EXHIBIT 2
DESC AUTOMOTRIZ, S.A. DE C.V. (FORMERLY UNIK, S.A. DE C.V.)
AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Desc, S.A.
de C.V.)
Consolidated Financial Statements
For the Years Ended December 31, 2001and 2002, and
Independent Auditors' Report
25
DESC AUTOMOTRIZ, S.A. DE C.V. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF DESC, S.A. DE C.V.)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT [27]
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND
2002:
Consolidated Balance Sheets [28]
Consolidated Statements of Income [30]
Consolidated Statements of Changes in Stockholders' Equity [31]
Consolidated Statements of Changes in Financial Position [32]
Notes to Consolidated Financial Statements [34]
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Desc Automotriz, S.A. de C.V.,
We have audited the accompanying consolidated balance sheet of Desc Automotriz,
S.A. de C.V. (formerly Unik, S.A. de C.V.) and subsidiaries as of December 31,
2002, and the related consolidated statements of income, changes in
stockholders' equity and changes in financial position for the year then ended.
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 consolidated financial statements of the Company as of
December 31, 2000 and 2001 and for the years then ended were audited by other
auditors who expressed an unqualified opinion in their report dated January 24,
2002.
We conducted our audit in accordance with auditing standards generally accepted
in Mexico and 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 are 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
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Desc Automotriz, S.A. de C.V. and
subsidiaries as of December 31, 2002, and the results of their operations,
changes in their stockholders' equity and changes in their financial position
for the year then ended in conformity with accounting principles generally
accepted in Mexico.
Accounting practices used by the Company in preparing the accompanying
consolidated financial statements conform with accounting principles generally
accepted in Mexico but do not conform with accounting principles generally
accepted in the United States of America (U.S. GAAP). A description of these
differences and a reconciliation of majority net income and stockholders' equity
to U.S. GAAP as permitted by the regulations of the U.S. Securities and Exchange
Commission, which allow omission of the requirement to quantify, in the U.S.
GAAP reconciliation, the differences attributable to the effects of
comprehensive inflation adjustments recorded locally, are set forth in Notes 24
and 25.
Our audits also comprehended the translation of the Mexican peso amounts into
U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2. The translation of the financial
statement amounts into U.S. dollars and the translation of the financial
statements into English have been made solely for the convenience of readers in
the United States of America.
Galaz, Yamazaki, Ruiz Urquiza, S.C.
/s/ C.P.C. Luis Javier Fernandez Barragan
C.P.C. Luis Javier Fernandez Barragan
Mexico City, Mexico
January 22, 2003
27
DESC AUTOMOTRIZ, S.A. DE C.V. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF DESC, S.A. DE C.V.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS (PS.) OF PURCHASING POWER OF DECEMBER 31, 2002
AND THOUSANDS U.S. DOLLARS ($))
- --------------------------------------------------------------------------------
ASSETS
2001 2002 2002
---- ---- ----
Current:
Cash and temporary investments Ps. 756,189 Ps. 694,249 $ 67,004
Accounts and notes receivable, net 802,302 750,965 72,478
Accounts receivable from parent company and related parties 551,111 29,367 2,834
Inventories, net 1,108,384 1,064,484 102,737
Prepaid expenses 34,660 16,021 1,546
Trust funds 280,793 - -
Discontinued operations 67,410 4,153 401
------------------ ------------------ ------------------
Total current assets 3,600,849 2,559,239 247,000
PROPERTY, PLANT AND EQUIPMENT, Net 5,686,608 6,011,969 580,233
INVESTMENT PROPERTIES, Net 364,876 266,812 25,751
OTHER ASSESTS, net 450,531 228,313 22,035
EMPLOYEE RETIREMENT OBLIGATION INTANGIBLE ASSET 165,982 12,621 1,218
DISCONTINUED OPERATIONS 04,054 107,069 10,334
------------------ ------------------ ------------------
Ps. 10,372,900 Ps. 9,186,023 $ 886,571
================= ================= =================
28
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2002 2002
CURRENT:
Bank loans and current portion of long-term debt Ps. 1,671,142 Ps. 1,090,848 $ 105,281
Notes and accounts payable to suppliers 733,909 690,917 66,682
Accounts payable to related parties 24,405 160,398 15,480
Other payables and accrued liabilities 484,074 367,890 35,506
Income taxes, asset taxes and employee profit sharing 318,084 269,869 26,046
Discontinued operations 27,056 29,999 2,895
----------------- ---------------- ----------------
Total current liabilities 3,258,670 2,609,921 251,890
LONG-TERM DEBT 145,832 5,246 506
DEFERRED INCOME DEBT 1,215,400 1,032,935 99,692
ADDITIONAL LIABILITY FOR EMPLOYEE RETIREMENT OBLIGATIONS 165,753 163,852 15,815
DISCONTINUED OPERATIONS 692 - -
----------------- ---------------- ----------------
Total liabilities 4,786,347 3,811,954 367,903
STOCKHOLDER EQUITY:
Common stock 2,717,394 2,717,394 262,264
Earned surplus from restructuring of subsidiary 65,818 65,818 6,352
Retained earnings 2,464,632 2,175,090 209,924
Cumulative initial effect of deferred income taxes (1,100,312) (1,100,312) (106,194)
Cumulative effect of restatement (554,760) (417,433) (40,288)
Adjustment of additional liability for employee retirement
obligations - (83,827) (8,090)
----------------- ----------------- -----------------
Majority stockholders' equity 3,592,772 3,356,730 323,968
Minority interest 1,993,781 2,017,339 194,700
----------------- ---------------- ----------------
Total stockholders' equity 5,586,553 5,374,069 518,668
----------------- ---------------- ----------------
Ps. 10,372,900 Ps. 9,186,023 $ 886,571
================= ================ ================
See accompanying notes to consolidated financial statements.
29
DESC AUTOMOTRIZ, S.A. DE C.V. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF DESC, S.A. DE C.V.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS (PS.) OF PURCHASING POWER OF DECEMBER 31, 2002
AND THOUSANDS U.S. DOLLARS ($) EXCEPT PER SHARE INFORMATION)
- --------------------------------------------------------------------------------
2000 2001 2002 2002
NET SALES Ps. 11,758,601 Ps. 9,769,381 Ps. 8,398,394 $ 810,554
COST OF SALES 8,625,040 7,382,001 6,615,119 638,445
----------------- ---------------- ----------------- ----------------
GROSS PROFIT 3,133,561 2,387,380 1,783,275 172,109
OPERATING EXPENSES:
Administrative 1,097,323 1,072,472 980,556 94,636
Selling 306,648 214,234 183,229 17,684
----------------- ---------------- ----------------- ----------------
1,403,971 1,286,706 1,163,785 112,320
----------------- ---------------- ----------------- ----------------
INCOME FROM OPERATIONS 1,729,590 1,100,674 619,490 59,789
INTEGRAL FINANCING COST:
Interest income (76,106) (58,968) (49,528) (4,780)
Interest expense 248,068 190,014 103,251 9,965
Exchange loss, net 37,835 (63,298) 125,758 12,137
Monetary position gain (95,207) (66,482) (3,547) (342)
----------------- ---------------- ----------------- ----------------
114,590 1,266 175,934 16,980
OTHER EXPENSES (INCOME):
Severance indemnities 57,174 131,760 - -
Income earned on trust funds (38,711) (35,603) (28,002) (2,703)
Impairment of fixed assets 10,593 6,442 9,990 964
Depreciation of idle plant 34,734 - 4,720 456
Nonrecurring freight and shipments 52,272 - - -
Cleaned-up accounting records - - 28,565 2,757
Other, net 65,875 51,578 34,940 3,372
----------------- ---------------- ----------------- ----------------
181,937 154,177 50,213 4,846
----------------- ---------------- ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISIONS 1,433,063 945,232 393,343 37,963
PROVISIONS FOR:
Current income taxes 381,914 465,893 446,076 43,052
Deferred income taxes 76,264 (202,102) (219,748) (21,208)
Asset taxes 10,334 1,073 - -
Employee profit sharing 105,653 115,336 91,508 8,832
----------------- ---------------- ----------------- ----------------
574,165 380,200 317,836 30,676
----------------- ---------------- ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS 858,898 565,032 75,507 7,287
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 22,048 (16,493) (78,212) (7,548)
EXTRAORDINARY GAIN (LOSS) 73,578 - (39,081) (3,771)
----------------- ---------------- ----------------- ----------------
CONSOLIDATED NET INCOME (LOSS), NET Ps. 954,524 Ps. 548,539 Ps. (41,786) $ (4,032)
================= ================ ================= ================
ALLOCATION OF CONSOLIDATED NET INCOME:
Majority interest Ps. 536,864 Ps. 360,277 Ps. (97,686) $ (9,428)
Minority interest 417,661 188,262 55,900 5,396
----------------- ---------------- ----------------- ----------------
Ps. 954,524 Ps. 548,539 Ps. (41,786) $ (4,032)
================= ================ ================= ================
MAJORITY EARNINGS PER SHARE:
Income from continuing operations Ps. 0.629 Ps. 0.5375 Ps. 0.0280 $ 0.0027
Income (loss) from discontinued operations 0.0315 (0.0235) (0.1116) (0.0108)
Extraordinary gain (loss) 0.1050 - (0.0558) (0.0054)
----------------- ---------------- ----------------- ----------------
Majority net income (loss) Ps. 0.765 Ps. 0.5140 Ps. (0.1394) $ (0.0135)
================= ================ ================= ================
See accompanying notes to consolidated financial statements.
30
DESC AUTOMOTRIZ , S.A. DE C.V. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF DESC, S.A. DE C.V.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS (PS.) OF PURCHASING POWER OF DECEMBER 31, 2002
AND THOUSANDS U.S. DOLLARS ($))
- --------------------------------------------------------------------------------
EARNED SURPLUS
COMMON STOCK FROM
NUMBER OF -------------------------------------- RESTRUCTURING RETAINED
SHARES HISTORICAL RESTATEMENT OF SUBSIDIARY EARNINGS
------ ---------- ----------- ------------- --------
BALANCES AS OF JANUARY 1, 2000 700,968,216 Ps. 700,968 Ps. 2,016,426 Ps. - Ps. 2,087,080
Cumulative initial effect of deferred
income tax - - - - -
Dividends declared and paid - - - - (406,106)
Consolidated comprehensive income - - 536,864
----------- -------------- --------------- ------------- ---------------
BALANCES AS OF DECEMBER 3, 2000 700,968,216 700,968 2,016,426 - 2,217,838
Dividends declared and paid - - - - (113,483)
Earned surplus from
restructuring of subsidiary - - - 65,818 -
Decrease in equity of minority
stockholders from restructuring of
subsidiary - - - - -
Consolidated comprehensive income - 360,277
----------- -------------- --------------- ------------- ---------------
BALANCES AS OF DECEMBER 31, 2001 700,968,216 700,968 2,016,426 65,818 2,464,632
Dividends declared and paid - - - - (191,856)
Consolidated comprehensive income
(loss) - - - (97,686)
-------------- --------------- ------------- ---------------
BALANCES AS OF DECEMBER 31, 2002 700,968,216 Ps. 700,968 Ps. 2,016,426 Ps. 65,818 Ps. 2,175,090
============= =============== ============= ===============
BALANCES AS OF DECEMBER 31, 2001 700,968,216 $ 67,653 $ 194,611 $ 6,352 $ 237,869
Dividends declared and paid - - - - (18,517)
Consolidated comprehensive income
(loss) - - - (9,428)
-------------- --------------- ------------- ---------------
BALANCES AS OF DECEMBER 31, 2002 700,968,216 $ 67,653 $ 194,611 $ 6,352 $ 209,924
============= =============== ============= ===============
See accompanying notes to consolidated financial statements.
** TABLE CONTINUED... **
31(a)
CUMULATIVE ADJUSTMENT OF
INITIAL EFFECT LIABILITY FOR
OF CUMULATIVE EMPLOYEE TOTAL
DEFERRED EFFECT OF RETIREMENT MINORITY STOCKHOLDERS'
INCOME TAXES RESTATEMENT OBLIGATIONS INTEREST EQUITY
------------ ----------- ----------- -------- ------
BALANCES AS OF JANUARY 1, 2000 Ps. - Ps.(223,066) Ps. - Ps. 2,939,283 Ps. 7,520,691
Cumulative initial effect of deferred
income tax (1,100,312) - (715,509) (1,815,821)
Dividends declared and paid - - - (49,291) (455,397)
Consolidated comprehensive income (135,037) 385,579 787,406
-------------- ------------ ----------- ---------------- ----------------
BALANCES AS OF DECEMBER 3, 2000 (1,100,312) (358,103) - 2,560,062 6,036,879
Dividends declared and paid - - - (386,703) (500,186)
Earned surplus from
restructuring of subsidiary - - - 65,818
Decrease in equity of minority
stockholders from restructuring of
subsidiary - - (240,514) (240,514)
Consolidated comprehensive income (196,657) 60,936 224,556
-------------- ------------ ----------- ---------------- ----------------
BALANCES AS OF DECEMBER 31, 2001 (1,100,312) (554,760) 1,993,781 5,586,553
Dividends declared and paid - - (116,450) (308,306)
Consolidated comprehensive income (83,827)
-------------
(loss) 137,327 140,008 95,822
-------------- ------------ ---------------- ----------------
BALANCES AS OF DECEMBER 31, 2002 Ps.(1,100,312) Ps.(417,433) Ps. (83,827) Ps. 2,017,339 Ps. 5,374,069
============== ============ ============= ================ ================
BALANCES AS OF DECEMBER 31, 2001 $ (106,194) $ (53,542) $ - $ 192,426 $ 539,175
Dividends declared and paid - - (11,239) (29,756)
Consolidated comprehensive income (8,090)
-------------
(loss) 13,254 13,513 9,249
-------------- ------------ ---------------- ----------------
BALANCES AS OF DECEMBER 31, 2002 $ (106,194) $ (40,288) $ (8,090) $ 194,700 $ 518,668
============== ============ ============= ================ ================
See accompanying notes to consolidated financial statements.
** TABLE COMPLETE **
31(b)
DESC AUTOMOTRIZ , S.A. DE C.V. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF DESC, S.A. DE C.V.)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS (PS.) OF PURCHASING POWER OF DECEMBER 31, 2002
AND THOUSANDS U.S. DOLLARS ($))
- --------------------------------------------------------------------------------
2000 2001 2002 2002
---- ---- ---- ----
OPERATING ACTIVITIES:
Income from continuing operations Ps. 858,898 Ps. 565,032 Ps. 75,507 $ 7,287
Extraordinary gain (loss) 73,578 - (39,081) (3,771)
Income (loss) from discontinued operations 22,048 (16,493) (78,212) (7,548)
---------------- ----------------- ---------------- ----------------
Consolidated net income (loss) for the year 954,524 548,539 (41,786) (4,032)
Add (deduct)- Items which did not require (generate)
resources-
Depreciation and amortization 626,646 709,194 743,693 71,766
Depreciation of idle plant 34,734 - 4,720 456
Deferred income taxes 76,264 (202,102) (219,748) (21,208)
Net cost of employee benefits for the year 65,978 76,887 49,471 4,775
Impairment of fixed assets 10,593 6,442 9,990 964
Non-cash items from discontinued operations 9,088 1,435 (8,303) (803)
---------------- ----------------- ---------------- ----------------
Net resources obtained from results 1,777,827 1,140,395 538,037 51,918
Change in working capital-
(Increase) decrease in-
Notes and accounts receivable, net 368,307 429,645 51,337 4,955
Accounts receivable from parent company and
related parties (393,409) (162,746) 521,744 50,355
Inventories, net 99,159 572,552 (28,290) (2,730)
Prepaid expenses 3,976 17,380 18,639 1,799
Trust fund 148,299 (56,053) 280,793 27,100
Current asset from restructuring of subsidiary - 100,640 - -
Current assets of discontinued operations (4,569) 24,676 63,257 6,105
Increase (decrease) in-
Notes and accounts payable to suppliers,
other payables and accrued liabilities 100,490 (175,695) (184,150) (17,773)
Accounts payable to related parties (17,622) (17,258) 135,993 13,125
Income taxes, asset taxes and employee profit
sharing (58,086) 168,694 (48,215) (4,653)
Short-term liability from restructuring of
subsidiary - (37,138) - -
Current liabilities of discontinued operations 11,375 (30,088) 2,943 283
---------------- ----------------- ---------------- ----------------
257,920 834,609 814,051 78,566
---------------- ----------------- ---------------- ----------------
Net resources generated by operations 2,035,747 1,975,004 1,352,088 130,484
FINANCING ACTIVITIES:
Variance in bank loans and current portion of
long-term debt in real terms 1,583,446 (460,753) (465,202) (44,898)
Variance in bank loans and current portion of
long-term debt from restructuring of subsidiary - (142,737) - -
Decrease in bank loans and current portion of
long-term debt due to restatement in constant
Mexican pesos (70,927) (100,311) (90,118) (8,698)
Long-term debt paid (1,305,144) (412,864) (132,722) (12,809)
Decrease in long-term debt from restructuring of
subsidiary - (36,491) - -
Decrease in long-term debt due to restatement in
constant Mexican pesos (172,595) (26,235) (7,864) (759)
Dividends paid to majority stockholders (400,311) (113,483) (191,856) (18,517)
Dividends paid to minority stockholders of
subsidiaries (49,291) (386,703) (116,450) (11,239)
Decrease in minority interest from restructuring of
subsidiary - (240,514) - -
Earned surplus from restructuring of a subsidiary - 65,818 - -
Adjustment of additional liability for employee
retirement obligations - - (83,827) (8,090)
32
2000 2001 2002 2002
---- ---- ---- ----
Adjustment to additional liability for employee
retirement obligations - minority interest - - (12,558) (1,212)
Deferred income taxes 1,649,799 (206,622) 37,283 3,598
Deferred income taxes from restructuring of subsidiary - (91,037) - -
Initial recognition of deferred income taxes (1,100,312) - - -
Initial recognition of deferred income taxes -
minority interest (715,509) - - -
Financing activities of discontinued operations (4,055) (8,658) (692) (66)
----------------- ----------------- ----------------- ---------------
Net resources used in financing activities (584,899) (2,160,590) (1,064,006) (102,690)
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,198,438) (320,353) (747,325) (72,127)
Net book value of retirements of property, plant and
equipment 45,780 193,178 162,885 15,721
Net increase in investment properties - - (27,867) (2,690)
Decrease in property, plant and equipment from
restructuring of subsidiary - 259,018 - -
Other assets (279,154) (123,139) 97,821 9,441
Other assets from restructuring of subsidiary - 10,993 - -
Decrease in employee retirement obligation
intangible asset - - 151,460 14,618
Investing activities of discontinued operations (15,628) (2,157) 5,288 511
----------------- ----------------- ----------------- ---------------
Net resources generated by (used in)
investing activities (1,447,440) 17,538 (357,738) (34,526)
Net increase (decrease) in cash and temporary
investments 3,408 (154,708) (69,656) (6,722)
Decrease in cash and temporary investments from
restructuring of subsidiary - (13,340) - -
(Increase) decrease in cash and temporary
investments of discontinued operations (18,260) 31,288 7,716 744
Cash and temporary investments at the beginning
of the year 907,801 892,949 756,189 72,982
----------------- ----------------- ----------------- ---------------
Cash and temporary investments at the end
of the year Ps. 892,949 Ps. 756,189 Ps. 694,249 $ 67,004
================= ================= ================= ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income and asset taxes paid Ps. 520,623 Ps. 403,906 Ps. 404,965 $ 39,084
================= ================= ================= ===============
Employee profit sharing paid Ps. 114,061 Ps. 100,632 Ps. 106,811 $ 10,309
================= ================= ================= ===============
Interest paid Ps. 234,216 Ps. 189,958 Ps. 100,928 $ 9,741
================= ================= ================= ===============
See accompanying notes to consolidated financial statements.
33
Unik, S.A. de C.V. y Subsidiarias
Notas a los estados financieros consolidados al 31 de diciembre de 1998, 1999 y
2000 Expresadas en miles de pesos (Ps.) de poder adquisitivo del 31 de diciembre
de 2000 y miles de dolares americanos ($)
DESC AUTOMOTRIZ, S.A. DE C.V. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF DESC, S.A. DE C.V.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS (PS.) OF PURCHASING POWER OF DECEMBER 31, 2002
AND THOUSANDS U.S. DOLLARS ($))
- --------------------------------------------------------------------------------
1. ACTIVITIES AND SIGNIFICANT EVENTS
ACTIVITIES- Desc Automotriz, S.A. de C.V. (DESC AUTOMOTRIZ or the Company)
is a subsidiary of Desc, S.A. de C.V. (DESC), represents the automotive
parts segment, and is the majority stockholder of a group of companies
engaged mainly in the manufacturing and distribution of pick-up truck
bodies, pistons, axles, transmissions, constant velocity and propeller
shafts, universal joints, aluminum and steel wheels and other parts, as
well as the manufacture of spare parts and accessories for the automotive
industry.
SIGNIFICANT EVENTS-
a. The economic decline experienced by the automotive industry in the
United States of America and Mexico in 2002 and 2001 resulted in a
decrease in customer demand for original equipment and in the spare
parts market, plus the termination of some contractual agreements
with one of the Company's major customers (Chrysler), originated a
significant decrease in sales and operating margins of the Company
during the second semester of 2002. In the middle of 2002, as a
consequence of the events mentioned above, DESC implemented a new
restructuring program named "Evolucion", the main objective of which
is to review the investment portfolios and align the operating
structure with market demands. Consequently, the Company decided to
shut down the spark plug and electrical part plants due to the low
profitability of those businesses and began a personnel reduction
program that affected the severance indemnity payments in the income
statement as an extraordinary item (see Notes 19 and 20).
b. In the Extraordinary General Stockholder Meeting held on November
27, 2002, the stockholders of Unik, S.A. de C.V. approved a change
in the name of the Company from Unik, S.A. de C.V. to Desc
Automotriz, S.A. de C.V. effective as of that date.
c. On October 18, 2001, a shareholding restructuring took place in the
subsidiary Moresa, S.A. de C.V. (MORESA), which engages in the
manufacturing of pistons, bolts and followers/valve lifters, and the
sale of automotive engine components. Such restructuring consisted
of the exchange of MORESA equity in Forjas y Maquinas, S.A. de C.V.
(FOMASA), representing 60% of the capital stock, for 40% of the
equity in Pistones Moresa, S.A. de C.V., Morestana, S.A. de C.V. and
Comercializadora Moresa, S.A. de C.V. held by TRW, Inc. (TRW). This
resulted in the Company increasing its current equity holdings in
MORESA to 96.3%, and the termination of the Company's
association/joint venture with TRW. Additionally, in this
transaction the Company recognized a capital surplus of Ps.65,818,
resulting from the increase in its participation in the equity of
MORESA and a reduction in TRW's minority shareholding of Ps.240,514.
d. On November 29, 2000, there was a shareholding restructuring of
Velcon, S.A. de C.V. (VELCON), a subsidiary engaged in the
manufacturing and sale of constant velocity shafts, whereby Spicer,
S.A. de C.V. (SPICER), another subsidiary, sold all of its shares in
VELCON, representing 36.18% of the capital stock. DESC AUTOMOTRIZ
acquired 26.22% and GKN Automotive International GMBH (GKN) acquired
9.96%, resulting in a shareholding interest of 51.05% and 48.95%,
respectively.
e. As a result of the restructuring, DESC AUTOMOTRIZ increased its
total shareholding interest in VELCON by 7.71% at a cost of
Ps.119,949. In connection with this transaction, Ps.70,137 of
goodwill was recognized, which will be amortized over four years,
the term over which it is estimated that the investment will be
34
recovered. As well, an extraordinary gain was recognized, which was
generated by SPICER. (see Notes 9 and 20).
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company are presented on the
basis of accounting principles generally accepted in Mexico ("MEX GAAP"),
which differ in certain significant aspects from the accounting principles
generally accepted in the United States of America ("US GAAP"). See Note
24 for an explanation of the differences and Note 25 for the
reconciliation of MEX GAAP to US GAAP.
The translation of Mexican pesos into US dollars is included exclusively
for the convenience of the reader, using the exchange rate at December 31,
2002 of 10.3613 Mexican pesos per U.S. dollar. The convenience
translations should not be construed as representations that the accounts
in Mexican pesos have been, could have been or could in the future be
translated into US dollars at this or any another rate of exchange. The
statement of income in U.S. dollars that is prepared monthly by the
Company is presented in nominal Mexican pesos and translated at the
average exchange rate of the corresponding month. Therefore, they differ
from the accompanying financial statements.
CONSOLIDATION OF FINANCIAL STATEMENTS - The consolidated financial
statements include those of DESC AUTOMOTRIZ and its subsidiaries, whose
shareholding percentage in their capital stock is shown below for the more
significant subsidiaries. Intercompany balances and transactions have been
eliminated in these consolidated financial statements.
% OF
OWNERSHIP
Spicer, S.A. de C.V. and subsidiaries 51.19
Moresa, S.A. de C.V. and subsidiaries 96.31
Hayes Wheels de Mexico, S.A. de C.V. and subsidiaries 59.99
Velcon, S.A. de C.V. 51.05
Pintura, Estampado y Montaje, S.A. de C.V. 99.99
The equity in results of operations and changes in equity of the
subsidiaries acquired or sold during the year are included in the
financial statements through or from the date on which the transactions
were carried out and are restated in terms of the purchasing power of the
Mexican pesos as of the latest year presented.
TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN SUBSIDIARIES - To
consolidate the financial statements of the foreign subsidiaries,
Transmissions Technologies Corporation (TTC) and Uniko, Inc, whose
operations are an integral part of the Company, the foreign currency
financial statements are remeasured into Mexican pesos with the resulting
translation gain or loss included in net comprehensive financing cost
within the consolidated statements of income. For remeasurement purposes,
amounts are translated into Mexican pesos using the following exchange
rates: (i) the closing exchange rate in effect at the balance sheet date
for monetary assets and liabilities (ii) the historical exchange rate for
nonmonetary assets and liabilities (iii) the exchange rate in effect at
the date the contributions were made for common stock (iv) the average
exchange rate of each month and restated at yearend for revenues and
expenses. The resulting translated Mexican peso amounts are then restated
to Mexican pesos of purchasing power of the most recent balance sheet date
presented using the National Consumer Price Index (NCPI). The effects of
the translation which are not significant, are included in the statement
of income as part of the exchange gain or loss in the integral financing
result.
COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) presented in the
accompanying consolidated statement of changes in stockholders' equity is
comprised of the net income (loss) of the year, plus other comprehensive
income (loss) items of the same period which, in accordance with MEX GAAP,
are recorded directly in stockholders' equity without affecting the
consolidated statements of income. In 2000, 2001 and 2002, other
comprehensive income (loss) includes the cumulative effect of restatement
of stockholders' equity and, in 2002, the adjustment of the additional
liability for employee retirement obligations.
35
RECLASSIFICATIONS - Certain amounts in the financial statements as of and
for the year ended December 31, 2000 and 2001 have been reclassified to
conform to the presentation of the consolidated financial statements as
of and for the year ended December 31, 2002.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are in conformity with MEX
GAAP, which require that management make certain estimates and use certain
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Although these estimates are based
on management's best knowledge of current events, actual results may
differ. The significant accounting policies of the Company are as follows:
a. NEW ACCOUNTING POLICIES - Bulletin C-2, "Financial Instruments",
which became effective in 2001, establishes the methodology to value
and record financial instruments. This bulletin requires that all
the effects from the valuation of contracted financial instruments
be recorded as assets or liabilities, thus affecting the integral
financing cost. Financial instruments that have been designated and
that function effectively as hedging of assets or liabilities or
future transactions will affect the assets or liabilities or the
corresponding transactions when they are realized, settled or occur
(Note 22). There was no cumulative effect for the valuation of the
financial instruments at the beginning of the year.
International Accounting Standard No. 40, "Investment Properties",
which in 2001 became an integral part of MEX GAAP, establishes the
valuation criteria with respect to properties whose purpose is to
generate rent or gains, or both. In conformity with Circular 55
issued by the Mexican Institute of Public Accountants, the valuation
model applicable to Mexico is the cost model, according to which
such properties should be valued at their acquisition and/or
construction cost and restated by applying the NCPI, less their
accumulated depreciation. There was no cumulative effect for the
valuation of the Investment Properties at the beginning of the year.
As of December 31, 2001 and 2002, the net restated values of such
investments are reflected separately in the consolidated balance
sheet under current assets, while their fair values are disclosed in
Note 8.
b. RECOGNITION OF THE EFFECTS OF INFLATION - The Company restates its
consolidated financial statements to Mexican pesos purchasing power
of the most recent balance sheet date presented. Accordingly, the
consolidated financial statements of the prior year have been
restated to Mexican pesos of purchasing power of December 31, 2002
and, therefore, differ from those originally reported in the prior
year.
c. TEMPORARY INVESTMENTS - Temporary investments are stated at the
lower of acquisition cost plus accrued yields, or market value.
d. INVENTORIES AND COST OF SALES - Inventories are originally recorded
at direct acquisition or production cost and subsequently restated
to the lower of replacement cost or market, without exceed their
fair value, adjusted at the end of each year to the full absorption
costing method through the capitalization of fixed expenses
applicable to the inventories. Cost of sales is restated using
replacement cost at the time of the sale.
e. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
initially recorded at acquisition cost and restated using the NCPI.
For fixed assets of foreign origin, restated acquisition cost
expressed in the currency of the country of origin is converted into
Mexican pesos at the market exchange rate in effect at the balance
sheet date.
Depreciation of property, plant and equipment is calculated based on
the assets' average restated value of the year using the
straight-line method based on the remaining useful lives of the
related assets.
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
36
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. GOODWILL - Goodwill results from acquisitions made by the Company at
prices greater than the restated book value at the date of
acquisition. It is restated using the NCPI and is being amortized
over four years. The amortization recorded in operating expenses in
2000 was Ps.1,460, and in 2001 and 2002 it was Ps.18,381.
h. WARRANTIES- The companies have established warranty reserves that
are estimated as a function of the contractual obligations arising
at the time sales are made and based on the experience of warranties
granted.
i. START-UP COSTS- These relate to expenses incurred in connection with
the acquisition of new production lines and are amortized over a
four-year period, the term over which the benefit from the
investment is expected to be realized. The amount amortized in 2000
and 2001 amounted to Ps.17,191 and Ps.15,832, respectively.
j. EMPLOYEE RETIREMENT OBLIGATIONS - Seniority premiums, pension plans
and payments that are similar to pensions are recognized as costs as
earned by the employees, based on calculations by independent
actuaries using the projected unit credit method using real interest
rates. Consequently, the liability is being accrued, which at
present value will cover the obligation from benefits projected to
the estimated retirement date of the companies' employees. Severance
is charged to results when the liability is determined to be
payable.
k. INCOME TAX, ASSET TAX AND EMPLOYEE STATUTORY PROFIT-SHARING - Income
tax (ISR) and employee statutory profit-sharing (PTU) are recorded
in results of the year in which they are incurred. Deferred income
tax assets and liabilities are recognized for temporary differences
resulting from comparing the book 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, are not probable of being realized. Deferred
PTU is derived from temporary differences between the accounting
result and income for PTU purposes and is recognized only when it
can be reasonably assumed that they will generate a liability or
benefit, and there is no indication that this situation will change
in such a way that the liabilities will not be paid or benefits will
not be realized.
The asset tax paid that is expected to be recoverable is recorded as
an advance payment of income tax and is presented on the balance
sheet with deferred ISR.
l. FOREIGN CURRENCY BALANCES AND TRANSACTIONS - Foreign currency
transactions are recorded at the applicable exchange rate in effect
at the transaction date. Monetary assets and liabilities denominated
in foreign currency are translated into Mexican pesos at the
applicable exchange rate in effect at the balance sheet date.
Exchange fluctuations are recorded as a component of integral
financing cost in the consolidated statements of income.
m. CUMULATIVE EFFECT OF RESTATEMENT - The insufficiency in the
restatement of stockholders' equity represents the accumulated
monetary position result through the initial restatement of the
consolidated financial statements and the gain (loss) from holding
nonmonetary assets, which resulted from restating certain
nonmonetary assets above (below) inflation, less the related
deferred income tax effect.
n. REVENUE RECOGNITION- Revenues are recognized when the products are
shipped or delivered to the client and the client assumes title to
the products.
o. MONETARY POSITION (GAIN) LOSS - The monetary position result, which
represents the erosion of purchasing power of monetary items caused
by inflation, is calculated by applying NCPI factors to monthly net
monetary position. Gains and losses result from maintaining a net
monetary liability or asset position, respectively.
37
P. EARNINGS PER SHARE- Basic earnings (loss) per share is calculated by
dividing the consolidated net income (loss) of majority stockholders
by the weighted average number of shares outstanding during the
year.
4. CASH AND TEMPORARY INVESTMENTS
2001 2002
Cash Ps. 48,592 Ps. 140,477
Investments with maturities of less than three months 707,597 249,134
Technology and training trust funds to be used within three months - 304,638
--------------------- ----------------------
Ps. 756,189 Ps. 694,249
===================== =====================
The management of the Company has decided to use for other purposes,
within a period of less than three months, the total amount of the
technology and training trust funds. As of February 14, 2003, the trust
funds utilized amounted to Ps. 40,998 (see Note 10).
5. ACCOUNTS AND NOTES RECEIVABLE
2001 2002
Customers Ps. 649,125 Ps. 581,027
Allowance for doubtful accounts (6,103) (4,461)
----------------------- -----------------------
643,022 576,566
Recoverable value-added taxes 17,942 44,559
Recoverable income and asset taxes 55,880 89,809
Other debtors 75,367 34,728
Officers and employees 10,091 5,303
---------------------- ----------------------
Ps. 802,302 Ps. 750,965
===================== =====================
During 2001 and 2002, certain subsidiaries sold commercial paper without
recourse at an average financial cost of 4.4% and 4.5%, respectively, and
terms ranging between 20 and 26 days, with two financial institutions. As
of December 31, 2001 and 2002, the balances of commercial paper sold
without recourse amounted to $37.6 and $33.4 million, respectively.
6. INVENTORIES
2001 2002
Finished goods and work-in-process Ps. 446,618 Ps. 494,029
Raw materials an indirect materials 597,282 535,177
---------------------- ----------------------
1,043,900 1,029,206
Allowance for slow-moving and obsolete items (20,954) (11,968)
---------------------- ----------------------
1,022,946 1,017,238
Advances to suppliers 391 823
Merchandise-in-transit 85,047 46,423
---------------------- ----------------------
Ps. 1,108,384 Ps. 1,064,484
====================== ======================
38
7. PROPERTY, PLANT AND EQUIPMENT
2001 2002
Buildings and installations Ps. 2,806,215 Ps. 2,712,256
Machinery and equipment 8,911,561 9,677,636
Transportation equipment 64,785 51,660
Furniture and fixtures 242,380 225,668
---------------------- ----------------------
12,024,941 12,667,220
Accumulated depreciation (7,107,888) (7,613,875)
---------------------- ----------------------
4,917,053 5,053,345
Projects in progress 413,828 549,790
Land 355,727 408,834
---------------------- ----------------------
Ps. 5,686,608 Ps. 6,011,969
====================== ======================
The average annual depreciation rates are as follows:
2000 2001 2002
Buildings and installations 2.26% 2.35% 2.44%
Machinery and equipment 5.01% 5.74% 5.40%
Transportation equipment 12.53% 14.39% 13.87%
Furniture and fixtures 11.54% 10.41% 7.85%
The Company continues to evaluate all idle assets, to determine their
possible use or disposal in the short-term.
Below is a summary of idle assets at their estimated realizable value at
December 31, 2001 and 2002:
2001 2002
Land Ps. 162,937 Ps. 195,481
Buildings and installations, net 65,215 97,459
Machinery and transportation equipment, net 76,181 71,588
---------------------- ----------------------
Ps. 304,333 Ps. 364,528
===================== =====================
Temporarily idle assets amounting to Ps.189,776 and Ps.247,845 in 2001 and
2002, respectively, are being depreciated and are restated as nonmonetary
items.
Permanently idle assets amounting to Ps.114,557 and Ps.116,683 in 2001 and
2002, respectively, are not depreciated and are restated as monetary
items.
On June 29, 2001, the subsidiary, Pintura, Estampado y Montaje, S.A. de
C.V. (PEMSA), entered into an $18.7 million machinery sale agreement
(without the obligation to repurchase) with a financial institution. On
that same date, a five-year machinery lease agreement covering the same
machinery was entered into, establishing quarterly rent payments beginning
on October 1, 2001 (see Note 21).
On December 19, 2002, the subsidiary, Pistones Moresa, S.A. de C.V.
(PISMO), entered into an $11 million machinery sale agreement (without the
obligation to repurchase) with a financial institution. On that same date,
a seven-year machinery lease agreement covering the same machinery was
entered into, establishing quarterly rent payments beginning on January 1,
2003 (see Note 21).
39
8. INVESTMENT PROPERTIES
2001 2002
Buildings Ps. 178,951 Ps. 262,688
Land 229,222 169,352
Accumulated depreciation (43,297) (165,228)
Ps. 364,876 Ps. 266,812
===================== =====================
The annual average depreciation rate of buildings in 2001 and 2002 was
2.4%. At December 31, 2001and 2002, the fair value of investment
properties determined by an external appraiser amounts to Ps.364,876 and
Ps.310,056, respectively. Therefore, the original amount recorded in 2001
decreased by Ps.6,442 and was applied to results for the year.
9. OTHER ASSETS
ANNUAL
AMORTIZATION
2001 2002 RATE
---- ---- ----
Unrealized contributions to the training trust fund Ps. 70,635 Ps. - -
Unrealized contributions to the technology trust fund 105,893 - -
Prepaid contribution of employee benefits (see Note 13) 87,741 53,031 -
Installation and preoperating expenses, net 44,994 43,970 10%
Development expenses and start-up cost, net 37,487 23,736 20% al 25%
Goodwill 48,981 30,452 25%
Other assets to be amortized 26,416 35,698 20% al 25%
Other assets not be amortized 28,384 41,426 -
---------------------- ----------------------
Ps. 450,531 Ps. 228,313
===================== =====================
10. TRUST FUNDS
The companies have a trust fund with Banco Santander Mexicano, S.A. as
trustee, to earmark funds for research and development of technology for
the companies. The companies are authorized to make use of these funds for
specific purposes, and the fund may be increased by future contributions
in accordance with the provisions in the contract, or by interest,
dividends and capital gains earned by the fund At December 31, 2001 and
2002, the unused amounts of the fund were Ps.141,082 and Ps.172,364,
respectively.
In addition, there is another similar trust fund through a contract also
with Banco Santander Mexicano, S.A., whose funds are utilized for the
training of personnel. The terms governing this trust are similar to those
of the technology trust. At December 31, 2001 and 2002, the unused amounts
of the fund were Ps.139,711 and Ps.132,274, respectively.
According to the technology and training plans in 2002, the Company
estimated investments in a total amount of the trust funds, as a result
the Company decided to classify the balance as short term.
40
11. OTHER PAYABLES AND ACCRUED LIABILITIES
2001 2002
Taxes payable Ps. 180,867 Ps. 138,343
Contributions to trust funds pending realization 176,528 -
Other debtors 54,341 132,967
Royalties 12,412 30,275
Guarantee reserves 13,462 20,484
Interest payable 12,833 7,597
Other accounts payable 33,631 38,224
---------------------- ----------------------
Ps. 484,074 Ps. 367,890
===================== =====================
12. LONG-TERM DEBT
2001 2002
INTEREST INTEREST
MATURITY RATE AMOUNT MATURITY RATE AMOUNT
-------- ---- ------ -------- ---- ------
2003 7.3420% Ps. 124,247 - - -
2003 Libor + 1.0% 58,727 - - -
2003 Libor + 1.5% 46,619 - - -
2003 Libor + 1.7% 20,799 - - -
2003 7.75% 460 - - -
--------------------
250,852
DENOMINATED IN US DOLLARS
2001 2002
INTEREST INTEREST
MATURITY RATE AMOUNT MATURITY RATE AMOUNT
-------- ---- ------ -------- ---- ------
2004 Libor + 1.0% 24,470 2004 Libor + 1.0% Ps. 15,542
--------------------
2004 7.75% 760 2004 7.75% 453
-------------------- ---------------
25,230 15,995
-------------------- ---------------
276,082 15,995
Less- Current portion of
log-term debt 130,250 10,749
-------------------- ---------------
Ps. 145,832 Ps. 5,246
==================== ===============
As of December 31, 2002 and 2001, the Libor rate was 1.38% and 1.88%,
respectively.
The maturities of long-term debt are as follows:
2001 2002
2003 Ps. 140,878 Ps. -
2004 4,954 5,246
---------------------- ----------------------
Ps. 145,832 Ps. 5,246
===================== =====================
41
The current portion of long term debt and short-term bank loans are
compromised as follows:
2001 2002
Current portion of long-term U.S. dollar debt Ps. 130,250 Ps. 10,749
Other short-term bank loans payable in U.S. dollar 1,540,892 1,080,099
---------------------- ----------------------
Ps. 1,671,142 Ps. 1,090,848
====================== ======================
The Company and it subsidiary SPICER, have acted as guarantors without
secure for certain short-term bank loans of group companies.
Additionally, DESC AUTOMOTRIZ has acted a guarantor for certain long-term
bank loans of Desc in the amount of Ps.1,300,000 and Ps.2,849,000 with
maturities in June 2007.
Since most agreements establish variable interest rates (monthly,
quarterly and semiannually) and there has been no significant variance
with respect to the fixed interest rate on agreements, it is considered
that the loans are recorded at fair value.
13. EMPLOYEE RETIREMENT OBLIGATIONS
The employee benefit obligation relates to the pension plan that will
cover the pension and seniority premiums due upon retirement. The amount
resulting from the actuarial calculations prepared by external actuaries
is being funded using the projected unit credit method. The amount of the
pension liability is as follow:
2001 2002
Projected benefit obligation (PBO) Ps. 543,527 Ps. 476,333
Plan assets at fair value 313,076 263,534
---------------------- ----------------------
Unfunded projected benefit obligation (230,451) (212,799)
Unrecognized net transition obligation (110,055) (110,043)
Unrecognized variances in assumptions 428,247 375,873
---------------------- ----------------------
Net projected assets Ps. 87,741 Ps. 53,031
===================== =====================
As of December 31, 2001 and 2002, the amount of the accumulated benefit
obligation (ABO) (equivalent to the PBO without projecting the salaries
at the retirement date) exceeds the amount funded by Ps.165,753 and
Ps.163,852 respectively, for which this amount was recognized as an
additional liability of employee retirement obligation creating a
deferred asset of Ps.165,982 and Ps.12,621, respectively as shown in the
consolidated balance sheet. As of December 31, 2002, the amount of the
additional liability exceeds the sum of the transition liability to be
amortized plus the prior services and the modifications to the plan, for
which excess was recorded in the account "adjustment of additional
liability for employee retirement obligations" in stockholders' equity.
42
The net periodic pension cost is as follows:
2000 2001 2002
Service cost Ps. 36,109 Ps. 38,549 Ps. 25,998
Amortization of transition assets (6,366) (6,192) (6,251)
Amortization of variances in assumptions 26,960 30,581 23,448
Interest cost 34,557 35,413 27,239
----------------------- ---------------------- ----------------------
91,260 98,351 70,434
Less- Actual return on plan assets (25,282) (21,464) (20,963)
----------------------- ---------------------- ----------------------
Net periodic cost Ps. 65,978 Ps. 76,887 Ps. 49,471
======================= ====================== =====================
The real rates used in calculations of the actuarial present value during
2000, 2001 and 2002 are as follows:
Funds rate yield 7%
Interest rate 5%
Salary increase rate 1.5%
The changes in the PBO for the pension liability are show below:
2001 2002
Beginning balance Ps. 691,101 Ps. 543,527
Service cost 38,549 25,998
Inters cost 35,413 27,239
Actuarial gain (221,536) (120,431)
----------------------- ----------------------
Ending balance Ps. 543,527 Ps. 476,333
======================= ======================
The changes in the net projected asset are as follows:
2001 2002
Beginning balance Ps. 62,392 Ps. 87,741
Net period pension cost (76,887) (49,471)
Actuarial loss (720) (7,593)
Contributions 102,956 22,354
---------------------- ---------------------
Ending balance Ps. 87,741 Ps. 53,031
====================== =====================
The changes in the plan assets are shown below:
2001 2002
Beginning balance Ps. 303,292 Ps. 313,076
Contributions 102,956 22,354
Actual return on plan assets 21,464 20,963
Special payments for the reduction of personnel (62,189) (48,573)
Actuarial loss (52,447) (44,286)
----------------------- ---------------------
Ending balance Ps. 313,076 Ps. 263,534
====================== =====================
43
The amortization period for unamortized items is as follows:
REMAINING YEARS
--------------------------
2001 2002
Transition liability 20 19
Variances in assumptions 18 18
14. STOCKHOLDERS' EQUITY
In the General Ordinary Shareholder Meeting held on July 3, 2001, the
shareholders decided to pay dividends of Ps.113,483 (Ps.105,145 at
nominal value) on July 13, 2001, through a partial reduction of the
account receivable from DESC (the holding company).
In the General Annual Ordinary Stockholder Meeting held on July 1, 2002,
dividends of Ps.120,984 (at nominal value of Ps. 117,810) were declared
and approved, payable in cash on July 23, 2002.
In the General Annual Ordinary Stockholder Meeting held on October 23,
2002, dividends of Ps.70,872 (at nominal value of Ps. 70,000) were
declared and approved, payable in cash on the same date.
In the General Ordinary Shareholders' Meeting held on June 15, 2002, the
shareholders decided to pay dividends out of the subsidiary Velcon, S.A.
de C.V. The decrease was in the majority and minority part of Ps.121,455
and Ps.116,450 respectively, (Ps.117,930 and Ps.113,070 at nominal
value), payable in cash on the same date.
As of December 31, 2001 and 2002, the capital stock is comprised as
follows:
SHARES AMOUNT
Fixed
Nominative Series "A" shares with a par value of one Mexican peso
each, which may only be acquired by Mexican
companies or individuals 25,500 Ps. 26
Nominative Series "B" shares with a par value of one Mexican
peso each, which are of unrestricted subscription 24,500 24
Variable-
Nominative Sub-series "A" shares with a par value of one mexican
peso each, which may only be acquired by Mexican companies or
individuals 357,468,291 357,468
Nominative Sub-series "B" shares with a par value of one Mexican
peso each, which are of unrestricted subscription 343,449,925 343,450
---------------------- ----------------------
700,968,216 Ps. 700,968
====================== =====================
Stockholders equity, except restated paid-in capital and previously taxed
retained earnings, will be subject 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.
Due to the tax reform for 2003, the credit of taxes paid as a result of
capital distribution as indicated in the previous paragraph may only be
applied against the 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 each 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
44
to stockholders' during the existence of the Company, except in the form
of a stock dividend. At December 31, 2001 and 2002, the legal reserve of
DESC AUTOMOTRIZ has a nominal value of Ps.109,109 and Ps.126,413,
respectively, and is included in retained earnings.
15. FOREIGN CURRENCY BALANCES AND TRANSACTIONS
The companies value their foreign currency denominated assets and
liabilities, mainly represented in U.S. dollars, at the sale exchange
rate effective at December 31, 2001 and 2002, which was 9.26 and 10.3613
Mexican pesos per U.S. dollar, respectively, because it is expected that
they will use their foreign currency denominated assets to liquidate
their foreign currency denominated liabilities.
a. The foreign currency position at the end of 2001 and 2002 consists
of the following:
US DOLLARS
----------------------------------------------------
2001 2002
Current assets $ 148,555 $ 60,117
Current liabilities
Without cost 62,255 58,563
With cost 172,048 118,488
Long-term- With cost 14,899 506
--------------------- ---------------------
249,202 177,557
--------------------- ---------------------
Net liability position in foreign currency $ 100,647 $ 117,440
===================== =====================
At January 22, 2003, date of the issuance of the consolidated
financial statements, the unaudited foreign exchange position was
similar to that at yearend, and the sale exchange rate was 10.8213
Mexican pesos per U.S. dollar.
b. Nonmonetary assets of foreign origin at December 31, 2001 and 2002
are as follows:
2001 2002
Inventories $ 57,645 $ 35,123
Machinary and equipment 266,850 282,117
---------------------- ----------------------
$ 324,495 $ 317,240
===================== =====================
c. During the years ended December 31, 2000, 2001 and 2002, the
companies had the following significant transactions in foreign
currency, which are recorded at the exchange rate as of the date the
transaction took place. Foreign currency transactions, which include
those executed in Mexico and denominated in U.S. dollars, as well as
those of the foreign subsidiaries, are as follows:
US DOLLARS (THOUSANDS)
------------------------------------------------------------------------
2000 2001 2002
Direct export sales $ 368,587 $ 444,618 $ 293,798
Indirect export sales under contract 305,692 119,234 181,728
Sales by foreign subsidiaries 34,746 67,255 49,962
--------------------- ---------------------- ---------------------
709,025 631,107 525,488
Less-
Raw material purchase (405,012) (287,161) (240,873)
Purchases and expenses of (38,644) (45,002) (29,281)
foreign subsidiaries --------------------- ---------------------- ----------------------
45
US DOLLARS (THOUSANDS)
----------------------------------------------------------------------
2000 2001 2002
$ 265,369 $ 298,944 $ 255,334
====================== ===================== =====================
Interest income $ 3,936 $ 4,148 $ 4,238
Interest expense (21,131) (15,096) (5,147)
---------------------- --------------------- ----------------------
Net $ (17,195) $ (10,948) $ (909)
====================== ===================== =====================
Technical assistance $ (9,498) $ (6,997) $ (3,132)
====================== ===================== =====================
Other expense, net $ (2,719) $ (8,413) $ (2,412)
====================== ===================== =====================
16. BALANCES AND TRANSACTIONS WITH HOLDING COMPANY AND RELATED PARTIES
The Company had the following transactions with related parties.
2000 2001 2002
Income-
Sales Ps. 594,092 Ps. 455,177 Ps. 418,766
================== ===================== =====================
Interest Ps. 10,741 Ps. 29,760 Ps. 31,783
================== ===================== =====================
Rent Ps. 1,433 Ps. 1,438 Ps. 1,420
================== ===================== =====================
Other Ps. - Ps. - Ps. 4,878
================== ===================== =====================
Expenses-
Purchases Ps. 909,739 Ps. 619,139 Ps. 373,781
================== ===================== =====================
Technical assistance Ps. 32,899 Ps. 24,624 Ps. 35,223
================== ===================== =====================
Services Ps. 3,758 Ps. 31,349 Ps. 61,207
================== ===================== =====================
Other Ps. 3,998 Ps. 22,469 Ps. 20,117
================== ===================== =====================
Transactions with related parties are part of the business regular
transactions and are carried out at market values.
Balances receivable and payable with related parties ending in 2002 are
as follows:
2001 2002
Accounts receivable-
Desc, S.A. de C.V. (holding company) Ps. 533,389 Ps. -
Dana Corporation - 20,814
GKN Indugasa 6,673 -
GKN Automotive International GMBH 8,969 8,271
Other 2,080 282
---------------------- ----------------------
Ps. 551,111 Ps. 29,367
===================== =====================
46
Accounts payable
Desc S.A. de C.V. (holding company) Ps. - Ps. 110,473
Promocion y Control, S.A. de C.V. - 9,849
Dana Corporation 2,477 -
Hayes Lemmerz International, Inc. 16,668 16,357
Glaezner Spicer, S.A. 1,584 5,307
Delphi Energy 1,194 5,886
GKN & affiliated - 8,724
Lohr and Bromkam - 1,357
Other 2,482 2,445
---------------------- ---------------------
Ps. 24,405 Ps. 160,398
===================== =====================
17. CONTINGENCIES
The subsidiary, Hayes Wheels Acero S.A. de C.V., jointly with its partner
Hayes Lemmerz Int., are negotiating with its client NISSAN for the recall
of some defective steel wheels. The Company will cover part of the cost
of this claim and another part will cover by Hayes Lemmerz Int. once the
insurance companies determine the amount that they will be covered. As of
December 31, 2002, the Company recorded a provision of $2.1 million which
corresponds to the offer of payment by the Company to cover this
contingency.
18. INCOME TAXES, TAX ON ASSETS AND EMPLOYEE STATUTORY PROFIT-SHARING
The companies are subject to income taxes (ISR) and tax on assets
(IMPAC). ISR is computed taking into consideration the taxable and
deductible effects of inflation, such as depreciation calculated on
restated constant prices, and the deduction of purchases in place of cost
of sales, which permit the deduction of current costs, and taxable income
is increased or reduced by the effects of inflation on certain monetary
assets and liabilities through the annual adjustment for inflation, which
is similar to the result from monetary position. ISR is calculated in
terms of currency when the transactions occurred and not in terms of
currency as of the end of the year. Until 2002, the income tax rate was
35%, with the obligation, through that date, to pay this tax each year at
a rate of 30%, with the remainder payable upon distribution of earnings.
This remainder is recorded as a short-term liability.
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 (PTU) and the obligation to
withhold taxes on dividends paid to individuals or foreign residents was
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 is creditable against the excess of ISR over IMPAC of
the following ten years.
As of December 31, 2002, certain subsidiary companies had tax loss
carryforwards for ISR purposes and recoverable IMPAC, indexed through
December 31, 2002, which will be further indexed for inflation through
the year in which they are applied or recovered, as follows:
47
RESTATED
TAX LOSS RECOVERABLE
MATURITY CARRYFORWARDS ASSET TAXES
2003 Ps. 38,701 Ps. 4,063
2004 135,281 5,608
2005 136,264 3,616
2006 1,049 8,440
2007 7,768 2,881
2008 102,041 9,534
2009 31,439 28,792
2010 87,663 45,041
2011 126,665 51,470
2012 274,889 47,195
---------------------- ---------------------
Ps. 941,760 Ps. 206,640
===================== =====================
Income for employee profit sharing purposes excludes the annual
inflationary adjustment and unrealized exchange gains or losses, and
depreciation is based on historical rather than restated values.
In accordance with the Mexican Income Tax Law, the companies are included
in the consolidated income and asset tax returns of DESC.
DEFERRED INCOME TAXES- The tax effects of the temporary differences that
generated deferred tax liabilities (assets), in accordance with Bulletin
D-4, are the following:
2001 2002
Property, plant and equipment Ps. 1,066,123 Ps. 1,087,090
Inventories 355,502 338,454
Reserves (40,244) (39,557)
Tax loss carryforwards (239,956) (290,989)
Recoverable tax on assets (160,851) (206,640)
Other 172,594 25,514
Add- Allowance for tax losses and recoverable asset taxes that
may not be applied or recovered 62,232 119,063
----------------------- ------------------
Ps. 1,215,400 Ps. 1,032,935
====================== ==================
The favorable effect derived from the decrease in the income tax rate in
2001 and 2002 was Ps.71,166 and Ps.71,650, respectively, which was
recorded as reduction of to the provision for the year.
The reconciliation of the statutory and effective ISR rates expressed as
a percentage of income before ISR and employee statutory profit-sharing
for the years ended December 31, 2000, 2001 and 2002 is as follows:
48
2000 2001 2002
Statutory rate 35.0% 35.0% 35.0%
Add (deduct) the effect of permanent differences.
Non -deducible items 3.3% 5.1% 16.6%
Non-taxable income (0.6)% 0.3% (15.1)%
Allowance for tax loss carryforwards and asset tax - - 15.3%
Income tax rate reduction effect - (7.5)% (0.2)%
Others (5.1)% (4.8)% 5.9%
------------------ --------------- --------------
Effective rate 32.6% 28,1% 57.5%
================== =============== ==============
19. DISCONTINUED OPERATIONS
On June 30, 2002, the management of the Company decided to shut down the
plants dedicated to the manufacture of spark plugs and automotive
electrical parts. A summary of statements of income for the years ended
of December 31, 2000, 2001 and 2002 is as follows:
2000 2001 2002
Revenues from discontinued operations Ps. 310,102 Ps. 164,230 Ps. 66,402
Costs and expenses 274,212 173,684 91,734
Integral financing cost (93) 1,966 2,796
Other expenses (income) (515) 11,894 70,439
Current and deferred income tax and employee statutory
profit-sharing. 14,450 (6,821) (20,355)
-------------------- ------------------- ----------------------
Net income (loss) from discontinued operations Ps. 22,048 Ps. (16,493) Ps. (78,212)
=================== =================== ======================
During the second semester of 2002, liquidation of assets and payment of
liabilities of the discontinued operations, as well as the creation of
the necessary reserves to conclude the plant closing process, was begun.
As of the date of these financial statements the sale of the plant and
certain equipment, which has a book valve less than its estimated
realizable value, is in process.
20. ANALYSIS OF EXTRAORDINARY ITEMS
2000 2001 2002
Gain from shareholding restructuring in VELCON Ps. 176,385 Ps. - Ps. -
Reorganization expenses in MORESA (63,189) - -
Severance indemnities from restructuring - - (60,125)
---------------------- --------------------- -----------------
113,196 - (60,125)
Less related income tax effect 39,618 - 21,044
---------------------- --------------------- -----------------
Ps. 73,578 Ps. - Ps. (39,081)
====================== --------------------- ================
49
21. LEASE COMMITMENTS
As of December 31, 2001and 2002, the Company had operating lease for
equipment commitments amounting to Ps.206,802 and Ps.297,043, whose
maturity dates are as follows:
MATURITY 2001 2002
2002 Ps. 33,587 Ps. -
2003 33,274 44,960
2004 54,949 51,900
2005 43,776 64,445
2006 41,216 59,535
2007 - 15,903
2008 - 15,903
2009 44,397
----------------- -----------------
-
Ps. 206,802 Ps. 297,043
================= =================
22. FINANCIAL INSTRUMENTS
The Company and its subsidiaries entered into option contracts for risk
coverage with Pemex Gas and Petroquimica Basica to hedge against the
price volatility of natural gas for the period from January 2002 to
December 2003.
The Company acquired insurance that covers the rise in market price of
gas over a maximum price through the payment of a premium. The maximum
price was $4.005 US dollars per "MMBTU" (one million energy units) and
the minimum price was $1.845 per "MMBTU". In the event the referred price
exceeds the maximum price, a discount will be applied to the invoice; if
it is below the minimum price, the invoice will be issued in the amount
of the corresponding minimum price. Since this insurance policy
represents a contractual obligation, which is guaranteed with the fixed
price of gas at $4 per MMBTU, the Company records the corresponding
effects in results upon consumption of the committed MMBTU'S amount, and
has not recorded the potential effect of a gain or loss from settling the
premium on the gas price at present value. As of December 31, 2002, the
net loss recorded from this transaction was Ps.11,743.
23. 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 1, 2003, although early application is
encouraged. C-9 supersedes the former Bulletins C-9, "Liabilities" and
C-12, "Contingencies and Commitments" and 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 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 identifying all intangible assets
to reduce as much as possible the goodwill relative to business
combinations.
The Company has not fully assessed the effects of adopting these two new
accounting principles on its financial position and results of
operations. However, the Company's management believes that the adoption
of such new principles will not have a material effect on its financial
position and results of operations.
50
24. DIFFERENCES BETWEEN MEXICAN GAAP AND US GAAP
The consolidated financial statements of the Company are prepared in
accordance with MEX GAAP, which differs in certain significant respects
from US GAAP. A reconciliation of the reported majority consolidated net
income, net stockholder's equity and comprehensive income to US GAAP is
presented in Note 25. It should be noted that this reconciliation to US
GAAP does not include the reversal of the restatement of the financial
statements for inflation effects as required by Bulletin B-10,
"Reconocimiento de los Efectos de Inflacion en la Informacion Financiera"
(Recognition of the Effects of Inflation in the Financial Information),
of MEX GAAP. The application of this bulletin represents a comprehensive
measure of the effects of price-level changes in the Mexican economy and,
as such, is considered a more meaningful presentation than historical
cost-based financial reporting in Mexican pesos for both Mexican and US
accounting purposes.
The principal differences between MEX GAAP and US GAAP included in the
reconciliation that affect the consolidated financial statements of the
Company are described as follow:
CLASSIFICATION DIFFERENCES - Certain items require a different
classification in the balance whet or income statement under US GAAP. These
include:
- Under Mexican GAAP advances to suppliers are recorded as
inventories. Under US GAAP advances to suppliers are classified as
prepaid expenses.
- The impairment of goodwill and other long-lives assets, the gain
or loss on the disposition of fixed assets, all severance
indemnities, and employee profit sharing must be included in
operating expenses under US GAAP.
STATEMENT OF CASH FLOWS- Under Mexican GAAP, the Company presents a
consolidated statement of changes in financial position in accordance
with Bulletin B-12, "Estado de Cambios en la Situacion Financiera"
(Statement of Changes in Financial Position), which identifies the
generation and application of resources by the differences between
beginning and ending financial statement balances in constant Mexican
pesos. Bulletin B-12 also requires that monetary and foreign exchange
gains and losses be treated as cash items for the determination of
resources generated by operations.
In accordance with US GAAP the Company follows Statement of Financial
Accounting Standards (SFAS) No. 95, "Statement of Cash Flows", excluding
the effects of inflation.
The following presents a reconciliation of the resources generated or
applied to by operating, financing and investing activities under MEX
GAAP to the resources generated or applied to such activities under US
GAAP.
2000 2001 2002
Net resources generated by operations under MEX GAAP Ps. 2,035,747 Ps. 1,975,004 Ps. 1,352,088
Gain from net monetary position (95,207) (66,482) (3,547)
Exchange loss (gain), net 37,835 (63,298) 125,758
Loss on sale of property, plant and equipment (12,446) 45,846 7,565
----------------------- ---------------------- -----------------
Net resources generated by operations under US
GAAP Ps. 1,965,929 Ps. 1,891,070 Ps. 1,481,864
====================== ===================== =================
Net resources used in financing activities under MEX
GAAP Ps. (584,899) Ps. (2,160,590) Ps. (1,064,006)
Reduction in current and long-term debt due to
restatement in constant pesos 243,511 126,546 97,983
Unrealized exchange (loss) gain, net (30,238) 99,148 (184,724)
----------------------- ---------------------- -----------------
51
2000 2001 2002
Net resources used in financing activities under
US GAAP Ps. (371,626) Ps. (1,934,896) Ps. (1,150,747)
====================== ====================== =================
Net resources (used in) generated by investing
activities under MEX GAAP Ps. (1,447,440) Ps. 17,538 Ps. (357,738)
Loss on sale of property, plant and equipment (45,780) (193,178) (162,885)
Investing activities restated for inflation 36,775 57,791 26,054
---------------------- ---------------------- -----------------
Net resources used in investing activities under
US GAAP Ps. (1,456,445) Ps. (117,849) Ps. (494,569)
===================== ===================== =================
DEFERRED INCOME TAXES AND EMPLOYEE PROFIT SHARING- The Company follows
SFAS No. 109, "Accounting for Income Taxes", for US GAAP purposes, which
differs from Mexican GAAP as follows:
- Under Mexican GAAP, deferred taxes are classified as non-current,
while under US GAAP the classification is based on the
classification of the related asset or liability.
- Under Mexican GAAP the effects of inflation on the deferred tax
balance generated by monetary items are recognized in the result
on monetary position. Under US GAAP the deferred tax balance is
classified as a nonmonetary item. As a result, the consolidated
income statement differs with respect to the presentation of the
gain (loss) on monetary position and deferred income tax
provision.
- Under Mexican GAAP, the change in statutory income tax rate
approved early in 2002 was considered in the calculation of
deferred taxes at December 31, 2001. Under US GAAP, a change in
statutory tax rate may not be considered until the enactment date,
which was January 1, 2002.
- Under Mexican GAAP deferred employee profit sharing is calculated
considering only those temporary differences that arise during the
year and which are expected to turn around within a defined
period, while under US GAAP the same liability method as used for
deferred income taxes is applied. Also, for US GAAP purposes,
employee profit sharing must be classified as an operating
expense.
The differences in the restatement of imported machinery and equipment
and the pension plan under Mexican GAAP have a different treatment than
under US GAAP. As a consequence, the related deferred income tax
presented under Mexican GAAP is different from the effect calculated
under US GAAP.
The tax effect of temporary differences that generated deferred tax
liabilities (assets) under SFAS No. 109 are as follows:
DEFERRED INCOME TAXES-
2001 2002
Property, plant and equipment Ps. 1,405,802 Ps. 1,178,681
Inventories 358,224 338,454
Reserves (40,836) (39,557)
Tax loss carryforwards (256,914) (290,989)
Recoverable asset taxes (160,852) (206,640)
Other 156,863 (53,401)
Add- Allowance for tax loss carryforwards and recoverable
asset taxes that may not be applied or recovered 62,232 119,063
----------------------- ----------------------
Ps. 1,524,519 Ps. 1,152,413
52
DEFERRED EMPLOYEE PROFIT SHARING-
2001 2002
Property, plant and equipment Ps. 308,362 Ps. 279,562
Inventories 94,534 96,737
Reserves (10,843) (8,369)
Unrealized exchange losses (4,713) (4,635)
Other 77,051 44,641
----------------------- ----------------------
Ps. 464,391 Ps. 407,936
====================== ======================
COST OF PENSION PLANS AND OTHER EMPLOYEE BENEFITS - Under Mexican GAAP,
the liabilities for employee benefits are determined using actuarial
computations in accordance with Bulletin D-3, "Labor Obligations", which
is substantially the same as US GAAP SFAS No. 87, "Employers' Accounting
for Pensions".
The Company has no post-retirement health care insurance or other benefit
plans, other than the pension plans referred to in Note 13. Therefore,
SFAS No. 106, "Employers' Accounting for Post-retirement Benefits other
than Pensions", would have no effect on the Company's financial position.
During 1992, the Company withdrew Ps.26,952 (at nominal value) from plan
assets covering pension and seniority premiums for employees of certain
subsidiaries, as the plans were overfunded. The amount of the withdrawal
was recorded as income under MEX GAAP; however, for purposes of SFAS No.
87, the amount must be amortized over the average remaining working life
of the employees, which is approximately 17 years.
MINORITY INTEREST- Under MEX GAAP, Bulletin B-8, minority interest in
subsidiaries must be included as a component of stockholders' equity.
Consequently, minority interest in the income of subsidiaries is not
presented as an expense in the statement of income. Under US GAAP,
minority interest in subsidiaries is presented below liabilities on the
balance sheet, and is not part of stockholders' equity.
PROPERTY, PLANT AND EQUIPMENT- As explained in Note 3 e), the Company
restates its fixed assets of foreign origin based on the internal rate of
inflation of the country of origin and the slippage of the Mexican peso
against the currency of the country of origin for the period. According
to SEC regulations, these fixed assets would be restated using the NCPI.
FINANCIAL INSTRUMENTS- As mentioned in Note 3 a), beginning in January
2001, Bulletin C-2 of the MEX GAAP became effective.
Under US GAAP, SFAS No.133, "Accounting for Derivative Instruments and
Hedging Activities", became effective in 2001. This statement requires
the recognition of all derivative financial instruments together with the
hedge items as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value.
The changes in the fair value of derivative financial instruments are
recognized either in the results for the year or in the other components
of comprehensive income if it is demonstrated through statistical
effectiveness calculations that such instruments are closely related to
the hedged items. Subsequently, upon maturity of the derivative
instruments, the corresponding gain or loss is recognized in the results
for the year.
VELCON GOODWILL- In 2001 the Company increased its share ownership in
VELCON, its subsidiary (see Note 1 d)), at a cost above its book value.
The resulting goodwill from this acquisition will be amortized over four
years according to MEX GAAP. Under US GAAP, in accordance with SFAS No.
142, effective January 1, 2002 goodwill is no longer subject to
amortization, but rather it is subject to periodic assessment for
impairment by applying a fair-value-based test.
53
In connection with the transition provisions for adopting this standard,
the Company performed a transitional impairment test as of January 1,
2002 and found no impairment.
In accordance with SFAS No. 142, for US GAAP purposes the Company
discontinued the amortization of goodwill effective January 1, 2002. The
financial statement impact was to reduce amortization expense and
increase net income under US GAAP by $15,888 for the year ended December
31, 2002.
CAPITALIZATION OF PREOPERATING EXPENSES- According to MEX GAAP, in 2001,
certain subsidiaries capitalized preoperating expenses related to a new
lines of products in the amounts of Ps.3,572. These expenses will be
amortized over the term it takes for this business to be fully
operational. According to US GAAP, these expenses should be reflected in
results as required by SOP 98-5 issued by the American Institute of
Certified Public Accountants (AICPA).
OTHER PRONOUNCEMENTS- Since the Company has a simple capital structure,
SFAS No.128, "Earnings per Share", has no impact on the calculation of
the approximate majority net income per share.
Beginning in 1998, SFAS No.130, "Comprehensive Income", became effective,
which requires presenting comprehensive income under US GAAP. Note 25 d)
presents a reconciliation of majority net income under US GAAP to
comprehensive income also under US GAAP, where the main reconciling item
is the result from holding nonmonetary assets. Therefore, other
accumulated comprehensive income is included in the balance sheet under
cumulative effect of restatement.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires that the bases to report the financial information
be the same as those used to internally evaluate the performance of the
business segments. Since the Company operates as only one segment of auto
parts, the consolidated figures provide a basis of evaluation and
analysis as only one business segment for DESC, its holding company.
Therefore, no additional disclosures are required to comply with this
SFAS.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET IN EFFECT-
In June 2001, the FASB issued SFAS No. 143, which is effective for the
Company beginning in 2003. The Company plans to adopt this new standard
in 2003. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of
lessees. This Statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the year in which it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The Company does not anticipate that this
new standard will have a significant impact on its financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No.4, 44, and 64, Amend ment of FASB statement No.13, and
Technical Corrections" which requires that gains and losses from
extinguishment of debt in all years presented be classified as
extraordinary items only if they meet the criteria of APB Opinion 30,
"Reporting the Results of Operations - Discontinued Events and
Extraordinary Items". The amendment of SFAS No. 13, "Accounting for
Leases", eliminates an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. The new standard will be effective for
financial statements issued for fiscal years beginning after May 15, 2002
and lease transactions occurring after May 15, 2002, with early
application encouraged. The Company plans to adopt this new standard in
2003. The Company does not anticipate that this new standard will have a
significant impact on its financial position or results of operations.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The principal
difference between SFAS No. 146 and EITF 94-3 relates to its requirement
that a liability for a cost associated with an exit or disposal activity
54
be recognized and measured initially at fair value when the liability is
incurred, as opposed to recognition under EITF 94-3 at the date of an
entity's commitment to an exit plan. The provisions of SFAS No.146 will
be effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. Previously issued
financial statements may not be restated, and the provisions of EITF 94-3
shall continue to apply for an exit activity initiated under an exit plan
prior to the initial application of SFAS No. 146. The Company plans to
adopt this new standard in 2003. The Company does not anticipate that
this new standard will have a significant impact on its financial
position or results of operations.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" which requires that the guarantor recognize, at
the inception of certain guarantees, a liability for the fair value of
the obligation undertaken in issuing such guarantee. FIN 45 also requires
additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002 and the disclosure requirements are effective for financial
statement periods ending after December 15, 2002. The Company does not
expect the adoption of FIN 45 will have a material impact on its
financial position, results of operations or cash flows.
55
25. RECONCILIATION OF MEX GAAP TO US GAAP.
RECONCILIATION OF MAJORITY NET INCOME (LOSS)-
2000 2001 2002 2002
Majority net income (loss) under MEX GAAP Ps. 536,861 Ps. 360,277 Ps. (97,686) $ (9,428)
US GAAP adjustments:
Deferred income taxes under US GAAP (251,235) 169,594 223,596 21,581
Deferred income taxes under MEX GAAP 76,264 (202,102) (219,748) (21,208)
Deferred employee profit sharing under US GAAP (79,292) 31,165 31,412 3,032
Additional depreciation of fixed assets of
foreign origin restated through the NCPI method (89,670) 91,521) (84,364) (8,142)
Withdrawal of pension fund assets and
amortization of gains under SFAS No. 87 1,616 1,547 1,464 141
Effects of inflationary accounting on the
US GAAP adjustments 143,286 65,739 132,358 12,773
Effects of the US GAAP adjustments
on the minority interest 67,627 5,133 (20,320) (1,961)
Decapitalization of preoperating expenses (17,629) (3,572) (15,389) (1,485)
Effect from sale of shares of subsidiary (12,705) - - -
Effect from the difference in amortization of goodwill (110) 1,271) 15,888 1,533
Effect of adjustments under
US GAAP by discontinued operations (7,141) 4,153 55,731 5,379
----------------- ----------------- -------------- -------------
Net income under US GAAP Ps. 367,872 Ps. 339,142 Ps. 22,942 $ 2,215
================= ================ ============= =============
Weighted average number of outstanding common shares (000) 700,968 700,968 700,968 700,968
================= ================ ============= =============
Net income per share under US GAAP Ps. 0.5248 Ps. 0.4838 Ps. 0.0327 $ 0.0032
================= ================ ============== =============
56
RECONCILIATION OF MAJORITY STOCKHOLDERS' EQUITY-
2000 2001 2002 2002
Majority stockholders equity under MEX GAAP Ps. 3,476,817 Ps. 3,592,772 Ps. 3,356,730 $ 323,968
US GAAP adjustments:
Deferred income taxes under US GAAP (1,880,846) (1,524,519) (1,152,413) (111,223)
Deferred income taxes under MEX GAAP 1,731,451 1,215,400 1,032,935 99,692
Deferred employee profit sharing under US GAAP (535,963) (464,391) (407,936) (39,371)
Adjustment for changes to the NCPI
method used to restate machinery of
foreign origin 480,068 747,449 276,935 26,728
Withdrawal of pension fund assets and
amortization of under SFAS No.87 (12,965) (10,870) (8,820) (851)
Effects of the US GAAP adjustments
on the minority interest 92,260 21,845 84,398 8,146
Decapitalization of preoperating expenses (27,672) (37,487) (30,966) (2,989)
VELCON goodwill 5,197 3,707 19,395 1,872
Effect of adjustments under US GAAP
by discontinued operations (8,552) 2,980 3,866 372
-------------- -------------- -------------- ------------
Majority stockholders' equity under US GAAP Ps. 3,319,795 Ps. 3,546,886 Ps. 3,174,124 $ 306,344
============== ============== ============== ============
57
RECONCILIATION OF CHANGES IN MAJORITY STOCKHOLDERS' EQUITY UNDER US GAAP-
2000 2001 2002 2002
Majority stockholders' equity at beginning of year Ps. 3,461,862 Ps. 3,319,795 Ps. 3,546,886 $ 342,319
Net income under US GAAP 367,872 339,142 22,942 2,215
Result from holding nonmonetary assets (103,833) (72,228) (120,021) (11,583)
Dividends declared and paid (406,106) (113,483) (191,856) (18,517)
--------
Adjustment of additional liability
for employee retirement obligations - - (83,827) (8,090)
--------
Earned surplus from restructuring of subsidiary - 73,660 - -
--------------- ----------------- --------------- -----------
Majority stockholders' equity at end of year Ps. 3,319,795 Ps. 3,546,886 Ps. 3,174,124 $ 306,344
=============== ================ =============== ===========
COMPREHENSIVE INCOME UNDER US GAAP-
2000 2001 2002 2002
Majority net income under US GAAP Ps. 367,872 Ps. 339,142 Ps. 22,942 $ 2,215
Other comprehensive loss:
Result from holding nonmonetary assets (103,833) (72,228) (120,021) (11,583)
Adjustment of additional liability
for employee retirement obligations - - (83,827) (8,090)
-------------- ---------------- ---------------- -----------
Comprehensive income (loss) under US GAAP Ps. 264,039 Ps. 266,914 Ps. (180,906) $ (17,458)
============== ================ =============== ===========
58