.
SIGNIFICANT EVENTS-
a. The economic slowdown experienced during 2002 and 2001 has had a
significant effect in the United States of America and in Mexico, which
has caused a decline in the results of DESC, mainly in its autoparts and
chemical sectors. This effect was reflected by a 5.8% decrease in the
production of the automotive industry in the North American region, as
well as lower sales volumes in the chemical sector.
Pursuant to the foregoing, DESC initiated a program to restructure its
investment portfolio and administrative area. As part of the restructuring
of its investment portfolio, during the second half of 2002 the Company
decided to close the following non-strategic businesses for the group:
Spark plugs and electric parts for the autoparts sector, the natural
pigments business in the chemicals sector, and the hog raising operation
in the food sector located in the Bajio region. These closures reflected
the Company's strategy to focus on the group businesses with the highest
potential for generating value. The shrimp business was donated to the
Instituto Tecnologico de Estudios Superiores de Monterrey (ITESM) in
October 2002.
Furthermore, as a result of the aforementioned restructuring, during the
year ended December 31, 2001, the Company and its subsidiaries recorded
the estimated costs of its implementation, net of a deferred income tax
effect of $298,162 ($108,155 corresponding to DESC), as an extraordinary
item in the statement of income. During 2002 the group's workforce was cut
by 15.6%.
b. In June 2002 the Company contracted two syndicated loans for an amount
equal to US$410 million, to substitute financial liabilities with longer
terms and better interest rates.
c. In the General Ordinary and Extraordinary Stockholders' Meetings held on
April 25, 2002 and November 29, 2001, the stockholders' approved the
mergers of DESC as the merging company, with Division Dine, S.A. de C.V.
and Girsa, S.A. de C.V., respectively; these mergers became effective, for
book and tax purposes, on May 1, 2002 and December 1, 2001, respectively.
The financial statements do not reflect these mergers retroactively, as
required by accounting principles generally accepted in Mexico, since such
effects are not significant to the financial statements taken as a whole
and because from both a legal and tax perspective, as of the date of the
merger, the merged entities only contributed their assets and liabilities
to DESC.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in compliance with
legal regulations that require presentation of the Company's financial
statements as a legal entity. Accordingly, all investments in shares of
subsidiaries are valued by the equity method. Consolidated financial statements
are presented separately, on which the independent auditors issued an
unqualified opinion dated March 25, 2003. Such consolidated financial statements
should be consulted for decision-making purposes.
INVESTMENTS IN SHARES- Investments in shares have been recorded using the equity
method, based on the financial statements prepared on the same basis as those of
the Company.
10
Equity in results and changes in net worth of the subsidiaries bought and sold
during the year are included in the financial statements from or up to the
transaction date and are restated in purchasing power of the Mexican peso of
December 31, 2002.
These financial statements should be read in conjunction with the consolidated
financial statements of Desc, S.A. de C.V. and subsidiaries. A summary of the
most significant consolidated captions is as follows:
2002 2001
---- ----
Total assets $ 29,306,247 $ 29,061,802
=================== ===================
Total liabilities $ 17,932,309 $ 16,379,950
=================== ===================
Total stockholders' equity $ 11,373,938 $ 12,681,852
=================== ===================
Net sales $ 19,582,937 $ 21,249,276
=================== ===================
Operating income $ 1,040,012 $ 1,887,329
=================== ===================
TRANSLATION OF FINANCIAL STATEMENTS OF SUBSIDIARIES- The financial statements of
foreign subsidiaries, whose operations are not an integral part of the Mexican
companies ("foreign entities"), are restated for the inflation rate of the
respective foreign country and are translated into Mexican pesos at the exchange
rate in effect at the end of the year. The financial statements of foreign
subsidiaries, whose operations are an integral part of the Mexican companies
("integrated foreign operations"), are translated using yearend exchange rates
for monetary items and historical exchange rates for nonmonetary items, and the
translated financial statements are then restated using the National Consumer
Price Index (NCPI) of Mexico. The effects of translating foreign entities are
recorded directly in stockholders' equity in the "Cumulative effect of
restatement" account. The effects of translating integrated foreign operations
are included in the "Integral financing cost" of the year in the "Monetary
position gain" account. Such effects are not significant
COMPREHENSIVE INCOME (LOSS)- Comprehensive income (loss) is comprised of the net
consolidated income (loss) for the period plus (less) any gains or losses that
under specific accounting regulations are recorded directly in stockholders'
equity, such as the gain or loss from holding nonmonetary assets. In 2002 and
2001 other comprehensive income is comprised of the cumulative effect of
restatement and, in 2002, the adjustment of additional employee retirement
liability of subsidiaries.
RECLASSIFICATIONS- Certain amounts in the financial statements at December 31,
2001 have been reclassified in order to conform to the presentation of the
financial statements at December 31, 2002.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are in conformity with generally
accepted accounting principles in Mexico, which require management to make
certain estimates and use certain assumptions to determine the valuation of some
of the balances included in the financial statements and to make the disclosures
required for inclusion therein. Although actual results may differ from those
estimates, management believes that the estimates and assumptions used were
appropriate in the circumstances.
The significant accounting polices followed by the Company are as follows:
a. CHANGES IN ACCOUNTING POLICIES- In 2001, the new Bulletin C-2, "Financial
Instruments", went into effect. This Bulletin establishes the methodology
for valuing and recording financial instruments, and requires recognition
of all effects of the financial instruments contracted on the balance
sheet as either assets or liabilities, under integral financial cost. The
financial instruments that have been designated and effectively function
as hedging of assets and liabilities or future transactions will affect
the assets, liabilities or the respective transactions when they are
realized, settled or take place, respectively (see Note 16). There was no
11
cumulative effect of financial instruments valuation upon adoption of the
new standard effective January 1, 2001.
As of 2001 International Accounting Standard 40, "Investment Properties,"
entered into effect on a supplemental basis, establishing valuation
criteria for properties whose purpose is to generate profits or increase
value or both. Pursuant to Circular 55 issued by the Mexican Institute of
Public Accountants, the valuation model applicable to Mexico is the cost
model, which establishes that such properties must be valued at
acquisition and/ or construction cost and are restated by applying the
NPCI, less the respective accumulated depreciation. The Company has no
investment properties as of December 31, 2002 and 2001.
b. RECOGNITION OF THE EFFECTS OF INFLATION- The Company restates all of its
financial statements in terms of the purchasing power of the Mexican peso
as of the end of the latest period, thereby comprehensively recognizing
the effects of inflation. The prior year amounts presented herein differ
from those originally reported in terms of Mexican pesos of the respective
year. Consequently, all financial statement amounts are comparable, both
for the current and the prior year, because all are stated in terms of
Mexican pesos of the same purchasing power.
c. CASH EQUIVALENTS- Investments in marketable securities consist mainly of
acceptances, bank promissory notes, and paper issued by the Mexican and
United States of America governments, at market (cost plus accrued
interest).
d. PROPERTY - Property is originally recorded at acquisition cost and is
restated by applying the NCPI. Depreciation is calculated using the
straight-line method on restated asset values and applying rates based on
the remaining useful lives of the assets.
e. OTHER ASSETS- This line item is represented mainly by (i) patents acquired
in 1999, for their exploitation in certain countries, which are being
amortized over a 10-year period; (ii) debt placement expenses that are
amortized over the life of the corresponding debt; (iii) shares of the
Company held in a trust to be issued to the Company's employees and; (iv)
the goodwill resulting from acquisitions made in excess of book value is
amortized over periods ranging from five to 20 years, the terms over which
the benefits from the investment will be realized.
f. FINANCIAL INSTRUMENTS - Financial assets and liabilities resulting from
any type of financial instrument, except for investments in financial
instruments held to maturity, are presented in the balance sheet at fair
value. The effects of the valuation of a financial asset or liability are
recognized in results of operations of the respective period. Investments
in financial instruments held to maturity are valued at acquisition cost.
The costs and yields of financial instruments are recognized in results of
the period in which they occur.
g. DERIVATIVE FINANCIAL INSTRUMENTS - These instruments are traded only with
authorized institutions and trading limits have been established for each
institution. The Company does not carry out transactions with derivative
financial instruments for the purpose of speculation.
The derivative financial instruments currently used by the Company are
primarily hedge contracts to reduce its exposure to exchange rate
fluctuations. Premiums paid are amortized over the term of the derivative
financial instrument using the unpaid balance of the liability being
hedged.
Derivative financial instruments identified as hedges are valued by
applying the same valuation criteria used for the assets or liabilities
hedged, and the effects of their valuation are recognized in results of
operations, net of costs, expenses, or revenue from the assets or
liabilities whose risks are being hedged. The financial assets or
liabilities generated by these instruments are presented in the balance
sheet as a reduction of the liabilities or assets whose risks are being
hedged
h. INCOME AND ASSET TAXES - Income tax (ISR) is recorded in results of the
year in which it is incurred. Deferred income tax assets and liabilities
are recognized for temporary differences resulting from comparing the book
12
and tax values of assets and liabilities, plus any future benefits from
tax loss carryforwards. Deferred income tax assets are reduced by any
benefits that, in the opinion of management, will probably not be
realized.
The asset tax paid that is expected to be recoverable is recorded as an
advance payment of ISR and is presented on the balance sheet with deferred
ISR.
i. RESTATEMENT OF STOCKHOLDERS' EQUITY- This item consists of monetary
position result accumulated through the first restatement of the financial
statements and the gain (loss) from holding non-monetary assets, because
price levels increased above (below) inflation more (less) the effect of
the corresponding deferred income taxes.
j. INTEGRAL FINANCIAL COST- This represents the net effect of interest earned
and incurred, exchange gains and losses and monetary position gain on,
which is the result of maintaining monetary assets and liabilities whose
real purchasing power is modified by the effects of inflation.
Foreign currency transactions are recorded at the effective exchange rate
at the date the transactions are carried out and foreign currency assets
and liabilities are adjusted to the exchange rate effective at yearend.
13
4. CASH AND CASH EQUIVALENTS
2002 2001
---- ----
Cash $ 25,725 $ 2,634
Cash equivalents 1,238,110 101,830
-------------------- --------------------
$ 1,263,835 $ 104,464
=================== ===================
5. OTHER ACCOUNTS RECEIVABLE
2002 2001
---- ----
Recoverable taxes $ 206,600 $ 234,428
Other debtors 154,038 238,478
-------------------- --------------------
$ 360,638 $ 472,906
=================== ===================
6. INVESTMENT IN SHARES
2 0 0 2 2001
------- ----
BOOK VALUE
PER SHARE
% DE NUMBER OF IN MEXICAN
PARTICIPATION SHARES PESOS TOTAL TOTAL
------------- ------ ----- ----- -----
Desc Automotriz, S.A. de C.V.
(formerly Unik, S.A. de C.V.) 100% 700,968,215 5.26 $ 3,356,731 $ 3,592,772
Bioquimex Natural, S.A. de C.V. 100% 285,656,899 (0.96) (27,842) (8,048)
Direccion IRSA, S.A. de C.V. 100% 4,201,745 (11.20) (47,049) 7,047
Fenoquimia, S.A. de C.V. 100% 4,998,994 (40.75) (203,708) (188,397)
GIRSA Corporativo, S.A. de C.V. 100% 5,509,998 7.73 42,590 4,632
GIRSA Concentradora, S.A. de C.V.
(formerly GIRSA Inmobiliaria,
S. A. de C. V.) 100% 615,124,720 1.19 730,601 734,386
Quimir, S.A. de C.V. 100% 1,930,986 26.69 51,541 56,323
Resirene, S.A. de C.V. 100% 236,058,979 0.82 193,764 178,463
Dynasol Elastomeros, S.A. 50% 1 430,883.00 430,883 441,337
Tecno-Industria, R. F., S.A. de C.V. 100% 10,673,496 5.12 54,684 46,742
Rexcel, S.A. de C.V. 100% 1,000,997 118.93 119,049 138,276
Industrias Negromex, S.A. de C.V. 100% 410,044,831 1.43 587,960 618,830
Plastiglas de Mexico, S.A. de C.V. 95% 200,778,189 0.44 87,602 83,597
Division Dine, S.A. de C.V.
(formerly Dine, S.A. de C.V.) 100% 1,462,227,342 - - 3,248,736
Bosques de las Lomas, S.A. de C.V. 100% 43,189,000 3.73 161,193 -
Club Equestre Chiluca, S.A. de C.V. 78% 15,274,170 27.63 421,967 -
Promociones Bosques, S.A. de C.V. 100% 82,212,000 5.02 412,919 -
Corporativo Dine, S.A. de C.V. 100% 238,390,000 0.24 56,373 -
Holding Dicomex, S.A. de C.V. 50% 141,740,000 0.55 78,623 -
Bosques de Santa Fe, S.A. de C.V. 98% 50 (937,238.00) (46,862) -
14
2 0 0 2 2001
------- ----
BOOK VALUE
PER SHARE
% DE NUMBER OF IN MEXICAN
PARTICIPATION SHARES PESOS TOTAL TOTAL
------------- ------ ----- ----- -----
Canada Santa Fe, S.A. de C.V. 73% 278,000,000 2.93 813,771 -
Inmobiliaria Dine, S.A. de C.V. 100% 10,010,200 6.22 62,267 -
Cantiles de Mita, S.A. de C.V. 96% 54,326,326 23.4 1,271,021 -
Club de Golf Punta Mita, S.A. de C.V. 88% 12,410,869 11.15 138,441 -
Agrobios Corporativo, S.A. de C.V. 100% 550,000 64.30 36,466 38,343
Authentic Acquisition Corporation, Inc. 81% 291,101 3,125.34 974,608 873,361
Agroken, S.A. de C.V. 100% 366,460,475 2.05 535,459 800,679
Corfuerte, S.A. de C.V. 77% 643,205,800 0.83 354,036 551,953
Aeropycsa, S.A. de C.V. 100% 648,309,280 0.17 110,687 121,263
Corporativo Arcos Desc, S.A. de C.V. 100% 260,524,996 0.22 56,882 60,659
Other 227,222 207,050
------------ ------------
$ 11,041,879 $ 11,608,014
============ ============
15
7. PROPERTY
ANNUAL
2002 2001 DEPRECIATION %
---- ---- --------------
Real estate property $ 184,231 $ 201,791 3.33 to 10.33%
Less- Accumulated depreciation (48,167) (46,041)
----------------------- -----------------------
136,064 155,750
Land 19,268 19,253
Projects-in-progress 140,791 -
----------------------- -----------------------
$ 296,123 $ 175,003
======================= =======================
8. OTHER ASSETS
ANNUAL
2002 2001 AMORTIZATION %
---- ---- --------------
UDI placement expenses, net $ 10,208 $ 13,555 14%
Secured bond placement expenses, net 11,366 - 28%
Syndicated loan fee, net 31,877 8,413 20%
Works of art 54,396 9,351 -
Patents, net 165,610 201,835 10%
Goodwill, net 38,274 - 33%
Trust fund of shares 99,927 36,446 -
Other assets not subject to amortization 739 12,499
---------------------- ----------------------
$ 412,397 $ 282,099
====================== ======================
9. OTHER PAYABLES, ACCRUED LIABILITIES AND RESTRUCTURING RESERVES AND
CONTINGENCIES
2002 2001
---- ----
Accounts payable $ 48,103 $ 41,146
Interest payable 88,042 109,141
Dividends payable 200,373 211,466
Restructuring reserves and contingencies 241,403 414,920
Other accounts payable 50,138 25,590
------------------- -------------------
$ 628,059 $ 802,263
=================== ===================
a. As mentioned in Note 1, the Company recorded a restructuring reserve in
the year ended December 31, 2001. The remaining balance as of December 31,
2002 will be applied for the closing of Bioquimex, S.A. de C.V. and the
administrative restructuring.
b. In the commercial lawsuit filed by Fenoquimia, S.A. de C.V. (a Company
subsidiary) against Sales Nacionales, S.A. de C.V., the latter filed a
counter suit demanding, among other things, mandatory compliance with the
contracts, plus the associated payment of damages and lost income. In a
final verdict issued November 5, 1998, the court ruled that Fenoquimia,
S.A. de C.V. must comply with the contracts subject matter of the lawsuit,
together with the associated accrued damages and lost income.
In the petition requesting payment of damages and lost income filed on
November 18, 1999 by Sales Nacionales, S.A. de C.V., Fenoquimia, S.A. de
C.V. obtained a favorable judgment, whereby the criteria used by Sales
16
Nacionales, S.A. de C.V. were definitively ruled as invalid to determine
and calculate the respective damages and lost income, without quantifying
any amount in this regard.
Notwithstanding that set forth in the preceding paragraph, the adverse
final verdict issued against Fenoquimia, S.A. de C.V. on November 5, 1998,
remains in effect, whereby the company was ordered to comply with the
terms of different contracts, and pay accrued damages and lost income to
Sales Nacionales, S.A. de C.V., even though such amounts have not been
quantified at this date.
On January 7, 2003, Fenoquimia, S.A. de C.V. was informed of a new
ancillary claim filed by Sales Nacionales, S.A. de C.V., quantifying the
aforementioned damages and lost income in the amount of Ps.153, 702. This
ancillary claim was contested by Fenoquimia, S.A. de C.V., and the suit is
now in the evidence admission stage.
The Company has recorded the amount that, according to its lawyers, it
might ultimately be required to pay Sales Nacionales, S.A. de C.V. based
on the calculation of the aforementioned damages and lost income.
c. Certain subsidiaries are engaged in lawsuits as plaintiffs and defendants
in the regular course of operations. These lawsuits always involve
uncertainty, and some of them may result in adverse judgments for the
companies. While it is impossible to determine the amount involved in
pending lawsuits, management believes that any resulting liability would
not materially affect the financial position or results of operations of
the companies.
10. BANK LOANS AND LONG-TERM DEBT
2002 2001
-------------------------------------------------- --------------------------------------------------
MATURITY INTEREST RATE AMOUNT MATURITY INTEREST RATE AMOUNT
-------- ------------- ------ -------- ------------- ------
SYNDICATED LOAN-
US$97.17 million 2005 LIBOR + 1.375 $1,006,808 - - $ -
US$177.83 million 2007 LIBOR + 1.625 1,842,550 - - -
$1,300 million 2007 TIIE + 0.9 1,300,000 - - -
US$150 million - - - 2003 LIBOR + 1.375 1,468,173
MEDIUM-TERM
PROMISSORY NOTES-
680.6 million UDIS 2006 and 2007 9% and 8.20% 2,195,363 2006 and 2007 9% and 8.20% 2,197,844
LOANS-
US$15 million 2004 3.85% 155,420 - - -
US$35 million 2004 3.75% 362,646 - - -
US $35 million - - - 2004 Variable 342,574
US $30 million - - - 2003 LIBOR + 1 293,635
US $15 million - - - 2003 LIBOR + 1.60 146,817
US $20 million - - - 2003 3.37% 195,756
US $22 million - - - 2003 4.25% 215,332
SECURED BONDS
US$73 million 2007 8.75% 756,903 - - -
OTHER - - - Variable 3.28% 9,787
---------- ----------
$7,619,690 $4,869,918
========== ==========
As of December 31, 2002 and 2001, the LIBOR rate was 1.38% and 1.874%,
respectively, and the Mexican Interbank rate (TIIE) was 8.45% and 7.90%,
respectively.
17
Long-term debt maturities are as follows:
2004 $ 1,411,469
2005 1,714,360
2006 1,996,108
2007 2,497,753
----------------
$ 7,619,690
Short-term bank loans are as follows:
2002 2001
---- ----
Mexican pesos $ - $ 414,024
Denominated in U.S. dollars 1,737,590 127,242
--------------------- ---------------------
$ 1,737,590 $ 541,266
===================== =====================
SYNDICATED LOAN-
In June 2002 the Company contracted a syndicated loan of US$275 million, divided
into two tranches of US$97.17 million and US$177.83 million, at LIBOR plus
1.375% and LIBOR plus 1.625%, respectively, which mature in 2005 and 2007,
respectively. The interest generated on such loan is payable semiannually.
Also, in June 2002 the Company contracted a syndicated loan of $1,300 million,
at the TIIE interest rate plus 0.9%, which matures in 2007. The interest
generated on such loan is payable monthly.
At December 31, 2002 all amounts available under such loans have been used. The
funds obtained were used to replace other financial liabilities.
The financing received establishes certain restrictions for the Company, with
which the Company has complied. The most important restrictions are:
- - Maintaining a capitalization ratio lower than or equal to 0.50. At the
close of 2002 the ratio is 0.48.
- - Limitations on the existence of new liens.
- - Restrictions on declaring dividends during 2003.
- - Maintaining an interest coverage ratio above 2.75. At the close of 2002
the ratio is 3.32.
- - Maintaining a debt-servicing ratio (net debt to earnings before taxes,
depreciation and amortization) less than 4.75 with quarterly reductions
until reaching 2.5 in April 2006. At the close of 2002 the ratio is 4.47.
At the close of the first quarter of 2003, the Company's estimated results show
a substantial improvement compared to the final quarter of 2002. However, due to
the effects of the devaluation of the Mexican peso against the U.S. dollar in
such period, this improvement is expected to be insufficient to comply with one
of the ratios established in the loan contracts executed with Citibank, N.A. and
a syndicate of banks on June 10, 2002, on the one hand, and with BBVA Bancomer,
S.A. Institucion de Banca Multiple, Grupo Financiero BBVA Bancomer, and a
syndicate of banks on May 27, 2002.
The ratio in question is that of debt servicing (net debt to earnings before
taxes, depreciation and amortization). At this date the Company has informed its
bank creditors of this potential noncompliance and is negotiating the respective
waiver. There is no other breach of contractual commitments, or of payments of
interest and capital, for which reason, the Company believes there should be no
problem in obtaining the aforementioned waiver.
MEDIUM-TERM PROMISSORY NOTES-
In October 1999 and July 2000, the Company issued medium-term promissory notes
equivalent to 324,000,000 and 356,568,600 units of investment (UDIS),
respectively. The UDI value as of December 31, 2002 was 3.225778, which is equal
18
to $1,045,152 and $1,150,211, respectively. The issues bear quarterly interest
of 9% and 8.20%, respectively, and mature in 2006 and 2007, respectively. There
are no restrictions on the promissory notes.
LOAN CONTRACTS-
The Company obtained a guaranteed line of credit for up to US$50 million with
Inbursa, S.A. at variable rates, with maturity in November 2004. At December 31,
2002 the Company has utilized the full amount of such line. The interest
generated on such contract is payable at maturity. This loan agreement imposes
no financial restrictions on the Company.
ISSUANCE OF SECURED BONDS-
On October 9, 1997, DINE issued long-term bonds guaranteed by DESC in
international markets at 8.75% annual interest, with principal and interest due
and payable on October 9, 2007. As a result of the merger between DESC and DINE,
DESC acquired the obligations related to the issue of such bonds (see Note 1).
At December 31, 2002 the book and market value of the bonds issued by DINE is
$73 million.
11. STOCKHOLDERS'EQUITY
During a General Ordinary and Extraordinary Stockholders' Meeting held on April
25, 2002, the stockholders approved the payment of cash dividends of 29 Mexican
cents for each of the outstanding shares, equivalent to $397,033, whose restated
amount is $412,557, payable in four quarterly payments in July and October 2002
and January and April 2003.
During a General Ordinary Stockholders' Meeting held on November 29, 2002, the
stockholders approved the cancellation of treasury shares repurchased in recent
years, which were 152,284,295 shares, of which 48,785,000 were Series "A"
shares, 60,088,140 Series "B" shares and 43,411,155 Series "C" shares.
As of December 31, 2002 capital stock is represented by:
NUMBER OF SHARES AMOUNT
---------------- ------
Fixed portion-
Nominative Series "A" shares (without withdrawal rights and
which must represent at least 51%
of voting stock) 587,479,900 Ps. 7,637
Variable portion-
Nominative Series "B" shares (with withdrawal
rights and which may not represent more than
49% of voting stock) 506,257,866 6,581
Series "C" shares (with voting restrictions) 275,341,610 3,580
---------------- --------------
1,369,079,376 Ps. 17,798
Series "A" and "B" shares may only be acquired by Mexican citizens or Mexican
entities with an exclusion clause for foreign investors. Series "C" shares may
be freely subscribed.
Stockholders' equity, except restated paid-in capital and tax-retained earnings,
will be subject to a 35% dividend tax. Beginning January 1, 2003, such rate will
be reduced by one percentage point each year until reaching 32% in 2005. Any
income taxes paid on such distribution on or after January 1, 2002, may be
credited against future income tax payable by the Company in the three fiscal
years following such payment.
19
Due to the tax reform for fiscal 2003, taxes paid as a result of capital
distribution as indicated in the previous paragraph may only be credited against
income tax payments of the year, including estimated payments, in which the
dividend tax is paid and in the two subsequent years.
The annual net income of the Company is subject to the legal requirement that 5%
thereof be transferred to a legal reserve each year, until the reserve equals
20% of capital stock. This reserve may not be distributed to stockholders during
the existence of the Company, except in the form of a stock dividend.
During the year the Company distributed restated retained earnings of $412,557
as dividends, reducing total equity to an amount lower than restated capital
stock, which for accounting purposes represents a capital reduction.
12. TRANSACTIONS AND BALANCES IN FOREIGN CURRENCY
The Company valued its foreign currency assets and liabilities, represented
mainly by U.S. dollars, at the exchange rates effective at December 31, 2002 and
2001 of 10.3613 and 9.26 Mexican pesos per U.S. dollar, respectively, as the
Company expects to use foreign currency assets to settle foreign currency
liabilities.
As of December 31, 2002 and 2001, monetary assets and liabilities denominated in
U.S. dollars were as follows:
2002 2001
---- ----
Current monetary assets 110,554 252,028
Current monetary liabilities 170,197 67,495
Long-term liabilities 398,051 273,000
---------------------- ----------------------
Net liability position in foreign currency 457,694 88,467
====================== ======================
During the years ended December 31, 2002 and 2001, the Company paid interest in
foreign currency amounting to US$19.1 million and US$9.1 million respectively,
and received interest by US$0.8 million in the two years.
As of March 25, 2003, the unaudited foreign exchange position was similar to
that at yearend, and the exchange rate was 10.80 Mexican pesos per U.S. dollar.
13. TRANSACTIONS AND BALANCES WITH SUBSIDIARIES
2002 2001
---- ----
Receivable-
Grupo Porcicola Mexicano, S.A. de C.V. $ 658,044 $ 387,830
Corfuerte, S.A. de C.V. 787,954 344,850
Nutrimientos GPM, S.A. de C.V. 9,079 8,291
Fenoquimia, S.A. de C.V. 277,588 273,412
Dynasol Elastomeros, S.A. de C.V. 437,010 218,578
Bioquimex Natural, S.A. de C.V. 111,795 235,224
Resirene, S.A. de C.V. 130,404 205,600
Industrias Resistol, S.A. de C.V. (antes Productos de
Consumo Resistol, S.A. de C.V.) 67,017 152,222
Quimir, S.A. de C.V. 51,432 104,577
Rexcel, S.A. de C.V. 174,659 139,722
Paratec, S.A. de C.V. 61,741 113,662
Nhumo, S.A. de C.V. 56,482 85,508
Industrias Negromex, S.A. de C.V. 45,379 -
Paratec Elastomers, LLC 18,660 -
Girsa Corporativo, S.A. de C.V. 72,995 -
Plastiglas, S.A. de C.V. 17,445 -
20
2002 2001
---- ----
Forestaciones Operativas de Mexico, S.A. de C.V. 21,432 -
H2Orizontes, S.A. de C.V. 13,144 -
Division Dine, S.A. de C.V. (antes Dine, S.A. de C.V.) - 381,149
Club Equestre Chiluca, S.A. de C.V. 89,646 -
Corporativo Dine, S.A. de C.V. 96,510 -
Canada Santa Fe, S.A. de C.V. 33,800 -
Holding Dicomex, S.A. de C.V. 16,043 -
Inmobiliaria Dine, S.A. de C.V. 6,620 -
Cantiles de Mita, S.A. de C.V. 782,796 -
Bosques de Chiluca, S.A. de C.V. 29,354 -
Promotora Inmobiliaria Hidalguense, S.A. de C.V. 2,217 -
Bosques de Santa Fe, S.A. de C.V. 1,174 -
Club de Golf Punta Mita, S.A. de C.V. 23,594 -
Resort Club Punta Mita, S.A. de C.V. 26,584 -
Pinturas, Estampados y Montaje, S.A. de C.V. 56,956 -
Ejes Tractivos, S.A. de C.V. 49,734 -
Tremec, S.A. de C.V. 259,068 -
Morestana, S.A. de C.V. 29,939 -
Pistones Moresa, S.A. de C.V. 246,081 -
Other - 301
------------ ------------
$ 4,762,376 $ 2,650,926
============ ============
Payable-
Spicer, S.A. de C.V. 299,019 426,649
Pinturas, Estampados y Montaje, S.A. de C.V. - 68,605
Desc Automotriz, S.A. de C.V. 228,807 38,133
Tecno-Industria, R. F., S.A. de C.V. 11,998 -
CID Centro de Investigacion y Desarrollo, S.A. de C.V. 6,554 -
Bosques de las Lomas, S.A. de C.V. 22,177 -
Promociones Bosques, S.A. de C.V. 30,621 -
Other 8,502 34,814
------------ ------------
$ 607,678 $ 568,201
============ ============
Transactions with subsidiaries derived from the following:
2002 2001
---- ----
Interest income $ 339,360 $ 114,417
=================== ===================
Interest expense $ 67,270 $ 31,382
=================== ===================
14. INCOME AND ASSET TAXES
The Company is subject to income taxes (ISR) and tax on assets (IMPAC). ISR is
computed by taking into consideration the taxable and deductible effects of
inflation, such as depreciation calculated on restated constant prices, which
permit the deduction of current costs, and taxable income is increased or
reduced on certain monetary assets and liabilities through the annual adjustment
for inflation, which is similar to the monetary position result. ISR is
calculated in terms of currency when the transactions occurred and not in terms
of the currency at yearend. Up to 2002, the income tax rate was 35%, with the
obligation to pay this tax each year at the 30% rate, with the remaining 5%
payable when income is distributed. This remainder is recorded as a short-term
liability
21
The new tax law enacted January 1, 2002, eliminated the option to defer the 5%
portion of the income tax payment and reduces the 35% tax rate by one percentage
point each year until reaching 32% in 2005. The deduction for employee statutory
profit-sharing and the obligation to withhold taxes on dividends paid to
individuals or foreign residents were also eliminated.
IMPAC is calculated by applying 1.8% to the Company's asset position, as defined
in the law, and is payable only to the extent that it exceeds ISR payable for
the same period. If in any year IMPAC exceeds the ISR payable, the IMPAC payment
for such excess may be reduced by the amount by which ISR exceeded IMPAC in the
three preceding years and any required payment of IMPAC can be credited against
the excess of ISR over IMPAC during the next 10 years
DESC is subject to ISR and IMPAC with its subsidiaries on a consolidated basis
in the proportion in which the Company holds the voting stock of its
subsidiaries at the balance sheet date. As of January 1, 2002, the proportion is
calculated based on the average daily equity percentage that DESC holds of its
subsidiaries during the year. The tax results of the subsidiaries are
consolidated at 60% of such proportion. Estimated payments of ISR and IMPAC of
both DESC and its subsidiaries are made as if the Company did not file a
consolidated tax return.
TAX LOSS CARRYFORWARDS AND LOSSES ON SALE OF SHARES- As of December 31, 2002,
the Company has tax loss carryforwards and losses on sale of shares for income
tax purposes which will be indexed for inflation through the year applied in the
following restated amounts:
TAX LOSSES ON
LOSS SALE OF
MATURITY CARRYFORWARDS SHARES
-------- ------------- ------
2005 $ - $ 1,013,753
2010 5,934 -
2011 96,527 -
2012 292,206 -
--------------------- ---------------------
$ 394,667 $ 1,013,753
===================== =====================
DEFERRED INCOME TAXES- The tax effects of the temporary differences that
generated deferred tax liabilities (assets) are as follows:
2002 2001
---- ----
Property $ (31,052) $ 35,010
Reserves and provisions (97,892) (479,269)
Tax loss carryforwards from sale of shares (324,401) (417,510)
Tax loss carryforwards (126,293) (102,461)
Tax losses applied 585,929 725,948
Other $ 6,332 5,958
---------- -----------
$ 2,623 $ (232,324)
========== ===========
15. EXTRAORDINARY ITEM
As mentioned in Note 1 during the year ended December 31, 2001, the Company
recorded the implementation restructuring program costs, net of a deferred
income tax effect of $108,155, as an extraordinary item in the statement of
income.
16. FINANCIAL INSTRUMENTS
The Company has contracted exchange rate forwards and calls on U.S. dollar
debts, fixing the exchange rate to hedge against exchange losses on U.S. dollar
loans. The exchange result of the forward or call is recorded in the net
22
integral financing cost, by offsetting the exchange result from the liability
hedged, while the asset generated is deducted from the hedged liability.
The Company also has interest rate swaps to manage the interest rate risk on its
variable interest debt. The Company has entered into interest rate swaps in
which it pays amounts calculated based on fixed interest rates and receives
amounts calculated based on variable interest rates. The difference between such
amounts is recorded in the net integral financing cost, offsetting the effect of
the variable interest rate on the hedged loans. The asset generated in the swap
is deducted from the payable interest hedged.
As of December 31, 2002 the net loss recorded for the forwards, calls and swaps
was $57,978.
17. OTHER INCOME (EXPENSE)
2002 2001
---- ----
Preoperating expenses and patent amortization $ (25,156) $ (2,096)
Loss on sale of shares (12,347) (11,853)
Royalties 9,233 -
Gain (loss) on sale of property 3,862 (32,977)
Trust fund of share restatement 30,539 -
Analysis and adjustment of taxes 43,533 -
Other 4,513 (2,344)
---------------------- -----------------------
$ 54,177 $ (49,270)
===================== ======================
18. NEW ACCOUNTING PRINCIPLES
In December 2001, the Mexican Institute of Public Accountants (IMCP) issued new
Bulletin C-9, "Liabilities, Provisions, Contingent Assets and Liabilities and
Commitments" (C-9), whose provisions are mandatory for fiscal years beginning
January 2003, although early application is encouraged. C-9 supersedes the
former bulletins C-9, "Liabilities", and C-12, "Contingencies and Commitments",
establishes additional guidelines clarifying the accounting for liabilities,
provisions and contingent assets and liabilities, and establishes new standards
for the use of present value techniques to measure liabilities and accounting
for the early settlement of obligations.
In January 2002, the IMCP issued the new bulletin C-8, "Intangible Assets"
(C-8), whose provisions are mandatory for fiscal years beginning January 1,
2003, although early application is encouraged. C-8 supersedes the former
Bulletin C-8, "Intangibles", and establishes that project development costs
should be capitalized if they fulfill the criteria established for recognition
as assets. Any preoperating costs incurred after the effective date of this
Bulletin should be recorded as an expense, unless they meet certain criteria.
The unamortized balance of capitalized preoperating costs under the former
Bulletin C-8 will continue to be amortized. C-8 requires identification of all
intangible assets to reduce as much as possible the goodwill relative to
business combinations.
In December 2002, IMCP issued the new bulletin E-1, "Agriculture" (E-1), the
observance of which is also compulsory for fiscal years beginning on or after
January 1, 2003, although earlier observance is recommended. Bulletin E-1
establishes the rules for valuing, presenting and disclosing biological assets
and agricultural products, which includes the administration carried out by a
related party with the respect to biological transformation of live animals or
plants (biological assets) that are destined to be sold as an agricultural
product or as a comprehensive part of a biological asset. Bulletin E-1 requires
biological assets and agricultural products to be valued at their fair market
value, less the estimated costs at the point of sale. Bulletin E-1 also states
that when the fair market value cannot be determined in a reliable and objective
manner, the aforementioned assets should be valued at production cost, less
accumulated depreciation.
The Company has not finished quantifying the effect of the adoption of these new
accounting standards in the balance sheet and income statement, but believes
that such adoption will not have a material effect on the balance sheet and
results of operations.
23
In March 2003 the IMCP issued Bulletin C-15, " Impairment of Long-Lived Assets
and their Related Disposal" (C-15), whose application is mandatory for financial
statements of periods beginning January 1, 2004, although early application is
encouraged. C-15 establishes, among other things, new rules for the calculation
and recognition of losses from impairment of such assets and their reversal, and
presents examples of indications of possible impairment in the value of
long-lived intangible or tangible assets in use, including goodwill. To
calculate the loss from impairment requires determination of the recovery value,
now defined as the higher of the net selling price of a cash generating unit and
its value in use, which is the present value of future net cash flows, using an
appropriate discount rate. The provisions issued prior to this Bulletin use
future net cash flows referred to purchasing power of the evaluation date, which
therefore does not require discounting of such flows.
The Company has not finished quantifying the effect of the adoption of this new
accounting standard in the balance sheet and income statement.
24